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Operator: Greetings. Welcome to Ball Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brandon Potthoff, Head of Investor Relations. Thank you. You may begin. Brandon Potthoff: Good morning, everyone. This is Ball Corporation's conference call regarding the company's first quarter 2026 results. During this call, we will reference our first quarter 2026 earnings presentation available through this webcast and on our website at investors.ball.com. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. We assume no obligation to update any forward-looking statements made today. Some factors that could cause the results or outcomes to differ are described in the company's latest Form 10-K, other SEC filings and in today's earnings release and earnings presentation. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. In addition, the release includes a summary of noncomparable items as well as a reconciliation of comparable net earnings and diluted earnings per share calculations. I would now like to turn the call over to our CEO, Ron Lewis. Ron Lewis: Thank you, Brandon. Today, I'm joined on our call by Dan Rabbitt, Senior Vice President and Chief Financial Officer. I will provide some brief introductory remarks and discuss first quarter 2026 financial performance and our outlook for the remainder of 2026. Dan will touch on key metrics, and then we will finish up with closing comments and Q&A. As we begin, I want to start with the big picture because it continues to matter how we think about Ball and our long-term value creation. We believe Ball is positioned to win and the fundamental supporting that belief remained firmly in place. Packaged liquid volume is continuing to grow globally, and aluminum cans are taking share as consumers, customers and retailers increasingly prioritize convenience, performance and sustainability. That dynamic creates a durable long runway of demand for our products. Within that growing market, Ball is executing at a high level. Across our regions, we continue to leverage long-term customer partnerships, a well contracted portfolio and an unmatched global footprint. Our utilization levels are strong, reflecting both disciplined capacity management and consistent commercial execution. We are pairing that execution with financial strength. We delivered solid results to start 2026, supported by a healthy balance sheet and a capital allocation framework grounded in EVA. Our focus remains on deploying capital where it earns returns above our hurdle rate and on continuing momentum as we move through the year. Operationally, our teams are performing well. Standardization, cost discipline and the Ball business system are driving improved profit per can and reinforcing our ability to generate operating leverage as volumes grow. While we are proud of the progress we continue to see opportunity ahead. When you bring together attractive industry fundamentals, disciplined execution, financial strength and an operating system built for continuous improvement, Ball remains exceptionally well positioned, not just for this year, but for the long term. Our strong start to the year underscores the resilience of our business, particularly in a complex geopolitical and macroeconomic environment. Our strategy is clear, consistent and grounded in our 4 strategic pillars, and that strategy is working. First is executing exceptionally in our core business. That discipline shows up in how we operate every day across our plants and regions, and it underpins our ability to deliver solid Q1 results in an uncertain world. Second, we stay close to our customers and maximize our global network, long-term partnerships strong service levels and a well-balanced footprint allow us to respond quickly and reliably. Third, we continue to accelerate the substrate shift to aluminum and expand categories. Aluminum, sustainability and performance advantages matter, reinforcing demand and long-term growth opportunities. And fourth, we manage complexity to our advantage. Our scale, standardization and systems enable us to remain focused on execution rather than distraction. The Ball business system brings these pillars together, connecting commercial excellence, operational excellence and continuous improvement. At the center are our people and our culture. Low ego, high collaboration and a shared commitment to doing the right things the right way. This is what makes our business resilient, supports strong Q1 performance and positions Ball to continue delivering disciplined execution and long-term value creation regardless of the external environment. The Ball business system is how we operate, and EVA remains our North Star. Together, they drive disciplined execution and capital allocation, enabling us to deliver results. That discipline showed up in our first quarter performance. We executed well and stayed focused on the levers we control, earning returns above our cost of capital while maintaining flexibility. This approach underpins a growth algorithm of 10-plus percent comparable diluted EPS growth, strong free cash flow and consistent returns to shareholders. The results we delivered this quarter are a direct outcome of this operating and financial discipline, and they set up the discussion on our performance in the quarter. Turning to our first quarter performance. We had a good start to 2026. Global volumes were up nearly 1% year-over-year, reflecting slightly stronger-than-expected volumes in North America and in-line performance in South America, partially offset by volumes in EMEA. What stands out is our execution. Comparable operating earnings grew 10% year-over-year, exceeding our 2x operating leverage objective for the quarter. That performance flowed through to the bottom line. with comparable diluted EPS up 22% year-over-year, driven by strong operational execution, cost discipline and capital allocation. The first quarter performance reinforces our confidence in delivering 10-plus percent EPS growth for the full year. We also remain focused on shareholder returns and are on track to deliver in the range of $800 million to shareholders in 2026. Operationally, we continue to advance our priorities, including completing the Benepack acquisition to expand EMEA capacity and making good progress at our Millersburg, Oregon facility, which remains on track towards full ramp up in 2027. Overall, this was a solid first quarter that reflects the resilience of our business, disciplined execution and the strength of our operating model. With that outlook in mind, I'll let Dan walk you through the details of our first quarter financial performance and provide more color on our current expectations for 2026. Over to you, Dan. Daniel Rabbitt: Thank you, Ron. Before walking through our first quarter 2026 performance, I want to spend a moment on the changes we made to our financial reporting this quarter. As you saw in the earnings release this morning, we updated how we report our segment financials. As Ron and I stepped into our roles, we took a fresh look at how we measure performance and align accountability across the organization. It became clear that we needed to more clearly distinguish between operating decisions made within the businesses and financing decisions made at corporate level. As a result, we amended our definition of comparable operating earnings to exclude such items as factoring fees interest income and other impacts driven by corporate financing activity rather than the underlying operations. Importantly, these financing-related items remain included in comparable net earnings in comparable diluted EPS. So there is not a material change to how we measure or report overall company earnings. In addition, we moved our beverage can plants in India and Myanmar into the EMEA segment, which has had management and P&L responsibility for those operations for several years. We believe these changes provide a clearer view of underlying operating performance by segment, while continuing to give investors full transparency into our consolidated financial results. And to be clear, these changes do not materially impact comparable net earnings or comparable diluted EPS. Additional information can be found in notes of the earnings press release as well as on investors.ball.com under financial results. With that context, I'll now walk you through our first quarter 2026 financial performance. Overall, the business delivered a good start to the year. Global ship beverage volumes increased approximately 1% year-over-year, low single-digit volume growth in North America and EMEA, partially offset by lower volumes in South America. Despite ongoing geopolitical and macroeconomic events, our teams executed well across the business. Comparable operating earnings increased 10% year-over-year. That performance translated into comparable diluted earnings per share of $0.94, up 22% year-over-year. This first quarter performance reflects the strength and resilience of our operating model and is consistent with the financial framework we've laid out for 2026. In North and Central America, segment comparable operating earnings increased 2.5% in the first quarter. Volumes increased low single-digit percent year-over-year, reflecting slightly stronger demand, particularly in energy drinks and nonalcoholic beverages. The team continues to execute at a high level, supporting customers, managing costs and navigating a dynamic operating environment. As we look to the remainder of 2026, we continue to expect volume growth at the low end of our long-term range of 1% to 3%. As previously discussed, we anticipate $35 million of start-up costs related to the Millersburg facility and U.S. domestication of ins to begin later this year. While these costs represent a near-term headwind, they support long-term volume growth and operating leverage. In EMEA, segment comparable operating earnings increased 20% in the first quarter. Volumes were up low single-digit percent year-over-year. The team continues to perform well operationally and during the quarter, we completed the Benepack acquisition, further strengthening our European footprint and expanding capacity in Hungary and Belgium. As we integrate these assets, we see meaningful opportunity to drive both volume growth and operating leverage as capacity is filled. For 2026, with the inclusion of Benepack, we continue to expect volume growth above the top end of our long-term 3% to 5% range, along with operating leverage of 2x. In South America, segment comparable operating earnings were flat in the first quarter. Volumes declined mid-single-digit percent year-over-year, reflecting customer timing and inventory position coming into the quarter. Despite lower volumes, the team remained disciplined on cost and execution supporting earnings and positioning the business well as growth normalizes in the next 3 quarters. Looking ahead, we continue to expect volume growth at the low end of our long-term range of 4% to 6% in 2026 with operating leverage of 2x. Focusing on modeling details for 2026. As Ron noted, with the resilience of our business and our pass-through models, we continue to expect to be on track with our algorithm of 10% plus comparable diluted EPS growth. We anticipate free cash flow of greater than $900 million in 2026. Our 2026 full year effective tax rate on comparable earnings is expected to be slightly above 23%. Full year 2026 interest expense is expected to be in the range of $320 million. CapEx is expected to be in line with GAAP D&A in 2026. Full year 2026 reported adjusted corporate undistributed costs recorded in other nonreportable are expected to be in the range of $175 million. We anticipate year-end 2026 net debt to comparable EBITDA and to be around 2.7x, and we will repurchase at least $600 million of shares, which will bring our total capital return to shareholders to $800 million in 2026. And last week, Ball's board declared its quarterly cash dividend. With that, I'll turn it back to Ron. Ron Lewis: Thanks, Dan. Overall, our strong first quarter results reflect exactly how we intend to run Ball. Amid ongoing geopolitical and macroeconomic factors, our teams stayed focused on what we control, serving our customers, running our operations with discipline and allocating capital through an EVA lens. The Ball business system and our strategic pillars are not theoretical. They are driving resilience in our business and translating into earnings, cash generation and returns for shareholders. We had a good start to 2026 and just as importantly, we are executing in a way that reinforces our confidence in the year ahead. Thank you. And with that, we are ready for your questions. Operator: [Operator Instructions] Our first question is from George Staphos with Bank of America. George Staphos: Question for you first. With the performance, are you seeing any effects that you could call out from the Middle East tensions in terms of increased costs that won't necessarily be passed through real time this year, any effects on volume, particularly as regards to Europe, was there any effect on the segment's volumes related to the conflict that you could call out? And then a couple of follow-ons. Ron Lewis: George, thanks for the question. Nice to talk to you. From the impact on the Middle East, First, it's important to note that we do not have any direct business in the Middle East. And as a rule of thumb, we maintain supply chains that are as short as possible. So there's no supply assurance impacts either for our business or for our customers. It is a fact, however, the cost of all things, commodities that are affected by the conflict in the Middle East to have affected our business like others, especially aluminum. And that's where our resilient business model comes to the 4. The way that our contracts work generally is we pass on the cost of aluminum to our customers on an immediate basis, and then they choose how they will manage that cost impact. So thus far, the can is winning. The can is winning in every region we operate. And EMEA is no different than that of North America or South America. Our volumes are actually accelerating as we begin the second quarter of the year across all of our businesses. and EMEA is no different from that. George Staphos: Okay. I appreciate that, Ron. Maybe the related question did European volume perform as you expected? Were there any one-off factors that might have led to better or worse performance related? Are there any important contracts qualitatively that we should at least have in the back of our mind that you'll be managing against and to renegotiate for 2027. And then lastly, with Europe with the contracts. The last point being, we appreciate all the detail you're giving us and the granularity and getting back to basically operating performance within the segment. Are there any other metrics that you would call out that you're using as a guide point or a North Star user term for the segment in terms of profitability over time beyond the 2x leverage? Ron Lewis: Thanks, George. So any one-offs related to our EMEA volume would be specifically, we purchased the business known as Benepack, the 2 plants, 1 in Belgium and 1 in Hungary. And we purchased that from basically the beginning of February, we assumed that we would have it from the beginning of the year. So that probably affected what we had versus what we had planned. The second thing is, we sold a business in Saudi Arabia called UAC. And that business was reported previously in our other segments and with the change in our segment reporting, that's now from a comparable perspective, Q1 of last year is reported in our business. So that shows up as a headwind in our business. Those 2 things probably would have been some one-offs for us. But the core of our Europe business, we believe we're in line with market. We're within our algorithm that we talk about in the 3% to 5% growth, and we feel pretty good about how we started the year there. basically as expected. You asked about contracts. It gives me a moment to just say that for this year, we are fully contracted. And we actually are volume constrained in North America, as you know, and we have been volume-constrained in Europe because it grew so fast last year as did North America. And those 2 things why we are building a plant in North America and why we acquired the Benepack plants. So we're sold for 2026. For 2027, we're more than 90% sold and out through the end of the decade, we are basically 50% sold. So no, we don't have any specific contracts that we are concerned about. We've got long-term contracts in place. And that's just the nature of this business, which makes it a wonderful business to be in because we're able to establish some great long-term relationships that help our customers win and win with they can. As it relates to what metrics we would like point you to, it would probably be operating earnings per can. And that's why we've had the segment changes that we did. And I'm sure we'll get questions about that as well. But it's basically we want to have the most transparent cleaner for you all that analyze and comment on us and advise on us. We want you to have the cleanest looking Canada. So the operating earnings per can would be the metric that we would point you to. Operator: Our next question is from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess just picking up on the last question from George. So if I have this right, it looks like 1Q was pretty much in line with your expectations on a volumetric basis, but was really the operating leverage that was quite strong. And if that's accurate. Can you just give us the specifics, Ron, on what drove that improvement in operating earnings specific to the first quarter? Ron Lewis: Yes. Ghansham, nice to hear your voice. Thanks for the question. I would say, yes, we were largely in line with what we expected from a volume perspective, even with our South America business down year-on-year. We were probably a little bit ahead of what we expected in North America. And we were a little bit behind in EMEA. And let me just take a moment to talk about volume. While we were down in South America -- well, how did we compare versus the market? We think we were in line with market in North America. We think we were in line with the market in EMEA, and we were obviously below the market in South America given what our competitors have already already publicly stated. As we begin Q2 at an enterprise level, our volumes as we finished April were up mid-single digits. Again, that's as we expected them to be. And importantly, our South America business is up 20% April on April, and that erases all of the declines we saw in Q1, and we're back to flat volume for the year. So we are very confident in our predictions for how our business will finish on a volume basis for 2026. We expect to finish in our 2% to 3% towards the top end of our range of the 2% to 3% volume at enterprise level, and we expect North America to be towards the bottom end of our range because we are capacity constrained. We expect EMEA to be above the 3% to 5% commitment that we've made because of the inorganic acquisition that we made as well as a business that's performing in line or better with market. And in South America, we expect to still achieve the 4% to 6% volume growth as it relates to our long-term commitment. Now as for the operating leverage, maybe I'll give Dan Rabbitt a moment to reflect on that for us because I think I want to hear his voice in this meeting, and I think you do, too. Daniel Rabbitt: Yes. Thank you, Ron, and Ghansham, thanks for the question. We are -- as we've been speaking to a lot of you all very focused on trying to improve the profitability. And that is why Ron really highlighted the the growing importance of our metric of profit per can. We measured in profit per 1,000 being manufacturers, but regardless, it's profit for can focus. And I think the business is responding very well to how to this focus. And you've seen -- we saw good performance, good cost management, good pass-through of our cost really on top of our game that came through to deliver that 10% growth on operating earnings quarter-over-quarter. Ghansham Panjabi: Okay. Fantastic. Very comprehensive. And then just on the resegmentation, if you will, and just moving the plants in India and Myanmar to the EMEA segment, should we take away from this that you're just going to focus on North America, Europe and Latin America and not so much on the emerging markets, including those regions? Or is it just an interim move, if you will, before before you start looking at capital deployment in the other regions, the emerging markets outside of South America. Ron Lewis: Let me start with that question, Ghansham. Thank you for it. And I know we probably have some follow-up work to do with you and others after this call. But number one, the reason we made this segment operating change is this is the way we manage our business. It really is. We -- the management team that manages our EMEA business is also the management team that manages those plants that we've now included in our EMEA business. So we're doing it for the way that we operate our business. We want you to look at us and advise on us the way we operate our business. Number two, we want it to be as clean as possible for you and others to analyze us from an operating earnings perspective. So it's about transparency for us, both the way we operate internally and the way that we want you to look at us. the 3 regions in which we operate, including those regions that we've now added to our EMEA business are our core business, and we are the market leader in North America, South America and what is our EMEA business, the footprint that we have there. And we're very excited about our EMEA business. It's a growing business, especially those parts of the world that we just added. India is growing high teens and has been for years, and you saw us add capacity and announce additional capacity adds to India and you see our competitors looking to add capacity there. So it's a great market, and there are other great markets out there. I wouldn't take from this that we are focusing only and solely on the markets we operate in. And maybe, Dan, if you wouldn't mind commenting a bit on the other segment changes. Daniel Rabbitt: Yes. As far as the segments goes, the other thing that we did noteworthy really and was taking out the financing, the treasury-related items of the businesses to allow for better transparency on how the businesses are performing. And we really like our prospects in all 3 regions. And as you know, we measure everything from how we want to grow this company through the lens of EVA, and we see great opportunities in all 3 of our regions. And -- so I think now you have a better picture on how they're performing. And really, if the changes may be contrary to what people might think is actually were slightly negative, but the operating earnings would have been higher had we not made them on the quarter. I think over the long haul, we see this as a de minimis change. And again, reinforcing that the net earnings really have not changed. We're really materially the same place where we are when you look at the bottom line. Operator: Our next question is from Anthony Pettinari with Citi. Bryan Burgmeier: This is Bryan Burgmeier on for Anthony. Just wanted to ask about tariffs. Curious if there's any impact to Ball from sort of the latest changes announced early last month, specifically just thinking about covering some of the derivative products or applying the tar value to the whole value of the product and conversely, maybe some changes to Mexican beer. Just not sure if that alters the Dew for Ball at all. Ron Lewis: Bryan, thanks for the question. again, the tariffs that manage and govern the aluminum ecosystem and industry are Section 232. That's what's most impactful on aluminum cost and pricing. And the recent changes I think they're de minimis for our business. There's a slight positive for products that can come to the U.S. filled products, be they impact extruded aerosol packages or, as you said, beverage packages that are filled. So net-net, it could be slightly positive. But we're focused on serving our customers. And when they look for supply from us, that's what we're intending to do. And yes, so far, so good. Bryan Burgmeier: Got it. Got it. And then you touched on India already, but just wanted to follow up there. You've seen maybe some reports like energy shortages or material shortages. Just curious if that region has been impacted at all by what's going on in the Middle East? And it seems like a pretty good growth outlook over there. But Yes, if you could just maybe share some details on the near term and long term for India. Daniel Rabbitt: Thanks, Bryan. India, for sure, is an exciting place. That's the real story is that we've seen multiple years of high teens plus 20% growth. So the can industry is really moving quickly to establish supply locally as we are. As I noted, we've recently added capacity to 1 of our 2 plants there, and we've announced the adding of capacity to the second of our plants. So that's the real story of just managing growth in a high-growth market with with capacity constraints. There are continuing to be imports into that country because we cannot, as an industry manage to fulfill all the demand locally and there are some minor supply chain disruptions in that market that are, I think, come and gone. So we're running our plants and our plants at capacity. So if there there's any -- there was no material impact and nothing to note really to talk about on this call, and we're excited about the long-term prospects of India. Operator: Our next question is from Phil Ng with Jefferies. John Dunigan: This is John on for Phil. I just wanted to start on EMEA. The comparable EMEA earnings came in quite a bit better than we expected. It sounded like Benepack wasn't much of a contributor, at least compared to where you were thinking it was going to close. But you did note that the FX actually supported the earnings in the segment. Could you just maybe give us a little bit more detail on what drove some of the higher year-over-year comparable EBIT in the quarter? Daniel Rabbitt: Sure. This is Dan. I mean, I think we have to start with is that the business performed really well. We're again, focusing very much on improving profit. This region really has probably the most runway to improve profit and indeed, they're doing that. So I think it's a credit to that. But when you look at the overall puts and takes that Ron previously had talked about. The driver of this region is the EMEA segment, as you've always heard about at the last few years. It is performing very well. We're getting good now with the India plants and the Myanmarr plant coming in. Those 2 are showing growth and good operating leverage as well. So I think the 2 inorganic opportunities that we took on buying Benepack and selling the UAC really kind of neutralize each other. So I think really mostly what's happening is good performance in this segment. John Dunigan: Great. And maybe you could just quantify how much the FX supported earnings in 1Q? And then my second question is just on the corporate undistributed cost. It sounds like they stepped up. Maybe that was just a factor of some of the recasting that you did, but going up to $175 million, I think you said. Could you just tell us what's going on there? Daniel Rabbitt: Yes. Well, a lot of the positive FX now is moving out of the segment reporting for what we did. So -- but for the company as a whole, I think we probably had about $15 million of positive earnings from the translation and a lot of that is the euro when you compare it year-over-year from the first quarter because it was at a low point a year ago and now it's kind of, I don't know, about 0.15 higher on the foreign exchange. Ron Lewis: As it relates to EMEA specifically, John, I think it was less than half of the gain in operating earnings in our EMEA business was related to FX. John Dunigan: Great. And then the corporate undistributed? Ron Lewis: That's what I think Dan referred to earlier, which was the $15 million. John Dunigan: I apologize. Ron Lewis: So there's a corporate undistributed. That's where we put the FX gains and losses as the translational impact on EMEA was less than half of the operating earnings gain, and that's what you heard from from others in the industry as well. Operator: Our next question is from Edlain Rodriguez with Mizuho Securities. Edlain Rodriguez: I mean clearly, I mean, one, we are clearly in an inflationary environment globally. Like how do you expect this to impact consumer mood and ability to spend. And if there is any impact, like in which region would you expect to kind of start seeing that first? Ron Lewis: Thanks for the question. Well, first of all, the can is winning in every single region in which we operate, and it continues to take share from other substrates. That was true last year and the year before, and it's true this quarter, and we believe it will be true for the foreseeable future. So the can is winning. And we can -- you see the same data we see, and we're really pleased for that. And why is that? It's because of the unique nature of the can. It provides a robust transportation. It provides a robust shelf life. The can has a shelf life of the year. It provides a great billboard effect. You could sell it a singles multiples. I mean, I can talk for for hours about the benefits and the filling your product in an aluminum beverage package and especially one made by Ball. So that's what makes it unique and helpful. As it relates to inflation on the consumer, I mean, all inflation -- all costs are going up. And all I can say is our customers are excited about winning with the can as well. Every time I go to one of our plants, I see new promotional activity coming into summer, especially in the Northern Hemisphere. So every one of our plants is running and most of those labels are promotional labels. And I think our customers will continue to lean into the can as a means of helping them to support the consumer as they seek value. Daniel Rabbitt: And Ron, the only other thing to add is that as consumer really is in place -- has headwinds, it tends to kind of retreat to doing more home consumption. Ron Lewis: And that's been the reason why it's remained so strong. Edlain Rodriguez: Now clearly, that's the case. And 1 quick one. In terms of like the past to make and assume you have for aluminum and other costs, can you remind us how -- like is there a lag? And how much is that lag in terms of like how quickly you pass to those costs? Ron Lewis: Okay. Well, let me do very quickly on aluminum, it's I say immediate, and our other cost pass-throughs are formulaic in nature, and usually, they pass through on an annualized basis. Is there more detail you'd like to add to that, Dan? Daniel Rabbitt: Yes. I think the 2 areas I would add on to that is that really we're talking about higher energy costs and how does that impact us. Ron covered the aluminum, so I won't go back to that. It's really about the customer often pays for the freight, more often at pace for the freight, too. So that's a pass-through to and that's a fairly immediate pass-through in many circumstances. And then when we look at the year, we always look at trying to hedge and lock in our energy cost. And so we're in a pretty good position from what it takes to run our plants right now, too. Ron Lewis: And we do those hedging to align with our customer contracts so that we want to be valued for the additional values that we add to the aluminum that we buy and make into aluminum beverage cans and ends and bottles for our customers. Operator: Our next question is from Mike Roxland with Truist Securities. Michael Roxland: Congrats on all the progress. First question I had is, Dan, you just mentioned in response to John's question that the EMEA business has the most runway to improve profit and they're doing that. That segment was already achieving operating leverage target, whereas North America is. And so I'm just wondering what you see in terms of potential for EMEA and why it has the most runway relative to other businesses. . Daniel Rabbitt: Yes. Thanks, Michael. I think the main thing to do is when you take a look at the profit per can, MEA is our lowest, okay? So for the regions. And they actually have been focused for several years and making the biggest strides on it. And as far as the profit per can. So that's why I highlight that there's the most opportunity and the most progress has been made, too, as we think about that from them. Your question about North America, really, right now for the last quarter or 2, we see North America on target for trying to -- for the 2x operating leverage. It's been pretty close to that number. As we measure it this quarter and last. So I think good things are happening in North America as well. And it is also increasing its profit for [ CAM2 ] as we look at it. Ron Lewis: And if you don't mind, Dan, I'd like to add a few things, Mike, thanks for the question. How are we going to improve our -- why do we believe we can improve our operating earnings in Europe? It comes back to our operational excellence platform. Number one, we need to implement manufacturing standards in our business, and we're doing that. Number two, we need to manage our network well and adding 2 new plants in countries where we didn't operate in Belgium and in Hungary are certainly going to help us. And we're investing in our people and our systems. So those are the things that I think will -- that give us confidence that we can continue to compete and operate our plants and our network well. I would say the other thing is Europe, we always talk about it as a land of opportunity. There is still significant opportunities for can penetration. So we know there's a lot of runway to go. We're really proud of our ability to deliver our operating leverage this quarter. We delivered and then some across the enterprise, we certainly delivered it and then some in our EMEA business. We delivered flat op earnings in South America despite the volume declines in North America. We achieved our operating leverage there as well in the quarter, although for the enterprise for the full year, we expect to do more or less operating leverage as compared to our volumes at 2x. That's what we're planning to do. Daniel Rabbitt: And Ron, I think I'll use this as an opportunity to reiterate the outlook for North America. We've been talking about the $35 million of ramp-up costs for Millersburg and the domestication of some in production as well. And that was not in the first quarter. So as we start to think about the rest of the year, you're going to see those costs come in later in this order and heavily in the third quarter, possibly a little in the fourth quarter as well. So that's going to distort some of that operating leverage. And that's why we've been saying all year long, you're going to have to make some adjustments for those, and you will see the operating leverage on the base business. Michael Roxland: That's perfect. And if I had just one quick follow-up. In terms of some of the incremental costs you're experiencing, obviously, they're believed to be transitory of freight, chemicals, energy, and I think I know the answer is going to be but going to ask the question anyway. What levers do you have available to you internally to offset those higher costs? I'm assuming operational efficiencies, deploying best practices, the bold business systems, some of the things you mentioned on your commentary. But are those are the levers that you have in your wheelhouse to basically offset incremental costs and to even potentially drive margins higher when those costs recede. Ron Lewis: Mike, I think you're thinking about it the right way. We have to be operationally excellent every day, and that's the first pillar with our strategy. So that -- those are the primary means by which we offset those costs. And they're real. So -- and then the second thing is we are a resilient business model. We are rewarded for and paid for making cans, bottles and ins as efficiently as possible. . And the cost that we manage on behalf of our customers are generally passed on to them in a formulaic way, be it freight, be it other direct materials, be it aluminum through various means. So that's what makes us a very resilient business in a very resilient industry. Operator: Our next question is from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to get your thoughts on maybe the contracting environment. You guys are adding capacity in North America and Europe and and elsewhere. So presumably, supply and demand is relatively tight in all regions. But are you expecting to -- given that tight capacity, would there be any pricing opportunities over the next few years? I mean how should we still expect about 1/3 of your contracts roll over every year? Or maybe you can just kind of help us frame those kinds of opportunities as well. Ron Lewis: Arun, thanks for the question. I would say you saw the industry grow significantly the last few years. Certainly, last year, Ball, we grew more than 4%, so above our long-term algorithm. And we used up a lot of the latent capacity that we had. So strong growth in the last several years has led to a relatively tight supply demand scenario. We, as a business, are operating certainly at asset utilization levels in the mid- to high 90s depending on the region on a percentage basis. So the supply and demand is relatively balanced to tight. The next thing I would say is the long-term nature of our business is also reflected in the long-term nature of our contracts with our customers. So I mentioned earlier on the call, we are sold out for this year. We are more than 90% sold for next year, and we're more than 50% sold for the balance of the decade. We have a heavy capital deployment in our industry. So it requires that level of commitment from a customer for multiyear contracts. So we're well contracted. You said there's roughly 1/3 of our volume turnover every year just based on those numbers, it's significantly less than that. Is there an opportunity for us for pricing, I would say, we want to be fairly rewarded for what we do. including down to all of the value-added things that we do, whether it be a different type of specialty can or a special special promotion or a different type of ink. Those are the things that we deserve to and get rewarded for when we're able to bring that sort of innovation to the market. the market will be what it will be, and we just know that we need to be operationally excellent to compete in it. Thank you, Arun. Arun Viswanathan: Okay. And then if I could ask a follow-up. Just curious on if you will be putting in more capacity here in North America. Obviously, you have the Millersburg plant, but Presumably, that will only bring you down to the low 90s and maybe even in the mid-90s. So is that -- would you be adding more capacity? And what are your customers, I guess, when you do go through this process, you kind of presell the plant out? Or is it kind of more done in the future? Ron Lewis: Yes. Thanks for the question, Arun. It gives us a chance to talk about Millersburg, which will be commissioning late this year, and it will bring material volume to our network next year. It will allow us to remove some supply chain inefficiencies because we do not have capacity in the Pacific Northwest and the U.S. So that will help us and our customers. The most important thing about that plant that you should know is it comes on the back of a long-term offtake agreement with one of our most strategic customers. So that plant is -- capacity is spoken for, for many, many years to come when we build it. And that is the second thing that you said, the case for any plant that we would build, we will not build a plant unless we have a long-term offtake agreement filling essentially all of the capacity for that plant. So we're excited to bring new capacity to North America, but we only bring it on the back of a customer's commitment to us because they see the growth of the beverage can. Maybe a specific comment, for example, the energy drink category, as you know, and we all know, is growing and continues to grow unabated. And as it grows, we're excited to help our customers in that regard. And we have potential to build another plant on the East Coast at some point before the end of the decade, but I wouldn't get too excited about it because it won't be in the next several years. But we have intentions to build a plant in the East Coast in North Carolina because of the growth of one of our more -- most strategic customers as well. And we'll do that when it's appropriate. And hopefully, that gives you a sense of how we deploy our capital related to our customers. Thank you. Operator: Our next question is from Hilary Cateno with Deutsche Bank. Unknown Analyst: Could you talk about what you're seeing from the CPGs and in terms of promotional activity? Are you seeing them be more promotional than they have been in the past? Any color on that would be helpful. Ron Lewis: Hilary, thanks for your coverage of us. We appreciate it. Yes, it's great. Our customers, we've really them and look to them for guidance on how they view the consumer. They're much better at this than us, and we really appreciate the insights they provide us. Based on what we know and we hear from them, I'm going to talk specifically about the summer coming up. When I go into our plants and our factories around the world, be it in Europe, in South America or in the U.S., at least one of the lines is running a World Cup label. So that's exciting. Everyone is excited about the summer's World Cup coming up. And if you're walking through one of our plants in North America, I can almost guarantee you, you will also see another rhine -- line running America 250-year celebration labels as well. So clearly, our customers are looking forward to taking advantage of some exciting consumer-driven marketing activity this summer. And it should be at least -- it will be no worse than neutral, and we think it will be a net positive for us. We couldn't put a number on it right now. We're just pleased that our customers continue to see the value that I spoke about earlier of the beverage can. It provides an amazing billboard for them to talk about that promotion. They can use it as a multipack or a single different sizes and the robustness of the package means that they can lean into the can as opposed to other packaging substrates because of the shelf life and the quality that, that can provides for their product. Unknown Analyst: Got it. That's helpful. And then just a follow-up question. The EVA framework really seems to be working well in setting a clear guideline and goals on the corporate level. So could you just talk a little bit about how the EVA framework is being used to like incentivize employees at the plant level and to make operational decisions and is that what's driving operational efficiency on the corporate level as well. Ron Lewis: Thanks for the question, Hilary. I'll let Dan say a few words in a moment about EVA, but it just gives me a chance to say, EVA is our North Star. It hasn't for a long, long time, and it will continue to be for the foreseeable future. So how we deploy capital, running a cost-efficient business, that's what acting like an owner means. So as it relates to our plants, all of us are rewarded for delivering EVA dollars, every single person in this company. And maybe, Dan, could you give some nuance around how we're thinking about EVA operationally? Daniel Rabbitt: Yes. Yes, the nice thing about having EVA is it's been here longer than Ron and I have. And so it's really ingrained in the culture. We do like to have everybody included in these plans. And what we're really focused on now is breaking EVA down from this financial concept into what they can actually do to improve EVA. So we're making it much more personal. And that's one of the key items we're doing to improve the profitability of the company right now is really getting much more granular and breaking down EVA. Operator: Our final question will be from Matt Roberts with Raymond James. Matthew Roberts: I got a couple of messages clarifications on first April. I know you said that was up mid-single digits. What region was that? Or was that enterprise wide? I believe South America, you said April up 20%. How much of that 20% was the catch-up from 1Q? Ron Lewis: Thanks for the question, Matt. So enterprise-wide, we started the quarter, the month of April, up mid-single digits as an enterprise. Within that enterprise, South America, April volumes were up 20%. How much of it was catch-up from Q1? Well, what I can say is that April volume made up for all of the declines we saw in the first quarter. And it gives me a moment to just say what happened in the first quarter. What happened in the first quarter for us was you saw a really strong volume for us, high single digits in Q4 2025. So we came into the to Q1 with a pretty healthy sales of cans to our customers who had built a strong inventory. The peak season in South America, weather wasn't probably as good as on average that it would normally be. So it was a little weaker than average, but the -- coming out of peak, the weather has been quite good. And we're seeing a strong pull through as we come out of that peak selling season in South America. And we think that's some of what's happening. And it wasn't asked, but we delivered flat operating earnings in the region, which we're really proud of. And how we did that was we actually got to a position where our inventory levels were a bit lower than we expected. So we were able to build back our inventory, which helped us to deliver the P&L in South America. And also, we had some good size mix and country mix there as well that helped us deliver flat operating earnings while we had volumes down a bit. So hope that answers your question about the volume and a little bonus on color on South America. Okay. Thank you very much, Matt. And Sherry, I think that's our last question. So I just wanted to thank everybody again for your interest in our company. our analysis of our company, your partnership in helping us tell our story. We really appreciate that very much. We look forward to talking with all of you more and sharing our story. So we're excited about how we delivered the first quarter of 2026. We're confident in how we're going to complete 2026. And importantly, we're confident in the long-term nature and the resilient business that we have the privilege to run. So thanks again, everyone, and we look forward to talking to you very soon. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead. Aijana Zellner: Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2026 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Christian Rothe, our CFO. Our results were released earlier this morning and the press release and charts are available on our website. These materials as well as our remarks today will reference non-GAAP measures. Reconciliations of these non-GAAP measures are included in both the press release and charts. A replay of today's webcast and a transcript of our prepared remarks will be available on our website at the conclusion of today's call. Before we begin, please note that our comments today include forward-looking statements regarding the expected future results of our company. Our actual results may differ materially due to a wide range of risks and uncertainties described in our earnings release and SEC filings. And with that, I'll hand it over to Blake. Blake Moret: Thanks, Aijana, and good morning, everyone. Before we turn to our detailed results on Slide 3, I'll make a couple of opening comments. Rockwell delivered especially strong operating performance this quarter with sales, margins and EPS all coming in above our expectations. Double-digit year-over-year growth in orders, sales and earnings reflects our strong market position led by North America and the team's continued focus and execution in a dynamic global environment. Our technology continues to perform in the most demanding mission-critical environments. Last month, Rockwell supported NASA's Artemis II mission, enabling ground control systems for the first crude mission to the moon in more than 5 decades. It's a powerful example of how customers trust Rockwell when reliability, precision and safety are paramount. These same capabilities, including our digital engineering, robust security and deep domain expertise are what our customers depend on every day to improve productivity, augment their workforce and modernize operations. We saw an improvement in customer demand across a broader range of industries in Q2, such as e-commerce, warehouse automation, data center, semiconductor and energy. Book-to-bill for the company was slightly higher than our historical average. This includes the increasing contribution from projects to build new capacity in the U.S. However, persistent trade volatility and geopolitical uncertainty continued to delay large capital investments in other industries, including automotive and consumer packaged goods. We're doing a good job of managing cost increases in areas affected by tariffs, demand for memory and fuel. At the same time, we're accelerating the release of new technology to grow our customer value and share over the long term. The investments we made over the last half dozen years in cloud native software and modern development tools are contributing to this measurably faster pace, including the ability to incorporate AI capabilities within months of their initial release to the market. Turning to our second quarter results on Slide 3. Q2 sales were above our expectations with organic sales growing 9% year-over-year. Reported sales were up 12% with favorable currency contributing 3 points of growth. Intelligent Devices organic sales were up 9% versus prior year, with strong growth in our Motion, I/O and Safety & Sensing businesses. We continue to build momentum with our production logistics offering where our OTTO AMRs are gaining adoption across a broader range of industries, including automotive, food and beverage, home and personal care and even pilots in data center applications. A great example of a strategic OTTO win in the quarter was with Subaru of Indiana Automotive, where our autonomous mobile robots are helping scale their production by improving efficiency, flexibility and safety. In our Software & Control segment, organic sales were up 17% year-over-year and well above our expectations, driven by continued double-digit sales growth of Logix, especially in North America. Our Logix growth was broad-based in the quarter and we saw a particularly strong performance with our data center customers, where we continue to see increasing demand for our industrial grade controllers. A great example of this momentum in Q2 was our win with ATS Automation, who is leading the conversion from commercial controls to our robust Logix PLCs at a new AI data center in Texas. Lifecycle Services organic sales were down 1% versus prior year. Our longer cycle business was largely in line with expectations with customers deferring some of their larger projects and continuing to prioritize smaller scope productivity and modernization investments. Book-to-bill in this segment was 1.07. The dissolution of our Sensia joint venture is now complete and executed as planned. Christian and I will cover the expected impact on full year fiscal '26 financials later on the call. Annual recurring revenue was up over 6% in the quarter, including high single-digit growth from software ARR and mid-single-digit growth from recurring services. We continue to see slower growth in our services business with customers temporarily delaying and reprioritizing their spend. One notable ARR win in this quarter was with Prometeon Tyre Group, who selected our cloud native Fix software as their digital maintenance platform, enabling asset management and operational discipline across complex multisite operations worldwide. From a profitability standpoint, we delivered strong margin performance this quarter. Beginning in Q2, we are now reporting enterprise operating profit and enterprise operating margin, which include corporate expenses. This is due to SEC requirements around non-GAAP measures and is simply a change in presentation with no impact to net income, EPS, cash flow or individual segment margins. Christian will add more detail on this in a few moments. Enterprise operating margin of 22.5% and adjusted EPS of $3.30 were up significantly year-over-year and well above our expectations, driven by higher volume, positive price/cost, favorable mix and productivity. Let's move to Slide 4 for Q2 industry highlights. Sales in our Discrete industries grew mid-teens versus prior year, led by better-than-expected growth in automotive, e-comm and warehouse and semiconductor. Within Discrete, automotive had a strong quarter with sales of mid-teens year-over-year. While we are starting to see a broader normalization in production schedules and the release of select larger projects, the majority of customer investment is still focused on productivity and smaller modernization initiatives. In addition to our Subaru win mentioned earlier, we secured several strategic AMR wins with global brand owners where our autonomous material movement solutions are replacing traditional AGVs and forklifts across their global operations. This quarter, we also had an important new logo win with an energy infrastructure company who chose Rockwell to automate the entire production line for their greenfield facility in China, marking our first end-to-end deployment across a complete battery manufacturing process. E-commerce and warehouse automation delivered another strong quarter with sales up over 30% year-over-year as customers continue to prioritize upgrades and retrofits within existing warehouses over new greenfield builds. Semiconductor performance improved in Q2 with sales growing high teens versus prior year, supported by a stabilization in core semi demand and an accelerating contribution from AI and data center-driven investment. This is one of the verticals where we saw broadening demand. Our data center business was one of the strongest end markets in the quarter, with sales more than doubling year-over-year. Customers are prioritizing speed to capacity, resilience and energy optimization driving investment in both upgrades to existing facilities and select new builds. Turning to hybrid. Sales in this segment were up high single digits, led by strong year-over-year growth in food and beverage. Sales in Food & Beverage grew high single digits with good growth in North America and EMEA. We continue to see customer investments in healthier products, including protein, dairy and nonalcoholic drinks. CapEx for new construction remains constrained in consumer packaged goods, including Food & Beverage, but we're seeing the impact of our new offerings such as autonomous mobile robots and contribution from midsized customers that we cover so well along with our distributors. This quarter, Agropur, a leading dairy producer, selected Rockwell's digital services to support its digital transformation and advance its factory of the future strategy. Our Life Sciences business grew low single digits versus prior year and double digits sequentially with new capacity projects in North America and Asia Pacific. In the quarter, our combination of FactoryTalk PharmaSuite MES, and FactoryTalk Optics helped secure a competitive win for an active pharma ingredient application. Another strategic life sciences win in the quarter was with Butantan Institute, one of Brazil's largest biopharma and vaccine producers, which expanded its PharmaSuite MES footprint to optimize and automate production processes, reinforcing Rockwell as a long-term digital manufacturing partner. Turning to Process Industries. Sales in this segment grew mid-single digits with solid growth across energy, metals, pulp and paper, and chemicals. Energy sales were up mid-single digits in the quarter and were above our expectations, particularly in the Americas. A great example of our continued momentum in oil and gas was a win with Petrobras where Rockwell will provide integrated automation services across multiple FPSOs in the Buzios offshore field. This reflects customers' continued trust in our capability to support complex offshore operations at scale. In mining, we formed a strategic partnership with BHP to support them in advancing the next generation of autonomous operations combining Rockwell's leadership in automation and AI with BHP's deep operational expertise to help enable scalable execution across complex safety critical environments. Another example of our increased presence in Process this quarter was our new capacity win with a leading North American packaging customer who chose Rockwell to deliver an integrated automation solution for one of the region's largest mill expansion projects, expanding our installed base and positioning Rockwell as a platform for future phases of this multiyear project. Moving to Slide 5 for our Q2 organic regional sales. We saw broad-based growth across most of our regions this quarter. While the conflict in the Middle East has paused some near-term customer activity, mainly in our Lifecycle Services business, the impact to results is limited today, and we see potential for reinvestment as customers restore operations over time. Organic sales in the U.S. were up 10% versus prior year and we continue to expect North America to be our strongest region in fiscal '26. Let's now turn to Slide 6 to review our fiscal 2026 outlook. I'm pleased with our performance in the first half of the year. Customer demand continues to gradually improve and broaden across more of our end markets. However, we are balancing this momentum with a prudent approach in an uncertain environment. We now expect both our reported and organic sales growth to be in the 5% to 9% range. Our reported sales midpoint now assumes 1.5 points of positive contribution from currency translation, offset by the negative sales impact from the Sensia dissolution. We expect organic annual recurring revenue to grow high single digits this year, led by cloud-native software. We're increasing our enterprise operating margin outlook to 21.5%, up from about 20% in our prior guide, and we now expect our adjusted EPS and to be about $12.80 at the midpoint. The increase is driven by volume and very strong conversion, even as CapEx spending in some verticals remain subdued. We continue to expect free cash flow conversion of 100% in fiscal year '26. I'll now turn it over to Christian for more detail on our Q2 and financial outlook for fiscal '26. Christian? Christian Rothe: Thank you, Blake, and good morning, everyone. Let's go to Slide 7, second quarter key financial information. Second quarter reported sales were up 12% versus prior year. About 3 points of growth came from currency. Our Q2 results still include Sensia as the JV was dissolved on April 1. Three points for organic growth in Q2 came from price, with about half coming from underlying price realization and half from tariff-based pricing. There were lots of puts and takes from tariffs in the quarter, including the removal of IEPA tariffs, the new Section 122 tariffs and the changed approach with Section 232 tariffs. We continue to expect pricing actions to fully recover tariff costs this year. We'll continue to evaluate and modify our plans as more details become available, especially related to the expected Section 301 tariffs. Maintaining earnings neutrality remains our focus. Our second quarter and full year guide do not include any impact from expected IEPA refunds or claims resulting from the Supreme Court decision. Moving on to the rest of the P&L. Gross margins expanded year-over-year by 160 basis points to more than 50%. The strong performance was driven by volume, ongoing benefits from productivity and favorable mix. SG&A spend was 2% higher year-over-year in the second quarter, primarily due to higher compensation, reflecting our annual merit increase and strong outperformance in Q2. Engineering and development spend was up about 11% year-over-year on pace with our sales growth as we continue to invest for the future. Our total innovation spend was about 8% of sales in the quarter. As Blake mentioned, beginning this quarter, we are now reporting enterprise operating profit and enterprise operating margin, which are both -- which are replacements for total segment operating earnings and total segment operating margin. We are making this change due to SEC requirements, as these new measures include corporate and other expenses and therefore, reflect enterprise level operating performance. There is no change to how we report individual segment operating earnings and segment operating margin for Intelligent Devices, Software and Control and Lifecycle Services. These will continue to be reported on a consistent basis with prior periods. Slide 15 of our earnings deck shows the recast information for the last 10 quarters, bridging previously reported total segment operating margin to the new enterprise operating margin. This is a change in presentation only and has no impact to reported net income, earnings per share, cash flows or overall financial position. Our enterprise operating margin expanded 350 basis points year-over-year, reflecting the strong growth in volume, positive price/cost, inclusive of productivity and favorable mix, partially offset by higher compensation. In short, we are getting great leverage on our P&L. Our adjusted effective tax rate in the quarter was 20.6%, slightly higher than our expectations. We continue to expect an adjusted ETR of 19.5% for the full year. The broad-based strength in our business delivered results that exceeded our expectations with Q2 adjusted EPS of $3.30, up more than 30% year-over-year. Free cash flow in Q2 of $275 million was above our expectations. It was $104 million higher than the prior year, primarily due to higher pretax income driven by our strong Q2 results. Receivables were a use of cash in the quarter, reflecting strong shipments. Slide 8 provides a sales and margin performance for our -- of our 3 operating segments. Intelligent Devices margin of 20.9% increased by 320 basis points year-over-year and was ahead of our expectations due to positive price cost inclusive of productivity, higher sales volume and favorable mix, partially offset by higher compensation. Resulting segment year-over-year incrementals were in the mid-40s. Software & Control margin of 34.9% was up 480 basis points versus prior year and was also higher than our expectations, driven by strong sales volume and positive price cost, partially offset by compensation. This segment saw year-over-year incrementals in the high 50s. Lifecycle Services margin of 14.6% was flat year-over-year, slightly ahead of our expectations. Lifecycle Services had another quarter of good project execution and productivity, offset by higher compensation. Sequentially, all 3 segments expanded margins from Q1 to Q2 with Intelligent Devices and Software & Control gaining more than 300 basis points each. For total Rockwell, the incremental margin and the year-over-year sales growth was in the low 50s in Q2, repeating the strong incrementals that we saw last quarter. Let's move to the next Slide 9, for the adjusted EPS walk from Q2 fiscal 2025 to Q2 fiscal 2026. Year-over-year, core performance had an impact of $0.80 in Q2. Our core performance was driven by volume, price/cost, productivity and mix, partially offset by higher compensation. A quick shout out to the operations team, who leveraged the volume increase to drive great margin performance. A $0.15 currency tailwind was offset by a $0.15 tax headwind. All other items had a neutral impact on adjusted EPS. Moving on to the next slide, 10, to discuss our guidance for the full year. We are increasing both our reported and organic revenue guidance to a range of 5% to 9% or 7% at the midpoint. That is up 3 points from our prior guidance. This increase reflects the outperformance in the first half of the year and a broadening of the end market strength that Blake discussed in his remarks. On April 1, after the close of our second quarter, we dissolved our Sensia JV. As we previously mentioned, the dissolution lowers reported revenue, increases Lifecycle and Rockwell margin percentage and is EPS neutral. Our full year guidance now reflects this impact. Slide 16 of the deck provides an estimate of the sales impact from the now divested businesses for the past 4 quarters. We're providing this pro forma, so you can update your models. The prior midpoint for reported sales guide was $8.8 billion. Our new guide of $8.9 billion reflects about a $200 million increase in our organic sales forecast, partially offset by a $100 million reduction due to the Sensia dissolution. This nets to a $100 million increase in the reported sales guide. Turning to Slide 11. We are increasing our adjusted EPS guidance range to $12.50 to $13.10. The new midpoint of $12.80 is $1 higher than the midpoint of our prior adjusted EPS guide. As we move into the second half, we expect inflationary costs to step up, primarily across key components, memory, transportation and general supplier inflation. For instance, memory costs continue to increase in Q2 and are now expected to represent a double-digit million dollar headwind in the back half. We are actively managing these pressures, including through increased safety stock to secure supply and protect operations. We've taken some additional pricing actions to help offset these cost increases, and we now expect 250 basis points of total price for fiscal 2026, with 150 basis points coming from underlying price and 100 basis points from tariff-based price. This is an increase of 50 basis points from our prior outlook, all from underlying price. The cost inflation and corresponding price realization won't 100% align in any given quarter. Our full year guide reflects sequential margin pressure in the second half. That said, our initial guide for fiscal 2026 expected incremental margin to be about 40% for the year. This new guide puts incrementals above 50% for the full year. For your models, CapEx for fiscal 2026 remains targeted at about 3% of sales. Now let me share some additional color on our outlook for the third quarter. In Q3, we expect total company reported sales to be roughly flat sequentially with correspondingly flat enterprise operating margin. We are losing about $50 million of sequential sales due to the Sensia dissolution, offset by growth predominantly in the Intelligent Devices segment. Sequential segment margin performance is expected to be up slightly in Intelligent Devices, down in Software & Control and up slightly in Lifecycle as expected post Sensia. We expect third quarter adjusted EPS to be up about $0.05 sequentially or up mid- to high teens year-over-year. For the full year, we expect Intelligent Devices reported revenue to grow in the high single digits, with segment operating margin around 20%. For Software & Control, reported revenue should grow in the low double digits, with segment margin in the low 30s, up several hundred basis points year-over-year. For Lifecycle Services, we expect reported revenue to be down about $100 million year-over-year given no second half revenue contribution from the portion of the Sensia business we have now divested with segment operating margin flat to slightly up year-over-year as margin in this segment benefits from the dissolution of Sensia. A few additional comments on fiscal 2026 guidance for your models. We expect corporate and other expense, which is now part of enterprise operating profit and margin, to be around $110 million. Net interest expense for fiscal 2026 is targeted at about $120 million. During the quarter, we repurchased 1.2 million shares at a cost of about $450 million. We are now expecting approximately $850 million in repurchases for the year. And we're now assuming average diluted shares outstanding of about 112.1 million shares. With that, I'll turn it back to Blake for some closing remarks before we start Q&A. Blake? Blake Moret: Thanks, Christian. You may have seen the announcement last week of Clock Tower Farms, a highly automated hydroponic farm, that will start production in our Milwaukee headquarters later this year. Particularly with the developments in software-defined automation, AI and robotics, we are unlocking new applications for our technology that improve the quality of life. I'm proud of the Rockwell team and our unmatched ecosystem, winning new business, managing costs and delivering impactful solutions, all of that came together in the quarter. We're in a strong position, and we intend to make the most of it. Aijana will now begin the Q&A session. Aijana Zellner: Thanks, Blake. We would like to get to as many of you as possible, so please limit yourself to 1 question and a quick follow-up. Julianne, let's take our first question. Operator: [Operator Instructions] Our first question comes from Scott Davis from Melius Research. Scott Davis: Everything seems pretty clear. Look, I guess this data center market, if it's doubling must be getting to somewhat of a material size, I would think. I'm remembering it kind of 1% of sales was doubling that means 2% of sales, you double from there, it's 4%. If you get my point. I'm just -- are you comfortable sizing it for us and helping us understand kind of what that TAM may look like for your products? Blake Moret: Sure. Scott, we're really proud of the progress we're making in data centers. We've talked about it as being low single digits. So a modest amount of base revenue and we don't change the percentage splits of the individual verticals that we show in the slides, except annually. And so we'll take a look at that and see where it lands to determine whether there's more explicit dimensioning of the data center business. But just for review as well, data center for us comes from, I'd say, 3 main places in our offering. The first would be the power distribution, largely through our Cubic technology that we acquired a few years ago. The second would be the growing trend to replace commercial grade controls with industrial PLCs. Logix has a natural choice for its safety and reliability. And then participating with some of our large HVAC customers. So think about the chiller demand and so on in drives from those customers. So we're proud of the progress, and we'll take a look at the numbers at the end of the year. Scott Davis: Okay. Helpful. And then, look, I think twice in the prepared remarks, you mentioned kind of productivity and modernization projects being the emphasis versus kind of the larger scale stuff. What does that mean as it relates to kind of content intensity and differences? I mean, how meaningful is that change for Rockwell? Blake Moret: Well, I'd say the modernizations, the expansions of existing brownfields, it's the same products that ultimately go into the solutions as when CapEx is being invested. There's probably a little bit heavier involvement in capital projects for Lifecycle Services. So that's part of what's muting the Lifecycle Services growth. But those modernizations, those expansion, lots of Logix, lots of Intelligent Devices and so on in those projects. Operator: Our next question comes from Andy Kaplowitz from Citigroup. Andrew Kaplowitz: Like, it seems like you raised your forecast for several CapEx-intensive end markets. Semicon, Energy, Chemicals, I think. Is it fair to say that you're seeing some decent unlock in larger projects versus last quarter? Then maybe you can give more color to the drivers and durability of the unlock. Obviously, looks like short cycle has gotten a bit better. We all see the improvement in the USIS 7. But the customer decision-making on large projects just accelerate? And why do you think that is? Blake Moret: So it's -- in certain of the industries that we've been talking about, where CapEx is being invested, we've talked about e-commerce and warehouse automation for a while now, or data center, we added to that semiconductor and energy as well. And so we are seeing enough of a broadening in the capital being invested to make particular note of that. What I should mention, however, is that we're still not seeing a wholesale unlock of capital in some of our biggest end markets, namely automotive and consumer packaged goods, including food and beverage. We had good results in those verticals in the quarter. But in the case of consumer packaged goods, in particular, it's more a factor of those modernizations that I mentioned, good performance with midsized customers where our channel particularly in North America is so valuable. And then the impact of new offerings, some sizable projects with mobile robots and some of the newer additions to the Rockwell portfolio. Andrew Kaplowitz: Helpful, Blake. And then like Christian, obviously, operating leverage is helping you. But when we look at your major segments, such as Intelligent Devices and Software & Control, you mentioned positive pricing and productivity is helping. As you've said, you're now focused on averaging 50% incrementals in '26 versus 40%, I think, which was your original guide. So I know you're focused on continuous improvement, but how much is that helping and impacting, for instance, price versus cost? And are we starting to think the core incrementals at Rockwell could be higher than your previous longer-term algorithm? Christian Rothe: Yes. Sure, Andy. I appreciate the question. The productivity cadence that Rockwell has been really good over the last couple of years and quite pleased with the progress of the team. And I think you're noticing something that's really great to see, which is it's not just the productivity programs overall in and of themselves, but it's actually a broadening of the thought process of the organization and continue to drive additional ways to win, additional ways to bring through that profitability. As you know, we're getting some really nice growth on the volume side, and that's flowing through nicely. You mentioned about the incremental margins for 2026 coming in at around 50% in our guide, which is great. Historically, we talk about 35% flow-through. I think when you think about a cycle and how the incrementals work through the cycle for us, we still feel very comfortable with that 35% that we've signed up for. As we move forward and we get to a point where we start talking about other targets for the organization, we do it under the overall umbrella of our growth algorithm. That will be the moment if we were to revisit it, that's what we would do. But again, 35% is a really good flow-through number for us to target for an industrial company. So we're happy with that. Operator: Our next question comes from Julian Mitchell from Barclays. Julian Mitchell: Just wanted to start with the enterprise operating margin guidance because I think it's pegged at about 22% in the second half of the year and the quarter just delivered was 22.5%. So it's very, very rare for margins in the back half to come down versus fiscal Q2, but that's what the guide is implying. Is this all just this sort of inflation from memory and so forth? Anything else in there, maybe mix is assumed to reverse or something like that? I think mix was a decent tailwind in the first half. Christian Rothe: Yes. Maybe I'll start with that one and Blake can jump in. But first of all, to confirm the -- historically, we've talked about a total segment operating margin percentage target for medium term, that's in the 23.5%. Now that we're talking about enterprise operating margin, you're right, the math is about 22% is what that target is. And we are -- we just did a number that's slightly above that. As we talk about and think about the second half of the year, and I said this in my prepared comments, we do have some inflationary pressures that are coming into play, specifically around memory, but also on raw commodities and other supplier inflation. So we also have some additional spending coming through in the second half. And I think it's just as important to note that Q2 was a really strong outperform. We had a number of things that converged all quite nicely for us, and that's everything from the volume increase that we had sequentially that the factories performed really well on that. The spending level was kept in check. We were able to get really good price realization in the quarter. So it all converged quite nicely. And when you look at the incrementals that we had from Q1 to Q2, that flowed through really well. So to be able to try to hold on to that and keep that total enterprise operating margin flat sequentially from Q2 to Q3. And then again, when we think about the full year numbers, we will have a little bit of mix shift that happens in the fourth quarter, which is normal for us that will be somewhat detrimental to our margins sequentially from Q3 to Q4. So overall, we feel comfortable with how this rolled together. Blake Moret: Yes, just the only other thing to add to that are that mix shift in the fourth quarter, that's the typical seasonal higher deliveries of Lifecycle Services and engineered lineups that we typically see in the fourth quarter. We're taking a prudent approach to this. The other comment that Christian made about cost is really associated with the accelerated pace of new product introduction that is really across all of our businesses, but especially in Software & Control and Intelligent Devices, we're going to see a lot of new products at automation fair this year and into next year. And so that's what the majority of that spend is associated with. Julian Mitchell: That's helpful. And then my second question, just on the demand front. I guess, first off, was there any kind of surge in orders in recent weeks? There were some other kind of industrial companies or shorter cycle industrial companies who saw very, very high orders growth in the March quarter, multiples of their organic revenue growth. I just wondered on the extent of the orders increase that you've seen? And any particular color on the Logix platform within that, please? Blake Moret: Sure. Julian, we continue to look very carefully at the buying patterns at our distributors. We look at their inventory levels and we continue to regularly survey our machine builders so that we make sure we understand and can ensure that the demand is natural. And that was the case in the quarter. We did not see any pull forwards or advance orders in the quarter. So we're encouraged by that. Logix itself grew over 20% in the quarter. We continue to see strong gains in Logix. We're introducing new products. We're seeing conversions in data center. So that business is doing quite well with some very exciting additional introductions planned over the coming year. Operator: Our next question comes from Chris Snyder from Morgan Stanley. Christopher Snyder: I wanted to follow up on the demand commentary. I think if I heard correct that you said the book-to-bill was above the normal range. So if you could just confirm that and like just maybe confirm what the normal range is, if I heard that correct? And then just, I guess, more broadly, have customer conversations changed? It felt like over the last year, the messaging was that there's a lot of interest in relocating production into the U.S. but companies were just not pulling the trigger yet. Do you think that has flipped, and if so, why? Blake Moret: Sure. So Chris, I'll start with some comments and Christian might add to that. Look, we've talked about a normal corridor for book-to-bill orders over shipments as being between 0.95 and 1.1. In the quarter, it was a little bit above that. For the first half, it was within that corridor, and we expect the full year to be within that corridor. So there was good demand, good conversion in the quarter of orders received, but we just saw orders particularly strong, especially in products in the quarter. From an overall customer demand standpoint, the sentiment is still positive. There's excitement, I would say, about the focus on manufacturing in America, our home market, and while we have seen the uncertainty around tariffs and geopolitical and some inflation delay capital in a few of the markets I mentioned, like consumer packaged goods and automotive, in these other industries, including a couple that we started talking about this quarter that we haven't talked about in the past, capital is being spent. And so I'd say the general mood is positive. But undeniably, there is still some uncertainty and volatility in the areas that I mentioned. Christian Rothe: Maybe just a quick follow-up on the book-to-bill number that Blake mentioned. So the book-to-bill in that range we talked about the 0.95 to 1.1, for us, that is the range for Q1 to Q3. Q4 for us, it's very common for us to have a book-to-bill that's below 1. We don't call that out typically, just because of the fact that, again, Q4 tends to be a higher shipment quarter for us. So we build up a little bit on the backlog during the course of the year and Q4, it comes back down to a more normalized level. But again, I can't overemphasize just slightly above that corridor in the second quarter and for the first half inside that corridor. Christopher Snyder: I appreciate that. If I could follow up on margins, and I understand there's a lot of moving parts with inflation changing quickly and mix. But I wanted to ask about the structural self-help margin opportunity for the company. At the Investor Day, you guys talked about a lot of opportunity. Clearly, a lot of that has been realized if we look at the margin expansion over the last couple of years. And I guess you guys are running ahead of that 23.5% medium-term target already. So I guess, like where are we in the self-help journey? When you guys look into '27 and '28, do you still see more opportunity on that front? Or from here, is it more about driving volumes to get the margins higher? Christian Rothe: Yes. Thanks, Chris. For sure, we never shy away from volume. Volume is extremely important. And of course, we want that. But from the productivity in the self-help side, I am -- and we talked about this at Investor Day as well, I think we're quite happy with how things are progressing with the organization and the number of projects we have that are underpinning our productivity program and that productivity program is alive and well. It did not conclude. We are, in fact, adding to it. We have more projects under that today than what we did a year ago and more projects a year ago than what we had 2 years ago. So we continue to build on that base. Yes, the projects probably have a little bit smaller overall number or average size, but we continue to execute against that. And importantly, as I'm on the road and going out and visiting our facilities and going into our operations, it's really exciting to have the operations team. They want to show all the different productivity projects they're working on. They are being very creative. We're doing everything from starting to build our own automated final assembly stations. There's in-sourcing projects that are happening. I heard a project last week around saving on labels that were costing us less than $0.01 already, and they were able to save a whole bunch of costs on that. We're streamlining our builds. That's all -- those are all great. And that's exactly what the operations should be doing in a continuous improvement environment, but it's beyond that also. The selling organization, the marketing team, the overall office staff inside the corporate office, yes, AI is enabling a portion of this. but it's also unlocking a lot more around what we can do as an organization. And so yes, we are excited about the future. We do think there's really good productivity opportunities for us for quite some time. The '27 pipeline is being built right now for us to go execute against, and we feel really good about our ability to finish out '26 well too. Blake Moret: Yes, absolutely. And I think additional comment about where are we in this journey? We've had good success, especially the back half of fiscal '24 as we set a new base, '25 and now '26, and we're operationalizing this. So this becomes a part of the total company's operating rhythm as enshrined in the Rockwell operating model. And so additional work to make this just a fundamental part of what we do going forward, that's not relying on individual heroics. It's a part of our processes, I think, is the exciting part of the journey that we're in now. Operator: Our next question comes from Quinn Fredrickson from Baird. Quinn Fredrickson: Just wonder if you could unpack a bit more of your expectations around discrete for the back half, just given the really strong start, you're off to in first half and the sequential acceleration you saw this quarter? Full year guide would seem to imply some deceleration in the back half. Is that just a function of comps get tougher or some conservatism embedded around CapEx or any other factors to call out? Blake Moret: So I'll start with -- I can start with some comments about Discrete. For the full year, we're looking at Discrete being up low double digits. We continue to expect automotive for the year to be up mid-single digits. Semiconductor, which we talked about a little bit on this call, up around 10%. And then e-commerce and warehouse automation up around 20%. So Discrete is a good industry end market force. We're seeing growth in hybrid and process as well as we've talked about. But I'd say, Discrete with the e-commerce and warehouse automation, data center, that's strong for us right now. Christian Rothe: And the -- just to build off of that, we are still looking at modest sequential growth in Discrete as we go through the remainder of the year. Yes, indeed, the comps get harder as we go through the second half of the year. And that's not just in Discrete that's also in the overall organization. Quinn Fredrickson: Sure. Okay. And then specifically within automotive, just wonder if you could unpack a little bit more the strength you did see relative to the fact that CapEx still is weaker. Is that being driven mostly by ARR or just healthy brownfields share gains? Just any color there? And then any visibility on when the CapEx side might start to turn based on your customer discussions? Blake Moret: Sure. In automotive, we've seen the brand owners balance their approach. So internal combustion engines where we have such a large installed base, is still a very important part of their portfolios. They're making investments in hybrid, and there's some in battery electric, but I'd say, hybrid has been a more recent source of focus. We've got that installed base across our hardware portfolio, but also some of the new ways to win that we've added. So Plex with tier suppliers, fixed or maintenance, autonomous mobile robots. Automotive is the single largest vertical for AMRs, and we saw some great wins recently there. So I think that characterizes it. Now in terms of when we could see an upturn in more wholesale capital spending in automotive, I think the tariffs are a big part of that. Everybody is watching USMCA as those negotiations begin, and it's especially important for the automotive companies. Operator: Our next question comes from Amit Mehrotra from UBS. Amit Mehrotra: I wanted to just double-click on warehouse automation growth. Obviously, that's been very robust. I just wanted to ask a little bit more color. Is that a few large customers restarting spending? Or are you seeing demand broadening out? And then just related to that, could you talk about how margins compare in that vertical versus maybe the company average? Blake Moret: Yes. So I'll talk about 4 main aspects of e-commerce and warehouse automation. First is the data center component. The second is new fulfillment centers with e-commerce. Third is production logistics, which is where companies, in many cases, consumer packaged goods companies are seeing dramatic increases in efficiency by improving the flow of components and material to the production line and then finished goods taken to the loading dock or into the warehouse, and then parcel handling companies as well. So it's fairly broad-based. There's some different customers and each one of those let's say, subsegments, but they're all robust. And when we look at the profile of what's being provided there, it's really more weighted towards hardware. And it's just the standard products, it's Logix, it's motion control for conveyors and diverters, it's sensors from our industrial components business. So it's products that we've been known for, for a long time in a vertical that's experiencing a very high sustained level of multiyear investment. Christian Rothe: Regarding the margin profile, these are -- keep in mind, for Rockwell, our offerings are horizontal. That is, we were able to use the same products and solutions for lots of different applications. The end result is that is a similar margin profile by offering. Now depends on what exactly the -- is being given in the warehouse automation space. So really the difference in profitability in warehouse automation for us has to do the products versus solutions and the mix of those that we see. And that really depends on customer and application. But overall, the margin profile is similar to other offerings. Amit Mehrotra: Got it. Great. And then just as a follow-up, one thing I noticed is obviously more balanced growth between North America, EMEA, AsiaPac. Can you just talk about if you're seeing the international market catch-up? It's primarily been kind of a North American let story, and that's your biggest growth region, but I'm curious if you're seeing EMEA and Asia Pac kind of accelerate as well? Blake Moret: Sure. So as you noted, it's good balanced growth in the quarter. We do expect for the full year that North America will be highest but when we look at what is contributing to the growth in Europe, it's largely the strength of machine builders. We saw high single-digit growth in Germany. We saw a low double-digit growth in Italy, two of the more machine builder intensive countries for us. And that's certainly for machinery that's bound for the U.S. but also other parts of the world because our portfolio is becoming more and more competitive for applications where the U.S. is not part of the mix. In Asia, we saw growth in China in the quarter, led largely by semiconductor in Taiwan. We've got some very large customers there, and we talked about semiconductor more generally, but that was a particularly strong spot there and then -- and growth in other countries in Asia as well. I would characterize the growth in Asia as systems integrators, engineering firms, users and machine builders. In Europe probably a little bit more concentrated on machine builders. Christian Rothe: From a comparable perspective, I just want to point out that Q2 last year Asia Pacific and EMEA were down year-over-year. North America was flat year-over-year. So our comps were a little bit easier in the EMEA and AP regions last year. Aijana Zellner: Julianne, we will take one more question. Operator: Our next question comes from Andrew Buscaglia from BNP Paribas. Andrew Buscaglia: A similar line of question on the end markets and regions. I think intra quarter, you see the geopolitics, heightened energy prices up a lot. And I think there's a lot of concerns around what that means for your process business, both near and long term. Can you talk about how process took out intra quarter? It sounded fine. But what are your thoughts long term in that segment? Blake Moret: Yes. Look, we're excited to bring back the oil and gas-focused process automation business from Sensia into full control under Rockwell. And that business, specifically is about 10% of our total energy if you include other forms of energy is about 15%. And we specifically called that out as you said, a good contributor in the quarter. People are going to be concerned about efficiency. They're taking a very disciplined approach to capital. And particularly where we're most exposed upstream, there's still a lot of opportunity to increase the efficiency of those operations, either in process control, with Logix, power control, with our variable speed drives, digitization, so providing digital twins of those processes to debottleneck. All the things that we've talked about in other industries are opportunities there. We talked about a nice FPSO win in Brazil in the quarter. LNG, although it's a relatively small part of our total exposure in oil and gas, is obviously doing very well and participating in some compressor trains there. So look, there's a strong correlation between energy abundance and the standard of living around the world, and we expect to be able to continue to participate in that we're all very concerned about the ongoing conflict in the Middle East. We see that on our business as having paused certain projects. But in general, we don't expect a material impact on our business results for the year. Andrew Buscaglia: Yes, okay. That's helpful. And I wanted to check on one other thing within Software & Control. So the second -- second quarter in a row of great results. And that margin of close to 35%, I know you're signaling near-term that's going to be down. But what were the biggest factors driving that performance in Q2? And is that a high water mark we likely don't see for a long time? Or is that kind of where you think that margin can shake out over the medium term? Blake Moret: Yes. So I'll make some comments and then Christian may have some additional thoughts on it. Look, we're very proud of the way Logix is trending. We've talked about a 31% to 34% margin corridor in our midterm targets. We're happy to have performed above that in this quarter. Volume certainly helps. Productivity is helping there. Software, in Software & Control, very profitable Plex business, for instance, certainly helps that. And as we said, ARR for software was up high single digits in the quarter. So we're proud of that. We're looking to sustain high levels of margin performance in that business, of course, but we indicated some of the factors in the second half of the year. Christian Rothe: Yes. And I think we're just -- we want to make sure we're being prudent about how we think about that performance. Blake just highlighted a bunch of things of all converge on what really went well for us in the second quarter. When we think about third quarter and second half overall, though we do have those inflationary impacts that are definitely coming into play. The memory side, it is real. We also have some additional engineering and development spend and other project spend. And importantly, Q2, the disciplined spending was outstanding, and that was great. But I think, again, to be prudent, we're expecting that there's going to be some spending that comes back in the second half for us. So really strong quarter for Software & Control. Really happy for that -- for all of us in that group. But again, trying to make sure we're balanced as we think about the full year. Aijana Zellner: That concludes today's conference call. Thank you for joining us today. Operator: At this time, you may disconnect. Thank you.
Operator: Good morning, and welcome to the IDEXX Laboratories First Quarter 2026 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Mike Erickson, Executive Vice President and incoming Chief Executive Officer; Andrew Emerson, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our first quarter 2026 results and 2026 financial outlook, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period, unless otherwise noted. [Operator Instructions] Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Andrew Emerson. Andrew Emerson: Good morning. I'm pleased to take you through our first quarter results and provide an updated outlook for our full year 2026 financial expectations. During the first quarter, IDEXX delivered exceptional financial results through continued execution in our companion animal business with benefits from IDEXX innovations. Revenue increased 14% as reported and 11% organically supported by over 11% organic growth in CAG Diagnostics recurring revenues, reflecting nearly 11% gains in the U.S. and approximately 12% growth in international regions. CAG Diagnostic recurring revenue growth in Q1 was negatively impacted by declines in U.S. same-store clinical visits of approximately 1%, with slightly positive growth in non-well visits more than offset by pressure on wellness visits. Strong premium instrument placements in the quarter resulted in 28% organic growth of CAG instrument revenues and included 1,100 IDEXX inVue Dx analyzers. IDEXX's operating performance was also excellent with comparable operating margin gains of 100 basis points, supported by gross margin expansion, which benefited from strong reoccurring revenue growth. Strong operating profit gains enabled earnings per share of $3.47 in the quarter, resulting in EPS growth of 15% on a comparable basis. Performance during the first quarter built confidence to increase our full year revenue range to between $4.675 billion to $4.76 billion, an increase of $42 million at midpoint or an outlook for overall reported revenue growth of 8.6% to 10.6%. Our updated full year overall organic revenue growth outlook is for 7.7% to 9.7% with an organic CAG Diagnostic recurring revenue growth of 8.7% to 10.7%. These organic growth ranges represent approximately 70 basis point increase at midpoint to our previous guidance, supported by strong global execution and modest improvement in our sector outlook for the CAG business. We're also updating our full year EPS outlook to $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint net of a $0.05 negative impact from a loss on an equity investment in Q1, reflecting 11% to 15% comparable EPS growth. We'll provide further details on our updated 2026 financial expectations later in my comments. Let's begin with a review of the first quarter results. First quarter organic revenue growth of 11% was driven by 12% CAG revenue gains and 7% growth in both our Water and LPD businesses. Strong CAG results were supported by CAG Diagnostics recurring revenue growth of 11% organically, including approximately 50 basis point benefit related to equivalent days, an average global net price improvement of approximately 4%. CAG diagnostics instrument revenue increased 28% organically, with another strong quarter of inVue Dx analyzer placements aligned with our expectations. U.S. organic CAG Diagnostics recurring revenues grew nearly 11% in Q1 including strong volume gains and net price realization aligned with full year expectations. U.S. same-store clinical visits declined minus 1% in the quarter, reflecting an IDEXX U.S. CAG Diagnostics recurring revenue growth premium to U.S. clinical visits of approximately 1,100 basis points, highlighting outstanding performance by the IDEXX commercial teams. During the quarter, the industry continued to see green shoots from aging pets, with growth in clinical visits for pets 5-plus years old. Non-well visits also continued to show signs of improvement, increasing 20 basis points year-over-year, while wellness visits declined minus 3%. IDEXX benefited from overall quality of clinical visits with increased diagnostic frequency and utilization per visit, demonstrating expansion of diagnostics and care protocols. International CAG Diagnostics recurring revenues grew 12% organically in Q1, with revenue performance driven by volume gains, including benefits of net new customers and same-store utilization. International regions performed incredibly well with steady growth of CAG Diagnostics recurring revenues through ongoing engagement with customers and expansion of IDEXX innovations while we see similar macro pressures affecting visits in most geographies. IDEXX also delivered strong organic revenue gains in major global testing modalities in the first quarter. IDEXX VetLab consumable revenues increased 15% on an organic basis reflecting double-digit growth in both U.S. and international regions. Consumable revenue growth included double-digit volume expansion driven by net new customer gains in our premium instrument installed base and expanded testing utilization, including benefits from innovations. InVue Dx utilization continues to track well to our reoccurring revenue estimates previously provided and progression of our controlled rollout of F&A is in line with our expectations. CAG premium instrument placements reached 4,650 units during the first quarter, an increase of 12% year-over-year and the quality of placements remains superb reflected in over 1,000 global new and competitive catalyst placements, including nearly 320 in North America. Globally, we placed 1,100 IDEXX inVue Dx instruments as we track to our full year expectations for 5,500 placements. Our success in placing instruments while maintaining high customer retention levels supported the 12% year-over-year growth in our premium instrument installed base in the quarter. IDEXX Global Reference Lab revenues increased 10% organically in Q1, driven by solid volume growth across regions with benefits from both net customer gains and same-store utilization each doubling from prior year levels. IDEXX Cancer DX has continued to support these categories, attracting new customers and broadening the use of diagnostics in both sick and wellness panels. As an example, approximately 20% of Cancer Dx customers are non-primary IDEXX reference lab accounts. Global Rapid assay revenues were flat organically. Rapid Assay results continue to be impacted by customers shifting pancreatic lipase testing to our Catalyst instrument platform, which we estimate to be an approximately 2% headwind to Q1 revenue growth. Veterinary software and diagnostic imaging organic revenues increased 11% driven by recurring revenue growth of 11% during the quarter and strong nonrecurring growth from placements of diagnostic imaging systems, setting a record with approximately 330 installations benefiting from the launch of DR50 PLUS platform. Veterinary software expanded double digits supported by cloud-based PIMS installations and adoption of related reoccurring services. Water revenues increased 7% organically in Q1, with strong growth in the U.S. and low single-digit growth in international regions. International growth in the business was impacted by supply chain dynamics in the Middle East. Livestock, poultry and dairy revenues increased 7% organically in the quarter, with solid gains across regions. Turning to the P&L. Strong recurring revenue growth enabled 15% comparable operating profit gains in the quarter. Gross profit increased 16% in the quarter as reported and 13% on a comparable basis. Gross margins were 63.4% up approximately 90 basis points on a comparable basis. These gains reflect benefits from strong recurring revenue growth in IDEXX VetLab consumables and Reference Lab volumes along with operational productivity. Pricing benefits offset inflationary cost pressures and foreign exchange, net of our hedge positions had a negligible impact on reported gross margins in the period. On a reported basis, operating expenses increased 17% year-over-year including both lapping a discrete Q1 2025 expense for concluded litigation matter as well as a $5 million loss on an equity investment in the current period. Comparable operating expenses increased 11% year-over-year as we advance investments in our global commercial and innovation capabilities. Q1 EPS was $3.47 per share, reflecting a comparable EPS increase of 15%. EPS in the quarter included $7 million or $0.09 per share benefit related to share-based compensation activity, and a $0.05 negative impact related to a loss on an equity investment. Foreign exchange added $14 million to operating profit and $0.14 to EPS in Q1, net of hedge effects. Free cash flow was $234 million in Q1, reflecting normal seasonality. On a trailing 12-month basis, the net income to free cash flow conversion rate achieved 99%. For a full year, we're maintaining our outlook for free cash flow conversion of 85% to 95% of net income, including full year capital spending of approximately $180 million. We finished the period with leverage ratios of 0.6x gross and 0.5x net of cash and continue to deploy capital towards share repurchases allocating $361 million during the first quarter, supporting a 2.1% year-over-year reduction in diluted shares outstanding through Q1. Turning to our full year 2026. As noted, we're increasing our outlook for overall revenue to $4.675 billion to $4.76 billion. At midpoint, this reflects approximately $32 million in constant currency improvement from our initial guidance, building on strong first quarter performance, including CAG Diagnostic recurring revenue expansion and a modestly improved industry outlook. Our updated reported revenue outlook includes $10 million or approximately 20 basis points growth benefit related to foreign currency changes compared to our prior estimates. This reflects our revenue growth outlook for 8.6% to 10.6% as reported, including approximately 90 basis points for full year growth benefit from foreign exchange at the rates outlined in our press release. As a sensitivity, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $12 million and EPS by $0.04 for the remainder of the year. Our updated overall organic revenue growth outlook of 7.7% to 9.7% includes an organic growth range of 8.7% to 10.7% for CAG Diagnostics recurring revenue, including approximately a 4% benefit of global net price realization. At midpoint, we're updating our estimate for U.S. clinical visits to a decline of minus 1.5% after a third sequential quarter of clinical visits trending between minus 1% to minus 2% and aligned with the trailing 12-month average. In terms of key financial metrics, we're updating our reported operating margin outlook to 32.1% to 32.5% for 2026, reflecting increased expectations of 50 to 90 basis points of full year comparable operating margin improvement. Operating margin was impacted by a 30 basis point headwind related to a discrete litigation expense from 2025 and the current year loss on an equity investment. These were offset by a 30 basis point benefit from foreign exchange effects. Our updated full year EPS outlook is $14.45 to $14.90 per share, an increase of $0.13 per share at midpoint. Our EPS outlook incorporates increased projections for operational performance of $0.13 per share at [ midpoint ] compared to our prior guide as well as a $0.05 negative impact from a loss on an equity investment and a $0.05 benefit from updated foreign exchange rates outlined in our press release. For the second quarter, we're planning for reported revenue growth of 7.3% to 9.3%, including approximately 60 basis point growth benefit from foreign exchange impacts. This operational outlook aligns with an overall organic revenue growth range of 6.7% to 8.7% and CAG Diagnostics recurring revenue growth of 8.5% to 10.5%. Organic revenue includes a negative 50 basis point impact from equivalent days in the second quarter, and at midpoint, we're planning for the U.S. clinical visit growth in line with the full year estimate. Overall organic revenue growth is impacted by expectations for declines in CAG instrument revenues as we begin lapping significant placements of InVue Dx during 2025 and modest revenue pressure from regional and placement mix. Second quarter reported operating margins are expected to be 33.9% to 34.3%, reflecting expansion of 10 to 50 basis points on a comparable basis as we expect increased spending during Q2 related to timing of projects. That concludes our financial review. I'll now turn the call over to Jay for his comments. Jay Mazelsky: Thank you, Andrew, and good morning. IDEXX delivered an exceptional start to 2026 with first quarter results reflecting disciplined commercial execution, continued benefits from innovation and expanded diagnostics utilization across a global customer base. These results were achieved despite headwinds from clinical wellness visits, underscoring the durability of our growth model and the importance of diagnostics to excellent veterinary care. The quarter also highlights the strong foundation we have built with strong customer relationships, where a commercial partnership is central to advancing our mission and supporting practice success. The economic value of instruments placed in the quarter, for example, grew double digits year-over-year, reinforcing the long-term value we are creating through our installed base growth. More broadly, companion animals are seen as members of the family and a large majority of pet owners prioritize their pet's health and happiness, creating pull for higher quality health care. This commitment is reflected in the continued expansion of diagnostics frequency during both well and non-well visits. Customer retention remains in the high 90s reflecting the trust veterinarians place in IDEXX as both a diagnostics provider and long-term partner. This loyalty underscores the strength of our integrated model, combining diagnostic software and medical support. We work alongside veterinarians and practice teams to better integrate diagnostics into everyday care protocols, supporting workflow optimization, increasing clinical confidence and demonstrating the economic value of diagnostics. When practices engage at this level, diagnostics utilization increases. Testing becomes more seamlessly embedded in care protocols, technicians gain confidence running diagnostics during the visit and clinicians make faster, more informed decisions, driving greater productivity across the practice. All 4 country expansions announced last year were in place at the start of Q1. And as a result of a well-established approach to training and new hire support, we saw initial contributions in line with expected productivity. Momentum with IDEXX inVue Dx continues with another solid placement quarter well on our way to our target of 5,500 placements for the year. Internationally, we are seeing a solid ramp in the installed base and adoption as awareness builds and commercial team support integration into practice workflow. Customer feedback remains highly consistent across regions, with veterinarians highlighting consistent performance, easy use and workflow productivity gains as key benefits. Utilization across ear cytology and blood morphology remains aligned with expectations, reinforcing the everyday clinical value of the platform. We continue to engage with customers to drive further adoption of these important testing categories through our professional service veterinarians and clinical staff trainings. At the same time, we are advancing the inVue Dx algorithm with monthly software updates to our installed base, enhancing performance and improved time to results, just another part of our Technology for Life promise. For example, the menu advanced in Q1 for blood morphology, the ability to detect and report [indiscernible]. These are red blood cells associated with severe underlying diseases such as with liver, clinic or kidney disease. We're also pleased with the solid progress of our controlled rollout of F&A. Early customer response to F&A remains very encouraging. Practices are seeing the value of evaluating lumps and bumps during the patient visit with rapid cytology insights supported by AI analysis and optional expert pathologists review available with a single click. This workflow enables clinicians to evaluate more lumps and bumps by reducing clinical effort and cost of the consumer. We continue to gain insights on customer behavior and experience during the controlled launch. Early adopters are very pleased with the high-quality training experience and follow-up support. These learnings and positive experience and support further broadening of the launch in Q2 as we ran volume and anticipate full volume ramp in the second half. Overall, F&A utilization is tracking to our planning assumptions, and we remain excited about the potential of F&A as a platform capability that can expand over time beyond mass cell tumor detection. Turning to IDEXX Cancer DX. Momentum continues to build behind this important innovation as veterinarians increasingly incorporated into both diagnostics and screening workflows. During Q1 in North America, nearly 70% of cancer DX tests were run as part of a panel, reflecting the growing clinical relevance of this test. Now with over 7,500 practices ordering since launch, Cancer Dx is a major differentiator for our [ reference ] business, and we believe it is one of the many elements driving competitive lab transitions at IDEXX. A major milestone this quarter was the international launch of Cancer DX for [indiscernible] and lymphoma in Europe and Australia. This represents an important next step in expanding access to early cancer detection globally and builds on the strong adoption we have seen in North America. Early international interest has been strong and reinforces the global need for accessible oncology diagnostics. Our global field teams are partnering with customers, both independent and corporate to develop wellness protocols. As an example, a large corporate group in Australia recently announced the inclusion of Cancer DX within their senior wellness plan. no additional charge for their members. We're also seeing continued use in monitoring applications, particularly in cases where serial testing can support treatment decisions. With the addition of mast cell tumor detection for later this year and a third test by the end of '26. Cancer diagnostics will continue to expand its clinical relevance and reinforce IDEXX's leadership in veterinary oncology diagnostics. We continue to expand our Catalyst customer base, adding over 1,000 new and competitive customers in the quarter. In each one of the now nearly 79,000 Catalyst customers have access to our new and expanded menu such as Catalyst pancreatic lipase and Catalyst cortisol. We continue to see strong adoption and utilization of both these tests as practices incorporate the test into routine real-time workflows to support pancreatitis and endocrine disorder diagnoses. Our software and diagnostic imaging businesses also delivered solid performance in Q1. Our cloud-native PIMS platform installed base grew double digits in the quarter, as we continue to see strong interest with virtually all placements now cloud-based. Practices are looking to software solutions to realize workflow optimization, staff productivity and digital client communications. Vello, IDEXX's pet owner engagement application continues to gain traction, growing double digits from last quarter as practices recognizing the importance of driving client deployments. Clinics using Vello report improved compliance with recommended diagnostics and treatments reinforcing the connection between engagement and medical outcomes. In our Diagnostic Imaging business, we launched our newest digital radiography system in January, the ImageVue DR50 PLUS combining high definition AI-powered imaging with up to 60% lower dose than premium competitors. Strong customer reception to the DR50 PLUS, coupled with excellent commercial execution, led to an all-time record imaging systems placements for the quarter, the fifth consecutive quarterly placement record. IDEXX Telemedicine also delivered very strong volume growth, supported by modernized integration with IDEXX Web PACS that reduces submission clicks by almost 50% saving time for clinical teams and delivering board-certified expert interpretation directly inside Web PACS. Software is a powerful enabler of diagnostics growth helping practices translate clinical insight into action and customers who use all of our diagnostic software and imaging solutions experienced faster clinical revenue growth and diagnostics usage. This will be my final earnings call as CEO before I transition to the Executive Chair role following our annual meeting next week. As I reflect on my experience as CEO and the state of the company today, I remain incredibly optimistic about the future of IDEXX and the multi-decade opportunity ahead for the company. The fundamental drivers of this industry have never been stronger. The human animal bond continues to deepen. That bond drives sustained commitment from pet owners to seek high-quality care, earlier diagnosis and better outcomes for the pets they love. Diagnostics is the foundation of this evolution. As medicine continues to advance the need for clinical insights to guide care decisions will only grow reinforcing the long runway ahead for diagnostics innovation and utilization. IDEXX is in a position of strength with a clear strategy, a powerful innovation pipeline and exceptional people. I believe the company's best days lay ahead. And I'm excited for the next chapter of IDEXX's growth to unfold. I would be remiss if I didn't highlight the role that our people play in the company's success. Our approximately 11,000 IDEXX employees around the world are purpose-driven and our talent fuels the company's growth. IDEXX is deeply committed to innovation, our customers and their success and operating the company as if it was their own. It has been an honor to lead IDEXX, and I want to thank all employees past and present for their commitment to improving the lives of pets across the world. Now before I turn it over for Q&A, I'd like to give Mike Erickson the chance to say a few words. I've worked with Mike for a long time, and I have tremendous confidence in him as he steps into the CEO role. He brings deep experience, strong leadership and a clear commitment to our purpose and strategy. With that, I'll turn it over to Mike. Michael Erickson: Thank you, Jay, and good morning, everyone. I'm humbled by the opportunity to lead IDEXX at such an exciting time in our company's history. As Jay mentioned, the sector remains highly attractive and I see a meaningful opportunity ahead to further accelerate our innovation-driven platform growth strategy. We will continue to focus on diagnostics and software where our platforms empower customers to see more and do more in their practices, uncovering deeper patient insights and driving next level productivity. We will also continue to advance commercial reach through investments to expand our field-based presence in key geographies around the world. This enables our talented commercial team to work even more closely with customers side-by-side, supporting accelerated adoption of innovations that expand care while driving a reliable return on investment. Another priority for us is AI. We have a well-established AI capability at IDEXX with AI embedded in platforms such as inVue Dx and our ezyVet software. Looking forward, I see advancements in AI as incredibly promising to further accelerate our innovation, expand testing access and utilization and drive deeper patient level insights. I plan to share more on this at our upcoming August Investor Day. Across these priorities, we're fortunate to have a talented team of IDEXXers globally that wake up every day focused on our customers and shaping the future of diagnostics software and AI in animal health. I want to close by thanking Jay for his leadership and service to IDEXX over the past 14 years. Under Jay's leadership, the organization has accelerated the innovation agenda, launching valuable new platforms like Cancer DX and inVue Dx, growing our cloud-native software platform offerings, significantly expanded customer reach internationally and delivered strong results and shareholder value, all while positioning IDEXX for sustainable long-term growth supported by a robust future innovation pipeline. I am grateful to have worked with Jay and I look forward to his continued support as he transitions to Executive Chair of IDEXX's Board. I'll now turn it over to the operator for Q&A. Operator: [Operator Instructions] We'll go first to Michael Ryskin of Bank of America. Michael Ryskin: Congrats on the quarter, and I [indiscernible] the comments. Jay, congrats. Been a pleasure. I want to kick things off on inVue. You had a lot of comments in the prepared remarks on strong performance. But just that placement number, 1,099. You reiterated the 5,500 for the year, but we would have expected you to do a little bit more in the first quarter. Is there just some pacing dynamics there to think of that maybe the first quarter tends to be a little bit slower. Is there anything in the funnel you can talk about just to give us confidence that these placements will be there for the full year? Jay Mazelsky: Yes. Michael. The -- we -- Keep in mind, we came off a very strong year in 2025 and Q4. We have a high degree of confidence in the 5,500 number. It tends to be -- you get some choppiness quarter-to-quarter, just based on customer mix of independents versus corporates. But the receptivity we see in the market amongst customers is very strong. So we have a lot of confidence in the overall 5,500 projection for the year. Michael Ryskin: Okay. Great. And for my follow-up on just sort of underlying market assumptions and what you've seen you had about 2% visit decline in the first quarter was to be expected in a lot of expectations. You talked about, I think, in your prepared remarks, modestly [indiscernible] the industry outlook -- just would be great to drive into that a little bit more. Is that U.S. or OUS? Is that something you're seeing now? Just expectations as you go through the year? Just parse that part a little bit more. Andrew Emerson: This is Andrew. Yes, so from a clinical visit perspective, we highlighted a minus 1% in the first quarter. So that's about a point better than what our initial guide had laid out from that standpoint. We continue to see positive momentum from the aging pet population, pets that are 5-plus years and older continue to add some positive momentum just to the overall industry. And I think what we're trying to do is capture the multi quarter perspective that we've started to see the green shoots in that area into our outlook. I hear more directly. I think if you look at the past trailing 12 months, the average is now very similar to what we're anticipating for the full year, which is about minus 1.5% decline in clinical visits. A lot of that is really from the wellness visit area and areas like the discretionary types of categories. We continue to see pressure related to the macro dynamics and consumers making trade-offs, whether they come into the clinic. But the positive side of that is when they are coming into the clinic, we're seeing really strong quality of care within those visits. So diagnostic frequency and utilization continue to expand at really healthy rates. And so you're seeing the diagnostic care protocols really continue to play out positively from that perspective. So we feel like we've kind of captured the range of outcomes here on the industry, but it is a little bit better than we had anticipated for the full year. Jay Mazelsky: Yes. Maybe just one comment on those pets 5 years and older. It is modestly positive. This is now the third quarter that we've seen that. So that's very encouraging. The other thing is it's been positive across both non-well and wellness visits. And so that cohort of pets said we know it's a very large cohort are coming into the practice, not just for sick visits, but also for well visits. Operator: We'll take our next question from Chris Schott of JPMorgan. Christopher Schott: Jay, Mike, congrats on the new roles. Just -- maybe just two for me. First on ex U.S. dynamics, another very strong quarter there. I'm just curious how much of this is commercial execution on IDEXX's part versus just maybe healthier broader market trends and just how you're thinking about kind of the directional growth for the ex U.S. business? And then maybe the second one for me is just coming back to inVue and the F&A rollout. I know you made some comments in the prepared remarks, but just elaborate a little bit more on how that initial utilization and uptake has ramped relative to your expectations? And just how we should be thinking about the broader rollout of that offering as we move through this year. Jay Mazelsky: Sure. Chris, I'll take the international market comment, then I'll ask Mike to handle the F&A rollout and how we think about that. The international markets just from a overall macro impact and performance side, we don't see broad differences between international and our domestic market. There's a macro impact, obviously, on wellness as a whole. Wellness is less a dominant [indiscernible] -- it's at a much lower rate than typically what we see in the U.S. just from a development standpoint. The really solid growth we're seeing in CAG recurring revenue, instrument placements internationally is a function of long-term investments that, as a company, we've made. So it's not just in terms of commercial expansion. So that's an important part of that, and we've done double-digit expansions over the last 5 years or so, it's building out. Our Reference Lab business, it's localizing software solutions like VetConnect PLUS. It's really building out the entire IDEXX ecosystem so that we can serve our customers at the level of experience, customer experience that they desire, but also making sure that they have full solutions. And if you look at our product road map and what we've rolled out over the last couple of years, a lot of our solutions have been from a design and development standpoint, targeted at these international customers. ProCyte One, for example, though it's been extremely successful in the U.S. Initially, we saw the opportunity footprint cost and performance to go more from a value standpoint. I think on the Rapid Assay business [indiscernible] is another example, really tailoring solutions for some of our international markets. And we're realizing I think that the success of all those efforts combined, and we've seen sustainable double-digit growth. We're very optimistic about the long-term opportunity in these international geographies. diagnostics utilization is just at an earlier state and that our experience has been with the right approach, creating awareness and education and working with customers in a [ tight ] partnership model that there's a lot of runway in front of us, and we feel like from a playbook standpoint, we really have a very successful and effective playbook we're executing. I'll hand it over to Mike to talk about F&A's [ controlled launch ]. Michael Erickson: Chris, thanks for the question. We're very happy with the controlled launch process for F&A. It's on track. And in fact, we're broadening it as we head into the second quarter here, we also would move to a more of an unconstrained launch posture later this year. Keep in mind, I mean, we've successfully been launching instrument platforms for many years here at IDEXX. We've done 4 of these just in my time. And this staged control launch process is what enables us to ensure we deliver the kind of outstanding experience that our customers expect from us, not just from the instrument, but from all aspects, end-to-end implementation, training and all of those things. And F&A, as Jay mentioned, it's really a very exciting platform within a platform, not just what it can do on the instrument with AI and detection of mast cell tumor cells, but also the one-click workflow if a customer wants added interpretation from an IDEXX board-certified pathologists. And we're seeing our controlled launch customers give us great feedback and really make use of all of that functionality. And then the final thing I'll just say here is that, as you know, these products have very long tails. We want to get it right up front because we know that the value creation really comes over time as we continue to expand what the platforms can do, and that's what customers really love about the solutions that we provide them. Operator: We'll go next to Erin Wright with Morgan Stanley. Erin Wilson Wright: So the consumables momentum was strong. It accelerated from the fourth quarter. I guess can you remind us kind of unpack that a little bit for us. I guess remind us what actually would be in view related or directly associated with inVue consumables? Is that really moving the needle yet? Or is this really about you locking in those customers into those IDEXX 360 contracts and having that sort of indirect impact from the inVue launch? And just when should we think about kind of inVue, I guess, moving the needle from a consumables perspective? Like what are you seeing in terms of the consumables flow-through so far relative to your expectations? Jay Mazelsky: Yes. The inVue consumables is definitely contributing to the strong growth and momentum we see in the VetLab consumables portfolio with ear cytology, blood morphology, we've communicated this before. It's well within expectations. Customers are enjoying it. It represents 100% new growth in the consumables area that we didn't have before. So we think that with F&A, we'll continue to build off that and can help sustain good momentum in that part of the portfolio. The other thing to keep in mind is because we've had very successful high single-digit, double-digit installed base growth across all the premium instruments. Every time we come out with a new slide. In the case of Catalyst, for example, with pancreatic lipase or cortisol, where we're able to market that into a very large installed base. And customers have grown to trust our solutions and the performance of the solutions and workflow of it is really load and go. So what we're seeing is a rapid uptake of these innovations across a large installed base globally. And these are -- in the case of my pancreatic lipase and cortisol, these are measurements or parameters that customers have been asking for. They see every day, dogs, cats coming into their practices that require these types of measurements. And the same really is true across the portfolio. We've seen a nice, I think, build in SediVue, for example, internationally, which started a little bit later than when we introduced it in the U.S., hepatology is typically sold as part of a chemistry and hematology suite. So we're benefiting from that focus on placing instruments, creating a seamless experience and continuing to evolve the menu through a Technology for Life approach. Erin Wilson Wright: Okay. Great. And then just on F&A again. And just on kind of the building a broader launch there. I guess, do you have a backlog or preorders to speak of on that front that customers are waiting for F&A, like what do you hear from the field as kind of you more broadly launched that throughout the year? And then what is your expectation? Or when should we hear more on the next menu expansion for inVue and how meaningful full that could be to the platform? And also just to know kind of thanks, Jay. It's been also great working with you, and thanks for the support over the past few years. Jay Mazelsky: Yes. Thanks, Erin. Why don't I -- I'll take the commercial aspect of it and then maybe have Mike talk a little bit about the F&A and why we think virtually all customers would be interested in it. From a commercial standpoint, what we launched at what customers, I think, focused on was, obviously, the ear cytology and blood morphology, it felt like from a menu standpoint that, that offered a degree of completeness that supported the placement of the instrument and overall utilization, and that's certainly played out. And they -- of course, we communicated the fact that we weren't going to stop at that from a menu standpoint that it was kind of -- we were going to broaden it to F&A, first on [indiscernible] and then over time, continue to expand the menu because the architecture and the technology enables us to do that. And I think we've communicated at one of the -- our last Investor Day that there's over 100 million, 150 million cytology done on a global basis, manually. So there's a very, very sizable opportunity still in front of us. Mike, why don't you talk a little bit about the F&A and how customers think about that? Michael Erickson: Yes. Thanks, Jay. I mean F&A, just like blood morphology and ear cytology, I mean these are all complementary care episodes, applications, if you will, on the inVue Dx platform. And really, every practice that you see is doing all of these things. And so we know there's a lot of excitement out there with fine needle aspirate. It's very common for practices to have pets coming in on a weekly or daily basis, dogs with lumps and bumps that are suspicious. We know today there are around 12 million of these of F&As being done, but we know that 90% or more of the masses that come in actually don't get investigated because it just takes a lot of work to do it manually with cytology. And frankly, it's pretty expensive. And so we're really excited about F&A on inVue Dx as an opportunity to not only elevate the standard of care, but also expand access to muted care and we see a long runway for doing that. As Jay shared and as I shared previously at our Investor Days, we see 100 million cytologies, beyond what we're talking about already around the world. And so we see a long road map, a very exciting road map ahead on inVue Dx and we'll continue to share more about that as we move forward. Operator: We'll go next to Jon Block with Stifel. Jonathan Block: So -- when I factor in the 2Q '26 guide, the first half CAG Dx recurring looks like it's expected to be about 10.25%. That's the [indiscernible] at. And the midpoint for CAG Dx recurring for the year is now after the raise 9.7%. So slightly below the [indiscernible] in a quarter but the comps get much more difficult in [ 2 age ] and it doesn't look like you're assuming the visits improve off the 1Q number. So Jay or Andrew, can you just lay out the drivers that allow the CAG Dx recurring call it, 2-year stacks to accelerate into the back part of the year, again, because it doesn't seem like there's a big uplift at least embedded in the visits from the 1Q number. Andrew Emerson: Yes. So I think from an overall perspective, if you look at the full year guide. We're really planning for solid growth. And we've actually increased the outlook both at midpoint and the overall range on an organic basis by about 70 basis points. That confidence really stems from continued execution that we see on a global basis. Our commercial teams continue to support our customers exceptionally well. We've also seen really strong and solid benefits from the new innovations that we've launched in recent years. Jay highlighted some of those earlier on the call, the contribution between inVue Dx as well as some of the new menu that we've added to our Catalyst platform. We've certainly seen expanded utilization as well, both in terms of the industry metrics as you highlighted, we are thinking that clinical visits are slightly improved from our initial guide, which is partly playing a role in there. But we continue to see really strong quality of visits. And I think that diagnostic frequency and utilization certainly benefits the overall growth rate that we have outlined as part of our long-term guide. Keep in mind, guidance continues to be a range. I think if you look at the upper bound of the guidance range, certainly more consistent trends with what we have now. And again, I think that comes back to confidence in our business execution and continuing to maintain strong relationships with our customers. Placement trends on instruments are really positive. We've seen growing benefits from utilization across our key modalities from a business standpoint. So I think we have really captured kind of a range that we feel confident with going forward here. But maybe I'll let Jay talk to a couple of the specifics just from a broader business perspective. Jay Mazelsky: Yes. One thing we haven't spent a lot of time talking about is the momentum also in the Reference Lab business. It's been very strong. We've seen that globally. Part of it comes down to a lot of differentiation. Cancer DX has given us, obviously, something to go in and talk to customers about, but leveraging that to talk about the broader differentiated portfolio in Reference Labs, not just from a menu standpoint, but from a service standpoint and being able to serve all of our customer needs. And what we've seen is we've been able to grow successfully the entire IDEXX portfolio. So point of care, Reference Lab, software, the integration that provides. And the business just has a lot of momentum because of that. And we've been, I think, transparent with customers in terms of the innovation agenda around what's coming, the expansion of IDEXX cancer diagnostics as an example, continued to build into more of a full volume posture with inVue Dx F&A in the second half of the year. I think that gives us a lot of confidence in terms of being able to sustain good momentum in the business. Jonathan Block: Okay. That's helpful. And maybe just a quick follow-up. For inVue, the way you guys frame it makes it seem like you're not yet in that [ 3,500 to 5,500 ] revenue per box band yet. And I guess maybe a couple of parts to the question. One, is that an accurate statement? You're not there yet, you're, I guess, trending to it or however, some of the verbiage is laid out? And then when do you expect to be in that band? And do you need sort of that full launch unrestricted launch of F&A to get there. Andrew Emerson: Yes. Thanks, Jon. Maybe I'll start and then Mike can add in here. But just from a recurring revenue perspective and utilization of the instrument, I think what we are seeing is very much in line with what we had anticipated as part of our build. Certainly, the range that we've given, again, is a range. I think it wasn't a precise number and it did include the launch of F&A, which we've started while that's in a controlled basis, we continue to ramp. We're within the band that we've highlighted here on a per instrument placement perspective. And I think, again, we'll continue to provide more insights and updates. We would like to see us more broaden out the F&A launch and then we can continue to identify exactly how that's playing out over time. But I think we're within that band, and we feel confident about the range that we provided. Michael Erickson: Yes, Jon, Mike here. I'll just underscore. We're well within the range that we've communicated. We're happy with that. And that's really before moving to an unconstrained launch position with F&A. So we see more opportunity ahead. And as I mentioned earlier, only 10% of the masses that come in today get looked at. And so we see -- if you look at it kind of the TAM for F&A, if you will, is very, very large. So we see lots of opportunity ahead of us there. Operator: We'll go next to Daniel Clark with Leerink Partners. Daniel Christopher Clark: Just wanted to ask on the updated visit guide. What are you thinking in terms of the macro and in terms of fuel prices? Do you assume sort of no change in that dynamic going forward through the rest of the year? And then I'll ask my follow-up upfront as well. When we think about performance in the first quarter, were there any changes in either visits or diagnostic frequency between January and February and March when we saw fuel prices pick up? Andrew Emerson: Thanks, Dan, for the questions. Maybe I'll start on this one. So from a visit guide perspective, certainly, fuel could have kind of an impact on consumers. I think obviously, the range that we provide, again, is a bit of a range, the lower end. You may assume that, again, you see continued constraints on the consumer demand side. But I think overall, what we know now is it's a pretty volatile and evolving dynamic in the Middle East and how fuel prices are going to play out and energy costs are going to impact the consumer, a little bit hard to predict that piece of it. But I think from a longer-term trend perspective, we're calibrated more on where we're -- what we've seen here over the last recent quarters on visits. Certainly, the wellness category and discretionary categories are the predominant driver of declines that we're seeing at this point. In the last 3 quarters, we've been relatively flat on non-well visits, meaning that as pets experience issues that they need to be dealing with. Consumers are willing to prioritize that spending. What we have seen though is that trade-off of consumers maybe not coming in for wellness or discretionary visits that have been more impacting just their overall decision-making here. But again, I think it's a bit dynamic on the fuel side. We'll see how that plays out. But I think we've captured what we believe is a good range at this point. Jay Mazelsky: Yes. Just the one thing I would add to Andrew's comments is we've seen very consistent international growth for a long time now. And that's been through Obviously, there's been a war in Europe, and there's been inflation and macro pressures. And we've been able to -- it's not that it's not real. We've been able to out-execute that through innovation and commercial partnership with customers and commercial expansion. So we've got a lot of confidence in the health of the business and our ability to continue to bring innovations to our customers. Andrew Emerson: And then maybe the second part of your question, just in terms of Q1 performance. We don't typically break out the monthly dynamics just relative to visits. It can be really noisy. There's a lot of factors including things like day accounts, et cetera, that can play out in a month. We just see a lot more variability on a week-to-week or month-to-month basis. So not something that we give too much stock in from that perspective. But certainly the quarter had a minus 1% decline, majority of that being the wellness side, I think, is pretty consistent with what we would have expected on the wellness side and a little bit better on the non-well side, just in terms of the quarterly results. And again, we're guiding to a minus 1.5% for overall clinical visits for the year. So I think we've captured expectations for continued pressure in those areas. Operator: We'll go next to Ryan Daniels with William Blair. Ryan Daniels: Congrats on the leadership changes. Maybe another one just on what we're seeing in the end market. It's interesting, as you said, we've seen somewhat of an inflection towards positive non-wellness visits. I'm curious if you've dug into that any deeper? Does it really relate to this aging pet population, is it anything with maybe some pent-up care demand because of the lack of wellness volume? Just anything you see there and how sustainable that might be would be helpful. Jay Mazelsky: Sure. Yes. We have seen -- we break it out through different age cohorts. And initially, if you go back some quarters, we have seen it in that 5- to 7-year cohort. So these are pet adoptions that largely occurred during the pandemic, where we had that huge step up. And what we've seen in terms of the type of breeds that were adopted during the pandemic is they're more heavily medicalized. The doodles, for example, frenchies. Dogs just require more care. And that's been -- in talking to customers, especially the corporate customers who track that sort of thing. They've also validated that, that's a real thing but we're beginning to see the front end of that very big pandemic adoption that we've seen. So we think that that's sustainable. Ryan Daniels: Okay. That's helpful. And then one just clarification. You mentioned some supply chain disruption impacting, I think, international growth. So maybe a multifold question there. Can you go into that? And was it for CAG or for Water and LPD? And then has that abated or how is that incorporated in your guidance looking forward? Andrew Emerson: Yes. Thanks for the question. So really, that was related to the Water business, specifically, and that was related to the Middle East. The Middle East region certainly have seen some dynamics going on where supply chain has gotten disrupted. We continue to work through that, but there was modest pressure in the water business that we factored into our outlook here. Operator: Our last question will come from Daniel Grosslight of Citi. Daniel Grosslight: I wanted to go back to the improved CAG Diagnostics revenue outlook for this year. Something you can maybe bifurcate a little bit more or force rank the contribution from volume, price and innovation on the improved outlook. And as we look to the [indiscernible] top end of the range now, what's the biggest swing factor between those 3 contributors, volume, pricing, innovation? Andrew Emerson: Yes. So we haven't actually updated anything from a pricing perspective at this point. What we highlighted on our initial guide and certainly in this outlook is approximately 4% net price realization for our CAG Diagnostic recurring revenues. In the U.S., that's modestly lower than we've highlighted before as well. But there's nothing new there in terms of change. This is all volume driven. I think the positive news here is we continue to see an outlook for expanded volumes, and that's largely the 70 basis points. That is a combination just of our overall business performance, the execution against some of the new innovations and our ability to continue to partner with customers to grow the use of diagnostics. We see, again, the diagnostic frequency or blood work conclusion continue to expand, which benefits the business as well as a modest improvement in the declines that we expected associated with the clinical visit flow through. So those are the components that we've highlighted specifically here but a lot of this comes back to the volume that we're able to drive as an organization for CAG Diagnostic recurring revenues. Jay Mazelsky: Yes. Just to build off that. It really is a volume-driven growth trend on the point-of-care side, we note that we've been able to grow double digits our installed base over a period of time, that's the flywheel in which customers drive utilization. I referenced that business is very healthy. All the investments that we've made, cancer, IDEXX cancer diagnostics, I think, has put some additional visibility to that business. The ability to really, I think, continue to support double-digit international growth as a result of the investments made in that area as well as commercial expansions, I think, give us confidence that it's a -- we're in an attractive part of the market with good momentum. And so with that, thank you for your questions. We'll now conclude the Q&A portion of the call. It's been a pleasure to share how IDEXX executed against our organic growth strategy, while delivering strong financial results in the first quarter. Thank you for your participation and engagement this morning, and we'll now conclude the call.
Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Atkore's Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Thank you. I would now like to turn the conference over to your host, Matt Kline, Vice President of Treasury and Investor Relations. Thank you. You may begin. Matthew Kline: Thank you, and good morning, everyone. I'm joined today by Bill Waltz, President and CEO; John Deitzer, Chief Financial Officer; and John Pregenzer, Chief Operating Officer and President of Electrical. We will take questions at the conclusion of the call. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our SEC filings and today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA, and any reference to EPS or adjusted EPS means adjusted diluted earnings per share. Adjusted EBITDA and adjusted diluted earnings per share are non-GAAP measures. Reconciliations of non-GAAP measures and a presentation of the most comparable GAAP measures are available in the appendix to today's presentation. With that, I'll turn it over to Bill. William Waltz: Thanks, Matt, and good morning, everyone. Starting on Slide 3. We are pleased with our second quarter performance. We achieved net sales of $731 million and adjusted EBITDA of $81 million. Adjusted EPS came in at $1.23. All 3 metrics were sequentially better than our Q1 performance. Organic volume also increased 5% year-over-year in the second quarter with contributions from both our Electrical and S&I segments. Following strong productivity improvements in FY '25, we continue to see solid productivity gains again this quarter after a very strong Q1 as well. Our productivity savings reflect our commitment to manufacturing efficiency and cost reduction. After the quarter concluded, we completed the divestitures of our high-density polyethylene or HDPE business, and we also just announced the sale of our surface protection and powder coating business in Belgium. We will continue to operate our metal framing and cable support systems facility in Belgium, which supports the electrical infrastructure market. These divestitures are part of a broader review of strategic alternatives, which we announced last year. To date, in addition to the HDPE and Belgium divestitures, we completed the sale of our Tectron tube mechanical product line, ceased manufacturing operations at 3 U.S.-based facilities and sold our Northwest Polymers recycling business. Each action represents what we believe are initiatives that will enable long-term shareholder value creation. We will continue to provide updates on our ongoing strategic alternatives process as we move forward. In addition, we announced last week that the company entered into agreements to settle 2 of the 3 punitive classes in the PVC Pipe antitrust litigation. The combined proposed settlement for the 2 punitive classes is $136.5 million and is reflected in our second quarter results. We anticipate making payment within the third quarter. Looking ahead to the remainder of fiscal '26, we are on track to deliver our outlook for adjusted EBITDA and our adjusted EPS. At the 6-month mark of our year, we remain focused on several continuous improvement and growth initiatives that are expected to create value this year and for many years to come. I'd like to take a moment to thank all of our employees for everything they do to support our key stakeholders. With that, I'll now turn the call over to John Deitzer to walk through the results from the quarter and provide more details on our outlook. John Deitzer: Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the second quarter, we achieved net sales of $731 million and adjusted EBITDA of $81 million. Adjusted EPS was $1.23 per share compared to $2.04 in the prior year. We are pleased to see a year-over-year improvement in our net sales, which reflects increases in both organic volumes and average selling prices. This was the first quarterly increase in net sales since the fourth quarter of fiscal 2022. Our net loss for the quarter includes several one-time items. As Bill mentioned, we reached an agreement to settle 2 of the 3 classes within the PVC antitrust litigation matter. We recorded a pretax liability of $136.5 million, which is reflected as a nonoperating expense in our second quarter results. Additionally, we recorded certain items associated with our recently completed strategic actions, including accelerated asset depreciation at the recently exited manufacturing sites as well as asset impairments and adjustments in carrying value related to the recent divestitures. Our tax rate in the second quarter was approximately 22%, a decrease from 24.7% in the prior year. Our second quarter income tax rate and benefit realized reflect the impact from several discrete items that I just referenced. Separate from these discrete items, the growth we've achieved and expect in our solar business this year has generated additional tax benefits compared to the prior year. Turning to Slide 5 and our consolidated bridges. Organic volumes were up approximately 5% compared to the second quarter of fiscal '25. Our average selling prices increased 1.5% during the quarter, which included products from both our Electrical and S&I segments. For example, our steel conduit and cable products both increased their average selling prices, while our PVC-related products declined within our Electrical segment. Our mechanical tube products saw selling price increases within our S&I segment. Moving to Slide 6. Our year-to-date volume is up mid-single digits compared to the prior year. 4 out of our 5 product categories have grown throughout the year. Our metal framing, cable management and construction services offering continued to benefit from data center growth, both in the U.S. and internationally. It is worth noting that these products and services grew approximately 10% in the first 6 months of fiscal '25. Despite the high comparability, these products and services are growing again in fiscal '26. Our plastic pipe conduit and fittings products saw growth in both our electrical and water products during the most recent quarter. Metal electrical conduit continues to see healthy end market demand, particularly for larger sizes of steel conduit. Our specialty conduit products, which include stainless steel and fiberglass are also growing due to increased market demand. Our mechanical tube business, which includes our solar-related products is growing as we expected due to better momentum for large utility scale solar projects. As we previously communicated, we are shifting certain available capacity from our existing nonsolar mechanical products to our electrical conduit products as part of our 80/20 initiative. This will continue to occur throughout the year. Overall, we continue to expect mid-single-digit volume growth for the full year. Turning to Slide 7. Net sales increased year-over-year in our Electrical segment, driven by higher volume growth and higher selling prices. Adjusted EBITDA margins improved sequentially from the first quarter, while still lower compared to the prior year. Net sales in our S&I segment were lower compared to the previous year. The segment saw higher volume and average selling prices. However, these gains were offset by the year-over-year impact from our Tectron tube product line that we divested in the first quarter as well as incrementally higher tax credits passed to solar end customers. Adjusted EBITDA and adjusted EBITDA margins both decreased year-over-year. During the second quarter last year, the S&I segment benefited from approximately $11 million of mostly one-time project-based benefits. Turning to Slide 8. Our ending cash position for the quarter was lower than our fiscal '25 ending cash balance. However, our second quarter ended prior to receipt of approximately $46 million of anticipated customer payments that occurred at the end of the calendar month. Excluding this timing aspect, we generated approximately $19 million of operating cash flow, highlighted by better inventory efficiencies. In addition, our March net sales per day were the highest of any fiscal month over the past 3 years, reflecting a higher ending accounts receivable balance that will be collected in subsequent months. Our balance sheet remains in a strong position with no debt maturity repayments required until 2030. Moving to Slide 9. We continue to expect volume growth to be mid-single digits for the full year. This growth is expected to be driven through a combination of nonresidential construction growth as well as contributions from certain initiatives such as solar and global construction services. We are adjusting our expectation for net sales to reflect a reduction from our HDPE divestiture and the divestiture of the 2 facilities in Belgium. For the full year, we expect net sales to be in the range of $2.9 billion to $2.95 billion. We continue to expect adjusted EBITDA in the range of $340 million to $360 million and adjusted EPS in the range of $5.05 and $5.55. The tax rate for the third and fourth quarter are expected to be in the range of 22% to 24% to approximate our adjusted EPS. As we look at end market demand, we expect our third quarter to grow sequentially in net sales, adjusted EBITDA and adjusted EPS from Q2 and then slightly grow sequentially from Q3 to Q4 in all 3 metrics. With that, I'll turn it to John Pregenzer to give an update on our strategic actions and our long-term focus. John Pregenzer: Thanks, John. Turning to Slide 10. To date, we have successfully executed several strategic actions. Since Q1 of this year, we ceased manufacturing at 3 U.S. facilities on schedule. I want to recognize and thank our teams for their commitment to improving our operational footprint and cost structure while delivering a positive customer experience. In April, we successfully divested our HDPE business, which included 5 manufacturing facilities. As part of this transaction, Atkore will retain a 10% ownership interest in a combined business that includes InfraPipe's existing HDPE business. Excluding the impact of our HDPE business, the electrical adjusted EBITDA margins would have been around 150 basis points higher in fiscal Q2. Additionally, we divested our surface protection and powder coating business located in Belgium. As we reflect on actions taken to date, we remain committed to utilizing the Atkore Business System to create shareholder value by improving operational performance, delivering consistent productivity and serving our customers with a highly diverse electrical infrastructure portfolio. Long-term electrification trends remain strong, and Atkore will continue to make strategic decisions with these trends in mind. In the meantime, there is more work to be done this fiscal year. As John mentioned, we expect volume growth to be mid-single digits for the year, and we believe the second half of the year will build upon the growth we've seen in the first half of the year. The electrical industry is a great place to be, and our operational and commercial teams are well positioned to capitalize on these opportunities globally. With that, we'll turn it over to the operator to open the line for questions. Operator: [Operator Instructions] And your first question comes from the line of Andy Kaplowitz from Citigroup. Andrew Kaplowitz: Could you give more color into what you're seeing in the overall markets in terms of volume and the drivers of that volume? Because when I look at your volume growth, as you said, you moved up nicely into the mid-single-digit range in Q2. I know you only reiterated your volume growth assumptions for the year, but I think you said data center growth up 10% in the first half. But does that start to ramp up in earnest in the second half? Any color on how big as a percentage of the business data centers is at this point? And is there something that's offsetting that growth in the second half? John Deitzer: I'll start on some of the items I referenced, Andy, and then I'll turn it to Bill and John to give a more macro perspective. The 10% was in reference to the metal framing, cable management and construction services business that grew 10% last year. So we had a tough comp in that business, but we're still up low single digits. So we're pleased to see that, and we also see that as a real opportunity for us in the back half of the year. I think John Pregenzer in his comments talked about we're well positioned commercially here to continue to capture some projects in that construction services and metal framing business really as we ramp in the back half of the year. So that will be some areas where we can outperform the market and get to that mid-single-digit outlook. So that's the clarification that was in -- the 10% was the last year growth in that sub business. But I'll turn it to Bill here to give some perspective here on the macro because there are some pockets of strength in items. William Waltz: Yes. So Andy, following up on John's comments. Overall, the markets are good across virtually everything. I would characterize -- data centers are double-digit growth. So anybody obviously happily as I'm sure you're seeing with your coverage that is focused on data centers or preponderance of their products should be growing, I think, organically double digits. For our products in that area, we're seeing high growth with those products, whether it's the metal conduit, larger diameter PVC, the metal framing and so forth that John Deitzer just mentioned. Other products are probably in the low single digit to mid-single -- other vertical markets are probably in the low to mid-single-digit growth. The things I would call out, and this correlates with like if you or anybody else to look at Dodge would see probably the same thing. The low markets are office buildings, if you strip out Dodge as a separate category and residential still seems to be slow but growing. And then obviously, on the other end, data centers are the highest growth. The one thing from our voice of customer of optimism talking to our distributors is kind of the manufacturing and industrial feels like they're optimistic for the future, which I don't know if Dodge calls out. Final statement there before I told us are too long is in talking to our customers, they're optimistic, good backlogs for the rest of this year as a holistic statement. Andrew Kaplowitz: Just one follow-up there, Bill, John. Like do you -- you've been working on initiatives like construction services for a while, and it seems like it's starting to ramp up. So does that mean data centers play a bigger role for you guys? I know it's hard to sort of break out the exact sales. But as you sort of go to the second half of this year and into '27, should we see a bigger role at Atkore from data centers given your initiatives? John Pregenzer: Andy, this is John. For sure, data centers are a big part of what we're doing global -- on the global construction services side. And as we look on the back half of the year, that's going to drive a lot of the growth that we're projecting. Also, we're seeing continued pickup in solar. So those will be 2 key areas that are going to drive what we're going to expect to see in the second half. William Waltz: Yes. And Andy, I'll just follow up. These are real rough, call it CEO math. But if you figure overall, markets are growing. And again, we're always talking, by the way, volume, as you know, other -- whether a distributor or manufacturer with positive price in their products, add the 2 plus inorganic growth and sum them together. But just organic volume, I'm going to say the market is up, let's just say, 2.5% to 3% and then our self-help, as John Pregenzer just walked through with data centers, the solar torque tubes, PVC, water, those type of things, should add another 2.5%, 3% that you get somewhere around that mid-single-digit growth. Andrew Kaplowitz: That's helpful. And then the other thing trying to figure out is the dynamics of price versus cost. I think last quarter, you said that baked into your guide was not a lot of additional spread given all the moving pieces. But obviously, as you guys have seen general upward trajectory of commodities, it looks like you've had some continued cost headwinds. So maybe give us more color on the spread you're seeing in the major commodities that you traffic in, whether it's steel or PVC. Are they getting more favorable at all in terms of the spread? And then how much of a hit are you taking with aluminum and copper, for example? John Deitzer: Andy, I'll start with some of the dynamics that we experienced here in the second quarter and then we're probably seeing in the back half, and then I'll kind of let Bill give any comments here also on the market dynamics. In the second quarter, in particular, we probably actually saw more of a steel impact in our costs because that was really the last year when we look back, it was the transition from our fiscal Q2 into fiscal Q3, go back to April of last year, Liberation Day, et cetera. That's where we saw the real spike occur. So our costs this year in the quarter were related here also with the -- primarily in the steel area. As we look forward in Q2 and looking forward into Q3, we are seeing that dynamic with copper and aluminum that impact our cable business. We are recovering a portion of that through higher selling prices, but that is definitely an area where we're seeing significant spread compression. And for us, the cable business is about 17% of company sales. And it was down in volume, but flat in revenue. So we did pick up a portion in price, but that decline in revenue also has an unfavorable impact to the cost structure and the margin. So that's an area of compression for us right now. But on steel, we have had several quarters here of sequential price increases on our steel-related products. I think I mentioned that in my comments. So we are positive here on seeing some of the trends. We were up for the first time in revenue year-over-year since the fourth quarter of 2022. Now that's on a sales basis, not on a profitability basis, I understand. But we are seeing some positive here momentum, and we'll see if that can continue. Anything... William Waltz: Yes. The only thing I would add, Andy, to that, and I did read your pre-guide this morning is most commodities, as John just mentioned, steel, but copper, as you go year-over-year is up, PVC resin is up at the moment -- I'm saying at the moment, but if we're sitting here at the beginning of May. But as we hold our guide -- and by the way, price for gas and everything else for trucking is up. But as we hold our guide, we feel comfortable with that. Obviously, one could infer that we're getting enough price to cover those costs as we go in the second half. So, so far for the year, there's always puts and takes in our product line and different things, but we're -- things are playing out as we expected. Operator: Your next question comes from the line of David Tarantino from KeyBanc. David Tarantino: Could you give us an update on both the strategic review and the ongoing cost savings program? You've announced a number of pruning deals and cost-saving initiatives. But could you give us some color on how you're thinking on the review on a go-forward basis? Are we still contemplating a broad range of outcomes here? William Waltz: Yes. So I'll do it in reverse order. I'll focus on the initiatives. I think the initiatives that we've laid out last fall, we've now hit everyone. In other words, as John Pregenzer covered in his remarks, we successfully compliment, as John did, the employees that did it really well, the 3 facilities on track for hitting, as we called out in the last quarter, $10 million to $12 million of annualized savings. there could be a slight upside to that. We divested everything that we had planned for, including the major one was HDPE, but including the small non-core operations in Belgium here just in the last day or 2, et cetera, et cetera. So those things are all -- and they all went very successfully. The facilities have been moved kind of on schedule, probably in less cost overall than even we expected. So those things are all going well. As for the overall holistic strategic review, both the Board and we have announced a strategic review committee are still considering kind of all options. They're being diligent. But beyond that, to say a time frame or whatever, the Board does not want to get locked into doing what they perceive as best for the shareholders, but whatever time schedule that takes. David Tarantino: Okay. Great. That's helpful. And maybe on the top line, nice to see pricing contribute positively. So could you give us some color on what drove the positive inflection here? It sounds like primarily in steel, but maybe some color on what you're hearing in the channel and what you're seeing from the level of imports would be helpful. William Waltz: Yes. So a couple of things. Thanks, David. Obviously, the under -- it's not a direct correlation, but the underlying commodities have a factor. We've always said in my mind, the first thing is supply and demand. From there, it's the cost of the commodities. But overall, as I referenced, I think, to Andy's question, if you look over the year, copper is up, steel cost is up, resin costs are up. So -- and as I referenced, we're passing those things along. As I look out over the next year, for -- and you guys -- you specifically, David or anybody else can reference. But hot-rolled steel, commodity futures are basically flat for the rest of the -- I'm saying for the next 12 months, but above $1,000 per ton. PVC resin, at least what we're hearing or seeing from different people is they're going to stay up through the end of the year -- our fiscal year, and they always drop some. But now I'm a little beyond my skis here. In other words, I would check with others that are experts. But in the U.S., natural gas is used to create PVC resin, not oil, but there's still a correlation that I saw a statistic like March exports were up 20% or something going overseas, i.e., the U.S. competitiveness to ship overseas is up. So I would expect them to keep their resin cost to us and others up. So I think the underlying commodities are up. And I think supply and demand, as I referenced in the earlier question where the markets are healthy. You could see -- and the last point, you could see if you check the public corporation for distributors, I think they're having -- they're being able to pass along the cost to contractors and so forth. So it's a good environment for us to continue to drive forward in. David Tarantino: And then just the level of imports? William Waltz: Great question. Apologize if you asked that in the first round. Imports, I would do the following thing. Steel -- and I'm looking back over the last 6 months because I'd tell you, it's really spiky by month and even quarter. So I don't want to give false precision for any time frame. But steel conduit imports for the last 6 months are down as we've already alluded, the markets themselves are up. So that's helping us. Continuing supply-demand, domestic, international, so forth with good markets to drive pricing that John Deitzer spoke of. PVC products are still coming in, growing, I guess, again, it depends on the quarter, but I would say with the markets and so forth. But again, the markets are relatively strong there. So... Operator: Your next question comes from the line of Deane Dray from RBC. Deane Dray: Bill, can we follow on that last point. Just with regard to some of the imports, can you be more specific? Because we're all watching the level of imports from Mexico on the steel conduit side. At one point, it was in the low 20% of the market. It had come down into representing high teens. Where is that today? That's -- really will help us calibrating here. William Waltz: Yes. John Pregenzer, do you want to give a... John Pregenzer: Yes, Deane, I think when you look at Mexico, there's been a continual steady decline in imports month-over-month, specifically from Mexico. So where it was in the low to mid-20s at one point, we would probably estimate it's in the high teens to mid-teens at this point. But that's one area where there has been some declines. There's been some offsets from other countries importing in, but that would be the situation for Mexico. William Waltz: Yes. And Deane, I don't have with me, and I don't know if we'd share the precise number versus John's guide. But just to follow up on David's question, and again, I don't want to get -- it does bounce. So I don't want to give too level of false precision. But as we called out on our Page 6, where metal electrical conduit and fittings are up mid-single digits for the year, I would say imports from Mexico for steel conduit is down directionally mid-single digits. So it's working in our favor here. Deane Dray: What's the impact of tariffs and 232 in particular? How has that changed the level of Mexican imports? William Waltz: I think -- well, let me do some -- try to answer that 2 ways, depending on where you're going with your question is, recently, there's been some updates, but they're not a direct -- like they go, hey, it's 100% of the content of the product, not steel. But like for us, maybe you're not even going here, but steel conduit is 100% steel conduit. So that specifically any changes of late have not made a material difference for us. And I'm talking -- I could go back and give you a precise date where the administration has come out with some updates. What I would say, but this is conjecture and correlation is the tariffs that the administration put in is probably a driving factor in the fact that the statement before, if you go back, I think, to 2024, steel conduit, as you know, is growing double-digit imports versus the statement I just made that steel conduit, metal conduit is growing mid-single digits and imports are down mid-single digits. So it feels that one could easily deduct the tariffs are a large factor in that. Deane Dray: All right. That's really helpful. And any other color you can share on the PVC dynamics? Because you're seeing you're getting steel price, but you're giving price on PVC overall. Are there -- maybe answer the question, we've got a good sense on the import or the input costs in resin. But what's going on competitively, what you're still seeing selling pressure there? William Waltz: Yes. Deane, maybe I'll give a different reflection and John and John, please either correct or add to it to go. The statements we've made so far have been more -- it should be year-over-year to go, a, what is different things. I don't want to get too far out my skis with 1 month if you have this quarter behind, but I would say that as we go forward and hold our guide is that even in things like PVC, 1 month doesn't make a quarter or a year and November, we'll talk about FY '27. But that so far, we have been able to raise our price and cover those costs for PVC. So again, there's good competition out there. But as I mentioned to David, the first thing that drives our pricing is supply and demand and the markets are overall pretty healthy. Operator: This concludes the question-and-answer session. I would now like to turn the call back over to Bill Waltz for closing remarks. William Waltz: Thank you. Let me take a moment to summarize my 3 takeaways from today's discussion. First, I'm pleased with Atkore's fiscal 2026 results so far. We grew sequentially in net sales and profit in our second quarter from the first quarter, and our results reflect a combination of healthy end markets and our own self-help improvement. Second, we are on track to deliver mid-single-digit organic volume growth for the full year. This represents how we see the broader market performing and contributions from several key initiatives. Finally, our executed strategic actions reflect our commitment to making changes that increase our focus on the electrical infrastructure market and enable long-term value creation. With that, thank you for your support and interest in our company. We look forward to speaking with you during our next quarterly call. This concludes the call for today. Operator: This concludes today's conference call. You may now disconnect.
Harry: Good morning, ladies and gentlemen. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome you to the Ferguson Results Quarter Ended October 31, 2025, Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of prepared remarks, there will be a question and answer session. Please press star followed by the number two. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may begin your conference call. Brian Lantz: Good morning, everyone. And welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-Ks available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin. Kevin Murphy: Thank you, Brian. Welcome everyone to Ferguson's quarterly results conference call. On today's call, we'll cover highlights of our quarterly performance. I'll also provide a more detailed view of our performance by end market and customer group. I'll turn the call over to Bill to review financials and our updated guidance before I wrap up with a few final comments. We'll have time to take your questions at the end. During the quarter, once again, our expert associates delivered strong results continuing to execute our growth strategy in a challenging market environment. Sales of $8.2 billion increased 5% over the prior year driven by organic growth of 4% and acquisition growth of 1%. Gross margin of 30.7% increased 60 basis points over the prior year. We remain disciplined on cost and generated $808 million of operating profit, which grew 14% over last year. Diluted earnings per share increased nearly 16% over the prior year to $2.84. We continued to execute our capital priorities, deploying $511 million this quarter. We declared a 7% increase to our quarterly dividend to 89¢ per share. And we acquired Moore Supply Company, HVAC equipment and supplies business in the Chicago Metro Area. We also returned $372 million to shareholders via share repurchases and dividends. Our balance sheet remains strong, with net debt to EBITDA of 1.1 times. While we continue to operate in a challenging environment, we remain confident in our markets over the medium term. And we'll stay focused on leveraging multiyear tailwinds in both residential and nonresidential end markets as we support the complex project needs of the water and air specialized professional. Turning to our performance by end markets in The United States. Net sales grew by 5.3%. Residential end markets representing approximately half of US revenue remain challenged. New residential housing starts and permit activity have been weak, Repair, maintenance, and improvement work has also remained soft. We continue to outperform the markets with residential revenue down 1% in the quarter. Nonresidential end markets performed better than residential. Our scale, expertise, multi-customer group approach, and value-added services drove continued share gains with nonresidential revenue up 12% during the quarter. Strength in large capital project activity has continued, and we've seen solid shipments, with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well. Moving next to revenue performance across our customer groups in The United States. We grew Waterworks revenues by 14% as our highly diversified customer group saw strength in large capital projects public works, general municipal, and meters and metering technology, offsetting weakness in residential. Ferguson Home, which brings together our best-in-class showroom and digital experience, grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience and cater to higher-end projects drove outperformance against the broader market. Residential trade plumbing declined by 4%, due to headwinds in both new and RMI construction. HVAC declined by 6%, against a strong 9% comparable and weaker markets impacted by the industry's transition to new efficiency standards and weak new residential construction activity as well as a pressured consumer. We remain pleased with our execution our counter build-out for the dual trade and M&A opportunities. Commercial mechanical customer group grew 21% on top of a 1% prior year comparable. Driven by large capital projects such as data centers, partially offset by weaker activity in traditional nonresidential projects. For fire and fabrication, facility supply, and industrial customer groups all saw growth during the quarter as we continued to take share and leverage our unique multi-customer group approach. Our customer groups are better together, sharing expertise to provide end-to-end solutions that help simplify complex projects and maximize contractor productivity. Now let me pass the call over to Bill for the financial results in more detail. Bill Brundage: Thank you, Kevin, and good morning, everyone. Net sales of $8.2 billion were 5.1% ahead of last year. Driven by organic revenue growth of 4.2% and acquisition growth of 1%. Partially offset by 0.1% from the adverse impact of foreign exchange rates and from a divestment in Canada. Price inflation was approximately 3%. Modest sequential improvement in finished goods pricing, offset by commodity-related categories being down low single digits. Gross margin of 30.7% increased 60 basis points over last year, driven by our associates' disciplined execution. Operating costs grew slower than revenue, delivering 20 basis points of operating leverage. And operating profit of $808 million was up 14.4% delivering a 9.9% operating margin with 80 basis points of expansion over the prior year. Diluted earnings per share of $2.84 was 15.9% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to EBITDA. Moving to our segment results, net sales in The U.S. grew 5.3%, with organic growth of 4.4% and a further 0.9% contribution from acquisitions. Operating profit of $806 million increased $109 million over the prior year, delivering an operating margin of 10.4%. In Canada, net sales were 2.2% ahead of last year. With organic growth of 0.7% and a 4.6% contribution from acquisitions partially offset by a 1.6% adverse impact from foreign exchange rates as well as 1.5% from a noncore business divestment. Markets have remained subdued in Canada, particularly in residential. Operating profit of $16 million was $7 million below last year. Moving next to our cash flow performance for the quarter. EBITDA of $867 million was $109 million ahead of last year. Working capital investments of $440 million during the quarter was up slightly from $376 million in the prior year. Principally driven by timing. Operating cash flow, was $430 million compared to $345 million in the prior year. We have continued to invest in organic growth through CapEx, investing $118 million in the quarter, resulting in free cash flow of $325 million compared to $274 million in the prior year. Turning to capital allocation. As previously mentioned, we invested $440 million in working capital. And another $118 million in CapEx. To further build on our competitive advantages and drive above-market organic growth. We paid $164 million of dividends during the quarter, and our board declared an $0.89 per share quarterly dividend. Representing a 7% increase on the prior year. And reflecting our confidence in the business. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin mentioned, we completed the acquisition of Moore Supply Company during the quarter. A great addition to our HVAC presence in the Chicago area. Our markets remain very highly fragmented, and our acquisition pipeline is healthy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to EBITDA. We returned $208 million to shareholders via share repurchases during the quarter. Reducing the share count by nearly 1,000,000. And we have approximately $800 million outstanding under the current share repurchase program. Now turning to our updated calendar 2025 guidance. We are pleased with our continued market outperformance and solid growth in the quarter. We are well positioned to deliver a strong calendar year 2025 performance and remain confident in our markets over the medium term despite near-term uncertainties. We now expect approximately 5% revenue growth for the year. And we expect an operating margin range of between 9.4% to 9.6% up from our prior expectation of between 9.2% to 9.6%. Interest expense is expected to be approximately $190 million for the year. We estimate CapEx of approximately $350 million the upper end of our previous guide. We continue to expect our effective tax rate to land at approximately 26%. We believe we are well positioned as we finish the year head into the new calendar year. Thank you, and I'll now pass back to Kevin. Kevin Murphy: Thank you, Bill. As we conclude our remarks, let me first reiterate our thanks for the hard work and diligence of our expert associates. They continue to execute on our growth strategy, we work to drive construction productivity for our customers. We're particularly pleased with the double-digit nonresidential growth as our teams closely collaborate to simplify projects bring order to chaos, and deliver end-to-end solutions to help maximize customer success. We're poised to deliver a strong calendar 2025 performance and our strong balance sheet enables us to invest in organic growth consolidate our fragmented markets through acquisitions, and return capital to our shareholders. We'll continue to operate at the lower end of our target leverage range maintain flexibility and capitalizes on strategic opportunities as they arise. We remain confident in our markets over the medium term, and expect to continue to outperform our markets as we leverage multiyear structural tailwinds. Our size, scale, and strategy we believe we're well positioned to take advantage of opportunities in the underbuilt and aging US housing market nonresidential large capital projects, and the growing demand for water and air specialized professionals. Thank you for your time today. Bill and I are now happy to take your questions. Operator? I'll hand the call back over to you. Harry: A. If you change your mind, please press star followed by 2 to exit the queue. And finally, I'm preparing to ask your question. Please ensure your device is unmuted locally. And our first question today will be from the line of Matthew Bouley with Barclays. Please go ahead. Your line is open. Matthew Bouley: Good morning, everyone. Thank you for taking the questions. Wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify, perhaps what portion of the business, that is for you today, and maybe kinda where that can get to. But also, I'm curious if you can kind of know, give us a little bit of color on the timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kinda think that this is gonna be more of a, I don't know, smoother kinda outlook for that business. Thank you. Bill Brundage: Yeah. Good morning, Matt. Thanks for the question. I'll start this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that that that is somewhere between mid to high single digits as a percentage of our total company revenue at this point. With data centers specifically being a bit over 50% of that a bit over half of that overall large capital project. Revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity. And our open order volume on large capital projects does continue to grow. And you're seeing that, you saw it come through revenue this quarter. Principally in the commercial mechanical business, which was up 21% and then a portion of that waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so, yes, there could be some lumpiness, in terms of of revenue rate as as we move into the future. But overall, we remain bullish that this is a continued growth area for us, and and will continue to be driving revenue as we as we exit '25 and step into '26. And, Matt, as Bill said, the lumpiness will likely be there in the gestation period for these projects. It's gonna be longer but that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against the backdrop where traditional nonres is in a pretty challenging spot. Matthew Bouley: Alright. That's perfect. Thanks for that, guys. And then secondly, kind of jumping into the outlook I guess, maybe this is since a bit of an unusual period here where you're guiding to just kind of the sub period. I guess I'm curious if you could kind of give us any color on the November or quarter to date results. But just given this is sort of a smaller and again, unusual guidance outlook here, If you're willing to kind of give any early twenty twenty-six thoughts, you know, across the end markets, kinda carryover inflation, etcetera, to sorta help us point us, directionally a little bit into next year. Thank you. Kevin Murphy: Sure. Yeah. Matt, as as we maybe as as we take a step back, if you recall when we set out our calendar '25 guidance at the end of our fiscal year in July, We had talked about the first half of the calendar year growth being about 5%. And our expectation that we believe that that growth was gonna get a bit more challenging as we work through the calendar year particularly towards the end of the calendar year. As we were expecting additional new res pressure, and HVAC pressure to step up. And that's what we've started to see play through, so very much in line with our expectations. Maybe I'll shift to the calendar quarter as we're gonna try to try to get to the calendar year reporting now. If you look at calendar Q4 to date, so October, November, and basically the first, you know, week, week and a half of December, our total growth is sitting at about 3% for that period. Again, very much in line with our expectations with with that additional pressure on new resi and HVAC. And so, clearly, now with about three weeks to go, I would expect our calendar Q4 growth rates to be somewhere in that that 3% range as we round out the year. And then as we look forward into '26, we will set out our calendar '26 guidance in February. We're back with you in a couple of months as we get onto that calendar year cycle. But but the early part of '26, we wouldn't expect much change from a market perspective or much difference. As we exit the year at about that 3% range and then step into the step into the new year. But, again, we'll set out our views on the market. And our views on our guidance in February. Matthew Bouley: Excellent. Thanks, Bill. Good luck, guys. Harry: Thanks, Matt. Next question today will be from the line of Ryan Merkel with William Blair. Please go ahead. Your line is open. Ryan Merkel: Want to follow-up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this at this point. Kevin Murphy: Yeah. It it it is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody's well aware, had continued to weaken through the calendar year. Outside of our waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups, to then then play through on revenue. I think we're just seeing that playing through on those weaker starts. And then, certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October. That growth got a little bit more challenging towards the end of the quarter as the market's in a pretty tough spot. So I think those two those are the two pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And and we would believe that residential at some point will will stabilize on on the new resi side. Ryan Merkel: Got it. That makes sense and pretty consistent with what we're hearing. Let me shift to pricing. Looks like it came in a little better than you thought. Maybe talk about that and then talk about how the commodities are trending and if you expect supplier price increases as we head into the New Year? Kevin Murphy: Yes. Overall, the quarter, inflation was about 3%. So to your point, it stepped up from about 2% in the previous quarter to 3% this quarter. Finished goods was up a little bit more than it was in the prior quarter. So I'd still consider that kind of at the high end of that low single digit range. And commodities were down in the low single digit range still. As a basket. If you look at commodities, three three main baskets within that that group, PVC, which is our largest commodity basket, is still in deflation. Down in the double digit range, kind of that low double digit range. Steel, is up. I would call that mild inflation, and then we're still seeing strong inflation on copper tube and fittings. So overall, pretty consistent with what we expected. As we as we round out the first quarter and and enter into the end of the calendar year. And if we look at entering the calendar '26, we would expect modest price increases that are in line with traditional behavior on the finished goods side of the world, and those announcements are coming through right now. Hard to say what's gonna happen with all of the different dynamics that are involved in the market right now, but our expectation is that it'll be a more normalized pricing environment knowing full well that we had six quarters of deflation before we got back to flat and then plus two in the previous quarter. Ryan Merkel: Alright. Good job. I'll pass it on. Thanks. Thanks, Ryan. Thanks, Ryan. Harry: Next question today will be from the line of Dave Manthey with Baird. Please go ahead. Your line is open. Dave Manthey: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters? Bill Brundage: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point. Dave Manthey: Makes sense. Thank you. And second, as it relates to the $2 billion ish in revenues from major projects that you discussed, It seems like you've been having a lot of success there because of the one Ferguson effort. Could you maybe I don't know if you could quantify or or bigger than a bread basket, tell us what percentage of those projects do you get more than one product and customer group via the one Ferguson effort. Versus not. Is that something you could share with us? Kevin Murphy: Yeah, Dave. Thank you. And and certainly, when we talk about large capital projects, we're talking about those projects north of $400 million in overall construction value. And so it's it's a varied group. Certainly, data center gets a lot of the attention today, but it's beyond that to pharma, biotechnology, onshoring, reshoring, manufacturing, and and others. And so the projects do vary. I will say, and people ask us quite a bit about what happens after large capital projects aren't the talk of the day. And the answer to that is really a new way of working for Ferguson. And so we are engaged early on in the construction process, early on with general contractors and owners around what specifications look like, how we can make sure that we have supply chains that stand up to timelines, And so doing that together with the contractors on the job we're engaging most of our nonresidential customer groups on these projects, whether that be industrial, fire and fabrication, waterworks, commercial mechanical, and they vary again depending on the kind of job. But that's the way we intend to work as we move forward. Never abandoning the local relationships that we have with our core contractor base, but also making sure that we can deliver on tight timelines make sure that we got the right product set for the job to deliver. Dave Manthey: That's great, Kevin. Thanks. Harry: Next question will be from the line of Keith Hughes with Truist. Please go ahead. Your line is open. Julian: Hey, good morning. This is Julian on for Keith. Just in terms of HVAC, when do you think comps are going to start to ease from the pre shipments ahead of the standard change from last Kevin Murphy: Yeah. I'd I'd say to again, to build on what Bill has already said, the market's in a tough spot right now. We saw it get a bit worse. As we went through the quarter and exited October. It's a variety of factors, though. You've got a bit of the a two l transition. As you had pull forward. You certainly have equipment price increase playing in now. As the majority of the sell through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that is now, you know, passed. And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's that's tough to to pinpoint. For us, we're bullish on what that market looks like over time. And we're gonna continue to build out convenient locations across The United States. Continue to build out our OEM brand representation, We're gonna continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor. Julian: Got it. Thank you. Harry: Next question will be from the line of Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open. Scott Schneeberger: Thanks very much. Good morning. The I want to touch on some SG and A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Just to could I get an update on on how these investments have been trending what you're looking for maybe going out over the coming year, and, and impacts of these, of these investments to date. Thanks. Bill Brundage: Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program something that's been really foundational to the success of this company over decades now. And it's a it's an area that we invest in in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our in our classes throughout the year, and we would expect to continue that that program and expand that program as we step into calendar '26. In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build out of convenient locations. We have now completed roughly 650 counter conversions So that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise of and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging eight HVAC environment, we believe we are outperforming that HVAC market. And have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to to ensure that we expand that HVAC footprint. And and and maybe lastly, we're continuing to invest from a a technology and a digital standpoint. And so we continue to invest in new technology tool, digital tools, principally in the areas of HVAC. And for the repair, replace plumbing contractor. We're very pleased with the progress that we've made with with many of those investments. If you take a step back from an overall SG and A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through where we've received the benefits of that. And so while even though we're operating in still a a bit of a challenging top line market environment, we're delivering good quality SG and A leverage. While we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26. And maybe to just build on what Bill was saying. Certainly, the trainee aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. Business over time. He spoke about the HVAC business, so I won't be repetitive there. But when you look at what investments we've made in waterworks diversification, and making sure that we have a broad book of business from residential to public works to water wastewater treatment plant to geosynthetics and soil stabilization that is serving us well. And, certainly, we're pleased with a plus 14% growth rate We're pleased with the large capital project space. We talked about a multi-customer group approach and engaging early on in the project. But we're also investing in value-added services like fabrication. Valve actuation and automation, and virtual design. And so that's serving us well, obviously, with plus 21 in the commercial mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home, and bringing together what is a best-in-class digital platform, with a showroom experience and a consultative approach and a builder outside Salesforce that's driving growth with the connected consumer to that builder, designer, and remodeler. And so we think all of those investments are proving to be successful as we move through a it's a challenging environment. Scott Schneeberger: Great. Thanks, guys. And just a follow-up. Spoke a little bit earlier. You you were asked about, supplier pricing going into next year. I'm just curious that from a high level, how are you thinking about managing inventory as you enter 2026? Thanks. Kevin Murphy: Yeah. We think our inventories are in a good spot right now. Teams are doing a really nice job and have done so managing through a unique environment. With price increases coming through the system this year. So I wouldn't expect significant changes to the inventory profile as we exit calendar '25 and enter calendar '26. We think we have the right levels of inventory to take care of our customers and to support continued market outperformance. Scott Schneeberger: Great. Thanks very much. Harry: Thank you. Our final question will come from the line of Nigel Coe with Wolfe Research. Please go ahead. Your line is now open. Nigel Coe: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date? Bill Brundage: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year. Nigel Coe: Great. And then a lot of helpful commentary on the larger project. Sites. In terms of I know this would probably be in quite a range, but any sense on what Stoixson's sort of opportunity would be on a typical large project? Again, I know there's no typical large project but any sense on what the kind of content might be for those? Bill Brundage: Yeah. Well, I'll caveat it with it will vary significantly. Depending on the type of project. But and and as Kevin talked about, when we talk about large capital projects, we're talking about those projects that have construction value north of $400 million. As a general ballpark, you take that construction value and somewhere 2-4% of the construction value would generally make up our product set and our customer group set. But, again, that will vary pretty significantly. And that certainly doesn't include, you know, in the likes of the data center, that wouldn't include the cost of the servers chips and those types of interior pieces of equipment to run the data center. It's more just that construction value. Nigel Coe: Right. Very helpful. Thank you. Harry: Thank you, guys. Have a great This concludes today's Q and A session. I'll now hand over to Kevin Murphy for closing remarks. Kevin Murphy: Thank you, operator. And let's end the call in the way that we began with a strong thank you to our associates for their hard work and diligence in what is clearly a challenging market. As you heard today, we're pleased with the quarter. 5% revenue growth, expansion of growth in operating margin, 16% EPS growth, operating profit growth of 14%, continued investment in the business, and a strong balance sheet. We're pleased with the execution of the teams. And the continued investment in key growth areas that are yielding solid results we're sat here today. We'll continue to focus on driving construction productivity for the water and air specialized professional. We're gonna leverage scale with the best local relationships We're gonna continue investing in value-added services and digital tools. So thank you very much for your time today, Have a happy holidays, and we'll talk to you soon. Thank you. Harry: That concludes Ferguson's results. For the quarter ended 10/31/2025 conference call. I'd like to thank you for your participation. You may now disconnect your lines.
Operator: Greetings. Welcome to Leidos First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, you may begin. Stuart Davis: Thank you, and good morning, everyone. Joining me on today's earnings conference call are CEO, Tom Bell; and CFO, Chris Cage. Today's call is being webcast on the Investor Relations portion of our website where you can find the earnings press release and the presentation slides for today's call. As shown on Slide 2, our discussion today will contain forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results. Turning to Slide 3. We'll also discuss both GAAP and non-GAAP financial measures. In today's press release and presentation slides contain a reconciliation between the 2. And now let me turn the call over to Tom, who'll begin on Slide 4. Thomas Bell: Thank you, Stuart, and good morning, everyone. Today, I am pleased to report a very strong start for Leidos in 2026. First quarter revenue was up 4% year-on-year to $4.4 billion, and profitability remained excellent to start 2026, with adjusted EBITDA of 14%. As a result of this strong core performance and the immediately accretive nature of our Entrust acquisition, we are raising our 2026 guidance for revenue by $500 million, non-GAAP diluted EPS by $0.05 and operating cash flow by $50 million. Execution of our NorthStar 2030 growth strategy is now in full swing. And these strong Q1 results set the stage for our multiyear growth trajectory beginning this year. Chris will go through our Q1 financials in detail later on this call. What I'd like to spend my time with you on this morning is the story behind these Q1 numbers and the fact that they represent another proof point that Leidos is built to thrive. Our scale, our unparalleled customer understanding, our ongoing corporate investments in our [ Golden Bolts ], our market-leading exploitation of AI, they are all allowing us to quickly adapt to this changing market dynamics and rapidly deploy learnings to all of our customers and all of our businesses. We are driving our business and executing our NorthStar 2030 growth strategy through a few simple principles. The first is increasing our investments in our 5 growth pillars. Our growth pillars, markets where we see robust revenue growth to deliver superior top and bottom line results, remain Defense Tech, managed health, digital infrastructure and cyber, energy resilience and mission software. The second principle is continuing to make Leidos faster, leaner and more focused, ensuring that speed is king at Leidos. And the third principle is leveraging our scale through technology insertion and learning across our whole business. Here are some examples of how we're delivering against this strategy in 2026. In Defense, we're capitalizing on years of technological investment to work with the Department of War as one of their key disruptors able to reliably produce at scale. We are currently pursuing accelerated procurement agreements such as framework agreements, to field a number of Leidos advanced products and capabilities. Let me illustrate a few for you this morning. Munitions is a clear area of focus by the Department of War and one of historical strength for Leidos. Following a string of successful flight tests of our small cruise missile, now designated the AGM-190A by our customer, we are working with the Department of War to accelerate production of the SCM itself, progress work on derivatives of this product and field iterations of this technology for even more challenging warfighter needs. All in all, we can clearly see a path to production runs of thousands of these products in this decade alone. We're also working to respond to the U.S. Navy for a marketplace acquisition approach to produce MUSVs and mission payloads at scale quickly. Our offering combines Leidos' Gibbs & Cox expertise, commercial boat yard capability, Leidos' proven LAVA software, integrated command and control, our exquisite C5ISR and counter C5ISRT to deliver real-world scale effects for the U.S. Navy. Related to this, you probably saw recent press reports about one of Leidos' existing MUSVs, the Seahawk MUSV, being operationally not experimentally deployed as part of the Theodore Roosevelt Carrier Strike Group. This is the U.S. Navy's first and only medium unmanned surface vehicle to reach this level of customer confidence, relevance and actual deployment. And we're also conducting advanced discussions regarding scaling production of Leidos' Air Shield high-power microwave counter UAS technology. That technology consistently outperforms all competitors in range and lethality. In addition to these framework agreements and other agreements, we've begun serial production of our ALPS product under our $2.2 billion ABADS-MD contract. ALPS is a Leidos developed passive sensing system that delivers persistent, wide area awareness at a fraction of legacy costs. In fact, you may have noticed last month at the Department of War Golden Dome update that our ALPS program was highlighted as a key sensor informing the Golden Dome architecture. Quoting General [ Guetlein ] himself, "the testing of the Army's advanced long-range persistent surveillance radar is tangible proof of our progress. " This is a powerful customer validation of ALPS' ReadyNow role in enabling a layered integrated defense network. All this momentum is translating directly into strong demand across our entire Defense Tech portfolio. In total, we've earned over $9 billion of awards for our Defense Tech business in the last 15 months alone, and we can see clearly a path to another $8 billion in our next 12-month pipeline. In Health, we are injecting real-world digital sophistication into mission-critical care with excellent customer impact, a standout example here is our recent $456 million Military OneSource award. This program provides confidential counseling, financial planning, tax assistance, career coaching and more to military personnel and their families. This directed award is a testament to Leidos' superior and repeatable digital innovations. By applying the predictive analytics from our Military and Family Life Counseling program, to this customer's Military OneSource needs, we are shifting the focus from reactive care to proactive force readiness. This award is in the wheelhouse of our managed health growth pillar, and grows our strategic moat in this market. By harmonizing these programs, MFLC and Military OneSource, we give the customer optionality to sync these ecosystems into a single high-efficiency care delivery model. We are embedding Leidos into the mission's digital DNA, ensuring long-term customer stickiness, improving our disruptive value across the managed health market. Elsewhere in Health, we've secured a first of its kind award for a pilot program called My Service Treatment Record. Here, we've been selected to exclusively develop an AI-driven tool to automate the medical record transfer for service members from the Department of War to the Veterans Administration. As the architects of MHS Genesis, Leidos was uniquely qualified to aggregate Department of War data at speed and scale necessary to expedite this transfer. A transfer that today is manual, paper-intensive, frustratingly slow and laborious. This new platform acts as another strategic entry point into the broader disability examinations mission. It allows us to further stitch together fragmented legacy systems with a seamless end-to-end digital thread. With the ability to automate everything from record retrieval to claim submission we are directly advancing both the Department of War and the VA's digital-first initiatives. In turn, this ensures Leidos and our technology are deeply embedded in both our customers' long-term operational road map. Also of note, in our ongoing Veterans Benefits exam business, I'm pleased to report that our disability exam volume remained high through the first quarter and customer satisfaction, veteran satisfaction with their treatment at Leidos QTC clinics remains best in class. We are very much looking forward to working with the customer on our continued leading role providing these mission-critical services to our nation's veterans, beginning with an industry day later this month. Together, these wins and our robust ongoing business give us confidence in our Health growth pillar and its sustainable growth through the decade. Now I'd like to take a minute to also update you on the 3 substantial portfolio moves we've undertaken in the last 12 months. Most recently, I was very pleased to have announced our intent to strengthen our nation's Homeland Defense by agreeing to combine our SES business into a joint venture with Analogic. Our joint venture will create a focused American leader in this critical global market. And through our significant minority interest in this JV, our shareholders will continue to participate in the market upside this JV will help unlock. Regarding our Kudu acquisition of last year, the nonkinetic effects you probably read about an Operation Absolute Resolve and Operation Epic Fury reinforce just how critical these capabilities are to our customers' missions. That demand is exactly what we foresaw in acquiring Kudu to combine with our existing business. The combination of Kudu's elite offensive cyber tools with our robust signal processing capabilities and our established defensive cyber leadership has created the integrated tool kit that our customers increasingly rely on. It also aligns directly with the recently published national cyber strategy. Leidos' full-spectrum cyber capacity is delivering against surging demand. We currently see a total cyber pipeline valued at $24 billion, a 21% increase since the acquisition of Kudu. The acquisition has also accelerated our use of AI technology to deliver cyber mission software and operations with unprecedented velocity. And speaking of velocity, we executed a quick, clean close of Entrust this past March, just 2 months after we announced the acquisition itself. That speed sets us up to accelerate delivery for our customers at a time when demand for energy infrastructure services is expanding every day. And closing this deal rapidly allows us to quickly gain the top and bottom line efficiencies we envisioned for this transaction this year. Integration is ahead of schedule, the cultural alignment is seamless, and the financial upside is already surfacing in our consolidated numbers. Strategically, this combination expands our business' breadth and depth and is already producing new opportunities. For instance, as a result of our combined prowess, we've received our first energy generation plant RFP. And we've been selected to perform detailed design for Canada's largest battery electrical storage facility. Building on this momentum, our team is focused on targeting a refreshed order pipeline of $10 billion. This represents growth of 230% post close, made possible by rapidly bringing our teams together to prosecute the market as one. And on the operational side, we've deployed Leidos' AI tools, Skywire across the new organization. Teams are already seeing significant opportunity to deliver high-quality services and solutions to more customers faster and cheaper. This is exactly what our NorthStar 2030 strategy is all about. Our Kudu and Entrust acquisitions provide us tremendous accelerants in high-growth markets, for scale and technology unite to deliver superior top and bottom line returns. And we aren't just looking at acquisitions to drive growth. I'm also pleased to announce that we are balancing these strategic moves with a surgical venture stage investment to ensure Leidos stays at the forefront of the market's innovation curve. We have committed a multiyear $100 million investment in a marquee PE firm with a proven track record in the federal technology space. This partnership gives us early access to a vetted pipeline of high-growth disruptors with mission-ready capabilities in AI, advanced cyber and autonomy to name a few. By continuing to be at the forefront of technological breakthroughs of all types, we ensure our customers have the technology they need tomorrow, integrated into the Leidos growth pillars today. To close out my prepared remarks this morning, I'd also like to spend a moment on AI and what it means for Leidos. As I have said on past calls, we are not reacting to AI. AI is nothing new to Leidos. We are scaling with AI. AI is not a threat to our business model, it's an accelerant of our business model because at our core, Leidos exists to make customers' outcomes smarter and more efficient. And AI allows us to do just that, work faster at greater scale with higher impact. What AI is doing in very practical terms is simply compressing the bottom of the solution value chain. It's making it easier to do things that were historically hard to do but it does not obsolete things that are hard to get. So things like routine development, basic analytics, data integration, AI is compressing the time to deliver these results. And that compression is of great value to us. We welcome it and are exploiting it because it frees up our highly specialized talent to focus where we create the most value, leveraging the multitude of things we have that are the very things that are hard to get, solving our customers' most complex mission-critical problems with deep customer understanding, the right people with the right specialty security clearances, real-world regulatory permission, Leidos' privileged access to our customers' digital infrastructure at scale, et cetera. AI makes us faster and AI makes us more efficient. And all these shifts reinforce they don't erode the digital advantages that Leidos enjoys. Our market position in highly cleared environments, our deep regulatory experience, our access to proprietary data and most importantly, the trust we built with customers over decades. These are not disrupted by AI, they are amplified by it. In our markets, real costs are not measured in dollars, they are measured in risk, mission accomplishment risk. And as AI increases the clock speed of our customers' mission execution, that risk only grows. So in turn, this only further strengthens our position as the trusted mission AI experts, the sober, cerebral, experienced, relatable experts deploying AI for our customers' success in ways they know they can trust. As part of this, as I've just alluded to, is an often underappreciated advantage for Leidos in this booming world of AI, the sheer scale of our federal digital infrastructure business. Our digital infrastructure business, the very large privileged position we enjoy today in our customers' digital ecosystem is not a vulnerability in an AI world, it's a strength because that ecosystem is foundational to how our customers are and will adopt AI securely and effectively. Every day, more than any other company we deliver open, secure, repeatable and mission-critical solutions for our customers. Capabilities we're currently grouping into 4 offerings, Uphold our cyber and resilient networks product suite; Insight, our Secure Cloud and data product suite; Forward, our customer digital experience product suite; and Headway, our information advantage product suite. Taken together, these product suites strengthen Leidos' position as the scaled, trusted integrator of AI-enabled mission systems in our customers' environments for their mission success. That's why we believe we are uniquely positioned to continue to lead in this market, and that's why we continue to see scalable growth in this business. So Leidos is out of the blocks in 2026 playing offense. We are very excited about where we are today and where we are taking this business tomorrow, all guided by our clear NorthStar 2030 growth strategy. I'll now turn the call over to Chris to review our Q1 financial performance and provide an update outlook on the rest of 2026. And then I'll look forward to your questions. Chris? Chris Cage: Thank you, Tom, and thank you, everyone, for joining us today. We are off to an impressive start in 2026 and now more than ever, we see our matchless portfolio as a key to driving superior performance and value creation over the coming years. Let's jump right into the results, starting with the income statement on Slide 5. Revenues were $4.4 billion, up 4% in total and 3% organically year-over-year with especially robust growth in the Intelligence and Digital and Homeland segments. Revenues grew year-over-year as customers accelerated mission execution, especially for innovative products and solutions supporting the intelligence community, commercial energy infrastructure, and domestic and international air traffic management. Bottom line performance remained strong. Adjusted EBITDA was $614 million for the first quarter, up 2% year-over-year for an adjusted EBITDA margin of 14%. Non-GAAP diluted EPS grew 5% to $3.13, driven by higher adjusted EBITDA, lower share count and a lower tax rate. Changes in estimates at completion were a modest headwind in the quarter, yet profitability remained high through prudent cost management, excellent award and incentive fee performance and a $15 million insurance reimbursement for previously recorded legal expenses. Digging a little deeper, let's turn now to the segment drivers on Slide 6. Intel and Digital revenues increased 7% year-over-year, with 6% coming organically. Revenue growth was driven by recent contract awards and increased volumes for intelligence community mission support as well as $22 million from the acquisition of Kudu Dynamics. Non-GAAP operating income margin increased from 9.7% in the prior year quarter to 10.2%, which is excellent performance for this portfolio. For Health, we sustained our excellent performance on the top and bottom line. Revenues were unchanged from a year ago, and profitability was relatively stable across periods. Homeland revenues increased 6% year-over-year, given surging demand for energy infrastructure engineering services and domestic and international air traffic control systems. Non-GAAP operating margin of 8.5% compared to 9.4% in the prior year quarter, reflected changing customer requirements on a fixed price program. Lastly, Defense revenues of $883 million were up slightly compared to the prior year quarter, as strong growth in integrated air defense systems offset the wind down of [ some airborne ] surveillance programs due to a scheduled delay on a fixed price development program, Defense non-GAAP operating margin was 8.3% compared to 9.8% in the prior year quarter. Turning to cash flow and the balance sheet on Slide 7. In the quarter, we generated $301 million of cash flows from operating activities and $270 million of free cash flow. Operating cash performance was exceptionally strong for the first quarter, building off of a record Q4. DSO was 59 days after normalizing for the impact of the Entrust acquisition. With strong EBITDA generation, proactive collections and disciplined working capital management, Leidos is a cash machine, and we are turning that into long-term shareholder value. Our Entrust acquisition is a confident move in 1 of our 5 strategic growth pillars. We had planned to fund the purchase price of $2.4 billion with $500 million of cash on hand, $500 million in commercial paper and $1.4 billion of new bonds. With our robust cash generation over the last 2 quarters, we borrowed less and have begun to pay it off sooner than anticipated and our commercial paper balance to the $300 million at the end of the first quarter, which will pay off throughout 2026. We were also able to repurchase $200 million of stock in the open market as part of our balanced capital deployment strategy. We ended the quarter with $6.3 billion of debt, $457 million in cash and cash equivalents and a gross leverage ratio of 2.6x. This provides us with ample capacity to continue to invest in line with our NorthStar 2030 strategy. Finally, on to the forward outlook on Slide 8. As Tom mentioned, we're raising our 2026 guidance for revenues, earnings and cash. Specifically, we're increasing revenue guidance by $500 million to a new range of $18 billion to $18.4 billion, maintaining our adjusted EBITDA margin guidance at mid-13s, raising our non-GAAP diluted EPS guidance of by $0.05, yielding $12.10 to $12.50 and increasing our operating cash flow guidance by $50 million to approximately $1.8 billion. For context, I'll address 3 major aspects of our forward outlook, the organic view, the quarterly cadence and the longer-term view. First, the raises to revenue, earnings and cash guidance primarily reflect our Entrust acquisition. So after only a little more than a month post close, we've enhanced our outlook and now expect the deal to be accretive to non-GAAP EPS and cash in 2026 with substantially more accretion as deal synergies are realized in 2027 and beyond. Our view of the rest of Leidos for 2026 is largely unchanged from where we initially guided in February. Our forward guidance does not incorporate any impact from the pending joint venture we announced in our security products business, which we anticipate closing sometime in the back half of the year. Until then, SES and general automation assets and liabilities will appear as held for sale on the balance sheet, and there will be no change to the income statement as the materiality threshold for discontinued operations will not be met. Once the deal closes, we will no longer show revenue from our minority position and our share, roughly 40% of the joint venture net income will be reflected as equity method income within our operating income. Second, we see Q2 as the likely low point this year in revenue growth and margin. At this point, we view Q1 revenue overperformance as a pull-forward from the second quarter as opposed to a notable market reacceleration, which we still expect in the second half of the year. Though there are many encouraging signs like the framework discussions that Tom described, procurement is still recovering from the protracted government shutdown. Still, we're pleased with the solid book-to-bill ratio of 0.8 in the quarter and 1.1x for the trailing 12 months. and we expect awards to pick up significantly over the course of the year. On the bottom line, we won't have the benefit of the insurance reimbursement benefit in Q2. More important, near-term growth investments will rise given our ability to lock in franchise positions on a number of compelling opportunities, including the Military OneSource Award and My Service Treatment Record Pilot in the Health segment and the multiple potential product lines within the Defense business. We're excited about the long-term upside these opportunities can create. And third, we remain extremely bullish on the long-term outlook for the business. As we shape our portfolio towards the growth pillars, we're enhancing the financials of the business, reducing unnecessary complexity while maintaining virtuous diversity. In the case of the Security Products joint venture, we are preserving significant upside for our shareholders. We've talked about optionality in the past. Now you can see how that looks in action. With that, operator, we're ready to take questions. Operator: [Operator Instructions] Our first question is going to come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe -- a lot to digest there. Maybe if you could just talk about profitability and the impact within Defense contracting 150 bps, how much of it was from the fixed price program? How do you expect that to trend? And maybe if you could give us an update on key programs and Dynetics within Defense? Chris Cage: Sheila, thanks, it's Chris. Yes. So the Defense profitability, that was kind of reflecting the development stage program on our Space Wide Field of View Tranche 1, which we're all in on getting that program delivered this year and on track to do so. But we're really encouraged about the new programs that we've been awarded and are ramping up. When you think of things like our IFPC program, which were continuing to win the next slot for our [ PoNS ] program, our [ AVAD ] program. Those all have superior economic profiles with them. And as those programs ramp up in larger quantities this year, you'll see that Defense level profitability continue to trend positively over the course of the year. So the business is on track. We're really excited about the growth prospects there and the team is laser focused on the pricing and bidding strategies to make sure we can deliver solid profitability with that. Operator: Our next question will come from the line of David Strauss with Wells Fargo. Joshua Korn: This is Josh Korn on for David. I wanted to ask if -- I think last quarter, you discussed the tripling of CapEx this year to $350 million. You talked about some growth investments in the remarks with only $31 million of CapEx in Q1, is that still the plan? And kind of what does that look like as the year goes on? Thomas Bell: Thanks, Josh. Yes. And we did earmark a sizable increase in our CapEx for this year, anticipating the need to invest. But that need hasn't risen in the first quarter to a level that we might have anticipated. Part of our anticipation of a second quarter that is higher spend rate is lower profitability because of that. And so we do anticipate spending more in CapEx this year, whether or not we spend the whole $350 million or not is to be determined based on how these programs layer in. I think what you should take away from this is we continue to be good stewards of our cash. We don't spend money just because we budgeted it. We earmark it and wait for the trigger to release it. Operator: Our next question will come from the line of Tobey Sommer with Truist Securities. Tobey Sommer: I was hoping you could elaborate on the outlook for the Health business, both the existing portfolio in exams as well as areas of expansion that you're targeting and how those could change the composition of margin within that business? Thomas Bell: Yes. Thanks, Tobey. Yes, so as I said in my prepared remarks, we're very encouraged by the fact that our volume remained high in that business in the first quarter of this year. So while we provisioned for the year outlook that Chris and I gave you last quarter for the effects of the fourth vendor, the fact is our volumes are staying high and remaining robust as we enter this year. The second thing that's happening is the VA, the Veterans Benefits Exam, is challenging the system to continue to burn off backlog. So we're hopeful that those volumes will remain elevated through the rest of this year. We're also encouraged by the fact that the customer is having an industry day later this month to talk about how we perpetuate how we serve veterans in this country. And so we're very optimistic that through the investment of technology, through the leaning in of innovative business models, we're going to be able to continue to serve more veterans, faster, cheaper than our competitors and make sure that we remain robustly profitable in this business. At the same time, that's a good base. What we're focused on is this managed Health business being a growth pillar for Leidos. So what you saw in the 2 awards that we talked about this quarter, the Military OneSource directed award and My Service Treatment Record Pilot program are indications of how we're leaning into the digital ecosystems of both the Department of War and the Veterans Administration to continue to serve them boldly. We see behavioral health as a major engine within that growth pillar, where we think we can differentially serve veterans and their families in this in this time. And rural health has always been an area that has been underserved and again, an area where we think we can lean in to help serve our nation's veterans where they live as opposed to asking them to come to where we are. And so we're very -- we remain bullish on our Health growth pillar, and we remain bullish that it can remain a mainstay of Leidos' top line and bottom line growth story. Operator: Our next question will come from the line of Scott Mikus with Melius Research. Scott Mikus: Tom, you touched on the portfolio moves you made in the portfolio recently. When I look at the latest portfolio in aggregate, it does everything from integrated air and missile defense, airport infrastructure modernization, hypersonic missiles, maritime autonomy. So a lot of broad offerings. Our investors are going to be challenged to actually analyze. You're moving the SES business to a JV. But internally, do you think the business would benefit from a more streamlined portfolio? And could we see that over the next, say, 12 to 24 months? Thomas Bell: What we did -- thanks for the question, Scott. What we did at the beginning of this year was streamline how we are organized for delivery of these effects. You'll recall that the new Defense business is a larger Defense business focused on the complete suite of how we serve the Department of War as opposed to having it fragmented within Leidos. That management focus and that attention, while the portfolio and the offerings are broad, is bringing the desired effect for execution. We've recently announced a COO in our Defense business to help drive execution and drive scaling of the products in the portfolio. And so we're very excited and encouraged by the activity we have going on in that Defense portfolio. You're right that this area of our portfolio is one of intense activity right now, but those are activities that are going to pay great dividends for our shareholders in the years to come. And as we ramp up these framework agreements, these accelerated purchase agreements and these traditional purchase agreements to field products at scale. So will help you continue to understand the portfolio and we'll help with what the capabilities are that we're focused on as you will remain cognizant of. While we had Defense Tech has a broad area of interest, we were focused on maritime and space. We remain focused there, but the fact is the customer continues to come to us with more opportunities as they look for reliable companies to help them scale production of the effects they need for the battles they see in the future. So we're very bullish on our Defense Tech business and excited as a part of the Leidos portfolio. Operator: Our next question will come from the line of John Godyn with Citi. John Godyn: I wanted to revisit the shape of the year and the comments about kind of revenue and margins around the shape of the year. It sounds like there may be a bit of a dip at least in revenue in 2Q. And I wanted to just make sure we frame that correctly and give you a chance to be a little more precise. Sometimes those things can just be a bit of an overhang on the stock if they're not kind of clarified in a moment. So maybe you could just kind of discuss the shape on revenue and margins. And hopefully, we can get there. Chris Cage: John, thanks. This is Chris. And I agree. I mean we're very pleased with the start to the year we had. And as I trailed in my remarks, maybe a little bit of that is pull forward from Q2. As we see the robustness of our pipeline and award activity and the proposal pits that are very active, we're still expecting a significant amount of that to translate into momentum in Q3 and Q4. So as we've gone through all of our planning activity really see the step function on growth building in the third quarter and fourth quarter. And with that, you'll see the high margin rates that we've come to demonstrate time and time again. Q2 itself, just as we look at which programs are in early phases of transition, which programs are winding off a little bit, that is probably more similar to Q1, maybe a small step down on run rate and profitability building to the back half of the year and then carrying that momentum into 2027. So that's how I'd frame it out. We've got a lot of cash capacity and capital to put to work, and we'll continue to be active on the deployment side over the course of the year. So we're really excited about how things are setting up for us. Thomas Bell: And while it's a little lumpy this year, it's not dimming our outlook on the year as a whole. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: I was wondering if it's possible to attempt to speak to the multiyear or maybe just even next year directionally beyond this year in the Health segment. I guess just as we all look at the VBA exam data and you have a few moving pieces here. You've talked about this year revenue kind of being flattish, margins being down a little bit. I guess what I'd like to wondering a little bit, are we looking at a 1-year minor reset or is this a multiyear period where revenue could be down more than just a little bit? How much did the margins reset, if you could give us your latest thinking there? Thomas Bell: Sure, Noah. Thanks. As we're in May already, and the customer is having his industry day later this month, we'll know more when we go to these industry days, and we hear what their plans are for this contract in the future. That said, it's becoming difficult to imagine a seismic shift in how we serve veterans in this nation. And so I'm remaining very bullish that we'll maintain our ability to serve the most veterans, the most effectively with the best results. And so we're leaning in. As we've said in past calls to talk about how we use technology to shorten the cycle time of veterans getting the benefits they deserve. We expect that with leaning into that technology, we'll be able to continue to be a leader in this marketplace. And we anticipate that marketplace will remain largely unchanged in how the Veterans Benefits Administration serves veterans. At the same time, what we're doing, as I alluded to, is leaning into the digital ecosystem of the Department of War and the Veterans Benefits agency to make sure that we're a part of the ecosystem beyond just providing Veterans Benefits exams. And we're also very focused on expanding how we serve veterans in the rural areas of our country. And so we are bullish on the long-term growth trajectory. I wish I had more definitive things to tell you about exactly how that's going to pan out. But that being said, with time being what it is, I anticipate it's going to continue to be more of what it is today than some radical departure from the status quo. Chris Cage: Noah, I'd just add, I mean, beyond VBA, which is a very well run part of the business. I mean the team has evidenced by the Military OneSource takeaway and looking ahead to $6 billion and expected submits over Q2 and Q3 have a lot of other avenues to scale this business up. My service treatment record were very small in a pilot phase. I mean that could turn into a very nice technology-oriented high revenue and profit stream for us over time as we prove out this capability. So yes, our expectations are health is platform, modest reset this year with the growth trajectory in the future, as Tom has talked about, and the team's got a lot of momentum behind building that up on many dimensions. Noah Poponak: And Chris, I guess, just on the margin, you sort of described their interesting and thoughtful ways that you could keep growing, but if the mix of the business that's driving the growth changes, does the margin change a lot over a 2-, 3-year window? Or can you kind of hang around where you're at right now? Chris Cage: Yes. No, I see that staying above that 20% margin threshold and we're well above that today, and that's absolutely in the zone beyond what we're going to win next, we're relentlessly focused on operational improvements, technology improvements to enable our processes. This unified health platform is a capability the team is deploying internally later this year, as an example, that will take more cost out of our delivery equation. So yes, no, the great thing about this part of the portfolio with how customers contract predominantly fixed price, fixed unit rate really incentivizes operational efficiencies and that's where we excel. So very confident we can keep the high margin profile of this business into the future. Operator: Our next question will come from the line of Jonathan Siegmann with Stifel. Unknown Analyst: This is actually Sebastian Rivera on the line for Jon today. Maybe one on maritime. You guys have an impressive USV and EUV portfolio, and I appreciate the commentary on Seahawk in the prepared remarks. I was wondering if you have seen an increase in demand related to the conflict in Iran, specifically around your Sea Dart that I believe can be used for demining and then if you could just kind of maybe frame how you see that opportunity ramping up, that would be super helpful. Thomas Bell: Sure. Yes. Our surface and subsurface autonomous programs are seeing increased pull by the Department of Navy. I can't comment on specific theaters or specific programs when it comes to that, except to say the Navy is very moving very quickly now with their MUSV industry program, and we are one of a few companies that we believe incredibly deliver against that need. As I've said in the Pentagon building boats fast is really not that difficult. Building boats that are autonomous fast is only slightly more difficult, but building autonomous boats fast that have real mission effects and real mission payloads, that's the secret sauce. And that's where Leidos excels because with our Gibbs & Cox, with our philosophy about deploying commercial boat yards, not trying to build boats ourselves, but really leaning into the autonomy package, the design of the vessels, the command and control of the fleet and the mission effects, especially with our exquisite C5ISR packages and counter C5ISRP packages. That's where we are really getting the attention of the U.S. Navy when it comes to scale effects quickly for what they see in front of them. And so I'm very bullish about the maritime portfolio we have under Cindy's leadership, and I'm going to be very excited to talk about big wins in future conference calls. Operator: Our next question comes from the line of Peter Arment with Baird. Peter Arment: Tom, thanks for your comments on the CapEx earlier. Just thought I'd drill in a little more. How are you thinking about this elevated level of CapEx? Is this something that you expect to continue at this higher rate just given the investment opportunities that you kind of laid out in terms of your long-term strategy? Or is this kind of do we reset down to kind of the lower level once we get through this period of investment spending? Thomas Bell: Yes. Thanks, Peter. No, I don't anticipate continuing at this level in perpetuity. I think this is a fixed finite period of time where investment in these production programs is critical whether that's just this year or with a little overhang into early next year remains to be seen. But it's not something that we are gearing up to do in perpetuity. In that regard, I'll mention the SEC -- excuse me, the SES joint venture. One of the reasons we purposefully formed that joint venture was because that business wasn't one of our growth pillars, we didn't want to start leaning into the capital intensity that, that business would require from Leidos if we were going to invest in it to fully grow. So forming this JV allows us to leverage the money necessary to grow the business and participate in the upside as a minority share of that joint venture, but not lean into it with Leidos cash from the beginning. And so again, what you -- what I'm trying to point to you, Peter, is a picture of being diligent and focused about where we spend capital, when we spend capital and how we spend capital, but not get ourselves into perpetual streams of capital spend. I hope that helps. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: So it seems like the market relative to what's going on in products, it seems like the market taking a more skeptical view of growth potential in services. And we see where some of the budget is concentrated and in some ways, that's not super surprising. But if we were to see the type of overall budget growth, even if not at the level that the administration has requested, but say, even half of that or something like that would be a robust -- a fairly robust level of overall budget growth. How do you think about the consequences of that for your intelligence and digital business and the potential to grow in that type of environment? Thomas Bell: Seth, I'm really glad you asked the question. While the $1.5 trillion budget request for the Department of War gets a lot of heat and light in the press, the bigger story is the more interesting story for us. Our IC budgets in the intelligence community for America have grown 4% to 5% annually since 2022. And we see that continuing in the future. And if you dive deeper into the classified budgets, you see a lot of money going into the digital infrastructure part of the whole ecosystem of our defense and intelligence communities. And so that's why in my prepared remarks, I spent so much time talking about the fact that AI isn't a disruptor to us it's a propellant to our progress in this business. And that's why our digital infrastructure business isn't a wait -- waiting to be obsoleted by AI, but rather, it is our entry point and our foundation from which our customers are going to embrace AI and upgrade their capability. We're very focused on leveraging those 2 things, our digital infrastructure business and our cybersecurity chops with our AI philosophy of exploiting these tools to move up the value chain in our customer spend and continue to help them have scaled effects at speed in an AI-enabled world. And so we don't see the negativity of being obsoleted in this market, we see it as an opportunity to tremendously grow our scale in the intelligence community and the Department of War. I mentioned the operations that we all watched over the recent months and the effect -- the nonkinetic effects that were brought to bear there -- and that's exactly why we are leaning into this part of our value to our nation. Operator: Our next question comes from the line of Gautam Khanna with Cowen. Gautam Khanna: Yes. I was wondering besides the VBA contract, if you could update us on what are the big upcoming recompetes. I know DHMSM is out there and some others over the next, call it, 12 to 24 months? Thomas Bell: Yes. The -- you mentioned, Gautam, the DHMSM recompete, we expect some near-term continuity through an extension mechanism with a longer-term contracts still evolving in our customers' mind. We are not exactly sure how they proceed with that program, and we're in deep dialogue with them on that. In the meantime, we expect near-term continuity through an extension mechanism. Also in that portfolio, we have our Antarctic program and expect continuity of operations while they -- the customer there continues to decide how they're going to prosecute the Antarctic in the future. And so there are other recompetes happening, but again, very buoyed by the 2 recent wins, the Military OneSource directed award of being almost $0.5 billion directed award is tremendous for us. And the opportunity for us to grow that with other aspects of what we're already doing, I mentioned -- and this My STR Pilot, where I think the opportunity to turn this pilot program into something that veterans are going to love moving from a highly laborious paper-driven process to a digital my service treatment record transfer is going to be a tremendous benefit for veterans and the veterans administration to remove a major pain point. So lots of goodness happening in the Health business. Chris Cage: Gautam, I mean I think Tom nailed it, looking at the list of key recompetes, there's nothing that rises to our top programs worth noting that you didn't already talk to, in fact, almost 70% of our next 12-month pipeline is focused on new business and takeaway activity. So it's very much skewed towards great opportunities to propel growth. But nonetheless, anything that's in the recompete category where we've had great success, above 90% win rates we're laser-focused on. But I wouldn't say there's anything I would highlight that's warranting note that the major program level at this point in time. Thomas Bell: Michelle, looks like we have time for just one more question. Operator: And our last question will come from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: Maybe Tom or Chris, I wanted to just follow up on Entrust, if you can give an update on integration there. And I think, Tom, in particular, you called out a $10 billion opportunity pipeline or order pipeline, how do we think about timing on that? And what's been the customer reception since you've now owned the business? Thomas Bell: Yes. Thank you for that. And yes, we're very excited about Entrust, as I mentioned in my prepared remarks, we closed almost 2 months to the day from when we announced it. So a very clean, quick close, reflecting well on our team and the due diligence and the Leidos team. The integration, as I said, is seamless. The cultural alignment is fantastic. The deployment of AI tools into Entrust are a big bonus that those engineers are enjoying, and we are enjoying having learned some technology tools that Entrust had that we're going to benefit from our electric services business on our side. So it is truly a synergistic relationship. As you know, it expands our footprint and it also expands the value services we can provide Customers have been very receptive to it. There's -- even in customers where there is overlap, they see benefit in the scale we're now bringing to their projects and increased capacity that we're bringing to their problems. And in terms of the $10 billion pipeline, One of the benefits of this business is it is not as long a cycle business as the rest of Leidos. It tends to work a little bit more quickly. So as we book orders there, they are liquidated within a year or 2, and we book more orders. So I think you can see -- you can look for rapid growth of our new scaled energy business in the coming quarters and the coming years. Operator: Thank you. And I would now like to hand the conference back over to Stuart Davis for closing remarks. Stuart Davis: I want to thank you, Michelle, for your assistance on this morning's call, and thank you all who joined the call for your interest in Leidos. I look forward to getting together over the next quarter and enjoy this Cinco de Mayo. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
Operator: Thank you for standing by. My name is Jill, and I will be your conference operator today. At this time, I would like to welcome everyone to the DigitalOcean's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to [ Raju Patrike ], Head of Investor Relations. You may begin. Unknown Executive: Great. Thank you, Jill, and good morning, everyone. Thank you all for joining us today to review DigitalOcean's First Quarter 2026 results. Joining me on the call today are Paddy Srinivasan, our Chief Executive Officer; and Matt Steinfort, our Chief Financial Officer. For those of you following along, an accompanying slide presentation is available on the webcast. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflects management's best judgment based on currently available information. Our actual results may differ materially from those projected in these forward-looking statements, including our financial outlook. I direct your attention to the risk factors contained in our earnings -- in our filings with the SEC as well as those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as our as well as in our earnings presentation that outlines the discussion on today's call. The webcast of today's call is available on the IR section of our website. And with that, I'll turn it over to Paddy. Padmanabhan Srinivasan: Thank you, Raju. Good morning, everyone, and thank you for joining us today. We had an outstanding Q1 2026, and I'll start with four headlines. First, our momentum is accelerating. Q1 revenue was $258 million up 22% year-over-year, with million dollar plus customers growing 179% year-over-year to $183 million in ARR. AI customer ARR grew 221% to $170 million, and we beat every financial target we shared in our last call. Number two, we launched the DigitalOcean AI native cloud last week, the most significant product launch in our history. With more than 15 new product launches across five fully integrated layers built into a modern, open unified stack, purpose built for the [ inferencing ] and Agentic Era. Third, we are investing to meet our growing customer demand and to seize the material opportunity in front of us. We raised $888 million in equity during Q1 to strengthen our balance sheet and quickly utilize that flexibility to secure 60 megawatts of incremental capacity that is slated to ramp throughout 2027, bringing our total committed capacity to 135 megawatts. And finally, we are again raising our near- and medium-term guidance on the strength of customer demand and the incrementally committed capacity. For 2026, we are increasing our full year revenue growth projection from 21% and to approximately 26% year-over-year and expect to exit Q4 approaching 30%. And this revised 2026 growth is entirely driven by our previously committed capacity, without any top line benefit in 2026 from the new 60 megawatts. With the projected ramp of the incremental 60 megawatts in 2027, we are now projecting revenue growth of 50% or more in 2027, meaningfully higher than the 30% growth we communicated just last quarter. I'll now spend a few minutes drilling down on each of these four headlines. The momentum we are generating is clear evidence of both our differentiated position and our strong execution across the board. It starts with the accelerating top line growth. Q1 revenue was $258 million, up 22% year-over-year and up over 400 basis points over Q4 2025 already strong 18% exit growth rate. We are delivering this growth by continuing to delight our top cloud and AI native customers. Our AI customer ARR reached $170 million, growing 221% year-over-year. Our $1 million customer ARR rates $183 million, growing 179% year-over-year. These are not just customers experimenting on our platform. These are cloud and AI native companies scaling their businesses on DigitalOcean. Our rate of acceleration is also increasing. We delivered a record $62 million in incremental organic ARR, the highest in the company's history. Customers see our differentiated value and are leaning into our platform. [ RPO ] reached $243 million, up an extraordinary 1,700% year-over-year. And we are doing all of this with strong profitability. We delivered 41% adjusted EBITDA margin and 18% trailing 12-month adjusted free cash flow margins. Drilling into our growth. Our largest customers continue to be our fastest growing and their growth continues to accelerate. ARR from our $100,000 customers grew 73%, while our $500,000 customer ARR grew 132%. ARR from our $1 million-plus customers reached $183 million, growing at 179% year-over-year versus 123% last quarter. Our AI customers are the other key driver of accelerating growth. AI customer ARR reached $170 million, growing 221% year-over-year. And most critically, inference and core cloud pull-through increased to more than 80% of total AI customer ARR, up from 70% in Q4. That number tells you something important. We are not a GPU rental business. We are a full stack cloud platform that AI native companies depend on to build, run and scale their production AI software. Last week, at our Deploy conference in San Francisco, we launched the DigitalOcean AI native cloud. And let me explain why this is a very significant step. Four forces are fundamentally reshaping AI right now. [ Inferencing ] has overtaken training as the dominant AI computing workload. Open source AI is now in production at over half of AI native companies. Reasoning models are driving the majority of token consumption. And Agentic systems are rapidly moving from experimentation to production. Together, these forces represents AI evolution from "thinking" in which AI plays an advisory role to both thinking and doing in which AI delivers outcomes by executing autonomous tasks. The thinking part is powered by AI bottles in inferencing mode and the doing part is delivered by a variety of modern cloud computing modules, all working together to take intelligent, autonomous real-world action. DigitalOcean's AI native cloud is purpose built for AI natives building exactly these types of workloads. It starts at the bottom with foundational layers. We operate a global scale infrastructure with 20 data centers purpose built for AI workloads running a full stack core computing platform with a complete set of computing primitive that Agentic workloads demand. Kubernetes, CPU and GPU droplet, advanced networking stack, including virtual private cloud, object block and file storage and high-performance NFS. This is part of the doing layer, the foundation that vast majority of GPU-centric cloud simply don't have. Last week, we launched a new inference engine, which we co-invented with our customers to address their most critical inferencing needs, and it delivers a lot more than just serving tokens. It provides serverless and dedicated end points for serving up AI models batch processing for asynchronous token generation, an intelligent policy of our inference router that automatically selects the best model for cost and performance a catalog of over 70 open source and close source frontier models with day 0 access, multimodal capabilities and guardrails. For customers who want to run their own models, we support BYOM, or Bring Your Own Model. This is the "thinking" layer, and it is far more than just serving tokens. It is about serving tokens efficiently with best-in-class performance, tightly integrated with other parts of the cloud. Augmenting this new inference engine is our data and learning layer for which we announced an enterprise version of our managed MySQL and [ PaaS CRIs ] databases for advanced workloads. We also announced new vector database support for building Agentic workloads. We also launched a brand-new managed agents platform to give AI native everything they need to build, execute and operate autonomous agents at scale with open harnesses, sandbox, state management, agent observability, toolbox for external integration and [ Plano ] based orchestration on an open platform without getting boxed into a single LLM or platform provider. This is the DigitalOcean AI native cloud, five fully integrated layers from silicon to agents with 0 lock-in because we offer open source options at every single layer. This is absolutely essential as our target customers are AI native companies who are creating and monetizing software. AI infrastructure is a material cost of revenue line item for these AI natives, especially when they scale, maintaining flexibility across models and platforms and leveraging the most efficient model capabilities for every specific task is an existential requirement for them. AI natives are increasingly adopting open source at every level, including multiple open source models to open agent [ harnesses ], open source vector databases and so on, to a wide lock in and deliver compelling unit economics for their customers as they go into hyper growth mode themselves. Building a truly open, fully integrated platform is hard, and that difficulty is precisely what makes our platform durable. The market is validating what we have long believed that infrastructure without intelligence, without orchestration and a full cloud platform is insufficient for what AI native workloads actually demand. Agentic applications require intelligence CPU-based execution, stateful memory, manage high-performance storage and databases and orchestration, all working together natively not assembled after the fact. Our integrated stack is built for exactly this architecture, and that's what enables us to deliver differentiated performance with compelling unit economics that matter to our AI native customers. Leading independent benchmarking company, artificial analysis recently reported that DigitalOcean delivers the #1 output speed for leading open source model like DeepSeek version 3.2, Qwen version 3.5, the $397 billion parameter model across all cloud providers. Our 230 output tokens per second on DeepSeek V3.2 is 3.9x faster than one of the leading hyperscalers. This wasn't just a hardware story. It required co-designing every layer of the stack from NVIDIA's Blackwell ultra GPUs to custom VLLM optimizations, including speculative decoding and kernel fusion, which is exactly the kind of deep engineering that differentiates the modern AI native platform from GPU farms and inference wrapper providers. The clearest validation of our strategy is the caliber of customers choosing to build and scale on us. We recently onboarded Cursor one of the fastest-growing AI applications ever built, for production inference, model fine-tuning and core cloud services. Ideogram, a leading text-to-image foundation model company migrated production inference from a hyperscaler to our AI infrastructure running their own model [ weight ] at scale. And Higgsfield AI, serving over 20 million creators with cinematic video generation run its full multi-model workflow on our integrated stack. Three different AI native companies in hyper-growth mode, running their production AI on our AI native cloud. And our pipeline continues to grow in both volume and strategic scale. Let me spend a couple of minutes on our competitive positioning with our new platform announcement. At a high level, unlike the hyperscalers, we are more open, purpose built for modern software without the legacy complexity of enterprise workloads designed for the previous era. Compared to the GPU Neoclouds, which are optimized for large training clusters, we are a full stack inferencing and Agentic platform. And finally, while the inference wrapper providers offer tokens, we offer the breadth AI-native builders need to build complete modern software without forcing them to stitch a platform together themselves. What makes our position genuinely durable is three compounding layers. Number one, our AI middleware. The [ Plano ] data plane and inference router built on technology from our recent Cataneo acquisition completed last quarter, sits between the agents and the underlying infrastructure, intelligently steering workloads across models, regions and accelerator types based on cost, latency and availability trade-offs at real time. Second, our managed agents platform extends computing primitives up the stack with secure run times, execution sandboxes, background workers, observability, orchestration and much more. All purpose-built for Agentic applications to be built and scaled on this platform. And the third is data gravity through managed databases, vector stores, cashing and object storage, production data lives inside our DigitalOcean AI native platform. Models and GPUs are not sticky, data is. For AI native, the decision of where to build is rarely about a single feature. It is about platform breadth quality of abstractions, openness of the platform and the absence of friction. Delivering that requires deliberate integrated engineering across every layer from silicon to agents. It needs an AI native cloud, which is what digital ocean has been building towards with millions of R&D hours over the last dozen-plus years. The market opportunity is generational and we are poised to earn more than our fair share. Global inference traffic will grow 10x by 2030, and Agentic workloads consumed 15x more tokens than human users, a multiplier that compounds as AI matures. And we're already seeing it in our numbers. Our AI customer ARR is growing 221%, and over 80% of that is coming from infant services and core cloud, not Bare Metal, these are companies running full stack production AI on digitation and they're accelerating. We are investing to meet this growing customer demand and to seize the opportunity in the massive inferencing and Agentic markets. In Q1, we raised $888 million in equity proceeds that enable us to expand our data center and GPU capacity to meet our growing customer demand while strengthening our balance sheet. Matt will provide more details on the equity raise and our capital strategy later in our comments. But let me give you a brief highlight on our expansion plans. Starting with our existing committed capacity. We remain on track to deliver our previously communicated 31 megawatts as planned in 2026. With our Richmond facility beginning to ramp revenue in March. On top of this, we have now secured approximately 60 megawatts of incremental data center capacity across four locations. Capacity that will ramp revenue throughout 2027. This brings our total committed data center capacity to approximately 135 megawatts. And given growing customer demand, we continue to actively pursue additional capacity beyond this new 60 megawatts capacity that will be targeted to come online in 2027 and 2028. The opportunity in front of us is enormous genuinely once in a generation. Every data point we see from our growing customer pipeline to the demand signals we are seeing and hearing from our largest customers to the reactions and interest in our AI native cloud reinforces that conviction. As we scale our business to meet this opportunity, we will continue to make the right long-term business decisions to seize this moment while building a durable and profitable growth engine. With momentum continuing to grow, we are further raising our near- and medium-term outlook for the full year 2026. We now expect revenue growth of approximately 25% to 27% year-over-year with an exit growth rate approaching 30%, a full year ahead of the guidance we provided just last quarter. This accelerated 2026 growth is based solely on the performance of our previously committed capacity and doesn't include any projected revenue uplift from the newly committed 60 megawatts. We expect to deliver this 2026 growth with high 30s adjusted EBITDA margins and 9% to 12% adjusted free cash flow margins, which does include some start-up costs for the new 60 megawatts. Looking further out, we now expect 2027 revenue growth of 50% or more, up from our 30% guidance last quarter with approximately 40% adjusted EBITDA margins and high teens adjusted free cash flow margins. This combination of rapid revenue growth and true durable profitability puts us in a ratified company. DigitalOcean is one of just a handful of names across a broad set of software and AI infrastructure players, delivering both attractive GAAP operating margins and material revenue growth. As I shared on our last call, growth and discipline are not trade-offs for us. They're both operating principles. And our execution of these principles is clear in our results. With that, I will turn it over to Matt to walk through our Q1 results and our updated guidance in more detail. Matt, over to you. Matt Steinfort: Thanks, Paddy. Good morning, everyone, and thanks for joining us. As Paddy just shared, we had a very good quarter. In my comments, I will review the financial results in detail, walk through our recent balance sheet and capital allocation actions and then provide an update to our near-term and medium-term outlooks. Starting with Q1, our results were very strong, and we exceeded the guidance we last provided on all key metrics. Q1 revenue was $258 million, up 22% year-over-year. above the top end of our recent guide. The vast majority of this Q1 revenue beat came from strong retention in our top [ DNE ] cohorts and from expansion in our top cloud and AI native customers. The Richmond data center, which began ramping revenue in March, contributed less than $500,000 of revenue and less than 20 basis points of year-over-year growth in Q1. Our top customers continue to drive our growth. Our $1 million customer ARR reached $183 million, growing 179% year-over-year. AI customer ARR reached $170 million, growing 221% year-over-year. And we continue to deliver both durable and profitable growth. First quarter adjusted EBITDA was $105 million, up 21% year-over-year with an adjusted EBITDA margin of 41%. GAAP operating income was $37 million, with an operating income margin of 14%. Adjusted operating income was $64 million, with an adjusted operating income margin of 25%. Trailing 12-month adjusted free cash flow was $171 million or 18% of revenue. Trailing 12-month adjusted free cash flow less lease principal payments was $154 million or 16% of revenue after including $17 million in financed equipment principal payments over the last 12 months. Next, I'll spend a few minutes on the recent equity raise and what it means for our financial profile and for our capacity plans. In Q1, we raised $888 million in equity, and we have already put the proceeds to work across two important priorities. The first priority was strengthening the balance sheet. We repaid our full $500 million Term Loan A, saving roughly $50 million per year in cash interest and mandatory prepayments. We intend to use a portion of the remaining cash to retire the outstanding $312 million 2026 convertible notes when they mature. Collectively, these actions result in a flexible balance sheet with no material maturities until 2030. The second priority was expanding capacity to meet demand. As Paddy shared, we have secured approximately 60 megawatts across four new locations, an 80% increase in our committed capacity. This capacity is projected to begin ramping revenue over the course of 2027. While there won't be any 2026 revenue impact, the build-out of some of this capacity is likely to start in late 2026, which will impact 2026 cash flow and margins. We expect the CapEx per megawatt in this new capacity to be higher than for the equipment ordered last year, for the 31 megawatts. The increase is driven both by the rising component cuts the entire market is seeing and higher cost and higher token capacity equipment that we plan to install. We expect the incremental ARR per megawatt to be higher as well. And importantly, we expect to generate the same or higher return on investment in these new data centers. We are likely to continue to align the timing of our investments with revenue by financing a material portion of the equipment for these facilities. With all of this, we expect to exit 2026 at approximately 3x net leverage with no material debt maturities until 2030. Looking forward, we are again raising our near-term and medium-term outlook. The strong Q1 retention and growth in our top cloud and AI native cohorts has continued in Q2. For the second quarter of 2026, we expect revenue of $272 million to $274 million, representing 24% to 25% year-over-year growth. We expect second quarter adjusted EBITDA margins in the range of 37% to 38%. And which is $102 million at the midpoint, up 14% year-over-year. We expect non-GAAP diluted net income per share of $0.20 to $0.23. And based on approximately 121 million to 122 million weighted average fully diluted shares outstanding. Note that our shares outstanding projection includes a benefit from the projected anti-dilutive impact of the cap call that we purchased along with the issuance of our 2030 notes. For the full year 2026, we are again meaningfully raising our outlook. We now expect full year 2026 revenue of $1.13 billion to $1.145 billion, representing 25% to 27% year-over-year growth, with a negative growth rate approaching 30% in Q4. Again, this does not include any projected revenue from the newly committed 60 megawatts. We expect strong full year adjusted EBITDA margins of 37% to 39%, which is $432 million at the midpoint. Projected adjusted free cash flow margin will be in the range of 9% to 12%. And which includes roughly $100 million cash flow impact in 2026, a projected nonrecurring start-up costs for some of our newly committed capacity. Without these costs, adjusted free cash flow margin would be roughly 18% to 21% for the year, above prior guidance. We expect adjusted free cash flow margin less equipment finance principal payments to be slightly positive for 2026, including the impact of the $100 million in cost for 2027 capacity. We expect full year non-GAAP diluted net income per share of $1.10 to $1.20 on $118 million to 119 million weighted average fully diluted shares outstanding. This is an increase to our prior guidance despite the equity raise as the interest savings from retiring our Term Loan A more than offset the impact of the higher share count. We are also increasing our medium- to long-term outlook, the 30% 2027 revenue growth outlook we provided last call was based solely on the 75 megawatts of capacity that we had active or under contract at that time. With approximately 60 megawatts of additional committed capacity, projected to begin generating revenue over the course of 2027, we now expect 2027 revenue to exceed $1.7 billion, full year growth of 50% or more year-over-year. We will deliver this growth while working to make smart investments generate attractive returns and maintain a strong and flexible balance sheet. Our margin outlook for 2027 is healthy. We project approximately 40% adjusted EBITDA margins and high teens adjusted free cash flow margins. While we are excited by our progress and the increased growth outlook, we're not stopping there. We continue to actively look for opportunities to further accelerate durable and profitable growth. With that, I'd like to turn it back over to Paddy. Padmanabhan Srinivasan: Thank you, Matt. Before we move to Q&A, let me recap what we shared today. First, our momentum has never been stronger. Our $1 million customer ARR reached $183 million, growing 179% year-over-year. Our AI customer ARR reached $170 million, growing 221%, and over 80% of that is coming from infant services and core cloud, not Bare Metal. We are an AI-native inference cloud, not a GPU landlord. Second, we launched the DigitalOcean AI native cloud. We unveiled our full platform last week at Deploy conference. We acquired Cataneo to accelerate our open source AI stack. We landed multiple marquee AI-native customers, including Cursor. Our differentiation is clear. The pipeline is deep and the wins are real. We are the AI native cloud. Third, we are investing to meet our customer demand. $888 million raised 60 megawatts of incremental capacity committed. We are building for 2027 and beyond with disciplined capital allocation and a strengthened balance sheet. Finally, we again raised our near- and medium-term outlook. Projected exit 2026 revenue growth approaching 30%, accelerating to 50% or more revenue growth in 2027, attractive margins and a flexible balance sheet. We continue to build a durable and profitable growth engine. The inference and Agentic economy is real. The demand is real. And DigitalOcean with its AI native cloud is purpose-built for this opportunity. With that, let's open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Kingsley Crane of Canaccord Genuity. William Kingsley Crane: Needless to say, congrats on the momentum you've earned it, you continue to earn it. It's great to see One of the ideas over the past couple of weeks is that the mix of CPU and GPU should be closer to 1:1 with the Agentic workloads compared to pure LLM calls. And you talk about that new arrow thinking and doing in your deck, which was really well prepared. Just curious how relevant is that CPU renaissance for your business given your large core cloud and CPU footprint? Just trying to think about the quantitative benefit that could create. Padmanabhan Srinivasan: Yes. Thank you, Kingsley. Appreciate your question. Yes, I think it is unmistakable that we are moving more and more towards an agent ear where more software is going to be rearchitected and there will be a heavy dose of autonomous agents performing tasks that were previously handled by humans. So in that era, the doing part, as I mentioned, will also require intelligence, but it is going to require a tremendous amount of computing that until about 12 months ago or more precisely until open [ plot ] really showed us the blueprint. We were in really as an industry contemplating how compute intensive it is going to be. When I say compute intensive, it is just not CPUs, right? It is high bandwidth memory. It is advanced databases like the ones that we just announced last week, it is safe agent execution, it is orchestration between these agents. There is a tremendous amount of modern computing primitives that are required to orchestrate all of this. So I don't know whether the ratios that have propped up with say, CPUs to GPUs will go from 1:12, as we were previously thinking to 1:1, I don't know exactly what that ratio will end up being. But what I can tell you is that we are going to need a hell a lot of more compute to do all of these things as more software gets rearchitected over the next handful of years to be more Agentic, which requires both inferencing for the thinking part and a lot of computing for the doing part. So we are preparing for that, the new capacity that we have just took on. All of our new data centers are deploying our full stack AI native cloud. So it is just not inferencing services. It is the full stack AI native cloud that is getting deployed in these data centers. And we are getting ready for a compute-heavy future, and we are starting to see that in a very pronounced way from some of our advanced AI native customers as they themselves move into an Agentic Era. William Kingsley Crane: It's really helpful. And then for either Paddy or Matt, we've been thinking about low to mid-teens revenue per megawatt for AI. You mentioned that the incremental capacity you're bringing on could be higher. And then just in addition to that, like to what extent can software capabilities like inference engine and [ French ] router, open source model adoption, agent framework, push that revenue per megawatt higher. I think we're all doing that megawatt math, but just curious to what extent that figure can become untethered from the peers there? . Padmanabhan Srinivasan: That's a great question. We definitely expect that we can increase that $13 million per ARR per megawatt over time. I mean you're already seeing that non Bare Metal over 80% of our AI customer ARR, and that should increase the ARR by itself. We're also expecting, as you just pointed out, there's going to be a lot of core cloud and a lot of compute that gets pulled through with that. Right now, it's still -- it's a modest amount of core cloud pull-through, and we think there's upside there. And then to your point, all of the capabilities that we announced to deploy, the serverless inferencing and a lot of these other capabilities, they detach the pricing and the value creation from a dollars per GPU hour and enable us to capture both higher revenue and higher margins with stickier services. So we're very optimistic about our ability to drive the ARR per revenue up over time. And certainly, that's part of our investment thesis as we've taken on this incremental capacity. Operator: Your next question comes from the line of Gabriela Borges of Goldman Sachs. Gabriela Borges: Paddy, you start up this conversation talking about how the beat in the quarter was not driven by new capacity coming online, but rather previously committed capacity. So I defer your thoughts on that. Talk to us a little bit about how we should think about the beat on rate [ cans ]. You're already giving us visibility into 2027 based on capacity coming online. But in any given quarter, what levers do you have to be in raise? And maybe if you could comment on the pricing dynamics and believe as you can pull on pricing within that. Padmanabhan Srinivasan: That's a great question. I think when we guided to 2026, and we outlined the pace at which capacity was going to come online this year, there's a number of assumptions that we had to make in that, that gave us the ability to have very strong confidence in the guidance that we were providing. One was the timing of the facilities coming online. The second was the -- our ability to sell into that capacity as it came on and the third, the pricing at which we're selling into that capacity. And if you think about all of those dimensions, again, when we provided that guidance, which was late last year, early or early this year, we had to make sure that we had enough cushion. And what we're finding is we're doing pretty well on all three of those dimensions. The Richmond data center came online. We had said second quarter, it came online in March. It didn't contribute much the first quarter, but it's online and ready to go ahead of what we had said. We're able to sell into it. Much, I'd say, on a very appropriate and aggressive time line, which is really good. And then as you're seeing in the market, the pricing for GPO hour, even services right now is not seeing any kind of price compression. In fact, we're seeing increases in the prices for [ H100s ] and [ H200s ] and some of the legacy gear. So I'd say we have sufficient ability to continue to beat and raise we just outlined the incremental 60 megawatts for next year. And we're taking a very similar approach, which is we'll be cautious about our expectations around timing of delivery, we'll be cautious about expectations of how long it takes to sell into it, and we'll be cautious about the pricing that we get and then we'll work to exceed that. Gabriela Borges: Matt, maybe I'll pick it up just some of those comments on being cautious. So I think we can all agree that we're pretty early in what is going to be an incredible product cycle. At some point, the product cycle will peak. So I guess the question is for the both of you. What are the demand signals that you're watching to be able to figure out whether it's 2027 growing north of 50%. Is that the peak growth rate? Does it accelerate from there, does it normalize and come down? What are some of the metrics that we could potentially be tracking from the outset? And what do you track internally? Padmanabhan Srinivasan: Yes, I can start at a high level, and then I'll let Matt comment on your specific 2027 question. So we all agree, Gabriela that this is such a tectonic shift in how software is built and delivered. And one thing that I also want to highlight here is that inferencing and Agentic workloads will scale very differently compared to training. Training is a onetime, almost episodic turn on, the entire cluster comes online and just stays static from a workload perspective. While inferencing and Agentic workloads have more of a cloud kind of characteristics in terms of how the workload ramps, although the gradient of the ramp has been significantly steeper than we have ever seen with traditional cloud software. So a lot of our confidence is coming from observing our big marquee AI native customers and seeing their workload growth and hence, the inferencing demand that they translate on to us and our platform. So in terms of the product cycle peaking, I think that is -- we are still a few revisions of our products, certainly and also as an industry to get to that peak cycle. [ Openly ], I have to remind everyone is barely 100 days old. And since then, there have been a few other personal productivity agents like Hermes agent and a few others that have come and the whole industry is now figuring out what agent harnesses should look like. It is still a very, very early days of the Agentic architecture. So I expect the product cycle refresh to continue for quite a bit into the next several quarters before we can say, okay, we now have a blueprint for how these modern autonomous systems are going to be built and operated in scale. So I think we still have a lot of innovation ahead of us. And what gives us a lot of confidence is having this front-row seat working with these marquee AI-native customers gives us a tremendous opportunity to learn about their application patterns. And this luxury is available to us because we are not just a Bare Metal provider. These customers want us to be in the room where they are solving these problems, and that's how we were able to build a lot of these things that we saw last week in terms of innovation, like the intelligent routing, the -- many of the cashing techniques that made us the #1 in DeepSeek and Qwen token throughput and time to first token and things like that, it gives us a front-row seat and a co-invention opportunity to do this alongside our customers. So I definitely feel like the product cycle is not going to peak anytime soon. Matt Steinfort: And I think the best metric to watch, which we're watching is ARR per megawatt. I mean if you think of token efficiency being one of the primary differentiators in terms of your ability to provide value to your customers is how much revenue can you get for those tokens and how efficiently can you provide them? And how sticky are those services that you're providing, that should all translate into higher ARR per megawatt, which is why we've introduced that metric, we track it internally, and it's all about optimization for us, and that's where we're focused that's what we would point the market to watch as well. Operator: Your next question comes from the line of Mark Zhang of Citi. Mark Zhang: So very nice to see the growingness of the non Bare Metal ARR this quarter. Just want to dig into some of the dynamics there in the input. So I wanted to get a sense of contributions from just new land versus existing conversions of the existing Bare Metal customers? And then how should we sort of like think of the pace of the mix shift going forward? And can you give us a sense of the ASP upfront, when you convert from Bare Metal? Padmanabhan Srinivasan: Thank you, Mark. Your line was a little choppy, but I think I got the essence of your question. So in terms of the mix of the customers, it's a healthy mix of AI native customers that are new to our platform, that are not just consuming core AI services, but also by the nature of their inferencing workloads, they use storage systems and database systems and also increasingly core computing primitive, but we also have some of our existing digital native enterprise customers also starting to ramp up their AI innovation and AI workloads. So it goes both ways, and we are super happy to see that. And in terms of the Bare Metal consumption, pretty much most of the customers that come to us now are coming to us because they see this rich set of inferencing entry points. So last week, we announced serverless inferencing, dedicated inferencing, batch inferencing and things like that. Increasingly, customers are realizing, especially the AI natives that they were forced to deal with all this complexity over the last couple of years, not because they wanted to, but they have to because there were very few vendors who were able to provide this kind of kernel optimization and performance enhancement using software and hardware codesign. But now that these kinds of capabilities are available out of the box from our AI native cloud. We are seeing a lot more appetite from our customers to come in at a higher altitude in our platform and we are not having to sell Bare Metal at all. In fact, we don't even have that as part of our standard pitch. Matt Steinfort: And from a timing standpoint, this is one of the benefits of our consumption-based model with but where we're not locking in bare metal prices for 4 and 5 years. As these Bare Metal customers, if you notice in the materials we provided the Bare Metal not only decreased as a percentage, but it actually decreased in absolute dollars of the AI customer ARR. That's because as these customers come up for contract renewal, we have the opportunity to resize and reconfigure that capacity. If we want to make that available to serverless inferencing, where we know we'll earn a higher return than Bare Metal, that's what we do. And so we have the ability to steer that percentage down by not consuming our scarce capacity for Bare Metal services. So not only are new customers not asking for it, but the customers that are on it right now, we can rotate them off into the new services or we can repurpose the capacity for higher-margin services, and we control that. Mark Zhang: No, that's terrific. And then just maybe a follow on. It's terrific to see the new five layers also referencing a new platform that you guys had provided last week at the pot. How should we sort of think of the maybe like changes to the gold market from here? Obviously, there's a lot to sell. There's much more products to for customers to consume. How do you -- how are you thinking about just in terms of the go-to-market partnerships and how you really like officially land new customers won this new module? Padmanabhan Srinivasan: So our go-to-market over the last several quarters has been aimed at getting marquee AI-native logos. And that's how we have landed some of the customers that I was so proud to announce today. And we just have to scale up in doing what we are already doing. So just as a reminder, we have a very small but mighty team of AI native focused sellers that are quite capable of selling our AI native cloud stack. On top of it, we also have a very focused start-up ecosystem team that nurtures high-quality AI native companies in Silicon Valley and nurture them through their growth phases. We also have a tremendous luxury of having perhaps the best product-led growth machine, which keeps growing in strength. So we get a tremendous amount of traffic and volume through our product-led growth flywheel, which includes a heavy dose of AI native customers that absolutely just love the simplicity and the absence of friction in our platform that enables them to just come and try our platform and do it without any human intervention. So we have multiple front doors as a way to solicit customer entry into our platform. So we'll be fortifying some of those things, and we have a very strong partnership team that enables us to build relationships with various frontier model and open source model companies in the rest of the ecosystem. Operator: Your next question comes from the line of Jason Ader of William Blair. Jason Ader: Paddy, you guys are exploiting a gap in the market right now, especially with the Neoclouds, but the Neoclouds are all messaging shifting to a full stack approach and a focus on inferencing. So I guess my question is, how sustainable is your differentiation relative to the Neoclouds and what drives that? Padmanabhan Srinivasan: Yes. Great. Thank you, Jason. I think the market opportunity is just huge and tremendous, right? We feel that the Neoclouds adding software capabilities is a great validation of our strategy and we've been saying that for a long time. But we are in fundamentally different businesses than the Neocloud. They're training first, and that's a great model. And they have a small number of highly concentrated customers with take-or-pay agreements and their needs, that type of contract needs a tremendous amount of infrastructure and discipline and execution to pull that off. So it is a significant heavy lift to deliver on these massive hyperscaler offtake contracts. So I like our chances of continuing to innovate on the software stack, as I said, it takes a lot of hard work to build a well-integrated stack like the one that we announced last week. It is just not a stack that lives on a PowerPoint slide. You can log into cloud.digitalocean.com and see how these layers work together. We are also incredibly proud of the fact that we have made the stack completely open with open source options at every single layer. That is a pretty big deal that I want everyone to appreciate because our target customers are AI-native customers. and they feel very uncomfortable boxing themselves into a single LLM provider. That is just not how their businesses will scale. And for them, having open source work as well as close source as part of the native stack is very, very important. So driving this kind of integrated open source enabled stack is really hard. And I like our focus. I like our discipline in terms of doing this. And the market opportunity is going to be so big that I feel very, very convinced that if we focus on learning and understanding our customers better than anyone else and translate that to product innovation, everything else is going to take care of itself. I keep telling my teams be extraordinarily customer-obsessed and competitive aware, not the other way around. We should obsess over our customers first so that we can build the best product for them while being aware of competition, and not the other way around. So I feel we have a lot of room to run with this strategy. Jason Ader: Okay. Great. And then one for Matt. Matt, for 2027, you talked about adjusted free cash flow margin in the mid- to high teens, I believe. Could you give us a sense of what it would be, including lease payments? Matt Steinfort: That's a great question, Jason. It's hard to answer, though, because it will depend entirely on the lease terms that we have. So whether we lease over 4 years or 5 years or a longer period, and it will also depend on the mix of what we lease versus what we pay for upfront. That's why we're not guiding to that at this point. What I can tell you is that we continue to make very disciplined investments, we've created a lot of balance sheet flexibility for ourselves with the equity raise. We've got a lot of options at our disposal. And we're very excited by the return on investment that we're underwriting for these new facilities. So we'll continue to operate with discipline, but we can't provide specificity on the -- what the lease payments are going to look like in 2027 because we don't know yet. Operator: Your next question comes from the line of Wamsi Mohan of Bank of America. Wamsi Mohan: Paddy, for -- when you look across your customer cohorts, how much penetration are you seeing of AI-driven workloads, as you look at sort of $1 million plus in the $500,000 plus customer cohort? And are you actually seeing because of AI, do you expect over the next 2 years to have an even higher chunk of customers graduating from this $500,000 to $1 million-plus cohort as you look through the next few years? And I have a follow-up for Matt. Padmanabhan Srinivasan: Yes. sees, you're absolutely right. I think the short answer is yes to both. We have a good mix of AI as well as cloud native customers in the $500,000 and $1 million customers. And yes, it is a very important motion that we drive internally to look at every 100,000 customer and drive our teams to find out what is blocking our customers from being a $500,000 customer. And similarly, we look at every 500,000 customer and find out how we can make them $1 million customer and so forth. So with the increased adoption of AI in these customer cohorts, we fully expect those numbers to keep going up to the right for sure. Operator: Your next question comes from the line of Tom Blakey of Cantor. Thomas Blakey: Congratulations on the great results here. Maybe a couple of questions on my side. Paddy, we've talked prior about 3 to 4x demand in terms of your 75-megawatt capacity was really impressive to see you announce Cursor here, a great win. Congratulations. Just wondering if you could just maybe update us on the framework of what you're seeing there in terms of your customer selectivity and maybe even turning some customers away in this type of market? And then secondly, for Matt and maybe the team just CapEx per megawatt, I think investors would love a little bit more color in terms of how much higher this can go for the 60 megawatts. And would it be difficult to just upgrade the prior capacity from a software upgrade perspective to the AI native cloud capacity to maybe kind of pull some of that in, that would be helpful. Padmanabhan Srinivasan: Yes. I think on the last thing, we -- it is hard to have a non-AI data center deployed with AI hardware because of the limitations, especially all of the new ones that we're deploying are all direct liquid cooled and the hardware specs are just different, Thomas. So that's that. And going back to your first question around the pipeline coverage and how we allocate capacity. I mean, that is some -- a new muscle that everyone in the industry is learning, right? Our pipeline, as I mentioned several times, is 3 to 4x, if not more, in terms of the actual capacity that we have. Which is a great problem to have, but it is a problem that we are very and very thoughtful about resolving because we have to make some bets just like our customers are making bets on us. We have to make bets on how we want to allocate the capacity. Because, as I said in the last call, if we decide to just sell the capacity to the first or the biggest or the loudest customer we'll be all done. We can go home and the capacity will all be taken. But we have an intention to run this like a cloud, right, where we want as many customers as possible so that we can learn, we can build a better product and build a bigger competitive moat that customers that only have -- or platforms that only have a few concentrated customers simply don't have the luxury to learn and innovate as fast as we are. So it's a balancing act that we are trying to figure out, but so far, so good with the types of customers we're bringing on board. Matt Steinfort: In terms of the cost of the CapEx, it's certainly going to be higher than what we experienced for the 31 megawatts equipment was ordered in 2025. And you're seeing broadly across the industry, component costs are going up. But more importantly for us, we're putting in gear that has higher token kind of capacity and capabilities. And we expect to get the same or higher ROI on the investments that we're making. So we'll invest a bit more. We see a phenomenal opportunity in front of us. We got a very differentiated position. We're going to get more capacity out of the investments we make, and we're going to earn similar or better returns on the investments. Operator: Your next question comes from the line of Josh Baer of Morgan Stanley. Josh Baer: Congrats on a wonderful quarter. I was hoping you could double-click a little bit on GPU and other pricing trends that you're seeing in the spot market. And wondering if you can quantify the portion of your business that's on demand and exposed to spot versus what portion is contracted and has fixed pricing? And any way that you can characterize the benefit in the quarter or the impact of the 2026 guide from spot market pricing? Padmanabhan Srinivasan: It's interesting, Josh, that you point to the spot pricing. So we have a portion of -- a small portion right now of on-demand because most of our capacity is locked up with a customer. But if you think about the core of your question, which is how much exposure do we have to the ability to raise GPU prices along with the market. Because we don't have 4- or 5-year contracts with our customers, if we're locked into a customer, it may only be for 3 months or 6 months or a year. And as I said earlier on the call, as those contracts are coming up, we can rotate. One, we can just raise the price on that customer to whatever the current market prevailing prices. Two, we can rotate it completely out of if it's a GPU per hour price, we can say we're not going to sell that capacity in that model any longer. And if you're interested in that you've got to take our on-demand pricing or you're going to take serverless inferencing. So we have the ability to adjust to the market, I'd say, probably more readily than maybe some of the other folks in the industry. So we feel very, very good about our ability to adapt to pricing. And as I said, to Gabriela's question, that ability and our ability to execute that is part of the reason why we're able to raise the guidance for this year without getting any benefit from the incremental capacity that we just announced. So that's a great question. Operator: Your next question comes from the line of Radi Sultan of UBS. Radi Sultan: If you think about adding more capacity and as the existing AI customer cohort scale, like how should we be thinking about the gross margin profile, this incremental capacity you're looking to add once it's fully utilized. And you mentioned, Matt, the increased component costs. But yes what are the key puts and takes there we should be keeping in mind just on the margin side of things. Padmanabhan Srinivasan: I think you'll note in our materials that we highlighted, non-GAAP operating margin. And the reason that we did that is because, again, if you think of where the industry is going and how different this business is than the business that we had several years ago, gross margin is one input, but operating margin is a better, more holistic view of what's going on in terms of the overall profitability because the revenue growth is so rapid and it's certainly at a lower gross margin, but it comes with tremendous operating expense leverage. And so the operating margins are very strong and very compelling, and we expect those to continue to be very attractive. Will we see a small decrease in operating margin as we invest to accelerate our growth, given some of the same timing-related issues with bringing on new capacity, we certainly will. But if you look at the rate of revenue growth, if you look at the strong operating margins, if you look at the fact that we've been very, very disciplined with cash flow, and that we're earning very good returns. I think you'd agree that we're positioned very, very well for very durable and profitable growth. Operator: Your next question comes from the line of Patrick Walravens of Citizens. Patrick Walravens: It's amazing results you guys, congratulations. So Paddy, when I was at your Deploy conference, the speaker got interrupted by applause like five or six times. But two of the times were when you talked about the inference router and then also when you guys talked about support for the latest DeepSeek model. So can you just talk a little bit about why your customers are so enthusiastic about that? Padmanabhan Srinivasan: Yes. Thank you, Patrick. And first of all, thank you for coming to deploy last week. So you bring up a really, really important point. And for those of you who have not seen the keynote video recording from last week, I encourage you to please do that. The two points that Patrick just mentioned are really important because AI Natives are doing something which is incredibly interesting. Number one is they are all running multiple models, right? Because as I mentioned, this is a cost of revenue line item for them, and it will be crippling if they are just beholden to one closed source model. Last week, there were two different models that were announced. One is DeepSeek version 4 and the other one was the latest version from OpenAI. And the difference in price was 10x. In terms of the output tokens, it was literally $3 versus $30. So AI natives are doing three things: One, they are all becoming multiple models. Number two is they're running a lot of open source. And number three is, many of these AI natives are also running their own version of a model, which is distilled from an open source model or something like that. So there's intelligent router becomes extraordinarily important so that the router can find the right model for the task you're assigning. So we showed a demo, which was super compelling where it showed better performance at lower [ TCO ] per token by routing the incoming prompt to the right model. And the second thing is Patrick mentioned that there was a lot of supplies for our DeepSeek support, which is fairly obvious because AI natives are embracing open source up and down the stack in a very pronounced manner. So that's why it is really important to understand, our target market is very different. These are AI natives that are building and monetizing software and for them, multiple models, open source and having destiny over their intelligence is an existential thing. Patrick Walravens: Great. And Matt, if I could ask you a follow-up. Cursor is an amazing win, congratulations. We've all seen the news about SpaceX having an option to buy it. So just how did that fit into your guidance? How did you think about that? Matt Steinfort: Cursor is a fantastic customer. And as you said, it's a great indication of the quality of the platform. And we're really excited by it based on the fact that they're using -- this is not a Bare Metal contract. They're using our inference services. They've made commitments around the NFS and some of the core cloud capabilities, so we're very encouraged by that, and we have a fantastic relationship with them. We haven't predicated any of our long-term guidance on any single customer. We have, as Paddy said, to the demand for the capacity that we have available and we were very confident that there'll be a good part of that, but we're not basing any of our forecasts on specific customer. Operator: And your last question comes from the line of Raimo Lenschow of Barclays. Raimo Lenschow: Two quick questions. Going back to Gabriela's point in terms of like how big the market is. At the moment, it looks like most of the work is getting done on training models and inference is only starting. Like Paddy from your perspective, which innings are we on inference actually because it seems very, very early still to get an idea about like how long this can go on for. And then, Matt, for you, the one thing that comes up in the market is a lot of like capacity of new data centers, et cetera. You're not building 100,000 GPU to have data centers who are much smaller, but like what's the constraint of finding sites to kind of go beyond the capacity you announced today? Padmanabhan Srinivasan: Thank you, Raimo. So to answer your question succinctly, since baseball season is just starting. I would say from an inferencing point of view, we are probably in the top of the second inning. And Agentic, we are just in the national anthem. It's just getting started. So I think there's a lot of room for a lot of innovation. And I am the one thing that I'm super proud of with all the announcements we made last week is 15 new product launches, not just features, 15 new product launches and the velocity and the intensity from our engineering team is just -- it's going to make a difference in terms of our ability to establish a leadership position. And then Raimo, your -- what was the second question? Second part of the question? Raimo Lenschow: [indiscernible] how did is it like, yes? Matt Steinfort: Sorry. The -- we've been able to secure the data center capacity that we've been targeting. We're still in active conversations on additional capacity beyond the both for '27 and '28. And we've not had an issue getting capacity that we've been trying to track down. Operator: That concludes our Q&A session. And this also concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Orthofix First Quarter 2026 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Julie Dewey. Julie Dewey: Thank you, and good morning, everyone. Welcome to Orthofix' First Quarter 2026 Earnings Call. I'm Julie Dewey, Orthofix' Chief IR and Communications Officer. Joining me today are President and Chief Executive Officer, Massimo Calafiore; and Chief Financial Officer, Julie Andrews. Earlier today, Orthofix released its financial results for the first quarter ended March 31, 2026. A copy of the press release and supplemental presentation are available on our Investor Relations website, and a replay of this call will be posted shortly after we conclude. Before we begin, please note that our remarks include forward-looking statements. These statements involve risks and uncertainties, and actual results may differ materially. All statements other than those of historical facts are forward-looking statements. We do not undertake any obligation to revise or update such forward-looking statements. Factors that could cause actual results to differ materially are discussed in our most recent filings with the SEC and may be included in our future filings with the SEC. We will also reference various non-GAAP financial measures during today's call. Reconciliations to U.S. GAAP and additional details are in our press release and supplemental materials. Unless otherwise stated, net sales growth rates are on a pro forma constant currency basis and exclude the discounted M6 artificial disc product lines and all results of operations will be on a non-GAAP as adjusted basis. Here's today's agenda. Massimo will start with business performance and operational highlights. Julie Andrews will follow with her financial results and guidance, then we'll open up the call for Q&A. With that, I'll turn the call over to Massimo, who will discuss how our early year execution and recent operational actions are beginning to support improved performance as we move through the year. Massimo? Massimo Calafiore: Thank you, Julie. And good morning, everyone. I appreciate you joining us today. We delivered a good start to 2026. First quarter results reflect steady execution, improving stability and sharper strategic focus. As the quarter progressed, we began seeing the expected progress from our spine commercial channel actions, along with stronger operating discipline, supporting our confidence that performance will continue to build through the year. While these results reflect meaningful progress, they also crystallize where we could further raise the bar. That's why in April, we took deliberate steps to simplify our spine leadership structure, a proactive move as we continue to scale, enabling technologies like 7D and advance the launch of VIRATA later this year. By bringing decision-making closer to the field and increasing accountability through direct oversight, we're improving speed, consistency and commercial focus where it matters the most. Stepping back, Q1 reflects where we are as a company today, moving into the next phase of our journey, executing with greater consistency and strengthening our position to benefit from our innovation pipeline as the year unfolds. What we delivered this quarter supports our confidence in continued improvement. Our priorities are straightforward: execute consistently, convert opportunity into results, and demonstrate progress quarter-by-quarter. Let me turn to business performance highlights, starting with Spine. In Spine, Global Spine Fixation net sales grew 6% on a constant currency basis, with U.S. net sales growth of 4%. Results were supported by enhanced commercial focus, deeper procedural penetration and the ongoing benefits of our distributor transitions. Importantly, those transitions are now largely behind us. As alignment has improved, we are seeing positive momentum from more consistent field execution. In Q1, our top 30 distributor partners delivered net sales growth of 27% year-over-year and 24% on trailing 12-month basis, reflecting the success of our strategy to prioritize larger, more dedicated distributors and deeper relationship with our top partners. A key driver of that momentum is 7D, which remains a core differentiator in our surgical ecosystem, enhancing precision, workflow and surgeon engagement. Following our leadership realignment, we are intensifying our commercial focus on adoption of our 7D FLASH navigation system to deliver a more integrated spine offering. While Spine is benefiting from better alignment, we are applying the same discipline to Biologics. Performance improved sequentially during the quarter as we implemented targeted actions to strengthen execution, expand account penetration and increase utilization across the portfolio. We are refining our go-forward strategy, building clinical evidence and supporting advocacy. Collectively, these actions are designed to drive improvement through the year and position Biologics to exit 2026 with stronger momentum and a more durable growth profile. Beyond Spine and Biologics, our other growth platforms remained resilient. Our Therapeutic Solutions business, formerly Bone Growth Therapies, delivered 5% year-over-year net sales growth and continue to outperform the broader market. Demand remained stable, utilization is improving and prescribing activity is increasing across both spine fusion and fracture care. With its consistent performance and healthy margins, this business continues to be an important contributor to margin and cash generation. Global Limb Reconstruction posted 3% constant currency growth, reflecting steady demand across our core fixation and reconstruction systems. Over the past year, we sharpened our focus by prioritizing high-value categories, enhancing our mix with platform like TrueLok Elevate and Fitbone and deemphasizing lower return product. We believe this action positions limb reconstruction for acceleration as we move through 2026. A common thread across the business is the increasing impact of our innovation pipeline. We will have a full year contribution from TrueLok Elevate and Fitbone, and we remain on track for the full market launch of VIRATA in the second half of the year. Together with the continued inspection of our 7D FLASH ecosystem, this platform are designed to deliver differentiated clinical value and support durable multiyear growth. In closing, Q1 was a solid start of the year. We are carrying that momentum forward with disciplined execution and targeted investment. The quality and the commitment of our U.S. spine distributors is greater than ever and meaningfully contributing to our success. Our innovation pipeline is strong. Our operating model is more focused, and we believe we have the right team and the financial foundation in place. There is more work to do, and we are increasingly confident in our ability to execute, doing fewer things better, sharpening accountability, generating cash and delivering on what we said we would do. With that, I'll turn the call over to Julie Andrews to review our financial results and guidance. Julie Andrews: Thank you, Massimo, and good morning. All growth rates I'll reference today are pro forma constant currency, excluding the impact from discontinued M6 product lines. We delivered a disciplined start to 2026 reflecting an execution that is consistent with our plan. For the first quarter, total global net sales of $196.4 million increased 3% year-over-year. Results reflect steady execution following the Spine Commercial channel actions, and we expect further improvement as productivity continues to increase. Spine Fixation was in line with market growth, while Therapeutic Solutions delivered above-market growth largely offsetting the remaining impact of commercial channel transitions and softness in Biologics. While timing of certain international stocking orders benefited Q1 in results by approximately $2 million, the majority of performance reflected underlying execution across our core franchises. As a reminder, Q1 had 1 less selling day than last year, which reduced first quarter growth rates by roughly 1.6%. In addition, the CMS TEAM pilot program that began in January and includes bone growth stimulation had a onetime impact of less than 0.5% on our fourth quarter growth rate, slightly less than the 1% impact we had originally anticipated. Taking these factors into account, our Q1 growth rate was within the range implied by our full year guidance of 5% to 6%. From a segment perspective, global spinal implants, biologics and enabling technologies delivered $105.8 million in net sales for Q1. Our performance was supported by continued growth from our top 30 distributors in the U.S., partially offset by the timing of stocking orders from our Middle East distributors due to the impact of the war. Therapeutic Solutions, BGT, net sales were $57.8 million, up 5% as we continued to outperform the market. Fracture sales grew 6% in the quarter. We expect growth to remain above market rates of 2% to 3%, driven by disciplined execution, new surgeon additions and competitive conversions, especially in the fracture channel. Global Limb Reconstruction net sales were $32.8 million in the first quarter, up 3%. U.S. performance was flat, largely due to the timing of OSCAR Capital sales. We have recently restructured our capital sales team, which we believe positions us for future growth. Early indicators are encouraging with a strengthening capital pipeline. Additionally, we are seeing continued acceleration in the worldwide adoption of TrueLok Elevate and Fitbone. As we sharpen our focus on our core limb reconstruction pillars and benefit from ongoing portfolio and commercial enhancements, we expect to return to double-digit growth in the U.S. in the second half of 2026. Moving down the P&L. Pro forma non-GAAP adjusted gross margin was 70.7%, a 40 basis point improvement over prior year, reflecting the impact of freight and logistics productivity improvements, partially offset by unfavorable geography mix. First quarter pro forma non-GAAP adjusted EBITDA was $9.7 million, in line with our expectations, reflecting impacts from geography mix and commercial transitions. We ended the quarter with $120.9 million in total cash, including restricted cash, providing ample liquidity to support our operating needs and strategic priorities. The cash increase was a result of financing activities during the quarter, including our draw on the second tranche of our debt facility. As we move through the year, our focus remains on disciplined execution, strengthening our commercial foundation and supporting upcoming product launches that we expect to contribute to growth and margin improvement over time. Now let me turn to our full year 2026 guidance. Against the backdrop of our fourth quarter performance and current visibility, we are reaffirming our full year 2026 guidance. As Massimo noted, we expect performance to improve as we move through the year, driven by a steadier commercial cadence and increasing contributions from recent and planned product launches balanced against macro and operational considerations. Net sales are expected to range between $850 million and $860 million, representing approximately 5.5% pro forma constant currency growth at the midpoint. Net sales growth is anticipated to be approximately 5% in the first half of the year and about 6% in the second half of the year. These projections are based on current foreign currency exchange rates and do not account for any further changes to exchange rates for the remainder of the year. Non-GAAP adjusted EBITDA is expected to be between $95 million and $98 million, reflecting approximately 70 basis points of margin expansion at the midpoint. Free cash flow is expected to be positive for the full year, excluding potential legal settlements. In closing, while progress is evident, we are still early in the year and remain focused on converting improved activity levels into consistent above-market profitable growth. We remain grounded in operational rigor, disciplined capital deployment and prioritizing high-value opportunities across our Spine, Therapeutic Solutions and Limb Reconstruction portfolios with the objective of creating sustainable long-term shareholder value. Now let me turn it back to Massimo for closing remarks. Massimo? Massimo Calafiore: Thank you, Julie. I am pleased with the progress we made in the first quarter and our anticipated trajectory for the remainder of the year. As we move through 2026, our focus is clear: deliver quarter-by-quarter progress, expand margins, generate cash and translate our innovation and execution into durable shareholder value. Before we open the line for questions, I want to thank our global teams and commercial partners for their performance in Q1 and their continued focus and execution as we continue to build Orthofix into their unrivaled partner in medtech, delivering exceptional experience and life-changing solution. With that, let's go ahead and open the call for your questions. Operator: [Operator Instructions] Your first question comes from the line of Tom Stephan with Stifel. Thomas Stephan: Nice start to the year. First question on U.S. Spine. Massimo, you talked about the distributor transitions now largely behind you. U.S. Spine up 4%, probably a bit stronger adjusting for selling days. So Massimo, maybe talk about how we should think about growth in this business as we move through 2026 and beyond as well would be helpful. And then I have a follow-up. Massimo Calafiore: As we described 2026, you're going to see an acceleration of the business towards the year. I think that you have a couple of drivers. All of this, you're going to see a phase out of the annualization of the distributor termination that we made in order to optimize our distributor infrastructure, so a natural acceleration there. But also, as you know, we have a very focused and strong innovation pipeline that is coming. We are on time for the full market launch of the VIRATA open system and on time on the alpha launch of the VIRATA MIS. So we're going to see a very good strong contribution of these two foundational systems for us in the second half of the year. So the combination between innovation, annualization of the distributor transition and key capital investment that we're making, I'm very confident they're going to drive a very strong 2026. And as you know, we made -- we shortened, let's say, the distance between myself and the business. I think that the optimization on the leadership side has let me be very close to the field, very be present and keep nurturing the talent that we have. So I'm very excited about where we are with Spine. And we made bold decisions to create a strong foundation and now it's on us to execute. Thomas Stephan: Got it. That's great. Super helpful, Massimo. And then my follow-up just on sort of guidance and cadence for rest of the year. Julie, this may be for you. By reaffirming 1H constant currency growth of 5%, you did 3% in 1Q. I guess, do we think about 2Q as around 7% constant currency? I just want to make sure I'm contextualizing the 5% correctly for 1H. A, is that correct? And then B, for 2H, any comments on selling day dynamics, maybe other fundamental considerations sort of from a headwind perspective in the back half that we should be mindful of for top line? Julie Andrews: Yes, so Tom, we are reaffirming our guidance. Our comments were we do expect growth in the first half of the year to be around the 5% and then accelerating to 6% in the second half of the year. And if you look at Q1, when you adjust it for the selling day, 1 less selling day, and the TEAM's impact, we were right at kind of that 5% growth rate in Q1. In Q2, we would expect our growth rate, I think, to be in the 6-ish percent, 6% range would get you there for Q2. Operator: Your next question comes from the line of Caitlin Roberts with Canaccord Genuity. Caitlin Cronin: Maybe just a little bit more color on the geopolitical impact in the Q1. And then just any expectations that might be built into the guidance there? Julie Andrews: Caitlin, so built into our guidance, we expect very minimal impact for the full year related to the activities in the Middle East. Q1, there was a little bit of what we see as timing just in our Spine business primarily with orders, but kind of more than made up for with other stocking orders. So very limited impact that we have from that and not necessarily in our guidance for the year. Caitlin Cronin: Understood. And then maybe just talk a little bit about putting the Biologics business under the Limb recon leadership and where you would expect Biologics growth to end 2026? Massimo Calafiore: For Biologics, I think that we are expecting to go back to market growth. It's clear that we have still work to do. But since the realignment, the performance has improved sequentially during the quarter. So the targeted actions that we are putting in place are working. We have strengthened the execution. We expand account penetration. And also, we increased the utilization of the portfolio, as you hinted before, not just in spine, but also in the orthopedic side. So I'm very confident about the quality of our Biologics portfolio. I think that the optimization that we are putting forward in terms of sales channel and leadership is working. But let me highlight a specific comment that you made. It's not a realignment under orthopedics. It's more a realignment under a leader that is Patrick Fisher, who has a lot of experience in the space. So of course, as I said before, you're going to see a natural expansion in the orthopedic side, but the idea of the realignment was mostly driven by the talent and the experience that we have in the company around this specific space. Operator: Your next question comes from the line of Mathew Blackman with TD Cowen. Mathew Blackman: Can you hear me okay? Massimo Calafiore: Yes. Mathew Blackman: Two little housekeeping questions for Julie, and then one question for Massimo. Julie, you didn't call it out, so I'm assuming it wasn't a headwind, but any impact from weather in the quarter? And also there was a big hospital strike on the West Coast. Just any other headwinds to call out besides the ones you did mention already? And then can you give us just a sense of the size of the Biologics business, even the roughest sense, whether it's as a percent of the total business or a percent of Spine, just for some context there, and then a follow-up for Massimo. Julie Andrews: Okay. Matt, no, we didn't see any sustained impact from the weather, and we didn't have an impact from the hospital strike on the West Coast. So those did not impact our business. From a Biologics perspective, we don't break that out separately. So I can't give you a context in terms of the size. I think I'd point you to a couple of places, you can look at pre-merger results, and then also a portion of our Biologics revenue, you can see in our Q with our MTF service fee for that portion. Mathew Blackman: I'll remember that. And then Massimo, as you sort of look at the top 30 distributors, obviously, tremendous performance there. Is there anything that you can take from that playbook and pour it over to the rest of the distributor book, such that you can sort of bring along that rest of the business? I mean, obviously not sort of approaching 30% growth. But anything that you could do to sort of bring up the tail of the business now that you're seeing, obviously, really solid execution on a large part of the business there. Just curious how you can execute across the entire distributor network now. Massimo Calafiore: The plan that we put in place was divided in different phases. Phase number one is the one that we just accomplished. Now phase number two is really started to pick among the networks that we have, the next tier of distributors that we want to help to grow. And as you hinted, we're going to apply the same discipline and rigor that we apply for our top 30 distributors to the second tier to make sure that over time, they can grow and create the operational excellence we are expecting by our partner. But 2026 is going to be mostly for us working on the next 30, more than -- keep fueling the growth with our top 30 and laser-focused on the second tier. Operator: [Operator Instructions] And your next question comes from the line of Mike Petusky with Barrington Research. Michael Petusky: I'm juggling on a couple of conference calls, I may have missed this. Did you guys give any detail around 7D placements, any percentages or just any detail around that this morning? Julie Andrews: Mike, we're doing that more on a biannual or annual basis updating this. So our last update on those were in our Q4 call. And as a reminder, for 2025, our Voyager earnout placements increased 30%. And our purchase commitments on those placements exceeded their purchase -- the accounts exceeded their purchase commitments by more than 50%. Michael Petusky: Okay. And then I guess I just want to ask around U.S. Ortho or Limb Reconstruction. It feels like the momentum has slowed there last couple of quarters. Can you guys speak to that and maybe speak to actions that you may be taking to try to reaccelerate growth there? Julie Andrews: Mike, the momentum hasn't slowed. We've had some transient issues or things that we're dealing with. So we did sunset about 30 product lines last year. We really saw that start to impact in Q4. And then we talked -- and continue some into Q1 as well. And then really the timing of OSCAR sales, which is a capital sale, in Q1 impacted the overall growth rate. But very good results and adoption that we're seeing on Elevate and Fitbone. So again, we expect that business to return in the U.S. to double-digit growth in the back half of 2026. Operator: There are no further questions at this time. I will now turn the call back over to Julie Dewey for closing remarks. Julie Dewey: Thank you for your questions and for joining us today. We appreciate your time and interest in Orthofix. If you need any additional information, please reach out. We look forward to updating you next quarter. This concludes today's call. Operator: Ladies and gentlemen, thank you all for joining. You may now disconnect.
Mark Flynn: Good morning, everyone, and once again thanks for joining us. We'll cover a couple of things today with Nova Eye. Obviously the March quarter results. We'll cover the record April sales release that we've put out to the ASX and our guidance today as well. And also, we'll give you an update on how the U.S. business is scaling up at this present time. Quick reminder, this session may include some forward-looking statements. So please refer to the ASX release and the investor presentation for full details. As always, if you like to ask a question, please use the Q&A function in Zoom and we will try and get to as many as we can. I have received a number of questions ahead of the meeting. So thank you to those that have sent those through. But with no further ado, I hand you straight over to Tom. Thomas Spurling: Thanks, Mark. Thank you very much, everybody, for tuning in today. I'm always very pleased with the number of people that take the time to listen to our story. I think we've got a good story again for the quarter to 31 December -- 31 March 2026. As our disclaimer, just a reminder, it's about pressure. Glaucoma is about pressure and us intervening in the disease to open up blockages and reduce that pressure. Next slide. The messages from today, we address, Nova Eye products address a genuine and growing clinical need. So we're not trying to make people do something they haven't done before. The disease is real. The customer base is real. There is competition, but that just means that we have -- and we have an offering that participates very well. Our revenues are now up near $23 million annually and growing at 25% plus year-on-year. And they reflect that real market demand. This quarter showed that we can grow revenue while also improving profitability. I've been saying that too for a while. We were just $75,000 short, just 1% of revenue away from breakeven in Q3. We were EBITDA positive if you include our strong December in the 4 months to March, and we're forecasting EBITDA positive in Q4. So that's EBITDA positive in the second half in total. We are delivering the outcomes we committed to, and that's what I'm pleased about. We have a company with 20-plus percent growth and profit at the bottom or EBITDA. Record sales were achieved in April. We saw the need to upgrade our sales guidance as a result of that. And on the -- just a USA surgeon, I received this e-mail randomly, just general feedback about how good iTrack is, performs better with its canaloplasty than other devices. As such, it is not critical to perform a concomitant goniotomy, which is a tearing of the trabecular meshwork. There's less likelihood of postoperative blood. And for premium IOL patients, it's good. You don't want to have someone that's just had a cataract surgery, spend a lot of money on a premium IOL and come out of that surgery with blood in their eye. I hear that from a lot of surgeons, and this is just another example. Next one. A reminder about the interventional glaucoma market. It means the active surgical engagement to change the disease trajectory and remove the patient's reliance on drops. I encourage you to have a look at Glaukos. Glaukos made an investor presentation today or released it to the market. I looked at it, they give a very good definition of interventional glaucoma and how important it is. And we are part of that market. Nova Eye is part of that market. That cataract link, 1 in 5 patients also have glaucoma gives us a reason for patients going into the OR, let's fix your cataract and get you off those drops. Our stent-free tissue preserving repeatable product is what puts us in the game. We are a required part of the business, interventional glaucoma market globally and in particular in the United States. Next slide. Just a quick summary of our -- a number of you have seen this. We have an FDA-cleared product, of course. We have a good reimbursement, which is stable. That reimbursement gives economic value to all the participants in the surgery, the surgeon, the facility hosting the surgery and us. Why do doctors choose iTrack Advance, well, we're talking about restoring the natural systems of the eye. It's implant-free and tissue sparing with a single pass with now the beautiful Green Light passing around the Canal of Schlemm, gives us the advantage over other devices that call themselves MIGS devices or are MIGS devices giving that doctors can choose from. And there are many -- I have all sorts of -- we've had all sorts of slides in the past about that. But at the heart of the matter is the tissue sparing natural method of action. Next slide. Here's our sales quarter-on-quarter compared with the PCP, USD 5.8 million. There were 2 new additional sales reps in the U.S. to service the growing demand we have there. This is, that's okay. I prefer to look at the next slide, which is our trailing 12 months revenue. It's a better picture of trends. And you can see 26% globally, 27% sales excluding China. We only do that. We started doing that because of the difficulties with tariffs. Remembering we're selling from the U.S. to China. And we were -- at the commencement of this financial year, there was a lot of uncertainty associated with that. So we just measure ourselves on sales excluding China at the moment. That doesn't mean China isn't being worked on. It just means that for guidance, we go to sales excluding China. And the sales guidance was lifted $21.7 million. We had guided to $21 million minimum a week or 2 ago. We have now passed that. So we've upgraded our guidance as a result of the very strong sales in April in all markets. Very pleasing. The drivers of that sales growth, our brand and product awareness by doctors was on display at the recent Australian -- American ASCRSA (sic) [ ASCRS ], American Society of Cataract and Refractive Surgeons in Washington, D.C. We have great trade booth presence and great booth attendance by doctors. We have sales team productivity, which I challenge is up with any ophthalmology company in the U.S. The release during the quarter of our proprietary Green Light technology to provide a clearer view for better navigation of the catheter through the Canal of Schlemm. I guess it's kind of goes without saying that a Green Light with -- is better seen in the case of any blood in the operation. And the release also of our Shear Clear technology, iTrack advanced with Shear Clear technology. This is also our technology transforms the cohesive viscoelastic into a low viscosity fluid during canaloplasty. You'll recall that viscoelastic is really a biocompatible hydraulic fluid that we flush, that we push through the canal. By virtue of our delivery system, it is thin and that thin viscoelastic circulates more freely into the ocular structures, the Schlemm's canal and the outflow pathway. And after a period of latency, regains viscosity and therefore holds open those structures. We're very pleased with the Shear Clear, the outcome of -- the addition of Shear Clear to our technology. There are some surgeon videos on YouTube that are highlighting the impact of this technology on their surgical outcomes. That is why sales are going up. We have a great product. We've got a good team, and we've got a lot of awareness of our brand and, well, to be honest, a little company. Next slide. China remains -- we made our first sales in February to China of iTrack Advance. And in that regard, I draw your attention or we draw your attention to the opportunity in China compared to the U.S. The same dynamic, 1 in 5 cataract patients present with concurrent glaucoma, and the opportunity to grow our business in China is very strong. It is a big opportunity. It will take time. But we think it is very exciting. Next slide. This slide, we've had a question about dips in sales reps. Well, I also get questions about dips -- sorry, revenue per rep. So what we've got is sales growth in the United States by quarter. What I like about this slide is that I have not made any change to the scale on the left-hand side to exacerbate the growth rate. It is a commendable growth rate of 6% a quarter. What we take away from that is despite our sales, we were maintaining a very strong revenue per rep. I'm often asked, how long does it take for reps to get to $1.6 million a quarter, $1.8 million and $1.9 million. I consider our whole pool of reps as an asset. And on average, we have managed over time to keep that quite high. Sales growth, keep it quite high. And therefore, that -- the sales rep expense is quite high. So that is a driver of productivity. Sales in the quarter, on that graph, look flat quarter-on-quarter. That could be, say Nova Eye has flat sales in the United States. January and February were materially affected by winter storms and surgery. And quite possibly, those surgeries were caught up in April, quite possibly. So we have had a great April, as we said, which augers well for Q4. So we will continue to push when we find the right people because there are territories in the United States which are underserved. We will continue to look for reps that we believe can be added to our team and maintain at $1.6 million, $1.7 million, $1.8 million per rep and therefore drive the bottom line productivity as well as sales growth. Our operating result here, I call out our investment in clinical data because it doesn't actually impact the current operating leverage as they call it. You can see I'm not resiling from the fact that we're EBITDA negative. I am pointing out that we're EBITDA positive for 4 months, but not for 3 months because we had a good December. That's a small loss in a -- as a percentage of total revenue, and it's heading in the right direction. The leverage -- the gross margin is pleasing as we improve our production -- constantly improving production processes, but also pricing of our product increasing, particularly in outside the U.S. markets where we're still only transitioning in some cases, from iTrack 250A to the more expensive, for us being a more expensive -- higher price, sorry, iTrack Advance. So I think this highlights the trends in quarterly EBITDA. I draw your attention to the green arrows which show Q4 relative to Q3 for the last couple of years. So we think our outlook for Q4, if that trend continues, is very strong. A couple of periods of very close to breakeven performance, and we're forecasting an improvement that to continue during the month of -- during the April, May and June. Cash flow, we continue to invest in working capital. There was a lot of marketing expenditure upfront that we had to make. Our cash receipts will flow through. And as we said, our existing cash and debt facilities provide sufficient runway for the continued execution of our mission, which is a mission to cash to EBITDA positive, cash flow positive will follow. Next one. Recapping our guidance. There's an update from $21 million to $22 million to $22 million to $23 million. People may say that's not much, but I'm excited by it because we're proud of the work we're doing. We're only a little company, and we are delivering what we want, what we said we'd deliver. So there's some FX things there. I tend not to worry about Australian dollars, but I have to give the -- just a reminder, we have no Australian dollar revenue. We do not sell in Australia. So it's U.S. dollars for us. Next one. And that's the same, our guidance that continued targeting breakeven with a small positive in H2 FY '26 and positive EBITDA from operations that removing the effect of clinical data and ongoing improvements in cash flows. We are generating cash in the U.S. I don't want to say the U.S. is a business on its own, but because it's a very global integrated business. But all our cash is coming in euros in the U.S., which the appreciating Australian dollar doesn't help when you turn it into Australian dollars. Okay. So thank you for that. Mark Flynn: Thanks, Tom. A couple of questions coming through. One live is that the Green Light, which we've announced and is currently in use in the U.S., will that supersede the red light or will both lights remain available for surgeon choice? Thomas Spurling: It will stay the same. And that's actually our choice because doctors, we are not making it -- if someone has a red light and they ask for it and they're a good customer, well, we are not trying to build to, the better production planning thing is just to deliver green is the answer. Mark Flynn: A question from Nick Lau at Taylor Collison in regards to those U.S.A. sales. You did cover it there and also the revenue per rep, which sort of dipped a little bit. What are the factors the sales rep are seeing that may have contributed to this? And I know you mentioned the weather. Thomas Spurling: Yes. So I know the weather sounds a lot like the dog ate my homework. But in the end, the Northeast of the U.S. in January and February, which seems like an eternity ago, but to me it's not because we're still seeing the effects on our P&L account where there was -- our reps were shut down, surgeries were shut down and surgeries were canceled. That impacts. It impacts doctors bimonthly and so it impacts. The revenue per rep, it's a vexed issue. I get equally the number of times people say, put on more reps, why don't you put on more reps? Well, when we put on more reps, there must be a dip naturally because you can't get all those sales in the first month the person is there. We try and split the territories, give the person a lot of leads. But we put on reps because we know in that 2, 3, 4 months' time, we'll get back up to the [ $1.678910 ], $1.6789 million per rep, which we know drives our bottom line result. And as I said, 20% growth, 20% plus top line growth and EBITDA. That seems to me like an achievable target for our business. Mark Flynn: The sales adoption by new or established surgeons, are you able to comment on the sales pattern? Thomas Spurling: Well, you can -- that requires a lot of analysis. We are a small business, but it also -- we'd like to think that our competitors don't need to tell -- we don't need to tell our competitors about new accounts. We just deliver our sales information. I know so many people have how many facilities, what's new, what are new accounts, what are old accounts, why are the old -- why are facilities dropping off? Why are new facilities not buying if they just bought a -- in month 1, they're not buying in month 2. There are so many combinations of analysis that we could do. And they are compromised by doctors moving around between facilities, by -- in particular that and the idea that some accounts have more than one facility and more than doctor doing it versus some accounts just having one doctor. So we believe that our EBITDA, operating revenue per rep. Increasing top line sales is our goal, and we have our internal guidance as to how we're doing at each account. Mark Flynn: You mentioned Glaukos and a bit of a comparison. So I know Glaukos leads in stents and drug delivery, but where do they sit with in competition against us? Thomas Spurling: Well, it's interesting, I refer you to some of the videos that have been posted by surgeons where there is a combination going on now where there seems to be doctors are deciding to team iTrack with Glaukos products, which is interesting. And we think that we don't have any clinical evidence around why that would do it, but that's up to doctors to do what doctors do. Glaukos' investor webinar today gives a very rosy outlook for interventional glaucoma. And I know it's to service their own needs, but it does describe very well the trends. And we think that we are -- if you like, we could be on the coattails of some of those trends. I mean the trends are real. I think that's what -- a review of the Glaukos investor presentation will show you, that we have -- that Nova Eye Medical is in a real market with a real growth thing. Mark Flynn: China, I know we do exclude China, but when do you believe or when do you think that sales there will become material? Thomas Spurling: I'm just starting. We've decided corporately to just be cool on that decision and let them flow through. So we're not giving any more guidance than what we have. Operator: Thank you. We've got one here. In regards -- we haven't mentioned the manufacturing facility or clean room in Adelaide. Just a short update on that. Thomas Spurling: Yes. So we have quietly and with conviction to lower our production costs, insourced some parts into, establish Nova Eye cleanroom facility and insource some parts to lower production costs ultimately. And it also provides a test bed for new manufacturing techniques and new product testing. The Shear Clear and the Green Light are as a result of that. So it's a good capability we have here in Adelaide. And compared with other parts of the world, Adelaide is a low-cost domain. So it's good. Mark Flynn: Always a reminder that there's new people joining our webinars and asking why don't we sell this product in Australia. Thomas Spurling: So simply put, we have presented data to the U.S. Medicare and it has accepted that data as meaningful in saying that, yes, canaloplasty does work, and therefore we will reimburse patients who need it or reimburse, yes, patients effectively. In Australia, the data, they have a different level -- different standard. They don't -- they believe more data is required. The size of the Australian market does not warrant our investment in getting that clinical data, just a standalone. We do have some clinical data in the pipe, which may help, but we see the investment in an additional rep in the U.S. helps us get to our 20% plus growth, EBITDA positive down the bottom, far better than just selling in Australia, unfortunately. Mark Flynn: Thanks, Tom. I think that covers all the questions. Any final questions come through now or as always, Tom and my details are on the screen. Please send through any questions. Happy to have a phone call as well. Look forward to staying in touch. But great news from Nova Eye today, and welcome any further questions. So thanks very much for joining. Thank you, everyone.
Operator: Ladies and gentlemen, welcome to the Schaeffler AG Q1 2026 Earnings Call. I am Sargen, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's a pleasure to hand over to Heiko Eber, Head of Investor Relations. Please go ahead, sir. Heiko Eber: Thank you very much. Ladies and gentlemen, I'm very happy to welcome you to today's call on Schaeffler financial results Q1 2026. The press release, the following presentation and our interim statement has been published today at 8:00 a.m. CET on our Investor Relations home page. And as always, we will provide the recording and the transcript of the webcast after the call. I'm sure that you have all taken notice of our, by now, well-known disclaimer. As always, Klaus Rosenfeld, our CEO; and Christophe Hannequin, our CFO, has joined the conference call to guide you through the key information in our presentation. And afterwards, both gentlemen will be available for our Q&A session. And now let me hand over to our CEO, Rosenfeld. Klaus Rosenfeld: Thank you very much, ladies and gentlemen. Welcome to our Q1 earnings call. You all received the presentation that Christophe and myself will share in the next minutes. Please follow me on Page #3 with a quick overview. I think you saw the numbers. From our point of view, a good summary to say we started well into the year in an environment that is certainly challenging and in some areas, unpredictable. Sales growth FX adjusted 1% up. We'll share the details in a moment. The gross profit margin is at 21.6%, so more or less the same margin like Q1 2025, clearly driven by operational gains in E-Mobility, VLS and BIS with a slightly negative development in PTC, that should not come as a surprise. EBIT margin at 5%. Clearly, an improvement in E-Mobility, while PTC, VLS and BIS contributed strongly to the EBIT, also supported by lower R&D costs. Free cash flow seasonally negative with minus EUR 209 million. You know that in Q1, it was EUR 155 million, Christophe is going to give you more detail. This also includes higher restructuring cash out and some advanced customer payments in the prior year. And yes, EPS is slightly positive, also impacted by the financial result. Page 4 gives you the breakdown of where we grew, where we not grew. 6% growth in E-Mobility in the first quarter is certainly pointing in the right direction. Powertrain & Chassis, as I said before, slightly down and then moderate growth in VLS and BIS, certainly also driven by the environment. The strongest growth came out of region, Asia Pacific, However, that still has the impact that we explained several quarters now, are embedded with a switch from a bigger project from China to Korea. More important, Page 5, if you look at the auto powertrain OEM business, and that spans across E-Mobility and PTC, breakdown by powertrain type, quite interesting picture here. Schaeffler outperformed in all these 3 different powertrain types. 4% outperformance in BEV segment, 16% versus market growth of 12%; HEV, an outperformance of 1.5%; and even in ICE, where our sales drop was not as big as the market. That is exactly what I hope were that I can show you these pictures continuously for the next quarters, but that all points in the right direction. Order intake, again, by powertrain type, we'll come back to the numbers per division, also shows that in the important best sector, we are showing a book-to-bill of bigger than 1, while in the other sectors in this quarter, order intake was lower than relevant sales levels. Page 6, E-Mobility. As I said, order intake for the whole division is certainly bigger than just for BEV powertrain solutions, is EUR 1.2 billion, what leads to a book-to-bill of 1.0x. You may question, why that? We showed you in the last quarter that we have an order book by end of the year 2025 of more than EUR 40 billion. We are adjusting also volume assumptions constantly. And we are sure that with that order book we have at the moment, enough to do to deliver. So we are a little bit more selective on order intake. EUR 1.2 billion is a good result, and it's also driven by the right projects. Now let me go from BEV to Powertrain & Chassis. Also there, an order intake of EUR 1.4 billion was slightly below last year, was driven by phaseout and also by market development. And as I said before, the gross margin has suffered a bit. It is also impacted by one-off impacts that we can discuss in the Q&A. Vehicle Lifetime Solutions with a 1% growth that is less than before, but a further improved gross margin, that also leads to a superior EBIT margin. Here, we can say that, as you see in the highlights that our platform business, in particular, in China, is growing, serving an increasing number of retail partners, and we are also proud to say that we won the Sustainability Award for the E-Axle Repair Tool, what again demonstrates that, that is not just a PTC business but also very active in the new powertrain solutions. And then last but not least, Bearings & Industrial Solutions, a good development, 1.6%, good outperformance and also a growing book-to-bill ratio with certainly a different time horizon of the order book. There, just to mention one thing that also points to the new businesses, we are proud that we were part of the Artemis II launch, one of the most spectacular space activities in the last weeks, and were represented here with some high-performance turbo pump spinning bearings that have sort of highest-quality offers. So Bearings & Industrial Solutions, as you see from the rocket, is definitely moving in the right direction in its repositioning and performance drive. Then one page on new growth. We have selected here, again, the humanoid because that is what we -- from all the questions we get, obviously, the one that is most interesting to you, three points, just to put it in perspective and give you a little bit more data, how we look at this. This is a business that is in a situation where we are building the business. We are engaging today with [ 45 ] different customers and engaging means active conversations, of which 30 prototype orders have resulted. And from these 35 -- 30 prototype orders, 5 contracts have been secured. You will understand that I cannot mention here the names, but I can tell you that from the 5, these are prominent names, both from China and the U.S. and from Europe. And we are in ongoing negotiations to further build the order book. If I look at what we have today and put our more conservative assumptions of a million robots in 2030 behind it, our best estimate at the moment is that this order book in total order intake from the 5 customer contracts included has a value of somewhere in midsized 3-digit million range. For sure, that is further building and we'll give you -- as soon as these numbers are more solid, we will give you more information on how that develops. That's what I can say at the moment for Q1 customer side. Last point here, we will see first SOP from these customer contracts in Q2 '26 and then also have scheduled further SOPs for Q3 and Q4 2026. So you see the business is building, it is growing. We are part of the companies that is here at the forefront of the development. And the number of inquiries also from German OEMs is interestingly increasing. What helped us was also the recognition for our products. As some of you heard, we won the prestigious Hermes Award at the Hannover Fair. You see a small picture here that recognizes our rotary actuator platform in multiple sizes and multiple sort of nanometers and other functions. That's a positive thing. And as you all know, we will continue to expand our Automotive know-how into this area. Last point is on manufacturing. We are investing into that business, not only for building the business, but also for making sure that we can scale what we need to scale. I finish on Page 11 with my last page before I hand over to Christoph. Capital allocation continues to be driven by a very disciplined approach. Capital employed has been further reduced also through the project that we explained to you in the Q4 results. We had CapEx in Q1 of EUR 237 million, more or less in line with previous year. The investment grade stands at 0.5x and the capital employed at the end of the first quarter was EUR 12 billion. From an average point of view, Q1 over the last 12 months, this is a reduction of EUR 974 million. You see where we spent the money. And I can assure you again, we are disciplined, but also able to invest into the new growth businesses based on our strong cash conversion. With that, I hand over to Christophe. Christophe Hannequin: Thank you, Klaus. Good morning, everyone. As explained by Klaus, very solid first quarter for 2026. So taking a step back and walking you through a couple of slides on sales and gross profit and then EBIT. We see on Slide #12 the slight growth year-over-year, 1% of growth FX adjusted, demonstrates the confirmed scale-up of our E-Mobility activities. The slight erosion is planned from PTC, especially as we disposed of some activities at the end of last year. Slight slow start from VLS, but nothing to worry about on the year to go. This is mainly driven by some negotiations with some of our key customers that impacted a little bit the sales at the beginning of the year, we will catch up and no issues whatsoever on the year to go for VLS. Last but not least, BI&S also having an encouraging start beginning of the year for Q1. If you look at the makeup of our gross profit bridge going from 21.7 to 21.6, so more or less stable, you see a strong contribution from price. So a little bit of that is linked to compensating for the U.S.-related tariffs, but the rest is also the pricing policy that you see mainly for us within VLS and B&IS. The volume, slight decrease there, as I mentioned before, mostly related to PTC and as a result of decisions we took at the end of last year. The one that I would like to draw your attention to is the EUR 67 million of improved production cost year-over-year, a combination of structural improvements year-over-year as the restructuring programs pay off as we continue to drive efficiencies in our plants. And also happy to report, a significant part of it is related to our purchasing performance and the evolution of our raw material prices or our purchasing performance in general. On the other cost of sales, some impact from the U.S. tariff, there's about [ EUR 20 million ] in there. And then a not very helpful comparison to last year from an inventory revaluation standpoint, where we had a very strong quarter last year. We changed the method this year in order to smoothen this out a little bit and make it easier to understand and steer. But we took the hit there on the comparison. On a full year basis, this disappears. And hopefully also it will give us a more streamlined earnings and EBIT profile for 2026. I will finish on this slide by pointing out the FX impact on our gross profit line, still negative, mainly driven by the U.S. dollar, the RMB and the Indian rupee. And we could have listed as well the Ukraine war, which is impacting us quite a bit. On the next page, you see the EBIT walk, increasing by 0.3 points year-over-year. I already mentioned the gross profit evolution, which is very favorable for us. The other interesting news on there is the progress on R&D expenses, which is both increased efficiency in the way we conduct our development programs as well as some of the benefits of some of the restructuring that we've been doing in this field. Again, the SG&A suffering a little bit from the comparison with last year. There's some timing impacts in there. And there's also the impact of higher cost this year related to our S/4 HANA rollout and the fact that we are heavily investing in digitalization and AI deployment within the organization. That [ inflation ], mostly offset by our performance programs, which is what I'd like to see in the P&L. You see that at the EBIT level, FX switches back to a positive level. This is due to two main aspects. The first one is there is a natural hedge within the group between the different lines of our P&L, depending on where we sell and where we spend. And we also have in there the impact of some of the hedging instruments that are paying out favorably and protecting us against the [ evolution ]. So again, a solid 5% of EBIT, which puts us in a good shape for the full year guidance that we'll discuss a little bit later. I will go very quickly through the different slides. But E-Mobility, clearly, the scale-up paying off, both in terms of production efficiency as well as the R&D piece, driven the -- growth on the top line driven mostly this time for this quarter by the controls part of the business, but overall, unfolding as we had forecasted for 2026. On the PTC side, again, sales decline, which is known, planned and accounted for. The EBIT level remains very, very strong in the double-digit range. The 12.7% from Q1 2025 was a very, very, very high comp, but the 11.5% for Q1, again, clearly in line with what we were expecting when you think about, again, our guidance on the right -- on the good side of the guidance approaching the top end of it. On Vehicle Lifetime Solutions, 0.9% of growth year-over-year, not completely what we used to. VLS, nobody grows stronger, stronger than this and will grow stronger than this on a full year basis. This is just a slow start for Q1, but no warning, no alerts, no reason to worry on the year to go, the volume piece will catch up. Despite this, an extremely strong, almost 16% worth of EBIT driven, as I mentioned before, but also a strong pricing policy. The other encouraging point, I think already mentioned by Klaus is the expansion of our platform business on a global basis, which means that we are successfully diversifying out of Europe and out of the traditional repair and maintenance solution activities. On the Bearings & Industrial side, I'm not getting bored of saying this every time, but it's a very, very interesting combination of both growth and restructuring and operational performance, driving a very, very solid first quarter at 9% EBIT. The 10% last year, again, very hard to beat the comparison, which was mainly driven by the inventory valuation topic that I mentioned before and which was followed by a complicated or weaker Q2 in 2025. The change in method takes us away from that. And the 9%, again, very, very much on the progress path for B&IS, for Bearings & Industrial Solutions that we highlighted during the Capital Market Day, it is paying off, and they are executing properly. Free cash flow, seasonally impacted as usual within the group. Klaus already mentioned the slightly higher restructuring payments that you find in the Others category. Net working capital impacted by a conscious decision to raise our inventory levels and buffers in order to ensure that our customers are protected and safeguarded in a very volatile supply environment. This is something we will work down throughout the year as the situation stabilizes and hopefully resolves itself. But the decision was made there to invest a little bit in working capital to protect our customers. CapEx, as planned, in line with the investment plan for this year with quarter 1 that is where we expected it to be. From -- if I move on to the next page, you'll see, again, a not very surprising evolution or lack of evolution of our leverage ratio in the 2.1, 2.2, 2.2 range. Our maturity profile remains extremely well balanced with the upcoming maturities already prefunded, and we will continue to work on this as opportunities arise. Then that takes us back to the full year guidance, which I will hand back to Klaus. Klaus Rosenfeld: Yes. Thank you, Christophe. Very briefly, we confirm our guidance. We are, from our point of view, also with what we see in April on track here. Certainly, the impacts from the geopolitical and macroeconomic environment were not known when we approved this guidance. We have still said we will not change it and do what is necessary to stay within the range. The 5 percentage points, 5% EBIT margin is clearly at the -- pointing to the upper end here. We need to see what the second quarters bring. You know that our business is seasonable. But what I can say here is we confirm these main KPIs. Let me finish by a quick look at the financial calendar. The colleagues will go on roadshow, virtual, but also to the conferences. We see a lot of interest at the moment from U.S. investors, but also from Asia. So you see it on the schedule. We try to be as responsive as possible. And we thank you for your attention and interest in Schaeffler. With that, I hand back to Heiko. Heiko Eber: Thank you very much, Klaus. Thank you very much, Christophe. As already mentioned, if there are further needs -- if you see further need for discussion tomorrow, the virtual roadshow organized by JPMorgan. So if you have interest, please let us know. And with this, I would say that we directly jump into our Q&A session, and I would hand back to our operator. Operator: [Operator Instructions] And we have the first question coming from Christoph Laskawi from Deutsche Bank. Christoph Laskawi: The first one would be on the humanoid SOPs that you've highlighted. Now that you are moving into series production, I was wondering if you could comment in a bit more detail on the expected revenue contribution in '26 and '27. Is it fair to assume that in '26, it's probably closer to low double-digit euro million amounts and in '27, more towards the mid- to high double-digit range? That's the first question. And then you called out earlier that the environment is tricky currently and in some cases, unpredictable. Do you see any changes of customer behavior currently from the OEMs, any changes in call-offs also on the Industrial side? And with that in mind, should we expect Q2 to roughly trend in line with Q1? Any color that you could share there would be appreciated. Klaus Rosenfeld: Well, let me start with the second one. Again, we are -- we have 4 different businesses. And I start with BIS. I just came back from China, and we see that there, although the macroeconomic situation sounds a little bit subdued, there is a growing interest to work with us. We don't look at the Industrial business by call-offs. That's more an Automotive concept. And there, everything we saw, Christoph, in April doesn't look like a dramatic change. It's maybe a little softer than what we expected at the beginning of the year, but it seems to be quite resilient. When you see the news, when you see what's going on in the world, this is to some extent a surprise, but the numbers speak rather for a little bit of a softer development in the next months, but it's not a dramatic change in direction. So let's see how this is going to unfold and how the second quarter will look like. With what I've just said, we don't expect a dramatic change to our Q1. But certainly, Q2 is typically not as strong in terms of growth as the first quarter. The more important question is how will this unfold? Let me give you a little bit of a logic how we do this when we now estimate what's coming. You basically -- in these contracts that we have, and I said, 5 customer contracts where you will understand I cannot mention the names, I can also not mention what kind of products the customers order, but for sure, these are the ones that we have also communicated and shown at fairs. We typically look at the number of bots. We look at the pieces per bot, and we look at the price per piece. This is the simple logic that is behind this. Now SOPs will start in Q2. There's another customer that will then come in Q3 and another one in Q4. But this is the simple mix. So don't expect miracles in 2026. This is not a full year, that's the start of the year. Again, this is all estimated at the moment. We have no reason to believe that these SOPs are not happening because for sure, in particular, the bigger players want to get ready for their first generation. The real interesting question, how does it scale then? And how many more pieces are we going to expect then in 2027? Also there, what I see, and you just mentioned indicative numbers, going to 2030 revenues, I think you have a chance to go up above the 3-digit million mark. But the ramp-up curve as such, again, is premature. Again, 2026 will be also impacted by this timing aspect that I said. If everything works well, 2027 is more a 2-digit million number. And then it will -- however, the development in terms of the numbers is -- will go up to something in the 3-digit million at the latest in [ 2030 ]. From a revenue point of view, order book is certainly already bigger than a 1-year number. That's, again, my best estimate at the moment. We have told all of you also in the individual conversations that we will give indication today that you have a little bit of a sense what's going, but the regular reporting about order books, order intakes, revenues will need a little bit more time. Christophe and myself, we are 100% certain that we should only come out with numbers that are solid. And we are building this business. There's a lot going on here. I could spend most of my time on this, but I can't. So give us a little bit -- be a little bit more patient, give us a little bit more time. We'll come up certainly during this year with more figures here that you can also follow what we are doing. Operator: The next question comes from Jose Asumendi from JPMorgan. Jose Asumendi: A couple of questions, please. On the order backlog on humanoids, can you maybe just give some color maybe how broadly is split by region, maybe a little bit the geographical split, if possible? Second, do you foresee, as we think about a 1- or 2-year view, some expansion of plants, of maybe footprint either in the U.S. or in Asia to support the humanoid ramp-up? And can you talk a bit about also your -- I believe you call it -- it's like an R&D lab that you have next to Shanghai. When do you expect to open up that center for investors to visit it? And then second, on E-Mobility, can you talk a bit about how you reuse some of the capacity -- existing capacity you have to adapt the different powertrain trends we have globally, so we can make the best use of -- you can make the best use of fixed cost investments? Klaus Rosenfeld: So let me start with the first question. In what I told you again with the 5 customer contracts, I can say -- again, it's a development that still needs to be more solidified. It's more or less equally balanced between China, the U.S. and Europe. It depends a little bit how you define it, whether you define it by the humanoid builder or where the end demand is coming from. But if I just look at the big partner in the U.S. and the big partner in China, and that is together with the other ones, it is more evenly spread at the moment. So it's not China or the U.S., it's at the moment, both China and the U.S. plus a positive outlook on the humanoid players that have more a European base. You heard about Hexagon, that's the latest one where we entered into a cooperation. That's certainly a positive that this is not just one country or one region bet. The footprint -- sorry, the humanoid factory in China is open. So if someone is interested to visit it, you just need to organize it. We have seen significant interest there. Maybe we need to organize a little bit of a tour, but it's certainly something that we would open up and show you what's going on there. It's quite fascinating, also the speed how the Chinese colleagues build that up. Footprint to support the ramp-up. At the moment, we have not decided on any plans to change the footprint. What we have, in particular in Germany is, for the time being, sufficient, but we need to follow the development very carefully. It's a function of the ramp-up speed. If this goes very fast, we will react. If it goes more slowly, it's a different story. But we do this, as I normally say, with our eyes on the road and the hands upon the wheels. And we'll be very pragmatic to organize the necessary capacity. At the moment, it looks like that we can more or less handle what we have without bigger footprint investments. For sure, the cumulative total investment for the next year will be another interesting figure for you. And don't forget, we'll also spend money not only for plants or machines, but also for R&D and for people. If I may say this, my biggest challenge at the moment is to add the relevant people here to the team. This is a start-up. It's a very different environment. We have super engineers, super product developers, all of that. But if we want to build this as a global business, we also need to support David and his team, that is a global team with more talent, and that's where we're focusing on. So the next years will not only be looked at from a CapEx point of view, but also from the buildup of the right talent to drive this new market. Don't forget, there is a very important angle to physical AI and industrial AI. This whole ecosystem is not just mechanics, it's the interface between software and hardware. And if you really want to play there, you need to understand the AI angle very carefully. Also, Christophe said this, see it in a broader context. Then the last question was on E-Mob. Again, here, it's not so much capacity in the plant. It's more how do we optimize the fixed cost portion. We certainly have a way to go in terms of R&D. That's something that we certainly address under our existing performance program. Whether that's enough, we need to see. In general, I can say, with the improvement in Q1 2026, for, say, over Q1 2025, if you remember this little formula that we developed, is it possible to bring E-Mobility across the line in 2026, that delta of nearly 5.5 basis points -- but the delta from Q1 '26 to Q1 2025 is 5.5 to 6 basis points. If you consider that E-Mobility is a seasonal business with a stronger fourth quarter, that shift is -- if that we can maintain that shift over the next quarters, that really points in the right direction, even if revenues come in lower than what we expected when we had our Capital Markets Day. So let's see how Q2 goes and let's see that we are able to put the right measures in place. It's not a CapEx question so much. It's more a question of reallocating resources within the group and reducing also the R&D impact from headcount here in Germany. Operator: The next question comes from Ross MacDonald from Citi. Ross MacDonald: It's Ross MacDonald at Citi. I have three questions. I'll again ask on the humanoids, given there's so much client interest here. Klaus, just to help us back out, let's say, a potential content per vehicle to Schaeffler from these activities, I understand you're guiding around mid-3-digit million revenue potential on the current 5 contracts, assuming a global market of 1 million humanoids in 2030, would be good to just confirm that specific point. But then within that, what is the market share that you're assuming on that sort of revenue ambition, let's call it? I'm aware for 2035, you'd be comfortable or happy even with a 10% market share. So on that math, is that the 10% market share assumes that is driving a mid-3-digit million top line? That would be my first question. Klaus Rosenfeld: Well, Ross, again, we are working in a market that is emerging. And that certainly needs, to some extent, a scenario approach. Our sort of conservative scenario is 1 million humanoids to be produced globally by 2030. And I can also tell you, this is start-up territory. We here at Schaeffler, we don't like hypes, we don't want to see something where we are putting too much out. We want to be conservative. I think the 1 million humanoids, as it looks today, is a conservative number. It could increase, but we need to see. It's also a question where are they applied, and there are still very different views on this. So let's build on the 1 million and make sure that we make that and seize the upside if possible. The second cornerstone of our calculation is also nothing new to all of you. Andreas has said this also a year ago. When we look at the bill of material of an average humanoid build for different purposes, we're talking about a 50% addressable market for Schaeffler. And if I now say if we aspire to get 10% market share of that addressable market for us, then that's basically the logic that we have in mind. You all know that this is then a function of how costs are decreasing and how this is progressing and certainly, whether you can sell your products and your development competency to the right partners, that is, from my point of view, from a CEO perspective, the most important thing. It's the same like in the auto market. There are so many humanoid players around, so many people that claim that they can do this and this and this. For us, as one of the sort of leading suppliers in this space, we want to do business with the right partners. And I can say, you will hopefully understand that I cannot disclose names, but the names are prominent names. We want to be selective in the ones that we bet on. And that what I see at the moment gives me a good sort of positive feeling that we have the right contracts to start with. This is a start. It's not the situation where we can say we've already achieved everything we want to achieve. It will continue in 2026. And this concept of offering partnerships in terms of we can supply our parts and we offer people the ability to utilize their robots and learn together in a context where this is very much AI-driven, where the industrial metaverse plays a role, that is, from my point of view, the driver for success. Let's leave it here, but I leave you the rest of the calculation. At the end of the day, what counts is really what comes out in the bottom line. Ross MacDonald: That's helpful. And maybe I will fire two more quick questions for Christophe actually. Christophe, maybe on the second quarter trading, if I look at 2025, there was quite a large step down in margin from Q1 to Q2. So you went from 4.7% to 3.5%. How should we think about the seasonality within Schaeffler this year? Would you be hoping for a less extreme margin pullback in the second quarter? How would you think about Q2 within the current guidance range? And then a second question, just specifically on the other division, noting that was around about EUR 30 million loss per quarter on average last year, it has stepped up significantly to minus EUR 15 million loss in Q1. How should we think about modeling that specific division going forward? And maybe you can give us some color on what drove that EUR 20 million delta in Q1 versus Q4? Christophe Hannequin: So first question, and I touched on it during some of my comments, Q1 was overly impacted by inventory revaluations in 2025, some of it which resolved itself in Q2 and led to the performance that you saw. It's not really driven by the business itself, it was more of the way we essentially take our standard cost variances through inventory and the balance sheet. As I mentioned, we have switched some of our methodology on this one. So I expect a smoother quarter-over-quarter evolution in this one. The division that's primarily impacted by this one, especially last year, was BI&S, so Bearings & Industrial Solutions, first and foremost. And then PTC was probably the second strongest impact. So we'll see how Q2 unfolds. But if we did it right, we should have a much smoother quarter-over-quarter evolution. Now we do have a seasonal business where plant loading is important to us and efficiencies are driven by the loading of our plants. So you should not expect Q1 and Q4 to be directly comparable, if I put aside some of the R&D and the customer negotiations impact. But from a purely operational standpoint, Q1 and Q4, despite everything I've said before, will not be directly comparable. But again, smoother quarter-over-quarter is what we would like to see and what we're driving for in 2026. I'm also a big believer that a better load, better operational steering of our plants drives throughout the year drives higher efficiencies and higher performance overall. So let's see what Q2 gives us. But again, I'm on the optimistic side on this one. Division others, as you know, it's a mix for us of activities we're ramping up, ramping down. So the humanoid piece is in there, our defense efforts are in there, hydrogen is in there, so are some of the businesses that we are disposing off. So the comparison year-over-year is a little bit tricky. But if you use what you're seeing right now, you probably will not be off from what we should see in 2026. But that one is especially tricky, I guess, for you to model from the outside, unfortunately. Klaus Rosenfeld: And it's a task for us to think about maybe for next year, whether we guide something on this or how we best do this. But as you said, it's a mixed bag of things that are ramping up and ramping down. And we understand the point. But for the time being, I think you have the guidance that you saw, and it needs to add up to the group guidance. Operator: There are no more questions at this time. I would now like to turn the conference back over to Heiko Eber for any closing remarks. We have a last-minute registration from Klaus Ringel from ODDO BHF. Klaus Ringel: I wanted to ask on the Auto business. I mean it was quite nice to see the outperformance this quarter across different powertrains. And I would be interested in your view looking ahead, if we can expect to see such a nice outperformance or if you would expect also some seasonality in here? Klaus Rosenfeld: Klaus, it's a good question, but I don't have a crystal ball, to be honest. With this environment, it's really difficult to mention that. To answer that question, what is quite interesting from my point of view, if you follow what's at the moment happening on E-Mobility, not only in Europe, but also in the U.S., you see what comes a little bit as a surprise to us that in particular in the U.S., people are buying e-cars, although the production side is more going in the other direction. That may have to do with the fact that people look for fuel economy in a situation where [ ethylene ] becomes more important. We don't know yet. The trend is not stable. You also saw what happened here in Germany, what happened in France with more E-Mobility support. There are the obstacles with the loading infrastructure. For me, what is really most important is that we have this hedge across the three different types. and that we can play these corresponding cubes well. So I can't tell you what Q2 is going to look like. What I can tell you is that our focus on playing in this space from E-Mobility to PTC in a clever and smart way to utilize the opportunities that are there quarter-by-quarter. That's the game plan. And for sure, our biggest challenge is to deliver on our E-Mobility promise. And there, if outperformance helps there, I would expect that we probably see a continuation during the year. How this unfolds quarter-by-quarter remains to be seen. A critical element will be the China angle of this. And maybe I can leave you with the following information. My colleague or our colleague, Thomas Stierle, is spending more time in China than any other colleague that we have. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Heiko Eber for any closing remarks. Heiko Eber: Thank you very much. So first of all, thanks to our speakers. Thanks to my CEO, my CFO. Thanks to all of you for your continued interest. And as always, a big thank you to the team for the preparation. If there are more questions, please feel free to give us a call, happy to help. And with this, thank you very much. Have a good rest of the day and talk to you soon. Operator: Ladies and gentlemen, the conference is now over, and you may now disconnect your lines. Goodbye.
Operator: Hello, and thank you for standing by. My name is Mel, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Tidewater Inc. First Quarter 2026 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to West Gotcher. Go ahead. West Gotcher: Thank you, Mel. Good morning, everyone, and welcome to Tidewater Inc.’s First Quarter 2026 Earnings Conference Call. I am joined on the call this morning by our President and CEO, Quintin V. Kneen; our Chief Financial Officer, Samuel R. Rubio; and our Chief Operating Officer, Piers Middleton. During today’s call, we will make certain statements that are forward-looking and refer to our plans and expectations. There are risks, uncertainties, and other factors that may cause the company’s actual performance to be materially different from that stated or implied by any comments that we are making during today’s conference call. Please refer to our most recent Form 10-Ks and Form 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, 05/05/2026. Therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we will present both GAAP and non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures can be found in our earnings release, located on our website at tdw.com. I will now turn the call over to Quintin. Quintin V. Kneen: Thank you, West. Good morning, and welcome to Tidewater Inc.’s First Quarter 2026 Earnings Conference Call. I will start the call today with the quarter’s highlights and then talk about capital allocation and what we are seeing on vessel supply and demand. West will walk through our financial outlook and what we are thinking about for 2026 guidance. Piers will cover the global market and operations, and Sam will close with the consolidated financial results. Each of us will touch on the impact from Operation Epic Fury. Starting with the first quarter, revenue and gross margin were both ahead of what we expected. Revenue was $326.2 million, driven mainly by higher utilization and stronger day rates. Gross margin was just under 49%, up slightly quarter over quarter and over three percentage points above our internal plan. Utilization benefited from strong uptime with less downtime for repairs and fewer dry-dock days than we expected. Overall, I am really pleased with the operational execution and with the returns we are seeing from the fleet investments we have made over the past few years. Before I get into more detail on the financials, I want to touch on Operation Epic Fury, what it meant for the quarter, and what we are watching going forward. As I said on last quarter’s call, we had not seen any disruption to our business at the outset, and we expected that any cost impact—especially insurance and fuel—would be immaterial. Quintin V. Kneen: And so far that has held to be true. Our vessels in the Middle East continue to operate normally, and utilization and revenue in the first quarter—specifically March, the first full month after the operation began—came in above our forecast. We did see some higher costs, mainly in crew along with insurance and fuel. The biggest item has been the incremental hazard pay for our crews. Insurance and fuel have been a smaller piece. Sam will share more detail in his remarks. Looking ahead, we are seeing pent-up demand in the region, and we believe activity could rebound above what we expected just a quarter ago once the conflict is resolved. In the first quarter, we generated $34 million of free cash flow. The step down sequentially was related to less cash flow from working capital and relatively higher dry-dock spend. Just as a reminder, in the fourth quarter we collected a sizable past-due receivable from PEMEX, which drove the working capital change, and Q4 is typically our lightest dry-dock quarter, whereas Q1 is usually our heaviest as we get vessels ready for a busier working season as the weather improves. That drove the dry-dock change. Importantly, nothing has changed in how we are thinking about free cash flow for the year, and the first quarter is tracking with our expectations for 2026. As we discussed previously, during the first quarter we announced our agreement to acquire Wilson Sons Ultratug Offshore—22 PSVs focused exclusively on the offshore market in Brazil—for $500 million. We have already started the pre-integration work using the playbook we built through prior acquisitions. The Wilson team has been well organized and is highly capable, and we are making good progress getting ready to bring the business onto the Tidewater Inc. platform. On approvals, things are moving as expected and we still anticipate closing by the end of the second quarter. We did not repurchase any shares in the first quarter because we plan to fund the equity portion of the Wilson transaction with cash on hand, and we are still waiting for consents to transfer the existing Wilson debt. We still have $500 million authorized under the program, which represents about 12% of the shares outstanding as of yesterday’s close. Even as we work towards closing and integrating Wilson, we are still in a good position to look at additional M&A opportunities. Our balance sheet remains strong and we continue to expect net leverage to be less than one times at closing. Liquidity is solid, and after issuing our unsecured notes last summer we have good visibility into the cost of debt capital should we decide to use it for an acquisition. Our preference is still to use cash, but we will consider using stock if the right fleet is available at the right value. With the GulfMark, Swire SOF segment, and now Wilson acquisitions, we have built a meaningful presence in essentially every major offshore basin. These have largely been newer, higher-specification fleets, and they have helped reestablish Tidewater Inc. as the leading OSV provider globally. We have also successfully reentered Brazil, which we have talked about as a priority market. From here, we will stay focused on fleets and geographies where our platform gives us an edge and where bringing additional vessels onboard can create outsized value. We continue to benefit from our scale and high-specification PSVs and anchor handlers, two of the most in-demand vessel classes in the global OSV fleet. When we look out over the next couple of years, we see the market tightening in late 2026 and into 2027 and 2028. That should set up for meaningful day-rate improvements over that time. If day rates move up the way we expect over the coming years, that will flow through to higher earnings and cash flow generation. If we do not see value-accretive acquisitions, we will look for other ways to put that excess cash to work. Our share repurchase philosophy has not changed. We will be opportunistic and disciplined, and more broadly, we do not think it makes sense to build and sit on a large cash balance for an extended period. As we move through to the Wilson closing and into a period of higher free cash flow, we will stick with the same capital allocation framework that is core to how we run the business. In practice, this means we will continue to weigh the relative merits of M&A versus share repurchase. We continue to view buybacks as an attractive way to return capital to shareholders. Turning to the outlook, while the Middle East conflict is still ongoing, what we have seen so far could be a positive for the offshore vessel market over time. Energy security became a key theme since the conflict in Ukraine, and the Middle East conflict has added another layer—an increased focus on sovereign energy independence, particularly in the Eastern Hemisphere. So far, at least 500 million barrels of oil have been lost, and there is still no clear sign when recent production losses will be reversed. The longer that goes on, the bigger the need becomes to replace those inventories, and historically, crude prices have had a strong relationship with inventory levels. Continued depletion should provide longer-term price support. Put together, the inventory drawdown and the heightened awareness of geopolitical risks suggest oil prices may have a higher floor than before the Middle East conflict began, which supports additional offshore projects. Stepping back, we think the trend towards offshore development supports a structural improvement in demand for offshore activity and for offshore vessels. We see this as a long-term dynamic, and it is additive to the demand we have been seeing already. Recent comments from offshore drillers point to a meaningful increase in fixtures and a high level of drilling unit utilization. We view the expected pickup in offshore drilling as a strong positive for our business. We support a range of offshore applications, but drilling activity typically has the biggest impact on vessel demand. Offshore vessel activity has been building year to date, and as it continues to pick up, the pressure on available supply creates an opportunity for higher utilization and higher day rates. On the supply side, the global fleet has stayed essentially flat over the past few years. A handful of vessels are expected to deliver late in this year and into early 2027, but we view those additions as relatively small in the context of the overall market. As supply tightens further, we can see a path to day-rate increases of roughly $3,000 to $4,000 per day per year for the entire fleet, moving the fleet back towards earning its cost of capital. We are excited about the drilling outlook, but we also expect other drivers of vessel demand—especially production and EPCI-related support—to remain strong. Production work has stayed robust and helped offset some of the relative drilling softness early in 2026. Looking ahead, we continue to like the outlook for both, given the strength we are seeing in both subsea and EPCI backlog, as well as continued momentum in FPSO orders. Over the longer term, more drilling in less developed regions should drive additional infrastructure work, which supports sustained demand across these categories. We are pleased with how the first quarter came together. While we still have some uncertainty in the Middle East until the conflict is resolved, we are increasingly optimistic about the outlook for the business. We will stay disciplined on capital and continue to look for value-accretive ways to deploy it, and we expect the opportunity set and our ability to capitalize on it to improve over the next 18 months. With that, let me turn it back over to West. West Gotcher: As Quintin mentioned, we did not repurchase any shares during the first quarter due to the pending Wilson acquisition. At the end of the first quarter, we retained our $500 million share repurchase authorization. As a reminder, under our outstanding bonds, we are unlimited in our ability to return capital to shareholders provided our net debt to EBITDA is less than 1.25x, pro forma for any share repurchase. Under our revolving credit facility, we are also unlimited in our ability to repurchase shares provided the net debt to EBITDA does not exceed one times. However, to the extent that we exceed one times net leverage, we still retain the flexibility to continue returns to shareholders, provided that free cash flow generation is in excess of cumulative returns to shareholders. We still anticipate being below one times net leverage, assuming a June 30 close of the Wilson acquisition. From a capital allocation perspective, we look to execute share repurchase transactions when suitable M&A targets are not available. We retain the option of evaluating M&A and share repurchases concurrently, but our financial policies and philosophies dictate our relative appetite to pursue both concurrently. Given that the offshore vessel market has stabilized at a healthy level, along with the constructive outlook for offshore vessel activity more broadly, the M&A landscape remains favorable and we will continue to evaluate additional inorganic opportunities to add to our platform. Turning to our leading-edge day rates, I will reference the data that was posted in our investor materials yesterday. Across the fleet, our weighted-average leading-edge day rate increased modestly in the first quarter compared to 2025. This is the first time since 2025 that our weighted-average term contract measure for new contracts has increased. Our largest class of PSVs saw average day rates increase sequentially, which we find encouraging given the relatively large number of contracts for these vessels and the geographic dispersion of the contracts. During the quarter, we entered into 18 term contracts with an average duration of 13 months, with two specific long-term contracts skewing the average. Excluding these contracts, the average duration of our new contracts during the quarter was seven months. Turning to our financial outlook, we are maintaining our full-year 2026 revenue guidance of $1.43 billion to $1.48 billion and a full-year gross margin range of 49% to 51%. Our guidance assumes that we close the Wilson acquisition at the end of the second quarter. Our view of the legacy Tidewater Inc. annual revenue and gross margin guidance has not changed from our initiation of guidance in November 2025. Our second-half expectation for the Wilson business remains unchanged. We expect our second-quarter revenue to be roughly flat with the first quarter, consistent with prior expectations, but expect our gross margin to decline by about 5 percentage points sequentially due to cost increases associated with Operation Epic Fury. However, we are in a position to seek rebills for about half of the conflict-related cost increases from our customers related to direct cost increases associated with crew wages, insurance costs, and G&A support, but we have not contemplated the recoupment of these costs in our guidance. Our forecast assumes a normalization of costs associated with the conflict in the Middle East by the end of 2026. To the extent the conflict-related cost pressure continues beyond the second quarter, we are similarly privileged to seek rebills from our customers on realized direct cost increases. Second-quarter guidance does not assume any impact from the Wilson acquisition. In summary, we are pleased to be able to maintain our full-year guidance given the impact from the conflict in the Middle East, with the possibility of recouping a good portion of the cost increase that we are absorbing in our current Q2 guidance. Our expectation remains that there is the potential for uplift to our full-year guidance depending on the strength of drilling activity picking up towards the end of the year. Looking to the remainder of 2026, first-quarter 2026 revenue plus firm backlog and options for the legacy Tidewater Inc. fleet represents $1.1 billion of revenue for the full year, representing approximately 84% of the midpoint of our legacy Tidewater Inc. 2026 revenue guidance. Approximately 69% of remaining available days for 2026 are captured in firm backlog and options. Our full-year revenue guidance assumes utilization of approximately 80% for the legacy Tidewater Inc. fleet, leaving us with 11% of capacity to be chartered if the market tightens quicker than we are anticipating. Our midsized anchor handlers and largest class of PSVs retain the most opportunity for incremental work, followed by our smaller and largest class of anchor handlers and midsized PSVs. Contract cover is higher in the earlier part of the year, with more opportunity available later in the year. The bigger risk to our backlog revenue is unanticipated downtime due to unplanned maintenance and incremental time spent on dry docks. With that, I will turn the call over to Piers for an overview of the commercial landscape. Piers Middleton: Thank you, West, and good morning, everyone. This quarter, I will talk a little about what we are seeing in each of our regions as we look out through the rest of the year and into 2026. Overall, the OSV market showed continued signs of improvement throughout the quarter, with sentiment starting to pick up in all regions where we operate, even those which could face some short-term challenges through 2025. Amid rising rig demand and offshore E&P activity, the long-term outlook for the OSV market remains strong, with the ongoing upturn in project investment expected to continue to drive additional incremental demand out to 2030, while the continued limitations in the supply of any significant growth in the global OSV fleet will further exacerbate the expected tightness in our market. Working through our various regions and starting with Europe, the North Sea OSV spot market strengthened throughout the quarter. In the PSV sector, spot rates strengthened significantly as the quarter progressed, with fixing activity remaining strong, helped by several PSVs leaving the region for warmer climates, a trend we do not see stopping in the short term. In the AHTS sector, supply constraints continued to drive rates higher, with spot rates in the largest classes of AHTS reaching record highs above $350,000 per day in Norway. In the Mediterranean, we continue to see strong activity, and with our global operating platform we were able to move two further vessels into the region to meet the increased demand that we mentioned on our last earnings call. Overall, we expect the Mediterranean region to be a strong market longer term, with several drilling campaigns and EPCI projects commencing in 2026. In Africa, even with the busier dry-dock schedule in the region, we had a good Q1 with a large increase in utilization across our West African and Angolan fleets, predominantly due to some overruns in drilling campaigns in both Namibia and Congo, as well as an uptick in EPCI work in Angola and Mozambique. Looking ahead, we do expect some slowdown in activity across the region in Q2, but are on track for a big pickup in activity from Q3 onwards, led by renewed drilling and EPCI activity in Nigeria, Namibia, Angola, Congo, and Mozambique. In the Middle East, as Quintin mentioned, we saw little disruption to our vessel activity in the region, with all our vessels remaining on hire throughout the quarter. However, we have seen a slowdown in new tendering activity as our customers assess the short-term impact of Operation Epic Fury on their plans. Looking ahead, low tendering activity is expected to persist in the near term due to the elevated risk, and while it is probably too early to predict with any accuracy long-term rate movements in the region, we do expect day rates in the shorter term to be impacted positively on the upside due to the lack of any new supply being able to enter the region. While the duration and trajectory of the conflict are still unclear, as Quintin mentioned, the ramifications of the conflict will likely have longer-term positive benefits to the OSV industry both in the Middle East and globally. In the Americas, as mentioned on our last call, we remain excited with the long-term outlook in Brazil, with the recent announcement that SBM agreed contracting terms with Petrobras for construction of two more FPSOs to be deployed offshore Brazil, with first production targeted for 2030. While there has been some short-term slowdown in OSV tendering activity in 2026, this is expected to pick back up again after elections are completed in Q4 of this year. In Mexico, PEMEX’s underlying financial pressures continue to weigh down sentiment; however, we are seeing some uptick in tendering activity from other oil companies in the country, which bodes well for 2027 and 2028. Lastly, in Asia Pacific, Taiwan, Indonesia, and Australia were the key drivers of demand in the current quarter, with several new contracts signed to support both drilling and EPCI activity that will kick off in Q2 and should go all the way through into 2027. Looking further out into 2027, we are also starting to see several of the other NOCs and IOCs in the broader region getting organized to increase drilling activities starting in 2026 all the way out to 2028, which bodes well for the region going forward. Overall, we are very pleased with how the market has continued to move in the right direction in Q1, and we fully expect that positive momentum to continue into the second half of the year. With that, I will hand it over to Sam. Samuel R. Rubio: Thank you, Piers, and good morning, everyone. I would now like to take you through our financial results, where my discussion will focus on the sequential quarterly comparisons of 2026 compared to 2025. In the first quarter, we reported net income of $6.1 million, or $0.02 per share. We generated $326.2 million in revenue compared to $336.8 million in the fourth quarter. We saw average day rates increase about 1% versus the fourth quarter but saw a slight decline in active utilization to 80.6% from 81.7% in Q4. The revenue decline was primarily due to a decrease in operating days, as there were two fewer days in the quarter, coupled with the lower utilization due to higher dry-dock days. Gross margin in the first quarter was $159.3 million compared to $164 million in the fourth quarter. Gross margin percentage in the first quarter was 48.8%, nicely above our Q1 expectation and slightly ahead of our Q4 margin of 48.7%. The increase in margin versus Q4 was primarily due to the decrease in operating costs. Operating costs for the first quarter were $166.9 million compared to $1.727 billion in Q4. The decrease in operating costs was due mainly to lower R&M costs and lower other operating expenses in addition to two fewer days in the quarter. While overall cost was lower, we did incur about $2.3 million of cost due to the Iran conflict, the majority of which was incurred in the Middle East. Costs directly impacted were higher insurance costs and higher crew wages in the form of hazard pay. Indirectly, we also saw fuel and travel costs increase due to the increase in the commodity price. Our EBITDA was $129.3 million in the first quarter compared to $143.1 million in the fourth quarter. For the first quarter, total G&A cost was $33.6 million, which is $5.4 million lower than Q4. The decrease was mostly due to lower professional fees due to a decrease in M&A transaction costs as well as costs associated with our Q4 internal vessel realignment. In addition, we saw a decrease in salaries and benefits due to adjustments made to our compensation expense. For 2026, exclusive of additional M&A costs, we expect Tidewater Inc. standalone G&A costs to be about $125 million. This includes an estimated $14 million of noncash stock compensation. Moreover, we expect to incur approximately $7 million in additional G&A costs in the second half of this year related to the Wilson acquisition. In the first quarter, we incurred $36.4 million in deferred dry-dock costs compared to $13.9 million in the fourth quarter. Q1 is typically a heavy dry-dock quarter, and this quarter was no exception, as we had 949 dry-dock days that affected utilization by about five percentage points. Dry-dock costs for 2026 are expected to be approximately $122 million. Additionally, we expect to incur approximately $16 million in dry-dock costs in the second half of the year related to the Wilson acquisition. In Q1, we incurred $14.9 million in capital expenditures related to vessel modifications and upgrades. For the full year 2026, we expect to incur approximately $51 million in capital expenditures. This amount includes a planned major upgrade to one of our Norwegian vessels. Absent this upgrade, our maintenance CapEx is expected to be approximately $36 million for 2026. In Q1, we spent $24.4 million related to two purchase options we have exercised for vessels we have been leasing. This amount is not reflected as CapEx spend, but is instead reflected in the financing section of our cash flow statement in Q1 as payments on finance leases. In addition, we expect to incur about $1 million in CapEx spend in the second half of the year related to the Wilson acquisition. We generated $34.4 million of free cash flow in Q1 compared to $151.2 million in Q4. The free cash flow decrease quarter over quarter was mainly attributable to higher deferred dry-dock and CapEx spend in Q1 and a large working capital benefit achieved in Q4 due to a significant increase in cash collections that did not repeat in Q1. In Q1, we sold two vessels for proceeds of $3.3 million, which is also lower than the Q4 sale proceeds of $5.3 million. Though the Q1 free cash flow amount was lower than Q4, it was higher than our internal estimate. As a reminder, following our debt refinancing, which was completed in Q3 2025, we only have small debt repayments that are related to the financing of recently constructed smaller crew transport vessels. We have no payments until 2030 on our new unsecured notes. Following the anticipated close of the Wilson acquisition, our debt maturity and repayment profile will change to accommodate the newly assumed Wilson debt. We conduct our business through five operating segments. In the first quarter, consolidated average day rates were 1% higher versus Q4, led by our Europe and Mediterranean day rates improving by 9% and our APAC segment increasing by 7%, partially offset by relatively small declines in each of our other regions. Total revenues were 3% lower compared to the fourth quarter, with decreases in the Americas, Africa, and Middle East, partially offset by increases in our APAC and Europe and Mediterranean regions. Regionally, gross margin increased by four percentage points in Africa, three percentage points in our APAC region, and one percentage point in the Middle East despite the conflict in Iran. Our Europe and Mediterranean region saw a decrease of two percentage points, and the Americas declined by four percentage points. The gross margin increase in our African region was primarily due to a five percentage point increase in utilization due to fewer idle days, offset by slightly higher repair and dry-dock days. This was offset somewhat by a decline in average day rates of 4%. Operating costs decreased by 15% due mainly to a decrease of four vessels operating in the area and two fewer operating days in the quarter. The gross margin increase in the APAC region was due to an increase in utilization due to fewer repair days and a 7% day-rate increase, partially offset by a small increase in operating costs as we had two vessels transferred into the area. The increase in Middle East gross margin was primarily due to a 5% decrease in operating costs. The decrease was primarily due to fewer operating days and lower R&M expense due to fewer DFR days, partially offset by higher costs related to the conflict. In the quarter, we did see a small drop in day rates and utilization. Utilization was down slightly quarter over quarter primarily due to higher idle days, partially offset by fewer dry-dock and repair days. Our Europe and Mediterranean region gross margin was two percentage points lower versus the prior quarter, but three percentage points higher than our expectation. Revenue was up 5.5% due to a 9% increase in day rates, partially offset by a seven percentage point decrease in utilization. We had a heavy dry-dock schedule in the quarter, and we mobilized vessels into the region, which contributed to the decrease in utilization. Dry docks represented a five percentage point decrease in utilization in Q1 compared to less than one percentage point in Q4. The increased revenue was partially offset by higher operating expenses related to higher salaries and travel and supplies and R&M due primarily to an average of four additional vessels operating in the region. Gross margin in our Americas segment decreased by four percentage points due mainly to a $12 million decrease in revenue caused by a four percentage point decline in utilization as well as a 3% decrease in average day rates. Utilization was affected by higher dry-dock and repair days. The revenue decrease was partially offset by a 10% decrease in operating cost versus Q4. The decrease was primarily due to transferring two vessels out of the region during Q1. As noted in our press release and as Quintin mentioned earlier on the call, we experienced additional operating costs in Q1 related to the impacts from Operation Epic Fury. We estimate ongoing additional crew wages in the form of hazard pay and insurance costs of about $1.6 million per month. In addition, we expect approximately $1.8 million of additional monthly costs related to fuel and travel expenses due to the higher global commodity prices. The fuel and travel expenses are estimates based on our forecasted activity and current commodity prices. These elevated costs related to the conflict will likely continue into the near future, though it is uncertain how long this geopolitical disruption may last. It is also widely expected that commodities markets will remain elevated beyond the immediate resolution of the conflict. In a scenario where the conflict extends and remains similar in nature to its current state, we estimate total operating cost increases of between $10 million and $11 million per quarter. We are currently working with our customers for reimbursement of wages and insurance costs that are provided for under our contracts, but as of now we have not included this in our guidance. When we look at our Q1 revenue, I am glad to announce that we did not experience any material reduction due to contract cancellations because of this conflict. As it relates to the Wilson acquisition, integration meetings are progressing as expected, and we expect the transaction to close by the end of the second quarter. We strongly believe that our increased presence in the Brazilian market is an important piece to our global strategy and are excited about our growth there. In summary, Q1 was another strong quarter from an operations and execution standpoint. We exceeded internal expectations for free cash flow, day rate, and utilization in what is typically a seasonally slow quarter, and industry fundamentals remain strong. Our balance sheet is in excellent condition, and we continue to be optimistic about the opportunities that lie ahead for Tidewater Inc. With that, I will turn it back over to Quintin. Quintin V. Kneen: Sam, thank you. We will now open the call for questions. Operator: If you have dialed in and would like to ask a question, please press star then 1 on your telephone keypad to raise your hand and join the queue. Your first question comes from the line of Ben Summers of BTIG. Your line is open. Analyst: Hey, good morning, and thank you for taking my questions. You called out the anchor handler market being particularly tight in Q1, especially in the North Sea. Is this more of a regional development, or is this something you are seeing across the global fleet? Piers Middleton: Yes. Hi, Ben. Thanks for the question. It is basically something that is happening in the North Sea where there tends to be a bit more of a spot market, but we are certainly seeing on the larger anchor-handling sizes that there has been some consolidation in that market, and that has driven some of that tightness. That has allowed some of our competitors to push day rates, which helps us as well. So long as we are all moving in the right direction, that is a positive thing. Generally, what we see is that the spot market in the North Sea tends to drive a lot of the noise elsewhere as well, so we expect that to have a trickle-down effect through the rest of the globe over the next few quarters. It is a positive sign on the largest classes of anchor handlers. If you see that in Norway, it tends to push through to other regions as well, and that is driven by increased towing of rigs but also on the subsea construction side—the big anchors needed for trenching and subsea support work as well. It plays into what we have been saying about the increase in EPCI work and also exploration starting to pick up again. Analyst: Awesome, thank you. Super helpful. On the broader picture, you talked about the long-term increased focus on energy security. Are there any specific basins you would call out as being specifically emphasized? Anything across the global fleet that could be specifically impacted by this longer-term trend? Quintin V. Kneen: Principally the smaller markets in Asia, I believe. I think you are going to see real strength growing over the next few years in Indonesia and Malaysia. Piers may have some other anecdotal information as well. I mean, I think it is across all, but it is primarily going to be in Asia. Piers Middleton: We see a huge amount of demand coming out of that region, and we are already seeing it a little bit in Indonesia as well. It is going to have a kick into Africa as well in terms of more drilling and pulling more supply. I would not be surprised if we see it on the East Coast of Africa, and of course we have already seen some of the Western Mediterranean pick up in Libya and so forth. Quintin V. Kneen: So, yes, you are starting to see players that have not been in the market over the past five or six years really reaching out and trying to develop their resources. Analyst: Thank you for taking my questions, and congrats on all the progress. Operator: Thank you. Your next question comes from the line of Josh Jain of Daniel Energy Partners. Your line is open. Analyst: Thanks for taking my questions. Offshore rig companies have outlined pretty constructive outlooks for activity over the next 12 months. I know you are not going to guide 2027 dry docks, but is there any thought in bringing forward any of those when you can? Or is it reasonable to think the dry-dock schedule is going to be more friendly as we exit this year into 2027, and how are you positioning the company given the expected growth in the deepwater side? Piers Middleton: We are not trying to bring any dry docks forward. We tend to plan out over a five-year period to help supply chain and procurement as well. We have a pretty well-set operation on that side and how we look at things. We might move one or two depending on how projects pan out, but at the moment we have a pretty good sightline in terms of where projects are rolling out over the next few years, both for our own technical team and for our commercial team in terms of what projects we are seeing and in which areas, and we try to line up our vessels and dry docks accordingly to that. Analyst: And then on the other one, with the Helix–Hornbeck merger, does this frame at all how you think about growing your business moving forward with respect to different service offerings? Or does additional M&A look more like Wilson and some of the other things that you have done over the last couple of years? Quintin V. Kneen: It does not change our view, because we have always had that expansive view of other service lines. It is certainly a lot easier for us to do that in our existing market. To the extent that we do reach out, it would be with a franchise that we feel is already well performing in that particular vertical. But no, it does not change anything. Glad to see it. More consolidation is better. I certainly cannot consolidate this industry by myself, so the more the merrier. Analyst: If I could sneak in one more. Given the number of rigs that were given multiyear extensions with Petrobras in the last 90 days, how does that frame your discussion for the Wilson acquisition? At the time of the deal, you talked about a number of assets that were in the process of being extended. Can you update us on those and how much more confident you are today than when you did the deal about that market? Piers Middleton: Josh, overall positive. We went into this year with an election going on in Brazil, so we have seen a couple of tenders being pushed to the right. The understanding from the market is that Petrobras wants to make some decisions on longer-term commitments. Overall, Petrobras is positive. There are also the IOCs coming out as well in that region, even moving up the tender margin as well. We do not see any concerns in terms of future tendering—maybe there is a bit of movement to the right on some of them—but overall, nothing that concerns us at the moment. It is very positive in terms of what we are seeing on the rig side, and then the additional FPSOs are coming as well. There is a really good long-term story in Brazil that we think we are well placed to take advantage of once we get the Wilson acquisition into the business. Operator: Thank you. Your next question comes from the line of Jim Rollison of Raymond James. Your line is open. Analyst: Hey, good morning, and thanks for all the detail again this quarter. Quintin, last quarter you were pretty optimistic about how things were shaping up as we head into late this year, really into next year and beyond, and that has only gotten better with the oil macro situation that has come out of this Middle East conflict. It sounds like you are having some customer conversations that have picked up. Are they already trying to mobilize incremental activity at this stage, and how do you think that translates into the timing of your ability to start pushing day rates up? Quintin V. Kneen: It is always a bit of a guess, but the building activity that we are seeing from the rig companies, EPCI, and subsea contractors gives us a lot of confidence in our ability to push day rates up once the market tightens. We are a little bit later in the chartering process for those customers, so I think we are not going to be able to demonstrate that until later into 2026 and into 2027. Analyst: Got it. And then back to M&A. You have the Wilson deal closing, and there have been a couple of other chess pieces moved off the board since you announced that deal. Has the shift in the oil macro and the better environment outlook changed any of the dynamics of opportunities in terms of target acquisition pricing expectations at this point? Quintin V. Kneen: I think people are definitely getting more confident in the longer-term view of the industry, and that is helping. People are also beginning to appreciate the importance of consolidation—they see the benefits from the drillers and other subsectors. I have not seen any real price movements at this point, but if the industry continues to improve at a steady rate, we will certainly see that too. Operator: Your next question comes from the line of Don Crist of Johnson Rice. Your line is open. Analyst: Sorry if this has already been addressed—I got on the call a little late. It is a busy morning. I just wanted to ask about the Far East. We are hearing some news reports of energy shortages and things like that. I know you had a bunch of boats working in Malaysia and Indonesia in the past that got sidelined for other reasons. What is the state of the Indonesian and Malaysia markets right now and your ability to put those big boats back to work? Is that coming sooner rather than later? Any thoughts around that? Piers Middleton: Hi, Don. The market is pretty positive. We do not have a huge number of our biggest market-age-specific vessels there, but we do have a lot of big boats in the region, which will be working in Malaysia, Indonesia, and Australia, and then up in Taiwan. We are very positive. As we said earlier, with the energy security story, we are going to continue to see more investment in those countries. I think the governments have been shocked a little bit by what has happened with Operation Epic Fury. Longer term, we were already seeing it, but we expect to see the governments really doubling down in terms of pushing their NOCs and also the IOCs that operate in those countries to do more investment—more drilling, exploration, and getting production. We are busy down there at the moment, and we expect to continue to be busy as well. We have moved one or two ships already into the region this year. With our operating platform, we are able to do that. It is a positive story in Asia Pacific for us. Analyst: And M&A has been a big topic in Q4 and Q1, so you have not really done any stock buybacks. Quintin, are you leaning more towards stock buybacks as the M&A story goes to the background and you are able to buy some stock back here, or are you going to keep that optionality for the future? Quintin V. Kneen: I do not believe that the M&A opportunities are winding down. We have no issue returning money to shareholders, and share repurchases are our way to do it. But to the extent that we see more value in acquisitions by getting the right boats at the right price, then I would lean toward that. Operator: That concludes our Q&A session. I will now turn the call back over to Quintin V. Kneen for closing remarks. Quintin V. Kneen: Thank you again for joining us today. We look forward to updating you again in August. Goodbye. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Good morning, and welcome to HealthStream, Inc.'s first quarter 2026 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Mollie Condra, Head of Investor Relations and Corporate Communications. Please go ahead, Ms. Condra. Mollie Condra: Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2026 results. Also on the conference call with me is Robert A. Frist, CEO and Chairman of HealthStream, Inc., and Scott Alexander Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream, Inc. that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-Ks, 10-Q, and our earnings release. Additionally, we may reference certain non-GAAP financial measures relating to the company's past and future expected performance on this call. The most directly comparable GAAP financial metrics and reconciliations are included in the earnings release that we issued yesterday. I will now turn the call over to CEO, Robert A. Frist. Robert A. Frist: Good morning, everyone. We do have a lot to cover this morning, and I will ask Scotty and Mollie to be on guard in case I have a cough. I am still working off a bit of a cold. That is my issue. I am going to get through it, though. Just in case, Mollie, be ready. Alright. Well, good morning, everyone. It is our first quarter 2026 earnings call. We have a lot to go over, starting with the strong financial growth we delivered in the quarter, which included record-setting revenues of $81.2 million, up 10.5% year-over-year, and record-setting adjusted EBITDA, which just pushed through $20 million to $20.1 million, up 24.1% year-over-year. Operating income grew 71% year-over-year. The strong performance in Q1 is allowing us to increase investment beyond our original plan, including in growth initiatives related to our current products, new products on the horizon, and accelerated use of AI. I am going to talk about some of those investments towards the end of my section. We are reaffirming our 2026 full-year guidance and continue to anticipate revenue between $323 million and $330 million, net income between $20.4 million and $22.8 million, and adjusted EBITDA between $73 million and $77 million. Our strong cash balance of $66.5 million and untapped line of credit and no long-term debt continue to position us well to take advantage of M&A opportunities as they arise, as well as other capital deployment strategies that we believe will benefit our shareholders. As a reminder, last quarter I described four reasons why HealthStream, Inc. sees real opportunity in today’s rapidly expanding AI environment. As AI continues to develop, I am pleased to reaffirm our increasing belief in each of those four reasons today. First, our healthcare user base continues to expand. Unlike companies facing seat compression from AI agents, healthcare keeps hiring and keeps growing. Roughly one quarter of all new U.S. jobs over the next decade is projected to come from the healthcare industry, and nurses, our largest user base, are leading that growth. AI is not expected to reduce demand for nurses. If anything, it should free them to spend more time with patients and less time documenting. Second, our data profile remains a meaningful differentiator. Our customers utilize our enterprise applications as a system of record for managing their learning, credentialing, and scheduling programs. The data in these applications serves as a source of truth for our customers as they carry out their operations. I believe they will use that source of truth in training their own AI. Third, in addition to the data profile, our career networks, which is going to be an area of investment, generate proprietary individual-level data that we believe is valuable for finding, developing, retaining, and engaging the healthcare workforce. NurseGrid alone, for example, now reaches roughly one in five U.S. nurses, telling us where, when, and for whom they want to work. Fourth, our hStream platform is built to incorporate AI as a core element rather than bolting it on. Platform elements like the hStream ID, which we have talked about extensively in the past, and our growing API footprint serve as essential infrastructure to help enable AI-driven innovation in healthcare workforce technology. Our ecosystem ties it all together. Millions of caregivers, thousands of healthcare organizations, and dozens of industry partners combined with more than 30 years of domain experience, and the hStream technology platform creates something difficult to replicate. AI cannot manufacture an ecosystem like HealthStream, Inc.’s, but it can enhance it, and our ecosystem can enhance AI in what we believe will be a virtuous loop of value creation for our customers and investors alike. Building on that foundation, I am pleased to share that we have meaningfully expanded our internal role of AI across the company and are making great progress. Adoption is broadening across teams. Our employees are putting these tools to work in their day-to-day, and we are encouraged by the early productivity and quality benefits we are already seeing. It is still early days in terms of realizing the benefits of AI, and with driving innovation as one of our company’s six constitutional values, I believe our employees are on the front foot of ensuring that HealthStream, Inc. is an innovator in this promising area. Before we go further in our call, I want to briefly summarize our business for the benefit of anyone who is new to the HealthStream, Inc. story, and I hope there are lots of you on the call today. First and foremost, HealthStream, Inc. is a healthcare technology company dedicated to developing, credentialing, and scheduling the healthcare workforce through technology solutions, each of which is becoming more valuable because of the interoperability they are achieving through our hStream technology platform. We have also started to open our sales channels directly to healthcare professionals and nursing students through our three career networks. These help nurses, CNAs, and students throughout their career journey. The company holds 20 patents for its innovative products, which have been awarded over 40 Brandon Hall awards. Historically, we sell our solutions on a subscription basis under contracts that average three to five years in length, which makes our revenues recurring and predictable. In fact, 97% of our revenues are subscription-based. We are profitable, have no interest-bearing debt, and reported a strong cash balance of $66.5 million at the end of the first quarter of 2026. This strong cash balance allows us to allocate capital to product development, M&A, share repurchases, and dividends. We are solely focused on healthcare and, more specifically, the healthcare workforce and those preparing to enter it. The 12 million to 12.5 million healthcare professionals and nursing students in the United States comprise the core total addressable market for our solutions. At this time, I will turn it over to Scott Alexander Roberts. We will turn our attention to our financials and hear a report from Scott. Scott, take a look at the first quarter of 2026 and give us your financial outlook. Scott Alexander Roberts: Alright. Thanks, Bobby, and good morning, everyone. I will be happy to cover our financial results for the first quarter with you this morning. For the first quarter, our revenues were a record $81.2 million, which was up 10.5%. Operating income was $7.5 million and was up 71.6%. Net income was $5.9 million, up 36.4%. Earnings per share came in at $0.20 per share, which is up from $0.14 per share, and adjusted EBITDA was also a new record of $20.1 million, which was up 24.1%. Our revenues increased by $7.7 million, or 10.5%, to $81.2 million compared to $73.5 million in the prior year. Revenues from subscription products were up $7.6 million, or 10.7%, while professional services revenues were up $0.1 million, or 4.3%. Our organic revenue growth rate was 5.8%, and the inorganic growth rate was 4.7% in the first quarter. Inorganic revenues are associated with the Verisys (Versus)12 and MissionCare Collective acquisitions that we completed in 2025. The first quarter of 2026 is the first full quarter with both operating as part of HealthStream, Inc. I am pleased to report that both post-acquisition integrations are progressing well. Verisys (Versus)12 is extending our reach into payer credentialing, a meaningful expansion of our addressable market, and MyCNAjobs is building momentum connecting CNAs and home care providers with the organizations that need them. Together, these two acquisitions contributed $3.4 million in revenue in the first quarter, and we continue to see compelling opportunities to cross-sell and integrate capabilities into the broader HealthStream, Inc. platform. In addition to the revenue contributions from these two recent acquisitions, our core business was supported by strong subscription growth performance from CredentialStream, which grew by 19%, and ShiftWizard, which grew by 29%. Revenues from our legacy credentialing and legacy scheduling products approximated $7.6 million of our first quarter revenues and declined by 16% compared to the first quarter of last year, as we continue our efforts to migrate customers from those solutions. Our remaining performance obligations were $687 million as of the end of the first quarter compared to $613 million for the same period of last year. We expect approximately 39% of the remaining performance obligations will be converted to revenue over the next 12 months and that 67% will be converted over the next 24 months. Gross margin was 65.8% compared to 65.3% in the prior-year quarter, and this improvement was primarily related to the growth in revenues, including contributions from the recent acquisitions. Operating expenses, excluding cost of revenues, increased by 5.3%, or $2.3 million. Product development increased by $1.6 million, or 12.9%. Sales and marketing increased by $0.8 million, or 6.7%. Depreciation and amortization increased by $0.6 million, or 5.7%, while G&A expenses declined by $0.7 million, or 7.7%. These operating expense increases were partially impacted by the recent acquisitions, while the G&A expense decline resulted from our office sublease. To wrap up, our net income was $5.9 million and was up 36.4% over the prior year, and adjusted EBITDA improved to a record high of $20.1 million and was up 24.1%, and the adjusted EBITDA margin was 24.8% compared to 22% last year. We ended the quarter with cash and investment balances of $66.5 million compared to $57 million last quarter. During the first quarter, we paid $7.5 million for capital expenditures, returned $1 million to shareholders through our dividend program, and repurchased $7.5 million of our common stock under the share repurchase programs that we announced in November 2025 and March 2026. In addition, we made $1.8 million of minority investments in companies that we expect to leverage our ecosystem and our platform. Our days sales outstanding were 39 days for the first quarter compared to 37 days in the prior-year first quarter. Our objective is to maintain our DSO in the 40–45 day range or better, and I am pleased with our continued progress in this area. Cash flows from operations came in at $27.1 million for both the current year and the prior-year first quarter. Cash flows were partially impacted by the minor increase in DSO that I just mentioned, as well as higher payments for sales commissions following the strong bookings that we achieved in the fourth quarter of last year. Our free cash flow was $19.7 million, which is up from $18.2 million from last year, an increase of 7.9%. Our capital expenditures came in at $7.5 million compared to $8.8 million last year. Ending the quarter with $66.5 million of cash and investments, strong free cash flows, and no debt, we are well positioned to deploy capital to improve our shareholder value. As a reminder, we maintain a disciplined approach to capital allocation and how we prioritize our use of capital. Our utmost priority is making organic investments back into the business, which is evident by our annual capital expenditure and R&D plans. The second is pursuing acquisition opportunities, which we have a long track record of executing. The third is returning a portion of profits back to shareholders in the form of cash dividends, and our fourth priority is that our Board may authorize share repurchase programs. Yesterday, as announced in our earnings release, our Board of Directors declared a quarterly cash dividend of $0.035 per share to be paid on May 29, 2026, to holders of record on May 18, 2026. During the first quarter, we made share repurchases of $7.5 million under two Board-authorized share repurchase programs. We repurchased the remaining $5 million under a $10 million share repurchase program that was authorized by the Board of Directors in November 2025, and in March 2026, the Board authorized a new $10 million repurchase program. We made $2.5 million of repurchases under this plan during the first quarter, and we have continued to make repurchases during the second quarter. This program will terminate on the earlier of September 12, 2026, or when the maximum dollar amount under the program has been expended. We may suspend or discontinue making purchases under the program at any time. I will finish up this morning by just recapping our financial outlook for 2026, which we are reiterating as previously announced in February. We continue to expect our consolidated revenues to range between $323 million and $330 million, net income to range between $20.4 million and $22.8 million, adjusted EBITDA to range between $73 million and $77 million, and capital expenditures to range between $31 million and $34 million. For the second quarter, we expect our revenue growth rate will approximate 9.5% and adjusted EBITDA margin will approximate 23%. Consistent with our operating budget for the year, we have several planned operating expenses that will begin in the second quarter, including higher labor costs, higher marketing costs from trade shows, sponsorship, and attendance, and new technology investments to support our infrastructure, among others. In addition, our strong performance in the first quarter provides us with additional capacity to accelerate investments towards several initiatives such as our career networks. These guidance expectations do not include the impact of any acquisitions or dispositions that we may complete during the year, gains or losses from changes in the fair value of non-marketable equity investments or contingent consideration, or impairment of long-lived assets that we may complete during the year. That is all I have for today. Thanks for your time this morning. Bobby, I will go ahead and turn the call back over to you for some more updates. Robert A. Frist: Thank you, Scotty. I am going to start this section of the call as I usually do with some business updates that highlight successes we have achieved in the learning, credentialing, and scheduling areas, along with updates on our career networks. Starting with the learning product family, which includes the Competency Suite, many customers are increasingly taking advantage of the opportunity to purchase a bundle of several of our most popular workforce applications and content libraries, which we call the Competency Suite. Customers purchase a subscription to the Competency Suite for all of their applicable employees, particularly the clinical staff, which comes with unlimited use. We saw strong momentum of this product in the first quarter with a 17.3% increase in revenues achieved. Our American Red Cross Resuscitation Suite continues to be in demand by customers. In the first quarter, we provided the marketplace with 18 updated courses, which included education content in our BLS, ALS, and PALS programs. The updated content was deployed simultaneously across the entire customer network in a single day, all aligned to the new ILCOR science guidelines. Among the sales successes we had in Q1 with the Resuscitation Suite was a decision by Cedars-Sinai Medical Center to renew and expand their number of users by 50%. They also informed us that the expansion will be beneficial as they have been named the official medical provider to the 2028 LA Olympic and Paralympic Games. That is super exciting for our teams as well. Now let us move to credentialing, where our flagship product CredentialStream continued its strong momentum in the first quarter. Revenues from sales of CredentialStream in the first quarter were up approximately 19% over the same quarter last year. One thing we love to see is our customers growing along with us, and some of our customers meaningfully expanded through M&A last year. In fact, two of our largest CredentialStream sales in the quarter were significant expansions due to M&A and enterprise-wide standardization on CredentialStream. We take it as a strong vote of confidence when our customers trust and rely on CredentialStream so much as the system of record that they choose to stop using solutions from our competitors and standardize on CredentialStream when they expand their operations. We are dedicated to repaying that vote of confidence by helping these customers improve their operating results by reducing the time it takes to onboard, enroll, credential, and privilege their physicians. There is a significant economic benefit when a health system can show demonstrable improvement in the time to revenue on these physicians. We believe our software plays an essential role in getting that outcome. Verisys (Versus)12, which we recently acquired in order to expand our market share and product offering and expertise in the payer credentialing space, also delivered one of our top three credentialing wins in the quarter. We are still in the earlier phases of our expansion to the payer market, and we are pleased to see Verisys (Versus)12 already contributing to that effort. Let us move to scheduling, where our core product ShiftWizard continues to deliver strong revenue growth, with first-quarter revenues up approximately 29% versus the first quarter of the previous year. It continues to be our top-performing product in our scheduling application suite. Our top two ShiftWizard deals in the quarter were once again takeouts of a competitor that is horizontally focused instead of solely focused on healthcare. Our sales leaders attribute these wins to the fact that our growing ShiftWizard customer base is increasingly touting the value of the healthcare-specific solution that ShiftWizard provides. When the rubber hits the road, scheduling and staffing clinicians is simply different than scheduling a labor pool for retail or factory shifts, and the market is taking note of that. Now let us turn to our career networks. They include My Clinical Exchange, NurseGrid, and MyCNAjobs. Importantly, career networks directly benefit both individual healthcare professionals as well as the health organizations seeking to employ and engage them. For individuals, HealthStream, Inc. Career Networks serve as a career catalyst through every stage of their pre-professional and professional journey. Last year alone, My Clinical Exchange connected over 364 thousand nursing and allied health students to clinical placements. NurseGrid, the number one app for nurses in the Apple App Store, engaged over 683 thousand monthly active users. MyCNAjobs connected approximately 70% of America’s direct care workforce in the home caregiver space. In doing so, these solutions guided caregivers through every stage of their career journey, helping them discover their path, build meaningful professional relationships, access focused learning, and advance to what is next in their career. For healthcare organizations, our career networks provide employers with direct access to the largest, most engaged audience of nurses and caregivers through targeted recruitment, development pathways, and in-app promotion. My Clinical Exchange served as the first touch point for helping over 715 health organizations and over 1.9 thousand schools seeking to place nurses and allied health students into clinical rotations. NurseGrid was utilized by nurses in approximately 37 thousand unique clinical sites as NurseGrid users manage their professional calendars and engagement across those sites. Finally, MyCNAjobs helped over 8 thousand healthcare organizations access our home caregiver and CNA community to promote work and learning opportunities. Today, the usage of our Career Networks has created over 450 thousand hStream IDs, and counting, among students, nurses, and allied health workers. In aggregate, Career Networks contributed approximately $3.78 million in the quarter. While this is modest compared to the company’s total revenue, we believe that the growth potential, differentiation, and diversification of Career Networks make them an important area for incremental investment. We are already rolling some of the profits from the quarter’s outperformance into new sales hires for this area, the Career Networks, to scale the three solutions. I am pleased to announce the promotion of Michael Collier to Chief Operating Officer and Executive Vice President. In this expanded role, Michael will lead enterprise operations across HealthStream, Inc., including customer experience, corporate development and M&A, implementations, legal, human resources, and other critical areas. He also serves as executive sponsor of the company’s AI transformation, driving AI readiness across operational teams. Since joining HealthStream, Inc. in 2011, Michael has been instrumental in our growth, including leading more than two dozen successful acquisitions. We look forward to his continued leadership in this expanded capacity. Before we move on, I want to remind our shareholders and investors that our annual shareholders meeting is scheduled to take place virtually on Thursday, May 28, 2026, at 2:00 PM Central. Notifications of the meeting and access to the proxy statement, 10-K, and shareholder letter were sent out on April 13, 2026. We encourage you to vote your shares and participate in the future of our company. I will close with the same reminder I share with you every quarter. If you are interested in a recurring-revenue, profitable, healthcare technology company that expects to deliver growth, then HealthStream, Inc. may be the right investment for you. If you are interested in a company whose core user base, the clinical health workforce, is expanding faster than any other sector in the job market, then maybe HealthStream, Inc. is the right investment for you. If you like a company whose software serves as a system of record on behalf of healthcare customers, then HealthStream, Inc. may be a company for you. If you favor ecosystems over point solutions, then maybe HealthStream, Inc. is the right investment for you. For all these reasons, HealthStream, Inc. is positioned for another exciting year helping the nation’s top health systems find, develop, credential, schedule, onboard, and retain the growing healthcare workforce. Maybe HealthStream, Inc. is the right investment for you. I will turn it over to the operator to begin the Q&A session. Thank you. Operator: We will now open the call for questions. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by. Our first question today is from Matthew Gregory Hewitt with Craig-Hallum Capital Group. Your line is open. Matthew Gregory Hewitt: Good morning, team, and congratulations on the strong start to the year. Maybe first up, obviously a nice pop in gross margin. It sounds like the acquisitions were aiding in that. Should we anticipate a little bit more lift here in Q2? And longer term, how could that play out? Are you anticipating annual improvement in gross margins or is it more about driving operating leverage as you go forward? Robert A. Frist: Scotty, I will let you take that one to start us. Scott Alexander Roberts: Yes. Really, Matt, no significant expectation of improvement in gross margin. I think the 65.8% we delivered in Q1 was a little bit ahead of where we expected to be in the quarter, and it is just revenue mix. We got a little bit of improvement in revenue in the first quarter from a variety of things. Some of it is timing that we anticipated to come in, in, say, Q2 or Q3, that kind of moved forward in the year. Some of that is early activations from customers that we had sold in, say, Q4, and some consumption-based revenue, things like that that we pulled forward. So we got a little bit of improvement in margin because of that. Some of our ambitions for moving to the cloud could compress margins a little bit over time as we make some of those transitions, but that is still a good ways in front of us to see how that plays out. That is just something that is on our to-do list for this year, to begin this year anyway. Matthew Gregory Hewitt: Got it. And then maybe a question for you, Bobby, since you addressed it in your prepared remarks. You spoke to how AI is expected to drive increasing efficiencies with nurses. What do you think will be the downstream effect of that? Will that allow them more time to care for patients? Will that allow more time for them to work on their training and education? From a hospital’s perspective, if nurses are becoming more efficient, maybe they do not need to hire as many. I am just trying to think what the downstream effects of AI adoption by the nursing group would be. Thank you. Robert A. Frist: Overall, we see a shortage of nurses, and we see the early successes of the deployment of AI in our customer base around ambient listening, and ambient listening definitely frees up more time for the nurses and caregivers to spend with patients, which I think is greatly appreciated by all patients, and helps the health systems put a more friendly face on their adoption of technology. I think the early use and adoption is in areas that will directly impact the patient experience in a positive way. As far as demand for nurses goes, every report that I read seems to indicate that there is far more demand than there will be supply for the next five years plus. I do not see fewer caregivers. I see more, and a better opportunity to be more in the care delivery. We view that as an opportunity to be a close ally to all those health systems. We continue to expand the value that we provide with these career networks, helping health systems not just develop and retain the ones they have through our learning capabilities, but now helping find, identify, and match new talent for them to employ. We are servicing more of the continuum of the workforce need at a time of great need for more workforce. We think we are well positioned with the mixture of our product sets to be a great ally to these health systems. Matthew Gregory Hewitt: That is great. Thank you. Operator: Thanks for your questions. Our next question is from Richard Collamer Close with Canaccord Genuity. Your line is open. Richard Collamer Close: Hi. Just, Scotty, maybe a question on the revenue dollars, $3.4 million acquired revenue. Is it okay to annualize that to get the $13.6 million expected contribution from the acquisitions this year? I am just trying to get a sense of the organic growth that is embedded in the annual guidance. Scott Alexander Roberts: I believe our expectation, we mentioned this on last quarter’s call, was for the two acquisitions. We were targeting around $13 million for the full year. So maybe the annualization of Q1 might be slightly ahead of that $13 million, but I think $13 million is where we would still forecast it to. Richard Collamer Close: Okay. Great. That is helpful. Thanks for the reminder there. And you have been providing some commentary on the legacy license drag in the past. I am just curious if there is any update in terms of what the impact there was in the first quarter? Scott Alexander Roberts: One thing we did disclose this quarter was the amount of revenue from those legacy applications in the quarter. It was around $7.6 million. The decrease was around 16%–17% versus the first quarter of last year. We tried to give a little more color on the magnitude of that bucket of revenue relative to our consolidated revenue and also this continued rate of decline. We continue to look for opportunities to migrate those customers to the new applications. We do see some trade-offs there in that decline. Some of that is moving into CredentialStream and ShiftWizard, but there is still some attrition going on as well. Richard Collamer Close: Okay. And then I guess my final question: clearly, if you annualize the first quarter EBITDA, it gets you above the high end of the annual range. I appreciate you calling out investments. Maybe a little bit more detail on those investments and the timing of them. Is it spread out throughout the year? I am trying to better understand what the cadence of EBITDA will be from Q2 through Q4. Robert A. Frist: Let me start, and then Scotty can add some color. First, the first area of investment we looked at was the sales organization. We had a budgeted plan as we ended the year to hire the sales organization, and specifically, we have decided after this Q1 performance that we are going to add to that original plan. Even more specifically, in the Career Networks area, we think the products warrant a stronger and bigger sales organization, so we are going to go ahead and start building that in the first half of the year, particularly in Q2. From a timing standpoint, we are going to post some new positions in the sales area around our Career Networks and try to hire them. Second, the area is a high-growth area for us, and to keep it current, we are going to increase our planned investments in the technology infrastructure specifically around My Clinical Exchange. We have some work to do there. That was an acquired product originally. We have continued to enhance it. This will give us a chance to enhance it even faster and expand it. The constituent base for that is growing rapidly, and we want to make sure that it meets the needs of that expanding market. We have had some unique opportunities present in the market where we think we are well positioned against some competitors there, and now is the time to invest in both the sales organization and the technical infrastructure for that category of product. More specifically within Career Networks, for My Clinical Exchange we are putting more into the tech stack as well. Remember, that software has three constituent audiences: the students are a user, the nursing schools are a user, and the healthcare organizations are a user. It is a network-effect piece of software that has a market effect as the school adopts it, the hospitals in the region adopt it, and that gets the students to use it as well. There is a lot to do technologically, and we are going to increase our rate of investment in that tech stack. Richard Collamer Close: Is that front-loaded into the second quarter, or is all that spread out? Robert A. Frist: Part will be spread out and will include a mixture of CapEx and OpEx to enhance the platform and the application suite. The sales team will be as fast as we can hire and onboard them. We already have several open positions in the sales team we are trying to fill, so we are using some outside recruitment to go faster there, as well as our incredible internal teams to find the talent we need to staff it up. I would like to see that be front-half loaded on the sales organization so that we might get some back-half benefits. Certainly, we will get benefit early next year, but salespeople take a little bit of time to ramp up and get productive in closing deals. Richard Collamer Close: Alright. Thank you. Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our next question comes from Vincent Alexander Colicchio from Barrington Research. Your line is open. Vincent Alexander Colicchio: Hey, Bobby. What differentiated ShiftWizard in the competitive takeout wins? Were any of the wins involving large enterprises with ShiftWizard in the quarter? Robert A. Frist: We did have some larger wins on a relative basis. They are not massive systems, but a 10 thousand-employee system went with ShiftWizard in the quarter. That was a huge win. We are seeing more of the larger to medium-sized—call them medium-large, not the supersized—health systems make that decision. That was nice to see a couple of wins there. In general, as I mentioned on the call, the vertical-specific nature of the software is more appropriate for this environment. We have a great long-term vision for the software as well. We are starting to outline a little bit more of that in some of the work we are doing to integrate our Career Networks with our scheduling systems, which is not done yet, but I think we are getting some excitement around the future direction of where we are going with this platform—integrating both our applications and, hopefully, also our Career Networks. Vincent Alexander Colicchio: Can you give us an update on your bundling effort in the small hospital market, and somewhat related, how is the Competency Suite doing in that part of the market? Robert A. Frist: In the smallest market, we are seeing a little bit of uptake. We created several market bundles specific to the skilled nursing space, the long-term care space, and the small hospital spaces, often called critical access hospitals. We are seeing some uptake. We are investing in the sales team there and getting some good bundle selling. We are pleased. The bigger bundles, as you pointed out, the Competency Suite, are really helping drive growth. I like adding the users of those smaller clinics because we are an ecosystem. We want all these healthcare professionals, because they may change jobs over time. We want them in our network, even at the small hospitals. But the revenue growth is coming from the bundling of the Competency Suite to the mid-market and bigger health systems. We are seeing uptake in the Resuscitation Suite when we see a medium to large health system switch to the Red Cross solution. The revenue growth contributions are coming from the mid-market and above. The small markets are very important to us. We are getting much better at both having the appropriate mix of products for them, and we view the market holistically. A clinician in an urban or rural market is important to have in our network, as well as the nurses in these rural centers, because they are mobile over their careers. We think of it as servicing the totality of the healthcare workforce, not just the urban centers. Vincent Alexander Colicchio: Thanks for all the color. Nice quarter. Robert A. Frist: Thank you. Operator: I am showing no further questions at this time. I would now like to turn it back to CEO, Robert A. Frist, for closing remarks. Robert A. Frist: Thank you, everyone, and especially to our little over 1.1 thousand employees who are delivering these great results. We have an exciting year in front of us and look forward to reporting the next earnings report here in another 90 days or so. We will see you throughout the quarter. Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.
Operator: Good morning, and welcome to the Sotera Health Company First Quarter 2026 Earnings Call. All participants will be in listen-only mode. To ask a question, you may press star then 1 on a touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Jason Peterson. Jason, please go ahead. Jason Peterson: Good morning, and thank you. Welcome to Sotera Health Company’s first quarter earnings call. Today’s press release and supplemental slides are available on the Investors section of our website at soterahealth.com. This webcast is being recorded and a replay also will be available on the Investors section of the Sotera Health Company website shortly after the call. Joining me today are Chairman and Chief Executive Officer, Michael B. Petras, and Chief Financial Officer, Jonathan M. Lyons. During today’s call, some of our comments may be considered forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to Sotera Health Company’s SEC filings and the forward-looking statements slide at the beginning of the presentation for a description of these risks and uncertainties. The company assumes no obligation to update any such forward-looking statements. Please note that during the discussion today, the company will present both GAAP and non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, tax rate applicable to adjusted net income, adjusted net income, adjusted EPS, adjusted free cash flow, net debt and net leverage ratio, as well as constant currency comparisons. A reconciliation of GAAP to non-GAAP measures for all relevant periods may be found in the schedules attached to the company’s press release and in the supplemental slides to this presentation. The operator will be assisting with the Q&A portion of the call today. Please limit yourself to one question and one follow-up. For further questions, feel free to reach out to the Investor Relations team. With that, I will now turn the call over to Sotera Health Company Chairman and CEO, Michael B. Petras. Michael B. Petras: Good morning, everyone, and thank you for joining us today. This morning, we announced a strong start to the year with 6.5% constant currency revenue growth and 6.9% constant currency adjusted EBITDA growth, driving over 20 basis points of margin expansion compared to the first quarter of last year. Sterigenics delivered 6.1% constant currency revenue growth in the quarter, while Nordion grew constant currency revenue 25.8% and expanded margins by over 290 basis points. Nelson Labs results were in line with the expectations we outlined on our last earnings call. Today, we are reaffirming our 2026 outlook provided during our February earnings call. As a reminder, we expect total company revenue to increase to a range of $1.23 billion to $1.25 billion, representing constant currency growth of 5% to 6.5% versus 2025, and adjusted EBITDA to grow to a range of $632 million to $641 million, or 5.5% to 7% constant currency growth. As we reaffirm our full-year outlook, I want to reiterate the strength and resiliency of our business model. We provide mission-critical regulated services that are deeply embedded in our customer supply chains. More than 70% of our revenue is supported by multiyear contracts servicing long-tenured customer relationships through a global network of facilities. Our commitment to customers is a core company value, and in 2025, we delivered substantial improvements in our customer satisfaction scores across both Sterigenics and Nelson Labs. Our business model has demonstrated its resilience over time, delivering consistent revenue growth for the past two decades across multiple economic cycles. We sit in a unique position in the healthcare supply chain and take our mission of safeguarding global health very seriously. Jonathan will get into the financial details in a moment, but first, I want to take the time to highlight some events that took place during the quarter. On the governance front, in addition to adding Rich Kyle to our board of directors in February, we are excited to welcome Ken Krausz, who joined our board in March. Ken’s leadership and proven track record of creating shareholder value as a public company chief financial officer for over ten years, combined with his extensive experience in strategy, finance, and governance, will be tremendous assets as we continue to grow. I would also like to thank Dean Meehos and Robert Canals, two of our private equity board members, for their service and contributions to Sotera Health Company. Dean recently completed his board service and Rob will transition off the board later this month. Both have provided valuable perspective and guidance, and we sincerely appreciate their impact over the years. In March, the private equity shareholders completed another secondary sale of existing shares, bringing our public float to approximately 90% of outstanding shares. Lastly, I want to briefly comment on some positive legal developments in Georgia. As a reminder, eight bellwether personal injury cases were selected into Phase 1 and Phase 2 causation proceedings where the court focused on the science. On 03/30/2026, the Georgia State Court dismissed the remaining five bellwether cases, as the plaintiffs could not prove general causation in the Phase 1 proceedings. As a reminder, the court dismissed the other three bellwether cases in October in the Phase 2 specific causation proceedings. All eight bellwether cases have now been dismissed and are subject to appeal. Although the March 30 order applies directly to the five Phase 1 pool cases, the court’s rejection of plaintiffs’ general causation theories is a critical issue common to all other personal injury cases. We believe this order underscores the lack of reliable scientific support for those remaining claims and should inform how the remaining cases are evaluated. We will continue to put sound science at the center of our defense as we stand behind the safety and importance of Sterigenics operations. As a reminder, developments related to EO can be found on our investors website. Now Jonathan will take us through the financials in more detail. Jonathan M. Lyons: Thank you, Michael. I will begin by covering the first quarter 2026 highlights on a consolidated basis and then provide some details on each of the business segments. I will then wrap up with additional details on our 2026 outlook. For the first quarter on a consolidated total company basis, revenues increased by 10% to $280 million, or 6.5% on a constant currency basis compared to the first quarter 2025. Net income on a GAAP basis for the quarter was $27 million, or $0.9 per diluted share. Adjusted EBITDA grew 10.5% to $135 million, or 6.9% on a constant currency basis, while adjusted EBITDA margins expanded over 20 basis points. Interest expense for Q1 2026 improved by $6 million to $35 million compared to the prior-year quarter. Approximately half of the improvement was driven by the term loan repricing and debt paydown completed late in 2025, with the remainder driven by lower interest rates. Adjusted EPS increased to $0.18 per share, an improvement of approximately 29% from the prior year. It was a strong first quarter overall, with results largely in line with our expectations, aside from some favorable timing in Nordion. Now let us go through the segment results. Sterigenics delivered 9.7% revenue growth to $186 million, or 6.1% on a constant currency basis. Favorable pricing of 4.5%, a foreign currency benefit of 3.6%, and improved volume/mix of 1.6% drove revenue growth for the quarter. Localized weather impacts in the U.S. during Q1 resulted in a 1.7% headwind to Sterigenics volumes versus the prior-year quarter. Segment income grew 9.6% to $96 million, or 6% on a constant currency basis, driven by favorable pricing, a foreign currency tailwind, and improved volume/mix, partially offset by higher costs. Nordion’s first quarter revenue increased 29% to $42 million, or 25.8% on a constant currency basis compared to the same period last year, driven primarily by increased volume/mix of 23.7% due to the timing of Cobalt-60 harvest schedules, along with foreign currency tailwinds of 3.2% and a pricing benefit of 2.1%. Nordion segment income increased approximately 36% to $24 million, or 33.1% on a constant currency basis, with segment income margins expanding more than 290 basis points to 56.4%, driven by higher volume/mix, foreign currency benefits, and favorable pricing, partially offset by inflation. Nelson Labs revenue declined 0.7% to $52 million, or 3.8% on a constant currency basis. Pricing benefits of 2.8% and a foreign currency benefit of 3.1% were more than offset by the change in volume/mix. Segment income decreased by 11.5% to $15 million, or 15.1% on a constant currency basis, with margins of 28%, reflecting lower volume/mix partially offset by favorable pricing and a foreign currency tailwind. Now I will touch on the balance sheet, cash generation, and capital deployment. In the first quarter, we generated $29 million in positive operating cash flow, inclusive of a $34 million payment for a previously disclosed legal settlement. We had positive adjusted free cash flow, which will accelerate throughout the year. Capital expenditures for the quarter totaled $46 million as we continue to make progress on our Sterigenics greenfield expansions, EO facility upgrades, and Cobalt-60 development projects. The company’s liquidity position remains strong; as of Q1 2026, we had over $900 million of available liquidity. Finally, we finished the quarter with a net leverage ratio of 3.2x, nearing our long-term target range of 2x to 3x. As Michael mentioned, we are reaffirming our 2026 outlook. To recap, we expect the following as compared to 2025: total company revenue to grow to a range of $1.233 billion to $1.251 billion, representing 5% to 6.5% constant currency growth and an estimated 100 basis point foreign currency benefit. We expect adjusted EBITDA to improve to a range of $632 million to $641 million, representing 5.5% to 7% constant currency growth and an estimated 100 basis point impact from foreign currency. The foreign exchange benefit is expected to be fully realized in the first half of 2026, with the second half impact expected to be approximately neutral versus the prior year. Total company pricing is expected to be approximately the midpoint of our 3% to 4% long-term range. For 2026, we expect Sterigenics to deliver mid- to high-single-digit constant currency revenue growth year over year, with the second quarter year-over-year growth similar to the first quarter of 2026. As a reminder, Q2 was our strongest quarter of growth in 2025. We expect Nordion to grow constant currency revenue in the low- to mid-single digits in 2026. Nordion’s first-half revenue is expected to represent approximately 40% to 45% of full-year 2026 revenue. For Nelson Labs, we expect full-year 2026 constant currency revenue growth to be in the low single digits, with a slight return to growth in Q2. Segment income margins at Nelson Labs are expected to improve throughout the year, resulting in full-year margins in the low- to mid-30s. Based on the current forward rate curve, we expect interest expense between $135 million and $145 million. We are projecting an effective tax rate applicable to adjusted net income in the range of 27% to 29%. We expect adjusted EPS in the range of $0.93 to $1.01. We continue to expect depreciation to increase in 2026, consistent with the step-up we experienced in 2025. On a weighted average basis, we expect a fully diluted share count in the range of 289 million to 291 million shares. Capital expenditures are expected to be in the range of $175 million to $225 million. We anticipate further net leverage ratio improvement in 2026. Finally, as usual, our guidance does not assume any M&A activity. Now I will turn the call back over to Michael. Michael B. Petras: Thank you, Jonathan. It has been my privilege to serve Sotera Health Company as CEO and Chair since 2016. With the company on strong footing after a decade of progress, I believe the time is right for a leadership transition that supports Sotera Health Company’s continued evolution. Following a thoroughly planned, board-led succession process, the board has appointed Alton Shader as Sotera Health Company’s new Chief Executive Officer, effective May 2026. Alton is a seasoned healthcare executive with significant experience leading and growing global healthcare organizations, including Viant Medical, Hillrom, and Baxter. In my new role as Executive Chair and as a meaningful investor in this company, I look forward to working closely with Alton to ensure a smooth and deliberate leadership transition. We have already started discussing priorities and the path forward for Sotera Health Company. I also will continue to be actively involved in investor relations and commercial and litigation strategies. As I transition to my new role, I want to thank our board for its guidance and support over the past decade. I want to thank our 3,100 employees for working with me and our leaders in continuing to make this company really special and a great place to work. I also want to thank our investors for your support since we took the company public in 2020. Rest assured, I continue to believe in and will remain engaged and committed to the long-term success of our company. With that, Operator, I would like to open it up for questions, please. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Sean Dodge with BMO Capital Markets. Please go ahead. Sean Dodge: Hey, good morning. This is Thomas Keller on for Sean. First off, congratulations on the ten years, Michael. Thank you for taking the questions. I wanted to start off on Sterigenics and the realignment of the business around higher-growth end markets. Where are you all in that strategy? I imagine it takes some time to get the pieces in place internally for that, and then to win and onboard new business. Was there any benefit here from a volume or mix shift standpoint in Q1? Or is there anything contemplated in the full-year guide? Thanks. Michael B. Petras: Yes, thanks, Tom. That is something that we are focused on as an organization. As we look at our cross-business unit activity and our strategic selling activity, we are focused on those key segments. In the quarter, Sterigenics put up 1.6% volume and mix growth, and remember, we also had an impact from weather. We are happy with the first quarter. The beginning of the quarter started off slow with the weather, which we signaled when we talked last time, but it finished strong, and we are optimistic on the outlook as we go forward based on how March finished out and how we are starting out the second quarter. Sean Dodge: Okay, that is great. And then, from a capacity standpoint, where is the business in terms of utilization across different modalities, maybe versus historical averages? And with remaining expansions, do you have what you need to support potentially higher levels of growth for the next several years? Thanks. Michael B. Petras: Yes, thank you. We are in a good spot on capacity. By modality and by geography you will have some pinch points at a given point in time, but we target approximately 80% utilization and we are in a good spot. The teams have done a nice job operationally trying to get more out of our existing capacity. We have a facility that we will start to bring online later this year in the X-ray modality, and then we have another one scheduled for late 2027, early 2028, that we feel good about. Overall, our capacity situation is in a good spot. We are well situated and have been servicing our customers very well. I also referenced on the call that we continue to see good satisfaction scores. We just got the results for 2025, and we saw significant improvement year over year in both Sterigenics and Nelson Labs. We are going in the right direction and are encouraged by what we see going forward. Operator: The next question comes from Brett Fishbin with KeyBanc Capital Markets. Please go ahead. Brett Adam Fishbin: Hey, good morning, everyone. Just a quick question on Sterigenics. Q1 was generally expected to be the lightest quarter for that segment, and you somewhat exceeded expectations. Do you still see Q1 as being the lightest quarter of the year? And then as a follow-up, can you speak a little bit to what you are seeing within core med devices and bioprocessing volumes, specific to Sterigenics? Michael B. Petras: Yes, we saw a nice quarter out of Sterigenics. We would like to have seen it a little bit better, but we cannot control the weather. Last year we had a significant second quarter, as we have talked about in the past. We will see a good quarter here in the second quarter and consistent with the guide that we just provided. We are expecting similar constant currency growth to the first quarter. Med device had a solid quarter, and across all the end markets we serve, med device was solid. Bioprocessing was up significantly year over year again, but remember, it is a small portion of our total business, though it was significant growth over the prior year. Brett Adam Fishbin: Alright, thank you very much. That is helpful. Operator: The next question comes from Patrick Donnelly with Citi. Please go ahead. Patrick Bernard Donnelly: Hey, guys, thanks for the question. Michael, congrats on the move and the transition. On Sterigenics, can you talk about what you saw as the quarter progressed on the volume side and the visibility there? It feels like you are in a pretty good spot, but talk through the different markets and what you saw as the quarter progressed, and the expectations here going forward? Michael B. Petras: Yes, Patrick, January and February were a little softer, particularly weather related, but as the quarter progressed, March was the best month on volume we have had in the last three or four years. One month does not make a year, but we are optimistic about that, and April started out strong. We feel very comfortable in the guide we have given, and we are seeing nice growth. We expect that to continue as the year progresses with some of the things we have coming online. We have that X-ray facility coming online, we will see some growth from that, and we have a customer conversion that we have talked about previously that will start to impact late in the year. Overall, the level of engagement with our customers and some of the commitments that we see coming forth from them make us feel good about how Sterigenics is positioned coming out of the first quarter. Patrick Bernard Donnelly: Okay, that is helpful. And then on the margin side, can you talk through the moving pieces? Pricing is always a good lever for you. Any changes on that front? And how should we think about margins as we work our way through the year? Jonathan M. Lyons: Thanks for the question, Patrick. We feel good about the margins, as the guide implies. We saw margin improvement in the quarter, and we expect margin improvement for the year. That is really going to be driven by Sterigenics, where we expect to get some good operating leverage in the business, and really stable margins in the other segments. We are optimistic about the opportunity to see another year of margin improvement on the heels of our strong margin improvement last year. Operator: The next question comes from William Blair. Please go ahead. Analyst: Hi, good morning, and thanks for taking our questions. I will try to hit on the Sterigenics question another way. Excluding the weather impact, you did about 8% constant currency in Q1. You said you expect similar constant currency growth in Q2, even though April is off to a strong start and you do not have that weather piece. Is that slowdown relative to the 8% ex-weather just a comp issue? Is it conservatism? Or are there other factors we should be thinking about for Sterigenics in the second quarter? Thank you. Michael B. Petras: Thanks. The big thing, and I alluded to it in my prepared remarks, is that Q2 of last year was our strongest quarter of growth, so it is really a comp issue versus anything else. Analyst: That is helpful, thanks. And then one on Nelson Labs. You said it was in line with your expectations for the quarter. Can you help us think through testing growth versus Expert Advisory Services and, in particular, how much of a headwind the latter represented in Q1? And then on margins, they stepped down pretty significantly year over year, so help us understand the drivers behind that and the outlook for margins for that segment over the balance of the year. Michael B. Petras: As we communicated, Nelson Labs came in as we expected. Expert Advisory Services is the last quarter we had that headwind that we are lapping over. Testing volumes were down a little bit over prior year, but routine volumes are coming back, and our service has been outstanding in that area. As sterilization volumes go up, we will continue to see that correlation and strength on the routine testing side. It is not always one-for-one, but there is a correlation. On the validation side, we are starting to see some pipeline in some of the longer-term projects start to build as we go into the latter parts of 2026. We signaled that we see the margins coming to the low to mid-30s, which is consistent with what we have been talking about for the last many quarters around this topic. Analyst: Got it. Thanks again for taking our questions. Operator: The next question comes from Piper Sandler. Please go ahead. Analyst: Hey, everyone, and congrats on the announcement, Michael. I am going to attack Sterigenics from a slightly different lens. Growth and margins in Q1 were impressive, even in spite of the weather-related headwinds. As we look at the broader inflationary backdrop, can you help us think about the durability of Sterigenics margins through the year, and whether sustained cost inflation actually creates an opportunity to take incremental price throughout the year? Michael B. Petras: Thanks. We are not seeing significant inflation in that business. We continue to manage that well. Our key inputs are really around labor and then gas and cobalt, and we are in a good spot there. We have set pricing in such a way that we make sure our value get is positive. In the quarter, Sterigenics had about 4.5% price, which is slightly above the 4% that we have guided toward. We continue to see that business in a good spot and being rewarded for the value it brings to our customers, and we are not concerned about anything material on the inflation side as we sit here today. Analyst: Got it, thanks. And on that large customer onboarding that should come on this year, is there any more detail you can provide about sizing or how to think about the ramp through the rest of the year, and is that part of the guide? Michael B. Petras: Yes, that is assumed in our guide. It will come late in the year. It is a meaningful customer, but it is not outsized. We are not building a facility for that business. It is a significant win for us from both a morale standpoint and reinforcing the company’s value proposition. We have that built into our outlook for the rest of this year, and you will see it late in the year. Operator: The next question comes from Barclays. Please go ahead. Analyst: This is Sam on for Luke. Thanks for taking the question. Michael, congrats on the ten years with the company and best of luck as Executive Chair. I wanted to talk about the administration’s announcement to potentially scale back some of the ethylene oxide emissions regulations. Can you talk about the different scenarios that might come out of that and what the implications might be from a top-line perspective? That has been talked about as a potential opportunity with higher regulations on some smaller players in the industry. How might that affect CapEx spend in the near term and the long term? Michael B. Petras: Thanks, Sam, for your comments and questions. We are executing. We have spent approximately $200 million in Sterigenics over the duration on general facility enhancements for EO activity. The team is doing a very good job executing on that, and we should have the vast majority complete in 2026. There is a rule out there today that has another couple of years before requirements must be met, and now there is a new proposed rule out there. We are proceeding as if the rule that is in place is going to be the requirement, and our engineering teams are executing along those plans. I am not exactly sure how the administration will rule on this. Our job is to make sure we are operating in a safe and compliant manner and taking all actions to put the facility in the best place possible. We will provide comments, as many others in the industry will, on the new proposed rule. Based on what we saw in the proposed rule, they are still going to be tough restrictions. They are a little easier than the rule that was recently put out, but still tough and challenging. We feel very well positioned to meet those requirements. As far as creating opportunities for us, depending on the final rule and timing, that will determine how much opportunity. We have a couple of opportunities: one customer we referenced who is converting over to us, and some other smaller ones where we continue to have dialogue and see opportunity. That activity slowed a little over the last several quarters with uncertainty on the timing of the new rule requirements, but we feel very well positioned for whatever the rule may be, and we will continue to operate in a safe and compliant manner for all our stakeholders, employees, and communities. Analyst: Thank you. Maybe an unrelated follow-up on Nordion pricing. I think that came in slightly below the usual at about 2.1%. Anything significant to call out there? Michael B. Petras: No. We have a long-range guide for the company of 3% to 4%. We said Nordion would be on the low end of that, around 3%. It is just a matter of timing and customer mix on which customers got shipments within the quarter. We are fine on price execution in Nordion and across the business. Operator: The next question comes from J.P. Morgan. Please go ahead. Analyst: Hi, this is Jayden on for Casey. Could you walk us through your pricing assumption for 2026 and highlight if anything has changed by segment? I know you just mentioned Nordion, but anything else would be helpful. Thank you. Michael B. Petras: Nothing has changed from what we communicated previously. Price would be in the 3% to 4% range overall. Nordion will be on the low end of that range, Nelson will be on the low end of that range, and Sterigenics will be on the high end of that range. We do not see anything changing in our outlook on that. Analyst: Alright. Thank you. Operator: The next question comes from RBC Capital Markets. Please go ahead. Analyst: Hey, this is Kevin on for Ryan. Two quick ones for us. Was there any extra selling-day benefit in Q1 2026? If so, how much did that impact your growth rates? Michael B. Petras: No, very minimally. Analyst: Awesome, thanks. In 2025, you talked about your XBU customers growing ahead of total company growth. Can you comment on how XBU is performing in 2026 at this point and any opportunities you have to further accelerate that XBU penetration? Michael B. Petras: Thanks for the question. We had a good first quarter in that area and saw growth again. As I mentioned earlier, our customer satisfaction scores were very positive with significant improvement as well. Overall, the work is going very well in the XBU. Remember, there is a lot of strength around the embedded labs within Sterigenics, the Nelson Labs that coexist there. We continue to execute well in that area, so XBU is well situated. Analyst: Gotcha. Thank you. Operator: The next question comes from Wolfe Research. Please go ahead. Michael K. Polark: Good morning. Hey, Michael, congrats and good luck. I would have thought if you were making a transition you would have shed the investor relations hat so you did not have to deal with folks like me and my clients, but I was surprised to see that is still part of your ongoing commitment. Michael B. Petras: Trust me, I was trying to shed the litigation, but the board would not let me on that. You can imagine more fun things than defending multistate toxic tort cases. But yes, thank you, and please go ahead. Michael K. Polark: Two for me. In the quarter, appreciate the weather callout for Sterigenics. If I recall, part of the Q1 guidance also considered excess EO maintenance downtime. Would you flag that as a significant item in the quarter on Sterigenics volumes? And then for the rest of the year, what is the maintenance schedule across the network? Anything unusual we should think about for Q2, Q3, Q4? Michael B. Petras: One point to add is that the number of downtime days in the second half will be lower. Jonathan M. Lyons: I would not add anything other than to reiterate that point. Downtime days are a headwind year over year in the first half and a tailwind in the second half. Michael K. Polark: Helpful. And the second one: for Nelson Labs in the second quarter, you said “slight” return to growth. Is that about 1%, or something better? Michael B. Petras: I would think in that range or below. Michael K. Polark: Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference over to Michael B. Petras for any closing remarks. Michael B. Petras: Thank you. As we move through 2026, we are encouraged by our momentum and strengthened financial position. We remain confident in our ability to drive long-term growth, strong cash flow, and shareholder value. Our leadership in a large and growing market, global scale, regulatory expertise, accelerating free cash flows, and disciplined capital allocation position us well for sustainable growth. We look forward to seeing many of you at the conferences coming up this spring and early summer. Thank you for your continued support, and have a good day. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Jennifer K. Beeman: Good morning and welcome to Metallus Inc.'s first quarter 2026 conference call. I am Jennifer K. Beeman, Director of Communications and Investor Relations for Metallus Inc. Joining me today are Michael S. Williams, chief executive officer; Kristopher R. Westbrooks, president and chief operating officer; John M. Zaranec, executive vice president and chief financial officer; and Kevin Rakovich, executive vice president and chief commercial officer. You should have received a copy of our press release, which was issued last night. During today's conference call, we may make forward-looking statements as defined by the SEC. Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in yesterday's release. Please refer to our SEC filings, including our most recent Form 10-Q which will be filed later today, as well as the risk factors included in our earnings release, all of which are available on the Metallus Inc. website. Where non-GAAP financial information is referenced, additional details and reconciliations to its GAAP equivalent are included in the earnings release and the earnings presentation available on the Investor page at metallus.com. With that, I would like to turn the call over to Mike. Mike? Michael S. Williams: Good morning, and thank you for joining us today. I am encouraged by our team's continued focus on operational priorities, which strengthened our performance in the first quarter. Demand continues to improve across our end markets and our order book grew year over year supported by overall industrial and defense demand, decreasing distribution inventory levels, and onshoring. Section 232 tariffs continue to support our competitive position in the markets we serve. The April 2026 updates to these tariffs applied only to downstream steel-containing derivative products and do not affect our products, which are classified as primary steel. Most importantly, the 50% tariff on imported primary steel, including all long bar and tube products, remains in place, reinforcing the long-term competitiveness of U.S.-produced steel. The capital investments and operational system improvements we implemented during the planned shutdown period in the fourth quarter contributed to higher melt utilization on both a sequential and year-over-year basis. Our strategic operational advancements achieved critical milestones during the quarter, highlighted by the safe and successful reheating and rolling of the first blooms from our new bloom reheating furnace. This achievement reflects the dedicated efforts of our internal teams and the support of the Department of War. As a reminder, the new bloom reheat and roller furnaces facilitate more consistent reheating, improve product quality, and more efficient throughput. In fact, the bloom reheat furnace has recently demonstrated a run rate of approximately 150 tons per hour compared with approximately 100 tons per hour using our legacy assets, along with significant improvements in temperature uniformity. These modern and efficient assets position us to better serve growing customer demand across all end markets, and we anticipate they will also improve our operating leverage over time. We expect the bloom reheat furnace to be fully operational in early to mid-third quarter and the roller furnace to be fully operational in late third quarter. We also continue to make meaningful progress in strengthening our operating systems, reinforcing consistent, efficient execution across the organization. These institutionalized systems help our teams identify issues faster and drive greater accountability. During the quarter, we expanded this framework into additional areas focused on reliability and throughput. Safety remains a foundational priority for us and a critical factor in our long-term success. As always, we focus on eliminating serious injuries through stronger controls, training, and leadership accountability. Our health and safety management system continues to mature with stronger proactive reporting, increased near-miss identification, and targeted capability building in higher risk activities such as cranes, rigging, lockout/tagout, and machine guarding. This shift towards leading indicators and disciplined risk management reduces variability, lowers long-term cost, and protects our most important asset, our people. Turning to our first quarter performance, shipments increased by 11% sequentially. Adjusted EBITDA for the quarter totaled $24.6 million, reflecting a 39% increase compared to the prior year's first quarter. Again, this strong improvement underscores our disciplined execution against key priorities and operational improvements. Lead times continue to expand, now reaching into the late third quarter for both VARs and seamless mechanical tubing. This reflects strengthening demand for domestic steel and provides a clear signal of the momentum we expect to carry throughout 2026. Turning to performance across our key end markets, we are seeing industrial customers take a more deliberate look at how and where they source steel as they navigate a challenging macro environment. Shifts in trade policy and the reassessing of supply chains are driving increased demand with domestic suppliers. With inventories low across the distribution channels and select products returning from offshore sourcing, we are seeing increased opportunities. We believe these dynamics position us well to strengthen new and existing customer relationships and continue gaining share as industrial markets stabilize. Automotive demand remains steady, with volumes up slightly compared to the prior year. Our automotive order book and key customer relationships remain strong, supported by our continued focus on light truck and SUV transmission programs and our success in winning new and emerging platforms. For example, during the quarter, we won two additional programs with existing customers, reinforcing our confidence in the strength of the automotive markets we serve and the importance of our automotive customers to our base business. The energy markets we serve remain cautious, as producers continue to seek greater confidence in long-term oil prices before materially increasing investment. Ongoing global conflicts and geopolitical uncertainty are contributing to volatility in energy markets. But favorable trade-related tailwinds, reduced imports, and a gradual increase in domestic oil and gas activity are creating incremental opportunities for Metallus Inc. Turning to aerospace and defense, this market continued to be a key source of strength during the quarter. Due to confidentiality, it is always difficult for us to call out new defense programs by name, but what I can say is that we were recently awarded an exciting contract with a new entrant in the defense supply chain to begin producing tubing for new rocket motors related to advanced weapon systems. Demand across defense programs continues to grow, supporting our near-term $250 million run-rate revenue expectation and the longer-term strategic expansion in the market, allowing us to provide our expertise to existing and new customers in these critical applications. While defense shipment timing can vary quarter to quarter based on program needs and downstream supply chains outside of our control, the underlying fundamentals remain strong in the foreseeable future. We continue to advance targeted investments and operational improvements to support higher defense volumes. Metallus Inc. is well positioned to benefit from growing defense spending and the continued focus on developing secure domestic supply chains. Overall, we remain focused on disciplined execution in 2026. During the quarter, we improved operational performance, strengthened our internal systems, and safely advanced strategic investments that support our long-term objectives. Our growing order book, improving operational execution, and U.S.-based manufacturing footprint provide a solid foundation as we move forward. We will continue to prioritize safety, operational discipline, and prudent capital allocation as we work to deliver consistent performance and long-term value for shareholders. With that, I will turn the call over to John to walk through our financial results in more detail. John M. Zaranec: Thanks, Mike. Good morning, and thank you for joining our first quarter 2026 earnings call. During the quarter, our team delivered improvements in shipments, net sales, and profitability on both a sequential and year-over-year basis, consistent with our expectations. As Mike noted, we also safely advanced operational and strategic investments to support near- and long-term business growth while maintaining a strong balance sheet. From a top-line revenue perspective, first quarter net sales totaled $308.3 million, a year-over-year increase of $27.8 million or 10%, primarily driven by higher shipments across most end markets. Net income was $5.4 million in the first quarter, or $0.13 per diluted share. On an adjusted basis, net income was $7.7 million, or $0.18 per diluted share in the quarter. Adjusted EBITDA was $24.6 million in the first quarter, a year-over-year increase of $6.9 million or 39%. The increased profitability was primarily driven by higher shipments across most end markets, better price/mix, higher raw material spread, and better fixed cost leverage on higher production volume, slightly offset by an increase in utility cost and a partial quarter of the cost increase related to the ratified union contract. As a reminder, our previous favorable electricity contract expired in May 2025, so the first quarter of 2025 included a full quarter of lower energy costs. As we noted in February, we expected a usage of free cash flow during the first quarter, which is consistent with historical seasonality as the first quarter normally requires a larger amount of pension funding and working capital build. Additionally, this year, our CapEx spend to complete the government projects is the highest in Q1 and is expected to ramp down throughout 2026. In the first quarter, capital expenditures totaled $24.7 million, including approximately $18.3 million of first quarter CapEx partially funded by the U.S. government. Planned capital expenditures for the full year 2026 are expected to be approximately $70 million, inclusive of approximately $35 million of capital expenditures primarily funded by the U.S. government. At the end of the first quarter, the company's cash and cash equivalents balance was $104 million. As it relates to government funding, during the first quarter the company received $5.9 million of cash funding from the government, with an additional $9.5 million received during the month of April based on our successful completion of key milestones. As a reminder, these funds are part of the previously announced nearly $100 million funding agreement in support of the U.S. Army's mission of increasing munitions production. Additional government funding of approximately $2 million is expected to be received in 2026 to complete the government funding arrangements, contingent on the achievement of the final mutually agreed-upon milestone. As a reminder, this funding substantially paid for both the new bloom reheat furnace at the company's Faircrest facility as well as the new roller furnace at the Gambrinus facility. Now switching to pensions, in the first quarter the company made $19.8 million of required pension contributions, of which the majority related to the U.S. bargaining plan and reflects roughly two-thirds of the expected full year 2026 pension contributions. Subsequent to the first quarter, the company made a required pension contribution of approximately $5 million in April, with an estimated $5 million of required pension contributions expected for the remainder of 2026. Consistent with our expectations in February, total 2026 required pension contributions are expected to decrease by nearly 60% compared to 2025. As part of the USW contract ratified during the first quarter, employees who are currently accruing a pension benefit will have a one-time opportunity between March 30 and May 30 to freeze their pension accrual and begin receiving a market competitive benefit under the 401(k) plan. These actions will allow employees access to their retirement funds earlier while also providing competitive defined contribution benefits and derisking the long-term pension obligation. As we continue to actively manage the pension, we will provide further updates as available. In terms of shareholder return activities, in the first quarter the company repurchased approximately 277 thousand shares of common stock at a cost of $4.3 million. At the end of March, a balance of $85.4 million remained under our existing share repurchase authorization. Since the inception of common share repurchases in early 2022, combined with the convertible note repurchase activities, we have reduced diluted shares outstanding by a significant 26%, or 13.8 million shares. These actions reflect the strength of the company's balance sheet and confidence in through-cycle cash flow generation. As it relates to liquidity, total liquidity remains strong at $375 million as of 03/31/2026. Additionally, as of 03/31/2026, the company had no outstanding borrowings. Moving now to near-term business outlook, commercially, second quarter shipments are sequentially expected to increase modestly in the low single digits on a percentage basis, supported by continued strength in the order book and normal seasonality. Through the first four months of 2026, we announced a series of targeted price actions across our bar and tube portfolios. In bar, we implemented two actions totaling $120 per ton, phased in based on customer promise dates. In tube, pricing actions were differentiated by size and product types, averaging about $100 per ton across the product mix. As a reminder, these pricing actions apply only to business not sold under annual price agreements and to new business, which historically represents approximately 30% of our total annual volume. We expect price realization to be gradual, with greater impact toward the second half of the year, based on lead times and product mix dependent. Second quarter price and mix are expected to be similar to the first quarter, with improvement anticipated in the second half of 2026. From an operational perspective, the company anticipates a sequential increase in its second quarter average melt utilization rate, supported by a strong order book. Manufacturing costs are expected to improve sequentially by approximately $2 million in the second quarter, as a result of higher melt utilization resulting in improved cost absorption, and net of the full-quarter run-rate cost increase related to the ratified union contract. And finally, an adjusted effective income tax rate between 27–30% is expected for the full year 2026. Given these elements, the company expects second quarter 2026 adjusted EBITDA to be modestly higher sequentially and year over year. To wrap up, thank you to all of our employees, customers, and suppliers for their support. We are well positioned as a high-quality, U.S.-based specialty metals producer supporting critical markets. As we continue to move forward in 2026, our focus is on safe execution to meet continued rising customer demand. We remain committed to delivering shareholder value through disciplined capital allocation and sustained profitable growth. As always, thank you for your interest in Metallus Inc. We will now open the call for questions. Operator: To ask a question, simply press 1 on your telephone keypad. Again, that is 1 to ask. Our first question is from the line of John Edward Franzreb with Sidoti. Please go ahead. John Edward Franzreb: Good morning, everyone, and thanks for taking the questions. I would actually like to start with the recent results reported. You touched on it in your prepared remarks about it typically being a working capital outflow quarter, but I was just curious about the sizable rise in inventory. Is that illustrative of any particular end market demand, or are you building inventory for any particular reason? I am just curious about that. Got it. That is good to hear. Sequentially, you are suggesting that revenue is going to be up in the low single-digit range. I am kind of curious, does that suggest maybe one of your key end markets is a little bit slower than you would have thought, say, three months ago, especially considering the visibility you have in A&D? And one last question and I will get back into queue. Regarding the operational improvement of $2 million, I just want to make sure I understand that properly. Is that improvement above the increased cost from the new union contract, or does it net out the increased cost? So it is a net positive of $2 million off the wages. I just want to make sure I understand. Great. Alright. Thank you. I will get back into queue. Michael S. Williams: Yeah, so hey, John, how are you doing? Pretty much, you know, we build inventory in Q1 based on the order book demand going into Q2, and with our lead times out to mid- depending on product, to late Q3, we can see. So we are positioning inventory to service our customers. And we continue to see higher demands. As we mentioned, year over year the order book is over 40% greater, which, if you did a year-over-year comparison, is about 90 thousand more tons in our order book than we had this time last year. So we are positioning the inventory to meet the order demand that we have. I mean, I do not see anything slower. It is just the timing of when the orders are requested and when we need to ship them on time, aligned with our throughput capability. Yeah, it is net of the increased labor cost with the new labor agreement. John M. Zaranec: Yes, that is an all-in increase that is offset, yeah, that is offsetting the wages. Correct. Correct. Operator: Your next question is from Samuel McKinney with KeyBanc Capital Markets. Please go ahead. Samuel McKinney: Hey, good morning. Your first quarter auto shipments were up slightly year on year despite the negative SAR comp. Could you just give us a little more color on your ability to outpace that figure and what you are hearing from the SUV and heavy truck customers moving into the summer? And I just want to turn to A&D and the Army investment. Given other commentary during this earnings cycle, it appears that the Army's munitions partner does not plan to begin production at the facility until sometime during 2027. How does that impact the timing for you to hit your previously stated goal of $250 million in annualized A&D sales this year? Okay. So is there any change to the outlook of hitting $250 million in A&D sales this year? Right. Sure. Alright. Thanks, Mike and John. Michael S. Williams: Yeah, I mean, those are predominantly the platforms that we are on, and those are the platforms that are driving the demand where we have seen year-over-year order increases. So we expect that to be fairly stable at this point throughout the year, with some typical seasonality towards the end of the year. It is all about the platforms that we are on and the pull rate that they are requesting for their build rates of the powertrain and transmission programs that we are on. I mean, it definitely has an overall impact of them getting to the 100 thousand shells per month production, which then, of course, affects us. But what we are seeing is we have seen them ramp up their other facilities, as well as we have seen some non-U.S. demand—most of it is still in North America, just not in the U.S.—and then the offshore inquiries and orders that we are getting. So it affects it, but then we are working diligently to offset that with other weapon system applications. We mentioned the one new program we just got; it will most likely ramp up to its full demand in 2027, but it will ramp up throughout the year this year, and really hit the peak cycles in 2027 and 2028. But we continue to work hard to get other programs to kind of offset the original planning process with the new facility coming online for the particular 155 millimeter munitions. As I said earlier, we are seeing increased demand from existing facilities because they are really trying to ramp it up. If you look at the math, and we kind of calculate it based on what we sell in those particular grades, they are operating around 70 thousand shells a month right now toward their 100 thousand target, but that is up from 50 thousand six months ago. So we do anticipate, as they continue to push these other facilities to improve their throughput capacity, that that will continue to modestly increase throughout the year. And then, depending on timing when that other facility gets up and running, it is a win-win for us. No, we still have that expectation, as we said in our comments. There is some variability that we are working towards in the second half to fill some gaps, because we were anticipating some type of ramp-up out of the one facility that still is being worked on to get it up and operational. But we are still confident that we are going to hit that expectation. At least that we strive for higher, as you can imagine, internally. But right now, we are confident that we will meet that expectation. John M. Zaranec: That is a run-rate expectation. I mean, some of this is a little bit lumpy due to supply chain and order timing, but as we talked about last year, that $250 million is a run rate that we expect to achieve in the year. Operator: Your next question comes from the line of David Joseph Storms with Stonegate. Please go ahead. Dave, your line is open. David Joseph Storms: Is that better? Just wanted to start with getting your thoughts around lead times. I know you mentioned they go to the third quarter. With the ramping of the bloom reheat furnace, could this maybe be the high watermark and maybe lead times might start to come down throughout the year, or does the order book indicate that they might continue to increase? Understood. Appreciate that. And then just also looking at the order book, a lot of strength there. Are you seeing more of the growth coming from price or maybe more from mix, or is it volume that is expected to drive that? Just any commentary on maybe some of the profile of the order book. Understood. Thank you for taking my questions. Michael S. Williams: Right now, everything we can see—here we sit in early May—is the fact that we expect demand to continue to be really good. Now, we do expect that the seasonality that occurs in the fourth quarter is going to be there—our maintenance outage, etc. But right now, what we see, we are halfway through the third quarter, so orders continue to come in at a pretty good rate per week, and we expect that to continue. We just have to focus on our execution and serve our customers. I mean, overall, it is volume, okay? But our team does a pretty good job trying to manage and maximize the highest return value creation in mix as we can. The area we see—automotive continues to be steady. We continue to expect growth in A&D. And we expect energy—we have seen positive improvement in energy because of the trade environment and what we would call reshoring, but it is really domestic sourcing of supply. So we expect that to potentially continue to modestly grow. As you can imagine, there is a lot of volatility with all the uncertainty, the global conflict, etc., affecting the energy market, so we have to watch that very closely and align with our customers the best way we can. I think the biggest area of opportunity we see the remainder of this year is really steady growth in the industrial end markets. Operator: Our next question is from the line of Analyst with Northcoast Research. Please go ahead. Analyst: Thanks for taking my question here. One of the questions I really have is, you mentioned that your old energy contract was expiring and you have a new one. I was wondering if you could give us any more insights into the terms around that, and is that something that is typically paid on spot, or are those longer-term contracts? That is helpful. Thank you. And the other question I had is about the new tariffs that went into place on May 1 for automotive. Do you expect that to have a meaningful impact on automotive demand? I know it is typically not what we are importing from Europe. Is it a real lot of overlap with what you are applying to? I just was not sure in the past how that impacted you, and does that give any insights on what the market might look like here going forward? Super helpful. Thank you. I will turn it back over. Michael S. Williams: Okay. So we did have a long-term contract that expired at the end of last May. The contracts that we currently operate on: 70% of our electrical demand is fixed under a two-year agreement—we actually just began the second six months of year one—that will exist for two years. The other 30% is spot purchased. Well, we are heavily influenced based on build rates and platforms. Predominantly, most of our steel applications go into powertrains, particularly transmissions. Kristopher R. Westbrooks: Crankshafts, etcetera. Michael S. Williams: And we have heavily focused on SUVs and trucks, and those are the vehicles that are selling. That is why we are seeing good steady demand all last year throughout the volatility of the market, regardless of imports. And this year, we see the same thing with incremental improvement. What we are seeing is the move away from the high expected volume of EVs and more hybrid demand, which is good for us because it has a combustion engine and has a transmission, as well as electric motors. So that is the move we have seen. And I think it still plays well for us because we can play in all three of those platforms—ICE, hybrid, or EV. So I think we are in a good spot. Our team has done a pretty decent job of going after the right applications where, typically, the consumer price effect is not as influenced based on price movements, because these tend to all be high-end vehicles. Operator: I will now hand the call back over to Metallus Inc. as we have no further questions in queue. Great. Thank you so much, and that concludes our call for today. Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Greetings and welcome to Donnelley Financial Solutions, Inc. First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Michael Zhao, of investor relations. Thank you. Michael Zhao: Morning, everyone, and thank you for joining Donnelley Financial Solutions, Inc. First Quarter 2026 Results Conference Call. This morning, we released our earnings report, including a set of supplemental trending schedules of historical results, copies of which can be found in the investors section of our website at dfinsolutions.com. During this call, we will refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further detailed in our most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, and other filings with the SEC. Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company’s ongoing operations and is an appropriate way for you to evaluate the company’s performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Daniel N. Leib, David A. Gardella, and other members of management. I will now turn the call over to Daniel. Thank you, Mike. Daniel N. Leib: And good morning, everyone. We started 2026 by building on the positive momentum in our performance from the fourth quarter of last year, delivering consolidated net sales growth, year-over-year growth in adjusted EBITDA, adjusted EBITDA margin expansion, and improvements in both operating cash flow and free cash flow. We delivered first quarter net sales of $205.5 million, which increased 2.2% compared to 2025. The combination of consolidated net sales growth and cost management yielded first quarter adjusted EBITDA of $70.6 million and adjusted EBITDA margin of 34.4%, both of which are significantly stronger than historical periods with similar revenue profiles. Importantly, our strong operating performance was in the context of a volatile market environment during the first quarter, shaped by increased macroeconomic uncertainty and escalating geopolitical conflicts. Our first quarter results are further proof points to the progress of our transformation and demonstrate the resiliency of our operating model across various market conditions as our business mix continues to transform. I am encouraged by the continued growth in our software solutions offerings, where we delivered year-over-year net sales growth of 8.4%. Software Solutions net sales represented 44.6% of total net sales in the first quarter, an increase of approximately 250 basis points from last year’s Software Solutions net sales mix, despite a moderate increase in print and distribution net sales in the first quarter related to a large special proxy project. Despite this deal-related increase in print and distribution sales in the first quarter, our view on the long-term secular decline in the demand for printed products remains consistent, which we expect to be in the range of 5% to 6% annually, with fluctuations based on transactional volumes. On a trailing four-quarter basis, Software Solutions net sales made up 47.4% of total net sales, an increase of approximately 460 basis points from the first quarter 2025 trailing four-quarter period. This continued positive mix shift positions us well to achieve our long-term target of deriving approximately 60% of total net sales from Software Solutions by 2028. A major driver of the first quarter Software Solutions net sales growth was the performance of our recurring compliance software product ActiveDisclosure, which posted approximately 21% sales growth, marking the sixth consecutive quarter of double-digit sales growth. This sustained momentum reflects the continued growth in net client count and increases in average value per client, both of which are positive outcomes of our transition from a legacy ActiveDisclosure platform to New AD as well as improved sales execution. In addition, we continued to experience the migration of certain traditional activities to ActiveDisclosure, including an increase in the number of transactional documents and proxy statements being completed on the platform compared to last year’s first quarter, a trend we expect to continue going forward. Further, ActiveIntelligence, a suite of artificial intelligence capabilities we introduced to select ActiveDisclosure clients in the fourth quarter of last year, became available to all clients in April, representing a step forward in our mission to responsibly deploy AI to increase productivity and efficiency for our clients. ActiveDisclosure’s intelligent, fit-for-purpose capabilities, combined with the domain expertise and 24/7 support of our services organization, remains a strategic differentiator for Donnelley Financial Solutions, Inc. Venue delivered solid year-over-year sales growth of approximately 7% in the first quarter, driven by a resilient demand for data rooms. I am encouraged by the momentum in the commercial adoption of our new Venue product, which was introduced in the third quarter of last year, as the upgraded product continues to resonate with both current and prospective clients for its speed and simplicity. The rebuilt product redefines efficiency in data room initiation and management, is easier to govern access and permissions, and is more intuitive for deal teams to use. The improvements we have delivered in new Venue, combined with our strong go-to-market execution, have allowed us to access a broader range of clients and increase the size of our serviceable market. As the adoption of new Venue continues to ramp up, we expect the upgraded product to contribute to Venue’s growth in 2026. In addition, we remain excited by opportunities for ArcFlex, the newest module within ArcSuite, which was also launched in 2025. As momentum toward private investments increases and, with it, more robust reporting and disclosure management needs, we are seeing increased interest from private investment institutions, including hedge funds, private equity, and business development companies. As a financial and regulatory reporting solution purpose-built for private investment institutions, ArcFlex positions Donnelley Financial Solutions, Inc. well to capture incremental market demand in the private investment space. In a demonstration of our progress in this area, during the first quarter, we signed our first ArcFlex contract with an alternative asset manager utilizing ArcFlex to modernize its financial and regulatory reporting workflows. We expect the commercial activities around ArcFlex to continue to scale through 2026, resulting in more meaningful incremental revenues starting in 2027. Before I turn the call over to Dave, I would like to provide some perspective on Donnelley Financial Solutions, Inc.’s operating characteristics as we navigate an evolving external environment. Over the past several months, global markets have been impacted by elevated volatility driven by a combination of AI-driven uncertainty and geopolitical tensions. In that context, Donnelley Financial Solutions, Inc.’s operating model continues to be a point of strength and a source of differentiation. Let me highlight a few items behind our relatively stable performance amid the turmoil. First, we serve markets where demand is regulatory-driven and nondiscretionary, centered on mission-critical compliance and deal-related workflows for corporations and investment companies. As a result, more than 75% of our revenue is based on recurring and reoccurring sources, the majority of which is related to ongoing SEC compliance for corporations and investment companies, with the remainder, specifically Venue, serving a wide market that encompasses both announced and unannounced deals across public and private companies, which is inherently more stable than the market for completed M&A transactions. Our strong mix of recurring and reoccurring offerings provides stability during times of market volatility. Next, our unique hybrid model features a combination of software solutions, tech-enabled services, and print-related output, underpinned by Donnelley Financial Solutions, Inc.’s deep regulatory knowledge and domain and service expertise. The hybrid model differentiates from seat-based pricing models and domain expertise and execution, which contrasts with more narrowly focused point-solution and pure-play software providers. While we continue to invest in the growth of our software products, our traditional services and output-related offerings supplement Donnelley Financial Solutions, Inc.’s ability to work in ways our clients prefer, whether through software-led, service-enabled, or hybrid workflows backed by capabilities to produce outputs where needed, providing multiple ways to serve their needs as the regulatory landscape evolves. Finally, amid the AI-induced market volatility, Donnelley Financial Solutions, Inc.’s strong position as a leading regulatory and compliance provider and our hybrid offerings are important differentiators in the marketplace. During times of market volatility and technological disruption, our clients increasingly recognize AI as a productivity enhancer within Donnelley Financial Solutions, Inc.’s workflows, not a substitute for the platform itself or the expertise behind it. Compliance and disclosure remain mission-critical, highly regulated activities that require accuracy and accountability, and AI is most effective when deployed within that framework. As we responsibly integrate AI across both our products and internal operations, our focus remains on improving efficiency, reducing risk, and enhancing productivity while maintaining rigorous standards around security, privacy, and data governance. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our first quarter results and our outlook for the second quarter. Dave? David A. Gardella: Thanks, Dan, and good morning, everyone. As Dan noted, we continued to demonstrate positive momentum in our performance during the first quarter, highlighted by year-over-year net sales growth, an increase in adjusted EBITDA, and adjusted EBITDA margin expansion. We posted 8.4% growth in our Software Solutions net sales, including approximately 21% growth in our recurring compliance product, ActiveDisclosure. By continuing to execute our software-centric strategy, while also driving operating efficiencies, we expanded our first quarter adjusted EBITDA margin by approximately 50 basis points to 34.4%. On a consolidated basis, total net sales for 2026 were $205.5 million, an increase of $4.4 million, or 2.2%, from 2025. The growth in Software Solutions net sales, which increased $7.1 million, or 8.4%, compared to the first quarter of last year, combined with higher event-driven transaction revenue within Capital Markets, part of which was realized through an increase in print and distribution revenue related to a special proxy, more than offset the decline in Capital Markets and Investment Companies compliance revenue, the majority of which was related to a reduction in the demand for printed products consistent with recent trends. First quarter adjusted non-GAAP gross margin was 64%, approximately 30 basis points higher than 2025, driven by the growth in Software Solutions net sales, the impact of cost control initiatives, and price uplifts, partially offset by higher print and distribution volume. Adjusted non-GAAP SG&A expense in the quarter was $61 million, a $1.1 million increase from 2025. As a percentage of net sales, adjusted non-GAAP SG&A was 29.7%, a decrease of approximately 10 basis points from 2025. The increase in adjusted non-GAAP SG&A was primarily driven by an increase in selling expense related to higher sales volume, partially offset by the impact of ongoing cost control initiatives. Our first quarter adjusted EBITDA was $70.6 million, an increase of $2.4 million, or 3.5%, from 2025. First quarter adjusted EBITDA margin was 34.4%, an increase of approximately 50 basis points from 2025, primarily driven by higher Software Solutions net sales and cost control initiatives, partially offset by higher Capital Markets transactional print volume. Turning now to our first quarter segment results, net sales in our Capital Markets Software Solutions segment were $58.6 million, an increase of $6.7 million, or 12.9%, from the first quarter of last year, primarily driven by growth in ActiveDisclosure, which grew approximately 21%. Total subscription revenue increased by approximately 17%, primarily driven by the continued growth in client count and the ongoing adoption of ActiveDisclosure services subscription packages, while service and support revenue increased approximately 36% as we benefit from the continued migration of certain traditional activities to ActiveDisclosure, including the use case for corporate proxy and transactional filings. During the first quarter, we experienced a higher volume of corporate proxy documents and S-1 filings related to IPO transactions completed on ActiveDisclosure compared to last year’s first quarter. We expect this trend to continue in the future, driven by the capabilities of our software platform combined with the evolving client preference to work in a hybrid environment leveraging both our software and unmatched service and domain expertise. We remain encouraged by ActiveDisclosure’s solid foundation for future revenue growth, part of which will be influenced by the pace of traditional activities transitioning onto the platform. Net sales of Venue increased approximately $2 million, or 7%, compared to the first quarter of last year. On a sequential basis, the impact from large projects which aided Venue’s growth during the fourth quarter of last year was less significant during the first quarter. A resilient level of underlying activity taking place on the platform, coupled with our recent launch of new Venue, creates a strong foundation for future sales growth. Adjusted EBITDA margin for the segment was 32.8%, an increase of approximately 600 basis points from 2025, primarily due to higher net sales and cost control initiatives, partially offset by higher bad debt expense. Net sales in our Capital Markets Compliance and Communications segment were $82.8 million, a decrease of $1.1 million, or 1.3%, from 2025, driven by lower compliance volume, partially offset by higher transactional revenue. In the first quarter, we recorded $50.8 million of Capital Markets transactional revenue, which exceeded the high end of our expectations and was up approximately $2 million, or 5%, from 2025. The positive momentum in the equity deal environment, which had been building throughout 2025, continued to start the year, resulting in increases in the number of regular-way IPO transactions that raised over $100 million and completed public company M&A deals in the U.S. during January 2026 compared to 2025. However, as the quarter progressed, increased market volatility and escalating geopolitical tensions dampened deal activity in March, resulting in a slowdown in the number of deal completions, especially large IPOs. In short, the global deal environment in the first quarter remained soft compared to historical averages. For transactions that were completed in the first quarter, we maintained our historical market share, reflective of Donnelley Financial Solutions, Inc.’s strong market position. Specific to M&A activity during the quarter, we benefited from a large merger-related special proxy that included an outsized print and distribution component—specifically, the printing and delivery of shareholder communication documents. Capital Markets compliance revenue was down $3.3 million, primarily due to our continued exit of certain low-margin activity and the related print and distribution. In addition, we continue to experience lower market demand for certain event-driven filings such as 8-Ks, given the softness in that market. Finally, as I commented earlier, certain activities which were historically performed on our traditional services platform shifted to ActiveDisclosure. Adjusted EBITDA margin for the segment was 40.7%, a decrease of approximately 300 basis points from 2025. The decrease in adjusted EBITDA margin was primarily due to the higher mix of print and distribution sales, partially offset by cost control initiatives and lower bad debt expense. Net sales in our Investment Company Software segment were $33.1 million, an increase of $0.4 million, or 1.2%, versus 2025, driven by an increase in services revenue while subscription revenue was flat. As expected, ArcSuite’s first quarter growth remained more modest compared to the growth rate from last year’s first quarter, during which net sales increased approximately 20% year-over-year driven by the uplift from the tailored shareholder report solution. We expect a similar dynamic to play out in the second quarter of this year. As Dan noted earlier, we are encouraged by the early positive market reception of ArcFlex and expect meaningful incremental revenue starting in 2027. Adjusted EBITDA margin for the segment was 39.6%, an increase of approximately 50 basis points from 2025. The increase in adjusted EBITDA margin was primarily due to price uplifts and cost control initiatives, partially offset by higher service-related costs. Net sales in our Investment Companies Compliance and Communications Management segment were $31 million, a decrease of $1.6 million, or 4.9%, from 2025, driven by lower print and distribution revenue, which accounted for more than all of the year-over-year decline. Adjusted EBITDA margin for the segment was 39%, approximately 160 basis points higher than 2025. The increase in adjusted EBITDA margin was primarily due to favorable sales mix and cost control initiatives, partially offset by the impact of lower sales volume. Non-GAAP unallocated corporate expenses were $7.5 million in the quarter, approximately flat to 2025. Free cash flow in the quarter was negative $16 million, an improvement of $35 million compared to 2025. The year-over-year improvement in free cash flow was primarily driven by favorable working capital, part of which was a result of lower incentive-based payments related to 2025 incentive targets and lower capital expenditures. While our first quarter capital expenditures were lower on a run-rate basis compared to our annual guidance of $55 million to $60 million, we expect our spending to ramp up throughout the year, reaching the range stated in our 2026 guidance. We ended the quarter with $229.9 million of total debt and $203.8 million of non-GAAP net debt, including $121 million drawn on our revolver. As of 03/31/2026, our non-GAAP net leverage ratio was 0.8x. As a reminder, our cash flow is historically seasonal, though over time that seasonality has become less pronounced as our sales mix has evolved towards software subscriptions. Regarding capital deployment, we repurchased approximately 595 thousand shares of common stock during the first quarter for $28.3 million at an average price of $47.58 per share. During the second quarter, the Board of Directors authorized a new share repurchase program of up to $150 million with an expiration date of 12/31/2027. This repurchase authorization, which commenced on 04/17/2026, replaced the prior authorization which had $25.5 million remaining as of 03/31/2026. We continue to view share repurchases as an important component to drive value for shareholders and as part of our balanced capital deployment plan, which also features organic investments to drive future growth and net debt reduction. As it relates to our outlook for 2026, we expect the unsettled operating environment we experienced during the first quarter to continue, driven by market volatility and ongoing geopolitical uncertainty. Further, we expect the reduction in print and distribution revenue associated with our traditional compliance offerings we highlighted earlier to continue in the second quarter, which historically is comprised of a heavy mix of print and distribution sales driven by the annual proxy season. This component of our sales profile becoming less significant over time continues to improve our overall sales mix and facilitates our long-term margin expansion. With those factors as the backdrop, we expect consolidated second quarter net sales in the range of $215 million to $225 million and adjusted EBITDA margin in the range of 34% to 36%. Compared to the second quarter of last year, the midpoint of our consolidated revenue guidance, $220 million, implies a modest increase of approximately $2 million, or 1% year-over-year, as growth in Software Solutions net sales—predominantly ActiveDisclosure and Venue—and higher Capital Markets transactional revenue are expected to more than offset a continued decline in print and distribution net sales. Further, our estimates assume Capital Markets transactional revenue in the range of $40 million to $45 million, which at the midpoint is up approximately $8 million from last year’s second quarter. As a reminder, last year’s second quarter transactional revenue of $34.8 million represented an all-time low in quarterly transactional revenue. In addition, and related to my earlier comments regarding the impact of the transactional environment on certain compliance filings, most notably 8-Ks, our second quarter estimate assumes a modest year-over-year decline in our compliance-based sales within this segment, part of which is related to print and distribution. With that, I will now pass it back to Dan. Daniel N. Leib: Thanks, Dave. Our strong performance in the first quarter was the result of the historical and current disciplined execution of our strategy, which again demonstrated Donnelley Financial Solutions, Inc.’s ability to perform across varying market conditions. Our focus remains on accelerating our business mix shift by continuing to grow our SaaS revenue base while maintaining share in our core traditional businesses. We will continue to invest to drive growth and support clients. In addition, we will continue to aggressively manage our costs and drive operational efficiencies while maintaining our historical discipline in the allocation of capital. While uncertainty continues to exist within our broader operating environment, the combination of our strong market position, portfolio of mission-critical regulatory and compliance offerings backed by our deep domain expertise, and financial flexibility position us well. Before we open it up for Q&A, I would like to thank the Donnelley Financial Solutions, Inc. employees around the world. Now with that, we are ready for questions. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Charles S. Strauzer with CJS Securities. Your line is open. Please go ahead. Charles S. Strauzer: Hi. Good morning. Thanks for taking my questions. A couple of questions. First, on guidance—if you could maybe expand a little more on the underlying assumptions for Q2, and what you are seeing in the external markets? David A. Gardella: Yeah. Charlie, it is Dave. Thanks for the question. So, look, I think from a transactional perspective, we said the guidance includes somewhere in the range of $40 million to $45 million, up significantly from last year’s second quarter. I think when you look at what we saw in the first quarter this year—just over $50 million—that started to soften, as we mentioned in the prepared remarks. January and February started out pretty nicely, and then March was much softer with some of the broader geopolitical uncertainty. So far, we have seen that continue throughout April and into May here. And so I think we are just taking a cautious approach on when that might come back. I do not know. Craig, do you have anything to add to that? Craig D. Clay: Yeah, Dave, maybe just to put an exclamation point on March: It was a real turning point. Only two times in history have filings declined sequentially from February. The first time was COVID 2020, and now the second is March 2026. So it just underscores how quickly volatility can change issuer behavior. As you turn to April and May, as Dave said, we are cautiously optimistic. It is building back. There have been 12 large IPOs that have priced in April, which is a nice number of $100 million-plus IPOs. Our share of that was 67%, so it highlights both the market share gain as well as the improved conversion as these issuances are accelerating again. I think another important note: Most of those issuers have adopted ActiveDisclosure as their platform post-IPO, so it reinforces the durability of these relationships beyond the transaction itself and the contracted recurring revenue. There are two IPOs in April that I think are giving the market some foundation. Madison Air, the largest IPO of the year, used ActiveDisclosure for their IPO, as Dave and Dan mentioned in their remarks. This transaction has really anchored April and hopefully gives the market some confidence. The next one is ArcSys, a defense contractor—an approximately $1.1 billion IPO in April—again furthering the investor appetite. Donnelley Financial Solutions, Inc. is proud to have supported three of the four $1 billion-plus IPOs this year: Madison, Forgem, and ARC. And their aftermarket performance has been pretty good. This week’s and next week’s calendar of IPOs that have said they expect to price is continuing to build. If all of this moves forward, it will equal Q1 for deals over $100 million. Donnelley Financial Solutions, Inc. has a robust pipeline of companies that have confidentially filed that are working through the process. We have a nice pipeline of IPO RFPs, so it suggests a normalized calendar as we move into likely the back half of 2026. Charles S. Strauzer: Great. And then just on the M&A side—clearly seeing some pickup there. With a kind of benign DOJ/FTC eye on things, are you seeing things percolating behind the scenes on that front as well? Craig D. Clay: Yes. Donnelley Financial Solutions, Inc.’s M&A business is a great opportunity. We deliver end-to-end support from deal ideation through announced public or private disclosure. Our virtual data room and M&A offering highlight how we support our clients from that early diligence through execution. Q1 was certainly dominated by a few mega deals—same issues with March that we talked about with IPOs. As you look at April and May, M&A momentum remains real, but I think narrow. We are seeing pitch activity and opportunity creation trending positively. So some of the same things you mentioned—we are excited about the future impact of that. Buyers are certainly prioritizing certainty right now, and the Venue forecast is to grow modestly. We had a large deal in 2025, and as Dan noted earlier, we are encouraged by the end-market performance of our new Venue. We believe we are positioned to capture this incremental demand going forward. When we say we have the newest Venue, it means we are acting as the disruptor. It has been built from the ground up. We are a strong number three in that marketplace, and we are positioned to take share as clients modernize their disclosure. So we are cautiously optimistic in the same way about M&A building throughout 2026. Charles S. Strauzer: Great. Thank you very much. Operator: Your next question comes from the line of Kyle David Peterson with Needham. Your line is open. Please go ahead. Kyle David Peterson: Great. Thank you, and good morning. I wanted to ask a little bit specifically on some of the SEC proposals on annual reporting. I know there are a lot of different puts and takes, and it seems like you have some insulation there. But any color you could give or thoughts on the impact if this does go through and gains a fair amount of adoption with U.S. issuers would be really helpful. Craig D. Clay: Yeah. This is Craig. We are closely monitoring, obviously, that development—moving from quarterly to semiannual. The SEC proposal is sitting with the Office of Management and Budget. That will be returned to the SEC. We expect that any day now, and soon after that, the proposed rule is expected to be posted for public comment. The Chair has commented several times on semiannual reporting—considering doing this for smaller companies, where perhaps semiannual might be more appropriate for them. So it is unknown what the proposed rule will be. At this stage, whether it is semiannual or not, we likely will see as much or equal or more disclosure. Whether the SEC continues to require quarterly earnings 8-Ks for large accelerated filers remains to be seen. You also have to weigh how the public debt obligation will factor into this. If a company has public debt, they have to report quarterly. Likely it is just easier to continue that process. You can look to Europe—companies there are given a choice. Half are doing semiannual. If they do that, they often are doing quarterly calls and quarterly disclosures that are as large or comprehensive as before. So what the actual adoption is going to be and what the proposal is—we do not know. But what is important is the vast majority of our 10-Qs are prepared in ActiveDisclosure, which operates on a subscription model, long-term contracts, and that subscription model helps insulate us from changes in filing frequency. So, again, closely monitoring it. We think any regulatory change is a positive for us. Kyle David Peterson: Okay. Appreciate all the color there. That is really helpful. And then maybe I wanted to switch over into the softness that you talked about on the 8-K filings. I apologize if I missed this, but could you give any more color on what is driving the softness? Is there actually less activity, or is there more competition? What is the delta there? David A. Gardella: Yeah, Kyle, I was just going to say it is really tied to the 8-Ks associated with Capital Markets transactions—so the ancillary filings as the transactions progress. We characterize the 8-K as a compliance filing, separate from the transactional activity, but there is some carry-on effect of the lower transactional activity in the market down to some of these 8-Ks and the like. Kyle David Peterson: Okay. Thank you for the color. And then just last one for me. The SG&A did run a little high this quarter. I know it sounds like there was some additional selling expense. Looking at the implied expense guide for the second quarter, it looks like you get some efficiency back. I know you mentioned some other cost savings. Was there any timing effect on that extra selling expense, or is that the benefit of the cost savings that are already starting to kick in? Any more insight or context into what is driving the operating leverage would be very helpful. David A. Gardella: Yeah, I will take that one, Kyle. When you look at SG&A, certainly, like you said, up modestly year-over-year. When you look at it as a percent of sales—down modestly. So it is a lot driven by the mix of revenue coming through. With the higher software sales, you tend to have higher gross margin, which we saw in the quarter—up about 40 basis points. Then when you look at the SG&A line, some additional SG&A comes in, but all in, the 50 basis points of EBITDA margin expansion obviously contemplates all that and is really driven by the mix. From a timing perspective, I would say nothing abnormal. There are always some small puts and takes, but nothing outsized in the quarter. Based on the guidance that we gave for Q2, probably a fairly similar trend in terms of SG&A dollars—year-over-year, a modest increase—and SG&A as a percent of sales pretty close to the comps since last year. Kyle David Peterson: Okay. Great. Thank you very much. Operator: Your next question comes from the line of Charles S. Strauzer with CJS Securities. Your line is open. Please go ahead. Charles S. Strauzer: Hi. Just a quick follow-up. On the conversation you were having about AI earlier, what is the general appetite from your client base in terms of inquiries about AI offerings that you may have or are planning to have? It seems that AI tools could be a highly complementary fit for the underlying software programs that you have as well as the transactional side. Any thoughts there? Daniel N. Leib: Yeah, Charlie, I can start off. I think it is multifaceted, and it is something we are experimenting with. Specific to the question on client interest, I would say the interest is really high—as it is across all industries. As we have rolled out ActiveIntelligence and been able to get insights from our clients as well, clients want to be absolutely sure from a security, governance, and data perspective that everything is secured. There will be no leakage. Obviously, the work we do from a compliance standpoint needs to be 100% correct. That is also a consideration. But like elsewhere in corporate America, the interest is extremely high. We are looking at it both on the internal side and breaking it into three buckets. On the internal side, we rely a lot on our vendors who have incorporated artificial intelligence within their offerings. For things that are proprietary for Donnelley Financial Solutions, Inc. on the internal side, we are looking at our own opportunities to build and drive efficiencies and serve clients better. On the product side, we view it as not a feature, but a core part of the offerings—again, with all my comments around the needs for governance, security, etc. It is certainly not going away. We think there will continue to be advancements that will be helpful to us. We have talked about vertical software and the service that wraps around it that is helpful and can thrive in an artificial intelligence environment. I will see if anyone else on the team wants to weigh in further. Craig D. Clay: Dan, I will add some context on ActiveIntelligence. ActiveIntelligence is in the market. Clients are not relying on Donnelley Financial Solutions, Inc. simply for a tool, but for an outcome. We really see that playing out with ActiveIntelligence—our AI capability embedded in ActiveDisclosure. It is streamlining client research, comparison, and analysis of SEC filings. A client recently said to us that they used ActiveIntelligence for their 10-K and quickly proved its value. The peer analysis surfaced disclosure that the client had not traditionally included, and having this visibility across peers built confidence in their decision to trust in that disclosure. So artificial intelligence at Donnelley Financial Solutions, Inc. and in ActiveDisclosure is really a force multiplier. Embedding it into our mission-critical compliance workflows is strengthening client trust, increasing switching costs, and reinforcing our position at the center of that. ActiveDisclosure is a system of record embedded in this high-consequence workflow. It is an excellent opportunity for us to be at the center of this, where accuracy and trust are nonnegotiable, and we think that we are positioned to become even more essential. Charles S. Strauzer: Great. That is helpful. Thank you. Operator: There are no further questions at this time. I will now turn the call back to Daniel N. Leib for closing remarks. Operator: Dan, over to you. Daniel N. Leib: Thank you, Kara, and thanks everyone for joining. We look forward to connecting in the near term. I will pass it back to Kara to close it out. Operator: Thank you. This concludes today’s call. Thank you for attending, and you may now disconnect. Unknown Speaker: Thank you.
Operator: Hello, everyone. Operator: Thank you for joining us and welcome to the Equitable Holdings, Inc. Q1 2026 Earnings and Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Erik James Bass, Chief Strategy Officer and Head of Investor Relations. Erik, please go ahead. Erik James Bass: Thank you. Good morning, and welcome to Equitable Holdings’ first quarter 2026 earnings call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the Safe Harbor language on Slide 2 of our presentation for additional information. Joining me on today's call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings, Inc.; Robin Matthew Raju, our Chief Financial Officer; Nicholas Burritt Lane, President of Equitable Financial; Onur Erzan, President of AllianceBernstein; and Tom Simioni, Chief Financial Officer of AllianceBernstein. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website and in our earnings release, slide presentation, and financial supplement. We will also refer to the pending transaction with CoreBridge. Any statements about the transaction made during this call are not an offer of securities. A registration statement containing a prospectus will be filed with the SEC in connection with the transaction. I will now turn the call over to Mark. Mark Pearson: Good morning, and thank you for joining today's call. The first quarter marked an extraordinary moment in Equitable Holdings, Inc.'s 166-year history with the announcement of our planned merger with CoreBridge, which will create a world-class platform to help our customers plan, save for, and achieve secure financial futures. This morning, I will spend some time discussing why we believe that by leveraging the complementary strengths of Equitable Holdings, Inc. and CoreBridge, the combined company will deliver tremendous value for both our customers and shareholders. On Slide 4, I will start by providing a few highlights from our first quarter results. We reported non-GAAP operating earnings of $1.62 per share, or $1.68 per share after adjusting for notable items. This increased 25% versus 2025, driven by healthy organic growth momentum, improved mortality experience, and a lower share count. We continue to expect earnings per share growth to exceed the high end of our 12% to 15% target range in 2026. Assets under management ended the quarter at $1.1 trillion, up 9% year over year. While equity markets declined modestly in the first quarter, they have since recovered, and higher average AUM versus 2025 levels should continue to provide a near-term tailwind for earnings. Our balance sheet remains a core strength with a combined NAIC RBC ratio of approximately 475% and $1.2 billion of holding company liquidity. Our credit portfolio continues to perform well, and as Robin will walk through, we are positioned to handle even a severe stress scenario. We remain committed to being a consistent returner of capital and executing the share buybacks assumed in our 2026 financial plan. Turning to organic growth, we see good momentum in retirement sales and flows even as the level of competition has increased. Total sales increased 10% year over year, driven by strength in RILAs, and we had $1.3 billion of net inflows. Wealth Management delivered another strong growth quarter with $2 billion of advisory net inflows. Over the last 12 months, the business produced a 13% organic growth rate. During the quarter, we also closed on the acquisition of Stifel Independent Advisors, which is a good example of how we can use bolt-on M&A to help scale our wealth management business. Asset Management earnings grew 11% year over year, driven by higher AUM and increased ownership. AB had net outflows of $7.1 billion in the first quarter, driven primarily by active equities and taxable fixed income. Private Wealth and private markets remain bright spots, as both had positive flows in the period. Total private markets AUM increased 13% year over year to $85 billion, and AB remains on track to meet or exceed its target of $90 billion to $100 billion in AUM by 2027. While near-term flows may remain volatile, AB has a record institutional pipeline of nearly $28 billion, which includes several large insurance mandates that will fund over the next few quarters. AB will also be a meaningful beneficiary of the CoreBridge merger as we expect it to receive at least $100 billion of incremental assets over the next few years. As I will walk through over the next few slides, the motivating factor behind the CoreBridge merger is our belief that it will accelerate our growth strategy and position us to be a long-term winner across all the markets we compete in. The companies have complementary strengths with limited overlap across products. We have already begun the integration planning process and have high confidence in achieving at least $500 million of expense synergies. As a result, the merger will be immediately accretive to earnings per share, and we expect to deliver 10% plus accretion on a run-rate basis by 2028 with potential upside from revenue synergies. Moving to Slide 5, before talking about the merger, I want to highlight five attributes we believe are critical for long-term success and which we use when evaluating any strategic option, including this merger. Underlying everything, of course, is providing an exceptional customer experience. Companies that are easy to do business with and offer the products and advice needed to transform complex financial risks into simple, reliable outcomes will attract clients and distributors. Developing deep brand loyalty will help create predictable and growing value for shareholders. Second, in intermediated markets like financial services, having strong distribution is critical as clients want local access to expert, personalized advice. Privileged shelf space, particularly in channels with high barriers to entry, provides a meaningful competitive advantage in acquiring new customers while also managing the cost of funds. Third is the imperative of competitive scale. Size matters. Being able to invest in technology and automation will improve efficiency and result in lower unit costs and a lower expense ratio. This provides capacity to reinvest in growth while simultaneously delivering higher profit margins. Fourth, we know that shareholders value consistent growth in earnings and cash flow across different market cycles, and having diversified sources of earnings and capital enhances the ability to deliver this. Disciplined risk management is also critical to give clients and investors confidence in the resilience of the balance sheet, especially during periods of macro uncertainty and market stress. Finally, we see significant value in owning insurance, asset management, and wealth management businesses to participate in the full value chain and benefit from the significant demographic tailwinds driving growth across each of these markets. It also means that shareholders capture the high multiple fee earnings generated by distributing and managing the assets associated with insurance and retirement solutions that are manufactured. By attracting the very best talent, and aligning to these five convictions, we ensure that when our clients win, our shareholders win. Turning to Slide 6, I will highlight why the merger with CoreBridge aligns to these convictions and will drive growth and shareholder value. The merger brings together three outstanding franchises to create a diversified financial services company with over 12 million customers, $1.5 trillion in AUMA, and leading positions across retirement, life insurance, asset management, and wealth management. Equitable Holdings, Inc. and CoreBridge complement each other well with different strengths and limited overlap. We intend to capitalize on our scale advantages to reduce unit costs and achieve a lower cost of capital. We expect to have a top-quartile expense ratio and will be able to combine our resources when making growth investments. This will make us more profitable, drive more cash generation, and increase our return on capital. We will have formidable distribution capabilities and leading positions across the retail, institutional, and worksite channels. The depth and breadth of our distribution should enable us to expand our offerings while achieving a lower average cost of funds, resulting in more profitable new business. We will also have flexibility to allocate capital where we see the best risk-adjusted returns and customer demand. In addition, our integrated business model allows us to capture the full value chain by acting as a product manufacturer, distributor, and asset manager. This differentiates us from our competitors, most of whom only participate in one or two of these verticals. While the merger will shift our mix more towards retirement, it also helps scale AB and Wealth Management, enhancing the value of these high-multiple businesses. We remain focused on maximizing the flywheel benefits inherent in our model. Finally, the new Equitable Holdings, Inc. will have a robust balance sheet and is expected to generate over $4 billion of cash flow annually. We are aligned in having strong financial principles that govern how we operate, starting with economic management of the balance sheet and a focus on cash generation. Ultimately, we want to produce consistent results and cash flow across market cycles so that we can provide attractive returns to shareholders while also investing for growth. I will conclude on Slide 7 by providing some clear examples of how the merger will help accelerate growth across all our businesses. Starting with Retirement and Institutional, the combined firm will have approximately $540 billion of AUM and unmatched breadth across products and distribution. We knew that Equitable Holdings, Inc. would need to become more diversified over time in order to fully participate in the growing U.S. retirement market, and combining with CoreBridge makes us a top-three provider of fixed and indexed annuities and expands our institutional capabilities, notably in pension risk transfer. It also adds a strong life business that provides earnings and capital diversification and should benefit from selling through Equitable Advisors. In addition, the merger doubles our third-party distribution network to approximately 900 firms, expanding our ability to reach new customers. The combined firm will originate $70 billion to $80 billion of liabilities annually, highlighting the size and scale of our platform. We will have a more balanced business mix that provides liquidity benefits and positions us well to generate consistent growth across market cycles while deploying capital where we can earn the most attractive returns. Moving to Asset Management, AB will also benefit from the merger in multiple ways. We expect AB to add at least $100 billion of CoreBridge general and separate account assets over the next couple of years, resulting in total AUM of nearly $1 trillion. AB will also benefit from the combined firm's increased liability generation, which should drive higher ongoing net inflows. We also see an opportunity to commercialize some of CoreBridge's internal asset origination capabilities, particularly for real estate and commercial mortgage loans, by leveraging AB's global distribution. Over time, we expect to find additional sources of incremental revenues and net flows, including the potential to develop new commercial partnerships. Lastly, the addition of CoreBridge Advisors accelerates the path to scaling our Wealth Management business and adds approximately $20 billion of AUA. The merger will expand our proprietary product offering to include fixed and indexed annuities and indexed universal life, which will be a win for advisors, particularly our emerging sales force. We will have a more attractive platform and more financial resources, which should enhance our ability to recruit and develop new and experienced financial advisors. Overall, the key message I want to leave you with is that having increased scale will provide competitive advantages that translate into stronger and more consistent growth and enhance our profitability. I will now turn the call over to Robin to highlight the financial benefits from the merger and discuss our first quarter results in more detail. Robin Matthew Raju: Thanks, Mark. I want to echo my excitement about the merger and the ways in which we will accelerate our growth strategy and deliver attractive financial outcomes for our shareholders. On Slide 8, we highlight some of the key financial benefits. First, the combined company will have a robust balance sheet with significant capital. As of year-end 2025, pro forma GAAP book value exceeded $30 billion, and the companies had over $25 billion of statutory capital. The pro forma leverage ratio is approximately 26%, which provides financial flexibility. Second, we will have a more diversified business mix with equal contribution from fee and spread-based earnings. This should help us generate more consistent earnings in different market environments. Third, we project at least 10% accretion to EPS and cash generation on a run-rate basis by year-end 2028, driven by expense, capital, and tax synergies. We also expect to have a 15% plus return on equity. These projections do not include any benefit from the anticipated revenue synergies. Finally, we forecast over $5 billion of annual earnings power and over $4 billion of cash flows to the holding company, which will make us the most profitable company in the sector based on U.S. earnings. Turning to Slide 9, I will provide some more detail on first quarter results. On a consolidated basis, non-GAAP operating earnings were $472 million, or $1.62 per share, and we reported net income of $621 million, or $2.14 per share. Notable items in the quarter included $32 million of below-plan alternatives and a $13 million benefit from the purchase of tax credits. Adjusting for these items, non-GAAP operating earnings per share was $1.68, up 25% year over year. This is consistent with our earnings per share growth guidance of above 12% to 15% for 2026. The 25% increase in earnings per share was driven by a 9% year-over-year increase in total AUM/AUA, lower mortality claims, the benefit of our increased ownership stake in AllianceBernstein, and a lower share count, which reflects the incremental buyback executed following the RGA transaction. In 2026, our alternatives portfolio, which is 2% of our general account, produced an annualized return of 3.5%, with results pressured by lower CLO equity returns. Given weaker market conditions in the first quarter, we currently project our portfolio to have a return of 2% to 3% in the second quarter. While it is premature to predict what will happen in 2026, based on the lower returns for the first half of the year, we now expect a full-year return to be below our prior 8% to 9% guidance. Adjusted book value per share ex-AOCI with AB at market value was $34.70. We view this as a more meaningful number than reported book value per share, which significantly understates the fair value of our AB stake. On this basis, our adjusted debt-to-capital ratio was 24.5%, down 40 basis points sequentially. On Slide 10, I will provide some more details on segment-level earnings drivers. In Retirement, first quarter earnings, excluding notable items, were $394 million. Net interest margin, or NIM, increased 3% sequentially, as lower alternative investment income was offset by growth in general account assets. Excluding alternatives, our NIM spread improved by 5 basis points sequentially, helped by a 4 basis point benefit from a modest recovery in MVAs. This reverses the downward trend in spreads we experienced over the past year and supports our view that spreads are beginning to stabilize. On a sequential basis, the growth in NIM was partially offset by lower fee-based revenues as market declines pressured average separate account AUM. Turning to Asset Management, AB reported earnings of $140 million, up 11% year over year, as a result of higher base fees and our increased ownership percentage. While base fees benefited from a 7% year-over-year increase in AUM, this was partially offset by a lower fee rate due to a shift in asset mix. As expected, performance fees were relatively modest in this quarter, but we raised our full-year forecast from $95 million to $115 million. Moving to Wealth Management, we experienced strong year-over-year growth in advisory fees and transaction revenues, driving a 22% increase in earnings. As a reminder, fourth quarter 2025 results benefited from favorable one-time items, and this quarter we had seasonally higher expenses and a couple of million of costs related to the Stifel acquisition. We still expect double-digit earnings growth in 2026. Finally, Corporate and Other reported a loss of $98 million in the quarter, after adjusting for notable items, which is consistent with our 2026 guidance. Mortality was slightly favorable in the quarter and improved versus previous periods. On Slide 11, I will highlight Equitable Holdings, Inc.'s strong balance sheet and cash flows, which enable us to be a consistent returner of capital to shareholders. We know there has been a lot of focus on credit risk, so we have updated our investment portfolio stress test to reflect our holdings as of year-end 2025. This assumes a hypothetical severe credit stress scenario at least as bad as the global financial crisis and a decline of 40% in equity markets. We estimate slightly less than a 50% decline in RBC ratio, which from a starting point of 475% still leaves us comfortably above our 400% target. As a result, we are well positioned to handle a potential downturn in credit markets. That being said, today, we do not see any signs of weakness in our portfolio. In the appendix, we provided updated disclosures on our private credit portfolio, which represents 18% of our general account and is 95% investment grade assets that match well against our liabilities. Let me now turn to cash. We ended the first quarter with $1.2 billion of cash at the holding company, above our $500 million target, and we remain on track to achieve our target of 2026 cash generation of $1.8 billion. During the first quarter, we returned $223 million to shareholders, including $147 million of share repurchases. We were blacked out from buying back shares for the second half of the quarter due to the merger with CoreBridge, which depressed our payout ratio for the period. We remain committed to delivering our 60% to 70% payout ratio target for 2026 and recognize that share buybacks look extremely compelling at the current valuation. We plan to be in the market purchasing shares during the open windows between now and the closing of the transaction. On Slide 12, we show a timeline with key dates related to the merger and a specific time period of when we will be able to repurchase stock. Both Equitable Holdings, Inc. and CoreBridge trade at a significant discount relative to where we believe they should be valued, making buybacks meaningfully accretive to shareholders. As a result, you can expect that we will be active in the market during the windows that are available to us. We expect to file the initial merger proxy statement today after market close, and we can repurchase shares from that point until we mail the final proxy. There is not a set date for that mailing, but we do not expect it to occur until at least early June. We would then be able to repurchase shares again after the shareholder vote. If any repurchases from our 2026 capital plan are not completed prior to the merger close, we plan to execute them as part of an ASR shortly after the closing. As a reminder, the exchange ratio for the merger is fixed and will not be affected by any share repurchases executed by either company. I will now turn the call back over to Mark for some closing comments. Mark? Mark Pearson: Thanks, Robin. Equitable Holdings, Inc. delivered solid first quarter results, and we remain confident in achieving our EPS growth and cash generation guidance for 2026, even with the volatile market backdrop. Looking forward, I am incredibly excited about the powerhouse franchise we are creating through the merger with CoreBridge. As we have talked about this morning, the combined company will have the scale, distribution strength, and product breadth to deliver differentiated growth and returns. I am confident that this merger positions us to win with customers and deliver superior value to shareholders over time. We will now open the call for questions. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Wesley Carmichael with Wells Fargo. Your line is open. Please go ahead. Wesley Carmichael: Hey, good morning. Thank you. My first question was on the Retirement segment, and you had a pretty good earnings result in the quarter. Previously, I think you talked about spread compression abating in 2026, at least on a percentage basis. Do you still think that is the case given the mix of the book here, and could you talk a little bit about what you are seeing on the cost-of-funds side from a competitive dynamic? Robin Matthew Raju: Sure, Wes. Thank you for your question. We were happy to see spreads stabilize here in the first quarter. If you look quarter over quarter, spread income/NIM was up $11 million quarter over quarter. If you exclude alts, it was up even more, and excluding some of the MVA benefit, it was up about 1 basis point net. So if you look at it, it was about 1.69%, and I think that is the level you can probably expect at this point, and you can expect spread income to grow as the general account, excluding embedded derivatives, grows. The two primary factors that you see are, yes, with the abatement of some of the higher-margin in-force that has run off, that is a smaller part of the business mix, but also the discipline in the new business underwriting that we are seeing. Despite what you hear on the competition, RILA sales were up 14% year over year, and the pricing discipline has been maintained and the margins have been good. So the combination of that with the runoff of the in-force should lead to stabilization of spreads going forward. Wesley Carmichael: Got it. Thanks, Robin. And then maybe just a more broad one on the Equitable Holdings, Inc.–CoreBridge merger. I know you reiterated EPS guidance with materials. Just wondering if you have done a bit more work, in earnest, on progress toward the merger. Have any of your expectations changed in terms of the financial impact, and maybe where you are seeing more or less opportunity relative to a little bit more than a month ago when the deal was announced? Mark Pearson: Thanks, Wes. It is Mark Pearson. The things we would say are the integration planning process is well underway now with the top 50 or so leaders from each of the organizations. We really are confirming through that the complementarity of the two businesses. We are stronger together in terms of our product breadth, in terms of our distribution, and in terms of scale. So that is confirming everything we have told you in terms of the synergy opportunities and the look forward. We are also pretty excited on the revenue synergy side, but we are going to save telling you that until 2027 when we have done the work, and we can start to quantify it for you. We are confirming the expense synergies now and also starting to work on the revenue side as well. Wesley Carmichael: Got it. Thank you. Operator: Your next question comes from the line of Suneet Kamath with Jefferies. Your line is open. Please go ahead. Suneet Kamath: Great. Thanks. I just wanted to start on the buyback. With the window opening later tonight, how should we think about the pace of buybacks over the next month? And is there any sort of restriction or coordination required with CoreBridge, or are you operating on your own, so to speak? Robin Matthew Raju: Sure. Thanks, Suneet. As we laid out in the presentation, we are excited to say we are going to be back in the market with share buybacks. We expect to file the proxy this evening, and that enables us to open up the window again until the final mailing that will happen in June. Within that time period, expect us to be active in the market. The returns on a share buyback are very attractive at this point in time, so that is one of the reasons why we wanted to be back in. Both we and CoreBridge will coordinate together to make sure that share buybacks maintain accretion for shareholders throughout the period. Then, as I laid out in the presentation, after the shareholder vote that will open up the next window for share buybacks. Anything that is not completed by the closing will be completed as an ASR if needed. Shareholders should expect the same level of capital return from both companies that they would have otherwise received. We are happy to say we are going to be back in the market because buybacks are accretive given that both stocks look cheap right now. Suneet Kamath: Okay. That is helpful. And then on the $70 billion to $80 billion of originated liabilities that you are talking about, is there a practical limit in terms of how much assets AB can originate in order to back those liabilities? Mark Pearson: No. We are fortunate. Robin Matthew Raju: With $70 billion to $80 billion of liabilities, we are going to have four asset managers that we will leverage. Obviously, AllianceBernstein, our in-house; also we get to benefit from some of the capabilities that CoreBridge brings to the merger—so Blackstone, BlackRock, and their internal capabilities as well. $70 billion to $80 billion provides lots of assets to put to work, and allows us to be disciplined on the general account and get the best risk-adjusted returns on those assets across the board. We would expect everybody to benefit. Obviously, AB will from the broader revenue synergies as well. That does not take into account the future growth. That is the $100 billion in separate account and general account assets that will move over to AB as a starting point, and then there will be upside from there with the future growth of the $70 billion to $80 billion benefiting AB and our other asset managers as well. Suneet Kamath: Okay. Thanks. Operator: Your next question comes from the line of Ryan Krueger with KBW. Your line is open. Please go ahead. Ryan Krueger: Hey. Thanks. Good morning. In the merger call, you talked about 2% to 4% synergies from capital and taxes that were part of the 10% plus overall synergies. I wanted to ask if that is a true best estimate, or did you embed some conservatism there, and could you possibly, as you do more work, see some upside to capital benefits of the merger? Robin Matthew Raju: Thanks, Ryan. It is important to repeat a few benefits we spoke about. It is going to be day-one accretive and 10% plus on a run-rate basis going forward. In addition, the diversification of both businesses together means we will have more stability in earnings and cash flows, which I think will lead to a lower cost of capital and a better profile for us going forward. To your question on the 10% plus synergies, we referenced 6% to 8% coming from expense synergies. There, we said we expect to at least get $500 million; there should be upside to that. The remainder will be from tax and capital, which I would say is our best estimate at this point in time. We will always do more work going forward. You can see both companies, Equitable Holdings, Inc. and CoreBridge, very active in terms of capital management since the IPO, so you can expect that to continue going forward. Most importantly, as Mark mentioned earlier, these numbers do not include the benefit of revenue synergies. I think that is what will differentiate this transaction on a go-forward basis: more assets and revenues going to AllianceBernstein, leveraging CoreBridge’s indexed IUL and fixed annuity products with Equitable Advisors, and leveraging our B/D with their third-party distribution. If we can be successful in capturing more revenue with the two companies together, we will be a stronger franchise that deserves a higher multiple going forward. Ryan Krueger: Thank you. And then just one question on the PGAAP impacts. I understand that it is contingent on where interest rates are, and there is probably a lot of work to be done on this. But maybe directionally, can you give any sense of whether, if the merger closed now, this would be more likely to be a positive or negative potential impact to your GAAP earnings? Robin Matthew Raju: I think it is too early to say at this point in time. As we put together the PGAAP, we will finalize that prior to close, and we will certainly give you that guidance. I think there will be moving parts in the PGAAP on the balance sheet. Obviously, the book value of the combined companies will be bigger, and that will be reflective of wherever the market cap of Equitable Holdings, Inc. is at that standpoint. On the income side, there will be moving parts between VOBA, DAC, and fair value of some of the assets. We will do that work, and as we do that work, we will disclose it as we get closer to the close of the transaction. Operator: Your next question comes from the line of Thomas George Gallagher with Evercore ISI. Your line is open. Please go ahead. Thomas George Gallagher: Good morning. One question about the quarter and then one about the merger. On the quarter, the MVA gains that you had in Retirement—Robin, can you comment on absolute dollars of earnings that that represented this quarter? And would you expect there to be any sustainability there? Was there something unusual about why they were higher? Robin Matthew Raju: Sure. Thanks. The key point for me is that spreads stabilized ex-alts and ex-the MVA, so about a 1 basis point improvement. The MVA was approximately $10 million in the quarter. We do not expect benefits on a go-forward basis; that is not something we include in our forecast or budgeting. As you have seen, that has been positive or negative through different periods over time. But excluding the MVA and excluding the impact of alts, spreads improved by 1 basis point quarter over quarter. Thomas George Gallagher: Gotcha. So $10 million was the earnings contribution? Robin Matthew Raju: Yes, approximately. Thomas George Gallagher: Gotcha. And my question on the merger—I listened closely to what you have been saying about the revenue synergies. I have not heard much of an emphasis on your institutional spread business, which I know is small for you; it is bigger for CoreBridge. But is that an opportunity? Because when I look at you and CoreBridge on a standalone basis, you are probably half the size, or maybe 30% or 40% of the size of that business compared to the Met’s and the Pru’s of the world. So I am just wondering, is that a business that we should expect you to really scale up? Robin Matthew Raju: Sure. For CoreBridge and Equitable Holdings, Inc., the FABN market has been attractive. It has generated good returns for us. It is obviously spread dependent, so depending on where our spreads trade at different time periods, that allows us to go in and out. With the balance sheet being much bigger, it gives us more capacity to lean in to that market, given the spreads are there and pricing is there. So it is certainly an opportunity for us with the larger balance sheet going forward. Thomas George Gallagher: Okay. Thanks. Operator: Your next question comes from the line of Joel Hurwitz with Dowling & Partners. Your line is open. Please go ahead. Joel Hurwitz: Hey. Good morning. Robin, first, can you just talk about mortality perspective in the quarter? It looked pretty good with reported benefit ratio at 83.1%. Robin Matthew Raju: Yes. It was nice to have a good quarter on mortality. Our benefit ratio is 83%; that is the lowest it has been in any quarter over the last year, which is good. Overall, we saw lower claims and fewer high face-amount claims specifically, which benefited us this quarter. Going forward, we think the guidance that we have given to the market appropriately captures what we would expect to see in mortality, and we look forward to speaking more about good mortality and focusing on the growth in the other businesses as well going forward. Joel Hurwitz: Got it. And then in Retirement, it looks like you are starting to utilize flow reinsurance for some of your spread business. Can you talk about what products that is on, how much you plan to do, and the economics for Equitable Holdings, Inc.? Robin Matthew Raju: Sure. Yes. In the fourth quarter, we started to do some flow reinsurance on our RILA product. Flow reinsurance is a tool that we think is helpful for us when making a product accretive going forward, so it is an important tool in the toolkit. We could look at flow reinsurance in other products as well, and even post-merger, CoreBridge does some flow reinsurance as well. As long as it is accretive for us versus not doing it, it is something that we will look at selectively in different products. It is important to have a good counterparty, which we have, and we try to make sure AB continues to manage a portion of the assets for us going forward. We also have Bermuda as a tool in our toolkit as well. We will look at that for flow reinsurance for selective products for our internal products, and potentially for third-party opportunities going forward as well. Flow reinsurance is something that we will always look at across our businesses. Joel Hurwitz: Got it. Thank you. Operator: Your next question comes from the line of Alex Scott with Barclays. Your line is open. Please go ahead. Alex Scott: Hi. Good morning. Thanks. One I have is on cash flow. I wanted to see if you could talk a bit about the cash generation of the business and how that will trend through the integration process, with some higher expenses related to the integration itself and probably some sort of hockey stick dynamic. Could you help us think through the way that will progress over the next few years? Robin Matthew Raju: It is probably a little bit too early to give you too many specifics. Both companies obviously have strong cash flow generation. On the Equitable Holdings, Inc. side, we continue to feel comfortable with our $1.8 billion guidance that we provided this year and the $2 billion for 2027. Expect that to be in addition to the investments that we have in growth to help grow our new business franchises across the board. As part of the integration, we will target $500 million plus in expense synergies and expect that will be a 1.5 times investment with a very good payback associated with it. That investment is split between cash and non-cash, and on the timing we will provide further updates as we get closer to the close of the transaction and the integration planning is more complete. Alex Scott: Got it. That is helpful. And then a related topic is just the excess capital level that you have right now, particularly at the opco level—pretty significant. CoreBridge has a pretty significant MedEx of capital as well. How will this transaction change the way you approach the amount of excess capital you hold over time? It has been a while now that you have sat on a pretty high level, and you mentioned the stress test does not even take you down that close to your buffer at this point, and that was a pretty extreme stress test. Are you thinking about that differently with the transaction coming on? Robin Matthew Raju: We will have an Investor Day in 2027 where we will give further guidance on all those metrics. Stepping back, as we mentioned, the two companies are stronger together. The balance sheets are more resilient; they are more diversified across each other. There will be a lower cost of equity across the company, and we will be well positioned to maintain through different cycles in the market, whether that be credit or equity, because of the diversification of the businesses. What does that do? It allows us to leverage excess capital for best use for shareholders. Obviously, buybacks are a very attractive use given the valuations of both companies, but it also allows us to invest in growth. We see very good returns across the RILA market and the other markets across both companies. The more we can invest in growth and grow earnings going forward, which will translate into growth in cash, that will benefit shareholders over the long term. We will evaluate investments in growth and share buybacks for uses of excess capital as the two companies come together. Alex Scott: Got it. Thank you. Operator: Your next question comes from the line of Yaron Kinar with Mizuho. Your line is open. Please go ahead. Yaron Kinar: Just a couple on capital deployment. If the windows end up being a bit narrower than expected or liked, and ultimately you have to complete the buyback through an ASR at the end of the year, is that 15% plus EPS growth target still achievable? Robin Matthew Raju: Yes. I think we are pretty comfortable. If you look at where we stand this quarter, we are at plus 25% on an EPS basis overall. That was with a lower share buyback in the first quarter. If you look at the windows that we have available to us, we believe we can deploy a lot of capital in the markets to buy back stock at these levels, keeping within our 60% to 70% payout ratio by year-end. The windows that we have are pretty broad and give us the availability and timing needed to deploy our capital plan. Anything that is left, we will complete in an ASR, so we feel comfortable with the guidance. Remember, the guidance for this year is that we would be above our 12% to 15%, and we still expect to be above our 12% to 15% as we progress during the year. Yaron Kinar: Great. And then the second one also on capital deployment. With the Stifel deal done, I think you had expressed interest in continuing to grow the Wealth business both organically and inorganically. Assuming, though, that given where the share price is today, buybacks would be a far more attractive capital deployment avenue than doing a deal in Wealth? Robin Matthew Raju: It is deal specific. Ultimately, we are in a fortunate position where the company can execute on its capital return program for shareholders and invest for growth. That is a position of strength that we are in right now. We want the Stifel transaction to complete its closure to advisors who will transition to our platform later this year. We can also look for opportunities at AllianceBernstein to grow on the asset management side as well. Obviously, where the share price is now, any deal needs to be accretive to shareholders, as you see this merger is as well. Ultimately, we are well positioned because we can buy back stock at this price and deploy excess capital to fuel future growth and make us a stronger company going forward. Yaron Kinar: Thank you. Operator: Your next question comes from the line of Wilma Burdis with Raymond James. Your line is open. Please go ahead. Wilma Burdis: Hey. Good morning. Given that one of your buyback windows will be May 6 through sometime in June, maybe we could drill down a little bit. Is there any limit to the amount Equitable Holdings, Inc. could buy given limitations on the percentage of daily trading volume? Could you help us a little bit with the math there? Robin Matthew Raju: We obviously have some limitations on average daily trading volume that we have to keep, but we feel—and I think CoreBridge would say the same—that the windows available to us provide the flexibility we need to be in the market to buy back stock. We will have this time period between when we file the proxy tonight and the final proxy in June to complete a decent amount of share buyback, and we will also have the ability again post the shareholder vote. We feel pretty comfortable to execute within a reasonable average daily trading volume our capital plans this year. We would expect to end with an ASR at our 60% to 70% payout ratio and no change in the amount of capital returned to shareholders for this year. Wilma Burdis: Okay. If there is any way you can give a little bit more detail just on that there, just as a quick follow-up. And then second question: I think the commentary that you have implied on the capital and tax benefits, I back-calculated it to around $500 million to $1.5 billion of capital that would be freed up by the deal. Any way to tell us if that estimate is somewhere in the ballpark? Robin Matthew Raju: I do not have more color on the share buyback at this time. On the capital and tax benefits of the deal, as we mentioned, the EPS accretion will be 6% to 8% from the expenses—hopefully more than that. We would expect it to be more, given the size of synergy potential we have between both organizations. Then we will have capital and tax benefits as well. We are not going to give nominal amounts at this time. Going forward, as we get into the Investor Day next year, you can expect more information on those numbers and also the revenue synergy. Do not forget that is the big part that we get excited about internally—what this brings to AllianceBernstein, what this brings to our Wealth Management business, and what this does for broader product distribution across both companies that will lead to a higher multiple over time. Wilma Burdis: Absolutely. Love the distribution. Thank you. Operator: Your next question comes from the line of Pablo Sing Son with JPMorgan. Your line is open. Please go ahead. Pablo Sing Son: Hi. Good morning. Just a follow-up on the mortality. So 1Q and 4Q tend to be the highest mortality quarters for you. Given this, should we expect Corporate & Other loss to be there sequentially, or was 1Q just too favorable? Robin Matthew Raju: In the quarter, we did have some favorability in mortality. As we mentioned, the benefit ratio was 83%; that is lower than it was last quarter, as you can see in the supplement, and also lower than it was over the last year. The Corporate & Other guidance that we gave for the full year was a $350 million to $400 million loss. We expect to be within that guidance if you look on a normalized basis this quarter. Also keep in mind, going forward, the benefit of the RGA transaction really limits the volatility related to mortality for us. I think you are starting to see those benefits come through, and we do expect that to continue. Pablo Sing Son: Thanks, Robin. And then second question is the implementation of VM-22. Do you see that having any material impact, whether from a price or capital standpoint, on the fixed annuity block you are getting from CoreBridge? Robin Matthew Raju: I would like CoreBridge to answer that on the VM-22 side. We have done diligence on each other—on the asset side, on the liability side, and potential regulation—and we feel comfortable with where both companies combined are positioned ahead of any regulation or asset changes. Pablo Sing Son: Thank you. Operator: Your next question comes from the line of Tracy Benguigui with Wolfe Research. Your line is open. Please go ahead. Tracy Benguigui: Thank you. Good morning. Going back to the PGAAP changes, you mentioned some of the moving parts, but I want to touch on AB. It seems like a big thing that folks misunderstand about Equitable Holdings, Inc. is your asset leverage—they are not looking at the right denominator. My personal view is statutory capital matters more. Now with this merger coming up, I understand that your PGAAP could mark up AB. Should we expect a large goodwill asset? And I am also curious, is doing the deal the only way to mechanically recognize AB's equity value? Robin Matthew Raju: Thanks, Tracy. I think you are right. The way to look at it is not GAAP leverage—stat is a bigger piece and something that a lot of people do not look at. On the GAAP side, it does not capture the full market value of AllianceBernstein outside of a transaction like this. Since we own AllianceBernstein, we cannot write up the asset as it exists today. That is one of the benefits of the transaction. It will lead to some additional goodwill, but there are a lot of moving parts related to the PGAAP, so it is too early to give you precise numbers on how the PGAAP works. Ultimately, both companies—if you look—on a statutory basis are going to be at $25 billion of pro forma capital. The GAAP equity is going to be above $30 billion. We feel very well positioned in terms of the size of both balance sheets and especially well positioned having AB, a Wealth Management franchise, and a broader Retirement platform to grow sales. Tracy Benguigui: Staying with a 68% stake? Robin Matthew Raju: Currently, we are quite happy with our ownership of AllianceBernstein at approximately 68% to 69%. AB is a key part of the flywheel and expected to grow. The synergy potential of AB is pretty significant. Maybe I will ask Onur to talk about the revenue synergies potential with the AllianceBernstein team, but I think that is a big part of this deal—the benefits to AllianceBernstein and getting the $100 billion of general and separate account assets. Onur Erzan: Thanks, Robin. We are very excited about the $100 billion plus that Mark and Robin mentioned. It is going to come from both the general account and the separate account businesses, as well as funds and retirement plans. We have multiple opportunities to do work over the next seven to eight months before the merger closes. We have a very bankable bottom-up plan, and that comes on top of a record pipeline we had before the CoreBridge–Equitable Holdings, Inc. merger, so it builds on a very sizable pipeline that already exists. We are very excited about that, and also like the fact that it is a diverse set of asset classes, ranging from public to private, fixed income, multi-asset, and equities, that will allow us to scale multiple platforms all at the same time. Tracy Benguigui: So would you want to take that stake up if you like the business? Robin Matthew Raju: No change right now in our stake of AllianceBernstein. After we purchased the increase last year, we went from 62% to approximately 68% to 69%. We have no other plans at this time. We are really focused on the combined firms and execution of this merger. As Mark mentioned on the call, we established the integration office, we got our teams together, and everybody is focused on planning to execute the expense and revenue synergies and making sure we have the right people in the right seats. That is our focus at this time. Tracy Benguigui: Thank you. Operator: Your next question comes from the line of Mark Douglas Hughes with Truist. Your line is open. Please go ahead. Mark Douglas Hughes: Thank you very much. Good morning. In the RILA business, sales are pretty strong. I wonder if you could discuss the competitive environment and then maybe touch on the biggest impact, biggest benefit from the merger on distribution? Nicholas Burritt Lane: Great. As you mentioned, overall we had a strong quarter in sales and volume, with RILAs up 14% and $1.3 billion of net flows, translating to a 6% trailing 12-month organic growth rate. We are very mindful of competitive trends. As we mentioned last quarter, we saw new entrants in 2025 revert back to more rational pricing in the fourth quarter, and we do not see any material change in competitive activity this quarter. Looking forward, we continue to see strong demand for RILAs driven by favorable demographics and macro uncertainty. I would highlight consumer sentiment is at an all-time low, so people are looking for protected equity stories, and we believe we have a durable edge to capture it—generating attractive yields through AB, our differentiated distribution with Equitable Advisors and our third-party networks. As Robin and Mark alluded to, the merger will expand our reach in that area. Finally, we have deep relationships and scale. As the pie has grown, we have nearly doubled our sales over the last four years, and this was another first quarter in record sales and volume. On the benefits on distribution: better reach, deeper relationships, and as Mark mentioned, we see scale becoming increasingly important to generate profitable growth and protect margins. CoreBridge will give us both of these immediately, so we think we are in a privileged position to capture a disproportionate share of value in the growing retirement market. Mark Douglas Hughes: Understood. Then of the $70 billion to $80 billion in liability origination capacity, how much of that is third party versus owned distribution? Nicholas Burritt Lane: Yes. The way to look at it is the $70 billion to $80 billion is for the combined companies post-merger. Today, for Equitable Holdings, Inc., about 35% of our sales in the Retirement business come through Equitable Advisors. That is the way to look at it. Operator: We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to CPI Card Group Inc.'s First Quarter 2026 Earnings Call. My name is Carrie, and I will be your conference operator today. If you are viewing on the webcast, you may advance your slides by pressing the arrow button. The call will be open for questions after the company's remarks. If you would like to enter the queue for questions, please press star then 1. If you would like to withdraw your question, press star 1 again. Now I would like to turn the call over to Mike Phillips. Please go ahead. Michael A. Salop: Thanks, operator. Welcome to CPI Card Group Inc.'s first quarter 2026 earnings webcast and conference call. Today's date is 05/05/2026, and on the call today from CPI Card Group Inc. are John D. Lowe, president and chief executive officer, and Tara Grantham, interim chief financial officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group Inc.'s most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only. We undertake no obligation to update any statements to reflect events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release as well as the presentation that accompanies this conference call and the Form 10-Q are accessible on CPI Card Group Inc.'s Investor Relations website, investor.cpicardgroup.com. On today's call, all growth rates refer to comparisons with the prior-year period unless otherwise noted. The agenda for today's call can be found on slide three. We will open the call for questions after our remarks. I will now turn the call over to John. John D. Lowe: Good morning, everyone. Overall, we are off to a solid start in 2026 and are on track to achieve our full-year outlook. We are executing on our initiatives to deliver on our strategy of growing and diversifying the business by helping our customers win as we expand our proprietary technology platform, grow our marketable base of relationships, and evolve our payment solutions to meet market needs. We exceeded our expectations in the first quarter, delivering 20% revenue growth, which reflected another strong contribution from AOI, as well as good growth across our other Secure Card Solutions businesses. This included strong performance from our contactless solutions, led by continued strength of contactless metal as we emphasize our offerings of value-driven metal solutions, and increased sales of personalization services. As expected, our Prepaid Solutions segment had a slow start to the year, but we continue to anticipate growth for the full year. Integrated Paytech grew only slightly due to comparisons with a strong prior-year quarter, and we continue to expect the segment to grow more than 15% for the full year. Adjusted EBITDA increased 9% in the quarter, and we generated strong cash flow with more than $10 million of free cash flow in the quarter. We also improved our financial position, ending the quarter with a net leverage ratio just below three times. Based on first quarter results and our current forecast, we are affirming the full-year financial outlook we provided in March. Tara will give you more details on first quarter results in a few minutes, but first, I would like to provide a brief strategic update on slide five. As I said before, we are executing on our strategy as we start 2026 and are fortunate to operate in multiple growing markets. In addition to ongoing increases in cards in circulation in the U.S. payments market, our business is supported by increased demand for digital solutions by financial institutions and an increased focus on security for prepaid cards and packages. As we discussed last quarter, our strategy is to continue providing payment technology solutions that help our customers win, driven by three primary growth pillars that underpin our value proposition. First, our proprietary technology platform with a vast reach into the U.S. payments ecosystem. Second, our marketable base of thousands of deep and broad relationships across the U.S. payments market. And third, our proven track record of delivering evolving payment solutions that reflect changing market needs. We continue to make progress on driving our strategy forward, laying more pipes to further expand our platform, expanding our marketable base of relationships, and introducing new solutions for the market. We mentioned at year-end that we had locked in a new referral agreement giving us the opportunity to significantly advance our marketable base for our Integrated Paytech segment. We are excited to share that we are actively marketing our solutions with the help of Fiserv and are seeing positive customer interest. And we continue to expand our pipes on our technology platform, creating further integrations and customer connections for our digital solutions. We have also expanded our solution set by delivering for the closed loop prepaid market, seeing strong closed loop revenue growth from Q4 2025 in the first quarter. And we continue to explore the viability of chip-embedded cards in the U.S. prepaid market, advancing our extensive pilot with a large national retailer testing Card Safe-to-Buy technology. We believe our strategic efforts and investments will continue to drive long-term growth, expanding our addressable markets and providing the solutions needed by the market as it continues to evolve, creating value for our company and our shareholders. We will continue to update you on progress throughout the year, but now I would like to turn the call over to Tara to take you through the first quarter results in more detail. Tara? Tara Grantham: Thanks, John. I will begin with the segment results on slide seven. Overall, as John said, we are pleased with our first quarter performance. First quarter revenue increased 20% to $147 million, led by our Secure Card Solutions segment. Secure Card Solutions revenue increased 35%, which included a $16 million contribution from ArrowEye. As John mentioned, we experienced strength across this segment in the first quarter with good growth from our contactless solutions and personalization services. Our Prepaid Solutions segment declined 17% in the first quarter, reflecting timing of orders from key customers, with the first quarter decline partially offset by better-than-expected incremental sales of closed loop cards. Integrated Paytech increased 1% in the quarter due to comparisons with a strong prior year while we maintained strong gross margins at over 55%. As John said, we still expect to grow revenue in this segment by more than 15% in 2026. Turning to profitability on slide eight, first quarter net income declined by 57% to $2.1 million, primarily affected by $3 million of pretax integration costs, while adjusted EBITDA increased 9%, driven by sales growth including the addition of AOI. Integration costs were high in Q1, and we expect them to remain at similar levels in Q2 but drop significantly in the second half of the year. Our 2026 integration costs are meant to drive revenue synergies and lower operating costs and primarily result from go-to-market spending, technology investments, and certain vendor termination fees as we drive operating synergies. As a reminder, integration costs are not included in adjusted EBITDA but do impact net income. Gross profit margin declined from 33.2% to 30%, affected by lower sales and margins in our Prepaid segment and increased production costs including tariffs and depreciation, partially offset by benefits from increased sales from Secure Card Solutions. Production costs in the quarter compared to prior year included $2 million of increased depreciation primarily related to ArrowEye and the new Secure Card production facility and $1.2 million of tariff expenses. We expect Prepaid margins to improve in the second quarter with higher revenue levels, and we also expect overall company gross margins to be much stronger in the second half of the year. Margin comparisons with prior year should also improve going forward as ArrowEye depreciation and tariff primarily began impacting results in 2025. Overall, we anticipate full-year gross margins to be relatively consistent with prior-year levels. We have multiple initiatives in place to drive margin improvement over time, including targeted supplier negotiations, automation investments, production optimization across our sites, driving more favorable product mix, and achievement of ArrowEye synergies. We are also managing discretionary spending and driving operational efficiencies as volume increases, including in our new Indiana production facility, where we expect volumes this year to be 30% higher than 2024 levels in our old production facility. First quarter SG&A expenses increased $6.5 million from the prior year, primarily due to ArrowEye integration costs, the inclusion of ArrowEye operating expenses, increased employee performance-based incentive compensation, increased severance, and higher technology spending. Investment spending was less than anticipated in the first quarter, and we expect that to ramp over the remainder of the year beginning in the second quarter. Turning to slide nine, we had strong cash flow generation in the first quarter. Our cash flow generated from operating activities for the quarter increased from $5.6 million last year to $13.6 million, driven by strong working capital management. Free cash flow increased from $300,000 in the prior year to $10.1 million in 2026. We spent $3.5 million on CapEx in the quarter compared to $5.3 million in the prior year, although we still anticipate full-year capital spending to be similar to 2025 levels, with increased focus on technology spending. On the balance sheet, at quarter-end, we had $19 million of cash, $15 million of borrowings on our ABL revolver, and $265 million of senior notes outstanding. Turning to our 2026 financial outlook on slide 10, we are affirming the full-year outlook provided in March. This includes high single-digit revenue growth, low- to mid-single-digit adjusted EBITDA growth, free cash flow conversion at similar levels to 2025, and a year-end net leverage ratio between 2.5x and 3.0x. We expect Q2 revenue to be similar to Q1 levels, with adjusted EBITDA expected to be slightly lower than the prior year due to timing of investment spending, including some spending that was delayed from the first quarter. I will now turn the call back to John for some closing remarks. John D. Lowe: Thanks, Sarah. Turning to slide 11 to summarize before we open the call for Q&A. We are executing on our strategy with a better-than-expected start of the year. The segment trends are largely as we anticipated, and we are on track to achieve our full-year outlook. We also generated strong cash flow and brought net leverage back down to just below three times after the temporary increases following last year's ROI acquisition. We intend to continue growing and diversifying our business, leveraging our expanding proprietary technology platform, our extensive marketable base, and our evolving portfolio of payment solutions to meet market needs, drive growth, and enable our customers to win. Operator? We will now open the call for questions. Operator: Thank you. We will now open the call for any questions. If you would like to ask a question, please press star then 1. If you would like to withdraw your question, press star 1 again. Your first question will come from Peter James Heckmann with D.A. Davidson. Peter James Heckmann: Hey, good morning. Thanks for taking my question. In terms of thinking about Instant Issuance, Card@Once solutions, you did not mention it in the prepared remarks, but what are you thinking for this year in terms of base business as well as some of the tangential areas that you have expanded into over the last fifteen months? John D. Lowe: Yeah. Pete, good morning. We are excited about Instant Issuance. It is a great platform for us. Just as a reminder, it is a software-as-a-service platform. We built it from the ground up. It took us, you know, ten-plus years to build it, especially all the integrations into what we refer to as the payments ecosystem that we service. So we have thousands of customers across the U.S., and we expect that to be a large chunk of the growth out of our Integrated Paytech segment for 2026, growing that segment from an outlook perspective greater than 15%. I think the Fiserv deal we announced helps us grow. And just on the breakout between Instant Issuance and everything digital — I will say digital — we are essentially building the business there. It is small in relation to the rest of the business, but we are seeing strong customer demand, a good pipeline, and we continue to build out the pipes and integrations, if you will, to continue to service multiple areas of the market. So we are excited about what we are doing in Instant Issuance, but broadly in digital too. Peter James Heckmann: Okay. Great. And then just in terms of contactless, where do you think we are in terms of contactless cards? I have not seen recently any information that would suggest what percentage of cards out today have a contactless chip embedded. John D. Lowe: Good question. What we produce today is 90% plus contactless. So, you know, we used to use the baseball analogy. I would say we are in the very late innings of the transition. That is on the debit and credit side. I would say on the prepaid side of our business, there is a lot of opportunity. The volumes within prepaid broadly, when including open loop and closed loop, are somewhat greater on an annual basis than even the debit and credit side in terms of what is produced. So to the extent that that market starts to move more towards chip, it starts to move specifically towards contactless — which is what we are doing with Carta and what we are doing with a large national retailer, where we have a pilot underway, which we are having positive kind of movement on, if you will. If that market continues to move towards chip and grows, we will see a long transition there. It is what we would expect, and we would be in a unique position to capitalize on that transition. So on the debit and credit side of your question, I think we are late innings; we are pretty much fully penetrated, but I think there is a lot of opportunity on the prepaid side. Peter James Heckmann: Got it. I appreciate it. I will get back in the queue. John D. Lowe: Yep. Thanks, Pete. Operator: Your next question comes from Jacob Michael Stephan with Lake Street Capital Markets. Jacob Michael Stephan: Hey, guys. Good morning. Nice quarter. I just wanted to ask on the Fiserv relationship. It seems like that was expanded a little bit. Maybe you could touch on some of the things and ways that it was different from the past contract with them, or agreement. And then maybe touching on the supply chain a little bit — last year about this time we were talking a lot about tariffs. From a supply chain perspective and chip tightness, what are you seeing out there in the market today? And lastly, you are kind of expecting a bigger ramp in the second half from the Integrated Paytech segment. What are going to be the main drivers of that growth in Paytech? John D. Lowe: Yeah. No. Jacob, I think the main difference is we call out their name. We had entered into this agreement around year-end, so we mentioned an agreement at year-end, but we just did not call out Fiserv's name. I would say getting marketing teams together to finalize documents takes a long time, but the agreement is in place. We are excited about it. We are seeing positive customer interest in Q1, kind of ramping up, if you will, and Fiserv is a great partner. We love working with them. They have thousands of customers across the United States that we have worked with them to build good relationships with and make sure we are helping our customers win and helping their customers win at the same time. On supply chain, broadly I would say it has normalized, and I think that is credit to not only the teams that we put in place to manage it that continue to focus on how to manage things well, especially today in light of the Iran war. That is another kind of thing to tackle from a cost perspective, although that is not significant, I would say. But tariffs are something we had to work through from a supply chain perspective. I would say tariffs have somewhat normalized as well. But we are — just to get ahead of your probably next question — we are expecting refunds on tariffs. But we do not necessarily have a timing aspect to that. We hope to see them at one point, but as I tell my team, I will believe it when I see it. Put it that way. On the second-half ramp in Integrated Paytech, a lot of it is in relation to the deal that we signed with Fiserv. That is a chunk of it. Another chunk is just the growth in the business as it stands. Last year, it grew roughly at a 20% rate. If we look back over time, it has been growing at a faster pace generally than the rest of the business, and that is because we have a unique value proposition in the market. I am talking about our Instant Issuance solution specifically. On the digital side of the house, that is an area that is growing even faster. Now you are talking about smaller dollars — so it is smaller dollars growing — but at the same time, that is an area we continue to see just a large amount of interest in, and we are trying to build out that business as quickly as we can to support that large customer interest. So it is our Instant Issuance solution growth, which we have seen historically be pretty strong — we are confident in that, especially in light of the new deal — and digital growing just given what we are seeing in the market and the customer demand. Jacob Michael Stephan: Got it. Very helpful. Appreciate it. Thank you. John D. Lowe: Yep. Thank you. Operator: Your final question will come from Craig Irwin with ROTH Capital Partners. John D. Lowe: Hey, Craig. We cannot hear you. Craig Irwin: Thank you. Sorry about that. Can you hear me now? John D. Lowe: Yes, we can. Okay. Perfect. Good morning. Craig Irwin: Good morning. So can you help us unpack the comments around Indiana, the 30% increase in volume? Is this something novel in the last quarter? Did something materially change there? And then with 30% higher volumes, this clearly is not translating to the top line. Is there a mix issue or price erosion or something like that impacting the contribution to revenue growth and, obviously, profit growth if the revenue is not following? Any color there would be helpful. John D. Lowe: Yeah. Craig, good question. The reason that we shared that number specifically is it is an indicator as we have kind of come to the end of building out Indiana. You know, just a step back, it took about a year plus to build. The team in Indiana has done a great job. We essentially had nearly zero customer complaints as we were transitioning. And the reason for the growth in volume disclosure is really the fact that we could not have done what we were doing in our old facility. We were at capacity. If you go back two, three years — in 2022, as an example, when the market was insatiable in a sense — we were busting the team. So there were multiple reasons to move, but I think moving has been a large success for us. And I think your question about margins — there is depreciation on ROI. There are tariffs that have come up. Those types of things have affected our margins. There is always a competitive pricing market, but I would not say the pricing is irrational. I would say that overall, from a margin perspective, we have definitely had some impacts, but nothing that has created an irrational pricing market. I do not know. Derek, you would provide any other comments. Tara Grantham: Yes. So I would just say that we did grow pretty strongly in our overall Secure Card Solutions space, up 35% overall, and then from an organic basis, we did grow 15%, so we did get strong top line growth in that solution, and that was in part driven by contactless growth across our Secure Card Solutions. So, related to that, as John said, we did get operating leverage based on that growth. It was offset by things like tariffs as well as the higher depreciation across the business related to our new Indiana facility as well as related to the acquisition of ARY. John D. Lowe: Craig, one thing I would add, though, we do expect our overall gross margins — they are somewhat stabilized. Right? So we would expect them to be somewhat stable over the course of the year, if not increasing. Tara and team are doing a good job driving a lot of margin improvement goals. So between that and the growth of the business and the leverage we expect to get, I know we have had a lot of impacts over the last year and a half, two years, but we do expect margins — not only on a gross margin basis, but on an EBITDA basis — to improve over the course of the year. We expect this year, similar to last year, fourth quarter to be our biggest quarter. And so think of Q1 as kind of a starting point for the year, if you will. Craig Irwin: Understood. That makes sense. So then, ROI — I will admit, I was a little surprised to see the increased integration expenses this quarter. I thought that you were a long way down the path of already integrating that. Can you maybe give us some detail around the actions that are being completed right now? What did you complete over the last couple of months? Strategically, I thought that you might be actually adding a little bit more CapEx for ROI and focusing on the growth of that platform, given that personalization really is such an exciting opportunity. John D. Lowe: Yeah. I mean, I would say the integration costs we are spending now are really in two big areas. One is technology, and one is go to market. And when we look at ROI and its position in the market specifically, when we look at our broader solutions that we provide outside of Airline, we see a lot of revenue synergies. Airline signed, even in their first deal — I mean, 10 plus deals — and we have not owned them, I mean, since essentially one year ago from now. So we have seen really strong progress in terms of AirWise performance on a revenue basis. And the other side that we are spending on is operating synergies, trying to make sure that the way that we operate on the floor is — I would not call fully integrated, but essentially aligned with everything we are doing on a broader basis, which ultimately means we get purchasing power, things of that nature. So there were some termination fees from a vendor perspective as we transition vendors. Things of that nature pop up, and unfortunately they are not small. But we do expect integration to drop off in the second half of the year. We expect a little bit in Q2 — that will continue — but in the second half of the year, you should see that drop off dramatically. Craig Irwin: Thank you for that. I will take the rest of my questions offline. John D. Lowe: Thanks, Greg. Operator: Your next question will come from Harold Lee Goetsch with B. Riley Securities. Harold Lee Goetsch: Hey. Thanks for taking my question. On the Prepaid statement, it was said it was down 17% in the quarter. Can you give us some of the friction points? And again, were there some maybe significant nonrecurring customer revenues that came in 2025 and before that that are at least driving these declines? Or is the channel rather full right now and we are working through channel inventories? And is organic growth through the channel slower than expected? Thanks. John D. Lowe: Yeah. Hal, on the Prepaid side, just as a reminder, the whole business and the market in general — think of on the open loop side — we have leading market share. We are positioned really well, especially if that market starts moving towards chip. And so if you think about the broader market and our customers, they are trying to determine, based upon not only regulatory demands, but just customer demands, how do you increase security around the package itself? You can do that in two ways. You can increase the actual security around the package itself, or you can put a chip in the prepaid card itself. And that is why we are working with Carta. That is the pilot we are working with the large national retailer on. And because of that kind of testing and transition that we ultimately do expect to occur over a long period of time, we are seeing the normal-course open loop market be weaker. And we knew coming into the year this would be a slow start to the year. We are hearing that from our customers on the Prepaid side. That is because we believe from a longer-term transition perspective the value of the market is going to grow, and we are well positioned to capitalize on that. The other side on Prepaid is the closed loop side of the business, and that actually has performed very well for us. It is fairly small today, but we had pretty strong growth over Q4 of last year in Q1. And so we are excited about where the Prepaid business is going, but it is definitely a weaker quarter for us. And you can see this in the Prepaid financials. That business gains a significant amount of operating leverage as it grows, and you saw the opposite in Q1, and that brought down broader margins. Tara Grantham: Yeah. Just a reminder that we do expect good growth across our segments this year, including in Prepaid. So even though it was down in Q1, we do expect better growth throughout the year. And just looking back, still very confident in that business. Look back to 2024, we did grow that business 26%. And even though we were down last year, we were only down 3% once you adjusted for the accounting change that we made in Q2. So I do expect that return to growth as well as the increase in gross margins throughout the year. John D. Lowe: Okay. Thank you very much. Thanks, Hal. Operator: And there are no questions in the queue. I would like to turn the call back over to John D. Lowe for any closing remarks. John D. Lowe: Thank you to all of our CPI Card Group Inc. employees for their dedication and for continuing to deliver for CPI Card Group Inc. and our customers. Tara Grantham: Thank you all for joining our call this morning, and we hope you have a great day. Operator: Thank you for your participation. This does conclude today's conference. You may now disconnect.
Operator: Hello, and thank you for standing by. At this time, I would like to welcome everyone to the Q1 2026 Pediatrix Medical Group, Inc. Earnings Conference Call. Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Mary Ann Moore, General Counsel. You may begin. Mary Ann Moore: Thank you, Operator, and good morning. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix Medical Group, Inc. management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Pediatrix Medical Group, Inc. undertakes no duty to update or revise any such statements, whether as a result of new information, future events, or otherwise. Important factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the sections entitled “Risk.” In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's press release, our quarterly and annual report, and on our website at pediatrics.com. With that, I will turn the call over to Mark Ordan, our Chief Executive Officer. Mark Ordan: Thank you, Mary Ann, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer. We were pleased with our strong first quarter results driven by top-line growth with adjusted EBITDA coming in at $58 million. We saw strong pricing that outpaced a modest decline in same-unit volumes across our service lines. Although recent volume results do not show a trend, our payer mix continues to be strong, and we are comfortable with our decision to not have a headwind estimate for the potential effect of the tax subsidy lapse. We know that major hospital systems have seen a decline in patient volume and revenue, and we may see that in the future. For now, this area is strong for us, and we will continue to report on it as the year continues. Given the uncertainty of whether we will experience this headwind, and since it is still early in the year, we are reaffirming our full 2026 outlook of $280 million to $300 million in adjusted EBITDA. Kasandra Rossi will now provide some additional details, and I will be back shortly. Kasandra Rossi: Thanks, Mark, and good morning, everyone. Our consolidated revenue increase was driven by same-unit growth of just under 3% and net non-same-unit activity of about $6 million, including growth from recent acquisitions and organic growth, which was partially offset by decreases in revenue from our portfolio restructuring. Pricing growth of 4% was driven by solid RCM cash collection, increases in contract administrative fees, favorable payer mix, and increased patient acuity in neonatology. While we saw volume declines across our service lines during the quarter, including NICU days that were down about 1%, practice-level S, W, and B expenses increased by $9 million year over year, primarily reflecting same-unit increases in clinical salary expense. Net salary growth for the first quarter was in line with the ranges we have seen over the past 18 months that have averaged around 3%. Our G&A expense increased slightly year over year, driven by a modest increase in salary and incentive compensation expense, partially offset by decreases in professional services and IT expenses. D&A expense increased slightly year over year, resulting from higher same-unit amortization expense and D&A related to our recent acquisitions. Other nonoperating expense decreased year over year, driven by a decrease in interest expense on modestly lower average borrowings at slightly lower rates. Moving on to cash flow. As a reminder, we are a user of cash in the first quarter of each year as we pay out incentive compensation and other benefits, namely 401(k) matching contributions. We used $130 million in operating cash flow in the first quarter compared to $116 million in the prior year, with the differential related to decreases in cash flow from AP and accrued expenses primarily related to incentive compensation payments, and decreases in cash flow from AR, partially offset by higher earnings. We also deployed $21 million of capital during the quarter to buy 1 million shares of our stock, leaving us with 82 million shares outstanding. We ended the quarter with cash of just over $200 million and net debt of just over $385 million. This reflects net leverage of just over 1.3 times using the midpoint of our updated adjusted EBITDA outlook for 2026. Our accounts receivable DSO at March 31 of 42.5 days was down slightly from December 31, but was down over five days year over year, driven by improved cash collections at our existing units. We are maintaining our previously issued outlook range for the full year of $280 million to $300 million in adjusted EBITDA, and while our first quarter results represented about 20% of that annual expected range, we do expect that adjusted EBITDA for the remaining three quarters will be fairly ratable. I will now turn the call back over to Mark. Mark Ordan: Thank you, Kasandra. I have pounded the drum over the last few quarters that investments in care quality are always wise. Hospital systems want a partner who will outperform, and our patients, of course, deserve nothing less. In the first quarter, we announced that two extraordinary physician leaders from the top of academic medicine are joining Pediatrix Medical Group, Inc.: Dr. Jim Barry, the Chief Clinical Quality and Transformation Officer, and Dr. Jochen Proffitt as Chief Quality Advisor. Jim is nationally recognized for his contributions in neonatal critical care, artificial intelligence in medicine, patient safety, and health care leadership. He has co-founded two national organizations: one is a learning collaborative of neonatologists, data scientists, and clinical information scientists to study the application of artificial intelligence in neonatal critical care and pediatric medicine; and the other is the Clinical Leaders Group of the American Academy of Pediatrics, which is a training, education, and collaboration resource for medical and quality directors of NICUs in the United States. Dr. Barry joined Pediatrix Medical Group, Inc. from the University of Colorado Health System, where he was chair of newborn governance as well as a professor of pediatrics and neonatology at the University of Colorado School of Medicine. Obviously, Jim, who is an MD and an MBA, brings a full package of quality, data, AI, and business acumen. Jochen Proffitt brings nearly two decades of leadership in perinatal quality improvement as chair and principal investigator of the California Perinatal and Maternal Quality Care Collaboratives. He is a professor of pediatrics at Stanford Medicine. These individuals will respectively help lead and advise a team of extraordinary clinicians to continue to raise the bar on quality through analyzing clinical data, reducing care variation, and improving patient outcomes using evidence-based strategies. Beyond the benefit to our core that our quality focus brings, our team is actively engaged in many opportunities to expand what we do. We have more hospital partnerships than any other organization in our core fields, which provides great opportunities in neonatology, maternal-fetal medicine, OB hospitalist, and pediatric intensive care. In addition to our leading in-house presence, we see a major opportunity to expand our teleservices and obstetrics presence nationwide. We believe that an organization like ours will continue to outperform if we stay laser focused on care quality that is data-based. We see great opportunity to leverage our leading footprint both through our data and through tele and remote services. It is that insistence on quality that binds us to our patients and hospital partners. We have the ability to use our strong balance sheet where there are opportunities to expand our core and emerging areas. On our last call, I spoke about a new program to integrate share price-based awards as part of our compensation program. We successfully rolled this out in last year's fourth quarter and in Q1 of this year. Included in this was welcoming 45 clinician leaders to our inaugural class of Pediatrix partners. This group is already actively helping us expand on the work we are known for by combining this superb clinical acumen with the spirit of ownership and alignment. We believe this is unique in our field—but so is Pediatrix Medical Group, Inc.—and we can already see the tangible positives of this new initiative. As a matter of fact, Drs. Proffitt and Barry are joining us because of the really hard work that some of our doctors did to look for the two top people in the field to join us, and I thank them for that. I will close by speaking about our General Counsel and CIO, Mary Ann Moore. In our filing this morning, we announced that Mary Ann will be leaving her role and retiring before the end of the year. In 20 years with Pediatrix Medical Group, Inc., Mary Ann has, and continues to, play a very important role in many areas of our operations, from legal and administrative to overall supervision and guidance. Mary Ann is a trusted colleague and adviser to the whole company and certainly to me and our Board of Directors. We will promptly begin a new search for a new General Counsel. We will now open the call for questions. Operator: We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star 1 again. Our first question comes from the line of Ryan Daniels with William Blair. Ryan, please go ahead. Matthew Mardula: Hello. This is actually Matthew Mardula on for Ryan. Thank you for taking the questions. When I look at pricing above 4%, are there any potential headwinds or impacts that we should be aware of, or that you see internally, that could reduce the trajectory of this growth going forward? I know you touched on the tax subsidy, but any other details there? Then are you still expecting pricing to be flat for the rest of the year, given the Q1 results? If not, how are you thinking about pricing for the rest of the year? Kasandra Rossi: Sure. On the pricing components, we have talked about the same four factors that have driven pricing over the past several quarters. The first is our RCM cash collections, and we mentioned in 2025 that we had almost a hockey-stick effect for those RCM cash collection impacts coming through pricing. We would expect the first half of the year to still be strong, and then I think it will start to lap as we move into the second half. The other three components that have driven positive pricing are contract revenue—those have continued to be strong. We do not know that will continue at this pace, but right now we know hospitals are facing pressures in that area, and it continues to be strong for us. The third item is payer mix. I know you touched on the tax subsidies. That is an unknown for us, but that has continued to be an area of strength for us that has flowed through pricing. The final one is acuity. We have seen really strong acuity, primarily in neonatology. These four factors have contributed to the last several quarters. Coming in strong at over 4%, we would expect that to tick down a bit as we move through the year, but I do not know of any other headwinds. Matthew Mardula: Great. Thank you for that. Over the last two and a half quarters we have seen declining volume trends, and I know last quarter was more because of the strong top line, but any thoughts on the continued decrease in volume in NICU days? I know it is difficult to pinpoint a reason for this, but how are you thinking about volume going forward and the potential for improvement? Mark Ordan: As I said in my comments, while we saw that in those two quarters, in recent results we have not seen a continuation of that trend. We do not have any different forecast there. Matthew Mardula: Great. Thank you for that. Operator: Our next question comes from the line of Jack Slevin with Jefferies. Jack, please go ahead. Jack Slevin: Hey, good morning. Appreciate the color so far. I want to double click a bit on the pricing side to understand two things. The rev cycle piece is very clear. From a visibility perspective—and I appreciate all the comments around HIX or the subsidies going away—is there anything you can share on what you are seeing on the ground right now as it relates to that continued strength in payer mix, or things you are hearing out of your MFM practices that might tell you how things might be shifting around? We have started to get some data points from payers and from hospitals on what they have seen from volumes or enrollments in HIX, but curious if there is anything additional you can share on that front. Then on the admin fee side, I understand that can move around a little; any visibility to that for the rest of the year would be really helpful. Thank you. Mark Ordan: On the first part, we do not see any signs of weakness. We have looked carefully by geography and by type of line of service, and we do not. I would not say we are surprised; we are pleased. We have speculated that perhaps people are making a cost-benefit calculation when it comes to pregnancy that keeps them in the exchanges. We do not really know, but we have not seen any negative. We expected, as I said on the last call, that there would be some negative around it, and as I said earlier, we know that hospital systems broadly have experienced it. But in no line of our business have we seen any weakness or any trend that would suggest any difference. It could be that there will be a delayed effect, or it could be that we can get through this as we have been. I am sorry, Jack—you also had a question on contract revenue. Kasandra Rossi, do you want to take that? Kasandra Rossi: Sure. On that line, one of the things we have talked about is there are sometimes salary increases in S, W, and B that we will only effect if we do get support from a hospital, so there is some net effect there. Even though you are seeing a bit of growth on that top line, some of that is really going to pay for some of the salary increase on the S, W, and B line. We do anticipate continuing to have those conversations. They are getting tougher, so we hope that it continues to stay strong. It has been anywhere from 10% to 20% of our pricing increase for the last few quarters, and we expect that as we move through the year. If anything changes, of course, we will let you know. Mark Ordan: Do not misunderstand. When it may sound like we are a one-trick pony talking about quality, the whole thesis of Pediatrix Medical Group, Inc.’s business is to be an irreplaceable partner to our hospital partners. If we are providing superior quality and really being a leader in our field, we think it justifies the kind of payments that we get. Kasandra is right that the environment for hospitals is tougher than it has been, which just makes us make sure that we are offering services that hospitals find very valuable and irreplaceable. Jack Slevin: Got it. Appreciate that. Maybe I will sneak two into one to wrap on my end. The couple of deals you have done—obviously not massive in terms of dollar amounts—but sizable enough that they could have a little bit of impact. Anything you can share in terms of what you are seeing on that front? Then, Kasandra, as it relates to the second quarter, are there any one-timers or things we should think about as we are looking at that for modeling purposes? Thanks. Mark Ordan: Because they are not material, we do not disclose the results. I will say that the recent acquisitions we have made have done better than our initial projections, so we are very happy about that. As I said in my remarks, we are actively working on opportunities that we think could bear fruit and be great additions to Pediatrix Medical Group, Inc. Kasandra Rossi: No one-timers to call out for the quarter, Jack. Jack Slevin: Awesome. Thank you both. Appreciate it. Mark Ordan: Thank you. Operator: Again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from the line of Pito Chickering with Deutsche Bank. Pito, please go ahead. Philip Chickering: Hey, good morning. Thanks for taking my questions. One more pricing question, and I apologize—it was so much stronger than expectations and obviously had a positive impact on EBITDA. Can you quantify how much of the pricing in the first quarter came from cash collections, just as you think about it fading or comping out in the back half of the year? And then, as you said on the admin fees, that is about 10% to 20%—I assume that was the same for this quarter. What percent of the book has admin fees at this point, and how has that changed year over year? Once you have an admin fee, is that a one-time step-up and then it stops increasing, or does that increase at inflation levels once it is implemented? Kasandra Rossi: About 25% from cash collections. On admin fees, that was around 20%—on the higher end—for the quarter. As to the prevalence and how they change, it depends on the contract. They vary. We have a couple thousand of those contracts. Philip Chickering: Okay, fair enough. Is there any ballpark on how many increase at inflation versus remain flat, just to help with modeling? Mark Ordan: No. I know where you are going with that, but as Kasandra said, we have thousands of contracts and they are all very different. If there were a trend in any way, we would call it out. Philip Chickering: Okay, fair enough. Last question—and maybe I missed this—but I think the previous question asked if you are going to maintain pricing being flat for the year. Are you still maintaining that? Looking at the first quarter with a strong comp, if this is stable, it could lead to pricing of a couple percent this year versus guidance. Are you still maintaining flat pricing guidance for the year? Kasandra Rossi: Yes, we are. We do expect that RCM cash collections, which have been really strong for us, will tail off as we move through the year, and so we are maintaining our flat outlook. It is early; if that does change as we move into the next quarter, we will update you on that. But right now, we are maintaining flat. Mark Ordan: After the last quarter, when we forecast the year on our last call, people asked why we did not put in some kind of hedge. I would say everything indicates that things continue to be strong, so it is hard to forecast something based on a fear or a possibility if there is no data behind it. That is why we are where we are. Philip Chickering: Fair enough. That is it for me. Thanks for the questions, and nice job in the quarter. Kasandra Rossi: Thank you. Operator: There are no further questions at this time. I will now turn the call back over to Mark Ordan for any closing remarks. Mark? Mark Ordan: Thank you all very much for your support, and we look forward to keeping you updated as the year unfolds. Have a great day. Operator: That concludes today’s call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the James River Group Holdings, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the conference over to Bob Zimardo, Senior Vice President of Investor Relations. You may begin. Bob Zimardo: Good morning, everyone, and welcome to James River Group's First Quarter 2026 Earnings Conference Call. A quick reminder that during the call, we will be making forward-looking statements that are based on current beliefs, intentions, expectations and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially. Such risks and uncertainties are detailed in the cautionary language regarding forward-looking statements in yesterday's earnings release and the risk factors of our most recent Form 10-K and other reports and filings we have made with the SEC. We do not undertake any duty to update any forward-looking statements. In addition, during this presentation, we may reference non-GAAP financial measures. Please refer to our earnings press release for a reconciliation of these numbers to GAAP, a copy of which can be found on our website. And lastly, unless otherwise specified for the reasons described in our earnings press release, all underwriting performance ratios referred to are for our continuing operations and business that is not subject to retroactive reinsurance accounting for loss portfolio transfers. I will now turn the call over to Frank D'Orazio, Chief Executive Officer of James River Group. Frank D'Orazio: Thank you for the introduction, Bob. Good morning, everyone, and thank you for joining us today. As we do each quarter, we look forward to discussing notable highlights of our performance, updates on the execution of key corporate objectives and the progress that James River continues to make in becoming a best-in-class E&S carrier. This quarter, our E&S results were negatively impacted by a sizable reinsurance reinstatement charge on a 2022 casualty treaty triggered by an individual claim, a disappointing development on an otherwise solid quarter. As we've discussed in the past, the organization restructured its E&S treaty placements in July of 2023 to prevent these types of outsized adjustments from impacting future results. In a few moments, Sarah will provide additional details on the specifics of this reinsurance charge. But before she does, I'd like to spend a few minutes discussing our current view of the market opportunity for James River as well as our progress across a number of prioritized corporate initiatives. First and foremost, relative to market opportunities, we continue to believe that heightened discipline is essential in a transitioning marketplace, and James River has been well served by the refinement of our underwriting appetite, focus on smaller insureds, investment in underwriting governance and performance monitoring and prioritization on underwriting margin, particularly over the last several years. For 2026, we feel our greatest opportunity to push rate remains in our Excess Casualty division and the greatest opportunities for overall growth reside in our specialty lines division as well as our small business unit, underwriting areas that we feel hold the most attractive margin in today's marketplace. At the segment level, casualty rates were positive at 7.7% for the quarter and were consistent with our expectations. While pressure on rates has been most pronounced in our excess property division for several quarters now, we've also recently seen increasing competitive pressure in our primary general casualty department. And as a result, our underwriters are navigating opportunities in those lines with appropriate prudence. For the segment, submission growth was strong at 4%. And for the first time in several quarters, we modestly grew gross written premiums across our E&S Casualty and Specialty portfolios with 7 of our 14 underwriting divisions reporting positive growth. Excluding our manufacturers and contractors business, where we made refinements and appetite last year and our small delegated contract binding portfolio, which is currently in runoff, our casualty portfolio was up over 6% when compared to the prior year. Looking more closely at production, targeted growth during the quarter was driven by several areas I have highlighted this morning. In the aggregate, specialty lines were up 6%, driven by professional liability, energy and health care and excess casualty premiums increased 15%, largely driven by our underwriters' ability to continue to drive rate. As mentioned earlier, during 2026, the company has prioritized a number of initiatives aimed largely at making James River a more efficient organization while also significantly improving our business development acumen and expanding our presence with our distribution partners. Continuing the same discipline that we exhibited during 2025, we also reduced G&A expenses across the group during the quarter by 11%. Finally, as we discussed during last quarter's call, we are excited about the significant investments in technology that we believe will increase underwriting efficiency while improving the underwriting tools and resources available to our E&S underwriting staff. The rollout of AI-enabled underwriting workbench technology is already underway with our first 2 underwriting departments being rolled out this quarter, and we expect to report on the progress of the initiative in future quarters. We are confident that the combination of underwriting improvements and appetite changes we have made over the last several years in concert with continued expense vigilance and technology adoption will allow us to optimize our SME platform and further differentiate our very special wholesale-only distribution model. As we manage the market cycle, I'm encouraged by the uptick in focus production in areas we are hoping to scale and by our ability to continue to push rate where necessary as we navigate through 2026. It continues to be a dynamic and competitive marketplace, but we are well positioned to succeed, strongly supported by our underwriters and wholesale distribution partners. With that, I'll turn it over to Sarah to walk through the financial results in more detail. Sarah Doran: Thank you, Frank, and good morning, everyone. This quarter, we reported a net loss to common shareholders of $10.9 million, which compares to net income of $7.6 million for the first quarter of 2025. Operating earnings were $5.8 million or $0.12 per diluted share as compared to $9.1 million or $0.19 per share. As Frank mentioned, our results this quarter were negatively impacted by $6.7 million of reinsurance reinstatement premiums, largely related to a single E&S claim from 2022 that was booked and settled in the first quarter and subject to our prior $9 million excess of $2 million casualty reinsurance treaty. The runoff structure of that treaty includes specific amounts of reinstatement premium potential for each accident year, leaving reinstatement premium aggregate exposure of about $9 million across accident years 2022 and prior. The structural changes that we made to that treaty should mitigate the forward impact of earnings volatility for accident years 2023 and on as we now pay a higher rate on such a premium upfront rather than pay meaningfully for these reinstatement premiums. Absent the reinsurance reinstatement impact, operating earnings would have been $0.22 per diluted share. This impact reduced net written premium, net earned premium and underwriting income for the quarter. It added approximately 5 points to the group combined ratio of 104.6%, including almost 2 points to our expense ratio, which was 35.4%. Absent this impact, the consolidated combined ratio would have been 99.7%, comprised of an adjusted loss ratio of 66% and expense ratio of 33.7%. For E&S specifically, the combined ratio of 96.5% was driven by a 68% loss ratio and a 28.5% expense ratio. And again, when adjusted for the impact of reinstatement premiums, the E&S combined ratio would be 91.8%, which is right in line with that of the prior quarter. Moving quickly to expenses. As Frank mentioned, expense efficiency continues to be a priority and G&A expenses declined 11% compared to the prior year quarter, driven by reductions within Specialty Admitted, where they were down 46% in the Corporate segment, where they were down 15%. Underlying loss trends remain stable, and the reserves continue to reflect improved risk selection in the more recent accident years. We recorded de minimis favorable reserve development of $165,000 split between E&S and Specialty Admitted. Consistent with the prior year period, and we continue to observe lower frequency and incurred losses in recent accident years, while remaining appropriately cautious in recognizing those trends as the business seasons. During the quarter, we ceded $16.2 million of development to the E&S top-up adverse development cover, which covers accident years 2010 through 2023. There is $7.5 million remaining on that cover. Finally, moving on to investments. Net investment income was $21.3 million for the quarter, an increase of 6.6% year-over-year. These results were driven by improved private investment income due to our move over the last 18 months to invest capital efficiently in private credit rated note vehicles as well as the deployment of cash into our high-grade portfolio. While we did have strong income from our diversified bank loan portfolio, which represents about 8% of our total cash and invested assets, we also saw some volatility there as the largest driver of net realized and unrealized investment losses. Overall, though, the portfolio remains positioned fairly conservatively with about 73% of it invested in high-grade fixed income at an average duration of 3.5 years and an A+ average credit rating. Tangible common equity per share declined modestly to $8.77, reflecting the combination of investment market movements and the impact of the legacy reinsurance structures. With that, I'll turn the call back to the operator to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Mark Hughes with Truist. Mark Hughes: Frank, you had mentioned a little more competition in the primary general casualty. Where do you see that coming from? How significant do you think that is? Frank D'Orazio: So in casualty lines, first of all, thanks for the question, Mark. In casualty lines, we've seen fairly aggressive MGAs and just an overall increase in capacity from carriers interested in the E&S sector as others, I think, have reported. We've also seen some of the newer competition not only competing on price, but in terms and conditions that at this point, seem unwise, particularly in the GC space. I mean fortunately, for James River, we've been in the sector for greater than 20 years with an existing portfolio and long-standing relationships with distribution partners and insurers. But we definitely see a break between underwriters being able to push rate in the excess lines versus the primary lines, much more significant. There seems to be more respect for loss trend from excess casualty underwriters at this point. Mark Hughes: Understood. And then, Sarah, on the adverse development cover, the top-up cover, what through the total reserves that are covered by that? And then if you've got it in front of you, how much has been paid on those expected losses? Just trying to figure out what the paid versus unpaid is at this point on the relevant reserves. Sarah Doran: Yes. Thanks, Mark, for the question. I don't have the page right in front of me, but very little of the reserves subject to those -- both of those structures would have been paid by now. I can certainly follow up with that. But order of magnitude, I would expect that number to be fairly low. And then the top-up adverse development cover and the other E&S ADC, LPT cover all E&S accident years 2010 through 2023 with the exception of the excess property book and the exception of the runoff Uber portfolio, which is covered by a legacy structure as well. Mark Hughes: Understood. If I could slip a third one in. Frank, you talked about the AI-enabled technology on the underwriters work bench, I think. Could you expand a little bit more on that, kind of what are the kind of practical implications of their day-to-day underwriting activity? And what do you think it could mean in terms of either efficiency, underwriting effectiveness? Just curious. Frank D'Orazio: Sure, Mark. So we spent the first -- really the last few years, I would say, kind of updating and upgrading our core systems, which has enabled us to now explore and invest in these AI-enabled work benches. And we see it as a competitive enabler just allowing us to optimize operational efficiency. But it really runs a gamut of clearance through risk prioritization against our appetite and production source relationships, data ingestion from third parties and ultimately, we will facilitate quote and buying processes. So we see it as a major efficiency play relative to being able to turn around quotes quicker and in a more targeted fashion. Operator: Your next question comes from the line of Brian Meredith with UBS. Brian Meredith: Frank, just following up on the market conditions. Perhaps you can kind of give us a little color on what's going on as far as movements between E&S and the admitted markets. We've heard that we're starting to see some business move back to the admitted market. Frank D'Orazio: We've definitely seen that as well, particularly in property. We've definitely seen that. But we've now started to see it in some of the more standard lines like primary casualty as well. So from a primary basis, some lines that have historically been in the E&S marketplace now starting to attract some attention from standard markets as well. But I would say, to date, it's been most broadly observed in the property area for us specifically. Brian Meredith: So would you like characterize as like a typical cycle here where business starts to move back a little bit? The market has been transitioning... Frank D'Orazio: I'm sorry, Brian, did I catch that? Brian Meredith: You think it will continue? Frank D'Orazio: Yes. So listen, I think we're several quarters now into a transitioning market, and this is kind of an old story, right? So we start to see some of this business now get the attention of the admitted market. But I think it's going to be more specific to certain classes of business. And anybody who hangs a shingle, writes a primary general casualty capability or has a primary casualty capability. So that's an obvious choice as is property as well. We're seeing, I think, a little bit more resilience in some of the specialty lines. Brian Meredith: Appreciate that. That's great. And then, Sarah, just one other just quick question on this reinstatement. Just trying to get my hands around it. So I think what's going on here, right, is that because there was perhaps some development on this claim is why you had the reinstatement premium come through. Is that true? So like if the treaty wasn't in effect, would there have been adverse development booked this quarter on this claim? Sarah Doran: Well, that -- let me just be clear. The 9X 2, there's an awful that covers the majority of our E&S book. That's obviously a prospective treaty. So I want to differentiate that from the retrospective treaties. And we have reinstatement premiums pretty frequently. I think what stood out this quarter, Brian, was that it was more sizable. So it was a larger claim that settled. But there is a fair amount in that book that, that treaty protects us from on an ongoing basis. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call back over to Frank D'Orazio, CEO, for any closing comments. Frank D'Orazio: Thank you, moderator. I also want to thank everyone who listened to our call for their time and thoughtful questions this morning. While the quarter did have its headwinds, a very positive takeaway that remains is the underlying strength of the improved business model that we continue to build and most notably, the very targeted growth in Specialty and Casualty lines, the expense discipline and a team that is executing in today's market. We are well positioned for 2026 and look forward to keeping you updated on our progress in just a few months. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
Operator: Welcome to GlobalFoundries First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Eric Chow, Head of Investor Relations. Please go ahead, sir. Eric Chow: Thank you, operator. Good morning, everyone, and welcome to GlobalFoundries' First Quarter 2026 Earnings Call. On the call with me today are Tim Breen, CEO; and Sam Franklin, CFO. A short while ago, we released GF's first quarter 2026 financial results which are available on our website at investors.gf.com, along with today's accompanying slide presentation. This call is being recorded, and a replay will be made available on our Investor Relations web page. During this call, we will present both IFRS and non-IFRS financial measures. The most directly comparable IFRS measures and reconciliations for non-IFRS measures are made available in today's press release and accompanying slides. Please note that these financial results are unaudited and subject to change. Certain statements on today's call may be deemed to be forward-looking statements. Such statements can be identified by the terms such as believe, expect, intend, anticipate and may or by the use of the future dense. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks and uncertainties described in our SEC filings, including in sections under the caption Risk Factors in our annual report on Form 20-F and in any current reports on Form 6-K furnished with the SEC. In terms of upcoming events, we look forward to hosting our Investor Day this Thursday, May 7, with live public webcast beginning at 9:00 a.m. Eastern Time. During the event, our leadership team will provide updates on GF's strategy, growth initiatives and long-term outlook, followed by a Q&A session. We will also be participating in fireside chats at the JPMorgan Global Technology, Media and Communications Conference in Boston on May 19 and the TD Cowen Technology, Media and Telecom Conference in New York City on May 27. We will begin today's call with Tim providing a summary update on the business environment, technologies and end markets. Followed by Sam, who will provide details on our first quarter results and second quarter guidance. We will then open the call for questions with Tim and Sam. We request that you please limit your question to one with one follow-up. I'll now turn the call over to Tim. Timothy Breen: Thank you, Eric, and welcome, everyone, to our first quarter 2026 earnings call. GF delivered a strong first quarter with all of our non-IFRS profitability metrics at or above the high end of their respective guidance ranges. This was the result of excellent execution by the team with a focus on delivering for our customers. These results demonstrate a strong step forward in our multiyear journey to enhance the quality of our revenue composition, improve our structural cost position and achieve efficient scale across our world-class fabs. We have made meaningful traction in secular growth end markets, where our differentiated technology drives share growth and [indiscernible] value creation. The first quarter continued to demonstrate proof points of this transformation. We delivered strong double-digit percentage growth in both automotive and comms infrastructure and data center. I'm proud of our team's accomplishments this quarter. We continue to execute to our proven 3-pillar strategy: to innovate and deliver a unique technology road map; to deepen our engagement throughout our customers' design cycles and to scale our diverse and fungible global footprint. Let me now update you on our progress on each. First, our unique and innovative technology road map. There is no better proof of our technology innovation that with our industry leadership in optical networking, which includes both our silicon sonics and silicon germanium capabilities. With the advent of optical for scale across scale out and scale up networks, the market is moving to adopt our solutions for pluggable, near and co-packaged optics. With process technology leadership, in-house design, assembly, test and packaging ecosystems, all supported with high-volume manufacturing in our advanced 300-millimeter fab footprint, including here in the U.S., we believe no other company has our suite photonics offerings at scale. Beyond silicon photonics, we also believe we have robust growth and opportunity within our silicon germanium solutions in the AI data center. SiGe by CMOS, or just SiGe, is another great example of GF's preparation and foresight meeting a strong positive inflection point in the market. Our SiGe technology is a critical enabler for data center networks where [indiscernible] amplifiers, TIAs and drivers using GF's solutions support the conversion between high-speed electrical and optical signals. GF SiGe has industry-leading FT and S-MAX performance. This means faster, cleaner signal amplification, more headroom and lower data loss across the system. TIAs and drivers are required on virtually every data center connection, and industry forecasts are anticipating significant unit growth in the coming years. Correspondingly, we are seeing very strong customer demand for our SiGe solutions with capacity at our Vermont fab oversubscribed through well into 2027. As these city offerings are meaningfully margin accretive to our overall business, we are expanding SiGe capacity to meet accelerating customer demand. We expect GF SiGe opportunity to be a substantial driver of high-quality long-term revenue growth that complements [indiscernible] to form a comprehensive optical networking portfolio. Another notable proof point of GF leadership was announced at the Optical Fiber Communications conference, OFC, in March. At OFC, [indiscernible] members of the Optical Compute Interconnect Multi-Source Agreement, or OCI MSA, including AMD, Broadcom, NVIDIA, Meta, Microsoft and OpenAI, established the CPO industry standard for scale-up networks that perfectly aligns with the capabilities GF has spent years developing. This was no accident. Thanks to our proven development and leadership in Dense Wavelength Division Multiplexing, or DWDM, GFNR partners provided industry proof points, laying confidence to the OCI founders to define this high standard. As a result, just a month after the OCI standard was announced, year-to-date, GF announced its complete optical module solution for NPO and CPO, known as scale or silicon photonics co-packaged advanced light engine. This is not just the industry's first OCI MSA capable platform, the technical specs exceed the MSA requirements, supporting our customers' road maps for multiple generations. For example, scale fiber coupling is natively broadband, which enables it to excel at minimizing insertion loss, a key differentiator for CPO. Our years of development, including partnering with our customers to design scale from the ground up, feedback so far has been excellent. In the first quarter, we saw new tape-outs in Multi New York for a pair of CPO design wins that support the new optical compute interconnect OCI standard for scaled networks. We are excited to share more details on scale and other developments at our Investor Day on May 7. also, at OFC in March, GF made several announcements in conjunction with partners that showcased our robust silicon photonics offerings. Notable highlights included the following: Senco and GF demonstrated a wafer-level detachable fiber interface solution for CPO, a critical breakthrough that enables [indiscernible] connectivity to be attached and detached through the entire [indiscernible] development process for precise and repeatable testing. Together with Corning and EXFO, GF showcased a complete ecosystem of CPO technology, which combined attachable fiber connectivity and automated die-level testing with high-volume silicon photonics manufacturing. Finally, we announced a strategic partnership with Siltech to mass produce 200 gig per lane receiver photonic ICs for pluggable optical transceivers using our process technology. All of these recent developments represent a growing body of proof points for the value our innovative technology road map provides. Let me now discuss our second key strategic pillar and provide an update on our customer partnerships and commercial engagements. Thanks to our robust product portfolio and deep partnerships with customers, we continue to accelerate our design win momentum. In the first quarter, we saw a 50% increase in design wins compared to the same period a year ago, with excellent representation across all 4 major end markets. Not only does this build on the record design win year in 2025, it is another leading indicator of our tape-out for revenue momentum in the years to come. Notable commercial engagements in the quarter included the following highlights. GF and Renesas announced a multibillion-dollar strategic partnership that expands [indiscernible] to GF technologies, including FDX, BCD and feature is CMOS with integrated nonvolatile memory. These platforms will support SoCs, power devices and MCUs for applications such as data center power, advanced driver assistance systems and secure industrial IoT connectivity. Tape-outs under the broadened collaboration are already underway, and we believe this partnership will contribute meaningfully to continued outperformance and ramp of our data center business over time. In automotive, we are particularly encouraged by the strong customer momentum around our new Auto Grade 1 embedded MRAM capability on FDX. This technology offers industry-leading 100 megahertz class access times for code execution directly from MRAM, combined with ultra-low power operation and proven insurance and reliability up to 150 degrees C. Our lead customers have taped-out with this feature. And as highlighted in our recent announcement, we are seeing growing engagement and traction with Tier 1, such as Bosch, as this technology moves towards production. This underscores the differentiated value of our SDX platform as automotive customers transition to a next generation of software-defined real-time systems. In our smart mobile devices end market, we continue to secure additional design wins in the quarter that expand our reach into new applications and emerging form factors that benefit from the features we offer such as low power, rate of reliability and superior RF performance. For example, in the first quarter, we secured 2 new design wins on our SDX platform for micro LED back planes used in smart glasses, a fast-growing market is starting to gain adoption. In the realm of robotics and typical AI, in March, GF announced a partnership with Inova Semiconductors to deliver our robotics control reference platform that combines MIPS open risk 5 compute and mixed-signal technologies with Inova's high-speed communication links. This physical AI reference platform will simplify robot design, reduce bond costs and accelerate time to market, enabling next-gen humanoid and advanced robotics. Finally, for optical networking reported within our comms infrastructure and data center end market, we have substantial forward momentum in both customer wins and pipeline. In the first quarter, we executed additional tape-outs for silicon photonics that reinforce our confidence that we are on track to roughly double our silicon photonics revenue in '26 and to achieve greater than $1 billion silicon photonics revenue run rate exiting 2028. GF is now designed in at 3 of the top 4 pluggable optical transceiver companies. Customers continue to provide excellent feedback on our suite of pluggable offerings that enable 1.60 solutions as well as a road map to 3.2T and beyond. With our proven record of high body manufacturing at scale, we believe we can sustain a strong growth trajectory in this area for years to come. Now let me address our third strategic pillar, the value and importance of GF's unique diversified manufacturing footprint. Recent world events have only reinforced the reality that faces business and government leaders around the globe. Concentrated supply chains are now subject to previously unimagined risks. The [indiscernible] lies in diversification flexibility and security. All 3 areas that GF is uniquely positioned to provide our customers. In a fragmented geopolitical environment, our 3 continent manufacturing footprint across the U.S., Germany and Singapore is a tremendously valuable asset for our customers. In particular, we have invested for years to cross-qualify fungible capacity across our fab network, meaning a customer who only design with GF once and gain the flexibility to manufacture out of 3 continents. Our one-of-a-kind footprint provides supply chain resilience, closer proximity to end demand and greater nimbleness to shift supply quickly as market demand changes. For many of our customers, geographic flexibility is no longer a nice to have, it is a requirement. As a result, we continue to see a meaningful increase in customer engagements and design win activity specifically linked to onshoring. For example, last month, Apple announced a joint collaboration with [indiscernible] Logic and GF to bring new process technologies to our Multi New York fab. This marks the first U.S. availability of the silicon platform that supports clinical functions in upcoming Apple devices, including next-generation components used in face ID systems. GF is proud to be a founding partner in Apple's American manufacturing program. We see this as another step in a growing partnership and just one notable example of our onshoring value proposition. We are not just partnering with customers to onshore semiconductor supply. We are also working closely with the governments of the U.S., Germany and Singapore. In the U.S. in particular, support frameworks such as chips grants and investment tax credits are an important element to our long-term strategic road map, and we continue to deepen our partnership with the U.S. government both for capacity growth as well as innovation and technology onshoring. In summary, I'm deeply proud of our team's execution in this quarter, which advanced GF across all 3 strategic pillars. With our deep and differentiated technology portfolio, we are reaping the benefits of years of innovation. With our customer-first approach and design enablement capabilities, we remain the partner of choice. With our unique and diversified scaled manufacturing footprint, we are empowering the global onshoring megatrend. All of these place GF at the heart of the industry transformations to come. I'll now pass the call over to Sam for a deeper dive on first quarter 2026 financials. Sam Franklin: Thank you, Tim. For the remainder of the call, including guidance other than revenue cash flow and net interest income, I will reference non-IFRS metrics. GF delivered strong results in the first quarter, with revenue in the high end of the guidance range and gross margin and operating margin well above the high end of the ranges. In particular, our gross margin achieved the first quarter record and grew over 500 basis points year-over-year, representing the biggest expansion in 3 years. This is testament to our team's execution and relentless focus on the structural levers driving GF sustained improvement in profitability, and we believe we're only in the early stages of this margin expansion opportunity. Before I go deeper into the financials, I'd like to take a moment to update you on some terminology changes to our revenue categorization. The acquisition of MIPS, closed in August 2025, as well as the announced acquisition of the Synopsys ARC, our key business, which we expect to close towards the end of the first half of 2026, are both helping to transform GF into a holistic technology solutions provider. As a result, we believe that non-wafer revenue no longer captures the broader reach of our customer offerings, which we expect to include an increasing proportion of revenue from IP, licensing and software over time. Similarly, wafer revenue is evolving to capture our expanding manufacturing capabilities in custom silicon and advanced packaging, which we look forward to covering in more detail at our Investor Day on May 7. As a result, revenue previously referred to as wafer revenue will now be categorized as revenue from manufacturing services, and non-wafer revenue will now be categorized as revenue from technology services. We believe these categories better reflect the depth and breadth of our business model today and going forward. Now on to the results. We delivered first quarter revenue of $1.634 billion, down 11% sequentially and up 3.1% year-over-year. We shipped approximately 579 300-millimeter equivalent wafers in the quarter, down 6% sequentially and up 7% from the prior year period. Revenue from manufacturing services accounted for approximately 87% of total revenue. Revenue from Technology Services, which includes revenue from IP, licensing, software, reticles, nonrecurring engineering, expedite fees and other items, accounted for approximately 13% of total revenue for the first quarter. Revenue upside in the quarter for Technology Services was driven by increased mask and reticles as we ramp customer tape-outs as well as consistent momentum from within IP licensing and software as we integrate the acquisition of MIPS. As the momentum and engagements with customers grow, we expect MIPS to contribute a greater proportion of our technology services revenue going forward at an accretive gross margin to our corporate objectives. All of these factors considered, we expect revenue from Technology Services to comprise a greater proportion of our total 2026 revenue, closer to the high end of our original 10% to 12% range. Our early traction here adds to our belief that the Technology Services portion of our business will be an important long-term driver of durable, high-quality, high-margin growth. Let me now provide an update on our revenue and outlook by end markets. Communications infrastructure and data center represented approximately 14% of first quarter total revenue and increased 2% sequentially and 32% year-over-year. This marked the sixth consecutive quarter of double-digit percentage year-over-year growth for communications infrastructure and data center. Within this end market, silicon photonics drove robust growth in the first quarter and remains on track to roughly double in 2026 compared to 2025. In line with our expectations, we saw a healthy revenue contribution from Advanced Micro Foundry, which GF acquired in November of last year. The integration is progressing well as we expand our photonics capabilities at the Jeff Science Park. Combining GF's significant scale in Singapore with AMF's complementary customer base and pluggable photonics solutions for scale across networks has expanded our customer momentum in this rapidly growing market. This acquisition is already gross margin accretive to GF, and we expect to realize even greater growth and profitability tailwinds in the coming years. For these reasons, we now expect to achieve high 30s percent year-over-year revenue growth in our communications infrastructure and data center end market in 2026, up from our expectations a quarter ago of approximately 30% year-over-year growth. Automotive represented approximately 23% of first quarter total revenue. Automotive revenue decreased 11% sequentially off a strong fourth quarter and increased 24% year-over-year. In addition to our strong customer share in automotive microcontrollers, we are in the early stage of revenue ramps as a result of our accumulated design wins in smart sensors and networking as well as vehicle infrastructure. We are continuing to diversify our offerings to the automotive end market by ramping newly secured sockets in applications such as camera, ethernet, radar and power. It is our differentiated technology and disciplined execution that we believe is enabling GF to capture the growing automotive semiconductor content opportunity and outperform peers in this end market. As a result, we expect Automotive revenue to deliver low double-digit growth in 2026. Its sixth consecutive year of double-digit percentage growth. Smart mobile devices represented approximately 34% of first quarter total revenue and declined 15% sequentially and 5% from the prior year period. Current industry forecasts for overall smartphone units in 2026 indicate a low double-digit percentage year-over-year decline. With approximately 2/3 of our revenue in this end market driven by premium handsets, we expect to see a more contained impact from memory pricing dynamics compared to the broader industry. As such, we expect revenue from smart mobile devices in 2026 to slightly outperform the overall smartphone market, with an expected decline in the high single-digits percentage. Beyond the near-term dynamics, we expect smart mobile devices to gradually benefit from the growth of new AI-powered form factors, such as smart glasses, hearables and wearables where we have nascent growing traction and design wins with our customers. Finally, home and industrial IoT represented approximately 16% of first quarter total revenue and decreased 16% sequentially and 22% year-over-year. The decline in revenue from this end market in the first quarter was principally driven by the timing of certain customer shipments, a temporary impact, which we expect to reverse in the second quarter. Importantly, we continue to expect 2026 to be a growth year for IoT, driven by the normalization of core industrial customer inventory as well as the production ramp of new applications in the second half of 2026, which we believe should contribute to a healthy growth of mid-single-digit percentage year-over-year. Beyond 2026, we expect this end market to be one of the primary beneficiaries of the burgeoning physical AI revolution and serviceable addressable market expansion, where our technology platforms and solutions are well suited to enable devices to sense, think, act and communicate. In summary, we believe GF's strong secular growth drivers, including meaningful upside from our recent acquisitions will help offset smart mobile devices in 2026. As continued growth across the other end markets we serve, expand as a percentage of revenue. These strategic actions are also intended to accelerate our targeted mix shift towards margin accretive high-value growth markets and applications. We believe the result over time will be a more durable, more resilient, more profitable business. In the first quarter, we delivered gross profit of $474 million, which translates into approximately 29% gross margin, above the high end of the guidance range and up 510 basis points year-over-year. First quarter saw the largest year-over-year expansion of gross margin in over 3 years. R&D for the quarter was $114 million, and SG&A was $89 million. Total operating expenses of $203 million, were up 4% quarter-over-quarter and represented approximately 12% of total revenue. We delivered operating profit of $271 million for the quarter and an operating margin of 16.6%, above the high end of our guided range and up 320 basis points from the prior year period. First quarter net interest income, net of other expenses, was $5 million, and we incurred tax expense of $49 million in the quarter. We delivered first quarter net income of approximately $227 million, an increase of approximately $38 million from the prior year period. Diluted earnings of $0.40 per share was at the high end of the guidance range based on a free diluted share count of approximately 561 million shares. Let me now provide some key cash flow and balance sheet metrics. Cash flow from operations for the first quarter was $542 million. First quarter CapEx net of proceeds from government grants was $309 million, or roughly 19% of revenue. Adjusted free cash flow for the quarter was $233 million, which represented an adjusted free cash flow margin of approximately 14% in the quarter. This outcome was principally driven by favorable working capital movements in the first quarter, which we expect to reverse in the second quarter. At the end of the first quarter, our combined total of cash, cash equivalents and marketable securities, stood at approximately $3.8 billion. Our total debt was $1.1 billion, and we also have a $1 billion revolving credit facility, which remains undrawn. In the first quarter of 2026, we repurchased $400 million of shares of the $500 million share repurchase authorization approved by our Board of Directors, approximately $100 million remains, and we remain flexible with the deployment of the remaining authorized amount. Capital allocation, planning and decisions remain tightly linked to visibility, returns and balance sheet resilience. As we move through 2026, our focus remains consistent, disciplined capacity investments structurally improving margins and cash generation aligned with returns. We will continue to drive momentum in areas that we can control and deliberate in how we allocate capital. Next, let me provide you with our outlook for the second quarter of 2026. We expect total GF revenue to be $1.76 billion, plus or minus $25 million. We expect gross margin to be approximately 28.5%, plus or minus 100 basis points, which at the midpoint reflects over 300 basis points of year-over-year gross margin expansion. Excluding share-based compensation, we expect total operating expenses to be $225 million, plus or minus $10 million. We are ramping R&D programs in the second half of 2026 to strengthen our technology differentiation and accelerate our road map in secular growth areas, such as custom silicon, silicon photonics and advanced packaging. Taking into account these investments into R&D and the expected close of the Synopsys ARC IP business acquisition towards the end of the first half of 2026, we expect to maintain a similar quarterly operating expense run rate in the second half of 2026, as indicated in our second quarter guidance. We expect operating margin to be in the range of 15.7%, plus or minus 180 basis points. At the midpoint of our guidance, we expect share-based compensation to be approximately $71 million, of which roughly $19 million is related to cost of goods sold. We expect net interest and other for the quarter to be between negative $6 million and $2 million and income tax expense to be between $28 million and $48 million. Based on the tax environments across the jurisdictions we operate in, we continue to expect an effective tax rate in the high teens percentage range for the full year of 2026. Based on a fully diluted share count of approximately 555 million shares, we expect diluted earnings per share for the first quarter to be $0.43, plus or minus $0.05. Given the timing of tool delivery windows in order to meet forecast customer demand in critical growth corridors as well as the timing of government grants, we expect net CapEx to increase in the second quarter. For the full year 2026, we continue to expect non-IFRS net CapEx to be in the range of 15% to 20% of revenue. Our CapEx strategy continues to align the sizing and timing of our investments with customer demand while scaling our footprint efficiently. Over the last few years, we have seen notable increases in customer demand for incremental capacity in high-growth technology corridors such as silicon photonics, FDX and high-performance SiGe. In order to unlock sustainable accretive revenue growth, we are expanding capacity in these areas to support the strong demand signals from our customers. Critically, these targeted CapEx investments are supported by robust partnerships with both customers and governments. As a result, we expect that the next wave of capacity investments will be accompanied by customer prepayments in addition to meaningful government grant and tax incentive frameworks in all of the geographies we serve. Even with greater investment in enabling capacity in these key growth technology corridors, we continue to expect adjusted free cash flow margin of approximately 10% for the full year 2026 with a skew towards the second half. In summary, I'm grateful for our team's excellent execution this quarter and the strong progress we are making towards our long-term strategic objectives, which are reflected in our financial performance. We believe GF is at a definitive inflection point where years of preparation have positioned us well to capitalize on the secular megatrends defining our industry, and we very much look forward to sharing more details with you all at our Investor Day on May 7. With that, let's open the call to Q&A. Operator? Operator: [Operator Instructions] Our first question comes from the line of Harlan Sur from JPMorgan. Harlan Sur: Congrats on the solid quarterly execution. Industry demand trends, even over the past 90 days, have accelerated, especially in areas like AI and data center where cloud and hyperscale spending continues strong. In non-AI segments, we're seeing this broad cyclical recovery profile. And then on the supply side, advanced all manufacturers are actually cutting their specialty mature capacity. And your competitors in specialty and differentiated are signaling wafer pricing increases starting in the second half of this year. I know the team had previously talked about a stable pricing environment this year. But just given the tight supply outlook, continued focus on supply chain resiliency, as you guys had outlined, how should we think about your pricing profile as you move to the second half and for the full year? . Timothy Breen: Yes. Thank you for the question, Harlan. I think the way you can think about it is differently for different parts of the portfolio. Obviously, there's a part of our portfolio that prices on a very long-term basis. That's been stable for several years now and continues to be stable going forward. There is a component, a smaller component of the portfolio, the prices over a more short-term dynamic. And exactly, as you said, both the supply and demand dynamics there are more favorable from a pricing perspective. And consistent with peers, consistent with even many of our customers, we will implement price adjustments on that part of the portfolio. You can imagine those kicking in towards the back end of 2026 and obviously flowing into 2027. I'll also add that for part of our portfolio where we are, capacity constrained, where demand is stronger, we're also having conversations with customers, not just about pricing but also about advanced payments to secure capacity as we accelerate our CapEx investments in those tight corridors such as FDX, silicon photonics, high-performance silicon germanium. Those customer discussions are very constructive. Harlan Sur: Appreciate that. And gross margins came in 200 basis points better than guidance. MIPS was such a factor, right, your higher gross margin segments like CID, auto, technology services did better on a sequential basis. And for the last question, on industry supply tightness, it looks like the team potentially also benefited from sustained or increasing utilization. But maybe you could just help us understand puts and takes around gross margins Q1, during Q2? And then given the better demand mix, pricing outlook, how should we think about gross margin trajectory as you move through the second half of the year? Could we see the team, as we end the year, closer to the 33%, 35% range? Sam Franklin: Harlan, it's Sam here. I'll provide you a little bit of color there. Obviously, we're very encouraged by where we're seeing the structural improvements within our gross margin profile, and this has been a trend which has been continuing for last couple of quarters now. Obviously, if you look at things from a year-over-year basis, roughly 3% of revenue growth but 510 basis points of gross margin. And so this is something we've been positioning for several years. These types of structural levers don't happen overnight, and they really focus across several areas in the business, namely productivity cost continuing, as Tim said, to optimize our footprint from a technology point of view. And mix obviously really matters as well. If I touch specifically on the first quarter and bridge you a little bit from last year. The single biggest driver there was mix and mix falls into 2 categories. It's the mix as it relates to our manufacturing services, and it's the mix as it relates to our technology services. And you called it out in part of your question, which is the relative strength of the growth that we've seen within those rich mix environments from, say, for example, a communications infrastructure and data center point of view, which generally falls through at a very high margin relative to our corporate objectives. And the same is true for the likes of automotive. So that's a contribution from manufacturing services, high rich mix has been important. And I'd say as well, from a revenue from technology services perspective, that's continued to trend actually in the first quarter, above the high end of the range, that we indicated. We expect it to be at around 12%. We ended up coming in at 13% of revenue. And part of that is related to the increased contribution we're seeing from the likes of mix and our capabilities in that arena. But I'd say that was factored into our guidance. We did see some stronger mask and [indiscernible] related revenue within technology services in the first quarter as well. And particularly in the aerospace and defense sector as well, and that falls through at a relatively attractive margin as well. So we're quite encouraged from that perspective. I'd say the other dynamic outside of mix is really from a cost perspective. And the teams have been focusing maniacally on driving cost and productivity improvements. actually, as it relates to the 200 basis points that you referenced in the quarter, about 1 point of that came through cost synergies that we've been driving from our acquisition of Advanced Micro Foundry in Singapore. So that came in certainly more favorable from the perspective of where we were at about 90 days ago. So you take that combination of richer mix, technology services, favorability from the acquisition when we made [indiscernible], that kind of bridges you to that 200 basis points of outperformance we had relative to the midpoint of our guidance. I think if I fast forward a little bit to take you into where we're looking at the guidance from the second quarter perspective and how we think about things for the remainder of the year, look, I'd like to focus a little bit on the year-over-year story here because I think it really matters in terms of that structural evolution that we're seeing. At the midpoint of our guidance range, that implies about 330 basis points of year-over-year margin growth. But if you take the revenue we delivered in the second quarter of last year, $1.688 billion, we delivered gross profit of about $425 million in the second quarter of last year. And then you compare that through to midpoint of our revenue guide for the second quarter at $1.76 billion and you take that 28.5% midpoint of the range, that implies about $500 million of gross profit delta, which actually corresponds almost fully to the revenue delta. So what you're seeing is a very meaningful pull-through from that increase in revenue relative to the year-over-year margin story there as well. Now just on a couple of the -- if you like, the pace as it relates to second quarter and how we're thinking about some of the rest of the year. Look, it would be remiss of us not to be thinking around how the conflict in the Middle East impact supply chain and how we proactively drive our supply chain planning decisions around that. And we've taken some very proactive steps in the first quarter to make sure that we're shoring up our supplies of key gas and cans like helium, hydrogen, sulfur. So making sure we have that supply chain security is key. Obviously, that comes with some incremental costs that we forecasted at the beginning of the year prior to this conflict. So expectation is that, that probably has about a 0.5 point of margin impact for each quarter as we go through the rest of 2026. But all said and done, we're quite pleased with the continued year-over-year margin trajectory that we're seeing. Operator: And our next question comes from the line of Vivek Arya from Bank of America. Vivek Arya: For the first one, I'm curious, how are you benchmarking your growth in comms infrastructure and data center? Because when I look at a lot of your analog peers or some of the optical customers or AI in general, they're all growing anywhere between 50% to 100%. So high 30% growth is impressive, but how do you know whether you are gaining or losing share relative to the growth rate? Like, are those growth rates representative of what the industry is growing? Or am I comparing Apples store in this year? . Timothy Breen: Yes. Thanks for the question, Vivek. I'd say the following. Remember, our CID market considered 3 kind of big drivers. Silicon photonics, we've talked about already approximately doubling year-on-year. We think that is definitely growing in line with the industry. Trends and the rollouts, and we even see further acceleration to follow as we launch new products like Gale that we announced earlier this week. Our high-performance silicon germanium equally exhibiting very, very strong year-on-year growth [indiscernible] networking we're seeing a very good story. Also in the CID mix, and that continues to grow very sort of solidly as we see rollout of more [indiscernible] capacity and the scale of terminals. So we look at it on a kind of end market, submarket basis. And in those cases, we don't see share loss. In fact, we see a share gain in many of those cases. Sam Franklin: Do you have a follow-up, Vivek?. Vivek Arya: Yes. Second question is kind of another follow-up on pricing and revenue per wafer. So when the year started, what did you assume for the pricing environment? And what is it now? And then I know I'm focusing on just one metric, but revenue per wafer that continues to decline. And I imagine that's probably because of mix or other factors. But I would just appreciate your perspective on how are you thinking about industry pricing now versus before? And is your revenue per wafer, what does it -- what should it indicate to us because it has continued to decline. Sam Franklin: Sure, Vivek, I'll take that. And obviously, Tim gave a little bit of color as part of the last question in terms of how we see the broader pricing environment, particularly in the context of some of those supply/demand constraints that we've seen. Look, I'd say one important point to remember around how we think about pricing is that within wafer pricing, we also have what used to be the underutilization payments that flowed through associated with some of those long-term agreements. That is largely in the rearview mirror. And in fact, we were still getting some of those in the first quarter of 2025. And so when you think about it from a year-over-year comparison basis, there is a little bit of fallout from that ASP perspective. The important point, and you touched on mix, which is the right way to think about it, but the way we think about pricing is really the contribution from a margin perspective. And at the start of the year, we viewed the broader pricing environment is certainly more constructive than it was in 2025. And actually, as we've gone through first quarter, particularly where we see space constraints on some of our core technology corridors, we remain [indiscernible] view that it is not only constructive in some of those, but favorable tailwinds in some of those technology corridors. So from a year-over-year comparison basis and going forward, I would say that the key focus is really around the margin structure that we're seeing pull through rather than just the stand-alone pricing. I hope that helps. Operator: Our next question comes from the line of C.J. Muse from Cantor Fitzgerald. Christopher Muse: I guess first question was to focus on technology services. Obviously, you're rebranding changes in mix. Would love to hear how we should think about the growth trajectory here beyond calendar '26. Is there a framework that we should be thinking about, particularly as Synopsys ARC closes at the end of Q in the first half of 2026 and your expectations around MIPS and other contributors? Timothy Breen: Yes. Thank you, C.J. Maybe I'll start with just kind of winding back on why we've made this [indiscernible] change, and it really reflects the evolution of our strategy. So we renamed wafer revenue to manufacturing services, and that's because more and more of our end products we delivered in different form factors. And if you take our announcement earlier this week on the optical engine, that's much more than wafer. That's an integrated module. And we'll see more and more of that across our portfolio. So it felt more appropriate to describe that as manufacturing services. In the technology services bucket, which you asked about, that's also growing. What that used to represent is really just a complement to the wafer revenue, the mass, the reticles, the NRE that went along with it. But with some of the acquisitions we've made, we increasingly see areas like IP, software in some of that customization and value-add services that really enable us to work more deeply with our customers. I'll let Sam talk about how that range will trend over time. Obviously, we see increased growth based on the acquisitions that we've made. Sam Franklin: Sure. Thanks, Tim. And C.J., we're definitely going to dive more into this as part of the day when we get together on Thursday. So I won't review too much. But to Tim's point, putting all of that together in terms of the composition of revenue from technology services, you'll recall that we used to guide that to the neighborhood of sort of 8% to 10%, we were typically around that 10% midpoint. And as we've seen this evolution and the increase in complementary services within our technology service, our expectation is that our trends will go to the high end of the 10% to 12% range that we indicated at the start of this year. And obviously, we're in the early innings of integrating MIPS, and we haven't yet reach close on the Synopsys ARC IP business. But again, as we ramp those over time and as we create more offerings for our customers, in the IP, the software, the custom silicon solutions, we'd expect that to drive incremental growth over time. Christopher Muse: Very helpful. And I guess as a follow-up, I wanted to focus on silicon photonics. You announced a new platform. You gave a pretty robust outlook exiting calendar, expected, I think revenues to double to $400 million here in calendar '26. Would love to get a sense of how you see kind of the product mix evolving over time. My sense is the lion's share of the revenues today are pluggables, but we'd love to get an understanding of how you see that pattern of changing as we go into '27 and '28. Timothy Breen: Yes. Thank you, C.J. No. I mean I think the broader picture is you're seeing extremely strong adoption of optical across the industry. We hear stats like by 2030, 70% of networking ports in the data center will be optical, and that reflects the complexity of compute and the sheer amount of data that AI workloads require. So I think the optical momentum is clearly building. I think there will continue to be a good discussion about the form factors. Pluggables are in high demand today, growing fast and also evolving with new features and new data rates with 1.6T going into the market today and 3.2 and others on the road map, including for us. I think the evolution to near and co-packaged optics is still very much, if anything, accelerating, and we've heard at OFC this year, many companies come out with their plans, and also this adoption of industry standards indicates ways that the industry can coalesce around a number of kind of more typical approaches to make those products consistent and accelerate the adoption. We've always been of a view that sort of co-package [indiscernible] story. I think that remains the case. What we have said is that we are already seeing tape-outs of products that are intended for co-package and near package optic use, and that's already happening today. So I think that confidence level on that rollout is definitely increasing. Operator: And our next question comes from the line of Krish Sankar from TD Cowen. Sreekrishnan Sankarnarayanan: Congrats on the strong results. Tim, just to stay on the topic of silicon photonics, is there a way you can compare and contrast your scale optical solution with TSMC scoop or [indiscernible] semis offerings? Any color on the nanometer nodes of the logic or optical photonics advanced packaging, et cetera, it would be helpful. Timothy Breen: Thanks for the question, Krish. And we're going to go into a lot more detail on this week on Thursday at our Investor Day. I think it merits not just a longer discussion, but also some slides to make it a bit more visual as well. I mean we've been working on co-packaged optics for more than 10 years. And a lot of what we announced this week is based on technologies that we've developed at the wafer level, but also around advanced packaging, things like hybrid bonding, TSVs, also some of the announcements we made about the ability to have fiber attached that is able to deliver low insertion loss light into the chip, while still maintaining maintainability of those devices so you can service them. All of these are some of the innovations we've worked on, and you'll find a lot of them written about in that OCI MSA. So we think we have an industry-leading solution. It benchmarks very well to competition. But more broadly, this is a fast-growing market and destined to be very large. And so of course, there will be multiple solutions in the market. I think we're very confident in our ability to be amongst those leaders for the foreseeable future. Sreekrishnan Sankarnarayanan: Very helpful, Tim. And then just a quick follow-up. Maybe you'll talk about this more on Thursday as well. On the MIPS IP strategy, how to think about it, given the risk [indiscernible] processor IP, custom silicon software angles. And I remember in the past, you mentioned that MIPS's technology service revenue could be a $100 million plus business this year. Is that still the [indiscernible] to think about? . Timothy Breen: Yes. So look, we've mentioned this before a little bit, but just to comment on it. We're seeing very, very good customer feedback to MIPS and even more positive feedback when we announced Synopsys ARC transaction, which, as Sam mentioned, is set to close within the first half. I think the reason is that customers love the idea of a company with GF scale, with GF, kind of, reliability through the cycle, providing that IP. And I think with the increased adoption of risk 5, especially in those real-world workloads, right, think automotive, think AI at the edge, think about things like radar that require different kind of process technologies. There's a real market need for risk file. I think what also customers are appreciating is the ability for us to engage earlier in that design cycle. And so we can talk about their optimization of their products. We can give them software tools to simulate those early on well before we're talking about manufacturing decisions. But obviously, it's also enabling us to have a deeper conversation and increase our chances of being that partner of choice when we get to the manufacturing. So that's highly synergetic, and it's changing the nature of the conversations with customers. And I think the last piece that's worth calling out is having internally these capabilities also gives us a chance to, if you like, taste our own cooking, and push our process technologies further, not just today but also a longer-term road map because we're able to -- with short learning loops, basically push the limits of what we can do in our process technologies for those key applications. So I'm very, very bullish, not just about the financial trajectory of these acquisitions but also on the strategic back. I'll let Sam comment about where we are for the year. Sam Franklin: Sure. Thanks, Tim. And Krish, to the second part of your question in terms of how we think about the revenue contribution from MIPS in 2026, but we provided some guidance actually at the start of this year and also at the end of last year when we did our Physical AI webinar, that we expected about $50 million to $100 million revenue contribution associated with MIPS in 2026. That range still holds. But what I would say is that we feel like the momentum with customers, as Tim said, is progressing very well. The bookings are progressing very well. We're sort of trending towards above the midpoint of that range that we indicated at the start of this year. And obviously, that's before we factor in the timing of the close associated with the Synopsys ARC IP business. That will come later, and we'll probably be able to give a bit more color on the contribution from that perspective when we get to our next earnings call. Operator: And our next question comes from the line of Matthew Bryson from Wedbush Securities. Matthew Bryson: For the comms and data center side of things, you've highlighted solid opportunities in silicon photonic, but can you talk a bit more specifically around whether there were any specific factors that drove the upside versus your prior guide? Timothy Breen: Yes. Thanks, Matt. Look, I think it's incremental across the board. We're seeing, for sure, the [indiscernible] optical networking picking up. I think there's a lot of momentum behind that adoption. As we mentioned earlier, pulling through to pluggable optical transceivers. If I could show you an X-ray of pluggable optical transceiver, you'd find in it. High-performance silicon tonics, you'd also find some of that high-performance SiGe content that we talked about. So those 2, I think, are the contributors to the increased confidence in the revenue trajectory within that end market. The other parts remain solid and growing well like SATCOM, but I think the optical piece is the one that we'd call out. Matthew Bryson: Awesome. And just a follow-up on that. Higher growth in the segment, I mean, it seems to be favorable for margins, but beyond the higher costs you've outlined tied to the geopolitical events, are there any potential offsets we should maybe think about, like additional CapEx to support the quarters that are tight, or is the shift to mix largely just an unmitigated positive for gross margins? Sam Franklin: Yes. Look, I'd probably break that down, Matt, into sort of the near-term horizon and longer term, and we'll obviously get to some of the longer term when we get together on Thursday. But the expectation from a CapEx point of view at the beginning of this year was that we'd be in the ZIP code of 15% to 20% net CapEx to revenue. That already contemplated some of the increasing demand that we've been seeing come through on the likes of high performant SiGe, photonis, FDX. And so we'd already sized our overall CapEx envelope at the start of this year to really factor some of that in. Now I would say one other point, which I mentioned earlier from a margin point of view, we have seen strong cost synergies come through with the acquisition and continued integration of AMS, that is proving to be a good business, not just accretive from a margin point of view, but growing our offering to customers within the photonics space. And so you're right to call out some of that cost headwind, but we've generally felt that we can see some offsets from that associated with the mix dynamics. And look, our target for the full year is still to exit 2026 at or above a 30% gross margin. Matthew Bryson: Congrats on the strong results. Timothy Breen: Thank you, Matt. Give me a second. I'll can add on the CapEx side. I think as you're seeing, our principles of where we think our CapEx are very much linked to where we see strong conviction in customer demand in those corridors that are oversubscribed today. But you should think about that CapEx, the ROI is very strong because we're adding tools to existing footprints and able to bring capacity on very quickly. And by the way, we do that in sites where we have in place strong government support frameworks and especially for these technologies, there's a lot of government support to build out capacity in the U.S. and around the world. And so even though that CapEx comes through at a significantly lower kind of net fall through once you consider those government partnerships as well. Operator: And our final question for today comes from the line of Ross Seymore from Deutsche Bank. Ross Seymore: One near-term one then one longer term. On the near-term side of things, you guys were helpful for the full year on the revenues by segment. And I think you mentioned that the home IoT is likely to rebound in the second quarter. Any other kind of even directional guidance for the subsegments between the manufacturing and the technology services by end market for 2Q? Sam Franklin: Yes. Look, I'd probably, Ross, draw your attention to start with in terms of how we're seeing this evolution from revenue composition and a diversification point of view because that kind of becomes a little bit of the layup as to how we see the opportunities, not just in the second quarter, but as we go through the year, from an end market point of view. And look, it's an important point to note that in the first quarter, the contribution of revenue from all of the end markets and technology services outside of smart mobile devices that came in at the highest level that we've had as a company, roughly 2/3 of our total revenue. So that gradual mix shift just from a technology point of view, but from an end market point of view has been several years in the making, and we're really seeing that come through in the first quarter, and our expectation is that continues through the rest of this year. So as it relates to the specific quarter-on-quarter dynamics, I'd say that we do continue to expect good year-over-year momentum as it relates to comms infra data center, automotive. As I said, IoT should reverse some of those dynamics we saw in Q1. And then the general offset that, which we touched on in the prepared remarks in the Q&A is really around smart mobile devices, where -- from 90 days ago, we're seeing more kind of high single-digit decline year-over-year. But putting it all together, we think that those declines are offset by the momentum we're seeing in the other end markets. Ross Seymore: Perfect. And I guess my one longer-term question is a perfect segue from what you just said on smart mobile devices. I realize what that end market is doing, and it's nice to see you guys outperforming it relatively speaking. How do you see the performance of GlobalFoundries in that business relative to the market over time? Can you increase that delta so you outperformed by more? Or is it just is what it is, and that might be a kind of year-over-year headwind more structurally going forward as an overall segment? Timothy Breen: Yes. And Ross, we'll share significantly more on that this firstly because obviously, the objective is that is to go a bit further out in time. I think you're seeing some tailwinds when it comes to content growth within the handset. You're also seeing new form factors that bring content. Let me give an example, like smart glasses. I'm a personal strong believer that, that form factor we'll see the light of day and will grow and will become a common place. And that requires new technologies, things like back lane for display micro LEDs things that we've been working on with partners for some time. So I think there are some tailwinds. We'll say more about the overall end market on Thursday. But I think it's too early to count out that category as a drive for the future. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Eric Chow for any further remarks. Eric Chow: Great. Thank you, Jonathan. Thanks, everyone, for joining today. We're very excited to see you at our Investor Day on May 7. We will also be at JPMorgan Conference on May 19 and the Cowen conference on May 27. Thanks, everyone, for joining. I appreciate your interest in the company. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.