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Operator: Welcome to the IonQ 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 Hanley Donofrio, Director of Investor Relations. Please go ahead. Hanley Donofrio: Good afternoon, everyone, and welcome to IonQ's First Quarter 2026 Earnings Call. My name is Hanley Donofrio, and I am the Investor Relations Director here at IonQ. I'm pleased to be joined on today's call by Niccolo de Masi, IonQ's Chairman and Chief Executive Officer; and Inder Singh, IonQ's Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the company's first quarter 2026 earnings release issued this afternoon, which is available on the SEC's website and on the Investor Relations section of our website at investors.ionq.com. Please note that on today's call, management will refer to non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information to investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. You are directed to our earnings release for a reconciliation of adjusted EBITDA and adjusted EPS for the closest comparable GAAP measures. During the call, we will discuss our business outlook and make forward-looking statements, including those regarding our guidance for 2026. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. Actual events or results could differ materially due to a number of risks and uncertainties. Therefore, you should not put undue reliance on those statements. We refer you to our recent SEC filings, including our annual report on Form 10-K for the year ended December 31, 2025, for a more detailed discussion of those risks and uncertainties. We undertake no obligation to revise any statements to reflect changes that occur after this call, except as required by law. Now I will turn it over to Niccolo de Masi, Chairman and CEO of IonQ. Niccolo de Masi: Thank you all for joining us today. 2026 is off to a strong start at IonQ, and our results this quarter serve as a powerful validation of what we built throughout our transformational 2025. Financially, we have delivered the biggest quarter in IonQ history thus far, and our fourth consecutive quarter of record-breaking results. $64.7 million of GAAP revenue in the first quarter of 2026, is more than 8x what we delivered in the same period last year. Our strong momentum is a testament to the demand for our industry-leading quantum computers as well as the commercial impact of our entire quantum platform. As I outlined on our fourth quarter call in February, a key objective for 2026 is to drive superior financial performance by leveraging our scale and Quantum product families, combined with increasing geographic breadth and depth. We are executing well and have today raised our full year revenue expectations to $270 million at the high end. Our results were underpinned by accelerating global quantum computing system sales, increasing high-margin cloud utilization and deepening application layer partnerships with our enterprise customers. I am tremendously excited about IonQ's ecosystem progress, which was on full display at the New York Stock Exchange when we rang the bell with over 50 customers to celebrate World Quantum Day. IonQ is defining the Quantum technology market and establishing the leading hardware and software quantum industrial ecosystem. Our organic performance is a direct reflection of this leadership as we architect and deliver the Quantum platform for the next century of computation. We continue to widen our lead across commercial and technical frontiers. Our parallel gate architecture with electronic qubit control will allow us to solve problems at a scale and cost that we believe will be unmatchable. On April 14, we rolled out clear third-party validated benchmarks, showcasing the incredible time to solution and cost to solution advantages that our Quantum computers already possess. These metrics represent the speed and economics with which our systems deliver accurate solutions to the world's hardest problems. As you can see on Slide 6 of our investor presentation, we presently enjoy up to 10,000x faster time to solution on key quantum algorithms, including 1,000x faster for the Quantum [ Ferrer ] transform. The Quantum [indiscernible] transform, in fact, enables many critical use cases, such as cryptography, molecular drug discovery, advanced material synthesis and unlocking fusion energy, making this timely solution valuable today and into the future. It is not a coincidence that several of the key utility scale applications, described by DARPA's quantum benchmarking initiative could take advantage of quantum farer transforms under the hood. IonQ's time to solution advantage with Quantum ferrer transform and other benchmark algorithms today, underscores our fidelity and connectivity advantages that we expect to endure throughout the coming decades. I am proud to report that we have presold our first chip-based 256-qubit system in the first quarter. We are moving with conviction to demonstrate this technology by year-end with customer systems expected to begin commissioning by the end of the second quarter of 2027. While much of the industry remains in the scientific research phase, IonQ has been able to focus on delivering production-ready systems that are shaping the quantum market globally. We remain the first and only quantum company in history to have demonstrated the critical technology components at the performance levels required for full fault tolerance. The next critical frontier in our industry is the efficient use of quantum error correction to convert high-quality physical qubits into even higher quality logical qubits, unlocking new frontiers of scale and impact. This is the bridge to utility scale, fault tolerant quantum computing. And it should be no surprise that IonQ is leading here as well. Just last month, we published our complete architectural blueprint for our flexible modular framework that describes how our technology scales through to 2030 objectives of a fully fall tolerant system with millions of physical qubits and logical error rates as low as 1 in 1 trillion. Our walking cat paper described IonQ's end-to-end architecture for full fall tolerant quantum computing, spanning compiler design and error correction to hardware, control systems and ion movement. This historic paper outlines in manufacturable detail, how we will move from today's IonQ commercial systems to deploying and commissioning INQ's utility-scale quantum computers to customers. The level of detail and completeness in our blueprint is a global first and historic milestone for the quantum industry as a whole. Along with the academic community, there has been strong and broad recognition that this is the industry's first clear detailed manufacturable path to scaled fall tolerance systems. For those able to follow along in our investor presentation, please see Page 7 for details. IonQ's specificity sets a new standard and distinguishes IonQ with its tangibility resting on capabilities our hardware has already demonstrated including 99.99% 2-qubit fidelity and reliable ion transport. This historic work demonstrates precisely why IonQ is on track to be the first to unlock fully full-tolerant quantum computers as we published clearly in June 2025. Our level of transparency is only possible through our 30 years of innovation. Only IonQ has the operational maturity and engineering predictability of generations of deployed systems as we now accelerate into a new phase of manufacturing and scale. Moving on now to SkyWater and our merchant supplier activities. As most listeners know, in January of 2026, we announced our intent to acquire SkyWater, in order to accelerate the U.S. quantum industry and deepen our commitment as a merchant supplier. We expect the transaction to close in the second or third quarter of 2026, subject to customary regulatory approvals. Over the past quarter, our commercial collaboration with SkyWater has already yielded multiple test iterations for our 256-qubit chip. As we shared in February, we hit the ground running with multiple initial tapeouts. Today, I am pleased to report that we have already received some of the first ion trap samples back from SkyWater and have demonstrated on the sample chips the critical performance we need for the complete 256-qubit chips. To design, fabricate and test these chips with SkyWater within a single quarter has been a delight. Our commercial partnership with SkyWater is a demonstration of the kind of acceleration, we hope our investment will bring for all customers of our quantum merchant supply function. And we expect these benefits to grow even further once the combination is complete. We already act as a merchant supplier with our industry-leading atomic clocks, sensors and networking products being sold to other quantum companies. When the SkyWater transaction closes, IonQ will be the largest quantum merchant supplier in the world, but [ Thomas Sanderman ] continuing to lead SkyWater. We view this transaction as not only accelerating IonQ's commercialization of fall tolerant quantum computers, but also using our balance sheet to secure the scalability of the entire U.S. and allied quantum market. As it is a frequent question from our community, I will now walk through our application and quantum algorithm momentum in a bit more granularity than in prior quarterly calls. This work can be seen in our investor presentation on Page 8. Applications and quantum algorithms are another cornerstone competitive advantage for IonQ. We know that for customers, value is measured not just on a machines architecture, but by how that architecture ultimately delivers customer value and results. We are confident IonQ already delivers a potent combination of orders of magnitude faster time to solution. The most accessible cost solution, reliability and quality that customers cannot find anywhere else. We have more than doubled our quantum algorithm and applications team size in the past few quarters, in response to strong demand. We continue to grow internationally, adding both application engineers and field engineers to support customer appetite for implementing IonQ's Quantum solutions in their organizations. We are deliberately focused on early advantage verticals, pharmaceuticals, financial services, energy and logistics. Real-world examples from just the past few quarters include the following partnerships. In the financial sector, we ran the world's first large-scale portfolio optimization, quantum algorithm using real S&P 500 data. This showcased along with [indiscernible] Quantum, our systematic improvement in portfolio quality and execution time in a production environment. Our trapped ion hardware has a long-term structural advantage for dense portfolio optimization such as these, because of its all-to-all connectivity industry-leading single qubit and 2-qubit gate fidelities. With Synopsis, we demonstrated accelerated computer-aided engineering workloads through quantum enhanced graft partitioning. We achieved double-digit percentage advantage in end-to-end time for large-scale structural models such as the Rolls-Royce jet engine and automotive models also. Trucially, this demonstration was integrated into their existing cloud workflow with 0 new infrastructure required. Ion Ride is using IonQ to optimize shipment allocations and fleet orchestration for electric and autonomous freight, delivering measurable gains in real-world logistics efficiency. We have already demonstrated real-world commercial validation using anonymized logistics data and historical cancellation logs. By achieving an increase in shipments delivered, this work will underpin very significant revenue gains for our partner at fleet scale. With Quantum Basel, we are advancing hybrid quantum classical techniques to optimize large language models and reduce energy consumption. Our results show that IonQ quantum computer energy consumption scales approximately linearly with qubit numbers for shallow circuits. By comparison, classical simulation exhibits exponential scaling. We are on track to demonstrate significant energy savings with improved inference performance as we scale these capabilities. These 4 production-oriented applications are just some of the examples our customers are deploying to actively drive business advantage and growth. We are proud to announce in parallel that our work to positively and powerfully impact humanity itself has this quarter seen a step change. We are now working with participants from the welcome [ LEAP ] initiative out of the U.K., which is a program designed to accelerate human health to apply our quantum optimization to improve cancer research. Our work introduces new computational approaches for reconstructing difficult regions of DNA that are often missed or misread by existing methods. This could become a useful foundation for future studies of genetic changes that matter in human disease, including cancer. Last quarter, we also announced a commercial partnership with CCRM and which is 1 of the world's leading accelerators for advanced therapies. We are very excited about the work we are doing with them, which includes cell and gene therapies for cancer and immune system rebuilding. This work is truly world-changing offering a powerful new future for human health. We have also begun work on combining our quantum optimization technology with computational methods for gene therapies. That includes optimization of mRNA sequences that get delivered into cells. Long term, we anticipate personalized medicine acceleration. For those following along in our investor presentation, this can be seen on Page 8. Let us now turn to the rest of our unique and expanding Quantum platform. Building on the momentum of our recent deployments of Quantum Communication Networks in Switzerland, Romania and Slovakia, IonQ has now successfully deployed Poland's first national quantum communications network. This is 1 of the largest terrestrial quantum key distribution networks in Europe, and it cements our position as the partner of choice for sovereign quantum security. We are similarly expanding our Quantum platform leadership domestically by announcing a new statewide Quantum networking initiative in the great state of Florida and the first commercial sale of a quantum memory node into the Mid-Atlantic regional Quantum Internet hosted at the University of Maryland. These partnerships underscore that IonQ is proudly playing a central role in the development of our secure national quantum infrastructure. On the technical front, we continue to innovate and lead the market as the only public company with a scaled quantum networking division. Last year, in partnership with the Air Force Research Lab, we achieved the first qubit to telecom frequency conversion in a field deployable system, enabling real-world quantum networks on existing telecom infrastructure. Last month, on World Quantum Day, we announced that in conjunction with AFRL, we connected qubits from 2 separate systems. This is the first demonstration of connected commercial quantum computers, demonstrating the operationalization opportunity of Quantum interconnects and paving the way for distributed quantum computing that will underpin the future of secure global communications. Our contract with DARPA's [ HARC ] program is another testament to our leadership in Quantum memory, modular quantum computing and scalable networking architectures using quantum interconnects. IonQ is playing a critical role in enabling a new class of networked quantum computers that can combine multiple qubit types into an interconnected high-performance architecture. To our knowledge, we are the only industry player to win a hardware award as part of [ HARC ]. This contract is another powerful example of how IonQ is already serving as the leading merchant supplier to the entire quantum industry with key IP, including the world's most accurate commercial clocks that matter to any modality's long-term scaling and manufacturability. Turning now to Slide 9 in the investor presentation. Momentum remains strong at IonQ Federal. We continue to advance through DARPA's quantum benchmarking initiatives and are building out our capabilities to support next-generation GPS, alternative PMT and other mission-critical initiatives for our nation. We were awarded a $39 million contract to advance next-generation space communications on the Space Development Agency's halo program. This paves the way for mission-ready quantum space systems for national security. Just this week, we expanded our space mission and sensing capabilities with a new product launch delivering persistent change monitoring intelligence from space. We were also awarded a spot on the Missile Defense Agency's Shield contract, which is focused on the rapid delivery of innovative capabilities to the war fighter with increased speed and agility. Our technology platform represents a dual-use advantage for our nation and its allies underpinning both economic growth and national security. We are proud to be the partner of choice for U.S. and allied governments in this geopolitical quantum space race. In order to do this work with U.S. government agencies, high-technology readiness levels are an imperative. Our quantum sensors and clocks have reached TRLs for deployment on land, sea, air and space. At this very moment, we have quantum sensors currently deployed on a Navy ship and in space on the X-37B spaceplane. Our Quantum Security products similarly have already reached deployment-ready TRLs across critical infrastructure, telecommunications and national networks, providing mature deployable quantum security solutions today is vital to ensuring continuity for communications as quantum computers become ubiquitous. Before I close, I would like to touch on [indiscernible] and talk through Page 10 in our quarterly investor deck. Lately, Q-Day, the threshold where Quantum Systems render current RSA encryption obsolete has dominated industry conversation. We have been transparent in our assessment of Q-Day's time line since publishing our technology road map in June 2025. Based on our public road map, we expect to achieve the logical qubit count required to challenge RSA 2048 encryption in the 2028 to 2029 window. China's stated goal is 2029 and their government quantum efforts. It's worth noting that our peers have now recognized this accelerated time line with Google very recently bringing forward its expectation for Q-Day from the mid-2030s to 2029. As we continue to accelerate the time line toward Q-Day, we view it as a strategic responsibility to also provide the solution. We are not just identifying the future risk we are delivering mature field deployable hardware and software cybersecurity solutions that allow global governments and enterprises to both enhance cybersecurity today and ensure our nation's protection in the age of Quantum ubiquity. IonQ is uniquely positioned to deliver post-quantum security solutions precisely because we're the ones defining the offensive frontier. Our deep understanding of how advanced Quantum Systems challenge RSA and ECC encryption allows us to build superior defenses. This creates a powerful strategic flywheel, our hardware leadership informs our security and innovation and our security expertise derisks the quantum transition for our customers. As I said in our full year call in February, 2025 was a strategic and financial inflection point for IonQ. Today, I am confident that 2026 is in turn the year we move from platform building blocks to platform execution at scale. We will continue to deliver superior financial performance, unlock exponential value through applications and system-level breakthroughs and operate with both discipline and speed. IonQ's mission is to pioneer and globally commercialize the world's Quantum solutions, positively impacting every aspect of applied science while ensuring U.S. and ally leadership in this generational and geopolitically vital technology race. I want to thank my colleagues for their extraordinary efforts and the broader quantum industry for their partnership. With our strong capitalization, unmatched talent density and clear road map, IonQ is 1 platform, 1 team primed and poised to win. I'm now delighted to hand the call over to Inder Singh, our COO and CFO. Inder Singh: Thank you, Niccolo. We are very proud to report our strongest quarter in the company's history, delivering $64.7 million in GAAP revenue, which is 755% year-on-year growth. This is now our third straight quarter of record-setting revenue growth. These results exceeded our revenue guidance by over 30% and our own expectations. Importantly, our results are underpinned by strong organic growth, which we expect will continue through the remainder of the year. In fact, as we indicated last quarter, we are expecting organic revenue growth to be 100% for the full year even exceeding 80% that we reported for 2025. I'll now cover our financials in more detail, which you can also see in our investor presentation on Pages 12 through 18. Consistent with the additional color we started to provide you last quarter regarding the different areas of our revenue and the composition of our revenue I'm going to touch on 4 key aspects: One, is commercial. Two will be geography. Third, we're introducing a metric around multiproduct sales, and of course, I'll again talk about remaining performance obligation, also known as RPOs. Number one, let me address our commercial revenue. I'm pleased to report that approximately 60% of our revenue came from commercial customers this quarter, similar to what we reported for all of full year 2025. This demonstrates that we are firmly entering the commercialization of our quantum technologies. Commercial revenues consist of Quantum platform contracts with non-U.S. government customers. We are happy to see this metric remain high as our revenues grow. We are happy that our commercial sales have now become a major part of the business and importantly, a takeaway for us is that our Quantum solutions have moved well away from the lab and squarely into real-world applications and deployment, as Niccolo described. Number two, our global revenue mix. I'm also pleased to report that we are seeing demand for our products come from around the world and from more countries than ever before. In Q1, approximately 35% of our revenue came from international markets. We've now sold solutions in over 30 countries compared to a year ago when we had customers in just a few. As I said last quarter, we're working on pursuit and capture in a very methodical way, and it is now starting to pay off as we begin to see revenues come from many more parts of the world. Number three, we are providing you with an additional metric, a new view into our revenues, which you look at and I would best describe it as multiproduct sales. Multiproduct sales means what percent of our revenue came from customers who have now bought more than 1 product from us, for example, computing, networking, sensing, security, et cetera. I'm pleased to report that in Q1, over 1/3 of our revenue came from multiproduct sales. The reason this is important is consistent with the strategy that Niccolo laid out last year, we have become the go-to place for all things Quanta. Under the leadership of [ Scott Mallard ] who head global sales for us, we have created a methodical approach to our go-to-market strategy. This includes cross-selling across our business, very disciplined pipeline development and conversion, our land and can strategy and yes, an amazing group of sales leaders that we are deploying around the world. While we may or may not always share all metrics every single quarter, we want to provide you color that will help you look at our business. You should know that we are investing in growing our revenues across our entire suite of products. It was Niccolo vision a year ago to develop this Quantum platform company, and we are seeing that play through our financials now. This multiproduct metric represents how that platform strategy has turned into financial outcomes. Number four, let me spend a moment on our remaining performance obligations or RPOs, which is a widely accepted measure that companies use to gauge their visibility over several quarters. As of March 31, 2026, our reported performance -- the remaining performance obligations or RPOs stood at $470 million compared to approximately $72 million a year ago. That represents a growth of 554% year-over-year. From our lens, RPOs help us get context around the continuing growth of our company as well as provide visibility potentially beyond the next few quarters. As all of you know, RPOs turn into revenue as performance obligations are met and RPOs get replenished with TCV from new sales. In Q1, to give you some context, for every $1 of revenue we recognized, we added roughly $2.5 in RPOs. And again, some use this as a proxy for backlog. To summarize my revenue comments, this first quarter of 2026 was another record-setting quarter with a revenue profile of 60% commercial, 35% international, 35% multiproduct and RPOs grew 554% year-on-year. And yes, we expect 100% year-on-year organic growth. Let me turn to our investments and profitability metrics now. First, let me talk to you about R&D. As of last quarter, our biggest investment area continues to be R&D and GAAP R&D in Q1 grew 215% year-over-year to $125.7 million. For some context, last year, our R&D exceeded the entire reported R&D in the quantum industry. Our strategy is to accelerate our innovation deliver the most powerful quantum computing solutions to the market, connect all things quantum them and secure our customers in a post quantum world, as Niccolo described. As a prime example of our innovation leadership and the compute power we intend to deliver and are delivering. Today, we're deploying our fifth-generation compute system called Tempo. We are now well on our way to the 256-qubit sixth generation system, and we are starting to turn our focus also on the seventh generation 10,000 qubit solution. We will maintain this relentless focus on innovation and our financial firepower allows us to do so. Turning now to adjusted EBITDA. We recorded a loss of $96.8 million for the first quarter. In this quarter, adjusted EBITDA included approximately $12 million of expenses related to our commercial agreement with SkyWater for the fabrication of our industry-leading ion trap. This commercial agreement remains in place until the approval and close of SkyWater. Excluding the SkyWater, commercial agreement end of $12 million, adjusted EBITDA would have been $85 million. Turning now to net income. In Q1, we reported a positive $805.4 million in GAAP net income, which was mainly due to an approximately $1.1 billion mark-to-market warrant valuation. As in prior quarters, let me remind you again that this warrant mark-to-market is a noncash item and depends on the stock price at any given time. Therefore this net income, including the volatility does not represent the operating performance of our business. Let me now turn to our financial [indiscernible] as a company. Cash cash equivalents and investments as of March 31, 2026, were $3.1 billion. This provides us with the visibility in financial firepower to accelerate our R&D road map, invest in new product development, scale our go-to-market engine and also to acquire critical capabilities. In addition to supporting our investment capabilities, our financial firepower provides comfort to our customers as well that we will be there for them, not just today, but in the coming years. This helps us create stickier relationships with top-tier customers who want to align with our multiyear road map. With my COO hat on, let me highlight a few areas we are driving towards excellence in our execution. As Niccolo shared last quarter, that is 1 of our prime objectives for 2026. Last quarter, I noted that near-term demand for some of our products in compute was outpacing our ability to perhaps meet that demand. And so this quarter, I'm happy to report we've addressed that and already strategically accelerated our ability to address the demand by growing our deployment teams, forward deployed engineers, manufacturing capacity and field operations. For 1 small example, we have more than doubled our manufacturing over the Tempo to meet the demand that we are seeing. Looking into the future for our 256-qubit system. Last quarter, I shared that we had completed tapeouts A, B and C and have started working on tapeout D. This quarter, I'm pleased to update you that tapeout D has been completed. The designs have been handed over to the foundry and their chips are now progressing well through the fabrication process. As part of this process, we received the first fully fabricated ion intra prototypes. I'm happy to share that they're already beyond the critical quality metrics needed for 256-qubit devices. Not only that, but also these metrics are approaching what we will eventually need to our 10,000 qubit device and beyond. This is an important milestone, it means we're proving out the path for the 256-qubit chips that are in fab at this time as well as the generations beyond. Building on our progress at the chip level, I'm pleased to share that we are also now wrapping the first engineering prototype for the full 256-qubit computer. This means that we're now moving from component-level testing to system-level testing. These are very important strides towards delivering the full 256-qubit system to the market in the future. And we're not stopping there. As I mentioned, our team is already starting stride towards our seventh generation 10,000 qubit chips. The key to scaling into our 10K high cubic count system is the integration of active CMOS design where SpyWater really helps. By moving control functions directly on to the silicon with CMOS, we are taking advantage of the scaling techniques of the existing global semiconductor industry in a nutshell, we're executing on our strategy. Let me now turn to financial guidance. As you have heard today, we have built a strong foundation for what we expect will be another historic year for IonQ in 2026. With that in mind, we are pleased to raise our revenue guidance for the full year 2026 to be between $260 million and $270 million. For context, even the lower end of that guidance doubles the company's year-over-year revenues. For the second quarter, we are projecting revenues of between $65 million and $68 million. We are also reaffirming our projections for full year 2026 adjusted EBITDA, to be in the range of negative $310 million to negative $330 million. We look forward to the remainder of 2026 with confidence and believe that IonQ is well positioned with the talent density, the processes, the technology and the innovation investment to remain the trail basing and quantum leader that we're establishing and have established already. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] Our first question comes from John McPeake of Rosenblatt Securities. John McPeake: Thanks. Nice work. So I think you've got 3 customers now for the 256. You just called out Cambridge. I think last call, you talked about Quantum Basel and also there's Horizon Quantum out there. Could you talk a little bit about the likely delivery schedule and how the -- how we should think about the revenues coming in from these? And then I just have a quick follow-up. Niccolo de Masi: Yes. Thanks, John. Thank you for the comments as well. Look, we are laser-focused on our fifth-generation machine because customers are laser focused on it. The demand that we're seeing is actually for many more customers that I can share today. You mentioned if you a few important, but as I look at the demand for our fifth generation machine, and in fact, customers will look at it and say, well, we might also want to look at your next and your [indiscernible]. That remains very, very strong. So we will continue to announce new wins. I mean, first quarter is obviously just the beginning. As I look at through the rest of the year, the demand is strong. The need for us to have the manufacturing and deployment capabilities was necessary, as I mentioned last quarter. And we've made those investments by bringing on board and deploying, frankly, folks that will be building these. You'll see many more announcements coming in the future. I mentioned, Scott and team are busy responding to some of the demand signals that we're seeing for Tempo. And importantly, early demand signals also for our 256. Remember, when customers buy something as unique as a computing platform they're buying the platform, meaning a multiyear view, not having to shift direction 12 months from now. So we're ensuring that we are in the right places with the right customers. who not only have the desire and interest in our solutions, yes, but also the long-term conviction to remain with us over multiple years. Quantum Basel is an excellent example of that. And there are many more we'll be announcing. Our focus is to make sure that 2026, we deliver on the guidance we've provided you and hopefully see and Tempo will be a big driver of that as well as the rest of our platform. But also 256 is just around the corner, looking into 2027 and beyond. So hope both of that addresses your question? John McPeake: It does. I just have a quick follow-up. The road map has 12 logical very respectable 10 to negative 7 2-qubit gate error rate. Will that be calibratable? In other words, could you have more logicals with slightly higher error rates? Is that in the cards because that's a very low error rate, but it's lower logical as a result. Niccolo de Masi: Yes. So I said in my script, this is Niccolo, that we're expecting 10 to the minus 12 error rates as our architecture matures. And so you're going to see even lower error rates in the coming generations of systems. The other thing that we are making progress on is reducing the ratio still further between the physical and logical qubit ratio. So I think there's probably some modest upside in the public road map that we published last June in terms of physical and large low qubit counts, accelerating a bit further, at least on the logical front. But as we've said consistently for the last year 2, if not 5, frankly, the advantage of our architecture is we have the highest fidelity qubits naturally. And that makes everything easier, right? It makes the ratio of physically lower as it starts out lower even before we start trying to optimize it. And it means their rates are lower, right? And you can see, particularly the advantages in having lower error rates on things like Page 6 in the investor deck, right, where we're talking about time to solution and the high fidelity 2-qubit parallel gate architecture we've developed. Time to solution is obviously a product of how many times you got to take what's called a shot and a certain algorithm and of course, how accurate the shops are. Our shots are all very accurate, so we don't have to take very many of them, right? And that's an advantage that we expect is going to endure throughout our entire architecture. And we're already obviously demonstrating in Grand style now. And obviously, with the walking cat architecture now all publicly available, you can see how we're going to hold that all the way through 2030. Operator: Our next question comes from Craig Ellis of B. Riley Securities. Craig Ellis: Congratulations on the momentum to start with your guys. I wanted to go back to the point that you made, Nicolo on the April 14 Photonic Interconnect announcement. And it's great to see something that I think some people are calling an Ethernet moment. But the question is, as you look at what that means and how customers are engaging what are the revenue implications of that either later this year or out on the road map as we look at that advancement in technology. Niccolo de Masi: Well, we're not going to give you a precise guidance on the revenue impact in out quarters. But I will say that the beauty of our lead in quantum networking and photonic interconnects, is threefold, right? So one, we think we can push our systems a long way vis-a-vis getting 2 million physical qubits on a single chip. At some point though, we may want even bigger systems. And so data center opportunities arise at some point in our architecture, whether it's 2 million per chip or it's 4 million per chip or even 10 million per ship. At some point, we may want 100 million qubits, right? I mean I'm very bullish on humanity's ability to take advantage of more compute power, and particularly more quantum computing power. And I think at some point in the future generations of quantum computers themselves will help us figure out how to optimize and take advantage of even bigger quantum computers. The second thing that does is it builds us an expanded merchant supplier capability. right? So I talked in my prepared remarks about the fact that our Quantum memory solutions and IP actually will allow multiple modalities to potentially connect together in a pretty seamless fashion and work together. And I think that's exciting vis-a-vis again, where the world will be in the coming years and decades. And then, of course, thirdly, we've talked a couple of times about the fact that we have multiple customers in the networked quantum computer category. Air Force Research Lab is obviously the first of those, and that continues to be a large contract that we prove out every quarter every year. My colleague, Inder mentioned a few other customers, both last quarter and this quarter is taking Quantum network computers. So in summary, there's really 3 great lever points for us, and we continue to invest and of course, protecting our Quantum networking and photonic interconnects because it's something that we've been working on, including from our founder, Chris Monroe early on. And believe it or not, Chris Monroe continues to work on that. So we're very excited that our lead there we believe, to be as prodigious as the computing one. The world is going to need, obviously, protected communications between quantum computers. And this is precisely why we expanded the vision of the company 15 months ago, 18 months ago from computing into networking. Inder Singh: Yes. And I'll just add, what Niccolo, I agree with everything you just said. So in Q1, we saw growth in every product line, Craig, year-on-year. And if you look at our guidance for the year without commenting on individual quarters, just look at the math, the company is doubling. Organic will be doubling. Therefore, it needs the rest of the company other product lines that we have also have a doubling effect on the company in total to get to the guidance that we've provided you. The interconnects, the ability to narrow our computers together, the ability to deliver hybrid compute. Those are the things that we are uniquely positioned. We can compute -- we can connect an ion tract type of quantum machine with someone else's. So we are, in that way, being very agnostic. We want the whole industry to grow. We want to become the networking and the compute leader in many ways in terms of our own innovation and we want the rest of the industry to succeed as well because that's how you make it the successful, durable industry. We have moved ourselves out of the lab into the commercial market. We want everyone else to do that as well, and that's how we grow. We are happy to see the results that we're delivering. We keep investing and Niccolo is all constantly getting calls in for, would you like some more investment and things like that. So I think there are ideas always that are in front of us. We are very happy with the portfolio we have. It was put together about a year ago by Niccolo strategy, become the first quantum platform company, and you will establish basically a critical mass that allows the industry to scale but also all set innovate and scale. So strong first quarter across every product line, a strong year. I think you can sort of do the math around the growth of the other products, not discontinued. Craig Ellis: That's really helpful, guys. And Inder, I'll ask a follow-up question that relates to the COO hat that you also were and it's directed that how go-to-market changes as you bring [ Scott Millard ] in from Dell. And you talked about wanting to be a service provider and span a range of solutions. You would seem to have just an ideal background for that. But how does go-to-market change as we think of the next few years in the company pursuing the road map that you laid out at Analyst Day? Inder Singh: Yes. Look, becoming a successful technology company is a team sport. You have to have the legal professional to do the commercial negotiations. So [indiscernible] you're seeing deployed around the world, working in partnership with Scott, my teams in the finance area, helping to Scott succeed at force. Scott himself developing a methodical pursuit and capture. These are not things companies do until they have critical mass. We think we're there, right? So that's where we're now investing not just R&D, but go to market. And some of the leaders that have joined the company would amaze you in terms of their knowledge of the market, the mindset of the customer. There's not a vertical that I think Quantum not touch eventually, it will touch everything. Some will be early adopters, some will lag. Areas like financial services, which needs protection now to the Q-Day comments that Niccolo made, life sciences companies that need faster innovation because they're competitive and they're trying to solve some of the most intractable problems that humanity faces and others. So we're happy to be the 1 that actually brings all that together, whether it's connecting our machine to someone else's or our's with interconnects, as you mentioned. But I'm happy to see kind of the flywheel effect starting to take over, Craig. Happy to follow up with you offline as well. Operator: Our next question comes from Troy Jensen of Cantor Fitzgerald. Troy Jensen: Congrats on the results and all the technical milestones. Maybe to start here with Niccolo. I agree 100% around the cusp of all your guys' quantum advantage, really helping to solve some commercial applications that we haven't done previously. But I was just curious, how do you think about like pricing the value that you guys are creating, because if you are enabling like new drug discovery and new material science, I mean, there are huge market opportunities. So can you just talk about how you kind of price and think through the value you're delivering here? Niccolo de Masi: Yes. So look, we obviously are innovating business models at the same time as we are building the Quantum ecosystem here. Inder as eloquently talked in the last few quarters about the platform strategy translating into real momentum. And so obviously, we are pricing things differently when there's a network Quantum computer and we're providing more value there than obviously just a single system that's not quantum networks. And there's going to be a fair amount of price exploration, frankly, on a global basis as our Quantum platform continues to mature. What I am excited about this quarter, in particular in this year really is that the market continues to come towards us. And Inder mentioned the fact that, at times, there is greater short-term demand and able to supply it. So we're very focused on improving manufacturing capacity at IonQ in total across the entire platform. We are working on both individual customer sales that can at times be multiproduct, but we're also working on some very large initiatives at the national scale. And I think it's safe to say that -- there is a fair amount of bespoke consultative selling that's going on. If you think about the breadth and depth of our product families as well as the geographies that we now have traction in. Now obviously, because of our cost advantages and because of the fact that we have always tried to forward invest in manufacturing capacities, I mean we did that obviously on both coasts in the U.S. years ago, for example, we have, we believe, the greatest power per unit dollar that's on offer in the marketplace. And that's, of course, our goal. I have talked in prior quarters about the fact that we do 3 things at IonQ across the company, right? We meet and beat financial expectations. We meet and beat expectations, and we continually refine our internal operating system. So as we see how market demand evolves, we will get more efficient about what we're bundling and how we're deploying configuring and delivering that. But right now, we're very much at the start of that S-curve, if you will. And I think there's orders of magnitude of growth to be had here and orders of magnitude of maturation to be had in our sales ops, manufacturing, deployment organization. We're proud of the fact that we believe we lead the industry right now in maturity, but we recognize that as revenue continues to grow, this organization will have to keep getting standardized and keep growing up. So we'll keep you posted as we standardize, but we're not quite at the point whereby we're listing rack prices on our website. Inder Singh: I think less about pricing to me, it's more about meeting the customer where they are. So a customer can choose to buy a system. They can choose to access it via the cloud, they can choose to ask us to provide them an edge device that connects them to something. So we meet them where they are. It's less about competing with price. It's more about ensuring that we give them what they want and frankly, can afford, and so cloud access is obviously cheaper than buying a computer device. So not everyone will buy a computer, not everyone will be happy with a [indiscernible]. Troy Jensen: Easy follow-up for you, Inder, did you report a number of 10% customers in size at all? Inder Singh: We did not in this quarter, Troy. Operator: Our next question comes from Quinn Bolton of Needham. Shadi Mitwalli: This is Shadi Mitwalli for Quinn. Congrats on the progress. I guess as IonQ transforms into a quantum platform company. Can you just talk about some of the solutions you've been bundling for customers, and then has the bundling been more IonQ driven or customer-driven? Inder Singh: Yes. Great question. The customer journey in Quantum is not very dissimilar than the customer journey in traditional networking and compute. I mean sometimes customers start in 1 area and expand it to another or vice versa. So we have claimed examples where we can say a customer started with buying a network from us and then saying, okay, please add a computer now and then maybe saying add security. On the other hand, somebody may start with the compute device sitting next to a GPU cluster or an AI factory. And what they want is to have hybrid workloads. The types of sort of like large-scale matrix multiplication that is required for LLM runs on the GPU. But where you need simultaneous analysis of all possible outcomes in a fraction of the time you need to give. So we're seeing both. And I think over time, you'll see the industry evolving into something that resembles frankly, networking. And I do think that we want to be in every part of that. And I think 1 of the really important parts to consider here is there's a Quantum Advantage Q-Day coming up and whether have as rapidly, whether we do it as a nation or someone else does it, there's a protection angle that has to be pursued as well. So we're finding some customers say, well, protect me first. Lock down my crown jewels, help me understand how I can protect what I value most and then go from there. So all those conversations are happening. They're starting from different places, maybe ending in other places. That multiproduct thing that we introduced and Niccolo and I introduced this quarter is around how many customers or what percentage of our revenue at least is now employing more than 1 product. And I think that's the network effect. Operator: Our next question comes from Richard Shannon of Craig-Hallum. Tyler Perry Anderson: This is Tyler on for Richard Shannon. I just wanted to first understand -- when does the architecture that you had recently published intersect into your road map? Like when do you have a -- what size QPU would that architecture be implemented? Niccolo de Masi: You're talking about the semiconductor road map, right? Tyler Perry Anderson: So yes, the most recent paper. Niccolo de Masi: Walking cat architecture, I think, is your question, right, for full fault tolerance? Tyler Perry Anderson: Yes. Niccolo de Masi: Yes. So I mean, look, we're going from 256 to 10,000 qubits out to 1 million, right? So this full-fault tolerant architecture kicks in every generation but obviously, 10,000 qubits is when you start to see all of the full benefits of the fault tolerant architecture. So next year and beyond. Inder Singh: And then basically use that as a jumping off point to go from 10,000 to 20,000 to 200,000, 2 million. And that just leverages a semiconductor ecosystem that is well tested, developed and we can just take advantage of. Niccolo de Masi: So we're working on like 3 generations of systems at the same time, right? So we're trying to obviously continue to accelerate here, as I said, every quarter. If we can find ways to go faster, we will. Tyler Perry Anderson: And then could you level set on how many satellites you have up in the space right now? And if you could what you think you would have exiting the year and whether or not you have a quantum memory in a satellite. And I presume that would be connecting Florida and Maryland, but any information on that would be helpful. Niccolo de Masi: Look, I think some aspects of our business are highly classified. We have a constellation of satellite is what I can say. I think that we look at the ability to connect things on the ground from ground-to-space, space-to-space space-to-ground under the water even. So we want to make sure that we can meet the customers' needs and not everyone needs everything. To your point, we're very uniquely positioned that we have the most accurate atomic blocks, the most accurate sensing. And yes, we have satellites, too. So I look at it as that platform story, not everybody needs everything. But some of the things that we invest in are ground-based and to your point, some are not. Inder Singh: All I'd add to that is, I think it's safe to say, I said in my script that we're focused on next-generation PNT, positioning, navigation and time. This is obviously dual-use. It's important for our Department of or it's also important for things like the future of autonomous driving and more precision and more reliability and robustness in GPSs, obviously vital. We're a very unique company in the sense that we have obviously, a leadership position in QKD. We have a leadership position in optical interconnection space and also leadership position in quantum sensing and space and atomic clock. So there's a good amount of I think both U.S. and allied enthusiasm for different configurations of what we're opting we'll update the market, obviously, as we can and as we make progress. Operator: Our next question comes from Antoine Legault of Wedbush Securities. Antoine Legault: Congratulations on the results as well. With regards the time line compression for Q-Day. I think, Inder, you mentioned it briefly, but are you seeing a shortening of the sales cycles within enterprise customers? Or put differently, is there more impetus for enterprises to migrate to PQC standards? And has that driven any acceleration in revenue growth recently? Inder Singh: Look, I can't comment on industrial customers before. We are seeing customers wake up to the fact not just because we're saying it, but Google saying it others are saying it, right? I mean there's an acceptance now that things are about to change in a very radical way in a very short time line. And if you look at our road map, our road map probably gets us there before many other companies. So when we look at the need for creating solutions that solve chemistry problems or, to your point, encryption as well. We also have to ensure that we are ready to secure our customers. And we're starting to see the conversations start around let's talk about security. So as I said earlier to a prior question, that has become more prevalent now than it was a year ago for sure. I'm not going to tell you that everyone is thinking, "Oh, I need to do something for tomorrow. I think people are realizing it's not 20 years away. So that's what they were hearing from some others in tech. We were saying quite the opposite, right? We were saying we're going to build the most powerful computing devices on the planet, and we are. So I think that the national conversation when you have the compute power that creates enormous amounts of exponential amount of compute, energy and power and then solutions that help guard us today so you can deploy the compute solutions you want and secure what matters to you. We're very unique in that mission. Antoine Legault: And just a quick follow-up. On the recent Florida [indiscernible] announcement, can you give us a sense of the scope of that engagement, what it means for the company? Or just more broadly, do you see that as a replicable model in other states or jurisdictions. Niccolo de Masi: Yes. So it's a phased contract. And obviously, it will connect a limited geography to start with, but there's ambitions from Florida's Secretary of Commerce to expand that to be a statewide initiative Universities are leaning in, obviously, in Florida. The state is also leaning in. And I think they recognize that as Q-Days coming earlier, the need to secure critical infrastructure for the state continues to climb. And it's now inside the planning horizon for both enterprise and government partners when we're talking about something that is 2 or 3 years away, not a decade away, right? And so all of a sudden, and there's broad agreements, we were the early mover and leader on this last summer, but there's now a very broad agreement, right, between geopolitical competitors through to large enterprise, non-Quantum enterprise and, of course, ourselves and Quantum enterprise that this is very much something that if you're a CIO, CTO, a CISO, you now need to plan in because the chances of your job, life expectancy running right through this have just skyrocketed, right, in the last year. So it has been a nice piece of momentum uptick for sure, Inder mentioned landing and expanding. And I think this is, for sure, part of that precise strategy. I think we're just getting started here, obviously. And so we will be growing in sophistication. As you can see in our presentation. We talk about security as a key tenet of what it is that we provide, and we've been investing in this as well. So I'm looking at Page 10 in particular, when I talk about the full stack of cyber for the Quantum era, right? And that stack is going to get deeper and broader itself also, and we intend to be the leading player here, obviously, as we are today. Operator: Our next question comes from [ Nehal Koski ] from Northland Capital Markets. Unknown Analyst: The $12 million impact from SkyWater, is that 100% realized in COGS? Would that have been 100% realized in COGS? Inder Singh: The expenses I talked about? Unknown Analyst: Yes. Inder Singh: Yes, it's more R&D tooling and things like that. Unknown Analyst: Okay. So then can you talk to the driver of gross margin being down about 600 basis points Q-on-Q. Inder Singh: Yes. I mean I've said this on prior calls, and I want to make sure that I make this very, very clear. This is a nascent industry. This industry in which scale will build over time. We are very focused on gross margin, obviously. We start with a huge advantage. Niccolo mentioned this earlier. We have a bill of material that is a fraction of the cost of any other modality. So you start with that and then you add capabilities on top of it. The better way to think about a business like this or frankly, any other high-tech business on the cutting edge, whether it's AI companies or sell to others, is EBITDA, and that's why we guide EBITDA because R&D is a big component as much as you're focused on COGS, yes, I am, too. But R&D is an important ingredient in our recipe right now, to maintain and accelerate into our road map. So that's what we look at. Yes, as our revenues are doubling this year and maybe more than doubling this year for the guidance, and continue to grow, we have the ability to then drive a cost margin across the goods sold focus as well. At the moment, it's a mix of things. It depends on what you sell more of in any given quarter. So I would not assess on the gross margin. I'd urge you to think more about a more fulsome view, which is EBITDA margin. Unknown Analyst: Okay. Great. Two more questions, please. Niccolo, the walking cat architecture, can you discuss what you see as the advantages relative to some other new relatively qubit architectures, specifically qubit architecture, specifically? Niccolo de Masi: Yes. I mean, look, the main advantage is ours is shop ready, and we're ready to go, and we've gotten there first as we have with everything else in more detail and more constructability, right? It is simple. It is all to all communication. It is parallel gate, okay? And we're going to have a lot more physical qubits, which means more logical qubits given our error correction ratio is very low on a single chip, right? So we'll be able to tackle problems in the fault tolerant era that simply will not be tackleable by other architectures because they won't have enough logical qubits. 100 large qubits will not do, what, 1,000 or 10,000 large qubits can do on a single chip where it can communicate quickly to each other and seamlessly to each other. The parallel gate aspect, I'll highlight because that's really quite unique. And I would also say that if you go through our BOM, or bill of materials, we announced last September, our Analyst Day at the NYC that our bill of materials in 2025 was under $30 million. That's truly astonishing. It's manufacturable. It is low. It is modest energy consumption. It is modest BOM. And because of the way architecture is built, it's really quite robust, right? We don't have a bunch of dilution refrigerator requirements that drives energy cost, space, and BOM up a long way quickly. What we have is something that can fit near the front line, can fit in your basement type thing, can fit in a normal data center, right, section of an office or a building. And because we also control a lot of the IP, I would argue all the best IP for networking and memory, we have extensibility to full data center offerings already being worked on already being built in. My friend Inder here mentioned hybrid workflows, hybrid data centers are coming. There's a recognition of that need. And IonQ, because we're networking forward and always have been, has thought about obviously how that component will fit into our architecture as and when we would like to roll out. You see customers beginning to obviously work on that, whether it's AFRL and others as early as last year, that's going to accelerate, obviously, an enthusiasm is my prediction. So built for scalability is really my summary here, right? It's modular, it's simpler, it's regular and it uses, of course, manufacturing techniques that are well proven, so we can move quickly and we can move at global scale. Unknown Analyst: One of the things that jumps out to me from the explanation that you just gave was the scalability. And I think that you're intimating towards a better error correction capability, lower physical to logical qubit ratios. Is that contemplated in the long-term road map that you guys had laid out a year ago where when you're talking about a 200,000 physical qubits, you're at 8,000 logical qubits, that basically implies 25 to 1 -- is that -- was that already contemplated that you were going to be moving forward with a walking cat architecture that enables the relatively low physical to logical qubit ratios? Niccolo de Masi: Yes, for sure. I mean this is -- we've been very clear on this, I think, in every meeting call and presentation we've done, right? Because we have the highest fidelity, 49s because we've proven ion transport and ion 49s and we -- yes, we've been working with architecture for a long time. I mean it's a multiyear effort, not a multi-week effort type thing. So yes, I mean, when we publish things in our road map, we have a very high, what I would call, do say or say do ratio, right? So end of the day, we do what we say we're going to do both technically and of course, financially each quarter and each year, and we're proud of that. And these are the goals that our entire team very much prides himself on delivering step 1 and then overdelivering against thereafter. So yes, I mean I'm very proud of the team. We're proud to be there first yet again. I'm not surprised because I said that we would get there last summer. First, and we continue to march right up this curve right on schedule. Unknown Analyst: Okay. Great. And real quickly, do you have the average duration on the RPO. Inder Singh: I mean -- but you can imagine that it's multiyear. In our [indiscernible] that will be filed, we'll break out for you what percent of that will turn into revenue in this year and then the rest of it turns into future years. What I like about it is we're talking years, right? I'm not talking about 1 quarter visibility. You start to look beyond a quarter, you can now focus on the long term. You can talk about R&D investment for the next 5 years. And you asked a really go question. And by the way, congratulations on launching coverage on the quantum sector and welcome to the party and the enlightened side. The thing that I would urge you to keep in mind though, and I know you know this, modalities that have lots of errors to start with, talk about error correction, modalities that have very few errors do not talk about error correction. Whether lucky or smart, the founders of this company 3 decades ago, [ victor ] modalities that have highest coherence, best fidelity, lowest error rate. 3 of the 4 ingredients that you absolutely must have. The fourth speed, so we are now trying to build the fastest, most powerful computing devices on, I think, the market today and probably in the coming years. We talk a lot about U.S. questions around cost of goods and things like that. customers think about total cost of ownership. Think about what it means to buy a superconducting based solution, which is great, no NOC. But then you have the operating costs after day 1. So we don't suffer from that. We don't suffer from the bill of materials issue. We are more around creating the best and most, I'll call it, app and App Store and iPhone analogy, which Niccolo talked about a lot. And if you think about that, as we build the next computing device, i.e., the next iPhone, we're also, at the same time, building the applications that can run on. That's really important. Keep that in mind just as much as we think about the power of the machine. That's number one. Number two, we're not just a maker of machines anymore. We are a maker of solutions, entire solutions end-to-end. So it's a platform company. And I think customers are starting to talk more around that and saying, let's talk about that other side of your portfolio, and then we'll come back to [indiscernible]. Operator: Our next question comes from Peter Pang of JPMorgan. Peter Peng: Just on the near-term question, you guys gave an updated annual revenue guidance. And just based on your second quarter guidance, it would imply a pretty flattish revenue through the remainder of the year? I know you guys talked about expanding capacity to accelerate the demand. To what extent are you still constrained as we look out in the back half of the year here? Niccolo de Masi: We're exercising proven look, it's a nascent industry, right, Peter. I mean, thank you for the question, by the way. It's a good one. Look, when we guided for Q1, a quarter ago, we guided for a number you saw. We beat that by $15 million. Not that we expect it to be the -- $15 million, but we knew we would work towards what we've been doing for 4-plus years, providing guidance on technology and financials, and trying to either meet or exceed on both. So I think stay with us on the journey. As we look at this company and the potential it brings, the total cost of ownership differentiation, which no 1 is really talking about yet. The fact that we can deliver the 10,000 machines and then the 20,000 beyond. And to someone's question earlier, it becomes a modular upgrades, modular upgrades, not a machine replacement at that point. So you get a sticky, very, very sticky relationship with the customer and the mutual dependence. So thank you. I appreciate your question. We are trying to be responsible stewards of investment, capital and what we say to investors with the hope that we can at least meet those expectations that we set out there. And last 4, 5 years would suggest we can actually even beat them. Peter Peng: Great. And then just for your next -- the 10,000 qubit chip, can you update us on the time line? Is that a calendar '27? Or is it calendar '28? Maybe just update on timing of that? Inder Singh: Yes. Look, I think we are focused this year on the Tempo, right? So 2026 when we last spoke, 2026, Tempo, 2027 in market 256 year after that in market 10K. Now because we have a team that is integrated across our compute now under leadership unified leadership, I would say, Matt, perhaps we can do things differently, perhaps we can do things more efficiently, maybe even faster. So we will invest in continuing to move our road map to the left. You've seen us do that twice. When we bought Oxford ionics, we moved our 5-year road map to the left. And when we announced the proposed acquisition of SkyWater, and we'll wait for the right approvals to happen, of course, and all that, we will be able to perhaps move, as you saw in our announcement, the road map yet again to the left. So the investment dollars that we have and the capacity to keep putting money into this business and delivering solutions faster and yes, financial outcomes also perhaps earlier and better, is what we're focused on. So 10k and this year, Tempo, next year, the 256 year after that 10k, my colleague, [ Chris Balance ] at Oxford who obsesses over this 24/7 and his entire team are making sure that they can execute with precision for more and more demanding customers. Our devices are not in the labs anymore, remember. Our devices are deployed in hybrid compute environments around the world, and those folks expect machines to work like turn on day 1, work, and provide the compute power that they need and the application development. So it's a continuing dialogue. We're happy to have it with you, Peter. It's an interesting evolving area. And when Niccolo and I joined the board 5 plus years ago, we didn't think the industry would be where it is perhaps 5 years from now, we'll look back and say, wow, so $3 billion of investment power, perhaps more singular focus on meeting the customer where they are, not trying to outcompete anyone else except ourselves, compete against ourselves, that's how you win, and that's our focus. Operator: Our next question comes from Vijay Rakesh of Mizu. Vijay Rakesh: Great to see solid guidance. Just 2 quick questions, 1 on short term and 1 on longer term. On the short term, as you look at that mix of hardware and platform services, should that mix be about the same going forward? Or do you expect 1 to accelerate? Inder Singh: Again, I think it depends on where the customer begins their journey with us, right? So again, #1 rule in business meets the customer where they are, meet their current need, understand what they need before they try to sell them something, and then do the land and expand and anything else in cross-selling that you want to do. So rather than worrying about which part, which product of our doesn't would be growing more than others. I look at the whole company -- that's how Niccolo looks at it, we look at it as 1 P&L, and we're trying to drive outcomes for our customers. The good news is the multiproduct sales that we just talked about, are demonstrating that customers are maybe starting with 1 and then adding more than one. And I hope that number will continue to grow over time. Our focus on 1 P&L, 1 R&D capability across the company, teams focused on the best efforts in terms of driving innovation. And our job is basically making sure that they succeed and create innovation to happen faster and faster. This is not about Moore's Law. This is way faster than Moore's law, right? You know. So that's how we look at it, Vijay. Vijay Rakesh: Got it. And then on your 2027 you have the ambitious plan of getting to 10,000 physical and 800 logical, how is that looking, I guess? Inder Singh: Yes. Early indicators, as we said in the prepared remarks on the 256, last quarter, we said we had already started to make progress on the tape-out. This quarter, we started to do system-level testing on 256. So when you get comfort with that generation of product, you can now turn your focus to the next, right? And it's always like a learning curve. Niccolo well. There's always an curve, but there's also a learning curve. And each learning curve helps you with the next one. Niccolo, I don't know if you want to add something. Niccolo de Masi: Well, no, I want to add to this is we're working on 3 generations in parallel. Obviously, we've talked in my prepared remarks about our success in the first quarter on the 256 tape-out with SkyWater. We expect continued progress, momentum, success there. Obviously, the difference between our architecture and what you might see in the marketplace is we've published the shovel-ready blueprints, right? We've been working on that for quite some time. We've published it. And our architecture is very scalable, very unique, very modular. And ultimately, it is something which is fully proven already in terms of what the components need to be, right? It's simple. It's regular. It has unified error correction, it's got parallel gates and execution. And ultimately, it's got subroutines with dedicated components tiled in the hierarchy on each chip. And so going from 10,000 to 100,000 to 1 million is not a particularly demanding leap. I think if you looked at what has been driven between generations of classical GPU architecture, I would argue that we are on parallel or simpler, right? And so we look at this scaling now, as we've said repeatedly last year as really an engineering challenge. Everything in our blueprint is extremely realistic in terms of the constraints and the specific details on the competitive design, the error correction, the hardware control systems, ion movement, parallel gates, the fidelities that we're acquiring are all less than what we've proven in the lab already, right? So I'm not saying that it's not hard. I'm not saying that there won't always be some things that sort of crop up when you move from a few systems to dozens or hundreds or even someday thousands or millions of systems. I mean that's all possible with this architecture. But nevertheless, it is all very digestible and it's been done many times in the history of humanity, right? So I think every -- of course, every year, it becomes yet more proven out. We sell more systems, and we prove out another generation. But the hard work has been done on this architecture on the components of the architecture that have all been demonstrated in the last year and years for that matter. This is really the culmination of 30 years of work. And the reason we're ahead is we've been thinking about it longer than everybody else. We built the first Quantum Longi gate in '95. And today, we have the highest 2-qubit gate fidelity. And of course, we also have the first shovel ready blueprint because we're not resting on our laurels. We can continue to put the pedal to metal and we keep pushing this. And we keep investing, and we will continue to do that. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Niccolo de Masi for any closing remarks. Niccolo de Masi: Thank you, operator. As I shared in our annual letter to shareholders last week, my personal journey with IonQ dates back to reading our founders seminal paper on the world's first phonologic gate as an undergraduate physics student in the 1990s. That moment was a shot heard around the world for anyone passionate about quantum mechanics and it cemented my commitment to this company's mission. Today, 1 year into my role as Chairman and CEO, IonQ has evolved from a quantum computing pioneer into the world's preeminent full stack Quantum platform and U.S. merchant supplier. We're the only company delivering integrated solutions across quantum computing, networking, sensing and security in all major and allied geographies and in all domains from submarines to satellites for the warfighter. We believe passionately in the importance of our merchant supply mission for the U.S. and allied quantum industry. We are investing and building a foundation to support the acceleration and commercialization of the entire quantum ecosystem as we have already done with our atomic clocks, sensors and quantum networks. Our North Star is the pioneer of Quantum Solutions and quantum applications that create durable value across global industries, and we are poised to transform sectors spanning pharma, finance, energy, defense, materials, logistics, GPS, cybersecurity and far beyond. Our revenue momentum underscores how we are already positively our global customers in these domains. We have 1,500 world-class professionals, comprised of over 300 PhDs and the deepest IP portfolio in the industry with over $3 billion of cash on the balance sheet. We are now moving from Quantum platform building blocks to Quantum platform execution at scale. IonQ is 1 platform, 1 team, primed and poised to win. I want to thank our shareholders for their continued trust and our colleagues for their extraordinary efforts. Thank you again for joining our call. We look forward to 2026 with confidence. Operator: Thank you. This call has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Coherent Third Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead. Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the third quarter of fiscal 2026 and the business outlook for the fourth quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, May 6, 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson. James Anderson: Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is a global leader in photonic technology, which is foundational to the performance and scalability of AI data centers and critical to many important industrial applications. We are at the center of an extraordinary expansion in optical networking infrastructure, driven by the rapid growth of AI and the increasing need for bandwidth and energy efficiency. As a result, we delivered another quarter of strong financial performance with accelerating growth, expanding margins and improving profitability. Importantly, we are seeing continued strengthening in demand across our business. This quarter, we experienced another step function increase in our order book, driving our backlog to a record level. Customer demand remains exceptionally strong with no signs of attenuation, and our visibility continues to extend further into the future with orders now reaching into calendar 2028 and customer LTAs extending to the end of the decade. This demand is increasingly translating into near-term shipment and revenue opportunities as we continue to expand capacity. Given both the near- and long-term demand strength, combined with our continued expansion of production capacity, we expect a period of sustained strong revenue growth over the coming quarters. We expect strong sequential revenue growth in our June quarter, and we continue to expect fiscal '27 growth rate to exceed our fiscal '26 growth rate. Turning to our Q3 operating results. Revenue increased 9% sequentially and 27% year-over-year on a pro forma basis, representing an acceleration in our year-over-year growth rate versus the prior quarter. Non-GAAP gross margin expanded both sequentially and year-over-year and the combination of revenue growth, margin expansion and operating leverage drove non-GAAP EPS growth of 55% year-over-year. We continue to grow profitability significantly faster than revenue. We are pleased with the continued execution, but we also see significant opportunity ahead as we scale the business to meet the demand environment in front of us. Our Datacenter & Communications segment continues to be the primary driver of our growth and accounted for 75% of total company revenue in Q3. Growth in this segment accelerated again this quarter with revenue increasing more than 40% year-over-year. Segment performance was driven by both accelerating demand and strong execution across our product portfolio. In our data center business, revenue increased 13% sequentially and 37% year-over-year, representing a second consecutive quarter of double-digit sequential growth. We expect data center growth to further accelerate in the current quarter, supported by exceptionally strong demand, improving supply and continued progress in our capacity ramp. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. We expect the accelerated growth in the current quarter to be driven by both transceivers and OCS systems. Within transceivers, we expect growth to be driven by both 800 gig and 1.6T. In particular, we expect 800 gig revenue to grow year-over-year in calendar '26, while 1.6T transceivers ramp rapidly through the balance of this calendar year and into next year as a broad range of customers adopt 1.6T. Given the exceptionally strong demand environment and the industry-wide constraints in indium phosphide, capacity expansion remains one of our highest priorities. Importantly, we continue to make excellent progress on our 6-inch indium phosphide ramp, which is a key driver of our long-term capacity expansion and a meaningful differentiator for Coherent. We are now seeing the benefits of this ramp in both revenue and margin, and we expect those benefits to increase further over the coming quarters. We remain on track to achieve our goal of doubling internal indium phosphide output capacity by the end of this calendar year. And based on current execution, we now expect to reach that milestone 1 quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027. Our 6-inch platform is producing EMLs, CW lasers and photodiodes and the yields for each of the 3 device categories continues to exceed those of our 3-inch production lines. During the quarter, we shipped our first transceivers containing components produced on our 6-inch lines, and those shipments contributed to both sequential revenue growth and gross margin improvement. The initial 6-inch production contribution came from our Sherman, Texas facility, which is the world's most advanced indium phosphide production site and will play an important role in ramping CW laser production for our CPO solutions, including those supporting our NVIDIA partnership. Given the success of the 6-inch ramp to date, we have also announced plans to begin 6-inch indium phosphide production at a third site in Zurich. Overall, we are very pleased with the execution of our production teams. As we continue to ramp 6-inch output, we expect increasing benefits to both revenue and gross margin across our transceiver and CPO product lines over the coming quarters. We expect OCS revenue to grow this quarter as we ramp production capacity to meet demand. We have increased our view of the OCS market opportunity to over $4 billion, reflecting expanding use cases across data center interconnect, scale-out and scale-up networks and continued broadening customer engagement. We believe OCS also expands our role into higher-value layers of AI networking infrastructure. We recently resolved the bottleneck in our production capacity and are now ramping output rapidly across 2 production facilities. As a result, we expect strong sequential revenue growth over the coming quarters as production improvements translate into higher shipments and backlog conversion. We also continue to make strong progress in co-packaged optics, which we believe represents one of the most important long-term growth opportunities for Coherent. As we have discussed previously, CPO expands our role in AI data center architectures, particularly in the scale-up portion of the network, where optics is expected to increasingly complement and over time, displace copper. We believe CPO represents more than $15 billion of incremental addressable market opportunity. In March, we announced a strategic partnership with NVIDIA focused on multiple CPO-related products and solutions. This partnership includes both NVIDIA's $2 billion equity investment in Coherent and a multiyear supply agreement extending through the end of the decade. The agreement covers multiple CPO-related products, including our high-power CW laser and provides meaningful long-term visibility into future demand. More broadly, our CPO opportunity is supported by the breadth and depth of Coherent's photonic technology platform. We believe our breadth of photonic technology and our manufacturing scale, position us very well to support a broad range of customer requirements across key optical components, subsystems and higher-level assemblies. We expect initial scale-out CPO revenue to begin ramping in the second half of this calendar year with scale-up CPO revenue expected to begin ramping in the second half of calendar 2027. In addition to NVIDIA, we are also engaged with multiple other customers across a broad range of CPO and MPO opportunities. Overall, we believe CPO will become a significant contributor to Coherent's long-term revenue growth and margin expansion and will further strengthen our strategic position in AI data center infrastructure. Turning to our Communications business. Revenue growth accelerated significantly in Q3, with revenue increasing 16% sequentially and 60% year-over-year, driven by strong demand across data center interconnect, scale-across and traditional telecom applications. We expect strong sequential growth again in the current quarter. Demand remains broad-based across customers, products and end applications. We are seeing strong momentum across our communications portfolio, which spans components, modules and systems, reflecting both favorable market conditions and Coherent's strong competitive position. In particular, we continue to see robust demand for our DCI solutions, including ZR and ZR+ transceivers as well as strong demand across our broader transport portfolio. One additional growth driver that we are particularly excited about is multi-rail. These solutions address the increasing need for greater bandwidth and connectivity between AI data centers as workloads become more distributed across multiple locations. We believe multi-rail represents a significant expansion of our communications addressable market opportunity, and we expect initial revenue to begin ramping in the first half of calendar 2027. Overall, we believe our communications business is very well positioned for continued strong growth, supported by current demand strength, our expanding portfolio and the ramp of important new platforms over time. Across our Datacenter & Communications segment, the breadth and depth of Coherent's Photonic technology portfolio, combined with our manufacturing scale, continue to resonate strongly with our customers. As a result, we have signed or are in the process of finalizing long-term supply agreements with multiple strategic customers that include both multiyear demand commitments and upfront investment to support capacity expansion. Turning to our Industrial segment. Revenue declined modestly both sequentially and year-over-year on a pro forma basis, reflecting continued softness in parts of the broader industrial market. However, we are seeing encouraging signs of improvement, particularly in semiconductor capital equipment, where bookings have increased meaningfully. We expect that improving demand to begin contributing to revenue growth in the current quarter and to support further sequential improvement through the balance of the calendar year. Over the longer term, we see important incremental growth opportunities for our industrial technologies and AI data center applications. At OFC, we highlighted our data center XPU cooling solutions and thermoelectric generators, which address the growing thermal and power challenges created by larger AI data centers. Our proprietary Thermadite material can improve thermal performance and help enable higher XPU efficiency, while our advanced materials for thermoelectric generation can improve data center power efficiency through waste heat recovery. We are engaged with multiple strategic customers on these technologies, and we believe they represent a meaningful expansion of our long-term market opportunity. We expect revenue from these products to begin ramping in the second half of calendar 2027. Overall, while industrial remains a smaller contributor to our current growth than data center and communications, we believe it is positioned to become an increasingly important source of incremental revenue and diversification over time. In summary, we delivered another quarter of strong financial performance with accelerating revenue growth, expanding margins and increasing visibility into future demand. We are operating in a highly favorable demand environment driven by AI data center expansion, and we believe Coherent is uniquely well positioned to capitalize on this opportunity, given the breadth of our photonic technology portfolio, our manufacturing scale, our continued capacity expansion and the increasing conversion of demand into backlog and revenue. I want to thank the entire Coherent team for their strong execution and continued innovation. I'll now turn the call over to Sherri. Sherri Luther: Thank you, Jim. In our third quarter, we delivered accelerated double-digit year-over-year revenue growth and meaningful gross margin expansion, significantly improving profitability. We have strategically increased our capital investments to expand internal capacity in support of the rapidly growing demand in data center and communications. In addition, we also continued to strengthen our balance sheet, reducing our debt leverage ratio to below 1x. I will now provide a summary of our Q3 results. Third quarter revenue was a record $1.8 billion, up 7% sequentially from the second quarter, and up 21% year-over-year, driven by growth in AI data center and communications demand. On a pro forma basis, revenue increased 9% sequentially and 27% year-over-year, excluding revenue from our Aerospace and Defense business and our Munich, Germany product division, which were sold in Q1 and Q3, respectively. Our Q3 non-GAAP gross margin was 39.6%, a 57 basis point improvement compared to the prior quarter and a 105 basis point improvement as compared to the year ago quarter. We continue to execute on our gross margin expansion strategy, where we generated sequential and year-over-year increases in gross margin, primarily in the Datacenter & Communications segment. These improvements were driven by reductions in product input costs, yield improvements from 6-inch indium phosphide as well as significant benefits from pricing optimization. Third quarter non-GAAP operating expenses were $348 million compared to $321 million in the prior quarter and $297 million in the year ago quarter. R&D expense as a percentage of revenue increased to 9.9% in Q3 compared to 9.4% in both the prior quarter and the year ago quarter. The sequential and year-over-year increases in R&D were primarily in the Datacenter & Communications segment product road maps. These investments are focused on multiple short- and long-term revenue growth drivers, namely in transceivers and CPO as well as new high-margin, high-value systems such as OCS and multi-rail. We continue to focus on investments with the highest ROI that drive the future growth of the company. SG&A expense as a percentage of revenue declined to 9.4% in Q3 compared to 9.6% in the prior quarter and 10.4% in the year ago quarter with continued progress on driving efficiencies and greater leverage in SG&A. We are already seeing benefits from our low-cost regional shared services initiatives within the G&A functions as we streamline processes and gain better leverage and efficiency. In addition, our ERP consolidation project has made great progress where the majority of the company is now in a single ERP platform. We expect additional benefits from these initiatives in Q4 with more meaningful benefits into fiscal year 2027. Our third quarter non-GAAP operating margin increased to 20.3% compared to 19.9% in the prior quarter and 18.6% in the year ago quarter due to strong revenue growth and continued gross margin expansion. Third quarter non-GAAP earnings per diluted share was $1.41, up 9% from the second quarter and up 55% from the year ago quarter. The acceleration in earnings outpaced revenue growth, driven by strong top line performance as well as gross margin expansion. Our cash balance increased to $3 billion from $1.5 billion in the prior quarter, primarily due to the $2 billion equity investment from NVIDIA that we announced on March 2, 2026. We focused our capital allocation priorities during the quarter on investments that drive long-term revenue growth and profitability, specifically investments in our data center and communications business and our R&D product road map as well as capacity expansion. We also made $162 million in debt payments during the quarter, reducing our debt leverage ratio to 0.5x, down from 1.7x in Q2 and 2.1x in the year ago quarter. Our capital expenditures increased to $290 million compared to $154 million in the prior quarter and $112 million in the year ago quarter. These investments were focused on expanding our internal capacity to support the exceptional demand in data center and communications. Due to our strong bookings and the rapidly growing demand, we expect capital expenditures will increase sequentially in Q4. We continue to be on track with our capacity expansion plans. With a strong balance sheet and continued focus on improving profitability, we are well positioned to support the unprecedented customer demand with investments to rapidly expand our production capacity. As a reminder, at the end of January, we closed the sale of our Munich, Germany product division. For reference, over the prior 4 quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. Our Q3 results included $8 million in revenue from this business. I will now turn to our guidance for the fourth quarter of fiscal 2026. We expect revenue to be between $1.91 billion and $2.05 billion. We expect non-GAAP gross margin to be between 39% and 41%. We expect total operating expenses of between $360 million and $380 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.52 and $1.72 on a non-GAAP basis. With our strong backlog and excellent visibility, we are focused on rapidly expanding our internal capacity with investments that drive the long-term growth and profitability of the company. We will continue to allocate capital in a disciplined manner as we execute against our long-term financial target model and drive durable shareholder value. That concludes my formal comments. Operator, please open the call for Q&A. Operator: [Operator Instructions] We take the first question from the line of Samik Chatterjee from JPMorgan. Samik Chatterjee: Congrats on the robust set of results, numbers here. Jim, maybe if I can start off with the guide for the June quarter. It is implying an acceleration from Q3, so the increases you had in Q3 from a revenue perspective. And particularly when I look back through the year, every quarter, you've managed to sort of accelerate the sequential revenue growth. So maybe if you can sort of dive into, one, what's the driver on the demand side that's helping you lead to that acceleration? And maybe also contextualize it in terms of supply and how that's helping with the acceleration as well? And I have a follow-up after that. James Anderson: Yes. Thanks, Samik, for the question. Yes, if you look at the midpoint in the June quarter guide, certainly, we expect acceleration in growth versus prior quarter and if you look at the year-over-year growth rate as well. We really believe the current June quarter kind of represents a new inflection point in our revenue growth rate moving forward, so faster growth this quarter. And as we look forward into fiscal '27, which starts in July, we expect our fiscal '27 growth rate to be above fiscal '26. And on the demand side of the equation, I would say that just -- it looks exceptional right now, both in terms of the degree of demand, but also our visibility on demand. If we look at just bookings in the prior quarter, bookings in the prior quarter were up substantially from the previous quarter, record bookings, incredible amount of backlog, and we've now got orders that extend out into calendar '28. And so we have just tremendous demand ahead of us, but also great visibility on that demand. And that demand is coming from places you'd expect, certainly data center and growth, both transceivers with some of the new growth vectors we're bringing on as well as communications. And then probably more importantly, on the supply side of the equation, that's probably really more than our focus. Demand looks great. What we're doing is ramping supply very, very quickly. And both this quarter, but moving forward, we're bringing on substantially more capacity over the coming quarters. And probably the best single example of this is just the indium phosphide capacity that's coming online. Indium phosphide has kind of been the key constraint for us for a number of quarters. It's a constraint for the industry. But our target this year is to double our indium phosphide capacity. And the great thing is we're -- it looks like based on the current execution, we'll achieve that goal next quarter, which is 1 quarter earlier than we thought. And when I look into next calendar year, we expect to more than double indium phosphide capacity again. So that's a quadrupling of capacity over a 2-year period. And so that looks really good. And so I think that really unlocks an acceleration in our revenue growth moving forward. And that's kind of on all the existing business. Then you layer on top of that some of the new growth areas and new growth vectors that are coming online. OCS is ramping. We expect that to contribute to growth this quarter and grow sequentially. CPO revenue kicks in, in the second half of this year. That's -- we view that as all incremental. Our multi-rail systems will start contributing revenue in the first half of next calendar year. And then we think thermal solutions will start to generate revenue in the second half of calendar '27. So we sort of have these multiple growth vectors that are layering on top of the existing business growth. So we feel really good about the growth and the sort of accelerated growth ahead of us. Samik Chatterjee: Got it. Got it. And then maybe just a follow-up on similar lines. You mentioned the acceleration on the indium phosphide capacity. Given that you're tracking a bit ahead relative to your target for 2x in the first year? How should we think about potentially upside or accelerating the target for 2x sort of next year as well? And as investors, how should investors think about the impact of that on gross margin? How material is it? When does it start to be material to your gross margin trajectory as well? James Anderson: Thanks, Samik. Actually, on the second part of your question on gross margin, we already started to see the impact of 6-inch indium phosphide capacity, which has a much better cost structure. So 6-inch versus 3-inch is more than 4x as many devices at less than half the cost. We already started to see that contribute to gross margin expansion in our fiscal Q3. As Sherri said, I think in our prepared remarks, our guide in the current June quarter has gross margin going up sequentially. Again, part of that, what's driving the gross margin expansion is the 6-inch indium phosphide capacity, which just gives us a much, much better cost structure. But overall, I'm really pleased with the execution on our 6-inch indium phosphide ramp. There's kind of 2 factors underneath there. There's just the raw capacity ramp, but also very important is the yields. And so the team has executed ahead of plan on the raw capacity ramp, but also we're seeing very healthy yields. We're in production on 3 different types of devices, EML, CWs and PDs. And all 3 of those devices have yields on 6-inch that are higher than our 3-inch production yields. And Texas was the first facility we started ramping 6-inch on. Super pleased with the progress there, because we saw such good yields out of the gate from Texas, which is the world's leading indium phosphide production facility. We started production in Sweden. And now we announced a third site that we're going to start production on 6-inch indium phosphide and that's Zurich, and we'll start to see production from that third site at the beginning of calendar '27. So this ramp of indium phosphide 6-inch is both -- it unlocks a lot of additional growth for us, but it's also definitely contributed to gross margin as it becomes a bigger portion of our indium phosphide overall production capacity. Operator: We take the next question from the line of Simon Leopold from Raymond James. Simon Leopold: The first thing I want to see if you could address is there's a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecast in categories like the OCS and CPO. How do you explain the difference? And then I've got a quick follow-up. James Anderson: Yes. I think, Simon, on both of those new growth areas, we feel really good about the growth that's ahead of us. On OCS, we recently, just over the last couple of months at OFC, we doubled our forecast of the market opportunity there. The revenue growth rate, the sequential growth that we're guiding in the current quarter, part of that growth, that sequential growth is OCS systems growth. We feel great about the differentiation of our technology. It's a very differentiated technology that provides both higher reliability, but much, much better power efficiency. And so we feel really good about the long term, both the short- and the long-term growth prospects on that product line. And we've really been focused on just ramping capacity as fast as possible. And as I mentioned in the prepared remarks, we did kind of have a breakthrough over the last couple of months on removing a bottleneck in the production capacity that's allowed us to ramp production at a much faster rate, and we're ramping in 2 sites in parallel. So we feel good about the OCS, both the long-term opportunity, but the ramp in the near term as well. And then look, CPO is -- I think it's a transformational growth opportunity for the company. We see that market size as over $15 billion, and that's probably a conservative estimate over the coming years. We've -- CPO revenue for us will start in second half of this calendar year, and that will be initially scale-out CPO revenue. And then we expect to see the beginning of scale-up CPO revenue in the second half of calendar '27. And we're engaged with multiple customers. Obviously, we have a public announcement that we did with NVIDIA on our partnership with NVIDIA. That's all around CPO. That's a multibillion-dollar agreement that extends out through the end of the decade. And importantly, is it's multiple different CPO solutions. So if you look at what can we provide in the CPO solution, it's not just the laser, right? We're certainly providing the high-power CW laser. But beyond that, we're providing the external laser source module. We can provide the fiber attach unit, which includes micro-lens arrays. It includes polarization maintaining fiber. So we have our own fiber optics fiber that we'll provide in those solutions. Within that external laser source, we provide all of the ingredients, not just the laser, but the isolators, the thermoelectric coolers. So there's a tremendous amount of content that we expect to provide in CPO. And I see this as a major new growth area for the company. And I think we're very, very well positioned in CPO. And like I said, first revenue will start in sort of later this year, this calendar year. Simon Leopold: Great. And just as a follow-up, I appreciate you don't want to get the -- micromanaging each product segment, but I'd like to see if you could confirm if the 1.6 terabit transceiver revenue exceeded, let's say, $100 million in the March quarter. And if not, when can we get to that milestone? James Anderson: Yes, Simon, we don't break out individual data rate revenue for our transceiver business. But we expect 800 gig to grow this year. It will probably grow again next calendar year. And then on top of that, 1.6T is ramping at an incredibly rapid pace. In fact, as I think we've shared in the past, that 1.6T ramp is actually faster than what we would have thought, say, a year ago, which we're really pleased with. And so if you look at our incremental or sequential growth in the current quarter, a good portion of that is driven by the 1.6T ramp. And we expect 1.6T to not just contribute to the current quarter sequential growth, but to continue to ramp very quickly over the coming quarters as well. And so I think really the growth drivers for our transceiver business are really 800 gig and 1.6T combined, not just this calendar year, but next calendar year as well. Operator: We take the next question from the line of Thomas O'Malley from Barclays. Thomas O'Malley: My first one is on gross margin. So if I look at gross margins in March at 39.6% and then I look at gross margins last year at 38.5%, the incremental on a year-over-year basis is around 44%. So since that time, I mean, you've increased 6-inch production, you've doubled indium phosphide almost, you exited some businesses. In fact, like your data center business, you kind of report -- well, you could assume some percentage of this comms business, but that's growing really nicely as well. So why aren't you getting more incremental fall-through on the gross margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item? Sherri Luther: Yes. Thanks, Thomas. So the way -- a few things I'll just highlight from a gross margin perspective is that if you go back about to the end of Q4 of 2025, we've increased our gross margin sequentially in 7 out of the past 8 quarters. And if you include the 57 basis points improvement from our -- just our recent Q3 quarter, that's an increase of about 530 basis points. And then if you tack on to the midpoint of our guide for Q4, that takes you to 570 basis points improvement. So I think that's pretty good progress. I mean we're not done, but I am pleased with the progress that we've made there. And the target that we put out at our Investor Day last year was greater than 42%, and we are super, super focused on making sure that we get to that target. And when you look at the drivers of our gross margin expansion strategy that we've been executing on quarter over quarter over quarter, it's cost reductions, it's yield improvements and it's pricing optimization. And when you look at our Q3 quarter, each of those areas increased quite significantly from the prior quarter in each of those categories. And so we talked a little bit about some of those in my prepared remarks. But from a cost reduction perspective, we had improvements from 6-inch indium phosphide. We've talked about the fact that it's half the cost, right, when you go from 3-inch to 6-inch. So we're already seeing the benefit of 6-inch. We also talked about yield improvements in Q2 that we saw in 6-inch. So we're continuing to see yield improvement as we continue to ramp. And we talked about how we've got 2 sites going in parallel. We've got another site coming up. I expect to continue to see improvements on 6-inch as we bring the other site up and as we continue to ramp 6-inch. That's going to continue to add benefit to our gross margin. And the other areas of cost reductions that we've seen, actually, that's been predominantly in our data center and communications business. So the majority of -- well, over the majority of our improvements in gross margin have really been in the data center and communications business. So I'm really pleased with that progress. We've also seen pricing optimization benefits. That has significantly increased quarter-on-quarter and certainly year-over-year. And that's been not only in the industrial business, but that was actually quite sizable in our data center and communications business. So I'm really pleased with the progress we've made so far. We're going to continue to drive to get to our target and super focused on doing that, but I'm quite pleased with the progress so far. And we're early stages is the way that I would look at it. Thomas O'Malley: And then just as a follow-up, in the preamble, Jim, you mentioned some bottlenecks that were being relieved in the OCS business. What specifically are you referring to? And how much of an impact could that have on production? James Anderson: Yes, there were some internal components or some components that we make internal to Coherent that we're pacing our production capacity expansion. And so we were able to sort of dramatically improve the amount of internal components that we were producing. And so that really unlocked an acceleration in our production capacity. And so the last month or 2, we've seen a really good ramp-up in our pace of production and expect that to continue. So we're seeing a much faster ramp of production on OCS than, say, a few months ago, which is really good. Operator: We take the next question from the line of Blayne Curtis from Jefferies. Blayne Curtis: Actually, I wanted to ask about scale-across just becoming a big talking point. You called it out in the comm business. Maybe you could just talk about kind of where that is today? And as you look to fiscal '27, how do you frame that ramp for scale-across? James Anderson: Yes. Thanks, Blayne. Yes, we're seeing just tremendous growth in the scale-across part of the business. This falls within our Communications segment, which I mentioned in the prepared remarks. So scale-across or DCI, also within that communications segment is traditional telecom. But the fastest growth that we're seeing is in that scale-across piece of the business. In the most recent quarter, we saw a 16% sequential growth and 60% year-over-year and here, again, similar to data center, just the demand is exceptional. The visibility is exceptional. We have LTAs that are in place with customers in that segment. And we're seeing -- it's really broad-based across almost every product we have in that segment and broad across customers as well. And just to give you a sense of the products in that segment would cover components like pump lasers. It would cover modules like ZR/ZR+ transceivers, which would be the 100 gig, 400 gig and 800 gig ramping ZR/ZR+. It covers line cards and amplifiers and then full systems as well. And so yes, this -- we expect this area, just given the demand we see in front of us and the visibility of this to be a very strong growth area for us moving forward. And then a new system that we think is going to continue to accelerate our growth rate here is multi-rail. And so our multi-rail technology, which we highlighted at OFC, this helps provide a huge capacity increase within the same power and physical area of the prior solution. So it's a tremendous benefit to the customer. And we have a number of very differentiated component technology pieces that go into that system that really position us very well. And we're selling full systems, and we expect that revenue to start in the first half of calendar '27. And so just another growth vector layering on top. So very strong growth in this area, and we expect that to continue given the strong growth that we see ahead of us. Blayne Curtis: And then I just wanted to follow up on Tommy's gross margin question. I just want to better understand the tailwinds. You called out 6-inch as being the biggest driver. I'm assuming the 6-inch volumes that you mentioned you're shipping in your units are still fairly small. So are there start-up costs that kind of roll off there, and that's what the savings are? And then as the -- is [indiscernible], is that a gross margin uplift as well? James Anderson: Yes. So when I mentioned in the prior quarter, the 6-inch, I mentioned that as it was one of the contributing factors. There were actually a number of other contributing factors to gross margin expansion in the prior quarter. And in our guide for the current quarter, it's kind of similar. 6-inch is a contributor, but there's other factors as well. There's pricing and other cost structure improvements that we made. And yes, I would say we're still pretty early in the 6-inch ramp. If you think about the 6-inch -- so we shipped our first transceivers last quarter that included devices from our 6-inch. And that was just the initial production that we started. That will ramp significantly over the coming quarters. So I think there's much more of the 6-inch benefit is ahead of us. If you think about the total doubling of capacity and the fact that all of that doubling of capacity is 6-inch, by the end of this year, next quarter, half of our capacity will be 6-inch. So I think that benefit from 6-inch is more ahead of us. And then on the 1.6T question, yes, we definitely see that as beneficial to gross margin. we expect -- just like we've always seen in prior transitions of speed of data rates at the beginning of the life cycle of a new data rate, generally, the gross margins are better than the prior data rate. So we would expect 1.6T to be beneficial to gross margin for the transceiver business. Operator: We take the next question from the line of George Notter from Wolfe Research. George Notter: I was just curious about anything more you could tell us on the new LTAs that you're signing. Obviously, we learned a lot around the NVIDIA transaction. But you mentioned there's a number of other deals that you guys have brought in. Anything you can tell us in terms of how big those deals are? What kind of duration are we talking about? Are they funding your capital expansions? Like anything you can tell us like financially just in the aggregate, more details would be interesting. James Anderson: Yes. Thanks, George. Yes, there were a couple of additional LTAs that we signed in the prior quarter. And then I would say there's a number of other ongoing discussions. We would expect to close some additional LTAs this quarter very soon. And those LTAs usually have 3 parts. You asked about kind of a CapEx commitment. Yes, there's usually an upfront investment from the customer. to help with the CapEx. And that can come in a number of different forms, but there's usually some upfront investment, which kind of represents sort of skin in the game from the customer and which we view as really positive. And then there's -- of course, there's a supply commitment from us. But the third element is there's almost always some sort of demand minimal -- at least minimal demand commitment from the customer to make sure that, that capacity is going to get utilized. So those are kind of 3 parts of the LTA. Almost every LTA has those 3 parts in it. And so yes, I would say good progress last quarter in additional LTAs, and we anticipate more LTAs to come and yes, significant in size. George Notter: Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could say? James Anderson: It's both, right? We would see -- we expect LTAs from both hyperscalers as well as other system customers. So I would expect both. Operator: We take the next question from the line of Vivek Arya from Bank of America Securities. Michael Mani: This is Michael Mani on for Vivek Arya. I wanted to dive in deeper with some of the CPO LTAs or long-term agreements that you're dealing with, including NVIDIA, but maybe some of the other deals that you're kind of eyeing over the next couple of years. What's the mix of these agreements between lasers, ELS modules, which you highlighted OFC and the various other components that you could sell into a CPO solution like fiber attach units. How does that vary by customer? Like what are the puts and takes there based on the deal? James Anderson: Yes. It kind of -- it can depend by customer, but it's important to keep in mind that we have a very broad portfolio of CPO technology that we can bring to the customers. I think that's a real advantage for us. And we -- at OFC, we laid out all the different types of technology that we can bring to a CPO solution. Lasers, the high-power CW lasers is certainly one important component, but it's not the only. We can also bring 200 gig and in the future, 400-gig VCSELs as well. There's some applications where VCSELs are sort of a better laser technology for like near package optics. But beyond that, if you look at the external laser source, we can provide that module. But within that, almost all those key optical ingredients we have in-house as well, not just the laser, but the isolators, the thermoelectric coolers. So all of the ingredients that go in that, which customers view as a big strength because we're not dependent on others for those technologies. And then the actual fiber attach unit, so this is the -- what connects the switch chip or the XPU to the faceplate or to the external laser source module, we can provide that entire assembly as well because we have the lens arrays, we have the polarization maintaining fiber. So we have all the ingredients for the CPO solution. And I would say most customers are leveraging, if not all of that portfolio, certainly a good portion of that portfolio. Michael Mani: Great. And for my follow-up, I just wanted to ask about the 2 incremental opportunities you highlighted for '27, right, with multi-rail and thermal management products. So you said revenue timing for first half, I think, for multi-rail and second half for the thermal products. But what are the milestones between now and then from a customer perspective? Like when do we get a better sense of how large those ramps can be? And what does the competitive landscape look like in both of those areas? And how do you think you're especially differentiated, if you could articulate that? James Anderson: Yes. Michael, on the -- let me start with the multi-rail, which is the near-term one. I would say the milestones are just the typical engineering milestones that we would walk through with the customers. There would be a qualification, a pilot run, very normal engineering milestones that we're moving through. And again, we would expect revenue to start in the first half of '27. I think as we get closer to that revenue ramp, we can provide just some better idea of what the rate and pace of that revenue ramp is. But we see that as a substantial new product line with significant revenue opportunity. I mean, we sized the market for multi-rail at least $2 billion over the coming years, and it could be larger than that. And the technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology. And without going into a bunch of the technical details because we covered this at OFC, but there's a number of key components that go into that multi-rail that are unique to us or we have unique differentiation that position us really well. So we feel really good about the competitive positioning on multi-rail. And then the second part of your question, definitely, thanks for asking about the thermal solutions. We're very excited about this. This is us taking our industrial technology, some of our materials technology that we apply to the industrial market and re-purposing this for data center. An example is our Thermadite technology. Thermadite is a material that it's a proprietary material that only Coherent provides. And if you look at Thermadite applied to the cooling of, say, a switch chip or an XPU or an ASIC chip relative to the current thermal solutions, which are usually copper-based solutions, a Thermadite or other type of material that we could provide can provide heat transfer that's either 2x better than copper, sometimes up to 5x better than a copper solution. So this is a massive improvement for customers because what that means is if we use one of those thermal solutions that have 2 to 5x better thermal properties, it allows the say, the XPU, the GPU to run at a much higher frequency or utilization rate because it can be cooled much more effectively. So it's almost like getting sort of more tokens out of the same CPU or GPU. And so it's a big win for our customers. We're really excited about that, very strong customer engagements there. And again, just kind of moving through the normal engineering milestones, but we would expect revenue in the second half of next year. By the way, the other one that I would mention, which is really a great technology is our thermoelectric generators where we're harvesting waste heat from the -- again, the CPU or GPU, harvesting waste heat and converting that back into electrical energy, which is pumped back into the data center. So a great efficiency gain for power efficiency in the data center. So yes, we're excited about those new thermal solutions. Operator: We take the next question from the line of Papa Sylla from Citi. Papa Sylla: Congrats on the results. Maybe, Jim, my first question is around pricing in general from like a transceiver perspective. Obviously, you were, I guess, too, had one, as a seller of transceivers, but also a buyer of lasers and electrical component as well. And at least kind of yesterday or over the past couple of days, we have been hearing kind of some laser pricing increases, particularly for EML. So I'm curious if you are seeing that on one front, but also are you able, if that's the case, at the transceiver level, pass through those costs? Are you -- do you have enough levers in general at the transceiver level to also increase pricing given the demand supply imbalance? James Anderson: Yes. Let me start with the pricing and come back to the cost. On price, yes, I would call pricing very healthy, very healthy dynamics around pricing. Because of the supply versus demand, I think pricing has been very good, right? And one of the things that always happens as we change data rates is the ASP goes up with the new data rate. So 1.6T pricing, higher than 800 gig, et cetera. And so I would say the pricing dynamics are very healthy. And then on the cost side, remember that most of the components that go into our transceivers are internally sourced. And so that buffers us from any increases, provides some level of buffer against increases in pricing in externally sourced. Now we do use some externally sourced components. We do that for strategic reasons. But yes, we view it as we've been successful at either passing along those external component price -- higher prices or offsetting that with our own internal production as well. So we've -- the combination of pricing and cost has been -- we've seen higher gross margins. I think Sherri shared in her prepared remarks, specifically in data center and communications, we've seen the gross margin improvement we've seen is primarily coming from that component of our business. Papa Sylla: Got it. That's very helpful. And then in terms of my follow-up, it seems like it's very clear that the demand you are seeing for 1.6T is very strong, the early deployments at least. So I'm curious if you can touch a little bit on the mix you are seeing between EML, SiPho and perhaps even VCSEL. And maybe a follow-up to that is kind of what would be, generally speaking, the margin implication of selling higher SiPho transceivers versus EML or vice versa? James Anderson: Yes. On the second part of your question, we really don't see a significant margin difference between EML or SiPho-based transceivers. Both those transceivers are in the same ballpark of gross margin. And we're ramping both 1.6T, we are ramping both EML and cycle-based 1.6T. Remember, even a SiPho-based transceiver requires a CW laser based on indium phosphide, right? So either way, they both require indium phosphide capacity, which is, again, ties back to why we're driving one of the reasons we're driving higher indium phosphide capacity ramp. But for us, the mix is really determined by -- between EML and SiPho is really determined by kind of the customer applications. So we work with the customer on which one of those 2 technologies just fits their application better. And there can be pros and cons depending on the type of application. And then we do expect VCSELs to be used later on as well. Our 200-gig VCSEL development going very well. And beyond just 200-gig VCSELs that go into transceivers, we see 200 gig where we expect 200-gig VCSELs to be adopted in some CPO applications or NPO applications as well. But yes, that initial 1.6T ramp is a combination of EML and SiPho-based 1.6T. Operator: We take the next question from the line of Ruben Roy from Stifel. Ruben Roy: Jim, the kind of the discussion around CPO has certainly seemingly accelerated since the beginning of the year through OFC and even over the past few weeks with some of your peers and yourselves talking about it. First question, just a clarification on the second half scale-out, '27 scale-up ramp. Are those ramps tied to NVIDIA specifically? Or are there other customers contributing to those initial scale-out CPO revenues for you? And then the second part of the question is, as you think about CPO and new opportunities like multi-rail and the components that go into multi-rail, my understanding is some of those things have higher margin structures than maybe other indium phosphide or silicon photonics components. How are you thinking about allocating capacity across some of these sort of, let's call them, newer growth areas as you think about the next 12 to 18 months? James Anderson: Yes. Thanks, Ruben. On the CPO, certainly, now that the NVIDIA partnership is public, yes, they're -- clearly, they're probably our lead customer on CPO -- and -- but we do expect other customers to follow as well. And we're engaged with multiple different customers. It's actually a pretty wide set of customers, and we expect to have CPO solutions across multiple customers. But definitely, NVIDIA would be kind of the lead customer for us. And then on the second question on multi-rail, yes, definitely higher gross margin structure in that part of the business. You're absolutely right that there's some specific components that go into multi-rail solutions that are quite high margin that also rely on indium phosphide capacity. In general, the way we look at capacity allocation is we allocate indium phosphide capacity to whatever drives the most -- the highest margin dollars. So whatever drives the maximum amount of margin dollars for the company, that's where we allocate the capacity. Operator: We take the next question from the line of Sean O'Loughlin from TD Cowen. Sean O'Loughlin: Jim, congrats on a solid set of results, as always. One of the things, and I think this speaks a lot to maybe Blayne and Tom's questions earlier in the call is one of the things that investors are trying to get a better handle on is, as you ramp 6-inch indium phosphide and the capacity there, the delta between maybe shipping initial SKUs, initial transceivers revenue, as you mentioned, versus having that line fully qualified at some of your customers for volume production. And I'm going to ask the question in a way that I know is the wrong way to frame it. But if I think about we're going to double indium phosphide capacity next quarter, why hasn't that translated into doubling revenue? And that's, I think, where I'm having conversations with a lot of folks, if you could just comment on that. James Anderson: Yes. Remember that there is a latency from the indium phosphide devices to when we actually ship transceivers, right? So when the indium phosphide devices, whether that's an EML or CW laser come out of the production facility, it's really probably the next quarter, 2 to 3 months later before we see the transceivers then shipped based on those devices, right? And as an example, those transceivers that shipped in our March quarter, that was indium phosphide devices that were produced in either our September or the early part of our December quarter. So there's usually a lag of a few months from when the devices are made to when we see those -- those show up in transceiver shipments. Sean O'Loughlin: And then just can you comment, Jim, on anything on the customer side? Or should we assume that there's a much tighter relationship between once the transceiver ships there, we've already been through the qualification process. Is that how we should think about it since it's... James Anderson: Yes, there's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. There may, in some cases, need to be qualification, but that would have already happened ahead of production shipments, right? So when we're talking about production shipments, the qualification is already complete at that point. Sean O'Loughlin: Got it. That's helpful. And then maybe related to the CW EML question, and I know I just -- I wasn't not listening. I know you're going to say it's sort of agnostic and you go where the customer goes. But if you could maybe comment on the 400-gig silicon photonics that you demonstrated at OFC and maybe some of the other industry commentary that maybe questioning the viability of silicon photonics and CW lasers at 3.2T, that would be helpful. James Anderson: Yes. Thanks, Sean. Yes, as you mentioned at OFC, we demonstrated 400-gig silicon photonics that would enable 3.2T. That -- we demonstrated that, but it could be used in either transceiver or could be used in CPO. So we demonstrated just the capability to do that. The form factor may be CPO or transceiver or both. But we would -- but we believe we have a path to 3.2T or 400 gig per lane silicon photonics based on that demonstration. And we're certainly -- we certainly expect to have both solutions based on 400-gig differential EMLs, which we already have but 400-gig silicon photonics as well. And by the way, we're -- we have 200-gig VCSELs that we're working on, but we also have 400-gig VCSELs that are in development as well. Those are a little further out, but we're certainly working on that as well. So we think we've got a really robust road map of multiple different laser technologies to support the future road map for our customers. Operator: Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Coherent's CEO, Jim Anderson, for his closing comments. James Anderson: All right. Thank you, operator, and thanks, everybody, for joining us today. In closing, we are certainly very pleased about the strong third quarter performance and the continued momentum across our business. Demand remains exceptionally strong, and we see accelerating growth ahead of us as we ramp capacity significantly over the coming quarters. I want to thank our employees for the great execution and the continued innovation, and we look forward to updating you at our next call in another quarter. Thank you. Operator: Thank you. Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day. My name is Chloe, and I will be your conference facilitator. I would like to welcome everyone to Aeva Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded and simultaneously webcast. I would now like to turn the call over to Andrew Fung, Senior Director of Investor Relations and Corporate Development. Andrew, please go ahead. Andrew Fung: Thank you, and welcome, everyone, to Aeva's first quarter 2026 earnings conference call. Joining on the call today are Soroush Salehian, Aeva's Co-Founder and CEO; and Saurabh Sinha, Aeva's CFO. Ahead of this call, we issued our first quarter 2026 press release and presentation, which we will refer to today and can be found on our Investor Relations website at investors.aeva.com. Please note that on this call, we will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect our views only as of today and should not be relied upon as representative of our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our most recent Form 10-Q and Form 10-K. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Aeva's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. The webcast replay of this call will be available on our company website under the Investor Relations link. And with that, let me turn the call over to Soroush. Soroush Dardashti: Thanks, Andrew, and good afternoon, everyone. Q1 was a strong quarter at Aeva, where we achieved another new quarterly revenue record as we continued executing on our growing commercial momentum. With the rise of physical AI and more industries looking to leverage new levels of perception, Aeva is uniquely positioned with our FMCW LiDAR on-chip technology to tap into a broader and more diverse range of applications than what is possible with conventional LiDAR. This quarter, it was especially exciting to see our commercial momentum progressing and expanding to more real-world deployments. This is not only helping drive our strong revenue trajectory, but we believe also further positions Aeva to continue our commercial growth with a growing list of customers. In automotive, we achieved important milestones with our customers on their path towards commercialization and production. With Daimler Truck, we began deliveries of our production-intent Atlas product, which highlights the maturity of Aeva's technology and is a critical step for the OEM's work towards series production. And in passenger vehicles, we successfully integrated first Atlas Ultra sensors in the top European OEM's development vehicles and are jointly working on the AV stack development with this passenger OEM. Outside of automotive, we are growing in defense across multiple fronts, including expansion with Forterra to use Aeva's technology in a second autonomous ground vehicle as they look to leverage our long-range and velocity measurements and notably our wavelength undetectability by night vision systems. We're also seeing interest in other applications in defense, such as drones for further expansion. In smart infrastructure, we recently unveiled Aeva CityOS, our AI-powered platform for real-time intelligent traffic management. Reception has been very positive, and we have already won our first large-scale deployment in Georgia. And on factory automation, we are seeing growing momentum with multiple customers. Our multiyear collaboration with Nikon is entering its next phase of commercial deployment with Nikon recently launching its next-generation robotic inspection laser radar system called APDIS MV5, which is powered by our Eve high-precision technology. This is part of a multiyear production agreement to use Aeva's technology for automated inspection in factories for automotive, aerospace and energy industries. Beyond all of this, we continue to advance on new opportunities to use our technology platform across multiple physical AI applications. Our focus remains on delivering on existing programs, further solidifying a leadership position with additional wins and scaling manufacturing to support the expanding demand for Aeva's differentiated technology. Now let's dive more into Aeva's recent business developments. Starting first with Daimler Truck. As the exclusive long-range LiDAR supplier and primary detection sensor for Daimler Truck's production program, Aeva played a critical role in bringing their highway Level 4 solution to market. And we continue to work very closely with Daimler Truck as well as with Torc, which are developing the AV stack. The start of Atlas C-sample deliveries to Daimler Truck this past quarter marks a major step forward on the OEM's path to commercialization. This is our production-intent sensor for Daimler Truck's series production trucks and will be used by the OEM to finalize the AV stack validation and operation ahead of their target launch in 2027 and the following production ramp-up. For Aeva, it also represents a major achievement that demonstrates the maturity and readiness of our technology for mass scale automotive-grade deployments. We are on track to scale deliveries of our Atlas sensors to Daimler Truck over the course of this year, which will support the OEM's vehicle fleet rollout and additional milestones ahead of series production. Moving now to the latest development in automotive with the global top 10 passenger OEM based in Europe and other automotive engagements. First, on the top European passenger OEM program, where we are the exclusive LiDAR supplier globally outside of China for the OEM's next-generation Level 3 production program. We have been collaborating closely with both the OEM and the OEM's AV stack provider and in the past quarter, began integration of Atlas Ultra in the OEM's development vehicles. This has been going on track and will be used to jointly develop and mature the AV stack. We expect to deliver additional sensors this year to support the OEM's ongoing development and fleet rollout ahead of target start of production in 2028. The top European passenger OEM selection of Aeva for its large-scale Level 3 program continues to serve as a strong vote of confidence in our technology and our growing maturity to the rest of the automotive industry. We are encouraged by our ongoing engagements and over Q1, continue to grow our pipeline. This includes our progress on the development program with a global top 5 passenger OEM that we announced last quarter. The work is focused on the configuration, integration and validation of our Atlas Ultra sensors for the OEM's next-generation global vehicle platform. We have successfully completed the initial set of milestones and we'll continue working with this OEM towards the next-generation vehicle program. Separately, we have kicked off our collaboration with NVIDIA following their selection of Aeva as the reference sensor for the DRIVE Hyperion platform. Aeva is the reference LiDAR sensor globally outside of China, which has the potential to effectively make Aeva a core LiDAR supplier to many leading passenger and commercial vehicle OEMs using the NVIDIA platform globally. As part of this, we are working together on one common platform comprising of the same sensor suite, meaning one common set of cameras, radars, LiDARs and NVIDIA compute and autonomy software to offer to these leading OEMs and AV players. And in the past quarter, our teams have made good progress on the integration of our FMCW technology into DRIVE Hyperion stack, including working together to implement our velocity data path in the DRIVE Hyperion platform. So in summary, we continue to advance on multiple automotive engagements, including other passenger programs and high-volume ADAS Level 2 for commercial vehicles. We continue to believe that Aeva is well positioned to secure additional wins given our differentiated performance, balance sheet and commercial momentum, bringing further validation of Aeva's capability and maturity. Switching gears to other physical AI applications. Aeva is quickly expanding in defense with Forterra, a leading provider of autonomous ground systems for defense and other complex operational environments. Since announcing our win with Forterra last quarter, I'm pleased to share that Forterra is expanding use of Aeva 4D LiDAR to its newest autonomous ground vehicle called MESA. MESA integrates 4 Atlas sensors for surround view and leverages our long-range and velocity detection, vehicle positioning and stealth operational capability in GPS-denied environments. Beyond the growing demand for AGVs, we're seeing new interest in drones and working on opportunities to expand further with existing customers as well as new engagements with defense companies and organizations on both autonomy applications. Over the past quarter, we have also been expanding deeper into the smart infrastructure market, particularly around Intelligent Transportation Systems or ITS. This is a growing market opportunity as municipalities across the country look to modernize infrastructure to be safer and more efficient. In just the U.S. alone, there are around 15 million intersections and more than 300,000 traffic signals. This is why we launched Aeva CityOS, a full stack intelligent traffic solution that combines 4D LiDAR with edge AI processing and analytics in collaboration with our partners. Compared to traditional ITS solutions, which rely on cameras, radar or inductive loop sensors, CityOS leverages the advantages of Aeva's 4D LiDAR to enable operation in all lighting conditions and deliver more advanced detection while preserving privacy. We are very encouraged that CityOS is quickly gaining traction with DOTs and municipalities across the U.S. We have already secured our first large-scale deployment in Georgia with an expansion to 30 additional intersections in the Greater Atlanta area. This expansion comes after a successful initial rollout across multiple intersections surrounding Centennial Olympic Park and others. The area is one of Atlanta's busiest pedestrian corridors where we believe CityOS can help improve roadway safety and traffic operations. Aeva's ITS team is also actively working with other programs and municipalities on new opportunities, and we believe that our differentiated solution will drive additional deployments over the course of this year. In precision sensing, we are incredibly excited to see Nikon's first commercial laser radar product powered by our Eve precision sensing platform. With Aeva, Nikon's next-generation APDIS laser radar system is capable of faster measurements in a smaller, more flexible size, which enables Nikon's major automotive OEM customers, aerospace and energy production partners to shorten production times, cut costs and improve quality for volume production. This product is the start of a multiyear production agreement to use Aeva's technology in Nikon's products. More broadly, the flexibility of our Eve precision technology is driving new interest to use Aeva across manufacturing and factory automation for a diverse set of industries from automotive to energy production and semi-capital equipment manufacturing. We are engaged with multiple customers on additional opportunities and working towards converting those to design wins as we expand in precision. With that, let me turn the call over to Saurabh, who will discuss our Q1 financial results. Saurabh Sinha: Thank you, Soroush, and good afternoon, everyone. Consistent with how Aeva is delivering on our commercial objectives, our Q1 financial results also reflect our growing momentum. This includes achieving a new record revenue quarter of $6.3 million in Q1, which represents an increase of around 90% year-over-year, driven by scaling sensor shipments across multiple markets and progression on development milestones for major customers. The non-GAAP operating loss was $25.8 million in Q1, which is about flat year-over-year and highlights our ability to maintain operating expenses at similar levels versus the prior year while continuing to scale the business. Gross cash use, which we define as operating cash flow less CapEx, was $28.1 million in the quarter. Our total available liquidity at the end of Q1 was $224.5 million, which consists of $99.5 million in cash, cash equivalents and marketable securities and $125 million in an undrawn facility that is fully available to draw at management's sole discretion. We continue to believe that our performance and liquidity position differentiates us from peers and together with our ongoing financial discipline enables Aeva to support ongoing programs as well as secure new wins. With that, I will turn the call back to Soroush for closing remarks. Soroush Dardashti: Thank you, Saurabh. In closing, I am really proud of how Aeva is expanding its leadership position with increasing real-world deployments of our unique perception platform across a wide range of industries. Looking ahead, as we continue to see growing commercial momentum and an increasing list of opportunities to pursue, we are keenly focused on execution, both with existing programs and new engagements, while also scaling our manufacturing to support more customers and the increasing demand for our products and differentiated technology platform. And with that, let's now turn to Q&A. Operator: [Operator Instructions] And we'll take our first question from Colin Rusch with Oppenheimer & Co. Colin Rusch: Guys, can you just give us an update on the progress with SOA and CPO solutions for data center? We continue to see data management and transport expense ramping pretty aggressively for all applications. Just want to see where you're at from a commercialization perspective with that and how we can think about that coming to market over the next few years. Soroush Dardashti: Colin, this is Soroush. Yes, happy to answer that. So obviously, the data center market is a massive market and a number of opportunities. I think maybe just a quick background here. I mean, as most of us know, the first wave of the AI data center market really started with all the semiconductor companies and the GPU and compute processing driven by faster compute needs. And the second wave and bottleneck arose from memory and high bandwidth storage, right? And I think as we're now going to higher and higher speeds, what's become clear is that there's a certain limitation on how much we can transfer data between data centers and racks. And I think this next bottleneck really is going to be relying heavily on optical interconnects because that's where copper hits a physical limit to transfer data center -- data within data centers. So I think this is obviously a significant, I think, next wave that's coming on. It's a massive opportunity. And why this is relevant for Aeva, I guess, as we mentioned, is because we've spent the past decade creating and perfecting some of the best high-power sources and proprietary silicon photonics technology and making it so that it works to meet the harsh requirements for automotive, right? And we did it because it simply did not exist. And I think what we are seeing now is those components, our proprietary technology for high-power sources and silicon photonics has a significant advantage potentially for both performance and cost efficiency compared to what's on the market. So we're seeing some strong -- very strong interest for high-power sources and silicon photonics from some of the big players in the space, from folks that are making the GPUs like the obvious NVIDIA and AMD to some of the hyperscalers, Amazon, Meta, others. And I think Aeva has a unique technology there in how we do those sources and the silicon photonics. We are looking now to take those investments we've made in the past number of years and apply it to the CPO market. But I think initial data is really promising on the performance of those high-power sources. And we're looking to apply that as we can talk more about this in the next years, we will. And -- but I think it's overall a massive opportunity for us where we are definitely going to be taking advantage of. Colin Rusch: Perfect. And then just moving on to other physical AI applications. We're seeing factories as a prime target for optimization. Given the fact that you've got a couple of partners and started delivering with Nikon now, can you talk about the potential acceleration in that market segment with metrology solutions and how we should think about new build versus retrofit applications for the sensors? Soroush Dardashti: Yes. Yes, happy to. I think in general, we are seeing for the industrial market and general physical AI significant demand across multiple segments for us. I mean, as you saw in the earnings today, it's not just about automotive right now where we are seeing significant traction, but in the other physical AI, including both in the industrial market for Eve sensing. We have now the first commercial product of Nikon coming online into the real world and shipping. Nikon already does [ $300 million ] in just robotic inspection and metrology alone, and we obviously, we're taking higher ASPs there than automotive with the mix of volumes. But also, we're seeing interest and demand from others importantly in the Eve sensing market for, for example, semi-capital equipment manufacturing, where there's significant investments. It kind of relates back to some of the infrastructure on the AI side we talked about. But folks are using our sensors already in some of those semi-cap factories for various things, wafer measurements, quality control, all that. So I think that opportunity is definitely picking up. We're already shipping in the 1,000-plus type of sensors in the Eve side. There is orders coming in for that as well with a much higher volume. So this is definitely an area that we're going to continue to grow. And then separately, on the other side of physical AI, I guess, on the ITS and smart infrastructure, we're seeing growing demand for CityOS. Within the past quarter, we've already had some wins. We are starting to deploy some of the large-scale deployments in Georgia. So multiple segments. And of course, defense is the other one that we're seeing double-digit growth pretty quickly there. So we're excited by all the progress. All that means, though, obviously, we're focused on scaling and manufacturing in the next phase as we bring up the products to [ massive ]. Operator: We'll move next to Suji Desilva with ROTH Capital. Sujeeva De Silva: Soroush, Saurabh, congratulations on the progress here. Just with getting closer on the auto -- passenger auto OEM and moving toward working on the software and the stack development, I'm just reminded earlier in the auto industry where there was challenges of the software development between the auto OEM and large programs, maybe Volkswagen and CARIAD, those kind of concepts. I'm just curious how you think it's happening differently now that's going to be more likely to hit production schedules and move forward versus having challenges? Any color there would be helpful. Soroush Dardashti: Yes. Suji, happy to answer. So obviously, on automotive, we are firing on multiple cylinders, right? We -- within commercial vehicles, we shipped our Atlas C-samples to Daimler Truck. We just announced that today. It's a critical milestone for the industry because these are the production-intent sensors and products. And I think it's going to be one of the first OEMs that we use for redundant chassis with production-intent hardware and sensors for the AV stack. On the passenger car side, in the last quarter, obviously, we just announced the win with a top 10 European OEM, top 10 global OEM, which is based in Europe. And we have made very good progress across the teams. We are working together with them and one of the AV stack partners. We've delivered the first Atlas Ultra samples for integration. I think the key right now is in the next number of months, we're going to be working together on implementing the sensor data into the stack and also doing fleet operations, fleet runs on the vehicles. And I think all that is pointing to the program being really progressing well on track. If you also look at the time line, we're not that far away from SOP, right? By 2028, the time line target is in the SOP, and we're progressing all pretty well to that. So it's kind of around the corner. So the teams are working very intensely together with on-site support and multi -- multiple times weekly engagement. So that -- all that, I think, is progressing good. On the pipeline side, we are also seeing growing interest on the pipeline with both passenger when we talk about the top 5, but also on commercial vehicles and on ADAS applications, not only Level 3 autonomy, but also high-volume ADAS Level 2 as well. Sujeeva De Silva: That's great. And then my other question, Soroush, is on the defense market and drones. Defense market, curious your go-to-market strategy. You partners there. Are you a subcon? How are you tapping that opportunity? And then specifically on drones, it sounds like it's a very interesting opportunity, but I'm curious, does the Aeva product translate to the flying vehicle drone market easily? Or are there kind of changes that we made? Any color there would be helpful. Soroush Dardashti: Yes. So I think in defense it's definitely an area that we're seeing significant growth in demand in the market. I think in the past consecutive 2 quarters since we announced even our first win in defense, defense has been a significant contributor of our shipments and also revenues, some of them double-digit percentage of product revenues. And I think Forterra is obviously one customer, our first win in there, and we talked about that they're expanding on multiple vehicle platforms. These are more ground vehicles or AGVs, where we have significant advantage with our technology as well as our wavelength compared to time of flight. That's why this is accelerating pretty quickly. If you recall, this kind of moved on from obviously, engagements and then to win to shipments and deployments with a matter of less than 60 days or so. So it's moving pretty quickly. But beyond that, as you mentioned, this is obviously not the only area in defense. We are acting as the Tier 1 supplier to these defense companies and innovators. So obviously, we're not the prime, but we are the tier supplier to them. But we are seeing significant interest and growth also in the drones applications. We already have some engagements there. Our technology with this long-range has some significant advantages and the velocity with the fact that also it's stealth in terms of detectability by night vision. So we are seeing that, and we are having some engagements with some of the, I would say, larger prime organizations that have significant investment and budget for drones application. So as we can, also talk about that, we will. Operator: We'll move next to Matthew Paciulli with Canaccord Genuity. Matthew Paciulli: Congrats on another great quarter. Maybe just to start, I think on the last call, you guys had mentioned 4 commercial wins in 2026 you were targeting. Is it safe to assume that CityOS is one of those wins? And could you just provide us an update on how those conversations are going? Soroush Dardashti: Yes, Matt, happy to. So I mean, to be honest, we have had multiple wins since the beginning of the year. I think the way also how we count that matters for us, with Forterra as the first win in defense. If you look at also NVIDIA and CityOS, we have had multiple wins. We are counting right now, I think, Forterra and NVIDIA on that. And so we're already ahead of track in terms of the 4 goals. And that was obviously aggressive because it was 100% or double from last year, I think, in terms of the targets for goals, but we're well ahead of the schedule. And I think more importantly, as we are growing and maturing also as a company, we see that it's going to be less about just the number of wins. Of course, these are targets we set for this quarter, but really responding to the growing demand across multiple segments and focusing on those main leaders with high volume and near-term potential as well to expand that. But I think we are overall progressing very well on track on the 4 targets we have. Matthew Paciulli: Great. I appreciate the clarity there. And maybe just as a follow-up, on CityOS, appreciate the commentary on just the market size behind that. Do you guys kind of foresee any potential bottlenecks associated with getting this product out globally? It seems like it could be very dependent on kind of time lines and funding of municipalities and such. If you could just provide some color as to how those deployments are going and how those time lines and sales cycles work? Soroush Dardashti: Yes, happy to. I think as a data point, as a time line, we started entering this market really towards the end of last year. And it's only been a few months since that time frame with the team that we have brought on and the ecosystem capabilities that we have, we've been able to introduce this new solution, which is importantly a total solution. It's a comprehensive solution, not just LiDAR, it's sensors, compute and perception software and analytics software, working together with our partners to deploy that. And obviously, ASPs there for the solution is much, much higher than automotive. So I think in the span of a few months, we've had multiple wins there. We talked about already our first win with Georgia and deployments. It's one of the first large-scale deployments in the state, over 30 intersections, which is significant. But also the team is continuing to grow this, I think, fairly quickly in the space. And part of it is because of the experience and the conversations that have been happening for some time. The other part is there is this growing interest and demand from both at the state level and at municipalities level to modernize traffic management and traffic flow. These are things that have been around for a number of years with very basic technologies like inductive loops in the ground to detect vehicles. So obviously, that's very ripe with better perception of sensing right now, and there's significant, I think, budgets and resources allocated for that. So from a timing standpoint, we're seeing that already. And right now, our focus you asked about internationally is in the U.S. Obviously, each country has different rules and regulations. So over time, I think we may expand into other areas. But U.S. alone has over 15 million intersections and 300,000 signalized traffic signals today. And you do the math, these are multibillion-dollar opportunities, and that's why it's one that we are going after. So we do expect that it's going to continue to contribute also to our growth in the near term as well. Operator: We'll move next to Richard Shannon with Craig-Hallum. Richard, you may need to check the mute function on your device. Richard Shannon: How's that? Is that working now? Andrew Fung: Yes. Soroush Dardashti: We can hear you. Richard Shannon: Okay. Sorry about that. I wasn't on mute, but just glad it's working now. Thanks guys for letting me ask a couple of questions here. My first one, Soroush, is regarding -- kind of similar questions here regarding both the top 10 OEM for which you have a win in the top 5, which I guess I'd characterize it as an advanced engagement here. But I'd love to get a sense from you what to expect from announcements and updates in the next couple of earnings calls here, either in terms of finalizing designs and hearing about forecast with the top 10 OEM or getting to and announcing a win with the top 10 OEM. Just want to get a sense of what we should hear in the future. Soroush Dardashti: Yes, yes, happy to talk about that, Richard. So obviously, on the top 10 OEM, this is a production program that we have already won, and we have already started the first phase of development there that's been going -- progressing very well. I think in terms of what's coming down, I think -- I guess, as I mentioned a bit earlier, the key focus right now is enabling the OEM and the AV partner to go and build the fleet with the full AV stack, including the FMCW technology and do the validation across different regions and make sure that all the KPIs are met and get that ready for launch. And we don't have -- it's a short kind of time frame between now and 2028. So it's in automotive world, that's pretty much lightening speed. So that's moving pretty quickly. I think in terms of what to expect, obviously, as we make those progress, I think, into those milestones for the fleets, and we can talk about that, we will. And I think at some point, that's expected in the next number of months that's coming online actually. So that's important. And then on the other opportunities, top 5 and others, we are engaged. Obviously, we delivered on top 5, the Atlas Ultra sensors as well. And we're working through the integration and the validation and testing. I think there, obviously, that's not one program yet, and we have to see how that progresses with the final decisions towards RFQ, but we're working towards the next-generation vehicle. But we're also, beyond these are engaged in multiple other Level 3 automated driving, but also ADAS, which is really Level 2, which typically LiDAR doesn't really penetrate, where we see some interesting opportunities where these will be very high-volume opportunities across passenger and commercial vehicles. So multiple OEMs, they are engaged. Some are in the RFI and some more on the RFQ, but we expect that in the next few months, some of those will make decisions as well. So -- and we are feeling good and well positioned. And I think our goal is that, obviously, as part of our goals for the 4 wins this year that we have automotive wins included in that. So that's what we also expect that at least additional win in automotive for hopefully, the rest of this year that's come online. And I think overall, all indications have been pretty positive for the developments we have had so far. Richard Shannon: Okay. To your last comments there, Soroush, you mentioned this briefly in the press release as well here about looking at L3 or even ADAS Level 2 here, which is interesting because you typically talked about and seem to be targeting more advanced levels of autonomy. And you typically, I think, have talked about a bit of a higher ASP than what other solutions might offer here. So being able to hit that pricing envelope is pretty interesting there. So I'd love to get a sense of whether you see the pricing looking attractive for you? And any way that you would characterize or quantify the number of programs you're looking at for the kind of these lower levels of autonomy? Soroush Dardashti: Yes, sure. I think you're definitely spot on there, Richard. I think in this space, Level 2 and ADAS typically and historically has been enabled more by vision and maybe radar solutions. I think one of the advantages as we have, obviously, is we kind of have a laser radar product, right? So it's -- we call it 4D LiDAR, so with additional velocity. I think we have multiple engagements there on the ADAS side. What I'm excited by is the fact that our solution beyond just price, which is I think is an important piece. And as we are getting into towards the automated production, we have always said that our economies of scale will enable us to go after higher volume markets and lower level ADAS is part of that. So I think from a price point structure standpoint, it's definitely made possible by our investments we have made on the core technology, our core vision as well as Atlas and Ultra lines. But I think we see that both on commercial vehicles and passenger. And I think at least between the programs that we have, I expect one of those to make the decisions this year coming up. So I think those are -- would be for, basically, think of it as more advanced automatic emergency braking, scenarios where cameras suffer like nighttime, pedestrians, automatic braking. And typically, those are higher volumes in the 100,000-plus type run rate that we talk about. Operator: And we've reached the end of our Q&A session for today's event. Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Thank you for standing by. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Miami International Holdings, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. It is now my pleasure to turn the call over to John T. Williams, Senior Vice President and Head of Investor Relations. You may begin your conference. John T. Williams: Thank you, operator. Good afternoon, and thank you for joining us for Miami International Holdings, Inc. or MIAX's first quarter 2026 earnings conference call. I'm John T. Williams, Head of Investor Relations. With us today are Thomas P. Gallagher, Chairman and Chief Executive Officer; and Lance Emmons, Chief Financial Officer. We will also have Douglas Schafer, Jr., Chief Information Officer; and Shelly Brown, Chief Executive Officer of MIAX Futures and Chief Strategy Officer of MIH, joining us for the Q&A session following our prepared remarks. Our earnings announcement was released prior to this call and we published an accompanying slide presentation on our Investor Relations website at ir.miaxglobal.com. In addition, this call is being webcast and an archived version will be available there shortly after the conclusion of the call. Our discussion today includes forward-looking statements that are based on the expectations, estimates and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. The forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, you should not place undue reliance on them. We refer you to our earnings press release and filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial condition of MIAX. We do not intend to update any forward-looking statements made on this conference call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. During today's call, we will refer to non-GAAP measures as defined and reconciled in our earnings materials. With that, I'll now turn the call over to Tom. Thomas Gallagher: Thanks, John, and good afternoon, everyone. We appreciate you joining us today. In Q1, we executed well and continued to benefit from industry tailwinds, posting record quarterly revenue in a volatile market environment. That is the story of this quarter, and I want to spend a few minutes walking you through what drove our results before Lance takes you through the financial details. I'll first highlight 3 things I hope every investor takes away from today's call. First, we continue to execute well and our options business had another strong quarter. We are seeing the benefits of our technology investment show up in sustained year-over-year volume growth and healthy revenue per contract levels. This continued strong performance is the result of the strong relationships we have built over the last decade. Second, we continue to benefit from powerful secular tailwinds in our core market. Options industry ADV reached 63 million contracts in Q1, up 17% year-over-year, driven by elevated volatility, broad investor participation and growing volume in the new short-term expirations in single name stocks. On top of that, when the market gets volatile, industry volumes tend to rise. Third, we are seeing broadening revenue and margin contributions across our business and continue to invest in offerings that will drive the next leg of our growth. Our equities business maintained its positive trajectory and our International segment performed well. Our futures business is set to expand as we are on track for the May 17 launch of our Bloomberg Equity Futures. Q1 was defined by elevated volatility across asset classes, driven by geopolitical tensions, trade policy uncertainty and shifting expectations around rates and growth. While most businesses are volatility adverse, for MIAX, elevated volatility is good for our business. Sustained geopolitical volatility drives an increased need for risk management tools for virtually all market participants; institutions hedging equity exposure, corporations managing exposure to underlying markets or retail investors protecting positions. Options are an important tool that can help end users manage risk and increased hedging demand translates directly into higher contract volumes on our exchanges. All of these factors contribute to our Q1 performance. First quarter total net revenue grew 40% year-over-year to $129 million and adjusted EBITDA margin improved by 800 basis points year-over-year to 51%. Q1 adjusted diluted EPS was $0.42. These results reflect the continued strength of our options business, the operating leverage in our model and the broadening contributions we are seeing across the platform. Taking a broader look at our business segments, our options franchise continued to perform well in Q1 with market share and volumes tracking ahead of levels seen in the first quarter of 2025. Our market share in multi-listed options was 17.3% in the first quarter, up from 16% in the prior year period. We continue to see opportunity for share gains over time as we build out new functionality and bring new products to market. Our Sapphire trading floor continues to build momentum. And on April 14 of this year, we had our first 1 million contract day. We've also seen improvements in our equities business with improved capture rates during Q1 and line of sight to sustained profitability. Our International segment delivered another strong quarter. And looking ahead, we'll continue to streamline operations across TISE and BSX to maximize revenue as well as cost synergies. In futures, our Onyx platform continues to perform well, and we are in the final stages of industry testing ahead of the launch of our new Bloomberg Equity Index futures. We will be launching the first product, a retail size contract based on the Bloomberg 100 Equity Index on the evening of May 17. We are launching with 3 different contracts designed to serve both institutional and retail participants. The full B500 contract provides large notional exposure for institutions, while the [ TEB500 ] and B100 contracts are smaller-sized versions of those indexes targeted at retail investors with fees that we expect will be very competitive with existing contracts traded by our peers. These new futures will clear at the Options Clearing Corporation, giving our members real margin efficiencies as part of their broader equity derivatives activity. The Bloomberg 500 and the Bloomberg 100 indices are built differently than the competing futures and options market benchmarks. Rather than relying on a committee to make decisions about which companies belong in the index, Bloomberg uses a transparent rules-based algorithmic methodology. Constituents are added and removed based on predetermined criteria, eliminating subjectivity and delays and newly minted public companies can be added faster than under a committee-driven process. We think this is a better construction and a meaningful structural advantage as the IPO pipeline improves and we believe the market will come to appreciate these differences. We have been working closely with liquidity providers on both onboarding and platform integration and Bloomberg is an active partner in our go-to-market effort. Building a futures market takes time, but we are doing it in the right way. The infrastructure is in place, the participants are engaged and we are confident in the long-term opportunity this product suite creates for MIAX, Bloomberg and our members. Following our Bloomberg product launch and given clear customer demand, we intend to bring additional commodity and agricultural products to the market. I also want to provide a brief update on our sale of MIAXdx, now called Rothera. As previously announced back in January, we completed the sale of 90% of the business to a joint venture established by Robinhood Markets in partnership with Susquehanna International Group. MIAX retains a 10% equity stake in that joint venture, giving us accelerated access to the predictions marketplace without tying up capital or resources. We will carry that stake at cost with any future distributions flowing through as dividend income. In other words, this is not something investors should be building into their revenue models. What it represents for MIAX is real long-term optionality, a position in a growing market alongside 2 strong partners with upside if the prediction market volumes scale the way we believe they can. We remain focused on what we can control, which is running our business exceptionally well. With positive free cash flow, we are generating cash and ended Q1 with more than $550 million in cash on our balance sheet. Our capital allocation priorities are unchanged; organic growth opportunities, including our futures business, supporting the Bloomberg product launch and investing in technology and people. Beyond that, we are open to opportunistic acquisitions that fit our strategy and make sense for our business. We understand that our cash position is a competitive advantage and we intend to deploy it thoughtfully. With that, I will turn it over to Lance to walk through the financial details. Lance Emmons: Thanks, Tom, and good afternoon. We are pleased with how the quarter came together across the business. Before I get into the numbers, let me briefly remind you of MIAX's revenue model. We generate revenue from transaction and non-transaction fees. Our key performance drivers for transaction fees include industry trading volumes, market share and revenue per contract or share, which measures the average revenue we earn from contracts or shares traded. Also, as a reminder, we provide RPC and capture rates on a 3-month rolling average basis on our Investor Relations website. For non-transaction fees, we generate revenue from access fees, which we charge customers to connect to our exchanges for market data, which we earn through direct subscriptions and through our participation in the U.S. pay plans and from listings fees, primarily in our International segment. Q1 total net revenue grew 40% year-over-year to a record $129 million, reflecting strong performance in our options business and growing contributions from our other business segments. Organic net revenue growth, excluding the contribution from TISE, was approximately 35% year-over-year. Adjusted Q1 operating expenses were $63 million compared to $52 million in the prior year period. This increase was primarily due to planned expansion of headcount to support our growth initiatives and higher employer payroll taxes tied to the timing of incentive compensation payments. Adjusted EBITDA was $66 million, up 66% year-over-year and adjusted EBITDA margin was 51%, up 800 basis points year-over-year. This reflects the operating leverage in our model as revenue scales across a largely fixed cost base. GAAP net income of $170 million includes a $51 million gain on the sale of MIAXdx and a $70 million income tax benefit for the quarter, primarily resulting from the release of our valuation allowance on deferred tax assets. The release is based on 12 quarters of cumulative positive pretax income and our expectations for future profitability. Adjusted earnings grew 51% year-over-year to $45 million in Q1 compared to $30 million in the prior year period. Moving to Q1 segment performance, starting with options. Options segment net revenue was $111 million, up 37% year-over-year. This represents average daily volume of 10.9 million contracts, a 27% year-over-year increase that outpaced industry ADV of 17%. Options segment net revenue growth was driven by an increase in both net transaction fees and non-transaction fees. Growth in net transaction fees reflected higher industry average daily volume, continued year-over-year market share gains and higher revenue per contract. Non-transaction fee growth of 45% was primarily due to increases in member connections, fee increases, market data sales and the expiration of certain MIAX Sapphire fee waivers. I will note that Q1 '26 included $2.7 million in ad hoc historical market data sales from a new market data offering. We expect this type of revenue will be episodic in nature and we would not recommend [indiscernible] as a run rate item. Our options market share for the quarter was 17.3%, up year-over-year, but down slightly on a sequential basis. Market share fluctuates quarter-to-quarter and we continue to manage our business for the right mix of volume and economics rather than for headline share number. With that in mind, we do continue to see opportunities to grow share over time. Underneath the share number, our technology remains differentiated. Our complex order franchise continues to grow and the Sapphire floor is performing well. RPC remains strong, reflecting the quality of order flow we are attracting. That includes complex orders and high-touch flow rather through our Sapphire trading floor, which carry higher capture rates. Early market share in the single name Monday and Wednesday expirations across the 9 names has largely tracked in line with our historical share in those classes. We view this as an additive volume driver and support expansion to additional names over time, subject to market demand and regulatory approvals. Our Equities segment net revenue was $7 million, up from $4 million in the prior year period, primarily due to higher net transaction fees from improved pricing. Equities capture was net positive for the quarter compared to inverted in the year ago period. Futures segment net revenue was $5 million compared to $6 million in the prior year period due to lower listings and interest revenues and decreased net transaction fees. Our International segment net revenue was $6 million compared to $1 million in the year ago period due to the acquisition of TISE in June of 2025. Following our TISE acquisition, we're beginning to streamline sales and marketing processes across our international operations to better serve global debt issuers and listings clients. Turning to our balance sheet. We ended the quarter with cash and cash equivalents of $551 million and outstanding debt of less than $2 million. Now let's walk through our 2026 guidance. We are reaffirming our full year 2026 adjusted operating expense guidance of $265 million to $275 million. We note that our expense expectations for the rest of the year include planned increases in marketing costs, including for quoting incentives associated with our Bloomberg Index futures products and for our recently launched Excellence in Every Exchange nationwide advertising campaign. We continue to expect full year share-based compensation expense in a range between $27 million and $30 million. We also continue to expect full year capital expenditures in a range between $40 million and $45 million. CapEx was a bit front-loaded in Q1 as we locked in many equipment purchases ahead of AI-driven price increases. Given that, we are comfortable with reiterating our full year guide. Our Q1 adjusted effective tax rate, which excludes the release of our deferred tax valuation allowance, was 27.2%. Beginning in Q2, we expect our tax rate will be in the 27% to 29% range, consistent with the guidance we provided in February. I'll now turn it back over to Tom. Thomas Gallagher: Thanks, Lance. We are very excited about our recent progress and look forward to another productive year in 2026. We'll keep doing the things we said we'll do and leverage the 4 competitive pillars you've heard me talk about before: our high-performance technology, our broad range of regulatory licenses, our diverse and expanding product range and our deep customer relationships that now include Bloomberg. These remain real competitive advantages and will help us drive long-term shareholder value. We like what we see ahead. The upcoming launch of our Bloomberg Index futures products represents a major milestone and the growth we are seeing in single name short-dated expirations is encouraging. We also see incremental volume opportunities for our exchanges, given an improving IPO pipeline and continued growth in structured products that use options as part of their strategies. Before we close, I want to acknowledge the recent sudden passing of our friend and Board member, Murray Stahl, who passed away a few weeks ago. Murray was an exceptional leader who brought insight and integrity to our Board and his positive impact will be felt by our team for years to come. One of the things Murray believed is that there is a real opportunity for a truly global exchange operator. Thanks to him and the support of our employees, members and shareholders, we're well on our way towards realizing this vision. We're grateful to each of you for joining us today. And as a reminder, Doug and Shelly are here with Lance and I for Q&A. So let's begin. Operator? Operator: We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Patrick Moley from Piper Sandler. Patrick Moley: Maybe just starting off with one on options market share. The year-over-year growth has been quite impressive, and you mentioned that you were optimistic on some of the opportunities for further market share gains there. I understand the Bloomberg options would probably be some or part of that. But maybe if you could just walk us through what you think are the biggest opportunities to grow market share and how we should think about some of the puts and takes here throughout the rest of the year? Thomas Gallagher: Thanks very much, Patrick, for that question. I'll start, and maybe I'll turn to some of my colleagues here. There always are normal shifts in volume and market share quarter-to-quarter. And obviously, myself and our team watch it really closely. With regards to Q1, our RPC was very strong and I think it reflected order flow quality and market share gains in areas with higher capture rates. So anecdotally, I did see some shifts in what I would call lower capture or negative capture volume, but I consider this the normal quarter-to-quarter migrations from time to time. At my disposal, we have a range of pricing mechanisms that we can use to grow market share. And what we really do is try and target the right mix of volume and economics rather than look for a headline share number. Maybe I'll turn it over to Shelly to talk about some of the ways that we think we can increase that market share that we experienced here in Q1 of 17.3%. Shelly? Shelly Brown: Thank you, Tom, and thank you, Patrick, for the question. As Tom said, we focus not just on market share but also capture rate. And by our changing market share in terms of less low capture volume and less negative capture volume, it's truly a positive from a revenue perspective. But as Tom said, we do have some ability to raise market share by focusing on other lower quality or lower volume -- excuse me, lower capture products and it's a constant mix between that market share and net capture. Thomas Gallagher: Shelly, in terms of the dials to increase our volumes and our market shares. Can you just talk about quickly the Sapphire floor and maybe some other releases coming out in 2026? Shelly Brown: Absolutely, Tom. We continue to see growth in the Sapphire floor. That's higher capture business from the -- rather than the electronic business, which tends to be lower capture. We're seeing growth there and we have additional releases coming throughout the year, first one next month to enhance functionality, which we believe will draw a greater flow to the trading floor. Again, that trading floor is higher capture than the electronic markets. Thomas Gallagher: And Shelly, just quickly to finalize the question from Patrick. Give us a sense of what the volumes were on floors in Q4 versus Q1 of this year? Shelly Brown: Market shares in the trading floors have been ranging from about 6% to 8%. The first quarter this year, it was 8.1% across all the trading floors versus 6.5% in '25. So we're seeing growth in the volume on trading floors, and we're seeing some growth from our trading floor as well and I expect continued growth with the new functionality. Thomas Gallagher: Great. And I think lastly, Patrick, the secular tailwinds that have been driving ADV in the industry and driving ours, to me, they remain intact. Some of the same concerns and issues with global strike, interest rate questions, a political season, those are still creating the tailwinds that we had as we ended 2025. So thank you for the question. Operator: And the next question will come from Michael Cyprys from Morgan Stanley. Michael Cyprys: I was just hoping to dig in a little bit further on the market share. You mentioned scope for new functionality, new products. I was hoping you could elaborate exactly on what that entails, what the timing looks like, what the sort of, I guess, benefit and ramping that you expect on the back of that? Thomas Gallagher: Yes. I think, Shelly, if you wouldn't mind just following up on that. And the things that I'm thinking about are the expanded single name expiration, Shelly and the IPOs. But do you want to throw a little more color on that for Michael? Shelly Brown: Absolutely. Michael, thank you for the question. So there's multiple aspects to this, as Tom said. We see continued growth in the -- it's still very early in the daily, weeklies on equities, equity options. That's been very positive for the industry and positive for us as well. Our overall market share in those names tends to be higher and continues to be higher than the other names that we trade. The flow of IPOs in the marketplace has improved over the last year and it's going to accelerate into this year. As you're aware, there's 3 -- I think they're calling them mega IPOs expected to happen this year and we believe there will be tremendous option volume in those classes once they become options eligible. So there's definitely tailwinds here. And then the functionality enhancements, there's -- it's a constant -- we're constantly working with our members in the trading floor to see what we can do to help them bring additional volume here to our marketplace. And that growth, we believe, will continue throughout the year with the additional releases bringing additional volume to the trading floor. Thomas Gallagher: And Shelly, would you speak for a moment about maybe increases in the folks that are joining the Sapphire floor and how does that look? Shelly Brown: There's continued growth in the floor. We have additional brokers coming to the floor as well as additional market makers. There's a lot of interest in what's going on in our trading floor. When members from other exchanges come down and visit the floor, they're very impressed with the functionality, with the feature set we've built in the environment and of course, the fabulous economic environment in Miami. There's a lot of excitement about our floor and I believe there are more members to come, which will, of course, bring additional value. Operator: And the next question comes from Ken Worthington from JPMorgan. Kenneth Worthington: So on the short-dated company options, clearly, they're off to the races. Maybe first, could you refresh us on your market share in these short-term company options in the quarter? And you mentioned the mega IPOs, but how are you thinking about the build-out of new single company options? I think to my question last quarter, you said you preferred the build-out of new options rather than doing the Tuesdays and the Thursdays. So how does the pathway to more listings look for you? Thomas Gallagher: Yes. Shelly, why don't you take that as well, Shell? Shelly Brown: Sure. Thank you. Our market share in those 9 classes range between 18% and 20% of the multi-listed volume, which is higher than our overall market share across all classes. That's why we believe we win these new listings. So we're excited about that program eventually expanding. It's an open discussion and there's actually been discussion at several recent industry events, including this week at OIC, about whether the growth in the single name weekly options will come from adding Tuesdays and Thursdays or adding additional classes. The reality is both options are available to the industry. It's not our decision individually as an exchange decide. This is these listings, whichever exchange adds new classes or would add Tuesdays and Thursdays, the entire industry will follow. I believe that expanding the program across additional classes is probably the next wave, but it's still very early in the program and we're still just letting the industry absorb this new volume and these new products and the decision will be made over the next several months as to which way that we will build out additional volume. Operator: The next question will be from Jeff Schmitt with William Blair. Jeffrey Schmitt: So the EBITDA margin expansion continued to be really strong, helped by higher volatility in the quarter. But what do you think is kind of a good run rate there in a more normalized environment? Obviously, it should go up over time, but would you expect that to fall a bit as volatility comes down? Thomas Gallagher: Thanks for the question, Jeff. We're very excited about the continued margin expansion that 800 basis points, I'm very proud of. And we'll give you some more details. Lance? Lance Emmons: Yes, Jeff. Yes, I mean, look, we do focus on our -- on maintaining and growing that EBITDA margin and getting that above 50% obviously, was a big milestone for us in the fourth quarter and continued in the first quarter. We do expect to grow that over time, especially as we bring in revenues outside of the options business. You can see the equities business has remained profitable in the quarter, nice contribution in the international business now with the acquisition of TISE. I think in the futures business, as we see new revenue come in from the Bloomberg and other products we're going to launch, that will come at a very high incremental margin. Quarter-to-quarter, you might see some shifts, particularly in the next couple of quarters as we start to spend more on branding and marketing initiatives and incentives. around the launch of the Bloomberg products. But again, we'll be very judicious in how we spend those. But we really think we've got some really good opportunities to bring in volume and new revenue in the futures business. Jeffrey Schmitt: Okay. And then the physical trading floor, I may have missed it, but did you mention what your share was of those industry volumes, which I think you said were like hovering around 6% to 8%. And do you see that floor helping with adoption of index options potentially later this year? I mean, aren't a lot of those volumes still traded on floors? Lance Emmons: Yes, I'll cover the market share, and Shelly, you can discuss the index options. But the market share for the quarter was about 40 to 50 basis points. So slowly picking up. But again, we think as we release additional functionality over the next several months that we'll be able to capture even more and -- more than our sort of 1/6 of that 8%. Thomas Gallagher: Shelly, you might want to take the follow up? Shelly Brown: Yes. Thank you. To add on what Lance said about the market share, we've been steadily rising from about 5% of floor volume to about 10% of floor volume. There's an ebb and flow each day, but that's growing over time. With regards to index options and the trading floor, the first point I want to make is we're listing the cash settled options on the Bloomberg indexes on MIAX options and our trading floor is Sapphire options. So they are 2 different exchanges within the MIAX family. That being said, we certainly have the optionality to carve out part of the physical space on the existing Sapphire trading floor and make that a MIAX options trading floor specifically for index products. And that is one option we have in our back pocket. But it's really an open question as to whether or not an index product really needs a trading floor. Certainly, our competitor has a trading floor. The products initially traded in trading floors before they went electronic many years ago. And they've seen a steady shift of volume from the floor to the screens. That being said, we did experience during COVID, the shutdown of the trading floors and 100% of that index volume went electronic for several months, eventually coming back to the trading floor. My belief is that you can operate a full suite of index options on an electronic marketplace without a trading floor that the incumbent chooses to keep the trading floor open because that's what they've traditionally done and they have a lot of members on that trading floor. I believe having a fully electronic market would lead to better quality markets, more screen activity because of tighter markets and more liquidity being shown because the electronic market makers who are also the floor market makers aren't competing with themselves in the electronic versus floor. A lot of the floor business is also complex business and the incumbents do not allow electronic options over a certain size. We think those are disadvantages to customers and we will automate those functions. So that -- therefore, we think our product will be a superior product because of the electronic features. Operator: The next question is from Chris Allen from KBW. Christopher Allen: I was wondering if you could unpack the growth in access fees, a very nice trajectory, both on a year-over-year and sequential basis. I know you mentioned member connections and fee increases. Just wondering if you could maybe quantify the impact of the fee increases, whether any of the MIAX Sapphire fee waivers were in there as well. Just trying to understand organic growth trajectory in terms of what's being driven by new connections, new sales versus fee increases. Thomas Gallagher: That's a great question, Chris. Lance, do you want to take that? Lance Emmons: Yes. Chris, good to hear from you. Yes, it's basically split down the middle between new member connections for the most part and fee changes. On the fee changes, it was both fee increases we made January 1 as well as the expiration of some Sapphire fee waivers, just like we've done in the past when we launch a new exchange, we tend to either waive fees or discount them and then kind of remove those waivers over time. So net-net, half is fee increases and half is new member connections. Operator: Next question is from Patrick O'Shaughnessy from Raymond James. Patrick O'Shaughnessy: Curious if you guys anticipate any impact either positively or negatively from options regulatory fee reform that looks like it's going to take place on July 1. Thomas Gallagher: Thanks for the question, Patrick. As have other exchanges, we have, in fact, filed rule changes that may or may not be effective on July 1, depending upon whether the industry is capable to do what they have to do from the technology perspective. We have not finalized our rates as of this time. So I really don't have an opinion as to whether or not these will cost us impact revenues or they'll be neutral. So right now, this evening, I'm really not in a position to tell you how that's going to impact our regulatory expense reimbursement or any other exchange. Lance, any color on that you want to add? Lance Emmons: No, I think you covered. Patrick O'Shaughnessy: All right. I appreciate that. And then for my follow-up, so you mentioned that you're launching the Bloomberg 100 product on May 17. What's the sequencing then for launching the 500 products? And why are you starting with the 100 rather than the 500? Thomas Gallagher: Great question, Patrick. Shelly, do you want to pick up? Shelly Brown: Sure. Thank you, Patrick. That was a very good question. It was an interesting call between the 3 initial futures, which to list first. Working closely with our retail firms that are interested in the product, many of them felt that their retail customers would have more interest in the B100 index initially because of the makeup of the index. They find a lot of their retail likes to trade in that family of indexes, the software technology companies. So that's why we made that choice. As far as the rollout, we certainly wanted to start slow. So we're starting with just one product on day 1 on May 18. We're listing the B500 TEB contract 2 weeks later on June 1 and the B500 big contract a week later from that June 8. But we want a slow rollout. It's a new product. It's a new data center for us, a new relationship that we're clearing these products at OCC, which benefits the entire industry from a margin and capital perspective. So that was the decision process. Thomas Gallagher: And then when do we follow with the big, Shelly, to answer the back end of the question? Shelly Brown: The big is June 8. The B500 big will be June 8. It's the third rollout. Thomas Gallagher: Shelly, maybe before we break Shelly, just a question, I mean, a point to make. What has you excited about this new proprietary product suite now that we finished the Onyx trading platform, the clearing and now the relationship with OCC for futures, what has you excited about this launch? Shelly Brown: The buzz in the industry has been -- there hasn't been a real strong competitor to the existing index complex. I believe over 95% of index volume is concentrated in 2 products, the SPX -- for the options side, the SPX and the VIX. The industry of buzz is we need competition. We'd like to see competition in these products. We'd like to see competition across exchanges. We believe these are better constructed indexes for all the reasons Tom mentioned earlier. We believe our technology is a differentiator. It's how we've gone from 0 to 17-plus percent market share just since the last 15 years. Combine those with, again, electronic trading and some of the other functionality we built, the buzz, both from the market makers who are interested in trading the product and the retail firms has been very positive. Thomas Gallagher: Thank you, Shelly. I think we have time for one more question. Operator: Certainly. And that question will be from Chris Brendler from Rosenblatt. Christopher Brendler: Congrats on strong results here. I wanted to ask a question just given it's topical since I covered more of the crypto names, Bullish's acquisition recently, sort of thrown some ideas around about tokenization. It seems like it's really gathering steam. How do you guys think about tokenization and how it might impact your business? Thomas Gallagher: Well, great question, Chris. Tokenization is not our focus right now. Our focus is really on the core business and maximizing the new product launches, particularly in the futures area based on the investments that we've made over the last several years. We're going to watch it. We're going to see what develops over the course of the next year. But I really want to focus on the businesses that we've acquired and the organic growth and the technology we've just brought to the futures market. So we're watching it closely, but I just want to be very frank, it's not a core focus today. Christopher Brendler: Yes, makes sense. I'll ask a core business question as a follow-up. I may have missed this. But can you -- the impact from the new single stock weekly, I assume that's still negligible at this point. It's not actually having a material impact on your results. Thomas Gallagher: Yes. Yes, that's correct. And Lance, do you want to just add some color to that? Lance Emmons: Yes. We're hearing the same. I mean we're seeing the same things in the data. It's still early days. I mean we all sort of believe across the industry that it is additive. But as I said, it's still a small negligible contributor at this point, but we do think it could grow over time. Christopher Brendler: Absolutely. Just add to the secular tailwinds. Operator: And ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Tom Gallagher for any closing remarks. Thomas Gallagher: Well, thank you very much, everyone, for joining on this evening. Obviously, we've had a great quarter and we're very grateful for the support of all of our member firms and our shareholders that have helped us get to this spot. I'm continuing to focus on our 4 pillars that have gotten us here and we're going to continue to work closely with the members that we have developed relationships since our first launch in 2012 and we're really proud of the new relationship with Bloomberg and I think we've got a real exciting future here in 2026. So thanks very much for your participation this evening and we're happy to follow up individually over the next few days. So have a nice evening. Thank you again. Operator: And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Ferroglobe's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin. Alex Rotonen: Good morning, everyone, and thank you for joining Ferroglobe's First Quarter 2026 Conference Call. Joining me today are Marco Levi, our Chief Executive Officer; and Beatriz Garcia-Cos, our Chief Financial Officer. Before we get started with prepared remarks, I'm going to read a brief statement. Please turn to Slide 2 at this time. Statements made by management during this conference call that are forward-looking are based on current expectations. Factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available at ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, adjusted net debt and adjusted diluted earnings per share, among other non-IFRS measures. Reconciliations of non-IFRS measures may be found in our most recent SEC filings. We'll be participating in the B. Riley Annual Investor Conference in Los Angeles on May 20. We hope to see you there. With that, I'll turn the call over to Marco. Marco Levi: Thank you, Alex, and thank you all for joining us today. We appreciate your continued interest in Ferroglobe. Overall, market conditions for ferroalloys have become more favorable, highlighted by our first quarter silicon-based alloys volumes, which grew 18% sequentially to the highest level in nearly 5 years. This segment was driven by growth in ferrosilicon in both Europe and North America. Our manganese-based segment was also strong with volumes increasing 6%. The improvement in Europe was helped by recently implemented safeguards. Antidumping and countervailing duties, tariffs and rising steel production have all strengthened demand for ferrosilicon in the U.S. This creates a more supportive silicon-based alloys market environment across our core regions. While the silicon metal market in Europe remains under continuous attack from China and its proxy Angola, we are encouraged by recent comments. European Trade Commissioner, Maros Sefcovic, has reaffirmed the commitment to protecting the silicon metal industry and is actively evaluating measures addressing imports from China and Angola. In the U.S., the silicon metal cases covering Angola and Laos are now final with antidumping and anti-circumvention duties of 78.5% and 173.5%, respectively, including the general tariff of 10%. The Department of Commerce is expected to set the final rates for Australia and Norway in late June with the U.S. ITC expected to announce its final decision in late July. These measures are critical to ensuring a level playing field and supporting the long-term health of our industry. Given recent events in Venezuela, we see a compelling opportunity to reopen our operations there. These assets offer strategic proximity to the U.S. market, along with access to low-cost energy raw materials and attractive logistics. We are actively pursuing a potential restart of our operation in Venezuela to take advantage of its geographic proximity to the U.S. At the same time, we are evaluating CapEx requirements, energy availability and cost structure to determine the viability of restarting. As a reminder, we have 3 large ferrosilicon furnaces with a combined capacity of 90,000 tons and the flexibility to convert them to silicon metal when market conditions dictate. In addition, there is also a 30,000 ton manganese alloy furnace originally built as a silicon metal furnace. We are strategically positioning Ferroglobe to scale our platform to increase our capacity utilization. Our core capabilities, large-scale electric furnace operations, advantage access to raw materials and decades of proprietary process expertise are directly applicable to a broader range of critical materials and alloys. This is why we are actively pursuing expansion beyond our traditional portfolio. We are building on a proven base not starting from scratch. Our history of producing materials such as magnesium and ferrochrome, combined with deep expertise in high temperature reduction and related processes, give us a strong technical and operational foundation. This is a natural evolution of our business. The same industrial platform that supports our leadership in silicon metal and ferroalloys can be redeployed to address growing supply gaps in other strategically important materials. As demand accelerates and supply chains realign, this optionality materially extends Ferroglobe growth runway. Our Western asset footprint is a clear competitive advantage. It places us at the center of rising demand fueled by higher defense spending, AI adoption, the energy transition and the need for secure domestically anchored supply chains. Recent U.S. EU agreements on critical materials reinforce a clear message, trust that local production is now a requirement, not a preference. Given that, it is crucial to understand what happened to critical materials production in the West and how it lost its advantage. It was not that access to mines and critical minerals was lost. Rather, China became the dominant processor of these materials into critical materials. And the market structure shifted to favor price over all other factors, rendering Western production unprofitable. All that is changing now to favor the reliability of a trusted supply chain. Taken together, this positions Ferroglobe to play a larger role in the next phase of industrial and geopolitical realignment, leveraging assets we already own, capabilities we already have and markets that are moving decisively in our favor. Moving to Coreshell. We continue to develop our partnership to advance the use of silicon in lightweight, high-capacity and fast charging batteries for EVs and drones. In March, we co-led a series bid round with a $7 million investment, increasing our total to $17 million and representing an ownership stake of approximately 10%. Coreshell has started production from its current 60 amp pilot plant, marking an important milestone and has already begun selling batteries to robotics and defense customers. In addition, Coreshell has signed multiyear sampling and qualification agreements with automotive OEM customers, positioning it to participate in the emerging growth area in critical materials. In March, we signed a binding term sheet for a multiyear silicon metal supply agreement with Coreshell. Overall, we are operating in an improving environment for ferroalloys, executing on our strategic priorities and positioning the company for sustainable growth across both our core and emerging businesses. Next slide, please. Strong ferro alloy volume growth in the first quarter drove shipments up 7% to 177,000 tons, primarily due to an 18% increase in silicon-based alloys. This resulted in a 6% increase in quarterly revenue to $348 million. Adjusted EBITDA declined to $3 million and free cash flow was a negative $16 million. Beatriz will provide more detailed comments in her section. Next slide, please. I will start updating our segments from silicon metal. The silicon metals market remains under pressure due to continued aggressive pricing by imports, mainly from China and Angola. These dynamics primarily impacted Europe as silicon metal was excluded from recent safer protections. As a result, total volumes declined 6% from the fourth quarter, and we decided not to participate at uneconomic prices. We partially mitigated this by converting 3 silicon metal furnaces to ferrosilicon, allowing us to capitalize on better market conditions in this segment. Two of the furnaces were in Europe and 1 in the U.S. was converted last year. This strategic shift underscores the value of Ferroglobe's flexible operating model and our ability to respond dynamically to evolving market conditions. Silicon metal volumes declined 2,000 tons to approximately 31,000 tons in the first quarter. North American volumes grew a solid 15%, while EU volumes continue to face predatory import competition, resulting in a 23% decline. In addition to China and Angola, low-priced imports in Q1 came from Malaysia, Kazakhstan and Laos. Norway is the largest importer of silicon metal to the EU, accounting for more than 50% of total imports. The polysilicon market remains weak with silicon prices reflecting soft demand and oversupply. The Aluminum segment, on the other hand, is showing initial signs of improvement as some Middle Eastern production is offline due to the Iran conflict. The chemical sector remains soft due to Chinese imports of siloxanes and silicones into Europe and in the U.S. U.S. index prices declined 3% in the first quarter compared to the fourth quarter, while EU prices declined by 6%. Although we remain cautious about the pace of recovery in Europe, pending more decisive trade actions from the European Trade Commission, recent comments from the Trade Commissioner regarding protecting the EU market are encouraging. In the U.S., we expect the market conditions to improve in the second half of 2026, bolstered by antidumping and countervailing measures. In the medium term, there is a significant growth opportunity for silicon metal in the U.S. as Tesla aims to build a large vertically integrated supply chain to produce 100 gigawatts of solar capacity by the end of 2028. Next slide, please. Silicon based alloys volumes reached their highest level since the second quarter of 2021, with total shipments increasing 18% to 61,000 tons driven by 21% growth in Europe despite a contraction in steel production in the first quarter. The North American growth was equally strong at 20%. After a 22% price jump from late October to early December following the safeguard announcement, EU ferrosilicon index prices declined 9% in the first quarter. The reason for the recent price decline is twofold. First, import volumes were high prior to November safeguards, leading to elevated inventory levels. Second, the reuse of low-priced silicon metal by steel producers to replace ferrosilicon is disrupting ferrosilicon market dynamics. Yet they are still up 9% since the pre-safeguard announcement, and we expect pricing to be positively impacted in the second half due to safeguards as excess inventory is depleted. The U.S. ferrosilicon index was flat in the first quarter. As I mentioned earlier, we converted 1 silicon furnace in U.S. and 2 additional furnaces in Europe to ferrosilicon to take advantage of shifting demand. Overall, we're optimistic that 2026 will be a strong year for silicon-based alloy volumes for Ferroglobe. An additional catalyst for the second half of the year is anticipated from enhanced EU steel sectors, which are expected to increase EU steel production by 12 million to 15 million tons annually, representing approximately 10% growth. These measures are expected to take effect on July 1, 2026. Next slide, please. Our Q1 manganese shipments posted a strong quarter with a 6% volume increase to 86,000 tons, up from 81,000 tons in the prior quarter, helped by safeguards. Europe accounts for the majority of the manganese sales. Manganese alloy index price surge after safeguards were announced in November and are up 18% since pre-safeguards with year-to-date levels roughly flat. We are constructive about the 2026 manganese outlook and expect to report strong volumes for the remainder of the year. Strengthened steel safeguards are another catalyst as they are expected to be implemented in July and improve EU demand. I would now like to turn the call over to Beatriz Garcia-Cos, our Chief Financial Officer, to review the financial results in more detail. Beatriz? Beatriz García-Cos Muntañola: Thank you, Marco. Please turn to Slide 9 for a review of the first quarter income statement. Total Q1 sales increased by 6% to $348 million, driven by a 7% increase in total volumes, with ferroalloys being the primary driver. More specifically, silicon and manganese-based alloys volumes increased 18% and 6%, respectively, while silicon metal shipments declined as we prioritize price discipline in Europe. Raw material and energy costs after adjusting for the $5.5 million impact from power purchase agreement declined to 66% of sales, down from 67% in the fourth quarter. As a reminder, the PP&As are mark-to-market using fair value, and we exclude them to better reflect comparable quarter-over-quarter performance. Despite strong volume growth, adjusted EBITDA declined to $3 million. Higher energy, transportation cost and raw material inflation began to impact costs in March as a result of the conflict in Iran. Next slide, please. Silicon metal revenue declined 13% to $84 million due to a 6% reduction in volumes and a 7% fall in prices to $2,754 per ton. Adjusted EBITDA declined $3 million in the first quarter to an EBITDA loss of $2 million, resulting in a negative margin of 3%. The margin contraction was driven by lower realized prices, partially offset by improved cost in Canada and the result of progresses in Spain and France. Next slide, please. Silicon-based alloys revenue posted another strong quarter with an 18% increase to $122 million, driven by an 18% sequential increase in volumes to 61,000 tons. Realized prices were essentially flat with fourth quarter at $2,016 per ton. Adjusted EBITDA decreased by $9 million to $6 million sequentially due to higher production cost in Spain, energy and raw material cost in Spain and the U.S. Margins declined [ 9 percent points ] to 6%. Next slide, please. Manganese based alloys revenue increased 16% to $107 million from $93 million in the prior quarter. The improvement was due to a 9% increase in realized prices to $1,250 per ton and a 6% increase in volumes to 86,000 tons. Adjusted EBITDA in the first quarter was $10 million, up from $9 million in the fourth quarter. Adjusted EBITDA margins remained solid at 9%. Inflation in manganese ore, combined with higher transportation and energy costs offset most of the price gains. While the Iran conflict continues to affect near-term logistics and raw material costs, we expect these costs to be temporary. Next slide, please. For the first quarter, our cash flow from operations was negative $6 million due to a $13 million investment in working capital as we built inventory and increased accounts receivable balance to support higher volumes. We reduced our CapEx by $3 million to $11 million in the fourth quarter. For the first quarter, our free cash flow was negative $16 million. Next slide, please. As announced previously, we increased Q1 dividend payout by 7% to $3 million, which was paid on March 30. Our next dividend of $0.015 per share, in line with the previous quarter is scheduled for June 29, payable to shareholders on record as of June 22. We fund strategic investments such as Coreshell to support near-term operating needs and long-term growth opportunities and repurchased a modest 5,000 shares in the first quarter. Although our net debt position increased to $55 million in the first quarter, we remain in a solid financial position to support our growth objectives. At this time, I will turn the call back to Marco. Marco Levi: Thank you, Beatriz. Before opening the call to Q&A, I'd like to provide key takeaways from today's presentation on Slide 15. We began to see the benefits of various trade measures in the first quarter as evidenced by stronger volumes of silicon-based alloys and manganese alloys. Unfortunately, the prices still reflect an imbalanced market environment. We believe that the pricing will strengthen in the second half of the year, as we have said before. Ferroglobe is uniquely positioned to lead the next era of critical materials supply with the asset platform footprint and expertise to serve Western markets where trusted local production has become a global imperative. While geopolitical disruptions continue to create near-term volatility and pressure logistics and raw material costs, we believe these impacts are temporary. The structural improvements underway in our markets, such as strengthened steel safeguards, CBAM and onshoring underpin our confidence in a stronger second half and longer-term value creation. Operator, we are ready for questions. Operator: [Operator Instructions] We would take our first question, and the question comes from Martin Englert from Seaport Research Partners. Martin Englert: Have you had discussions with the U.S. and/or EU governments regarding potential grant opportunities for growth when it comes to critical materials. And then if you could just touch on what specific metals or alloys you're most strongly considering maybe pursuing here? Marco Levi: Yes. I mean there are different departments -- government departments in U.S. we have been talking to and the recent agreement between U.S. and Europe on planning this critical material partnership confirm the intent of governments to increase the independence from China on critical materials. We have been -- today, we produce coal, silicon metal and manganese alloys, which are critical. But in the past, we have been producing other materials in our furnaces, in particular, ferrosilicon chrome and ferrochrome. And a long time ago, FerroAtlántica was producing magnesium in Europe. But on top of that, we have technologies that can be applied to our furnaces to produce other critical materials for Europe, critical minerals for U.S. At this stage, I cannot be disclosing which materials we're going to produce. But I can tell you that we went through a serious process where we started from more than 100 options, and now we are down to new 10 critical materials, that we can produce either by -- in the current furnaces that we have or in slightly modified furnaces with minimum CapEx. And in some cases, like magnesium, we will need to invest in a new plant. What we are doing right now, we are validating the market attractiveness of these 10 new materials. And we plan to drive our conclusions in the next few weeks when we present to the Board how we intend to start this critical minerals diversification at Ferroglobe. Martin Englert: And you touched on this, but the -- maybe goalposts for associated CapEx and correct me if I misheard you, but it sounds like several of the options for materials that you're considering might be very minimal where the furnaces wouldn't need much. Others sound like they're fairly nominal investments with some furnace upgrades, but then I believe you said magnesium would require more substantial investment. And I believe you said a new plant. So just goalposts on if you would decide to go forward, is this something in the single-digit millions of dollars at the low end to tens of millions? And then what would it look like on the high end with CapEx? Marco Levi: We are consolidating the numbers right now to go to the Board with some NPV estimates to select the most attractive opportunities. You got it right. Some of these materials really don't need further investment. Probably they need some new permits because we have not been producing these products for a while. We need to assess the reliability of raw material -- new raw material sources. And you are correct. For some of these materials, we don't need any additional CapEx. For other materials, we need a little bit of CapEx in the single-digit million dollars. Of course, due to the pressure that we have from governments to start the production of these products. We will give priority to be easier and more profitable to produce critical materials or minerals. Martin Englert: Okay. Would be curious to learn more over the coming weeks or months as you have more to share. When it comes to the increased logistical expenses, are you implementing surcharges across your product offering to cover both the inbound and outbound inflation associated with this? Marco Levi: Yes. We are implementing surcharges both in Europe and in the U.S. We are implementing a surcharge of EUR 30 per ton in Europe and $40 per ton in the U.S. with different level of acceptance. There are businesses like chemicals who are doing that. They are more used to this practice. Other businesses like steel, which are much more resistant to that. I think that anyway in the next few weeks, we are going to be forced to increase prices across our product mix as well because the prices that we see today, particularly in Europe, particularly on silicon metal and ferrosilicon are simply unacceptable for everybody. So I think the market should move -- and there is a lot of cost pressure coming from freight, gas is influencing, the energy cost and all the critical raw materials of our supply chain have gone up. So we need to try to pass these increases through the supply chain. Martin Englert: When it comes to the pricing dynamic, I mean, within the silicon-based alloys business, there's been fairly favorable trade measures across your asset footprint. Underlying demand seems like it's pretty favorable or moving in a better -- quite a bit better direction. What do you think is the inhibiting factor that hasn't allowed you to raise prices thus far in the EU and U.S. market for products like ferrosilicon? Marco Levi: Yes. As I said that we have to consider different dynamics here. In Europe, before safeguards were announced, a lot of ferrosilicon has been moved by the usual countries and inventories were pretty high. The second point is that Angola has been switching furnaces to ferrosilicon, dumping ferrosilicon in Europe. Angola is not subject to any kind of safeguard. The third element due to the low price of silicon metal in Europe, we have seen significant ferrosilicon volumes being converted by the steelmakers to silicon metal. And we have seen imports in the first quarter from Malaysia and Kazakhstan going up. So these are the main factors that have prevented the consolidation of the price increase that happened immediately after the safeguard on ferrosilicon. In the U.S. I think now it is really a matter of time with the recovery of the steel consumption in U.S. the first quarter numbers show growth in U.S. in steel. So we expect pricing to become more robust on ferrosilicon in U.S. near-term. Operator: [Operator Instructions] We will take our next question, and the question comes from the line of Nick Giles from B. Riley Securities. Nick Giles: I appreciate you updated this morning. I guess just following up on some of Martin's questions. When we think about you pursuing new critical minerals, was something like a price floor or government-related offtake or stockpiling efforts, would that be a part of the decision matrix? Or is it really more a factor of kind of CapEx requirements and something more on the grant side? Just appreciate any color there. Marco Levi: Well, we are trying to be as fast as possible here. And clearly, we count on government support. But like I mentioned when I replied to Martin, Nick, we are looking at what we can control now. And what we can control is which technologies are available to us, which technologies can be then implemented with minimum investment or 0 investment and market -- current market attractiveness for these products. Clearly, we -- I think pretty soon, deals like the critical material partnership between U.S. and Europe will have tremendous weight on our decisions and strategy implementation because when you look at this kind of deal, yes, you talk about potential decision on price floors for these critical minerals in U.S. and Europe. They are talking about joint mapping, meaning identifying new resource deposits in our geographies. We talk about defense. So prioritizing NATO on the rest. We talk about very interesting about harmonized ESG, especially when you talk about E, this can be an harmonization of the environmental measures can be extremely interesting, especially for Europeans and focus on recycling is another key element of the deal. So we have to see how this kind of agreement gets translated into measures, being it either price levels or environmental limits or whatever else refers to what I just mentioned. But for me, there is a fact that certain products that we can produce either in Europe or in U.S. are not -- either not produced at all like magnesium. There is no active production of magnesium in the West at this stage. There are a few start-ups, but there is nothing or the current amount of products that are produced today are a minimal part of the demand. So being the intention of Europe and U.S. to be more back integrated on these materials, I think, will provide us a tremendous opportunity to position Ferroglobe like one of the key suppliers of critical minerals in the West. Nick Giles: I really appreciate your perspective. Maybe switching gears, just you mentioned in your prepared remarks, Coreshell did another raise and you obviously participated and attached to that or alongside that, there is a multiyear silicon metal supply agreement. So can you just touch on maybe the overall progress for Coreshell, kind of -- what kind of customers are they signing? And how you anticipate volumes within that supply agreement to ramp and what the margins look like there? I know that was a lot, but I think you get where I'm going. Marco Levi: Yes. I mean the volumes are not going to be significant until OEMs qualify the 60 amp pilot batteries that we estimate happening between the end of 2027 and '28. And then we expect to develop business by 2030, '31 to a level of about 70,000 tons of silicon metal for batteries just related to Coreshell. The volumes are already flowing now, but there are minimal volumes for their sales to batteries and drones. I think I can share the budget of the sales for Coreshell next year is north of $60 million, so it's significant. So the technology is validated. Now we need -- the Series B, like I mentioned in the past, is related to building a bigger pilot plant that is going to be used to sample 60 amp pilot batteries for qualifications by the automotive OEMs who have shown interest in this technology. Nick Giles: Understood. I appreciate that. Maybe just turning back to FeSi. I mean volumes did improve pretty meaningfully in the first quarter. Can you just talk about what your volume expectations are in 2Q? And then what should we expect for manganese-based alloys as well? Marco Levi: Well, we mentioned in -- when we communicated in the previous quarter about our expectation for 2026 that we are related to a significant growth in alloys, driven by safeguards in Europe, by the new safeguard measures on steel are kicking in as of July 1, 2026, and steel recovery in U.S. So this is happening. Clearly, on manganese, when you talk about safeguard, there is only one producer. I would say, of manganese alloys in EU27 territory, which is Ferroglobe. One of our competitor has a small plant in France, but we are the guys that from a volume point of view, benefit the most out of safeguards of manganese. On ferrosilicon, I've already described in detail to Martin what happened in Europe and in U.S. I hope you were in the call, so I think I answered this question. Nick Giles: No, understood. That's helpful. Maybe just one more, if I could. Just on the ferrosilicon costs, you kind of went through, you're looking to pass through some of the elevated costs within each segment. But if we were to kind of isolate those cost pressures and just look at quarter-over-quarter, what kind of cost improvement would we expect to see in ferrosilicon specifically? Beatriz García-Cos Muntañola: Maybe it's a point to notice, Nick, this is Beatriz speaking. In Q4 versus Q1, we have a huge one-off in Q4, a positive. And of course, in Q1, we don't have any longer this nonrecurrent. So this is why you noticed an increase in cost in Q1 2026 versus Q4 2025. So what I'm saying is that not a like-to-like when you compare the 2 quarters. Going forward, I can confirm that, of course, we are improving our cost. The challenge could be more on the logistics side and transportation costs, as you know, due to the Iran war. We expect these cost to potentially increase a little bit more in Q2 and then pave the way on the second half of the year. Nick Giles: Just to clarify, so costs in silicon-based alloys would actually rise in 2Q before kind of declining in 3Q and 4Q? Beatriz García-Cos Muntañola: Yes. You're right. Operator: Thank you. That concludes today's question-and-answer session. I'll now hand back for closing remarks. Marco Levi: Thank you. We are excited about the medium-term potential to grow and diversify our business through a broader mix of critical materials and an expanded geographic presence. Thank you again for your participation. We look forward to updating you on the next call in August. Have a great day.
Operator: Good day, and thank you for standing by. Welcome to the VSE Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead. Michael Perlman: Thank you. Welcome to VSE Corporation's First Quarter 2026 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John. John Cuomo: Good morning, everyone, and thank you for joining us today. We delivered a strong start to 2026 with record results in the first quarter and continued momentum across our business. Our performance was driven by balanced contributions from both our distribution and MRO channels, supported by strong execution, new program activity and continued market share gains. Engine-related aftermarket activity remains a key driver of our business and now represents more than half of our total revenue with continued strength across our core platforms. During the quarter, we advanced our OEM-aligned distribution programs, expanded our MRO capabilities, invested in targeted growth opportunities and made meaningful progress on our acquisition integrations. We remain focused on executing our strategy, scaling our platform and driving continued growth, margin expansion and long-term value creation. Let's begin on Slide 3, where I will highlight our recent developments. Let me start with the acquisition of PAG, which we closed this week on Tuesday, May 5. Together, VSE and PAG now form a scaled independent aviation aftermarket platform with 61 locations across 8 countries, including 48 repair facilities and 11 distribution centers of excellence. The combination significantly expands our capabilities across both distribution and MRO, enhances our technical depth and strengthens our ability to deliver more integrated end-to-end solutions with increased proprietary content to a broad and diversified customer base. The business will now serve a diverse customer base across commercial, business and general aviation, rotorcraft, OEM and defense markets. Strategically, this transaction accelerates our transition towards a more integrated, higher-margin aftermarket model with greater exposure to repair and engine-related activity. PAG's margin profile is immediately accretive and supports a clear path to exceeding 20% consolidated adjusted EBITDA margins over time, along with improved free cash flow generation. We funded the transaction through a combination of equity and new debt financing, which Adam will cover in more detail shortly. With the transaction now closed, our focus shifts to integration and execution. We see clear opportunities to drive synergies through cross-selling, repair in-sourcing and procurement efficiencies, and we are confident in our ability to deliver on those objectives. Let's move to Slide 4 and continue with our recent developments. On April 1, we acquired NorthStar Technologies, a provider of MRO and third-party logistics services supporting the engine aftermarket. This acquisition expands our engine service capabilities in the business and general aviation market, deepens our integration with OEM aftermarket supply chains and enhances our ability to capture growing demand for teardown and other labor-intensive services. The business operates under a capital-light model with strong demand visibility and a demonstrated resilience across market cycles, supporting both active fleet and increasing teardown and retirement activity. Let's now turn to Slide 5, where I will highlight a few business developments from the quarter. First, we previously announced a new globally exclusive life of program distribution agreement with Pratt & Whitney Canada for APU aftermarket components. This agreement spans more than 2,500 SKUs across more than 15 commercial, regional and business aviation platforms and meaningfully expands our OEM aligned portfolio while deepening our role in supporting these assets across their full life cycle. Second, we expanded our airline-focused asset management program through the acquisition of CFM56 engines for a major U.S. airline partner. By leveraging our in-house capabilities across asset management, teardown and component level repair, we're able to deliver a more integrated engine aftermarket solution. This program supports our organic growth and further strengthens our position across the engine life cycle. Third, we completed the integration of Turbine Weld into the VSE platform. With that integration now in place, the business is well positioned to continue to scale and contribute to our expanding engine-focused MRO capabilities. And finally, in connection with the PAG acquisition, we strengthened our capital structure through a combination of equity and debt financing, enhancing our financial flexibility to support future growth. Adam will cover this in more detail shortly. Let me briefly update you on the current aviation aftermarket environment. Despite near-term macroeconomic uncertainty, including elevated fuel prices driven by recent geopolitical developments, we have not seen a pullback in airline capacity, OEM production plans or operator behavior to date. Demand for engine maintenance and repair activity remains strong, supported by continued fleet utilization, aging assets and ongoing supply constraints. This continues to be a key driver of activity across our commercial and business aviation businesses. Specifically in the business and aviation sector, demand also remains resilient. This segment has historically demonstrated lower sensitivity to fuel price volatility and continues to provide a stable and diversified source of revenue within our portfolio. Let's now move to Slide 6 and discuss our consolidated first quarter 2026 financial performance. In the first quarter of 2026, we delivered record revenue and profitability. Revenue growth was driven by balanced contributions from both our distribution and MRO businesses, along with contributions from recent acquisitions. Engine aftermarket activity remains a key driver of our performance and now represents more than 50% of our total revenue. We continue to see strong demand across this segment, supported by high fleet utilization and ongoing supply constraints. Our business also delivered record profitability in the quarter. Profitability in the quarter reflects disciplined execution across both new and existing programs, expanded product offerings and MRO capabilities, strong performance in our OEM licensing and manufacturing programs and early synergy realization from recent acquisitions. With that, I will now turn the call over to Adam to walk through our financial details. Adam Cohn: Thank you, John. Let's turn to Slide 7 of the conference call materials, where I will provide a detailed overview of our first quarter consolidated financial results. For the first quarter of 2026, we generated $325 million of revenue, an increase of 27% year-over-year. Both distribution and MRO delivered strong results with distribution revenue increasing 26% and MRO revenue increasing 28% year-over-year. The 26% increase in distribution revenue was driven by strong performance across new and existing programs, product line expansion, market share gains and contributions from the Aero 3 acquisition. The 28% increase in MRO revenue was driven by expanded repair capacity, new repair capabilities, sustained end market demand and contributions from the Aero 3 and Turbine Weld acquisitions. Growth across both segments continues to be supported by strong demand, specifically in the engine aftermarket. Excluding recent acquisitions, organic revenue increased about 15% year-over-year, reflecting strong underlying demand across the business. Consolidated adjusted EBITDA increased 37% to $55 million compared to the first quarter of 2025. Adjusted EBITDA margin was 17.1%, an increase of approximately 130 basis points versus the prior year period, driven primarily by greater mix of higher-margin product and repair activity, higher-margin OEM license manufacturing sales and continued synergy realization from recent acquisitions. Adjusted net income was $33 million and adjusted diluted earnings per share was $1.17 per share. Let's turn to Slide 8 and our balance sheet. At the end of the first quarter, total debt outstanding was $366 million. The company had approximately $1.24 billion of cash and cash equivalents on hand, of which a majority was used to fund the PAG acquisition at closing, which occurred on May 5. We had no borrowings under our $400 million revolving credit facility, which was recently upsized to $500 million. The upsized credit facility remains undrawn. During the first quarter, we used approximately $69 million of free cash flow, driven by part procurement seasonality and targeted strategic investments to support both the recently awarded APU program and the expanded airline-focused asset management program. We remain confident in our ability to generate strong free cash flow as these investments scale through the balance of the year. Pro forma for the acquisition, adjusted net leverage is estimated to be below 3x with a clear path to below 2.5x by year-end, driven by EBITDA growth and free cash flow generation. Let's turn to Slide 9 to review our updated consolidated company guidance for full year 2026, inclusive of the PAG acquisition. Starting with revenue. With the PAG acquisition now closed as of May 5, we are updating our full year 2026 revenue growth guidance to reflect the contribution of that business. Our new range, inclusive of PAG is 57% to 61% for the full year. Importantly, this update reflects the inclusion of PAG and no change in our expectations for the underlying business. The updated revenue guidance is presented net of intercompany eliminations. We are also updating our full year 2026 adjusted EBITDA margin outlook to reflect the addition of PAG, raising our range to 18.1% to 18.5%. As with our revenue guidance, this update is driven by the inclusion of PAG and does not reflect any change in our expectations for the underlying business. On a free cash flow basis, inclusive of our strategic investments executed in the first quarter and inclusive of the PAG acquisition, we expect to see improvement over the course of the year and on a year-over-year basis, driven by earnings growth and a reduction in working capital intensity. I would now like to provide an update on several additional modeling assumptions post PAG acquisition, which are also detailed in the appendix of the presentation. For the full year 2026, interest expense net of interest income is projected at approximately $37 million to $40 million. Depreciation and amortization is expected to be approximately $98 million to $103 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be approximately $18 million to $19 million, and capital expenditures are expected to be approximately 2% to 2.5% of revenue. Let's now move to Slide 10 and review our new capital structure. On May 5, we closed on a $900 million Term Loan B and upsized our revolving credit facility to $500 million. These new facilities replace our prior Term Loan A and the revolver structure. And together, they strengthen our balance sheet and give us flexibility to execute on our strategic priorities. With this refinancing, we extended our term loan maturity, expanded our borrowing capacity and improved our day-to-day operating flexibility. We were pleased with the level of institutional support and the pricing achieved. This refinancing positions us with significant available liquidity to support our strategic priorities and future growth initiatives. With that, I'll turn the call back over to John. John Cuomo: Thanks, Adam. I'd like to conclude by briefly reviewing our 2026 priorities on Slide 11. First, we are focused on executing our recent acquisitions, accelerating integration and realizing synergies. We've made meaningful progress in the first quarter, including completing the integration of Turbine Weld. Second, we are implementing newly awarded OEM and distribution programs across our core platforms, including the Pratt & Whitney Canada APU agreement and our CFM engine initiatives, which we expect to contribute more meaningfully in the second half of the year. Third, we are expanding our MRO capacity and technical capabilities to capture continued demand across the engine aftermarket. Fourth, we are advancing and converting our organic growth pipeline into revenue and margin contribution. Fifth, we are continuing to enhance our systems and processes to support scale, integration and efficient growth, including the targeted use of AI and data-driven tools to improve operational efficiency and optimize workflows across the platform. And finally, with the PAG acquisition now closed, our focus moves to execution. We see clear opportunities to realize synergies through cross-selling, repair in-sourcing, procurement efficiencies and network optimization, and we are confident in our ability to deliver on those objectives. In closing, we delivered a strong start to 2026 with record results in the first quarter and continued momentum across our business as we begin the second quarter. During the first quarter, we advanced our OEM aligned distribution programs, expanded our MRO capabilities, invested in targeted growth opportunities and made meaningful progress on our acquisition integrations. While we are mindful of the current macro environment, including geopolitical developments and fuel price volatility, demand across our core end markets has remained resilient, and we have not seen a change in customer behavior to date. Overall, we believe the strength of our engine-focused aftermarket exposure, combined with our growing presence in business and general aviation, positions us well to navigate near-term uncertainty while continuing to execute on our long-term growth strategies. Thank you for your continued support and confidence in VSE. Operator, we are now ready to take questions. Operator: [Operator Instructions] And our first question will come from Ken Herbert from RBC Capital Markets. Kenneth Herbert: John, Adam, and Michael, really nice results for the quarter. Maybe just to start the discussion, John. I can appreciate you've maintained the full year guide and not seeing any impact yet from the higher crude prices on airline or purchasing behavior. But some other engine companies like GE, in particular, have talked about a lag effect and have sort of lowered their expectations of cycles and utilization this year somewhat. Are you concerned at all that we see any sort of lag impact on your business, especially now with a greater focus on engine? Or maybe how can you talk about in your prior experiences, how this could potentially play out as you think about the portfolio today? John Cuomo: Yes. I think -- I appreciate the question. And what I would add to kind of the remarks I made a minute ago is April has also started out quite strong. And our bookings don't go out years, but they do, in many instances, go out months, specifically on our engine-related business. And again, not seeing any outward impact on our engine bookings at this point in time. I'd also kind of highlight the mix of the work that we have. We typically lag a bit on newer generation engines and have a mix of more legacy engines. So whether if you want to play kind of downside scenarios and think through retirements accelerate a bit, that does cause an element of teardowns and such as acceleration happens, which creates additional demand inside of our shops. The second thing I would note is our business is about 50% business and general aviation. And we're -- we do more work on the workhorse aircraft than we do on kind of the more expensive airplanes that don't fly as much. And we tend to see that market slightly more resilient in the near term where you see a little blip from a macro perspective, you don't usually see an impact there. So at this point, we're holding to our guidance. If things change, we may even look at some upside potential towards the back end of the year. Kenneth Herbert: That's great. And if I could, just a follow up. On PAG, congratulations on getting that done. How do we think about the pace of the synergy capture? Typically, you're going to take some time to get to know the business well, but you tend to move fairly quickly as you identify opportunities. How should we think about that as it impacts '26 and '27 on the synergy side? John Cuomo: Yes. Think about '26 is more in-sourcing and cross-selling and '27 is more kind of cost synergies. We have already -- during diligence and then in our work pre-closing, we've highlighted a number of synergies. And if you look at kind of the embedded organic growth for that business, it's -- the business will grow naturally high single digits. We've conservatized it slightly because some of that will move towards intercompany as we drive some synergies, which is where we'll get some near-term margin improvement. And then the second phase of synergies will roll out through 2027 as we execute on our cost initiatives. Operator: Our next question will come from Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: I wanted to ask just the organic growth in Q1 of 15% is ahead of schedule. Maybe, John, on your comments, specifically honing in on that 28% MRO expansion. How much of that was organic? And you mentioned it was increase in repair capability, increase in parts, I guess. Can you maybe expand on how you're doing that and how you think about the MRO business growing? John Cuomo: Yes. Actually, Sheila, for the first quarter, distribution outpaced MRO in terms of growth. We saw our distribution businesses, both on the commercial and on the business and general aviation side, quite strong. More of our engine-focused product, I would say, led that growth with kind of MRO slightly lower organic growth in comparison. And I'd say it's a -- it really is -- what I like about the quarterly results is there's a lot of balance to it. You saw contributions from new programs that we've implemented or in the process of implementing. You saw contributions from businesses we've acquired in the past that are now organic, and we have them growing at above market. And then we have some of the internal investments that we've made to support some expanded repair capabilities. We saw some contributions from those as well. And again, April, I'd say, has started off quite strong on both sides of the business, both MRO and distribution. Sheila Kahyaoglu: Great. And then maybe if I could ask another one, just given your relatively high business aviation exposure, how are you thinking about -- or what are you seeing in terms of the fleet activity given higher jet fuel, and how are you thinking about the business aviation side of both repair and distribution growing in that channel? John Cuomo: Yes. I mean we see it more resilient than the commercial side of the business. And again, as I mentioned a moment ago, the workhorse aircraft, your PT6 engines, your Citations, your Learjets, your King Airs and Pilatus, that is the core of what we focus on, both from an airframe and from -- I mean, from a component and from an engine perspective. And you tend to see sometimes people downgrade slightly to those aircraft when they're flying kind of higher, more expensive jets. And we tend to see that side of the business to be more resilient. So we haven't seen any concern. And I think the data has been quite strong for the first quarter and leading into the second quarter as well. Operator: Our next question will come from Louie DiPalma from William Blair. Louie Dipalma: Your organic growth in the first quarter of 15% was -- it appears that it will be faster than the industry growth that you estimated was going to be in the high singles for this year. Should your new Pratt & Whitney Canada APU global distribution deal and the other deal that you announced, the CFM56 deal, should that lead to an acceleration in the organic growth in the second half because that likely wasn't a contributor in the first quarter, right? And what are some of the other moving parts in terms of the organic growth for this year? John Cuomo: Yes. I think the Pratt & Whitney Canada, you're correct. It will scale throughout the year. And I'd say on the engine side, the CFM56 announcement that we made, that could be some late '26 or even sometimes 2027 revenue. So Adam, I think from a modeling perspective, how would you... Adam Cohn: Yes. I would say it's already embedded into our guidance. And as you know, we had a program that's ending this year, Louie. So the Pratt APU program will -- is replacing that revenue. Louie Dipalma: Great. That makes sense. And secondly, in the prior question, you were just discussing the dynamic between business aviation and commercial. In your recent 10-K disclosure, you revealed that a group of affiliated customers now represents 20% of revenue, and it would seem that affiliated group is RTX, since you have such a strong relationship with Pratt & Whitney Canada. But I was wondering how has business grown with Pratt & Whitney Commercial since you've acquired TCI? And how is the TCI business done? And is there more room for growth on the commercial side there, not only for Pratt & Whitney, but for your other partners? John Cuomo: Yes. I mean RTX is an important partner to us. You also have the Collins business, which is a number of businesses within that business as well. So there's -- it's just -- it's really 4 separate companies or 5 separate companies with a number of contracting arms even within them. We see all of our OEM partners as continued opportunities for share of wallet expansion. And if you look back from all of our acquisitions, and we'll do a little bit more deep dive at the back end of the year as we have our Investor Day, but the organic growth that we've been able to experience inside all of our core acquisitions and those programs or tangential programs they support is well above market. So I don't want to give an exact percentage around that, but I would just say we've grown the business north of 20% since we've owned it. Louie Dipalma: Great. And one final one. If the price of oil were to stay elevated, and that might not happen, but if it were -- would you expect that like PMA and USM would start to become more competitive to OEM parts? And I know in the past, you've described how you work with the OEMs on pricing strategies to help protect their businesses from competition related to PMA and USM. And so would you expect to play a significant role there? And would that help offset any weakness? John Cuomo: Yes, it's a good question. I tend -- this is an opinion. I tend to still think that PMA and DER repairs and our proprietary solutions, it's driven more by supply chain than by cost to start. You're solving problems for customers when they can't -- they don't have access to the products or the services in the market. So I tend to believe that, that's really the biggest driver. I think that in some instances, when you look at the economics around a repair or the economics around a certain type of aircraft, I do think that you'll look at can you do something different in terms of parts and repair to drive a better economic situation for that carrier or for that operator. I think when you're looking at the commercial airlines, one part here and there is not going to change the overall dynamics that dramatically that I still think engineering and supply chain will be the biggest drivers of kind of that PMA/DER transition over cost first, even with fuel prices being up. But that's an opinion. It may be different. We're prepared. We're working with our OEM partners. We work with our supplier partners. We have our reverse engineering team and then our engineering team that can support PMA parts as needed. We have DERs on staff, and we have the ability to support proprietary solutions around that as well. And then assuming OEMs want to kind of reallocate capital during any type of period of disruption, we have our OEM solutions business where we're buying the IP as well. So we've got kind of 3 avenues and 3 levers to pull there. And I would say we're more responsive to what customers want and force them down one path or another. Operator: Our next question will come from Scott Deuschle from Deutsche Bank. Scott Deuschle: John, can you clarify what exactly the CFM56 asset management program is and then what work scope is for VSE? John Cuomo: Yes, it's a good question. So we typically are not -- I wouldn't call us a traditional used serviceable material player. Everybody has USM product that's part of their portfolio. We tend to tie new parts, rotables, and exchanges, and repair together as much as possible. And then we look at our USM business more as an asset management business where we're supporting our major airline customers. And hopefully, in many instances, it's asset-light, where we're not buying the asset. We're just helping them monetize a used asset, and that could be us selling it on behalf of them. It could be us tearing it down and repairing pieces of it. And then we can drive some revenue in our MRO shops and then, again, maybe some type of profit sharing. In this instance, we have a major airline who did want to exit some engines because they don't have a program set up today, and we did buy the engines. We'll be tearing them down. We'll be utilizing our existing capabilities inside of our MRO shops. And this is more of a traditional USM model than we typically deploy. And that's what this airline needs at this point in time. And we wanted to show our nimbleness and agility, and we got a hold of some really great engines that in a time where the market needs them at a pretty good valuation. Scott Deuschle: Okay. And was this the main driver of the inventory build we saw in the quarter? Or was that more related to the new distribution agreement? Adam Cohn: It's really 2 reasons, Scott. It was partially the engine purchases and then also the inventory build on the new APU program. That was most of the cash usage in the quarter and the inventory build. John Cuomo: And that's why we felt very confident saying expect guidance to -- I mean, expect the cash to change dramatically throughout the year because you had 2 kind of one-offs nonrepeatable. Scott Deuschle: Okay. And then, John, can you share your latest thinking as to when you think the business can get to 20% EBITDA margins? It seems like it could be relatively soon given the outperformance in the quarter, the accretion from PAG and the PAG cost synergies, but just curious for your perspective there. John Cuomo: Yes, ask me that next quarter, and I say that because it's funny you buy these businesses, you do all this work and all the diligence and then you have to see it play in reality and really the devil is in the detail as you start to operate the business. So we have -- we never put a time line on it, candidly, because of a lot of the financing that we were going through. But we were hoping that we would be in that 20% range more like the end of '27. That's really kind of how we modeled things initially in our plans. The question is, can I accelerate that and bring that forward? I'm not 100% ready to commit to that at this point. I would tell you, we are doing everything in our power to try to accelerate that. We think it's an important milestone for the business. And I'll keep you updated as I kind of get my arms around both the synergies and just really my arms around each of the business units in a different way as we're operating it. We've owned the business for, I think, 25 hours. Scott Deuschle: Right. Okay. And then last question, Adam, can you just offer any detail on NorthStar's revenue and margins? Just trying to think through the modeling implications of that acquisition. Adam Cohn: Yes. Scott, I would say it's immaterial. It's a few million of revenue contribution for the year. John Cuomo: Yes. And Scott, from a strategic perspective, this acquisition was really done to support one of our OEM partners. They need some support in their aftermarket programs on logistics. They need support with some repairs that they may be doing in-house today that there's an opportunity where they don't have capacity for us to support. And then they have some leases that are coming -- engines coming off of lease that they need to tear down and again, repair and other types of support around it. So this was a fast way to build the business plan around kind of an OEM partner's need. Operator: Our next question will come from John Godyn from Citi. John Godyn: There were a few earlier questions about aftermarket resiliency. And sometimes you're referring to kind of the trends in 1Q and other times that you were talking about forward bookings and having multi-month visibility. I just want to be like crystal clear. Is it fair to say that not only did you not see anything this quarter impact -- negative impact on aftermarket, but you see nothing in any of the leading indicators that you have access to that suggests there's softness. Is that the message? John Cuomo: Yes. I think it's a good question, John. At this point, we have not seen any softness in our business. And like I said, April was a strong month. I don't have the closed final numbers yet, but just looking at the flash for the month, it was another strong month, and we look at outward bookings being quite strong at this point in time as well. So I'd say from our indicators and the data that we have on hand today, we are not seeing any demand degradation at this point. John Godyn: Okay. Appreciate that. And then just focusing on PAG, congrats again on closing the deal. I remember earlier in the year, there was a little bit of a sort of sidebar discussion about an earn-out that you had on PAG. And you had made the comment at different times that you'd be more than happy to pay that earn-out because it means that the integration synergies, everything went phenomenally. It feels like we're on the first step of hitting that earn-out because the deal closed early. Can you elaborate on the likelihood of hitting the earn-out, what it takes to get there? And maybe this idea that you kind of described as priority #1, which was accelerating the integration. What can be done? And are we on track at the end of this year, do you think, to be hitting those kind of above normal targets for that earn-out? John Cuomo: Yes. I mean it's a good question. I mean, essentially, to oversimplify it, our model showed one EBITDA number, their model had a higher one. So the question is, how do you bridge that gap and get there? And that was not just dollars, but their margin percentage was higher in their model. So it's a combination of the right mix and of accelerating some of the in-sourcing and sales synergies. So as soon as we got antitrust clearance about 3 or 4 weeks ago. So we're waiting on a few foreign investment things to close. But in that last 3 weeks, we started to put together the synergy plan. And we're actually having dinner with the team tonight, and we'll spend a little bit of time this week diving into it a little bit further to try to accelerate some of that -- those growth opportunities. I think that the answer is probably somewhere in the middle, meaning that their model, I still think was a bit on the robust side. But I do think ours probably had some level of conservatism on the ability to achieve some of those near-term synergies. So hopefully, there'll be some upside on margin as we get into the back end of the year. Again, like I mentioned earlier, I just got to get my arms around it, and I want to get 1 or 2 wins in there quickly, right, to say, okay, this is exactly what we thought it is, and I can validate all the things that we have on our internal slides at this point. Operator: Our next question will come from Louis Raffetto from Wolfe Research. Louis Raffetto: John, maybe can you provide an update on the fuel control systems manufacturing? I think you kind of referenced it a few times in the release and this morning. So just curious how that is going? Are we fully up to speed now? John Cuomo: Yes. I mean, essentially, all the revenue and earnings are in the business at this point. We have a few transition items to get done to make us officially the manufacturer of record of that product line. But essentially, from a modeling perspective, I'd say everything is embedded. What we've learned over time is we're building a really deep -- I'm trying to think of the right phrasing to use. But with the fuel control program, what we've learned is we're building a very deep portfolio on the engines that, that supports. So I would say that the share of wallet opportunity around the fuel control has been what's been exciting as well. So we've got some fuel pumps that we're supporting. We've got other repair capabilities that we're supporting. So it's turned out to be not just a very strong revenue and margin driver for us, but it's created organic opportunities for us to grow around it as well, and that's been pretty exciting. So it's been a big contributor to both the margin improvement in the business as well as the organic growth. Louis Raffetto: Great. And then Adam, I know the slide deck mentioned attractive pricing on the refinancing. I think on the old stuff, you were like SOFR plus 175. Do you have an idea what the new items are? Adam Cohn: Yes. On the Term Loan B, we're SOFR plus 200 with scale downs depending on leverage. So the term loan A, we are at 175. That's only because we are at a low leverage level with the cash that we generated from some of the equity raises. So it's a similar kind of grid where you're in that at this leverage level, you'll be in that S plus 200-ish range. And obviously, there's more flexibility there, less covenants and borrowing requirements that are easier going forward from a flexibility standpoint. So we feel, all in all, it is a very good outcome for us. Operator: And our next question will come from Jeffrey Van Sinderen from B. Riley Securities. Jeff Van Sinderen: And let me add my congratulations on closing PAG. I feel like that was pretty fast. John Cuomo: Yes. I mean for the size of the transaction, we feel good about the pace and getting that over the finish line. Jeff Van Sinderen: Yes. So now that you're 25 whole hours in, I won't ask you to jump too far ahead, but maybe any more color you can share on what the first 90 days focus on integration looks like for PAG? And then also, maybe you can touch on how you're thinking about PAG's ability to reverse engineer and do you further develop that? John Cuomo: Yes. I mean, candidly, the first 30 to 45 days is actually just physically visiting the sites, getting to meet the people, spending time with them. What we will -- the first element of integration will be by capability set and by market segment and customer base, getting those teams together to work on cross-selling opportunities and in-sourcing opportunities. And whether that means just bringing things in-house, whether that means how we go to customers with a greater offering, whether that means utilizing the proprietary solutions that we have in our business and they have in theirs and embed them inside of our capability sets. So I'd say that, that's really all the focus. We'll have probably five or six key people who will come up with a number of actions. And we've got a synergy capture leader that will be very much focused on how do we drive those benefits in the market, which -- meeting to our end user customers. So we're bringing better service to customers, which will drive the near-term integration. As far as kind of organization and systems and all of that, we have a framework of what we think the business is going to do and how it should come together. And the CEO, David Mast and I kind of worked on it a lot as we went through kind of diligence and just time together. Now again, we got to go validate that, and that's why we won't make any changes of any substance until 2027 there. So again, picture all the synergy capture really around in-sourcing and sales synergies at this point in time and all the actions around it will be focused there. Obviously, Adam has got his things in terms of internal controls and treasury and the like, but that's not stuff that you're going to see in the P&L. Jeff Van Sinderen: Okay. That's helpful. And then any thoughts on kind of the reverse engineering capabilities there? John Cuomo: I'd say their stronger capabilities are actually more on the DER repairs than actually on reverse engineering capabilities. I think we bring more opportunity on the reverse engineering to them. So I think bringing our engineering team into their shops, they did acquire a couple of businesses in the last like 18 months that do have a little bit more kind of reverse engineering capability. And candidly, I did not spend a lot of time with those businesses during diligence, and I look forward to the site visits next week actually to dive into that. So I'll have a better answer for you when I see you at the end of the month at your conference on that topic. Jeff Van Sinderen: Fair enough. And then it may seem like a small detail at this moment, but how are you planning to apply AI to your businesses? John Cuomo: Yes. I mean, we've got a number of initiatives. How we're starting with AI is a couple of things. Number one, it's more bottoms-up than top-down led, meaning I want the businesses to find problems that they have inside of their business units and then working with our IT leader and the AI initiatives that we can deploy to really support solving those problems. So some of our MRO leaders have launched a number of programs already. And we're measuring both productivity improvements and ROI on those initiatives. The second thing I'd say is we're trying to build as much in-house as we possibly can. I'm concerned about having somebody else get embedded from a process perspective inside of our processes and then I've got kind of this annuity-based fee that I have to pay forever to somebody because we like what's happened and what's been done. But I would say it's anything from improving kind of work on the shop floor where from an end-to-end, a part comes in the door, we tear it apart, quote it and then repair it wherever we can improve a process in that kind of chain. The second piece is aggregating data to support both supply chain demand planning and pricing. And then I'd say on the third side, anything on the customer service side. We get a lot of quotes, aggregating quotes, the quality of those quotes and data around that, I think, is really critical. So I would say we're at the very infant phases right now and look forward to having real productivity gains really 2027 and beyond. Operator: And our next question will come from Jonathan Siegmann from Stifel. Jonathan Siegmann: So on the Pratt & Whitney Canada agreement, congratulations on that. I think by our count, there were 5 or 6 other agreements and expansions and geographies of that particular customer. So just -- I know you said you didn't want to quantify how much opportunity there was at specific customers. But given the great success here with this one, is it fair to say that you're in the late innings of expansion? Or is there further opportunity here in Pratt? John Cuomo: Yes. I mean I think when you look at any of the Tier 1 OEMs as partners, I'd say there's no late innings because they're still managing somewhere between 75% and 80% of the aftermarket on their own. So number one, there's share gain to just happen there. The second is they touch so many different aircraft types and so many different product categories that even though it's "the same OEM partner", so many of these programs, an APU program on a regional jet is very different than an engine program on a light business jet, which is very different than a gearbox program on a Gulfstream. So I'd say it's really kind of early to mid-innings with all of these partners because there's just so many different opportunities that don't look like each other. So for us, it's almost like separate programs than it is the same account that it may look like to you from the outside. Jonathan Siegmann: Great. And then with NorthStar, I appreciate that small, but glad to see the acquisition flywheel going into hibernation mode after Precision Aviation. I'm just wondering if -- if we should consider this just a one-off or if there's other potential small bite-size opportunities for you? John Cuomo: Yes, it's a good question. Two things. Number one, the NorthStar deal was intended to support one of our OEM partners, and I want to continue to show my OEM partner regardless of me doing a large deal that I can still be nimble and agile and support them as quickly as I've always been for this time. With regard to our M&A pipeline, which remains very robust, the smaller deals that are kind of self-sourced, timing is complex on those because you never know when an individual owner wants to sell. So if they accelerate their own kind of mental process, I would tell you we've been part of it. And you'll absolutely see us play in that space in the back end of the year. With regard to anything more material, I look more at end of the year to 2027 before we'd be open to doing anything. Operator: And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Cuomo for any closing remarks. John Cuomo: Yes. I just want to -- a quick thank you to everybody for your continued support. Thanks for the time this morning, and have a great rest of your week. Take care. Operator: Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.
Operator: Good morning, and welcome to Sixth Street Specialty Lending, Inc.'s First Quarter ended March 31, 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, May 6, 2026. I will now turn over to Ms. Cami Senatore, Head of Investor Relations. Please go ahead. Cami Senatore: Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, we issued our earnings press release for the first quarter ended March 31, 2026, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.'s earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the first quarter ended March 31, 2026. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Bo Stanley, Chief Executive Officer of Sixth Street Specialty Lending, Inc. Robert Stanley: Thank you, Cami. Good morning, everyone, and thank you for joining us. With me today is our Head of Investment Strategy, Ross Bruck, and our CFO, Ian Simmonds. Before I begin, I'm pleased to announce that effective May 21, Mike Fishman will become Chairman of our Board of Directors, following our previous announcement regarding Josh Easterly's retirement from the role. Mike is a respected industry veteran with decades of experience in credit investing and asset management. As an early member of Sixth Street, and a Director of SLX since 2011, including tenure as CEO, he has been instrumental in building our business. His combination of deep industry expertise and platform understand him -- make him uniquely qualified for this position, and we look forward to his contributions as Chairman. For our call, I'll review our first quarter highlights and pass it to Ross to discuss investment activity in the portfolio. Ian will review our financial performance in detail, and I will conclude with final remarks before opening the call to Q&A. Yesterday, we reported first quarter net investment income of $0.42 per share or an annualized return on equity of 9.9%. Inclusive of our movement in fair value of our investments, we reported a net loss per share of $0.27. Our net loss per share this quarter was largely driven by unrealized losses on our investments as we incorporated the impact of wider market spreads and lower market multiples in our fair value determinations, more on that in a moment. At quarter end, our net asset value per share declined by approximately 4.3% from $16.97, which includes the impact of the Q4 supplemental dividend to $16.24. Of this decline, $0.58 per share or nearly 80% was attributable to the movement in fair value from the market inputs, which are unrealized. That included $0.40 per share from unrealized losses in our debt portfolio tied to credit spread widening seen in the broader market and $0.18 per share from lower market valuations and in our limited equity portfolio. $0.08 per share of the decline is related to portfolio company-specific performance and the remainder from the payoffs and realized gains. Ian will walk through the NAV bridge in more detail. These results reflect a period of market-driven volatility rather than a change in the underlying strength of our business. Our portfolio remains healthy. Our balance sheet is strong, and we are well positioned to capitalize on opportunities as the market continues to evolve. Volatility in Q1 was driven by several factors, including market concerns around the impact of AI on software investments, increased redemption requests from shareholders of nontraded BDCs and heightened geopolitical uncertainty, the latter of which was not something we anticipated at the time of our last earnings call. These dynamics contributed to spread -- credit spreads widening in a subdued transaction environment. LCD first-lien spreads widened by 48 basis points and second-lien spreads widened by 256 basis points during the quarter. I want to reiterate our approach to valuation, which incorporates changes in market-wide credit spreads when determining the fair value of our investments. Our process is designed to reflect the price in an orderly transaction at the measurement date. That's not just our perspective. It's the regulatory requirement designed to maintain the integrity of the balance sheet. For additional detail regarding our valuation framework, we encourage you to read the -- our stakeholders' letter on the topic from August 2022 available on our website. We have consistently applied this valuation framework since inception, including periods of volatility, such as Q1 2020 related to COVID and Q2 2022 related to the interest rate hiking cycle. During those quarters, net asset value per share declined by approximately 7.4% and 3.6%, respectively, driven primarily by the impact of wider credit spreads. These unrealized losses reflected in earnings and NAV, are noncash in nature and do not reflect our view of permanent credit losses. As such, we expect these unrealized losses related to credit spread movement to reverse over time as market conditions change, and our investments approach realization or maturity. Our track record of long-term value creation is demonstrated by the 4.7% cumulative growth our net asset value per share since our 2014 IPO through March 31. This compares to an average NAV decline of 7.3% for our public BDC peer group from our IPO through the end of 2025, representing significant outperformance, irrespective of the volatility we experienced in any quarterly period. Market volatility also impacted net investment income through lower activity-based fee income. In Q1, we earned $0.05 per share of activity-based fees, which is below our 3-year historical average of $0.09 per share. As we've discussed in prior periods, activity-based fees, which are primarily driven by early repayments, are inherently episodic. During periods of heightened market volatility our experience is that many borrowers and asset owners defer capital markets activity. As a result, both funding and repayment volumes typically contract as valuation gaps widen and transaction activity slows. While we recognize that the current environment will take time to fully play out, as the market undergoes a period of price discovery, our experience has consistently shown that these periods of volatility create some of the most attractive investment opportunities. We believe we are well positioned to capitalize on that opportunity set. In our earnings release yesterday, we announced a change in our base dividend level from $0.46 to $0.42 per share. This decision was informed by what we believe is a responsible and sustainable dividend policy. As we assess the current environment, we have always believed it is appropriate to align our base dividend with the forward earnings power of the business. That forward view reflects the level of uncertainty we see around near-term activity, including the rate and spread backdrop and also the market volatility caused by geopolitical uncertainty that has occurred since our last call. Our perspective is also informed by historical periods of dislocation, which suggests that activity-based fee income can take several quarters to normalize following a market dislocation. While this segment may differ, history reinforces our decision to take a measured and prudent approach today. The pre-2022 environment provides a baseline for where our dividend level stood before rates began to increase. We had a base dividend of $0.41 per share. Our earnings power increased with higher base rates and wider spreads, we raised the base dividend to $0.42 in Q3 2022, $0.45 in Q4, and $0.46 in Q1 2023, representing a total increase of 12.2%. While we see potential for an increase in transaction activities as the year progresses, the timing and magnitude of that pickup and the resulting impact on our activity-based fee income remains difficult to forecast with conviction. That said, our view on base rates through the forward curve and new issue spreads is more visible. This adjustment establishes a distribution level that is sustainable across a range of potential activity outcomes. At quarter end, we had approximately $1.57 per share of potential activity-based fee income embedded in the portfolio, including unamortized OID and call protection. If activity accelerates, that embedded income provides meaningful upside. Our supplemental dividend framework captures and distributes that upside to shareholders as it's realized. Yesterday, our Board approved a base quarterly dividend of $0.42 per share to shareholders of record as of June 15, payable on June 30. This corresponds to an annualized dividend yield of 10.3% on our March 31 net asset value per share, which we believe is aligned with the core earnings power of the portfolio and with our target return on equity for the year. Ian will speak more on that in a moment. With that, I'll pass it to Ross to discuss this quarter's investment activity. Ross Bruck: Thanks, Bo. In Q1, we provided total commitments of $338 million and total fundings of $135 million across two new portfolio companies upsizes to four existing investments and an initial investment in our previously announced joint venture Structured Credit Partners, or SCP. A key advantage for SLX is our deep integration with the broader Sixth Street platform, which manages over $130 billion in assets. This connectivity allows us to leverage the collective expertise of hundreds of investment professionals to conduct the deep proprietary diligence required for today's complex investment landscape. By combining this expertise, the firm's platform-wide sourcing engine, and our disciplined underwriting, we remain well positioned to execute on investments that we believe create long-term value for our shareholders. Our recent investment in Mindbody is a good example of how the platform comes together in practice. Given our history with the business dating back to 2021, we had a differentiated understanding of the company, and we're well positioned to lead the new financing. This was a cross-platform and cross-border effort with our direct lending teams working closely with our consumer team to deliver a bespoke solution. The business benefits from significant network effects with a scaled 2-sided ecosystem across consumers and wellness partners that we believe supports growth and strong underlying business quality, ultimately driving attractive risk-adjusted returns for our shareholders. Our other new investment was Labrie, a leading North American manufacturer of premium refuse collection vehicles and related aftermarket parts. Labrie operates in a recession-resistant market with predictable demand and structural tailwinds. The company's sticky dealer and customer base, combined with a consistent high margin and capital life financial profile, make this a compelling investment aligned with our approach of lending to businesses with attractive unit economics. On repayments, payoffs moderated versus levels seen throughout 2025. We experienced $113 million in repayments from 4 full and 4 partial investment realizations resulting in $22 million of net fundings for the quarter. Of the 4 full payoffs in Q1, 2 were refinancings and 2 were sales of liquid investments. Of the 2 refinancings, both were completed at lower spreads with one executed in the private credit market and the other in the broadly syndicated loan market. Our largest payoff was Galileo Parent, which refinanced its senior secured credit facility originally structured to support Advent's 2023 take-private transaction. Sixth Street served as agent on the original deal and the company refinanced with a broadly syndicated loan priced at SOFR plus 450 basis points compared with SOFR plus 575 basis points on the existing facility. SLX was repaid with call protection generating an asset-level IRR and MOM of 15% and 1.4x, respectively. Our other refinancing was MadCap, a provider of authoring, publishing and content management solutions, which refinanced its existing credit facility in March. Sixth Street originally provided capital in December 2023 to support an acquisition with an underwriting thesis centered on MadCap's robust product offering, granular blue-chip customer base and strong unit economics. Having executed on its business plan, the company was able to transition to the bank market for a lower cost of capital. SLX was repaid in full, generating an asset level IRR and MOM of 16% and 1.3x, respectively. During the quarter, we had one addition and one removal from nonaccrual status, resulting in no change to the total number of investments on nonaccrual at 3 names representing approximately 1.4% of the portfolio at fair value and 1.9% at amortized cost. The addition was our investment in Bed, Bath & Beyond. While the path of this credit has not followed our original expectations, we have driven recoveries through secondary sources of repayment and have received approximately 85% of our cost basis through March 31. While we believe we are well positioned to realize meaningful additional recoveries over time, uncertainty around the timing and ultimate resolution of remaining claims led us to place the investment on nonaccrual effective January 1. The removal was our investment in Astra Acquisition Corp., which was reorganized in Q1 following the company's Chapter 11 process. This had no impact on the quarter's NAV as the position was already fully marked down. Moving on to portfolio yields. Our weighted average yield on debt and income producing securities at amortized costs decreased slightly quarter-over-quarter from 11.3% to 11.2%. The decline primarily reflects the decline of reference rates during the quarter. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attachment and detachment leverage points of 0.4x and 5.2x, respectively, down from 5.3x in the prior quarter with weighted average interest coverage of 2.3x. As of Q1 '26, the weighted average revenue and EBITDA of our core portfolio companies was $425 million and $127 million, respectively. Median revenue and EBITDA were $174 million and $54 million. Before turning the call over to Ian, I'd like to provide an update on our existing portfolio companies highlighting key metrics. The performance rating of our portfolio continues to be strong with a weighted average rating of 1.19 on a scale of 1 to 5 with 1 being the strongest. We continue to see stable top line growth and earnings durability, which signal a healthy demand environment across our end markets. Across our core portfolio companies, LTM revenue and EBITDA growth were both 9%. The overall stability in these metrics continues to reflect proactive actions by management and sponsor teams. With that, I'd like to turn it over to Ian to cover our financial performance in more detail. Ian Simmonds: Thank you, Ross. For Q1, we generated net investment income per share of $0.42, and net loss per share of $0.27. Our reported and adjusted metrics converged this quarter as there was no impact related to capital gains incentive fees. Total investments were $3.3 billion, in line with prior quarter as a result of net funding activity offset by lower valuations. Total principal debt outstanding at quarter end was $1.8 billion, and net assets were $1.5 billion, or $16.24 per share. Our average debt-to-equity ratio decreased slightly quarter-over-quarter from 1.17x to 1.14x, and our debt-to-equity ratio at March 31 was 1.18x. The increase in this ratio was largely due to the impact of widening spreads on fair value versus net funding activity. We continue to have ample liquidity with $1.1 billion of unfunded revolver capacity at quarter end against $249 million of unfunded portfolio company commitments eligible to be drawn. Post quarter end, we further enhanced our debt maturity profile by closing an amendment to our revolving credit facility, maintaining the pricing and key terms of the facility while extending the final maturity through May 2031. All of the 19 banks in our syndicate were supported and participated in the amendment, an extension that closed on May 1. Adjusted for the revolver extension, our weighted average remaining life of debt funding is 3.9 years compared to a weighted average remaining life of investments funded by debt of only 2.5 years. At quarter end, our funding mix was represented by a 68% unsecured debt. Moving on to upcoming maturities. As we mentioned on our last earnings call, we have reserved for the $300 million of 2026 notes due in August under our revolving credit facility, after adjusting our unfunded revolver capacity as of quarter end for the repayment of those notes, and our revolver amendment, we have liquidity of $649 million, representing 2.6x our unfunded commitments eligible to be drawn at quarter end. Our balance sheet remains well positioned, allowing us to play offense in the current market environment. We believe the ability to invest capital opportunistically in what we're seeing as a wider spread environment today is a meaningful advantage for our shareholders. Pivoting to our presentation materials, Slide 8 contains this quarter's NAV bridge. As Bo mentioned, the impact of credit spread widening and movement in market multiples on the valuation of our portfolio was by far the most significant driver of NAV movement this quarter, including $0.58 per share from fair value marks. Again, absent permanent credit losses, we would expect to see a reversal of these unrealized losses related to credit spreads over time as our investments approach their respective maturities. The estimated impact of broad market credit spread tightening since quarter end represents approximately $0.12 per share, or 30% of the unwind of unrealized losses on our debt portfolio that we saw during Q1. Walking through the other drivers of NAV movement this quarter, we added $0.42 per share for net investment income against a base dividend of $0.46 per share. There was a $0.07 per share decline in NAV from the reversal of net unrealized gains from paydowns and sales. Other changes included $0.04 per share increase in NAV from net realized gains on investments and an $0.08 per share reduction to NAV primarily from unrealized losses from portfolio company-specific events. Moving on to our operating results detailed on Slide 9. We generated $93.4 million of total investment income for the quarter compared to $108.2 million in the prior quarter. Interest and dividend income was $87.8 million, down from prior quarter, primarily driven by the decline in interest rates. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns, were lower at $3.4 million compared to $10.9 million in Q4, driven by lower payoff activity in Q1 relative to the elevated level experienced in Q4. Other income was $2.2 million, up from $1.9 million in the prior quarter. Net expenses were $52.4 million, down from $56.4 million in the prior quarter, primarily driven by the decline in base rates. This contributed to our weighted average interest rate on average debt outstanding decreasing approximately 50 basis points from 6% to 5.5%. Lastly, on undistributed income, we estimate that to be approximately $1.15 per share at the end of Q1. Turning to our outlook for the year. Our original guidance was based on an assumption of 30% portfolio turnover in line with our long-term historical average. Given the moderated pace of repayments in Q1, we anticipate an ROE of 10% to 10.5% if turnover remains below 20% for the full year, and an ROE above 10.5% should we experience higher repayment activity. While we are taking a more measured view on forward portfolio activity, our fundamental return hurdle remains unchanged. We will continue to prioritize investing capital into opportunities that generate returns in excess of our cost of equity, maintaining the same discipline that has characterized our platform since inception. We may prove to be moving early on the base dividend adjustment, but our supplemental dividend framework provides the flexibility to capture upside should activity accelerate. With that, I'll turn it back to Bo for concluding remarks. Robert Stanley: Thank you, Ian. While the market environment remains dynamic, our conviction of the path forward is rooted in the platform we've built, over the last 15 years. Our historical outperformance through varying market conditions is underpinned by the depth and continuity of our people from this team sourcing and underwriting the risk to the professionals managing the portfolio and working through complex situations, this is a group with years of experience navigating every part of the credit cycle. We've been through these environments before and remain fully committed to the same disciplined approach that has guided the firm since day 1. Looking ahead, we're excited about the investment opportunity set to come as the markets reset our thematic sourcing engine and the breadth of the Sixth Street platform provide us with a significant advantage in identifying and executed on high-quality transactions. We believe the actions we are taking today position SLX to continue delivering strong risk-adjusted returns for our shareholders over the long term, and we are energized by the road ahead. In closing, I'd like to encourage our shareholders to participate and vote for our upcoming Annual and Special Meeting on May 21. Consistent with previous years, we are seeking shareholder approval to issue shares below net asset value effective for the upcoming 12 months. To be clear, to date, we have never issued shares below net asset value under prior shareholder authorization granted to us for each of the last 9 years, and we have no current plans to do so. We merely view this authorization as an important tool for value creation and financial flexibility in periods of market volatility. As evidenced by the last 12 years since our initial public offering, our bar for raising equity is high. We've only raised equity when trading above net asset value on a very disciplined basis, so we would only exercise this authorization to issue shares below net asset value if there was a sufficiently high risk-adjusted return opportunities that would ultimately be accretive to our shareholders through overearning of our cost of capital and any associated dilution. If anyone has questions on the topic, please don't hesitate to reach out to us. We have also provided a presentation which walks through this analysis in the Investor Resources section of our website. We hope you find the supplemental information helpful as a way of providing a clear rationale for providing the company with access to this important tool. With that, thank you for your time today. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Finian O'Shea from Wells Fargo. Finian O'Shea: To start with the dividend, I wanted to ask about why it's framed on activity-based fees where it feels like to us more good old-fashioned spread compression, credit loss which happens. You've kept a dividend for a very long time. But with that framing, is it a signal of some kind of shift in strategy, say, more toward flow lending, that's where the market is? Or is it more transient because, say, your software book won't refi for a long time and -- but you'll still focus on the same style and eventually recover in the sort of fee income line. Robert Stanley: Fin, thanks. It's Bo. I appreciate the question. There's a lot to unpack there. I'll attempt to get through it all. So first of all, first principles for us is we want to set our dividend level at a sustainable and responsible level. I think that has been from day 1, we've talked about that. We framed I want to take a step back, first of all, and talk about what we have signaled to the market, both for the space and for Sixth Street over the past 12 months and even before that. But I think we wrote a letter in April of last year, outlining what we believed were the path forward for ROEs in the sector, given the interest rate curve and spread compression that we've seen both in the market and at Sixth Street and SLX during that -- in that letter, we laid out what we believed was the path for ROEs for the sector and for Sixth Street. I think we had the forward curve at that day. So 12 months forward, ROEs of 10.3% for Sixth Street in SLX, which is coincidentally where we've set the base dividend level on a yield basis today. So just starting there. The framing of activity-based fees is exactly that for -- as we thought about forecasting ROEs last quarter, we forecasted normalized levels of activity-based fees, which have been generally around $0.08 to $0.09 per share since inception. Last year, on an LTM basis, that was closer to $0.12 per quarter. And this quarter, it was $0.04 because there was muted activity levels -- this is very consistent with what we've seen in the past when spread levels increase. And when you think about it intuitively, Fin, as spreads increase, you're going to have less repayments because people are not going to refinance you into higher-yielding loans. So your activity-based fees are really going to be focused on M&A activity, which was also muted in the quarter. Here's the good news, and what we feel good about is it's a better spread environment. We said last quarter that we believe ROEs for the sector were troughing and for Sixth Street, we still believe that. We think it's a better spread environment. That's going to slowly work through the book. We also are ramping SEP, which should continue to add support, but that's going to take time as well. And eventually, we will return to normalized activity-based fee levels. Historically, that has taken several quarters. Post rate-hiking cycle, it took 6 quarters to get back to normalized activities. I'm not sure it's going to take that long, we shall see. But just as we thought about setting a responsible dividend policy, we took all of those factors into consideration. Also, the great news is, and we commented this in the script, there continues to be high levels of activity-base fees embedded in the portfolio, should that activity return, and we believe it will eventually. So hopefully, that answered your question and it was a comprehensive answer. Finian O'Shea: Yes. No, it's definitely helpful. Like it will be a bit of a drought maybe sooner, maybe later, they hopefully come back in, I guess, sort of in the meanwhile, like that sort of call pro, correct me if I'm wrong, that's been pretty instrumental to NAV preservation, right? Like that's your sort of formula for gains, which is obviously a very critical input over time. Do you have any like backup plan or approach to solve for that issue in the meanwhile? Or do you think it's sort of also a NAV headwind? Robert Stanley: Yes. So, Fin, the great news is, I think our call protection as a percentage of book today is at 94%. Is that right? Finian O'Shea: 94.1%. Robert Stanley: It's 94.1%, that is -- that's versus a historical level of 94.7% since inception. So there continues to be a lot of embedded economics within the book. I would also note that, and I think you've heard from others that we're seeing a better investing environment and that includes higher spreads, but also it's better fees. We're seeing better both upfront fees and call protection. And I think that makes us happy about investing in the future. And then lastly, I would say we have seen a pickup of what I would call special situation type deals that have always been a hallmark of our platform and consistent historically, probably of 30% to 35% of what we've done. That had been muted activity. We're seeing a handful of opportunities in the current pipeline that excite me. All of that would support strong activity-based fees in the future when they begin to return. Again, the 2 biggest components that drive that are M&A activity, which we are seeing early signs of stabilization there. I think geopolitical concerns will really be the determinant if that returns, and then repayment activity, which we do believe will be muted for some time because, again, it's a better spread environment and it's just natural if you're -- if new loans are getting created at better spreads than historic, you're not going to have a lot of payoffs. Operator: Our next question comes from Brian McKenna from Citizens. Brian Mckenna: Okay. Great. So I'm curious, when did the Board make the final decision on the dividend? Was it in and around the end of the first quarter because if it was, I'm curious if the decision was made, call it, this week or today versus roughly a month ago, would that have changed the outcome on the dividend given the broad-based recovery in sentiment and risk assets over the past 5 weeks, similar related to the sharp recovery we saw post Liberation Day last April. Robert Stanley: Well, the formal decision was made yesterday at the Board meeting. We, as a team, have been working through this over the past months, given that we saw the muted levels of activity-based fees and have some forward visibility, albeit it's usually no more than 4 to 5 weeks on those activity-based fees. So I would -- so the answer is we've been working on it for some time. Again, we had talked about ROEs for the sector and for Sixth Street in a couple of letters, both in April and November. So this is something we've been thinking about for some time but didn't come to a final conclusion until the final weeks. You're right, there has been a stabilization generally in the credit markets. But again, the spread environment is a more attractive environment and that is going to mute activity levels, at least from refinancings in the meantime. And what we did is really did a thorough analysis of the data, we always when we have questions that are hard to answer turn to the data, and look at periods of historical spread widening in the past, and it always has taken several quarters to return to those activity-based fee normalization levels. Ian Simmonds: And maybe if I add to that, Brian, just to color up some of the data that Bo was referencing. That means that we went back and looked at every quarter back to 2014 to understand the characteristics of our earnings profile, what was generated from interest income and dividend income alone, what was generated from activity-based fees. We looked at that on a quarterly basis. We looked at that on an annual basis. We overlaid periods of credit spread widening and/or dislocation. So we looked at what was the behavior of our earnings profile during and post COVID, during and post the rate rise cycle in '22, and what are we seeing today? And all of those inputs into a determination about what is our level of conviction about the right level for our base dividend. And so as Bo said, it was data intensive as part of the framework for the discussion with the Board. Brian Mckenna: Okay. That's helpful. And then just looking at spreads on new deals in the quarter, I think these totaled around 600 basis points versus the recent pace of around 700 basis points. So is the 600-plus basis points going to be the new run rate for spreads on new deals? Was it just a one-off quarter? Like I'm just trying to think through where things settle in on the spread front. Robert Stanley: Yes, it's a good question. It was very idiosyncrat. There are only really 2 new originations. Both of those were -- we had been working on free the spread widening environment. Activity in general was muted. So it's -- we've had volatility from quarter-to-quarter given volumes come and go. And by the way, Q1 is always a low volume quarter. What I would tell you is, what we're seeing on the forward is a much better investing environment, wider spreads, more importantly, lower leverage, better documentation standards, better fees and call protection. So the whole package seems to be a better investing environment. I also mentioned with Fin, we're seeing more special situations than we had seen in the past. That's always been a driver of over earning relative to the space. So all of that would point to increasing spreads over time, which we're excited about. Operator: Our next question comes from Robert Dodd from Raymond James. Robert Dodd: Thanks for the color on the quarter. I wanted to like the $1.57 that you said was kind of embedded call protection in the portfolio right now. I mean, what's the half-life on that? Obviously, it ages out over time. I mean, if we look at low levels of activity, say, for 12 months, and I don't know, half of that $1.57 ages out over those 12 months, then even if activity rebounds a year from now, you still got structurally lower activity-based fees for a period after that as well, right? So I mean, the deals you're onboarding right now, are those sufficient to kind of maintain that total embedded core protection in the portfolio over kind of a prolonged period? Or is the aging phenomenon kind of going to drag it out even further if you have, say, 12 months, maybe it's not 12 months, but 12-month period of? Robert Stanley: I think that's a great question. Again, just turning that $1.57 into a metric that I think that we've talked about before, just to contextualize as a percentage of fair value on the call price is 94% today. That's versus a historical means of 97%. What we're seeing in new activity today, we'll have better call protection than what we've seen in the last couple of years, especially as it relates to some of the special situation deals, which generally have non-call features. What I would tell you is as far as half-life generally speaking, call protection is between 2 to 3 years when you see a number like 94%, which is above historical means, it means it's closer to the earlier vintages where we have that embedded that makes sense given portfolio turnover has been elevated over the last couple of years. So there's a long runway for that half-life. And what we're replacing, and what we're putting in a new deals will continue to actually add to that. When -- I actually don't have these in front of me, Cami, but when we returned after 2022, to the post kind of normalized fees, which took us 6 quarters, about 1.5 years, we started at a slightly less, if you look at 3 years, it was 94.5%. And what we're -- once we returned, I think those embedded numbers were well above historical means of $0.08 per share. We'll get you that data. So there is a shelf life kind of early into those vintages. What we're seeing from new deals, it's better call protection. I think all of that protects what we think should be normalized activity into the future. Robert Dodd: Got it. And a kind of tied follow-up. I mean, obviously, one of the issues here is spread widening, maybe that slows down refinancing to the point who wants to refinance that higher spread. Where spread widening has been greatest so far, anecdotally, at least, is in the software segment, which is obviously your biggest single sector, so to speak. How much of this expectation of low activity is tied to software given that spreads have widened more in that sector than elsewhere in the market right now? Robert Stanley: It really didn't go into the calculation. We think there's actually for names that are not deeply AI-impacted, and that's a very small percentage of the portfolio. As we've said before and also in our letter about a month ago, there continues to be what we think is a refinancing market for software names, albeit at wider spreads. Again, just looking back at the data historically, whenever there's been spread widening regardless if it was sector-based, it's just you've had muted levels of activity, and that's why we thought it was prudent to set the dividend level where it's at. I would also note that the portfolio continues to be very healthy earnings growth close to 10% in software and technology names are in line with that. In fact, I think the earnings power of those businesses continues to increase as EBITDA margins are expanding as growth slows a bit. Those also would point you to deleveraging over time and being able to refinance. We had, as we mentioned, MadCap was a software name that we had refinanced this quarter by a bank. It had executed well. It had delevered. You could argue whether it was going to be AI affected or not, but it was refinanced into a much cheaper paper. So that did not go into our calculus. Operator: Our next question comes from Arren Cyganovich from Truist Securities. Arren Cyganovich: The amend and extend of the credit facility with no increase in pricing was a positive sign given what we've seen in some press articles about banks looking to increase pricing on these types of -- or I guess more specifically, it was bilateral facilities, but were there any pressure from the banks in terms of that process to raise the pricing? And maybe you just talk a little bit about that process and how the banks have been supportive? Ian Simmonds: Yes, I'll take that, Arren. It's Ian. I would say there was no pressure, but that's really a factor of continued delivery on what we tell the banks that we're going to do. We view those banks as our capital partners, and so they're pretty in tune with our business. But I'd also point out that these syndicated BDC facilities are pretty well structured to protect the banks that actual LTVs are very low. And given the development of the unsecured market as another form of financing, it's actually a very supportive way to build the capital structure. So I would characterize this as really just ordinary course discussions collaborative in nature and the outcome was the supportive renewal that we achieved. Arren Cyganovich: That's good to hear. In terms of the investment activity slowing down, and I know that you don't have a crystal ball and you don't know when things might pick up. But in terms of whether or not it's discussions with sponsors or what have you, are there any kind of green shoots of activity in areas other than software that are showing some signs that you might see some stronger deal activity, maybe in the second half of the year? Robert Stanley: I'll start and then pass it over to Ross. Look, I think the pipeline has rebounded, and there's some -- definitely some green shoots I mentioned, more special situations than we had seen in the past, and that's across a lot of our core thematic areas, whether it's retail ABL, ABL, Energy ABL, some technology, special situations. So that is encouraging. As we speak with sponsors, there seems to be a renewed focus on platform activity and finding new deals. I think a lot of that M&A activity is really going to -- what's going to matter is the geopolitical concerns and where energy prices go over the next quarter. I think that's going to be the big determination. But the reality is, if you think about the robustness of our originations platform, especially the thematic platform across industries and specialties. I think that piece is really picking up here from what we can see. Ross, you should add anything to that. Ross Bruck: Yes. I think in addition to either platform acquisitions or full platform refinancings, our portfolio continues to be active on the M&A front. Our management teams, and our sponsors are looking to continue to drive growth and a large portion of our activity on the amendment side, this quarter was to support that growth or support acquisitions, which creates options for us to reprice existing facilities, provide new capital into credits that we know well or catalyze exits where the risk-return doesn't make sense any longer at what's being offered. So there continues to be a fair amount of activity within the portfolio itself. Arren Cyganovich: Very helpful. And just one quick one. The software exposure, I think last quarter, you said it was 40% in the portfolio. You had a refi. What's the exposure as of 3/31? Robert Stanley: Yes. Look, as you know, we don't think of software as an industry. We gave that number as a proxy to what we believe others in the space, including enterprise software. That has not meaningfully changed. In fact, we had one payoff. So if anything, it's down a bit, but it's not meaningfully changed quarter-over-quarter. Operator: Our next question comes from Rick Shane from JPMorgan. Richard Shane: Look, and you talked about this a bit in your response to Fin's question, but there's a lot of conversation about how terms and structures have changed since December. If you can help us understand sort of specifically what types of changes you're seeing, not only in terms of spreads, but in terms of structure, in terms of covenants that would be great. And more importantly, if you can put where we are today in the context of the historical continuum, because I don't think we're in sort of this dislocated market. I think, we're probably more in the middle, but I'd like to understand how you guys see things and also valuations on the underlying equity positions. Robert Stanley: Yes. I'll take a first swing at that, and then I'll pass it to Ross. So I think that's the right characterization, which is the pendulum is starting to swing back towards the middle from where it was to historic tights, both in pricing fees, and structures. The encouraging thing is all of those are actually improving. We're seeing anywhere from 50 to 75 basis points of spread widening across all industries. I think more encouragingly for us and 1 of the reasons that we were not participating in the market as robustly as others over the past 2 years is that underwriting standards are getting better. You're getting more access to management teams, you're getting better data. Your ability to underwrite and prove your core thesis is better. That is what was keeping us from being able as much as pricing from being able to participate in the market. Those dynamics are better. I would say leverage on average is probably down 0.5 turn to 1 turn in total from what we were seeing at the historic tights. Documentation standards are getting better. So all of those things are contributing to a much better environment, but to your point, I think that pendulum is swinging more to the middle than to look, what would be a deeply distressed environment where you've seen us grow by leaps and bounds in times of past. But that's how I characterize it. Ross, do you have anything you'd add? Ross Bruck: I don't have a lot to add. The other thing I'd say that we're seeing is better preservation of the headline economics. So things like carve-outs to call protection, we're seeing pared back where step-downs are set versus headline spread. Those are all things that have been important to us and that we've selectively decided not to participate in transactions where we're not getting the terms to preserve the bargain for economics, and I think we're seeing it come back our way a bit. Richard Shane: Got it. Okay. That's helpful. I mean, is it -- should we think of it that last year you would get sort of an RFT and the request would be, okay, here's the docs, or here's the valuation pack and you have 2 weeks to respond and this is all the information you're going to get now the due diligence time frames are extended to 4 weeks? Like I'd love to anecdotally sort of think about how this has changed from your perspective. Robert Stanley: Yes. I'll take that because I've been pretty vocal about this. And actually, in my letter to the team starting the year, this is one of the headlines, which is we will not be velvet roped in processes if we're not getting access to management and the data to underwrite our credit thesis, we don't participate in those deals, literally is almost verbatim what I said to the team. There was this velvet roping by issuers, both private equity and corporates because of the tight markets that, at least in our view, we're contributing to looser underwriting standards and very, very intense time lines, very little access to management, if at all, no real Q&A. And as a result, not only did we shrink the portfolio last year, but if you look at our originations that we did do, they were predominantly nonsponsor away from kind of the traditional channels. We lean very heavily on the thematic originations platform that we've built for -- to be robust through all environments. What we're seeing so far, and this could change is just better access all around. Access to management teams, actual management meetings. I actually think our team is -- this is -- our team is at a management -- all day management meeting today on a special situation deal. It's an 8-hour session. Those are the types of environments that contribute to the full understanding of the businesses, the ability to underwrite your credit thesis, and we do believe that is returning to the broader market and the credit environment as well. Hopefully, that's helpful. Richard Shane: It's very helpful. I appreciate it. And it will be interesting to see how things continue to evolve. Operator: Our next question comes from Kenneth Lee from RBC Capital Markets. Kenneth Lee: One more on the ROE outlook there. Wondering whether you've been embedding any assumptions or benefit from potentially wider spreads on new investments or at least less spread compression for any kind of prepayments and refis. Just wondering whether there's any impact on the assumptions there. Robert Stanley: Yes. From where we set our base dividend, it did not have an impact. But as we think about the future, we do believe that's going to slowly roll through and spreads will increase over time. We do think we are nearing trough levels just based on what we're seeing in the pipeline and in the markets in general. Ian, you're closer to kind of the projections, anything to add to that? Ian Simmonds: Yes, we did not update our new issue spreads for the purposes of this exercise. I think if you think about the volume of new deals relative to the size of the portfolio, you need to have quite a significant amount of origination activity for that to move the needle. Our business from an ROE perspective in the near term is much more oriented towards repayment activity. Robert Stanley: Yes. The one thing, because I think this is important as you think about the future, not only should you see spreads begin to increase over time through the book as you layer on new deals. There are opportunities, obviously, to -- with amendment fees, et cetera, as our portfolios come back to us as they're doing M&A, et cetera, to slowly reprice the book as well. That did not go into our numbers in the near term, but that should show up in -- after several quarters. So that's one of the things that leaves us pretty encouraged about the future earnings of the business. Kenneth Lee: Got you. Very helpful there. And it looks like you made some initial investments related to the SCP JV, just given the discussion around the geopolitical uncertainty and just the general backdrop there. What's sort of like the outlook in terms of how fast could you ramp up further in terms of that JV there? Ross Bruck: Yes. Thanks for the question. This is Ross. So in Q1, SLX invested $14.7 million into SCP, so 0.4% of SLX investments at fair value. This was the first quarter of activity when we put the program in place. Our base case expectation was that it would take about 2 years to 2.5 years to get to fully ramped. That continues to be our expectation. We've continued to invest into the program over the course of 2Q. So there were two CLOs that were priced before the end of Q1 that closed in 2Q. And overall, we are pleased with the results that we think we're achieving in the program. We were able to take advantage of some of the periods of dislocation in 1Q to build the portfolio at attractive prices. And despite the volatility, we're able to price the liability side of those two CLOs at levels that are consistent with the returns target for the program. Operator: Our next question comes from Paul Johnson from KBW. Paul Johnson: Yes. I was wondering if you could provide just kind of a very general update in terms of roughly what percent of the portfolio was sort of originated pre-2022. I think last quarter, you said roughly about 20% of it was kind of pre-2022 originated. I was just curious if that's changed at all since last quarter. Robert Stanley: No. It's very similar percentage. It has not changed. So pre-2022 is now 8% of the portfolio. No, no, I'm sorry, 18% of the portfolio. I missed the bar, but yes, about 18% of the portfolio. Paul Johnson: Okay. And then I was just curious, Mindbody that refinanced during the quarter. So there's some evidence obviously that the market is still there in terms of software companies. But I'm curious, in the last quarter, you also kind of talked about a little bit of slowing economics just within the software space in terms of the lending within that space. But I'm just curious, kind of based on some of the recent transactions, if there's anything that could be deduced from that in terms of what the common thread is of companies within the software space that are able to transact like that, refinance loans, and those that might have a much tougher time doing so. Ross Bruck: Yes. I think the trends that we're seeing within our software portfolio is consistent with the commentary that we gave in the prior quarter. So while top line continues to grow at a high single-digit rate on a broad basis, there has been a bit of deceleration in that number. But our portfolio companies are expanding margins and improving leverage profiles, which we think is ultimately supportive of refinancing activity. We talked about MadCap as an example of that transitioning from the private credit market into the bank market, given the deleveraging that the company had been able to achieve. And overall, as we look at our portfolio, we view management teams and sponsors generally as being forward-footed in finding ways to continue to drive organic growth as well as selective inorganic opportunities in order to sustain the deleveraging that we see within our credit book. Robert Stanley: Yes. And the only thing I would add to that because I think one of your questions was what we're seeing as far as spreads and leverage for new deals, there was muted activity of new deals in the technology space. In general, there were a couple of proof points. There's one in particular that was a U.K.-based software provider that priced maybe 50 bps wider than it would have been -- would have a year ago, but it was -- it's still a pretty robust package. I think it was 7.5x leverage so for 5 to 5.25. We did not participate in that. We were lower in leverage and wider on pricing, but there seems to still be a pretty robust market for anything other than what people perceive as having immediate AI disruptive risk. Operator: Our next question comes from Derek Hewett from BofA Securities. Derek Hewett: Since this is generally a better spread environment and really maybe even just more of a lender friendly environment, how should we think about capital issuance, assuming the shares continue to trade above book, which could potentially help pare back a little bit of the software exposure? And then to the extent that capital issuance makes sense, would you be leaning more towards just ATM issuance at this point? Or would you be willing to do overnight transactions? Ian Simmonds: Derek, it's Ian. Thanks for the question. I think there's no change to the framework that we've talked about in the past about the conditions that we want to see for considering new issuance. And so we want to have high conviction about the pipeline. We want to have high conviction about the ability to drive earnings as a result of accessing growth capital. So that's a really important piece for us. As to the tool we use, the way we communicated it 12 months ago when we put in place the ATM is it's an efficient tool. So I think our mindset is always how can we be efficient with our shareholders' capital and how can we generate the best outcome if there is an opportunity to raise capital? So without specifically answering which methodology, it's really going to come back to our view on the pipeline before we think about the tool that we apply. Derek Hewett: Okay. And then maybe a quick follow-up. Just in terms of circling back to the software portfolio. What is the -- like either the median or average EBITDA of the software portfolio? Or like how would you characterize it relative to the overall weighted average EBITDA? Robert Stanley: Do you want to go, Ross? Ross Bruck: Sure. Overall, we see margins in the software portfolio as broadly consistent with the overall portfolio, but also expanding at a quicker pace in the overall portfolio. So hopefully, that helps give a little bit of context. Robert Stanley: EBITDA margins are a bit higher, and they're expanding. I think quarter-over-quarter, they're up from 20% on average to 22% margins. That's been the historical trend, right? You've seen businesses continue to have slowing growth, which was maybe 2 years ago in the low to mid-teens on an average basis to high single-digit revenue growth, earnings growth continues to trend above that as companies move more to profitability. That has really been the trend post COVID when it was really a growth at all cost environment. And when we believed both public and private markets were kind of missed reading the signals from unit economics and the valuations were not in line with those declining unit economics, but it continues to be healthy, broadly in line on a growth basis, but probably more on the margin, just more profitable businesses in general. Derek Hewett: But what about on the absolute level? Is it -- are the software companies, are they similar in terms of the top line with the overall portfolio in terms of EBITDA? So the weighted average EBITDA for the overall portfolio was a little under $130 million for software. Robert Stanley: Yes, I would -- I don't know that we have that number in front of us. I would guess they're broadly in line, but we'll have to get back to you. Operator: Our next question comes from Ethan Kaye from Lucid Capital Markets. Ethan Kaye: Most of mine have been asked and answered, but maybe just a quick one. It looks like commitment activity was relatively kind of in line with historical average was really the funding activity that was maybe a bit lower. I'm curious whether perhaps that suggests, maybe there are some deals like towards the end of the quarter that were closed but not funded? Or if you can just help us kind of reconcile that delta between the commitments and fundings for the quarter? Ian Simmonds: Yes, Ethan, it's Ian. That's a good observation. Just to be clear, that commitment figure includes the full commitment to the structured credit partners JV. So Ross made the comment earlier that we funded about over $14 million in the quarter, but the commitment was $200 million that was previously disclosed. So that's in the commitment number. Ethan Kaye: The full -- okay, the full SCP, $200 million. Ian Simmonds: Yes. I point you don't read too much the gap. It's sort of very specific given we commenced operations of the JV in this -- in Q1. Operator: I'm showing no further questions at this time. I would now like to turn it back to Bo Stanley for closing remarks. Robert Stanley: Great. Well, thank you, everyone, for the thoughtful questions. Thanks to the team for the preparation here. And I just want to wish everybody Happy Mother's Day weekend. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Utz Brands, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Trevor Martin, Senior Vice President, Head of Corporate Finance. Please go ahead. Trevor Martin: Thank you, operator, and good morning, everyone. Thank you for joining us today for our live Q&A session of our first quarter 2026 earnings results. With me today on today's call are Howard Friedman, CEO; and BK Kelley, CFO. I hope everyone has had a chance to read our prepared remarks and our presentation, all of which are available on our Investor Relations website. Before we begin our Q&A session, I just have a few administrative items to review. Please note that some of our comments today will contain forward-looking statements based on our current view of the business and that actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials posted on our website. Now operator, we are ready to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Peter Galbo with Bank of America. Peter Galbo: Howard, maybe to start, just -- you had some commentary on the second quarter in your prepared remarks kind of addressing some of the softness to start 2Q, particularly in April. So I was hoping maybe you could expand a little bit just on that point as well as whether or not you think April represents kind of the bottom within the quarter, and then we should see improvement in May and June. So maybe I'll start there and let you kind of elaborate on your commentary? Howard Friedman: Yes. Thanks for the question, Pete. So a couple of things. Look, I think, first of all, we always expected that April was going to be sort of -- it would be a more difficult lap for a couple of reasons. Beyond sort of the Easter shift, we have year-over-year programming that we had done in the prior year. Specifically, you see it on Boulder Canyon, and you can see it on the cheese business. We also had some laps in some larger customers where there's some merchandising timing that actually shifted. So as you look at the year-over-year, we expected the quarter to start out a little bit softer than the run rate had been. I think if you look at the food channel overall, 50% of our business, I think it's a pretty good indicator of our underlying strength, which continues to be positive. And as we progress through the second quarter, you'll actually see some incremental activations coming. Boulder Canyon has some activity behind Tallow. You'll see new product innovations start to hit. And obviously, California will continue to grow. So I think we're off to where we expected to be in the second quarter and largely through the -- through Q1 as well. Peter Galbo: Great. And BK, just maybe as a follow-up, you left the guidance unchanged for the year, actually reiterated all elements of it. I think there was a bit of concern out there in the market that just given maybe less of a scaled DSD platform, things like freight, resins might hit you a bit sooner. So maybe you could just talk a little bit about the hedging program and kind of how you're locked on freight and go forward for the rest of the year. William Kelley: Yes. Thanks, Pete. Thanks for the question. So first of all, I would say we're covered for most of the year on fuel, ags and freight. Our productivity program that we've touted a bit here at approximately 4% is going well, and we'll continue to build on those plans in H2. And that will help us offset any incremental inflation, which we think comes from primarily a small impact from fuel for us, but mostly packaging driven by the resin impact. We'll continue to maximize the other levers that we have, the RGM tools around price pack architecture, and we'll be using AI to improve our promo effectiveness, and we'll continue to improve our sales mix. The net impact for us is that we have many levers to address potential inflation, but we are mostly covered on the fuel, ags and freight pieces to your point. Operator: Your next question comes from the line of Michael Lavery with Piper Sandler. Luke Maloney: This is Luke on for Michael. I just wanted to ask on marketing spend. You increased marketing spend by 35% in the first quarter, and I believe your long-term target is for 3% to 4% of sales. How close do you get to that target this year and in 2027? And then also, where do you see the biggest opportunities for return on marketing spend? Howard Friedman: Thanks for the question. Look, I think what we've said, we're largely in line with what we would have expected on the marketing investment for the year. We will expect to add [indiscernible] about 40% year-over-year, and we continue to have conviction that, that's the right place to be. We're still many -- probably a couple of years out from being able to get to that 3% to 4% longer-term target because as you can imagine, when we start to think about the available resources we have and the opportunities we have to grow, whether it's with westward expansion, continue to drive capabilities as well as marketing and innovation, there is a reasonable competition for those dollars. I would tell you that we feel great about the innovation this year, and I think it's probably the strongest lineup we've certainly had in the -- in my time here. I think in terms of where we see ongoing investment, I think there are a couple of places. One is obviously supporting our Power Four Brands, Utz, Boulder Canyon, Zapp's and On The Border. Boulder Canyon has new advertising that will be out this year to support the momentum on that brand, which continues to grow very quickly. Second is in our expansion markets where we're introducing the brand. In California, we'll obviously get investment as we continue to scale that area. And then the last is in supporting our core where it's a little bit more traditional competitive dynamics for us within the category. So I think over time, you'll continue to see us grow our advertising and consumer spend, and we'll remain focused and disciplined on how we deploy those resources. Luke Maloney: Okay. That's great. And your household penetration increased just over 1 point. What's working there? And what opportunities are ahead? Howard Friedman: Yes. So look, I think part of our household -- we feel very good about the household penetration trend we've been on. I think equally important to us is that the loyalty rates continue to grow because, obviously, as you grow penetration, you're introducing yourself to newer users, and they may not repeat quite as much. And what we're seeing is very strong loyalty rates as well, which I think is a testament to the quality of our products and the variety of items that we offer. I think that the major drivers, again, are going to be -- partially it's going to be about expansion geographies which obviously, for the Utz brand is as we're moving westward and for the remaining Power of Three, it's also bringing it into Utz's core geography. So we're introducing new households in both places. Second, our innovation is introducing products into households that they may not have had before. We feel very good about the early start on Tallow. And then lastly is just driving incremental advertising, which is also doing a good job of being both effective and efficient, but also driving our brand story. So I think we're kind of hitting on most of the cylinders right now and lots left to do. Operator: Your next question comes from the line of Scott Marks with Jefferies. Scott Marks: First thing I wanted to ask about in the prepared remarks, you made a comment about not seeing any need to change commercial plans because of competitor activity. Wondering if you can expand on that a little bit and just help us understand what you're seeing out there from a competitive perspective and how some of the recent changes within the category may or may not have impacted your own business. Howard Friedman: Yes. Thanks for the question, Scott. Look, I think overall, we feel like we're where we expected to be at this point in the year and that our commercial plans are holding. And a lot of the innovation expansion and investment in marketing consumer, I think, is going to deliver on the goals that we've had for the year. I think with respect to what we're seeing competitively, I'd tell you what we've observed is, obviously, the Bell-Mark prices or the on-pack price has come down, and we have seen some sharper promotional price points with some customers in some of the subcats. And this isn't wildly different than what we had seen in Q4 as we were going through the -- observing the early testing. And we do believe that at this point, it will continue to be a targeted and focused activity from the competition. From our perspective, we feel pretty good. I think if you look at the first 2 major merchandising windows of the year, Super Bowl and Easter, we were able to take dollar share. We grew our distribution 7% on TDPs, and we increased marketing to, as we said, to 35%, while also being mindful of where our price gaps need to be to remain competitive. So I think we feel confident in our drivers for the year. I think we feel confident that California will continue to build and that we've invested in our revenue management capabilities to make sure that we are able to compete. And the nice thing about our company is we can be fairly agile and with productivity giving us more resources potentially to deploy it if we had to, we feel like we can compete in a variety of contexts. Scott Marks: Appreciate the thoughts there. And then just a follow-up for me. A lot of comments in today's remarks about the bonus bags. Hate to bring up the term again, but obviously, it's in there. You obviously helped us -- give us a little bit of context in terms of what the numbers look like, excluding the Bonus Packs. Wondering if you can break that down between core markets versus expansion markets. What would the impact have been if we exclude the bonus bags just in terms of price versus volume and kind of where that growth has come from? Howard Friedman: Yes. So a couple of things. I think -- I know we haven't broken it out between core and expansion geographies. It's kind of more difficult for us to do just given the nature of the fact that bonus bags were actually the same UPC. So we have to do quite some additional work to be able to offer that. I think what you can take [indiscernible] is that bonus bags broadly were mostly in the core geography because that's where the majority of our distribution is with respect to things like Utz and On The Border, which is where it was. But we tried to give you a perspective of on a 2-year basis, we're holding up quite well competitively and that both volume mix and price are being similar contributors to our overall growth rate, which is I think really kind of the point we wanted to make sure we got across. Operator: Your next question comes from the line of Rob Dickerson with BTIG. Robert Dickerson: Yes, just a quick question on the category. I realize you're using retail dollars in the quarter, category is not flat, right? It was up, I think, over 2% based off of what you spoke to, the guidance that you've been talking for a while of kind of expecting kind of flat for the year. Is it just kind of -- obviously, the market is very dynamic right now, kind of we're still in the early or at least first half of the year. So there's no need to say, oh, we actually think the category could be more than flat this year and maybe we'll be in line with the category. I'm just trying to gauge a sense of kind of where your head is right now sitting in early May with respect to the category and maybe its potential for the year and then kind of how you could maybe operate vis-a-vis that category growth? Howard Friedman: Yes. I think -- first, I think when you think about the beginning of the year, we have continued to project a more flattish category, just given how early it has been in the year, and there is a very -- it's certainly been noisy in the first 3, 4 months of the year. So I think at this point, we're just continuing to take a conservative view on the category. I think what we would expect is that as the year continues and as the category sort of starts to demonstrate more consistency, then we would -- we'll relook at that, look at our assumptions. But from our perspective, obviously, we've never been solely dependent on the category for our growth. The expansion geographies remain a significant area of white space for us and our increases in innovation in A&C, we believe, puts us in a position to make sure that we are delivering against the guidance that we've provided as we go forward. And obviously, if the category continues to improve, then we'll take a different decision as we continue to navigate the year. Robert Dickerson: All right. Super. And then I guess just on the innovation front, I think you mentioned you were saying like Beef Tallow going for $20 on auction. And then I know you have flavored tortillas coming and Utz Protein, some Utz Protein SKUs. There are a few other competitors that might have some healthier options coming in as well. But just as we think about kind of consumer reengagement, right, in the category like Boulder is clearly doing very well, engaging well with the consumer. Again, kind of coming back, I guess, to Utz, but then also to the category, it just feels like there's clearly action in motion that would support kind of category improvement potentially as we get through the year, but especially just within consumer reengagement. I don't know if that makes sense. Just to hear your comments. Howard Friedman: Yes, it does. Look, we think that there are kind of 3 areas where consumer engagement really kind of matters to us. I think the first, to your point, is around better-for-you, and we're certainly seeing many people entering into the better-for-you category, larger scale competitors and smaller guys. We feel really good about Boulder Canyon's ability to compete. Tallow has gotten off to a great start. It was a new one for me to go on to an auction site and see the product there, but really around better-for-you attributes and non-seed oil and that business continues to grow in both the Natural and conventional channels. I think we've also seen that it's actually able to stretch with, to your point, both unflavored and now flavored tortilla chips, which we feel very good about the authorizations and early consumption trends on that business is strong. I think Protein in Utz is introducing that brand into what we call an elevated performance, not necessarily all the way to the Boulder Canyon side, but the presence of positives, we think, is a big territory for consumers who are looking to incorporate more protein in, and we'll continue to try and work on the better-for-you attributes across. We have Snacking Made Simple on our Utz brand is our sort of our organizing idea, which highlights the simple ingredients that are in our core products. The next 2 areas really are around flavor and value. And those 2 areas also are places where I think consumers have always engaged in this category and we will continue to do so as we go forward. So I do think you're going to see more effort by everybody to continue to introduce presence of positives. I think it's a consumer trend, but I also think flavor and value you'll also see. Robert Dickerson: All right. And then just maybe a quick one for me, too, for BK. Just on the free cash flow front, is there kind of anything to call out as we get -- as we're now in early May, for the year. And I'm really just kind of speaking to that expected kind of sequential improvement in free cash flow this year and then kind of that ability to hit that larger target longer term. That's all. William Kelley: Yes. I think the -- thanks for the question. Our confirmation of our guidance included the $60 million to $80 million of free cash flow that we were chasing this year. The Q1 for us is always going to be a quarter where we burn cash as we build for the seasons. I think the improvement in our leverage year-on-year is something that is indicative of the improvement we're making in our processes and capabilities in this area. We continue to think that, that will build over the year, and we'll be on track for the free cash flow that we expect to generate as well as the leverage targets that we set. Operator: [Operator Instructions] Your next question comes from the line of Jim Salera with Stephens. James Salera: I wanted to circle back on the pricing actions you mentioned by large competitors and kind of the limited impact on the commercial plan. From some of the work that we've done, it seems like those pricing actions are most pronounced in mass, particularly the largest mass retailer. I wonder if you could share how you're thinking about your pricing maybe on a kind of channel basis relative to peers and if we should see maybe a more strategic opportunity for you to differentiate yourself in channels outside of mass? Howard Friedman: Yes. Thanks for the question. Certainly, we've seen similar performance in the mass channel, which is not that much of a surprise to us. I think you've seen that -- we've seen that historically, which kind of goes back to the original point of the nothing that we're doing -- we've seen so far has been all of that surprising to us. And if you think about how our commercial strategy kind of unfolds, we have got a wide range of competitive dynamics across the price ladder. So we continue to grow very nicely in the Natural channel. We've been making good progress in Club behind some of our premium brands, notably Boulder. Our expansion geographies and frankly, the food channel overall continues to perform for us with the larger national grocers as well as the regional players. And so we will compete there. Obviously, our [ rev man ] capability really comes through in the food channel because that's where promotional effectiveness and timing can really kick in. And then I think more broadly, as you think about sort of the rest -- the remainder of the mass channel, we are feeling very good about the performance of our business there. We've seen distribution gains. So overall, we are -- it is a subcat by subcat, channel-by-channel game for us. And that's -- again, I think we have a lot of different ways to get to our goals and our objectives. And I think that's kind of what you're seeing in the first quarter. James Salera: Great. And then if I could shift gears and ask a quick one on California. You mentioned in your prepared remarks, California was up high single digits. It might be too early, but I want to ask if -- do you have any sense for the repeat rates in California given your brand is going to be new to a lot of folks out there. Curious to see kind of the initial loyalty response. Howard Friedman: Yes. It's early for us to see. We have to get through a couple of purchase cycles before we really be able to give you a better sense of loyalty. What I can tell you is if you look at our overall marketing metrics nationally, which, of course, our expansion geographies are a significant portion of our growth, you continue to see loyalty and repeat rates actually fairly consistent across. So I think that, that gives us quite a bit of confidence that even with a lower relative brand awareness on a brand like Utz that the product once in consumers' hands and pantries will have -- will earn its right to stay there. I think beyond that, remember that Boulder Canyon and Hawaiian are also brands that exist in that marketplace today. And so that -- it's also the opportunity for us to expand distribution of those items, which are more familiar to the California market. So it will be a full suite of our Power Four Brands and some of our targeted brands as we kind of mature that geography over time. But like I said, high single digits, a couple of weeks in, call it, 5, 6 weeks into it, we feel pretty good about where we are in California, lots to do, but we're excited about it. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning and good afternoon, everyone. My name is Chelsea and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Third Quarter Fiscal 2026 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, May 6, 2026, at 8:00 a.m. Eastern Standard Time or 2:00 p.m. Central European Time. Please note that on May 5, at approximately 4:30 p.m. Eastern Standard Time or 10:30 p.m. Central European Time, Coty Issued a press release and prepared remarks webcast, which can be found on its Investor Relations website. On today's call are Markus Strobel, Executive Chairman of the Board and Interim Chief Executive Officer; and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release. With that, we will now open the line for questions. Operator: [Operator Instructions] Our first question will come from Filippo Falorni with Citi. Filippo Falorni: First question, Markus, I was hoping you can elaborate on the sell-in versus sellout gap that you called out yesterday, both for Prestige and Consumer Beauty, different drivers there. But how should we think about it going forward into Q4 and as you start thinking about fiscal '27? And then one question for Laurent. On the margin side, can you provide some color on the exposure to oil and higher oil prices, both from a raw material standpoint but also from a distribution and logistical standpoint? Markus Strobel: Yes. Thanks, Filippo. On your first question, I mean, first of all, on the Prestige side, it was good that we saw some sellout growth. Not much but it was good and we're happy about that. But the sell-in was trailing. There's basically 3 reasons behind this. #1 is the Middle East because when this hit us end of February, we basically couldn't sell anything in March. And Middle East for us is a mid-teens region, was growing very highly. So a good part of that sell-in problem is attributable to the Middle East. #2, we're still in a highly promotional environment, so -- which can be visible in the gross to net. And finally, what we also saw is that a lot of our European retailers stocked up quite a bit for the holiday, for the Christmas period and our sellout was not as high as they had intended it to be. So they were working down a little bit of inventory in Q3. So all these 3 factors combined led to that gap between sell-in and sellout. When it comes to consumer, first of all, the good news on consumer is that we have closed a bit the gap to the category, especially on Sally Hansen and on CoverGirl in the U.S. Actually, on both of these brands, we are now growing versus the market in unit volume and we are catching up in value. Now why have we not seen this in the sell-in? There is basically multiple reasons behind this. #1, we have basically decided to get our whole organization focused on sellout and market share. This is for us, a big cultural shift. So in the Q3, we sold in much slimmer, much sharper bundles because you sell in a big -- in the past, we sold in very big bundles, a lot of volume, problem with it, if it doesn't sell out, it comes back in returns and obsolescence. We avoided it this time. So we sold in less but we sold through much, much more. That's how we got up against the category. So this is a short-term effect of selling in less because we changed our strategy in the way we drive retail productivity. And #2, we also exited some smaller markets on the consumer business, especially on color cosmetics in Southeast Asia and in Mexico. And obviously, when you exit, you don't sell in. So we believe that long term, the focus on sellout and the sharper bundles and much more retail productivity will make us a stronger company. And over time, sell-in -- sellout will equal sell-in. Laurent Mercier: Yes. So Filippo, I can take the second question on -- so Middle East, indeed, there are 2 implications on, of course, the top line margin. So Middle East is a mid-single digit net revenue for the company. And of course, the other impact is indeed on oil price. So what I can tell you, if you have to keep in mind some numbers is that roughly speaking, $1 impact from oil price is impacting our profit by $2 million. This is roughly the gross number. So this is before any intervention on productivity, change of sourcing or any other kind of activities or ultimately even pricing. So -- but just to have in mind. So now but the timing is -- there is some delay, #1, because we have inventories on components. #2, also that procurement team, they have also some hedging policy with our suppliers, which is also protecting suppliers and as a result is protecting us. So all in all, it means that we are protected against oil inflation roughly by the end of calendar year '26, okay? So this is the rough cut. And maybe just to conclude on this but indeed, what are the scope impacted. So #1 is freight. This has a impact on freight. And it's also on glass, obviously and this is where procurement teams are really finding, optimizing in terms of sourcing, okay, how we can avoid this impact. And #3, it's about components, when we have some plastic components, okay? So again, we are managing this very tightly. I mean the procurement teams have really demonstrated over the last years ability and agility to navigate this kind of volatility of inflation, was the case 3-4 years ago when there was a peak of inflation. So again, the teams are really full on and managing all these elements, while at the same time, of course, making sure that we keep always the top quality products. Operator: Our next question will come from Olivia Tong with Raymond James. Olivia Tong Cheang: Can you -- you mentioned retail destocking is mostly complete but promotional levels are obviously still higher than you'd like. And at least in the near term, Middle East is likely a continued headwind. So perhaps can you give us a better sense of when you expect that sell-in and sellout to converge? Is this a next 12 months endeavor? Or do you think it could potentially take longer? I understand your comments to Filippo about some of the actions that you're taking, particularly in Consumer Beauty but would love a little bit more detail on that. And then just longer term, can you talk about some more of the building blocks to get you closer to category growth and whether you may need to take even more drastic actions, particularly in Consumer Beauty to get you there? Markus Strobel: Okay. I mean let me just start with how we get to category growth, both on Prestige and Consumer Beauty. And they're pretty similar, okay, because they both run under the Coty.Curated framework. So #1 is getting the right innovation out there and focusing on the right innovation. So what we have done already for fiscal '27, we have identified what is our best innovation, what is innovation that complements the brand that has a halo effect on the brand. And what are some small things that we have been doing in the past that we should not be doing at all. So we have cut our number of activities but we're going to make the innovation that we bring to market bigger, better and make sure it has a halo effect on the brand. So that's point #1. And we're doing this on Prestige. And we're also doing this on consumer because we already see now that some of our reduced bundles with bigger, better innovation, some of our items are far ahead of objectives, some of them 3x. So we've seen we can appeal much, much more to the consumer, get more traction. Second point is getting consumer engagement, improved consumer engagement. As I mentioned in the last call, by doing so many activities, we have invested a lot of money in creating assets or even have enough -- sufficient money to put these assets out there for consumers to see. So we're changing that, creating fewer assets, having more money in working media and especially focusing more on what we call advocacy, which is a modern way of doing marketing, influencers. We have been a bit slow on this one because we still had a very traditional marketing mix up until last year but we're catching up very quickly so that we believe that consumers will respond much, much more to offering. #3 and this is very important when you mentioned the sellout, and we are changing our whole company culture to sellout oriented. It used to be fairly sell-in oriented. But now we are -- for every innovation, for everything that we're doing, we're asking what is the sellout plan? What is the joint business planning with the retailer? Does it fit into the cadence of the retailers to have a really fully synchronized plan to drive sellout and then sell-in will follow. And #4 is on everything that we do, we put the ROI lens. Does it -- we have very good ROI measurements now of all our actions, of our media spending, marketing spending. And we're seeing everything what we do, does it move the needle? Yes or no. So across these 4 elements, which is basically Coty.Curated on both Prestige and consumer, we believe this is going to have a big impact over time. Now there will be -- we had a framework. We put out this framework in the last call, as you remember, we're putting into the market now. And hopefully, it will improve quite a bit in 2027. It's probably going to go much faster on the innovation side because we decided this already. It's going to go much faster on the ROI side because we have the data. Moving asset creation to working media is going to take a little bit more time because you need some lead time to do that and getting the whole organization that has been traditionally focused on sell-in, sellout oriented will also take a little bit more time. When everything comes together, we believe we will finally be in a position that sellout and sell-in kind of equate. And we have a very healthy business from which to grow and reduce the gap we have versus the market. We want to grow over time at least with the market. And in the long term, obviously, we want to outgrow the market. Operator: Our next question will come from Sydney Wagner with Jefferies. Sydney Wagner: So just curious on -- we're encouraged to hear some of the progress early from CoverGirl. Which of those strategic steps do you think are most repeatable outside of the U.S.? And then we are seeing several mass retailers developing and broadening their beauty offerings. So can you talk about how you think about where the Coty brands fit into that evolving mass retail environment and kind of how your strategy fits around there? Markus Strobel: Yes. I found it quite interesting, when we look at CoverGirl and Sally Hansen, we had a lot of failed efforts in the last couple of years to position the brands where the brands don't fit. I think at one point in time, we tried to turn CoverGirl into the ultimate Gen Z brand. That didn't really work because this was not credible for the consumer. And each time when I go see a retailer in the United States but also in Europe, they always say, please, please, please, can anybody do something for Gen X, because Gen X women have money, they're ready to spend it but nobody talks to them and nobody has an offering for them. So basically, what we're doing, what we've done with CoverGirl, we made CoverGirl, again, the -- in the process of making the penultimate Gen X brand and retailers really support us in this. What this means, the way we're going to market, we need to have a good mix of advocacy. As I just mentioned, we've got to improve that but also some traditional media to focus on the core properties, Simply Ageless, Lash Blast, all these kind of things that people know, that people trust in. So where we bring innovation on these existing franchises versus news, news, news, all the time. And I think that it's highly appreciated that helps us now to actually get much closer with CoverGirl to the category. And we're actually outgrowing the category at the moment in terms of units in the U.S. And I believe this model is also applicable outside of the U.S. We're going to apply this on Rimmel in the U.K. and on some of our other properties like Bourjois and Max Factor in Europe. Operator: Our next question will come from Oliver Chen with TD Cowen. Oliver Chen: Regarding the focus on the sellout culture, what does that mean in terms of your systems and/or capabilities or working capital and what you're thinking that requires? It sounds like it's quite prudent. And then as you mentioned earlier, Markus, on the promotional environment that you're seeing as well as the European accounts being overstocked, how long might that persist? Or what are you monitoring in terms of the relationship of what you're seeing there relative to guidance? And lastly, Laurent, on the A&CP shift, was that planned? Or was that in relation to what you were seeing in the marketplace? Markus Strobel: Okay. In terms of sellout culture, which is obviously like probably the more difficult part because culture change is usually more difficult and takes a bit longer than strategy change. What we're doing is, we're trying to implement this in all parts of the organization. So when we do a business review, we're basically what are the selling plans? What is the retailer plan? How we can engage with the retailer? Has the retailer verified these plans? So they can start asking the right questions but also personally on the top level, connecting with the right retailers, which we're doing. And #2 is we will also, as we move forward, putting some on the -- these metrics into our evaluation system. If you put market share, right, into your way -- into way -- how you evaluate the organization, you see a shift to -- on sellout almost immediately. So I think it's a mix of putting it into our performance metrics, KPIs, measure it and drive it home with the organization every single day. But also building the capability for joint business planning with retailers, not just selling it in and hope it sells with top line media but having the right plan every time. It's much easier to have the right plan. If you go back to the curation, if you have fewer, bigger initiatives because you can focus on that to make the right plan versus throwing out too many things where you just don't have the bandwidth and the capacity to do the right plan. So I think this is going to help us quite a lot. When it comes to retailer inventory, again, we said before that we don't think there is any more -- much more structural destocking in the trade. Structural destocking means retailers are in general, dramatically reducing their inventory or their days on hand. We don't see that at the moment. It was just for us that all our Christmas sellout was not as great as we wanted. Now -- and we've worked through that in the first quarter. Now as you go into the next holiday period, which is Mother's Day and Father's Day, we're obviously much more attuned to that. And now that we get into the sellout culture, I think we will be better in sellout and sellout and inventory will be much closer correlated than what they have been -- what they were in the past. So I think it's going to get better over time. Laurent? Laurent Mercier: Yes. So Oliver, I will take -- just maybe to build on -- and your first question about the working capital, I would like to build on this also to make clear that as part of the Coty.Curated and again, this focus on sellout, I mean, there are also some strong benefits on cash and working capital because, of course, by focusing on the big SKUs, reducing the tail, it has some implication on inventory and on working capital. So that's one and it's part really of the discussion. And #2, when we say focus on sellout culture, it's also behind this and is also to have a very strong focus on forecast accuracy, really understand better the dynamic with the retailers. And again, by doing this, is really to be much more efficient on our inventory and also on excess and obsolescence. So it's really a big element and that's also what you -- you saw that -- what procurement implementing alliance progress -- project, which is really about streamlining of supplier ecosystem. So it's also another benefit as part of this particular thing. So that's very important. And it has indeed concrete implication on top line, on the gross margin and also on the working capital and the cash. So now I go to your last question on A&CP. First of all, I want to remind that our level of A&CP in Q3 is flat, okay, which means that even in terms of percentage, it has increased, okay? So it's really that there is no cut or drastic reduction and it's part of our tight monitoring that we are implementing. When we say focus, it's, of course, focusing on the big bets but it's also focusing on where we are seeing strong ROI. And this is also the analysis and the decision we made during the Q3 that -- we believe that we need to preserve and we need to invest more for the A&CP and indeed Mother's Day and Father's Day are really A&CP, especially for Prestige. And this is a conscious decision that we made during the quarter, say, okay, let's reserve some money from Q3 because we are in a good place. And then we allocate this money where we are seeing, in fact, a strong ROI. So that's really part of the new dynamic, okay, not to be absolutely stuck on some decisions made 3 months ago. We are seeing how things are evolving. And when we have to make the decision to reallocate some money, we do it. So it's absolutely conscious decision. Operator: Our next question will come from Susan Anderson with Canaccord Genuity. Alec Legg: Alec Legg on for Susan. I guess how should we think about the exit of Orveda and then also some of the brands from smaller markets? And then when should we expect, I guess, Orveda exit to occur? And can you give any details on how large that business was? Markus Strobel: Well, let me put it that way. Orveda, we have started transitioning out of Orveda since February, basically. We have reserved for all these costs in our Q2 already. We're executing this at the moment, which means closing some of these big boutiques. Some of them might be taken over by the previous licensor. We're still working on that. We think we're going to be out more or less completely by the end of this fiscal year. So come June, July, August, we should be out of that business and can reallocate some of that spending that we have on this business on our core fine fragrance brands. The size of the business, we don't break out individual brands but you can imagine it was not huge, to say the least. So that is Orveda. And from the other brands, you mentioned mostly the consumer business where we exited some smaller markets because they're just not economical. We cannot create any scale or make any money or have any ROI. And with our new ROI culture, we will continue some of these but will not be -- it will not be dramatically pronounced because the volume per market there is fairly small. We will focus in Consumer Beauty on our most important franchises, CoverGirl, Rimmel, Sally Hansen, Max Factor. We've got to win in North America. That's job #1. We've got to win on Rimmel in the U.K. That's job #2. And then we got to win in Europe of the rest of our portfolio, job #3, in that priority. Alec Legg: That's really helpful. And then just a quick follow-up. Are you able to quantify the tariffs you paid over the last year? And any insight on if there's a chance for getting refunds on that? Markus Strobel: Yes, Laurent. Laurent Mercier: Yes, indeed. So roughly, it's about $30 million impacting the P&L this year. And of course, I mean, we are looking carefully at any opportunity to refund and depending how situation is evolving, okay, if -- when and if we can do it, of course, this is something we will contemplate to helping with our P&L. Operator: Our next question will come from Charles Scotti with Kepler. Charles-Louis Scotti: Two questions from me, please. The first one, you mentioned that the competitive environment remains very intense. Could you provide more details on this and who is putting pressure on pricing and in which regions? And more broadly, do you think that similarly to the luxury industry, consumers are starting to push back against perfumes price increases and could prices eventually start to decline at some point? Or could you push more on smaller formats to add up to a lower purchasing power? And then second question, there have been many media rumors suggesting that you could dispose of certain licenses to other industry players in order to accelerate your deleveraging. I think these rumors have since been denied but do you have any comment on this topic? And regarding Gucci more specifically, you previously seemed open to a disposal ahead of the license maturity. Could you give us an update on this matter, please? Markus Strobel: Okay. Okay. I have to make -- this is 3 questions, I have to make sure I don't forgot them, one by one, in terms of the price. First of all, I mean, you got to know that the beauty market is extremely resilient. We saw again 5% growth in the market in Q3 and both 5% on Prestige and 5% on the mass. So basically, the consumer is shopping across a very, very wide price spectrum. And so far, we have seen an amazing resilience of the consumer out there. Yes, there is a bit of -- everybody is fighting for market share. So there is a lot of promotion in the market but that has more to do with, yes, building sellout and market share than it has to do with absolute price levels. So we believe we're still in good shape when it comes to the resilience of the consumer, at least we haven't seen anything negative yet. On the rumors that you may have heard that we will be divesting anything in our Prestige portfolio, I can say here for everybody, very clear that there is no truth to this. We categorically deny this. There is no plans whatsoever. We're very, very happy with our portfolio. We're very, very happy with our brands on the Prestige side. And each of them has an important role to play for us in the future. And if you go to the specific article, our Burberry and Hugo Boss, our biggest brands, they are our global brands and we love them and we continue to strongly build them in the future, okay? Very, very clear, no doubt about that. And when it comes to Gucci, yes, obviously, we are open to everything, to an early exit if it creates value for us. We need to create value for us and for our shareholders. And if anything becomes clear and fixed, we will obviously notify the public as -- based on our requirements, okay? Nothing to report here at the moment. We'll keep you posted. Operator: Our next question comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: Markus, you and Laurent, you both talked about like going back to the SKU, about the SKU rationalization, brand rationalization, Consumer Beauty. This has been obviously a very long journey. And I just wanted to see what inning you are in terms of that, if -- how many more iterations of that you think you need? And then related to that on the cost side, I think you talked about returns or obsolescences impacting your numbers. How -- again, how we should be thinking where these margins will land? And how long do you think you're going to take as you focus, to your point, more in the sellout vis-a-vis the sell-in? It seems to me that you're going to have to incurring something, kind of restructuring those brands and making sure that you get the best returns on those. Markus Strobel: Yes. Well, I think in terms of getting the innovation to a place where it really makes sense for shelf and retail productivity. I mean in the past, you probably know that we put out such a big innovation bundle every spring and every fall that we almost like crowded out productive SKUs on the shelf. So it's a double whammy. You have stuff out there that doesn't sell and you have lost some productive SKUs. And if you add it all up, it's all coming back to you in either returns or obsolescence, okay? And we're still suffering from the hangover of that. But this quarter, Q3 was the first time where we are breaking that cycle. And we're going to break the cycle even more in the fall bundle, which is going to be sharper. And the most important thing, it's not like just reducing the number of properties. It's actually important to bring properties out there that resonate with the consumer. So we're going to be much more consumer-based, much more trend-based, trying to meet the market in creating some of these trends. And the first results we have seen now and are really, really good. I mean we have some of the innovations are really far above our expectations and they help actually to build market share in volume but also catching up very much in value now to the market with actually a much smaller number of bundle and a much smaller number of SKUs, much more efficient model. It's probably going to take us 1, 2, 3 iterations with those bundles to work through that and see the full effects as we will see less and less obsolescence over time. But give us a few quarters and you will see the effects of this. Laurent, that was the second part. Go ahead on... Laurent Mercier: Yes. I think on -- when we were talking about E&O and I think is really to build on this and what we were referring before. I think it's really important you look at all these initiatives really from an end-to-end element or cycle. It's not just one bucket about reducing the number of SKUs but it's how we can be very precise. And again, it will have some implication on forecast accuracy, on inventory and E&O indeed today. This is -- as you saw in the Q3, it's really an element which is hurting our gross margin in Prestige but also in Consumer Beauty. So by reducing this and to give the example, reducing the bundle, it's indeed a way that we are reducing inventory. We reduced E&O but also we will reduce the returns that we get from retailers. So this will flow into the -- into P&L. And also there are also currently some, let's say, exceptional elements. Markus was referring to some markets that we are closing in Consumer Beauty because they are not profitable. It also triggers, I would say, as a short term that sometimes it's impacting -- we need to cut some inventory here and it's hurting E&O or even in some cases, we have some returns. So these are also some exceptional costs that as time goes, will disappear. And then on the other hand, we get really the benefit from this -- from the decision. So it takes time. But again, it's really part of a very consistent plan and it will be visible in the gross margin improvement. Operator: Our next question will come from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: I had a couple of questions on your FY '27. First, how should we think about the impact from the Middle East? Is the 2- to 3-point headwind that you expect in F -- Q4 a good proxy? And then could you provide a little more context of these pressures and maybe investments to support your launches in the year? Ultimately, is it reasonable to assume continued EBITDA declines? Or could EBITDA start to flip positive? Laurent Mercier: Yes. Thank you, Bonnie, for the question. I think we agree on -- in your question that there are a lot of moving pieces. So is -- we always made clear that we operate in an environment where there is a lot of volatility. And indeed, currently, the geopolitics is bringing, of course, some additional volatility. So on Middle East and I think like all of us and we read the news every day, as you understand the big number, so mid-single-digit percentage of the size of Coty as a whole. Indeed, it's a very strong fragrance business and also very dynamic. So indeed, it's creating a headwind. Now you need really to understand that within Middle East, there are different dynamics. The channel, which is the most impacted is travel retail, which, of course, given the circumstances is drastically reduced. Also in Emirates because you have a lot of tourists and currency, of course, this is very -- to the minimum. But on the other hand, you have markets like Saudi, which are pretty well protected. So we need to understand these dynamics. We are monitoring as we go. And also, we are managing the P&L equation and the investment and the spending of the region according to how the situation is evolving and we have a very good team on site and very close to all the actions and really the agility. So we'll keep you posted. But of course, we are making sure that we are managing this very closely within our equation. So now on your second question, again and again, the big focus and it brings all the discipline in the organization is a focus on sellout. So this is really what will drive the performance and the improvement. Of course, at some moment, it will be visible in the sell-in but that's really a matter of discipline that Markus shared loud and clear. So gradually improve our sellout to reduce the gap versus the category which is resilient. And of course, is really -- our goal is really indeed to improve our EBITDA year-on-year trend over the course of fiscal year '27. So that's for sure. At the same time and we've been very clear, we need to manage potential inflation, which is the first question from oil increase. And also, we've been very clear in the presentation that there are also some short-term benefits that also will create some headwind next year. But again, the trend -- the organic trend is, we need to improve sellout and of course, we need to improve the trend of our EBITDA trajectory. Operator: Our last question will come from Anna Lizzul with Bank of America. Anna Lizzul: I know you talked a bit about the promotional environment here being a bit elevated. I was wondering if you could comment more on both the Prestige and Consumer Beauty lines of business and when you expect this to better normalize? Laurent Mercier: Indeed, yes, we are seeing some promotion being more elevated. So indeed coming from specific actors, specific retailers. I think this is something that I will not call as a major change versus what we observed in the previous quarters and what we flagged. But we are always making sure that we are protecting our brands, we are protecting our innovation and indeed that we are not playing that game. I will insist also and you saw in the Consumer Beauty presentation that we have been also very cautious in terms of price increase versus most of our competitors. And you see that in fact, our sellout in units especially in the U.S. is growing. So this is very encouraging. And it really helps also to avoid playing this kind of promotionality game. So again and you see tangible results in the sellout improvement in CoverGirl in [indiscernible]. So we are managing this very closely, managing really all the revenue management approach. So again, so this is the way we are looking at it. When it will normalize, I can tell you on our side, we stay very disciplined on this. And then on how our peers want to play that game, of course, this is a question that you can raise with them. But again, we stay very disciplined, managing the revenue management in a very targeted way. Markus Strobel: So we'll -- just let me do -- just a final closing comment. Obviously, we are not -- no -- to be honest, we're not where we want to be yet where we want to be but we're improving. And I think Q3 demonstrated our ability to protect profitability and cash flow while taking first concrete steps to strengthen execution across the business. Coty.Curated is the framework that's guiding the shift, sharpening our priorities, simplifying our operating model and scaling what works. With sustained focus and disciplined execution, we are confident Coty is well positioned to deliver more consistent profitable growth and the long-term value creation. And I want to use this opportunity again to thank all Coty employees around the world who are working very hard to make this happen and especially our colleagues in the Middle East are doing a tremendous job under a high state of high uncertainty. So thank you very much. Operator: Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good afternoon, and welcome to HCI Group's First Quarter 2026 Earnings Call. My name is Tom, and I will be your conference operator. [Operator Instructions] Before we begin today's call, I would like to remind everyone that this conference call is being recorded and will be available for replay through June 6, 2026, starting later today. The call is also being broadcast live via webcast and available via webcast replay until May 6, 2027, on the Investor Information section of HCI Group's website at www.hcigroup.com. I would now like to turn the call over to Nat Otis, HCI Investor Relations. Nat, please proceed. Nathaniel Otis: Thank you, and good afternoon. Welcome to HCI Group's First Quarter 2026 Earnings Call. To access today's webcast, please visit the Investor Information section of our corporate website at www.hcigroup.com. Before we begin, I'd like to take the opportunity to remind our listeners that today's presentation and responses to questions may contain forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. Words such as anticipate, estimate, expect, intend, plan and project and other similar words and expressions are intended to signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various risks and uncertainties. Some of these risks and uncertainties are identified in the company's filings with the Securities and Exchange Commission. Should any risks or uncertainties develop into actual events, these developments could have materially adverse effects on the company's business, financial condition and results of operations. HCI Group disclaims all the obligations to update any forward-looking statements. Now with that, I'll turn the call over to Mark Harmsworth, Chief Financial Officer. Mark Harmsworth: Thanks, Nat. Good afternoon, everyone, and thank you for taking the time to join us on our call today. This was another fantastic quarter. Pretax income grew by 15% from the same quarter last year to $115 million and diluted earnings per share were $5.45. This was the best first quarter ever for us as we continue to grow the top line, the bottom line and return on equity. Gross premiums earned grew by just over 8%, reflecting the full impact of the assumptions we completed in 2025. Total revenue grew by just over 12% as investment income and other income grew significantly. The increase in other income reflects revenue that Exzeo and Griston are generating, non-HCI business. The loss ratio this quarter was 20%, about the same as the first quarter last year, reflecting continued low claims and litigation frequency. We've been talking about the combined ratio for a while now. With where the business is, we are targeting a combined ratio of 60%, plus or minus 5%. For the full year 2025, the combined ratio was about 57%, and it was 57% again this quarter, illustrating the quality of our underwriting and our operating efficiencies. Let's turn to the balance sheet for a minute. With growing earnings and prudent capital management, the balance sheet continues to strengthen. Stockholder equity has doubled over just the last year to over $1 billion. We have just under $2 billion of cash and fixed-term securities. Book value per share is now almost $85 and the debt-to-cap ratio is only 6%. In addition to the strong consolidated balance sheet, the underwriters are stronger than ever. As I mentioned earlier, gross premiums are up by 8% or so, but total surplus has grown by 22% over the last year to well over $0.5 billion. The gross leverage ratio is now less than 2.5, leaving plenty of room for additional growth without the need for surplus -- for new capital, sorry, and gives us additional security if there's a storm. We also have significant surplus in Claddaugh, which gives us considerable flexibility in our upcoming reinsurance program. As you know, we announced a buyback plan in March, under which we were authorized to purchase up to $80 million of stock, and we have been actively buying back shares under that plan. As of the end of March, we had used $17.5 million of the authorization, buying back approximately 110,000 shares. Since the end of the first quarter, we have continued buying back shares. And at the end of April, we were up to a cumulative total of 239,000 shares purchased and have used about $37.5 million of the $80 million. In terms of holding company liquidity, we have just under $200 million of liquidity at the HCI level. This does not include the 75 million shares we own of Exzeo, which now trade publicly. Speaking of Exzeo, while our book value per share of almost $85 is impressive, I should mention that this does not include any unrealized gains on our ownership of Exzeo. If the fair value of Exzeo and our real estate portfolio were added, pro forma book value per share would be almost $145. This means that we are trading only about 10% above book value while generating record earnings and 35% after-tax return on equity. Wrapping up on the quarter, this has been another fantastic one for the company. 2025 was a record year for HCI and the first quarter of this year was even better. Revenue is growing, margins are expanding. We are generating record cash flows, have minimal debt and are generating superior returns on capital. And with that, I'll hand it over to Karin. Karin Coleman: Thank you, Mark. We are very pleased with our start to 2026. We averaged more than $5.60 per share over the past 5 quarters and entered the second quarter with -- and we entered the second quarter with $1.3 billion in premiums in force spread across 4 carriers. It is important to point out that over half of our Citizens takeouts in 2025 were done by Tailrow, our second reciprocal exchange. Tailrow is now well positioned going forward with over $120 million of in-force premiums. All 4 of our carriers are now profitable inception to date, the last 2 having reached that milestone within a 12- to 15-month time span from inception. I bring this up to underscore our company philosophy. When we make strategic decisions, we take actions with purpose and precision. Execution is critical in our line of work. In other words, starting an insurance carrier is not that challenging. Establishing a carrier that is profitable and in a relatively short period of time is much more difficult and takes experience, skill as well as some finesse. With that in mind, I want to share that in the first quarter, we licensed a new reinsurance company, Fortex Reinsurance, domiciled in the Cayman Islands as a Class B insurer, making it our second reinsurance company and giving us even more flexibility to selectively retain risk and reduce the cost of third-party reinsurance. You may recall that our other reinsurer, Claddaugh is domiciled in Bermuda and has been very advantageous in our reinsurance placements. Speaking of reinsurance, HCI is in the final phase of the June 1 reinsurance placements. We won't announce any specific details until everything is finalized since current market conditions are continuing to improve. As Mark noted, we announced the $80 million share repurchase authorization on March 3 and immediately entered the market on the 4. We're not shy about our view that shares of HCI offer great value at the current price. Consistently high return on equity, strong earnings generation, a track record of value creation and our technology platform, Exzeo, are all compelling reasons for this confidence. In addition to earnings generation and value creation, HCI offers longer-term optionality as well. Historically, we have taken advantage of market dislocation, acting quickly to deploy capital when opportunities present themselves. There will be an inflection point for our industry. In the meantime, we'll continue to serve our policyholders well, deliver strong operating results, return value to shareholders and look for additional ways to drive long-term growth in a measurable way. With that, let me turn it over to Paresh Patel for some final thoughts. Paresh Patel: Thanks, Karin. Mark and Karin just spent a few minutes talking about where the company is at this time. Let me recap. Premiums are growing. Reinsurance is moving in the right direction. The investment portfolio is making money. The loss ratio is stable. We are generating record earnings and the balance sheet is strong and getting stronger. This is allowing us to do 2 things at the same time. Buy back a portion of the company every month and still strengthen the balance sheet. And why are we doing this? Because we want to invest in a company at a terrific valuation, and this is a company that we know everything about. Simply put, we are investing in ourselves. At the current rate, we are buying back about 2% of the company every quarter. This means that every shareholder on this call will effectively own 2% more of the company at the end of every quarter than they did at the start. And we are doing this with only a portion of our earnings. With the rest of the earnings, we are further strengthening our balance sheet. This is planning for a better tomorrow because eventually an inflection point or an opportunity will come along. And when it does, we will have a very robust balance sheet that will allow us to execute quickly and with great ease. But what do we do until that opportunity or inflection point comes along? Mark outlined the value creation that Exzeo represents to the HCI shareholders. We grew Exzeo from about an idea -- from just an idea to a $1.5 billion current valuation. And what we're doing is we're working on the next thing. We are looking at 2 or 3 things that have the potential to be the next Exzeo-like asset. We have the resources to nurture these things to their full potential. Outcomes are not always certain, but given our track record, I am very excited about the possibilities. So that is what we are working on while we are waiting for the inflection point. And at the same time, we are acquiring valuable HCI shares. In summary, every day we come to work knowing our mission if things stay the same. We also know our mission and what we're going to do if conditions change. And finally, we are planting seeds for the long-term future. With that, I will turn it over for questions. Operator: [Operator Instructions] And our first question will come from Matt Carletti from Citizens Capital. Matthew Carletti: Either Paresh or Karin, I guess, maybe to start with a pretty simple one, which is just can you just update us on kind of how you see kind of the primary environment in Florida, not the reinsurance environment, but just kind of the primary environment for HCI and all its carriers? Karin Coleman: Sure. For HCI, we see stability in our premiums as it relates to previous quarters, and we anticipate that stability will remain there going forward. Matthew Carletti: Okay. Great. And then, Karin, you hit on starting a new reinsurer, which sounds like it's a captive kind of alongside kind of a new Claddaugh. I guess other than the domicile, why -- can you give us a little more color on why start a new reinsurer as opposed to just leveraging Claddaugh more? Karin Coleman: Sure. So we have 4 carriers that we have, and we find that, that optionality really gives us an advantage through different market conditions. And so we feel that we have an opportunity to do something similar within the reinsurance space as well and maybe have some additional flexibility within those reinsurance carriers. Matthew Carletti: Okay. Great. And then one last one, if I could, Paresh, you -- at the end of your comments there you kind of touched on looking at 2 or 3 possibly Exzeo-like opportunities. Can you give us any more color? In particular, I'm just curious, are they insurance related? Or obviously, HCI does more than just insurance, you've got real estate, you've got your hands in a few things. How should we think about it at a kind of 30,000-foot level? Paresh Patel: Yes. Matt, we are leaving these conversations slightly vague because ideas come and go, but the things we're looking at are insurance related, but I don't mean like homeowners insurance in Florida. It's other lines of insurance and/or also other aspects of the insurance value chain. So it's quite a broad net we are casting because growth isn't all about just doing more of the same. It's also being able to do new things. So we are thinking about it in terms of what's going to be needed, what's going to be valuable a decade from now, yes. Operator: Your next question is coming from Mark Hughes from Truist. Mark Hughes: Mark, what was your combined ratio target? Someone sneezed just as you're giving the target. At least, [indiscernible] sound like reminding... Mark Harmsworth: Yes, 60%, plus or minus 5%. And we were 57% in Q1, which was pretty much the same as it was in full year 2025. Mark Hughes: And Karin, you talked about stable for HCI for, I think, premiums. Is that the entire stable of companies, the TypTap Homeowners Choice, et cetera? Or are you specifically referring to Homeowners Choice...? Karin Coleman: I'm talking about the whole enterprise, yes. Mark Hughes: Okay. And then with all that capital, are there opportunities these days for book rolls or M&A or is the industry just too profitable, nobody wants to transact when they're making decent profits? Paresh Patel: Mark, I would characterize it in the comments Karin made about the inflection points. There will be an inflection point. In terms of those kinds of things, we are now coming up on hurricane season. Would you want to expand through an acquisition coming into that? This is assuming it was Florida-based kind of thing. But it's those kinds of items that also sort of play out here. There will be a time, there will be an opportunity, right? But you have to time it at the right moment. And let me answer it in a different way. We would like to do M&A the day after the storm as opposed to do an M&A the day before the storm. One creates a lot more headaches than the other one does, yes. Mark Hughes: Yes. What is your posture around the reinsurance renewals? It sounds like you would be perhaps retaining more risk with the capital in Claddaugh and the Fortex. Is that a fair statement? Paresh Patel: Yes. I think you'll see the nuances of all of this stuff when the reinsurance is placed. Karin Coleman: Yes. We know the reinsurance market continues to softening. And so I don't know that we want to speculate on the final outcome at this point. But once we have that final -- we have the June 1 program finalized, we'll issue a press release most likely in a few weeks. Mark Hughes: Okay. But I think you said it continues to soften. It sounds like you're saying here in recent weeks. Karin Coleman: Yes. yes, that's why we're kind of in this position now. Mark Hughes: Yes. I know Exzeo is going to have its own call. But as they execute, Mark, what does it do to the P&L, just the geography of the P&L, if they're going to be growing their business, what line items are going to be most affected here? Mark Harmsworth: Well, the other income, a lot of their revenue will flow through -- on a consolidated basis will flow through that other income line. That's why I kind of highlighted that for this quarter. And of course, earnings and still 80%, 85% of that is flowing through to earnings per share. So -- but in terms of revenue as they grow, that other income line is the one that will really -- that's the one that you'll see go up. And it I think tripled quarter-over-quarter, and that's why I kind of pointed that out in my prepared remarks. Mark Hughes: Okay. And so this is kind of the starting point, and it will presumably should go up from here as they execute. Mark Harmsworth: Yes. Operator: [Operator Instructions] our next question is coming from Michael Phillips from Oppenheimer. Michael Phillips: Mark, I wanted to make sure I understand when you talk about the target combined ratio. The 57% this quarter, like you said, was kind of what you did in 2025. So when you say target, first off, you're referring to an accident year ex cat, correct? Mark Harmsworth: Yes. Michael Phillips: Okay. And also when you say target, are you thinking about kind of through a cycle longer term? Or are you referring to, hey, that's this year's target, maybe the next 18-month target? Or what kind of time frame do you mean when you say that? Mark Harmsworth: Yes. I mean it's where we are now. I don't expect it to change significantly. I mean the thing that can move it a little bit is weather, obviously, right? But I think for us right now, that's a pretty good target for the next -- certainly for this year. Michael Phillips: Okay. Okay. Good. That's what I meant. Just to be clear on my question. So no concerns on maybe pressure on that given where the rate environment is. There's lots of good things happening in Florida, but the rate environment is softening and so there's -- you don't foresee any pressure on that because of the rate environment? Mark Harmsworth: Well, I think Karin talked about that. If you look at our average premium per policy at the end of Q1, you compare it to a year ago, it's pretty much flat. And as Karin -- across the book and as Karin suggested, we don't expect that to change considerably. So yes, I mean -- and obviously, we've taken that into account when we're talking about an estimated combined ratio. The big mover is the loss ratio. Michael Phillips: Yes. Cool. And then maybe just last one, just changing gears. One of your new initiatives was the E&S company, the surplus lines company. Can you talk about that and kind of where you see that going in the near term? I think that just started pretty recently last quarter or so. So just any thoughts on where that is. Paresh Patel: It continues making progress, right? One of the things we talked about using that for is maybe California or things of that nature. And California is a lovely place. Things continue to evolve over there. I think we just saw some headline the other day where 60 policyholders are suing their previous carriers for the losses in the California wildfires. All of these things sort of make you -- make sure that you do your homework and diligence before you step into that. So we're doing all those things, yes. Michael Phillips: So is that 1 of the 2 or 3 things you refer to working on? Is that kind of in the past? Paresh Patel: I don't think it is 1 of the 3 things we're talking about in the $1 billion category kind of thing. It's yet another something we're doing, just like Karin's new reinsurer of Fortex Re. It's just yet another something we're doing besides the $1 billion asset creation kind of things that we're talking about. Operator: [Operator Instructions] And there are no questions in queue at this time. And this does conclude our question-and-answer session. I would now like to turn the call back over to Paresh Patel, who has a few closing remarks. Paresh Patel: Thank you. On behalf of the entire management team, I would like to thank our shareholders, employees, agents and most importantly, our policyholders for their continued support as we embark on the next phase of our growth. Thank you, and talk to you soon. Operator: Thank you. This concludes today's call. You may now disconnect. Thank you once again for your participation. Have a wonderful day.
Randall Giveans: Ladies and gentlemen, welcome to the Navigator Holdings Conference Call for the First Quarter 2026 Financial Results. On today's call, we have Mads Peter Zacho, Chief Executive Officer; Gary Chapman, Chief Financial Officer; Oeyvind Lindeman, Chief Commercial Officer; and myself, Randy Giveans, Chief Investor Relations Officer. I must advise you that this conference call is being recorded today. Now, as we conduct today's presentation, we'll be making various forward-looking statements. These statements include, but are not limited to, the future expectations, plans and prospects from both a financial and operational perspective and are based on our assumptions, forecasts and expectations as of today, May 6, 2026, and are as such, subject to material risks and uncertainties. Actual results may differ significantly from our forward-looking information and forecast. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission. With that, I now pass the floor to our CEO, Mads Peter Zaco. Go ahead, Mads. Mads Zacho: Thank you, Randy. Good morning and good afternoon and thank you for joining this Navigator Gas earnings call for Q1 2026. Before I get into the highlights of the quarter, let me again address the Middle East. As of today, we have no vessels operating in or transiting the Hormuz Strait. And just to be clear, we have experienced no significant negative operational or financial impact from the conflict, only commercial tailwinds. We are watching the developments closely. And we will keep our crew and assets safe. Please turn to Slide #4. The first quarter of 2026 was a quarter of resilient trading, and a quarter of record net income for Navigator Gas. And now in Q2, which is starting strong. In terms of our operations during Q1, TCE rates came in just below $30,000 per day, about $1,000 below Q4 and just below same period 2025. Utilization was slightly better than Q4 and within our guided range. Net income was $36 million or $0.55 per share and EBITDA was $80 million. All 3 are strong numbers. The balance sheet remains strong. Total liquidity less restricted cash was $241 million at quarter end. This is essentially flat versus year-end even after paying down debt and returning capital to shareholders and completing a significant share repurchase. On that note, in March, we repurchased and canceled 3.5 million shares from BW Group at $17.50 per share for a total of $61.2 million. This is a substantial transaction. And it reflects our strong conviction of the value in our company. We're also improving our capital return policy. From Q2 onwards, our policy will be to return 35% of net income each quarter, up from the 30%. The Board has declared a fixed dividend of $0.07 per share for Q1. And we expect to add $6.3 million worth of buybacks to bring the total to 30% of Q1 net income. Now, to what I consider the real highlight of the quarter. Our ethylene export terminal at Morgans Point delivered record throughput at over 300,000 tons. This is up 57% from Q4 and more than 2.5x up compared to the volumes from Q1 of last year. Both European and Asian demand for U.S. ethylene is growing. European crackers are undergoing restructuring and Asian producers are switching away from naphtha-based production given the elevated oil prices. Three new offtake contracts for the Morgans Point terminal were signed in the quarter and more are expected shortly. On vessel sales, in January, we sold the Navigator Saturn and the Happy Falcon, at attractive prices and generating substantial book gains as we communicated last quarter. In April, we also sold the Navigator Pegasus, for approximately $31 million, generating a book gain of about $15 million. As I've said a couple of times before, I view these asset sales as recurring income stream. We have been able to consistently sell well above book and at or above market estimates. The proceeds fund capital return and our fleet renewal ambitions. And then, there's the Unigas news. In April, we signed a letter of intent to sell our 8 gas carriers in the Unigas pool for an aggregate price of approximately $183 million. This is a significant strategic step. And I'd be pleased to discuss any of this in more detail during the Q&A. On newbuilds, financing is in place for the first 2 of the 6 vessels that we've ordered at an attractive margin of 150 basis points, equal to the best ever. Expect more good news on our newbuilding financings to come in shortly. Looking at the Middle East, the commercial angle, only 3% of global handysize volumes load in the Persian Gulf. These exports have been disrupted, but that creates demand for substitute product, U.S. ethane-based ethylene over Middle East and naphtha-based production and longer ton miles on ammonia. We also expect to see more LPG volumes from Venezuela that will come into the regular fleet. The supply side remains in our favor. The handysize order book is only 10% of the fleet, while 22% of the fleet is more than 20 years of age. Net fleet growth is likely to be flat or even negative. And then on to the outlook for Q2. This is where it gets exciting. Both TCE and utilization are expected to be above Q1 levels. April has already set some monthly Navigator records. Ethylene export volumes are also expected to set a new record in Q2. But I'll leave it to Gary to talk a little bit more about the financial details. So over to you, Gary. Gary Chapman: Thank you very much, Mads. Hello, everyone. As we entered 2026, we saw a slightly softer start to the quarter than we would have liked, but we ended with a resilient outcome overall for the quarter. And by the time we reached the end of March, supported by the strength and diversification of our platform. This was, of course, against the backdrop of ongoing geopolitical uncertainty, including continued disruption and risk across key global shipping corridors, which influenced and continues to influence trading patterns. However, many of these influences have turned into a positive tailwind for Navigator as we entered the second quarter and Oeyvind will talk more about this later. Turning back specifically to the first quarter on Slide 6. We're reporting an average TCE of $29,684 for this first quarter of 2026 compared to $30,647 in the fourth quarter of 2025 and $30,476 in the first quarter of last year. The slight softness in TCE this quarter arises principally from quarter end revenue recognition under U.S. GAAP due to having more vessels on voyage charters at the end of this first quarter compared to the end of the fourth quarter of 2025 or at the end of the first quarter of last year. And considering loading dates, revenue from a number of these vessels being recognized in the second quarter as a result. Utilization was above our benchmark at 90.6% for the quarter and was above 95% for April 2026. EBITDA for the quarter was $80.3 million, benefiting from strong terminal performance and fleet renewal gains on vessel disposals and adjusted EBITDA was $65.9 million, lower mainly due to the factors around TCE revenue recognition mentioned just now. Vessel operating expenses were down compared to the first quarter of 2025 at $45.8 million, but very slightly below in dollar per vessel per day terms due to timing of vessel sales, and there's more guidance for 2026 on Slide 9. Depreciation was slightly down compared to previous quarters, due to our now slightly reduced fleet size, and due to our remaining older vessel, Navigator Pluto, that reached the end of her 25-year accounting life during the fourth quarter last year and hence, is no longer depreciated. General and admin costs are higher in this quarter, primarily due to one-off project-related activities and associated legal and professional fees, which are not expected to recur at the same level. Randy will discuss more about our ethylene terminal. But as Mads mentioned, throughput volumes for the first quarter were a record high of 300,537 tons, up compared to 191,707 tons in the fourth quarter of 2025 and up from 85,553 tons in the first quarter of 2025, resulting in a profit to Navigator from our Morgan's Point terminal in this first quarter of $2.6 million. Our income tax line reflects movements in current tax and mainly deferred tax in relation to our equity investment in the ethylene export terminal. Net income attributable to stockholders for the first quarter of 2025 was $35.5 million or $0.55 per share, as Mads mentioned, and is the highest Navigator has ever reported. And in the quarter, we completed the sale of 2 vessels recording a gain of $12.1 million and completed the $61.2 million share buyback as part of the secondary offering from BW Group. The EPS figure also represents a significant increase versus both the prior quarter and the same quarter in the prior year. We continue to actively use, strengthen and build our already strong balance sheet, as shown on Slide 7. Our cash, cash equivalents and restricted cash balance was $199.6 million at March 31, 2026, and including our available but then undrawn revolving credit facilities of $91 million gave total liquidity of $291 million at the same date. Taking out restricted cash leaves a total available liquidity of $241 million. This strong liquidity position is despite paying out $29 million for scheduled loan repayments, $5 million under our capital return policy in respect of the fourth quarter of 2025 and over $61 million for the 3.5 million shares repurchased and then canceled as part of the secondary offering from BW Group. Our ethylene export terminal is currently unencumbered. And we also owned 9 unencumbered vessels at March 31, which gives us significant additional available leverage to tap when and as needed. Alongside this, we have paid from our own cash a total of $110 million as at March 31, 2026, towards the 6 vessels we have under construction. The difference of this figure to our balance sheet figure represents capitalized interest under U.S. GAAP. A significant part of these construction payments will be recouped as we fix financings for our newbuild vessels. And together with a still growing operational cash flow, this all helps to demonstrate our financial stability and strength. And to bring you up to date, we had around $310 million of available liquidity or $360 million, including restricted cash at the close of business on May 4, 2026. We continue to maintain a conservative and well-managed capital structure. And on Slide 8, across the quarter, where with a very supportive banking group and a strong underlying business, we were able to return capital to shareholders, raised funds for the construction of our newbuilds, reward our shareholders through buybacks and continue working on managing our debt and financing needs. We successfully entered into a new secured term loan, signing a 5-year post-delivery facility for up to $133.8 million, which will be used to finance up to 65% of the delivery and also predelivery installments for the construction of 2 of our new ethylene Panda newbuild vessels. As of March 31, we have partially drawn down $26.8 million of this facility to recoup some of our cash already paid out for these vessels. This transaction was executed at a very low margin of 150 basis points plus SOFR. And we would very much like to thank our banking group for supporting Navigator on this transaction. We believe the deal and the very keen pricing not only reflects the banking market today, but also the strong and stable credit position of the company. We expect financing for the remaining 2 of our 4 Panda vessels to be completed in May 2026 and financing for our 2 Coral ammonia vessels to be completed in June 2026. This would result in all 6 of our newbuild vessels being financed by the end of the second quarter this year. Then in terms of debt repayments, in addition to scheduled repayments of $29.3 million in this first quarter, we have only 2 relatively small debt balloons due before 2028, with payments due in 2026 of $54 million in total. And we expect to pay down an average of $128 million of annual scheduled pro forma debt amortization per year across 2025 through 2028. Net debt to last 12 months adjusted EBITDA stood at 2.5x at March 31, materially consistent with prior periods and remains at a level where we believe is comfortable for the business. Our loan-to-fleet value ratio was approximately 32% or below 30% when including a reasonable value for our Morgan's Point, terminal investment. Then finally, as at March 31, 2026, 56% of the company's debt was either hedged or was on a fixed interest rate basis with 44% open to interest rate variability. And this is another key metric that we keep under close review, particularly in today's economic environment. Hopefully, that you can see we continue to prioritize returning capital to shareholders, while maintaining balance sheet strength. And we'll continue to balance growth, deleveraging and shareholder returns in a disciplined and careful manner. On Slide 9, this slide highlights 2 of the core strengths of our Navigator platform, our ability to generate consistent operating cash flow and our structurally lower all-in cash breakeven. Starting with cash flow. Over the last 12 months to March 31, 2026, the business has continued to generate strong underlying operating cash flows with a pre-CapEx cash flow yield averaging around 15%. Whilst post-CapEx free cash flow has seen some variability, this is largely a function of CapEx timing and investment in our newbuild program rather than any change in the underlying earnings capacity of the business. Operating cash flow generation itself has remained quite stable. Our latest estimate for 2026 all-in cash breakeven shown below is $21,230 per vessel per day, which incorporates over $180 million of operating costs, $119 million of debt amortization and approximately $44 million of net interest expense. This level remains significantly below current and historic TCE levels, providing significant headroom for the business and should allow us to deliver positive EBITDA and cash generation even through more challenging market conditions. Our cost guidance for 2026 remains materially unchanged from that provided in the fourth quarter 2025 when adjusting for changes in fleet composition. And you can also see the expense guidance across vessel OpEx, G&A, depreciation and interest expense for both the second quarter and the full year. As noted, this guidance includes our 8 Unigas vessels. And of course, should the sale of those vessels complete, there would be a corresponding reduction in certain of those cost lines, particularly OpEx and depreciation, reflecting what would then be a smaller fleet. Slide 10 outlines our historic quarterly adjusted EBITDA, adding this first quarter's results. We now have 13 quarters in a row since the beginning of 2023 of reporting at least $60 million of quarterly adjusted EBITDA at an average of $71 million over that period. On the right-hand side, as we've highlighted previously, our earnings remain sensitive to TCE movements with approximately $17 million to $18 million of annual EBITDA uplift for every $1,000 increase in TCE rates, all other things being equal. As for previous quarters, an update on our vessel drydock schedule, projected costs and time taken can be found in the appendix, Slide 30, should that detail be of interest. So then overall, Q1 started a little more slowly than we would have liked, but accelerated well as we moved into March. And the resilience of our results and the flexibility of our fleet have again been shown with another very solid set of numbers and record net income. And with market tailwinds translating into improving second quarter conditions, we can look forward with confidence and from a position of strength. So with that, I hand you over to Oeyvind to provide some more details on Q1, but also on what we're seeing as we move forward. Oeyvind? Oeyvind Lindeman: Thank you very much, Gary, and good morning, everyone. Let me start with one of the big topics, the Strait of Hormuz on Page 12. The Strait has essentially been closed for over 2 months now. Since the 28th of February, we've seen commodity prices across the board, LNG, LPG, petrochemical gases and of course, oil moved sharply higher. And that makes sense because the Strait of Hormuz carries roughly 20% of the world's energy supply. When that gets turned down, prices goes up. Now there's still some traffic moving through, but it's a trickle. And most of what's moving are what we call shadow fleet vessels, ships that are sanctioned in one country or another. Many of them switch off their tracking equipment, so it's genuinely difficult to know exactly what is passing through. What we can say with confidence is that LPG flows have fallen from around 1 million metric tons per week down to about 1/5 of that. The vessels still moving these cargoes are largely Iranian flagged or ships that have specific permission from the Iranian government to discharge into places like India. For Navigator directly, our exposure is limited. As Mads mentioned, we do not have any vessels inside. And we do not have any vessels waiting to enter. Our last vessels actually loading LPG from Iraq passed through the Strait exactly on the 28th of February. So we got out just in time. But the indirect impact on our business has been very meaningful and very positive. With traditional supply chains disrupted, buyers around the world started looking hard at North America as an alternative to Middle East supply. And that shift in behavior has created a strong tailwind for us and I want to walk you through what that looks like. Turning to Page 13, which covers fleet utilization and our ethylene terminal. I'm pleased to say that our first quarter utilization came in about 90%. And April has continued building on this strength, reaching 95%. What happened is that when the Strait first closed, the market was a bit caught off guard. No one knew, if this was going to last a week or a month or longer. But once it became clear that this wasn't going away quickly, our customers moved decisively to lock in stable supply from North America and that drove our utilization higher as we moved into April. That same urgency showed up at our joint venture ethylene export terminal. From March onwards, the volumes have been at record levels, not just above normal capacity, but above the expanded nameplate capacity as well. That means the flex feature we built into the terminal is actively adding value today. More volume means more ship movements, which feeds directly into higher utilization and stronger rates. These things go hand-in-hand, and I'll come back to spot rates in a moment. Now, Page 14 gives you a really clear picture of the competitive position North America finds itself in right now. The chart on the left tracks the price of U.S. ethane and U.S. ethylene compared to international markets. And here is what's remarkable with every other energy commodity has been impacted by what's happening at the Strait of Hormuz. U.S. ethane, however, that price have barely moved. [ Technical Difficulty ] Mads Zacho: I think we will need to just hold off a second while Oeyvind is getting back on. And if he's not back in half a minute, then, we will take over and continue on his behalf. Randall Giveans: I'll keep going while we wait for him. So the chart on the left tracks the price of U.S. ethane, U.S. ethylene versus the international markets. And really, the more remarkable thing is while every other energy commodity was squeezed by what's happening at the Strait of Hormuz, U.S. ethane prices, as Oeyvind was saying, has really barely moved. So this is an extraordinary situation. So think about it from a producer's perspective. If you can buy ethane in the U.S. for under $200 per ton, cracking into ethylene versus dealing with oil at $100, $110 a barrel, there's really no contest. Now North America is, by a long way, the cheapest place in the world to make ethylene right now. And the gap to Asian naphtha producers is enormous. It's about $1,800 per metric ton in terms of a U.S. advantage. And the arbitrage, really the price difference between U.S. ethylene and markets in Europe and Asia, it's at an all-time high, a $900 per metric ton gap to Europe means much higher revenues for us as a shipowner and higher revenues for us as a terminal owner, which I'll get to in a minute. So you might ask, is this really a short-term bump or something more lasting? We believe it's the new normal, not just the situation in the Middle East, but the competitiveness of America, right? Yes, maybe the Strait of Hormuz reopen soon, but the U.S. cost competitiveness remains. Now on Page 15, we'll explain why. So the 3 major U.S. shale gas basins, they're all producing gas that is getting richer and richer over time, right? The crude depletion curve is much steeper than that of gas. So the gas streams are what we call wetter, right, meaning they contain more NGLs, which means more LPG and more ethane. That's really the raw material that underpins everything that Oeyvind and us have been talking about. So for the global handysize fleet, North America has really become the center of gravity. Around 45% of all of our handysize cargo is linked here to North America. Now 4x what it was back in 2017. So this is clearly a structural shift, not just a cyclical change. Turning to the supply side on Page 16. Picture really hasn't changed much since our last update. We're looking at around 10% of our order book in terms of potential fleet growth over the next 3 years. Conversely, 22% of the existing fleet is already over 20 years of age. So it's a pretty healthy setup from a supply standpoint. So what does this all mean for freight rates? Looking at the next slide, ethane and ethylene capable vessels are earning record daily numbers right now in the range of $45,000 to $750,000 that is not a typo, $1,000 per day for some spot voyage charters. Now to understand really what you're looking at, we want to explain something important. So this green line you see on chart, it's the 12-month assessment. So this is not the spot rates, right? In other words, what it would cost to hire one of our ships for a 1-year contract today. That number is assessed by third-party brokers to be around $33,000 a day. Now, that line is almost theoretical because the time charter market has really gone quiet. Customers don't want to really lock in rates at these very elevated levels at this time of uncertainty. And ship owners like us have really little incentives to tie up our vessels for a year long when the spot market is offering such strong elevated levels. So if you're trying to understand the real earnings power of the ships right now, look past the green line and focus on those spot fixtures. That's where the real premiums are. Now clearly, not all of our vessels are able to capture those spot rates. Some are committed to time charters. Some, frankly, aren't even capable of carrying ethane and ethylene on our semi-raps, on our fully raps. So Page 18 gives you a breakdown of our 2026 time charter coverage profile, again, with most of them being on time charters. Now our semi-ref vessels, they're around half and half. But the ethane and ethylene capable ships, those are the ones that are predominantly in the spot market earning those premium rates. So those are the ones capturing the upside right now. So bringing it all together, the gap between North American commodity prices and the rest of the world has widened dramatically. Buyers are chasing U.S. supply. Demand for ethane and ethylene shipping is strong. Our terminal is running at record volumes. Utilization is up. Rates are up and the underlying competitiveness of North American supply, driven by that shale gas that just keeps getting richer means it isn't going away. So April shaping up to be a record month. May is looking very strong as well. So with that, I'll turn it over to myself to find out what else is happening at Navigator Gas. So with that, we've made several announcements in recent months. We want to provide some additional details and updates on these recent developments. So starting on Slide 20. We've been saying how attractive we valued our shares are. And we've been putting our money where our mouth has been, right? In March, we repurchased and canceled 3.5 million shares of NVGS directly from BW for $61 million or $17.50 per share. Now a few things to note. This transaction was done at a discount to the prevailing market price at the time. It removed some of the overhang. It had no negative impact on our free float and has further increased our earnings per share and NAV per share. So importantly, our recent buybacks really answer 3 key questions. Do we have a strong balance sheet and ample liquidity? As Gary said, yes. Is the earnings outlook attractive? As Oeyvind said, yes. Is the share price undervalued? As Mads has been saying, yes. So for a quick recap, you can see on the bottom left chart, we had about 56 million shares outstanding for many years up until the merger with Ultragas in 2021, in which we issued 21 million shares in exchange for those 18 vessels. So since peaking at around 77 million shares outstanding in December 2022 and including the capital return here in March, we just continued to reduce this number. We've repurchased and canceled 16 million shares, totaling $236 million for an average price of around $15 per share. Additionally, we paid $41 million of cash dividends for a total of $277 million of capital return to shareholders over just the past 3.5 years. So this equates to around $4 a share, greater than 26% return during that time. Now as seen over the past few years, and you'll hear about it here in a minute. We want to reiterate that returning capital to shareholders will remain a priority for us going forward. Now looking at Slide 21, we recently celebrated the 5-year anniversary of the Navigator Gas Ultragas merger, a match made in handysize heading. So I want to show you 3 graphs that cover the past half decade. Now starting on the left, our share price has more than doubled from $11 to about $22. And thus far this year, we're up around 30%, but still trading at a 25% discount to NAV, which we do not think is warranted based on the positive outlook for our shipping business, terminal throughput, our strong balance sheet and our steadily climbing earnings. Now, focusing on the center chart, our ownership structure has had quite the transition during this time. Our shares are now 55% in free float that's publicly traded. Ultranav owns 34% and BW is down to 11%. Looking at the table on the right, this increased free float, coupled with many new shareholders coming aboard has led to much higher daily trading liquidity, right? We're currently averaging more than 7 million per day and that's year-to-date. Some days, we're doing 10 million, 15 million as you see there on the table. So that covers the past. But now let's look to Slide 22. Looking ahead. Our capital return policy, it includes a fixed quarterly cash dividend of $0.07 per share. And as part of that quarterly payout percentage of 30% of net income. So as a result, for the first quarter, we paid a $0.07 quarterly cash dividend totaling $4.3 million and repurchased over 50,000 additional common shares in the open market. And that totaled $1 million for an average price of around $19.34 per share. Looking ahead, we are announcing that we're returning 30% of net income, a total of $10.6 million to shareholders during the second quarter. The Board has declared a cash dividend of $0.07 per share payable on June 10 to all shareholders of record as of May 20, equating to a quarterly cash dividend payment of $4.3 million. And additionally, with our shares still trading below our NAV of more than $30 a share, we'll use the variable portion of the return of capital policy for share buybacks. As such, we plan to repurchase $6.3 million of our shares between now and the quarter end, so that the dividend and the share repurchases together equal 30% of net income, $10.6 million this quarter. But wait, there's more. Now starting next quarter, we'll be increasing our capital return policy to 35%, more than 1/3 of our net income. Now to fund this incremental capital return policy, the Board has also approved a new $50 million share repurchase plan authorization. So based on our current expectation of improved earnings in 2Q '26, coupled with a higher payout percentage. We expect to announce even more than $10.6 million of return to shareholders under our quarterly capital return policy next quarter. Stay tuned. Now turning to our ethylene export terminal on Slide 23. All of us touched on it earlier because it's pretty exciting news here. But ethylene throughput volumes rebounded to a record high of 300,000 tons during the first quarter. And that was including a monthly record high of 150,000 tons in March. And this was despite the domestic ethylene prices ticking up, but multiple European crackers underwing turnarounds and both European and Asian demand for U.S. ethylene also increased due to that recent surge in oil-based naphtha prices that Oeyvind was discussing earlier. Now, to even better news, as you'll see in the bottom of the chart, that strong demand for U.S.-sourced ethylene has continued into the second quarter, leading to another record high monthly throughput in April of around 151,000 tons. And we expect a third consecutive record high month in May with around 160,000 tons currently scheduled. To note, this is above the nameplate capacity of 130,000 tons per month. That's really proving the upside of the flex train that we've alluded to in recent quarters. So as such, we expect to report another record quarter of throughput on our next earnings call for the second quarter. Now, looking at the bottom right chart, despite that near-term increase in U.S. ethylene prices, the ARB remains wide open, and that's driven by the much higher international ethylene prices. So that's led to numerous new spot customers buying cargoes from the terminal. And longer term, the forward curve remains very stable at around $0.25 per pound throughout 2027. So and when it comes to contracting the expansion volumes, we recently signed 3 new offtake contracts for various quantities and durations. And the robust demand has resulted in multiple customers now in advanced discussions for take-or-pay contracts commencing in the coming months. So as such, we expect that additional offtake capacity will be contracted soon as new customers continue to request updated terms for the terminal and for shipping. So in the meantime, we'll continue to sell those volumes on a spot basis at very attractive rates. Now, finishing with our fleet and the fleet renewal on Slide 24. We're continuing to rightsize our fleet by selling our older vessels and our noncore assets. So on the same day in January, we sold both the Navigator Saturn and the Navigator Falcon. And then in April, we sold the Navigator Pegasus, a 2009-built 22,000 cubic meter semi-refrigerated gas carrier for $30.5 million. And that's netting a book gain of $15.2 million, which will be booked in our second quarter 2026 results. Furthermore, as Mads was mentioning, we announced the upcoming sale of 8 Unigas vessels for $183 million. We'll repay around $54 million of associated debt so that the net cash proceeds will be around $129 million. Now these 8 vessels will also result in a book gain of about $65 million, which we will book upon vessel deliveries throughout the second, third and maybe into the fourth quarter of this year. So looking at all 17 of our vessel sales over the last 4 years and including those Unigas vessels, the total proceeds are expected to be $342 million. And after all the associated debt repayments, total net cash proceeds of $288 million, which we'll be sure to use prudently. Now, our current fleet consists of 54 vessels with an average fleet age of 12.3 years, average fleet size of 21,000 cubic meters. Now excluding the Unigas vessels, our fleet would be a little younger on average at 12.2 years and a little larger on average of close to 23,000 cubic meters. So we continue to upgrade our vessels with some various energy savings technology. You can see that on Slide 30. And we continue to roll out new artificial intelligence AI programs to make our fleet even more efficient. So with all that, I'll now turn it back to Mads for some closing remarks. Mads Zacho: Good. Thank you, Randy. And it's great that you illustrate we have good redundancy, not only in our vessel operations and our financing structures, but also in our investor presentation. So that's great. The first quarter of 2026 was a quarter of resilient cash generation, continued structural tailwinds and once more a demonstration of our disciplined capital allocation. It was also a quarter where we delivered the strongest quarterly net income in the history of Navigator Gas. The strong net results include both tailwinds from vessel sales, but also some headwinds. Importantly, some of those headwinds that Gary just reviewed with us, they will translate into tailwind in Q2, which is a quarter that has already taken off to a good start. Our resilient earnings and strong cash generation are underpinned by the structural advantaged U.S. exports, particularly the low-cost ethane and a tightening supply fundamental. These effects will outlast the more cyclical effects that we are seeing from the war in the Persian Gulf. With record terminal throughput anticipated and improving fleet utilization and TCE and supportive macro dynamics into Q2 of 2026. We enter the remainder of the year from a position of strength and we are well positioned to sustain this momentum. A strong balance sheet and clear capital return policy continues to drive attractive shareholder returns. So with that, I'll round it off. Thank you for listening. And back to you, Randy, to open the Q&A. Randall Giveans: Thanks so much, Mads, and great to see Oeyvind. It looks like he's back. We missed his calm and strong Norwegian voice. Operator, we'll now open the lines for some Q&A. [Operator Instructions] Spiro Dounis: Spiro here from Citi. I want to start with the Middle East. Obviously, a very fluid situation, seeing some of that play out today. But you did note the disruption has been a net positive for you commercially. And so to the extent you do see a return to normal, however you defined it. It doesn't sound like you guys are expecting business to go back as usual. So curious to get your thoughts on maybe the durability of some of these tailwinds to last longer. Oeyvind, you talked about renewed interest in U.S. cargoes. So I kind of wanted to get a glimpse of maybe what you're hearing from customers? How those conversations are going? And when do you think this starts to convert maybe into longer term commercial success for you guys? Oeyvind Lindeman: I think the most important feature, what is happening now is what we mentioned at the boardrooms around the world when they're looking at the supply chains. They're looking for reliability. And what the issue in the Middle East have shown is that it is not reliable. So when you're running your multibillion-dollar production system crackers and so forth, you can't rely on that anymore. So that has highlighted that issue. And that is hurting many of those customers to the U.S. talking about ethane and ethylene. So I think that is a lasting change in the supply chain strategies around the different companies or customers. In short term, in terms of freight and so forth, et cetera, I think this is going to be if the Strait opens, there's going to be a long lag on the prices and to settle and so forth, et cetera. So I think long term, it's a structural shift. Short term, I think we'll see a strong market continue for the foreseeable future until things are settled. But when that happens, it may takes time. Spiro Dounis: Understood. That's great color. Second one, maybe just going to capital redeployment here. Liquidity getting pretty healthy, looks strong at these levels following these vessel sales. And just wondering if you guys provide a little more color on how you're thinking about redeploying that capital. Maybe where the best value is, if there's any obvious holes in your portfolio? And if some of that capital can maybe find its way to infrastructure development. Mads Zacho: Yes. There's still a continuation of the strategy we have communicated in previous occasions that we still see some opportunity for consolidating the markets that we are in. That goes for both the handysize market and also the midsized market that we're looking at. The midsized market is a little bit more fragmented and there may be more opportunities. And here, we just need to find the right deals at the right price at the right time. But we clearly see that there are opportunities for consolidation here. We also see opportunities in infrastructure. And that can be both export infrastructure out of North America and it can be import infrastructure into Europe. We have a pretty active business development portfolio. The infrastructure projects will tend to take a little bit longer before they materialize. Whereas you could say the secondhand consolidation on vessels could maybe happen a little bit faster. But we still -- we are a company that want to grow over time, nothing wild, but just gradually, as you've seen in the past, quite predictable in how we look at it. And that leaves also ample cash on hand to deploy both into repayment of debt and at the same time, in particular, capital return to shareholders. So it's a little bit the same story that you heard before that we think we can do all of the things at the same time, growing gradually, but also deploying gradually more cash over time to shareholders. Christopher Robertson: This is Chris Robertson at Deutsche Bank. Just wanted to start with the terminal. I think you're currently around 23% over nameplate capacity at these levels, around 160,000 tons for April. How confident are you in maintaining throughput at that level sustainably, I guess, across the year without periods of increased maintenance due to the increased throughput? Are there any technical or physical limitations that you could continue to optimize further on here? And is there any low-hanging fruit in terms of some minimal CapEx investment to continue to improve the total capacity number? Randall Giveans: Yes. I'll start there. A few questions. I was actually up there on Monday at the terminal. So back in February, you saw that dip. We did 60,000-ish tons. And during that time, we did some maintenance, did a few little capital improvements, added an additional pump, and that really bode well for us. Obviously, in the last few months, you're seeing us operating above nameplate capacity. Now this is our partner, the operating partner, enterprise products, more than Navigator turning screws. But all that being said, we can operate above nameplate for an extended period, not at the 160,000 ton level probably for multiple months. Once we get into the summer, June, July, especially August, you're here in Houston, you know very well, when the temps are over 100 degrees Fahrenheit, it's a lot harder to chill this commodity down to negative 104 Celsius, right? So there are some technical difficulties to keep going at these levels. On the commercial standpoint, right, the flex train does ethane and ethylene. So there's a balance there. So we have a contractual agreement that we're buying 1/4 of the capacity. There's upside above and beyond that when it's not being used for ethane. So it's hard to really say, yes, every month we'll be at x level. We have the kind of the throughput that we expect and hope 130,000 tons a month. But it would be hard to get above that continuously in the short term. Now, longer term, when some of those contracts roll over to the Neches River ethane export facility that Enterprise has, there will be some opportunities for that. But for the time being, yes, I think the 130,000 tons, 140,000 tons, 150,000 tons is a great level, probably not going to stay at those levels perpetually. But we're hoping for some strong throughput here in the second quarter and beyond. Christopher Robertson: Got it. Fair. This is a follow-up question. Just as it relates to the ethylene pricing we're seeing in both Europe and Asia have moved up. Obviously, Europe is still at an advantage here, but less so, let's say, from a ton-mile perspective as Asia is a further distance away. So as it relates to ethylene, are you guys still doing 100% of the cargoes to Europe? Is there any Asian buyers on that? Or is that more on the ethane side? Randall Giveans: Oeyvind, welcome. Oeyvind Lindeman: The ARB to Europe is the widest. So logically, most of the volumes will go there, because that's the -- those are the guys who pays the most for the product, which means that there's scope -- more scope for the terminal, which we're part owner and for the freight side to extract more additional value. So most of the ethylene is currently heading to Europe for those reasons. Some are starting to go to Asia as well. We believe that the Asian producers, the naphtha producers and so forth had quite large storage available in oil. Now those are dwindling and therefore, appetite for ethylene to Asia is coming on the scene. Ethane, however, have been flowing to both locations simultaneously. Climent Molins: Climent Molins from Value Investor's Edge. My first one, I think, is going to be for Gary. Considering that if the sale of the Unigas vessels goes forward, it will include the pool, will any working capital be included? Would the $183 million transaction price be adjusted for that? Or is it already accounted for? Mads Zacho: You're muted, Gary. Gary Chapman: Climent, yes, good question. The price that we've quoted for the vessels, there's a small administrative pool that we own 1/3 of. And there's a small couple of millions attached to the value of that pool entity. But the vast majority of the value here is on the vessels. I can go into a lot more detail should you want me to, but that's the crux of the answer, I think. Climent Molins: Yes, makes sense. And I also had a question regarding the ethylene export terminal. You may not be able to provide exact commentary, but pro forma for the addition of the 3 contracts you mentioned year-to-date. What percentage of the 1.55 MTPA are currently fully fixed? Randall Giveans: Yes. We won't go into the exact percentages. But the vast majority, we're still in some offtake discussions with additional customers. So we'll just leave it at that. Thank you. All right. It looks like that's all the questions we have. Mads, final thoughts. Mads Zacho: No, good. Thanks a lot. Thanks a lot for listening in. As you can see, we had a quite resilient first quarter. And it seems like the Q2 is going to be a pretty exciting one. And we definitely look forward to meeting same place, same time in about a quarter and just reviewing with you the Q2 results. So thanks a lot for all the good questions from the analysts and thanks for listening in. So have a fantastic day and evening, and see you next time. Randall Giveans: Thank you.
Operator: Good morning, and welcome to the Archrock First Quarter 2026 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I would now like to turn the call over to Ms. Repine. You may begin. Megan Repine: Thank you, Carrie. Hello, everyone, and thanks for joining us on today's call. With me today are Brad Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the first quarter of 2026. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on current beliefs and expectations as well as assumptions made by and information currently available to Archrock's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that expectations will prove to be correct. Please refer to our latest SEC filings with the securities -- with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted EPS, adjusted net income, cash available for dividend, adjusted free cash flow and adjusted free cash flow after dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's first quarter results and provide an update on our business. D. Childers: Thank you, Megan, and good morning, everyone. Archrock is off to a strong start in 2026, driven by disciplined execution and continued progress on our strategy with a clear focus on delivering returns to our investors. At the same time, customer demand remains strong and our order book continues to build, supporting a constructive outlook for compression and Archrock over the long term. Let me share a few highlights from the quarter that underscore the momentum in our performance and the durability of our business model. We delivered adjusted EPS of $0.42 during the first quarter of 2026, and adjusted EBITDA of $221 million. Compared to the first quarter of 2025, we increased our adjusted EBITDA by 12%. Our fleet remains fully utilized, extending our multiyear track record of full utilization. At the same time, we continue to high-grade our fleet with the sale of nonstrategic compression units totaling approximately 40,000 horsepower, strengthening our portfolio and supporting disciplined capital allocation with year-to-date asset sale proceeds of $21 million helping to fund our newbuild program. We again delivered outstanding performance and profitability in both our contract compression and aftermarket services business segments. And we translated this performance into adjusted free cash flow of $92 million in the quarter, of which we returned $44 million to shareholders through dividends and share repurchases, which is up 29% year-over-year. Overall, we're encouraged by the strong start to 2026, which keeps us on pace to achieve our full year 2026 adjusted EBITDA guidance range of between $865 million and $915 million, which we expect will translate into meaningful free cash flow generation for the year. As we look ahead, we believe our strategy is supported by 3 key drivers: the right market, the right platform, and the right balance sheet. Let me briefly walk through each one. First, the right market. The importance of natural gas is clear today, and it has been underscored again by recent conflict in the Middle East. Natural gas remains essential to powering economic growth, delivering affordable, reliable energy and enabling energy security, driving sustained demand for the infrastructure needed to move more gas to market. Second, the right platform. We have the people, assets and technologies in place to help customers move more gas to market more efficiently and safely and to do so profitably. Customer service is a top priority for our organization, and we're continually deploying technology and data-driven tools for the benefit of our customers, our employees and our shareholders. Our scale, operating discipline and focus on reliability position us to execute consistently. Third, the right balance sheet. Our leverage profile reflects the strength and durability of our cash flows, and it provides the flexibility to invest in the organic and inorganic opportunities the current market is offering while continuing to return capital to shareholders. Taken together, these 3 drivers give us confidence in our ability to continue compounding earnings and free cash flow. And as we execute by moving more gas to market safely and efficiently, investing in the highest return segments of the growing compression industry and maintaining balance sheet strength, we believe Archrock is well positioned to deliver sustainable and superior returns on capital. Natural gas production continues to climb, and we expect U.S. volumes to reach record levels for the sixth consecutive year in 2026. For Archrock, our footprint is concentrated in the faster-growing basins, especially the Permian, where associated gas volumes are expected to grow at mid-single-digit rates. Rising gas-to-oil ratios are making the basin more compression intensive and about 4.6 Bcf a day of new takeaway capacity expected later this year should further support expanding levels of activity. We're also seeing early but encouraging signs of improving compression demand beyond the Permian across other basins. On demand, LNG remains a key driver. Roughly 2 Bcf a day of additional FID export capacity is expected to come online in 2026 and projects already sanctioned represent about 14 Bcf a day of incremental capacity through 2030. At the same time, the build-out of AI data centers is accelerating power demand, reinforcing natural gas-fired generation as a practical scalable source of incremental electricity. Bottom line, we continue to see a constructive setup for natural gas and for compression across the market. Near term, the U.S. is on track for another record year in 2026. And in the Permian, we expect mid-single-digit gas growth supported by rising gas to oil ratios and new takeaway later this year. Geopolitical risk in the Middle East, including Iran-related volatility, reinforces the strategic value of U.S. supply and supports tighter global LNG fundamentals. And longer term, the outlook is improving. The EIA's Annual Energy Outlook 2026 raised its view of U.S. gas production and demand versus last year, driven in part by LNG growth and AI data center power needs with production projected to rise from 107 Bcf a day in 2025 to approximately 133 to 151 Bcf a day by 2050. That would represent an increase in natural gas production of between 24% and 41%, reinforcing our view of a longer-term growth trajectory for both natural gas production and for compression. Moving to our segments. Contract operations delivered outstanding performance, supported by excellent execution and continued high demand for our compression fleet, particularly our large horsepower and electric motor drive units, extending our track record of strong results. Our fleet remained highly utilized during the quarter, exiting at 95% utilization, reflecting continued high demand and the high quality of our fleet and sustaining strong utilization in our contract operations business over a multiyear period. That durability is also evident in the time on location with the blended fleet averaging approximately 6 years and units of 1,500 horsepower or greater averaging approximately 8 years in largely midstream applications. At quarter end, we had 4.5 million operating horsepower. Operating horsepower declined by approximately 43,000 as newbuild deliveries during the quarter were more than offset by the sale of approximately 40,000 nonstrategic horsepower, including 21,000 active horsepower. As a reminder, we also sold approximately 123,000 horsepower, including 84,000 active horsepower at the end of 2025. Taken together, these sales reduced first quarter adjusted EBITDA by approximately $3 million on a sequential basis. Monthly revenue per horsepower moves higher on a sequential and year-over-year basis. In 2026, we continue to expect monthly revenue per horsepower to benefit from the full year carryover of the rate increases implemented in 2025 and increases in 2026. We achieved a quarterly adjusted gross margin percentage of 72%. Consistent profitability above 70% continues to be driven by strong pricing, disciplined execution and a continued focus on per horsepower cost management. Over the last several years, we've executed well on the cost inputs into our operations, offsetting some of the cost increases we experienced during the recent higher inflationary environment, including higher costs for labor and parts. We remain focused on continuing this level of execution through technology deployment and ongoing cost management. Moving to our aftermarket services segment. Performance was solid in the first quarter. As expected, Q1 is seasonally slower. Even so, we continue to deliver strong profitability levels in the business, reflecting disciplined execution and an ongoing focus on higher quality, higher-margin work. Turning to capital allocation. We remain disciplined and returns-focused, prioritizing growth investment and shareholder returns supported by a strong balance sheet. We reaffirmed our 2026 growth capital plan of $250 million to $275 million for fleet investment, reflecting strong demand and our desire to continue growing our profitable platform through high-return newbuild investments. We expect substantial free cash flow to support increasing shareholder returns. We declared a quarterly dividend of $0.22 per share, up approximately 16% year-over-year while maintaining robust coverage. We also have flexibility for additional shareholder returns, including $113 million of remaining authorization under our share repurchase program as of quarter end, which we view as a tool within our returns-based framework and may use more actively during periods of market dislocation. We exited the quarter below our long-term leverage target of between 3x to 3.5x and expect to operate below 3x in the near term, preserving flexibility for both organic and inorganic growth as well as continued shareholder returns. In summary, Archrock is delivering consistent strong results underpinned by a culture of disciplined execution and continuous improvement. Looking ahead, we see a meaningful runway for profitable growth with earnings supported by a returns-based capital allocation and durable tailwinds for natural gas infrastructure, including compression. Before I hand it over, I want to recognize Doug Aron. As we previously announced, Doug plans to retire by the end of the year. On behalf of Archrock, thank you, Doug, for more than 7 years of outstanding service and leadership during an exciting and transformative period for the company. Doug has been a key leader and a trusted adviser to me, the rest of the executive leadership team and our Board. And to be clear, he's not going anywhere just yet, Doug will stay in his role until a successor is named to ensure a smooth transition. With that, I'll turn the call over to Doug to walk through our first quarter and 2026 outlook. Douglas Aron: Thank you, Brad. Certainly appreciate the kind words. Good morning, everyone. Thanks for joining us. Let's review our first quarter results and then cover our current financial outlook for 2026. Net income for the first quarter of 2026 was $73.8 million. Excluding transaction-related and restructuring costs and adjusting for the associated tax impact, we delivered adjusted net income of $74.4 million or $0.42 per share. We reported adjusted EBITDA of $221 million for the first quarter of 2026. Underlying business performance exceeded our basis for guidance and results also benefited from a $10 million net gain from the sale of nonstrategic compression and other assets. Strength in segment fundamentals was somewhat offset by higher selling, general and administrative expense in the quarter. That performance translated into adjusted free cash flow of $92 million and adjusted free cash flow after dividend of $52 million in the quarter, driven by durable operating cash flow and further supported by proceeds from the nonstrategic asset sales, supporting our ongoing commitment to return capital to shareholders. SG&A expenses were $45 million in the first quarter of 2026 compared to $37 million in the first quarter of 2025, with the increase primarily driven by higher long-term incentive compensation for two reasons. First, a little more than half of this increase was the result of the sharply higher stock price in the quarter. Second, the balance of the increase was the result of a GAAP accounting acceleration of expense recognition for long-term incentive compensation under an executive retention agreement, which we do not expect will recur in the remaining periods of this year. Turning to our business segments. Contract operations revenue came in at $331 million in the first quarter, up 10% compared to the first quarter of 2025, driven by growth in horsepower and higher pricing. Operating horsepower of 4.53 million at the end of the quarter was up approximately 250,000 year-over-year from 4.28 million in the first quarter of 2025. Our adjusted gross margin percentage of 72% in the first quarter of 2026 reflects consistent profitability. While reported adjusted gross margin percentage was down from 78% last quarter, the figure increased slightly on a sequential basis after excluding the impact of out-of-period cash tax settlements and credits we benefited from during the fourth quarter of 2025 that were more onetime in nature. In our aftermarket services segment, we reported first quarter 2026 revenue of $43 million, reflecting lower service activity and a seasonal slowdown. Even with the expected seasonal softness, AMS delivered a great level of profitability. First quarter 2026 adjusted gross margin percentage was 23%, consistent with the high end of our guidance range for the year. We ended the quarter with total debt of $2.4 billion. In January, we issued $800 million of senior notes to fund the April 1 repurchase of 100% of our senior notes due 2028 at par, which moves our nearest bond maturity to 2032. Pro forma for this activity, available liquidity was approximately $600 million. Our leverage ratio at quarter end was 2.6x compared to 2.7 in the fourth quarter of 2025 as we continue to operate comfortably below our stated target of 3x in the near term. We recently declared a first quarter dividend of $0.22 per share or $0.88 on an annualized basis. This is consistent with the fourth quarter '25 dividend level and up approximately 16% year-over-year. Cash available for dividend for the first quarter of 2026 totaled $134 million, leading to robust quarterly dividend coverage of 3.5x. During the quarter, we repurchased approximately 171,000 shares for approximately $4.4 million at an average price of $25.87 per share. This leaves approximately $113 million in remaining capacity for additional share repurchases. Given our solid first quarter performance, we reaffirmed our full year 2026 guidance with yesterday's earnings release. We remain on track to deliver our 2026 adjusted EBITDA guidance of $865 million to $915 million. Segment performance in the first quarter was consistent with the basis of that guidance with strength in the underlying business, partially offset by higher SG&A. We do not expect the $3.7 million of long-term compensation expense acceleration to recur in future periods for the remainder of 2026. In contract operations, our outlook reflects year-over-year growth in horsepower, revenue and profitability. In AMS, we expect revenue and profitability to remain strong. Turning to capital. On a full year basis, we continue to expect total 2026 capital expenditures to be approximately $400 million to $445 million. Within that total, we reiterate growth CapEx of $250 million to $275 million to support investment in newbuild horsepower and repackage CapEx to meet continued customer demand. Growth is expected to be funded by operations with additional support from nonstrategic asset sale proceeds as we continue to high-grade our fleet, including year-to-date proceeds totaling approximately $21 million. Maintenance CapEx is forecasted to be approximately $125 million to $135 million, up versus 2025 due to increased planned overhaul activity. We also anticipate approximately $25 million to $35 million in other CapEx, primarily for new vehicles. In summary, we remain confident in the strength of our platform and in the long-term opportunity in front of us. The combination of a fully utilized fleet and the continued build-out of U.S. midstream infrastructure to support both expected growth in LNG exports and rising power demand reinforces our view that the need for reliable compression remains strong. Against that backdrop, we are focused on excellent execution, delivering for our customers, advancing the technologies we've put in place, and adhering to a disciplined returns-based approach to capital allocation to grow the business and create long-term value for our shareholders. With that, Carrie, I believe we are ready to open the line for questions. Operator: [Operator Instructions] Your first question will come from Michael Blum with Wells Fargo. Michael Blum: I wanted to start on the guidance. You made the comment that your first quarter underlying business performance is exceeding the basis for guidance, but you didn't raise guidance here. So is that just a function of the higher SG&A in Q1 or conservatism? Or is there something else? Douglas Aron: Yes. Look, I would say, and I can't remember exactly what we did last year because I know we had an acquisition middle of the year. But it is -- for us, historically, to not do anything with guidance after only a quarter is not something that is unusual. And I think that it just feels early in the year. We've given a guidance range that we feel comfortable with. And we'll continue to look at that as we move through the year. Michael Blum: Okay. Fair enough. Appreciate that. And then I wonder if you can just give us your latest view on Cat equipment lead time and how the order book is shaping up for 2027. D. Childers: Yes. Cat lead times continue to extend out. So we're seeing an extreme tightness in the supply chain. I think that now we're out to close to 160 weeks. So it's meaningfully out there. The interpretation I'd offer that is interesting, though, this tightness in the market just reflects a market that I believe is coiled for growth. We see this in the overall burgeoning demand for natural gas. We see this in the amount of pipeline capacity expected to come online in 2026, the amount of LNG incrementally that's going to come online in 2026. We see it in the tightness in the supply chain. And candidly, we're seeing it in our bookings. So this is a market that's just posed right now for that accelerated growth for the future and candidly for years. As far as 2027, we are definitely going to be placing orders and have placed orders to ensure we're positioned well to meet customer demand, but we're not yet giving guidance on CapEx for 2027. Operator: Your next question will come from Elias Jossen with JPMorgan. Elias Jossen: Congrats to Doug on your retirement and next steps ahead. Maybe to take that last point a step further. I know some of your peers have signaled reserving slots even past '27 and '28 and '29, just given the aforementioned tightness. Can you give any color just in terms of how you're thinking even multiple years ahead and what kind of discussions you're having with your customers so that they can ensure they're getting the equipment they need? D. Childers: Yes. Thanks for the question. For the customers, we are working closely with our customers to advise where the lead times are and to help them ensure that they are not caught short and without equipment to produce and compress the gas that they're going to have in the coming years. When we think about our outlook for the business, we are seriously optimistic about the growth ahead. And that does mean we are absolutely going to use our incredibly strong balance sheet that positions us well to capture market going forward to place orders and ensure that we're not caught without equipment to support our customers' needs. Thinking about years beyond 2026, we assess the market overall based on -- and we're willing to place orders based on a contract in hand, based upon a good lead and intel with our customers as well as strong market signals. And so we are going to be in the position to show up and have equipment for our customers and to move the market to capture market share in the future based upon the extreme tightness we see. Elias Jossen: Got it. And then maybe just thinking about some of the strong performance we saw this quarter, it looked like pricing jumped up a bit. And I just want to get a sense, I know that you need to balance kind of those price increases with your customers' needs. But can you just give us a signal to how you see price trending throughout the year? And maybe also confirm the cadence for deployment of horsepower this year as well, how much we're expecting and when it should come on? D. Childers: On the second part of the question first, the deployment of horsepower, it is the case that in Q1, we took -- that was the lowest quarter for us of deliveries of newbuild horsepower, and we expect future deliveries in future quarters of 2026 to continue to grow, and it's more back half weighted. So that -- you'll see that shape in the curve for new equipment deliveries. We expect that to translate to start activity for the same reason. As far as pricing goes, we are very happy to see the growth in revenue per horsepower that we delivered year-over-year on a sequential basis. It shows the strength in our business. And I'm going to point out that our profitability above 70% now on a sustained -- for a sustained period of time, we are very happy with the overall pricing in the market, the returns we're achieving and expect to grow our business to achieve growing returns to our investors going forward. As far as particular pricing commentary right now and other points of strategy for the company, let's just say that we're very invested in growing this profitable business for the benefit of our investors. Operator: Your next question will come from Jim Rollyson with Raymond James. James Rollyson: Congrats, Doug, on your pending retirement, and we'll send you off properly in Aspen this summer, I think. Brad, on the oil price side, obviously, you guys have been in this kind of perfect environment until recently where gas outlook has been fantastic and you've been growing at a pretty rapid clip, and you've had somewhat muted oil prices that have kind of helped on the lube oil and fuel cost side of the equation, and that's obviously changed. So I'm kind of curious what you all are seeing there and how quickly can you pass those through so you can sustain these low 70% margins in that business? D. Childers: We do expect to have some oil price headwinds primarily in the back half of the year as lube oil pricing for us adjusts quarterly. There's definitely a lag time between when we experience an increase in our costs and when we can pass them on to customers. And I'm not going to use the word transitory. However, what we see in the market today is that we are not willing to know or to guess where oil will ultimately resolve, and therefore, what base oil and lube oil pricing will ultimately result. But what we see for this higher stock price, higher oil price environment today is it appears to be mostly driven by external events, notably hostility in the Middle East. And so we need to see where that resolves longer term. In the meantime, we did not change our guidance, notwithstanding what we see for risk on lube oil pricing for the back half of the year. We intend to mitigate that through the best cost management we can offer in the market to continue to deliver this high level of profitability and returns to our investors. James Rollyson: Got it. Appreciate that. And then just on the asset sales side, you guys have been basically great portfolio managers for a while now where you keep high-grading assets and redeploying the capital. Just curious if you have any color or view, and maybe you don't yet. But just on how we should think about incremental kind of older asset sales that you're looking to monetize just as we think about how that impacts the numbers and there's obviously a lag between getting the capital and redeploying it. So just wondering how do you think about that going forward? D. Childers: The fleet repositioning that we've been engaged in for the last number of years now has been remarkably consistent. And just when I think that we actually have de-aged the fleet and we don't -- we no longer have a lot of assets in that category for disposal, yet the calendar turns another year passes, and we find that there's still an opportunity for some assets that we believe will not be as competitive for the future. And so this program on our asset management that we've implemented has some real benefits, and it's really important. And first and foremost, in keeping our fleet as competitive as we can keep it and in providing the best service to our customers that we can deliver. Second, when we look at the total ownership over the life of a unit, it allows us to really think about how to optimize the total cash flow coming out of the unit for its life, and to sell units while they still have meaningful market value, which is why we've been able to generate nice gain on sale on a fairly consistent basis to our asset management program over that period of time. And then we take those proceeds and redeploy it into our newbuild program, which is a very efficient overall capital management program. And so -- and the third benefit is that even though I know this is a gain on sale income, in some ways, it accelerates some of that EBITDA into the period. So it's a really effective program when you think about those 3 primary benefits. So we're going to continue to engage in a very disciplined asset management approach. I do think that looking to our past levels is fairly indicative of what could happen in the future. It's very difficult to forecast this, but we're going to continue. And that said, it's going to be consistent with past levels. But I do think it's going to ramp down a bit potentially lower going forward only because of the amazing growth environment that we find ourselves in as an industry in compression and for natural gas production, and because of the high quality and the repositioning we've already accomplished on the fleet. Operator: Your next question will come from Nate Pendleton with Texas Capital. Nathaniel Pendleton: Brad, in your prepared remarks, you called out improving compression demand outside of the Permian. Can you talk about where you see those opportunities geographically? And maybe if there's any difference in the unit sizes needed for those opportunities? D. Childers: Yes. Great question. What we saw in the quarter was and really beneficially only about 35% of our bookings were in the Permian in the quarter. And so more were outside. And they're spread fairly evenly between the Northeast, the Mid-Continent, the South, and that would be East Texas, Haynesville and the Rockies. And so it's been a nice spread, but it's also been good to see units moving into other markets and other basins accomplishing some growth, especially on natural gas. And the unit sizes are more diverse in the plays outside the Permian, especially in the electric motor drives that we're deploying, where we see a spread of horsepower more all the way from 400 to 800 and potentially -- and moving up to 1,500. So we do see more diversity, but it's primarily within the electric motor drives that we're seeing the smaller horsepower go out into the marketplace. Nathaniel Pendleton: Got it. I appreciate that. And then as my follow-up, with the longer time lines for large horsepower units that's been very topical so far. Can you talk about if those -- if that delay changes your procurement strategy with packagers? Do you have to put down a deposit for the full unit so far in advance? And maybe can you help us understand the cash flow implications of such a long lead time for just the engines? D. Childers: Well without going into too much on our procurement strategy and the work we do with our packagers, I will say we're very aligned with our packagers in fulfillment and making sure we can manage the need. It does not require a change in the overall kind of structure of the cash flows where we still expect to have very effective deployment of capital so that the unit revenue is recognized within 2 months to 3 months max of when the bulk of the capital goes out the door for a unit. Operator: Your next question will come from Doug Irwin with Citi. Douglas Irwin: Brad, you made a comment in your prepared remarks about maintaining flexibility for both organic and inorganic growth. Just curious if inorganic growth becomes even more attractive here just given where lead times are as well as the fact that you have a much stronger equity currency compared to the last few acquisitions you did? D. Childers: We are extremely well positioned, both from a balance sheet perspective, given our low leverage ratio now and our equity position with our stock price, we're definitely really well positioned to finance any growth going forward, including inorganic growth. But I would say that it's not going to -- it doesn't make the targets look more attractive. And we're still going to be very disciplined in how we evaluate the opportunity set going forward. We want to make sure that if we see an opportunity that we know why we can use -- why we can add value to that opportunity or why that opportunity adds value to us. So the discipline is going to remain outstanding, the really strong financial position we're in. But we do see that there are a number of opportunities in the marketplace that could develop over the coming years. And we're optimistic that just like our track record of having grown through acquisition with TOPS, with NGCSI, that there will be opportunities for us to deploy capital into the market through both means. Douglas Irwin: Got it. And then maybe just a higher level one as a follow-up here. It sounds like you're working pretty closely with your own customers to make sure they have enough supply over the next year or so, but it's obviously a pretty dynamic market. So just curious to get your view on the balance of the broader market here going forward. I guess, is there a potential scenario where we could see compression become kind of a real near-term bottleneck if we see producers look to start accelerating activity into the back half of the year? Just curious kind of how much slack you see there being in the broader compressor market here. D. Childers: I don't know that I have enough visibility into the market to be able to answer the question accurately. But I would step back and pose the following that for the United States to deliver all of the LNG we're targeting to export and all the power we expect to fuel through natural gas. I'm going to stick to that. It's in our lane. But we got -- we have a lot of power capacity, power plants, power generation to build. We have a lot of lines to lay. We have a lot of pipelines to lay. We have a lot of gas plants to go in, and we have a lot of compression to go into the market. It is not all going to happen without some bottlenecks and delays along that entire supply chain. At Archrock, we're very invested in not being one of them. Douglas Aron: Yes. And look, I think I'd just add, like with our utilization as high as it is the industry and tight utilization, as Brad pointed out, there are a lot of macro factors. We saw a large E&P make a pretty aggressive announcement earlier in the week about their ability to grow even this year. And I think we're going to do everything we can to continue to make sure we have equipment for our customers and support this growth for compression. Operator: Your final question will come from Steve Ferazani with Sidoti. Steve Ferazani: Brad and Doug, when I think about your fleet, which you've obviously spent several years high grading, it's higher -- it's larger horsepower units. It's a younger fleet. How do you think about changes in annual maintenance and other CapEx, particularly in a quarter where it looks like a lot of your guidance for the full year other CapEx was taken in Q1. D. Childers: A few things you're seeing in our CapEx. Number one, our CapEx is typically dictated by what the units tell us they need from a time on location, time and operation and hours perspective. We are seeing an incremental uptick in our maintenance CapEx right now because of the time at which we added the horsepower in prior years, we just have more large horsepower due for major maintenance this year than we have in the most recent couple of years. So that's -- what you're going to see in major maintenance in particular, is just going to be exactly that the timing required for the units based upon hours of operation in the field, and that's what we're experiencing. And even though we've de-aged the fleet nicely, we've standardized the mix of fleet really well, and we've increased the average size of horsepower and added in electric motor drives. The other aspect that you're seeing is that we grew through acquisition. And so some of what we're seeing for the year includes the NGCSI units coming into our fleet. And finally, we did go through a period of inflation that was pretty steep -- and so just the maintenance investment required for the same work has increased over time. So that's what you're seeing in our maintenance activity overall. That said, we're very dedicated to ensuring we spend the maintenance capital required by the units to deliver superior customer service over time. Steve Ferazani: And when we think about your other CapEx guidance for the year, it looks like you spent about half of it in Q1. Was there anything particular? Any reason to think that number could end up higher? D. Childers: Likely just timing. The other CapEx is primarily trucks and computers. And so that would just mostly be the timing of delivery of our truck fleet to support the growth that we're seeing in the marketplace and making sure we have the right transportation for our mechanics. Steve Ferazani: Got it. That's helpful. And then just -- I mean, you almost doubled your available liquidity sequentially with the asset sales. When you think about returning capital to shareholders, does that mean you can get more aggressive? Or do you have to carefully think about the multiyear likely expansion of your fleet given the expected demand growth? D. Childers: Fortunately, we're in the position to be able to pay attention to both these key drivers of value creation for our investors. First and foremost, given the market we're in, as you just highlighted, growth, poised for growth and maintaining some dry powder for growth is absolutely strategically something we want to make sure we have done. But we do expect to continue to grow our cash returns to our investors over time as we grow our business. We certainly have the financial strength to do that comfortably. Operator: There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks. D. Childers: Thank you for joining us today. We're pleased with our strong start to 2026 and remain focused on execution, profitable growth and returning capital to shareholders. We appreciate your support and look forward to updating you on our progress next quarter. Thank you. Operator: Thank you for your participation. This does conclude today's conference. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holley's First Quarter 2026 Earnings Results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Holley. And as a reminder, this call is being recorded and will be made available for future playback. I would now like to introduce your host for today's call, Anthony Rozmus, with Investor Relations. Please go ahead. Anthony Rozmus: Good morning, and welcome to Holley's First Quarter 2026 Earnings Conference Call. On the call with me today are President and Chief Executive Officer, Matthew Stevenson; and Chief Financial Officer, Jesse Weaver. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. Our discussion today includes forward-looking statements that are based on our best view of the world and our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, we will review our financial results for the first quarter of 2026. At the conclusion of the prepared remarks, we will open the call up for questions. With that, I'll turn the call over to our CEO, Matthew Stevenson. Matthew Stevenson: Thank you, Anthony, and good morning to everyone joining us today. Before we get into the first quarter details, I wanted to provide some context for the quarter. As discussed on our last earnings call, Q1 began with a couple of temporary headwinds. Distributor inventories were elevated coming into the year as partners work towards their year-end rebate targets and stocked up in advance of our January 1 price increase. We expected this inventory to normalize through January and February, but more severe winter weather slowed retail activity and delayed that process, shifting some demand out of the quarter. That said, here's the key takeaway for Q1. Beginning in week 8, as weather conditions improve and channel dynamics normalize, we saw steady improvement in purchasing patterns. We exited the quarter with momentum and early Q2 trends are encouraging with healthier inventory levels across the channel and improving order activity. The spring selling season is building. More importantly, the underlying business performed solidly. Adjusted EBITDA remained essentially flat year-over-year at $27.3 million despite the revenue decrease, reflecting disciplined execution. Net income increased, margins expanded, and free cash flow improved. We are also making progress on key strategic initiatives, including advancing our new portfolio rebalancing efforts and closing the acquisition of HRX. While we're investing in innovation, deepening our connection with enthusiasts and competing to gain share, we're also prioritizing cost control and portfolio optimization. We believe that this combination positions us well for the balance of the year. Let's please turn to Slide 5. Net sales were $147.3 million, down 3.7% versus the prior year, reflecting the elevated partner inventory levels and weather impacts we just discussed. Adjusted EBITDA was $27.3 million, in line with the prior year period. Holding EBITDA flat on lower revenue reflects the progress we've made in our continuous improvement efforts, as adjusted EBITDA expanded 71 basis points year-over-year to 18.5%. Free cash flow was negative $6.3 million, an improvement of approximately $4.5 million year-over-year, still negative for the quarter, but trending in the right direction, and we expect meaningful improvement through the remainder of the year. We delivered $6.5 million in cost savings in Q1 through purchasing discipline, tariff mitigation and operational improvements. Three of the 4 divisions grew, and 12 brands performed positively across B2B and D2C. That reflects the breadth of the portfolio working as intended. Strategically, we closed HRX, and we are advancing our portfolio rebalancing initiative, which we expect to generate more than $15 million of proceeds to reinvest in higher growth areas of the business. Slide 6 provides additional insight into recent highlights across the business. Since our last earnings call, we've introduced several new products, including our engine swap solution packages and the Holley performance car care line, both of which have been well received by our enthusiast customer base. On the operational front, we continue to make solid progress. We maintained approximately a 92% in-stock rate on our top 2,500 SKUs and delivered $3.8 million in purchasing and tariff savings and $2.7 million in operational improvements during the quarter. We also reengaged our M&A efforts with the closing of HRX, -- in further slides, I'll provide more detail on its strategic importance and the broader approach we're taking to rebalance our portfolio. Slide 7 breaks out the Q1 divisional performance, and I think the story here is clear once you understand the context. American Performance declined 9.7% in the quarter. This segment saw the most impact from weather and some temporary inventory dynamics at a small number of key partners. As conditions improved over the course of the quarter, demand trends strengthened, and we expect the business to return to growth. Truck and Off-Road was up 3.8%, a solid result given the market dynamics. The truck category continues to have real momentum and the product introductions we've been building out over the past year are gaining commercial traction. Euro and Import was up 1%. This business would have been stronger, but some product availability constraints earlier in the quarter, which have since been addressed, limited performance. Safety and Racing grew 10.2%, driven by the Snell 2025 helmet certification cycle, strong demand for our Stelo brand and continued strength in motorcycle safety. There is a solid foundation here as we move through the year. Three of our 4 divisions delivered growth, with the fourth impacted by a defined set of weather and inventory-related factors that are normalizing and are actively improving. Our divisional operating model anchored in clear prioritization, accountability and resource alignment continues to support consistent progress across the company. Slide 8, which we have shared in the past, outlines our long-term strategic framework, which continues to guide how we operate and allocate resources. It's built around 8 pillars, starting with making Holley great place to work, then premier consumer journey, Trailblazing and trusted partner, product innovation and portfolio management, global expansion in new markets, transformational M&A, funding the growth, our operational improvements, all culminating with delivering results. The value of a framework like this is how it keeps the organization aligned and focused, particularly in a more dynamic environment. Through the first quarter, our teams remain disciplined, stay focused on execution and continue to deliver against our priorities. You'll see that reflected in our initiative progress. Slide 9 outlines some of the highlights for each of these initiatives within the strategic framework for 2026, which we introduced on our last call. There was solid underlying progress across these initiatives in the first quarter. This includes innovative new products such as our package engine swap solutions and the new car care line, along with continued momentum in national retail accounts and international markets. On the operations side, the team is tracking ahead of our 2026 targets, delivering meaningful material cost savings, mitigating tariff exposure and driving improved efficiency and productivity across our manufacturing facilities. Overall, these efforts position us well to continue execution against our plan and delivering on our objectives for 2026. With that, let's turn to the detailed initiative tracker on Slide 10. The strategic initiative tracker provides a clear view of our Q1 performance, highlighting both areas of progress and those impacted by temporary external factors. Trailblazing trusted partner was down $7.9 million versus the prior year, reflecting elevated inventory levels at a handful of larger accounts and slower seasonal sell-through due to weather. Encouragingly, roughly half of the B2B portfolio delivered positive momentum, and our national retailer channel grew approximately 10%, supported by improved SKU penetration, enhanced product data, expanded e-commerce presence and enhanced in-store placement. Now, as inventory levels are normalizing and seasonal demand builds, we are seeing growth in the B2B channel. Premier consumer journey was essentially flat to the prior year. Direct-to-consumer performance was impacted by weather early in the quarter, but improved as conditions normalized, returned to year-over-year growth in March. Third-party marketplaces led by Amazon delivered growth of approximately 3%. The improvement in March is a positive indicator as we move into the next quarter. Product innovation contributed approximately $3.6 million, driven by solid performance in safety with new motorcycle helmets and the Snell 2025 motorsports offerings as well as in modern Truck and Off-road with new tuning solutions. Global expansion in new markets contributed approximately $2 million, including $1.4 million from international distributor growth with continued expansion planned in Q2 and approximately $0.6 million from the globalization of powersports and safety categories, led by the Simpson brand and motorcycle helmets. Fund the Growth delivered approximately $6.5 million in savings, including $3.8 million from purchasing initiatives and tariff mitigations and $2.7 million from operational improvements. Our focus on managing input costs and tariffs continues to contribute positively to results. Overall, the tracker highlights our disciplined execution and strategic progress, effectively navigating near-term external pressures while delivering strong performance across new product innovations, expansion into new markets and cost reduction initiatives, all progressing as expected. Now Slide 11 outlines our new portfolio rebalancing initiative, which we view as an important driver of long-term value creation. The first step is to exit brands that are not meeting our growth, profitability or strategic criteria. These businesses tend to consume a disproportionate amount of time and capital relative to their returns. Second, these actions along with facility consolidations help simplify the portfolio, reduce complexity and improve free cash flow and cost structure. Third, we redeploy that capital into disciplined bolt-on acquisitions. Our focus is on businesses with attractive growth profile, strong margins and positive cash flow characteristics. The recent HRX acquisition is a good example of this approach in action. Finally, over time, we anticipate these higher growth additions will contribute to improved earnings and cash generation, supporting further reinvestment and balance sheet strength. We are targeting 5 to 10 bolt-on acquisitions over the next 24 months. While this is a focused goal, we believe we have the pipeline and processes in place to execute effectively. Overall, portfolio rebalancing is a key component of how we are positioning the business for sustained long-term growth. Slide 12 outlines our site and brand optimization program, which represents the operational component of our broader portfolio rebalancing efforts. As part of this initiative, we are in the process of exiting 5 brands and consolidating 5 facilities, and we are approximately halfway through this work. This includes reducing our warehouse footprint by approximately 100,000 square feet and streamlining our workforce by about 9%. We are also rationalizing roughly 11,000 SKUs, about 25% of our portfolio by count, reflecting a focus on reducing complexity while maintaining core capabilities. From a financial standpoint, we expect our portfolio rebalancing efforts to generate more than $15 million of one-time net cash, along with adjusted EBITDA margin expansion of approximately 75 to 150 basis points, including at least $1 million in annualized benefits. We also expect a modest improvement in leverage of around 0.15x and approximately a 5% improvement in inventory turns. Overall, we are creating a more streamlined and focused operating model, enhancing efficiency, strengthening margins and improving cash generation while positioning the business around its strongest opportunities for growth. Slide 13 outlines our M&A acquisition profile, reflecting a disciplined and thoughtful approach to bolt-on acquisitions as well as how these efforts connect to our broader portfolio optimization work. As we streamline the business through our site and brand optimization initiatives, reducing complexity and generating incremental cash, we are focused on redeploying that capital into higher growth opportunities that we can scale over time. Within M&A, we are primarily targeting founder-led businesses. These companies often bring strong brand equity, deep customer relationships and a proven operating capability. Our role is to support and accelerate that foundation through our distribution network, commercial infrastructure and broader customer reach. We structure transactions with alignment in mind, including shared business plans and incentives that encourage continued growth post close. Our financial criteria is consistent and disciplined. Typically, $5 million to $10 million in revenue at acquisition, established double-digit revenue growth and the ability to achieve EBITDA margins of 20% or greater post synergies with positive free cash flow. These are not turnaround situations, but rather businesses with solid fundamentals where we believe that we can help unlock additional value. Strategic fit is equally important. We prioritize businesses that align well with our existing portfolio, where we can leverage shared customers, channels and capabilities to drive incremental growth. Overall, we believe that this approach allows us to take the benefits of our optimization efforts and reinvest them in scalable, higher-growth brands. Slide 14 provides additional detail on the HRX acquisition, which is a strong example of the M&A framework I just outlined in action. HRX is based in Turin, Italy and specializes in premium racing apparel and safety equipment, including suits, gloves, shoes and teamwear. Product line is FIA homologated and the business has developed a proprietary digital platform that enables scalable customization, an important differentiator in a category where fit, performance and certification are critical to the customer. The company is founder-led with established double-digit revenue growth, strong EBITDA margin characteristics and positive free cash flow. It also has a growing international presence, particularly in Europe, with additional opportunities as we leverage Holley's broader distribution and commercial capabilities. From a strategic standpoint, HRX is a strong fit within our Safety division. It enhances our position in motorsport safety, adds premium manufacturing capabilities and expands our presence in the European market, an area we see meaningful opportunity for growth. More broadly, HRX reflects the type of disciplined strategic aligned acquisition we are targeting. It demonstrates how we can deploy capital generated through our optimization efforts into higher growth opportunities, and we expect to continue pursuing similar transactions over time. So stepping back, while Q1 was impacted by temporary external factors, primarily weather and channel inventory, the underlying business performed well. We expanded margins, improved cash flow and made meaningful progress on our strategic priorities. And as conditions normalized, demand improved, and we exited the quarter with momentum that's carrying into Q2. With that, I'll turn it over to Jesse to walk through the full financials and provide additional perspective on the 2026 outlook. Jesse? Jesse Weaver: Thank you, Matt. Picking up on Matt's comments, the weather and channel inventory dynamics played out as he previously described. And even with those factors, we delivered strong financial performance in the quarter. This result reflects our consistent commitment as an organization to our financial priorities. Let's take a look at these on Slide 16. Our financial priorities for '26 remain consistent: restore historical profitability, improve working capital discipline and continue to deleverage. On profitability, we continue to see tangible progress from disciplined operational execution. In the first quarter, continuous improvement initiatives delivered $2.7 million of benefit, supporting continued year-over-year adjusted EBITDA margin expansion for the quarter. These efforts are centered on optimized staffing, manufacturing and distribution efficiencies and targeted facility and network cost actions. For full year '26, we continue to expect $5 million to $7 million of additional operational improvements, reinforcing structural margin expansion. Turning to working capital. Inventory was up modestly in Q1, primarily reflecting Q1 sales performance. The actions we put in place starting in January around improved forecasting, right-sized safety stock and a more just-in-time approach on high velocity SKUs are starting to pay off in Q2, and we continue to target $10 million to $15 million in inventory reduction for the year. On the balance sheet, deleveraging remains a core focus. We ended the first quarter at 3.84x net leverage, down 0.48x from a year ago. Based on current trends, we expect steady progress toward our year-end target of below 3.5x. Our actions across operations, working capital and the balance sheet are strengthening the fundamentals of the business. We believe this positions us well to drive sustained profitability, generate free cash flow and further enhance balance sheet flexibility over the course of 2026. On Slide 17, we'll walk through our key financial metrics for the first quarter. Net sales for the first quarter were $147.3 million versus $153 million in the same period a year ago. Gross profit was $60.7 million in the quarter compared to $64.1 million in the same period last year. Gross margin for the quarter was 41.2%, a decrease of 65 basis points versus 41.9% in the prior year. Margin compression was driven by fixed cost deleverage, partially offset by operational efficiency gains. SG&A, including R&D for the first quarter was $39.4 million versus $40.8 million in the same period last year. The decrease reflects improved efficiency in legal and marketing spend as well as reduced outbound freight from lower sales volumes. Net income for the first quarter was $7.3 million, a $4.4 million improvement compared to $2.8 million in the first quarter of '25. Adjusted net income in the first quarter was $5.7 million versus $2.6 million in the same period last year. Adjusted EBITDA for the first quarter was $27.3 million, in line with the prior year. Adjusted EBITDA margin was 18.5%, a 71 basis point improvement versus 17.8% in the first quarter of '25. On Slide 18, we improved our free cash flow in the first quarter year-over-year by $4.5 million. Similar to last year, first quarter free cash flow is expected to be the low point in the year. And with the elevated inventory levels in the quarter anticipated to come back in line in the second quarter, we expect Q2 free cash flow to meaningfully improve quarter-over-quarter, furthering our progress on leverage, which I'll walk you through on Slide 19. Covenant net leverage ended the first quarter at 3.84x, down from 4.32x a year ago. We exited 2025 below the 4 turn target we set during the year, and we expect to be below 3.5 turns at the end of '26. This progress reflects a sustained commitment to margin improvement, working capital discipline and disciplined capital allocation rather than reliance on any onetime actions. I note that leverage moved up modestly from year-end, reflecting the seasonal working capital build in the HRX acquisition. We expect the trajectory to resume downward through the balance of the year as the team's initiatives on working capital are expected to begin generating incremental free cash flow. We ended the quarter with $33.1 million of cash on hand and $10 million drawn on the revolving credit facility. The revolver draw was taken proactively to fund the final [indiscernible] payment and the HRX acquisition. We retain substantial availability under the facility and ample liquidity to run the business, and we plan to fully repay the revolver in the coming weeks with cash on hand. Overall, we have come a long way in strengthening the balance sheet with continued progress expected during the remainder of the year. We remain committed to a conservative financial position using free cash flow to continue deleveraging while preserving flexibility to support disciplined bolt-on acquisitions. Turning to our '26 outlook. Our core business revenue range is unchanged. We are updating full year net sales guidance to $610 million to $640 million which reflects the net $15 million revenue reduction tied to the portfolio optimization actions that previously discussed. Importantly, our '26 adjusted EBITDA guidance is unchanged at $127 million to $137 million. The portfolio optimization is expected to be slightly accretive to adjusted EBITDA on a net basis while generating more than $15 million of incremental cash and reducing operational complexity through the SKU rationalization Matt outlined. Capital expenditures, depreciation and amortization and interest expense ranges are also unchanged. Q2 is starting out on a positive note with mid-single-digit growth in April, supported by winter being behind us and normalizing inventory at our distribution partners. We view that as a constructive signal for the balance of the quarter. And with that, we will open the line up for questions. Operator: [Operator Instructions] We take the first question from the line of Brian McNamara from Canaccord Genuity. Brian McNamara: Apologies if I missed this in the prepared remarks, but what was the gap in Q1 sell-in versus out-the-door sales? And what was the actual Q1 core sales growth? Jesse Weaver: So Brian, we didn't talk about the core because in this particular quarter, all the sales were core. We weren't rolling over anything in Q1. So what you're seeing reported in the down 3.7% is all core. I would say versus out-the-door sales, out-the-door sales were very strong within the quarter for our distribution partners. And we're probably in the plus 4% range. And I think that kind of gets to some of the remarks Matt and I had on the call, which is between the combination of weather, which we're estimating probably accounts for 3% and then the inventory kind of coming into the quarter a little stronger or heavier than we would have liked, that gets you to another 4% that kind of bridges the gap there. Brian McNamara: Great. That's helpful. And then on the portfolio optimization, I'm sure you guys consistently review the portfolio. But I guess what drove this decision in terms of the next set of brand and SKU exits? And what brands are you culling if you care to reveal them? Matthew Stevenson: Yes, Brian, thanks. This is Matt. Yes, we constantly look at the portfolio just to see where business has taken a disproportionate amount of resources compared to the contribution they offer. And there were some things on the bubble and just the changing environment relative to freight rates, tariffs, we monitor that closely. And these businesses do not fall in the bucket of performance or offer that true competitive differentiation and scalability that we look for in the market. So we've been looking at these. There was nothing previously that really stood out. But I'd say over the last 6 months, these businesses came more into focus as well as the growth opportunities on the other end to reinvest those proceeds into these higher-growth businesses. Brian McNamara: And then just finally on M&A. Your renewed commitment there is pretty noteworthy. I think HR was your first deal in like 3.5 years. I'm assuming that doesn't happen unless you have confidence in your base business? And is the sales contribution from HRX this year material and then I'm done there. Matthew Stevenson: Yes. On HRX, we're really excited. It's a great business and fills an opportunity in our portfolio. For competitive dynamics, we're not giving specifics into the size of that business. But generally speaking, Brian, in the prepared remarks that those types of businesses that are in that range, the $5 million to $10 million of top line revenue, double-digit EBITDA, high growth rates, et cetera, that it squarely fits in that bucket. Operator: We take the next question from the line of Christian Carlino from JPMorgan Chase & Company. Christian Carlino: You had talked about the difficult channel inventory position and the storms pressuring some of the orders from the distribution partners when you reported in early March. So I guess, could you talk through more, I guess, what drove the miss versus your expectations? Did you expect a more healthy ramp of orders into March that didn't materialize maybe due to the headline shock of gas prices and consumer sentiment? Just any further color on that. Matthew Stevenson: Yes. Thanks for the question, Christian. Yes, as Jesse mentioned on Brian's question there, I think it was the Q&A in the last call, we talked about, hey, we think about 2% to 3% of the growth in Q4 normally would have fell into Q1 due to more working days and some of our distribution partners leaning in to hit their rebate targets. That ended up being from what we surmised here, probably north of 4%. And although, as Jesse just commented, the out-the-doors were healthy, those weeks really impacted the sellout rates in late January and early February at some of our key partners based on the weather. You got to remember, there's a bit of a seasonality effect in our business. People start working on their cars a lot more earlier in the South that really had unprecedented weather conditions. And we saw that by state in our D2C business as well and of course, impacted our D2C business in those weeks. Christian Carlino: Got it. That's really helpful. And I know it's small, but one of the businesses you sold was Arizona Desert Shocks, -- and I think that's been a priority growth vertical in the past couple of years. So is it that maybe the vertical simply isn't growing what it was in the post-COVID days? Or is it still a priority, but there was something specific about that business that didn't make sense? And I guess more broadly, it seems like with the bolt-ons that you're planning, it's more about maybe filling in gaps in the portfolio versus expanding the TAM and growing into new verticals. So I guess could you just talk a bit more about the broader M&A philosophy and sort of what multiples are you looking to pay for these bolt-ons? Matthew Stevenson: Yes. So on Arizona Desert Shocks, I mean, great brand, great team. But effectively, what we found is the scalability of that business where they concentrated on really high-end racing shocks was just something that was not scalable. And so when we looked at that business and the great team down there, it just made sense to return that business back to its former owner. But that is a segment that the core more of OE replacement plus that you see in Fox and King and Bilstein and other things, it is a nice growing segment. We were just at the very upper end of that and we're just missing the meat of what that market truly is. Now when you take a look at HRX, I mean, you saw it in the numbers here, and you saw it in the fourth quarter of '25, our safety business is growing really nicely. And when you look at our portfolio, one of the things that was really an extension of it here was getting into more European kind of fit design racing suits that really are the preferred cut and look of racers around the world. We have, of course, racing suits with Simpson, and those are more of the Americana, NHRA, NASCAR-type suits and HRX filled an opportunity for us for FIA suits in that aesthetic around the world. So we're very excited about the business. It's growing really nicely. We've got a great team over there. We're happy to have part of the family. Operator: We take the next question from the line of Phillip Blee from William Blair. Olivia May Witte: This is Olivia Witte on for Phillip. First, I wanted to ask, could you talk about your exposure to rising transportation costs as well as changes in tariff policy? Do you have any concerns there? And are you embedding any price increases into your guide to help offset? Matthew Stevenson: Olivia, thanks for the question here. Yes, just based on what's going on in the kind of the macro environment, we're seeing some increases relative to freight and some other PPV coming through on resins and other components driven by some of the increases in oil prices. So we'll be looking to take a moderate price increase. We're still finalizing the exact number, somewhere around the mid-June time frame and give our distributors ample notice in advance. When we look at the tariff landscape, of course, there's been a lot of puts and takes over time on there. So some of the IPAs were reduced, of course, but that really was the minority of our tariff costs on an annual basis. Those got reduced. Other tariffs came in, ended up being somewhat of a wash overall when you looked at our overall tariff exposure on an annual run rate. Olivia May Witte: Okay. Great. That's helpful. And then could you also talk about -- obviously, the first quarter was choppy across the board, broader retail environment with weather and whatnot. But curious how you view your performance versus the industry during the quarter. Do you think you maintained the level of share gains that you saw during the fourth quarter? Matthew Stevenson: Yes. I mean, ultimately, the out-the-door is a true testament, our consumers preferring our brands and buying our products. And as Jesse commented there a few minutes ago, the out-the-doors, generally speaking, are pretty healthy when you take out the weather effect. So as we're -- we continue to maintain share in our key categories, we're seeing growth in other categories. So overall, we think that momentum we've built over the last 12 to 18 months is continuing. And just we had this temporary effect of the weather that, as you just commented, we're seeing in a lot of consumer businesses in the first quarter. Operator: We take the next question from the line of Joseph Altobello from Raymond James. Martin Mitela: This is Martin on for Joe. I just wanted to quickly touch on the weather impact. You've quantified around $3 million. I'm wondering if you view that as completely lost? Or could we see some recovery of it sort of in the second quarter? Matthew Stevenson: I think ultimately, Martin, we got to see how the quarter continues to play out. As we sit here in early May, April was over 6% growth, right? So it was a nice recovery going in the month of April, and we're seeing those demand trends stay consistent into May. So ultimately, we got to see if that demand washed out of the quarter completely or it's recoverable here as we go through the remainder of the year. Martin Mitela: And just really quickly touching on the guidance, you've taken down the sales guidance a bit. Is that entirely the product optimization? And just sort of have you seen any kind of retailer concern on consumer confidence because of the Iran war and the increased energy pricing? Jesse Weaver: Yes. This is Jesse. Good question. On the guide adjustment, that's purely the net impact of the portfolio optimization. So that includes both the businesses that we've identified that we need to find new homes for, offset by what we're getting -- picking up in HRX. And then on the question around retailers, can you restate that one? Martin Mitela: Yes. Just have you had any concern from retailers about consumer confidence? I think you've said at least ordering patterns have normalized, but are you hearing anything about consumer confidence concerns? Matthew Stevenson: Yes. I think our large customers and partners, they read the headlines and those like Michigan Consumer Confidence Index and such. But at the same time, they're reporting to us to sellout, generally speaking, are good. And the enthusiast customer base, this is a passion for them, right? This isn't something they do every 5 to 10 years or like some of these other consumer durables, like this is their thing. This is what they go and do in the evenings and the weekends. This is what they do with family and friends. They work on car modifications or they go race on the track or do they go road motorcycles, parts of our business. So we're cautiously optimistic. Of course, with the extended conflict in the Middle East, we've got to see how that plays out. But right now, our large partners aren't reporting outside of the weather impact, any negative impact so far. Operator: We take the next question from the line of Joe Feldman from Telsey Advisory Group. Joseph Feldman: With regard to the portfolio rebalancing, did any of that happen already in the first quarter? Did that impact any sales in the first quarter? And how should it impact, I guess, each of the next few quarters? Is it ratable? Is it all at once in the second quarter? Or how should we think about it? Matthew Stevenson: Joe, it's a great question. So for Q1, no impact really in Q1. I would say for Q2, Q3 and Q4 to kind of put to the $15 million on the top and bottom end of the guidance that was adjusted specifically for this activity. You probably see about $1 million in Q2 and about $7 million in Q3 and $7 million in Q4 the one caveat to that is, obviously, this is our current estimate of timing of when these transactions would take place. But right now, that's our current pacing. And we'll obviously update as we go forward throughout this year on an apples-to-apples comparison, which as you can see in our guide, that hasn't changed at this point. The range is still the 2% to 7% on the core business, which would exclude the impacts of those pieces. Joseph Feldman: Excellent. That's helpful. And then with regard to the bolt-on acquisitions that you guys are talking about, is that contemplated in the CapEx guidance that you gave? Or is that going to be incremental? Or I guess, how do we think of that portion of it? Matthew Stevenson: Yes. The CapEx guidance would not account for any bolt-on acquisition activity as it currently is laid out. I would say to Matt's earlier comments, these are businesses that we feel like have sustained long-term double-digit growth trajectory, and they're in the relatively small range. I mean, we're talking $5 million to $10 million with huge upside and things that we feel very confident we could fund with free cash flow. So they're not in the guide at the moment. But as they come along, we will absolutely be funding those with free cash flow. Operator: We take the next question from the line of Bret Jordan from Jefferies. Bret Jordan: Contribution year-over-year in same SKU price? Matthew Stevenson: Pricing was in the mid-single digits, Bret, from a price realization, similar to kind of how we were pacing more and more throughout the end of last year, so mid-single digits. Bret Jordan: Okay. And then I guess the 12 brands that you saw growth, could you sort of give us just as perspective, how many brands in total you are running, I guess, post the SKU cull here? Matthew Stevenson: The ones when we talk about the SKU rationalization, Bret, there are only about 5, relatively speaking, in that bucket. But when we talk about our lifestyle and power brands, it's roughly about 20 that we really concentrate across our 4 divisions and through our organization. And you saw nice growth in some of the brands. In my prepared comments, I commented Euro was a bit behind just for some product availability because Q4 demand was quite strong. So that limited some of the growth. You saw nice growth in safety and growth in Truck and Off-Road. And the decline there in American Performance was really just a concentration of inventory at some key partners that primarily focus on American Performance. So that's where you saw the differences across those 4 divisions. Bret Jordan: Okay. And I guess a quick question on HRX. I guess, international distribution, are there other brands that you have in your portfolio that you can lever into the HRX distribution? Matthew Stevenson: I'd say I'd look at it, Bret, in a broader context. International opportunity for our organization, we believe, is quite extensive. We're underpenetrated in Asia Pacific, Europe, South America, Mexico, a number of these areas that we're developing strategies for or executing on like we are in Mexico and Latin America. So we include HRX in our lifestyle and power brands, and they'll be part of this larger global expansion effort that we will coordinate. Operator: We take the next question from the line of Mike Baker from D.A. Davidson. Michael Baker: Okay. Great. I guess just a follow-up on a previous question. Because it seems like your sales guidance is just in line with the portfolio rebalancing both the positive addition and subtraction. Doesn't mean that you expect the lost sales from the first quarter to come back. Am I misinterpreting that? I know that was already asked, but I just wanted a clarification on that. Matthew Stevenson: Yes. No, it's a good clarification, Mike. I mean I think that is exactly what that would imply. I mean we're seeing pretty strong in April and what that would imply for the balance of the year is 6% to 7% on each of the subsequent quarters. It may not phase out exactly that way. But based on what we're seeing in April, we still feel like there's a lot of year left and reason to believe. I mean some of the things that we've spoken to in the past were pretty significant new product development that's rolling out in Q3 and Q4. I mean I think this -- we hadn't spoken as much until this quarter about the new Car Care line, but we've seen really positive feedback from consumers as we started to introduce that at LS Fest West. And that's just a really big TAM, something that we always knew could be big, but we feel really good about. In addition to that, you've got our CTS 4, which is one of our top products. We also have the continued growth in the Snell cycle, growth in safety and new products coming out within the EFI product line. So that is what's implied. Michael Baker: Okay. That's helpful. And maybe 2 quick related follow-ups. One, I guess with all the moving pieces of this -- the weather shift and the exits and acquisitions, et cetera, last quarter, you had said expect the year to be 51% in the first half, 49% in the second half, versus typically 52%, 48%. Can you help us sort of adjust that with all these moving parts? And then a related follow-up, the rebound in April and continuing into May, is that primarily on the American business? Has that improved from, I think, the minus 10% in the first quarter? Matthew Stevenson: Yes. Mike, I'll take the back half of that question, and I'll defer to Jesse for the first half. No, we're seeing a nice recovery across the portfolio here as we get into April into May. Like I commented, a lot of that concentration of that inventory is in American Performance in Q1, and we're seeing that turn around as that inventory has normalized in the weather and continuing to see nice growth across the board in all 4 divisions. Jesse Weaver: Yes. And Mike, to answer your question, after all the changes with the portfolio rebalancing just on the first half, second half, it probably is going to be a bit more of the -- closer to 50% to 51% in the first half versus the 51% guide that we gave before. So a little bit less in the first half as a result of these. Operator: Ladies and gentlemen, as there are no further questions, with that, we conclude the question-and-answer session. I would now hand the conference over to Matthew Stevenson for his closing comments. Matthew Stevenson: All right. Thank you. Let's turn to Slide 22. First quarter reinforced what we believe about this business. The fundamentals are durable. Despite temporary headwinds early in the quarter, we held adjusted EBITDA essentially flat year-over-year, a reflection of disciplined execution by our team and the resilience of our brand portfolio. With April showing mid-single-digit growth and channel inventory normalizing, we are entering Q2 with genuine momentum. We are managing the portfolio with intention, streamlining where it creates value, investing where we see competitive advantage. Adjusted for our planned portfolio optimization actions, our full year outlook for our core business is unchanged. We remain committed to the long-term financial targets we set out, at least 6% organic top line growth, 40% gross margins and greater than 20% adjusted EBITDA margin. That conviction hasn't wavered. The automotive enthusiast market is a near $40 billion space, driven by passion, loyal and a culture that extends generations. Holley's portfolio of storied brands sits at the center of it. We believe we are better positioned than anyone to serve that market and to grow in it through a combination of our brand heritage and the digital platform we are building. The path forward is clear: disciplined growth, margin expansion and sustainable free cash flow while continuing to invest in the innovation and experiences that keep our consumers at the heart of everything we do. In closing, I want to thank our team members for their dedication and hard work every single day, our consumers whose passion and performance drives everything we build, our distribution partners whose long-standing commitment has been essential to our success and all of you on this call for your continued interest in Holley. We look forward to updating you on our progress throughout the year. Thank you, and have a great rest of the day. Operator: Thank you. Ladies and gentlemen, the conference of Holley has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Greetings, and welcome to the Freshpet First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Rachel Ulsh, Vice President, Investor Relations and Corporate Communications. Thank you. You may begin. Rachel Perkins-Ulsh: Good morning, and welcome to Freshpet's First Quarter 2026 Earnings Call and Webcast. On today's call are Billy Cyr, Chief Executive Officer; and John O'Connor, Chief Financial Officer. Nicki Baty, Chief Operating Officer, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements related to our strategies to reaccelerate growth, progress and opportunities and capital efficiencies, timing and impact of new technology, capital spending, adequacy of capacity, expectations to be free cash flow positive, 2026 guidance and 2027 targets. They involve risks and uncertainties that could cause actual results to differ materially from any forward-looking statements made today, including those associated with these statements and those discussed in our earnings press release and our most recent filings with the SEC, including our 2025 annual report on Form 10-K, which are all available on our website. Please note that on today's call, management will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for how management defines such non-GAAP measures, why management believes such non-GAAP measures are useful, a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and limitations associated with such non-GAAP measures. Finally, the company has produced a presentation that contains many of the key metrics that will be discussed on this call. That presentation can be found on the company's investor website. Management's commentary will not specifically walk through the presentation on the call, rather, it is a summary of the results and guidance they will discuss today. With that, I'd like to turn the call over to Billy Cyr, Chief Executive Officer. William Cyr: Thank you, Rachel, and good morning, everyone. The message I would like you to take away from today's call is that we are off to a strong start to the year and are well positioned to continue to capture a very large share of the growing market for fresh pet food. This strong start and our success are built on manufacturing scale and expertise that deliver a broad lineup of exceptional products, our extensive fridge network across a wide array of channels that increasingly serves our rapidly growing e-commerce business and our first-mover advantage that has enabled us to build a large and diverse consumer franchise. We've built a business around a wide range of product forms, sizes, prices and channels and with a level of quality that no single competitor can match. It is those strengths that position us to lead the transformation of the pet food category from kibble and can to fresh. Our first quarter net sales growth was ahead of our guidance range for the year, and we believe demonstrates our ability to successfully adapt our growth plans to the dynamic environment in which we are operating. Since last reporting earnings in February, however, the macro environment has been increasingly volatile. So while we are encouraged by the trends we see, we also want to remain prudent. Year-to-date, the consumer's remained remarkably resilient, but we are keeping a watchful eye on potential shifts in consumer buying habits, particularly as it relates to their willingness to trade up and are balancing these risks against the strength we have seen to start the year. As such, we are modestly increasing our sales guidance for 2026. As we look at the business holistically, the fundamentals remain firmly intact. We compete in the large category. We are making consistent share gains and are improving margins and new technologies are increasing our returns on capital. Together, this creates a compelling backdrop and a long runway for value creation. Against that backdrop, there are 3 core reasons we remain confident in our long-term growth opportunity. First, pet food is a very attractive category, with long-term tailwinds like the humanization of pets, treating our pets as valuable family members and younger generations are increasingly interested in feeding high-quality food to every member of their family, including their pets. The phenomenon of feeding your children and pets better food is a generational shift, and that suggests we have a very long runway for growth. As a result, our total addressable market has grown to 36 million households versus the 16.1 million we have today, and we expect both the addressable market and our household penetration to keep growing. Second, consumers are increasingly choosing fresh and frozen over dry and canned food. So we have the winning proposition in a winning category. We've increased our market share to 4.2% in U.S. dog food and treats according to Nielsen omnichannel data and expect to capture a large portion of the future growth of the fresh/frozen category as it continues to become more mainstream. Third, we are focused on improving returns on capital investments as we progress from being a category disruptor to a high-growth, profitable scaled business. Our operational effectiveness programs plus the new technologies we are developing are designed to improve returns. And to continue to drive capital efficiency, we intend to: one, get more out of existing lines, primarily through OEE improvements; two, get more out of existing sites, whether that be finding ways to optimize our network or add more lines to our existing campuses; and three, develop and implement new technologies. We are quite encouraged by the progress we are making on each piece of that plan. We have discussed over the last few quarters how we are shifting our commercial model by changing the media mix and message, making tactical pricing changes and evolving into an omnichannel distribution model. Our goal is to address the needs of a broad consumer base, and we want to give them the Freshpet products they want, how they want them, when they want them and where they want them. We have built significant organization capability to accomplish that. And in conjunction with our network of more than 39,000 fridges that service fulfillment centers, we believe that Freshpet is uniquely positioned to serve the widest range of consumers seeking Freshpet food and the most diverse ways in which they buy. As we make these changes, there will be learnings along the way, but the key will be how we pivot to capture that opportunity. As you know, our marketing model is based on strong advertising driving household growth and more households helps drive further distribution growth. Our recent shift in both our advertising message and our media mix to support our omnichannel business appears to be working, and we are seeing some early signs of increasing media leverage. Our fall campaigns continue to resonate with consumers, and we just launched a new campaign this week called "Kitchen Conversations." Our new tagline of "Better Food for your better half" deepens our connection and relationship with our core audience and our ads showcase the difference that fresh products made. From a household penetration and buy rate standpoint, we continue to see household penetration growth in excess of all other super premium dog food brands, including DTC brands, and MVP growth continues to outpace total households. On a 12-month basis, as of March 29, 2026, household penetration was 16.1 million households, up 8% year-over-year, and total buy rate was approximately $114, up 6% year-over-year. MVPs, our super heavy and ultra heavy users are continuing to grow faster than overall households and now total 2.5 million households, up 13% year-over-year and have an average buy rate of $513. Note that Numerator recently completed its annual panel reset in April. So there have been some revisions to the absolute numbers in the historical data, but the overall trends remain the same. Growth continues to be strongest amongst higher income households and millennials amongst club and online shoppers and amongst our heaviest users, Ultra buyers. We do not see any signs of trade down amongst our users. From a retail standpoint, our objective is to improve accessibility and visibility for the omnichannel consumer. Our products are now in 30,435 stores and 25% of those stores in the U.S. and Canada have multiple fridges. You can see on the updated chart on Slide 13 of our investor presentation that we are adding fridges faster than new stores, and we expect that trend to continue. We will still add new stores such as Tractor Supply's recently announced expansion to up to 700 stores by year-end, but have more opportunity to add more fridges in a variety of formats and configurations in the highest velocity stores we are already in so that we can serve more omnichannel consumers. Our large retail footprint acts as micro fulfillment centers for omnichannel consumers and is a key piece of fulfilling digital orders. In the first quarter, digital orders grew 43% and accounted for 16.1% of our total business, up from 14.6% in the fourth quarter and 81% of those sales volume went through our extensive fridge network. According to Nielsen omnichannel data, Freshpet was the fastest-growing brand over the 13 weeks ending March 28, 2026, demonstrating the power of our marketing model and the broad availability of Freshpet design to meet a wide range of consumers' buying preferences. Our scale advantages extend to our manufacturing as well. Because we own our manufacturing, we have the incentive and the ability to advance the technology for making Freshpet food. We believe our new breakthrough technology enables an even stronger product proposition with both a better consumer experience and better unit economics. As we mentioned last quarter, the first bag line in Bethlehem, utilizing the new technology started up in January. That line continues to perform well, and our first lite version of the technology was successfully installed on another bag line in Bethlehem last month. We are very encouraged by the potential to significantly improve quality, throughput and yield, but we want to run each of these lines for several months before we quantify the magnitude of the benefits. However, the results to date supported our decision to convert a bag line in Ennis to the lite version of the technology as well. That conversion is expected to be completed by late June or early July and will allow us to convert a larger portion of our existing product lineup to the new technology this year. By the end of the year, we expect to have about 35% of our bag capacity using some version of the new technology. The capital for this expansion is modest and does not change our CapEx guidance for the year. In the coming months, we will decide whether to convert an additional bag line, i.e., a third line converted to the lite version of the new technology and also whether we will pull forward the installation of a completely new line using the full version of the technology. That incremental line using the full version of the new technology would add significant capacity to our network sooner than we might need it, and that will factor in our decision-making. If we do move forward with either project, any capital spending for those projects would be above our original $150 million capital budget. We believe the development of this technology demonstrates our technical mastery as a self-manufactured leader in fresh pet food. Maintaining control of our manufacturing also opens up opportunities to further advance the technology. Now I'll provide some highlights from the first quarter. First quarter net sales were $297.6 million, up 13.1% year-over-year, primarily driven by volume. Recall in Q1 of fiscal year '25, we had distributor disruption in the pet specialty channel. Lapping that disruption added 50 to 100 basis points to our growth rate in Q1 of this year. Adjusted gross margin in the first quarter was 46.9% compared to 45.7% in the prior year period. Adjusted EBITDA in the first quarter was $37.9 million, up $2.4 million year-over-year. Now turning to our updated 2026 guidance. We are raising our net sales guidance range from 7% to 10% growth to 8% to 11% growth year-over-year and reiterating our adjusted EBITDA guidance of $205 million to $215 million. We are encouraged by recent sales trends and believe raising net sales guidance is prudent based on year-to-date trends. However, we are balancing the dynamic environment we are operating in. So we are monitoring our costs closely, particularly on logistics, packaging and any additional ripple effects on input costs. We continue to expect capital expenditures to be approximately $150 million this year, absent any incremental investments, and we expect to be free cash flow positive in 2026. John will walk through more details of our 2026 guidance in a few minutes. With that, I'll turn it over to John to walk through more details of our financial results. John O?Connor: Thank you, Billy, and good morning, everyone. The first quarter results demonstrated our ability to deliver category-leading growth despite a challenged consumer environment. Net sales in the quarter were $297.6 million, up 13.1% year-over-year. Volume contributed 14.6% growth, partially offset by unfavorable price/mix of 1.5%, which was primarily driven by gross to net items, which include an unfavorable prior year comp and current year items we do not expect to recur in the rest of the year. We also saw the effect of targeted price reductions, some of which began last year, and we will begin to lap in Q4. We had broad-based consumption growth across channels. For Nielsen-measured dollars, we saw 13.5% growth in total U.S. Pet Retail Plus with Costco. First quarter adjusted gross margin was 46.9% compared to 45.7% in the prior year period. The 120 basis point increase was driven by improved leverage on planned expenses and lower input costs. First quarter adjusted SG&A was 34.2% of net sales compared to 32.2% in the prior year period. This increase was primarily due to higher variable compensation in the quarter, increased media as a percentage of sales due to timing and increases in our logistics costs. Media spending was 15.8% of net sales in the quarter, up from 15.1% in the prior year period, mainly due to a planned shift in cadence of spend that brought more spending into the first quarter. Logistics costs were 6.3% of net sales in the quarter compared to 5.8% a year ago. The increase was partly due to storm-related costs, including driver shortages as well as recent fuel cost increases, which we began to experience in March. First quarter net income was $48.5 million compared to a net loss of $12.7 million in the prior year period. The increase in net income was primarily due to the sale of our equity investment in Ollie, contributions from higher sales and lower nonrecurring SG&A charges, partially offset by the increase in income tax expense related to the gain on the Ollie sale. First quarter adjusted EBITDA was $37.9 million compared to $35.5 million a year ago, an increase of approximately 7%. This growth was primarily driven by higher sales and gross profit, partially offset by higher adjusted SG&A expenses. Adjusted EBITDA margin was 12.7% in the first quarter compared to 13.5% in the prior year period. This decrease was primarily driven by the higher G&A, cadence of media investments and higher logistics costs in the quarter. Operating cash flow in the quarter was $40.3 million, while capital spending was $27.6 million. We ended the quarter with cash on hand of $381.4 million, including $95.5 million in proceeds from the sale of Ollie and generated free cash flow of $12.7 million. Now turning to guidance for 2026. As Billy mentioned earlier, we now expect net sales growth of 8% to 11% compared to 7% to 10% previously. We are pleased with our results for the quarter and are optimistic about growth opportunities for the year. However, we continue to balance the recent acceleration in our net sales growth against the volatile macro environment and its ability to affect the consumer. Going back to last year, we have taken steps to position ourselves to continue expanding the fresh dog food category amid a slower consumer backdrop with improved entry price point offerings, and we'll continue to make balanced investments in both improved affordability for the consumer and profitability for Freshpet. As a reminder, -- we have easier comps through May and then a tougher comp in Q3 from the significant expansion in a large club customer in the year ago, including pipeline fill. We continue to expect to grow market share as we benefit from a generational shift from dry and wet food to fresh. We continue to expect adjusted EBITDA in the range of $205 million to $215 million, an increase of 5% to 10% year-over-year. Adjusted EBITDA dollars and margin should improve sequentially for the remainder of the year. Media as a percent of sales for the year is still expected to be roughly in line with 2025 at approximately 12.5% of net sales and will be front half weighted in dollars. We now expect elevated logistics costs for the remainder of the year given increased fuel costs. As I said on the last earnings call, 2026 is not necessarily indicative of the underlying operating leverage in our model. We reset variable compensation this year and have made significant investments in omnichannel capabilities. Beyond 2026, we expect adjusted EBITDA growth to exceed net sales growth with an expectation of continued gross margin expansion and a more consistent variable compensation expense. We anticipate adjusted gross margin to improve by approximately 50 to 100 basis points at the midpoint of our net sales range, primarily driven by plant leverage, partially offset by mix. Should our current revenue trends continue, it is possible we will need to add staffing in our manufacturing operations, although this is not currently contemplated in our guidance. Within our guidance range for net sales, we expect to drive OEE improvements to deliver the volume growth embedded in the range. From an inflation standpoint, we are carefully watching for any changes. To address any higher input costs, we are evaluating opportunities to offset through product formulations and targeted pricing actions. Capital expenditures are projected to be approximately $150 million in 2026, excluding any significant incremental investments in fridge islands or expediting the rollout of our new technology. These are 2 distinct investment decisions. Conversations with retailers about fridge island expansion are ongoing, and we expect to make a decision on whether to accelerate the new manufacturing technology in the middle of the year. While it's still early and we need to run the new lines for longer to demonstrate consistent efficiency gains, we are encouraged by the initial results. Regarding our fiscal year 2027 targets, we are confident in our ability to deliver net sales growth well in excess of the U.S. dog food category growth, achieve at least 48% adjusted gross margin and deliver an adjusted EBITDA margin in the range of 20% to 22%. And we believe we have a variety of paths to achieve our 2027 margin targets. Since joining in February, a key focus of mine has been assessing our capital allocation strategy given the strong and evolving nature of our financial position. Freshpet operates in a very attractive and growing category and has built strong competitive advantages that support durable market share gains and revenue growth. With this backdrop, investing internally in the business is far and away our highest priority for capital deployment. These investments include expanding manufacturing capacity in a fast-growing space where we lead, developing novel production methods that enhance product quality, reduce cost to produce and improve returns on capital, new recipes that broaden our offerings and enhance our appeal to pet owners and enhancements to our commercial model to expand distribution, access new channels and reach consumers in a more targeted way. As we pursue these investments, we desire to retain a high degree of financial flexibility to invest in new technologies, capabilities or accelerate our growth. To the extent we are able to cover all of these investment opportunities through internal cash generation, we would then evaluate the opportunity to improve our capital efficiency by returning cash to shareholders in a manner that does not compromise our ability to fund our long-term growth drivers. To summarize, we are pleased with our first quarter results, but remain conscious of developments in the macro environment since we initially set our guidance for 2026. In light of this, we remain cautiously optimistic with our outlook for the remainder of the year. I firmly believe we have a long runway for growth, and we'll continue to build on our competitive advantages as the scaled leader in the fresh/frozen pet food category. That concludes our overview. We will now be glad to answer your questions. As a reminder, we ask that you please focus your questions on the quarter, guidance and the company's operations. Operator? Operator: [Operator Instructions] Our first question comes from the line of Peter Benedict with Baird. Peter Benedict: First, just maybe talk a little bit more about the competitive environment and how your performance is trending in stores where you've seen some new competition enter the market and maybe how that's influencing your plans for innovation or new product rollout? That's my first question. William Cyr: Yes. Yes, so as we look at the competition, obviously, we're seeing a wide range of people trying to compete with us in a variety of different channels. And I'll let others speak for their own performance. But what I can tell you is you should look at us and think about us as having a very broad lineup of products in a wide range of channels at a variety of price points -- and that breadth of our portfolio and the distribution we have has insulated us very, very well from all these new competitive entrants because the vast majority of these folks are competing in a very narrow product lineup and a very limited number of distribution points or different distribution channels. And so as you look at our results, we're able to perform quite well because of the breadth and depth of our portfolio regardless of who these competitors are, what channels they might be in. Peter Benedict: Okay. And then I guess one follow-up. You mentioned in the remarks some signs of media leverage on some of the new programs. Maybe you could expand on that. What exactly are you seeing on that front? William Cyr: I'll let Nicki take that one. Nicola Baty: So as you know, we very much focus on advertising as being a big strategic choice for our investment. We don't discount, so we don't have any investment going through in promotions. We've made some really big shifts with media, especially when you look at the results over the last 13 weeks where we've seen an acceleration versus the last 26. We've changed our messaging. So we put the new creative on air, and we've seen our CAC coming down, which has been great news. We've seen improvements in our ROAS. So return on advertised spend has really gone up across a number of areas. And what we're particularly encouraged about is we're getting higher growth coming through from millennials and also MVPs. So we're seeing some really encouraging signs coming through from media. We elevated media spend in Q1 as we'd always intended to do, and we feel really good about the results that we're seeing as we now go through the year. Operator: Our next question comes from the line of Brian Holland with D.A. Davidson. Brian Holland: So maybe just first on taking the top line guidance of this year. Billy, it sounded like in your prepared remarks that that was informed by the better-than-expected performance in 1Q. So that's backwards-looking, looking forward, do we have any greater visibility on whether that's distribution or competitive dynamics as far as what you're going to see in fridges that you share or other fridge installations outside of your own that leaves you comfortable with the balance of the year relative to when you set your initial guidance? And then maybe within that, do we expect consumption and shipments to largely align over the balance of the year? William Cyr: Yes. Brian, first of all, the decision to raise the guidance and what's embedded in the guidance is obviously informed not by just what we saw, as you indicated, but what we see going forward. As you know, we look at a wide range of factors. We look at everything from the Nielsen measured consumption to what we know our customers' plans are, what our read is on the broader macro environment. And what I can tell you is that so far to date, we feel very good that the brand is performing well. We see that in Nielsen, we see that in the household panel data. To the extent that there are competitors out there, it's obviously not having any significant impact on the numbers that are showing up in Nielsen or showing up in our household panel data because we're still leading growth in the category in both those areas. So our guidance going forward on growth has been informed by that. We are, as you heard in the comments, a little bit cautious about the macro environment. We look at everything from consumer sentiment to housing starts to unemployment to disposal or discretionary income. And as I think you've heard from a lot of other folks, we're all kind of watching and waiting to see where that might go. But so far, everything in our business looks like it's heading in the right direction, and that's what's informed our guidance. Brian Holland: And then maybe on gross margin, as we just think about the year going forward and maybe tied back to the top line here. I believe that initially no plans to add staffing in 2026. What level -- and I think there was some reference to potentially needing to add folks later in the year in the prepared remarks. So maybe just trying to understand at what level of volume growth do you feel like you would then have to bring on more staffing? Just trying to understand the leverage potential there on continued volume strength in excess of what you initially anticipated. William Cyr: Brian, I forgot to answer the second part of your original question, and then I'll hand it to John to answer the margin question. But your question about shipment growth versus consumption growth, the only variable that's going to be different between the 2 is, as we've said before, we will lap a very significant launch into Sam's last year in Q3. And so you would expect that there were more shipments there necessarily than there were consumption in Q3 of last year. So this year, you'd expect to get a little bit of a reversal of that. Outside of that, our business is very predictable and reliable, so consumption growth and the shipment growth should be fairly closely in line with each other. Let me turn it over to John to talk about the margin. John O?Connor: Sure. Thanks, Billy. Yes. So Brian, within the net sales guidance range that we gave, we believe we can deliver that without having to add staff. So what starts driving it higher is if we start meaningfully outperforming our guidance range as we go through the year and getting above the top end of the range, maybe we get a better consumer environment. Those are the levels where we'd start looking at the staff needs to come on at some point in 2026. There is a point as we continue to grow, where we'll need staff for -- to deliver volumes in 2027. But really, the question is if and when in 2026 based on the revenue trends that we're seeing throughout the year, and it would need to be above the net sales guidance range that we gave today. Operator: Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company. Rupesh Parikh: Just going back to the consumption acceleration you saw in Q1. Just curious what you believe are some of the key factors that drove that improvement? And then as you look at the underlying pet category just overall, what you guys are seeing there? William Cyr: I'll take the first part, and Nicki will take the second part. But as you saw in the data that we published, we saw a resumption in household penetration growth and the buy rate growth. Buy rate has been a bigger contributor to our growth of late than it has been historically, and that's in part due to our focus on the MVPs. But it's really -- it's been strong fundamentals, the things that we've been building this business on for a long time, which is great advertising is engaging the right consumers. It's increasing household penetration, and it's increasing household penetration amongst those consumers who are -- have the propensity to buy the highest amount of product. And so that's driving the buy rate. So we feel very good that it's really fundamentally driven. It's not any unique demographic or customer or channel. It's broad-based across the board. So I'll turn to Nicki to talk about the category. Nicola Baty: Great. Thanks, Billy. So I think the category is still a little bit pressured, especially when we look at dog food. It's broadly flat in terms of household penetration. At the moment, we're not really seeing a significant turn either way. We are seeing more going through online than in-store. So that's still really a faster-growing part of the category. And there's definitely a trend for more going through to what I call affordable retailers. So whether that's club or also the likes of some of the mass grocers are doing particularly well in that area. Now generationally, we are seeing boomers coming out of the category. We're seeing the fastest-growing part being millennials and Gen Z. And then within income groups, we are seeing sort of lower income, particularly pressurized as well. As Billy said, I think why we're feeling pretty good about where our results are coming in at is our growth has been very broad-based. We're growing in every income group, and we're growing with every demographic. But we're particularly winning, especially with millennials and Gen Z, and we're growing at a fast rate with both middle income and higher income as well. Operator: Our next question comes from the line of Robert Moskow with TD Cowen. Robert Moskow: A couple of questions. John, I think you said that you still see a path to the 20% to 22% EBITDA margin target for 2027. But you've also talked about these extra staffing costs that you'll have to take on to handle extra volume and I guess, also cost for the new tech. So I just want to make sure that, that's still the case that you can take on those extra costs and still get to the 20% kind of the low end of that range because it does require a lot of leverage in '27. John O?Connor: Yes. Thanks, Rob. So yes, I think one of the points to also make, right, is that in the past, when we've made some staffing increases, we were a much smaller company, right? And we're much larger today. So each incremental line staffing that we bring in is much less consequential to our overall gross margin, right? And so we do believe, right, that we can bring on additional staffing, deliver volume growth in 2027 and get leverage on that staffing. In terms of the new technology, the costs that it would take to bring on would be capital costs. And those would be depreciated, which for the margin targets that we're talking about is adjusted gross margin, which excludes depreciation, right? So there would be overall cash costs and depreciation that would come with that, but the 20% to 22% is excluding the depreciation. We would, of course, have to staff those lines. But again, we'd only be doing that if we saw the need to deliver more volume into a strong demand backdrop. So it's a good question, Rob, but we do believe that we can get the leverage on the additional expenses or costs required to deliver additional volume in 2027. Robert Moskow: Okay. Can I ask a follow-up? First quarter, you have a big club customer that expanded the size of their fridges. And I think you got the full benefit of that expansion. But I believe in second quarter, they'll introduce a private label version into those fridges. Is any of the beat in first quarter from that dynamic? And would you expect still growth with that customer, but some deceleration in 2Q? William Cyr: Nicki will take that one. Nicola Baty: Thanks, Rob. So look, our club business is performing well, and it's more than one customer, as you can see. We obviously made a big expansion last year into a second club customer, too. The one thing I'd say with our club business is we have more than one item with our club retailers. We have a handful of items that appeal to -- with different formats that appeal to different consumers that are sitting in there. With one particular club customer, we did actually expand our portfolio. We brought in an additional item, which you may have seen, which was our beef roll. And that's delivered a lot of incremental sales that we really saw coming through in Q1, and we anticipate as that distribution has continued to expand, we will continue through the rest of the year. And also another club customer, we've clearly seen the expansion of a much larger fridge network. That's definitely raised the opportunity for more items to have more holding capacity in that club retailer. Clearly, we've seen the benefit being the largest player within that. But we haven't seen any meaningful impact really coming through as yet or significant impact coming through from any competition that's listed. We believe that's due to the increased visibility and the holding capacity that we can continue to bring through. So for us, we're very focused on making sure that we have a breadth of portfolio at the right price points and that we are accessing across all club channels where the shopper is looking to go. And we believe that, that will support sustainable growth for the future. Operator: Our next question comes from the line of Tom Palmer with JPMorgan. Thomas Palmer: In the prepared remarks, you noted the possibility of expediting the rollout of the new manufacturing technology and had kind of a comment that it could result in capacity outpacing sales. Could you maybe discuss the decision-making process here? Are the potential margin benefits, for instance, so significant that it might justify kind of having this excess capacity or maybe there's something else? William Cyr: Yes, Tom. It's -- there's a variety of factors that are going to be involved in that decision. In part, as you indicated, is if you bring on extra capacity, you will have, in essence, incremental costs. But I'd also make sure you think about the technology development and the validation process here. The longer we run the technology, the more we learn, the more certain we can be that the next line that we put in is going to be the best possible line, and it's going to have all the right unit operations in it. So to your question of what are the factors that we're looking at, it's obviously going to start with, is it delivering on the yield throughput and quality advantages that we think it will. And so far, we're very encouraged by what we see. The next question will be, are those gains big enough to justify pulling forward capacity just on that basis alone because we do believe there's also another level of benefit, which will come from higher return on invested capital where these new lines, if they have higher throughput, will put us in a position where the cost to add incremental capacity is lower than what it has been historically. And so we'll put that into the equation as well. But I would also say that one of the big factors is going to be how confident are we that we know exactly what this line needs to look like because every single line we've installed, we have found that there's something we can improve on the next line. And the longer we run it, the more we'll learn about what that will be so we get it right. So I would just put it under the heading of there's a variety of factors that we're going to consider, but all of them seem to be very positive. It's just when do you want to make that choice. Thomas Palmer: Understood. I also wanted to maybe ask on the cost environment and how you kind of see that evolving as this year plays out. For the first quarter, there was the call out for logistics. I think it was both weather challenges and then later in the quarter, higher fuel. As we think about the remainder of the year, should we look at the level of kind of logistics margin as indicative of what the rest of the year will look like because you had that weather piece? And then are there other inflationary call-outs we should be thinking about that might either flow through kind of that SG&A side or COGS? William Cyr: Let me take a shot at that, and I'll ask Nicki or John if they have anything to add to it. But you properly characterized the first quarter. There were 2 things that impacted logistics. One of them was the weather events that occurred in January and early February. And the second was the fuel cost that happened in basically beginning in March. The fuel cost, at least at this point, looks like it's going to continue on, and it will have an impact, and that's going to be embedded in our financials. I don't expect to see another one of the weather events, although the weather event created a driver shortage event. And so obviously, you're vulnerable to driver shortages. But the fuel cost is embedded and it's embedded in our thought process for the guidance we've given going forward. If there's a material change in the cost of fuel, that obviously will have an impact, whether it's positive or negative on how we think about the balance of the year. On the bulk of our cost structure, we are not completely locked, but we're largely locked on the bulk of our cost structure for the year. And so if there is going to be an impact from sort of the trickle effect of higher energy costs on our ingredient suppliers or the inbound transportation and whatnot, that will flow through, but it could flow through later in the year. It may not be as significant. We just have to see where that's going to flow. I don't know, Nicki or John have any thoughts to add on that, John? John O?Connor: Yes. Tom, I think you appropriately characterized it, right? When you look at the total logistics cost as a percent of sales in the first quarter, that's about the level we're expecting it to continue at for the rest of the year, but based on fuel costs, right, for the remainder of the year, as Billy said. Operator: Our next question comes from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: I actually wanted to ask around the economics of the omnichannel strategy and maybe focus in on e-commerce, just given the strength of the digital orders that you've been seeing and the growing percentage of sales that it represents. Is there a way to help us understand the unit economics in that area and whether the mix shift impacts the margin mix at all materially for the better or for the worse, either on the gross margin line or as it relates to SG&A? Just help us a little bit understand the puts and takes of that growing digital channel and if it has an impact on the P&L. William Cyr: Yes, we'll let Nicki take that one. Nicola Baty: Thanks, Steve. So omnichannel, we're doing a lot of work at the moment. We've built out our capabilities. I think that's the first thing I would say in omnichannel. It does require a little bit of different capabilities for us to build out in the G&A line overall. Our omnichannel is very focused on super serving our MVPs, and our MVPs are much more valuable to us. So the first thing I'd say is as we grow our business and grow our business in MVPs, this is a more long-term profitable way for us to be growing. So the MVP buy rate is obviously much higher. And we do believe we're going to get better returns from a CAC standpoint with each MVP that we bring in from a lifetime value perspective. Now in the short term, we will see a little bit of channel shift coming through. So the first thing I'd say with omnichannel is we've been underpenetrated a little bit in club. So you will see a slight dilutionary impact coming through in that part of the business. But regarding your specific question on e-commerce, I think the great thing about our omnichannel strategy is it's really based on a local fulfillment model, which is to be serving the business through the 39,000 fridge networks that we currently have. So that fridge network and the way that we serve our omnichannel customer, 82% of our online sales are going through that fridge network. Now that's already installed capacity. So we actually anticipate the ROIC from our fridges is going to be improving over time as we continue to drive omnichannel sales. And in terms of the economic profile, given it's in our current retail structure, we don't anticipate a significant shift coming through in that area. We may have a slight change in the economics of D2C coming through, but we still anticipate that will be a relatively small part of our business. John O?Connor: Yes. And if I could add to that, right? So Nicki mentioned the margin in club as we see that shift, right? We had strong growth in club in Q1, but we had also strong delivery of gross margin improvement as well. So as we grow the volume, we are seeing our ability to drive greater and greater efficiency in our cost structure and manufacturing. Stephen Robert Powers: Got it. Okay. Appreciate it. And the second question is a little bit more tactical. Billy, you called out the distribution wins, both in terms of more stores and more fridges per store. Can you guys just update us on sort of your distribution gain outlook for the year today versus where the year started? And just maybe remind us on what was originally embedded in guidance and if there's anything that's been achieved so far that would be incremental to that original outlook? William Cyr: Yes, I'll have Nicki handle that. Nicola Baty: Okay, Steve. So I think the main piece of news on distribution was what was announced on someone else's earnings call last week. So the retail lifestyle distribution, we will have coming through the back end of the year. We're still working through phasing of the incremental stores. In that retail lifestyle, we have 250 stores distributed by the end of the first half. And then we anticipate that by the end of the year, we will have around 700, but that will have to be carefully phased as we go through the year. So that's the main distribution gain in terms of retail. As we also look at, we anticipate that our online growth will continue as we go through the year. And we're nicely on track based on our budgeted goals for the number of multiple fridges that we will be securing. So that's really embedded through in guidance. Billy, is there anything else you'd like to add to that? Stephen Robert Powers: No, I think that's good. Operator: Our next question comes from the line of Michael Lavery with Piper Sandler. Michael Lavery: Just want to start on -- maybe just making sure I've got all the moving parts on pricing. I realize the macro environment is pretty dynamic, but you've made some tactical pricing changes. We see that flow through the numbers. You've talked about that running through kind of the balance of the year. But you've also then flagged some incremental cost pressures and potentially reevaluating maybe taking, I think you said some more pricing. Would those offset each other? Would you undo what you did? Is it partly just a function of differentiating it by SKU that you've got the breadth of the portfolio, the comment you mentioned some of the ability to do that? Or how should we think about all those moving parts? William Cyr: Yes. Michael, let me take a shot at that, and Nicki or John might have something to add. But I would just start with, we're very comfortable with the pricing that we have in the market today. We feel like it's made us very competitive. It's delivering the household penetration growth we'd like. And at the same time, we're expanding our gross margin. So we feel good about where we are. The comments that we made about pricing and the inflationary environment going forward is more perspective. We're just telling you that if, for example, there is some increase in the cost that is a more sustained increase in costs over time that we are willing to take pricing as we have in the past. we would be glad to take the right pricing. But we also will work on efforts to improve productivity, formulation changes and whatnot because we want to do everything we can to make this category as affordable as we can to make it -- to let it grow as big as it can be. So we will drive as much affordability as we can into the category. But from a fundamental perspective is we are committed to expanding our margins over time. And if there is inflation that would require us to take pricing, we are willing to take pricing. I don't know if you guys want to have anything to add to that? Michael Lavery: Okay. No, that's helpful. And I just want to follow up on a bit of the manufacturing you've characterized the scale and expertise as an advantage. And I think we're seeing that as much as ever. If you've got the lower cost and higher quality position, how long would you estimate it could take somebody else to replicate that? William Cyr: It's obviously a very difficult question to answer. All I can tell you is it took us a long time to figure out what we figured out in a long time and a lot of money to build the scale that we've built, and we're very committed to continuing that. So we are investing heavily in R&D and in new technologies. We're not standing still. Our expectation is that if somebody could figure out what we're doing today, spend a lot of money in a couple of years trying to catch up by the time they catch up, we'll be on the next generation of technology, and we'll be further ahead again. So our focus here is that we always want to be the brand that is leading the category in terms of driving the technology advancements that give us highest volume and lower cost. I also want to point out that if you think about our product lineup, -- we have a variety of different product forms. And the innovation that we've been focused on right now is on our bags and technology advancements on our bags, and we made huge gains there. But we have other product forms that we can continue to invest in and develop new technologies to make them even better as well. So I just -- I don't know how long it's going to take somebody to catch us. They'd have to spend a lot of time and a lot of money. That's what we did. But by the time they get to where we are today, we expect to be further ahead and on the next generation. Operator: Our next question comes from the line of Eric Serotta with Morgan Stanley. Eric Serotta: First, in terms of the lite version of the new technology, now that you're further along in the testing and validation phase and it looks like you're going to be -- or you said that you plan to roll that out to more lines. Can you help us dimensionalize the order of magnitude of savings versus your existing lines? I know you've spoken before about, well, it's less than sort of the full fat version from scratch, but any help dimensionalizing that would be helpful. And should we think of any benefits from that as just in terms of phasing, more benefiting '27 than '26. And then a follow-up on the questions around the large club retailer. As you speak to them and look at their store base and where they have the double-wide fridges, what's your sense as to how much more expansion for refrigerated fresh space is still to come at that retailer as they add it to more stores, sort of leaving aside the question of what the mix will be between your product and their private label and potentially others? William Cyr: Eric, I'll take the first part of that question, and I'll have Nicki take the second part. But as we said on the call, we don't want to give anybody any specific numbers on what the improvements are that we're going to see on this technology until we get further into the year, and we've had a chance to run it for an extended period of time. But you should take from the fact that we made the decision to install a second light line as a confirmation that this is a good technology and it's delivering on our expectations or exceeding. The metrics that we're focused on are input costs, which is really a measure of yield through the throughput that we get and the quality that we get. And what I can tell you so far is that we're seeing all those benefits, and we're at this point, just trying to dimensionalize how big are those benefits. And because the capital cost in these light lines is relatively small and also the time to disruption, meaning the time that we have to take a line down to retrofit it is also very brief. It's a very attractive technology investment for us. In terms of its impact this year, because it's only going to be impacting a portion of the line and we have to convert meaning a portion of our product lineup, and we have to convert parts of the lineup over time, it will have an impact in this year. It will be skewed towards the back half, and it will be relatively modest because we have to ramp our way into it. It's much more of a 2027 event. And in 2027, you should expect to see some benefits from it. Remember, what we said on the call was the technology, we should be, by the end of this year, have about 35% of our bag volume could be produced on lines that will have this technology. And we feel like that's going to be -- would contribute meaningfully in 2027. But again, it's a little bit too early because every one of these lines is a ramp-up, and you don't really want to lock in and say this is going to be until you've tested under a lot of different circumstances over an extended period of time. Nicki, on the club question. Nicola Baty: Thanks, Billy. So regarding club, those wide double fridges that are in at the moment are in 416 club stores. So that's around 70% of the estate. What it's done is it's opened up both a lot of holding capacity, but also an opportunity for incremental products, both from us and from others to be listed in those fridges. Those fridges are not planogrammed. So I think the key piece is that no matter which club store you're going into, the range may look a little bit different in there. We would never expect to only have Freshpet in those fridges. And we believe that this Fresh as a segment is still a very big growing segment within the category, and there will be more competition coming in. But we do believe those fridges has opened up a lot of opportunity for Freshpet to put more product assortment in. And we're seeing very encouraging signs by having the highest level of distribution of any fresh product in there today. Eric Serotta: And just to follow up on that, Nicki, of the 30% of stores that don't have the double-wide fridges, are those stores that will potentially -- some of those that they're still rolling out to? Or do you think the customers kind of tapped out the store base that the double wide fridges would be appropriate to, given the demographics of the consumer at the store or the store footprint or things like that? Nicola Baty: I think that's a decision for the retailer to make. We don't see any space constraints today beyond expanding those double-wide fridges, but clearly, that's not really within our control. Operator: Our next question comes from the line of Matt Smith with Stifel. Matthew Smith: A follow-up question on the omnichannel growth. You referenced 82% of orders fulfilled through the fridge network. In the past, there's been some constraint on fridge space and out of stocks. Where does that stand today? Is there still a capacity constraint on omnichannel growth from availability of product? Does that improve as fridges expand? And are you seeing greater incremental fridge interest from retailers as they look to participate in more omnichannel growth with more capacity on the floor? William Cyr: I'll let Nicki take that. Nicola Baty: Thanks. I think we're seeing a lot of interest in moving more to multiple fridges, which might be the standard fridges, but also concepts like fridge island or open-air fridges, which is obviously what you're seeing in club retail at the moment. Many of our conversations with retailers are all about maximizing holding capacity so that they can compete very effectively with online sales, but also having the right assortment in. The big bit of research that we've done shows that the biggest unlock for that MVP shopper is actually access. An MVP shopper is buying across multiple channels. They want to buy online and they want to buy in-store and they buy very frequently. So as we continue to partner with retailers, they're looking for help in how they unlock that MVP access, and they're also wanting to compete very much with local fast delivery versus maybe some pure-play retailers. So we believe we will continue to steadily expand multiples, but we also believe there'll be more opportunity in the future for different fridge configurations, whether it's open air or items. Operator: Our next question comes from the line of Marc Torrente with Wells Fargo. Marc Torrente: Last quarter, you talked to the expected bridge on underlying SG&A, which was limiting some of the sales and gross margin flow-through to EBITDA this year. Has anything changed on those underlying assumptions? And any color on the cadence of those items through the year, particularly on media spend? William Cyr: I'll have John take that. John O?Connor: Marc, no change to what we outlined last quarter and no change also to the cadence of media. So we expect to be front half weighted. You saw some growth in the media as a percent of sales in the quarter year-over-year, which was planned. And we'd expect that media intensity to be stepping down as a percent of sales as we go through the year. In terms of other G&A, excluding logistics and media, we'd expect that to be generally flat on a sequential basis as we go through the year. There will be some comps that will drive differential growth rates, but overall flat sequentially as we go through the year. Marc Torrente: Okay. I appreciate that. And then I guess just building on that a little more, part of the SG&A step-up is investment behind omnichannel, and this is going to be a growth channel over time. So just trying to get a sense of how much of the SG&A step-up is, I guess, onetime versus more going in nature. John O?Connor: Yes. So there's kind of 2 elements of it that are onetime, right? I'll remind you of the step-up in variable comp expense, which we said was about 1/3 of the increase in dollars on the year. The remainder is capability investments, and there will be ongoing capability investments over time, but not to the scale that we saw this year. And a lot of it, Nicki has outlined in terms of driving the things we're doing from an omnichannel perspective that we weren't before. Those are investments we needed to make in '25 that are carrying into '26. And so that's really just a big step-up. And so there were 3 items that we said were roughly equal in size, driving growth in dollars year-over-year, media, in dollars, variable comp expense and then the investments in our capabilities being the other one. Operator: Our next question comes from the line of Jon Andersen with William Blair. Jon Andersen: Two quick ones. On the technology, the new tech, you've talked a lot about quality and cost. I'm wondering if there is an element here around product range, innovation, differentiation that this tech can also enable, if you could speak to that? And then second, Billy, you mentioned product forms earlier. I wanted to ask a broader question about forms in super premium and ultra-premium pet food. Are you seeing any changes by customers or within any of your channels where customers may be leaning into kibble, kibble plus, fresh/frozen? Anything on that front or does kind of the fresh refrigerated remain the gold standard? William Cyr: Jon. I'll take the first one, and I'll have Nicki take the second one. One of the beauties of this new technology is its ability to produce a wider range of product forms, all within the context of our bags. But think of that as different shapes. It could include different proteins that we can't currently produce with today. And what it'll allow us to do is also give higher quality inclusions. So some of our products you might have noticed, we have very nice cranberries and carrots and whatnot, and we can get better looking and a more diverse supply of inclusions that go into the products. And so you should expect that a big part of the payback for the incremental investments in these new technology will come from a wider range of product innovation that will be both more appealing, but also higher quality than what you can get from some of the competitors going forward. So we spent a lot of time focusing on the economic benefits or the efficiency gains of input cost, throughput, yield, quality, whatnot, but innovation is going to be a big driver going forward. But that's not going to be a big driver until we have more lines installed because we have to have enough capacity to support those new items. I'll let Nicki take the second part of the question. Nicola Baty: Thanks, Billy. We are seeing some more shelf-stable products coming in that might have some claims of being sort of fresh, i.e., they can be refrigerated after being purchased. We're not seeing very much traction coming through certainly when we look at the Nielsen data on any of those products. We're definitely seeing a little bit more growth coming through in higher interest in functional foods and ingredients that might deliver functional benefits. We think that, that continues to be an opportunity more for Freshpet to explore. And then clearly, we see a lot of frozen entrants, which is a little bit of an easier barrier to entry to cross to get frozen products out there. But unless they're supported with very heavy brand investment, so advertising investment, also, it's a little bit hard for them to get traction, especially when they're head-to-head with a fresh product at retail. So that's really pretty much the gist of what we're seeing in the competitive landscape. Operator: Ladies and gentlemen, our final question this morning comes from the line of Yasmine Deswandhy with Bank of America. Yasmine Deswandhy: I just wanted to dig in a little bit more on your -- on the omnichannel unit economics. In your prepared remarks, you talked about adding new stores like Tractor Supply, where you recently announced expansion to up to 700 stores by year-end. The shopper there is a little bit different than some of the other retailers that you're in. So if you can maybe talk about your go-to-market strategy there, whether the approach will be different, product lineup, marketing, messaging and if it will impact mix at all for this year? William Cyr: Nicki, you'll take that one. Nicola Baty: Yes. So we've had the benefit of doing a long test with Tractor Supply. So we've really learned on what part of the portfolio is going to work for their specific shopper. As you may expect, we've got some larger pack and larger dog SKUs that have gone into that range. We also have put our Vital pet specialty range into Tractor Supply, combined with some of our top-selling home style creations lines as well. So the mix of products that we have has been performing very well, which is why we've had the green light to expand really through the year. In terms of margin positioning, there's nothing in that, that would be particularly either accretive or detrimental on the P&L. So broadly the same as where we stand today. And in media, very much supported with the same master brand advertising that we do overall. Yasmine Deswandhy: Okay. That's helpful. And then the 35% of that capacity using new tech by end of year, where does that number stand today? And as you continue to install new technology, will you be able to ramp at that same pace? Or as you manage through capital cost and margin impact, will it be kind of slower than the pace that you're doing it this year, faster? Or yes, any change there? William Cyr: Yes. I would tell you, it's a very low number right now as a percentage of our total capacity because as you heard, we started up the full version of technology in January, but it's a relatively small throughput line and is producing relatively limited SKUs. The lite version that we started up has only recently started up, and we're still in the ramp-up phase, but what we've seen so far is very encouraging. But between the 2, it's a relatively small percentage of our total volume. When we add on the third line and we get further out on the operating competency or expertise level, that's where you get to that 35%. The big question for us is going to be as we add these new lines, it will come in a little bit in fits and starts. It won't be a uniform pace, and it will in part be driven by the capacity needs that we have because at some point, we'll have converted all the products that are relevant to be converted to this. And then the question will be when do you need more capacity? Because as we add capacity, it's likely that we'll have to make a decision about which technology we use to add the capacity, and that will be really driven by when that capacity is needed and what product forms is needed to produce. So it's not going to be any -- it's not going to be linear. It's going to be more episodically driven than it is going to be something you can lay down on a straight line. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments. William Cyr: Great. Thank you, everyone, for your time and attention today. I'll end today with a quote that I think is particularly appropriate for the challenging times we're operating in today. This is from an unknown. "The best therapist has fur and four legs." To which I would respond, "Pay them with Freshpet and give them treats as a co-pay." Thank you very much. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. My name is Brittany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EyePoint First Quarter 2026 Financial Results and Recent Corporate Development Conference Call. [Operator Instructions] Please be advised that this call is being recorded at the company's request. I would now like to turn the call over to George Elston, Executive Vice President and Chief Financial Officer of EyePoint. George Elston: Thank you, and thank you all for joining us on today's conference call to discuss EyePoint's first quarter 2026 financial results and recent corporate developments. With me today is Dr. Jay Duker, President and Chief Executive Officer of EyePoint. Jay will begin with a review of recent corporate updates and discuss our ongoing clinical programs for DURAVYU in wet AMD and DME. I will close with commentary on the first quarter 2026 financial results. We will then open the call for your questions, where we will be joined by Dr. Ramiro Ribeiro, our Chief Medical Officer; and Mike Campbell, our Chief Commercial Officer. Earlier this morning, we issued a press release detailing our financial results and recent corporate developments. A copy of the release can be found in the Investor Relations tab on the company website, www.yepoint.bio. Before we begin our formal comments, I'll remind you that various remarks we will make today constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These include statements about our future expectations, clinical developments and regulatory matters and time lines, the potential success of our products and product candidates, financial projections and our plans and prospects. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC and in other filings that we have made or may make with the SEC in the future. Any forward-looking statements represent our views as of today only. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. I'll now turn the call over to Dr. Jay Duker, President and Chief Executive Officer of EyePoint. Jay Duker: Thank you, George. Good morning, everyone, and thank you for joining us. The start of 2026 for EyePoint was marked by a strong quarter of consistent execution as we approach a pivotal inflection point for our lead program, DURAVYU. We have strong conviction that the upcoming LUGANO and LUCIA readouts will catalyze our future transition into a fully integrated biopharmaceutical company, furthering our mission of improving the lives of patients with serious retinal disease. We remain on track to deliver these Phase III top line data in wet age-related macular degeneration or wet AMD, beginning mid-year, positioning us to potentially be the first to market among all current investigational sustained release programs. In Diabetic Macular Edema, or DME, we are seeing strong momentum in our Phase III program with enrollment rapidly progressing to support our ambitious goal of full enrollment in both pivotal trials in the third quarter of 2026. As we advance towards these significant milestones, we are confident that our clinically-rigorous, derisked and patient-centric approach will continue to reinforce DURAVYU's best-in-class potential in the 2 largest retinal disease markets. The fundamental strength of the DURAVYU program lies in its robust and differentiated clinical data. In Phase II trials, a single dose of DURAVYU demonstrated durable efficacy with improved vision and tight anatomic control. In over 190 patients across 4 completed clinical trials, DURAVYU has demonstrated a consistently favorable safety profile with no safety signals. That profile continues to hold in our ongoing Phase III LUGANO and LUCIA trials for wet AMD as observed on a mass basis, where our low discontinuation rate of about 5% remains well below the 10% yearly average typical for wet AMD trials. Importantly, none of these discontinuations were related to treatment. At this stage, all patients across the LUGANO and LUCIA trials have reached the week-32 visit, during which patients in the DURAVYU arms received their second DURAVU dose. Over 35% of those patients have since received their third planned dose of DURAVU at week 56. As a reminder, we received 2 consecutive positive recommendations from the independent Data Safety Monitoring Committee with a third review scheduled for later this month. We are optimistic that the interim masked safety data will continue to remain consistent, further strengthening DURAVYU's clinical profile. In addition, we believe the multi-mechanism of action or MOA of DURAVYU's active ingredient, vorolanib, will prove to be a key clinical differentiator. Along with blocking all VEGF isoforms and PDGF at the receptor level, preclinical data supports vorolanib's ability to inhibit IL-6 signaling via the JAK1 receptor. With this unique ability to not only address both the vascular leakage and inflammation that contributes to retinal disease pathogenesis, but also potentially provide sustained release efficacy, DURAVYU is uniquely designed to deliver wide-reaching therapeutic potential. Earlier this week, we presented peer-reviewed data at the Association for Research in Vision and Ophthalmology, or ARVO meeting that reinforces these findings and further substantiate DURAVYU's potential to improve long-term outcomes for patients. A primary kinase screen and subsequent measure of IC50 levels identified vorolanib as a potent inhibitor of JAK1, which plays a critical role in IL-6 mediated inflammation. In addition, vorolanib proved to be a potent inhibitor of IL-6 leakage in an in vitro cellular model. This data further highlights the multi-MOA potential of DURAVYU with the opportunity to bring a synergistic anti-inflammatory effect in addition to established VEGF and PDGF inhibition to the treatment of wet AMD and DME. As we near top line data for our Phase III wet AMD program, it's worth remembering the key elements underpinning its thoughtful design. Our approach is derisked, following an established non-inferiority regulatory pathway. Both pivotal trials are identical and compared DURAVYU to on-label 2-milligram aflibercept, which is intended to reflect real-world practice and generate clinically-relevant data to inform the retina community. Additionally, both trials are evaluating 6-month redosing and statistical superiority in treatment burden reduction to support the potential for a compelling label that addresses the need for effective, durable disease control. Taken together, we believe our Phase III program is well positioned to deliver data that will build upon our positive clinical development track record and contribute to strong commercial positioning for DURAVYU, if approved. We look forward to reporting top line data from our Phase III wet AMD trial, LUGANO, this summer with our second trial, LUCIA to follow shortly thereafter. We are applying the same derisked approach to our Phase III DME program, which leverages a non-inferiority design, an on-label 2-milligram aflibercept control, and redosing every 6 months. Similar to our wet AMD program, we designed our pivotal trials for DME based on impressive data from the Phase II VERONA study in which DURAVYU demonstrated rapid efficacy with 4 to 5 letters of vision improvement and approximately 50-micron improvement in anatomic control compared to aflibercept at week 4. Both of our DME trials, COMO and CAPRI are now underway with over 1/3 of patients enrolled across both trials following first patient dosing at the end of February of this year. Our strong pace of enrollment is driven by our ability to leverage our pre-existing clinical trial infrastructure and investigator network as well as the significantly smaller trial size compared to our wet AMD program. We expect top line data in the second half of 2027. Stepping back, both wet AMD and DME together represent the vast majority of the global branded retinal disease treatment market with a combined branded opportunity totaling nearly $15 billion in the U.S. and growing. Through exceptional clinical leadership and commitment to serving the retinal community, we are positioning DURAVYU to become a durable franchise with blockbuster potential. With a unique multi-MOA, robust clinical data package, proven delivery technology, the ability to be shipped and stored at ambient temperatures and administration via standard in-office intravitreal injection, DURAVYU represents a compelling and truly innovative product profile that has the potential to reshape the treatment paradigm for serious retinal diseases. We continue to make significant strides in our commercial readiness while remaining disciplined in our investments as we prepare for regulatory submission. We have thoughtfully grown our organization with the addition of Michael Campbell as Chief Commercial Officer last quarter. In addition to expansion across key areas such as marketing and market access, regulatory, compliance and medical affairs to build on our organizational capabilities as we advance our launch planning and strategy for DURAVYU in wet AMD. In addition to progress on our commercial readiness activities, we continue to prioritize CMC readiness. Our cGMP facility in Northbridge, Massachusetts has been online for over a year, supporting our plans for an anticipated CMC submission for our potential new drug application or NDA as well as for commercial supply, if approved. We continue to prepare for pre-approval inspection, underscoring our growing independent commercial readiness that we believe will ensure our preparedness to deliver DURAVYU to patients upon potential approval. Before passing it over to George to review the financials, I'd like to thank the entire EyePoint team for your unwavering commitment to improving the quality of retinal care. We are proud to support the retina community and grateful to the patients, study coordinators and clinical investigators who enable our research. We look forward to our upcoming Phase III wet AMD readouts together with continued progress in our DME program, which we believe sets the stage for meaningful value creation at EyePoint. I will now turn the call over to George. George Elston: Thank you, Jay. As the financial results for the 3 months ended March 31, 2026, were included in the press release issued this morning, my comments today will be focused on a high-level review for the quarter. Importantly, we continued our disciplined financial management and good stewardship of our resources, ending the first quarter with $223 million in cash and investments. For the quarter ended March 31, 2026, total net revenue was $0.7 million compared to $24.5 million for the quarter ended March 31, 2025. The decrease was primarily driven by the recognition of remaining deferred revenue related to the company's agreement in the second quarter of 2023 for the license of YUTIQ product rights. Operating expenses for the quarter ended March 31, 2026, totaled $88 million compared to $73 million in the prior year period. This increase was primarily driven by the ongoing Phase III trials for DURAVYU in both wet AMD and DME and the scaleup of our Northbridge commercial manufacturing facility. Net non-operating income totaled $2 million and net loss was $85 million or $0.99 per share compared to a net loss of $45 million or $0.65 per share for the prior year period. As I noted earlier, cash, cash equivalents and investments in marketable securities on March 31, 2026, totaled $223 million compared to $306 million as of December 31, 2025. We continue to expect that our current cash position will enable us to fund operations into the fourth quarter of 2027 beyond key milestones for the Phase III wet AMD program expected later this year. In conclusion, we're pleased with EyePoint's progress so far in 2026 and remain well capitalized to deliver DURAVYU through key value-driving milestones in the 2 largest retinal disease markets. I will now turn the call back over to Jay for closing remarks. Jay Duker: Thank you, George. As we continue to deliver on our key priorities for 2026, our team is focused on advancing preparations for the pivotal Phase III top line data readout in wet AMD expected mid-year and completing enrollment of our Phase III DME program in the third quarter of this year. We believe TKIs represent the next frontier in retinal disease innovation, and we are proud to be advancing DURAVYU as a potential first and best-in-class option in the 2 largest retinal disease markets. Thank you all for your attention this morning. I will now turn the call back over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Tess Romero with JPMorgan. Tessa Romero: So just one from us, on the DME side, actually. So for your COMO and CAPRI trials, you talked a bit about your swift pace of enrollment here. Can you speak to what you're hearing from the investigators in terms of the level of interest from both patients and physicians around a TKI sustained delivery treatment option like DURAVYU? What are the key differences and similarities that you hear in the DME space versus maybe what you heard in the wet AMD space? Jay Duker: Thanks for the question, Tess. Given that our CMO, Ramiro Ribeiro, is really at the forefront of this, I'll ask him to answer your question. Ramiro Ribeiro: Tess, thanks for the question. So first, as you mentioned, we are seeing a great excitement around our DME program, COMO and CAPRI with a quite quick enrollment so far. We are now leveraging all the infrastructure that we use for our wet AMD with our clinical sites and our CRO and vendor as well. The feedback that we're getting from the investigators, very similar to our wet AMD, is that our study is a very patient-centric study, trying to address a very important unmet need, which is the treatment burden. So patients that are participating in this study are very excited for a therapy that can last for about 6 months. In particular, for the DME indication, we know that the need for this patient population might be even greater than wet AMD. This is a patient population that is relatively younger, and they are still in the workplace. So a therapy that can reduce the number of visits like DURAVYU is, of course, of very interest for this patient population. Again, I think the excitement both from the investigators, the patient in clinical sites is being reflected in the pace of our enrollment. Jay Duker: And I'd like to add just one more thought to this. We invited 90 of our wet AMD investigators to be investigators in the DME trials and all 90 accepted. So we believe that continues to show investigators' enthusiasm for the potential of DURAVYU. Operator: Our next question comes from the line of Yigal Nochomovitz with Citigroup. Yigal Nochomovitz: I'm just wondering if you could comment on how the supplement trigger criteria are functioning in the Phase III trial relative to the Phase II trial, the DAVIO 2 trial? And if you could also comment on what you would expect to be a meaningful supplement rate in the Phase III trial that would be consistent with a strong commercial uptake. Jay Duker: Yigal, nice to hear from you. Thanks for the question. With respect to supplements, I'm going to have Ramiro comment in a moment about how that is working in the trial. But I think there's really 2 issues around the supplementation that people should understand. The first is that in the clinical trials, supplements will be handled statistically with sensitivity analyses that we will be doing when we submit the NDA. So there is a rate of supplements, at least conceivably, above which the drug would not be considered to be working independently because of the high rate of supplements. In saying that, the FDA has never put a line in the sand as to what that level would be, because they want to see the totality of the data. They want to see the safety and the efficacy otherwise. So, from a supplementation perspective, there is an important hurdle, which, of course, we need to get over, which is the non-inferior margin, which is the primary endpoint. If we are approved, then I think the commercial acceptance shifts to a very different place. In the real world, a supplement is not a failure. Doctors, I believe, if we are approved, will enjoy taking advantage of using 2 MOAs to help a [indiscernible] across a lot of chronic diseases, where if 2 MOAs in treatment are available, using them synergistically is a potential advantage to patients. Now obviously, we haven't shown that yet in our trials, but we hope that, that would be the case for the benefit of patients. But my point about supplements in the real world, I'll give you again an example. If I've got a patient that I have to inject every 2 months with a biologic anti-VEGF and let's hypothesize that DURAVYU is FDA approved, it's safe, it's tolerable. It has a label for every 6 months and the patient gets shifted to DURAVYU, for the next year with 2 injections. But in addition, they received 2 injections of a biologic. Well, it's a great win for everyone. The patient can go from every 2 months to every 3 months from 6 injections to 4 injections and that presumably the advantages of DURAVYU will be aligned with the patient and the doctor's interest. So there is the regulatory hurdle that needs to be reached over supplements. And if that's reached, I believe that supplementation in the real world will have great latitude for acceptance. Yigal Nochomovitz: Okay. And then if I could just ask one other follow-up on DME. Of course, you mentioned IL-6 as a potentially interesting biomarker. Are any of those IL-6 biomarker endpoints formally embedded in the Phase III DME program as sort of secondary endpoints that could help differentiate the product? Jay Duker: I would say yes, but indirectly. Given that there is no way to measure in a patient in a clinical trial, the direct effects on IL-6 or JAK1, we would be measuring the indirect effects. The indirect effects, of course, number one is visual acuity. What we hope to be doing in the long term is provide better visual acuity for patients. But in DME, we may be able to provide it in the short term. Again, looking at the VERONA data at week 4, the patients who received DURAVYU had better vision and drier retinas as early as week 4 compared to a single dose of aflibercept. We have set up the COMO and CAPRI trials to try to show that. And there is a secondary endpoint of visual acuity and OCT at week 4, given our drug is given at day 1 in the DME trials so that -- we hope to show that even if we're non-inferior and equivalent to Eylea, but we can provide the benefit earlier with fewer injections, then we will be able to have a great advantage to patients and therefore, a commercial success. There are other secondary endpoints that we can look at that are not direct measurements of IL-6 or JAK inhibition. For example, leakage on fluorescein angiography. And you may recall that in the VERONA trial, we had a significant reduction in leakage as measured by an independent reading center, and it was dose-dependent, with the higher dose of 2.7 milligrams showing much greater leakage reduction compared to the lower dose and compared to the aflibercept control. And that is the kind of secondary endpoint that if we can show reduction in leakage greater than aflibercept, I think the evidence would lead to that is due to IL-6 inhibition. Operator: Our next question comes from the line of Faisal Khurshid with Jefferies. Faisal Khurshid: I just wanted to ask on the ongoing wet AMD studies, are you guys able to see blinded rescue rates? And are those tracking in line with your expectations? Jay Duker: Thanks for the question, Faisal. Again, I'll let Ramiro talk about the supplementations and what we're seeing and what we're not seeing. Ramiro Ribeiro: Faisal, thanks for the question. We -- there's a very small team at EyePoint that reviews the supplementation injections essentially to make sure that the clinical sites are following the protocol. But we don't review aggregated supplemental injection rate, and that's something that we don't disclose publicly. Jay Duker: And if I may add, we -- again, as Ramiro indicated, have no insight into the number of supplements, supplementation rate, et cetera, at this point. It's all masked. But we do anticipate that the supplementation rates in the Phase III trials will be less than what we saw in the Phase II for several reasons, again, due to the tightening of the supplement criteria, getting rid of the physician discretion in supplements, the reinjection at month 6 and the inclusion of the majority of naive patients, all of those together should result in fewer supplements in Phase III. Operator: Our next question comes from the line of Yatin Suneja with Guggenheim. Eddie Hickman: I'm sorry. This is Eddie on for Yatin. Thinking about the fixed-dose regimen that you guys are going after, are patients who are already dry with stable vision still receiving that third dose at week 56? And if so, is there any incremental safety signal from redosing well-controlled patients? And further, has the FDA weighed in on how this complicates the retreatment redosing schedule? Jay Duker: Thanks, Eddie. Very good question. And yes, this is a fixed dose regimen. It has nothing to do with whether the patient at the time of their repeat dose of DURAVYU is dry or wet or what the visual acuities are. So just like any drug, for example, take 2-milligram Eylea, when it was first studied every 2 months, that was fixed dose where they received that injection, whether they were active or not. So that's going to be true in our trial. From the perspective of safety, we've done extensive preclinical safety in animals. And in rabbits, we never found a maximally tolerated dose of vorolanib, and we've injected scale dose of about 10x higher than anything we could achieve in humans. We've also not found the maximally tolerated number of inserts in rabbits. And so from a safety perspective, we were not concerned about reinjection. Again, we are reviewing the masked safety. And I will once again turn to Ramiro if he wants to comment on the upcoming DMC meeting that is going to be occurring shortly. Ramiro Ribeiro: Yes. No, thanks, and thanks, Eddie, for the question. We -- as Jay mentioned, safety is something that is, of course, paramount for EyePoint, and we conduct ongoing safety review of the data. If you do the math, we have now have patients that reached that week 56 visit that you mentioned, which is the third dose of EYP-1901, and we haven't seen anything different than what we saw before. We do have an upcoming DMC meeting in the month of May, where the members will review our masked data, and we look forward to provide updates after that meeting. Operator: Our next question comes from the line of Debanjana Chatterjee with Jones. Debanjana Chatterjee: So what have you seen in the masked safety data set so far? And has anything shifted your expectations going into the DSMB review that is scheduled for late May? Jay Duker: Thanks for the question, Debanjana. And we're not commenting on any individual SAEs or AEs. But in total, I would say and repeat what Ramiro has said, what we've seen so far is consistent with what we have seen in the prior 4 trials. No new safety concerns and no incidents that we haven't seen or expected from before. Again, Ramiro, I don't know if you want to add any more color to what I said. Ramiro Ribeiro: Yes. No, I think just again, to reiterate, safety at EyePoint is paramount. We -- internally, we review the data on an ongoing basis on a masked fashion. And as Jay mentioned, we have no safety signal. We haven't attacked anything that is new. The safety profile continues to be very similar to what we saw in our previous completed studies. Debanjana Chatterjee: Just a very quick follow-up. Can we expect any formal public update following the DSMB meeting? Jay Duker: Yes. I think it's likely that we will give an update, yes. Operator: Our next question comes from the line of Lisa Walter with RBC Capital Markets. Lisa Walter: Congrats on the progress. We have seen a long-acting TKI competitor had a successful readout of their pivotal study earlier this year. And we've heard their plan is to file with the FDA and seek approval on this trial alone. In a scenario where essentially both, yours and the other long-acting TKI, are being launched within similar time frames, does perhaps having 2 products with the same mechanism of action actually help break into a market which already has an established therapeutic base with the anti-VEGF? How should we think about this? Jay Duker: Yes, Lisa, thanks for the question. It's a great question. And I think you've really hit on a very important point. This is not a zero-sum game. The TKIs are going into a multibillion-dollar market. And there is certainly room for 2 competitors to both be very successful in this very large market. There is evidence from -- as I think you're alluding to, from other launches with new mechanism of action into an established space that having more than one entry really helps both because doctors are hearing it and learning about it from multiple places. So we welcome another competitor. And part of that is we believe we've got a better drug and a better delivery system. And hopefully, if both are FDA approved, well we will have the opportunity from a commercial basis to really show that. Operator: Our next question comes from the line of Nick for Colleen Kusy with Baird. Nick Quartapella: It's Nick on for Colleen. So just at ARVO and other recent scientific conferences, just wanted to ask what -- just what the takeaways were on DURAVYU, sentiment among physicians and if you got any learnings about how physicians intend on using DURAVYU upon a potential approval? Jay Duker: So one point I'd like to make, and thanks for the question, Nick. One point I'd like to make about ARVO is we had a poster there, which showed another preclinical model of leakage induced by VEGF and IL-6. And in that model, vorolanib, the active ingredient in EYP-1901 was able to suppress the inflammation induced by IL-6 and VEGF equal to an anti-VEGF and an anti-IL-6. So again, one more model that suggests that vorolanib does have potent anti-IL-6 activity through the JAK1 receptor. There was a lot of interest in that poster. A lot of KOLs saw it, and there were quite a number of comments. Ramiro met with multiple KOLs at ARVO, and I will let him weigh in on what the sentiment seems to be around EYP-1901. Ramiro Ribeiro: Yes. No, thanks, Nick, for the question. And we had a very productive ARVO this year with several posters being presented, including the one that Jay just mentioned. We also had a few advisory boards and some interactions with our Phase III wet AMD and DME investigators. I think first on the sentiment of the clinical trials, I think everybody, of course, is very excited for the upcoming data for LUGANO and LUCIA. Mentions are, this is going to be the highlight of the retina space for the year of 2026. For DME, the investigators, again, reflect that this is a really well-studied plan, very patient-centric, and they were all excited about bringing the therapy for patients with DME. In terms of future use of DURAVYU, as Jay mentioned previously in the call, they expressed the important unmet need that we're trying to address with DURAVYU. And they see this if we can replicate the results that we saw in the Phase II study as something that is going to be very meaningful for patients, especially for those patients that require frequent treatment. Operator: Our next question will be coming from the line of Yale Jen with Laidlaw. Yale Jen: And I just follow up a little bit on the commercial question earlier, which is that besides the TKIs, in terms of the long-acting biologics, VABYSMO and the high-dose Eylea, which one you think you [ scale really ], if approved, will be competing more or less? And any comment on that? Jay Duker: Thanks for the question, Yale. It's an important question because these are excellent medications that are multibillion-dollar drugs that are really helping many, many patients. I think the first point to be clear on is we're not another anti-VEGF biologic. We work at the receptor level. We have multi-MOA block VEGF, PDGF, and we do believe the inflammation related to IL-6 elevation, which is not something that they do. In addition, it looks like from our Phase II data that at least 2/3 of the wet AMD population could be treated with our drug alone every 6 months should physicians choose to do that. That's not something that we're seeing in the real world with those new medications. While there are extended durations, what the real-world data is suggesting that most patients are getting about a week or 2 extension from either of those drugs compared to what they were on before. Now that's great, but we still believe that it leaves a lot of room in the market for a 6-month or longer medication. I -- it's hard to predict which of those drugs will be -- I don't want to say the winner because I think both drugs are doing well when we launch potentially. But we -- again, our belief is that we can provide benefits greater than what either of those drugs can do for patients. And we believe in the long term, we will achieve better visual acuity. Mike Campbell, our Chief Commercial Officer, I believe, is on the line. And I don't know if he's going to maybe have any other comments now. I think it's a little early to talk about commercial strategy. But maybe, Mike, you can talk a little bit about how you view the competition. Michael Campbell: Yes. Thank you for the question. The one point I would add is that while we have these very good anti-VEGFs, longer-acting anti-VEGFs in the market, not only is the real-world data showing the extension that Jay mentioned around 8 days. We also look at what the retina specialists are saying in the community and where the needs are. And so if you look at the American Society of Retina Specialists, ASRS, every year, they put out a PAT survey. And very consistently, the #1 need in wet AMD treatments that is reported from ASRS is still durability even with VABYSMO and Eylea HD in the market. So to Jay's point, there is a very clear opportunity should DURAVYU be successful and be approved, there's a very clear opportunity or room in this market for more durable agents. Operator: Our next question comes from the line of Samuel Rollenhagen with TD Cowen. Samuel Rollenhagen: This is Sam on for Tara. Can you hear me? Jay Duker: Yes. Samuel Rollenhagen: Congrats on another great enrollment update. So I just wanted to ask on safety for the LUGANO data. And if you could help us set some expectations there for what you're hoping to see. I guess, besides avoiding some of the more serious back of the eye events, are there any other AEs where you think DURAVYU could be differentiated versus competitors? And then also, it'd just be great if you could clarify how you're anticipating to disclose those safety data in the top line release? Will you be reporting all events or just those above a specific threshold? Jay Duker: Thanks for the question, Sam. And so again, the -- one of the hallmarks of the current anti-VEGF approved drugs with perhaps one exception, is they're quite safe. And while patients and physicians will probably be willing to accept perhaps a few more AEs from a long-acting drug, there can't be a big difference. There's really a high bar that's out there for safety. And the good news is that all our safety from our 4 reported trials shows no real increase in any SAE or AE that would preclude our drug from being widely accepted, in our opinion. So from a safety perspective, again, a lot of the safety issues that can occur are injection related. And if you're reducing the number of injections that a patient gets, then you're likely in the long term to have fewer adverse events. We hope to be able to show that in our pivotal trials. And from a reporting perspective, I don't know how granular the safety reporting will be initially, but we do expect to have complete AE tables when we present the data from LUGANO and LUCIA. Operator: I'm showing no further questions in the queue at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program, and you may now disconnect. Everyone, have a great day.
Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to trivago's First Quarter Earnings Call 2026. I must advise you the call is being recorded today, Wednesday, the 6th of May 2026. We are pleased to be joined on the call today by Johannes Thomas, trivago's CEO and Managing Director; and Wolf Schmuhl, trivago's CFO and Managing Director. The following discussion, including responses to your questions, reflects management's view as of Tuesday, May 5, 2026, only, unless expressly stated otherwise, in which case, reflects management's view as of today, Wednesday, May 6, 2026 only. Trivago does not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate or similar statements. Please refer to the Q1 2026 operating and financial review and trivago's other filings with the SEC for information about factors which could cause trivago's actual results to differ materially from these forward-looking statements. You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in trivago's operating and financial review, which is posted in trivago's Investor Relations website at ir.trivago.com. You are encouraged to periodically visit trivago's Investor Relations website for important content. Finally, unless otherwise stated, all comparisons on this call will be against results for the comparable period of 2025. With that, let me turn the call over to Johannes. Johannes Thomas: Good morning, and thank you for joining our Q1 2026 earnings call. We are off to a strong start to 2026, delivering 15% year-over-year total revenue growth and our fifth consecutive quarter of double-digit growth, while improving profitability against our prior year. Americas grew 17% and Developed Europe, 14% in referral revenue, both substantially exceeding our expectations. This performance came despite tangible FX headwinds and geopolitical pressures in parts of our Rest of the World segment. The results reflect our balanced approach to growth and profitability with cost discipline and the compounding effects of prior brand investments translating into tangible outcomes. Branded traffic revenue once again outpaced total revenue growth this quarter, demonstrating that our long-term brand strategy continues to compound. Our product is converting better with conversion rate up 58% since Q1 2023. Before intercompany eliminations, our logged-in member base now drives more than 30% of referral revenue. Trivago Book & Go's relevance has increased significantly compared to previous year. This is what optimizing momentum and pushing frontiers, our theme for 2026 looks like in practice. We continue to grow at a healthy pace in markets we have built up since mid-2023 while increasing profitability through the compounding effects of the investments we have already made. While we are facing challenging year-over-year comparables across the first half of 2026, Q1 surprised us positively and Q2 has had a promising start. On the back of our strong Q1 performance and the momentum we are carrying into the rest of the year, we are reaffirming our full year revenue outlook of double-digit percentage growth and raising our profitability guidance. We now expect adjusted EBITDA of around EUR 25 million for 2026, up from prior guidance of at least EUR 20 million. We are also announcing a planned share buyback program up to EUR 20 million, reflecting our confidence in trivago's long-term value creation potential. Wolf will cover the rationale and more context on this. Before walking you through our strategic priorities, I want to address one further announcement. Yesterday, we filed an antitrust damages claim against Google before the Regional Court of Hamburg in Germany, seeking compensation for damages trivago has suffered as a result of Google's self-preferencing in general search results. For more than a decade, we have raised concerns that Google has systematically steered travelers away from competing hotel metasearch platforms and towards its own service. We believe the claim rests on a strong legal foundation. The EU Commission's 2017 Google Shopping decision upheld by European Court of Justice in September 2024, established a legal framework for damages actions of this nature and 2 first instance awards have already been granted in comparable cases before the Regional Court of Berlin in November 2025. The claim covers the period from January 2014 through December 2025 and seeks substantial monetary damages based on an independent expert analysis. We expect this to be a multiyear effort and the outcome of litigation is inherently uncertain. That said, the size of the potential claim is meaningful, and we believe pursuing it is in the best interest of our shareholders and of a travel ecosystem that benefits from competing based on merit. For details, please refer to our separate press release published on ir.trivago.com. With that, let me return to business and walk you through the great progress we made against each of our 3 strategic priorities this quarter. For additional details, please also refer to our investor presentation on ir.trivago.com. Our first strategic priority is to drive growth through brand marketing. The flywheel we have been building since mid-2023 continues to compound. Branded traffic revenue grew faster than overall top line in Q1, demonstrating that our brand spend produces returns that extend well beyond the period in which it incurred. Our successful 2025 campaigns, combined with the deliberate diversification of our marketing mix into owned and direct channels set up Q1 well, and we have meaningfully reduced our reliance on search-related channels. Before intercompany eliminations, the share of referral revenue from Google is down 34% compared to Q1 2023, and our non-branded SEO exposure remains at low single-digit levels. We believe the business is structurally less exposed to search volatility as a result. Traffic referred from GenAI sources remains below 1% of revenue. These channels are small in absolute terms. And in our view, their near-term impact often appears overestimated. We see them as an emerging marketing opportunity gradually growing in relevance, operating more upper funnel than traditional search. We are actively integrating and testing new ad formats, calibrating investments to the relevance those channels demonstrate over time. Our strong brand, deep performance marketing expertise and vertical focus positions us well to leverage them to our advantage. In our view, AI systems will play an increasingly relevant role in the travelers' journey, but primarily at the top of the funnel, helping users get inspired and explore where to go. Once users move into planning, selection and booking, the experience they need is fundamentally different. They compare hotels side by side, check different booking sites, build shortlists, filter across many dimensions, check room types and explore locations through a rich map experience. These are only a few examples. In essence, our user experience is much richer and has been optimized over decades. This is not a result of taste or opinion, but of tens of thousands of tests that have shaped our interface into what it is today and how it addresses the nuanced needs of travelers. We believe this is where trivago plays a distinct role as a trusted guide backed by comprehensive pricing, availability and rich content that AI assistants are likely struggle to build a competitive edge on. Our partnership with Jurgen Klopp continues to be a meaningful asset, and his association with the trivago brand resonates strongly across our audiences. Ahead of the summer travel season, we have produced new creative spots, including dedicated TV ads that combine Klopp with a major sporting event taking place this summer. We are heading into the year's most important travel period with a strong creative pipeline. We are now operating in 30 active markets, though our brand investment remains meaningful below 2019 levels, and our market share in these markets is still small. We believe significant growth potential lies ahead. Our second strategic priority is to enhance our core hotel search experience, so travelers can book with confidence, saving time and money. Our testing velocity remained high in Q1, and we have increased our product conversion rates by 58% since Q1 2023. This is significant. It reflects how much better our product has become and is having a direct impact on our unit economics and marketing efficiency. We also expect this increased conversion rates to have a meaningful impact on our user satisfaction and retention over time. For partners, it means more qualified travelers landing on their site. Our member strategy is advancing faster than we expected. Before intersegment elimination, locked-in members now account for more than 30% of referral revenue. Members unlock access to exclusive partner deals, creating a compelling reason to log in and return to trivago. This deepens our understanding of users, gives us more touch points to extend the user life cycle, and we expect this to drive long-term retention. As more data accumulates within the member experience, we expect to unlock further opportunities around loyalty features and reengagement through CRM activities. Personalization is becoming an increasingly important lever for us. We continue to refine our ranking logic based on user behavior. And this quarter, we expanded our explicit preference settings, allowing users to indicate what matters most to them across dimensions like hotel style, quality, star rating, location and budget. The combination of real-time behavioral signals and stated preferences gives us a much richer picture of what each user is looking for. This lays the foundation for increasingly accurate recommendations and a more tailored search experience at scale, and we believe personalization can become a true differentiator for us. We also shipped 2 important product improvement in Q1. We launched Nova Vista, our new desktop architecture, which gives us a stronger foundation for the more structural experimentation required to rethink the user experience for a conversational AI native era. As part of our AI Smart Search initiative, we're experimenting with conversational experiences that keep our core search and rich user interface at the center, combining the familiar with the new capabilities GenAI-based technology unlocks. We also introduced AI synthesized top 10 badges by theme, surfacing each hotel's standout qualities at a glance across attributes like pool, breakfast, location and family-friendliness, a simple but effective way to reduce decision fatigue and help users move from search to booking with more confidence. The progress across these fronts is mutually reinforcing. Better conversion makes us a stronger channel for partners. Members deepen our personalization and personalization improves conversion. We are building a flywheel inside the product itself, and we are still at the early stages of what we believe it can deliver. Our third strategic priority is to help our partners realize their potential on our platform. Our marketplace is healthier than it has ever been in years, and the numbers reflect it. Before inter-comp eliminations, the share of referral revenue from all others advertisers has grown from 20% in Q1 2023 to 35% in Q1 2026, Partners increasingly recognize the quality of traffic we deliver, and this is showing up across the board. Over the past 3 years, we have made deliberate investments to rebalance our marketplace and reduce advertiser concentrations. Initiatives like our transaction-based CPA model, our second price auction, trivago Book & Go and our Property Details Page share a common goal, making it easier for small and midsized partners to compete effectively on our marketplace. We believe all of these have contributed to this shift and drove advertiser engagement. Our Property Details Page has now been rolled out globally after being qualified over the course of the past year. It addresses a structural disadvantage independent hotels and chains have long faced. Previously, when users click through from trivago to a partner site, they would often land on a room selection page, far further into the journey than they actually were. By qualifying our Property Details Page as an intermediary referral destination, we now hand off users at the right moment. We have seen this meaningfully improve conversion for our direct partners. Trivago Book & Go continues to scale rapidly. Since Q1 2023, referral revenue before intercompany eliminations generated through this funnel has grown by 530%, and it has doubled its share compared to last year. Globally, trivago Book & Go has become a top 5 player in our marketplace. By combining our trusted brand with a seamless booking experience, we are creating value for users and partners alike. Our transaction-based CPA model continues to grow with over 30% of referral revenue before intercompany eliminations now processed through this model, up from 25% just 1 quarter ago. CPA is particularly valuable for small and midsized partners who often do not have the resources to optimize bids and manage exposure effectively. By removing that complexity, we believe we are helping them to compete more effectively, which is good for partners and for the long-term health of our marketplace. Before closing, I want to address one topic that cuts across all 3 of our strategic priorities. AI transformation. The pace of AI is accelerating and driving its diffusion across the organization is a key focus for us as a leadership team. In recent months, new impactful AI capabilities have become available, and therefore, we have further elevated AI's role inside the company. We are leading this transformation actively with a clear ambition for our approximately 600 core talents to operate with the impact of 6,000. Importantly, we are not starting from 0. Trivago has run AI in production for over a decade, across our marketplace, search ranking, coding and advertising infrastructure. A majority of our workforce already thinks in systems, acts as builders and operates in close feedback loops, giving us a strong foundation to build on. From here, we see teams evolving through 4 stages, from AI-assisted work to automated workflows to agentic-first systems and ultimately self-improving systems. There is broad consensus that AI will absorb a meaningful share of execution work, and we view this as a great efficiency gain. It expands our capacity and lets the same number of people deliver more. This has become a base expectation for us, but we believe the real upside is much bigger, reaching the impact of 6,000 will come from human craft being amplified by AI leverage. As execution work is absorbed, our people do not just gain time. They become meaningfully better at what they do, sharper decision-makers, faster and more ambitious builders, capable of governing greater complexity and with real capacity to deepen the relationships that move the business. This is where the real leverage lies, and this is what makes us excited about the path ahead. To execute on this opportunity, with sharper focus and clear accountability, we expanded our leadership team in the recent months with 3 C-level appointments. Ioannis Papadopoulos joined as Chief Technology Officer at the end of the last year, leading our technology agenda and AI enablement. In March, Alexander Volkmann was appointed Chief Intelligence Officer, owning machine learning and AI data strategy. And Sherin Hegazy was appointed Chief Commercial Officer, deepening our partner ecosystem. The pace of AI is reshaping what is possible in travel search, how we build products and what travelers and partners will expect. All 3 additions have helped building what trivago is today and the institutional depth and judgment they bring is exactly what this next chapter requires. I'm excited to have them on board and to shape the future of trivago together. None of this would be possible without our standout team. What gives me confidence is how our people are stepping up to this moment. They are curious, fanatic learners and deeply committed to defining the next chapter of trivago. That mindset more than any single technology or strategy is what can set us apart. Thank you all for your hard work and dedication. With that, I'll hand over to our CFO, Wolf, for a more detailed financial review. Wolf Schmuhl: Thank you, Johannes, and good morning, everyone. We are thrilled to report that Q1 was another strong quarter for trivago, exceeding our internal total revenue growth expectations. We achieved a 15% year-over-year increase in total revenues while shifting more towards profitability despite ongoing FX-related headwinds. This is a result of optimizing existing markets and making use of compounding brand effects, showcasing our balanced approach between top line growth and improving profitability. We are announcing an up to EUR 20 million share buyback program with details to be finalized and execution plan to start at the end of May. Given our strong cash position of EUR 136.1 million and 0 long-term debt as of March 31, we believe this represents a disciplined and high return use of capital. Our view is that the current share price does not reflect the company's long-term earnings potential, and we are putting capital behind it. Let's review our first quarter results as well as our 2026 outlook. Unless otherwise indicated, all comparisons for 2026 are on a year-over-year basis. In the first quarter, total revenue reached EUR 142.9 million, representing 15% year-over-year growth despite foreign exchange headwinds of approximately 5% globally. Americas grew 17% and Developed Europe 14% in referral revenue, both exceeding our expectations, driven by better quality traffic from higher branded channel traffic and compounding brand effects. In Americas, prior quarter brand investments compounded particularly well. In Developed Europe, demand remains strong. Rest of World declined 12% in referral revenue year-over-year, impacted by FX headwinds of approximately 9% and geopolitical pressures in the Middle East, including airspace restrictions and elevated oil prices. We have managed these markets tactically through the quarter, adjusting bidding, spend and targets locally. The evolving situation in the Middle East continues to create near-term uncertainty, and we will continue to manage our exposure dynamically as conditions develop. With Rest of World representing only 17% of our Q1 referral revenue, the overall impact on total referral revenue was limited. More broadly, with Developed Europe at 44% and Americas at 39% of Q1 referral revenue, our business is well diversified across segments, making us structurally more resilient to localized macro pressures. During the first quarter, we reported a net loss of EUR 7.3 million and achieved an adjusted EBITDA loss of EUR 4.5 million, which was above our internal expectations. Operational expenses increased by EUR 19.2 million, totaling EUR 152.9 million for the first quarter. This was mainly due to a EUR 10.6 million increase in selling and marketing, resulting from higher investments in both brand and performance marketing channels made over the course of the quarter, and incremental expenses resulting from the consolidation of trivago DEALS, formerly Holisto. Advertising spend increased by EUR 7.8 million or 20% in Developed Europe, EUR 4.1 million or 9% in the Americas and decreased by EUR 1 million or 5% in Rest of World. Despite the continued scaling of our marketing investments in this quarter, global ROAS improved from 118.1% in Q1 last year to 121% in Q1 this year. We observed a significant ROAS improvement in Americas, increasing from 102.7% in Q1 2025 to 116.1% in Q1 2026, while we observed reductions in Developed Europe from 134% to 130.5% and in Rest of World from 120.3% to 111.2%. By the end of Q1 2026, we had EUR 136.1 million in cash and cash equivalents and no long-term debt, highlighting our exceptional financial position. Despite challenging comps in the first half of the year, we are off to an encouraging start to Q2. We expect to further scale our brand marketing investments, but at a more moderate pace compared to previous years and make use of compounding brand effects in order to gradually increase profitability in 2026. Additionally, in 2026, we aim to begin consolidating trivago deals without the 1-month reporting lag, our current accounting policy election, which currently causes timing differences in our consolidated financial statements. We anticipate sustaining our growth trajectory with steadily improving profitability, targeting 10% adjusted EBITDA margin in the next few years. For 2026, we are maintaining our expectation of double-digit year-over-year total revenue growth and increasing our adjusted EBITDA guidance to around EUR 25 million. With that, let's open the line for questions. Operator, we are now ready to take the first question. Operator: [Operator Instructions] Your first question comes from the line of Naved Khan with B. Riley Securities. Naved Khan: Congrats on the results and the raised outlook. A couple of questions from me. It seems like you may be further ahead in getting the compounding benefits of brand advertising in Americas versus Europe, just looking at where the ROAS is on these markets. Can you maybe just talk about why that may or may not be the case, if I'm thinking about it the right way? And then on your 10% EBITDA margin over the next few years, maybe just give us a better sense of like maybe the time line, if it's like 2 or 3 years or maybe further out or not? And then maybe on the -- just on Google, I think you've been testing some changes as part of remedies. And I just wanted to know if that's -- if those changes are favorable to your business or not or if it's too early to say? Wolf Schmuhl: Naved, thanks for your questions. So if I get it right, your first question was related to the developments in Americas and in Developed Europe. So in our Americas segment, we [indiscernible] use of compounding brand effects. This was basically the major impact we saw there. So basically, we the investments we did in previous quarters are now compounding. And if you take a look at the ad spend development there, it is reduced to prior quarters or year-on-year comparables. And therefore, we need to spend less in order to generate the same revenue. That was the main driver we saw in the Americas. An additional point that also influences the development is that we improved our conversion rate tremendously that we were able to generate better quality traffic. All these developments are also related to this. When we then take a look at our Developed Europe segment, there, we also saw a slight decrease in the ROAS. And the reason is mainly due to the fact that we saw strong investment opportunities in Developed Europe. And as you increase your brand spend at the same point, your ROAS also decreases due to the fact that the positive effect from your brand investment will set in at later stages. That's on the development in the segments. And your next question was related to the -- our way to the 10% margin that we called out. So we are comfortable with this 10% target within the next few years. We -- at the moment, we don't want to narrow it down further, but thinking about it in the next -- or in the upcoming quarters, most probably. And -- but what we can say and what leads to this positive margin development, I would like to point out here. So first, we see compounding effects on the one hand from our increased brand investments and on the other hand, from a much improved product. More travelers become aware of us and more travelers engage with our product. And yes, at the same hand -- on the other hand, the loyalty of the users increases -- the probability that they come back increases. The second important point is that we also in the future will further increase our brand investments, but at a more moderated pace compared to previous quarters and make further use of these compounding brand effects in order to gradually increase our profitability. And here again, the example of our ad spend in Q1 where we -- in Q1 2025, where we increased our ad spend by about 24%. And now in Q1 2026, only on a more moderated level by 10%. And the additional contribution that we expect from these measurements will directly go to the bottom line instead then of reinvesting them again into marketing. So the U.S. market or the Americas market at the moment is a good example for this. Johannes Thomas: Yes. And maybe I can add one aspect here what makes us excited and how we believe we can improve bottom line. And before I do that, maybe the point you asked initially on Americas, if you look at our ad spend increase last year in Q1 was I think, 3x higher compared to this year. And this is exactly the path we are going just to incremental -- our incremental investment will slow down gradually, but there's still lots of room to grow compared to our investment in 2029. So there can be a multiyear uplift in brand investment, but slower than in the past years. And then that will go into bottom line. A third point that we believe will drive the 10% EBITDA or what makes us rather comfortable about the 10% adjusted EBITDA is that one effect that's not -- that we haven't talked much about is the logged-in member aspect has won a higher loyalty because people have more touch points with us. But then you also have aftermath of that. You have e-mails and a chance to engage with users. And we call this owned media internally. So we are reengaging users in this period where there's like users come to us and they tend to book within 1 day and like 2 weeks. That's a high converting period. And if we have e-mails, we can engage with these users much more actively, make sure we stay on top of mind with the users and then drive and convert these users and bring them back. So that has a direct impact. We see our CRM activities, sending e-mails to users. This is growing a lot internally, and it will start to become meaningful for our bottom line very soon. And over time, the more our members go up, the better we optimize the engagement with our members, the more this will contribute to the bottom line. And then the 10% is realistic. And the time line, I think we will figure out and create more clarity. I think the next few years is indicating that we don't want to make this a long process, but rather go there with confidence as soon as we can. Naved Khan: Great. And then on Google? Johannes Thomas: On Google, yes, the third point on Google. So Google from our perspective, is still not complying with DMA. I think the commission had the preliminary finding that they are not and everybody is waiting for the final finding of the commission. This can happen any time. What we see on the Google front is that they do some changes. We have not seen any material impact. They are testing, they're evolving. Overall, I think what has been true over the long term, and they are not allowed to put their full hotel search product and price comparison product on top of the search results, and that is strategically a positive development because they are not pushing a product in front of people's mind on top of the generic search results. So this is generally positive. I wouldn't say this has a short-term impact on us. It's rather a stronger position we have as a metasearch with a better product that we can operate for users. So there's no change we can see in the last week. Operator: Your next question comes from the line of Doug Anmuth with JPMorgan. Dae Lee: This is Dae on for Doug. I have 2. The first one, it looks like the share of referral revenue from all others appears to have inflected more meaningfully over the past 2 quarters. Curious what's driving that acceleration? And can you speak to the competition within the bucket? Is it broad-based long tail or specific partners scaling into material individual share? And I have a follow-up. Johannes Thomas: Yes. I think -- thank you for the question, a very important one. On the one side, on the marketing hand, we are diversifying our marketing mix, and we believe this makes us more resilient. And then on the other hand, also the partner mix is becoming much better, and the mix has moved from 20% in Q1 2023 to 35% in 2026. And that's quite substantial. And I think the main reasons, it's many things. If you have a marketplace, lots of dynamics come together. So it's hard to dissect and say what are individual things that drove this. Overall, it's always a matter of how our advertisers engage in our marketplace. Some engage more, some engage less. But overall, the engagement, I think, is very good. And we have seen that the improved conversion rates we deliver, so higher quality of traffic has resonated very positively with our partners. And then there is a range of structural things that we have done. You might remember, I think it's 2 to 3 years ago, that was the time line when we rolled our second price auction, which made our marketplace dynamics different. Then over the last quarters, we have reported that the CPA model has been very successful being rolled out, which is a transaction-based model. So partners don't need to do the bidding. Bidding is very complicated, especially for small partners that have scarcity of data. And that has been a very successful initiative. Book & Go took more share. It doubled its share into our marketplace. So you asked about who in the all others mix have taken share. Book & Go is one. There's other players that joined our auctions, that joined our marketplace that are relevant in the alternative accommodation space, and Book & Go took more space. And also the direct players have significantly increased in size as well. And here, the connected part is Property Details Pages that we rolled out. We qualified in the course of the last year, a very long testing process, lots of diligence, making sure this drives conversion and is positive for our direct partners. What I explained in my remarks earlier is that if you come as a user and land from trivago on a room selection page, this is a very big step in the decision-making process. So what we have introduced now when you click on a direct partner, you land on a hotel page, we call it Property Details Page, that gives you content, images and the different room types and so on, on trivago. And we only forward more highly qualified users to our direct partners. So you remove some of the structural disadvantages independent hotels or chains have. And this had a significant impact in the recent months as well together with Book & Go, other partners, CPA model, and this all had an impact that contributed to the shift. Dae Lee: Okay. Great. And as a follow-up and somewhat related, when you guys talk about referral revenue from log-in members growing to 30% of referral revenue. I'm curious like where does that log-in conversion happens through the travel funnel? And I guess is the log-in members growth from new users and logging in for the first time, drawn by exclusive deals? Or are you seeing meaningful repeat behavior and higher revenue per member from existing base? Johannes Thomas: Yes. I think very good question as well. I think overall, and we have shown this in the Investor Relations presentation, an example, the most important drivers for this are the prompts in -- if you go to the desktop, you are prompted, there are better prices when you log in. You have unlocked rates in the price comparison stack that you have on the hotel level and when you are -- a main driver as well. If you use our app, you are quite prominently asked to log in. And these are drivers that do this. And it's both. It is people returning to trivago, the share there of logged-in members is much higher than for the general population. So it's a combination of both. But most important is unlocking new deals and pushing users in our app to log in, where users tend to be more core trivago loyal users and where trivago -- and where people are more used to logging in. And in the app, the great thing is we not only have CRM activities with e-mails. And if you get somebody to log into the app, you can create push notifications, which then drives contribution as there's little cost to these activities compared to other marketing. Operator: We have no further questions at this time. I'll now turn the call back to Johannes Thomas for closing remarks. Johannes Thomas: Thank you. Over the past 3 years, we have deliberately diversified our marketing mix, reduced our reliance on Google and rebalanced our marketplace effectively. The result is a structurally a more resilient business that we expect to continue to grow at a strong pace. From here, we are increasingly focused on steering towards profitability to maximize returns for our shareholders. Our planned share buyback program reflects our conviction. To our investors, thank you for the trust you place in us. And to everyone on the call, thank you for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon. My name is Carmen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fastly First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would like to turn the conference over to Vern Essi, Investor Relations at Fastly. Please go ahead. Vernon Essi: Thank you, and welcome, everyone, to our first quarter 2026 earnings conference call. We have Fastly's CEO, Kip Compton, and CFO, Rich Wong, with us today. The webcast of this call can be accessed through our website, fastly.com, and will be archived for 1 quarter. A copy of today's earnings press release, related financial tables and supplements, all of which are furnished in our 8-K filing today can be found in the Investor Relations portion of Fastly's website, along with the investor presentation. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, products and services, sales and growth, strategy, long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly reports filed on Form 10-Q filed with the SEC and our first quarter 2026 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer, in particular, to the sections entitled Risk Factors. We encourage you to read these documents. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today other than revenue will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website and filed with the SEC. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that during the second quarter, we will be attending the William Blair 46th Annual Growth Stock Conference in Chicago on June 2 and the D.A. Davidson 2026 Technology and Consumer Conference in Nashville on June 11, and also mark your calendars for our Investor Day, taking place on September 23 at the Nasdaq MarketSite in New York. Now I'll turn the call over to Kip. Kip Compton: Good afternoon, everyone, and thank you for joining us. We had a great start to the year at Fastly. In Q1, we delivered $173 million in revenue, up 20% year-over-year and near the high end of our guidance range. Fastly's value proposition is resonating with our customers, driving strong performance and growth in security and compute. Our focus on traffic engineering and platform efficiency continues to deliver results with another quarter of record gross margins. Security growth accelerated to 47% year-over-year and represented 22% of our total revenue. Our industry-leading WAF continues to perform well, and we are also seeing increasing momentum across our portfolio. In fact, among instances of security products sold to new customers in the quarter, almost half were of our newer products, DDoS Protection, Bot Management, and API Discovery and Inventory. We believe these are clear signals that our broader security suite is opening opportunities for wallet share expansion with existing customers while attracting new customers to the Fastly platform. Increased demand for our Compute offering drove the other category up 67% year-over-year, marking our largest quarter-on-quarter revenue step-up ever in this category. We expect continued momentum in compute as customers address increasingly demanding edge workloads and prove out high-value AI use cases. On a combined basis, security and other saw impressive growth of 50% year-over-year, and we anticipate these product lines will exceed the $200 million annual run rate milestone by late 2026. In Network Services, our platform's superior performance, reliability and value are driving continued share gains and delivered 11% year-over-year growth in the quarter, roughly double the market growth rate. We believe the Fastly platform's appeal is fueling momentum across the portfolio as customers increasingly prioritize secure, reliable and innovative solutions where performance matters. Our go-to-market execution continues to deliver strong results, including growth in new customers across key verticals in Q1. At the same time, our continued expansion within our existing base remains robust and drove LTM NRR to 113%, as Rich will discuss later in the call. We also saw broad-based strength year-over-year across all geographies. We are continuing our investment in APJ, highlighted by the recent opening of our new office in Singapore. Following key leadership hires in Q1, we remain committed to scaling our regional presence with additional strategic talent this year. To further accelerate the momentum of our go-to-market transformation, we hired Joan Jenkins as our new Chief Marketing Officer. Joan brings over 2 decades of experience leading global marketing organizations at world-class companies, including Informatica, Druva, Oracle and Cisco. Joan has a proven track record of building high-performing teams, driving category leadership and importantly, strengthening the AI narrative to drive growth. Joan will be instrumental in bringing the Fastly platform story to a global audience, and we are excited to have her on the leadership team. Turning to AI. We see the rise of autonomous agents as a long-term growth driver. The edge has become critical for scaling and securing AI across multi-cloud environments. Fastly's flexible programmable platform is built for this moment. For our customers, traffic generally passes through the Fastly platform regardless of where agents are hosted. We are co-innovating with them to secure and scale their AI use cases and helping them manage and optimize a massive new wave of automated traffic. AI Bot Management is an early example of this. Most importantly, this strategy is working. It is actively building our pipeline. As a result, we believe AI is a tailwind for our business. Now let me shift gears and provide details on some outstanding customer wins in Q1, including several 7-figure deals. We closed a multimillion-dollar ARR full platform win to support a large social media platform's API and Video-on-Demand operations. By meeting rigorous availability and security standards, we mitigated downtime and data breach risk and enabled 24/7 continuity for millions of users. To enhance user trust, a privacy-first browser customer leveraged our platform to power a native in-browser VPN. The Fastly platform enabled them to fulfill their core privacy promise critical to their brand at global scale and support long-term user retention. A global social media corporation chose Fastly in a critical cross-sell security win. After a high-profile industry outage, the customer turned to Fastly, an established and reliable partner to help secure its global API traffic. By adding Fastly, the customer reduced their infrastructure risk, improved reliability and supported uninterrupted platform availability. Lastly, a multinational tech company chose Fastly for our network, security and privacy offerings to accelerate and secure their critical workloads. We are also seeing momentum in AI Bot Management wins in conjunction with our leading NG WAF offering, including an enterprise cloud storage provider replaced a fragmented legacy setup by consolidating app security and delivery on the Fastly platform. Deploying our Next-Gen WAF and Advanced Bot Management provided robust, scalable security compliance without sacrificing performance. Facing daily malicious AI bot traffic, a long-standing media customer added ContentGuard, a new product in the Fastly security portfolio introduced this quarter to protect their intellectual property without compromising the reader experience. A leading digital payment conglomerate expanded its Fastly footprint by adding 10 new products and services on our platform. With this expansion, they maximized network availability, safeguarded revenue and enabled 24/7 availability against cyber incidents. We were especially pleased to see a partner-enabled deal with a Japanese financial services provider. Working through a regional partner, offering 24/7 local support, this customer chose the Fastly platform to enable and secure a critical international expansion. Through the adoption of Fastly's Security and Network Services offerings, the customer was able to build a highly reliable, compliant infrastructure for its regulated business-critical payment systems. This is an example of our international go-to-market expansion at work. As these wins illustrate, our flexible platform and continuous innovation uniquely position Fastly to capture growing AI demand, and our expanded security portfolio directly drives customer wins and growth. Highlights of our expanding security portfolio from Q1 include ContentGuard. Managing the exploding AI bot landscape requires more than just a simple switch. It requires continuous intelligence. We launched ContentGuard to give publishers precise control over access to their content. Leveraging Fastly's pre-cache inspection, customers can stop unauthorized AI agents without sacrificing the speed or performance of their authorized traffic. This unmatched visibility provides the critical data our customers need to secure and monetize their intellectual property. API Security. As AI accelerates code delivery, it creates security blind spots through shadow APIs. We have addressed this customer need by enriching our web application and API protection portfolio enabling enhanced API Discovery and inventory tools. Automated API cataloging gives enterprises continuous at-scale visibility to secure their ecosystems without slowing developer velocity. Fastly Agent Toolkit. We released a toolkit that equips AI coding agents with Fastly-specific skills. This toolkit accelerates the customer development life cycle, enabling customers to build, deploy and secure edge services faster and with expert-level precision, ultimately driving quicker time to value on the Fastly platform. We also enhanced our Compute and Security offerings by adding support for additional programming languages. This completes the core suite of languages requested by our enterprise customers, extending our premium security layer to a wider set of edge applications. Given these highlights, we are proud that Fastly was named one of only 2 leaders in The Forrester Wave for Edge Development Platforms. Fastly also earned a perfect score for innovation and was the only vendor to receive a top 5 out of 5 rating for workload and network isolation as well as observability. This recognition underscores our platform's differentiated strength, built-in resilience and the observable actionable insights we deliver to customers. Additionally, Fastly was the only company to receive a halo designation, highlighting superior customer feedback and our continued commitment to delivering business value for our customers. Next month marks my first year as CEO of Fastly, and I'm incredibly proud of what we have accomplished. We have a leadership team in place that is deeply committed to our core mission, making the Internet a better place where all experiences are fast, safe and engaging. We believe our platform is the gold standard for flexibility and resilience without compromising performance. We see our story resonating with the market, and we are delivering tangible value through our expanded portfolio and relentless customer-centric approach. As we scale, Fastly is positioned to drive better business outcomes for our customers and long-term value for our shareholders. Rich will now walk through our Q1 financial results and guidance in more detail. Rich, over to you. Richard Wong: Thank you, Kip, and thank you, everyone, for joining us today. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the first quarter increased 20% year-over-year to $173 million coming in at the high end of our guidance range of $168 million to $174 million. This result was a record high for Fastly and was driven by continued success in our go-to-market upsell and cross-sell motions with our expanded product platform, highlighted by strong security momentum. In the first quarter, Network Services revenue of $126.2 million grew 11% year-over-year. Our typically flat Q1 revenue seasonality was amplified this year by a record-breaking Q4. Despite the seasonality and strong Q4 results, we delivered quarter-over-quarter sequential revenue improvement in Q1. Security represented 22% of revenue or $38.8 million, both record levels. This represented growth of 47% year-over-year, our fourth consecutive quarter of accelerating security revenues and 9% sequentially. This was due to the expansion of our security product portfolio, which has resulted in larger 7-figure wins in the first quarter. Additionally, we are seeing new security wins expanding beyond our WAF product and into DDoS protection, Bot Management and API Discovery and inventory. This sets us up very well for the long-term growth opportunities with new and existing customers. Our other products revenue of $8 million grew 67% year-over-year, driven primarily by sales of our compute products. As Kip mentioned, other revenue grew a record $1.6 million quarter-over-quarter as we are seeing momentum in our compute revenue driven by new customer requirements in AI and related areas. In the first quarter, our top 10 customers represented 34% of revenue and grew 25% year-over-year. Revenue from customers outside our top 10 grew 17% year-over-year. Also, no single customer accounted for more than 10% of revenue in the first quarter. No affiliated customers that are business units of a single company generated more than 10% of the company's revenue for the quarter. As we mentioned in our previous earnings call, we have made changes to our customer metrics. Given that typically over 90% of our revenue has historically been generated by our large customers, formerly referred to as enterprise customers in prior reporting periods, we believe it is a more meaningful metric to track our customer acquisition compared to total customers. Thus, as previously mentioned, starting this quarter, we will no longer disclose our total customer count on a go-forward basis. Our large customer count, which represents customers with more than $100,000 in annualized revenue in the quarter was 634 customers. Our trailing 12-month net retention rate was 113%, up from 110% in the prior quarter and up from 100% in the year ago quarter. The quarter-over-quarter and year-over-year increases were due to revenue increases across a broad range of customers. Note that the LTM NRR is shifting from primarily being driven by our largest customers to now extending into our mid-market customers. We exited the first quarter with record RPO of $369 million, growing 63% year-over-year. This is our fourth consecutive quarter of accelerating RPO. The current portion of RPO was 75% of total RPO and grew 77% year-over-year. Our improved RPO continues to benefit from improved go-to-market discipline with our customer onboarding, which resulted in larger upfront commitments. I will now turn to the rest of our financial results for the first quarter. Our gross margin was 65.1% in the first quarter, a record high for Fastly. Gross margin was 110 basis points above our guidance midpoint of 64% and up 780 basis points from 57.3% in Q1 of 2025. This outperformance was primarily due to a 190 basis point onetime benefit from a change in accounting policy regarding server useful life to align with industry standards. Our incremental gross margin flow through on a trailing 12-month basis increased to 89% in the first quarter, up from 54% a year ago. Operating expenses were $93.5 million in the first quarter. OpEx was in line with our expectations for increased expense levels as we encounter a seasonal payroll impact in the first half of the calendar year. We continue to execute with OpEx spend discipline while balancing our growth investments in headcount. We had operating income of $19.1 million in the first quarter, coming in above our operating income guidance range of $14 million to $18 million. We intend to continue to drive leverage in our operating results as we scale our revenue. This is demonstrated by our operating margin expanding from negative 4% to positive 11% in the first quarter, an expansion of approximately 1,500 basis points year-over-year. This is underscored by our incremental operating margin flow through of 68% of revenue on a trailing 12-month basis, significantly above our long-term target of 25% to 40%. In the first quarter, we reported net profit of $22.9 million or $0.13 per diluted share compared to a net loss of $6.6 million or negative $0.05 per diluted share in Q1 of 2025. Our adjusted EBITDA was $29.5 million or 17% of revenues in the first quarter compared to $7.8 million or 5% of revenues in the first quarter of 2025. Turning to the balance sheet. We ended the quarter with approximately $330 million in cash, cash equivalents, marketable securities and investments, including those classified as a long term, a sequential decrease of $31 million over Q4 2025. This was primarily driven by the retirement of our current portion of the long-term debt totaling $39 million that became due in March 2026. Our cash flow from operations was positive $28.9 million in the first quarter compared to positive $17.3 million in Q1 2025. Our free cash flow for the first quarter was positive $4.1 million, representing a $4.1 million decrease from $8.2 million in the Q1 2025 quarter. This was primarily due to a year-over-year increase in infrastructure spend of $18.4 million offsetting an operating cash flow increase of $11.6 million. Moving to our CapEx plans and strategy. Last quarter, we shared that we will focus only on infrastructure capital expenditures and remove capitalized internal use software which is not a meaningful indicator of our capital spend. We believe this change more accurately represents the inherent capital costs to growing our business and more aligns reporting to our peers. Our infrastructure capital expenditures were approximately 12% of revenues in the first quarter. As we highlighted in our last earnings call, approximately $10 million in CapEx was pushed to 2026. This delay in CapEx resulted in our Q1 infrastructure CapEx spend coming in at the high end of our 10% to 12% full year expectation. Normalizing this timing impact, infrastructure CapEx would have been 6% of revenue in the first quarter. I will now discuss our outlook for the second quarter and full year 2026. I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law. Our revenue model is primarily based on customer consumption, which can lead to variability in our quarterly results. Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today. As Kip discussed, we saw revenue strength from successful upsell and cross-sell motions highlighted by new customer velocity in our bookings across the platform. Additionally, our newer security features are proving to be strong vectors into existing and new customer wallet share, supported by Compute and Network Services growth. In the second quarter, we expect revenue in the range of $170 million to $176 million, representing 16% annual growth at the midpoint. We anticipate our gross margins for the second quarter will be 64%, plus or minus 50 basis points. As a reminder, our gross margin performance is dependent upon incremental revenue increases or declines as demonstrated by our improving gross margin through 2025 on accelerating revenue growth. It is also dependent on our infrastructure levels, which will serve as a modest headwind in 2026 as we invest in our platform capacity. For the second quarter, we expect a non-GAAP operating profit of $12 million to $16 million, reflecting an operating margin of 8% at the midpoint. We expect a non-GAAP net earnings per diluted share of $0.05 to $0.08. For calendar year 2026, we are raising our revenue guidance to a range of $710 million to $725 million, reflecting annual growth of 15% at the midpoint. We anticipate our 2026 gross margins will be 64%, plus or minus 50 basis points. We are increasing our non-GAAP operating profit expectations to a range of $58 million to $68 million, reflecting an operating margin of 9% at the midpoint, and highlighting our improved profitability compared to 2025's operating margin of 4%. We expect our non-GAAP net earnings per diluted share to be in the range of $0.27 to $0.33. We are closely monitoring supply chain dynamics, particularly regarding memory components and have taken strategic actions to mitigate potential impact. Our software-defined infrastructure is continuously improving, typically with lower capital requirements for expansion than legacy providers. We are also implementing server component upgrades in our fleet to efficiently expand our capacity. This structural efficiency underpins our expanding gross margins, positioning us to stay ahead of global traffic trends while maintaining strict capital discipline. For 2026, we continue to anticipate our infrastructure capital spend will be in the range of 10% to 12% of revenue compared to 5% in 2025 as we ramp our capacity to meet our growth objectives. As demonstrated in Q1, we believe the spend will be front loaded to ensure we have adequate equipment given recent supply chain constraints. We are actively monitoring our capacity plans relative to demand in this dynamic environment and may increase our capital infrastructure spend in the back half of 2026. As a result, we maintain our 2026 free cash flow guidance in the range of $40 million to $50 million. Before we open the line for questions, we would like to thank you for your interest and your support in Fastly. Operator? Operator: [Operator Instructions] Our first question comes from Jackson Ader with KeyBanc Capital Markets. Jackson Ader: First one is on Network Services. It came in kind of light of our, and I think consensus expectations. So just curious what was the driver there to the pretty big material slowdown in the year-over-year growth? And then also, like what role -- can we get an update on what role agentic use of the Internet is playing in your kind of core Network Services and maybe even the attach rates for security? And then I have a quick follow-up. Richard Wong: I'll take the first question, then Kip can answer the second part of it. [indiscernible] Remind that Q4 was particularly strong. We had particular strength in network services in Q4 for two primary reasons, we had a gaming download that was overperformance where we did see record traffic in Q4. And then we also have a seasonally strong e-commerce online holiday shopping. And so despite that strength of Q4, we did see a little bit of a dip, but it's not related to pricing. It's really just the seasonality that we would normally see in the business. Kip Compton: Yes. I would just add, we've not seen a material change in the pricing environment. And I think in Q4, we mentioned that we saw a stronger-than-expected seasonality. And of course, coming off of that, you might expect a little bit more of a drop out of that seasonality because, after all, the seasons do change. On agentic, we are seeing tailwinds across different parts of our business. Certainly, in network services, there's a volume component that we believe is being driven by agentic traffic. In terms of security attach, frankly, it may be more pronounced in the security part of our business as we have customers looking to protect AI workloads and provide privacy capabilities to agentic workloads and AI cloud compute use cases that require privacy. So we are seeing significant security there, security uplift that I think we could attribute to those trends, likewise on compute, so we see kind of an increase in volume over time on network services, but more specific attach in some of those other businesses. Jackson Ader: Okay. Okay. Cool. And then you guys mentioned pricing a couple of times. I know that some competitors in the network services market are explicitly raising prices because of the memory component prices that are impacting you and others. I'm just curious, what is your current strategy on maybe passing some of those component pricing on to your customers or whether you're taking this as an opportunity to be a little strategic on price? Richard Wong: Sure, Jackson. From a Q1 perspective, pricing environment was very similar to Q4. I think in the last earnings call, I mentioned the Q4 kind of price erosion in the mid-single digits. We did see a very similar mid-single digits in Q1. I think a good reminder is that price erosion is a year-over-year metric. And as customers spend more on our platform and as they increase the volumes, they're actually unlocking additional volume discounts and even the cross-selling. So we're actually going to naturally see some of the price erosion. There's also another reminder is that this only applies to our network services business. That phenomenon is not on our security or our compute business. And so we continue to focus on the value we create for our customers and the pricing discipline reflects this. With regard to what Akamai is doing and then what we're doing, we feel it was the right thing to do was to maintain the pricing that we negotiated with our customers, and we're honoring the contracts that we have with our customers. And as they continue to unlock those volume discounts, we are going to continue to honor that. We think it's the right thing to do from a customer relationship perspective. Kip Compton: Yes, I would just add maybe two things. First of all, of course, we see pricing changes when we experience renewals with our customers, not on a continuous basis. So there is some lag in seeing changes in market pricing just driven by when customers renew, and that is the time when prices are negotiated or potentially change, not generally mid-contract. So if you think about actions that others have said they're taking in the market starting in April, we're very closely monitoring that. We've not seen a change in the pricing environment yet. But it's conceivable that those changes are simply going to take a few more months to filter through the market as others have renewals and as our customers' renewals come up as well. The other thing I'll add, we said and I'll say again that we believe that we have a more efficient platform. It's a more modern platform. And I think if you look at the capital intensity of our business compared with some of the other similar platforms out there, you can see that it is more efficient. That does, in our view, give us a potential sort of structural advantage in an environment with rising component costs. They certainly affect us, but it appears likely that may affect us less than our competitors. And so we may not have as many cost increases that we need to pass through to customers. Operator: Our next question comes from the line of Frank Louthan with Raymond James. Frank Louthan: Great. Two quick ones. What is the percentage of your revenue that has revenue commitments with it now? The first question. And the second one, your network is deployed largely in Equinix and DLR data centers or something similar with power and connectivity. Is there a reason that you could not facilitate distributed compute nodes to GPUs, combined with your network delivery out of those? And is that something you're pursuing? And what would it take to have a product like that? Richard Wong: Yes, Frank, I'll take the first one, and I'll let Kip take the second one. In terms of the kind of revenue commitment, I think the best number to really point you to is the current portion of RPO. So we mentioned on the earnings call that we had RPO of $369 million, which grew 63% year-on-year. The current portion represents the next 12-month component of that. That was 75% of the total that was -- so taking 75% of that, it's $275 million as a next 12-month commit. And that actually, if you look at current RPO on a year-over-year basis, our current RPO is growing 77% year-on-year. Kip Compton: So to your question on GPUs and the opportunity that our global network presents there. We're in a very close contact with component vendors, including in the GPU space and looking strategically at that market. The observation I'd make is our network, most of our peers' networks is highly distributed around the world. And we don't concentrate as much capacity and compute power in a single location as, for example, a centralized cloud does. And when training was the primary driver of GPU demand, that meant that -- with training being extremely large scale, that meant that our network was not well positioned to drive training and therefore, GPU-based demand. As we are seeing, and I think many in the industry are seeing the workloads and the focus shift from training to optimal inference and how different chip architectures can help with a very high performance and highly efficient inferencing, that may very well open up a bigger opportunity for us given the way our network is built and given how software defined it is. So that is yes, absolutely something that we're tracking very closely. Operator: Our next question comes from the line of [ Charlie Zhou ] with Evercore. Unknown Analyst: This is Charlie on for Peter Levine from Evercore. It was great to see the step-up in compute revenue this quarter. Rich, could you maybe help us frame how we should best think about the trajectory of that business from here? Particularly what needs to happen for compute to become a more meaningful contributor to overall growth? And Kip, maybe could you walk us through some of the use cases where Fastly is seeing the strongest customer interest for edge compute today? And how do you expect AI edge inference to evolve over the, let's say, next 12 to 18 months? Richard Wong: Sure. Thank you for the question. I think from a compute perspective, we did report $8 million in our other bucket, which was a nice kind of 67% year-over-year growth in our other business. I think when we think about compute, that's a good business to -- and then we're co-innovating with our customer base right now on agentic and AI and what we're doing there. I do think that as the agentic kind of market really starts taking off and maturing, those co-innovations that we're doing become like much better and real products that we will go out to market with. So I think for now, from a co-innovation perspective, we are working with some of our best customers on the biggest and hardest opportunities and problems. And I think those are really unique opportunities for Fastly in that space. Kip Compton: Yes. I would add just to echo Rich's comment, I mean we've definitely seen an uptick in customers' interest in additional optimizations and features in our compute platform, specifically related to interoperability with LLM so that they can drive some of those workloads from the edge. And as Rich described, we're actively working with them to optimize and continue to enhance the platform. So I think the edge compute opportunity is a large opportunity overall and one that we're certainly well positioned to garner a good share of. Operator: Our next question comes from the line of James Fish with Piper Sandler. James Fish: Just curious what you guys are seeing at this point from some of the competitor exits, the Edgio side of things in terms of traffic and how that's kind of rolling through? And is it still that roughly 90% of the time you guys are replacing some of those legacy CDN providers, more incumbents like Akamai? Richard Wong: Yes, James, thanks for the question. I think that we have lapped Edgio probably for about 2 to 3 quarters now in terms of that opportunity. We are -- what we are doing on the network services, I think, as Kip mentioned on the earnings call, we are growing almost 2x the market. And the way we're doing that is increasing share with existing customers. So we continue to really support them and increase volumes with our existing customers. But we also do have takeout campaigns. And we've been pretty good about doing that where we go out there, sell the value, which is we win where performance matters, where customers care really about speed, reliability, security in their network. And so that's probably more the last 2, 3 quarters in terms of being able to kind of beat the growth rate of the market is doing those takeouts versus our competitors versus the ones that went out the business, which we lapped 2 to 3 quarters ago. James Fish: Yes. I mean at the end of the day, those guys are seeing renewals that kind of shift over and mix shift anyways. But my follow-up question was more around the emergence of Anthropic's Mythos? And how do you see the value of your portfolio in security changing with some of the advancements there? Kip Compton: No, it's a great question. We believe that the threat environment is only becoming more dynamic and more challenging for our customers. As these technologies come out, they could be quite disruptive on the security landscape. So we're seeing actually more interest in our security products, not -- to be clear, not less. I think there's an interesting market reaction when Mythos was first announced. We actively use AI technologies in our security work. So we believe that we have a modern approach there that's well equipped to respond to these evolving threats. And we see more and more customers seeing value in products like web application firewall because as the velocity of threats increases, they can't patch all of their systems in time. So having something like web application firewall that can be patched quickly and that can be managed by a company like Fastly, who sees the global threat landscape in real time is very attractive in terms of reducing their time to protect their workloads. So we think it's an evolution of the security space that makes perhaps platforms like ours even more important. Operator: Our next question comes from the line of Rudy Kessinger with D.A. Davidson. Rudy Kessinger: It's been a lot of noise and bigger questions around AI traffic. Could you help us just maybe break it down a bit further or provide more color. When you look at the year-over-year growth and the traffic on your network in Q1, what percent of that was driven by AI chatbots and agentic traffic? Kip Compton: I don't know that I have a robust number on exactly how to break that traffic out for you. I mean what we have seen is that, that traffic is growing faster than human browsing traffic. So we see it becoming a greater share of traffic over time. But I'm looking at -- I don't think Rich or I have like a percentage or a number that we could share on this call. Rudy Kessinger: Okay. Fair enough. And then on security, really another really strong step-up in the revenue on a quarter-over-quarter basis and the year-over-year growth acceleration. Were there any large deals in that in Q1 that contributed to that, that we should be mindful of, similar to Q3 last year, I believe it was? Or was that pretty broad based? Richard Wong: Yes. Security this quarter was more broad-based. I would say that we did not highlight it because it's multiple customers that we won security. I would say that compared to Q3, where we mentioned we had one kind of big customer deal. Here, I think we mentioned multiple 7-figure deals that we closed in the quarter that involve security. Beyond just those three, we also had a number of smaller ones that are also using security. I think as we see agentic traffic increase, our customers are getting more focused on the use of security and the use of compute on our platform. And so it's for us, we're seeing it much more broad-based than we did see in Q3. Kip Compton: I mean, I guess, the one thing I'll mention before we move on to the next question. Another characteristic, and I think we talked about this a little bit in the earnings script is we're seeing broader interest across our expanded security portfolio. So there are different ways to quantify it. But our newer products are starting to perform very well alongside the Next-Gen WAF, which obviously continues to perform well. So from a revenue concentration perspective, we saw a lot of different sized deals during the quarter. I would say, from a product diversification perspective, we saw broader interest and adoption across our portfolio, which is exactly our strategy. Operator: Our next question comes from the line of Jonathan Ho with William Blair. Jonathan Ho: I wanted to maybe start out with the hiring of Joan and the potential opportunity that you see in terms of the CMO role and maybe what the biggest opportunity could be for the business to accelerate just given the hiring there? Kip Compton: No, absolutely. We see a big opportunity there. We're proud of the efforts that we've made in marketing, but really look forward to Joan helping us take those to the next level, especially as we reach more markets around the world. I think there's a significant opportunity to better position the value of our platform and of our services with specific buyers and specific verticals. And I think there's also an opportunity to build awareness and particularly APJ, but other markets where we believe that we're underpenetrated from a market perspective. And I'm just obviously very impressed with Joan's background, and she has a very systematic and scalable and repeatable approach to marketing. And I think that's going to serve us well, especially as we work to expand our brand recognition to include, but be a lot more than our world-class network service and delivery products, but really as a first-class security and edge compute brand. Richard Wong: I think the one thing I would add to that is that I think we were founded by technologists. We've always been very technology-first company, and I think our brand really resonates really well with a lot of technologists who are so deep in the Edge platform. I think bringing Joan brings this level of, hey, how do we speak about the performance that we have and the technological capabilities we have beyond just a technologist organization. And I think that's pretty exciting to me because being able to appeal to a broader audience beyond just technologists is very important. Jonathan Ho: Got it. Got it. And just in terms of a follow-up, I mean, just given the strength in your security business this quarter, and what's -- can you help us understand what's maybe driven the strong uptake and what inning we're in, particularly given how early agentic rollout is around some of these use cases that you mentioned? Kip Compton: Yes. I mean, it's a great question what inning we're in. I'm not sure I know how to quantify that. But what I can say is we've had a few different things come together to drive that growth higher. As Rich mentioned, one was new deals and some significant new deals in the quarter. We've also had continued robust expansion of some of the deals we've won in the last several quarters. And so we continue to see growing volume and growing adoption. As I mentioned earlier, another thing that's happening is over the last 5 or 6 quarters, we've dramatically expanded our security portfolio, essentially from what was really one product, a phenomenal product in our Next-Gen WAF, but nonetheless, one product to include 5 or 6 very solid products that solve important business problems for our customers. So I think another thing that's sort of compounding into that growth is us being able to land more customers with that broader portfolio and having existing customers adopt more of the portfolio. I think it's hard to quantify, but AI, I think, is a driver here. We have seen increased interest in our privacy products that are part of our security portfolio and also in our API governance products, which includes our API Discovery and schema enforcement products and that appears in many cases, to be driven by AI use cases. And so we'll continue to monitor that. But as I said earlier, we see some significant relevance with aspects of our security product and important AI use cases. Richard Wong: Yes. The one quantification area I would -- may try to chime in with is that if you think about the midpoint of our guide for the full year 2026, that's a $93.5 million increase on the incremental revenue perspective. If you look at where that incremental revenue is coming from based on the growth rates of the various businesses, more than half of our incremental revenues will actually come from security and other, which I'm very positive and bullish on, right? I think that those are areas that we're investing in, those are areas that we think create the biggest opportunities for Fastly, and you can see that reflected in our growth rate, and you'll see that reflected in incremental revenue year-on-year for 2026. Operator: It comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group. Jeff Van Rhee: A few for me. First, on the network side, I think you said last quarter bit growth was in the mid-20s. Just wanted to confirm it's sort of still in that range. And then what are the assumptions implicit in the annual outlook? Richard Wong: Yes. So network services, we've talked about traffic growth kind of being in the mid-20s. And then we talked about kind of the mid-single-digit kind of price compression. Nothing right now is really changing that. I think that from a prudence perspective, we are seeing kind of still mid-double-digit kind of traffic growth rates and then that's offset by price kind of erosion that we see in the mid-single digits. When we see the contracts coming up for renewal from a prudence perspective, we do still layer in expectations of both volume discounts that our customers start unlocking plus some price discounting that we do give. And so from a modeling perspective, we are still kind of doing the low double-digit kind of renewal assumption, which is again prudent thing to do, given the environment we're in. Jeff Van Rhee: Yes, agreed. And that's helpful. And on the CapEx side, just like-for-like on hardware, what is the assumption in terms of increased prices on the hardware built into your CapEx outlook? Richard Wong: Yes. So basically, from a hardware perspective, we guided 10% to 12% of revenues. That implies roughly a $70 million to $80 million infrastructure CapEx spend for the full year. We are front-loading that spend. So the majority of that infrastructure CapEx will come in Q1 and Q2. We have placed all the server orders already from an ordering perspective for the year. And as a matter of fact, the server orders, we've already received it in Q1. One of the things you may notice in our financial statements is that you'll see a big pickup in AP. The orders that we placed arrived in Q1, and we have not yet made payment. They arrived literally the last kind of 2, 3 weeks in the quarter. And so that's a normal thing. And those prices have been locked in, we've already received the equipment. And so we're good to go on the hardware side. We did see the price increase, I mean, in some of the areas we did see increases of 2 to 3x, especially when it comes to memory pricing. Jeff Van Rhee: Yes. Okay. And then just last, in terms of the high-level revenue guide, can you help us just in terms of what you're thinking network versus security, what's implicit in that annual guidance in terms of growth rates for those subsegments? And if you don't want to get too precise, even just some ranges would be helpful. Richard Wong: Yes. From a business-by-business outlook, we think network services is probably like 6% -- 5% to 6% market grower. For us, I think that from a growth rate perspective, we could be anywhere between 9% to 11% kind of year-on-year growth in network services. I think from a Security perspective, we should continue to see growth in this area. I think that it wouldn't be unheard of to be in the kind of 25% to 30% kind of year-on-year growth perspective, especially after delivering a 47% quarter in Q1. And then the other is just kind of the delta between what we've guided for the full year unless those two growth rates. Operator: Our next question comes from Param Singh with Oppenheimer. Paramveer Singh: I actually had a couple. First, I really appreciate the insight you've shared so far on the agentic AI side and some of the products that you're bringing on the security side. Now in that vein, when you talk to your customer base, what do they feel is missing so far either from a security or a compute perspective, that should help them deploy and manage the agentic AI platform. And how would you price some of these incremental products versus how you're pricing the current platform to the customer base? And then I have a follow-up. Kip Compton: That's a great question. A question I think a lot of people in the industry have. What we're seeing is with enterprises, it's relatively early days in terms of agentic adoption. Many of them are seriously looking at how their processes evolve to embrace agentic AI and get the full capabilities out of it. We've certainly seen interest, as I said before, in the security area. If they have agentic coding tools, writing code and executing it, how can they perhaps use API Discovery and Schema enforcement to make sure that they're comfortable with what that code is doing to other systems. I mentioned the privacy aspect. We've had a lot of interest in that. But I would characterize our work with customers is relatively early for the majority of enterprises. And that's why we talked about the design partner program where we're working very closely with those customers to make sure that we meet their needs. In terms of specific products and pricing, it's probably premature to comment on it, certainly not in this forum at this time as we continue to develop those products and work with our customers and assess the value creation potential. Paramveer Singh: Understood. That's really helpful. Maybe one for Rich. If I'm not mistaken, you still have some converts at 7.75%, that's a pretty high interest rate. How are you thinking about kind of rejiggering your financial structure at this point, taking advantage of the market and your stock price? Richard Wong: Yes. So the 7.75% convert we have outstanding. It's not due until June 1, 2028. And so we have a little bit of ways to do it. It is high interest rate relative to the interest rate environment we are in. These bonds are trading at a significant premium to where they are. So a refinance opportunity is quite expensive given the trading values they're at. Right now, we're focused on just what we have. And I think that from a liquidity perspective, I think that we sufficiently have the liquidity, and we feel good about the kind of maturity in 2028 and 2030, that they're a ways out to have to focus on that and focus on growing the business and really operating the business the way we've been doing. Paramveer Singh: And Rich, do you feel you're sufficiently capitalized to fund the CapEx to extend to all this growth opportunity you have in front of you? Richard Wong: Absolutely. I think we guided free cash flow for the year, even after the CapEx spend of $40 million to $50 million. And so we feel very good about how we're operating the liquidity we have with $330 million in cash and still generating cash flow. Operator: [Operator Instructions] Our next question is from Max Persico with RBC Capital Markets. Maximillian Persico: Great. I've got two for you. And I'll just give them both to you right away. On the security side, as we think about kind of the broadening portfolio and the traction you're seeing with the products outside of the core WAF solution, can you just help me understand like are you seeing customers and maybe net new customers actually land with the newer solutions? Or is it still predominantly a cross-sell upsell motion? And then separately, on the Network Services side, as we think about kind of -- I think what would be fair to describe as like a fluid macro environment with ongoing conflicts in the Middle East and higher energy prices, supply chain disruptions, et cetera, and the impact that, that could have on like consumer budgets, particularly at the low end. Could you just remind me like how much of that business is impacted by e-commerce traffic? And like how are those contracts structured? Like really, the question is like could that could slower traffic show its head or show its face in the numbers over the near term? Or are you somewhat insulated from those kind of macro trends that may or may not show up? Kip Compton: Sure. Thanks. I'll take the first question. I'll -- maybe a comment on the second question, but Rich may be able to offer a more quantitative lens on that. In terms of security and the newer products, we absolutely have customers starting on our platform with multiple of our security products at the same time, including, obviously, the newer products like Bot Management, DDoS and API Security. So absolutely, at this point, we see customers starting their journey with us with multiple security products, often also including WAF, to be clear. But starting with more than just the WAF and with those other products. So we're definitely seeing the attractiveness of those. I think that's something that we've talked about in the past is that we felt like as we completed the web application and API protection portfolio, as some of the analysts call it, which I think with the API releases we have, we expected to see some pickup on the security business as we were able to fully meet some, for example, RFP requirements of enterprises. And in those scenarios, they do adopt a bunch of products upfront at once. And so that is absolutely what we're seeing. We're very proud of our Next-Gen WAF, but there's sort of an opportunity for these other products as they come into their own in our portfolio. On the macro environment, I would not describe us as insulated from macro environment or geopolitical risk, for sure. But I think if you think about our business, it's to me, complex to predict exactly how it will have an impact. I have experience in past lives in industries where, for example, when the economy was not strong, people retained cable subscriptions and things like that because they were not going to be going out as much. So it's not as clear at the consumer level exactly how it affects the different lines of business that our customers are in that we support. So I don't know if I can draw a direct line but Rich may have some numbers or some further thoughts. I'm not sure. Richard Wong: No, I think, Kip, you answered it really well. I think that, that comment around like what people do in a recessionary environment is completely accurate. I think the other part of your question was around like how much exposure on e-commerce in terms of a recessionary downturn. I do think that we -- in our network services business, we win where performance matters and e-commerce is certainly one of those areas where performance is required and performance matters, but we are also very important to a lot of other verticals as well. And so, one, the exposure to e-commerce is not like magnified huge. But I think, two, we have seen in the past in a recessionary environment, there is a little bit slightly more resilient demand than what we see with in other areas. And so we are monitoring and we are watching because, of course, we care about this. But we are a little bit more resilient on the e-commerce front. Operator: And as I see no further questions in the queue, I will conclude the Q&A session and pass it back to Kip Compton for closing comments. Kip Compton: Thank you, everyone, for joining and for your interest in Fastly. We look forward to you -- seeing you at our Investor Day in September, which Vern mentioned earlier, and we'll be sharing more about as it approaches at the Nasdaq MarketSite in New York. Lastly, I want to thank our Fastly employees for all of their contributions, our customers for their trust and partnership and our investors for their continued support. Thank you. Operator: This concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Greetings, and welcome to the Bloomin' Brands Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Tara Kurian, Senior Vice President, IR, FP&A and International. Thank you, Ms. Kurian. You may begin. Tara Kurian: Thank you, and good morning, everyone. With me on today's call are Mike Spanos, our Chief Executive Officer; and Eric Christel, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal first quarter 2026 earnings release and our investor presentation slides, both of which can be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release and investor presentation on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal first quarter 2026, current thoughts on fiscal 2026 guidance and an update on our turnaround strategy. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to Mike Spanos. Michael Spanos: Thanks, Tara, and good morning, everyone. On today's call, I will discuss our first quarter results and provide an update on our turnaround strategy. Eric will then review the financials and our guidance. I want to start by thanking our teams in the restaurants and the restaurant support center for their hard work and dedication to our business and our guests. They supported their local communities by operating safely during some challenging weather conditions this quarter. The team focused on controlling what they could control, delivering a great experience to our guests while also driving productivity. Turning to our first quarter results. We launched our turnaround strategy in Q4 of last year with a focus on consistent execution across food, service, experience and value to deliver a great guest experience at Outback Steakhouse. This focus is driving improvement in underlying guest metrics, reinforcing our belief that we are on the right track to deliver sustainable traffic and profit growth. Outback's guest metric scores increased year-over-year for the third consecutive quarter. In Q1 of this year compared to Q1 of last year, Outback's brand trust increased by 4 points, guest scores increased across service by 6 points, value by 5 points, atmosphere by 5 points, food by 4 points and intent to return by 4 points. Given that our average guest visits approximately twice per year, we expect the cumulative impact of these initiatives to become increasingly visible in traffic momentum as more guests experience the improvements we have made. I will share more detail of our progress shortly. Our Q1 U.S. comparable restaurant sales were positive 90 basis points with traffic down 180 basis points. We experienced approximately 240 basis points of weather impact this year, driven by the winter storms experienced in the earlier part of the quarter. This was lapping approximately 130 basis points of negative impact from Q1 last year. Although we trail the industry as defined by Black Box by 30 basis points on comp sales and 70 basis points on traffic, we continue to narrow the gap versus the industry each quarter. We remain focused on improving the what you get for what you pay for value equation, which is driven by consistent execution in the restaurant, combined with offering affordable entry price points to meet the guests where they are economically across all of our casual dining brands. Outback's Q1 comp sales were down 30 basis points with traffic down 240 basis points. As we mentioned in our previous earnings call, in comparison to Q4 2025, we adjusted our offers in 2026 to be more balanced across check average and traffic. Outback continues to drive traffic and loyalty from the Aussie Three Course offering with about 60% of our guests trading up from the entry price point of $14.99 and into the higher tiers of $17.99 and $20.99 and approximately 20% trading up on the dessert option. Carrabba's comp sales were up 130 basis points with traffic of negative 270 basis points. This is the fifth consecutive quarter that Carrabba's drove positive same-store sales growth, driven by their continued focus on the in-restaurant experience. From experiential wine dinners to revamped Happy Hour and our recently launched day of week offers, we are seeing positive results and guest satisfaction. Bonefish's comp sales were up 610 basis points with traffic of positive 300 basis points. Bonefish has steadily improved traffic growth, driven by the team's focus on compelling day of the week offers like Martini Mondays and Bang Wednesdays and prefixed lunch affordability offers. Fleming's comp sales were up 80 basis points with traffic down 290 basis points and reflects the seventh consecutive quarter with positive comp sales growth. Team has capitalized on special occasions and created experiential events with approachability to drive demand while remaining focused on elevating service to create memorable experiences for our guests. I would now like to update you on our turnaround strategy focused on Outback Steakhouse. Our strategy is based on 4 strategic platforms, which are to: first, deliver a remarkable dine-in experience; second, drive brand relevancy; third, reignite a culture of ownership and fun; fourth, invest in our restaurants. These platforms will be supported by non-guest-facing productivity savings, balanced capital allocation and a strong management team. Starting with an update on the first platform to deliver a remarkable dine-in experience. In November last year, we launched our new steak lineup as part of our commitment to steak excellence. This is a critical component to delivering a remarkable dine-in experience at Outback, and our Outbackers are proud to serve our best steak lineup. We are excited that all of our craveable steak cuts and burgers are scoring high in the top box of menu satisfaction, and we continue to have strong and improving guest satisfaction and reorder intent scores driven by our tender sirloin, standout barrel cut filet, our new signature Delmonaco Boneless ribeye, new 20-ounce bone-in ribeye and new 0.5 pound burger that you can also get with great tasting Bloom petals. We are very pleased with what we are seeing from the new steak lineup. The commitment to steak quality is complemented by a relentless focus on consistency of execution. In the Outback principles and beliefs, we commit that close is never good enough for Outbackers. Our Outbackers are leveraging the tabletop Ziosk data, both from guest feedback as well as specific KPIs to drive accountability and close any gaps in performance across restaurants. Specific to steak quality, the team is conducting monthly steak reviews and training to build consistency and accuracy by each multiunit leader. We are recognizing our top performers and coaching the bottom-performing restaurants to drive consistency of execution and bring them up to brand average. As we hone in on our consistency of execution on steak accuracy scores, we are measuring intent to return, food quality and overall service scores. The Ziosk data, combined with guest feedback enables our multi-unit leaders and managing partners to quickly coach and provide feedback by location and by shift. We believe our focus on consistency of execution has translated into improved brand scores. As I mentioned earlier, we had the third consecutive quarter of year-over-year improvements in Outback guest metric scores. Moving to the next element of a remarkable dining experience, Craveable Service. Last year, we identified that our 1 server to 6 table station ratio during peak hours didn't provide the right level of guest interaction and Outbacker satisfaction. We tested and validated that a reduced ratio of 4 tables per server during peak times enables our Outbackers to provide a more consistent and enhanced experience for our guests. We are pleased to have kicked off this new service model in April. As part of the national rollout, we are gathering feedback from our guests and Outbackers as well as using the Ziosk tabletop data to measure specific KPIs, including intent to return, server attentiveness, overall service scores and labor scheduling. We will provide a more meaningful update on the progress of this turnaround initiative on our next earnings call. Our second strategic platform is to drive brand relevancy at Outback and differentiate the brand. The core of our Aussie brand roots is inviting customers to come as our guests, leave as our mate with a sharpened brand positioning centered on steak leadership, craveability and a casual fun environment. We continue to plan for an increase in marketing spend year-over-year concentrated in the second half of this year, which comes after our investments in steak quality and the service model enhancements. Marketing will bring them in, but consistent execution brings the guest back. More to come on this platform later this year. Reignite a culture of ownership and fun is our third strategic platform. Our people are the key to our turnaround, and we remain focused on our managing partners. Their names as value leaders are above the door of each restaurant. We know that to retain and recruit the best partners, they need to be compensated competitively and incentivized to drive operational performance. The goals of our updated MP compensation model are simple. First, ensure total compensation is competitive with the local market; and second, aligning total compensation to the growth of sales and profit of the restaurant. Through these changes, we are able to create a competitive compensation program that continues to drive accountability and ownership. [indiscernible] rollout of changes across our managing partner group in April will continue the changes through the balance of this year. We know that when we take care of our Outbackers, they serve our guests with pride and ownership. Lastly, let me update you on our fourth strategic platform, invest in our restaurants. Our goal is to touch nearly all the Outback restaurants by the end of 2028 with targeted initiatives to refresh the interior and exterior, expecting to spend on average between $350,000 and $400,000 per location. With this asset refresh approach, we are focusing on guest-facing areas, the areas that make a positive impact on restaurant ambiance. Additionally, we have started to expand the char grill capacity in our Outback locations to support the steak lineup and expect to be done by the middle of this year. Let me now turn it over to Eric to review our financial performance for Q1 and guidance for Q2. Eric Christel: Thank you, Mike, and good morning, everyone. I would like to start by providing a recap of our continuing operations financial performance for the fiscal first quarter of 2026. Q1 total revenues were $1.06 billion compared to $1.05 billion last year, reflecting a 1% increase. Restaurant sales were up, driven by positive comparable restaurant sales. This was partially offset by a decline in franchise revenue as Q1 last year included 1 additional month of intercompany Brazil royalties. As Mike mentioned, U.S. comparable restaurant sales were up 90 basis points and traffic was down 180 basis points. We remain very focused on narrowing the gap to the industry in the near-term and positioning ourselves to lead the industry long-term. Average check increased by 270 basis points compared to 2025, with pricing offset by negative mix as we continue to invest in affordable offers for our guests. Off-premises sales were 23% of total U.S. sales in the quarter, consistent with Q1 last year. Outback's off-premises mix were 25% in the quarter and Carrabba's were 33%. Our GAAP diluted earnings per share was $0.64 compared to earnings of $0.50 per share last year. Our Q1 adjusted diluted earnings was $0.67 per share versus earnings of $0.59 per share last year. The difference between GAAP and adjusted GAAP operating results is approximately $3 million of adjustments in Q1 2026, primarily as a result of transformational and restructuring activities. Q1 adjusted operating margins were 5.9% versus 6.1% last year. This is down 20 basis points despite an increase in restaurant margin and more favorable depreciation and G&A due to higher impairment and restaurant closure costs year-over-year. Within restaurant margin, COGS and labor were both slightly elevated compared to last year, driven by commodities inflation of 4.6%, labor inflation of 3.1% and an increase in health insurance expense. This was offset by lower other restaurant operating expenses driven by lower advertising spend and an improvement in productivity initiatives. As it relates to our 33% retained ownership from Brazil, which is classified as an equity method investment, we recognized a loss of approximately $200,000 in Q1. We still expect the full year loss to be approximately $3 million to $4 million. Turning to our capital structure in Q1. Total debt net of cash is $681 million. As of the end of Q1 2026, our leverage metrics were 3.8x on a lease adjusted net leverage basis and 2.2x on a net-debt-to-adjusted EBITDA basis. Capital expenditures in the quarter was $25 million. We would expect expenditures to be higher in the remaining quarters of 2026 as the timing of refreshes and remodels ramps as we move through the year. We still expect the full year capital expenditures to be in the range of $185 million to $195 million. As we mentioned in the last call, our capital allocation priorities are to: one, invest in the base business; and two, pay down debt. Turning to our guidance this year. As it relates to the full year fiscal 2026, we reiterate the guidance for the full year communicated on our last earnings call in February. As it relates to the second quarter of 2026, we expect Q2 U.S. comparable restaurant sales to be between 1% and 2%. We expect Q2 adjusted diluted earnings per share to be between $0.27 and $0.32. We expect the tax benefit to be between $4 million and $5 million in the quarter. We expect our 33% Brazil EMI to be between approximately negative $1.2 million and negative $1.7 million. Let me now turn it back over to Mike. Michael Spanos: Thanks, Eric. While it's still early innings in our turnaround, we are highly confident that our strategy will put Outback Steakhouse in the right course for sustainable long-term profitable growth. The brand is strong. Our confidence is based on the foundation of a strong management team with extensive years of restaurant operating experience, positive guest feedback as demonstrated by our improvements in leading guest indicators over 3 quarters and the excitement and pride to serve our best stakes from our Outbackers. Overall, we have a clear strategy in place, which is to: one, deliver a remarkable dining experience, improved steak quality, enhanced service and consistency of execution; two, drive brand relevancy to differentiate Outback; three, reignite a culture of ownership and fun with a commitment to our people; four, invest in our restaurants to refresh approximately 100% of Outbacks by 2028. Strategy is supported by non-guest-facing productivity savings with a balanced capital allocation. Our leadership team is aligned and committed to the turnaround. We will continue to be transparent in our progress and our actions. Lastly and most importantly, I want to thank our people in the restaurants and restaurant support center for making this strategy a reality, both in terms of their exceptional input and hard work to make it happen at the moment of truth with our guests. With that, let me open up the call for questions. Operator: [Operator Instructions] And our first question for today will come from Alex Slagle with Jefferies. Alexander Slagle: Congrats on the momentum here. I guess I wanted to start on Outback and I mean it looked like the check growth was pretty solidly positive. And I know there was some more pricing, but it seems like the mix component of check also seems to stabilize after being more negative in recent quarters. Just wonder if you could break that down a bit and your outlook for 2Q and beyond, if that sort of check and that mix component can be a little bit less negative than it's been for a while. And I know Carrabba's also had pretty solid check growth, but you could touch on that. Michael Spanos: Good morning Alex. Yes, I'm really pleased and excited about the progress we had at Outback. I think it's great what we've said we would do and what we've accomplished executionally. And on your point about pricing, the way I look at it is our check average at Outback is going to grow by about 2.5% to 3%. It's very balanced. And we talked about this in Q4. If you remember, as we were doing some test and learn, the mix got a little heavier than we liked. We got much more disciplined in terms of the mix. And we've been balanced, and we'll continue to be balanced across the levers of traffic, how we think about inflationary pricing, how we think about mix and reinvesting that pricing, a portion of it back into affordable entry price points. And that's why all of our casual dining brands have provided those affordability price points. The latter part of your question, if you look at the full year, the way we're looking at the balance is you should assume -- we know we're expecting about 4.5 to 5.5 points of commodity inflation. We're balancing that with -- that's really predicated on we got high single-digit inflation on beef. By the way, that's in our guidance, and we're locked for the year on our beef. We exited 2025 with about 3.5 points of pricing. Full year is probably about 4 to 5 points of pricing. But remember, 2 points of that is carryover from 2025. And the other half of that pricing is actions we've taken into 2026. So again, it gets back to what I said, the net on a per check average gets to that 2.5% to 3%, which we think is the right balance in terms of how we're dealing with the guests in the commodity environment. Alexander Slagle: Okay. Makes sense. And a question on labor as a percentage of sales seem to flatten out year-over-year for the first time in like 12 quarters or so. And maybe you could talk more about the drivers behind that and views on maybe the server ratio changes that start in April. Does that start to impact us a little bit? Maybe the underlying improvements are sustainable, but there's a little impact from those server ratio changes. Eric Christel: Sure. Thanks, Alex. It's Eric. On Q1, we're very pleased with our labor performance, especially given the weather. So we had really, really good middle of the P&L management across all cost levers, including labor. We have a huge focus on using HotSchedules, which is a bit of an AI tool to help us dynamically make sure that we have the right service for our guests at the peak times. The service model you mentioned actually just launched in April. So we're very pleased about that and very bullish on that impact on the guest experience. Operator: Your next question will come from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. My question is just on the core Outback comp trends. Encouraging to see the brand scores continue to improve. Just looking at the absolute comp for the first quarter, it looks like it fell short of The Street. I'm wondering where that was maybe versus your internal expectation. And if you can share maybe some color on the sequential trends through the quarter and I guess, for the month of April. I know you mentioned a 240 basis point headwind from weather in the first quarter. Wondering whether you saw any volatility increasing from gas price spikes. So any color you could provide on the trends through the first quarter and into April relative to expectation? And then I had one follow-up. Michael Spanos: Yes. Jeff, on Outback, I'm very pleased with where we're at on Outback, and our results were very much within where we expected to be within the guide. When you look at it, I feel really good because we know our success is not going to be linear. We're totally focused on long-term profit, long-term sustainable traffic and comp sales growth. So to me, we start with Q4, we launch the steak lineup and the team is doing a great job on that. You mentioned the economic scores, the guest is giving us credit and especially when you look at brand trust and especially when you look at intent to return, those are great leading indicators 3 quarters in a row. As Eric mentioned, in April, we launched the service model, great initial feedback on that. We did through our tests. Later in the summer, we'll launch 6-star hospitality piece. We've also launched and communicated our MP compensation update, and we're executing our char grill expansion, which we'll have those done by the summer. So I feel really, really good about that and where they landed was consistent with where I expect them to be. Second part of your question, if -- around the results. We start off 2026 nicely, really strong. And then we saw that tough weather hit at the end of January, early February. Our Valentine's Day, and I mentioned this on the last call, our Valentine's weekend and Valentine's week was very strong. All 4 brands grew traffic, all 4 brands grew comp sales. And then you look at Easter, we had a good Easter week like week year-over-year, growing comp sales in all the brands. And for the weekend of the day, all 4 brands grew traffic and comp sales. So that tells me our guests like us from an occasion. Then if I go to what did March-April look like, which is your other part of your question, we saw sequential improvement in March versus January and February. And then we saw April step up as well from there. And our early read on Mother's Day, I mean it's quite early, is also very positive. So all this is embedded in our guide. It's how we're thinking about the comp sales. So I actually like where the guest and the consumer is right now. They're engaging in our brands. They're seeing casual dine and eating out as a very affordable luxury. And we're going to keep dialing in on what you get for what you pay for and keep the guests engaged. Jeffrey Bernstein: That's very encouraging to hear that there was sequential improvement in March and then further in April. And you actually got me a little nervous, but I missed Mother's Day, but it's still coming up. You're just talking about what you're seeing ahead of time. So that's. Michael Spanos: Yes. No, you're good, you're good. I guess you're helping your mom. We're just -- you got till this Sunday, Jeff. But there's a couple of the brands we know ahead of time based on reservations and open tables where they're trending and where they're pacing. And we like what we're seeing. Jeffrey Bernstein: Got it. And my follow-up is just on the restaurant margin. I don't think it was mentioned in this call, but if you're reiterating everything, I think last quarter, you said you expected a mid-11% range for the full year with the first half higher than the second half. If that's true, I'm just wondering, maybe if you look by quartile, like as an indication, like where are the best units running? Just wondering how that comes into your thought process as you think about where the margin should be longer term relative to, again, the 11% for the system or just maybe that top quartile is doing something much better? Just trying to get a sense for the long-term opportunity on restaurant margin. Michael Spanos: Yes, Jeff, we haven't gotten into breaking down the margins across different quartiles, et cetera. What we're focused on is controlling what we can control being disciplined in the strategic plan, that's going to bring sustainable traffic. That's going to bring sustainable comp sales. That's going to unlock good restaurant margin expansion with that sustainable growth in sales. And we -- as Eric said, we've got real -- we've got great operators here. We know how to manage the side of the P&L and how to manage costs appropriately without taking it away from the guests or taking away from our people. Jeffrey Bernstein: Got it. But no published longer-term restaurant margin guidance specifically? Michael Spanos: No. Operator: Your next question will come from Brian Harbour with Morgan Stanley. Brian Harbour: Could you guys remind us how you -- like roughly the timing of marketing this year and how you plan to handle that and how we should sort of just kind of factor that into our margin expectations? Michael Spanos: Yes. Brian, in terms of marketing, I'll start and Eric can add on. I'd start with -- the first thing is our marketing, we've gotten very disciplined in terms of connecting it to our strategic framework, which is all about driving brand relevancy. And for us, that starts with, with Outback being true to the core of the brand, which is about that hospitality, the Australian reverence, no rules just right. Our brand communication, as I've said before, is going to be very steak-centric. It's going to be about casual. It's going to be about fun. It's going to bring together what we're doing, which is the steak lineup, the service model and that 6-star hospitality model. As far as how we plan the year, we said we're going to go from a legacy of 70% linear TV, 30% digital, we're flipping that. We're now at a 60% digital, 40% linear TVs, we're going to be much more digitally focused, and we'll continue to evaluate that. We also -- I really am excited about the marketing mix models. Our marketing performance returns have increased significantly. We are just getting a better bang for the buck in terms of the right message and then which channels we're putting in and when we're running our marketing. And then as we said, broadly, we're going to be in that kind of low 2s to mid-2s as a percent of revenue on marketing for the full year. The increased investment, which we've talked about approximately an extra $10 million of marketing is in the back half of the year. But that will follow when we feel really good about our consistency of execution that we're running the elements of delivering a remarkable dine-in experience the right way, and we'll step that up. And we can measure the returns. If we like it, we'll step it up more. If we don't, we'll dial it down. Brian Harbour: Okay. Got it. And with the new service model in April, I mean, I would guess there's some impact on sort of how servers are paid, right, if you're changing their table count. I appreciate that it's sort of the right thing for the customer, but how do you sort of like manage through that and make sure that it's not kind of disruptive for the servers? Michael Spanos: Yes. I think it's a really good question. I start with ownership and connecting it to our principles and beliefs. What I heard from our servers and we know from the past is our servers want to own the guest relationship. And that's how the model was set up. Two, remember, we did test this. And when we tested it, we saw overall comp and tips were about the same and tips might -- were actually slightly up on a per check basis because remember, the tip share changes in this model versus the previous server, server assistant model. So we see our servers making the same, especially on a shift basis, which is really important. And part of that as well, we really like what we're seeing in terms of intent to return, attentiveness of the server, likelihood to recommend the server. And it's less stress. If you're a server and you used to have during peak, 6 tables as a server during the peak dinner hour and somebody else calls out, that stress level is really high. And that's not a good guest experience. It's not a good team member experience. And we like where we've landed and the initial feedback is very good. We'll have that fully rolled out by the end of Q2. We started in April. Operator: And the next question will come from Jeff Farmer with Gordon Haskett. Jeffrey Farmer: As it relates to that, I think you said roughly 4.5% menu pricing for the year. What was the number in Q1? And how should we be thinking about the cadence of pricing across the balance of the year? Eric Christel: Yes. Pricing was about 5% in Q1. It's going to be a little bit higher in Q2. That's due primarily to the lap of off-premises promotions we did prior year. So full year, we're still basically in the 4.5% to 5% range on pricing. Jeffrey Farmer: Okay. And then G&A, I think on the last call, you mentioned $215 million in G&A. Is that number still in play? And then it sounds like it is, but same question. How should we be thinking about the cadence across quarters? Eric Christel: Yes, that's still our number. We had a little bit of favorability in Q1, probably more timing than anything. So we basically see mid-5s getting down to basically low 5s, 5.3% approximately for G&A full year as a percent of sales, but right on that $215 million number. Michael Spanos: Yes. Jeff, it's Mike. I'll just add one point Eric touched on, which I think is important. As we communicated in Q4, how we're going to just be more balanced on mix and being disciplined. Eric hit on it. Part of that, especially this is important for Q2, we're not going to chase dilutive traffic. We're going to be really focused on what's sustainable long-term. And what that means is we decided not -- as we go into Q2, we're not going to lap what we thought was some dilutive type traffic in the third-party channel. We're just going to be very balanced. So you'll see that -- that moderates, by the way, as we finish up the first half of the year. But I think it's important -- we're focused primarily on delivering that remarkable dine-in experience. Operator: The next question will come from Sara Senatore with Bank of America. Sara Senatore: I have, I guess, quick questions about some of the capacity investments you're making. But maybe first, if you could talk about the Steakhouse category, it's been very strong for the last few quarters. And I was just curious, as you look at Outbacks improving momentum, is that kind of tracking with the Steak category or is it -- are you sort of exceeding that? Just trying to understand kind of how much might be category strength versus -- clearly, you have company initiatives that are working, but just disaggregating it. Michael Spanos: Yes, morning Sara. I think it's both. One, we're getting momentum and I'm really pleased with the momentum we're getting. And I already covered it in the previous questions. What we're seeing on the leading indicators, really impressive. We're getting good momentum, a consistency of execution. So that is us controlling what we can control. The category, I believe, is very resilient. We've talked about this. The category is resilient. The pure proteins, in our case, we have great steak proteins. We have great non-steak proteins. But the bottom line is we're seeing Americans continuing to engage in beef. We're seeing that with our new steak lineup. They were thrilled with the cuts we offer. And I've said this before as well, we deliver a great relative value. You come in and you get a meal with us, that steak is going to be right. We're going to make sure it's right. And you're going to get your sides and you're going to get your Coke or your Bloomin' Blonde and you're going to get your dessert. If you buy that steak and you cook it at home and screw it up, it's on the guest. We make it right. And we also give you a great experience. And I think that's why the category remains robust, and I see it looking that way in the future as well based on everything we're hearing and seeing from our guests. Sara Senatore: Okay. Right. Understood. I just wasn't sure if sequentially, there was any kind of change in category dynamics, but it sounds like 4Q to 1Q, no real change in the category. So obviously, more Outback specific. Is that fair? Michael Spanos: Yes, Sara, as I said, we saw a step-up across all brands, including Outback March versus that Jan, Feb and then again in April and our early read going into Mother's Day. If you look -- if you're asking about it on a short-term and over the long haul, we're seeing a steady resilience in the category and strength in the category. Sara Senatore: Perfect. And then just on the investments like the reimagery remodel, if you can just remind me, I mean, are you looking for a specific same-store sales lift or is this more kind of table stakes you need to have the assets look as good or comparable to the service model and the quality of the food. So trying to think through the kind of returns on the capital. Michael Spanos: Yes. So one, as we said, you start with -- we've got about half of the Outbacks have already been touched in the last few years, whether they're new or they were remodeled. So you've got about approximately 300 left that we're going to execute this asset refresh, which is light touch -- an average of about $350,000 to $400,000. We'll get those done through 2028. And what we're focused on is that which drives a good restaurant ambience and adds the cumulative effect to the guests. So inside, that's going to be tables, it's chairs, it's [ booths ], some ceilings, maybe some light bar touches on the outside, you're hitting the landscape and you got some paint and lighting. And what we've seen in tests and other brands before is we typically see about 100 basis point to 200 basis point tailwind in traffic right after those refreshes as we do them. So we'll continue to [ bring ] them out in a smart way. We want to do it when the restaurants aren't jammed. So you'll see that more in some of the lighter quarters, but it's table stakes in terms of how we think about capital. Operator: Your next question will come from Christine Cho with Goldman Sachs. Hyun Jin Cho: Congrats on the great momentum. A follow-up to Jeff's question earlier. Could you please help further unpack the margin drivers for the quarter? So I think you noted the higher restaurant level margin driven by check and cost savings and lower ad costs as key factors. Could you quantify these impacts and discuss whether you expect these trends to persist for the second quarter and the remainder of the year? Eric Christel: Yes. Christine, it's Eric. So the main driver of our margins and profit performance in Q1 really was we delivered top line at the top of our range, so about 1%. We also had better mix. And those 2 combined with sort of very good cost controls in the middle of the P&L, again, despite the weather, that all added up to essentially our ability to kind of hold slightly expand restaurant margins. So we see that -- so everything that's baked into our guidance is the flow-through resulting from the top line guidance. We remain committed to, as we mentioned, labor management as well. Hyun Jin Cho: Great. And then the last quarter, I think you mentioned there were some check management in some of the older consumer cohorts. Have you seen any changes there? Have you seen any shift in trends in other demographics that you would call out? Michael Spanos: Yes. Chris, it's Mike. Yes, that's the right recall. We're -- as I've been saying, we're cautiously optimistic on the consumer. There's been some choppiness, but we see an engaged guest. We have, to your point, when we look at number of guests, the guests in Outback that tend to run above age 55, 60 with household incomes under that $75,000 range, they are managing their checks. But what's quite interesting, they're adding frequency of visitation. So they're actually remaining very engaged. And this is why we've kept the affordability offers. And that group, especially has resonated within Aussie Three Course within Outback. So when you look at a loyalty hook or increase in frequency, Aussie Three Course has played very well for that cohort that is balancing that. As I also said, what we see is the opposite, too, Christine, which we like. If I stay on Aussie Three Course, we see younger cohorts with bigger household incomes, they're coming in and they're -- whether they're new or frequent, they're trading up into the higher tiers. They're going into that $17.99. They're going into the $20.99. They're enjoying that experience and they're moving up the incentive curve. Operator: The next question will come from Christabel Rocha with JPMorgan. Unknown Analyst: This is [ Christopher on for John ]. The first question is on expanding char grill capacity that you mentioned by the summer. Can you remind us, is this moving away from your clamshells? Michael Spanos: No, no. It's about creating the optimal cooking platform. We know and we've tested what is the best cooking platform, whether it's a steak or non-steak protein. So the whole point of char grill and bringing back broilers as well was we want to have enough capacity on the flame for our new steak lineup. We also -- we love our clamshells for a number of steak and non-steak proteins. And the other thing I pointed out on the previous earnings call, this was also feedback from our Outbackers. As you look at what we're doing with the char grill capacity, which again, we'll have done by the end of the summer, it actually created better visibility on the line, the way it's set up. So the flow and the teamwork, it's much easier to see on the peripheral vision. It gives us more refrigeration, capacity storage space in the base of the line. So this actually helps us from pace and execution simplicity in the back of the house. Unknown Analyst: And then on the remodels, you mentioned an average spend of like $350,000 to $400,000. It kind of feel slow, especially like you might be overdue for a remodel? Is this just Phase 1 of a multiphase effort? And is there any like downtime that you're seeing that you need? And how are you communicating these changes to the customer without significant exterior work? Eric Christel: Yes, I think your third question first. So no downtime. We're able to do these off hours. The scope of the refreshes typically do not require permits. So it's very easy for us to do it sort of non-guest-facing, non-guest impacting. Your first question was -- I think to answer, we basically see this as getting caught up to where we will now have a normal refresh cycle for -- across all of our concepts, including Outback. So by getting to what Mike mentioned, getting 100% of our Outbacks touched by 2028, that allows us to then continue to invest on a normal cycle past that. Michael Spanos: Yes. Remember, Chris, we -- one of the decisions, if you go back, as we've brought down the future capital on new restaurants, we're reallocating to the refresh because before we were putting that same level or more level of capital into those new ones. And our point is we need to invest -- as Eric said, we want to invest in the base of the business first and then pay down debt in terms of capital allocation. Operator: The next question will come from Brian Vaccaro with Raymond James. Brian Vaccaro: Just 2 quick clarifications for me. Just back to the Outback comps, obviously underperformed a little bit, as you noted, the Black Box casual dining category in Q1. But you noted the improvement in March-April. So I was curious if Outback is outperforming segment trends in more recent months? And then second, on the commodity inflation, it sounds like that might have come down a little bit, maybe 50 bps on each range. Just curious what might be moving a little bit more favorable in the basket. Michael Spanos: On Outback, when you look at the last year, Brian, I would -- we've improved our performance versus Black Box. So if you look at it, we've narrowed that gap both in terms of comp sales and traffic and the same for Total Bloomin' Brands. We obviously want to be at a point where we're leading Black Box, as I said in my prepared remarks, but we made progress and momentum versus that standard or that comparison. And we also, in the short-term, like I said, Outback and Total Bloomin', we saw an improvement in comp sales when you look at March versus Jan, Feb and April versus March and out of the gates here early as we go into Mother's Day. In terms of commodities, and Eric can add on, we were pretty clear with our commodities. We assumed them to be roughly 4.5% to 5.5% with that high single-digit inflation on beef. We're about 85% locked in terms of -- if you look at our commodity basket, we're locked in on 85%. Our beef is locked in. And Eric can give you more on the details of the pace and how that looks. Eric Christel: Yes. Q1 came in a little bit favorable due to dairy and poultry primarily. We had also a pretty good inventory management in terms of commodities. But for the full year, we're still in the 4.5% to 5.5% range on total commodities inflation. So no change to the full year. Brian Vaccaro: Okay. I might have been mistaken. I thought it was 5% to 6% previously, but it's a small change either way. Just curious if something moved there, but that's helpful. Okay. Perfect. And I guess the last one for me. As it relates to your second quarter EPS guidance, and this just ran some quick back of the envelope math, but it seems to embed maybe some year-on-year store margin contraction. I just wanted to ask if that's right? And if it's right, can you help square what might be driving a little bit of year-on-year contraction in the second quarter after Q1 was flat on a lower comp, assuming you hit the 1% to 2% for Q2. Just anything on the Q2 margin dynamics? Michael Spanos: Yes. No, I would assume more flat margins flat margins -- flat at the midpoint of the guidance. And it really just embeds some cautious optimism that we see with consumers and guests. We feel great about the momentum. Operator: And that will conclude our question-and-answer session. I would like to pass the call back over to Mr. Mike Spanos for any closing remarks. Michael Spanos: Thank you once again for your investment and support of Bloomin' Brands. I want to close by thanking our people for their hard work, their passion and commitment to each other and our guests. Thank you. Operator: That will conclude our conference call for today. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Criteo's First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Dambre, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead. Melanie Dambre: Good morning, everyone, and welcome to Criteo's First Quarter 2026 Earnings Call. Joining us on the call today, Chief Executive Officer, Michael Komasinski; and Chief Financial Officer, Sarah Glickman, are going to share some prepared remarks. Joining us for the Q&A session is Todd Parsons in his role as Chief Product Officer. As usual, you will find our investor presentation on our IR website now as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements, which reflect Criteo's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to the risk factors discussed in our earnings release as well as our most recent Forms 10-K and 10-Q filed with the SEC. We will also discuss non-GAAP measures of our performance. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this quarter are against the same period in the prior year. With that, let me now hand it over to Michael. Michael Komasinski: Thanks, Melanie, and good morning, everyone. One year into my role, we've made significant progress in sharpening our strategy, strengthening execution and focusing the company on what we expect will drive sustainable value creation. Our focus is clear, building Criteo into the leading commerce intelligence and AI decisioning platform for an increasingly complex and fragmented ecosystem. Our conviction is that the next phase of commerce will be defined by how decisions are made, not just where ads appear. As AI changes how people discover products and makes the ecosystem more fragmented, the real value will come from turning intent into measurable outcomes at scale. That is exactly where we are focused and where we are building our advantage. While this is not yet reflected in our results, we are making meaningful progress as we continue to transform our business. As we navigate this transition year, we executed with discipline in the first quarter, including media spend growth for the third consecutive quarter and meaningful progress across all our strategic priorities. What matters most is the pace of execution, and we are moving quickly. In the first quarter, we have advanced our Agentic AI road map, including our exciting partnership with OpenAI and increasing adoption of MCP with agencies. We also launched Criteo GO as our AI-powered self-service offering and introduced new capabilities like Page Intelligence to help retailers improve product discovery while maximizing monetization. Together, these milestones demonstrate strong progress against our strategy and reinforce the foundations for mid- and long-term growth. More broadly, AI is shaping how consumers discover, evaluate and buy, which raises the bar for relevance, trust and high-quality data. As commerce becomes more complex, the need for a decisioning and orchestration layer across multiple touch points becomes critical, and that is exactly where we believe we have a clear competitive advantage. This is powered by our unique commerce data foundation with visibility into over $1 trillion in e-commerce transactions annually and reach across billions of daily active users, products and interactions, allowing us to operate at scale. We believe this combination of data, AI and scale positions us to play a central role in the ecosystem and to capture increasing value over time. At the same time, AI platforms are emerging as a powerful new discovery channel, unlocking incremental budgets and expanding our addressable market. And for retailers, this is opening new monetization opportunities as they integrate conversational AI into their digital storefronts and create new surfaces for sponsored discovery. These dynamics are increasing demand, expanding our opportunity set and reinforcing the central role we play across the commerce ecosystem. We entered 2026 with the ambition to lead in Agentic AI, and we are already delivering on this ambition with discipline and focus. We became OpenAI's first ad tech partner, integrating our demand into ChatGPT's advertising offering with a focus on experiences that are relevant, additive and built on user trust. This positions us at the forefront of a new high-intent discovery channel for our advertiser clients. Momentum is building. We now have over 1,000 brands live with incremental budgets from both existing and new clients, strong agency traction and early expansion across international markets. We are also extending access through Criteo GO, integrating ChatGPT into our self-service cross-channel platform to enable advertisers to easily test and scale AI native media. This traction reflects the value advertisers are seeing. Traffic from AI platforms like ChatGPT converts at approximately 1.5x the rate of other referral channels, driving incremental high-quality demand to retailer and brand destinations. More broadly, as AI-driven commerce emerges, our agentic recommendation service is enabling us to demonstrate our capabilities. It has been instrumental in advancing several partnership opportunities, including driving new engagement with a broader set of partners and is now evolving into a foundational layer of our platform embedded across multiple use cases. An example is conversational ads, an innovative format we are actively developing. These enable interactive shopping experiences where users can describe what they're looking for and receive tailored product or service recommendations directly within the ad unit. In addition to being engaging, they generate richer intent signals that continuously enhance our models. We're seeing strong early interest, particularly in our travel vertical. We are also advancing sponsored recommendations within retailer AI assistant built on the same capability. This allows sponsored and organic products to appear seamlessly within conversational experiences, opening new retail media inventory across these emerging surfaces, and we look forward to sharing more. Importantly, Agentic AI is making our platform more scalable and easier to use. We are moving toward an API-first future with agentic workflows embedded directly into our solutions, reducing friction and accelerating execution for our clients. Thanks to our MCP server, dentsu has activated campaigns with Criteo from their agent using only a plain text brief. And this is a concrete example of how Agentic AI raises the bar for efficiency and interoperability, and we expect others to follow. At the same time, we are scaling agents across the platform, helping clients move faster across onboarding, audience creation, analytics and activation. Turning to Performance Media, our focus is clear: reaccelerating growth by scaling self-service, expanding cross-channel activation and extending further up the funnel. As consumer journeys become more dynamic, advertisers are increasingly looking for unified outcome-driven solutions across the full path to purchase. This plays to our strengths and reinforces our confidence that Performance Media will be a durable and growing contributor to our business over time. Against this backdrop, near-term trends reflect softer demand in specific verticals, particularly travel in Europe and reduced budgets from certain large U.S. clients, primarily driven by client-specific decisions. Sarah will provide more detail shortly. We are proactively responding by focusing on delivering strong outcomes to secure client budgets while executing against our growth priorities. While the near-term environment is challenging, it does not distract us from delivering on the strategy we believe will drive sustained growth and value. We are taking decisive actions to improve execution. Since joining as Chief Customer Officer in January, Ed Dinichert has elevated our commercial team and operating discipline, including bringing in new leadership for Performance Media in the Americas with deep experience in enterprise sales and scaling revenue. We are also deepening and accelerating our engagement with agencies to capture greater share of spend while reinforcing commercial discipline through clearer performance metrics, stronger accountability and more rigorous pipeline management. We are already seeing early signs of progress with new enterprise client wins in the U.S. Our mid-market remains resilient, and our GO self-service offering is increasingly effective in addressing the needs of smaller clients. Starting with self-service, GO launched as planned at the end of Q1. With more than 2/3 of campaigns from small clients now running through GO in the U.S., we are building on the successful transition of existing clients as we roll out self-service to new ones, supported by a comprehensive go-to-market plan, including targeted marketing campaigns with focused commercial support to drive awareness and adoption. GO simplifies activation and optimizes performance across channels, bringing together display, video, native and social into a single campaign environment. AI dynamically allocates budgets to drive outcomes, while built-in generative tools ensure consistent, high-performing creative across formats. We are also embedding agentic onboarding capabilities into GO, further reducing friction and accelerating time to value for our clients. Importantly, GO expands our addressable market, particularly among small- and medium-sized businesses. This is supported by strong industry tailwinds with AI-powered ad buying expected to grow from approximately $35 billion in 2025 to over $140 billion by 2030 according to Madison and Wall. We are already seeing strong interest and expect GO to be a multiyear growth driver. Clients running fully cross-channel campaigns are spending up to 3x more, reinforcing the value of an integrated approach. For example, Wine Country Gift Baskets increased return on ad spend by 28% and average order value by 10%, driving higher spend. We are also extending performance further up the funnel as brand performance becomes increasingly important. Discovery is how we help brands reach new audiences across channels. And as we build toward a more complete full funnel offering, we are introducing Discovery audiences in GO this quarter. Discovery typically represents at least 1/3 of media budgets, creating a meaningful opportunity to expand our addressable market. We are well positioned to capture that spend by connecting upper funnel engagement directly to lower funnel performance. Our cross-channel foundation is what makes this possible. It allows us to execute this full funnel strategy seamlessly, engaging consumers wherever they are and optimizing outcomes across channels rather than in silos. In practice, this means activating discovery across the environments where it is happening today, including social, CTV and emerging surfaces like AI platforms, all supported by AI-driven creative and optimization. Social continues to be a strong driver for our business, providing broad incremental reach and scalable performance. We are expecting -- expanding into high-impact formats like short-form video on Instagram, Facebook and TikTok, where we are seeing encouraging traction. CTV is another important growth channel. Through our recently announced partnership with Roku, we are combining premium inventory with our commerce audiences to drive better performance and simplify activation, and we expect to bring CTV into GO by the end of the year. Taken together, this positions us to capture a greater share of upper funnel budgets while reinforcing our leadership in performance, and we expect these initiatives to build momentum as we move through the year. Turning to Retail Media. We continue to build on our position as a global leader in the fastest-growing segment of digital advertising. Today, we partner with 235 leading retailers worldwide, and our focus is clear: unlock greater demand, scale high-performing formats and bring more intelligent conversational experiences to retail environments. Underlying performance remains strong with contribution ex-TAC up 24% in the first quarter, excluding the impact of the 2 previously communicated scope reductions. On the demand side, we are expanding budgets and deepening engagement with brands and agencies. We drove additional share gains in the quarter, supported by our network of 15 third-party demand API partners and marketplace integrations that continue to unlock additional demand, particularly from long-tail advertisers. We are also seeing new capabilities like conquesting drive incremental spend across multiple retailers. By increasing competition on the digital shelf, it helps brands acquire new customers and defend market share. On the supply side, we expanded our partnership with DoorDash in Canada and added Hyundai department store in Asia Pacific. We also secured many multiyear renewals, including ASOS in the U.K., reflecting the strength and durability of our retailer relationships. Innovation across formats continues to be a major growth driver and a source of share gains with existing and new retailers. Auction-based display remains our fastest-growing format, now live with more than 60 retailers, up from 49 last quarter. This is improving monetization efficiency and driving higher yields for retailers. Shoppable video is also scaling quickly as retailers adopt more full funnel on-site strategies that combine discovery and conversion. AI is an important enabler of how we drive performance and monetization. With Page Intelligence, we are introducing an AI optimization layer that helps retailers balance organic and sponsored content while improving the shopper experience and also to unlock additional revenue opportunities while maintaining full control over product selection and ranking. This positions retailers for a more AI-driven commerce future and reinforces our role as a long-term strategic partner. Collectively, these drivers are strengthening both demand and monetization across our network. We are executing with focus and remain on track for Retail Media revenue to return to growth in the fourth quarter as we move past previously communicated near-term headwinds from 2 [ client scope ] changes. We also continue to expect underlying Retail Media growth to accelerate in 2026 compared to 2025. To close, we are executing with focus in a transition year. Our fundamentals remain strong with solid margins and cash generation while we invest in the capabilities that will drive our next phase of growth. We remain highly confident in the trajectory of our business, including our expectation of a return to growth in the fourth quarter and reacceleration into 2027. We remain committed to shareholder value, including continued share buybacks, reflecting our confidence in the business and its potential. At the same time, we are advancing our portfolio and corporate structure optimization. Our redomiciliation to Luxembourg remains on track for completion in the third quarter, following strong shareholder support and will enhance our strategic and financial flexibility. As a next step, we plan to pursue a subsequent redomiciliation to the United States, which could occur as early as the first quarter of 2027, subject to applicable approvals and other conditions to make Criteo easier to invest in and better positioned for the future. We are building a more scalable Criteo, well positioned to capture the opportunities ahead and deliver sustainable value to our shareholders. With that, I'll hand it over to Sarah, who will provide more details on our financial results and our outlook. Sarah Glickman: Thank you, Michael, and good morning, everyone. Our first quarter performance reflects solid execution and financial discipline. Our first quarter media spend surpassed $1 billion for the first time. Revenue was $425 million and contribution ex-TAC was $250 million. This includes a year-over-year tailwind from foreign currencies of $9 million. At constant currency, Q1 contribution ex-TAC was down 9% as expected, reflecting a $27 million headwind related to previously communicated scope changes with 2 Retail Media clients. Excluding this impact, contribution ex-TAC grew 1% in Q1 and client retention remains high at close to 90%. Starting with Performance Media, revenue was $383 million and contribution ex-TAC was $210 million, down 2% at constant currency. This reflects mixed performance in Commerce growth, continued momentum in our Commerce Grid SSP and improving trends in Ad Tech Services. Within Commerce Grid, we have a diversified client base and a global footprint. By region, we delivered low growth in media spend in EMEA, while budgets declined in the U.S. and to a lesser extent, in APAC. By vertical, travel remains our fastest-growing category, up 20% on top of 43% growth in Q1 last year, followed by solid performance in our marketplaces. We continue to see lower spending in retail, especially in discretionary categories such as fashion, which was down 18%. As the quarter progressed, spend from certain large enterprise clients softened in the U.S., while the broader client base remained stable and resilient. In Retail Media, revenue was $41 million and contribution ex-TAC was also $41 million, reflecting the previously communicated $27 million headwind in the quarter. Excluding this impact, trends improved compared to last quarter and contribution ex-TAC grew 24% in Q1 across the underlying client base. This growth was driven by continued strength in Retail Media onsite. We benefited from the traction of our auction-based display offering and new retailers. Growth from existing clients was strong with same retailer contribution ex-TAC retention at 88% or 110%, excluding our largest retailer, driven by multiyear contracts and exclusive partnerships with most of our retailer clients. Media spend in Q1 grew 30% year-over-year, accelerating from 25% last quarter as our 4,150 global brands continue to prioritize retail media as a key channel for their investments to reach relevant audiences and sell more products. We delivered adjusted EBITDA of $65 million in Q1 2026, reflecting lower top line along with planned growth investments in our seasonally lowest quarter, partially offset by lower-than-expected RSU social charges and onetime tax refunds recognized in Q1 that were originally expected in Q2. Non-GAAP operating expenses increased 10% year-over-year, primarily driven by planned growth investments, return to office costs and a foreign exchange headwind on our euro-based cost structure with productivity gains partially mitigating the increase. AI deployment continues to improve efficiency, streamlining execution and enabling better resource allocation. Moving down the P&L, depreciation and amortization was $28 million and share-based compensation expense was $14 million. Our income from operations was $10 million, and our net income was $9 million in Q1 2026. Our weighted average diluted share count was 51 million, which resulted in diluted earnings per share of $0.15 compared to $0.66 last year. Our adjusted diluted EPS was $0.73 in Q1 2026 compared to $1.10 last year. Operating cash flow was $48 million and free cash flow was $16 million in Q1, reflecting planned higher CapEx and improved working capital in a seasonally low quarter. Criteo continues to be a resilient cash-generative business with the financial strength to invest for growth and return capital to shareholders. We have a strong balance sheet with no long-term debt. We had $889 million in total liquidity as of the end of March, which gives us significant financial flexibility to execute on our strategy and enable disciplined and balanced capital allocation. Our priorities are to invest in high ROI organic investments and value-enhancing acquisitions and to return capital to shareholders via our share buyback program. We are confident in our business strategy, and we are committed to driving shareholder value. We deployed $31 million to repurchase 1.6 million shares this quarter, and there was $190 million remaining under the current authorized share repurchase program as of the end of March. In April, we canceled a total of 1.9 million shares, increasing our capacity for additional share repurchases. Turning to our financial outlook, which reflects our expectations as of today, May 6, 2026. Our guidance incorporates softer performance media trends seen so far in Q2, while our Retail Media outlook remains unchanged. For 2026, we now expect contribution ex-TAC to decline by low single digits at constant currency. This reflects the previously communicated Retail Media client scope reductions as well as a more cautious view of the volatile macro environment and the reduced budgets from certain large enterprise performance media clients in the U.S. At the midpoint, our full year outlook is down approximately 300 basis points, reflecting several factors impacting Performance Media. About half of that or roughly 150 basis points relates to indirect macro impact. Our direct exposure to the Middle East is limited at around 1% of our business, but we are seeing broader effects. This includes slower travel growth in Europe, which has been the region's fastest growth driver, softness in discretionary retail due to inflation and weaker consumer sentiment and slower adoption of newer products as advertisers concentrate spend on established solutions in a more cautious environment. It's important to note that these dynamics are largely concentrated in our international markets, EMEA and Asia Pac, which represent close to 2/3 of our media spend for commerce growth. The remaining approximately 150 basis points is driven by U.S. client-specific dynamics. Taken together, these factors are pushing our return to growth into the fourth quarter. Excluding the $75 million Retail Media headwind, underlying contribution ex-TAC is expected to grow at a mid-single-digit rate. Our guidance does not assume any material revenue contribution from Agentic AI initiatives given their early stage, although we are seeing strong early traction. We estimate ForEx changes to drive a positive year-over-year impact of about $6 million to $8 million on contribution ex-TAC for the full year. In Retail Media, we are confident in our outlook that remains unchanged. We continue to expect media spend growth ahead of the market with contribution ex-TAC declining in the mid- to high teens year-over-year at constant currency due to the $75 million client scope reduction impact. Excluding the 2 clients, the underlying Retail Media contribution ex-TAC growth for 2026 is expected to accelerate towards the high end of the high teens to 20% range that we previously provided compared to 16% in 2025. In Performance Media, we now expect contribution ex-TAC to be flat to up low single digits at constant currency in 2026. This reflects the expected ramp-up of GO over the course of the year, offset by macro headwinds and reduced spend from certain large U.S. clients. We have taken actions to reinforce execution, including new sales leadership. Overall, we continue to anticipate an adjusted EBITDA margin of approximately 32% to 34% for 2026. Despite lower top line, we expect to maintain margins in line with our prior view through disciplined cost management and productivity gains, while we continue to invest in Agentic AI and key growth initiatives and absorbing foreign exchange headwinds on our euro-based costs. We anticipate that the investments we are making this year will position us for sustainable top line growth and strong cash flow generation for the coming years. We expect a normalized tax rate of 27% to 32% under current rules, driven by our evolving revenue mix and certain onetime items related to our redomiciliation. As previously communicated, we anticipate higher CapEx in 2026, primarily related to the renewal of certain data centers with total CapEx expected to be approximately $190 million. We expect operational cash flow conversion from adjusted EBITDA to improve to approximately 85% in 2026, up from 76% in 2025, driven by continued improvements in working capital. We also expect free cash flow conversion of about 35% of adjusted EBITDA. For Q2 2026, we expect contribution ex-TAC $260 million to $264 million, down 11% to 9% at constant currency. Our range reflects a more volatile environment shaped by geopolitical tensions and reduced spend from certain large U.S. Performance Media clients, which has translated into softer April trends. We estimate foreign exchange to be a modest headwind in Q2, reflecting more unfavorable rates compared to 3 months ago. We now expect up to a $2 million negative year-over-year impact on contribution ex-TAC in Q2, about $3 million worse than under the rates assumed in our prior guidance. We expect adjusted EBITDA between $67 million and $71 million, reflecting lower top line, continued high ROI investments in Agentic AI and growth areas, annualized employee costs and our annual promotion cycle and foreign exchange rate headwinds on our European cost base. We are pleased that our proposed redomiciliation for Luxembourg and direct listing are progressing as planned, following strong shareholder support. This is expected to enhance our flexibility for share repurchases by removing current structural constraints. We remain on track to complete the redomiciliation in the third quarter of 2026. Looking ahead, we plan to pursue a subsequent redomiciliation to the U.S. as early as the first quarter of 2027, subject to applicable approvals and other conditions with the objective of further broadening our access to U.S. capital markets. In closing, we have strong conviction in our strategy. We are excited for Agentic AI, and we are laser-focused on disciplined execution and capital allocation while delivering strong margins and cash flow generation. And with that, I will open up the call for questions. Operator: [Operator Instructions] Your first question is from Mark Kelley with Stifel. Mark Kelley: I appreciate all the color on the macro headwinds that you're seeing by vertical and by region. I guess I had 2 questions there. One is, is it fair to assume that the majority of the headwinds are outside of retargeting? Or is it kind of spread across the whole performance business? And number two, you mentioned slower adoption of some of the newer products given some of the worries that people have out there from a macro perspective. I feel like we've been worried about collectively across the digital advertising industry. We've been worried about a lot of things for a handful of years here with ongoing conflicts and plenty of things to be mindful of. I guess what do you think your clients need to see in order for them to start adopting some of these newer tools that you've put into the market a bit more -- in a more meaningful way? Michael Komasinski: Yes. Sure, Mark. Happy to take that, and Todd probably add a little color to some of the product adoption parts of that question. The slowdown with the U.S. clients is across the Performance Media segment at large. So not just retargeting sort of across the whole portfolio. And that sort of leads to maybe the more important point, which is there wasn't any common denominator of those decisions. No sort of red thread running between them other than we need to build a stronger pipeline. We need to execute better with the way that we convert that pipeline on large U.S. clients. And that's something that we think we've already addressed. We've got a great new leadership team in place. We brought on a new Chief Customer Officer and Ed Dinichert at the beginning of the year. And Ed, in turn, has revamped his entire commercial organization globally, in fact, but especially in the United States, where he brought on several key hires, many of whom started in the March or April time frame. So we feel like we've got the right team in place to jump start growth with that portfolio. And it's really more at an account level, just making sure that we're right there with our clients, driving strategic decisions, maintaining the right share of budget across our product set. And in terms of adoption of new clients or products, and Todd, if you wanted to comment on that part. Todd Parsons: Yes, I can add to that, Mark. We're seeing a very healthy mix of new and existing advertisers adopting the capabilities that we're shipping. And as Michael said, we're shipping a lot of product at a very quick rate here. What you're seeing is early days in that adoption. And with large clients, it really goes to our commercial and selling motion and the work that Dinichert and the new organization are doing. With self-service products like GO, it's just simply early. We're a month into it. our focus is what you'd expect from a launch, very tight feedback loops from our users, continuous improvements in customer experience and so forth, and we're seeing all positive signs there. Operator: Your next question comes from Matthew Cost with Morgan Stanley. Matthew Cost: Maybe one for Michael, one for Sarah. Michael, just on the ChatGPT partnership, you talked about incremental spend, which is very encouraging. How are you defining success for that product? And what are the milestones that investors should be watching as you continue to work through that launch? That's question one. And then for Sarah, you've talked about how travel in Europe is softer, but EMEA was still a growth driver in 1Q. And obviously, that's been -- travel in Europe has been a very fast-growing category for you, as you pointed out. So what are your assumptions for the rest of the year for that category? And how conservative are you choosing to be given the uncertainty in the macro? Michael Komasinski: Sure. Thanks, Matthew. I can start with the OpenAI question and then the second part to Sarah. On OpenAI, definitely the leading KPI right now is client count. And that's why we published the update yesterday on the 1,000 clients that we now have live. And we expect that number to continue to scale nicely over the course of the year as they open up additional markets. And what's going to be really interesting is how our value proposition coexists along OpenAI as they develop their own self-service platform, right? And so we continue to see really strong engagement with clients where they need our expertise and our service to help them with adopting a new ad unit, a new surface, right? How does it work? How do they optimize? How should they think about that alongside their other investments and touch points? We're developing our data management feeds to help them scale their product data into that environment because that's a real key part of driving ad performance in that unit. And then, of course, the cross-channel setup will always be a unique proposition that we'll be able to offer. And so we're really excited about getting that supply into our cross-channel setup and go over the course of the year. And that is something that we'll continue to provide updates on publicly in terms of making progress on that product rollout. So a lot to be excited about. I think key client count is the main KPI for now as we get into '27, we probably would start to guide more around contribution and some additional disclosure. But Sarah, do you want to take the second half of Matthew's question? Sarah Glickman: Yes. So just on travel, that was our highest growing vertical this time last year at 43% and in Q1, it was at 20%. We did anticipate growth, including in the Middle East. We actually won some really good new clients there, and they just have been floated for obvious reasons. So we are taking a prudent approach on travel, assuming that we won't see the growth profile that we had anticipated. And maybe if I can just take one minute on other verticals. We talked about fashion being down kind of year-on-year. Last year, that was down about 6%. This year, it's down like 18%. So we are seeing these trends from our clients. Even if I just go one more marketplaces, real estate classified was an amazing growth driver for us last year. And it's just much more muted. So that's what we've put into our guide, and we've just assumed a European and Asia Pac impact as well as a U.S., I would say, slower spend impact as well. Operator: Your next question comes from Justin Patterson with KeyBanc. Justin Patterson: Great. I appreciate the details on Agentic. I guess one thing that our team has been wondering is that how you think about some of the new device types and multimodal search, more visual search as an opportunity in there. Is that something Criteo can address today? Or is that just another area you would need to invest in down the road? And then separately, the 1,000 clients is a nice milestone with Agentic. I'm curious how that's changed the pipeline of of client engagements and how you think that might build up over the course of the year? Michael Komasinski: Yes. So I can jump in to start with. So the answer is absolutely yes. We see that as an opportunity for us, and it's a very natural one, Justin. Our job overall is to bring performance discipline to the LLM surface. And as Michael laid out, that's not just client count, but from a product functionality standpoint, it's relevance, it's outcomes, it's measurement. Those surfaces or additional creative types or ways that users are engaging them are absolutely baked into our strategy. But at the core, we're really focused on enabling those 3 things consistently across the surfaces so that we're not running towards an interaction or engagement that might not scale. But yes, it absolutely represents an opportunity, and we're well prepared to take advantage of it. And Justin, just on the kind of incrementality part of OpenAI, a couple of different thoughts there. One, I mean, it's been the fastest-growing partnership that Criteo has ever had. I think it's probably sort of obvious from some of the statistics that we're sharing. We do find that, by and large, the budgets that go into it are incremental. And the pipeline is increasingly incremental as well. In the early stages, a lot of existing clients then wanting to use their Criteo pipes and service model to get into that platform. But it opened up a lot of traction for us on the new business front. And so increasingly, that's net new in our pipeline. Now we need to go convert that over the course of the year and then cross-sell those clients into our cross-channel setup or to our other products. But we see a lot of potential in kind of a flywheel coming off this partnership. So helping our partners scale their product, but certainly bringing new folks into the Criteo platform more broadly. So more to come on that in the second half of the year. Operator: Your next question comes from Alec Brondolo with Wells Fargo. Alec Brondolo: Maybe two for me. On the large client softness that you've experienced year-to-date, I guess, what is the level of confidence that it's a sales execution issue and not an issue that's more structural with the underlying performance of the advertising products? So that would be a helpful place to start. And then maybe secondly, can you speak to the GO self-service rollout? Has it been a material new customer driver thus far? And could you help us understand what's implied in the guide for contribution from that product specifically in 2Q and the back half of the year? Michael Komasinski: Sure. Great questions, Alec. Yes, look, on the U.S. clients, we do not think that, that's structural. As I said, we've not lost any clients there. And as I mentioned, there really isn't like a common theme running through those other than we've got to be closer to those clients and jockey for position amongst other vendors that they work with. And as they make decisions, be able to move budget from, say, one Criteo product into another, right? If someone wants to pull budget from, say, lower funnel conversion into mid-funnel customer acquisition, we need to be right there at the table to suggest the right alternatives and move that from left pocket to right pocket. We also need to continue to build more pipeline at that scale. And we've started to do that. But we have to convert it, and we need to get those net new clients scaled up so that when we have these fluctuations, in that segment. We've got new growth and revenue coming in to offset it. So we're a little out of sync for the quarter on that. We feel like we've brought in the right leadership to address it. And the underlying metrics on pipeline growth and certainly stability with those U.S. clients is there. So we think that this will resolve itself in another quarter or two. In terms of GO, maybe I'll let Todd take that one. Todd Parsons: Yes. Just to reinforce what I was saying earlier, we're a month into the launch there, and we can't say now exactly what's going to happen for the rest of the year. But I can say that the interest for the product is outstanding. And as I mentioned, we are really focused on making sure that smooth onboarding and customer retention, so we're ensured with product market fit is there. That's the stage that we're at in launching a new product, but it looks very good at the beginning. And of course, we're brokering on a year worth of experience in G campaign success in the company. So we feel very good about that, but it's just very early. Operator: Your next question comes from Brian Pitz with BMO Capital Markets. Unknown Analyst: This is David Lustberg on for Brian. Two quick ones, if I may. The first one, just to touch on some of the macro impacts that obviously impacted the full year guidance. I was just curious if you could kind of pinpoint when you started to see those impacts kind of come on and hit the model? And then secondarily, just on the client retention, I think it's kind of remained in the strong kind of like 90% range. But just kind of curious if you can kind of touch on the customers that do churn off the platform, where are you finding that they're either replacing you or they kind of just with a vendor would be helpful. Sarah Glickman: Yes. Just -- I mean, on the macro, we started to see it within Q1. So we were seeing, I would say, March and then April, we are seeing that impact. And it does -- it is quite broad reaching, obviously, Asia PAC and especially Europe. It's definitely a conversation with our clients. And then in the U.S., notwithstanding all the comments that Michael made, we are seeing some lower growth in, for example, large U.S. department stores and some other areas. So it's a trend that we have seen over the last few months and hence, why we felt that we needed to take Q2 guide down and there for the year. Michael Komasinski: Yes, I can take the second part on the churn question. The good news on that one is that there really isn't sort of a dominant or even a couple of different places that people typically go. I think the market for performance products and even branded products to be more measurable and performance like has definitely accelerated. So when we churn something or when we lose a budget, it can go to a variety of places because even brand products are measurable these days. And thus our move into the full funnel, our plan to launch Discovery audiences next quarter, we need to be wherever those budgets are going to shift. And again, I think that's why we feel good about our strategy to be full funnel cross-channel so we can catch those dollars wherever they move. So no common denominator of where people typically churn to other than maybe, like I said, some validation of our strategy to be in the right places to catch things. Operator: Your next question comes from Mark Zgutowicz with Benchmark. Mark Zgutowicz: Sarah, just a couple of clarifications, if I could. Your PR mentioned certain large performance media U.S. clients in terms of some of the weakness that you're seeing. Is that multiple clients or 1 or 2? And if you think about the '26 guide, how wide is the scope of, I guess, those weakening budgets that you're seeing? And how does that translate into the level of conservatism that's now set in the '26 guide? And then perhaps for Todd and/or Michael, is there a first-mover advantage with ChatGPT versus a steep learning curve that you may be carrying for others to follow? And then, Michael, you mentioned regarding initial client spend being incremental there. I suspect that, that's test budgets. But as you -- as this evolves over time, why is that budget not a replacement versus remaining incremental? Sarah Glickman: Yes. So to comment on the clients, it's a -- yes, a number of, I would say, extra large U.S. clients, and they're all kind of down. So that is having an impact and some of those were key growth drivers for us. So that is the impact, but it's a number -- a small number, but a number of U.S. clients. The rest of the base is resilient. So our medium, large, small kind of clients are all resilient, but there have been some client-specific reasons why the spend is down on those certain large U.S. clients. Todd Parsons: Yes. On the ChatGPT question, absolutely. Yes, it's a competitive advantage for us in two ways. One, in terms of just time to be in market. And as Michael mentioned, we're crossing 1,000 clients on that, many of which are new to the company. That gives us a really neat advantage to grow the Criteo portfolio. Technically speaking, though, it gives us an advantage to already be at the table, having our tech and the value we add to ChatGPT's integration, developing faster than others so that when OpenAI launches new features, CPC being a good example or a new measurement feature, as you saw announced yesterday, we're ready for that. And in fact, we're ahead of the pack on that. So we're really excited about the timing of things, and we're doing what we're really good at, which is bringing performance to a new surface and making it cross channel and full funnel. So we're right in our sweet spot there and competitively, it feels quite good. Michael Komasinski: Yes. In terms of incrementality, it's definitely incremental for Criteo even as we move past test budgets because in its current format, that's a discovery budget. And so that, again, is an example of us wanting to move up funnel. This partnership accelerates that. So CPM and even the CPC model that they currently have in place, and that's why they call it a test program right now. We'll see if that's the model that they persist with. But let's take as an example, if they did move to like a full optimization model off of this CAPI that they introduced this week, that would then compete for search budgets, which again, for Criteo would be truly incremental. So we're incremental off this platform either way. If it stays a discovery surface with kind of the model that you see now or if they really go performance-oriented, that's a channel that we've been blocked out of. So I think for us, it's incremental either way. Operator: Your next question comes from Tim Nolan with [ SSR ]. Timothy Nolan: It's actually a bit of a follow-on to the last one regarding OpenAI, again, surprise, surprise. Could you please just clarify what the business model is for you? If it's a demand integration, which I understand it is, then is it a similar business model as any other partner that you'd be placing ads on or maybe not placing ads but providing the data for the ad placements? And relatedly, if OpenAI, if ChatGPT is successful with however you've explained the model may work out, how might that change the retail media business? Meaning if consumers are doing -- spending more and more of their time on ChatGPT and not doing searches and clicking links to the publisher sites and going on to the retailer sites, how does that change the retail media business model for you? Todd Parsons: So to answer your question, it's both data and placements, and it's a normal course of doing business for us. So there's really nothing to say that is out of the ordinary there, Tim, except that when it comes to cross-channel, the point -- the second point that you make, we are very set up to catch users as they traverse channels. So whether it's OpenAI or whether it's retail media or whether it's the open web, we're there with our performance setups to make sure that we find those users and we're able to convert them into outcomes for advertisers. Also, I think it's important to say that traffic continues to grow on retailer sites for us. So we're not seeing deterioration in places that would signal weakness to us, and that feels quite good. So cross-channel helps us find users where they're engaging, and we're seeing traffic go to the places where we have the greatest strength as a company. Those are 2 good patterns. Michael Komasinski: Yes. And I'll just build on that second point, Tim. I think you really see the vision that we have for how this all plays out is that retailers continue to own the transaction. And I think that, that's supported by some of the different product moves that you've seen in the market over the last few months. even with ChatGPT itself with the pullback on instant checkout. We see discovery offerings like OpenAI's product being complementary to retail media, right, providing more high-intent traffic. And so people may land in a customer journey in a different state of mind or in a different part of the sort of site infrastructure. We published some thought leadership about product detail pages being the new homepage or the new landing page. But retailers still then have the opportunity to do a lot with that high-intent traffic. There's different ad units that you can play around with on the PDP or certainly the introduction of shopping assistance conversational ads. I think the transition from keyword search to semantic interaction is a powerful trend. So as long as high-intent traffic is landing in retail environments, retailers are going to figure out ways to optimize that, both for organic and paid objectives. So we're a big believer in that future. So -- and we think that the OpenAI products are complementary to that, not cannibalistic. Operator: Your last question comes from the line of Richard Kramer with Arete Research. Richard Kramer: Just a couple of quick ones that haven't really been addressed yet. First one, activated media spend grew 8% constant currency and topped $1 billion, but contribution ex-TAC declined against that. Maybe Michael or Sarah, can you give us some details on what impacted take rates across retail and Performance Media? And then equally, excluding the headwind, you had 24% growth in retail media, and you mentioned the sort of 20% growth in retailers to 60 adopting auction-based formats. What's the pipeline look like for expanding retail media networks? And where should that 60 number get to relative to your 235 retailers that you mentioned? Sarah Glickman: Yes. I mean just to take the take rate question, it's actually quite stable on the Performance Media side. There is some mix there, but that was pretty stable quarter-on-quarter, year-on-year. The biggest impact is the retail media client impact that took the take rate down for Retail Media quite significantly, which I think we've communicated. The underlying take rate of all other clients is at the high end of the previous communicated range of the 10% to 15%. So we feel -- we do see that the only big impact being that retail media dynamic. Michael Komasinski: Yes. Happy to take the second part of that on the display product and retail. Look, it's already a key growth driver and definitely a source of share gains. It represents 64% of on-site display spend. And as we mentioned, the 60% versus the 49% last quarter in terms of retailers. We think that, that will continue to grow significantly across that client base. And what you see is a lot more monetization and growth happening in that existing base. So there definitely is still a pipeline for net new retailers standing up new networks. But certainly, the growth of the business is tilted towards new products like conquesting, like display and now some of the new things like Page Intelligence, where retailers continue to gain traffic and we'll get more out of that and make those networks work harder. Melanie Dambre: Thank you, Michael, Sarah and Todd. That concludes our call for today. Thanks again to everyone for joining. If you have any follow-up questions, we're available to assist. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to today's BrightView Earnings call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Chris Stoczko, Vice President of Finance and Investor Relations. Please go ahead, sir. Chris Stoczko: Good morning, and thank you for joining BrightView's Second Quarter 2026 Earnings Call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. I will now refer you to Slide 2 of our presentation, which contains our safe harbor disclaimer. Our presentation includes forward-looking statements subject to risks and uncertainties. In addition, during the call, we will refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these measures. With that, I will now turn the call over to Dale. Dale Asplund: Thank you, Chris, and good morning, everyone. Our second quarter marked a key inflection point for BrightView as our transformation strategy centered around prioritizing our employees and putting the customer at the center of everything we do has begun to yield meaningful returns and inflect sustainable and profitable top line land growth. While this is a pivotal moment for BrightView and our ongoing transformation, our momentum is building as we continue accelerating investments in our go-to-market teams as we manage the business for the long term. Total revenue grew 6% in the quarter, highlighted by a robust 4% increase in Land revenue, reaffirming that our transformation strategy is working and positions the business for sustained momentum. We also delivered record second quarter adjusted EBITDA of $79 million with a record margin of 11.3%, underscoring the strength and scalability of our business. From day 1 of my tenure, my focus has been on solidifying the foundation of our business through improving frontline turnover, driving higher customer retention and unlocking our size and scale as the industry's largest commercial landscaper. These initiatives continue to strengthen the foundation and have allowed us to accelerate investments back into our sales force, resulting in the continued momentum in our contract book of business. Now we are seeing the expanded contract book drive revenue growth in our Land segment. This, combined with outsized snow performance in the quarter positions us to raise our 2026 revenue guidance and reaffirm our commitment to delivering a third consecutive record EBITDA year. While the broader macroeconomic environment remains uncertain, we've built a resilient business model designed to perform through cycles. The recurring nature of our contract revenue, combined with disciplined pricing and cost management position us to continue driving sustained profitable growth in both the near and long term. While we're enthusiastic by the progress we've made this quarter, this marks just the beginning of our journey to drive sustained, profitable top line growth in both the near and long term supported by continued investments in our frontline employees, a growing sales force and the realization of efficiencies from our size and scale, driving meaningful shareholder value and positioning BrightView as the investment of choice. Turning to Slide 5. We continue to reduce frontline turnover with an approximately 5 percentage point improvement over the previous quarter and 35% since the start of our One BrightView initiative. Our focus remains, as it has since day 1, on prioritizing our frontline employees by creating a safe and rewarding environment, offering industry-leading benefits and providing reliable, consistent schedules. This continues to differentiate BrightView from its competition as the Employer of Choice, driving improved turnover and unlocking cost efficiencies that we're reinvesting into our frontline. Moving to Slide 6. I've said in the past, the longer we retain frontline employees, the more consistent our service delivery is. And as a result, customer retention continues to improve. Since bottoming at approximately 79% in 2023, retention has increased by approximately 550 basis points as of Q2 2026, now approaching IPO levels of 85%. This sequential improvement reflects the commitment of our frontline teams, our focus on service quality and our continued investment in the business which together are strengthening our underlying contract book and setting the foundation for sustained land revenue growth. Over the past 2-plus years, we have strengthened relationships with our customers by delivering best-in-class service and earning their trust. In light of recent macroeconomic uncertainty and rising fuel costs, our priority remains on maintaining long-term relationships with our customers and not reacting to potential short-term headwinds. As I've said since day 1, we are managing this business for the long term and customer retention remains a top priority to delivering sustainable, profitable growth. Continuing to Slide 7. I'd like to highlight the progress we've made in improving customer retention across our branch network with approximately 35% of our branches now achieving best-in-class 90-plus percent retention, a significant improvement since 2024. At the same time, the share of underperforming branches has declined with only 10% of our branches now under 70% retention. We know the branches with higher retention are yielding growth and our improvement reflects meaningful progress. But let me be clear, there is still plenty of runway for improvement as we continue to transform this business. Now to Slide 8, where we see the significant byproduct of our transformation continuing to materialize through accelerated momentum in our Land Contract book. The equation is simple: improved customer retention and the accelerated ramping of our sales force are generating growth in our net new sales, a metric that factors in both customer retention and new contract sales. As previously mentioned, customer retention has improved through our ongoing initiatives. The second part of the equation has been ongoing since the back half of 2025 and really accelerated in the first quarter of 2026. Now as our increased sales force is ramping up their productivity, we are starting to realize the true momentum that has been building over the past few quarters. The combination of these 2 metrics improving in [ unison ] has contributed to 4 consecutive quarters of net new sales growth driving 3% growth in our Land Contract book of business, a key leading indicator of future top line growth and in the recurring Land Maintenance business. Now as we move to Slide 9, we are reaching an inflection point where the momentum built in our contract book over the past year is translating into measurable results. Land Maintenance revenue grew 4% in the quarter and approximately 1% year-to-date, making the first year-over-year increase in the segment since the third quarter of 2023. This growth has been made possible by the steps we've taken to solidify the foundation of our business by investing in and prioritizing our frontline employees delivering consistent, reliable service to our customers and unlocking our size and scale as the industry's largest commercial landscaper. These efforts have driven sequential improvement in employee turnover, customer retention and margin expansion, all of which are strengthening the core foundation of our business and will continue to be key focus areas for the future. On top of this, we will continue to focus on driving profitable top line growth through accelerated sales force investments. This will be key to continuing contract book growth, providing a runway for heightened ancillary sales and increasing density within existing and adjacent service lines. As we grow our business organically, we continue to evaluate M&A opportunities that either complement our core business or help drive expansion in greenfield markets. Last quarter, I highlighted our expectation for Land growth in the back half of 2026. The acceleration in our contract book, along with other key underlying metrics give us the confidence to raise our 2026 Land revenue guidance, which Brett will discuss in more details in a few minutes. Before turning the call over to him, I want to express my gratitude to our nearly 18,000 employees. During the month of April, we celebrated Employee Appreciation Week. It was great to see pictures and hear stories of how the branches celebrated their teams. Their unwavering commitment to delivering consistent, high-quality service reinforces our position as the Provider of Choice and is just the beginning of our journey ahead. It is the customer-first mindset and relentless focus on service that defines BrightView. And we thank our employees for their continued commitment to excellence. With that, I will now turn the call over to Brett. Brett Urban: Thank you, Dale, and good morning, everyone. Our second quarter results reflect the continued momentum we are building across the business with solid execution driving another strong quarter of record financial performance, most notably in our Land Maintenance segment, where revenue grew 4%. The strategic investments we have made over the past 2-plus years in our employees, customer experience and sales force are translating into tangible results as evidenced by our improving retention, strengthening demand and encouraging results from our expanded sales efforts. We are increasingly excited about the trajectory of the business and continued momentum towards future sustainable growth. This is reflected in our updated guidance, which raises total revenue and Land revenue and reaffirms a third consecutive year of record adjusted EBITDA. Let's now turn to Slide 11 to discuss profitability in the quarter. We delivered record Q2 adjusted EBITDA and margin of $79 million or 11.3%. This represented an increase of $6 million and 8% higher than prior year as we continue to realize efficiency in our business. Higher revenue in the quarter drove incremental flow-through, while fleet refresh initiatives, enhanced procurement-driven purchasing power and continued G&A savings drove efficiencies. These benefits were partially offset by the acceleration of the investments in our sales force, which was funded by a portion of the incremental benefit from the outsized snowfall in the quarter. These revenue-generating resources underpin our growth strategy as evidenced by the 4% growth in our Land business, which was driven by our continued momentum in our Land Contract book. At the segment level, Maintenance margins grew 110 basis points, supported by the higher revenue flow-through and continued efficiencies in the business. In development, margins contracted in the quarter as a result of the timing and mix of projects. As a reminder, the margins in this segment benefited the most over the past 2 years as we implemented our One BrightView strategy and are still significantly above pre- One BrightView. Moving to Slide 12. Revenue for the second quarter was $703 million, representing a 6% increase driven by Land revenue growth and above-average snowfall in the quarter. Land revenue was a major bright spot, growing $13 million, representing a 4% increase from the prior year. This marks the much anticipated inflection in Land revenue growth, the recurring and highly resilient revenue stream of our business, driven by the continued momentum in our growing contract book and rising demand across the segment. We are highly encouraged that this result demonstrates the successful execution of our transformation strategy with benefits expected to continue in the back half of 2026 and beyond. These benefits are reflected in our updated Land revenue guidance, which I will discuss in a bit. Snow once again was a major benefit in the quarter, increasing 30% from the prior year as we saw higher-than-average snowfall in the Mid-Atlantic and Northeast geographies, slightly offset by lower snowfall in the Rocky Mountain and Pacific Northwest regions. In the Development segment, revenue decreased 13%, driven by project timing delays. To be clear, the headwinds we experienced here were timing related and should not be viewed as lost revenue over the long term. Building on that, let's turn to Slide 13 to look into our growth prospects in the Development segment. The segment was unable to get some work in the ground this quarter due to adverse weather. However, our strategic initiatives provide a balanced runway for continued long-term success. As we are building our sales force in the Maintenance segment, we are doing the same in Development, where we have about 50% more sellers versus this time last year. These sellers are already contributing to the business' underlying momentum, and we've grown development bookings roughly 15% year-to-date. This metric is the leading indicator of future development growth and drives our confidence in the long-term health of this business as we continue to sell into 2027 and beyond. At the same time, we are also enhancing our market position by leveraging our existing footprint through development cold starts with 6 currently opened and 5 more underway. These new branches located in markets where we already serve for maintenance will drive incremental development activity and result in multi-segment growth. Moving to Slide 14. I'd like to touch on snow as the winter season is now primarily behind us. Snow was a major benefit to revenue for the first half of 2026, growing approximately $85 million or 40% from the previous year as we saw record snowfall across core snow markets. This came in $70 million above the high end of our original guidance, enabling us to fund accelerated investments into our sales force, which will further drive sustained profitable top line growth. While snow was certainly a benefit in 2026, our current contract structure leans 60-40 variable versus fixed revenue contracts, and this creates a degree of unpredictability when forecasting revenue as snowfall can vary year-to-year. Since our February 2025 Investor Day, we've made progress increasing our mix of fixed tiered contracts. This shift towards a higher mix of fixed contracts will enhance revenue predictability, mitigate the impact of light snowfall and enable us to service our customers year-round. Turning to Slide 15. I'll provide a brief update on the strategic actions we've taken to fortify our balance sheet. Subsequent to quarter end, we extended our revolving credit facility, enhancing our liquidity position and extending our maturity profile. This transaction also includes a 25 basis point reduction in pricing and provides an additional $100 million of capacity to support future liquidity needs. This further strengthens our financial flexibility and reflects our continued proactive management of the balance sheet. Let's turn to Slide 16 for our updated 2026 guidance, which we have provided a reconciliation on Slide 21 in the appendix of the presentation today. Our updated guide is highlighted by raising total revenue and raising Land Maintenance revenue for the year. Total revenue guidance is now in the range of $2.745 billion to $2.795 billion, representing a 4% increase at the midpoint versus 2025 and a 3% increase versus our prior guidance. This guidance assumes Maintenance Land growth of 2% to 3%, a 100 basis point increase at the midpoint of our previous guidance. This also assumes snow revenue of approximately $290 million, an increase of approximately $70 million versus the original high end of the guide. Development guidance has also been updated to reflect timing impact of projects. Moving to adjusted EBITDA. We are reaffirming our guided range of $363 million to $377 million, which represents another year of record adjusted EBITDA and margin expansion of roughly 20 basis points at the midpoint. Included within this guidance are costs related to our accelerated investments into our sales force, which we expect to continue at a similar pace, but does not include the potential impact of fuel price volatility, which I will touch on in a minute. It's important to note that at the midpoint of our margin guidance implies an approximate 300 basis point improvement over the last 3 years, reflecting the incredible progress made on our transformation. We are also reaffirming our adjusted free cash flow guidance of $100 million to $115 million, providing us with significant financial flexibility to continue to reinvest in the business. In total, this guidance reflects a third consecutive year of record-breaking adjusted EBITDA, continued margin expansion and the continuation of Land revenue growth. To wrap up, let's move to Slide 17 to describe the potential impact of higher fuel costs in the back half of the year and the actions we're taking to mitigate against this. Through the first half of the year, fuel prices were relatively consistent with prior year. But amid recent macroeconomic uncertainty, prices have moved higher and are fluctuating daily. Given that roughly 60% of our fuel consumption occurs in the second half of the year, continually higher prices has the potential to create cost headwinds. While approximately 1/4 of our remaining fuel consumption is hedged, the unhedged portion remains exposed to market volatility. Given the volatility in the price of oil, this could mean varying impacts based on how long prices remain elevated. That said, there are mitigating factors within our control that will help us offset a portion of this impact as the year progresses. Pricing power remains a key lever for us. Ancillary work, representing approximately 1/3 of our total land revenue is priced daily and adjust in real time to reflect cost increases. Additionally, all new bids and annual contract renewals incorporate these higher costs. Alongside pricing, we are working on our own efficiencies on reducing fuel consumption through improved route density, minimizing idle time and leveraging technology to identify the most cost-effective fuel options. Before turning the call back over to Dale, I want to underscore my confidence in the momentum of the business and the ability to deliver sustainable, profitable top line growth. Our investments continue to drive measured improvements in employee turnover and customer retention and are now powering top line growth in the Land Maintenance segment, a trend we expect to build upon in both the near and long term to deliver meaningful value for our shareholders. With that, I'll turn the call back to Dale. Dale Asplund: Thanks, Brett. Before we turn to questions, I want to express my enthusiasm for the trajectory of our business, underpinned by the inflection of Land Maintenance revenue in the quarter, continued growth in our contract book and sequential improvement in our core KPIs as we execute upon our strategic objectives. This progress has been made possible by our people who are at the center of everything we do and the driving force behind our transformation. While we're encouraged by these results, this marks just the beginning of our journey to deliver sustainable, profitable top line growth and create meaningful long-term shareholder value. With that, operator, you can open the call up for questions. Operator: [Operator Instructions] We'll go first this morning to Tim Mulrooney with William Blair. Timothy Mulrooney: It be hard to limit myself to one question here, but I'll do my best. I guess I want to ask about the Land Maintenance growth because it feels like we've been -- what we've all been waiting for is finally here, inflecting in a positive territory here and a positive 4% at that, which was well above our expectations. We were actually expecting organic revenues to decline a little bit in the quarter and that's a pretty big variance relative to our expectations. So was some of this just weather related? Or how would you characterize the main drivers of this result so that we can get comfortable with underwriting, I don't know, a similar level of growth in the second half here? Dale Asplund: Yes. Thanks, Tim. I'll start off and I'll let Brett add. 30 months. 30 months, we've been waiting for this inflection point, Tim. And you are right. We have done everything right to build the foundation for getting us ready for growth. And even though last quarter, we had some headwinds from weather where we actually reported a slight decline in Land. We were able to actually see some of that come back. We had said roughly $6 million of Q1's decline was just temporary. We saw some of that benefit return in Q2. And then even with the weather that we saw in Q2, the outsized snow, we still saw our Land business show growth. Some of that was our ancillary revenue. But I think the big important topic in answering the second half of your question is what we see that builds momentum. When you look at everything we talked about in Q1, where we talked about our book of business being up 2%, we just reiterated that by saying at the end of Q2, now we're up 3%. Just let me do some math for everybody on the call. Our book of business is roughly $1.15 billion. If we have a 3% growth in that book of business, that means we're growing our contract book by roughly $35 million. 60% of our Land revenue will occur over the next 6 months. So that means we have $20 million of tailwind built into our updated guide going from 1% to 2% Land growth to 2% to 3% Land growth. And on top of that, the most exciting part is with our continued momentum in retention getting up to almost pre-IPO levels at 84.5% roughly. That means the longer we keep customers, the more they're willing to work with us on ancillary services. So we are very confident. We saw this coming. We tried to give a little signal to that as we went through Q1's earnings. But now I think everybody sees the inflection point is behind us. And Brett and I, I think both said the term several times, our focus is on sustained long-term profitable growth. And our Land business is key to that initiative. So Tim, great question. It's probably the one thing Brett and I are the most proud of. We've done it the right way. We've stayed focused on getting the business to be able to start growing organically the right way. And then, look, you heard me mention. I've said to all of our team, you have to earn the right to do M&A. I think our quarter here on Land shows people are starting to earn the right for us to consider M&A again. But Brett, do you want to add anything? Brett Urban: No, Tim, we're excited. Look, the inflection is here. I think we've been saying it's coming. They all said 30 months. You go back 2.5 years ago and investing in our employees, who invest in our customers and can drive that customer retention higher, the strategy is working. And now the strategy has evolved to investing in our sales force. We started that last year. We invested $6 million in our sales force in Q1, another $6 million in Q2. And I said it in the script, we're going to invest another $6 million probably in Q3 and another $6 million in Q4, because it's working. The strategy we laid out on paper 30 months ago is now inflected growth in the Land business. If you look at the kind of the first half of the year, as Dale mentioned, it's about a 1% growth in the Land business, but we're entering into our busy season. We raised revenue guidance in Land. And the back half of the year implies a 3% to 4% growth in that Land business. So we couldn't be more excited, Tim, about the inflection being here. Operator: We go next now to Greg Palm with Craig-Hallum. Greg Palm: Congrats again on the solid results. Can you maybe just talk about the competitive environment a little bit? Just -- I don't know, it seems like a lot of factors that are now coming together that would support at least the potential for not just share gains, but maybe significant share gains. So maybe you can talk about what your thoughts on that are. Dale Asplund: Yes. Great question, Greg. I think we have said from day 1, customers require quality service and your commitment to putting the customer at the center of everything you do is what's going to drive our path forward. We have to take care of what we can take care of in our control, and we've done that. When I joined in the end of '23, our customer retention was a dismal 79%. We were never going to outrun that type of loss on an annual basis. So we did that foundational work to get our branches focused on quality service to the customer, making sure the customers we had, we kept. And now after 2.5 years, we're amplifying that by bringing in more sellers. So you keep your customers you have and you grow the new sales because the environment out there, a lot of people might be getting reactionary with what's going on in the overall economy with fuel. And we just remain focused on we're going to take care of our business for the long term. We're partnering with our customers. We're working with them to look at where we want to be over the next several years. At our Investor Day last February, we made a commitment that we're going to grow this business and the targeted mid-single digits for our Land business, and we are still committed to that. And I think the trajectory that we'll exit 2026 and go into 2027 with puts us on a path for that. So we couldn't be excited about what we've done. Now what we've got to do, Greg, is continue to listen to customers. We've done great with snow this year, everybody saw. We had a big snow year, and we had a lot of customers turn to us to ask us if we can bail them out when we had a lot of snow coming down. That creates relationships and gives us the opportunity to partner with customers all year round. We want to take care of the customers we have. And when new customers come in, we want to do what we promise we're going to do. That's what's key. We've got to make sure whatever we commit to, that's what we do. But Brett, do you want to add anything for Greg? Brett Urban: No, Greg, I would just say market share, the market grows about 1% to 2% a year. This year, implied in our guide, we're going to grow at 2% to 3% a year. So yes, you're saying we're taking market share. And look, it starts with the strategy. It starts with taking care of our employees, which the minute Dale stepped in here for all 18,000 employees in this company. We put them front and center, especially the folks that service our customers. And that's driven customer retention. Now it's time to invest in our sales force, which we've been doing, which is resulting in higher growth than the market. And look, you go out into our operations, Dale mentioned we had Employee Appreciation Week not too long ago, and you see our employees with new boots, new safety equipment, new vests, new high vis safety gear. You see them with new trucks and trailers, just the business has drastically improved over the last 2.5 years. And obviously, our customers are seeing that with the result in customer retention. And now it's our time to take share, Greg, as you just said. Operator: We go next now to Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to segue off of that last question, but I might ask it to be more specific here. So I mean, definitely really appreciate what you just outlined and certainly the color on improved labor and customer retention. But could you maybe talk about how you think about your long-term strategy while also navigating this heightened fuel environment? And maybe it would be helpful if you could kind of compare and contrast to 2022 and the strategy at that time, which was the last time fuel really spiked and how it's different from what you guys have outlined today? Dale Asplund: Yes. Thanks, Stephanie. It's a great topic because, obviously, a lot of people, including some of our vendors, the initial reaction is try to pass on any fuel headwinds they get to their customers. The last time BrightView did that back in 2022 when we started the year with 83% customer retention, and by doing a haphazard fuel surcharge that we just pushed out blindly across the board, it resulted in exiting the year down 300 basis points with a customer retention level at 80%. So we are going to make sure we put in the long-term view with our customers. We're going to communicate. Brett went through a litany of items we're doing to mitigate fuel. Let me give you some statistics of what we're doing that's in our control and not trying to pass along our challenges to our customers at a very volatile time. And for those of the people I'm sure that watch the news every morning, there was new news out this morning that has oil coming right back down at a rapid pace. But let's talk about what we can control. First, Brett mentioned some of this stuff. I'll give you some statistics. We have made a considerable investment in our fleet, in our route density for our employees. What else is a byproduct of that is we anticipate and what we've seen year-to-date is our consumption of fuel is down across our network between 5% and 8% in our branches. All that new investments we made are helping us use less fuel. We have to reduce idle time. We have to reduce -- we have to increase route density and reduce wasted time to make sure we're being as efficient as we can using fuel. Brett said it, we have ancillary services we're pricing every day. And this is a balance between us making sure we're still growing our ancillary business for our customers and showing them we respect them, yet pricing it at a fair level. So we have built in some fuel opportunity into our ancillary pricing. And in the back half of the year, we have roughly $300 million of ancillary work of roughly half of that, we have an opportunity to do spot pricing on. So we'll get some recovery with that. When you look at the things we've done to mitigate, in the full year, we used 20 million gallons of fuel at BrightView. We're halfway through the year, just over 7 months now for BrightView. Roughly 60% of our fuel is used across the next 2 quarters. So if you do the math on that, that's 12 million gallons of fuel that we're coming into the season with that we're going to consume. Of that 12 million gallons, we've already hedged fuel at about 25% of that. So that takes us down to 9 million gallons. If you take the improvement we've seen in fuel, that takes us down to 8.5 million gallons that we think we are potentially trying to find out how we're going to make sure, we find an offset for. In the month of April, we saw roughly $1 increase per gallon for that month, creating about $1.5 million headwind for us. But we believe we will see some recovery as we work through all the initiatives I mentioned and continue to focus on making sure as fuel prices come down, we don't damage customers long term. We are 100% focused, not on the next 90 days, but on the next several years. Our project to get to 2030 goals is still our North Star, and it's not the third or fourth quarter. Brett, do you want to add? Brett Urban: I would just add, Stephanie, we are going to be better partners to our clients than that. And that's what we're demonstrating right now. This short-term headwind that you see in the market is very dynamic. It changes every day. There was articles out this morning that drove fuel down over 10%. But we are not going to manage this business for the short term. We've said that continuously now for the last 10 quarters. And we're going to stay on that long-term focus. And back to the piggybacking on Greg's question, that's how we're going to be better partners to our customers. That's how we're going to gain market share. And I'll take one step further. If we see in our regional areas where other service providers are passing along fuel increases, we'll pick up that business without the fuel increase. So we are going to be better than that to our customers. We're going to continue to drive customer retention. We're going to continue to sell more business through our expanded sales force, and we're not going to manage this business for the short term. The best long-term decision is going to be taking care of those customers now. So 6 months from now, a year from now when this all blows over, that's what's going to be remembered that's going to continue to drive that customer retention and that Land revenue growth even higher. Operator: We go next now to Bob Labick at CJS Securities. Bob Labick: On the quarter. We're viewing it as a beat and reinvest. And kind of with that team, you've talked about it a little bit. Can you talk about the decision to keep your foot on the pedal with the hiring of the salespeople? What have you learned so far from the recent hires that keeps you so encouraged? And where do you stand in your plan? I think you outlined a plan to increase the sales force 50% or so. Dale Asplund: Yes. Yes. Great question, Bob, because it's what gives us the enthusiasm to keep looking at how much opportunity this business has. So it's a tough -- when you look at the investment to make in the sellers, we invested $6 million more year-over-year in Q1. We invested $6 million more year-over-year in Q2 in just the frontline sellers of our business. Now the way I look at those new sellers, Bob, the first 6 months, they relatively produce very little. Some of them don't produce hardly any sales as they start making customer relationships. Between 6 and 12 months, their annual run rate is closer to $500,000 to $600,000. And once they get to a year plus, that's when they're starting to produce somewhere around $1 million. A fully matured seller has been with us roughly 18-ish months, and we target about $1.5 million of new sales. Here's the exciting part. We've been able to cover that $12 million that we invested year-to-date. And we're seeing that net new growth every quarter, 4 consecutive quarters now. We started to add sellers in the back half of '25, and we really stepped on the gas pedal in Q1, and we continued it in Q2. So what gives me the confidence is it's working. We just put up 4% Land growth. We just raised our guide from 1% to 2% of Land for the year that on the last call, people questioned if we were going to be able to deliver to 2% to 3% growth. And we are optimistic that as we get into 2027, we can even do better than that. So we are not going to pause. This is our future. Growing this business is how we're going to make BrightView the Investment of Choice for our investors. Long-term profitable growth is the key for us, and that's what we have to do by making sure we're bringing in new customers and getting our arms around our existing customers and keeping them as long as we can as a great partner. Brett, do you want to add? Brett Urban: Yes, Bob, I only add the strategy is working. We're not going to slow down something that's showing positive signs and working for us. And we said during Investor Day around 15 months ago that we'd add 50% to our sales force, which is the starting point was about 1,000 in total sellers. We're well ahead of that pace. We've added just under 200 year-over-year right now. So call it, we're up to about 20% add of that 50% or 40% of the way there. So we are making significant progress much sooner than anticipated. Dale mentioned, we had the benefit of heightened snowfall, which allowed us to move quicker and pay for them. But I would just say that the strategy is working, and we are going to go as quickly as possible to get these sellers on board, ramped up and productive. Operator: We go next now to Greg Parrish with Morgan Stanley. Yehuda Silverman: This is Yehuda Silverman on for Greg. Just have a quick question on the development cold starts that are opened and the 5 more underway. Just curious how bookings have been early on and how long you expect it will take to get to a normalized backlog book there? And what gives you confidence to have success in those regions? Dale Asplund: Yes. Yes. It's great question, Yehuda. So look, I think one thing I've seen, we have -- and I've said this since the day I started, I met our teams in our development business, we have hands down some of the most talented development people in this industry. Our Development business is the largest in the industry. The jobs we do just amaze me. So our team in Development, while it's a choppy business, they do unbelievable work. And the one thing I can assure you, where we have the ability to do quality development installations and long-term maintenance service, we are a better provider, a better partner to our customers. And our customers see that. So a year ago, I said what we have to do is take those markets that we're so strong in that we have great Development and great Maintenance teams working side-by-side under our One BrightView initiative, and we have to make that in every market we can service. So we announced we're going to open 10. What we need to do to open a Development branch, we usually have real estate with our Maintenance branches. We try to get a branch manager, we get a seller into that market, and we go up. What you see as us saying we have 6 that are open, it's because we have booked backlog. They vary. Some branches have gotten big jobs, but I will assure you, every branch has a nice pipeline of open quotes that they're trying to land. The 5 that we still say are in process of opening. We've hired people. We have sellers. We have them starting to work. We haven't closed any deals there yet, but we anticipate over the next several months, we will see those go to fully open branches. We believe we need to have a Development resource helping our branches in every market that we service. And there's still so much open space for us to expand into through either M&A on the Maintenance side or through organic opportunities. So look, I think we're happy with the progress we've seen. The business of Development is choppy, to say the least, especially with some of the weather that we just saw in Q2, you can get movement between quarter-to-quarter, but we're anticipating growth in the back half of the year in that business. And our teams are focused on continuing to go after the customers every day, and we're working with our partners. So the backlog is a little bit choppy in those, but every branch that we set are now open for those 6 have now booked orders. Brett, do you want to add detail? Brett Urban: I would just echo Dale's comments. We do have the best teams, the best experts that produce unbelievable work in this business. It can be a bit choppy with timing. We saw the last 2 to 3 quarters, projects push out. But if you look at our bookings year-to-date, up 15%, you look at our remaining performance obligations, which is projects greater than 1 year, that's up 6% quarter-over-quarter. So the momentum is building in that business as well. And, look, let's not discount the fact that when we have these cold starts and they open up business and sell new Development work, that's just a leading pipeline for more Maintenance Land revenue. So converting that work also is a big opportunity for us. But we're excited about the trajectory of the business. The momentum there is building. We haven't quite got the work in the ground and the timing we anticipated, but it's coming and the leading indicators are there to show growth. And that's what's implied in our second half guidance is growth in that business. Operator: We'll go next now to Andrew Steinerman with JPMorgan. Alexander EM Hess: This is Alex Hess on for Andrew. I hope everybody is having a lovely day. I actually have a multi-parter, so I hope you'll bear with me on this. But just a couple of items that haven't yet been touched on. On fuel costs, I know there was some discussion about how that might impact ancillary. But just to be clear, you're not flowing any fuel benefits through on revenue that you aren't also flowing through on costs, correct? Just maybe to start with. Dale Asplund: Correct, Alex. We have said we didn't imply any assumptions for fuel cost outs and nor have we assumed anything on the revenue side. So you are absolutely right with that assumption. Alexander EM Hess: Understood. Then on snow, can you provide us what was the EBITDA flow-through on that snow revenue? I know it was a little muted last quarter due to some of the contract dynamics. Just trying to understand how that shift to contract -- more contract book impacts the revenue and incremental margin of snow. And that's the third one to pull out. Dale Asplund: Yes. So last quarter, we said we were under the 20% target that we had, Alex. While we don't have a fully loaded P&L for snow, obviously, we're sharing resources. We believe that our full year flow-through is about 20% right now on EBITDA for that business. Now snow has been a great story, and I'm going to let Brett comment here in a few minutes. Snow is the markets we saw a lot of snow and the markets we didn't see any snow. So when you really break down the snow season that we went through, obviously, everybody on the Eastern Seaboard felt the impact of weather, some way or shape through the quarter and through the first half of the year. In fact, some of our ancillary benefits that we saw in Land, we saw freezing all the way into Florida that those teams had to do work as we went through Q2 after those deep freezes. But the Eastern Seaboard, even the Carolinas, where we always have variable snow, saw a considerable amount of snow. On the opposite of that, Colorado had a very, very soft snow year as well as the Pacific Northwest. Both of those markets are traditionally more time and material/variable snow because of the volatility in their snow, what can do a little bit of a drag on those margins. But once again, long term, our goal is to be a better partner to our customers is our continued movement to get customers on more of an annual fixed snow agreement. We want to keep pushing that, so customers know what they're going to spend for snow. And if we get a big year like we just had, yes, maybe it's not quite as profitable, but it allows us to manage the business with them over the long term, where years where we get less snow maybe in those markets, we do a little better. So -- but Alex, to answer, it's about 20% is the way I'd look at it. I think that's a healthy margin for us and make sure we get our arms around our customers. Brett, do you want to add? Brett Urban: No, I think the takeaway there is this is our opportunity heading into next snow season with outsized snow in the Northeast and Mid-Atlantic regions to try to move more of those contracts to fixed. We are about 2/3, 1/3 variable. Now we're about 60-40 variable, so leaning towards variable. But as we have those conversations now and renewals for next season and selling into next season, this heightened snowfall, this is the opportunity for us to become more predictable in our snow model by shifting even more of that business to fixed. Operator: We'll go next now to Ryan Gilbert with BTIG. Ryan Gilbert: Great to see all the work on the revenue initiatives starting to play out in the landscape maintenance business. I think last quarter, we had talked about the potential for some of your customers' budgets to be stretched potentially due to the snowfall, and it seems like that fortunately did not materialize in the quarter. But I'm wondering if you could expand on what you're hearing from customers as to their appetite and ability to pay for landscaping services. And then just a quick housekeeping. I don't think I heard the number of sellers you added this quarter. So if you could quantify that, that would be great. Dale Asplund: Yes. What Brett had said, Ryan, is we're roughly up 200 year-over-year. We had said we're up about 180 at the end of Q1. We're saying we're up about roughly 200 on the number of sellers. So it's fluctuating every day, obviously. We continue to keep the foot on the gas as we've gone through April. So that's just your quick housekeeping. I would say what we're hearing is we talked last year as we went through Q3, some of the challenge we heard with the reactions from Liberation Day, we had heard pretty quickly from our customers how they were nervous about all the potential impact from tariffs or anything else that was coming out. Our teams are telling us there's plenty of work out there for them right now. They feel much more optimistic as we go into this summer. We have some customers that had severe snow costs. But for the most part, take that little bit of that noise out, people are much more optimistic as they're going into this summer for that discretionary spend. A lot of people know they want their properties looking good. It's the spring time. It's the time for them to start making some investments. So I would tell you, we feel more optimistic as we sit here beginning of May 2026 than we did just 12 months ago as we were facing some headwinds. And look, we're looking forward to your conference this week, and we're excited about some of your investors, and we'll see you in New York this week. But Brett, do you want to add anything? Brett Urban: No, Ryan, I'd just add, that's what gave us confidence to raise our Land guidance in the back half of the year, right? If we're seeing any type of slowdown or softness, we'd be hesitant to do that. But the momentum in our contract book, that's now 3% up year-over-year, 4 sequential quarters of net new positive growth in our contract book. We're keeping customers longer, as Dale said earlier, those customers who stay with us longer, have more confidence in us to do ancillary, spend more money with us. So those things, including the ancillary outlook for the second half of the year, gave us the confidence to raise our Land guide in the back half. Operator: We go next now to George Tong with Goldman Sachs. Alex Lakritz: This is Alex Lakritz on for George Tong. Can you provide an update on the conversion of Development contracts to recurring Maintenance contracts? And then how BrightView is tracking towards the 70% long-term target? Dale Asplund: Yes. Look, I think what we're saying is Development is choppy. We saw continued momentum. Our teams are working better than they ever have. It's relatively consistent as we went from 2025 through into the first half of 2026. So we had very few projects closed here in the first half of the year, as you can see. We have a little softer development revenue. We'll see that as work gets finalized as we go through the back half of the year, we'll see more opportunity to convert that. So it's a tough metric when all you're looking at is the development revenue, Alex, because what you actually got to really focus on how many jobs close. We had some pushouts here. We'll see those jobs close as we get into the back half of the year. And then it will create opportunity for us on the maintenance side. So we feel great about how the teams are working together. But Brett, do you want to add? Brett Urban: Alex, I'd just say our teams are working together better than they ever have in our geographies, especially where we have Maintenance and Development branches together. Those teams are partnered at the hip now under One BrightView over the last 2.5 years, and they're working better together than they ever have. And you think about our cold start strategy, we have 6 cold starts opened with Maintenance branches, Maintenance employees, a reputation for Maintenance already in those markets. That's only going to supercharge that conversion opportunity as we open up development cold starts in those areas we already have Maintenance. Operator: We'll go next now to Jeffrey Stevenson with Loop Capital. Jeffrey Stevenson: Congrats on a nice quarter. You reported strong 110 basis points of maintenance margin expansion during the quarter, benefiting from the positive revenue flow-through on the landscaping side. So although you're taking Maintenance margins down due to continued accelerated pace of new sales hires during the back half of the fiscal year, do you believe the strong March quarter margin expansion shows that the One BrightView initiatives are driving improved underlying margins as landscaping demand returns positive? Dale Asplund: Yes. Great question, Jeff. So 30 months ago, I realized we had to fix this business, and we have to get it growing. There is no question our future is about growing the top line organically, not just buying revenue, it's about organic growth for the business. And there is no question that when we can grow Land 4% through our existing branch network, that's going to create profitable margin expansion for us. Now snow didn't really hurt us. It wasn't the reason that everything happened, but we firmly believe, Jeff, that Land organic growth and the flow-through that's going to produce is our future. And that's why we are so excited about what we're predicting for the back half of the year, increasing from 1% to 2% for full year to 3% to 4% or 2% to 3% in Land growth. Just to give you a quick reference, our updated guide suggests we will grow our Land Maintenance business over the next 2 quarters between 3% and 4.5% in the back half of the year. And that's why we're excited. That's why there is no question. I am 110% committed to investing in our frontline teams and our sales force to go after market share. We have done everything needed to get the foundation of this business in a healthy spot. We're far from perfect. We need to keep pushing those customers -- those branches that don't have customer retention at 90-plus percent. You've seen now 35% of our branches are at 90%, which is great, and I congratulate those, but we still have 10% below 70%. We are hyper focused on taking care of those branches. I want to talk about the day we don't have branches below 80%. Taking care of our existing customers is my #1 priority. And on the backside of that, I am going to invest, invest, invest in growth. And there is not a reason that we should back off on our strategy because Brett said it, and I'll say it, it's working. It's producing the growth that we've been waiting for. And I am so excited about what that means, not just for the back half of this year, but '27, '28, '29, future years. We have $130 billion end market, and we are just a fraction of that end market. We are going to take share. We are going to grow this business. We are 100% focused on becoming the Provider of Choice for our customers. And that's our focus. So Jeff, great question. Brett, do you want to add? Brett Urban: Yes. I would just add quickly. Look, you think about development margins for a second over the last 3 years since One BrightView, that business has expanded EBITDA margins over 500 basis points or around 500 basis points. So huge margin expansion in Development really getting pulled into the One BrightView strategy. And you said it, Jeff, now it's time for Maintenance implied in our back half of the guide and full year guide is margin expansion and Maintenance, 30 to 50 basis points while investing in the business. We're investing $6 million a quarter into our incremental sellers and sales force. About 90% of that is maintenance related. So even despite that investment, we are seeing the outsized benefit now start to come in Maintenance margins. and for the full year guide, still expected to expand 30 to 50 basis points. Operator: And gentlemen, it appears we have no further questions this morning. Mr. Asplund, I'd like to turn things back to you, sir, for any closing comments. Dale Asplund: Yes. Thank you, operator. Look, I'll close by reiterating our confidence in the path ahead. We had some great questions today, but our transformation is starting to take hold. That's what's critical for us. Over the past 2-plus years, we've built a stronger foundation at BrightView, bringing the organization together, unlocking efficiencies and achieving good financial results. Through this period, we've consistently reinvested back into the business by refreshing our fleet, supporting our frontline teams and building a stronger, deeper sales organization. Even though we're still early in our transition, the investments we've made are translating into a growing contract book, which is the driving top line growth in our Land business long term. So once again, we said it many times, everything we've done is with one focus in long term, continued profitable top line growth across this business and make it sustainable, so we will grow this business for years to come. So we look forward to talking to everybody come Q3. Thank you again for your attention, and we hope everybody has a good day. Operator, you can now end the call. Operator: Certainly. Thank you, Mr. Asplund, and thank you, Mr. Urban. And again, ladies and gentlemen, that concludes BrightView's earnings conference call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.