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Operator: Welcome to the MPLX First Quarter 2026 Earnings Call. My name is Julie, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin. Kristina Kazarian: Welcome to MPLX's First Quarter 2026 Earnings Conference Call. The slides that accompany this call can be found on our website at mplx.com under the Investor tab. Joining me on the call today are Maryann Mannen, President and CEO; Chris Hagedorn, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. With that, I will turn the call over to Maryann. Maryann Mannen: Thanks, Kristina. Good morning, and thank you for joining our call. MPLX delivered over $1.7 billion of adjusted EBITDA, which enabled a return of over $1.1 billion to our unitholders. 2026 is a year of execution with multiple investments expected to transition from construction to operations and EBITDA generation. With Secretariat I coming online in April, Harmon Creek III in the third quarter and the Titan gas treating complex reaching over 400 million cubic feet per day of treating capacity in the fourth quarter. This gives us confidence that year-over-year growth in 2026 will exceed that of 2025. The underlying fundamentals in natural gas and NGLs remain strong. We see strategic opportunity to support increasing demand for these commodities. As an example, in the Delaware Basin of the Permian we treated over 150 million cubic feet per day of our committed producer sour gas at our recently acquired Titan facility. Our third acid gas injection well in the Delaware Basin is expected to be completed in the third quarter. The expansion of the Titan complex is on schedule. Downstream, the 200 million cubic feet per day Secretariat I processing plant has entered service. Last quarter, we announced our intention to further expand our gas processing footprint with Secretariat II, an additional 300 million cubic feet per day of capacity expected online in the second half of 2028. Once in service, our total processing capacity in the basin will reach approximately 1.7 billion cubic feet per day. These investments meaningfully strengthen our position in the Delaware Basin, supporting activity in the low-cost sour gas windows and extending the competitiveness of our broader value chain. The Blackcomb natural gas pipeline continues to progress as planned, and is expected to enter service in the fourth quarter. Demand for firm takeaway capacity is driving expansions on several long-haul natural gas pipelines. Volume commitments from top-tier shippers underscore the competitiveness of our footprint as well as the long-term durability of our natural gas system. Within NGL, the expansion of the BANGL pipeline to 300,000 barrels per day is expected online in the fourth quarter, providing critical takeaway capacity as in-basin NGL volumes grow. Construction across our Gulf Coast fractionation and export facilities continues to advance on time and on budget. Our fully integrated NGL value chain provides high confidence in the volumes, utilization and durability of cash flows these assets will generate for years to come. Against the backdrop of ongoing geopolitical uncertainty, the strategic importance of U.S. energy infrastructure has never been clearer. Global demand for secure, reliable energy continues to grow, and the international customers are increasingly more dependent on the United States as a preferred supplier. MPLX is exceptionally well positioned to capitalize on this opportunity. Our joint venture LPG Export Terminal is favorably located along the Gulf Coast, providing meaningful, competitive and logistical advantages. In the Marcellus, construction of Harmon Creek III remains on track for a third quarter in-service date increasing our total processing capacity to 8.1 billion cubic feet per day in the Northeast. This project, along with our associated gathering and compression expansions enhances our ability to meet producer needs in liquids-rich areas and supports long-term throughput growth. Beyond 2026, the opportunity set for natural gas and NGLs remains robust. We are deploying 90% of our $2.4 billion organic growth capital plan toward these opportunities which will drive continued mid-single-digit growth. Now let me turn the call over to Chris to discuss our operational and financial results for the quarter. Carl Hagedorn: Thanks, Maryann. Slide 8 outlines the first quarter operational and financial performance highlights for our Crude Oil and Products Logistics segment. Segment adjusted EBITDA increased $14 million when compared to the first quarter of 2025. The increase was primarily driven by higher rates across the business units, partially offset by lower crude pipeline throughputs. Pipeline volumes decreased 4% year-over-year, primarily due to Marathon's refining turnaround and maintenance activities in the Midwest and Gulf Coast regions. Terminal volumes also decreased 4% year-over-year, primarily due to less favorable market dynamics and refining industry turnaround activity in the first quarter. Moving on to Slide 9. Segment adjusted EBITDA decreased $42 million compared to the first quarter of 2025. 2025 included a onetime $37 million benefit associated with the customer agreement. The decrease was primarily driven by a $45 million impact from divestiture of our noncore gathering and processing assets in 2025, lower natural gas liquids prices and higher operating expenses. These factors offset growth from equity affiliates and increased volumes inclusive of acquisitions. Excluding the impacts of our noncore Rockies divestiture, gathering volumes were up 10% year-over-year due to production growth in the Utica and Permian, including acquisitions. Processing volumes increased 2% year-over-year, primarily due to increased production in the Marcellus and the Permian. Marcellus processing utilization was 94% for the quarter, demonstrating the need for incremental capacity as Harmon Creek III is positioned to come online on a just-in-time basis in the third quarter. Total fractionation volumes decreased 3% year-over-year, primarily due to lower ethane recovery in the Marcellus as a result of elevated regional gas prices in the first quarter. Winter Storm Fern in January impacted crude oil and natural gas production volumes resulting in a roughly $13 million headwind to our first quarter results. We would like to extend our gratitude to our teams in the field whose round-the-clock efforts for continuous safe and reliable operations at our MPLX assets during the storm. Thank you to our team. Across our business for every $0.05 change in weighted average NGL price, MPLX expects approximately a $20 million annual impact to segment adjusted EBITDA. During the first quarter, to manage this exposure, MPLX executed an economic hedge on 80% of this risk and recognized the negative mark-to-market of $56 million during the quarter. This impact will offset -- be offset by physical gains over the course of 2026. As a reminder, the first quarter is typically our lowest quarter for project-related expenses. While we expect these expenses in 2026 will be flat versus the prior year, we anticipate a sequential increase of $50 million in the second quarter, reflecting the seasonality of this project-related work. Now let me hand it back to Maryann for some concluding thoughts. Maryann Mannen: Thanks, Chris. MPLX has a proven history of executing on our commitments and delivering consistent financial performance. Through disciplined capital deployment and optimization of our integrated value chains, we have sustained strong EBITDA growth and maintained a robust return profile. This track record supports our confidence in our ability to continue creating value for unitholders through both organic project execution and reliable capital returns. Our long-term strategy is straightforward, and we are executing with discipline, operate safely and reliably, grow through high-return investments, optimize our integrated value chains and to maintain a strong financial foundation. The actions we have taken to position MPLX over the last several years are delivering strong results. The strength of our base business continues to deliver steady durable growth. As we progress through 2026, we expect the investments we are making to provide a clear path to continued mid-single-digit growth, and we continue to evaluate both organic and inorganic opportunities to drive income generation. With this momentum, we remain confident in our outlook and committed to creating exceptional value for our unitholders. Now let me turn the call over to Kristina. Kristina Kazarian: Thanks, Maryann. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will reprompt for additional questions. With that, operator, we are ready for questions today. Operator: [Operator Instructions] Our first question comes from John Mackay with Goldman Sachs. John Mackay: Look, in the back half of last year, you were talking about considerably higher EBITDA growth for '26 over '25. First quarter was flattish. I understand some of the moving pieces you guys gave on the cost side. And then you've walked us through the project ramp timelines. But could you spend a little bit more time walking us through how we should think about the EBITDA ramp through the year and kind of getting to that maybe above mid-single-digit target you laid out last call? Maryann Mannen: And you're correct. And as we were talking about in 2025, we continue to see growth '25, '26, if you let me to look at it first on an annual basis, '25 to '26 growth rate to be stronger than we saw '24 to '25. And as you well said, that growth for us is more back half weighted for 2026 than front half weighted. If you look at it over a 3-year period, our mid-single-digit growth has trended right around that 7.5% range. So I mentioned in a couple of my opening remarks there, Secretariat I now in service. And so obviously, we'll see that EBITDA strength coming online throughout the back half of this year. We typically see a 9- to 12-month ramp. We could see that in a little more narrower window as we look at Secretariat I. I also talked about Harmon Creek III. That project remains on track to enter service in the third quarter. I think you know this. It's a 300 million cubic feet per day gas processing plant. It also includes construction of a second 40,000 barrel a day de-eth, and it gives total Northeast gas processing and fractionation capacity to a total of 8.1 Bcf a day and 800,000 barrels a day, respectively, when that project comes online. A few other projects, as you know, will lean in. So the back half of the year, we expect to be stronger clearly than the first half of the year. And we see good line of sight to that, which also continues to give us confidence, frankly, in our 12.5% distribution increase. As you know, we've been talking about that for 2026 as well and 2027. And again, we remain confident in these projects delivering a little bit longer term. As you know, we've got our fractionation '28, '29 coming online and the export dock. That project remains well on track, on budget, as you've heard me say as well. So back half weighted, remain confident, we still expect '26 to be a stronger growth than 2025. Let me pause there, John. John Mackay: That's clear. Second question for me is just given the disruptions we've seen in the Middle East. We've seen a kind of higher call for U.S. hydrocarbon exports. Could you just kind of remind us your asset position there, kind of what you've been seeing on the commercial side? Maybe if you can walk through LOOP, Mount Airy and then, I guess, any incremental comments on the NGL dock under construction would be great. Maryann Mannen: Yes. I'll pass that to Shawn. He can give you some insights on the export dock as well. Shawn Lyon: John, this is Shawn. Thanks for the question. As we look at what's going on in the market dynamics right now and we look at our asset base, Mount Airy is a great example. We're located strategically right next to Garyville, and based on some of the market things going on, I think MPC and others will continue to lean into that. So we anticipate that asset utilization will be increasing some. And then also, as you look -- you talked about LOOP. MPLX has a share of LOOP there. We've seen Venezuelan crude come in. And obviously, some imports and exports are increasing across that asset base there. And as Maryann mentioned on the, I'll say, the export dock and fractionator complex on the Gulf Coast. We're excited as we continue to stay on track for in-service date of '28 and '29. Again, we're excited that those -- our facilities, our assets are going to be full as we go in service date there. Operator: Our next question comes from Burke Sansiviero with Wolfe Research. Burke Sansiviero: So distribution coverage has been 1.3x over the past 2 quarters. Can you just provide a little bit more color on your confidence in growing the distribution by 12.5% for another 2 years and staying above the -- at or above the 1.3x threshold, seems to imply that cash flows also need to grow 12.5% from here? Maryann Mannen: Yes, certainly. So when we think about our 12.5% distribution growth both for this year 2026 and 2027, we've set financial metrics for that and one of which is, as you stated, that our coverage doesn't fall below 1.3x. So that is our commitment. We look at that, obviously, on an annual basis, of course. But you're absolutely correct. Cash flows would be supportive of that, and we continue to see our ability to do that for '26 and '27. Burke Sansiviero: And buybacks have been somewhat programmatic over the past year at $100 million a quarter cadence. Can you just talk to why buybacks went down in Q1 to $50 million? And are you looking to retain more cash from here? Maryann Mannen: Certainly. So -- what I would say is there really no change in our overall capital allocation strategy. We continue to see opportunities to put capital to work and, therefore, have modified our share buyback program. I want to pass it to Chris because I know he's got a few things that he wants to share as well. Carl Hagedorn: Yes. Thanks, [ Keith ]. And I'll say, as Maryann stated, again, no change to our capital allocation methodology or strategy. Distributions will continue to be that primary tool to return capital to unitholders with the unit repurchases really being that more flexible method of returning capital. But what I would also say is we continue to believe that MPLX units trade at a discount. We think this type of a program at this level reflects that belief. Operator: [Operator Instructions] Our next question comes from Manav Gupta with UBS. Manav Gupta: I have two questions. I'm going to ask them right upfront. So first, can we get an update on the Titan sour complex, what you're seeing in that area? Is the producer activity increasing with higher crude prices in that particular area? And second, I wanted to talk to you about -- a little bit about the local gas markets in Texas. There are more pipelines coming to Agua Dulce, including yours, but then you also have some pipelines like Traverse and Bay Runner, which can move gas out of Agua Dulce and help with these opportunities where local prices are depressed. So could you talk about the local gas Texas markets and how MPLX can benefit from the dislocation in prices in various hubs? Maryann Mannen: So in general, first, let me share with you sort of overall progress on Titan. First and foremost, as I mentioned, we were successful in the first quarter treating over 150 million cubic feet per day in the first quarter. As a matter of fact, March was actually -- we saw our absolute strongest performance in the month of March. And no change in our expectations for the completion of Titan II by the end of this year, 2026. So that we will have full run rate EBITDA as we outlined when we talked about the opportunity for Northwind. So we expect that expansion from 150 million to over 400 million cubic feet per day of sour gas treating capacity to be available and consistent. We're seeing a lot of interest from our producers, producer customers in that space, particularly as they are moving their production into that region. I'm going to first pass it to Greg to give you some incremental color on the customers. And then to respond to your question around all of the Texas opportunities as we see all that pipeline, I'm going to ask then Dave to answer your question on that. Thanks, Manav. Gregory Floerke: Manav, this is Greg. Just a little bit more color on the Titan system. We have been focused daily and weekly on integrated -- integrating that system, increasing reliability, bringing on more volume. We really continue to be excited about the number of rigs that are operating up in the -- this portion of Lea County in the Delaware Basin and the associated gas that comes with it. CO2, H2S, sour gas that needs treating. So the demand is definitely there, as Maryann said. In terms of the projects, the scaling this is our other big focus, and that includes Titan II. We recently brought on a new sour gas treater on the north end of the system that we call Pelham. It's a compressor station as well. That is operating well. And Titan and the multiple pipeline projects that are associated with increasing -- doubling our capacity at Titan. And our fourth AGI well are all in construction and on schedule for fourth quarter completion. David Heppner: So Manav, this is Dave. And maybe I'll touch on -- I'll build on a little bit what Greg talked about and touch on the gas markets and dig a little deeper in our overall Permian wellhead-to-water nat gas strategy because I think I'll try to bring all the pieces of the puzzle together for you. So first of all, let me reaffirm a little bit that generally, MPLX is a fee-based business, and we're not taking on the commodity risks within the nat gas markets in the U.S. Gulf Coast. With that said, when we think about our strategy, maybe think it in about 5 major components. So Greg touched on the first one. In-basin gathering, processing and treating. From there long-haul egress pipelines, and I'll talk about those in a minute. And then connectivity between markets. And then the next is connectivity into demand centers, specifically LNG, but also potentially data centers and power. And then finally is giving our shipper customers optionality and flexibility to all those markets. So -- when you think about the long-haul pipelines, you mentioned Agua Dulce. So from the basin in Agua Dulce, of course, we have Whistler already moving 2.5 Bcf a day, and we have Blackcomb coming in service in the third quarter of this year. And then when you think about the long hauls into the Katy market, of course, we have Matterhorn currently flowing 2.5 Bcf a day, similar to Whistler. And we have Eiger coming online in 2028 in the second half of 2028. So those are those 4 main headers, both into Agua Dulce and Katy, which gives our customers that flexibility to those markets. But I think the other piece of the puzzle is Traverse, which is the bidirectional pipe between those two markets, which allows that flexibility. So that's that connectivity between markets. And then you think about you getting it to the end demand centers, specifically LNG and the high growth -- rapid growth in the LNG market. So of course, we got ADCC going into Corpus Christi, and we have the Bay Runner I and II go into NextDecade, specifically down in Brownsville, those last ones. So when we think about all that, that's really how we're trying to build out -- have been building out and continue to build out our nat gas strategy. With all that said, we also believe that there is the need for incremental egress pipelines out of the basin. So as we look forward, we think and believe that MPLX can continue to play a very active role in supporting those value chain solutions that -- and our strategies necessary to address all that incremental demand in those market opportunities. So hopefully, that gives you a little bit of color on how we're thinking about it. Kristina Kazarian: All right. Thank you. Operator? Operator: I am showing no additional questions. I will turn the call back to Kristina. Kristina Kazarian: Thank you. Thank you for your interest in MPLX. Should you have more questions or would you like clarifications on topics discussed this morning, please contact us. Our team will be available to take your calls. Thank you for joining us today. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Jaime Marcos: Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Today, our Chief Financial Officer, Pablo, will be the one presenting the first quarter trends. The presentation will last approximately 20 minutes, and it will be followed by our usual Q&A session. Without further ado, I would now like to hand over to Pablo. Pablo Gonzalez Martin: Thank you very much, Jaime. I will start on Page 3, where we show the main highlights of the quarter. Starting with our business activity, I would like to highlight that business volumes have accelerated their growth rate to over 3% year-on-year. This progress has been supported by an almost 4% growth in customer funds and supported by an increase of almost 11% in off-balance sheet funds, mainly mutual funds, where we are showing a 17% year-on-year growth, maintaining a 9% market share in net inflows. This improvement is also supported by a 2.4% growth in total performing loans, which for the second consecutive quarter continued to accelerate their growth. Turning to profitability. Net income for the quarter amounted to EUR 161 million. Both net interest income and fees showed year-on-year growth, something that combined with lower provisions more than offset the mid-single-digit increase in total cost. The adjusted return on tangible equity remained at 12%, while the cost-to-income ratio stood at 46%. Asset quality remained strong. The net NPA ratio stood at just 0.7%. The NPL ratio continued its downward trend, reaching 2% and its coverage further improved to 80%, significantly above the 70% reached a year ago. The cost of risk also showed a positive trend, declining to 20 basis points, marking one of the lowest levels in recent years and below our initial guidance. Lastly, we remain focused on value creation. Our CET1 ratio stayed stable at 16% during the quarter as we are allocating capital for shareholder remuneration and lending growth. Two weeks ago, we paid the 2025 final dividend which, together with the interim dividend paid in September reached EUR 443 million. This represents a payout of 70%, resulting in 9% dividend yield. Looking ahead to 2026, we expect to further enhance shareholder remuneration up to 95% of net income, thanks to our relatively higher capital position and also to our robust organic capital generation. Overall, our tangible book value per share adjusted for dividends was 9% higher than the previous year. In summary, all trends remained solid throughout the first quarter of 2026, confirming the recent positive momentum. We recognize that uncertainty has increased in the past couple of months, and it may be too early to provide more specific effects. Nevertheless, based on the information available so far and despite market volatility and the possible direct and indirect effects of the current geopolitical risks, we reaffirm all targets and commitments outlined in our strategic plan. The beginning of 2026 has been better than initially expected, which is obviously great news given the uncertain environment we are facing. All in all, we confirm our initial guidelines for the year. I will continue with the commercial activity on Page 5. As you can see, total customer funds increased by 3.9% year-on-year. On-balance sheet funds grew by 1.6% or 2.4% when excluding the public sector. Off balance sheet funds rose by 10.6%, driven by a remarkable 16% growth in mutual funds. It is worth mentioning that mutual fund balances have grown from EUR 14 billion to nearly EUR 17 billion over the past 12 months. On the next page, you can see the details regarding our assets under management and insurance business. As highlighted in the previous slide, assets under management increased by 11% year-on-year with mutual funds showing particularly strong growth of 17% despite challenging environment this quarter. Net inflows reached EUR 468 million, representing a strong 9% market share. On the right hand side, we show the revenues from these 2 business segments, which have risen by 4% compared to the last year and now account for 19% of total revenues. Now on Page 7. As you can see, loan volumes continue to grow. Total performing loans increased by 0.8% quarter-on-quarter and 2.4% year-on-year, reflecting a positive performance across all segments. Private sector loans rose by 1% compared to the previous quarter while corporate loans posted an increase of over 3%. Lending to individuals maintained its gradual growth trajectory. Mortgage volumes remained stable during the quarter and on a year-on-year basis, whereas consumer loans continued to expand at high single-digit rates like in the previous quarters. Overall, first quarter evolution demonstrates slightly better trends than previous quarters, driven mainly by improvement in the mortgage and SME segments, both of which showed some growth this quarter, while maintaining positive dynamics in corporates and consumer. On Page 8, you will find details regarding the new loan production. During the first quarter of 2026, new lending to private sector increased by 10% compared to the previous year, reaching EUR 2.5 billion. As we have just seen, we are delivering growth in the loan book in all main segments. You can see consumer lending maintains very good momentum Mortgages are close to our natural market share level. And in business lending, lower volumes are explained by some large tickets last year, but we are delivering a strong portfolio growth here on much better portfolio and customer management. Turning to Slide 9. We would like to briefly present some evolution of digital sales and customer acquisition. In the top left, 65% of consumer loans were granted digitally, significantly higher than the 49% in the previous year. It is also worth noting that digital consumer loans amounted to EUR 160 million, representing an 82% increase compared to the first quarter of 2025. In mutual funds, the weight of digital sales grew from 25% to 36%, reaching EUR 230 million, which is nearly 50% higher than last year. Also, as shown in the bottom right of the slide, I would like to highlight that more than 1 million clients use their Bizum with us, which is the instant payment tool most used in Spain, something that is quite relevant for the transactional business as you can only have one Bizum account per fund number. Also, it is worth noting that in the first quarter of 2026, the acquisition of new salary accounts has doubled, explaining the quarterly increase in the cost of deposit as we will see later. The commercial campaigns include an upfront compensation for the client in exchange for their formal commitment to maintain their salary with us in the future. As you can see, a strategy that is working very well to further improve the transactional business with our clients, which is one of the main commercial focus of the bank. Moving now to Slide 10. We highlight our continued progress in our sustainability strategy. We keep financing the transition and actively pushing green bond issuance. During 2025, our green bonds enabled the avoidance of 142,000 tons of CO2. Our pool of eligible projects continue to grow together with our ESG business, both green and social. We are well on track on the decarbonization targets over the lending portfolio. Overall, the evolution we are seeing is very positive, and this is clearly reflected in our sustainability ratings that show a consistent positive trend. We now continue with the review of the P&L in the next section in Slide 12. Net interest income increased by 1.3% compared to the first quarter of 2025. On the quarter, it fell by 1.2%, primarily due to the lower day count. Total fees were 1% higher than in the previous quarter and 3% higher than last year. Overall, revenues reached EUR 520 million, 1% higher than the first quarter of 2025. Total costs grew by 1% on a quarterly basis and 4.5% compared to last year, in line with our mid-single-digit growth guidance. Loan loss charges decreased by over 20%, both quarter-on-quarter and year-on-year, confirming the positive asset quality trends. Other provisions were 9% lower than last year and also significantly lower than last quarter when we booked some restructuring charges. Profit before tax stood at EUR 232 million. After accounting for EUR 71 million in taxes, which includes EUR 6 million of the banking tax, net income reached EUR 161 million, representing a 1.4% increase over last year. Now let's review the income statement in more detail. Starting with the net interest margin on Page 13. As you can see, the customer spread remained stable compared to the previous quarter, reversing a negative trend that began in the first quarter of 2024. Loan yield increased by 2 basis points, the same as the cost of deposits, which, as I mentioned earlier, grew due to the impact of our successful salary account campaigns. Net interest margin fell to 1.69% due to the volume effect, driven by higher balances in repo market activity. However, if we exclude this effect, net interest margin stayed stable during the quarter. On the following page, we show the details of the quarterly evolution of net interest income, which decreased by 1% during the quarter but was 1% higher than the previous year. The lower day count of the quarter amounted to EUR 6 million, while NII decreased by almost EUR 5 million. So, without this effect, NII would have actually increased during the quarter. As you can see in the bridge, the increase in deposit cost, mainly driven by customer acquisition campaigns and the lower lending income, which is fully explained by the lower day count, were partially offset by liquidity, ALCO, and wholesale funding. Turning to fee income, the trend observed in recent quarters was confirmed, with a slight decrease in banking fees, which is more than offset by non-banking fees growth, mainly from mutual funds and insurance. Despite the negative mark-to-market at the end of the quarter, fees from mutual funds continued to improve, increasing 19% year-on-year and nearly 4% quarter-on-quarter. Fees related to assets under management and insurance further strengthened their contribution this quarter, accounting for 53% of total fees, up from 48% last year and 43% in the first quarter of 2024. In Slide 16, we show you the details of the rest of revenues, which also show a relatively stable trend in recent quarters, with a slightly lower trading income this quarter owing to market conditions, but nothing material. Regarding total costs, personnel expenses continue to grow due to salary increases agreed with unions and new hirings. Other administrative expenses also reflect some of the initiatives needed to implement our business plan, leaving total costs 5% above the previous year, in line with mid-single-digit growth guidance. On the right-hand side, you can see our cost-to-income ratio, which grew to 46%, mainly owing to these initiatives that we expect will positively impact the future revenues. Something that going forward will help reverse this trend. All in all, the ratio remains below our 50% target. On the next page, we continue with the cost of risk and other provisions, which, in my view, are one of the most positive news of the quarter. As you can see on the left-hand side the cost of risk was 20 basis points, which is the lowest since the merger with Liberbank and below our initial guidance of less than 30 basis points for the year. The remaining provisions, including legal ones, were also lower, leaving total provisions at EUR 43 million in the quarter, which is 19% below 2025. Provisions showed a very positive evolution at the start of the year, which is obviously great news and leaves us in a comfortable position for the rest of the year. Moving now to Page 19, the bank's return on tangible equity continues its upward trajectory, reaching 10% as of March 2026, or 12% when adjusted for excess capital. As we frequently highlight, we consider the return on CET1 to be a reliable benchmark for us, as it effectively isolates the relatively larger accounting equity required due to solvency deductions, mainly from deferred tax assets. In the first quarter of 2026, the return on CET1 adjusted for excess capital stood at 17%. Lastly, on the right-hand side, you'll find the tangible book value per share plus dividends which has grown by 9% over the past 12 months. Let's move now to the credit quality section on Page 21. As you can see on the slide, positive trends remain in place. NPLs are down 20% year-on-year, with a coverage growing to 80%. Overall NPAs are also down 26% year-on-year, with coverage also improving to 79%, a very positive evolution that leaves total net problematic exposure at only 0.7%. If we now move to solvency on Page 23, you have the quarterly bridge. CET1 was very stable in the first 3 months of the year. Quarterly capital generation, including a positive contribution from the stake in EDP, was mainly allocated to shareholder remuneration and lending growth, which are the 2 main users where we plan to go toward our comfortable solvency position, leaving the CET1 stable at 16% in March 2026. On the next page, you will find our MREL position. As shown, our MREL ratio stood at nearly 27% at the end of March, providing a substantial buffer above the key requirements listed on the right, including an MDA buffer that was higher than 680 basis points. In terms of liquidity, all ratios remain among the highest in the sector with the NSFR at 159% and the LCR at 292%. Finally, our loan-to-deposit was 69% in March, summarizing the excess of retail funding of the bank that, among others, explains the size of our structural ALCO portfolio that we show on the following page. The yield of the portfolio grew from 2.6% to 2.7%, a small improvement owing to the reinvestment and active management. Duration and size also represented a modest increase in the quarter. It is also worth noting that 81% is public debt and that 83% is included in the amortized cost portfolio. Finally, as shown on Page 27, despite geopolitical uncertainties, we reaffirm our guidance for the year. We expect net interest income to exceed 2025 figure, net fees to grow at low-single digit and total cost to increase by mid-single digit. Regarding cost of risk, our initial forecast was to finish the year below 30 basis points, which we also maintained despite the strong first quarter of 20 basis points. It is obviously better than expected at the start of the year, but given the current situation, we prefer to be prudent. In terms of business volumes, we remain well on track to achieve the target of 3% growth. Finally, we confirm our expectation that net income for 2026 will surpass the EUR 632 million from last year. This concludes my quarterly update that as demonstrated, shows a continued improvement in the bank's overall financial position with a stronger commercial performance, enhanced results, consistently high solvency and very positive outlooks for shareholder remuneration. Thank you very much. And I will now hand over to Jaime for the Q&A session. Jaime Marcos: Thank you very much, Pablo. We will now begin with the Q&A session. [Operator Instructions] Operator, please open the line for the first question. Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Pablo Gonzalez Martin: Thank you. Maks. Regarding the cost of risk, as you can imagine, we are in an uncertain environment and geopolitical risks are part of our analysis, and we have considered with our post-model adjustment some impact in the quarter. So, we are quite aware that the potential cost of risk for the quarter was quite good and even below our guidelines for the year, but we want to be prudent for the year and maintain the guidelines for the time being. Jaime Marcos: The other one, the second one was related to a potential exit scheme because another competitor has announced one. Just as a reminder, in the fourth quarter 2025, we booked some restructuring charges to implement a similar exit scheme, a voluntary exit scheme. In our case, that exit scheme, it is more focused on renewal of part of the staff rather than specific cost cutting. So that was announced in the fourth quarter. It was booked in the fourth quarter, and it will be implemented throughout 2025. Pablo Gonzalez Martin: Yes. And was within our guidelines for total cost was considered this scheme. Jaime Marcos: Thank you, Pablo. Please, operator, can we go to the next one? Operator: Next question from the line of Miruna Chirea from Jefferies. Miruna Chirea: I just had 2, please, on NII and then one on the salary account campaigns. So firstly, on NII, you are maintaining your full year '26 guidance of NII greater than '25. But if I'm just analyzing your Q1 NII point, I'm already getting to a number that is more than 1% above '25. And presumably, you're also looking at some volume growth and potential further margin expansion for '26. So, it seems that there is some upside to your guidance. If you could just walk us through your expectations for quarterly NII provision? And then on the salary account campaigns, we showed the increase in your cost of deposits for the quarter. Could you give us some color on how successful the campaigns were and then some details on the pricing? I hear your comments about the upfront cost, but is there also a promotional rate? And if so, for how long does it last? And what does the rate reset afterwards? And if you could share any thoughts on the outlook for the cost of deposits for the rest of this year? Thank you very much. Pablo Gonzalez Martin: I'll try to give you some information on the NII. We maintain the guidance. If you consider the improvement compared to one year, it's only 1.3%. So, this is quite in line with what we were expecting. So, we maintain the NII. I think for the coming quarters and the expectation on a quarterly basis of what we expect, I think the first thing to mention is interest rate volatility is paramount and will have an impact mainly on 2027 and 2028. In the short term, in the quarterly, the impact of any interest rate shock is always smaller. So, our expectation remains that the first quarter was going to be slightly below last year. But if we consider the day count, it could consider the fourth quarter the bottom of NII. From this onward, our expectation is a gradual improvement, slower in the second quarter and then taking and picking up and having some momentum from the second half of the year and especially in 2027. So, we maintain that expectation, and we will see how this evolves. And regarding the salary account. I think this has been quite successful, and this is one of the reasons that we have some pickup in cost of deposits, but it's with our strategy to improve the transactional business with our customers and improve the transactional business down the line. And the overall cost of risk this quarter has been quite stable regardless of this impact. And going forward, obviously, we have higher rates on market prices, we will have some impact down the line, but within the expected beta that we have at the moment, and consider that we have only 25% of remunerated deposits in our book. Jaime Marcos: Thank you, Pablo. Please, operator, can we move to the following question. Operator: Next question from the line of Cecilia Romero from Barclays. Cecilia Romero Reyes: I have two. The first one on NII sensitivity and 1 year have moved higher again. Over a 24-month repricing horizon, how much incremental support can NII realistically receive from higher rates, including out of reinvestment at higher yield relative to the assumptions you had at the end of last year? And in a scenario where sector loan growth is affected by the macro backdrop and lending slows, will a stronger deposit growth support NII? And the second one on provisions, if the macro environment were to become more uncertain, how would that typically feed through into your provisioning models and cost of risk? I think you have a high weight in your base case. Are you thinking of changing your weight for each scenario? And do you have any overlays? Pablo Gonzalez Martin: Thank you, Cecilia. Regarding the NII sensitivity, I think as I mentioned, for the first year, any interest rate shock has very little impact since we started at the end of 2023 to lock in the level of rates for the next 2 years -- 2, 3 years. So, for this first 12 months, the impact will be very small. From a more second year impact, we think we have an impact for 100 basis points parallel movement of around mid- to high-single digit impact in NII. And this obviously, as you can imagine, will depend a lot on how customer deposits cost evolve. So, it's always with the assumptions that everything, the beta is maintained as it is now, which is -- has been quite stable. So, there's no reason to think in a different way. But obviously, we consider in this analysis that we have some renewed ALCO portfolio reinvestment, and we have also some new lending at higher rates after the shock. So, this gives us with a positive evolution in the second half of this year, a small one and then picking up some momentum from '27 onwards. Overall, I think it's important to remember that we have quite a significant NII sensitivity in the medium term due to our liability and the deposit -- the transactional deposit base that we have. And regarding the volumes in the impact of NII, we have given a more stable and constant balance sheet impact rather than dynamic impact. So, we haven't considered in this sensitivity the impact on volumes. I think in the short-term the impact of reducing expected volumes, we were expecting to have around 3% growth in volumes more or less for the year. So, if maybe anything of this geopolitical risk has an impact of some reduction in lending. Maybe we have an increase in the saving rate that support the deposit side. So, I'm not convinced this is negative or neither positive. We have some NII coming from the lending. The good news is the front book is ahead of the back book, and the deposits are behaving as expected. So, we're comfortable with the guidance that we give for the year and expect to improve next year. And regarding provisioning and how we consider -- we have a prudent approach in our model. And just to give you some color, the model of our IFRS 9 macroeconomic variables that consider our base scenario, we were expecting only 1.9% GDP growth for the year. And the last number that we have for the first quarter is we have an annualized 2.7%. So, still room for some reduction in the year in the GDP numbers. We consider the situation to have some impact, but not a very significant impact and still maintain positive momentum in the Spanish economy. And regarding the post-model adjustment and the 1-year cost of risk, I think we already have some buffer on top of this provisioning within our IFRS model, which is we already considered last year, and we mentioned that we consider geopolitical risk as one of the potential impact that our model didn't consider. So, we already have some provision last year, and we slightly increased this quarter, again, our post-model adjustment. So, we are comfortable with our guidance of below 30 basis points for the year, even in some stress scenarios as we are witnessing today. Jaime Marcos: Thank you, Pablo. Please can we move to the following question please, operator. Operator: Next question from the line of Borja Ramirez from Citi. Borja Ramirez Segura: I have 2 questions, please. The first is on the payroll accounts, if you could kindly provide more details on the volume outstanding and the average cost? And also, if you could provide details on the ongoing system competition in Spain? And then my second question would be, I understand that you have some ALCO maturities that I think it was between 80 and 90 basis points, around EUR 2 billion maturing this year. If you could kindly reconfirm this number. And I think you also have NII benefit from the maturity of an expensive bond at the end of this year, if I remember well. So, there could be some NII uplift on that. If you can this as well, please? Pablo Gonzalez Martin: Thank you, Borja. Regarding the customer acquisition campaigns, I think just to give you some color, we have spent around EUR 6 million in this quarter on these campaigns, which represent the successful of the campaigns, which is more than EUR 4 million more than the previous quarter. So, this strategy is picking up, and we pay slightly less than EUR 500 upfront with compromise from the customer to be with us at least for 2 years. And so, the impact on the cost is within those EUR 500 that I mentioned. And the amount, we gathered more than 12,000 new salary accounts for the quarter. Regarding the ALCO portfolio maturity, as I mentioned last presentation, we have for this year, slightly above EUR 2 billion. We still have remaining EUR 1.7 billion for the year, and the average cost is very similar to the number for the whole year. So, it's around 0.8%. And this has been considered when we say that we expect to have a slightly higher NII for the year than compared to last year. So, we already took this in consideration. And as you can imagine, we are reinvesting this at a higher level. Jaime Marcos: Thank you very much, Pablo. Operator, please, we can move to the following question. Operator: Next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So, my first question would be on cost growth. Some of the wage negotiations are coming due next year, if I'm not mistaken. So how should we think about cost growth beyond 2026, more in '27, '28? And what cost pressures do you see kind of on the horizon? And then my second question would be, could you just remind us how much DTA benefits we should be expecting every year going forward? Pablo Gonzalez Martin: I think regarding cost growth, I think as you can imagine, it's a combination of different things. As we mentioned within our strategic plan, we have a strategy to diversify our revenue sources. So in order to grow in corporate lending and in consumer lending and import/export lending and private banking and so on, this requires some deployment of IT developments process and people and talent. And we have been hiring some talent. So, you have to consider this on top of the actual salary increase that we mentioned. So, we maintain and we are comfortable with the 5%. I think to talk down the line for '27, '28 is too premature, and we will give more details on the future position for the bank. And on top of this, we have this, as I said, on top of these new hirings, we have some schemes, as we mentioned, to reduce some of our workforce. So, what we are doing is not a cost-cutting measure, but to renew and to uplift the capabilities of our workforce. And regarding your second question, Jaime, can you comment? Jaime Marcos: Yes. On the DTAs, very straightforward. I think that you can expect a run rate between 20 to 25 basis points per year of solvency generated by lower deductions from DTA at current profitability levels. That will be probably the summary. So, we can move please operator to the next question. Operator: Next question from the line of Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: The first one would just be a little bit of a follow-up on fee income. Basically, you're maintaining the low-single digit growth for the year. Do you see any tailwinds here or headwinds, sorry, actually from the market -- the recent market volatility or potential hampering of your assets under management business because of this? And then the second one would be on capital distribution plans. So, you have already upgraded payout to very high levels. But I was just wondering whether there are any additional plans to distribute or to accelerate the distribution of the existing excess capital? Pablo Gonzalez Martin: Thank you, Carlos. I think on fee income, as we said, we have managed quite well the headwind coming from market volatility. I think that the market is performing quite well considering the geopolitical risk environment. And I think there's still some momentum in the Spanish and our customer base to increase their investment compared to their saving. And so, we haven't changed our expectations on off-balance sheet growth and mutual funds. This obviously will depend on how market evolves. But so far, I think the drawdown that we saw in March is almost recovered now. So, we don't think the customer and the investor base will change their attitude unless we have a more significant impact on the market that we don't foresee in the short-term. And regarding capital distribution plans, I think we have a quite generous level of 95% shareholder remuneration of net income. And just to recall, we will have a presentation in the second quarter. We will have the update of our interim dividend of 70% in the first half of the year. Then in the third quarter result presentation, we will announce how is going to be delivered, the 25% additional remuneration that we plan. And in the final year presentation, we will have the final dividend. So, we don't think we need to accelerate anything regarding shareholder remuneration, and we stick to our strategic plan. Jaime Marcos: Thank you very much, Pablo. Can we please move to the following question, operator. Operator: Next question from the line of Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: About corporate lending, if you could elaborate a bit more on what has been the plan delivered in the quarter? And how should we expect growth in the future? Do you think that the strong quarter-on-quarter growth that you have delivered could be maintained or there was any specific one-off transaction that distorted the growth? And the second question is on capital linked to the previous question of Carlos. I wanted to understand whether you could use part of that capital for any inorganic growth and what will be the priorities and the capital hierarchy that you will be looking for in terms of businesses, whether you will prioritize fee-based business or whether you would like to, as the guy has been suggesting looking for diversification. Pablo Gonzalez Martin: I think I have got both of the questions, but thank you, Ignacio, for your question. I think regarding the corporate lending, although the quarter has been significantly good we think the year-on-year numbers are sustainable, and we will probably maintain this 6% growth for the coming quarters. I think you have to think that we have to catch up in terms of customer activity. We are deploying more resources for this business. And although the level is higher than the market growth, we have to do some catch-up in terms of market share in this business. And so, we still have plenty of opportunities to maintain the growth. Maybe not the growth on a quarterly basis, but the growth on an annual basis could be some guidance for how much we expect to grow in the high-single digit number, between mid- and high-single digit number for the coming quarters as well. And regarding the capital, on top of what I mentioned of shareholder remuneration, we also mentioned in our strategic plan that we will consider any bolt-on operation in M&A. And this will have a clear view on improving and accelerating our diversification of revenues that we were thinking. And as you can imagine, this diversification spans from fee business, but also in areas where we have a lower market share like consumer lending or other type of specialized lending that we have a smaller market share. So, we maintain that possibility. But I think to be clear, the whole idea of this bolt-on is not something that we need to do to deliver in our strategic plan targets. It's something that will help us to accelerate the process of diversification. But we will maintain hiring people and improving capabilities to do this diversification. Jaime Marcos: Thank you again, Pablo. Let's move to the following question, please. Operator: Next question comes from the line of Fernando Gil de Santivañes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: I hope you can hear me? Pablo Gonzalez Martin: Yes. Go ahead Fernando. Fernando Gil de Santivañes d´Ornellas: So I see headcount substantially up by 100 persons in the quarter. I just want to get a sense of how should we be thinking about headcount going into the year-end of 2026 and given that you [indiscernible] to be in Q4. Pablo Gonzalez Martin: I'm not sure I got your question properly, but I think you were looking at the headcount of employees and how this has evolved in the quarter, increasing slightly. You have to consider that we have 2 different forces. One is we are growing our capabilities in certain areas. In IT, in artificial intelligence deployment and some specialized areas like specialized lending and things like that. And on the other side, we have the redundancy, the voluntary redundancy plan. And in this quarter, we have the first impact, but we have not any impact from this plan. So, net-net, I think the headcount will be very similar, slightly up, but not very significant. So, we maintain our cost guidance of mid-single digit for the year, and this consider the employee and workforce. Jaime Marcos: Thank you very much, Pablo. Just to double check, I think that we don't have any more questions. But please, operator, can you confirm it? Operator: Yes. There are no other questions at this time. Jaime Marcos: All right. So, thank you very much, everyone. The IR team remains at your disposal. If you need further info, please do not hesitate to contact us. Thank you very much for your interest and your time. Pablo Gonzalez Martin: Thank you very much. Have a good day.
Kevin Lorenz: Good afternoon, ladies and gentlemen, and welcome to WashTec's earnings call on the results of Q1 2026. My name is Kevin Lorenz. I'm Investor Relations Manager at WashTec. With me, I have today our Chief Financial Officer, Andreas Pabst, who will provide a brief update on WashTec and guide you through our quarterly results. Following his presentation, the floor will be open for questions. Also, you might have just seen a short video on our newest product, JetWash Connect during the waiting room, which we are very proud of. If you are interested, you can find this and further videos on this new product on our WashTec website or you can also just send us a short mail, and we will share it with you. But without further ado, I'm now handing over to our Chief Financial Officer, Andreas Pabst. Andreas Pabst: Thank you, Kevin. Also from my side, a very warm welcome. I really appreciate that you are in our call today. Let me first give you some brief statements about our current topics at WashTec before I shift over to the figures of the first quarter of 2026. Let's start with our new JetWash Connect. We already mentioned the planned launch of this new product during our last call on the fiscal year 2025. But now we are live. And as you can imagine, we are very proud on our product launch on April 14. Our new JetWash has some really good features for the users, for our customers, the operators as well as for us. First, the new steel structure. We own the complete construction details, and that puts us in the position that we can source the necessary steel parts locally instead of shipping them from Germany to all over Europe. Second, Wash & Pay leads to the fact that the average paid time increases by 25% to 30%. That means more revenue for our customers. And third, the new polish is a real eye catcher. You can really see the difference when you clean your car with this feature. With all these advantages, we believe that we can expand our business in this production category even further. Already with our last generation, we were able to achieve double-digit million revenue in Europe in 2025 that stands for approximately 10% of our equipment business. So we expect more to come. That brings me to my next topic. You are already aware that we are optimizing our production. This is one of the biggest levers we currently have in the company. We have made a major step in the future development of our production network. The grand opening of our new plant in Czech took place on March 26. We started with the transfer of preassembly, assembly and logistics to the new building. The state-of-the-art facilities ensures process stability and efficient material flows while enhancing preassembly capacity with clear structured process change. Currently, we have already transferred around 50% of the total jobs to be transferred. That means on the other side, we currently have planned higher costs. There are people in Augsburg who train the new colleagues in Czech. The handover is in quite good shape, and our employees are working very well together. We expect that this higher capacity need will be resolved before the end of this year, and then we will collect the full saving from this lighthouse project. Let me now briefly address the potential risks related to the conflict in the Middle East. From a revenues perspective, our direct exposure in the affected countries is limited and remains modest. However, the broader uncertainty can lead to a temporary reluctance to invest, particularly impacting equipment demand on a global level. This is something we are closely monitoring. On the recurring side of the business, our assessment remains unchanged. Based on historical data, higher fuel prices may lead to short-term adjustments in driving behavior, but we do not expect a structural impact on car wash usage. Accordingly, we see no material long-term risk to our chemicals and service revenues. On the cost side, we are paying particular attention to supply chains and commodity prices, especially energy-related inputs and selected raw materials. For metals, we are in the lucky situation that we have secured a major part of our need until end of this year already in December 2025. For other parts, we are increasing our stock level cautiously. Higher fuel prices, we counteracted with some surcharges for our customers in the field of service. Currently, we are discussing further mitigation measures and put them in place, depending on the duration of the conflict. You see we are prepared and do the utmost to keep the financial impact on WashTec manageable and to protect margins. On this slide, which you probably already know, you see our main efficiency programs, which we are currently driving. And you are, of course, aware that these are already fundamental for our company. For sure, you also can imagine that not all of those programs always run 100% as planned. I have already given an update on the optimization of production footprint, where we currently have some planned negative impact on the gross margin, but where we are fully in line with our targets. In terms of installation costs, here, we are facing some delays, which are -- influence our gross margin negatively. We somehow have underestimated the complexity of this job in some details and have intensified our efforts here. Our program for cost down of production and modularization is currently slightly behind time line, but overall, with no significant impact for the 2026 figures. On the other side, our programs for quality excellence and the Global Scope Configurator are developing extremely well. Our quality cost per units are decreasing continuously and contribute to our profitability. The Global Scope Configurator has been rolled out now to 3 European countries and further to come. This program clearly delivers what we expected, a strong complexity reduction along the whole process chain from the customer order to production. Now let's come to the figures for Q1 2026. Summing up Q1 in a statement. Revenue is good, especially in equipment in North America, improvement of profitability necessary. But first things first. Starting with our revenues for Q1 2026. We achieved a new first quarter revenue record of EUR 111 million, representing an increase of 2.3% year-on-year. This growth was primarily driven by a strong performance in North America, particularly in the equipment business, supported by higher revenues with key accounts. In Europe and Other, revenues were stable overall compared to prior year. On a business line basis, equipment revenues increased by 7%, while service remained stable. Consumable revenues declined mainly due to the weather-related lower wash volumes. However, the revenue decline was less pronounced than the drop in volumes, underlining the resilience of the underlying business. Looking at our profitability, we see an EBIT of EUR 3.8 million. This is an EBIT margin of 3.4%, whereas on -- 1 year ago, we booked 4.5%. The shortfall was on the one hand side, expected by necessary expenses caused by some programs. Remember my statements to a production shift to Czech. On the other side, we saw a cost increase in terms of installation. Our measures we started are not finished and do not show positive effects in the first quarter, but they will come. We have full focus on this cost block. Having a short view on free cash flow. The number is down by EUR 9 million to EUR 7 million. This drop doesn't make me too nervous right now as we have increased our stock due to the real good order backlog we have. Therefore, our net working capital increased to EUR 94 million and comparable number of March 2025 was EUR 82 million. So overall, Q1 was mixed in terms of financials and hard work is still in front of us. But given the strong top line as well as our current order book, we can look optimistic in the future, especially if we look at the development in equipment, what brings me to the next page. In the first quarter, we see a clear differentiation across our business lines. Equipment was the key growth driver with revenues up 7% year-on-year. This growth was primarily driven by North America, supported by higher revenues with key accounts, while Europe and Others also showed a slight increase. Service revenues were stable compared to the prior year, once again underlying the resilience of our recurring revenue base. This stability is a key strength of our business model, particularly in a more volatile macro environment. Consumable revenues were below the prior year level, mainly due to weather-related lower wash volumes. Importantly, the decline in revenue was less pronounced than the decline in volumes, which demonstrates the fundamentally sound operational development of our washing chemical business. Overall, we are confident with the growth of our top line. Now let's put eyes on our segments. In Europe and Other, revenue remained broadly stable year-on-year. Earnings in the segment were impacted by planned temporarily higher costs, mainly related to the expansion to our Czech site as well as delays in the execution of certain efficiency initiatives, particularly in installation and logistics. I already gave some insights here. In addition, earnings were affected by weather-related lower activity in consumable business. In North America, we saw a clear improvement in both revenue and earnings, driven primarily by higher equipment revenues with key accounts. The segment benefited from improved execution and more favorable product mix. Looking at the EBIT number, we see an increase in this KPI by EUR 1.4 million to now breakeven. This is the best EBIT in the first quarter in North America since 2017. Yes, that's remarkable. Coming now to our EBIT bridge, showing the development of Q1 '25 to Q1 '26. The increase in group revenue in the first quarter generated a positive gross profit contribution, while at the same time, the gross margin declined year-on-year, coming from 29.3% last year to now 28.4%. This was mainly driven by a less favorable product and regional mix, including a lower share of consumables and a higher share of equipment business in North America. In addition, gross profit was impacted by planned temporarily higher costs, primarily related to the expansion of the Czech site and delays in selected efficiency programs, as already mentioned. Selling expenses increased in line with revenue growth and remained broadly stable as a percentage of revenue. Administrative expenses are slightly higher compared to last year, mainly to ongoing IT projects. On this slide, you see some more financial KPIs. Net income and earnings per share follow mainly our EBIT development. Our net financial debt is still in a very good shape despite the outstanding amount is higher compared to the same time 1 year ago. Reason for this is besides higher dividend payment and the share buyback program, we already mentioned higher net working capital. On the following slide, you see our equity ratio and our fixed asset ratio. Both in a reasonable shape. In terms of employees, it is remarkable that we have increased our workforce by 94 year-on-year. Most of our new colleagues have been hired in the business line service followed by sales department. Now to the equipment order backlog, as always, indexed basis this time is the year 2022. Equipment orders received was significantly higher in the first 3 months of the year than in the prior year quarter. This cut across both segments and was primarily due to the positive trend in North American segment, where the increase was even well into the double-digit percentage range. Therefore, as already mentioned, we have a very strong order backlog, plus 10% compared year-on-year, plus 16% compared to end of 2025. And by the way, the increase in North America is even stronger. This gives us a good view on the top line in the coming months. Let's now turn to our guidance for 2026. In general, WashTec confirms its guidance for 2026 and expects that the delays in the efficiency projects will be made good over the course of the year. That is where we, the management and the complete team, need to focus on. We expect revenue growth in the mid-single-digit percentage range and an increase in EBIT that is disproportionately higher than revenue growth. The forecast does not make allowance for any further significant worsening of the economic situation due to the developments in the Middle East or other global disturbances due to some political statements and actions. However, in addition to high volatility in raw material markets, we are currently seeing a significant increase in uncertainty regarding the future course of the conflict in Middle East and the resulting indirect economic impact. That doesn't help too much for stable guidance. So this time, it is even more important to state that this guidance is subject to uncertainties and all these figures reflect our expectations based on our current knowledge and significant deviations in either directions are not factored in here. This concludes my remarks. On the following page, you will find our 2026 financial calendar. Thank you very much for your interest so far. Kevin and I are now available to answer your questions you might have. Kevin Lorenz: [Operator Instructions] We have the first question from Stefan Augustin from Warburg Research. Mr. Augustin, we can hear you. Stefan Augustin: Great. I hope so. I have a couple of questions. So the first one is actually, can you elaborate a little bit more again on the headwinds? So when do you think which one of the headwinds is going to start to decline? I mean, Czech Republic is probably second half of the year, so not Q2 yet. When is the element of the installation efficiencies going to kick in? And can you remind us on the SAP integration costs in Q1 '26 compared to the ones you might have had in Q1 '25? So that would be the first block. Andreas Pabst: Okay. So yes, you are right, the profitability or the increasing profitability for the transfer to Czech Republic will kick in more, end of this year, and we will see full effect according to the actual plans. And we are in the current time line, we are fully on track. We will see that in 2027. In terms of installation costs, we are currently really a little bit behind. We detected some, let's call it, difficulties, yes, where we need to dig further and we need to create other solutions to come back here. So that means, I would say we are here now 1 quarter behind, but we will manage to come up with this one during the year. And then you asked about the cost for the implementation of SAP. So if you look to the EBIT bridge, which is in the presentation, the deviation in administrative cost is more or less coming from this cost for the introduction of S/4HANA. So it's around about EUR 200,000. Stefan Augustin: Okay. The next one is the -- you mentioned that the orders that you received in Q1 are largely also on the U.S. side, but we should also expect growth and a positive book-to-bill in the quarter on the European side. Is that okay? Andreas Pabst: So if I look at the order income, I'm positive in Europe as well as North America for the first quarter. Both showed an increase compared to prior year. That is good. The increase was even -- just what I said was, the increase was even higher in North America. So yes, you're right with your statement. Stefan Augustin: And probably the weather, especially in Germany has been quite good in the second quarter or in April. So it would not be wrong to expect a better chemicals business in the second quarter. Is that a fair assumption? Andreas Pabst: Let me think about -- so currently, we have May 5, I guess. So the second quarter is not completely done yet. But looking at April was good washing weather, especially in Europe in one of our key markets. That's some headwind we have -- or tailwind, sorry. Stefan Augustin: Okay. And then maybe just switching back a little bit. The -- say, the headwind on the installation efficiencies, is that more in Europe or respectively, if we have in the second quarter, stronger volumes to expect from North America, would we still see a very or a sizable drop-through in operating leverage as the installation part is quite okay in North America? Andreas Pabst: That's really a good question. Thank you for that one. So the topic what we see in installation cost is mainly related to Europe. So the installation costs in North America are on a reasonable level if we compare it over the year and compare it to the targets we have. Kevin Lorenz: And we have another question from Wolfgang Specht from Berenberg. Mr. Specht, can you hear us? We can't hear you. Sorry, okay, I see the question was actually in written form. So the question is, connection is a mess still would have several questions. Okay. And so Mr. Specht, our provider in EQS has now also included an option that you can dial in via phone. Currently, many analysts have the problems that their banks are very restrictive with their IT and so if you can -- if it's possible for you, then you can also dial in via phone and there should be -- the procedure should be described. There should be a number that you have to call and then -- so let's maybe give him a little bit more time to -- if there's a question coming or not. Else -- I don't see any other questions right now. So I don't know, should we give him another minute or should we. Andreas Pabst: Let's wait for 30 seconds and see if it works, if not yes. And that's also. Kevin Lorenz: There should also be an option to write down questions in text form, also for everyone else who might still have questions. Andreas Pabst: So Mr. Specht, we really like to answer your question. So if it doesn't work right now, yes, probably then we can do it later on. That is for all the audience. But then I would say no further questions right now. So then ladies and gentlemen, on behalf of the whole Management Board, we really would like to thank you for your interest in WashTec and wish you a pleasant day. Thank you. Bye-bye.
Jacob Johnson: And we'll provide financial guidance for the full year 2026. Join us on the call today are Repligen's President and Chief Executive Officer, Olivier Leo; and our Chief Financial Officer, Jason Garland. As a reminder, the forward-looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning risks related to our business is included in our quarterly reports on Form 10-Q, our annual report on Form 10-K, our current reports, including the Form 8-K that we are filing today and other filings that we make with the Securities and Exchange Commission. Today's comments reflect management's current views, which could change as a result of new information, future events or otherwise. The company does not oblig or commit itself to update forward-looking statements, except as required by law. During this call, we are providing non-GAAP financial results and guidance, unless otherwise noted. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this morning, which is posted to Repligen's website and on sec.gov. Adjusted non-GAAP figures in today's report include the following: organic revenue and/or revenue growth, cost of goods sold, gross profit and gross margin; operating expenses, including R&D and SG&A, income from operations and operating margin, other income or expense, tax rate on pretax income, net income, diluted earnings per share, EBITDA, adjusted EBITDA and adjusted EBITDA margin. These adjusted financial measures should not be viewed as an alternative to GAAP measures, but are intended to best reflect the performance of our ongoing operations. With that, I'll turn the call over to Olivier. Olivier Loeillot: Thank you, Jacob. Good morning, everyone, and welcome to our 2026 first quarter call. We are delighted to share our first quarter 2026 results. Great execution once again by our team enabled us to deliver 15% reported revenue growth or 11% organic and 160 basis points of adjusted operating margin expansion. Mid-teens top line growth, coupled with disciplined cost management resulted in margins outperforming expectations. In addition to our strong financial performance in the quarter, we advanced several key strategic priorities. This includes the launch of our transformation office, the associated sale of the polymer business and a new partnership in China. This OEM relationship advances our strategy in the country where we are seeing significant growth again. I'll touch on each of these initiatives in more detail shortly. As I reflect on our end markets and company today, it's encouraging to see the strength we are seeing across all of our customer segments. The talented and experienced team we have assembled is executing fiercely on our differentiated strategy. This has resulted in a very rich high probability opportunity funnel that just needs to be coupled with faster customer decision-making. We did see encouraging signs in the first quarter, and remain convinced that capital equipment tap will open. We delivered $194 million of first quarter revenue, driven by healthy demand across our broad portfolio and all geographies. Analytics led the way with 50% plus growth, but all of our franchises grew nicely again in the first quarter. Consumables, including protein, grew double digit which was coupled with solid capital equipment growth and services remained a standout with 30% plus growth. Capital equipment demand benefited from strength in Analytics, mixers and easier comps. We also saw growth across our diversified customer base in all geographies. Order trends were solid in the first quarter with a significant pickup in March and included some conversion of our robust capital equipment funnel. Our first quarter results and these recent order trends reinforce our confidence in our full year revenue outlook. Jason will provide more details. We are reiterating our expectation for 9% to 13% organic growth, while updating our reported revenue guidance to reflect the sale of our noncore and low-margin Polymem business. This reduces our full year revenue outlook by $7 million, but improved our margin outlook. In addition, given our strong first quarter performance, while increasing our adjusted earnings per share guidance for the full year. We remain excited about our differentiated product portfolio, the global team we paired and the strategy we're executing. As we look ahead to the next several years, we see a number of opportunities across our portfolio that position us for robust growth and allow us to continue to outpace the market. Looking at our performance by end market, we saw widespread strength across our customer base. CDMO revenues grew mid-teens with similar growth across both Tier 1 and Tier 2. Biopharma revenues also grew despite a very difficult comparison. We saw notable growth outside of large pharma, including 20%-plus growth from emerging biotechs. We continue to be encouraged by growth from this customer base, though demand remains below historical levels. OEM and integrated demand was very robust given growth in fleet management. From a geographic point of view, we saw strength across all regions led by Asia Pacific. This included a near doubling of revenues in China with our best revenue quarter in the country in over 2 years. This is a testament to the team we've put in place. Asia Pacific remains a key strategic region and I will discuss the progress on our strategy in China shortly. As expected, new modalities were dilutive to growth given the gene therapy headwind we previously discussed. We continue to see healthy growth in cell therapy and also in gene therapy when excluding that specific headwind. I wanted to update you on the following 3 strategic initiatives: First, as we have emphasized recently, we are committed to expanding margins, while banking the efforts needed to support future growth. In an effort to accelerate both of our Fit for Growth journey and our path to 30% adjusted EBITDA margin by 2030, we've formed a transformation office that will ensure with the right prioritization and resources focused on these critical initiatives. Key focus areas under this program include a force to optimize our manufacturing footprint for increased cost efficiency, improving the profitability of certain product lines through targeted productivity and rationalization, continuously improving service to our customers and efforts to capture the value of our differentiated products; and finally, acceleration of our IT modernization and AI implementation across all functions. Jason will walk you through more details. But in terms of financial impact, we estimate this effort should result in at least one point of annualized margin benefit by the end of 2027. We remain committed to our goal of doubling the business and expanding margins while further progressing our Fit for Growth capabilities. The transformation office will enable us to achieve and accelerate all of these. So most of these initiatives have just picked off, we're happy to share that as part of this effort on March 30, we divested the Polymem operation in France for nominal proceeds. While this facility was a key contributor to Repligen's ability to supply product during the pandemic, the business has since reverted to noncore sales outside bioprocessing and has operated at a net loss. In 2025, Polymem generated $7 million of revenue and an adjusted operating loss. The new owner will offer synergies in the common market in which they operate. Second, we remain more excited than ever by our growth opportunity in Asia. In fact, Jason and I recently returned from a week-long visit to the region where we met with both key customers and our Asia leadership team. We are building a great team and continuing to gain traction with key customers in the region. We are also thrilled to announce that while in the region, we signed a critical partnership to expand our capabilities and local presence in China. The partnership outlines an OEM relationship that will increase our competitiveness and access to local manufacturing beginning in 2027. It will be a multiphase and multiproduct arrangements that we expect to expand over the coming years. After our trip, we have more conviction than ever that China will be a meaningful player in biopharma for years to come. Finally, I want to comment on our IT investments and digitization journey. On our last call, we mentioned investment in our IT organization in 2026 as part of our Fit for Growth journey. We have made key additions to our team this year, including new data management and AI experts. We have implemented AI across a variety of functions including, but not limited to legal, commercial and supply chain. And as part of our transformation office, we are also working to further optimize our data infrastructure which will allow us to better implement AI in the coming years. To support our customers, our analytics franchise is well positioned for an increasingly digital environment. Our PAT product portfolio allows for the collection of both upstream and downstream data in real time. We have integrated our FlowVPX into our downstream filtration system and are working to replicate this on the upstream side. We announced a partnership with Novasign last year and are working to integrate their digital twin capabilities into our next-generation small-scale filtration systems. We see digitization as a multiyear journey, and it [indiscernible] a key strategic focus area for our company. Before I turn the call over to Jason, I'll provide some more detail on our franchise level performance. Starting with situation. Revenue grew mid-single digits on a reported basis in the quarter, driven by Fluid Management, ATF and other consumables. Excluding the gene therapy headwind, this franchise would have delivered double-digit growth. With the sale of Polymem, we now expect filtration growth to be roughly mid-single digits in 2026 on a reported basis. This also contemplates a moderated ATF outlook in 2026 due to customer-specific timing dynamics that are expected to be a tailwind in 2027. As a result, we see ATF returning to strong growth in 2027 and beyond, and we continue to see overall healthy consumable demand across our portfolio. We remain extremely confident in our process identification leadership position. After over a decade of seeding our ATF technology, we have built a high amount of trust from the biopharma industry. We will continue to prioritize further innovation and advancements that will allow us to remain the industry's partner in process in densification. Chromatography revenue increased over 25%, driven by growth in OPUS columns. We continue to win new customers globally as they appreciate the plug-and-play convenience of prepacked columns. Given the traction we are seeing in OPUS we now expect 20% plus growth in chromatography in 2026. With this outlook, we do expect a slightly higher mix of chromatography revenue versus our initial expectations. It was a great quarter in proteins with mid-teens growth on top of a very strong prior year comparison. We saw healthy demand across our offerings, led by our ligands, reflecting the benefits of the strategy we put in place to control our own destiny in proteins. We expect protein growth of at least low double digits for the year. Our Analytics franchise had another phenomenal quarter with 50% plus growth. This was led by notable strength in our downstream analytics offering, which had a record quarter. This benefited from strong demand for our SoloVPE PLUS, including new placements and upgrades. We continue to assume Analytics growth of 20% plus given momentum in downstream demand and a growing contribution throughout the year from our upstream Analytics offering. To wrap up, we are very pleased with our start to 2026. We delivered 11% organic growth in the first quarter, which is right in line with the midpoint of our full year guidance. This coupled with operating expense discipline has reinforced our confidence in our full year revenue outlook and enabled us to increase our adjusted earnings per share guidance. In addition, we made tangible progress on our strategic priorities, which positions us well to drive robust growth and margin expansion in coming years. Now I'll turn the call over to Jason for the financial highlights. Jason Garland: Thank you, Olivier, and good morning, everyone. Today, we are reporting our financial results for the first quarter of 2026 and providing updated guidance for the full year 2026. Unless otherwise noted, all financial measures discussed reflect adjusted non-GAAP measures. As shared in our press release this morning, we delivered first quarter revenue of $194 million, reported year-over-year increased 15%. This is an 11% organic growth, excluding the impact of acquisitions and foreign exchange. Foreign currency contributed 3 points of growth and we had 2 months of inorganic contribution from our upstream Analytics acquisition. As Olivier offered details on our product franchise performance, I'll provide more color on our regional performance. Starting with quarterly revenue mix. North America represented approximately 46% of our total. EMEA represented 37% and Asia Pacific and the rest of the world represented approximately 17%. North America grew mid-single digits, driven by OPUS and Analytics. EMEA grew more than 20%, driven by proteins in OPUS. In Asia Pacific grew more than 25% driven by ATFs, mixers and Analytics. And as previously mentioned, we had very strong growth in China. Transitioning to profit and margins. First quarter adjusted gross profit was $108 million and adjusted gross margin was 55.5%. This was 180 basis points of margin expansion versus last year. The year-over-year increase was driven primarily by volume leverage, pricing execution and favorable product mix, all of which more than offset inflation and tariffs. The favorable mix was driven by growth in our Analytics business and certain accretive filtration products. In addition, first quarter gross margin also benefited from cost absorption timing associated with production levels required to support the sales ramp through the year. We expect this benefit to normalize over the remainder of 2026. Continuing through the P&L, our adjusted income from operations was $30 million in the first quarter, up 28% year-over-year on a reported and organic basis. OpEx grew 11% on an organic basis. We remain thoughtful about balancing investments in the business while expanding margin. We expect some additional investment in the second quarter. This translated to an adjusted operating margin of 15.4% in the first quarter, which was an increase of 160 basis points year-over-year on a reported basis and 200 basis points of margin expansion, excluding M&A and the impact of foreign currency. Adjusted EBITDA was $40 million in the quarter or just under 21% adjusted EBITDA margin. Moving to the bottom line. Adjusted net income was $27 million, a 22% year-over-year increase. Higher adjusted operating income was offset by slightly lower interest income on declining interest rates. Our first quarter adjusted effective tax rate was 22%, which starts the year on the low end of our full year guidance, which remains unchanged. Adjusted fully diluted earnings per share for the first quarter was $0.48, compared to $0.39 in the same period in 2025 or an increase of 23%. Finally, our cash and marketable securities position at the end of the first quarter was $785 million, up $17 million sequentially from the fourth quarter. This was driven by $20 million of strong cash flow from operations, offset by $5 million of CapEx in the quarter. We remain focused on optimizing our working capital to drive improved cash flow conversion. I will now speak to adjusted financial guidance. As Olivier mentioned, we are reiterating our organic growth guidance for full year 2026, while updating guidance for the sale of Polymem and our first quarter results. Our guidance also assumes a couple of million dollars tariff surcharges in 2026. We are now guiding $803 million to $833 million of revenue or 9% to 13% growth on both a reported and organic basis. Our updated guidance now reflects only one quarter of revenue from Polymem which removes approximately $7 million of revenue from the full year, previously included in guidance. This continues to assume just under one point of benefit from foreign currency, which we realized in the first quarter. Our reported growth of 9% to 13% assumes the following: mid-single-digit growth in Filtration, greater than 20% growth in Chromatography, Proteins growth greater than low double digits and 20% plus growth in Analytics. We now expect 110 to 160 basis points of gross margin expansion for the year. This assumes a slight benefit from the divestiture, partially offset by higher Chromatography mix and limited impact from the conflict in the Middle East. With the strong Q1 performance, the sale of Polymem and judicious management of OpEx, we are raising our adjusted income guidance. We now expect $124 million to $132 million of adjusted operating income. This implies 160 to 200 basis points of operating margin expansion which represents a 30 basis point increase at the midpoint versus our prior guidance. Continuing through the P&L, we now assume $90 million of adjusted other income and continue to assume a 22% to 23% adjusted effective tax rate. Putting this together, we expect adjusted fully diluted earnings per share to be between $1.97 and $2.05, this is up $0.26 to $0.34 versus 2025 or up 18% at the [indiscernible] and $0.04 higher than our prior guidance at both the low and high end of the range. To assist with the quarterly cadence, we expect Q2 organic revenue growth to be similar to the first quarter. As a result, our guidance does not require a second half acceleration to achieve the midpoint of our full year outlook. We expect second quarter gross margin to be slightly below our full year guidance range and OpEx to pick up slightly sequentially following our disciplined OpEx control in the first quarter. We expect second half OpEx to be similar to 2Q. As a result, we expect solid operating margin expansion in the second quarter, while the third quarter will likely represent the lowest margin quarter of the year. Our balance sheet remains strong as we ended the first quarter with $785 million of cash and marketable securities. We will remain prudent in our spending while maintaining substantial dry powder for potential acquisitions. We expect CapEx spend to be approximately 3% to 4% of 2026 revenue. Before we wrap, I wanted to briefly follow up on the transformation office that Olivier shared earlier. We are thrilled to establish a team of both internal and external experts to drive focus improvements in areas that will drive our fit for growth capabilities and margin expansion. This is a change in mindset that reinforces the structured framework is required to drive margin expansion beyond volume leverage. As Olivier shared, we expect to see meaningful benefits from the initiatives. We are still finalizing the detailed scopes and benefits, but expect to generate at least one point of annualized margin benefit by the end of next year and continue into 2028 and beyond. We will see benefits in both gross margin and at the EBIT and EBITDA level. We see this effort accelerating our path to our 2030 EBITDA target. In other words, our path to reaching 30% adjusted EBITDA margins will be less weighted to the out years than previously communicated. We expect nonrecurring charges of approximately $5 million to $6 million through 2027 associated with this effort. These will be excluded from our adjusted non-GAAP results. Finally, Olivier and I would like to thank our Repligen teammates for delivering a strong start to 2026. We continue to be energized by the opportunities ahead, and we are focused on advancing our strategic efforts in 2026. With that, I'll turn the call back to the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Daniel Arias: Jason, nice start to the year on the op margins there. Obviously, you went through some of the moving parts, but can you just maybe summarize what within the quarter was sort of incidental, I guess, you could call it mix elements, timing of cost items versus more of a reprioritization that sounds like maybe it's starting to be in play here? And then like along those lines, the transformation office impact, I know you said you're still working through the moving parts there, but is the right way to think about that, the normal 1 to 200 bps of annual op margin expansion that you've been talking about, plus the impact of transformation, is that like [ 100bps ] to fiscal '27? Or are you kind of run rating by the time you get to the year at the end of the year at 100 bps. I just want to make sure that we get the modeling element of that whole exercise right. Olivier Loeillot: Olivier here. I'm just going to kick it off and then let Jason give you more details. I mean we're obviously extremely happy about how we delivered on margin expansion in quarter 1, but beyond quarter 1, obviously, being able also to have line of sight of further improvement towards the rest of the year as well. And yes, you're right, the transformation office is an initiative like we've been thinking about for a long period of time. Now that we have the right people on board, we said that's the right time to kick it off. And as you'll hear from Jason in a few seconds, it's really a mix of getting acceleration on the fit for growth side, but also accelerating margin improvement. But Jason, yes? Jason Garland: Yes. So Dan, great 3 questions, a lot of pieces, and there we'll go through it. So yes, I'm really happy with the first quarter gross margin and overall margin performance. I think to your question, the driver really was volume, volume leverage price. So continuing to execute that. And to your point, strong mix really from Analytics growth as well as a few of the, I'll say, product lines within our overall filtration franchise. There was a timing element to your point on a little bit from timing of cost absorption that will unwind through the year. But overall, it sets us up for well and high confidence in our guide for expanding gross margin by about 110 to 160 bps for the year. From a profile perspective, Yes, we do expect 2Q to be lower than 1Q. 3Q may step down slightly from that as well. And then fourth quarter back higher as we grow on volumes through the end of the year. Most of that change will be driven by the mix phasing. So here's what I'd say, though, on a total year versus -- a total year, a full year versus full year basis year-over-year, mix is still a neutral dynamic for us. But for the first quarter being positive, we'll see some mix headwinds in the second and third and then again, fourth quarter steps back up mostly on higher Chromatography sales. And to your point, again, that cost absorption unwind. So again, a real great start and puts us right on track to our guide, lifted it up a little bit with Polymem. On the transformation office, yes, again, great questions as well. Look, I'll start by, it's really about creating the structure program where we allocate the right resources to our priorities. So there's a a real heavy fit-for-growth execution and developing the capabilities we need and then the margin expansion side. That one point of annualized margin expansion by end of '27, think of that as more in the run rate, we'll have various settlements and projects that will, I'll say, come into initiation over several months, right? We haven't assumed anything in 2026 yet but there may be some benefits that we'll share later in the year if they come in early, but we're really expecting a run rate to start by the end of '27 and then kind of seeing full benefits in '28. To your point, that's going to be on top of our normal run rate. And that was the message that we tried to share and here as well. Again, we've talked a lot about this path to 30% EBITDA target by 2030, but that we would be more weighted towards the back end. We think this initiative helps us to be less weighted in those out years, which brings some incremental in the earlier. So I'm really excited about all this. Great start to the year. Operator: Your next question comes from the line of Doug Schenkel with Wolf Research. Unknown Analyst: This is Madeline Mollman on for Doug. Just a question on equipment. You mentioned that there was a pickup in equipment in March. Where was the strength most notable? Was it by category and customer type? And did that help you in the quarter? Or was it more the order book? And then I think last quarter, you mentioned that there were some RFPs you were waiting on. Have you started to hear back on those? Or do you feel that pharma companies are still digesting some of the MFN deals? Olivier Loeillot: Yes, good questions. I mean capital equipment increased year-on-year in quarter 1 on what was pretty easy comp to be very open. And that was mostly driven by strength in both Analytics and mixers as well. We've partly seen a nice pickup of mix of demand in China, which is one of the reasons why China did so well for us in quarter 1. And similar to peers as well, we've seen orders increasing in the quarter. I mean, after what was maybe a bit of a slower start in January up to mid of February, we've seen a real acceleration of order intake towards the second half of the quarter and partly on the capital equipment side. And we realize pharmacy taking their time, but it was good to see indeed finally some answers coming and positive answers. And to your last point on RFP wins, yes, we start to win some of the RFP. We answered two towards the end of last year, which is for us very encouraging. As I mentioned previously, we didn't really have seat at the table before. So overall, very encouraging and we would like to see further acceleration of decision-making, but definitely going in the right direction right now. Operator: Your next question comes from the line of Matt Larew with William Blair. Matthew Larew: You called out 20% growth from emerging biotech, and that comes off a very -- 3 very strong quarters to end 2025. You did reference it's still below historical levels. We're now working off the back of two straight quarters of strong funding data. There's been some positive clinical updates. You're going to be escaping the one large customer headwind. So Olivier, just curious for your take on sort of what's remaining to get emerging biotech back to strength and how you feel about the momentum over the last couple of quarters? Olivier Loeillot: Yes. obviously, very happy to see the fourth quarter in a row of very significant growth for that customer segments. I mean, I've said like we've seen in each of the segments coming back one after the other, and that was the last one. to be still fair. I mean, quarter 1 comps were pretty easy still. So I want to see quarter 2 still showing exactly the same growth. But overall, it sounds like this market segment is back to a much more normal type of behavior. And you're right, the customer -- the biotech funding numbers also look very good. I mean, quarter 1 was almost double what it was last year. And April was very strong. I mean I think I've seen numbers around USD 10 billion funding in April. So the good news is we've seen really a nice rebound, we're still of the opinion that the money that has been injected has not reached yet all of these guys fully to the extent that they are spending much more money. So to your point, yes, what we've seen should hopefully be very sustainable, and we're hoping to see a similar type of growth over the next few quarters for emerging biotech. But definitely something that we are very excited about fourth quarter in a row, very nice growth here. Operator: Your next question comes from the line of Philip Song with Leerink Partners. Unknown Analyst: Two question. This is Philip on for Puneet. You mentioned China nearly doubled in Q1 [indiscernible] low base after just 2 quarters of growth in the second half. And I think, 2% to 3% revenue contribution. I was wondering if you could just unpack this some more just how much impact was from the OEM partnership kind of what's the composition between large pharma and CDMOs? And I guess, how would you characterize how much was order timing versus sort of genuine demand acceleration? Olivier Loeillot: Yes. Philip. Absolutely delighted about the way quarter 1 played out for us in China. I mean you've heard me talking about it quite a lot over the last several quarters and it was actually also to almost see a doubling of our sales in China in quarter 1. You're right, it was on very low comp. What I'm even more excited about, to be honest, is our funnel looks really very strong. I mean Jason and I were in the region recently, we spent almost a week with the team down there, and we're seeing a funnel that looks really very strong across all of China right now, and that's very exciting. By the way, talking about China, all of Asia did very well. I mean that was our fastest-growing market geographically in quarter 1. But obviously, to your question about the OEM partner, I mean this has no impact yet. I mean, we literally just signed the agreement a couple of weeks ago. So we're going to take transfer different part of our portfolio, particularly on the filtration consumable side, and we expect those guys, those partners to be up and running probably towards the beginning of next year. But it's never really black and white. And where you're somewhat probably clear asking the question is, it's a good strong signal we're giving to customers in China that we are back and that we're going to really reclaim our market in China with that partner, but also we really want to be part of that huge upcoming market growth we're seeing in China over the next several years. So there might be already a little impact that people feel like, wow, Repligen is going to become really indeed a very strong actor in China for China. And that's why we're delighted about that agreement. It is just a first step, Philippe. I mean we are looking at expanding that collaboration and potentially with other partners as well in China over the next several years, but very excited to be back in China. Operator: Your next question comes from the line of Casey Woodring with JPMorgan ahead. Casey Woodring: So you had a one point organic beat in 1Q and expect similar growth in 2Q, but you kept the low end of the full year guide unchanged. Maybe just talk about how much of that is driven by the moderated view for ATF in the second half versus the rest of the business? And then on ATF, could you provide more color on the customer timing dynamics that are driving that more moderated view in the second half. I think in the past, you had talked about a second half ramp in ATF consumables tied to one of the blockbusters you expect in 2. So is that really just a function of a customer commercial launch? And then what gives you confidence that things will pick up in '27? Olivier Loeillot: Yes. So, first of all, I mean, we're obviously very happy we started quarter 1 at the midpoint of our full year guidance. As you heard us saying we estimate quarter 2 will probably be about the same. So obviously, it will set us up very well for the guidance we've given at the beginning of the year. And the midpoint would assume at this stage like there is no need for any acceleration towards the second half of this year, which is probably a little bit of a Repligen, specific situation that we are very happy to be in right now, it's a really high comfort zone for us from that point of view. So we would be disappointed if we would land at the low end because that would somehow imply a softening of the market that we're actually not seeing today. So we are more hopefully looking at [indiscernible] the high end. And in order to reach the high hand, we would need some type of acceleration both of our Consumable business, and you mentioned ATF, I'll come back to that in 10 seconds. But also said that some of these equipment orders we've been receiving now in the last couple of months, would also be potentially delivered this year, which is not a given yet because we need to hear about our customer site preparedness to be able to accommodate that or not. So that cannot really the way to look at the guidance for this year. We're quarter into the year with a very strong start with a couple of more calls, we'll know much more about how the year is going to play out by the end of July when we report out on quarter 2. In terms of ATF, yes. I mean, we have always been very transparent. I mean, we were transparent last year about what happened with that specific gene therapy program, we said we're going to be transparent has got a huge runway for the next several years. I mean I can tell you, we are more bullish than ever. A couple of our customers came to us beginning of this year, explaining as they were managing inventory this year on a couple of commercial drugs that have been using ATF now for a few years. This is not something unusual for what is still a pretty new technology where at the beginning, people built a little bit more stock maybe than they will need finally. We know it's going to be a real tailwind for us from '27 onwards because these are 2 commercial drugs, that will require more because the drugs themselves are growing very nicely. So it's really just a temporary inventory management that we are facing. What we think about those two customers is, in fact, they are implementing ATF across many more products than this specific commercial drug I was talking about, which is why we know next year, it's going to be a real tailwind for these customers for the commercial drugs themselves, but also across the new one, they are implementing ATF right now. Operator: Your next question comes from the line of Daniel Markowitz with Evercore. Daniel Markowitz: I wanted to follow up on emerging biotech. It's good to see 4 quarters in a row, if I heard correctly, of growth from this customer segment. And I wanted to talk about the benefit from biotech funding recovery, which seems like it could flow through to back half this year and help in back half in 2027. Can you help frame the potential timing of when this benefit might occur? Remind us your exposure to this customer set and help us understand what the contribution could look like once we start to see that benefit? Olivier Loeillot: Yes. I think you nailed it already pretty well. I mean fourth quarter in a row of very significant growth. I mean, I would say, very significant growth in quarter 1 was above 20% of growth. This being said, the activity level still remains slightly below historical level. So that's why we're saying it's probably a little bit too soon to call it a trend. But maybe to be a bit more specific, we mentioned in previous call, like we some of the growth coming from some of the small biotech getting acquired. That was particularly the case in quarter 2, quarter 3 of last year. It's fair to assume that some of the funding that we started to improve towards quarter 3 of last year, has maybe started to reach some of these company toward the end of last year and probably a little bit more in quarter 1. I do expect it to become real stronger tailwind from quarter 2, quarter 3 onwards to be confirmed, but that's what we could expect, we would expect looking at this much better biotech funding environment we've been experiencing. And to answer your specific question, I mean, it's still lower than 10% of our total sales. I won't say more into the 8% to 9% vicinity in quarter 1, but probably trending back to the 10% that we experienced in the past -- in the next few quarters, I would [indiscernible]. Daniel Markowitz: That's helpful. And then just a follow-up. Can you talk about the ATF opportunity more broadly? Like how penetrated is this market? And how would you frame the potential impact from competitive product introductions? Olivier Loeillot: Yes. No. I mean, again, let me start by saying ATF grew in quarter 1, both, by the way, in capital and consumable as well. And we've just decided to moderate our expectation for 2026 because of this transitory headwind that we've been hearing from the 2 specific customers. But apart from that, I mean, we are still extremely bullish. I mean we were getting our products designing in multiple new products, multiple new modality as well. I mean we've talked about successes we've had on the cell therapy side, and that has become a very significant tailwind for us over the last several quarters. We are also very heavy on innovation. And I tell you, I'm very, very confident about the fact that were going to be leading the process intensification for the next several years. I mean I have 0 doubt about that. And we've got a lot of innovation being worked out right now with several launches that we expect to happen probably towards one toward the beginning of next year and then 1 or 2 others towards mid or end of next year. So we are absolutely very bullish. And as the runway on ATF is still absolutely very strong. Operator: Your next question comes from the line of Mac Etoch with Stephens. Steven Etoch: Maybe just following up on some of the previous order related questions. Just looking at what you called out during March, can you just unpack what specifically changed in the order environment at that point? Was it tied to improving customer decision-making, budget releases, increased activity within certain [indiscernible] like maybe Analytics or upstream systems? And how is that exit rate carried in April at this point? Olivier Loeillot: Well, it's a little bit of all of that, to be honest with you, but maybe let me take one step back. So you're right. I mean we had a little bit of -- well, taking two steps back a fantastic quarter 4 in terms of order intake. And then really when I say fantastic, I mean, it was like in [indiscernible], we have not seen like for probably the previous several years and so on. So it was somehow pretty expectable that the beginning of quarter 1 would be a little bit softer. But then towards mid of February, we started to see a really significant acceleration that has enabled us to deliver a very strong order intake for the full quarter 1 really in the right zip code in terms of book-to-bill like what we expect for the previous several quarters. So really across the board, very healthy quarter 1, thanks to what happened in March. What's more important, honestly, than order because we said it can be somewhat a little bit lumpy. As you know, what's tracking our funnel. And I won't say we are really extraordinary discipline on the way we are tracking our funnel. And one part of the funnel, I'm looking at myself on a weekly basis what we call the high probability funnel, which is a probability that is above 50% closing orders within the next 2 to 3 quarters. And I mean, probably at the highest level ever. In fact, I just made the exercise a week or 2 ago, looking at how it looked versus what it looked like a year ago, and it's significantly higher than what we've seen a year ago. So from that point of view, we are very confident about the way things are going to play out for the next several quarters. what we're not still controlling fully is decision-making. And that's maybe where indeed, I would still see a bit of a difference between consumables and equipment, both look really good for this year. I mean, in terms of guidance for the full year, we see like both grew double digits in sales. But obviously, most of the headwinds we've talked about are going into consumable, as you know, meaning the gene therapy program on one side and then these two ATF customers on the other side. So it means like consumables are still doing extremely well. On capital equipment, it's fair to say like Analytics and mixers have been leading the pack. We would like to see a real acceleration of what we call the bigger type of CapEx equipment. We started to win some of these RFPs. As I mentioned earlier, if the tap of capital equipment really opens, this is going to be a massive opportunity for all of us. And I'd say Mac because the water is just waiting for the tap to open, and then it's going to become like a totally different story for tool provider. So that's kind of really a long answer to a short question, but across the board how we're seeing order intake and how we're seeing a different part of the business between consumable and hardware. Operator: Your next question comes from the line of Paul Knight with KeyBanc. Paul Knight: When you look at the China market right now, is this domestic demand or is it multinationals expanding their bioprocess capabilities in that market? Olivier Loeillot: Paul, yes, I have to say at this stage, the vast majority, and I say last majority, at least what I have a good line of sight of is really China, local demand market that's coming back. And we've had a lot of successes. I mentioned mixers already a couple of times. But beyond mixers even on our filters, consumable and so on, we're seeing a lot of these customers coming back now. As you know very well, we are facing much more competition than we were before, which is why we've been pushing and now implementing that strategy that I think it's very different, very differentiating as well versus what others might have been doing, where we are really going to capitalize on local company to help us gaining our market back. I've said several times, the China market today is totally different than it was 5, 5 years ago, even maybe 3 years ago, even to a certain extent, you want to subsidy in China, you have to appear to be much more really Chinese than you were before, and that the only way you're going to be able to defeat competition locally. We found a part that we like a lot because we know the management team pretty well, but also they are still in the early phase of growth. And I've seen so many of these companies being successful over the last several years that collaborating together, we feel we have got an incredible runway over the next several years. But the demand is really from Chinese company Chinese local demand, which we know is going to grow very significantly over the next several years now with all of the money that has been injected into the China ecosystem. Operator: Your next question comes from the line of Brendan Smith with TD Cowen. Brendan Smith: I wanted to actually ask just another one on the transformation office a bit. Any more granularity on what kinds of margin optimization efforts you really have going on there? I guess are you focused on certain segments more than others? I know you mentioned some AI process involvement. So I guess just wondering if there's any potential for some of the relative margins across your different segments and maybe close ranks a bit from some of the historical spread we've seen? Olivier Loeillot: Yes, Brendan, good question. So we highlighted kind of 4 buckets. One is manufacturing footprint in terms of how to optimize that. So that, of course, will hit either different product lines or help us drive efficiencies across the overall network. The other piece, to your point is really this improving profitability on certain product lines. So that's examples of where do we look at our portfolio? What's dilutive to the overall average? And how can we look at design changes? How can we look at manufacturing efficiencies, to your point, how do we look at the the product SKUs that we have to try to raise that overall. And then it's things like Polymem, again, where we saw that a noncore product, not even within bioprocessing and not only dilutive at the margin, but a loss at the bottom line. And so that's fairly unique, though. So just to caution you in terms of opportunities at that level, but it's absolutely about finding the below-margin products and then increasing those. The other pieces is also around how do we serve our customers better, how do we get more value. So again, you might see that within the product lines. And then the other big bucket is this topic of IT modernization as well as AI. And we kind of keep them connected but also have a very different path on each of those. We've talked a lot about the need to to upgrade our IT infrastructure. It's data, I'll say, optimization -- it's looking at the -- when you look at the number of applications and vendors we have for our size company, we can rationalize that. That's the type of thing that actually drives synergies and cost savings. But always bring, how do we leverage SAP, our ERP as well to to get more out of that. And then from an AI perspective, it's a balance of looking at the tools that are available, but then also going back into each process and function understanding the problems that we're solving and the use cases for those AI, I'll say, solutions. And so incredibly exciting for us. Again, this is about allocating the right resources focusing internal experts as well as bringing external experts to help us accelerate that. And again, it's just another example of kind of the long game that we're playing on both margin expansion as well as being able to grow in scale. Operator: Your next question comes from the line of Matt Stanton with Jefferies. Matthew Stanton: Maybe just one in the context of the order commentary and then the kind of high probability funnel that you laid out, Olivier. Can you just remind us in terms of your equipment portfolio and the order book there, how quickly you turn that? I think historically, you had kind of talked about earning 2/3 of the order book in 6 months or less. I think it would be helpful to kind of get an updated number on that given the evolution of the portfolio as it relates to about what could maybe show up in orders today and income and revenues in the back half of the year versus 27. It sounds like mixers, analytics, some of those are maybe shorter cycle type equipment than the larger projects you talked about late but would just be helpful to kind of level set the order book, how quickly you think you can turn that today and how that maybe has evolved from a couple of years ago. Olivier Loeillot: Matt, I think you answered your question very well. So I'll try to add some more details here. But you're absolutely right, like we've got very different type of hardware in our portfolio. So the 2 you mentioned, you're right, both mixers on the one side and analytics on the other side, turnaround time is very short. I mean, in fact, for analytics, typically you can even turn around an order within a couple of weeks. So for mixers and here, I would differentiate what we call the stainless steel mixers, which is what we acquired when we 5 years ago from the single-use mixes, this time are slightly different. For the stainless steel side, we are like below 3 months. for the single-use mix, we would probably be a little bit more than 3 months. And so there is a slight difference here. and then comes what we call well, even within the larger scale type of hardware, there is still a difference. For ATF, system very often we are capable to turn around delivery in 3 months or even less some time if we've got no customization to achieve for downstream system, whether TSF or Chrome system, it really depends again whether it's catalog type of product or whether it requires some customization. If it's catalog, turnaround time can also be in the range of 3 months. also if it's custom probably more into the 5 to 6 months range. But what's becoming probably more important than our own lead time is really customer preparedness. And especially now that we start to enter into these onshoring projects more and more we will see probably very different cases where people already have brownfield or people need to build everything from scratch. And then this is what we don't control fully where our lead time might be absolutely enabling us to recognize those revenues this year it might well be that those sides are only ready by mid of 27% or even maybe second half also. And as you know, when I mentioned about the blockbuster, we had -- we won a couple of years ago now on ATF, I mean it's a specific example where the customer size is still just being finalized right now. So what we don't control fully is customer preparedness and especially with ensuring that, that's something we're all going to have to figuring out better in the upcoming few quarters here. Operator: Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Matthew Hewitt: A great start to the year. Analytics is becoming a much bigger demand area for your customers, whether it's the CDMOs or the pharma companies. You're seeing increased demand. You're speaking to some of the growth that you're seeing there. From an investment standpoint, -- where do you see opportunities to invest in that area, whether it's real-time monitoring or taking some of the data that you're capturing and kind of helping your customers identify areas for improvement. Is this an area that you're investing internally is an area that you see from an M&A perspective, maybe augmenting some of your existing capabilities? Any discussion there? Olivier Loeillot: Yes, Matthew, great question. I mean, obviously, as you mentioned, we're really excited about the traction we're seeing on process analytics. I mean, 50% growth in quarter 1, 40% organic credit, downstream analytics. I mean we've never seen that before. In fact, historically, quarter 1 was always a weaker from a seasonality point of view. So that was really obviously an incredible performance. And you're asking absolutely the right question, what are we doing to make sure we capitalize on that and we even can double down on that over the next several years. So first of all, you know, we said that upgrade cycle is just still at the beginning. So going to be a tailwind for us for the next several quarters, if not probably several years. But beyond that, and I didn't talk so much about the PAT side, the PAT has got huge traction as well. I mean -- as you know, we launched our FlowVDX in-line protein concentration technology 1.5 years, 2 years ago, so which has got incredible traction while working on multiple other PA technologies product grade or product launches that will happen over the next 1 to 2 years. So talking about investment and talking about organic investment, we're investing a huge amount of money on the R&D side to make sure we've got many more products on our shelves over the next several years. but both from an app line but also from an in-line point of view, and you will hear us tell talking about that massively over the next several quarters and years. And then, yes, in terms of M&A, absolutely. I mean, as you know, capital spending top priority #1 for us is on the M&A side. I mean we ended quarter 1 with $785 million of dry powder. So we are looking at several opportunities, and it's the right Polymem on the Analytics side to complement our offering further so on, we would be very interested. So the last piece I would mention and services are benefiting from that grandly as well. I mean our service business grew more than 3% in in quarter 1. And the good news is we've got a very nice attachment rate of service to our analytical equipment. So that's another area we're investing into quite a bit and then partially for that piece that is linked to the analytical business here. Operator: Your next question comes from the line of Justin Bowers from NJ. Unknown Analyst: It's Deutsche Bank, but I'll squeeze a multiparter into one. So on the proteins, pretty strong quarter, especially against a tough comp. Can you talk about some of the drivers there? And then -- is that more of a shorter cycle business, i.e., how much visibility do you have into that? And then over the next 2 to 3 years, is that a franchise that you believe can continue to grow above Fluid average. Olivier Loeillot: Justin, Happy to have a question on protein because that's another business. I'm so happy about the progress we're seeing here. So yes, you're right, I mean, meeting growth lapping on what was a very strong quarter 12025 was a really great positive surprise for us. And honestly, we got demand across all our offerings, but partially on the legal side. I mean I mentioned in the past we've really become closer and closer with Purolite. We work really very much hand-in-hand together they have fantastic traction, and we are very happy about the way we collaborate together. That has been one of the reasons why protein did so well. So we are in the long-term type of business here because beyond that specific collaboration the fact also we have our date in our hands for all of the non monocular antibody side of the business is also very encouraging because we are winning multiple and we say multiple is really multiple designing. And it's a business that takes a little bit of time because where you first need to get designed in and then you start to deliver some first pilot quantities. And then hopefully, some of these products are either making it to the market or if they are already on the market, people are -- our customers are going to put the trigger to switch from one supplier to us. But with all of the designing we've been working on, and we've got a dedicated team that is going on the market, getting fantastic response from the market because they've never seen a company capable to develop a new lean in 3 months and month. I'm absolutely very bullish about that market for the next several years. I think the best is still to come here for sure. Operator: We have reached the end of the Q&A session. I will now turn the call back to Olivier Loeillot for closing remarks. Olivier Loeillot: Thank you all for joining our call today. We had a very great first quarter, and we're executing against the plan we've outlined which is outpacing market growth, delivering margin expansion, and Jason gave you a good number of details about what we're achieving on that side; and finally, making tangible progress on our strategy. I really want to thank all of our Repligen teammates. We have an incredible team, and we are delivering a fantastic start of the year and looking forward to talking to you again in a quarter from now. Thank you all.
Operator: Welcome to the Fiserv First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded. At this time, I will turn the call over to Walter Pritchard, Senior Vice President and Head of Investor Relations at Fiserv. Walter Pritchard: Thank you, and good morning. With me on the call today are Mike Lyons, our Chief Executive Officer, and Paul Todd, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed in this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise noted, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. And now I'll turn the call over to Mike. Michael Lyons: Thank you, Walter, and good morning, everyone. As we began the year, we were firmly in execution mode, and our first quarter results were in line with the expectations we shared with you in February. Our teams continued to be laser-focused on executing against the One Fiserv action plan, and while there is still significant work to do, we are taking the right actions, with the right sense of urgency and feel really good about the progress to date. We are confident in our strategy and the unprecedented pace of change in banking and payments is creating an extraordinary opportunity for us. As our clients and prospects want a trusted partner to deliver sophisticated technology and value-added solutions. We are uniquely positioned to do exactly that. To drive these efforts, we continue to add outstanding talent across the organization, including new heads of operations for both Merchant Solutions and Financial Solutions, new Chief Revenue Officers for Clover and Enterprise Merchant and a new Head of Product for Financial Solutions. With respect to business performance, I'll start with Merchant Solutions, where we saw solid growth in Clover GPV supported by good execution against our strategic initiatives and a stable macro. Clover VAS revenue represented 27% of Clover revenue in Q1, growing 18% from a year ago, driven by software in Clover Capital. We also saw steady growth in enterprise transactions. While anticipation lending volumes in Argentina remain strong, lower inflation and interest rates in Argentina were a revenue headwind to Merchant in Q1. I would note that this revenue softness was largely offset by lower interest expense below the line. Our preliminary April merchant volume growth, including Clover GPV remained solid around Q1 levels. Going forward in Merchant, we're watching the impact of various environmental factors, including higher gas prices from the conflict in the Middle East, which, if sustained, can impact the mix of consumer spending. We saw some of this dynamic in the most recent Fiserv Small Business Index data. In Q1, we signed 27 new banks as Merchant Referral Partners. We also announced our largest agent bank partnership in our history with Western Alliance Bank, which has more than $90 billion in assets and expands our reach with merchants across the Western U.S. We also hit important milestones in the quarter, going live with CommerceHub omnichannel capability across a number of our largest petro customers. We also went live on CommerceHub with built rewards in neighborhood hospitality and via Americas in cross-border remittance. Our broadening global releases and customer go lives are driving CommerceHub transaction growth, which was up nearly 200% in Q1. Other key enterprise merchant wins in Q1 included a retail energy provider, Blue Shield of California, a leading tax compliance platform and a large telecom provider who added on fraud capabilities. In Financial Solutions, we saw solid underlying business volume growth, particularly in Finxact and our Payments businesses, excluding BillPay. New business sales showed continued momentum. We hit important product delivery milestones, and we saw an improvement in key client service metrics. While core bank account and revenue attrition remain above our long-term trend, we've seen early signs that our client service initiatives have been well received. We're also getting positive client feedback on our decision to continue supporting all of our cores, and we are signing and renewing customers across all core. Also contributing to an enhanced client experience is the value we are delivering from our recent acquisitions of StoneCastle and Smith Consulting, where both our strategic and financial results are in line with our business cases. Key new business wins in Financial Solutions included OceanFirst Bank, which is a $14.5 billion Northeast regional bank that is growing rapidly through its announced acquisition of Flushing Bank. It extended its premier core and surrounds agreement with us, adding Digital Payments and committing to deploy CoreAdvance. Nicolet National Bank, a $16 billion Wisconsin-based bank, is adopting our Premier Core with its Midwest One acquisition. Truliant Federal Credit Union, a $5 billion-plus North Carolina-based institution chose to move to our debit processing platform. We expanded our long-standing digital money movement relationship with PNC Bank to include cash flow central AR/AP Services for their small businesses. And we had embedded Finance Wins with a large payroll provider and a large retailer to bring new capabilities to their payroll members and customers. In these wins, we will leverage new integrated capabilities across Fiserv, including Finxact for ledger, PayFair for banking applications and program management and VisionNext as a cardholder platform. Finxact was named Best SaaS for FinTech at the 2026 FinTech Awards, recognizing the combination of its market-leading innovation and scaled customer deployments. Finxact continued to grow strongly in Q1 with accounts and positions up over 70% as clients find value and its ability to provide financial infrastructure to enable any asset class in any domain at scale under a common platform and business model. So our execution is improving across both businesses, but as expected, that progress is not yet visible in our reported financial results as we are still lapping a higher mix of nonrecurring revenue, fueling the lingering impacts from prior client service challenges and absorbing the incremental expense from investments that will drive long-term client-focused growth, all necessary and important elements of our transition year in 2026. We look forward to the second half of the year and 2027 and when we expect our operating performance will be more fully visible in our financial results. I'll now provide an update on our execution against the One Fiserv Action Plan. Of course, we will cover all aspects of the plan in greater detail at the May 14 Investor Day. Under our client-first pillar, we continue to make targeted investments to raise the bar for client coverage, relationship management, service delivery and product resilience. The number of client-facing personnel we have is up significantly, meeting a key demand from clients, and importantly, we are seeing better day-to-day execution. Our time to resolve client inquiries is down 27% year-on-year. While we still have significant work to do, high-impact client incidents are down nearly 60% year-on-year, and we launched important AI initiatives to enhance the performance of our primary client portal and call centers in Financial Solutions. Turning to Clover. Our second pillar, we continue to make progress towards establishing it as the preeminent small business operating platform. We launched 2 new verticals in March with PracticePay in the health care space and our Professional Services offering. We are seeing promising early results with annualized GPV per health care outlet running at double-digit levels above our existing Clover Health care merchants, and a 20% plus increase in new Professional Services outlets that attached our paid SaaS offering in the month. Internationally, our momentum continued with Brazil Clover outlets up over 30% sequentially, and we had another strong Clover quarter in Canada, where we remain on track to enable TD Merchant Solutions to provide Clover's product offering, processing and servicing to its clients in second half of the year. After launching in Q4, we continued to expand our Digital Merchant Activation capability, and now have 22 of our top bank partners signed. We will also add this capability to our clover.com online Merchant Referral Partners. Through integration with StoneCastle, we remain on track to launch Clover Savings, our merchant cash management program before the end of Q2. Through a number of important partnerships, we continue to build agentic capabilities for our Clover merchants and we'll showcase some of these at Investor Day. And finally, we are excited to share that Clover is slated to support 30 World Cup games this summer in the U.S. and Mexico. Next, on the innovation front, we continue to hit critical milestones on key strategic products including Experience Digital, CashFlow Central, Vision Next, Optis and CommerceHub, as I mentioned earlier. In our Enterprise Merchant business, we delivered a new developer portal supporting agentic commerce. Our teams have further ramped up their usage of AI tooling in the software development process with early results showing a significant reduction across key steps in new feature development and delivery time with mainframe modernization. And finally, we are on track to launch our previously announced stablecoin pilot this summer to facilitate interbank money movement. Fourth, we are in full swing with Project Elevate. With AI at the center of this program, we are very encouraged by the early results. The teams have identified hundreds of opportunities to drive revenue uplift, reduce expenses, increase simplicity and improved productivity, and we're moving with urgency to operationalize them. Paul will outline our financial targets for Elevate at Investor Day. Beyond Elevate, we took several important actions in Q1 to drive efficiency, including closing 2 subscale offices, exiting underperforming Merchant businesses in India, reducing management layers, and implementing more aggressive performance management. And just last week, we completed the migration of all customer activities from a significant data center as we continue our modernization activity. Last, but certainly not least on One Fiserv is our commitment to highly disciplined capital allocation. We continue to sharpen our focus on the businesses and assets that best align to our go-forward strategy, including evaluating potential dispositions. I'll conclude by saying we look forward to seeing you at Investor Day where among other topics, we will further highlight our strategic priorities describe how our businesses are converging further to unlock more synergies and share how we're using AI to transform systems of record into systems of collaboration, create new TAMs and increase efficiency. Together, these actions will support the mid-single-digit adjusted revenue and double-digit EPS growth that we've discussed since last fall. This will position Fiserv to return to its roots and create significant shareholder value as a constant compounder. I want to thank our employees for their hard work and dedication and our clients for their continued trust. With that, I'll turn it over to Paul to cover the details of Q1 and our guidance. Paul Todd: Thank you, Mike, and good morning, everyone. I will cover details on total company and segment performance in the first quarter and reiterate our guidance for 2026. Beginning on Slide 6, total company Q1 adjusted revenue was $4.68 billion, a decrease of 2.4% compared to the prior year period and was in line with our guidance as we lapped higher nonrecurring revenue from a year ago. Q1 adjusted operating income was $1.4 billion, resulting in adjusted operating margin of 29.7% also in line with the just below 30% view, I provided on our last call. Total company organic revenue was down 3.6% in Q1 and with a differential in organic-to-adjusted revenue of just over 1%, in line with the approximately 1% delta we communicated in February. First quarter adjusted earnings per share was $1.79. Our Q1 results reflect an adjusted effective tax rate of 11% driven by the release of a tax valuation allowance in the first quarter. Relative to our expected annual adjusted tax rate of between 19% and 19.5%, this lower tax rate resulted in a $0.17 positive impact to adjusted earnings per share in Q1. This 11% rate in Q1 is strictly a timing-related impact. Our full year adjusted tax rate guidance of 19% to 19.5% remains unchanged, and we expect higher quarterly effective tax rates through the balance of the year as an offset. Free cash flow for the quarter was $259 million and in line with our expectations we noted in February, and reflects typical seasonality where Q1 is our lowest free cash flow quarter of the year. Now I will turn to the performance by segment for Q1. Starting on Slide 7 for Merchant Solutions. Merchant Solutions organic revenue declined 1% for the quarter, while adjusted revenue was flat, which is largely in line with our expectations as we fully anniversary the CCV transaction. As Mike mentioned, lower inflation and interest rates in Argentina did have a negative impact on adjusted revenue in our Merchant business. Small Business revenue declined 1% on an organic basis in Q1 and grew 1% on an adjusted basis. Small Business volume grew 7% in the quarter. Clover revenue grew 6% in Q1. However, excluding higher nonrecurring revenue from the first quarter of 2025, Clover revenue growth would have been in the mid-teens. Clover revenue from Payment Processing grew 10%, more in line with volume trends. As we noted in February, we expect similar trends for Clover in Q2 with this period representing the peak in nonrecurring impacts and also expect that Clover processing revenue will grow in line with Clover GPV. Clover volume grew over 9% on a reported basis and was in line with our expectations as we saw stable growth, both in the U.S. and in key international markets. Clover volume, excluding the previously discussed gateway conversion, grew 12%. As the previously discussed gateway conversion continues to run off, the delta between Clover reported and ex Gateway growth will converge. We continue to expect Clover revenue growth in the low double-digits for 2026 and and GPV growth of 10% to 15% ex the Gateway conversion. The lower end represents the core growth rate, while the higher end assumes more significant conversion of non-Clover merchants. Value-added Services revenue contributed 27% of Clover revenue in Q1, growing 18% from a year ago, driven by software attach and lending, including Clover Capital. Moving on to Enterprise. Our revenue grew 3% on an organic basis in Q1 and grew 2% on an adjusted basis. Enterprise transactions grew 8%, and finally, in Processing, organic revenue declined 14%, while adjusted revenue declined 9%. First quarter adjusted operating income for Merchant Solutions segment was $626 million, down 23% with adjusted operating margin of 26.4%. Now I will cover Financial Solutions starting on Slide 8. For the quarter, organic revenue declined by 6% in Financial Solutions, while adjusted revenue declined by 5% relative to our expectations of adjusted revenue decline at the high end of mid-single digits that I mentioned on our last call. In Digital Payments, both organic and adjusted revenue declined by 5%. Our underlying account and volume growth in Financial Solutions was in line with what we expected and our recent history. This included low single-digit growth in debit processing and low double-digit debit network volume growth. Zelle transactions grew 18% in the quarter in line with recent trends we have seen while we saw BillPay transactions down high single digits. Also, we saw a further ramp in CashFlow Central revenue in the quarter. In Issuing, revenue declined by 6% on an organic basis and 5% on an adjusted basis. While global accounts on file grew in the low single digits, revenue comparables were impacted by nonrecurring revenue in Q1 last year, a trend we expect to be more pronounced in Q2. Finally, in Banking, revenue decreased 6% on an organic basis and was down 4% on an adjusted basis as we continue to be impacted by certain actions taken over the last several years as well as higher nonrecurring revenue in the year ago period as well as attrition that remains above our long-term target. We saw core counts declined 2% year-over-year while overall accounts and positions, including Finxact grew 6%. First quarter adjusted operating income for the Financial Solutions segment declined 24% to $877 million and adjusted operating margin was 38.1% versus 47.5% in the prior year period. From a leverage standpoint, we finished the quarter with a debt to adjusted EBITDA ratio below 3.2x measured on a gross basis. We expect to finish the year at approximately 3x. Turning to Slide 9. We repurchased 3.3 million shares during the quarter for approximately $200 million. As we noted in February, we are focused on managing our leverage ratio and remain committed to returning capital to shareholders. Now with Slide 10, I'll move on to our 2026 guidance. First, on revenue, we continue to expect 2026 organic revenue growth in the range of 1% to 3% with Merchant Solutions revenue growth in the mid-single digits and Financial Solutions flat to slightly down. Consistent with February, we expect adjusted revenue growth in the range of 1% to 3%. All of this continues to assume a stable macro environment. As we told you in February, we expect the second quarter to be the trough in terms of our year-on-year revenue decline and we expect our Financial Solutions business to decline at the high end of mid-single digits in Q2. We expect our weighted average share count to be approximately 530 million resulting in adjusted EPS of $8 to $8.30, consistent with our prior guidance. We continue to expect adjusted operating margin of approximately 34% for the year. In line with our commentary in February, we expect first half adjusted operating margin of approximately 31% to 32%. In the second half of the year, we continue to expect adjusted operating margin of 35% to 36%, with Q4 representing the high point in the year. We continue to expect capital expenditures to remain approximately flat with 2025 levels. We continue to expect free cash flow conversion of approximately 90% of adjusted net income for the year, in line with historical levels and our February guidance. And with that, I will turn the call back to the operator to start the Q&A session. Operator: [Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: I wanted to ask just on maybe visibility on the Banking side and retention given some of the bank conversions that you're doing. Just any surprise there? I know the trough comments were made, but I'd love to hear a little bit more detail on attrition and retention, that kind of thing. Michael Lyons: I think broadly on Banking, we continue to be, obviously, very proud of the leading market share position we have in the business and all the support across almost 3,000 banks and credit unions on the core side. As we've said and we said again today, core attrition [ has been above ] where we want it to be and getting that back to normal is a significant focus for us. That attrition, as you know, is the result of actions taken over the last several years and especially around the client service front. And we're confident we have the right fixes and addresses, and the way we're addressing it is the right thing to do. And while there's significant work to do as I said today, we feel like we're bending that curve in a positive way. And contributing to that is we've significantly increased our client coverage efforts, which was an ask of our -- they came directly from the clients. But from that has come better service, and we're seeing that show up in both our surveys and anecdotal evidence. And then we've really leveraged a number of different forms of AI to help in call centers, enhancing our client portal experience, accelerating our tech modernization and reducing the books [ of what we ] have then obviously, the decision to support all of our cores was an important one for our clients and has taken a significant amount of pressure -- perceived pressure that they had on themselves to switch and obviously, pressure on us. So little things or less highlighted things. The StoneCastle acquisition has been a great value-added positive, supporting our clients, depository clients and one one of their biggest needs, which is continue to -- continued deposit growth. And then our approach to embracing the consultant community and even acquiring Smith Consulting to really drive value-added services to our depository partners, again, is another piece. Finally, we've taken an advanced approach again using AI to measure our -- what we call a Client Health Index across all their experiences with us in terms of pace of change, resolution inquiries, client touch and the like, and it's given us a much better view and perspective of where these clients stand, which allows us to play much more on the offensive side to getting to them. So a lot of self listed, but it's a complete package of behavioral changes, technology changes, service changes, alignment changes, enhancements. We talked about continued enhancement in the quality of our leadership team bringing in new executives to combine new executives here. So I wish it was more visible in the results, but when you go through the underlying KPIs that we have, we feel really good about the progress we're making and our ability to get core revenue-related attrition back down to more normal levels. Ideally would like to have none, but of course, you've got M&A and stuff. And we've had some over history, but getting it back to those historical levels, we feel like we're doing all the right stuff and are on the path to do it, just takes time and work. Operator: Next, we'll go to the line of Andrew Schmidt from KeyBanc Capital Markets. Andrew Schmidt: I wanted to ask just on SME back book. If you talk about the performance there ex Clover. And then I know there's a swing factor in terms of the conversion of non-Clover merchants. If you did any testing there? It'd be interesting to just understand how that testing is performed and how that might influence just the go-forward emphasis on converting those non-Clover merchants to Clover? Paul Todd: Yes Andrew, thanks for the question. And yes, first of all, I wouldn't call out anything unique as it relates to the back book conversion in the first quarter. And certainly, for the year, we don't have any different expectations around what that back book conversion looks like. We've commented for some time now, we're being very mindful about how we approach any of the non-Clover to Clover transition to make sure that we're doing it in a very mindful customer-centric way. And we've had some good tests around that, around the receptivity of those moves when there's a good product fit. But there [ is a ] peaking incremental. We've talked about and the overall Clover GPV guide for the year, the low side of the guide assumes very minimal back-book conversion. And the higher side assumes a more meaningful back-book conversion. But right now, everything is on plan as it relates to how we're looking at that. And we're going to talk a lot about this at Investor Day, [indiscernible] is going to be going through just the overall Clover strategy, the overall merchant strategy, you'll see all the pieces kind of fit together related to this topic at Investor Day. But right now, nothing has changed. Mike, do you have anything to add? Michael Lyons: I'd just add that we've said in the past that our ability and willingness to pursue conversions of Fiserv customers from one platform onto Clover. We obviously very much like to do that given the robust set of VAS we have on the Clover side, but that depends on us doing certain actions, and we're proud this quarter to launch 2 new verticals, as I mentioned in the prepared comments, in health care and professional services. And each time we build unique capabilities to address a certain vertical that allows us a greater opportunity to go in and address the back-book with compelling offers. We don't want to just go in and try to move that to Clover without a strong rationale and mutual benefit for the customer. And as Paul said, our efforts to date have been very modest. [indiscernible] will talk you through that study learn, test and then when we have the right capabilities and the right understanding of it, if you could pick up the pace of it. Operator: Next, we'll go to Dan Dolev from Mizhuo. Dan Dolev: Guys, great progress here. Quick question on AI. I think your competitor made an announcement yesterday on AI with regards to bank processing. Can you maybe, Mike, elaborate on some of the initiatives and how you add value with AI to your banking plans? Michael Lyons: Yes. Thanks for the question. And as we keep progressing with it for our businesses, we get more and more excited about what AI is allowing us to do, and we've seen incredible results to date, recognizing it's still early in the development of it. But we're really intensely focused on four areas, which is taking those great systems of record we have into systems of greater value and systems of collaboration, generating new revenue sources and TAMs, which goes a little bit to your question, enhancing client service where I just mentioned and then increasing our own productivity and efficiency across the company. With respect specifically to leveraging AI on the revenue side and for the benefit of our clients, agentic is clearly the next important phase on both the Merchant side and the Banking side and we have a number of extremely exciting developments going on there, including new agentic commerce capabilities, which we've been talking about in Merchant and rolling out through important partnerships and Takis will go through that in detail next week, but we see a great opportunity, especially with the Clover customer base and enabling them to access an agentic world without building all the back-end systems needed. And on the Banking side at IR Day, Divya will introduce a new governed AI operating layer that will importantly allow FIs to access and fully capture the power and benefit of all agents across many functions, including front, middle and back office and using any LLM, so we're already live with pilot agents with 2 financial institutions around this today and then have a number of others lined up with different use cases, think about loan originations, compliance in call centers. So not to steal too much thunder for next week, but Divya will formally introduce the product and you'll be able to actually see some demos of it. So again, whether it's internally or externally, Merchant or Financial, we're seeing great opportunities both to drive value for ourselves and help our clients access the agentic capabilities available to them. Operator: Next, we'll go to Vasu Govil from KBW. Vasundhara Govil: I just had a couple of quick ones on Clover. I guess the first one just on the nonrecurring revenue that you called out, Paul, from last year. Was that mostly hardware revenue or something else? And then more broadly, Mike, on Clover Capital, you've highlighted in prior calls how the penetration is still relatively low in your installed base. So maybe if you could just talk a little bit about what has constrained adoption so far? And as you look to scale that business, how should we think about the long-term penetration potential and sort of the mix between on-balance sheet, off-balance sheet to support that growth? Paul Todd: Yes. So Vasu, maybe I'll take two parts of those, and then, Mike, if you want to add anything. As it relates to the nonrecurring revenue on the Clover side, yes, hardware is a big piece of that. There are some other things from a nonrecurring standpoint in that comparative. We highlighted that up, that's why the Clover revenue grows in the mid-teens, a reported growth of 6%. But if you take the the comparative dynamics of the nonrecurring, not repeating in the first quarter of this year, that puts you to the mid-teens to roughly 15% in hardware is the biggest or one of the biggest pieces there. On the Clover Capital side, we will talk more about this at Investor Day and just our strategy around Clover Capital, you're right, we are under-penetrated relative to the opportunity set and we're going to kind of lay out a much broader strategy around how we're going to be approaching the marketplace both from a balance sheet standpoint as well as just an overall growth standpoint at Investor Day. So I'd rather kind of give a more wholesome view of that on a go-forward basis. But we did see good Clover Capital growth in the quarter. So I'm very pleased with the underlying volume growth that we saw. And we don't see any change in that growth trajectory as we look at the forecast for the remaining part of the year, but we'll give you more color at Investor Day. Mike, anything else? Michael Lyons: No. I think you highlighted perfectly that the opportunity is significant in front of us we're a couple of quarters into building our -- enhancing what we had core capabilities and going after that, and it's domestic and international opportunity. Operator: Next, we'll go to Bryan Bergin from TD Cowen. Bryan Bergin: I wanted to ask on Financial Solutions. Can you just give us a sense on the nonrecurring revenue headwinds where relevant across the subsegments. And I'm thinking particularly in Issuing and Banking. And then the relative potential size of those headwinds in 2Q? Just so we could unpack the recurring performance within overall performance. Paul Todd: Yes. So specifically, in the issuing area, the biggest single driver I'd point out to is the output solution there, where we had some significantly sized output solutions business that is not recurring this year, that is in the first half. And specifically in the second quarter, you'll -- how we had that team's growth rate on the Issuing business in the first half -- or in the second quarter of last year. And so that's providing a meaningful comparative headwind on the Issuing side. There are other nonrecurring across the digital channel as well as in Banking. But as it relates to general sizing, we kind of gave you when we talked about the high mid-single digit and the second quarter being the trough, relative sizing of what we expect the impact to be. I would say we are pleased with the fundamental growth in the -- across the Financial Solutions segment of each of the underlying growth across Digital, our Issuing business, Mike commented on the Banking. So we're seeing consistent. So the volume picture that we see in the first quarter and the second quarter and really for the back half of the year is very stable. It's just these comparative dynamics that we have in the first half and more acutely in the second quarter of the first half is what we're needing to grow through, and then we're going into be to a much more visible normalized growth picture in the back half of the year. We do have some natural tailwinds in the back half of the year as it relates to growth. We have a comparative tailwind in the back half on Financial Solutions due to some of the strategic things we did in the Digital space in the third quarter of last year. So that's a natural tailwind. And then we have some contracted revenue from some of the client wins that we've talked about that also will be additive in the back half of the year. Mike, anything else to add? Michael Lyons: No, I think it's the same comments we made last quarter. It's hard to go through every single recurring revenue item. And broadly, we think, and we'll talk at Investor Day that we're a mid-single-digit growth company with FS being a low single-digit growth company probably operating flattish today on a clean basis and Merchant being a mid- to high single-digit company today operating in mid-single-digit basis. And our plan is to obviously make -- we're anxious to get it so it's more visible in the financial results. But to Paul's point, you look at the underlying volumes, they track very much against what we're talking about from a high level and maintaining and growing that volume step, the revenue will come behind it and start to match. Operator: Next, we'll go to Will Nance from Goldman Sachs. William Nance: Mike, if I could just follow up on the comment you made. I think you've been pretty clear in sort of telegraphing what you think the right growth rate is for business and the message you expect to deliver at the Investor Day coming up. I'm wondering, to the comment that maybe the underlying growth in FS is more or less flat right now, and obviously, the investments that you're making that are weighing on margins right now. As you look out into next year, you've talked about seeing the benefits of some of the improved execution coming through the numbers. Is it your expectation that the company can actually get to that level of performance sort of exiting the year and into 2027? Or are there lingering kind of performance and attrition issues in FS or investments you want to make on the margin front that could delay that? Michael Lyons: I'd say that go back to the One Fiserv comments, we are confident we're taking the right actions. We obviously have to execute against those and complete them. And we are -- the team has rallied around those. We're laser focused on them. We know the fundamentals that we have to get in the right place to be a mid-single-digit grower. And those -- the efforts we need to get there are fully funded and fully resourced. And I believe that we've brought in some great talent to complement the talent we have here. So I feel good about all the execution. We have to go do it. And we've said, as you exit '26, you start to look -- they're still comparables, obviously, with some of the actions we did across the business in Q3 and Q4, some going the other way, being beneficial comps to us as you get into Q4. And then '27, we sort of see is the first full year where you can see really clear visible growth. But again, we're trying to give you and we'll give you more at Investor Day the underlying volume drivers that we're seeing that support our belief that we've got a great business. We've got two great TAMs in Merchant and Banking both in a very strong position today, both in an investment mode, probably the best meetings we've had in a long time here where whether it's an enterprise merchant or an FI, you leave with a lot of stuff to work on. So the environmental support is there, the fundamentals underlying our volumes are there, and we got to put ourselves in a position where the execution resilience and service is much crisper than it's been, and that's the path we're on. But I'm very confident we're taking the right actions to get to where we need to get to, to put the business in a position to do it. We have to execute. Operator: Next, we'll go to the line of Jason Kupferberg from Wells Fargo. Melissa Chen: This is Melissa Chen on for Jason. I wanted to ask about the launch of Clover PracticePay, it sounds like the initial reception there has been good. But can you talk a little bit about how big the addressable market is in health care POS and who you're mainly competing with in that space? Michael Lyons: Yes. The -- we were thrilled. This has been in -- we've been previewing this for some time now. We're thrilled to get it launched this quarter, very optimistic about our growth in that area, its a massive TAM. And the -- it was -- this was the #1 area from our bank partners, which is a major distribution channel for us where they need help, and we heard it loudly from our ISO partners, also the specific TAM, as you know, is massive. We're going -- think about more of the local doctor practice and our penetration there is low, and our growth rate relative to the FSBI over time, if you measure us against index using the FSBI as a proxy for the industry, we've been below that. So this is the key component that we're missing, and is a key component that will allow us to go after some of the back book conversion. Got a great partner in developing with Rectangle, and we're pleased. We launched this month, so it's still early, but we're very pleased with the progress we're making, and we'll continue to remain very focused on execution here. Operator: Next, we'll go to Jamie Friedman from Susquehanna. James Friedman: I was wondering at a high level, if you could share your perspective on the competitive dynamic of Financial Solutions, specifically in Issuing and Banking because it does seem like landscape is changing somewhat, investors are potentially anxious about it. Michael Lyons: Yes. I think Mike (sic) [ James ], I made a lot of comments on core banking earlier specifically. Obviously, we've got great competitors across Banking, Digital and Issuing. I think -- and all of them are -- we enjoy continuing against every day in innovation and competition fuels growth for the industry. As I said, the backdrop of the industry is very, very supportive of solutions from all of us. And we're focused -- all the stuff we're doing in One Fiserv is to put us in a position to compete very, very effectively against any of the competitors. I think a lot of the questions we hear is around the modern core space, change in competitive dynamics. We are thrilled, as we said in the prepared comments with Finxact, which is are on the way, the largest -- with the most accounts being served on the modern core platform, cloud agnostic, asset-agnostic, true modern core -- truly modern digital ledger. So we're thrilled with our competitive position there. We continue to -- that continues to be the hallmark and both Divya and Takis will address that at Investor Day around our embedded -- the growing embedded finance space. So I think no major changes in the competitive landscape as we see it. We've got great competitors they're innovating, competing as always. And our focus is to make sure that our underlying fundamentals around service, product delivery, value-added solutions and speed to market are at the highest level to allow us to compete and maintain all the leadership positions we have across the FI businesses. Operator: Next, we'll go to the line of Timothy Chiodo from UBS. Vasundhara Govil: I was hoping we could spend a few minutes on non-Clover SMB. So it's roughly 20% of total company revenue, roughly 40% of the Merchant segment. I know there's a lot of moving parts there in terms of some of the the Argentina changes, some of the Clover migration. But I was hoping you could talk about the organic growth on an adjusted basis for that business this past quarter, but also over the past few and then what is implied in the guidance? And maybe a little bit bigger picture. I understand this might be more of an Investor Day topic. But to the extent that you could decompose some of the portions that are U.S. that are international, how large the ISB your partner business might be in there. et cetera. Any additional color. And again, I appreciate that last part might be more suited for the Investor Day. Paul Todd: Yes, Tim. So yes, that's exactly what I'd say on that last piece is we are going to go over this in good detail at Investor Day. So you'll get a lot of that clarity around some of the componentry there. We're going to provide additive disclosure of Clover just in general of the components of Clover as well as then non-Clover and you'll also understand maybe some of the strategic things around the non-Clover side, particularly in [ ISP ] and some of the international expansion there. As it relates to the organic growth, we do have comparative dynamics here. We have the Argentinian kind of noise. But as I said on our last call, we're expecting our non-Clover SMB business to have slight growth this year. We were down low single digits in the first quarter. So organically, we were down in the low-single-digits for the first quarter. And we would expect similar kind of performance if everything kind of holds in the second quarter. As it relates to the back half, kind of what changes there is we do have incremental ISV growth that's coming in there. And specifically, some of the international growth is we're seeing good ramping, particularly in Brazil. And so there's a few international dynamics that are playing through throughout the year that helped that. But generally speaking, we've talked about that non-SMB, non-Clover SMB, not being a growth business for us. But relative to the overall picture, we're managing it in a more systemic way than we have in the past. We've been very mindful about how we approach that of moving over that business to Clover over time in the right sort of way. That's the end goal is to move as much of that business to Clover where the product and the feature functionality of Clover fits with those merchants and Takis and team will cover that in more detail. Mike, anything to add? Michael Lyons: No, I think all great topics for next week and all in our materials to be addressed. Operator: Next, we'll go to James Faucette from Morgan Stanley. James Faucette: I appreciate all the commentary and apologies if I missed something because I've been bouncing between calls. But I would like to ask quickly, when you talk about like moving volumes and taking advantage of Clover's strength. How are you thinking about kind of the moving targets and competitive environment, especially as we see more companies looking to add incremental functionality for omnichannel, et cetera, even for SMB? And how do we think about that and its implications versus product road map? . Michael Lyons: Yes. Again, we'll do a deep dive next week on Clover, but high level. We think we've got the best small business operating system in the business. We're continuing to invest heavily across horizontal features vertical features we talked about PracticePay and Professional Services coming in this quarter, seeing great growth and opportunities on the international side. Takis and his team are digging deep on the experience piece of Clover, where as well as we've done, we have room for improvement there. And then we think we've got the best distribution channel by a significant margin combining not only a direct sales force, but 1,000-plus banking partners, thousand devices as Paul mentioned and was in the previous question, an unbelievable ISV business is growing at a very attractive rate and then other great partners, whether it's an ADP or some of the big food distribution businesses. So the opportunities there, the focus, the investment around the product is strong. And when you look across retail and restaurant, which we are characterized, even that, we have small market share, and then you go into some of these other verticals and Clover market share is still single digits. So we see a ton of room for growth. There's always a great competitive landscape. As I said to the earlier question on the Banking side. That's part of a natural part of any business with great growth opportunities. But we think we've got a great platform here and it's -- everything is about investing, focusing and driving Clover growth here and abroad. Operator: Next, we'll go to Ramsey El-Assal from Cantor Fitzgerald. Unknown Analyst: You called out some senior hires in Merchant Solutions. Could you comment more broadly... Paul Todd: We're having a hard time hearing you. Yes. We picked up that there were maybe some senior hires. But could you maybe repeat the question, maybe we'll be able to hear it clear. Rayna Kumar: Can you hear me now? Paul Todd: Yes, much better. Unknown Analyst: Sorry about that. This is Ryan on for Ramsey. You called out some senior hires on Merchant Solutions. So I was hoping you could comment more broadly on the org chart in terms of whether you have all the pieces in place to execute on the plan? And also if there's more opportunities to streamline head count by way of AI? Michael Lyons: Yes. First part of the question, were mentioned in the prepared comments that we've been thrilled actually blown away by the interest of seeing talented senior people from outside of Fiserv wanting to come join Fiserv, and we've added a number of incredibly talented people on both the Merchant side and the FS side, who are additive to an already strong team here. So we feel very, very good about where we are in terms of critical hires remaining to have the go-forward team. It's down to a very few. So yes, we've got the right team in place, an outstanding team. I look forward to -- we'll have a series of demos at the IR day next week. So in addition to give you all and Takis, you'll have a chance to meet a lot of these leaders and see some of the products they're working on. But we love the team, and we love the combination of some external talent we brought in along with the great institutional knowledge that's been built here at Fiserv. On AI, allowing for efficiencies, a couple of thoughts there. First of all, we're going pillar 4 of the One Fiserv plan, Project Elevate. We are deep into the process of Project Elevate, we're very pleased with the portions we've gone through so far, which is really the origination of ideas and sourcing of ideas. As part of that, there are no sacred cows, everything's on the table. All people from around the company are involved. There's a couple of hundred people very focused, almost fully dedicated to this. We put all of them around Paul, on the CFO floor, is very formal and dedicated effort, and we think there's great opportunities that are going to come out of that. I think, if you look at our head count over the last 4 or 5 years, we're down double digits in headcounts. We've already largely by leveraging early stages of automation. We've already taken significant gains there. So maybe we're a little bit different from where other peers have come from over the last several years. But from here, we continue to see whether in Project Elevate or outside of Project Elevate, significant opportunity to become more productive and more efficient through AI and it's even incremental generations of AI. For example, we've streamlined our call center services over the last 4 or 5 years, using sort of "old AI" and now modern solutions show a significant opportunity to make that experience even better for the customers and more efficient for us. So yes, we see great opportunities, especially in and around the areas we expect in operations and call center services, app development and the like. So as I said earlier, very excited about the potential for AI across all aspects of the business, and we're leaning in hard to it. Operator: Our final question comes from Dave Koning from Baird. David Koning: In the Acceptance segment, it seems like you're implying high single-digit growth in the back half. And it seems like the first half is probably close to mid-single digits. And I'm just wondering, source of acceleration. You answered Tim's question, there's going to be some SMB non-Clover but will Clover accelerate from the normalized 15%? And will Enterprise accelerate to the high single digits? And maybe how will those things happen? Paul Todd: Yes, Dave. So we do obviously expect that Clover on a certainly reported basis will accelerate from the 6% because we're expecting low double-digit revenue growth for Clover for the year. So if you just kind of do the math, you're going to see acceleration there. I would point to two kind of favorable dynamics in the back half of the year for the Clover acceleration. One is, you'll recall in the fourth quarter, we had some pricing roll backs on over specifically that provide a nice tailwind in the fourth quarter from a comparative standpoint that fuels just some of the additional growth on a reported basis from the fundamental growth that you would otherwise expect just relative to static volume growth. And then the other nice comparative tailwind that we get on the Clover side, is in the fourth quarter, we did have some weakness, particularly in November on the volume side. So we actually have a volume positive compare as well, in addition to all the other things of Clover Capital and all the other growth that you would otherwise see as we progress along the year. So from a Clover standpoint, if you look right now, fundamentally, we're in a mid-teens growth rate from the Clover side and would expect to see a fundamental growth rate in line with being able to deliver the low double-digit Clover revenue growth. On the non-Clover side, you heard me comment earlier, we are right now at a decline of low single digit overall, and there's competitive dynamics in there as well. But given some of the growth that I talked about on the ISV side, given some of the international expansion that will come through there. As I said, we expect that to improve and largely expect that to be a very small contributor to growth, but net positive for the overall year. So that's the way the shaping, nothing's changed in our volume assumptions. We are very pleased with the volume growth we saw in first quarter. The shaping of the year, we still expect to be intact. And so that gives you kind of from a Clover standpoint, the more moving parts. But overall, we're still expecting the same kind of growth rates for Clover and non-Clover that we did at the start of the year. Michael Lyons: Thanks, everyone, for joining today. We look forward to seeing you next week at the IR Day. Operator: Thank you all for participating in the Fiserv First Quarter 2026 Earnings Conference Call. That concludes today's call. Please disconnect at this time, and have a great rest of your day.
Operator: Good morning, and welcome to PayPal's First Quarter 2026 Earnings Conference Call. My name is Sarah, and I will be your conference operator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winoker, PayPal's Chief Investor Relations Officer. Please go ahead. Steven Winoker: Thanks, Sarah. Welcome to PayPal's First Quarter 2026 Earnings Call. I'm joined by CEO, Enrique Lores and Chief Financial and Operating Officer, Jamie Miller. Our remarks today include forward-looking statements that involve risks and uncertainties. Aactual results may differ materially from these statements. Our commentary is based on our best view of the world and our businesses as we see them today. As described in our earnings press release SEC filings and on our website, those elements may change as the world changes. Over to you, Enrique. . Enrique Lores: Thank you, Steve, and thank you to everybody for joining us this morning. I'm stepping into this role at an important moment for PayPal. I appreciate the opportunity to serve as CEO and I'm confident we will accelerate the growth of the company while improving profitability and cash flow. That is why I'm here. At the same time, I'm also realistic that we need to make significant changes to improve the strategic and operational issues the company has faced. Today, I will share what I have observed since joining the company. However, shaping our strategic direction and the actions we are taking to move forward with focus and discipline. During my time on the Board, I developed a good understanding of PayPal's strengths, opportunities and areas for improvement. Over the past 2 months, I have listened to and learn from our customers, our team and our investors. This has helped to deepen my view of where we are, where we need to go and how we get there. I will begin with a few initial observations. First, our foundation is strong. The company has valuable assets in our brands, our risk and underwriting capabilities, our technology and most importantly, our team. Our scale and global reach set us apart and are difficult to replicate. And the hard earned trust our customers place in us every day is a critical advantage. Second, we operate in market defined by growth and traffic change. It is still in this period that leading companies trying ways to differentiate themselves by innovating, delivering new and superior solutions and driving to growth. These PayPal needs to focus. Third, One of our core strengths is our 2-sided network, serving both consumers and merchants. In recent years, PayPal has put more energy into the merchant side of the network. Strengthening. The value we offer to the hundreds of millions of consumers who choose PayPal and Venmo is a key priority. Doing that, we increased the value of our platform for merchants and create a stronger foundation for sustainable growth. Fourth, due to years of underinvestment, we need to accelerate the modernization of our technology platform. Moving faster to become cloud native and aggressively adopting AI in our development processes will help us significantly increase developer productivity and short-term time to market. Fifth, we need to simplify how we operate, streamline decision-making and clearly define accountability to strengthen execution. Finally, there is potential to significantly reduce the company cost structure, simplifying the organization and accelerating the adoption of AI across the company will generate significant savings that can be reinvested in growth and used to respond to business headwinds, improving our overall financial profile over time. With this as context, we need to recommit to the fundamentals. That includes becoming a technology company again, sharpening our focus on consumers, aligning the company around 3 strong businesses and simply how we work with clear accountability and a stronger emphasis on execution. I expect that it will take a few months to completely define our new plan. But I think it is important to start sharing the direction we have taken and some of the actions we have underway. Let me start by sharing the framework we are using to define our strategy. We see 3 distinct attractive and in many ways, complementary market opportunities where focused investment and sharper execution can meaningfully improve our growth trajectory, checkout, consumer financial services and payment services. Each has clear near-term levers to improve the performance of our existing assets as well as conveys medium-term growth opportunities. And in every case, we have a strong right to win. I will take each in turn. Let me start with checkout. This is a large and growing market where we deliver meaningful value to consumers and merchants. With in checkout, we also see strong consumer demand for flexible payment options, including by now pay later solutions. This is becoming an important driver of consumer acquisition we are also delivering clear benefits to merchants through higher basket sizes. The second opportunity is in consumer financial services. Consumers are increasingly turning to digital platforms to handle everyday financial activities. This is also our large market opportunity or more than $200 billion annually in just our top 6 markets, and it is growing low double digits. What is most attractive about this market is not only size and growth but also the customer lifetime value opportunity we can tap into. The third opportunity is in payment processing and value-added services. The PSP space represents significant untapped value for us, driven by the continued shift to digital channels and the increasing complexity of global payments. We're aligning the organization to unlock this growth opportunities. Previously, our teams were organized primarily around the customers we serve, consumers, small businesses and large enterprises. That structure resulted in organizational complexity with multiple dependencies and handoffs that slow decision-making and weakened execution. Check out for example, test on customer groups and markets, creating a multidimensional matrix for road map prioritization. The changes we announced last week will organize the company into 3 times of business, each with a single leader. Checkout solutions and PayPal consumer financial services and Venmo and payment services and clip. And importantly, we are bringing together the 2 sides of the network to maximize our competitive advantage. Simplifying our operating model and clarifying accountability means that each leader will earn clear outcomes, and our teams will be able to focus on our most important growth priority. We're also using these changes to simplify and delayer our organization. And we have formed a new AI transformation and simplification team that will help us work more effectively and drive our enterprise-wide AI agent. Let me now outline how we are thinking about the path forward across each of our businesses. Checkout Solutions and PayPal is primarily a checkout focus business and is the highest priority for the company and me. It brings together our consumer and merchant ecosystems under 1 unified strategy. This structure will enable us to fully leverage our 2-sided network and accelerate innovation across both sides of the platform. Our intent is not to change transitory share in any given quarter, but rather to focus on segments and verticals where we can deliver differentiated value to our customers. I have also emphasized that strengthening the consumer side of the network is key to increasing the value we deliver to merchants. Driving habituation through the adoption of our financial services offerings is an important step toward enhancing the consumer value proposition and reinforcing the power of our 2-sided network. On our PayPal Plus loyalty program, which we introduced in the U.K. and will expand traditional market is another important step. Over the medium to long term, we have a number of compelling innovative initiatives underway. We will take a disciplined approach to prioritization focusing resources scenarios with a greater potential to drive durable growth and shareholder value. Within this portfolio, we will be highly selective as we evaluate our growth set of initiatives, including digital wallet interoperability, biometric functionality and additional programs under consideration. Within Consumer Financial Services and Venmo, we have been making good progress in the last few years and have built a strong portfolio of related products. but awareness and adoption remained well below their full potential. Our focus is on becoming more central to our customers' financial lives. And our goal is to enable consumers to spend, save, invest and borrow seamlessly. Venmo will be a key component of our growth plans moving forward. supported by a strong brand and younger demographic. We are in a strong position to expand in this space, deeper engagement and increase customer lifetime value. Payment Services and Quito unifies our processing and platform capability into a single scalable offering for merchants. We will bring together the company's unbranded processing capabilities, including Braintree, and value-added services, such as fraud management, authorization, optimization and global payment infrastructure. They are designed to support businesses of all sizes with flexible high-performance payment solutions. We are also well positioned to capture and monetize this growth. Stablecoin is also part of the enabling faster, lower cost transactions. We have made good progress with TY USD, which became the largest federally regulated stablecoin in December, and we recently expanded its availability to 70 markets globally. At the same time, we have much more opportunity to scale our offerings and accelerate growth in this space. Across the company, we need to modernize our technology platform to enable greater speed and interoperability across our offerings. As I said earlier, leveraging AI more extensively in our development processes will significantly help us with this effort. Supporting our growth plans is the opportunity to realize cost savings. First, we will remove to application and layers from our organizational structure. Second, we will accelerate our AI adoption and automation across our operations. Combined, the savings will be significant. We expect to see at least $1.5 billion of gross translate savings over the next 2 to 3 years. Jamie will discuss more on this point later in the quarter. Let me touch briefly on some highlights from the quarter before Jamie takes you through our results in more detail. Our first quarter results show an improvement in branded checkout. Branded checkout TPV growth was 2% on a currency-neutral basis, up from 1% last quarter. We continue to see spend in key parts of the business. with Venmo and PSP delivering mid-teens TPV growth. Transaction margin dollars, excluding interest on customer balances grew 3% with contributions from credit, Venmo and PFT. Non-GAAP earnings per share grew 1%. We also continue to generate robust free cash flow giving us ample room to invest and return capital to shareholders through buybacks and our dividend. On the operational side, our team accomplished a lot in the first quarter from securing apps in presentment on key merchants to enabling interoperability for peer-to-peer payments between PayPal and Venmo. To close, I am confident in our ability to put this company on a more durable path to long-term growth and shareholder value creation. We have a strong foundation, and we are now organized to move with greater urgency. We have a well-defined framework. I will continue to define our strategy and prioritize our plan in line with it. I look forward to sharing more progress as we move ahead. And finally, I want to thank our teams for their continued focus and execution and our customers and shareholders for their trust. I will now turn it over to Jamie. Jamie Miller: Thanks, Enrique. The team and I are energized by the focus, clarity and disciplined prioritization you are already bringing to PayPal. We have a strong market position and a solid foundation and I'm confident we're set up to move faster from here. Turning to the financials in more detail on Slide 7. PayPal delivered a solid quarter with both transaction margin dollars and non-GAAP earnings per share coming in moderately better than our guide. Total payment volume accelerated to 11% at spot and 8% currency neutral in the first quarter reaching over $460 billion. Online branded checkout volume growth improved slightly from the fourth quarter, while enterprise payments and Venmo both accelerated into the mid-teens. First quarter revenue grew 7% on a spot and 5% on a currency-neutral basis. TM dollars, excluding interest on customer balance, grew 3% in the first quarter. The drivers of our TM dollar growth were broad-based, led by credit performance, Venmo monetization, PSP profitability and loss improvement across multiple products. Growth in these areas more than offset the headwind from investments we are making to strengthen our branded checkout position and drive higher engagement, habituation and incremental activity over time. First quarter non-GAAP earnings per share increased 1% to $1.34. And compared to our guidance, non-GAAP EPS benefited from stronger transaction margin dollar growth with some offset from higher nontransaction operating expense. We expect the second quarter to reflect more pressure on a year-over-year basis, driven by the nonrecurrence of certain prior year items and the timing of anticipated cost savings and investment, both of which I'll walk through in more detail shortly. Importantly, these are factors we anticipated, and we remain confident in our full year 2026 guidance. Adjusted free cash flow, which excludes the timing impact from the origination and sale of Paylater receivables was $1.7 billion or nearly $6.8 billion on a trailing 12-month basis. Turning to Slide 8. We continue to drive deeper, more active relationships with our customers. Monthly active accounts increased 1% to $225 million. Transactions per active account, excluding PSP, improved sequentially to 6% growth. Moving to Slide 9. Total payment volume in the first quarter grew 11% at spot and 8% on a currency-neutral basis to $464 billion. Working our way down the page, branded experience is TPV, which includes online checkout, PayPal and Venmo debit as well as tap to pay grew 5% compared to 4% in the fourth quarter. While debit card and tap-to-pay spend represent a small portion of branded experience in volume today, they continue to grow rapidly, up 60% year-over-year. Venmo TPV continues to reach new highs, accelerating sequentially to 14% growth year-over-year and marking the sixth consecutive quarter of double-digit growth. Online branded checkout volume growth improved slightly compared to last quarter, up 2% on a currency-neutral basis. Compared to the fourth quarter, we saw a slight improvement in the U.S. with softer performance continuing in Europe. Pay with Venmo and buy now pay later continue to outpace the market, taking share from other payment methods and growing 34% and 23%, respectively. P2P and other consumer volume growth remains healthy, up 10% in the first quarter and reflecting the debit card and Venmo momentum I just mentioned. Turning to PSP. Volume growth accelerated to 11% from 7% in the second half of 2025. Within PSP, enterprise payments again showed notable strength with volume growth accelerating to the mid-teens from a combination of growth in profitable front book business, high retention and growth alongside our existing merchant base. Driving higher attachment of value-added services continues to be a key focus to improving yield and monetization as we move through 2026. Moving to more financial detail on Slide 10. Transaction revenue grew 7% on a spot basis to $7.5 billion. Other value-added services revenue grew 10% to $852 million, driven by strong contribution from consumer and merchant credits, partially offset by lower interest rates. Transaction take rate declined by 6 basis points to 1.62%. Excluding the impact of foreign exchange hedges, transaction take rate declined about 4 basis points. This output was driven by a combination of factors, including branded co-marketing investments and rewards as well as higher growth in Venmo and enterprise payments. TM dollars ex interest on customer balances grew 3%. Within volume-based expenses, transaction expense as a percentage of TPV was 90 basis points increasing slightly year-over-year from a mix shift to enterprise payments. Transaction loss as a percentage of TPV improved slightly year-over-year to 6 basis points, this reflects our team's ongoing work to continue to improve and strengthen onboarding, fraud prevention and risk management capabilities. Nontransaction-related OpEx increased 8% and this higher increase relative to our guide was driven by our decision to pull forward a combination of technologies, marketing and product investments, which will continue into the second quarter making our OpEx profile more first half weighted this year. As a result of higher investments, non-GAAP operating income was down 5% in the quarter to $1.5 billion. Moving to capital allocation. In the first quarter, we completed $1.5 billion in share repurchases, bringing our trailing 12-month total to $6 billion. We ended the quarter with $13.5 billion in cash and cash equivalents and investments and $11.6 billion in debt. Moving to guidance on Slide 11 for the second quarter and for the full year 2026. While first quarter was a solid start to the year, it's early. The macro and geopolitical environment remains complex and we operate in a dynamic, highly competitive industry. The company is also in the midst of a significant multiyear transformation during which we are taking steps including the business realignment discussed today to better organize around our key market opportunities and drive stronger execution. With that as a backdrop, we are reiterating our guidance for the full year. We see a significant opportunity to enhance customer lifetime value by driving consumer engagement through a combination of scaling new experiences, improving presentment and increasing consumer selection with rewards and loyalty. We continue to expect our targeted growth investments to represent approximately a 3-point headwind to transaction margin dollars growth in 2026, while driving durable long-term benefits in the years ahead. We have conviction in the impact these initiatives can drive in the future, but it will take time to keep scaling our programs and experiences. For online branded checkout specifically, our guidance continues to reflect slightly positive to low single-digit branded checkout TPV growth for the full year. Quarter-to-date, we are seeing trends at the low end of our full year guidance, and these are reflected in our second quarter guide. Compared to the first quarter, we have seen slower growth in the travel vertical as well as more muted growth in Europe. As Enrique discussed, we see significant opportunity to further improve productivity and reallocate resources to our highest returning initiatives. And while we've made real progress over the past few years, there is meaningfully more we can do. We are realigning the organization to sharpen strategic focus, eliminate duplication and remove layers, enabling faster decision-making and clearer accountability. In parallel, we will be accelerating efforts to deploy AI and automation across our operations and technology platform, which we expect will both improve the customer experience and drive meaningful internal efficiencies. These efficiencies will come from organizational realignment, process redesign through AI and automation, procurement and vendor rationalization and optimizing our local footprint. Together, these represent 2 distinct waves of savings, the first from structural realignment and the second from accelerating AI adoption and automation to comprise the vast majority of the more than $1.5 billion cost savings program we will execute over the next 2 to 3 years. A portion of this opportunity was already contemplated in the 2026 guidance we provided last quarter. Looking ahead, we expect to deploy these cost savings to reinvest in growth and respond to business headwinds and improving our overall financial profile over time. During 2026 and into 2027, we will be transitioning teams, establishing new ways of working and building systems and processes to run the business aligned with the structure we have announced. In the coming months, as we launch the full scope of this program, we plan to share more details on the expected cadence of savings and our reinvestment framework for the years ahead. We intend to follow that up with external reporting, including segments sometime next year. Turning to more specifics for the second quarter. Let me start by noting that the second quarter has the most demanding year-over-year comparison this year. You may recall that last year second quarter had 1.5 point of transaction margin dollar benefit from the renewal and expansion of a relationship with a key payment partner as well as very strong credit performance. This year, our transaction margin dollar investments also ramped through the year and pressure will be more pronounced in the second quarter compared to the first. In 2Q of last year, nontransaction OpEx also benefited from discrete items within general and administrative expense, including a nonrecurring decline in indirect tax expense. The 2Q tax rate was below the full year average. Pulling all this together, for the second quarter, we expect low single-digit revenue growth on a currency-neutral basis, a low single-digit or approximately 3% decline in transaction margin dollars. Transaction margin dollars excluding interest to decline low single digits or approximately 2% and mid-single-digit growth in nontransaction operating expenses and non-GAAP earnings per share to decline by high single digits or approximately 9%. For the full year, we are reiterating our guidance, and we continue to expect transaction margin dollars to decline slightly or be roughly flat, excluding interest on customer balances, approximately 3% growth in nontransaction operating expenses and non-GAAP earnings per share ranging from down low single digits to slightly positive. Our guidance continues to assume approximately $6 billion in share repurchase and at least $6 billion of adjusted free cash flow. I'd like to wrap up by thanking the PayPal team for their continued focus and dedication. We have a solid foundation to keep building on as we drive value creation by executing on PayPal transformation. With that, Steve, let's go to Q&A. Enrique Lores: Before we open the lines for Q&A, I'd like to ask everyone to limit themselves to 1 question so we can get to as many of your fellow analysts as possible. Sarah, please open the line. . Operator: [Operator Instructions] Your first question comes from Harshita Rawat with Bernstein. Harshita Rawat: I want to ask about branded checkout, Enrique, Jamie, can you maybe talk about the market dynamics in Europe, and also over time, what can we expect to see as execution improves and kind of like the realistic growth versus e-commerce we should expect? Jamie Miller: I'll talk a little bit about the market dynamics in Europe and then Enrique, perhaps you want to talk about over time, execution focus we have. When you look at branded checkout, I would say that we're operating in a dynamic environment. When you look at the consumer generally, while it's remained strong, we are seeing some skewing in the middle income, which, candidly in the U.S., that was 1 of our bigger improvement points in that cohort. When you look internationally, what we are really seeing is a little bit more pressure from high oil prices, certainly, gas prices, but more importantly, travel in Europe was something that we saw slightly at the end of the quarter, but really more this quarter. And when you look across Europe, I would say, generally speaking, we've got areas growing quite well, but we're still under pressure in places like the U.K. With respect to Germany, I would say the quarter we continue to see moderation there like we had seen in the fourth quarter, still growing, but at a slower rate. And generally, pretty consistent combination of macro softness, competitive intensity, some natural normalization is a long-time market leader. But having said that, I think what's important, and this is where I'll maybe hand off to Enrique, we began investing, taking all of the things we were doing with respect to branded checkout over the past couple of years and really bringing those to Europe midyear last year and leaning into those investments. And as Enrique has come in, I think his country to country level focus has been really important and I think will be a real acceleration for that. But Enrique, maybe you want to unpack that a little bit. Enrique Lores: Yes. I think in Europe, we have an opportunity to improve execution by improving our focus in the countries. During the last 8 weeks, I have been twice in the U.K., 1 in Germany to understand that what is the situation and to work with the team to see what the improvements we need to make. And as Jamie was saying, there is a combination of macro effects but also local competition. But we have enough tools in our side to be able to compete and to be able to grow. And this is what we are going to be doing Overall, answering your other question about branded checkout, we are taking a lot of actions to change the trajectory of the business. Of course, we need to continue with investments we did a quarter ago to -- we started a quarter ago to improve [indiscernible] to improve selection. And we have especially focused on the top 50 customers, we are starting to see progress there. We also need to continue to improve the experience of our customers so they get a better experience when they check out with PayPal. And we have other opportunities that we started to mention in the prepared remarks that I think in the future are going to be very meaningful. We have been more focused on the merchant side of the network than on the consumer side. And we need to rebalance those that focus and rebalance that investment. For example, the loyalty program, which was launched in the U.K. is going to be an element of that. There are other things that we need to do in that space. There are also specific verticals, high-value verticals where we can have a more differentiated value proposition, especially we combine with financial services. And this combined with an improvement in execution that by really understanding what our priorities are and simplifying how we make decisions, we think the combination of all that will have a significant impact in the business going forward. Operator: Your next question comes from Timothy Chiodo with UBS. Timothy Chiodo: Great. I want to see if we could talk a little bit more about $1.5 billion of gross run rate cost savings that you outlined today. And Jamie, I appreciate that you mentioned over the coming months, you'll be giving more detail around the cadence and reporting around the progress there. But 1 area of the expense base that often comes up in investor discussions is the customer support line item, it's roughly $1.7 billion or so, and I fully appreciate and I think investors do as well. that there's many countries, there's lots of compliance, there's lot of support. There's people answering the phone and local language. There's a lot of complexity there. But I was hoping you could maybe bring to life a little bit more of some of the tasks or roles or some of the activities within that bucket that might be more applicable to this cost savings initiative. And in general, any other broader thoughts around kind of areas of low-hanging fruit that you see for the $1.5 billion. Jamie Miller: Yes. So maybe I'll talk a little bit about the cost, some of the components of how we're tackling it. and a little bit around the AI benefit. And then Enrique, you might want to chime in as well. When we look at the 1 -- the at least $1.5 billion in cost, we really see this coming in a couple of different phases. The first is really around structural realignment. And you've heard us announce our organization last week, but this is about duplication. It is about layers, it is about org structure, but really focusing and aligning our teams for top to bottom execution and improving our execution speed, candidly. But with that also comes a lot of opportunity for cost and remixing there. The second piece, which I think is really a little bit more along the lines of your question on CSO is aggressive deployment of AI. With respect to customer experience, how we touch customers and service and support and operations. And equally with respect to risk and the modernization of our risk platform and how we deploy AI as we do that. AI has really across-the-board opportunity, particularly in CSO, but candidly, across the company, I think we've made really good inroads. We're seeing good engineering productivity. We're seeing different elements of acceleration in different functions. But I think the full top to bottom acceleration is going to be really important. And to your point, as we really lay this out, I think there's 2 things to note. Number one, we do plan to reinvest savings for growth. So a lot of what Enrique has talked about with respect to the company's strategy and not just branded checkout where we're leaning into the consumer value prop more but really building out financial services with Venmo, really leading into PSP and deeper ways to grow. That reinvestment piece is an important element of this. But as you said, we'll lay out more of this in the coming weeks. Enrique Lores: And I think the changes that AI will enable us to do to drive are going to be very significant. And this is why we created a group last week reporting to me, that is going to be in charge of driving function by function, process by process, this AI transformation. And this is not about adopting AI as a technology we have done many pilots in the company, and we have seen what is possible. It's really about understanding how can we redesign the key processes. Once the edition [indiscernible] adopt AI. And this is what we have seen that really will drive savings. But under early savings, it will help us to move faster, and it will help us to bring and to deliver a better customer experience. The 2 key areas where we see the biggest opportunity in the short term, 1 is technology development. And as I mentioned before, this is going to really help us to accelerate some of the improvements and modernization we need to do in our platform. And the second is customer support as you were saying, Tim, this is a large cost for us today. And with AI, we believe we can both reduce cost but also improve the experience that we will provide to customers. And the fact that we have multiple language and that we need to support multiple languages, multiple businesses, just highlights the opportunity of really reducing the cost by automating and driving it and doing it in an even better way for our customers. Operator: Your next question comes from James Faucette with Morgan Stanley. James Faucette: I wanted to follow up on that question and not only how we should think about reinvestment and the other side of a capital return? And how you're going to decide how to apportion savings to 1 or the other -- and in particular, what are the proof points that you're going to be looking at whether it be ongoing engagement growth in customers? Just help us think through the KPIs and how you're going to make sure that you allocate capital most efficiently. I know you have big ambitions for both, but nuance there is, I think, important this morning. . Enrique Lores: This is a great question, and you will see us doing much more work and been reviewing that with all of you in the coming quarters. What we have designed so far is what is the strategic framework that we see for the company. We have outlined that we see 3 big growth opportunities, where we think we can both grow revenue and operating profit, and we are aligning the company and the strategies of the company to make that happen. As we do that, we will identify what are the best opportunities, opportunities that will drive the best return. And also, we are going to be very rigorous, I would even ruthless in the prioritization we are going to apply because the company has today multiple attractive initiatives. We have also several small businesses. And in the coming quarters, we need to decide in which ones we double down, and we increased investment to increase our ability to execute and our chances to be successful. And in which ones we are going to be investing, stopping or doing something different. And this is the process that between now and the next quarter we will be doing. And we will be -- as we do that, we also will identify what are the key KPIs per business, so you can track the progress that we are making. We are just starting the -- what we call the transformation process. This is going to take some time. So it's not something that immediately will happen. But the combination of the assets that we have the ability that we have to invest and the rigor we are going to apply make us confident that we will be able to really improve the performance of the company over time. Operator: Your next question comes from Darrin Peller with Wolfe Research. Darrin Peller: Thanks. Enrique, can you just walk through your thought process on your review of your assets in the company in a sense of which assets you actually absolutely feel like you must keep as part of the go-forward entity. If there are assets you do -- you've identified that you would consider selling where you stand on Venmo. Is that potentially something that we should consider that the company would consider wanting sell for the right price? And then your thought process on synergies or dissynergies of keeping assets together, whether it's Venmo with the rest of the business or Braintree with the rest of the business? If you could just walk through your thought process on that, that would be great. . So let me start by saying that our #1 priority, my #1 priority is to maximize shareholder value. And at this point, I believe that the best approach is to invest in our 3 core businesses, PayPal, Venmo and Braintree, to drive profitable growth. Because in each of them, we see the opportunity of making it happen. To do that, as we explained before, we are going to be simplifying the priorities for each of them, identifying what are the core areas where we need to invest. At the same time, we need to modernize the technology platform that will be helping the 3 of them. and we need to simplify how we work and drive cost reductions to drive these investments. I think what is important is that we believe that there are significant synergies across the 3 businesses that make them stronger together. For example, we see customer synergies in driving cross-selling and helping each business to penetrate and to grow with different customers. We also see synergies in the technology and offering space. And as we develop some of the financial services options that we have been discussing before, they will be benefiting the, for example, PayPal and Venmo, and we also see strong synergies in key capabilities as risk management and identity. So at this point, our plan is to grow profitably the 3 businesses because this is what we think will create the maximum value for shareholders. On top of these 3 business, I just mentioned before, there are many other initiatives in the company. that we are going to be rigorously prioritizing to make sure that we leave those in the plan where we see we have the highest opportunities to success and that we use this to fund those activities that we will stay focused on. Operator: Your next question comes from Sanjay Sakhrani with KBW. Sanjay Sakhrani: Enrique, thank you for all your commentary. Obviously, you've had a very unique window as the new CEO, having been on the board. I'm just wondering if you could just drill down specifically on how you intend to do things differently from sort of the previous administrations to affect the change. And then, Jamie, just 1 question because I'm getting a lot of these questions on the trend line that you saw that you mentioned trending at the low end of the range and some of the choppiness. I guess if the higher fuel prices persist, do you feel like there's risk to the second half relative to what you've incorporated in the second quarter? Enrique Lores: Sure. Let me start with the first part of your question, and then Jamie will take the second part. I think what we're going to do start from the development and the analysis that we have done and where the company is today what is working and what areas need to be changed. From a strength perspective, I would say that the company has very unique and high-quality assets. the combination of the scale that we have, the technologies that we have, some of the key capabilities around risk management, underwriting value of the brands and the global presence are very unique assets that are difficult to replicate. At the same time, we operate in markets with high growth, and we have very relevant presence in this market. But we also have seen that there are some areas where we need to make some changes. We need to accelerate the modernization of our technology stack, so we can continue to deliver compelling solutions to our customers. We need to rebalance the focus we have in our dual side -- in the 2-sided network between merchants and consumers. During the last year, we have paid much more attention to merchants, and we need to rebalance that and increase our investment in consumers. We also need to simplify how the company works and we used the complexity that the core model brings. And on top of that, we clearly have an opportunity to reduce our cost structure, and this is what we are doing. So based on that, we have built a transformation plan that we are going to be executing, and the plan starts by identifying what are the highest opportunities in the 3 markets where we operate and investing significantly -- investing behind them and and aligning the priorities towards that. Second is we identified these priorities. They are going to be different for each of the market opportunities. in the PayPal side is by continuing to grow and improve the performance of the checkout business. And I mentioned before, the combination of continuing some of the work that we have done until now by also rebalancing the focus on consumer, combining with some of the financial services that have shown us that we can improve the value proposition and identifying the vertical categories where we can offer a more differentiated solution. This will help us to grow. In the case of Venmo, it's about growing our attach rate to financial services and improving ARPU. And in the case of our processing business, it's all about maintaining the growth that we have and continuing to add value-added services. Third point is really the process to simplify the priorities and define in what areas we're going to focus and what areas we're going to reduce our focus, which I mentioned before, we will be doing in the coming quarters. Fourth, it is about accelerating the process to modernize our technology stack module by module to make sure that in the coming quarters, we really address some of the gaps that we have identified from a technology perspective. Fifth is to complete the reorganization of the company that we have started simplifying how we work and aligning the work and aligning the priorities to the segments that we have identified. And finally, is to complete the execution of the cost program that we have announced today. So it's a very aggressive transformation plan. We think that by executing that, we will be able to improve significantly the performance of the company, and we have started the process now as we have been mentioned in the call today. Jamie Miller: Great. And then, Sanjay, with respect to your question on what we're seeing with consumer and some of the impact on growth, I guess, first, what I would say is we are reiterating our full year guidance. And so we continue to expect slightly positive to low single-digit branded checkout TPV growth. And that's what we've seen so far this year. Compared to first quarter, as I mentioned, we are seeing some impacts on the travel vertical, but we are very focused on execution as we get into deeper into the second quarter, comps get easier and candidly, in the second half as well. But also, we're laser-focused on our initiatives and really driving improvement there. And we've been prudent, I think, in how we've set our branded checkout guide and our expectation for lower growth this year than last year, and we're confident with where we are today. Operator: Your next question comes from Jason Kupferberg with Wells Fargo. Jason Kupferberg: Enrique, I wanted to talk about just current product strategy in checkout. I mean you guys have the fully optimized button now. Wondering if you are planning on any big changes there? Do you just feel like there's room to improve the execution of the rollout of the current product? And if we can get an update on the progress of the rollout that would be great. And I would just love your take on how long it might take to actually fully roll out that fully optimized version of the new checkout button because it seems like that's that's key to ultimately getting some structural reacceleration in branded volume. Enrique Lores: Thank you. In the short term, it's all about continued execution of the plans that we had until now. And we have continued to make progress using the same metric we reported in the last couple of quarters. Today, we have the customers, 45% of the nonvoltage customers are already experiencing the new simplified version. So we have continued to make progress quarter-over-quarter and the plan is to continue to that in the coming quarters. But it's not only about that. It's also -- what we have learned is -- this is 1 element of the many that we need to do. We need to -- when we combine our new checkout process with financial services and BNPL, we see also significant improvement and significant acceleration of growth. When we see better marketing and more, and the customers are more attractive to use our bottom, we see also improvement. So we need to continue to build end-to-end plants to make sure that we improve across the board. And this is what you're going to see us doing. And this is why execution is going to be so critical for us. It's not only about what we bring to market. It's about how do we maximize the value from it by having all the different functions and groups of the company focused on it. Operator: Your next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: I want to ask about modernizing the tech platform and becoming a tech company again. Does this include platform consolidation, specifically? I'm asking because modernizing the tech stack brings with it, obviously, a lot of risks. I don't know you appreciate that, Enrique, given where you're coming from. So what's your assessment on the risk of modernizing, why it hasn't been done already and how integrated or distinct the technology stacks across the 3 businesses if you can detail that as well that would be great. Thank you. Enrique Lores: So the prices, we have started to go and modernize the tech platform module by module. And as we do that, right integration or complete integration in some cases across the 3 businesses. As you said, all these changes have some risk. But on the other side, we have a very competent team, and this is a process that has already started. I think one of the key differences will be that we are going to be investing in making that happen. And this is why the cost structure savings that we have announced today are going to be so critical. They will be helping us to make these investments possible because we think it's critical for us to do that for the company to continue to succeed for the company to continue to grow. Operator: Your next question comes from Darrin Peller with RBC Capital Markets. Darrin Peller: Enrique, I wanted to kind of turn back a minute to the commentary on the consumer side, kind of in multiple parts of the prepared remarks then even through kind of answering some questions. It sounds like there was a deficiency relative to the merchant side of the network to being focused on this consumer side. And what I'm wondering is, as you were on your listening tour really talking with merchants, do you feel like they were telling you that they didn't have the conviction that maybe you had that level of engagement with the consumer, and therefore, you feel like you need to make bigger investments there? Or is there another angle to that. Enrique Lores: I think it's a combination of what I heard from merchants, but also what I saw happening in in the countries and what I saw happening in the front line. And I think it's not so much that we will focus less on merchants. It's about how do we to improve the value proposition we have, we offer to consumers and how we improve, how we communicate that and how do we make it more visible. And I show that as we because if I think about what has happened during the last few quarters, we have launched a lot of great innovation to market, but we haven't had enough effort, enough investment in the countries to make it real. And we have moved to launch the [indiscernible] before really maximizing the value that we got from what we were launching. And let me use an example. In Germany, a few months ago, we launched a fantastic solution, leveraging NFC. We launched the solution. It had great initial reception. And then we didn't invest enough to -- for it to be adopted broadly by consumers. And by consumers adopting us, the impact on merchants would have been very positive, but we just didn't have the effort, the focus the team, the investment to make it happen. So this is an example of the type of things you will see us doing. And this is what we mean by rebalancing the focus we put on the 2-sided network because if consumers perceive a stronger value proposition, they will transact with PayPal when they do -- when we buy something from merchants. Steven Winoker: Sarah, We have time for 1 last question. Operator: Our last question will come from Bryan Keane with Citi. Bryan Keane: Enrique, when you think about the merchant specifically in your conversations, do you think -- how aggressive will you guys be in sunsetting platforms, enforcing them onto the new technology in order to help reduce friction. Kind of that's question one. And then the second part of that is, what about A lot of investors are asking about the price. Is the price too high? Can you lower price for PayPal in order to drive faster branded volumes? Enrique Lores: Yes. So in the last 2 months, I have had many, many conversations with merchants, and 1 of the key things I have learned is with all of them, we have opportunities to improve our solution and to complete our solution addressing specific needs, and whether this is a merchant in the travel space that needs help in close-border selling and cross-border activities or a merchant in the retail side that needs help with customers that buy and return and that we can help to reduce the return because of the data that we have, we have a lot of opportunities to improve the value of our products and do it in a way that we can replicate it across multiple merchants. So the opportunity is clearly there. And again, in every conversation, I have seen it. To do that, we need to complete the modernization of our technology platform as we have been saying. And to do that, merchants will have to move to the new platforms. And we will do that in a way that we minimize the work and the effort that it will take with them from them whenever it will be possible. But to continue to improve the solution, we will have to drive and move to the new platforms. But I think the key message is really the opportunity that we see, the opportunity that merchants are telling us we have and the fact that we really -- by doing that, we will have an opportunity to also offering additional services that will help us from a margin perspective and to compensate potential price pressure that we will have in the more commoditized business. The answer is about adding these incremental value added services, which is what we are going to be doing during the coming quarters. Steven Winoker: Enrique, any final thoughts? . Enrique Lores: Well, first of all, thank you, everybody, for your questions. And as we have today discussed today, we have both strong assets, a clear opportunity and a path forward that is grounded in improving our execution. Our focus now is to deliver, and I really look forward to continue to update all of you in the coming quarters, especially as we report our second quarter results in late July. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham. Graham Stanley: Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the first quarter of 2026. With me on today's call are Fred Lowery, Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that is forward-looking. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading and they're also in our quarterly earnings presentation posted on the Investor Relations website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 5, 2026. And Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q&A session, please limit yourself to a single question so that we can accommodate questions from as many of you as possible. And with that, I'd like to turn the call over to Fred Lowery. Frederick Lowery: Thank you, Graham, and good morning, everyone, and thank you for joining us today. I'm honored to lead Henry Schein as a CEO, and I look forward to building on the strong foundation and proud heritage that define this company. While at the same time, taking a fresh look at people, process and technology to advance the culture of continuous improvement. I'm also pleased to report our strong financial results for the first quarter. But before we turn to these I want to highlight some key observations that I've had as I progressed through my 100-day plan. First, I am impressed by the strong competitive advantages Henry Schein has built over the years. Globally, we successfully serve hundreds of thousands of independent private practices with responsive, consistent overnight delivery. In the U.S., we are the primary distributor for most national DSOs a position that reflects years of being a trusted and reliable partner. Our reach provides us with supply chain flexibility and sourcing advantages as well as access to a broad global customer base for our suppliers. Secondly, pursuant to our BOLD+1 strategy, we deliver an extensive integrated offering, which includes a broad portfolio of quality corporate brands and specialty products, software, equipment products, technical services and business solutions, this differentiated offering makes us the platform of choice for office-based practitioners. And third, our ability to deliver an excellent customer experience really sets us apart. Our field sales consultants, they really know their customers deeply and are genuinely and invested in their success, and they're supported by our equipment service technicians. And when you put that together, we provide a service that is difficult to replicate. When you put all these things together, our technology, our products, our value-added services, and our people, we create a significant competitive advantage, which we will continue to enhance over time. So over the last 2 months, I've immersed myself in the business, and I've spoken with lots of customers and suppliers and employees and a few things that I've heard. One thing is clear from customers, the dental market remains healthy. with demand continuing to outpace supply. Therefore, efficiency and workflow optimization are important for our customers to be able to see more patients. What's encouraging is how well our strategy aligns with our customers' needs through the development of open architecture integrated solutions that create a platform allowing our customers to deliver better care while running more productive and more profitable practices. Turning to the medical market. procedures continue to shift to nonacute care settings, which also aligns well with our unique capabilities to supply the right quantities to all nonacute settings, including ambulatory surgical centers, community health centers, private practices and home solutions. I also received feedback that our dental and medical supplier partnerships remain another source of competitive differentiation. And I'm committed to providing a broad product offering to our customers supported by strong national brands as well as through our own value-added owned brand products. Suppliers recognize that our deep customer access and trusted relationships make us the partner of choice for driving growth in their businesses. Through exclusive and targeted promotional programs, we create value for suppliers and customers alike. Now while it's still pretty early days for me, I intend to sharpen our operational execution, build a stronger performance culture and create a leaner, more agile Henry Schein, allowing us to respond faster to customer needs and translate our market strength into accelerated growth and improve financial results. As I continue to dive deeper into the business, I expect to identify opportunities to drive growth, to streamline processes and to enhance execution. I'd like to highlight a couple of examples for you today. The first is to enhance the cadence of new products and service offerings. This includes AI solutions, which are transforming the industry rapidly. And Henry Schein has a tremendous opportunity to develop further value-enhancing solutions. I think you're starting to see this with some of the recent product launches from Henry Schein One. The second is to align our commercial efforts to accelerate overall growth across each of our businesses. This is contemplated in accelerating the leverage priority of our BOLD+1 strategy, and we've already started. It's clear that Henry Schein has great assets with a differentiated platform to serve as a trusted partner to health care practitioners worldwide. As we look ahead, I'm excited by the significant opportunities to accelerate growth through the use of technology, improved operational excellence and becoming a more agile company. Now let's turn to the first quarter results. I'm pleased with our strong first quarter results that reflect continuing momentum from the second half of last year as we grow market share and expand gross margins. Sales strengthened in the U.S. dental and global technology businesses overcame softness in the medical business. The dental markets remain stable and healthy, and we are gaining market share. While merchandise prices have increased, particularly in the U.S., procedure volumes are holding steady. We anticipate further merchandise price increases in the second quarter as a consequence of higher oil prices. Dental practices and, in particular, DSOs are continuing to invest in equipment, and we are seeing DSOs gaining market share in the overall dental market. The nonacute care U.S. medical market remains strong, and our Home Solutions business continues to grow well. Our medical business had good underlying growth. However, the quarter was impacted by a decline in demand for point-of-care diagnostic test products related to respiratory illness, resulting from a light flu season. Our specialty products underlying markets remain healthy, with European volumes ahead of the U.S. Demand for premium implants is being driven by strong clinical engagement, most recently demonstrated at our BioHorizons Global Symposium last month where over 40 internationally recognized speakers presented the latest innovations in tissue regeneration, digital workflows and implant-based tooth replacement therapies to more than 1,100 clinicians from around the world. Growth in value implants driven by our S.I.N. and biotech dental businesses continues to outpace premium implants. Our Global Technology business again posted really good growth, reflecting continued demand for our cloud-based software technology solutions. The development pipeline of AI solutions has increased, and these are mostly integrated into our global suite of practice management software solutions. Last week, I had the opportunity to attend our Thrive Live event in Las Vegas which brings together dental professionals to get really hands-on training and education and to showcase our range of equipment and software solutions. This year, we had over 1,000 attendees and we launched our next-generation AI clinical workflow at the event, which generated significant excitement. The broad level of interest in our AI solutions was a clear signal that our customers are ready to embrace these tools and that Henry Schein is well positioned to lead that transition. Now let me give you a few highlights into the initiatives that advanced our strategic plan during the quarter. As I mentioned, our overall operating margin expanded, and we stabilized margins compared to a year ago. Our high-growth, high-margin businesses are now approaching 50% of our total operating income, and we remain on track to exceed our goal of 50% by the end of our strategic planning cycle in 2027. We are just beginning to unlock value from our value creation initiatives. These not only provide a clear path to both cost efficiencies and margin expansion, but I expect them to fuel our growth and further support an enhanced customer experience. Execution is really well underway. Let me give you a couple of examples. We've appointed an outsourced partner to centralize, select back-office functions and we expect to see benefits beginning later this year. We continue to strategically buy out minority partners to unlock integration opportunities across the specialty products business. We are starting to generate additional savings from our indirect procurement processes by leveraging our scale advantage. And finally, we are implementing gross profit initiatives, including value pricing and enhanced growth of our corporate brands. Therefore, I am committing to the company's goal of achieving greater than $200 million of annual operating income improvement within the next few years with $125 million run rate by the end of 2026. These initiatives, along with continued execution of our strategic plan will contribute to us achieving high single-digit to low double-digit earnings growth in the coming years. We have also successfully rolled out our global e-commerce platform, henryschein.com to our Canadian and U.S. laboratory customers. We are well advanced in implementation across the U.S. with over 80% of our U.S. dental e-commerce sales now transacted over henryschein.com. We expect to complete the U.S. rollout by the end of August and to extend the platform to new customers after we plan to shift our focus to the broader international deployment. Over the past several weeks, I have worked through the details of our financial plan. Our growth outlook, combined with the progress made on value creation initiatives and a strong start to the year reinforces my confidence and my commitment that we will deliver on our 2026 financial guidance. Looking ahead, I plan to continue learning more about the business and identify opportunities to accelerate our momentum. I look forward to sharing updates in our next calls. Now with that, I'll turn the call over to Ron to review in more detail our first quarter results. Ron? Ronald South: Thank you, Fred, and good morning, everyone. Today, I will review the financial highlights for the quarter. Starting with our first quarter sales results. Global sales were $3.4 billion, with sales growth of 6.3% compared to the first quarter of 2025. This reflects local currency internal sales growth of 2.5%, a 3.1% increase resulting from foreign currency exchange and 0.7% sales growth from acquisitions. Our GAAP operating margin for the first quarter of 2026 was 5.41%, a decrease of 12 basis points compared to the prior year GAAP operating margin. On a non-GAAP basis, the operating margin for the first quarter was 7.53%, up 28 basis points compared to the prior year, driven by gross margin expansion within the global distribution and global technology products groups as well as business mix. First quarter 2026 GAAP net income was $107 million or $0.92 per diluted share. This compares with prior year GAAP net income of $110 million or $0.88 per diluted share. Our first quarter 2026 non-GAAP net income was $153 million or $1.32 per diluted share. This compares to prior year non-GAAP net income of $143 million or $1.15 per diluted share. Foreign currency exchange favorably impacted our first quarter diluted EPS by approximately $0.03 versus the prior year. Adjusted EBITDA for the first quarter of 2026 was $289 million compared to first quarter 2025 adjusted EBITDA of $259 million or 11.6% growth. During the first quarter, we successfully completed a transaction that provides us a controlling interest in S.I.N. 360, the U.S. distributor of S.I.N. Brazil's value implant systems. We are excited about this transaction as it provides us with greater control over our U.S. implant product portfolio, especially in the faster-growing value implant market. and allows us to unlock growth and back-office integration efficiencies across these businesses. As we had previously held a noncontrolling interest at S.I.N. 360, the transaction did result in a remeasurement gain of $11 million this quarter or approximately $0.07 of diluted earnings per share. We will continue to evaluate strategic opportunities to further integrate some of our joint ventures to unlock growth and efficiencies. Some of these opportunities may result in additional reregimen gains. However, further gains from such transactions, if any, are not expected to be recognized until the second half of 2026. Turning to our sales results. The components of sales growth for the first quarter are included in Exhibit A in this morning's earnings release. We will now walk through key sales drivers for each reporting segment. Starting with our global distribution and value-added services group, whose sales grew by 6.1%, reflecting continuing strong momentum in the U.S. Looking at the components of that growth, U.S. dental merchandise sales grew 5.6% or 4.1% internal sales growth, reflecting ongoing acceleration of sales growth. Data from our Henry Schein One eClaims activity indicated signs of modest procedure growth in the U.S., and we believe that in general, patient traffic remained stable to leaning positively in the quarter. Our sales volume growth resulted in market share gains and prices increased further with the introduction of some additional price increases in January. U.S. dental equipment sales growth of 3.4% was driven by sales of traditional equipment as practitioners, particularly DSOs, remain confident in investing in their dental practices, and we expect this solid growth to continue. U.S. equipment growth was supported by some exclusive supplier initiated opportunities as our suppliers continue to view Henry Schein as their best opportunity to expand market share. This helped drive sales in the traditional and digital imaging categories. Overall, digital equipment sales were essentially flat due to continued softness in sales of Interroll scanners and treat printers. This was driven by lower average selling prices from new market entrants despite higher sales volume. U.S. medical distribution sales grew 1.3% or 1.2% internal sales growth. with strong growth in Home Solutions and dialysis, partially offset by lower sales of point-of-care diagnostic test products related to respiratory illness as a result of the light flu season. This category represents roughly 15% to 20% of our medical business. Excluding the impact of the diagnostic test products category, sales growth would have been in the mid-single-digit range. International dental merchandise sales grew 12.5% or 1.8% LCI sales growth driven by sales growth in the U.K., Italy and Brazil. International dental equipment sales grew 13.4% or 3.6% LCI sales growth, with solid growth in traditional equipment. Equipment sales growth was especially good in Germany, U.K. Canada, Australia and New Zealand. Finally, global value-added services sales grew 10.6% or 7.8% LCI sales growth. Turning to the Global Specialty Products Group, sales grew 8.1% or 1.7% LCI sales growth. Our implant sales were driven by high single-digit growth in value implant systems. The sales mix of value to premium implants also resulted in a lower gross margin compared to the prior year. We expect to achieve improved growth in the Specialty Products Group going forward this year. Our Global Technology Group continued to post solid results, with total sales growth of 7.0% or 6.9% LCI sales growth. In the U.S., we had strong revenue growth in our Dentrix Ascend practice management software business. Internationally, sales growth was driven by our Dentally cloud-based practice management software product. The number of cloud-based customers increased by roughly 25% year-over-year, primarily from new accounts, and we now have more than 13,000 Dentrix Ascend and Dentale subscribers. Regarding our restructuring program, the company recorded restructuring expenses of $12 million or $0.07 per diluted share during the first quarter of 2026 as we advance our value creation initiatives. With reference to capital deployment, during the first quarter of 2026, the company repurchased approximately 1.6 million shares of common stock at an average price of $77.64 per share for a total of $125 million. At the end of the quarter, we had approximately $655 million authorized and available for future stock repurchases. Turning to cash flow. Operating cash flow was negative $97 million in the first quarter of 2026 due to a normal seasonal decrease in accounts payable and accrued expenses from the year-end. Cash flow is typically lower in the first quarter than the rest of the year, and we still expect operating cash flow to exceed net income for the full year. Turning to our 2026 financial guidance. At this time, we are not able to provide about unreasonable effort and estimate of restructuring costs related to ongoing value creation initiatives. Therefore, we are not providing GAAP guidance. Our 2026 guidance is for current continuing operations and does not include the impact of restructuring expenses and related costs and other items described in our press release. Guidance assumes stable dental and medical end markets during the year that foreign currency exchange rates will remain generally consistent with current levels and that the effects of changes in tariffs and higher oil prices can be mitigated. We have implemented a number of measures designed to offset the potential financial impact of rising oil prices at this time, which affect both freight costs and cost pricing. Our 2026 full year guidance remains unchanged. Total sales growth is expected to be approximately 3% to 5% over 2025. We expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5.23 to $5.37. We are assuming an estimated non-GAAP effective tax rate of approximately 24%. We expect benefits from value creation programs to be weighted towards the second half of the year. Adjusted EBITDA is expected to grow in the mid-single digits versus 2025 adjusted EBITDA of $1.1 billion. and we continue to expect remeasurement gains recognized in 2026 to be less than recognized in 2025. So with that overview of our business and recent financial results, we're ready to take questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: I've got a couple, and I'll just ask them both upfront or somewhat connected. When I look across first quarter performance, I guess, what really stood out to me was that gross margin result, a really nice start to the year. Can you unpack maybe a bit some of the drivers there? Is that a function of value creation benefits that we can expect to persist through the year? You're already seeing some of that? And then how do we think about this result in the context of these rising shipping costs that are just better obviously happening just with where oil has moved. And Ron, just if you could maybe unpack some of those comments you made near the end of your prepared remarks on mitigation actions, any rules of thumb we should have in mind on what oil above $100 a barrel or a one kind of barrel means for your margin profile, just so we can have a little bit of an idea on sensitivity to this metric just in, I guess, last thing here, too. Just what's -- if you can help us what's included in guidance around what you're assuming for oil. Ronald South: Sure, Jason. I think on the -- with reference to the gross margin, yes, we are pleased with the improvements that we were able to get in gross margin the year-over-year is about 25 basis points and then the gross -- the total gross margin improvement versus the fourth quarter is about 86 basis points. So you are seeing a little bit -- some of the early benefits perhaps of the gross profit initiative from value creation to more -- we have, I would say, a slightly more dynamic pricing environment that's allowing us to react in a more timely basis. But it also reflects, I believe, the fact that our own brand products continue to -- the growth of those products continues to outpace the rest of the portfolio. where we do get better margins with those products as well. So we're seeing some mix benefit. We're seeing some strategic benefit and just, I think, a greater consciousness of how well we can work with our suppliers to assure that we get competitive costs and improve our margins accordingly. With reference to the price of crude oil and what's happening in terms of some of the disruption in the energy industry, I mean, it's an area where we're watching closely. It does impact a little bit some of the freight costs coming in. We are working closely with our customers. We're not just defaulting to increasing prices or looking at fuel surcharges but there are some things that -- some measures we're trying to take to try to protect the margins a little bit as our -- as we see those costs go up. Nothing that we're seeing out there yet that we believe is creating a significant issue. We have some plans in place that we could initiate if we think we need to. But right now, like we're seeing in our guidance, we feel like based on the current situation, we are able to mitigate any related cost increases. Jason Bednar: Okay. And sorry, just to clarify, your guidance assumes oil stays where it is or you have some error bars around where oil currently is? Ronald South: It assumes that we can mitigate rising. Obviously, there's a tipping point out there, right? But it assumes that we can mitigate the changes in the cost of oil. Operator: Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering about how to think about the cadence of specialty growth over the course of the year? Just in terms of anything to call out seasonality-wise, or some of those pricing changes, Ron, that you mentioned? And then, Fred, one for you. Maybe can you talk about some of the biggest sort of positives that confirmed your sort of expectations coming into Henry Schein and then maybe some of your biggest surprises? Ronald South: Certainly. Elizabeth, I'll start, and then I'll have Fred answer your second question. I think that -- on the specialty side, the results in the quarter were in line with our expectations. There was some timing of some buys from customers that we knew would impact Q1 somewhat. But we do expect improved growth in specialty going forward in terms of what the -- what we saw in the first quarter. I think that the products there, like we still remain very positive on what we're seeing on the value implant side and the high single-digit growth we're seeing in the sales of value implants. I think gives us the confidence that we can continue to improve that growth going forward. Fred, I'll let you to answer the second one. Frederick Lowery: Yes. Elizabeth, great to hear you. Thanks for the question. When I just take a step back and think about the positives, the biggest positive to me, and I sort of said it in the script, has been the confirmation that the set of assets that Henry Schein owns that we own are incredibly important to customers. And the ecosystem that we've built here through these assets really do help customers improve their practices. And that has been confirmed from the many custom business that I've been on. And I think that's incredibly exciting. I would say it's also an opportunity because I don't think it has been exploited to the extent that we can. I think we can do a better job of improving our customer value proposition so that our customers really understand what we can do for them. and that it's not just about us helping them save costs but about helping them have more profitable practices by driving productivity and helping them with their own pricing and seeing more patients. So that's quite exciting. I would say surprises, I don't know that I would characterize anything as a major surprise, but maybe things that I was quite encouraged by would be as it relates to our team Schein members, it's been a very consistent feedback, as I've talked to many, many different employees. The feedback has been 3 things. One, we love the company. We love the culture, the strong culture in the company; two, we love Stan, and we hate to see Stan go. But three, we know that we need to change in order to be better. And that has been like a really great starting point to see people leaning in and excited about the future of the company. I would say from a customer standpoint, without a doubt, every customer visit I've been on, customers enjoy doing business with Henry Schein, and they want to do more business with Henry Schein. And they think that we can help them more and they're depending on us to help them more, which really plays into our opportunity set as we develop new products and services that support them managing and running more profitable and higher growth practices. And then the third will be with our suppliers. Without a doubt, I talk to all of our top suppliers and they all see Henry Schein as a great place for them to grow their business. So those will be the things that I would say I was -- I've been most encouraged by and excited. It gives me some confidence in the future. I'm excited about a bright future for the company. Operator: Our next question comes from the line of Jeff Johnson with Baird. Jeffrey Johnson: Welcome, Fred. So I know it's only been a couple of months in the job now, and I'm sure you're going to get a lot of focus today on the 3-year profitability improvement plan, good to see that you're reiterating that $125 million run rate by the end of this year. But I'd love to hear your thoughts on how Schein gets back maybe to delivering stronger earnings growth in the absence of these one-off kind of restructurings we've been seeing every couple of few years out of the company. How do you think about building and investing in the muscle memory of this company so we can get back to kind of that upper single, low double-digit EPS growth longer term without having to go through kind of these bigger programs every couple few years. Frederick Lowery: Jeff, thank you for the question. And I'd first start with just characterizing the value creation not as just a one-off. We're building real capability that will stay with us over a long period of time. For example, our gross profit programs are -- will be ongoing. So we will be better at value pricing in the future than we are today. We have new techniques and new capabilities there that will stay with us. So I think you'll see that continue over time. We'll continue to benefit from that. The same with the programs that we're focused on driving our own brand products or our corporate brand products. So those things will continue over time. So I would start with that. Secondly, my focus is on developing a continuous improvement process here where we don't have an episodic approach to taking cost out, but where we continue to streamline our processes really for the benefit of our customers, streamlining our process so we become easier to do business with, so we support our customers better, so we grow our business faster. And as we do that, we will actually take some cost out and become more productive. So those are the 2 ways that I think about the question. And then as we do take costs out of the business, over time, we'll be able to reinvest into areas that are going to drive greater growth and thinking about the Henry Schein One portfolio where we're investing in AI capabilities that will help us grow over time. And then finally, our high-growth, high-margin products are growing faster. As I said during the prepared remarks, we're approaching the 50% mark for operating income from those products, and we expect to reach that as expected by 2027 at the end of our strategic plan period. So I think those things will support us getting back to continuing to deliver margin expansion over a period of time. Operator: Our next question comes from the line of Michael Cherny with Leerink Partners. Michael Cherny: Maybe if I can just go into the mitigation efforts a little bit more. You've obviously had situations in the past on a macro basis, I'm thinking back to COVID, where price increases were a component to offset your business. I know you said -- I think it was Ron that you don't want to just do price increases, but how much do you preview some of those dynamics? I can't imagine your customers would be surprised if there are price increases, short-term price increases, surcharges put in place. But how do you think about going through those conversations, the engagement to make sure that if and when you do have to push price increases as an offset, that it's taken in a way that's not necessarily deleterious to the customer relationship? Frederick Lowery: Listen, I'll take that one, and thank you for the question. So just to clarify, listen, we're taking the appropriate pricing actions based on what's happening in the macro, whether that's fuel surcharges, whether it's increasing the price of a particular product that may be oil-based like gloves, for example. And so we'll have those conversations with customers where it makes sense and give customers visibility as to what's driving the change. We also will offer customers alternatives. That's part of what makes us a really great partner and to say, hey, listen, there's some other alternatives that can help you without receiving such a high price increase by looking at the entire portfolio that we have. So we'll take the appropriate actions with our customers and have those direct conversations as we see things materialize in the market. Operator: Our next question comes from the line of Jonathan Block with Stifel. Joseph Federico: Joe Federico on for John. Maybe just to look at implants a little bit closer. I think that the specialties internal growth was low single digits and implants is the majority of that. I think you mentioned high single-digit value implant growth to an earlier question. So does that mean that premium was more flat to down? And is that possibly a function of the consumer? I think premiums heavier weighted to the international business. So any color on some of those dynamics would be great. Ronald South: Yes, Joe. So I think that -- yes, like we said, the value implants did experience higher growth, keeping in mind that of the mix within implants is about a 2:1 mix premium to value for us, right? We did see some flatness in the premium implants. And I would say more so in the U.S. versus Europe, but both were in the, say, lower single digits to flat. And so I do think that there is a -- there is some -- whether it be a little consumer pressure there or whatever it might be. But like I said, there was also some timing on some transactions that where the quarter itself came in, in line with our expectations within that segment. And we do believe that we'll see improved growth within that segment as the year progresses. Operator: Our next question comes from the line of Daniel Grosslight with Citi. Frederick Lowery: Daniel, you may be muted. We can't hear you. Matthew Miksic: Sorry about that. Global Dental growth was relatively strong across both merchandise and equipment. You mentioned a couple of times that you're taking share here, but also the underlying market seems to have recovered somewhat. So I'm curious how much of the dental strength is due to share gains versus just the overall market improving? And what your visibility is into the sustainability of that momentum through the remainder of the year? Ronald South: Certainly. I think that most of our market commentary is really fairly U.S.-centric because it's difficult to kind of talk to the international markets as a whole. Within the U.S., we think there was -- we said a slightly more positive tone to the market, still relatively low market growth. But what we're seeing is that we -- our data indicates that we are taking market share there. So we got a little bit of volume growth. We got a little bit of pricing favorability within the quarter within merchandise. And in the end, in the U.S., with a local internal growth of greater than 4% is a number we're pretty happy with. Outside the U.S., you do get a little bit of some pressure that has occurred in some countries, but we had I would say, especially outside of Europe, when you look at the growth we had in Brazil and in Canada, we had very good merchandise growth there. So there's a lot of pockets of positive whether it be from the market or from us taking market share, and I think it's probably more from us taking market share in those countries where we're getting this, seeing the growth in dental. Operator: Our next question comes from the line of Allen Lutz with Bank of America. Allen Lutz: I want to follow up on that last question around the sources of share gains in dental. The U.S. merchandise sales were a little bit better than we expected and specialty was a little bit softer. Can you talk about where you're gaining share. Ron, I think you mentioned that you're gaining share in the merchandise sales. But have the pockets where you've been gaining market share in general? Have they -- in the U.S. market, have they changed or evolved over the past year or the past couple of quarters between merchandise and specialty? And then how do we think about what you expect for share gains or the sources of share gains for the remainder of 2026? Ronald South: Well, I mean, I don't know if there's any one -- when you say pockets, I don't know if you mean product categories, but I don't think there's anything like any specific product category I would point to. I think it's broader than that. I would say if you're looking for something specific, we are seeing better growth of our own brands than we are with the -- versus the balance of the portfolio. So that is an area that has I think, given us some opportunity to provide some growth that exceeds that of the market. We're also kind of continuing with I think some of the success of the promotional activity we did last year, and that has provided us with some momentum, and we've been able to retain a lot of those customers that we picked up and that increased share of wallet that we picked up with some existing customers that -- so some of that growth you saw in Q3 and Q4 has continued into Q1. Operator: Our next question comes from the line of John Stansel with JPMorgan. John Stansel: Just following up on that point around maybe DSOs in particular. I think you've said over the last couple of months that they're gaining share or growing faster than the market. Is there anything particularly driving their growth above market growth rates? And then maybe just for Fred, as you've had discussions with them, particularly, what are they looking for that you see as opportunities for Schein to provide to the DSOs. Frederick Lowery: Yes. I'll take maybe -- I'll start, and Ron, you can add to this. But one thing to consider about even the last question on market share is that we're growing with DSOs. We have a strong position with all the national DSOs, the most of the national DSOs, almost all of them and they're growing faster. And so we're seeing the benefit of that growth. But when I've spoken with the DSO leaders and I've spent quite a bit of time with them. They appreciate the fact that we're able to support them nationally. They appreciate the fact that we're able to help them improve their efficiency. They appreciate the fact in many cases, that they're leveraging our technology to improve their profitability. And we've got access to some of the best exclusives in the market that are helping to drive their growth. So I think that total platform that we've built to support, particularly in this case, dental, that DSOs are benefiting from that. And so those are the kind of the feedback points that I've received from DSOs. Operator: Our next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Fred, I want to talk a little bit about the organic sales growth at a high level. I mean, as you sort of highlighted in your prepared remarks, the second half of the year was particularly strong. And looking at the fourth quarter, we exited at a pretty robust rate. Now you obviously moderated a little bit from that trend and you spoke about medical. And I'm just kind of curious, can you give us some color about how the quarter maybe played out sequentially kind of thinking about the fact that other companies have sort of commented that weather may have impacted January we have the war now in March. And I'm kind of curious if you could give us any early view on sort of April and how things have played out. Frederick Lowery: Yes. Thanks for the question, Glenn. Looking at the quarter sequentially, we saw better performance sequentially through the quarter. So March was stronger than February. Part of what you're seeing in Q1 is the softness related to our respiratory business or because of the light and flu season. And maybe there's a little bit of weather, I would say it's more of the flu season than weather for us. But sequentially, we saw that get better and even that continued in April. So April continues to be strong. Operator: Our next question comes from the line of Kevin Caliendo with UBS. Kevin Caliendo: The remeasurement -- excuse me, not the remeasurement, the cost savings program, what -- can you just give us a little bit of a cadence? I understand the exiting of the year at $125 million is great. Can you size what the costs were in 1Q? When do you think it's going to be breakeven within the P&L? Just trying to understand the cadence. I know you don't like to give quarterly guidance, but just this part of the of the business would be really helpful to understand. Ronald South: Yes, Kevin, I think that the financial impact, at least with reference to the G&A portion of this was, I would say, was relatively nominal in the first quarter because we incurred some costs associated with the programs. We saved some costs associated with the program. we're going to start seeing that savings begin to accelerate as we get into the second quarter and then even more so in the third and the fourth quarter. So that's the root of our of our comment when we say we expect to see better earnings in the back half of the year than the first half of the year because it will be largely driven by some of those G&A cost reductions. I think equally, but it's -- I don't want to forget about the gross profit optimization as well because we do think that there were some benefits in Q1 from it. We think that those benefits can continue to grow as we get into the year. and we'll continue to accumulate into the -- especially into the back half of the year. So in terms of the quarterly cadence, it's really more to what's the back half versus first half, and we still expect the back half of the year to have better earnings in the first half. Kevin Caliendo: Got it. If I can ask a quick follow-up just on the remeasurement stuff. So there's $11 million this quarter and your guidance assumes that from an operational perspective, it will be less than last year, right? So that would imply single digits the rest of the year. Is that -- am I thinking about that the right way? Ronald South: Single digits in terms of EPS? Kevin Caliendo: No, in terms of dollars, in terms of EBIT impact or EPS, however you want to describe it. I'm just trying to understand what's sort of embedded for the rest of the year. Ronald South: Yes. I mean we're -- like I said, we're contemplating a range. And I believe in the prepared remarks, we said any remeasurement gains, if any, I mean there's no guarantee we will have any more remeasurement gains this year, but that's the -- we look at the opportunities there. We look at the strategic initiatives we're taking and which of these joint ventures would it make sense for us to consolidate, and that is contemplated in the overall guidance that we've provided. Operator: Our next question comes from the line of Brandon Vazquez with William Blair. Unknown Analyst: It's Max on for Brandon. Just one quick one for me. On the medical supply side of the business, are you guys seeing any impacts from noise around ACA or Medicaid work requirements or do you have any concerns about this impacting procedural volumes going forward? Ronald South: I would say that clearly, there's going to be -- I'm sure there's some impact, but we -- we're not seeing it as having a material impact at all really on the business. I mean, I think that at the end of the day, the more people who have access to care, the better off we are on the medical side. But this is really a, I think, a relatively small part of a lot of our customers' business, and we don't expect it to be that -- have a significant impact. Operator: And now we have time for one last question coming from the line of Michael Sarcone from Jefferies. Michael Sarcone: I was hoping you can just elaborate a bit more on what you're seeing on the equipment demand side, particularly for the digital equipment? Ronald South: Yes. On the digital side, we're still seeing very good demand for intraoral scanners. That's really the -- to me, that's the key product in digital. But we continue to see lower-priced entrants to the market, which is actually helping drive demand of intraoral scanners. And the beauty of intra-oral scanners, and I've said this before, is once a practice is investing in intraoral scanners, they become a digital practice, and then they are now they become a customer to buy other digital equipment. So while those prices have depressed a little bit and do hurt a little bit of that top line growth, it does give you an opportunity to sell additional digital equipment to those customers going forward. Traditional equipment still had very good growth in the quarter, and that's a very good indicator of the confidence and practices who are investing in their practices, either adding a chair or renovating a chair. And we continue to feel like the backlog on our traditional side is healthy and will help gives us the confidence that we can continue to see growth in equipment as the equipment sales as the year goes on. Frederick Lowery: Well, thank you, again, for joining us today. And I'd like to maybe just give a few concluding remarks. First, we delivered a strong first quarter. Sales momentum continues and the U.S. Dental and Global Technology businesses delivered strong sales growth, more than offsetting the softness in medical. Margins are also expanding, driven by favorable business mix and some early impact from value creation. Secondly, I'm encouraged by the progress we've made on our value creation initiatives. I do remain very realistic about the work that's ahead but we are committed to achieving the $200 million target and the $125 million run rate by the end of the year. The early progress gives me confidence that these initiatives will be a meaningful driver of operating margin expansion over the next several years and will contribute to achieving future high single-digit to low double-digit earnings growth. And third, I believe the full year 2026 financial guidance is appropriate. It assumes stable end markets and takes into account potential macro uncertainty. While our fundamentals are strong, I see meaningful opportunities to enhance our operational execution and performance culture. This will take time, but the work is actively underway, and I'm confident it will drive sustained value creation. I'm optimistic about what lies ahead, and I look forward to updating you on our progress throughout the year. Thank you for your interest in Henry Schein, and enjoy the rest of your day. Operator: Thank you. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Welcome, everyone. The KBR's First Quarter 2026 Earnings Call Conference will begin shortly. Hello, everyone, and thank you for joining the KBR's First Quarter 2026 Earnings Conference Call. My name is Gabriel, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Rachael Goldwait, Head of Investor Relations. Please go ahead. Rachael Goldwait: Thank you, and good morning. Welcome to KBR's First Quarter 2026 Earnings Call. Joining me today are Stuart Bradie, President and CEO; and Chad Evans, Executive Vice President and CFO. Stuart and Chad will cover highlights from the quarter, and then we'll open the line for your questions. Today's earnings presentation is available on the Investors section of our website at kbr.com. This discussion includes forward-looking statements reflecting KBR's views about future events and their potential impact on performance as outlined on Slide 2. These matters involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements as discussed in our most recent Form 10-K available on our website. This discussion also includes non-GAAP financial measures that the company believes to be useful metrics for investors. A reconciliation of these non-GAAP measures to the nearest GAAP measure is included at the end of our earnings presentation. I will now turn the call over to Stuart. Stuart Bradie: Thank you, Rachel, and good morning, everyone. I'll pick up on Slide 4. Now before we get into the results, I wanted to share a brief 0 harm moment on staying connected especially in challenging times. At KBR, zero harm starts with keeping our people informed and supported even when they're hard to reach, whether they're on a remote site, a project location or in an office. The focus on reaching the unreachable is what led to the launch of the KBR Pulse app. Pulse was not built in response to a crisis. It actually came out of a global employee Hackathon where our teams identified a better way to stay connected across our diverse and distributed workforce. It is employee-driven, built by our people for our people, and it provides easy access to viewers, safety updates and company resources wherever work happens. When the conflict in the Middle East escalated, Pulse quickly became a critical channel for sharing timely updates on guidance. Most importantly, it helped us stay closely connected with our teams in the region and all of our people have remained safe, supportive and informed. Pulse helps us reach employees who are not sitting at desks and reinforces our ability to act as one team, even in the most challenging environments. It is a practical example of how listening to our people and then investing in the right digital tools strengthens our zero-harm culture and supports resilience when it most matters. On to Slide 5. Today's call will cover these key topics. Firstly, I'm pleased to report that we started the year well, demonstrating disciplined execution and resilient operators. Secondly, we continue to see demand in our core markets with clear pipeline visibility. Third, we're advancing our planned spin transactions more than that later and thus, sharpening our strategic focus. And finally, we are reaffirming our 2026 guidance and remain committed to execution, margin discipline and strong cash generation. Moving to Slide 6, where I'll start by covering the STS business. Over the last few quarters, we've seen customer priorities move toward energy security, reliable supply and resilient infrastructure. A more complex geopolitical environment is reinforcing these trends and shaping both capital spending and services demand across our end markets. With that context, I want to provide a bit of color on where we're winning work today and how those wins align to our strategy and how that sets up the near-term pipeline on the next slide. For the third consecutive quarter, STS delivered book-to-bill ex LNG well above 1.0. Demand continues to be anchored in energy security, downstream reliability and long-duration asset services with a balanced mix of capital projects and recurring services work, supporting growth and improving backlog visibility. In energy security and transition, customers are prioritizing execution certainty across upstream, downstream and gas infrastructure. This quarter, highlights include project management services for the Zales South refinery in Libya, integrated field management services at the Magino oilfield in Iraq and a long-term general maintenance contract at Sator in Saudi Arabia. These wins reflect continued investment in mission-critical assets where reliability really matters. In Critical Materials and circularity, we are winning life cycle orientated work that extends asset life and improved performance. During the quarter, we secured a long-term catalyst supply agreement supporting Indorama's ammonia operations alongside optimization work across chemicals and materials assets. In Infrastructure and Transport, we continue to pursue selective program and project management opportunities, including water infrastructure work in the Middle East and sustained activity in Australia across rail, water and defense adjacent infrastructure. Overall, our bookings reflect a capital-linked engineering and project foundation with selective layering of recurring operations and maintenance services. This deepens our customer relationships and extends our role across the asset life cycle and, of course, improves backlog visibility. We're also adding digital capabilities where they strengthen our role with the customers. Our partnership with Applied Computing supports data-driven and AI-enabled solutions that are expected to connect project execution to maintenance and operations while staying disciplined within our capital light model. To put this in context with some key metrics, STS first quarter book-to-bill ex LNG was 1.2x, with a trailing 12-month book-to-bill of 1.2x. Backlog ended the quarter at approximately $4.7 billion, and that is up 9% year-over-year. [indiscernible] pipeline, again, excluding LNG, is more than $5 billion was roughly 80% from repeat customers. And work under contract today now covers approximately 67% of our 2026 revenue guidance, which is a good place to be at this time of the year. The momentum we're seeing in bookings is consistent with the pipeline outlook, which brings me to Slide 7. This matrix shows where near-term pipeline activity is clustering by market and region. It's directional, not a forecast of timing, size or conversion. Stepping back, the pattern reflects 2 core dynamics. First, we are seeing broader distribution of critical programs rather than reliance on single large awards. Second, customers are advancing work through early engineering and phased scopes, reflecting disciplined progression across project life cycles. From there, 5 themes explain how demand is showing up across regions. First, energy security and resilience in the Middle East. Customers continue to prioritize reliability, redundancy and throughput expansion across critical infrastructure. Recent geopolitical conflict is reinforcing these priorities with increasing emphasis on resilience alongside restoration and rebuilding efforts were needed. Importantly, we have not seen any material change in capital spending priorities as customers continue to fund essential programs already underway. These tend to move as multiyear programs that award engineering work early, supporting a steady and visible near-term opportunity set. With a strong local throughprint and established relationships, KBR remains well positioned to support customers across the region, particularly as they navigate evolving conditions. Second, resource security within critical minerals and circularity across the Middle East, Africa and parts of the Americas. Governments and producers remain focused on maintaining and expanding supply of essential inputs particularly ammonia. This includes continued demand for licensed ammonia technology and proprietary solutions with customers increasingly engaged early with engineering-led scopes, again supporting durable near-term booking opportunities. Thirdly, pragmatic transition activity in Europe. Near-term transition demand remains largely engineering-driven including design, permitting and modularization across key transition value chains. We are seeing particular demand in areas such as sustainable aviation deal alongside policy-driven feasibility and pre-FEED studies as customers assess options and navigate regulatory frameworks. Fourth, energy security and critical materials across the Americas. Customers are pursuing targeted programs that strengthen energy exports, improve reliability and, of course, support domestic supply chains, particularly across LNG adjacent infrastructure and processing and separation assets tied to critical materials. And finally, Infrastructure and Transport in Australia. Near-term opportunities remain concentrated in government-funded transport, defense and enabling infrastructure programs with a strong emphasis on alliances, framework [indiscernible] and stage delivery models. Work is predominantly engineering, PMC and early works rather than full greenfield execution, which supports recurring capital light bookings and reflects customers' focus on resilience, capacity expansion and program continuity. Overall, the Matrix reinforces the STS bookings, a near-term pipeline are diversified and concentrated in stage programmatic work aligned with resilience and resource security priorities. And this plays directly to our engineering-led, capital-light model and repeat customer relationships. Now on to Slide 8 for the mission tech business. As we've discussed over the last few quarters, awards are not flowing at historical levels. In this environment, our focus remains on what we can control, increasing both the volume and quality of our bid activity, expanding access to IDIQ vehicles and continuing to position the business for future awards. While several larger opportunities remain pending, and, in some cases, under protest, we continue to win work that aligns with our core capabilities and the government's most enduring priorities. Recent mission tech wins reflect a consistent set of strengths. We are buying digital engineering and analytics to help accelerate time lines, leverage AI and data-driven insights to support higher confidence decisions, and delivering trusted execution in mission-critical environments. In space and national security, we won new work supporting the U.S. space force, applying digital engineering and analytics to help accelerate the development and deployment of next-generation space capabilities. We also secured a new role, providing direct data and analytical support to senior defense leaders focused on translating complex data into actionable insight for critical decisions. On the civilian side, we were awarded a recompete with the Department of Transportation's, [indiscernible] Center extending a long-standing partnership focused on using AI, analytics and systems engineering to modernize transportation and improve safety. And lastly, we secured contract extension under the Army's LOGCAP program, reinforcing KBR's role supporting the U.S. military with mission-critical logistics and sustainment in complex operating environments. Before moving on, I wanted to briefly address what we're seeing at NASA. KBR has supported NASA emissions for more than 60 years. And recently, the administrator has indicated an interest in in-sourcing certain core workforce competencies. If implemented, these changes would affect the mix of work across some programs and that impact is reflected in our 2016 outlook, which Chad will discuss in more detail as we walk through the guidance. Importantly, KBR continues to support NASA in areas with deep mission experience, independent technical expertise and operational continuity are essential. We are very proud of our team's contribution to the ARTEMIS 2 mission and have a decades long service to the agency. As you'll hear from Chad, these emission tech dynamics are being offset by strength in sustainable tech, so the impact is primarily mix as we reaffirm our full year guidance. Stepping back and looking across the portfolio, recent wins reinforce where MTS is differentiated. We operate in mission-critical environments that demand speed, technical debt and trusted execution with digital and data capabilities playing an increasingly central role in mission success. So to put this in context with some key metrics, MTS' first quarter book-to-bill was 1.0 with trailing 12 months book-to-bill of 1.0. Backlog and options ended the quarter at $18.5 billion, with 39% of that funded, excluding the PFIs. Bids and waiting award totaled $16 billion and work under contract now covers approximately 91% of our '26 revenue guidance. And we continue to make progress towards our bid volume goal of $25 billion in 2026 with significant submissions expected in the next 2 quarters. With that, I'll turn to Slide 9 and our near-term pipeline opportunities. This slide provides a directional view of where we see the MTS near-term pipeline forming across markets and customer sets. It is not intended to indicate precise timing, size or conversion, but rather to highlight where demand is clustering based on our current visibility. We see 2 core dynamics shaping the pipeline. First, customers are prioritizing a more selective set of enduring machine-critical programs with long-term relevance and funding durability, a trend evident across U.S. and allied defense markets, including Australia. Second, we are increasingly valuing partners who can integrate across the [indiscernible] and translate software and data-driven architectures, into operational capability at speed. Those dynamics translate into several clear demand themes across the portfolio. First, national security space and space mission operations with programs award technical debt and integrated delivery from digital engineering through operations. This includes long-standing work supporting the U.S. space forces, military satellite communications mission on related space architecture. Second, integrated air and missile defense, including counter U.S. and directed energy. Here, customers are prioritizing layered, scalable solutions that reduce cost per engagement. Our role centers on integrating new capabilities into existing architectures, so customers can field solutions faster and, of course, more affordably. Third, connected balance pace and Decision advantage as customers invest to compress decision cycles by linking senses to decisions at the edge. We are supporting architecture and integration efforts aligned with JADC2 objectives, including work related to the Air Force bottle network. Finally, we continue to see durable demand in readies sustainment and deployed mission support, including Allied life cycle programs. These missions place a premium on reliability, scale and end-to-end accountability, and we're increasingly applying AI-enabled tools, including through our partnership with tag-up AI to help improve sustainment workflows and readiness outcomes. Across these areas, the common thread is customers prioritizing speed, integration and measurable mission outcomes, areas where MTS is positioned to deliver. On to Slide 10 and an update on the spin. Next, I'll provide an update on the tax rate spin of MGS, which remains central to our strategy and to sharpen focus and, of course, create long-term shareholder value. The strategic rationale for the separation remains unchanged. This spend reflects the culmination of a decade-long portfolio transformation and will result in 2 independent pure-play companies with clear strategic focus, distinct investment profiles and dedicated leadership aligned to their end markets. As part of this process, we evaluated all strategic alternatives and concluded that a spin is the right path to unlock value and position both businesses for long-term success. We are executing on this path while ensuring the separation is completed in a way that protects continuity, minimizes risk and positions both companies for success from day 1. We continue to believe a quarter end spend is the most practical approach both operationally and financially. And given the scope and complexity of separation, a fourth quarter time line provides additional runway to address these complexities. As a result, we are working toward an effective spin date of January 4, 2027, so the first business day of fiscal '27. On the regulatory front, we have confidentially resubmitted our Form 10 including the fiscal 2025 audited carve-out financials. We expect continued confidential refinement through the SEC review process before transitioning to a public filing, which we currently anticipate in September. In parallel, we're advancing the IRS private letter ruling process to support a tax-free transaction. From a leadership standpoint, we are now well advanced on talent migration. The MTS CEO set is in its final stages, with Board interviews plan for later this month. And the CFO process is expected to follow shortly thereafter. At the same time, additional leadership and functional appointments are beginning to be announced across both organizations, helping to build clarity and momentum. Operational separation continues to progress. We have completed the IT standup project plan and are now executing against it, supporting coordinated separation across systems, processes and controls. And in parallel, teams are advancing real estate and legal entity rationalization to position both companies to operate independently at close. Looking ahead, we plan to host 2 Investor Days in the second week of November. These events will outline the stand-alone strategy, operating models and long-term priorities for both the STS and MTS businesses ahead of the transaction close. Overall, the dedicated spin transaction team remains fully engaged across all work streams and coordination across the organization continues to build reinforcing our confidence in execution. With that, I'll turn it over to Shad. Shad Evans: Thanks, Stuart. I'll pick up on Slide 12 with the consolidated first quarter results. We started the year with solid momentum despite a challenging backdrop. Revenues declined $95 million year-over-year, driven primarily by the planned reduction in EUCOM contingency, as outlined on our last call. Excluding EUCOM, revenues were largely consistent with prior year, and we did not experience any material impact from the Middle East conflict during the quarter. Despite lower revenue, adjusted EBITDA increased by $3 million year-over-year. supported by strong program execution and favorable mix across the portfolio. As a result, adjusted EBITDA margin expanded to 13.1%, up from 12.3% last year. . Adjusted EPS was $0.96, down $0.05 year-over-year, primarily due to higher financing expenses from unconsolidated joint ventures. This was partially offset by lower average shares outstanding following open market repurchases throughout 2025. Cash flow was a key highlight for the quarter. Adjusted operating cash flow totaled $119 million, up $28 million year-over-year, reflecting strong DSO performance and resulting in 98% adjusted OCF conversion. Overall, the quarter reflects disciplined execution, margin resilience and strong cash generation, even as revenues were impacted by known and anticipated program dynamics. On to Slide 13 for segment performance. Results this quarter demonstrated solid execution and performance was in line with expectations across both sustainable tech and mission tech. Starting with sustainable tax revenues were down $10 million year-over-year, primarily reflecting new awards that are still ramping and have not yet contributed meaningfully to revenue. Adjusted EBITDA increased by $2 million year-over-year with margins expanding approximately 70 basis points to 21.9%, driven by equity and earnings contributions from an LNG project. Excluding this project, underlying margins in the business were 16.1%. Turning to Mission Tech. Revenues were down $85 million year-over-year, driven primarily by the planned reduction in EUCOM contingency work. Excluding EUCOM, Mission Tech revenues were in line with prior year with the growth in the U.S. and Australian defense programs, offset by the combination of award delays, protest activity and funding restrictions at NASA. Adjusted EBITDA was essentially flat year-over-year, declining $1 million, while margins expanded to 10.6%. Margin performance reflected the roll-off of lower EUCOM work continued disciplined execution and increasing mix of higher-value offerings. Overall, segment results reflected solid execution, expected mix dynamics and continued focus on disciplined margin management across both businesses. Turning to Slide 14. As we committed last quarter, this slide breaks out the underlying sustainable tech margin structure separating the LNG project and showing how the broader portfolio is positioned as that project rolls off and our JV footprint expands over time. As you see on the left, you can see the margin tiering across the STS portfolio. Higher margins are driven by technology licensing and differentiated engineering while international OpEx services, PCM and proprietary equipment fit in the middle. At the lower end is domestic maintenance, which we primarily access through our recurring JV structure, including breast, allowing us to participate with appropriately managed risks and returns. As shown on the right, that mix supports a 20%-plus weighted STS margin profile in 2026 driven by technology, engineering and JV participation. Over the last several years, growth in our services business has outpaced technology sales, resulting in margins of approximately 15% with the LNG project adding an incremental 500 basis points. Importantly, the backfill of this LNG project is portfolio based rather than a 1-for-1 replacement. As that project rolls off, growth in higher margin and more recurring streams, particularly technology licenses and JV OpEx work support a more durable margin profile over time. Overall, this slide reinforces the STS margins are structural, supported by deliberate portfolio shaping, disciplined program selection and contract structures that align risk and return. With that, let me turn to Slide 15. As mentioned earlier, cash generation was strong in the quarter. particularly given the fact that the first quarter is typically a low cash flow period for us. That performance reflects disciplined execution and the underlying cash generative nature of the portfolio. Net leverage increased modestly following our investment in Bris to fund the SWAT acquisition, ending the quarter at approximately 2.3x trailing adjusted EBITDA that remains comfortably below our stated ceiling of 2.5x and maintaining that leverage discipline remains a key guardrail for us. More importantly, our approach to capital allocation remains balanced and disciplined. We continue to invest for growth, return capital to shareholders, maintain prudent leverage and incorporate the expected cash outflows associated with executing the spin-off transaction. Overall, our strong cash generation provides flexibility across these priorities and supports disciplined capital deployment going forward. On to Slide 16 and full year guidance. Today, we are reaffirming our full year guidance and range across all metrics. Within that framework, we're operating in an environment where the range of potential outcomes is wider than normal for our government services portfolio. Geopolitics and policy shifts across the U.S. and Australia can create both opportunity and funding risk and those factors are influencing how demand flows across the portfolio. Building on Stuart's comments, the dynamics we're seeing are reflected primarily in segment mix rather than a change in our full year outlook. In Mission Tech, we expect revenue to be flat to modestly down year-over-year, largely reflecting unresolved protests in the first half that delayed anticipated ramp activity. Those impacts particularly related to the MIS contract are timing driven. And we feel good about the underlying award and the transition profile as regional disruptions get resolved. In addition, given the uncertainty around potential program level changes at NASA relating to the workforce directive Stuart referenced earlier, we have incorporated a modest second half decline, assuming those changes are implemented. These impacts are more than offset by strong performance in sustainable tech, where we now expect to deliver mid-teens year-over-year revenue growth. driven by award momentum and elevated service demand. Taken together, this results in revenue phasing of approximately 47% in the first half and 53% in the second half, reflecting a relatively stable mission tech run rate and second half growth in sustainable Tech as customer activity normalizes and recent wins ramped, particularly in regions impacted by the Middle East disruptions. Importantly, there are no changes to our adjusted EBITDA, adjusted EPS or adjusted operating cash flow guidance. However, we may see some volatility in adjusted operating cash flow during the second quarter as the Middle East conflict is resolved. Our underlying assumptions remain consistent with what we outlined on our last call with today's puts and takes reflected in segment mix rather than a change in our overall outlook. With that, I'll pass it back to Stuart. Stuart Bradie: Thank you, Shad. On to Slide 17 to wrap up. There are 4 key takeaways from the quarter. Firstly, we delivered a solid start to the year with disciplined execution, resilient operations and continued margin and cash focus. Second, demand in our core markets remains durable, and we have clear visibility, work under contract today now covers approximately 67% and of our 2026 revenue guidance in STS and 91% in MTS. Third, we continue to advance our planned spin transaction with key milestones progressing as we prepare for a targeted distribution on January 4, 2027. And finally, we are reaffirming our 26th guidance ranges, and we remain committed to execution, margin discipline and strong cash generation. We appreciate your continued interest and support, and we look forward to updating you on our progress throughout the year. With that, I'll turn it back to the operator for Q&A. Thank you. Operator: [Operator Instructions] Our first question is from Adam Bubes from Goldman Sachs. Adam Bubes: Margins in the quarter, I think, 13.1%, appears modestly ahead of your expectations, and it's above the full year guide. I recognize that equity income can drive some quarter-to-quarter margin noise. But can you just help us parse out what came in better than expected on the margin line this quarter? And anything we should keep in mind when thinking about the trajectory of margins and equity income through the balance of the year? . Shad Evans: Yes. So I'll take that one, Adam. Again, as you point out, margins remain in line with our long-term targets with 10% plus for MTS and took a 20% for STS through 2026. We do expect continued contributions from the LNG project to continue into early '27. And we'll be kicking off our 2027 budgeting process here shortly, which will, of course, have the stand-alone costs for corporate structures and margin expectations for both businesses that we really look forward to highlighting in Investor Day in November. And then can you just help us think about the Brown & Root equity income contribution on a run rate basis following the SWOT acquisition? And maybe can you talk about the magnitude of the M&A pipeline for Brown & Root, what's your vision for that piece of the business in the medium term? Sure. I'll take the first one, and then Stuart can cover the M&A piece. So as you'll see on our website, in the fact sheet, the recurring joint venture contributions generated approximately $18 million of EBITDA in the quarter, and we expect that contribution to tick up modestly as the year progresses. Strong year-to-date bookings really begin to ramp in that portfolio, and that will provide incremental volume in the back half of the year. Stuart Bradie: And on the M&A pipeline, we continue to not sit in our hands. We continue to look at opportunities that will take us both into new geographies and into all reasonably adjacent industries. And I guess more to come on that as we look forward, there's plenty of opportunity. We need to be very disciplined in the way we look at that, both from margin accretion and fit and obviously, values and culture perspective, but certainly more on the table to look at as we go through the year. Operator: Our next question is from Andrew Kaplowitz from Citi. Unknown Analyst: This is [indiscernible] on behalf of Andy Kaplowitz. I guess first question will start off with just on the margins on SCS margins, like I appreciate the call out on margin XLN this quarter. But could you help us think about the underlying margin profile ex LNG and the margin trajectory going forward or over time? And as compared to your long-term framework and you're like 20% plus margin as well. . Stuart Bradie: So as promised, we gave more transparency into the buildup of the margin profile within SDS and contribution that comes from the lock project in equity and earnings, and hopefully, that's been useful. In the quarter, ex that project, we made 16.1%. I think that was in Shad's prepared remarks, -- and so the circa 15% that we put in that slide generally is the mark for the base business as we look forward and ex that LNG project. . Now that could change over time if we do win something with that sort of commercial construct, but hopefully, that gives you a good indicator of how this business performs. And we've got in file just to add to that, we there are margin expansion opportunities on mix, particularly around technology, where you can see in that breakdown where the margins in that business are well in excess of 20% in truth. And the more we do in licensing. And I guess, they're sort of initial sort of engineering, the better for margins. And the timing of that is difficult to predict. So you get some [indiscernible] -- and the more we grow the operational OpEx side of the business under brisk, which is obviously part of our strategic push. Obviously, that comes through equity and earnings, and you'll see that growing stronger as the year progresses, which again is good for margins. Unknown Analyst: Got it. That's helpful. So underlying margin ex LNG still see creeping up over time to that 20%-plus range. Stuart Bradie: Well, 15 going upwards, I would say. Operator: Our next question is from Jerry Revich from Wells Fargo. Jerry Revich: Yes. I wanted to ask on NASA. Can you just talk about what the ebbs and flows look like from a booking standpoint, there's been volatility between the President's request and Congress reinstatement of funding. Can you just talk about how that has impacted timing, if at all, for you folks and what we should be looking for in terms of booking and activity levels over the remainder of the year? Stuart Bradie: Yes. The main comment, Jerry, on NASA related to the new administrators push for greater in-sourcing. So effectively moving people who are on contractor staff back on to government payroll that is being discussed and being looked at today, and we think that may or may not happen over the next little while, but certainly, if it does, it will be gradual. But we did call that out in the call. That's a recent event in the quarter. In terms of the scale of that to KBR, it's 50 million, 60 million or so through the course of this year that happened today. So it will be a lesser impact than that likely. So that's really the discussion there in terms of the broader impact to NASA budgets, we're not seeing any real issue there in terms of what's happening in terms of the levels of service and the commitment to funding that we've experienced over the last little while. So that feels pretty steady at the moment. Jerry Revich: And separately, can I ask on STS just to unpack the prepared remarks, it sounds like you folks feel pretty good about the ability to backfill to replace the LNG project. Can we just expand on that conversation? How much visibility do you have on replacing that project in the earnings power of STS '27 versus '26 and then you had really favorable project closeout performance in the quarter, which was great to see. Can you just help us quantify that and help us understand in '26 are we trend line level of closeouts, higher or lower, just to give us context as we start to think about the bridge into '27? Stuart Bradie: Jenny, you've followed us for quite a long time now. You know that we are prudent as we look at project accounting, we don't want to surprise to the downside. So we manage that carefully and prudently. So there are always ongoing favorable project. There was a so nothing unusual there. And I'm sure that will continue into the foreseeable future as long as we continue our current practice, which we will do. . In terms of bookings momentum, third quarter in a row of very strong bookings for STS, 1 point, well over 1.2 and across that spectrum with a significant pipeline of opportunities that gives us really good confidence about continued momentum in that bookings profile and the growth that comes with it effectively. We are ramping up new awards as we announced those awards in late last year and early this year, and those projects are ramping up right now. In fact, with new risk people coming on to KBR's books in over a couple of thousand people [indiscernible]. And so we're starting to see really strong cadence there. We started this quarter pretty well. We're only a month in or so, but it's been a solid start to this quarter also and the pipeline of opportunities, we tried to give you color as to where that activity is in the slides and the different mix of drivers that are driving those awards, and we expect to see that to continue to -- it's a global operation with a very strong footprint in areas where there's a strong commitment to funding and project development driven by whether it be energy security, food security, energy transition or what's happening in critical infrastructure in minerals. So again, we're feeling pretty good about that and feeling very confident in terms of the ongoing performance of the STS business. Operator: Our next question is from Ian Zaffino from Openheimer. Ian Zaffino: Great. Would you guys be able to give us a little bit more color on kind of the Middle East bookings. How is that going? What's kind of the current environment? And I guess if we kind of stick on that a little bit with on the MTS side. How do we think about maybe the U.S. reducing NATO exposure or the troop movement. Would that be somewhat of an impact to you guys? Or how do you think about that as well? Stuart Bradie: Okay. So let me start with the Middle East and STS mainly because I was there last week for a visit and went to Saudi and Bahrain and into Abu Dhabi and Dubai to visit our folks and all the key customers there. I have to say I was really uplifted with that visit think the resiliency and just the commitment was absolutely amazing. I think the customers really appreciated that we have performed all through this volatility and management, we're actively supporting and doing the right thing for our people, but they were doing the right thing for their customers. We have seen no slowdown in activity. Our ambition and our desire to staff up work that we won in Saudi continues without really interruption, similarly in what's happening in Qatar and the Abu Dhabi businesses continue to grow as does Dubai in terms of what they are doing. So really all up a really positive visit with strong award cadence and ongoing performance. So there's obviously richness and being on the ground and with the sort of delivery reputation and the capability set that we have locally as well as being able to support that internationally [indiscernible] as well as we look to support those customers as they look to do restoration and repairs and really sort of look at their long-term strategy of lessons lent through the war, if you like, in terms of things like protection of critical areas that some of the the sales track were very targeted in critical areas like operations rooms and things like that and how we can provide more resilience or sparing into existing facilities, but also looking at whether there should be additional export routes and things like that, so that they're not so handcuffed as they are today. So I think lots to do there and very positive about the outlook in the Middle East. Turning to your sort of last question on what's happening with the activity in Europe and recently all over the press about reduction in Germany, I think there's 2 pieces just to put in context. I think that it's about 5% of the overall strength in Europe is that number. And I think some of that may well have been encapsulated in some of the planned drawdowns already. We're not expecting any material impacts to our business as a [indiscernible]. Ian Zaffino: Okay. And then just as a follow-up, as far as timing, what was kind of the -- it looks like it's a little bit behind schedule. What was driving that? And maybe any other color you could give us as far as -- because I know in the past, you talked about giving us more detail at the Investor Day, but that now seems to be delayed a little bit. So how are you thinking about delivering maybe that information to us maybe at the same time that you had thought even though there's not an Investor Day? And maybe any other type of color you would think about delays with the spin, et cetera. Stuart Bradie: Yes, I'll give you a little bit of color there. We've made good progress with the regulatory piece in the spin -- the discussions with the SEC and IRS have been highly constructive. And so we're feeling good about that. And I gave an update on how we're doing with people and sort of people transitions and obviously bringing the new CEO in, et cetera. So I'll try to cover all that in the prepared remarks. So that is progressing very well. We were targeting around like Q3 for the spin originally. So I think October and when we started to look at this when you think about accounting, if you think about benefits and salary adjustments, et cetera, it makes it so much more sensible and logical to do this at the beginning of a fiscal year when all that lines up. And also in truth, it also builds in a little bit of float into the schedule as we work through IT complexities and things like that, that I've never seen an IT project finish on time anywhere really. I don't know if anyone has -- so having a little bit of flow in there means that we mitigate any risk of being able to operate as 2 independent entities with [indiscernible] systems and things. So nothing more sinister than that. And obviously, by moving that date it makes more sense to hold the Investor Days closer to the actual spin, so the data is more relevant in Pim's top of mind, if you like, as they're looking to separate and then when you kind of work back from that or everything else lines up in terms of the public filings and things like that. So again, nothing sinister. We committed to giving more color as we've gone through the year as we've done in this earnings call in truth about the breakdown of STS and how that operates and the performance associated with that. And we'll continue to build on that as we go forward. So it does not [indiscernible] between now and Investor Day. We won't tell you everything or we point the tubing Investor Day, but we will give you more color as the year progresses and I commit to doing it. Operator: [Operator Instructions] Our next question is from Mariana Perez Mora from the Bank of America. Mariana Perez Mora: So my first one is a detailed one, and then I'll follow up with more of an end-market growth one. On the first one, could you please measure how large was the close out at STS? Shad Evans: So on the closeout piece, as Stuart covered, these are pretty recurring items in the business, as you know, Mariana. And so it would it probably wouldn't be appropriate for us to detail the specific counterparty or nature of the reserve release, but what I'll say is we're really pleased to reach a resolution in the quarter, which was consistent with our expectations. Mariana Perez Mora: Okay. And then when we think about all these like moving pieces, right, in both markets, the pipeline, but then like the joint ventures you are having the opportunities in the Middle East and everything on STS. And on the other side, MTS also having opportunities but also headwinds from NASA and the European Command involvement. How should we think about like next couple of years or 3 years growth trajectory. Stuart Bradie: That really is an Investor Day question, I think, Mariana, and I'm not trying to. But I would say that from an STS perspective, where we're positioned, I commented earlier on the pipeline and the lack of concentration risk in terms of the global nature of that business and the drivers and market drivers that are driving that sort of those global opportunities. So I think you can see from that, that there will be a change in thought processes around food security just given what the impact has been from the Middle East, I think similarly in energy security also, and we're well positioned to take advantage and help our customers think that through. In terms of MTS very much focused on quality of earnings and positioning the business where we feel the funding is going to flow opposite the priorities of today and tomorrow. And I think you'll have seen that coming through in the awards, particularly on data and digital and AI solutioning that really helps speak to mission data analysis to help sort of decision-making and really that sort of impact to mission that is really at the front of the agenda of the Trump administration. So -- we're seeing that across space force, [indiscernible] Defense, connected battlefield, electronic warfare, et cetera. So -- and also our probably our most best-performing business in the last quarter in that sense has been in the intelligence side of what we do, including space intelligence. So I think that's going to be the key thematics that are going to endure over the next couple of years unless the sort of presidential funding request for a substantial increase in defense spending. I think that those are the areas where you're going to see the greatest demand. And I believe KBR is very well positioned and have been positioning in that area for some time. This is nothing new. We've talked about it many times and the Lyncus acquisition, et cetera, kind of doubled down on that strategic positioning. So we feel pretty good about the growth opportunities over time. I mean, part of the rationale of the spin is exactly that to get focused in on these growth areas with 100% leadership focus and making sure that we're building capability as things evolve and also able to deploy capital in a very focused way. So I guess more to come on the actual targets. But over the medium term, we're feeling really good about both businesses and their prospects. Mariana Perez Mora: Perfect. And I have one more because -- sorry, -- you mentioned in the prepared remarks, you were doing like this, like separation works already like is progressing? And just mentioned MTS has really strong like high growth businesses and verticals. As you do this exercise, are you open to [indiscernible] sell some like parts of the business or that's going to be an effort that will be done whenever MTS is a standalone cost. Shad Evans: I mean you can never say never if someone comes over the hill, if you like, and makes an offer, we would have to look at that from a shareholder value perspective as we do with any offer across the KBR portfolio or KBR as a whole or whatever, we would look at shareholder value is the north star in that review. But as we sort of said about the positioning of this business where it is today, in our minds, unless something does happen from that field, which we'll be open to, but right now, we are heading towards the businesses as they are today separately. Operator: Our next question is from Tobey Sommer from Truist. Tobey Sommer: I wanted to ask a question on STS with the war and elevated petrochemical prices, how are -- what are you hearing from customers? And how are they planning anybody -- are they planning for prices to remain high and therefore, get into development? Does the impact direct physical impact of the war, facilitate a better medium or long-term outlook for KBR in the region? If you could speak to those questions, that would be great. Stuart Bradie: So from a petrochemical perspective and really an oil price perspective, I think that's -- these are moments in time, I think, Tobey. Ultimately, the fuller market dynamics are in a normal trading environment would be similar to what they were pre-war. So I don't think there's going to be a massive expansion in petrochemicals or anything as a consequence. The asset base that's there will be in the case of the Middle East, if it's damaged and any that will be repaired. And if it's not, it will be, I guess, the the asset while the pricing is high, which obviously leads to greater maintenance services and things which fits our strategy very nicely. In terms of the broader Middle East, their stated objectives over time will be far more driven to I guess, security of supply and making sure they've learned a lot of lessons, as I covered earlier as a consequence of the war. But at the meantime, doubling down on things like [indiscernible] security and doubling down on really gas is really the main driver in the development cycle in the Middle East for the next little while rather than petrochemicals per se. So -- and I think we're very well positioned in all of those areas to assist and to add value to our customers with an increasing focus on digital and AI solutioning, and we covered a bit of that in the scripted remarks as well as the how we're moving firmly in that direction. So we're feeling good about the long-term opportunity or even medium-term opportunities in the Middle East, but more broadly from a global perspective and STS to be fair. Tobey Sommer: And then if I could ask you to expand a little bit on NASA, what elements of your exposure there are growing and see strong demand signals and then maybe a little bit more granularity on where the weakness is within the portfolio, either a functional or some other basis? . Stuart Bradie: I mean the primary -- I mean, certainly, with the success of the [indiscernible] 2 machine, which we are very proud of. Our people were instrumental in the success of that mission. So really human space flight is where we're seeing where the activity is. And as you know, we're firmly engaged in across that spectrum, and we've talked about that many, many times. I won't go into it again. So that's the key element for us, and we expect that to continue. And as we move on to Artemis 3 are putting boots in the ground, that's obviously something we'll be heavily engaged in. So across both what we do technically and from a human health performance perspective. So -- that's probably the best way to answer that. The softness, if you like, when it comes down to the uncertainty on these people moves that we covered earlier, it really only affects one main contract of ours that's an industry-wide directive not targeted in any way at one particular company. It's changing or evolving strategic move by NASA that's still got to play out in truth. And as I say, it really only impacts one element of our contractual base. So reasonably contained but in the spirit of transparency, just calling it out as we move through the course of this year. So really, that's [indiscernible] in space light is the key thematic and we are every engaged in that area. Operator: Our next question is from Steven Fisher from UBS. Steven Fisher: Congrats on managing a tricky environment. Just Stuart or Shad related to the guidance. I think in the past, you've been prudent or cautious to raise guidance in the first quarter. But with the solid start, are you perhaps kind of trending above midpoint and leaning towards upper end? Or do you think this year, there's sort of just too many uncertainties going on with some of the things you mentioned in NASA and the Middle East and the separation to kind of call any directional trend at the moment? . Stuart Bradie: Doing well in the quarter and being above consensus is a good start, I think, to the year, Steve, and not just one metric across all metrics, of course, is terrific. Our bookings are really solid, as we described, and we're feeling good about the year ahead. But as as is normal, we are not known for raising guidance in Q1, and we've proven that again today. But you're quite right. I mean, let's face it, if you just step back and think about the world at large, there are still significant volatility and to get out over your skis right now, would not generally be viewed positively. We don't think by market nor is it prudent for us to do so. So just bear with us, I think. Steven Fisher: Fair enough. And then on the STS side, just in terms of kind of pace of progress and status of projects that could potentially move forward into something more materially. I guess, I'm curious to what extent you have, say, completed engineering on some bigger projects that are really just kind of pending FID. Or are we still sort of embedded in sort of very early stages of projects? And if you are towards the latter stages, what are the conditions you think that are needed to kind of move ahead on some of these projects? . Stuart Bradie: So we try to be very choosy about what we get engaged in, making sure there's -- it doesn't always work out as you know, but trying to be very considered about where we point our reserve base and the chance of that project actually going forward. Today, we're engaged in front-end designs for the LNG projects. We're engaged in [indiscernible] commitment, I think, beyond some of your conceptual early sort of estimate it to sort of put good money into making that definition a bit tighter. So we feel that those projects have lags. And then on the broader pipeline itself, it's engaged, I believe, with a level of maturity in terms of our understanding of the need for those projects to go ahead and the drivers to do so and the funding flow that will support them. So in terms of the pipeline that we've put forward, we feel pretty good about the the enduring nature of the STS performance as a consequence. That's probably the best way to describe it, Steve. So we're not sort of betting the farm on early concepts or early engagements, thinking some huge project is going to come as a consequence of someone's good idea. We're actually basing our positivity and outlook on maturing projects across the globe, as I said before, with these energy and food security sort of drivers that ultimately, we believe will come into fundamental revenue generation for KBR. Operator: We currently have no further questions. So I will hand back to Stuart for closing remarks. . Stuart Bradie: Okay. Thank you very much. And -- so a few final thoughts, I guess. You've heard today, our strategy and priorities are clear and some good questions around the dynamics there, we're operating in markets where our capabilities are highly relevant. I think our customer relationships are really deep and that really plays to our advantage. And our model is really designed to deliver disciplined execution across a range of operating environments, and that drives the resilience of what we do. And I think you're seeing that coming through in the numbers. Across sustainable tech, durable demand tied to energy security, resource efficiency, and resilient infrastructure and their engineering led, technology-led, capital-light approach and growing mix of recurring services and other key thematic continue to support backlog visibility, strong margin performance and resilience and cash generation. In Mission Tech, the near-term award environment remains uneven, [indiscernible] describe it. the underlying mission priorities we support, we do believe, however, are enduring, had a good question on that during the call. And we remain focused on increasing our bid volume and importantly, the quality of earnings associated with that bid volume and really expanding access through contract vehicles and positioning the business to convert opportunities as funding and award activity normalizes and the recent executive order looking at more fixed price within the government environment is something we really welcome. We've got a strong commercial acumen through KBR, and that plays well to our strengths. And importantly, none of this will happen without our people. I want to thank our employees across KBR for their amazing resilience and commitment. Nothing more so than the Middle East recently, and particularly as they continue to deliver for our customers in complex and of course, in some cases, really challenging environments. The focus on safety is paramount, and they deliver a focus on execution excellence and teamwork is central to our performance and a key part of our culture. And finally, we continue to execute the planned separation of the 2 businesses with discipline and real intent and the spin is designed as we've said, to sharpen strategic focus, aligning each company with its end markets and ultimately position both organizations to pursue their long-term objectives with quality and accountability. So thank you again for your time. Thank you for your continued interest in KBR, and we look forward to speaking with many of you soon. Thank you. Operator: Thank you, Stuart. This concludes today's KBR's First Quarter 2026 Earnings Conference Call. Thank you for joining. You may now disconnect your lines.
Operator: Good day, and thank you for standing by. Welcome to the BellRing Brands Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead. Jennifer Meyer: Good morning, and thank you for joining us today for BellRing Brands Second Quarter fiscal 2026 Earnings Call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC filings section at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measures, see our press release issued this morning are posted on our website. With that, I will turn the call over to Darcy. Darcy Davenport: Thanks, Jennifer, and thank you all for joining us this morning. Our second quarter results came in below our expectations, and we are disappointed with our results. We faced a challenging operating environment as multiple dynamics pressured our financial results. While net sales grew 2%, which was only modestly below expectations, the mix of our revenues differed meaningfully from both our forecast and what we've seen historically. The combination of negative sales mix, higher-than-expected freight costs and an isolated inventory-related charge weighed significantly on our Q2 profitability. The challenging operating environment was driven by increased competitive intensity, a more pressured consumer and macro-driven cost headwinds. Our updated outlook, which I'll discuss in greater detail, assumes these conditions persist through the back half and that our demand drivers will have a more muted impact on growth. We are also seeing protein-driven commodity inflation running above our expectations, which will impact us in the second half. Against this backdrop, we are making a deliberate choice to continue to invest in promotion and advertising to defend share and support our long-term growth. To put this in context, I'll step back and walk through how the environment has evolved over the course of the year. At the beginning of the fiscal year, the category was one of the fastest growing in [ CPG ] fueled by consumer health and wellness trends. Strong category growth, combined with increased industry capacity attracted new competition. Retailers also expanded space particularly in the club channel, which represents just over 40% of BellRing sales. As a result, we expected some higher levels of promotional investment. As the year progressed, the most meaningful change has been the rising cost required to maintain our leadership position. In the first quarter, we noted increased promotional frequency across the category, which largely played out as expected. This quarter, however, we saw a more pronounced [indiscernible] year including higher levels of trade down and a greater response to promoted price. These dynamics drove higher-than-expected promotional lifts across the category and pressured our baselines, further elevating the cost required to defend share. To illustrate, in Q2, promotional frequency and breadth increased sharply year-over-year as newer brands, particularly smaller entrants, continue to invest aggressively to gain traction. As a result, 27% of RTD [ shake ] category volumes were sold on price promotion up 8 percentage points versus last year and a meaningful step up from Q1. Household penetration in protein shakes continues to grow, with little evidence of consumers shifting spend out of shakes into other protein enhanced products. However, in recent months, we have seen a contraction in RTD shake spend per household marking the first decline in buy rate in 5 years. This reflects an increasingly value-focused consumer with greater reliance on promotions, low-priced brands and value-priced pack sizes. In short, the category remains strong with RTD shakes up 8%, which is well ahead of the broader food and beverage industry. However, the impacts of increased competition are more pronounced than we anticipated at the start of the year and the added factor of an increasingly price-sensitive consumer has put near-term pressure on our business, especially the bottom line. That said, our category remains highly relevant to both consumers and retailers with meaningful runway for growth. For fiscal '26, we expect RTD shake category to grow at the low end of high single digits, primarily driven by volume. While we expect heightened promotional intensity to continue, we also anticipate base pricing across the category to rise, considering the rapidly inflating input environment. Against this backdrop, I'll now turn to details on our second quarter results, operating plans and an updated outlook. Net sales increased 2% in the second quarter with Premier Protein net sales in line and Dymatize sales down 2%. Premier RTD shake net sales increased 2.3% with double-digit volume growth, mostly offset by price mix declines. Premier Powder and Dymatize net sales were consistent with expected consumer elasticities following our price increase. Premier's shake dollar consumption was up 3%. Consumption outside of club continues to be strong, up 15%, with the mass channel up high teens driven by distribution and incremental promotion. We are pleased with the performance of our key promotions this quarter with a club retailer and a large mass retailer, driving a record quarter for both sales and consumption. Both events exceeded our expectations and delivered significant household gains with meaningful portion coming from new to category consumers. Consistent with category trends, we saw softer velocity than non-promoted weeks and retailers, reflecting shifts in consumer purchase behavior to our promotions and value priced options. This, coupled with increased promotional lifts led to a higher-than-expected mix of promoted versus nonpromoted volume. Note, our promotions in Q2 ran as we communicated in early February with no further events added during the quarter. I'll now turn to an update on our demand drivers, which remain centered on growing our distribution, both in and out of the aisle, increasing advertising investment while elevating its impact and launching innovation that provides consumer excitement, odds, occasions and drive trial. Distribution growth continued during the quarter, and we remain on track for double-digit TDP growth in '26. It's worth noting that single-serve bottles represent a decent portion of these gains. And while not as productive as larger pack sizes, they drive trial and are a critical part of our display strategy. Our promotion with a large mass retailer, which included extensive displays and end caps across both pharmacy and grocery aisles drove strong consumption, increased household penetration and delivered solid trial for our coffee health innovation. Given these successes, we now plan to repeat this promotion in the mass channel in the fourth quarter. Our second priority is advertising, where we've increased investment in elevated our creative. Our new [ go get 'em ] campaign launched in late December, is showing early signs of success with lifts in awareness, brand equity and traffic to our website and e-commerce product pages. Our analysis indicates strong ROI and incremental sales from the campaign. We believe continued brand investment is the right strategy to strengthen brand equity and support long-term growth and we expect to maintain our investment this year at approximately 4% of sales with more tempered and near-term returns given the more competitive promotional environment. Turning to innovation. As I've discussed previously, we conducted a comprehensive demand study to identify white space opportunities as the category evolves to meet a wider range of consumer needs and occasions. Two of the most attractive and underserved areas were performance protein and refreshing protein. I'm pleased to announce we will be launching new products in both spaces in the fourth quarter. The first, Premier Protein Ultimate is a new 42-gram shake for consumers looking for high protein levels, available in both multipacks and single-serve bottles. The item targets a fast-growing 40-plus protein gram segment and launches in mass, e-commerce and select food retailers. I'm especially excited about our new second new offering, Premier Protein sparkling soda, which targets one of the most underserved segments of the category. Premier will be the first scaled player to enter this rapidly growing segment. Our sparkling soda is bubbly and refreshing with 15 grams of protein in a vibrant can format in 4 different fruit flavors. It has a very clean label with only 5 ingredients. We expect our protein soda to bring in new, younger consumers increased basket sizes and expand usage, particularly the afternoon and mid-day occasions. The initial launch of this refreshing protein item will be in a significant mass retailer, e-commerce and many other FDM retailers. It will be supported by strong display merchandising targeted retail media and an exciting social media campaign to drive awareness. I'll now move on to the details of our outlook. We expect Q3 Premier shake conception to be relatively flat with continued double-digit growth outside of club. Club remains challenged in Q3, with increased competitive promotional intensity and consumer trade down weighing on our performance in this channel. Our promotional activity in Q3 is expected to be fairly modest, slightly below last year's Q3 levels. We now expect full year '26 net sales growth of flat to up 2%. Our updated adjusted EBITDA margin outlook is 14%, inclusive of 50 basis points of impact from the Q2 inventory-related charge. This assumes that price mix and freight cost headwinds continue in the second half of the year. Additionally, as consumer demand for protein remains strong and protein products continue to proliferate, demand for protein input has materially increased. This is a result -- this is resulting in protein-driven commodity inflation above our initial assumptions, which will begin to impact us in the third quarter with a greater impact in our fourth quarter. In this environment, we are balancing near-term investment to defend market share with actions to strengthen long-term profitability. We believe that our results this year are below the long-term potential of the business and closing that gap through innovation, pricing discipline and cost optimization is a clear priority. In closing, the near-term environment is challenging as we navigate competitive consumer and macro inflation headwinds. However, consumer demand for protein remains healthy. And while competitive intensity from insurgent brands remain elevated, we would expect it to gradually moderate over time. In the long term, we continue to expect scaled players with deep category expertise mainstream appeal and high repeats to be the winners as retailers consolidate shelf space behind the best-performing brands. Premier's strength across each of these attributes positions us well to capture our fair share of the long-term growth. Our team is acting with urgency to adapt to the evolving environment and position our business for long-term success. Now I'll turn the call over to Paul. Paul Rode: Thanks, Darcy, and good morning, everyone. Total BellRing net sales for the second quarter were $599 million, up 2% year-over-year with adjusted EBITDA of $54 million. As Darcy noted, sales were modestly below our expectations, while adjusted EBITDA margin of 9% was 400 basis points below our guide of 13%. An inventory-related charge of $11 million represented 190 basis points of the variance. The remainder was primarily driven by the composition of our Premier Protein RTD sales along with higher-than-expected freight costs. Premier Protein net sales grew 1.7% with RTD shake net sales up 2.3%. The Premier shake volumes increased 12% with unfavorable price/mix of 9% with the latter above expectations given higher promoted volumes, coupled with lower baseline volume. Dymatize sales declined 2%, impacted by elasticities due to inflation-driven price increases. Adjusted gross profit was $136 million with adjusted gross margin of 22.7% compared to 34.5% a year ago. The year-over-year decline was driven by significant input cost inflation, including tariffs, the unfavorable price mix I just described, higher freight and the inventory-related charge. Compared to expectations, freight costs were modestly above plan and protein inflation was in line. SG&A expenses were $92 million at 15.3% of sales, in line with prior year on a percentage of sales basis. This is inclusive of an increase in advertising investment, which was up 140 basis points as a percentage of sales. Turning to our 2026 outlook. We now expect net sales of $2.325 billion to $2.365 billion, which represents flat to 2% growth. Adjusted EBITDA is expected to be $315 million to $335 million with a margin of approximately 14% or 14.5% excluding the inventory-related charge in Q2. Our revised guidance incorporates our second quarter results and our updated outlook for the second half, which I will now discuss. We now anticipate net sales growth of 1% in the second half, in line with the first half versus 8% implied in our prior guide. The sales revision is primarily on Premier Protein, where we have reflected the consumer dynamics we saw in Q2 and a more muted contribution from demand drivers. Specifically, we have reduced our second half baseline velocities for Premier Protein RTD shakes, which has an outsized impact in Q3. As a reminder, Q3 typically is a lower promotional quarter than Q2 and Q4. In Q4, we've added promotional activity, which increases trade spend and also unfavorably impacts mix as we saw more volume on promotion than previously expected. As a result, we now expect volume growth and price mix headwinds in the second half to be relatively similar to the first half for Premier Protein with high single-digit volume growth, partially offset by mid-single-digit pricing headwinds. Regarding adjusted EBITDA, we expect second half margins of 15% versus 20% implied in our prior guidance. Four items drive this change in EBITDA margin. First, higher freight and protein costs represent approximately 200 basis points. Second, unfavorable mix and increased trade investment are approximately 160 basis points. Third, lower cost savings and other manufacturing costs are approximately 60 basis points. And last, lower SG&A leverage represents the remainder of the decline. Importantly, we are maintaining our advertising investment at approximately 4% of sales for the full year as we continue to support the Premier brand. For the third quarter, we expect net sales growth to be down approximately 1%, with Premier declining slightly, somewhat offset by Dymatize growth. Third quarter adjusted EBITDA margin is expected to be approximately 16% and reflects significant year-over-year commodity and freight inflation, tariffs and higher planned advertising investment. Compared to the second quarter, Q3 margins benefit from better mix as less volume is sold on promotion. Additionally, we expect improved pricing and margins on our powder business as Q3 fully reflects the price increase implemented late in Q2 to address historically inflation, the key input in powders. Now I'll make a few comments on cash flow and liquidity. The first half was a modest use of cash in line with our expectations, and we ended the quarter at net leverage of 3x. We returned cash to shareholders through share repurchases with $26 million repurchased in the second quarter. We continue to expect strong cash flow generation in the second half of '26, in line with historical conversion. Recall, we anticipate payment of a legal settlement in our Q4. As a result, we expect leverage to remain in the low 3s during the remainder of our fiscal '26. In closing, we believe in the long-term potential of our category and the Premier brand and are not satisfied with our current performance. The near-term environment is challenging, and we are investing in promotions and advertising this year to defend market share while managing through significant commodity cost headwinds. We are evaluating our pricing plans and cost structure to strengthen our economic model and continue to believe in the long-term attractiveness of our business. We hold a leadership position in the category supported by a brand that remains highly relevant to consumers and retailers, and an attractive scaled asset-light model, we are acting with urgency to position the company for improved performance. I will now turn it over to the operator for questions. Operator: Our first question comes from Andrew Lazar with Barclays. Andrew Lazar: Great. I guess Darcy, over the last couple of quarters, you've mentioned that it will be gradual, but over time, the category will likely go through somewhat of a shakeout, right? As some of these insurgent brands ultimately don't prove to have the kind of velocity on the shelf to sort of maintain the shelf space, right, that they're currently paying up for? And I know that takes some time. But we've seen that happen in other sort of growth of your categories as well. I think maybe one of the I guess, concerns that I've heard a lot about is what gives you the confidence that, I guess, the Premier Protein brand can be, right, and sustain its leadership or be among one of the leaders in this category if we're thinking 2 years out from now. What are you seeing in the category that's making some of these insurgent brands so attractive right, to consumers? Are there -- is the innovation right, the Premier is keeping up with -- I'm trying to get a sense of if one thinks that Premier Protein is going to be a leadership brand 2 years from now in a category that clearly has a lot of runway. One would think, therefore, the stock wouldn't be at sort of levels where it is. That's kind of the question I've got. Darcy Davenport: Yes, it's a great question. So first of all, the category itself, I mean, we have seen it is a healthy category with a ton of tailwind. And so when you have that -- those type of macro tailwinds and then you get added capacity into the market. There is going to be a ton of competition. As the number -- I think our latest estimates were internally somewhere around 40 new competitors over the last 18 months. So it's tremendous. And as the #1 player, we are going to get affected by that. I think what gives me confidence is, first of all, we're largely holding our share. We've had a modest share loss, which is expected. But we're actually gaining share outside of club, but there's no doubt it's costing us more than we expected, and that was evident in our results. I think that when I step back and I think of the long-term potential of a, the category and Premier as a leader, we truly believe that there is going to be a shakeout. Their -- retailers are going to consolidate the shelf around the most successful brands, and we will be them. And we will be in that consideration set because we are, right now, have the highest awareness, repeat, household penetration. We are the most well-known brand, both with aided awareness and unaided awareness. From a GLP-1 standpoint. We are the brand that gets the most benefits from GLP-1 because of those things. We have great brand metrics, and that has not changed. So are the most trusted brand. We are the brand that people are willing to pay more for. We are the high quality. All of these things, which take years to create that trust with consumers. And given the amount of -- given the amount of competition and because we have been the #1, we expect to have kind of -- we're getting [indiscernible], small [ mics ], but we actually are not losing our -- more than our fair share to anyone which I think is encouraging. So I think that we've built this national supply chain. We have tremendous knowledge about the category and overall, the brand is ultimately what consumers are choose. And I think right now, we are having a shakeout and it's going to be the ones with these strong repeats that ultimately win, and we're going to be one of those. I think it's also just remember, Andrew, this is a growing category. And you can have multiple winners. So this is not just a zero-sum game. I know we talked about this when we first IPO-ed. But I think that's a big factor. Operator: Our next question comes from Megan Clapp with Morgan Stanley. Megan Christine Alexander: Maybe you could just build on that and talk a little bit about the category and the promotional environment, which Darcy, I appreciate all the color you gave in the prepared remarks just around what has changed. And it does sound like promotions ran as planned. You didn't add any events, but that you're just seeing the cost of volume is higher as consumers are a little bit more price sensitive. So the category does feel like it's trending a little bit more towards the kind of traditional [ CPG ] promotional cadence seeing that a big move in terms of the volume sold on promo was pretty significant in the quarter. So I guess, like the question is, do you view this as more macro-driven and kind of likely to normalize? And what gives you that confidence? Or is this maybe a bit more of the new normal for the category as it starts to scale and maybe attracts kind of a more mainstream price-sensitive consumer and related? And sorry for the multipart question. How do you expect kind of base pricing across the category to rise given what you're seeing right now? Darcy Davenport: Yes, I think this is macro driven. So as you mentioned, that -- the reason why I think it's macro driven is just -- well, first of all, that you highlighted that promotion materially increased in the quarter, up 8 points. So it's a big number. That's 40% higher than last year. So it is a big number. So not only did the overall category, but then we saw [ higher less ]. And no, we did not add any more events to compete. It was simply the events that we had drove higher [ lifts ] and connected, pressured our nonpromoted baselines, hence the impact to the bottom line. We think this is a direct impact of kind of consumer -- the broader consumer affordability issue. I mean, ultimately, when you look at the -- our products they're a pretty inexpensive breakfast, but the absolute pricing in club is about $30. So when you have a coupon that is 25% off that, that's $8. So it matters to consumers. So I think that's what you're seeing. We do believe that this is kind of transitory. I think that it will change. But right now, we're kind of in a bit of the perfect storm, specifically with increased consumer price sensitivity sustained competitive intensity when you have these insurgent brands not acting very rationally and then the increased inflation. So that's the first piece. The second piece was just what do we expect pricing because of the increased inflation and Paul and I both talked about how not only these are also macro, so you're seeing freight increases and also protein increases that pricing has to follow. And so I don't know exactly the timing. But over the next whatever 12-plus months, we -- there have to be some pricing that follows because the increases are just too big. Operator: Our next question comes from David Palmer with Evercore ISI. David Palmer: Sort of a follow-up on that, just what you would encourage us to be monitoring along the way. With inflation increasing and maybe you can give us some color about when you see some of these things flowing through. It sounds like your last comment about the 12-plus months. I'd love to get a sense of maybe the cadence of inflation increases that you're seeing. But really, I want to ask you about pricing power. What's going to convince you that you have that? And when I look at base volume in the all-channel numbers, it looks like it was up 4%, 4% or 5%, it looks not bad. I mean, compared to a lot of companies that we see in terms of base volume trends that would more or less convince you that you have pricing power versus the down what, high single digits versus the low single digits that you had. So what should we be following and thinking about to give us a sense of how you're thinking about pricing power going forward in the data? Darcy Davenport: Yes. I'll hit pricing power, and then Paul, you can address the inflation question. Yes. I think we've shown that we have pricing power. We have a fantastic brand with high repeat, high loyalty, the highest loyalty in the category. And we've taken pricing over time when we've had to. And so -- and we see kind of expected elasticities -- and if you think of the last 5 years, I think we've taken 3 or 4 price increases. So -- and we've continued continue to grow. We try not to. But I think that given -- when you step back and you think of a how much it cost -- is a healthy breakfast and you think of a shake is about $2. So given all the kind of macro tailwinds around protein, and a $2 healthy, convenient breakfast is still pretty reasonable. And so -- and again, I go back to just our loyalty and our history showing that we have pricing power. Paul Rode: Yes, on inflation data. So a couple of things on inflation. So first, we expected a healthy dose of inflation this year anyway with -- especially on our whey proteins, which is the inputs on our powders. And so we had called kind of mid-single-digit inflation for the year. What has changed is, first, as Darcy highlighted a minute ago, freight has increased. A lot of that has to do with the Middle East conflict. We saw that kind of happen after kind of in the February time frame and beyond. So that we expect to continue. That is not a huge driver, but because it's about 10% of our overall cost, it's definitely a headwind. The bigger piece is we've continued to see whey protein increase, so that's affecting our powders in the second half. And then over the last couple of months, the nonfat dry milk market on the CME has gone up significantly. So that's really the biggest new news on the inflation side as we've just seen a significant increase there. We were largely covered for the year. We weren't fully covered. So there is some impact in the latter part of our year. And then as we look into next year, obviously, we need to see where this plays out. It doesn't seem like it should stay at these levels and it should pull back, but obviously, we can't make that prediction at this point. If they stay at these levels, then obviously, we would have some headwinds in '27 that we would need to address. I think on the whey protein side, the headwinds in '27 should be less. They may not be 0, but they will at least not be as significant as we saw in '26. So really, the big new news is just a ramp up on the cost side of non-fat dry milk, which is a key input cost into or milk proteins, which is on our shakes. Operator: Our next question comes from Alexia Howard with Bernstein. Alexia Howard: Following up on the previous question on input cost inflation, do you have visibility into what competitors that are using ultrafiltered milk would be seeing because my understanding is that the milk inflation has not been as sharp. So I'm just trying to think about how this might play out across the space in terms of competitiveness. Paul Rode: Yes. We believe over time that the dairy complex should be similar for ultra filter milk as it is for milk protein concentrates. So over time, we don't believe that there is a structural difference. Now I -- to be fair, I don't have full visibility into some of our competitors and what they can achieve on the cost side. But we feel like we have -- we have strong advantages on scale with milk protein. We obviously source it not only domestically but internationally, so that -- it's interesting the U.S. markets right now are elevated compared to the international markets on some of the -- on the non-fat dry skim milk powder, so that could give us some advantage and I should mention this on the last question, and I did not. But for '26, we're largely now covered on our protein side. But to answer your specific question, we do not believe there's a big structural advantage or disadvantage of ultra-filtered milk versus milk protein concentrate, they may not move exactly in lockstep, but we think over time, they should. Operator: Our next question comes from Peter Grom with UBS. Peter Grom: Great. I do wanted to come back to the long-term targets. Several months ago, you outlined expectations for 7% to 9% on the top line. Adjusted EBITDA margin will be to 20%. Obviously, this year, it's far more challenged. But I guess based on what you've seen over the last several months, do you still view those as realistic targets? And if so, what is a reasonable time line that we should be ending get back to those levels of growth or profitability? Darcy Davenport: Yes. So as a reminder, we reassess our long-term algorithm and outlook in November, and we'll plan to do the same thing this year. But definitely acknowledging that, I mean, the near term is challenging from competitive consumer and commodity pressures kind of all hitting at the same time. But when I step back, the category is -- remains healthy. We have the #1 brand with a very strong equity. We expect to get our fair share of that category growth over time. And we believe that the category will be growing at those kind of levels. So I think I talked about this to Andrew's question is that in the long term, we expect the scaled players with mainstream appeal, high repeats to be the winners and retailers to consolidate the shelf space behind the best-performing brands and Premier will definitely be one of those brands. So I think it will take -- we're in the middle in the near term, and we need to get through some of these macro forces and we will continue to grow out of it and get back to that -- the long-term estimate. Operator: Our next question comes from Matt Smith with Stifel. Matthew Smith: Paul, you called out flat consumption for Premier in the third quarter. Can you talk about shipment expectations in relation to the level of consumption? It looks like prior year consumption was roughly in line with shipments. But does the upcoming launch of 2 new products or the resumption of the mass program in the fourth quarter? Does that benefit shipments in the third quarter? Or is that kind of contained as we get into the fourth quarter? Paul Rode: Yes. So most of the new product innovation shipments will occur in the fourth quarter. So we should get a little bit of a bump from that in the fourth quarter. So I would expect that shipments would be slightly ahead of consumption in the fourth quarter. And then in the third quarter, we'd expect consumption growth on a dollar basis to be slightly above our shipment dollar growth. Nothing of major consequence there, just some minor rebalancing from some of the shipments we had in the first half. So net-net, slightly [ Jim], it's slightly below consumption in Q3, and I would expect to be slightly above in Q4. Operator: Our next question comes from Steve Powers with Deutsche Bank. Stephen Robert Powers: I just want to clarify a little bit more on the current environment. I think the -- in what's going on is pretty clear from your remarks. But I'm a little uncertain as to when it started. So I mean, are these dynamics you saw earlier in the quarter and they were evident when you reported the first quarter and it just didn't dissipate the way you expected? Or are these dynamics that evolved more late in the quarter and that you expect to continue and if there's any clarity around where is the incremental challenge concentrated still in club? Or has it now spread to those non-club channels? That would be helpful. If I could, well, I'm at it, Paul, just as we net out the pricing power and inflation commentary, I guess when you net it all together and you think about the next 12 months, what percentage of inflation that's building, do you think you're realistically able to price for? If there's $100 of incremental inflation, is it realistic that net of promotional environment, you can price for a majority of that? Or should we recalibrate our expectations at least in the near term that you kind of pricing power, so to speak, will be constrained by the competitive dynamics? Darcy Davenport: Yes. So I'll start -- Yes. So okay, the new information that we had since our February guidance, I think, is important to hit. So first of all, we only had a few weeks of consumption data heading into our February call. Our largest club promotion hadn't occurred, that occurred in March. And then many weeks of the mass promotion was still ahead of us. So that is really around kind of the consumption and the mix that we ended up seeing. From a cost perspective, obviously, none of us predicted the Iran War, which affected oil in our freight costs. And then protein costs have accelerated late in the quarter, specifically late in March, but really in April. And then the last thing is just this unanticipated inventory charge was discovered in late March. So we recognize -- this is super dynamic, and we recognize that this is a significant change, but a lot of things have changed. And so I appreciate the question because -- and going through each one of those. As far as your question around where -- we're seeing price -- the increased consumer price sensitivity is happening across channels. However, it is the most acute in club. And that is where we're seeing the highest promo list and the pressure baselines. And that's also where we're seeing the most competitive intensity. So -- and obviously, inflation is [indiscernible]. Paul Rode: And just adding on to that, really, it was a lot of the competitive intensity which affects our baseline really started occurring in the February and March time frame. So kind of back to your question on timing, a lot of that occurred after our guidance. As far as your question around pricing power and our ability to pass cost increases through. I mean, historically, we have been able to do that. I don't expect that the current environment, you're right, is more competitive. So it will be something we'll have to think through and assess if that affects how we want to pass through cost, but our current thinking is that we should be able to pass it through. We've seen -- we see competitors in our space that have taken fairly sizable increases recently as well. And so obviously, that gives us another data point that we can look at to see. But overall, we would expect to continue to be able to pass through commodity costs. Operator: Our next question comes from Yasmine Deswandhy with Bank of America. Yasmine Deswandhy: I just wanted to dig into the competitive landscape a little bit. I was just wondering if you could talk a little bit about the challenges that you're facing competing against the insurgent brands versus the legacy brands? And if those challenges are the same or have they require different strategies. I guess I'm wondering when things moderate with -- when competitive intensity moderates from the insurgents, how are you planning to competitively or effectively compete against the legacy brands once the insurgents kind of moderate? Darcy Davenport: So let me just kind of lay out the competitive set. I've talked about this before, but I think it's helpful. So about 50% of the category are kind of the leading brands, which includes Premier about 30% -- 25% to 30% of the category is kind of what I -- what you described and what we describe as legacy brands. And then about 10% are these kind of new insurgence and the remainder are kind of private label as well as kind of branches growing with the category. So if you -- for years, the legacy brands have been donor brands, and you see you've seen them decrease in market share. The larger brands have mostly grown with the category. And the [ insurger ] brands, there is a -- there's a lot of -- they're making a lot of noise and -- but they shake out, meaning that the group of [ insurgent ] brands that we saw a year ago are different than the ones we see now. A couple of them are doing well. And we will see them. I think they will make it, but there will be a lot of churn in that group. So I think that we will consider -- and the 30% of I think this is often overlooked because the insurgent brands make a lot of -- there's a lot of flashiness. They're new. But I think that it is -- it's important to note that the legacy brands, we think they will continue to be donor brands in essence and we will continue to source volume from them. So that's ongoing. I think as we -- what's interesting about looking at some of the insurgent brands is it's innovation. So meaning that we're seeing them bring in new consumers, so -- which is good for the category. And I think that, that is an area that we are closely monitoring to see if we should launch innovation in those specific kind of product categories. So what we're seeing is, whereas the category used to be much more nutrition-led, nutrition-focused. I think some of these insurgent brands are more beverage-focused and therefore, bringing in new consumers in new occasions. So it's -- we monitor it to see if it's something that we would want to put in our pipeline. So when you talk about how do we compete, we are continuing to -- we have a built-in customer base that is highly loyal, and we will feed that. But we also bring in new consumers around this kind of nutrition-first type of proposition, but then through innovation, we will compete in some of the areas that we think are incremental and interesting. Operator: Our next question comes from Jim Salera with Stephens. James Salera: I wanted to get a little more detail on the innovation and how we should think about that contributing on a go forward. First of all, are those innovation launches going to have similar unit economics to the core shake lineup? And as we think about their presence on shelf, is there going to be some swapping of lower terming core SKUs? Or do you expect the innovation to be largely incremental to what you have on shelf right now? Darcy Davenport: I'll hit the incremental on shelf and then Paul I'll pass it to you for the unit economics. From I'll tell you what we're seeing so far is that they're incremental shelf, so they are not only -- I mean, actually connected to the last question that I answered. They are incremental to our business. And so we obviously communicate that to our retailers, and we are getting them incremental on the shelf. And then do you want to talk about unit economics, Paul? Paul Rode: Yes. I mean, so it varies by various innovation. Some are at par to hire from a unit economics perspective in summer smaller or lower from a margin perspective in particular. And keep in mind, I mean, obviously, our 30-gram shake business has got a large scale to where a lot of these other ones are smaller. So we would expect them to be lower margins beginning, but they should as they grow, the margin will improve over time. Darcy Davenport: Just one other thing. I talked about our 42-gram item that we're launching as well as sparkling. These are really different propositions. So if you think of the 42-gram line, that has been avoided in our business, in our portfolio. And it's important when it comes to singles and specifically the convenience channel. I think that we needed that to really effectively play there. So that's one piece. Also important to kind of our single display strategy and getting new households. So that's one piece. And sparkling is really exciting. Every time we do more research on it, we get more excited about this incremental kind of demand what we call [ pallet ]. But it's really demand occasion because if you think of most of the categories really around the breakfast meal replacement, this is for an afternoon refreshing time. And you're seeing a lot of activity from small players, but we're going to be the first kind of scaled player that's competing here, and the product is fantastic. Operator: Our next question comes from Jon Andersen with William Blair. Jon Andersen: Darcy, you mentioned how things have evolved in the category where we've gone from an industry capacity shortage to -- it sounds like more industry capacity, whether there's surplus, I don't know. But I guess my question around is centered around capacity because it does seem to be driving the ability of perhaps these [ insurgence ] to play like in club and also to the category overall to engage in more promotion. You give us kind of your perspective on where the industry or the category sits in terms of capacity? And the reason I ask is I'm kind of curious if -- what you're seeing in club in terms of heightened promotion, could begin to migrate to [ food, drug and mass ]. So these [ insurgence ] have the ability to scale. Is there enough capacity out there to take the competition in a bigger way beyond club? Paul Rode: Overall, I would say the capacity -- it's a little bit mix still. Certainly, I think on the Tetra cartons, we've seen -- I believe there is more capacity available, so that's one. On bottles, we've definitely seen some capacity added. But -- there's also -- I think if you're trying to get into cans, I think some of the other competitors, I think, are likely going to need to add capacity to continue to scale. Obviously, there's some other competitors who are expanding facilities as well. So I think it's still mixed. There's definitely more -- it's more in balance than it was before. So I would say again, I don't know if it's excess, but there's definitely more in the Tetra side than there was, and then bottles has been added over time. So that has obviously given some additional capacity out there available. But as we've talked about, it's one thing to get market share of 3 or 4 percentage points. It's a whole other one to get to the size and scale of our business, it just takes time. But we've seen it. We've gone through 2 waves of extensive capacity additions to get to where we are now. So it just takes time. So -- can they -- is it more available capacity absolutely than there was before. But [indiscernible] still had to scale to a sizable business there tends to be more capacity added for those brands to continue to grow. Darcy Davenport: And just on that, capacity is definitely going to be a challenge, I think, for many of these kind of insurgent brands. But just the cost increases, I mean, the things that we're facing is not unique to us. And I think that those -- they're highly reliant right now on value and they're highly reliant on promotion. Some of the insurgent brands are promoting at 60% of the time. And so I think that with that is very expensive. And when some of the inflation becomes more meaningful towards the end of the year, in the back half. That's going to have a big impact on those businesses. Operator: Our next question comes from Thomas Palmer with JPMorgan. Thomas Palmer: I did want to ask maybe on some of those promotional plans you mentioned for 4Q. One, you did have some other promotions running in the club channel and just want to confirm, are those going to be running again as we think about the fourth quarter? Any changes there? And then second, just the promotion you mentioned in the mass channel. How does it compare to what ran earlier this year in terms of the duration of it? And then maybe how broad-based it might be across the category? Because I think last time we did see some other brands participating even if maybe you guys were more prominent. Darcy Davenport: Yes. The promotional schedule in Q4 will be similar to Q2. So we have -- that is when we have our 2 club promotions and then we will also have the mass promotion, which will mirror similarly to what we did in Q2. Thomas Palmer: Okay. And any color kind of how broad-based it will be with others? Darcy Davenport: We do have visibility to that. My expectation is that it was good for their category. And so my expectation is it will be similar. I mean maybe a little less just because -- if you think of the Jan-Feb March time frame, it is -- the time in the calendar in the year when the most new households enter into this category because of New Year, New You. So there's a lot of attention for the category in all retail. So I think if you -- the next big time frame is that our Q4. So it might be a little bit less, but again, we don't necessarily have visibility. We just have visibility to what we're doing. Operator: Our next question comes from John Baumgartner with Mizuho Securities. John Baumgartner: Darcy, I wanted to revisit your comments on innovation between nutrition credentials and even surgeons bringing more of a beverage experience. Historically, Premier in the category have differentiated through protein content and flavor variety. And I guess I'm hearing the strategy is offering more proteins during more times of the day. But at what point does the consumer look at the proposition as a commodity? It becomes more sophisticated, the demand pull goes next level where maybe just offering high protein is no longer enough. Maybe to qualify as nutrition, you need high protein and maybe to be a true meal replacement with more vitamins, more minerals because I do wonder if part of this price sensitivity, yes, it's macro, but it also a sign that consumers are longing for something more and to wield that pricing power and defend market share you need to redefine the category's proposition with more specialized innovation. Darcy Davenport: Yes. I think you're seeing that. I mean, I think you're seeing -- so the demand landscape, the study that we did, I mean, it basically mapped out. I think it's like 10 to 15 different demand moments kind of going from, I mean, what I call kind of nutrition-focused with all the vitamins and minerals complete nutrition, et cetera, all the way to more of a beverage moment like the refreshing protein. Those products and those demand moments creating a product for a refreshing moment versus a nutrition-focused moment are very different. I mean, a refreshing moment, you don't need vitamins and minerals, just to use an example. So I think that what -- as the category develops and matures, what will happen is, yes, there will be more specific products specialized to use your word specialized products for different demand moments. I think what is encouraging, what came through very clearly in this study was our 30-gram product has a really good job against a lot of demand moments. Not all, hence the refreshing, but it does a very good job against a lot of the demand moments, which is why it's a $2 billion line. And so I think that -- but that -- I think as the category evolves, that's what you're going to see. And I think you're already starting to see it, which is more specific specialized products meeting a specific demand. John Baumgartner: And then a follow-up, coming back to your comments on category buy rate. I think you stated that RTD is not losing share to other protein formats. But if vary for RTD is down and protein consumption is up overall, are you seeing consumers shifting out of process protein into unprocessed, maybe more commodity products like eggs or meat. I guess what are you seeing across the protein dynamic more broadly? Darcy Davenport: Yes. So it was -- as we looked -- we dug into this. And what we saw, we didn't see a huge outflow of consumers leaving our category and RTD shakes into kind of more protein enhanced products that you see all over the store. But -- and we also didn't see a decline in household entering, so into our TD shake. So we're still seeing strong household growth, showing the strength of the category but what you're seeing is, like I said in my remarks, is that for the first time in 5 years, you're seeing a decline in buy rate. And that really happened this quarter. So I think that as far as the detail of if we're seeing consumers leave to go to more Whole Foods, we do see some interaction with our category and like eggs, depending on pricing, but it's not significant. It's not significant. So I would just say that the biggest change this quarter continued households coming in, but the buy rate did decline. Operator: Our next question comes from Robert Moskow with TD Cowen. Robert Moskow: I want to know, in most CPG categories, the market leaders set the price and that everyone follows. Would you say that it's harder to do that today given the influx of so many smaller players that may or may not play along. And you said that I think, Paul, you said that you have seen one of your competitors take significant pricing recently. Is that a big player? Or is it a small player? And does that make a difference? Darcy Davenport: It's -- I mean I'll answer. It's a big player. And I think that -- and it was just this quarter. So it's pretty recent and yes, I mean, I think that it's one of the leaders, and it's pretty significant pricing. So I think that right now, this is all pretty new in that, as I talked about, the changes in the category and the environment, they're pretty significant, and they're pretty new. So we are -- we're evaluating really how to respond. And I think that this is not going to be, I think, ultimately, I think that most players are going to need to reevaluate their pricing given the -- both freight and but more importantly, the protein the protein increases. We're seeing it in powder where whey protein has -- is at historic highs. And there's been pricing across the board. We've taken pricing a couple of times. But now we're starting to see it come into also milk protein. Operator: That concludes today's question-and-answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to Ball Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brandon Potthoff, Head of Investor Relations. Thank you. You may begin. Brandon Potthoff: Good morning, everyone. This is Ball Corporation's conference call regarding the company's first quarter 2026 results. During this call, we will reference our first quarter 2026 earnings presentation available through this webcast and on our website at investors.ball.com. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. We assume no obligation to update any forward-looking statements made today. Some factors that could cause the results or outcomes to differ are described in the company's latest Form 10-K, other SEC filings and in today's earnings release and earnings presentation. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. In addition, the release includes a summary of noncomparable items as well as a reconciliation of comparable net earnings and diluted earnings per share calculations. I would now like to turn the call over to our CEO, Ron Lewis. Ron Lewis: Thank you, Brandon. Today, I'm joined on our call by Dan Rabbitt, Senior Vice President and Chief Financial Officer. I will provide some brief introductory remarks and discuss first quarter 2026 financial performance and our outlook for the remainder of 2026. Dan will touch on key metrics, and then we will finish up with closing comments and Q&A. As we begin, I want to start with the big picture because it continues to matter how we think about Ball and our long-term value creation. We believe Ball is positioned to win and the fundamental supporting that belief remained firmly in place. Packaged liquid volume is continuing to grow globally, and aluminum cans are taking share as consumers, customers and retailers increasingly prioritize convenience, performance and sustainability. That dynamic creates a durable long runway of demand for our products. Within that growing market, Ball is executing at a high level. Across our regions, we continue to leverage long-term customer partnerships, a well contracted portfolio and an unmatched global footprint. Our utilization levels are strong, reflecting both disciplined capacity management and consistent commercial execution. We are pairing that execution with financial strength. We delivered solid results to start 2026, supported by a healthy balance sheet and a capital allocation framework grounded in EVA. Our focus remains on deploying capital where it earns returns above our hurdle rate and on continuing momentum as we move through the year. Operationally, our teams are performing well. Standardization, cost discipline and the Ball business system are driving improved profit per can and reinforcing our ability to generate operating leverage as volumes grow. While we are proud of the progress we continue to see opportunity ahead. When you bring together attractive industry fundamentals, disciplined execution, financial strength and an operating system built for continuous improvement, Ball remains exceptionally well positioned, not just for this year, but for the long term. Our strong start to the year underscores the resilience of our business, particularly in a complex geopolitical and macroeconomic environment. Our strategy is clear, consistent and grounded in our 4 strategic pillars, and that strategy is working. First is executing exceptionally in our core business. That discipline shows up in how we operate every day across our plants and regions, and it underpins our ability to deliver solid Q1 results in an uncertain world. Second, we stay close to our customers and maximize our global network, long-term partnerships strong service levels and a well-balanced footprint allow us to respond quickly and reliably. Third, we continue to accelerate the substrate shift to aluminum and expand categories. Aluminum, sustainability and performance advantages matter, reinforcing demand and long-term growth opportunities. And fourth, we manage complexity to our advantage. Our scale, standardization and systems enable us to remain focused on execution rather than distraction. The Ball business system brings these pillars together, connecting commercial excellence, operational excellence and continuous improvement. At the center are our people and our culture. Low ego, high collaboration and a shared commitment to doing the right things the right way. This is what makes our business resilient, supports strong Q1 performance and positions Ball to continue delivering disciplined execution and long-term value creation regardless of the external environment. The Ball business system is how we operate, and EVA remains our North Star. Together, they drive disciplined execution and capital allocation, enabling us to deliver results. That discipline showed up in our first quarter performance. We executed well and stayed focused on the levers we control, earning returns above our cost of capital while maintaining flexibility. This approach underpins a growth algorithm of 10-plus percent comparable diluted EPS growth, strong free cash flow and consistent returns to shareholders. The results we delivered this quarter are a direct outcome of this operating and financial discipline, and they set up the discussion on our performance in the quarter. Turning to our first quarter performance. We had a good start to 2026. Global volumes were up nearly 1% year-over-year, reflecting slightly stronger-than-expected volumes in North America and in-line performance in South America, partially offset by volumes in EMEA. What stands out is our execution. Comparable operating earnings grew 10% year-over-year, exceeding our 2x operating leverage objective for the quarter. That performance flowed through to the bottom line. with comparable diluted EPS up 22% year-over-year, driven by strong operational execution, cost discipline and capital allocation. The first quarter performance reinforces our confidence in delivering 10-plus percent EPS growth for the full year. We also remain focused on shareholder returns and are on track to deliver in the range of $800 million to shareholders in 2026. Operationally, we continue to advance our priorities, including completing the Benepack acquisition to expand EMEA capacity and making good progress at our Millersburg, Oregon facility, which remains on track towards full ramp up in 2027. Overall, this was a solid first quarter that reflects the resilience of our business, disciplined execution and the strength of our operating model. With that outlook in mind, I'll let Dan walk you through the details of our first quarter financial performance and provide more color on our current expectations for 2026. Over to you, Dan. Daniel Rabbitt: Thank you, Ron. Before walking through our first quarter 2026 performance, I want to spend a moment on the changes we made to our financial reporting this quarter. As you saw in the earnings release this morning, we updated how we report our segment financials. As Ron and I stepped into our roles, we took a fresh look at how we measure performance and align accountability across the organization. It became clear that we needed to more clearly distinguish between operating decisions made within the businesses and financing decisions made at corporate level. As a result, we amended our definition of comparable operating earnings to exclude such items as factoring fees interest income and other impacts driven by corporate financing activity rather than the underlying operations. Importantly, these financing-related items remain included in comparable net earnings in comparable diluted EPS. So there is not a material change to how we measure or report overall company earnings. In addition, we moved our beverage can plants in India and Myanmar into the EMEA segment, which has had management and P&L responsibility for those operations for several years. We believe these changes provide a clearer view of underlying operating performance by segment, while continuing to give investors full transparency into our consolidated financial results. And to be clear, these changes do not materially impact comparable net earnings or comparable diluted EPS. Additional information can be found in notes of the earnings press release as well as on investors.ball.com under financial results. With that context, I'll now walk you through our first quarter 2026 financial performance. Overall, the business delivered a good start to the year. Global ship beverage volumes increased approximately 1% year-over-year, low single-digit volume growth in North America and EMEA, partially offset by lower volumes in South America. Despite ongoing geopolitical and macroeconomic events, our teams executed well across the business. Comparable operating earnings increased 10% year-over-year. That performance translated into comparable diluted earnings per share of $0.94, up 22% year-over-year. This first quarter performance reflects the strength and resilience of our operating model and is consistent with the financial framework we've laid out for 2026. In North and Central America, segment comparable operating earnings increased 2.5% in the first quarter. Volumes increased low single-digit percent year-over-year, reflecting slightly stronger demand, particularly in energy drinks and nonalcoholic beverages. The team continues to execute at a high level, supporting customers, managing costs and navigating a dynamic operating environment. As we look to the remainder of 2026, we continue to expect volume growth at the low end of our long-term range of 1% to 3%. As previously discussed, we anticipate $35 million of start-up costs related to the Millersburg facility and U.S. domestication of ins to begin later this year. While these costs represent a near-term headwind, they support long-term volume growth and operating leverage. In EMEA, segment comparable operating earnings increased 20% in the first quarter. Volumes were up low single-digit percent year-over-year. The team continues to perform well operationally and during the quarter, we completed the Benepack acquisition, further strengthening our European footprint and expanding capacity in Hungary and Belgium. As we integrate these assets, we see meaningful opportunity to drive both volume growth and operating leverage as capacity is filled. For 2026, with the inclusion of Benepack, we continue to expect volume growth above the top end of our long-term 3% to 5% range, along with operating leverage of 2x. In South America, segment comparable operating earnings were flat in the first quarter. Volumes declined mid-single-digit percent year-over-year, reflecting customer timing and inventory position coming into the quarter. Despite lower volumes, the team remained disciplined on cost and execution supporting earnings and positioning the business well as growth normalizes in the next 3 quarters. Looking ahead, we continue to expect volume growth at the low end of our long-term range of 4% to 6% in 2026 with operating leverage of 2x. Focusing on modeling details for 2026. As Ron noted, with the resilience of our business and our pass-through models, we continue to expect to be on track with our algorithm of 10% plus comparable diluted EPS growth. We anticipate free cash flow of greater than $900 million in 2026. Our 2026 full year effective tax rate on comparable earnings is expected to be slightly above 23%. Full year 2026 interest expense is expected to be in the range of $320 million. CapEx is expected to be in line with GAAP D&A in 2026. Full year 2026 reported adjusted corporate undistributed costs recorded in other nonreportable are expected to be in the range of $175 million. We anticipate year-end 2026 net debt to comparable EBITDA and to be around 2.7x, and we will repurchase at least $600 million of shares, which will bring our total capital return to shareholders to $800 million in 2026. And last week, Ball's board declared its quarterly cash dividend. With that, I'll turn it back to Ron. Ron Lewis: Thanks, Dan. Overall, our strong first quarter results reflect exactly how we intend to run Ball. Amid ongoing geopolitical and macroeconomic factors, our teams stayed focused on what we control, serving our customers, running our operations with discipline and allocating capital through an EVA lens. The Ball business system and our strategic pillars are not theoretical. They are driving resilience in our business and translating into earnings, cash generation and returns for shareholders. We had a good start to 2026 and just as importantly, we are executing in a way that reinforces our confidence in the year ahead. Thank you. And with that, we are ready for your questions. Operator: [Operator Instructions] Our first question is from George Staphos with Bank of America. George Staphos: Question for you first. With the performance, are you seeing any effects that you could call out from the Middle East tensions in terms of increased costs that won't necessarily be passed through real time this year, any effects on volume, particularly as regards to Europe, was there any effect on the segment's volumes related to the conflict that you could call out? And then a couple of follow-ons. Ron Lewis: George, thanks for the question. Nice to talk to you. From the impact on the Middle East, First, it's important to note that we do not have any direct business in the Middle East. And as a rule of thumb, we maintain supply chains that are as short as possible. So there's no supply assurance impacts either for our business or for our customers. It is a fact, however, the cost of all things, commodities that are affected by the conflict in the Middle East to have affected our business like others, especially aluminum. And that's where our resilient business model comes to the 4. The way that our contracts work generally is we pass on the cost of aluminum to our customers on an immediate basis, and then they choose how they will manage that cost impact. So thus far, the can is winning. The can is winning in every region we operate. And EMEA is no different than that of North America or South America. Our volumes are actually accelerating as we begin the second quarter of the year across all of our businesses. and EMEA is no different from that. George Staphos: Okay. I appreciate that, Ron. Maybe the related question did European volume perform as you expected? Were there any one-off factors that might have led to better or worse performance related? Are there any important contracts qualitatively that we should at least have in the back of our mind that you'll be managing against and to renegotiate for 2027. And then lastly, with Europe with the contracts. The last point being, we appreciate all the detail you're giving us and the granularity and getting back to basically operating performance within the segment. Are there any other metrics that you would call out that you're using as a guide point or a North Star user term for the segment in terms of profitability over time beyond the 2x leverage? Ron Lewis: Thanks, George. So any one-offs related to our EMEA volume would be specifically, we purchased the business known as Benepack, the 2 plants, 1 in Belgium and 1 in Hungary. And we purchased that from basically the beginning of February, we assumed that we would have it from the beginning of the year. So that probably affected what we had versus what we had planned. The second thing is, we sold a business in Saudi Arabia called UAC. And that business was reported previously in our other segments and with the change in our segment reporting, that's now from a comparable perspective, Q1 of last year is reported in our business. So that shows up as a headwind in our business. Those 2 things probably would have been some one-offs for us. But the core of our Europe business, we believe we're in line with market. We're within our algorithm that we talk about in the 3% to 5% growth, and we feel pretty good about how we started the year there. basically as expected. You asked about contracts. It gives me a moment to just say that for this year, we are fully contracted. And we actually are volume constrained in North America, as you know, and we have been volume-constrained in Europe because it grew so fast last year as did North America. And those 2 things why we are building a plant in North America and why we acquired the Benepack plants. So we're sold for 2026. For 2027, we're more than 90% sold and out through the end of the decade, we are basically 50% sold. So no, we don't have any specific contracts that we are concerned about. We've got long-term contracts in place. And that's just the nature of this business, which makes it a wonderful business to be in because we're able to establish some great long-term relationships that help our customers win and win with they can. As it relates to what metrics we would like point you to, it would probably be operating earnings per can. And that's why we've had the segment changes that we did. And I'm sure we'll get questions about that as well. But it's basically we want to have the most transparent cleaner for you all that analyze and comment on us and advise on us. We want you to have the cleanest looking Canada. So the operating earnings per can would be the metric that we would point you to. Operator: Our next question is from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess just picking up on the last question from George. So if I have this right, it looks like 1Q was pretty much in line with your expectations on a volumetric basis, but was really the operating leverage that was quite strong. And if that's accurate. Can you just give us the specifics, Ron, on what drove that improvement in operating earnings specific to the first quarter? Ron Lewis: Yes. Ghansham, nice to hear your voice. Thanks for the question. I would say, yes, we were largely in line with what we expected from a volume perspective, even with our South America business down year-on-year. We were probably a little bit ahead of what we expected in North America. And we were a little bit behind in EMEA. And let me just take a moment to talk about volume. While we were down in South America -- well, how did we compare versus the market? We think we were in line with market in North America. We think we were in line with the market in EMEA, and we were obviously below the market in South America given what our competitors have already already publicly stated. As we begin Q2 at an enterprise level, our volumes as we finished April were up mid-single digits. Again, that's as we expected them to be. And importantly, our South America business is up 20% April on April, and that erases all of the declines we saw in Q1, and we're back to flat volume for the year. So we are very confident in our predictions for how our business will finish on a volume basis for 2026. We expect to finish in our 2% to 3% towards the top end of our range of the 2% to 3% volume at enterprise level, and we expect North America to be towards the bottom end of our range because we are capacity constrained. We expect EMEA to be above the 3% to 5% commitment that we've made because of the inorganic acquisition that we made as well as a business that's performing in line or better with market. And in South America, we expect to still achieve the 4% to 6% volume growth as it relates to our long-term commitment. Now as for the operating leverage, maybe I'll give Dan Rabbitt a moment to reflect on that for us because I think I want to hear his voice in this meeting, and I think you do, too. Daniel Rabbitt: Yes. Thank you, Ron, and Ghansham, thanks for the question. We are -- as we've been speaking to a lot of you all very focused on trying to improve the profitability. And that is why Ron really highlighted the the growing importance of our metric of profit per can. We measured in profit per 1,000 being manufacturers, but regardless, it's profit for can focus. And I think the business is responding very well to how to this focus. And you've seen -- we saw good performance, good cost management, good pass-through of our cost really on top of our game that came through to deliver that 10% growth on operating earnings quarter-over-quarter. Ghansham Panjabi: Okay. Fantastic. Very comprehensive. And then just on the resegmentation, if you will, and just moving the plants in India and Myanmar to the EMEA segment, should we take away from this that you're just going to focus on North America, Europe and Latin America and not so much on the emerging markets, including those regions? Or is it just an interim move, if you will, before before you start looking at capital deployment in the other regions, the emerging markets outside of South America. Ron Lewis: Let me start with that question, Ghansham. Thank you for it. And I know we probably have some follow-up work to do with you and others after this call. But number one, the reason we made this segment operating change is this is the way we manage our business. It really is. We -- the management team that manages our EMEA business is also the management team that manages those plants that we've now included in our EMEA business. So we're doing it for the way that we operate our business. We want you to look at us and advise on us the way we operate our business. Number two, we want it to be as clean as possible for you and others to analyze us from an operating earnings perspective. So it's about transparency for us, both the way we operate internally and the way that we want you to look at us. the 3 regions in which we operate, including those regions that we've now added to our EMEA business are our core business, and we are the market leader in North America, South America and what is our EMEA business, the footprint that we have there. And we're very excited about our EMEA business. It's a growing business, especially those parts of the world that we just added. India is growing high teens and has been for years, and you saw us add capacity and announce additional capacity adds to India and you see our competitors looking to add capacity there. So it's a great market, and there are other great markets out there. I wouldn't take from this that we are focusing only and solely on the markets we operate in. And maybe, Dan, if you wouldn't mind commenting a bit on the other segment changes. Daniel Rabbitt: Yes. As far as the segments goes, the other thing that we did noteworthy really and was taking out the financing, the treasury-related items of the businesses to allow for better transparency on how the businesses are performing. And we really like our prospects in all 3 regions. And as you know, we measure everything from how we want to grow this company through the lens of EVA, and we see great opportunities in all 3 of our regions. And -- so I think now you have a better picture on how they're performing. And really, if the changes may be contrary to what people might think is actually were slightly negative, but the operating earnings would have been higher had we not made them on the quarter. I think over the long haul, we see this as a de minimis change. And again, reinforcing that the net earnings really have not changed. We're really materially the same place where we are when you look at the bottom line. Operator: Our next question is from Anthony Pettinari with Citi. Bryan Burgmeier: This is Bryan Burgmeier on for Anthony. Just wanted to ask about tariffs. Curious if there's any impact to Ball from sort of the latest changes announced early last month, specifically just thinking about covering some of the derivative products or applying the tar value to the whole value of the product and conversely, maybe some changes to Mexican beer. Just not sure if that alters the Dew for Ball at all. Ron Lewis: Bryan, thanks for the question. again, the tariffs that manage and govern the aluminum ecosystem and industry are Section 232. That's what's most impactful on aluminum cost and pricing. And the recent changes I think they're de minimis for our business. There's a slight positive for products that can come to the U.S. filled products, be they impact extruded aerosol packages or, as you said, beverage packages that are filled. So net-net, it could be slightly positive. But we're focused on serving our customers. And when they look for supply from us, that's what we're intending to do. And yes, so far, so good. Bryan Burgmeier: Got it. Got it. And then you touched on India already, but just wanted to follow up there. You've seen maybe some reports like energy shortages or material shortages. Just curious if that region has been impacted at all by what's going on in the Middle East? And it seems like a pretty good growth outlook over there. But Yes, if you could just maybe share some details on the near term and long term for India. Daniel Rabbitt: Thanks, Bryan. India, for sure, is an exciting place. That's the real story is that we've seen multiple years of high teens plus 20% growth. So the can industry is really moving quickly to establish supply locally as we are. As I noted, we've recently added capacity to 1 of our 2 plants there, and we've announced the adding of capacity to the second of our plants. So that's the real story of just managing growth in a high-growth market with with capacity constraints. There are continuing to be imports into that country because we cannot, as an industry manage to fulfill all the demand locally and there are some minor supply chain disruptions in that market that are, I think, come and gone. So we're running our plants and our plants at capacity. So if there there's any -- there was no material impact and nothing to note really to talk about on this call, and we're excited about the long-term prospects of India. Operator: Our next question is from Phil Ng with Jefferies. John Dunigan: This is John on for Phil. I just wanted to start on EMEA. The comparable EMEA earnings came in quite a bit better than we expected. It sounded like Benepack wasn't much of a contributor, at least compared to where you were thinking it was going to close. But you did note that the FX actually supported the earnings in the segment. Could you just maybe give us a little bit more detail on what drove some of the higher year-over-year comparable EBIT in the quarter? Daniel Rabbitt: Sure. This is Dan. I mean, I think we have to start with is that the business performed really well. We're again, focusing very much on improving profit. This region really has probably the most runway to improve profit and indeed, they're doing that. So I think it's a credit to that. But when you look at the overall puts and takes that Ron previously had talked about. The driver of this region is the EMEA segment, as you've always heard about at the last few years. It is performing very well. We're getting good now with the India plants and the Myanmarr plant coming in. Those 2 are showing growth and good operating leverage as well. So I think the 2 inorganic opportunities that we took on buying Benepack and selling the UAC really kind of neutralize each other. So I think really mostly what's happening is good performance in this segment. John Dunigan: Great. And maybe you could just quantify how much the FX supported earnings in 1Q? And then my second question is just on the corporate undistributed cost. It sounds like they stepped up. Maybe that was just a factor of some of the recasting that you did, but going up to $175 million, I think you said. Could you just tell us what's going on there? Daniel Rabbitt: Yes. Well, a lot of the positive FX now is moving out of the segment reporting for what we did. So -- but for the company as a whole, I think we probably had about $15 million of positive earnings from the translation and a lot of that is the euro when you compare it year-over-year from the first quarter because it was at a low point a year ago and now it's kind of, I don't know, about 0.15 higher on the foreign exchange. Ron Lewis: As it relates to EMEA specifically, John, I think it was less than half of the gain in operating earnings in our EMEA business was related to FX. John Dunigan: Great. And then the corporate undistributed? Ron Lewis: That's what I think Dan referred to earlier, which was the $15 million. John Dunigan: I apologize. Ron Lewis: So there's a corporate undistributed. That's where we put the FX gains and losses as the translational impact on EMEA was less than half of the operating earnings gain, and that's what you heard from from others in the industry as well. Operator: Our next question is from Edlain Rodriguez with Mizuho Securities. Edlain Rodriguez: I mean clearly, I mean, one, we are clearly in an inflationary environment globally. Like how do you expect this to impact consumer mood and ability to spend. And if there is any impact, like in which region would you expect to kind of start seeing that first? Ron Lewis: Thanks for the question. Well, first of all, the can is winning in every single region in which we operate, and it continues to take share from other substrates. That was true last year and the year before, and it's true this quarter, and we believe it will be true for the foreseeable future. So the can is winning. And we can -- you see the same data we see, and we're really pleased for that. And why is that? It's because of the unique nature of the can. It provides a robust transportation. It provides a robust shelf life. The can has a shelf life of the year. It provides a great billboard effect. You could sell it a singles multiples. I mean, I can talk for for hours about the benefits and the filling your product in an aluminum beverage package and especially one made by Ball. So that's what makes it unique and helpful. As it relates to inflation on the consumer, I mean, all inflation -- all costs are going up. And all I can say is our customers are excited about winning with the can as well. Every time I go to one of our plants, I see new promotional activity coming into summer, especially in the Northern Hemisphere. So every one of our plants is running and most of those labels are promotional labels. And I think our customers will continue to lean into the can as a means of helping them to support the consumer as they seek value. Daniel Rabbitt: And Ron, the only other thing to add is that as consumer really is in place -- has headwinds, it tends to kind of retreat to doing more home consumption. Ron Lewis: And that's been the reason why it's remained so strong. Edlain Rodriguez: Now clearly, that's the case. And 1 quick one. In terms of like the past to make and assume you have for aluminum and other costs, can you remind us how -- like is there a lag? And how much is that lag in terms of like how quickly you pass to those costs? Ron Lewis: Okay. Well, let me do very quickly on aluminum, it's I say immediate, and our other cost pass-throughs are formulaic in nature, and usually, they pass through on an annualized basis. Is there more detail you'd like to add to that, Dan? Daniel Rabbitt: Yes. I think the 2 areas I would add on to that is that really we're talking about higher energy costs and how does that impact us. Ron covered the aluminum, so I won't go back to that. It's really about the customer often pays for the freight, more often at pace for the freight, too. So that's a pass-through to and that's a fairly immediate pass-through in many circumstances. And then when we look at the year, we always look at trying to hedge and lock in our energy cost. And so we're in a pretty good position from what it takes to run our plants right now, too. Ron Lewis: And we do those hedging to align with our customer contracts so that we want to be valued for the additional values that we add to the aluminum that we buy and make into aluminum beverage cans and ends and bottles for our customers. Operator: Our next question is from Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. First question I had is, Dan, you just mentioned in response to John's question that the EMEA business has the most runway to improve profit and they're doing that. That segment was already achieving operating leverage target, whereas North America is. And so I'm just wondering what you see in terms of potential for EMEA and why it has the most runway relative to other businesses. . Daniel Rabbitt: Yes. Thanks, Michael. I think the main thing to do is when you take a look at the profit per can, MEA is our lowest, okay? So for the regions. And they actually have been focused for several years and making the biggest strides on it. And as far as the profit per can. So that's why I highlight that there's the most opportunity and the most progress has been made, too, as we think about that from them. Your question about North America, really, right now for the last quarter or 2, we see North America on target for trying to -- for the 2x operating leverage. It's been pretty close to that number. As we measure it this quarter and last. So I think good things are happening in North America as well. And it is also increasing its profit for [ CAM2 ] as we look at it. Ron Lewis: And if you don't mind, Dan, I'd like to add a few things, Mike, thanks for the question. How are we going to improve our -- why do we believe we can improve our operating earnings in Europe? It comes back to our operational excellence platform. Number one, we need to implement manufacturing standards in our business, and we're doing that. Number two, we need to manage our network well and adding 2 new plants in countries where we didn't operate in Belgium and in Hungary are certainly going to help us. And we're investing in our people and our systems. So those are the things that I think will -- that give us confidence that we can continue to compete and operate our plants and our network well. I would say the other thing is Europe, we always talk about it as a land of opportunity. There is still significant opportunities for can penetration. So we know there's a lot of runway to go. We're really proud of our ability to deliver our operating leverage this quarter. We delivered and then some across the enterprise, we certainly delivered it and then some in our EMEA business. We delivered flat op earnings in South America despite the volume declines in North America. We achieved our operating leverage there as well in the quarter, although for the enterprise for the full year, we expect to do more or less operating leverage as compared to our volumes at 2x. That's what we're planning to do. Daniel Rabbitt: And Ron, I think I'll use this as an opportunity to reiterate the outlook for North America. We've been talking about the $35 million of ramp-up costs for Millersburg and the domestication of some in production as well. And that was not in the first quarter. So as we start to think about the rest of the year, you're going to see those costs come in later in this order and heavily in the third quarter, possibly a little in the fourth quarter as well. So that's going to distort some of that operating leverage. And that's why we've been saying all year long, you're going to have to make some adjustments for those, and you will see the operating leverage on the base business. Michael Roxland: That's perfect. And if I had just one quick follow-up. In terms of some of the incremental costs you're experiencing, obviously, they're believed to be transitory of freight, chemicals, energy, and I think I know the answer is going to be but going to ask the question anyway. What levers do you have available to you internally to offset those higher costs? I'm assuming operational efficiencies, deploying best practices, the bold business systems, some of the things you mentioned on your commentary. But are those are the levers that you have in your wheelhouse to basically offset incremental costs and to even potentially drive margins higher when those costs recede. Ron Lewis: Mike, I think you're thinking about it the right way. We have to be operationally excellent every day, and that's the first pillar with our strategy. So that -- those are the primary means by which we offset those costs. And they're real. So -- and then the second thing is we are a resilient business model. We are rewarded for and paid for making cans, bottles and ins as efficiently as possible. . And the cost that we manage on behalf of our customers are generally passed on to them in a formulaic way, be it freight, be it other direct materials, be it aluminum through various means. So that's what makes us a very resilient business in a very resilient industry. Operator: Our next question is from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to get your thoughts on maybe the contracting environment. You guys are adding capacity in North America and Europe and and elsewhere. So presumably, supply and demand is relatively tight in all regions. But are you expecting to -- given that tight capacity, would there be any pricing opportunities over the next few years? I mean how should we still expect about 1/3 of your contracts roll over every year? Or maybe you can just kind of help us frame those kinds of opportunities as well. Ron Lewis: Arun, thanks for the question. I would say you saw the industry grow significantly the last few years. Certainly, last year, Ball, we grew more than 4%, so above our long-term algorithm. And we used up a lot of the latent capacity that we had. So strong growth in the last several years has led to a relatively tight supply demand scenario. We, as a business, are operating certainly at asset utilization levels in the mid- to high 90s depending on the region on a percentage basis. So the supply and demand is relatively balanced to tight. The next thing I would say is the long-term nature of our business is also reflected in the long-term nature of our contracts with our customers. So I mentioned earlier on the call, we are sold out for this year. We are more than 90% sold for next year, and we're more than 50% sold for the balance of the decade. We have a heavy capital deployment in our industry. So it requires that level of commitment from a customer for multiyear contracts. So we're well contracted. You said there's roughly 1/3 of our volume turnover every year just based on those numbers, it's significantly less than that. Is there an opportunity for us for pricing, I would say, we want to be fairly rewarded for what we do. including down to all of the value-added things that we do, whether it be a different type of specialty can or a special special promotion or a different type of ink. Those are the things that we deserve to and get rewarded for when we're able to bring that sort of innovation to the market. the market will be what it will be, and we just know that we need to be operationally excellent to compete in it. Thank you, Arun. Arun Viswanathan: Okay. And then if I could ask a follow-up. Just curious on if you will be putting in more capacity here in North America. Obviously, you have the Millersburg plant, but Presumably, that will only bring you down to the low 90s and maybe even in the mid-90s. So is that -- would you be adding more capacity? And what are your customers, I guess, when you do go through this process, you kind of presell the plant out? Or is it kind of more done in the future? Ron Lewis: Yes. Thanks for the question, Arun. It gives us a chance to talk about Millersburg, which will be commissioning late this year, and it will bring material volume to our network next year. It will allow us to remove some supply chain inefficiencies because we do not have capacity in the Pacific Northwest and the U.S. So that will help us and our customers. The most important thing about that plant that you should know is it comes on the back of a long-term offtake agreement with one of our most strategic customers. So that plant is -- capacity is spoken for, for many, many years to come when we build it. And that is the second thing that you said, the case for any plant that we would build, we will not build a plant unless we have a long-term offtake agreement filling essentially all of the capacity for that plant. So we're excited to bring new capacity to North America, but we only bring it on the back of a customer's commitment to us because they see the growth of the beverage can. Maybe a specific comment, for example, the energy drink category, as you know, and we all know, is growing and continues to grow unabated. And as it grows, we're excited to help our customers in that regard. And we have potential to build another plant on the East Coast at some point before the end of the decade, but I wouldn't get too excited about it because it won't be in the next several years. But we have intentions to build a plant in the East Coast in North Carolina because of the growth of one of our more -- most strategic customers as well. And we'll do that when it's appropriate. And hopefully, that gives you a sense of how we deploy our capital related to our customers. Thank you. Operator: Our next question is from Hilary Cateno with Deutsche Bank. Unknown Analyst: Could you talk about what you're seeing from the CPGs and in terms of promotional activity? Are you seeing them be more promotional than they have been in the past? Any color on that would be helpful. Ron Lewis: Hilary, thanks for your coverage of us. We appreciate it. Yes, it's great. Our customers, we've really them and look to them for guidance on how they view the consumer. They're much better at this than us, and we really appreciate the insights they provide us. Based on what we know and we hear from them, I'm going to talk specifically about the summer coming up. When I go into our plants and our factories around the world, be it in Europe, in South America or in the U.S., at least one of the lines is running a World Cup label. So that's exciting. Everyone is excited about the summer's World Cup coming up. And if you're walking through one of our plants in North America, I can almost guarantee you, you will also see another rhine -- line running America 250-year celebration labels as well. So clearly, our customers are looking forward to taking advantage of some exciting consumer-driven marketing activity this summer. And it should be at least -- it will be no worse than neutral, and we think it will be a net positive for us. We couldn't put a number on it right now. We're just pleased that our customers continue to see the value that I spoke about earlier of the beverage can. It provides an amazing billboard for them to talk about that promotion. They can use it as a multipack or a single different sizes and the robustness of the package means that they can lean into the can as opposed to other packaging substrates because of the shelf life and the quality that, that can provides for their product. Unknown Analyst: Got it. That's helpful. And then just a follow-up question. The EVA framework really seems to be working well in setting a clear guideline and goals on the corporate level. So could you just talk a little bit about how the EVA framework is being used to like incentivize employees at the plant level and to make operational decisions and is that what's driving operational efficiency on the corporate level as well. Ron Lewis: Thanks for the question, Hilary. I'll let Dan say a few words in a moment about EVA, but it just gives me a chance to say, EVA is our North Star. It hasn't for a long, long time, and it will continue to be for the foreseeable future. So how we deploy capital, running a cost-efficient business, that's what acting like an owner means. So as it relates to our plants, all of us are rewarded for delivering EVA dollars, every single person in this company. And maybe, Dan, could you give some nuance around how we're thinking about EVA operationally? Daniel Rabbitt: Yes. Yes, the nice thing about having EVA is it's been here longer than Ron and I have. And so it's really ingrained in the culture. We do like to have everybody included in these plans. And what we're really focused on now is breaking EVA down from this financial concept into what they can actually do to improve EVA. So we're making it much more personal. And that's one of the key items we're doing to improve the profitability of the company right now is really getting much more granular and breaking down EVA. Operator: Our final question will be from Matt Roberts with Raymond James. Matthew Roberts: I got a couple of messages clarifications on first April. I know you said that was up mid-single digits. What region was that? Or was that enterprise wide? I believe South America, you said April up 20%. How much of that 20% was the catch-up from 1Q? Ron Lewis: Thanks for the question, Matt. So enterprise-wide, we started the quarter, the month of April, up mid-single digits as an enterprise. Within that enterprise, South America, April volumes were up 20%. How much of it was catch-up from Q1? Well, what I can say is that April volume made up for all of the declines we saw in the first quarter. And it gives me a moment to just say what happened in the first quarter. What happened in the first quarter for us was you saw a really strong volume for us, high single digits in Q4 2025. So we came into the to Q1 with a pretty healthy sales of cans to our customers who had built a strong inventory. The peak season in South America, weather wasn't probably as good as on average that it would normally be. So it was a little weaker than average, but the -- coming out of peak, the weather has been quite good. And we're seeing a strong pull through as we come out of that peak selling season in South America. And we think that's some of what's happening. And it wasn't asked, but we delivered flat operating earnings in the region, which we're really proud of. And how we did that was we actually got to a position where our inventory levels were a bit lower than we expected. So we were able to build back our inventory, which helped us to deliver the P&L in South America. And also, we had some good size mix and country mix there as well that helped us deliver flat operating earnings while we had volumes down a bit. So hope that answers your question about the volume and a little bonus on color on South America. Okay. Thank you very much, Matt. And Sherry, I think that's our last question. So I just wanted to thank everybody again for your interest in our company. our analysis of our company, your partnership in helping us tell our story. We really appreciate that very much. We look forward to talking with all of you more and sharing our story. So we're excited about how we delivered the first quarter of 2026. We're confident in how we're going to complete 2026. And importantly, we're confident in the long-term nature and the resilient business that we have the privilege to run. So thanks again, everyone, and we look forward to talking to you very soon. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead. Aijana Zellner: Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2026 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Christian Rothe, our CFO. Our results were released earlier this morning and the press release and charts are available on our website. These materials as well as our remarks today will reference non-GAAP measures. Reconciliations of these non-GAAP measures are included in both the press release and charts. A replay of today's webcast and a transcript of our prepared remarks will be available on our website at the conclusion of today's call. Before we begin, please note that our comments today include forward-looking statements regarding the expected future results of our company. Our actual results may differ materially due to a wide range of risks and uncertainties described in our earnings release and SEC filings. And with that, I'll hand it over to Blake. Blake Moret: Thanks, Aijana, and good morning, everyone. Before we turn to our detailed results on Slide 3, I'll make a couple of opening comments. Rockwell delivered especially strong operating performance this quarter with sales, margins and EPS all coming in above our expectations. Double-digit year-over-year growth in orders, sales and earnings reflects our strong market position led by North America and the team's continued focus and execution in a dynamic global environment. Our technology continues to perform in the most demanding mission-critical environments. Last month, Rockwell supported NASA's Artemis II mission, enabling ground control systems for the first crude mission to the moon in more than 5 decades. It's a powerful example of how customers trust Rockwell when reliability, precision and safety are paramount. These same capabilities, including our digital engineering, robust security and deep domain expertise are what our customers depend on every day to improve productivity, augment their workforce and modernize operations. We saw an improvement in customer demand across a broader range of industries in Q2, such as e-commerce, warehouse automation, data center, semiconductor and energy. Book-to-bill for the company was slightly higher than our historical average. This includes the increasing contribution from projects to build new capacity in the U.S. However, persistent trade volatility and geopolitical uncertainty continued to delay large capital investments in other industries, including automotive and consumer packaged goods. We're doing a good job of managing cost increases in areas affected by tariffs, demand for memory and fuel. At the same time, we're accelerating the release of new technology to grow our customer value and share over the long term. The investments we made over the last half dozen years in cloud native software and modern development tools are contributing to this measurably faster pace, including the ability to incorporate AI capabilities within months of their initial release to the market. Turning to our second quarter results on Slide 3. Q2 sales were above our expectations with organic sales growing 9% year-over-year. Reported sales were up 12% with favorable currency contributing 3 points of growth. Intelligent Devices organic sales were up 9% versus prior year, with strong growth in our Motion, I/O and Safety & Sensing businesses. We continue to build momentum with our production logistics offering where our OTTO AMRs are gaining adoption across a broader range of industries, including automotive, food and beverage, home and personal care and even pilots in data center applications. A great example of a strategic OTTO win in the quarter was with Subaru of Indiana Automotive, where our autonomous mobile robots are helping scale their production by improving efficiency, flexibility and safety. In our Software & Control segment, organic sales were up 17% year-over-year and well above our expectations, driven by continued double-digit sales growth of Logix, especially in North America. Our Logix growth was broad-based in the quarter and we saw a particularly strong performance with our data center customers, where we continue to see increasing demand for our industrial grade controllers. A great example of this momentum in Q2 was our win with ATS Automation, who is leading the conversion from commercial controls to our robust Logix PLCs at a new AI data center in Texas. Lifecycle Services organic sales were down 1% versus prior year. Our longer cycle business was largely in line with expectations with customers deferring some of their larger projects and continuing to prioritize smaller scope productivity and modernization investments. Book-to-bill in this segment was 1.07. The dissolution of our Sensia joint venture is now complete and executed as planned. Christian and I will cover the expected impact on full year fiscal '26 financials later on the call. Annual recurring revenue was up over 6% in the quarter, including high single-digit growth from software ARR and mid-single-digit growth from recurring services. We continue to see slower growth in our services business with customers temporarily delaying and reprioritizing their spend. One notable ARR win in this quarter was with Prometeon Tyre Group, who selected our cloud native Fix software as their digital maintenance platform, enabling asset management and operational discipline across complex multisite operations worldwide. From a profitability standpoint, we delivered strong margin performance this quarter. Beginning in Q2, we are now reporting enterprise operating profit and enterprise operating margin, which include corporate expenses. This is due to SEC requirements around non-GAAP measures and is simply a change in presentation with no impact to net income, EPS, cash flow or individual segment margins. Christian will add more detail on this in a few moments. Enterprise operating margin of 22.5% and adjusted EPS of $3.30 were up significantly year-over-year and well above our expectations, driven by higher volume, positive price/cost, favorable mix and productivity. Let's move to Slide 4 for Q2 industry highlights. Sales in our Discrete industries grew mid-teens versus prior year, led by better-than-expected growth in automotive, e-comm and warehouse and semiconductor. Within Discrete, automotive had a strong quarter with sales of mid-teens year-over-year. While we are starting to see a broader normalization in production schedules and the release of select larger projects, the majority of customer investment is still focused on productivity and smaller modernization initiatives. In addition to our Subaru win mentioned earlier, we secured several strategic AMR wins with global brand owners where our autonomous material movement solutions are replacing traditional AGVs and forklifts across their global operations. This quarter, we also had an important new logo win with an energy infrastructure company who chose Rockwell to automate the entire production line for their greenfield facility in China, marking our first end-to-end deployment across a complete battery manufacturing process. E-commerce and warehouse automation delivered another strong quarter with sales up over 30% year-over-year as customers continue to prioritize upgrades and retrofits within existing warehouses over new greenfield builds. Semiconductor performance improved in Q2 with sales growing high teens versus prior year, supported by a stabilization in core semi demand and an accelerating contribution from AI and data center-driven investment. This is one of the verticals where we saw broadening demand. Our data center business was one of the strongest end markets in the quarter, with sales more than doubling year-over-year. Customers are prioritizing speed to capacity, resilience and energy optimization driving investment in both upgrades to existing facilities and select new builds. Turning to hybrid. Sales in this segment were up high single digits, led by strong year-over-year growth in food and beverage. Sales in Food & Beverage grew high single digits with good growth in North America and EMEA. We continue to see customer investments in healthier products, including protein, dairy and nonalcoholic drinks. CapEx for new construction remains constrained in consumer packaged goods, including Food & Beverage, but we're seeing the impact of our new offerings such as autonomous mobile robots and contribution from midsized customers that we cover so well along with our distributors. This quarter, Agropur, a leading dairy producer, selected Rockwell's digital services to support its digital transformation and advance its factory of the future strategy. Our Life Sciences business grew low single digits versus prior year and double digits sequentially with new capacity projects in North America and Asia Pacific. In the quarter, our combination of FactoryTalk PharmaSuite MES, and FactoryTalk Optics helped secure a competitive win for an active pharma ingredient application. Another strategic life sciences win in the quarter was with Butantan Institute, one of Brazil's largest biopharma and vaccine producers, which expanded its PharmaSuite MES footprint to optimize and automate production processes, reinforcing Rockwell as a long-term digital manufacturing partner. Turning to Process Industries. Sales in this segment grew mid-single digits with solid growth across energy, metals, pulp and paper, and chemicals. Energy sales were up mid-single digits in the quarter and were above our expectations, particularly in the Americas. A great example of our continued momentum in oil and gas was a win with Petrobras where Rockwell will provide integrated automation services across multiple FPSOs in the Buzios offshore field. This reflects customers' continued trust in our capability to support complex offshore operations at scale. In mining, we formed a strategic partnership with BHP to support them in advancing the next generation of autonomous operations combining Rockwell's leadership in automation and AI with BHP's deep operational expertise to help enable scalable execution across complex safety critical environments. Another example of our increased presence in Process this quarter was our new capacity win with a leading North American packaging customer who chose Rockwell to deliver an integrated automation solution for one of the region's largest mill expansion projects, expanding our installed base and positioning Rockwell as a platform for future phases of this multiyear project. Moving to Slide 5 for our Q2 organic regional sales. We saw broad-based growth across most of our regions this quarter. While the conflict in the Middle East has paused some near-term customer activity, mainly in our Lifecycle Services business, the impact to results is limited today, and we see potential for reinvestment as customers restore operations over time. Organic sales in the U.S. were up 10% versus prior year and we continue to expect North America to be our strongest region in fiscal '26. Let's now turn to Slide 6 to review our fiscal 2026 outlook. I'm pleased with our performance in the first half of the year. Customer demand continues to gradually improve and broaden across more of our end markets. However, we are balancing this momentum with a prudent approach in an uncertain environment. We now expect both our reported and organic sales growth to be in the 5% to 9% range. Our reported sales midpoint now assumes 1.5 points of positive contribution from currency translation, offset by the negative sales impact from the Sensia dissolution. We expect organic annual recurring revenue to grow high single digits this year, led by cloud-native software. We're increasing our enterprise operating margin outlook to 21.5%, up from about 20% in our prior guide, and we now expect our adjusted EPS and to be about $12.80 at the midpoint. The increase is driven by volume and very strong conversion, even as CapEx spending in some verticals remain subdued. We continue to expect free cash flow conversion of 100% in fiscal year '26. I'll now turn it over to Christian for more detail on our Q2 and financial outlook for fiscal '26. Christian? Christian Rothe: Thank you, Blake, and good morning, everyone. Let's go to Slide 7, second quarter key financial information. Second quarter reported sales were up 12% versus prior year. About 3 points of growth came from currency. Our Q2 results still include Sensia as the JV was dissolved on April 1. Three points for organic growth in Q2 came from price, with about half coming from underlying price realization and half from tariff-based pricing. There were lots of puts and takes from tariffs in the quarter, including the removal of IEPA tariffs, the new Section 122 tariffs and the changed approach with Section 232 tariffs. We continue to expect pricing actions to fully recover tariff costs this year. We'll continue to evaluate and modify our plans as more details become available, especially related to the expected Section 301 tariffs. Maintaining earnings neutrality remains our focus. Our second quarter and full year guide do not include any impact from expected IEPA refunds or claims resulting from the Supreme Court decision. Moving on to the rest of the P&L. Gross margins expanded year-over-year by 160 basis points to more than 50%. The strong performance was driven by volume, ongoing benefits from productivity and favorable mix. SG&A spend was 2% higher year-over-year in the second quarter, primarily due to higher compensation, reflecting our annual merit increase and strong outperformance in Q2. Engineering and development spend was up about 11% year-over-year on pace with our sales growth as we continue to invest for the future. Our total innovation spend was about 8% of sales in the quarter. As Blake mentioned, beginning this quarter, we are now reporting enterprise operating profit and enterprise operating margin, which are both -- which are replacements for total segment operating earnings and total segment operating margin. We are making this change due to SEC requirements, as these new measures include corporate and other expenses and therefore, reflect enterprise level operating performance. There is no change to how we report individual segment operating earnings and segment operating margin for Intelligent Devices, Software and Control and Lifecycle Services. These will continue to be reported on a consistent basis with prior periods. Slide 15 of our earnings deck shows the recast information for the last 10 quarters, bridging previously reported total segment operating margin to the new enterprise operating margin. This is a change in presentation only and has no impact to reported net income, earnings per share, cash flows or overall financial position. Our enterprise operating margin expanded 350 basis points year-over-year, reflecting the strong growth in volume, positive price/cost, inclusive of productivity and favorable mix, partially offset by higher compensation. In short, we are getting great leverage on our P&L. Our adjusted effective tax rate in the quarter was 20.6%, slightly higher than our expectations. We continue to expect an adjusted ETR of 19.5% for the full year. The broad-based strength in our business delivered results that exceeded our expectations with Q2 adjusted EPS of $3.30, up more than 30% year-over-year. Free cash flow in Q2 of $275 million was above our expectations. It was $104 million higher than the prior year, primarily due to higher pretax income driven by our strong Q2 results. Receivables were a use of cash in the quarter, reflecting strong shipments. Slide 8 provides a sales and margin performance for our -- of our 3 operating segments. Intelligent Devices margin of 20.9% increased by 320 basis points year-over-year and was ahead of our expectations due to positive price cost inclusive of productivity, higher sales volume and favorable mix, partially offset by higher compensation. Resulting segment year-over-year incrementals were in the mid-40s. Software & Control margin of 34.9% was up 480 basis points versus prior year and was also higher than our expectations, driven by strong sales volume and positive price cost, partially offset by compensation. This segment saw year-over-year incrementals in the high 50s. Lifecycle Services margin of 14.6% was flat year-over-year, slightly ahead of our expectations. Lifecycle Services had another quarter of good project execution and productivity, offset by higher compensation. Sequentially, all 3 segments expanded margins from Q1 to Q2 with Intelligent Devices and Software & Control gaining more than 300 basis points each. For total Rockwell, the incremental margin and the year-over-year sales growth was in the low 50s in Q2, repeating the strong incrementals that we saw last quarter. Let's move to the next Slide 9, for the adjusted EPS walk from Q2 fiscal 2025 to Q2 fiscal 2026. Year-over-year, core performance had an impact of $0.80 in Q2. Our core performance was driven by volume, price/cost, productivity and mix, partially offset by higher compensation. A quick shout out to the operations team, who leveraged the volume increase to drive great margin performance. A $0.15 currency tailwind was offset by a $0.15 tax headwind. All other items had a neutral impact on adjusted EPS. Moving on to the next slide, 10, to discuss our guidance for the full year. We are increasing both our reported and organic revenue guidance to a range of 5% to 9% or 7% at the midpoint. That is up 3 points from our prior guidance. This increase reflects the outperformance in the first half of the year and a broadening of the end market strength that Blake discussed in his remarks. On April 1, after the close of our second quarter, we dissolved our Sensia JV. As we previously mentioned, the dissolution lowers reported revenue, increases Lifecycle and Rockwell margin percentage and is EPS neutral. Our full year guidance now reflects this impact. Slide 16 of the deck provides an estimate of the sales impact from the now divested businesses for the past 4 quarters. We're providing this pro forma, so you can update your models. The prior midpoint for reported sales guide was $8.8 billion. Our new guide of $8.9 billion reflects about a $200 million increase in our organic sales forecast, partially offset by a $100 million reduction due to the Sensia dissolution. This nets to a $100 million increase in the reported sales guide. Turning to Slide 11. We are increasing our adjusted EPS guidance range to $12.50 to $13.10. The new midpoint of $12.80 is $1 higher than the midpoint of our prior adjusted EPS guide. As we move into the second half, we expect inflationary costs to step up, primarily across key components, memory, transportation and general supplier inflation. For instance, memory costs continue to increase in Q2 and are now expected to represent a double-digit million dollar headwind in the back half. We are actively managing these pressures, including through increased safety stock to secure supply and protect operations. We've taken some additional pricing actions to help offset these cost increases, and we now expect 250 basis points of total price for fiscal 2026, with 150 basis points coming from underlying price and 100 basis points from tariff-based price. This is an increase of 50 basis points from our prior outlook, all from underlying price. The cost inflation and corresponding price realization won't 100% align in any given quarter. Our full year guide reflects sequential margin pressure in the second half. That said, our initial guide for fiscal 2026 expected incremental margin to be about 40% for the year. This new guide puts incrementals above 50% for the full year. For your models, CapEx for fiscal 2026 remains targeted at about 3% of sales. Now let me share some additional color on our outlook for the third quarter. In Q3, we expect total company reported sales to be roughly flat sequentially with correspondingly flat enterprise operating margin. We are losing about $50 million of sequential sales due to the Sensia dissolution, offset by growth predominantly in the Intelligent Devices segment. Sequential segment margin performance is expected to be up slightly in Intelligent Devices, down in Software & Control and up slightly in Lifecycle as expected post Sensia. We expect third quarter adjusted EPS to be up about $0.05 sequentially or up mid- to high teens year-over-year. For the full year, we expect Intelligent Devices reported revenue to grow in the high single digits, with segment operating margin around 20%. For Software & Control, reported revenue should grow in the low double digits, with segment margin in the low 30s, up several hundred basis points year-over-year. For Lifecycle Services, we expect reported revenue to be down about $100 million year-over-year given no second half revenue contribution from the portion of the Sensia business we have now divested with segment operating margin flat to slightly up year-over-year as margin in this segment benefits from the dissolution of Sensia. A few additional comments on fiscal 2026 guidance for your models. We expect corporate and other expense, which is now part of enterprise operating profit and margin, to be around $110 million. Net interest expense for fiscal 2026 is targeted at about $120 million. During the quarter, we repurchased 1.2 million shares at a cost of about $450 million. We are now expecting approximately $850 million in repurchases for the year. And we're now assuming average diluted shares outstanding of about 112.1 million shares. With that, I'll turn it back to Blake for some closing remarks before we start Q&A. Blake? Blake Moret: Thanks, Christian. You may have seen the announcement last week of Clock Tower Farms, a highly automated hydroponic farm, that will start production in our Milwaukee headquarters later this year. Particularly with the developments in software-defined automation, AI and robotics, we are unlocking new applications for our technology that improve the quality of life. I'm proud of the Rockwell team and our unmatched ecosystem, winning new business, managing costs and delivering impactful solutions, all of that came together in the quarter. We're in a strong position, and we intend to make the most of it. Aijana will now begin the Q&A session. Aijana Zellner: Thanks, Blake. We would like to get to as many of you as possible, so please limit yourself to 1 question and a quick follow-up. Julianne, let's take our first question. Operator: [Operator Instructions] Our first question comes from Scott Davis from Melius Research. Scott Davis: Everything seems pretty clear. Look, I guess this data center market, if it's doubling must be getting to somewhat of a material size, I would think. I'm remembering it kind of 1% of sales was doubling that means 2% of sales, you double from there, it's 4%. If you get my point. I'm just -- are you comfortable sizing it for us and helping us understand kind of what that TAM may look like for your products? Blake Moret: Sure. Scott, we're really proud of the progress we're making in data centers. We've talked about it as being low single digits. So a modest amount of base revenue and we don't change the percentage splits of the individual verticals that we show in the slides, except annually. And so we'll take a look at that and see where it lands to determine whether there's more explicit dimensioning of the data center business. But just for review as well, data center for us comes from, I'd say, 3 main places in our offering. The first would be the power distribution, largely through our Cubic technology that we acquired a few years ago. The second would be the growing trend to replace commercial grade controls with industrial PLCs. Logix has a natural choice for its safety and reliability. And then participating with some of our large HVAC customers. So think about the chiller demand and so on in drives from those customers. So we're proud of the progress, and we'll take a look at the numbers at the end of the year. Scott Davis: Okay. Helpful. And then, look, I think twice in the prepared remarks, you mentioned kind of productivity and modernization projects being the emphasis versus kind of the larger scale stuff. What does that mean as it relates to kind of content intensity and differences? I mean, how meaningful is that change for Rockwell? Blake Moret: Well, I'd say the modernizations, the expansions of existing brownfields, it's the same products that ultimately go into the solutions as when CapEx is being invested. There's probably a little bit heavier involvement in capital projects for Lifecycle Services. So that's part of what's muting the Lifecycle Services growth. But those modernizations, those expansion, lots of Logix, lots of Intelligent Devices and so on in those projects. Operator: Our next question comes from Andy Kaplowitz from Citigroup. Andrew Kaplowitz: Like, it seems like you raised your forecast for several CapEx-intensive end markets. Semicon, Energy, Chemicals, I think. Is it fair to say that you're seeing some decent unlock in larger projects versus last quarter? Then maybe you can give more color to the drivers and durability of the unlock. Obviously, looks like short cycle has gotten a bit better. We all see the improvement in the USIS 7. But the customer decision-making on large projects just accelerate? And why do you think that is? Blake Moret: So it's -- in certain of the industries that we've been talking about, where CapEx is being invested, we've talked about e-commerce and warehouse automation for a while now, or data center, we added to that semiconductor and energy as well. And so we are seeing enough of a broadening in the capital being invested to make particular note of that. What I should mention, however, is that we're still not seeing a wholesale unlock of capital in some of our biggest end markets, namely automotive and consumer packaged goods, including food and beverage. We had good results in those verticals in the quarter. But in the case of consumer packaged goods, in particular, it's more a factor of those modernizations that I mentioned, good performance with midsized customers where our channel particularly in North America is so valuable. And then the impact of new offerings, some sizable projects with mobile robots and some of the newer additions to the Rockwell portfolio. Andrew Kaplowitz: Helpful, Blake. And then like Christian, obviously, operating leverage is helping you. But when we look at your major segments, such as Intelligent Devices and Software & Control, you mentioned positive pricing and productivity is helping. As you've said, you're now focused on averaging 50% incrementals in '26 versus 40%, I think, which was your original guide. So I know you're focused on continuous improvement, but how much is that helping and impacting, for instance, price versus cost? And are we starting to think the core incrementals at Rockwell could be higher than your previous longer-term algorithm? Christian Rothe: Yes. Sure, Andy. I appreciate the question. The productivity cadence that Rockwell has been really good over the last couple of years and quite pleased with the progress of the team. And I think you're noticing something that's really great to see, which is it's not just the productivity programs overall in and of themselves, but it's actually a broadening of the thought process of the organization and continue to drive additional ways to win, additional ways to bring through that profitability. As you know, we're getting some really nice growth on the volume side, and that's flowing through nicely. You mentioned about the incremental margins for 2026 coming in at around 50% in our guide, which is great. Historically, we talk about 35% flow-through. I think when you think about a cycle and how the incrementals work through the cycle for us, we still feel very comfortable with that 35% that we've signed up for. As we move forward and we get to a point where we start talking about other targets for the organization, we do it under the overall umbrella of our growth algorithm. That will be the moment if we were to revisit it, that's what we would do. But again, 35% is a really good flow-through number for us to target for an industrial company. So we're happy with that. Operator: Our next question comes from Julian Mitchell from Barclays. Julian Mitchell: Just wanted to start with the enterprise operating margin guidance because I think it's pegged at about 22% in the second half of the year and the quarter just delivered was 22.5%. So it's very, very rare for margins in the back half to come down versus fiscal Q2, but that's what the guide is implying. Is this all just this sort of inflation from memory and so forth? Anything else in there, maybe mix is assumed to reverse or something like that? I think mix was a decent tailwind in the first half. Christian Rothe: Yes. Maybe I'll start with that one and Blake can jump in. But first of all, to confirm the -- historically, we've talked about a total segment operating margin percentage target for medium term, that's in the 23.5%. Now that we're talking about enterprise operating margin, you're right, the math is about 22% is what that target is. And we are -- we just did a number that's slightly above that. As we talk about and think about the second half of the year, and I said this in my prepared comments, we do have some inflationary pressures that are coming into play, specifically around memory, but also on raw commodities and other supplier inflation. So we also have some additional spending coming through in the second half. And I think it's just as important to note that Q2 was a really strong outperform. We had a number of things that converged all quite nicely for us, and that's everything from the volume increase that we had sequentially that the factories performed really well on that. The spending level was kept in check. We were able to get really good price realization in the quarter. So it all converged quite nicely. And when you look at the incrementals that we had from Q1 to Q2, that flowed through really well. So to be able to try to hold on to that and keep that total enterprise operating margin flat sequentially from Q2 to Q3. And then again, when we think about the full year numbers, we will have a little bit of mix shift that happens in the fourth quarter, which is normal for us that will be somewhat detrimental to our margins sequentially from Q3 to Q4. So overall, we feel comfortable with how this rolled together. Blake Moret: Yes, just the only other thing to add to that are that mix shift in the fourth quarter, that's the typical seasonal higher deliveries of Lifecycle Services and engineered lineups that we typically see in the fourth quarter. We're taking a prudent approach to this. The other comment that Christian made about cost is really associated with the accelerated pace of new product introduction that is really across all of our businesses, but especially in Software & Control and Intelligent Devices, we're going to see a lot of new products at automation fair this year and into next year. And so that's what the majority of that spend is associated with. Julian Mitchell: That's helpful. And then my second question, just on the demand front. I guess, first off, was there any kind of surge in orders in recent weeks? There were some other kind of industrial companies or shorter cycle industrial companies who saw very, very high orders growth in the March quarter, multiples of their organic revenue growth. I just wondered on the extent of the orders increase that you've seen? And any particular color on the Logix platform within that, please? Blake Moret: Sure. Julian, we continue to look very carefully at the buying patterns at our distributors. We look at their inventory levels and we continue to regularly survey our machine builders so that we make sure we understand and can ensure that the demand is natural. And that was the case in the quarter. We did not see any pull forwards or advance orders in the quarter. So we're encouraged by that. Logix itself grew over 20% in the quarter. We continue to see strong gains in Logix. We're introducing new products. We're seeing conversions in data center. So that business is doing quite well with some very exciting additional introductions planned over the coming year. Operator: Our next question comes from Chris Snyder from Morgan Stanley. Christopher Snyder: I wanted to follow up on the demand commentary. I think if I heard correct that you said the book-to-bill was above the normal range. So if you could just confirm that and like just maybe confirm what the normal range is, if I heard that correct? And then just, I guess, more broadly, have customer conversations changed? It felt like over the last year, the messaging was that there's a lot of interest in relocating production into the U.S. but companies were just not pulling the trigger yet. Do you think that has flipped, and if so, why? Blake Moret: Sure. So Chris, I'll start with some comments and Christian might add to that. Look, we've talked about a normal corridor for book-to-bill orders over shipments as being between 0.95 and 1.1. In the quarter, it was a little bit above that. For the first half, it was within that corridor, and we expect the full year to be within that corridor. So there was good demand, good conversion in the quarter of orders received, but we just saw orders particularly strong, especially in products in the quarter. From an overall customer demand standpoint, the sentiment is still positive. There's excitement, I would say, about the focus on manufacturing in America, our home market, and while we have seen the uncertainty around tariffs and geopolitical and some inflation delay capital in a few of the markets I mentioned, like consumer packaged goods and automotive, in these other industries, including a couple that we started talking about this quarter that we haven't talked about in the past, capital is being spent. And so I'd say the general mood is positive. But undeniably, there is still some uncertainty and volatility in the areas that I mentioned. Christian Rothe: Maybe just a quick follow-up on the book-to-bill number that Blake mentioned. So the book-to-bill in that range we talked about the 0.95 to 1.1, for us, that is the range for Q1 to Q3. Q4 for us, it's very common for us to have a book-to-bill that's below 1. We don't call that out typically, just because of the fact that, again, Q4 tends to be a higher shipment quarter for us. So we build up a little bit on the backlog during the course of the year and Q4, it comes back down to a more normalized level. But again, I can't overemphasize just slightly above that corridor in the second quarter and for the first half inside that corridor. Christopher Snyder: I appreciate that. If I could follow up on margins, and I understand there's a lot of moving parts with inflation changing quickly and mix. But I wanted to ask about the structural self-help margin opportunity for the company. At the Investor Day, you guys talked about a lot of opportunity. Clearly, a lot of that has been realized if we look at the margin expansion over the last couple of years. And I guess you guys are running ahead of that 23.5% medium-term target already. So I guess, like where are we in the self-help journey? When you guys look into '27 and '28, do you still see more opportunity on that front? Or from here, is it more about driving volumes to get the margins higher? Christian Rothe: Yes. Thanks, Chris. For sure, we never shy away from volume. Volume is extremely important. And of course, we want that. But from the productivity in the self-help side, I am -- and we talked about this at Investor Day as well, I think we're quite happy with how things are progressing with the organization and the number of projects we have that are underpinning our productivity program and that productivity program is alive and well. It did not conclude. We are, in fact, adding to it. We have more projects under that today than what we did a year ago and more projects a year ago than what we had 2 years ago. So we continue to build on that base. Yes, the projects probably have a little bit smaller overall number or average size, but we continue to execute against that. And importantly, as I'm on the road and going out and visiting our facilities and going into our operations, it's really exciting to have the operations team. They want to show all the different productivity projects they're working on. They are being very creative. We're doing everything from starting to build our own automated final assembly stations. There's in-sourcing projects that are happening. I heard a project last week around saving on labels that were costing us less than $0.01 already, and they were able to save a whole bunch of costs on that. We're streamlining our builds. That's all -- those are all great. And that's exactly what the operations should be doing in a continuous improvement environment, but it's beyond that also. The selling organization, the marketing team, the overall office staff inside the corporate office, yes, AI is enabling a portion of this. but it's also unlocking a lot more around what we can do as an organization. And so yes, we are excited about the future. We do think there's really good productivity opportunities for us for quite some time. The '27 pipeline is being built right now for us to go execute against, and we feel really good about our ability to finish out '26 well too. Blake Moret: Yes, absolutely. And I think additional comment about where are we in this journey? We've had good success, especially the back half of fiscal '24 as we set a new base, '25 and now '26, and we're operationalizing this. So this becomes a part of the total company's operating rhythm as enshrined in the Rockwell operating model. And so additional work to make this just a fundamental part of what we do going forward, that's not relying on individual heroics. It's a part of our processes, I think, is the exciting part of the journey that we're in now. Operator: Our next question comes from Quinn Fredrickson from Baird. Quinn Fredrickson: Just wonder if you could unpack a bit more of your expectations around discrete for the back half, just given the really strong start, you're off to in first half and the sequential acceleration you saw this quarter? Full year guide would seem to imply some deceleration in the back half. Is that just a function of comps get tougher or some conservatism embedded around CapEx or any other factors to call out? Blake Moret: So I'll start with -- I can start with some comments about Discrete. For the full year, we're looking at Discrete being up low double digits. We continue to expect automotive for the year to be up mid-single digits. Semiconductor, which we talked about a little bit on this call, up around 10%. And then e-commerce and warehouse automation up around 20%. So Discrete is a good industry end market force. We're seeing growth in hybrid and process as well as we've talked about. But I'd say, Discrete with the e-commerce and warehouse automation, data center, that's strong for us right now. Christian Rothe: And the -- just to build off of that, we are still looking at modest sequential growth in Discrete as we go through the remainder of the year. Yes, indeed, the comps get harder as we go through the second half of the year. And that's not just in Discrete that's also in the overall organization. Quinn Fredrickson: Sure. Okay. And then specifically within automotive, just wonder if you could unpack a little bit more the strength you did see relative to the fact that CapEx still is weaker. Is that being driven mostly by ARR or just healthy brownfields share gains? Just any color there? And then any visibility on when the CapEx side might start to turn based on your customer discussions? Blake Moret: Sure. In automotive, we've seen the brand owners balance their approach. So internal combustion engines where we have such a large installed base, is still a very important part of their portfolios. They're making investments in hybrid, and there's some in battery electric, but I'd say, hybrid has been a more recent source of focus. We've got that installed base across our hardware portfolio, but also some of the new ways to win that we've added. So Plex with tier suppliers, fixed or maintenance, autonomous mobile robots. Automotive is the single largest vertical for AMRs, and we saw some great wins recently there. So I think that characterizes it. Now in terms of when we could see an upturn in more wholesale capital spending in automotive, I think the tariffs are a big part of that. Everybody is watching USMCA as those negotiations begin, and it's especially important for the automotive companies. Operator: Our next question comes from Amit Mehrotra from UBS. Amit Mehrotra: I wanted to just double-click on warehouse automation growth. Obviously, that's been very robust. I just wanted to ask a little bit more color. Is that a few large customers restarting spending? Or are you seeing demand broadening out? And then just related to that, could you talk about how margins compare in that vertical versus maybe the company average? Blake Moret: Yes. So I'll talk about 4 main aspects of e-commerce and warehouse automation. First is the data center component. The second is new fulfillment centers with e-commerce. Third is production logistics, which is where companies, in many cases, consumer packaged goods companies are seeing dramatic increases in efficiency by improving the flow of components and material to the production line and then finished goods taken to the loading dock or into the warehouse, and then parcel handling companies as well. So it's fairly broad-based. There's some different customers and each one of those let's say, subsegments, but they're all robust. And when we look at the profile of what's being provided there, it's really more weighted towards hardware. And it's just the standard products, it's Logix, it's motion control for conveyors and diverters, it's sensors from our industrial components business. So it's products that we've been known for, for a long time in a vertical that's experiencing a very high sustained level of multiyear investment. Christian Rothe: Regarding the margin profile, these are -- keep in mind, for Rockwell, our offerings are horizontal. That is, we were able to use the same products and solutions for lots of different applications. The end result is that is a similar margin profile by offering. Now depends on what exactly the -- is being given in the warehouse automation space. So really the difference in profitability in warehouse automation for us has to do the products versus solutions and the mix of those that we see. And that really depends on customer and application. But overall, the margin profile is similar to other offerings. Amit Mehrotra: Got it. Great. And then just as a follow-up, one thing I noticed is obviously more balanced growth between North America, EMEA, AsiaPac. Can you just talk about if you're seeing the international market catch-up? It's primarily been kind of a North American let story, and that's your biggest growth region, but I'm curious if you're seeing EMEA and Asia Pac kind of accelerate as well? Blake Moret: Sure. So as you noted, it's good balanced growth in the quarter. We do expect for the full year that North America will be highest but when we look at what is contributing to the growth in Europe, it's largely the strength of machine builders. We saw high single-digit growth in Germany. We saw a low double-digit growth in Italy, two of the more machine builder intensive countries for us. And that's certainly for machinery that's bound for the U.S. but also other parts of the world because our portfolio is becoming more and more competitive for applications where the U.S. is not part of the mix. In Asia, we saw growth in China in the quarter, led largely by semiconductor in Taiwan. We've got some very large customers there, and we talked about semiconductor more generally, but that was a particularly strong spot there and then -- and growth in other countries in Asia as well. I would characterize the growth in Asia as systems integrators, engineering firms, users and machine builders. In Europe probably a little bit more concentrated on machine builders. Christian Rothe: From a comparable perspective, I just want to point out that Q2 last year Asia Pacific and EMEA were down year-over-year. North America was flat year-over-year. So our comps were a little bit easier in the EMEA and AP regions last year. Aijana Zellner: Julianne, we will take one more question. Operator: Our next question comes from Andrew Buscaglia from BNP Paribas. Andrew Buscaglia: A similar line of question on the end markets and regions. I think intra quarter, you see the geopolitics, heightened energy prices up a lot. And I think there's a lot of concerns around what that means for your process business, both near and long term. Can you talk about how process took out intra quarter? It sounded fine. But what are your thoughts long term in that segment? Blake Moret: Yes. Look, we're excited to bring back the oil and gas-focused process automation business from Sensia into full control under Rockwell. And that business, specifically is about 10% of our total energy if you include other forms of energy is about 15%. And we specifically called that out as you said, a good contributor in the quarter. People are going to be concerned about efficiency. They're taking a very disciplined approach to capital. And particularly where we're most exposed upstream, there's still a lot of opportunity to increase the efficiency of those operations, either in process control, with Logix, power control, with our variable speed drives, digitization, so providing digital twins of those processes to debottleneck. All the things that we've talked about in other industries are opportunities there. We talked about a nice FPSO win in Brazil in the quarter. LNG, although it's a relatively small part of our total exposure in oil and gas, is obviously doing very well and participating in some compressor trains there. So look, there's a strong correlation between energy abundance and the standard of living around the world, and we expect to be able to continue to participate in that we're all very concerned about the ongoing conflict in the Middle East. We see that on our business as having paused certain projects. But in general, we don't expect a material impact on our business results for the year. Andrew Buscaglia: Yes, okay. That's helpful. And I wanted to check on one other thing within Software & Control. So the second -- second quarter in a row of great results. And that margin of close to 35%, I know you're signaling near-term that's going to be down. But what were the biggest factors driving that performance in Q2? And is that a high water mark we likely don't see for a long time? Or is that kind of where you think that margin can shake out over the medium term? Blake Moret: Yes. So I'll make some comments and then Christian may have some additional thoughts on it. Look, we're very proud of the way Logix is trending. We've talked about a 31% to 34% margin corridor in our midterm targets. We're happy to have performed above that in this quarter. Volume certainly helps. Productivity is helping there. Software, in Software & Control, very profitable Plex business, for instance, certainly helps that. And as we said, ARR for software was up high single digits in the quarter. So we're proud of that. We're looking to sustain high levels of margin performance in that business, of course, but we indicated some of the factors in the second half of the year. Christian Rothe: Yes. And I think we're just -- we want to make sure we're being prudent about how we think about that performance. Blake just highlighted a bunch of things of all converge on what really went well for us in the second quarter. When we think about third quarter and second half overall, though we do have those inflationary impacts that are definitely coming into play. The memory side, it is real. We also have some additional engineering and development spend and other project spend. And importantly, Q2, the disciplined spending was outstanding, and that was great. But I think, again, to be prudent, we're expecting that there's going to be some spending that comes back in the second half for us. So really strong quarter for Software & Control. Really happy for that -- for all of us in that group. But again, trying to make sure we're balanced as we think about the full year. Aijana Zellner: That concludes today's conference call. Thank you for joining us today. Operator: At this time, you may disconnect. Thank you.
Operator: Good morning, and welcome to the IDEXX Laboratories First Quarter 2026 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Mike Erickson, Executive Vice President and incoming Chief Executive Officer; Andrew Emerson, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our first quarter 2026 results and 2026 financial outlook, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period, unless otherwise noted. [Operator Instructions] Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Andrew Emerson. Andrew Emerson: Good morning. I'm pleased to take you through our first quarter results and provide an updated outlook for our full year 2026 financial expectations. During the first quarter, IDEXX delivered exceptional financial results through continued execution in our companion animal business with benefits from IDEXX innovations. Revenue increased 14% as reported and 11% organically supported by over 11% organic growth in CAG Diagnostics recurring revenues, reflecting nearly 11% gains in the U.S. and approximately 12% growth in international regions. CAG Diagnostic recurring revenue growth in Q1 was negatively impacted by declines in U.S. same-store clinical visits of approximately 1%, with slightly positive growth in non-well visits more than offset by pressure on wellness visits. Strong premium instrument placements in the quarter resulted in 28% organic growth of CAG instrument revenues and included 1,100 IDEXX inVue Dx analyzers. IDEXX's operating performance was also excellent with comparable operating margin gains of 100 basis points, supported by gross margin expansion, which benefited from strong reoccurring revenue growth. Strong operating profit gains enabled earnings per share of $3.47 in the quarter, resulting in EPS growth of 15% on a comparable basis. Performance during the first quarter built confidence to increase our full year revenue range to between $4.675 billion to $4.76 billion, an increase of $42 million at midpoint or an outlook for overall reported revenue growth of 8.6% to 10.6%. Our updated full year overall organic revenue growth outlook is for 7.7% to 9.7% with an organic CAG Diagnostic recurring revenue growth of 8.7% to 10.7%. These organic growth ranges represent approximately 70 basis point increase at midpoint to our previous guidance, supported by strong global execution and modest improvement in our sector outlook for the CAG business. We're also updating our full year EPS outlook to $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint net of a $0.05 negative impact from a loss on an equity investment in Q1, reflecting 11% to 15% comparable EPS growth. We'll provide further details on our updated 2026 financial expectations later in my comments. Let's begin with a review of the first quarter results. First quarter organic revenue growth of 11% was driven by 12% CAG revenue gains and 7% growth in both our Water and LPD businesses. Strong CAG results were supported by CAG Diagnostics recurring revenue growth of 11% organically, including approximately 50 basis point benefit related to equivalent days, an average global net price improvement of approximately 4%. CAG diagnostics instrument revenue increased 28% organically, with another strong quarter of inVue Dx analyzer placements aligned with our expectations. U.S. organic CAG Diagnostics recurring revenues grew nearly 11% in Q1 including strong volume gains and net price realization aligned with full year expectations. U.S. same-store clinical visits declined minus 1% in the quarter, reflecting an IDEXX U.S. CAG Diagnostics recurring revenue growth premium to U.S. clinical visits of approximately 1,100 basis points, highlighting outstanding performance by the IDEXX commercial teams. During the quarter, the industry continued to see green shoots from aging pets, with growth in clinical visits for pets 5-plus years old. Non-well visits also continued to show signs of improvement, increasing 20 basis points year-over-year, while wellness visits declined minus 3%. IDEXX benefited from overall quality of clinical visits with increased diagnostic frequency and utilization per visit, demonstrating expansion of diagnostics and care protocols. International CAG Diagnostics recurring revenues grew 12% organically in Q1, with revenue performance driven by volume gains, including benefits of net new customers and same-store utilization. International regions performed incredibly well with steady growth of CAG Diagnostics recurring revenues through ongoing engagement with customers and expansion of IDEXX innovations while we see similar macro pressures affecting visits in most geographies. IDEXX also delivered strong organic revenue gains in major global testing modalities in the first quarter. IDEXX VetLab consumable revenues increased 15% on an organic basis reflecting double-digit growth in both U.S. and international regions. Consumable revenue growth included double-digit volume expansion driven by net new customer gains in our premium instrument installed base and expanded testing utilization, including benefits from innovations. InVue Dx utilization continues to track well to our reoccurring revenue estimates previously provided and progression of our controlled rollout of F&A is in line with our expectations. CAG premium instrument placements reached 4,650 units during the first quarter, an increase of 12% year-over-year and the quality of placements remains superb reflected in over 1,000 global new and competitive catalyst placements, including nearly 320 in North America. Globally, we placed 1,100 IDEXX inVue Dx instruments as we track to our full year expectations for 5,500 placements. Our success in placing instruments while maintaining high customer retention levels supported the 12% year-over-year growth in our premium instrument installed base in the quarter. IDEXX Global Reference Lab revenues increased 10% organically in Q1, driven by solid volume growth across regions with benefits from both net customer gains and same-store utilization each doubling from prior year levels. IDEXX Cancer DX has continued to support these categories, attracting new customers and broadening the use of diagnostics in both sick and wellness panels. As an example, approximately 20% of Cancer Dx customers are non-primary IDEXX reference lab accounts. Global Rapid assay revenues were flat organically. Rapid Assay results continue to be impacted by customers shifting pancreatic lipase testing to our Catalyst instrument platform, which we estimate to be an approximately 2% headwind to Q1 revenue growth. Veterinary software and diagnostic imaging organic revenues increased 11% driven by recurring revenue growth of 11% during the quarter and strong nonrecurring growth from placements of diagnostic imaging systems, setting a record with approximately 330 installations benefiting from the launch of DR50 PLUS platform. Veterinary software expanded double digits supported by cloud-based PIMS installations and adoption of related reoccurring services. Water revenues increased 7% organically in Q1, with strong growth in the U.S. and low single-digit growth in international regions. International growth in the business was impacted by supply chain dynamics in the Middle East. Livestock, poultry and dairy revenues increased 7% organically in the quarter, with solid gains across regions. Turning to the P&L. Strong recurring revenue growth enabled 15% comparable operating profit gains in the quarter. Gross profit increased 16% in the quarter as reported and 13% on a comparable basis. Gross margins were 63.4% up approximately 90 basis points on a comparable basis. These gains reflect benefits from strong recurring revenue growth in IDEXX VetLab consumables and Reference Lab volumes along with operational productivity. Pricing benefits offset inflationary cost pressures and foreign exchange, net of our hedge positions had a negligible impact on reported gross margins in the period. On a reported basis, operating expenses increased 17% year-over-year including both lapping a discrete Q1 2025 expense for concluded litigation matter as well as a $5 million loss on an equity investment in the current period. Comparable operating expenses increased 11% year-over-year as we advance investments in our global commercial and innovation capabilities. Q1 EPS was $3.47 per share, reflecting a comparable EPS increase of 15%. EPS in the quarter included $7 million or $0.09 per share benefit related to share-based compensation activity, and a $0.05 negative impact related to a loss on an equity investment. Foreign exchange added $14 million to operating profit and $0.14 to EPS in Q1, net of hedge effects. Free cash flow was $234 million in Q1, reflecting normal seasonality. On a trailing 12-month basis, the net income to free cash flow conversion rate achieved 99%. For a full year, we're maintaining our outlook for free cash flow conversion of 85% to 95% of net income, including full year capital spending of approximately $180 million. We finished the period with leverage ratios of 0.6x gross and 0.5x net of cash and continue to deploy capital towards share repurchases allocating $361 million during the first quarter, supporting a 2.1% year-over-year reduction in diluted shares outstanding through Q1. Turning to our full year 2026. As noted, we're increasing our outlook for overall revenue to $4.675 billion to $4.76 billion. At midpoint, this reflects approximately $32 million in constant currency improvement from our initial guidance, building on strong first quarter performance, including CAG Diagnostic recurring revenue expansion and a modestly improved industry outlook. Our updated reported revenue outlook includes $10 million or approximately 20 basis points growth benefit related to foreign currency changes compared to our prior estimates. This reflects our revenue growth outlook for 8.6% to 10.6% as reported, including approximately 90 basis points for full year growth benefit from foreign exchange at the rates outlined in our press release. As a sensitivity, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $12 million and EPS by $0.04 for the remainder of the year. Our updated overall organic revenue growth outlook of 7.7% to 9.7% includes an organic growth range of 8.7% to 10.7% for CAG Diagnostics recurring revenue, including approximately a 4% benefit of global net price realization. At midpoint, we're updating our estimate for U.S. clinical visits to a decline of minus 1.5% after a third sequential quarter of clinical visits trending between minus 1% to minus 2% and aligned with the trailing 12-month average. In terms of key financial metrics, we're updating our reported operating margin outlook to 32.1% to 32.5% for 2026, reflecting increased expectations of 50 to 90 basis points of full year comparable operating margin improvement. Operating margin was impacted by a 30 basis point headwind related to a discrete litigation expense from 2025 and the current year loss on an equity investment. These were offset by a 30 basis point benefit from foreign exchange effects. Our updated full year EPS outlook is $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint. Our EPS outlook incorporates increased projections for operational performance of $0.13 per share at [ midpoint ] compared to our prior guide as well as a $0.05 negative impact from a loss on an equity investment and a $0.05 benefit from updated foreign exchange rates outlined in our press release. For the second quarter, we're planning for reported revenue growth of 7.3% to 9.3%, including approximately 60 basis point growth benefit from foreign exchange impacts. This operational outlook aligns with an overall organic revenue growth range of 6.7% to 8.7% and CAG Diagnostics recurring revenue growth of 8.5% to 10.5%. Organic revenue includes a negative 50 basis point impact from equivalent days in the second quarter, and at midpoint, we're planning for the U.S. clinical visit growth in line with the full year estimate. Overall organic revenue growth is impacted by expectations for declines in CAG instrument revenues as we begin lapping significant placements of InVue Dx during 2025 and modest revenue pressure from regional and placement mix. Second quarter reported operating margins are expected to be 33.9% to 34.3%, reflecting expansion of 10 to 50 basis points on a comparable basis as we expect increased spending during Q2 related to timing of projects. That concludes our financial review. I'll now turn the call over to Jay for his comments. Jay Mazelsky: Thank you, Andrew, and good morning. IDEXX delivered an exceptional start to 2026 with first quarter results reflecting disciplined commercial execution, continued benefits from innovation and expanded diagnostics utilization across a global customer base. These results were achieved despite headwinds from clinical wellness visits, underscoring the durability of our growth model and the importance of diagnostics to excellent veterinary care. The quarter also highlights the strong foundation we have built with strong customer relationships, where a commercial partnership is central to advancing our mission and supporting practice success. The economic value of instruments placed in the quarter, for example, grew double digits year-over-year, reinforcing the long-term value we are creating through our installed base growth. More broadly, companion animals are seen as members of the family and a large majority of pet owners prioritize their pet's health and happiness, creating pull for higher quality health care. This commitment is reflected in the continued expansion of diagnostics frequency during both well and non-well visits. Customer retention remains in the high 90s reflecting the trust veterinarians place in IDEXX as both a diagnostics provider and long-term partner. This loyalty underscores the strength of our integrated model, combining diagnostic software and medical support. We work alongside veterinarians and practice teams to better integrate diagnostics into everyday care protocols, supporting workflow optimization, increasing clinical confidence and demonstrating the economic value of diagnostics. When practices engage at this level, diagnostics utilization increases. Testing becomes more seamlessly embedded in care protocols, technicians gain confidence running diagnostics during the visit and clinicians make faster, more informed decisions, driving greater productivity across the practice. All 4 country expansions announced last year were in place at the start of Q1. And as a result of a well-established approach to training and new hire support, we saw initial contributions in line with expected productivity. Momentum with IDEXX inVue Dx continues with another solid placement quarter well on our way to our target of 5,500 placements for the year. Internationally, we are seeing a solid ramp in the installed base and adoption as awareness builds and commercial team support integration into practice workflow. Customer feedback remains highly consistent across regions, with veterinarians highlighting consistent performance, easy use and workflow productivity gains as key benefits. Utilization across ear cytology and blood morphology remains aligned with expectations, reinforcing the everyday clinical value of the platform. We continue to engage with customers to drive further adoption of these important testing categories through our professional service veterinarians and clinical staff trainings. At the same time, we are advancing the inVue Dx algorithm with monthly software updates to our installed base, enhancing performance and improved time to results, just another part of our Technology for Life promise. For example, the menu advanced in Q1 for blood morphology, the ability to detect and report [indiscernible]. These are red blood cells associated with severe underlying diseases such as with liver, clinic or kidney disease. We're also pleased with the solid progress of our controlled rollout of F&A. Early customer response to F&A remains very encouraging. Practices are seeing the value of evaluating lumps and bumps during the patient visit with rapid cytology insights supported by AI analysis and optional expert pathologists review available with a single click. This workflow enables clinicians to evaluate more lumps and bumps by reducing clinical effort and cost of the consumer. We continue to gain insights on customer behavior and experience during the controlled launch. Early adopters are very pleased with the high-quality training experience and follow-up support. These learnings and positive experience and support further broadening of the launch in Q2 as we ran volume and anticipate full volume ramp in the second half. Overall, F&A utilization is tracking to our planning assumptions, and we remain excited about the potential of F&A as a platform capability that can expand over time beyond mass cell tumor detection. Turning to IDEXX Cancer DX. Momentum continues to build behind this important innovation as veterinarians increasingly incorporated into both diagnostics and screening workflows. During Q1 in North America, nearly 70% of cancer DX tests were run as part of a panel, reflecting the growing clinical relevance of this test. Now with over 7,500 practices ordering since launch, Cancer Dx is a major differentiator for our [ reference ] business, and we believe it is one of the many elements driving competitive lab transitions at IDEXX. A major milestone this quarter was the international launch of Cancer DX for [indiscernible] and lymphoma in Europe and Australia. This represents an important next step in expanding access to early cancer detection globally and builds on the strong adoption we have seen in North America. Early international interest has been strong and reinforces the global need for accessible oncology diagnostics. Our global field teams are partnering with customers, both independent and corporate to develop wellness protocols. As an example, a large corporate group in Australia recently announced the inclusion of Cancer DX within their senior wellness plan. no additional charge for their members. We're also seeing continued use in monitoring applications, particularly in cases where serial testing can support treatment decisions. With the addition of mast cell tumor detection for later this year and a third test by the end of '26. Cancer diagnostics will continue to expand its clinical relevance and reinforce IDEXX's leadership in veterinary oncology diagnostics. We continue to expand our Catalyst customer base, adding over 1,000 new and competitive customers in the quarter. In each one of the now nearly 79,000 Catalyst customers have access to our new and expanded menu such as Catalyst pancreatic lipase and Catalyst cortisol. We continue to see strong adoption and utilization of both these tests as practices incorporate the test into routine real-time workflows to support pancreatitis and endocrine disorder diagnoses. Our software and diagnostic imaging businesses also delivered solid performance in Q1. Our cloud-native PIMS platform installed base grew double digits in the quarter, as we continue to see strong interest with virtually all placements now cloud-based. Practices are looking to software solutions to realize workflow optimization, staff productivity and digital client communications. Vello, IDEXX's pet owner engagement application continues to gain traction, growing double digits from last quarter as practices recognizing the importance of driving client deployments. Clinics using Vello report improved compliance with recommended diagnostics and treatments reinforcing the connection between engagement and medical outcomes. In our Diagnostic Imaging business, we launched our newest digital radiography system in January, the ImageVue DR50 PLUS combining high definition AI-powered imaging with up to 60% lower dose than premium competitors. Strong customer reception to the DR50 PLUS, coupled with excellent commercial execution, led to an all-time record imaging systems placements for the quarter, the fifth consecutive quarterly placement record. IDEXX Telemedicine also delivered very strong volume growth, supported by modernized integration with IDEXX Web PACS that reduces submission clicks by almost 50% saving time for clinical teams and delivering board-certified expert interpretation directly inside Web PACS. Software is a powerful enabler of diagnostics growth helping practices translate clinical insight into action and customers who use all of our diagnostic software and imaging solutions experienced faster clinical revenue growth and diagnostics usage. This will be my final earnings call as CEO before I transition to the Executive Chair role following our annual meeting next week. As I reflect on my experience as CEO and the state of the company today, I remain incredibly optimistic about the future of IDEXX and the multi-decade opportunity ahead for the company. The fundamental drivers of this industry have never been stronger. The human animal bond continues to deepen. That bond drives sustained commitment from pet owners to seek high-quality care, earlier diagnosis and better outcomes for the pets they love. Diagnostics is the foundation of this evolution. As medicine continues to advance the need for clinical insights to guide care decisions will only grow reinforcing the long runway ahead for diagnostics innovation and utilization. IDEXX is in a position of strength with a clear strategy, a powerful innovation pipeline and exceptional people. I believe the company's best days lay ahead. And I'm excited for the next chapter of IDEXX's growth to unfold. I would be remiss if I didn't highlight the role that our people play in the company's success. Our approximately 11,000 IDEXX employees around the world are purpose-driven and our talent fuels the company's growth. IDEXX is deeply committed to innovation, our customers and their success and operating the company as if it was their own. It has been an honor to lead IDEXX, and I want to thank all employees past and present for their commitment to improving the lives of pets across the world. Now before I turn it over for Q&A, I'd like to give Mike Erickson the chance to say a few words. I've worked with Mike for a long time, and I have tremendous confidence in him as he steps into the CEO role. He brings deep experience, strong leadership and a clear commitment to our purpose and strategy. With that, I'll turn it over to Mike. Michael Erickson: Thank you, Jay, and good morning, everyone. I'm humbled by the opportunity to lead IDEXX at such an exciting time in our company's history. As Jay mentioned, the sector remains highly attractive and I see a meaningful opportunity ahead to further accelerate our innovation-driven platform growth strategy. We will continue to focus on diagnostics and software where our platforms empower customers to see more and do more in their practices, uncovering deeper patient insights and driving next level productivity. We will also continue to advance commercial reach through investments to expand our field-based presence in key geographies around the world. This enables our talented commercial team to work even more closely with customers side-by-side, supporting accelerated adoption of innovations that expand care while driving a reliable return on investment. Another priority for us is AI. We have a well-established AI capability at IDEXX with AI embedded in platforms such as inVue Dx and our ezyVet software. Looking forward, I see advancements in AI as incredibly promising to further accelerate our innovation, expand testing access and utilization and drive deeper patient level insights. I plan to share more on this at our upcoming August Investor Day. Across these priorities, we're fortunate to have a talented team of IDEXXers globally that wake up every day focused on our customers and shaping the future of diagnostics software and AI in animal health. I want to close by thanking Jay for his leadership and service to IDEXX over the past 14 years. Under Jay's leadership, the organization has accelerated the innovation agenda, launching valuable new platforms like Cancer DX and inVue Dx, growing our cloud-native software platform offerings, significantly expanded customer reach internationally and delivered strong results and shareholder value, all while positioning IDEXX for sustainable long-term growth supported by a robust future innovation pipeline. I am grateful to have worked with Jay and I look forward to his continued support as he transitions to Executive Chair of IDEXX's Board. I'll now turn it over to the operator for Q&A. Operator: [Operator Instructions] We'll go first to Michael Ryskin of Bank of America. Michael Ryskin: Congrats on the quarter, and I [indiscernible] the comments. Jay, congrats. Been a pleasure. I want to kick things off on inVue. You had a lot of comments in the prepared remarks on strong performance. But just that placement number, 1,099. You reiterated the 5,500 for the year, but we would have expected you to do a little bit more in the first quarter. Is there just some pacing dynamics there to think of that maybe the first quarter tends to be a little bit slower. Is there anything in the funnel you can talk about just to give us confidence that these placements will be there for the full year? Jay Mazelsky: Yes. Michael. The -- we -- Keep in mind, we came off a very strong year in 2025 and Q4. We have a high degree of confidence in the 5,500 number. It tends to be -- you get some choppiness quarter-to-quarter, just based on customer mix of independents versus corporates. But the receptivity we see in the market amongst customers is very strong. So we have a lot of confidence in the overall 5,500 projection for the year. Michael Ryskin: Okay. Great. And for my follow-up on just sort of underlying market assumptions and what you've seen you had about 2% visit decline in the first quarter was to be expected in a lot of expectations. You talked about, I think, in your prepared remarks, modestly [indiscernible] the industry outlook -- just would be great to drive into that a little bit more. Is that U.S. or OUS? Is that something you're seeing now? Just expectations as you go through the year? Just parse that part a little bit more. Andrew Emerson: This is Andrew. Yes, so from a clinical visit perspective, we highlighted a minus 1% in the first quarter. So that's about a point better than what our initial guide had laid out from that standpoint. We continue to see positive momentum from the aging pet population, pets that are 5-plus years and older continue to add some positive momentum just to the overall industry. And I think what we're trying to do is capture the multi quarter perspective that we've started to see the green shoots in that area into our outlook. I hear more directly. I think if you look at the past trailing 12 months, the average is now very similar to what we're anticipating for the full year, which is about minus 1.5% decline in clinical visits. A lot of that is really from the wellness visit area and areas like the discretionary types of categories. We continue to see pressure related to the macro dynamics and consumers making trade-offs, whether they come into the clinic. But the positive side of that is when they are coming into the clinic, we're seeing really strong quality of care within those visits. So diagnostic frequency and utilization continue to expand at really healthy rates. And so you're seeing the diagnostic care protocols really continue to play out positively from that perspective. So we feel like we've kind of captured the range of outcomes here on the industry, but it is a little bit better than we had anticipated for the full year. Jay Mazelsky: Yes. Maybe just one comment on those pets 5 years and older. It is modestly positive. This is now the third quarter that we've seen that. So that's very encouraging. The other thing is it's been positive across both non-well and wellness visits. And so that cohort of pets said we know it's a very large cohort are coming into the practice, not just for sick visits, but also for well visits. Operator: We'll take our next question from Chris Schott of JPMorgan. Christopher Schott: Jay, Mike, congrats on the new roles. Just -- maybe just two for me. First on ex U.S. dynamics, another very strong quarter there. I'm just curious how much of this is commercial execution on IDEXX's part versus just maybe healthier broader market trends and just how you're thinking about kind of the directional growth for the ex U.S. business? And then maybe the second one for me is just coming back to inVue and the F&A rollout. I know you made some comments in the prepared remarks, but just elaborate a little bit more on how that initial utilization and uptake has ramped relative to your expectations? And just how we should be thinking about the broader rollout of that offering as we move through this year. Jay Mazelsky: Sure. Chris, I'll take the international market comment, then I'll ask Mike to handle the F&A rollout and how we think about that. The international markets just from a overall macro impact and performance side, we don't see broad differences between international and our domestic market. There's a macro impact, obviously, on wellness as a whole. Wellness is less a dominant [indiscernible] -- it's at a much lower rate than typically what we see in the U.S. just from a development standpoint. The really solid growth we're seeing in CAG recurring revenue, instrument placements internationally is a function of long-term investments that, as a company, we've made. So it's not just in terms of commercial expansion. So that's an important part of that, and we've done double-digit expansions over the last 5 years or so, it's building out. Our Reference Lab business, it's localizing software solutions like VetConnect PLUS. It's really building out the entire IDEXX ecosystem so that we can serve our customers at the level of experience, customer experience that they desire, but also making sure that they have full solutions. And if you look at our product road map and what we've rolled out over the last couple of years, a lot of our solutions have been from a design and development standpoint, targeted at these international customers. ProCyte One, for example, though it's been extremely successful in the U.S. Initially, we saw the opportunity footprint cost and performance to go more from a value standpoint. I think on the Rapid Assay business [indiscernible] is another example, really tailoring solutions for some of our international markets. And we're realizing I think that the success of all those efforts combined, and we've seen sustainable double-digit growth. We're very optimistic about the long-term opportunity in these international geographies. diagnostics utilization is just at an earlier state and that our experience has been with the right approach, creating awareness and education and working with customers in a [ tight ] partnership model that there's a lot of runway in front of us, and we feel like from a playbook standpoint, we really have a very successful and effective playbook we're executing. I'll hand it over to Mike to talk about F&A's [ controlled launch ]. Michael Erickson: Chris, thanks for the question. We're very happy with the controlled launch process for F&A. It's on track. And in fact, we're broadening it as we head into the second quarter here, we also would move to a more of an unconstrained launch posture later this year. Keep in mind, I mean, we've successfully been launching instrument platforms for many years here at IDEXX. We've done 4 of these just in my time. And this staged control launch process is what enables us to ensure we deliver the kind of outstanding experience that our customers expect from us, not just from the instrument, but from all aspects, end-to-end implementation, training and all of those things. And F&A, as Jay mentioned, it's really a very exciting platform within a platform, not just what it can do on the instrument with AI and detection of mast cell tumor cells, but also the one-click workflow if a customer wants added interpretation from an IDEXX board-certified pathologists. And we're seeing our controlled launch customers give us great feedback and really make use of all of that functionality. And then the final thing I'll just say here is that, as you know, these products have very long tails. We want to get it right up front because we know that the value creation really comes over time as we continue to expand what the platforms can do, and that's what customers really love about the solutions that we provide them. Operator: We'll go next to Erin Wright with Morgan Stanley. Erin Wilson Wright: So the consumables momentum was strong. It accelerated from the fourth quarter. I guess can you remind us kind of unpack that a little bit for us. I guess remind us what actually would be in view related or directly associated with inVue consumables? Is that really moving the needle yet? Or is this really about you locking in those customers into those IDEXX 360 contracts and having that sort of indirect impact from the inVue launch? And just when should we think about kind of inVue, I guess, moving the needle from a consumables perspective? Like what are you seeing in terms of the consumables flow-through so far relative to your expectations? Jay Mazelsky: Yes. The inVue consumables is definitely contributing to the strong growth and momentum we see in the VetLab consumables portfolio with ear cytology, blood morphology, we've communicated this before. It's well within expectations. Customers are enjoying it. It represents 100% new growth in the consumables area that we didn't have before. So we think that with F&A, we'll continue to build off that and can help sustain good momentum in that part of the portfolio. The other thing to keep in mind is because we've had very successful high single-digit, double-digit installed base growth across all the premium instruments. Every time we come out with a new slide. In the case of Catalyst, for example, with pancreatic lipase or cortisol, where we're able to market that into a very large installed base. And customers have grown to trust our solutions and the performance of the solutions and workflow of it is really load and go. So what we're seeing is a rapid uptake of these innovations across a large installed base globally. And these are -- in the case of my pancreatic lipase and cortisol, these are measurements or parameters that customers have been asking for. They see every day, dogs, cats coming into their practices that require these types of measurements. And the same really is true across the portfolio. We've seen a nice, I think, build in SediVue, for example, internationally, which started a little bit later than when we introduced it in the U.S., hepatology is typically sold as part of a chemistry and hematology suite. So we're benefiting from that focus on placing instruments, creating a seamless experience and continuing to evolve the menu through a Technology for Life approach. Erin Wilson Wright: Okay. Great. And then just on F&A again. And just on kind of the building a broader launch there. I guess, do you have a backlog or preorders to speak of on that front that customers are waiting for F&A, like what do you hear from the field as kind of you more broadly launched that throughout the year? And then what is your expectation? Or when should we hear more on the next menu expansion for inVue and how meaningful full that could be to the platform? And also just to know kind of thanks, Jay. It's been also great working with you, and thanks for the support over the past few years. Jay Mazelsky: Yes. Thanks, Erin. Why don't I -- I'll take the commercial aspect of it and then maybe have Mike talk a little bit about the F&A and why we think virtually all customers would be interested in it. From a commercial standpoint, what we launched at what customers, I think, focused on was, obviously, the ear cytology and blood morphology, it felt like from a menu standpoint that, that offered a degree of completeness that supported the placement of the instrument and overall utilization, and that's certainly played out. And they -- of course, we communicated the fact that we weren't going to stop at that from a menu standpoint that it was kind of -- we were going to broaden it to F&A, first on [indiscernible] and then over time, continue to expand the menu because the architecture and the technology enables us to do that. And I think we've communicated at one of the -- our last Investor Day that there's over 100 million, 150 million cytology done on a global basis, manually. So there's a very, very sizable opportunity still in front of us. Mike, why don't you talk a little bit about the F&A and how customers think about that? Michael Erickson: Yes. Thanks, Jay. I mean F&A, just like blood morphology and ear cytology, I mean these are all complementary care episodes, applications, if you will, on the inVue Dx platform. And really, every practice that you see is doing all of these things. And so we know there's a lot of excitement out there with fine needle aspirate. It's very common for practices to have pets coming in on a weekly or daily basis, dogs with lumps and bumps that are suspicious. We know today there are around 12 million of these of F&As being done, but we know that 90% or more of the masses that come in actually don't get investigated because it just takes a lot of work to do it manually with cytology. And frankly, it's pretty expensive. And so we're really excited about F&A on inVue Dx as an opportunity to not only elevate the standard of care, but also expand access to muted care and we see a long runway for doing that. As Jay shared and as I shared previously at our Investor Days, we see 100 million cytologies, beyond what we're talking about already around the world. And so we see a long road map, a very exciting road map ahead on inVue Dx and we'll continue to share more about that as we move forward. Operator: We'll go next to Jon Block with Stifel. Jonathan Block: So -- when I factor in the 2Q '26 guide, the first half CAG Dx recurring looks like it's expected to be about 10.25%. That's the [indiscernible] at. And the midpoint for CAG Dx recurring for the year is now after the raise 9.7%. So slightly below the [indiscernible] in a quarter but the comps get much more difficult in [ 2 age ] and it doesn't look like you're assuming the visits improve off the 1Q number. So Jay or Andrew, can you just lay out the drivers that allow the CAG Dx recurring call it, 2-year stacks to accelerate into the back part of the year, again, because it doesn't seem like there's a big uplift at least embedded in the visits from the 1Q number. Andrew Emerson: Yes. So I think from an overall perspective, if you look at the full year guide. We're really planning for solid growth. And we've actually increased the outlook both at midpoint and the overall range on an organic basis by about 70 basis points. That confidence really stems from continued execution that we see on a global basis. Our commercial teams continue to support our customers exceptionally well. We've also seen really strong and solid benefits from the new innovations that we've launched in recent years. Jay highlighted some of those earlier on the call, the contribution between inVue Dx as well as some of the new menu that we've added to our Catalyst platform. We've certainly seen expanded utilization as well, both in terms of the industry metrics as you highlighted, we are thinking that clinical visits are slightly improved from our initial guide, which is partly playing a role in there. But we continue to see really strong quality of visits. And I think that diagnostic frequency and utilization certainly benefits the overall growth rate that we have outlined as part of our long-term guide. Keep in mind, guidance continues to be a range. I think if you look at the upper bound of the guidance range, certainly more consistent trends with what we have now. And again, I think that comes back to confidence in our business execution and continuing to maintain strong relationships with our customers. Placement trends on instruments are really positive. We've seen growing benefits from utilization across our key modalities from a business standpoint. So I think we have really captured kind of a range that we feel confident with going forward here. But maybe I'll let Jay talk to a couple of the specifics just from a broader business perspective. Jay Mazelsky: Yes. One thing we haven't spent a lot of time talking about is the momentum also in the Reference Lab business. It's been very strong. We've seen that globally. Part of it comes down to a lot of differentiation. Cancer DX has given us, obviously, something to go in and talk to customers about, but leveraging that to talk about the broader differentiated portfolio in Reference Labs, not just from a menu standpoint, but from a service standpoint and being able to serve all of our customer needs. And what we've seen is we've been able to grow successfully the entire IDEXX portfolio. So point of care, Reference Lab, software, the integration that provides. And the business just has a lot of momentum because of that. And we've been, I think, transparent with customers in terms of the innovation agenda around what's coming, the expansion of IDEXX cancer diagnostics as an example, continued to build into more of a full volume posture with inVue Dx F&A in the second half of the year. I think that gives us a lot of confidence in terms of being able to sustain good momentum in the business. Jonathan Block: Okay. That's helpful. And maybe just a quick follow-up. For inVue, the way you guys frame it makes it seem like you're not yet in that [ 3,500 to 5,500 ] revenue per box band yet. And I guess maybe a couple of parts to the question. One, is that an accurate statement? You're not there yet, you're, I guess, trending to it or however, some of the verbiage is laid out? And then when do you expect to be in that band? And do you need sort of that full launch unrestricted launch of F&A to get there. Andrew Emerson: Yes. Thanks, Jon. Maybe I'll start and then Mike can add in here. But just from a recurring revenue perspective and utilization of the instrument, I think what we are seeing is very much in line with what we had anticipated as part of our build. Certainly, the range that we've given, again, is a range. I think it wasn't a precise number and it did include the launch of F&A, which we've started while that's in a controlled basis, we continue to ramp. We're within the band that we've highlighted here on a per instrument placement perspective. And I think, again, we'll continue to provide more insights and updates. We would like to see us more broaden out the F&A launch and then we can continue to identify exactly how that's playing out over time. But I think we're within that band, and we feel confident about the range that we provided. Michael Erickson: Yes, Jon, Mike here. I'll just underscore. We're well within the range that we've communicated. We're happy with that. And that's really before moving to an unconstrained launch position with F&A. So we see more opportunity ahead. And as I mentioned earlier, only 10% of the masses that come in today get looked at. And so we see -- if you look at it kind of the TAM for F&A, if you will, is very, very large. So we see lots of opportunity ahead of us there. Operator: We'll go next to Daniel Clark with Leerink Partners. Daniel Christopher Clark: Just wanted to ask on the updated visit guide. What are you thinking in terms of the macro and in terms of fuel prices? Do you assume sort of no change in that dynamic going forward through the rest of the year? And then I'll ask my follow-up upfront as well. When we think about performance in the first quarter, were there any changes in either visits or diagnostic frequency between January and February and March when we saw fuel prices pick up? Andrew Emerson: Thanks, Dan, for the questions. Maybe I'll start on this one. So from a visit guide perspective, certainly, fuel could have kind of an impact on consumers. I think obviously, the range that we provide, again, is a bit of a range, the lower end. You may assume that, again, you see continued constraints on the consumer demand side. But I think overall, what we know now is it's a pretty volatile and evolving dynamic in the Middle East and how fuel prices are going to play out and energy costs are going to impact the consumer, a little bit hard to predict that piece of it. But I think from a longer-term trend perspective, we're calibrated more on where we're -- what we've seen here over the last recent quarters on visits. Certainly, the wellness category and discretionary categories are the predominant driver of declines that we're seeing at this point. In the last 3 quarters, we've been relatively flat on non-well visits, meaning that as pets experience issues that they need to be dealing with. Consumers are willing to prioritize that spending. What we have seen though is that trade-off of consumers maybe not coming in for wellness or discretionary visits that have been more impacting just their overall decision-making here. But again, I think it's a bit dynamic on the fuel side. We'll see how that plays out. But I think we've captured what we believe is a good range at this point. Jay Mazelsky: Yes. Just the one thing I would add to Andrew's comments is we've seen very consistent international growth for a long time now. And that's been through Obviously, there's been a war in Europe, and there's been inflation and macro pressures. And we've been able to -- it's not that it's not real. We've been able to out-execute that through innovation and commercial partnership with customers and commercial expansion. So we've got a lot of confidence in the health of the business and our ability to continue to bring innovations to our customers. Andrew Emerson: And then maybe the second part of your question, just in terms of Q1 performance. We don't typically break out the monthly dynamics just relative to visits. It can be really noisy. There's a lot of factors including things like day accounts, et cetera, that can play out in a month. We just see a lot more variability on a week-to-week or month-to-month basis. So not something that we give too much stock in from that perspective. But certainly the quarter had a minus 1% decline, majority of that being the wellness side, I think, is pretty consistent with what we would have expected on the wellness side and a little bit better on the non-well side, just in terms of the quarterly results. And again, we're guiding to a minus 1.5% for overall clinical visits for the year. So I think we've captured expectations for continued pressure in those areas. Operator: We'll go next to Ryan Daniels with William Blair. Ryan Daniels: Congrats on the leadership changes. Maybe another one just on what we're seeing in the end market. It's interesting, as you said, we've seen somewhat of an inflection towards positive non-wellness visits. I'm curious if you've dug into that any deeper? Does it really relate to this aging pet population, is it anything with maybe some pent-up care demand because of the lack of wellness volume? Just anything you see there and how sustainable that might be would be helpful. Jay Mazelsky: Sure. Yes. We have seen -- we break it out through different age cohorts. And initially, if you go back some quarters, we have seen it in that 5- to 7-year cohort. So these are pet adoptions that largely occurred during the pandemic, where we had that huge step up. And what we've seen in terms of the type of breeds that were adopted during the pandemic is they're more heavily medicalized. The doodles, for example, frenchies. Dogs just require more care. And that's been -- in talking to customers, especially the corporate customers who track that sort of thing. They've also validated that, that's a real thing but we're beginning to see the front end of that very big pandemic adoption that we've seen. So we think that that's sustainable. Ryan Daniels: Okay. That's helpful. And then one just clarification. You mentioned some supply chain disruption impacting, I think, international growth. So maybe a multifold question there. Can you go into that? And was it for CAG or for Water and LPD? And then has that abated or how is that incorporated in your guidance looking forward? Andrew Emerson: Yes. Thanks for the question. So really, that was related to the Water business, specifically, and that was related to the Middle East. The Middle East region certainly have seen some dynamics going on where supply chain has gotten disrupted. We continue to work through that, but there was modest pressure in the water business that we factored into our outlook here. Operator: Our last question will come from Daniel Grosslight of Citi. Daniel Grosslight: I wanted to go back to the improved CAG Diagnostics revenue outlook for this year. Something you can maybe bifurcate a little bit more or force rank the contribution from volume, price and innovation on the improved outlook. And as we look to the [indiscernible] top end of the range now, what's the biggest swing factor between those 3 contributors, volume, pricing, innovation? Andrew Emerson: Yes. So we haven't actually updated anything from a pricing perspective at this point. What we highlighted on our initial guide and certainly in this outlook is approximately 4% net price realization for our CAG Diagnostic recurring revenues. In the U.S., that's modestly lower than we've highlighted before as well. But there's nothing new there in terms of change. This is all volume driven. I think the positive news here is we continue to see an outlook for expanded volumes, and that's largely the 70 basis points. That is a combination just of our overall business performance, the execution against some of the new innovations and our ability to continue to partner with customers to grow the use of diagnostics. We see, again, the diagnostic frequency or blood work conclusion continue to expand, which benefits the business as well as a modest improvement in the declines that we expected associated with the clinical visit flow through. So those are the components that we've highlighted specifically here but a lot of this comes back to the volume that we're able to drive as an organization for CAG Diagnostic recurring revenues. Jay Mazelsky: Yes. Just to build off that. It really is a volume-driven growth trend on the point-of-care side, we note that we've been able to grow double digits our installed base over a period of time, that's the flywheel in which customers drive utilization. I referenced that business is very healthy. All the investments that we've made, cancer, IDEXX cancer diagnostics, I think, has put some additional visibility to that business. The ability to really, I think, continue to support double-digit international growth as a result of the investments made in that area as well as commercial expansions, I think, give us confidence that it's a -- we're in an attractive part of the market with good momentum. And so with that, thank you for your questions. We'll now conclude the Q&A portion of the call. It's been a pleasure to share how IDEXX executed against our organic growth strategy, while delivering strong financial results in the first quarter. Thank you for your participation and engagement this morning, and we'll now conclude the call.
Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Atkore's Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Thank you. I would now like to turn the conference over to your host, Matt Kline, Vice President of Treasury and Investor Relations. Thank you. You may begin. Matthew Kline: Thank you, and good morning, everyone. I'm joined today by Bill Waltz, President and CEO; John Deitzer, Chief Financial Officer; and John Pregenzer, Chief Operating Officer and President of Electrical. We will take questions at the conclusion of the call. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our SEC filings and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA, and any reference to EPS or adjusted EPS means adjusted diluted earnings per share. Adjusted EBITDA and adjusted diluted earnings per share are non-GAAP measures. Reconciliations of non-GAAP measures and a presentation of the most comparable GAAP measures are available in the appendix to today's presentation. With that, I'll turn it over to Bill. William Waltz: Thanks, Matt, and good morning, everyone. Starting on Slide 3. We are pleased with our second quarter performance. We achieved net sales of $731 million and adjusted EBITDA of $81 million. Adjusted EPS came in at $1.23. All 3 metrics were sequentially better than our Q1 performance. Organic volume also increased 5% year-over-year in the second quarter with contributions from both our Electrical and S&I segments. Following strong productivity improvements in FY '25, we continue to see solid productivity gains again this quarter after a very strong Q1 as well. Our productivity savings reflect our commitment to manufacturing efficiency and cost reduction. After the quarter concluded, we completed the divestitures of our high-density polyethylene or HDPE business, and we also just announced the sale of our surface protection and powder coating business in Belgium. We will continue to operate our metal framing and cable support systems facility in Belgium, which supports the electrical infrastructure market. These divestitures are part of a broader review of strategic alternatives, which we announced last year. To date, in addition to the HDPE and Belgium divestitures, we completed the sale of our Tectron tube mechanical product line, ceased manufacturing operations at 3 U.S.-based facilities and sold our Northwest Polymers recycling business. Each action represents what we believe are initiatives that will enable long-term shareholder value creation. We will continue to provide updates on our ongoing strategic alternatives process as we move forward. In addition, we announced last week that the company entered into agreements to settle 2 of the 3 punitive classes in the PVC Pipe antitrust litigation. The combined proposed settlement for the 2 punitive classes is $136.5 million and is reflected in our second quarter results. We anticipate making payment within the third quarter. Looking ahead to the remainder of fiscal '26, we are on track to deliver our outlook for adjusted EBITDA and our adjusted EPS. At the 6-month mark of our year, we remain focused on several continuous improvement and growth initiatives that are expected to create value this year and for many years to come. I'd like to take a moment to thank all of our employees for everything they do to support our key stakeholders. With that, I'll now turn the call over to John Deitzer to walk through the results from the quarter and provide more details on our outlook. John Deitzer: Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the second quarter, we achieved net sales of $731 million and adjusted EBITDA of $81 million. Adjusted EPS was $1.23 per share compared to $2.04 in the prior year. We are pleased to see a year-over-year improvement in our net sales, which reflects increases in both organic volumes and average selling prices. This was the first quarterly increase in net sales since the fourth quarter of fiscal 2022. Our net loss for the quarter includes several one-time items. As Bill mentioned, we reached an agreement to settle 2 of the 3 classes within the PVC antitrust litigation matter. We recorded a pretax liability of $136.5 million, which is reflected as a nonoperating expense in our second quarter results. Additionally, we recorded certain items associated with our recently completed strategic actions, including accelerated asset depreciation at the recently exited manufacturing sites as well as asset impairments and adjustments in carrying value related to the recent divestitures. Our tax rate in the second quarter was approximately 22%, a decrease from 24.7% in the prior year. Our second quarter income tax rate and benefit realized reflect the impact from several discrete items that I just referenced. Separate from these discrete items, the growth we've achieved and expect in our solar business this year has generated additional tax benefits compared to the prior year. Turning to Slide 5 and our consolidated bridges. Organic volumes were up approximately 5% compared to the second quarter of fiscal '25. Our average selling prices increased 1.5% during the quarter, which included products from both our Electrical and S&I segments. For example, our steel conduit and cable products both increased their average selling prices, while our PVC-related products declined within our Electrical segment. Our mechanical tube products saw selling price increases within our S&I segment. Moving to Slide 6. Our year-to-date volume is up mid-single digits compared to the prior year. 4 out of our 5 product categories have grown throughout the year. Our metal framing, cable management and construction services offering continued to benefit from data center growth, both in the U.S. and internationally. It is worth noting that these products and services grew approximately 10% in the first 6 months of fiscal '25. Despite the high comparability, these products and services are growing again in fiscal '26. Our plastic pipe conduit and fittings products saw growth in both our electrical and water products during the most recent quarter. Metal electrical conduit continues to see healthy end market demand, particularly for larger sizes of steel conduit. Our specialty conduit products, which include stainless steel and fiberglass are also growing due to increased market demand. Our mechanical tube business, which includes our solar-related products is growing as we expected due to better momentum for large utility scale solar projects. As we previously communicated, we are shifting certain available capacity from our existing nonsolar mechanical products to our electrical conduit products as part of our 80/20 initiative. This will continue to occur throughout the year. Overall, we continue to expect mid-single-digit volume growth for the full year. Turning to Slide 7. Net sales increased year-over-year in our Electrical segment, driven by higher volume growth and higher selling prices. Adjusted EBITDA margins improved sequentially from the first quarter, while still lower compared to the prior year. Net sales in our S&I segment were lower compared to the previous year. The segment saw higher volume and average selling prices. However, these gains were offset by the year-over-year impact from our Tectron tube product line that we divested in the first quarter as well as incrementally higher tax credits passed to solar end customers. Adjusted EBITDA and adjusted EBITDA margins both decreased year-over-year. During the second quarter last year, the S&I segment benefited from approximately $11 million of mostly one-time project-based benefits. Turning to Slide 8. Our ending cash position for the quarter was lower than our fiscal '25 ending cash balance. However, our second quarter ended prior to receipt of approximately $46 million of anticipated customer payments that occurred at the end of the calendar month. Excluding this timing aspect, we generated approximately $19 million of operating cash flow, highlighted by better inventory efficiencies. In addition, our March net sales per day were the highest of any fiscal month over the past 3 years, reflecting a higher ending accounts receivable balance that will be collected in subsequent months. Our balance sheet remains in a strong position with no debt maturity repayments required until 2030. Moving to Slide 9. We continue to expect volume growth to be mid-single digits for the full year. This growth is expected to be driven through a combination of nonresidential construction growth as well as contributions from certain initiatives such as solar and global construction services. We are adjusting our expectation for net sales to reflect a reduction from our HDPE divestiture and the divestiture of the 2 facilities in Belgium. For the full year, we expect net sales to be in the range of $2.9 billion to $2.95 billion. We continue to expect adjusted EBITDA in the range of $340 million to $360 million and adjusted EPS in the range of $5.05 and $5.55. The tax rate for the third and fourth quarter are expected to be in the range of 22% to 24% to approximate our adjusted EPS. As we look at end market demand, we expect our third quarter to grow sequentially in net sales, adjusted EBITDA and adjusted EPS from Q2 and then slightly grow sequentially from Q3 to Q4 in all 3 metrics. With that, I'll turn it to John Pregenzer to give an update on our strategic actions and our long-term focus. John Pregenzer: Thanks, John. Turning to Slide 10. To date, we have successfully executed several strategic actions. Since Q1 of this year, we ceased manufacturing at 3 U.S. facilities on schedule. I want to recognize and thank our teams for their commitment to improving our operational footprint and cost structure while delivering a positive customer experience. In April, we successfully divested our HDPE business, which included 5 manufacturing facilities. As part of this transaction, Atkore will retain a 10% ownership interest in a combined business that includes InfraPipe's existing HDPE business. Excluding the impact of our HDPE business, the electrical adjusted EBITDA margins would have been around 150 basis points higher in fiscal Q2. Additionally, we divested our surface protection and powder coating business located in Belgium. As we reflect on actions taken to date, we remain committed to utilizing the Atkore Business System to create shareholder value by improving operational performance, delivering consistent productivity and serving our customers with a highly diverse electrical infrastructure portfolio. Long-term electrification trends remain strong, and Atkore will continue to make strategic decisions with these trends in mind. In the meantime, there is more work to be done this fiscal year. As John mentioned, we expect volume growth to be mid-single digits for the year, and we believe the second half of the year will build upon the growth we've seen in the first half of the year. The electrical industry is a great place to be, and our operational and commercial teams are well positioned to capitalize on these opportunities globally. With that, we'll turn it over to the operator to open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Andy Kaplowitz from Citigroup. Andrew Kaplowitz: Could you give more color into what you're seeing in the overall markets in terms of volume and the drivers of that volume? Because when I look at your volume growth, as you said, you moved up nicely into the mid-single-digit range in Q2. I know you only reiterated your volume growth assumptions for the year, but I think you said data center growth up 10% in the first half. But does that start to ramp up in earnest in the second half? Any color on how big as a percentage of the business data centers is at this point? And is there something that's offsetting that growth in the second half? John Deitzer: I'll start on some of the items I referenced, Andy, and then I'll turn it to Bill and John to give a more macro perspective. The 10% was in reference to the metal framing, cable management and construction services business that grew 10% last year. So we had a tough comp in that business, but we're still up low single digits. So we're pleased to see that, and we also see that as a real opportunity for us in the back half of the year. I think John Pregenzer in his comments talked about we're well positioned commercially here to continue to capture some projects in that construction services and metal framing business really as we ramp in the back half of the year. So that will be some areas where we can outperform the market and get to that mid-single-digit outlook. So that's the clarification that was in -- the 10% was the last year growth in that sub business. But I'll turn it to Bill here to give some perspective here on the macro because there are some pockets of strength in items. William Waltz: Yes. So Andy, following up on John's comments. Overall, the markets are good across virtually everything. I would characterize -- data centers are double-digit growth. So anybody obviously happily as I'm sure you're seeing with your coverage that is focused on data centers or preponderance of their products should be growing, I think, organically double digits. For our products in that area, we're seeing high growth with those products, whether it's the metal conduit, larger diameter PVC, the metal framing and so forth that John Deitzer just mentioned. Other products are probably in the low single digit to mid-single -- other vertical markets are probably in the low to mid-single-digit growth. The things I would call out, and this correlates with like if you or anybody else to look at Dodge would see probably the same thing. The low markets are office buildings, if you strip out Dodge as a separate category and residential still seems to be slow but growing. And then obviously, on the other end, data centers are the highest growth. The one thing from our voice of customer of optimism talking to our distributors is kind of the manufacturing and industrial feels like they're optimistic for the future, which I don't know if Dodge calls out. Final statement there before I told us are too long is in talking to our customers, they're optimistic, good backlogs for the rest of this year as a holistic statement. Andrew Kaplowitz: Just one follow-up there, Bill, John. Like do you -- you've been working on initiatives like construction services for a while, and it seems like it's starting to ramp up. So does that mean data centers play a bigger role for you guys? I know it's hard to sort of break out the exact sales. But as you sort of go to the second half of this year and into '27, should we see a bigger role at Atkore from data centers given your initiatives? John Pregenzer: Andy, this is John. For sure, data centers are a big part of what we're doing global -- on the global construction services side. And as we look on the back half of the year, that's going to drive a lot of the growth that we're projecting. Also, we're seeing continued pickup in solar. So those will be 2 key areas that are going to drive what we're going to expect to see in the second half. William Waltz: Yes. And Andy, I'll just follow up. These are real rough, call it CEO math. But if you figure overall, markets are growing. And again, we're always talking, by the way, volume, as you know, other -- whether a distributor or manufacturer with positive price in their products, add the 2 plus inorganic growth and sum them together. But just organic volume, I'm going to say the market is up, let's just say, 2.5% to 3% and then our self-help, as John Pregenzer just walked through with data centers, the solar torque tubes, PVC, water, those type of things, should add another 2.5%, 3% that you get somewhere around that mid-single-digit growth. Andrew Kaplowitz: That's helpful. And then the other thing trying to figure out is the dynamics of price versus cost. I think last quarter, you said that baked into your guide was not a lot of additional spread given all the moving pieces. But obviously, as you guys have seen general upward trajectory of commodities, it looks like you've had some continued cost headwinds. So maybe give us more color on the spread you're seeing in the major commodities that you traffic in, whether it's steel or PVC. Are they getting more favorable at all in terms of the spread? And then how much of a hit are you taking with aluminum and copper, for example? John Deitzer: Andy, I'll start with some of the dynamics that we experienced here in the second quarter and then we're probably seeing in the back half, and then I'll kind of let Bill give any comments here also on the market dynamics. In the second quarter, in particular, we probably actually saw more of a steel impact in our costs because that was really the last year when we look back, it was the transition from our fiscal Q2 into fiscal Q3, go back to April of last year, Liberation Day, et cetera. That's where we saw the real spike occur. So our costs this year in the quarter were related here also with the -- primarily in the steel area. As we look forward in Q2 and looking forward into Q3, we are seeing that dynamic with copper and aluminum that impact our cable business. We are recovering a portion of that through higher selling prices, but that is definitely an area where we're seeing significant spread compression. And for us, the cable business is about 17% of company sales. And it was down in volume, but flat in revenue. So we did pick up a portion in price, but that decline in revenue also has an unfavorable impact to the cost structure and the margin. So that's an area of compression for us right now. But on steel, we have had several quarters here of sequential price increases on our steel-related products. I think I mentioned that in my comments. So we are positive here on seeing some of the trends. We were up for the first time in revenue year-over-year since the fourth quarter of 2022. Now that's on a sales basis, not on a profitability basis, I understand. But we are seeing some positive here momentum, and we'll see if that can continue. Anything... William Waltz: Yes. The only thing I would add, Andy, to that, and I did read your pre-guide this morning is most commodities, as John just mentioned, steel, but copper, as you go year-over-year is up, PVC resin is up at the moment -- I'm saying at the moment, but if we're sitting here at the beginning of May. But as we hold our guide -- and by the way, price for gas and everything else for trucking is up. But as we hold our guide, we feel comfortable with that. Obviously, one could infer that we're getting enough price to cover those costs as we go in the second half. So, so far for the year, there's always puts and takes in our product line and different things, but we're -- things are playing out as we expected. Operator: Your next question comes from the line of David Tarantino from KeyBanc. David Tarantino: Could you give us an update on both the strategic review and the ongoing cost savings program? You've announced a number of pruning deals and cost-saving initiatives. But could you give us some color on how you're thinking on the review on a go-forward basis? Are we still contemplating a broad range of outcomes here? William Waltz: Yes. So I'll do it in reverse order. I'll focus on the initiatives. I think the initiatives that we've laid out last fall, we've now hit everyone. In other words, as John Pregenzer covered in his remarks, we successfully compliment, as John did, the employees that did it really well, the 3 facilities on track for hitting, as we called out in the last quarter, $10 million to $12 million of annualized savings. there could be a slight upside to that. We divested everything that we had planned for, including the major one was HDPE, but including the small non-core operations in Belgium here just in the last day or 2, et cetera, et cetera. So those things are all -- and they all went very successfully. The facilities have been moved kind of on schedule, probably in less cost overall than even we expected. So those things are all going well. As for the overall holistic strategic review, both the Board and we have announced a strategic review committee are still considering kind of all options. They're being diligent. But beyond that, to say a time frame or whatever, the Board does not want to get locked into doing what they perceive as best for the shareholders, but whatever time schedule that takes. David Tarantino: Okay. Great. That's helpful. And maybe on the top line, nice to see pricing contribute positively. So could you give us some color on what drove the positive inflection here? It sounds like primarily in steel, but maybe some color on what you're hearing in the channel and what you're seeing from the level of imports would be helpful. William Waltz: Yes. So a couple of things. Thanks, David. Obviously, the under -- it's not a direct correlation, but the underlying commodities have a factor. We've always said in my mind, the first thing is supply and demand. From there, it's the cost of the commodities. But overall, as I referenced, I think, to Andy's question, if you look over the year, copper is up, steel cost is up, resin costs are up. So -- and as I referenced, we're passing those things along. As I look out over the next year, for -- and you guys -- you specifically, David or anybody else can reference. But hot-rolled steel, commodity futures are basically flat for the rest of the -- I'm saying for the next 12 months, but above $1,000 per ton. PVC resin, at least what we're hearing or seeing from different people is they're going to stay up through the end of the year -- our fiscal year, and they always drop some. But now I'm a little beyond my skis here. In other words, I would check with others that are experts. But in the U.S., natural gas is used to create PVC resin, not oil, but there's still a correlation that I saw a statistic like March exports were up 20% or something going overseas, i.e., the U.S. competitiveness to ship overseas is up. So I would expect them to keep their resin cost to us and others up. So I think the underlying commodities are up. And I think supply and demand, as I referenced in the earlier question where the markets are healthy. You could see -- and the last point, you could see if you check the public corporation for distributors, I think they're having -- they're being able to pass along the cost to contractors and so forth. So it's a good environment for us to continue to drive forward in. David Tarantino: And then just the level of imports? William Waltz: Great question. Apologize if you asked that in the first round. Imports, I would do the following thing. Steel -- and I'm looking back over the last 6 months because I'd tell you, it's really spiky by month and even quarter. So I don't want to give false precision for any time frame. But steel conduit imports for the last 6 months are down as we've already alluded, the markets themselves are up. So that's helping us. Continuing supply-demand, domestic, international, so forth with good markets to drive pricing that John Deitzer spoke of. PVC products are still coming in, growing, I guess, again, it depends on the quarter, but I would say with the markets and so forth. But again, the markets are relatively strong there. So... Operator: Your next question comes from the line of Deane Dray from RBC. Deane Dray: Bill, can we follow on that last point. Just with regard to some of the imports, can you be more specific? Because we're all watching the level of imports from Mexico on the steel conduit side. At one point, it was in the low 20% of the market. It had come down into representing high teens. Where is that today? That's -- really will help us calibrating here. William Waltz: Yes. John Pregenzer, do you want to give a... John Pregenzer: Yes, Deane, I think when you look at Mexico, there's been a continual steady decline in imports month-over-month, specifically from Mexico. So where it was in the low to mid-20s at one point, we would probably estimate it's in the high teens to mid-teens at this point. But that's one area where there has been some declines. There's been some offsets from other countries importing in, but that would be the situation for Mexico. William Waltz: Yes. And Deane, I don't have with me, and I don't know if we'd share the precise number versus John's guide. But just to follow up on David's question, and again, I don't want to get -- it does bounce. So I don't want to give too level of false precision. But as we called out on our Page 6, where metal electrical conduit and fittings are up mid-single digits for the year, I would say imports from Mexico for steel conduit is down directionally mid-single digits. So it's working in our favor here. Deane Dray: What's the impact of tariffs and 232 in particular? How has that changed the level of Mexican imports? William Waltz: I think -- well, let me do some -- try to answer that 2 ways, depending on where you're going with your question is, recently, there's been some updates, but they're not a direct -- like they go, hey, it's 100% of the content of the product, not steel. But like for us, maybe you're not even going here, but steel conduit is 100% steel conduit. So that specifically any changes of late have not made a material difference for us. And I'm talking -- I could go back and give you a precise date where the administration has come out with some updates. What I would say, but this is conjecture and correlation is the tariffs that the administration put in is probably a driving factor in the fact that the statement before, if you go back, I think, to 2024, steel conduit, as you know, is growing double-digit imports versus the statement I just made that steel conduit, metal conduit is growing mid-single digits and imports are down mid-single digits. So it feels that one could easily deduct the tariffs are a large factor in that. Deane Dray: All right. That's really helpful. And any other color you can share on the PVC dynamics? Because you're seeing you're getting steel price, but you're giving price on PVC overall. Are there -- maybe answer the question, we've got a good sense on the import or the input costs in resin. But what's going on competitively, what you're still seeing selling pressure there? William Waltz: Yes. Deane, maybe I'll give a different reflection and John and John, please either correct or add to it to go. The statements we've made so far have been more -- it should be year-over-year to go, a, what is different things. I don't want to get too far out my skis with 1 month if you have this quarter behind, but I would say that as we go forward and hold our guide is that even in things like PVC, 1 month doesn't make a quarter or a year and November, we'll talk about FY '27. But that so far, we have been able to raise our price and cover those costs for PVC. So again, there's good competition out there. But as I mentioned to David, the first thing that drives our pricing is supply and demand and the markets are overall pretty healthy. Operator: This concludes the question-and-answer session. I would now like to turn the call back over to Bill Waltz for closing remarks. William Waltz: Thank you. Let me take a moment to summarize my 3 takeaways from today's discussion. First, I'm pleased with Atkore's fiscal 2026 results so far. We grew sequentially in net sales and profit in our second quarter from the first quarter, and our results reflect a combination of healthy end markets and our own self-help improvement. Second, we are on track to deliver mid-single-digit organic volume growth for the full year. This represents how we see the broader market performing and contributions from several key initiatives. Finally, our executed strategic actions reflect our commitment to making changes that increase our focus on the electrical infrastructure market and enable long-term value creation. With that, thank you for your support and interest in our company. We look forward to speaking with you during our next quarterly call. This concludes the call for today. Operator: This concludes today's conference call. You may now disconnect.
Harry: Good morning, ladies and gentlemen. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome you to the Ferguson Results Quarter Ended October 31, 2025, Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of prepared remarks, there will be a question and answer session. Please press star followed by the number two. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may begin your conference call. Brian Lantz: Good morning, everyone. And welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-Ks available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin. Kevin Murphy: Thank you, Brian. Welcome everyone to Ferguson's quarterly results conference call. On today's call, we'll cover highlights of our quarterly performance. I'll also provide a more detailed view of our performance by end market and customer group. I'll turn the call over to Bill to review financials and our updated guidance before I wrap up with a few final comments. We'll have time to take your questions at the end. During the quarter, once again, our expert associates delivered strong results continuing to execute our growth strategy in a challenging market environment. Sales of $8.2 billion increased 5% over the prior year driven by organic growth of 4% and acquisition growth of 1%. Gross margin of 30.7% increased 60 basis points over the prior year. We remain disciplined on cost and generated $808 million of operating profit, which grew 14% over last year. Diluted earnings per share increased nearly 16% over the prior year to $2.84. We continued to execute our capital priorities, deploying $511 million this quarter. We declared a 7% increase to our quarterly dividend to 89¢ per share. And we acquired Moore Supply Company, HVAC equipment and supplies business in the Chicago Metro Area. We also returned $372 million to shareholders via share repurchases and dividends. Our balance sheet remains strong, with net debt to EBITDA of 1.1 times. While we continue to operate in a challenging environment, we remain confident in our markets over the medium term. And we'll stay focused on leveraging multiyear tailwinds in both residential and nonresidential end markets as we support the complex project needs of the water and air specialized professional. Turning to our performance by end markets in The United States. Net sales grew by 5.3%. Residential end markets representing approximately half of US revenue remain challenged. New residential housing starts and permit activity have been weak, Repair, maintenance, and improvement work has also remained soft. We continue to outperform the markets with residential revenue down 1% in the quarter. Nonresidential end markets performed better than residential. Our scale, expertise, multi-customer group approach, and value-added services drove continued share gains with nonresidential revenue up 12% during the quarter. Strength in large capital project activity has continued, and we've seen solid shipments, with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well. Moving next to revenue performance across our customer groups in The United States. We grew Waterworks revenues by 14% as our highly diversified customer group saw strength in large capital projects public works, general municipal, and meters and metering technology, offsetting weakness in residential. Ferguson Home, which brings together our best-in-class showroom and digital experience, grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience and cater to higher-end projects drove outperformance against the broader market. Residential trade plumbing declined by 4%, due to headwinds in both new and RMI construction. HVAC declined by 6%, against a strong 9% comparable and weaker markets impacted by the industry's transition to new efficiency standards and weak new residential construction activity as well as a pressured consumer. We remain pleased with our execution our counter build-out for the dual trade and M&A opportunities. Commercial mechanical customer group grew 21% on top of a 1% prior year comparable. Driven by large capital projects such as data centers, partially offset by weaker activity in traditional nonresidential projects. For fire and fabrication, facility supply, and industrial customer groups all saw growth during the quarter as we continued to take share and leverage our unique multi-customer group approach. Our customer groups are better together, sharing expertise to provide end-to-end solutions that help simplify complex projects and maximize contractor productivity. Now let me pass the call over to Bill for the financial results in more detail. Bill Brundage: Thank you, Kevin, and good morning, everyone. Net sales of $8.2 billion were 5.1% ahead of last year. Driven by organic revenue growth of 4.2% and acquisition growth of 1%. Partially offset by 0.1% from the adverse impact of foreign exchange rates and from a divestment in Canada. Price inflation was approximately 3%. Modest sequential improvement in finished goods pricing, offset by commodity-related categories being down low single digits. Gross margin of 30.7% increased 60 basis points over last year, driven by our associates' disciplined execution. Operating costs grew slower than revenue, delivering 20 basis points of operating leverage. And operating profit of $808 million was up 14.4% delivering a 9.9% operating margin with 80 basis points of expansion over the prior year. Diluted earnings per share of $2.84 was 15.9% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to EBITDA. Moving to our segment results, net sales in The U.S. grew 5.3%, with organic growth of 4.4% and a further 0.9% contribution from acquisitions. Operating profit of $806 million increased $109 million over the prior year, delivering an operating margin of 10.4%. In Canada, net sales were 2.2% ahead of last year. With organic growth of 0.7% and a 4.6% contribution from acquisitions partially offset by a 1.6% adverse impact from foreign exchange rates as well as 1.5% from a noncore business divestment. Markets have remained subdued in Canada, particularly in residential. Operating profit of $16 million was $7 million below last year. Moving next to our cash flow performance for the quarter. EBITDA of $867 million was $109 million ahead of last year. Working capital investments of $440 million during the quarter was up slightly from $376 million in the prior year. Principally driven by timing. Operating cash flow, was $430 million compared to $345 million in the prior year. We have continued to invest in organic growth through CapEx, investing $118 million in the quarter, resulting in free cash flow of $325 million compared to $274 million in the prior year. Turning to capital allocation. As previously mentioned, we invested $440 million in working capital. And another $118 million in CapEx. To further build on our competitive advantages and drive above-market organic growth. We paid $164 million of dividends during the quarter, and our board declared an $0.89 per share quarterly dividend. Representing a 7% increase on the prior year. And reflecting our confidence in the business. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin mentioned, we completed the acquisition of Moore Supply Company during the quarter. A great addition to our HVAC presence in the Chicago area. Our markets remain very highly fragmented, and our acquisition pipeline is healthy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to EBITDA. We returned $208 million to shareholders via share repurchases during the quarter. Reducing the share count by nearly 1,000,000. And we have approximately $800 million outstanding under the current share repurchase program. Now turning to our updated calendar 2025 guidance. We are pleased with our continued market outperformance and solid growth in the quarter. We are well positioned to deliver a strong calendar year 2025 performance and remain confident in our markets over the medium term despite near-term uncertainties. We now expect approximately 5% revenue growth for the year. And we expect an operating margin range of between 9.4% to 9.6% up from our prior expectation of between 9.2% to 9.6%. Interest expense is expected to be approximately $190 million for the year. We estimate CapEx of approximately $350 million the upper end of our previous guide. We continue to expect our effective tax rate to land at approximately 26%. We believe we are well positioned as we finish the year head into the new calendar year. Thank you, and I'll now pass back to Kevin. Kevin Murphy: Thank you, Bill. As we conclude our remarks, let me first reiterate our thanks for the hard work and diligence of our expert associates. They continue to execute on our growth strategy, we work to drive construction productivity for our customers. We're particularly pleased with the double-digit nonresidential growth as our teams closely collaborate to simplify projects bring order to chaos, and deliver end-to-end solutions to help maximize customer success. We're poised to deliver a strong calendar 2025 performance and our strong balance sheet enables us to invest in organic growth consolidate our fragmented markets through acquisitions, and return capital to our shareholders. We'll continue to operate at the lower end of our target leverage range maintain flexibility and capitalizes on strategic opportunities as they arise. We remain confident in our markets over the medium term, and expect to continue to outperform our markets as we leverage multiyear structural tailwinds. Our size, scale, and strategy we believe we're well positioned to take advantage of opportunities in the underbuilt and aging US housing market nonresidential large capital projects, and the growing demand for water and air specialized professionals. Thank you for your time today. Bill and I are now happy to take your questions. Operator? I'll hand the call back over to you. Harry: A. If you change your mind, please press star followed by 2 to exit the queue. And finally, I'm preparing to ask your question. Please ensure your device is unmuted locally. And our first question today will be from the line of Matthew Bouley with Barclays. Please go ahead. Your line is open. Matthew Bouley: Good morning, everyone. Thank you for taking the questions. Wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify, perhaps what portion of the business, that is for you today, and maybe kinda where that can get to. But also, I'm curious if you can kind of know, give us a little bit of color on the timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kinda think that this is gonna be more of a, I don't know, smoother kinda outlook for that business. Thank you. Bill Brundage: Yeah. Good morning, Matt. Thanks for the question. I'll start this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that that that is somewhere between mid to high single digits as a percentage of our total company revenue at this point. With data centers specifically being a bit over 50% of that a bit over half of that overall large capital project. Revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity. And our open order volume on large capital projects does continue to grow. And you're seeing that, you saw it come through revenue this quarter. Principally in the commercial mechanical business, which was up 21% and then a portion of that waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so, yes, there could be some lumpiness, in terms of of revenue rate as as we move into the future. But overall, we remain bullish that this is a continued growth area for us, and and will continue to be driving revenue as we as we exit '25 and step into '26. And, Matt, as Bill said, the lumpiness will likely be there in the gestation period for these projects. It's gonna be longer but that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against the backdrop where traditional nonres is in a pretty challenging spot. Matthew Bouley: Alright. That's perfect. Thanks for that, guys. And then secondly, kind of jumping into the outlook I guess, maybe this is since a bit of an unusual period here where you're guiding to just kind of the sub period. I guess I'm curious if you could kind of give us any color on the November or quarter to date results. But just given this is sort of a smaller and again, unusual guidance outlook here, If you're willing to kind of give any early twenty twenty-six thoughts, you know, across the end markets, kinda carryover inflation, etcetera, to sorta help us point us, directionally a little bit into next year. Thank you. Kevin Murphy: Sure. Yeah. Matt, as as we maybe as as we take a step back, if you recall when we set out our calendar '25 guidance at the end of our fiscal year in July, We had talked about the first half of the calendar year growth being about 5%. And our expectation that we believe that that growth was gonna get a bit more challenging as we work through the calendar year particularly towards the end of the calendar year. As we were expecting additional new res pressure, and HVAC pressure to step up. And that's what we've started to see play through, so very much in line with our expectations. Maybe I'll shift to the calendar quarter as we're gonna try to try to get to the calendar year reporting now. If you look at calendar Q4 to date, so October, November, and basically the first, you know, week, week and a half of December, our total growth is sitting at about 3% for that period. Again, very much in line with our expectations with with that additional pressure on new resi and HVAC. And so, clearly, now with about three weeks to go, I would expect our calendar Q4 growth rates to be somewhere in that that 3% range as we round out the year. And then as we look forward into '26, we will set out our calendar '26 guidance in February. We're back with you in a couple of months as we get onto that calendar year cycle. But but the early part of '26, we wouldn't expect much change from a market perspective or much difference. As we exit the year at about that 3% range and then step into the step into the new year. But, again, we'll set out our views on the market. And our views on our guidance in February. Matthew Bouley: Excellent. Thanks, Bill. Good luck, guys. Harry: Thanks, Matt. Next question today will be from the line of Ryan Merkel with William Blair. Please go ahead. Your line is open. Ryan Merkel: Want to follow-up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this at this point. Kevin Murphy: Yeah. It it it is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody's well aware, had continued to weaken through the calendar year. Outside of our waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups, to then then play through on revenue. I think we're just seeing that playing through on those weaker starts. And then, certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October. That growth got a little bit more challenging towards the end of the quarter as the market's in a pretty tough spot. So I think those two those are the two pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And and we would believe that residential at some point will will stabilize on on the new resi side. Ryan Merkel: Got it. That makes sense and pretty consistent with what we're hearing. Let me shift to pricing. Looks like it came in a little better than you thought. Maybe talk about that and then talk about how the commodities are trending and if you expect supplier price increases as we head into the New Year? Kevin Murphy: Yes. Overall, the quarter, inflation was about 3%. So to your point, it stepped up from about 2% in the previous quarter to 3% this quarter. Finished goods was up a little bit more than it was in the prior quarter. So I'd still consider that kind of at the high end of that low single digit range. And commodities were down in the low single digit range still. As a basket. If you look at commodities, three three main baskets within that that group, PVC, which is our largest commodity basket, is still in deflation. Down in the double digit range, kind of that low double digit range. Steel, is up. I would call that mild inflation, and then we're still seeing strong inflation on copper tube and fittings. So overall, pretty consistent with what we expected. As we as we round out the first quarter and and enter into the end of the calendar year. And if we look at entering the calendar '26, we would expect modest price increases that are in line with traditional behavior on the finished goods side of the world, and those announcements are coming through right now. Hard to say what's gonna happen with all of the different dynamics that are involved in the market right now, but our expectation is that it'll be a more normalized pricing environment knowing full well that we had six quarters of deflation before we got back to flat and then plus two in the previous quarter. Ryan Merkel: Alright. Good job. I'll pass it on. Thanks. Thanks, Ryan. Thanks, Ryan. Harry: Next question today will be from the line of Dave Manthey with Baird. Please go ahead. Your line is open. Dave Manthey: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters? Bill Brundage: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point. Dave Manthey: Makes sense. Thank you. And second, as it relates to the $2 billion ish in revenues from major projects that you discussed, It seems like you've been having a lot of success there because of the one Ferguson effort. Could you maybe I don't know if you could quantify or or bigger than a bread basket, tell us what percentage of those projects do you get more than one product and customer group via the one Ferguson effort. Versus not. Is that something you could share with us? Kevin Murphy: Yeah, Dave. Thank you. And and certainly, when we talk about large capital projects, we're talking about those projects north of $400 million in overall construction value. And so it's it's a varied group. Certainly, data center gets a lot of the attention today, but it's beyond that to pharma, biotechnology, onshoring, reshoring, manufacturing, and and others. And so the projects do vary. I will say, and people ask us quite a bit about what happens after large capital projects aren't the talk of the day. And the answer to that is really a new way of working for Ferguson. And so we are engaged early on in the construction process, early on with general contractors and owners around what specifications look like, how we can make sure that we have supply chains that stand up to timelines, And so doing that together with the contractors on the job we're engaging most of our nonresidential customer groups on these projects, whether that be industrial, fire and fabrication, waterworks, commercial mechanical, and they vary again depending on the kind of job. But that's the way we intend to work as we move forward. Never abandoning the local relationships that we have with our core contractor base, but also making sure that we can deliver on tight timelines make sure that we got the right product set for the job to deliver. Dave Manthey: That's great, Kevin. Thanks. Harry: Next question will be from the line of Keith Hughes with Truist. Please go ahead. Your line is open. Julian: Hey, good morning. This is Julian on for Keith. Just in terms of HVAC, when do you think comps are going to start to ease from the pre shipments ahead of the standard change from last Kevin Murphy: Yeah. I'd I'd say to again, to build on what Bill has already said, the market's in a tough spot right now. We saw it get a bit worse. As we went through the quarter and exited October. It's a variety of factors, though. You've got a bit of the a two l transition. As you had pull forward. You certainly have equipment price increase playing in now. As the majority of the sell through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that is now, you know, passed. And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's that's tough to to pinpoint. For us, we're bullish on what that market looks like over time. And we're gonna continue to build out convenient locations across The United States. Continue to build out our OEM brand representation, We're gonna continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor. Julian: Got it. Thank you. Harry: Next question will be from the line of Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open. Scott Schneeberger: Thanks very much. Good morning. The I want to touch on some SG and A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Just to could I get an update on on how these investments have been trending what you're looking for maybe going out over the coming year, and, and impacts of these, of these investments to date. Thanks. Bill Brundage: Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program something that's been really foundational to the success of this company over decades now. And it's a it's an area that we invest in in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our in our classes throughout the year, and we would expect to continue that that program and expand that program as we step into calendar '26. In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build out of convenient locations. We have now completed roughly 650 counter conversions So that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise of and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging eight HVAC environment, we believe we are outperforming that HVAC market. And have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to to ensure that we expand that HVAC footprint. And and and maybe lastly, we're continuing to invest from a a technology and a digital standpoint. And so we continue to invest in new technology tool, digital tools, principally in the areas of HVAC. And for the repair, replace plumbing contractor. We're very pleased with the progress that we've made with with many of those investments. If you take a step back from an overall SG and A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through where we've received the benefits of that. And so while even though we're operating in still a a bit of a challenging top line market environment, we're delivering good quality SG and A leverage. While we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26. And maybe to just build on what Bill was saying. Certainly, the trainee aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. Business over time. He spoke about the HVAC business, so I won't be repetitive there. But when you look at what investments we've made in waterworks diversification, and making sure that we have a broad book of business from residential to public works to water wastewater treatment plant to geosynthetics and soil stabilization that is serving us well. And, certainly, we're pleased with a plus 14% growth rate We're pleased with the large capital project space. We talked about a multi-customer group approach and engaging early on in the project. But we're also investing in value-added services like fabrication. Valve actuation and automation, and virtual design. And so that's serving us well, obviously, with plus 21 in the commercial mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home, and bringing together what is a best-in-class digital platform, with a showroom experience and a consultative approach and a builder outside Salesforce that's driving growth with the connected consumer to that builder, designer, and remodeler. And so we think all of those investments are proving to be successful as we move through a it's a challenging environment. Scott Schneeberger: Great. Thanks, guys. And just a follow-up. Spoke a little bit earlier. You you were asked about, supplier pricing going into next year. I'm just curious that from a high level, how are you thinking about managing inventory as you enter 2026? Thanks. Kevin Murphy: Yeah. We think our inventories are in a good spot right now. Teams are doing a really nice job and have done so managing through a unique environment. With price increases coming through the system this year. So I wouldn't expect significant changes to the inventory profile as we exit calendar '25 and enter calendar '26. We think we have the right levels of inventory to take care of our customers and to support continued market outperformance. Scott Schneeberger: Great. Thanks very much. Harry: Thank you. Our final question will come from the line of Nigel Coe with Wolfe Research. Please go ahead. Your line is now open. Nigel Coe: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date? Bill Brundage: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year. Nigel Coe: Great. And then a lot of helpful commentary on the larger project. Sites. In terms of I know this would probably be in quite a range, but any sense on what Stoixson's sort of opportunity would be on a typical large project? Again, I know there's no typical large project but any sense on what the kind of content might be for those? Bill Brundage: Yeah. Well, I'll caveat it with it will vary significantly. Depending on the type of project. But and and as Kevin talked about, when we talk about large capital projects, we're talking about those projects that have construction value north of $400 million. As a general ballpark, you take that construction value and somewhere 2-4% of the construction value would generally make up our product set and our customer group set. But, again, that will vary pretty significantly. And that certainly doesn't include, you know, in the likes of the data center, that wouldn't include the cost of the servers chips and those types of interior pieces of equipment to run the data center. It's more just that construction value. Nigel Coe: Right. Very helpful. Thank you. Harry: Thank you, guys. Have a great This concludes today's Q and A session. I'll now hand over to Kevin Murphy for closing remarks. Kevin Murphy: Thank you, operator. And let's end the call in the way that we began with a strong thank you to our associates for their hard work and diligence in what is clearly a challenging market. As you heard today, we're pleased with the quarter. 5% revenue growth, expansion of growth in operating margin, 16% EPS growth, operating profit growth of 14%, continued investment in the business, and a strong balance sheet. We're pleased with the execution of the teams. And the continued investment in key growth areas that are yielding solid results we're sat here today. We'll continue to focus on driving construction productivity for the water and air specialized professional. We're gonna leverage scale with the best local relationships We're gonna continue investing in value-added services and digital tools. So thank you very much for your time today, Have a happy holidays, and we'll talk to you soon. Thank you. Harry: That concludes Ferguson's results. For the quarter ended 10/31/2025 conference call. I'd like to thank you for your participation. You may now disconnect your lines.
Operator: Greetings. Welcome to Leidos 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, Stuart Davis from Investor Relations. Stuart, you may begin. Stuart Davis: Thank you, and good morning, everyone. Joining me on today's earnings conference call are CEO, Tom Bell; and CFO, Chris Cage. Today's call is being webcast on the Investor Relations portion of our website where you can find the earnings press release and the presentation slides for today's call. As shown on Slide 2, our discussion today will contain forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results. Turning to Slide 3. We'll also discuss both GAAP and non-GAAP financial measures. In today's press release and presentation slides contain a reconciliation between the 2. And now let me turn the call over to Tom, who'll begin on Slide 4. Thomas Bell: Thank you, Stuart, and good morning, everyone. Today, I am pleased to report a very strong start for Leidos in 2026. First quarter revenue was up 4% year-on-year to $4.4 billion, and profitability remained excellent to start 2026, with adjusted EBITDA of 14%. As a result of this strong core performance and the immediately accretive nature of our Entrust acquisition, we are raising our 2026 guidance for revenue by $500 million, non-GAAP diluted EPS by $0.05 and operating cash flow by $50 million. Execution of our NorthStar 2030 growth strategy is now in full swing. And these strong Q1 results set the stage for our multiyear growth trajectory beginning this year. Chris will go through our Q1 financials in detail later on this call. What I'd like to spend my time with you on this morning is the story behind these Q1 numbers and the fact that they represent another proof point that Leidos is built to thrive. Our scale, our unparalleled customer understanding, our ongoing corporate investments in our [ Golden Bolts ], our market-leading exploitation of AI, they are all allowing us to quickly adapt to this changing market dynamics and rapidly deploy learnings to all of our customers and all of our businesses. We are driving our business and executing our NorthStar 2030 growth strategy through a few simple principles. The first is increasing our investments in our 5 growth pillars. Our growth pillars, markets where we see robust revenue growth to deliver superior top and bottom line results, remain Defense Tech, managed health, digital infrastructure and cyber, energy resilience and mission software. The second principle is continuing to make Leidos faster, leaner and more focused, ensuring that speed is king at Leidos. And the third principle is leveraging our scale through technology insertion and learning across our whole business. Here are some examples of how we're delivering against this strategy in 2026. In Defense, we're capitalizing on years of technological investment to work with the Department of War as one of their key disruptors able to reliably produce at scale. We are currently pursuing accelerated procurement agreements such as framework agreements, to field a number of Leidos advanced products and capabilities. Let me illustrate a few for you this morning. Munitions is a clear area of focus by the Department of War and one of historical strength for Leidos. Following a string of successful flight tests of our small cruise missile, now designated the AGM-190A by our customer, we are working with the Department of War to accelerate production of the SCM itself, progress work on derivatives of this product and field iterations of this technology for even more challenging warfighter needs. All in all, we can clearly see a path to production runs of thousands of these products in this decade alone. We're also working to respond to the U.S. Navy for a marketplace acquisition approach to produce MUSVs and mission payloads at scale quickly. Our offering combines Leidos' Gibbs & Cox expertise, commercial boat yard capability, Leidos' proven LAVA software, integrated command and control, our exquisite C5ISR and counter C5ISRT to deliver real-world scale effects for the U.S. Navy. Related to this, you probably saw recent press reports about one of Leidos' existing MUSVs, the Seahawk MUSV, being operationally not experimentally deployed as part of the Theodore Roosevelt Carrier Strike Group. This is the U.S. Navy's first and only medium unmanned surface vehicle to reach this level of customer confidence, relevance and actual deployment. And we're also conducting advanced discussions regarding scaling production of Leidos' Air Shield high-power microwave counter UAS technology. That technology consistently outperforms all competitors in range and lethality. In addition to these framework agreements and other agreements, we've begun serial production of our ALPS product under our $2.2 billion ABADS-MD contract. ALPS is a Leidos developed passive sensing system that delivers persistent, wide area awareness at a fraction of legacy costs. In fact, you may have noticed last month at the Department of War Golden Dome update that our ALPS program was highlighted as a key sensor informing the Golden Dome architecture. Quoting General [ Guetlein ] himself, "the testing of the Army's advanced long-range persistent surveillance radar is tangible proof of our progress. " This is a powerful customer validation of ALPS' ReadyNow role in enabling a layered integrated defense network. All this momentum is translating directly into strong demand across our entire Defense Tech portfolio. In total, we've earned over $9 billion of awards for our Defense Tech business in the last 15 months alone, and we can see clearly a path to another $8 billion in our next 12-month pipeline. In Health, we are injecting real-world digital sophistication into mission-critical care with excellent customer impact, a standout example here is our recent $456 million Military OneSource award. This program provides confidential counseling, financial planning, tax assistance, career coaching and more to military personnel and their families. This directed award is a testament to Leidos' superior and repeatable digital innovations. By applying the predictive analytics from our Military and Family Life Counseling program, to this customer's Military OneSource needs, we are shifting the focus from reactive care to proactive force readiness. This award is in the wheelhouse of our managed health growth pillar, and grows our strategic moat in this market. By harmonizing these programs, MFLC and Military OneSource, we give the customer optionality to sync these ecosystems into a single high-efficiency care delivery model. We are embedding Leidos into the mission's digital DNA, ensuring long-term customer stickiness, improving our disruptive value across the managed health market. Elsewhere in Health, we've secured a first of its kind award for a pilot program called My Service Treatment Record. Here, we've been selected to exclusively develop an AI-driven tool to automate the medical record transfer for service members from the Department of War to the Veterans Administration. As the architects of MHS Genesis, Leidos was uniquely qualified to aggregate Department of War data at speed and scale necessary to expedite this transfer. A transfer that today is manual, paper-intensive, frustratingly slow and laborious. This new platform acts as another strategic entry point into the broader disability examinations mission. It allows us to further stitch together fragmented legacy systems with a seamless end-to-end digital thread. With the ability to automate everything from record retrieval to claim submission we are directly advancing both the Department of War and the VA's digital-first initiatives. In turn, this ensures Leidos and our technology are deeply embedded in both our customers' long-term operational road map. Also of note, in our ongoing Veterans Benefits exam business, I'm pleased to report that our disability exam volume remained high through the first quarter and customer satisfaction, veteran satisfaction with their treatment at Leidos QTC clinics remains best in class. We are very much looking forward to working with the customer on our continued leading role providing these mission-critical services to our nation's veterans, beginning with an industry day later this month. Together, these wins and our robust ongoing business give us confidence in our Health growth pillar and its sustainable growth through the decade. Now I'd like to take a minute to also update you on the 3 substantial portfolio moves we've undertaken in the last 12 months. Most recently, I was very pleased to have announced our intent to strengthen our nation's Homeland Defense by agreeing to combine our SES business into a joint venture with Analogic. Our joint venture will create a focused American leader in this critical global market. And through our significant minority interest in this JV, our shareholders will continue to participate in the market upside this JV will help unlock. Regarding our Kudu acquisition of last year, the nonkinetic effects you probably read about an Operation Absolute Resolve and Operation Epic Fury reinforce just how critical these capabilities are to our customers' missions. That demand is exactly what we foresaw in acquiring Kudu to combine with our existing business. The combination of Kudu's elite offensive cyber tools with our robust signal processing capabilities and our established defensive cyber leadership has created the integrated tool kit that our customers increasingly rely on. It also aligns directly with the recently published national cyber strategy. Leidos' full-spectrum cyber capacity is delivering against surging demand. We currently see a total cyber pipeline valued at $24 billion, a 21% increase since the acquisition of Kudu. The acquisition has also accelerated our use of AI technology to deliver cyber mission software and operations with unprecedented velocity. And speaking of velocity, we executed a quick, clean close of Entrust this past March, just 2 months after we announced the acquisition itself. That speed sets us up to accelerate delivery for our customers at a time when demand for energy infrastructure services is expanding every day. And closing this deal rapidly allows us to quickly gain the top and bottom line efficiencies we envisioned for this transaction this year. Integration is ahead of schedule, the cultural alignment is seamless, and the financial upside is already surfacing in our consolidated numbers. Strategically, this combination expands our business' breadth and depth and is already producing new opportunities. For instance, as a result of our combined prowess, we've received our first energy generation plant RFP. And we've been selected to perform detailed design for Canada's largest battery electrical storage facility. Building on this momentum, our team is focused on targeting a refreshed order pipeline of $10 billion. This represents growth of 230% post close, made possible by rapidly bringing our teams together to prosecute the market as one. And on the operational side, we've deployed Leidos' AI tools, Skywire across the new organization. Teams are already seeing significant opportunity to deliver high-quality services and solutions to more customers faster and cheaper. This is exactly what our NorthStar 2030 strategy is all about. Our Kudu and Entrust acquisitions provide us tremendous accelerants in high-growth markets, for scale and technology unite to deliver superior top and bottom line returns. And we aren't just looking at acquisitions to drive growth. I'm also pleased to announce that we are balancing these strategic moves with a surgical venture stage investment to ensure Leidos stays at the forefront of the market's innovation curve. We have committed a multiyear $100 million investment in a marquee PE firm with a proven track record in the federal technology space. This partnership gives us early access to a vetted pipeline of high-growth disruptors with mission-ready capabilities in AI, advanced cyber and autonomy to name a few. By continuing to be at the forefront of technological breakthroughs of all types, we ensure our customers have the technology they need tomorrow, integrated into the Leidos growth pillars today. To close out my prepared remarks this morning, I'd also like to spend a moment on AI and what it means for Leidos. As I have said on past calls, we are not reacting to AI. AI is nothing new to Leidos. We are scaling with AI. AI is not a threat to our business model, it's an accelerant of our business model because at our core, Leidos exists to make customers' outcomes smarter and more efficient. And AI allows us to do just that, work faster at greater scale with higher impact. What AI is doing in very practical terms is simply compressing the bottom of the solution value chain. It's making it easier to do things that were historically hard to do but it does not obsolete things that are hard to get. So things like routine development, basic analytics, data integration, AI is compressing the time to deliver these results. And that compression is of great value to us. We welcome it and are exploiting it because it frees up our highly specialized talent to focus where we create the most value, leveraging the multitude of things we have that are the very things that are hard to get, solving our customers' most complex mission-critical problems with deep customer understanding, the right people with the right specialty security clearances, real-world regulatory permission, Leidos' privileged access to our customers' digital infrastructure at scale, et cetera. AI makes us faster and AI makes us more efficient. And all these shifts reinforce they don't erode the digital advantages that Leidos enjoys. Our market position in highly cleared environments, our deep regulatory experience, our access to proprietary data and most importantly, the trust we built with customers over decades. These are not disrupted by AI, they are amplified by it. In our markets, real costs are not measured in dollars, they are measured in risk, mission accomplishment risk. And as AI increases the clock speed of our customers' mission execution, that risk only grows. So in turn, this only further strengthens our position as the trusted mission AI experts, the sober, cerebral, experienced, relatable experts deploying AI for our customers' success in ways they know they can trust. As part of this, as I've just alluded to, is an often underappreciated advantage for Leidos in this booming world of AI, the sheer scale of our federal digital infrastructure business. Our digital infrastructure business, the very large privileged position we enjoy today in our customers' digital ecosystem is not a vulnerability in an AI world, it's a strength because that ecosystem is foundational to how our customers are and will adopt AI securely and effectively. Every day, more than any other company we deliver open, secure, repeatable and mission-critical solutions for our customers. Capabilities we're currently grouping into 4 offerings, Uphold our cyber and resilient networks product suite; Insight, our Secure Cloud and data product suite; Forward, our customer digital experience product suite; and Headway, our information advantage product suite. Taken together, these product suites strengthen Leidos' position as the scaled, trusted integrator of AI-enabled mission systems in our customers' environments for their mission success. That's why we believe we are uniquely positioned to continue to lead in this market, and that's why we continue to see scalable growth in this business. So Leidos is out of the blocks in 2026 playing offense. We are very excited about where we are today and where we are taking this business tomorrow, all guided by our clear NorthStar 2030 growth strategy. I'll now turn the call over to Chris to review our Q1 financial performance and provide an update outlook on the rest of 2026. And then I'll look forward to your questions. Chris? Chris Cage: Thank you, Tom, and thank you, everyone, for joining us today. We are off to an impressive start in 2026 and now more than ever, we see our matchless portfolio as a key to driving superior performance and value creation over the coming years. Let's jump right into the results, starting with the income statement on Slide 5. Revenues were $4.4 billion, up 4% in total and 3% organically year-over-year with especially robust growth in the Intelligence and Digital and Homeland segments. Revenues grew year-over-year as customers accelerated mission execution, especially for innovative products and solutions supporting the intelligence community, commercial energy infrastructure, and domestic and international air traffic management. Bottom line performance remained strong. Adjusted EBITDA was $614 million for the first quarter, up 2% year-over-year for an adjusted EBITDA margin of 14%. Non-GAAP diluted EPS grew 5% to $3.13, driven by higher adjusted EBITDA, lower share count and a lower tax rate. Changes in estimates at completion were a modest headwind in the quarter, yet profitability remained high through prudent cost management, excellent award and incentive fee performance and a $15 million insurance reimbursement for previously recorded legal expenses. Digging a little deeper, let's turn now to the segment drivers on Slide 6. Intel and Digital revenues increased 7% year-over-year, with 6% coming organically. Revenue growth was driven by recent contract awards and increased volumes for intelligence community mission support as well as $22 million from the acquisition of Kudu Dynamics. Non-GAAP operating income margin increased from 9.7% in the prior year quarter to 10.2%, which is excellent performance for this portfolio. For Health, we sustained our excellent performance on the top and bottom line. Revenues were unchanged from a year ago, and profitability was relatively stable across periods. Homeland revenues increased 6% year-over-year, given surging demand for energy infrastructure engineering services and domestic and international air traffic control systems. Non-GAAP operating margin of 8.5% compared to 9.4% in the prior year quarter, reflected changing customer requirements on a fixed price program. Lastly, Defense revenues of $883 million were up slightly compared to the prior year quarter, as strong growth in integrated air defense systems offset the wind down of [ some airborne ] surveillance programs due to a scheduled delay on a fixed price development program, Defense non-GAAP operating margin was 8.3% compared to 9.8% in the prior year quarter. Turning to cash flow and the balance sheet on Slide 7. In the quarter, we generated $301 million of cash flows from operating activities and $270 million of free cash flow. Operating cash performance was exceptionally strong for the first quarter, building off of a record Q4. DSO was 59 days after normalizing for the impact of the Entrust acquisition. With strong EBITDA generation, proactive collections and disciplined working capital management, Leidos is a cash machine, and we are turning that into long-term shareholder value. Our Entrust acquisition is a confident move in 1 of our 5 strategic growth pillars. We had planned to fund the purchase price of $2.4 billion with $500 million of cash on hand, $500 million in commercial paper and $1.4 billion of new bonds. With our robust cash generation over the last 2 quarters, we borrowed less and have begun to pay it off sooner than anticipated and our commercial paper balance to the $300 million at the end of the first quarter, which will pay off throughout 2026. We were also able to repurchase $200 million of stock in the open market as part of our balanced capital deployment strategy. We ended the quarter with $6.3 billion of debt, $457 million in cash and cash equivalents and a gross leverage ratio of 2.6x. This provides us with ample capacity to continue to invest in line with our NorthStar 2030 strategy. Finally, on to the forward outlook on Slide 8. As Tom mentioned, we're raising our 2026 guidance for revenues, earnings and cash. Specifically, we're increasing revenue guidance by $500 million to a new range of $18 billion to $18.4 billion, maintaining our adjusted EBITDA margin guidance at mid-13s, raising our non-GAAP diluted EPS guidance of by $0.05, yielding $12.10 to $12.50 and increasing our operating cash flow guidance by $50 million to approximately $1.8 billion. For context, I'll address 3 major aspects of our forward outlook, the organic view, the quarterly cadence and the longer-term view. First, the raises to revenue, earnings and cash guidance primarily reflect our Entrust acquisition. So after only a little more than a month post close, we've enhanced our outlook and now expect the deal to be accretive to non-GAAP EPS and cash in 2026 with substantially more accretion as deal synergies are realized in 2027 and beyond. Our view of the rest of Leidos for 2026 is largely unchanged from where we initially guided in February. Our forward guidance does not incorporate any impact from the pending joint venture we announced in our security products business, which we anticipate closing sometime in the back half of the year. Until then, SES and general automation assets and liabilities will appear as held for sale on the balance sheet, and there will be no change to the income statement as the materiality threshold for discontinued operations will not be met. Once the deal closes, we will no longer show revenue from our minority position and our share, roughly 40% of the joint venture net income will be reflected as equity method income within our operating income. Second, we see Q2 as the likely low point this year in revenue growth and margin. At this point, we view Q1 revenue overperformance as a pull-forward from the second quarter as opposed to a notable market reacceleration, which we still expect in the second half of the year. Though there are many encouraging signs like the framework discussions that Tom described, procurement is still recovering from the protracted government shutdown. Still, we're pleased with the solid book-to-bill ratio of 0.8 in the quarter and 1.1x for the trailing 12 months. and we expect awards to pick up significantly over the course of the year. On the bottom line, we won't have the benefit of the insurance reimbursement benefit in Q2. More important, near-term growth investments will rise given our ability to lock in franchise positions on a number of compelling opportunities, including the Military OneSource Award and My Service Treatment Record Pilot in the Health segment and the multiple potential product lines within the Defense business. We're excited about the long-term upside these opportunities can create. And third, we remain extremely bullish on the long-term outlook for the business. As we shape our portfolio towards the growth pillars, we're enhancing the financials of the business, reducing unnecessary complexity while maintaining virtuous diversity. In the case of the Security Products joint venture, we are preserving significant upside for our shareholders. We've talked about optionality in the past. Now you can see how that looks in action. With that, operator, we're ready to take questions. Operator: [Operator Instructions] Our first question is going to come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe -- a lot to digest there. Maybe if you could just talk about profitability and the impact within Defense contracting 150 bps, how much of it was from the fixed price program? How do you expect that to trend? And maybe if you could give us an update on key programs and Dynetics within Defense? Chris Cage: Sheila, thanks, it's Chris. Yes. So the Defense profitability, that was kind of reflecting the development stage program on our Space Wide Field of View Tranche 1, which we're all in on getting that program delivered this year and on track to do so. But we're really encouraged about the new programs that we've been awarded and are ramping up. When you think of things like our IFPC program, which were continuing to win the next slot for our [ PoNS ] program, our [ AVAD ] program. Those all have superior economic profiles with them. And as those programs ramp up in larger quantities this year, you'll see that Defense level profitability continue to trend positively over the course of the year. So the business is on track. We're really excited about the growth prospects there and the team is laser focused on the pricing and bidding strategies to make sure we can deliver solid profitability with that. Operator: Our next question will come from the line of David Strauss with Wells Fargo. Joshua Korn: This is Josh Korn on for David. I wanted to ask if -- I think last quarter, you discussed the tripling of CapEx this year to $350 million. You talked about some growth investments in the remarks with only $31 million of CapEx in Q1, is that still the plan? And kind of what does that look like as the year goes on? Thomas Bell: Thanks, Josh. Yes. And we did earmark a sizable increase in our CapEx for this year, anticipating the need to invest. But that need hasn't risen in the first quarter to a level that we might have anticipated. Part of our anticipation of a second quarter that is higher spend rate is lower profitability because of that. And so we do anticipate spending more in CapEx this year, whether or not we spend the whole $350 million or not is to be determined based on how these programs layer in. I think what you should take away from this is we continue to be good stewards of our cash. We don't spend money just because we budgeted it. We earmark it and wait for the trigger to release it. Operator: Our next question will come from the line of Tobey Sommer with Truist Securities. Tobey Sommer: I was hoping you could elaborate on the outlook for the Health business, both the existing portfolio in exams as well as areas of expansion that you're targeting and how those could change the composition of margin within that business? Thomas Bell: Yes. Thanks, Tobey. Yes, so as I said in my prepared remarks, we're very encouraged by the fact that our volume remained high in that business in the first quarter of this year. So while we provisioned for the year outlook that Chris and I gave you last quarter for the effects of the fourth vendor, the fact is our volumes are staying high and remaining robust as we enter this year. The second thing that's happening is the VA, the Veterans Benefits Exam, is challenging the system to continue to burn off backlog. So we're hopeful that those volumes will remain elevated through the rest of this year. We're also encouraged by the fact that the customer is having an industry day later this month to talk about how we perpetuate how we serve veterans in this country. And so we're very optimistic that through the investment of technology, through the leaning in of innovative business models, we're going to be able to continue to serve more veterans, faster, cheaper than our competitors and make sure that we remain robustly profitable in this business. At the same time, that's a good base. What we're focused on is this managed Health business being a growth pillar for Leidos. So what you saw in the 2 awards that we talked about this quarter, the Military OneSource directed award and My Service Treatment Record Pilot program are indications of how we're leaning into the digital ecosystems of both the Department of War and the Veterans Administration to continue to serve them boldly. We see behavioral health as a major engine within that growth pillar, where we think we can differentially serve veterans and their families in this in this time. And rural health has always been an area that has been underserved and again, an area where we think we can lean in to help serve our nation's veterans where they live as opposed to asking them to come to where we are. And so we're very -- we remain bullish on our Health growth pillar, and we remain bullish that it can remain a mainstay of Leidos' top line and bottom line growth story. Operator: Our next question will come from the line of Scott Mikus with Melius Research. Scott Mikus: Tom, you touched on the portfolio moves you made in the portfolio recently. When I look at the latest portfolio in aggregate, it does everything from integrated air and missile defense, airport infrastructure modernization, hypersonic missiles, maritime autonomy. So a lot of broad offerings. Our investors are going to be challenged to actually analyze. You're moving the SES business to a JV. But internally, do you think the business would benefit from a more streamlined portfolio? And could we see that over the next, say, 12 to 24 months? Thomas Bell: What we did -- thanks for the question, Scott. What we did at the beginning of this year was streamline how we are organized for delivery of these effects. You'll recall that the new Defense business is a larger Defense business focused on the complete suite of how we serve the Department of War as opposed to having it fragmented within Leidos. That management focus and that attention, while the portfolio and the offerings are broad, is bringing the desired effect for execution. We've recently announced a COO in our Defense business to help drive execution and drive scaling of the products in the portfolio. And so we're very excited and encouraged by the activity we have going on in that Defense portfolio. You're right that this area of our portfolio is one of intense activity right now, but those are activities that are going to pay great dividends for our shareholders in the years to come. And as we ramp up these framework agreements, these accelerated purchase agreements and these traditional purchase agreements to field products at scale. So will help you continue to understand the portfolio and we'll help with what the capabilities are that we're focused on as you will remain cognizant of. While we had Defense Tech has a broad area of interest, we were focused on maritime and space. We remain focused there, but the fact is the customer continues to come to us with more opportunities as they look for reliable companies to help them scale production of the effects they need for the battles they see in the future. So we're very bullish on our Defense Tech business and excited as a part of the Leidos portfolio. Operator: Our next question will come from the line of John Godyn with Citi. John Godyn: I wanted to revisit the shape of the year and the comments about kind of revenue and margins around the shape of the year. It sounds like there may be a bit of a dip at least in revenue in 2Q. And I wanted to just make sure we frame that correctly and give you a chance to be a little more precise. Sometimes those things can just be a bit of an overhang on the stock if they're not kind of clarified in a moment. So maybe you could just kind of discuss the shape on revenue and margins. And hopefully, we can get there. Chris Cage: John, thanks. This is Chris. And I agree. I mean we're very pleased with the start to the year we had. And as I trailed in my remarks, maybe a little bit of that is pull forward from Q2. As we see the robustness of our pipeline and award activity and the proposal pits that are very active, we're still expecting a significant amount of that to translate into momentum in Q3 and Q4. So as we've gone through all of our planning activity really see the step function on growth building in the third quarter and fourth quarter. And with that, you'll see the high margin rates that we've come to demonstrate time and time again. Q2 itself, just as we look at which programs are in early phases of transition, which programs are winding off a little bit, that is probably more similar to Q1, maybe a small step down on run rate and profitability building to the back half of the year and then carrying that momentum into 2027. So that's how I'd frame it out. We've got a lot of cash capacity and capital to put to work, and we'll continue to be active on the deployment side over the course of the year. So we're really excited about how things are setting up for us. Thomas Bell: And while it's a little lumpy this year, it's not dimming our outlook on the year as a whole. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: I was wondering if it's possible to attempt to speak to the multiyear or maybe just even next year directionally beyond this year in the Health segment. I guess just as we all look at the VBA exam data and you have a few moving pieces here. You've talked about this year revenue kind of being flattish, margins being down a little bit. I guess what I'd like to wondering a little bit, are we looking at a 1-year minor reset or is this a multiyear period where revenue could be down more than just a little bit? How much did the margins reset, if you could give us your latest thinking there? Thomas Bell: Sure, Noah. Thanks. As we're in May already, and the customer is having his industry day later this month, we'll know more when we go to these industry days, and we hear what their plans are for this contract in the future. That said, it's becoming difficult to imagine a seismic shift in how we serve veterans in this nation. And so I'm remaining very bullish that we'll maintain our ability to serve the most veterans, the most effectively with the best results. And so we're leaning in. As we've said in past calls to talk about how we use technology to shorten the cycle time of veterans getting the benefits they deserve. We expect that with leaning into that technology, we'll be able to continue to be a leader in this marketplace. And we anticipate that marketplace will remain largely unchanged in how the Veterans Benefits Administration serves veterans. At the same time, what we're doing, as I alluded to, is leaning into the digital ecosystem of the Department of War and the Veterans Benefits agency to make sure that we're a part of the ecosystem beyond just providing Veterans Benefits exams. And we're also very focused on expanding how we serve veterans in the rural areas of our country. And so we are bullish on the long-term growth trajectory. I wish I had more definitive things to tell you about exactly how that's going to pan out. But that being said, with time being what it is, I anticipate it's going to continue to be more of what it is today than some radical departure from the status quo. Chris Cage: Noah, I'd just add, I mean, beyond VBA, which is a very well run part of the business. I mean the team has evidenced by the Military OneSource takeaway and looking ahead to $6 billion and expected submits over Q2 and Q3 have a lot of other avenues to scale this business up. My service treatment record were very small in a pilot phase. I mean that could turn into a very nice technology-oriented high revenue and profit stream for us over time as we prove out this capability. So yes, our expectations are health is platform, modest reset this year with the growth trajectory in the future, as Tom has talked about, and the team's got a lot of momentum behind building that up on many dimensions. Noah Poponak: And Chris, I guess, just on the margin, you sort of described their interesting and thoughtful ways that you could keep growing, but if the mix of the business that's driving the growth changes, does the margin change a lot over a 2-, 3-year window? Or can you kind of hang around where you're at right now? Chris Cage: Yes. No, I see that staying above that 20% margin threshold and we're well above that today, and that's absolutely in the zone beyond what we're going to win next, we're relentlessly focused on operational improvements, technology improvements to enable our processes. This unified health platform is a capability the team is deploying internally later this year, as an example, that will take more cost out of our delivery equation. So yes, no, the great thing about this part of the portfolio with how customers contract predominantly fixed price, fixed unit rate really incentivizes operational efficiencies and that's where we excel. So very confident we can keep the high margin profile of this business into the future. Operator: Our next question will come from the line of Jonathan Siegmann with Stifel. Unknown Analyst: This is actually Sebastian Rivera on the line for Jon today. Maybe one on maritime. You guys have an impressive USV and EUV portfolio, and I appreciate the commentary on Seahawk in the prepared remarks. I was wondering if you have seen an increase in demand related to the conflict in Iran, specifically around your Sea Dart that I believe can be used for demining and then if you could just kind of maybe frame how you see that opportunity ramping up, that would be super helpful. Thomas Bell: Sure. Yes. Our surface and subsurface autonomous programs are seeing increased pull by the Department of Navy. I can't comment on specific theaters or specific programs when it comes to that, except to say the Navy is very moving very quickly now with their MUSV industry program, and we are one of a few companies that we believe incredibly deliver against that need. As I've said in the Pentagon building boats fast is really not that difficult. Building boats that are autonomous fast is only slightly more difficult, but building autonomous boats fast that have real mission effects and real mission payloads, that's the secret sauce. And that's where Leidos excels because with our Gibbs & Cox, with our philosophy about deploying commercial boat yards, not trying to build boats ourselves, but really leaning into the autonomy package, the design of the vessels, the command and control of the fleet and the mission effects, especially with our exquisite C5ISR packages and counter C5ISRP packages. That's where we are really getting the attention of the U.S. Navy when it comes to scale effects quickly for what they see in front of them. And so I'm very bullish about the maritime portfolio we have under Cindy's leadership, and I'm going to be very excited to talk about big wins in future conference calls. Operator: Our next question comes from the line of Peter Arment with Baird. Peter Arment: Tom, thanks for your comments on the CapEx earlier. Just thought I'd drill in a little more. How are you thinking about this elevated level of CapEx? Is this something that you expect to continue at this higher rate just given the investment opportunities that you kind of laid out in terms of your long-term strategy? Or is this kind of do we reset down to kind of the lower level once we get through this period of investment spending? Thomas Bell: Yes. Thanks, Peter. No, I don't anticipate continuing at this level in perpetuity. I think this is a fixed finite period of time where investment in these production programs is critical whether that's just this year or with a little overhang into early next year remains to be seen. But it's not something that we are gearing up to do in perpetuity. In that regard, I'll mention the SEC -- excuse me, the SES joint venture. One of the reasons we purposefully formed that joint venture was because that business wasn't one of our growth pillars, we didn't want to start leaning into the capital intensity that, that business would require from Leidos if we were going to invest in it to fully grow. So forming this JV allows us to leverage the money necessary to grow the business and participate in the upside as a minority share of that joint venture, but not lean into it with Leidos cash from the beginning. And so again, what you -- what I'm trying to point to you, Peter, is a picture of being diligent and focused about where we spend capital, when we spend capital and how we spend capital, but not get ourselves into perpetual streams of capital spend. I hope that helps. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: So it seems like the market relative to what's going on in products, it seems like the market taking a more skeptical view of growth potential in services. And we see where some of the budget is concentrated and in some ways, that's not super surprising. But if we were to see the type of overall budget growth, even if not at the level that the administration has requested, but say, even half of that or something like that would be a robust -- a fairly robust level of overall budget growth. How do you think about the consequences of that for your intelligence and digital business and the potential to grow in that type of environment? Thomas Bell: Seth, I'm really glad you asked the question. While the $1.5 trillion budget request for the Department of War gets a lot of heat and light in the press, the bigger story is the more interesting story for us. Our IC budgets in the intelligence community for America have grown 4% to 5% annually since 2022. And we see that continuing in the future. And if you dive deeper into the classified budgets, you see a lot of money going into the digital infrastructure part of the whole ecosystem of our defense and intelligence communities. And so that's why in my prepared remarks, I spent so much time talking about the fact that AI isn't a disruptor to us it's a propellant to our progress in this business. And that's why our digital infrastructure business isn't a wait -- waiting to be obsoleted by AI, but rather, it is our entry point and our foundation from which our customers are going to embrace AI and upgrade their capability. We're very focused on leveraging those 2 things, our digital infrastructure business and our cybersecurity chops with our AI philosophy of exploiting these tools to move up the value chain in our customer spend and continue to help them have scaled effects at speed in an AI-enabled world. And so we don't see the negativity of being obsoleted in this market, we see it as an opportunity to tremendously grow our scale in the intelligence community and the Department of War. I mentioned the operations that we all watched over the recent months and the effect -- the nonkinetic effects that were brought to bear there -- and that's exactly why we are leaning into this part of our value to our nation. Operator: Our next question comes from the line of Gautam Khanna with Cowen. Gautam Khanna: Yes. I was wondering besides the VBA contract, if you could update us on what are the big upcoming recompetes. I know DHMSM is out there and some others over the next, call it, 12 to 24 months? Thomas Bell: Yes. The -- you mentioned, Gautam, the DHMSM recompete, we expect some near-term continuity through an extension mechanism with a longer-term contracts still evolving in our customers' mind. We are not exactly sure how they proceed with that program, and we're in deep dialogue with them on that. In the meantime, we expect near-term continuity through an extension mechanism. Also in that portfolio, we have our Antarctic program and expect continuity of operations while they -- the customer there continues to decide how they're going to prosecute the Antarctic in the future. And so there are other recompetes happening, but again, very buoyed by the 2 recent wins, the Military OneSource directed award of being almost $0.5 billion directed award is tremendous for us. And the opportunity for us to grow that with other aspects of what we're already doing, I mentioned -- and this My STR Pilot, where I think the opportunity to turn this pilot program into something that veterans are going to love moving from a highly laborious paper-driven process to a digital my service treatment record transfer is going to be a tremendous benefit for veterans and the veterans administration to remove a major pain point. So lots of goodness happening in the Health business. Chris Cage: Gautam, I mean I think Tom nailed it, looking at the list of key recompetes, there's nothing that rises to our top programs worth noting that you didn't already talk to, in fact, almost 70% of our next 12-month pipeline is focused on new business and takeaway activity. So it's very much skewed towards great opportunities to propel growth. But nonetheless, anything that's in the recompete category where we've had great success, above 90% win rates we're laser-focused on. But I wouldn't say there's anything I would highlight that's warranting note that the major program level at this point in time. Thomas Bell: Michelle, looks like we have time for just one more question. Operator: And our last question will come from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: Maybe Tom or Chris, I wanted to just follow up on Entrust, if you can give an update on integration there. And I think, Tom, in particular, you called out a $10 billion opportunity pipeline or order pipeline, how do we think about timing on that? And what's been the customer reception since you've now owned the business? Thomas Bell: Yes. Thank you for that. And yes, we're very excited about Entrust, as I mentioned in my prepared remarks, we closed almost 2 months to the day from when we announced it. So a very clean, quick close, reflecting well on our team and the due diligence and the Leidos team. The integration, as I said, is seamless. The cultural alignment is fantastic. The deployment of AI tools into Entrust are a big bonus that those engineers are enjoying, and we are enjoying having learned some technology tools that Entrust had that we're going to benefit from our electric services business on our side. So it is truly a synergistic relationship. As you know, it expands our footprint and it also expands the value services we can provide Customers have been very receptive to it. There's -- even in customers where there is overlap, they see benefit in the scale we're now bringing to their projects and increased capacity that we're bringing to their problems. And in terms of the $10 billion pipeline, One of the benefits of this business is it is not as long a cycle business as the rest of Leidos. It tends to work a little bit more quickly. So as we book orders there, they are liquidated within a year or 2, and we book more orders. So I think you can see -- you can look for rapid growth of our new scaled energy business in the coming quarters and the coming years. Operator: Thank you. And I would now like to hand the conference back over to Stuart Davis for closing remarks. Stuart Davis: I want to thank you, Michelle, for your assistance on this morning's call, and thank you all who joined the call for your interest in Leidos. I look forward to getting together over the next quarter and enjoy this Cinco de Mayo. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Thank you for standing by. My name is Jill, and I will be your conference operator today. At this time, I would like to welcome everyone to the DigitalOcean's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to [ Raju Patrike ], Head of Investor Relations. You may begin. Unknown Executive: Great. Thank you, Jill, and good morning, everyone. Thank you all for joining us today to review DigitalOcean's First Quarter 2026 results. Joining me on the call today are Paddy Srinivasan, our Chief Executive Officer; and Matt Steinfort, our Chief Financial Officer. For those of you following along, an accompanying slide presentation is available on the webcast. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflects management's best judgment based on currently available information. Our actual results may differ materially from those projected in these forward-looking statements, including our financial outlook. I direct your attention to the risk factors contained in our earnings -- in our filings with the SEC as well as those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as our as well as in our earnings presentation that outlines the discussion on today's call. The webcast of today's call is available on the IR section of our website. And with that, I'll turn it over to Paddy. Padmanabhan Srinivasan: Thank you, Raju. Good morning, everyone, and thank you for joining us today. We had an outstanding Q1 2026, and I'll start with four headlines. First, our momentum is accelerating. Q1 revenue was $258 million up 22% year-over-year, with million dollar plus customers growing 179% year-over-year to $183 million in ARR. AI customer ARR grew 221% to $170 million, and we beat every financial target we shared in our last call. Number two, we launched the DigitalOcean AI native cloud last week, the most significant product launch in our history. With more than 15 new product launches across five fully integrated layers built into a modern, open unified stack, purpose built for the [ inferencing ] and Agentic Era. Third, we are investing to meet our growing customer demand and to seize the material opportunity in front of us. We raised $888 million in equity during Q1 to strengthen our balance sheet and quickly utilize that flexibility to secure 60 megawatts of incremental capacity that is slated to ramp throughout 2027, bringing our total committed capacity to 135 megawatts. And finally, we are again raising our near- and medium-term guidance on the strength of customer demand and the incrementally committed capacity. For 2026, we are increasing our full year revenue growth projection from 21% and to approximately 26% year-over-year and expect to exit Q4 approaching 30%. And this revised 2026 growth is entirely driven by our previously committed capacity, without any top line benefit in 2026 from the new 60 megawatts. With the projected ramp of the incremental 60 megawatts in 2027, we are now projecting revenue growth of 50% or more in 2027, meaningfully higher than the 30% growth we communicated just last quarter. I'll now spend a few minutes drilling down on each of these four headlines. The momentum we are generating is clear evidence of both our differentiated position and our strong execution across the board. It starts with the accelerating top line growth. Q1 revenue was $258 million, up 22% year-over-year and up over 400 basis points over Q4 2025 already strong 18% exit growth rate. We are delivering this growth by continuing to delight our top cloud and AI native customers. Our AI customer ARR reached $170 million, growing 221% year-over-year. Our $1 million customer ARR rates $183 million, growing 179% year-over-year. These are not just customers experimenting on our platform. These are cloud and AI native companies scaling their businesses on DigitalOcean. Our rate of acceleration is also increasing. We delivered a record $62 million in incremental organic ARR, the highest in the company's history. Customers see our differentiated value and are leaning into our platform. [ RPO ] reached $243 million, up an extraordinary 1,700% year-over-year. And we are doing all of this with strong profitability. We delivered 41% adjusted EBITDA margin and 18% trailing 12-month adjusted free cash flow margins. Drilling into our growth. Our largest customers continue to be our fastest growing and their growth continues to accelerate. ARR from our $100,000 customers grew 73%, while our $500,000 customer ARR grew 132%. ARR from our $1 million-plus customers reached $183 million, growing at 179% year-over-year versus 123% last quarter. Our AI customers are the other key driver of accelerating growth. AI customer ARR reached $170 million, growing 221% year-over-year. And most critically, inference and core cloud pull-through increased to more than 80% of total AI customer ARR, up from 70% in Q4. That number tells you something important. We are not a GPU rental business. We are a full stack cloud platform that AI native companies depend on to build, run and scale their production AI software. Last week, at our Deploy conference in San Francisco, we launched the DigitalOcean AI native cloud. And let me explain why this is a very significant step. Four forces are fundamentally reshaping AI right now. [ Inferencing ] has overtaken training as the dominant AI computing workload. Open source AI is now in production at over half of AI native companies. Reasoning models are driving the majority of token consumption. And Agentic systems are rapidly moving from experimentation to production. Together, these forces represents AI evolution from "thinking" in which AI plays an advisory role to both thinking and doing in which AI delivers outcomes by executing autonomous tasks. The thinking part is powered by AI bottles in inferencing mode and the doing part is delivered by a variety of modern cloud computing modules, all working together to take intelligent, autonomous real-world action. DigitalOcean's AI native cloud is purpose built for AI natives building exactly these types of workloads. It starts at the bottom with foundational layers. We operate a global scale infrastructure with 20 data centers purpose built for AI workloads running a full stack core computing platform with a complete set of computing primitive that Agentic workloads demand. Kubernetes, CPU and GPU droplet, advanced networking stack, including virtual private cloud, object block and file storage and high-performance NFS. This is part of the doing layer, the foundation that vast majority of GPU-centric cloud simply don't have. Last week, we launched a new inference engine, which we co-invented with our customers to address their most critical inferencing needs, and it delivers a lot more than just serving tokens. It provides serverless and dedicated end points for serving up AI models batch processing for asynchronous token generation, an intelligent policy of our inference router that automatically selects the best model for cost and performance a catalog of over 70 open source and close source frontier models with day 0 access, multimodal capabilities and guardrails. For customers who want to run their own models, we support BYOM, or Bring Your Own Model. This is the "thinking" layer, and it is far more than just serving tokens. It is about serving tokens efficiently with best-in-class performance, tightly integrated with other parts of the cloud. Augmenting this new inference engine is our data and learning layer for which we announced an enterprise version of our managed MySQL and [ PaaS CRIs ] databases for advanced workloads. We also announced new vector database support for building Agentic workloads. We also launched a brand-new managed agents platform to give AI native everything they need to build, execute and operate autonomous agents at scale with open harnesses, sandbox, state management, agent observability, toolbox for external integration and [ Plano ] based orchestration on an open platform without getting boxed into a single LLM or platform provider. This is the DigitalOcean AI native cloud, five fully integrated layers from silicon to agents with 0 lock-in because we offer open source options at every single layer. This is absolutely essential as our target customers are AI native companies who are creating and monetizing software. AI infrastructure is a material cost of revenue line item for these AI natives, especially when they scale, maintaining flexibility across models and platforms and leveraging the most efficient model capabilities for every specific task is an existential requirement for them. AI natives are increasingly adopting open source at every level, including multiple open source models to open agent [ harnesses ], open source vector databases and so on, to a wide lock in and deliver compelling unit economics for their customers as they go into hyper growth mode themselves. Building a truly open, fully integrated platform is hard, and that difficulty is precisely what makes our platform durable. The market is validating what we have long believed that infrastructure without intelligence, without orchestration and a full cloud platform is insufficient for what AI native workloads actually demand. Agentic applications require intelligence CPU-based execution, stateful memory, manage high-performance storage and databases and orchestration, all working together natively not assembled after the fact. Our integrated stack is built for exactly this architecture, and that's what enables us to deliver differentiated performance with compelling unit economics that matter to our AI native customers. Leading independent benchmarking company, artificial analysis recently reported that DigitalOcean delivers the #1 output speed for leading open source model like DeepSeek version 3.2, Qwen version 3.5, the $397 billion parameter model across all cloud providers. Our 230 output tokens per second on DeepSeek V3.2 is 3.9x faster than one of the leading hyperscalers. This wasn't just a hardware story. It required co-designing every layer of the stack from NVIDIA's Blackwell ultra GPUs to custom VLLM optimizations, including speculative decoding and kernel fusion, which is exactly the kind of deep engineering that differentiates the modern AI native platform from GPU farms and inference wrapper providers. The clearest validation of our strategy is the caliber of customers choosing to build and scale on us. We recently onboarded Cursor one of the fastest-growing AI applications ever built, for production inference, model fine-tuning and core cloud services. Ideogram, a leading text-to-image foundation model company migrated production inference from a hyperscaler to our AI infrastructure running their own model [ weight ] at scale. And Higgsfield AI, serving over 20 million creators with cinematic video generation run its full multi-model workflow on our integrated stack. Three different AI native companies in hyper-growth mode, running their production AI on our AI native cloud. And our pipeline continues to grow in both volume and strategic scale. Let me spend a couple of minutes on our competitive positioning with our new platform announcement. At a high level, unlike the hyperscalers, we are more open, purpose built for modern software without the legacy complexity of enterprise workloads designed for the previous era. Compared to the GPU Neoclouds, which are optimized for large training clusters, we are a full stack inferencing and Agentic platform. And finally, while the inference wrapper providers offer tokens, we offer the breadth AI-native builders need to build complete modern software without forcing them to stitch a platform together themselves. What makes our position genuinely durable is three compounding layers. Number one, our AI middleware. The [ Plano ] data plane and inference router built on technology from our recent Cataneo acquisition completed last quarter, sits between the agents and the underlying infrastructure, intelligently steering workloads across models, regions and accelerator types based on cost, latency and availability trade-offs at real time. Second, our managed agents platform extends computing primitives up the stack with secure run times, execution sandboxes, background workers, observability, orchestration and much more. All purpose-built for Agentic applications to be built and scaled on this platform. And the third is data gravity through managed databases, vector stores, cashing and object storage, production data lives inside our DigitalOcean AI native platform. Models and GPUs are not sticky, data is. For AI native, the decision of where to build is rarely about a single feature. It is about platform breadth quality of abstractions, openness of the platform and the absence of friction. Delivering that requires deliberate integrated engineering across every layer from silicon to agents. It needs an AI native cloud, which is what digital ocean has been building towards with millions of R&D hours over the last dozen-plus years. The market opportunity is generational and we are poised to earn more than our fair share. Global inference traffic will grow 10x by 2030, and Agentic workloads consumed 15x more tokens than human users, a multiplier that compounds as AI matures. And we're already seeing it in our numbers. Our AI customer ARR is growing 221%, and over 80% of that is coming from infant services and core cloud, not Bare Metal, these are companies running full stack production AI on digitation and they're accelerating. We are investing to meet this growing customer demand and to seize the opportunity in the massive inferencing and Agentic markets. In Q1, we raised $888 million in equity proceeds that enable us to expand our data center and GPU capacity to meet our growing customer demand while strengthening our balance sheet. Matt will provide more details on the equity raise and our capital strategy later in our comments. But let me give you a brief highlight on our expansion plans. Starting with our existing committed capacity. We remain on track to deliver our previously communicated 31 megawatts as planned in 2026. With our Richmond facility beginning to ramp revenue in March. On top of this, we have now secured approximately 60 megawatts of incremental data center capacity across four locations. Capacity that will ramp revenue throughout 2027. This brings our total committed data center capacity to approximately 135 megawatts. And given growing customer demand, we continue to actively pursue additional capacity beyond this new 60 megawatts capacity that will be targeted to come online in 2027 and 2028. The opportunity in front of us is enormous genuinely once in a generation. Every data point we see from our growing customer pipeline to the demand signals we are seeing and hearing from our largest customers to the reactions and interest in our AI native cloud reinforces that conviction. As we scale our business to meet this opportunity, we will continue to make the right long-term business decisions to seize this moment while building a durable and profitable growth engine. With momentum continuing to grow, we are further raising our near- and medium-term outlook for the full year 2026. We now expect revenue growth of approximately 25% to 27% year-over-year with an exit growth rate approaching 30%, a full year ahead of the guidance we provided just last quarter. This accelerated 2026 growth is based solely on the performance of our previously committed capacity and doesn't include any projected revenue uplift from the newly committed 60 megawatts. We expect to deliver this 2026 growth with high 30s adjusted EBITDA margins and 9% to 12% adjusted free cash flow margins, which does include some start-up costs for the new 60 megawatts. Looking further out, we now expect 2027 revenue growth of 50% or more, up from our 30% guidance last quarter with approximately 40% adjusted EBITDA margins and high teens adjusted free cash flow margins. This combination of rapid revenue growth and true durable profitability puts us in a ratified company. DigitalOcean is one of just a handful of names across a broad set of software and AI infrastructure players, delivering both attractive GAAP operating margins and material revenue growth. As I shared on our last call, growth and discipline are not trade-offs for us. They're both operating principles. And our execution of these principles is clear in our results. With that, I will turn it over to Matt to walk through our Q1 results and our updated guidance in more detail. Matt, over to you. Matt Steinfort: Thanks, Paddy. Good morning, everyone, and thanks for joining us. As Paddy just shared, we had a very good quarter. In my comments, I will review the financial results in detail, walk through our recent balance sheet and capital allocation actions and then provide an update to our near-term and medium-term outlooks. Starting with Q1, our results were very strong, and we exceeded the guidance we last provided on all key metrics. Q1 revenue was $258 million, up 22% year-over-year. above the top end of our recent guide. The vast majority of this Q1 revenue beat came from strong retention in our top [ DNE ] cohorts and from expansion in our top cloud and AI native customers. The Richmond data center, which began ramping revenue in March, contributed less than $500,000 of revenue and less than 20 basis points of year-over-year growth in Q1. Our top customers continue to drive our growth. Our $1 million customer ARR reached $183 million, growing 179% year-over-year. AI customer ARR reached $170 million, growing 221% year-over-year. And we continue to deliver both durable and profitable growth. First quarter adjusted EBITDA was $105 million, up 21% year-over-year with an adjusted EBITDA margin of 41%. GAAP operating income was $37 million, with an operating income margin of 14%. Adjusted operating income was $64 million, with an adjusted operating income margin of 25%. Trailing 12-month adjusted free cash flow was $171 million or 18% of revenue. Trailing 12-month adjusted free cash flow less lease principal payments was $154 million or 16% of revenue after including $17 million in financed equipment principal payments over the last 12 months. Next, I'll spend a few minutes on the recent equity raise and what it means for our financial profile and for our capacity plans. In Q1, we raised $888 million in equity, and we have already put the proceeds to work across two important priorities. The first priority was strengthening the balance sheet. We repaid our full $500 million Term Loan A, saving roughly $50 million per year in cash interest and mandatory prepayments. We intend to use a portion of the remaining cash to retire the outstanding $312 million 2026 convertible notes when they mature. Collectively, these actions result in a flexible balance sheet with no material maturities until 2030. The second priority was expanding capacity to meet demand. As Paddy shared, we have secured approximately 60 megawatts across four new locations, an 80% increase in our committed capacity. This capacity is projected to begin ramping revenue over the course of 2027. While there won't be any 2026 revenue impact, the build-out of some of this capacity is likely to start in late 2026, which will impact 2026 cash flow and margins. We expect the CapEx per megawatt in this new capacity to be higher than for the equipment ordered last year, for the 31 megawatts. The increase is driven both by the rising component cuts the entire market is seeing and higher cost and higher token capacity equipment that we plan to install. We expect the incremental ARR per megawatt to be higher as well. And importantly, we expect to generate the same or higher return on investment in these new data centers. We are likely to continue to align the timing of our investments with revenue by financing a material portion of the equipment for these facilities. With all of this, we expect to exit 2026 at approximately 3x net leverage with no material debt maturities until 2030. Looking forward, we are again raising our near-term and medium-term outlook. The strong Q1 retention and growth in our top cloud and AI native cohorts has continued in Q2. For the second quarter of 2026, we expect revenue of $272 million to $274 million, representing 24% to 25% year-over-year growth. We expect second quarter adjusted EBITDA margins in the range of 37% to 38%. And which is $102 million at the midpoint, up 14% year-over-year. We expect non-GAAP diluted net income per share of $0.20 to $0.23. And based on approximately 121 million to 122 million weighted average fully diluted shares outstanding. Note that our shares outstanding projection includes a benefit from the projected anti-dilutive impact of the cap call that we purchased along with the issuance of our 2030 notes. For the full year 2026, we are again meaningfully raising our outlook. We now expect full year 2026 revenue of $1.13 billion to $1.145 billion, representing 25% to 27% year-over-year growth, with a negative growth rate approaching 30% in Q4. Again, this does not include any projected revenue from the newly committed 60 megawatts. We expect strong full year adjusted EBITDA margins of 37% to 39%, which is $432 million at the midpoint. Projected adjusted free cash flow margin will be in the range of 9% to 12%. And which includes roughly $100 million cash flow impact in 2026, a projected nonrecurring start-up costs for some of our newly committed capacity. Without these costs, adjusted free cash flow margin would be roughly 18% to 21% for the year, above prior guidance. We expect adjusted free cash flow margin less equipment finance principal payments to be slightly positive for 2026, including the impact of the $100 million in cost for 2027 capacity. We expect full year non-GAAP diluted net income per share of $1.10 to $1.20 on $118 million to 119 million weighted average fully diluted shares outstanding. This is an increase to our prior guidance despite the equity raise as the interest savings from retiring our Term Loan A more than offset the impact of the higher share count. We are also increasing our medium- to long-term outlook, the 30% 2027 revenue growth outlook we provided last call was based solely on the 75 megawatts of capacity that we had active or under contract at that time. With approximately 60 megawatts of additional committed capacity, projected to begin generating revenue over the course of 2027, we now expect 2027 revenue to exceed $1.7 billion, full year growth of 50% or more year-over-year. We will deliver this growth while working to make smart investments generate attractive returns and maintain a strong and flexible balance sheet. Our margin outlook for 2027 is healthy. We project approximately 40% adjusted EBITDA margins and high teens adjusted free cash flow margins. While we are excited by our progress and the increased growth outlook, we're not stopping there. We continue to actively look for opportunities to further accelerate durable and profitable growth. With that, I'd like to turn it back over to Paddy. Padmanabhan Srinivasan: Thank you, Matt. Before we move to Q&A, let me recap what we shared today. First, our momentum has never been stronger. Our $1 million customer ARR reached $183 million, growing 179% year-over-year. Our AI customer ARR reached $170 million, growing 221%, and over 80% of that is coming from infant services and core cloud, not Bare Metal. We are an AI-native inference cloud, not a GPU landlord. Second, we launched the DigitalOcean AI native cloud. We unveiled our full platform last week at Deploy conference. We acquired Cataneo to accelerate our open source AI stack. We landed multiple marquee AI-native customers, including Cursor. Our differentiation is clear. The pipeline is deep and the wins are real. We are the AI native cloud. Third, we are investing to meet our customer demand. $888 million raised 60 megawatts of incremental capacity committed. We are building for 2027 and beyond with disciplined capital allocation and a strengthened balance sheet. Finally, we again raised our near- and medium-term outlook. Projected exit 2026 revenue growth approaching 30%, accelerating to 50% or more revenue growth in 2027, attractive margins and a flexible balance sheet. We continue to build a durable and profitable growth engine. The inference and Agentic economy is real. The demand is real. And DigitalOcean with its AI native cloud is purpose-built for this opportunity. With that, let's open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Kingsley Crane of Canaccord Genuity. William Kingsley Crane: Needless to say, congrats on the momentum you've earned it, you continue to earn it. It's great to see One of the ideas over the past couple of weeks is that the mix of CPU and GPU should be closer to 1:1 with the Agentic workloads compared to pure LLM calls. And you talk about that new arrow thinking and doing in your deck, which was really well prepared. Just curious how relevant is that CPU renaissance for your business given your large core cloud and CPU footprint? Just trying to think about the quantitative benefit that could create. Padmanabhan Srinivasan: Yes. Thank you, Kingsley. Appreciate your question. Yes, I think it is unmistakable that we are moving more and more towards an agent ear where more software is going to be rearchitected and there will be a heavy dose of autonomous agents performing tasks that were previously handled by humans. So in that era, the doing part, as I mentioned, will also require intelligence, but it is going to require a tremendous amount of computing that until about 12 months ago or more precisely until open [ plot ] really showed us the blueprint. We were in really as an industry contemplating how compute intensive it is going to be. When I say compute intensive, it is just not CPUs, right? It is high bandwidth memory. It is advanced databases like the ones that we just announced last week, it is safe agent execution, it is orchestration between these agents. There is a tremendous amount of modern computing primitives that are required to orchestrate all of this. So I don't know whether the ratios that have propped up with say, CPUs to GPUs will go from 1:12, as we were previously thinking to 1:1, I don't know exactly what that ratio will end up being. But what I can tell you is that we are going to need a hell a lot of more compute to do all of these things as more software gets rearchitected over the next handful of years to be more Agentic, which requires both inferencing for the thinking part and a lot of computing for the doing part. So we are preparing for that, the new capacity that we have just took on. All of our new data centers are deploying our full stack AI native cloud. So it is just not inferencing services. It is the full stack AI native cloud that is getting deployed in these data centers. And we are getting ready for a compute-heavy future, and we are starting to see that in a very pronounced way from some of our advanced AI native customers as they themselves move into an Agentic Era. William Kingsley Crane: It's really helpful. And then for either Paddy or Matt, we've been thinking about low to mid-teens revenue per megawatt for AI. You mentioned that the incremental capacity you're bringing on could be higher. And then just in addition to that, like to what extent can software capabilities like inference engine and [ French ] router, open source model adoption, agent framework, push that revenue per megawatt higher. I think we're all doing that megawatt math, but just curious to what extent that figure can become untethered from the peers there? . Padmanabhan Srinivasan: That's a great question. We definitely expect that we can increase that $13 million per ARR per megawatt over time. I mean you're already seeing that non Bare Metal over 80% of our AI customer ARR, and that should increase the ARR by itself. We're also expecting, as you just pointed out, there's going to be a lot of core cloud and a lot of compute that gets pulled through with that. Right now, it's still -- it's a modest amount of core cloud pull-through, and we think there's upside there. And then to your point, all of the capabilities that we announced to deploy, the serverless inferencing and a lot of these other capabilities, they detach the pricing and the value creation from a dollars per GPU hour and enable us to capture both higher revenue and higher margins with stickier services. So we're very optimistic about our ability to drive the ARR per revenue up over time. And certainly, that's part of our investment thesis as we've taken on this incremental capacity. Operator: Your next question comes from the line of Gabriela Borges of Goldman Sachs. Gabriela Borges: Paddy, you start up this conversation talking about how the beat in the quarter was not driven by new capacity coming online, but rather previously committed capacity. So I defer your thoughts on that. Talk to us a little bit about how we should think about the beat on rate [ cans ]. You're already giving us visibility into 2027 based on capacity coming online. But in any given quarter, what levers do you have to be in raise? And maybe if you could comment on the pricing dynamics and believe as you can pull on pricing within that. Padmanabhan Srinivasan: That's a great question. I think when we guided to 2026, and we outlined the pace at which capacity was going to come online this year, there's a number of assumptions that we had to make in that, that gave us the ability to have very strong confidence in the guidance that we were providing. One was the timing of the facilities coming online. The second was the -- our ability to sell into that capacity as it came on and the third, the pricing at which we're selling into that capacity. And if you think about all of those dimensions, again, when we provided that guidance, which was late last year, early or early this year, we had to make sure that we had enough cushion. And what we're finding is we're doing pretty well on all three of those dimensions. The Richmond data center came online. We had said second quarter, it came online in March. It didn't contribute much the first quarter, but it's online and ready to go ahead of what we had said. We're able to sell into it. Much, I'd say, on a very appropriate and aggressive time line, which is really good. And then as you're seeing in the market, the pricing for GPO hour, even services right now is not seeing any kind of price compression. In fact, we're seeing increases in the prices for [ H100s ] and [ H200s ] and some of the legacy gear. So I'd say we have sufficient ability to continue to beat and raise we just outlined the incremental 60 megawatts for next year. And we're taking a very similar approach, which is we'll be cautious about our expectations around timing of delivery, we'll be cautious about expectations of how long it takes to sell into it, and we'll be cautious about the pricing that we get and then we'll work to exceed that. Gabriela Borges: Matt, maybe I'll pick it up just some of those comments on being cautious. So I think we can all agree that we're pretty early in what is going to be an incredible product cycle. At some point, the product cycle will peak. So I guess the question is for the both of you. What are the demand signals that you're watching to be able to figure out whether it's 2027 growing north of 50%. Is that the peak growth rate? Does it accelerate from there, does it normalize and come down? What are some of the metrics that we could potentially be tracking from the outset? And what do you track internally? Padmanabhan Srinivasan: Yes, I can start at a high level, and then I'll let Matt comment on your specific 2027 question. So we all agree, Gabriela that this is such a tectonic shift in how software is built and delivered. And one thing that I also want to highlight here is that inferencing and Agentic workloads will scale very differently compared to training. Training is a onetime, almost episodic turn on, the entire cluster comes online and just stays static from a workload perspective. While inferencing and Agentic workloads have more of a cloud kind of characteristics in terms of how the workload ramps, although the gradient of the ramp has been significantly steeper than we have ever seen with traditional cloud software. So a lot of our confidence is coming from observing our big marquee AI native customers and seeing their workload growth and hence, the inferencing demand that they translate on to us and our platform. So in terms of the product cycle peaking, I think that is -- we are still a few revisions of our products, certainly and also as an industry to get to that peak cycle. [ Openly ], I have to remind everyone is barely 100 days old. And since then, there have been a few other personal productivity agents like Hermes agent and a few others that have come and the whole industry is now figuring out what agent harnesses should look like. It is still a very, very early days of the Agentic architecture. So I expect the product cycle refresh to continue for quite a bit into the next several quarters before we can say, okay, we now have a blueprint for how these modern autonomous systems are going to be built and operated in scale. So I think we still have a lot of innovation ahead of us. And what gives us a lot of confidence is having this front-row seat working with these marquee AI-native customers gives us a tremendous opportunity to learn about their application patterns. And this luxury is available to us because we are not just a Bare Metal provider. These customers want us to be in the room where they are solving these problems, and that's how we were able to build a lot of these things that we saw last week in terms of innovation, like the intelligent routing, the -- many of the cashing techniques that made us the #1 in DeepSeek and Qwen token throughput and time to first token and things like that, it gives us a front-row seat and a co-invention opportunity to do this alongside our customers. So I definitely feel like the product cycle is not going to peak anytime soon. Matt Steinfort: And I think the best metric to watch, which we're watching is ARR per megawatt. I mean if you think of token efficiency being one of the primary differentiators in terms of your ability to provide value to your customers is how much revenue can you get for those tokens and how efficiently can you provide them? And how sticky are those services that you're providing, that should all translate into higher ARR per megawatt, which is why we've introduced that metric, we track it internally, and it's all about optimization for us, and that's where we're focused that's what we would point the market to watch as well. Operator: Your next question comes from the line of Mark Zhang of Citi. Mark Zhang: So very nice to see the growingness of the non Bare Metal ARR this quarter. Just want to dig into some of the dynamics there in the input. So I wanted to get a sense of contributions from just new land versus existing conversions of the existing Bare Metal customers? And then how should we sort of like think of the pace of the mix shift going forward? And can you give us a sense of the ASP upfront, when you convert from Bare Metal? Padmanabhan Srinivasan: Thank you, Mark. Your line was a little choppy, but I think I got the essence of your question. So in terms of the mix of the customers, it's a healthy mix of AI native customers that are new to our platform, that are not just consuming core AI services, but also by the nature of their inferencing workloads, they use storage systems and database systems and also increasingly core computing primitive, but we also have some of our existing digital native enterprise customers also starting to ramp up their AI innovation and AI workloads. So it goes both ways, and we are super happy to see that. And in terms of the Bare Metal consumption, pretty much most of the customers that come to us now are coming to us because they see this rich set of inferencing entry points. So last week, we announced serverless inferencing, dedicated inferencing, batch inferencing and things like that. Increasingly, customers are realizing, especially the AI natives that they were forced to deal with all this complexity over the last couple of years, not because they wanted to, but they have to because there were very few vendors who were able to provide this kind of kernel optimization and performance enhancement using software and hardware codesign. But now that these kinds of capabilities are available out of the box from our AI native cloud. We are seeing a lot more appetite from our customers to come in at a higher altitude in our platform and we are not having to sell Bare Metal at all. In fact, we don't even have that as part of our standard pitch. Matt Steinfort: And from a timing standpoint, this is one of the benefits of our consumption-based model with but where we're not locking in bare metal prices for 4 and 5 years. As these Bare Metal customers, if you notice in the materials we provided the Bare Metal not only decreased as a percentage, but it actually decreased in absolute dollars of the AI customer ARR. That's because as these customers come up for contract renewal, we have the opportunity to resize and reconfigure that capacity. If we want to make that available to serverless inferencing, where we know we'll earn a higher return than Bare Metal, that's what we do. And so we have the ability to steer that percentage down by not consuming our scarce capacity for Bare Metal services. So not only are new customers not asking for it, but the customers that are on it right now, we can rotate them off into the new services or we can repurpose the capacity for higher-margin services, and we control that. Mark Zhang: No, that's terrific. And then just maybe a follow on. It's terrific to see the new five layers also referencing a new platform that you guys had provided last week at the pot. How should we sort of think of the maybe like changes to the gold market from here? Obviously, there's a lot to sell. There's much more products to for customers to consume. How do you -- how are you thinking about just in terms of the go-to-market partnerships and how you really like officially land new customers won this new module? Padmanabhan Srinivasan: So our go-to-market over the last several quarters has been aimed at getting marquee AI-native logos. And that's how we have landed some of the customers that I was so proud to announce today. And we just have to scale up in doing what we are already doing. So just as a reminder, we have a very small but mighty team of AI native focused sellers that are quite capable of selling our AI native cloud stack. On top of it, we also have a very focused start-up ecosystem team that nurtures high-quality AI native companies in Silicon Valley and nurture them through their growth phases. We also have a tremendous luxury of having perhaps the best product-led growth machine, which keeps growing in strength. So we get a tremendous amount of traffic and volume through our product-led growth flywheel, which includes a heavy dose of AI native customers that absolutely just love the simplicity and the absence of friction in our platform that enables them to just come and try our platform and do it without any human intervention. So we have multiple front doors as a way to solicit customer entry into our platform. So we'll be fortifying some of those things, and we have a very strong partnership team that enables us to build relationships with various frontier model and open source model companies in the rest of the ecosystem. Operator: Your next question comes from the line of Jason Ader of William Blair. Jason Ader: Paddy, you guys are exploiting a gap in the market right now, especially with the Neoclouds, but the Neoclouds are all messaging shifting to a full stack approach and a focus on inferencing. So I guess my question is, how sustainable is your differentiation relative to the Neoclouds and what drives that? Padmanabhan Srinivasan: Yes. Great. Thank you, Jason. I think the market opportunity is just huge and tremendous, right? We feel that the Neoclouds adding software capabilities is a great validation of our strategy and we've been saying that for a long time. But we are in fundamentally different businesses than the Neocloud. They're training first, and that's a great model. And they have a small number of highly concentrated customers with take-or-pay agreements and their needs, that type of contract needs a tremendous amount of infrastructure and discipline and execution to pull that off. So it is a significant heavy lift to deliver on these massive hyperscaler offtake contracts. So I like our chances of continuing to innovate on the software stack, as I said, it takes a lot of hard work to build a well-integrated stack like the one that we announced last week. It is just not a stack that lives on a PowerPoint slide. You can log into cloud.digitalocean.com and see how these layers work together. We are also incredibly proud of the fact that we have made the stack completely open with open source options at every single layer. That is a pretty big deal that I want everyone to appreciate because our target customers are AI-native customers. and they feel very uncomfortable boxing themselves into a single LLM provider. That is just not how their businesses will scale. And for them, having open source work as well as close source as part of the native stack is very, very important. So driving this kind of integrated open source enabled stack is really hard. And I like our focus. I like our discipline in terms of doing this. And the market opportunity is going to be so big that I feel very, very convinced that if we focus on learning and understanding our customers better than anyone else and translate that to product innovation, everything else is going to take care of itself. I keep telling my teams be extraordinarily customer-obsessed and competitive aware, not the other way around. We should obsess over our customers first so that we can build the best product for them while being aware of competition, and not the other way around. So I feel we have a lot of room to run with this strategy. Jason Ader: Okay. Great. And then one for Matt. Matt, for 2027, you talked about adjusted free cash flow margin in the mid- to high teens, I believe. Could you give us a sense of what it would be, including lease payments? Matt Steinfort: That's a great question, Jason. It's hard to answer, though, because it will depend entirely on the lease terms that we have. So whether we lease over 4 years or 5 years or a longer period, and it will also depend on the mix of what we lease versus what we pay for upfront. That's why we're not guiding to that at this point. What I can tell you is that we continue to make very disciplined investments, we've created a lot of balance sheet flexibility for ourselves with the equity raise. We've got a lot of options at our disposal. And we're very excited by the return on investment that we're underwriting for these new facilities. So we'll continue to operate with discipline, but we can't provide specificity on the -- what the lease payments are going to look like in 2027 because we don't know yet. Operator: Your next question comes from the line of Wamsi Mohan of Bank of America. Wamsi Mohan: Paddy, for -- when you look across your customer cohorts, how much penetration are you seeing of AI-driven workloads, as you look at sort of $1 million plus in the $500,000 plus customer cohort? And are you actually seeing because of AI, do you expect over the next 2 years to have an even higher chunk of customers graduating from this $500,000 to $1 million-plus cohort as you look through the next few years? And I have a follow-up for Matt. Padmanabhan Srinivasan: Yes. sees, you're absolutely right. I think the short answer is yes to both. We have a good mix of AI as well as cloud native customers in the $500,000 and $1 million customers. And yes, it is a very important motion that we drive internally to look at every 100,000 customer and drive our teams to find out what is blocking our customers from being a $500,000 customer. And similarly, we look at every 500,000 customer and find out how we can make them $1 million customer and so forth. So with the increased adoption of AI in these customer cohorts, we fully expect those numbers to keep going up to the right for sure. Operator: Your next question comes from the line of Tom Blakey of Cantor. Thomas Blakey: Congratulations on the great results here. Maybe a couple of questions on my side. Paddy, we've talked prior about 3 to 4x demand in terms of your 75-megawatt capacity was really impressive to see you announce Cursor here, a great win. Congratulations. Just wondering if you could just maybe update us on the framework of what you're seeing there in terms of your customer selectivity and maybe even turning some customers away in this type of market? And then secondly, for Matt and maybe the team just CapEx per megawatt, I think investors would love a little bit more color in terms of how much higher this can go for the 60 megawatts. And would it be difficult to just upgrade the prior capacity from a software upgrade perspective to the AI native cloud capacity to maybe kind of pull some of that in, that would be helpful. Padmanabhan Srinivasan: Yes. I think on the last thing, we -- it is hard to have a non-AI data center deployed with AI hardware because of the limitations, especially all of the new ones that we're deploying are all direct liquid cooled and the hardware specs are just different, Thomas. So that's that. And going back to your first question around the pipeline coverage and how we allocate capacity. I mean, that is some -- a new muscle that everyone in the industry is learning, right? Our pipeline, as I mentioned several times, is 3 to 4x, if not more, in terms of the actual capacity that we have. Which is a great problem to have, but it is a problem that we are very and very thoughtful about resolving because we have to make some bets just like our customers are making bets on us. We have to make bets on how we want to allocate the capacity. Because, as I said in the last call, if we decide to just sell the capacity to the first or the biggest or the loudest customer we'll be all done. We can go home and the capacity will all be taken. But we have an intention to run this like a cloud, right, where we want as many customers as possible so that we can learn, we can build a better product and build a bigger competitive moat that customers that only have -- or platforms that only have a few concentrated customers simply don't have the luxury to learn and innovate as fast as we are. So it's a balancing act that we are trying to figure out, but so far, so good with the types of customers we're bringing on board. Matt Steinfort: In terms of the cost of the CapEx, it's certainly going to be higher than what we experienced for the 31 megawatts equipment was ordered in 2025. And you're seeing broadly across the industry, component costs are going up. But more importantly for us, we're putting in gear that has higher token kind of capacity and capabilities. And we expect to get the same or higher ROI on the investments that we're making. So we'll invest a bit more. We see a phenomenal opportunity in front of us. We got a very differentiated position. We're going to get more capacity out of the investments we make, and we're going to earn similar or better returns on the investments. Operator: Your next question comes from the line of Josh Baer of Morgan Stanley. Josh Baer: Congrats on a wonderful quarter. I was hoping you could double-click a little bit on GPU and other pricing trends that you're seeing in the spot market. And wondering if you can quantify the portion of your business that's on demand and exposed to spot versus what portion is contracted and has fixed pricing? And any way that you can characterize the benefit in the quarter or the impact of the 2026 guide from spot market pricing? Padmanabhan Srinivasan: It's interesting, Josh, that you point to the spot pricing. So we have a portion of -- a small portion right now of on-demand because most of our capacity is locked up with a customer. But if you think about the core of your question, which is how much exposure do we have to the ability to raise GPU prices along with the market. Because we don't have 4- or 5-year contracts with our customers, if we're locked into a customer, it may only be for 3 months or 6 months or a year. And as I said earlier on the call, as those contracts are coming up, we can rotate. One, we can just raise the price on that customer to whatever the current market prevailing prices. Two, we can rotate it completely out of if it's a GPU per hour price, we can say we're not going to sell that capacity in that model any longer. And if you're interested in that you've got to take our on-demand pricing or you're going to take serverless inferencing. So we have the ability to adjust to the market, I'd say, probably more readily than maybe some of the other folks in the industry. So we feel very, very good about our ability to adapt to pricing. And as I said, to Gabriela's question, that ability and our ability to execute that is part of the reason why we're able to raise the guidance for this year without getting any benefit from the incremental capacity that we just announced. So that's a great question. Operator: Your next question comes from the line of Radi Sultan of UBS. Radi Sultan: If you think about adding more capacity and as the existing AI customer cohort scale, like how should we be thinking about the gross margin profile, this incremental capacity you're looking to add once it's fully utilized. And you mentioned, Matt, the increased component costs. But yes what are the key puts and takes there we should be keeping in mind just on the margin side of things. Padmanabhan Srinivasan: I think you'll note in our materials that we highlighted, non-GAAP operating margin. And the reason that we did that is because, again, if you think of where the industry is going and how different this business is than the business that we had several years ago, gross margin is one input, but operating margin is a better, more holistic view of what's going on in terms of the overall profitability because the revenue growth is so rapid and it's certainly at a lower gross margin, but it comes with tremendous operating expense leverage. And so the operating margins are very strong and very compelling, and we expect those to continue to be very attractive. Will we see a small decrease in operating margin as we invest to accelerate our growth, given some of the same timing-related issues with bringing on new capacity, we certainly will. But if you look at the rate of revenue growth, if you look at the strong operating margins, if you look at the fact that we've been very, very disciplined with cash flow, and that we're earning very good returns. I think you'd agree that we're positioned very, very well for very durable and profitable growth. Operator: Your next question comes from the line of Patrick Walravens of Citizens. Patrick Walravens: It's amazing results you guys, congratulations. So Paddy, when I was at your Deploy conference, the speaker got interrupted by applause like five or six times. But two of the times were when you talked about the inference router and then also when you guys talked about support for the latest DeepSeek model. So can you just talk a little bit about why your customers are so enthusiastic about that? Padmanabhan Srinivasan: Yes. Thank you, Patrick. And first of all, thank you for coming to deploy last week. So you bring up a really, really important point. And for those of you who have not seen the keynote video recording from last week, I encourage you to please do that. The two points that Patrick just mentioned are really important because AI Natives are doing something which is incredibly interesting. Number one is they are all running multiple models, right? Because as I mentioned, this is a cost of revenue line item for them, and it will be crippling if they are just beholden to one closed source model. Last week, there were two different models that were announced. One is DeepSeek version 4 and the other one was the latest version from OpenAI. And the difference in price was 10x. In terms of the output tokens, it was literally $3 versus $30. So AI natives are doing three things: One, they are all becoming multiple models. Number two is they're running a lot of open source. And number three is, many of these AI natives are also running their own version of a model, which is distilled from an open source model or something like that. So there's intelligent router becomes extraordinarily important so that the router can find the right model for the task you're assigning. So we showed a demo, which was super compelling where it showed better performance at lower [ TCO ] per token by routing the incoming prompt to the right model. And the second thing is Patrick mentioned that there was a lot of supplies for our DeepSeek support, which is fairly obvious because AI natives are embracing open source up and down the stack in a very pronounced manner. So that's why it is really important to understand, our target market is very different. These are AI natives that are building and monetizing software and for them, multiple models, open source and having destiny over their intelligence is an existential thing. Patrick Walravens: Great. And Matt, if I could ask you a follow-up. Cursor is an amazing win, congratulations. We've all seen the news about SpaceX having an option to buy it. So just how did that fit into your guidance? How did you think about that? Matt Steinfort: Cursor is a fantastic customer. And as you said, it's a great indication of the quality of the platform. And we're really excited by it based on the fact that they're using -- this is not a Bare Metal contract. They're using our inference services. They've made commitments around the NFS and some of the core cloud capabilities, so we're very encouraged by that, and we have a fantastic relationship with them. We haven't predicated any of our long-term guidance on any single customer. We have, as Paddy said, to the demand for the capacity that we have available and we were very confident that there'll be a good part of that, but we're not basing any of our forecasts on specific customer. Operator: And your last question comes from the line of Raimo Lenschow of Barclays. Raimo Lenschow: Two quick questions. Going back to Gabriela's point in terms of like how big the market is. At the moment, it looks like most of the work is getting done on training models and inference is only starting. Like Paddy from your perspective, which innings are we on inference actually because it seems very, very early still to get an idea about like how long this can go on for. And then, Matt, for you, the one thing that comes up in the market is a lot of like capacity of new data centers, et cetera. You're not building 100,000 GPU to have data centers who are much smaller, but like what's the constraint of finding sites to kind of go beyond the capacity you announced today? Padmanabhan Srinivasan: Thank you, Raimo. So to answer your question succinctly, since baseball season is just starting. I would say from an inferencing point of view, we are probably in the top of the second inning. And Agentic, we are just in the national anthem. It's just getting started. So I think there's a lot of room for a lot of innovation. And I am the one thing that I'm super proud of with all the announcements we made last week is 15 new product launches, not just features, 15 new product launches and the velocity and the intensity from our engineering team is just -- it's going to make a difference in terms of our ability to establish a leadership position. And then Raimo, your -- what was the second question? Second part of the question? Raimo Lenschow: [indiscernible] how did is it like, yes? Matt Steinfort: Sorry. The -- we've been able to secure the data center capacity that we've been targeting. We're still in active conversations on additional capacity beyond the both for '27 and '28. And we've not had an issue getting capacity that we've been trying to track down. Operator: That concludes our Q&A session. And this also concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Orthofix First Quarter 2026 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Julie Dewey. Julie Dewey: Thank you, and good morning, everyone. Welcome to Orthofix' First Quarter 2026 Earnings Call. I'm Julie Dewey, Orthofix' Chief IR and Communications Officer. Joining me today are President and Chief Executive Officer, Massimo Calafiore; and Chief Financial Officer, Julie Andrews. Earlier today, Orthofix released its financial results for the first quarter ended March 31, 2026. A copy of the press release and supplemental presentation are available on our Investor Relations website, and a replay of this call will be posted shortly after we conclude. Before we begin, please note that our remarks include forward-looking statements. These statements involve risks and uncertainties, and actual results may differ materially. All statements other than those of historical facts are forward-looking statements. We do not undertake any obligation to revise or update such forward-looking statements. Factors that could cause actual results to differ materially are discussed in our most recent filings with the SEC and may be included in our future filings with the SEC. We will also reference various non-GAAP financial measures during today's call. Reconciliations to U.S. GAAP and additional details are in our press release and supplemental materials. Unless otherwise stated, net sales growth rates are on a pro forma constant currency basis and exclude the discounted M6 artificial disc product lines and all results of operations will be on a non-GAAP as adjusted basis. Here's today's agenda. Massimo will start with business performance and operational highlights. Julie Andrews will follow with her financial results and guidance, then we'll open up the call for Q&A. With that, I'll turn the call over to Massimo, who will discuss how our early year execution and recent operational actions are beginning to support improved performance as we move through the year. Massimo? Massimo Calafiore: Thank you, Julie. And good morning, everyone. I appreciate you joining us today. We delivered a good start to 2026. First quarter results reflect steady execution, improving stability and sharper strategic focus. As the quarter progressed, we began seeing the expected progress from our spine commercial channel actions, along with stronger operating discipline, supporting our confidence that performance will continue to build through the year. While these results reflect meaningful progress, they also crystallize where we could further raise the bar. That's why in April, we took deliberate steps to simplify our spine leadership structure, a proactive move as we continue to scale, enabling technologies like 7D and advance the launch of VIRATA later this year. By bringing decision-making closer to the field and increasing accountability through direct oversight, we're improving speed, consistency and commercial focus where it matters the most. Stepping back, Q1 reflects where we are as a company today, moving into the next phase of our journey, executing with greater consistency and strengthening our position to benefit from our innovation pipeline as the year unfolds. What we delivered this quarter supports our confidence in continued improvement. Our priorities are straightforward: execute consistently, convert opportunity into results, and demonstrate progress quarter-by-quarter. Let me turn to business performance highlights, starting with Spine. In Spine, Global Spine Fixation net sales grew 6% on a constant currency basis, with U.S. net sales growth of 4%. Results were supported by enhanced commercial focus, deeper procedural penetration and the ongoing benefits of our distributor transitions. Importantly, those transitions are now largely behind us. As alignment has improved, we are seeing positive momentum from more consistent field execution. In Q1, our top 30 distributor partners delivered net sales growth of 27% year-over-year and 24% on trailing 12-month basis, reflecting the success of our strategy to prioritize larger, more dedicated distributors and deeper relationship with our top partners. A key driver of that momentum is 7D, which remains a core differentiator in our surgical ecosystem, enhancing precision, workflow and surgeon engagement. Following our leadership realignment, we are intensifying our commercial focus on adoption of our 7D FLASH navigation system to deliver a more integrated spine offering. While Spine is benefiting from better alignment, we are applying the same discipline to Biologics. Performance improved sequentially during the quarter as we implemented targeted actions to strengthen execution, expand account penetration and increase utilization across the portfolio. We are refining our go-forward strategy, building clinical evidence and supporting advocacy. Collectively, these actions are designed to drive improvement through the year and position Biologics to exit 2026 with stronger momentum and a more durable growth profile. Beyond Spine and Biologics, our other growth platforms remained resilient. Our Therapeutic Solutions business, formerly Bone Growth Therapies, delivered 5% year-over-year net sales growth and continue to outperform the broader market. Demand remained stable, utilization is improving and prescribing activity is increasing across both spine fusion and fracture care. With its consistent performance and healthy margins, this business continues to be an important contributor to margin and cash generation. Global Limb Reconstruction posted 3% constant currency growth, reflecting steady demand across our core fixation and reconstruction systems. Over the past year, we sharpened our focus by prioritizing high-value categories, enhancing our mix with platform like TrueLok Elevate and Fitbone and deemphasizing lower return product. We believe this action positions limb reconstruction for acceleration as we move through 2026. A common thread across the business is the increasing impact of our innovation pipeline. We will have a full year contribution from TrueLok Elevate and Fitbone, and we remain on track for the full market launch of VIRATA in the second half of the year. Together with the continued inspection of our 7D FLASH ecosystem, this platform are designed to deliver differentiated clinical value and support durable multiyear growth. In closing, Q1 was a solid start of the year. We are carrying that momentum forward with disciplined execution and targeted investment. The quality and the commitment of our U.S. spine distributors is greater than ever and meaningfully contributing to our success. Our innovation pipeline is strong. Our operating model is more focused, and we believe we have the right team and the financial foundation in place. There is more work to do, and we are increasingly confident in our ability to execute, doing fewer things better, sharpening accountability, generating cash and delivering on what we said we would do. With that, I'll turn the call over to Julie Andrews to review our financial results and guidance. Julie Andrews: Thank you, Massimo, and good morning. All growth rates I'll reference today are pro forma constant currency, excluding the impact from discontinued M6 product lines. We delivered a disciplined start to 2026 reflecting an execution that is consistent with our plan. For the first quarter, total global net sales of $196.4 million increased 3% year-over-year. Results reflect steady execution following the Spine Commercial channel actions, and we expect further improvement as productivity continues to increase. Spine Fixation was in line with market growth, while Therapeutic Solutions delivered above-market growth largely offsetting the remaining impact of commercial channel transitions and softness in Biologics. While timing of certain international stocking orders benefited Q1 in results by approximately $2 million, the majority of performance reflected underlying execution across our core franchises. As a reminder, Q1 had 1 less selling day than last year, which reduced first quarter growth rates by roughly 1.6%. In addition, the CMS TEAM pilot program that began in January and includes bone growth stimulation had a onetime impact of less than 0.5% on our fourth quarter growth rate, slightly less than the 1% impact we had originally anticipated. Taking these factors into account, our Q1 growth rate was within the range implied by our full year guidance of 5% to 6%. From a segment perspective, global spinal implants, biologics and enabling technologies delivered $105.8 million in net sales for Q1. Our performance was supported by continued growth from our top 30 distributors in the U.S., partially offset by the timing of stocking orders from our Middle East distributors due to the impact of the war. Therapeutic Solutions, BGT, net sales were $57.8 million, up 5% as we continued to outperform the market. Fracture sales grew 6% in the quarter. We expect growth to remain above market rates of 2% to 3%, driven by disciplined execution, new surgeon additions and competitive conversions, especially in the fracture channel. Global Limb Reconstruction net sales were $32.8 million in the first quarter, up 3%. U.S. performance was flat, largely due to the timing of OSCAR Capital sales. We have recently restructured our capital sales team, which we believe positions us for future growth. Early indicators are encouraging with a strengthening capital pipeline. Additionally, we are seeing continued acceleration in the worldwide adoption of TrueLok Elevate and Fitbone. As we sharpen our focus on our core limb reconstruction pillars and benefit from ongoing portfolio and commercial enhancements, we expect to return to double-digit growth in the U.S. in the second half of 2026. Moving down the P&L. Pro forma non-GAAP adjusted gross margin was 70.7%, a 40 basis point improvement over prior year, reflecting the impact of freight and logistics productivity improvements, partially offset by unfavorable geography mix. First quarter pro forma non-GAAP adjusted EBITDA was $9.7 million, in line with our expectations, reflecting impacts from geography mix and commercial transitions. We ended the quarter with $120.9 million in total cash, including restricted cash, providing ample liquidity to support our operating needs and strategic priorities. The cash increase was a result of financing activities during the quarter, including our draw on the second tranche of our debt facility. As we move through the year, our focus remains on disciplined execution, strengthening our commercial foundation and supporting upcoming product launches that we expect to contribute to growth and margin improvement over time. Now let me turn to our full year 2026 guidance. Against the backdrop of our fourth quarter performance and current visibility, we are reaffirming our full year 2026 guidance. As Massimo noted, we expect performance to improve as we move through the year, driven by a steadier commercial cadence and increasing contributions from recent and planned product launches balanced against macro and operational considerations. Net sales are expected to range between $850 million and $860 million, representing approximately 5.5% pro forma constant currency growth at the midpoint. Net sales growth is anticipated to be approximately 5% in the first half of the year and about 6% in the second half of the year. These projections are based on current foreign currency exchange rates and do not account for any further changes to exchange rates for the remainder of the year. Non-GAAP adjusted EBITDA is expected to be between $95 million and $98 million, reflecting approximately 70 basis points of margin expansion at the midpoint. Free cash flow is expected to be positive for the full year, excluding potential legal settlements. In closing, while progress is evident, we are still early in the year and remain focused on converting improved activity levels into consistent above-market profitable growth. We remain grounded in operational rigor, disciplined capital deployment and prioritizing high-value opportunities across our Spine, Therapeutic Solutions and Limb Reconstruction portfolios with the objective of creating sustainable long-term shareholder value. Now let me turn it back to Massimo for closing remarks. Massimo? Massimo Calafiore: Thank you, Julie. I am pleased with the progress we made in the first quarter and our anticipated trajectory for the remainder of the year. As we move through 2026, our focus is clear: deliver quarter-by-quarter progress, expand margins, generate cash and translate our innovation and execution into durable shareholder value. Before we open the line for questions, I want to thank our global teams and commercial partners for their performance in Q1 and their continued focus and execution as we continue to build Orthofix into their unrivaled partner in medtech, delivering exceptional experience and life-changing solution. With that, let's go ahead and open the call for your questions. Operator: [Operator Instructions] Your first question comes from the line of Tom Stephan with Stifel. Thomas Stephan: Nice start to the year. First question on U.S. Spine. Massimo, you talked about the distributor transitions now largely behind you. U.S. Spine up 4%, probably a bit stronger adjusting for selling days. So Massimo, maybe talk about how we should think about growth in this business as we move through 2026 and beyond as well would be helpful. And then I have a follow-up. Massimo Calafiore: As we described 2026, you're going to see an acceleration of the business towards the year. I think that you have a couple of drivers. All of this, you're going to see a phase out of the annualization of the distributor termination that we made in order to optimize our distributor infrastructure, so a natural acceleration there. But also, as you know, we have a very focused and strong innovation pipeline that is coming. We are on time for the full market launch of the VIRATA open system and on time on the alpha launch of the VIRATA MIS. So we're going to see a very good strong contribution of these two foundational systems for us in the second half of the year. So the combination between innovation, annualization of the distributor transition and key capital investment that we're making, I'm very confident they're going to drive a very strong 2026. And as you know, we made -- we shortened, let's say, the distance between myself and the business. I think that the optimization on the leadership side has let me be very close to the field, very be present and keep nurturing the talent that we have. So I'm very excited about where we are with Spine. And we made bold decisions to create a strong foundation and now it's on us to execute. Thomas Stephan: Got it. That's great. Super helpful, Massimo. And then my follow-up just on sort of guidance and cadence for rest of the year. Julie, this may be for you. By reaffirming 1H constant currency growth of 5%, you did 3% in 1Q. I guess, do we think about 2Q as around 7% constant currency? I just want to make sure I'm contextualizing the 5% correctly for 1H. A, is that correct? And then B, for 2H, any comments on selling day dynamics, maybe other fundamental considerations sort of from a headwind perspective in the back half that we should be mindful of for top line? Julie Andrews: Yes, so Tom, we are reaffirming our guidance. Our comments were we do expect growth in the first half of the year to be around the 5% and then accelerating to 6% in the second half of the year. And if you look at Q1, when you adjust it for the selling day, 1 less selling day, and the TEAM's impact, we were right at kind of that 5% growth rate in Q1. In Q2, we would expect our growth rate, I think, to be in the 6-ish percent, 6% range would get you there for Q2. Operator: Your next question comes from the line of Caitlin Roberts with Canaccord Genuity. Caitlin Cronin: Maybe just a little bit more color on the geopolitical impact in the Q1. And then just any expectations that might be built into the guidance there? Julie Andrews: Caitlin, so built into our guidance, we expect very minimal impact for the full year related to the activities in the Middle East. Q1, there was a little bit of what we see as timing just in our Spine business primarily with orders, but kind of more than made up for with other stocking orders. So very limited impact that we have from that and not necessarily in our guidance for the year. Caitlin Cronin: Understood. And then maybe just talk a little bit about putting the Biologics business under the Limb recon leadership and where you would expect Biologics growth to end 2026? Massimo Calafiore: For Biologics, I think that we are expecting to go back to market growth. It's clear that we have still work to do. But since the realignment, the performance has improved sequentially during the quarter. So the targeted actions that we are putting in place are working. We have strengthened the execution. We expand account penetration. And also, we increased the utilization of the portfolio, as you hinted before, not just in spine, but also in the orthopedic side. So I'm very confident about the quality of our Biologics portfolio. I think that the optimization that we are putting forward in terms of sales channel and leadership is working. But let me highlight a specific comment that you made. It's not a realignment under orthopedics. It's more a realignment under a leader that is Patrick Fisher, who has a lot of experience in the space. So of course, as I said before, you're going to see a natural expansion in the orthopedic side, but the idea of the realignment was mostly driven by the talent and the experience that we have in the company around this specific space. Operator: Your next question comes from the line of Mathew Blackman with TD Cowen. Mathew Blackman: Can you hear me okay? Massimo Calafiore: Yes. Mathew Blackman: Two little housekeeping questions for Julie, and then one question for Massimo. Julie, you didn't call it out, so I'm assuming it wasn't a headwind, but any impact from weather in the quarter? And also there was a big hospital strike on the West Coast. Just any other headwinds to call out besides the ones you did mention already? And then can you give us just a sense of the size of the Biologics business, even the roughest sense, whether it's as a percent of the total business or a percent of Spine, just for some context there, and then a follow-up for Massimo. Julie Andrews: Okay. Matt, no, we didn't see any sustained impact from the weather, and we didn't have an impact from the hospital strike on the West Coast. So those did not impact our business. From a Biologics perspective, we don't break that out separately. So I can't give you a context in terms of the size. I think I'd point you to a couple of places, you can look at pre-merger results, and then also a portion of our Biologics revenue, you can see in our Q with our MTF service fee for that portion. Mathew Blackman: I'll remember that. And then Massimo, as you sort of look at the top 30 distributors, obviously, tremendous performance there. Is there anything that you can take from that playbook and pour it over to the rest of the distributor book, such that you can sort of bring along that rest of the business? I mean, obviously not sort of approaching 30% growth. But anything that you could do to sort of bring up the tail of the business now that you're seeing, obviously, really solid execution on a large part of the business there. Just curious how you can execute across the entire distributor network now. Massimo Calafiore: The plan that we put in place was divided in different phases. Phase number one is the one that we just accomplished. Now phase number two is really started to pick among the networks that we have, the next tier of distributors that we want to help to grow. And as you hinted, we're going to apply the same discipline and rigor that we apply for our top 30 distributors to the second tier to make sure that over time, they can grow and create the operational excellence we are expecting by our partner. But 2026 is going to be mostly for us working on the next 30, more than -- keep fueling the growth with our top 30 and laser-focused on the second tier. Operator: [Operator Instructions] And your next question comes from the line of Mike Petusky with Barrington Research. Michael Petusky: I'm juggling on a couple of conference calls, I may have missed this. Did you guys give any detail around 7D placements, any percentages or just any detail around that this morning? Julie Andrews: Mike, we're doing that more on a biannual or annual basis updating this. So our last update on those were in our Q4 call. And as a reminder, for 2025, our Voyager earnout placements increased 30%. And our purchase commitments on those placements exceeded their purchase -- the accounts exceeded their purchase commitments by more than 50%. Michael Petusky: Okay. And then I guess I just want to ask around U.S. Ortho or Limb Reconstruction. It feels like the momentum has slowed there last couple of quarters. Can you guys speak to that and maybe speak to actions that you may be taking to try to reaccelerate growth there? Julie Andrews: Mike, the momentum hasn't slowed. We've had some transient issues or things that we're dealing with. So we did sunset about 30 product lines last year. We really saw that start to impact in Q4. And then we talked -- and continue some into Q1 as well. And then really the timing of OSCAR sales, which is a capital sale, in Q1 impacted the overall growth rate. But very good results and adoption that we're seeing on Elevate and Fitbone. So again, we expect that business to return in the U.S. to double-digit growth in the back half of 2026. Operator: There are no further questions at this time. I will now turn the call back over to Julie Dewey for closing remarks. Julie Dewey: Thank you for your questions and for joining us today. We appreciate your time and interest in Orthofix. If you need any additional information, please reach out. We look forward to updating you next quarter. This concludes today's call. Operator: Ladies and gentlemen, thank you all for joining. You may now disconnect.
Mark Flynn: Good morning, everyone, and once again thanks for joining us. We'll cover a couple of things today with Nova Eye. Obviously the March quarter results. We'll cover the record April sales release that we've put out to the ASX and our guidance today as well. And also, we'll give you an update on how the U.S. business is scaling up at this present time. Quick reminder, this session may include some forward-looking statements. So please refer to the ASX release and the investor presentation for full details. As always, if you like to ask a question, please use the Q&A function in Zoom and we will try and get to as many as we can. I have received a number of questions ahead of the meeting. So thank you to those that have sent those through. But with no further ado, I hand you straight over to Tom. Thomas Spurling: Thanks, Mark. Thank you very much, everybody, for tuning in today. I'm always very pleased with the number of people that take the time to listen to our story. I think we've got a good story again for the quarter to 31 December -- 31 March 2026. As our disclaimer, just a reminder, it's about pressure. Glaucoma is about pressure and us intervening in the disease to open up blockages and reduce that pressure. Next slide. The messages from today, we address, Nova Eye products address a genuine and growing clinical need. So we're not trying to make people do something they haven't done before. The disease is real. The customer base is real. There is competition, but that just means that we have -- and we have an offering that participates very well. Our revenues are now up near $23 million annually and growing at 25% plus year-on-year. And they reflect that real market demand. This quarter showed that we can grow revenue while also improving profitability. I've been saying that too for a while. We were just $75,000 short, just 1% of revenue away from breakeven in Q3. We were EBITDA positive if you include our strong December in the 4 months to March, and we're forecasting EBITDA positive in Q4. So that's EBITDA positive in the second half in total. We are delivering the outcomes we committed to, and that's what I'm pleased about. We have a company with 20-plus percent growth and profit at the bottom or EBITDA. Record sales were achieved in April. We saw the need to upgrade our sales guidance as a result of that. And on the -- just a USA surgeon, I received this e-mail randomly, just general feedback about how good iTrack is, performs better with its canaloplasty than other devices. As such, it is not critical to perform a concomitant goniotomy, which is a tearing of the trabecular meshwork. There's less likelihood of postoperative blood. And for premium IOL patients, it's good. You don't want to have someone that's just had a cataract surgery, spend a lot of money on a premium IOL and come out of that surgery with blood in their eye. I hear that from a lot of surgeons, and this is just another example. Next one. A reminder about the interventional glaucoma market. It means the active surgical engagement to change the disease trajectory and remove the patient's reliance on drops. I encourage you to have a look at Glaukos. Glaukos made an investor presentation today or released it to the market. I looked at it, they give a very good definition of interventional glaucoma and how important it is. And we are part of that market. Nova Eye is part of that market. That cataract link, 1 in 5 patients also have glaucoma gives us a reason for patients going into the OR, let's fix your cataract and get you off those drops. Our stent-free tissue preserving repeatable product is what puts us in the game. We are a required part of the business, interventional glaucoma market globally and in particular in the United States. Next slide. Just a quick summary of our -- a number of you have seen this. We have an FDA-cleared product, of course. We have a good reimbursement, which is stable. That reimbursement gives economic value to all the participants in the surgery, the surgeon, the facility hosting the surgery and us. Why do doctors choose iTrack Advance, well, we're talking about restoring the natural systems of the eye. It's implant-free and tissue sparing with a single pass with now the beautiful Green Light passing around the Canal of Schlemm, gives us the advantage over other devices that call themselves MIGS devices or are MIGS devices giving that doctors can choose from. And there are many -- I have all sorts of -- we've had all sorts of slides in the past about that. But at the heart of the matter is the tissue sparing natural method of action. Next slide. Here's our sales quarter-on-quarter compared with the PCP, USD 5.8 million. There were 2 new additional sales reps in the U.S. to service the growing demand we have there. This is, that's okay. I prefer to look at the next slide, which is our trailing 12 months revenue. It's a better picture of trends. And you can see 26% globally, 27% sales excluding China. We only do that. We started doing that because of the difficulties with tariffs. Remembering we're selling from the U.S. to China. And we were -- at the commencement of this financial year, there was a lot of uncertainty associated with that. So we just measure ourselves on sales excluding China at the moment. That doesn't mean China isn't being worked on. It just means that for guidance, we go to sales excluding China. And the sales guidance was lifted $21.7 million. We had guided to $21 million minimum a week or 2 ago. We have now passed that. So we've upgraded our guidance as a result of the very strong sales in April in all markets. Very pleasing. The drivers of that sales growth, our brand and product awareness by doctors was on display at the recent Australian -- American ASCRSA (sic) [ ASCRS ], American Society of Cataract and Refractive Surgeons in Washington, D.C. We have great trade booth presence and great booth attendance by doctors. We have sales team productivity, which I challenge is up with any ophthalmology company in the U.S. The release during the quarter of our proprietary Green Light technology to provide a clearer view for better navigation of the catheter through the Canal of Schlemm. I guess it's kind of goes without saying that a Green Light with -- is better seen in the case of any blood in the operation. And the release also of our Shear Clear technology, iTrack advanced with Shear Clear technology. This is also our technology transforms the cohesive viscoelastic into a low viscosity fluid during canaloplasty. You'll recall that viscoelastic is really a biocompatible hydraulic fluid that we flush, that we push through the canal. By virtue of our delivery system, it is thin and that thin viscoelastic circulates more freely into the ocular structures, the Schlemm's canal and the outflow pathway. And after a period of latency, regains viscosity and therefore holds open those structures. We're very pleased with the Shear Clear, the outcome of -- the addition of Shear Clear to our technology. There are some surgeon videos on YouTube that are highlighting the impact of this technology on their surgical outcomes. That is why sales are going up. We have a great product. We've got a good team, and we've got a lot of awareness of our brand and, well, to be honest, a little company. Next slide. China remains -- we made our first sales in February to China of iTrack Advance. And in that regard, I draw your attention or we draw your attention to the opportunity in China compared to the U.S. The same dynamic, 1 in 5 cataract patients present with concurrent glaucoma, and the opportunity to grow our business in China is very strong. It is a big opportunity. It will take time. But we think it is very exciting. Next slide. This slide, we've had a question about dips in sales reps. Well, I also get questions about dips -- sorry, revenue per rep. So what we've got is sales growth in the United States by quarter. What I like about this slide is that I have not made any change to the scale on the left-hand side to exacerbate the growth rate. It is a commendable growth rate of 6% a quarter. What we take away from that is despite our sales, we were maintaining a very strong revenue per rep. I'm often asked, how long does it take for reps to get to $1.6 million a quarter, $1.8 million and $1.9 million. I consider our whole pool of reps as an asset. And on average, we have managed over time to keep that quite high. Sales growth, keep it quite high. And therefore, that -- the sales rep expense is quite high. So that is a driver of productivity. Sales in the quarter, on that graph, look flat quarter-on-quarter. That could be, say Nova Eye has flat sales in the United States. January and February were materially affected by winter storms and surgery. And quite possibly, those surgeries were caught up in April, quite possibly. So we have had a great April, as we said, which augers well for Q4. So we will continue to push when we find the right people because there are territories in the United States which are underserved. We will continue to look for reps that we believe can be added to our team and maintain at $1.6 million, $1.7 million, $1.8 million per rep and therefore drive the bottom line productivity as well as sales growth. Our operating result here, I call out our investment in clinical data because it doesn't actually impact the current operating leverage as they call it. You can see I'm not resiling from the fact that we're EBITDA negative. I am pointing out that we're EBITDA positive for 4 months, but not for 3 months because we had a good December. That's a small loss in a -- as a percentage of total revenue, and it's heading in the right direction. The leverage -- the gross margin is pleasing as we improve our production -- constantly improving production processes, but also pricing of our product increasing, particularly in outside the U.S. markets where we're still only transitioning in some cases, from iTrack 250A to the more expensive, for us being a more expensive -- higher price, sorry, iTrack Advance. So I think this highlights the trends in quarterly EBITDA. I draw your attention to the green arrows which show Q4 relative to Q3 for the last couple of years. So we think our outlook for Q4, if that trend continues, is very strong. A couple of periods of very close to breakeven performance, and we're forecasting an improvement that to continue during the month of -- during the April, May and June. Cash flow, we continue to invest in working capital. There was a lot of marketing expenditure upfront that we had to make. Our cash receipts will flow through. And as we said, our existing cash and debt facilities provide sufficient runway for the continued execution of our mission, which is a mission to cash to EBITDA positive, cash flow positive will follow. Next one. Recapping our guidance. There's an update from $21 million to $22 million to $22 million to $23 million. People may say that's not much, but I'm excited by it because we're proud of the work we're doing. We're only a little company, and we are delivering what we want, what we said we'd deliver. So there's some FX things there. I tend not to worry about Australian dollars, but I have to give the -- just a reminder, we have no Australian dollar revenue. We do not sell in Australia. So it's U.S. dollars for us. Next one. And that's the same, our guidance that continued targeting breakeven with a small positive in H2 FY '26 and positive EBITDA from operations that removing the effect of clinical data and ongoing improvements in cash flows. We are generating cash in the U.S. I don't want to say the U.S. is a business on its own, but because it's a very global integrated business. But all our cash is coming in euros in the U.S., which the appreciating Australian dollar doesn't help when you turn it into Australian dollars. Okay. So thank you for that. Mark Flynn: Thanks, Tom. A couple of questions coming through. One live is that the Green Light, which we've announced and is currently in use in the U.S., will that supersede the red light or will both lights remain available for surgeon choice? Thomas Spurling: It will stay the same. And that's actually our choice because doctors, we are not making it -- if someone has a red light and they ask for it and they're a good customer, well, we are not trying to build to, the better production planning thing is just to deliver green is the answer. Mark Flynn: A question from Nick Lau at Taylor Collison in regards to those U.S.A. sales. You did cover it there and also the revenue per rep, which sort of dipped a little bit. What are the factors the sales rep are seeing that may have contributed to this? And I know you mentioned the weather. Thomas Spurling: Yes. So I know the weather sounds a lot like the dog ate my homework. But in the end, the Northeast of the U.S. in January and February, which seems like an eternity ago, but to me it's not because we're still seeing the effects on our P&L account where there was -- our reps were shut down, surgeries were shut down and surgeries were canceled. That impacts. It impacts doctors bimonthly and so it impacts. The revenue per rep, it's a vexed issue. I get equally the number of times people say, put on more reps, why don't you put on more reps? Well, when we put on more reps, there must be a dip naturally because you can't get all those sales in the first month the person is there. We try and split the territories, give the person a lot of leads. But we put on reps because we know in that 2, 3, 4 months' time, we'll get back up to the [ $1.678910 ], $1.6789 million per rep, which we know drives our bottom line result. And as I said, 20% growth, 20% plus top line growth and EBITDA. That seems to me like an achievable target for our business. Mark Flynn: The sales adoption by new or established surgeons, are you able to comment on the sales pattern? Thomas Spurling: Well, you can -- that requires a lot of analysis. We are a small business, but it also -- we'd like to think that our competitors don't need to tell -- we don't need to tell our competitors about new accounts. We just deliver our sales information. I know so many people have how many facilities, what's new, what are new accounts, what are old accounts, why are the old -- why are facilities dropping off? Why are new facilities not buying if they just bought a -- in month 1, they're not buying in month 2. There are so many combinations of analysis that we could do. And they are compromised by doctors moving around between facilities, by -- in particular that and the idea that some accounts have more than one facility and more than doctor doing it versus some accounts just having one doctor. So we believe that our EBITDA, operating revenue per rep. Increasing top line sales is our goal, and we have our internal guidance as to how we're doing at each account. Mark Flynn: You mentioned Glaukos and a bit of a comparison. So I know Glaukos leads in stents and drug delivery, but where do they sit with in competition against us? Thomas Spurling: Well, it's interesting, I refer you to some of the videos that have been posted by surgeons where there is a combination going on now where there seems to be doctors are deciding to team iTrack with Glaukos products, which is interesting. And we think that we don't have any clinical evidence around why that would do it, but that's up to doctors to do what doctors do. Glaukos' investor webinar today gives a very rosy outlook for interventional glaucoma. And I know it's to service their own needs, but it does describe very well the trends. And we think that we are -- if you like, we could be on the coattails of some of those trends. I mean the trends are real. I think that's what -- a review of the Glaukos investor presentation will show you, that we have -- that Nova Eye Medical is in a real market with a real growth thing. Mark Flynn: China, I know we do exclude China, but when do you believe or when do you think that sales there will become material? Thomas Spurling: I'm just starting. We've decided corporately to just be cool on that decision and let them flow through. So we're not giving any more guidance than what we have. Operator: Thank you. We've got one here. In regards -- we haven't mentioned the manufacturing facility or clean room in Adelaide. Just a short update on that. Thomas Spurling: Yes. So we have quietly and with conviction to lower our production costs, insourced some parts into, establish Nova Eye cleanroom facility and insource some parts to lower production costs ultimately. And it also provides a test bed for new manufacturing techniques and new product testing. The Shear Clear and the Green Light are as a result of that. So it's a good capability we have here in Adelaide. And compared with other parts of the world, Adelaide is a low-cost domain. So it's good. Mark Flynn: Always a reminder that there's new people joining our webinars and asking why don't we sell this product in Australia. Thomas Spurling: So simply put, we have presented data to the U.S. Medicare and it has accepted that data as meaningful in saying that, yes, canaloplasty does work, and therefore we will reimburse patients who need it or reimburse, yes, patients effectively. In Australia, the data, they have a different level -- different standard. They don't -- they believe more data is required. The size of the Australian market does not warrant our investment in getting that clinical data, just a standalone. We do have some clinical data in the pipe, which may help, but we see the investment in an additional rep in the U.S. helps us get to our 20% plus growth, EBITDA positive down the bottom, far better than just selling in Australia, unfortunately. Mark Flynn: Thanks, Tom. I think that covers all the questions. Any final questions come through now or as always, Tom and my details are on the screen. Please send through any questions. Happy to have a phone call as well. Look forward to staying in touch. But great news from Nova Eye today, and welcome any further questions. So thanks very much for joining. Thank you, everyone.
Operator: Ladies and gentlemen, welcome to the Schaeffler AG Q1 2026 Earnings Call. I am Sargen, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's a pleasure to hand over to Heiko Eber, Head of Investor Relations. Please go ahead, sir. Heiko Eber: Thank you very much. Ladies and gentlemen, I'm very happy to welcome you to today's call on Schaeffler financial results Q1 2026. The press release, the following presentation and our interim statement has been published today at 8:00 a.m. CET on our Investor Relations home page. And as always, we will provide the recording and the transcript of the webcast after the call. I'm sure that you have all taken notice of our, by now, well-known disclaimer. As always, Klaus Rosenfeld, our CEO; and Christophe Hannequin, our CFO, has joined the conference call to guide you through the key information in our presentation. And afterwards, both gentlemen will be available for our Q&A session. And now let me hand over to our CEO, Rosenfeld. Klaus Rosenfeld: Thank you very much, ladies and gentlemen. Welcome to our Q1 earnings call. You all received the presentation that Christophe and myself will share in the next minutes. Please follow me on Page #3 with a quick overview. I think you saw the numbers. From our point of view, a good summary to say we started well into the year in an environment that is certainly challenging and in some areas, unpredictable. Sales growth FX adjusted 1% up. We'll share the details in a moment. The gross profit margin is at 21.6%, so more or less the same margin like Q1 2025, clearly driven by operational gains in E-Mobility, VLS and BIS with a slightly negative development in PTC, that should not come as a surprise. EBIT margin at 5%. Clearly, an improvement in E-Mobility, while PTC, VLS and BIS contributed strongly to the EBIT, also supported by lower R&D costs. Free cash flow seasonally negative with minus EUR 209 million. You know that in Q1, it was EUR 155 million, Christophe is going to give you more detail. This also includes higher restructuring cash out and some advanced customer payments in the prior year. And yes, EPS is slightly positive, also impacted by the financial result. Page 4 gives you the breakdown of where we grew, where we not grew. 6% growth in E-Mobility in the first quarter is certainly pointing in the right direction. Powertrain & Chassis, as I said before, slightly down and then moderate growth in VLS and BIS, certainly also driven by the environment. The strongest growth came out of region, Asia Pacific, However, that still has the impact that we explained several quarters now, are embedded with a switch from a bigger project from China to Korea. More important, Page 5, if you look at the auto powertrain OEM business, and that spans across E-Mobility and PTC, breakdown by powertrain type, quite interesting picture here. Schaeffler outperformed in all these 3 different powertrain types. 4% outperformance in BEV segment, 16% versus market growth of 12%; HEV, an outperformance of 1.5%; and even in ICE, where our sales drop was not as big as the market. That is exactly what I hope were that I can show you these pictures continuously for the next quarters, but that all points in the right direction. Order intake, again, by powertrain type, we'll come back to the numbers per division, also shows that in the important best sector, we are showing a book-to-bill of bigger than 1, while in the other sectors in this quarter, order intake was lower than relevant sales levels. Page 6, E-Mobility. As I said, order intake for the whole division is certainly bigger than just for BEV powertrain solutions, is EUR 1.2 billion, what leads to a book-to-bill of 1.0x. You may question, why that? We showed you in the last quarter that we have an order book by end of the year 2025 of more than EUR 40 billion. We are adjusting also volume assumptions constantly. And we are sure that with that order book we have at the moment, enough to do to deliver. So we are a little bit more selective on order intake. EUR 1.2 billion is a good result, and it's also driven by the right projects. Now let me go from BEV to Powertrain & Chassis. Also there, an order intake of EUR 1.4 billion was slightly below last year, was driven by phaseout and also by market development. And as I said before, the gross margin has suffered a bit. It is also impacted by one-off impacts that we can discuss in the Q&A. Vehicle Lifetime Solutions with a 1% growth that is less than before, but a further improved gross margin, that also leads to a superior EBIT margin. Here, we can say that, as you see in the highlights that our platform business, in particular, in China, is growing, serving an increasing number of retail partners, and we are also proud to say that we won the Sustainability Award for the E-Axle Repair Tool, what again demonstrates that, that is not just a PTC business but also very active in the new powertrain solutions. And then last but not least, Bearings & Industrial Solutions, a good development, 1.6%, good outperformance and also a growing book-to-bill ratio with certainly a different time horizon of the order book. There, just to mention one thing that also points to the new businesses, we are proud that we were part of the Artemis II launch, one of the most spectacular space activities in the last weeks, and were represented here with some high-performance turbo pump spinning bearings that have sort of highest-quality offers. So Bearings & Industrial Solutions, as you see from the rocket, is definitely moving in the right direction in its repositioning and performance drive. Then one page on new growth. We have selected here, again, the humanoid because that is what we -- from all the questions we get, obviously, the one that is most interesting to you, three points, just to put it in perspective and give you a little bit more data, how we look at this. This is a business that is in a situation where we are building the business. We are engaging today with [ 45 ] different customers and engaging means active conversations, of which 30 prototype orders have resulted. And from these 35 -- 30 prototype orders, 5 contracts have been secured. You will understand that I cannot mention here the names, but I can tell you that from the 5, these are prominent names, both from China and the U.S. and from Europe. And we are in ongoing negotiations to further build the order book. If I look at what we have today and put our more conservative assumptions of a million robots in 2030 behind it, our best estimate at the moment is that this order book in total order intake from the 5 customer contracts included has a value of somewhere in midsized 3-digit million range. For sure, that is further building and we'll give you -- as soon as these numbers are more solid, we will give you more information on how that develops. That's what I can say at the moment for Q1 customer side. Last point here, we will see first SOP from these customer contracts in Q2 '26 and then also have scheduled further SOPs for Q3 and Q4 2026. So you see the business is building, it is growing. We are part of the companies that is here at the forefront of the development. And the number of inquiries also from German OEMs is interestingly increasing. What helped us was also the recognition for our products. As some of you heard, we won the prestigious Hermes Award at the Hannover Fair. You see a small picture here that recognizes our rotary actuator platform in multiple sizes and multiple sort of nanometers and other functions. That's a positive thing. And as you all know, we will continue to expand our Automotive know-how into this area. Last point is on manufacturing. We are investing into that business, not only for building the business, but also for making sure that we can scale what we need to scale. I finish on Page 11 with my last page before I hand over to Christoph. Capital allocation continues to be driven by a very disciplined approach. Capital employed has been further reduced also through the project that we explained to you in the Q4 results. We had CapEx in Q1 of EUR 237 million, more or less in line with previous year. The investment grade stands at 0.5x and the capital employed at the end of the first quarter was EUR 12 billion. From an average point of view, Q1 over the last 12 months, this is a reduction of EUR 974 million. You see where we spent the money. And I can assure you again, we are disciplined, but also able to invest into the new growth businesses based on our strong cash conversion. With that, I hand over to Christophe. Christophe Hannequin: Thank you, Klaus. Good morning, everyone. As explained by Klaus, very solid first quarter for 2026. So taking a step back and walking you through a couple of slides on sales and gross profit and then EBIT. We see on Slide #12 the slight growth year-over-year, 1% of growth FX adjusted, demonstrates the confirmed scale-up of our E-Mobility activities. The slight erosion is planned from PTC, especially as we disposed of some activities at the end of last year. Slight slow start from VLS, but nothing to worry about on the year to go. This is mainly driven by some negotiations with some of our key customers that impacted a little bit the sales at the beginning of the year, we will catch up and no issues whatsoever on the year to go for VLS. Last but not least, BI&S also having an encouraging start beginning of the year for Q1. If you look at the makeup of our gross profit bridge going from 21.7 to 21.6, so more or less stable, you see a strong contribution from price. So a little bit of that is linked to compensating for the U.S.-related tariffs, but the rest is also the pricing policy that you see mainly for us within VLS and B&IS. The volume, slight decrease there, as I mentioned before, mostly related to PTC and as a result of decisions we took at the end of last year. The one that I would like to draw your attention to is the EUR 67 million of improved production cost year-over-year, a combination of structural improvements year-over-year as the restructuring programs pay off as we continue to drive efficiencies in our plants. And also happy to report, a significant part of it is related to our purchasing performance and the evolution of our raw material prices or our purchasing performance in general. On the other cost of sales, some impact from the U.S. tariff, there's about [ EUR 20 million ] in there. And then a not very helpful comparison to last year from an inventory revaluation standpoint, where we had a very strong quarter last year. We changed the method this year in order to smoothen this out a little bit and make it easier to understand and steer. But we took the hit there on the comparison. On a full year basis, this disappears. And hopefully also it will give us a more streamlined earnings and EBIT profile for 2026. I will finish on this slide by pointing out the FX impact on our gross profit line, still negative, mainly driven by the U.S. dollar, the RMB and the Indian rupee. And we could have listed as well the Ukraine war, which is impacting us quite a bit. On the next page, you see the EBIT walk, increasing by 0.3 points year-over-year. I already mentioned the gross profit evolution, which is very favorable for us. The other interesting news on there is the progress on R&D expenses, which is both increased efficiency in the way we conduct our development programs as well as some of the benefits of some of the restructuring that we've been doing in this field. Again, the SG&A suffering a little bit from the comparison with last year. There's some timing impacts in there. And there's also the impact of higher cost this year related to our S/4 HANA rollout and the fact that we are heavily investing in digitalization and AI deployment within the organization. That [ inflation ], mostly offset by our performance programs, which is what I'd like to see in the P&L. You see that at the EBIT level, FX switches back to a positive level. This is due to two main aspects. The first one is there is a natural hedge within the group between the different lines of our P&L, depending on where we sell and where we spend. And we also have in there the impact of some of the hedging instruments that are paying out favorably and protecting us against the [ evolution ]. So again, a solid 5% of EBIT, which puts us in a good shape for the full year guidance that we'll discuss a little bit later. I will go very quickly through the different slides. But E-Mobility, clearly, the scale-up paying off, both in terms of production efficiency as well as the R&D piece, driven the -- growth on the top line driven mostly this time for this quarter by the controls part of the business, but overall, unfolding as we had forecasted for 2026. On the PTC side, again, sales decline, which is known, planned and accounted for. The EBIT level remains very, very strong in the double-digit range. The 12.7% from Q1 2025 was a very, very, very high comp, but the 11.5% for Q1, again, clearly in line with what we were expecting when you think about, again, our guidance on the right -- on the good side of the guidance approaching the top end of it. On Vehicle Lifetime Solutions, 0.9% of growth year-over-year, not completely what we used to. VLS, nobody grows stronger, stronger than this and will grow stronger than this on a full year basis. This is just a slow start for Q1, but no warning, no alerts, no reason to worry on the year to go, the volume piece will catch up. Despite this, an extremely strong, almost 16% worth of EBIT driven, as I mentioned before, but also a strong pricing policy. The other encouraging point, I think already mentioned by Klaus is the expansion of our platform business on a global basis, which means that we are successfully diversifying out of Europe and out of the traditional repair and maintenance solution activities. On the Bearings & Industrial side, I'm not getting bored of saying this every time, but it's a very, very interesting combination of both growth and restructuring and operational performance, driving a very, very solid first quarter at 9% EBIT. The 10% last year, again, very hard to beat the comparison, which was mainly driven by the inventory valuation topic that I mentioned before and which was followed by a complicated or weaker Q2 in 2025. The change in method takes us away from that. And the 9%, again, very, very much on the progress path for B&IS, for Bearings & Industrial Solutions that we highlighted during the Capital Market Day, it is paying off, and they are executing properly. Free cash flow, seasonally impacted as usual within the group. Klaus already mentioned the slightly higher restructuring payments that you find in the Others category. Net working capital impacted by a conscious decision to raise our inventory levels and buffers in order to ensure that our customers are protected and safeguarded in a very volatile supply environment. This is something we will work down throughout the year as the situation stabilizes and hopefully resolves itself. But the decision was made there to invest a little bit in working capital to protect our customers. CapEx, as planned, in line with the investment plan for this year with quarter 1 that is where we expected it to be. From -- if I move on to the next page, you'll see, again, a not very surprising evolution or lack of evolution of our leverage ratio in the 2.1, 2.2, 2.2 range. Our maturity profile remains extremely well balanced with the upcoming maturities already prefunded, and we will continue to work on this as opportunities arise. Then that takes us back to the full year guidance, which I will hand back to Klaus. Klaus Rosenfeld: Yes. Thank you, Christophe. Very briefly, we confirm our guidance. We are, from our point of view, also with what we see in April on track here. Certainly, the impacts from the geopolitical and macroeconomic environment were not known when we approved this guidance. We have still said we will not change it and do what is necessary to stay within the range. The 5 percentage points, 5% EBIT margin is clearly at the -- pointing to the upper end here. We need to see what the second quarters bring. You know that our business is seasonable. But what I can say here is we confirm these main KPIs. Let me finish by a quick look at the financial calendar. The colleagues will go on roadshow, virtual, but also to the conferences. We see a lot of interest at the moment from U.S. investors, but also from Asia. So you see it on the schedule. We try to be as responsive as possible. And we thank you for your attention and interest in Schaeffler. With that, I hand back to Heiko. Heiko Eber: Thank you very much, Klaus. Thank you very much, Christophe. As already mentioned, if there are further needs -- if you see further need for discussion tomorrow, the virtual roadshow organized by JPMorgan. So if you have interest, please let us know. And with this, I would say that we directly jump into our Q&A session, and I would hand back to our operator. Operator: [Operator Instructions] And we have the first question coming from Christoph Laskawi from Deutsche Bank. Christoph Laskawi: The first one would be on the humanoid SOPs that you've highlighted. Now that you are moving into series production, I was wondering if you could comment in a bit more detail on the expected revenue contribution in '26 and '27. Is it fair to assume that in '26, it's probably closer to low double-digit euro million amounts and in '27, more towards the mid- to high double-digit range? That's the first question. And then you called out earlier that the environment is tricky currently and in some cases, unpredictable. Do you see any changes of customer behavior currently from the OEMs, any changes in call-offs also on the Industrial side? And with that in mind, should we expect Q2 to roughly trend in line with Q1? Any color that you could share there would be appreciated. Klaus Rosenfeld: Well, let me start with the second one. Again, we are -- we have 4 different businesses. And I start with BIS. I just came back from China, and we see that there, although the macroeconomic situation sounds a little bit subdued, there is a growing interest to work with us. We don't look at the Industrial business by call-offs. That's more an Automotive concept. And there, everything we saw, Christoph, in April doesn't look like a dramatic change. It's maybe a little softer than what we expected at the beginning of the year, but it seems to be quite resilient. When you see the news, when you see what's going on in the world, this is to some extent a surprise, but the numbers speak rather for a little bit of a softer development in the next months, but it's not a dramatic change in direction. So let's see how this is going to unfold and how the second quarter will look like. With what I've just said, we don't expect a dramatic change to our Q1. But certainly, Q2 is typically not as strong in terms of growth as the first quarter. The more important question is how will this unfold? Let me give you a little bit of a logic how we do this when we now estimate what's coming. You basically -- in these contracts that we have, and I said, 5 customer contracts where you will understand I cannot mention the names, I can also not mention what kind of products the customers order, but for sure, these are the ones that we have also communicated and shown at fairs. We typically look at the number of bots. We look at the pieces per bot, and we look at the price per piece. This is the simple logic that is behind this. Now SOPs will start in Q2. There's another customer that will then come in Q3 and another one in Q4. But this is the simple mix. So don't expect miracles in 2026. This is not a full year, that's the start of the year. Again, this is all estimated at the moment. We have no reason to believe that these SOPs are not happening because for sure, in particular, the bigger players want to get ready for their first generation. The real interesting question, how does it scale then? And how many more pieces are we going to expect then in 2027? Also there, what I see, and you just mentioned indicative numbers, going to 2030 revenues, I think you have a chance to go up above the 3-digit million mark. But the ramp-up curve as such, again, is premature. Again, 2026 will be also impacted by this timing aspect that I said. If everything works well, 2027 is more a 2-digit million number. And then it will -- however, the development in terms of the numbers is -- will go up to something in the 3-digit million at the latest in [ 2030 ]. From a revenue point of view, order book is certainly already bigger than a 1-year number. That's, again, my best estimate at the moment. We have told all of you also in the individual conversations that we will give indication today that you have a little bit of a sense what's going, but the regular reporting about order books, order intakes, revenues will need a little bit more time. Christophe and myself, we are 100% certain that we should only come out with numbers that are solid. And we are building this business. There's a lot going on here. I could spend most of my time on this, but I can't. So give us a little bit -- be a little bit more patient, give us a little bit more time. We'll come up certainly during this year with more figures here that you can also follow what we are doing. Operator: The next question comes from Jose Asumendi from JPMorgan. Jose Asumendi: A couple of questions, please. On the order backlog on humanoids, can you maybe just give some color maybe how broadly is split by region, maybe a little bit the geographical split, if possible? Second, do you foresee, as we think about a 1- or 2-year view, some expansion of plants, of maybe footprint either in the U.S. or in Asia to support the humanoid ramp-up? And can you talk a bit about also your -- I believe you call it -- it's like an R&D lab that you have next to Shanghai. When do you expect to open up that center for investors to visit it? And then second, on E-Mobility, can you talk a bit about how you reuse some of the capacity -- existing capacity you have to adapt the different powertrain trends we have globally, so we can make the best use of -- you can make the best use of fixed cost investments? Klaus Rosenfeld: So let me start with the first question. In what I told you again with the 5 customer contracts, I can say -- again, it's a development that still needs to be more solidified. It's more or less equally balanced between China, the U.S. and Europe. It depends a little bit how you define it, whether you define it by the humanoid builder or where the end demand is coming from. But if I just look at the big partner in the U.S. and the big partner in China, and that is together with the other ones, it is more evenly spread at the moment. So it's not China or the U.S., it's at the moment, both China and the U.S. plus a positive outlook on the humanoid players that have more a European base. You heard about Hexagon, that's the latest one where we entered into a cooperation. That's certainly a positive that this is not just one country or one region bet. The footprint -- sorry, the humanoid factory in China is open. So if someone is interested to visit it, you just need to organize it. We have seen significant interest there. Maybe we need to organize a little bit of a tour, but it's certainly something that we would open up and show you what's going on there. It's quite fascinating, also the speed how the Chinese colleagues build that up. Footprint to support the ramp-up. At the moment, we have not decided on any plans to change the footprint. What we have, in particular in Germany is, for the time being, sufficient, but we need to follow the development very carefully. It's a function of the ramp-up speed. If this goes very fast, we will react. If it goes more slowly, it's a different story. But we do this, as I normally say, with our eyes on the road and the hands upon the wheels. And we'll be very pragmatic to organize the necessary capacity. At the moment, it looks like that we can more or less handle what we have without bigger footprint investments. For sure, the cumulative total investment for the next year will be another interesting figure for you. And don't forget, we'll also spend money not only for plants or machines, but also for R&D and for people. If I may say this, my biggest challenge at the moment is to add the relevant people here to the team. This is a start-up. It's a very different environment. We have super engineers, super product developers, all of that. But if we want to build this as a global business, we also need to support David and his team, that is a global team with more talent, and that's where we're focusing on. So the next years will not only be looked at from a CapEx point of view, but also from the buildup of the right talent to drive this new market. Don't forget, there is a very important angle to physical AI and industrial AI. This whole ecosystem is not just mechanics, it's the interface between software and hardware. And if you really want to play there, you need to understand the AI angle very carefully. Also, Christophe said this, see it in a broader context. Then the last question was on E-Mob. Again, here, it's not so much capacity in the plant. It's more how do we optimize the fixed cost portion. We certainly have a way to go in terms of R&D. That's something that we certainly address under our existing performance program. Whether that's enough, we need to see. In general, I can say, with the improvement in Q1 2026, for, say, over Q1 2025, if you remember this little formula that we developed, is it possible to bring E-Mobility across the line in 2026, that delta of nearly 5.5 basis points -- but the delta from Q1 '26 to Q1 2025 is 5.5 to 6 basis points. If you consider that E-Mobility is a seasonal business with a stronger fourth quarter, that shift is -- if that we can maintain that shift over the next quarters, that really points in the right direction, even if revenues come in lower than what we expected when we had our Capital Markets Day. So let's see how Q2 goes and let's see that we are able to put the right measures in place. It's not a CapEx question so much. It's more a question of reallocating resources within the group and reducing also the R&D impact from headcount here in Germany. Operator: The next question comes from Ross MacDonald from Citi. Ross MacDonald: It's Ross MacDonald at Citi. I have three questions. I'll again ask on the humanoids, given there's so much client interest here. Klaus, just to help us back out, let's say, a potential content per vehicle to Schaeffler from these activities, I understand you're guiding around mid-3-digit million revenue potential on the current 5 contracts, assuming a global market of 1 million humanoids in 2030, would be good to just confirm that specific point. But then within that, what is the market share that you're assuming on that sort of revenue ambition, let's call it? I'm aware for 2035, you'd be comfortable or happy even with a 10% market share. So on that math, is that the 10% market share assumes that is driving a mid-3-digit million top line? That would be my first question. Klaus Rosenfeld: Well, Ross, again, we are working in a market that is emerging. And that certainly needs, to some extent, a scenario approach. Our sort of conservative scenario is 1 million humanoids to be produced globally by 2030. And I can also tell you, this is start-up territory. We here at Schaeffler, we don't like hypes, we don't want to see something where we are putting too much out. We want to be conservative. I think the 1 million humanoids, as it looks today, is a conservative number. It could increase, but we need to see. It's also a question where are they applied, and there are still very different views on this. So let's build on the 1 million and make sure that we make that and seize the upside if possible. The second cornerstone of our calculation is also nothing new to all of you. Andreas has said this also a year ago. When we look at the bill of material of an average humanoid build for different purposes, we're talking about a 50% addressable market for Schaeffler. And if I now say if we aspire to get 10% market share of that addressable market for us, then that's basically the logic that we have in mind. You all know that this is then a function of how costs are decreasing and how this is progressing and certainly, whether you can sell your products and your development competency to the right partners, that is, from my point of view, from a CEO perspective, the most important thing. It's the same like in the auto market. There are so many humanoid players around, so many people that claim that they can do this and this and this. For us, as one of the sort of leading suppliers in this space, we want to do business with the right partners. And I can say, you will hopefully understand that I cannot disclose names, but the names are prominent names. We want to be selective in the ones that we bet on. And that what I see at the moment gives me a good sort of positive feeling that we have the right contracts to start with. This is a start. It's not the situation where we can say we've already achieved everything we want to achieve. It will continue in 2026. And this concept of offering partnerships in terms of we can supply our parts and we offer people the ability to utilize their robots and learn together in a context where this is very much AI-driven, where the industrial metaverse plays a role, that is, from my point of view, the driver for success. Let's leave it here, but I leave you the rest of the calculation. At the end of the day, what counts is really what comes out in the bottom line. Ross MacDonald: That's helpful. And maybe I will fire two more quick questions for Christophe actually. Christophe, maybe on the second quarter trading, if I look at 2025, there was quite a large step down in margin from Q1 to Q2. So you went from 4.7% to 3.5%. How should we think about the seasonality within Schaeffler this year? Would you be hoping for a less extreme margin pullback in the second quarter? How would you think about Q2 within the current guidance range? And then a second question, just specifically on the other division, noting that was around about EUR 30 million loss per quarter on average last year, it has stepped up significantly to minus EUR 15 million loss in Q1. How should we think about modeling that specific division going forward? And maybe you can give us some color on what drove that EUR 20 million delta in Q1 versus Q4? Christophe Hannequin: So first question, and I touched on it during some of my comments, Q1 was overly impacted by inventory revaluations in 2025, some of it which resolved itself in Q2 and led to the performance that you saw. It's not really driven by the business itself, it was more of the way we essentially take our standard cost variances through inventory and the balance sheet. As I mentioned, we have switched some of our methodology on this one. So I expect a smoother quarter-over-quarter evolution in this one. The division that's primarily impacted by this one, especially last year, was BI&S, so Bearings & Industrial Solutions, first and foremost. And then PTC was probably the second strongest impact. So we'll see how Q2 unfolds. But if we did it right, we should have a much smoother quarter-over-quarter evolution. Now we do have a seasonal business where plant loading is important to us and efficiencies are driven by the loading of our plants. So you should not expect Q1 and Q4 to be directly comparable, if I put aside some of the R&D and the customer negotiations impact. But from a purely operational standpoint, Q1 and Q4, despite everything I've said before, will not be directly comparable. But again, smoother quarter-over-quarter is what we would like to see and what we're driving for in 2026. I'm also a big believer that a better load, better operational steering of our plants drives throughout the year drives higher efficiencies and higher performance overall. So let's see what Q2 gives us. But again, I'm on the optimistic side on this one. Division others, as you know, it's a mix for us of activities we're ramping up, ramping down. So the humanoid piece is in there, our defense efforts are in there, hydrogen is in there, so are some of the businesses that we are disposing off. So the comparison year-over-year is a little bit tricky. But if you use what you're seeing right now, you probably will not be off from what we should see in 2026. But that one is especially tricky, I guess, for you to model from the outside, unfortunately. Klaus Rosenfeld: And it's a task for us to think about maybe for next year, whether we guide something on this or how we best do this. But as you said, it's a mixed bag of things that are ramping up and ramping down. And we understand the point. But for the time being, I think you have the guidance that you saw, and it needs to add up to the group guidance. Operator: There are no more questions at this time. I would now like to turn the conference back over to Heiko Eber for any closing remarks. We have a last-minute registration from Klaus Ringel from ODDO BHF. Klaus Ringel: I wanted to ask on the Auto business. I mean it was quite nice to see the outperformance this quarter across different powertrains. And I would be interested in your view looking ahead, if we can expect to see such a nice outperformance or if you would expect also some seasonality in here? Klaus Rosenfeld: Klaus, it's a good question, but I don't have a crystal ball, to be honest. With this environment, it's really difficult to mention that. To answer that question, what is quite interesting from my point of view, if you follow what's at the moment happening on E-Mobility, not only in Europe, but also in the U.S., you see what comes a little bit as a surprise to us that in particular in the U.S., people are buying e-cars, although the production side is more going in the other direction. That may have to do with the fact that people look for fuel economy in a situation where [ ethylene ] becomes more important. We don't know yet. The trend is not stable. You also saw what happened here in Germany, what happened in France with more E-Mobility support. There are the obstacles with the loading infrastructure. For me, what is really most important is that we have this hedge across the three different types. and that we can play these corresponding cubes well. So I can't tell you what Q2 is going to look like. What I can tell you is that our focus on playing in this space from E-Mobility to PTC in a clever and smart way to utilize the opportunities that are there quarter-by-quarter. That's the game plan. And for sure, our biggest challenge is to deliver on our E-Mobility promise. And there, if outperformance helps there, I would expect that we probably see a continuation during the year. How this unfolds quarter-by-quarter remains to be seen. A critical element will be the China angle of this. And maybe I can leave you with the following information. My colleague or our colleague, Thomas Stierle, is spending more time in China than any other colleague that we have. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Heiko Eber for any closing remarks. Heiko Eber: Thank you very much. So first of all, thanks to our speakers. Thanks to my CEO, my CFO. Thanks to all of you for your continued interest. And as always, a big thank you to the team for the preparation. If there are more questions, please feel free to give us a call, happy to help. And with this, thank you very much. Have a good rest of the day and talk to you soon. Operator: Ladies and gentlemen, the conference is now over, and you may now disconnect your lines. Goodbye.
Operator: Hello, and thank you for standing by. My name is Mel, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Tidewater Inc. First Quarter 2026 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to West Gotcher. Go ahead. West Gotcher: Thank you, Mel. Good morning, everyone, and welcome to Tidewater Inc.’s First Quarter 2026 Earnings Conference Call. I am joined on the call this morning by our President and CEO, Quintin V. Kneen; our Chief Financial Officer, Samuel R. Rubio; and our Chief Operating Officer, Piers Middleton. During today’s call, we will make certain statements that are forward-looking and refer to our plans and expectations. There are risks, uncertainties, and other factors that may cause the company’s actual performance to be materially different from that stated or implied by any comments that we are making during today’s conference call. Please refer to our most recent Form 10-Ks and Form 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, 05/05/2026. Therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we will present both GAAP and non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures can be found in our earnings release, located on our website at tdw.com. I will now turn the call over to Quintin. Quintin V. Kneen: Thank you, West. Good morning, and welcome to Tidewater Inc.’s First Quarter 2026 Earnings Conference Call. I will start the call today with the quarter’s highlights and then talk about capital allocation and what we are seeing on vessel supply and demand. West will walk through our financial outlook and what we are thinking about for 2026 guidance. Piers will cover the global market and operations, and Sam will close with the consolidated financial results. Each of us will touch on the impact from Operation Epic Fury. Starting with the first quarter, revenue and gross margin were both ahead of what we expected. Revenue was $326.2 million, driven mainly by higher utilization and stronger day rates. Gross margin was just under 49%, up slightly quarter over quarter and over three percentage points above our internal plan. Utilization benefited from strong uptime with less downtime for repairs and fewer dry-dock days than we expected. Overall, I am really pleased with the operational execution and with the returns we are seeing from the fleet investments we have made over the past few years. Before I get into more detail on the financials, I want to touch on Operation Epic Fury, what it meant for the quarter, and what we are watching going forward. As I said on last quarter’s call, we had not seen any disruption to our business at the outset, and we expected that any cost impact—especially insurance and fuel—would be immaterial. Quintin V. Kneen: And so far that has held to be true. Our vessels in the Middle East continue to operate normally, and utilization and revenue in the first quarter—specifically March, the first full month after the operation began—came in above our forecast. We did see some higher costs, mainly in crew along with insurance and fuel. The biggest item has been the incremental hazard pay for our crews. Insurance and fuel have been a smaller piece. Sam will share more detail in his remarks. Looking ahead, we are seeing pent-up demand in the region, and we believe activity could rebound above what we expected just a quarter ago once the conflict is resolved. In the first quarter, we generated $34 million of free cash flow. The step down sequentially was related to less cash flow from working capital and relatively higher dry-dock spend. Just as a reminder, in the fourth quarter we collected a sizable past-due receivable from PEMEX, which drove the working capital change, and Q4 is typically our lightest dry-dock quarter, whereas Q1 is usually our heaviest as we get vessels ready for a busier working season as the weather improves. That drove the dry-dock change. Importantly, nothing has changed in how we are thinking about free cash flow for the year, and the first quarter is tracking with our expectations for 2026. As we discussed previously, during the first quarter we announced our agreement to acquire Wilson Sons Ultratug Offshore—22 PSVs focused exclusively on the offshore market in Brazil—for $500 million. We have already started the pre-integration work using the playbook we built through prior acquisitions. The Wilson team has been well organized and is highly capable, and we are making good progress getting ready to bring the business onto the Tidewater Inc. platform. On approvals, things are moving as expected and we still anticipate closing by the end of the second quarter. We did not repurchase any shares in the first quarter because we plan to fund the equity portion of the Wilson transaction with cash on hand, and we are still waiting for consents to transfer the existing Wilson debt. We still have $500 million authorized under the program, which represents about 12% of the shares outstanding as of yesterday’s close. Even as we work towards closing and integrating Wilson, we are still in a good position to look at additional M&A opportunities. Our balance sheet remains strong and we continue to expect net leverage to be less than one times at closing. Liquidity is solid, and after issuing our unsecured notes last summer we have good visibility into the cost of debt capital should we decide to use it for an acquisition. Our preference is still to use cash, but we will consider using stock if the right fleet is available at the right value. With the GulfMark, Swire SOF segment, and now Wilson acquisitions, we have built a meaningful presence in essentially every major offshore basin. These have largely been newer, higher-specification fleets, and they have helped reestablish Tidewater Inc. as the leading OSV provider globally. We have also successfully reentered Brazil, which we have talked about as a priority market. From here, we will stay focused on fleets and geographies where our platform gives us an edge and where bringing additional vessels onboard can create outsized value. We continue to benefit from our scale and high-specification PSVs and anchor handlers, two of the most in-demand vessel classes in the global OSV fleet. When we look out over the next couple of years, we see the market tightening in late 2026 and into 2027 and 2028. That should set up for meaningful day-rate improvements over that time. If day rates move up the way we expect over the coming years, that will flow through to higher earnings and cash flow generation. If we do not see value-accretive acquisitions, we will look for other ways to put that excess cash to work. Our share repurchase philosophy has not changed. We will be opportunistic and disciplined, and more broadly, we do not think it makes sense to build and sit on a large cash balance for an extended period. As we move through to the Wilson closing and into a period of higher free cash flow, we will stick with the same capital allocation framework that is core to how we run the business. In practice, this means we will continue to weigh the relative merits of M&A versus share repurchase. We continue to view buybacks as an attractive way to return capital to shareholders. Turning to the outlook, while the Middle East conflict is still ongoing, what we have seen so far could be a positive for the offshore vessel market over time. Energy security became a key theme since the conflict in Ukraine, and the Middle East conflict has added another layer—an increased focus on sovereign energy independence, particularly in the Eastern Hemisphere. So far, at least 500 million barrels of oil have been lost, and there is still no clear sign when recent production losses will be reversed. The longer that goes on, the bigger the need becomes to replace those inventories, and historically, crude prices have had a strong relationship with inventory levels. Continued depletion should provide longer-term price support. Put together, the inventory drawdown and the heightened awareness of geopolitical risks suggest oil prices may have a higher floor than before the Middle East conflict began, which supports additional offshore projects. Stepping back, we think the trend towards offshore development supports a structural improvement in demand for offshore activity and for offshore vessels. We see this as a long-term dynamic, and it is additive to the demand we have been seeing already. Recent comments from offshore drillers point to a meaningful increase in fixtures and a high level of drilling unit utilization. We view the expected pickup in offshore drilling as a strong positive for our business. We support a range of offshore applications, but drilling activity typically has the biggest impact on vessel demand. Offshore vessel activity has been building year to date, and as it continues to pick up, the pressure on available supply creates an opportunity for higher utilization and higher day rates. On the supply side, the global fleet has stayed essentially flat over the past few years. A handful of vessels are expected to deliver late in this year and into early 2027, but we view those additions as relatively small in the context of the overall market. As supply tightens further, we can see a path to day-rate increases of roughly $3,000 to $4,000 per day per year for the entire fleet, moving the fleet back towards earning its cost of capital. We are excited about the drilling outlook, but we also expect other drivers of vessel demand—especially production and EPCI-related support—to remain strong. Production work has stayed robust and helped offset some of the relative drilling softness early in 2026. Looking ahead, we continue to like the outlook for both, given the strength we are seeing in both subsea and EPCI backlog, as well as continued momentum in FPSO orders. Over the longer term, more drilling in less developed regions should drive additional infrastructure work, which supports sustained demand across these categories. We are pleased with how the first quarter came together. While we still have some uncertainty in the Middle East until the conflict is resolved, we are increasingly optimistic about the outlook for the business. We will stay disciplined on capital and continue to look for value-accretive ways to deploy it, and we expect the opportunity set and our ability to capitalize on it to improve over the next 18 months. With that, let me turn it back over to West. West Gotcher: As Quintin mentioned, we did not repurchase any shares during the first quarter due to the pending Wilson acquisition. At the end of the first quarter, we retained our $500 million share repurchase authorization. As a reminder, under our outstanding bonds, we are unlimited in our ability to return capital to shareholders provided our net debt to EBITDA is less than 1.25x, pro forma for any share repurchase. Under our revolving credit facility, we are also unlimited in our ability to repurchase shares provided the net debt to EBITDA does not exceed one times. However, to the extent that we exceed one times net leverage, we still retain the flexibility to continue returns to shareholders, provided that free cash flow generation is in excess of cumulative returns to shareholders. We still anticipate being below one times net leverage, assuming a June 30 close of the Wilson acquisition. From a capital allocation perspective, we look to execute share repurchase transactions when suitable M&A targets are not available. We retain the option of evaluating M&A and share repurchases concurrently, but our financial policies and philosophies dictate our relative appetite to pursue both concurrently. Given that the offshore vessel market has stabilized at a healthy level, along with the constructive outlook for offshore vessel activity more broadly, the M&A landscape remains favorable and we will continue to evaluate additional inorganic opportunities to add to our platform. Turning to our leading-edge day rates, I will reference the data that was posted in our investor materials yesterday. Across the fleet, our weighted-average leading-edge day rate increased modestly in the first quarter compared to 2025. This is the first time since 2025 that our weighted-average term contract measure for new contracts has increased. Our largest class of PSVs saw average day rates increase sequentially, which we find encouraging given the relatively large number of contracts for these vessels and the geographic dispersion of the contracts. During the quarter, we entered into 18 term contracts with an average duration of 13 months, with two specific long-term contracts skewing the average. Excluding these contracts, the average duration of our new contracts during the quarter was seven months. Turning to our financial outlook, we are maintaining our full-year 2026 revenue guidance of $1.43 billion to $1.48 billion and a full-year gross margin range of 49% to 51%. Our guidance assumes that we close the Wilson acquisition at the end of the second quarter. Our view of the legacy Tidewater Inc. annual revenue and gross margin guidance has not changed from our initiation of guidance in November 2025. Our second-half expectation for the Wilson business remains unchanged. We expect our second-quarter revenue to be roughly flat with the first quarter, consistent with prior expectations, but expect our gross margin to decline by about 5 percentage points sequentially due to cost increases associated with Operation Epic Fury. However, we are in a position to seek rebills for about half of the conflict-related cost increases from our customers related to direct cost increases associated with crew wages, insurance costs, and G&A support, but we have not contemplated the recoupment of these costs in our guidance. Our forecast assumes a normalization of costs associated with the conflict in the Middle East by the end of 2026. To the extent the conflict-related cost pressure continues beyond the second quarter, we are similarly privileged to seek rebills from our customers on realized direct cost increases. Second-quarter guidance does not assume any impact from the Wilson acquisition. In summary, we are pleased to be able to maintain our full-year guidance given the impact from the conflict in the Middle East, with the possibility of recouping a good portion of the cost increase that we are absorbing in our current Q2 guidance. Our expectation remains that there is the potential for uplift to our full-year guidance depending on the strength of drilling activity picking up towards the end of the year. Looking to the remainder of 2026, first-quarter 2026 revenue plus firm backlog and options for the legacy Tidewater Inc. fleet represents $1.1 billion of revenue for the full year, representing approximately 84% of the midpoint of our legacy Tidewater Inc. 2026 revenue guidance. Approximately 69% of remaining available days for 2026 are captured in firm backlog and options. Our full-year revenue guidance assumes utilization of approximately 80% for the legacy Tidewater Inc. fleet, leaving us with 11% of capacity to be chartered if the market tightens quicker than we are anticipating. Our midsized anchor handlers and largest class of PSVs retain the most opportunity for incremental work, followed by our smaller and largest class of anchor handlers and midsized PSVs. Contract cover is higher in the earlier part of the year, with more opportunity available later in the year. The bigger risk to our backlog revenue is unanticipated downtime due to unplanned maintenance and incremental time spent on dry docks. With that, I will turn the call over to Piers for an overview of the commercial landscape. Piers Middleton: Thank you, West, and good morning, everyone. This quarter, I will talk a little about what we are seeing in each of our regions as we look out through the rest of the year and into 2026. Overall, the OSV market showed continued signs of improvement throughout the quarter, with sentiment starting to pick up in all regions where we operate, even those which could face some short-term challenges through 2025. Amid rising rig demand and offshore E&P activity, the long-term outlook for the OSV market remains strong, with the ongoing upturn in project investment expected to continue to drive additional incremental demand out to 2030, while the continued limitations in the supply of any significant growth in the global OSV fleet will further exacerbate the expected tightness in our market. Working through our various regions and starting with Europe, the North Sea OSV spot market strengthened throughout the quarter. In the PSV sector, spot rates strengthened significantly as the quarter progressed, with fixing activity remaining strong, helped by several PSVs leaving the region for warmer climates, a trend we do not see stopping in the short term. In the AHTS sector, supply constraints continued to drive rates higher, with spot rates in the largest classes of AHTS reaching record highs above $350,000 per day in Norway. In the Mediterranean, we continue to see strong activity, and with our global operating platform we were able to move two further vessels into the region to meet the increased demand that we mentioned on our last earnings call. Overall, we expect the Mediterranean region to be a strong market longer term, with several drilling campaigns and EPCI projects commencing in 2026. In Africa, even with the busier dry-dock schedule in the region, we had a good Q1 with a large increase in utilization across our West African and Angolan fleets, predominantly due to some overruns in drilling campaigns in both Namibia and Congo, as well as an uptick in EPCI work in Angola and Mozambique. Looking ahead, we do expect some slowdown in activity across the region in Q2, but are on track for a big pickup in activity from Q3 onwards, led by renewed drilling and EPCI activity in Nigeria, Namibia, Angola, Congo, and Mozambique. In the Middle East, as Quintin mentioned, we saw little disruption to our vessel activity in the region, with all our vessels remaining on hire throughout the quarter. However, we have seen a slowdown in new tendering activity as our customers assess the short-term impact of Operation Epic Fury on their plans. Looking ahead, low tendering activity is expected to persist in the near term due to the elevated risk, and while it is probably too early to predict with any accuracy long-term rate movements in the region, we do expect day rates in the shorter term to be impacted positively on the upside due to the lack of any new supply being able to enter the region. While the duration and trajectory of the conflict are still unclear, as Quintin mentioned, the ramifications of the conflict will likely have longer-term positive benefits to the OSV industry both in the Middle East and globally. In the Americas, as mentioned on our last call, we remain excited with the long-term outlook in Brazil, with the recent announcement that SBM agreed contracting terms with Petrobras for construction of two more FPSOs to be deployed offshore Brazil, with first production targeted for 2030. While there has been some short-term slowdown in OSV tendering activity in 2026, this is expected to pick back up again after elections are completed in Q4 of this year. In Mexico, PEMEX’s underlying financial pressures continue to weigh down sentiment; however, we are seeing some uptick in tendering activity from other oil companies in the country, which bodes well for 2027 and 2028. Lastly, in Asia Pacific, Taiwan, Indonesia, and Australia were the key drivers of demand in the current quarter, with several new contracts signed to support both drilling and EPCI activity that will kick off in Q2 and should go all the way through into 2027. Looking further out into 2027, we are also starting to see several of the other NOCs and IOCs in the broader region getting organized to increase drilling activities starting in 2026 all the way out to 2028, which bodes well for the region going forward. Overall, we are very pleased with how the market has continued to move in the right direction in Q1, and we fully expect that positive momentum to continue into the second half of the year. With that, I will hand it over to Sam. Samuel R. Rubio: Thank you, Piers, and good morning, everyone. I would now like to take you through our financial results, where my discussion will focus on the sequential quarterly comparisons of 2026 compared to 2025. In the first quarter, we reported net income of $6.1 million, or $0.02 per share. We generated $326.2 million in revenue compared to $336.8 million in the fourth quarter. We saw average day rates increase about 1% versus the fourth quarter but saw a slight decline in active utilization to 80.6% from 81.7% in Q4. The revenue decline was primarily due to a decrease in operating days, as there were two fewer days in the quarter, coupled with the lower utilization due to higher dry-dock days. Gross margin in the first quarter was $159.3 million compared to $164 million in the fourth quarter. Gross margin percentage in the first quarter was 48.8%, nicely above our Q1 expectation and slightly ahead of our Q4 margin of 48.7%. The increase in margin versus Q4 was primarily due to the decrease in operating costs. Operating costs for the first quarter were $166.9 million compared to $1.727 billion in Q4. The decrease in operating costs was due mainly to lower R&M costs and lower other operating expenses in addition to two fewer days in the quarter. While overall cost was lower, we did incur about $2.3 million of cost due to the Iran conflict, the majority of which was incurred in the Middle East. Costs directly impacted were higher insurance costs and higher crew wages in the form of hazard pay. Indirectly, we also saw fuel and travel costs increase due to the increase in the commodity price. Our EBITDA was $129.3 million in the first quarter compared to $143.1 million in the fourth quarter. For the first quarter, total G&A cost was $33.6 million, which is $5.4 million lower than Q4. The decrease was mostly due to lower professional fees due to a decrease in M&A transaction costs as well as costs associated with our Q4 internal vessel realignment. In addition, we saw a decrease in salaries and benefits due to adjustments made to our compensation expense. For 2026, exclusive of additional M&A costs, we expect Tidewater Inc. standalone G&A costs to be about $125 million. This includes an estimated $14 million of noncash stock compensation. Moreover, we expect to incur approximately $7 million in additional G&A costs in the second half of this year related to the Wilson acquisition. In the first quarter, we incurred $36.4 million in deferred dry-dock costs compared to $13.9 million in the fourth quarter. Q1 is typically a heavy dry-dock quarter, and this quarter was no exception, as we had 949 dry-dock days that affected utilization by about five percentage points. Dry-dock costs for 2026 are expected to be approximately $122 million. Additionally, we expect to incur approximately $16 million in dry-dock costs in the second half of the year related to the Wilson acquisition. In Q1, we incurred $14.9 million in capital expenditures related to vessel modifications and upgrades. For the full year 2026, we expect to incur approximately $51 million in capital expenditures. This amount includes a planned major upgrade to one of our Norwegian vessels. Absent this upgrade, our maintenance CapEx is expected to be approximately $36 million for 2026. In Q1, we spent $24.4 million related to two purchase options we have exercised for vessels we have been leasing. This amount is not reflected as CapEx spend, but is instead reflected in the financing section of our cash flow statement in Q1 as payments on finance leases. In addition, we expect to incur about $1 million in CapEx spend in the second half of the year related to the Wilson acquisition. We generated $34.4 million of free cash flow in Q1 compared to $151.2 million in Q4. The free cash flow decrease quarter over quarter was mainly attributable to higher deferred dry-dock and CapEx spend in Q1 and a large working capital benefit achieved in Q4 due to a significant increase in cash collections that did not repeat in Q1. In Q1, we sold two vessels for proceeds of $3.3 million, which is also lower than the Q4 sale proceeds of $5.3 million. Though the Q1 free cash flow amount was lower than Q4, it was higher than our internal estimate. As a reminder, following our debt refinancing, which was completed in Q3 2025, we only have small debt repayments that are related to the financing of recently constructed smaller crew transport vessels. We have no payments until 2030 on our new unsecured notes. Following the anticipated close of the Wilson acquisition, our debt maturity and repayment profile will change to accommodate the newly assumed Wilson debt. We conduct our business through five operating segments. In the first quarter, consolidated average day rates were 1% higher versus Q4, led by our Europe and Mediterranean day rates improving by 9% and our APAC segment increasing by 7%, partially offset by relatively small declines in each of our other regions. Total revenues were 3% lower compared to the fourth quarter, with decreases in the Americas, Africa, and Middle East, partially offset by increases in our APAC and Europe and Mediterranean regions. Regionally, gross margin increased by four percentage points in Africa, three percentage points in our APAC region, and one percentage point in the Middle East despite the conflict in Iran. Our Europe and Mediterranean region saw a decrease of two percentage points, and the Americas declined by four percentage points. The gross margin increase in our African region was primarily due to a five percentage point increase in utilization due to fewer idle days, offset by slightly higher repair and dry-dock days. This was offset somewhat by a decline in average day rates of 4%. Operating costs decreased by 15% due mainly to a decrease of four vessels operating in the area and two fewer operating days in the quarter. The gross margin increase in the APAC region was due to an increase in utilization due to fewer repair days and a 7% day-rate increase, partially offset by a small increase in operating costs as we had two vessels transferred into the area. The increase in Middle East gross margin was primarily due to a 5% decrease in operating costs. The decrease was primarily due to fewer operating days and lower R&M expense due to fewer DFR days, partially offset by higher costs related to the conflict. In the quarter, we did see a small drop in day rates and utilization. Utilization was down slightly quarter over quarter primarily due to higher idle days, partially offset by fewer dry-dock and repair days. Our Europe and Mediterranean region gross margin was two percentage points lower versus the prior quarter, but three percentage points higher than our expectation. Revenue was up 5.5% due to a 9% increase in day rates, partially offset by a seven percentage point decrease in utilization. We had a heavy dry-dock schedule in the quarter, and we mobilized vessels into the region, which contributed to the decrease in utilization. Dry docks represented a five percentage point decrease in utilization in Q1 compared to less than one percentage point in Q4. The increased revenue was partially offset by higher operating expenses related to higher salaries and travel and supplies and R&M due primarily to an average of four additional vessels operating in the region. Gross margin in our Americas segment decreased by four percentage points due mainly to a $12 million decrease in revenue caused by a four percentage point decline in utilization as well as a 3% decrease in average day rates. Utilization was affected by higher dry-dock and repair days. The revenue decrease was partially offset by a 10% decrease in operating cost versus Q4. The decrease was primarily due to transferring two vessels out of the region during Q1. As noted in our press release and as Quintin mentioned earlier on the call, we experienced additional operating costs in Q1 related to the impacts from Operation Epic Fury. We estimate ongoing additional crew wages in the form of hazard pay and insurance costs of about $1.6 million per month. In addition, we expect approximately $1.8 million of additional monthly costs related to fuel and travel expenses due to the higher global commodity prices. The fuel and travel expenses are estimates based on our forecasted activity and current commodity prices. These elevated costs related to the conflict will likely continue into the near future, though it is uncertain how long this geopolitical disruption may last. It is also widely expected that commodities markets will remain elevated beyond the immediate resolution of the conflict. In a scenario where the conflict extends and remains similar in nature to its current state, we estimate total operating cost increases of between $10 million and $11 million per quarter. We are currently working with our customers for reimbursement of wages and insurance costs that are provided for under our contracts, but as of now we have not included this in our guidance. When we look at our Q1 revenue, I am glad to announce that we did not experience any material reduction due to contract cancellations because of this conflict. As it relates to the Wilson acquisition, integration meetings are progressing as expected, and we expect the transaction to close by the end of the second quarter. We strongly believe that our increased presence in the Brazilian market is an important piece to our global strategy and are excited about our growth there. In summary, Q1 was another strong quarter from an operations and execution standpoint. We exceeded internal expectations for free cash flow, day rate, and utilization in what is typically a seasonally slow quarter, and industry fundamentals remain strong. Our balance sheet is in excellent condition, and we continue to be optimistic about the opportunities that lie ahead for Tidewater Inc. With that, I will turn it back over to Quintin. Quintin V. Kneen: Sam, thank you. We will now open the call for questions. Operator: If you have dialed in and would like to ask a question, please press star then 1 on your telephone keypad to raise your hand and join the queue. Your first question comes from the line of Ben Summers of BTIG. Your line is open. Analyst: Hey, good morning, and thank you for taking my questions. You called out the anchor handler market being particularly tight in Q1, especially in the North Sea. Is this more of a regional development, or is this something you are seeing across the global fleet? Piers Middleton: Yes. Hi, Ben. Thanks for the question. It is basically something that is happening in the North Sea where there tends to be a bit more of a spot market, but we are certainly seeing on the larger anchor-handling sizes that there has been some consolidation in that market, and that has driven some of that tightness. That has allowed some of our competitors to push day rates, which helps us as well. So long as we are all moving in the right direction, that is a positive thing. Generally, what we see is that the spot market in the North Sea tends to drive a lot of the noise elsewhere as well, so we expect that to have a trickle-down effect through the rest of the globe over the next few quarters. It is a positive sign on the largest classes of anchor handlers. If you see that in Norway, it tends to push through to other regions as well, and that is driven by increased towing of rigs but also on the subsea construction side—the big anchors needed for trenching and subsea support work as well. It plays into what we have been saying about the increase in EPCI work and also exploration starting to pick up again. Analyst: Awesome, thank you. Super helpful. On the broader picture, you talked about the long-term increased focus on energy security. Are there any specific basins you would call out as being specifically emphasized? Anything across the global fleet that could be specifically impacted by this longer-term trend? Quintin V. Kneen: Principally the smaller markets in Asia, I believe. I think you are going to see real strength growing over the next few years in Indonesia and Malaysia. Piers may have some other anecdotal information as well. I mean, I think it is across all, but it is primarily going to be in Asia. Piers Middleton: We see a huge amount of demand coming out of that region, and we are already seeing it a little bit in Indonesia as well. It is going to have a kick into Africa as well in terms of more drilling and pulling more supply. I would not be surprised if we see it on the East Coast of Africa, and of course we have already seen some of the Western Mediterranean pick up in Libya and so forth. Quintin V. Kneen: So, yes, you are starting to see players that have not been in the market over the past five or six years really reaching out and trying to develop their resources. Analyst: Thank you for taking my questions, and congrats on all the progress. Operator: Thank you. Your next question comes from the line of Josh Jain of Daniel Energy Partners. Your line is open. Analyst: Thanks for taking my questions. Offshore rig companies have outlined pretty constructive outlooks for activity over the next 12 months. I know you are not going to guide 2027 dry docks, but is there any thought in bringing forward any of those when you can? Or is it reasonable to think the dry-dock schedule is going to be more friendly as we exit this year into 2027, and how are you positioning the company given the expected growth in the deepwater side? Piers Middleton: We are not trying to bring any dry docks forward. We tend to plan out over a five-year period to help supply chain and procurement as well. We have a pretty well-set operation on that side and how we look at things. We might move one or two depending on how projects pan out, but at the moment we have a pretty good sightline in terms of where projects are rolling out over the next few years, both for our own technical team and for our commercial team in terms of what projects we are seeing and in which areas, and we try to line up our vessels and dry docks accordingly to that. Analyst: And then on the other one, with the Helix–Hornbeck merger, does this frame at all how you think about growing your business moving forward with respect to different service offerings? Or does additional M&A look more like Wilson and some of the other things that you have done over the last couple of years? Quintin V. Kneen: It does not change our view, because we have always had that expansive view of other service lines. It is certainly a lot easier for us to do that in our existing market. To the extent that we do reach out, it would be with a franchise that we feel is already well performing in that particular vertical. But no, it does not change anything. Glad to see it. More consolidation is better. I certainly cannot consolidate this industry by myself, so the more the merrier. Analyst: If I could sneak in one more. Given the number of rigs that were given multiyear extensions with Petrobras in the last 90 days, how does that frame your discussion for the Wilson acquisition? At the time of the deal, you talked about a number of assets that were in the process of being extended. Can you update us on those and how much more confident you are today than when you did the deal about that market? Piers Middleton: Josh, overall positive. We went into this year with an election going on in Brazil, so we have seen a couple of tenders being pushed to the right. The understanding from the market is that Petrobras wants to make some decisions on longer-term commitments. Overall, Petrobras is positive. There are also the IOCs coming out as well in that region, even moving up the tender margin as well. We do not see any concerns in terms of future tendering—maybe there is a bit of movement to the right on some of them—but overall, nothing that concerns us at the moment. It is very positive in terms of what we are seeing on the rig side, and then the additional FPSOs are coming as well. There is a really good long-term story in Brazil that we think we are well placed to take advantage of once we get the Wilson acquisition into the business. Operator: Thank you. Your next question comes from the line of Jim Rollison of Raymond James. Your line is open. Analyst: Hey, good morning, and thanks for all the detail again this quarter. Quintin, last quarter you were pretty optimistic about how things were shaping up as we head into late this year, really into next year and beyond, and that has only gotten better with the oil macro situation that has come out of this Middle East conflict. It sounds like you are having some customer conversations that have picked up. Are they already trying to mobilize incremental activity at this stage, and how do you think that translates into the timing of your ability to start pushing day rates up? Quintin V. Kneen: It is always a bit of a guess, but the building activity that we are seeing from the rig companies, EPCI, and subsea contractors gives us a lot of confidence in our ability to push day rates up once the market tightens. We are a little bit later in the chartering process for those customers, so I think we are not going to be able to demonstrate that until later into 2026 and into 2027. Analyst: Got it. And then back to M&A. You have the Wilson deal closing, and there have been a couple of other chess pieces moved off the board since you announced that deal. Has the shift in the oil macro and the better environment outlook changed any of the dynamics of opportunities in terms of target acquisition pricing expectations at this point? Quintin V. Kneen: I think people are definitely getting more confident in the longer-term view of the industry, and that is helping. People are also beginning to appreciate the importance of consolidation—they see the benefits from the drillers and other subsectors. I have not seen any real price movements at this point, but if the industry continues to improve at a steady rate, we will certainly see that too. Operator: Your next question comes from the line of Don Crist of Johnson Rice. Your line is open. Analyst: Sorry if this has already been addressed—I got on the call a little late. It is a busy morning. I just wanted to ask about the Far East. We are hearing some news reports of energy shortages and things like that. I know you had a bunch of boats working in Malaysia and Indonesia in the past that got sidelined for other reasons. What is the state of the Indonesian and Malaysia markets right now and your ability to put those big boats back to work? Is that coming sooner rather than later? Any thoughts around that? Piers Middleton: Hi, Don. The market is pretty positive. We do not have a huge number of our biggest market-age-specific vessels there, but we do have a lot of big boats in the region, which will be working in Malaysia, Indonesia, and Australia, and then up in Taiwan. We are very positive. As we said earlier, with the energy security story, we are going to continue to see more investment in those countries. I think the governments have been shocked a little bit by what has happened with Operation Epic Fury. Longer term, we were already seeing it, but we expect to see the governments really doubling down in terms of pushing their NOCs and also the IOCs that operate in those countries to do more investment—more drilling, exploration, and getting production. We are busy down there at the moment, and we expect to continue to be busy as well. We have moved one or two ships already into the region this year. With our operating platform, we are able to do that. It is a positive story in Asia Pacific for us. Analyst: And M&A has been a big topic in Q4 and Q1, so you have not really done any stock buybacks. Quintin, are you leaning more towards stock buybacks as the M&A story goes to the background and you are able to buy some stock back here, or are you going to keep that optionality for the future? Quintin V. Kneen: I do not believe that the M&A opportunities are winding down. We have no issue returning money to shareholders, and share repurchases are our way to do it. But to the extent that we see more value in acquisitions by getting the right boats at the right price, then I would lean toward that. Operator: That concludes our Q&A session. I will now turn the call back over to Quintin V. Kneen for closing remarks. Quintin V. Kneen: Thank you again for joining us today. We look forward to updating you again in August. Goodbye. Operator: This concludes today’s conference call. You may now disconnect.