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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.
Lluc Sas: Welcome to Sabadell's results presentation for the first quarter of 2026. Joining us today are our CEO, Cesar Gonzalez-Bueno; and our CFO, Sergio Palavecino. The presentation will follow the same structure as in previous quarters. Our CEO will begin by highlighting the key developments of the quarter and discussing the most relevant topics. Then our CFO will review financial results and the evolution of the balance sheet. The presentation will conclude with closing remarks from our CEO, after which we will open the floor for a live Q&A session. So Cesar, over to you. Cesar Gonzalez-Bueno Wittgenstein: Thank you, Lluc. Good morning, everyone. I will begin by outlining the 4 highlights of the quarter, which we will discuss in more detail during today's presentation. First, the sale of TSB is now complete. Therefore, we will pay the extraordinary cash dividend of EUR 0.50 per share at the end of May. Second, as we already anticipated, Q1 will mark the bottom of our core revenues. We expect these items to increase in each quarter over the course of the year. Third, we have launched an early retirement plan, which would improve efficiency in '26, but mainly in 2027. Fourth, we commit our full year guidance. Indeed, beyond the ups and downs of any given quarter, we have a sound, secure and proven growth strategy to deliver a 16% return on tangible equity in 2027. Slide 5 shows the key financial messages for the quarter. Just to remind everyone, all figures and results presented now exclude TSB. Supported by strong commercial momentum, performing loans and customer funds recorded year-on-year growth in the mid-single digits. In this context, core revenues are expected to have reached in this quarter their lowest point of the year. We see core revenues improving going forward as repricing pressures on NII ease and fee performance normalizes. Recurrent costs performed well in the quarter and reached EUR 569 million. We recorded one-off costs in the quarter of EUR 55 million related to the early retirement program underway. Our fundamentals remain solid. Our recurring return on tangible equity stood at 14.1%, and our capital position remains strong with a core Tier 1 at 13.2%. This performance is underpinned by strong asset quality that keeps on improving. Cost of risk and total NPAs both showed a reduction year-on-year. We continue to build up our Stage 3 coverage, which now stands above 70%. Finally, as I said before, we will distribute EUR 0.50 per share as an extraordinary dividend by the end of May. In parallel to this cash dividend, we keep executing our share buyback programs. We have already completed EUR 267 million out of the approved EUR 800 million. On Slide 6, financial implications of the now completed TSB transaction. Let me start with the sale proceeds. The initial agreed price was GBP 2.65 billion. This figure was agreed to be increased by the tangible net asset value generated since April 25. Taken together, this results in a final sale price of GBP 2.9 billion. Now let me emphasize the strategic and financial merits of the transaction. Firstly, the sale has generated significant value for shareholders. Transaction multiples are above both peer transactions and Sabadell's own trading multiples. In addition, the transaction is expected to generate more than 400 basis points of capital. This is driven by capital gains of more than EUR 300 million and the deconsolidation of risk-weighted assets. As approved at the Extraordinary General Meeting held last August, we will return this capital to shareholders. Accordingly, we will pay an extraordinary dividend of EUR 0.50 per share on the 29th of May. To conclude, following the sale of TSB, Sabadell now represents a more focused and simplified equity story with a clear strategic profile centered in Spain. In Slide 7, we see the details of the early retirement plan. We executed our last efficiency program as you remember, back in 2022, which included an early retirement plan. Since then, circumstances such as the demographics of our workforce prevented us from executing additional early retirement plans. Circumstances have changed and a structured early retirement plan is already being implemented in 2026. Importantly, this approach supports workforce optimization in line with the evolving business models and digital transformation. In terms of financial impact, we will incur in one-off costs in 2026 of approximately EUR 90 million. Meanwhile, we will generate gross annual savings of approximately EUR 40 million. Approximately 1/3 of these savings are expected to materialize in 2026 as the program is rolled out with a full run rate savings achieved in 2027. On Slide 8, we talk about new lending. Starting with mortgages, new lending decreased by 24% year-on-year. We remain focused on managing new lending through risk-adjusted return on capital, ensuring that growth is delivered in a profitable manner. As a result, we have continued to reduce our market share in new mortgage lending over the past months as front book yields have compressed. Origination of consumer loans decreased both year-on-year and quarter-on-quarter. We introduced changes to the application process this quarter, which temporarily impacted on conversion rates. We have already improved the process again and conversion rates and origination volumes are picking up again. Quarterly new loans and credit facilities granted to SMEs and corporates increased by 1% year-on-year and by 5% quarter-on-quarter, while working capital performance was more subdued. Overall, as we share on the next slide, these volumes of new lending allow us to continue growing our loan book. On slide 9, we see the loan book and starting with Spain on the left-hand side of the slide. Performing loans increased by 0.8% on the quarter with positive growth across all segments. Performing loans in Spain increased by 4.3% year-on-year. Our international operations are experiencing good momentum as well with performing loans rising by more than 7% quarter-on-quarter and by double-digit figures year-on-year. Overall, our total loan book showed a positive trend during the quarter, growing by 1.6%. Annual growth rate reached 5.6%. Moving on to customer funds on Slide 10. First, on balance sheet, customer funds ex-TSB remained broadly stable quarter-on-quarter and increased by 4.3% year-on-year. The Spanish perimeter showed an increase of 4.7%. Second, our balance sheet funds also remained broadly stable in the quarter, as market volatility has had a dampening effect on net subscriptions. We posted an increase over 10% on a year-on-year basis. All in all, total customer funds grew by 5.9% year-on-year. Looking at on-balance sheet funds breakdown on the right-hand side of the slide, non-remunerated deposits reached EUR 83.9 billion. Those non-remunerated deposits are almost completely located in Spain. This highlights the high proportion of low-cost funding within our deposit base. The cost of customer funds stood at 78 basis points in the quarter in the ex-TSB perimeter. Let me note that this includes higher yields in U.S. dollars and Mexican pesos. Therefore, the cost of customer funds in Spain was significantly lower and stood at 59 basis points. On Slide 11, we make a summary of our quarterly results. We recorded a net profit of EUR 284 million or EUR 347 million, including the contribution from TSB. Let me emphasize two points. Firstly, as I had previously explained, revenues have bottomed out with improvements expected in the coming quarters. Secondly, Quarterly results include EUR 70 million pretax in one-off charges, nonrecurring costs related to efficiency initiatives and FX hedge on the proceeds from the sale of TSB. Underlying profitability remains solid and recurring return on tangible equity stood at 14.1%. This keeps us on track to reach our full year guidance of 14.5%. And with that, let me turn it over to Sergio. Sergio Palavecino: Thank you, Cesar. And good morning, everyone. Let's move on to the financial results on Slide 13. Before going through the different lines of the P&L, I would like to explain the extraordinary items that Cesar has just mentioned. First, within the trading income line, we recorded an expense of EUR 14 million related to the foreign exchange rate hedging of the full proceeds from the sale of TSB. Once the sale has been completed, next quarter, we will record only EUR 5 million corresponding to the month of April. Second, we recognized EUR 55 million of nonrecurring costs related to the early retirement program in Spain. Overall, recurring ROTE stands at 14.1%, which is in line with our expectations and our year-end target of 14.5%. We will now review the main P&L items in more detail, focusing on Sabadell's performance, excluding TSB. Starting with NII on Slide 14. NII bottom out this quarter as expected, decreasing by 2.5% quarter-on-quarter and by 3.5% year-on-year, which is mainly explained by the final headwind of lower interest rates repricing as well as the seasonality of Q1. On the top right-hand side of the page, you can see the drivers that explain the quarterly evolution. Moving from left to right, customer NII had a negative contribution of EUR 8 million due to lower customer margin. This was driven by loan book repricing at lower rates and a slightly higher cost of deposits following the success of the last digital current account campaign. Then the day count effect on customer NII resulted in a EUR 6 million negative impact. Regarding ALCO liquidity and wholesale funding, we have seen a net impact of also minus EUR 6 million, mainly attributed to liquidity, reflected increase in borrowing in dollars and Mexican pesos, which carry higher interest rates. Going forward, this will no longer be a headwind and we are expecting tailwinds from customer NII as explained in the next slide. Indeed, looking ahead on the left-hand side of the Page 15, the expected quality evolution throughout 2026 is shown. As anticipated, after reaching a low point this quarter, we now expect NII to grow at a low single-digit rate quarter-on-quarter. From there, NII should increase steadily over the year, ending the fourth quarter of 2026 with a mid-single-digit increase compared with the fourth quarter of last year. This outlook is based on the current macroeconomic environment where we are assuming interest rates will stay at higher levels than we had previously expected. The slightly higher rate environment, together with ongoing uncertainty and volatility may affect loan volumes. We now expect growth to be slightly below our initial plans, but still at mid-single digits. At the same time, on balance sheet customer funds are expected to grow between 3% to 4%. Higher interest rates should support loan yields with a steady quarter-on-quarter improvement starting from the beginning of the second quarter already. Regarding deposit costs, we now expect a lower pass-through compared with our existing book, which should support customer spread. Overall, customer spread is expected to improve quarter-by-quarter and reached levels above 290 basis points by year-end, slightly better than initially forecasted. Finally, noncustomer NII, which includes ALCO, wholesale funding costs and the liquidity contribution is expected to remain broadly stable around current levels. Taking all of this together, we are maintaining our NII guidance and continue to expect more than 1% year-on-year growth in 2026. Moving on to fees. posted a quarter-on-quarter decrease, mainly driven by the absence of success fees recorded in the previous quarter by seasonality and by a one-off cost in the payment service business. Looking ahead, we expect this line to improve, supported by increasing activity, particularly in the Payment Service business and in Corporate and Investment Banking, which has already been seen in March. In Asset Management, we also expect a continued positive trend in net inflows. To sum up, while we acknowledge a lower quarter than expected, we believe this marks a trough that will serve as an inflection point. Looking ahead, we expect fees to increase and land at the lower end of the mid-single-digit growth range. Moving on to cost. The key developments this quarter is the launch of the new efficiency initiatives in Spain. However, let me first focus on the underlying evolution of recurring costs. Total recurring costs decreased by 3% quarter-on-quarter when excluding EUR 55 million of nonrecurring costs and for comparability purposes, also excluding the reclassification related to the end of the agreement to sell the merchant acquiring business at the end of last year. On a year-on-year basis, total recurring cost increased by 3.4% mainly driven by inflationary pressures on personnel expenses as well as higher amortization and depreciation costs, which already reflect the current quarterly run rate. Looking ahead, as Cesar mentioned earlier, we expect that circa 1/3 of the total savings from the efficiency initiatives will fit through in 2026. Overall, this evolution is fully aligned with achieving our year-end targets. On the next slide, we covered the cost of risk, which remains at contained levels supported by solid underlying asset quality despite the increased uncertainty. Total cost of risk for the quarter was 38 basis points which includes all provisions and impairments across all categories. Looking specifically on loan provisions, the credit cost of risk was 27 basis points. Turning now to the bridge of the different components of total provisions for the quarter shown on the top right-hand side. We booked EUR 94 million of loan loss provisions after reviewing carefully the macroeconomic scenarios. Then we had EUR 4 million of provision reversals driven by the real estate asset disposals at a premium. In addition, we recorded EUR 23 million in NPA management costs and EUR 19 million in other provisions mainly related to litigation. Overall, the quarterly evolution of total cost of risk is fully aligned with our year-end target of around 40 basis points despite the increased uncertainty. Moving on in the next section, I will walk you through asset quality, liquidity and solvency. On Slide 20, we see a continued improvement in both the NPL ratio and coverage levels. The NPL ratio reached 2.55% representing a reduction of 10 basis points compared to the previous quarter. We can also see that Stage 2 exposure declined by more than EUR 1.2 billion year-on-year. Finally, the coverage ratio calculated as total provisions of Stage 3 exposures continued to improve and reached 71%, rising by more than 1 percentage point during the quarter. In terms of total NPAs in Slide 21, you can see the continued reduction of foreclosed assets. We have sold 24% of the stock of foreclosed assets in the last 12 months at an average premium of 8%. At the right-hand side of the slide, we can see that the ratio of NPAs as a percentage of total assets declined to just 0.7% which is a record low. Turning now to Slide 22. All liquidity ratios remain comfortably above requirements with a net stable funding ratio at 135% and the liquidity coverage ratio at a strong 186%. Credit ratings remained stable during the quarter. All rating agencies have assigned a stable outlook, except for S&P, which maintains a positive outlook, reflecting the possibility to achieve further uplift based on ALAC. I will also highlight that Moody's upgraded our deposit rating in April, and it has reconfirmed our Baa1 long-term rating following the application of the new EU depositor preference regulation. Finally, year-to-date, we have issued EUR 500 million in covered bonds. Given the sale of TSB, this 2026 will be a year with lower MREL funding needs. And therefore, less affected by potential market volatility. To conclude this part of the presentation, let me walk you through the evolution of our capital ratios during the quarter. This time around, this slide includes both the quarter-on-quarter variation and the expected impact of the TSB sale and the extraordinary dividend on the CET1 ratio. We will start by reviewing the quarterly evolution. This quarter, the CET1 ratio increased by 7 basis points, while generating 32 basis points before accounting for the dividend accrued. This includes 42 basis points from organic generation after deducting 81 coupons, minus 4 bps from fair value reserves adjustment in the fixed income portfolio due to higher interest rates at the end of the quarter and minus 6 basis points from higher risk-weighted assets, mainly driven by volume growth in our international businesses, where loans carry higher density. The accrual of a 60% dividend payout ratio had a negative impact of 26 basis points, bringing the CET1 ratio to 13.18%. Now looking at the capital effect of the sale of TSB. The transaction will unlock more than 400 basis points of capital for shareholders, as already anticipated when we announced the transaction. The sale generates a positive capital impact of 369 basis points this year driven by the release of risk-weighted assets, a net capital gain of more than EUR 300 million and the reduction of intangibles. This will be offset by the extraordinary cash dividend distributed to shareholders which represent a reduction of 378 basis points, bringing the pro forma CET1 ratio to 13.09%. Finally, the release of operational risk-weighted assets over the next 2 years will add a further 36 basis points, lifting the pro forma fully loaded CET1 ratio to 13.45%. With that, I will hand over to Cesar, who will conclude today's presentation and probably say goodbye after 5 very successful years leading Banco Sabadell. Cesar Gonzalez-Bueno Wittgenstein: Thank you, Sergio. Continuing after that phenomenal waterfall is very interesting. So to conclude this presentation, I would like to briefly review the bank's transformation journey over the last few years. Our growth strategy has proven to be successful and has structurally transformed the bank. First, we are delivering lending growth while reducing the cost of risk. Performing loans have increased by more than EUR 11 billion since 2021, while the cost of risk has declined by more than half. This improvement reflects stronger underwriting standards and a higher quality loan portfolio. Second, the bank is showing a consistent increase in capital generation. Indeed, we are delivering high and sustainable profitability, along with strong capacity to remunerate shareholders. In this context, we have committed to distribute EUR 2.5 billion of ordinary remuneration over the next 2 years, representing an average yield of more than 9% when adjusted for the upcoming extraordinary dividend. In short, a solid performance supported by 2 key levers. We have gradually shifted the organization towards profitability-focused metrics, and we have significantly transformed our risk processes and models. The benefits of these 2 elements will continue to gradually improve the quality of our loan book over time. Finally, let me emphasize our full commitment to delivering the full value of this plan through 2027 as we enter a new phase under a new leadership. We are well positioned to create long-term shareholder value. To conclude my last quarterly results presentation at Sabadell, I would like to share some words on a more personal note. Looking back at the last 5 years, I am honestly proud of the results we have achieved. Sabadell was going through difficult times in late 2020. During this 5.5 years, we, as a team, have managed to deliver on our strategy. We have deployed the profound transformation of the bank, which has enabled our financial turnaround. And now I would like to thank you for the interactions we have had during this period. The team and I feel we have been treated with utmost fairness and respect and I honestly thank you for that. I will now hand it over to Lluc start the Q&A section. Lluc Sas: Thank you, Cesar, for your commitment and for everything you have accomplished this year. We will now open the Q&A session. I would kindly ask you to limit your participation to a maximum of two questions. So operator, could you open the line for the first question, please? Operator: First question is coming from Cecilia Romero from Barclays. Cecilia Romero Reyes: I have two, one on volume growth and the second one on cost. On the first one, on the asset side, loan growth in Spain has been modest quarter-on-quarter. While some peers point to raising competition in both corporate SME deposits. And how are you seeing competition evolve across SMEs and corporates? And how are you balancing pricing, funding costs and returns? And how do you think about your appetite to compete in mortgages where cross-selling helps the economics? And finally, how do you see growth evolving across segments to deliver mid-single-digit growth this year? And then on costs, following the restructuring announcement and the EUR 40 million expected annual savings, could you help us understand how this fits within your current cost targets? Are these savings incremental or already factored in your 2027 guide? Cesar Gonzalez-Bueno Wittgenstein: Thank you very much. So on -- let's go one by one. On Corporates and SMEs, I think if you look at it, we've increased by 5% quarter-on-quarter and 1% year-on-year. And looking ahead, loan demand from Corporates and SMEs remains solid. We keep a strong pipeline of medium- and long-term loans. Therefore, we are confident that growth will accelerate back to mid-single-digit levels and the front books and yields and spreads remain stable. You have to understand that the change in model is a long-term element. So the cost of risk going forward will be much lower. There has been a phenomenal transformation in the strategy of the bank. In terms of mortgages, to your question, the average front book yield on new Spanish mortgage lending is currently below swap rates, as you all know. And pricing conditions remain very competitive, even after taking potential cross-selling benefits into account. Therefore, we have intentionally reduced our market share of new mortgages lending from approximately 9% at the end of '24 when the yields were positive to below 6% this quarter when our natural market share is around 7%. And we will continue to adjust our appetite according to market pricing as we have done over the past year. On the consumer lending, I mentioned before that during the quarter, we introduced changes in the application process. And although the demand -- the upfront demand remained stable and strong, we had lower conversion rates. We have adjusted for these new changes and now conversion is back to where it was, and we expect healthy growth from now on. And in the cost of deposits and in the deposits, I think we've grown healthily in deposits, and that has been somewhat on the back of the growth of the digital account. We have been very successful in the growth of the digital account during the quarter. And as we have mentioned many times, this is not to increase the volume of deposits. This is to attract new customers that then become transactional and that allow for further growth. More than 60% of our acquisition is now through digital accounts when it was 0 a few years ago. And these clients behave well. They have strong transactionality, more than 50% have payrolls, 45% use payments every month and 40% use Bizum through Sabadell, which is a big sign of being engaged with us. And despite the fact that we have done this campaign at a high rate, it has been at the rate that we could obtain in the wholesale market. So it makes lots of sense. I will let Sergio to develop a little bit more on the cost side. But I think we are not -- just to make it very brief, I don't think we are adjusting our forecast now despite this one-off. Of course, that would imply that there is some room as the year progresses to review. But for the time being, we leave it untouched. Sergio Palavecino: Thank you, Cesar. A couple of comments to the first one, Cecilia. The first quarter is typically because of seasonality, probably one of the sort of slower in terms of volumes. In any case, we've been able to grow a little bit the loans and a little bit the deposits. And when you look at the year-on-year growth rate, it's at 5.6%. So it is actually absolutely in line with our expectations. And as Cesar mentioned, the pipeline is good. So regarding volumes. As of today, there isn't anything that makes us think that we're not going to grow in line with expectations. And then as per the cost to your question, this efficiency initiative, so the early retirement, the EUR 40 million in 2027 was not included in our guidance when we detailed the guidance of 2027 by the different lines. We think it's early to update guidance per lines in 2027 given the different changes that we're seeing in the market. Of course, this is a positive because then it allows us to have a buffer and then we see how inflation plays out in the different lines of the cost. But again, I think it's a buffer, and we feel optimistic about it. Lluc Sas: Okay. So operator, could you switch off the microphones when the analysts are asking the questions because we've been told that there's some feedback that analysts cannot hear the questions when they do the Q&A. So we can jump to the next question. Thank you. Operator: Next question is coming from Francisco Riquel from Alantra. Francisco Riquel: Yes. So I just wanted to say goodbye to Cesar and congratulations for the last 5 years' performance. So my first question is on NII. You maintain your guidance of plus 1% in '26 but Euribor rates are now higher than expected, and you used to have a positive sensitivity. So I wonder if you can elaborate on NII dynamics in coming quarters? And what is the offset to the higher Euribor rates? And in the case, the margin uplift is delayed, if you can update on the risk to your '27 NII guidance as well? And my second question is capital distributions, the EUR 90 million of restructuring charges that you will book in '26, I wonder if that is compatible with your distribution targets? You did not specify how much of the EUR 2.5 billion will be paid out in '26 and '27. So I wonder if top-up share buybacks will be postponed to '27 after the winding of operational risk-weighted assets or not? Sergio Palavecino: Thank you, Paco, for your questions. Regarding NII, NII sensitivity, you're absolutely right, it's a positive one. So when interest rates go up, we expect NII to be higher. Actually, for 100 basis points immediate uplift in all rates, then we expect a 6% increase in the second year. And the first year is less. So the first year is somewhat more stable. So the first year is more stable as said. Looking at the evolution of NII, we initially expected NII to grow by more than 1% and keep on growing into next year. And that was basically based on volume growth, while rates were expected to be stable. This time around, what we are seeing and when we look at the yield curve to update our expectation, the yield curve was reflecting two hikes from the ECB. So now we have updated our model with two hikes. So the ECB at 2.5%, which is definitely a higher rate. For the first quarter and the second quarter, volumes are not changing in our view. They are absolutely in line to our expectations. And then I think the question mark is whether at some point at the end of the year may be somewhat less volume. And as particularly, we are growing a little bit less than expected in mortgages because we want to be really prudent with prices, particularly in this environment. So the movements that we are seeing are not going to affect 2026, cost of deposits, the market looks good. In the past, this rate have had a very gradual pass-through into the deposit cost and from everything that we're looking at, this seems to be the case this time around. So the pass-through at the beginning is less than the pass-through that we have in the book, which is close to 30%. And then for 2027, we feel positive, but it's a bit early to say. Definitely, the higher yields is going to be a tailwind and then remains the question mark on volumes that we had expectation for a continuous mid-single digit at so far, we maintain, but I think we need a bit more time to have visibility in 2027 and also cost of deposits, although we feel very comfortable for cost of deposits. So I think those are the moving pieces that taking all that into account, we feel that the outlook is solid for this year. And then for next year, as said, we feel somewhat optimistic, but it's early to be precise. And regarding capital distributions, EUR 90 million is the one-off cost. But already in the period, we are expecting the benefits -- part of the benefits, EUR 40 million in 2027, EUR 15 million, almost EUR 15 million in 2026 million. So that combined is EUR 55 million. The net is only EUR 35 million, which net of taxes, is less than EUR 25 million. So yes, it's going to have a bit of an effect, but we are talking about less than 1% of the distribution. So we think that at this point moment in time, there might be some organic capital generation that can offset that small deviation. So we maintain the target of the EUR 2.5 billion distributions, which we have always seen them being higher in 2027 than 2026. In 2026, we have the extraordinary of the TSB distribution, EUR 0.5. We're actually distributing a little bit more than what is generated in 2026. So it's -- I think the balance between timing of the distributions are also quite sensible. Lluc Sas: Perfect. So let's take the next question, please. Operator: Next question is coming from Maks Mishyn from JB Capital. Maksym Mishyn: All the best to Cesar in the new chapter. Two questions from my side. The first one is, maybe I've missed it, but on the digital campaign for the deposits, could you give us a bit more color on pricing and volumes you were able to achieve with the campaign in the first quarter? And the second question is on cost of risk. Have you updated your macro models in the quarter? And can you provide us with some comfort that macroeconomic turbines may not push your cost of risk higher? Cesar Gonzalez-Bueno Wittgenstein: Thank you very much. So I think we have never been too transparent on the numbers of the digital account. It's quite successful. And we have now more than 600,000 digital customers. And what I could say is that it has increased overall by around 2 basis points to cost of deposits in the quarter. And let me leave it at that. It has been quite successful. We are very happy, and it is fulfilling all its purposes. Lluc Sas: And then we also had the questions on cost of risk and macro models. Cesar Gonzalez-Bueno Wittgenstein: Yes. Thank you, Maks, for your question. Regarding cost of risk and the macroeconomic models, we have, of course, reviewed carefully the scenarios and taking into account what is going on, the conflict and the uncertainty. For the basic scenario, we have kept it unchanged. We are -- we built this scenario during the second half of last year, and we built it on a quite a prudent basis. In our base scenario, we're assuming GDP to grow, in Spain, 1.7%, unemployment to be a little bit above 10% and what consensus is delivering today is an expectation of growth above 2% in Spain and unemployment below 10% while the price of real estate will not be declining. That is the consensus. And we feel that we have seen that the assumptions in our macroeconomic base scenario are actually more prudent than what we're seeing in the market. Of course, this only affects Spain, which is our home market. So we have not changed the base scenario. What we have done is we have changed the probabilities of the upside and the downside scenarios. You know that under IFRS 9, you have the base at the downside and the upside, and we have a shift 5% probability from the upside to the downside. And with this, this has triggered a EUR 20 million provision that has been already incorporated in the EUR 94 million of credit loan provisions. So this actually 10% in the change of probabilities. And for the time being, we will monitor the situation and the development. But for the time being and as long as the GDP expectation in Spain is maintained at a growth of around 2%, we feel that the scenario is going to be good. Lluc Sas: Okay. So let's jump to the next question, please. Operator: Next question is coming from Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: All the best of luck for you, Cesar, in your new adventures. I just have one question on fees and one questions on the deposit and one on interaction with lending. So on fee income, I mean how should we expect the improvement in coming quarters? Is it mainly driven by an acceleration of the asset management net inflows because you are launching a new product campaign or how should we think about fee progression basically coming in the coming quarters? And the second one on the loan to deposit. I mean do you have any target for loan-to-deposit ratio in the long run or in the medium term? Cesar Gonzalez-Bueno Wittgenstein: Yes. On the fee side, I think we are expecting an improvement in the recovery of CIB activity. There were quite a few things in the pipeline that are probably delayed. I think the payment business is also going to do better and certainly, the net inflows in asset under management. And we have already seen a recovery in the first two months -- I mean, in the first two weeks of March. Sergio Palavecino: Yes. So if I follow up on those, natural actually, we expect the credit services and assets under management, we expect the 3 of them to grow from this level. Services, the different business lines are working well. We had this one-off in the first quarter and seasonality. Seasonality affects very much our payment service business. And then we mentioned also the Corporate & Investment Banking, which simply was slow in January and February, and then is not picking up in March and therefore, the second quarter is expected to be good in terms of activity. So we also expect growth coming from that business line that is going to affect or is going to affect positively the credit, the services and then finally, the asset under management because of the growth in balances. And per the loan-to-deposit is 92%, very stable. It's been very stable already for many quarters where we've been able to grow mid-single digit in loans and sort of 4% in deposits with a higher base of deposits. So at the end of the day, quite stable. If we were in a situation where we had the opportunity to grow the loan portfolio, I think growing up to a loan-to-deposit in the range of 90% to 100%, it could be no problem. So we would also feel that, that's not an issue. However, our -- in our plan, we will try to grow as balanced as possible. Lluc Sas: Thank you much for your questions. Let's jump to the next caller, please. Operator: Next question is coming from Borja Ramirez from Citi. Borja Ramirez Segura: Thank you very much for taking my questions. I have two, please. Firstly, on the net interest income, I saw that your ALCO portfolio grew by roughly EUR 2 billion quarter-over-quarter. If you could kindly provide details on the yields at which you bought new bonds? And then also on NII, I would like to ask, I think it was mentioned in the previous results call that you had you're going to decrease the cost of digital accounts from 2% to 1%, and there was a EUR 30 million positive NII benefit on a -- basis from this. If you could kindly confirm this number? And then my second question would be, it is noted regarding the change in the scenarios of the IFRS 9 models. I would like to ask if you could kindly remind me the macro relay provision. Sergio Palavecino: Sure. May I start with the ALCO question? Thank you, Borja. Yes, we have increased a little bit our ALCO portfolio, in line with our plan. The ALCO, the size of the ALCO book is related to mainly the ALM, the hedging that we do, the size of our current accounts and deposits, which have been growing. And then on top of this year with the sale of TSB at the TSB level, we are selling the TSB MREL bonds at the ex-TSB and replacing them with cash from the transaction. So we wanted to put that money to work partially. So that's why we wanted to increase the portfolio this year. And we have invested in the typical investments that we do that mean Spain and other core European sovereigns with durations up to 10 years, some of them hedged. So at the end of the day, the duration of the portfolio that we buy is between 5 to 6 years and with yields above 3% and in the current environment, actually very close to 3.5%. And then as per the online current account, you are absolutely right. We have the intention to cut the remuneration on the previous campaigns from 2% to 1%. We did, and that took place in the month of March. So it was only one month in the first quarter and the benefits will keep on coming. The very good news is that -- the very good news is that after this cut, we're seeing a lot of stability in the balances. So I think it's working the strategy of buying customers and then keeping the balances. And finally, regarding your question on the macro provision, I think I mentioned that it was EUR 20 million, the provision that we took after changing the probabilities. And Cesar, I don't know if you'd like to add something? Cesar Gonzalez-Bueno Wittgenstein: I think you were spot on. I think on the digital account, what we said is exactly that there will be a EUR 30 million saving from the portion of that portfolio that we brought from 2% to 1%. And of that, we have seen 1 month and that EUR 30 million is over the course of the year. And as you mentioned also the very good news, as expected, is that the loss of volumes is low. And this proves again that this is a transactional account. It's not deposits. It's not to maximize returns. It's to have a full current account that, at the same time, has low costs and full services and at the same time, yields something that is above 0. And that is exactly what has happened. And now there are different tiers, and that is the strategy around this account, there are different tiers. Some for acquisition because to create the excitement to move the account, you need a slightly higher rate, but then everybody understands that the current account with a decent remuneration of 1% is attractive enough and they are becoming transactional. So as I mentioned before, we are very satisfied with the progress of this strategy. Lluc Sas: Operator, could we have the next question, please? Operator: Next question is coming from Ignacio Cerezo from UBS. Ignacio Cerezo Olmos: Two follow-ups on lending growth. The first one is on the SME and corporate book, the Spanish one. I mean you've got peers basically growing, I mean, significantly above that 2% so I just wanted to follow up a little bit actually on what do you think explains that gap right now? Is it risk profile, risk appetite by Sabadell? Is the fact that the incumbents in Spain have stepped up the pace. Is it related to the fact that your customers are requiring less credit than other type of corporates. So just a little bit of color basically on that. And then the second one is whether you're seeing actually the international book ex-TSB as a bit of an offsetting factor against and that we're seeing some degree of acceleration, especially in Miami and the foreign branches actually. So do you think there is a little bit of an offsetting actually coming from international book and the Spanish book or you treat those books completely separately? Cesar Gonzalez-Bueno Wittgenstein: I think reducing the probability of default by 50%, as we have done in new lending, of course, strengthens our asset quality. But for a period of time, makes the volumes slightly more subdued. And it makes a lot of sense to do that, but it's a transition in which we are still somewhat immersed. You have to take into account that, that probability of default improvement has a long tail it will take more than 4 years to see the full benefit in the SME portfolio, 7 years in mortgages and more than 2 years for consumer loans. And for sure, it's very difficult to separate off all the different factors that make that demand a little bit more subdued, but it is our impression that this is the main factor that reducing the probability of default of being more demanding on the quality, on the risk quality of the new loans is having certainly somewhat of a slowdown, which will fade over time. And regarding the growth abroad, not really. We have good business units abroad, Miami, Mexico in particular and we do what's right. And whenever we find the right project, so the right returns on capital with the right risk, then we're able to do it, and we are seeing an environment with a lot of activity and project finance, in structured finance and the corporate, our corporate customers that are doing business abroad. So we are taking advantage of that activity, but it's not really like that we see sort of offsetting. We don't look things that way, no. Lluc Sas: Let's go to the next question then. Operator: Next question is coming from Pablo de la Torre from RBC Capital Markets. Pablo de la Torre Cuevas: I have a couple of follow-ups on cost and distribution. So the first one was on cost. I just wanted to understand the phasing of any remaining one-off costs in 2026 and whether the plan as it stands now considers any further actions in 2027? And the second one was on distributions. I know you reiterated the EUR 2.5 billion in distributions for this year and next. But I just wanted to check that you also reconfirmed the previous dividend guidance of 2026 being above EUR 0.204. And then the last one on fees also, if you just can comment on the previous guidance of double-digit growth in asset management and insurance fee income growth from this year. I think that's growing only at 4% in Q1. Cesar Gonzalez-Bueno Wittgenstein: So you will complement to that. But on cost, we don't see further actions at this point in time in '27 and there will be a progressive deployment during '26, and we will accelerate it as much as possible. So we have incurred already in EUR 55 million of the EUR 90 million, and you should expect the greater start to happen relatively soon. And for '27 at this point in time, there's no expectation. That doesn't mean that there couldn't be later on. But at this point in time, there are no further expectations. And for the distribution, I think we have -- we are confirming everything, everything that we said in terms of distribution almost 6.5% of the total of the 3 years, the EUR 2.5 billion ordinary, the EUR 0.50, everything, I think, is being confirmed. Sergio Palavecino: Indeed. Yes. And finally, Pablo, I think you were asking for fees, which I think we've been discussing and the fee development -- I mean the expected performance of fee remains unchanged to what we said in the first -- at the beginning of the year, and for the year. So we expect fees connected with assets under management to grow linked to volume, but then we also expect a higher contribution from the different businesses that we run and in the presentation, we are acknowledging a slower start than expected. We were sort of expecting maybe a figure similar to the one that we have in the first quarter of last year. And the difference, which is some EUR 7 million is half that one-off and half a slow January and February in the import and export business and corporate and investment banking which has already get back on track from March. And with all this, what we are seeing is that we keep on targeting growth that might be close to the mid-single-digit range, probably the lower range -- the lower part of that range. So we are targeting close to 4% overall growth in the fee line for 2026. Lluc Sas: Let's go to the next question please. Operator: Next question is coming from Carlos Peixoto from Caixa Bank. Carlos Peixoto: Just a couple of questions from my side as well, basically focus on NII. I'd like to have a follow-up there. The first one is that your NII guidance is based -- or the above 1% growth is based on NII that was provided last year, excluding TSB or on the statutory NII that we now have? Just to understand the basis for the growth. And then delving into NII, just if you could remind us what type of savings you might be getting going forward from MREL instruments that you had to issue at the group level to finance the size of the group or when it includes the TSB and now with the sale you could have some savings on those instruments from maturing the instruments, basically, what -- how much could it be? And what will be the time line for those to kick in? Cesar Gonzalez-Bueno Wittgenstein: Thank you, Carlos, for your questions. Regarding the second one, MREL. We were done streaming an equivalent to EUR 1.4 billion of MREL to TSB, which is the MREL related to its risk-weighted assets. And that is the MREL that, therefore, we will be saving at the group level in the wholesale capital market, so EUR 1.4 billion. And that's why we're saying that we will not be active in the debt capital markets in 2026 as we don't need to get that. So if you apply the spread on the senior nonpreferred and senior preferred to that figure, it's something close to EUR 20 million per year that may take place already -- I mean, gradually from the second quarter of 2026, as we will not be issuing and we will have maturities. And then I think the first question, not sure if I got it fully right. I think you are asking about the perimeter for the NII, and we are trying to be comparable. So it's going to be the ex-TSB perimeter is the one that is going to remain. So that's the one we're being guiding on to try to make it -- [ PLs with PLs ]. Hopefully, that was your question, and I hope I answered otherwise, we can follow up on it. Lluc Sas: Thank you, Carlos. And then we have got one final question. So operator, please. Operator: Last question is coming from Britta Schmidt from Autonomous Research. Lluc Sas: Britta we cannot hear you. No? Well, so probably he's jumped to another call because we know that it's a busy day for you, so thank you for your understanding. And that concludes our presentation for today. Thank you, Cesar and Sergio, and thank you all for participating. If you have any further questions, the Investor Relations team remains available for any follow-up or additional information. Have a great day. Thank you. Cesar Gonzalez-Bueno Wittgenstein: Thank you.
Kevin Lorenz: Good afternoon, ladies and gentlemen, and welcome to WashTec's earnings call on the results of Q1 2026. My name is Kevin Lorenz. I'm Investor Relations Manager at WashTec. With me, I have today our Chief Financial Officer, Andreas Pabst, who will provide a brief update on WashTec and guide you through our quarterly results. Following his presentation, the floor will be open for questions. Also, you might have just seen a short video on our newest product, JetWash Connect during the waiting room, which we are very proud of. If you are interested, you can find this and further videos on this new product on our WashTec website or you can also just send us a short mail, and we will share it with you. But without further ado, I'm now handing over to our Chief Financial Officer, Andreas Pabst. Andreas Pabst: Thank you, Kevin. Also from my side, a very warm welcome. I really appreciate that you are in our call today. Let me first give you some brief statements about our current topics at WashTec before I shift over to the figures of the first quarter of 2026. Let's start with our new JetWash Connect. We already mentioned the planned launch of this new product during our last call on the fiscal year 2025. But now we are live. And as you can imagine, we are very proud on our product launch on April 14. Our new JetWash has some really good features for the users, for our customers, the operators as well as for us. First, the new steel structure. We own the complete construction details, and that puts us in the position that we can source the necessary steel parts locally instead of shipping them from Germany to all over Europe. Second, Wash & Pay leads to the fact that the average paid time increases by 25% to 30%. That means more revenue for our customers. And third, the new polish is a real eye catcher. You can really see the difference when you clean your car with this feature. With all these advantages, we believe that we can expand our business in this production category even further. Already with our last generation, we were able to achieve double-digit million revenue in Europe in 2025 that stands for approximately 10% of our equipment business. So we expect more to come. That brings me to my next topic. You are already aware that we are optimizing our production. This is one of the biggest levers we currently have in the company. We have made a major step in the future development of our production network. The grand opening of our new plant in Czech took place on March 26. We started with the transfer of preassembly, assembly and logistics to the new building. The state-of-the-art facilities ensures process stability and efficient material flows while enhancing preassembly capacity with clear structured process change. Currently, we have already transferred around 50% of the total jobs to be transferred. That means on the other side, we currently have planned higher costs. There are people in Augsburg who train the new colleagues in Czech. The handover is in quite good shape, and our employees are working very well together. We expect that this higher capacity need will be resolved before the end of this year, and then we will collect the full saving from this lighthouse project. Let me now briefly address the potential risks related to the conflict in the Middle East. From a revenues perspective, our direct exposure in the affected countries is limited and remains modest. However, the broader uncertainty can lead to a temporary reluctance to invest, particularly impacting equipment demand on a global level. This is something we are closely monitoring. On the recurring side of the business, our assessment remains unchanged. Based on historical data, higher fuel prices may lead to short-term adjustments in driving behavior, but we do not expect a structural impact on car wash usage. Accordingly, we see no material long-term risk to our chemicals and service revenues. On the cost side, we are paying particular attention to supply chains and commodity prices, especially energy-related inputs and selected raw materials. For metals, we are in the lucky situation that we have secured a major part of our need until end of this year already in December 2025. For other parts, we are increasing our stock level cautiously. Higher fuel prices, we counteracted with some surcharges for our customers in the field of service. Currently, we are discussing further mitigation measures and put them in place, depending on the duration of the conflict. You see we are prepared and do the utmost to keep the financial impact on WashTec manageable and to protect margins. On this slide, which you probably already know, you see our main efficiency programs, which we are currently driving. And you are, of course, aware that these are already fundamental for our company. For sure, you also can imagine that not all of those programs always run 100% as planned. I have already given an update on the optimization of production footprint, where we currently have some planned negative impact on the gross margin, but where we are fully in line with our targets. In terms of installation costs, here, we are facing some delays, which are -- influence our gross margin negatively. We somehow have underestimated the complexity of this job in some details and have intensified our efforts here. Our program for cost down of production and modularization is currently slightly behind time line, but overall, with no significant impact for the 2026 figures. On the other side, our programs for quality excellence and the Global Scope Configurator are developing extremely well. Our quality cost per units are decreasing continuously and contribute to our profitability. The Global Scope Configurator has been rolled out now to 3 European countries and further to come. This program clearly delivers what we expected, a strong complexity reduction along the whole process chain from the customer order to production. Now let's come to the figures for Q1 2026. Summing up Q1 in a statement. Revenue is good, especially in equipment in North America, improvement of profitability necessary. But first things first. Starting with our revenues for Q1 2026. We achieved a new first quarter revenue record of EUR 111 million, representing an increase of 2.3% year-on-year. This growth was primarily driven by a strong performance in North America, particularly in the equipment business, supported by higher revenues with key accounts. In Europe and Other, revenues were stable overall compared to prior year. On a business line basis, equipment revenues increased by 7%, while service remained stable. Consumable revenues declined mainly due to the weather-related lower wash volumes. However, the revenue decline was less pronounced than the drop in volumes, underlining the resilience of the underlying business. Looking at our profitability, we see an EBIT of EUR 3.8 million. This is an EBIT margin of 3.4%, whereas on -- 1 year ago, we booked 4.5%. The shortfall was on the one hand side, expected by necessary expenses caused by some programs. Remember my statements to a production shift to Czech. On the other side, we saw a cost increase in terms of installation. Our measures we started are not finished and do not show positive effects in the first quarter, but they will come. We have full focus on this cost block. Having a short view on free cash flow. The number is down by EUR 9 million to EUR 7 million. This drop doesn't make me too nervous right now as we have increased our stock due to the real good order backlog we have. Therefore, our net working capital increased to EUR 94 million and comparable number of March 2025 was EUR 82 million. So overall, Q1 was mixed in terms of financials and hard work is still in front of us. But given the strong top line as well as our current order book, we can look optimistic in the future, especially if we look at the development in equipment, what brings me to the next page. In the first quarter, we see a clear differentiation across our business lines. Equipment was the key growth driver with revenues up 7% year-on-year. This growth was primarily driven by North America, supported by higher revenues with key accounts, while Europe and Others also showed a slight increase. Service revenues were stable compared to the prior year, once again underlying the resilience of our recurring revenue base. This stability is a key strength of our business model, particularly in a more volatile macro environment. Consumable revenues were below the prior year level, mainly due to weather-related lower wash volumes. Importantly, the decline in revenue was less pronounced than the decline in volumes, which demonstrates the fundamentally sound operational development of our washing chemical business. Overall, we are confident with the growth of our top line. Now let's put eyes on our segments. In Europe and Other, revenue remained broadly stable year-on-year. Earnings in the segment were impacted by planned temporarily higher costs, mainly related to the expansion to our Czech site as well as delays in the execution of certain efficiency initiatives, particularly in installation and logistics. I already gave some insights here. In addition, earnings were affected by weather-related lower activity in consumable business. In North America, we saw a clear improvement in both revenue and earnings, driven primarily by higher equipment revenues with key accounts. The segment benefited from improved execution and more favorable product mix. Looking at the EBIT number, we see an increase in this KPI by EUR 1.4 million to now breakeven. This is the best EBIT in the first quarter in North America since 2017. Yes, that's remarkable. Coming now to our EBIT bridge, showing the development of Q1 '25 to Q1 '26. The increase in group revenue in the first quarter generated a positive gross profit contribution, while at the same time, the gross margin declined year-on-year, coming from 29.3% last year to now 28.4%. This was mainly driven by a less favorable product and regional mix, including a lower share of consumables and a higher share of equipment business in North America. In addition, gross profit was impacted by planned temporarily higher costs, primarily related to the expansion of the Czech site and delays in selected efficiency programs, as already mentioned. Selling expenses increased in line with revenue growth and remained broadly stable as a percentage of revenue. Administrative expenses are slightly higher compared to last year, mainly to ongoing IT projects. On this slide, you see some more financial KPIs. Net income and earnings per share follow mainly our EBIT development. Our net financial debt is still in a very good shape despite the outstanding amount is higher compared to the same time 1 year ago. Reason for this is besides higher dividend payment and the share buyback program, we already mentioned higher net working capital. On the following slide, you see our equity ratio and our fixed asset ratio. Both in a reasonable shape. In terms of employees, it is remarkable that we have increased our workforce by 94 year-on-year. Most of our new colleagues have been hired in the business line service followed by sales department. Now to the equipment order backlog, as always, indexed basis this time is the year 2022. Equipment orders received was significantly higher in the first 3 months of the year than in the prior year quarter. This cut across both segments and was primarily due to the positive trend in North American segment, where the increase was even well into the double-digit percentage range. Therefore, as already mentioned, we have a very strong order backlog, plus 10% compared year-on-year, plus 16% compared to end of 2025. And by the way, the increase in North America is even stronger. This gives us a good view on the top line in the coming months. Let's now turn to our guidance for 2026. In general, WashTec confirms its guidance for 2026 and expects that the delays in the efficiency projects will be made good over the course of the year. That is where we, the management and the complete team, need to focus on. We expect revenue growth in the mid-single-digit percentage range and an increase in EBIT that is disproportionately higher than revenue growth. The forecast does not make allowance for any further significant worsening of the economic situation due to the developments in the Middle East or other global disturbances due to some political statements and actions. However, in addition to high volatility in raw material markets, we are currently seeing a significant increase in uncertainty regarding the future course of the conflict in Middle East and the resulting indirect economic impact. That doesn't help too much for stable guidance. So this time, it is even more important to state that this guidance is subject to uncertainties and all these figures reflect our expectations based on our current knowledge and significant deviations in either directions are not factored in here. This concludes my remarks. On the following page, you will find our 2026 financial calendar. Thank you very much for your interest so far. Kevin and I are now available to answer your questions you might have. Kevin Lorenz: [Operator Instructions] We have the first question from Stefan Augustin from Warburg Research. Mr. Augustin, we can hear you. Stefan Augustin: Great. I hope so. I have a couple of questions. So the first one is actually, can you elaborate a little bit more again on the headwinds? So when do you think which one of the headwinds is going to start to decline? I mean, Czech Republic is probably second half of the year, so not Q2 yet. When is the element of the installation efficiencies going to kick in? And can you remind us on the SAP integration costs in Q1 '26 compared to the ones you might have had in Q1 '25? So that would be the first block. Andreas Pabst: Okay. So yes, you are right, the profitability or the increasing profitability for the transfer to Czech Republic will kick in more, end of this year, and we will see full effect according to the actual plans. And we are in the current time line, we are fully on track. We will see that in 2027. In terms of installation costs, we are currently really a little bit behind. We detected some, let's call it, difficulties, yes, where we need to dig further and we need to create other solutions to come back here. So that means, I would say we are here now 1 quarter behind, but we will manage to come up with this one during the year. And then you asked about the cost for the implementation of SAP. So if you look to the EBIT bridge, which is in the presentation, the deviation in administrative cost is more or less coming from this cost for the introduction of S/4HANA. So it's around about EUR 200,000. Stefan Augustin: Okay. The next one is the -- you mentioned that the orders that you received in Q1 are largely also on the U.S. side, but we should also expect growth and a positive book-to-bill in the quarter on the European side. Is that okay? Andreas Pabst: So if I look at the order income, I'm positive in Europe as well as North America for the first quarter. Both showed an increase compared to prior year. That is good. The increase was even -- just what I said was, the increase was even higher in North America. So yes, you're right with your statement. Stefan Augustin: And probably the weather, especially in Germany has been quite good in the second quarter or in April. So it would not be wrong to expect a better chemicals business in the second quarter. Is that a fair assumption? Andreas Pabst: Let me think about -- so currently, we have May 5, I guess. So the second quarter is not completely done yet. But looking at April was good washing weather, especially in Europe in one of our key markets. That's some headwind we have -- or tailwind, sorry. Stefan Augustin: Okay. And then maybe just switching back a little bit. The -- say, the headwind on the installation efficiencies, is that more in Europe or respectively, if we have in the second quarter, stronger volumes to expect from North America, would we still see a very or a sizable drop-through in operating leverage as the installation part is quite okay in North America? Andreas Pabst: That's really a good question. Thank you for that one. So the topic what we see in installation cost is mainly related to Europe. So the installation costs in North America are on a reasonable level if we compare it over the year and compare it to the targets we have. Kevin Lorenz: And we have another question from Wolfgang Specht from Berenberg. Mr. Specht, can you hear us? We can't hear you. Sorry, okay, I see the question was actually in written form. So the question is, connection is a mess still would have several questions. Okay. And so Mr. Specht, our provider in EQS has now also included an option that you can dial in via phone. Currently, many analysts have the problems that their banks are very restrictive with their IT and so if you can -- if it's possible for you, then you can also dial in via phone and there should be -- the procedure should be described. There should be a number that you have to call and then -- so let's maybe give him a little bit more time to -- if there's a question coming or not. Else -- I don't see any other questions right now. So I don't know, should we give him another minute or should we. Andreas Pabst: Let's wait for 30 seconds and see if it works, if not yes. And that's also. Kevin Lorenz: There should also be an option to write down questions in text form, also for everyone else who might still have questions. Andreas Pabst: So Mr. Specht, we really like to answer your question. So if it doesn't work right now, yes, probably then we can do it later on. That is for all the audience. But then I would say no further questions right now. So then ladies and gentlemen, on behalf of the whole Management Board, we really would like to thank you for your interest in WashTec and wish you a pleasant day. Thank you. Bye-bye.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today At this time, I would like to welcome everyone to the JELD-WEN First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to James Armstrong, Vice President of Investor Relations. Please go ahead. James Armstrong: Thank you, and good morning. We issued our first quarter 2026 earnings release last night and posted a slide presentation to the Investor Relations portion of our website, which can be found at investors.jeld-wen.com. We will be referencing this presentation during our call. Today, I'm joined by Bill Christensen, Chief Executive Officer; and Samantha Stoddard, Chief Financial Officer. Before I turn it over to Bill, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we are providing with respect to certain expectations for future results. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measures calculated under GAAP can be found in our earnings release and in the appendix to our earnings presentation. With that, I would like to now turn the call over to Bill. William Christensen: Thank you, James, and good morning, everyone. Before turning to our results, I want to thank the teams across JELD-WEN. Even with continued market pressure, our organization is showing up every day with focus and urgency driving operational improvements, supporting customers and advancing the work needed to strengthen the company. A key element of that work is investing for our customers through improved service and customer experience. As a company, we continue to place incremental focus into service and responsiveness, and we believe that this will create value as the year progresses. The macro environment remained soft in the first quarter consistent with our expectations. As a reminder, the first quarter is the seasonal low period, and we anticipate improvement as we move through the remainder of the year. During the quarter, we also implemented a number of pricing increases, and we expect those increases to begin flowing through more meaningfully in the second quarter and beyond. Overall, we delivered the quarter within our expectations and managed through a difficult volume environment. As seen on Slide 4, sales for the quarter were $722 million. As we have previously discussed, we took deliberate actions to align our labor with current market conditions, and we continue to adapt the cost structure of the business. At the same time, we are balancing investments in our customers by maintaining the resources needed to deliver quality and dependable service. We are already seeing significant service improvements across the company including our On-Time, In-Full Rates. Adjusted EBITDA was a modestly positive $6 million for the quarter, and cash performance was generally in line with our expectations. As a reminder, the first quarter is typically the highest working capital quarter, and we would expect working capital to unwind as we move into the back half of the year consistent with the seasonality of the building products industry. As we look ahead, we continue to focus on what we can control. As we mentioned last quarter, customers are very clear that consistent delivery and follow-through are what they value most. And we continue to direct investments towards these priorities. With the improvements we are seeing, we continue to discuss opportunities to regain volume, and we now expect improved execution and service levels to contribute to incremental sales versus the 2026 expectations we shared in the fourth quarter results call. We are strengthening the customer experience through better execution and consistency, and we expect that to support improved performance as the year progresses. At the same time, we are also seeing higher cost pressure, particularly in freight and pricing remains competitive in certain areas versus what we expected previously. We are managing those dynamics, staying disciplined on what is within our control while continuing to prioritize customer service and operational execution. Finally, we continue to progress the strategic review of our European business. While the process is ongoing and we have nothing to announce at this time, we believe this review could provide meaningful liquidity and help further strengthen our balance sheet. We are also evaluating various alternatives thoughtfully with a focus on improving financial flexibility while preserving long-term value. With that, I'll hand it over to Samantha to review our financial results in greater detail. Samantha Stoddard: Thank you, Bill. Turning to the financial results on Slide 6. First quarter net revenue was $722 million, down 7% year-over-year. The revenue decline was driven by lower volume/mix. While mix was down slightly year-over-year, most of the volume/mix decline was driven by lower volume. Adjusted EBITDA for the quarter was $6 million, down 72% year-over-year and adjusted EBITDA margin was 0.9%, down 190 basis points year-over-year. The lower earnings performance was primarily driven by volume/mix, along with negative price/cost dynamics during the quarter as inflation was not fully offset by pricing. These headwinds were partially offset by significantly improved productivity year-over-year. Turning to cash flow. Operating cash flow was a $91 million use of cash in the first quarter driven by lower EBITDA, combined with a $43 million use of working capital. As a reminder, the first quarter is typically the highest working capital quarter of the year, and we expect significant working capital improvement as we move through the remainder of 2026. As a result of lower EBITDA and the use of cash, net debt leverage increased to 11.3x at the end of the first quarter. Given the seasonal use of working capital, we drew $40 million on our revolver. We continue to manage the business with a disciplined focus on cash, cost and balance sheet flexibility. Turning to Slide 7. The year-over-year change in net revenue was driven primarily by lower volume/mix. First quarter sales were $722 million, compared to $776 million in the prior year, and core revenue declined 10% year-over-year. Pricing was a slight positive, but it was more than offset by the volume/mix decline, which drove the majority of the year-over-year reduction. The comparison also reflects a $30 million tailwind from foreign exchange driven by a stronger euro relative to the dollar. Taken together, these factors explain the year-over-year change in revenue and are consistent with the market conditions we discussed earlier. Turning to Slide 8. Adjusted EBITDA for the first quarter was $6 million, compared to $22 million in the first quarter of last year. The year-over-year decline reflects a combination of cost pressure and lower volume/mix. Price/cost was a $21 million headwind as pricing was slightly positive, but it continued to be outweighed by cost inflation in areas like glass, metals and transportation. Volume/mix was also a $22 million headwind, and that impact was driven primarily by lower volumes year-over-year. These headwinds were partially offset by improved execution across the business. Productivity was a $22 million benefit year-over-year, and we also delivered a $6 million improvement in SG&A and other expense despite a $10 million other income headwind from prior year. Turning to Slide 9 and our segment results. In North America, first quarter revenue was $453 million, compared to $531 million in the prior year. The year-over-year decline was driven primarily by lower volumes and the court-ordered Towanda Divestiture which had partial impact in the first quarter of 2025. Adjusted EBITDA for North America was $4 million, compared to $16 million last year. And adjusted EBITDA margin declined to 0.8% from 2.9%. Profitability was pressured by continued inflation and lower volumes, partially offset by significant year-over-year productivity and SG&A improvements. In Europe, revenue was $269 million, up from $245 million in the prior year, an increase of 10% year-over-year. The improvement was driven primarily by foreign exchange and slightly better pricing, partially offset by continued volume decline. Foreign exchange contributed approximately 11.5 percentage points to the year-over-year revenue change. Adjusted EBITDA for Europe was $7 million compared to $11 million last year and adjusted EBITDA margin was 2.6% versus 4.3% in the prior year. Productivity was a slight positive, but those benefits were more than offset by lower volume/mix, along with higher SG&A expense. With that, I will turn it back over to Bill to discuss our updated market outlook and how we are positioning JELD-WEN for the path ahead. William Christensen: Thanks, Samantha. Turning to Slide 11. I want to walk through our market outlook for 2026 and the assumptions underlying our guidance. Importantly, our view of the market has not meaningfully changed from what we outlined previously in our fourth quarter 2025 results call. We continue to operate in a challenging and uncertain environment and our outlook reflects a cautious view rather than any expectation of a near-term recovery. In North America, we expect the overall windows and doors market to be down low to mid-single digits. Within that, we see new single-family construction down low single digits and repair and remodel down mid-single digits. We now expect U.S. multifamily to be up significantly year-over-year, while Canada continues to face more significant pressure with high single-digit declines, reflecting ongoing economic softness and continued weak housing activity. In Europe, conditions appear to be stabilizing. We expect volumes to be roughly flat year-over-year. Demand remains subdued, but we are not seeing further deterioration from current levels. At the company level, our volume assumptions are now more aligned with the underlying market. We continue to expect some impact from prior pricing actions but we are also beginning to see the benefits of improved service levels. Our guidance reflects a modest contribution from these service improvements while maintaining a clear focus on pricing discipline. Overall, our framework remains consistent. Our guidance is based on current demand levels with pricing actions largely in place and a continued focus on margin protection and execution rather than relying on an improvement in end market conditions. Turning to Slide 12. I I'll walk through our updated full year 2026 guidance. Overall, we are increasing our revenue outlook, holding our adjusted EBITDA range and maintaining cash flow expectations. We now expect net revenue in the range of $3.05 billion to $3.2 billion, up from our prior range of $2.95 billion to $3.1 billion. This reflects a modest benefit from improving service levels, which brings our company volume assumptions more in line with the underlying market. April sales have been in line with our expectations, which supports the updated view we are sharing today. As a result, we now expect core revenue to decline between 3% and 6% year-over-year compared to 5% to 10% previously. The adjusted EBITDA range remains unchanged at $100 million to $150 million. While the higher revenues progress, we are seeing incremental price/cost headwinds relative to our prior assumptions, which offset the benefit from improved volumes. Our outlook continues to reflect higher pricing and a focus on execution in a still changing demand environment. On cash flow, we continue to expect operating cash flow of approximately $40 million and a free cash flow use of approximately $60 million. We still anticipate capital expenditures of approximately $100 million that are largely maintenance in nature. Our guidance assumes no portfolio changes. However, as noted, we continue to evaluate strategic options, including our review of the European business, and additional actions to improve liquidity. Turning to Slide 13. This chart bridges our 2025 adjusted EBITDA of $118 million to the midpoint of our 2026 adjusted EBITDA guidance of $125 million. Starting on the left, market volume/mix remains a headwind of approximately $25 million, reflecting the continued pressure we see across our end markets. The next item is net share loss which we now expect to be a $30 million headwind, improved from our prior expectation of $60 million. This reflects early progress on service and a more stable customer response as those improvements begin to take hold. We now expect a greater headwind from price/cost, which we anticipate to be approximately $40 million, compared to $10 million previously. The environment remains highly competitive and as our service improves, we've been more active commercially, including targeted promotional activity to regain traction with certain customers. In addition, we are seeing higher-than-expected cost pressure, most notably in freight. These external and commercial pressures are offset by actions within our control. We continue to expect approximately $75 million of benefit from rightsizing and base productivity, reflecting actions that are largely executed and will be realized over the course of the year. We also expect about $35 million of carryover benefit from our transformation initiatives, including automation, footprint optimization and systems improvements as those efforts continue to move in a more steady state operating model. The remaining items include approximately $10 million of headwind from compensation and other timing-related factors, partially offset by foreign exchange and other items. Taken together, these elements bridge to the midpoint of our 2026 adjusted EBITDA guidance. While the mix of headwinds has shifted, the overall earnings outcome remains unchanged, reflecting both the ongoing pressure in the market and the impact of the actions we are taking to manage through it. Before we wrap up, I want to step back and highlight the progress we are making on service across our North America business. On Time, in Full delivery or OTIF, is a key customer metric and it is where we have been intensely focused. As you can see on Slide 14, our OTIF performance has improved significantly over the past year, moving to over 90%. This is a meaningful step change in how we are serving our customers, and we are seeing that reflected in the feedback we are getting across the business. Customers are noticing the improvement. We are seeing better engagement, more consistent order patterns and importantly, increased opportunities to quote and compete for new business as our service levels improve. This progress is being driven by both stronger execution and deliberate investment. Operationally, we have now deployed our A3 management system across the network, which has improved how we identify issues, solve problems at the root cause and maintain consistency as well as ownership at the plant level. At the same time, we have made conscious decisions to prioritize service, including higher transportation spend, such as shipping partial loads when needed and maintaining staffing levels despite lower volumes. These are targeted investments to support service and rebuild trust with our customers. We believe that as service continues to improve, that trust will translate into volume recovery and share gains over time. That said, we are not finished. Our goal is to consistently operate above 95% OTIF and reaching that level will require further progress, particularly with our vendor base and how we manage special order products. Overall, we are encouraged by the progress we are making. Service is improving, customers are responding, and we are beginning to see that translate into commercial opportunities. Turning to Slide 15. I'll close by stepping back and putting our progress into perspective. Over the past year, we've made significant improvements in how we serve our customers. We have invested in service, strengthened our operating discipline and focused the organization on the metrics that matter most. Cash and liquidity remain a priority. We are taking actions to preserve cash, and we continue to evaluate opportunities to strengthen liquidity and maintain flexibility in an uncertain environment. Our strategic review of Europe is ongoing, and we continue to evaluate other opportunities to improve liquidity and strengthen financial flexibility. Across the business, we are also aligning labor with current market conditions while continuing to invest in the organization for the long term. That includes work to improve culture and engagement. We recently completed a company-wide baseline employee engagement survey, and our managers are actively using that feedback to create individual action plans focused on local level engagement. Importantly, our customers are seeing the difference. Service levels have improved, performance is more consistent, and we are beginning to rebuild trust. That is showing up in better engagement and increasing opportunities to compete for new business. However, we are not yet where we need to be. There's more work to do and we know that this will not happen overnight, but we are moving in the right direction and starting to see the early benefits. At the same time, we are managing the business with a clear view of current market conditions. We are aligning the cost structure to demand, maintaining pricing discipline and staying focused on execution. As I close, I want to recognize the work of our associates across JELD-WEN. The progress we are seeing is the result of their effort and focus every day. Our customers are noticing the improvement and it is important that we continue to build on that momentum. Overall, we are becoming a more consistent and disciplined company. We are improving service, rebuilding customer confidence and managing the business with a clear focus on cash and execution. With that, I'll turn the call back over to James for questions. James Armstrong: Thanks, Bill. Operator, we're now ready to begin Q&A. Operator: [Operator Instructions] Your first question comes from the line of John Lovallo of UBS. John Lovallo: The first one is, at the midpoint, your outlook seems to imply 2Q adjusted EBITDA of about $31 million. That's versus about $6 million in the first quarter. Can you just help us kind of bridge the ramp from first quarter to second quarter? Samantha Stoddard: John, yes, this is Samantha. I can help bridge that gap. So it's primarily driven by normal seasonality with the second quarter typically benefiting from higher sales volume and then better labor absorption as well. This year, we also expect to see the benefit of pricing actions that we implemented already in Q1, but begin flowing through more meaningfully at the start of Q2. And as you heard Bill say in the earlier remarks, we are already seeing the uptick in April. So we do feel good about going into Q2. John Lovallo: Got it. That's helpful. And then on the North American decremental margin, it is around 15%, which was pretty favorable, and I think it speaks to the cost controls and the cost takeout you guys have achieved. I mean how sustainable do you think this level of decremental is? And maybe more importantly, how are you thinking about incrementals in an improving volume environment? Samantha Stoddard: Yes. So I can start, and then I'll let Bill jump in. I think that in the short term, you are going to see us holding the line with the costs in particular. So you're right in that a lot of the transformational actions and cost takeouts that we saw in '25 going into '26 are going to continue. With the improved volumes from what I just spoke about, the seasonality as well as some of the higher price, that should then flow, I would say, our normal incrementals, 25% to 30% on the upside. William Christensen: John, it's Bill. So the only thing I'd add there is what I'm really pleased with is if you look at our bridge coming out of our full year '25 guide to where we are now, we've removed about $100 million of headwind. And that speaks to the hard work that our teams are doing every day to really make things work for our customers. So we're starting to gain traction and reducing the rate of decline, which is great. So we do have some share loss that's lapping from '25, but we feel pretty good here headed into the last 3 quarters of this year. Operator: Your next question comes from the line of Susan Maklari of Goldman Sachs. Susan Maklari: My first question is on the improved service levels. It's encouraging to hear that you're seeing such a nice lift there. I guess, can you talk more about how you're thinking of the path from here, the specific programs that you are working on and putting in place to support that? And I know last quarter, we talked about standardizing some of your operating systems and processes to help with that service. Is this part of what's driving that? And where you are in that process as well? William Christensen: Yes, Susan. Thanks for the question. So absolutely, standard work across our network of sites, both in Europe and in North America is progressing very well. And you can see, based on what we showed on Chart 14 with the improvement on the OTIF metrics, clearly, there's still work to be done. But we are in a pretty choppy demand environment. And so our network needs to be very flexible and as we noted in the prepared remarks, we have incurred some additional costs based on not in full shipments, but making sure we're doing everything we can to meet our customers' expectations. So that's progressing well. I think the second thing I'd want to call out is that the teams are working extremely hard to connect with our customers and define areas of opportunity where we can lean in together with them to regain some of the share that we've lost in the last couple of years, and that's starting to show up as well. So we think this bodes well for the back half of the year, even though we still are expecting a pretty soft market environment as we outlined in prepared remarks. Susan Maklari: Okay. That's very helpful. And then can you give a bit more color on the magnitude of the inflation? How we should be thinking about that path for price/cost this year? I know you mentioned that you're starting to see some of the realization on the first quarter increase. And with that, how you're thinking about that balance between volume versus price in this environment? Samantha Stoddard: Yes. Let me go ahead and start that, Susan. So on the inflation side, I think the biggest area that we're seeing inflation is going to be around the freight and energy prices. So we're seeing that both in North America as well as Europe. On the better note, we are seeing slightly less tariff exposure that we did expect when we were starting the year. In terms of the magnitude, they're somewhat offsetting each other, not exactly, but materially, they're about offsetting. So when we think about the price/cost negativity, I think that there is some of that in inflationary pressures. And there is the affordability challenge from a price standpoint. We are seeing competitive pricing in different areas of the market. So while we have already gone out with price, that is why we're calling down some of the price/cost that we initially expected to be around negative 10% from an EBITDA bridge, we are now seeing that to be a little bit higher. Operator: Your next question comes from the line of Matthew Bouley, Barclays. Anika Dholakia: Anika Dholakia on for Matt today. So first off, for Europe, you guys mentioned that you're not seeing any further demand pressure from current levels. So I'm curious if this suggests that pricing strength can continue in this region similar to 1Q? And then just kind of going off of that, how have some of the recent geopolitical dynamics maybe impacted the review of the European business, if at all? So yes, any color on that? William Christensen: Thanks for your question. Yes. So we clearly are seeing more signals that we're at the bottom of the valley from a volume decline. So Europe has stabilized. We called it last quarter. We're seeing similar trends just to remind you, it takes 9 to 12 months post start to put our product in. So it's going to be a while until you see things tick up in the Doors world. On pricing, we've done a great job across many European markets of introducing price to offset inflation and headwinds. The macro reality is going to have a pretty significant impact in Europe on energy, feedstock input prices, transportation costs, et cetera. We're already in market with pricing to offset a number of those headwinds. So I'd say we're feeling fairly balanced currently in Europe. And then the third comment is we wouldn't really comment specifically on where we are on the strategic review and what the influences would or wouldn't be as we said in the prepared remarks, nothing further process is ongoing, but no further details today. Anika Dholakia: Okay. Great. That's really helpful. And then on the second question, so on the productivity initiatives on the $110 million, I'm curious, I think last quarter, you guys said 50% completed, 25% actioned, but hadn't hit and then 25% still needed to be actioned. Is this on track with what you guys expected? Or any updates to these numbers? Samantha Stoddard: Sure. So breaking it down, the $35 million of the transformation carryover, that is 100% completed at this point. So these are structural costs. We talked about it on an earlier question that we are seeing the benefits of and they're 100% complete. On kind of the base productivity, rightsizing of the business, I would say we're greater than 80% of those initiatives that are done. So there's still a little bit of work to be done on some of the smaller initiatives, but the majority have been banked at this point, and we'll see that carry through in Q2 through Q4. Operator: Your next question comes from the line of Jeffrey Stevenson with Loop Capital. Jeffrey Stevenson: Can you talk more about the improvement in on-time deliveries you've seen over the last year and whether it's corresponded with the stabilization in your share position over that time period of service levels continue to improve? William Christensen: Yes. So yes, that's the short answer. The longer answer is, obviously, we have a fairly broad portfolio in the North American market. So there's a number of different areas where we're performing very well and continue to do so. And there's other areas where clearly we weren't meeting expectations of our customers. And as we had described last year, there was some share loss, some pruning on our side, but also some share loss. And we're definitely regaining share in certain pockets that our North America team is very focused on partnering with our customers to give them the product at the right time at the right place. So we're pleased with the improvements. And as I said, we've probably reduced by about half the headwind that we thought we would have this year from a top line standpoint. So we're making good progress, not finished. There's more work to be done, but I think that's a good signal that we're moving in the right direction, Jeff. I think that's the important message today on the call. Samantha Stoddard: And Jeff, just highlighting back to the full year guidance bridge. As I talked about earlier with Susan, that the price/ cost, unfortunately, has become a little bit more negative but that share loss volume/mix, EBITDA impact, as Bill was talking about, has improved by about $30 million from last quarter. Jeffrey Stevenson: That's very helpful. And then thanks for the update on the Europe strategic review. But previously, you talked about divestitures of smaller noncore assets as well, such as your distribution business in North America. And I just wondered if there are still opportunities across your footprint for other potential divestitures as well. William Christensen: Yes. So Jeff, what we've said is we continue to evaluate other options in addition to the strategic review to improve liquidity, which clearly is a key focus point of ourselves given the current macro environment. And that includes assessing sale of other assets, potential sale-leaseback transactions. No further detail from our side. I think more importantly, we've said this a number of times, I want to reiterate, we expect to address our near-term maturities before they go current in December. And for the time being, as Samantha laid out in her prepared remarks, we have ample liquidity, and we're actively managing cash in this soft macro environment. So I think that important combination. We continue to evaluate options. We have a number of options, and we're staying very close to the cash situation, combine that with improvements on service and better volume outlook from our side. We're feeling good about where we are currently. Operator: There are no further questions at this time. And with that, I will now turn the call back over to James Armstrong for final closing remarks. Please go ahead. James Armstrong: Thanks, everyone, for joining us today. If you have any follow-up questions, please feel free to reach out. We appreciate your time and interest in JELD-WEN. Have a great day. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. 2026 Earnings 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, simply press star followed by the number one on your telephone keypad. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Kerri Joseph, Senior Vice President, Investor Relations and Treasury. Ms. Joseph, please begin your conference. Kerri Joseph: Thank you, operator. Good morning, everyone. Thank you for joining our first quarter 2026 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Michael Fedock, Executive Vice President and Chief Financial Officer; and members of our leadership and Investor Relations teams. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events and Presentations section of our IQVIA Holdings Inc. Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company’s business, which are discussed in the company’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-Ks and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. As previously disclosed, we implemented a new segment reporting structure effective 01/01/2026. In conjunction with this change, prior period segment amounts have been recast to conform to this new reporting structure. I would now like to turn the call over to our Chairman and CEO, Ari Bousbib. Ari Bousbib: Thank you, and good morning, everyone. Thank you for joining us today to discuss our first quarter results. IQVIA Holdings Inc. delivered outstanding financial results, achieving record first quarter revenue and adjusted diluted earnings per share that exceeded the high end of our guidance, reflecting solid top and bottom line performance. We are seeing continued positive year-over-year momentum across the portfolio with strong acceleration of organic revenue growth. In fact, year over year, our organic revenue growth rate in Commercial Solutions doubled, and our organic revenue growth rate in R&D Solutions tripled. On the commercial side, revenue growth accelerated as clients continue to launch new products and increase the breadth of services they utilize from IQVIA Holdings Inc. We saw particular strength in Patient Solutions, which is the part of Real World that remained in the Commercial segment, and particular strength in Analytics and Consulting, which had the highest growth we have seen in three years, as well as strength in our Commercial Engagement Services, which includes the former CSMS segment. We feel good about demand on the commercial side with pipelines growing to record levels, and we think AI has something to do with it. AI is causing our clients to have more questions. It is causing them to increase their demand for IQVIA Holdings Inc.’s differentiated AI capabilities and for the innovation we are embedding across our commercial offerings. On the clinical side, we also delivered very strong performance in the first quarter with better than expected reported and organic revenue growth. We had solid bookings with double-digit growth year over year, both as reported and as recast. In particular, we had solid growth in net service fee bookings, that is, excluding pass-throughs. Net service fee bookings growth in the quarter was solid year over year as well as sequentially, both as reported and as recast. Cancellations in the quarter were within the normal range. So why was our book-to-bill ratio 1.04 in the quarter despite solid service fee bookings growth and normal cancellations, and no, AI has nothing to do with it? What happened was that pass-through bookings were unusually low in the quarter, simply due to the particular mix of indications of the clinical trials we booked in the quarter, which included more full-service trials with lower pass-throughs than usual. I want to note that the proportion of FSP in our bookings this quarter was consistent with historic levels. Regarding the overall demand environment, forward-looking demand metrics continue to point in the right direction. Our backlog reached a new record of $34.2 billion at the end of the quarter. Noteworthy is the amount of dollars from our backlog that will convert to revenue in the next twelve months. We have $8.9 billion out of our backlog, representing nearly 8% growth year over year versus the recast numbers last year. Our qualified pipeline grew mid single digits year over year, with notable strength in EVP. RFP flow grew high single digits year over year, driven by growth both in large pharma and in EVP. All of these comparisons are, of course, apples to apples, that is, versus prior year numbers that have been recast to reflect the new segment reporting. Finally, you may have noticed EBP funding was very strong in the first quarter, reaching $25 billion according to BioWorld, which is almost double the funding in Q1 2025. Now let us turn to the results in the quarter. We delivered outstanding revenue and profit results. Total revenue for the first quarter exceeded the high end of our guidance range, representing year-over-year growth of 8.4% on a reported basis and 6% at constant currency. First quarter adjusted EBITDA was up 5.5%. First quarter adjusted diluted EPS of $2.90 also exceeded the high end of our guidance range; it increased 7.4% year over year. Let us review a few highlights of business activity. A brief update on AI: IQVIA Holdings Inc.’s AI solutions are built on our unparalleled proprietary data foundation, best-in-class compliance with the privacy, regulatory, and integrity standards healthcare-grade AI demands, and are connected to our deep life sciences and healthcare expertise. We have been integrating AI into our operations and solutions at scale for nearly a decade. It is part of who we are and what we do. We already function as an AI-native company in life sciences. A few weeks ago, we unveiled iqvia.ai at NVIDIA’s GTC conference. This is our agentic AI portal and marketplace purpose-built for life sciences. It provides clients a single access point to their purchased IQVIA Holdings Inc. AI solutions, enabling centralized control with their internal user base, while also enabling visibility to a broader AI portfolio to support future solution adoption. Our deployment of highly specialized life sciences industry AI agents is progressing as planned. To date, we have 192 agents deployed in the field covering 64 use cases across both our Commercial Solutions and R&D Solutions businesses. Nineteen of the top twenty pharma companies are already using IQVIA Holdings Inc. agents in some of their workflows, underscoring broad industry trust in our AI capabilities. Switching to client activity in Commercial Solutions, this quarter we saw clients increasingly selecting IQVIA Holdings Inc. to build AI-ready data foundations, which facilitate the incorporation of AI agents, including our agents, into their workflows. These new services expand the scope of our partnerships with clients. A few examples of wins in the quarter: a top-10 pharma client awarded IQVIA Holdings Inc. a contract to modernize performance reporting on markets and therapeutic areas using an AI-driven analytics platform. The engagement replaces hundreds of disconnected reports and dashboards from multiple vendors with a centralized, managed, AI-powered IQVIA Holdings Inc. insights solution. IQVIA Holdings Inc. secured a multiyear partnership with a midsized client to build a scalable, AI-ready data foundation. The win demonstrates IQVIA Holdings Inc.’s plug-and-play capabilities within a client’s multi-provider technology ecosystem. Pfizer and IQVIA Holdings Inc. entered into a strategic regional promotion agreement covering selected Pfizer products across 23 countries in Europe. This collaboration brings together Pfizer’s scientific leadership with IQVIA Holdings Inc.’s promotional expertise, market intelligence, and AI-supported technology to support long-term impact. We entered into a strategic, long-term collaboration with Boehringer Ingelheim to transform the global commercial intelligence foundation. Boehringer selected IQVIA Holdings Inc.’s Data-as-a-Service plus platform as the core accelerator to harmonize and upgrade global commercial operations, enabling more scalable analytics and a single version of the truth across therapeutic areas and geographies. This collaboration will support upcoming product launches and market reporting across 59 countries. IQVIA Holdings Inc. was awarded a multiyear agreement to serve as the primary patient information and analytics partner across an EVP’s full portfolio, including our Data-as-a-Service platform. This partnership is designed to drive strong visibility into existing brands, accelerate improvements in analytics, insights, and pipeline assets, and enable more intelligent commercial and portfolio decisions. Turning to R&D Solutions, our strategy has been to leverage our AI solutions to optimize trial design and execution to reduce timelines for our clients. We have been doing this for years through protocol optimization, site identification, and operational risk mitigation, and we are taking this to the next level with AI agents, which lead to much faster study execution and increased quality by reducing errors and rework. For example, the agentification of the complex database setup process in study start-up or the AI identification of tasks involved in filing multiple documents in the Trial Master File. We are increasingly embedding these AI agents in our delivery model. Recent wins on the back of these capabilities include: a top-five pharma company selected IQVIA Holdings Inc. to provide AI-enabled global medical safety and pharmacovigilance services, building on a decade-long relationship and strong performance across both FSP and clinical delivery models. The deal consolidates safety operations under a single scalable model to improve efficiency and reliability while enabling ongoing innovation. A top-10 pharma client awarded IQVIA Holdings Inc. a multiyear agreement to serve as the primary partner for delivering full-service global clinical trials. We differentiated ourselves through AI-enabled innovation that accelerates development and improves execution quality. IQVIA Holdings Inc. won a contract with a global midsized pharma to deliver a Phase 3 clinical study supporting a high-profile oncology asset, based on our experience running similar studies and our ability to deliver AI-enabled trial design, protocol optimization, and site identification. A top-20 pharma company selected IQVIA Holdings Inc. to support a late-stage clinical program in asthma in overweight patients, highlighting AI-enabled clinical solutions, including protocol and design strategy optimization, regulatory compliance, and study document filings. For an EDP, we are delivering a global late-stage clinical program that integrates clinical and laboratory services within a single operating model, with agentified analytics embedded across site feasibility and selection, enrollment, and performance forecasting. Lastly, in the quarter, we announced a strategic collaboration with the Duke Clinical Research Institute to advance clinical research in obesity and related cardiometabolic conditions. The collaboration brings together IQVIA Holdings Inc.’s global operational scale and execution capabilities with Duke’s academic rigor and scientific leadership, creating an integrated end-to-end model for large, complex clinical trials. The partnership is designed to accelerate trial start-up, improve execution efficiency, and support regulatory submissions and commercialization. IQVIA Holdings Inc. contributes deep expertise in obesity and metabolic disease, having supported more than 120 obesity trials and enrolled more than 90,000 patients, including work across all FDA-approved GLP-1 therapies to date, providing sponsors with a proven operational foundation. This partnership with Duke has already resulted in a significant pipeline of opportunities and a few wins in the second quarter. I will now turn the call over to Michael Fedock for more details on our financial performance. Michael Fedock: Thank you, Ari, and good morning, everyone. As Kerri noted earlier, we implemented a new segment reporting structure effective 01/01/2026. In conjunction with this change, prior period segment amounts have been recast to conform to this new reporting structure. Let us start by reviewing the results. First quarter revenue was $4.151 billion, up 8.4% on a reported basis and 6% at constant currency. Revenue growth includes about two points of contribution from acquisitions. Commercial Solutions revenue for the first quarter was $1.754 billion, up 11.6% on a reported basis and 8.5% at constant currency. R&D Solutions first quarter revenue was $2.397 billion, up 6.2% on a reported basis and 4.2% at constant currency. Now moving down the P&L. Adjusted EBITDA was $932 million for the first quarter, representing growth of 5.5% year over year. First quarter GAAP net income was $274 million and GAAP diluted earnings per share was $1.61. Adjusted net income was $492 million for the first quarter and adjusted diluted earnings per share was $2.90, representing growth of 7.4% year over year. Now turning to RDS bookings. To provide an apples-to-apples comparison, last year’s Q1 2025 net new bookings and backlog have been recast to reflect the Real World Late Phase and certain other Real World offerings that are closely related to the clinical trial business, which we moved from TAS to RDS. On this new basis, R&D Solutions net new bookings in Q1 2026 were $2.5 billion, a double-digit increase year over year. RDS backlog at March 31 was $34.2 billion, an increase of mid single digits year over year. Additionally, the next twelve-month revenue from this backlog was $8.9 billion at March 31, which is up high single digits versus the prior year on a recast basis. Now reviewing the balance sheet. As of March 31, cash and cash equivalents totaled $1.947 billion and gross debt was $15.833 billion, resulting in net debt of $13.886 billion. Our net leverage ratio ended the quarter at 3.62 times trailing twelve-month adjusted EBITDA. First quarter cash flow from operations was $618 million; capital expenditures were $127 million, resulting in strong free cash flow of $491 million, which represents 100% of adjusted net income, a 15% increase year over year. In the quarter, we repurchased $552 million of our shares, which leaves us approximately $1.2 billion of repurchase authorization remaining under the current program. Now turning to guidance. We are reaffirming our full year 2026 guidance for revenue and adjusted EBITDA, and we are raising the guidance for adjusted diluted earnings per share. We continue to expect revenue to be between $17.15 billion and $17.35 billion, representing growth of 5.2% to 6.4%, or 5.8% at the midpoint. This revenue guidance continues to assume approximately 150 basis points of contribution from acquisitions and approximately 100 basis points of tailwind from foreign exchange. These assumptions are unchanged from the prior guide. We continue to expect adjusted EBITDA to be between $4.05 billion and $4.25 billion, growing 4.9% to 6.3% year over year, or 5.6% at the midpoint. We are raising our adjusted diluted EPS to be between $12.65 and $12.95, up 6.1% to 8.6% versus prior year, or 7.4% at the midpoint. Turning to the second quarter. For Q2, we expect revenue to be between $4.28 billion and $4.34 billion, which represents year-over-year growth of 6.5% to 8%. Adjusted EBITDA is expected to be between $955 million and $975 million, representing growth of 4.9% to 7.1% versus prior year. Adjusted diluted EPS is expected to be between $2.98 and $3.08, which represents year-over-year growth of 6% to 9.6%. Both this guidance and our full year guidance assume that foreign currency rates as of May 4 continue for the balance of the year. To summarize, IQVIA Holdings Inc. delivered outstanding financial results with first quarter revenue and adjusted diluted EPS exceeding the high end of our guidance. We delivered strong acceleration of organic revenue growth in both Commercial Solutions and R&D Solutions. RDS net new bookings grew double digits year over year with solid year-over-year and sequential growth in net service fee bookings. We continue to make very strong progress in the deployment of highly specialized life sciences industry AI agents, with more than 190 agents deployed covering over 50 use cases across Commercial Solutions and RDS businesses, with 19 out of the top 20 pharma companies already using our agents in some of their workflows. Forward-looking indicators continue to point in the right direction for both Commercial Solutions and RDS. We repurchased $552 million of our shares in the first quarter, and we reaffirmed our full year 2026 guidance for revenue and adjusted EBITDA and raised the guidance for adjusted diluted earnings per share. We will now open the call for questions. Operator, please go ahead. Operator: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We request that you please limit yourself to one question so that others in the queue may participate as well. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of an Analyst with Leerink Partners. Your line is now open. Please go ahead. Analyst: Good morning, everyone. Thanks for taking the questions. Maybe if I can dive in a little bit more on the services versus pass-through bookings that you saw in the quarter. As you think about the demand dynamic, how should we think about that conversion of what you are winning across the margin progression, Ari? I just want to make sure we all understand the push and pull on what is coming through into the backlog versus how profitable it is relative to the core business, especially if these are a lot more full-service-oriented wins within the RDS segment? Thank you. Ari Bousbib: I hope I understood your question well, but just to be clear, you understand that pass-throughs have zero profitability drop-through. That is clear. So pass-throughs are irrelevant to profitability. We have to report them because that is an accounting requirement. We had solid execution in the quarter. We booked $2.5 billion of trials in the quarter. It just happens to be that the mix of indications was such that we had full-service trials that had fewer pass-throughs than usual. In fact, if you look at pass-throughs, the first quarter was about one third lower than the historic average. It is always within a range, but it was significantly lower. Had we had a regular mix of projects consistent with long-term history and a consistent level of pass-throughs, then we would not be having this conversation. The infamous quarterly book-to-bill ratio would have been quite significantly higher. There is no impact on margins—no unexpected impact whatsoever. I want to point out that on pure service fee bookings, year over year and sequentially, we were up very significantly. Now, ignoring the pass-through issue, generally Q1 is always lower than Q4, usually by 16% to 17%. This quarter it was lower by less than that—about 13% down—so lower as always, but a little bit less than usual. Frankly, we also have the most conservative bookings policy in the industry. You only book business when it is contracted. So if we are awarded a couple of trials at the end of the quarter and the client board is only meeting on April 2 and that is when the contract is signed, then that is when we book it. It is not a first quarter win. The influence this can have on a reported book-to-bill is very significant. Again, and I said this when we reported book-to-bill ratios of 1.3, I said it when we reported 0.9, and I will say it again today: the quarterly book-to-bill metric is a bad metric to predict future growth. I can easily point to many competitors who reported great book-to-bill ratios and are now having very negative growth. Point to us: last year at this time, we reported a book-to-bill of 1.02, and if this were predictive of growth, this quarter we would be showing really poor, anemic growth in RDS, and yet we are reporting very strong 3% organic growth—over 6% reported. We have about two points from FX and about a point from acquisitions; our organic growth in R&D was 3%. Could you have predicted that from the 1.02 reported book-to-bill last year? The answer is no. Again, there is zero impact from AI in our bookings. The number of trials that we lost to anyone using any AI tool is exactly zero. And, again, no impact on margins whatsoever from the unusually low pass-throughs in the bookings this quarter. I hope that gives you enough color. Operator: Your next question comes from the line of Justin Bowers with Deutsche Bank. Your line is now open. Please go ahead. Justin Bowers: Good morning. A two-parter, maybe one for Ari and one for Mike. In terms of the wins you saw here, it is interesting to hear the full-service dynamics and that having fewer pass-throughs. Is that more of a function of how customers are deploying their clinical strategy, and are you seeing any shift there from large pharma, either in the quarter or what is in the funnel? That is number one. And then part two would be on the margins. Is that something that we would see this year, or is that more of a 2027 and beyond dynamic? Ari Bousbib: Thank you. Again, one quarter does not make a trend, and $2.5 billion of bookings that are going to convert to revenue over the next four to seven years is not going to affect our margins one bit. It is not indicative of any change whatsoever. It just happens to be that the trials that we won this quarter had lower pass-throughs. It has nothing to do with a change in customer dynamics. Some trials, like certain large vaccine trials, have an enormous amount of pass-throughs. There are certain types of large cardiovascular studies that require a lot of patients and a lot of procedures; the protocol may require more reimbursed expenses. That just was not the case this quarter. It is unusual to have lower pass-throughs, but that is what happened. I would not read anything about changing client dynamics into this. On demand, we see no change at all in the fundamental drivers of outsourced clinical development. Trial complexity is rising, the need to execute globally is rising, and the growing use of data and analytics—all of these point to the need to outsource more, not less. In the near term, we see that the environment has stabilized. Large sponsors are still taking a more deliberate approach to capital deployment, coming out of three to four years of policy-driven macro headwinds and disruptions. We have not yet returned to the decision-making speed we saw before this period started, but it is getting there and moving in the right direction. On the EDP side, funding is growing at a very nice pace, which points to renewed confidence in the pipeline. It takes a year to a year and a half before funding drives awards and into the backlog, but the demand indicators are quite strong. Michael Fedock: Just to reemphasize Ari’s point: do not draw any sort of margin conclusions from one quarter of bookings. Every dollar we book now burns over roughly five years. Some color on Q1 margins: we recorded about 60 basis points of EBITDA margin contraction, and all of that was due to non-operational headwinds—FX and pass-throughs. We have a very strong productivity program. Operationally, despite adverse mix, our productivity programs more than offset that mix, so we expanded margin operationally quite significantly in the quarter. This further highlights that you cannot correlate a quarter of bookings, or even several quarters, to future margins. Ari Bousbib: We report the book-to-bill because you want it, but it is not comparable to anyone else in the industry. Our number two competitor is part of a larger conglomerate; we know nothing about their numbers. Our number three competitor, we have no clue what their numbers are now or in the past three years. Numbers four and five are private. There is very little rationale to give so much color on bookings; conclusions people draw can be false and it is competitive information. Operator: Your next question comes from the line of an Analyst with Barclays. Your line is now open. Please go ahead. Analyst: Wanted to talk more about the upside in Commercial Solutions. You called out a few businesses that were really strong during the quarter, but it would be great to hear more about which areas were most surprising versus your internal expectations. And can you remind us on the mix of the more recurring revenue offerings within this business versus what is more discretionary? Thanks. Ari Bousbib: Thank you for the question. Our Commercial Solutions business is underappreciated. We performed very well in the first quarter. When the industry went through difficulties over the past three years, headwinds caused our large pharma clients to pause discretionary spending. Our growth rates never went negative, but they slowed to low single-digit organic growth. We then started to rebound, and a year ago in the first quarter our organic growth rate was about 2% to 2.5%. Our organic growth rate in Commercial Solutions this quarter was 5%. We reported 11.6% growth; at constant currency that is 8.5%, and when you strip out acquisitions, it is 5% organic growth—double the underlying organic growth year over year. What is driving this? On the clinical side, our AI work focuses on creating efficiency and improved execution to reduce timelines. On the commercial side, we are focused on innovation—creating new offerings—and those are gaining traction. Customers are dealing with massive amounts of data from us, from third parties, and generated by their own operations, and with disparate legacy systems. AI agentification enables clients to bypass and leapfrog systems and multiple vendors and data sources, analyze information much faster, derive insights, and make decisions at much higher speed. Our agents are healthcare-grade AI, tailor-made for regulatory requirements. Clients are very interested in these solutions. Our pipelines have reached record levels, in part influenced by these offerings. Concerns that AI would replace services are unfounded; quite the opposite, it creates new demand. The part of our commercial business theoretically most vulnerable to AI disruption—Analytics and Consulting—actually has a record pipeline and very strong growth, the best in three years, and we see this continuing. Underlying demand in Commercial Solutions is fueled by the number of new drug launches. In Q1 there were 10 new drug launches; launch activity is the bread and butter of our commercial business, and it is increasing. To summarize mix: our Info business is about 30% of the total and continues to grow low single digits, a little stronger given more demand for data that our AI agents create. The fastest growth within Commercial Solutions is Patient Solutions—the pieces of Real World that we kept in Commercial—with very strong double-digit growth. Everything else—Analytics and Consulting, Commercial Tech, and Commercial Engagement Services (including the former CSMS business), now also supplemented with AI agents—will grow mid to high single digits going forward. Operator: Your next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open. Please go ahead. Shlomo Rosenbaum: Hi. Thank you very much. Ari, I wanted to get a view on the market in general. Your commentary has been that it is stabilizing, but we are seeing things like Analytics and Consulting being the highest growth in three years, and that very often is a leading indicator that things are improving. Where are you seeing growth actually accelerating versus just stabilizing? And do you think your performance is indicative of market growth, or are you noticing an improvement in win rates? Ari Bousbib: I understand the question. We are coming out of a period of three to four years of significant turmoil in the industry, driven by the post-COVID deflationary environment, the biotech funding decline which constrained budgets, the IRA under the Biden administration, and announced or enacted policies under the Trump administration, plus M&A, tariffs, FDA changes, etc. All of that constrained the demand environment both on the clinical and commercial side. It is always difficult to evaluate whether we are truly out of it. Frankly, we ourselves are surprised by how well we performed in the quarter. We beat on every one of our financial metrics, and we surpassed our own expectations in both businesses. The AI disruption concerns are actually a tailwind for our business, and we are seeing it already. We feel confident that the tailwind will continue. In conversations with clients, large pharma is much more constructive on both RDS and Commercial—perhaps a little more on Commercial because large clinical trials and capital programs take more time to get started. We have not returned to “business-as-usual” speed, but we are much improved versus where we were. On the EVP front, funding reached record levels—$20 billion in the first quarter, almost double last year—which indicates renewed confidence. It takes time, but significant capital committed to specific programs is a strong indicator. Looking forward, large pharma clients tell us they plan to increase the number of molecules in their pipeline because they are using AI to identify more targets, most of which is at the discovery stage. That will increase the number of trials and the number of assets pursued, which in turn increases demand for CRO services, not the opposite. Some clients are even asking us what it would take to ramp up capacity to handle a larger number of targets, given the number of LOEs coming up in the four- to five-year timeframe and the need to replenish pipelines. On Commercial, I already commented on the strength and pipeline. Operator: Your next question comes from the line of Elizabeth Hammell Anderson with Evercore ISI. Your line is now open. Please go ahead. Elizabeth Hammell Anderson: Hi, good morning, and thanks so much for the question. Could you comment on the drivers of EBITDA margin as we move through the year? The second quarter guide implies a little bit lower EBITDA margin versus consensus. Is that a rightsizing of some of the mix impact? And how should we think about the back half of the year? Michael Fedock: Sure, Elizabeth. If you look at our EBITDA progression implied in our guide, it is pretty consistent with history—nothing noteworthy to call out there. On margins, as we mentioned when we gave our Q1 guidance, Q1 has the largest FX tailwind, and you will see that start to moderate as we go through the back end of the year. Given the strength in our productivity programs, we are very confident that reported margins will flip to positive as we progress through the year. Operator: Your next question comes from the line of Eric Coldwell with Baird. Your line is now open. Please go ahead. Eric Coldwell: Good morning. Going back to the bookings, maybe looking at it a little differently. You exited 2025 with about $10 billion of total net awards. If we use a rough 30% pass-through mix, that is about $3 billion a year of pass-through bookings, about $750 million a quarter. A third below would be about $250 million. If we add $250 million back to reported awards, as if pass-throughs were normal, that would get us to about a 1.15 book-to-bill. Is that logic consistent with what you are trying to express today? And then, can we get the constant-dollar organic growth in both segments on a recast basis? Ari Bousbib: Eric, the answer to your first question is yes. If, in addition, our RDS revenue had been what we planned as opposed to the strong burn because we converted faster in the quarter, it would have been north of that. I will let you do the math. On organic growth, from memory: RDS reported growth is 6.2%. About two points of that is FX and one point is acquisitions, so organic growth for RDS in the quarter was 3%—a year ago it was 1%. On the Commercial side, reported is 11.6%, with about three points of FX and a little more than three points of acquisitions, so organic is 5%, which is double where it was last year. So again, 3% organic for RDS, 5% organic for Commercial, and about 4% for the enterprise. Operator: At this time, I turn the call back over to Kerri Joseph. Kerri Joseph: Thank you, operator. Thank you, everyone, for taking the time to join us today. We look forward to speaking with you again on our second quarter 2026 earnings call. The team will be available the rest of the day to take any follow-up questions you might have. Thank you. Have a good day. Operator: This concludes today’s conference call. You may now disconnect.
Operator: Welcome to the Fortrea First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Tracy Krumme. Senior Vice President of Investor Relations. Please go ahead. Tracy Krumme: Thank you. Good morning, everyone, and welcome to Fortrea's First Quarter 2026 Earnings Conference Call. With me today on the call is Anshul Thakral, Chief Executive Officer; and Jill McConnell, Chief Financial Officer. Before we begin, please note this call is being webcast. There is an accompanying slide presentation which can be found on the Investor Relations section of our website, fortrea.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports filed with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation that are posted on our website. Please note that any forward-looking statements represent our views as of today, May 5, 2026, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to nor a replacement for the comparable GAAP measures, but we believe these measures provide investors with a more complete understanding of results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the presentation slides that are provided in connection with today's call. Lastly, I would like to add that Bill Holzmann, Vice President of Treasury and Risk Management, and I will be at the Barclays Leveraged Finance Conference in Austin on May 19. If anyone would like to meet with us on these dates, please contact me or a sales represented from the firm. With that, I'd like to turn the call over to Anshul Thakral, Chief Executive Officer. Anshul, please go ahead. Anshul Thakral: Thank you, Tracy. Good morning, everyone, and thank you for joining us today to discuss Fortrea's first quarter 2026 results. We started the year strong in the first quarter and remain on track with our plans. We made progress on our journey back to growth and margin expansion. We delivered solid results that reflect improving commercial traction, continued operational discipline and a clear focus on the actions we control in a market environment that is gradually becoming more favorable. As always, Jill will share a review of our financial performance, but I will start with a few highlights that clearly show the progress on our journey. We delivered revenue and adjusted EBITDA putting us on a track to achieve our full year expectations. We had a Q1 book-to-bill of 1.15x and a trailing 12-month book-to-bill of 1.05x, reflecting improved commercial execution for the third consecutive quarter. We also reached a strategic operational milestone with the recent launch of Fortrea Intelligent Technology, or FIT, as we call it. FIT is our technology suite that integrates persona-driven AI-powered solutions to automate workflows and streamline oversight, helping improve trial speed, predictability and quality. As I get more into the details of the quarter, I'd like to remind you that we are taking a disciplined approach to measure our progress using a framework of 3 pillars: commercial, operational and financial excellence. I'll do a deeper dive into our commercial and operational performance and then Jill will walk through the quarter's financial results. But first, let me speak to the environment, which continues to stabilize with early signs of improvement. Large pharma is more constructive and biotech funding has inflected positively versus last year, supporting a steadier demand backdrop. In addition, we're seeing operational indicators improving. For example, clinical trial starts rebounded this quarter. To address this growing opportunity, we remain focused on our foundational growth drivers that we call the 3 Rs: reach, relevance and repeat. During the quarter, we continued to see evidence that our commercial actions are translating into healthier activity levels and better quality engagement. In short, I was pleased with our sales in the quarter. Not only did we deliver a book-to-bill of 1.15x, which is our third quarter in a row of book-to-bills of 1.1x or higher, we also diversified our customer base, with notable success in biotech, a sector where Fortrea has deliberately been sharpening our approach. Our authorizations in the first quarter skewed toward biotech where we saw a significant year-over-year improvement. These organizations range from early growth innovators with fewer than 200 employees to publicly-listed development-stage companies with core strengths in oncology, cardiovascular, RNA-based therapeutics and other innovative therapeutic areas. Wins were driven by building new client relationships, senior-level engagement and scientific differentiation. We saw the number of RFPs issued in the first quarter for biotech opportunities increase both sequentially and year-over-year, including an increase in new-to-Fortrea biotech evidence that our reach and visibility are improving across the board. I'm pleased with how we continue to build on previous improvements in sales with new to Fortrea biotechs. Turning to another priority area for us, that's China, where we also saw strong double-digit growth in our pipeline of opportunities as well as some significant wins in the quarter. We believe we are well positioned in the country with more than 1,000 employees and around 10 strategic clients headquartered in China. Let me share some additional commercial snippets from the quarter that give me confidence in our underlying progress. We had the best first quarter since our founding for authorizations in clinical pharmacology, supported by both new and repeat customers. Beyond that, I'm extremely proud of our clinical pharmacology team for going beyond simple first-in-human and healthy volunteer studies. This quarter, the team at our Leeds clinic successfully performed its first-in-human dosing in patients with immune thrombocytopenia, a rare blood disorder for which new therapies and treatment options are desperately needed. This accomplishment was the result of great collaboration between our team and the sponsor and is another example of how we are on the cutting-edge of helping to bring life-changing therapies to patients. Overall, enterprise cancellations remain within an expected historical range. Beyond the metrics, we are seeing third-party validation that Fortrea's brand awareness is rising, consistent with what we're hearing in client conversations and what we're seeing in the sales funnel. Stepping back, our first quarter performance isn't an accident. It's the result of a deliberate commercial execution, expanding our reach, increasing our relevance through differentiated scientific and operational capabilities, and earning repeat work through better delivery. And that takes me to our second pillar: operational excellence. Operational excellence is how we deliver quality, predictability and efficiency for clients at scale. A major step forward in that strategy is the launch of Fortrea Intelligent Technology, or FIT, which we announced in April. The launch was met with strong reactions from customers, partners and investors. We saw immediate positive feedback from sponsors and technology partners, and it has helped strengthen our commercial narrative around predictability and execution. Over time we expect AI technology and innovation enablement to increasingly support win rate, operational efficiency and longer-term differentiation rather than being viewed as a stand-alone initiative. It's important to be clear, FIT is not a single product. It's an AI-enabled integrated platform strategy combining trial execution, oversight and intelligence, designed to improve predictability, reduce cost to serve, improve quality and strengthen the way we partner with our clients. In light of unveiling FIT, let me say a bit more about AI more broadly as it remains an active discussion topic. Across the industry, leaders have more data, more tools and more AI pilots, yet we haven't seen a commensurate increase in approvals. If we don't redesign how decisions are made, AI will amplify noise rather than improve outcomes. Our goal with AI is not automation. It is to create a force multiplier. Automation improves efficiency. Judgment improves outcomes. In clinical trials, some of the most valuable calls are when to intervene on enrollment, when to change a study strategy or when risk becomes irreversible. These are judgment-heavy decisions, and that's where AI must help, not replace our leaders. The expected AI revolution will require rapid evolution of the kind that has become a hallmark of the CRO industry. I believe CROs are ready for the shift just as CROs were ready for the pandemic. CRO stepped up and delivered significant value at the time it was needed. I believe this industry will do it again. Fortrea's approach is pragmatic and outcomes-focused. It keeps humans in the lead in a tightly connected R&D ecosystem, aided by an integrated and powerful AI-enabled information platform. We are already embedding AI into our workflows and integrating it with our deep therapeutic and domain expertise. We have equipped our award-winning trusted Xcellerate platform with AI and ML, a platform that currently has tens of thousands of users, including employees, clients, SaaS users and even investigator sites. As technology waves continue to revolutionize clinical trials, CROs serve as a change catalyst and as change agents. Alongside technology, we're staying intensely focused on improving delivery. Because in a services business, consistency is paramount. We continue to strengthen project management to increase speed, predictability and efficiency, with a particular focus on investigator sites and patient enrollment. Notably, we have revamped our approach to site activation, adding greater efficiency to significantly compress the time from site selection to site initiation, resulting in both year-over-year and sequential improvements. In the first quarter, we further broadened our site navigator program globally, including expansion in China and Japan. Site navigators provide dedicated support to sites. We also leveraged centralized start-up teams and partnerships with site networks in emerging regions, driving more consistent site performance across geographies. We also strengthened leadership in key areas, including the appointment of Erin Koch to lead our Functional Service Provider or FSP organization, supporting sharper execution and a tighter connection between commercial commitments and delivery. Quality remains foundational at Fortrea. We continue to advance our risk-based quality management approach and we're proud that our Chief Quality Regulatory Affairs and Sustainability Officer, Sandy Kennedy, was voted Chair of our industry association, ACRO. The appointment shows our credibility and leadership in industry quality standards. As the regulatory landscape around the world shifts to embrace and accelerate innovation that can improve patient outcomes, Fortrea is engaged and ready to help sponsors navigate the changes. In our Phase I clinical pharmacology services, we're performing well and adding momentum. For example, we're taking advantage of improving MHRA time lines to drive greater utilization of our flagship clinical research unit in Leeds in the U.K., supporting sponsors looking to move efficiently in early development. Clients across all of our services have experienced the difference from our progress in operational excellence. Our customer Net Promoter Score has improved steadily, reflecting ongoing progress in delivery and day-to-day client experience. Taken together, commercial traction, improving delivery and technology enablement, these actions are reinforcing one another. They strengthen how we compete, how we execute and how we build confidence with sponsors. Our third pillar is financial excellence, driving margin expansion, disciplined cash management and continued focus on the balance sheet. Jill will cover the details including key themes from our quarter and our guidance framework. But importantly, I'll highlight that we're making solid progress on margin expansion, as we journey toward mid-teens in adjusted EBITDA margin percentage over the next 3 to 5 years. Before I close, I want to recognize colleagues from Fortrea for their continued focus and resilience and thank our clients, partners and shareholders for their support. The progress we're making is a result of disciplined execution across the organization and our team's dedication to our patient-inspired mission. Now let me close with 3 takeaways. First, we're seeing improved commercial momentum, including continued strength in book-to-bill and biotech engagement. Second, we're elevating operational performance through better delivery discipline and the launch of FIT, which we believe will be an increasingly important differentiator over time. And third, we remain committed to disciplined execution and financial rigor as we continue this journey back to growth and improve profitability. With that, I'll turn the call over to Jill. Jill McConnell: Thank you, Anshul, and thank you to everyone for joining us today. As Anshul stated, we delivered a solid first quarter. I am very proud of what the team achieved, and before getting into the details, I'd like to briefly highlight our progress against financial excellence, the third pillar of our growth strategy. First, as part of our rightsizing initiatives, we delivered quarterly cost savings of nearly $16 million gross and over $9 million net, putting us on track to achieve our full year cost optimization targets. Second, the first quarter of 2026 represented the strongest start to the year since our spin, as evidenced by the year-over-year improvement in margin and in leverage ratios, reflecting our continued focus on rightsizing the business along with improving project mix and delivery. Now I'll cover the financial results in more detail. First quarter revenue was $636.5 million, down 2.3% year-over-year, consisting of a 3.2% constant currency decline, partially offset by a 0.9% currency benefit. The decline was driven primarily by lower pass-through costs in both our clinical pharmacology and clinical development businesses due to study mix as well as continued FSP headwinds. Importantly, underlying full-service clinical revenue grew year-over-year. On a GAAP basis, direct costs in the quarter decreased 4.1% versus the prior year primarily due to lower pass-through costs and headcount-related personnel costs. These reductions were achieved despite a year-over-year increase in variable compensation expense and currency headwinds, demonstrating our ability to balance rewarding our talent while maintaining cost discipline. SG&A in the quarter decreased 17.5% year-over-year, driven primarily by lower IT and headcount-related personnel costs, partially offset by higher variable compensation expense. Interest expense for the quarter was $19.1 million, down $3.2 million versus the prior year quarter, reflecting the $75.7 million repurchase of senior secured notes in the fourth quarter of last year, lower interest rates on variable rate debt and no revolver borrowings in the quarter. Book-to-bill was 1.15x for the quarter and 1.05x on a trailing 12-month basis. Backlog was $7.8 billion, and cancellations remained in line with historical trends. Adjusted EBITDA for the quarter was $47 million, compared to $30.3 million in the prior year period. The increase versus the prior year quarter was driven primarily by the benefits of our cost savings initiatives. Moving to net loss and adjusted net income. In the first quarter of 2026, net loss was $23.6 million, compared to a net loss of $562.9 million in the prior year period. Note that the prior year was impacted by a noncash pretax goodwill impairment charge. Adjusted net income for the quarter was $15.2 million, compared to $1.9 million in the prior year period. Adjusted basic and diluted earnings per share for the first quarter of 2026 were $0.16. In terms of customer concentration, our top 10 customers represented 54.8% of revenue for the quarter ended March 31, 2026. Our largest customer accounted for 17.2% of [ first ] quarter revenue. While we are still targeting positive full year 2026 operating cash flow, as expected, our cash generation in the first quarter was negative, primarily due to payments to our employees for variable compensation. However, our lower net loss and continued focus on improving our order-to-cash processes enabled us to offset a large portion of the impact. For the quarter ended March 31, 2026, operating cash flow was negative $17 million, compared to negative $124.2 million in the prior year period. And free cash flow was negative $25 million, compared to negative $127.1 million in the first quarter of 2025. Recall that negative cash flows in the first quarter of 2025 were primarily timing related due to the implementation of our ERP system. In the first quarter of 2026, DSO increased slightly compared to December 31, 2025, increasing from 16 to 20 days, consistent with our expectations. Even with this 4-day increase, year-over-year DSO was 31 days lower than the prior year. Net accounts receivable and unbilled services was $619.6 million as of March 31, 2026, compared to $729 million in the prior year quarter. This reduction is primarily driven by the continued improvements we made in our order to cash processes during 2025. For the second quarter in a row, we navigated the quarter without using our revolver. This combined with our solid cash position resulted in available liquidity in excess of $0.5 billion. Looking ahead, we are currently targeting the remainder of 2026 to be operating cash flow positive. With our targeted EBITDA and significant add-backs available under our credit agreement, we expect to maintain ample liquidity and significant flexibility under our financial covenants for the foreseeable future. Our capital allocation priorities remain driving organic growth, improving productivity and continuing to deleverage. Since the spin, we have paid down approximately 35% of our original debt. This has strengthened our balance sheet and improved our capital position, underscoring our disciplined approach to financial management. Backlog burn of 8.2% in the first quarter was lower sequentially, driven primarily by the impact of previously communicated pricing concessions on a large pharma FSP contract, the timing of change orders, and to a lesser extent, lower billable volumes consistent with historic patterns in the first quarter. As we continue on our journey of commercial, operational and financial excellence, we believe that sustainable revenue growth is key to our transformation, which is why we remain laser-focused on strengthening our commercial engine. The second half of 2025 was a step in the right direction, which continued into the first quarter of 2026. As our commercial engine matures and the market environment continues to normalize, we anticipate that these changes could enable more stable book-to-bill performance over time. With targeted value propositions that attract both large pharma and biotech customers, we believe we are well positioned to capitalize on demand across our end markets. Margin improvement remains a multiyear journey, supported by 2 primary building blocks: revenue diversification and growth, and our ongoing efforts to optimize costs and improve efficiency. Our cost actions continue to strike a balance between maintaining high-quality customer delivery while driving continued operational efficiency. With this combination, we continue to target an achievable path back to mid-teens adjusted EBITDA margin percentages more in line with peers, and our solid performance in the first quarter of this year is a step in that direction. Turning now to guidance. We reiterate our targeted full year 2026 revenue guidance in the range of $2.55 billion to $2.65 billion, and targeted adjusted EBITDA guidance in the range of $190 million to $220 million. As a reminder, the year-over-year anticipated decline in revenue primarily reflects the impact of softer bookings in the first half of 2025, continued FSP headwinds and anticipation of lower pass-through costs. The targeted improvements in adjusted EBITDA are driven by our continued efforts to rightsize the business, improve our efficiency and build a more attractive project mix. As I noted earlier, in the first quarter, we delivered nearly $16 million of new gross savings against our target of $70 million to $80 million, and more than $9 million in new net savings against our target of $40 million to $50 million, with the difference between gross and net being continued investments in our people. The first quarter slightly exceeded our expectations in terms of the pace and benefit of our rightsizing initiatives, putting us on a solid trajectory to achieve our guidance while allowing for targeted investments in our employees and in areas that we anticipate could support longer-term revenue growth. For the second quarter, we anticipate a modest sequential increase in revenue, driven by higher underlying service fee revenue and pass-through costs. We anticipate a slight step-up in adjusted EBITDA as the higher revenue will be partially offset by increased variable compensation costs. In closing, we are pleased to have delivered another solid quarter, demonstrating that we are making progress against our commercial, operational and financial excellence targets on our journey back to growth and margin expansion. Every day our customer-facing and supporting function teams show up with strong engagement and a commitment to accelerating the clinical development process. We remain excited about the future of Fortrea. Now we'll open the call for Q&A. Operator: [Operator Instructions] Our first question will be coming from the line of Patrick Donnelly of Citi. Patrick Donnelly: Anshul, maybe one for you just on the overall backdrop here. Pretty encouraging book-to-bill performance. Can you talk about what you're seeing? Last quarter, you talked about maybe a little more constructive conversations with biotech. Are you seeing that continued [indiscernible] looks pretty good there for a couple of quarters now, the competitive environment. Would love to just talk through that booking backdrop and the confidence level moving forward here. Anshul Thakral: Patrick, you're coming in a little bit muffled, but I think the question was around backdrop and the evolution of the backdrop specifically as it relates to the competitive nature in biotech. I think that's right, Patrick. As I said, in the world with large pharma, we're seeing a lot of constructive dialogue. We're seeing pipeline prioritizations have largely passed in 2025. But in biotech, we're seeing a slightly speedier path to recovery. As I mentioned, the RFPs for us were up sequentially in biotech, particularly new-to-Fortrea biotech. One of the things I'm very proud of our team is the reach component of our commercial strategy seems to be working really well. But I think that answers your question. We are seeing a little bit speedier recovery in the biotech space. Patrick Donnelly: Okay. That's helpful. And then, Jill, maybe one for you, nice progress on the EBITDA front, a little bit of combo on 2Q progression here. Can you talk about the moving pieces? Obviously, the pass-throughs are one impact. Can you talk about the cost levers you guys are pulling and, again, the right way to think about the level of conservatism layered in after the strong performance to start the year here? Jill McConnell: Sure, Patrick. Revenue was down sequentially, but I did comment that underlying service fee revenue for the second quarter in a row was up. And so I think that is a good sign that some of the work we've been doing to try to diversify the portfolio and really think about the mix of work we have is starting to recover. We continue to be pleased with our cost optimization efforts. They came in a little bit ahead of where we expected for the quarter. And I think the team just continues to really execute strongly. We've been talking about project efficiencies and how we deliver there. And those things are starting to come together. I think in terms of the guidance, it's 1 quarter. We want to continue to keep working at it. And if we have upside, quite frankly, there are opportunities where we believe some of those could be used for small investments to try to accelerate future growth. So I think we think sticking with the guidance as it is right now makes the most sense. Operator: And the next question will be coming from the line of Elizabeth Anderson of Evercore. Elizabeth Anderson: I was hoping to dig in a little bit on the China comments, Anshul, that you put through. Is that an area of like specific incremental investment given some of the opportunity, the changing market dynamics there? Or is that sort of part of a broader geographic investment mix? That would be helpful to get your broader thoughts on that topic. Anshul Thakral: Elizabeth, my comment in China is less about an incremental investment. It's a continued strength in China. Fortrea through its legacy has always had strength in operations in China, a little over 1,000 colleagues covering a majority of the clinical trial sites throughout the country. I think it's a comment on our continued strength. And as the market evolves and continues to pick up, we are the beneficiary of that, having a strong customer base in China. Again, we are focused on China Go Global, meaning assets that are coming out for the global markets, and we're running global clinical trials for those companies. Elizabeth, hopefully that answers your question. Elizabeth Anderson: Yes. No, that's helpful. I was just trying to understand whether -- how that was reflecting. So perfect. Operator: Our next question will be coming from the line of Max Smock of William Blair. Max Smock: Just wanted to follow up on some of the earlier commentary, particularly around small biotech. And trying to bifurcate, I think, between market improvement versus share gains. And the commentary I thought that you provided on the latter was pretty bullish there. So just in general, can you kind of help us understand like how much of that small biotech -- or improvement, I should say, that you've seen do you think is attributable to the market getting better versus how much is maybe you all taking share from some of the other players? And in terms of the share gains piece, like what are you all doing that's really resonating and allow you to get a bigger portion of the pie here moving forward? Anshul Thakral: Max, I think that's a great question. Share gain is always a hard question to answer given that you don't have perfect visibility on the data, especially given how many of our competitors are private. So I'll focus on the fact that we're seeing an uptick in activity. We're seeing an uptick in conversations as well as RFPs coming from small and midsized biotech companies. What I'm really proud of is our team. The win rates are broadly consistent with what I would want to see from our commercial team. But more importantly, the aperture is increasing. So we are starting to bring forth more new-to-Fortrea biotech into our pipeline and into our mix. And I think it's our commercial execution that I'm most proud of. Max Smock: That's very helpful. And then maybe just following up with one on margins. I think, Jill, maybe in your prepared remarks, you mentioned mid-teens margins over the next 3 to 5 years, I think that's the first time I've kind of gotten some detail around the time line there. And if I just think about what that means, call it, 15% by 2030, basically 700 basis points of improvement over the next kind of 4 years there at the midpoint, is that a reasonable way or like a reasonable starting point for thinking about margin expansion moving forward? And then just thinking through the cadence of improvement over the next 3 to 5 years and just the puts and takes behind that improvement as well. Jill McConnell: Sure, Max. I think we wanted to start to give some sense of what we saw in terms of how we would be back on that journey. And with the building blocks in place, if you remember last year when we talked about this, we said it's going to be based on continuing to deliver on the cost optimizations, which we've been doing and we're continuing to do. And then most importantly, being able to drive top line growth. And we said it would be really important to be able to see more consistency in our commercial execution. We now have 3 quarters of that with the pipeline growing. And the continued momentum and focus, we believe that we're starting to see the foundation for that, which should allow us to start to have more significant improvements in margin over time. We've talked about the fact that early on with low levels of growth, we will be able to absorb and use some of the capacity that we have. And then as we grow more, we will we would add back personnel but in a more measured way. And we're creating the environment that will allow us to do that. So we're thinking -- we talked to you guys last quarter about an Investor Day, we're thinking -- we're planning that logistics and more to come, but in the second half of the year, and that will be the place for us to really lay out more detail about what that margin progression would look like. Operator: And our next question is coming from the line of David Windley of Jefferies. David Windley: I think Fortrea wins the award for the cleanest quarter this quarter. So congratulations on that. The question that I have is around the cadence of client renewals, Anshul, I think we talked about this fairly recently. I think your view is that maybe the re-procurement cycle in the last couple of years was a little elevated, but not dramatically so. I guess I'd be curious how you view 2026 or maybe even '26 and '27 in terms of the larger client renewals that you are approaching and when you expect to have -- what your hopes and aspirations are for those and when you expect to have visibility on those. Anshul Thakral: Sure, David. Yes, we've talked about this in the past. I do think there was some level of elevation in terms of re-procurement conversations happening over the last couple of years. I think it was particularly in FSP, especially as there's opportunities for leverage in terms of price. And as we've talked about that in our own case, in one particular strategic client. If I look forward into '26 and '27, I see normal levels. I mean remember, in any one given client, they may have multiple outsourcing models. Within that particular client, they may have multiple therapeutic areas and business units within that particular client. So we've got a team that's focused on these renewals. We continue to see some level of steady progress, a couple a year. I won't comment on the specific numbers of the specific clients. But I think what I will comment on, what is interesting, as our -- as we regain stability in the marketplace and as I rebuilt the commercial excellence framework that we've been talking about, we're getting invited to certain renewals that we weren't invited to in the past, from a large and midsized pharma. And that's actually what gives me some pride in terms of what our commercial team is being able to accomplish here in 2026. David Windley: And then you touched on the topic of my follow-up, which was around that FSP concession that you called out. I guess I wanted to understand that a little bit better. Is that -- was that a, say, a rate card or a price level that is baked in and a new level on a go-forward basis? Or Jill, was your call-out, your words, about the first quarter highlighting a specific, say, disproportionately large effect here as we start the year that doesn't necessarily persist? I didn't quite understand the... Anshul Thakral: I'll make it simple, David. It was a particular client who decided to renew their multiyear FSP contract with several CROs a year early. And it was a rate card impact. And that rate card impact is a go-forward rate. And we've been able to absorb that rate card impact within our business. And some of that shows up here in Q1 because the new rates took effect in Q1. Does that answer your question? David Windley: Yes, it does. Operator: And our next question will be coming from the line of Eric Coldwell of Baird. Eric Coldwell: A couple of things here. First, on the bookings and bookings mix in the quarter, and Anshul, you highlighted your pleasure with the momentum on biotech in particular. Does that by default indicate a heavier skewing towards FSO wins versus FSP? I would assume so, but I'd love your commentary on the kind of the underlying quality of the mix of bookings in the quarter. And then as an adjunct to that, there was some chatter in the quarter leading up to this about rescue wins and various puts and takes across companies in the space, not necessarily new business in terms of demand, but business shifting from one player to the next. I'm curious if you could -- would be willing to share any perspective on size or quantity of rescue wins on a net basis as well? Anshul Thakral: Sure. Eric, I'm happy to share. In terms of booking mix, you're correct with your assumption, our bookings skewed more towards FSO than FSP in the first quarter. And our bookings skewed more heavily towards biotech than biopharma in the first quarter. So you're correct in both of your assumptions there in terms of the mix of the backlog. So we've got a quality of backlog going in -- a quality of bookings going into the backlog that I'm very happy to see. In terms of chatter, Eric, there's always chattered. I'll tell you there's always rescues in any given quarter. Typically, if a CRO has had some financial difficulties or there's been news in the marketplace, everybody is going to counter detail. It's happened to us. We've done it, vice versa, et cetera. But there is no -- there was no trend line necessarily of rescues happening in any given quarter. Look, we took on a rescue or 2. I'm sure every other CRO took on a rescue or 2. But I'll tell you from the perspective of CRO and perspective of sponsor, rescues are not taken lightly. They're not easy. They're not difficult. I mean they're very difficult to execute on. And while they may provide some short-term revenue, they're usually very hard. But there wasn't a trend line, I would say, in Q1 around rescues. Chatter, sure. Counter-detailing, always, but not a trend line. I hope that answers your question. Eric Coldwell: Yes. That's great. And then I know Jill made the comment that Q2 revenue is expected to be up modestly quarter-over-quarter. And I think there was an implication that that was in absolute dollars, both the service revenue as well as the pass-through revenue. So I wanted to verify pass-through revenue actually reincreasing, if you will, here in the second quarter. And then any kind of a signal you could give us on your expectations for pass-through mix for the full year, whether that's dollars, growth rates, percentages? Just anything to help us get a sense on the pass-through trend line over the next 3 quarters would be great. Jill McConnell: Sure. So in terms of the second quarter, you're correct, it's dollars both for service fee revenue as well as pass-throughs, and the step-up being pretty consistent between the 2. It's not going to get to the levels that we saw in Q2 and Q3 of last year. As we had shared on the call from year-end, we had a handful of trials. One, we reached the milestones reporting out a year ahead of time, so that trial was winding down. And then we had a few other very large ones that reached more maintenance stages of their life cycle. So we see it stepping up from Q1, but not to the levels that we saw. And I think for the remainder of the year, it will be pretty consistent to a slightly higher level than we saw in Q1, but still below last year. Because you'll recall, that's part of why we have a revenue reduction for the year, is related to a lower expectation around pass-throughs for what we see today. Eric Coldwell: Yes. Good. And then last one for me, variable comp. I was just hoping you could walk through all of the mechanics of that, what it's up in Q1, what your expectation is for incremental cost in calendar '26 now that you're a quarter in and you've realized Q1 results. I'm just curious where the final tally came on variable comp increases, both in Q1 and then for the full year on a year-over-year basis. And I'll wrap it with that. Jill McConnell: Sure. So we've been talking to you all about that journey and how it's important in our organization to make sure that we are compensating our employees in line with market and as they deserve. And we were pleased to be able to, for the first time since the spin, have a variable compensation payout for 2025. However, it was still below the norm. So this year, we're going back to what you would consider more normal levels of variable compensation. And in the quarter, that was a more significant increase because we took it up a little bit over the course of last year. So it's a little bit more of a significant headwind in Q1 this year versus Q1 last year. But it was built into our guidance. And as I mentioned earlier, if we continue to perform strongly, we're going to look at ways to continue to navigate how we compensate our employees and think about things that accelerate growth. Eric Coldwell: Could you give us the number, the incremental increase? Jill McConnell: I mean so a full year estimate for us is around about -- it comes in at around $60 million. So last year, we were a little bit north. So we paid out about 2/3, and then this year, we're looking more to be at a normal run rate. Eric Coldwell: Okay. So consistent with prior commentary. Jill McConnell: Yes. Correct. Anshul Thakral: Eric, you never give up on the number. That's good. Eric Coldwell: I like numbers. Operator: The next question is coming from the line of Luke Sergott of Barclays. Anna Kruszenski: This is Anna Kruszenski on for Luke. Anshul, you've made a number of leadership changes over the last few months and specifically within the commercial organization. So it would be great to just hear more about any key strategy shift here and how you've seen this drive momentum, especially with the 1Q bookings. Anshul Thakral: Yes. I think, look, the Q1 bookings are driven through execution. And it's not just the execution of the commercial team, but it's execution of our delivery team, continuing to delight our customers, continuing to ensure we have repeat work and continuing to present strategies in bid defenses that are differentiated and give us a leg-up over competition. It's also driven by execution of our finance team. So it's execution all around, not necessarily leadership changes, that are driving performance right now. And we continue to look for talented colleagues and individuals at all levels to be able to bring into the organization, especially as we as we return to growth. But it's really execution by our commercial teams, our operational teams and our finance teams that I think is giving us the wins that we need in the marketplace right now. Anna Kruszenski: That was helpful. And then, Jill, if we could go back to margins just a bit, I know you talked about like reinvesting some of the savings that you achieved in the first quarter, but if there's just any other color you can share on like how we should think about the cadence of margins, specifically in the second half of the year, that would be helpful. Jill McConnell: Sure, Anna. In terms of margin, again, we would see an incremental step-up, a slight incremental step-up in Q2, and I think it will just trend up slowly over the course of the year as we go forward. You're not going to see the big step-up, because Q1 came in more strongly historically, that 1Q to Q2 has been pretty pronounced. It's going to be much more measured this quarter because of where Q1 came in. And we're really pleased to see how strongly Q1 performed. But I think a slow gradual increase over the course of the year as more of the cost savings initiatives take hold and we continue to see some of the benefits of the new business wins we've had over the last few quarters. Operator: The next question will be coming from the line of Charles Rhyee of TD Cowen. Charles Rhyee: Can I just follow up there, Jill. You're kind of saying we should see margins kind of still steadily improved. And just to clarify back to some of the other comments, I think you guided to 2Q EBITDA being sort of a step-up from 1Q. But if we think about that, that's like the bulk of the [ range ] for EBITDA for the year. And I think to an earlier question, you had said you feel good about where it is right now and there's some investments that you have coming. Just curious, are those -- do you have like known investments that you plan to make particularly in the second half of the year? Or is that you just want to be prepared for more opportunistic on that? And then within this question, right, back to David's question around sort of the FSP, and you talked about the rate card impact, is that impact all already embedded within the 1Q performance and already embedded into 2Q? Or is there anything we would expect from that that could also show up in the second half? Jill McConnell: Sure. So in terms of investments, I think it's really important, one, we have been talking about how we make sure we compensate our people. We are a people business. Our revenue stream comes through our people, and we want to make sure that we are continuing to compensate them in a market that's starting to get just a touch more competitive, and being ahead of that. And we -- so some of the investments are definitely targeted towards that, continued investments in things like merit. The other ones, I think, are relatively smaller organic investments, but particular places like therapeutic areas and medical expertise where we believe certain investments and maybe even some target investments in the commercial organization, because we know that the real lever for getting that margins in line with peers is going to be revenue growth, so things that we believe will help to accelerate that growth trajectory. They're relatively small, but important for us to do as we prepare and come in to think about 2027 and beyond. In terms of FSP impact, it is pretty much already now manifested in the first quarter, probably even slightly more pronounced in the first quarter relative for that drop. But that was fully built into guidance, and so there isn't anything surprised there that we would expect to see. Charles Rhyee: Okay. That's helpful. I appreciate that. And then maybe, Anshul, I just wanted to -- I appreciate your comments early on when you're talking about sort of AI is for efficiency, but you need people for sort of interpretation and strategic kind of thinking. But I guess the question though is, obviously, with all the focus on AI up and down the chain, what are those discussions like when you're talking with sponsors? Like what are they asking from you in terms of your AI capabilities? And are you starting to see any types of changes in the pricing model to create incentives for partners to use more AI? Or I'm just trying to understand ways that you can still benefit. Because I think the big fear is that AI is going to drive lower cost, and then lower cost drives lower bid sizes, and that's kind of a negative cycle. Maybe you can talk a little bit how you can -- are there new scenarios where maybe more outcomes-based or risk-based that could be helpful for you going forward? Anshul Thakral: Sure, Charles, I'm happy to talk about it. This conversation comes up a lot. That's why I wanted to mention it in my prepared remarks and get ahead of it. I will say this, it's early days. And you're going to get tired of me hearing me say it's early days, because it genuinely is early days. I will tell you that most sponsors are having some version of a conversation, but it's looking to CROs as partners in, okay, we've got a tool here that could be a solution to helping speed up clinical trials. How we exactly use it? We don't know. The tool itself is a singular tool. It's a suite of tools that continue to evolve. The problems that we're solving for are, in some cases, relatively simple, and it's a matter of testing tools, piloting them, and then executing, such as in pharmacovigilance and safety. And then there's problems that are far more complicated, which is having the tool be able to analyze data that leads to better site selection and that leads to better signal detection around things that may or may not be going right or wrong in a clinical trial. But it's early days. I will tell you, almost every conversation we have is constructive in how do we solve it together rather than what are you going to do for me conversation, which I really appreciate, out of our clients. So far, we haven't seen any push on a commercial model as you're suggesting, because everyone is in the stages of developing, piloting, testing. We don't have active solutions that are rolling out at mass scale. And when we get there, yes, I'm sure we'll have conversations around commercial models. We'll have various conversations, just like we've had with every form of change, innovation, change to the workflow in this industry over the last 20, 25 years. I think people forget how resilient the CRO industry was in the middle of the pandemic in changing its workflows and models to be able to accommodate a new environment in a very short period of time. And I have full faith, not just in Fortrea, but in the entire industry's ability to do that over the coming years. Operator: Our next question will come from Jailendra Singh of Truist Securities. Jailendra Singh: So Anshul, I want to stick with the last question around the AI impact. And let me ask it in a slightly different manner and maybe see if you can give us some flavor around how do you think about the directional financial impact for the industry maybe near term and longer term? Would you agree that -- I mean clearly, CROs get paid based on billable hours and tasks, some of which could be automated. But on the flip side, you can argue that AI is driving more drug discovery, which could lead to more larger drug development pipeline longer term. And on margins, you should have more efficiencies. So would you agree with this view that AI adoption could result in some top line pressure near term, but then neutral to positive impact longer term, but better margin will offset top line headwinds. So any directional color you can provide would be helpful. Anshul Thakral: Jailendra, I appreciate the question, though I do think you kind of answered your own question to a certain extent, because I know you and I have talked about this in the past. So look, broadly, I think that it's harder to determine what will happen in the nearer term because it's harder to see the impact given all of the -- we have a lot of conversations happening, a lot of noise, a lot -- but not a lot of progress just yet. But you are right. I think in the near term, we will see certain areas that where workflow can be automated with machine learning, we'll see some margin, I would hope, appreciation for the near term and maybe some revenue headwind. But I would tell you, most, if not all of that, will be countervailed by the fact that, and I've talked about it and other peers have talked about it, is that the industry just continues to invest, reinvest into the next clinical program. We may even see speed pick up in terms of the early phase work as molecules move out of discovery at a greater rate. But long term, I see this as a tailwind and I see this as a net positive the industry. Longer term, I think we will finally get to a place where clinical trials will get modestly and modestly faster. We haven't seen that in the last decade, but I think we will get there with these new advancements in technology. What that will mean is an opportunity to develop more drugs. They have opportunity to solve more diseases, and CROs continuing to play a vital role in that. So longer term, I do see this as a net-net tailwind for the industry overall, not just for CROs, but for pharmaceutical companies as well as the pace of innovation gets faster. Jailendra Singh: My quick follow-up on -- I know this is a difficult metric to guide for, but how do you feel about sustaining these strong book-to-bill trends for the rest of the year? Should we still model like 1.1x as a baseline backlog for rest of the year? Or do you have a high confidence that it could probably sustain this 1.15x plus/minus range given recent results? Anshul Thakral: Look, as I mentioned in the past, I don't think trying to give guidance on book-to-bill is the -- is a prudent thing to do here. The market is recovering. As I've said, I see recovery in biotech, but I do see a constructive recovery in biopharma. I'm not going to guide to a book-to-bill. I'll tell you I'd drive the team to much higher standards. And what I am really happy is that both my operational and commercial teams are responding to the pressure and the high bar that I've set for all of them. Operator: Next question will be coming from the line of Justin Bowers of Deutsche Bank. Sam Martin: This is Sam Martin on for Justin Bowers and Deutsche Bank. Just 2 quick questions building on the previous themes of AI that were asked about. One on the commercial launch of Fortrea Intelligent Technology. Can you just dig in a little bit more to the initial reception where it's most concentrated, is among biotech or pharma, or really broad-based? And some of the earliest use cases that some of your customers are looking at applying it to? And then beyond that on AI, just given some peer commentary on efficiencies gain versus the cost to actually implement the solutions, what are you thinking about really a time line for the efficiencies to outweigh the cost and the investment required to kind of put AI-related solutions in your workflow? Anshul Thakral: Sure, Sam. I'm happy to try to answer both questions. Look, our launch of our FIT platform was received very well, both by technology partners and sponsors. I hosted a 2-day workshop in Boston when we launched our FIT platform, inviting both technology partners and sponsor partners. And it was meant as a true workshop in I don't think any 1 company, whether it's a technology company, a CRO or pharma, is going to be able to solve things on their own. We're got to find a way to work together to collaborate to develop solutions. It's another reason why our FIT platform is based on an open source architecture. We want to be able to invite partners both on the sponsor side as well as in the technology partner side to help us develop solutions because, at the end of the day, we're not trying to be a technology company. We want to be a clinical research services company where we're starting to develop solutions that increase efficiency, increase quality and increase throughput of the development pipeline. That said, all of that said, Sam, the reception was positive. A lot of traction, lots of folks wanting to work on solutions together. It's still early days. We're still in the stage of being able to throw pilots out there to see what's working, what we're able to do at scale, what we're not able to do at scale. And all of this work requires us working with partners, especially our partners on the client side, on the sponsor side. In terms of your question around AI and when will efficiency gains overcome the costs required, I think there's a lot of initial costs required to make sure you have that kind of infrastructure and platform that Fortrea does. And remember, for us, FIT isn't a stand-alone product. FIT is our way of embedding machine learning and AI into our existing workflow into clinical operations, to our Xcellerate platform. For us, now it's incremental cost. It's incremental cost and, more importantly, the incremental cost of technologies, incremental cost to pilots. It's incremental cost of testing the solution. I do think in the near to medium term, we'll start seeing that inflection point of efficiency gains outweighing the cost of running those pilots and the cost of developing the incremental agentic solutions. Operator: The next question is coming from the line of Michael Ryskin of Bank of America. Unknown Analyst: This is [indiscernible] on for Mike. Given several quarters of strong book-to-bill, how should we think about revenue conversion timing from here? And are study durations or start-up time lines changing versus historical levels? Jill McConnell: Yes. I mean I think -- [ Andrea ], thanks for the question. In terms of revenue conversion, as we said for the remainder of this year, we're pleased to be affirming our guidance. We will see a bit of a moderate step-up in the second quarter. And as the course of the year plays out, I think you'll see a little bit of continued strength as we go through the course of the year. We are obviously looking at what we can do to try to return to some level of growth in 2027, continuing to execute on the commercial side and get book-to-bills in line with what you've seen over the last few quarters, will be really important. And as I shared before, we do plan to have an Investor Day later in the year where we can lay out a little bit more about the specific journey going forward. Operator: Thank you. This concludes the Q&A session. I would like to turn the call over to Anshul for closing remarks. Please go ahead. Anshul Thakral: Thank you, everyone. As we conclude, I want to thank you for your continued engagement and really for your thoughtful questions. Our performance this quarter reflects the discipline and operational and financial rigor that is now embedded across Fortrea. We continue to make progress on our strategic priorities to drive growth, expand margins and strengthen our ability to serve clients globally. What matters to our clients matters most to us, and we remain focused on delivering high-quality execution and long-term value. We're confident in our strategy and are taking the right steps to drive continued execution. Thank you once again for your time. Operator: This concludes today's program. Thank you for joining. You may now disconnect.
Operator: Good day, and welcome to the Aptiv Q1 2026 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Betsy Frank, Vice President, Investor Relations. Please go ahead. Betsy Frank: Thank you, Cynthia. Good morning, and thanks for joining Aptiv's First Quarter 2026 Earnings Conference Call. The press release, slide presentation and updated New Aptiv pro forma financials can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials exclude amortization, restructuring and other special items, and will address the continuing operations of Aptiv as of March 31. The reconciliations between GAAP and non-GAAP measures are included at the back of the slide presentation and the earnings press release. Unless stated otherwise, all references to growth rates are on an adjusted year-over-year basis. During today's call, we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, Aptiv's Chair and Chief Executive Officer; and Varun Laroyia, Executive Vice President and Chief Financial Officer. With that, I'd like to turn the call over to Kevin. Kevin P. Clark: Thank you, Betsy, and thanks, everyone, for joining us this morning. Starting on Slide 3. The first quarter concluded with the successful completion of the separation of our Electrical Distribution Systems business into a new independent public company, Versigent, which you'll hear more about following their earnings release and conference call after the market closes later today. The step in our portfolio evolution better positions Aptiv to enhance our advanced software and hardware tech stack, further diversify our end market mix and accelerate our revenue and earnings growth. I'll start by covering our first quarter total Aptiv results. We continue to flawlessly execute for our customers in an increasingly dynamic environment, further amplified by the conflict in the Middle East, enabled by our operating rigor and the resilience of our business model. We secured $7 billion of new business awards while also delivering solid financial results, including revenue of over $5 billion, an increase of 1% versus the prior year despite a deterioration in underlying vehicle production. Adjusted EBITDA of over $750 million, driven by flow-through on volume growth and strong operating performance, which helped to offset significant year-over-year headwinds from FX and commodities. When combined with lower net interest expense and a lower share count resulted in record earnings per share of $1.71. Varun will review our financial results in more detail later. Turning to Slide 4. My remaining prepared remarks will be focused exclusively on New Aptiv, a leading provider of advanced software and optimized hardware solutions across multiple end markets that are being shaped by the acceleration of automation, electrification and digitalization. Our deep domain expertise and experience providing OEMs with our technology stack to enable their vehicles to sense, think, act and continually optimize increasingly can be utilized for applications in other end markets, which I'll talk more about in a moment. Competitively, we're well positioned with content on all market-leading platforms across automotive, commercial aerospace and telecom. And roughly 1/4 of our business is in markets outside of automotive, and we have several strategic priorities underway to further increase our penetration of those markets, and we maintain a diversified regional revenue mix and have significant momentum gaining share with the leading local China OEMs on vehicle platforms sold in China, as well as exported to or manufactured in overseas markets. In addition, we've made significant progress further penetrating the leading OEMs serving the markets in Japan, Korea and India. Turning to Slide 5 to spend a moment discussing New Aptiv's investment thesis. First, we've built a comprehensive portfolio that collectively powers intelligence at the Edge by enabling devices and systems to sense, think, act and continually optimize. Second, we deliver our unique product portfolio through a robust operating model that leverages our global engineering, supply chain, manufacturing and commercial capabilities, enabling us to provide high-performance, cost-optimized solutions backed by a resilient supply chain on a global scale, ensuring flawless execution in a dynamic environment. Third, our unique product portfolio and robust operating model are leveraged to create an attractive financial profile that includes more diversified, higher-margin revenues. And lastly, generates a significant amount of free cash flow that can be allocated both organically and inorganically to enhance the earnings power of our business while also returning capital to shareholders. We made solid progress across each of these pillars in the first quarter. Continued product innovation supporting new and emerging use cases across diverse end markets, including two that were showcased at last week's Beijing Auto Show, the advancement of our next-generation end-to-end AI-powered ADAS platform designed to deliver safer and more enhanced hands-free L2++ autonomy in both highway and urban environments. And in robotics, we partnered to enhance the functionality and performance of both an AI-powered collaborative robot and an autonomous mobile robot for material handling, each of which integrates our award-winning pulse sensor and advanced compute solutions. We successfully navigated ongoing geopolitical dynamics and the evolving macro environment by leveraging our resilient operating model to manage through changing vehicle production schedules and increasing headwinds associated with rising input costs, including resins and metals, enabling us to deliver strong operating performance in the quarter, more than offsetting ongoing headwinds while continuing to invest in key strategic initiatives. Our financial results reflected continued momentum advancing our strategic priorities, including high single-digit revenue growth in nonautomotive markets and double-digit revenue growth across our software and services product portfolio as well as margin expansion of 30 basis points, excluding FX and commodities, a measure more reflective of the results of our business given we passed the majority of input cost inflation on to our customers. And lastly, we worked diligently through the Versigent separation to position both companies for success with strong operating models, resilient supply chains and solid balance sheets. However, there's still more for us to do, and I'm confident that we'll continue to make progress further strengthening our value proposition and creating shareholder value. Moving to Slide 6. Customer awards were strong in the first quarter, totaling $4.6 billion, an increase of approximately 15% from the 2025 quarterly average, and included roughly $900 million of bookings with nonautomotive customers. Both business segments posted solid results with approximately $2.4 billion in awards for Intelligent Systems, and $2.2 billion for Engineered Components. I'll talk more about some of the key customer awards across each segment in a moment, but would also note that we have a large and growing pipeline of commercial opportunities and expect 2026 bookings of more than $20 billion. Let's now review each segment in more detail, starting with Intelligent Systems on Slide 7. Our tech stack, which first enabled intelligence at the edge for automotive applications is now gaining momentum for applications in other markets such as drones within aerospace and defense, and robotics within diversified industrials. During the quarter, there were a number of new program and product launches of [indiscernible] include the launch of an intelligent interior camera that incorporates our entire software and hardware stack, enabling enhanced interior sensing functionality, including driver monitoring and driver view features for the flagship sedan vehicle platform of a luxury German OEM. And the launch of an integrated high-performance cockpit controller for the high-volume, mid-level variant of an Indian OEM's electric SUV lineup, which follows a successful launch last year of an entry-level model. We also secured several important new business bookings in the quarter, including active safety award from a large North American OEM that integrates our full tech stack from sensors to compute to software, for incremental large truck and SUV platforms, underscoring the flexibility of our solutions and deep technology partnerships with several customers. And sensors and advanced compute awards for a leading China local OEM for their next-generation EV platform, which support production for both the China [ market ] and export volumes. We also secured several notable software and service awards, including VxWorks RTOS and a Helix virtualization software award for a leading defense [ prime ], building upon an established long-term partnership with this customer. And the software tool chain award for a large North American OEM that will be used to optimize -- which will be used to build optimized deterministic software for mission-critical and safety-critical embedded systems. This award supports this OEM's software factory initiative to move towards cloud-based development and software-defined solutions. Lastly, our commercial momentum has also accelerated in the robotics and drone markets. In addition to our partnership with robust AI and [indiscernible] robotics, this quarter, we secured another partnership agreement with [ Comau ], a top 10 industrial robotics company. In addition, we've been executing sub proofs of concept and pilots in both the robotics and drone markets, that we're confident will translate to commercial agreements, and we plan to share further progress on these efforts in the near future. Moving on to Slide 8 to cover [indiscernible] components. Notable new program launches during the quarter included a broad array of high-speed interconnect launches, including [indiscernible], Ethernet in other flexible and modular assemblies across more than two dozen nameplates and OEMs, ranging from North America to Europe to China, powering next-generation software-defined vehicle architectures. High-voltage electrical centers for two major local China OEMs, which will support production for both the China market and export volumes. Continued proof points of the progress we're making growing in the China market, specifically with the top 10 local OEMs that are growing both domestically and overseas. And terminals across numerous models within the portfolio and across regions for a North American-based global EV automaker. Moving on to new business awards. We secured a high-voltage [indiscernible] award from a major Korean OEM that combines high performance at a competitive cost, supporting its next-generation multi-power train software-defined vehicle platform. High-speed interconnects and components from multiple aerospace and defense primes, including for lower orbit satellite and subsea applications, and a low-voltage connection system award for an integrated high-power energy storage solution from a North American-based global EV OEM that scales to support grid level performance and resilience. Collectively, these awards reflect the breadth of our solutions, meeting demanding performance and reliability requirements in automotive, which also translate across a range of other end markets. I'll now turn the call over to Varun to go through our financial results, and our full year and second quarter guidance in more detail. Varun Laroyia: Thanks, Kevin, and good morning, everyone. Starting with first quarter on Slide 9. Total Aptiv, including our EDS segment delivered solid financial results in the quarter, reflecting robust execution amidst a dynamic market backdrop, where we once again navigated industry-wide and OEM-specific production disruptions and macro-driven input cost inflation. Revenues of $5.1 billion grew at an adjusted rate of 1%, driven by strength at EDS, while [ new ] Aptiv absorbed certain customer mix headwinds, but importantly, progressed in diversifying revenues with 9% growth in nonautomotive, and 10% growth in software and services. Adjusted EBITDA was $752 million. EBITDA margin declined 90 basis points year-over-year, driven by FX and commodity headwinds of 180 basis points, well above the 120 basis points we had forecasted for the quarter. It should be noted that the year-over-year impact for [ new ] Aptiv was lower. Earnings per share was $1.71, an increase of $0.02 from the prior year, reflecting the benefit of lower interest expense and low share count, partially offset by a higher tax rate. Free cash flow for the quarter was negative $362 million, and this included approximately $260 million in transaction payments across [ new Aptiv ] and Versigent consistent with our guidance for the year. It should be noted that we anticipate approximately $100 million in separation costs for new Aptiv in Q2. However, we will recoup approximately $80 million of transaction payments which were tax-related later in the year. Turning to the next slide and looking at first quarter adjusted revenue growth on a regional basis for both Total Aptiv and New Aptiv. For Total Aptiv, revenue growth of 1% on an adjusted basis was driven by growth in North America and Asia Pacific, which was partially offset by a decline in Europe. New Aptiv, as I mentioned earlier, faced some customer mix headwinds in the quarter, most of which are [indiscernible], while generating strong results in strategically important areas. Looking at revenue growth by region for New Aptiv. In North America, revenue grew 7%, driven by double-digit growth in Intelligent Systems and strength in nonautomotive markets. In Europe, revenue was down 5%, largely reflecting unfavorable customer mix, specifically with one of our largest customers in Intelligent Systems due in part to a slower-than-expected ramp-up of next-gen programs. In Asia Pacific, revenue was down 5%, essentially in line with vehicle production, reflecting continued improvement in our business mix in China with local OEMs and growth with ex-China Asian OEMs. Moving on to our results on a segment level on Slide 11 and starting with Intelligent Systems. Revenue of $1.4 billion decreased 1% versus the prior year, which reflects two discrete factors. As we have discussed previously, the cancellation of certain programs from local China OEMs in 2025, which will anniversary midyear, and a greater-than-anticipated headwind from lower production at 1 of our largest North American customers owing to supply chain constraints following its supplier fire. Although this should be partially recovered in the second half of the year. Cumulatively, these two factors amounted to approximately 250 basis points of headwinds to Intelligent Systems revenue growth in the quarter. And these were largely offset by strength in other areas, including double-digit growth in software and services. Intelligent Systems adjusted EBITDA margin declined 90 basis points primarily owing to a 60 basis point headwind related to FX and commodities, as well as incremental investments across product engineering and go-to-market to continue diversifying towards nonautomotive markets. These were partially offset by performance improvements. Moving to Engineered Components. Revenue of $1.7 billion was flat on an adjusted basis. This reflects 6% growth in nonautomotive, including double-digit growth in diversified industrials markets, offset by a 2% decline in automotive, which reflects some customer mix headwinds in China attributable to broad-based production volume declines there, including with the largest local OEM. Engineered Components adjusted EBITDA margin declined 90 basis points which was entirely the function of a 140 basis point headwind related to commodities and FX. Excluding this impact, margin expansion was driven by performance initiatives. And lastly, I'll briefly comment on our EDS business, which will move to discontinued operations starting in Q2. Revenue of $2.2 billion increased 3% on an adjusted basis driven by strength in Asia Pacific, both in China via export volumes and in APAC ex China countries. And favorable customer mix in North America, which offset broader production clients globally. EDS adjusted EBITDA margin declined 70 basis points versus the prior year, and this reflects a 260 basis point headwind related to FX and commodities which was largely offset by the timing of certain recoveries and flow-through on volume growth. Moving to Slide 12 to discuss our balance sheet before I discuss guidance. We ended the quarter with $3.2 billion of cash. This was temporarily inflated as it included $2.1 billion of gross debt raised by our EDS subsidiaries, which was assumed by Versigent on April 1st. In conjunction with the spin-off, year-to-date Aptiv has paid down $2.1 billion of debt, including $300 million in the first quarter, and $1.8 billion in early April. This was funded by a [ $1.65 billion ] dividend on a net basis from Versigent upon the spin-off, and $400 million from cash on hand. Pro forma for the spin-off mechanics, New Aptiv gross leverage. For the first quarter was 2.3x, and net leverage 1.9x, both of which are consistent with our leverage levels [indiscernible] to the ASR program that was launched in Q3 of 2024. We also deployed $75 million towards share repurchases in the quarter and plan to remain [ Aptiv ] on this front through the remainder of the year. Looking forward, we remain committed to a balanced approach to capital allocation, focusing on bolt-on acquisitions and investments, as well as continued return of excess cash to shareholders. Moving on to our 2026 financial guidance on the following slide. We are maintaining our full year 2026 financial guidance which is presented on a pro forma basis to exclude our EDS segment in the first quarter. We continue to expect adjusted revenue growth of 4% at the midpoint. And this implies an acceleration through the course of the year which is driven by the following factors, first half to second half. First, approximately 100 basis points from an improvement in vehicle production. Second, approximately 150 basis points from the abatement of certain headwinds mentioned earlier, which are specific to our business, and include the production impact at one of our customers related to a supplier fire in North America, and select program cancellations in China in 2025. And third, approximately 300 basis points from the anticipated timing of program launches and ramps. We continue to expect adjusted EBITDA and EBITDA margin of $2.4 billion and 18.6% at the midpoint. I would call out that we are starting to see incremental inflationary pressures on materials as a result of the conflict in the Middle East. And relative to our prior guidance, we now anticipate higher input costs, primarily in commodities, some of which had occurred in the first quarter. However, as in the first quarter and through last year, we expect to continue offsetting these macro headwinds through performance initiatives and where appropriate, customer pass-throughs. We continue to expect adjusted earnings per share in a range of $5.70 to $6.10, which assumes an effective tax rate of 18.5%, and does not incorporate any meaningful incremental benefit from share repurchases. Free cash flow is expected to be $750 million at the midpoint which is inclusive of transaction costs associated with the EDS separation, the majority of which are being incurred in the first half, as well as continued investments in supply chain resiliency for semiconductors. For the second quarter specifically, we expect adjusted revenue growth of 2% at the midpoint. Adjusted EBITDA and EBITDA margin of $580 million and 17.6% at the midpoint. And lastly, we expect earnings per share of $1.40 at the midpoint. Just as a reminder for everyone, on day 1 of the EDS separation, New Aptiv is burdened by $70 million in annualized stranded costs, which we are working to completely eliminate from our cost structure by the end of 2027. And finally, outflows by reiterating that our robust business model and relentless focus on optimizing performance, we remain confident in our ability to drive strong execution and financial results, as well as enhanced shareholder value. With that, I will turn the call back to Kevin for his closing remarks. Kevin P. Clark: Thanks, Varun. Before I wrap up on Slide 14, let me provide some additional context on our outlook. We continue to see significant long-term opportunity for our portfolio of products and solutions, while in the shorter term, we do see challenges that our industry will have to contend with. As Varun alluded to, the macroeconomic environment remains very dynamic, at present and is reflected in our first quarter results and full year guide, we're experiencing a meaningful increase in input costs, broadly related to the ongoing conflict in the Middle East. However, as evidenced by 2025, we have a resilient business model with an ability to mitigate and offset these pressures through performance initiatives and through commercial recoveries. That being said, should the current situation persists, it could amplify these pressures from a macroeconomic perspective, which are difficult to precisely forecast at this point. And this uncertainty could present a challenge to the value chain across the markets we serve, which is a risk, but it's also an opportunity for Aptiv to demonstrate our value proposition to our customers, providing high-performance, cost-optimized market-relevant system solutions at global scale and with industry-leading service levels. Now to wrap up, after reporting our final quarter as Total Aptiv, we're positioned to benefit from the sharper focus resulting from the completion of our strategic portfolio evolution. For the New Aptiv, we're now better positioned to accelerate our product development and enhance go-to-market activities to further penetrate multiple high-growth end markets. The high-quality opportunities we're actively engaged in is growing, and our momentum is accelerating. I'm confident these opportunities will result in incremental customer awards and strong financial results, and we'll continue to remain relentlessly focused on delivering value for our shareholders. Operator, let's now open the line for questions. Operator: [Operator Instructions] We will take our first question from Colin Langan with Wells Fargo. Colin Langan: Any color -- you kind of talked about some of the puts and takes. But the sales and margin guidance are at the midpoint [indiscernible], but we know FX is different. Commodities are different. Any puts and takes in terms of FX now a little bit more of a tailwind? Is commodity now part of your -- a bigger part of your sales and is production now down? Any color on the -- sort of the -- sort of recomposition of guidance given a lot of the changes in the quarter? Kevin P. Clark: Yes. It's Kevin, Colin. So that's a great question. So thanks for asking it. I think I'll start at a high level, and then Varun will walk you through the pieces. We're in a dynamic environment. I wouldn't say -- you made a comment or ask the question, is FX -- or FX -- is FX and commodities a bigger item for Aptiv -- the New Aptiv? From a commodity standpoint, it certainly isn't. What's going on as you follow the markets is we've had tremendous spikes in commodity prices over the last few months. And we do have products like copper, like silver, even to some extent, gold that impacts -- that is included in our product, and we get impacted by those changes in commodity prices. Clearly what's going on in the Middle East from a price of oil standpoint, impacts [ resins ]. So those input costs, the spikes in those input costs have significantly impacted us in the first quarter, and we believe for the foreseeable future. Relative to our traditional business, pre spin, I would say those are actually less from an overall buy and exposure standpoint. Varun, I don't know if you want to walk through? Varun Laroyia: Yes. I'm just going to paraphrase some of the stuff that Kevin just mentioned. But Colin, first of all, from a commodities perspective, copper, gold, silver, oil-based products such as resin, as Kevin mentioned, yes, we are seeing inflationary pressures. Those are up versus our guidance from 3 months ago. So that is one aspect, which is kind of weighing on overall updated guidance. Overall, FX remained positive for us on a year-over-year basis. So I just want to share that with you. And then I think your final point was underlying vehicle production assumptions. Yes. So from our perspective, first half to second half, we see activated vehicle production down [indiscernible] in the first half and down [ 1 ] in the second half of the year. So we do expect to see an improvement in underlying vehicle production first half to second half. Colin Langan: Now [indiscernible] imply went for the year-end production. Is that in line with S&P of [ down 2 ]? Kevin P. Clark: Yes. It's roughly in line with [ S&P ]. Colin Langan: Got it. And then just secondly, on -- if we look first half to sign up, I look at the midpoint of Q2 and the midpoint of full year guidance, you did explain pretty well the expected improvement in sales growth. There's pretty high conversion as well on margins. I think it's something like a 60% conversion on higher sales half over half. What's driving that? I know there's normally -- is that just normal seasonal recoveries? Or is that kind of skewed a little bit extra because of the commodity recoveries as well? Kevin P. Clark: Yes, I'd say a couple of items. As you know, the mix of our business first half to second half. Traditionally, we experienced higher margin, or higher flow-throughs giving engineering -- timing of engineering recoveries and items like that. There may be a small amount of commercial recovery that's back half loaded, but I think that's fairly balanced, Colin, for the full calendar year. I think the margin profile of the business ex our traditional EDS business is higher, so flow through on volume growth, just given where our gross margins are now, you should expect that to be actually higher. So I don't have the numbers right in front of me, but I don't think there's anything unique relative to first half -- second half profitability versus first half other than things like engineering recoveries. Operator: We will take our next question from James Picariello with BNB Paribas. James Picariello: Can you to the Aptiv safety growth in the quarter, and what your expectations are there? And then as well as separately for user experience. And then, yes, I know Colin just hit on this, but just on margin front. What differs this year in that first half, second half split on the year's margin cadence where we saw a more balanced split last year? Kevin P. Clark: I'm sorry, Can you repeat the second half of your question? [indiscernible] understood. James Picariello: Yes. Just on the margins, as we look at New Aptiv, so last year, the first half, second half split in profitability like just the margin was pretty balanced. First half, second half, and then this year's guidance has a more significant second half step-up on the margin front? Kevin P. Clark: Okay. I'll let Varun walk through that. As it relates to ADAS [indiscernible] growth, listen, as we is reflected in our disclosures in our presentation, we're starting to see conversions between different domains [indiscernible] so when you think about things like in-cabin sensing, is that an ADAS product, or user experience product, when you see domain consolidation and some element of use of fusion chips were the ADAS controller, or the [indiscernible] controller consolidating. It's going to continue to get fuzzier and fuzzier. So that's why we're trying to give a more clear of visibility and transparency to investors as you think about sensors and compute software and services breakdown. ADAS in Q1 was basically flat, though. Having said that, that's principally driven because of that large North American OEM that had significant supply disruption given the fire at their aluminum supplier. As we look at the back half of the year, we see a significant ramp-up related to that particular customer and ADAS growth. So we'd expect ADAS to be in line with kind of the mid-single-digit, sort of, growth rate. With respect to user experience, it's consistent with what we've talked about in the past as we introduce new -- as new programs get launched principally in China today. That's an area where we'll see second half more significant growth. It was impacted to some extent in the first quarter just given small delays in [indiscernible] in China well as some soft production with a European OEM in the [indiscernible] sector. Varun, do you want to talk about... Varun Laroyia: I will. Yes, yes. James, a good question, and thanks for raising it. So the question was specifically in terms of first half versus second half profitability. Listen, the 3 items I would highlight. The first, as Kevin mentioned, is just a second half, third quarter, fourth quarter, true-up associated with engineering credits, and that's something that we've seen in the years gone by also. That's kind of point number one. No change from that perspective. The second one I'd call out is just kind of recovery on commodities, and there's something that we've always talked about, there is a timing lag. The recoveries that we have -- the higher commodity prices currently, there is a timing like 3, 4 months is what we've typically talked about. We expect those to kind of come through in the second half as the second one. And the final point I can raise is we are happy with the way our software and services business has grown double digits in Q1. And that's an industry which continues to kind of have seasonality weighted more towards the second half of the year. So the margin profile associated with that product line also, kind of, adds to the overall profitability first half relative to the second half. James Picariello: Right. No, that's very helpful. I appreciate all that color. And then I [indiscernible] will host this conference call [indiscernible] today. But just on EDS, if you're willing to discuss this business at a high level, a competitor recently announced a major [ Conquest ] wiring award. I would just be interested in, again, any color on that competitor program announcement and any perspective on the broader bookings backdrop as it pertains to [ wiring systems ]? Kevin P. Clark: Sure. Thanks for asking this question. I typically wouldn't comment on an individual OEM program award. And I certainly wouldn't speculate on the relationship between another supplier and an OEM customer. I find it inappropriate and be very transparent [indiscernible]. However, given the nature of the comments made and the inaccurate message that's in the marketplace, I think I have to comment on this particular matter, and in line with kind of standards for the -- that should be upheld by our industry up. My comments, I want to make sure everyone [indiscernible] have been approved by General Motors leadership. I think that's important for you to know. I'll confirm GM did award a very small portion of the wire harness content on the T1 program to another supplier. This portion represents a simpler portion of the harness. It's a build-to-print portion of the harness. GM actually refers to it as the simple harnesses. We remain the supplier for the most complex portion of the programs where harness content firmly aligned with where our core strengths are. This is where most of the actual water harness content is. The bulk of our EDS business is more complex full-service wire harnesses where we design, we develop, we assemble the harness to bring more value to the OEM. And this is a business we've been strategically focused on. I think, as all you know. And this is, quite frankly, the area where it's the highest margin, and it's growing the fastest. And it's least exposed to changes in vehicle architecture and the transition to things like zonal controllers. Build-to-print. It's a much smaller portion of the EDS segment. That's, I don't know, 20% of total revenues, maybe 25% of total revenues, much less complex. It's much lower margin. And for that reason, it's not as a strategic area of focus for us. Now having said that, we want all of an OEM's wire harness business. And General Motors is a very, very important customer to us, and this is an important program. Regarding comments related to our relationship with GM, which for me is the most disturbing, in fact, remains very healthy. And I -- given the comments made, I've personally reconfirmed with GM leadership and I can share with you some comments that were made by GM leadership. There have been zero service -- these are quotes. "There have been zero service level issues. That is never a problem with EDS. EDS is the gold standard for wire harnesses and EDS is our strategic wire harness supplier. And there'll be incremental full-service wear harness opportunities for the EDS business with GM in the future." So I hope these [indiscernible] put these rumors and factually incorrect comments to bed. The EDS business is the leader in the wire harness space. It's a great business. And I'm sure Joe and team will make some comments during the earnings call early evening. Operator: We will take our next question from Chris McNally with Evercore. Chris McNally: Thanks so much, team. Kevin, on the call, I thought you sounded the most positive about some of these, sort of, additional areas of growing the active TAM that you've been in a long time. And I think a lot of times, we always discuss, sort of, M&A bolt-on opportunities in industrial. But just looking at the ECG highlights on Slide 8. I mean, the awards now are in naval, space, energy storage. And so my question here is on some of the exciting opportunities that the world is all seeing in AI and data centers, and that some of your competitors have strong business opportunity in. Could you just talk about what would have to happen organically for you to start to invest? Automotive is one of the harshest environments. Could you get into those businesses over the next year or 2 from an organic greenfield, brownfield perspective because it seems like a pretty big TAM opportunity? Kevin P. Clark: No, Chris, it's a great question, and I should start with -- it's a great question. It's a great opportunity. The team is making significant progress, quite frankly, across each of our businesses. As it relates specific to the Engineered Components business, we've been very active over the last 1.5 years, 2 years leveraging what we have in our Winchester product portfolio, which is principally targeted on nonautomotive business with a very strong position in areas like A&D, like diversified industrials. Developing solutions from that product portfolio with our traditional interconnect solutions and bringing those to nonautomotive customers more as systems. So we've made a lot of progress. That's an area we have been investing in, both from a product standpoint as well as from a go-to-market standpoint. We've been leveraging our customer relationships in the U.S. as well as in China, where there are strong OEM relationships that span across industries. So leveraging our capabilities and our relationships in those automotive businesses to take solutions into things like aerospace into areas like data centers. We have a very focused initiative as it relates to building out our data center product portfolio, certainly our space product portfolio. So there's been a great deal of focus in that space, and we're gaining real traction. To meaningfully move it, as we've talked about in the past, that really requires M&A. We have a long funnel of bolt-on M&A opportunities that the team is executing on. That hopefully, during the calendar year 2026, we're looking to close on. And to wrap up, quite frankly, we're very excited and feel like we're very well positioned to pursue these opportunities. But we're very excited about our opportunities within automotive and the trends that are headed there. Near-term, we're wrestling with a few customer mix issues and industry mix use that we think as we move on through the year, you'll see improvements on. Chris McNally: That's great, Kevin. So, I mean, [indiscernible] to paraphrase some of the small bolt-on acquisitions could go a long way to some of the internal initiatives that you've been working for. But with some of these bolt-on acquisitions comes to [ sales force ] and these relationships that then you may have a lot, so 1 plus 1 equal 3. Kevin P. Clark: Exactly. It's not just the product portfolio piece. It's the industry positioning piece and building up sales organization and product organizations that have years of experience in a particular sector that we can leverage across our broader product portfolio. Absolutely. Chris McNally: And then just the last follow-on. I mean I kind of focus on AI and data centers. But like energy storage actually should be very easy given some of the customers now, obviously, with a lot of battery -- excess battery capacity in the U.S., the customer set is almost the same for a good portion of that business. Is that one that could be done a little bit more organically? Kevin P. Clark: Yes. That's one that is being done very organically now. So that's a focused effort with a focused product portfolio with a focused sales team. So there are a significant number of business awards we received. They tend to be smaller relative to large OEM program awards. But we're gaining a significant amount of traction across multiple OEMs. So that is certainly a tailwind. Listen, as it relates to -- you made a comment about AI, and this is true in the interconnect portfolio, as well as in our software and services portfolio. As AI accelerates, it provides a structural tailwind for both of our businesses, whether that be some of the products that we have in intelligence systems, or in engineered components, as more and more is driven to the edge, AI is driven to the Edge. They need high-speed interconnects, high-speed cable assemblies. We need RTOS solutions, or Linux solutions to enable performance at the Edge, and those are areas that in automotive, we've been enabling for a very long period of time. And that's an area that we're confident we'll continue to get more traction. Operator: We will take our next question from Joe Spak with UBS. Joseph Spak: First question is, Varun, you mentioned -- and I appreciate all that, some of the margin drivers half over half. I think I counted like 550 basis points. But your guidance is about 180 basis points half-over-half. So I just want to, maybe, understand if we could sort of talk through some of the offsets and, sort of, what exactly is baked in? Like, is some of that -- some of the commodities and higher input cost, is that sort of what's sort of weighting that back down? Or maybe we just sort of complete that bridge? Varun Laroyia: Yes. Joe, it's Varun. It's a great question. Yes, you're right. I think in terms of the half-over-half walk on revenue, the 100 bps, as I mentioned, is improvement in the underlying vehicle production half-versus-half. About 150 basis points specific to us with regards to the production impact at one of our customers related to supply fire in North America and then obviously select program cancellations in China in 2025, that will anniversary midyear. And the final one to mention was just the 300 basis points of anticipated timing of program launches and ramps. So that's the 550 basis points that you mentioned. With regards to the commodity side of things, yes, as I mentioned previously, we are seeing incremental inflationary pressures on input costs over the last 90 days since we initially gave guidance for pro forma New Aptiv to now, there is an uptick of about 60 basis points on the commodities and FX side of it. As I mentioned, basically, it's commodities. FX remains a net positive on a year-over-year basis. And it's -- again, it's the same things with regards to based on where copper is trading. And while overall exposure levels to copper, pre-spin to post-spin are markedly down. We still have some of those. Some of those are contractual pass-throughs. The remainder of it is commercial negotiations. But then also, we have exposure to gold and silver. And if you see as to where those have been trading, on a year-over-year basis, that's the other aspect of it. And then finally, our Connection Systems and [indiscernible] business as part of the Engineered Components portfolio, does have a significant level of resin purchases. Clearly, a key input cost into resin is oil. But that's the other aspect that we've seen through -- come through, that we expect to kind of ramp up. So yes. And again... Joseph Spak: I may have misunderstood. So that happened was the top line and then we should think about the flow-through on that top line, and then some of the commodity inputs is sort of the offset to when we think about the margins? Sorry. Varun Laroyia: Yes, yes. That's right. Joseph Spak: Okay. Okay. And then Kevin, just maybe to follow up of your last conversation with Chris. The nonauto awards in EC and space, energy storage naval $500 million. I think we're all familiar with auto lead times, but maybe you could give us a sense for these businesses, like how quick do some of these business comes on? What's the sales process like? And when you kind of convert to revenue? And maybe the same thing for IS, if you don't mind, and [indiscernible] Kevin P. Clark: Yes. It's a good question. So the sales cadence, it's in both segments, the sales organization is a separate distinct sales organization. So we have separate teams and separate product teams. So commercial teams, as well as product teams that support the go-to-market. The programs tend to, between award and actual revenue can range as short as a few months to -- as fast -- as short as a few months to -- I think at the far end, you're talking under a year. So call it, 9 months in those sort of typical areas, so much shorter from a long lead standpoint than what we have in our traditional business, automotive or in commercial vehicle. Operator: We will take our next question from Mark Delaney with Goldman Sachs. Mark Delaney: The [ company ] spoke already about the pickup in growth from the roughly flat year-over-year organic in 1Q to the 4% outlook for the full year for New Aptiv. A couple of those drivers you spoke about were timing. We [ get 2 new ] product launches and an assumption that auto production is more stable in 2H. I'm hoping you could share more on whether there's any conservatism in those assumptions relative to customer schedules given that new launches can sometimes be delayed, and the potential or macro headwinds to weigh on demand? Kevin P. Clark: Yes. There is an element of conservatism we always place in our outlook. So we will always incorporate some element of what we refer to is hedged. And we rely upon both third-party sources as well, as our customer EDIs or schedules. There are some areas like China where schedules are a bit more fluid and changes are more -- can happen more quickly. That's less the case in places like Europe in North America. I think as Varun talked about, our outlook right now based on what we're seeing from a schedule standpoint, and then triangulating with IHS with some amount of overlay is the 100 basis point improvement first half to second half from a vehicle production standpoint. There are some specific customer headwinds that we're aware of. I mentioned the North American OEM, who we were impacted more than we originally forecasted in Q1 given a further reduction in their schedules as it relates to addressing the issues with their supplier. We pick up a benefit in the back half of the year as things become -- that gets addressed and they come online. And then we talked about we've been talking about since last year, the 3 China program cancellations that impacted us in the ADAS area, in the user experience area, we can size those, those annualized at the end of the second quarter. Those two together are worth roughly 150 basis points. And then there's roughly 300 basis points of program launches first half to second half from a growth standpoint. That's the area where we tend to overlay the most conservatism because things can shift. Some of that is in China. We did see some small delays as it related to Q1, but we're starting to see those programs launch now. That's what gives us confidence in the in the back half of this year and the revenue ramp first half to second half. Mark Delaney: Very helpful details and color, Kevin. And my other question was another one around the commodity and inflationary environment. Could you be a little bit more specific around to what extent Aptiv has seen incremental headwinds tied to inflation in 2Q that you haven't been able to offset yet? And then for your full year outlook, you spoke about getting recoveries, but you also mentioned that can come through [ on a lag ]. So I was a little unclear. Do you assume that you're able to recapture all of the recent inflation in your full year outlook? Or does some spill out into next year? Kevin P. Clark: So I think -- and Varun will correct me. I think as it relates to prior guide versus this guide, there's effectively roughly 50 basis points of FX in commodities that is in our -- that's come into our system. It's principally resin and commodity prices. And commodities would be copper -- I mentioned the copper, aluminum, areas like that. We expect to fully offset that, most of that, a significant portion of which would be operational performance initiatives that we have underway that we're able to offset the overall cost of the increased cost of those commodity prices. And there will be some amount some amount that we will push through to our customers. So we're not relying on customer recoveries to achieve our full year outlook. Those are things that we have a high level of confidence that we can manage through internally and at the same time, go back to our customers in areas where it's more challenging and pursue recoveries. You look at past track record from a recovery standpoint. We've collected 95% to 100% of what we pursued with our OEM customers because we do that operationally, we've performed extremely well. And we do that while we're presenting them with additional cost reduction opportunities to help support the recovery that we're asking for [indiscernible] Operator: We will take our next question from Itay Michaeli with TD Cowen. Itay Michaeli: Just wanted to focus in on the strong -- strong new business bookings of $5 billion and the $20 billion outlook. Kind of curious happening on the auto side. Like are we finally seeing major sourcing decisions being made next-gen architectures, and perhaps also winning some market share? Just kind of curious sort of what is driving, sort of, the inflection? Kevin P. Clark: Yes, it's a great question. Yes, I would say first quarter relative to last year, we started to see programs that we've been working on for a period of time, free up in decisions made. We're starting to see OEMs look at next-generation ADAS solution, the user experience solutions, vehicle architecture solutions, including what we refer to as smart vehicle architecture. So -- so we're seeing more of those opportunities. Itay, we have a high level of confidence in the $20 billion of bookings for New Aptiv [indiscernible] 2026, just given our funnel. I think that's, to some extent, dependent upon things stabilizing a little bit as it relates to the situation in the Middle East. We're not deteriorating. Maybe that's a better way to describe it. But we're seeing a significant amount of opportunities in and around the areas that are sweet spot. Itay Michaeli: Terrific. And a quick follow-up. I think earlier you mentioned, of course, supply chain risks to do the Middle East but also potential opportunities that can come out of that. Hoping you can kind of comment a bit more on that. Like, could you actually end up seeing -- or leverage our supply chain capabilities with OEMs, maybe kind of win more business going forward? Just kind of curious a bit on that comment. Kevin P. Clark: Yes. Listen, we are today, Itay. I would say, over the last 2 years, the job the team has done from a supply chain management standpoint, both from a service level standpoint as well as from a visibility and transparency has created a lot of goodwill and there are a number of OEMs that we're partnering with now in terms of regular supply updates. I mean, we're now at a point where we're informing OEMs of where their particular pinch points are. As we look at areas like memory, and other areas where there's concern about inflation, availability or constraints, those are areas that we've been focused on for the -- been aware of. Anticipating, focused on for the last couple of years. So we've been bringing them alternatives as it relates to a park standpoint. It's also presented us with opportunities to bring to them solutions that include more [ Aptiv ] content, displacing some of their traditional suppliers. And they're all very focused on it and listening. When we're able to say we're confident in memory supply for '26 and also '27, given the relationships and agreements we have with our suppliers, and we have actually multiple alternatives that we validated, that's very differentiating with our customers. So it positions us extremely well. And when we take that supply chain capability outside of automotive, to some of the areas like robotics, like drones. That is one of the big selling points we have in terms of supply chain visibility, knowing source down to multiple levels being able to provide multiple solutions depending upon where the application takes place, or is actually used. That's been one of the big areas that's been differentiating, for example, for us in their own space. Operator: We will take our final question from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: I was hoping to ask if you could just -- I would say this year's revenue growth in the context of the longer-term targets. And so you're expecting some level of acceleration over the next couple of years for the [indiscernible] targets. [indiscernible] this year will be around [ 4% ]. Can you just remind us holistically, what are some of the drivers of revenue acceleration as we move past this year and towards the next couple of years of the plan? Kevin P. Clark: Yes. Thanks, Emmanuel. That's a great question and I appreciate you asking it. It's a mix of two things. One, it's improved customer mix. So in our prepared comments Varun and I were talking about progress we're making with the China local OEMs focused on the top 10 OEMs for the China market. One of the fastest-growing areas for us is on export platforms, as well as with several [indiscernible] now. We're very much focused on supporting their initiatives to manufacture overseas. So we're supporting several of them in terms of evaluation and with some of them in terms of actual programs. We're working with European OEMs as well as Chinese OEMs as it relates to China [indiscernible] for European products. So we've been very engaged there. So that's an area where we expect to see a pickup. As it relates to APAC non-China, that's been a particular focus area. And as we've talked about in the past, that's one of the fastest areas of bookings growth for us, so that's Japan, Korea, and [indiscernible]. So we're seeing a benefit from that. And then lastly, when you look at the nonautomotive space, we're growing very strong nonautomotive growth, which based on bookings and potential bookings we have in front of us. We're very, very confident. And then when you look at the software space, both in automotive as well as outside of automotive, that's an area where bookings are strong, and we're seeing solid and strong revenue growth that will drive us to the midpoint or higher in that 4% to 7% growth range. Emmanuel Rosner: That's very helpful. And then I guess I was hoping to follow up on China. So in the quarter, the New Aptiv China [indiscernible] was down 14%. You've mentioned some of the factors, including still the ongoing impact from cancellation of programs. What is sort of like your estimate of when you believe China would, sort of, like become more neutral and then eventually positive to your growth? Kevin P. Clark: Yes, great growth. So actually positive growth you'll see in Q2, and that's a result of a couple of things, the launch of new programs, and we see the benefit from that. Two, in Q1, we were affected principally in our Engineered Components business by our exposure to the top the top OEM in China in their vehicle production -- reductions. So I would say disproportionately given their year-over-year comp, that normalizes in Q2, and it's not as big of a headwind. And then lastly, as you get in the back half of the year, we talked about those 3 programs that were canceled in the second quarter of last year from a comparison standpoint. We won't have to be dealing with that. So we're expecting very strong growth in China and for the calendar year 2026. Operator: That will conclude today's question-and-answer session. I will now turn the call back over to Mr. Kevin Clark for any additional or closing remarks. Kevin P. Clark: Great. Thank you, everybody, for your time. We really appreciate you participating in our earnings call. Have a great day. Operator: The call is now complete, and thank you for joining.
Operator: Good day, and thank you for standing by. Welcome to Avista Corporation Q1 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Stacey Walters. Please go ahead. Stacey Walters: Thank you, and good morning. Thank you all for joining us for Avista Corporation’s first quarter 2026 earnings conference call. Our earnings and first quarter Form 10-Q were released pre-market this morning. You can find both documents and this presentation on our website. Joining me today are Avista Corporation President and CEO, Heather Lynn Rosentrater, and Senior Vice President, CFO, Treasurer, and Regulatory Affairs, Kevin J. Christie. We will be making forward-looking statements during this call. These involve assumptions, risks, and uncertainties which are subject to change. Various factors could cause actual results to differ materially from the expectations we discuss in today’s call. Please refer to our Form 10-K for 2025 and our Form 10-Q for 2026 for a full discussion of these risk factors. Both are available on our website. On this call, we will also discuss non-GAAP utility earnings. Our first quarter earnings presentation is posted on our website and includes definitions and reconciliations for all non-GAAP disclosures, including non-GAAP utility earnings. Our non-GAAP utility earnings are comprised of results from our Avista Utilities and AEL&P segments. The unrealized gains and losses that have historically made up the majority of our non-regulated other business earnings can be significant, but they are difficult to predict and outside management’s control. Discussion of non-GAAP utility results and earnings guidance reflects management’s focus on the core utility business. And now, let me turn it over to Kevin for a recap of the financial results presented in today’s press release. Kevin J. Christie: Thank you, Stacey. Our consolidated first quarter 2026 earnings were $1.11 per diluted share compared to $0.98 in 2025. Our first quarter 2026 non-GAAP utility earnings were $1.10 per diluted share compared to $1.10 per diluted share in 2025. Now I will turn the call over to Heather. Heather Lynn Rosentrater: Thank you, Stacey. It is hard to believe the first quarter is already behind us. The year began with real momentum and the pace of activity across our business has only accelerated. In a short amount of time, we have taken meaningful steps to strengthen reliability and resilience, move forward with our growth opportunities, and continue delivering value for our customers and shareholders. We continue to advance important grid hardening work, pursue load growth opportunities, and support resource adequacy for our customers into the future, all of which contribute to the long-term strength of our utility. Our ongoing investment in grid hardening and resilience, including vegetation management, is helping to prevent outages that can occur periodically during inclement weather. Although much of the work is driven by our wildfire mitigation program, we have experienced benefits resulting from these efforts through enhanced system resilience and storm response preparedness year-round. We found that the predictive tools we developed to monitor wildfire weather conditions also help us better anticipate other weather-related outage risks. That means we can stage crews and materials earlier and, when appropriate, alert potentially affected customers so they can prepare before outages occur. The work we are doing to build a more wildfire-resilient system also benefits us day-to-day in smoother operations and results in better outcomes for our customers and the communities we serve. And we saw directly how being better prepared through predictive tools and material pre-staging enables faster restoration work just a couple of months ago. In March, nearly 60 thousand customers were impacted by outages from high winds, and I commend each of the employees and partners who joined us in the restoration efforts, replacing poles, reconnecting lines, and rebuilding infrastructure to successfully restore power to all customers. I am happy to say that our grid hardening and resilience efforts improved the overall response to the storm. Related to the work underway to advance our growth opportunities, we remain optimistic about the opportunities ahead. We are planning for the growth identified in our most recent integrated resource plan and potential new large load customer growth in a way that supports customer affordability, system reliability, and compliance with clean energy requirements. A key part of this work is strategic resource planning—making sure we add the right mix of resources at the right time and in the most cost-effective way so we can meet reliability and clean energy requirements without taking on unnecessary expense. Negotiations continue with one of the prospective data center developer customers looking to locate in our service territory, with a projected incremental load of up to 500 megawatts. Ensuring appropriate protections for our current customers is a key element of our negotiations, as we expect the new large load customer to return a significant contribution to support affordability for our existing customers. We are currently targeting a signed memorandum of understanding with this new customer by May 31. In addition to negotiation discussions with the potential data center developer, we continue to discuss these opportunities with community leaders and other stakeholders. We are also engaging with policymakers and the Washington Commission regarding data centers to advocate for policies that ensure appropriate allocation of costs and benefits associated with the integration of these large loads. To support resource adequacy for our customers into the future, resource planning is a crucial task. As we work with potential new large load customers, we also continue to work toward final contracts with the projects selected from our recent request for proposals, including the build-transfer for a battery energy storage project included in our base capital plan and targeted to come online in 2028. At Avista Corporation, several related processes together inform our decision-making about these future resources as we consider the timing of integrating potential new large loads. Work has already begun on our 2027 electric integrated resource plan, or IRP. We have made progress with key data points for the IRP, like our clean energy implementation plan, which was recently updated and approved by the Washington Commission. Long-term affordability is central to our planning practice as we evaluate the resource needs into the future. Overall, I am optimistic about the opportunities ahead. I will now turn the call to Kevin for additional discussion of earnings. Kevin J. Christie: Thank you, Heather, and good morning, everyone. Our focus on delivering results at the utility is fundamental to our success. Our performance this quarter reflects the continued commitment of our teams to disciplined cost management. We began the year with solid execution across the business, and we are well positioned as we move forward. Alongside our other initiatives, regulatory outcomes are key to our progress. The first settlement conference for our Washington GRC takes place on the 22nd of this month, and we will continue to work through the regulatory process if no satisfactory settlement is reached. We continue to invest in our utility infrastructure to support customer growth and maintain safe and reliable service. Based on updates to project costs, we now expect capital expenditures at Avista Utilities of $615 million in 2026. We expect capital expenditures from 2026 through 2030 of $3.4 billion. We continue to estimate potential capital investment of up to $350 million associated with integrating a new large load customer that would be incremental to the $3.4 billion five-year capital plan. Integrating that investment in our five-year projection would result in a rate base growth of 8%. Our base capital plan also does not include incremental transmission, like regional grid expansion, and any large load customer additions beyond the customer previously mentioned. Turning to liquidity, we expect to issue $230 million of long-term debt and up to $90 million of common stock in 2026, which includes $14 million issued in the first quarter. This morning, we are affirming our non-GAAP utility earnings guidance with a range of $2.52 to $2.72 per diluted share for 2026. Our guidance includes an expected negative impact from the Energy Recovery Mechanism, or ERM, of $0.10 in a 90% customer, 10% company sharing band. Our current hydro forecast shows above-normal levels of generation for the year. We do not expect a material change to our position. The ERM resulted in $0.01 expense in the first quarter, and we expect to recognize the remaining $0.09 spread evenly in the second and third quarters. Expected long-term equity at Avista Utilities is approximately 9%, excluding the impact from the ERM. This reflects expected regulatory lag of 0.6%. Over the long term, we continue to expect that our earnings will grow 4% to 6% from the midpoint of our 2025 earnings guidance. Our first quarter results are a strong start to delivering on our commitment to financial strength. Heather and I are excited to build on this strength as we look ahead. We will now open the call for questions. Operator: Thank you. At this time, we will conduct the question-and-answer session. 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 first question comes from Shar Pourreza from Wells Fargo Securities. Your line is now open. Whitney Wutalama: Good morning, team. This is Whitney on for Shar. On the electric margin, how should we think about electric utility margin from here now that the quarter has lapsed the Colstrip-related revenue effect? Does 1Q represent a cleaner baseline for the rest of 2026, or are there still a few unusual comparison items that we should keep in mind? Kevin J. Christie: Thank you, Whitney. Good question. We would consider the first quarter a more clean quarter as we go forward, but we will have to go through the whole year as we compare quarter after quarter from 2025, which had Colstrip in it for the entire year, and, of course, 2026 will not. But I think the first quarter of the year is a pretty good representation. Whitney Wutalama: Thank you, Kevin. And then on the regulatory side in Oregon, just in relation to the Fair Act transition and as Oregon moves towards the multiyear rate plan, what is the most important element in these discussions that you need to preserve during the transition? Is it the ability to file in late 2027 for 2028 rates, continued access to interim recovery tools, or some form of indexing to avoid a larger first-year catch-up? Kevin J. Christie: That is another good question, and it is hard to prioritize the three—they are all very important. If we are going to need to stay out longer while we are working through the proceeding, we, of course, would need some interim rate relief as we continue to make capital investments. And then as we look forward, we have had a lot of success with multi-years in other states like Idaho and Washington. To have a quality multiyear with a strong first-year starting point is also equally important as we look forward, and then, of course, earning a fair return for our shareholders. Whitney Wutalama: That sounds good. Thank you, Kevin and Heather. Operator: Thank you. One moment for our next question. Our next question comes from Michael Logan from Barclays. Your line is now open. Michael Logan: Hi. Thanks for taking my questions. Regarding the large load customer that put down a deposit, how are you feeling about reaching an MOU, or when can we expect that? I think you said 90 days or so on your last earnings call. And then subsequent to that, how long would the process take to reach an ESA and potentially formally enter your capital program? Heather Lynn Rosentrater: Great question, thank you. We shared that we are working towards a May 31 date for an MOU, and so the next-step timeline would be identified through that agreement. I do not think we have a clear understanding of what that next step will be, but we are looking towards that May 31 date. Michael Logan: Thank you. And then you highlighted previously 1.7 gigawatts remaining in your queue of potential large load customers. How are you feeling about that pipeline? Is there an update to that number? Heather Lynn Rosentrater: We do continue to vet those opportunities, and we are at about 1.1 gigawatts now in the queue. As we continue to work with these customers, we have higher confidence in what may come to be. We are excited about the opportunities that are still out there—specifically the one customer, but there are others as well that we are working. We are continuing to plan to be able to go out and have curated opportunities for customers once we have a better understanding of the best geographic locations that have available capacity, and we do have some of those areas on our system. We are also looking to be more proactive. Michael Logan: Lastly for me, regarding the Washington rate case later this month, how are you feeling about the prospects of reaching a settlement, or given that it is your first four-year plan filing in the state, do you expect it to be fully litigated? Kevin J. Christie: Michael, thanks for the questions. With regard to the Washington GRC, we are deep in the discovery process, which helps the parties formulate their positions as we enter into settlement, and, of course, we are prepping for settlement. I would like to think there is an opportunity for us to settle at least some, if not all, of the case. That being said, as you highlight, this is the first four-year that any utility, as far as we know, has filed in the state of Washington, and so there are a number of issues to work through. From a party perspective that might engage in settlement, it is hard to say how constructive or how well we can come together, given that they are going to view risks in a certain way and we are going to view risks in a certain way. I cannot give you a probability of settlement, but I think everybody is going to give it a shot. Michael Logan: Great. Thank you for taking my question. Kevin J. Christie: 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 Julien Dumoulin-Smith from Jefferies. Brian J. Russo: Hi. It is Brian on for Julien. Good morning. Just to follow up on the four-year multiyear rate plan in Washington, remind us of your confidence or ability to manage within the revenue requirements and the return requirements over the four-year period, albeit with an off-ramp up to two years, especially given the geopolitical backdrop, fuel, inflation, etc. How can you de-risk this plan, if at all, relative to what has been filed? Kevin J. Christie: Thanks, Brian, for the question. I will start with the off-ramp that you referred to. We have the ability after the first year to file a replacement for years three and four, given the 11-month process, and that would occur if some form of inflation or additional investments beyond what is built into the case materialize. We have been very successful over the last several years adding deferral mechanisms that help to hedge some of our risk. In this particular case, we have a new mechanism that we are requesting around employee benefits—that is one of the remaining more volatile, harder-to-control items for us. If we were to have success with building that mechanism in, and with the other mechanisms that we have in place, we should be in pretty good shape. Of course, that is barring some kind of extreme inflationary activity—in that case, we would use the mechanism where we refile if that were to occur. We feel like we are in a good position to manage the risk that we might see materialize. The company is very focused on managing our costs, and we see some opportunities as we look forward. All of those things combined make us optimistic. Brian J. Russo: Understanding that you are reporting the non-GAAP utility EPS going forward, I noticed in other businesses there really were not any non-cash mark-to-market gains this quarter. Is there any insight there relative to what we are seeing in the broader market? And any additional thoughts on monetizing any of the investments that are more liquid than others? Kevin J. Christie: It is nice to see that things have leveled off, or appear to have leveled off, a bit from about a year ago, and we think with that calming we would see minor adjustments overall. You are referring to the bioscience company when you talk about monetization. To the extent we are excited about the opportunity there, it is a noncore investment, and we would exit at the point in time that makes sense. If there was value created through that exit, then that would help us with our overall equity needs, and hopefully we would be issuing low or no equity for a period of time, which would help boost our overall earnings. Brian J. Russo: You mentioned regional transmission opportunities possibly that would be upside to the CapEx. Can you discuss those some more? Understanding North Plains Connector would likely be post-2030, I am trying to get a sense of whether there is incremental upside to the CapEx relative to that $350 million that you highlighted. Heather Lynn Rosentrater: I am happy to cover this one, Brian. As you mentioned, the North Plains Connector, which we have talked a lot about, likely has opportunities beyond the five-year capital budget, but we are continuing to work with peers and other regional organizations to identify other opportunities for transmission investment that might make sense for us and our customers. There are a lot of reports acknowledging the need for more transmission in our region. We feel that we are geographically blessed—we are in between where a lot of the load growth is and where a lot of the new resources are. We do see potential opportunities in the future for additional investment there and we will continue to participate in those activities. Operator: I am showing no further questions at this time. I would like to turn it back to Stacey Walters for closing remarks. Stacey Walters: Thank you all for joining us today and for your interest in Avista Corporation. We hope you have a great day. Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
David Cohen: Good morning, everyone. Welcome to Gartner's First Quarter 2026 Earnings Call. I am David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chairman and Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. This call will include a discussion of first quarter 2026 financial results and Gartner's outlook for 2026 as disclosed in today's earnings release and earnings supplement both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to revenue are for adjusted revenue, and all references to EBITDA are for adjusted EBITDA, in each case, excluding the divested operation and with the adjustments as described in our earnings release and supplement. Our contract values and associated growth rates we discuss are based on 2026 foreign exchange rates. All growth rates in Gene's comments are FX neutral, unless stated otherwise. All references to share counts are for fully diluted weighted average share counts, unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements confined materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2025 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now I will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall. Eugene Hall: Good morning. Thanks for joining us today. First quarter insights, revenue, EBITDA, adjusted EPS and free cash flow were ahead of expectations. New business with enterprise leaders was strong in the first 2 months of the quarter. Due to changes in the geopolitical environment, client decisions slowed somewhat in March. Year-over-year contract value growth accelerated in the first quarter. We were agile in managing expenses, and we continue to deliver unparalleled value to our clients. Gartner's strategy is to guide executives on their journeys to achieve their mission-critical priorities. Our clients are the senior most executives and their teams who lead every major enterprise function. For example, Chief Information Officers and Senior IT leaders, Chief Supply Chain Officers and Heads of Logistics, Chief Financial Officers and Corporate Controllers and more. These roles are enduring regardless of change in the world. The executives who lead these roles will always have priorities that are mission critical to the success of their enterprise, their functions and their personal careers. Priorities that are mission-critical tend to be long, complex journeys. They take time and effort to achieve. Executives want and need help. In today's environment, most executives face information overload. It could be challenging to differentiate authoritative sources from others. Trust is at a premium. Gartner is the best, most trusted source for the help executives need to achieve success. We proactively deliver insights that guide smarter decisions and stronger outcomes on mission-critical priorities. Gartner insights are derived from a vast pool of highly proprietary data. Every year, we hold more than 0.5 million 2-way conversations with more than 80,000 executives across every major function and in every industry. We conduct more than 27,000 briefings with the executives from technology providers. We also leverage data from proprietary surveys, tools, models, benchmarks and more. This gives us a deep understanding of what executives care about most, what's working and what isn't. Our insights are independent and objective. They reflect the latest information and situations our clients are experiencing. They're continually updated and they're available exclusively from Gartner. A large part of our value comes from helping clients see around corners. We help leaders understand issues and approaches they're often not aware of. We help them identify blind spots, prioritize issues and avoid costly mistakes. Our insights are forward-looking. We guide clients on how the world is likely to change and what they should do to thrive in uncertain environments. We deliver unparalleled client value through both digital and human interactions. Clients can access our written insights, budget quadrants, pipe cycles, critical capabilities, ignition guides, toolkits for procurement and governance and many more. In addition, through inquiry, clients can tap into the deep expertise of our world-class analysts that goes beyond what's in our written insights. They can get personalized support from experienced practitioners. Through our conferences, clients can interact in person with analysts, peers and technology providers. They can validate decisions through the Gartner Pure community, which has more than 100,000 executives from nearly every enterprise function. And of course, they can use AskGartner to go even deeper into specific topics. No one else does what we do at our scope and scale. Retention is foundational to our success. Clients who engage frequently with our insights, receive greater value and retain at higher rates. To support more frequent client engagement, we've been transforming our business and technology insights organization and processes. I covered the dimensions of this transformation on last quarter's earnings call. They are impact, volume, timeliness and user experience. Today, I'll give you an update on how we're doing. We measure progress in a number of ways. I'll highlight just a few examples for simplicity's sake. Starting with impact. Our objective is to ensure insights are always on the topics our clients care about most right now. We've increased the number of high-impact documents by 22%. The second dimension is volume. The number of documents in our insights library is up 19%. The third dimension is timeliness. With the accelerating rate of change in the world, we've introduced insights that are published the same day important events occur. The number of these documents has more than doubled. A recent example includes recommendations for heads of software engineering in response to the dramatic change in the security landscape posed by Anthropixs Mythos. And of course, we continue to make improvements on the user experience. For example, we've added the ability to create downloadable PowerPoint presentations directly from within AskGartner. Clients can ask questions in 25 languages, and we continue to integrate additional proprietary data sources. The programs we have underway are driving increased client engagement, which should result in higher retention and additional new business. AI continues to be one of the most requested topics across all the roles we serve. Gartner sits at the nexus of CIOs and IT organizations, business leaders and AI technology providers. This gives us a full proprietary perspective that includes all the major players. We also have comprehensive independent and objective guidance on all aspects of AI, strategy, ROI, ethics and governance, workforce readiness and more. We cover the full range of issues leaders need to address to be successful with AI. And we are world-class users of AI internally. No one is more capable or better positioned to guide leaders along their AI journeys than Gartner. Our people drive our success. I just returned from one of our sales recognition events, where I had the opportunity to spend time with hundreds of our most successful salespeople. They continue to demonstrate unwavering dedication to their clients, and are incredibly excited at the future of our business. In closing, Gartner has an unparalleled and enduring value proposition. We're transforming our business and technology insights organization and processes to deliver even more client value. Clients who engage frequently with our insights receive greater value and retain at higher rates. Gartner is the best source for clients looking to achieve success on their AI journeys, and our teams are incredibly optimistic about our future. Looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to drive strong free cash flow that we can put to use to drive incremental shareholder value, and we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian. Craig Safian: Thank you, Gene, and good morning. First quarter contract value, or CV, grew 1% year-over-year. This was an acceleration from the fourth quarter. Insights revenue, EBITDA, adjusted EPS and free cash flow in the first quarter were better than expected. We are increasing our EBITDA, adjusted EPS and free cash flow guidance for the full year. In the first quarter, we reduced our share count by about 4%, buying back $535 million of stock. And we expect to generate significant free cash flow and have fewer shares outstanding over the course of the next several years. First quarter revenue was $1.5 billion, up 2% year-over-year as reported and down 1% FX neutral. In addition, total contribution margin was 72%, EBITDA was $395 million, up 6% as reported and 1% FX neutral. Adjusted EPS was $3.32, up 11% from Q1 of last year. And free cash flow was $371 million, up 29% year-over-year. Rolling 4-quarter return on invested capital was about 27%. Insights revenue in the quarter grew 3% year-over-year as reported and was about flat FX neutral. First quarter Insights contribution margin was 78%, up about 120 basis points versus last year. Contract value was $5.3 billion at the end of the first quarter, up 1% versus the prior year and an acceleration from year-end. Excluding the U.S. federal government, CV growth was 3.5%. At March 31, we had approximately $114 million of U.S. Federal CV. Q1 is normally a higher-than-average renewal quarter and our seasonally lowest new business quarter. The second quarter is a smaller renewal quarter and a larger new business quarter than Q1. We had more than $200 million in new business in the first quarter as there continues to be considerable interest in Gartner's proprietary unbiased insights. As you recall, new business dollars increase each quarter as we move through the year. Driving engagement is critically important to retention. As Gene discussed, through both digital and human interactions, we understand our clients' mission-critical priorities, and we are proactive in helping them to address those priorities. This ongoing engagement helps drive client success and strong retention. We've increased license user engagement levels over time. In each month of the first quarter, they are higher than they've been in any of the same months over the past 3 years with consistent engagement improvements in both digital and human interactions. Derived from analyzing monthly active users, overall engagement in Q1 was up over 170 basis points compared to the prior year quarter. Digital engagement improved by more than 160 basis points year-over-year. Human interactions increased more than 80 basis points year-over-year through improvements in the usage of analyst inquiries. Global Technology Sales contract value was $4 billion at the end of the first quarter, up versus the prior year. GTS CV for both enterprise leaders and tech vendors increased by more than 3% year-over-year ex Fed. Wallet retention for GTS was 97% for the quarter. Ex Fed, wallet retention was 99%. GTS new business was down 4% compared to last year and down about 3% ex Fed. As Gene noted, new business was tracking ahead of the prior year through February and was affected a bit in March due to the geopolitical environment. Global Business Sales contract value was $1.3 billion at the end of the first quarter, up 3% year-over-year. Ex Fed, GBS CV grew 5%. Growth was led by the sales, supply chain and legal practices. Wallet retention for GBS was 98% for the quarter. GBS new business was down 2% compared to last year. Again, as Gene noted, new business was tracking very favorably through February with some client decision-making slowing down in March. Conferences revenue for the first quarter was $78 million. On a same conference basis, revenue growth was around 9% FX neutral. Contribution margin was 39%. We held 10 destination conferences in the first quarter as planned. Q1 consulting revenue was $119 million compared with $140 million in the year ago period. Consulting contribution margin was 31% in Q1. Labor-based revenue was $90 million. Backlog at March 31 was $201 million. In contract optimization, we had $147 million of revenue on an LTM basis, about flat compared with Q1 of 2025. On a 2-year CAGR basis, revenue was up about [ 15%. ] As you know, our contract optimization revenue is highly variable. EBITDA for the first quarter was $395 million, up 6% from last year as reported and 1% FX neutral. We outperformed expectations in the first quarter through effective expense management and a prudent approach to guidance. Adjusted EPS in Q1 was $3.32, up 11% compared to Q1 last year. We had 70 million shares outstanding in the first quarter. This is an improvement of about 8 million shares or approximately 10% year-over-year. We exited the first quarter with 68 million shares on an unweighted basis. Free cash flow remained strong in the first quarter, up 29% year-over-year. Free cash flow on a rolling 4-quarter basis was $1.3 billion. Adjusting for several items detailed in the earnings supplement, free cash flow was 20% of reported revenue, 79% of adjusted EBITDA and 145% of GAAP net income. At the end of the first quarter, we had about $1.7 billion of cash. This includes about $500 million for running the business and around $1.2 billion available to deploy on behalf of shareholders. Our March 31 debt balance was about $3 billion. Our reported gross debt to trailing 12-month EBITDA was under 2x. We repurchased $535 million of stock during the first quarter, reducing our share count by more than 4%. Last week, the Board increased the buyback authorization to about $1.2 billion. We expect the Board will refresh the amount as needed. We are updating our full year guidance to reflect recent performance and trends, including FX. For Insights revenue in 2026, our guidance reflects Q1 contract value. The revenue outlook is operationally unchanged as we had modeled in the NCVI performance we saw in the quarter. We increased the outlook for FX. For conferences, we are basing our guidance on the 56 in-person destination conferences we have planned for 2026. We have good visibility into current year revenue with the majority of what we've guided already under contract. For consulting, we have reflected a prudent view for the balance of the year based on the Q1 results. Contract optimization has had several very strong years and the business remains highly variable. For 2026, we expect consolidated revenue at or above $6.405 billion, which is updated from last quarter and is FX-neutral growth of 1%. We now expect full year EBITDA at or above $1.545 billion, up $30 million from our prior guidance. This reflects full year margins at or above 24.1%, also up from last quarter. We expect 2026 adjusted EPS at or above $13.25, an increase from last quarter that primarily reflects the increase in the EBITDA outlook and a lower share count. For 2026, we expect free cash flow at or above $1.16 billion. This reflects a conversion from GAAP net income of 137%. Our guidance is based on 69 million fully diluted weighted average shares outstanding, which incorporates the repurchases made through the end of the first quarter. We exited Q1 with about 68 million fully diluted shares. For Q2, we expect EBITDA at or above $425 million. Our profit and cash flow results in Q1 were ahead of expectations, and we've increased the EBITDA, adjusted EPS and free cash flow guidance for 2026. Contract value ex Fed grew 3.5% in the quarter and total CV growth improved from the fourth quarter of 2025. We are positioned to accelerate CV growth in 2026, and we expect to deliver adjusted EPS on a compound basis above 12% over the next 3 years. We'll also deploy our capital on stock repurchases, which will lower the share count over time and on strategic value-enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator? Operator: [Operator Instructions] First question comes from the line of Jeff Mueller with Baird. Jeffrey Meuler: Yes. So it makes sense that the selling environment would be tougher in March. Can you give any perspective on if that has started to convert in April, the things that kind of slipped out of March by some indications, maybe the environment is getting a little bit better. And then just any differentiation on new business sales trends between new logo versus upselling in the base, which I think had been lagging? Eugene Hall: Okay. Jeff, it's Gene. I'll get started. So in terms of -- again, as I said in my prepared remarks, we had really good January and February, March decision slowed down. By and large, clients and prospects told us, we still want to buy from you, but we can't make a decision today. To your point, as a role to April, we're seeing many of those deals actually closed where clients delayed in March, but actually be came through and closed in April. Craig Safian: And then Jeff, on the mix between new logo and existing client growth, the what we saw through the first 2 months where we did see nice year-over-year growth that was broad-based across both new logo and with existing clients. And then with the challenging -- more challenging environment in March, it was also broad-based across new logo and existing clients. And so as we continue to see some of those things, as Gene just mentioned, come through, it's a mix of new logo growth and growth with existing accounts. Jeffrey Meuler: Got it. And then on -- good to hear overall engagement of both in person and digital. Just anything you can give us on the evolution of AskGartner, either usage statistics or any meaningful changes in, I guess, user experience, either from something new with the foundational models that underpin it or any adjustments that you've been making to it? Eugene Hall: Yes. So as Gartner is just one part of our value proposition. Obviously, there's a whole lot of other pieces of Gartner like people buy. We have a start and it's important we will make it competitive. The client usage continues to increase and the amount of repeat client usage continues to increase. And so we're seeing increasing engagement with AskGartner. We do a new release every 2 weeks. Clients -- we have a telesales you want a button on there and they do, plus we do market research. And every 2 weeks, we have new releases. As Craig and I mentioned in our remarks, we've added sort of support for 25 languages. You can now create PowerPoints directly from the from with AskGartner, and there's all series of other kinds of upgrades. And we're upgrading every 2 weeks, so it's too numerous to actually talk about over the course of the quarter. Craig Safian: Yes. And Jeff, it's a common -- those upgrades are a combination of feature enhancements and incremental proprietary data that the tool is going from as well. And so we are very quickly rolling out new features, as Gene mentioned, every 2 weeks, and we'll continue to do that as there's demand for it, as the models improve and as our clients give us feedback on what they want from the tool. Operator: Our next question is from Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. I wanted to follow up on the geopolitics comment. And I'm curious if you could give us some regional color. Did you see slowing sort of across the board? Or if there was any differentiation regionally? I'm assuming maybe you saw some slower decision-making outside the U.S., but just would love some additional color there. Eugene Hall: So there was a slowdown across the board by by industry. It was worse in some places than others. So if you could imagine, with airlines and transportation companies, it was worse in financial institutions, for example. And. It was worse in the country's directly impact such as the Gulf Cooperation Council countries than it was in places that were less impacted like in the U.S. Faiza Alwy: Okay. Understood. And then I'm curious if you're reevaluating any pricing strategies, maybe just thinking about the overall price point just as virtually every company is trying to figure out AI, but maybe they can't afford your services at -- or your subscription at the price point that it is. So just curious how you're thinking about any changes around pricing. Eugene Hall: We talk to our clients a lot about price and understand how they think about pricing, weather we're priced appropriately or not. And the feedback we get from our clients today is that their pricing is very appropriate where they expect. They're very comfortable with it. We have different price points. So if a client -- we have our community guide the products was the highest price than our guided products and our advisory products and our reference products. And when clients have price sensitivity, we give them an option they can go for a different level of service. So same content with a different level of service with those, and that's what clients choose to do. As we look within each of those groups, we feel like we're priced at property. Again, we talk we bench work with clients to see if that's the case. We also look when clients say I'm not going to buy a price is a major issue. And price is not the issue, it's potentially, if they're not going to buy, the CFO said, we have to cut all expenses 50%. And so whether we're at 4 points or 8 points higher isn't tissue at all, it's kind of a broader cost cutting that organization is going through. Craig Safian: And Faiza, it's important to remember who we're targeting and focusing on from a go-to-market perspective and a strategy perspective, which is really the top of the org chart and each of the functions that we serve. And so again, we are going in and targeting the CIO, the Chief Information Officer or the CFO or the Chief Supply Chain Officer, et cetera, and their teams. And so we're starting at the top of the pyramid where there tends to be much less price sensitivity around those things. And again, we have, as Gene articulated, an architecture where if there is price sensitivity, there are offerings that we can provide to the clients if they're not willing to sign up for a guided product. They'll go to adviser product. If they're not willing to go with the adviser product to go with the reference pros and so on. Eugene Hall: And the other thing to think about is that, it's a very small part of their budget. So even our smallest clients would have $100 million of revenue. And so individual executive likes to have a $10 million budget and their service card might be $100,000 out of that $10 million budget. So the -- whether it's $100,000 or $104,000 isn't big issue, it's about the value they had. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Andrew Nicholas: I wanted to ask on the U.S. federal government business, in particular. I think it was 250 basis point headwind in the quarter. Maybe a little bit more than I would have thought because I thought you had lapped most of that. Can you just level set for us where you sit in that kind of renewal cycle post kind of some of the government approach changes early last year? And maybe at what point would you expect that headwind to alleviate as we move through '26? Craig Safian: Andrew, it's Craig. On the U.S. Federal side, as we talked about through most of last year, the DOGE impacts, we really didn't start feeling them until March of last year. And so Jan and Feb were, let's just say, semi normal month from a selling environment perspective. And then when the DOGE activities kicked in, that was really March and April and then forward from there. And so I think as we roll into Q2, we really do start to then lap the significant challenges that we had there. From a U.S. federal CV perspective, we exited Q1 with about $114 million worth of U.S. federal CV spread across GTS and GBS, the bulk of that actually in GBS -- GTS, I'm sorry, the bulk of that in GTS, I should say. What we saw from a renewal rate perspective in the quarter was obviously a significant improvement on a year-over-year basis. we are renewing a lot of business. We are writing new business, but we really do start to lap the significant challenges starting in Q2 with the U.S. Fed clients. Andrew Nicholas: Perfect. Very helpful. And then for my follow-up, I just kind of want to go to the headcount growth. I think you had outlined low single-digit growth for GTS and in mid-singles for GBS as kind of your targets for this year. Is that still the case? And any color you could give us on the cadence of the slope of that ramp would be great. Craig Safian: Yes, Andrew. So the target still remain. You articulated them correctly. That is what we are gunning for over the course of the year. We typically do see a little bit of a step back in the numbers in Q1 just because we do a lot of our promotions in the first quarter from a frontline seller to manager. It does -- we try and get ahead of that from a hiring perspective, but it often does take a little bit of time to catch up on some of that hiring. As we noted, the hiring we're doing in 2026 is really about 2027 and 2028 and beyond. We've got ample capacity in 2026 to deliver on that CV acceleration that we've been talking about. The other note I'd mentioned is we are hiring more incremental new business developers than AEs. It's not one or the other, but we definitely have a bias towards hiring incremental BDs right now as opposed to hiring incremental account managers going forward. And that's baked into those year-end numbers you talked about, and that's all baked into our OpEx guide as well. Operator: Our next question comes from Jason Haas with Wells Fargo. Jason Haas: I'm curious for the ex federal government CV, did that accelerate from the 3.5% that you reported for 1Q in April? And how are you expecting that to trend through the year? Do you expect an acceleration in ex federal government CV growth? Craig Safian: Jason, it's Craig. So we're not giving any stats on April yet. We've barely closed the books on that. So I can't quite comment on that. I think the answer on the CV trend is we expect the whole CV base to accelerate over the course of 2026 and then continuing onward, which would be a combo of the U.S. Fed recovery and then also the non-U.S. Fed base accelerating as well. Jason Haas: Okay. Great. And then do your pre-existing long-term targets still hold? Or are those no longer in place? Craig Safian: That's a great question. So there's no change to the medium-term objectives. I would say those objectives really do apply to a normal operating environment, and you can still find those medium-term objectives in our Gartner 101 presentation, which is on the Investor Relations site. I do think as we think about where we are today, and both Gene and I articulated this, we expect in the current environment for our CV growth to accelerate. We're committed to driving compound annual growth at or above 12% to our EPS number. We continue to have a great and very large addressable market and a compelling client value proposition. Those 2 things are unchanged. We've rebaselined the EBITDA margin now based on our updated guidance of 24.1%, and we would expect our margins moving forward over the medium term to expand from there. And then obviously, with the great free cash flow engine that we have, we expect to generate a significant amount of free cash flow. As CV growth accelerates, we'll get more towards the higher end of our typical conversion levels of net income to free cash flow or EBITDA to the free cash flow. And obviously, we'll have all that free cash flow to put to use on behalf of our shareholders as well. Operator: Our next question, it comes from Surinder Thind with Jefferies. Surinder Thind: When looking ahead, when we think about the acceleration in CV growth, any color there where you can maybe disaggregate the drivers? Is the expectation maybe a bit more new business development? Or should we expect wallet retention to continue to improve and maybe a bit more upsell at existing clients? And then maybe I assume it's also underpinned by just normalized annual price increases that are normally embedded. Eugene Hall: The reason we're expecting CV to accelerate is, we're expecting -- so we're making a bunch of changes in visit we talked about. So Craig talked about how we're driving engagement, and we expect engagement to go up. And in fact, engagement has been rising just as Craig outlined. We expect that to continue because we've got a big focus on it. When we get more engagement, we expect that our retention will increase as well. And so our CV retention will increase with our increased engagement. In addition to that, we're making a bunch of changes in BTI and I articulated all the changes we're making. And we expect that's going to lead to more and better insights that again leads to even more engagement and also help support new business growth. And so as we look forward through the year, we expect that our new business growth and our retention both improving as we go through the year. Based on all the changes we're making and the leading indicators, which Craig and I talked about that indicates that these things are causing increased engagement with our clients, which ultimately should result in more more business, more retention and higher growth. Craig Safian: And Surinder, you should see that come through, obviously, in the CV growth rate but also in the lot retention number, which is the measure of net growth from clients that stay with us. And so the more that clients stay with us, the more new business opportunities we have with that. The more that they stay with us, the more opportunity we have to expand the relationship and so on and so on. So we would expect the CV acceleration to read through both, obviously, to the top line CV growth, but also on the [indiscernible] retention line as well as we will be selling more new business to existing clients over that time frame as well. Surinder Thind: Got it. And then just on the management of costs, can you maybe provide a bit more color there just relative to your expectations versus just kind of normally being conservative when you initially guide, just any update where maybe there's a bit more benefits from even if it's AI or just other things that are going on and the opportunity for any potential structural change in the outlook for margins at this point? Or is it just one small step forward each quarter at this point? Craig Safian: Yes, it's a great question, Surinder. So as we look at the OpEx number, I'd say a couple of things. So 1 is we're obviously very focused on making sure that we're delivering on our commitments from both EBITDA profitability perspective and a free cash flow perspective, and we are tuning our OpEx model as we go. The second thing I'd say is we're very focused on making sure that we keep our run rates aligned with our CV growth expectations, which are essentially what drive future revenue growth. And again, we want to make sure that we not only deliver strong earnings and free cash flow in current year, but that we're setting ourselves up to continue to do that into the future. Third thing I'd say is we are always focused on continuous innovation and continuous improvement and driving operational efficiencies through the business. we can leverage AI for some of that. We can leverage other technologies for other things. We can improve processes as well, and we will continue to do that. And then the fourth thing I'd say is we're doing all that while also making sure we're making investments that we believe will drive future medium- and long-term growth for us. And so under the covers, we'll be investing in places and we may be harvesting benefits and efficiencies in other places so that we can reinvest in the places that we know drive value. So we know we need analysts in our business and technology insights business. We're not going to stop investing there. We know adding QBH drives long-term growth we're going to be adding there. It may mean that we are driving significant operational efficiencies in other areas, and we'll continue to do that so that we free up the appropriate resources to invest in the things that we believe will drive long-term growth. Operator: Our next question comes from Josh Chan with UBS. Joshua Chan: I guess, as we think about sort of the selling environment on a year-over-year basis, it's obvious that in Q1 it was worse than last year. But as we go into Q2, you lap Liberation Day in the prior year, et cetera. How do you think about the year-over-year selling environment comparison as we kind of go through the rest of the year? Eugene Hall: So what I'd say, Josh, is it kind of depends on how the world evolves. As I sit here today, as I mentioned, a lot of the deals that clients in March said, let's wait and revisit this in a couple of weeks actually closed in April. In fact, one of the things that will an interesting is that a lot of these companies think airline shipping companies, other energy-intensive industries and geographies. And basically that normally a functional leader like a CIO, which have [indiscernible] decision, when times are tough, what will happen is I'll say we're going to escalate that maybe even the CEO depending on how have the decision with the company. And so we saw more of those kind of escalations. They got escalated, they said you the values there and then they closed. It just took longer to close. And so I think that what happens in the rest of the year is going to depend on kind of what the environment looks like. Craig Safian: The one thing I'd add, Josh, though, is we pride ourselves on adapting. And so yes, the environment is crazy and continues to remain a little bit chaotic, but we're making sure that our sales and our service people are armed with the right tools, contracts back up, et cetera, to be successful in any sort of environment. We'll see how the world evolves, but we're going to make sure that we keep -- we're going to make sure that sales and service from our perspective are armed to deliver value, highlight the value for prospects, continue to deliver the value for clients, et cetera, moving forward. Eugene Hall: Yes. To build on Craig's point, one of the things that I talked about both the last and on this call is we made more change in the last year than we've ever opened Gartner in terms of increasing value to clients. And those -- the [indiscernible] speed farm is going to be tough going forward. And we want to make sure we're resilient in that environment. And I think what we're seeing here is that selling cycles are longer, but they're still buying. And so that's kind of what we saw happen in March. So again, January and February, actually, we had great very robust new business growth that is Greg and I talked about. Decisions then took longer starting March. And so I think there are good signs overall for what the selling environment, but it's probably going to take longer decision cycles if the environment continues to have the uncertainty in does today. Joshua Chan: Sure. Sure. That makes a lot of sense. And I appreciate the color there. And then maybe on your EPS CAGR outlook, can you talk about the drivers behind that 12%? I mean, obviously, revenue growth, at least currently is not probably at that level, so you're going to need some margins or buybacks. Can you just talk about what contributes to that level of EPS growth? Craig Safian: Yes, Josh, happy to. So again, over a 3-year period, where our expectation is CV growth will reaccelerate, which will drive future revenue growth. As we noted earlier and have noted for a while, we're committed delivering strong margins and margin expansion over time as well. And then obviously, on top of that, we have significant capital to put to use on behalf of our shareholders. Over the last 12 months, I think we've bought back like $2.4 billion, $2.5 billion worth of stock, reducing the share count significantly. And obviously, our intention will be to continue to do that, and that's obviously, one of the bigger drivers to that EPS CAGR as well. Operator: Our next question comes from Toni Kaplan with Morgan Stanley. Toni Kaplan: Gene, just a strategic question. A number of the other info services firms have been starting to use large LLM providers as like an additional distribution channel. And I know your business is different being more weighted towards advisory, but you still have proprietary data that people want. And so I was wondering if -- is there a sort of broader data distribution that you would consider? Or do you think that, that dilutes your value proposition too much because, obviously, a lot of the value isn't talking to the research analysts and the network and everything like that? Eugene Hall: Yes. Toni, I think you're at the nail on the head, which is what clients rule out us for is for us to proactively go to them and say, given your mission-critical priorities, here's the things you should be worried about, things you may not have thought of, things that you might be surprised by. And so what they rely on us for is to be very proactive as opposed to wait and answer a question. So that's not our plan to work with us. That's not our value proposition. And then in addition to that, there's a big human component, and so we have our executive partners, which can function as advisers to our clients, with our analysts, which are world-class experts. And while they publish, obviously, a lot of content and insights, the kind of rule that we have, that's only like 5% of what they know that could be active and valuable. It's our -- when they do it an inquiry with our analysts, clients get access to that other 95% that actually isn't -- we have a vast content library, but again, that's only a portion of what our analysts actually know. And then we have our conferences that they go to which clients get to interact live, we have peer interactive. And so if you think about it, the -- that piece of it is just a small piece of our overall value proposition. And so we want to focus on what clients want from us the most value, which is a whole tell us what I'm not seeing, help you see around corners, tell how world is going to evolve so that I can be successful in this uncertain environment. And that doesn't really fit well with feeding into an LLM that is really answering questions, which is we have as Gartner. That's not the majority of what we do that's all my clients [indiscernible]. Toni Kaplan: Yes. That makes sense. I wanted to shift to consulting. I know both the labor-based and contract optimization was down a bit year-over-year, and contract optimization can be volatile and the comp was tough. But on the labor base, any -- do you just attribute the slowdown there to just normal macro slowdown? You mentioned a lot that March was slower, or do you think that there's something structurally worse going on right now given AI? Eugene Hall: Yes. Toni, I don't think if there's something structurally worse. And again, this is a different behavior than we saw in Q4. So it's not something that has been kind of a long-term thing. I think basically, it's what you said, which is the American environment changed a lot, and that affects both the -- it effective differently, both the labor part of the business as well as CFC -- FX CFC, because if a client was going to buy something, and they postpone that decision. We get paid when they buy something. And so with CFC, you had both a very tough comp, as Greg went through. In addition, if clients, and we saw this, say, "Hey, I was going to do that big software deal. I've decided to push the decision of for a month," that puts us getting paid off as well. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Keen Fai Tong: I wanted to take a step back on CV performance. Can you provide more details on the reasons why CV growth is coming below historical levels in the high single, low double-digit range? Specifically, can you outline how much of the slower growth is due to tariff affected industries, government spending, the macro environment and other potential unnamed factors? Craig Safian: George. So I think; one, the first obvious headwind is the U.S. federal business, which we talked about in detail and is a 250-basis-point headwind in the quarter alone. That business, we believe, is rebaselined. Our current assumptions are for it to be flat in 2026 and grow from there going forward. And so that is a temporary headwind. Obviously, we've been dealing with it for since really March of last year, but that certainly remains the most dominant headwind that we have going forward, or that we have had that have impacted the results and should write itself going forward. In terms of the other areas, I think it's a combination of -- the macro has been really, really, really challenging over the last several quarters and whether it's the DOGE impacts that started in March of last year, josh referred to Liberation Day, which I remember was April 2 of last year to lots of other geopolitical challenges over the course of the year to where we sit today. I think the short answer is, we fully expect our CV growth rate to accelerate over the course of 2026. As I mentioned earlier, we expect it to increase across the board. So yes, we expect the U.S. Fed growth rate improve as we lap some of the more challenging areas, but we also expect the non-U.S. Fed business to accelerate. That includes tariff affected and nontariff affected, that includes software companies and IT services companies, et cetera. And so I think from where we sit today, we expect CD growth to reaccelerate over the course of 2026. And again, we believe the combination of that CV growth reacceleration, our operating expense management, our ability to invest in the right areas that drive and support future growth will allow us to drive significant free cash flow and earnings per share growing at a 12% compound a growth rate. Keen Fai Tong: Got it. That's helpful. And then following up on the CV growth expectations. So you noted acceleration over the course of the year. What are your CV growth expectations exiting the year? And do you expect the improvement to be relatively linear from 1Q? Craig Safian: So we don't guide to CV growth, George, and we're going to continue to not do that. What I can tell you is we expect to accelerate over the course of this year. I did note in my prepared remarks that Q1 happens to be a heavy renewal quarter and our smallest new business quarter. As we roll into Q2 and Q3, we see increasing levels of new business dollars, and we just have less CV that is up for renewal in those quarters. And so that certainly helps. CV though, is a rolling 4-quarter number. And so we expect to continue to see improvements across the year. And we don't believe that we're done at the end of this year. But right now, we're focused on making sure we're driving engagement, making sure we're delivering on all the transformations Gene outlined, and all those things should lead to CV growth accelerating over the course of this year. And again, that should benefit us as we roll forward in 2027 and beyond. Operator: Our next question is from Jeff Silber with BMO Capital Markets. Jeffrey Silber: You mentioned a couple of times your goal to have compounded adjusted EPS growth, I think, over -- at or above 12% over the next 3 years. What kind of headcount growth do you need to get there both from a sales force perspective and an analyst perspective? Craig Safian: Yes, Jeff. I mean, I think it's all baked into our ability to drive the margin to get the desired results that give us that 12% CAGR. Our operating model with QBH or sales headcount, is unchanged, so grow at roughly [ 300 ] bps slower than what we're growing or our expectation around CV growth. That framework still -- we're still operating with that framework going forward. And on the analyst side, it's really demand-driven. And because we've got such a good finger on the pulse of what our clients are most interested in, we're actually able to predict where that demand is and make sure that we've got the appropriate analyst levels and analyst count to handle that. And so it's not a specific number. And we'll do all that while also driving efficiency and improvement across the rest of the business. And so the combination of those three things is what gives us the [indiscernible] the operating result levers to get to that 12% EPS CAGR over time. Jeffrey Silber: Okay. That's great. And just to clarify something, the base here that you're talking about, is that 2025 or 2026? Craig Safian: That base year is 2025. It's a great question. Thanks for clarifying that, Jeff. Operator: And our next question is from Jasper Bibb with Truist Securities. Jasper Bibb: Again, I know you don't guide for CV, but I think you've mentioned on a couple of earlier questions that CV should reaccelerate those total and ex fed through the year and helpful context to around the seasonal payments of renewals and new business. I just wanted to clarify, like, do you think we see a reacceleration in the ex Fed CV growth number next quarter? Or maybe are we still a little bit further away from the acceleration in ex Fed CV? Craig Safian: Jasper, so all I'll tell you without getting into too many details is we expect the CV growth rate to accelerate over the course of the year. We're not going to get into the details of expectations by segment of business per quarter. We'll tell you all about that when we report our Q2 results. but the headline should be that we expect CV growth to accelerate. Jeffrey Silber: Got it. And then maybe following up on the early pricing question. I think there was some speculation intra-quarter if sales teams have made offers to sign on below the normal $50,000 ASP for new LUs, I guess can you just clear up kind of in response to that, like if there's anything that's changed on your approach to pricing or offering discounts? Craig Safian: Yes. So we do not offer discounts. Our pricing strategy and focus and mechanics are unchanged. We put through our normal annual price increase on November 1 of last year. That has been in place since then. And we are -- despite -- well, of course, you may be hearing, I could assure you we are not -- there's no change in our discounting posture or philosophy. Operator: And our next question comes from Scott Wurtzel with Wolfe Research. Scott Wurtzel: Just one for me. Just wondering if you can talk a little bit about just the puts and takes on client versus wallet retention in the quarter with client retention ticking down a little bit, but wallet retention ticking up. Just wondering if there was any incremental, I guess, price realization or upsells that drove that expanding wallet retention will client ticked down? Craig Safian: Yes. Scott, great question. I think it's largely a function of those are both rolling 4 quarter numbers. In the first quarter, as I noted earlier, it's our smallest new business dollar quarter, which implies it's our smallest new business enterprise quarter as well. And so we added new enterprises there. But as always, there is a lot of churn within our small tech clients. That's -- it's improved over the last couple of years, but that's still the most significant impact on that client retention number. And because those are typically lower spending clients, does not have as big of an impact on the wallet retention number. With wallet also, we are lapping some of the challenges from last year, but also we are holding on to more dollars than we have historical -- than we did last year as well. And so I think that's manifesting itself in that modest improvement in the wallet retention number as well. Operator: And our next question is from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: I just wanted to focus on the tech vendor conversation. I was wondering if you could provide any color on that front, how is that trending? And also, if you could talk about some of the challenges that software companies are facing, has that influence any of that conversation? Craig Safian: So on the tech vendor side, I think what we're seeing is consistent with what we saw in the last couple of quarters where our business with software companies and services companies is growing at high single-digit growth rate, and other elements of our tech vendor client universe are not performing as well, most notably, I'd say, hardware providers and telecom carriers, which we classify as part of that that tech community. But the bulk of our CV sits with software and services and the software and services business continues to grow at high single-digit growth rates. Ashish Sabadra: That's very helpful color. And then on the quota-bearing headcount, I just wanted to follow up on the prior comment around hiring more incremental new business developers than account managers. How should we think about the overall QDH growth going forward, but also how do we think about that mix shift going forward and influence on productivity. Craig Safian: Yes, it's a great question. So again, it's not binary 1 or the other. We're obviously -- as we are successful with our BD and they sell more new business, we do need to hire account managers to catch that business, retain it and going forward. But what we've been doing is driving productivity and efficiency out of our account management teams by adding incremental clients to their territories. And again, we've studied this really intently to make sure that we're not going too far on any of those, and we feel really good about the productivity gains we've driven there. And what that does is free up incremental for us to invest in business developers. And when you think about the size of the addressable market opportunity, the fact that there are roughly 140,000 enterprises that we think to be clients of Gartner, and we're currently doing business with 14,000 of them, the way we capture that market -- that incremental market is really through business developer investment. It's a slow shift in mix, though, because, yes, the bias is towards hiring incremental BDs, but it's not like a student body left or a student right. And so that mix will move moderately over time but we think it's the right combination of being able to manage, retain and grow the existing client base while having the right-sized engine to be the new logo addition and incremented growth going forward as well. So we think we've got the right mix there going forward, and we'll continue to update our investors and the investment community on that incremental investment and the mix of that investment going forward. Eugene Hall: The vast majority of our sales force today is account executives. They do a lot of new business growth as well, and we expect that to continue. And even given with our accounts executives under the covers, we changed territories all the time. So if there's less demand in the U.S. federal government, then what we'll do is reduce territories there and move those over to places where there's higher demand. And so there's more change when under the covers to actually improve productivity as well. Operator: And our last question comes from Wahid Amin with Bank of America. Wahid Amin: Just one for me. On an earlier remark, you talked about sometimes clients and budgets are tight, maybe the selling environment is much longer than expected. How would you classify the customers that want to keep a Gartner subscription, but may consider down selling or using a different user experience? Are you seeing a huge influx of that? Eugene Hall: It's a great question. So in all times, we have some clients that are upgrading some upgrading, there are some that are downgrading clients. Because while there's more concern today because of so much political things. Any time there's always clients, sometimes they are doing well and some that aren't. And so to your point, we often see clients that are doing really well, so they want to upgrade and get more value. They try it at lower price points and more value. Similarly, we often see clients say, "Hey, my CFO says cut half expenses, I won't keep Gartner, so let's go with the lower service level unless we still keep partner. Those things actually tend to balance out. And so we see about as many upgrades as downgrades, which is why we don't talk about it that much because it actually -- the 2 balance out almost exactly. Operator: Ladies and gentlemen, this will conclude the Q&A session. I will pass it back to Gene Hall for closing comments. Eugene Hall: Well, here's what I'd like to take away from today's discussion. Gartner has an unparalleled and enduring value proposition. We're the best, most trusted source for executives who want to succeed with their mission-critical priorities. We're transforming our business and technology insights organization processes to deliver even more client value. Clients engage ritually with our insights receive greater value and retain higher weights. Gartner is the best source for clients looking to achieve success upon their AI journeys. We are incredibly optimistic about our future. And looking ahead to the rest of the year, we expect contract value will accelerate. We will continue to grow our strong free cash flow that we can put to use to drive incremental shareholder value. And we expect to deliver adjusted EPS on a compound annual basis above 12% over the next 3 years. Thanks for joining us today, and I look forward to updating you again next quarter. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Q1 2026 Revvity Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Steve Willoughby, SVP, Investor Relations. Steve, please go ahead. Stephen Willoughby: Thank you, operator. Good morning, everyone, and welcome to Revvity's First Quarter 2026 Earnings Conference Call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer; and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind you that today's call may include forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from our expectations. Please refer to the safe harbor statements in our earnings release and to our SEC filings for a detailed discussion of these risk factors. We assume no obligation to update these forward-looking statements in the future. Additionally, we will refer to certain non-GAAP financial measures during this call. Reconciliations to the most directly comparable GAAP measures are available in our earnings release. I'll now turn it over to our President and Chief Executive Officer, Prahlad Singh. Prahlad? Prahlad Singh: Thank you, Steve, and good morning, everyone. I have several important developments to discuss today. First, I'm really excited to report that Revvity delivered strong first quarter results with 3% total company organic growth, demonstrating the resilience and strength of our business. Our adjusted operating margins came in at 23.6%, which was above our 23% outlook. These results are a good start to the year and position us well to achieve our full year expectations, which Max will update you on in a bit. The better-than-anticipated revenue and margin performance in the quarter led to our adjusted earnings per share in the quarter being $1.06, which was solidly above the $1.02 to the $1.04 outlook that was implied in our guidance. I next want to highlight a transformative strategic decision we have made that will accelerate our growth trajectory, improve our financial profile and allow for even more focused investments. Following an extensive review, we have decided to divest our immunodiagnostics business in China, which represented approximately 6% of total company revenue last year. This decision reflects our commitment to focusing resources where we can generate the highest returns for shareholders going forward. The health care market in China, particularly diagnostics, has faced persistent policy-induced headwinds that have dramatically impacted both customer demand and pricing dynamics. Unfortunately, we see these challenges continuing over the medium term. To maintain our position in this space, it would require us to make substantial investments, including fully localizing manufacturing, supply chains and regulatory capabilities. This would require meaningful capital allocation, resulting in a deprioritization of other higher potential return initiatives available to us. Rather than deploying material dollars and management attention to address the structural challenges in the China immunodiagnostics market, we are choosing to concentrate our efforts on business areas where we have clear competitive advantages and see healthy growth trajectories. This is an intentional strategic allocation of our resources towards higher value opportunities that will drive and further improve our future performance. In fact, this selective approach is being validated by our performance in other parts of our China business. For example, our Life Sciences business in the region, which was larger in absolute revenue dollars last year than the immunodiagnostics business we will be divesting continued to perform well with reagents growing solidly above our overall reagents performance last year. We anticipate a continuation, if not acceleration, of our strong Life Sciences performance in China as we move through 2026, demonstrating our ability to succeed and grow meaningfully in China with the right products, market positioning and appropriate policy backdrop. We have signed a letter of intent with a local management-led buyer group for the purchase of this business and expect to reach a definitive agreement within the next 2 months, which would include our retaining a minority interest in the new company. The transaction is anticipated to close by the end of next year, allowing time for the buyer to establish local manufacturing capabilities and obtain necessary regulatory approvals. Until closing, we will continue to report the financial impact of these operations, but will exclude them on a pro forma basis to provide clear visibility into our ongoing business performance. The financial benefits of this planned divestiture are meaningful. On a pro forma basis, China will now only represent approximately 8% to 9% of our total revenue with approximately 7% being Life Sciences. If you were to exclude this business, our pro forma organic growth in the first quarter would have been 6%, while our pro forma adjusted operating margins would have been an even better 24% overall. We expect this change to improve our 2026 total company organic growth by approximately 100 basis points and enhance our operating margins by approximately 30 basis points. This move reflects the removal of a lower growth, lower margin business that has been a significant drag on our cash flow conversion over the last several years and was also consuming disproportionate management focus and capital resources. More importantly, this move further supports our long-range plan, which calls for 6% to 8% organic growth and double-digit EPS growth. As it pertains to our updated pro forma guidance for 2026, which now excludes the immunodiagnostics business in China, we are now looking for organic growth of 3% to 4%, adjusted operating margins of 28.4%, and adjusted earnings per share of $5.20 to $5.30, which includes a 20% reduction related to the planned divestiture, offset by $0.05 of benefit from improved operational execution throughout the year. This move will result in a more focused business with cleaner financial metrics that better reflects our core growth drivers. Turning to our end markets. We saw a modestly improved pharma and biotech spending environment in the first quarter, which led to positive low single-digit year-over-year organic growth from these customers. This was the strongest year-over-year growth we've had for reagents and instrument sales to this customer group since the first half of 2023. While customer behavior continues to remain somewhat measured as customers work through budget cycles, we are seeing early indicators that we believe should lead to future improvement. On the academic and government side, there have been some promising developments from a budget and policy perspective, which also bodes well as we look ahead. I'm encouraged by the positive mid-single-digit growth overall in the first quarter from our academic customers. And in the U.S., we also saw positive growth from these customers for the first time since the second quarter of 2023. So while we are pleased by the first quarter trends in this end market and recent policy developments, we remain mindful of the world we live in today and how quickly policies and regulations can change. Consequently, until we see a bit more consistent performance from both our pharma and academic customer bases, we plan to remain prudent with our forward-looking assumptions across each of these end markets. As it pertains to Diagnostics, we had a fantastic quarter within reproductive health as it grew in the low double digits organically overall. This was driven by a combination of continued success in our newborn screening business despite continued challenging global birth rate trends and a better-than-expected contribution from our Genomics England contract. Within immunodiagnostics, we saw challenging conditions in China as anticipated, while the business outside of China performed in line with our expectations. During the first quarter, we also continued to demonstrate strength in our ability to drive innovation, a consistent priority of ours. In our Signals software business, we introduced Xynthetica in December, our AI models as a service platform that serves as a secure marketplace, collecting computational capabilities to wet lab research. Last month, we introduced BioDesign, our cloud-native molecular design platform for biologics development. Upon its official launch at a major industry trade show next week, BioDesign will be the only cloud-based offering of its type, addressing a critical need for molecular biology teams developing the next generation of antibody cell and gene therapies. Then towards the end of this year, we'll introduce LabGistics, a novel AI-first drug discovery to drug development workflow offering, rounding out an impressive year of software innovation that demonstrates our ability to rapidly bring new capabilities to market. In our instruments business, we have been highlighting to you for several quarters that we have been seeing stronger demand for our high content screening portfolio, driven by increases in GLP-1 related research, new approach methodologies, including organ on chip development work and data generation for AI model creation and training, amongst other validation related work. Our launch earlier this year of our new flagship Opera Phenix OptIQ system will only further build on this momentum. The OptIQ's enhanced confocal imaging capabilities, advanced 3D cell analysis and automated phenotypic profiling aligned perfectly with current market trends focused on complex disease modeling and precision medicine research. This is another great example of one of our key product lines, which we believe will meaningfully benefit from increasing AI adoption by our customers in their preclinical R&D work. I think it is important to clearly address the transformational impact of artificial intelligence and life sciences research. AI is dramatically accelerating scientific discovery, enabling researchers to identify and design exponentially more therapeutic compounds and biological targets than ever before. This acceleration means more discoveries to validate and more insights to unlock through physical experimentation than ever before. To understand the opportunity, let me provide you an example to consider in where we believe we are in the AI adoption cycle. Today, we are in what would be called the infrastructure build-out phase, similar to the early days of the Internet, when companies were laying fiber optic cables and building foundational systems that would support the digital transformation. After that Internet infrastructure was established, we witnessed an explosion of value creation. Companies like Google, Amazon and Meta built entirely new business models that created fundamentally new ways of organizing information and commerce. AI in Life Sciences is following a similar trajectory. We expect our consumables, instruments and software to see significant increases in demand in the future. as they are utilized by our customers to create new insights at an accelerating rate in order to capitalize on the new capabilities that AI provides. Our offerings are used by our customers to actually uncover and translate the new data that the AI models and the infrastructure can then learn from. This value creation phase is only just beginning, and this is where the real opportunity lies for Revvity. Every AI-generated discovery will still require physical validation through wet lab experimentation. One cannot approve a drug based solely on computational predictions. It must be synthesized, tested, screened and validated through rigorous and laboratory work given that only a small fraction of human biology is well understood. We believe that as more compounds are designed and combined with new ways to develop and refine them, a continuous loop of innovation and improvement will be created. That is likely to result in a demand bottleneck in validation related work for our customers. As AI generates more promising therapeutic hypothesis at an unprecedented rate, the downstream demand for laboratory tools, reagents, and instruments to validate these discoveries will grow substantially. This inflection point sits squarely within Revvity's core strengths, providing the critical technologies that translate AI-driven insights into real-world biological validation. Looking ahead, I anticipate a third phase emerging after value creation, which is value capture. This is where our customers will begin realizing substantial returns on their AI investments through faster development time lines and higher success rates. These gains will incentivize even greater investments in research capabilities, creating a virtuous cycle that expands the entire market for scientific research tools. Beyond our external AI strategy, we are dramatically transforming our internal operations through AI adoption that I believe is quite differentiated and includes appropriately repositioning our employees and their roles. The well-known research from Gartner recently published a research paper highlighting our internal AI deployment, which stands out across the industries that they've researched. They noted how our structured approach has accelerated software delivery and enable impactful initiatives that previously would not have been feasible. With our unique rollout of multiple leading LLMs to the entirety of our global employee base, we are seeing employee adoption rates of AI well above corporate averages, and we are doing so at a fraction of the cost of traditional AI corporate implementations. We also continued to execute on our operational efficiency initiatives that we discussed on our fourth quarter call. Implementation is well underway and remains on pace to be fully completed around midyear, which will result in a greater impact on our financials starting in the second half of this year. These initiatives are a meaningful driver of the operating margin expansion we have communicated. Since the contributions from these actions will not anniversary until midyear next year, it positions us well for robust margin expansion in the first half of 2027 as well. Before turning the call over to Max, I want to make you aware and invite you to our Investor Day in New York City on Friday, November 13. This will be an excellent opportunity for us to showcase the progress we've made across our business and share our vision for where Revvity is heading in the future. Software will be a central theme of that discussion, and we are excited to provide much deeper insights into how our offerings in this space will enable long-term growth. I've never been more excited about the future potential of Revvity than I am right now. We are exceptionally well positioned in both the near and long term to lead the transformation of how preclinical research is performed, while delivering an outstanding opportunity for our shareholders as end market demand trends normalize. With that, I will now turn the call over to Max. Maxwell Krakowiak: Thanks, Prahlad, and good morning, everyone. As Prahlad highlighted, we started 2026 on a strong note as our first quarter organic growth, adjusted operating margin and adjusted earnings per share all came in ahead of our expectations, which sets us up well to achieve our full year expectations. Additionally, the plan we have announced to divest our immunodiagnostics business in China is an extremely important strategic decision for the future of the company as it allows us to continue to refine Revvity so that we can focus on the areas that we believe have the highest returns for our shareholders in the years to come. This is a bold decision and one that has a multitude of benefits for the company, including improved financial performance metrics and returns, streamlined operations and management focus and reduced future uncertainty from a market, which has been challenging over the last several years and will likely remain pressured over the medium term as the impact from policy changes continues to unfold. As Prahlad mentioned, we are actively working with a local management-led group and expect to reach a contractual agreement with them over the next few months with an expected closing of the transaction to occur by the end of next year as it will take them some time to receive the necessary regulatory approvals and to localize manufacturing. Going forward, our guidance and reported organic growth will exclude the financial impact of this planned divestiture. We have provided historical financials for 2025 in a supplement that is available on our Investor Relations website, which excludes this business so that you are able to understand what the future of Revvity looks like and how we plan to provide guidance and report our results going forward. For 2026, our plan to divest this business would result in the reduction of approximately 4.5% of our previously expected revenue. When combined with FX, which we now only expect to contribute approximately 50 basis points to our revenue growth, down from our previous 100 basis point expectation, these 2 factors represent the entirety of change and our updated 2026 total revenue outlook, which now calls for $2.81 billion to $2.84 billion in total revenue this year. We anticipate this planned divestiture will also positively impact our organic growth by approximately 100 basis points this year while also positively impacting our organic growth rate in the years to come. For 2026, we are now estimating 3% to 4% organic growth overall, which excludes the impact and contribution of the China Immunodiagnostics business. We also expect this change to positively impact our adjusted operating margins, leading to our adjusted operating margins this year now expected to be approximately 28.4%, up 40 basis points from our prior outlook. Finally, by excluding the financial impact of this business from our outlook, we also anticipate a net reduction of our expected adjusted EPS this year of approximately $0.15, resulting in a new EPS outlook for this year of $5.20 to $5.30. Another important benefit from this action is a dramatic further expected improvement in our cash flow conversion. For example, in fiscal year 2025, when excluding this business in China, our free cash flow conversion of our adjusted net income would have been approximately 300 basis points higher than the already solid 87% conversion we had reported. With these changes, I am confident that we are well positioned to be in an even stronger position to deliver accelerated top and bottom line growth in the future. Now turning to the specifics of our first quarter performance. All of the figures I'm about to provide are on a total company basis and the same format that we provided guidance on -- during our fourth quarter earnings call, which includes our immunodiagnostics business in China. I will then separately provide an update on a pro forma basis, demonstrating what our performance looked like when excluding the China Immunodiagnostics business that we plan to divest. Overall, the company generated revenue of $711 million in the quarter, resulting in 3% organic growth with an approximate 3% tailwind from FX. We also had a 75 basis point incremental contribution from ACD/Labs, our recent software acquisition. As it relates to our P&L, despite known headwinds from FX, having an extra week this fiscal quarter, tariffs and the timing of our cost efficiency initiatives, we exceeded our expectations for the quarter by generating 23.6% adjusted operating margins. Looking below the line, our adjusted net interest and other expenses were $23 million in the quarter, and our adjusted tax rate was 18.3%, both in line with our expectations. We repurchased another $86 million of our shares in the first quarter, resulting in an average of 111.9 million diluted shares in the quarter. Our adjusted EPS in the quarter was $1.06, which exceeded the high end of our expectations due to the revenue and margin upside. Moving beyond the P&L. We generated free cash flow of $115 million in the quarter, resulting in a robust 97% conversion of our adjusted net income. Our balance sheet remains strong as we finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.8x, with 100% of our debt being fixed rate with a weighted average interest rate of 2.6% and weighted average maturity out another 6 years. As we evaluate capital deployment, we still plan to pay off the roughly [ $600 million ] we have outstanding on Eurobond, which is coming due in mid-July, which will leave us with a gross leverage of below 3x as we exit the year. I will now provide some commentary on our first quarter business trends, which are also highlighted in the quarterly slide presentation on our Investor Relations website. Again, these results include our immunodiagnostics business in China and are comparable to the guidance we provided 90 days ago. The 3% growth in total company organic revenue in the quarter was comprised of 3% growth in our Life Sciences segment and 4% growth in Diagnostics. Geographically, organic growth declined in the mid-single digits in APAC, with China being down double digits overall due to diagnostic pressures, grew in the low single digits in the Americas and continued to grow double digits in Europe. From a segment perspective, Life Sciences generated revenue of $362 million in the quarter. This was up 6% on a reported basis and 3% on an organic basis. From a customer perspective, sales in the pharma/biotech grew in the low single digits in the quarter, while sales in the academic and government grew in the mid-single digits in the quarter. From a business perspective, Life Science Solutions grew in the low single digits organically in the quarter with low single-digit growth in reagents and mid-single-digit growth in instrumentation. Our Signal software business grew in the mid-single digits in line with our expectations. As it pertains to some of the software industry specific metrics, our SaaS pipeline continues to grow robustly with 40% ARR growth year-over-year leading to the business, again, growing double digits from an APV perspective. In our Diagnostics segment, we generated $349 million of revenue in the quarter, which was up 8% on a reported basis and 4% on an organic basis. From a business perspective, our immunodiagnostics business declined in the low single digits organically in the quarter, which was in line with our expectations. Our performance was strong outside of China but was offset overall by meaningful declines in China as anticipated. Our reproductive health business had a great quarter and grew double digits organically with broad-based strength across the portfolio, including in newborn screening, which grew low double digits in the quarter. Reproductive health also benefited from an increasing contribution from our work with Genomics England, as sample volumes from this project are now running slightly ahead of our initial expectations. I now also want to give you some perspective of what our first quarter performance looked like on a pro forma basis, which excludes our immunodiagnostics business in China that we plan to divest as this is how we will be providing guidance and reporting our results going forward. Overall, on a pro forma basis, we generated total revenue of $687 million in the quarter. This equates to pro forma organic growth of 6%. While there is no impact from this change on the 3% growth in our Life Sciences segment, on a pro forma basis, our Diagnostics business grew 9% organically in the first quarter. There is no impact to our reproductive health performance, but our immunodiagnostics business grew in the mid-single digits on a pro forma basis. Moving to the P&L. Our pro forma adjusted operating margins were 24% and our adjusted pro forma EPS would have been $1.04. Now moving to our updated guidance for the year. Our updated guidance is on a pro forma basis as it excludes the business we are planning to divest as this is the most appropriate view of what the company and its performance will look like going forward. As Prahlad discussed, we were pleased with our first quarter performance and believe key end markets may be starting to show signs of moving in the right direction, though we want to remain prudent in our outlook until we see more sustainable signs of concrete improvement. With this backdrop, we are now expecting our pro forma organic growth this year to be in the 3% to 4% range. FX is now expected to positively contribute approximately 50 basis points to growth, while we still expect the ACD/Labs acquisition to add approximately 75 basis points to our revenue growth this year. We expect this all to result in our 2026 pro forma total revenue to be in a range of $2.81 billion to $2.84 billion overall. We performed well from a margin standpoint in Q1, and our cost efficiency programs are in flight and progressing as planned. Consequently, we now expect our pro forma adjusted operating margins this year to be 28.4% with 30 of the 40 basis points of the improvement versus our prior guidance reflecting the impact of excluding the business in China that we plan to divest. Our outlook for net interest expense and other is now approximately $90 million and we continue to anticipate our adjusted tax rate for the full year will be approximately 18%. We also still expect our diluted average share count to continue to be approximately 112 million. This all results in us expecting that our pro forma adjusted earnings per share will now be in the range of $5.20 to $5.30. For the second quarter, we expect our pro forma organic growth to be in the 2% to 3% range, which is an improvement from our prior assumption as it no longer includes the immunodiagnostics business in China. Assuming FX rates as of the end of March and the incremental contribution from the ACD/Labs acquisition, this puts our expected total pro forma revenue for the second quarter in the range of $699 million to $707 million. We continue to expect an improvement in our margins as we progress throughout the year and anticipate them being approximately 27% in the second quarter on a pro forma basis. With net interest and other expected to be similar to the first quarter and an assumed 19% tax rate, this should all result in our pro forma adjusted EPS in the second quarter being approximately 23% of our updated full year pro forma outlook. Overall, we had a good first quarter to start the year and are on track for our full year expectations. Our decision to divest our immunodiagnostics business in China is the right one for our company and will benefit our performance going forward while removing a business that required a disproportionate amount of internal and external focus, as well as requiring near-term capital investment for what have become an increasingly small contributor to our overall company. I'm extremely excited about the direction in which Revvity is headed, and I look forward to sharing more with you in person at our Investor Day in November. With that, operator, we would now like to open up the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Patrick Donnelly with Citi. Patrick Donnelly: Prahlad, maybe on the software SaaS piece, helpful to get some data there. Can you just talk about the recent conversations with customers? I know you talked a lot about your offering with all the focus on that business. Would be curious just the recent trends. And then Max, on that business, I know there's some comp dynamics. So if you'd be able to talk through just the cadence of the software as we work our way through the year would be helpful. Prahlad Singh: Sure, Patrick. On the software side, as we've talked about both -- you heard in the prepared remarks and even during some of the investor conferences, the excitement and the engagement with our customers continued to remain high. We announced the Lilly TuneLab partnership, which is a great launch path for Xynthetica, leveraging the ecosystem that Lilly brings to the table. But more importantly, I think as we talk to our big pharma biotech customers, the question really is not really how AI is going to impact, but how are we going to leverage AI in the development of the software into bringing Xynthetica early on. As Signals continues to be on the plan of record, the excitement level around Xynthetica, BioDesign, LabGistics, as you know, these are 3 of the biggest launches that could have happened in the software business, and all of them are coming in this year. So the engagement level and excitement level continues to remain very high for that business. Maxwell Krakowiak: Yes. And then, Patrick, on the OG cadence piece, I think a couple of things to mention. First, I would say, as you look at our software business, organic growth is not always the best measure to look at the performance of this business. As we mentioned, we always quote the APV, which sort of normalizes for [ rev rec ] and that again was strong double digits in the first quarter here and a trend that we expect will continue and has been playing out over the past couple of years, especially as we bring a lot of these new products to market. It was also encouraging in the first quarter, we continue to see robust growth from a SaaS and ARR perspective, and that was north of 30% in the quarter. And then I think when you look at it from an organic growth standpoint, for the full year for this business, we are calling for positive mid-single digits organic growth. If you look at the cadence over the course of the year, it was positive mid-single here in the first quarter. In the second quarter, we do have tougher comps. And so we expect that business to be down approximately 20% in the second quarter. However, those comps ease in the second half of the year and for the second half of the year for this business, we expect it to grow in the high teens. That's how I think about it from a cadence perspective. Patrick Donnelly: Okay. Okay. That's helpful. And then maybe just on the reagents business, it sounds like that was improving a little bit, Prahlad. Can you talk about -- it sounds like ac and gov got a little bit better. Are you seeing the recent biotech funding start to show up a little bit? What do those conversations look like? Would love just some more color on the reagents business and how you're feeling there. Prahlad Singh: Yes, Patrick. I would say that I would characterize it as positively stable. We experienced better performance from this customer segment in the first quarter as our revenue was up positive mid-single digit. There might -- there has been in this market a continuation of soft trend last year, but we are definitely starting to see signs of improvement, both around the instrument and on the reagent side. And as we continue to see this uptick in the reagent behavior from our customers, it will build on the optimism that we are starting to see in this end market. Operator: Your next question comes from the line of Puneet Souda with Leerink. Puneet Souda: First one, actually, both of them high-level questions, I would say, on the portfolio side, you've obviously taken important steps early, and this appears to be another important step for -- on the China DX side. Does this change your appetite for further M&A and capital deployment in the space? I mean I appreciate the deal hasn't closed yet. But when we look at the broader tools, multiples, they took a step down further after a larger peer recently reported, but you guys are clearly showing stronger momentum versus that peer. Prahlad Singh: Yes, Puneet. I think this is the journey that we have taken in the portfolio transformation. We are starting to see the differentiation in our performance was on the end markets versus our peers. This was the intent and the idea of setting up what we have today. If you look at our performance, especially in pharma/biotech and in academia, we are diverging from the peer group in terms of what we are seeing in growth. But the journey doesn't get over. Obviously, with the China divestiture, it is a challenging and uncertain end market environment there, particularly in Diagnostics. And this was a strategic direction to address that. It brings us back to what I would say our China business would be 8% to 9% of our total revenue, of which 7% is now in Life Sciences, which is a strong growth market there, and about 1% to 1.5% is reproductive health, which we've already localized. So we feel very good with the way we have set up the portfolio. In terms of capital deployment, we'll continue to be an acquisitive company. But when we look at our share buyback performance, if you see what we've done over the last year, we'll continue to be aggressive and opportunistic on the stock buyback, too. So we have enough avenues to deploy capital in both ways. Puneet Souda: Got it. Super helpful. And then on the software side, great to see the progress. But just wanted to understand a bit more about the AI corporate implementation. What are some of the steps there that you're taking that could yield sort of an immediate or near-term result? And how are you thinking about margin uplift from that this year? Prahlad Singh: Yes, Puneet, some of this I addressed in my prepared remarks. From an internal operations perspective, the AI adoption, I would say, is going very well and is quite differentiated. I referred to the Gartner research paper that was recently published that sort of laid out what we are doing in that. We've tried to use a much more structured approach and we are starting to see the benefits of it primarily around the software development component. It is enabling initiatives in the company. We are rolling out multiple leading LLMs to our total employee global -- global employee base. And the adoption rate is well above what we are seeing in terms of peers' metrics out there from corporate averages perspective. But I think most importantly, we are doing this at a fraction of a cost that you would see from traditional AI corporate implementation. So we feel really good about it. And the feedback that we are getting from an employee -- our employee base in terms of productivity and efficiency initiatives. And in the mid- to longer term, the cost-out impact that it will have on the business will be remarkable. Operator: Your next question comes from the line of Dan Brennan with TD Cowen. Daniel Brennan: Maybe just starting on the quarter for reproductive health. Can you just unpack a little bit the strength there? You mentioned GEL strength in the quarter, you're running samples. So just kind of what's now incorporated for the full year for GEL? And just speak also on the ex-GEL reproductive health for the full year. Maxwell Krakowiak: Yes, I'd say from a reproductive health perspective, it was a very strong quarter. It grew double digits versus our expectation of high single digits. And I think when you look at the drivers of it, it was really a multitude of factors. One, we did just have stronger underlying performance from a reagents perspective but also benefited from some additional instrument placements, which will bode well for us in the years to come? And then secondly, GEL, the Genomics England partnership was a little bit stronger than what we had anticipated. I think just to answer your question on what that looks like for the rest of the full year, there's been really no change in our assumption to contributing about $20 million for us in the first year, obviously, for this year. First quarter was obviously a little bit stronger than we had anticipated, but we'll see how the rest of the quarters play out from a sample volume perspective. But just stepping back, I would say, on reproductive health, it continues to be a really strong business for us. And I think when you look at even with the challenging birth rate environments, the performance, not only in the first quarter, but over the past several years has well outpaced that and has been growing above its LRP. That's really due to the fact of, I would say, the execution of our commercial pillars where there's still 100 million babies born every year that don't get any level of testing. There continues to be differing levels of testing menus across different geographies and countries around the globe. And we continue to come out with new assays where we can test for different rare diseases. And so that business continues to have, I would say, a lot of Revvity specific tailwinds that should allow us to well exceed whatever happens from a birth rate perspective. Daniel Brennan: Great. And then maybe as a follow-up, just on the ImmunoDx business in China. Just can you speak to a little bit of like the deal itself? I mean you're kind of pulling this business out of your guide, but the deal hasn't closed yet? Like what kind of protection do you have, certainty of closing, things like that, if you could. Maxwell Krakowiak: Yes. Look, I think as we mentioned in the prepared remarks, we have engaged in a letter of intent to divest our immunodiagnostics business in China. We expect definitive agreements to be completed here within the second quarter. So I do think we have a high degree of confidence in our ability to get this done. It is being led by an internal management group as part of the buying consortium. And so obviously, we've got a lot of strong coordination there and communication. And I think we are confident in our ability to get this deal closed in 2027. Operator: Your next question comes from the line of Vijay Kumar with Evercore ISI. Unknown Analyst: Maybe Prahlad, on your Q1 pro forma organic of 6%. That came in quite nicely, excluding China, was certainly well above expectations. But when you look at the annual guide, pro forma 2 to 4 implies I think a step down to 3% for the remainder of the year. Why -- your comps don't necessarily get harder, right? So maybe talk about why the 6% slows down. Was there anything one-off in Q1? Anything that stood out? Maxwell Krakowiak: Vijay, thanks for the question. Yes, I think as you -- maybe just speaking holistically on our 2026 organic growth guidance and the cadence over the course of the year, so the way I would think about it is with our updated guidance, we're now calling for, again, 3% to 4% for the year. And with that's doing about 6% here in the first quarter on a pro forma basis and a guidance in the second quarter of 2% to 3%, we essentially are averaging about 4% in the first half of the year. So then if you look what's required for us to hit our 3% to 4% organic growth for the full year, that would imply about a 3% to 4% growth in the back half of the year. I think when you look at our assumptions, I would say for 2 of our business units for Life Science Solutions and Diagnostics, we do have conservative assumed in the back half of the year versus the trends we're seeing for the first half. I already talked about the software cadence as a result of Patrick's question. But I do look -- expect us to have, I would say, a strong performance here in the first half of the year and continued trends on that in the second half. And should markets maintain or, if not, even improve, we would expect to see potential opportunity for upside versus our current organic growth guidance of 3% to 4%. Unknown Analyst: Understood. And maybe one more sort of guidance-related questions, Max. Organic was raised by 100 basis points, EPS came down by $0.15. So one, is the organic raise, is that all driven by removal of China Immunodiagnostics or did base go up? And on EPS, does it include any contribution from proceeds, from sale proceeds? Maxwell Krakowiak: Yes. So on the organic growth, the only change of that 100 basis points was a result from the removal of the China Immunodiagnostics business. So you're correct in that. Secondly, as you look at the EPS for 2026, it does not include any benefit from proceeds, as we mentioned in the prepared remarks, the deal won't close to 2027, which is when we would expect to see the proceeds. Operator: Your next question comes from the line of Mike Ryskin with Bank of America. Michael Ryskin: Great. Let me just pick up exactly where you left it with Vijay there on impact of the divestment in the model and how to think about it going forward. So you talked through the bridge for this year. I want to dig a little bit into the future years. So I mean, I realize you haven't even announced the deal yet, so hard to talk about cash incoming proceeds, use of proceeds, anything like that. But just any high-level thoughts on how we should think about dilution in future years? You've got $0.20 impact this year. But what about future years? And the same thing on the margins and on the top line, it's 100 bps uplift this year. I think it's -- you said it's 30 bps impact to margins. Is that -- should that relatively flow through the future years as well? Or any other moving pieces to think about in the out years for adjusting the model for this? And I got a follow-up. Prahlad Singh: Yes, Mike, let me start by addressing it at the higher strategic level, right, and then Max will give you more color. This definitely further fortifies our LRP. Let me start with that, right? This was one of the overhangs, and we were over-indexed on China, especially in the end market around Diagnostics, which was in a challenging market environment. That takes away that overhang, it further fortifies our LRP. More importantly, I think from the question around what we would do with the proceeds, share buyback is a great opportunity to leverage the proceeds that we would get. And from an EPS impact perspective, the cost efficiency initiatives that we are putting that will be fully implemented starting in the second half of this year will also go a long way in offsetting the earnings-related dilution as we move into the next year. And we'll continue to see the impact from their impact throughout the first half of next year and 2027. Max? Maxwell Krakowiak: Yes, I think that's right. I mean maybe the only other color I would add is in terms of the operating margin adjustment. That is going to be a permanent change. The pro forma results are meant to represent what our business would look like excluding this business. And as a result, we're calling for 28.4%. So that is sort of I would think the new baseline exiting this year, Mike. Just to add that point on. Michael Ryskin: Okay. And then I want to dig in on 2Q a little bit as well. I think you're guiding for 2% to 3%. You previously talked to flat, give or take. Obviously, the changes in China. So I want to dig into that. Did anything change ex-China, if maybe you could give us that bridge? I think one point you called out, I think with Patrick's question was you said you expect software to decline 20% in the second quarter now. I think previously you talked down mid-teens. So can you just talk about the moving pieces in the 2Q guide? Maxwell Krakowiak: Yes. Thanks, Mike. I would say on its surface for the second quarter, the biggest change is really the removal of the China IDX business. And so again, we're calling 2% to 3% organic growth here. I mean some things might have moved around on the edges, but I would say fundamentally, the underlying business, assumptions more or less remain the same. . And just to provide a little bit of color on what those splits look like. So if you look at the 2% to 3% overall organic growth for the company in the second quarter, Life Sciences, we expect to be sort of roughly flattish with Life Science Solutions, which again, comprises our reagents and platforms business growing in the low single digits in the second quarter. And then software, we have down, as I mentioned, about 20% expectations for the second quarter. And conversely, if you look on the Diagnostics side of things, we expect Diagnostics to be up mid- to high single digits in the period with relatively similar results across immunodiagnostics and reproductive health. Operator: Our next question comes from the line of Tycho Peterson with Jefferies. Tycho Peterson: I want to dig in a little bit more on biopharma. Some of the signals you're seeing, you talked about working through budgets. When do you think you're really going to see a turn here? Maybe just unpack what it is you're seeing? Is it instrument demand, just more discussions, funnel activity? And I think there's also been a view that spending on upstream is going to go up to train the model. So how do you think about that kind of layering in over the next couple of years? Prahlad Singh: Yes, Tycho. I mean if you look on the instrument side and on the reagent side, we already started seeing modest improvements in the fourth quarter from these customers, which has continued into the first part of 2026. Our Life Sciences Solutions were up low single digit from pharma/biotech in Q1, which was the strongest core growth we've seen on both instruments and platform from these businesses from this customer group since the second quarter of 2023. Low single digit is obviously not where we want to be, but it appears to be slowly moving in the right direction. And I think that is more important that this is coming back to what normal should look like. We would like to obviously continue to see even greater pickup in the reagents before we can say things are on a clear path to improvement. But I'm optimistic that these customers are now starting to move on the right path. Tycho Peterson: Okay. And then for the follow-up, just on operating margins. Max, can you maybe just talk about some of the gives and takes in the quarter, cost inflation, incremental spending? And then maybe get us comfortable with the bridge from where you are now to 28.4% target? Maxwell Krakowiak: Yes, sure. Look, I think as you look at the first quarter results, obviously, we are encouraged by the margin performance on a pro forma basis. We finished at 24%, which is about 40 basis points above what we had in our underlying assumptions going into the quarter. I would say, that was really driven by the strong incrementals we got on the additional volume that we had in the period. Again, we were slightly above the higher end of our expectations. And so that flew through at about 45% incrementals, which is really where the beat in the first quarter came from. I think as you look over the cadence of the rest of the year from an operating margin standpoint, we will see an improvement here from the first quarter to the second quarter, going from 24% to 27% on a pro forma basis. That step-up between Q1 and Q2 is really driven by half from not having the extra week and a little bit of FX benefit. And the other half is just from the incremental revenue as you do get a seasonal pickup from Q1 to Q2. I think then when you look between the jump of 2Q to 3Q, we do expect our margins to go up about from 27% in the second quarter to 29% in the third quarter. That step-up is really driven by the cost productivity initiatives that we've put into place. We've talked about those being completed by the end of the second quarter. We're still on track to drive those costs out on that time line. And I think when you look at some of the dynamics of it, again, the majority of this is really head count driven by us driving further integrations, additional -- new centers of excellence, and just a general sort of delayering of management and layers across the organization. And there's about 1/4 of it that's from sort of non-labor operational initiatives, whether that be around footprint consolidation, sourcing, whether it be in-sourcing, renegotiating with vendors, freight optimization. And so I think we're really starting to see a lot of the revenue business model on our playbook come through here. We have a high degree of confidence in our ability to execute on those cost initiatives. On the last leg of this is then from 3Q to 4Q, again, I would encourage you to remember that we do have a seasonal step up between 3Q and 4Q from a volume perspective. And really, all you're seeing there from the margin step-up is really just a matter of that incremental volume leverage from the seasonal revenue increase. Operator: Your final question comes from the line of Catherine Schulte with Baird. Catherine Ramsey: I know we're sitting here in May, so we shouldn't be talking about '27, but you did bring it up regarding the robust margin expansion that we could see. So just hoping we could unpack your comments a bit more just to frame the opportunity there? Maybe how should we think about the margin jumping off point for next year, just given the cost initiatives that you have underway? Maxwell Krakowiak: Catherine, yes, I appreciate your caveat there upfront, too, that we are in May '26 here and aren't giving any guidance for 2027. But I think as you look at things from an operating margin standpoint, what I'd encourage you to think about is if we're talking about the cost actions being completed by the end of the second quarter, it's giving the benefit in the second half, that will mean that we will get the annualization benefit of that in the first half of '27. And so again, we're not providing formal guidance, but yes, there should be an additional catch-up from a margin perspective in the first half of '27 once we exit this year. Catherine Ramsey: And then maybe just back to Puneet's question on capital deployment. Are there other parts of the portfolio you think could be pruned? And then from an M&A standpoint, what are your priorities here? Should we just stick back tuck-ins going forward? Or would you be open to larger deals as well? Prahlad Singh: Yes, Catherine. I mean, if you look at our track record, we continue to be acquisitive and we will continue to be acquisitive to ensure that if there are any gaps in the portfolio, we fill. We don't see anything that is really compelling either from an opportunity perspective that might be large in scale. You might see some tuck-ins here and there. But really, the biggest opportunity for us continues to be the share buyback. Right now, we will continue to be opportunistic on that element. But we have a fertile pipeline on the M&A side, and we look at opportunities on both sides. Operator: There are no further questions at this time. I will now turn the call back to Steve for closing remarks. Stephen Willoughby: Thank you, Nicole, and thank you, everyone, for your time this morning. I know it's a busy day, but we look forward to touching base with you later today and over the next few weeks. Have a good day.
Operator: Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ann Giancristoforo, VP of Investor Relations. You may begin. Ann Giancristoforo: Good morning, and thank you for joining us for DuPont's First Quarter 2026 Financial Results Conference Call. Joining me today are Lori Koch, Chief Executive Officer; and Antonella Franzen, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on DuPont's website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports, includes detailed discussions of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today are on a continuing operations basis and exclude significant items. We will also refer to other non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measure is included in our press release and presentation materials and has been posted to DuPont's Investor Relations website. I'll now turn the call over to Lori, who will begin on Slide 3. Lori Koch: Good morning, and thanks, everyone, for joining our call. Earlier today, we reported our first quarter financial results, which exceeded our previously communicated guidance. Through disciplined commercial and operational execution, we delivered organic sales growth of 2%, 130 basis points of pro forma margin expansion and double-digit adjusted EPS growth. Free cash flow generation and conversion were solid in the quarter. As a result of our first quarter performance, along with price increases due to the Middle East conflict, we are raising our full year 2026 financial guidance. Antonella will provide further details shortly. We also announced that we expect to launch a $275 million accelerated share repurchase under our existing program. A clear example of how we continue to advance our strategic priority of driving disciplined capital allocation by returning cash to shareholders. On the next slide, I will cover the progress we are making on driving growth and continuous improvement. We completed the previously announced divestiture of the Aramids business on April 1. We are confident in [indiscernible] ability to continue to drive growth and opportunity for the employees and customers of the combined businesses. We also recently issued our 2026 sustainability report and announced our new 2035 sustainability goals. The progress we made in 2025 highlights the power of our innovation engine, creating sustainably advanced solutions that help our customers succeed. We continue to reduce our environmental footprint and increase the use of renewable energy sources across our operations while maintaining a strong focus on execution and discipline. Safety and culture continue to differentiate DuPont with record safety performance and high employee engagement reinforcing the connection between what we do every day and the value we create for our customers. Our 2035 goals reinforce our commitment to delivering value by embedding sustainability directly into our business strategy. These goals focus on 3 impact areas. Sustainable innovation, resilient operations and people, partners and communities. They are designed to drive growth through innovation, operational excellence and accountability across our value chain while also advancing progress in areas such as climate action, circularity, safety and responsible sourcing. Moving to Slide 4. We continue to advance our strategic priorities and are seeing direct impacts from the implementation of our business system. We strengthened our performance-based culture with a clear emphasis on growth and continuous improvement, reinforced by the launch of our refreshed core value. This is enabling greater consistency across the businesses as we drive excellence in innovation, commercial execution and operations. Starting with innovation. It remains at the core of our value proposition. Our 2025 [ Vitality ] Index was 35% above the benchmark we previously outlined reflecting the strength and relevance of our product portfolio. During the quarter, we delivered a steady cadence of new product introductions and customer wins across health care, water and diversified industrial end markets. Recent launches include upgraded FILMTEC nanofiltration elements designed to help municipalities and drinking water utilities produce high-quality water with lower energy consumption and reduced operating costs. These innovations are being enabled not only by strong R&D execution but also by continuing investments in digital and AI capabilities. Last week, we announced that we are collaborating with [indiscernible] an AI-driven platform for end-to-end product and application development, focused on accelerating development, improving cycle times and sharpening how we translate ideas into differentiated solutions for customers. This collaboration streamlines and accelerates the work we have been doing on connected lab infrastructure and digital innovation. From a commercial standpoint, we are making steady progress in demand generation and pipeline discipline. Across the businesses, we are advancing targeted sales leads that bring together our technologies and application expertise to address specific end markets where we see attractive growth and differentiated value. We continue to standardize how opportunities are identified, reviewed and advanced, supported by a clear cadence, better data quality and stronger collaboration between commercial, technical and operations team. These efforts are driving better visibility, improved conversion and stronger alignment between our commercial team and customers' highest value needs, improving the quality and durability of our pipeline. On operational excellence, our teams remain intensely focused on the fundamentals. Safety, quality, delivery, inventory and productivity. During the quarter, we delivered meaningful improvements in asset reliability and equipment effectiveness across our key facilities, which supported better on-time delivery and stronger operational throughput. At the same time, we continue to drive productivity through focused maintenance and reliability initiatives, main execution and Kaizen activity across our sites. I am personally excited as we recently kicked off our annual CEO Kaizen event, in which myself and the executive leadership team will each participate in events focus on strengthening our value creation processes across the company. We are also advancing how we operate by pairing process discipline with digital and AI capabilities. Over the last several quarters, we have expanded the use of data-enabled tools to improve maintenance, planning, accelerate defect detection and optimize asset performance. These capabilities are allowing our teams to convert operational data into actionable insights faster, improving reliability, reducing variability and reinforcing safe operations, all while delivering cost and productivity benefits. Importantly, this operational rigor positions us well as we navigate a dynamic external environment. While we are mindful of potential macro and geopolitical headwinds, our focus on productivity, automation, and structural improvement is creating resilience in the businesses. We are building a strong pipeline of Kaizen events and improvement projects for the balance of the year aimed at sustaining momentum in growth and productivity. Our first quarter results demonstrate that we are off to a great start. Our April sales were in line with our expectations, and we continue to see strong order growth trends across the majority of our businesses. Our teams continue to focus on driving growth and operational discipline and our strategic priorities position us well for long-term value creation. With that, I'll now turn the call over to Antonella to cover the financials and outlook in more detail. Antonella Franzen: Thanks, Lori, and good morning, everyone. The first quarter marked a strong operational start to the year, with results exceeding our financial guidance. Favorable top line mix and effective productivity actions drove strong operating EBITDA performance and meaningful margin expansion in the quarter. Throughout today's call, I will provide comments on our results against our prior year reported financials, as well as on a pro forma basis, which adjusts for our post-separation corporate costs, interest expense and income tax rate. This is consistent with the methodology and financial metrics that we provided at our 2025 Investor Day. Beginning with our first quarter financial highlights on Slide 5. Net sales of $1.7 billion were up 4% versus the year ago period on 2% organic sales growth and a 2% benefit from currency. Organic sales growth was led by strength in health care and aerospace, partially offset by continued softness in construction markets and logistics disruptions due to the conflict in the Middle East. These disruptions primarily impacted sales in our water business in the quarter. From a segment view, during the quarter, organic sales grew 3% in Health Care & Water Technologies with organic sales growth about flat in Diversified Industrials. First quarter operating EBITDA of $414 million increased 15% versus the year ago period on organic sales growth, favorable mix and productivity. This resulted in operating EBITDA margin of 24.6% in the quarter, an increase of 230 basis points year-over-year. On a pro forma basis, operating EBITDA increased 10%, with margins expanding 130 basis points year-over-year. Turning to cash flow. We delivered transaction-adjusted free cash flow of $147 million and related conversion of 65%, a solid start to the year. Turning to Slide 6. On a reported basis, adjusted EPS for the quarter of $0.55 increased 53% year-over-year. On a pro forma basis, adjusted EPS for the quarter was up 20% versus the year ago period. The increase was primarily driven by higher segment earnings of $0.06 with an additional $0.03 benefit coming from a lower tax rate, share count and exchange gains and losses. Turning to Slide 7. Healthcare & Water Technologies first quarter net sales of $806 million were up 6% versus the year ago period on 3% organic growth and a 3% benefit from currency. For the first quarter, health care sales were up high single digits percent on an organic basis versus the year ago period. Organic growth was broad-based, led by continued strength in medical packaging and biopharma. Broader sales were down low to mid-single digits percent on an organic basis as strength in industrial water and microelectronics markets were more than offset by logistics disruptions in the Middle East. Operating EBITDA for the segment during the quarter of $244 million was up 9% versus the year ago period on organic growth, favorable mix and productivity gains. This resulted in operating EBITDA margin of 30.3% in the quarter, an increase of 110 basis points year-over-year. Turning to Diversified Industrials on Slide 8. First quarter net sales of $875 million increased 3% versus the year ago period on a 3% benefit from currency. Organic sales growth was about flat in the quarter. At the line of business level, organic sales for building technologies were down low single digits percent on continued weakness in construction markets. Industrial technologies organic sales were up low single-digits percent as continued strength in aerospace and growth in automotive were partially offset by declines in the printing and packaging businesses. Operating EBITDA for Diversified Industrials of $200 million was up 8% versus the year ago period on favorable mix and productivity. Operating EBITDA margin during the quarter was 22.9%, expanding 110 basis points versus the year ago period. Turning to Slide 9. We are raising our full year 2026 financial guidance, given our strong start to the year as well as now including the interest income benefit from the Aramids transaction. For the second quarter, we estimate net sales of about $1.8 billion, operating EBITDA of about $430 million and adjusted EPS of $0.59 per share. Our second quarter net sales guidance assumes about 3% organic growth year-over-year. Currency is expected to be a slight tailwind in the quarter. For the Healthcare & Water segment, we expect second quarter organic sales growth in the mid-single digits percent range, led by strength in medical device, biopharma and industrial water markets. For the Diversified Industrial segment, we expect second quarter organic sales growth in the low single digits percent range on continued strength in aerospace and growth in printing and packaging, partially offset by continued softness in construction markets. For the first half, our estimated net sales of about $3.5 billion assumes growth of about 4% year-over-year. This translates into operating EBITDA of about $844 million, a year-over-year increase of about 8% on a reported basis and 7% on a pro forma basis, resulting in strong operating leverage and an incremental margin greater than 40%. Our first half net sales and operating EBITDA guidance, both represent approximately 48% of our total expected full year results at the midpoint. This is in line with our historical sales and earnings cadence. For the full year 2026 at the midpoint, we now expect net sales of about $7.185 billion, a net increase of $80 million versus our prior guide. Our full year net sales guidance now assumes about 4% organic growth, including about 1% from pricing actions taken to fully offset higher input costs due to the Middle East conflict. A stronger U.S. dollar has also reduced our expected full year currency benefit to less than 1%. Operating EBITDA at the midpoint is now expected to be about $1.745 billion, primarily reflecting our stronger first quarter results partially offset by currency headwinds. Our adjusted EPS range is now expected to be $2.35 to $2.40 per share, a $0.10 increase versus our prior guidance. Our EPS guidance now includes benefits from higher interest income due to the Aramids transaction as well as a lower tax rate which we now expect to be in the 24% to 25% range. At the midpoint, our adjusted EPS is about a 40% increase on a reported basis, and a 15% increase on a pro forma basis. With that, we are pleased to take your questions, and let me turn it back to the operator to open the Q&A. Operator: [Operator Instructions] Your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Congrats on second kind of clean quarter in a row, numbers look pretty good overall. But a couple of kind of big picture questions. I mean you guys have been implementing 80/20. Where are we in that process? And what kind of impact has that had on your top line? Lori Koch: Yes. So we are well into the process within the Diversified Industrials portfolio. So we selected 4 businesses to start, and we're about 2/3 through the initial study. We didn't have any impact in the full year guide on either top line or margin with respect to any implementation, but we would expect over time to see nice margin appreciation with minimal top line impact as we look to improve the margin profile of the businesses and scope. Scott Davis: Okay. Fair enough. And then -- well, I'm going to move on to stranded costs. Where are we with stranded costs in the quarter and for the year. I can't recall what you expected? . Antonella Franzen: Yes. So Scott, we had estimated overall. There's about $30 million of stranded costs, which we committed to taking out within the first 2 years. So this year, we'll have a nice start on that. So for the full year, we'll have approximately like $10 million out from a run rate basis, we'll be actually halfway there. So I would tell you, we're right on cadence with where we expect to be. And again, we expect to have that out in the first 2 years. Operator: Your next question comes from the line of John McNulty with BMO Capital Markets. John McNulty: So I wanted to dig into the water business a little bit more. And especially just given some of the headwinds that you're seeing around the Middle East logistics. I guess a couple of things on it. Can you help us to think about the cost of navigating around some of these issues. Can you speak to also the customer base? And if there's been any -- I know there's been some [indiscernible] impact in the region. I guess any of your customers that may not be coming up, say, when things resume or the strait reopens, et cetera. Can you just help us to think about that? Lori Koch: Yes, thank you. So in the quarter, we had about $10 million of sales that weren't able to ship out of the Middle East. And so if you look at the results for water, we were down kind of low to mid-single digits. If you isolate out that impact of $10 million, we would have been about flat to slightly down. Those materials have already shipped in April, and so we continue to be on track with respect to our Q2 expectations. We didn't bake in a ton of disruption in Q2 with respect to the Middle East for the water business. We will, on a full year basis, continue to expect to be up mid-single digits for water. It's about flat in the first half and then up in the second half, really driven by the timing of some large projects. And so large projects last year were the reverse of this year where they were stronger in the first half in the second half. But the underlying kind of consumables or recurring revenue business is growing nicely each quarter. With respect to the impact from our customer base, nothing as of this point. So there have been a little bit of disruption in our site in Saudi Arabia, but nothing that we can't navigate around. We do have some large projects in the second half in the Middle East around the [indiscernible] as you had mentioned. Right now, we continue to expect them to be on track, but we'll have to watch as the broader situation evolves. John McNulty: Got it. Okay. No great results in a really tough, tough environment. I guess our second question would just be around the operational side. So the margin is clearly coming in really strong at this point. I guess how much of that is mix versus some of the operational improvements you were speaking to? And if it's more leaning toward the latter? It seems like you're -- if anything, you're solidly ahead of kind of the 150 to 200 basis point target that you had set for the next 3 years, I guess any thoughts or comments around that? Antonella Franzen: Yes. So first quarter margins were very strong, as you mentioned. And I would say we got a benefit of both actually. So mix was quite positive in the quarter. That added about 50 basis points of margin. But I would also say net productivity was about another 70 basis points of margin. So again, really strong performance as we move forward. When you take a look at our full year guidance that we have, margins continue to be strong. And even when you go to the first half to the second half, there's another incremental 40 basis points of margin expansion. So to your point, I would say we are well on our way to our 3-year targets that we laid out at our Investor Day. Operator: Your next question comes from the line of Christopher Parkinson with Wolfe Research. Christopher Parkinson: Just as it relates to your health care exposure, obviously, it seems like you're building a decent amount of momentum there. You addressed this at your Analyst Day, but I'd love to hear your updated thoughts. Just in terms of your balance between [ PB, ] biopharma, med device, and some of the larger secular trends that's going on. And do you feel you're underexposed to anything within that spectrum non pun intended? And is there anything that you think you'd like to add to the portfolio to really round it out? Lori Koch: So our overall health care segment is about $2 billion in sales. So it's about $1.2 billion of Tyvek sales and the remainder being the [indiscernible] sales and underneath Tyvek about half of that is health care packaging and the rest primarily are the [ garment. ] So we like our exposure as we sit today, we're nicely positioned in the med device profile between both spectrum on the CDMO side and then also on the Tyvek health care side with packaging needs. So we've got an intent to continue to add to that piece of the portfolio. We've got a nice robust pipeline of assets that are both accretive to growth and also affordable. So there are assets that we would like to add, whether it's around the packaging side to have a broader net packaging offering or whether on the CDMO side, they continue to round out our sales into that space. With respect to our appetite for M&A, we obviously closed the Aramids transaction on April 1. So we got about $1.2 billion of gross proceeds, about $1.1 billion net proceeds. We will continue to be balanced. We announced the $275 million ASR this morning. And we also continue to be prudent. So we're not going to lever up to do a deal. We targeted 2x leverage. We're a little below that today. So between the dry powder we have on the balance sheet as well as the remaining proceeds from the Aramids divestitures, it puts us in good position to also take advantage of potentially an accretive growth deal for us. Christopher Parkinson: And just as a quick follow-up, just kind of a broader question on pricing in terms of the second quarter and also the second half environment. Just how are you thinking about this by segment in terms of what you're seeing in your inputs, transportation, logistics cost. Just obviously, a lot of moving parts. I'd love to just hear your thoughts on strategy and how quickly you believe the organization can pivot? Antonella Franzen: Yes. So I would say the organization has done a great job pivoting as all this has started. So we already have surcharges as well as certain price increases in place to cover these incremental costs. So overall, our expectation is around incremental cost of around $90 million, which we expect to fully cover from a top line perspective related to price and surcharges. As you would expect, it's starting in Q2, so we don't have a full run rate in the second quarter, but the second half will have a full run rate. Just to put a little bit of numbers around it, the second quarter is around $25 million or so of price on the top line to cover those costs. Operator: Your next question comes from the line of Chigusa Katoku with JPMorgan. Chigusa Katoku: Congrats on a great quarter and a challenging operating environment. So I just wanted to follow up on the price cost. So margins were really strong this quarter. If my math is correct, it looks like it's going to step down to around 24% in the second quarter. So if you could just help me understand the puts and takes around this. I think that you plan to institute price increases on April 1, you had inventory. So I think meaningful raw material inflation as opposed to come be felt around maybe late 2Q, but any moving pieces here? And what's impacting the doctor margins in the second quarter? Antonella Franzen: Yes. So when you go from the first quarter to the second quarter, 2 things to keep in mind, price cost, to your point, we have pricing actions we'll have costs in the P&L. That's about a 30 basis point margin headwind. And there's about 40 basis points of a margin headwind from Q1 to Q2 related to mix. So that's your Q1 to kind of Q2 walk relative to where we're at, but underlying performance continues to remain very strong. When we talk about kind of what's embedded in terms of the full year, and the timing of that. So we did have some that started in April, I'll tell you, a majority of increases related to surcharges and price increases started on May 1 because there is some customer notification time that's needed relative to that. Obviously, every product that we have in inventory has different terms associated with it. So keep in mind that these increased costs started at the latter end of the first quarter. So we definitely have some impact related to that in the second quarter. And as I mentioned, when you take the difference between price on the top line and costs on the bottom line, it's about 30 basis points of the headwind in the quarter. Chigusa Katoku: Okay. Great. So is my understanding correct that the majority of increases started in May versus April. So you haven't been seeing the order trends. I guess, maybe put it differently, after you started some price increases in April, how have order trends been compared to March? Antonella Franzen: Yes. So as Lori mentioned, I would say our order trends in April were actually -- we have very similar demand as we have been seeing and nice increases overall on a year-over-year basis. So order trends are doing well. Operator: Your next question comes from the line of John Roberts with Mizuho. John Ezekiel Roberts: I think you noted strength in automotive during the quarter. Maybe you could comment a little bit on where that came from and how sustainable that might be since I think the auto outlook is not that rosy right now. Lori Koch: Yes. So we've got automotive. It's primarily within the industrial technologies line of business within Diversified. So we've got the predominant exposure within [indiscernible] we also have physicians in [indiscernible]. So our outperformance amid a tough market, as you had mentioned, is really based on the battery adhesive volumes that we have. So we've got about roundly $300 million of sales that go into EVs. A piece of that is battery, which is all incremental growth for us, and it's growing nicely in the year, well above kind of where the 20-ish percent EV growth expectations are because it's new volume for us and new wins. So we continue to be positioned nicely and realize the pipeline has been building over the last couple of years, frankly, as we got qualifications with the large OEMs. John Ezekiel Roberts: And then just a clarification. When you talk about desalination, is that municipal to you? Or is that industrial to you? Lori Koch: It's primarily industrial. Primarily RO as well. It's the reverse osmosis component of water. Operator: Your next question comes from the line of Josh Spector with UBS. Joshua Spector: I wanted to follow up on just the Middle East impacts around water. I think on some of the pre-closed conversations, there was messaging that there were maybe $25 million a month in sales into and out of the Middle East. And there is an inability to get material out, I guess, while the strait is closed. Just based on your comments about not really baking in much in terms of the outlook, have you found alternative routes for those materials? I guess it sounds like you've mitigated that, but I'm not 100% clear. So can you expand on that a bit more? . Antonella Franzen: Sure. So let me size up our total exposure related to the Middle East. So in total, it's around $300 million, about 4% of our top line. Half of that is related to sales into the Middle East and the other half is related to things that are sourced from the Middle East. So when you kind of do the math around that and 1 month of the strait being closed, that's kind of where the $25 million came from. As we mentioned earlier, there was about a $10 million impact to the top line in the first quarter related to products that we weren't able to get out. So that clearly tells you we have been able to mitigate quite a bit of that and obviously have taken that into consideration relative to our Q2 guidance. Joshua Spector: But I guess if I take that then in those comments, it seems like half of it is still impacting, maybe a little bit less. So is there something to the tune of $30 million to $40 million in sales and maybe 1/3 of that in terms of EBITDA impact in 2Q to assume that the impacts linger or does that lessen through the quarter and therefore, this whole map becomes somewhat not necessary? Antonella Franzen: All that math is not necessary. I would say that the teams have done a great job to find alternative routes in order to get some products out and to make sure that we have the necessary raw materials in order to be able to produce at the site as well. So again, the teams have stepped in very quickly to find alternatives related to that. We were able to have minimal disruption as in first occurred and clearly have plans in place as we move forward. Operator: Your next question comes from the line of David Begleiter with Deutsche Bank. David Begleiter: Lori, just on construction, can you talk about the weakness in those markets? And how much is it down for you guys in Q1 and your expectations for the first half of the year? Lori Koch: Yes. So we continue to expect overall construction markets to be about flat on a full year basis. We do have about 1% price in that space that will give us some slight organic growth but it's really kind of slightly down in the first half and then slightly up in the second half. So in the first quarter, we were down low single digits. Our performance was in line with the market where the resi, primarily North America resi continues to be weak and then you're seeing about flattish in the commercial and do-it-yourself base once you back out the data center volume that happened in commercial, our commercial is more on the health care, education, retail side. David Begleiter: Very good. And just on the Middle East conflict, are there any opportunities longer term from you being a more U.S. supplier, reliable supplier at lower cost overall down the road? Lori Koch: Yes. I mean I think there's always opportunities that we're looking for to be able to continue to expand both our share and our TAM. Not only are we well positioned from a share perspective, we're also well positioned with where our asset base sits, which has enabled us to navigate quite a few disruptions over the past couple of years. So starting back with tariffs, we were able to move product around our supply chain to mitigate the headwind there. And then now with the Middle East tariffs, we've been able to move volume around to be able to mitigate the impact that was felt initially within our KSA plant in Saudi Arabia. . Operator: Your next question comes from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: So health care sales seem to be like accelerating quite a bit. I wanted to just dig in a little bit more on comps versus market versus owned portfolio position for 1Q. And as we look, I guess, to the guidance a bit, you're looking for 4% on the year, 1% from price. I think 1Q is probably closer to 1.5%. And so I kind of bridge this like 1.5%-ish from 1Q to 3% for the back half. It seems like maybe normalization of water, but can you fill in the gaps and maybe how that also relates to how health care should trend from here? Lori Koch: Yes. So we had a very strong quarter with health care in Q1, where our results were up high single digits organically. That was really nice volume and some nice price as well. And we continue to expect health care to be up mid-single digits as the year progresses and land at maybe mid- to high single digits on a full year basis. So we have really nice positions I had mentioned on the health care packaging side and see nice growth in procedures that influenced both the med packaging as well as the spectrum side. [ Livio, ] which is our biopharma business, a really, really nice results in Q1. So there's a nice recovery in demand there that will continue to see nice results. And then maybe just quick on water. I had mentioned that it was down in the first quarter that was really more around the $10 million of volume that didn't ship as well as the timing of large projects. So we'll be will be about flat overall in water in the first half and then we think up kind of high single digits in the second half really around the project timing volume to land at mid-single digits for the full year. Antonella Franzen: The only thing I would add to that is just around the water business, although it's relatively flat first half, high single digits in the second half, if you adjust for the timing of the projects and normalize that, you're more going from like a 4% growth to a 5% growth. Matthew DeYoe: Okay. And then quickly, so Tyvek's been able to absorb a fair amount of raw material pressure in the short time. And I'm looking at obviously, some of your suppliers talking about another $0.20 per pound for May. And I don't know we'll see if they can get it, right? But I'm wondering, is there kind of an ongoing propensity to be able to push surcharges in a world where this gets increasingly sketchy. I'm thinking almost maybe a little bit more on the building products side because I feel like health care would probably be less plastic, but maybe that's not the case. Lori Koch: Yes. I mean we had nice success with both mix of prices and surcharges that we already put in place, whether it was April 1 or May 1. And so I think if you can provide the documentation to your customers around what we're seeing with respect to input costs, as we had mentioned, are most felt on the [ HDPE ] side, as you had mentioned within TYVEK and then with the [indiscernible] side in water and [indiscernible]. But there's other pieces that we've seen as well. So I think there's -- we haven't received an abnormal amount of pushback. Obviously, there's always a discussion that needs to be had, but we're not looking to profit. We're looking to just cover it, and the conversation has been constructive. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: You called out some weakness in packaging. We've been hearing sort of mixed things about the packaging arena. So maybe you could just talk about what you're seeing there what the outlook is for the remainder of the year? And I would assume there's also some inflation there that you need to push through. Lori Koch: Yes. So our impact in the packaging business weakness in the first quarter was really more around the [indiscernible] business in scope. It's really around home and office shrinking. It was a tough comp from a strong first quarter of last year. I think on a full year basis, we see the overall printing and packaging businesses normalizing being up kind of low single digits. Vincent Andrews: Okay. And I think the answer to this is there's nothing. But is there -- is there any at all update to [ PFAS ] or anything that's going on with the personal injury litigation? Lori Koch: Happily, no. Operator: Your next question comes from the line of Patrick Cunningham with Citi. Patrick Cunningham: You previously noted, I think, free cash flow greater than 90% for 2026. Is that still the case? And how should we think about working capital dynamics given the higher input costs potentially impacting cash generation cadence for the year. . Antonella Franzen: Yes. So first off, yes, free cash flow generation is still expected to be greater than 90% for the year. As I mentioned in our prepared remarks, our first quarter conversion was around 65%. So we did have a good start to the year. As you would expect, we tend to have a stronger free cash flow conversion in the second half of the year than the first half of the year, predominantly in the third quarter as we have our interest payments twice a year in Q2 and in Q4. Clearly, the increased cost in materials will increase your inventory dollar value, but the teams, I would say, are doing a good job relative to our inventory days outstanding and kind of taking those numbers down on a year-over-year basis. So we do have that embedded within our free cash flow conversion. So I would say we are managing working capital very well, and the teams are also focused not only on inventory but as well as DSO in terms of collections, which will put us in a good spot to achieve our free cash flow conversion for the year. Patrick Cunningham: Great. And then I think this is the first time you kind of explicitly called out microelectronics within water. So can you help us size the business there? What sort of growth rates we should expect? And any color on market penetration, new technology, new wins? Lori Koch: Yes. So microelectronics is primarily within ion exchange. So it's about 20% of ion exchange. We saw nice volume in the first quarter, as you would expect, just around the broader data center trend. So we continue to expect to perform nicely there with that business. . Operator: Your next question comes from the line of Mike Sison with Wells Fargo. Unknown Analyst: This is [ Avi ] on for Mike. I wanted to confirm your assumptions underpinning your full year '26 guidance. So when are you assuming the conflict in the Middle East resolved, if at all? And if it stretches to the end of the year, does that mean you're going to have to raise prices of more than 1%, offset incremental raw material inflation do you think you'd see any demand destruction if it stretches that long? Any color you can give would be helpful. . Antonella Franzen: Yes. So I would say our overall full year guidance anticipates that the current situation continues through the remainder of the year. So current oil prices, current natural gas prices, our assumption is that continues all year long. That is covered by the pricing actions that we have already put in place. Clearly, if this were to escalate or get even worse from where we are today, that would obviously have some impact on the assumptions that we've made, but we're not planning on it going away. Also, I would tell you if things were to escalate from where we are today, the teams would obviously see what other actions that we could take in order to mitigate any disruptions. Unknown Analyst: Got it. And then just pivoting back to health care, can you just talk about some of the underlying demand trends that are driving growth across the medical packaging and devices spaces. . Lori Koch: Yes, a lot of it is around the aging population and health care access. So that's one of the key global mega trend drivers for both med packaging and the health care needs. A lot of our exposure on the Med packaging side to the higher-end Class 3 devices and on the med device side with spectrum, it's really around cardiovascular and higher-end growth not elective surgery type application. So really, with the aging population and the access to health care is what's driving that megatrend. Operator: And the last question will come from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: Sorry, I was on mute. Apologies for that. I guess just 1 final question for me was given that you've had many years of portfolio transformation here, would you expect -- and maybe you can just provide us an update on the 80/20 strategy within Diversified Industrials and so -- there's any further portfolio reconfiguration that we can expect? Lori Koch: Yes. So the 80/20 work within Diversified is really to look at enhancing margin profile. So we had targeted 4 businesses to start and have been working through a really robust process on making sure that we're looking at the [ tailspin, ] looking we're investing, making sure that we're investing for growth in pockets of where there's opportunity across those businesses. I would say more broadly with respect to the portfolio, we're excited about the portfolio that we have. It's nicely balanced between Health Care & Water and Diversified Industrials. We're about 50-50 today. We've mentioned that over the medium term, we would like to get to more 2/3, 1/3 with respect to growth above market. So moving more of the company more towards that Health Care & Water space. But as of now, we're happy with the portfolio. But we'll always be looking, as I had mentioned, due to some M&A, we've got dry powder and cash from Aramids to be able to potentially take advantage of some good opportunities. Arun Viswanathan: Okay. And sorry, just 1 more. Given the $275 million ASR, is that really the last kind of accelerated repurchase activity that we should expect? Or maybe you can just comment on your outlook for further buybacks or yes, capital return. . Antonella Franzen: Yes. I would say, overall, we're always looking to see what's going to bring the best return to our shareholders. So we already had completed, as we announced in the last quarter, the $500 million ASR. We now announced this morning an additional $275 million ASR. As Lori mentioned, we do have a lot of flexibility relative to the cash in the door related to the Aramids transaction as well as the balance sheet we have. So we will continue to evaluate. As a reminder, we do have a $2 billion program, of which we've used the $500 million and now the $275 million. So we'll continue to evaluate our opportunities, and we'll act on what brings our shareholders the most amount of value. Operator: I will now hand the call back over to Ann Giancristoforo for closing remarks. Ann Giancristoforo: Great. Thank you, everyone, for joining our call. For your reference, a copy of our transcript will be posted on DuPont's website. This concludes today's call. Operator: Thank you. This concludes today's conference call. You may [ now disconnect. ]
Operator: Good day and welcome to the Scorpio Tankers Inc. First Quarter 2026 Conference Call. All participants will be in listen-only mode. By pressing the star key followed by zero, you may reach an operator. Please note this event is being recorded. I would now like to hand the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead. Thank you for joining us today. James Doyle: Welcome to the Scorpio Tankers Inc. First Quarter 2026 Earnings Conference Call. On the call with me today are Emanuele A. Lauro, Chief Executive Officer; Robert L. Bugbee, President; Cameron Mackey, Chief Operating Officer; Christopher Avella, Chief Financial Officer; and Lars Dencker Nielsen, Chief Commercial Officer. Earlier today, we issued our first quarter earnings press release, which is available on our website, scorpiotankers.com. The information discussed on this call is based on information as of today, 05/05/2026, and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of the risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release as well as Scorpio Tankers Inc.’s SEC filings, which are available at scorpiotankers.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at scorpiotankers.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. For those asking questions, please limit the number of questions to two. If you have an additional question, please rejoin the queue. Now I would like to introduce our Chief Executive Officer, Emanuele A. Lauro. Emanuele A. Lauro: Thank you, and good morning, and thank you for joining us today. I would like to start this earnings call by saying thank you. And thank you to all the stakeholders who have supported us in bringing the company to where it is today. When Robert, Cameron, and I started this business in 2009, I cannot say that we envisioned every detail of what the company would become. But in our most ambitious plans, I remember looking at something like this. We have built a platform that can return capital through the cycle while preserving the flexibility to invest countercyclically. This would not have been possible without the trust of our shareholders, the partnership of our customers, and, most of all, the commitment of our people. So thank you. Now focusing on the business front, in the first quarter, the company generated $214 million of adjusted EBITDA and $151 million of adjusted net income. For years, we have focused on what we have under control, on what we can control: strengthening the balance sheet, optimizing the fleet, and reducing our cash breakevens. Today, the discipline is fully reflected in the model. Our cash position stands at approximately $1.4 billion, and it is bound to hit the $2 billion mark early in the summer, with a daily cash breakeven of around $11,000 per day. To put that into perspective, in today’s market, we generate, of course, substantial free cash flow, but in a stressed environment similar to the depth of the COVID 2020 market, we remain at or above breakeven. That is a structural advantage. Our recent financing further reinforces this. We reduced our cost of capital through 1.75% convertible bonds and a new bank facility at 120 basis points; these are the lowest margins in our history. These were proactive and opportunistic actions that were executed from a position of strength and not necessity. We are applying the same discipline to the fleet. Since the start of the year, we have sold 12 of our older vessels at prices above their original purchase levels more than a decade before. This value realization is not only fleet management. The balance sheet strength and fleet optimization together create a powerful foundation for sustained capital returns. In April, we repurchased 1.4 million shares for around $100 million. Today, we are going further. We are announcing a new $500 million share buyback authorization and a quarterly dividend of $0.45 per share. This is deliberate capital allocation. By any measure, this was one of the strongest quarters in the company’s history, not only in earnings but also in execution. Rates have improved for consecutive quarters, and that momentum not only continues, but has strengthened further into the second quarter. While the timing of geopolitical developments in the Middle East remains uncertain, we remain constructive on the underlying fundamentals that are driving the tanker market. We expect restocking and demand to reassert themselves as disruptions normalize. Critically, our low breakeven model allows us to perform across all environments, as mentioned before. We can be resilient in a weaker market and highly levered in stronger ones. We believe Scorpio Tankers Inc. is exceptionally well positioned to continue generating meaningful cash flow and deliver long-term shareholder value. Thank you again, and I will now turn the call to James. James Doyle: Thanks, Emanuele. Slide 7, please. Today, product tanker rates are at unprecedented levels, with average clean tanker earnings over $70,000 per day. It is unclear when returns to the Strait of Hormuz will normalize. But what we do know is this: global inventories, commercial, strategic, and floating, have been significantly drawn down. The system will need to rebuild inventories globally, and given the scale of these draws, that process will take time. This creates a constructive setup for product tankers as refinery utilization and seaborne flows increase to support restocking and global demand. More importantly, product tanker rates were strong prior to these disruptions as a result of robust global demand driving higher seaborne exports, refinery dislocation increasing ton-mile demand, and modest fleet growth constraining supply. We remain optimistic that those fundamentals support a constructive outlook in the short and medium term. Slide 8, please. Last year, over 18 million barrels of crude and refined products transited the Strait of Hormuz. Approximately 90% of the crude oil and naphtha volumes transiting the strait were destined for Asia. West of Suez, roughly 75% of jet fuel flows go to Europe, and 45% of diesel moves to Africa. The temporary loss of these volumes has forced global rerouting of trade flows on an unprecedented scale, reshaping supply chains across regions. Slide 9, please. We are seeing a rebalancing of flows with increased exports from the U.S., Africa, and Europe partially offsetting reduced volumes from the Middle East and Asia. Voyage distances have more than offset lower volumes, tightening effective supply and supporting a strong rate environment that we are seeing today. Slide 10, please. Despite the scale of the disruption, demand has remained quite resilient. In the second quarter, refined product demand is expected to decline by approximately 1.5 million barrels per day year-over-year before rebounding by roughly 2.4 million barrels per day in the third quarter. This aligns with what we are seeing on the water, with seaborne exports down 1.9 million barrels per day in April compared to last year. As transit through the Strait of Hormuz normalizes, we expect demand to recover. Slide 11, please. Importantly, the recovery in demand is expected to occur alongside a period of significant inventory restocking following recent draws. High-frequency refined product inventories have declined by more than 80 million barrels since the start of the year. U.S. refined product inventories have drawn 12 out of the last 13 weeks. Taken together, these data points highlight the scale of the drawdown and the magnitude of the restocking cycle ahead. Slide 12, please. Product tanker newbuilding activity has slowed meaningfully over the past 18 months. Only 37 vessels have been ordered year to date, and approximately half the product tanker order book is LR2s. As we have highlighted, a meaningful portion of LR2s operate in the crude market. Today, roughly 57% of the LR2 fleet is trading crude oil. As a result, the effective product tanker order book is smaller than it appears, reinforcing the view that future fleet growth will remain constrained. Slide 13, please. Today, the order book is 18% of the existing fleet, which may seem high, but context matters. As you can see on the left, 21% of the product tanker fleet is already older than 20 years. By 2028, it will be 30%. Roughly 25% of the Aframax/LR2 fleet and 9% of the MR/Handy fleet are sanctioned, averaging 20 to 21 years old. In a normal market, much of this tonnage would have likely already exited the fleet. Slide 14, please. When adjusting for aging vessels, sanctioned capacity, and LR2 crossover, effective clean products supply fleet growth is materially lower than the headline order book implies. We expect fleet growth to average approximately 3% over the next three years, but potentially lower. As refinery utilization and seaborne flows increase to support global restocking and demand normalization, the market should tighten further. Longer term, refining capacity remains constrained while the fleet is aging faster than it can be replaced. Overall, we expect ton-mile demand to outpace fleet growth. With that, I would like to turn it over to Christopher. Christopher Avella: Thank you, James, and good morning or good afternoon, everyone. Slide 16, please. This quarter, we generated $214 million in adjusted EBITDA and $216 million in net income on an IFRS basis. This includes a $66 million gain on the sale of four vessels during the quarter. We sold another two vessels in April and have reached agreements to sell another nine vessels, all built in 2014 or 2015, all at cyclically high prices. Additionally, we declared a $0.45 per share dividend and replenished our securities repurchase program to $500 million. The chart on the right shows the evolution of our net debt position since December 2021. Our capital allocation policy over this period has been headlined by debt reduction and balance sheet fortification. As you can see, this approach has resulted in a reduction of our net debt position by $3.8 billion, from a net debt balance of $2.9 billion at 2021 to a pro forma net cash balance of $876 million as of today, which reflects our actual net cash balance of $479 million adjusted for the sales of nine vessels that are pending closing. Slide 17, please. The chart on the left breaks down our outstanding debt by type. As you can see, our capital structure keeps evolving as we continue to pursue opportunities to lower our cost of capital. First, we have $368 million in secured bank debt with a lending group exclusively comprised of experienced shipping lenders, and this debt all carries margins below 200 basis points. Further to this, $198 million of this amount is drawn revolving debt, an important tool that we can use if we want to repay the debt but maintain access to the liquidity in the future. Next is our $200 million five-year senior unsecured notes, which were issued in the Nordic bond market in January 2025 and are currently trading at above 103 to par. Last is our $375 million convertible notes due 2031, which were just issued under a month ago. These notes have a coupon rate of 1.75% and are convertible to common stock only under certain circumstances at a conversion price over $100 per share. As part of the offering of our convertible notes, we repurchased 1.3 million, or 2.6%, of our outstanding common shares for $100 million. The chart on the right shows how we continue to pursue ways to reduce our cost of capital. Over the past four years, we have transitioned our vessel-related borrowings out of expensive lease financing into lower-cost, higher-flexibility secured bank debt. Our efforts to pursue lower-cost, longer-tenor structures are ongoing, as you can see with our recent announcement of a $50 million secured credit facility with Bank of America at just a 120 basis point margin and a seven-year tenor. This strategy, coupled with our aggressive prioritization of debt reduction, has transformed the company’s credit profile, thereby unlocking these opportunities in the markets. Now around 60% of our debt structure is unsecured, and not due until 2030 and 2031. Slide 18, please. The chart on the left shows our liquidity profile. We had $1.4 billion in cash as of May 1. If we consider the sale of three vessels that were pending closing as of that date, the cash balance is $1.8 billion on a pro forma basis. We also have an additional $712 million in availability under revolving credit facilities for a total of approximately $2.5 billion in available liquidity. Since November, we have signed contracts to purchase 10 newbuilding vessels, and the chart on the right is a waterfall reflecting our commitments to purchase these vessels. Our disciplined capital allocation over the last three years has afforded us the financial flexibility to enter into these newbuilding contracts. Our remaining newbuilding commitments total just over $641 million as of today, after the payment of $69 million towards these vessels in 2026. Hypothetically speaking, we could pay for all of these vessels today in cash without incurring any new debt. Importantly, approximately 80% of these remaining installment payments are not due until the years 2027, 2028, and 2029. With a low cash breakeven rate, currently at approximately $11,000 per day, we are well positioned to build cash prior to delivery. Moreover, the age and specifications of these vessels make them attractive financing candidates, which has the potential to open opportunities for us to further optimize our capital structure and lower our cost of capital. Slide 19, please. Our cash breakeven rates are at the lowest levels in the company’s history. As shown on the left, these levels are below our achieved daily TCE rates dating back to 2013, with the closest point occurring during COVID-19 when global oil demand saw its largest decline on record. To add, the cash interest on our convertible notes only raises our cash breakeven levels by a modest amount and is more than offset by the interest we currently earn on our deposits. To illustrate our cash generation potential at these cash breakeven levels: at $20,000 per day, the company can generate up to $260 million in cash flow per year; at $30,000 per day, up to $548 million per year; at $40,000 per day, up to $836 million per year; and at $50,000 per day, up to $1.1 billion per year. This concludes our presentation today. We would like to thank everyone for their time and attention. We will now open the call for questions. Operator: To ask a question, if you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. Our first question will come from Gregory Robert Lewis of BTIG. Please go ahead. Gregory Robert Lewis: Hi, thank you, and good morning and good afternoon, and thanks for taking my questions. I guess this first question is either for Christopher or Robert. Could you walk us through the decision on the convertible bond? Clearly, you laid out how strong the balance sheet is, and you touched on it, but just curious, with a lot of cash on the balance sheet, how are we thinking about the liquidity and opportunities for staying, you know, with the convert? Christopher Avella: Sure. Thanks, Gregory. As we said, it was opportunistic. The convertible markets are strong right now, and we have a strong credit profile. It made for a good opportunity to execute an instrument that we view as a low cost of capital: a 1.75% coupon and a high conversion premium. We are mindful of the fact that we have a lot of secured debt maturing in a couple of years—say, 18 to 24 months. Our debt position is not static, and we are going to continue to look at opportunities to execute on low-cost transactions, and this is just one of those. Robert L. Bugbee: I do not have anything to add to that, Gregory. Gregory Robert Lewis: Okay, great. And then the other question on the market: James, you touched on volumes being a little bit light. Roughly a little over two months into the conflict in, or the war in, Iran, have we started to see pockets of hoarding or anything that is out of the ordinary? How is that translating into maybe new trade routes or expanding ones, replacing others? Curious what you are seeing there. James Doyle: Lars, would you like to take this one? Lars Dencker Nielsen: Yes, sure, I will start off. We have seen a lot of what you would consider to be genuinely unique voyages and instances. Ton-miles have obviously elongated across the board. We have seen a huge increase in U.S. Gulf Coast exports, very much further afield than what we would have seen before. From a pre-conflict into conflict level related to Iran, we had ships that were transporting towards the West, and before they even came to the Cape of Good Hope, they were asked to go to the Middle East, and then one day later, to go back to Asia where they had loaded from. The fact is that the price of oil and product has made it such that the price of freight has become insignificant. We are not seeing any issues of freights being curtailed because of the price of freight, because the oil underlying is so valuable and so important for the security of supply. That also goes into the structural reshuffling of product in the United States. We saw the headline of the Jones Act being waived for a brief moment in time; that has also moved the needle relative to anything we have seen in the past. So, yes, there certainly has been a lot of change. Gregory Robert Lewis: Super helpful. Thank you very much. Operator: The next question comes from Omar Nokta of Clarksons Securities. Please go ahead. Omar Nokta: Clearly, things are moving in a really nice direction for Scorpio Tankers Inc., certainly from a financial perspective—going deeper into net cash. You just re-upped the buyback to $500 million, and I wanted to get a sense from you: does this signal a pivot in how you are viewing use of capital from here? And is there any preference at this point in terms of the interest looking either at the shares or the unsecured notes or the converts? Robert L. Bugbee: I do not think it creates a pivot in strategy. I think it creates a point where we feel ready enough to give ourselves the largest ever buyback the company has ever had, if it decides that that is the right thing to do. So there is no pivot. The idea is a developing strategy. The first thing is to de-lever. The second is to start to renew the fleet and take advantage of backwardation in the curve. The third is, as Christopher says, to start to use that balance sheet to get very effective, cheaper finance. Being able to put up the largest ever buyback for the company is a continuation of the strategy: we will watch, act, and react when and if we see the opportunity. We have developed, in a way, a hammer and an anvil here. We have the tremendous cash position that the company has and its ability to get debt cheaply. Underneath it, we are developing the anvil so that if you had a wobble in the stock or we see a continuing dislocation between NAV and stock price, we can take advantage of that, because we believe very much in the long-term development and continued health of the company. Omar Nokta: Thanks, Robert. That makes sense. Maybe just a follow-up: you were mentioning the fleet and taking advantage of the backwardation. How are you thinking about the fleet as it is now? You sold a bunch of vessels this year; you have about $500 million coming in in the second quarter from those vessel sales. Are we getting to a point where the active selling, if you want to call it that, slows down? And is it more about fine-tuning the fleet? Is it looking at newbuildings? How are you thinking about the fleet position from here? Robert L. Bugbee: We have not changed on that. We will continue to take opportunistic sales and work on longer-term time charters too. At the same time, we might continue to gently and responsibly, where it is clear that the financing is not changing our hammer, engage in the renewal part of it. You are not going to see some massive, great big order. You are not going to see an acquisition of a competitor. It is going to be continuing to gently move each of the parameters we are looking at along the way—much of the same. Operator: The next question comes from Jonathan B. Chappell of Evercore ISI. Please go ahead. Jonathan B. Chappell: Thank you, and good morning. James, appreciate the presentation. Regarding the disruption, a lot of it seems to be focused around once the flows normalize. Can you help us with scenario analysis? There is still a lot of uncertainty. It feels like the path may be changing by the week, if not the hour. What are some of the other upside opportunities but also downside risks as this unprecedented situation continues to evolve? Robert L. Bugbee: Thanks. I do not think we are in control of that. We do not spend much time going through the hypotheticals or working out if they happen, if they all happen, or even whether any will happen. Information changes—whether or not the straits are open, whether or not there were shells hitting international ships about three or four times just yesterday. We will pass on the hypotheticals, if that is okay. Jonathan B. Chappell: Okay. How have your operations changed? We see these headline rates. Are you fully absorbing them? Have you had to move the fleet around, so maybe you have imbalance or maybe even better exposure to certain regions? As we think about these headline rates, how does it translate to you both from a top-line perspective, but also from a potential disruption or cost/bunker perspective? Lars Dencker Nielsen: This is part and parcel of what we do every single day. We assess where we anticipate the market to react as fleets are deployed. When this happened, we made a conscious effort to move our ships West, where we could see that the market dislocation was the greatest and there were clearly, at the margin, stronger market movements taking place. We moved ships a lot, both through the canal and also around the Cape of Good Hope, and we also made sure that the ships we had opening in New Zealand, Alaska, and North Asia made decisions to move across. That took a little time, but it paid off. You still see today, even with the high volatility in the markets, rates are moving 15% to 20% intra-week. Structurally, the West market has been benefiting from a rate perspective more than vessels trading East of Suez. Jonathan B. Chappell: Got it. Thank you, Lars. Thanks, Robert. Operator: The next question comes from an Analyst at Bank of America. Please go ahead. Analyst: Great. Good morning and good afternoon. Can you talk about any increased interest in multiyear charters given the environment, and your thoughts on that? Do you want to keep the same exposure to the spot market? And then any incremental developments from Venezuela—we have talked about that a lot in terms of short-haul moves. Robert L. Bugbee: I will take one part first. Our reduced breakevens, the lack of debt, and low borrowing cost open up situations where you can look quite favorably at five-year, six-year, seven-year charters. These are very simple, profitable, secure returns, adding to a base of income which has always been lacking in tanker companies. We are not only looking at opportunities that arise, but also favorable to them because of our own financial breakeven dynamics. Lars, would you like to go through the details? Lars Dencker Nielsen: We reported a couple within the quarter. In my experience, these are generational highs in terms of long-term charters, and this is long-term charters to very bankable first-class end users, which we have not seen before. We will always have a balance between spot and time charter. We certainly still have a very large component towards spot, but the ships we have on time charter all reflect the quality of the paper and also counterparties that we have strategically aligned with in terms of the spot business we also do for them, so the relationship goes to a different level. Over the years, that has benefited the business. In terms of looking at period charters for the future, we continue to look at charters every single day. There has been continued interest both in MRs and in LR2/Aframaxes. As everybody on the call will appreciate, we today look at LR2s and Aframaxes as one segment. There has been substantial interest in that market. We have seen one-year deals at extremely high and elevated numbers, three-year interest, five-year interest. Eight-year deals, which we have done on a one-off basis, are not that frequent, but it is clear that not only shipowners consider the market to look pretty good; a lot of the people we do business with are willing to put pen to paper for long-term charter. Analyst: Great insight. Thanks, Lars. Two rapid ones: are you seeing any shortages now at this point on some products—jet fuel or different areas? It seemed like Australia was starting to ration some fuel. Thoughts on where we are? James was talking about inventories. Then you mentioned the $2 billion in cash by this summer, but with the $500 million buyback plan, thoughts on the other $1.5 billion usage plans? James Doyle: I will start with shortages. In Southeast Asia, we have seen methods to reduce travel, but at a high level, it appears it is more inefficient supply to meet demand. Demand has been quite strong. A lot of the current issues fall to the fact that there is not a lot of spare refining capacity in the world. We have been talking about this for years: closures around the world, and refinery capacity has moved further away from the consumer. What you are seeing is a result of this. Going forward, you are going to see a lot of restocking. You will still see refinery dislocation because of how long it takes to build a refinery. We will see how the situation develops, but it is very constructive in the short to medium term based on this refinery dislocation. Robert L. Bugbee: On the future, I think you will see us continue to maintain a very healthy overall cash position. We have said we would even consider further sales of older tonnage. That would result in an even higher cash position than any forecast you could make at the moment. We have also said that we would be willing to explore opportunistically continuing our renewal, which would indicate a few newbuilding orders—not many, but a few to keep a steady position—while keeping the vast majority of cash generated. You are giving some of it out on buybacks, as you have seen so far this quarter, dividends, and newbuilding orders. We did not raise the dividend this quarter, but not for any reason other than it was a knockout quarter. It is fantastic, and we would like to have a look later in the year—July or September—whether we are likely to increase the dividend again, and by how much, whether in smaller steps or a slightly bigger step. Overall, it is a continuation of what we have been doing in the last six, nine, twelve months: taking advantage of the arbitrage on the curve, taking advantage of great secondhand prices, which are indicated to still be increasing. We are seeing that in the market. It is a continuation. It is working well so far. Operator: The next question comes from an Analyst at Jefferies. Please go ahead. Analyst: Good morning and good afternoon, everyone. I wanted to touch on fleet renewal. Do you have a preference whether it is more LR2s or medium-range exposure in the fleet? Any general commentary on fleet exposure within fleet renewals would be helpful. I do have one follow-up. Robert L. Bugbee: We have backed off the VLCCs in terms of expanding there. The recent renewals have been in product tankers, both MRs and LR2s. My expectation is that is where we would continue to concentrate and find opportunity. Analyst: Appreciate it, thank you. Then a follow-up on the dividend itself. Given the favorable financial position that you are in now—and I appreciate your stance on flexibility—do you have any kind of quarterly targeted payout that we should be looking at? Robert L. Bugbee: We have not reached that. I can tell you what we will not have: we will not do extraordinary dividends, and we will not do a high payout dividend. We are for what we would call a permanent dividend that can be met through good times and bad, and ideally can be improved on in good times and bad. High payout dividends, particularly those tied to percentages of income, work great in good times and are quite tragic in other times. Operator: The next question comes from Christopher Robertson of Deutsche Bank. Please go ahead. Christopher Robertson: Good morning, everyone. Thank you for taking my questions. This might be one for Lars. This is related to the bunker fuel market. Initially there was quite a bit of disruption and a huge spike in prices. Can you talk about availability and whether it is having any impact on where you are thinking about positioning the fleet and which voyages you are taking? Has that situation gotten better over the last few weeks? Lars Dencker Nielsen: The short answer is that we do not see issues today in terms of securing bunkers on any of our ships around the world. Prices certainly went to a very high and elevated place, and there were a lot of questions as the conflict started, and we were looking at this. To be honest, this is what we do every single day anyway. Bunker planning is a very important part of any voyage planning that we do. These things are looked at at any given time so that we can reflect the pricing of the bunker input to the output on the time charter equivalent. Right now, we do not encounter issues that create additional challenges for us in terms of supplying bunkers. Christopher Robertson: Got it, thank you. A follow-up related to the dividend. Realizing this is a bit of a chicken-and-egg situation, Robert, could you talk a little more about the philosophy around the dividend? Are you looking for a certain amount of balance sheet strength, a certain breakeven level, or a certain market environment in rate sustainability? What would drive an increase to the dividend, realizing that the goal is to have a sustained level throughout various parts of the cycle? Robert L. Bugbee: The goal is a regular dividend that we can raise through the cycle—not the same percentage of earnings or linked to the stock price. We would hope to raise the regular dividend so it is clear to the most conservative of long-only large institutions, and hopefully to the income growth side too, that we can pay it under any circumstances. You are starting to see in the presentation a lot of concentration by Christopher on cash breakeven and slides related to what happens if we relive the worst market we have ever lived in, which is COVID. Can the company continue to pay and grow the dividend through that cycle? That is how we are evaluating it. At the moment, things are moving. We waited in the last quarters gradually. This was an unbelievably knockout quarter. We felt it was unclear whether to raise it 1 cent or 5 cents. We left it aside, knowing we had an incredible quarter. We put steps into the balance sheet and gave terrific guidance for the second quarter. It is extraordinary; it even surprised us. Later in the year we can see what the next sustainable level is that we are happy to move to. Christopher Robertson: Got it. Thank you. That is very prudent, and we appreciate the commentary. Thank you, Robert. Robert L. Bugbee: Thank you. Operator: The next question comes from Liam Dalton Burke of B. Riley. Please go ahead. Liam Dalton Burke: Yes, thank you. Even prior to the tensions in the Mideast, the rates in the Aframaxes were higher, and there had been a lot of shift from clean to dirty. Post tensions, is there anything that would flip that situation where the Aframaxes would move back to the LR2s or start trading clean? Lars Dencker Nielsen: We are in the perfect situation where you have a lot of LR2s in a north of $100,000 per day market, where the alternative in Aframax is also trading north of $100,000 per day. If you look at the numbers, a couple of years back we were trading around 256 LR2s in the market. Today, we are trading around 170 LR2s in the market. You have had a large component of LR2s go into the sanctioned trade and the age part as well. You also have the element of crude transporting itself farther afield. You have a very strong Aframax market not only in the Atlantic Basin but also East of Suez. TMX, which goes from the Pacific Northwest to Asia, has been extremely strong. The market that goes down to the Pacific lightering area has also been very strong, particularly because VLCCs have been very strong. The Suezmaxes have been very strong. Every element within that framework is extremely strong. The last time we saw switching the other way was when you had a very weak crude market that had been persistent for a while, and the LR2 market had ramped up. At that point, you had a delta of about $8 million between one to the other, and you started seeing a large number of vessels going into the clean market. Today, whichever way you look at it, it is very strong. Regarding Venezuela, that is also an Aframax market. TMX is 100% an Aframax market. The stuff that goes out of Australia is 100% an Aframax market. The story is good in terms of supply and demand when you look at LR2s and Aframaxes together, which is what you have to do today. The argument that was the case a while back—saying you have all these ships being built—does not hold that much when you consider the average ages of the fleet and what ships are actually able to trade. Structurally, we are looking at a very decent supply-demand story on both Aframaxes and LR2s. Liam Dalton Burke: Great, thank you. I think this would be for James. You have always highlighted the redistribution of global refinery capacity. Post-conflict, a lot of that has been Middle East refinery. Would you anticipate any modification of that redistribution? James Doyle: Thanks, William. Good question. It is a challenge. The quickest you can probably build a refinery is seven years, so if you are not starting today, it is not coming in that time frame. One of the things we feel is likely is people will view storage differently coming out of this—how much crude and how much product you are keeping domestically. I think that is going to be great for refinery runs. But in terms of major changes, it will be a challenge to do anything in a short time frame. I am certain people might look at new pipeline opportunities. Liam Dalton Burke: Great. Thank you. Operator: This concludes our question and answer session. I would like to turn the call back over to Emanuele A. Lauro for any closing remarks. Emanuele A. Lauro: Thank you very much, operator. No closing remarks of any substance apart from thanking everybody for your time and looking forward to connecting in the near future. Have a great day. Bye-bye. Operator: The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Diamondback Energy, Inc. first quarter 2026 conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam T. Lawlis, VP of Investor Relations. Please go ahead. Adam T. Lawlis: Thank you, Corey. Good morning, and welcome to Diamondback Energy, Inc.’s first quarter 2026 conference call. During our call today, we will reference an updated investor presentation and letter to stockholders that can be found on Diamondback Energy, Inc.’s website. Representing Diamondback Energy, Inc. today are Kaes Van’t Hof, Daniel N. Wesson, Jere W. Thompson, and Albert Barkmann. During this conference call, the participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company’s filings with the SEC. In addition, we will make reference to certain non-GAAP measures. Reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Kaes Van’t Hof. Kaes Van’t Hof: Thanks, Adam, and welcome, everyone. As with the last few years, we are going to go straight into Q&A. Operator, please open the line for questions. Operator: Thank you very much. One moment. As a reminder, to ask a question, you can press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. We will now open the call for questions. Our first question comes from the line of Neil Singhvi Mehta of Goldman Sachs. Neil, your line is open. Neil Singhvi Mehta: Good morning, Kaes, and good morning, team. The big development you have been signaling is the move to a green-light framework from yellow-light, adding two to three rigs and moving to the fifth completion crew. Can you take a moment to talk about the thought process that went into this decision and how you are thinking about where and when to add activity? Kaes Van’t Hof: Yes, Neil. Good question. There are macro and micro elements. From a macro perspective, there is a clear market signal. We are two months into the world’s largest oil supply disruption in history, and while Diamondback Energy, Inc. is solely based in West Texas and somewhat of a tourist in this situation, it is a very serious event with a lot of oil supply off the market. If that is not a signal to grow production in an advantaged area like the Permian Basin, I do not know what is. We hope there is a resolution to the conflict, but even if there is, there is a lot of noise in the system and a lot of barrels have been taken off the market. Global inventories are starting to decline rapidly, and we are going to do our small part to add production. On the micro, Diamondback Energy, Inc. has the best inventory quality and depth in North America, executed at the best cost structure. If this is not the time to grow now, then when? We are able to do this in a very capital-efficient manner and get it done quickly. We have a backlog of DUCs and we prepare our business for up, down, or sideways. By adding a frac crew earlier in the year, we can get production up immediately. It is a testament to the team’s preparation and the whole organization working together to do this very quickly. In other organizations, the decision might take longer. Neil Singhvi Mehta: Thanks, Kaes. On the return of cash framework, you did not move away from the fixed framework, and while you bumped the dividend, you indicated you might slow the buyback a little bit. What did you intend to communicate with that? Also, there is a concentrated seller ownership base. If the family ultimately sells down their stake, do you still view Diamondback Energy, Inc. as a logical buyer to help offset that potential risk on the stock? Kaes Van’t Hof: Let us take it higher level. Allocating capital is our most important job. The return-of-capital programs were put in place after the COVID near-extinction event, when investors said, “I want my money back and I want it in a formulaic manner.” That has worked very well. We do not expect our ability to return capital to stockholders to change. We just want the flexibility to make more cyclical moves versus moves within a 90-day window. We have a very good track record buying back our stock: 42 million shares for $6 billion to date at $148 per share. With the stock where it is today, that is a very positive return for our stockholders, and I expect that to continue. We recognize we also have a large shareholder, and we have found ways to help monetize their stake efficiently. They are most focused on us creating long-term value. Allocating a ton of free cash to the balance sheet in times of extremely high oil prices creates long-term value with, in our mind, a higher floor for the stock. I would not expect anything to change. We have a great relationship with the family and the ability to help them monetize. If we use excess free cash flow over the next couple of quarters to pay down debt, we can help monetize their stake more efficiently coming out of this. They are long-term holders and they want the stock higher. Operator: Thank you very much. Our next question comes from the line of Scott Michael Hanold of RBC Capital Markets. Scott, your line is open. Scott Michael Hanold: Thanks. You all had pretty robust production performance in 1Q. Based on our chat last night, it sounds like your completions were as planned. Can you walk through why performance was so strong? It sounds like it was a lot more well performance versus any other dynamic. Is that something we should anticipate moving forward, and what is embedded in guidance? Kaes Van’t Hof: Yes, Scott. High level, our well performance year-to-date looks up relative to last year, which is probably even a surprise to us internally. We continue to try new things in completion design and efficiency that are starting to pay dividends. On the production side, there are a lot of good things happening in the field: less downtime, more automation—call it AI or automation—impacting that side of the business. Better wells and lower downtime is a good recipe for a production beat. Daniel N. Wesson: Post the Endeavor merger and getting the team together, we started trading a lot of ideas to optimize primary completions as well as the base. On the completion optimization side, with perforating strategies, rate design, and sand loadings, we think we are seeing uplift, and time will tell as we continue to implement that design. On the production side, workovers and treatments—acid jobs, chlorine dioxide jobs, surfactant jobs—are starting to pay dividends. Layering on machine learning as we continue to look at our data streams and processes, we are working toward implementing AI into field operations. We are seeing downtime come down, which was a big part of the beat in Q1. Little bits of optimization across the board are starting to show through to the top-line number. Scott Michael Hanold: When you guided oil, it looks like you could be greater than potentially 520 thousand barrels per day. If the macro environment continues, how much desire is there to continue to let oil production grow versus curtail it? Is there a scenario where you would step it up even higher if the macro remains heightened? Kaes Van’t Hof: It is fluid, and the board wants us to take this quarter by quarter. If there is outperformance and we still have triple-digit oil prices and the market is calling for oil, this could be a year where, instead of pulling back activity, you keep efficiencies going and let production continue to climb. We are only two months into this conflict, and it could be resolved quickly. We are ready to react. We still have levers to grow further, but for now, 520 thousand-plus barrels per day of oil is the new baseline. Operator: Thank you very much. Our next question comes from the line of Neal Dingmann of William Blair. Neal, your line is open. Neal Dingmann: Morning, Kaes and team. Thanks for fitting me in. My question is on activity. How much, if any, will negative Waha prices impact what you might or might not do? Same question with oilfield service prices—are you expecting OFS inflation given what is going on with prices? Kaes Van’t Hof: On Waha, pricing is deeply negative. We are well protected with financial and physical hedges. Our mix is moving more toward physical when the two new pipes come on, hopefully in the second half of the year. We are protected to get through this tight spot financially while we continue to add oily inventory—we are drilling some of the oiliest stuff in the basin. We will continue to work on physical protection on the gas side. We have worked on a power project for almost a year; we will see if we can get that done. We have talked at length about monetizing our gas, and we are on the cusp of that starting to happen when these pipes come on. Danny, on services? Daniel N. Wesson: We have not seen much pressure to date on service pricing. It is really a capacity question—what does service capacity look like? We have not seen industry activity ramp aggressively through these first couple of months of this conflict, so there is still quite a bit of capacity in rigs and completions. Calendars are not squeezed enough yet for providers to push pricing when we look for additional equipment. We have seen some inflation in consumables tied directly to commodity price, but those have been minimal thus far. We will see what activity does in the Permian and the Lower 48 to gauge service inflation through the rest of the year. Neal Dingmann: On capital allocation—given likely record free cash flow per share—how does capital for M&A stack up against buybacks or near-term debt repayment? Kaes Van’t Hof: The options for free cash flow are to grow—organically or inorganically—return cash, pay down debt, or hold cash. On organic growth, we pulled that lever in a small way by going to the top end of our CapEx guidance. On inorganic (M&A), we have been very good over the years, but this volatility makes deals difficult, private or otherwise. M&A is likely fairly quiet at Diamondback Energy, Inc. for the foreseeable future. We increased the base dividend. With oil prices where they are, we do not know if investors are capitalizing this price environment yet. For us, the bigger use of free cash is to pay down debt rapidly and convert that debt value to equity value in our NAV, and to keep some cash for a rainy day because this is a very volatile environment. Operator: Thank you very much. Our next question comes from the line of Arun Jayaram of JPMorgan Securities. Arun, your line is open. Arun Jayaram: Good morning. The 2026 and 2027 strips are around $90 and $75. How do you think about development in a much stronger oil price than 90 days ago? For the two to three incremental rigs, how are you thinking about capital allocation across the asset base? Are deeper benches now competing for capital as you drive down well costs in the Barnett? Kaes Van’t Hof: Even with higher commodity pricing, we are going to hold to the vast majority of our spacing assumptions throughout the basin. We look at each DSU-level project to maximize wells until the incremental last well generates a 40% rate of return at $60 oil. That provides prudent spacing and solid returns despite volatility. Drilling our best stuff first and sticking to that knitting continues. The Barnett, particularly given well sizes from a production perspective, generates more PV today, so it is getting more attention. Albert Barkmann: That is right, Arun. The acceleration coming in with these two rigs is really an acceleration of the Barnett plan. We are focused on that development and getting ahead of the Barnett obligations we discussed last quarter. Daniel N. Wesson: I will add that Barnett activity and obligation activity are almost entirely focused on the JV area with another partner. Those wells are not as high working interest—about half and half, a little heavier weighted to Diamondback Energy, Inc. The two to three rigs equate to about 1.5 net rigs at Diamondback Energy, Inc. The top line looks like we are adding a bunch of activity in the back half, but net to us it will be less impactful. Arun Jayaram: For Jere, you have taken pro forma net debt down to $12.7 billion. Given the intention to pay down more debt in a higher commodity price environment, what are your targets for the balance sheet from a gross or net debt perspective? Jere W. Thompson: Great question. We previously talked about hitting $10 billion net debt sometime in the next 12 to 18 months. With current commodity pricing and excess free cash flow generation, it looks like we can hit that much earlier—potentially in a couple of months. As we move into the back end of the year, we will have an opportunity to reduce both net and gross debt. We will build cash on the balance sheet through the fourth quarter and then look at calling our $750 million of 2026s outstanding. As we move into 2027, we may consider a larger liability management exercise with additional cash to take out as much as we can from near-term maturities, particularly anything maturing prior to 2030. We are in an advantaged position to move our balance sheet from a position of strength to a fortress in the near term. Operator: Thank you very much. Our next question comes from the line of John Christopher Freeman of Raymond James. John, your line is open. John Christopher Freeman: Thank you. Even after increasing activity, your reinvestment rate still fell sharply from what you planned last quarter—from 44% to 34% at the current strip. You have the ability to increase activity more and still have an industry-leading low reinvestment rate. Is there a reinvestment rate that you want to stay below regardless of the commodity environment? Kaes Van’t Hof: We have polled investors who own the stock. The general consensus: a little growth will differentiate Diamondback Energy, Inc. and makes sense, but do not do it in a capital-inefficient manner. We were going to run between four and five frac crews to hit our original guide. That fifth crew was going to go away for five or six months and then come back. It is a Halliburton e-fleet simul-frac, as efficient as it gets. We are just bringing that crew back to run five crews consistently. That maintains capital efficiency versus going too fast too soon, which has driven inefficiencies in E&Ps’ plans and, at times, ours. Staying capital efficient is the priority; the reinvestment rate is an output of that. John Christopher Freeman: Along those lines, the original 2026 plan did not forecast meaningful DUC draws or builds. How does that look now with the new plan? Kaes Van’t Hof: It evolves through the year. We will draw down DUCs in Q2 and backfill with two rigs worth of activity to build the DUC balance back up. We peaked a little over 200 DUCs in Q1. That number will come down in Q2, and the backfill rigs will rebuild it. We likely need to keep a slightly higher DUC balance than with four crews—around the high hundreds, about 200 DUCs—so we have two projects behind each crew ready to go. Daniel N. Wesson: We like to keep a quarter to a quarter-and-a-half worth of inventory ahead of each crew for flexibility if we run into a pad issue or takeaway constraint. Each crew will do about 100 wells per year, maybe a little more. A couple hundred wells ahead of five fleets is the right carry DUC balance. As crews get more efficient and complete more wells, it either means releasing crews to keep the same well count or building 20 to 30 more wells for the year in total—still within our original guidance window. We took the momentum from Q1’s beat and kept it going through the rest of the year. Operator: Thank you very much. Our next question comes from the line of Analyst of Barclays. Your line is open. Analyst: Good morning. On crude oil marketing, 1Q pricing was a bit stronger. Can you remind us of your exposure to premium price indices and the marketing strategy on oil? Kaes Van’t Hof: Strategy-wise, we learned from the Permian takeaway crisis of 2018 that we needed to use our balance sheet to get crude to the biggest markets—Corpus Christi and Houston. We invested in EPIC, Gray Oak, and Wink to Webster. Those made our investors money and protected Diamondback Energy, Inc. commercially. We have about 300 thousand barrels per day going to Corpus on EPIC and Gray Oak, and another 100 thousand barrels per day going down Wink to Webster into Houston refineries. We are exposed to water-based pricing and even have a small contract with dated Brent exposure. That has helped us. This is a good playbook for gas; we are a little behind there because oil is 90%+ of revenue, but the next trend is to improve gas marketing. Analyst: On the acquisition line item in 1Q, there were just a few hundred million. Are you doing any organic acquisitions or bolt-ons at good pricing? Jere W. Thompson: There were a couple of small acquisitions in our backyard in the Midland Basin. In that line item, we also have capitalized interest and capitalized G&A, which made up the vast majority. Add a couple of small acquisitions and about $50 million to $75 million in leasehold bonus as well. Operator: Thank you very much. Our next question comes from the line of Phillip J. Jungwirth of BMO. Phillip, your line is open. Phillip J. Jungwirth: Good morning. Can you talk about how you are viewing Viper ownership and what is optimal for Diamondback Energy, Inc.? You sold some in the quarter, still own 39%. With a stronger free cash flow outlook, there is less need for divestitures. Is there a minimum level of ownership you would maintain, and how does that play into capital allocation? Kaes Van’t Hof: We sold down a little Viper ownership as a follow-on from the drop-down where Diamondback Energy, Inc. took a lot of Viper stock. We could have taken more cash then, but instead waited and sold a little last quarter. We are done selling Viper shares at Diamondback Energy, Inc. The growth opportunity set for Viper is significant. Could Diamondback Energy, Inc.’s ownership be reduced through dilution? Possibly. But no desire today to monetize more shares. In a few months, both companies will be very well positioned from a balance sheet perspective to do anything from an M&A perspective, which is where we wanted to be. Phillip J. Jungwirth: In the 2022–2023 upcycle, private operators drove an outsized share of rig additions and oil growth. How would you characterize privates’ ability in the Permian to respond to higher oil prices now versus a couple of years ago, given implications for tightening OFS markets? Kaes Van’t Hof: Important question, and it has factored into our calculus. In 2022, Endeavor (now part of Diamondback Energy, Inc.) went from 2 rigs to 15; CrownRock (now part of Oxy) from 2 to 8; EnCap North (now part of Aventa) from 2 to 6; DoublePoint/Double Eagle (now part of a combination of us and Exxon) from 1 to 6. Big private-side moves back then. Much of that Midland private activity growth has been consolidated. There will be private growth—the model has shifted to smaller asset packages developed quickly, farm-ins to larger operators, and growth in Northern New Mexico—but by our math that is 20–30 rigs, not 100 like 2022. They will move quickly, but the volume impact will be much smaller than 2022. Operator: Thank you very much. One moment for our next question. Our next question comes from the line of Scott Andrew Gruber of Citigroup. Scott, your line is open. Scott Andrew Gruber: Good morning. In light of the impact of privates, how do you think about Diamondback Energy, Inc.’s volumes over the next five to ten years on an organic basis? Do you think about modest growth, stepping higher during periods of elevated prices and then maintaining that new level so net-net you are growing? Or, when prices are soft, do you pare back activity and let production fade? Kaes Van’t Hof: The operator with the best inventory quality, lowest cost structure, and longest inventory depth has the right to grow organically and create shareholder value. We have been looking to hit the organic growth accelerator for a while but did not have macro support. If mid-cycle pricing is a little higher—say $70–$75 WTI—I think a couple percentage points of organic growth adds to NAV and long-term free cash generation. Importantly, this new plan generates more free cash flow per share at any oil price above $60 than prior plans. In a $70+ world, that is advantageous to shareholders long term. Scott Andrew Gruber: On capital efficiency, it appears to improve on the margin with the updated plan, but it is hard to separate the DUC draw impact from adding rigs in the Barnett where you are still ramping learnings and efficiency. How would you describe the underlying trend in capital efficiency as you lap the DUC draw into 2027? Kaes Van’t Hof: DUC draws and Barnett timing are noise. Below that, the team is executing. We set records on drilling two-, three-, and four-mile laterals. Wolfcamp D development: we set a goal of $300 per foot for drilling, down from $360 per foot last year—we are already at $300 per foot. Barnett drilling needed to be below $400 per foot to target $800 per foot well costs to be competitive with the base program—we have already put a well in under $400 per foot. Efficiencies continue to improve above ground, and the big move is drilling and completing better wells subsurface. Those are the long-term drivers of capital efficiency. Operator: Thank you very much. Our next call comes from the line of Derrick Whitfield of Texas Capital. Derrick, your line is open. Derrick Whitfield: Good morning, and thanks for taking my questions. Regarding your share buyback and guiding principles, where do you view mid-cycle pricing now in light of the Middle East conflict and the risk premium? Also, what are you seeing in degradation of inventory quality across the Permian, clearly beyond Diamondback Energy, Inc.? Kaes Van’t Hof: We are long-term bullish. Within three months, we went from a projected largest oversupply (which was debatable) to the largest undersupply, and we are only two months in. It is hard for us to move off our mid-cycle framework—mid-$60s WTI, mid-teens NGLs, and $3 gas with Waha differentials. Energy security is becoming more important, meaning more landed storage and the U.S. barrel being more important than ever. We think the U.S. shale cost curve is moving up. Operators have done a good job with efficiencies, but geologic time catches up and there are signs of degradation in productive quality across the U.S. Our job is to keep Diamondback Energy, Inc. at the low end of the cost curve, with top-tier inventory depth and quality and low execution costs. We are very well positioned. It is too early to raise mid-cycle pricing. Derrick Whitfield: As a follow-up on the Barnett, referencing the play outline, how large could you reasonably grow this position beyond the 200 thousand you are highlighting? You have one of the most prolific buyers in Midland working with you. Kaes Van’t Hof: We announced the position after we felt we had a solid base of what we could get. We continue to add in Q1 on a small basis. Now we are doing a lot of trades. Big operators have Barnett positions, and we are all looking to block up to three- and four-mile laterals. There is a lot of Midland-based private equity building six- to eight-section positions that likely come to market. I think the position will grow, and we have the sizable base to continue growing it. Operator: Thank you very much. Our next question comes from the line of Analyst of Pickering Energy Partners. Kevin, your line is open. Analyst: Good morning. Can you provide color on the cadence of net lateral footage per quarter throughout the year and the lateral length per well? We assume the additional 200 thousand lateral feet is back-half weighted. Daniel N. Wesson: It will be pretty evenly weighted toward the back half. We went up to around 6.2 million lateral feet, so we are looking at probably 1.5 to 1.6 million per quarter for the back half of the year. Q1 was one of our lighter quarters on lateral length—about 11.5 thousand feet. For full-year 2026, we still expect to be at 12.9 thousand feet, ramping through the back half. Analyst: As a follow-up, any updates on the surfactant tests? Daniel N. Wesson: We had a big push toward the end of last year to get tests in the ground and try different surfactant combinations across rock types to understand drivers of well performance. Those tests are in, the team is studying results, and we are refining the process. We plan the next deployment early this quarter. Kaes Van’t Hof: One thing I would add: we tested about 50 wells last year. On average, we saw a 100-barrel-per-day uplift, but some wells were up 400–500 barrels per day and some were zero. We are figuring out what we did right in the 400–500 barrel-per-day wells and what we did wrong in the zeros. This is version 1.0. I think the basin and Diamondback Energy, Inc. are on the cusp of technological breakthroughs related to increasing recoveries past primary development. That will likely be a mega theme over the next four to six years. That is why we have held as much acreage as we have. We have some of the best oil in place in the basin and some of the smartest people working on this—potentially extending the basin’s life by a decade or two. Operator: Thank you very much. Our next question comes from the line of Analyst of Truist. Your line is open. Analyst: Morning. Thanks for the time. On the return-of-capital framework and pursuing growth this year—which makes sense—what is an upper bound of oil production growth for Diamondback Energy, Inc., assuming a green light on the macro? Is 5% a fair assumption, or could it be higher? Kaes Van’t Hof: I do not want to get into a specific number. We have already grown low single digits year-to-date. I do not think there is a lot of investor appetite for a large CapEx bump and more than mid-single-digit growth. It is early, there is a lot of noise, and no one is sure how the macro unfolds. We are keeping our cards close, coming out with a good Q1 forecast, and will see how the year unfolds. Investor appetite is not for the “go-go” days of 2017–2018 with multiple CapEx increases and mid-double-digit growth. We will keep it steady and capital efficient and take the macro quarter by quarter. Analyst: Any update around your surface position in light of a potential new market entry there—specifically the power project? Jere W. Thompson: As Kaes alluded to, we are making meaningful progress with our partners. We view the power and data center opportunity as a unique way to use our natural gas in-basin at advantaged pricing. Once we finalize a project, we will discuss more details, but it continues to move forward. Operator: Thank you very much. Our next call comes from the line of Charles Arthur Meade of Johnson Rice. Charles, your line is open. Charles Arthur Meade: Good morning, Kaes and team. On the acceleration of CapEx, can you give us an inside-baseball account of how you came to that decision—board latitude versus a quick telephonic/Zoom meeting? I am looking for insight into how you operate as a fast mover in a volatile tape. Kaes Van’t Hof: Our board is very nimble for its size—13 members who are responsive and move quickly when the decision is obvious. We also got advice from Jamie Dimon last year: communicate with your board often and tell them everything. We decided to overcommunicate through this crisis. The crisis kicked off a week after earnings; we had set the budget. We sent three or four notes to the board in March to update how we were thinking. Then it was a simple meeting ahead of earnings to make this decision. The board had resounding support for the plan. That is the inside baseball on how Diamondback Energy, Inc. works with its board. Operator: Thank you very much. Our next question comes from the line of Leo Paul Mariani of Roth. Leo, your line is open. Leo Paul Mariani: There has been discussion of weak Waha prices in 2Q. Could there be short-term negative volume impact for the company? Are there wells with a lower oil cut you might choke in for a period given how bad gas prices are? Kaes Van’t Hof: At these NGL prices, we think negative $3 Waha basically cuts out the value of your NGLs. Worse than that—negative $4 to negative $6—you start to eat into the value of oil production. Oil is $100 a barrel, not $60, so the math on shutting in oil barrels is different, but I do think shut-ins are happening in the basin. In areas like New Mexico, with tighter restrictions on midstream development and flaring, that is probably happening. For us, back in October when Waha blew out due to maintenance, we shut in 2 thousand–3 thousand barrels per day of production for a period and then brought it back. I would bet we are around that range today with Waha as weak as it is. It is not impeding new development, particularly with the amount of financial hedges we have. Leo Paul Mariani: That is helpful—it sounds like you still have flow assurance and this is more of an economic decision. Kaes Van’t Hof: That is right. Every molecule we have produced has moved; it is just moving at a negative price. Leo Paul Mariani: On growth, your oil guidance is a bit open-ended with 520 thousand-plus. You did around 520 thousand in 1Q. If the oil environment holds, should we think about that plus a little growth in the second half? Kaes Van’t Hof: That is fair. We will take it quarter by quarter. If we are outperforming the plan, we will hold activity and produce more oil into a market that needs it. Operator: Thank you very much. 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 the line of Analyst of Wolfe Research. Analyst: Thanks. Back to the balance sheet—Jere, with no variable dividend in the capital return structure, is it inconceivable that your net debt could go to zero over the next two or three years? Would you allow it to go to that level? Kaes Van’t Hof: That would be a good problem to have. We will be transferring a lot of value from the debt side of the NAV to the equity side over this quarter. We will take things quarter by quarter. If this oil price environment persists and the stock continues to go up, we will allocate less to buybacks and continue to put cash on the balance sheet. This is a cyclical business. We want the ability to pounce on opportunities when the cycle turns—M&A, buying back a lot of stock, or leaning on the balance sheet to buy back stock. The key is flexibility and long-term value creation. We want to get to zero debt and one share outstanding—it will be a race between those two with free cash generation over the coming decades. Analyst: Follow-up on non-operated positions: what are you seeing from your non-op and how could that influence consolidated growth? Perhaps a Viper question, but any color on private-side rigs and non-op activity? Kaes Van’t Hof: Diamondback Energy, Inc. carries very little non-op. Viper sees about half the wells in the basin. Early signs show nothing major on permitting, but field discussions suggest rigs are getting picked up on the private side. If we had to give a Permian rig count forecast for year-end, we are probably up 25–30 rigs from today. Operator: Thank you very much. Our next question comes from the line of Analyst of Melius Research. Your line is open. Analyst: I know things are fluid and you are taking it quarter by quarter, but the market has significantly changed in the last 60 days with structurally higher oil. You raised guidance for this year. How are you thinking about out-years and setting up the company to continue to grow at a mid-single-digit rate or not in 2027, 2028, 2029? Kaes Van’t Hof: We have to think long term. If we are in a higher-for-longer world, an advantaged company with advantaged inventory like Diamondback Energy, Inc. should answer the call for production growth—so long as it maintains capital efficiency. That would shift the business from a steady-state bond-like free cash generator to a free-cash-flow-per-share growth generator over the next few years, into the decade. It is early; we will see what the macro holds. It does feel like the world changed a lot since our last call. Analyst: As you think about your inventory depth versus peers, you are in a leading position. How would you characterize your position versus peers given the longevity you have? Kaes Van’t Hof: We are fortunate to have incredible inventory quality and duration. Within Diamondback Energy, Inc., we are always looking for the next stick—organically (Barnett generation, Upper Spraberry development) and inorganically. This machine is built to do significant transactions like Endeavor, but also the sub-$20 million deals. We do not want a unit in the Midland Basin to trade hands without Diamondback Energy, Inc. knowing it could be in our hands. We are set up for both small bolt-ons and larger transactions. Operator: Thank you very much. I am showing no more questions at this time. I would now like to turn it back to Kaes Van’t Hof for closing remarks. Kaes Van’t Hof: Thank you, everybody, for your interest. We are always available to answer any questions. Please reach out to the number or email on the notices. Operator: Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Ingredion Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. To ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Noah Weiss, Vice President of Investor Relations. Good morning, and welcome to Ingredion Incorporated's First Quarter 2026 Earnings Call. I am Noah Weiss, Vice President of Investor Relations. Joining me on today's call are Jim Zallie, our Chairman, President and CEO, and Jason Payant, our Vice President and interim CFO. Noah Weiss: The press release we issued today, as well as the presentation we will reference for our first quarter results, can be found on our website, ingredient.com, in the investors section. As a reminder, our comments within the presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those estimated in the forward-looking statements, and Ingredion Incorporated assumes no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed Annual Report on Form 10-Ks and subsequent reports on Forms 10-Q and 8-Ks. During this call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income, and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2, Non-GAAP Information, included in the press release and in today's presentation appendix. With that, I will turn the call over to Jim. Jim Zallie: Thank you, Noah, and good morning, everyone. While we expected a challenging quarter after last year's strong first quarter, results were weaker than anticipated in Food and Industrial Ingredients U.S./Canada due to operational challenges at our Argo facility. At the same time, performance in our Texture and Healthful Solutions and Food and Industrial Ingredients LatAm segments were in line with our expectations despite an increasingly uncertain macroeconomic environment. Overall, net sales were down 1% and adjusted operating income was down 22% versus last year, driven by Argo and softer industry volumes in Food and Industrial Ingredients U.S./Canada and LatAm. As expected, our Texture and Healthful Solutions segment delivered a solid quarter with broad-based volume growth reflecting increased adoption of our expanding solutions portfolio and continued customer demand for clean label offerings. Turning to the next slide, we are pleased that our Texture and Healthful Solutions segment posted its eighth straight quarter of volume growth, up 2%, led by clean label and texture solutions in EMEA and Asia-Pac. In Food and Industrial Ingredients LatAm, overall volumes were slightly down for the quarter due to expected weaker consumer demand versus a strong first quarter last year. We saw a modest recovery in Brazil, supported by improved customer demand and early benefits from our polyols network optimization completed at the end of last year. Additionally, this morning, we announced plans to cease operations at our Cabo manufacturing facility in Northeast Brazil by 2026 as we drive enterprise productivity to deliver operational efficiencies while sharpening customer mix priorities. We expect the actions we have taken in Brazil, both commercially and operationally, to deliver continued benefits throughout the year. In our Food and Industrial Ingredients U.S./Canada segment, net sales volumes declined 7% in the first quarter, driven primarily by operational issues at our Argo facility as well as softer demand across certain food and industrial markets. As noted earlier, Food and Industrial Ingredients U.S./Canada results were negatively impacted by Argo in the quarter. Within our February outlook, we expected $10 million to $15 million of additional costs to impact the quarter as the facility recovered to normal grind rates. However, additional operational challenges slowed the recovery and negatively impacted saleable inventory. As a result, the actual Q1 impact was much greater than anticipated, coming in at $40 million, comprised of higher maintenance spend and the costs associated with elevated levels of rework. Additionally, we incurred higher logistics costs as we sourced products from other facilities in our network to meet customer commitments. In response to challenges in our refinery operations, we took meaningful actions during the quarter to diagnose and remedy the sources of process failures. We assembled a multidisciplinary team of internal and external experts in refinery unit operations and are pleased to say that downstream production returned to normal levels by quarter-end. Unfortunately, in the midst of this progress, on April 10, there was an isolated thermal event in Argo's corn germ processing operations. While the front-end grind and refinery were not impacted, crude oil production went offline. Our teams are working diligently to restore our germ processing capabilities, and we expect to return to normal operations in this unit within the second quarter. Our balance-of-the-year assumptions for Food and Industrial Ingredients U.S./Canada are based on the germ processing recovery timeline that I just outlined, as well as sustaining current levels of production and yield through the refinery operations at Argo. Turning to a significant driver of Texture and Healthful Solutions growth in the quarter, our solutions sales continue to outpace overall segment growth. As a reminder, our solutions portfolio is approximately $1 billion, or 40% of this segment's revenue. Clean label remains a major growth driver within our solutions offering. It is noteworthy to point out that even against a challenging volume backdrop, customers continue to seek clean label options. Our industry-leading portfolio of functional native starches grew strongly in the quarter, benefiting from sustained customer demand for simpler ingredient panels and increased reformulation support. Examples include customized texturizing systems for dairy and dairy-alternative applications, as well as solutions supporting reformulation for healthier bakery and beverage platforms. Solutions growth is coming from more than just clean label ingredients. It also reflects the breadth of our capabilities and how we are partnering with customers through co-development, providing formulation expertise and differentiated ingredients. This combination is helping us deepen customer engagement and improve mix within Texture and Healthful Solutions. As part of the innovation engine for solutions, we are increasingly leveraging artificial intelligence to power the consumer insights and predictive formulation work that are at the heart of our solutions customer briefs. This is helping us accelerate the brief-to-solution cycle time. Moving to another bright spot in the quarter, our Healthful Solutions portfolio, comprised of clean taste solutions for sugar reduction and protein fortification, continued to grow strongly. Sales of our pea protein isolates, driven by recent new product innovations, grew more than 50% in the quarter, and our clean-tasting stevia-based solutions also demonstrated a solid 6% growth in the quarter. Growth in these categories is broad-based across both branded and private label, reflecting the heightened consumer pull for protein-fortified and lower-sugar offerings. As we look ahead to the remainder of the year, we are actively monitoring and managing both the direct and secondary effects of higher energy prices. The largest impact we foresee is related to increased logistics costs, which we are actively working to offset within-year price increases. It is important to mention that at this point, we do not foresee major challenges related to sourcing any of our important manufacturing inputs. The work done in recent years to increasingly localize our supply chains should position us well to mitigate disruptions. We are also monitoring the impact higher energy costs are having on packaging inflation and gasoline prices, and the effect that together they could have on consumer demand in the second half. At this point, it is too early to estimate the degree to which these inflationary pressures may impact volumes. We are also carefully monitoring fluctuations in the value of the U.S. dollar. The Mexican peso has unexpectedly maintained its strength, and this is presenting a meaningful transactional foreign exchange headwind for the FNII LatAm segment. The dynamics brought on by new inflationary headwinds are familiar to us, as we have successfully managed through these periods before. We have the operational experience to react with agility, and we are leveraging our pricing centers of excellence to implement targeted price increases where they are required and where possible. With that, I will turn the call over to Jason for the financial review. Jason Payant: Thank you, Jim, and good morning, everyone. Moving to our income statement, net sales for the first quarter were $1.8 billion, down 1% versus prior year. Gross profit declined 14% with gross margin decreasing to 22.4%, driven primarily by operational challenges at Argo; lower volumes and unfavorable mix in Food and Industrial Ingredients U.S./Canada and Food and Industrial Ingredients LatAm; and transactional foreign exchange impacts in Mexico. Reported and adjusted operating income were $203 million and $212 million, respectively. Turning to our Q1 net sales bridge, the 1% decrease was driven by $32 million in lower volume and $22 million in lower price/mix, partially offset by $33 million of favorable foreign exchange translational impacts. Moving to the next slide, we highlight net sales drivers by segment for the first quarter. Texture and Healthful Solutions net sales were up 2%, driven by sales volume growth of 2% and foreign exchange favorability of 2%, partially offset by lower price/mix. Food and Industrial Ingredients LatAm net sales were up 1%, driven by favorable foreign exchange, partially offset by lower volumes and weaker price/mix. Food and Industrial Ingredients U.S./Canada net sales declined 9%, driven by operational challenges at Argo and weaker consumer demand. Now let us turn to a summary of results by segment. Texture and Healthful Solutions net sales were up 2% in the first quarter, and operating income was up 1%. The increase in operating income was driven by favorable input costs, foreign exchange, and better volumes, partially offset by strategic price and mix management. In Food and Industrial Ingredients LatAm, net sales were up 1% in the quarter. However, operating income decreased by 9% to $115 million, with operating margins of approximately 20%. These decreases were driven primarily by Mexico transactional currency impact and softer volumes in Mexico and the Andean region. Positive performance in Brazil and the Argentina joint venture helped offset some of these headwinds, allowing the total segment to deliver results in line with expectations. Moving to Food and Industrial Ingredients U.S./Canada, first-quarter net sales were down 9%. Operating income was $34 million, driven by operational challenges at our Argo plant and weaker volumes and mix. Net sales in All Other increased approximately 3%, driven by continued growth in protein fortification, particularly in higher-value isolate and specialty protein applications. Operating income improved by over $3 million year on year, reflecting improved mix and operating leverage. Turning to our first-quarter earnings bridge, the top half of the slide reconciles reported to adjusted earnings per share, and the bottom half walks through the drivers of the year-over-year change. Adjusted diluted earnings per share declined by $0.63 year over year, including $0.71 of margin impacts and $0.14 of volume impacts, that were primarily the result of the operational challenges we previously discussed. These headwinds were partially offset by foreign exchange benefits of $0.07 and other income benefits of $0.08 per share, as well as $0.07 of non-operating items, including $0.06 of share repurchase benefits. Turning to cash flow and capital allocation, we continue to demonstrate financial discipline in the quarter. Year-to-date cash from operations was $33 million, reflecting a planned investment of approximately $205 million in working capital. This was driven primarily by receivables and payables. We invested $110 million of capital expenditures, net of disposals, to support reliability, capacity, and strategic priorities across the business. During the quarter, we continued to return cash to shareholders through $52 million in dividends and the repurchase of $14 million of shares. This underscores our commitment to balanced capital allocation and long-term shareholder value creation. Now let me turn to our updated 2026 outlook. As Jim noted in his opening remarks, we have revised our outlook to reflect the updated impact from Argo; foreign exchange transactional impacts from continued strength of the Mexican peso relative to the U.S. dollar; the impact of higher energy prices on input costs and logistics; and softer volumes in LatAm. For the full year 2026, we now anticipate net sales to be flat to up low single digits and adjusted operating income will be flat to down low single digits. Our 2026 financing cost estimate is in the range of $35 million to $45 million and a reported and adjusted effective tax rate of 26% to 27.5%. Our full-year adjusted earnings per share is now expected to be in the range of $10.45 to $11.15. This outlook assumes sequential operating improvements at Argo and continued resilience in the Texture and Healthful Solutions side. Our adjusted earnings per share range is based on a diluted share count of 63.5 million to 64.5 million shares. We anticipate that our 2026 cash from operations will now be in the range of $725 million to $825 million, reflecting our updated net income expectation as well as working capital investments in line with net sales growth and normalized inventory levels in Food and Industrial Ingredients U.S./Canada. Capital expenditures for the full year are now anticipated to be between $400 million to $440 million. Please note that our guidance reflects current tariff levels in effect as of April 2026. In addition, this guidance excludes any acquisition-related integration and restructuring costs as well as any potential impairment costs. Turning to our updated full-year outlook by segment, our net sales outlook for Texture and Healthful Solutions remains the same, but operating income is now expected to be up low single digits, which still reflects volume growth but is partially offset by higher input cost inflation. For Food and Industrial Ingredients LatAm, net sales are now estimated to be flat to down low single digits and operating income is expected to be down low single digits, reflecting foreign currency transactional headwinds in Mexico and softer volumes in LatAm. As a reminder, our Mexico business is U.S. dollar denominated, but most of our SG&A and operating costs are in pesos. As the peso strengthens against the dollar, our transactional costs increase in dollar terms, which negatively impacts operating income and can more than offset translational benefits against a weaker U.S. dollar in other parts of our LatAm business. For Food and Industrial Ingredients U.S./Canada, we now expect net sales to be down low single digits, and operating income is projected to be down low double digits, which reflects the impact of operational challenges in Q1 on our full-year outlook. All Other operating income is still anticipated to improve by $5 million to $10 million from full year 2025. Lastly, for 2026, we expect net sales to be flat to up low single digits and adjusted operating income to be down high single digits, as we lap a very strong second quarter in 2025. That concludes my comments, and I will turn it back over to Jim. Jim Zallie: Thank you, Jason. To close, even in a challenging quarter, we continue to see momentum in the highest-value parts of our portfolio, particularly Texture and Healthful Solutions, where customer demand remains robust, supported by clean label, healthy eating, reformulation, and solutions-led growth. As stated, our Food and Industrial Ingredients U.S./Canada projections are based on the sequential operational recovery at Argo throughout Q2 and reflect sustaining current levels of production and yield for the balance of the year. We are actively monitoring and managing the impacts of energy and currency movements and are pursuing targeted price increases where required and where possible. Our enterprise productivity initiatives, specifically from network optimization, are providing operational and commercial benefits which will support margin. With a strong balance sheet and solid cash generation, we remain well positioned to invest for growth, support our strategic priorities, and deploy capital with discipline as we continue to build long-term shareholder value. We will now open the call for questions. Operator? Operator: Thank you. Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. And our first question comes from Pooran Sharma with Stephens. You may proceed. Analyst: Hi. This is Jack Harden on for Pooran Sharma. Thanks so much for the question. Once Argo normalizes, do you still view the Food and Industrial Ingredients U.S./Canada business as capable of getting back to the mid- to high-teens operating margin profile? And is that more of a 2027 target now, or could that run rate be possible exiting 2026? Jim Zallie: Yes, the answer to that question is yes. We are still committed to getting back to the mid-teens operating income margins for that business, consistent with what we put forward in the Investor Day in September. The issues at Argo are the predominant driving factor in relationship to the margin decline and the operating income decline in that business. We are encouraged by how the grind and how the refinery operations finished the quarter. We were disappointed with the April 10 issue in the corn germ processing unit, but, again, that particular issue is isolated. It is in a very specific location within the plant, separate from grind, separate from the refinery operations, and the repairs are well underway. That unit should be back up and running again within Q2. So in answer to your question from a standpoint of getting back the majority of the 1,000 basis points of margin decline in this quarter compared to the 16% to 17% that we are typically projecting, I think we would say for 2027, certainly, that is our expectation at this point in time. Assuming that we can string a couple of good quarters together of run-ability and reliability, we feel that from a standpoint of the demand and how we have been able to service customers through this period, we can get back to those levels of operating income. Analyst: Thank you. And a quick follow-up on capital allocation. With updated cash flow from operations guidance and CapEx guidance remaining the same, how should we think about capital allocation through the rest of the year? And is the prior commitment of $100 million roughly the right way to think about it, or has that been updated as well? Thanks. Jim Zallie: Jason, do you want to take that? Jason Payant: Yes. I would say yes. Certainly, based on our current cash flow projections and capital allocation priorities, we plan to build on the $14 million shares we repurchased in Q1 to meet our full-year targeted commitment. Jim Zallie: And Q1's CapEx came in consistent with the full-year projections as well. So yes, it is to continue as planned for the capital allocation priorities. Thanks so much. Operator: Thank you. Our next question comes from Joshua Spector with UBS. You may proceed. Joshua Spector: Hi. Good morning. I wanted to drill into Texture and Health a little bit more and just understand some of your assumptions through the year. I guess if I look at the first quarter, your organic growth was about flat. You got the couple points basically from FX. So assuming FX becomes less of a tailwind, you basically need organic growth to pick up. So I am just curious relative to the 2% volumes and the down 2% pricing, how do you expect that to evolve through the year to get the segment to the low- to mid-single-digit growth you expect for the year in total? Jim Zallie: The mid-single-digit target is part of our long-term algorithm for growth. We are pleased to deliver 2% net sales volume growth in the quarter, and I think it is noteworthy again to highlight that it is the eighth consecutive quarter of sales volume growth. We really believe that the focus that we have now on solutions, which is a result of the re-segmentation work that we completed nearly two years ago, and the solution selling approach that we have globally implemented with trainings and certifications and formulation experts that collaborate with our 30-plus Idea Labs around the world, plus our technical headquarters in Bridgewater, New Jersey, all of that continues to come together very well on behalf of the customer. At the same time, driven by regulatory changes and health and wellness trends, there are a number of reformulations that are coming to us from customers. We also have proactively decoded, I guess you could say, better than we have in the past, the private label ecosystem and the supply networks, the co-packing networks, and we have an increasing pipeline of project briefs to support customers with solution selling and co-creation, which is driving really deeper engagement and faster delivery of solutions to customers. And so I think all of that makes us feel confident that when the macroeconomic conditions and inflationary pressures lessen a bit, that is going to enable us to move from what currently is low single digits to that mid-single-digit territory that we believe is absolutely achievable and correct for that segment based on the portfolio that we have, based on the differentiated ingredients that we have, and based on the investments that we have made in capabilities, both in people capabilities as well as in equipment capabilities within our R&D facilities. So that is what gives us the confidence that we can do that. Joshua Spector: Okay. I appreciate that. I guess I would be more specifically curious on pricing, because you guys had done well on volumes, but pricing has been a persistent headwind. It sounds like from how you described the call today, you would expect pricing maybe to pick up to cover some of the higher costs that you are starting to see in logistics and other areas. Is that the right framework? Jim Zallie: Let me try to clarify in relationship to something that occurred uniquely in the quarter to help put that in perspective. So first of all, let me speak to margins, which is what you are also getting at with your question around pricing. What is encouraging to highlight is that margins in U.S. and Canada in Texture and Healthful Solutions actually increased in the quarter. The majority of the slight margin compression we are seeing is related to the rapid rise in tapioca costs in Asia Pacific. Tapioca for us is a significant business, and that pretty rapid increase in tapioca costs in Asia-Pac started to occur at the end of Q4 last year, and so the time lag that it takes to pass through those costs through increasing pricing is what we are seeing in Q1 manifest itself. That typically takes about a quarter to a quarter and a half to work its way through, just on how tapioca pricing works. So that may help to clarify what you are highlighting in relationship to the quarter and some of the margin compression that we experienced. It is something that is pretty heavily weighted and unique to that particular issue. Joshua Spector: Okay. One other quick follow-up around that issue is just so pricing was still reported down. How do I square an escalation in cost and the pricing side there? Is that the timing that that margin and that price recovers in 2Q? Or are there other factors outside of this which are still pressuring that? Jim Zallie: Yes. So regarding pricing and taking it back to, I think, the prior earnings call and what we said in relationship to Texture and Healthful for the full year: going into contracting, we were, for our less differentiated products, having to price to maintain market share and, in some cases, increase our market share to a degree. We are expecting and are seeing increases in fixed cost absorption through our Texture and Healthful Solutions manufacturing facilities because we did pursue volume in the contracting period, and that is why the setup for this year you are seeing some of that play itself out in the way of how pricing is being viewed. But we believe that that was absolutely the right approach to continue with our relevance with the customer base that we segmented and targeted to then bring our solutions capabilities, which over time are going to increase our margins just due to the higher gross profit associated with solutions versus the, say, less differentiated parts of the Texture and Healthful Solutions portfolio. So there are a few things going on here strategically as it relates to how we approached the year from a standpoint of what the market gave us related to competitive dynamics going into contracting and how we pursued pricing. But the thing to be most encouraged about is the solutions growth in the quarter, which is margin accretive over time. And then we had this one issue related to the tapioca costs, which, again, we have been there on the other side of that before many times. Given our market position, those prices will flow through; it just takes about a quarter to a quarter and a half to get them. Joshua Spector: Okay. Thank you very much. Jim Zallie: Thank you. Operator: Thank you. Our next question comes from Benjamin Thomas Mayhew with BMO Capital Markets. You may proceed. Benjamin Thomas Mayhew: Hi. Good morning, and thanks for taking the questions. So my first question has to do with customers having to manage pricing. So I am just wondering what you are seeing in terms of elasticity on your products, and how, when you are trying to take this pricing, how might that impact volumes should you need to pass through an extended amount of costs through the balance of the year? Jim Zallie: I am going to let Jason take this, but let me just set it up. Obviously, very similar to last year in relationship to the tariff implementation, we have been very proactive to put in place a Middle East response team that is collecting all of the input to our business as it relates to the inflationary impacts of increased energy prices, and we are monitoring and managing those direct and indirect impacts. So we have a handle right now on certainly the direct impacts and what we need to do to offset the logistics cost increases and any increases that are flowing through to us directly with chemicals and/or packaging. Jason, you are overseeing that. Do you want to give some perspective? It is early. I know it is very early in the cycle, but the team is actively working that. Jason Payant: Yes, and as we have done in the past with tariffs and other disruptions like this, we do believe that we will be able to pass through most of the costs. Jim Zallie: There may be a small but manageable net negative impact, but overall history has shown that, contractually and consistent with market dynamics, we are able to pass those costs through. At this point, what is more difficult to predict is the indirect impacts this may have on consumer demand as our customers work to pass through those incremental costs onto the market. Yes. I think that is absolutely correct. I think that last year, if you remember, we navigated tariffs extremely well. In fact, I think the net impact to us was, after putting through price increases, a net impact of about $6 million for all of the tariffs that went into place last year, and we managed through that very well. This year, as it relates to the direct impacts thus far that we have been able to project forward for the Middle East energy price situation, we are seeing a number in a similar range. So we think that is extremely manageable. But to Jason's point, the bigger watch-out, I think, for everyone, for the industry at large, is the longer the conflict lasts and the inflationary impacts are felt through increases that consumer products goods companies are putting through in packaging—plastic-related packaging, which is mid- to high-single digits—and passing that on to the consumer, as well as gasoline prices that are going to impact lower- to middle-income consumers. That is where I think the watch-out is for the second half of the year, which is very hard to predict, even though in the first quarter, we saw minimal to no impact of this. But everyone is watching cautiously, despite the fact that consumers seem to remain robust in the first quarter, at least in the United States. Benjamin Thomas Mayhew: Got it. Thank you so much for the context there. That was very helpful. And just a follow-up question going in a different direction here. Your balance sheet—the cash balance is still very, very strong. We know that you have been looking at a pretty robust M&A pipeline, but that valuations have not quite been where they need to be to take action. As you are looking at a potentially tougher environment for the industry, how are you thinking about your M&A pipeline? Is it getting more interesting? And are you prepared to pursue more inorganic growth? Thanks. Jim Zallie: Yes. One of the things we are obviously fortunate to have is a strong balance sheet and strong cash flows, and that does provide us optionality to pursue value-accretive M&A. I think it is important to note that we have a track record for remaining disciplined in pursuit of M&A prospects, and when we do pursue a target and integrate that business, we have typically integrated and delivered on the business case. We have a robust M&A pipeline—we always do—and we are actively pursuing a number of businesses that could bring us sales, EBITDA, talent, and technology. Anything that is going to, again, enhance our winning aspiration in the areas of Texture Solutions and Healthful Solutions is going to be our priority. But, again, we will remain disciplined in relationship to the value-accretive nature of those and the executability and the synergies that we can deliver from those targets. Analyst: Thank you. Operator: Our next question comes from Analyst with Barclays. You may proceed. Analyst: Good morning. Thanks for taking my question. I just wanted to follow up a little bit on the performance in Latin America and what has been driving this. You have called out the volume decline, but if we look at some of the underlying trends, be it at the Coke bottlers or even what we saw with a large beer brewer in Brazil earlier this morning as well—reporting surprisingly better results—I was just wondering where the mismatch is between what we saw operationally for the Coke bottlers and brewers in the region, where we have actually flattish to maybe even slightly up volume, versus you guys having about a 7% impact on volume. I just wanted to understand the mismatch here. Thank you. Jim Zallie: Yes, it is a really good question, and we saw those results as well that you referred to. What we can say about our LatAm volumes: we expect volumes to be down slightly, lapping a strong 2025. For us, brewery volumes have been lower than anticipated thus far due to conservative customer ordering ahead of the World Cup, which is surprising. We believe this has the potential to pick up in Q2. However, we are lapping soft volumes in Q3 of last year related to a particular customer contract management issue, and we think that in the second half the volumes are going to be stronger. The Mexican economy continues to demonstrate softness, and thus we have a cautious outlook on volumes for the remainder of the year for Mexico. I think GDP growth now is in the 1% to 1.5% territory. Overall, against a record Mexico performance last year, we are seeing softness, and then, as Jason alluded to, we have the impact of the Mexican peso, which is a headwind for us as well. We will dig more into the numbers that you refer to, specifically in brewing, and try to understand what may be happening in relationship to, say, no- and low-alcohol beers, which appears to be growing 25% in comparison to mainstay beers, and understand how that then flows through to us and impacts us. But that is what we are seeing. That is what we can say to you in relationship to trying to reconcile it at this point in time. Analyst: Okay. And then just following up, the price/mix—was it more price, or was it more mix in terms of what drove the headwinds here? Just to understand if it is more like a price pass-through or if it is an actual mix effect to lower-price items. Jason Payant: In Latin America, you are asking. Yes, correct? I would say that all the impacts from the price were reflected in our guidance and even our original guidance. It is really, at this point, a mix issue. We are seeing differentiated customer mix and some product mix that is having a little bit of an impact there. But, overall, results were in line with our expectations for the quarter, and we are not seeing a huge change in LatAm balance of year. Obviously, the bigger drivers in our guidance change are Argo, which is about half of it, and then the balance is really the Mexican peso and some of the Middle East impacts on energy costs. So the LatAm piece is really a smaller component of that. Analyst: Okay. Got it. Thank you very much. Operator: Thank you. Our next question comes from Kristen Owen with Oppenheimer. You may proceed. Kristen Owen: Hi, Jim, Jason. Thank you for the time this morning. Just following up on this thread on LatAm, I wanted to ask if you could provide a little bit of background on the Cabo plant—just what the decision factor was there, and how we should think about that influencing margins. Also, just clarification on the model: is the shutdown of that plant included in the updated outlook? And then I have a follow-up. Thank you. Jim Zallie: The answer to your last question is yes, and I will give you some context in relationship to the decision that we announced today. We are always continuously evaluating the efficiency and optimization of our operations and network. As part of a broader initiative to adjust our operating footprint in Brazil, with a goal of strengthening operational efficiency, competitiveness, and long-term business sustainability, we made the decision to cease operations at our Cabo plant. That plant is in the northeast part of Brazil. Economic growth in that part of Brazil compared to when we made the decision to make that investment has not lived up to its potential. Brazil at the time of that plant going in—Brazil itself—was growing 7%. I remember when the investment was made. Here we are fifteen-plus years later, and the potential for that plant with its location and the economic growth in that territory just has not delivered. So while these decisions are never easy, the decision regarding Cabo does align with our long-term vision for Brazil as we concentrate resources on higher value-generating businesses. What I think is also noteworthy is the decision we took in Brazil as well in Q4 to close our Alcantara plant. The ingredient polyols business in Brazil is a strategic growth platform, and we successfully have executed that, and we have expanded our polyols production at our flagship facility at Mogi Guaçu, and that is delivering now on all elements. We are encouraged by that, and that will provide some strength for the Brazilian business in this year as well as the savings associated with the Cabo facility. These were all necessary moves to strengthen our footprint and our network in Brazil, dealing with the realities of the marketplace. Kristen Owen: Okay. Great. Thank you for that. And then my follow-up question: we have talked about some of the moving pieces in F&NI North America. I am wondering if you can help us understand how to think about co-product opportunities just given where fed prices have moved—maybe some crosswinds on the paper and packaging side—how we should think about that influencing the balance of the year. Thank you. Jim Zallie: Do you want to take that, Jason? Jason Payant: Yes, I can take that. I think our co-products are always an important part of the business. What we have been able to do over the past few years is mitigate some of the volatility related to the co-products. So, as we have been able to hedge further forward on our corn during our contracting process, we are also hedging further forward on our co-products. That does somewhat temper any volatility relative to our forecast, which is actually a good thing. We will obviously see a little bit of benefit as prices rise for the unhedged portion of our contracts, but it will be muted relative to what we may have seen five or ten years ago. Kristen Owen: Thank you. Jim Zallie: Thank you, Kristen. Operator: Thank you. Our next question comes from Heather Lynn Jones with Heather Jones Research. You may proceed. Heather Lynn Jones: Good morning, and thanks for the question. I hopped on late, so I apologize if my question is repetitive. I was wondering on the guidance side—I guess I just wanted to ask about your confidence level. As far as the Argo issue, you had the issues from last year's fire, and now there was a recent fire, I think, in the corn germ part of the plant. I was wondering: have the issues from last year been fully resolved? And does your guidance for the rest of the year assume that the corn germ piece is fully resolved relatively soon? Jim Zallie: Yes. The answer to your last question is yes. In Q2, that issue, we believe, will be behind us. Because Argo was so significant in the quarter, I do want to take just maybe a little bit more time, picking up on your question, to try to put it in perspective. It has been a disappointment for us. Early in the first quarter, we had a failure in our corn conveying at the plant, which led to incremental intraplant logistics to have corn flow as it should, and that led to increased logistics and maintenance costs. This was repaired in the quarter, and that is now behind us. In addition, in our downstream refinery operations, we experienced operational reliability challenges in our syrup refining, and that led to product downgrades and unexpected rework costs. Typically, we can overcome that pretty quickly. In this case, the issue and getting to the root cause proved a little bit more elusive, and it just took longer than we had anticipated. This issue, unfortunately, persisted through the quarter and was the single biggest unexpected negative impact to results. That is now resolved, and that is now behind us, and that came about through really a SWAT-team approach to get that behind us. While these issues cumulatively had a significant impact, we are pleased to say with where we are at right now, the issues are behind us, and refinery production is operating at normalized rates as we exited the quarter. But to the question you asked about the thermal event that we had: on April 10, we suffered that thermal event in our corn germ processing unit, which took this unit offline for approximately five to six weeks. That is scheduled to be back online within Q2. It was isolated. It was limited to just the germ processing area; again, the front-end grind and refinery were not impacted. What is important to highlight is that, due to the nonrecurring nature and magnitude of this event, that impact will be excluded from our adjusted results. What I leave you with related to the Argo plant is that we are seeing sequential improvement at Argo, and our outlook assumes we will sustain the production and yield levels we are operating at today. So hopefully, that provides you some additional context as it relates to Argo and the impact in the quarter. Heather Lynn Jones: It does. And I just want to clarify before my next question: so the issues from last year—where I think there was a dryer issue related to your gluten feed and gluten meal—that was fully resolved and was not a factor in Q1? It was more on the downstream refinery, but that is all been resolved and is working well. The corn germ issue is not resolved, but it is expected to be. But regardless, it is excluded from your adjusted guidance. Jim Zallie: That is 100% correct. Yes. I can say the challenge you have when your germ processing goes down is you have more germ. We can store a good proportion of it that we can process once everything is back online, but some of that will go into the wet feed pile, and it will impact co-product values overall, because you have a larger portion of product that you need to dry. We will not be able to manage that through all of the dryers. But the issues of last year are resolved. We do expect a little follow-on co-product headwinds as we get the corn germ processing back online. Heather Lynn Jones: Okay. Thank you for that. Then I want to go through your segment guidance. If I was reading the releases and Q4's release correctly, I think you took down T&HS a little bit. I think you had been guiding up low single digit; you are guiding up low single digit; you had been low single to mid single. LatAm now down, and U.S./Can down low double digit. U.S./Can seems obvious because of Argo. I was wondering on the T&HS side and the LatAm side—beyond brewing—has there also been disappointing demand, or are those guidance changes related to costs? Jason Payant: Yes. I would say the impact on T&HS really just reflects the higher costs that we are expecting from the higher energy costs and the lag that it will take in some regions to pass those costs through. Again, there will be a net negative, but a small, manageable impact for certain costs that we cannot pass on to customers—warehouse-to-warehouse transfers, things like that. That is really the cause of the reduced outlook for T&HS. Beyond that, we are expecting volumes and sales to be roughly in line with our original guidance, although, as we said, it is hard to assess the potential impact on consumer demand that those higher cost pass-throughs may ultimately have. That is something that we are watching carefully and would be included in the lower end of our range. Heather Lynn Jones: Okay. Thank you so much. I appreciate it. Analyst: Thanks for taking my questions. Just one quick one for me. You alluded in your prepared remarks earlier in the call to optionality regarding growth investments. I am wondering a couple of things around this dynamic. First, have the issues that you have been forced to navigate—be it Argo or the various macro dynamics—in any way compromised your ability to really focus on growth initiatives so far year to date? Second, can you talk about how you see these growth investments evolving? Are you leaning more into the protein side of the business that you highlighted, still focused on the Texture and Healthful Solutions segment? Any context there would be great. Jim Zallie: One of the things that we did is, alongside our enterprise productivity initiative—which we always need to have as a lever to drive continuous improvement in our business—as a management team we got together early in the year, looking at that initiative and what we wanted to achieve from that this year alongside what our CapEx budget presented. We ring-fenced certain investments that we preserved for support of our Texture Solutions capability build, and we proceeded to make the people investments and the innovation investments. Right now, one of the bodies of work in enterprise productivity—which you would think could be solely about cost reduction—but actually one of the biggest parts is enhancing our innovation operating model: how do we become even more efficient and effective from innovation with the investments that we can make in artificial intelligence to get the predictive formulation that is at the heart of our solutions capability, as well as the measurement capabilities to do structure-function predictability work for, again, texture solutions. We have ring-fenced those investments. We are continuing to make those investments. The cash flows afford us the opportunity to invest both in a balanced way in growth capital as well as reliability capital. We are always assessing those needs, and I think we have the balance right going forward. We spent a lot of time debating and discussing that. Analyst: Very good. I appreciate that context. I will get back in queue. Jim Zallie: Thank you. Operator: Thank you. I would now like to turn the call back over to Jim Zallie for any closing remarks. Jim Zallie: I want to thank everyone for joining us this morning. We look forward to seeing many of you at our upcoming investor events, with the next significant engagement being the BMO Farm to Market on May 13 in New York. I want to thank everyone for your continued interest in Ingredion Incorporated. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure, Inc. First Quarter Webcast and Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. As a reminder, this call is being recorded on Tuesday, 05/05/2026. I would now like to turn the conference call over to Noelle Christine Dilts, Vice President of Investor Relations and Corporate Strategy. Please go ahead. Noelle Christine Dilts: Good morning to everyone joining us, and welcome to Sterling Infrastructure, Inc.’s 2026 First Quarter Earnings Conference Call and Webcast. I am pleased to be here today to discuss our results with Joseph A. Cutillo, Sterling Infrastructure, Inc.’s chief executive officer, and Nicholas M. Grindstaff, Sterling Infrastructure, Inc.’s chief financial officer. Joseph A. Cutillo will open the call with an overview of the company and its performance in the quarter. Nicholas M. Grindstaff will then discuss our financial results and 2026 guidance, after which Joseph A. Cutillo will provide some additional commentary on our markets and outlook. We will then open the call up for questions. As a reminder, there are accompanying slides on the Investor Relations section of our website. These slides include details on our full-year 2026 financial guidance. Before turning the call over to Joseph A. Cutillo, I will read the Safe Harbor statement. The discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling Infrastructure, Inc.’s most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted operating income, adjusted net income, or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. I will now turn the call over to our CEO, Joseph A. Cutillo. Joseph A. Cutillo: Thanks, Noelle. Good morning, everyone. Thank you for joining Sterling Infrastructure, Inc.’s First Quarter 2026 Earnings Call. Sterling Infrastructure, Inc. is off to a fantastic start, delivering strong revenue growth of 92% and adjusted diluted EPS growth of 120%. Adjusted EBITDA more than doubled with margins expanding over 150 basis points year over year to reach a new first quarter record of 20%. During this period of unprecedented demand, our focus remains on pursuing projects that offer the most attractive returns. We are not looking to win all projects. We are looking to win the best projects. Signed backlog at the end of the quarter totaled $3.8 billion, a 78% year-over-year increase, and combined backlog grew 131% to reach $5.2 billion. Additionally, we have visibility into high-probability future phase opportunities that now total over $1.3 billion. Together, our signed backlog, unsigned awards, and future phase opportunities provide visibility into a total pool of work approaching $6.5 billion. This has grown by approximately $2.0 billion since year end. Notably, during the quarter, we were awarded the first phase of a multi-phase semiconductor fabrication campus. This first phase, which will be executed under a joint venture, totals over $500 million and is expected to be completed in late 2027 or early 2028. The campus build is expected to span a multi-decade period and presents opportunities for additional scopes of work through 2027 and beyond. The growth in our backlog and future phase work in the quarter, combined with our visibility into our customers’ multi-year plans, strengthens our confidence in our outlook. We believe we are perfectly positioned to continue to deliver strong earnings growth and returns for our shareholders for many years to come. The Sterling Way—our commitment to take care of our people, our environment, our investors, and our communities while we work to build America’s infrastructure—remains our guiding principle as we execute our strategy and grow the company. Now I would like to discuss our segment results for the quarter in more detail. In E-Infrastructure, first quarter revenue grew 174%, including organic growth of over 100%. The data center market was again the primary growth driver in the quarter. E-Infrastructure adjusted operating income increased 177% as margins expanded, despite the dilutive impact of the CEC acquisition. Revenue for our site development operations more than doubled and operating margins expanded both year over year and sequentially. Margins continue to benefit from our strong execution on large, time-sensitive, mission-critical projects. CEC delivered 78% revenue growth compared to its prior-year first quarter, with margins performing in line with our expectations. The Texas market remains exceptionally strong, with robust award activity in early 2026. During the quarter, CEC secured several large project wins, contributing to a $1.2 billion increase in its combined backlog since year end 2025. We continue to see tremendous opportunities ahead for both electrical and site development. In aggregate, our E-Infrastructure signed backlog, unsigned electrical awards, and future phase site development opportunities now exceeds $5.0 billion, representing an increase of $2.0 billion since year end. Mission-critical work, including data centers, large manufacturing projects, and semiconductor, represented over 90% of the E-Infrastructure signed backlog at the end of the quarter. Future phase work is predominantly related to mission-critical projects. Moving to Transportation Solutions, first quarter revenue grew 10%, driven by strong activity in the Rocky Mountain region, which benefited from favorable weather conditions and some earlier-than-anticipated project starts. Adjusted operating income grew 26%, reflecting strong execution and a mix shift towards higher-margin projects. We ended the quarter with Transportation Solutions backlog at $1.04 billion, a 20% year-over-year increase. Shifting to Building Solutions, in the first quarter segment revenue grew 3%, driven by a pickup in homebuilder activity, and adjusted operating margins were 8.7%. While we are encouraged by the slight revenue increase in the quarter, we continue to anticipate that the residential market will face strong headwinds throughout 2026. The strength of Sterling Infrastructure, Inc.’s diversified portfolio and strategy to focus on high-growth and high-margin end markets enabled us to deliver another fantastic quarter. With that, I would like to turn it over to Nicholas M. Grindstaff to give you more details on some of our financial metrics and 2026 guidance. Nicholas? Nicholas M. Grindstaff: Thanks, Joseph, and good morning. I will begin with our consolidated backlog metrics. Our first quarter backlog totaled $3.8 billion, a 78% year-over-year increase, or 51% excluding CEC. Combined backlog of $5.2 billion increased 131%, or 46% excluding CEC. First quarter 2026 book-to-burn ratios were 2.1x for backlog and 3.5x for combined backlog. Moving to our cash flow metrics, cash flow from operating activities for 2026 was a strong $166 million. We expect continued strength in operating cash flow for the full year. Cash flow used in investing activities included $20 million of CapEx. For 2026, we are forecasting CapEx in the range of $100 million to $110 million, which is unchanged from prior guidance. Cash flow from financing activities was a $27 million outflow, including share repurchases of $12 million at an average price of $305.14 per share. Remaining availability under the existing repurchase authorization is $362 million. We will remain opportunistic in our approach to share repurchases. We are in great shape from a balance sheet perspective. We ended the quarter with $512 million of cash and debt of $287 million, for a cash net of debt balance of $224 million. Additionally, our $150 million revolving credit facility remained undrawn during the period. Given our strong liquidity, we are in an excellent position to continue to take advantage of both organic and inorganic growth opportunities in the years ahead. Our current backlog, visibility, and strong market tailwinds position us for an even better year than we originally anticipated. We are increasing our guidance ranges for 2026 as follows. Revenue of $3.7 billion to $3.8 billion, which at the midpoint is a 20% increase over previous guidance and represents more than 50% growth over 2025. Diluted EPS of $16.50 to $17.15; adjusted diluted EPS of $18.40 to $19.05, which at the midpoint is a 36% increase from previous guidance and represents 72% growth over 2025. EBITDA of $800 million to $831 million; adjusted EBITDA of $843 million to $873 million. I will now turn the call back to Joseph. Joseph A. Cutillo: Thanks, Nicholas. For quite some time, we have been communicating a bullish view on our markets and outlook. As we sit here today, that outlook is stronger than ever and continues to surpass our expectations. Customers are continuing to ask for more, with projects growing in size, complexity, and duration. At the same time, we are being pulled into new geographies with urgency, as customers prioritize alignment with partners who have the capability and capacity to execute over the long term. Together, these dynamics reinforce our conviction in the multi-year opportunities across our markets. Moving to our segment expectations for 2026, in E-Infrastructure Solutions, we anticipate that the current strength in data center demand will continue for the foreseeable future. We continue to have conversations with our customers regarding how we can best support their strong multi-year capital deployment programs. As part of this, we are getting pulled more rapidly into new geographies, including Texas, the Pacific Northwest, and the Midwest. In the semiconductor market, our industry-leading capabilities enabled us to be selected as the site development partner for a mega-fab semiconductor campus. This award highlights how Sterling Infrastructure, Inc.’s highly differentiated capabilities make the company the partner of choice for large, mission-critical projects in the U.S. We believe that this is just the beginning of a wave of semiconductor fabrication activity that will begin to accelerate at the end of the decade. In addition, there are still several opportunities in the broader manufacturing market that we believe could be awarded in 2026 or early 2027. We are gaining meaningful traction in our cross-selling efforts between site development and electrical services. We are currently in active construction on two data center projects where we are executing both services in an integrated capacity. These joint awards have materialized approximately six to eight months ahead of our original expectations. For the full year 2026, we expect to deliver E-Infrastructure revenue growth of 80% or higher, including the full-year contribution of CEC. We anticipate that the legacy business will grow at rates approaching 60% or higher, as several of our larger projects accelerate. Adjusted operating profit margins for E-Infrastructure are expected to be in the mid-20% range. In Transportation Solutions, we are in the final year of the current federal funding cycle, which concludes in September 2026. We have built over two years of backlog and continue to see good levels of bid activity. For 2026, we anticipate continued growth in our core Rocky Mountain market. The downsizing of our low-bid heavy highway business in Texas is progressing according to plan, resulting in some moderation of Transportation Solutions’ top line and backlog, but should continue to drive margin improvement as we move through the year. We expect Transportation Solutions revenue to grow in the low to mid-single-digit range in 2026. After the strong first quarter, we anticipate a moderation of growth rates in the remaining quarters. This is driven by three factors: the early start of projects in the first quarter that we originally expected to start in the second quarter; the allocation of resources towards E-Infrastructure projects; and the final wind-down of our Texas low-bid work. In Building Solutions, we believe the business is well positioned for growth over a multi-year period. Our key geographies of Dallas–Fort Worth, Houston, and Phoenix are expected to see population growth driving new home demand. Additionally, there is an opportunity for share gain coming out of the down cycle. We anticipate that Building Solutions revenue will be modestly down in 2026 and that adjusted operating margins will be in the low double digits. On the acquisition front, we continue to look for acquisitions that are the right strategic fit to enhance our service offering and geographic footprint. We are seeing more high-quality acquisition targets in the market today than a year ago. Our significant balance sheet firepower positions us to take advantage of these opportunities. Moving to our full-year 2026 guidance, the midpoint of our guidance ranges would represent 51% revenue growth, 72% adjusted EPS growth, and 70% adjusted EBITDA growth. We will now open the call for questions. Operator: Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Sangeeta with KeyBanc. Please go ahead. Analyst: Maybe, Joseph, you can help us understand what you think went a lot better in 1Q versus expectations, maybe on revenue and margins, since usually we consider 1Q to be a seasonally slower quarter? And then if I can ask a follow-up on the comment you made on M&A targets and the fact that you are seeing better targets now, can you tell us how you define these services as being better than what you saw before? Joseph A. Cutillo: Sure. Q1 is, and will probably be consistently, our lowest quarter. A couple of things helped us. We certainly had some very good weather through the Rocky Mountains and some of the other regions, which enabled us in the Transportation segment to start some projects a little earlier and execute projects through the winter months when we normally shut down. That definitely helped us. But more importantly, as we look at E-Infrastructure, we are really starting to see the impact of the new projects that are coming in larger and more complex, and what the added values of our vertical integration are adding to the margin profile and productivity through the build of these projects. We are far enough along—again, a little bit of history—you know, we started this journey when data centers became really data campuses. We went from 100 acres to now doing projects that are north of 1,000 acres, and the future projects coming out look like they are multi-thousand acres. The larger they get, the more complex they get, the more we can leverage our vertical integration, and our size and scope, which drives more productivity. And that is why we have said all along, and we feel even more confident as we are executing, we will continue to see nice margin growth in E-Infrastructure. On M&A, we have some significant criteria that we look at. We always say we buy people; we do not buy businesses. So it is absolutely critical on the caliber of the talent and the willingness of the key team to stay. But our primary focus is in E-Infrastructure. If we take a look in a couple different areas—either geographic expansion of capabilities that we have, more focus on the site development from a geographic expansion standpoint, and then on the electrical side, a combination of geographic expansion and incremental services or products that we can offer. I will tell you we are looking beyond electrical as well. We are looking at the whole portfolio. We really spend a lot of time with our customers and understand what are their needs and what are driving the success or the complexity of these projects. And we will constantly look for those services to add to our portfolio. It is how we moved into electrical. Analyst: Appreciate it. Thank you. Operator: Your next question comes from Noah with William Blair. Please go ahead. Analyst: Joseph, Nicholas, and Noelle, thanks for taking my questions, and great quarter. You highlighted a robust bidding environment in Texas. Can you walk us through your current presence in that state as it relates to capacity and project manager availability, and how you would characterize Texas’ data center market today versus where, say, the Atlanta or greater Georgia market is at today, and your ability to gain share over there in Texas? And then as it relates to CEC, can you walk us through your current level of assimilation with the business as it relates to what you are seeing with revenue and cost synergies? You mentioned the two active projects involving both the legacy site development work with CEC’s electrical, but how much of their collective bidding pipeline is collaborative with this cross-selling? And then what is the progress on CEC’s margin expansion opportunity? Joseph A. Cutillo: Our approach in Texas is, we have CEC located up in Dallas—call that North Central Texas—and we are attacking Texas from the west and from the east. We are using our Rocky Mountain assets and businesses to come from the west to hit western Texas, and then we are leveraging the Atlanta folks and Southeast team to come from the east. They will make it all the way to Dallas and both of those teams will meet in the middle. So we have current capabilities and capacity to do that. We are constantly looking for acquisitions in the upper Pacific Northwest and also in Texas, so that we can add capacity as we move along the way. If I look at the market, I would tell you that the Atlanta/Southeast market is more mature with a longer runway and today is probably a larger market. As I look forward the next four to five years, I think people will be shocked with the size and scope and quantity of data centers, along with some other stuff, being built in the Texas market. We are in the early innings, but the projects are extremely big, they are coming out extremely quickly, and we see not only this year and next year, but what our core customers are talking about starting in 2028–2029. These projects, on top of being large, will take longer time frames to complete. A typical project today is more like three years; these will be pushing out more like four- and five-year projects. On CEC, we call it assimilation, not integration, and we have been really happy with the progress. We really did not think we would see a joint effort take place until late second quarter or early third quarter of this year; we started those in the first quarter, which is fantastic. We have had great reception from the hyperscalers, and they quickly see the benefit of combining these together and what it does to the cycle time of the build process. On margin expansion, we are still extremely bullish that we are going to see 300 to 500 basis points of margin improvement in 12 to 18 months. There are a couple end markets and products that we knew CEC was in that have much lower margin. We are exiting those, and as we exit those, margins will come up. On the core business ex those markets, we saw really nice margin expansion in the quarter—actually ahead of what we anticipated. In addition, it has taken off so quickly that we talked about expanding our modular capabilities. We just locked down a lease to triple the size of our modular build capabilities. We are building a world-class manufacturing site to do that, and we think we will ultimately expand that to other locations in the U.S. over the next 18 months. I just wish I had 2,000 or 3,000 more electricians—we would grow it even faster. Noelle Christine Dilts: One other thing to add here is we are getting pulled into these new geographies by our customers. It is not like we are just going into these new geographies cold. They are looking for partners that can support their builds in these new areas, and that is really a continuation of the geographic expansion strategy we have had since the beginning. It is just taking that one step further. Joseph A. Cutillo: Yes, and to add to that, our customers—if you look at our geographic expansion from the beginning—we have let the major hyperscalers pull us into new markets. They are more than pulling now; they are kind of screaming to get into these markets faster with the capital spending they are going to do. Our challenge is how do we grow as fast as we can and still deliver at the same levels and caliber. It also allows us to be extremely picky on the projects we decide to do and the projects we are not going to do, which helps us long term on margins and capacity planning. Operator: Your next question comes from Manish with Camper. Please go ahead. We lost them. If you are still there, please call back in. Otherwise, I will go to the next caller. Your next question comes from Brian with Stifel. Please go ahead. Analyst: Thanks. Good morning, everybody, and congrats on the great quarter here. Just a follow-up on Texas. In your traditional site development business, how much do you expect Texas to account for as a percentage of revenue there, putting CEC aside? And can you remind us where it was last year? And then is there any notable difference in the margin profile in the site development business in Texas relative to some of your other regions? And as a follow-up on CEC, in the release you talked about approximately $600 million contribution to backlog, but a $1.9 billion contribution to combined backlog. Can you help us understand the delta here? Joseph A. Cutillo: It is really hard to say where Texas will be as a percent of revenue. I will tell you it is growing extremely quickly, but so is the Southeast, and we have been pulled into the Midwest by one of our customers. So it is hard for me to give you a number without being wrong. Margin profiles—as long as the projects are getting bigger and more complex—will be fine. We have certainly seen in some of the far Pacific Northwest projects early on, where we have a smaller equipment group and are not as fully vertically integrated as we are in the Southeast, margins are a little lower, but they would be margins everybody would love to have. Part of our acquisition strategy is to look at how we start putting in those elements, or even organically adding those elements of vertical integration. We are really seeing the benefits of these ancillary goods and services—not only from time reduction of the project because we control more of it—but that is what is helping drive these margins. Everybody keeps asking us if we are getting more price. The answer is no, we are not getting more price. This is all around effectiveness and efficiency and what we are able to drive to the execution of these projects for our customers. On the CEC backlog versus combined backlog question, it is a combination—both external and internal electrical work—and that will be on upcoming centers and existing centers. The contracts with CEC are very similar to what we have talked about in our site development where the work is phased. They will release a small phase. We know that the scope of the project—say an internal electrical package—is $300 million to $500 million generally. We know the total scope, but they will release those in small pieces along the way. That is why you see some in backlog and some in future phase work. Those are projects that we are either actively working on or getting ready to work on. Noelle Christine Dilts: Just one thing to add. Within some of that work that fell into combined backlog, the terms and conditions are already finalized on that piece of the contract that may be unsigned but would fall into combined backlog, and some of that has subsequently moved into signed here as we have moved into the second quarter—a pretty big chunk of it. Analyst: Understood. That is very helpful. Thank you. Operator: Your next question comes from Alex with Texas Capital. Please go ahead. Analyst: Thank you, and good morning. Should we think about your new work being competitively bid versus negotiated, and how has that changed or how might that change? And congratulations on the semi campus—sounds really exciting. Do you see other opportunities developing outside the data center markets this calendar year, or is that more of a 2027 event? Joseph A. Cutillo: In theory, everything is bid. In certain instances, we are asked to go work on specific projects—consider that negotiated. Our pricing—people need to understand—we have done a tremendous amount of work for customers in the past. It is not like we can raise our prices 20% or 30% even if we are negotiating it. They know what the price range is going to be. It is our ability to execute faster than anybody else and be on time every single time that gets us pulled into these jobs. As we go forward, we are looking at these multi-year programs of our core customers and the size and scope, and it is causing us to look harder at those. We will be passing up on more jobs that may be smaller in size or scope, or may have lower margin profiles because they are not as complex as some of these bigger jobs. We will keep moving assets to where the most money is. With the combination of electrical and site, it really gives us another avenue on some of these extremely large projects coming out in the future. On the semiconductor fab, this is going to be one of the bigger jobs in the U.S.—the biggest semi fab plant in the U.S. We actually participated in the process because we did not know if we wanted to do the project or not, and it was fascinating to see the differentiation we had. There was no one else in the room that was going to have a chance at this. It is the first semiconductor project we have done; it is not a market we have been in in the past. A lot of the GCs and engineering firms in that space are not people we deal with every day—now we are dealing with them every day. When we show them our capabilities, we feel confident that, just like in data centers, we will be the supplier of choice for every chip plant that comes out in the future. We do not see the huge rush of chip plants coming out until 2029–2030. We are positioned perfectly for that. Operator: Okay, thank you. Your next question comes from Julio with Sidoti. Please go ahead. Analyst: Thanks, and good morning. I wanted to ask about how your competitive positioning is evolving due to these shifting and increasing customer needs. As you said, these customers are no longer asking you to scale, but kind of screaming for you to go into other geographies. As they act with more urgency, are you realizing a better pricing environment? Are you negotiating better payment terms? Related to that, how do you maintain risk discipline and not allow these large customers to force your hand into taking on more work than you would typically handle? And as a follow-up, on expanding production capacity, how would you rank order the levers you have to pull to continue to grow—both in the near term and in the longer term? Joseph A. Cutillo: If we are going to get criticized for something, it would be that we are probably not aggressive enough on price. We have a philosophy that we have a fair price and we make our money on execution. If we take care of customers, they will have us back. There is no reason for us to try to take advantage of a situation—history says at some point that comes back to bite you. We will keep growing margins with vertical integration and productivity. On risk, the beauty of all of this coming at us is we are not afraid to say no. Sometimes our biggest customers may not like that. There may be a geography or a small job that, for the time and effort, would take away significant capacity from doing their bigger jobs. We proactively tell them which jobs we will do and which we will pass on, and in some cases help them find someone else. We are incredibly risk averse; we will not take on high-risk jobs that are going to get us in trouble. Our biggest challenge is they would like to have us in two, three, or four new markets tomorrow. We have had to say no to some of those. Over the long term, that enhances our credibility with them because we will never let them down. On capacity, electrical is very different than site development. Electrical comes down to electricians. We have the university—great—but it is a four-year program to get someone through apprenticeship into a certified electrician. They can work along the way, but it is lengthy. Second, as we get larger multi-year jobs, you can attract electricians from smaller shops who want to be on projects for 18, 24, or 36 months. Third is acquisition: can we buy something larger that gives us geographic expansion, or smaller tuck-ins with 150–200 electricians we can convert to mission-critical work. The modular strategy is another lever—anything we can build in a factory where a certified electrician does not have to do 100% of the work saves field hours and adds quality. On site development, we have a waiting list of operators; it is really about project managers. Our AI project focused on PMs and we picked up about 15% capacity. We have an internship program—hiring people in their sophomore year, running them through college and our program—graduating four or five a year into real PM roles. We are also looking hard for acquisitions, but it is challenging to find the right ones at our size and scale; many small players have limited equipment and rely on tight rental/lease markets. If we find the right ones, we will buy them, alongside our internal development. Operator: Your next question comes from Adam with Thompson Davis. Please go ahead. Analyst: Good morning, and congrats on putting up one of the best earnings reports I have ever seen. You had some large awards recently for CEC—what should our expectation be for continued awards? And as they get out of some of their lower-margin ventures, does that free up electricians that you can move back into more mission-critical work? And on the M&A side, since your electrical deal has worked out so well, where are customers asking you to add scope, and could that include something purely on the manufacturing side? Joseph A. Cutillo: We get a double benefit from the low-margin stuff we want to exit—you free up people and your margins move up significantly. We have more opportunities than we have capacity to get to with CEC, so, like everything else, we will focus more where we get joint awards, because we can really leverage that on total project scope, take out significant time, and drive significant productivity. Net margins will go up as well. It has been fun to watch CEC over eight months transform—shifting more resources and capabilities to these joint opportunities. If I had 2,000 more electricians, we could put them to work in a quarter. On scope expansion, there is a lot more to these projects than people realize. There are underground components manufactured by others that we purchase and install—that may make sense for us to do. As we look at modular, we are starting with basic stuff, but there is no reason we cannot go to whole modules being built in a factory and set on-site. We see that expanding rapidly for two reasons: electrical capacity relief and opening up other end markets we are not in today. Operator: Your next question comes from Manish. Please go ahead. Analyst: Good morning, and congrats again. Joseph, two questions for you. One is on E-Infrastructure: the margins we are seeing—are they structurally sustainable, or are they peak margins? Is there more room to be had? And how should we think about margins and risk profile between data center and advanced manufacturing work? Lastly, on Residential and Transportation segments—how should we think about those two segments long term? Are they core or non-core? Would you monetize them if you found a bigger acquisition that gives you more scale in E-Infrastructure? Joseph A. Cutillo: On sustainability—if you consider margins going higher than they are now, then they are not at a peak because they will continue to go up. Margins will improve for a couple reasons. As jobs become more complex, we drive better productivity. As we vertically integrate through the Rocky Mountains and add larger equipment suites, we get further productivity—both drive margins. As we combine the site and electrical packages, there is another element of productivity, and the inherent margin of that is better for our CEC business on top of it. When you couple all of those, and exit lower-margin end markets at CEC, we will continue to see margins tick up in E-Infrastructure. You may see some quarter-to-quarter variability due to volumes, but the margin trend line will continue to grow. On margins by end market, fundamentally the same—size matters. A 50-acre data center will not have the margins a 1,000-acre data center has; same for manufacturing. There are opportunities for some large projects either late this year or early next year with similar margin profiles. The only variance we see is geographic—historically, our Northeast region has had lower margins due to generally smaller project size and some projects mandating vertical integration with the union base. Think of it as size, not end market. On Transportation, seven years ago I might have answered differently, but today we have turned Transportation. It is like the Rodney Dangerfield of our business—it does not get enough respect. Their margins are now almost 2x better than best in class. They have done a phenomenal job. We have turned that into a cash cow that throws off great cash we use to grow our high-margin, high-growth E-Infrastructure product line. We are also shifting assets towards E-Infrastructure. For example, we started with a pilot with Meta in the Pacific Northwest using yellow iron and assets out of our highway business in Utah with project management teams out of Atlanta. They executed at very high levels, and we have five or six projects out of that with customers and GCs. We are closing down our low-bid heavy highway business in Texas, and shifting those underground assets to E-Infrastructure—helping with underground utilities and duct bank work—converting them into E-Infrastructure. It is now so intertwined with E-Infrastructure that it would be hard to break out even if we wanted to. Building Solutions has been a great cash cow business. We will look for opportunities to grow it. We evaluate strategic fit every day. Right now, we believe it still has great long-term growth potential. We are in the best three markets in the U.S., so we have no plans other than to grow it. Operator: Your next question comes from Louis with William Blair. Please go ahead. Analyst: Good morning, Joseph, Nicholas, and Noelle. Following up, is your large semi fab project for your Patillo division? And secondly, what is the timing for the expansions into the Northwest and the Midwest? I think you referenced a trial project with Meta in the Northwest—has that already started? Joseph A. Cutillo: The semiconductor fab is being done in the Northeast and by our union operation, and that would be Patillo doing that. It is an exciting project for us right in our backyard and should be a great project. On the Pacific Northwest, that is one we started two years ago—that was our foray into transitioning RLW into E-Infrastructure site development, and we have both to pull through there. We believe, based on conversations with our customers, that in 2027–2028 there will be some nice projects coming out in the Pacific Northwest. Believe it or not, the Pacific Northwest and western Texas are a lot closer than people think. From our Salt Lake City office to our West Texas job is plus or minus 200 miles difference compared to us driving from Houston. Texas is a pretty big state. So we are using those resources to come further east as well. We believe 2028 is going to be the start of some really nice projects in the Pacific Northwest, so you will see us adding capacity and capabilities in that area over the next six to twelve months. We will be able to talk more about that probably in the second or third quarter. Operator: Your next question comes from Julio. Please go ahead. Analyst: Thanks for taking a quick follow-up here. You guided to legacy E-Infrastructure growth of 60% for 2026, which I think implies some moderation of the year-over-year growth rates above the 102% that was this quarter. Given the larger order intake this quarter, which I assume has some timing variability, how would you have us think about the year-over-year legacy growth rates over the remaining three quarters of the year to get to that 60%? Joseph A. Cutillo: I have not laid it out in that level of detail. On the timing around big wins, it is all about when these kick off, when they start, and how fast they go. If we get great weather through the rest of the year and projects kick off earlier, we will be really happy and we will beat those numbers. There are just a lot of variables left from now until the rest of the year. Julio, we can lay that out exactly for you and talk more about what that does quarter by quarter; I just do not have that here. Operator: There are no further questions at this time. I will turn the call back over to Joseph A. Cutillo. Please go ahead. Joseph A. Cutillo: Thank you, Melissa. I want to thank everybody again for joining today’s call. We are off to a great start, and we are going to have an amazing year. If you have any follow-up questions or want to schedule further calls, feel free to contact Noelle Christine Dilts. Her contact information is in the press release. Hope everybody has a great day, and again, thank you very much. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Good morning, everyone. Welcome to today's Transocean Ltd. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. During the question and answer session, to register to ask a question at any time, please press 1 on your telephone. Additionally, you may remove yourself from the queue by pressing 2. Please note today's call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the meeting over to David Kiddington, Vice President and Treasurer. David, please go ahead. David Kiddington: Thank you, and good morning, everyone. Welcome to Transocean Ltd.'s first quarter earnings call. Leading today's call will be Transocean Ltd.'s President and Chief Executive Officer, Keelan I. Adamson. Keelan I. Adamson will be joined by other members of Transocean Ltd.'s executive management team, Chief Financial Officer, Thaddeus Vayda, and Chief Commercial Officer, Roderick J. Mackenzie. In addition to the comments that will be shared on today's call, we would like to direct you to our earnings release, fleet status report, and 8-Ks filed yesterday that contain additional information, all of which is available on Transocean Ltd.'s website at www.deepwater.com. Following our prepared comments, we will open the conference line for questions. Please limit your inquiries to one question and one follow-up, as this will allow us to hear from more participants. Before we begin, I would like to remind everyone that today's call will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. With that, I will hand it over to Transocean Ltd.'s CEO, Keelan I. Adamson. Keelan I. Adamson: Good morning, and welcome to our first quarter conference call. Today, we will address several topics. First, an overview of our accomplishments in the first quarter. Next, I will provide some market updates, including a few thoughts on the impact of events in the Middle East on our business. Then I will update you on the pending acquisition of Valaris. And finally, Thaddeus will make a few comments on our financial results and guidance. First, the quarter. Operational performance was very strong, with uptime of 98%. Adjusted EBITDA was $440 million, implying a solid margin of over 40%. Our average daily revenue in the period was $476,000, the highest in over a decade. These results were accomplished while working safely and efficiently with zero life-changing injuries or operational integrity events. This exceptional performance is due to our team's dedication to providing best-in-class service to our customers. We are committed to eliminating costs from our business and are on track to deliver, versus a 2024 baseline, savings of $250 million in aggregate through 2026. As we have discussed, these savings are associated with continuous improvements in how we run our rig operations, removing idle and stacked assets from the fleet, more efficient maintenance spending, and a reduction in shore-based support infrastructure. Since our February call, we have announced approximately $1.6 billion of backlog, including new contracts and contract extensions on five rigs in Norway, Brazil, and the Eastern Mediterranean, increasing our backlog to over $7 billion as reflected in our fleet status report published yesterday. Nearly one third of this backlog increase is related to a three-year contract on the Transocean Barron with Vår Energi in Norway at a rate of $450,000 per day. The program is expected to start in mid-2027 and includes options that, if fully exercised, could keep the Barron working in Norway into 2034. We are very excited to be commencing a new long-term strategic relationship with Vår Energi. In Brazil, three of our ultra-deepwater ships—two sixth gen and one seventh gen—were awarded contract extensions by Petrobras. The sixth generation drillships, the Deepwater Orion and Deepwater Corcovado, were each awarded three-year contract extensions, collectively contributing about $845 million in incremental backlog, committing the rigs into 2030. The seventh generation drillship Deepwater Aquila was awarded a one-year extension, contributing about $160 million in incremental backlog, committing the rig through mid-2028. Lastly, in the Eastern Med, the Deepwater Asgard was awarded a five-well contract, contributing about $158 million in backlog and committing the rig through 2027. Including these announcements, our firm full-year 2026 and 2027 contract coverage is currently 86% and 73%, respectively, providing a strong base for future cash flow and a line of sight to continued debt and interest expense reduction. On a related note, and as previously disclosed, we retired the balance of the Deepwater Titan notes, reducing debt by $358 million in excess of our scheduled maturities. This is consistent with our commitment to delever, simplify the balance sheet, and reduce interest expense as quickly as possible. Moving to our outlook for the business, we continue to see improving demand for our rigs and services. While not directly affecting Transocean Ltd.'s operations, recent events in the Middle East have further exposed the vulnerability of the global energy supply chain and, at an absolute minimum, have amplified the energy security imperative around the globe. This reinforces our thesis that offshore exploration and development will comprise an essential component of oil and natural gas supply for the foreseeable future. I will now provide a summary of developing opportunities around the world. The number of contract awards and tendering opportunities during the quarter remains high, with visibility into multiyear programs improving meaningfully. So far in 2026, S&P Petrodata has cited 80 rig years added across 61 newly signed floater fixtures. Assuming opportunities materialize as expected, we now see deepwater utilization approaching nearly 100% by 2027, setting the stage for a significantly improved business environment. Looking first at the U.S. Gulf, long-term demand remains stable, supported by recent lease awards. In the near term, any softness may result in some high-specification assets incurring idle time before securing new work. However, with elevated crude pricing, we would not be surprised if certain customers operating in this market chose to take advantage of this short-term opportunity. In Brazil, following the recent blend-and-extend negotiations, Petrobras awarded approximately 38 rig years, securing its strategic capacity for the coming years. We expect Petrobras to return to the market later this year to secure additional capacity for 2027 onward to satisfy additional exploration and production activity. Supported by incremental IOC demand, the overall rig count in Brazil is expected to remain stable between 30 to 33 rigs over the next five years, at least. As we highlighted last quarter, Africa is finally showing measurable and more consistent growth. We expect the regional count to increase from roughly 15 units today to at least 20 over the next one to two years. In Mozambique, one multiyear program has already been awarded by Eni, with two additional awards expected this year from Exxon and Total. In Nigeria, Shell, Chevron, and Exxon have recently awarded their development programs, while Total has just issued a new tender for a multi-well program starting in 2026. In Namibia, we continue to expect more activity as several majors, including most recently BP, evaluate opportunities in the country. And in the Ivory Coast, Eni has issued a one-rig tender for a three-year program beginning in early 2027. In the Med, our recent fixture for the Deepwater Asgard satisfies a portion of increasing demand in the region, with several other awards expected soon for drilling programs starting in 2027. Rig count in the region is expected to stabilize at around seven units going forward. Turning now to Southeast Asia and India, we expect domestic production and exploration initiatives to drive a material increase in activity beginning in 2027. In Indonesia, programs are currently being tendered, adding potentially 10 rig years across five rig lines to a market that currently only has one rig operating. As previously discussed on our last call, in India, ONGC and Oil India are expected to substantially expand the regional fleet by up to four drillships and two semisubmersibles in 2027, potentially adding 20 incremental rig years. In Norway, utilization of high-specification harsh-environment semisubmersibles remains robust through 2028, supported by recent awards from Vår Energi, Equinor, and Aker BP. Most operators are already in the market to secure capacity from 2028 onward, suggesting that utilization for these units should remain near 100% in the coming years. In summary, both the development of known reserves and the call for new exploration continue to build strong momentum. As evidenced by the recent increase in award announcements and numerous ongoing tenders for multiyear opportunities, our fleet is ideally positioned to capture value in this improving business environment. Finally, regarding the acquisition of Valaris, we are required to seek antitrust approval in seven countries, and we have received that approval in Saudi Arabia and Trinidad and Tobago. As of yesterday, we received a second request for additional information from the U.S. Department of Justice as a continuation of their antitrust review. Further, we continue to work with antitrust agencies for approval in Angola, Australia, Brazil, and Egypt. We remain confident that the outcome of the global regulatory review will be favorable and that we are on track to close the transaction in 2026. We remain excited about the capabilities and potential of the combined company. Until the transaction closes, we will continue to conduct business as separate companies. However, we have materially progressed our integration and business continuity planning. We remain confident in our ability to achieve over $200 million in cost synergies incremental to our standalone cost reduction initiatives of approximately $250 million that I mentioned earlier. On a pro forma basis, Transocean Ltd. is expected to have about $12 billion in backlog. The combined company's robust cash flow will continue to accelerate the reduction of gross debt, resulting in leverage of approximately 1.5x EBITDA within about 24 months of closing. The acquisition of Valaris is fundamentally aligned with Transocean Ltd.'s strategic priorities. We will be an industry leader with the scale, scope, and geographic reach that allows us to effectively support our customers in the cost-effective delivery of hydrocarbons from the world's offshore reserves. I will now hand the call over to Thaddeus to provide some brief comments on our financial performance and guidance. Thaddeus? Thaddeus Vayda: Thank you, Keelan, and good day to everyone. Most of the information you should need to update your models is provided in the materials we published last night; I will only make a few remarks this morning. Our performance during the first three months of the year exceeded our forecast and the guidance range we provided to you in February. As Keelan pointed out, contract drilling revenues of $1.08 billion reflected outstanding operations in the quarter, including revenue efficiency in excess of 97% versus our guidance of 90.5%. This is worth about $9 million in the quarter. Also included in the top line is $18 million of revenue recognized due to the early contract conclusion of the Deepwater Proteus. Additionally, higher recharge revenue and favorable foreign exchange effects, which are largely offset in our O&M cost, totaled about $18 million in the period. Operating and maintenance and G&A expense were $606 million and $49 million, respectively. Adjusted EBITDA of $440 million translated into a margin of over 40%, and cash flow from operations was $164 million. Free cash flow of $136 million reflects operating cash flow net of $28 million of capital expenditures in the period. Lower sequential free cash flow in the first quarter of the year is not unusual for us and is typically related to, among other items, the timing of collections and higher payroll obligations. We closed the quarter with an unrestricted cash balance of $330 million, which has since increased to about $495 million as of May 4. Our earnings report includes guidance for the second quarter and only slightly updated guidance for the full year for Transocean Ltd. on a standalone basis. There are only two changes to note in our annual guidance. First, the upper end of our full-year revenue range has been reduced by $50 million to $3.9 billion, primarily to reflect the passage of time. While there are a number of negotiations ongoing, given necessary lead times to plan and commence work, there is a somewhat lower probability of filling certain gaps in our 2026 contract schedule. As we discussed in February, our revenue guidance is otherwise based primarily on firm contracts, with the upper range reflecting the possibility of new contracts commencing slightly ahead of schedule or the extension of existing contracts. The lower end of our revenue range assumes that no additional fixtures with 2026 commencement dates are secured. Second, we have increased our capital expenditure expectations for the year by $20 million due to certain customer requirements that were not anticipated in our initial guidance. Approximately half of this increase is related to environmental upgrades to exhaust systems on a rig operating in Norway. We will substantially recover the cost of this upgrade by the end of the year through specific contract provisions. As we highlighted in February, our cost guidance for the full year reflects our ongoing cost efficiency initiatives and also contemplates slightly lower levels of activity in 2026 versus 2025, with idle time assumed on certain rigs with contracts ending this year. This includes the KG2, Deepwater Proteus, and Deepwater Skiros, as well as costs associated with the mobilization and preparation of the Deepwater Asgard and Transocean Barron for contracts we have recently announced. As you might assume, given the dynamic nature of the market, we may incur incremental expense to position and prepare idle rigs to pursue work. These new opportunities, likely commencing primarily in 2027, will increase utilization, revenue, and cash flow. To the extent that this occurs, we will provide updated cost guidance. With respect to inflationary trends resulting from events in the Middle East, we are just now beginning to observe some small effects on our costs, mostly as it relates to scheduled projects rather than on our active rigs. Recall that we have escalation provisions in certain contracts to permit some cost recovery. While prices for fuel have nearly doubled, our customers are generally responsible for providing it, which means we are only affected by this increase for our idle rigs, for which fuel currently amounts to less than 1% of O&M expense. Ocean and air freight costs are also up as much as 30%–50%, respectively, but logistics in general comprise only 2% to 3% of our annual O&M costs. We do expect that over time, higher energy and logistics costs will influence the pricing of goods and services we procure, but for now, that does not warrant modification of our guidance. As Keelan noted, in March we opportunistically retired the 8.375% notes due 2028 that were secured by the Deepwater Titan, reducing debt by $358 million and saving nearly $40 million in interest expense. Right now, we have about $5.1 billion of debt principal remaining. At the end of 2024, we were forecasting a principal balance of $6 billion of debt remaining at the end of 2026, meaning we are currently over $900 million ahead of schedule in our efforts to reduce debt and strengthen the balance sheet. We ended the quarter with a trailing twelve-month net debt to adjusted EBITDA ratio of approximately 3.1x, and we expect to retire at least $750 million in total debt in 2026, ending the year with a principal balance of around $4.9 billion, excluding our capital lease obligation. Based upon the consensus EBITDA, this would imply a ratio of about 3.3x at the end of this year. We will continue to evaluate opportunities to accelerate debt repayment and reduce interest expense. We closed the first quarter with total liquidity of approximately $1.1 billion, adjusting for the effect of the Deepwater Titan note retirement. This includes unrestricted cash and cash equivalents of $330 million, restricted cash of $285 million after the reduction of $87 million associated with the debt service reserve for the notes, and $510 million of capacity from our undrawn credit facility. On a standalone basis, and absent any additional early retirement of debt, we expect to end the year with between $1.25 billion and $1.35 billion of total liquidity, inclusive of our undrawn credit facility. This range is consistent with our previous liquidity guidance when adjusted for the early repayment of the Deepwater Titan notes. This concludes my prepared remarks. Keelan, do you have any final thoughts? Keelan I. Adamson: Thanks, Thaddeus. To conclude, we will continue to focus intently on achieving our strategic priorities, including optimizing the value of our differentiated asset portfolio in this improving market to maximize free cash flow, reduce total debt and interest expense, and simplify our balance sheet to create a sustainable and resilient capital structure. This is our 100th year in business, and we are striving to be the most attractive offshore drilling investment for those desiring exposure to increasingly favorable energy and industry dynamics. We will now open the call for questions. Operator: Thank you, Mr. Adamson. Ladies and gentlemen, at this time, if you do have any questions, please press 1. Additionally, you can remove yourself from the queue by pressing 2. As a reminder, we do ask that you please limit yourself to one question and one follow-up. We will go first this morning to Eddie Kim with Barclays. Eddie Kim: Hi. Good morning. I wanted to start off with a bigger-picture question. The world has clearly changed since your last earnings call in mid-February. It feels like the market is tightening based on the number of fixtures announced year to date. You also raised your utilization expectation next year to approach 100% versus 90% previously. If I go back four or five years, 2020 and 2021 were extremely challenging years for the market, but things started to turn in a big way in 2022 and 2023. By mid-2023, leading-edge rates were in the mid-$400,000s with an expectation that pricing could exceed $500,000 a day by the end of that year. Unfortunately, we ran into some industry white space which halted that trajectory, but nonetheless 2023 was a very strong market environment. Based on how you see things now and the customer conversations you are having, do you think the market environment next year in 2027 could be as good, if not better, than it was in 2023? Keelan I. Adamson: Good morning, Eddie. Thanks for the question. As you look at the business and the current situation in the world, we are not seeing an impact per se of what is happening today. What we are seeing is the development of a market that we were forecasting prior to any of the recent conflicts. As an industry, we have been talking about improved tendering opportunities, growth in the market, a real concern about hydrocarbon demand and more so about hydrocarbon supply, and many of our customers starting to lean into the exploration activity that needs to progress. We are seeing the results of that in the number of awards that have been announced year to date. The term of those awards has nearly doubled, and we are starting to see what we expected to happen with respect to rig utilization into 2027. We said we expected 90% utilization into 2027 and then improvement from there. The activity and the forecast are being realized from our perspective. The continual concern with energy security is a real topic of conversation around the world and is amplifying the need for further investment in the offshore space, particularly in deepwater. Utilization is building, backlog is building, and the rate progression will reflect the supply and demand dynamics that exist in the industry and the visibility for future work. Roddie, would you like to add anything to that? Roderick J. Mackenzie: Yes, probably just to pick up on one of the things that you mentioned. In the previous run-up, we kind of stalled out—yes, we posted a few rates above $500,000, but the context is important. We hit a bit of a global economic bump that coincided with a moment when many of the majors were focused on capital discipline, and part of that was their push for M&A. That created white space. The difference now is that at that time there was still a heavy skew towards shale, but now everything is pointing towards offshore. Offshore CapEx is going to be a much larger chunk of the pie, going from about 13% of total CapEx to nearly 30% by 2028. Basically, CapEx spend in offshore and deepwater is expected to approach $100 billion annually by 2030. In that context, the upside for us is very significant. There are not as many M&A opportunities available on the operator side, and to Keelan’s point, everybody is now looking at exploration. Basins that were previously explored and had discoveries are now shifting to development, and on top of that, we are adding a lot of exploration work. Eddie Kim: Got it. That is very helpful color, and that is a great point on the changing mindset of the majors. My follow-up is on the Petrobras blend-and-extends. They extended both of the 6G rigs, the Orion and Corcovado, for three years, but the 7G rig, the Aquila, was only extended for one year. Was there some intentionality behind that decision on your end to not lock in your high-spec asset on a multiyear deal in a rising dayrate environment? Roderick J. Mackenzie: Yes. As we have always alluded to, it is very important to us that we get appropriate value for our assets. The sixth gens are workhorses of the fleet and do a fantastic job, and Petrobras were very keen to extend the rigs. It is an interesting moment because Petrobras is traditionally the barometer of where things are going, so when you see them go long, that is a pretty good sign for us. In that instance, note the delta between the average dayrates between the sixth and seventh gen, somewhere in the region of $50,000 to $70,000. That is a fairly big deal. In our view, the market tightness is not projected; it is already here. A few quarters back, we were talking about things that were going to happen; now the scoreboard has fixtures on it, and they are prolific. As Keelan pointed out earlier, we are a third of the way through the year, and we have already significantly eclipsed what happened in all of 2025. So 2026 is shaping up to be something potentially as big as 150 rig years awarded, and that is before we consider direct negotiations that are not necessarily on the market. You are spot on in that strategy. We have always taken a portfolio view on the fleet—very keen to see those sixth gens go long and give us a bit of optionality on the higher-spec units as we move forward. Operator: Thank you. We will go next to Fredrik Stene with Clarksons Securities. Fredrik Stene: Hey, team. Hope you are well. Happy to see that the market is looking better. According to my numbers, we have the highest market-wide visibility contracting-wise, even above 2023 levels. Something is happening, and I am happy to see that. Today, my question relates more to the M&A process—the acquisition of Valaris. You gave some color in your prepared remarks, Keelan, but could you elaborate a bit more on what this second request actually means and the implications for potential deal risk? You still said confidence in second-half closing, but is that timeline potentially delayed now compared to before? And what does this potentially mean for remedy sales, etc.? I am not trying to be a devil's advocate; I am just trying to get clarity on what this actually means, even though it seems like most deals that receive a second request end up going through. Any color would be helpful. Keelan I. Adamson: Sure, Fredrik, and thanks for the question. We remain confident that the DOJ will approve the transaction. The second request is part of the process. For a deal of this nature, it is simply a case of needing a little bit more time to understand the competitive dynamics post-close. We have been heavily engaged with the DOJ, working productively with them, answering their questions, and helping them understand the nature of our business in the U.S. Gulf and the market worldwide. Those conversations have been going very well. There is no read-through I would suggest to you that changes our expectations. When we declared the timeline we believe this transaction would close in, we are still in that window and very much believe so. We are happy with the progress we are making and will continue to work with the DOJ as they assess the situation. Fredrik Stene: Thank you very much. As a follow-up, I think you said Saudi and Trinidad and Tobago have cleared approval already. In addition to the U.S., it was Australia, Brazil, and Egypt. Are there any risks of similar second requests or hurdles in those countries, or do you feel confident that those discussions are on the track you originally perceived? Keelan I. Adamson: It is following the exact process and timeline that we would have expected to go through the regulatory approval process. Some are further along than others. We are engaged with all of those countries, and everything is moving as we would have expected at this point in time. Operator: Thank you. We will go next to an analyst from Morgan Stanley. Analyst: Hey, thanks. Good morning, guys. I wanted to ask: you shared a couple of years ago, or more recently, some of the terms and components around reactivating a cold-stacked rig. Could you refresh us with your latest thoughts on the cost to reactivate a rig, the timeline, and what type of contract terms or macro backdrop you would need to move forward with that decision? Keelan I. Adamson: Good morning, and thanks for the question. It is timely as we talk about a constructive market going forward. However, we are a little bit away from a situation where either the market needs it or the economics are present for a cold-stack reactivation of a deepwater drillship right now. In a few years, it may be slightly different. From a cost perspective, we are still in the $100 million to $150 million range to reactivate one of these assets. We are comfortable with the stacked fleet we have, the condition they are in, and we have a good handle on the timeline it would take to bring one back to market; we are still in the 12 to 15 month range to reactivate and bring one of those rigs back to service. We will not do that speculatively. We will want a contract that fully recovers that cost and provides a return on top. We are not quite there yet. We would look for 100% utilization in the drillship market, with visibility into market programs, to justify bringing one out. You can imagine we will be looking for term and productive dayrate for that to happen. Roderick J. Mackenzie: To add to that, term and return economics are very important. At this point in the year, the average award has been 480 days, which is double what it was in all of 2025. But that is still not enough, in our view, to bring out one of the cold-stacked assets. It is encouraging to see a doubling of duration and effectively a four-times multiple on how many fixtures are being made today, but we still think there is room to run before we reactivate the cold-stacked fleet. Analyst: Great, that is helpful. A higher-level question: as you toured the world and pointed to areas where you see potential for incremental tendering, are there any areas where customer conversations or incremental activity are more related to events over the last two months in the Middle East—more related to building strategic reserves or reducing reliance on Middle East exports? You highlighted Southeast Asia and India previously, and you mentioned some big numbers in Indonesia. Can you parse out any areas where incremental need or demand is more related to diversifying away from Middle East exports? Keelan I. Adamson: The conflict is not that old at this moment, but nations around the world are reassessing their energy security and policies for energy supply. You highlighted a couple that come to mind straight away. In India, Prime Minister Modi has set his government in motion with a mission to establish the nature of their reserves in country. That is driving ONGC and Oil India action. It was a bit of a surprise when it came—we announced it last earnings call—and from our conversations in country with both the ministry and the oil companies, this is not a short-term effort. This is a significant investment with several years of CapEx commitment to establish their position from an offshore oil and gas reserve and supply perspective. That is just one country. In Indonesia as well, and when you look around the world at what the IOCs are looking at, they are focused on ensuring a diversified global supply—major developments going through sanction right now in Suriname, Namibia, Mozambique, into the Med and West Africa. The importance of a globally diversified supply is only more heightened now for secure, reliable, and affordable energy. Roderick J. Mackenzie: We have already exceeded last year’s fixtures and rig-year awards, and none of that was based on the Middle East conflict. The tenders on the market today—collectively we think somewhere in the region of 150 rig years awarded this year, maybe more—are not predicated on what happened in the Middle East. It is based on the macro shift over the past 12 months: the shift towards deepwater, customers ramping up exploration and development, moving beyond the strict capital discipline mantra. All of that was predicated on $60–$70 per barrel outlooks. Now we are in a different position, which is good for our customers’ earnings near term, but our fixtures are predicated on mid-range oil prices, not elevated prices. We have not yet seen the impact in our business of a prolonged increased oil price; our current work is predicated on oil prices of six to nine months ago. Operator: Thank you. We will go next to Gregory Robert Lewis with BTIG. Gregory Robert Lewis: Hey, thank you and good morning. I was hoping to spend a little time talking about the harsh-environment market. It is good to see the Barron move back to Norway. We have the traditional North Sea, but there was a rig that just won work in Canada, we have Australia, you hear about other pockets like the Falklands. This is a market where there is not a lot of supply. As you think about positioning Transocean Ltd.’s harsh-environment fleet for 2027 and 2028, should we expect more of a return to the North Sea, or are there going to be opportunities to keep this fleet spread? How tight could we be for the harsh market as we approach 2028? Keelan I. Adamson: Good morning, Greg. The harsh-environment market, while in balance currently, was expected to get tighter based on projects being sanctioned and growing activity. You are right—the harsh-environment market is no longer just Norway. It is returning to places like Canada and Australia, and rigs can be used in other, not-necessarily harsh, shallower-water environments. The opportunity set for the harsh-environment fleet is more global now, and we are not even considering yet what could happen in Namibia. With licensing rounds and the imperatives of Equinor, Aker BP, Vår Energi, and the energy security conversation in Europe, Norway is going to get busier. The opportunity presented itself to take the Barron back to Norway. We are very pleased to begin that relationship with Vår Energi again. We will continue to keep our assets in the most strategic locations and ensure we are available to the market upswing we expect in harsh environment. Roderick J. Mackenzie: To add, the name of the game over the last few years was operators retaining optionality on rigs without making large commitments, but the dynamic has shifted. Awards in Canada have been made; there is another tender for an incremental rig there. Within Norway, you see commitments—Vår, Aker BP, and Equinor’s NCS 2035 plans. The number of wells and the longevity of the programs speak to the Norwegian government’s commitment to sustain energy security in Europe. Those are strong fundamentals. We are about to enter a period of a very tight market because there is a shift towards longer-term contracting. That showed up in some numbers already and will be more prolific as operators need to secure assets because there are not many of them. There is a high chance more rigs will return to Norway because demand is well beyond the fleet currently in Norway. Operator: Thank you. We will go next now to Noel Augustus Parks with Tuohy Brothers. Noel Augustus Parks: Hi. Good morning. I was intrigued by what you were saying about exploration conducted long ago, with some of those projects now heading for development. For perspective, can you think of what may be the oldest exploratory project that you are now seeing greenlighted for development? Roderick J. Mackenzie: Good question. A lot of activity in Nigeria fits that description. Nigeria is expected to go up to five rigs; they had gone down to one. Much of what is triggering the incremental rigs now is based on exploration that took place some time ago—some as long as eight to ten years ago, certainly at least five years ago. A shorter example is Namibia. You saw lots of announcements about discoveries, then a lull as results were digested, and now we are seeing several long-term tenders based on development. Even there, there are still several exploration wells on the books. It is a treadmill: you have to keep discovering and exploring. Petrobras is vocal that they must contribute a significant portion of the portfolio every year to exploration. If you take your foot off the gas on exploration, your reserves dwindle quickly. Reserve replacement is becoming more of an issue, and the only way to address it is to explore. Noel Augustus Parks: Thanks. With energy security coming to the fore and the ripple effects for importing countries and their plans, assuming sustained higher oil prices, are there any regions where the economic opportunity could become so compelling that it overcomes some political inertia or opposition to moving forward? Roderick J. Mackenzie: It is definitely a theme. The war in the Middle East reinforces decisions already taken over the last several years, particularly by NOCs, to look at what they have within their own borders. Domestic production makes sense: you retain taxes, employ your people, and reduce dependency. Energy security reinforces domestic exploration. India is a top example. Even in places like the UK, I think you are going to see a U-turn; they have been cutting back for some time, but it is almost inevitable that will shift in the near term. Norway is a great example—linked to energy security and providing energy for Europe as the biggest producer in Europe. Overall acceptance that hydrocarbons are here for a very long time—there is no peak oil this side of 2050—so time to get on with it. Keelan I. Adamson: To add, deepwater is a very long-cycle business, and the economics are compelling at much lower oil prices than today. Activity we are seeing is based on fundamentals regarding supply and demand of hydrocarbons, concern on replacement of reserves, and the need to explore. Layering in energy security amplifies the case and will continue to promote more investment in offshore. It is a very good place to get affordable, secure, and reliable energy, and we continue to see it playing that role going forward. Operator: Thank you. Gentlemen, it appears we have no further questions this morning. David Kiddington, I would like to turn things back to you for any closing comments. David Kiddington: We would like to thank everyone who participated in our earnings call today. We invite you to follow up with us for any additional inquiries. With that, we will close the call. Operator: Ladies and gentlemen, this concludes the Transocean Ltd. First Quarter 2026 Earnings Conference Call. Thank you all so much for joining us, and we wish you a great day. Goodbye.
Operator: Good morning, and welcome to the Energy Transfer LP First Quarter 2026 Earnings Call. All participant lines will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one on your touch tone phone. To withdraw your question, you may press star then two. Please note this event is being recorded. I will now turn the conference call over to Tom Long, Co-Chief Executive Officer. Thank you, and over to you. Tom Long: Thank you, Operator, and good morning, everyone, and welcome to the Energy Transfer LP First Quarter 2026 Earnings Call. I am also joined today by Marshall McCrea, Dylan Bramhall, and other members of the senior management team who are here to help answer your questions after our prepared remarks. Hopefully, you saw the press release we issued earlier this morning. As a reminder, our earnings release contains an update to guidance and a thorough MD&A that goes through the segment results in detail. We encourage everyone to review the press release as well as the slides posted to our website to gain a full understanding of the quarter and our growth opportunities. As a reminder, we will be making forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are based upon our current beliefs, certain assumptions, and information currently available to us and are discussed in more detail in our Form 10-Q for the quarter ended 03/31/2026 that we expect to file later this week. I will also refer to adjusted EBITDA and distributable cash flow, or DCF, both of which are non-GAAP financial measures. You will find a reconciliation of our non-GAAP measures on our website. Let us start with our financial results for the first quarter of 2026. We generated adjusted EBITDA of approximately $4.9 billion compared to approximately $4.1 billion for the first quarter of last year. DCF attributable to the partners of Energy Transfer, as adjusted, was approximately $2.7 billion compared to approximately $23 billion for the first quarter of 2025. These results were supported by strong operations, including record midstream gathering volumes, NGL fractionation volumes, NGL export volumes, and crude oil transportation volumes for the quarter. For 2026, we spent approximately $1.5 billion on organic growth capital, primarily in the intrastate, NGL and refined products, midstream, and interstate segments, excluding Sun and USA Compression CapEx. Turning to our 2026 guidance. As a result of our strong first quarter performance across our segments as well as revised expectations for the rest of 2026, we now expect our 2026 adjusted EBITDA to range between approximately $18.2 billion and $18.6 billion compared to the previous range of approximately $17.45 billion to $17.85 billion. This includes a beat of approximately $500 million and the capture of our full-year optimization target in the first quarter, as well as expectations for continued outperformance for the balance of the year. Now turning to organic growth capital guidance. We now expect 2026 organic growth capital to be between approximately $5.5 billion and $5.9 billion compared to our previous guidance of approximately $5.0 billion to $5.5 billion, excluding Sun and USAC. This increase is primarily a result of the addition of several new growth projects, including the construction of the new Springerville lateral off our existing Transwestern pipeline, the construction of pipelines and meter stations to provide natural gas to various power plants and data center sites in Oklahoma and Arkansas, accelerated timing on longer-term projects like Desert Southwest and FGT capital spend, and gathering system and compression buildout in the midstream segment, primarily in the Permian Basin associated with recent contract and acreage dedication extensions. I will provide additional details about these projects later in the call. Beyond these projects, we continue to have a significant backlog of opportunities that are expected to support future growth. Now turning to our results by segment for the first quarter, starting with NGL and refined products. Adjusted EBITDA was approximately $1.2 billion compared to approximately $978 million for the first quarter of 2025. We saw higher throughput across our Gulf Coast pipeline operations and record performance at our Mont Belvieu fractionators. In addition, new chilling capacity placed into service last year contributed to a $50 million increase in earnings, as well as record export volumes from our Nederland terminal in the first quarter. This more than made up for fog delays experienced in the first quarter of 2025. During the first quarter of 2026, we realized higher gains of $65 million due to the timing of the settlement of NGL and refined product inventory hedges, which offset losses realized in the first quarter of 2025. Results for the quarter also included an increase of approximately $50 million from higher premiums from the sale of propane and butane for both export and domestic supply, as well as approximately a $25 million increase due to inventory writedown losses realized in the first quarter of last year. For Midstream, adjusted EBITDA was approximately $887 million compared to approximately $925 million for the first quarter of 2025. Base business earnings increased primarily due to growth in the Permian Basin where we saw volumes up 8% related to new and upgraded processing plants brought online since the first quarter of last year. In addition, we saw a $25 million decrease due to lower NGL and natural gas prices compared to last year. As a reminder, the first quarter of last year included the recognition of revenue of $160 million from Winter Storm Uri. For the crude oil segment, adjusted EBITDA was approximately $869 million compared to approximately $742 million for the first quarter of 2025. During the quarter, we saw continued growth across several of our crude oil pipeline and gathering systems. Results also included a $60 million increase related to favorable impacts to our crude oil inventory value as a result of rising crude oil prices. We expect these gains to be mostly offset with hedge losses during the second quarter of this year. In addition, we recognized $43 million of revenue that had previously been reserved related to the recontracting and extension of a legacy shipper contract during the recently completed successful DAPL open season, and we had lower expenses due to a $43 million adjustment to an accrual for a litigation-related contingency. In our interstate natural gas segment, adjusted EBITDA was approximately $519 million compared to approximately $512 million for the first quarter of 2025. This increase was primarily due to higher contracted volumes and higher rates on several of our pipelines including Panhandle Eastern, Trunkline, Florida Gas, and Transwestern. And for our intrastate natural gas segment, adjusted EBITDA was approximately $437 million compared to approximately $344 million in the first quarter of 2025. This was primarily due to an increase of approximately $100 million from winter storm burn. Results for the first quarter show how incredibly well-positioned our assets are across the country. Combining our extensive pipeline network, our storage facilities, and our terminals with our exceptionally experienced optimization and operating teams, we were able to capitalize on quickly changing dynamics and market volatility. For a closer look at some of our major projects on the natural gas side of our business, where we continue to see significant demand for our services: We are making good progress on our Desert Southwest pipeline project. In March 2026, Transwestern Pipeline initiated the FERC prefiling process for the project as previously scheduled, and we expect to file the formal certificate application with FERC in the fourth quarter of this year. In April, as a continuation of our comprehensive stakeholder engagement program, we hosted 15 open houses in communities along the entire proposed pipeline route throughout Texas, New Mexico, and Arizona. Our teams continue to actively engage with elected officials, county leadership, landowners, and associated communities along the route to communicate project information and updates; we have engaged with over 500 stakeholders to date. Our discussions have continued to be very positive as existing and potential stakeholders learn more about the expected economic benefits, realize the critical need for a dependable supply of natural gas to help with the transition from coal generation to natural gas–fired generation, and to help address significant power needs in the coming years driven by population and demand growth in Arizona and New Mexico markets. We expect this pipeline to be in service providing a reliable energy source by 2029. On the existing Transwestern pipeline, we recently approved the construction of the new Springerville lateral, an approximately 120-mile, 30-inch pipeline that will have a capacity of approximately 625 million cubic feet per day and extend south to new natural gas power generation that is expected to replace two coal-fired plants. This project is backed by 20-year agreements and is expected to be in service in 2029. Total growth capital for this project is expected to be approximately $600 million. New construction on our Hugh Brinson pipeline is going well. We continue to expect Phase 1 to be in service in the fourth quarter of this year upon the full buildout of the 400-mile pipeline and associated compression required to move 1.5 Bcf per day of gas to customers’ contractual delivery points. However, if we stay on our current schedule, we will have the ability to begin flowing some gas early in the third quarter, which is prior to placing Phase 1 into service. We continue to expect Phase 2, which includes additional compression, to be in service in 2027. The pipe is fully contracted from west to east, and we also have a growing amount of backhaul volumes committed that are expected to add significant upside. Turning to Florida Gas Transmission, or FGT. In February, we completed open seasons for two new projects that are supported by 15- to 25-year long-term agreements with anchor shippers. The Phase 9 project is designed to expand firm gas transportation capacity to multiple new and existing meter stations located across FGT’s market area. This project will consist of the construction of approximately 90 miles of pipeline looping as well as new and upgraded compression, with an anticipated capacity of approximately 525 million cubic feet per day. We recently locked in pipe for delivery in 2027 and compression for delivery in 2028, and we continue to expect the project to be available for service in the fourth quarter of 2028. The South Florida project is designed to enhance the reliability of critical infrastructure and increase overall deliveries in South Florida. The project has a condition precedent but, once we reach FID, it will consist of the construction of an approximately 40-mile extension with a capacity of approximately 230 million cubic feet per day, along with compression and a new meter station, and is expected to be available for service in 2030. Energy Transfer LP’s share of the cost for these two projects is expected to be approximately $565 million and approximately $110 million respectively, depending upon final shipper volume elections. We continue to make progress on a new storage cavern at our 12 Bcf facility. In February, our intrastate power team added connections to serve three new power plant loads in the state of Oklahoma. We have since added a fourth connection for a total of approximately 300 million cubic feet per day of new gas supply. The first of these connections is in service, with two more expected in service in the third quarter of this year. The remaining connection is expected to be in service in 2028. These connections are supported by long-term contracts with investment-grade counterparties. In addition, we have entered advanced negotiations to serve another 400 million cubic feet per day of new power plant demand in Oklahoma. Since our last earnings call, Energy Transfer LP has entered into agreements to provide long-term firm natural gas transportation services through our Texas intrastate system to support the Nexus Hubbard campus located in Central Texas, where Nexus is constructing a behind-the-meter AI hyperscale campus powered by on-site natural gas generation. Initial volumes are expected to be approximately 150 million cubic feet per day with certain rights by the transporter to increase its capacity upon election. Costs associated with this project are expected to be fully reimbursed, and it is expected to be in service by the end of this year. In addition, we recently entered into firm natural gas transportation service through our EGT pipeline to support a new data center site in Arkansas. The facility is expected to be in service in mid-2027. Energy Transfer LP also previously entered into a 20-year binding agreement with Intergic Louisiana to provide at least 250 thousand MMBtus per day of firm transportation service to fuel their facilities in Richland Parish, Louisiana. To facilitate flow of this gas, we plan to construct an 18-mile lateral off of our Tiger Pipeline, for which our customer recently exercised their option to upsize the pipeline lateral to 36 inches, and they continue to have an option to increase their commitment to up to 1 Bcf per day. In addition to these projects, we have multiple ongoing discussions with power plants to provide significant volumes and associated transportation revenues across 15 states, which have a high likelihood of reaching FID. Now looking at our Permian processing expansions, the 275 MMcf per day Mustang Draw 1 processing plant is currently being commissioned and is expected to be in full service next month, and we expect volumes to ramp up quickly. We continue to expect our 275 MMcf per day Mustang Draw 2 plant to be in service in the fourth quarter of this year. In our NGL segment, we placed the Gateway NGL pipeline debottleneck project into service in the first quarter of this year, providing increased deliveries of Delaware Basin liquids to Energy Transfer LP’s NGL fractionation complex in Mont Belvieu. Construction is also underway on a new 3 million barrel ethane storage cavern at Energy Transfer LP’s NGL fractionation complex at Mont Belvieu. The cavern, which is expected to be in service in 2027, will help support our ninth fractionator at Mont Belvieu that is expected to be in service in the fourth quarter of this year, as well as future ethane export expansions. At Nederland, we have recently extended the vast majority of our ethane export agreements into 2041, adding 10 years to the current contracts. We are hopeful to be in position for incremental Nederland ethane expansion in the coming months. In our crude oil segment, we continue to work with Enbridge on a project to provide capacity for approximately 250 thousand barrels per day of light Canadian crude oil through our system. In addition, we have approved an expansion of the Bayou Bridge crude oil pipeline, which is expected to increase the capacity to up to approximately 600 thousand barrels per day depending on destination and product mix. This expansion is underpinned by a 10-year term extension and volume increase from a demand-pull customer and is expected to be in service in the first quarter of 2027. As you can see, we had a lot of great things happen in the first quarter and many more exciting things on the way, which contributed to our increased EBITDA guidance for 2026. Our guidance each year is based upon expectations for the base business, with minimal optimization included. However, in five of the last eight years, we have seen large spreads, optimization, and other opportunities that have provided significant upside to our base business. These kinds of benefits, while one-time in nature, highlight the unique ability of our business to consistently capture significant upside during market volatility. While additional upside is expected to be dependent upon the duration and impact of current market disruption and resulting commodity prices, our assets remain incredibly well-positioned to continue maximizing these opportunities. As a result, we are optimistic that some of the benefits we saw in the first quarter will carry over throughout the rest of the year, putting us in a position to achieve or exceed the high end of our guidance range. Additionally, we continue to expect the ramp-up of growth projects, including our FlexPort NGL export project, new Permian processing plants, Hugh Brinson, and others, which we expect will contribute to continued growth in 2026. In particular, as our Hugh Brinson pipeline is in service, it will be extremely well-positioned to become a major U.S. header system that ties together our network of large-diameter pipelines, providing significant future upside. Our large slate of growth projects is contracted under long-term commitments and expected to generate mid-teen returns and considerable earnings growth over the next decade or more. Completing these projects safely, on time, and on budget remains one of our top priorities for 2026. We also continue to see new growth opportunities across all aspects of our business, demonstrated by the announcement of several new projects this quarter, and we remain extremely well-positioned to help meet the substantial growth in demand for energy resources over many years to come. As a result, we also remain very focused on capital discipline, targeting a long-term annual distribution growth rate of 3% to 5% and maintaining our leverage target of 4.0x to 4.5x EBITDA. In summary, because of the breadth of our assets, we have an unparalleled ability to transport large amounts of energy from all of the major supply basins to markets throughout the U.S., including major trading hubs, power plants, data centers, city gates, industrial complexes, and other downstream markets, including international markets through our export terminals. This concludes our prepared remarks. Operator, please open the line for our first question. Operator: Thank you. We will now begin the question-and-answer session. 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 two. We will pause momentarily to assemble the roster. We have the first question from Michael Blum with Wells Fargo. Please go ahead. Michael Blum: Thanks. Good morning, everyone. Wanted to start high level in light of the Middle East conflict that is ongoing. Are you seeing any change in U.S. producer activity or messaging? And in a similar vein, would you expect to see any permanent shifts in where global buyers will be sourcing their hydrocarbons, perhaps leaning more heavily on the U.S.? And are you seeing any of that in your discussions yet? Marshall McCrea: Good morning, Michael. As I look around the room, there are several people who want to answer because we are so excited about where we sit and where our assets sit. Given what has been going on in the world, there is a very clear redirection to the U.S. for all products—LNG, NGLs, oil, etc.—and it really emphasizes the value of what this country offers and, more importantly, what our partnership offers to deliver these products around the world. If you talk about individual basins, it is all different, but the major tenor throughout is optimism. It is not a rush to put a bunch of rigs in, but even as of yesterday, one of our bigger customers in the Midland Basin, Diamondback, announced they are going to upsize and bring in more rigs. We think it will be a slow-moving pickup, not a lot of talk, but evident that we will see more rigs as more countries and companies turn to the U.S. for supply regardless of how long the war may last. An example in North Louisiana, the Haynesville: we are projecting about 800,000 Mcf of growth into our processing, treating, and downstream assets by August or September. Clearly, producers in North Louisiana are drilling and will bring on DUCs as we proceed deeper into this year, and we think that will continue for many years. We love where our assets are and are very excited about the future of drilling growth. It is not clear how quickly all companies and all basins will pick up, but the bottom line is there will be increased drilling and bringing on new wells from DUCs throughout the country, and we are very excited about where we sit. Michael Blum: Thanks for that, Marshall. Appreciate it. On LPG exports, can you remind us what percent of your capacity is contracted versus open? Are you seeing any increase in demand for contracted capacity? And do you think length of contracts or rates could trend higher over time? Marshall McCrea: Yes to all of the above. As mentioned earlier, whether with companies building assets here or buying products here, everybody is turning to the U.S., and we are extremely well-positioned. Our strategy is long-term. Whether LPG or natural gas, we are looking to extend into the 2030s and 2040s where possible. Our team did a great job at healthy rates extending our LPG business well into the 2030s. We do not have a lot of spot; we have four or five ship slots where we could be printing more money, but we do have some spots available at the FlexPort project that we just completed and are ramping. We have at least one or two slots a month that can benefit from higher spreads. We do think this environment will bring about longer terms and stronger margins over time as everyone leans on the U.S. for supply. Operator: Thank you. We have the next question from Gabriel Moreen with Mizuho. Please go ahead. Gabriel Moreen: Good morning, team. On guidance, in the slides you did not shift your allocation between fee-based and commodity-based margin through the year, and you are using the forward curves. On the other hand, you noted you are hopeful to exceed the upper end of guidance if things persist. Can you talk about the moving pieces, assumptions on commodity versus forward curve, and what you are baking in for the rest of the year? Dylan Bramhall: We had an incredible first quarter. We beat our internal plan by approximately $500 million and achieved our full-year optimization earnings target. Of that $500 million, about $300 million would probably be considered one-time. We call it one-time, but we see this almost every year at Energy Transfer LP because of our assets and people. The rest is a result of tailwinds to the business. We raised guidance by $750 million at the midpoint based on line-of-sight continued outperformance across most segments—volumes, rates, and spreads. The conflict in the Middle East has made clear, as Marshall pointed out, the need for reliable U.S. energy supplies, increasing demand, volumes, and rates. We pray for a resolution, but we believe supply and product flows will take an extended time to normalize and likely will not return to the pre-conflict pattern, similar to what we saw with the Ukraine conflict. For the balance of the year, the midpoint of our guidance range assumes a conservative commodity price stack going forward. If prices remain anywhere near where they are now, that will push us to the high end of the guidance range and potentially allow us to exceed it. Gabriel Moreen: Thanks. As a follow-up on Desert Southwest and the Springerville lateral, were the Springerville volumes contemplated in the original 2.3 Bcf/d on Desert Southwest, or is there potentially upsizing to the base project? Any potential for further laterals? And has anything changed on the regulatory approval or timeline given the lateral associated with the project? Marshall McCrea: The Springerville lateral is tied to the retirement of some coal plants and replacement with natural gas–fired generation. We believe the majority of that gas will come from either the San Juan Basin or the Permian Basin. There are other lateral opportunities off that, and we are constantly evaluating them. Separately, on Desert Southwest, throughout New Mexico and especially in Arizona, there are numerous opportunities to lay laterals to different power plants and customers. We are chasing a lot of demand and have zero concerns about selling the remaining portion of that gas through what will be the largest pipeline built in the U.S. once completed. As always, we will add value on assets already in the ground. The Springerville customers can ultimately source gas from anywhere on the TW system, but the vast majority will come from the Permian Basin or San Juan. Operator: We are not showing any further questions at this time. I will now turn the call back to Tom Long for any closing remarks. Tom Long: Thank you, everyone, for joining today. As you heard, we have a lot of great projects underway and a strong outlook, not just for the quarter we reported but for many years to come. Our projects are supported by long-term contracts with a healthy mix of demand-side customers, many with terms extending beyond 20 years. This supports why we remain optimistic and excited about our future. We look forward to following up with you on any additional questions. Operator: That concludes today’s conference call. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the American Electric Power First Quarter 2026 Earnings Conference Call. backgrounds. [Operator Instructions] I would now like to turn the conference over to Darcy Reese, Vice President of Investor Relations. Please go ahead. Darcy Reese: Good morning, and welcome to American Electric Power's First Quarter 2026 Earnings Call. A live webcast of this teleconference and slide presentation are available on our website under the Events and Presentations section. Joining me today are Bill Fehrman, Chairman, President and Chief Executive Officer; and Trevor Mihalik, Executive Vice President and Chief Financial Officer. In addition, we have other members of our management team in the room to answer questions if needed, including Kate Dickson, Senior Vice President, Controller and Chief Accounting Officer. We will be making forward-looking statements during the call. Actual results may differ materially from those projected in any forward-looking statements we make today. Factors that could cause our actual results to differ materially are discussed in the company's most recent SEC filings. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We will take your questions following opening remarks. I will now hand the call over to Bill. William Fehrman: Thank you, Darcy, and good morning. We appreciate you joining us for American Electric Power's First Quarter 2026 Earnings Call. I'll begin on Slides 4 and 5. This is a defining period for our industry. The pace of change is accelerating and the opportunities ahead of us are expanding. Within this environment, AEP is extremely well situated to capture growth, given our scale, leadership position in generation and transmission, exceptional execution capabilities and our operational footprint in some of the fastest-growing regions in the country. As customer needs evolve, scale, innovation and intense focus on execution will define the next generation of utility growth. We are ready to meet unprecedented demand across our large service territory, not only driven by data centers, but also broader economic development. This is meaningfully expanding the long-term opportunity ahead of us and in the communities we serve. At the same time, our growth is only possible with trusted partnerships. We are staying closely aligned with our stakeholders, listening to our customers, governors, regulators and policymakers while working to advance solutions that support affordability, economic development, reliability and resiliency. As we scale our system, execution and operational discipline become even more crucial. These are significant strengths of the new leadership team at AEP. By leveraging our size and experience we are mitigating supply chain pressures and acquiring critical resources to support what is a multiyear sustained period of infrastructure build-out. This includes already securing extra high-voltage long lead-time equipment like transformers, breakers and [ Lattice ] steel. As we also said on past calls, we have secured more than 10 gigawatts of gas-fired turbine capacity. In short, we are executing on a disciplined strategy to deliver consistent and timely long-term value for both customers and shareholders. Now turning to Slide 7 and 8 of the presentation, I will provide a high-level overview of our first quarter results strategic outlook, affordability and regulatory progress before handing it over to Trevor to walk through our financials and strong growth trajectory in more detail. We are pleased to report first quarter 2026 operating earnings of $1.64 per share or $891 million. These results build on our financial and operational momentum from 2025 and give us confidence in reaffirming our full year 2026 operating earnings guidance range of $6.15 to $6.45 per share. AEP continues to experience substantial system demand concentrated largely in our key growth states of Indiana, Ohio, Oklahoma and Texas. In the first quarter, we contracted an additional 7 gigawatts of load, coming mostly from AEP Texas and AEP Ohio. And we now have an incremental contracted total of 63 gigawatts expected by 2030. This is an increase from the 56 gigawatts we shared just last quarter. Of the 63 gigawatts, nearly 90% are data centers, which include hyperscalers, while the rest are industrials. Contracted load customers must meet high credit standards through investment-grade credit quality, parent guarantees or other forms of credit support compliant with tariff requirements. They are also backed by electric service agreements and levers of agreement. To be very clear, I am intensely focused on execution of the projects required to get this load connected for our customers. That is why we earn business. Of the 63 gigawatts, 53 gigawatts are in Texas and Ohio requiring large-scale transmission projects, which we believe we excel at constructing and operating. The remaining 10 gigawatts requires new generation, for which AEP has secured the necessary long lead-time equipment and has strategic contracting arrangements to supply the labor necessary to successfully execute on our delivery commitments. Size matters, and AEP is using our breadth and scale to aim to provide what is needed to meet customer demands. Trevor will discuss the 63 gigawatts in more detail shortly. To support these projects, today, we are increasing our 5-year capital plan to $78 billion, up from the prior $72 billion, which now drives an expected 11% 5-year rate base CAGR. The $6 billion of incremental investments includes $3.5 billion in recently approved PJM and SPP transmission investments and $2.5 billion for I&M gas-fired generation. In addition, we have line of sight to over $10 billion of projects for 2026 through 2030. These investments are incremental to the new $78 billion plan and include the Piketon transmission project, the Wyoming fuel cell initiative and additional new generation opportunities across our footprint. We stand ready to capture incremental growth opportunities while maintaining a strong balance sheet, which, as I have said many times, is a key priority for us. Especially in light of the exceptional load expansion we are seeing, today, we are also reaffirming our premium operating earnings growth rate of 7% to 9% for 2026 through 2030. The $6 billion increase to our capital plan is driven by transmission and generation projects that come online later in the next 5 years. These investments are expected to be accretive to earnings in the back end of the plan and increase our expected long-term operating earnings CAGR to now greater than 9%. Turning to Slide 9 of our presentation, we believe our transmission, scale and expertise remain unmatched in the industry. Today, AEP owns and operates more than 2,100 miles of ultra-high-voltage 765 kV transmission lines across 6 states. Large [ low ] customers continue to choose sites in our footprint because of the strength and sophistication of our advanced transmission network. As we have highlighted before, AEP pioneered the modern 765 kV transmission system in North America, and we have more than 6 decades of experience designing, building and operating these ultra-high voltage assets. Currently, nobody even comes close to our experience and capabilities in this area. Hands down, we are the largest owner-operator in the United States. The strategic partnership agreement with [ Quanta Services ] that we announced late last year, continues to drive high confidence in the execution of our high-voltage transmission projects. By pairing AEP's vision for a modern, resilient grid with an industry-leading partner like [ Quanta ], we are accelerating the development of the 765 kV infrastructure build-out that will be essential to meeting the reliability, resiliency and energy delivery needs of the future. As I mentioned, we were recently awarded new 765 kV transmission projects in SPP and PJM. For SPP, we were directly assigned a major project that consists of 315 miles of 765 kV lines from Seminole, Oklahoma to Southwest [ Freeport ], Louisiana. We also secured additional projects from Potter, Texas to Beckham County, Oklahoma. Together, these projects totaled $1.6 billion and are anticipated to be in service by 2030. In PJM, we were awarded the build-out of 330 miles of predominantly 765 KV lines in Ohio and Indiana. These projects totaled $1.9 billion and also have expected in-service dates towards the end of our 5-year plan. Additionally, we are pleased to have been selected for a nearly 200-mile 765 kV project in MISO, which expands our competitive footprint into Wisconsin. While this project falls largely outside the current 5-year window with an in-service date of 2034, it gives us confidence and visibility in our longer-term growth rate into the future. With the addition of these projects, our transmission investment forecast now totals $33 billion, representing 42% of the overall $78 billion capital plan and underscoring our position in strengthening the nation's critical electric transmission backbone. Turning to new generation resources on Slide 10. AEP is proactively building the capacity needed to support accelerating demand and long-term growth. As part of this effort, we have expanded our generation capital outlook by $3 billion to $24 billion through 2030, driven by new gas generation at I&M. At a broader level, our portfolio strategy is intentionally balanced and diversified with investments across natural gas, solar, wind and storage. This mix strengthens reliability while promoting a disciplined approach to delivering cost-effective investments for our customers over the long term. We have secured access to more than 10 gigawatts of gas-fired turbine capacity from leading manufacturers and are advancing our projects through the interconnection process across PJM and SPP. We are leveraging experienced EPC partners alongside our in-house engineering expertise to deliver these projects efficiently and at scale. We are also maintaining flexibility in how we meet incremental demand for new generation, utilizing competitive RFPs and targeted bilateral acquisitions to supplement our self-developed pipeline and ensure we capture the most attractive opportunities. In parallel, we continue to evaluate nuclear solutions aiming to position AEP at the forefront of next-generation baseload technologies. As we have previously mentioned, we are actively reviewing several potential sites and interconnection locations as we assess how nuclear can play a meaningful role in the future to support load growth. Any nuclear investment will require strong capital protection, disciplined balance sheet safeguards and significant regulatory and governmental engagement, such as loan guarantees and long lead-time equipment support. No projects will move forward if they place undue risk on our business or our shareholders. While we have been very successful with building out transmission infrastructure in PJM, AEP continues to identify some issues around how quickly and efficiently load is being connected to generation. The current state of PJM's performance and stakeholder approval process does not give me great confidence that these issues will be resolved anytime soon. In fact, if something is not done now, I expect we could still be having these same conversations in 10 years. The PJM market worked very well when supply exceeded demand, but we are now in a very different time. As such, we are currently assessing all of our options to ensure that we are finding an efficient and effective path forward to deliver what our customers need, which simply put, is more interconnected generation to power their businesses. We are performing a similar review of our membership in SPP. Expanding the strengthening the grid will ensure new generation resources across all technologies can connect quickly, reliably and affordably to serve our fast-growing loan. As our exciting generation plans mature, we will share the financial plans as part of our normal cadence on the third quarter call later this year. Please turn to Slide 11. We -- even as we invest to meet rapidly growing load expectations, affordability is top of mind, and we remain focused on taking decisive actions to facilitate keeping residential rate impacts manageable. With the large load contracts we have secured, we are forecasting up to $16 billion in cost offsets for existing customers from their allocated contributions to expenses during the life of these agreements. This is a major affordability win for our existing customers and a clear validation of our customer-focused growth strategy. At the same time, our focus on customer service through accountability is delivering results. In fact, we have had a meaningful reduction in the average duration of outages across the system across the last year. which is strengthening customer relationships through more reliable power. While our rate base continues to expand, O&M is rising modestly at a 4% CAGR over the same period. driven by the additional staffing and maintenance support required to operate new generation and transmission assets being added to the system. This operational discipline is a real differentiator for AEP and positions us exceptionally well for the future. We are also tapping federal tools to strengthen customer savings. The team has secured $315 million in generation and distribution brands. We closed on a $1.6 billion DOE loan guarantee related to transmission, projected to deliver over $275 million in customer savings over the life of the loans. As part of our long-term strategy, we have also applied for additional DOE loans to fund our generation and transmission investments. We expect to provide periodic updates as loan closings progress. These are meaningful dollars going right back to customers, which is just another example of how we are pairing growth with affordability. Over the past 2 years, we have led the industry in establishing the right regulatory framework for a large load growth. We secured approvals for new data center tariffs in Ohio, followed by large low tariff solutions in Indiana, Kentucky and West Virginia, and we are not stopping there. We have active filings in Michigan, Oklahoma, Texas and Virginia. You will find a full summary of these actions on Slide 12 of today's presentation. These tariff structures are designed with a couple of clear goals: First, we are protecting our existing customers by ensuring data centers and other large load customers cover the investments required to support their energy needs. And second, we are protecting our revenue and earnings base through minimum demand charges embedded directly within these binding take-or-pay contracts. We have made solid progress on tariff structures, and we will continue to work with our regulators and stakeholders to make sure large load customers pay their cost to serve and provide cost relief to our residential customers. Turning to Slide 13, this brings me to our strong regulatory progress in the quarter across multiple jurisdictions. This continues to be a major focus area of mine. In Ohio, we secured commission approval of the distribution base case settlement, including an affordability measure, which contains a rate decrease for customers along with a 9.84% ROE, up from the prior ROE of 9.7%. As another example, in Arkansas, we successfully increased our ROE from 9.5% to 9.65% and Pointedly, we have not ended up with a reduced ROE in any recent rate case outcome. In Indiana, we advanced our resource strategy with approval of our expedited generation resource plan. setting the stage for an upcoming base rate case that will include a customer rate reduction, supporting our focus on affordability. In West Virginia, we received a favorable reconsideration order that increased the authorized ROE to 9.75% from 9.25%, a significant increase. The commission also approved a modified rate base cost infrastructure investment tracker. Both of these approvals come at an important time as the state seeks to advance its long-term energy strategy. And the initiative aimed at ensuring West Virginia has the reliable, affordable energy needed to support rising demand. With strong support from the governor, this presents significant investment opportunity under a more constructive regulatory environment. And we also continued to see consistent positive outcomes across other areas of our multistate footprint, including Oklahoma, Louisiana and Texas. Taken all together, we believe these actions and outcomes reflect the growing strength of our regulatory approach. By listening closely to state leaders and aligning our plans with their needs, we are achieving balanced regulatory results that benefit both customers and investors. Before I wrap up, I want to underscore just how exceptional the start of this year has been. Our team is operating at a level of execution that we believe is setting a new standard for the industry. We are making significant strategic investments to meet what is truly a transformative moment for our company. At the same time, we are working hand-in-hand with our regulators and policymakers to advance their key priorities, all while taking disciplined, proactive steps to maintain affordability for our customers. I'm extremely confident in our strategy, our capabilities and the AEP team, we are ready to capture the substantial opportunities in front of us by accelerating growth, having an intense focus on execution, driving customer affordability and and using AEP's size and scale to strengthen our competitive advantages while creating long-term value for our shareholders. I'll now turn the call over to Trevor to walk through our first quarter performance drivers and provide more detail on our financials and strong growth trajectory. Trevor Mihalik: Thanks, Bill, and good morning, everyone. On today's call, I will begin by reviewing the quarter's key earnings drivers, along with our confidence in load growth, which has increased 7 gigawatts from last quarter to now 63 gigawatts. I will then discuss our newly expanded $78 billion capital plan, up $6 billion and our expected increased long-term operating earnings CAGR of now greater than 9% based on this capital plan. I will then highlight the line of sight we have to over $10 billion of investment opportunities above our base capital plan before closing with comments on our balance sheet strength. Please turn to Slide 15 of the presentation. First quarter 2026 operating earnings were $1.64 per share compared to $1.54 per share in the first quarter of 2025. Results in our VIU and T&D segments remained strong during the quarter, driven by constructive rate case outcomes across multiple jurisdictions. As Bill noted earlier, we continue to see positive regulatory progress across our service territory. Regulated earned ROE for the quarter increased to 9.3% and is expected to reach approximately 9.5% by 2030 as we continue to execute our regulatory strategy with a focus on affordability for our customers. In addition to robust regulatory performance, we continue to advance our transmission investment strategy and saw ongoing [ loan ] growth across our footprint, which I will discuss in more detail shortly. These positives were partially offset by prior year's favorable weather and continued spend to enhance system reliability. Transmission Holdco performance was mainly impacted by increased expense, including storm restoration and higher property taxes. We expect Transmission Holdco earnings to be favorable on a year-over-year basis by the end of 2026. In the Generation & Marketing segment, results reflected stronger wholesale margin performance, partially offset by prior year contract optimization benefits. Finally, in Corporate and Other, the variance was largely driven by higher O&M, increased interest expense and timing related to income taxes, of which we anticipate the impact to reverse by the end of this year. Turning to Slide 16 and our current load outlook, we continue to see significant acceleration in contracted load growth. In support of that trend, we have executed on 63 gigawatts of total load, up from 56 gigawatts reported just a few months ago. This increase reflects continued progress converting projects from our planning queue into binding customer contracts. As a reminder, these contracts include letters of agreement and long-term electric service agreements, depending on the relevant tariff provisions in each jurisdiction. As Bill mentioned, with large load ESA contracts we have secured within our vertically integrated utilities, we are forecasting up to $16 billion in cost offsets for existing customers from their allocated share of fixed expenses. Our analysis estimates contracted revenue from large customers over the life of the ESAs and evaluates how fixed cost responsibility reallocates across customer classes over time, taking into consideration load wraps. As contracted load continues to grow, we remain equally focused on the quality and credit strength of the customers who are driving it. As Bill referenced earlier, our contracted customers must meet high credit standards. The majority of contracted megawatts are with large, well-capitalized hyperscalers and industrial customers. This high-quality and diversified customer base forms a strong foundation for long-term partnerships and infrastructure development. With that context, I'll turn to recent activity by region, starting with PJM. Contracted load in PJM increased by approximately 1 gigawatt during the quarter, driven primarily by additional customer contracts executed in Ohio. Substantially, all of our total incremental PJM load is supported by take-or-pay ESAs. Beyond near-term additions, we continue to see a robust pipeline of longer-dated opportunities in PJM. Most notably, we recently announced a 10-gigawatt data center campus with [ SB Energy ] in Piketon, Ohio. The majority of the incremental load associated with this project is not currently included in our load forecast that is reflected in the approximately 190 gigawatt active interconnection queue. Given the early stage of development, we anticipate incorporating this load into our forecast as commercial discussions progress and ESAs are formalized. In addition to the Piketon campus, we are also evaluating a multibillion-dollar Google data center development in Putnam County, West Virginia. This opportunity remains in the early stages and is not included in AEP's current load forecast for financial outlook. Turning to SPP. Contracted load increased by approximately 1 gigawatt during the quarter, driven primarily by an Amazon data center project in Northwest Louisiana. Almost half of our total incremental SPP load is now supported by take-or-pay ESAs, an increase from last quarter, reflecting continued progress converting new load development into binding take-or-pay ESAs. Stepping back, these newly announced data center projects are supported by high-quality hyperscalers, most of whom have publicly committed to funding the required infrastructure upgrades, helping to protect rate affordability for our broader customer base. At the same time, the scale of load growth we are seeing highlights the strength of our diverse footprint that is highly suited for data centers and our ability to attract large-scale economic development to the communities we serve. Turning to Slide 17 and shifting to ERCOT. This region accounted for the majority of contracted load growth during the quarter. Load increased to 41 gigawatts, up from 36 gigawatts reported at the end of the fourth quarter. For context, I want to highlight how this load is contracted and how this differs from PJM and SPP. All 41 gigawatts of contracted load in ERCOT meet the standards under Senate Bill 6 and are secured through executed LOAs. These agreements require customers to secure, complete interconnection studies provide detailed load forecasts and fully fund related construction costs. This structure acts as an effective filter, ensuring projects advancing into our forecast are well developed, financially backed and are executable. With that framework in place, we are working closely with ERCOT and other stakeholders to advance solutions that will support the significant and growing demand. Annually, in April, AEP Texas files its low growth forecast through ERCOT's regional transmission planning, or RTP, process. This RTP methodology analyzes peak load along with transmission and generation constraints to recommend system improvements. In this year's April 1 RTP filing, AEP Texas submitted 31 gigawatts of incremental demand by the end of the decade. Due to submission requirements and timing, AEP Texas has since executed LOAs for another 10 gigawatts of load above the 31 gigawatts, underscoring AEP's low growth needs of 41 gigawatts in ERCOT. Keep in mind, the underlying demand in ERCOT is real. It's supported by signed customer agreements formal planning submissions and backed by roughly 60 gigawatts of active load in the ERCOT interconnection queue. As Senate Bill 6 implementation advances, including backed processing, the focus will be increasingly on timing. We expect greater clarity and certainty later this summer as the rule-making progresses on when these loans will ultimately interconnect. AEP is committed to building the required transmission and distribution infrastructure in Texas, but timing remains highly dependent on the supporting generation. In short, the question is not whether the demand exists. but when it comes online in ERCOT. Turning to Slide 18. I want to spend some time on our capital plan and how it continues to strengthen our long-term earnings growth profile. Today, we formally increased our 5-year capital plan by $6 billion, bringing the total to $78 billion. This increase reflects our inclusion of the SPP and PJM transmission projects Bill referenced earlier, which together represent roughly $5 billion of awarded transmission projects. Consistent with our disciplined approach to capital planning we have incorporated only approximately $3.5 billion of those awards into the capital plan. Specifically for the SPP project, the exact division of lines between AEP and a regional peer has not yet been finalized. So we're using a conservative 50% assumption to update the capital plan. The expanded plan also includes our recent announcements related to I&M's planned acquisition of the [ Sycamore and Big Sandy ] natural gas generation facilities. From a timing perspective, this incremental $6 billion is largely associated with projects that enter service closer to the 2029 and 2030 time frame. As a result, these investments are accretive to earnings in the back end of the plan. The best way to think about this is that these investments not only reinforce our earnings growth, but increase our expected long-term operating earnings CAGR to now greater than 9% over the period of 2026 to 2030. Beyond the base plan, we continue to see meaningful upside. For the 2026 through 2030 period, we have line of sight to over $10 billion of projects that are not included in the $78 billion plan, including the Wyoming fuel cell project [ Hudson ] transmission project and additional generation investments. While these incremental opportunities remain subject to key gating items or require clarity and are therefore not reflected in our base capital forecast, they highlight the depth and strength of our capital pipeline. With contracted load growth now totaling 63 gigawatts combined with line of sight to over $10 billion of projects and other developing generation and transmission opportunities, we see meaningful upside to the current capital plan. We will provide a more fulsome update on the capital plan, our related financing strategy and talk through our long-term growth outlook as part of our normal cadence in the third quarter. Turning to Slide 19, I'll walk through our updated 5-year financing plan aligned with this new expanded capital program. To support the $6 billion of additional capital formally added today, we have modestly increased the level of growth equity in the plan. Equity has increased by $1.1 billion and now total $7 billion for the period of 2026 to 2030. Importantly, this incremental equity represents only 18% of the $6 billion of incremental capital growth, underscoring our continued focus on disciplined, balanced financing. Looking at the timing of the equity issuance. The majority remains weighted towards the back half of the 5-year plan, providing flexibility as projects advance and cash flows build with execution. Consistent with that profile, we intend to remain opportunistic across all financing instruments as market conditions evolve, funding long-term growth in a measured and shareholder-friendly manner. Let's now turn to our financing activity so far this year. Given our strong stock performance in the first quarter, we took advantage of the market and accelerated our at-the-market program. issuing $665 million of ATM equity. This fulfills 2/3 of our full year 2026 equity needs and reflects strong progress against our financing plan. In fact, we have issued the $665 million of ATM equity at an average price of over $131 per share. Looking across the planning horizon, -- we remain well aligned with our FFO to debt targets of 14% to 15% for both S&P and Moody's. As of the first quarter, S&P FFO to debt stands at 14.7%, near the top end of our target range; while the Moody's metric is 13.9% and just below our target, And both remain well above the downgrade threshold of 13%. Overall, the updated financing plan preserves balance sheet strength while supporting our expanded capital program. With a disciplined funding approach, a strong credit profile and flexibility to deploy a range of financing tools to take advantage of market conditions, we are well positioned to responsibly finance this growth while delivering exceptionally strong financial results over time. Turning to Slide 20. I want to close by highlighting a few key takeaways that reinforce the progress we are making across financial performance, growth execution and balance sheet discipline. First, we delivered a strong first quarter of 2026, with operating earnings of $1.64 per share. This performance gives us confidence to reaffirm our full-year operating earnings guidance of $6.15 to $6.45 per share, reflecting robust financial results through continued positive regulatory momentum. Second, our load growth story continues to strengthen. We now have executed on 63 gigawatts of incremental contracted load through 2030, supported by a diverse and high-quality customer base. This continued large load demand provides a strong foundation for long-term infrastructure investments that enable us to deliver reliable power to our customers. Third, we remain focused on executing our newly expanded $78 billion capital plan, which is driving an expected 11% 5-year rate base CAGR. The $6 billion of incremental investments reinforce our expected 7% to 9% annual earnings growth, increasing our expected long-term operating earnings CAGR to now greater than 9%. With contracted load growth totaling 63 gigawatts in together with line of sight to over $10 billion of projects in other developing generation and transmission opportunities, we see meaningful upside to the current plan. We will assess and incorporate further opportunities as part of our normal cadence in the third quarter. Fourth, we continue to fund this growth in a disciplined manner, with only a modest increase in incremental equity to support the expanded capital program. At the same time, our large and diversified footprint provides the flexibility to deploy capital, where it delivers the greatest impact while maintaining financial strength as we execute at scale. Finally, we continue to work closely with regulators and other stakeholders to keep affordability front and center, including forecasting up to $16 billion in cost offsets for existing customers. Through constructive engagement, we are advancing regulatory frameworks that balance fairness for customers and shareholders and support the critical work of building and modernizing the electric grid. Taken together, these elements highlight the momentum we are building and the discipline we bring to execution. We are confident in our strategy, supported by a growing pipeline of opportunities and a balanced financial approach. We believe AEP is one of the best positioned investor-owned utilities to deliver long-term value as we help build the critical infrastructure needed to support unprecedented growth. We operate in states that are highly receptive to our service model and are very pro business. We continue to see strong positive momentum across the platform with electrification at the heart of our growth story. Thank you for joining us today. I will now ask the operator to please open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Steve Fishman with Wolfe Research. Steven Fleishman: Thanks for all the updates. Bill. So so many questions. The PJM commentary, could you maybe give a little more color on kind of what -- a little more on why and what you're assessing what are -- what would it take to actually exit PJM? What would you like them to see to do to not exit maybe? Just any more color on that. William Fehrman: Yes. To be clear, we're not saying we're exiting PJM. What we are seeing is that as we look at the RTOs that we operate in, obviously, they're increasingly struggling to provide the responses that we need to meet the demands. And as we begin to prepare our plans and our ability to execute on this. We're extremely comfortable that we have the equipment, we have the engineering, we have the contractors. What we need is a faster way to interconnect into these systems. And so as we've seen, there's efforts that the government has put into place to try to move PJM along and SPP along and there's fits and starts on that and it's not really moving that quickly. And for us, we need to make sure that we're doing everything we can to, number one, help push that process along and work with our state regulators and governors and policymakers to try to advance the system that we have in place today. But as the manager of risk of this company, I also have to look at what happens in the event that we can't find a path forward on that. So we're in the very early stages of the evaluation phase, obviously, considering full ranges of options, including staying in these or shifting or exploring alternative structures. But the bottom line on this is we're going to continue to work closely with our regulators and policymakers, we're continue to engage directly with FERC and with the RTOs and with others to try to figure out how can we absolutely move this process along faster because while all of us are working very hard to get the equipment we need and the contractors we need, at the end of the day, we also have to get the interconnections we need to accelerate the interconnection and getting the generation to load. So bottom line, we're committed to participating in a market that's responsive to the customer needs, but we also know that we have to figure out a way to get it to move more efficiently and more effectively. Steven Fleishman: Got it. That makes sense. Two other quick ones. Just on the bloom and customer agreement in Wyoming, just how confident are you about these requirements being met in the second quarter to move forward with that? Unknown Executive: So those discussions continue to move forward. Obviously, for us, we're protected regardless of what happens on those projects. But our team has recently been in contact with the local mayor and other stakeholders in that region, there's active work going on. So I'm confident that, that project will continue forward, but there's some work that has to be done between other parties. For us, we are ready to go. We have everything we need in place. We're essentially doing a little bit of earthwork on this project, waiting for the -- basically the full release. We're continuing to work with Bloom to ensure that we can meet schedules that the customers want to have. And so for us, I feel as though we're in great shape on this. We're in a good position with regards to our commercial terms on this project. And hopefully, this will all get resolved by the end of the second quarter. Operator: Our next question will come from the line of Julian DeMolenSmith with Jefferies. . Julien Dumoulin Smith: I'll echo the comments here. Lots of questions and very well done guys, really quite something to start the year here. So maybe to pick it up for where Steve left it off here. How do you think about the cadence of the line of sight for that next $10 billion as you think about it, right? You've got this Wyoming piece, you get the Piketon piece. It seems like you might be insinuating some PJM generation opportunities. Again, I'm not sure exactly if that's right or when it's right or how you think about backstop procurement or bilateral participation. But just as you think about this refresh, you guys have obviously provided a little bit of an out-of-cycle comment here. How do you think about the third quarter cadence for instance, versus how you would set expectations across the litany of things going? Trevor Mihalik: Yes. Thanks, Julien. This is Trevor. Look, I would say, let me step back a little bit and just say we're always going to maintain a disciplined approach to capital planning where we only include really those projects that have sufficiently advanced and cleared getting the gating items with a high degree of regulatory confidence in our formal plan. Now I will say we have announced the Pyton project and the Wyoming fuel cell project. And so that's why we wanted to shadow this $10 billion because just between those 2 projects, that could be around an $8 billion amount associated with that. And then we do have other opportunities and line of sight to additional generation in the footprint. And so I think what I wanted to do was really put a marker around pipe in and Wyoming and then also show that there is incremental opportunity around generation and really kind of get the Street comfortable with the fact that we are really being pretty conservative in the $78 billion 5-year capital plan. And what I didn't want to do is just come out on the third quarter when we do the formal update without addressing these on the first quarter call because we have been public, at least with Piketon and Wyoming. So again, I think it really just shows the robust nature of our growing capital plan. And again, I think if you take a look over the last several years, we've been growing our capital plan. If you look at over the last 4 years at roughly a 22% CAGR in -- so it's a robust plan. And again, the $6 billion definitive line of sight, that's why we raised the plan and then the $10 billion is incremental on top of that. We're looking forward to coming out on the third quarter call with a more robust fulsome approach. Julien Dumoulin Smith: Got it. And just on PJM, just needle you a little bit here, timeline on that decision and if you would or how you participate in the backstop just to make sure I hear that right? William Fehrman: So on the backstop, obviously, when that process gets formally approved, we'll -- we are already looking for potential opportunities that we could bid in to that through our unregulated businesses. But the broader piece here for me is that we have to solve the speed to market issue here. And as we're continuing to work with PJM and other stakeholders and our governors, clearly, this is an area that has to get fixed. And so the point here is we are going to intently engage in this, we're going to figure out how we can get this accelerated, make sure that we do it in an appropriate manner with our states and and see where this ends up because PJM, in particular, is clearly a system that is not expediting the connection of flow to demand. And so we're very confident with where we sit today on the projects that we have today. But I also think in the world we're in, we need to figure out how to make it go faster. Operator: Our next question will come from the line of David Arcaro with Morgan Stanley. David Arcaro: Bill, as you talk about trying to move more quickly here. Are you looking at other strategies to or potentially expanding like pursuing on-site power anywhere else across your system, expanding what you had done with the fuel cells? William Fehrman: As we work with our customers. We're very proud of the fact that we're able to bring to them a variety of bridging strategies to serve their loads. And we've got a number of examples where we've done fuel cells. We have access to [ aero ] derivatives. We can do smaller interconnections into our system. So we have a variety of tools that we take to our customers to try to accelerate their ability to get their business online at the speed of which they want to move forward. And so we'll continue to offer those types of opportunities. We're also working to accelerate our ability to get transmission built. We're looking at different ways of how we construct transmission or design of transmission to accelerate the overall construction of this. And obviously, with our partnership with Quanta, that gives us a tremendous competitive advantage with them to find innovations for speed. And so this is, for us, all about getting our customers connected as absolutely fast as possible and working with them on where they want to be short term and where they want to be long term with their power supply and making sure that we're the ones that can deliver it, so we get their load. David Arcaro: Got it. That makes sense. And then let's see, Trevor. I was just wondering, looking at the equity financing update here relative to the incremental CapEx, could you also touch on now going forward to the extent some of that CapEx from the $10 billion bucket is brought into the plan over time? What does the equity financing need look like proportionally to that? Trevor Mihalik: Yes, sure. Let me start by saying that what we have is a strong operating cash flow model here, and we're forecasted to generate over $47 billion of operating cash flows over this 5-year period. And so to fund the growth, we will use a full range of financing tools. And you've seen us be pretty active with that, including hybrids and other equity-like instruments, structured financing and again, growth equity. And we want to make sure we take advantage of the most optimal market conditions and fund the plan in a balanced and shareholder-friendly way. But you've heard me say many times, David, that I'm not opposed to issuing accretive growth equity. And generally, what you see in the industry is typically, it's around a 30% to 40% equity content for CapEx. And what we announced today with the $6 billion is only 18% of equity content. And so you're always going to see us make sure we balance the most effective way to finance this in the most shareholder-friendly way. But again, I would go back to the strong operating cash flows. And the fact that we have multiple tools at our disposal and we're also very focused on our FFO to debt metrics, so I think you will see us continue to look at the timing of when that $10 billion rolls out over the plan and then the methodology in which we finance it. But right now, when you take a look at Page 19 of the presentation today, you'll see that we have $1 billion of ATM in 2026, of which $665 million is already issued and then really nothing in '27. And then we've got the ATM at $1 billion a year in each of the years, '28, '29 and '30 and then just a modest amount of growth equity in the back end of the plan. And so again, I think what this does is it really gives us a great deal of flexibility in how we're going to finance the incremental $10 billion or what we ultimately roll out on the third quarter call. We are going to ensure that we're doing this in a very disciplined manner as we finance these great opportunities. Operator: Our next question will come from the line of Richard Sunderland with Truist Securities. Unknown Analyst: I wanted to pick up a couple of the earlier themes around PJM, but kind of turn that to the SPP side. You spoke a little bit to progress there on the load front. But curious how you're viewing sort of SPP as a whole interest into that RCO and what it might mean for like Septoand continuing loan interest there? William Fehrman: Yes. So very similar view of SPP with regards to just a general focus of wanting to get load connected to generation there. SPP though, I would say, has been more aggressive in getting after these issues. We've had better luck in SPP. They've made their filings on the [ ARRIS ] program and such. And so it's, I would say, a little bit better there with regards to being able to get our generation connected and moving forward. So -- but still, we still want to make sure that we're staying on top of this. And because it is a part of any of these projects. And every utility out there who's trying to do this has the exact same issues we have. We're just going to engage more on this and make sure that we eliminate the risk and get our customers connected just as quickly as we can. Unknown Analyst: Got it. That's super helpful. And then turning to, I guess, a bigger-level topic around transmission, you've had a lot of commentary today on what you're doing there. I'm curious, what you see on the policy side as needs for transmission? I mean there's been a lot of focus recently around some recent FERC actions elsewhere. And I guess just the bigger question is, do you think there are opportunities on the transmission side that go beyond the sort of engineering construction efforts you spoke to earlier? William Fehrman: Well, certainly, on transmission. There's keys around accelerating right-of-way acquisition, there's keys around the supply chain of this and getting ahead of that. And as we mentioned earlier, with our size and scale, we are well ahead on our supply chain and the procurement for all of these projects that carry us out through this plan. I feel very confident with regards to having what we need there to get these done. Clearly, as we're going through the regulatory environment, I would say that at least in my discussions with the states. At the policy level, they're very supportive of transmission. They know that transmission forms the backbone for economic development. and that without a very strong transmission system that their economic development will, in some cases, be muted. And so for us anyway, we've had great success on transmission, both on the regulated side, on the competitive side. We've got an exceptional relationship with Quanta. So we know we have the labor to get it bill. We're having very innovative design so that we can reduce right of way. We can reduce the amount of weight for each of these structures that we have. So we're really attacking this from a multi-value stream of opportunity to continue our leadership role in the operation, maintenance and construction and transmission. Operator: Our next question will come from the line of Nick Amicucci with Evercore ISI. Nicholas Amicucci: I wanted to just kind of dig in a little bit on the growth equity proportion on Slide 19. So do we think about that kind of the $3 billion of gross equity. Is that firm? Or is that kind of contingent upon the CapEx pace? And how should we think about kind of that just moving forward as you think about '28 through '30? Trevor Mihalik: Yes. Definitely, Nick, I would say that, that $3 billion at the back end of the plan is tied to the $78 billion CapEx plan. And as we indicated, a lot of the uplift that we even had today with the $6 billion is in the back half of the plan when a lot of those dollars will come through. And so I would say it's pretty firm because we feel very confident about the CapEx plan. And this is what we would need to finance that. So the good news is we need it in that 28 to 30 period. And then we've been pretty focus on getting the ATM done this year and getting that $665 million done. And so from my perspective, I think the equity is really not much of an issue right now in support of the $78 billion 5-year capital plan. And it's really a modest amount of equity to think about what is ultimately needed to fund this growth plan. Nicholas Amicucci: Got it. That's helpful. And then as we -- as you kind of think about the potential uplift that we will receive with the third quarter update, to the CapEx plan. Should we -- is it fair to -- I mean we've seen a pretty consistent kind of breakdown between transmission and generation. And just given kind of the commentary surrounding speed to market. Is it fair to assume that, that breakdown kind of persists, so a little bit more heavily skewed towards transmission? Trevor Mihalik: Yes. I think that's a pretty safe assumption on this. While you have seen that we have a fair amount or $33 billion of the capital plan is associated with transmission right now. We continue to see a lot of opportunities around the transmission business, both within our service territory as well as competitive opportunities. Bill mentioned the one up in -- MISO up in the Wisconsin area. Those are opportunities that we continue to see, and people are acknowledging that AEP is differential with regards to being the largest transmission owner operator and the one that really pioneered [ 765 ]. And so a lot of that is a competitive advantage for us around transmission. But I also will say that what we're seeing with the load growth of the 63 gigs across our footprint, generation is also very important. And that's where we have been very aggressive in leaning into securing turbine slots and putting those turbine slots into the planning cycle. And so we're excited to roll out the updated capital plan on the third quarter call. But I didn't think that I could come out without actually updating on this call, at least the $6 billion. And then because we have mentioned the Piketon project as well as Wyoming, I needed to also at least speak to that $10 billion, which, again, in my prepared remarks, I said was fairly conservative. Operator: Our next question will come from the line of Andrew Weisel with Scotiabank. Andrew Weisel: Thanks. Good morning, everybody. I can maybe start continuing a little bit on that last one. If you could speak to the timing and pricing of gas turbines. You keep adding generation to the outlook. It sounds like there's potentially more to come in the near future. Are you looking at simple cycles, CCGTs or both? And given your strong relationships, you're certainly well positioned with suppliers. How soon could you add incremental units? And what level of pricing are you seeing? William Fehrman: So we're building out what our customers are asking for. So we have a variety of simple cycle projects as well as combined cycle projects across the 11-state footprint. As we talk with our customers and have them continue to lock in what their longer-term expectations are for additional projects and growth of the existing facilities that they have in place, we're in communication with the major turbine suppliers to ensure that we have access to those turbines. As far as what we see sort of going forward, we're most active with Mitsubishi and GE on the supply. We do have access to turbines going well out into the future. Obviously, the actual pricing of those are under confidentiality agreements. But for me, the important part of this is that we have access to turbines, we're able to get the equipment that we need to serve the load. We are a preferred supplier for these customers because our focus is on getting them interconnected either through a bridging strategy or through ultimate grid connection and expedited generation buildout. And so I'm excited with where we're at. As we noted earlier, our Q actually continues to grow. We now have 190 gigawatts in our queue of people wanting to interconnect with us, which obviously solidifies our continued growth and what we're trying to do. And I think, again, a big reason for that is, that we are delivering for these customers, and we're coming up with innovative and creative solutions to make sure we get them connected as quickly as possible. Andrew Weisel: Okay. Great. And then I realize we're at the hour, but 1 more quick one. On the Wyoming fuel cells, Bill, I think you used the term that you're protected, can you discuss that a little bit? I know you're waiting for the customers to get their work done? And you said you're hoping gets resolved by the end of the second quarter, which is just at the end of next month. Is there a deadline associated with your contract? And what happens if the end of June comes and goes without the customers figuring their side out? William Fehrman: Yes. I'll have Trevor give you a couple of the details here, but this was a fundamental part of this commercial arrangement, was to make sure that our company and our investors were protected on this project. Trevor, maybe you want to give them a little bit of color on this? Trevor Mihalik: Sure, Bill. Yes. So the good thing here, as Bill says, we are protected. And we can -- if everything were to not proceed, we have the ability to put the fuel cells back to the hyperscale at a cost plus, and we've been public about that, it's roughly 10%. So we're protected on that side. I think we have a deadline of the end of June, and then there is another 6-month period that the hyperscaler could -- if they can't advance discussions by the end of June, they could look to seek another location for that property. And if they can't, by the end of the year, find another property, then we can put those fuel cells to the hyperscaler at 110%. Andrew Weisel: And that property could be anywhere in the U.S.? Trevor Mihalik: Correct. Operator: Our next question will come from the line of Michael Lonegan with Barclays. Michael Lonegan: So when you say alternative strategies in obviously, you're already vertically integrated in West Virginia. Just wondering what are your thoughts on doing a [ Genco ] structure there? There's a clear backdrop in the state wanting more gas generation. Is that something you are considering? And what would you say that's within your risk tolerance there? William Fehrman: So we've been studying the Genco model, obviously, in Indiana is a perfect example of what they were able to complete there. We think that's an innovation that would work for us. Obviously, in West Virginia, we just completed the rate case that was in progress for a number of months, and we got a good reasonable outcome there, and we're in close communication with the governor and the energies are in West Virginia. And so we'll stay closely connected to them to determine how best to move forward. He's very committed to his 50 gigawatts by 2050 vision. And with the more reasonable regulatory outcome that we got there now, we are in deep discussions with him and his team and the regulator there to determine how best to deliver what they want. There is tremendous opportunity in West Virginia. And so that is another major growth opportunity for us in that state. Michael Lonegan: Then a lot of questions on the financing. You touched upon your equity needs, obviously, Just would you consider selling noncore assets or a sale of a minority interest to finance additional capital or mitigate equity needs? And then if so, what assets could be on the table for potential divestitures? Trevor Mihalik: Yes, Michael, I'm sure you're going to expect this answer, but we wouldn't talk about any kind of M&A and if we were contemplating that. But I would say this that we really like our footprint, we like the states we're in. We indicated that these are very pro-business states. And we're trying to grow this business and not shrink it. And I think there are alternative forms of financing that we can execute on to fulfill what we need around our growing capital plan without having to sell assets. So I would just leave it at that. . Operator: Our next question will come from the line of Bill Appicelli with UBS. William Appicelli: Most of my questions have been asked. But just as we unpack sort of the magnitude of the EPS growth upside here, you guys are modifying the language to say greater than 9%. I mean how much of this incremental capital should be reflected in earnings in 2030? And then when we think about the $10 billion, is that -- how much of that related to Piton and Wyoming could be sort of fully reflected by 2030 as well? Trevor Mihalik: Yes. So I appreciate the question. And I would say AEP's growth rate certainly is 1 of the highest in the industry. And I think the key point is that the increase in the long-term earnings CAGR to greater than 9% is supported by the $6 billion of incremental capital that we formally added to the plan. But as we said, it is weighted to the back half of the plan, and that's when we'll see more of the impact to EPS. But we do see other upside. And when you take a look at, for example, the Piketon project, if and when that advances, that's well within the 5-year capital plan. And it needs -- those assets need to be constructed by 2028. And so from that perspective, I think that's where we're saying there's upside and we're being conservative in the capital plan. Now what I want to do, because we have almost best-in-class growth rate of this 7 to 9, and then we have intimated that we were at in over the 5-year period with the previous plan and now we're greater than 9 with this plan, I always want to be careful that we're under-promising and over-delivering. And again, as you said, that $10 billion is not in that greater than 9% EPS CAGR. But what that ultimately means with regards to financing it and how that cascades through the earnings cycle that we would come out with once we update the plan on the third quarter call. William Appicelli: Okay. All right. No, that's helpful. And then just going back to a comment earlier about the reliability backstop, just to confirm, it sounds like you would be interested in submitting bids for under a bilateral fully contracted structure. Is that what I heard? William Fehrman: So we'll continue to follow the RPG process that's going through the approval process, and we'll assess that when it comes out. And if we have an opportunity to get into that through our unreg business, we'll certainly make that assessment. We would have good potential opportunities for that. But at the end of the day, we have to see what the rules are of the game and figure out if we have something that we believe would be competitive. William Appicelli: Okay. And then just one other one along that same line. The cost allocation that's being proposed is going to be a function of the EDC load forecast. So within your PJM load forecast, you guys feel confident that there's not going to be any revisions to that at this point in terms of tightening for -- as it relates to what PJM is going to need to see for cost allocation? William Fehrman: Yes. I'm confident right now that we're good with where we sit. Operator: Our final question will come from the line of Jeremy Tonet with JPMorgan. Unknown Analyst: This is actually Ed Kelly on for Jeremy. How are you using grid-enhancing technologies across your T&D network to do more with less and extract capacity by managing peaks better, whether that be through transmission grid management or grid edge intelligence and then using that to perhaps provide customer rebates to reduce rate of bill increases? William Fehrman: So our team is deeply engaged with innovation. We are tied in with a number of the manufacturers and technology developers out there on these types of of technologies and where they make sense. Our team is pursuing implementation of it. But to be very clear, I think that those help fill in some gaps, but we have tremendous need here for new generation and new transmission. And so our focus is really on both of these -- the three legs of the school, if you will: One, getting new generation connected; two, to getting brand-new transmission built to build out the backbone and deliver the energy and reliability that our customers want. And then the third leg is the variety of of guests and energy efficiency tools and new technologies and AI and the variety of innovations that are coming our way to assess. But with the dramatic need for additional generation, additional transmission that's out there, we have a strong focus on that to make sure that we're executing well for our customers. Unknown Analyst: Great. And just one remaining question for me. Could you clarify whether the current AEP Texas capital plan supports the contracted loads added in this quarter and last quarter or whether you might need to add more capital to support these added loads? Trevor Mihalik: Yes. There definitely is incremental capital that we would put in the plan. Now I would say when you look at the $78 billion capital plan, recall last fall, we shared a $72 billion capital plan that was really alongside the 28 gigawatts of contracted load outlook. And really, since that time, that contracted load outlook has now grown on an overall basis. And again, Texas is a big part of that, to 63 gigawatts. Now I will preface this by saying that the capital plan is really not built off of a direct one-for-one relationship between incremental megawatts and capital spend, certain investments are required regardless of the load growth. And so when you look at this, some incremental load can be served by existing system capacity, depending on location, timing and other factors, However, I would say that with the significant increase in contracted load through 2030, it really implies a meaningful upside to our current capital plan. And so that's really not incorporated into the amounts that we put out at this point right now. Operator: This concludes our question-and-answer session. I will now hand the call back over to Bill Fehrman for any closing comments. William Fehrman: Thank you. So we appreciate everyone joining us on today's call. We're very excited about the opportunities ahead at AEP as we continue to advance our long-term strategy. That's driving sustainable growth, enhancing the customer experience and really creating value for shareholders. Our focus remains on disciplined execution in some of the fastest-growing regions in the country, supported by our strong operational and financial foundation. If there's any follow-up items, please reach out to our IR team with your questions, and we look forward to seeing many of you at the upcoming investor conferences and meetings. This concludes our call. And again, thank you for your continued interest in AEP. Operator: Today's call will be available for replay beginning approximately 2 hours after completion and will run through 11:59 p.m. Eastern Time on Tuesday, May 12, 2026. Callers may access the replay by dialing (800) 770-2030 or 609-800-9909 and enter ID # 8577 followed by the pound key. This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. For optimal sound quality, we ask that you silence your electronic device. Star zero, and a member of our team will be happy to help. Good morning. My name is Stephanie, and I will be your conference operator today. Welcome to the Ecovyst Inc. First Quarter 2026 Earnings Call and Webcast. Please note, today’s call is being recorded and should run approximately one hour. Currently, participants have been placed in a listen-only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to hand the call over to Gene Shiels, Director of Investor Relations. Please go ahead. Gene Shiels: Good morning, and welcome to Ecovyst Inc.’s first quarter 2026 earnings call. With me on the call this morning are Kurt J. Bitting, Ecovyst Inc.’s Chief Executive Officer, and Michael P. Feehan, Ecovyst Inc.’s Chief Financial Officer. Following our prepared remarks, we will take your questions. Please note that some of the information shared today is forward-looking information, including information about the company’s financial and operating performance, strategies, our anticipated end-use demand trends, and our 2026 financial outlook. This information is subject to risks and uncertainties that could cause actual results and the implementation of the company’s plans to vary materially. Any forward-looking information shared today speaks only as of this date. These risks are discussed in the company’s filings with the SEC. Reconciliations of non-GAAP financial measures mentioned in today’s call with their corresponding GAAP measures can be found in our earnings release and in the presentation materials posted in the Investors section of our website. I will now hand the call over to Kurt. Kurt J. Bitting: Thank you, Gene, and good morning. Consistent with the positive outlook for 2026 that we shared in our fourth quarter earnings call in late February, our first quarter results provide an excellent start to the year, with strong growth in both our regeneration services business and for virgin sulfuric acid. Sales for Regeneration Services were up on a double-digit percentage basis compared to 2025, reflecting high refinery utilization, favorable alkylation economics, and lower planned customer downtime compared to the year-ago quarter. First quarter sales for virgin sulfuric acid were also up significantly, benefiting from increased mining demand and the contribution from the Wagaman sulfuric acid assets that we acquired last May. As a result of the strong volume growth and positive pricing in the quarter, we reported adjusted EBITDA of $40 million, which is up 87% compared to 2025. During the quarter, we also maintained our focus on the implementation of our long-term strategic plan to accelerate growth and enhance value for our stockholders. During the first quarter, we repurchased approximately $36 million worth of our outstanding shares. And with regard to the pursuit of inorganic growth opportunities, our efforts over the course of the first quarter led us to last Friday’s announcement that we had reached an agreement to acquire the Calabrian sulfur dioxide and sulfur derivatives business from INEOS Enterprises in a transaction that will broaden our portfolio and further position Ecovyst Inc. for attractive growth in end uses we currently serve, such as mining and water treatment, and new end uses, including pharma and food processing. Kurt J. Bitting: As we move to the next two slides, I want to provide a brief overview of the Calabrian business and highlight the details and strategic merits of this transaction. What makes the Calabrian acquisition so compelling is how closely the business aligns with Ecovyst Inc. strategically, operationally, and commercially. The combination directly leverages our core competencies in sulfur chemistry and extends our platform into highly complementary adjacent chemistries. Just as Ecovyst Inc. is a leading provider of virgin sulfuric acid and sulfuric acid regeneration services, Calabrian is a leading provider of sulfur dioxide and sulfur-based derivatives. It is the sole on-purpose producer of sulfur dioxide in North America with a significant supply share, a leading producer of sodium bisulfite alongside Ecovyst Inc., a leading producer of sodium thiosulfate, and the sole North American producer of sodium metabisulfite. These products are critical inputs into a range of attractive end uses that overlap meaningfully with the markets we serve today, reinforcing the natural fit between the two businesses. Looking at a rough breakdown of Calabrian’s 2025 sales, nearly one-third of sales were to the mining sector, where we have well-established and long-standing relationships. Roughly a quarter of Calabrian’s 2025 sales were in water treatment, a market that we currently participate in with our virgin sulfuric acid, sodium bisulfite, and aluminum sulfate sales. Approximately 15% of sales were into specialty chemical applications and the balance of 2025 sales included sales into food preservatives and other applications. Similar to Ecovyst Inc., Calabrian has longstanding customer relationships with blue-chip customers, significant long-term contracts, and sales visibility. In terms of the strategic fit with Ecovyst Inc., I will first say that Calabrian has a seasoned and engaged management team, and we look forward to leveraging their expertise and enthusiasm as we move forward on a combined basis. Equally as important, Calabrian provides us with a very attractive opportunity to expand our reach and product offering in sulfur-related chemistries while leveraging our existing supply chain and manufacturing infrastructure. In doing so, it provides an opportunity to diversify our sales mix and increase our penetration into high-growth industries such as mining, water treatment, pharma, and food processing. Calabrian has two manufacturing locations: Port Neches in Texas, situated in the middle of our existing Gulf Coast infrastructure, and the Timmins site in Ontario, Canada, which we expect to broaden our exposure to Canada’s growing mining sector. Given our existing footprint in the Gulf Coast region, the acquisition provides opportunities to leverage our existing supply chain and manufacturing infrastructure. Finally, the financial profile is equally compelling. Calabrian brings attractive growth prospects, strong margins, and a track record of high cash conversion. On a trailing twelve-month adjusted EBITDA of approximately $24 million, the $190 million purchase price represents a multiple of approximately 8x, stepping down to roughly 7x as we capture synergies over the next three years. The transaction is expected to close by the end of the second quarter. We plan to fund the acquisition through cash on hand and a new debt offering, with specific allocation to be determined as we move towards closing. At this time, we expect that our pro forma net debt leverage ratio at close of the transaction will be approximately 2x. Before I hand the call over to Mike to review the details of our first quarter, I want to comment on our expectations for near-term demand trends and our confidence in the longer-term outlook for Ecovyst Inc. While the geopolitical and global macroeconomic environment remains dynamic, our outlook remains very positive. As a leading provider of products and services that are essential to our North American-based customers, we expect demand trends to remain favorable, underpinning our growth expectations for 2026. We see U.S. refinery utilization remaining high in 2026, with far less planned and unplanned customer downtime than we experienced in 2025. As such, we continue to expect higher volume for our Regeneration Services in 2026 with favorable contract pricing. We also expect volumetric growth for virgin sulfuric acid in 2026 with increased sales into mining, and a full year of contribution from the Wagaman sulfuric acid assets we acquired last year. Sales into the nylon end use are expected to be generally in line with 2025, and we anticipate relative stability across the broader range of industrial applications. Looking beyond 2026, we believe the long-term outlook remains extremely favorable. We expect that high refinery utilization will continue to support demand for our Regeneration Services business. And for virgin sulfuric acid, we believe we are positioned for growth, with sales into mining applications benefiting from multiyear expansion projects, growth in industrial applications associated with onshoring, and the prospect for continued sales recovery in the nylon end use. I will now turn the call over to Mike, who will review our financial results. Michael P. Feehan: Thank you, Kurt, and good morning. We are very pleased with our results for the first quarter and believe that we are off to a great start to the year, as stable demand and favorable pricing helped deliver solid results. Our sales were up 50% compared to the first quarter of last year. Higher sales volume for both virgin sulfuric acid and Regeneration Services, as well as positive pricing, translated into adjusted EBITDA of $40 million, up $19 million compared to the prior-year first quarter and ahead of our previously provided guidance range. Our favorable earnings compared to our guidance range were driven by higher-than-expected volume and pricing. We realized stronger-than-expected volume in Regeneration Services and, to a lesser extent, Treatment Services compared to our original expectations. With a significant spike in the cost of sulfur, we also realized a temporary benefit associated with the timing between when we incur the cost of our sulfur purchases and when we pass through those costs to our customers. Adjusted free cash flow for the first quarter was $4 million. Our net debt leverage ratio at quarter end was 1.2x, unchanged from year end, and our available liquidity remained strong at $237 million as of March 31. As we look at the first quarter financial results, sales were $215 million, up $72 million. Excluding the $33 million impact of higher sulfur costs passed through in price, sales were up nearly 27%. Regeneration Services volume was driven by less customer downtime compared to 2025. Sales volume for virgin sulfuric acid was also higher year over year, reflecting the contribution of 2025 and higher overall demand, including into nylon and mining applications. Average selling prices were higher, driven by virgin sulfuric acid pricing and favorable contract pricing for regenerated sulfuric acid. Adjusted EBITDA of $40 million was up $19 million, or 87%, driven by higher sales volume and favorable pricing, partially offset by higher manufacturing costs driven by higher turnaround costs, the impact of general inflation, and increased transportation costs. Favorable price-to-cost ratio at the contribution margin level remains evident in our first quarter. As previously mentioned, the pass-through effect of higher sulfur costs on sales was approximately $33 million, with the pass-through having no material impact on adjusted EBITDA. Excluding the sulfur pass-through, the price-to-cost uplift in the first quarter was approximately $11 million, largely driven by the net price impact, including favorable variable costs. Higher sales volume, including the contribution from the Wagaman assets, accounted for nearly $15 million of the period-over-period increase in adjusted EBITDA, and this was partially offset by higher manufacturing costs, including the incremental cost of the acquired Wagaman assets, as well as higher SG&A and other costs. Turning to cash and debt, adjusted free cash flow for the first quarter was $4 million, up compared to a use of cash of $13 million in 2025. The lower-than-average free cash flow for the first quarter reflects the normal cadence of cash generation, with the first quarter typically low primarily due to timing of working capital. During the quarter, we repurchased $36 million of our common stock at an average price of approximately $11 per share, and we have $146 million remaining under our existing authorization. We ended the first quarter with a strong liquidity position of $237 million, comprised of cash of $163 million and availability under our ABL facility of $74 million. With net debt of $234 million at quarter end, our net debt leverage ratio was 1.2x, unchanged from December 31. Turning to our 2026 outlook, note that the guidance included in our materials and discussed on this call does not include any contributions from the recently announced Calabrian acquisition. Our previous guidance provided in late February anticipated higher sulfur costs in 2026. However, disruption associated with the Iran conflict has resulted in further increases in sulfur costs. We now expect the impact of higher sulfur cost pass-through in price to be $30 million higher than previously guided, resulting in full-year 2026 sales to be in the range of $890 million to $970 million, up from our previously guided range of $860 million to $940 million. With a strong start to the year and having one quarter under our belt, we are revising our adjusted EBITDA guidance by tightening the range, now expecting full-year 2026 adjusted EBITDA to fall in the range of $180 million to $195 million. Similarly, we are tightening the range for adjusted free cash flow to be $40 million to $55 million. While we are not changing our guidance due to the announced Calabrian acquisition, we do intend to finance a portion of the acquisition through a debt offering along with cash on hand. As a result, we would expect cash interest to increase an additional $4 million to $5 million on a full-year annual basis. As we provide directional guidance by quarter for the balance of the year, for the second quarter, we continue to expect higher year-over-year sales of Regeneration Services, with favorable contractual pricing. We also continue to expect higher volume of virgin sulfuric acid driven by mining demand and the contribution of the acquired Wagaman assets, along with stable pricing for virgin sulfuric acid. Turnaround costs are expected to be lower than in the year-ago quarter. As a result, we project second quarter 2026 adjusted EBITDA to be in the range of $50 million to $55 million. For the third quarter, we continue to expect higher sales of Regeneration Services compared to 2025, and we currently project that virgin sulfuric acid volume will be slightly lower than the year-ago quarter, driven by the timing of our sales into nylon applications. With higher projected turnaround costs than in 2025, we expect third quarter 2026 adjusted EBITDA to be in the range of $50 million to $55 million. Finally, for the fourth quarter, we continue to expect higher sales of Regeneration Services compared to 2025, with favorable contractual pricing. We are currently expecting lower virgin sulfuric acid volume than in 2025. We also are anticipating that sulfur costs will ease from the current historic highs. As a result, we expect that sulfuric acid pricing, excluding the pass-through effect, will be lower due to the overall customer mix and timing between when we incur the cost of our sulfur purchases and when we pass through these costs to our customers. Lastly, we expect higher turnaround costs compared to 2025. As such, we currently anticipate that the fourth quarter adjusted EBITDA will fall in the range of $40 million to $45 million. I will now turn the call back to Kurt for some closing remarks. Kurt J. Bitting: Thank you, Mike. We had a great start to the year, and we are energized by the positive momentum we see as we move into the second quarter. While the global macroeconomic landscape continues to evolve, we believe Ecovyst Inc. remains well positioned to deliver on our objectives. Moreover, we are extremely pleased with our progress on strategic implementation as we maintain our focus on growth and on value creation for our stockholders. The disposition of our Advanced Materials and Catalyst segment at year end was a transformational event that resulted in a strengthened balance sheet and a robust liquidity position that provides us with the resources and flexibility to execute on multiple capital allocation alternatives, including the funding of organic growth projects, the pursuit of attractive inorganic growth opportunities, and the return of capital to our stockholders. During the first quarter, we returned $36 million in capital to our stockholders through share repurchases. As previously indicated, to support organic growth this year, we are investing in the expansion of our Gulf Coast storage and logistics capabilities that will further enhance our ability to serve our customers’ growing needs. Building upon last year’s successes, we also expect further contributions and network optimization benefits from the acquisition of our Wagaman site, as we continue to leverage the site’s capacity to meet the growing needs of our customers. With regard to our stated objective to pursue attractive inorganic growth opportunities, we are excited about the agreement that we have reached to acquire Calabrian, which will broaden our portfolio of sulfur products that we can offer to growing end uses. We look forward to the completion of the Calabrian acquisition and to providing you with updates on our ongoing progress as we move throughout the year. At this time, I will ask the operator to open the line for questions. Operator: Thank you. At this time, we will open the floor for questions. We will take our first question from John Patrick McNulty with BMO Capital Markets. Please go ahead. Your line is open. John Patrick McNulty: Yes, good morning. Thanks for taking my question, and congrats on a really solid start to the year. I wanted to dig into the changes since your last guide, both in the virgin acid markets and the scarcity around sulfuric acid on a global basis, maybe a little less so in the U.S., and also the strength of U.S. refining, which seems to be even better now given what has gone on in the Middle East. How have your expectations changed and how is that woven into the guide? I am a little surprised, with a couple of things being reasonably better, that you were not ready to raise at least the upper end of the guide. Can you help us think about that? Michael P. Feehan: Yes, John, thanks for the question. I think the first way we would look at that is there were some things that did change positively for us during the quarter. Certainly compared to the guidance that we had provided, we saw some strength in Regeneration Services and some positivity on the virgin pricing, but that is a little bit more based on timing. As we talked about, we expect to give some of that timing back in the fourth quarter. That Regeneration strength is clearly a tailwind for us, but we also are tempered with some of the other potential macroeconomic items that are going on. So we want to continue to keep our guide relatively where we were. We did raise the bottom end of it, so our midpoint is up to $187.5 million. We believe that there is strength in the numbers of what we have seen but want to be tempered with what we are expecting for the rest of the year. John Patrick McNulty: Okay, fair enough, and I understand it is a fluid situation. Maybe just speaking to Calabrian, can you give us some color as to how that business has grown over the past few years and what the longer-term growth outlook is? Kurt J. Bitting: Yes, sure. Thanks for the question, John. Calabrian has been in its current form since the 1980s with the site in Port Neches. They built a site in 2017 up in Timmins, Ontario, which is primarily used to service the mining sector in Canada. A lot of the growth in the Calabrian business has been from mining, and that backstops gold, which at current gold prices has been very healthy. So their business has grown from that. There has also been some growth in pharma, food, and other industrial applications. We look at that business as probably GDP to GDP-plus type growth, with some end uses moving faster than others, like mining and industrials. They are the only on-purpose North American producer of sulfur dioxide and the only producer of sodium metabisulfite in North America. They have a strong position and proprietary technology that is completely different from how competitors produce it. We are very happy with the acquisition and confident in its future potential. Operator: Thank you. We will take the next question from Patrick David Cunningham with Citigroup. Please go ahead. Your line is open. Analyst: Hi, everyone. This is Rachel Li on for Patrick. Adjusted EBITDA margins were meaningfully stronger than you expected this quarter, driven by higher volumes and incremental pricing above the sulfur pass-through, despite some other headwinds from transportation and manufacturing costs. As we look through the balance of the year, how should we think about the net price-cost dynamics? Michael P. Feehan: Thank you for the question. Yes, the margins were favorable. As we have discussed in the past, the pass-through of the sulfur cost is relatively neutral to EBITDA, so it does lower the margin percentage, but we did see positivity around overall pricing and volume that dropped straight through to the bottom line. That provided us with the higher margin. The price-to-cost ratio was positive in the quarter, and we expect that to continue throughout the year. We have been consistent over several quarters where we are making more EBITDA on a per-ton basis comparatively. So while the margin percent will look lower because of the sulfur pass-through, the earnings benefit is intact, and we expect that to continue through the rest of the year. Analyst: Great, thank you. And on the Calabrian acquisition, could you provide more detail on the contract structure and the level of visibility you have into forward sales and earnings? Michael P. Feehan: Yes. The business is similar to the general construct of the Eco Services asset business, where there are long-term agreements or certainly long-term customers with blue-chip users, whether in mining, industrials, pharma, food, and so forth. The contracts also have a high pass-through component, given it is a sulfur-based chemistry, so passing through sulfur is very important, and they have a similar dynamic to the Eco Services business. In terms of visibility, the customers tend to have very steady offtake. The products they purchase from Calabrian are critical to their processes, and there is generally very good visibility in terms of forecasting and readability of volume. Operator: Thank you. We will take our next question from Laurence Alexander with Jefferies. Please go ahead. Your line is open. Daniel Rizzo: Good morning. This is Dan Rizzo on for Laurence. Thanks for taking my questions. Looking at prices and structural change, oil analysts now expect about a 5% structural risk premium for oil due to what is going on in the Middle East. Do you expect a similar structural reset in sulfur prices over the long term that will flow through to your business, or should we view the sulfur spike as a net negative because it hurts industrial volumes? Michael P. Feehan: For our business, sulfur is at all-time highs right now, and the run-up in sulfur actually started well before the conflict in Iran. A lot of that is due to the need for the sulfur molecule and sulfuric acid to produce copper and other metals. We do feel there is definite demand for sulfur that will support higher prices. I do think right now we are in an extremely high situation given the geopolitical conflict. Long term, we continue to have the ability to pass through sulfur to our customers. Unlike fertilizer, which is very heavily dependent on commoditized markets where sulfur impacts demand a lot, our customers’ use of sulfuric acid tends to be a small component of their overall cost. While it is not ideal that sulfur prices increase, it remains a small component, so we are able to pass it through. Daniel Rizzo: Thanks, that is very helpful. On the most recent acquisition and synergies, should we think mostly about supply chain and procurement synergies as opposed to production and revenue, and will you quantify later? Michael P. Feehan: When we look at synergies, there are certainly some cost-based synergies, including procurement across sulfur chemistry, and we have a large supply and manufacturing infrastructure that should provide synergies, especially with the Port Neches site sitting in the middle of our Gulf Coast footprint. We also see revenue synergy upside, given the ability to leverage our sales force across sulfur products, one of which we already sell, sodium bisulfite. So we see a nice mixture of both cost and revenue synergies, stemming from the fact that we are both in sulfur chemistry and the products are closely related. Operator: Thank you. We will take our next question from Hamed Khorsand with BWS. Please go ahead. Your line is open. Hamed Khorsand: First, on the acquisition, you were talking about potentially selling into Canadian mining. Would these be relationships that Calabrian brings to the table? Kurt J. Bitting: Yes. We will be selling sulfur dioxide to Canadian mines, and these would be new mining relationships. Ecovyst Inc.’s mining relationships are primarily focused in the southwestern part of the U.S. Hamed Khorsand: And on the refinery side, is the increase in activity and utilization more about the current environment, or is it more of a normalization given where Q4 was? Kurt J. Bitting: The answer is both. Coming into this year, and as we guided on the previous call, we expected healthy refinery utilization due to significantly less planned and, hopefully, unplanned maintenance outages in the U.S. refining complex. Utilization was expected to be high. The current conflict has certainly added a tailwind—margins are high right now, not only for oil but for refined products, and U.S. refineries can take advantage of that. For us, the alkylation units that we service with regeneration are expected to run at very high rates this year, and really in all years, outside of maintenance. They do not have the ability to flex up a tremendous amount given the margin climate, but the current environment provides a tailwind for everything to run as hard as it can. Hamed Khorsand: Thank you. Operator: At this time, I would like to thank everybody for joining today’s event. You may now disconnect.