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Operator: Good day, everyone, and welcome to the Thomson Reuters' First Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Gary Bisbee, Head of Investor Relations. Please go ahead, sir. Gary Bisbee: Thanks, Margo. Good morning, and thank you all for joining us today for our first quarter 2026 earnings call. I'm joined today by our CEO, Steve Hasker; our CFO, Mike Eastwood; and our incoming CFO, Gary Bischoping. Steve and Mike will discuss our results, and then we'll take your questions following our prepared remarks. [Operator Instructions] Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS and other supplementary financial measures, which are discussed on this special note slide. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You can access these reports on our website or by contacting our Investor Relations department. Let me now turn it over to Steve Hasker. Stephen Hasker: Thank you, Gary, and thanks to all of you for joining us today. Before I begin our prepared remarks, I'd like to recognize our colleagues at Reuters, who learned yesterday that they have won 2 2026 pullet surprises for journalism, bringing the total pullet surprises to 15 since 2008. So congratulations to Alexander and everyone at Reuters. We have had a strong start to 2026 with revenue growth ahead of our prior expectations and margins in line. Total company organic revenues rose 8%, up from 7% throughout 2025, driven by 9% growth from the Big 3 segments. We are reaffirming our full year 2026 outlook for organic growth in a range of 7.5% to 8%, including approximately 9.5% for the Big 3 segments and for our margins to rise by 100 basis points year-over-year to approximately 40%. Good momentum continues from many areas in our portfolio. This includes double-digit growth from key products, including CoCounsel, Pagero, SafeSend, SurePrep and our international businesses. We continue to invest heavily in innovation, and we remain focused on delivering against our robust product road maps. Commercial momentum across our AI-enabled offerings continues to build, highlighted by strong adoption trends for Westlaw Advantage. Later in my remarks, I will discuss why we are uniquely positioned to provide producery-grade AI and provide an update on adoption and usage trends. We also remain excited by the development of Thomson, our proprietary legal focused large language model. Thomson has begun to outperform leading frontier models on specific legal tasks and provides us with important optionality as we continue to execute our AI innovation road map. Our capital capacity and liquidity remain a key asset we are focused on deploying to create shareholder value, and we made solid progress on this during the quarter. In February, we raised our annual dividend by 10% for the fifth consecutive year. We repurchased $262 million of our shares in the first quarter. And yesterday, we completed the previously announced $605 million return of capital and concurrent share consolidation. Together, these transactions have reduced our share count by approximately 2%. We remain committed to a balanced capital allocation approach, and we continue to assess a number of inorganic opportunities with more than $9 billion of estimated capital capacity through 2028, we are positioned to be both aggressive and opportunistic. Now to the results for the quarter. First quarter organic revenues grew 8%, organic recurring and transactional revenue grew 8% and 10%, respectively, while Print revenues declined 5%, in line with our expectations. Adjusted EBITDA increased 9% to $881 million with a margin of 42.2%. Turning to the first quarter results by segment. The Big 3 segments delivered 9% organic revenue growth. Legal organic revenue again grew 9% despite softer government growth. Legal, excluding government, accelerated to 11% in Q1 from 9% last quarter. Continued momentum from Westlaw and CoCounsel Legal were the key drivers. Corporate's organic revenue grew 9% driven by offerings in our legal, tax and risk portfolios and segments international businesses. Tax, audit and accounting organic revenues grew 10% driven by CoCounsel for tax and audit, our Latin American business and SafeSend. Reuters' organic revenues rose 6%, driven by within the agency business and our contract with LSEG. Lastly, Global Print organic revenues declined 5% year-on-year. In summary, we're pleased with our start for 2026. I'll now discuss a concept we've recently coined what we call fiduciary-grade AI and provide a few updates on customer adoption and usage. The AI workflow market is evolving rapidly, and we see 3 tiers of solutions emerging. First, general purpose productivity tools that are broadly useful but lack domain depth. Second, professional grade AI built for specific fields, but operating environments where some error is tolerable. And third, the one that defines our business, which is fiduciary-grade AI. Work in law, tax and audit operates under strict regulatory and professional standards because the consequences of being wrong are severe. A small error can mean a lost case, a failed audit, a meaningful financial exposure or worse the loss of customer trust. And that's why professionals in these fields cannot rely on probabilistic answers. They need deterministic solutions that produce work that they can verify, validate and stand behind. We believe that the winners in fiduciary-grade AI will be those who train agents to automate complex work with the accuracy and accountability that fiduciary professions demand. This is a difficult standard, but one we are equipped to meet. In fact, one where we believe we have met with Westlaw Advantage because we bring 4 key assets, which set a standard that cannot be watched. The first asset is our proprietary authoritative content. Without authoritative data, you have no source of truth and thus cannot ground or validate your AI outputs. General purpose models trained on broadly available information, lack this source of truth. We have spent decades building and curating unique proprietary content repositories in legal, tax and compliance, including Westlaw, Practical Law, Checkpoint and clear. These are not easily replicable. The second asset is our deep domain expertise. We have the largest team of subject matter experts in our markets, totaling approximately 2,600 people. This domain expertise is critical. As our experts not only help create our content, but also play a key role in training our AI agents and evaluating and validating their outputs. Let me share an example. Since last July, teams have seasoned attorneys and data scientists have invested thousands of hours building the CoCounsel bench evaluation framework, a growing repository of gold standard [ onces ] to real-world legal queries. CoCounsel bench is used to evaluate and improve the performance of our AI products throughout development so that our AI solutions meet the exacting standards legal professionals require. The third is data privacy and governance. Our messaging to customers is very clear. Their inputs will not become part of our AI output. When a client's privacy is paramount, we protect their workflows, strategic approaches and confidential information. The idea that a fiduciary is training a third-party platform with their clients' confidential information is a third rail issue for the professions that we serve, which makes our commitment in this area, an important trust factor with our customers. The fourth is our customer support infrastructure. When a litigator is working through a complex research matter in Westlaw or a CPA needs help understanding intricate tax regulations as they prepare a tax return they can call our expert reference attorneys and tax analysts. We invest heavily in these capabilities to support our customers and their outcomes in real time. No frontier model or AI-focused start-up offers this. In summary, our authoritative content, train domain experts, data privacy and governance and our customer support together uniquely positioned Thomson Reuters to deliver fiduciary-grade AI solutions to the standards our professional customers demand. Let me next share a few updates on the success we're having with customer adoption of our AI products. I'll start with an update on Westlaw Advantage. As is shown on the left side of the slide, customer feedback has been strong, supporting our view that the new agentic deep research capabilities offer a meaningful step forward in performance. Through 8 months, adoption is running faster than what we have seen with the 2 prior Westlaw upgrade cycles, contributed to our revenue growth from law firms accelerating to 11% in the quarter. Last quarter, we mentioned our work on the next-generation version of CoCounsel Legal, which incorporates a similar agentic framework that has been so successful with Westlaw Advantage. We built from the ground up, it delivers on the vision we set out from the start, an AI companion that works alongside lawyers through every task and every stage of a matter grounded in the trusted sources of knowledge that they can rely on. On the right half side of the slide, we share feedback from 3 customers that have participated in the alpha development stage, which supports our optimism. We recently entered beta with a broader set of customers using the product and look forward to a full launch of next-generation CoCounsel legal in the third quarter. In February, we announced an important milestone, achieving 1 million users for the advanced AI features in our product portfolio through CoCounsel. On the topic of usage, let me share several other statistics to describe the growing customer interaction with our AI features and offerings. Firstly, monthly CoCounsel [ SKUs ] in legal have quadrupled year-over-year with strong growth in both the U.S. and international markets. Secondly, we've seen significant growth following the Westlaw Advantage launch with the number of advantage users and deep research searches, both up more than 7x in the last 6 months. And thirdly, CoCounsel for tax and audit weekly conversation volume has grown approximately 5x since September, reflecting accelerating adoption. And in summary, we remain excited about the building momentum from our AI solutions and the opportunities ahead as we execute against our innovation road maps. Before turning to the financials, I'd like to acknowledge a very important leadership transition. Our Chief Financial Officer, Mike Eastwood, will be retiring at the end of this week after 26 years with Thomson Reuters. Mike has been a trusted partner to me and the Board and has played a central role in strengthening the company's financial discipline, capital allocation and operational execution through a period of significant transformation. I want to sincerely thank Mike for his many contributions and wish him well in his retirement. At the same time, I'm pleased to welcome Gary Bischoping as our incoming Chief Financial Officer. Gary is an accomplished tech executive and finance leader who brings deep financial expertise, strong operational experience and a long and successful track record of driving growth. Gary has been working closely alongside with Mike, me and the leadership team to ensure a seamless transition. We're confident in Gary's leadership and look forward to partnering with him as we continue to execute our strategy. I'll now turn it over to Mike for a review of our financial results. Michael Eastwood: Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the first quarter revenue performance for our Big 3 segments. Organic revenue grew 9% in the first quarter, continuing the strong trend from recent periods. Legal Professionals organic revenue grew 9% again this quarter despite the slower growth from government we discussed last quarter. Key drivers from our product perspective remain Westlaw and CoCounsel. While government slowed to 1% year-over-year growth, legal professionals, excluding government accelerated to 11% growth, up from 9% in the fourth quarter. The strength was broad-based with our large, mid and small law segments, all growing at double-digit growth rates. Our Corporate segment grew 9% organically, driven by 8% recurring and 12% transactional growth. Pagero, Confirmation, Westlaw, CoCounsel, and our international businesses were key contributors. Tax, audit and accounting organic revenue increased 10% and recurring and transactional revenues grew 10% and 11%, respectively. Our Latin America business, CoCounsel for tax and audit, SafeSend and SurePrep were key drivers. The tax, audit and accounting first quarter growth rate was impacted by 2 product updates that shifted revenue recognition towards the second half of the year. For the full year, we remain confident in our 11% to 13% revenue growth outlook, with acceleration from Q1 levels, driven by rising revenue contribution from our newer AI-driven offerings in the U.S., a key product line extension at Dominio in Brazil, and the product updates I just mentioned. Moving to orders. Organic revenue rose 6% for the quarter driven primarily by growth from the news agreement with the data and analytics business of LSEG and our agency business. The latter included $3 million of intercompany transactional licensing revenue related to Reuters News content being used for other Thomson Reuters products. Finally, Global Print revenues decreased 5% on an organic basis. On a consolidated basis, first quarter organic revenues increased 8% up from 7% throughout 2025 and slightly ahead of our expectation from a quarter ago. At the end of Q1, the percent of our annualized contract value, or ACV from products that are Gen AI-enabled was 30%, up from 28% last quarter. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $829 million, up 9% from the prior year period with a margin of 46.7%. Reuters adjusted EBITDA was $34 million with a margin of 16.1%. Global Print's adjusted EBITDA was $43 million with a margin of 38.6%. In aggregate, total company adjusted EBITDA was $881 million, a 9% increase versus Q1 2025, reflecting a flattish year-over-year margin of 42.2%. Our Q1 results included $12 million of severance expense related to our initiatives to reimagine how we work. Turning to earnings per share. Adjusted EPS was $1.23, up 10% from $1.12 in the prior year period. Currency had no impact on adjusted EPS in the quarter. Let me now turn to our free cash flow. For the first quarter, our free cash flow was $332 million, up 19% from $277 million in the prior year. EBITDA growth was the primary driver of the year-over-year increase in free cash flow. I will also provide a quick update on several capital allocation items. In the first quarter, we repurchased $262 million of our shares through the NCIB announced in February. Yesterday, we completed the previously announced $605 million return of capital and concurrent share consolidation. Together, these transactions reduced our share count by approximately 9 million shares or 2%. I will conclude with a few thoughts on our outlook. As Steve outlined, we are largely reaffirming our full year 2026 guidance. We continue to expect organic revenue growth of 7.5% to 8% with the Big 3 growing approximately 9.5%. Within the Big 3, we now expect legal professionals to grow by approximately 9% or the upper end of the prior 8% to 9% framework. We see 2026 adjusted EBITDA margins of approximately 40% up 100 basis points versus 2025, and we expect free cash flow of approximately $2.1 billion. We are raising our interest expense outlook by $30 million to a range of $180 million to $190 million to incorporate the $1.2 billion share repurchase and return of capital we announced on February 25. Inclusive of the higher interest, we expect these transactions to be accretive to our per share earnings and cash flow. We continue to expect the tax rate for the full year to be approximately 19%. I would also note, we plan to pay down the $500 million bond that matures later this month with cash and commercial paper borrowings. Turning to the second quarter. We expect organic revenue growth in a range of 7% to 8% and our adjusted EBITDA margin to be approximately 38%. As a reminder, the sequential decline in our margin into Q2 is primarily due to the normal seasonality of our tax, audit and accounting professionals business segment. I would like to thank you all for your trust and engagement over my 6 years as CFO. It has been an honor to lead such a strong team, and I am really excited for and confident in the company's future. Let me now pass to Gary Bischoping. Gary E. Bischoping, Jr.,: Thank you, Mike. I'm truly excited to be joining Thomson Reuters at such a pivotal moment in the company's evolution. Throughout my career, from my years at Dell to my CFO roles at Varian Medical Systems and Finastra and most recently as an operating partner at Hellman & Friedman, have been drawn to organizations at the intersection of innovation, transformational growth and value creation. Thomson Reuters is exactly that. What brought me here is a unique position this company holds, a trusted global content-driven technology company with strong competitive advantages, a clear strategic vision, a dynamic innovation engine and an extraordinary opportunity ahead in the AI era. I look forward to partnering with the leadership team to drive the next chapter of growth and value creation for our customers, our people and our shareholders. Now I'll turn it to Gary Bisbee for the Q&A. Gary Bisbee: Thanks. Margo,we're ready to move ahead with Q&A. Operator: [Operator Instructions] But we'll go to our first question from Drew McReynolds with RBC. Drew McReynolds: And Mike, congrats on everything, real powerhouse and appreciate all the transparency just in your role as CFO. It's been great working with you. The 2 questions that I had. I think first, maybe for you, Steve, on the legal LLM or the proprietary LLM Thomson. Can you just kind of flesh that out a little bit, just obviously getting good results from it, but how it kind of integrates into your product road map and maybe a little bit more granularity around that? And then secondly, as you look at the fiduciary-grade AI segment of the market, at a high level, obviously, in terms of potential TAM expansion within that segment as you roll out new AI capabilities, just comment on some of the moving parts and how you're doing TAM overall. Stephen Hasker: Yes. Thanks, Drew. And thanks for your comments about Mike. I share your thoughts on his transparency. So with regard to the Thomson model. So you may remember we made a very small acquisition a number of years ago, a business called Safe Sign as testing from SafeSend. And Safe Sign is a collection of of scientists working under the direction of Jonathan Schwarz who's a Google DeepMind researcher. And they're split between Cambridge and Harvard and Imperial College. And essentially, what they had done, we thought was some very early exciting work in building a large language model for legal. And Jonathan was attracted to Thomson Reuters because of the access to our data and our experts, and we are attracted to the quality of the team that Jonathan has built. And so we've really poured fuel on that fire. And Jonathan and his team, to their credit, have built a model, which as I mentioned in my prepared remarks, is outperforming the frontier -- the very latest frontier models for certain legal tasks. And I think the punchline here, Drew, is it provides us with optionality. So for example, we may -- we've built a series of AI products that are model-agnostic. So that's CoCounsel and Westlaw Advantage. We may decide to put some or all of the tasks performed by those agents across to the Thomson model, particularly if it continues to develop at the rate that it has been. So that's one option for us. I think one of a number of other options is we've attracted a significant amount of interest from our largest and most sophisticated customers. So law firms and General Counsel's office as to whether they can access models and start to use those models in conjunction with their own information. And so I think the punchline there, Drew, is we're very excited about the work that Jonathan is doing and the early results. And I think towards the back end of this year, we'll start to make some of the calls as to exactly how we're going to exercise the options I described amongst others. In terms of fiduciary-grade AI and the TAM expansion, I think for some time, as you know, we've been talking about the idea that law firms would replace their -- some of their real estate spend with increased technology spend. And then ultimately, as these tools develop and the change management within the firms starts to take hold, that they may be able to automate significant tasks, particularly at the sort of entry levels and particularly some of the research and document preparation human analysis work. And with CoCounsel Next, the next version of CoCounsel Legal, which, as I mentioned, is now in beta and is testing very, very strongly. We're starting to see, I think, that the process whereby the very high stakes work that has to be right that can't hallucinate is to understand real confidence in and around CoCounsel Next as a tool to support that. And with that, we think that the TAM expansion is just starting. I think we're starting to see it with the 11% organic growth in legal in the first quarter. And we're confident that, that is a trend that will continue for a number of years to come. And so you couple that with our product road map and the sort of change management support that we're increasingly providing to law firms into general counsel's offices. And I think our confidence is growing in the sort of organic growth characteristics of that legal professionals business and of the legal portion of our corporate business. Operator: And we'll next go to Stephanie Price with CIBC. Stephanie Price: Two questions from me. Just on the revenue guide. Hoping you could talk a little bit of the cadence of revenue here. With the Q2 outlook, it does look like H1 revenues are kind of tracking a bit ahead of the full year guide. Can you kind of think about what gets you to the top and bottom end of that revenue guide? And then my second question is just on Anthropic. Obviously, views TRI as a key client. Just curious how you think about vendor relationships here that you have with the LLM and how you envision the partnerships evolving over time? Michael Eastwood: Yes. Stephanie, I'll start and then ask Steve and Gary to supplement. I'll provide a few different viewpoints in regards to your question on the 2026 revenue guidance. First, you alluded to, our Q1 at 8% was slightly higher than the guidance that we provided in February at 7%. Two key factors there. Our legal professionals had really strong demand for Westlaw Advantage, which we launched back in August of 2025 at ILTACON. And second, we continue to have strong demand from our CoCounsel legal product. Secondly, within corporates, we had really strong growth from Pagero, thanks to Laura Clayton McDonnell, Ray Grove and the full team there, Gustav. And then secondly, within corporates, we had higher transactional revenue growth in Q1. A portion of that, we had a few million dollars that shifted of transactional revenue from Q2 into Q1. Second part of your question you alluded to in regards to Q2, our revenue guide for [indiscernible] 7% to 8% organic revenue growth for Q2. Obviously, we're pleased with the Q1 start. A couple of factors to consider for Q2. Q2 does not include any forecasted additional content licensing deals in Q2, which means more modest revenue growth for orders. And then secondly, in Q2, we expect Corporates transactional growth to moderate from the Q1 levels that we saw. That takes us into, I think, the third element of your question in regards to our total revenue guide of 7.5% to 8%. We remain very confident in delivering on that 7.5% to 8% for each of the Big 3 legal professionals, as noted in my prepared remarks today, approximately 9% Corporates, our revenue guide for the full year is 9% to 11%. And then for tax, audit and accounting professionals 11% to 13%. So for the Big 3, we remain very confident there. In regards to factors to consider, Stephanie, in regards to that range of 7.5% to 8%. Big 3, once again, is approximately 9.5% is the quarterly net sales and if you look at our quarterly distribution of sales quota, Q1 is traditionally the lowest sales quarter -- sales quota quarter, which was again Q1 2026. Q4 traditionally is our highest sales quota quarter. It will be again in 2026. So we're really pleased with the momentum of the Q1 sales. And as we go into Q2, we're very pleased with the pipeline across the Big 3. So I think that is a key factor, Stephanie, if you think about that 7.5% to 8% range. Certainly, we have transactional revenue, transactional revenue varies by quarter and also by the segment, but the biggest factor for me is the continued momentum in the net sales or bookings throughout the remainder of the year, which we have very strong confidence in. Westlaw Advantage, as we discussed in February, had a strong December, strong Q4, which helped drive that increase in legal professional revenue growth in Q1. We expect that to continue CoCounsel Legal, if you go through each of the segments, overall confidence, Stephanie. I'll pause before we go into the Anthropic question to see if that was helpful. Stephen Hasker: Yes, Stephanie, the -- so as I mentioned, our AI platforms and agents have been built to be model agnostic. And so what we do is sort of constantly evaluate the latest frontier model releases to see which are best suited. And currently, we think for products like Westlaw Advantage and CoCounsel Legal that that the Anthropic Board models are best suited. But as I said, we can and we are model agnostic and we can and have in the past change the models out. So we've been -- Anthropic are an important vendor to us. We were one of the earliest enterprise customers to Anthropic and continue to work closely with them in terms of the co-development and our products. But we have a level of independence there as we go forward. Operator: And next, we'll go to Kevin McVeigh with UBS. Stephen Hasker: Kevin? We might come back to Kevin. Operator: We'll next go to Vince Valentini with TD Cowen. . Vince Valentini: Congrats to Mike as well on well deserved times been great working with you. Stephen, everything seems so good that the overall results seem strong. You obviously are going to call out areas of the business where you're doing well and where there seems to be a lot of them. Is there anything that's worrying you these days? Do you see any customers who have left your platform, either in legal or in tax? And if so, have you done exit interviews to sort of say what are you leaving for anybody going to [ Parvi or Lavoro ] or maybe just a native AI service like Quad and thinking that's good enough. Are you seeing any -- I don't know with the opposite of a green shoot a dark shoot here of anything that worries you that if more customers started doing that, it could be problematic in the future? Or is it just simply nothing and you're still winning across the board? Stephen Hasker: Yes. Yes. Thanks, Vince. It's a great question. So everything worries me. The team here will tell you paranoid a lot of things. So I won't bore you with everything there. But what I would say is a couple of things. As you know, we've been focused on retention since the change program. And I think we're finally starting to see the green shoots and things tick up in terms of our customer retention. And that's across -- across the different segments. But we're seeing a broad-based positive signs in terms of retention. So there is nothing new or worrying in terms of customers moving away from our content-driven technology products across the Big 3. What I would say is I think we're at a phase where there's lots of law firms trialing lots of different tools. So if you speak with a law firm, they'll be running a trial of or they'll have implemented CoCounsel or they implemented 1 or 2 other tools. And I think that's why we're so excited about CoCounsel Next. We think that it's a big step forward, and it represents the combination of content, expertise, data privacy and support in ways that none of our competitors can match. And so we're increasingly confident that as we pull that into full release and scale it up in the U.S. and beyond, that will start to accelerate from some of the competitors that exist. Vince Valentini: Okay. Fair enough. And I just try to clarify something. I'm not sure I understand the 7x and the 5x figures you gave, both Westlaw Advantage, Deep Research and the CoCounsel for tax were not available a year ago. So I assume that's not a year-over-year figure, and it wouldn't be relevant if you measured it from day 1 to now, it's obviously going to increase exponentially, but I assume you wouldn't have given us the number, if there wasn't some relevance to it. So can you just help me unpack... Michael Eastwood: You want to expand the starting of this. . Gary E. Bischoping, Jr.,: Yes. Vince, so on the Westlaw advantage, what Steve mentioned was over the last 6 months. And so that began a few months after launch. And for CoCounsel tax and audit, it was the number of customer conversations in the product has gone up 5x since September. Stephen Hasker: Yes. And let me sort of expand on it, Vince, to explain why we mentioned those stats and why we're excited. I think to an earlier question, we see the TAM expanding from law firms, from general counsels from tax and audit firms for different reasons, but basically spending more on technology and starting to get to levels that are comparable with other professions in terms of the percent of revenues that is spent on technology. We think over the next few years, they're going to start to approximate or at least get within the same ZIP code as some of the other professions. So that's the first sort of TAM expansion. I think the second is we've talked since our last Investor Day about AI being the means with which Thomson Reuters can play a larger well success of our customers. And if you take something like -- okay, if you take something like prior versions of Westlaw, which was the leading sort of point solution for litigation research, and you compare that to Westlaw and Practical Law integrated in CoCounsel. We envisage a world where the first thing a lawyer does when they get into the office in the morning is switch CoCounsel alone. And it's a companion throughout the entire day, whether they're doing litigation research, whether they're drafting, whether they're drafting a motion to compel or a motion to dismiss, whether they're doing an SEC filing, whatever it might be, and are similar with ready to review and ready to advise in the context of our tax accounting business. So we really do believe this is the vehicle for a pretty significant increase in the number of touch points with our customers and the users. And that, I think, is an exciting growth vector that we plan to fully explore in terms of the product road map in the coming couple of years. Operator: We'll next go back to Kevin McVeigh with UBS. Kevin McVeigh: And let me add my congratulations, Mike. You've obviously done an exceptional job helping set you folks on the path today, and I wish you well. I guess, maybe can we talk about the AI-related ACV, you've seen pretty good momentum there. I think the number is 30%, which is up from last quarter. Any sense of where that ultimately settles? And I guess the spirit of my question is, I think there's been so much concern, which we think is overdone. We think there's a real big opportunity beyond the core. So maybe talk about just the ACV growth? And then ultimately, Steve, maybe some of the other addressable markets, whether it's mid- to down market, you can really start to focus on with the technology. Michael Eastwood: Kevin, happy to start there, and thank you for your kind remarks there. I'll just go back in time 5 quarters ago, we introduced the AI-enabled ACV metric. We were at 15% 5 quarters ago. As you said, we're now at 30% as of March 31, 2% increase versus year-end. We expect that to continue to increase each month, each quarter, Kevin. We'll continue to provide that on a quarterly basis. Gary will there. We think that's a really important signal for us. As we've discussed in the past, Westlaw, Westlaw Advantage the high end of Practical Law, CoCounsel Legal, CoCounsel tax and audit or some of the drivers there. As we launch CoCounsel Next later this year, we think that will be a further seamless for this AI-enabled metric. Also, I think we mentioned in prior quarters, some of our products, especially in the ONESOURCE array or a suite of products as they become AI-enabled. At some point in time, I speculate, Kevin, there's going to be more of a step change. Right now, we're seeing 2 to 3 percentage points increase on a quarterly basis. I think that certainly continues to increase over the time horizon. We're very encouraged on our product pipeline, innovation pipeline. And as that continues to go forward, the underlying ACV metric will continue to increase. You specifically asked, Kevin, about maybe a point in time orders to get to. I think it just continues to increase over time on a quarterly basis. Stephen Hasker: Yes. Let me talk about the sort of -- some of the dynamics to your point, Kevin, about mid- to down market opportunities. I'd point to a couple of things. So typically, when we put out a new version of Westlaw, it was the most -- it was the largest firms with the biggest budgets in the most sort of one of a better term sophisticated procurement organizations, whether that was a Chief Knowledge Officer or a CTO that would evaluate the tool and and adopt it first. And then we'd sort of grow the ACV number as it penetrated further and further down market. If you look today at CoCounsel, we get sold litigators and sold transaction attorneys in the Midwest of the U.S. and in Canada and Australia, the U.K. elsewhere. We'll take one look at it and say, okay, sign me up. And Aaron Rademacher, who runs the small law segment, Lucy Mackin, who runs mid law, have done a wonderful job of getting these tools in the hands of customers of all sizes. And that's a fundamentally new dynamic, and I think it's starting to contribute to that growth acceleration that we saw in the first quarter. So that's the first one. I think the second one is at the very most sophisticated end, you have sort of legendary litigators and transaction attorneys who litigator, whose entire sort of profession has been based on sitting in conference rooms with the collection of peers partners and refining their arguments over hours or even days in advance of a trial. Those same attorneys are increasingly using Westlaw Advantage for that process and decreasingly spending the time of their partners. And that has certainly exceeded my expectations in terms of the sophistication of the products that we're putting into the marketplace and the kind of the sophistication of work that we're able to, in a sense, automate and supplement. And then I think in the tax space, we're seeing the same thing. Typically, it was the largest firms with the biggest budgets. But with products like ready to review and ready to advise, these are appealing at least in the early going, and it's still early for those products, these are appealing to the smallest firms that have a collection of clients in one particular geography. So AI, as I said, I think the TAM is growing on the back of these firms spending more money on technology, but it's also growing in terms of the, as you said, the mid- to down market opportunities and the opportunity at the very top end. So we see sort of multiple vectors of growth, as I said, that we're planning to to explore in the coming years. Operator: And next, we'll go to Tim Casey with BMO. Tim Casey: Could you talk a little bit about EBITDA margins going forward? And when you kept the guide stable. Just wondering about the balance between operating leverage and business mix and so forth. And as a follow-on, how should we think about transactional revenues? Are they similar margins to recurring revenues? Or are they lower margin? Michael Eastwood: Yes. Kevin, Tim, I'll start with each of those. First, in regards to EBITDA margin. I'll share a few comments in regards to both Q2 but for the full year. In regards to the Q2 margin, as noted in my prepared remarks, 38% EBITDA margin for Q2, we remain confident in our full year outlook for 100 basis points margin expansion, 2 key drivers there, the underlying operating leverage that we continue to have and achieve. And second is the growing benefits from our efforts to reimagine how we work through AI-driven automation. Andrew Pearce, Liz Bank, Jason Win, Mike Goddard, Kirsty Roth various leaders within our business, continue to drive our productivity initiatives in regards to reimagining how we work. So if you look at the full year, Tim, that's why we're confident in 100 basis points. If we look at just Q2 separately, 3 factors to consider. We do have increased LLM cost. Second, we have some modest M&A dilution in Q2, and as I mentioned in my prepared remarks, the tax, audit and accounting professional business led by Elizabeth Beastrom, has seasonality there. So then that takes us naturally into H2 and why are we confident with higher margins for the second half of 2026. One, we have continued productivity from the AI automation, reimagining how we work that I just mentioned, that is building in Q1, Q2 that continues to build and have an uplift in Q3, Q4. Second, the M&A dilution that occurred both in Q1, Q2 and that begins to lap in Q3, Q4, meaning it goes away. And then the third item I would mention is the LLM cost. We saw LLM costs begin to increase in August of 2025 with the launch of Westlaw Advantage. As we go into Q3, the degree of increase for the LLM cost lessens because it, in essence, begins to lap and begins to normalize there. So hopefully, Tim, that was helpful, in regards to really the evolution of our margin in Q2, and there will be a step up in Q3, Q4, which we have line of sight on, as I mentioned, which gives us confidence to deliver the 100 basis points improvement for the full year. Your second question related to transactional revenue. Transactional revenue profitability does vary areas like professional services will traditionally have a lower margin than some other products, say, some of the AI content licensing revenue that we have in borders would be at the high end. And then if you look at the continuum on the left side, the lowest piece would be things like professional services. On the right side, the high end would be Reuters AI content licensing revenue and then you have a distribution across that. So there is a pretty good wide distribution on the transactional revenue, Tim. Hopefully, that was helpful. Tim Casey: Yes, Mike, just a follow-up. What -- is there not a concern that LLM costs will continue to increase as you lean into your proprietary Thomson model? Michael Eastwood: With the LLM cost, as we have more and more AI offerings, certainly, that increased on a variable basis. But if you look at LLM costs, although they're increasing, they remain a relatively small for all cost for Thomson Reuters. So we have it appropriately factored into our forecast and in our guidance. Steve talked about the Thomson LLM earlier. As we go through the end of '26 into '27, could that be an avenue to help us manage the LLM cost? The answer is yes there, but I'll emphasize the LLM costs overall for total TR is a relatively small cost. But what's happening is why I mentioned it for Q1 and Q2, it began in Q3 of 2024 and is building. Steve, anything to add? Stephen Hasker: No. I think as I said, the optionality around the Thomson model is twofold. One, the quality and accuracy that model, given that it's been specifically created the legal task. And secondly, the fact that we can run it on a per unit basis at a fraction of accessing a frontier model. So those 2 things are attractive, and we're going to keep investing in it as we have been, and update you as we go. . Operator: And next, we'll go to Andrew Steinerman with JPMorgan. Andrew Steinerman: I just wanted to know within the revenue guide, particularly for legal professionals for the year, what's assumed in terms of the government practice as we move through '26. And then also overall for the '26 revenue guide, are you assuming a contribution from CoCounsel Legal Next? Michael Eastwood: First, in regards to government, Andrew, we expect the growth to remain subdued near term. We are optimistic regarding the reacceleration of government revenue led by Pat Eveland. Once we lap the losses and downgrades that occurred last fall, so we'll see as we approach the end of 2026, an uptick in the overall government revenue. So we have assumed when we think about legal professionals overall that the government growth rate remains subdued near term, and then begins to increase towards the end of 2026, and then that will increase as we go into 2027. And can you repeat the second part of your question, Andrew? Andrew Steinerman: Sure. I just was asking in the 2026 revenue guide, are you assuming any revenue contribution from the new product CoCounsel Legal Next? Michael Eastwood: Yes. Certainly, we're very pleased with the progression of CoCounsel Legal. And when it's launched sometime in Q3, we're very optimistic with the sales momentum there. So it will provide some degree of revenue for us in the latter part of 2026. But the larger contribution from CoCounsel Next will happen in 2027, just with the revenue recognition. I would call out Emily Colbert and Rawia Ashraf in regards to the work that they're doing on it, very pleased with beta. I think now we're in the third week of beta for CoCounsel Next. So good momentum and progress there. And we expect really good sales momentum, Q3, Q4, Andrew, but then the rev rec really beginning to take hold as we go into the latter half of '26 and then '27. Operator: And next, we'll go to Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: Wanted off of my best to Mike as well, an outstanding tenure as CFO from my vantage point. All the best, Mike. And just wanted to start on the capital allocation side. Obviously, you announced a sizable buyback and return of capital. Is it -- correct me if I'm wrong, you bought back $262 million worth of shares as of March 31. Am I correct in assuming there haven't been any more utilization of that block since the remaining $340 million or whatever, since April? And then perhaps generally your view on stepping that up. I mean the companies that have seen setoffs in their stock, including some of your comps have announced more sizable buybacks and you certainly have the flexibility to do that. I wanted to get your thoughts on that. Michael Eastwood: Sure, Aravinda, multiple questions there. First, just a reminder, we did complete the $605 million return of capital yesterday with the cash distribution being executed. Your question in regards to the NCIB, we have not done any additional purchases beyond the $262 million that occurred in Q1. We do plan Aravinda to complete the remaining $338 million in the second quarter. That is our intent. In regards to our overall balanced capital allocation approach, certainly, we have the annual dividend increase 5 years in a row now of 10%, still focused on strategic M&A. And that leads to your point in regards to the optionality to consider additional capital returns. It is something that we will continue to discuss with our Board. The next meeting is in June, followed by September. So certainly, with the very strong balance sheet that we have, Aravinda, is something that we will continue to have discussions with our Board with no specific commitments today to announce or to discuss but we agree that it is certainly an option for us to consider additional NCIB share backs. We agree that they are accretive today and we certainly have to balance it with strategic M&A opportunities. Aravinda Galappatthige: And just a quick follow-up, smaller question on Westlaw Advantage Deep Research. I forget, Mike, if you had given any numbers on adoption there, any targets or any sort of recent adoption numbers that you've quoted. I was wondering if you can speak to that. Michael Eastwood: Yes. We have not quoted specific adoption numbers on Westlaw Advantage. 5 quarters ago when we pivoted to the overall GenAI enabled metric. We thought that was more encompassing of our total portfolio. I can't share some additional points on Westlaw Advantage. It is definitely trending faster that being the ACV penetration, trending faster than the prior to Westlaw upgrade cycles that we had there. We're certainly very encouraged with the fast start on sales and very strong customer usage there. I can confirm again, very strong sales for Westlaw Advantage in the first 8 months since it was launched August of 2025. And as I look at the pipeline for Q2, whether it be global Westlaw, midsized firms or small law, very strong pipelines. We would anticipate and forecast that Westlaw Advantage continues to have a strong Q2 and a strong 2026 overall and 2027. Very encouraged with the progress there. I think Steve may have mentioned Mike Dahn earlier, Emily Colbert, who lead Westlaw Advantage, just a hell of a job there. Operator: And next, we'll go to Jason Haas with Wells Fargo. . Jason Haas: I'm curious, was there any negative impact to sales cycles or anything from the conflict in the Middle East in 1Q? . Stephen Hasker: es, go ahead, Mike. . Michael Eastwood: No negative impact, Jason, in regards to the conflict. Stephen Hasker: It certainly -- it's certainly amongst other global events caused an uptick in the Reuters subscription business. And I think put the spotlight on the quality of that coverage, Jason, but as we've described over the years, our business, we're fortunate enough to have a business that is largely immune to the cycles. Jason Haas: Okay. That's great to hear. And then just as a follow-up, on the tax, law and accounting professionals business, can you just share why that was slower at 10% organic growth in 1Q and what drove the deceleration through the year? Michael Eastwood: Sure. I'll take each of those, Jason. First, in regards to tax, law and accounting, 10% organic growth in Q1. It was impacted by revenue recognition timing shift or 2 products that will normalize in H2. In simple words, we had some revenue recognition that shifted from Q1, Q2 into Q3, Q4. If you look at it on a full year basis, it normalizes or harmonizes, that was the biggest factor. If you look at the full year in regards to why we're confident, once again, Elizabeth Beastrom and team drives that, we're confident in delivering the 11% to 13% range that we have previously provided. I would emphasize 3 factors: First, the revenue recognition timing that I just mentioned, that normalizes. Second, Adrian Fognini has a key product line extension with our Dominio business in Brazil. I can confirm that Dominio continued to grow approximately 20% again in Q1 but with the key product line extension and launch for Dominio, that will provide incremental growth in revenue internationally for the TAP portion of business. And then thirdly, Jason, is the newer AI-driven offerings in the U.S. will provide additional lift as we go through this year. But once again, very confident in achieving 11% to 13% for the full year. Operator: Next, we'll go to Doug Arthur with Huber Research. . Douglas Arthur: Yes, Mike, just staying with tax and accounting for a second. The costs in the quarter were up quite a bit. I know you had mentioned that on the fourth quarter call. Was that partly or mostly the SafeSend acquisition impact? Michael Eastwood: We had 3 factors, Doug. First, we had some modest dilution from the Additive acquisition that we closed last fall. Second, we made some additional investments in our product line in Dominio that I just mentioned that has an upcoming launch. And then thirdly, a portion of the $12 million of severance that are referenced for total TR that impacted TAP. So the convergence of those 3 factors was the reason for the lower margin for TAP in Q1. Operator: And next, we'll go to Maher Yaghi with Scotiabank. Maher Yaghi: Great. And congrats, Mike, on great tenure at Thomson. I wanted to ask you, I know you disclosed the ACV on GenAI, but could you provide some KPIs that prove that AI is lifting net revenues and not just increasing usage example like Westlaw Advantage upgrade attachments versus CoCounsel paid expansion into new horizontal segments of the market something that can give us some sense of that AI is adding top line revenue growth, not just on your existing subscription basis that you used to have in the past, but expansion into new segments of the market. Michael Eastwood: Yes. I think, Maher, the most prominent metric that I provide both Steve and I mentioned in our prepared remarks, legal professionals or law firms revenue, excluding government, 11% organic growth in Q1, up from 9% in Q4 really speaks to the penetration that we're getting across every segment of legal professionals and law firms, that's led by Raghu Ramanathan and his team there. We had double-digit organic growth in global large law firms, midsized firms and small firms. And we have the highest growth ever in each of these segments in Q1. I apologize if that's overly simplistic, Maher, but driving that 11% growth in Q1, up 9%. I think it's a pretty tangible metric for us to just continue to monitor. And we have confidence as we go into Q2 and the full year in regards to that 11%. Maher Yaghi: Okay. Great. And just one follow-up question on the margin expansion in the second half. Can you give us maybe some -- like a bridge that helps us understand where the improvement in the margins year-on-year will be coming from in the second half? Is it all from do we imagine how we work business productivity improvement that you have? Or -- some of it can also come from AI revenue growth? Michael Eastwood: Yes. Certainly, as we continue to expand our overall revenue growth, that will help us in margin, just given the significant operating leverage that we have. Secondly, I'll just reemphasize the work that we're doing and reimagine how we work, that will accelerate as we go into Q3, Q4. So that continued operating leverage, higher revenues, the benefits from reimagining how we work. And then also just sorry to be repeated, if I mentioned earlier, the M&A dilution laps or decreased in the second half of 2026. That also helps us. And then also LLM calls since we had them last year also helps when you do it year-over-year. And if you look at a bridge on the full year margin expansion. . Operator: Next, we'll go to Toni Kaplan with Morgan Stanley. Toni Kaplan: And I'll add my congrats to Mike. It's been really terrific working with you over the years. So all the best. Steve, wanted to go back to your comment that many customers are utilizing multiple AI and technology tools, which is something we've seen as well. And I see the advantage of having your AI product utilizing the Westlaw Legal data and research. And so I guess my main question is, if you have the strong AI product, which I think you do. And I guess, why isn't it more compelling that -- and you are seeing success, so I don't want to take that away. But I guess it seems like a natural that someone would want to choose strong AI product with the really strong legal research. And so I just wanted to understand why this hasn't taken off across the top 100 law firms, for example. Stephen Hasker: Yes. Toni, I think as we recently published, we've got to 1 million CoCounsel users across various instances of the product. So we're proud of that, we're sort of happy with this, if you like, the starting point as we sit here today. I think, though, back to Vince's questions to what worries me. I think if I were giving this a hard grade I would say that within the legal realm, it has taken us too long to really unleash the sort of power, if you like, in the authority of our content, Westlaw, Practical Law and so forth and our experts. And that's why we're excited about CoCounsel Legal. We think it's a big step forward. It's fully agentic. It's a deep research built product. It's been built by, in large part, the same engineers and data scientists that did Westlaw Advantage. And I think for the first time, what the market is going to see is an agentic legal assistant that is grounded in that authoritative content. The prior versions in the legal realm were built on the case text methodology without full access to our content. And so you could critique us for taking a while to do that, but we wanted to get it right, and we think we have. And certainly, the early beta testing suggests that we have. So we'll keep refining it. We'll keep learning and investing and scaling it. But Toni, I think that explains why you've got a pretty sort of fragmented market with multiple tools being measured and why we're increasingly confident going forward. Operator: Next, we'll go to Curtis Nagle with Bank of America. Curtis Nagle: Great. Maybe just staying on that topic, Steve, just elaborate a little bit more on the feedback you're hearing from clients on next-gen version of CoCounsel underlying demand. And I guess just how material of an upgrade cycle do you think we could see? And to what degree that is factored in guidance, so don't sound like me at this point. Stephen Hasker: Yes. I mean, Curtis, we're -- I think we've got to sort of look at exactly where the marketplace is at. And in my view, and this is a view that's shared by many of the managing partners that I interact with on a daily basis. The tools, including ours, and we think especially ours now that we've got CoCounsel Next in the marketplace, are ahead of the change management within the firms, right? It's one thing to sort of give a lawyer access to one of these tools and have him or her save a few hours in place many hours a day. It's another thing to rewrite the basis on which a young attorney produces a work product, run that up the chain, gets feedback, refines it and eventually it goes from a partner to a client for review and discussion, that process, I think, is just beginning. And that's why from a revenue standpoint, we -- as I said, we're proud of the 1 million users. I think we're off to a good start, CoCounsel, the next version of Legal is a really exciting step forward for the entire industry in our view. But it's going to take the change management to sort of mirror that for this sort of virtuous circle to really kick in. And as that happens, we are confident in the revenue and the growth prospects and we like the margin profile, but it's -- I think it's still fairly early days. Operator: And next, we'll go to George Tong with Goldman Sachs. Keen Fai Tong: I'll add my congrats, Mike, on your retirement. In terms of the legal ex government organic growth acceleration from 9% to 11%, can you discuss how much of that acceleration came from volumes versus sell versus pricing? Michael Eastwood: George, I don't have at my fingertips the breakdown between those 3 components like reiterate is that we had really strong performance across all of our segments. As I've mentioned before in prior releases of new versions of Westlaw, we would see first the traction in the large law firms and then it would begin to evolve in the mid and small with Westlaw Advantage, we're seeing consistent track across large law, mid low and small wall. And we're seeing the retention rates continue to hold there, George. I think that given seeing strong performance across -- and I should also mention John Shotwell in Europe across all geographies, across all segments of legal professionals and law firms we're seeing really strong adoption of Westlaw Advantage and CoCounsel Legal, and that's what's driving that 11% for legal, excluding government. Keen Fai Tong: Got it. That's helpful. And as a follow-up, can you share how legal government performed in the quarter? Michael Eastwood: Legal had a 1% growth in Q1. That was down from Q4. As I mentioned in the February earnings call, we had the cancellations and downgrades in government in the second half of 2025. So we also indicated in February that Q1 would have a lower growth rate for government in Q1 given that rev rec impact. And as a follow-up to one of the questions I received earlier as we go into Q3 and Q4, and we began to lap those cancellations and downgrades, we're very confident that Pat Eveland team will drive accelerated organic growth for government and the latter part of '26 and then into '27. . Operator: And at this time, I'd like to turn the call back over to Gary Bisbee. Please go ahead. Gary Bisbee: Yes. Thanks, everybody. We're around if you want to follow up. Have a good day. Thank you. Operator: Okay. Thank you. And this does conclude today's call. We thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Addus HomeCare's First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Drew Anderson. Please go ahead. Darby Anderson: Thank you. Good morning, and welcome to the Addus HomeCare Corporation First Quarter 2026 Earnings Conference Call. Today's call is being recorded. To the extent any non-GAAP financial measure is discussed in today's call, you will find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release. This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2026 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its first quarter 2026 news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's Chairman and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir. R. Allison: Thank you, Drew. Good morning, and welcome to our 2026 First Quarter Earnings Call. With me today are Brian Pop, our Chief Financial Officer; and Heather Dickson, our President and Chief Operating Officer. As we do on each of our quarterly earnings calls, I will begin with a few overall comments, and then Brian will discuss the first quarter results in more detail. Following our comments, the 3 of us would be happy to respond to any questions. As we announced yesterday afternoon, our total revenue for the first quarter of 2026 was $363.6 million, an increase of 7.7% and as compared to $337.7 million for the first quarter of 2025. This revenue growth resulted in an adjusted earnings per share of $1.62 and as compared to adjusted earnings per share for the first quarter of '25 of $1.42, an increase of 14.1%. Our adjusted EBITDA was $44.5 million compared to $40.6 million for the first quarter of 2025, an increase of 9.7%. For the first quarter of 2026, cash flow from operation was $52.4 million as compared to $18.9 million for the same period in 2025. As of March 31, 2026, we had cash on hand of approximately $103 million. With our strong cash flow in the first quarter, we reduced our bank debt to $94.3 million, leaving us with the financial flexibility to consider larger acquisitions as we continue to pursue expansion of our market reach and creating geographic density. During the first quarter, we saw an impact on revenue due to the widespread weather event that occurred towards the end of January. Our team did a good job of rescheduling affected personal care visits where possible. However, we could not make up for every weather-impacted miss visit. While the amount of the revenue was immaterial to our company overall, we did see a loss of revenue of approximately $1.5 million as a result of these storms. However, February and March returned to our normalized revenue expectations. As we announced on May 1, we closed on the acquisition of the Personal Care operations of home court home care based in Fort Wayne, Indiana. This acquisition marks our entry into an attractive state, which is adjacent to our largest personal care market of Illinois. We have been interested in Indiana for some time as over the past 3 years, they increased rates and worked to eliminate client wait lists. I'm excited to welcome all of our new team members from home court home care. We have also entered into a definitive purchase agreement for an additional personal care operation in Indiana, which will complement HomeCourt home care. We anticipate that this additional Indiana acquisition should close in the coming months subject to customary regulatory approvals. These 2 acquisitions continue our strategy of entering new markets with scale and where we have the ability to expand our services. As we mentioned on our last earnings call, the State of Illinois increased our rates in personal care service effective on January 1, 2026, adding approximately $17.5 million in annualized revenues. This most recent rate increase continues to show the important support we are receiving from our state partners as we continue to provide these much-needed services to our elderly and disabled clients. We also understand the New Mexico legislature included increased funding of $10 million for home and community-based services in the budget for the upcoming fiscal year. We are waiting for communications from the New Mexico Medicaid department regarding how and to which programs the funding will be extended. As we have stated before, we continue to believe that the 80-20 provision of the CMS Medicaid access rule will be eliminated in the near future. While implementation is still several years away and has no current impact on our business or financial performance, we believe this outcome would be an encouraging development for both our industry and our company. All our recent communications indicate that this part of the Medicaid access rule is expected to be eliminated this year. During the first quarter of 2026 we continued to experience positive current trends in our Personal Care segment. Our number of hires for [indiscernible] in the first quarter of 2026 was 108, up sequentially from 103 hires per day in the fourth quarter of last year and consistent with the first quarter of 2021. We achieved this number in spite of the impact of the weather event I mentioned earlier. As we have mentioned in the last few quarters, our clinical hiring remains consistent and has been mostly stable outside of a few of our urban markets. However, even in those markets, we have been able to staff our operations appropriately. Now let me discuss our same-store revenue growth for the first quarter of 2026. For our Personal Care segment, our same-store revenue growth was 6.5% compared to the first quarter of 2025. During the first quarter of 2026, we saw personal care same-store hours increased by 2.2% compared to the same period in 2025 and while our percentage of authorized hours served in the first quarter remain consistent with what we experienced in the fourth quarter of 2025. On a sequential basis, Personal Care same-store census was down slightly, partially due to the weather we mentioned before. However, during the first quarter, we saw growth in clients served in Illinois, our largest market, which is something we had anticipated for a while. This is important as we look to achieve year-over-year census during 2026. Turning to our clinical operations. Our hospice same-store revenue increased 7.7% compared to the first quarter of 2025. Our average daily census increased to 3,804 for the first quarter up from 3,515 for the same period last year, an increase of 8.2%. For the first quarter of 2026, our hospice medium length of stay was 23 days as compared to 25 days for the fourth quarter of 2025 and 19 days for the first quarter of 2025. We are very pleased by the continued growth in our hospice segment over the past several quarters. While our home health same-store revenue decreased when compared to the same quarter of 2025, our home health operating income improved over last year's first quarter and sequentially versus the fourth quarter of 2025. It is also important to understand that over 25% of our hospice admissions in New Mexico and now in Tennessee are coming from our own Addus Home Health operations, which overlap in these 2 markets as we continue to focus on our bridge program. We are pleased to see more patients receiving the benefit of the full continuum of post-acute home-based care and anticipate seeing similar clinical teamwork developed in Illinois, where we also have both home health and hospice operations. We continue to believe that size and scale are important to health care services and have been the focus of our strategy for the past 10 years. We continue to evaluate opportunities, which will increase both density and geographic coverage as well as seek to further strengthen our relationships with states and managed care organizations. Recently, we have begun to see an increasing number of personal care opportunities. Due to our focus on maintaining a conservative balance sheet, we have the ability to actively pursue these transactions. Recently, there appears to be more optimism around home health care due to the final home health rule for 2026 being more favorable than was originally proposed. While there is still some uncertainty about the future rate increases, there does seem to be more potential activity in home health care. While we will be open to home health opportunities, we will continue to be diligent as we evaluate possible transactions to further our strategy. Before I turn the call over to Brian, it is important that I thank the Addus team for the care they are providing to our elderly and disabled consumers and patients. We all have come to understand that the majority of this population prefers to receive here at home, which not only remains one of the safest but also the most cost-effective places to receive this care. We believe the heightened awareness of the value of home-based care is favorable for our industry and will continue to be a growth opportunity for our company. We understand and appreciate that our operations and growth are dependent on both our dedicated caregivers and other employees who work so incredibly hard providing outstanding care and support to our clients, patients and their families. With that, let me turn the call over to Brian. Brian Poff: Thank you, Dirk, and good morning, everyone. The first quarter of 2026 marked a solid start to a new year for Addus. The results for the quarter reflect our continued ability to execute our strategy and deliver consistent growth. Results were highlighted by a 7.7% increase in top line revenue to $363.6 million and a 9.7% increase in adjusted EBITDA to $44.5 million when compared with the first quarter of 2025. Our Personal Care Services segment, which accounted for 77.3% of our revenues, was a key driver of our business. Revenues for the segment grew to $281.1 million, an increase of 8.8% overall and an increase of 6.5% on a same-store basis compared to the same quarter last year. We are continuing to see contributions from our acquisition of Gentiva's Personal Care operations in late 2024 and the acquisitions of Helping Hands home care services and [indiscernible] Home Care, both of which were acquired in the back half of 2025. The revenues of Gentiva's Personal Care operations are included in our same-store numbers for the first time this quarter. In addition to higher volumes, we are continuing to benefit from rate support in some of our key state markets including our 2 largest in Illinois and Texas. Our first quarter results included the impact of the 3.9% rate increase in Illinois, which became effective on January 1, 2026, and as well as the 9.9% rate increase in Texas that became effective on September 1, 2025. Our hospice care business continued to perform well and accounted for 18.1% of revenues for the first quarter. Our hospice revenues were $65.8 million, with a same-store increase of 7.7% over the same period last year and year-over-year improvement in average daily census. For the period, Home Health Services, our smallest segment, accounted for 4.6% of first quarter revenue at $16.7 million. We continue to look for ways to support and expand our home health service line, including through acquisitions, as we believe important synergies can be realized by offering multiple levels of home-based care in the markets we serve. Yesterday, we announced 2 transactions in Indiana, HomeCourt Home Care based in Fort Wayne which closed on May 1, and the signing of a definitive agreement to acquire additional operations of a similar size in the state. Currently, HomeCourt serves approximately 240 clients with annual revenues of approximately $9.7 million. We anticipate our second acquisition in the state will close later this year. We believe our announced expansion into Indiana, a new market for Addus is aligned with our strategy of broadening our geographic coverage with density and scale. Our team looks forward to welcoming the clients and caregivers to the Addus family. We intend to provide additional details on the second acquisition when regulatory considerations permit. Strategic opportunities will continue to play a role in our long-term growth planning. Our primary focus will be on identifying opportunities where we can leverage geographic coverage and density providing us with a competitive advantage. We will also seek opportunities to add services to meet our ultimate objective of offering multiple levels of care in the markets we serve. With our size and expanding scale and the support of a strong balance sheet, we are well positioned to execute our strategy. As Dirk noted, total net service revenues for the first quarter were $363.6 million. The revenue breakdown is as follows: Personal Care revenues were $281.1 million or 77.3% of revenue, Hospice care revenues were $65.8 million or 18.1% of revenue and home health revenues were $16.7 million or 4.6% of revenue. Other financial results for the first quarter of 2026 include the following: our gross margin percentage was 31.9%, consistent with the first quarter of 2025. As usual, our gross margin was affected in the first quarter by our annual merit increases and the annual reset of payroll taxes. Looking forward, we anticipate our gross margin percentage will remain relatively stable and consistent with our historical annual pattern. G&A expense was 21.4% of revenue compared with 21.7% of revenue for the first quarter a year ago. Adjusted G&A expense for the first quarter was 19.6% and compared with 19.9% a year ago as we continue to generate leverage from our growing revenue base. The company's adjusted EBITDA for the first quarter of 2026 was $44.5 million compared with $4.6 million a year ago, an increase of 9.7%. Adjusted EBITDA margin was 12.2% compared with 12% for the first quarter of 2025. Consistent with 2025, we anticipate our adjusted EBITDA margin percentage for the full year will remain above 12%. Adjusted net income per diluted share was $1.62 compared with $1.42 for the first quarter of 2025. The adjusted per share results for the first quarter of 2026 exclude the following: acquisition expense of $0.06 and noncash stock-based compensation expense of $0.20, including the impact of accelerated vesting for the previously announced retirement of our former President and COO. The adjusted per share results for the first quarter of 2025 exclude the following: acquisition expenses of $0.13 and noncash stock-based compensation expense of $0.13. Our effective tax rate for the first quarter of 2026 was 22.7%, benefiting from the excess tax benefit related to our stock compensation. For the full year 2026, we expect our tax rate to be in the mid-20% range. DSOs were 63 days at the end of the first quarter of 2026 compared with 38.2 days at the end of the fourth quarter of 2025 with DSOs for the Illinois Department of Aging at 47.4 days compared with 54.7 days at the end of the fourth quarter of 2025. As expected, we saw a resolution in some of the normal timing differences in payment cycles we experienced around year-end. Our net cash flow from operations was $52.4 million for the first quarter of 2026, a strong start to the year. As of March 31, 2026, the company had cash of $103.1 million with capacity and availability under our revolving credit facility of $650 million and $547.8 million, respectively. Total bank debt was $94.3 million at the end of the quarter a reduction of $30 million from the end of the fourth quarter of 2025. We have continued to reduce our revolver balance in the second quarter of 2026, with $10 million paid to date. We have a capital structure that supports continued pursuit of our strategic initiatives. Looking ahead, we expect to maintain our disciplined capital allocation strategy and continue to diligently manage our net leverage ratio while also focusing on enhancing shareholder value. This concludes our prepared comments this morning, and thank you for being with us. I'll now ask the operator to please open the line for your questions. Operator: [Operator Instructions] And our first question comes from Brian Tanquilut from Jefferies. Brian Tanquilut: Maybe I'll start, Dirk, when we think about the caregiver app rollout, I know that's something that you're working on in Texas. How do we think about the progress there? And what it will take to get it to where you want it to be as quickly as possible? And then what are the expected benefits for that? I mean, how do we think about the P&L translation of this app rollout and why it's important. Heather Dixon: Brian, I'll start, and then Dirk can add to anything [indiscernible] that I say. So I'll start with just the progress that we're seeing. With that Caregiver app, we now have deployed it in all 3 of our 3 largest states, Illinois, as you know, has been deployed for a while, and we're continuing to see really good utilization and uptick of that utilization throughout the state. In New Mexico, we have deployed it for a portion of our branches. We have some special nuances associated with the state EVV system there. So we're going to roll it out in 2 tranches. But we have deployed it, and we expect to be deploying to the rest of the branches soon in the coming quarters. And then finally, in Texas, we rolled it out during Q1, and we're seeing some really positive momentum in the utilization of that and caregivers actually downloading that app. We saw even in the first few days to a week, we saw up over 10% of our caregivers had already adopted that app. So we're seeing really good momentum. And as we think about where we go from here, there are a couple of things. One, continue to roll it out to other locations, and that's really going to enable our caregivers and help us focus on increasing our service percentage. And then two, we can use that to really drive communication and really create a good engagement -- positive engagement with our caregivers. R. Allison: Yes, Brian, and I think what Heather just mentioned, there are the 2 aspects that we really focus on and why we invested in the caregiver app. You've seen positive momentum in Illinois for the percent of hours served that we believe a large part of that is directly attributed to the fact that there's the caregiver app at the allows to be particular career to see how many hours are left on the authorization and make sure that we're serving to an appropriate amount. Also, we think it can allow us to be a little more sticky, as Heather said, with our caregivers, make it easier for them to know what their paycheck is going to be to know their hours served and now also the ability for them if they want to pick up additional hours we have this app out there that allows them to be able to do that in an effective manner. So those are really the benefits that we're looking for from this app. Brian Tanquilut: That makes sense. And then maybe my follow-up, Heather, for you or maybe for Brian. As I think about the length of stay on the hospice side, you just gotten questions on cap risk and how you're thinking about that. So just anything you care with us just on the hospice cap concern. Brian Poff: Yes, Brian, right now, we don't really have any cap consideration. We actually are managing, I think, our referral mix and our patient base pretty well. Discharge length of stay was a lite here this quarter. But again, those are just a factor of the people that actually discharged during the quarter and probably not indicative of you would pick a cap. Our median length of stay, as Dirk mentioned, was 23 days, which actually is probably a little bit low for us. I think we've got a really good mix and no cap concerns for us at the moment. Operator: Our next question comes from Raj Kumar from Stephens. Raj Kumar: Maybe just a date on the kind of from each states. I'm curious kind of Indiana, more specifically. I know when you guys went into Texas with Gentiva, that was kind of on the front of the state passing or kind of in the process of passing a rate update. So curious on the kind of Indiana rate backdrop and any commentary there? Brian Poff: Yes. I think in India, specifically, I mean we talk about some other states as well, Raj. Indiana, as Dirk mentioned, we've seen some nice rate support from that over the past several years. I think if you went back about 5 years ago or so, I'm not sure it would have been probably quite as attractive for us, but we've seen nice support for them, a nice margin and that stay pretty consistent with where we are on a consolidated basis. I think the ability for us to do 2 acquisitions simultaneously or in close proximity gives us really good coverage. I think we've always wanted to have a pretty good footprint when we go into a new market. I think if we were to do one the other, it probably wouldn't have been quite as attractive, but I think doing both gives us a nice -- a nice place to start in Indiana and the ability to continue to add either additional services or more density there. So we're more placed on the map where we have opportunities. I think just thinking about it from a budgetary standpoint, Obviously, Texas is every other year. So they're not going to meet this year. So nothing to really report on that in our kind of reference New Mexico, we just finalized their budget. There are dollars allocated for home and community-based services. We're just trying to determine it gets the information on the logistics of how that will pass down to providers. Indiana -- I mean, I'm sorry, Illinois, is our largest market is still [indiscernible] has not been finalized our budget this year. Our understanding is there's conversations from the union as we would expect every year about our services and rates, but nothing to report. We would expect them to probably finalize their budget over the next few weeks. So we'll know more then. But those are probably the 3 largest obviously, that we keep our eye on. Raj Kumar: Got it. And then maybe looking at home health, I guess there was a shift in the payer mix trend higher Medicaid year-over-year. I guess maybe anything to call out on that front, I guess, more intentional or just kind of how it played out. And I guess, has it been paying better than MA if it is intentional. I'm just kind of curious on the payer mix trend for home health in the quarter. Brian Poff: Yes. I think [indiscernible] quarter probably a little bit of a mile, we had some rate updates, some positive rate updates in one of our programs that kind of falls into that other bucket that you saw in our press release yesterday. So we saw that in the quarter, we'll probably revert back to more historical norms next quarter. Nothing intentional. I think, obviously, we're focused on making sure we try to get the best rate possible in the business that we take in home health. I'm trying to make sure that it's profitable. Our guys on the payer side are having conversations consistently with folks on trying to get as many episodic rates as we can and looking at taking cases that makes sense for us from a profitability perspective. Operator: The next question comes from Matthew Gillmor from KeyBanc. Matthew Gillmor: Maybe following up on some of the census comments for Personal Care. I think I saw the census was down a little sequentially you mentioned Illinois was up, which is encouraging. I just wanted to confirm I heard that correctly. And then maybe more broadly, I know census for personal care, oftentimes is lower in the first quarter. And if Illinois was stronger, does that imply there was weakness elsewhere? Or would you just sort of categorize it as sort of normal seasonal trends. Just wanted to see if there's any other details to share on this topic. Heather Dixon: Sure. I'll take that. So as Dirk mentioned, we did have some weather impact of the quarter. and that impacted our sequential census growth. That's what you saw as a slight sequential decline. But you did hear correctly, we had census improvements throughout the quarter, and we saw gains as we exited the quarter. And I think, very importantly, March since this exceeded January and February census. So we're focused on those sequential gains. And going forward, that should lead to year-over-year gains as we move through the next couple of quarters. And then specifically in Illinois, we were very pleased to see that start the care exceeded discharges throughout the quarter, and that led to sequential monthly improvement there as well. And so as we exited the quarter for Illinois, we saw a nice trajectory, and frankly, overall with census, and then we saw that trajectory really continue as we moved into the second quarter as well. There is nothing to point to. It's not that Illinois is masking anything else. It's just as our largest state and one that we're very focused on. We wanted to be sure that we shared the positive improvement that we've seen there. Matthew Gillmor: That's great. Appreciate it. And then maybe following up on some regulatory topics. CMS has made some comments that have been skeptical of the self-directed care model within personal care and sort of home and community-based services. broadly, especially with some key states like New York, which I know you don't have exposure to I was curious if the skepticism on the self-directed care model created opportunities for Addus more broadly, given your focus on the agency directed model? R. Allison: Self-directed care does have an issue. You don't have anybody in between the patient and the caregiver and the patient to make sure that the surface is actually being performed. So it's -- the state has a little more responsibility on themselves to do that. So we saw in New York that it was a program that was probably in our mind, going to have issues and not really sustainable. That's why we left New York. There's also issues out in California. There is a large issue out there because it's self-directed care. We don't participate in medical out there, most of the business we have is VA and private pay. But as you look at it, we've been saying for years, Personal Care is a great service and much needed and saves the states a lot of money but it needs to be done in the right way. And one of the things that is an advantage to having the companies like Addus and others sit out there hiring the caregiver and matching them with the patient is that we have responsibilities to do a lot of extra things to make sure that service is being provided. Whether that's supervisory visits, actually in person calls on the telephone, we have EVV. We have to make sure that the client shows up. I mean the caregiver shows up and stays the amount of time when they leave so that we're billing a proper number of hours. So there's a lot of compliance issues that are placed on companies like Addus as opposed to the self-directed care where there's very little, if any, of those. So we think it's a real encouragement to our industry. From our standpoint, we agree with the fact that there needs to be a look and make sure that when you're paid for services, those services are being rendered. We think that will benefit a company like Addus. Operator: The next question comes from Sean Dodge from BMO Capital Markets. Christopher Charlton: It's Chris Charlton on for Sean here. Maybe back on Personal Care. You've again driven strong growth in same-store a billable hours even amid a declining census. Can you just share some more detail on some of the dynamics behind the strength here and continuing to fill a strong percentage of the authorized hours and kind of how you anticipate that evolving throughout the year as you expect to return to some census growth? Heather Dixon: Sure. Sure. I'll take that. Chris, I'll start with talking about billable hours and sort of what we're doing that really fuels that growth in billable hours. A couple of things specifically. One, we're working on refining our operational processes from the support center and then also from the branch perspective, and that's particularly with scheduling and utilization of our authorized hours. And then as we talked about just a couple of minutes ago, we've been focused on creating tools and deploying them that will help our providers, actually, the caregivers have access to those hours as well, and that's in the form of the app. What we have seen is improvement in that service percentage or fill rate. So the hours that we are posting are really a higher utilization of the authorized hours. We're seeing that in most of our states, and we're seeing that specifically where we have deployed the app and we've had some really good usage. And we would expect for that opportunity to improve the service percentage to improve as we move throughout the year, particularly as we deploy the app in Texas, one of our largest states. If you think about from Q4 to Q1, your question about even though census is down just a bit sequentially, billable hours are up. I think that's just a function of the weather that we saw earlier in the quarter and nothing else really to point to there. R. Allison: Let me jump in on census because I know everybody is focused on that number, and it is an important number. It's not one that we get paid on billable hours. So we really focus on making sure we get the proper amount of hours per census as opposed to just census per se because you got to get the right census. You got to get the right hours from that patient coming on board to make sure that it's something we can serve appropriately and profitably. That being said, we do understand that people are looking at that. And I think the important thing this quarter that's very exciting to us is Illinois made the turn. And Illinois is one we really worked on the last 4 quarters to get it back into a growth mode. It just so happens this month, Texas was a little soft coming out in January, really. And so we saw a little bit of effect in Texas for the census for the quarter. But by the end of the quarter, Texas was back. Illinois was continued to grow. So the important thing is we believe most of our states now are in the situation where starts of care are exceeding discharges. Sometimes you're going to have a little bit of issue in a state maybe during a quarter. But the general trend is we think we've seen that change. And now we think all 3 of our big states are in that particular situation where we should grow census. Christopher Charlton: Okay. That's helpful. And then on home health, obviously, there was some encouraging adjustments to the final rate from CMS there last year. As you kind of come up on their initial proposal for 2027 rates in the coming months. Maybe just qualitatively, can you just share some thoughts on the backdrop and kind of what you would like to see initially just kind of give everyone some clarity that the environment might be starting to stabilize and might be looking just to be a more favorable backdrop for some opportunities there? Brian Poff: Yes. I think I can take that one, and Dirk can add some color as well. I think in Dirk's comments, I think, obviously saw some positivity in the final rule last year. I think we're interested to see what the rule will look like this year. It feels like maybe there's more appreciation coming out of CMS for what the industry has gone through the last few years, I think, in kind of focusing on some of the areas where there might have been some issues that might have impacted the way that they've looked at reimbursement in the last few years. And the industry, I think, has been lobbying for some time for them to see that in the way that some of the things in the fraud, waste and abuse area potentially have been used in the calculation. And with those kind of maybe out of the mix and maybe identified, I think we're hopeful that, that means maybe there'll be more positivity in the rate that we'll see coming up this year. So a small segment for us. We think there's a lot of synergies of having multiple lines of care. So something that we'll watch closely, but things that we're still interested in looking at. Operator: The next question comes from Andrew Mok from Barclays. Unknown Analyst: This is Jeffrey on for Andrew. So I appreciate all the color around the Personal Care segment, but maybe I just wanted to better understand Addus' exposure to self-directed personal care and the impact that's had on recent Personal Care segment results. R. Allison: Yes. We don't really see an impact from self-directed care in most of our states. As we mentioned, there was some issues in New York. We left that state. California, we used to -- if you go back 10, 15 years ago, we did business in California, and California really decided to go self-directed care, and it wasn't something that we provided. So we focused on states that really understand the difference between sub-directed care and agency care. And that really goes back to what I said a few minutes ago, was what you get with agency care is a compliance program. You get companies like Addus that are making sure that, that care never who may or may not just because it's called family caregiver. It may not actually be a family caregiver or a family member. It may be somebody that knew the patient and is willing to serve in that market. So for that aspect, we still do all the things. We do all the training. We make sure that EVV is in place. We go through our complete compliance program to make sure that we are being paid appropriately and that we're providing the appropriate care that per the plan of care. So really from us, the self-directed care does not have a direct impact, but we are glad to see that they're looking at self-directed care to make sure that it is following the rules just like agency care. Unknown Analyst: Okay. And maybe on the hospice side, I think revenue per patient day growth was negative for the first time while could you help us better understand the dynamics there? -- including any trade-off with average length of stay? Brian Poff: Yes. I think there's 2 elements to that this quarter. I think primarily, we talked last year that we had some positive impact from the implicit price concession or revenue adjustment, whichever term you want to use. And I think we had indicated we expected that revert back to kind of historical norms. And I think that's where we were this quarter. So that definitely was part of the consideration between last year and even Q4 rated into Q1. I think there's a little bit of probably impact from just mix as well, but nothing really material there, but those are really the 2 factors. Operator: The next question comes from Constantine Davides from Citizens. Constantine Davides: Dirk, you highlighted your balance sheet strength and ongoing debt reduction both in the quarter and post the quarter and I guess can you just comment a little bit on the size of the opportunities in the M&A pipeline, whether that's starting to skew up a little bit more in recent months? R. Allison: Yes. What we're starting to see this year, and there's already 2 or 3 opportunities out there that are upside that we're looking at. I think it's really something that changed probably in the last 3 months or so where we're seeing processes begin on these larger opportunities. And that's one of the reasons, I think, constant team that we've worked very hard to keep our balance sheet clean. It's the reason we were able to do Gentiva very quickly and bring it on board. So we're looking at some of these bigger opportunities that because of our balance sheet, we could do and bring on fairly rapidly without having to stress our balance sheet. So again, they are out there. They're in a process, and we're more looking at them. Constantine Davides: And when you say of size something along the size of -- or scale of Gentiva. R. Allison: Yes, they're similar concise to Gentiva. That's correct. Constantine Davides: Great. And then a quick follow-up on India. You talked about that being -- that state being attractive and good rate momentum, I guess, in recent periods. Where do rates kind of compare to either other states you're in or your blended average? R. Allison: The rates are a little higher than some of the Midwestern states. I mean, obviously, Illinois is going to be our highest market. But Indiana, if you look around the other states around there, the rates now are very -- there are nice rates. There are rates that we can operate in very effectively. Also, there seems to be a little less competition in Indiana in the number of providers of our care. So it's a state that we've been looking at. And with -- I think it was in like 2023 time frame is when they really raise their rates to make them more competitive. Ever since then, we've been looking for opportunities to get into a state. And this [indiscernible] home court home care brought to us and the other acquisition that we announced allow us to that state and start looking for other opportunities to grow. Operator: The next question comes from Ryan Langston from TD Cal. Ryan Langston: Maybe just dovetailing off Indiana. Obviously, strategy to enter states the size and scale. Do you know if you combine the 2 assets where that would put you in terms of market share in the state. And I just caught your comments on decent rates and competition dynamics. But anything else in particular that made Indiana attractive? Brian Poff: Yes. I can start and Dirk could add some color on. I don't know that we have a detail of exactly where we stand. I think it's going to be a good footprint for us from just a coverage standpoint. All in, the other acquisition is going to be similar size. So we're going to be just under $20 million in revenue, which is a pretty good start for us in the state. I think one of the things that made it attractive for us in addition to what Dirk had kind of referenced is the managed Medicaid component. Obviously, a lot of the larger players there, I think United and those folks, we have good relationships with all of those guys, as everyone knows kind of nationally. So I think it is a good fit for us as it's always been something that's been part of the profile that we like as we get into states that have managed Medicaid where we can have those relationships in place. So I'm excited about that. Ryan Langston: Okay. And then I appreciate the commentary and response to Matt's question, but maybe just more broadly, obviously, this administration is really focused on fraud, waste and abuse and have made some statements to that quite a bit over the past several months to a year plus. Like I guess, just in general, what do you think any of that could mean for Addus? Is that potential benefit because you're so large and sophisticated maybe versus some of your smaller competitors in your markets? Just maybe more broadly, what do you think this administration sort of stands on FWA, how that could affect that? R. Allison: Yes. One of the things that Addus as did, we participated with the alliance in talking to the current administration about the fact that front abuse is out there, and it causes companies that are legitimate providers. It causes issues with various things you can talk about. And so from the standpoint of Addus, we're glad to see the administration focus on fraud and abuse. We spend a lot of money on compliance. We have for the last 10 years, we want to make sure that when we operate in a state that we're following the rules and we're doing what's proppant. And at times that you find that maybe something was built in properly, we pay it back very quickly to stay in compliance with the state. So the fact that we are large, we spend millions of dollars into the compliance aspect, we think -- bodes very well for what the administration is trying to do, and that is take out the players -- mostly smaller players, but take out the players that aren't doing the right thing. They're just billing and not following through with what they need to do to make sure the rules are being followed. And more importantly, the most important thing is that the care is being given to the patient. There's a reason that patient has a plan of care that has stayed approved, and that is they need that care. And so for us, calling out personal care, we'd rather than just call out home care and talk about the fact that there's a lot of fraud and abuse in home health. There seems to be an in hospice. From a personal care standpoint, we believe that we're a leader in the industry, and part of that being a leader is to lead the compliance effort. And so we're pleased with the fact that we're focused on that. And we believe long term, it will be a benefit to our company. Operator: The next question comes from Jared Hasse from William Blair. Jared Haase: Maybe just one for the model. I appreciate all the detail you guys have given as far as hiring and some of the initiatives you have going on like the caregiver application. That hours per se a month metric has been about 70% for a couple of quarters now. I guess, is there anything structurally that would cause that decline? I think the typical seasonality would have that sort of continue to grow sequentially over the rest of the year. But I just want to make sure that's sort of the right expectation to level set how we're thinking about things for the model, just given the moving parts as it relates to sort of census and volume trends. Brian Poff: Yes, Jared, I wouldn't expect to see that. There's nothing structurally that's going to cause that to decline. I think you're always going to have a little bit of ebb and flow in mix in the states. But with the efforts that we're using in the caregiver app and that rollout and thinking about our full rate, we would actually probably expect that longer term to actually continue to grow because we think there are hours that are available for clients under their care plan that we are currently not serving. So no, I wouldn't expect from [indiscernible] I would not expect to see that decline for any structural reason. Jared Haase: Okay. Got it. That's helpful. And then maybe just another one on Indiana as a market for you guys. I'm just curious do you get any sort of regional leverage in a market like Indiana, just given obviously the proximity to your largest market, Illinois. I don't know if there's any sort of infrastructure that you're able to leverage that would help you scale up and extract synergies a little bit more quickly than normal. Brian Poff: Yes. If you look at it from where we have markets around India, obviously, we're very large in Illinois. We're in Michigan, we're Ohio. So Indiana is kind of right in the middle of that geographically. So if you think about from just a regional or leadership perspective, there's not going to be a need for us to add any additional layers there. They should be able to just talk under kind of what exists for us on the infrastructure today. Obviously, you'll have people in those branch locations. But really that should be the limit of it. So from a -- just from a lift perspective on G&A, that definitely should slide right into the operations that we have that kind of surround the state. Operator: Next question comes from Clarke Murphy from Truist. Clarke Murphy: I had a follow-up on labor. I appreciate all the commentary that you guys have around the caregiver app and hiring trends. But I wanted to see if you guys are seeing perhaps any benefit on labor availability, even some of the macro concerns that seem to have amplified over the last couple of months and the impact that, that's had on kind of a broader consumer environment. Heather Dixon: I'll take that. The short answer is that we're seeing positive hiring trends and we are seeing some of the leading indicators in terms of wage inflation and availability of candidate full trend in the right direction. And frankly, with wage inflation, we're back to sort of that normal roughly 3% base, a little -- some are a little higher, some are a little lower. But in terms of candidates, we're seeing really good candidate flow across our markets. As Dirk mentioned, we're always going to have small kits where it's a little bit more difficult to staff, but that is really limited to mostly rural locations and frankly, just a couple of skilled categories in those rural locations, but we continue to [indiscernible] though those so that we can make sure we're hiring the right staff to drive growth and to serve our patients and clients. So really seeing some good trajectory there. Now whether it's attributable to the macro environmental issues, that's really hard to say, of course, but I can tell you that we are seeing positive trends. Jared Haase: Got it. And then just switching gears to capital deployment. The other question I had was just if I think about your current pace of debt paydown relative to your debt balance suggests absent M&A be kind of largely paid off by the end of the year. Just wanted to see absent any large-scale M&A, how that would potentially impact your capital deployment priorities going forward? R. Allison: We spent a lot of time talking about this at our Board meeting, as you would expect with the company in our position. I think the thing we see that maybe is not as apparent to outsiders is the number of deals that are now starting to come on board. We're starting to see some larger transactions as we mentioned. And remember, with those large transactions, there still are a number of smaller transactions that we just announced that are out there that we consider in most cases, backfilled. And in this case, it was entering into a new market. So we believe that before our data is paid off, we will put to work, a great deal of our capital in these opportunities that are out there. So it led us to decide that that's really what we understand we're going to use our cap for today. Now if that didn't [indiscernible] over the next year, you would see us maybe come up with a different decision on how we use our capital. But we believe right now that with the opportunities that are there for us, and we'll be able to use our debt and our cash and debt to grow the company. Operator: The next question comes from Ben Hendricks from RBC Capital. Michael Murray: This is Michael Murray on for Ben. You saw some pretty good leverage on adjusted SG&A even with the weather headwinds. Are there specific cost initiatives driving this improvement? Do you think the caregiver app is helping there? And how should we think about SG&A ratio as we move through the year? Brian Poff: Yes. I would say, first, the caregiver app probably isn't going to really have an impact on G&A. I think what we continue to see is kind of ongoing leverage, particularly on our corporate G&A as we grow our revenue base as we would expect. So we're not having to obviously add incremental cost there. On the labor side, as we kind of mentioned earlier, this year in this cycle, we're back to kind of a 3-ish percent kind of default rate there, so kind of back to norm. I think kind of going forward, we do give our merits on March 1. So we think sequentially into Q2, there's going to be a little bit of additional dollars in G&A in Q2 as those kind of flow through for the full quarter. But nothing else really from a seasonal perspective. So I think we would expect it to maintain a pretty stable percentage of revenue and continue to see additional leverage as we grow. Michael Murray: Okay. And then just shifting gears to home health. Organic revenue declined 6.6%. I think you previously indicated a return to growth in the second half of this year against some easier comps. So just wanted to get an update on admission trends, the impact of your new leadership and your confidence in achieving that time line. Heather Dixon: Sure. Michael, I'll take that one and talk about home health. Just start by reminding everybody, it's less than 5% of our business. But that said, we've made changes from a leadership perspective and then also from a sales perspective and how we go to market for that business recently. In Q1, we saw our margins really where we want them to be. And so our focus is now on volume. We did see some positive trends in Q1. In fact, in Q1 2026 new admissions, total volume and total visits, all improved sequentially versus Q4 2025. So that is the trend that we would like to see. That's part of what we're focused on seeing and we continue to think that certainly later this year and feel good about that statement. Just to just step back a little bit at a higher level picking up on something that Dirk said earlier, the real value in our home health business is the interconnecting care that we provide and the correlation that we see in markets where we have multiple lines of service there and different levels of care between those lines of service. So for example, I think it bears repeating in New Mexico and also Tennessee, where we have what we call the bridge program in place, and we really focus on creating referrals and admissions from home health into hospice for patients where that's appropriate, we've seen those rates exceed 25%. And we've also now begun that program in Illinois. Obviously, Illinois Home Health is a little bit earlier for us, but there is great opportunity there and opportunity to continue that pattern Operator: And our next question comes from A.J. Rice from UBS. Albert Rice: First, I think at one point, you were -- had said that you thought in the second quarter, you'd still see above average growth in personal care and hospice and then it would moderate in the second half. Just wanted to give you a chance if there's any update. Are you thinking about seasonality, what that might be or if there's any comments on thinking about the seasonal layout of the business for the rest of the year. Brian Poff: Yes, A.J., this is Brian. I think maybe not so much seasonal, but I think you started thinking about comps over prior year and some of the rate impact, particularly in Personal Care. I think our prior comments that we expect it to be probably toward the high of our kind of normal 3% to 5% range, if not above. So starting this year, obviously, at 6.5% same-store basis. We would still expect that to be the case for the remainder of this year. I think once we kind of get confirmation on New Mexico and that flowing through as well, that will obviously benefit the back half of the year. So I think we still feel pretty comfortable with that commentary thinking about kind of where we'll be on a same-store basis for each quarter going forward in [ BCS ]. Home health -- I mean, sorry, hospice has been double-digit plus in same-store. I think we had guided people to think that's probably not long-term sustainable. Our ultimate expectation is probably upper single digits, so we're just under 8% this quarter. I think we've seen some nice trajectory in ADC coming out of the quarter. We were a little bit softer coming off of the holiday. So I think that sets us up pretty well. I think going forward to be in really good shape to continue to meet that as well for the remainder of this year. Albert Rice: Okay. And then I guess your comments about M&A and the pipeline and so forth. Obviously, these deals are more in the personal care arena. You sound like you're feeling a little better about the home health backdrop. Would that be something you would now sort of lean into again on M&A? Or is it still too early to do that? R. Allison: I think we would look at home health deals today as opposed to maybe a year ago. As you can understand, we'd be very careful in what we did, make sure it's strategically met. For us, the overlap with our hospice and personal care so that our [indiscernible] bridge program can work. But yes, we would start looking at home health care opportunities today. Operator: The next question comes from Joanna Gajuk from Bank of America. Joanna Gajuk: Full of questions here. So on personal care same-store hours per business day, I think grew, call it, 2%, 2.2% -- so what was it excluding weather? I know you gave a revenue, I guess, impact from that? And what was it as you exited the quarter? So essentially what I'm trying to get at is kind of what was your growth in March? And do you expect sort of the acceleration and a little bit higher over the rest of the year on that metric? Brian Poff: Yes. I think, Joanna, I think our target has always been and we've been talking about it for some time now. We can keep that same-store hours per business day between 2% and 2.5%, we're probably going to be in a pretty good spot. We've been 2.4% each of Q3 and Q4 [indiscernible], but we were a little bit softer as we kind of mentioned in Heather -- with some of the weather we saw in January. So we're probably not going to go into kind of a month-by-month metric on that. I think we feel pretty comfortable coming out of the quarter with where we were from just a census perspective in hours in March and going into that 2% to 2.5% range still feels very, very solid for us going forward. Joanna Gajuk: It's great. 2.5%. And then the gross margins, so Q1 is seasonally low, right? But can you help us kind of call out anything as we think about Q2 from Q1? Brian Poff: Yes. I think yes, seasonally is usually always our low watermark of the year with the reset of payroll taxes and our merits. I think traditionally, what we see is -- usually you see a little bit of improvement with some of the payroll tax caps getting Q1 into Q2. So usually, there's a little bit of benefit into Q2. Q2, Q3, usually pretty flat. I think Q4 usually is the best quarter for us from a margin perspective, just with some additional benefit from payroll tax caps but also our hospice rate increase kicks in, in that quarter as well. I think if you look at the mix of our business, personal care was a little over 77% this quarter. As a comparison, you think about that versus hospice and home health, hospice and wealth have a higher gross margin. So if that mix gets back more to 75-25 on skilled and non-skilled that would benefit as well, but mix is going to potentially play in as well. So I think we feel really good coming out of the quarter on the track for [indiscernible] ADC. So if that were to be a bigger part of our mix going forward, that would benefit our gross margin percentage as well. Joanna Gajuk: And the last one on the quarter. The stock comp was higher sequentially from Q4. Is there -- was there something kind of onetime in nature? Is the $5 million a good run rate? Or is this something outside of [indiscernible]? Brian Poff: Yes. That's not a run rate. I mentioned in my comments. So with our former President and COO, retiring, there was some accelerated vesting as part of this retirement that impacted the quarter, but should be onetime and would not be continuing going forward. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dirk Allison for any closing remarks. R. Allison: Thank you, operator. I want to thank each of you for taking the time to join us today on our call, and we hope that you have a great week. Thank you. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors, Inc. First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, 05/05/2026, 11:00 AM Eastern Time. I will now turn the presentation over to Mr. Aaron R. Reyes, Chief Financial Officer. Please go ahead, sir. Aaron R. Reyes: Thank you, Operator. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that the commentary on this call will contain non-GAAP financial information including adjusted EBITDAre, adjusted FFO, and hotel adjusted EBITDAre. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our quarterly results have been provided in our earnings release and supplemental which are available in the Investor Relations section of our website. With us on the call today are Bryan Albert Giglia, Chief Executive Officer, and Robert C. Springer, President and Chief Investment Officer. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Bryan. Please go ahead. Bryan Albert Giglia: Thank you, Aaron, and good morning, everyone. We were pleased with our performance in the first quarter which came in ahead of our expectations even with some weather-related headwinds across a handful of our markets. The strength was broad-based, with continued solid group results and transient performance that was better than anticipated. Overall, RevPAR in the quarter grew an impressive 14.6%. Excluding Andaz Miami Beach, which continues to ramp nicely, RevPAR grew 5.7%. This strong revenue performance, combined with continued focus on cost controls at the hotels and at the corporate level, allowed us to generate meaningful growth in earnings. The added benefit of our accretive repurchase activity drove even greater growth in earnings per share with first quarter adjusted FFO nearly 29% higher than last year. Our resorts once again led the portfolio with combined comparable RevPAR growth of over 18%. While the rebound at Wailea Beach Resort was expected, it has been impressive, where revenue grew 14% in the quarter even with significant cancellations from the two weather events that impacted the Hawaiian Islands in March. While we will need to navigate some repair work and disruption following the storms, the outperformance in January and February, and the trends that we are seeing for the remainder of the year, continue to point to a sustained recovery in Maui. We were also quite pleased with performance at our wine country resorts, which turned in a combined 34% growth in RevPAR driven by better contributions from both group and transient business. As we shared with you on our last call, we were encouraged with how Andaz Miami Beach performed over the festive period and into the early weeks of this year. That trend has continued, with results exceeding expectations in the first quarter. We are seeing further strength into April, with second quarter benefiting from strong transient and group business with major events like the F1 race last weekend and the World Cup coming this summer. During the first quarter, the Andaz ran 86% occupancy at a $564 rate and produced $6.5 million of EBITDA. The concept ran a similar occupancy but at a rate over $900 per night. Q1 was an absolute success for the Andaz, and we are encouraged with how much opportunity we have to continue to grow rate closer to its peers and build on our multiyear growth story. We have had a solid start to the year, and we are well positioned to deliver on our earnings expectations in 2026, and we look forward to the resort’s next phase of growth into 2027 and beyond. Our urban hotels had a noisier quarter as we navigated a challenging Super Bowl comp in New Orleans and weather-related headwinds across the East Coast. RevPAR declined 9.3% in the first quarter across our urban portfolio, but out-of-room spend performed better and limited the decline in total RevPAR to only 2.9%. At JW New Orleans, revenue was lower given the benefit of the Super Bowl in the prior year, but despite the challenging comp, our hotel continued to gain share. After picking up nearly 15 points of RevPAR index in 2025, the JW again outperformed the comp set in the first quarter and now sits at over 150% relative to the group, demonstrating the strength of the hotel’s location, superior room product, and recently upgraded meeting space. In addition, our New Orleans hotel had one of its best first quarter production results in years, with group bookings growing over 50% relative to the prior year. In Boston, the quarterly performance was hampered by the severe winter weather that disrupted travel earlier in the year. Overall, we expect the first quarter to be the toughest quarter for our urban portfolio with sequential growth in RevPAR through the balance of the year. Our convention hotels turned in better-than-expected performance with RevPAR growth of 5.2%. Performance varied widely, however, as we experienced the push and pull of a few large events. In Washington, D.C., we had a very challenging comp given the inauguration last year. After increasing over 24% in 2025, RevPAR at our Westin D.C. Downtown was 9.8% lower this year due to the tough comp and higher group attrition from the severe winter storms that occurred in the quarter. Despite this decline, our performance was better than expected as stronger transient demand helped to partially offset the sluggish group backdrop in the market. Additionally, the Westin had a solid booking quarter with transient pace for the next six months up 11% relative to last year, pointing to a continuation of the current transient trend. On the flip side, RevPAR increased over 27% in San Francisco where the Super Bowl added compression to a market that was already on a positive trajectory. In fact, if you look only at January and March, RevPAR was still higher by 14% as the city benefited from an active event calendar and an increased level of commercial activity in the downtown area. Performance at the Renaissance Orlando SeaWorld was impacted by isolated group cancellations earlier in the quarter and a shift in the mix of business, which led to a decline in rooms RevPAR but generally flat total RevPAR given the benefit of strong contribution from out-of-room spend. We expect the balance of the year to be more conducive to growth in Orlando with particular strength in Q3 and Q4, where second half group pace is up over 40% relative to last year. Lastly, in San Diego, we were pleased to see better transient performance in the market, which has given us a more optimistic outlook for the year. We are in the final stages of our meeting space renovation at the [inaudible] and we expect that our second quarter will be the toughest comp of the year with sequential improvement through the third and fourth quarters as we benefit from better group patterns and our new meeting space. On the expense side, we were particularly pleased to see better productivity in the rooms department, which allowed us to keep comparable departmental expense growth on a per occupied room basis to only 1%. This better cost performance was partially offset by higher utility expenses, property G&A, and sales costs. Overall, our comparable portfolio, excluding Andaz, saw expense growth for all costs increase 3.4% on an absolute basis during the quarter, or 2.4% per occupied room. This was generally consistent with our expectations and allowed us to grow margins by 140 basis points. Given the cadence of our quarterly revenue growth, we expect that the first quarter will be our strongest margin growth performance of the year, but we are continuing to work with our operators to focus on cost controls and drive efficiencies wherever possible. As part of our last earnings call in February, we noted that we were encouraged by the trends we were seeing in recent operations, but that broader uncertainty gave us reasons to be cautious. This remains the case today with recent events only reinforcing this view. We continue to monitor events that could impact costs and the demand for travel. While we did not see any measurable impact on our first quarter operations, an elongated period of heightened volatility or sustained increases in fuel prices could present headwinds. That said, performance in the first quarter was meaningfully ahead of our expectations, and based on what we see today, we are comfortable revising our full-year outlook higher to reflect these results. Given the elevated uncertainty, we will continue to be measured in our expectations for the rest of the year. If more of the momentum from the first quarter carries into the balance of the year, or if some of the special events slated for later this year outperform our modest expectations, then we could be positioned to deliver stronger performance. We are encouraged by the increase in hotel transaction activity and believe the environment may be becoming more conducive to executing our capital recycling strategy and demonstrating the value of our portfolio. In the interim, we continue to deliver value to shareholders through an additional $50 million of accretive common and preferred stock repurchase activity so far this year. We expect to continue opportunistic repurchase activity as pricing allows while we focus on generating profitability growth from our operations and realizing the benefits of our investment projects. And with that, I will turn the call over to Robert to give some additional details on our capital investment activity. Robert C. Springer: Thanks, Bryan. We have gotten off to a busy start on the operations and investment front. As we shared with you last quarter, our planned capital projects for 2026 were concentrated in the first half of the year, and I am pleased to report that we have made solid progress executing them on schedule and on budget. In San Diego, we are wrapping up the renovation of the meeting space. The finished product looks great and should help the hotel to maintain its leadership position in the market. Recent trends in the city have been more encouraging, and based on what we see today, we expect better performance in the latter part of this year; the hotel is pacing ahead for 2027. In Miami, we are also finishing construction on Bazaar and we are very pleased with how the space is coming together. We expect to begin training activities in late summer with the restaurant opening in early fall to take advantage of the full high season in the market. As we shared earlier, our renovated resort is already attracting some great group business, but the addition of Bazaar will round out the property, further increasing its appeal with luxury travelers and higher-end groups. We anticipate that Bazaar will not only help drive incremental room-night demand at the hotel, but will be a dining destination for guests from nearby properties and local residents as well. Elsewhere across the portfolio, we will be starting some facade work and a rooms refresh at Ocean’s Edge Resort and Marina in the middle part of the year as part of a broader effort we are working on to drive incremental revenue and earnings to this resort. We will also be completing some smaller routine projects across the rest of the portfolio. As Bryan noted earlier, our Wailea Beach Resort was impacted by a series of severe storms that came through the Hawaiian Islands in March and brought heavy winds and substantial rainfall. While our resort remained operational during the storms, we did sustain wind and water damage in some of the guest rooms, public spaces, and portions of the roofs. We are currently working to restore impacted areas and should have most of the public space and guest room-related work completed in the coming weeks. We will, however, have some additional repair work to do on a few roofs, which will not be done until later this year. We are working closely with our insurers to pursue cost recovery for the repair work and lost business from the storms. It is too early to share any of those details. Based on what we see today, we expect that incremental capital expenditures needed at Wailea will likely mean we will be in the upper half of our existing CapEx guidance range for 2026. We are still working through the details of the approach and timing of the required spend, and cost recovery from our insurance policies, and will share additional information as part of our next call. With that, I will turn it over to Aaron. Please go ahead. Aaron R. Reyes: Thanks, Robert. As we noted at the top of the call, our earnings results for the first quarter came in ahead of expectations driven by broad-based strength across the portfolio. RevPAR increased 14.6% in the quarter, including an 890 basis point benefit from Andaz Miami Beach. Total RevPAR for all hotels increased 13.4%, including an 810 basis point benefit from Andaz. Given our mix of business, we anticipated that rooms revenue would grow faster than total revenue in the first quarter, which was the case, but ancillary spend performed better than we thought and the guidance ranges that I will discuss shortly reflect a more optimistic outlook for out-of-room revenue growth than our prior expectation. The stronger top line performance in the quarter contributed to earnings that were ahead of our expectations, including adjusted EBITDAre of $68 million, an increase of 18% relative to last year. When combined with the added benefit of our accretive repurchase activity, adjusted FFO per diluted share was $0.27, an increase of nearly 29% from last year. Our balance sheet remains strong. We have no debt maturities prior to 2028 and net leverage stands at only 3.5 times trailing earnings, or 4.6 times including our preferred equity. Since December, we have repurchased over $19 million in liquidation value of our traded preferred stock at a 21% discount, a positive impact on both FFO and NAV. Included in our press release this morning are the details of our updated outlook for 2026. Our revised guidance ranges reflect the outperformance we saw in the first quarter but retain a degree of caution for the balance of the year given the uncertain backdrop. We now expect that rooms RevPAR for all hotels in the portfolio will increase between 57.5% to a range of $236 to $242. This reflects the full year benefit of Andaz Miami Beach, which is expected to contribute approximately 400 basis points of growth at the midpoint. Based on what we see today, we now expect total RevPAR to increase between 5% to 7.5%, an increase of 125 basis points at the midpoint, which captures our higher expectations for growth in ancillary spend. This would now imply a range of $390 to $400 with a similar 400 basis point benefit from Andaz. As we noted on our last call, the first quarter will be our strongest revenue growth quarter of the year with the remaining growth quarters being between the lower end and the midpoint of our RevPAR and total RevPAR guidance ranges. While Andaz will certainly provide a lift to our results all year, the impact will become less pronounced as we get further into the year and begin to lap more of last year’s operations, with the revenue growth benefit estimated at approximately 500 basis points in the second quarter and 150 to 200 basis points in each of the third and fourth quarters. This revised revenue growth is now expected to translate into adjusted EBITDAre in the range of $238 million to $252 million. Based on where we sit today, we expect our FFO per diluted share to now range from $0.88 to $0.96. This updated earnings per share range reflects the benefit of better operations and our recent share repurchase activity. In terms of the distribution of our earnings by quarter, based on the midpoint of our updated range, the first quarter accounted for roughly 28% of our full-year earnings, with the second quarter expected to comprise approximately 28% to 29% and the balance split more or less evenly across the third and fourth quarters. Moving to our return of capital, since the start of the year up to April, we have repurchased $35 million of common stock at a blended price of $9.11 per share. In addition, we have also purchased over $14 million of our preferred stock at a blended price of $19.84 per share, or a 21% discount to its liquidation value. This common and preferred stock repurchase activity has been accretive to both NAV and earnings per share, and while we retain capacity and appetite for additional share repurchases, our revised 2026 outlook does not assume the benefit of additional buy activity. In addition to our share repurchases, our Board of Directors has authorized a $0.09 per share common dividend for the second quarter and has also declared the routine distributions for our Series G, H, and I preferred securities. Before we conclude our prepared remarks, I will turn it back over to Bryan for some additional thoughts. Bryan Albert Giglia: Before we open the call to questions, I want to provide an update on our 2026 objectives. The Company remains focused on realizing the value of our portfolio. Over the past few years, we have sold hotels at what have proven to be attractive valuations and redeployed proceeds into the most accretive option available at the time. While most of the proceeds went to repurchase common or preferred stock at a discount, we also acquired assets when our cost of capital became more competitive. Given the improving transaction market, we expect to recycle capital in 2026 and take advantage of strong private market values for certain assets. This would then allow us to redeploy proceeds into additional share repurchases at a discount to NAV or liquidation preference, or potential hotel acquisitions under the right circumstances. We remain focused on executing transactions that will result in the best risk-adjusted returns to our shareholders. The Board and management remain committed to maximizing the value for shareholders and are open to pursuing any alternative that would reasonably be expected to result in value creation. We will now open the call for questions. Operator, please go ahead. Operator: To ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Duane Pfennigwerth from Evercore ISI. Peter Laskey: Yeah, hi. This is Peter on for Duane. Thanks for taking the question. So, if we zoom out and think about the 14-hotel portfolio and that portfolio reaching some level of stabilization, what are some of the building blocks left to get there? And, said differently, what are some of the growth drivers beyond what you have provided for 2026? And then you mentioned the transaction markets are getting more active. Could you just quickly expand on that, and what sort of assets are you seeing being marketed? What are brokers saying? Bryan Albert Giglia: Sure. Good morning. Let me start, and then Aaron can provide some additional detail. When you look at the building blocks, there are several pieces. First, Andaz is a multiyear story. We had an excellent Q1. The resort is ramping up. We started to see this at the end of Q4 last year and into Q1 this year, and it is ramping. The group business has been very strong. The transient business continues to grow, and we are very happy with the performance so far. That said, when we look at Q1 and we look at our rate, which was in the mid-$500s, and we look at the comp set, we still have a lot of room to grow. The comp set was running over $1,000, so that is a lot of room for us to expand into next year. Also, fourth quarter last year was the same delta, and so fourth quarter this year we have room to grow. Opening the Bazaar at the end of this year into the high season, the beach club just opened, which also serves as additional meeting space for the resort. So Andaz has a very good two-year-plus trajectory. Maui is also another asset where we have room to grow. We talked about this last year of having to have the island stabilize, and we saw that with Ka’anapali reaching a stable 70% occupancy in the fourth quarter. Our transient volume started to recapture our index and our share in the fourth quarter of last year and has continued into this year, and given where we are relative to prior EBITDA, there are still several millions of dollars of EBITDA growth that we will get into next year. San Francisco is another market for us that has grown and rebounded very well, but still has quite a ways to go, and everything we are seeing in that market from group demand, transient demand, and citywide demand has been very positive and will go into 2027 and beyond. As far as San Francisco’s strength, we have also seen that help wine country and the two resorts there, where as the citywides and the city of San Francisco do better, it then leads into additional leisure demand up in wine country. So I think those are the big pieces that we will continue to see grow throughout the next few years. On your question about the transaction market, we see additional equity capital coming into the markets and increasing the number of deals and potential transactions, which is good and healthy. Right now, you are seeing more luxury assets out there, given where the recovery has been and the demand and productivity of those assets. There is a lot more on the luxury side. As the year goes on and some of those transactions are announced and closed, we will start to see more of the higher-quality, upper-upscale assets come to market too. Aaron R. Reyes: I might add to that. I think Bryan hit the broader points of what we have going on across the portfolio. On top of that, we have the added benefit of the activity that we have been doing. We have been thoughtful in how we have allocated capital both to our common stock and most recently to our preferred stock as well. When we think about not just EBITDA growth, but growth on an earnings per share basis, we have capacity for significant accretion in FFO per share. Operator: Our next question comes from Michael Bellisario from Baird. Please go ahead. Your line is open. Michael Bellisario: Good morning. Bryan, just want to follow up on your acquisition commentary. Maybe high level, can you talk about the criteria that you are looking at for potential acquisitions in terms of markets, brands, initial yields, and then also the appetite for buying a cash-flowing asset versus doing another deeper-turn renovation project? Bryan Albert Giglia: Sure. With what we have done in the past and the way we have approached things, I think it is important, especially for a portfolio our size, to make sure that we have some degree of balance. We have a lot of deeper turns that are coming back online and/or ramping up assets. We have capacity for that. That said, like everything we do, we have to look at the options available to us and what is the best allocation of capital, whether it be using our balance sheet or recycling an asset, on a risk-adjusted basis, what makes the most sense for our shareholders. Up until this point, that has absolutely been share repurchase and repurchasing our preferred at a meaningful discount to liquidation preference. Going forward, that is a balance. As our cost of capital improves and our stock price improves, then we look to balance that with potential acquisitions, mainly coming from recycling capital where we can take advantage of private market values in specific markets or asset types where there is a lot of demand right now, and we can potentially realize a portion of the future upside today, and then redeploy that into something that has good growth, maybe not quite as much growth, but at a much more compelling initial yield that provides future opportunities. Every day we make the decision of how we will allocate additional capital. Where we stand right now, our common and preferred are still very compelling. As that changes, the preference would probably be more stabilized. If you look at the types of hotels and resorts that we have, we like assets usually slightly larger, that have a good group component with some secondary, whether it be leisure or business transient. There are varying degrees of rebranding activity, whether it be like the Westin D.C. or the Marriott Long Beach, with different degrees of renovation but the same game plan where we are able to capture more index through finding a brand that could do better. That is our focus. Today, our equity and preferred are very attractive, but as the space improves, that gives us more opportunity to deploy into assets. Operator: Our next question comes from Smedes Rose from Citi. Please go ahead. Your line is open. Smedes Rose: Hi, thanks. Maybe just switching to a couple of market questions. On the Andaz, I think in the past you had talked about maybe mid- to low-teens EBITDA contribution this year. Are you still comfortable with that? And are you seeing any lift from the World Cup helping that property? And then I was hoping you could comment on a couple of the larger group markets where you operate. You mentioned a lot of strength at the JW in New Orleans. Are you seeing strength overall in that market? It seems like it has been kind of weak on the group side. And could you also touch on Orlando and San Diego? Bryan Albert Giglia: Morning, Smedes. We feel, based on where the asset has performed, that we are comfortable with the range we have given, inching toward the higher side of that with some opportunity to achieve it this year. Remember the seasonality of the market. The asset will be a little bit skewed more toward the first quarter this year as it is ramping up, and Q1 through April is a big piece of the annual EBITDA. Based on what we have seen so far, transient bookings forward, and group bookings forward, we feel very comfortable with that range. As far as the World Cup goes, we have had really good events in the market this year. The national championship and F1 last weekend were fantastic. For the World Cup, we continue to be measured in our various markets where we have matches. It is a good time in the year for Miami because the summertime tends to be the lower season, so having additional international travel coming into the market will be good. As we get closer, we will have a better understanding of the ultimate impact, but right now we continue to be somewhat measured across our markets for the World Cup. On the broader group markets, when we look at first quarter and second quarter, transient has been the strongest segment across the board, and transient at some of our large group hotels has been better than anticipated. The way our group calendars and bookings laid out this year, the first half was always the weaker of the two, and our pace picked up in Q2, Q3, and Q4 depending on the asset. For the second half, New Orleans pace is up significantly. Orlando also had a tougher comp in the first half but has a really good second half. D.C. has stronger citywides and does pick up, and there are some events in D.C. that should be helpful. Looking forward, we have a great transient base of business for the next six months that is booking very strong. We did not have the greatest group bookings in the first half, but in the second half that is where it picks up and gives us a solid setup. There are also variables out there that could impact travel or fuel costs. We like what we see and the setup, but we will remain measured until we get a little more time to see what other external impacts there could be. Operator: Next question comes from JPMorgan. Please go ahead. Your line is open. Analyst: Hi. This is Michael Hirsch on for Dan today. Thanks for taking my question. In the prepared remarks you mentioned seeing some group cancellations during the first quarter across the portfolio. Could you provide any additional color on attrition or overall group trends and pacing for this year or next? And for my follow-up, you touched on the World Cup in Miami. For your broader portfolio, could you remind us what your outlook is for the RevPAR uplift, and what about recent World Cup demand trends are leading to your more measured approach? Bryan Albert Giglia: Overall attrition is probably down slightly from where we were last year. There were a lot of government cancels last year. We are always going to have cancellations and some attrition throughout the year. Some of the storms on the East Coast did impact various groups, with a couple of weeks where groups either could not get to the destination or had to cancel last minute due to storms. Those were more specific to weather or specific events and not overall group patterns. What we are seeing on the group side is ancillary spend continues to be very strong. We continue to see corporate groups and associations both perform well. Our group pace picks up into the second half of this year, and while it is a little early to start talking about future years, 2027 pace looks good at this point. On the World Cup, our measured approach is how we started the year. It was too early to have bookings. There was the expectation that things would be very strong, but without a recent history and not having business on the books, it did not make sense to anticipate rate increases and major demand. As we get closer, we have seen data points from brands and others indicating a shorter-term booking window. We do have some group business on the books—there is a group in San Francisco, a group in Miami—but it is limited. If we see international travel very strong during that time and last-minute bookings pick up, that will be additive to our second and third quarter, but it is not in any of our guidance at this point. Operator: Thank you. Our next question comes from Compass Point. Please go ahead. Your line is open. Kenneth Billingsley: Hi, this is Ken. Thank you for taking my question. I wanted to ask about out-of-room spending. Your total RevPAR guidance grew faster than RevPAR. Could you talk about what is driving some of that? How much of it is fixed spending associated with the room and how much is discretionary? And away from just the group-specific piece, on out-of-room spending not related to group, are you seeing that being stronger as well? So a lot of that flip there is on the occupancy side, not so much that they are necessarily spending more per room? Bryan Albert Giglia: Good morning, Ken. Even with groups, there is a portion that is discretionary. You have your minimums and contracted amounts, but as you get closer to the event, you see groups buying up different things—adding items—and at certain times they subtract things. What we saw in the first quarter, not just for corporate group but also association, was better spend. The contractual amount is there, but the additional add-ons or upgrades—whether AV, food options, beverage options—were strong in the quarter, and we do not see that slowing down at this time. Outside of group, yes, it is also up. It is a function of occupancy, too. In Wailea, a market with significant out-of-room spend for transient customers, as we regain our occupancy share, those customers spend more at the bars, restaurants, and other amenities. We are seeing that on the transient side too—more at resorts than at a business transient hotel where there are fewer options to spend. On the group side, we are seeing more spend per occupied room. On the transient side, it depends hotel by hotel. Maui is probably a mix of both occupancy and spend. At some of the more luxury resorts in wine country, there is generally more spend—spa, food. Occupancy was up a little in the quarter, but we are seeing strong spend across. Operator: Our next question comes from Chris Darling from Green Street. Please go ahead. Your line is open. Chris Darling: Thanks, good morning. Bryan, I understand guidance may prove conservative, but if I look at what is implied for the rest of the year, it seems to suggest flattish to slightly declining margins for the rest of the year. Can you put that outlook into context and talk about how you see expenses trending for the rest of the year? And I may have missed this earlier, but could you elaborate on the recent operating performance at the wine country hotels and your outlook for the rest of the year there? Bryan Albert Giglia: In general, we see expenses increasing 3.25% to 3.5%. If you look at the RevPAR gain distribution quarter to quarter, the first quarter was and will be our biggest growth quarter. We had margin expansion in the first quarter. As we go through the rest of the year, we saw good productivity in Q1 and we are planning on maintaining or increasing productivity, especially in the rooms department. Depending on where RevPAR shakes out, margins could be positive to slightly up or maybe neutral for the rest of the year. If we are conservative on RevPAR, we will have better flow-through and margins will tick up. Given where the implied RevPAR guidance is and that expenses are growing in the low-to-mid 3%, we will revise after another quarter under our belt, but for now that is the most prudent outlook. On wine country, first quarter is the low season and the most challenged on occupancy. The key to profitability or getting to breakeven in Q1 is the right amount of group business. We have focused the resorts on building that base. It comes at a lower rate but with higher ancillary spend. Both resorts worked very hard to get as much group on the books as they could and had great group on the books this year. Transient demand was better than expected, and while we had bad weather on the East Coast and in Hawaii, in California and wine country they had great weather in Q1, which helped. Going forward, both hotels continue to have very good transient demand. Four Seasons has very good group pace for the second half. Montage has decent group pace and is a little farther ahead in establishing its group business. We are doing more group room nights this year than ever before—about 55% of total occupancy—and we would like to see that in check at about 60% to 65% for that asset. Luxury is outperforming, and combined with improved demand from the Bay Area that feeds up there, our outlook for both is very strong for the rest of the year. Operator: Our next question comes from Ladenburg. Please go ahead. Your line is open. Analyst: Just following up on the wine country hotels. Even though it is still a loss, performance was a $4 million improvement in EBITDA relative to the first quarter of last year, which is pretty meaningful. As you think about disposition plans, are those potential candidates, particularly now that the JW Marriott in Marco Island is sold and the luxury market seems to be unthawing in terms of financing availability? And a follow-up: operations are trending the right way, but your guidance, like your peers, stays cautious. Are there outliers in terms of the World Cup impact that it could have based on your outlook today? What is the upside if the World Cup does better than you are expecting? Bryan Albert Giglia: I do not know if Marco Island is a direct comp for these two, but we have been very clear: when we look at our portfolio and potential dispositions, we want to capitalize on private market values. There are certain types of assets right now—luxury being one of them—and markets where there is a lot of interest. We do not comment on transactions before we have something to publicly say, but based on our actions and the criteria I just highlighted, we are clearly out there exploring various opportunities at all times to identify assets we can recycle and redeploy proceeds into our common, our preferred, or, as I said earlier, different acquisition targets as things improve. Monetizing low-yielding assets is something that could be achievable right now in the current market, and we will look at doing what we can. There are a lot of luxury assets out in the market now, including older portfolios returning, so there is a lot of supply. Recycling assets is a core tenet of our strategy, and we are focused on doing it. On World Cup upside, it will add significant compression. Looking at our portfolio, Q1 had great transient demand. The next six months of transient bookings are up significantly across our convention, urban, and resort hotels. Transient is very strong. Our second half group pace is very strong. Hotels are booking significant current-year and future-year business. If World Cup comes in stronger, that is additional compression and benefit that will accrete to our performance. The caution is that there are events out there that could impact the cost and demand of travel, and like others we will remain cautious until we see those potential impacts alleviated. Operator: Our next question comes from Logan Shane Epstein from Wolfe Research. Please go ahead. Your line is open. Logan Shane Epstein: Yes, thanks for taking the question. Last quarter you talked about government-related transient coming back to San Diego in the first two months of the year. Did that trend continue into March and April, and how do you expect that to impact both San Diego and D.C. for the rest of the year? Bryan Albert Giglia: We saw the largest increase in transient demand in Long Beach in the first quarter, with defense and other government-related business. San Diego had transient pickup; it was more negotiated and some discount as well, and the negotiated piece could be government-related, including consultants and contractors. In D.C., we saw a little less government-related, but we saw strong transient driven by the rebranding to a Westin—we are picking up more corporate accounts and more retail accounts. Looking at our rate and occupancy index compared to pre-Westin, we are gaining share in the market. Some of that will be government-related as everything in D.C. is to some extent, but the real driver is the benefit of the rebranding we did. Operator: Our last question comes from Chris Jon Woronka from Deutsche Bank. Please go ahead. Your line is open. Chris Jon Woronka: Hey, good morning, thanks for taking the question. Bryan, you covered a lot on Miami and Andaz and what still needs to happen to get fully ramped up. It seems like you had a good start in Q1. Can you flush out a few more details on whether there is also a group story and ancillary beyond the rate story? How much will things like the beach club factor in? Bryan Albert Giglia: Our target for group is probably about 25% for the hotel. This year we will run around 20% of the business as group, which is better than we anticipated going into the year. We have seen not only group volume but the quality of group continue to improve as we move throughout the year. Miami is a repeat market for both transient and group customers. That quality of group—whether for Art Basel or other major events—we did not really participate in last year. We will have groups in this year, and next year we will likely have even better groups. While there is still occupancy to build on the group side, the group side will also be a rate story. At the end of Q3 and into Q4, when Bazaar opens, that will bring a level of energy and notoriety into the hotel that will be a big catalyst for overall rate as well. Everything has accelerated in the first quarter. We have seen group pickup and quality increase. There is still occupancy and ancillary spend to capture, and as we move into next year it becomes more of a rate story, with a lot of space between our current rate and the market rate that will be very meaningful to the hotel’s cash flow. Operator: We have no further questions. I would like to turn the call back over to Bryan Albert Giglia for closing remarks. Bryan Albert Giglia: Thank you, everyone, for your interest, and we look forward to seeing many of you at upcoming conferences. We also look forward to anyone we have a chance to get through the new Andaz. We have had many tours, but are always available to show off this really remarkable resort. Thank you. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, greetings, and welcome to the Crescent Energy Company First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference call, press zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reid Gallagher from Investor Relations. Please go ahead. Reid Gallagher: Good morning, and thank you for joining Crescent Energy Company’s First Quarter 2026 Conference Call. Today’s prepared remarks will come from our CEO, David Rockecharlie, and our CFO, Brandi Kendall. Our Chief Operating Officer and Executive Vice President of Investments will also be available during Q&A. Today’s call may contain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflict, our business strategies, and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures. We have no obligation to update any forward-looking statements after today’s call. In addition, today’s discussion may include disclosure regarding non-GAAP financial measures. For reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measures, please reference our 10-Q and earnings press release available under the Investors section on our website. With that, I will hand it over to David. David Rockecharlie: Good morning, and thank you for joining us. First, I would like to say thank you to all of our investors, our talented colleagues, and everyone who has been part of our journey as the Crescent Energy Company team. Together, we have executed a consistent strategy, uniquely combining investing and operating expertise to deliver better returns, more free cash flow, and profitable growth. Today, Crescent Energy Company is a top 10 U.S. independent oil and gas producer with more scale, more focus, and more opportunity than ever before. On this solid foundation, we will continue to build tremendous value in the months and years ahead. And our update today gives us great confidence in Crescent’s future. Crescent delivered another strong quarter. We outperformed on production, generated meaningful free cash flow, and made significant progress integrating our Permian assets. As always, I want to begin with three key takeaways. First, strong execution drove outperformance. We exceeded production expectations driven by faster cycle times and some key steps in optimization of our producing base. We further increased free cash flow through an opportunistic refinancing, lowering our cost of capital. Second, we are thrilled with our Permian acquisition, where our integration is ahead of plan, and we see meaningfully more upside every day. We have already exceeded our initial synergy target, capturing $120 million to date, and we are seeing early improvements in both well costs and production. And third, our differentiated combination of investing and operating expertise continues to deliver significant free cash flow both in the quarter and in our future outlook. Let me now discuss the quarter in more detail. We produced a record 341 thousand barrels of oil equivalent per day for the quarter, including 140 thousand barrels of oil per day, and generated $192 million of levered free cash flow. Importantly, first-quarter production was above expectations on both total equivalent volumes and oil volumes, driven largely by base production outperformance and acceleration in the Permian from improved cycle times. While our development plan remains fundamentally unchanged, we are selectively accelerating volumes to capture higher near-term returns while continuing to drive operational efficiencies and lower well costs across our asset base. In the Eagle Ford, we continue to see steady efficiency gains. We continue to increase our use of simul-frac completions across our development, which is reducing costs and accelerating volumes. At the same time, we have strengthened our 2026 development program through an active ground game, increasing lateral lengths and working interests. In the Permian, we are off to a strong start and capturing early wins. The initial phase of our integration focused on stabilizing the assets. We have right-sized capital intensity and implemented our returns-driven operating approach. We are now focused on optimization and have seen impressive early results, with $120 million in synergies captured to date, already exceeding our original target. To provide a few examples, we have improved the operational planning around our development program, efficiently increasing wells per pad and adding roughly 100 thousand incremental lateral feet to our 2026 plan through offset acreage trades and land optimization. We have accelerated cycle times in our 2026 development plan, and we are already having success reducing well costs. From rebidding service contracts to changing fuel usage and facility design, we have achieved over $500 thousand of savings per well versus the prior operator. These are not one-off wins. They reflect Crescent’s operating model and our track record of buying assets and making them better. And importantly, we still see meaningful upside from here. In the Uinta, we have had strong execution, with well costs down roughly 20% year over year as we implement the same proven approach you have seen from us in the Eagle Ford. Implementing simul-frac, increasing efficiency, and extending laterals are just a few of the tools we have brought to the basin to optimize the capital program and increase well returns. Activity this year remains focused on our core Utelem Butte development. Additionally, after strong results in additional formations across the basin and on our acreage, we are investing more capital towards the prudent delineation of our broader resource opportunity. With our meaningful cost improvements and the tremendous stacked resource potential across our position, we see significant opportunity for value creation ahead of us in the Uinta. Our minerals and royalties business has shown similar strong performance. Our portfolio of world-class resource and high-margin cash flow provides valuable exposure to cost-free organic growth. And at current prices, we expect the portfolio to generate approximately $200 million of EBITDA this year, representing a meaningful increase versus our original guidance. Across the portfolio, the results are clear. We are executing well, improving our assets, and generating strong returns and significant cash flow. Our unique combination of investing and operating skills delivered this quarter, and Crescent Energy Company is better positioned than ever before to continue delivering impressive results and long-term value for investors. With that, I will turn the call over to Brandi. Brandi Kendall: Thanks, David. Crescent Energy Company delivered another quarter of strong financial results, generating approximately $690 million of adjusted EBITDA and approximately $192 million of levered free cash flow. These results reflect both strong execution and a portfolio built to generate outsized free cash flow. During the quarter, we also improved our cost of capital with an opportunistic refinancing. We reduced interest expense, extended maturities, and further strengthened the balance sheet, all of which support higher free cash flow going forward. Our capital allocation framework remains consistent and disciplined. First, the dividend. We declared a $0.12 per share dividend for the quarter, continuing our long history of returning cash to shareholders. Second, we remain committed to maintaining a strong balance sheet. We ended the quarter with approximately $2 billion of liquidity, no near-term debt maturities, and a clear pathway to lower absolute leverage over time. And third, our free cash flow provides significant flexibility. At current prices, we expect to generate approximately $1 billion of levered free cash flow in 2026, which gives us the ability to reduce debt, fund accretive M&A, and repurchase shares when appropriate. Our focus remains on long-term per-share value creation, and our scale, cash flow profile, and balance sheet strength give us multiple ways to achieve that. With that, I will turn the call back to David. David Rockecharlie: Thanks, Brandi. Before we open the call for Q&A, I want to reiterate our key messages. First, our base business continues to outperform. We exceeded expectations on production, delivered strong financial results, and continued to improve the efficiency of our operations. Second, our Permian integration is ahead of plan. We have already exceeded our initial synergy target and see further upside ahead. And third, our differentiated combination of investing and operating expertise continues to deliver strong returns and significant free cash flow. Not long ago, Crescent Energy Company was a new public company producing just over 100 thousand barrels of oil equivalent per day. Since then, we have driven profitable growth, significant free cash flow, and meaningful operating efficiencies to create a top 10 U.S. independent oil and gas producer, delivering impressive results like you have seen today. Our strategy remains consistent and, with more scale, more focus, and more opportunity than ever before, we believe Crescent Energy Company has never been better positioned to deliver impressive performance and long-term value in the months and years ahead. We will now open the call for questions. Operator? Operator: Thank you. We will now begin the question-and-answer session. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We will wait for a moment while we poll for questions. We take the first question from the line of Neal Dingmann from William Blair. Please go ahead. Neal Dingmann: Morning. Nice quarter. David, my first question is just on your operational efficiency. Specifically, how much upside are you already seeing on the Vital assets? It seems like you are already very quickly seeing some upside there. Would love to hear color. Joey: Hey, Neal. This is Joey. I will take that one. We have really hit the ground running. The way I like to describe how we have attacked this is just taking our integration capabilities and moving from a defensive position to an offensive position as quickly as we can. I really like the way slide seven frames it. We wanted to stabilize as quickly as we could. Of course, slowing down the activity helps. I liken it to the way they talk about football: slowing the game down helped us immensely. And we have quickly moved into the optimization process. Some of the first things that we did was rebid our services, which was incredibly timely because we had some 100% diesel fleets out there operating and we were able, through the bidding process, to find some dynamically gas-blending fleets, DGB fleets. If I were to talk about one lever, that would be the biggest one that we have really hit to reduce our cost because displacing 55% to 75% of the diesel, particularly in light of diesel costs currently and also with the gas prices that we are getting in the Permian, it was just a huge win, and you can see the impact of that on slide 12, which I really like as well, being able to get $25 per foot reduction. So that was a big one. Some of the things that are coming down the pike, it is kind of the same playbook, different days: larger pads, implementing simul-frac. Previous operator had maybe done one or two pads towards the end, and we are doing as many pads as we can. I think we are going to be approaching 50% of our wells this year with the simul-frac. And then just doing the things that we do: reducing cycle time, right-sizing artificial lift, reducing facility sizes. The opportunities are plentiful, and I am really proud of how well the team has hit the ground running. Neal Dingmann: Great. And then secondly, wondering—you saw, for instance, Diamondback boost activity. What would it take for you all to do something similar, maybe a rig or two? David Rockecharlie: Hey, Neal. I will just start by taking a quick step back and again reiterating why we talk so much about investing and operating. Deployment of capital is investing. We are really pleased with the M&A that has taken place over the last three years. That is dollars in the ground in a $60 oil price environment, and we think in today’s environment we should be grabbing as much cash flow as we can for the benefit of investors. So we do not see increasing rig activity into a higher price environment. We see producing barrels at really high margin and returning cash to the balance sheet and investors. Operator: We take the next question from the line of Zach Parham from JPMorgan. Please go ahead. Zach Parham: Yes, thanks for taking my question. First, just wanted to ask in the Permian—Waha spot today is around negative $4. Futures indicate that it gets quite a bit better later this year with new pipes coming online. I think Vital had quite a bit of Waha exposure, so I am assuming that is still the case with your Permian asset. How do you factor that into your operations? Do you think about holding back the timing of some turn-in-lines or shutting in some higher GOR wells in the basin with where Waha is today? Brandi Kendall: Hey, Zach. I would say as we sit here today, we are very well hedged from a Waha standpoint over the next 24 months in the mid $2s. I feel like we have a lot of protection there. Zach Parham: Okay. Thanks. And then, David, maybe just following up on one thing you said in your prepared remarks, talking about the delineation of broader resource opportunity in the Uinta. Could you just unpack that a little bit more? What other zones do you plan to test in the near term? What is the timeline there? Just curious for some more color there. John Clayton Rynd: Hey. It is Clay. As we mentioned in the remarks, early in the year we have been focused on the Butte. As we get into the back half of the year, you will see us continue to drill with confidence but take passive delineation opportunities. We mentioned a JV we had on the northeastern side of our acreage that we felt really good about and continue to lean into that. If you think about where we are focused, you can see more of the same as you think about the upper cube. You see activity in the upper cube across the play and then the results we have seen early on our asset that we are really excited about. More to come about the opportunity set for us. Operator: We take the next question from the line of John Freeman from Raymond James. Please go ahead. John Christopher Freeman: Good morning. Thanks. When I look at the nice first-quarter beat, even though you have not officially changed your full-year production guidance, given the strong first-quarter beat and the extra footage that you all are adding, it seems likely that you are going to do better than that original guide. But when I break down the drivers of this outperformance between the faster cycle times that you all are mentioning in the Permian and then the base outperformance, which I assume is your waves of this optimized workover program, is there any way you can flush that out between how much of this—at least of the first-quarter upside—was driven by the base outperformance relative to the improved cycle times? Brandi Kendall: Hi, John. I would say it is roughly 50/50—better cycle times in the Permian and then optimizing the base. John Christopher Freeman: Perfect. And then just the follow-up for me: as you have continued to provide more details about Crescent Royalties the last few quarters and continue to build out that business, when you look at the leverage on Crescent Royalties—obviously with Crescent E&P you have stated leverage targets and things like that—I know Royalties right now is about 1.9 times. Is that sort of the right zip code for that type of business? Is there any sort of targets that we should be thinking about with that business, similar to how we think about the E&P? Brandi Kendall: I will take this. We would expect to be 1.5 times or below on the minerals business as we exit the year. The asset base, as we flag in the materials at today’s commodity prices, is generating close to $200 million of free cash flow. So that free cash flow will go to the balance sheet there. But I think similar zip code as we think about the working interest business from a leverage perspective. Operator: We take the next question from the line of Michael Furrow from Pickering Energy Partners. Please go ahead. Michael Webb Furrow: Hey, good morning. Thanks for taking our questions. Wanted to touch on the improved cycle times again and what they could mean for the overall broader business. The efficiency gains are clearly positive, especially at current oil prices. But one caveat is that accelerated activity could put some pressure on the corporate decline rate. That said, it looks like the base production appears to be performing well. Can you walk us through some of the key drivers behind the base business outperformance and how you are thinking about further optimizing that decline rate from here? David Rockecharlie: Yes. Hey, it is David. I will just start with better performance is better performance, so we feel great about how things are going. And to your point, getting some barrels sooner is not going to fundamentally change decline rate. We really focus on that as a business, as you know, and so I think we feel very comfortable with what I will call the capital discipline and our ability to maintain the production base where we want it. I will turn it to Joey to give some perspective on further outlook there, but the punch line for me is that we have been able to integrate the business faster and make change sooner, and that is just getting us more value, quite simply, sooner. Joey: Michael, I get your question that whenever you get faster cycle times, you have the opportunity to bring more activity in and how does that impact capital. The other thing I would point to is the significant reduction that we are demonstrating on our well costs. So a lot of this increased activity we are paying for—we have indicated even on the West Texas asset a $500 thousand per well reduction in well cost. That will go a long way toward adding a little bit of activity. The other things we have talked about through acreage trades—adding 100 thousand extra feet, not leaving stranded resource—all those things. At the end of the day, I like the way David said it. Efficiency gains are definitely a positive, and then we just balance how the rest of the year plays out by doing everything we can to keep our well costs down. Michael Webb Furrow: Thanks for that. David, I agree with your statement about performance, and it looks like the market is agreeing with that as well. As a follow-up, building off the same subject—the improved cycle times and efficiency gains—you previously mentioned that maximizing cash flows is the objective. Looking later in the year, in the event that operations continue at this pace and the company is faced with a decision on whether to reach or extend the planned number of wells or capital for the year, do you think you will maintain this operational cadence and efficiencies by seeing both production and CapEx higher, or will activity and spending be the governor here? David Rockecharlie: Short answer is that our focus on the corporate targets of decline rate, reinvestment rate, and returns are always going to drive everything there. As you also know, given the new assets we brought in, we have guided to the ability to move up or down one rig throughout the year across the whole portfolio. So the long story short: the activity levels and the business plan are generally already baked in, and a higher price environment just means more cash flow. I do not think you will see us change fundamentally anything as it relates to that, given the flexibility we have already got at the margin. Brandi Kendall: And, Michael, maybe what I would add: no formal change to production or capital guidance for the full year. But given performance to date and, to David’s point, given where commodity prices are, we would expect to be between the mid and the high point on both production and capital. Operator: We take the next question from the line of Oliver Huang from TPH. Please go ahead. Oliver Huang: Good morning, all, and thanks for taking our questions. Just wanted to start out on the synergy side. Great to see you all exceeding the initial target already. But as we look forward, could you provide a composition of what remains to be achieved to hit the updated target from last quarter—just trying to get some better insight to the line of sight there? Brandi Kendall: Hey, Oliver. What we have captured to date is largely overhead, cost of capital, and starting to bring forward the operational synergies. I would say what is left for us: I think there is additional room for us to improve cost of capital. I will let Joey talk about what we are focused on from an ops standpoint, but I think there are also opportunities to further optimize our marketing efforts—not just in the Permian, but across our portfolio. John Clayton Rynd: Good morning, Oliver. We have already talked about some of the capital opportunities that we have identified, particularly with DGB fleets and reducing our diesel usage. Same points on larger pads, longer laterals, increasing our capital efficiency. Maybe a specific example of the way that we are looking at things differently—focusing on value versus chasing volumes. Artificial lift is a perfect example where, different to prior operators, rather than put in the largest ESP that we can to chase a high volume, we would have deference to putting in an appropriately sized ESP that will last longer, maybe all the way up until its next conversion, so you eliminate a workover and a changeout of an ESP that could cost as much as $250 thousand. And then you are just not chasing those peak volumes. The other thing that allows you to do, because you are not chasing those peak volumes, is reduce your facility size—again reducing CapEx. Some of the other things that we have identified are the number of failures that we can eliminate that reduces our workover activity significantly because we had seen a tendency to work over some of the wells multiple times, and we are focused on how we can get rid of those capital workovers. And then doing everything we can to attack LOE as well, and the opportunities there are pretty plentiful. We are looking forward to continuing the pace that we started at the beginning and continuing that through the year. Oliver Huang: Okay, awesome. That is helpful color. Maybe just for a second question, to stick with the Permian: could you please remind us when we might expect to see the first start-to-finish Crescent-designed well, given all the progress on the integration front? And just trying to get a sense for how much of all this that you have talked through is being reflected in the well cost slides with respect to larger pad sizes, longer laterals, simul-frac usage? John Clayton Rynd: I would say it is going to be a little bit of a journey. Obviously, we inherited a drill schedule. We have had the opportunity to make some modifications. But on the front end of this, it has been primarily just what can we do operationally to reduce the cost of what we have. The increased pad size and longer laterals—those are things that are going to start to play out in the latter part of the year and into early next year. What is encouraging is we have had so much success early term on just hitting our operational efficiencies and reducing costs through some pretty simple changes, which keeps me optimistic that some of these other things that are going to be coming with time are going to keep the journey going. But it is going to take a little bit of time for us to have our development plan fully implemented toward the end of the year into next year. Brandi Kendall: And maybe just to add, we think there is outperformance to the $500 thousand reduction in well cost that we have captured. Operator: We take the next question from the line of Phil Jungwirth from BMO Capital Markets. Please go ahead. Ajay Bhukshani: Hey, this is Ajay Bhukshani on for Phil. Great quarter, and thanks for taking our question. I know it is early with the integration, and although you have already achieved quite a bit, can you talk about your initial assessment around Vital inventory in terms of low risk versus total locations? How close are you to having a Crescent view of total inventory, and how are you viewing upside to Permian low-risk locations and moving more wells to this category? John Clayton Rynd: It is Clay. As you just heard from Joey, we are really excited about where we are today. The focus on operational execution and the ability to put points on the board there is real—what you have heard from us. We continue to be excited about the overall inventory opportunity. You heard in David’s prepared remarks our excitement about the acquisition overall and where we sit today, but we have got a lot ahead of us there. I think it will be an ongoing evolution, but if you look at where we sat when we announced the acquisition, we are more encouraged on all fronts, including the inventory side. Ajay Bhukshani: Great, thanks. And for my next one, just wondering, how has the stronger commodity environment changed, if at all, how you approach the A&D market with Crescent Royalties? I bet you guys got those two deals off before the run-up. If you could also just touch on how you are viewing A&D for Crescent E&P in this market as well, that would be great. Thanks. John Clayton Rynd: You mentioned it. We are really excited about what we accomplished across the business. If you look at it over the last couple of years into a very different macro environment, we were able to meaningfully scale the business accretively and expand the opportunity set—obviously with the royalties business and with the scale Permian entry, but also meaningfully scaling our Eagle Ford business where we are the third-largest producer today. When we think about going forward, you have heard from us that the opportunity set we see internally for the business has never been greater. So we have a ton of value-creation opportunity under our control. When we look at the A&D market—obviously a lot of volatility on the commodity side—you have not seen an oil-weighted transaction get announced since the start of the conflict in mid to late February. We continue to be disciplined evaluators of assets, and you would expect us to continue that in this market environment. That includes both across the base E&P business, but also the royalty asset. Clearly, with the portfolio we have built, we have never been in a better position of strength, but we will be disciplined acquirers, disciplined evaluators, and we are really excited about the opportunities that we control today. Operator: We take the next question from the line of John Abbott from Wolfe Research. Please go ahead. John Holliday Abbott: Hey, good morning, and thank you for taking our questions. Question is really early thoughts on 2027. Brandi has already mentioned that for 2026 you will be likely up in the upper half—mid to upper half—of CapEx and production guidance. If we continue to have strong commodity prices, looking to 2027, what are the early puts and takes as we think about the next year? Do you get to the 25% decline rate? Do you change potentially the reduction in the number of Permian rigs? Joey just talked about 50% simul-frac this year in the Permian—maybe that could go higher. What are the early puts and takes as we think about 2027? David Rockecharlie: Hey, John. Great question. Without getting into too much detail too early, I think you know us well enough to know that we are going to continue to just do more of the same and do it better. Very steady focus on production levels—we talk about maintaining flat to very modest growth through the drill bit. We expect to continue to drive performance both on the production and D&C side, but also on the cost side. We would love to continue to generate significant free cash flow following all the core principles—decline rate, reinvestment rate, return on our capital—and strong free cash flow benefiting investors. So call it more of the same in 2027 and, hopefully, a very stable and continually improving business. John Holliday Abbott: And the next question is for Brandi. Brandi, the $140 million working capital draw during the quarter—Is it correct to assume that sort of reverses over the course of the year? And additionally, how are you thinking about or how would you fine-tune cash taxes if higher commodity prices persist? Brandi Kendall: Great questions, John. Working capital—I would expect that to unwind next quarter, and I would say largely related to the A&D transaction that we closed at the end of the fourth quarter. From a cash tax standpoint, specifically with respect to 2026, we have significant tax assets to offset any expected taxable income. Over the longer term, we would expect to become a cash taxpayer in an $80-plus WTI environment. Operator: We take the next question from the line of Hanwen Chang from Wells Fargo. Please go ahead. Hanwen Chang: Could you walk through your current oil marketing exposure—specifically the split between MEH-linked barrels versus WTI-based pricing—and how much of the oil volumes are exposed to spot pricing? Brandi Kendall: Hey, Hanwen. I think your question is coming from just our strong oil realizations this quarter. We printed 99% of WTI. That is a function of the fact that we sell a lot of our South Texas crude based off MEH, which is technically a waterborne crude. Given what is happening in the Middle East, that is pricing at an incremental premium to how MEH has normally traded. I would say roughly 70% to 75% of our crude across the business prices off of MEH. Hanwen Chang: Thanks. And given your MEH exposure, how should we think about the second quarter versus the first quarter? Are you seeing potential for further upside, or is first quarter closer to a high point? Brandi Kendall: With respect to second-quarter oil realizations, I think it is probably in the zip code where first quarter printed. Operator: We take the next question from the line of Charles Meade from Johnson Rice & Company. Please go ahead. Charles Arthur Meade: Yes, good morning, David, to you and the whole Crescent team there. I wanted to ask a question about your CapEx flexibility—specifically about reallocating CapEx within the current capital budget to more oily assets. It seems like the obvious place that you could do that would be by moving updip in the Eagle Ford, but I think there is probably also an opportunity out in the Permian once we get some of these big pipelines online and gas is not so negative anymore. For example, some of the stuff you have further west in Pecos would be—once gas goes positive—maybe there is an opportunity to bring on some oil volumes out there. Could you talk about where you see those opportunities and how likely you are to act on them? David Rockecharlie: Great question. I will start with a really simple answer of yes, and your commentary is music to our ears. We pride ourselves on having flexibility within the portfolio. I think it is one of the really valuable, distinctive things about Crescent’s assets that we have put together. Long story short, we have been able to manage that over the last few years, and this year is much the same—meaning we are today about 90% plus allocated to liquids-oriented drilling, and we will continue to monitor opportunities for the best returns across the portfolio. As you said, we have multiple places in the portfolio where we can allocate more or less capital to liquids and to gas. We are really just looking for the best returns and the best efficiency. We feel great about the program we have today, but we do continue to have flexibility to do exactly what you outlined, and we will stay focused on that. Operator: Ladies and gentlemen, as there are no further questions from the participants, I will now hand the conference over to David Rockecharlie for his closing comments. David Rockecharlie: Great. As I said at the beginning of the call, I would like to thank again all the investors who have trusted us, all the colleagues here at Crescent Energy Company who have helped build this company into what it is today and are going to help us take it forward, continue to improve every day, and everyone else who has been along the ride with us. We do think the best days are ahead for us. We have got a lot of work to do. We appreciate all the questions on this morning’s call, and we are going to get back to work and look forward to having a very strong series of updates, as I said in the beginning, over the coming months and years as we continue to build Crescent Energy Company into an outstanding business. Operator: Ladies and gentlemen, the conference of Crescent Energy Company has now concluded. Thank you for your participation. You may now disconnect your lines.
Christian Gjerde: Good morning, and welcome, everybody, to this first quarter results presentation for Elopak. My name is Christian Gjerde, and I'm the Head of Treasury and Investor Relations. Today's presentation will be held by our CEO, Thomas Kormendi; and our CFO, Bent Axelsen, and will last for around 30 minutes, followed by a Q&A session, where we will take questions from the people here in the audience as well as the people joining us online. So with that short introduction, over to you, Thomas. Thomas Kormendi: Thank you, Christian, and a warm welcome to all of you here on the beautiful, beautiful spring day in Oslo. It's really great to see so many of you here in person. So Q1 let's get started. As you know, some of you will know, just 2 words on who we are. We are actually in the business of sustainable packaging. All we do, the only thing we do is fiber-based packaging. We do that with protecting essential commodities, not the least dairy products, but also other products such as juices, soups. And in all of this work, we are committed to reducing the use of plastics. So Q1, what -- let's look at the performance here. Well, first of all, we report a revenue pretty much stable in terms of -- stable when you look at the constant currency. We're reporting a 3.9% decline. But on constant currency, given the exchange rate primarily in U.S., we're looking at a stable development. Secondly, as you know, and some of you who have followed us, we've had a strong -- very, very strong development in Americas. And actually, our development in the U.S., in the Americas continues with 6% growth on a constant currency basis and also another strong quarter for Little Rock. Little Rock as you recall, that we started up last year in April, and that has now onboarded more and more customers in Line 1. So although we have seen and we have reported earlier, somewhat slower onboarding of our customers. And when I say onboarding, it's not about acquiring customers, but it's about onboarding their designs, onboarding their materials. That has been somewhat slower. We still remain absolutely confident in the midterm targets related to Americas. Second -- thirdly, the EBITDA. We came in at EUR 41 million, which corresponds to around just short of 14%. And we also came in at an earnings per share slightly above the previous -- the year-on-year quarter last time. What we also see, even though we have also during this last quarter, invested quite heavily in the expansion in Americas, we still come in at a very solid 2.2 leverage ratio, which is actually slightly impacted as well by the currency impact of Americas. Very importantly, of course, and I'm coming back to that in a little bit broader sense. But as everyone around us know, we have a turbulent world around us, particularly in the Middle East. It does impact a lot of the raw materials, including our raw materials. And it does have a cost impact on our side as well. I will come back to some of the mitigating effects that we are addressing this with in the coming slides. Now on the revenue. As I said, revenue overall stable, although we report a EUR 12 million lower revenue. This is primarily related to the commissioning of filling machines. And as you may remember from Q4, where we reported a very strong filling machine commissioning, the commissioning of filling machines is not a linear curve. It will vary a little bit between the quarters. If you look at the EBITDA, you could -- there is a decline of EUR 3.6 million versus same period last year. However, EUR 2.5 million of this relates entirely to currency impact from the U.S. dollar. And the remainder as well as the impact that we've had in this period relates to some one-off effects that we've had. We've also seen a tough margin pressure in India, including pressure on margin, pressure on volume. And we have also front-loaded some of the strategic initiatives that we have taken already in Q1. So all of that impacts the EBITDA for this period. Now we have also initiated a program and some of those initiatives have already taken place. During this quarter, we have had restructuring effects in the likes of EUR 1.3 million, which is part of the program of reducing our -- addressing our costs, and these will have been adjusted in the EBITDA from Q1. Back to the Middle East and the extraordinary cost impact. Now everybody in the world now knows where Hormuz Strait is, very exactly where it is. Everybody knows what the impact is beyond just the surrounding countries. What you see in our world is a very significant increase in LDPE. On the slide, you will see that the LDPE increase is around 160%, which is, by the way, a picture we -- some of us will recognize from '22, where we saw raw materials explode as well, not the least on the plastic side, but also aluminum foil and other raw materials in general. We are now seeing the increase, right? And what we have done is that we have, of course, addressed these increases by implementing and introducing extraordinary surcharges on the pricing side towards our customers, given the price -- the cost pressure that we are seeing. These have been introduced. They are being implemented as we speak. And they are, of course, related to an existing price level on LDPE, on polyethylene, on naphtha, but also an expected development. So this carries a certain uncertainty because none of us know exactly how this develops. So what we have introduced is a mechanism that will allow for this kind of uncertainty. And it also brings me to the strategy of Elopak. And we remain absolutely committed and confident in our strategy that consists of these 3 pillars. The global growth, as we know, is not the least related to America, which is the big growth driver we have. We have Little Rock up and running. Little Rock is accretive. Little Rock is producing in high volumes. Little Rock is producing in multiple shifts in Line 1. We are establishing Line 2 as we speak, and we have already agreed and announced that we will do Line 3 as well. Little Rock is the foundation or rather Americas is the foundation of the realizing global growth. But beyond that, it's also India, and it's also MENA, where we are now working as well as we have announced earlier on expanding our portfolio, getting more aseptic products in, getting more ESL long extended shelf-life products in. The second one is the leadership in the core. And as we have talked about earlier, we have a strong position in chilled fresh business in Europe, and we continue to build that with a number of initiatives related around sustainability, related around the PPWR, et cetera. But the third one is the one that I'd like just to spend a little bit of time on because the third one relates to the plastic to carton conversion. And of course, in times that we see now, right, LDPE increasing off the roof, we see that competitive solutions such as PET will have increased by 60% for a PET bottle with the impact of LDPE. So while -- actually, while clearly, it impacts everyone in packaging with rising raw materials, the situation we see now is that primarily the impact will relate to the plastics products, which will, at some point, potentially improve the understanding among customers, among retailers that the carton packaging in a much, much wider sense than what we have now creates stability in cost, creates a much better transparency in cost and is a an alternative not only for sustainability reasons, but also for cost reasons when it comes to packaging other products than just milk and juice. And that is what we do in the third box, leveraging the plastic replacement because this is the area where we work with the nonfood products. This is the area where we work with alternatives to plastics, which can be very closely related to our business or a little bit further related, where we can utilize our strong know-how in liquid products, in filling of liquid and semi-liquid products. So in short, the current development poses a certain amount of challenges for anyone in any industry, primarily because it's uncertain what comes out of the ongoing conflict, but particularly for the carton industry and for packaging in our case, it does also provide the understanding, the certainty among customers that carton actually provides a whole range of advantages in their cost portfolio and their product portfolio beyond the fact that it is the most sustainable solution. And with that, I think I will hand over to you, Bent. Bent K. Axelsen: Thank you, Thomas. Before we dive into the numbers, I would like to address 2 changes that we have done to how we report our figures. The first thing that we are doing is that we are moving the R&D activities and associated corporate activities from the EMEA segment to what we call other and elimination, simply because this unit is serving both segments, not only EMEA. So this will improve the comparability and clarity when we are reviewing the relative performance between EMEA and America. The second change that we are doing is reflecting an adjustment to our operating model where the aftermarket services and spares part are now run by the local regions together with the blanks, together with the closures. Today, or in the previous reporting regime, all these financials were reported in EMEA. Now the America part of these financials will now be reported in the Americas segment because these are services and spare parts sold to the American market. So we think this is a logical change. The 2025 figures are reclassified in this report, and there is more information in this presentation file and in the report. So let's start with the EMEA segment. In EMEA, we are reporting stable volumes with results impacted by one-off effects and timing effects related to filling machines. The revenues are EUR 208 million, down 7% from last year. If we look into this reduction of EUR 16.5 million, EUR 6 million is related to timing of filling machines sold by EMEA to external customers, while EUR 9 million is related to reduced sales from EMEA to Americas internal sales. So altogether, EUR 15 million is basically timing related to filling machines. If we go then to the carton and closure revenues, they are moderately down compared to last year, and that is a result of a negative mix impact, which I will dive into. The Pure-Pak volumes, they are stable in the EMEA segment. What you see here is that there is a decline in the aseptic juice segment. This is what we have reported before. It's a result of the consumer preferences combined with the very high citrus prices that we have observed for the last year. These products are -- we have attractive margins. We have growth in other segments in UHT milk, but they are sold at a lower price point compared to aseptic juice. We see year-over-year growth in MENA, driven by growth in North African markets and we also see growth of closures as we are growing with customers that both buy our blanks and our closures together. If we look at Roll Fed, we are happy to report that we are growing the Roll Fed volumes again after several quarters with decline. This comes from onboarding of customers in Poland. But as you know, the pricing points on the margin for Roll Fed is lower compared to Pure-Pak. So it's not enough to compensate fully. In contrast, in India, we are reporting a volume decline in Roll Fed year-over-year. And we are also having, as we reported before, a pressure on margin. The revenue decline is around 13% on a constant currency basis, 26% reported. So that is related to the weakening of the rupee. So as we have reported before, the supply-demand balance is pressured in India. And in this quarter, we saw, particularly in January, February, this also impacting our volume development. If we move to EBITDA, we are reporting EUR 36 million, down from EUR 40.7 million. The margin is 17.4%. This contains EUR 1.8 million one-off related to an operational matter. It also is a result of the mix effect that I talked about for Pure-Pak versus Roll Fed, but also the fact that India remains margin dilutive, and we also see the absolute impact as the results are down in India year-over-year. If we move to America, we are reporting around EUR 95 million. As Thomas explained, it's a 6% growth on a constant currency basis, but a decline of 4% because of the weakening of the U.S. dollar. The revenue growth is below our earlier expectations due to the weaker demand for plant-based which is important for our growth in America. We are seeing consumption patterns changing into lactose-free milk, other dairy products, and there's also concern related to cost inflation. We are working very actively to fill that shortfall with other types of business in the quarters to come. In addition, the quarter was impacted by destocking among our customers. In Q4, some of our customers were building inventory in Q4, and they're now taking the stock down to normal level, and that also impacted the top line in the first quarter. Finally, on the revenue side, we also have a timing effect of filling machines in America with a decline of EUR 5 million for the quarter. If we look at profitability, the EBITDA was EUR 21 million, up from EUR 19.7 million, and the margin is improving to 22%, as you can see. And this comes from the improved production output of Little Rock and with the operational leverage that we get from that ramp-up. And we also would like to remind that 1 year ago, we had negative results of Little Rock because we have pre-start-up costs in that quarter. The share on net income is EUR 2 million compared to EUR 2.5 million last year, and that is solely driven by the weakening of the Dominican peso against the dollar, while the underlying performance remained stable. And as Thomas explained, we have -- the U.S. dollar has significantly weakened year-over-year and in America results that is measured in euro, that is EUR 2.4 million down. That wraps up America. So let's look at the bridge from EUR 44.6 million to EUR 41 million. Here, the American development and the margin accretive development in America continues to be the most important growth driver for the company. We see -- in Europe, we see the negative effect because of the negative mix effect with less juice cartons and more Roll Fed, but also the impact from the result decline in India. Raw materials are largely stable. Behind that number, we have higher board cost as per our contracts. We see higher other prices, but lower PE prices giving this number. In this quarter, our raw materials are not significantly affected by the conflict in Iran. But as Thomas explained, we expect these costs to affect the Q2 cost base and also onwards. On the operational costs, we have the EUR 1.8 million one-off effects and the rest is related to the wanted increase in R&D is related to inflation is related to the onboarding -- sorry, the frontloading of strategic initiatives in the quarter. The JV results, we have addressed and it comes to the FX combined for the group, that's EUR 2.5 million. And I just want to reiterate the fact that in Americas, we are running this as a U.S. dollar business with dollar revenues and dollar raw material base. If we look at the underlying result, if it adjusts for the one-off, the margin is -- would then have been around 14.4% for the quarter, so in line with the same quarter last year. Let's move to the cash flow. So the -- if we look just starting at the net debt, that is increasing by EUR 21.6 million. The main contributor to that is actually the strengthening of the NOK against the euro that gives a loss on our green bonds. What is important to remember is that this is mitigated by our cross-currency swaps, but we don't report the positive gains, the gains from the currency swaps in our net debt. So that is EUR 16 million. If you start to continue with the cash flow from operations, we are reporting around EUR 20 million based on an EBITDA of EUR 41 million. We have taxes paid of EUR 4 million, and we are also reversing the accounting results from the joint ventures to get to the EUR 20 million. When it comes to cash flow from investing activities, that is around EUR 12 million. This is based on the continued expansion in Little Rock and also the normal maintenance programs, also the replacement of equipment in Europe. Maybe one more thing before I move on to the next element is to come back to working capital because I jumped that, that is EUR 14 million negative effect, and that can be split into 2 factors. It's the timing. EUR 17 million worsening is related to settlement of account payables for our filling machines. So that is really a one-off because we are settling machines that we have commissioned some time ago. Structurally, we see a reduction of inventory around EUR 5 million. This is a result of the structural work that we are doing to improve the inventory turnover. Now what we would like to say is that this reduction is a little bit more than what we think is sustainable. So we expect some moderate increase of the inventory to get back to normal levels. Filling machine inventories also went down following the sales in the quarter. Now we are ready to go to the cash flow from financing and loan payments, which is minus EUR 14 million. That is included in the lease payments, the interest payments and also purchase of treasury shares. This brings us then, including the FX effect to EUR 286 million net debt. The leverage ratio is 2.2 compared to 2 at the end of the previous quarter. This is following this, I would say, the technical increase of the net debt bringing by the FX effects, but also the continued investment in the U.S. plant. The ROCE declined by 0.6, and that is a result of a lower last 12 months adjusted EBIT. And the capital employed actually is now stabilized since year-end. The accumulated investment in the U.S. plant is $106 million, and we have around $22 million to go to get -- that will take us to the full 3 lines in Little Rock. Let's -- before I give the word back to Thomas, let's just address how we think about the -- where the quarter is ending to compared to what you would have expected. So as you know, we are not guiding individual quarters in Elopak. But if you go to our Q4 earnings release, we said that we would deliver on our midterm targets. So if you convert that into implied Q1 guiding, that could be an expectation of EUR 50 million and versus a reported adjusted EBITDA of EUR 41 million. This gap is 50-50 between structural market implications, market effects and one-offs. Within the 50% market effects, 30% is Americas, 10% is Europe and MENA and 10% is India approximately. And the remaining 50% is related to the phasing of filling machines and phasing of fixed costs and also one-offs. In addition to the price increases that Thomas was talking about, we are obviously working with our cost base to delay and reduce spend where it makes sense without jeopardizing our long-term value creation. With that, this concludes the financial section. So back to you, Thomas. Thomas Kormendi: Thank you, Bent. And so overall, I think it's fair to say that we have seen somewhat softer market conditions generally in Q1 than what we've seen earlier. And one of the impacts that Bent just mentioned was, of course, the plant-based, which is a significant business in U.S. and part of the growth that we are looking for in U.S. What we also see, and that is very important for us is to say the ongoing crisis, ongoing situation in the Middle East causes extraordinary cost increases in all industries, including ours, and we are now mitigating this with price increases, in fact. We call it surcharges, but it is higher prices to compensate for this. We are seeing that, but we are also doing, as Bent explained, the other side of the -- whatever it's called, but we're also looking at our own cost base and at the same time, taking some steps to ensure that we are adapting and keeping our costs at bay in times like these. I think also, though, it's very, very important to remember, and for those of you who were with us from the IPO, where we had a year of '22 with increasing costs, with increasing a lot of turmoil, this is a resilient business. This is a business of basic food, basic food stuff that people need. So even if we have ups and downs as we do have, like any other industry, we are in a very resilient world. And the demand for our kind of products will continue even when economies around the world and including the -- our part of the world will be more or less constrained through consumer spending. So what we are saying is despite this volatile political -- geopolitical situation that we're in and with all the potential impact, we expect to continuously also improve from Q2 and onwards, our results in a moderate and gradual way. That is how we look at the year and that is how we are going to address the year and the cost situation that we experienced thing. So with this, I'd like to thank from my side and hand over to you, Christian, please. Christian Gjerde: Thank you, Thomas. Thank you, Bent. So with that, we will move to Q&A, starting with the people here in the audience first. So if you raise your hand, I will come out with a mic. Please state your full name, the company that you represent and make sure to speak into the microphone. Elliott Geoffrey Jones: Elliott Jones from Danske Bank. Just firstly, you mentioned some plastics prices up 60%. Obviously, it's a near-term headwind to you guys. But I'm just wondering your -- some of your plastic competition. Is this something that customers have started talking about that you're hearing? And is that something you can capitalize on kind of longer term? Thomas Kormendi: So what I did say is that PET in specifics, you would look at the cost of a PET bottle will have increased about 60%. If you look at the LDPE that is being used in our carton as well, we're looking at, as you saw on the slide, somewhere around 160% cost increase, really, really, really significant. So what you typically see in the industry and many of our customers will have a mix of plastics and cartons, right? So what -- and they will, depending on where they are, provide private label and/or their own brands. The decision they make then is what kind of format am I using? If it's a brand, you don't easily change from one format to the next for all the obvious reasons. But what does happen in times like this is that the consideration is what is the right format moving forward is much more relevant when it comes to costs as well as sustainability. We have been very clear that from a sustainability point of view, the carton solution is the absolute superior solution versus plastics, both from a renewability point of view, from a CO2 point of view and also eventually, as we move on, you'll see it from a recycling point of view. Now what we are seeing then here is that with the insecurity that is created in PE pricing, when you are a customer, when you are a retailer, you're going to look -- you are looking now at carton saying, this creates a stability, it creates transparency. It creates a predictability in cost that plastics cannot guarantee because it's all about the oil price. It doesn't mean, though, short term that everyone changes into carton sadly. But that's not going to happen because of equipment, because of industrial production, et cetera. So these take time, but it's very, very important in the longer perspective and very important for the new areas that we're discussing where the consideration should we -- should we not suddenly tilt hopefully more towards, yes, we should go carton. Elliott Geoffrey Jones: And then just 2 more quick ones. Just on the Americas segment, you talked about this being affected by developments in plant-based. Can you kind of provide more color as to how that could affect maybe your medium-term growth targets in the Americas? Would that kind of delay the pathway to 100% utilization rates in the lines that you've announced? Or do you see it easy to kind of replace those volumes near term? Thomas Kormendi: I would never use the word easy, right? But I think what is very important is we commit to our midterm targets for Americas. That is the simple story. And we are absolutely convinced with the plans we have in place that we are going to deliver on this midterm target. Remember, that's EUR 480 million calculated on the exchange rate --. Bent K. Axelsen: At that time... Thomas Kormendi: At that time, right? So we don't know what happens to exchange rate, obviously. But that plan stands, will be delivered accordingly. Elliott Geoffrey Jones: Got it. And then just on the EMEA mix effect. Am I right in thinking that it's not obviously an easy fix in terms of reversing that in Q2? Should we expect that kind of mix effect to continue maybe in the next few quarters? Bent K. Axelsen: So when it comes to the juice development, that is a trend that we have reported for quite a few quarters. So we expect that trend to continue. It depends a little bit on the citrus prices. So I think we need to distinguish between the consumer preferences and focusing on sugar versus the cost of juice because of the citrus prices and the diseases that have been worse in recent years, Yellow Dragon disease, I think it's the name, and that has reduced the supply of citrus. So that is not a quick fix at all. When it comes to the Roll Fed business in the Europe, we have then finally been able to grow that business after several quarters with decline. Some of that decline was related to the cap regime back in the days, I think it was 1st of July 2024, which is more of a one-off, and there also have been increased pricing competition. What's going to happen to the Roll Fed business where we are able to continue to grow that business? It depends on the whole raw material situation and the whole Iran conflict because it's -- Roll Fed is the most competitive product group that we have in Elopak. So yes, to juice on Roll Fed, we will wait and see before we can call it a positive trend. We need some more quarters in the bank. Ole-Petter Sjøvold: Ole-Petter Sjøvold, SpareBank 1 Markets. So first, a question on the contracts for Little Rock. I mean, as we understand it, it's no take-or-pay, but it's when the customers take materially lower volumes, the price could be up to negotiation. So could you give some insight into this? And could we potentially then see some sort of compensation later this year that should relate to Q1? Thomas Kormendi: It's a little bit difficult to answer, but if you take the mechanics in this, right, the way we normally do this, and we have, of course, some very, very big customers around the world, including U.S. These customers will say to us, look, we would like to -- we would like you, please, to produce X amount of volume, and we will then agree a price on that volume. When they make that commitment, which is a commitment, it doesn't necessarily mean that if you do something less, then there is a compensation. There are -- we also have those models, I have to say. But in the bigger context, it is much more of, I say, can you fill our needs. So what would typically happen is after a while, if that volume is not -- we're not seeing the volume coming for different reasons. Typically, one reason is they have more stock than what they thought, honestly. You would think they know, but it's actually, in some cases, many plants and there are -- so the volume will arrive later. That's one area. The other area is, of course, there can be -- they say, well, we're going to use more suppliers simply for contingency reasons and procurement reasons, et cetera, et cetera. Now in the latter case, right, so we say on a more continuous basis, we're going to see lower volume than what we have agreed. We will renegotiate price. Price and volume always correlates. So if you're not delivering the volume, we need to have a different discussion on price. If you're saying we are not delivering volume because of some stock reasons, typically would not happen. Ole-Petter Sjøvold: Got it. And a final question for me. On the price surcharges you're implementing right now, I mean, you guys typically hedge LDPE prices and aluminum prices in Q3, Q4 on the majority of your exposure. Are you able to increase prices for the full extent of what your price or cost should increase if you didn't hedge? Or is it only your open exposure able to push out to increase prices? Thomas Kormendi: That's a very good question. And the reality is, of course, that we, as well as our competitors, right, everybody hedges as you would do normally. So when we increase our price, we have to think about our competitors as well, and we keep that in mind. So typically, what you would see in extraordinary situations like this is that everyone tries to limit the cost increases that are needed to cover the cost, right? And we live in a competitive world, so we do the same. But it's also very clear that hedges are for this year, right? So what happens next year when you need new hedges, and we don't know where the raw materials will be at that time, that's another set of increases that would come on top of that. But we are not in a position that we can increase only based on our own costing. We have to look at market conditions as well, of course. Christian Gjerde: If there are no further questions from the audience, then we will move to the questions that we have received online. So starting with a question from Geir Olsen. More than 90% of your revenues comes from cartons and closures. Could you provide some color on the revenue mix across key end markets such as milk, juice, liquid detergents and other categories and highlight where you are currently seeing the most -- the strongest growth? Bent K. Axelsen: Yes. So with our disclosure principles, we do not report on end user segments. I would say when it comes to the biggest contributor of growth, that continues to be America for us. And America for us is milk. It's a combination of plant-based, in particular for the growth in Little Rock, but also dairy. Juice in America is limited. So milk, America is the biggest contributor. As far as what we call nonfood is concerned, it's still a very, very limited part of the business as of today, but we believe that to be an interesting and significant business opportunity in the long term. That really depends on the hunger for green alternatives and to which extent green is back on the agenda again because of the new energy crisis. And there's a lot of discussions in media, whether this is now a forced green agenda coming from the conflict. And I think this is probably where I should leave that comment, IR. Thomas Kormendi: I think you're right, Bent. Christian Gjerde: So thank you for that, Bent. And then moving to the next question or questions, I would say, coming from Hakon Fuglu. I'll do them one by one to make it easier for you. First question, have you been impacted in the quarter by raw material cost and/or logistical costs? Bent K. Axelsen: The implications of the Iran conflict is very limited. So we haven't commented on those in Q1. There could have been some freight increases in the region in the beginning or in the end of the quarter. But when it comes to the raw material impact, which is a big part that has not impacted Q1. And let me remind that we have an inventory turn of around 2 to 3 months, so which means a spot price increase end of March will take at least 2 months for that to impact the reported costs in our accounts. Christian Gjerde: Thank you, Bent. And moving to Hakon's second question. What's your hedge position on raw materials for EMEA? And should we expect similar price increases this time as we witnessed during 2022? Bent K. Axelsen: So when it comes to PE, we are hedged south of 80%. When it comes to ALU, which is a smaller part of the cost, we are hedged mid-50s. PE is around 11%, 12% of the material cost as reported in our P&L. Aluminum is around 5%, if I remember correctly. To your second question, I think the difference between '22 and 2026 is that in '22, it was PE, it was ALU, it was electricity, which was maybe the biggest relative increase we had, it was pallets, it was inflation on almost everything. The situation that we're looking at right now is a situation mainly related to PE. We saw the price increases on the chart and also the ALU. So the breadth of the inflation is not the same so far. So it's not the same as '22. I think the situation reminds me more of 2021 when we saw the raw material start to increase following the aftermath of the pandemic. And in 2021, this was not yet a broad inflation. So '26 reminds me more about '21, and I hope that '27 will not become '22. Christian Gjerde: Thank you, Bent. Then a couple of more questions from Hakon. How much of the phasing/one-off costs for the quarter is related to Americas? Bent K. Axelsen: So I have to think about that. When it comes to America, there are some one-offs related to the destocking effect, but we have not quantified that in the report, but it's part of the picture. And it's -- when you start to generate the results, you see the impact of that destocking effect. It's there, but it's not a major effect in our numbers. The main proportion of the one-off is related to EMEA. Christian Gjerde: Thank you, Bent. And then the last question from Hakon. Is production Line 2 at Little Rock ramping up according to plan? Thomas Kormendi: Well, it's actually too early to ramp up production in Little Rock on Line 2. So -- and the plan was not that it would ramp up yet. So you could say it's according to plan, if you like. We are not ramping up yet. We're installing. We're preparing, but we have not ramped up the production yet on Line 2. Christian Gjerde: Thank you, Thomas. Then we have a question from [ Cole Hopen ]. Focusing on surcharges and price increases. Firstly, can you give some color on how you approach these commercially with customers? Are the surcharges just for logistics or polymers as well? I'll take that part of it first and then --. Thomas Kormendi: Yes. So what we do is we sit down with our customers. We explain them the situation in all of the agreements we have. We have what is called sit-down clauses. Clearly, this is an extraordinary situation, extraordinary event hitting pretty much all industries, definitely also ours. So there is a wide understanding that's needed. The cost increases are -- the cost surcharge that we are introducing relates to both PE as well as logistics. Christian Gjerde: Thank you, Thomas. And then the second part of Cole's question, have our liquid packaging board suppliers also approached you for logistical surcharge costs? Thomas Kormendi: If our suppliers -- so -- and this is actually -- maybe I should have qualified my previous statement. When we deliver our material from our plants to our customers, there's a mix of Incoterms. Some will pick it up themselves, somewhere -- in some cases, we will arrange the transport, et cetera. And with our suppliers, it's the same thing. It depends on who it is and what the Incoterms are. So if -- and in some cases, it's very transparent, we simply pay whatever the transport is and in some cases, included in the price. So it's difficult to give one answer on that. Christian Gjerde: Thank you, Thomas. Then we have a question from Niclas Gehin in DNB. You write in the report that you are confident in reaching your midterm target for Americas in 2028. Can we also expect for you to reach your midterm targets for 2026? Thomas Kormendi: Well, you have to look at the -- you have to take the outlook statement for what it is. And I think the way we have phrased it is we think the underlying business is doing well. We also recognize the fact that there is a lot of uncertainty around us out of our control, one of which relates to, of course, as we keep saying, the Middle East, but also other impacts. So for that reason, we are not guiding on '26 beyond what we said in the outlook statement. Christian Gjerde: Thank you, Thomas. Then we have a question from Marcus Gavelli at Pareto. Assuming price hikes, price increases will not be fully passed on to customers before later this year, so some lags in the implementation of that. Should we expect near-term margin squeeze? And are the ongoing price increases sufficient to fully offset the cost increase that you are seeing today? Bent K. Axelsen: So should I take the first part of the answer. So --. Thomas Kormendi: I can think about the second. Bent K. Axelsen: Yes. So I will speak slowly. Thomas Kormendi: Exactly. Bent K. Axelsen: So when we are looking at this, we need to consider a couple of things. So one thing is the inventory speed. So when we have a price hike in the spot prices, how long time will it take before it will hit the cost base in our P&L. The second element is the timing that these surcharges becomes effective and we are in the process of working and implementing those price increases as we speak. So based on the information we have today, it's difficult to assess which force is stronger, but we stick to what we say in the outlook that we believe that second quarter overall will start a gradual improvement compared to Q1. Thomas Kormendi: And then the -- just repeat the second question, please, exactly. Christian Gjerde: Second question he is basically asking, are we passing all the full net of the open price increase to our customers. Thomas Kormendi: So I think when you think of the price surcharge, right, this is based on partly what we know, i.e., the existing price levels of PE. It's also based on what we think and we don't know how long these price impacts will last. So what we have passed on now is actually what we need to cover the cost of the significantly increased cost that we are experiencing. If these costs tend for whatever reason become even higher, then it's a different situation, right? And we need to reassess and we need -- and as I said before, we've put in a mechanism that will allow for some movement in this. But it's very important to understand for everyone, including our customers, by the way, that this is a volatile time. We have little to very, very limited visibility on how cost will develop. And we have various indexes when it comes to PE, et cetera, but they tend to be, let's just say, not very accurate historically. So we have to look at it, but we are implementing a plan. We're implementing a surcharge to cover for the costs. And it's important that we cover for cost. And it's just like in '22, when you cover -- if you look at it from a margin point of view, it does have an impact. There is no way around it. If you increase by the cost levels you have in price, there is a margin impact on that. Christian Gjerde: Thank you, Thomas. Then we have a final question from Martin Melbye at ABG. Could you please comment on the change in the competitive situation in Europe? Thomas Kormendi: I'm not entirely sure what the question means when it changed compared to what and compared to when. Christian Gjerde: Yes. I think he's referring to the update that we gave to the market in February where we talked about increased price competition in Europe. Thomas Kormendi: Right. So what we have seen during the end of last year is more intense competition in the core markets of Europe, in the chilled business, in our core business. And that, in a way, to be honest, is not surprising given that we have had good development and success in building our market share from a strong point to an even stronger point. And of course, at some point, you will expect that there will be reactions and competitors trying to win back lost territory. That has been the case that attempts have been made. But so far, knock on wood, we have been in a good position to defend our positions and defend our strongholds where we are now. Since then, nothing significant has changed in that respect. And -- but I think it's also absolutely normal and expected, whether it's in Europe or in America, that competition as we are growing, as we are building our business, competition will try to fight back. And we will try to do our very best to defend our positions and keep growing the business as we have done for the last many years. Christian Gjerde: Thank you, Thomas. I see that concludes our online questions for today. So thank you, everyone, for joining this fantastic morning in Oslo. I wish everyone a good day. Thomas Kormendi: Thank you, everyone, for listening to me so many times. Thank you and all the best.
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.
Aapo Kilpinen: Ladies and gentlemen, dear Remedy investors, welcome to the webcast for Remedy's Q1 Business Review of 2026. My name is Aapo Kilpinen from Remedy's Investor Relations. Joining with me today are Remedy's new CEO, Jean-Charles Gaudechon, also known as JC; and then our CFO, Santtu Kallionpaa. JC will briefly introduce himself and then guide us to the quarter. Santtu will then do a deeper dive on the financials of the quarter. We'll then look at the outlook for the year, and then we'll end with a Q&A session at the end of the webcast. [Operator Instructions] But without further ado, JC, please, the stage is yours. Jean-Charles Gaudechon: All right. Thank you, Aapo, and hello, everyone. Welcome to Remedy Q1 2026 Business Review. I guess I need to start by saying a few words about myself. So let me start with, I think, something that really defines me is my past as a software engineer. I think that's really what shapes how I think about games, how I think about running studios, companies like Remedy, and how we approach game development in general. Over the past 25 years, I've had a chance to work on games across many roles on all platforms really and across North America, Asia and Europe, so quite global. That has given me a good overview of our craft and now I have the immense privilege of bringing that experience to Remedy. One of the boldest, most original studios in gaming with some of the best talents in the industry, which is excellent. You know what Remedy has achieved is rare. Over more than 3 decades, this studio has built a voice unlike any other, supported by a strong and engaged community, which is extremely rare, as I said, and a great asset now and for the future. More broadly, in our industry today, I think the creative craft is under real pressure. Games with a genuine soul, games that take risks, that have a point of view are getting harder to find. And those are exactly the games that Remedy makes. My mission is not to change what Remedy is. My mission is to protect and grow that soul and to help this studio grow without losing what makes it Remedy. All right. Enough of me, let's go through our business performance together. Q1 2026 was a good start to what I believe is going to be a very exciting and pivotal year for Remedy. Revenue increased, driven by game sales and royalties that nearly doubled for the comparison period. EBITDA came in ahead of the same comp period at EUR 2.9 million and EBIT was positive at EUR 1 million. Operating cash flow was on a healthy level. So good signals as we start that year. And a good share of that performance is being driven by our back catalog, which continues to find its audience. That is very encouraging, especially as we are building the self-publishing muscle at Remedy. We have a number of exciting projects in development, but the most immediate focus for Remedy, the one closest to our players' hands with the 2026 launch is CONTROL Resonant, obviously. So let's cover that. Our goal with CONTROL Resonant is to deliver a great melee action in RPG. Again, that honors the Control universe but also expands it, and that players will truly appreciate because in the end, that is what really only matters. So we're doing that for players in our fan base. A lot of interest was captured with our December 2025 announcement, and the leading indicators are on track. Looking ahead, we will ramp up the marketing campaign leading up to release, and we expect the momentum to significantly intensify. We have an ambitious global campaign and a sizable marketing budget for execution. The reception has been incredible so far. We're extremely happy about traction. During Q1, we released 2 new trailers. The first was our gameplay reveal trailer featured in the PlayStation State of Play. As you know, one of the highest profile venues in the industry for a reveal like this one. And putting our gameplay in front of that audience -- in front of you all for the first time was a very important moment for us and for the game at Remedy. The second was produced with our long-term partner, NVIDIA. This partnership shines a spotlight on the technical ambition behind CONTROL Resonant. And of course, on our very own Northlight, our proprietary engine, which is what allows us to push the game's performance and cutting-edge graphics, extremely important for Remedy games, as you know. Beyond the trailers, sorry, we released a developer diary for our community called Beyond the Oldest House. This is the kind of content that really matters, we believe, to our most dedicated fans, direct access to the people making the game, our dev team speaking in their own voices, speaking honestly about what they are building. Remedy's community has always liked authenticity. And I think that's really what we've been doing here and what we want to keep doing. We also hosted an exclusive showcase for media and creators. We had over 70 outlets that attended, generating more than 140 articles and around 2 billion impressions across global media, which we believe are good numbers at this stage of the campaign and more importantly, the coverage was not just broad and just volume, it was also quality and it was positive, which obviously, for us, is very encouraging and kind of how we want to land the product. Outlets like Edge, Polygon, GAMINGbible, IGN, just to name a few, I don't want to hurt anyone in the process, but have all come away from their previews with a clear message, to be clear, this was a hands-off preview, but still very encouraging. And people really said, this is a Remedy game that takes risks and has its own identity. And that's always what we want to make at Remedy. And you'll see that more and more as I talk strategy moving forward, it's very, very important that these games feel Remedy and are more Remedy than ever. There are, of course, fair questions being raised. Action RPG is a new genre for Remedy, and the press, the fans are right to scrutinize how the gameplay holds up. We welcome that scrutiny, but we are also confident that as players and press get their hands on the game, they will see kind of how serious we are about earning our place in the action RPG space. I have the chance to play the game daily, and I can tell you that it's coming very well together. I'm very happy. All right. So beyond the press, the broader signals heading into launch are healthy, sentiment among fans and content creators has held up globally, which is great to see. That audience is sizable. The Control universe has been played by close to 20 million people over its lifetime. We are also making a deliberate push beyond our traditional strongholds, the U.S. and Europe. This time around, Asia and Latin America are real priorities for this launch. And we have invested in localization at a level we have never done before. Our thinking here is simple, Remedy's voice deserves to reach further, and we are giving it the means to do so. All right. So turning over to our games currently in market. Alan Wake 2 became available on Amazon's Luna service during Q1, alongside Alan Wake Remastered, generating a platform deal royalty. The game also continued to perform across other platforms throughout the quarter, and Santtu will explain a bit more how that impacted Q1 positively. Happy to -- I'm very happy to announce that the game has passed a 6 million benchmark in lifetime copies sold. Control retained its solid sales momentum in Q1. In fact, Control actually sold better than the comparison period driven by promotions and added visibility from CONTROL Resonant, obviously. This is a dynamic we plan for at attractive price points. Control is a great vehicle for new players to enter the world of Control ahead of the sequel. All right. FBC: Firebreak. The last major update, Open House was released in March, and the game has moved to maintenance mode after that. The game will remain online and a Friend's Pass feature was introduced to support the player base. It is very important for us at Remedy to let players enjoy the game for as long as they can and as long as they want. The game remains available on PlayStation Plus and Xbox Game Pass, sorry, and can be purchased on PC and console platforms. All right. Our development pipeline has 3 active projects. CONTROL Resonant, obviously, in full production. We already discussed about this one at length. Max Payne 1 and 2 remake is also in full production in partnership with our partner, Rockstar Games. And you know how close to our heart is Max Payne. So something that we're putting a lot of effort on also. And we have a new project currently in proof of concept, which unfortunately, I cannot tell much more about today. So building on what I shared earlier, 3 areas where we are sharpening our focus. One, focus on core strength. Remedy is exceptional at building single player narrative experiences on core platforms. This is what we do best, and we need to double down on that expertise. We cannot take it for granted, not our craft and certainly not our players. This does not mean we stand still. We will innovate and we will explore new ways of reaching players when the case is right. But every step beyond our core has to build on what we already do best. Franchise expansion as the second pillar. Today, we tend to think about our games one after another. I want us to evolve that mindset, managing more franchises. I think our IPs today can really give a lot more than what they already do. We need to think as long-term strategies that let us be bolder to connect the dots further within and between our world. That is something very important to me for the future of Remedy. And three, self-publishing. I think this is a unique opportunity to hone the whole chain. No one can really speak about Remedy games better than Remedy. I want our publishing voice to be as unique and distinctive as our games themselves. It's a chance to be heard like never before. And we are not going to play safe, you will see that with the CONTROL Resonant campaign. With that, I will hand over to Santtu to walk you through the Q1 financial results. Santtu Kallionpaa: All right. Thank you, JC, and good afternoon also on my behalf. Let's start reviewing the financials from the revenue. So in Q1 2026, our revenue was EUR 13.1 million, which is 2 percentage lower than in the comparison period. Game sales and royalties almost doubled from the comparison period being EUR 5 million for the first quarter. This was driven by the royalties from Alan Wake 2, which include also the onetime royalty accrual from the game becoming available in Amazon Luna. Also, Control games has performed well in Q1 and partly drove the game sales and royalties above previous year. Q1 2026 also includes revenue accruals from FBC: Firebreak's subscription service deals, which we didn't have last year Q1. Development fees, they decreased from the comparison period and still made over half of the total revenue for Q1 2026. Development fees were for the projects, Max Payne 1 and 2 remake and CONTROL Resonant. Revenue was impacted negatively by weak USD rate. With the FX-neutral revenue, we would have had a growth of 0.2 percentage. Then looking at the longer perspective, the share of game sales and royalties of the total revenue has started to increase during 2025. Alan Wake 2 started accruing royalties in the end of 2024. And as said, during the first quarter 2026, Control games and sales related to our older game titles were on a higher level than in Q1 2025, and FBC: Firebreak started accruing revenue from Q2 2025 onwards. Development fees have remained roughly on a similar range for the last 4 quarters, but there has been also a variation between the quarters due to the development milestones of CONTROL Resonant and Max Payne 1 and 2 remake. Then moving on to profitability. So the operating profit in Q1 2026 was EUR 1.0 million positive, being EUR 0.3 million less than in the comparison period. This decrease is mainly due to higher depreciation and investments to self-publishing in Q1 2026. EBITDA improved from the comparison period and was EUR 2.9 million positive. Growth from the comparison period is largely due to the decrease of external development expenses. Then let's look at the costs in more detail for transparency. So unnetted external development and personnel expenses in total decreased by 11 percentage from EUR 11.5 million in Q1 2025 to EUR 10.3 million in Q1 2026. External work expenses were EUR 1.9 million in Q1 2026, being 44 percentage lower than in the comparison period. This was driven by lower external development needs in the game projects. The unnetted personnel expenses were EUR 8.4 million in Q1 of 2026, increasing by 3 percentage from the comparison period. This growth matches the growth of average number of personnel during the reporting period, which also increased by 3 percentage. The amount of capitalized development expenses at EUR 3 million was on a similar level than in the previous year. The amount of capitalization is higher than in the previous quarters, mainly due to increased efforts on CONTROL Resonant. In Q1 2026, depreciation expenses in total were EUR 1.9 million, of which EUR 1.2 million were related to game projects. These included Alan Wake 2 and FBC: Firebreak depreciations. Q1 depreciations are on a lower level than in the previous quarter, and this is due to the depreciations following the level of game sales of the games, which we are depreciating. Currently, a major part of Remedy's intangible assets is from capitalized development costs of CONTROL Resonant. Also, the remaining capitalization of Control's publishing and distribution rights has been mainly allocated to CONTROL Resonant. Once the game is launched later this year, the depreciations related to CONTROL Resonant will start, which will impact the quarterly depreciation levels. So at the end of Q1 2026, our total cash level was EUR 34 million, including EUR 14.4 million in cash and EUR 19.6 million in short-term cash management investments. During Q1 2026, the cash flow from operations was EUR 8.3 million positive. Besides the cash flow from operations, our cash position was affected by a EUR 3.2 million negative cash flow related to investments and EUR 0.3 million negative cash flow from financing. Cash flow from investments, that includes payments related to capitalized development costs and machine acquisitions. Cash flow from financing includes IFRS lease liability payments. The cash position improved in relation to both the comparison period, Q1 2025 as well as to what the situation was at the end of year 2025. Then if you look at the cash flow from operations closure, there has been variation in timing of payments from quarter-to-quarter. Q1 2026 cash flow from operations was EUR 14.9 million higher than in the comparison period. Our outflowing operative payments were 23 percentage higher than in the comparison period. Due to timing of sales payments, we, at the same time, received significantly more inflowing sales payments than a year ago. Timing of development fees -- fee payments are agreement based, and there is difference compared to revenue accruals. Royalty and game sales-related payments follow the revenue accruals with delay. So in overall, year 2026 started with a profitable quarter for us with both EBIT and EBITDA being positive. This is, of course, ahead of marketing ramp-up and related spend to support the launch of CONTROL Resonant during 2026. And now, JC will continue with outlook. Jean-Charles Gaudechon: Thank you, Santtu. All right. Our outlook for 2026 is unchanged. We expect our full year revenue and EBITDA to increase from the previous year. And then handing it to Aapo for Q&A. Aapo Kilpinen: Thank you, JC. Thank you, Santtu. Let's move on now to the Q&A. [Operator Instructions] We already have a couple of good questions in the pipeline, so let's begin with those. JC, the first question is related to you. What are the short-term goals from the new CEO? And will those goals affect how Remedy operates? Jean-Charles Gaudechon: Yes. Good question. I mean, so I've been here for a few months, and I spent a lot of that time listening and getting to understand people, the studio where we're at. And honestly, the priorities are very clear. Today, it's to execute on CONTROL Resonant. We can have all the strategies in the world, if we don't make an incredible game, what's the point? So I think to me today, it's really to give the studio the support, the direction, the inspiration to really kind of get CONTROL Resonant across the finish line in the best possible way now. It now is, of course, the biggest one, but we have other great games in the pipeline, which also needs and deserves attention and support. So this is very much the focus right now. The strategy pillars I talked about, we'll surely get into it, get into that vision, but today, let's focus on product execution. Aapo Kilpinen: Excellent. Thank you, JC. The next question is on CONTROL Resonant. Can you give more color on the leading indicators that you're tracking on the game? Jean-Charles Gaudechon: So unfortunately, right now, we cannot yet. Of course, we're still being -- a lot of that is happening behind closed doors, and we apologize. I know both present players are antsy to hear and learn more about the game and trust us, it's going to come. But today, I can't say a lot more. What I can say, as I said in the presentation, we're happy about how it's tracking. We're getting the momentum we want to gain. We're getting the traction. The game is landing the right way. The message, what we're hearing back is very much in line with what was planned. So happy about that. Apologies that I can't go much deeper into details, into numbers, but that's what I can say today. Aapo Kilpinen: Very good. Next question is on China and broader Asia. Is there a local partner model with a distribution arrangement? And how does the economic split compare to core markets? Jean-Charles Gaudechon: So good question. And you know I spend quite a bit of time in Asia myself. So that allows me also to hopefully get a bit better understanding of that region, even though you can't make any generalities and it's a daunting market, but also a very attractive one. We're going to have a local strategy. We're going to have a local partner. I can't announce any of that just yet or have any more details, but there is a strategy around how to approach China specifically. I think for me, what's most important today is how do we position the product to be a success with Chinese gamers. I think action RPG is something that resonates well in China. And I believe Chinese gamers will, I hope, Chinese gamers will appreciate CONTROL Resonant, and we're going to do everything on the way to get there. It's tough to say how much this is going to play in economics of the game. But what I can tell you is we're going to push really harder. Also on the localization front, I touched on it earlier. It's pretty much the biggest localization investment Remedy has ever made. And we're very happy to tell our Chinese gamers that the game and in China, but across the world, Chinese speakers that the game will be both kind of text and audio localized, which I think will be great. Aapo Kilpinen: Super. Next question is to Santtu. With CONTROL Resonant nearing completion, how should we think about the development fee trajectory through the rest of 2026? Santtu Kallionpaa: Yes. So the general rule regarding the development fees is that they follow the agreed milestones of the game development and the contracts. And good assumption regarding, for example, CONTROL Resonant is that the development fees will continue to accrue as long as the development of the game takes. Aapo Kilpinen: Excellent. Continuing with the finance question, Santtu. Are there still some B2B payments accrued for the coming quarters in relation to FBC: Firebreak? Santtu Kallionpaa: Yes. I think we have said earlier that the B2B deal accruals continue as long as the B2B deals regarding the game being in the subscription services continue. So it's based on that. We have also said that the major part of the cash flow impact from these agreed deals for FBC: Firebreak, that's already in our balance sheet. Aapo Kilpinen: Excellent. Then back to JC. I would like to hear more about the social media marketing efforts in China and how big of a share of the CONTROL Resonant sales do you see coming from Asia? Jean-Charles Gaudechon: I think I've kind of already answered this one and the last one. Not much more to say that we're going to be present. We are present and we're going to intensify our presence on the Chinese social media, and in general, kind of try to create our voice, getting a share of voice in China. Aapo Kilpinen: Very good. Next question on CONTROL Resonant's budget, ahead of CONTROL Resonant's launch, does the estimated development budget of approximately EUR 50 million still hold? Jean-Charles Gaudechon: So I'm not going to -- this is Santtu already looking at me and saying, don't say it. It's -- what I can tell on the budget is the team has done and the studio has done excellent work to stay on track, has done excellent work to build a AAA game on a relatively short or small budget. And that's something we've seen from Remedy before. That's something we'll see again from Remedy because honestly, there's something pretty incredible about the way being -- the games are being built at Remedy the way they've been thought through and managed. So it's been -- it's not has always been the case. I know that. We've had some hiccups in the past, but I can tell you that the team has done incredible work on control resonance. Aapo Kilpinen: Very good. Next question then is in relation to Remedy's headcount. Remedy's head count is increasing. This seems to be counter to what is happening in many other game studios. What is the thinking behind the increase? Jean-Charles Gaudechon: I mean good segue from what we just -- the previous question. And let me answer it by telling you again that the studio has made incredible games on relatively small actually team size, a relatively small budget size. And I think that happened because, well, it's a studio that has its own engine that has its own kind of tools and ways of building it, which I've seen for the past 2 months, and I understand why they were able to pull it off that way. I think also one thing you can see about Remedy is Remedy has always been smart of not going too fast, too quickly, which you've seen in other parts of the industry, unfortunately. And when you get to that, then that's when you take the risk of potentially having to downsize. What I can say today from the size of the team, the size of Remedy and the games we're making, I think we're pretty much rightsized for it. Aapo Kilpinen: Excellent. Next question, again, on organizational topics. As you've gotten to know the company, do you see areas in Remedy's operating model or organizational structure where changes may be needed? Jean-Charles Gaudechon: I think you can always make improvements, and we will make improvements. Yes, I've seen parts of Remedy, which I think can be improved at many different levels. Today, what's really important is to keep a balance on what you can improve and when you do some of these improvements. And as I said right now, the studio is in full execution mode. You need to be cautious with that. We need to give the right support. And a lot of this is gradual anyway. So today, it's more about protecting, supporting, making sure that we stay on the right tracks, but not necessarily disrupt any of that. But yes, there will be changes here or there, kind of internal cuisine type of thing, which will help, I think, the studio even perform better in the future. Aapo Kilpinen: Perfect. Next question is about the new projects. Is there any information you can share about it? Will it be under the Remedy connected universe? Or will it be a completely new title, spin-off? Anything that you can communicate at this point? Jean-Charles Gaudechon: It's tough. I keep having to say that I can't say much. But unfortunately, no, I can't reveal anything about this new project, except that it's going to be yet again an incredible Remedy game. Aapo Kilpinen: Very good. The next, Remedy has always been a contender for the Game of the Year in TGA. So is winning Game of the Year with CONTROL Resonant in your playbook? Jean-Charles Gaudechon: It always is. This team, and I've seen it now, we know it from before, right? This team is always going for the highest possible quality. And I think CONTROL Resonant is not different on that front. So we're going to push hard. I heard that this is going to be a pretty hard year, but I'm not sure exactly what's coming out this year, but there's going to be competition. But I think we'll be up there fighting for it. Aapo Kilpinen: Excellent. Then would you consider adding a preorder option for the games you publish? Jean-Charles Gaudechon: So I can't say much once again on CONTROL Resonant specifically. Me personally, I think preorder is a good way to judge traction, to judge success of the game ahead of launch. So I think it's a good thing. Aapo Kilpinen: Yes. Super. Then I think the final question, might there be any collaboration with Epic Games to bring Jesse or Dylan Faden or maybe even Ahti the janitor to Fortnite to promote CONTROL Resonant like what was done with Alan Wake 2? Jean-Charles Gaudechon: I mean we're big fans of crossover. I think we've showed it in the past. I think it helps us expand our universe, our worlds, and that's something that I mentioned in some of the pillars in the presentation just now. And this is something we're going to keep doing because I believe strongly in RPs in our worlds, and they should even get deeper and connect the dots more, as I said before. So I can't, of course, say anything about whether we do something with Epic or Epic is a strong and close partner. So we're always talking to our partners about potential opportunities. And these are, again, a great opportunity to look into. Again, as I said, one filter we will, I think, use more and more is, is it building on our core strength? As I said, as the first filter -- first pillar, sorry, this is going to be something we do a lot. And I think you define the vision of a studio not by just saying yes, but also saying no, which is what we don't go after, what may not really help compound that culture and build on the core strength of Remedy. So this is the filter we'll be using moving forward on the crossover, et cetera. But so far, we've been really happy with it. Aapo Kilpinen: Very good. One final question came through. In what way do you think the rapid development of AI will impact Remedy's operations, perhaps regarding product price or game development costs? Jean-Charles Gaudechon: So you're casually dropping an AI question at the end, excellent. Of course, it's a big topic these days. We've had a clear stance as Remedy with AI. Today, we're not using generative AI to create any user-facing content or in general. I would also say, good luck trying to make Alan Wake with AI. I would love to see that happen, but I think that it's going to be very, very hard. So today, I would say it's a bit of a non-topic. Of course, we need to make sure this is framed. There is adoption here or there happening like in gaming in general, you can never really stop someone to tinker with it. But it's really important that we have a clear frame, and it's very important that this does not replace any parts of the creativity coming up in our games. And that's something that, to me, I'm going to be fearless about. Aapo Kilpinen: Thank you, JC, very clear. Excellent. Thank you so much for the questions. Excellent questions once again. If there are any additional questions you didn't have the chance to present, feel free to send those over to the e-mail address now visible on the screen. We'll be back next time with our half year financial report that will be on August 11. But until then, bye-bye from us.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2026 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin. Christie Thomas: Thank you, operator, and good morning, everyone. Welcome to the HII First Quarter 2026 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer; Kari Wilkinson, Executive Vice President and President of Newport News Shipbuilding; and Tom Stiehle, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to Chris. Christopher Kastner: Thanks, Christie. Good morning, everyone. Before I begin today, I'd like to thank the men and women in the U.S. military and our shipbuilders for supporting our nation and our allies every day. Our ships, submarines and defense technology solutions are foundational to United States military operations around the globe, providing superior capabilities in a high-threat geopolitical environment. At HII, we are focused on delivering for mission success, and we are committed to providing quality platforms for the war fighter. Today, I'll start by discussing our results, the Ingalls and Mission Technologies division highlights and provide an update on our operational initiatives. I've asked Kari Wilkinson to join me to discuss Newport news updates, and then Tom will provide more details on our financial performance and outlook. Now turning to our results. We reported first quarter sales of $3.1 billion and diluted earnings per share of $3.79. Another strong quarter of shipbuilding sales growth at 18% year-over-year was driven by our shipbuilding division's focus on increasing throughput in our shipyards and supported by broader efforts underway to revitalize and rebuild the U.S. maritime industrial base. Customer demand for our products and services remain strong. First quarter contract awards were $4 billion. At Ingalls, in the first quarter, we achieved stern release on LPD 31 Pittsburgh, laid the [indiscernible] for LPD 32 Philadelphia, loaded JP 5 Fuel on LHA 8 Bugganville and continued to make test progress on LPD 30 Harrisburg, which we expect to deliver later this year. We also completed builders trials for DDG 1000 USA ZoomWault and achieved crew [indiscernible]. On the Detroit program, after delivering DDG 128 Ted Stevens at the end of last year, we loaded fuel on DDG 129 Jeremi Denton, launched DDG 131 George M. Neil and achieved stern release on DDG 133 Sam [indiscernible]. We also loaded main machinery on DDG 135 [indiscernible] Cochrane and received the first 2 of 32 units in yard from our distributed shipbuilding partners on DDG 137 John F. Lehman. Moving to Mission Technologies. We had another quarter of strong sales of $748 million. We have a robust opportunity pipeline, and we were awarded a position on the $25 billion ceiling Advanced Technology Support Program, Microelectronics multi-award contract and the $151 billion ceiling Missile Defense Agency Shield multi-award contract. We also secured a new $500 million contract to expand our Cyber Defense and Data mesh solutions for the Department of Ward. In support of the Navy's HEG strategy and the government's approaches to procuring new technology programs, emphasizing corporate investment in product development and demonstration prior to formal contract award, we are increasing our investments in our autonomous solutions portfolio of products. We have multiple autonomous vessels in production, and we are actively extending the capabilities of Odyssey, our autonomy software in strategic partnership with leading AI companies. We see significant award opportunities in this group as evidenced by material increases in the FY '26 funding and FY '27 budget documents and international growth pipeline. Our expertise in unmanned technology and autonomy, coupled with strong technology partnerships and comprehensive understanding of manned, unmanned interfaces provides a strategic advantage that we can capitalize on to substantially grow this business. Moving on to an update on our operational initiatives. As for the first operational initiative, enhancing shipbuilding throughput, we are on plan through Q1 and continue to expect to achieve our goal of approximately 15% throughput improvement for the full year in 2026. We hired over 1,600 shipbuilders in the first quarter. We also graduated nearly 200 apprentices from our apprentice schools this year, and our apprentice schools are now at full enrollment. I'm confident that as our workforce continues to stabilize, our workforce will become more proficient. Also, we continue to make progress on our second operational initiative to rapidly grow our trusted industrial base network. Leveraging our distributed shipbuilding strategy, we are on track to grow our outsourcing hours year-over-year by 30%, and we will continue to identify capacity expansion opportunities to meet customer program demand requirements. The third operational initiative of securing new contract awards is on track, and we are making good progress on the VCS Block VI and the next Columbia contract with awards expected in the second quarter. Shifting to activities in Washington. Congress finalized defense appropriations for fiscal year 2026 in February. In addition to the support for our programs in last year's reconciliation bill, we saw continued bipartisan support for our programs reflected in the 2026 Consolidated Appropriations Act, including funding for CVN 80 and 81, along with advanced procurement for CVN-82, continued funding for CVN 74 RCOH, funding for the Virginia-class and Columbia-class submarine programs, advanced procurement for the DDG 51 program and funding for long-lead materials for the new frigate program. In early April, the President submitted a top-level fiscal year 2027 budget request to Congress. The proposed budget reflects continued investment in our shipbuilding programs, funding 2 amphibious ships, LPD 34 and LHA 10, 1 DDG 51 surface combatant, 2 Block VI Virginia-class submarines, one Columbia-class submarine and the first FFX frigate. The budget request continues funding Ford-class nuclear aircraft carriers and aircraft carrier refueling programs provides initial advanced procurement funding for the leadership of the Trump Glass battleship program, the USS defiant. Beyond shipbuilding, the fiscal year 2027 request reflects increased investments in capability enablers, including autonomous systems that align well with our advanced technology capabilities of our Mission Technologies division. Now to wrap up my remarks. In summary, we had a solid first quarter and remain focused on meeting our commitments to our customers and creating value for all our stakeholders. And now I'll turn the call over to Kari for her remarks on Newport News. Kari Wilkinson: Thank you, Chris, and good morning, everyone. We've been busy at Newport News since the start of the year, beginning with our visit from the Secretary of War for the launch of his arsenal of Freedom Tour. Over the course of the day, the Secretary spoke directly to sellers and shipbuilders about the importance of what they do and how what we build directly supports the mission. Appropriately within just a few weeks of that engagement, we marked 140 years of service to our nation. In program milestones, we exited a very active and successful fourth quarter in 2025 and hit the ground running by successfully completing builders sea trials of CVN-79 John F. Kennedy. We remain focused on preparing for CVN-79 acceptance trials later this year. CVN-80 Enterprise is now coming together at pace and is over 50% erected in dry dock 12 and and CVN-81 units continue to move through steel fabrication and outfitting in support of the [indiscernible] later this year. In our submarine programs, we completed sea trials and redelivery of SSN 796 USS New Jersey after her post-shakedown availability. We remain laser-focused on getting the last of our Block IV boats SSN 800 Arkansas to sea and delivering later this year. As Chris mentioned, we've made good progress on the framework for both Virginia Class Block VI and Columbia build 2 and anticipate contract awards in the second quarter, demonstrating our continued commitment to increased submarine delivery cadence. We also continue to invest in our future. Following our January 2025 acquisition of a fully operational facility with an established and talented team of shipbuilders in Charleston, South Carolina, we added nearly 0.5 million earned hours of progress to our programs in our first year operating as Newport News shipbuilding Charleston operations. In 2026, our plan is to double Charleston throughput, including structural fabrication and more fully outfitted units that are ready for integration when they arrive at Newport News. We will also continue our capital investments to grow the site substantially over the next several years. And we will continue to transform our shipyard. In 2026, we are again making hundreds of millions of dollars of capital investment at Newport News, including significant investment in our manufacturing centers of excellence to support the submarine throughput our nation needs, finishing a multipurpose carrier refueling and overhaul work center and making peer updates to support carrier and activation. Our investments in people will continue as well. Our shipbuilders continue to gain in proficiency, confidence and tenacity. In March, we congratulated 128 apprentice graduates as they walked across the stage and stepped into their leadership roles and our trades. We continue to partner with local high schools and community colleges as well as Hampton Roads manufacturing pipeline programs to expand our workforce, and we have already reached our strategic goal of onboarding more than 50% of our new shipbuilders through these more sustainable methods. We also continue to graduate our Forman from the leadership programs that our operations leaders have reimagined. This program reboot focuses on the critical skills identified through our process excellence organization and gives our frontline leaders the hard and soft skills they need to do the important work we are asking them to do. With our 2025 and 2026 successes in hiring, reducing attrition and our continued efforts to enable and strengthen our supply chain partners, I am confident we will continue to see improvement in Newport News outcomes. Now I'll hand the call over to Tom for some remarks on our financial results. Tom? Thomas Stiehle: Thanks, Kari, and good morning. Let me start by briefly discussing our first quarter results, and then I'll provide some color on our expectations for the remainder of the year. For more detail, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation, our first quarter revenues of approximately $3.1 billion increased 13.4% compared to the same period last year. The higher revenue was attributable to year-over-year growth at all 3 divisions with particularly strong growth at both shipyards. Shipbuilding revenue was up 17.6% compared to the first quarter of 2025. Ingall's revenues were $725 million, an increased 13.8% compared to the first quarter of 2025, driven primarily by higher volume and surface combatants. Newport News revenues of $1.7 billion increased by 19.3% compared to the first quarter of 2025 driven by higher volumes across aircraft carriers, submarines and naval nuclear support services. Together, shipbuilding revenue was $2.4 billion, modestly ahead of the $2.3 billion guidance we have provided for the quarter. Mission Technologies revenues of $748 million increased by 1.8% compared to the first quarter of 2025, driven by higher volume in all domain operations due to the C5ISR growth unmanned systems due to the growth in [indiscernible] fish autonomous UUV program and Global Security, partially offset by lower volumes in warfare systems. Moving on to Slide 6. Segment operating income of $172 million and segment operating margin of 5.6% in the first quarter of 2026 compared to $171 million and 6.3% in the first quarter of 2025. At Ingalls, segment operating income was $49 million and operating margin was 6.8% compared to $46 million and 7.2% in the first quarter of last year. The increase in segment operating income was driven by the higher volumes and surface combatants that I noted earlier, partially offset by the lower performance in amphibious assault chips. The first quarter net cumulative adjustment at Ingalls was a negative $3 million, and none of the adjustments were individually significant. At Newport News, segment operating income was $88 million, and operating margin was 5.3% compared to $85 million and 6.1% in the first quarter of 2025. The increase in segment operating income was primarily driven by the higher volumes described earlier, partially offset by contract adjustments and incentives in the first quarter of 2025 from the Virginia-class submarine program as well as lower performance in aircraft carrier construction. Recall that Newport News results in the first quarter of 2025 had the benefit of meaningful contract incentives related to the award of a contract modification for the construction of 2 additional Block V Virginia class submarines. For the first quarter of 2026, Newport News Shipbuilding's net cumulative adjustment was negative $9 million. None of the adjustments in the quarter were individually significant. Mission Technologies segment operating income was $35 million, and operating margin was 4.7% compared to $40 million and 5.4% in the first quarter of 2025. The decrease in segment operating income was primarily due to the timing of equity income from nuclear and environmental joint ventures, partially offset by higher performance in warfare systems. For the first quarter of 2026, Mission Technologies' net cumulative adjustment was a positive $13 million. None of the adjustments in the quarter were individually significant. Consolidated operating income for the quarter was $155 million, and operating margin was 5% compared to $161 million and 5.9% in the same period last year. The decrease in operating income was driven by higher noncurrent state income taxes, partially offset by the slightly more favorable segment operating income that I've just reviewed. Net earnings in the quarter were $149 million, and diluted earnings per share were $3.79 with both consistent with the results from the same period last year. The effective tax rate in the first quarter was 20.7%. We provided the tax guidance for 2026 out of approximately 17% and still believe that is correct. The credit responsible for that lower tax rate is expected to be processed later this year. I will provide our view on the appropriate tax rate for the second quarter in a moment. Turning to Slide 7. Cash used in operations was $390 million in the quarter. Net capital expenditures were $71 million or 2.3% of revenues. Free cash flow in the quarter was negative $461 million. Free cash flow results in the quarter were better than the guidance we had provided largely due to stronger collections in the quarter as well as some disbursements moving out of the period. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.38 per share of $54 million in aggregate. Turning to liquidity and the balance sheet. We ended the quarter with a cash balance of $216 million and liquidity of approximately $1.9 billion. Moving on to our outlook on Slide 8. We are reaffirming all of the guidance elements that we provided on our last quarter's call for both 2026 and our medium-term outlook. I'll note that we continue to see the new battleship in frigate programs as meaningful upside opportunities to our medium-term outlook, that we will need additional details before we can include those in our guidance outlook. As I noted on our last call, our guidance for 2026 is predicated on achieving the shipbuilding throughput improvements that we've outlined as well as reaching agreement on the next Virginia and Columbia class submarine contracts in the near term. Moving on to the second quarter look ahead outlined on Slide 8, we expect shipbuilding revenue of approximately $2.4 billion and shipbuilding operating margins between 5.7% and 6%. For Mission Technologies, we expect revenue of approximately $750 million and operating margin of approximately 4%, inclusive of the strategic investments that we expect to make in our unmanned capability and production capacity. We expect free cash flow in the second quarter to be between negative $100 million and positive $100 million. There are a number of factors, including the timing of the upcoming submarine contract award regular working capital movement and CapEx timing that create variability in Q2. Regarding the effective tax rate, we believe it's prudent to use a tax rate of 21% for the second quarter though we still believe 17% is appropriate for 2026 with an expected research and development tax credit coming later this year. To close, it was a good quarter as we continue to make steady progress and execute against our 2026 operational initiatives. With that, I'll turn the call back over to Christie to manage the Q&A. Christie Thomas: Thanks, Tom. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Scott Mikus with Melius Research. Scott Mikus: You called out the battleship and Frigate as being potential drivers of upside to the medium-term shipbuilding revenue growth outlook? What we saw in the 2027 budget request, there's a lot of funding in there for auxiliary and support ships. Just wondering how you're thinking about that opportunity set when it comes to Ingalls and could that put upward pressure on the medium-term growth outlook? Christopher Kastner: Yes. The auxiliary ships when you take into consideration their current workload at Ingalls as well as we'd have to evaluate those kind of on a case-by-case basis. But there's plenty of work at Ingalls when you look at their baseline business, battleship, frigate, which we know we're going to build battleship. We're just at the beginning of with the design effort with the Navy. But I don't necessarily anticipate competing for those at this point, but we're going to evaluate it based on how they unfold and how the acquisition strategies unfold. Scott Mikus: Got it. And then a quick one for Tom. If I look at the 2Q outlook in the 1Q results, it implies that you need to generate about $1 billion of free cash flow in the second half of this year. Just curious if you could talk about the level of visibility to achieving that? And what are some of the moving parts that could cause that to come in a little bit below or maybe even a little bit higher than that? Thomas Stiehle: Yes, I appreciate the question, Scott. Yes. So we're in the normal cycle here where we use cash at the beginning of the year. We beat guidance for Q1 as we were out in front by about $100 million. As I mentioned in my remarks, it was some disbursements kind of moved out to the right as well as we did better in collections than we anticipated. The Q2 guidance is about neutral, plus or minus 100, and that will kind of leave us at the midpoint about $460 million negative, which means we've got to pick up about $1 billion in the back half of the year. That's in line with our play book and consistent with what we guided at the beginning of the year. That will come about through making progress through the back half of the year. We have some major milestones and deliveries as well. We have some tax credits and collections in R&D that will come about, which will provide a tailwind to our performance as well on free cash flow. As far as opportunity set, I mean, obviously, there's opportunities and risks around that, but we're reaffirming the guide for the end of the year at $500 million to $600 million, and we'll keep you informed as we move forward here. We usually don't want to get ahead of ourselves and we guide relatively stable to conservative. There are opportunities that -- both for improvement or if there's a drag on performance here. But we still feel good about the range that we have as we start to tackle the back half of the year. Operator: Your next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Tom, does the 2Q guide include any margin benefit at Newport News from the expected contract awards that Kari mentioned. Thomas Stiehle: Yes. So in Chris' remarks, we're expecting and working closely to finalize and execute that contract mod for those subs. There's opportunity sets around those for performance and incentives both in margin and cash collections. And that's just going to depend on the timing as far as when that -- if and when it hits in Q2 and then how we push that through the system, both in modification, margin and cash. I would tell you that we have that kind of weighted, we factor these things. And it's anticipated, as I said at the beginning of the year to happen in the first half of the year. It is a factor in the Q2 guide that we gave here but it's at a factor weight right now. So I'm comfortable with where we are making meaningful good progress with our customer on this front, and I anticipate that will work itself through the system in Q2 and the back half of the year. Christopher Kastner: And this is Chris. I might add that operationally, it's important to get that under contract, so we can continue to make progress on the submarines. So that is just as large a factor as the margin and cash guide for the quarter as we need to stay on schedule, need to stay in sequence on the submarine program. Scott Deuschle: Okay. And then Chris, can you explain what is driving the additional delays for LHA 8, 9 and 10 that the Navy justification book show? And then do you still feel confident that it will be a nice margin step-up on the post-COVID ships LHA 9 and 10, despite these additional delays? Christopher Kastner: Yes, I'm very confident in the post-COVID ship ability to improve margin. What you found on LHA 8 was just some issues in the test program as we're working through it. We have some new systems on that ship, having some challenges. We have seen over the last couple of weeks a bit of a ramp in the test rate. So that's positive. I wouldn't get overly concerned about the J. books scheduled date issues. That's kind of contextual and how the Navy communicates to Congress. We evaluate our EACs every quarter and we take into consideration a schedule risk that we may have. So I'm real confident in the [indiscernible] subsequent to LHA-8, and I have great expectations for their performance. Operator: Your next question comes from the line of David Strauss with Wells Fargo. David Strauss: Just a follow on to that -- to Scott's question. The Ingalls margin performance, I think this is the lowest we've seen in quite some time there. So Chris, if you could just dig in there in terms of exactly what's driven the margin that's much lower and kind of the outlook from here for Ingall's margin? Christopher Kastner: Sure. It was really what I would consider a pacing quarter for Ingalls, making good progress on the DDGs. As I said, we did have some risk we had to put into the LHA 8 EAC for the progress in approaching their delivery and risk related to their delivery. So we had to take an adjustment there. But I think Ingalls is making pretty good progress. It's what I consider, as I said, a pacing quarter. DDGs are showing some improvement. Milestones are in place and holding. LPD 30 making really good progress. DDG-129, making progress should you get to see this year. So yes, I've got a lot of confidence in Ingalls team. It's pretty stable there. We just had to take a minor adjustment through on LHA8. David Strauss: Okay. And in terms of the shipbuilding revenue came through the year based on the guide you gave for Q2, it doesn't look like you're forecasting much in the way of kind of sequential second half versus first half shipbuilding revenue growth typically, we see a fair amount of growth in the second half in terms of just absolute revenue. If you could just talk about kind of the profile for the year. Thomas Stiehle: Yes. It's Tom here. I'll take that one. And I'm comfortable with what we're seeing in shipbuild. It's a third quarter in a row where it's double-digit returns for 2025, over '24 was a 9.7% growth in shipbuilding. And as I said, from Q3, Q4 and Q1, again, we see both yards overachieving our guide of 6% kind of going forward here. So I think it's fairly linear. We at Newport News, their growth was about 2/3 in labor and 1/3 in material and Ingalls, it was the other way around, about 1/3 in labor and 2/3 in material. So we see what we strategically trying to do here is get more throughput and capacity, increase the revenue volume here, in-sourcing, outsourcing hiring, additional overtime, additional progress here. So I think it will be linear as we work through the year. And as we increase the guidance from 4% to 6% last year, we said we'd take a look at it. I want to see a little bit more run rate for a couple of more quarters here. But the backlog has increased to $54 billion. So the work is the demand, what we see already in the FY '27, the draft dock looks like there's even more appetite for additional ships. So I would anticipate a consistent, steady incremental ramp as we go forward here from quarter-to-quarter in ship building. Operator: Your next question comes from the line of John Godyn with Citi. Unknown Analyst: This is Jeremy Jason on for John Godyn. I kind of wanted to ask about last quarter you. Christopher Kastner: I'm sorry, I didn't get that. You may have cut off, Jeremy. Unknown Analyst: I was just going to -- sorry, I thought I heard that was cut out. Last quarter, you guys provided a nice layout for some major milestones for 2026 and 2027. So I was kind of wondering if you could provide an update on that chart. And if you have sort of any indication of when those could hit beyond 2Q? Christopher Kastner: Sure. Sure. So of the '26 milestones, obviously, we delivered 128 with the sea trials on 1000. We did launch DDG131 and we're on track for delivery of LPD 30. That will be the back half of the year. Newport News, acceptance of 79 will still happen is on schedule. Lake [indiscernible] of 81 should happen this year. We already did redeliver SSN 796 and delivery of SSN 800 is towards the back half of the year as well. So timing of these, especially the significant ones are towards the back half of the year and '27 is all on schedule. Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: Just wanted to -- just wanted to ask on the carrier. When you talked about some of the performance on the carrier in the quarter and it comes on top of the year ago quarter, where I think there were some challenges on performance there as well. So what do you think it will take to kind of gain confidence in the estimates on the carrier and have the profitability outlook there kind of stabilized? Christopher Kastner: Yes. Thanks, Seth. I'll start here, and then I'll kick it over to Kari. But I -- we did have a minor adjustment in the quarter just to deal with some schedule challenges that we have getting it back into sequence. But I want to kick it over to Kari to talk about some of the things we're working on, on the aircraft here. Kari Wilkinson: Yes. So it's good to hear your voice. So as Chris mentioned, we have been on previous calls talking about some of that missing equipment [indiscernible] in the ship and having that equipment delivered now and being on pace to erect out the ship is really going to help us from a performance perspective. Those delays are costly, as you're familiar. And so I'll give you an example. So the team has been really focused on structural completion with those components in place. And so over the quarter, we did 3 super lifts over the course of just 10 days. That's the kind of pace that I was referring to in my initial remarks. We said another last night. So what that does for us is it really enables the completion of distributed systems. And so the team is getting after that in a more meaningful way and getting the ship integrated. So coming through those delays, as Chris mentioned, being out of sequence and working ourselves back into a more reasonable sequence is a really important part of that strategy, and the team is really working hard to execute on that strategy. Seth Seifman: Excellent. That's helpful. And then maybe to turn to the crude side of the business. You talked about some incremental investments there. What's the timeline when you think about when you might see the types of awards to get production going in that area of the business in a way that would kind of stand out to us on the outside. Christopher Kastner: Yes. So I don't think it's really immediate. If you look at the budget in '26 and '27, you see significant increases in the unmanned and autonomous system budgets. We think we're well positioned to deal with that. Obviously, we have large capital ships. We've made significant investments in unmanned already. We have our unmanned undersea business. It's very mature. We have our new Romulus family of systems. And then we have Odyssey with really premier technology providers teamed with their Odyssey software. All that mingled together with our man ships means we're kind of uniquely qualified to take advantage of that business. And then you lay over the top of that on [indiscernible] where we're the prime developer of [indiscernible] for the U.S. Navy, which is really the common operating environment and visibility for Navy platforms. We think we're uniquely qualified to take advantage of it. Now do I think it's immediate? No, I think there are immediate opportunities that we're competing for, both domestically and internationally. I think it will start to ramp. I'm not sure it will be material this year, but it will over the next couple of years, you'll see material growth in the unmanned business for HII. Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: I was wondering if you could just describe whether the fit up delivery schedules aligned with what you're expecting as of a quarter ago. So were there any surprises? You got the question on LHA just in general, were there any delivery time lines that were inconsistent with your internal thinking expressed in the '27 pivot? Christopher Kastner: Not necessarily. I have high confidence in 30 being delivered this year. I think that's into next year. So I think it will happen this year. But as I said previously, I think it's contextual. I think it's just a different communication tool. And we're evaluating these things every quarter. So just off the top of my head, 30 is the only one -- LPD-30 is the only 1 that I think we should do a little bit better than, but beyond that, I'd have to do some research on that issue. Gautam Khanna: Okay. And I know you guys pushed through some wage increases at the Ingalls shipyard. I was wondering if you've seen any notable improvements in attrition since then, any changes really? Christopher Kastner: Gautam, that's an interesting question. We did adjust Newport News wages last year, and it took a while. It took a while for the additional applications to go through the system where we were able to accelerate hiring, and we're seeing meaningful improvements in attrition and really the right level of attrition, the right people from an attrition standpoint at Newport News. I think you're going to see the same issue at Ingalls. We did adjust wages at a very positive labor agreement put in place there. We do see some increase in applications, but it's going to take a while to run through the system. We do have better attrition or improved retention actually within both shipyards. But I don't think you're going to see meaningful improvement in Ingalls for a bit. It takes a couple of quarters for that to work through the system. Operator: Your next question comes from the line of Ron Epstein with Bank of America. Ronald Epstein: You guys talked about increasing outsourcing. I think I remember you talked about maybe increasing 25%, 30% in 2026. How is that going? How is the South Carolina facility ramp progressing? And can you discuss at all the MOA with Hyundai, how is that evolving? And is that going to impact capacity? Christopher Kastner: Sure. I'll start, and then I'll kick it over to Kari to talk about Charleston. But yes, we do anticipate 30% increase in outsourcing in 2026 over increases that we had in 2025. We continue to expand our distributed shipbuilding network. Charleston is doing well. As I said, I kick that over to Kari. But from a Hyundai standpoint, we still have -- we're still engaging in discussions with them and evaluating potential. We don't see them in the network right now. for this year that could provide upside if we're able to jointly invest in some operating manufacturing footprint. So that would be upside. But we still think there's some very positive, we could get some very positive results from the Hyundai relationship, not only in manufacturing but also in efficiencies, in how we build ships. So I want to kick it over to Kari to talk about Charleston for a second. Kari Wilkinson: So yes, Charleston is tracking to plan. So last year, we spent a lot of time coming up on plan with respect to structural fabrication and the team there did a fantastic job meeting the commitments that they made at the beginning of the year to go from closing in January on our facility to producing almost 0.5 million man hours over the course of 1 year was pretty phenomenal. So I'm really proud of what the team did there. This year tracking to the commitment to increase throughput there and moving into outfitting more meaningfully. So starting with structure, moving into outfitting, really allows us to start ramping that up in an even more meaningful way. I mentioned in my remarks, we'll do some additional capital investments to continue that growth trajectory, but really pleased with what that team is doing. And that's obviously, a core, we are also working with other distributed shipbuilding partners that have been in our network and those muscles are strengthening as well, getting back to the ebb and flow of what naturally happens in our industry, and we're certainly in a place where we're able to stretch and grow there, and that is tracking pretty well from my estimation. Ronald Epstein: Great. And then maybe just one quick one. Any update on the [ Romulus USDs ] and the Odyssey autonomy stack. Any production contracts visible that you could discuss or hint at for 2025? Christopher Kastner: Well, I hate to talk about ongoing competitions, but the obvious one right in front of us is the MUSV program and then some armor concepts over in the U.K. that could be interesting. We're talking about manned unmanned teaming. We're uniquely qualified to do that, but we'll compete for -- really, we have a breadth of product set that we can compete for a number of opportunities in the space. But the one right in front of us is the MUSV program. Operator: Your next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Last quarter, when you provided the initial 2026 outlook. I think we were all a little surprised at a low growth rate in shipbuilding revenue given what happened in the second half of last year and the funding environment and everything going on with shipbuilding. You just logged another high growth rate and outperformed 1Q. So I guess in reiterating the full year, it actually now you would need shipbuilding revenue down year-over-year for the rest of the year to do the midpoint of the guide. Is that possible? I mean that would imply end of last year, beginning of this year was just a kind of a onetime bump in ship loading growth. It seems like what's happening in the industry is much more long term and structural than that. Thomas Stiehle: No, it's Tom here. I'll take that one. And no, I think the math is a little bit off on that. As I mentioned earlier, we've seen some good growth 3 quarters in a row. Obviously, there's a comparison that we did from the previous year there, both for what we've seen in in-sourcing, outsourcing high revenues. I talked earlier about the material and the labor that's growing. I think the guide is on the conservative side, we don't want to get ahead of ourselves and where we think we can land here. But we won't see a contraction in revenue in the back half of the year. I think there's a strong opportunity set for us to exceed that. And we're holding the guide right now as we want to see us kind of burn through the existing work that we have on contract, monetize the backlog that we have and see the new awards that come on board. But I think operationally, going forward in my remarks earlier that I expect incremental quarterly growth in shipbuilding still holds. Noah Poponak: Okay. Tom, if we were able to see your internal estimate for the mix of pre-COVID versus post-COVID ships, each of the remaining years through the end of the decade, if we were looking at that right now and then right next to it, we had the version you had of that from a year ago, do those look significantly different? Has there been a lot of movement. It's the pre-pandemic contractual roll off sliding out taking longer? Or would they look pretty similar? Thomas Stiehle: They look on top of each other right now. We're on plan and on the guide that we've given. We kind of laid out a couple of years ago that would be in 2027, where we would swing over from pre-COVID to post COVID, and we're right on track on that. We'll finish off 2027 with more post-COVID work than pre-COVID work. And with a perspective on our backlog, it's about 50-50 right now, what we put on contacts before these subs that are coming on contract. So again, that will continue to grow as the subs are awarded CVN, RCOH 75, advanced procurement for CVN 82. The new awards will continue -- from a backlog perspective, we'll see more of that, too. But we're on pace as we watch -- as we retire out the pre-COVID work. 2027 is a significant year we'll see more revenue on post than pre. And there's been really no material change since we've provided that pathway following. Noah Poponak: Okay. And is it possible to provide any more color on the sticking points in the -- in getting to the finish line on the next batch of nuclear subcontracts, it's been several months now versus the original timing forecast. And obviously, we know where the demand is, you're performing the long lead. That just remains a little surprising to see if you can help us better understand what points in the contract are holding it up? Christopher Kastner: Yes. No, I just think it's a large contract that needs significant review and approval and it's complicated, and we're just going through the approval process. I don't want to comment on any specific negotiation points. It's just a -- it's a significant, very important contract that we all need to get right. Operator: Your next question comes from the line of Myles Walton with Wolfe Research. Myles Walton: I was wondering if you could comment on the reports about the Navy revisiting the carrier design and what, if any, impact that might have on ongoing work and/or disruption? Christopher Kastner: Yes. So this is Chris. I'll start, and then I'll kick it over to Kari, but I'm not worried about the reviews of the aircraft carrier. Those happen from time to time. It's usually at the end of those, it's found that it's an amazingly capable platform, and it's required, and we can see all the great work it's doing over and its engagement in Iran right now. So I'm not worried about it. I think long lead for 82 will happen this year, and we'll continue on on the aircraft carrier program. But let me kick it over to Kari. Kari Wilkinson: Yes, Myles. The only thing I would add to that is that it's pretty routine for us to evaluate new capabilities as systems progress in order to incorporate those capabilities on all of the classes of ships in both yards that we build. So pretty confident where we are, and we're going to support whatever the Navy needs. So as we do evaluations on any given system, we're able to incorporate those over time pretty routinely. So I'm pretty comfortable with where we find ourselves. Myles Walton: Okay. And then maybe one for Tom -- sorry, maybe one for Chris, actually back to you. The workforce size, and I asked this kind of frequently, but I'm going to ask it a different way. Should we expect the workforce size to start to grow in line with the sales growth or at least a trend in line with the sales growth of the whole company on a go-forward basis. You've had roughly the same size for the last 20% increase in sales, but I imagine that probably is going to have to start increasing? Or is the outsourcing initiative enough to carry the load. Christopher Kastner: Not entirely. I think you will see increase in labor. Obviously, you need to adjust for taking into consideration you have contractors that come in to do work as well that won't be on your role. So outsourcing is going to play a significant part of it, but you should see labor start to trend as well. Operator: I'm not showing any further questions at this time. I would now like to hand the call back over to Mr. Kastner for any closing remarks. Christopher Kastner: Thank you for joining the call today. I look forward to updating you throughout the year as we continue to make progress on our operational initiatives and deliver on our commitments. Thank you. Operator: That does conclude today's conference call. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Duke Energy First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Mike Switzer, Vice President, Corporate Development and Investor Relations. Mike, please go ahead. Mike Switzer: Thank you, Jen, and good morning, everyone. Welcome to Duke Energy's First Quarter 2026 Earnings Review and Business Update. Leading our call today is Harry Sideris, President and CEO; along with Brian Savoy, Executive Vice President and CFO. Today's discussion will include the use of non-GAAP financial measures and forward-looking information. Actual results may differ from forward-looking statements due to factors disclosed in today's materials and in Duke Energy's SEC filings. The appendix of today's presentation includes supplemental information, along with a reconciliation of non-GAAP financial measures. With that, let me turn the call over to Harry. Harry Sideris: Thank you, Mike, and good morning, everyone. We're pleased to be with you to share our results on the continued progress we're making on our strategic priorities. Today, we announced first quarter 2026 adjusted earnings per share of $1.93, which builds on our momentum from last year and marks a strong start to the year. These results are primarily driven by critical infrastructure investments to meet growing customer demand in our service territories. We are on track to achieve our 2026 guidance range of $6.55 to $6.80 and are reaffirming our 5% to 7% long-term EPS growth rate through 2030. And we are more confident than ever that we will deliver in the top half of the range beginning in 2028 when we expect to see accelerated growth from the economic development projects we have secured under ESAs. Our growth is strong. Economically attractive jurisdictions is underpinned by the industry's largest regulated capital plan, efficient recovery mechanisms and a long track record of constructive regulatory outcomes, and we continue to see strong fundamentals across our business. In the first quarter, we achieved key strategic milestones in support of the growing states we serve. With every investment, we're ensuring the dollars deliver long-term value for our customers and communities. We will continue to execute this strategy with discipline and look forward to updating you throughout the year. As we invest in our system, I want to underscore that our priority has been and always will be providing customers reliable power at the lowest possible cost. As a result of this unwavering focus, our rates are below the national average and have risen below the pace of inflation. We continue to find new ways to deliver affordable energy for our customers, including leveraging our scope and scale to achieve top-tier cost management. As shown on Slide 5, I'm pleased to announce 2 major accomplishments that will provide more than $5 billion of customer benefits, further demonstrating our sustained commitment to providing customer value. First, last week, we reached a multiyear agreement to monetize up to $3.1 billion of clean energy tax credits expected to be generated through 2028. The proceeds will flow back to customers to support keeping rates as low as possible. We also received all regulatory approvals, including from FERC, North Carolina and South Carolina regulators for the proposed combination of our 2 Carolina utilities. Combining these utilities will enable us to meet the Carolina's growing energy needs more efficiently with estimated customer savings of $2.3 billion through 2040. With these approvals, we're working towards an effective date of January 1, 2027. Our customers remain our top priority, and we will continue to utilize every tool available to keep rates as low as possible. We had several other significant accomplishments in the first few months of 2026, which are outlined on Slide 6. Starting with the 2 strategic transactions announced last year. We closed on the first tranche of Brookfield's minority investment in Duke Energy Florida in early March, receiving $2.8 billion in cash proceeds for a 9.2% interest in our Florida utility. Several weeks later, we completed the sale of our Piedmont Natural Gas Tennessee business to Spire for $2.5 billion. The more than $5 billion in proceeds strengthen our credit profile and help cost effectively fund our $103 billion capital plan as we invest for the benefit of our customers. Moving to economic development. We continue to seize the growth in our attractive regions driven by innovation in AI technologies and advanced manufacturing. Since the fourth quarter call, we've signed an additional 2.7 gigawatts of ESAs with data center customers, bringing our total executed agreements to approximately 7.6 gigawatts, nearly 2/3 of which are already under construction. We recognize that we're in a once in a generation build cycle and have been collaborating with state and local officials, policymakers and regulators to attract these investments to our communities while protecting our existing customers. We've taken a leading role in developing contract structures that establish greater certainty for planning and ensure that new large customers pay their fair share of the overall system costs. Contracts include minimum demand provisions, credit support, refundable capital advances and termination charges. Importantly, these incremental volumes will benefit all customers over the life of the contract as system costs are spread over a larger base. For decades, our teammates have had the privilege of living and working alongside the customers we serve, and that experience has made community engagement and core competency in our planning and delivery. When projects are built with communities and not around them, we are able to support growth in a way that both protects and benefits customers. And finally, I want to touch on several regulatory updates, beginning with North Carolina. The rate cases for both Duke Energy Carolinas and Duke Energy Progress are proceeding on schedule. The next step will be intervenor testimony, which is due for DEC at the end of May. We look forward to continuing constructive engagement with stakeholders as we advocate for the critical investments needed to reliably serve our growing communities and provide value for our customers. And in mid-March, we filed our initial electric rate stabilization adjustment in South Carolina under legislation that was signed into law last May. This efficient process allows for annual true-ups that reduce rate volatility for customers. The investments we're making in our systems support critical upgrades to improve reliability, harden the grid and support growth. Whether it's a blue sky day or responding to winter storms like we experienced earlier this year, we continue to provide value by keeping the lights on and restoring power safely and quickly. Moving to Slide 7. We continue to advance our all-of-the-above strategy, adding 14 gigawatts of generation over the next 5 years. We're also maximizing existing generation by extending the lives of our nuclear fleet. In April, the NRC approved the subsequent license renewal for Robinson Nuclear Plant, marking our second nuclear plant to reach this important milestone. As the operator of the largest regulated fleet in the nation, nuclear is foundational to our strategy, and we intend to seek similar extensions for all our remaining reactors. Our gas generation program, which is a critical component of our strategy is well underway with 5 gigawatts under construction and an additional 2.5 gigawatts in development. In March, the South Carolina Commission approved our application for a 1.4 gigawatt combined cycle plant in Anderson County. The plant is the first to be approved after the enactment of the Energy Security Act last May, and is our first new baseload generation asset in the Palmetto State in a decade. Construction is expected to begin in 2027. And last month, we implemented a CWIP rider in Indiana for our Cayuga combined cycle plant. This recovery mechanism supports the state's focus on affordability by reducing overall costs to customers while maintaining balance sheet strength. We have agreements in place to secure the long lead time equipment and workforce needed for this dispatchable generation, which reduce risk and leverage our size and scale to complete these projects efficiently, maximizing the value for our customers. The first turbine secured under our framework agreement with GE Vernova are being built, with the turbines for the first Person County combined cycle project expected to be delivered in the second half of this year. Our gas generation build will create thousands of construction jobs and we have a solid plan to ensure we have the skilled labor needed to meet our construction milestones on time and on budget. In the Carolinas, we have signed EPC contracts for the first 3 new gas generation facilities, a programmatic approach that gives our EPC provider Zachry line of sight to an order book of projects. We have deliberately laid out the construction timelines for Person County and Marshall plants to create a road map for Zachry to stage the regional workforce. This will support developing and retaining a local craft pool for years into the future. We're building on the success we've had supporting talent pipelines to address needed skills in our service territories, like we've done with lineworker training programs, and we're sharing these best practices with our EPC partners. To bring all this together, our project management and construction team has a robust construction monitoring process in place. We are working closely with our equipment suppliers and EPC providers, including conducting quality assurance checks of equipment and manufacturing and leveraging AI technologies to track milestones. This includes monitoring construction at a granular level down to the cubic yard of dirt excavated and concrete being poured. Overall, our scope and scale as well as our extensive experience and infrastructure development uniquely position us to lead this record generation build. And we've been actively preparing for this next build cycle for more than 3 years given us full confidence in our ability to execute the work ahead. With that, let me turn the call over to Brian. Brian Savoy: Thanks, Harry, and good morning, everyone. As shown on Slide 8, we delivered strong first quarter results with reported and adjusted earnings per share of $1.97 and $1.93, respectively. This compares to reported and adjusted earnings per share of $1.76 last year. Electric Utilities and Infrastructure was up $0.16, driven by infrastructure investments to reliably serve customers in our growing jurisdictions as well as favorable weather. Partially offsetting this was higher O&M and depreciation expense on a growing asset base. The colder temperatures we experienced in the quarter drove higher usage, but this was offset by higher O&M expenses incurred responding to winter storms. We budget for storms and have solid recovery mechanisms in place. So the impact in the first quarter is largely timing, and we continue to target flat O&M for the full year. Gas Utilities and Infrastructure was up $0.01 compared to last year, with contributions from riders and customer growth, partially offset by higher depreciation expense. The Other segment was essentially flat to the prior year. Our results for the quarter continued to build on the momentum from the past year, reflecting the strength of our utilities and consistent execution of our strategy, positioning us well to achieve our full year EPS targets. Turning to Slide 9. Our economic development success continues as we progress additional large load projects through the pipeline and signed contracts. We have now secured approximately 7.6 gigawatts of electric service agreements with data center customers, including an incremental 2.7 gigawatts since the fourth quarter call. As Harry touched on, these contracts include provisions that protect existing customers and deliver value to those customers over time by spreading fixed costs over a larger base. As we continue to convert economic development prospects into firm projects, we are locking in contracted ramp schedules that provide us with increasing confidence in our long-term load growth projections. On Slide 10, I want to highlight the work underway to sign additional contracts and bring new large loads onto the system. We continue to see robust interest from large load customers with our late-stage high confidence pipeline now at 15.4 gigawatts, inclusive of the ESAs we've signed. Our teams are working diligently to advance projects through the pipeline, and we expect to convert additional prospects to ESAs over the next 12 months. Construction is underway on the first 5 gigawatts of new data centers, and we are putting the necessary infrastructure in place to support speed to power, preparing the grid to deliver energy as soon as they are ready and executing our generation build to grow together over time. Consistent with our load forecast, we expect these customers to begin taking energy as early as the second half of 2027 and into 2028 and ramp into their full contracted load through the early 2030s. We expect the 2.7 gigawatts signed in the first quarter as well as any incremental projects signed to begin taking energy late in the 5-year planning window and ramp into the early to mid-2030s, strengthening the durability of our long-term growth potential well into the next decade. Turning to the balance sheet on Slide 11. We remain well positioned to meet our financial commitments for the year. In March, we received over $5 billion of proceeds from the sale of Piedmont's Tennessee and the first tranche of our -- of the Duke Energy Florida minority investment. Closing these transactions provides financial flexibility to execute our strategy and demonstrates our commitment to pursuing the lowest cost of capital to support our investment plans. Also in March, we issued $1.5 billion of convertible senior notes at a 3% coupon, providing interest savings as we pay down higher cost debt. We took advantage of the strong market conditions and priced $300 million of equity under our ATM program, which will settle in December 2027, consistent with the timing of our future equity needs. This balanced funding approach, along with improving cash flows from efficient recovery mechanisms keeps us on track to deliver 14.5% FFO to debt in 2026 and 15% over the long term, providing meaningful cushion to our downgrade thresholds. I also want to take a moment to acknowledge a major achievement we celebrated as a company this year, our 100th consecutive year of paying a quarterly cash dividend. This milestone marks a long-dated commitment to the dividend that's directly tied to the company's financial strength, regulatory execution and disciplined long-term investments. We have a diverse investor base, including many who live and work in the jurisdictions we serve, and we are proud to deliver this consistent cash flow they can count on. Let me close with Slide 12. We are off to a strong start in 2026, and I'm proud of our team's unwavering commitment to deliver value for our customers each and every day. We are on track to achieve our 2026 EPS guidance range of $6.55 to $6.80 and 5% to 7% EPS growth through 2030 with confidence to earn in the top half of the range beginning in 2028. Economic development success across our states generates an extensive runway of customer-focused capital investments that position us to deliver on our growth targets, which combined with our attractive dividend yield, provide a compelling risk-adjusted return for shareholders. With that, we'll open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Julien Dumoulin-Smith. Julien Dumoulin-Smith: So just as it pertains to the Carolinas cases here, right? I mean, obviously, they're proceeding, as you say, on schedule. How do you think about any potential to settle them up here partially or otherwise here? Again, obviously, we're ticking through the milestones here. But just how would you set expectations against the wider backdrop here? A lot of noise in the system here, would love to hear how you set expectations. Harry Sideris: Yes, Julien. So we always pride ourselves in working closely with our regulators and stakeholders to make sure everybody understands the benefits of the case, the value that we're providing to our customers. Like I mentioned, the next big milestone is the intervenor testimony later this month. I think once we get that out, we will have more extensive discussions on settlement opportunities. We always are open to that, but we also feel like we have a strong case if we have to litigate it. We understand that affordability is front and center for everyone, it's front and center for us, and we're taking every action that we can. The announcement that we made yesterday with over $5 billion of savings over time for our customers is just one of the tools. And we have other tools in our tool bag to help as we have those stakeholder discussions. So we feel very confident that we will be able to continue our regulatory outcomes -- strength in regulatory outcomes that we've had for the last several years. Julien Dumoulin-Smith: Awesome. Excellent. And then just coming back to the load growth, I mean, kudos again on that here in the quarter. Can you give us a little bit of an update in South Carolina, where do we stand on the generic large load tariff docket? How do you think about that being a catalyst in its own right? And any differences in the framework that you're expecting between the 2 different Carolinas here? Harry Sideris: Yes. We're looking at several dockets and several tariff opportunities in all our states, but they're all grounded on the contracts that we have mentioned before, making sure that the data centers pay their fair share through minimum take provisions, deposits, refundable deposits, clawback provisions if they terminate. And also the benefits that they provide over time is a tremendous value to our customers. So making sure that people understand that. This is billions of dollars over the life of these contracts that are going to go to help offset the fixed system costs that we have with the larger loads. So we're in discussions in South Carolina, North Carolina, Florida and other states to make sure that these are memorialized and that we have the right provisions and tariffs in place to be able to do that. We feel our contracts do that now and then tariffs will just add to that. Operator: Your next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just on the tax credit monetization that you announced this morning or mentioned in your prepared, any details you can provide in terms of counterparty or terms there? And just are there any other opportunities like that, that you could utilize to continue to provide customer benefits as the focus on affordability remains top of mind? Brian Savoy: Carly, this is Brian. I'll take that one. As we monetize tax credits over the past couple of years, we've tested the market and we found a couple of partners that we wanted to go longer with. And that's what was the catalyst to negotiate a multiyear contract with this counterparty. We can't disclose the counterparty, but they have a healthy tax appetite, obviously, because they're acquiring these credits and going to be applying them on their tax return. And we feel like that, that's the best approach to partnering with companies as this IRA monetization market has continued to mature because going through an auction each year does take a lot of churn and effort in the system and you don't necessarily get the best prices. Like we tested the prices. We got great value for our customers with this contract. And after we've proven out that the discounts on the tax credits are as good or better than any market we've seen. So I think you could expect us to continue doing this. And just to be clear, this is a forward contract. So we're going to earn the tax credits and sell them in those given years, but we predetermined the set value for our customers, which is a great, great opportunity. Carly Davenport: Great. Super helpful. And then maybe just on nuclear. I guess across the industry, there's been some discussion on perhaps a consortium of utilities, hyperscalers, government entities kind of coming together to try to address some of the cost overrun issues and move forward on new build AP1000s in particular. I guess, is that sort of a structure something that you might consider participating in? And maybe just refresh us on kind of what specifically you're looking for to feel confident to move forward on new nuclear development. Harry Sideris: Yes, Carly, obviously, nuclear is very important to us. We have 11 reactors that provide safe, reliable, dispatchable clean energy to our customers. And like Brian just mentioned, also helps us with customer value by providing almost $600 million of tax credits a year to our customers. So obviously, nuclear is important to Duke Energy. I think nuclear is important for the future of the country and the utility industry in general. We're going to need nuclear in the future to be able to deliver reliable power and clean power to handle the growth that our country is experiencing. But like we've said before, our main focus right now is to make sure that we get the most out of our current reactors. So we have about 300 megawatts of upgrades that we're executing and also getting the life extended. So we just announced Robinson's life extension, we'll be extending the lives of our other reactors as well. And we're working with the government, with hyperscalers and others to make sure that the things that we need to solve to be able to go forward with the new nuclear build are being managed. So those risks like we've talked about before, first-of-a-kind risks on the technology, what are we going to do with supply chain and workforce and making sure that that's available out there. And last but definitely not least is how we manage the financial risks that protects our customers from overruns as well as protects our investors from that. So we continue to have those discussions. We continue to maintain optionality in our IRPs and our planning to be able to do that if those answers come. But we will not make any moves till we get those 3 questions answered. Operator: [Operator Instructions] Your next question comes from the line of Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to maybe go into the backlog a little bit more for the ESAs. Just wondering if you could, I guess, share a bit more of the view of the larger pipeline, as you said, the 15 and change, and how you think the cadence of this could come together in the future as far as the potential to expand the plan and what that could mean over time? Harry Sideris: Yes, Jeremy, like we talked before, we're taking a very disciplined approach to this, really focused on those counterparties that are -- that can deliver those projects, and we're very conservative in what we're putting into that. So our pipeline is much bigger than that. But what we focus on is that late-developed stage, and we feel confident that the discussions that we're having are going to land a lot of these that are in our late development pipeline in the next 12 months. So we'll continue to update you on that. But we continue to have prospects further deeper in the pipeline that we're moving up into this more advanced stage as well. Brian Savoy: Jeremy, if I could just add, I can't help myself. I'm so proud of our focus on speed to power. We've really retooled how we approach these large load customers, pulling together our transmission and grid teams as well as our economic development teams, ensuring that we're looking at every solution to get these customers signed. And I think it's evident. We signed 2.7 gigawatts this quarter, which was more than half we signed last year is really a testament to that speed to power focus, and you should expect more of that in the future. Jeremy Tonet: Got it. That's helpful there. And just wanted to turn towards the current rate case. Are there any direct offsets here from the savings that you announced with the merger of the Carolinas and as well as the tax credits? Just wondering if you think about the potential to -- levers, I guess, to reframe the ask as a result of what was accomplished here just looking at forward prospects. Harry Sideris: Yes, Jeremy, we have a lot of levers, tax credits being one of them. The one utility, that's going to go into effect at the beginning of next year. So that will be more over time, but it does definitely provide a lot of value to the customers over that time, $2.3 billion. So our focus with the levers that we have now is how we can offer some of those up to mitigate some of the increase. So think about tax credits, then we have some other options as well. Again, we'll be talking to our stakeholders and our regulators after the intervenor testimony is filed at the end of this month. Jeremy Tonet: Got it. One quick one, if I could, just as it relates to the legislative session, if there's anything that you're watching there? I think there might be some bills talking on tax incentive for data centers, fuel cost sharing mechanisms. And just wondering if -- any thoughts on the legislative session you could share? Harry Sideris: Yes. We share the goals that our legislators and our regulators and our stakeholders have in the states. They want to make sure that customers are protected from the large load that's coming to our territory to make sure they pay their fair share. They want to make sure that the reliability is maintained. And they also want to make sure that we continue to have economic development in the states grow. Those are all things that we're in tune with, and we're working with them. I think a lot of the things that are being discussed are already in our contracts. It's just codifying some of that. So we'll continue to work with them, but we all have the same goal in mind to make sure that our customers are protected and our states can continue to grow and we can continue to have reliability. Operator: Your next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was just wondering -- just one question from me. Have you seen any -- just in terms of the data center activity in the broader pipeline, have you seen any acceleration in that activity in terms of top of the funnel interest in your service territory? Wondering if there are any areas, any regions that are showing indications that they could be bigger hubs and develop that way over time? Harry Sideris: Yes, Dave, we're seeing an acceleration in interest in our territories. Being a vertically integrated utility has a lot of advantages to these hyperscalers. We plan our transmission, our generation. It's a one-stop shop. We also have a very vast experience and skill around community engagement that can help these folks as they navigate zoning and other issues that crop up. So we're getting a lot more interest in our service territories. We're seeing in North Carolina around the Charlotte area kind of becoming another hub. We have a lot of interest in Florida as well as the southern part of Indiana. I know a lot of activity has happened in Northern Indiana originally, but we're getting a lot of incomings for the Southern Indiana region now as well. So we'll continue to work on those. Like Brian mentioned, we have a team in place that their goal 7 days a week, 24 hours a day is how do we get these things signed quicker, how do we service them quicker, maintaining the reliability and the value for all our customers. Operator: Your next question comes from the line of Richard Sunderland with Truist Securities. Richard Sunderland: Circling back to the customer savings outlined on Slide 5. The tax credit agreement, can you speak a little bit to the timing of flowback to rate payers there? I think you've discussed this a little bit in the past. Just trying to get a sense of if the latest monetization agreement is consistent with that or any changes in thinking there? Brian Savoy: Thanks, Richard, and congrats on the new role. I know you started covering Truist recently. So it's good to hear your voice. The tax credit agreement, I would think about it as we're locking in the value per customer. So we're not going to be negotiating discounts year in and year out. The flowback is different for North Carolina versus South Carolina for DEP and DEC currently. But you think of -- we've been signaling to a 4-year amortization generally, and that's what is in North Carolina. And as Harry said, as we work through the rate cases, this might be a tool to accelerate to keep the rates even lower during this time. But it's not additional tax credits, it's ones we expected to earn through our nuclear, solar and battery investments. It's monetizing them at these predetermined discounts and locking in that value for customers. Richard Sunderland: No, I appreciate that commentary as well. I guess on the ESA update too, just if I caught that in the script, I think it was 2/3 are under construction. Curious what you see as the timing for those remaining projects to begin construction. And I guess anything you're focused on locally around moratoriums, what have you in terms of the confidence of those projects advancing until they start turning dirt? Harry Sideris: Yes. So we're very confident in all our projects that are in the ESA bucket. Our ESAs require having zoning nailed down, having permits in place. So we feel confident, and that's why a lot of them have been able to start construction as soon after we sign those ESAs. We anticipate the same thing with all the new ones that are coming into us. They'll start construction very rapidly. And in fact, we're looking at ways of how we can accelerate some of the bridge power to them -- to get them online and have them start taking their service a little bit earlier as well. Operator: Your next question comes from the line of Steve D'Ambrisi from RBC Capital Markets. Stephen D’Ambrisi: I just had a quick one to follow up on kind of the load commentary in the 2.7 gigawatts. I was just looking at the North Carolina IRP that you guys had filed in October. And I think in that IRP, you had included the moderate development forecast, which included something like 6 gigawatts of advanced stage, but it was risked at like a 25% or 30% rate. And so I mean, it seems like signing this 2.7 gigawatts, even if it's in the tail end, looks like it would be upside to what was kind of laid out in the moderate development plan. So can you just talk about what that means and like what the avenue is to update load forecasts in North Carolina or elsewhere just as you continue to sign these large loads? Harry Sideris: Yes. It's a very dynamic environment that we're dealing with. That's why we put a high case in that IRP. So this 2.7 gigawatts that we just recently signed, that moves that load up to that level. So it's been contemplated in our plans there. It will be discussed in our rebuttal as well. So that just solidifies that other line in there. This is very dynamic. We're also talking to our stakeholders on how we can update that a little bit more frequently than what we have in the past because it's such a dynamic environment. But we're doing everything that we can to make sure that we're planning the generation, staying ahead of it so that we can sign these ESAs as fast as possible and not have any delays. Operator: We have reached the end of the Q&A session. I will now turn the call back to Harry Sideris for closing remarks. Harry Sideris: Thank you again, everybody, for joining us. And before I close, I just wanted to reemphasize how proud I am of the results that this team has delivered in the first quarter, and we're going to continue to build on that momentum as we move through the rest of the year. But I want you to know that we're executing our strategy effectively. We're reaching our new milestones in our generation build, and we're converting those economic development opportunities into real projects, and we're going to continue doing that in the future. So I'm very confident in our ability to earn in the top half of the range -- EPS growth range in 2028 as these loads materialize. And our plan is very durable well into the future. So again, thank you for joining us today, and thank you again for your investment in Duke Energy. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings, and welcome to the Eve Holding, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lucio Aldworth, Head of Investor Relations. Thank you. You may begin. Lucio Aldworth: Thank you, operator. Good morning, everyone. This is Lucio Aldworth, the Director of Investor Relations at Eve, and I wanted to welcome everyone to our first quarter 2026 earnings conference call. Our CEO, Johann Bordais; and CFO, Eduardo Couto, are joining me on the call today. After their prepared remarks, we will open the call for questions. At that point, Luiz Valentini, our Chief Technology Officer, will also join in to address some more technical questions. We have a deck with a few slides and additional pictures that showcase our achievements in the quarter, including, of course, the more recent stages of the test flights of our full-scale prototype. The deck is available on our site at ir.eveairmobility.com. So please feel free to download it and follow along. And in fact, we just published on our website today a video of one of the more recent flights that features some more complex on-air maneuvers. You might want to check that out as well. Let me first mention that today's conference call includes statements about events or circumstances that have not yet occurred. These are primarily based on our current expectations and projections regarding future events and financial trends that will affect our business and future economic performance. These forward-looking statements are based on current expectations and involve risks and uncertainties that could cause financial results to differ substantially from those expressed or implied in this conference call. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. For a more detailed list of these risks and uncertainties, please refer to our SEC filings, which are available on our website. Now I'll turn it over to our CEO, Johann Bordais. Johann? Johann Christian Jean Bordais: Thank you, Lucio. Good morning, everyone, and welcome to the first quarter 2026 conference call. This quarter was especially significant. As many of you know, we achieved the inaugural flight of our engineering prototype last December after a thorough development and a series of breaks and ground tests. This major milestone validated not only our building block concept by extensively testing every part, but also the integration of critical systems such as fly-by-wire and fixed-pitch lifter rotors. The successful first flight launched an intensive flight test campaign. Our prototype completed 59 flights and logged nearly 2.5 hours in the air with multiple days of 2 flights and the completion of all planned hover phase objectives. Moving to Slide 3. More than quantity, our flight campaign has also excelled in quality. Every flight is planned to test and validate specific aircraft component or flight metrics. In total, our engineers have already validated 130 different performance points. The prototype has reached 215 feet above the ground and now moving forward at 30 knots. As an example of the envelope expansion, our first flight in December was stationary with the aircraft climbing to 40 feet. Besides flying more frequently, longer, higher and faster since the first flight, we have also introduced multiple on-air maneuvers to the protocols. We use a building block approach in both design and flight testing, which means we break complex systems into smaller parts, test each unit until it reaches the needed maturity and then build in on this component. Each test validates specific points and allows progression to next level, more complex phases of the campaign. As such, the aircraft has tested and validated the Autoland feature fully controlled by the fly-by-wire system. We have also performed difficult maneuvers in all 4 axis with consistent behavior, allowing continuous envelope expansion. On Slide 4, the flight campaign has delivered meaningful knowledge gain to date. Most importantly, we confirmed that our predictive models are reliable and precise, enabling safe and confident campaign advancement. Ground effect behaved somewhat differently, but loads remain within expectations. These common small deviation help us further refine and improve our engineering models. We have better-than-expected results for motor thrust and battery performance with noise and vibration meeting our expectations. The key takeaway is that we remain on track for further envelope expansion and more complex flights. Speaking of which, Slide 5 shows the next steps in the engineering prototype test campaign for this year. The flights up to now have been in hover mode up to 30 knots and all were completed successfully on schedule with approximately 60 flight. During the remainder of the second quarter, we will upload a refined flight computer software and perform final ground test on the pusher and actuators. This will ensure that they are fully integrated with all the other aircraft systems in preparation to initiate transition flight. Besides software upgrades, we will also perform mandatory structural ground tests and lay-up activities that are required for the transition phase and that will last few weeks. This is critical opportunity that will help us validate methods, setup instrumentation and test techniques to continue advancing. In a nutshell, this structural and software upload phase is an investment in the maturity, safety and predictability of the coming transition and certification path. The transition phase will also be gradual. We will start with a partial transition, progressively increasing speed. The lifters will be engaged and to provide the aircraft with the necessary vertical support. At the end of this phase, we plan to accelerate the aircraft to a full transition speed above 85 knots. At this point, the entire lift of the aircraft will be provided by the wing, meaning the aircraft will be wing-borne flight with lifters motors off. This is the aircraft ultimate mission. Take off vertically, transition to wing-borne flight and then transition back to vertical flight for landing procedures. After transition testing, we will introduce controlled failures such as motor shutdown to observe system reaction and refine the safety procedures and the pilot's protocols. Meanwhile, we are concluding the critical design review with our suppliers for each component that will be featured in our coming performing prototypes. This will allow us to release drawings and continue manufacturing components within the required specs to start testing our conforming vehicle in 2027. We continue to mature our flight test campaign, advance our engineering prototype this year while gaining greater visibility into the certification plans for our conforming vehicles. This suggests that certification and entering the service are more likely in 2028 as we will need to fly our conforming vehicles for 12 months to complete all necessary certification tests. It is important to mention that this greater visibility gives us more confidence in the new schedule and lowers its risk. The new time line is also important to incorporate knowledge gained from the engineering prototype to the conforming prototype and guaranteeing the maturity and performance level of our Eve-100 eVTOL, especially for range, noise, reliability, payload and lower operating cost. We are now confident that we can deliver an aircraft that is very competitive and well designed for urban air mobility missions. In parallel, on Slide 6, we continue to engage with authorities worldwide to advance certification for our eVTOL. We have recently performed the demonstration at the Gaviao Peixoto Embraer facility in Brazil for several Brazilian authorities, including the President of Brazil. We also met with both Brazil ANAC and the U.S. FAA certification authorities at our Melbourne, Florida office to continue discussing our certification time line. We also met with Japan JCAB and ANAC to strengthen cooperation between the 2 agencies. Lastly, we formally applied for our eVTOL type certificate with EASA. Moving on to Slide 7. We attended VERTICON in Atlanta, the world's largest helicopter conference. Our goal was to raise awareness to our eVTOL amongst helicopter operators. We believe that these operators will be very early adopter and see an attractive short-term commercial opportunity with them. Slide 8 shows our total preorder backlog with approximately 2,700 aircraft valued at about USD 13.5 billion at list price. Out of the 27 customers, we also have LOIs with 14 different customers for our eVTOL aftermarket services and support as well as 21 different potential customers for our air traffic management solution called Vector. Now I will hand over to our CFO, Edu, for the 2026 first quarter financial review. Eduardo Couto: Thanks, Johann. Eve ended first quarter 2026 with a record cash position of $441 million and total liquidity of $578 million, including about $136 million in undrawn credit from the Brazilian Development Bank. This is our highest cash level since the IPO, driven by a new 5-year $150 million loan raised in January. This added liquidity should support operations through 2028 without new funding. We're also working with Embraer to find new synergies to reduce our cash burn from 2026 to 2028. Our initial review indicates that we can achieve $100 million to $150 million in incremental synergies in the next 3 years, likely reducing cash usage and extending our cash runway. We already started to implement these actions. Our 2026 expected cash burn remains at $225 million to $275 million, excluding the new potential synergies under implementation. Now moving to Slide 10, just to highlight some of our numbers. Eve invested $59 million in R&D during the first quarter '26, mainly for eVTOL development. SG&A expenses totaled $7 million for the quarter. Including R&D and SG&A, Eve's net loss for first quarter 2026 was $69 million. Finally, as mentioned previously, we ended the quarter with $441 million in cash and $578 million in total liquidity. Cash consumption in the first quarter was $69 million, but this figure includes approximately $11 million in service expect to have been paid in the fourth quarter of 2025. Excluding this additional payment in the first quarter '26, our cash consumption was $57 million and in line with the low end of our guidance. With that, we conclude our remarks, and I would like to open the call for questions. Operator, please proceed. Operator: [Operator Instructions] The first question is from Savi Syth from Raymond James. Savanthi Syth: Maybe, Edu, first, just on the synergies, could you provide a little bit of color on kind of what type of actions those are? And just to make sure that the $100 million to $150 million you're targeting over a 3-year period, is that coming off of a base of like roughly $250 million per year over the next few years? Is that how we should think? Eduardo Couto: Yes, you're correct. We did a big workshop in Brazil a couple of weeks ago. There was more than 200 people involved on that from Eve and Embraer side. We basically explored, I would say, 4 main areas. We explored the Eve structure, right? We have a lot of costs at Eve. We also explored all the service that Embraer provides to us. A third pocket was suppliers, right, and all activities we do with third-party suppliers. And the fourth one was industrialization. So after doing this deep workshop, we were able to initially identify this $100 million to $150 million that we expected to capture between 2026 to 2028. That would be a reduction, right, on the expected cash burn that we were planning for the next 3 years. And you're right, we believe these actions will help us to reduce the forecasted cash flow to the years ahead -- cash burn to the years ahead. Savanthi Syth: That's helpful. And maybe if Valentini is there, just on the means of compliance, I know last kind of earnings call, you talked about working on 2 fronts. Just wondering if there's any kind of update on that. And just related to that, you noted that some suppliers have kind of already initiated performance certification rehearsal test. Just wondering if you could elaborate a little bit more on that. Luiz Valentini: Sure. Savi, this is Luiz Valentini. So we continue to work with ANAC and also with the FAA on the discussion on the means of compliance. I think we've had good progress recently. We've had all of the means of compliance proposed to ANAC. They are inside the certification plans we call. But basically, we've been discussing them one by one, and we have all of them proposed. We believe that we are at around 90% of the means of compliance agreed, which puts us, we believe, in a good position, like you said, to start working on detail, the design of the test campaigns in order to show compliance with requirements. We also were able to find a good agreement on the noise certification requirement, which is not part of the certification basis, but is an important part of the certification and operation of the vehicle. So we believe that it's still on par with the development of the vehicle itself. With respect to other authorities, we've also been engaging with the FAA, as we communicated previously, but most of the alignment work on the means of compliance is done directly with ANAC being the primary certification authority. Operator: The next question is from Andres Sheppard from Cantor Fitzgerald. Andres Sheppard-Slinger: Congrats on the quarter. I wanted to touch on the flight campaign for a minute. So just to make sure I have it right, so we're targeting first full transition flight in Q3. So I guess, what -- just remind us what are the milestones leading up to it? And how confident are we in that milestone in Q3? Luiz Valentini: This is Luiz Valentini. So we've been flying quite a bit, as we've shown, all of the flights in the hover flight phase. So we've been pretty excited not only with the pace of the campaign, but also with the results that are coming out that makes us confident in moving forward with the tests, right? The next few weeks we'll be focused on testing some of the integration of the systems in the ground. So we've been planning shifting from a period of many flights to now a period of tests on the ground. And that, again, we will focus on making sure that the flight control surfaces work well with the flight control laws connected with the pusher. And so the lifters, of course, all of that connected. We also will have more tests in the ground that focused on the structure on the airframe of the vehicle to make sure that the vehicle is ready for the larger envelope of flight that we will start from the Q2 to Q3. Of course, there is a lot to be learned as we move on to this new transition flight phase. So like I said, we are confident and we're excited on the way that the vehicle has been showing itself with respect as it compared to our expectations. But there is a lot to be found out still on this expansion and as we move forward. So we are planning this preparation phase very carefully to increase the chances of doing the transition. And again, that's very important, not only for the transition itself, but on the way that it brings knowledge for us to increase the maturity of the Eve-100 design as we progress to building the certification prototypes and moving to the certification flight test campaign. Andres Sheppard-Slinger: Got it. Wonderful. I really appreciate all that context. Very helpful. And maybe just one quick follow-up. Just on the backlog, can you remind us kind of the strategy for this year? Is the plan to continue to increase the backlog or are we happy with the number and that will be more about converting those LOIs? Just kind of curious how you're thinking about it for this year. Johann Christian Jean Bordais: Yes. Thanks, Andres. Johann speaking. When it comes to the backlog, we still have the strongest preorder book with 2,700 aircraft at this stage. We understand the number of LOI and the spread of our customers and the customer profile is what we need. Really, it's a variety of first mile, last mile operation. It's also sightseeing. It's also organ transportation, different type of mission, which I think it's the right balance in different parts of the world, where it's Australia, it's Japan, it's Brazil, obviously, and the United States. So we're very comfortable with our portfolio right now. We demonstrated that we have the right solution because we're very preoccupied based on our strong experience of Embraer, how is the operation will be. So that's something that we work hard also to make sure that we have the ecosystem ready. And this is what has driven this big order book, let's say, right? And the strategy for -- since last year and this year is to engage the customers so they can go for firm contracts, so then they can also engage with their local authority together with Eve, but also the stakeholders and prepare the Internet service, right? Certification is really the starting line. And the game will be on when they're going to be operating -- we'll be delivering -- certifying and delivering those aircraft and then they'll be able to operate with the lowest operating cost with the highest utilization, and this is how we're going to be starting the urban air mobility. So first will be Revo and then AirX as we announced this year at the Singapore Air Show in Japan, but then we're working with other customers in Brazil, but also in the United States. Operator: The next question is from Sheila Kahyaoglu from Jefferies. Unknown Analyst: This is Kira on for Sheila. And I appreciate the added color on the flight test progress. You mentioned greater engagement with suppliers with the pickup in R&D. Could you maybe walk us through how conversations with suppliers have developed since flight test began? And how work is progressing on the supplier side at this point in the campaign? Luiz Valentini: Sheila, this is Luiz Valentini. So what we've been doing with the suppliers is making sure that we have the parts and their systems in the most optimized way for the vehicle to meet its product requirements, right? So the flight test campaign helps us to gather data on the vehicle behavior and flight, on the behavior of the systems, for example. So one example, how the temperature of the battery behaves during flights, right? So with that, we can go back to the supplier and use this information to make sure that what they are developing will lead the Eve-100 to meet its product goals. So the way that the interaction is going now is to make sure that, again, their products will lead us to reach our targets and the flight test data helps us to bring more clarity and more confidence on the data that we are exchanging with them. So based on this, we are moving forward to finalizing their design of the systems, and again, making sure that it all integrates in a way that will satisfy the Eve-100 goals. And once we are done with that, then we can go ahead and release the drawings for the manufacturing and then manufacture the production prototypes. So that's how the -- let's say, the connection is with the flight test campaign and what we expect to do once we're past this phase. Operator: The next question is from Andre Madrid from BTIG. Andre Madrid: I wanted to ask a bit more about the binding orders. At the end of the year, could you maybe just point to what dollar figure would be binding orders have to be for you to call it really a successful year? How many of what's in backlog right now would you have to convert the binding to? Johann Christian Jean Bordais: Thanks, Andre. Yes, the binding orders, we have 2 right now. The first one is Revo with 50 aircraft -- up to 50 aircraft firm. And we also have AirX, right? Same type of operation for both customers. As you can also see, like it's a $500 million under a binding agreement right now. There are some PDPs actually associated to it. There is some milestone associated to also the product development. And this is how we've been setting up the whole deal. Now we need to move the right time. As you understand, since it's going to be a high utilization aircraft and based also on the safety level standard and of commercial aviation, this is what we are doing strong from our experience, there are some commitment that they expect from the vehicle. And as we move the testing campaign and the conforming prototype also certification, then we'll define a bit better with the customers how it's going to work and how the operation will be. Andre Madrid: Got it. Got it. And if I could follow-up on that, you mentioned the PDPs. I know you guys don't usually guide this, but is there any more color as you could point to as to the cadence of that flowing in? Eduardo Couto: Yes, it's Edu here. In terms of down payments, right, as we signed the binding agreements, we already received an initial down payment. And we expect that those down payments will continue 18, 12, 6 months prior to the delivery. And in total, we're anticipating we can receive up to 30% or 40% of the total value of the vehicle before the delivery and then receive the balance at the delivery. Johann Christian Jean Bordais: Very similar to what the industry practice is used to between the commercial aviation or executive aviation. Operator: The next question is from Austin Moeller from Canaccord Genuity. Austin Moeller: Just my first question on Vector. Is that being actively evaluated by ANAC for approval? And can that be integrated immediately into Brazil's national airspace system once your aircraft are delivered to customers for the first time? Johann Christian Jean Bordais: Yes. Thank you, Austin, for your question. Yes, Vector is definitely part of the ecosystem and the solution that we're providing for our customers. Obviously, it comes with module just like for the air traffic management, and we can start today the Urban Air Mobility operation using the current air traffic management system in place. The idea is as we're going to be scaling up, then we will need to have a really robust solution eventually. And when we say we, it's not necessarily Eve, we're talking about the aerospace industry. It's going to be -- we're talking about thousands, hundreds and thousands of vehicles, whether it's drone, whether low altitude space, airspace. So that's something. It's a journey. It goes along with the scale of the UAM. And the first module is really focused on how to manage your vertiport, right, or helipad still because our strategy is to start today. As a matter of fact, we delivered the first module to Revo, and they already tested it at the Grand Prix of Sao Paulo end of last year, and it was successful. And then we're going to go at the fleet level. And then we'll go for a certifiable software together with ANAC and DECEA, as a matter of fact, who takes care of the flying of the air traffic management in Brazil, right? Our experience on Vector, we have a strong DNA and a strong right to play as I'd like to remind everyone that the software company that actually developed the air traffic management that is used in Brazil to control the whole air space in Brazil is actually coming from Atech. It's a fully owned company from Embraer, and we're developing Vector together with them. Austin Moeller: Okay. And if we think about the production schedule for the certification prototypes, I understand there will be one finished by the end of the year. But how should we think about the cadence of how many will be produced between now and 2028? Johann Christian Jean Bordais: So I think as you say, we'll finish the prototype, no, we'll start assembling the prototype and then we'll finish up probably the first semester next year, and then we're looking at the first flight, which I think is a very important milestone for conforming prototype certification. It's the first flight with the pilot on board. And so we're looking at mid next year for the -- early second semester for the first flight of that prototype. And then we will be producing and delivering more or less once every -- once a month afterwards up to 6 prototypes. Operator: The next question is from Marcelo Motta from JPMorgan. Marcelo Motta: Just 2 follow-ups here. The first one, when we look at the release in the fourth quarter, you were talking about like a $21 million deferral payment to Embraer. And this quarter, this was converting to $11 million. So just wondering if this $10 million difference is for next quarter or if there was some readjustment on the amount? And the second question is regarding the test campaign. You mentioned to try to get to 300 testing flights this year. Just wondering if this is still the level or what are you expecting in terms of maybe number of testing or hours in there, whatever you can share with us? Eduardo Couto: Motta, how are you? Edu here. In terms of the accounts payable, you're correct, right? We closed last year with $21 million that were supposed to be paid in fourth quarter. We paid $11 million -- actually, we paid the whole $21 million. But then on the invoices of the first quarter, there was $10 million that slipped to the right. So we pretty much recovered more than half of what was a carryover from last year. But your math is correct. Luiz Valentini: Motta, this is Luiz Valentini. With respect to the number of flights, yes, we are still considering the 300 flights as a reference for the test campaign of the engineering prototype. Of course, this is flexible as we may decide to test more things. So maybe we have modifications on the vehicle, for example, we want to test, for example, different propellers or different lifters, things like that. So the vehicle allows us to do that. So there's a lot of flexibility on the campaign. But the 300 flights we are considering that is the number of flights that allows us to bring the knowledge that we need for the development of the Eve-100 and also to progress with the expansion of the envelope, as we have mentioned. So we believe that with that campaign, we can demonstrate the vehicle and its characteristics and also we can bring the knowledge to the development of the Eve-100 in time as we've been mentioning for the production of the production prototypes -- for the manufacturing of the production prototypes, right? But keep in mind that this number is a reference and we may change it as we progress with the test campaign and decide to test more things if we'd like to. Operator: The next question is from Amit Dayal from H.C. Wainwright. Amit Dayal: Just going back to the Embraer synergies, does this -- can you clarify whether this includes technology or personnel? Like where are these synergies coming from? If you could just maybe clarify that. Eduardo Couto: Yes. No, that's a good question, Amit. It's a broad range, right? We are looking at a bunch of different things, but we're looking at how we can use existing assets better, existing facilities, how we can allocate the work between the different teams in a more efficient way. So there are different -- also getting into more details of the flight test campaign, the CapEx and OpEx associated with all of that. It was a very big work. As I mentioned, there was more than 200 people involved. It came with hundreds of actions, and we are starting to implement that. That's the beauty, right, of being part of a big group as Embraer, when you start to look things in more details and we bring everybody together, you are able to identify gains and synergies that you're not seeing before. So that's pretty much what we're doing. We mapped this $100 million to $150 million to incorporate -- to capture, right, in 3 years, and we are now moving forward with the plan. Amit Dayal: Okay. Just a follow-up on that, Edu. Will this impact more on the SG&A side or more on the R&D side, do you think, the cost synergies? Eduardo Couto: It's both. There are synergies in terms of being more efficient in the way that we are going to be assembling the vehicles, in the way that we are doing the development, being more efficient on the general expenses, more efficient with third-party consultants, right, third-party service. There's a lot of things. I would say, it includes both pockets, R&D and SG&A, right, general expenses. And as I mentioned, also industrialization, right, how we can be more efficient, not only assembling the conforming prototypes that are coming, but also on the production going forward. So there are different areas, pockets, and it includes both. Amit Dayal: Okay. Some CapEx is what it looks like? Eduardo Couto: Yes, that's correct. Johann Christian Jean Bordais: Yes. No, it's -- I like the question, and it's something -- it's important to understand that within Embraer and Eve is born as such is about the lean philosophy. And this is something that is dear to Embraer. This is a program that was implemented back in 2007. Now I think it really has to do with -- it's in the blood of all of the Embraer employees, but also the Evers is looking for being lean and looking at every efficiency that we can bring. So we do it through a whole philosophy, which is called the Kaizens and then we go through -- and that's something we do all the time. And I spent 25 years at Embraer, and then we've done it over the last 20 years. And it's just amazing how you keep improving and you keep working on your efficiency at all time. And this is one of the benefits that also Eve is getting from being part of the group of Embraer. Amit Dayal: Yes. It looks definitely like a little bit of a competitive edge you guys have versus some of the other players. Just one last one for me. On the cost of the aircraft side, right, roughly it's translating around $5 million per aircraft right now with the numbers you shared. Have any inflationary factors been built into this given sort of these trends all over the world where prices have been rising? Just wondering -- curious about like how this may sort of end up in the next few years in terms of pricing per aircraft? Eduardo Couto: Yes. I can start here, Johann, but feel free to chime in. Yes, the list price is $5 million, right? We -- as we are progressing on the development of our vehicle, right, we're gaining not only confidence on the specs of the vehicle, right, in terms of range, noise, payload and everything. But we are also getting more visibility on the COGS of the vehicle. We believe our vehicle, given the simplicity, right, and the design, the lift plus cruise design and the focus on the urban missions, we believe our vehicle is going to be extremely competitive in terms of COGS. We have been working also with our suppliers, right, of the critical components to make sure that our COGS stay within the range that will allow us to sell the vehicle at the $5 million list price and be highly profitable. Things are going in this direction. And -- but we are the whole time challenging not only internally ourselves, but our suppliers to make sure we have a lower cost vehicle and how we can leverage, right, the supply chain of Embraer and the supply chain that our big suppliers also have to have a competitive vehicle. Johann Christian Jean Bordais: Nice. Thanks, Edu. Yes. This is something how we build our program. We have the major systems covered by the suppliers. And this is also what we worked on from very beginning. I mean those contracts are lifetime contracts. So we don't look only just to develop the prototype or the production, but also make sure that the operation is covered to guarantee to our customers that they have a competitive aircraft. So we do have also on those long-term and lifetime life cycle aircraft -- contracts, sorry, the inflation also formulas that allows us to control all this and including the aftermarket. So this is something that we have a good visibility. We brought Embraer also experience. And then we're comfortable with what we have in our $5 million vehicle. Operator: There are no further questions at this time. I would like to turn the floor back over to Lucio Aldworth for closing comments. Lucio Aldworth: Great. Thank you, Sashi, and everyone who joined the call today. As you can see, we accomplished several important milestones this past quarter. There is much more to come, and our upcoming achievements will be more visible to the investment community from now on. So it's going to be a very exciting next few months for Eve as a whole. We're going to keep you updated on our progress over the next few quarters, and we do look forward to meeting you in the upcoming events we're going to attend. If you have any questions, as always, please feel free to reach out. Thank you, and have a good day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome to AH Realty Trust First Quarter 2026 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Chelsea Forrest, EVP of Investor Relations. Please go ahead. Chelsea Forrest: Good morning, and thank you for joining AH. Realty Trust's First Quarter 2026 Earnings Conference Call and Webcast. On the call this morning, in addition to myself, is [ Shawn ] Tibbets, Chairman, President and CEO; Matthew Barnes-Smith, CFO; and Craig Romero, EVP of Asset Management. The press release announcing our first quarter earnings, along with our supplemental package were distributed yesterday afternoon. A replay of this call will be available shortly after the conclusion of the call through June 4, 2026. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 5, 2026, and will not be updated subsequent to this initial earnings call. During this call, we may make forward-looking statements, including statements related to the future performance of our portfolio, transactions involving our multifamily portfolio, our real estate financing program and our construction business and the use of proceeds from such transactions, our rebranding and the effects thereof, the consequences of our strategic transformation, our liquidity position as well as comments on our outlook. Listeners are cautioned that any forward-looking statements are based upon management's beliefs, assumptions and expectations, taking into account information that is currently available. These beliefs, assumptions and expectations may change as a result of possible events or factors, not all of which are known and many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release that we distributed yesterday afternoon and the risk factors disclosed in documents we have filed with or furnished to the SEC. We will also discuss certain non-GAAP financial measures, including, but not limited to, FFO, normalized FFO and FFO as adjusted. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at ahrealtytrust.com. I will now turn the call over to Shawn. Shawn Tibbetts: Good morning, and thank you for joining us today. Today, I will briefly reflect on the quarter results, our progress on the company's transformation to date, discuss portfolio highlights and conclude with a review of our capital allocation activity. Since announcing our strategic restructuring on February 16, we have executed more transformation milestones in a single quarter than in any comparable period in the company's history. We entered into a binding agreement to sell 11 multifamily assets for $562 million completed the sale of the construction business, advanced the wind down of our real estate financing platform through multiple dispositions, repurchased 4.3 million shares of common stock, nominated 2 highly qualified independent directors to the Board, secured term sheets or reached final stages on all 3 2026 debt maturities, launched our new corporate identity as AH Realty Trust and raised full year FFO as adjusted guidance. The pace and magnitude of these actions reflect our unwavering commitment to unlocking shareholder value, and I will walk through each of these in more detail. In the first quarter of 2026, we delivered solid operating results, reflecting strong performance in our retail and mixed-use office portfolios and the benefits of our disciplined operating approach. AH Realty Trust is a pure-play, high-quality retail and mixed-use office REIT focused on identifying and realizing dominant market competitive advantages throughout the Sunbelt, Mid-Atlantic and Southeast. Our company is primarily comprised of and focused on open-air shopping centers and mixed-use ecosystems within our markets. We are encouraged by a combination of the retail market strength and the leasing activity we are experiencing in both retail and office. We are also mindful of macroeconomic conditions and geopolitical uncertainty, including higher interest rates, elevated financing costs and heightened global tensions as they continue to influence the broader real estate landscape. That said, our results exceed our internal expectations and reflect the actions we are taking to restructure AH Realty Trust into a simpler and more focused real estate platform positioned for long-term value creation. As a result of the performance of the retail and mixed-use office portfolio, our visibility into the coming quarters and the transformational actions we've taken to date, we are raising our full year 2026 FFO as adjusted guidance range to $0.51 to $0.55 per diluted share. We are here first and foremost for shareholders, and every single action we take is aimed at identifying and clearly demonstrating the underlying value in our portfolio. Another key initiative as part of this transformation is ensuring that we have the right Board skills and governance profile to help guide us. I trust you saw our press release last week announcing planned changes to the Board as part of our ongoing refreshment process to add directors with skills and experience that align with the company's evolved strategy. This includes the Board's nomination of Ted Bigman and Lori Wittman to stand for election at the 2026 Annual Meeting of Stockholders. Ted brings deep capital markets and real estate investment experience owned over decades at leading institutional platforms, capabilities that are directly aligned with our capital allocation priorities and balance sheet optimization objectives. Lori brings extensive public REIT, operating and financial leadership experience that will be invaluable as we execute the next phase of our strategy as a focused retail and mixed-use office REIT. Together, their skill sets are purpose-built for the company AH Realty Trust is becoming. I would also like to recognize George Allen and Dennis Gartman, who will not stand for reelection to the Board at the annual meeting. We are very grateful for their years of service and significant contributions during their tenure. The first quarter of 2026 was pivotal in AH Realty Trust's strategic transformation. We made meaningful progress implementing our new operating model and disciplined capital allocation framework. We are reshaping our business by exiting multifamily properties and focusing on high-quality retail and mixed-use office assets in markets where we have durable competitive advantages. As evidenced by our actions in the first quarter, we are taking decisive and deliberate steps to simplify the company, reduce leverage and reallocate capital to advance a new operating strategy. During the quarter, we entered into an agreement with an affiliate of Harbor Group International to sell 11 of our 14 multifamily assets for $562 million. This transaction represents a major milestone in our strategy to exit the multifamily property sector and will meaningfully strengthen AH Realty Trust's balance sheet and materially reduce complexity across the organization. Importantly, this sale reflects a significant premium to the value the public market was implicitly assigning to these assets within our REIT structure, which we believe further validates our thesis that substantial embedded value exists across our portfolio. We expect to close the sale in the coming weeks, subject to customary closing conditions. We are marketing the remaining 2 multifamily assets in Gainesville. Following these sales, we intend to retain only Smiths Landing in the residential category because its ground lease structure is unique relative to the remainder of the portfolio and the property continues to generate stable cash flow. As a result, we concluded that given the stable cash flow generation, combined with the ownership structure, retaining Smiths Landing is appropriate at this time and remains consistent with our value preservation objectives. Exiting the multifamily sector unlocks significant embedded value that has not been reflected in our share price, and there was a robust private market demand for our well-located and young assets. We also concluded that we prefer to compete in the commercial market and that future growth for our company in multifamily would be difficult given the low cap rates. Also, given the highly volatile nature of Southeast U.S. multifamily, where supply cycles are long and absorption predictions are often inaccurate, we are far more excited to return that value to shareholders through deleveraging our stable go-forward portfolio of well-leased, well-located retail and mixed-use office assets. Outside of multifamily, we made considerable progress exiting other noncore businesses. Last week, we completed the sale of the construction business, fully exiting. We also advanced the wind down of our real estate financing platform. We closed the previously announced sale of 2 multifamily financing investments. Additionally, I'm happy to announce that our partner closed on the sale of Allure last week. Collectively, we expect the asset sales already underway and those that have been completed will provide us with approximately $750 million in proceeds, which we intend to use to delever the balance sheet and achieve our target leverage ratio of 5.5x to 6.5x net debt to total adjusted EBITDA while also repurchasing shares in the market. We will do this while ensuring the dividend remains fully covered by core property operating cash flow. We will also have removed dependency on uneven construction fees and mezzanine investment revenue. I am proud of the significant progress we have made on our transformation in 2026. We have already achieved a number of key milestones in our journey, and we are well positioned to complete the transformation this year. A focused and agile AH Realty Trust will operate as a pure-play model, retail and mixed-use office real estate investment platform. Our retail portfolio consists primarily of open-air shopping centers and mixed-use retail environments located in strong, fundamentally supported markets. Importantly, 95% of our office investments are concentrated in vibrant mixed-use settings rather than stand-alone suburban office assets. These properties benefit from integrated retail, residential and experiential components, which continue to support consistently high demand from high credit tenants. At quarter end, our stabilized retail and mixed-use office portfolios were 94.8% and 96% leased, respectively. In contrast, while our office product delivers superior occupancy and performance metrics that exceed those of our peers' office product nationally, we would like to see a better appreciation of its value. This disconnect reflects broader sector sentiment rather than asset level fundamentals. 95% of our office portfolio is situated in mixed-use ecosystems and therefore, is highly differentiated and not suburban office product. As a result, our assets benefit from integrated retail, residential and experiential components. These characteristics support durable demand, consistently strong occupancy and a high-quality tenant base, resulting in operating performance that stands apart from prevailing conditions affecting the broader publicly traded office sector. The strength of our retail and mixed-use office portfolios was evident in their performance this quarter. For the first quarter, FFO as adjusted was $0.15 per diluted share, exceeding our internal expectations and demonstrating the earnings power of our go-forward retail and mixed-use office platform. Craig will discuss portfolio performance in detail in his remarks. Turning to capital allocation. We remain disciplined and shareholder focused. Since the beginning of the year, we have repurchased approximately 4.2 million shares for a total of $24.1 million at a weighted average price of approximately $5.70 per share, representing more than 4% of the common equity and reflecting our confidence in the underlying value of the business. Our commitment remains allocating available capital where we believe it is most beneficial to shareholders. Our NAV demonstrates the intrinsic value of our real estate and simultaneously informs our capital allocation decisions. When combined with our transformation, we believe the implied yield relative to other capital allocation alternatives is compelling. To put it simply, we believe that investing in our own assets above a 9% cap rate is very attractive and creates more shareholder value than other available capital allocation options. We expect that our transformation will create additional financial flexibility to allow us to invest in future growth opportunities while building on the performance of the portfolio and the momentum of this transition. As you know, as part of the transition planning, we initially modeled up to $50 million of retail acquisitions to offset potential gains associated with the multifamily sale. As we move closer to closing the residential transactions, we now have improved visibility into the timing and magnitude of the related tax considerations, and we expect, in this case, that the transactions do not result in a material tax consequences to the REIT. With that clarity, given our current cost of capital and leverage objectives, we have reallocated approximately half of that previously modeled acquisition capital towards share repurchases to date. And as stated, we believe this is the most compelling use of capital. We continue to evaluate our remaining allocation options while being mindful of leverage. Factors such as market conditions and potential dispositions will also figure prominently into our analysis. Finally, I want to acknowledge the key role our people play in our company's ongoing transformation. Over the past several quarters, we have made meaningful changes across the organization to ensure that we have the right people, focus and operating discipline to deliver on our full potential in this next chapter. We are investing intentionally in our people and building a culture centered on accountability, execution and disciplined decision-making. We believe these efforts are critical to sustaining performance and successfully executing the next phase of our strategy. In closing, our transformation continues to gain momentum. The multifamily sale is a defining step forward, and we remain committed to executing our strategy with discipline, transparency and strong governance. With a simpler platform, a strengthened balance sheet and continued governance enhancements, we are confident that we are positioning AH Realty Trust with the resiliency and flexibility to capitalize on opportunities while generating consistent cash flows, disciplined growth and superior risk-adjusted returns. We appreciate the continued support of our shareholders and look forward to the opportunities ahead. With that, I'll turn it over to Craig Romero to go through our portfolio highlights. Craig Ramiro: Thank you, Shawn, and good morning, everyone. Before discussing first quarter portfolio performance, leasing activity and expectations for the rest of this year, I'll draw your attention to additional information presented in this quarter's supplemental financial package, particularly economic occupancy. Economic occupancy as opposed to leased occupancy, which we've historically presented, considers free rent periods, rent abatements and periods prior to rent commencement, therefore, providing stronger correlation to cash NOI. We believe reporting both economic and leased occupancy going forward will provide investors with greater clarity on both past and expected future results. Retail lease occupancy at the end of the first quarter was 94.8% and economic occupancy was 92.5% -- we expect rent commencements primarily at Columbus Village and the Interlock to drive retail economic occupancy increases during the second half of 2026. Retail same-store NOI for the quarter was up 2.2%, driven by rent commencements on new leases across the portfolio as well as positive cash spreads on both new leases and renewals. We anticipate growth to slow through the rest of the year because of certain vacancies and store closures with annual same-store NOI growth ultimately settling well within our projected range of 1% to 2%. Higher economic occupancy at the Interlock Patterson Place, Overlook Village and Columbus Village was the primary driver of first quarter growth. We expect these properties to continue to boost same-store NOI for the rest of the year, driven by rent commencements from new tenants, including Trader Joe's, Golf Galaxy and F1 Arcade. First quarter visits to the new Trader Joe's at Columbus Village continued to outpace the only other location in the market by nearly 2x, while the new Golf Galaxy ranks in the top 3 nationwide. During the first quarter, F1 Arcade opened at the Interlock, driving a 30% year-over-year increase in visits and a 45% increase in parking volume, solidifying the property's destination status in the market. Partially offsetting first quarter gains were vacancies at Southgate Square, Broadmoor Plaza and Broadcreek Shopping Center as well as store closures at Hilltop and Town Center. We expect these properties to weigh on current year same-store NOI as we work to backfill spaces previously occupied by Conn's, Party City, JOANN, West Elm and Orbis. However, we anticipated these closings and tenant demand for these spaces is strong, creating future growth opportunities. We are already in the process of securing high-quality national tenants to fill these storefronts at positive spreads and enhance the merchandising mix at these properties to create longer-term durability. I look forward to providing further updates in the coming quarters. Our retail portfolio remains well positioned to capture sustained tenant demand for retail space at higher rents as demonstrated by positive first quarter spreads of 14.4% on new leases and 4.5% on renewals. Office leased occupancy at the end of the first quarter was 96% and economic occupancy was 87.7%. We expect rent commencements at the Interlock and Town Center to drive economic occupancy gains during the rest of the year. Office same-store NOI for the quarter was up 0.7%, driven by contractual rent increases on existing leases, new rent commencements and 7% positive cash spreads on new leases. These economic occupancy gains were partially offset by vacancy at One City Center from space reclaimed from WeWork in the second quarter of last year. Nevertheless, we expect to end the year comfortably within our projected range of 1.4% to 2.5% annual growth, supported by scheduled rent increases and anticipated rent commencements during the second half of 2026. At the Interlock, we've already begun realizing nearly $1 million of new ABR with the majority expected to commence in the third and fourth quarters. We anticipate that these economic occupancy gains, combined with additional increases at Team Street Wharf, 2 Columbus and 222 Central Park, formerly Armada Hoffler Tower, will outpace temporary challenges at One City Center, 4525 Main and Wills Wharf. While we are not forecasting any new rent commencements at either One City Center or Wills Wharf in 2026, we are seeing good activity and interest in the market and remain confident in our team's ability to re-lease the space. At 4525 Main, we remain on track to re-lease the 8,000 square feet we recaptured last quarter with lease execution expected by the middle of this year. At One Columbus, while we expect leased occupancy to decline by roughly 10 basis points in the second quarter because of anticipated lease expirations, we expect economic occupancy to slightly increase, driven by rent commencements for new tenants at positive spreads. Additionally, we're already at lease on over half of the expiring space at One Columbus and are confident in our team's ability to backfill the rest given the tremendous demand for Town Center office space. Just last week, we completed the consolidation, downsize and relocation of AH Realty Trust's offices to accommodate this demand. As a result of this intentional move, we unlocked and leased 38,000 square feet at 222 Central Park at top of market rents creating $1.3 million of new ABR, which we expect to begin fully realizing in the third quarter of next year, with partial recognition weighted towards the third and fourth quarters of 2026. Town Center is a case study example of the type of asset in which we invest, high quality, differentiated, mixed use and located in markets with high barriers to entry. Another good example is Southern Post, our newest mixed-use asset delivered at the end of 2024, where this quarter, we leased 22,000 square feet to industrious. Just last week, our team executed another 9,000 square foot lease, bringing office lease occupancy at Southern Post to over 93% -- we expect economic occupancy to increase to over 60% by the end of this year and over 80% by the first quarter of 2028 as free rent periods for existing office tenants burn off. Office portfolio fundamentals remain strong with nearly 8 years of WALT, high credit tenancy and less than 2% rollover for the rest of 2026 as well as our team's demonstrated ability to lease space and grow rents. We see continued organic growth opportunity across both our retail and office portfolios through proactive leasing, mark-to-market adjustments on new leases, positive renewal spreads, disciplined expense management and targeted redevelopment and capital investment where returns justify it. This operational focus is central to how we intend to drive consistent NOI growth and deliver long-term value going forward. With that, I'll turn it over to Matt for more details on our first quarter financial results and an update to our fiscal year 2026 guidance. Matthew Barnes: Good morning, and thank you, Craig. AH Realty Trust delivered solid first quarter performance, laying a strong foundation for the 2026 fiscal year. The results reflect the resilience of our assets and the benefits of the actions we are taking to reshape our portfolio and implement a simpler operating approach with less debt, focused assets and shareholder value that recognizes our asset quality. For the first quarter, FFO attributable to common shareholders was $20.6 million or $0.20 per diluted share, above our expectations for the period. FFO as adjusted attributable to common shareholders was $15.1 million or $0.15 per diluted share, also above our expectations for the period. FFO as adjusted excludes the segments classified as discontinued operations, multifamily, construction and real estate financing and therefore, represents the clearest measure of the earnings of our go-forward retail and mixed-use office platform. We believe this is the metric investors should focus on as it reflects a simplified higher-quality earnings profile that will define AH Realty Trust following the completion of our transformation. Net operating income for Q1 was $34.7 million, representing a 1.8% increase year-over-year and approximately $700,000 ahead of guidance. AFFO totaled $19.9 million or $0.19 per diluted share, which exceeds our current cash dividend as outlined in the supplemental with a payout ratio of 72%. Starting with the supplemental package, this quarter reflects a comprehensive refresh aimed at enhancing transparency and aligning disclosures with how we evaluate the business internally. We introduced several new metrics and disclosures, including economic occupancy, a refreshed NAV page and rental revenue disaggregation, all of which are designed to provide clarity on cash flow durability, asset performance and the embedded portfolio value. We believe these changes allow investors to more effectively track our continued progress by assessing both the quality and sustainability of our earnings streams, specifically as it relates to future cash flow growth. A key highlight is the NAV section illustrated on Page 13. This page is intended to provide a clear and transparent view of the underlying per share asset value, excluding the segments and assets categorized for discontinued operations. The analysis reflects the strength of our underlying real estate portfolio, including our high-quality office and mixed-use assets with the non-stabilized component currently representing Southern Post at development cost. The NAV framework plays a central role in how we evaluate financial performance and deploy capital. As our transformation progresses, we believe the quality of our assets is increasingly positioned to translate into durable earnings and shareholder returns. Our NAV analysis points to the intrinsic value of the real estate and serves as an important reference point in our capital allocation decisions, including share repurchases. As Shawn touched on, we remain committed to executing a disciplined capital allocation approach centered on shareholder interest. To that end, we have continued to take advantage of the dislocation between our share price and underlying asset value through our share repurchase program. Year-to-date, we repurchased $24.1 million of common stock at a weighted average price of $5.70 per share, representing an implied yield that we view as highly attractive relative to other investment opportunities. We see this as having a chance to invest our own assets at an effective implied cap rate for this quarter's share purchase above a 9% cap rate. Where else can we create more shareholder value than doubling down on our market-leading portfolio. As Shawn highlighted, dispositions of the multifamily portfolio, real estate financing platform and construction entity are all either complete or well underway. Based on the headway made, we are well positioned to continue advancing our balanced capital allocation strategy, paying down debt, making disciplined investments in select high-growth markets and continuing to execute our share repurchase program where appropriate. Turning to the balance sheet. We are proactively managing maturities and maintaining flexibility in what continues to be selective capital market environment. Looking ahead to the remainder of 2026, we have 2 office asset loans and 1 term loan scheduled for refinancing. We are actively engaged with lenders on all notes and expect to complete these refinancings consistent with our broader balance sheet strategy. Starting with the term loan. Maturing at the end of May, we have received a term sheet from our current lenders and are working to extend this loan at maturity for 12 months under the same terms and conditions, including extending the pricing that we have today. Pain Street Wharf matures at the end of September, and we are in the final stages with a relationship lender to close in the coming days on a 5-year nonrecourse asset level note priced in the 5.25% to 5.5% range. To round out the refinancings, we've also received a term sheet from a large institutional life insurance company for both 5-year and 7-year fixed rate debt on the Constellation office asset priced around 200 basis points plus the corresponding treasury with the expectation to close on this refinancing in the next 2 months. We are pleased with the pricing and terms of each of these loans. This reflects the quality of the underlying assets and the credit strength of the tenants and reinforces our track record of prudent liability management and our ability to navigate an especially challenging office debt market. Reducing leverage to strengthen the balance sheet remains a core priority. Upon completion of the transformation, we anticipate approximately $700 million in total debt paydown, a material reduction that is expected to fundamentally reshape our capital structure. Net debt to total adjusted EBITDA was 8.3x at quarter end, temporarily elevated relative to the prior quarter. We intend to use proceeds from the sale of 11 of our 14 multifamily assets to meaningfully reduce leverage to our target range of 5.5 to 6.5x net debt to total adjusted EBITDA, which we anticipate closing in the coming weeks. We ended the quarter with approximately $142 million of liquidity, providing adequate coverage of our capital needs. We are committed to maintaining a flexible balance sheet, disciplined capital allocation and sufficient liquidity to navigate a potentially prolonged higher rate environment. Now moving to our updated guidance. We are raising full year 2026 FFO as adjusted guidance to $0.51 to $0.55 per diluted share, reflecting the continued restructuring progress, retail and mixed-use office portfolio strength and the solid first quarter performance. We are confident that the actions underway, including simplifying our operating model, exiting noncore businesses, strengthening our balance sheet, executing opportunistic share repurchases positions us to drive long-term value for shareholders. We are committed to unlocking that value one way or another, and we have enhanced disclosures that will provide shareholders with additional transparency to continue to track our progress as we advance these initiatives. With that, I will turn the call back over to Shawn Shawn Tibbetts: Over the past several quarters, we have taken many of the hard but necessary actions to reposition the company for long-term success. We have completed the majority of our strategic transformation, simplifying the business, strengthening our foundation and sharpening our focus on a high-quality operating portfolio. Today, AH Realty Trust is a pure-play retail and mixed-use office REIT, owning and operating open-air shopping centers and thoughtfully integrated mixed-use assets in strong markets across the Sunbelt, Mid-Atlantic and Southeast. With these actions largely behind us, we are now squarely focused on execution and on delivering sustainable performance that drives long-term shareholder value. The path forward is clear, close the multifamily transaction, reduce leverage, continue to invest in our shares at a compelling discount to intrinsic value and demonstrate through consistent operating results that this portfolio deserves to trade at a valuation commensurate with its quality. We have never been more aligned with our shareholders. We remain deeply grateful for the continued support and confidence of our investors as we move into this next chapter. Operator, we are ready for the question-and-answer session. Operator: [Operator Instructions] Your first question comes from the line of Jana Galan of Bank of America. Jana Galan: Congratulations on the progress of the restructuring. The capital markets activity is especially impressive given the macro and interest rate volatility. I was hoping if you could talk to kind of the breadth and depth of buyers for multifamily and for the construction platform and maybe the decision to go with the portfolio versus single assets? Shawn Tibbetts: Yes, thank you for the question. And we appreciate the congratulatory remarks. We are excited to be able to beat our forecast and raise, and we're excited about the path forward. In terms of the capital markets, we've continued to see, especially in the multifamily and retail, obviously, the depth of the market. It's good to see that those markets remain strong even given the kind of macro headwinds. That being said, we had an opportunity to sell to Harbor Group here, great deal for our shareholders, obviously, at a mid-5 cap on in-place and likely, hopefully, a good deal for their investors. We saw interest. We talked to quite a few folks, but we were able to make the best deal for shareholders all things considered with Harbor Group. So we feel good about that. And we're excited, by the way. We're a couple of weeks out, and will be -- that will be a material move, as you're aware, for our firm at $562 million, paying down debt. And as you heard, buying back some of our own shares at what we believe is a nice discount. In terms of construction, that business was and has been in wind-down mode. So our view was let's sell it. And the best buyer for that was actually the employees of the company. So we essentially traded that for a price that's north of what was due to the shareholders anyway in terms of gross profit, but we sold that at a slight uptick from what gross profit would have otherwise been received by the shareholders. It's a tough business right now, as you could imagine, with interest rates, and we think this is the best move for the company, for the shareholders to create a more simplistic company reduce not only confusion, but reduce risk, quite frankly, over the short, mid and long run. So we're excited about that. Jana Galan: Super helpful. And then I appreciate the enhanced disclosure. And you mentioned several lease commencements in the second half '26 for both retail and office, but also some offsets and known move-outs. Can you give any type of year-end '26 economic occupancy projections or ranges for either portfolio? Shawn Tibbetts: Sure. I'll just start by saying that -- we are encouraged by the tailwinds, by the strength of the market and the leasing kind of momentum and velocity activity out there broadly, especially in terms of our retail and mixed-use office portfolio. But I think, Craig, why don't you drill down a little bit, if you don't mind, just quickly and talk a little bit about what's on the horizon here? Craig Ramiro: Yes, sure. Happy to, Shawn. And thank you for the question. When it comes to lease and economic occupancy, I think the widest gap is obviously today in the office portfolio, as you can see. The biggest pieces of that are the Interlock, which we expect to see that gap narrow during the second half of the year as new tenants that we've secured and leased in prior quarters begin to pay rent. And one interesting anomaly, the same Street Wharf, you'll see a decent sized gap there between leased and economic occupancy. The main tenant there is Morgan Stanley. They have a month of free rent every other quarter. That happens to be this quarter. So you will see that gap narrow in the second -- actually close in the second quarter, again, widen in the third and then close again in the fourth. So a little bit of volatility there. But overall, macro speaking, you'll see the difference between leased and economic occupancy from our expectations to narrow as we progress through the second half of this year due to rent commencements. Operator: [Operator Instructions] Your next question comes from the line of Victor Fediv of Scotiabank. Viktor Fediv: I have a question on your decision to kind of shift from acquisitions to share buybacks. It kind of makes sense given where your stock is trading. Just trying to understand the financial implications because if I'm not mistaken, you were planning to use some 1031 exchange money to kind of do these acquisitions. I'm just trying to understand financial implications for you connected with this decision. Shawn Tibbetts: Sure. Thank you, Victor. I think it's pretty straightforward. As we get closer to closure in a couple of weeks on the kind of biggest material part of our transaction or transformation, have a better line of sight on the tax consequence to the REIT, and it looks like that will not be material. So we chose to -- given the value the stock was trading at and kind of capital allocation opportunity cost, if you will, versus buying a retail center at a 7 cap, we said, look, north of a 9 cap, it's better to invest in our assets that we have perfect information on. And obviously, to the benefit of the shareholder, kind of reduce that share count. So we think that was the best move. Obviously, we'd like to get into a mode where we're acquiring additional properties, but not at all costs, right? It needs to be accretive to the shareholder. So our view was let's take the opportunity while there is a discount and let's take also the opportunity to close that distance between current share price and what we believe NAV is -- we will move through that chapter as well as kind of look at some repositioning, kind of some redevelopment opportunities on the smaller scale within the portfolio as we close that gap and then continue to focus on our FFO growth to grow the value of the firm. So we thought it made a lot of sense, especially given that gap to buy the shares back kind of opportunistically, especially given that the REIT is not facing a material tax consequence as a result of the sales of the assets or otherwise real estate positions. Viktor Fediv: Makes sense. And then on these 2 multifamily assets, which are left in Gainesville. So I see that now you're kind of expecting to close it in Q4 '26, first quarter of -- so just trying to understand your logic here. So are you trying to kind of reach full stabilization for those assets and then sell them at the highest price? Like just trying to understand whether you will be willing to sell it earlier or later? How do we think about that? Shawn Tibbetts: Yes. I think, look, the reality is they are stabilized now. And there's some market timing to this as well in addition to the fact that the buyer was not willing to pay us what we wanted for those assets, and we believe the market will bear a better price. So we're going to take those and sell them at the market to get the best number that we can and obviously benefit the company and therefore, the shareholders the best that we can in the form of paying down debt and bringing capital back on the balance sheet. Viktor Fediv: Got it. And then just last for me on -- in terms of -- you mentioned kind of some opportunities to invest capital in redevelopment. Or do you have like any outparcel that you can invest in or kind of upcoming redevelopments that are not on the lease that you're kind of considering? Can you provide some additional details on that? Shawn Tibbetts: Sure. There is a page in the supplemental, forgive the page flipping because I didn't memorize your page. But yes, Page 29 of the supplemental, Victor, includes opportunities that we see kind of on the horizon given the portfolio that we currently own. And there are a number of outparcels there as well as some assets that I would characterize as maybe underutilizing the real estate. Outparcels are probably the quickest move, right, in terms of getting some accretive opportunity into the earnings stream, but also there are some opportunities there with assets that may not be using the real estate in terms of the size of the plot they sit on or the box, quite frankly, may not be the best -- may not have the best tenant. So kind of repositioning in terms of something like we did with the Bed Bath & Beyond the Trader Dose, outparcels, and we have a couple of other opportunities with assets with large parking lots and sitting on a large amount of acreage that we could think about more in the midterm. So yes, we're thinking about that a lot. Candidly, we're doing a lot of work on that. But yes, we'll continue to look for those opportunities and strike at the right time when it makes sense to best deploy that capital. Operator: Your next question comes from the line of Jon Peterson of Jefferies...... Jonathan Petersen: Great. On the share buybacks, I mean, you talked about the implied cap rate of your company being well north of 9%. I mean, how do we think about where your share price needs to go where you hit some sort of breakeven where share buybacks make less sense and maybe investing in future acquisitions or buying back more debt is -- it makes more sense. Shawn Tibbetts: Yes. I think, John, thank you for the question, first of all. Second of all, I think -- when we get within a line of sight of NAV, I think, would be the way to think about that for us, right? Theoretically, if we're at NAV, we can begin to think about deploying capital. I think that implies that our -- we're trading at a cap rate that's compressed relative to where we are today. We don't think we're there. Candidly, we think we've got some work to do to close that gap. So in the short run, as you know, we bought back these shares, and we may do some more. But yes, I think we've got a little ways to go before we can think about actually deploying capital into an acquisition or otherwise, obviously, yield dependent, market dependent. Jonathan Petersen: Okay. And then if we look at your lease expiration schedule over the next 2 or 3 years, are there any material mark-to-market opportunities, particularly in the retail portfolio that we should be thinking about? Shawn Tibbetts: That's squarely down the middle of your plate. Why don't you take that one? Craig Ramiro: Yes, happy to take that, Jon. Thank you for the question. As far as expirations for this year, about half of those we've actually already renewed at positive spreads. So we feel pretty good about near-term expirations. Looking out further, a lot of this is big box anchor spaces, which we'll expect to be able to push rents nominally on those. That's kind of the balance of the retail side. In office, I think there's still tremendous opportunity to mark-to-market, particularly in Charlotte at our Province Plaza asset, where I know we are significantly below market. That is a little bit older, but we have plans to reinvest in that particular location so that we can drive further rent growth. So still lots of organic growth opportunity in both sides of the coin, retail and office and bullish about our prospects going forward here. Jonathan Petersen: Maybe kind of -- Shawn, just bringing together all your comments and just all the moves that you guys have made with the Board refresh and the selling multifamily, what would you say is the most meaningful movement that the company has made this year? Shawn Tibbetts: Well, that's a tough one. As you can tell, Jon, and I appreciate the question, we're excited about where we are and more importantly, where we're headed. It's hard to single one out. But I think from an economic standpoint, the scale and the momentum created here as of late on the sale of the multifamily and the real estate financing as well as the construction business. I mean, we came to the market 3 months ago and said we are going to do these things, and we have materially done those things. I think when you add to that, this kind of evolution of our company, the ability to bring highly skilled directors on board is, in my mind, metaphorically accretive to the Board, right? And it gives us an opportunity to have some additional guidance. We appreciate more than they know the kind of contributions from George and Dennis. But as we evolve this company, we're bringing 2 folks with deep capital markets REIT, public REIT experience on to this Board. And we think that is helpful to us to kind of challenge some assumptions work through the challenges that face us ahead and continue to grow this company, grow, again, close that NAV gap and grow the FFO and in turn, grow the shareholder value over time. So we're just excited about this, excited about the opportunity, thankful for the directors that were with us and very thankful for the ones that will be joining us. And I think, look, I'd be remiss not to say I'm thankful for the team for digging in and plowing through this challenging yet rewarding kind of phase in our company here. But we're fired up. We're excited. We are bullish, and we are executing, and we're excited about the future. Operator: This concludes our question-and-answer session. I would now like to turn the call back to Shwan Pivot for closing remarks. Shawn Tibbetts: Thank you very much. First and foremost, we appreciate your interest in our firm. For the shareholders, your investment in us, for the employees, your continued resolve to see our company continue to succeed. I just want to thank you for joining us today. We look forward to more exciting quarters in the future and look forward to some press releases from us. We're excited about where we're headed and couldn't be more excited for the support that we're receiving along the way. So thank you for joining this morning, and have a nice day. Operator: Thank you. That does conclude today's call. You may now disconnect. Goodbye.
Operator: Ladies and gentlemen, welcome to BWX Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead. Chase Jacobson: Thank you. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Mike Fitzgerald, Senior Vice President and CFO. On today's call, we will reference the first quarter 2026 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in the investor materials and the company's SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex. Rex Geveden: Thank you, Chase, and good evening to all of you. We had a great start to 2026 with very strong first quarter results. Revenue grew 26%, 11% of which was all organic. Adjusted EBITDA grew 14% and earnings per share grew 22%, all ahead of expectations. Outperformance in the quarter was driven by improved throughput, favorable pacing of work and exceptional operational execution across our business lines. We ended the quarter with a backlog of $8.7 billion, up 77% year-over-year and 19% sequentially. Supported by robust bookings in government and consistent backlog in commercial, providing clear visibility to future growth. Demand for commercial nuclear power components and services continues to accelerate across the U.S., Canada and Europe. As projects launched, we believe that localized manufacturing capacity will increasingly differentiate BWXT, making the establishment of U.S. commercial manufacturing footprint to complement our Canadian operations a strategic priority. To that end, in April, we announced the acquisition of Precision Components Group, PCG, a U.S.-based manufacturer of complex heat transfer components for the U.S. naval and commercial nuclear markets with 2 facilities in more than 400 highly skilled employees, PCG represents our first step toward building domestic U.S. commercial nuclear manufacturing capacity. While most of PCG's current revenue and backlog is related to naval programs, its facilities have immediately available capacity that we intend to utilize for the commercial market. With products such as reactor internals, pressurizers, heat exchangers and reactor head assemblies. Beyond the PCG acquisition, we intend to expand our U.S. commercial manufacturing footprint likely with a greenfield plant at our Mount Vernon, Indiana site on the Ohio River. This facility will be capable of producing larger heavy nuclear equipment, including steam generators and reactor pressure vessels. Ultimately, our goal is to build scalable U.S. commercial nuclear manufacturing operations that can serve U.S. and global SMR and large reactor projects. By adding domestic capacity, we are positioning BWXT to meet rising commercial demand while creating meaningful synergies with our existing U.S. operations. Beyond commercial power, we are making disciplined growth investments across the portfolio, supporting existing businesses, adding new technologies and capabilities and pursuing opportunities in advanced nuclear and other national security applications. Turning to segment results and market outlook. Government Operations revenue was up 4% and adjusted EBITDA was up 1% in the quarter, slightly ahead of our expectations. We had strong bookings, including $1.4 billion from the second portion of the pricing agreement for Naval reactors awarded last year and long lead material procurement contracts for out-year production. This led to segment backlog of nearly $7 billion up 25% sequentially and 93% year-over-year. In naval propulsion, we are driving operational efficiencies in our plants, which contributed to our good margin performance in the quarter. We anticipate continued revenue growth with a steady pace of Virginia-class production, growth in the Columbia class and early work on the next Ford class ship set. The President's FY '27 budget request supports these programs and ship building generally, further reinforcing our confidence in longer-term growth rates. In special materials, our legacy programs delivered solid results and our defense fuels enrichment and HPDU programs are progressing in line with early program schedules. Specific to defense fuels enrichment, we completed construction of the Centrifuge manufacturing development facility earlier in the year and have begun prototyping the first units. In April, we engaged with the NRC regarding our plans to build an HEU enrichment facility in Erwin, Tennessee. This engagement is an important milestone as it creates alignment with regulators in the NRC approval process. For our new large HPDU contract, we are organizing the supply chain and preparing for construction of the new facility in Jonesborough, Tennessee. That program will ramp through 2026 and continue over the next several years before transitioning to commissioning and production. The growth potential in special materials is exciting, and we continue to pursue new scopes with existing customers and evaluate entry points to new markets. Technical Services has delivered strong equity income growth over the past few years with multiple strategic wins. We are pursuing new opportunities in the DOE market and in other new markets with the next wave of contract awards expected over the next 12 to 18 months. Moving to microreactors and advanced nuclear fuels, the market is evolving rapidly in land-based defense, commercial and space markets. We continue to see strong demand across the board, including TRISO fuel for demonstration reactors and future commercial projects with multiple reactor developers. Of note, Kairos with whom we have a collaboration agreement on TRISO recently began construction of its Hermes 2 reactor for Google in Oak Ridge, Tennessee. Finally, we are continuing our close engagement with the Army on the Janus Program. Turning now to commercial operations. Results in the quarter were well ahead of our expectations. Organic revenue grew 39% and total revenue rose 121% with robust double-digit growth in commercial nuclear and medical and contribution from Kinectrics. While the outperformance was partially due to timing of outage work and progress on large component manufacturing, we also improved operational performance with accelerated throughput and reduced lead times. Following an 85% increase in backlog in 2025, backlog was flat sequentially in the first quarter, but still up 33% year-over-year, supporting our expectation for low teens organic growth in commercial power this year. The outlook for new build nuclear projects remains very positive. Notably, the U.S. and Japan announced plans to invest up to $40 billion to build up to 3 gigawatts of GE Hitachi, SMRs in the Southeastern United States. Our role is the reactor vessel supplier on the first GE Hitachi BWRX-300 SMR in Canada puts us in a good competitive position for these future projects. Given BWXT's industrial scale and engineering and design capabilities, customers are increasingly coming to BWXT to supply critical nuclear components for their current and future SMR and large-scale nuclear projects, which should lead to further backlog growth over the next 12 months. Kinectrics continues to exceed the acquisition business case having delivered another very strong quarter. A key highlight in the quarter was Kinectrics being selected as the design and fabrication partner for a U.K. Tritium loop facility, which will be the world's largest and most advanced tritium fuel cycle facility. This presents an entry point for engineering services and specialty equipment manufacturing and the exciting nuclear fusion market. With that, I will now turn the call over to Mike. Michael Fitzgerald: Thanks, Rex, and good evening, everyone. I'll begin with total company financial highlights on Slide 4 of the earnings presentation. First quarter revenue was $860 million, up 26% year-over-year with 11% organic growth. Strong performance in commercial operations was complemented by steady growth in Government Operations. Adjusted EBITDA was $148 million, up 14% year-over-year driven by robust growth in commercial operations and modestly higher Government Operations, partially offset by higher corporate expense relative to an unusually low level in last year's first quarter. Adjusted earnings per share were $1.12, up 22%, reflecting strong operating performance and approximately $0.08 of higher nonoperating contributions. Our adjusted effective tax rate for the quarter was 15.8%, benefiting from timing of stock compensation. Our updated full year tax rate guidance of less than 21.5% is modestly higher than last year's rate, reflecting strong growth in international earnings, mainly from Canada. First quarter free cash flow was $50 million, a strong result for what is typically our seasonally weakest quarter, reflecting solid earnings and effective working capital management. Capital expenditures in the quarter were $43 million. We continue to expect our full year capital expenditures to be around 6% of sales. However, it is possible that CapEx may exceed that level in future periods as we advance targeted growth investments including expansion of U.S. commercial nuclear manufacturing capacity and advanced nuclear and fuel capabilities given the significant business we expect to capture. We are carefully balancing these strategic investments with our financial return metrics as we evaluate the numerous growth initiatives across the business. Moving to the segment results on Slide 6. In Government Operations, first quarter revenue was up 4% with growth in special materials and naval propulsion offsetting lower microreactor volumes. Adjusted EBITDA in the segment was $118 million up 1%, resulting in an adjusted EBITDA margin of 20.4%, has better revenue, solid operating performance and timing of technical services income benefited margin. Given first quarter performance, we now expect government operations margins to exceed 19% for the year. Turning to Commercial Operations. Revenue was up a robust 121% including 39% organic growth, reflecting increases in both commercial power and medical and contribution from Kinectrics. Growth exceeded expectations due to increased throughput on large commercial nuclear component projects, mainly associated with the Pickering life extension and better-than-expected performance from Kinectrics. Adjusted EBITDA in the segment was $36 million, up 162% from last year. Adjusted EBITDA margin in the quarter was 12.9%, with higher sales and strong execution, offsetting the impact of growth investments as we continue to scale the business. Turning to our 2026 guidance on Slides 7 and 8 of the earnings presentation which I will note does not include contribution from the recently announced PCG acquisition. We expect revenue of at least $3.75 billion, up high teens compared to 2025. In Government Operations, we expect low teens growth with over half coming from the defense fuels and HPDU contracts. In Commercial Operations, we increased our revenue growth expectation to approximately 30%, driven by low teens growth in commercial power, high teens medical growth and a full year of contribution from Kinectrics which as mentioned, has outperformed our expectations to date. For adjusted EBITDA, we are increasing the guidance range by $5 million on each end, resulting in revised adjusted EBITDA guidance of $650 million to $665 million. Regarding the cadence of operating earnings, we continue to expect our full year results will be slightly more back half weighted than usual with about 55% of full year EBITDA anticipated in the second half, and we expect second quarter EBITDA to be roughly in line with to slightly below first quarter levels. These assumptions lead to non-GAAP earnings per share guidance of $4.60 to $4.75 with the increase driven by higher operating earnings. We expect free cash flow of $315 million to $330 million, inclusive of mid- to high teens operating cash flow growth supporting continued reinvestment and long-term shareholder value creation. Regarding the recently announced acquisition of PCG, the business generated approximately $125 million of revenue with low double-digit EBITDA margins in 2025, and we anticipate mid-single digits revenue growth in 2026. The acquisition, which will be included in our Commercial Operations segment, is expected to close in the second half of the year. As such, our annual financial guidance does not include contributions from PCG at this time. Overall, we're off to a strong start in 2026. Our robust backlog provides us great visibility for the remainder of the year, allowing us to focus on margin expansion cash generation and capturing new high-value contracts across the defense and commercial nuclear markets. With that, I will turn it back to Rex for closing remarks. Rex Geveden: Thank you, Mike. It is an exciting time at BWXT. We are delivering on our commitments to customers and shareholders in driving value through process optimization, technology adoption and disciplined growth investments. Our 2026 guidance supports meeting or exceeding the medium-term financial targets, we introduced at our Investor Day in February 2024. We look forward to providing an update at our next Investor Day this fall. As I wrote in a recent Washington Times op-ed, BWXT is not betting on a horse. We are betting on the race. We participate across the nuclear value chain in defense and commercial markets and as a merchant supplier and a technology provider, enabling us to win across a broad range of competitive outcomes. We have record backlog, unprecedented demand and the financial strength to continue investing for growth. We intend to build on our market-leading position in nuclear solutions for defense and commercial nuclear markets, thereby driving long-term shareholder value. And with that, we look forward to your questions. Operator: [Operator Instructions] Our first question comes from Matt Akers from BNP Paribas. Matthew Akers: I may have missed this, but did you say how much you're planning to pay for PCG. And then I guess another, just a question on the sort of footprint build-out because you mentioned this is sort of the first step towards building out the footprint. And sort of how should we think about what's left? Is it more kind of capacity driven? Is it technology? Is it head count? And just kind of what -- how to think about that? Michael Fitzgerald: Yes. Thanks, Matt. So from a purchase price standpoint, we didn't put it in the public release, but it was roughly around $200 million. So in line with the multiples that we've seen in some of our more recent acquisitions. And so ultimately, depending on the time line, we'll see when that will close out this year, but fully expect that to move along pretty rapidly. I would say when you look at this from a kind of first step, there's a couple of different ways to think about this. One, we like the capabilities. We like the workforce. We certainly need the square footage from a capacity standpoint. However, this is going to be primarily focused on manufacturing of certain aspects. It's not going to be able to handle some of the large, heavy, very large scale components that we need to manufacture. So we're looking at kind of a multiple approach step, which we announced in our last earnings call, the potential for a new facility may be adjacent to our Mount Vernon location which could handle some of the heavier large components. And so we're looking at this both from a capacity and workforce standpoint. Matthew Akers: Great. I was wondering if you could touch a little bit on kind of the space end market and the opportunities that you're seeing there. I saw you just added Dan, to the Board recently, you remember from Maxar. But just curious what you kind of think of it as kind of the opportunities coming up in the pipeline there. Rex Geveden: Yes. So I kind of -- this is Rex. So kind of divided into 2 areas. There is a civil space opportunities and NASA seems interested in really 2 things: nuclear electric propulsion and then also efficient surface power for a lunar based. And then there's a long-term commitment to nuclear thermal propulsion according to the NASA Administrator, Jared Isaacman. And so we have opportunities to play in all of that. Certainly on the fuel side and on delivering a reactor for any of that. So interesting -- it's an interesting opportunity. It's an interesting market for us. It's kind of a one-off market in the sense that you do one of those systems typically. I think probably the more fertile ground for us is national security space. I believe we'll see more applications for power and propulsion there, and we're locked in on that opportunity. Operator: Our next question comes from Jeffrey Campbell from Seaport Research Partners. Jeffrey Campbell: Congratulations on the strong quarter. My first one is, would your new commercial facility, the one that you have not yet reached FID, and would it have any limitations regarding components that it could build for customers such as, again, Hitachi Westinghouse or Rolls-Royce? Michael Fitzgerald: No limitations at all. I mean I think when we look at our demand signals, we're certainly seeing some capacity constraints even in our Cambridge facility as we look out multiple years. The other thing that I think we're finding is that being kind of localized in the U.S. creates a competitive advantage, and we're excited to add some of those capabilities to make sure that we have a U.S. presence and we think that, that's a differentiator when we look at it from a market standpoint. So ultimately, the idea is to set up potentially centers of excellence, where you would have certain facilities that are focused on things like reactor internals and tanks and pressurizers and you would have other facilities that would be focused on kind of the large steam generators, reactor pressure vessels, those types of things. And so we would think of it there, but we would ultimately make that across multiple customers and multiple platforms. Jeffrey Campbell: Okay. Great. I appreciate that color. My other question is you've made the case for PCG's acquisition for the budding U.S. commercial activity. I just wondered if the acquisition has any positive effects for your naval business as well? Rex Geveden: Yes, I think it could, Jeff. It's a nice business in the sense that it has an existential qualified nuclear workforce. It has plenty of capacity, as we alluded to in the script, and we'll make immediate use of that capacity. But I think the more important thing is nuclear manufacturing credentials are rare and hard to get. So you have to go through certifications to get stamps for it to get things like N stamps and NPT stamps and U stamps. These are ASME certified factories that also have nuclear quality systems. And so that's hard to get, and it's an immediate capability for us. And so certainly beneficial to our Navy customer, which has been using that -- has been using that capability for a long time, but more importantly, I think, is the commercial case because as we expand into the U.S., we need that kind of manufacturing capacity capability, and we'll get going with it right away. Operator: Our next question comes from Bob Labick with CGS Securities. Bob Labick: Congratulations on the results and the exciting outlook as well. I just wanted to expand on the questions on kind of U.S. capacity build-out. Have you decided yet? Or do you know how much capacity do you want to add? And could you give us a sense of the capital needed for a U.S. greenfield and how long that might take to build out? Rex Geveden: Yes, Bob. We're going -- we're presently going through a 60,000 square foot capacity expansion at our Cambridge plant. And the capacity we're looking for in Mount Vernon would be 50%, 60% more than that, let's rough it out at 100,000 square feet and then to outfit that factory. So now the expansion that we're doing in Cambridge is brownfield this would be quasi greenfield. And so it will be more expensive than our Cambridge build-out. But that -- the reason we're attracted to the Mount Vernon site is because we've got rail spur there, we've got crane capacity 1,000 metric ton crane pass, radiography facilities. So there's some natural cost synergies that would go with our Navy business that's there, not to mention workforce that's nuclear qualified in a plant next door. So that's kind of the thesis behind it. In terms of budget, it would be -- think of it as kind of twice what we're doing at Cambridge in rough terms. Bob Labick: Okay. Great. And then there's obviously so much demand out there, and it just seems to keep growing and growing. Is there any thought about, I guess, exploring customer funding for commercial capacity growth? Or how do you derisk building out incremental capacity on the commercial side versus on the government side? Rex Geveden: Yes, I'd say we have got the balance sheet to do what we need to do in terms of capacity. Operator: Our next question comes from Pete Skibitski from Alembic Global. Peter Skibitski: You talked, I think, in both segments about improved throughput. I was just wondering if you could put some color to that, if there's certain initiatives you have in place to help with throughput or if it's just net hiring or something? Rex Geveden: Yes, Pete. We did have formal initiatives in-house called Driving Performance Excellence is what we call a DPX, that's our -- that's sort of our name for operational excellence. And we've had that kind of process going on in the plants for a long time. We've now expanded across the entire enterprise. So we're using things like supply chain and human capital and other areas. But yes, we do have some dedicated throughput projects, including, for example, the Pickering steam generators, TheraSphere, we had an important throughput project in our Lynchburg plant last year, having to do with an area called -- that we call higher tier. So yes, we're highly focused on that because of this basic fact, we need more capacity than we have, and we can get capacity in 1 of 2 ways. We can get capacity from increasing our throughput, which is the cheapest and best way to do it or we can get it by adding square feet. Doing acquisitions or doing brownfield and greenfield plants. We're doing all of the above because we need so much capacity. But that's how we're thinking about it, and that's the reason we focused on throughput. Peter Skibitski: Okay. Okay. Great. And last one for me. I guess Air Force DIU had this recent ANPI awards, Radian, Westinghouse and Antares. Just was wondering, were you guys disappointed you didn't get an award here? Are there going to be further ANPI opportunities? Or is the focus really more so on Janus and on your BANR reactor. Just wondering if you could kind of -- these initiatives seem to have some relationship to each other. So I was just wondering if you could kind of sort it out for us. Rex Geveden: Yes, sure, Pete. So no disappointment because we didn't pursue those opportunities. Those were more about some smaller scale reactors for lower power output. And none of those reactors is transportable like our Pele reactors. So we have our transportable Pele reactor that fits certain use cases, and it's very interesting, but not for those particular opportunities. And then we have commercial derivative of Pele, you might say that's called BANR, which is a 20-megawatt electrical output, a much larger microreactor than you see out there in most case and that one fits a completely different use case. So that was -- those competitions weren't really for us. We are focused on Pele follow-on work. We're focused on Janus, and we see plenty of opportunities for microreactors and for microreactor fuel for TRISO fuel. Operator: Our next question comes from Marc Bianchi from TD Cowen. Marc Bianchi: Maybe Rex, following up to the last point there on TRISO. There's been some more focus on it now with some other companies that are involved in manufacturing coming public. Can you talk a bit about your process there and how you think your competitive positioning would stack up over time? I know currently, you're doing it. So that's a good sign. But maybe just as you think about the next few years and stamping out your competitive position? Rex Geveden: Yes, I'll try and put some color on that one. Yes, we are the only producer of TRISO at any scale at this point. We're producing hundreds of kilograms a year, we made all the fuel for our Pele reactor. We're making fuel for Antares and some other clients we haven't disclosed yet. So we're in the commercial business on TRISO. I would say that, that is sort of the limit of our capacity now, a few hundred kilograms a year. So there's only so much you can do with that. In order to scale that, we are considering brownfield and greenfield opportunities. And we've talked publicly about doing something on a larger scale in Wyoming. And that's what the market needs. We need a very large-scale plant so that we can drive down the cost on TRISO to help make these reactors commercially viable. I will just maybe add to that point that I think this is a really interesting place to be in the market to be able to be in the fuel side of microreactors and small modular reactors is a pretty nice place to be. I said it in the script, but we're betting on the race, not on the horse and that posture enables us to win in a variety of competitive outcomes. And for TRISO, we're positioned exactly where we want to be, which is we produce it for our own purposes, but we also produce it for the market, and we intend to do that in the future. Marc Bianchi: Okay. And then the other one I had was just on the Japan announcement, the $40 billion for GE Hitachi, when would it be realistic for awards to be made to the market for that equipment? Like just -- I know you still need to win it, but just in terms of thinking of a time line for when that could potentially be added to backlog. Rex Geveden: I think it's -- I mean I think of this one and the AP1000 one is fairly near term as far as nuclear projects go, I'm in touch with the top leadership of GE, and we're in touch with the top leadership of Westinghouse. And these deals are being negotiated at a -- with urgency is the way I would put it with the Department of Commerce. And so I think -- I said it on prior call, it wouldn't surprise me if we started to receive orders this year related to those large -- to those sort of bulk reactor buys. But there's a lot of things that -- a lot of hurdles that need to be cleared between now and then. Operator: Our next question comes from Jeff Grampp from Northland Capital Markets. Jeffrey Grampp: Rex, it seems like conviction and proceeding with the commercial expansion at Mount Vernon, I'm curious how long might something like that take to get operational from when you ultimately decide to move forward there? And how important do you guys sense is having something like that operational to winning U.S.-based business? Rex Geveden: Yes. You said a couple of key things there, Jeff. So on the time line, that's something that will take us 2 or 3 years to complete. And that should be in the right time frame for being able to take some of these large orders and get going. But you made a key point there on the end, which is around how important it is to have U.S. industrial capacity. I do believe that localization of supply chain is kind of going to be the way it is in nuclear. It's certainly a strong emphasis in Canada where we play strongly and we have local capabilities in there. I think you'll see the same thing play out in Europe. I think they're going to favor local supply because of the economic development impacts. And so I do believe that localization in the U.S. will matter. And I think it will particularly matter on some of these government projects like the 10 AP1000 and up to 10 X-300s. And that's one of the reasons we're doing it. We don't have orders yet, obviously, but we're trying to skate to where we think the puck is going because these are such long cycle projects and you have to have the capacity, the existential capacity when the order comes. So that's how we're thinking. We're very bullish on it. And by the way, I don't think in the long run about 10 reactors or 4 reactors at Darlington. If you think about what the global industrial base did -- nuclear industrial base did in the 70s, 80s and 90s, it built 600 large reactors. And I think if we're going to decarbonize the grid to meet the energy needs of AI, meet the energy needs of electrification, we're talking about hundreds and hundreds of reactors globally, large reactors, translate that into thousands of small modular reactors. And so that's the kind of opportunity set we think about. And so we're very bullish on that outcome, and we're building capacity in advance of the orders. Jeffrey Grampp: Super helpful detail. I appreciate that. My follow-up is on the enrichment side. Can you just give us maybe a high-level flavor for kind of, I guess, general timing or progression points on the Centrifuge Manufacturing Facility, that NRC licensing engagement, things like that? Just anything we should kind of keep our eyes peeled for to gauge kind of moving that project forward? Rex Geveden: Yes, I think I've said publicly that, that will progress over the next few years. We've obviously completed our Centrifuge Manufacturing development facility in Oak Ridge, Tennessee. We are outfitting it and working on prototypes right now, that will progress. So the technology transfer from Oak Ridge National Laboratory to BWXT occurs over the next few years. The licensing for the HEU part of it should progress normally over the next few years. I think the more interesting part of it is when we get into Centrifuge Production, which we need to do for the high enriched uranium cascade. And I think in the long term, what will be interesting for us is how do you fill the gap for low-enriched uranium and high-assay low-enriched uranium. That gap is very evident and fundamentally very interesting from a business development perspective. Operator: Our next question comes from David Straus with Wells Fargo. Joshua Korn: This is Josh Korn on for David. I wanted to ask about Medical. I think you had said strong double-digit growth in the quarter. I just wanted to ask about any specific products or markets to call out kind of the outlook there. And then any update on the Tc-99? Rex Geveden: Yes, we didn't give much detail on the script on medical, but that's still a good news story for us. We've got good growth all across the board. And following 3 years of 20% compounded growth, we're forecasting high teens growth this year and we see strength in strontium. We see it in germanium. We see it in TheraSphere. Actinium-225 is growing at an outsized pace, but that's off a pretty small revenue base and we're ramping up production of stabilized isotopes with ytterbium 176. That production is going quite well. And we've got some new therapeutic products in the pipeline like lead-212 and other products that are interesting. Tc-99 is progressing. There's fundamentally no different news on that. We mentioned on the last call that we're evaluating some approaches to the market based on the particularities of our product. And we don't have -- we don't have anything in the 2026 forecast for Tc, but we're continuing to push that towards the finish line. Joshua Korn: Okay. And then wanted to ask on defense. You had been a recipient on the SHIELD contract for Golden Dome. So with all of that money in the '27 budget, kind of what -- if you could provide any color on what that -- what your work may involve and then kind of what the addressable market is for you? Rex Geveden: Yes. We are a Golden Dome contract recipient awardee. That's not uncommon. They certainly awarded to several hundred companies, as I recall it, ours was for some broad infrastructure scope, which I think is pretty interesting for us because of the nuclear capabilities that we have. So to the extent that Golden Dome would need microreactors to drive missile defense sites or radars or whatever it is, distributed power even up to small modular reactors we could play there as a fuel supplier, I think there's a lot there for us potentially in the future, but it's pretty undefined at this point for us. But we've got sort of -- we've sort of got a license to go hunting and we'll turn it into something. Operator: Our next question comes from Scott Deuschle from Deutsche Bank. Scott Deuschle: I think Kinectrics brought with it some revenue connected to the broader power and grid infrastructure space, including in areas like high-voltage testing and cable commissioning. Would you be able to give us a sense as to how big of a business that is for them and what the growth outlook is there? Rex Geveden: Yes, it's about 10% of the total Kinectrics business right now and growing faster than a lot of the parts of that portfolio. That -- yes, that's a very interesting business super high voltage capability, testing components for the grid for component supplier to the grid, kind of an underwriters' laboratory type of thing. But I think the real shoots of -- the real green shoots of growth are around cable testing for wind power in Europe. We have some portable test sets, and we've invested in some more portable test sets, and we've got a nice share of that market, and it's growing smartly. So pretty interesting business obviously exposing us to a different market than we had before, and we like where that's going. Scott Deuschle: Do they have any direct exposure to the data center build-out given these high-voltage data centers that are now coming up? Rex Geveden: Yes. I don't know the details on that. I suspect that we do. Scott Deuschle: Okay. And then Mike, when you talk about CapEx potentially exceeding 6% of sales in the future, is there a maximum threshold you could share with us as to what that excess might be? Like would it still be less than 8% of sales? Or could it exceed that as well? Michael Fitzgerald: No, I think that's about it, that's about right. I mean we feel pretty comfortable with the 6% for what we're seeing for 2026, the comment is really just if we make the decision to have a greenfield facility for another kind of large-scale manufacturing component facility in the U.S. we may exceed that 6%. But I would see it somewhere around the 7%-ish range. What we don't want to do is go back to closer to the kind of 9%, 10% that we saw over the last decade and we were going on a large kind of CapEx spend. So we're going to keep it pretty reasonable, but I could just see it going up in the maybe 7% range. Operator: Our next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Good job pronouncing that name. So Rex, I guess, if I read between the lines here, it sounds like Mount Vernon is a bit more of a signal on -- I mean I know the administration's meeting with supply chain companies, including yourself, and it sounds like you're a bit more balanced, not that you're ever imbalance, but a bit more balanced in terms of AP1000 versus SMR. So I guess my question is, how are you thinking about the E&C part of the equation, where you build out or spend the CapEx to build out the capacity. And in terms of the labor to get these things stood up, which I know Scott over GE has talked about one of his concerns. So a broad question, how are you thinking about this whole supply chain and kind of the pieces of the puzzle and am I thinking about this correctly in terms of the body language on around Mount Vernon and AP1000? Rex Geveden: Yes. So if you're talking, Jed, broadly about delivery risk for nuclear projects, I do think that is an existential and important risk. And I think it's probably the biggest risk in the market just to be able to deliver those projects and we've got some poor examples of project delivery Vogtle and others. That said, the counterpoint to that is the refurbishment projects in Canada, both at the Bruce site and at the Darlington site so far have delivered ahead of schedule and under budget. So there are some examples we can point to where the industry stood up and delivered the project according to the plan, and I'm hoping that the industry can get to that point. If you're talking about the sort of the construction delivery risk of a project like Mount Vernon, we've demonstrated the ability we can do that. We are doing very well with our Cambridge project that will come in under budget. It will come in on time. We delivered the Centrifuge Manufacturing Development facility, which, by the way, a hell of an impressive facility from the first shovel in the ground until the completion of it, and that was in 7 months. And so I think we've got a -- we really got sort of a high skill set for being able to deliver projects that are internal to the need of BWXT. Now that's apart from the complexity of the nuclear power plant, but we can build our facilities with a good risk posture. Jonathan Dorsheimer: Yes. That's fair. My question was for the former, not the latter in terms of more industry not worried about you standing up Mount Vernon and getting that burn and getting that on time. And so I guess just to the broader -- so far, we've seen the LPO. We've seen the administration kind of through EOs. What would you think would help solve the -- one of the key components in terms of -- it sounds like you're going to get -- the supply chain is getting stood up. Is it just a sequencing or do you see something else in terms of how the government could step into trying to assuage risk here? Rex Geveden: Again, you're talking about delivery risk for the balance of plant in the nuclear island, Jed. Jonathan Dorsheimer: To the other question, specific to BWX have already been asked. So I'm just curious, using my second just to think from a more macro broader perspective, given that you are in late-stage discussions with -- or I'm assuming that. Rex Geveden: Yes. So maybe I'll break it into 2 pieces. I think the supply chain risk is manageable. I think we're demonstrating BWXT as a company that we can deliver the components on schedules that our customers need reactor pressure vessels, steam generators, whatever it is. We're organizing around that. And I think the industry can stand up and do that. And of course, I'll remind you that we've delivered 420 roughly small module reactors to the nuclear Navy. So we know how that's done. I do think -- I agree with you that the bigger risk is on the engineering procurement and construction side, and that's a problem that the Bechtels and the Fluors of the world are going to have to solve. They're just going to have to do it. And I think it's going to require the injection of higher levels of talent. Maybe AI can help on the planning side of it, maybe even on robotic construction in the long run, but it's something the industry has to address. It's not a thing, I don't think BWXT can address, but I do recognize it as a gating item for the success of the nuclear resurgence. Operator: Our next question comes from Peter Arment with Baird. Peter Arment: Rex, Mike, Chase. Nice results. Rex, could you give us maybe the latest update or your thoughts on overall schedules? I know OPG just recently had an update on Darlington at the end of March. And there was also an update regarding the foundation or the basement module getting installed. So how does that line up with your first reactor pressure valve delivery schedule and if everything tracking according to plan there? Rex Geveden: You're talking, Peter, about the small modular reactor at Darlington? Peter Arment: Correct. Correct. Correct. Rex Geveden: Yes. I don't have detailed insight to how that project delivery is going, but I hear that it's reasonably on track, and I have the expectation that the following units will -- order for those will be coming relatively shortly. Peter Arment: Okay. And when -- and just as a reminder, when the delivery is, for your first pressure valves there? Rex Geveden: Let's see, next year, as I recall it. Yes, I think it's next year. Peter Arment: Okay. And then just, Rex, at a high level, kind of Department of War and Department of Energy budgets out in detail. Anything that stood out to you, whether it's on microreactors or enrichment or anything to call out that you're encouraged by? Rex Geveden: Yes. I'm encouraged by all of it, Peter. Good support for Pele, good support for defense fuels, there's some long lead procurement in there for a couple of extra Columbia-class submarines. So I think we're starting to hear about adding Columbia units to the submarine force. And I think that's pretty encouraging. So when you add AUKUS in additional Columbia, I think our naval nuclear propulsion program looks more robust and more interesting than it did even a couple of years ago. So yes, I'm very excited about what I'm seeing. Operator: Our next question comes from Ron Epstein with Bank of America. Ronald Epstein: Have you seen any changes on the front with doing work for the Koreans on some sort of Korean nuclear submarine? Rex Geveden: No, we haven't seen anything on that, Ron. Are you talking about submarines? Ronald Epstein: Yes. Right. At some point there was some talk about the Korean doing something nuclear and my guess would be right that you guys have helped them, maybe not, I don't know. Just survey. Rex Geveden: Yes. Again, yes, yes, certainly, there's a discussion between the White House and the Koreans about having nuclear-powered submarines. The Korean ambitions are real. I think they will have nuclear-powered submarines, There's, let me call it, sovereign intent there. I think the question is, where do they source their fuel. I think that probably comes from the U.S. And if it does, I think maybe there's something interesting there for us but super early days, and we'll have to get that demand signal from our customer at naval reactors, should that ever come. So yes, I like the possibility of that, but I would say it's very immature at this point. Ronald Epstein: Got you. And then on the M&A front, it seems like you still -- you guys still have a dry powder? Is there any areas that you're particularly interested in today? Or if you could give us a sense of what you might be thinking about? Rex Geveden: I'm sorry, Ron, the audio was a little weak. What was the front end of the question? Ronald Epstein: M&A. Rex Geveden: Yes, lots in the pipeline there. Mike, do you want to take that one? Michael Fitzgerald: Yes. I would say -- I mean we started the year off really focused on the expansion of capacity and that continues to be a priority. But we also are looking at a number of other adjacent opportunities really to expand our capabilities. I think when we look at this, we want to focus on driving opportunity set within the full life cycle of nuclear and how we support our customers from end to end. And so anything that would continue to enhance our capabilities there, we're very interested in. Operator: Our next question comes from Andre Madrid with BTIG. Andre Madrid: I wanted to refocus on PCG for a second. I know initially, it seems like the customer sets, mainly government and navy focused, but the capacity is highly fungible. I mean just can you provide us some context to how quickly you can pivot that mix to more commercial? And maybe what the margin or utilization uplift could look like as a result? Rex Geveden: Yes, Andre, I'll start with that and maybe Mike will add to it. First off, it's about 70-30 maybe in commercial nuclear at this point, and scattered across 2 sites, New York, Pennsylvania and Florence, New Jersey. Both of them are good sites. There's a lot of manufacturing capacity and we mentioned in the script that there are 400 employees there. There's more capacity, there's plenty of available capacity. So one of the things that we can do right away is we can move some work that we've been outsourcing from our commercial business right into those plants. And in so doing, we can capture the profits that are otherwise going to the supply chain. And so that's an immediate opportunity for us. And let me also say, we're absolutely going to satisfy the needs of our existing customers with the Navy and other government -- the government customers. We're under contract to deliver. We will absolutely deliver, no question about that. But over the course of time, we'll probably change the complexion of the portfolio in that business more toward commercial because that's where we need the capacity. Mike, do you have? Michael Fitzgerald: Yes. So Andre, just the way I would think about it, we have roughly -- we believe about 50% capacity that can be utilized. Now the reality is it's going to take some time to ramp up and hire the workforce. You've got 400 people. Let's assume that we can hire a few folks per week. I mean it's still going to take a few years to get to kind of a whole ramp. So I think there's some -- as Rex mentioned, there's some immediate opportunities for us to move some things in-house, and I think that will be accretive from a margin standpoint. But when we looked at the business case, we looked at kind of a longer ramp and just making sure that, that still made sense financially and it certainly did. I think on margin side, we disclosed it's low double-digit EBITDA margins today. We certainly think as we have opportunities to increase that slightly as we increase scale and we focus on kind of in-sourcing certain aspects of -- from a supply chain perspective where we can capture that margin as well. So there's certain opportunity to expand over time. Andre Madrid: Got it. That's really helpful. I think you also mentioned AUKUS. It's been a while since we've heard a more fleshed out update there. Any color you can provide us on the conversation that you're maybe having and how you're gearing up to support the effort. I know you kind of have a lot of shots on goal there. Michael Fitzgerald: I don't think there's anything really new to disclose. I would say we continue to -- our build from an infrastructure standpoint to support from an AUKUS. We've seen good funding support for that. And so we continue those capacity build-outs and we're anxious for future awards. But a lot of good support for its continuing, but I don't think anything else to really disclose at this point. Operator: There are no further questions at this time. I will now turn the call back over to Chase Jacobson for closing remarks. Chase Jacobson: Yes. Thank you, and thank you, everyone, for joining us today. We look forward to speaking with many of you and seeing you at upcoming investor events we will be on the road and at a few conferences over the next month or so. If you have any questions, feel free to reach out at investors@bwxt.com. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the analyst and investor presentation for HSBC Holdings plc First Quarter 2026 Earnings. This webinar is being recorded. I will now hand over to Pam Kaur, Group Chief Financial Officer. Manveen Kaur: Welcome, everyone. Thank you for joining. We have had another quarter of positive performance, which reflects further progress towards creating a simple, more agile, growing HSBC. Annualized return on tangible equity, excluding notable items, was 18.7%. We are confident in achieving the targets we set out to you at the full year. We are updating 2 pieces of guidance today, banking NII to around $46 billion and our expected ECL charge to around 45 basis points. I'll talk to the drivers of both shortly. In the quarter, we continued to make disciplined progress in simplifying the group to unlock HSBC's growth potential. We actioned a further $0.2 billion of simplification saves and remain well on course to deliver the $1.5 billion target. We completed the privatization of Hang Seng Bank, the sale of U.K. Life Insurance, Sri Lanka Retail Banking and South Africa. And as you will have seen, we have agreed the sale of our retail banking business in Indonesia. We expect to realize an up to $0.4 billion gain on completion anticipated in the first half of 2027. Our CIB business in Indonesia is unaffected. On outlook, the economic landscape remains complex and uncertainty will persist. Our thoughts are with all those affected by current events in the Middle East. We are fully engaged in supporting our colleagues, customers and partners across the region. We are well positioned to work with our customers and manage the uncertainties in the global environment from a position of financial strength. Let's turn first to the income statement, where I will focus on year-on-year comparisons unless I indicate otherwise. Profit before tax, excluding notable items, was $10.1 billion. Notable items this quarter include a loss of $0.3 billion on moving Malta to held for sale, a loss of $0.2 billion on the sale of U.K. Life Insurance and $0.1 billion of restructuring costs related to our simplification program. Revenue, excluding notable items, grew 4% year-on-year to $19.1 billion. This was driven by banking NII and strong growth in wealth fee and other income. Annualized RoTE was 18.7%, 0.3% higher than last year. It benefited from the removal of Hang Seng Bank minorities. Looking at capital and distributions. Our CET1 capital ratio is 14%, down 90 basis points on the quarter as expected following the privatization of Hang Seng Bank. Reflecting our strong organic capital generation, we are already back to our operating range of 14% to 14.5%. The dividend for the quarter is $0.10. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. This broad-based performance shows our strategy is working. I would just mention the $0.2 billion gain from a one-off property asset disposal in the Corporate Center, which is not a notable item. Moving now to banking NII. Banking NII increased $0.3 billion year-on-year to $11.3 billion. It fell by $0.5 billion quarter-on-quarter. $0.3 billion of this quarterly decline is day count. We also noted at the fourth quarter, $0.1 billion in gains that we did not expect to repeat. In addition, this quarter, HIBOR was lower in March, and we also recognized a $0.1 billion adverse one-off. We are now upgrading our full year banking NII guidance to around $46 billion. This reflects an improved interest rate outlook. I would highlight that interest rate curves have been volatile and can, of course, change further in either direction. Turning now to wholesale transaction banking. Recent economic, market and tariff situations have validated the strength of our franchise, both over the last 12 months and in this quarter. We grew fee and other income 2% year-on-year. Customers continue to turn to us to help them navigate volatility and uncertainty. Our balance sheet and franchise strength are particularly valuable in times like this. In the quarter, Securities Services grew fee and other income 11%, reflecting new mandates and higher transaction volumes. Trade grew 8%, driven by continued growth in volumes. Payments grew 3%, driven by growth in volumes across most regions. Foreign exchange fell by 1% compared to a strong first quarter last year. We continue to see growth in volumes and strong client engagement. Turning now to wealth. We grew fee and other income by 15% to $2.7 billion. I remind you that the first quarter of last year was a high base. Growth was driven by all 4 income lines, and we added 287,000 new-to-bank customers in Hong Kong. It is worth remembering there is typically favorable seasonality to the first quarter when compared with the fourth quarter. Having said that, we are pleased that the investments we are making in our wealth products, distribution channels and customer experience are translating into real results. Private Banking grew 8% and Asset Management, 3%. Investment distribution performed very well, up 21%, reflecting particularly strength in our customer franchise in Hong Kong. Insurance growth of 19% from a strong base was also pleasing, again, with Hong Kong, the standout. Our insurance CSM balance was $15.2 billion, up 19% versus the prior year. First quarter wealth balances were $1.6 trillion, up 12% or $170 billion year-on-year. Net new money in the first quarter was a strong $39 billion, of which $34 billion came from Asia. This is a broad-based and robust franchise. Our investments and focus are paying off. I will note that we saw a slowdown in flows in the early days of the conflict, but activity recovered in April across our wealth franchise in Asia. Turning now to credit. Our first quarter ECL charge was $1.3 billion, equivalent to an annualized charge of 52 basis points as a percentage of loans and advances. Given the ongoing uncertainty in the outlook, we are updating our full year 2026 credit guidance to around 45 basis points. This quarter includes a $0.3 billion charge related to the Middle East conflict. This is precautionary and related to the impact of the conflict everywhere, not just in the Middle East. We also include $0.4 billion for fraud-related secondary securitization exposure with a financial sponsor in the U.K. I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns. We have updated our risk appetite and are incorporating lessons in our due diligence processes. This remains an area in which we are comfortable, but it is not a significant growth driver in our plan. In Hong Kong commercial real estate, we had some small recoveries in the quarter. And overall, it remains broadly stable. You will see our usual detailed breakdown on Slide 21. On Slides 15 and 16, we have also set out our private market exposure. We have made these expansive definitions to give you a full picture of our full-service business in private markets. Let's now turn to costs. We continue to take a disciplined approach to cost management. We are on track to achieve our target of 1% cost growth in 2026 compared to 2025 on a target basis. Cost growth this quarter is 3% year-on-year. This included 1% driven by higher variable pay accrual based on business performance. If you exclude the variable pay accrual, target basis cost growth was around 2% year-on-year. We manage costs on a full year basis. So looking at a quarter in isolation is not meaningful. We remind you that our simplification actions provide a cumulative year-on-year benefit through 2026. For the avoidance of doubt, our 2025 target cost baseline is $34 billion when updated for FX. Now let's turn to customer deposits and loans. Our deposit momentum continues with $99 billion of deposit growth, including held-for-sale balances over the last 12 months. CIB deposits increased $10 billion quarter-on-quarter in what is usually a soft quarter. Hong Kong was a particular driver. This corporate inflow offset a slower retail flow in our Hong Kong pillar. You will see deposit seasonality on Slide 20. Excluding the movement of Malta to held for sale, IWPB deposit growth was $4 billion. You will see on Slides 18 and 19 that we have set out additional deposit disclosure. This shows you the deposit base split between fixed term and instant access accounts. The 70% instant access proportion should help you see the strength and breadth of our deposit base across our businesses. Turning to loans. Growth picked up in the quarter. CIB mainly reflects continued momentum in GTS, higher term lending in Hong Kong and drawdowns on committed lines by high-quality borrowers in the Middle East. We are pleased to be there for our customers when they need us most. Hong Kong returned to volume growth this quarter after a period of decline. We are pleased to see borrowing appetite return as the economy grows and as residential property prices recover. Our $13.7 billion investment in Hang Seng Bank is a signal of our confidence in the opportunity in Hong Kong. We are investing across both iconic banks, and we see significant growth runway for both ahead. In the U.K., we delivered another quarter of good growth. This was both mortgages and our commercial lending book. We see good momentum in our domestic portfolio. Low levels of household and corporate debt in the U.K. provide a platform for the continued growth of our franchise. Now turning to capital. Our CET1 capital ratio was 14%, down 90 basis points in the quarter. This follows the 110 basis point impact of the Hang Seng Bank privatization and Malta disposal loss. We also saw a 12 basis points impact from the fair value through other comprehensive income bond portfolio, as government yields rose following events in the Middle East. These were offset by ongoing strong organic capital generation. We are pleased to have remained within our CET1 operating range since the announcement of the Hang Seng Bank privatization. A decision on future share buybacks will be taken quarterly, subject to our normal buyback considerations. Let's turn to targets and guidance. First, targets. We reiterate the targets we set out to you at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. Finally, to guidance. Today, we are updating our banking NII to around $46 billion, given the higher rate outlook and our ECL charge to 45 basis points given macroeconomic and market uncertainty. In addition, to inform management planning, we have assessed a range of top-down stress scenarios. We have set these out for you on Slide 17. I'm happy to discuss these further in Q&A. All other guidance set out on this slide remains unchanged. To conclude, the intent with which we are executing our strategy is reflected in the growth and momentum in our first quarter. It shows discipline, performance and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from nonstrategic or low-returning businesses towards growth opportunities, while upgrading our operating model. This includes investing in artificial intelligence to empower our colleagues, simplify how we operate and enhance the customer experience by personalizing service at scale. Performance in our earnings. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items and delivery. Our first quarter results show we are creating a simple, more agile, growing HSBC built on the strong foundations of a robust balance sheet and hallmark financial strength. This is why during periods of greater uncertainties, our customers turn to us as a source of financial strength, and we remain confident in delivering against our targets. With that, I'm happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Guy Stebbings at BNP Paribas. Guy Stebbings: The first one was on wealth. Clearly, another very good performance, particularly on investment distribution, insurance. Can you talk about what you're seeing in terms of flows in the competitive landscape in Hong Kong right now? I'm sort of mindful it's been a very good story and the benchmark comparisons is getting tougher in terms of growth rates. But equally, there's sort of no evidence of let up in momentum and can see another really good performance for new business CSM, which is well above what you're actually booking through the P&L right now. And then the second question was on private markets. Thanks for Slide 15 and 16. Interested in any changes you're making in your approach to this segment. You've called out the $400 million hit in Q1, and you've not identified anything comparable in the book. One of your peers has signaled sort of partially stepping away from some exposures in this segment, as they've assessed sort of levels of financial controls. I know you said this wasn't a big growth driver of the plan, but are you changing how you're thinking about this segment in any way? Manveen Kaur: Thank you, Guy. If I take your questions in turn. On the first question on wealth, we are really pleased with the growing CSM balance and as well as on investment distribution. First quarter is always a very strong quarter for us, but I'm pleased to say that even after some slowdown in the month of March, we again see momentum coming through in April. We have a very vast range of products that we offer to our customers. So we've seen some shift in the products. So people moving from bonds and mutual funds into structured products and equities and all that obviously contributes very well to our fee income in wealth. We have an iconic brand in Hong Kong. And yes, competition is fierce. But as you can see, we are also growing new customers despite putting the fee in January, and these new customers over time also become customers from a wealth perspective, but more in the near term for the insurance business. So those are all very positive signs for us. From a private credit perspective, our overall exposure on private credit has stayed the same, as I called out at the year-end of $6 billion on the chart. And then this is both drawn and undrawn and the private credit and related exposure stays within 2% of our balance sheet. So that, again, from our perspective, is a comfortable position in terms of the concentration. Following the, what I would call, experience that we've seen in the fraud perspective, I've always said that in this ecosystem, no one is immune to second order sort of exposures, which is where we have had from financial sponsors. Clearly, as a learning, what we are working on is looking at very specifically some of the additional due diligence processes we may carry even where we are relying on the due diligence of financial sponsors. In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall. And as I've said, we will not have this and it has never been a significant driver of private credit. So same as before, continue to be even more diligent where we are relying on financial sponsors related secondary exposures and their due diligence. Operator: Our next question today comes from Amit Goel at Mediobanca. Amit Goel: So 2 other questions from me. So one was just on the cost growth. So it seemed like the cost growth was a bit higher this quarter, even ex the VP than the overall target for the year. So just in terms of why you think the costs will be a bit more contained or at least the cost growth will be a bit more contained and the drivers there? And then also the second question is just on the Middle East scenario. So I appreciate the extra slide. Just curious on those stress scenarios. So what would we need to see or what would we have to see -- to be seeing some of that scenario play through and to have further impact on your ECL guidance? Manveen Kaur: Thank you, Amit. So I'll take the cost question first. So as we have said, our simplification actions will be completed by the middle of the year. And those simplification actions will give us cumulatively more savings in the second half of the year. And if we factor those in and phase out in line with our forecast and financial resource planning, we are very comfortable that we will be within our cost guidance of around 1% growth on a target basis. It is a timing of when you have the gross increase, which we said last year would be 3% and then the timing of when the 2% savings come so that you come to the net 1% cost growth. Now from a Middle East scenario, firstly, to be clear that our ECL guidance and indeed, when we reaffirm our targets, we look at all plausible downside scenarios, and we are, by nature, quite conservative in how we approach these matters. We have, in the fullness of an integrated top-down stress scenario called out a bookend stress scenario, which requires all 5 things to happen. So just to give you some perspective, in this kind of a scenario, you would expect stock markets to be down 35%. So it's pretty severe. You would also expect oil price at 145 basis points and market disruption as well as significant GDP slowdown across markets globally. So that is the context of this scenario. But as I said earlier, in terms of the right weightage of probability from an ECL perspective, that has already been factored in the 45 basis points guidance. And this scenario gets driven by not just an ECL number, but also an impact on the revenue line, and it assumes that the wealth business, which has continued to do really well even through the month of April will have a significant impact in this kind of a scenario as well as deposits, which typically in a stress position always become an inflow for large deposits. But because of the extreme market disruption, very high inflation that the deposits will come down because customers will need to get money in order to survive through a very stressful economic scenario. Operator: The next question today comes from Aman Rakkar at Barclays. Aman Rakkar: I just wanted to ask one quick follow-up on the Middle East scenario. Is there any chance -- I think just back of the envelope, it's a kind of $2 billion to $3 billion hit to PBT in terms of the mid- to high single-digit percentage on '26. Is there any chance you could just kind of round out the disclosure on that in terms of what the breakdown in that scenario is between revenues and impairments? I'm assuming it's literally revenues and ECLs and if you could just quantify that for us, that would be really helpful. The second question was just on banking NII, please. So first of all, I think you're calling out $100 million negative impact in the quarter. Just kind of adding that back in, I guess, to the underlying run rate, it looks like your Q1 banking NII is annualizing a shade above the $46 billion that you are guiding for your full year. So I'm interested in the sequential drivers of net interest income, please, from here, as you see them presumably rates not that much of a headwind and you've got some balance sheet momentum. So trying to work out what the negative is from here to offset that, please? Manveen Kaur: Thank you, Aman, for your 2 questions. So taking the first one. Firstly, to say, yes, the impact absolutely is equal between sort of revenues and ECLs broadly in this scenario and your numbers were right. I also want to say this is what I would call an unmitigated impact. In other words, it's prior to management actions. We are very comfortable that even in stress scenarios, we have a range of management actions we would be taking. And therefore, we are very confident in reiterating our RoTE targets for '26, '27 and '28. Now on banking NII guidance, as always, as you would expect, we tend to be quite conservative. We consider in the guidance all possible downside scenarios as well, at least the plausible ones. So in terms of the mathematical calculation, as you've done ex the one-off and looking at the day count, et cetera, it, of course, takes you above the $46 billion. Our guidance is around $46 billion, not just $46 billion. So that's the first point to call out. And the things that we have considered in terms of a possible plausible headwind would be, of course, there's an uncertainty on the interest rates. Also, we have seen the experience. There were a few weeks of impact of a lower HIBOR in the month of March, but I'm very pleased to note that the HIBOR has again come to the range that we are most pleased with, which is around 2.5% and obviously, there is the continuing tailwind of our structural hedge reinvestment. We've given you disclosures on that. And the deposit flow overall continues to be very strong, but we are happy to say around $46 billion with our usual conservatism. Operator: Our next question today comes from Andrew Coombs at Citi. Andrew Coombs: A couple of follow-ups from me, please. Just firstly, coming back on the private credit exposures on Slide 16. I think the exposure on which you booked the charge today falls within the $3 billion securitization financing bucket that you list on that slide. Can you just give us an idea, please, of how much of the exposure that you've taken a charge on today accounts for of that $3 billion total, please? And then secondly, coming back to wealth, it's difficult to quibble on 15% year-on-year growth, but that revenue growth does look slightly weaker than your peers. So can you just give us an idea of where you think the differences are? Is it business mix, which means you have lower transaction income benefit year-on-year? Anything you can comment on relative performance? Manveen Kaur: Thank you. So just in terms of the exposure, we have substantially provided for that exposure. And that exposure, when you can see mathematically, is not an insignificant part of the $3 billion that you've called it quite rightly, it really comes from that particular bucket. Coming back to your point on our revenue. So in terms of the revenue, I'll just bring to attention that the CSM balances have been growing, but the way they actually hit the P&L, it is really over a period of time. And therefore, what you capture in the P&L is 1/10 and that then flows through over the following years. So that is how I would look at it in terms of the fee income growth. If you ex that or adjust for that, we are very much in line or indeed ahead of peers in certain pockets. Operator: The next question today comes from Katherine Lei at JPMorgan. Katherine Lei: Pam, I would like to ask about the fraud cases. Like can we have more color about the fraud cases such as like what is our total exposure? Because the key concern is that is this $0.4 billion one-off or we were going to see more like step-up in impairment charges because of this particular case? I think this is the number one question. Number two question is like I look at the risk weighting, right? It seems like a downside scenario, now we aside, 45% versus like before the war, like, say, 4Q '25 is roughly about 15%. Can we get more color of like, say, in this scenario, would that be -- let's put it this way, under what situations do you think we will continue to see continue rise in this 45% of downside scenario? Manveen Kaur: Thank you, Katherine. So firstly, this fraud is an idiosyncratic fraud. We have gone back and reviewed all our highest risk exposures across our portfolio and specifically looked at the private credit exposures as called out on the slide, and we see no comparable fraud risks in this matter. And of course, we continue to review our risk appetite, tightened due diligence and so on. So therefore, we feel quite comfortable that this is a one-off fraud indeed, and it comes to us through a secondary exposure that we have through a financial sponsor and where there was reliance on the financial sponsor due diligence. So that's the first case. And second one, in terms of the downside scenarios, the 45% downside scenario is built also from a 30% Middle East-related specific scenario that we created, which was a fifth scenario. So we do not expect that 45% downside scenario to shift much. And I can just give you as a comparison as we went through periods of COVID, Russia, Ukraine, that's sort of a leaning on the downside scenario. It's pretty much at the top end of the downside scenarios. And then once the situation gets more normalized, we bring the scenarios back to what our normalized scenarios that you have called out. I also want to stress to you that the IFRS 9 downside scenarios factor in, what we think at this point of time, the full extent of the forward-looking guidance, as we would obviously calculate based upon what we're seeing on the ground as well as assumptions as well as the probabilities given to all the scenarios. And this is quite distinct and different from the bookend Middle East conflict stress scenario on Slide 18, which has a much holistic view and a range of things happening, including, as I called out, from very severe stock market disruptions as well as oil price distinction. So I just want to make a clear distinction between what you account for, what you have in your outlook versus what you keep as part of a planning exercise in terms of the range of scenarios that you should always be aware of as a good management practice. Operator: Our next question today comes from Chris Hallam at Goldman Sachs. Chris Hallam: Two for me. So the first, again, on wealth. So $5 billion of that $39 billion of net new money was deposits. So it feels as though sort of 90% of the flows were invested, whereas if I think about the stock of your wealth balances, it's closer to 60%. So how should we think about that? Is that a structural trend you're seeing? Are clients becoming more invested? And if so, what does that mean for fee margins and for returns going forward? And maybe just within the $39 billion, without the conflict in Iran, would that number have been higher or lower? And then second, on capital, like you said, well managed through the guidance range throughout the HSB privatization process. Obviously, this quarter, a couple of one-offs within the quarter, but the underlying business performance appears to be encouraging. So given all of that, can you comment on when you expect to restart share buybacks? Manveen Kaur: Thank you, Chris. So firstly, in terms of invested assets, we are very pleased with the growth in invested assets. But I just want to remind you, typically, Q1 is strong for investments. So there is some seasonality of money moving from deposits into investment assets into -- in Q1. We've also been very strong in terms of the new mandates we've got from private banking. So overall, wealth is a very robust story to call out, and it's very broad-based, not just dependent on one lever. In terms of the conflict, there was a bit of risk-off wait and watch in the second half of March. However, as April has come through, we continue to see high volume of transactional activity. And as I said earlier, our customers, they continue to readjust their portfolios and our strength lies in the broad range of products we have on offer. And we have really invested in this business. So going forward, from a fee income perspective, I do believe there is a huge tailwind for us in terms of how we build on this year-on-year. So coming back to capital now. Firstly, I'm really pleased that even with this very large core investment we have done in Hong Kong, which is a critical market for us where we are hugely confident about the future growth prospects, we have still remained throughout the entire period within our CET1 operating range, and that truly reflects the very strong capital generation capabilities of our business across all 4 businesses. So that is indeed very encouraging. Now in terms of share buybacks, you're right that even with all the one-offs we've had in the first quarter, we are in a good position, and I expect Q2 to be equally highly capital generative for us. But of course, a share buyback decision is done on a quarterly basis. Starting point is always capital generation, which looks strong. We have to also look at loan growth, then we have to look at our 50% dividend payout ratio, which is an important target for us and the residual is always in terms of share buybacks and distributions, notwithstanding any inorganic opportunities for which we have an extremely high hurdle rate. So we will look at it again starting from Q2. Operator: The next question today comes from Kunpeng Ma at China Securities. Kunpeng Ma: I got 2 questions for you. And the first one is about Hang Seng. I'm glad to hear the momentum in deposit and wealth management in the first quarter and the pickup in the momentum from April. But how -- what proportion of such momentum could be attributed to the synergies out of the Hang Seng deal? And also some color on future synergies, future synergy effects of the Hang Seng deal would be much more helpful for us. Yes. The second question is on HSBC's global footprint. Yes, this is out of the proposed disposal of the Indonesian retail business. I think the Indonesian market is quite important. It's not the kind of some marginal or less important market. So I want to know the HSBC's views on your global franchise. I mean, which markets are important to you or which markets and which business are less important? Yes. Manveen Kaur: Thank you, Kunpeng. So firstly, we have made a very good start on the Hang Seng privatization, but the synergies at the moment have been very little, if any, because it's just the start of the process. We have already started investing in Hong Kong, both in the red brand and the green brand in terms of technology, in terms of simplifying customer journeys and training and skilling of our colleagues. So we do expect progressively the growth from the synergies to come through starting from the second half of this year, but mainly through 2027, '28. So that's a very strong tailwind, again, to support our targets as we progress. And so far, everything is very much on plan and with a lot of engagement with colleagues on the ground, which is, I think, really important, both in terms of maintaining the momentum, the sentiment as well as reinforcing our strong optimism in Hong Kong, as you've already seen in the results as well as in the stabilization of the Hong Kong commercial real estate market. Now coming to our global footprint from an Indonesia perspective, we think Indonesia is a critical market for us from a CIB perspective. It is an important network market and the economy is significant from an Asian perspective. However, our retail business of the size and the scale it was and the scope it had was not within the strategy of our wealth business. It was a valuable business, remains a valuable business, as you've seen from the financials for the transaction that has been announced. But from our perspective, from a wealth perspective, it did not meet the high hurdle rate criteria we had. We have other markets where we are investing in a far more focused manner. Operator: Our next question today will come from Alastair Warr at Autonomous. Alastair Warr: Just a couple of follow-ups on the credit costs and on the insurance that we touched on just a moment ago. If you've got 52 basis points booked in for the first quarter on credit costs, it looks like, therefore, to get to your 45 over the rest of the year, you'd be looking at a little bit above 40 for the remaining quarters of the year? You were at 40 for the full year before. So is that just implicitly building in maybe a little bit more drag from the Middle East? Or is there anything else going on anywhere else for us to be thinking about? And just a second point, you touched on the CSM there and how it can make a difference to how you're booking your speed of growth of income at the wealth line. HSBC has been really strong on some big ticket quite short payment period and products that some of your big name peers in Hong Kong are not necessarily so keen on. So can I just confirm, you talked about 10 there -- that your release rate in years is about 10 years and that this shorter payment period thing doesn't turn up in a shorter release rate as well. Manveen Kaur: Thank you, Alastair. So firstly, on the credit costs. You're right, this quarter's credit cost of 52 basis points has 2 significant numbers in it. One is obviously the idiosyncratic one-off fraud-related. If you take that off, we are pretty much in line with where we would be in Q1 of 2025. Our books overall ex these 2 items have performed really well. The second being obviously the Middle East reserve. So if you take the Middle East reserve build of $300 million and the fraud number, then the actual credit cost would be lower than what it was in Q1 2025 at around $600 million. What we are looking -- $600 million, sorry. As we look at going forward into the next few quarters, we are always a bit conservative, and we do have a little bit of scope built in, both in terms of what happens on Stage 3s of the fraud-related item, obviously, that's a one-off, but the ex-fraud-related Stage 3 buildup increases because of a prolonged conflict in the Middle East. Also Q1 has been very benign on Hong Kong commercial real estate. We are very pleased that we are seeing the beginning of a stabilization, but we are not calling it the end of the cycle. So therefore, we keep that sort of a buffer for the rest of the year. So in terms of the CSM balances very specifically, there is no change in the accounting policy. Obviously, it's based upon IFRS 17 principles, hence, the drip feed over the 9- to 10-year period that we will see. And the key thing there is as long as with the new customers that we are onboarding, with the growth in the CSM balance, the growth in the CSM balance exceeds the P&L flow from the CSM balance because the trajectory is very positive in the growth of that business in Hong Kong. It is an iconic brand for us. So therefore, the demand for the product from a distribution perspective remains extremely strong. Operator: Thank you, Pam. We will take our last question today from Joseph Dickerson at Jefferies. Joseph Dickerson: I just wanted to ask in terms of the numbers you've given the guidance upgrade on the banking NII, is that taking into account the -- effectively marking the market for the current yield curve in the U.K. I note some footnotes around you were using rates, as I think mid-April. Does that take account of the yield curve in the U.K.? And then presumably, there's some outer year tailwind into that. And given you've got some outer year revenue growth assumptions, I'd be keen to know how that -- how any maturities at higher rates might influence the outer year revenue growth rate. Manveen Kaur: Thank you, Joe. So from a banking NII perspective, yes, we looked at the yield curves as -- at the middle of April across the currencies. So that's correct. In terms of the revenue growth projections that we gave for the outer years, they were based upon the yield curves as when we set our targets. So if the yield curves continue to be higher or grow, then everything else being equal, that will be a tailwind for revenue in future years. The banking NII guidance, as you know, we always only give for the current year. Operator: Thank you very much. That ends today's Q&A. So I'll now hand back to you, Pam, for any closing remarks. Manveen Kaur: So thank you all for your questions. As you've seen from our results, we are very pleased with our return on tangible equity of 18.7%. We have never printed a number of this size for nearly 20 years now. And that gives us a very good start in terms of where our targets are and how firmly we stand behind them for the next 3 years. Of course, there are macro uncertainties in the current environment, and we have given disclosures, which are very fulsome, both on private credit as well on extreme downside stress scenarios, bookends. So hopefully, in that context, I have answered all your questions. And obviously, if you have any more detailed questions, please reach out to the IR team. Thank you very much again for your patience and interaction. Operator: Thank you, everyone, for joining today. You may now disconnect.
Operator: Good day, everyone, and welcome to today's AdaptHealth First Quarter 2026 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth. Before we begin, I would like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2026 and beyond. Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. AdaptHealth Corp. has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, organic growth and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster. Suzanne Foster: Good morning, everyone. Thank you for joining us today. The opening months of 2026 has set the stage for what will be a defining year for AdaptHealth. We made significant progress in three areas this past quarter. First, we successfully completed the transition of hundreds of thousands of active patients to our platform under our new capitated agreement. The second highlight of the quarter was the progress we are making on infrastructure investments as our AI-enabled initiatives and patient-facing digital platform reached meaningful milestones, and we are beginning to drive improvement in our operating metrics. And third, in April, we refinanced our credit facility with improved terms, further strengthening our balance sheet and providing financial and strategic flexibility. Starting with our new capitated agreement, we navigated through one of the most ambitious operational undertakings by completing the largest patient transition in the history of home medical equipment. No HME company had ever taken on a capitated contract of this scale from an incumbent. Over the past couple of months, we established 35 de novo locations and are now the exclusive HME provider for more than 10 million new members. We had planned to work through this transition over the first a result of completing this transition on a more aggressive time line and delivering strong performance across our legacy business, we delivered revenue significantly ahead of our guidance with solid organic growth across all four segments. Regarding the contract, covered membership count, revenue per member, utilization and product costs are all meeting our expectations. However, we maintained heavier-than-planed labor costs to ensure a responsible transition. In the first quarter, that amounted to $12 million of elevated labor expense, of which $8 million was variable labor to accelerate the transition, and that should normalize by the end of the second quarter. The $4 million of elevated wages and benefits that will decline as we rightsize and operating -- rightsize to the operating model and to meet the service requirements. Given that this is a 5-year contract with a potentially longer horizon, the extra implementation spend was the right decision for the relationship and the patients. As for Q1 financial results, first quarter revenue of $819.8 million grew 5.4% versus the prior year quarter and exceeded the midpoint of our guidance range by approximately $22 million. On an organic basis, adjusting for the impact of acquisitions and dispositions, we delivered 9.1% year-over-year growth. Of that, about 500 basis points came from the new capitated contract. The other 400 basis points came from the base business with each of our four segments delivering positive organic growth in the quarter. Sleep Health net revenue of $358.5 million grew 13.3% versus the prior year and PAP new starts set another new record. We anticipate that as accumulating evidence highlights the significance of sleep in overall health, there will be corresponding increase in demand for therapies aimed at improving sleep quality. Currently, up to 80% of individuals with obstructive sleep apnea are undiagnosed. However, patient awareness is rising, driven by expanded access to home sleep studies, the development of wearable devices for early detection of obstructive sleep apnea and the integration of dual therapies. As more patients experience the advantages of sleep therapy, our commitment remains on focusing -- remains focused on delivering high-quality care and supporting treatment adherence to fully capture the health benefits. Despite a very mild flu season, Respiratory Health net revenue of $178.1 million grew 7.6% versus the prior year and oxygen new starts grew 12.8%. Diabetes Health net revenue of $142.2 million grew 2.4% versus the prior year. Our investments in talent, process improvement and technology over the past year have taken hold. We had particularly strong results from resupply, further demonstrating that our centralized resupply team is performing well and providing quality and timely care to these patients. Wellness at Home net revenue of $141 million declined 10.3% on a reported basis, reflecting $35.8 million of disposed revenue from noncore assets exited during 2025. Over the past 2 years, we have carefully pruned our portfolio to product categories that support growth in our Sleep and Respiratory Health segments. After adjusting for these dispositions, Wellness at Home delivered 11% organic growth. In Q1, capitated net revenue made up 9.2% of the total consolidated net revenue. Capitated membership increased 7x year-over-year to about $15 million. Adjusted EBITDA of $121.2 million fell short of guidance, driven by the previously mentioned labor and benefit costs. While labor costs will keep decreasing post transition, we started a cost containment initiative to stay on track. As a result, we are comfortable raising our full year net revenue projections and maintaining our full year 2026 guidance for adjusted EBITDA and free cash flow. Stepping back from the quarter, I want to spend a few minutes on the playbook we are following because the industry dynamics at work right now are among the most favorable we have seen for a company of our scale. The business we have built over the past several years is well aligned to these dynamics, which leaves us well positioned to grow in the coming years. Interest in capitated arrangements among payers is increasing as a way to align incentives and lower health care costs, a trend we anticipate will persist. Securing and implementing these agreements is complex, demanding nationwide coverage, strong clinical practices, robust technology and operational expertise. We possess these strengths, which the market acknowledges. Our discussions regarding new capitated deals remain active and promising, and we are optimistic about announcing additional partnerships soon. The regulatory environment is evolving in ways that benefit scaled compliant operators. The government is actively working to root out fraud and abuse in home medical equipment, and we think that effort is long overdue and unambiguously what is needed for patients, for the Medicare program and for the broader health care ecosystem. The many legitimate hard-working home medical equipment companies that serve millions of patients managing chronic conditions at home deserve to operate in an industry with a reputation be fitting this critical mission. So we applaud the government's efforts, and we see an opportunity and frankly, a responsibility to be a constructive partner as it pursues these aims. The direction of travel here is clear. Greater scrutiny and clearer standards will, over time, separate operators who have made those investments in the systems, process and clinical infrastructure that proper compliance requires. We have made these investments, and we are committed to helping lead the industry toward that standard. Our balance sheet following the refinancing of our credit facility gives us the flexibility to pursue tuck-in acquisitions from a position of strength where it makes sense in attractive geographies for assets that expand our access to patients focused on our core Sleep and Respiratory Health segments. These must be at returns that soundly meet or exceed our thresholds. The last two years reflect that discipline. We have deployed capital selectively, and we have terminated as many deal processes in due diligence as we have closed. Technology is creating a real separation. We have invested in our patient-facing and operational platforms, and those investments are improving the patient experience and time to therapy. Our conversational AI platform has moved beyond pilot and in Q1 is handling live calls across sleep scheduling, our contact center and resupply use cases. Scheduling that was entirely manual a year ago is now 25% touchless. Order conversion times have shortened materially, a meaningful improvement in the experience for referring providers and patients alike. Our patient portal, MyApp crossed 412,000 users in Q1. These capabilities matter more as volume scales. In summary, our focus for the rest of 2026 is to manage patient growth and control costs. We aim for sustainable, profitable organic growth while maintaining excellent service for over 4.5 million patients. With that, let me turn it over to Jason to review the financials. Jason Clemens: Thank you, Suzanne, and thanks to everyone for joining our call today. I'll cover our first quarter 2026 financial results, followed by our balance sheet, capital allocation and outlook. For Q1 2026, net revenue of $819.8 million increased 5.4% versus the prior year quarter. Organic growth was 9.1% for that same period with broad-based growth across all four segments. Capitated revenue of $74.9 million outperformed our expectations as we met go-live dates for our new agreement faster than we originally anticipated. Covered membership count, revenue per member, utilization and product costs were all in line with our expectations. First quarter adjusted EBITDA was $121.2 million, representing an adjusted EBITDA margin of 14.8% and coming in about $7 million lower than guidance. Although it required additional labor to start the capitated contract sooner, the elevated labor cost is already declining, and we expect to return to baseline in the next few months. First quarter cash flow from operations of $93.7 million was essentially flat versus the prior year quarter. First quarter free cash flow of negative $27.5 million was in line with our expectations and driven by capital expenditures of $121.2 million, reflecting patient equipment start-up purchases to stock inventory in support of the new capitated contract. As we move into steady-state operations with the capitated arrangement, we expect CapEx to normalize and free cash flow to improve in the back half of the year. Turning to the balance sheet. We ended the quarter with unrestricted cash of approximately $48 million. Net debt stood at approximately $1.84 billion, and our consolidated net leverage ratio was 3.0x from 2.75x in the fourth quarter of 2025. The increase reflects the $100 million we drew on our revolving credit facility to acquire certain assets from a provider of home medical equipment to support our new capitated arrangement for a total consideration of $84.7 million. We intend to pay down the balance on our revolver in the coming quarters and remain committed to achieving our target of 2.5x net leverage. In April, we completed a $1.1 billion refinancing of our senior secured credit facility, consisting of a $325 million Term Loan A, a $325 million delayed draw term loan and a $450 million revolving credit facility, all maturing in April 2031. The new facility extends our term loan maturity, lowers our weighted average cost of debt and provides incremental operating flexibility with expanded capacity on the revolving credit facility. It also provides committed capital through the delayed draw facility that we intend to use to redeem our 2028 notes following the call premium expiration in August 2026. The favorable pricing reflects the recent credit upgrades we received from both S&P and Moody's as well as our commitment to further delevering. Our capital allocation priorities remain unchanged, investing to accelerate organic growth, reducing leverage and pursuing disciplined tuck-in acquisitions. Subsequent to the end of the quarter, we completed the disposition of our remaining custom rehab assets, a small but consistent step in concentrating our portfolio around Sleep, Respiratory and the related product categories that support growth in our core. Turning to guidance. We are raising our full year net revenue projection by $10 million to $3.45 billion to $3.52 billion. This reflects the first quarter revenue outperformance, offset by the revenue of the custom rehab disposition. Given the steps we are taking to moderate labor costs related to the capitated arrangement, we are maintaining our full year guidance for adjusted EBITDA of $680 million to $730 million and free cash flow of $175 million to $225 million. For the second quarter of 2026, we expect net revenue of $840 million to $860 million and an adjusted EBITDA margin of approximately 19%. We expect free cash flow to be modest as we incur elevated CapEx to support the new contract. With that, I'd like to pass the call back to Suzanne for closing remarks. Suzanne Foster: Thank you. This really has been a monumental quarter for us. Our team went to extraordinary lengths to complete the largest patient transition in the history of this industry and over an incredibly short period of time. So I want to close by saying thank you to all the adapters that worked nights, weekends, overtime, whatever they needed to do to stand up our new capitated partnership. And a special thank you to all the adapters who ensured that our base business continued to perform. This was truly a team effort. The progress we made this quarter is just another proof point that this team has what it takes to achieve our aspiration of becoming the most trusted and reliable partner in home health care, the one patients depend on and physicians choose first. That brings me to the end of our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Pito Chickering with Deutsche Bank. Pito Chickering: On the organic revenue side, are you realizing all the revenues from the capitated arrangements, the 9.1%? Or should we assume acceleration in 2Q from those levels? And also, any color on what organic revenue growth would be, excluding the capitated arrangements? Just trying to figure out sort of what core growth is after all the capitated arrangements are fully realized. Jason Clemens: Sure, Peter. This is Jason. So on the organic split, a little over 4% growth in the core business ex capitation, ex the new contract. And to your question on Q2, we do expect acceleration specifically of capitated revenue. That is where we are providing the raise of net revenue for the full year. So we do expect that we're -- we'll be assuming an entire quarter of capitated revenue growth from this new contract in the second quarter that we will accelerate organic growth. Pito Chickering: Okay. And then you talked about the $8 million of variable labor from the acceleration and the $4 million of rightsizing. There's just a lot more sort of moving parts, and it's been a little challenging in 4Q and 1Q to sort of model EBITDA. So can you give us some color on how EBITDA should ramp 2Q and then ramp into 3Q and 4Q just because of all these moving parts around these costs? Jason Clemens: Sure. Thanks, Pito. So in our Q2 guidance, we are projecting $840 million to $860 million of revenue at an adjusted EBITDA margin of approximately 19%. So that translates to a little over $160 million of EBITDA for the second quarter. The reason for the big ramp is really twofold. Firstly, we will have an entire quarter of revenue from the new capitated arrangement, very different from Q1, where we had portions of that revenue as the staggered start dates rolled out. And so that revenue is going to come in at a very high margin as the fixed costs are already in the P&L as we enter Q2. The second component is really around putting controls around the labor spend. Certainly, as we were exiting March, we had a surge in variable pay. So incentive pay bonuses, contract labor and as such to support the transition. That came with a lot of call volume as patients were moving from the incumbent provider over to Adapt and a lot of questions about how to continue to access their care and how to work with AdaptHealth going forward. So as that volume settles down as we're moving into Q2, we do expect to get some of this cost out that we referenced in Q1, and we expect to get all of it out at the time of Q3. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I just want to make sure I understand. So you said you missed Q1 EBITDA by roughly $7 million, but you also said that labor expenses are moderating. Is there anything else improving in the underlying EBITDA outlook ex contract onboarding? Meaning whether it's mix, you cited some AI initiatives. Just trying to understand if those are helping the underlying trends as we see the ramp over the course of the year or if it's just simply the onboarding stuff? Jason Clemens: Well, it's certainly the onboarding, Kevin. Secondly, as we get in Q2, we typically see a little over 1 point of improved collections and therefore, lower reserves on our revenue. So that number alone is about $10 million, and that all drops to the bottom line as a pure collections and rate on the revenue side of things. The AI that we referenced this morning, Suzanne may expand on a little more. It's important to see that we're moving out of pilot phase and first starting go-lives as we were exiting the first quarter. So that's going to take some time to scale over the course of the year and into '27. But maybe Suzanne wants to add some color on one specific. Suzanne Foster: The technology that we're deploying has been -- the goal has been to improve the patient experience and time to therapy. Now obviously, referencing things like going scheduling 25% touchless does come with some benefit. We have been reinvesting that back into the business where we have gaps. And so I've been out there saying that any financial benefit from implementation of technology will be back half of the year, but really more of a 2027 story because we've needed to make some investments in the rest of the business as we rightsize places that we're underinvested in. Kevin Caliendo: That's helpful. Can I ask a quick follow-up? Have you seen any changes to sleep apnea coverage amongst payers? Is that -- did anything hit in 1Q that was different? Suzanne Foster: No, that's all consistent. Sleep apnea has enjoyed a stable quarter. Nothing on the horizon that we see in terms of changes at this point. Operator: We will take our next question from Ben Hendrix with RBC Capital Markets. Michael Murray: This is Michael Murray on for Ben. With the capitated contracts expected to reach 20% EBITDA margin at full ramp and the base business continuing to improve, what's the right way to think about Adapt's steady-state EBITDA margin over the next 2 to 3 years? Is there a path to low 20% on a sustained basis? Jason Clemens: Yes, sure. This is Jason. I guess I'd start with our expectations for 2026. At the midpoint of our guidance, we're showing just a touch over 20% for our adjusted EBITDA margin. And as we get into 2027, a couple of key items to note. Firstly, in the first quarter, of course, we'll have a full quarter of capitated revenue versus the first quarter of 2026. And the lab -- the variable labor that we discussed and some of the fixed costs that we saw in the first quarter, we expect at that point that we'll have pulled that back out of the P&L, thus increasing margin profile as we get into '27 and beyond. Suzanne Foster: And I think just adding on to that, how we think about it is assuming a fairly stable fee-for-service reimbursement landscape, coupled with increased capitated revenue over the next couple of years, driving additional census and the underlying operational improvements, including the technology I referenced, those things over the next 12 months really into 2027 will allow us to hold that EBITDA slightly improvement as we move forward. Michael Murray: That's helpful. And then do you have any update on the pipeline or timing of potential new capitated arrangements? Are you seeing any acceleration in inbound interest? Suzanne Foster: Yes, sure. Well, like I said, we're very positive about the movement of our pipeline. It's moving through. And you should expect that we'll be coming out with an announcement soon on that. Operator: We will move next with Brian Tanquilut with Jefferies. Brian Tanquilut: Maybe I'll ask first on the de novo. I think you mentioned that expansion with the de novos is well ahead of guidance. So just curious what you can share with us in terms of what operational milestones kind of like allowed this acceleration during the quarter? Jason Clemens: Yes, you're talking top line, right, Brian? Brian Tanquilut: Yes, yes. Jason Clemens: Yes. So this capitated arrangement came in multiple stages or phases as we stand here today, all phases are complete, but they were staggered. And so they were back half weighted to the first quarter. That's really why we're seeing the raise of revenue, particularly in the second quarter as we'll experience the entire quarter with that full revenue flowing. So at this point, the contract is fully operational across all 8 states. And as Suzanne said, 35 new locations in support of that business. And so we're very pleased to report the successful delivery, and we're looking forward to moving forward. Suzanne Foster: And the milestones that we focused on, remember, this is a three-way transition. And so all three parties had to be ready. And given that the other two parties were ready, we had to step up and make sure that we accelerated our go-live. And so getting those new -- getting all the new employees in place A lot of the labor that was in one region or allocated to one phase of go-live, we had to repeat very quickly. So we couldn't -- they were not done onboarding in the first phase, and we couldn't use them for the second phase. So we had duplication in onboarding based on the region. That's why we say we're confident that will be coming out because there's not only is there a lot of labor, but there's duplication. Brian Tanquilut: Okay. That makes sense. And then maybe, Jason, just thinking of free cash flow here. I think you said in the prepared remarks, it's in line with expectations, but also you mentioned some of the asset purchases slipped into Q1. So just curious how we should be thinking about the makeup of free cash flow for the quarter and how we should be thinking about the cadence of it for the rest of the year? Jason Clemens: Sure, Brian. So for the first quarter, we came right in line. We had guided negative $20 million to negative $40 million. And so at negative $27.5 million, we were pleased with the cash flow performance despite the additional cost on the P&L. I'd say as we get into Q2, we are signaling a step-up in CapEx for the second quarter versus where we were 90 days ago. Again, that's to support the capitated arrangement and just ensuring that we've got all inventory locations stocked and fully ready for all new patient volumes that are coming in. So that's going to steer the second quarter down from what we were originally thinking. We still think we'll be positive for the second quarter, but it will likely be modest. As we get through that normalization of CapEx, we're very confident that the third and fourth quarter will both be very strong in the neighborhood of $100 million in each. Operator: We will move next with Richard Close with Canaccord Genuity. Richard Close: Congratulations. Just maybe hitting on potential new capitated business going forward. Obviously, a large portion of this most recent agreement was relatively new territory for you. So as you think about potential announcements of new business this year, next year, how are you thinking about the level of investment that that's going to require for any potential new wins? Jason Clemens: Richard, on the investment side, we do see elevated CapEx, particularly as we're starting up the arrangement. Now the reason for that is if that business is taken or won from an incumbent provider, of course, there's patients that are still on service. So there's a CapEx requirement typically to start up the arrangement. And then there's an ongoing CapEx commitment that is priced right in line with our standard CapEx, so call it, 11% to 12% of revenue is what to expect for ongoing operations for those businesses, but it does require some start-up CapEx to get into the new market. Suzanne Foster: And let me address the part about how and where we're looking at this. So this, the one we referred to today, our new agreement was primarily in a geography new to us. which we knew we had to make investment to set up the fixed cost, the locations, et cetera. And obviously, long term, right now, those new locations are only servicing our new strategic partner. And over time, as we stabilize, it will give us a footprint to expand upon, of course. With the pipeline that we have in place and now with this new footprint, there's very little area where we don't already have existing locations with teams that know how to do this business. For example, when we took on the first phase of this new capitated agreement, it was on the East Coast where we have a dense grouping of locations. And really without a blip, we were able to onboard that effectively. And so as we consider new capitated agreements, we're looking at where do we have locations or can we buy locations to pick up operations. And we expect that it will be a much different and obviously a much smoother than opening up 35 de novo locations to service hundreds of thousands of patients on day 1. Richard Close: Okay. That's helpful. And then just on diabetes, obviously, progress there. Can you talk how you're thinking about diabetes business as we progress through the rest of the year? Any updates would be helpful. Suzanne Foster: Sure. So we're super happy with the team, positive growth. As I mentioned, I can't applaud them enough for digging in. All of the improvement has been on execution. We're not seeing anything different in the marketplace. There's -- it's pretty much the same in terms of pharmacy and med benefit, referral patterns, all of that. So the improvement that the team has made over the last year has been the internal focus on us doing the best job possible. I have said that diabetes is -- in the past, I said, first, we got to fix it, which to check the mark. And two, we're always looking at do the -- what in our portfolio is strategically fitting for AdaptHealth, and we'll continue to review diabetes for a strategic fit as we do all our portfolio. Operator: And this concludes our Q&A session as well as our conference call. We appreciate your time and participation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Oil States' First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Ellen Pennington, VP of HR. Ellen, please go ahead. Ellen Pennington: Thank you, Melissa. Good morning, and welcome to Oil States' First Quarter 2026 Earnings Conference Call. Our call today will be led by our President and CEO, Lloyd Hajdik; and Matt Autenrieth, Oil States' Executive Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. No one should assume that these forward-looking statements remain valid later in the quarter or beyond. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our 2025 Form 10-K and Form 10-K/A, along with other recent SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 2 hours after the completion of this call and will continue to be available for 12 months. I will now turn the call over to Lloyd. Lloyd Hajdik: Thanks, Ellen. Good morning, and thank you for joining our conference call today, where we'll discuss our first quarter 2026 results and provide our thoughts on market trends in addition to discussing our company-specific strategy and outlook for 2026. During the first quarter, the global energy backdrop shifted meaningfully due to escalating geopolitical tensions in the Middle East, leading to severe restrictions imposed on maritime vessels transiting through the Strait of Hormuz. These events introduced near-term volatility in commodity markets, leading to elevated supply and logistics challenges and increased costs overall. Longer term, these geopolitical events reinforce the strategic importance of energy security, supply diversification, and long-term offshore and international development. We saw commodity prices strengthen throughout the quarter, with crude oil prices increasing significantly late in the period, reflecting diminishing inventories and a growing supply risk premium. Our global customer base facing market uncertainty delayed existing projects and awards of new projects. During this volatile period, operators maintained capital discipline, prioritizing free cash flow generation and returns to shareholders over incremental activity. Given the recent drawdown in global inventories, the global oil and gas sector is poised for growth. During the quarter, we generated revenues of $145 million and adjusted EBITDA of $17 million. The sequential decline was attributable to seasonal factors, timing of revenue recognition for our percentage of completion projects, certain Middle East-related delays, and continued softness in U.S. land markets. The current conflict in the Middle East, along with ongoing market uncertainty, contributed to contract award delays, reduced revenues, and increased costs. These disruptions have not changed our strategy or offshore and international growth thesis. The macro drivers actually serve to further strengthen our primary markets as the need increases for energy security, demand for offshore and deepwater developments, LNG, military, and highly engineered technologies. We believe operators stand poised to increase production in other lower-risk global offshore basins. We strive to implement a consistent strategy. Approximately 72% of our first quarter revenues and 74% of our revenues generated over the last 12 months were derived from offshore and international projects. This is an increase from 66% in the first quarter of 2025 and up substantially from a few years ago. This strategic shift in business mix positions the company for sustained and durable higher-margin work. We remain focused on cost control, monetization of exited facilities and equipment, and supporting our customers' critical energy infrastructure programs, which play an increasingly important role in creating a more stable and affordable future energy supply. Our Offshore Manufactured Products segment continued to lead the performance of our company, with revenues of $91 million and adjusted segment EBITDA of $19 million, with adjusted segment EBITDA margins of approximately 20%. Backlog remains near a decade-high level, at $430 million, supported by bookings of $84 million, yielding a quarterly book-to-bill ratio of 0.9x. Based on our order visibility, we reiterate our view that our full year book-to-bill ratio should be 1x or greater. In our Completion and Production Services segment, our continued focus on high-grading technologies and service lines has again resulted in improved adjusted segment EBITDA margins year-over-year. In our Downhole Technologies segment, we remain focused on market introductions of our upgraded technology domestically, along with international expansion of our full product suite. We are also focused on improving profitability given impacts of higher raw materials and shipping costs. Despite the geopolitical headwinds encountered in certain international markets, revenues remained relatively flat sequentially. The duration of the Middle East conflict may influence the timing of future international expansion for the segment's products. Reinforcing our technology leadership position, we are pleased to receive 2 2026 Spotlight on New Technology Awards from the SPE Offshore Technology Conference for our GeoLok geothermal wellhead and our managed pressure drilling, or MPD, Drill Ahead Tool. The GeoLok geothermal wellhead leverages field-proven oil and gas technology to solve the inherent challenges encountered in conventional high-temperature geothermal applications. The MPD Drill Ahead Tool complements the operational efficiency of our existing MPD system, saving drilling contractors additional time and money. Both technologies reinforce the strength of our engineering capabilities for developing critical applications to enable our customers to solve complex challenges. With our extensive portfolio of differentiated technologies and a globally diversified footprint across major offshore and international basins, we believe we are well positioned to support our customers' evolving needs. Matt will now review our operating results, along with our financial position in more detail. Matthew Autenrieth: Thank you, Lloyd, and good morning, everyone. During the first quarter, as Lloyd mentioned, we generated revenues of $145 million and adjusted EBITDA of $17 million. We reported net income of $1 million, or $0.02 per share, which included facility exit charges, an impairment on assets held for sale, and valuation allowances established on deferred tax assets. The noncash impairment on additional assets moved to assets held for sale, together with related exit costs, were recorded in our corporate call center. Excluding these charges, our adjusted net income totaled $5 million, or $0.09 per share. Turning to segment performance. Our Offshore Manufactured Products segment generated revenues of $91 million and adjusted segment EBITDA of $19 million in the first quarter, resulting in an adjusted segment EBITDA margin of 20%. Our backlog totaled $430 million as of March 31, a small decrease from year-end, but an increase of $73 million, or 20%, from March 31, 2025. We achieved a 0.9x book-to-bill ratio in the quarter. Our backlog continues to reflect a diversified mix of offshore and international energy, as well as military programs. We believe current global events may encourage sustained energy infrastructure and military spending. Backlog strength and execution continue to support earnings visibility into the balance of 2026 and beyond. Our Completion and Production Services segment delivered $21 million in revenues and adjusted segment EBITDA of $6 million in the first quarter, resulting in an adjusted segment EBITDA margin of 29%. In our Downhole Technologies segment, we generated revenues of $32 million with adjusted segment EBITDA of $1 million. Planned growth initiatives have been delayed due to the Middle East conflict, yet we are seeing signs of increased customer adoption of our upgraded and expanded product portfolio. Our first quarter cash flow performance was indicative of normal increases in working capital that we experienced early in the year, which included the investment of $13 million in working capital associated primarily with inventory purchases to support future backlog execution. Investments in net CapEx totaled $3 million in the quarter. Free cash flow is expected to improve over the balance of 2026 as working capital normalizes through backlog conversion and assets held for sale are monetized. In January, we entered into an amended and restated 4-year cash flow-based credit agreement, which provides for borrowings of up to $75 million under a revolving credit facility and $50 million available under a multi-draw term loan facility, which replaced our asset-based lending credit agreement. We ended the quarter with $59 million of cash on hand. As of March 31, 2026, the company had no borrowings outstanding under the cash flow credit agreement and $13 million of outstanding letters of credit, leaving $112 million available to be drawn. We retired the remaining $53 million principal amount of our convertible senior notes on April 1 with a combination of $25 million of cash on hand, borrowings of $25 million under the revolving credit facility, and the issuance of 529,000 shares of our common stock. We expect our strong balance sheet, ample liquidity, and strong free cash flows to provide us with enhanced strategic flexibility to continue to invest in organic growth, R&D, and to opportunistically repurchase additional common stock. Now, Lloyd will offer some market outlook and concluding comments. Lloyd Hajdik: Thanks, Matt. As we look ahead, the broader energy landscape continues to evolve in ways that we believe are increasingly aligned with Oil States' strategic positioning. Global markets are being shaped by a combination of supply risk, energy security priorities, and the need for long-cycle, reliable sources of hydrocarbon production. While near-term activity levels, particularly in U.S. land, are still expected to be restrained, we are seeing growing evidence that customers are considering expansions to existing plans. Together, these factors should drive an increased focus on offshore and international developments, subsea infrastructure, military products, and other high-specification engineered solutions, all areas where Oil States has built deep expertise and a strong competitive position. Our strategy remains consistent. We're focused on partnering closely with our customers to understand their evolving needs and to deliver engineered products, services, and technologies that solve complex challenges and enable access to reliable sources of energy. We believe differentiation comes from the combination of our technical capabilities, our operational experience, the longevity of our products in the market, and our ability to collaborate with customers to develop practical, high-performance solutions. Across our portfolio, we are continuing to invest in technologies and capabilities that enhance performance, improve efficiency, and support the safe and reliable delivery of energy in increasingly complex environments. As we continue to consistently implement this strategy, we will remain disciplined in how we operate the business, maintaining a focus on margin performance, cash flow generation, and prudent capital allocation. Our second quarter guidance calls for revenues in the range of $157 million to $162 million and EBITDA of $18 million to $20 million. Given limited visibility as to the duration and magnitude of the current conflict in the Middle East, we do not have sufficient insight into the demand environment to adjust our full year guidance. We believe that an expedient resolution to the conflict could still support our guidance. However, a longer drawn-out conflict puts that at risk. We see meaningful opportunities to further expand our presence in offshore and international markets, deepen our customer partnerships, and continue to evolve our portfolio toward higher-value, technology-driven solutions. In summary, Oil States today is a more focused, more resilient, and more cash-generative company with a clear strategy, a strong balance sheet, and increasing exposure to the long-cycle markets that are expected to drive the next phase of industry growth. That concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] The first question comes from the line of Jawad Bhuiyan with Stifel. Jawad Bhuiyan: I'm on for Stephen Gengaro. I guess to start off, can you talk a little bit about what you're seeing in the offshore markets in terms of order flow? And I guess more particularly when you look at the growth in offshore activity, are there any markets where you have greater exposure to than others? Or is that, I guess, pretty level on a global scale? Lloyd Hajdik: Yes. No, great question, and good morning. The markets that we participate in are global in scope and scale. So we have, within our Offshore Manufactured Products segment, manufacturing really across the globe. The markets that we're seeing an uptick in activity, no surprise, the Latin American markets, Guyana, Brazil, Suriname, et cetera. But we are starting to see more activity starting to pick up in markets such as West Africa, Southeast Asia, even some activity in the North Sea, as well as some level of activity in the Gulf of America. Jawad Bhuiyan: And maybe just a little bit more on the Iran war and, I guess, the broader Middle East conflicts. I guess, do you guys think that, that will lead to a material rise in U.S. land activity? Or do you think E&P operators and their capital discipline is too strong? And maybe some commentary on pricing within the U.S. land. Do you think that pricing would probably increase or rise in the near term? Just any commentary on that would be really helpful. Lloyd Hajdik: Yes, I do. In my earlier comments, I certainly believe that we're going to see some increased activity in U.S. land. Some of the anecdotes we're starting to see is that the private operators are increasing activity. They'll start -- they'll lead it and then the public E&Ps come behind that. For us, U.S. land has been lesser levels of activity or revenue base. Again, about 75% of our revenues are now generated from markets outside U.S. land, international, and offshore. So U.S. land uplift is really incremental upside for us because our strategy is primarily anchored in the offshore and international markets. But we do believe U.S. land is poised for increase and for pricing. The services that we still provide in the U.S. are in our Completion and Production Services business, our frac work and also our extended reach technology through our Tempress business. Within Downhole Technologies, we do supply frac plugs and perforating into that market as well, and we are expecting to see -- and are seeing -- increased levels of activity. Operator: The next question comes from the line of John Daniel with Daniel Energy Partners. John Daniel: Just one this morning. Let's assume the business clicks in the second half and the growth cycle really shapes up for next year, can you speak to what you all might need to do to be ready for such an upwards pivot? That is speak to what the labor issues, constraints, [indiscernible] facilities, supply chain, just it all looks really good. What's the playbook? Lloyd Hajdik: Yes. Thanks, John. Good morning. So from a -- I'll say, from a manufacturing roofline perspective, we have plenty of manufacturing capacity today. Just as a frame of reference, we opened a new facility in the Heartlands in the U.K. about 10 years ago. So it's a special purpose-built facility that has plenty of engineering and manufacturing capability. We just completed our new manufacturing facility in Asia, in Batam, Indonesia, after exiting Singapore. In terms of the labor side, it's adding shifts where we need to, but we have plenty of capacity in terms of roofline and likely the ability to increase the throughput and absorption with the existing labor base. Operator: [Operator Instructions] The next question comes from the line of Connor Jensen with Raymond James. Connor Jensen: I was just wondering what the confidence level is for revenue conversion for the recent backlog and if you think that will hit in the second half of 2026, specifically in Offshore Manufactured Products with the increased macro uncertainty. Lloyd Hajdik: Yes. Thanks, Connor. Good morning. Historically, the conversion to revenue in the backlog within the Offshore Manufactured Product segment has generally been about 70%. Now we did book these military products orders that we talked about on our fourth quarter call, both in the third quarter and in the fourth quarter. And those are longer durations, so timing can extend over a longer period with those -- that particular contracts about 5 years. So again, historically, we've converted about 60% to 70%. I think with these longer-duration military products contracts, that gets elongated somewhat. So I would say it's probably 50% to 60% backlogs converts over the forward 12 months. I have no concerns about the overall conversion and the quality of backlog. Again, we've historically had virtually no cancellations. And I think more importantly is we reiterate our view on the backlog book-to-bill ratio for 2026 at 1x or greater. And I will point out over the last 5 years, going back to even to 2021 and each year thereafter, that we have achieved a 1x book-to-bill or better on higher and increasing levels of revenue. So we're very confident in our backlog conversion. Connor Jensen: I was going to ask about the military, but you already answered it. So it's all for me. Operator: There are no further questions at this time. We have reached the end of the Q&A session. I will now turn the call back to Lloyd for closing remarks. Lloyd Hajdik: Thanks, Melissa, and thank you all for your time today and for the thoughtful questions. We do remain focused on consistently implementing our strategy, partnering with our customers to address technical challenges in complex energy environments, strengthening our portfolio, and maintaining a disciplined approach to capital allocation. Before we conclude, I want to recognize Cindy Taylor regarding her illustrious career with Oil States these past 25 years, the last 19 of which as our CEO. Cindy's leadership, integrity, and steady hand have had a profound impact on Oil States, positioning our company for long-term success, but her influence extends well beyond our organization. Through her thoughtful leadership and deep industry engagement, Cindy has been a highly respected voice across the energy industry, and we are grateful for the lasting contributions she's made to our company and to the industry as a whole. Thanks again, everyone, for joining us today, and have a great week. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the Vitesse Energy First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to the Director of Investor Relations and Business Development at Vitesse, Ben Messier. Thank you. You may begin. Ben Messier: Good morning, everyone, and thanks for joining. Today, we will be discussing our first quarter 2026 results. Our 10-Q and earnings release were released yesterday after market close and an updated investor presentation can be found on the Vitesse website. I'm joined this morning by our CEO and President, Jamie Benard; our CFO, Jimmy Henderson; and Brian Cree, our former President, who is with us in a senior adviser capacity. Before we begin, please be reminded that this call may contain estimates, projections and other forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. Please review our earnings release and risk factors discussed in our filings with the SEC for additional information. In addition, today's discussion may reference non-GAAP financial measures. For a reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-Q and earnings release. Now I will turn the call over to Vitesse's CEO and President, Jamie Benard. Jamie Benard: Thank you, Ben. Good morning, everyone, and thank you for joining today's call. It's a privilege to begin my tenure as CEO and President of Vitesse as of last Friday. I want to thank the group for their hard work getting us to where we are today, and I look forward to building on the strong foundation already in place. I want to thank Brian Cree, in particular, for his commitment to ensuring a seamless handoff and for his continued partnership as a senior adviser through this transition. Vitesse's primary objective of returning capital to stockholders has not changed. Our Board reaffirmed that commitment last week in declaring our second quarter cash dividend at an annualized rate of $1.75 per share. Our fundamental strategy remains consistent, disciplined capital allocation towards high rate of return opportunities. This includes organic development of our long-duration asset base, purchases of near-term development opportunities and accretive acquisitions, we will continue to maintain a conservative balance sheet and hedge at prices that support our dividend. The Powder River Basin acquisition that closed in early April is a good example of that strategy in action. It is accretive in all key financial metrics and funded with equity to preserve balance sheet flexibility. You should expect more of the same discipline going forward. I'll now turn the call over to Brian Cree to provide more detail on our results and operations. Brian Cree: Good morning, everyone, and thanks, Jamie. I've been fortunate to serve as President of Vitesse over the past 13 years. We've accomplished a great deal together. I'm most proud of the strength of our team and the culture we've built. Jamie, you're in good hands, and I look forward to working alongside you through this transition. Production for the first quarter averaged 15,962 barrels of oil equivalent per day, up 7% year-over-year and above our internal expectations. Oil production contributed 89% of total oil and natural gas revenue in the quarter. These results do not yet include any contribution from the Powder River Basin acquisition, which closed in early April. This acquisition is anticipated to add an average of 1,400 net barrels of oil equivalent per day over the remainder of 2026 and was closed without issue for 1.9 million shares of Vitesse common stock. Our underlying asset continues to be developed at a consistent and robust pace. As of March 31, 2026, we had 19.9 net wells in our development pipeline, including 6.2 net wells that were either drilling or completing and another 13.7 net locations that have been permitted for development. As we previously discussed, 3 and 4-mile development continues to increase across the Williston Basin. For Vitesse, 72% of our year-to-date AFEs have been for these extended laterals and drilling activity continues to progress further into areas where we hold concentrated acreage positions. As of last week, 67% of the 28 rigs drilling in the Williston were on Vitesse acreage. With the continued hostilities in the Middle East, we have opportunistically layered on additional oil hedges through the end of 2028 at levels supportive to our dividend. For the remainder of 2026, we have approximately 73% of our oil production hedged through swaps and collars with a weighted average floor of $64.68 and ceiling of $67.20 per barrel. We have approximately 50% of our 2026 natural gas production hedged through collars with a weighted average floor of $3.73 and ceiling of $4.91 per MMBtu. Both percentages of hedged oil and natural gas volumes are based on the midpoint of our annual guidance. Thank you for your time. Now I'll hand the call over to our CFO, Jimmy Henderson. James Henderson: Good morning, everyone. Before I get into the first quarter performance, I want to welcome Jamie to the team. I'm excited about the company's future and look forward to working together. With that, I want to highlight a few items from our financial results for the first quarter of 2026. Please refer to our earnings release and 10-Q, which were filed last night for any further details. As Brian mentioned, production for the quarter was right at 16,000 BOE per day with a 63% oil cut. For the quarter, adjusted EBITDA was $33.4 million and we had an adjusted net loss of $300,000. GAAP net loss was $42.3 million, driven by a $48.2 million unrealized hedge loss. As a reminder, this loss is due to forward prices as of March 31 and is a noncash item. These hedges allow us to lock in the underlying returns as our asset is developed where properties are acquired, which in turn support our dividend and our balance sheet. Free cash flow for the quarter was $12 million after $18.7 million of development capital expenditures net of divestitures with the Powder River Basin acquisition contributing for the remainder of 2026 and our hedge book now extending through 2028, we remain very well positioned to support our $1.75 annualized dividend. As for the balance sheet, we ended the quarter with total debt of $144.5 million, putting net debt to our trailing 12-month adjusted EBITDA at just 0.82x. In April, we amended our revolving credit facility, expanding availability by $25 million. The elected commitment amount and borrowing base now sit at $275 million with total liquidity before internal cash flows of roughly $130 million. Our previously issued guidance has not changed and incorporates the Powder River Basin acquisition as previously mentioned. We are optimistic that the development pace could increase in the current environment but at this time, our operators continue to be diligent as we've seen through the industry as a whole. In closing, I want to recognize the team's execution this quarter. Leadership transitions are important moments for any organization, but what ensures continuity is the strength of the people across the business. We are entering this next chapter from a position of strength, fully aligned on strategy and ready to execute. With that, let me now pass the call back to the operator for questions. Operator: [Operator Instructions] The first question comes from the line of Jeff Grampp with Northland Capital Markets. Jeffrey Grampp: Jamie, curious for you with this being your first earnings call and welcome and congrats. If you could just lay out at a high level, kind of what's your vision for Vitesse over the coming years? And maybe what attracted you to the company and what you perhaps see as the main opportunities you're planning on spending time on as you kind of get up to speed and hit the grab on here with the company? Jamie Benard: Sure. Thanks for the question. Well, what drew me to Vitesse is truly, it's alignment, alignment between my experience, my philosophy and the company strategy. I've spent most of my career across both operated and non-operated models and most recently with a very heavy focus in the Williston Basin. So I understand where value is created and where it's lost. That shaped a very disciplined approach to capital allocation. And Vitesse already embodies that discipline, strong returns, conservative balance sheet, clear commitment to returning capital to stockholders. That's a model I believe in. So this isn't about coming in to change direction. It's about leaning into a strategy that works and helping scale it very thoughtfully. Jeffrey Grampp: Great. I appreciate that. And for my follow-up, this is the market share, if you will, your percentage of rigs in the Bakken seems to be maintained at a super high clip. I think you guys had typically talked about being in kind of that 30% to 50% range. And I think this is the second quarter above 60%. Is this just kind of -- it will ebb and flow? Do you guys see this as maybe something more fundamental changing in terms of operators focusing more on Vitesse acreage? Just wondering if there's anything to read there. Brian Cree: Yes, Jeff, this is Brian. I'll try to handle that one. Look, as we've talked about in the past, a lot of the development that's going on in the Williston right now is really focusing on the 3-mile and 4-mile development and where those development areas seem to be trending toward is just areas of the field where Vitesse has a larger acreage position. So I think that's what we're seeing. Obviously, it can always ebb and flow, it always will. This is a very high level for us at this point in time, but it is consistent with kind of what we've been seeing, which is that 3- and 4-mile development being in areas where Vitesse has a lot of acreage. Operator: Next question comes from the line of Chris Baker with Evercore ISI. Christopher Baker: So I just want to start off maybe on a similar note, just in terms of the significant exposure you all have to rigs in the Bakken. Could you maybe just talk about what you guys have seen over the past quarter or two in terms of AFEs? And then you kind of touched on this earlier in terms of -- with higher prices at some point, likely to see an acceleration in activity. Just kind of curious as you guys think about service costs or the potential for service cost inflation in the back half of the year, sort of how you think that could maybe come together? And what sort of a reasonable outlook in terms of activity and what that could mean for service costs? Brian Cree: Chris, this is Brian. I'll start with that. As I mentioned over the last few quarters, a lot of our development activity has been focused on the extended laterals. And what we have seen over that last probably 6-month period is that the operators are becoming much better, just as they have all along at bringing drilling costs down. So the 3- and 4-mile CapEx that we are seeing has continued to decline, especially in the last 3 months period of time. The operators are just getting really good and efficient at drilling 3 and 4-mile laterals. Now what that means for cost on a go-forward basis. Obviously, with oil prices where they are, it's something we're going to continue to watch and it's going to really be a combination of what those operators do from a rig count standpoint. We have not really seen a lot of increased activity at this point in time. Our operators seem to be very disciplined about their approach to adding rigs. Clearly, in the field right now, there is a higher level of activity on workover rigs, maybe some increased frac crews. So it does appear that our operators are looking to try to bring back production as quickly as they can, wells that may have been off-line. They're trying to get them back online. But that being said, we have not seen an increase in the amount of rigs drilling. We've heard some comments that maybe there's a couple of more rigs to be added in the next quarter. but we just haven't seen that big increase. And so certainly, there's going to be some costs that go up as a result of just what's been going on, fuel costs, whatnot. But in terms of where the larger costs of drilling and completion will occur is if the activity levels go up substantially. Christopher Baker: That's great. And a follow-up, obviously, the dividend is pretty central for you all. I think the team obviously has evolved. But you did a good job last quarter of, I guess, resetting the outlook and really kind of reflecting, I think, what was a much different macro outlook at the start of the year. Since then, we've seen prices come up quite a bit. Again, to think that we're talking about incremental activity is certainly a big shift in the outlook. Just curious, as you guys think about the hedge program, opportunities for further sort of accretive M&A like the PRB deal and the dividend, just to kind of maybe wrap it all into, I think, some interrelated and interrelated topic. Does the change in the macro outlook influence how you think about hedging going forward? Obviously, it provides a good amount of downside protection, but much different outlook in terms of -- at least from our perspective, the opportunity to see a higher for longer type environment starts to establish itself. James Henderson: Chris, this is Jimmy. I'll take a stab at that. There's a handful of questions embedded in that, that are all very germane to our strategy and what we think about on a daily basis. I think starting off with a core tenet of ours is the dividend. And we believe it's set at a level now that we're very comfortable with. We don't want to be super reactive to short-term volatility and near-term commodity prices. So we want to be very careful about setting that level, and we've always maintained that as a fixed dividend that we don't want to be moving up and down. So we'll continue to have that discussion quarter-by-quarter with our Board. Obviously, with our hedging position and our activity level coming into this year, we're -- it's set at a level that's supported by where we're at on both of those things. But we'll continue to evaluate it as we go through the year and into next year. Definitely -- it all really comes back to sort of how you laid out capital allocation. We want to continue to invest in the company and do accretive transactions that create value for our shareholders for the long term. So we want to be able to have enough dry powder to invest in acquisitions, continue to fund drilling on our acreage. It's a very high return proposition. So we want to continue to do that. So really, it's the same as it's always been. The strategy of capital allocation is what we're all about, and we want to be able to do all those things in a measured way. Christopher Baker: Great. So it sounds like, if I'm hearing correctly, sort of no change to how you're thinking about hedging from here? James Henderson: We've been very opportunistic about putting hedges on as you can see in our press release last night. We've just very methodically added hedges every since conflict in Iran started. Tried to maintain enough dry powder to keep adding to our position in a way that's supportive of our dividend and gives us the ability to add more as we go. It's very opportunistic, but very methodical at the same time. Operator: Next question comes from the line of Poe Fratt with Alliance Global Partners. Charles Fratt: Jamie, I'm not that familiar with your background, but could you highlight sort of any notable experience that you have on the acquisition front? And then also highlight where you have experienced outside of the Bakken as far as maybe that there might be some future direction in that way? And then if you could just sort of highlight -- you talked pretty broadly about adding value, but can you be a little more specific on which prong of the strategy you think you can make the most impact on near term? Jamie Benard: Sure. Happy to address it. So on the M&A front, going back over the past years, I'd say it's north of $3 billion between the Permian Basin, the Marcellus, the Eagle Ford, both from the operated and the non-operated positions. It's where I've been focused. And then of late, the last two years, I've been leading an operated organization in -- primarily in the Williston Basin as well as the Permian Basin. So as far as avenues to create value to be more specific, like we said, this isn't a change in direction. This is methodically adding value consistent with the existing strategy and with the experience in the Williston Basin and other basins as well, we're going to continue to look at all opportunities and start to hone in on what fits us best, and it's more about quality as opposed to quantity as far as opportunities come. Charles Fratt: And then reading between the lines, so if AFEs continued at the same pace and you don't see a pickup, operators or other operators are sort of taking more of a wait-and-see attitude. How well positioned is the organization right now to move into the operated arena? How many locations do you have ready if you were to make that pivot? Jamie Benard: Sure. We're in the middle of a comprehensive planning process for the reasons you just mentioned with permitting and it's four locations right now that we're contemplating. That said, we're not going to mobilize anything until we've done a very constant -- the size of our inventory. We're going to measure twice and cut once. But as always, it comes down to capital discipline and how those opportunities compete against other activity throughout the portfolio. So it's nice to have that feather in our cap but it's still going to be competing against other activity. Brian Cree: Yes. Poe, this is Brian. Let me just add to that is, obviously, one of the great things about the Lucero acquisition is it gave us that operated asset. It gave us that flexibility to allocate capital to either our operated properties or our non-operated properties. And our guidance for this year, the $50 million to $80 million of CapEx did not assume any operated development. So with oil prices in the 60s at the time that we set that budget and that guidance, it didn't really make sense to us to spend our capital on those operator development opportunities, and we wanted to hold those in our inventory. Obviously, now with the change in prices, it's something that, as Jamie said, we are planning for, we are looking at, we are preparing to be able to take advantage of the higher prices. But again, we're going to remain disciplined. We're going to look at everything that goes on over the next few months and analyze what other opportunities come before us. It's great to have that asset available for us to develop at the right time. The right time can be when we don't have as much CapEx coming in other areas or it can be when the rates of return are really high. And clearly, the rates of return on these properties are very strong, but we'll continue to evaluate what other operators bring our way in what we see in AFEs and then make that decision as the year goes. Charles Fratt: Great. It sounds like, Brian, though, it's more of the '27 of that from an impact to the production profile? Brian Cree: Yes. I think, Poe, if we drill these wells, it would likely be sometime in the fall. So by the time you drill and complete those, you get those online, it's much more impactful to 2027 than it would be to 2026. Charles Fratt: Great. That's helpful. And then if you could just address looking outside the basin. Obviously, the Powder River acquisition is an example of that. But if you could look at more broadly, where else are you looking? I heard that Jamie mentioned the Marcellus and my sense is you wouldn't go into the Marcellus, but maybe correct me if I'm wrong there. Brian Cree: No, I think you have a pretty good understanding of that. We have looked at a lot more gas assets over the last year, 1.5 years than we had previously. But clearly, for us, there's a great pipeline of acquisition opportunities. What I think is most prevalent for us at this point in time is that several of the opportunities we're looking at are right in our core asset area. And that's a little different. We've always looked at all kinds of different basins, whether it be oil or gas. But right now, we're seeing a lot of good opportunities both in the Williston and the DJ, where we have the majority of our production and assets. And a couple in the powder also where we just completed one. So it's kind of cool that we have the opportunity to look at things that are right in our backyard, but we will continue to look at other basins. And I think Jamie's experience coming in, in those other basins is something that we'll continue to try to leverage on. Operator: Next question comes from the line of Noel Parks with Tuohy Brothers. Noel Parks: I was just wondering if -- you mentioned a moment ago that there was -- you're seeing a higher level of activity in workover rigs. And is there anything available that you consider where the -- I'm thinking in the Williston, for example, where the main value would really consist mostly of refracs. I'm just wondering if you -- if anybody has put things on the market like that? And if so, how you might approach valuing something like that? Brian Cree: Well, clearly, refracs is something that we have always been high on and believe will be a needle mover in the Williston Basin over time. It's interesting when prices are lower, like they were in the 60s, you don't have as many companies completing wells. And right now, a lot of the refrac opportunities have been kind of in connection with additional development to where you go into a DSU that's got one or two wells that were drilled back in 2014 and '15. And now there's four, five, six additional wells being drilled, a lot of times. What we've seen is the operators are refracing those wells. I think that will continue. We have not seen an uptick in refracs at this point in time like we have seen in the workover category. I think I heard the NDIC say the other day that they've seen about a 20% increase in workover rigs going on. I just think that, that is the quickest way to get production online to take advantage of the current prices. And I think look, the industry is just trying to figure out what's going to happen in Iran and where those prices are going to be in 3 to 6 months. And again, the workover activity is the quickest way, along with just getting fracs done on any wells that have been drilled that were kind of DUCs. And so that's where we've seen the enhanced activity level so far. Noel Parks: Great. And I apologize if you've touched on this already. But I wonder if you could -- for the transactions you see or reviewed or pursued, I was wondering if you can kind of maybe characterize what the types of sellers are that you see coming to the market? Sometimes, of course, higher prices does get a few people out of the other channels. And I guess I'm just wondering sort of maybe what sort of the pace and quality of deals is that you're reviewing these days? Ben Messier: Noel, it's Ben. It's always a mix. I would say right now about 80% of the transactions we're evaluating are private equity-backed portfolio companies that frankly, are trying to monetize it in the elevated price environment, which is why making acquisitions goes hand-in-hand with hedging to ensure that we can lock in whatever returns we underwrite. There are one or two larger public companies right now that are bringing assets to market that are in our wheelhouse. So I think that impacts kind of the cash stock mix to, I'd say, some PE-backed sellers are generally more open to taking shares, whereas a big public company probably wants cash. So we evaluate all of these things when making acquisitions. I mean the goal remains the same regardless of the seller. It's got to be accretive. It needs to keep our balance sheet conservative and it needs to be an attractive asset. Noel Parks: Great. And just a follow-up on that. I mean can you kind of give an idea of roughly what vintage of PE companies you're seeing selling kind of like roughly when they were started or raised their funds? Ben Messier: A lot of the assets we're evaluating right now. We also evaluated last year in different forms. So I think they're PE-backed assets that are reaching the end of their fund life for the most part and are happy to see the higher prices to try to reach their internal hurdle rates that they need. Operator: Next question comes from the line of Jeff Grampp with Northland Capital Markets. Jeffrey Grampp: Just had one follow-up. I'm seeing some commentary regarding some pretty interesting pricing dynamics going on in a lot of basins, Bakken, specifically. Just kind of curious what you guys are seeing with respect to oil dips and it's perhaps hard to forecast much beyond maybe a quarter or two. But just wondering how that might influence realizations for Q2 and in the near term. James Henderson: Jeff this is Jimmy. I'll take a shot at that. Yes, we're definitely seeing some cash prices that are better than what -- better than WTI, frankly. Pretty evident when you look at the index that's pegged on the Dakota Access Pipelines, the [ DAPL dip ] has been positive here in the spring months of the year and early summer. So we do expect to see much improvement in our differentials that we realize for physical oil cells for at least the next few months. And obviously, that's a result of sort of changing in flows of light sweet oil around the world is -- a lot of Canadian oils being called to the West and being exported. That's reduced the flows down to the Midwest of the U.S. And so there's been a big call on oil coming out of the Bakken to meet the needs of refineries in the Midwest and even on down to the goal. So yes, at least for the short, medium term here, we are pretty optimistic about what differentials will be experiencing. And the great thing about that is that's unhedged. So it's incremental to the realized pricing that we're getting after hedging effects. So it looks like it could set up for a pretty interesting second and third quarter here. Operator: Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Jamie Benard for closing comments. Jamie Benard: Thank you all for your time today. As mentioned, Vitesse's priorities remain returning capital to stockholders, discipline, capital allocation, pursuing accretive growth opportunities and maintaining a conservative balance sheet. So should you have any additional questions, please feel free to contact Ben Messier directly. And we look forward to speaking with you at one of our investor events or on next quarter's earnings call. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the ONE Gas First Quarter Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Dailey. Please go ahead, Ms. Dailey. Erin Dailey: Thank you, Regina. Good morning, everyone, and thank you for joining us on our First Quarter 2026 Earnings Conference Call. This call is being webcast live, and a replay will be made available later today. After our prepared remarks, we are happy to take your questions. A reminder that statements made during this call that might include ONE Gas expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities and Exchange Act of 1934, each as amended. Actual results could differ materially from those projected in any forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. This call will include financial results and guidance with respect to adjusted net income and adjusted net income per share, which are non-GAAP financial measures as defined by the SEC. A reconciliation of the company's GAAP net income and GAAP earnings per share to adjusted net income and adjusted net income per share, along with additional disclosures required by Regulation G are available in the earnings release we issued yesterday. Joining us this morning are Sid McAnnally, Chief Executive Officer; Chris Sighinolfi, Senior Vice President and Chief Financial Officer; and Curtis Dinan, President and Chief Operating Officer. And now I'll turn the call over to Sid. Robert McAnnally: Thanks, Erin, and good morning, everyone. We're glad to be with you to discuss our first quarter results and to affirm our guidance. We delivered strong results in the first quarter with adjusted EPS growing 6% year-over-year despite one of the warmest winters in the history of our service territory, 25% warmer than the first quarter last year. Our performance reflects disciplined execution of our long-term plan, advancing our regulatory strategy, driving operational efficiencies and supporting growing customer needs. We continue to meet our growth targets while maintaining a strong focus on customer affordability, which was particularly important during a volatile winter. While conditions were historically warm across Kansas, Oklahoma and Texas, we did experience Winter Storm Fern in January, a brief isolated cold event that temporarily drove higher gas prices across our service territory. Our 20% increase in storage capacity since Winter Storm Uri allowed us to shield customers from price volatility and save $98 million relative to purchasing gas at spot prices. Ultimately, this performance reflects the same focus that guides our business every day: safe, reliable and affordable service to our customers and long-term value creation for our investors. Safety remains a priority for our company. Our strong performance in 2025, especially in the areas of workplace safety and safe driving continues to place ONE Gas among the safest natural gas utilities in the nation. The Safety Achievement Award is given each year by the American Gas Association to companies who experienced the fewest number of serious injuries when compared to peers. Last month, AGA named ONE Gas as the winner of this award for 2025, the ninth consecutive year ONE Gas has received the Safety Achievement Award. We are grateful for the commitment and dedication of our entire workforce to operating safely as we serve our customers and support our coworkers. Now I'll ask Chris to discuss the details of our financial performance and regulatory activities. Chris? Christopher Sighinolfi: Thanks, Sid, and good morning, everyone. As Sid noted, we delivered strong first quarter financial performance, demonstrating the resilience of our business model during a historically warm winter. This was largely due to new rates taking effect and the impact of Texas House Bill 4384. We are affirming our financial guidance which includes adjusted net income of $306 million to $314 million and adjusted earnings per diluted share of $4.83 to $4.95. Adjusted net income for the first quarter was $133.4 million or $2.11 per diluted share compared with $120.1 million or $1.99 in the same period last year. First quarter revenues reflect an increase of approximately $27 million from new rates. Depreciation and amortization expense was down 6% year-over-year and interest expense was down 9%. Texas and Oklahoma experienced their warmest winters since 1895 when regional temperature tracking began. Kansas had its second warmest winter in that period and its warmest of the past 34 years. While we have effective weather normalization mechanisms that tempered the earnings impact, we were not completely insulated. Along with earnings impact, cash flows were affected as we monetized less gas in storage than we would have under normal conditions. Higher spring storage balances mean we will inject less this refill season. We expect the storage-related cash flow impact to normalize as we move through the remainder of the year. First quarter O&M expenses increased approximately 8.6% year-over-year compared with 1.9% year-over-year growth in the prior year period. The increase was primarily driven by employee-related costs. We also experienced elevated line locating activity. In particular, more fiber installations, led to an increase in line-locating tickets. Quarterly O&M naturally fluctuates due to the timing and the nature of our operations, and we continue to expect compound annual O&M expense growth of 3% to 4% over our 5-year plan. Other income net decreased by $2.6 million compared with the same period last year, in part due to decreases in the market value of investments associated with our nonqualified deferred compensation plan. Excluding amounts related to KGSS-I, interest expense was $3 million lower year-over-year in the first quarter, due in part to the impact of Texas House Bill 4384 and 2025 Federal Reserve rate cuts, a reminder that our 2026 guidance did not assume any rate reductions. Turning to liquidity. During the first quarter, we executed forward sale agreements under our at-the-market equity program for approximately 237,000 shares of common stock. We also have roughly 269,000 shares remaining to be issued under a forward sale agreement executed in May of last year. Had all shares under forward sale agreement been fully settled as of March 31, net proceeds would have totaled approximately $41.5 million. We will continue to be opportunistic about issuing equity as we meet our remaining needs. Our balance sheet remains strong. Our adjusted CFO-to-debt ratio was 19.1% for 2025 and supporting our A- credit rating and stable outlook from S&P and our A3 rating and stable outlook from Moody's. Our financial plan supports similar performance going forward. Yesterday, the ONE Gas' Board of Directors declared a dividend of $0.68 per share, unchanged from the previous quarter. I'll now turn to our regulatory activities. Oklahoma Natural Gas filed its annual performance-based rate change application in February, seeking a $28.7 million adjustment with rates expected to go into effect in late June. In March, Texas Gas Service made its gas reliability infrastructure program filing for all Texas customers seeking a $36.9 million revenue increase that is expected to take effect in July. Kansas Gas Service has not yet made a 2026 Gas System Reliability Surcharge filing. The GSRS was amended by statute effective July 1, 2026. The amendment expands the qualifying infrastructure investments eligible for recovery to include all state-specific utility plant investments. It also increases the maximum monthly residential surcharge to $1.35 from $0.80. Filings can be done once per calendar year, and we expect to make ours in the third quarter. As a reminder, we do not have any full rate cases planned until we file the Oklahoma rate case in 2027 as required by tariff. And now Curtis, I'll turn things over to you. Curtis Dinan: Thank you, Chris, and good morning, everyone. I'll start with an update on growth and capital deployment. We completed $170 million worth of capital projects this quarter, relatively in line with the same period last year. We are on schedule with final system design and acquiring right of way for the Western Farmers project that was announced late last year. This project, which includes the construction of a 43-mile 24-inch pipeline in Southern Oklahoma is on track to be in service in 2028. Our teams have also completed construction of the 1.6-mile 12-inch pipeline serving the advanced manufacturing facility near El Paso. Commissioning of the pipeline and final installation of the meter set are on schedule to be in service early in the third quarter, meeting our customers' needs. This project required multiple complex crossings including 5 irrigation canals and was executed in close coordination with local authorities and other stakeholders to ensure safe, timely and successful completion. We continue to see steady residential customer growth, even with slower new housing starts due to macroeconomic conditions. Through April, we've installed over 6,300 new meters with Oklahoma City and El Paso showing the strongest growth year-to-date. Across the board, our major metropolitan areas are adding customers at a healthy rate. We are advancing opportunities to serve additional large-load customers across our footprint. Our active discussions include a range of prospects such as large manufacturing facilities, data centers and grid connected utility generation. We have 6 projects in late-stage discussion that in aggregate could support approximately 3 gigawatts of generation and up to 1 Bcf per day of demand across Kansas, Oklahoma and Texas. We recently signed a transportation agreement for one of these projects to supply 20 million cubic feet of natural gas per day to an Oklahoma data center. This is another example of how we're leveraging our existing system to support economic growth that benefits all of our customers. We will update our growth forecast as final agreements are executed. Turning to O&M. Our coworkers continue to drive improvements in workforce efficiency and safety. First quarter line locating activity increased approximately 8.5% year-over-year while damages declined 2%. This highlights the operational benefits of bringing certain work in-house. Building on that progress, we plan to begin in-sourcing the Watch and Protect function in Oklahoma this year. We will be deploying our personnel at excavation sites near transmission and critical high-pressure distribution pipelines to support safe digging practices. This initiative further enhances public safety and system integrity while supporting more proactive management of O&M expenses. We are also using AI technology to drive efficiency. One process improvement initiative has already generated more than 12,000 hours of annualized labor savings. By automating certain tasks, AI allows employees to focus on higher value work while improving consistency, accuracy and reliability. These efficiencies are not onetime gains. They are embedded in our daily operations and supported by a stable and growing technology platform. Our investment in automation reflects a deliberate data-driven approach to cost management and operational excellence while maintaining the safety, affordability and service quality our customers expect. Operator, we're now ready for questions. Operator: [Operator Instructions] Our first question will come from the line of Richard Sunderland with Truist Securities. Richard Sunderland: I realize there are a lot of moving pieces with 2026, but I wanted to start there. You called out the weather, line locates and the Kansas GSRS filing timing. I guess, a shift around that last one in consideration of the new legislation. How do just kind of aggregate in terms of line of sight to 2026? Is -- I guess is the weather putting you in a hole that you have to overcome? I'm just curious about the moving pieces here and how you see them stacking up? Christopher Sighinolfi: Rich, it's Chris. Yes, you're right. I noted in my prepared remarks that weather normalization mechanisms while effective, didn't fully mitigate the impact of the warmth that we experienced in the first quarter. There are both structural things that will be recognized later in the year that derive from that weather, and there are discretionary decisions that we'll make around managing that. So if you look at the structural, for example, in Kansas, we have capacity release of some of the pipeline capacity that we maintain in part due to how warm it was. We didn't need it in the moment, and we don't need it in terms of storage refill. We can sell that capacity. We share that capacity release with customers. You'd have to look back a decade or more to find a weather dynamic that rivals this and where you'd see that similar type of structural delayed benefit, but that's part of what is present in the back half of the year. And then also, if you recall, Rich, last year, we accelerated some O&M projects into 2025 that had originally been planned in 2026. That affords us some flexibility and optionality as we think about managing 2026. We had contemplated a sleeve of projects that we could pull forward from '27 into '26. We formerly assumed we would do them. They're not time sensitive. There's not a safety-related or integrity component to them. So we can defer those projects and create some added capacity in that way. Robert McAnnally: Rich, this is Sid. You also mentioned Curtis' reference to the Watch and Protect program. You'll recall that we've had great success in-sourcing line locating and seen an improvement not only in performance, but significant savings. We are running that same play with Watch and Protect. And so it may feel counterintuitive to speak to the plan that we have to address the impact of weather. But I think it's important to continue those programs that we know are accretive, both in the short term and the long term. They're investments that have a meaningful return. And so we'll continue to make those, but we wanted to be very clear and open with the support for our guidance because we have confidence in the plan and our ability to execute that over the course of the year. Richard Sunderland: That's all very clear. And then turning to the large-load commentary, it sounds like a lot of exciting activity there. The 6 projects referenced in late-stage discussion, are those all incremental to your current capital plan? And then any kind of order of magnitude on the capital opportunity across those 6 projects? Curtis Dinan: Yes, Rich, this is Curtis. When we talk about late stage, that means we're literally talking about final contract terms and final needs of our customers, final design, final understandings of where they will be sourcing the gas supply from because these are transport customers. They're not gas sales customers. So in terms of the scale of those projects, I gave a sense of the magnitude overall. The one that we have announced that gives you a little bit of context, that's the largest one that we've ever announced. That's the Western Farmers project that we talked about at the end of last year. So other projects are more like the one that I mentioned in my prepared remarks that we've just signed that contract. It's not a large capital investment, but it's a meaningful contribution to our operations where we make that investment, it is very immediate-accretive because it's not a large project to put into service. So that one would be, maybe on the smaller scale of some of them that we're talking about. There was another part of Rich's question? Christopher Sighinolfi: Capital plan. Curtis Dinan: The capital plan. So the way we think about that, Rich, or the way we give the guidance is in our 5-year plan in the earlier parts -- the earlier years of the 5-year plan, those projects and those growth dollars are pretty specifically identified in what they're going to. Projects in the latter part of the year are -- there's several different options of those that will ultimately get commercialized. And so we think of those as filling in the bucket ultimately. Is there the opportunity that those buckets may overrun with additional projects? Yes, that's a possibility. We'll just have to continue to see when customers decide to move forward with the projects and what the timing of that might be versus what we've assumed. And as that happens, we'll continue to update what that growth profile looks like. Operator: [Operator Instructions] And our next question will come from the line of Paul Zimbardo with Jefferies. Paul Zimbardo: And just a follow-up on the prior question. Could you quantify what that weather plus kind of the storage excess capacity, just in terms of like an EPS impact from all those kind of abnormal weather items in the quarter? And also, if you had the number, the benefit from that House Bill 4384 in the quarter as well? Christopher Sighinolfi: Paul, I don't. I'd have to follow up with you. I mean we broke out specifically for the Texas House Bill, the non-GAAP, the equity return component. But in terms of how much it impacted interest expense and depreciation, I don't have that offhand. But if you're looking for sort of a total, "Hey, how much did this impact you?" I think that's something we could probably work to provide. In terms of the weather impacts, we have weather norm that doesn't fully reflect in the quarter. What happens? There's somewhat of a delay there. In terms of the capacity release benefits that are coming, it's in the couple of million dollar territory. Paul Zimbardo: Okay. Okay. Great. That's helpful. And then also just to follow up on the large-load side. So like that 20 Mcf project, it sounds like there could be some of those. And I think you said it's decently accretive. I don't want to put words in your mouth, but just is there a way to kind of frame what that benefit could be either to shareholders and/or customers from executing on some of those capital-light opportunities? Curtis Dinan: Paul, this is Curtis. And we have not quantified that project. Probably the easiest way is if you look at what our tariff is, and I've given you what the volumes are, but we've not made a specific comment about what the total of that would be. And typically, we wouldn't on any individual projects like that. So -- but we will include it as part of our overall guidance as we update it. Paul Zimbardo: Okay. Okay. Understood. And then just the last really quick. Is there anything on the weather normalization, like lessons learned, things that you'd recommend proposing? I know this is a really extreme mild period. I don't know if there's any kind of refinements that you're looking to advocate for? Robert McAnnally: Paul, this is Sid. If you look at the way that our weather norm mechanisms have worked across the service territory, on balance, they've been very effective in achieving the goal, which is protecting all of the participants to make sure that everyone is incented to continue to focus on reliable and affordable gas service. And so there are some extraordinary situations like think about this winter, and we covered it a bit in the prepared remarks, where you have essentially no meaningful winter and then one spike that is really significant in the amount of gas that was used and the requirements on the system and then back down to no winter. So it really was an extraordinary first quarter from that standpoint. We don't have any concerns about the weather mechanism going forward. Chris just spoke to the capacity release. That's a pretty elegant solution that the Kansas Commission put in place to incent the company to be prepared. So we know that if we're oversupplied, then there's a capacity release option that's available. It supports good service to our customers, and it is all wrapped around affordability, which takes me back to your previous question. The way that we are treating data centers and large-load opportunities not only is pursuing those opportunities, but as we've said in the past, has 2 other components. The first component is what's the impact to our customers and how do we derisk our participation in those projects to ensure that our customers aren't exposed in a way that we don't think is appropriate. And we successfully have done that, and we continue to do that. The other is how does it fit with the long-term strategy that we have for our own system. So we're thoughtful about these opportunities when they come up. Does it forward the plan that we have already to build a system that's designed to serve our customers and provide economic development opportunities across our service territory? Or is it essentially an alley with a dead end that doesn't have that kind of knock-on growth potential? We're very focused on what's the long-term potential and how does it support our long-term growth profile. So kind of a long answer, but I think you have to understand that we are constantly looking at not weather norm in isolation, not large-load in isolation, not pulling projects forward or pushing them back. We're trying to maintain flexibility so we can operate the company in a way that allows us to respond to whatever the event may be, in this case, weather, but do it in a way that doesn't interrupt our long-term vision for how we support growth for the company and long-term returns for our investors. Operator: And that concludes the question-and-answer session. I would now like to hand it back to the ONE Gas team for closing comments. Erin Dailey: Thank you all again for your interest in ONE Gas. We look forward to seeing many of you at the AGA Financial Forum in a few weeks. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings on August 4. We'll provide details about the conference call at a later date. Have a great day. Operator: This concludes the ONE Gas First Quarter Earnings Conference Call and Webcast. You may now disconnect.
Operator: Welcome to the 2026 First Quarter Results Announcement Conference Call for Budweiser Brewing Company APAC Limited. Hosting the call today from Budweiser APAC is Mr. YJ Cheng, Chief Executive Officer and Co-Chair of the Board; and Mr. Bernardo Novick, Chief Financial Officer. The results for the 3 months ended 31st of March 2026, can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser APAC websites. Before proceeding, let me remind you that some of the information provided during this result call, including our answers to your questions on this call, may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is possible that Budweiser APAC actual results and financial condition may differ possibly materially from the anticipated results and the financial condition indicated in these forward-looking statements. Budweiser APAC is under no obligation to and expressly disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, the risk factors in the company's prospectus dated 18th September 2019, the 2025 annual report published and any other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated, percentage changes refer to comparisons with the 2025 full year. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company disclosed the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the press release published earlier today. Further details of the 2026 first quarter results can also be found in the press release. It is now my pleasure to pass the time to YJ. Sir, you may begin. Yanjun Cheng: Thank you, Ari, and good morning, everyone. Thank you for joining today's call. We entered 2026 with a clear focus on recovering volume through disciplined execution across our market. For Bud APAC total volume returned to a positive growth, supported by continued strong momentum in India. In China, our increased investment shows a sign of progress. With the quarter-over-quarter volume decline tightening further as we remain committed to our strategy of enhancing our in-home route to market enriching our portfolio and innovating behind our mega brand to rebuild momentum. In South Korea, we gained market share in both on-premise and in-home channels. Before we go over our financial results, I wanted to take a moment to introduce Bernardo Novick, our new Chief Financial Officer, effective from April 1 this year. Novick joined ABI Group in 2009 through the global MB program and has worked across various functions in multiple markets. He brings deep finance and global resource allocation expertise, having led projects, delivering savings and meaningful value creation. I'm pleased to welcome him to the Bud APAC team. Let me now hand over to Novick for a brief introduction. Bernardo Novick Rettich: Good morning, everyone. I am delighted to join the Bud APAC team. I would like to thank you, YJ for your trust and invitation to join the team. I joined AB InBev 16 years ago and spent 5 years in finance roles, 5 years in commercial roles and 5 years in innovation roles where I led the corporate venture capital arm in New York. Most recently, I was responsible for our global capital allocation division reporting to the global CFO. I hope I can bring this experience to grow Bud APAC's business in a profitable way. I have already had the pleasure of meeting some of you joining the call today, and I look forward to meeting many more in the next weeks and months ahead. Let me share our financial results for the first quarter of 2026 in more detail. In the first quarter, APAC volume returned to growth, even if it's just 0.1% after many quarters, driven by strong growth in India, and a sequential improvement in the industry and our volumes in China, with volume decline narrowing quarter-over-quarter. This progress was driven by both enhanced execution as well as increased investments across channels and our portfolio, which added temporary pressure to our bottom line. We also maintained strong brand momentum in South Korea, despite a soft industry and a challenging comparable last year. In India, we continue to advance premiumization, delivering strong double-digit volume and revenue growth. In summary, for Bud APAC, total volumes increased by 0.1%. Revenue and revenue per hectoliter decreased by 0.7% and 0.8%, respectively. Normalized EBITDA decreased by 8.1%, while our normalized EBITDA margin contracted by 246 basis points. Now let me cover some of the highlights from each of our major markets. In China, volumes decreased by 1.5%, improving sequentially with a quarter-over-quarter decline continuing to narrow since the second half of 2025. Revenue and revenue per hectoliter decreased by 4% and 2.5%, respectively, impacted by increased investment to support our wholesalers and activate our brands in the in-home and emerging channel. Normalized EBITDA decreased by 10.9%, impacted by our top line performance and increased investments. We continue to make progress in expanding our distribution in the in-home channel, while increasing the distribution of our premium brands. This premiumization is more clear in the online to off-line or O2O channel, which grew strong double digits in the quarter. Now let me share with you some of the investments we are making on our brands through our marketing campaigns as well as liquid and package innovations to better connect with our consumers across more occasions and increased sales momentum particularly in the in-home channel. On Budweiser, we accelerated the national expansion of Budweiser Magnum, building on its strong consumer traction and sustained sales growth. In March, Budweiser Magnum, launched an integrated nationwide campaign, anchored by a strategic partnership with global football icon Erling Haaland, and the FIFA World Cup mega platform to drive geographic and channel expansion. Regarding our Harbin family, we introduced Harbin 1900, celebrating its brewing heritage as the birthplace of Chinese beer. Position in the Core++ segment, which is the RMB 8 to RMB 10 price range. This new innovation is 100% pure malt classic lager, pairing distinctive vintage packaging with a rich authentic taste. The launch reinforces Harbin's role in driving innovation and placing new bets in this growing and important Core++ segment. In South Korea, volumes decreased by low teens and revenue decreased by mid-single digits, mainly due to a challenging comparable in the first quarter of last year, driven by shipment phasing ahead of a price increase that if you recall, was in April 2025. Revenue per hectoliter on the other hand, increased by low single digits, also comparing with the first quarter last year before the price increase. This led to a normalized EBITDA decreasing by low teens. Having said that, we maintain a good commercial momentum in both in-home and on-premise channels, and we foresee a recovery in the second quarter. Finally, India continues to grow and will play a bigger role in our footprint. Industry momentum continued in the first quarter, and we gained total market share. We delivered strong double-digit volume and revenue growth led by a strong growth in our premium and super premium portfolio. We also continue to see momentum in the moderation agenda with states like Maharashtra and Karnataka introducing changes that decreased the current relative tax advantage of hard liquor versus beer. We see this as a step in the right direction and a sign that some states understand the importance of evolving towards an alcohol tax policies that are consistent with global policy standards where high alcohol products are taxed higher than low alcohol products like beer. And with that, YJ and I are here to answer any questions that you might have. Operator: [Operator Instructions] Our first question is coming from Xiaopo Wei from Citi. Xiaopo Wei: Can you hear me now? Operator: Yes, we can hear you very well. Xiaopo Wei: I'm sorry. That -- I have two questions on China. I'll ask one by one. The first one, in the past 2 years, we have seen a few senior management leadership changes in the company. So far is any achievement or breakthrough that the company would like to share with us with the new leadership? [Foreign Language] Yanjun Cheng: I'm YJ. Let me take these questions. So let me start in English, then let me turn to Chinese, if needed. So the changes we have, mainly happened first half year last year. And the reason for the change is kind of retention between either global other between the region in China. So and also between Headquarter in China versus operation in the field in each sales region. And the reason for that is to share some best practice and to further strengthen their strengths in each area or each function and also learn each other best practice sharing. So that's kind of a normal retention changes. And to be able to share the more the answer to your question about the changes of the people. As I mentioned earlier, we keep a consistency of our strategy which is focused on portfolio, brand portfolio, which is meaning Harbin and Budweiser and also focus on in-home and market. And third one is focus on execution. So those are the 3 strategies we set up early last year and we have no changes. And also, you see the progress we have been made as Novick just mentioned, quarter-over-quarter on decline narrow quarter-by-quarter and see very good trends. And also, we see the execution in each area make a huge improvement, and we put a lot of effort to invest in our brand and also further focus on the in-home channel that the channel changes reached which and that's our further opportunity in our operation. So we see starting from second quarter last year and the fourth quarter last year, and first quarter this year, the things getting improved quarter-by-quarter. So I think that's I tried to answer your question. Xiaopo Wei: Shall I start a second question? Yanjun Cheng: Yes, go ahead. Xiaopo Wei: Okay. The second question is about the channel inventory. As far as I can recall, the company in China start destocking the channel in 4Q '24. It has been a few quarters of destocking and I remember in the last quarterly earnings call, you mentioned that actually, our China inventory actually was young and lower versus historic level. But we know that China is a very dynamic market and the changing areas on a daily basis. So were you foreseeing the future that the China channel inventory will be below historic level as a new norm? Or is any factor you expect to see before you become more exciting and try to restock the channel looking forward. [Foreign Language] Yanjun Cheng: Thank you for your question. You're right. We have been proactively taking steps to adjust our inventory given the current business environment. [Foreign Language] Operator: Our next question is coming from Ye Liu from Goldman Sachs. Ye Liu: Thanks. Can you hear me? Yanjun Cheng: Yes. Ye Liu: This is Liu from Goldman Sachs. Thanks for the opportunity and welcome Novick for your first earnings call with Bud APAC. I have 2 questions. The first one is on China. So basically, our ground check shows that there has been some volume recovery in the super premium segment, including Corona, Blue Girl in the first quarter. So how to look at the sustainability of this trend? How to comment on the on-trade consumption recovery so far, including any color on 2Q to date on the on-trade performance in China? I will translate to Mandarin by myself. [Foreign Language] Yanjun Cheng: Let me take this question. I will start the summary of the answer first, then I'm going to talk a little bit detail in sort of answer in Chinese. Indeed we grow Super Premium volume by double digit in the first quarter 2026 as we focus on premiumization in the in-home channel and O2O. In terms of on-trade recovery nightlife channel contribution was stable, and we grew volume in the nightlife the first quarter 2026. However, Chinese restaurant channel remains under pressure. [Foreign Language] Ye Liu: The second question is to our new CFO, Novick. So I would like to know what's the 3 key focus for you this year, would you please share with the investors on the call. Thank you so much. Bernardo Novick Rettich: Thank you, Liu. Nice to hear from you, and thanks for the question. So let me share the 3 priorities that me and my team will focus this year. The #1 priority is growth. And the main objective here is to stabilize the volumes in China. The second priority is to improve execution. And the third priority is value creation. So on the #1, the #1 is consistent to the business strategy that YJ was describing. And the main objective of the business is to grow volumes here, right? And in order to do that, we really need to stabilize volumes in China. And the finance role to do that is increasing investments and making the investments more effective. I think it's important here, when we manage to stabilize volumes in China, given our footprint in India and in Southeast Asia, will be able to reignite growth for the whole Budweiser APAC. Number two priority is execution. I think here, finance has an important role, collaborating with our commercial team in China to enable and upgrade our route-to-market model to help on this transition to more volume in the in-home channel. That's another important priority for us. And the third one is value creation. Here, we are reviewing internal investment decisions, improving efficiencies, cost controls. One example here, for example, we are reviewing the unit economics of different packs to make decisions that can help us be more efficient with resource allocation. But ultimately, Liu we are here for growth, and that's our main priority for this year. Thank you very much for the question. Operator: Our next question is coming from Elsie Sheng from CLSA. Yiran Sheng: Thank you management for taking my questions. Thank you, YJ, and also welcome Novick. I have 2 questions. My first question is on China in-home development. Do you have any update or progress to share on the development of off-trade channel in China. I will translate myself. [Foreign Language] I will ask my second question later. [Foreign Language] Yanjun Cheng: Thank you, Elsie. This is YJ. Let me take this question. As a channel shift to in-home channel, we are taking actions to expand in the in-home channel to adapt. As we have a relative low exposure in in-home channel, which means we have a massive growth potential. We are investing to catch up. [Foreign Language] Yiran Sheng: My second question is on China commercial investment. So previously, management mentioned that you will increase marketing this year. Is that plan still on track? And what's the marketing plan for the coming peak season and sport events like World Cup? [Foreign Language] Yanjun Cheng: Yes. So as Novick mentioned, as I mentioned earlier, in 2026, our top priority in China is a stabilized volume. To achieve this, we have given room to the team, to the commercial team to increase commercial investment. So that's the direction we set up for the commercial team. [Foreign Language] Operator: Our next question is coming from Mavis Hui from DBS. Mavis Hui: My first question is on China. Could we have some more updates on the growth of your emerging channels such as O2O instant retail and e-commerce in China. More importantly, how do margins and pricing dynamics across these channels compared with traditional off-trade and how are we managing potential channel conflict with our distributors? But let me translate first. [Foreign Language] Yanjun Cheng: Thank you for your question. I will take this question as well. O2O is one of faster emerging channel in China. We have started to make a fair significant effort to increase our presence with it. And we see this as a great opportunity for us in 2026 and beyond. We partnered with a major O2O platform to further expand our participation. [Foreign Language] Mavis Hui: And my second question is on Korea. Excluding shipment phasing effects, are we still seeing underlying share gains in South Korea? What are the key challenges to sustaining outperformance in the market? [Foreign Language] Yanjun Cheng: Thank you. Let me take this question again. Total industry in Korea have remained soft in the first quarter 2026. With a soft consumer environment continued to impact overall alcohol consumption. However, our underlying momentum in Korea continued and we outperformed the industry in both the on-premise and in-home channel. [Foreign Language] Operator: Our next question is coming from Anne Ling from Jefferies. Kin Shun Ling: I have 2 questions here. First is on the cost of goods sold in general. We saw some raw materials price volatility, and this has been coming up recently for example, like aluminum. So what will be our view on the raw material costs for year 2027? [Foreign Language] Yanjun Cheng: In 2026 of first quarter our cost per hectoliter has decreased by 0.8%, mainly driven by efficiency improvement, partially offset by commodity headwind. [Foreign Language] Kin Shun Ling: [Foreign Language]. So my second question is on the India side. So could you share with us now on the Indian market update? How do we see the market competition and our strategy over there? I understand that we are focusing on more market share. So may I know when the company will start focusing on the profitability of the market? Is it still a little bit too early? And that competition is still very keen? Should -- I mean should Carlsberg be listed? What is your view on the competitive environment afterwards? [Foreign Language] Yanjun Cheng: Thank you. In India, we are focused on sustainable and meaningful top line growth that can translate to EBITDA and cash flow growth accordingly. [Foreign Language] Operator: Our next question is coming from Lillian Lou from Morgan Stanley. Lillian Lou: And thank you, YJ and Bernardo for the detailed answer previously. Congrats to Bernardo for your new role. I have two questions. The first one is on China pricing because YJ just mentioned that the raw materials are fully hedged and were relatively stable. But on the pricing side, any price action and mix shift that you observed that could improve the overall pricing in the market in general? [Foreign Language] Bernardo Novick Rettich: I can take this question YJ. Yanjun Cheng: Go ahead. Bernardo Novick Rettich: Lilian, nice to hear from you. Thank you for the question. I think all the answers should start with the same reminder that our main priority, right, is growth and particularly to stabilize the volumes in China. It's true that in the first quarter, our net revenue per hectoliter was below last year and this was impacted by investments, mainly in 3 objectives for the investments to support our wholesalers, to activate our brands and also to accelerate the growth in O2O. But on the other hand, we had positive mix effects coming from our brands, mainly driven by our Premium and Super Premium brands. I think it's important to mention to you and the press that we expect to continue to invest in 2026. Regarding price, we will continue to monitor always the prices in the market, and we are open to adjustments if something changes. But at this moment, we don't have any news regarding price increase for China. Lillian Lou: My second question is on Korea -- South Korea market. We all know that last year, April, you had a price increase, which still benefited the first Q this year on the pricing side. But what will drive the South Korea revenue and also pricing and the EBITDA growth for the rest of the year, in particular, the industry remain a little bit soft and the competition is still there. So this is the question on Korea. [Foreign Language] Bernardo Novick Rettich: I can take this one too. Very good question, Lillian, thanks. When we think about like a medium-term margin growth for APAC East and Korea, I think there are mainly 3 things that can drive this. One is, of course, pricing. The second one, operational efficiencies. And the third one, I think it's important to mention is mix and innovations. Maybe let me talk about each one of them. On prices, of course, we always consider our pricing decisions looking at what's happening in the beer market, but also the macroeconomic situation in the country. We'll continue to monitor similar to China. We don't have anything to announce at this point. On the second part, operational efficiencies. Here, we continue to implement cost management initiatives. This is one of our main strengths at Budweiser APAC, as YJ was talking about our efficiency and excellence programs that we have so this is something that we still see opportunities. And number three, I think mix and premiumization and innovations are very important for us in the future. Maybe I can share a couple of examples one of them is the growth of Stella Artois in the on-trade. I think that's a prudent healthy growth. The other one is the nonalcoholic beer, like example like Cass 0.0. I think both of them are good examples of innovations that can both drive volume growth, but also margin expansion. So overall, I think that we see opportunities to keep recovering margins in Korea in the future. Thank you for the question. Operator: In interest of time, our final question will come from Linda Huang from Macquarie. Linda Huang: My first one is regarding for the dividend. And given that Bernardo has really taken up the CFO role. So I just want to know that whether from the group perspective, whether you will change the capital allocation approach. Especially the last 2 years, right, we -- they paid out USD 0.0566 per share dividend to the shareholders. So whether this is the dividend per share policy under review. So this is my first question. [Foreign Language] Bernardo Novick Rettich: Thank you, Linda. Nice to hear from you. Thanks for the question. So I think it's important to remind everybody, right, we are working to deliver sustainable long-term results for our shareholders, right? And the other message is that our capital allocation strategy remains the same. Our first priority continues to be to invest in our business like we are doing this year to drive organic growth. followed by M&A when we see opportunities for acquisitions. That's the second one. And then the third one to return to our shareholders, for example, via dividend, but it's also what we have been doing, right? So I think we are very proud of our dividend track record since the beginning, recently with the announcement of the $750 million dividend that we announced for 2025, which by the way, was consistent to the dividend for the previous 2024. So I think if I have to summarize, we are working towards improving our business performance this year to be able to keep this consistency in the future. Thanks for the question. Linda Huang: My second question is regarding for our products, and I think this may be YJ can help. So when we compare China to the other Western countries. I think there's always plenty of alcohol product innovation. So I just want to know that, again, whether the management can elaborate more about our product innovation plans? And then what kind of the innovation strategy will fit well for our China market. [Foreign Language] Yanjun Cheng: [Foreign Language] Operator: Thank you. That concludes our Q&A session today. I would like to turn the conference back over to YJ for the closing remarks. Yanjun Cheng: Thank you. As I mentioned on our 2025 annual results call early this year, our priority is to stabilize volume and rebuild our market share momentum in China by investing in our in-home route to market and a leading permium portfolio. The progress we have been seeing in the first quarter and have been encouraging. On this positive note, thank you all for joining us today, and I'm looking forward to speaking to you soon. Operator: Thank you. And this concludes today's results call. Please disconnect your lines. Thank you.
William Lundin: Okay. So welcome, everybody, to IPC's 2026 First Quarter Results Update Presentation. I'm William Lundin, the President and CEO. I'm joined today by Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. So I'll start with the highlights and give an operational update, then Christophe will touch on the financial highlights for the quarter. Following the presentation, we'll take questions, which can be submitted through conference call or via the web online. Jumping into the highlights. We're very pleased to report another solid quarter of operational performance. Production for Q1 was at the top end of the quarterly forecast at 43,000 barrels of oil equivalent per day, and we're retaining our full year production guidance range of 44,000 to 47,000 boes per day. We had good cost discipline with Q1 operating expenditure coming in at sub USD 18 per barrel of oil equivalent, and we are maintaining guidance for OpEx at USD 18 to USD 20 per barrel. Entering 2026, we set a lean work program and budget as we were assuming a base case price estimate of $65 per barrel Brent. And in response to the improved pricing environment, we're taking advantage of our operatorship and increasing our capital program from USD 122 million to USD 163 million, predominantly to accommodate short-cycle investments across some of our producing assets. The Q1 capital spend was USD 71 million. Operating cash flow generation for Q1 was $68 million, and we revised our full year OCF guidance to USD 220 million to USD 340 million assuming $70 to $90 per barrel Brent for the remainder of 2026. Free cash flow was minus USD 17 million. And we are entering really an inflection point here for the company and there shouldn't be too many more quarters of negative free cash flow going forward with Blackrod first oil expected in the near horizon. Full year free cash flow is expected to be between 0 to USD 120 million positive between $70 to $90 Brent for the rest of 2026. Net debt stands at $513 million, and we expanded our Canadian credit facility during the quarter to USD 250 million. We also extended the maturity of that to 2028. So that gives us an increased headroom and overall flexibility. Our benchmark hedges for WTI and Brent for approximately 40% of our production exposure rolls off in June, leaving us fully exposed to benchmark oil prices from July onwards. We have some WTI/WCS differential hedges and transport/quality-related hedges tied to our Canadian heavy oil exposure as well at attractive levels and some natural gas hedges in place that are currently in the money as well. No material incidents took place during the quarter, we're very pleased to report on. So on to the following slide. As shown on the production graph on Slide 3 here, IPC delivered flat production, really at the high end of our guidance in the first quarter, with overall strong performance across all the assets in the portfolio. So I'll touch on more detail on each of the assets' performance later on in the presentation. Moving on, we're very strongly positioned to deliver within our CMD production forecast range of 44,000 to 47,000 barrels of oil equivalent per day. Drawing your eyes to the bottom of the production chart on this slide. 2026 is really a story of two tales here with forecast production volumes expected to rise materially at the back end of the year with Blackrod Phase 1 oil production set to come online. In addition to some of the incremental capital adds, fast payback projects we've also added in, this will be contributing more so at the back end of this year for production rates. Our production mix is weighted 60% towards Canadian crude, which is tied to WCS pricing, 10% to Brent-linked production coming from Malaysia and France and the remaining balance of 30% being natural gas from Southern Alberta. And I'd also like to reiterate here that the 44,000 to 47,000 barrels of oil equivalent per day guidance is an annual average, very much an annual average rather than a quarterly average as can be seen on the high and low guidance bands on that bottom left-hand chart. OpEx, so we are maintaining that original Capital Markets Day forecast as we set out in February of $18 to $20 a barrel. First quarter operating cash flow was USD 68 million. The differentials from Brent to WTI, can be seen in the brackets there, was $9 and from WTI to WCS was $14 a barrel. So the Brent to WTI differential was notably high on the back end of the geopolitical conflict in the Middle East, which our Brent-linked production benefits from, of course. Our operating cash flow full year forecast for 2026 is updated to USD 220 million to USD 340 million based on $70 to $90 Brent, and that assumes a $5 differential between Brent and WTI and a $14 differential between WTI and WCS. So a material improvement compared to our CMD forecast and notably more than funding our incremental capital spend program this year with the revised updated operating cash flow generation outlook. Moving on to our CapEx program inclusive of decommissioning, which now stands at a forecast of $163 million. So that's roughly $40 million higher than the original CMD CapEx guidance. The increase is mainly due to accelerated fast payback drilling activity at our Southern Suffield assets in Alberta and in the Paris Basin in France, which I will expand on following asset-specific slides. So we continue to see great progress at Blackrod, and we've updated our 2026 budget outlook for the forecast spend at that asset. Big picture, the multiyear budget for Blackrod Phase 1 growth capital, the first oil is USD 850 million. There has been some minor cost pressure with total costs expected to be approximately USD 857 million, which is less than 1% overall of that original sanction CapEx guidance for the growth capital to first oil. And we're still expecting the project to be delivered in terms of first oil in Q3 of 2026, which is ahead of the original timeline given at the time of sanction back in 2023. Because of this continued acceleration and positive progress, there are some sustaining completion costs as well being pulled forward, which is a positive outcome overall. The free cash flow outlook, we're projecting to generate between 0 to $120 million of positive free cash flow between $70 and $90 Brent for the remainder of 2026. Very exciting to be returning into a positive free cash flow generating position this year with a major boost in free cash flow levels anticipated in 2027 and beyond as Blackrod Phase 1 ramps up and comes onstream. Moving to the share repurchases slide. IPC, of course, has a very strong track record of share repurchases in our brief history as a company. So 77 million shares have been bought back at an average price of SEK 79 or CAD 11 per share, respectively. And that represents around $1.4 billion of value created from the share repurchases when comparing the average share price that those shares were bought back at to our current share price. Notably on the antidilution waterfall, the only time shares were issued in a transaction was for the BlackPearl acquisition back in 2018. All of those shares have been bought back. And our current shares outstanding is just shy of 113 million shares, which is less than the original starting amount of 113.5 million shares. And we've transformed the company to where we are today compared to at inception in 2017. Now we see a 4.5x increase in production levels, 18x increase on our 2P reserves in excess of 20 years, added to our 2P reserve life index in excess of 1 billion barrels of contingent resources, added an overall 4x increase to our NAV compared to that of when the company was formed at the beginning of 2017. So Blackrod. This is a 20-year journey in the making to bring this vision into reality by unlocking a Phase 1 commercial development. I had the privilege of being at site at the end of April. This is a world-class SAGD plant with a best-in-class operational staff. It's a compact site with a small footprint for the CPF and nearby well pad facility tie-ins. This asset is going to propel the company to new levels, and it's been a fantastic journey going from sanction through to development and on to startup now with rotating equipment well in service at this point in time. Original guidance for this project, again, back in 2023 when it was sanctioned, called for first oil in late 2026 and growth capital up into that point of USD 850 million. We achieved first steam ahead of our original forecast, resulting in a schedule improvement which was announced at the beginning of this year, with first oil expected in Q3 2026. So operations continue to progress well, and we're strongly positioned to deliver within this accelerated timeline. Cumulative spend as at the end of Q1 from the beginning of 2023 on the growth capital is USD 842 million with some minor works remaining on the final boiler tie-in as well as well pad facilities as we expect to deliver this project overall in line with the original growth capital guidance to first oil. I really couldn't be more proud of our multidisciplinary IPC teams as well as the vendors utilized in this major undertaking, and we're especially pleased that there has been no material safety incidents under IPC's supervision as prime contractor of the site. Excellent delivery overall and stewardship of this project to date. So Blackrod valuation. Again, this is a true game-changing asset for IPC. We have regulatory approval up to 80,000 barrels of oil per day with over 1.45 billion barrels of recoverable resource. Phase 1 targets 30,000 barrels per day and 311 million barrels of 2P reserves. And the economics as at the beginning of this year, based on our conservative reserve auditor price deck, is USD 1.4 billion of net present value using a 10% discount rate and approximately a $47 WTI breakeven. As you can see on the figure on the right-hand side of the slide, this is a massive uniform sandstone reservoir. It's contiguous and homogeneous, lending to a very much predictable and scalable product potential that's validated through the 15 years that it's been under pilot operation testing. In the lower graph here, the dark wedge on the bar chart reflects what is booked in 2P reserves and carried within our valuation. The light blue component of that bar chart is the contingent resources and represents upside to our business. Moving on to our producing assets. Our current flagship oil-producing asset at Onion Lake Thermal delivered stable production through Q1. We also did some 4D seismic work at the beginning of the year and are reviewing that data to hone in on some additional potential infill targets on existing producing drainage patterns. And also to note on that schematic on the right, H Pad is the next main drainage pattern to be developed in the sequence. Moving on to the Suffield area assets. So very much predictable and low decline production, the Suffield area assets, which delivered around 23,000 barrels of oil equivalent per day through Q1. We're very excited to be redeploying some capital into these assets, where we've sanctioned a 4-well production drilling campaign within the Basal Quartz area, just west of the Suffield block. Production from France and Malaysia for Q1 was in excess of 5,000 barrels of oil per day. We had some incremental activity that's also been sanctioned now in France. We look to drill 3 sidetracks in the FAB field and 1 sidetrack in the Villeperdue field. So very exciting to be drilling again in France. And in Malaysia, we also plan to do an operational activity of workover using a hydraulic workover unit later this year on our A13 well. So with that, I will hand it over to Christophe to go through the financial highlights. Thank you. Christophe Nerguararian: Thank you very much, Will. Good morning, everyone. So indeed, a good quarter with production at the high end of our Q1 guidance at 43,000 barrels of oil equivalent per day. And of course, during this first quarter, when the situation happened between Iran, the U.S. and Israel, the oil prices increased massively from the beginning of March. And so you really have a relatively high average Dated Brent oil price for the whole quarter, in excess of $81 per barrel, but that was really two sides of the story with lower oil prices in January and February and much higher in March. So overall, that really helped generate on that basis strong operating cash flows and EBITDA for the quarter at USD 68 million and USD 64 million. As we guided before and as most of our investors know, the capital expenditure in 2026 was always expected to be much front-loaded, and so you can see a disproportionate portion of the CapEx spent during this quarter translating into a free cash flow of negative USD 17 million. And it depends where oil prices will be on average for Q2, but it's fair to assume that the free cash flow may be negative again in Q2. But from that point onwards, we're expecting to turn the corner and to be again back into free cash flow territory for the second half, depending on where first oil kicks in at Blackrod. So USD 13 million of net profit for this quarter. The net debt increased during this first quarter by USD 30 million. Again, it's fair to assume that this net debt would increase again in the second quarter and from that point on progressively. Depending on where oil prices stand, we should see some deleverage from Q3 or from Q4. But certainly this year, we should start to see some accelerated deleveraging as the Blackrod production ramps up over time. Realized prices, so I mentioned, were strong. And I think it's interesting, a bit sad at the same time, but interesting to see that the physical market is quite dislocated. And so the Dated Brent has been trading at between $5 up to $30 premium on top of the future or the financial Brent, if you wish. And when we lifted our cargo in Malaysia, the last one in March, we had a good premium. And for the future June cargo, which we're going to lift in Malaysia, we can see that the physical market is very tight because the premium we can realize there are very, very high. So you can see we sold in March a cargo in Malaysia at USD 110 per barrel, while on average for the quarter, Dated Brent was USD 81. The Brent-WTI differential widened a bit at $9 and the WTI/WCS differential stood at negative $14 for the quarter. We're continuing in Canada to sell our heavy oil on parity or very close to the WCS. Gas prices were actually okay during this first quarter. But overall, the market again is quite disconnected between the U.S., and the Canadian market has been a new reality for the Canadian gas prices over the last 18 months now for the lack of infrastructure and communicating infrastructure between the Canadian gas pipeline network and the U.S. market. So you can see that we realized CAD 2.5 per Mcf during this first quarter. But the forecast is showing for the summer months lower gas prices, which is still a negative to IPC given that we are producing more gas than we're consuming at Onion Lake or that we will consume in the following quarters at Blackrod. Now the positive in the long run is that because we are consuming gas at Blackrod, it will be a relatively cheap feedstock gas going forward. In terms of financial results, it's interesting to compare '25 and '26. We had during this first quarter '26 similar production and overall revenues between the first quarter '26 and '25. Some of the difference between the 2 quarters in '26 and '25 was coming from the fact that we lost $10 million of hedges -- hedged losses in this first quarter because we had hedged around 40% of our WTI and Brent exposure at between $62 and $68 per barrel. And of course, we've been losing in the month of March mainly. And given that we are still hedged until the end of June at those around 40% level at current prices, we can expect to make a hedging loss of around USD 30 million during the second quarter. But I think it's important to flag as well that beyond the end of June, we no longer have any benchmark hedged. So we are totally exposed to the Brent and the WTI prices going forward into the second half of 2026. Looking at the operating costs. So we were below during this first quarter as a result of strong production level and relatively low electricity and gas prices. We can expect higher operating cost per barrel going into the second quarter with a bit of a slightly lower production in the second quarter. In the third quarter, when we're going to move progressively into commercial production at Blackrod, we're going to register some OpEx which will be a bit higher in the first months of operation. But you can see that as soon as the Blackrod production ramps up in the fourth quarter, the OpEx per barrel will progressively reduce, and we would expect that trend to continue into 2027. You can see the netback on the following graph with gross margin of close to $18 per barrel and operating cash flow at $17.5 and EBITDA at $16.5 per barrel of oil equivalent of netback. Looking at the evolution of our net debt. So we increased our net debt this quarter by USD 30 million given the reasonably high CapEx of $71 million we spent during the year. So we spent more CapEx than the level of operating cash flow. This is going to reverse in Q2 and even more so in the second half of this year. In terms of financial items, it's sort of a steady state now in the second half. Last year when we refinanced our bonds, we had some exceptional and one-off fees that we paid as part of that bond refinancing. From now on, it's going to be much more stable. And just to mention that the foreign exchange loss you can see here of $6.5 million during this quarter is a noncash item. Otherwise, the G&A remains reasonably stable and flat at around USD 4 million per quarter. So looking at the financial results. We generated net revenues of $173 million, netting a cash margin of $68 million and gross profit of USD 37 million, which net of the financial items, tax and tax elements yielded a net profit of USD 13 million for the quarter. The balance sheet has continued to evolve since we sanctioned the Blackrod project. As you expect, our level of cash has reduced and our level of net debt increased over the last 3 years. But again, we are almost touching distance from reversing this trend certainly going into 2027 but as well going into the second half of this year. And I will let Will conclude this presentation. William Lundin: Thank you very much, Christophe. So in summary, very exciting to be ramping up activity really across all regions of operations. Q1 capital came in at USD 71 million and the full year outlook is $163 million now, really leveraging our operatorship and increasing our production exposure to the high commodity pricing environment that we're seeing. We're well positioned to deliver within our production guidance, and our operating costs remain under control. Operating cash flow generation was robust for Q1 at USD 68 million. And the outlook for the full year is $220 million to $340 million. We have in excess of USD 150 million of undrawn liquidity headroom. There are no material environmental or safety incidents that took place in the first quarter. And with that, I'm happy to pass it over to the operator to begin questions, and you can also submit your questions online via the web. Thank you. Operator: [Operator Instructions] We'll now take our first question from Teodor Nilsen of SB1 Markets. Teodor Nilsen: Will and Christophe, first question there is around the small CapEx increase you announced. I just wanted to know what is driven by cost increases and what is driven by higher activity. And second part of that question is related to the activity increase. By how much should we assume that the exit rate production this year increases as a result of the accelerated investments? So that's the first two questions. And third question, that is on share repurchases. You've, of course, been very successful doing that for the past 2 years as you discussed. But you haven't been doing any repurchase. You have not done any material repurchases the past few months. So I just wanted a background for that. Do you think the share price approached a reasonable level? Or are there other reasons for why you have reduced the buybacks? William Lundin: Thanks very much, Teodor, for the questions. I'll head those off. First one being the small CapEx increase. So we had an adjustment of $122 million to $163 million for capital expenditure for 2026. So that $40 million some-odd increase, the lion's share of that is for capital activity in France and Canada. So we're going to be doing 4 sidetracks drilling program in France for approximately $15 million and also in Southern Alberta at our Suffield area assets, more on the more recently acquired in 2023 Core 4 property. We're also going to be drilling 4 wells there. So the total combined amount is around $23 million when you add the France plus the Brooks-related activity that we're undertaking. I also touched on the slight cost increase at Blackrod there as well, which was expanded on throughout the presentation. But really the vast majority of the cost increases are deliberate cost increases here to increase the activity for production contributing projects. And so that production increase for those 2 projects that I had noted, which will be more back-end weighted this year in terms of the production contribution, we expect to see in excess of 1,000 barrels per day on average delivered for 2027 from those 2 programs. So very attractive cost per flowing barrel metrics to undertake those capital activities and really a part of our whole strategy as well over the past couple of years while we've been accommodating the growth capital for Blackrod as well as buying back our shares at very cheap levels. Some of the capital activity that's been ripe and ready to go across our existing producing assets, we've elected to wait until more constructive oil prices present themselves. And here we are now. And that is the reason for why we've kind of prioritized the incremental capital going towards production contributing activity right now as opposed to share buybacks. We do have the flexibility to restart share buybacks, where we have the NCIB activated up until December of this year. We are steadfast on focusing on getting Blackrod on to production here. We continue to monitor market conditions and overall liquidity headroom. Safe to say we are very strongly positioned, and it's something that we're going to continue to monitor as the year progresses here in terms of restarting shareholder returns. Operator: [Operator Instructions] We will now move on to our next question from Mark Wilson of Jefferies. Mark Wilson: Excellent progress as ever and good look with the final steps in Blackrod, obviously. I thought the most interesting area now is the gas side of things in Canada. You mentioned that your hedges are rolling off for WTI. Just remind us where that stands for the gas, particularly as that is looking weaker in terms of infrastructure. And whether you think there's any longer-term impact from the M&A we've seen into Canadian gas, Shell coming in for ARC and further phases of Canada LNG. Just be interested to hear that. Christophe Nerguararian: Yes. Thank you, Mark, and very good questions. So I skipped the table on hedging as Will touched on it already in the opening slide. But you're absolutely right. It was very interesting to see Shell going after ARC, which is a large gas producer, and so this is just speculation at this stage, but probably paves the way or at least increases the chances and the odds that Shell would go and try to expand the LNG facility on the West Coast of Canada, North of Vancouver. And that's a fairly obvious move when you look at the massive arbitrage you can see between local domestic gas prices and international gas prices. So I think the projection in the very short term is to probably still have reasonably low gas prices onshore Western Canada, but the prospects of having more demand from that LNG Canada plant going forward has probably increased over the last few weeks. In terms of hedging, we have 50,000 GJ a day of gas hedged at CAD 2.7 per GJ or CAD 2.8 per McF. So unfortunately, that's probably going to be in the money. And so you know us. We remain very opportunistic. If we see any gas prices hike in the forward curve, you should fairly expect us to seize that kind of opportunities. And so that was your main question, around gas prices. No, you're absolutely right, that in terms of WTI or Brent exposure, the hedges are rolling off at the end of this quarter, at the end of June. And so we'll be fully exposed going forward to what looks to be reasonably constructive oil prices going forward. William Lundin: Sorry, just to add to that in terms of being a great signal in terms of Shell increasing its exposure in Canada just for the upstream overall Canadian landscape there. And now with that acquisition, Shell has secured roughly 3/4 of its feed gas requirements for both Phase 1 and Phase 2 of LNG Canada. So it certainly bodes well and signaling for an FID of Phase 2, but we're still yet to see that for that LNG project on the West Coast of B.C. there. Mark Wilson: Got it. Okay. And is it worth mentioning on the broader Canada side of things, what was it I heard recently, is it a sovereign wealth fund? Or is it an infrastructure fund? And any implications? William Lundin: Yes. That was Mark Carney, and he said a sovereign wealth fund. The extent of the details are yet to be understood in terms of where the funding is going to come from to be able to do that. But that is the headline that Mark Carney announced, was a sovereign wealth fund. Mark Wilson: Okay, okay. And then just one last point. I might have missed it in Teodor's question. But the short cycle in Suffield, that's obviously targeting liquids, I imagine. William Lundin: Yes, oil. Mark Wilson: Okay. Very good. Congratulations again. Looking forward to reading the rest of the news in the year as it ramps up. Christophe Nerguararian: Exactly, thank you. William Lundin: Much appreciate it. Thanks, Mark. Operator: Thank you. We have no further questions in the queue. I'll now hand it over to the company for online questions. Rebecca Gordon: Okay. Thanks, operator. So we've got a couple of questions here. Maybe we can just start with a bit of information on the short cycle, Will. Just a couple of questions on Ferguson and whether we have opportunity there to put some rigs in or maybe look at additional drilling there. William Lundin: Yes, for sure. So Ferguson, there's quite a few opportunities in terms of drilling as well as recompletion, refracking-related activity as well that we are looking into. Some of the activity is likely to be an operating expenditure-related item. So that is something that we do plan to do in terms of a few wells and recompletions on a few wellbores there. So look to see some minor production boost coming from the asset towards the tail end of the year. Rebecca Gordon: Okay. Very good. And then another question here. I mean, obviously, there's a lot of interest on Phase 2. Is there any intention to bring that forward now? Or how are we feeling about the timing given the oil price? William Lundin: Yes. I think the liquidity position as we've stated for quite some time now is going to change quite rapidly as Blackrod Phase 1 sets to come onstream in the back half of this year, and we look to generate significant free cash flow in the year of 2027 even at more modest oil prices. And if these pricing levels are to hold through 2027, it's going to put us in a very, very good place to look to continue pursuing our key capital allocation strategic pillars in terms of organic growth, shareholder returns and also staying opportunistic towards M&A. But for Phase 2 specifically, our future expansion potential at Blackrod behind the scenes is definitely something that's being worked up. But of course, we remain very, very much focused on successfully completing and bringing Phase 1 online from an oil-producing standpoint. Rebecca Gordon: Great. Thanks. And then just a quick question on capital structure, Christophe. Could you explain the increase in the RCF, why you went for that? Christophe Nerguararian: Yes. Well, if you look back at what IPC has been doing as a corporate, we try to raise and improve liquidity when we don't need it. So it's been a constant discussion with our banking partners and banking friends. We enjoy very good support from Canadian banks these days. There was the opportunity to increase the Canadian revolving credit facility from CAD 250 million to USD 250 million, which we just did and extended the maturity up to May 2028 as we do every year. So it's all positive for no other specific purpose than having ample liquidity. Rebecca Gordon: Fantastic. Thanks. Will, just a question on regulatory framework, so in Canada, the U.S. and our other operating jurisdictions. Have we seen any changes post the Iran war in those sort of regulatory frameworks or anticipate anything to come? William Lundin: No, there hasn't been any changes regulatory-wise in the stable jurisdictions where we operate and we have production operations taking place. And specifically in Canada also, they have a sliding framework based on oil prices for the royalties. So no changes expected there or elsewhere within the portfolio at this time. Rebecca Gordon: Okay. Fantastic. And then maybe one final question here. What would be your priority post Blackrod complete in terms of organic growth or shareholder returns or buybacks? William Lundin: Yes. The infamous question, I think. The punch line here is that we have the ability to do it all, and we look to strike the right cadence in terms of pulling forward organic growth and continuing to screen opportunities in the M&A landscape and balancing shareholder returns as well. And so I think we're going to be really strongly positioned to deliver on all three of those fronts. And the main lens, of course, will be to maximize shareholder value in our pursuit of that capital allocation strategy. Rebecca Gordon: Okay. Fantastic. That's what we have time for today. That's all our questions. So I leave it to you to close, Will. William Lundin: Excellent. Thanks very much, Rebecca, and thanks, everyone, for tuning in to our first quarter results update presentation. We're very, very strongly positioned, and It's a super exciting time for the company with the next major catalyst being Blackrod first oil. So that will come in due course very soon here. So thanks, everyone, and take care. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Hiroshi Hosotani: I am Hiroshi Hosotani, CFO. I will now provide an overview of the business results for the fiscal year 2025. Page 4 shows the highlights of business results for fiscal '25. Foreign exchange rates were JPY 150.5 to the U.S. dollar, JPY 173.8 to the euro and JPY 99.2 to the Australian dollar. Compared to the previous fiscal year, the Japanese yen appreciated against the U.S. dollar and Australian dollar, but depreciated against the euro. Net sales increased by 0.7% to JPY 4,132.8 billion. Operating income decreased by 13.7% to JPY 567.3 billion. The operating income ratio was 13.7%, down 2.3 points. Net income attributable to Komatsu decreased by 14.4% to JPY 376.4 billion. Net sales reached a record high for the fifth consecutive year. ROE was 11.3%, down 2.9 points from the previous year. We plan to pay an annual cash dividend of JPY 190 per share, the same as the previous year, resulting in a consolidated payout ratio of 45.9%. Page 5 shows segment sales and profits for fiscal '25. Net sales in the Construction, Mining & Utility Equipment segment increased by 0.2% to JPY 3,806 billion. Sales exceeded the projection announced in October, as demand was higher than expected. Segment profit decreased by 18% to JPY 491.1 billion. The segment profit ratio was 12.9%, down 2.9 points. Retail finance sales increased by 2.4% to JPY 126.1 billion. Segment profit increased by 24.4% to JPY 36.6 billion. Industrial Machinery and Others sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. I will explain the factors behind the changes in each segment later. Page 6 shows the sales by region for the Construction, Mining & Utility Equipment segment for fiscal '25. Sales to outside customers for the segment increased by 0.2% to JPY 3,796.1 billion. Details of regional changes will be explained by Mining and Construction Equipment, respectively, on the following pages. Page 7 shows the sales by region for mining equipment within the segment for fiscal '25. Mining equipment sales decreased by 0.6% to JPY 1,904.4 billion. In Asia, sales decreased due to a decline in demand following low coal prices in Indonesia and demand decline. However, sales increased in Africa and Latin America, where demand for copper mines remained strong, keeping overall sales flat. Page 8 shows the sales by region for Construction Equipment within the segment for fiscal '25. Construction Equipment sales increased by 1.1% to JPY 1,891.7 billion. In real terms, excluding FX impact, sales increased by 0.2%. In Asia, sales decreased as it took time to adjust distributor inventories in Indonesia. Sales increased in North America, driven by demand for infrastructure, rental and energy and in Europe, where infrastructure investment is on a recovery trend. Page 9 shows the causes of difference in sales and segment profit for the Construction, Mining and Utility Equipment segment for fiscal '25. Sales increased by JPY 7.8 billion as price improvement effects outweighed the negative impact of decreased volume. Although we focused on improving selling prices, segment profit decreased. The negative effects of decreased volume, product mix and higher costs due to U.S. tariffs and production costs outweighed the price improvements, resulting in a JPY 107.8 billion decrease in profits. The segment profit ratio was 12.9%, down 2.9 points from the previous year. The impact of tariffs in fiscal '25 amounted to JPY 64.2 billion. Page 10 shows the performance of the Retail Finance segment for fiscal '25. Assets increased by JPY 238.3 billion from the previous fiscal year-end due to an increase in new contracts and the depreciation of the yen. New contracts increased by JPY 75.8 billion, mainly due to higher finance penetration in North America and Europe. Revenues increased by JPY 2.9 billion, mainly due to an increase in outstanding receivables. Segment profit increased by JPY 7.2 billion, mainly due to lower funding costs. Page 11 shows the sales and segment profit for the Industrial Machinery & Others segment for fiscal '25. Sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. The segment profit ratio was 15.9%, up 3.6 points. For the automotive industry, sales of large presses increased. For the semiconductor industry, sales and profits increased due to higher maintenance sales of excimer lasers with high profit margins. Page 12 shows the consolidated balance sheet and free cash flow. Total assets reached JPY 6,423.9 billion, an increase of JPY 650.4 billion, primarily due to the impact of the yen's depreciation. Inventories increased by JPY 195.2 billion to JPY 1,601.9 billion, affected by both the weak yen and U.S. tariffs. The shareholders' equity ratio was 54.7%, down 0.3 points and the net D/E ratio was 0.26x. Free cash flow for fiscal '25 was an inflow of JPY 249.7 billion, a decrease of JPY 56.8 billion from the previous year. From Page 13, I will explain the progress of the strategic growth plan. The current strategic growth plan, driving value with ambition, which started in fiscal ' 25, set 3 pillars of growth strategy, create customer value through innovation, drive growth and profitability and transform our business foundation. Under create customer value through innovation, we began operating a power agnostics truck at a copper mine in Sweden as part of our efforts to address various power sources. We also conducted a POC test of a hydrogen fuel cell powered hydraulic excavator at a highway construction site in Japan. As part of our efforts for advanced automation and remote control, we are advancing the development of SPVs for next-generation mining equipment in collaboration with applied intuition. We are also promoting the practical use of autonomous driving technology for Construction Equipment through collaboration with Tier 4. Next, under drive growth and profitability, we received the first major mining equipment order in the Middle East for the Reko Diq Copper Gold Project in Pakistan. We began deploying AHS in the U.S. and delivered the 1,000th unit globally. We will also strengthen our remanufacturing business through the acquisition of SRC of Lexington in the U.S. We have initiated the establishment of a training center in Côte d'Ivoire, and we'll work to strengthen our marketing and service capabilities in the Africa region. Lastly, regarding transformer business foundation, in addition to embedding risk management through ERM and strengthening our supply chain through cross-sourcing and multi-sourcing, we accelerated human resource development for innovation and business transformation through the utilization of AI and digital transformation. We succeeded in improving scores in our employee engagement survey. Also, our global brand campaign led to high recognition at international creative awards. Page 14 shows achievement of management targets in the strategic growth plan. Net sales for fiscal '25 increased by 0.7% year-on-year as improvement in selling prices offset the decline in sales volume. On the other hand, profit decreased year-on-year as the negative impacts of volume reduction and cost increases outweighed the effects of price improvements. Regarding management targets, in terms of profitability, the operating income ratio for fiscal '25 was 13.7%, a 2.3 point decrease from the previous year. Despite efforts to improve selling prices, the results were significantly impacted by volume decline, inflation-related cost increases and higher costs due to U.S. tariffs. In terms of efficiency, ROE was 11.3%, achieving our target of 10% or higher. For the retail finance business, we achieved our targets for both ROA as well as the net D/E ratio. Regarding shareholder returns, we expect to maintain a consolidated payout ratio of 40% or higher. Also, we executed the repurchase of JPY 100 billion of our own shares. Regarding the resolution of social issues, we have set 30 KPIs, and progress in fiscal '25 has been broadly in line. Among these, for the reduction of environmental impact, we achieved our target for CO2 reduction from production ahead of schedule. Reduction of CO2 emissions during product operation and the renewable energy usage ratio are also progressing largely as planned. That concludes my presentation. Operator: With that, fiscal year 2026 forecast of the business, and that will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, the GM from Business Coordination Department. I'd like to walk you through our forecast for fiscal year '26 in our primary markets. Page 16 summarizes the impact of the situation in the Middle East and the U.S. tariffs as well as the underlying assumptions that have been factored into the fiscal year 2026 earnings forecast. And then the fiscal 2026 forecast incorporates items for which estimates can be made based on information available at this time. Regarding the situation in the Middle East, assuming the turmoil in the Middle Eastern countries and soaring oil prices and supply chain disruptions will continue throughout the year. We have factored in a decrease in sales of JPY 90.1 billion and an increase in cost of JPY 18.8 billion. However, regarding the impact on production due to shortages of crude-oil-derived materials, while there is a risk, the situation is unclear at this time. Therefore, it has not been factored into the fiscal 2026 outlook. Now on to U.S. tariffs. Based on assumptions of Section 122, additional tariffs will apply throughout the year and the revised steel and aluminum tariffs will apply from April 6 throughout the year. We have factored in additional costs of JPY 67.8 billion. However, we have also factored in JPY 30 billion in refunds, resulting in a net cost increase of JPY 37.8 billion. Page 17 provides an overview of the outlook for fiscal year 2026. We anticipate exchange rates of JPY 150 to the U.S. dollar, JPY 170 to the euro and JPY 106 to the Australian dollar. We project net sales of the JPY 4,118 billion, a 0.4% year-on-year decrease and operating income of the JPY 508 billion, a 10.5% year-on-year decrease. Net income is projected to be JPY 318 billion, a decrease of 15.5% year-on-year. Furthermore, at the Board of Directors meeting held today, a resolution was passed to repurchase treasury stock up to a maximum of JPY 100 billion or 25 million shares and to cancel all repurchase shares during fiscal year 2026. ROE for fiscal '26 is projected to be 9.1%. The dividend per share is planned to be JPY 190, the same as previous year, and consolidated dividend payout ratio is projected to be 53.8%. In addition, when the JPY 100 billion share buyback announced today is included, the total payout ratio is projected to be 85.4%. Page 18 presents the revenue and profit forecast for each segment. Revenue for the Construction Machinery and Mining Equipment and Utilities segment is expected to decrease by 0.4% year-on-year to JPY 3.79 trillion, while segment profit is expected to decrease by 10.4% to JPY 440 billion. Revenue for Retail Finance is expected to increase by 1.1% year-on-year to JPY 127.5 billion, while segment profit is expected to decrease by 1.6% to JPY 36 billion. Revenue for Industrial Machinery and Others is expected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% to JPY 37 billion. We'll explain the factors behind the change in each segment later. Page 19 presents the regional sales forecast for the Construction Equipment and Utilities sector for fiscal '26. Sales of this segment are projected to decline by 0.5% year-on-year to JPY 3,778.2 billion. Details of the year changes by region are provided on the following pages, broken down by Mining Machinery and General Construction Machinery. Page 20 presents the regional sales forecast for Mining Machinery within the Construction Equipment and Utilities segment for fiscal '26. Sales of mining equipment are expected to decline by 2.4% year-on-year to JPY 1,858.5 billion. Sales are expected to decline in Asia and Middle East due to sluggish demand for coal and impact of situation in the Middle East. In North America and Oceania, demand is expected to decrease as mining companies complete their equipment renewal cycles, leading to a decline in sales. Page 21 shows regional sales forecast for general Construction Equipment within the Construction Equipment and Mining Equipment Utilities segment for fiscal '26. Sales of general Construction Equipment are forecast to increase by 1.5% year-on-year to JPY 1,919.7 billion, while sales expected to decline in Middle East and Asia due to regional situation. Overall sales of general Construction Equipment are projected to increase year-over-year, driven by growth in North America, where demand for infrastructure energy project remains strong and in Latin America, where public investment is robust. This page outlines the factors contributing to the projected changes in sales and segment profit for this segment. Although we are striving to improve selling prices, sales are expected to decrease by JPY 16 billion year-on-year due to negative impact of lower sales volume caused by situation in the Middle East. Segment profit is expected to decrease by JPY 51.1 billion year-on-year, although we will strive to improve selling prices. This is due to the negative impact of lower sales volume, the expanding impact of tariffs and rising procurement cost. The segment profit margin is expected to decline by 1.3 percentage points year-on-year to 11.6%. Page 23 presents the outlook for retail finance. Assets are expected to increase by JPY 23.6 billion compared to the end of the previous fiscal year as new lending exceeds collections. New lending volume is expected to increase by JPY 5 billion year-on-year as we anticipate a high utilization rate continuing from the previous year. Revenue is expected to increase by JPY 1.4 billion year-on-year, primarily due to an expansion in outstanding loan balance. Segment profit is expected to decrease by JPY 0.6 billion year-on-year, primarily due to higher costs. ROA is expected to decline by 0.1 percentage points year-on-year to 2.3%. Page 24 presents the sales and segment profit outlook for Industrial Machinery and Others. Sales are projected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% year-on-year to JPY 37 billion. In the Semiconductor Industry segment, sales are expected to increase due to customers ramping up production amid the market recovery. However, for the automotive industry application, revenue is expected to rise, while segment profit is expected to decline due to factors, such as decreased sales of large presses and automotive battery manufacturing equipment as well as rising procurement costs resulting from the situation in the Middle East. The segment profit margin is expected to decline by 0.4 percentage points year-on-year to 15.5%. Starting on Page 25, we will explain the demand trends and outlook for the 7 major Construction Equipment categories. The demand figures for the 7 major Construction Equipment categories include the mining equipment. The figures for the fiscal year '25 are preliminary estimates based on our projections. Demand for fiscal '25 appears to have increased by 5% year-on-year. For fiscal year '26, we anticipate a year-on-year decline in demand ranging from 0% to negative 5%. In addition to decline in demand in Indonesia, we expect a decrease in demand in Middle East and neighboring countries due to the deteriorating situation in the region. Page 26 outlines the demand trends and forecast for the North American markets. Demand for the 2025 fiscal year appears to have increased by 3% year-over-year. Demand remains strong in sectors, such as data centers and other infrastructure, rentals and energy. The demand forecast for '26 fiscal year is expected to remain on par with the previous year. We anticipate the infrastructure and energy sectors will continue to drive demand as we go forward. Page 27 shows the demand outlook and demand for European markets. The demand units for 2025 fiscal year is expected -- was expected to increase by 4% previous year. And the demand outlook for '26 is expected to be 0% to positive plus percent -- positive 5%. And Germany and the U.K. public investment demand is expected to lead overall demand, and we are expecting to see the robust demand. Page 28 covers demand trends and outlook for the Asia market. Demand for '25 fiscal year appears to have increased by 5% year-on-year. In Indonesia, although the demand for mining machinery declined due to sluggish coal prices, overall demand increased due to rising demand for general construction machinery, such as food estate projects. In India as well, demand increased driven by aggressive infrastructure investment. The demand outlook for fiscal '26 is projected to be a decrease of 5% to 10%. While demand in India is expected to remain robust, demand in Indonesia is forecast to decline significantly due to the government's policy to reduce coal production and the impact of the introduction of the B50, which is biodiesel fuel regulations. Page 29 outlines the trends and outlook for demand in the Japanese market. It appears that demand for the 2025 fiscal year declined by 13% compared to the previous year. We expect demand for '26 to remain at the same level as the previous year. Although nominal construction investment is increasing due to inflation, real-time growth -- real-term growth is stagnant due to soaring material and labor costs, and there are currently no signs of recovery in demand. Page 30 presents trends and outlooks for the prices of key minerals related to demand for mining machinery. We expect copper and gold prices to remain at high levels going forward. While both low grade and high-grade thermal coal are currently trending upward, we will continue to monitor future developments closely. Page 31 shows the trend in demand for mining machinery. It appears that the number of units in demand for fiscal '25 decreased by 10% year-on-year. Overall demand declined due to a significant drop in demand for coal-related machinery in Indonesia. The demand forecast for fiscal '26 is expected to be a 10% to 15% decline. Although demand for copper and gold mining equipment is expected to remain at a high level, overall demand is projected to decline due to weak coal-related demand and the completion of the replacement cycle in North America and Oceania and the impact of the situation in the Middle East. Page 32 presents the sales outlook for the construction machinery, mining equipment and Utilities segment, including equipment, parts and services. In fiscal '25, parts sales increased by 0.4% year-on-year to JPY 1,055.2 billion. The aftermarket segment as a whole, including services accounted for 52% of total sales. Excluding the impact of ForEx, total aftermarket sales increased by 1% year-on-year. For fiscal '26, parts sales are projected to increase by 2.2% year-on-year to JPY 1,078.5 billion. The aftermarket overall sales ratio, including services, is projected to be 53% and aftermarket sales, excluding ForEx effects are projected to increase by 3.1% year-on-year. The Page 33 presents outlook for capital expenditures and other investments for fiscal year '26. Excluding investments in rental assets on the left, capital expenditures are expected to increase year-on-year due to investments in production and sales facilities as well as the reconstruction of the head office. Research and development centers shown in the center are expected to increase year-over-year due to focused investment in adapting diverse power sources and automation. Fixed costs shown on the right incorporate the effects of the structural reforms. However, they are expected to increase year-over-year due to wage increases and higher R&D expenses. Next, I'll explain the main topics. Page 51 now. Komatsu has acquired a remanufacturing business for construction and mining machinery components and parts from SRC of Lexington through its wholly owned subsidiary, Komatsu North America, Komatsu America Corp. In 2009, Komatsu transferred its North American remanufacturing business to SRC Lexington, and since then, has continued to do business with the company as one of its most important suppliers for Komatsu's North American remanufacturing operations. With this acquisition of SRC of Lexington's remanufacturing business, Komatsu will further expand this operation by establishing a new dedicated manufacturing facility in North America, one of the largest markets for construction and mining equipment. Page 52. In December 2025, Obayashi Corporation, Iwatani Corporation and Komatsu conducted demonstration test of hydrogen fuel cell power hydraulic excavator during rockfall prevention work on the Joshin-Etsu Expressway. The test confirmed several benefits, including operational performance equivalent to that of conventional diesel-powered models and reduced operator fatigue due to the absence of vibration. At the same time, we reaffirm the challenges facing practical implementation, such as the need for higher capacity and the faster hydrogen supply and refueling systems. The three companies will continue to conduct the studies and verification tests aimed at practical implementation. Page 53. Komatsu exhibited at CONEXPO International Construction Machinery Trade Show held in Las Vegas, U.S.A. from March 3 to 7. The company showcased a new generation of vehicles, including bulldozers and hydraulic excavators equipped with the latest features, such as intelligent machine control as well as articulated dump trucks designed to further improve operational efficiency. Komatsu highlighted its initiatives to leverage data from vehicles and digital solutions to enhance customer productivity and safety while reducing total cost of ownership. Page 54. Komatsu has acquired Malwa Forest, a forestry machinery manufacturer through its wholly owned subsidiary, Komatsu Forest. By acquiring technological capabilities and product lineup for lightweight compact cut-to-length forestry machinery, specifically designed for thinning operations, a segment in which Komatsu previously had no presence, the company will contribute to value creation across the entire circular forestry process. Page 55. We have reached a cumulative total of the 1,000 units for our ultra-large autonomous dumb truck equipped with autonomous haul system, AHS, for mining operations. Since introducing AHS for the first time in the world in 2008, the cumulative total haulage volume has exceeded 11.5 billion tons. That concludes my presentation. Operator: Now we would like to move on to the Q&A session. So first, we would like to take any questions from the people here. Maekawa-san from Nomura, please. Kentaro Maekawa: This is Maekawa from Nomura. I have 2 questions. First, regarding tariff impact and price increases. Hosotani-san, you mentioned this in your presentation, but last fiscal year, JPY 64.2 billion was the cost impact. I think originally, you were expecting JPY 55 billion and about JPY 120 billion, which is 4 quarters -- a quarter multiplied by 4, what's going to be your expectation for fiscal '26? So what kind of changes did you experience in reaching your results for fiscal '25? Can you confirm that first? And what have you accounted for, for this fiscal year? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding U.S. tariffs, there are no major changes on a dollar basis. While we were converting it at JPY 140 before, but now it's at JPY 150 against the dollar or to be more exact, JPY 150.5 against the dollar. Therefore, on a U.S. dollar basis, it's not different. It hasn't changed. It's just because of the FX impact. For fiscal '26, the impact will materialize on a full year basis. So it was about around JPY 600 million before, but it should reach around JPY 900 million. Other than that, we have accounted for refunds as well, which is equivalent to the reciprocal tariffs that are likely to be refunded. So that's what we have accounted for. Kentaro Maekawa: So if it's $900 million, it's about JPY 135 billion. For steel and aluminum, how much of an increase? How much of a decrease are you expecting from reciprocal? And the JPY 30 billion refunds are also included in the JPY 135 billion. So when you look out at March '28, is it going to become JPY 165 billion? So can you break down the JPY 135 billion? What has been going up, what has been coming down? Or can you talk about how it's going to rise from the JPY 64.2 billion? Kiyoshi Hishinuma: Well, regarding the period, before, it was from the middle of the year. So at the beginning of the year, we did have inventory from the previous year. So we started paying the tariffs at a later timing from a payment point of view. From a P&L impact, we had year-end inventories. So it was relatively low. But in fiscal '26, from the beginning of the fiscal year, we are making payments. So there is a period difference. And regarding the details, reciprocal tariffs may be gone. But for steel and aluminum, we used to calculate the content in order to reduce the level of tariffs paid. But now it's at 25%. So the impact is greater. So that is one reason why it's greater than before. From that point of view, for the refunds, that's about last fiscal year's portion. So for fiscal '27, we won't have deferrals from the previous fiscal year. Therefore, we will see full impact. So if nothing changes, it's likely to be JPY 165 billion. Next year, of course, that 10% or Article 122, when that's going to end is a question mark. But well, if we're working off the assumption that the same thing is going to materialize for the next year, that's what we're accounting for, but we are not sure. In that case, it's JPY 135 billion, for next year, the following year, if sales and production is not going to change, it should be about JPY 130 billion for fiscal '27 as well. And this year, it's JPY 30 billion less, or excuse me, for the results for fiscal '25, we already said that it was JPY 64.2 billion. And for fiscal '26, originally, we were guiding JPY 130.7 billion or JPY 130.8 billion. But because of the refunds that we were explaining, which is worth USD 200 million, which we view as JPY 30 billion in terms. So when you account for that, it should be a little bit over JPY 100 billion of an impact on our P&L. Kentaro Maekawa: Got it. For price increases, and on Page 22, when you look at the projections for selling prices, it's plus JPY 68.9 billion. So hypothetically, even if you don't get the refunds at JPY 130 billion, you should be able to make up for it through price increases. Are you making progress? And have you gained visibility already? Can you also speak to that? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding pricing, we did a bottom-up approach looking at the business plans of our subsidiaries, but price increases are also accounted for, for the U.S. But Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen. So that's what we're accounting for. Kentaro Maekawa: Understood. My second question is for this fiscal year and your view on volume. Also going back to Page 16, in light of the Middle Eastern conflict, you have reduced sales by JPY 90.1 billion. And last year, when there were some tentative assumptions for GDP as much as you can see, what can you see, what can you not see? So what are the assumptions that led you to JPY 90.1 billion? Because in mining, when energy prices are high, I think that may also serve as a positive. So I was wondering how you view this situation. Kiyoshi Hishinuma: This is Hishinuma. First, regarding demand for the Middle East, a 60% decline is expected. So that has been accounted for, 6-0 percent. And also due to the impact from the Strait of Hormuz, we believe that costs are likely to increase and especially negative impact on countries in Asia. So we are expecting sales to decline. But when it comes to higher coal prices, there is a chance that they may stimulate demand. But when you look at countries like Indonesia, it's true that what originally used to be $40, $50 a ton are now reaching $60 a ton. But even so, we are seeing a higher idle standby rate of equipment, and we're not sure if this is going to continue or not in the future. So demand has not really picked up. So currently, people are still on the sidelines waiting and seeing. There may be an opportunity, but so far, we have not accounted for that in our expectations. Takuya Imayoshi: Just to add a comment to that. Last year, U.S. tariffs just started. So it was hard to account for it in our guidance. But based off IMF predictions and so forth, we have viewed how much GDP is likely to decline and what's going to happen to demand. And that is why we accounted for JPY 50 billion decline in sales. But the global economies have not yet fallen, but we try to account for risk as much as possible to the extent that we can calculate. And also the Middle Eastern crisis, we don't really know its impact clearly yet, but our way of thinking is the impact from the Strait of Hormuz is likely to continue. That's the assumption we have. But then because we are dependent on crude oil as well as LPG, like -- in regions like Africa as well as Asia are likely to be affected. So like Hishinuma-san explained, we are expecting a demand decline in Asia as well as in the Middle East, leading to a sales decline in turn. And also accounting for our gut feeling that we have experienced from the past, we have accounted for a JPY 90 billion impact. And also due to higher crude oil prices, we are already seeing material prices increase that are crude-oil-derived, and that impact is JPY 18.8 billion. So this is purely looked at as a cost increase. So JPY 90 billion of volume decline and JPY 18.8 billion of a cost increase SVM-wise is what we've assumed due to what I've just explained. On the other hand, of course, the impact may be greater than our assumptions or the crude-oil-derived goods may fall to a shortage, which may affect our production, but that is still not known. So we have not accounted for that negative impact. Operator: I would like to move on to the next one, Sasaki-san from UBS. Tsubasa Sasaki: This is Sasaki from UBS Securities. I've got several ones, but the first question is the figures I always ask you. Page 22, this waterfall chart and volume product mix and also the cost variance. Looking at the Page 9 and Page 22, the plan and actual performance, and there have been some figures related to tariffs, but could you please give us the details around those factors? And this volume mix has been negatively contributed to your performance. So the negative JPY 32.2 billion, that's in your plan, but what gets you to that number? Hiroshi Hosotani: This is Hosotani speaking. First, Page 9. Page 24 and Page 25 variance. First in segment profit, JPY 72.6 billion of the volume mix and product mix difference, just hold on a moment. I'm sorry on this one. First, JPY 25.8 billion for the volume difference, and that was a negative. And also product mix, JPY 25.1 billion, that's included. Now factors for this, is that as we explained, electric dump truck, as we explained those up until the last fiscal year, and it's not that they were able to enjoy the higher profitability, but the mix increased for this electrical dump truck. And also Chile contract business margin declined slightly. And also regional mix had negatives here. And among the region, the highest profitability comes from Indonesia. And sales volume significantly decreased in Indonesia market. And that's why regional mix has seen the impact from that and JPY 19.6 billion approximately. Now moving on to the right and production cost, JPY 81.6 billion negative. Let me give you the breakdown for that, which includes the U.S. tariff cost increase, JPY 64.2 billion. This is only applicable to the Construction Equipment of the JPY 64.2 billion and other ones, like the variance coming from industry others, Industrial Machinery and Others. And also cost variance, let me give you the breakdown for that. From third party, we purchased components, the major components, and those costs started to inflate. So that's why there is the major variance of cost of goods. And fixed cost variance, fiscal '24 to '25, the labor cost significantly increased. Apology, you talked about the volume variance, apology, hold on a moment. For fixed cost, JPY 20 billion comes from the labor cost and the SGP projects were underway. And also the variance in comparison between '25 and '26, JPY 31.8 billion of the volume that's been included here, and of which the volume mix amounts to JPY 40 billion. JPY 40 billion, the big chunk comes from Indonesia. Hold on a moment. Other than volume mix, the regional mix and product mix are written here. Fiscal '25, the losses we have to make were all gone for '26. So JPY 31.8 billion included volume mix and that amount to JPY 40 billion. That's all from me. Tsubasa Sasaki: What about the variance of cost of goods? Because I guess the cost increases comes from the conflict in the Middle East. Hiroshi Hosotani: Yes. Fiscal '25 and '26, JPY 49.6 billion for production. The U.S. tariff's impact is included here in this number. About JPY 67 billion is included here, but at the same time, the JPY 30 billion of the refund is included. So the net it all out, the JPY 37 billion of cost increase is included here. And also other cost of goods variance, JPY 10 billion-some is also included. Tsubasa Sasaki: My second question, let me take this opportunity to ask this question of Hosotani-san. You took office as CFO. Give us your commitment as a CFO as we look ahead. For example, as a Komatsu, the capital efficiency improvement and the better margin, I mean, there could be a number of the lists that you want to attain, but you're succeeding Horikoshi-san and took office as CFO. And as one of the members of the top management team, what are the things would you like to achieve? I mean this is your first time to be here in a financial briefing. Do you have any commitment would you like to make? That's my second question. Hiroshi Hosotani: Well, you set the high bar for me actually, but let me try to answer. My predecessor, Horikoshi-san, mentioned this too. But basically, we always have to be mindful of the shareholders in running the business. And I would like to be contributing to the way we run the business. So shareholder returns and balance sheet and ROE, those indicators are the things I always look. For example, in comparison '25 to '26, the net income -- I mean, volume declined because of the conflicts in the Middle East. So net income declined. Business size and the revenue size need to expand from our perspective. And to that end, we are engaged in various activities. As we expand the business size, I would like to be of a support for the better decision on the management level so that we are able to have a better top line. I'd like to engage in those activities as CFO. Tsubasa Sasaki: Is it more like a better top line? Is it one of the things, which you like to commit? That's what I get from your message. What made you think that way? Hiroshi Hosotani: Well, for example, as we look at the current status, the conflicts in the Middle East and there are impacts from that. It takes time until the situation will go back to where it has been. So in the longer term, this is the one-off factor. But the U.S. tariff is concerned, some say this is a one-off factor, but at the end of the day, this is about the balance of the export-import of the United States and other countries and try to correct this imbalance. So these costs are permanently are subjected to occur. So that's why we need to continue to contribute to the cost, but net profit size need to be secured to an extent, which means that we are able to -- we need to have a better top line. Operator: Let's take the next question from SMBC Nikko, Taninaka-san. Satoshi Taninaka: This is Taninaka from SMBC Nikko. Regarding mining equipment, mainly, I have 2 questions. For metal prices, including coal prices, they are rising lately. And in the new fiscal year, when you add up the after services, you're only accounting for about 3% growth year-over-year. I think you're being conservative when you think about the underlying trends. And when you look at the underground mining equipment manufacturers' results, their growth rates look stronger. So can you talk about the backdrop to how you derive these assumptions? Kiyoshi Hishinuma: This is Hishinuma speaking. For mining equipment, as you rightly said, prices have been going up for, obviously, copper and gold and so forth. But on the other hand, for equipment and the way we look at demand, the replacement cycle is pretty long. So there's ups and downs. And also when you look at it by region, there are regions where we're expecting higher demand and other regions where we're expecting lower demand. That's for equipment. And the growth we're expecting for the aftermarket business may look small. However, we did see drop-offs that were quite significant in Indonesia and also in the Middle East, including reman, we have been growing the business, but all in all, the numbers may not look as dynamic as you were expecting. Satoshi Taninaka: My second question is with respect to the replacement cycle and you talked that it has run its course. From 2011 through 2013, demand for mining equipment grew quite substantially. And then you have a replacement cycle. And are you trying to say that the message was that the replacement cycle is over? Or are you saying that over the short term, there are ups and downs and replacements are at a standstill at this moment? So for March '28, are you trying to imply that demand is going to go down even more? Kiyoshi Hishinuma: Well, the cycle we're referring to is not about the 2011 cycle. It's more about whether we have big deals or not in recent years. For example, in North America, in '24, '25, in North America, there were some big deals. And we have been explaining that some big deals have been absent in 2025 because there were more in 2024. So they were less in 2025. And in 2026, we are expecting at this moment less of large deals. But regarding the share volume of general deals, we are actually seeing an increase. So it's just a matter of whether or not we are carrying large deals or not. For example, in the case of Australia, in fiscal '26, we're not expecting that much of big deals, so to say. That's what we were referring to. But for super large dump trucks that we manufacture in North America, when you look at our production plans and compare '25 with '26, production volume is not going to change that substantially. Even if the sales may not be recognized in 2026, there is a possibility that it's going to go into 2027 sales. And rope shovels are being produced at 100% capacity. And we are also working on fiscal '27 already. And because copper is doing well, we're not really expecting that much a decline. However, we need to monitor closely the trends in Indonesia. Operator: I would like to take a question from Adachi-san from Goldman Sachs. Takeru Adachi: This is Adachi from Goldman Sachs. I have 2 questions, too. The first one, the mining equipment. As Hishinuma-san shared, Asian market, usually coal prices are on the rise, which is positive, but diesel prices and operating costs have been boosted, which is negative and negative outweighed the positive and the dormant that populated the vehicles is increasing. And what are the changes that you have seen for dormant and idle vehicles? And I think up until Q1 last fiscal year, there was a last minute demand was very strong and that sub demand in Q2. But as you look ahead, Q1, you see the sales can drop from the fiscal year, but do you think that, that will be flattish after Q2? Or do you think that Q2 and beyond, do you think the moderate decline continues, especially for the Indonesia mining equipment market? Kiyoshi Hishinuma: For Indonesia, as you raised a number of the points, the idle vehicles ratio and what are the historical trends? For example, 2024, the end, 5%, they used to be 5%. Then fiscal '25 in June, 8.5%. And then that was up to 9.6% in January and 10% afterwards and 17% in January. So the coal prices goes up and even the workload increases, and they are able to handle the increase in volume with the coal prices with the current volume. So B40 and now start in July, it starts B50 and production volume, 800 million tonnes, 600 tonnes -- 600 million tonnes. And there are some talks of increasing the volume. Throughout the year, we are not 100% confident that there are bound to increase. So fiscal '26, I believe that we are seeing this as a cautious note. Takeru Adachi: As Tanigawa-san and yourself discussed a bit, Indonesian coal and precious metal have been pretty strong in prices and the production plan is at full, as you said. In order to accelerate it, would you like to accelerate further on that point? Kiyoshi Hishinuma: In North America production capacity ramp-up, rope shovel might be at full. The electric dump truck production plan for fiscal '26 and '25 will be equivalent, I said. But versus what it has been in the past, there are some time where we produce more. So at the full capacity, if we produce them, and there could be some more availability. So in North American market, we are not -- we haven't gone to the point where we are dealing CapEx. Takeru Adachi: Okay. Next one is cash flow and the buyback is announced. And the previous year and two years ago, like those 2 years, you have announced JPY 100 billion. What are the decision-making process like? And behind that, free cash flow assumption were -- would have been calculated. How much free cash flow you're expecting, JPY 160 billion is expecting, I guess. So how much of the operating cash flow and the working capital level? And what are the production assumption to the working capital? Maybe you can have a breakdown approximately. Do you have any up and down of your planning for production? Hiroshi Hosotani: This is Hosotani speaking. For free cash flow, fiscal '24, free cash flow, JPY 300 billion-or-some. That's fiscal '24. And it's been a few years, the JPY 250 billion to JPY 300 billion of the free cash flow. That's our track record of the free cash flow. Now with this amount, dividend and buyback of the JPY 100 billion, we have enough excess capacity to do that with this amount because it amounts to JPY 300 billion. Now for fiscal '26, free cash flow or as planned of the JPY 250 billion plus and deposits and others, I mean, sales were not growing and profits declined, but the working capital is expected to improve. So as a result, so we are able to generate equivalent level. JPY 300 billion plus of the free cash flow are our commitment. So that will continue for 3 years. And M&A portion excluded, then JPY 1 trillion. And that's a commitment and goal we set ourselves. Operator: There are people raising their hands on Zoom. So we would like to take that question from [ Otake-san ], please. Unknown Analyst: Can you hear me? This is Otake speaking. Operator: Yes, we can. Unknown Analyst: Just wanted to confirm again. First question is regarding the impact from U.S. tariffs, please let me sort it out. For the year ended in March 2026, the impact was JPY 64.2 billion on your P&L. Is that correct? Hiroshi Hosotani: That is correct. JPY 64.2 billion for Construction Equipment. That's for Construction Equipment. But for Industrial Machinery, there are -- there is a bit of tariff's impact as well that has been incurred. Unknown Analyst: Up until the previous results, according to the materials, you were saying JPY 55 billion of impact from tariffs. So does this include Industrial Machinery as well on top of Construction Equipment? Kiyoshi Hishinuma: It's only several hundreds of millions of yen attributed to Industrial Machinery. So the level doesn't really change. There was about JPY 400 million of an impact from Industrial Machineries and Others. Unknown Analyst: Got it. And for -- from the assumption of JPY 55 billion, the reason why it increased to JPY 64.2 billion is due to FX impact, right? Kiyoshi Hishinuma: Yes, exactly. Unknown Analyst: No differences on the U.S. dollar basis, broadly speaking. It's just due to the differences in conversion FX rates. So for this fiscal year, for the year ending March '27, excluding refunds, you're expecting JPY 130.8 billion. Is that correct? Hiroshi Hosotani: That is correct. Unknown Analyst: Got it. And the impact amount, the reason why it's higher, you were saying that the content calculation has been abolished and that has had an impact. Can you walk me through what that means and entails? Kiyoshi Hishinuma: Regarding content, for steel and aluminum content, you calculate how much is included for -- as part of your product prices or cost. And that is subject to steel and aluminum tariffs and the rest to reciprocal tariffs. So by calculating the content, we have been able to reduce its cost. And even for derivatives, it is 25% now. So when we were calculating the content, it was less than 25% basically. Unknown Analyst: Or by doing a precise calculation of content, you have been explaining from before that you are able to reduce the cost. But I guess that is not possible anymore. Then in order to reduce tariff impact going forward, such as reviewing our supply chain or logistics, I think that will be key, but with respect to these measures, in order to reduce the negative impact, what are you focusing on? Or what would you like to focus on going forward? Takuya Imayoshi: Well, last year, in April, we shared with you various types of countermeasures we were planning for. For the products that used to go through North America that went to ultimately Canada or Latin America, by shifting to direct shipments instead and shipping out to Canada directly, we will be able to alleviate the impact, and that is fully contributing already. And there are some parts that are going through the U.S. as well. But by directly shipping and also creating warehouses in Panama, we are trying as much as possible to reduce the impact. And for countermeasures, for steel and aluminum tariffs, not by simply just paying for it, but by calculating the content, we had been trying to minimize the tariff impact. However, now it's going to be 25% across the board. So that countermeasure is no longer viable. However, reciprocal tariffs are now gone. So on a net-net basis, the actual amount of payments are slightly up. You referred to the P&L, but the impact on '25 and the impact on '26 because of more inventory impact, it's going to become a greater impact. And the difference in tariff rates have also been impact -- are expected to impact us as well. Unknown Analyst: I see. So you are working on various initiatives. But in order to mitigate tariff impact even more, one kinds of feels that it may be challenging. But what would you like to do additionally? Or do you feel that you will be able to reduce its impact? Takuya Imayoshi: Of course, increasing production in the U.S. is something we are considering. But from a cost point of view, it is also challenging, which is preventing us from doing so. So I think it's more of a buildup of various improvements. And hopefully, we could raise prices to make up for it globally or reduce costs globally as well so that we can ensure that we are profitable. And sorry for going on, but for price increases, you were talking about Caterpillar and that they are not raising prices recently, but currently, in the U.S. as well as in other regions. Unknown Analyst: When you look across the competitive landscape, how are the price increase trends from your point of view? How do you view the market? Takuya Imayoshi: Well, we have been communicating this from before. But from several years ago, in accordance with higher steel prices, we have been increasing prices, but our competitors have been more bullish in raising prices. So we were a little bit behind. But in order to catch up, we have continued to steadily raise prices. But now steel prices have calmed down and price increases just limited to higher tariffs is not really happening, and that is why we are seeing difficulty here. Unknown Analyst: My final question is about the Middle East and its impact. JPY 18.8 billion of a cost increase is what you're expecting. Can you break it down? How would it look like? Can you share it with us as much as possible the breakdown? Kiyoshi Hishinuma: It's -- costs are rising and parts are rising due to oil-derived products and also logistics, transportation costs because of higher fuel costs, that has been accounted for as well. The majority is because of higher parts prices and cost increases. Takuya Imayoshi: Meaning fuel, oils, paint, gas that are oil-derived, material prices have already been going up quite a lot. So that has been accounted for as a cost increase. Unknown Analyst: I see. So procurement cost increases is about maybe 80% of the cost increase and maybe 20% to 30% associated with seaborne transportation. Takuya Imayoshi: Maybe it's like a 70-30 split. Operator: I would like to take questions from anyone joining us online. BofA, Hotta-san. Kenjin Hotta: This is Hotta from Bank of America. I have 2 questions, too. First, with the conflicts of the Middle East and that has impacts on volume and other mix. On the production front, you have uncertainties, so you haven't incorporated them into the guidance, as you said. But if possible, on production front, how much impact do you think that there is? You said there is nothing for now, but given the current situation, how much potential impacts you might have to suffer from? Or are you saying that you have enough inventory, so you are able to have the muted impacts from that on the production front? Give us the details around production areas, if there's anything you can share with us. Kiyoshi Hishinuma: Well, first on production area or production front. First, we try to sustain production work, and we try to work with suppliers. We try to secure enough works and components. And how far we are able to secure them? It's not to say that we are able to secure them for 6 months and 1 year ahead. So we always have to cement where we are, and we try to secure production. To the worst-case scenario, naphtha and other materials could have issues in the future. And if and when, if we can secure some of the materials from plants for any of the one single supplier and the production itself could be impacted. But when would that happen? We're still not sure. That's why we haven't incorporated the potential factors into the guidance this time. Kenjin Hotta: Okay. My second question is the mining equipment. You said replacement cycle. And you said that there is a completed replacement cycle now, but fuel is on the rise. So a little bit outdated equipments. Needs to have -- needs to be a newer ones so that, that uses less oil or less fuel. Is that kind of the replacement demand that you're seeing? Kiyoshi Hishinuma: Well, it's not going to be a replacement cycle you're going to see in the passenger cars. Kenjin Hotta: Okay. But to stay on the same topic of the fuel prices, if you look at the Australian market, diesel shortages is very dire and SMEs mining companies started decide the shortage of diesel and they need to compromise the utilization ratio recently. And BHP has no issue whatsoever because they are big enough. But Australian market is primarily a market where the utilization ratio for the machine is declining. Is that something you're saying? Or isn't there any impact on your operation whatsoever in terms of the diesel shortage? Takuya Imayoshi: Well, we haven't witnessed any of the specifics, be it suspension of the operation itself, but there are risks, yes. Operator: There's another question from online, McDonald-san from Citigroup Securities. Graeme McDonald: Can you hear me? Operator: Yes, we can. Graeme McDonald: This is McDonald speaking. I have a question about Page 26 in North America. Looking at the right-hand side for Q4, for the 7PLs, it was plus 7%. And going back, I think for the first time in several occasions, it was a good number, maybe several years, where you're seeing an uptrend even so for this fiscal year. For volume, you're expecting flattish demand compared to fiscal '25. The non-housing space, when you look at the segments like mining, energy, road construction and data centers and so forth, for this fiscal year, I kind of think that you're conservative in your projections for North America this year. Of course, I'm sure you have a lot of concerns in your heads. But why are you guiding flattish demand? Shouldn't you be guiding having an assumption that is more positive? That's my first question. Kiyoshi Hishinuma: Thank you for the question. For North America, as you said, what we show in the material for Page 26, at the bottom right, we show the breakdown of demand by segment, divided into rental, energy, infrastructure that are performing positively across the board. It was only housing as well as government-related that was negatively contributing. So all in all, the trends are positive. And after completing fiscal '25, we saw plus 3% growth in demand. So when you listen to what customers are saying even, they have about order backlog of 6 months to 2.5 years. Therefore, we do believe the market is quite strong. So our assumptions are flattish, but we're not really anticipating any major negatives. Therefore, yes, you can say that we are being conservative. Graeme McDonald: Well, from a regional point of view, Indonesia apparently had the highest profitability in the past, but if you're so bearish about Indonesia, the highest profitability as a market, I guess, is coming from North America in the non-housing segments. Do you think that's true that it has the highest margins? Kiyoshi Hishinuma: If you just look at SVM, excluding fixed costs, the procurement cost inclusive of tariffs is quite big. So no, the margins are not the highest in North America. Graeme McDonald: Okay. So it will continue to be challenging. So I just wanted to confirm another thing about Page 9, I think. In your comments, Hosotani-san, for last fiscal year and the negatives from product mix was EDTs. Is this one-off? Or for electric dump trucks and its profitability, is it relatively low? I just wanted to confirm that point you made. Hiroshi Hosotani: This is Hosotani speaking. Our dump trucks is because of our dump truck mix. Globally, we sell -- the regions where dump truck margins were high was Indonesia. For Indonesia, we have been selling rigid dump trucks mainly. And for electric dump trucks are being made in the U.S. on the other hand, compared to rigid dump trucks, the costs are greater due to its structure. And sales in Indonesia, especially for mining has been dropping off. So product mix-wise, rigid went down, whilst EDT composition has increased. So from a product mix point of view, because of more electric dump trucks, average margins have come down slightly. Graeme McDonald: I see. So we shouldn't be that concerned, I guess. Hiroshi Hosotani: Correct. Graeme McDonald: Finally, I have a quick question on topics on Page 50, you talked about AHSs and reaching 1,000 units in volume. I think that's great. Going forward, do you have any numerical targets as to how to grow the business even more? That's my final question. Kiyoshi Hishinuma: Well, in the strategic growth plan and our targets, it was 1,000 units in fiscal '27. That was our original target, but we have been able to reach it beforehand. So we have been -- we are thinking about raising the target up to 1,200 units instead. So compared to the pace we saw back in fiscal '25, it looks like it's going to decelerate. However, new customer implementation is likely to increase. And in that case, the rate of increases is going to look like it's decelerating, but we will continue to work on its implementation. Graeme McDonald: How about margins? Compared to rigid dump trucks, is it lower? Kiyoshi Hishinuma: Well, we talked about electric dump trucks earlier. So that in itself is not that high, but this is an AHS system, and we receive income from subscriptions as well. So that is a positive. Operator: We are counting down some time. Anyone who has questions here? Okay. I'd like to take a final question from the floor. Issei Narita: Narita from Mizuho Securities. Sorry, I'm repeating myself, but Page 28, here in Indonesia, mining equipment demand doesn't look like it's declining so much. And yes, I do understand that there is a declining market, but the Chinese manufacturers try to make inroads into mining equipment more and more. And against the hard work in Latin America, the Indonesia and those smaller kinds of smaller dumps were utilized in those Indonesia. So other than the market, there have been anything that you can share other than the competitive landscape? And also, you said Indonesia, it has the highest margin, whereas coal prices will give you the headwind. And that might be changing in the future, but with your self-effort, do you see any capacity to increase further overall performance in Indonesia? Takuya Imayoshi: Well, as you see the bottom right, Page 28, you see the demand trend, and that might be misleading, but you see by sector here. So in terms of the size, the smaller equipment for mining are included here. And then fiscal year '25, we are shipping a lot of those smaller ones and 100 tons demand is on a decline. So that sounds like that doesn't add up. But the demand for 100 tons, the customer try to hold back the purchase. That's why we are struggling. And fiscal year '26, the coal production volume is going to be struggling, but we work with the distributors to secure enough volume here. Operator: So finally, Tai-san from Daiwa Securities, we would like to take your question remotely. Hirosuke Tai: Yes, I'll keep my question brief. I have a question for Imayoshi-san. With respect to the Middle East and tariffs, that was the main topic for today's call. Even if you add back those numbers into your guidance, profitability is expected to be about the same as last year or a little bit down, whether it be on a company-wide basis or for the C&ME segment. And I think it all comes down to inflation, maybe. But how about striving to raise profitability by making up for it? Do you have that intention? Or are you fine with this kind of margin? And would you like to instead raise top line? Because you have just started a new fiscal year. So Imayoshi-san, of course, can you talk about some themes that you're considering as a company? Of course, countermeasures for the Middle Eastern conflict may be one, but I was hoping that you could share 1 or 2 things on your mind. Takuya Imayoshi: Well, as stated in the strategic growth plan, we want to have profitability and growth rates that exceed industry levels. So it's not just about growing top line, but also profitability as well. Overall, demand-wise, we are at a juncture where it's broadly flat. It's not just tariffs impact, but Indonesia's drop-off is also a negative when it comes to profitability, but we will steadily implement the measures that we're stating in the strategic growth plan. We will work on product development as well as we'll think about ways to grow the aftermarket business. So we would like to ensure that we're able to generate results so that we can also enhance profitability. Operator: Thank you very much. This concludes the Q&A session.