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Operator: Good afternoon. My name is Ludy, I will be your conference operator today. I would like to welcome everyone to Thinkific's First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on May 4, 2026. I would now like to turn the conference over to Joo-Hun Kim, Head of Investor Relations. Please go ahead. Joo-Hun Kim: Thank you, and good afternoon, everyone. Welcome to Thinkific's First Quarter Fiscal 2026 Financial Results Earnings Call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific; and Kevin Wilson, Interim CFO. After the prepared remarks, we will open up the call to questions. During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. They should be considered as a supplement to and not a substitute for IFRS measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify key trends affecting our business, formulate business plans and make similar strategic decisions. Such key performance indicators may be calculated in a manner different to similar key performance indicators used by other companies. I should also note, we have a slide deck that supports our remarks available to download on the webcast interface or on our website. And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated. I will now turn the call over to Greg Smith, CEO and Co-Founder of Thinkific. Greg Smith: Thank you, Joo-Hun. Good evening, and thank you for joining us. I'm pleased to report we delivered a solid first quarter while continuing to execute on the transformation across Thinkific. I want to take a moment to welcome Leigh Ramsden, our new CFO, to Thinkific. Leigh will be joining us effective June 1, 2026. He brings great experience to the team, and I'm very much looking forward to working with Leigh on our leadership team. Kevin Wilson joining us on the call today has been serving as an exceptional interim CFO for us. I'm very grateful to Kevin and his team for the amazing work they've been doing. I also want to acknowledge that we're currently undergoing a couple of significant changes at Thinkific. The first is our shift upmarket. And as much as I remain confident in this choice and the eventual results it will bring, like most changes of this nature, the path to success is rarely a straight line. We're in the midst of that journey now. I continue to see an excellent opportunity for us to perform better having chosen this path. The rapid evolution of AI and its effects on our industry and SaaS are no less than the single greatest change we've experienced since inception. and probably in the history of technological advancements. While AI is a massive rising tide, it won't lift all boats. Some will sink. I am positioning Thinkific to be one of those that rises and potentially significantly so. We are all in on AI at Thinkific. Our entire team is now leveraging it in every role. From sales and support to go-to-market motions, I'm seeing teams adopt and evangelize the power of AI to help us go faster and deliver more value for our customers. Most importantly, in R&D, we're moving faster than ever. In this area, I have seen teams deliver in days what once took months to build. This opens a world of opportunities for value we can create for our customers and ultimately, revenue growth opportunities. But we are still in the midst of this change as well, and we still have work to do here. My specific intents for the use of AI focus around the accelerated achievement of actual outcomes, specifically prioritizing revenue growth, while EBITDA improvements are also an opportunity here. I've taken a personal role in driving this forward across the company with specific focus on R&D, where I think we can see the biggest gains. Evangelical AI adoption and use, combined with an intense focus on velocity are now absolute requirements at Thinkific. Similar to our shift upmarket, we are now in the midst of this change, and I hope to be generating improved results from both later this year. I see these two vectors of change as very complementary. I've spoken before about the need to accelerate our product road map to better serve our larger customers. AI empowers us to do exactly that. Additionally, as the AI era evolves, moving to larger customers positions Thinkific to capitalize on this evolution. Larger customers have both larger revenue opportunities and larger expense buckets. Both are areas that Thinkific can leverage AI to help them with making us inherently more valuable. I think there's fear out there about the effects of AI on software, and I'm very aware of this. At Thinkific, we are constantly asking ourselves what our moats are and what significant value we bring in a world where software is significantly easier to develop. We have identified some key areas where we'll be deepening these strengths, focusing on value we can provide that others cannot build on their own. I believe there's opportunity here for us not just to survive but ride the wave that AI is bringing to our industry to set ourselves up so that as each new model drops, we get exponentially better. Q1 marked the release of our new AI product, Thinker. As a reminder, Thinker is Thinkific's agentic product that allows any customer to create their own custom agents based on their own proprietary data and content and to deliver those agents to their customers. Thinker agents differentiate from others, and they are focused on teaching and learning. They specialize in specific topics offered by our customers, and they're customizable and are highly reliable and accurate. This accuracy is increasingly important, both to our larger customers and as learners come to expect accuracy from their agents. Unlike generalized models, Thinkific agents are trained on our customers' data and further refined by Thinkific's own large data sets. Customer feedback has been very positive, reinforcing our conviction in the direction we're taking. While the benefits of Thinker are clear, its adoption raises new considerations for our customers. Pricing is primarily outcome-based and as AI consumption scales, so do associated costs. While this means initial usage is muted, it also represents one opportunity for us to scale alongside the wave of AI advancements. We are working with our customers to design the right commercial models to ensure that token billing ties directly to financial outcomes of revenue or cost savings in order to ensure customers are happy to scale their Thinker usage to any level. Thinker is also just one product area where we're leveraging AI. There are a number of others. We continue to make steady progress in executing against our new ideal customer profiles. We continue to see larger customers at the top of the funnel and improve our ability to close those larger names that have significant expansion potential in the future. One example from Q1 is a large online real estate marketplace that selected Thinkific to support continuous learning for its broker network while maintaining a strong sense of community. The initial rollout will focus on a subset of brokers with significant room to expand over time given that their broader community is orders of magnitude larger. Notably, this opportunity came to us through word of mouth within the real estate ecosystem. Word-of-mouth referrals like this represent a strong signal for the strength of our offering. In Q1, at a customer's request, we advanced our work to ensure Thinkific aligns with HIPAA requirements. This work landed us a new and rapidly expanding customer, and it also strengthens our ability to expand in health care and adjacent segments where trust, privacy and reliability are essential. As I shared at the start, we're in the midst of two critical changes, our upmarket focus and the opportunities that AI represents. What excites me is the urgency I see in the team. We've accelerated our execution and will continue to do so. This energy and mindset shift, combined with the powerful AI tools we're leveraging present real opportunity for growth. I'm confident that Thinkific has the ability to not only capitalize on these changes, but set ourselves up to be competitive in the AI era. With that, I'll turn the call over to Kevin to walk through the financials. Kevin Wilson: Thanks, Greg, and good afternoon, everyone. Our financial performance for Q1 '26 was in line with our guided range. Our Plus segment contributed -- continued to deliver double-digit growth and commerce revenue passed over the $3.5 million mark for the first time. Adjusted EBITDA came in just ahead of the midpoint of our guided range. Overall, while we are impatient for our efforts to be reflected in stronger top line growth, we are pleased by the way Thinkific is managing through this period of strategic change and are excited by the potential of AI to create meaningful advantages for us and our customers over the coming quarters. For the first quarter of fiscal '26, revenue totaled $18.7 million, a 5% increase year-over-year. The largest driver of growth is our Plus segment, where we are seeing strong upmarket interest along with improved traction on upgrades and retention. Plus grew 12%, totaling $5.1 million for the quarter. Crossing the $5 million mark for the first time is an important milestone as we work to shift the bulk of our revenue to this larger and more durable segment. As expected, our self-serve segment continued to slow with growth coming in at 2% -- the continued slowdown of self-service is both a product of our own shift in marketing investment, along with the inherent challenges at the low end of the segment. This slowdown reaffirms we are making the right strategic decision to focus on larger and more established customers. As much of our commerce revenue is tied to self-service customer base, we are also seeing a corresponding slowdown on that front. That being said, total revenue earned from our commerce portfolio crossed the $3.5 million mark for the first time. Our depth in commerce is a key differentiator for us in the Plus space and allows us to attract a broader array of customers compared to others in our field. Gross margin was 72%, down 2 points year-over-year, but consistent with the prior quarter. The year-over-year decline was primarily driven by a shift in revenue mix, reflecting stronger growth in commerce revenue relative to total subscription. ARPU was $175, up 4% year-over-year and flat sequentially compared to the prior quarter. Subscription growth was subdued as we continue to execute on our strategic pivot upmarket. This reflects a deliberate reduction in customer acquisition spending in our traditional lower-tier creator segment, while we continue to make progress upscaling our sales team to sell larger and more complicated deals. These factors resulted in a total ARR of $61.3 million, up 2% year-over-year and up $300,000 sequentially. Commerce revenue growth was primarily driven by increased penetration of our commerce solution into our customer base as measured by GPV as a percentage of GMV, which rose to 64% from 56% a year ago. As noted in prior earnings calls, at the current levels and with our existing feature set, we believe penetration rates are approaching a plateau around the mid- to high 60% range and is expected to remain relatively stable in the near term. Take rate of 4.3% was down from 4.5% in Q1 of last year, but consistent with the prior quarter and within our anticipated range. Note that take rate will fluctuate depending on the types of commerce features being used by our customers in any given quarter. GPV of $75.7 million was up 16% year-over-year and 3% sequentially. The year-over-year growth in GPV is due primarily due to the increased penetration of our commerce solution. GMV of $117.5 million was up 1% year-over-year and largely flat sequentially. Turning to operating expenses. Total OpEx was $15.3 million, up approximately $2 million both sequentially and year-over-year. As we discussed last quarter, the increase was driven largely by a surge in AI-related investments, coupled with an increase in the depth and talent of our R&D team. As a result, R&D expenses increased to $7.1 million, up from $4.9 million in the prior year and $5.8 million in the prior quarter. We also incurred additional nonrecurring costs in G&A, primarily related to the CFO transition. Sales and marketing was flat sequentially and down almost $400,000 over last year as we continue to refine our go-to-market approach and find savings and efficiencies across the board. Adjusted EBITDA was a loss of approximately $500,000. This was driven primarily by the largely onetime investments in our engineering organization to accelerate the adoption of AI tools and workflows. These investments will drive productivity gains and support a faster pace of product innovation, allowing us to accelerate our product road map. On the balance sheet, cash and cash equivalents as of March 31 were $49.4 million, down from $50.7 million in Q4 of last year. The decrease of $1.3 million was primarily a result of the usage of $152,000 in cash flow from ops, $900,000 in cash used in the NCIB and tax remittances of approximately $115,000. I'll end with a few comments on guidance. Q2 2026, we're expecting revenue of $18.2 million to $18.5 million, representing approximately 1% year-over-year growth at the midpoint. Our revenue range represents continued stable gains in Plus subscriptions, offset by anticipated seasonal slowdown in commerce revenue. From an EBITDA standpoint, we expect similar results to Q1 with a range of minus 2% to minus 5% of revenue. While Q1 included some onetime costs related to AI investments, Q2 includes a company-wide gathering along with costs related to our CPTO transition. In closing, between shifting towards being an AI-centric organization and our transition to serve more upmarket customers, the next 12 months are going to be pivotal for Thinkific. We are not being patient and are pushing the pace of change faster every day. On a personal note, I'd like to welcome Leigh to the finance team and the broader Thinkific community. As Greg mentioned, Leigh will be a great asset to the team, and we are pleased to have him here with us. With that, we can open the floor to questions. Operator: [Operator Instructions] With that, your first question comes from the line of Stephen Machielsen with BMO Capital Markets. Stephen Machielsen: So Greg, it wasn't lost on us that you're stepping into more of a product role. Is that going to be a full-time thing? And I guess, if so, like what sort of developments or specific things do you want to see that just weren't being achieved with the previous leadership? Greg Smith: Yes, I appreciate the question, Stephen. So I don't intend to add more to the senior team here. So yes, this change is permanent for the at least foreseeable future. I do have a strong engineering leader and product leader in VP roles. And for a company of our size, it's pretty typical to have VP Product, VP Engineering and as well in some of the other -- in the other R&D design and data as well, have VPs reporting into me. So that's going to work for the foreseeable future, and this allows me to just get a lot closer to the R&D team. Part of it is just removing layers so that I can dive in and ensure we're on the right path here. Part of it is really the injection of more velocity. We're doing a really good job with AI adoption, but I think there's a huge step change I'd like to create here in terms of the process and decision-making and how we move forward at pace to really take advantage of it because AI can take us reasonably far, but there's a bunch more we can do culturally, I think, to accelerate the delivery of value for our customers. And then, yes, I'm looking at the whole road map. I think there's a lot of good in what we had planned and we're planning to do and a lot of value for customers coming and intend to complete the majority of that. There are some adjustments I'm making in part to -- between the acceleration of output and some of the adjustments to the road map, I anticipate making more room for more AI-specific value that we can deliver to customers, which the intent there, obviously, is to drive some cost savings for customers and some revenue driving for Thinkific as well. Stephen Machielsen: Very good to hear. Second question, just based on some simple ARPU math, it looks like the customer count has actually been holding up quarter-over-quarter, which is not really what we would have expected given the -- like the higher priority given to the Plus customers. I wonder if you can speak to any of the dynamics going on there? Like are you just adding more self-service customers than you expected? Or is churn lower than you expected? Any color would be great. Greg Smith: Yes. I think we've seen -- certainly, when we initially made some of those changes around the go-to-market and reducing the spend, as Kevin highlighted on the prepared remarks around the creator and bottom end of the market, we were surprised by how we did continue to add a number of customers there. I wouldn't say we're sort of through this whole journey yet. So we may still see some fluctuations there. And you're right, as we move to larger customers, it may be that the customer count comes down and we see -- but we see larger dollar value customers. And to some extent, we are seeing sort of a shift. To date, it's remained, as you said, relatively stable with not a lot of change where we're kind of shedding some of the old, bringing in the new at higher price points. Over time, we may see that number come down, though. But moving to the right type of customers. Operator: And your next question comes from the line of Gavin Fairweather with ATB Cormark. Gavin Fairweather: Maybe just to build off that last discussion, just on the Q2 guidance, it does look like there's a modest kind of top line decline sequentially. I know you talked about a bit of seasonality around commerce. But have you seen any kind of change in self-serve retention or anything on that front in the current quarter that would maybe speak to that decline? Greg Smith: I think that is more, as we said, on the commerce related. And then we're being -- we are quite optimistic here about what we can create with AI to start to unlock this, but Q2 is still in the midst of this transition and really specifically unlocking more with AI. So my hope is that we can do significantly better than this in the future, but being cautious on what we put out there in the near term. Kevin Wilson: Just to add to Greg's point. So on commerce going from Q1 to Q2, we've got obviously inherent seasonality, but the other thing that comes with the self-serve customer base, which is the majority of our commerce revenue, we get a fair bit of volatility quarter-to-quarter. And just what we're seeing thus far in the quarter leads us to be a little bit more cautious to Greg's point on Q2 as it stands right now. Gavin Fairweather: Understood. That's helpful. And then just on R&D costs, hoping you can help us out a little bit. So there are $6.6 million in Q1, $4.5 million year-over-year, $5.2 million in Q3. Kind of hard from the outside looking in to quantify how much of that was tied to the third-party kind of surge and consultants coming in versus maybe token usage and kind of driving AI into the organization. Maybe you can just help us understand what a future baseline might look like and how we should think about the timing to getting back to that baseline? Greg Smith: Yes. Maybe I can give some color and then, Kevin, you can talk more -- a little bit of baseline, and then we may make some adjustments from there as well. So the majority of that was the more onetime in Q1 there. We do have on an OpEx generally some more onetime expenses in Q2 and that we are currently actually at the offsite for the whole team. But yes, so on the R&D front, it wasn't a huge acceleration of, say, token expenditures there. I do expect us to increase the amount of token usage going forward, but a lot of that was more onetime in Q1 there. Gavin Fairweather: Appreciate it. And then just lastly for me, just on Plus, can you kind of discuss any product milestones that are coming up over the course of kind of Q2 or later bit of 2026 that you think are really going to unlock some further growth for that business? Greg Smith: One of the bigger ones is what we have actually coming out next month in May is a whole new learner hub. And so this allows our customers to bring together their Thinker AI agents, their communities and their courses and other learning experiences into one more cohesive experience. It's going to look and feel a lot different than what others have on the market. A lot of learning experiences right now are a little bit homogenized. And so this breaks us apart and put something that certainly when we've been putting in front of customers for the last few months has gotten rave reviews. So I think it creates a lot of opportunity. It also is a re-architecting of the underlying code to allow us to move faster on top of it with AI. So that's a big one I'm excited about. There's a bunch of -- we've made some big recent improvements in our mobile app and our communities experience that have gotten good reviews from customers and is actually starting to move metrics in a positive way there. And then there's more on the front of specifically what we can do for larger customers that's coming that are just a laundry list of asks that they have, whether it's to close more deals or stay with us longer. And then the piece I'm looking to inject more into the road map is how we introduce additional product to drive up ARPU and revenue opportunity with those customers because I think there's a big opportunity to do that certainly with the use of agents. Operator: And the next question comes from the line of Robert Young with Canaccord Genuity. Robert Young: A couple of questions. First one, keep extending some of the other questions, but the ARR growth implied in the guidance, if you could help me understand the moving parts there. I was trying to parse your comments and it sounds as though a lot of the decline, I guess, it's $3 million decline quarter-over-quarter at the midpoint thereabouts. Is that mostly driven by commerce that seems like that's a larger amount than would only be driven by commerce. And so how much of that would be Plus decline and how much would be self-serve decline? Can you just maybe lay out those pieces, that would be really helpful. Greg Smith: And just to be clear, you're talking ARR? Robert Young: Yes. So I'm talking about revenue, but I'm just simplifying towards, ARR. Greg Smith: I'm just trying to understand -- so first question would be ARR looks like it's going to decline in Q2 overall. And so the decline in the revenue guidance suggests that it would be larger than just a decline in commerce. I think that's what you said earlier on in the call. Is that correct? Or is the self-serve or Plus declining would ARR from those pieces decline? Does that make sense? Kevin Wilson: Yes. I can jump in there. So the seasonality that you're seeing in the change from Q1 to Q2 this year is a little bit different from Q1 to Q2 last year. So Q2 last year, Q3 last year, we had a few customers in commerce having outsized success. As I mentioned, volatility in self-serve means that sometimes customers come on, have outsized success and then retire from the business, change their business model, change something in their business that doesn't show up in the same way. And that's, to some extent, what we're seeing this year going from Q1 to Q2. So the vast majority of the decline from Q1 to Q2 is commerce, and that is larger than what we saw last year simply because last year, we had some customers having outsized success that we're not necessarily expecting to repeat this year. ARR should be in line with trends for Q2. Robert Young: Okay. So that would mean that the incremental or the added ARR in Q2 from both Plus and self-serve would be positive? Kevin Wilson: Yes. I'd say in line with trend, which has been... Robert Young: Yes. Understood. Okay. Okay. My next question would be around the token usage that you mentioned. We're trying to understand where that shows up, the cost shows up in the income statement. Does it fall into gross margins? Because I think you said that gross margin is going higher due to mix. Could you dig into that just a little bit? Kevin Wilson: Yes. I don't think you [indiscernible] if you could identify where... Go ahead. Greg Smith: Kevin can confirm if I'm wrong here, but I don't think you would see a significant impact from token usage in Q1. Q2 going forward, we'll see more. But although we have been using tokage, it's not a huge line item at this point. We are doing a pretty good job of both leveraging the best of the models and the best models to managing the spend there as well. And then where you would see that, Kevin, I'm not actually sure, is that primarily R&D or we split it entirely across OpEx based on team usage? Kevin Wilson: It's based off team usage, but obviously, the majority of it we currently expect in R&D, but I think we're learning as we go in terms of how the usage is going to differ from team to team. Robert Young: Okay. And then what elements of the pricing model are consumption based? Is it just Thinker at this point? And are you thinking that, that might expand over time? Kevin Wilson: It is Thinker, and I do think we could expand that as well. So we do have some usage-based pricing, but not on a token-by-token basis. And then with Thinker, we do, which is -- the product itself is getting really positive response from customers, very excited about using it. And we're just in the process of adjusting the pricing and the controls that customers have on the pricing, so they have some ability to either moderate what they spend on it over time or ideally pass that cost on to the end user so that they're not as at all gun-shy about turning it on to full board because most of our customers we're talking are really excited to roll it out and expand it as broadly as they can, but they want to have some confidence about an ROI, and that's something we can give them if we allow them to flow through the cost to the final user. Robert Young: Okay. The gross margin expansion due to mix, I think what is the driver of that? Is that a shift towards plus with less commerce contribution or some other driver? Kevin Wilson: Gross margin, I'll just confirm here, I think, is usually, that is a shift in mix between subscription revenue and commerce revenue. And I believe that was the case here as well, which meant a slightly lower gross margin, less than 1% lower, but a slightly lower gross margin based on that mix, if I've got that right. Greg Smith: Yes. Robert Young: Okay. So nothing to do with pricing or anything else like that. And then... Kevin Wilson: No. Robert Young: Last question for me, and then I'll pass the line. Maybe just give us a sense of the drivers behind the Plus deceleration. I know the target a few quarters ago was 30% growth, and now it's somewhere around 12%, I think it's 12%. Like what are the headwinds there given all of the effort to sort of push that piece of the business? Is it just a retooling that's also impacting the Plus growth? Or are you still aiming for 30% and think that's possible in the short run? And I'll pass the line. Greg Smith: Yes. So this -- I think this is -- I've talked about it a bit on this call and a bit on the last call, and it really kind of comes down to we've entered a new market with a different ideal customer profile. We had many of these customers before, but now that we're going heavy into it, we have realized there's some product gaps to fill. And so we're in the process of doing that with AI. I think we can fill them pretty quickly. That's largely what the road map currently is for this year is closing those gaps so that we're more competitive in that space with the larger customers while opening some new revenue opportunities. But largely, it's things we need to do to amp up the product. I've seen some really good success on our CSM account management team, support teams working with customers to do more there as well as launch and onboarding. So we're actually seeing some gains on the operations and more hands-on work that we're doing with these customers to win more deals, get them up and running, see them through success and keep them longer. The last gap we really need to fill there is on the R&D side. Operator: And the next question comes from the line of Todd Coupland with CIBC. Thomas Ingham: I had a longer-term question, Greg. I'm just wondering if you could frame out whether it's 1-year, 3-year, 5-year, what does success look like in a transition model for Thinkific? What's the ideal customer look like? How are they using the products that you can imagine? Can you just talk us through what that may look like or what you think it could look like at this point in time? Greg Smith: Definitely, yes. And so as we look forward and we see through these transitions, good looks like to me that it is not exclusively Plus. I think that's sort of one misconception out there. Plus is a huge part of it because it's a higher price point, but I see self-serve and Plus as plans, not customers. And so there's still an opportunity of bringing in people at the self-serve price point, and we see this consistently and then moving their way through price points and many of them making their way to Plus. The ideal customer for us is generally has a team. If they're coming in at a low price point, maybe five people or more, if they're coming in at the higher price points, often 25 and up and sometimes in the thousands. They are delivering training to their customers. and often as a revenue stream for them, which can be a real differentiator because that's something that we do extremely well. And so it's really focusing on them and making sure we're meeting their needs. So it's businesses that have teams that are delivering training to customers and ideally doing it, at least in part as a revenue stream, and that sets us up well to set ourselves apart. And then how we help them is there's -- over the next few years, there's a lot we can do on the Agentic side to just roll out agents to both help with their actual OpEx while creating revenue opportunities for us. So things that may cost them currently hundreds of thousands or millions that with the tooling we have could potentially do it for significantly less for them. Thomas Ingham: Okay. And have you thought through your pricing model with, I guess, a group of agents that you're offering to your customers versus a subscription model? Greg Smith: Yes. And so Thinker being the first step in that where it is more usage and outcome-based. What's really outcome-based is what we're trying to move towards is so that as they're getting outcomes through the use of agents that it's more pay based on outcome and success. And I think that's -- it's an obvious trend in software and one we see a lot of opportunity. And if we can do more to provide better outcomes for customers that either have a revenue-driving outcome, a customer-facing outcome or in many cases, an OpEx outcome for them, there's a lot -- they're a lot more amenable to the outcome or usage-based pricing. And so I think you'll see us and more and more software move in that direction. Thomas Ingham: And then sort of last thing for me. You say you're first mover from your group of peers. But are you seeing Agentic-based competitors show up already? And if so, who are they? And what types of products are they already demoing to the market? Kevin Wilson: Yes. I mean I wouldn't name -- I don't want to throw a bunch of competitors on the call, but I would say that I do -- I think every software company out there is looking at this. And if they're not, they're already dinosaurs is we do need to be looking at agentic solutions. And so it's a huge part of the stack now that I think any software company needs to be incorporating. And so I do see it all over the place. We were pretty quick to market with Thinker with the specific functionality that it has, and I think it's still something that it can stand out on. But I think there's a lot more we can do in terms of custom agents for customers or customizable agents for customers that go well beyond what Thinker is doing today. And I think you're going to continue to see this from most of our competitors that they are offering more agentic solutions for sure. Operator: And I'm showing no further questions at this time. I would like to turn it back to Greg Smith for closing remarks. Greg Smith: Thank you all. I appreciate the wonderful questions and insight and time you take to spend with our company. As I highlighted on the call, I think we're in the midst of a couple of exciting changes where I see a lot of opportunity. And in particular, with the use of AI rolling out to the customers that we're best suited to serve, I think there's -- I'm very optimistic here that we can move a lot faster and deliver a lot more value and create more value for all of you as shareholders, us as Thinkific and of course, for our customers, which is the base of it all. Thank you. Operator: Thank you, presenters. And ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.
William Lundin: Okay. So welcome, everybody, to IPC's 2026 First Quarter Results Update Presentation. I'm William Lundin, the President and CEO. I'm joined today by Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. So I'll start with the highlights and give an operational update, then Christophe will touch on the financial highlights for the quarter. Following the presentation, we'll take questions, which can be submitted through conference call or via the web online. Jumping into the highlights. We're very pleased to report another solid quarter of operational performance. Production for Q1 was at the top end of the quarterly forecast at 43,000 barrels of oil equivalent per day, and we're retaining our full year production guidance range of 44,000 to 47,000 boes per day. We had good cost discipline with Q1 operating expenditure coming in at sub USD 18 per barrel of oil equivalent, and we are maintaining guidance for OpEx at USD 18 to USD 20 per barrel. Entering 2026, we set a lean work program and budget as we were assuming a base case price estimate of $65 per barrel Brent. And in response to the improved pricing environment, we're taking advantage of our operatorship and increasing our capital program from USD 122 million to USD 163 million, predominantly to accommodate short-cycle investments across some of our producing assets. The Q1 capital spend was USD 71 million. Operating cash flow generation for Q1 was $68 million, and we revised our full year OCF guidance to USD 220 million to USD 340 million assuming $70 to $90 per barrel Brent for the remainder of 2026. Free cash flow was minus USD 17 million. And we are entering really an inflection point here for the company and there shouldn't be too many more quarters of negative free cash flow going forward with Blackrod first oil expected in the near horizon. Full year free cash flow is expected to be between 0 to USD 120 million positive between $70 to $90 Brent for the rest of 2026. Net debt stands at $513 million, and we expanded our Canadian credit facility during the quarter to USD 250 million. We also extended the maturity of that to 2028. So that gives us an increased headroom and overall flexibility. Our benchmark hedges for WTI and Brent for approximately 40% of our production exposure rolls off in June, leaving us fully exposed to benchmark oil prices from July onwards. We have some WTI/WCS differential hedges and transport/quality-related hedges tied to our Canadian heavy oil exposure as well at attractive levels and some natural gas hedges in place that are currently in the money as well. No material incidents took place during the quarter, we're very pleased to report on. So on to the following slide. As shown on the production graph on Slide 3 here, IPC delivered flat production, really at the high end of our guidance in the first quarter, with overall strong performance across all the assets in the portfolio. So I'll touch on more detail on each of the assets' performance later on in the presentation. Moving on, we're very strongly positioned to deliver within our CMD production forecast range of 44,000 to 47,000 barrels of oil equivalent per day. Drawing your eyes to the bottom of the production chart on this slide. 2026 is really a story of two tales here with forecast production volumes expected to rise materially at the back end of the year with Blackrod Phase 1 oil production set to come online. In addition to some of the incremental capital adds, fast payback projects we've also added in, this will be contributing more so at the back end of this year for production rates. Our production mix is weighted 60% towards Canadian crude, which is tied to WCS pricing, 10% to Brent-linked production coming from Malaysia and France and the remaining balance of 30% being natural gas from Southern Alberta. And I'd also like to reiterate here that the 44,000 to 47,000 barrels of oil equivalent per day guidance is an annual average, very much an annual average rather than a quarterly average as can be seen on the high and low guidance bands on that bottom left-hand chart. OpEx, so we are maintaining that original Capital Markets Day forecast as we set out in February of $18 to $20 a barrel. First quarter operating cash flow was USD 68 million. The differentials from Brent to WTI, can be seen in the brackets there, was $9 and from WTI to WCS was $14 a barrel. So the Brent to WTI differential was notably high on the back end of the geopolitical conflict in the Middle East, which our Brent-linked production benefits from, of course. Our operating cash flow full year forecast for 2026 is updated to USD 220 million to USD 340 million based on $70 to $90 Brent, and that assumes a $5 differential between Brent and WTI and a $14 differential between WTI and WCS. So a material improvement compared to our CMD forecast and notably more than funding our incremental capital spend program this year with the revised updated operating cash flow generation outlook. Moving on to our CapEx program inclusive of decommissioning, which now stands at a forecast of $163 million. So that's roughly $40 million higher than the original CMD CapEx guidance. The increase is mainly due to accelerated fast payback drilling activity at our Southern Suffield assets in Alberta and in the Paris Basin in France, which I will expand on following asset-specific slides. So we continue to see great progress at Blackrod, and we've updated our 2026 budget outlook for the forecast spend at that asset. Big picture, the multiyear budget for Blackrod Phase 1 growth capital, the first oil is USD 850 million. There has been some minor cost pressure with total costs expected to be approximately USD 857 million, which is less than 1% overall of that original sanction CapEx guidance for the growth capital to first oil. And we're still expecting the project to be delivered in terms of first oil in Q3 of 2026, which is ahead of the original timeline given at the time of sanction back in 2023. Because of this continued acceleration and positive progress, there are some sustaining completion costs as well being pulled forward, which is a positive outcome overall. The free cash flow outlook, we're projecting to generate between 0 to $120 million of positive free cash flow between $70 and $90 Brent for the remainder of 2026. Very exciting to be returning into a positive free cash flow generating position this year with a major boost in free cash flow levels anticipated in 2027 and beyond as Blackrod Phase 1 ramps up and comes onstream. Moving to the share repurchases slide. IPC, of course, has a very strong track record of share repurchases in our brief history as a company. So 77 million shares have been bought back at an average price of SEK 79 or CAD 11 per share, respectively. And that represents around $1.4 billion of value created from the share repurchases when comparing the average share price that those shares were bought back at to our current share price. Notably on the antidilution waterfall, the only time shares were issued in a transaction was for the BlackPearl acquisition back in 2018. All of those shares have been bought back. And our current shares outstanding is just shy of 113 million shares, which is less than the original starting amount of 113.5 million shares. And we've transformed the company to where we are today compared to at inception in 2017. Now we see a 4.5x increase in production levels, 18x increase on our 2P reserves in excess of 20 years, added to our 2P reserve life index in excess of 1 billion barrels of contingent resources, added an overall 4x increase to our NAV compared to that of when the company was formed at the beginning of 2017. So Blackrod. This is a 20-year journey in the making to bring this vision into reality by unlocking a Phase 1 commercial development. I had the privilege of being at site at the end of April. This is a world-class SAGD plant with a best-in-class operational staff. It's a compact site with a small footprint for the CPF and nearby well pad facility tie-ins. This asset is going to propel the company to new levels, and it's been a fantastic journey going from sanction through to development and on to startup now with rotating equipment well in service at this point in time. Original guidance for this project, again, back in 2023 when it was sanctioned, called for first oil in late 2026 and growth capital up into that point of USD 850 million. We achieved first steam ahead of our original forecast, resulting in a schedule improvement which was announced at the beginning of this year, with first oil expected in Q3 2026. So operations continue to progress well, and we're strongly positioned to deliver within this accelerated timeline. Cumulative spend as at the end of Q1 from the beginning of 2023 on the growth capital is USD 842 million with some minor works remaining on the final boiler tie-in as well as well pad facilities as we expect to deliver this project overall in line with the original growth capital guidance to first oil. I really couldn't be more proud of our multidisciplinary IPC teams as well as the vendors utilized in this major undertaking, and we're especially pleased that there has been no material safety incidents under IPC's supervision as prime contractor of the site. Excellent delivery overall and stewardship of this project to date. So Blackrod valuation. Again, this is a true game-changing asset for IPC. We have regulatory approval up to 80,000 barrels of oil per day with over 1.45 billion barrels of recoverable resource. Phase 1 targets 30,000 barrels per day and 311 million barrels of 2P reserves. And the economics as at the beginning of this year, based on our conservative reserve auditor price deck, is USD 1.4 billion of net present value using a 10% discount rate and approximately a $47 WTI breakeven. As you can see on the figure on the right-hand side of the slide, this is a massive uniform sandstone reservoir. It's contiguous and homogeneous, lending to a very much predictable and scalable product potential that's validated through the 15 years that it's been under pilot operation testing. In the lower graph here, the dark wedge on the bar chart reflects what is booked in 2P reserves and carried within our valuation. The light blue component of that bar chart is the contingent resources and represents upside to our business. Moving on to our producing assets. Our current flagship oil-producing asset at Onion Lake Thermal delivered stable production through Q1. We also did some 4D seismic work at the beginning of the year and are reviewing that data to hone in on some additional potential infill targets on existing producing drainage patterns. And also to note on that schematic on the right, H Pad is the next main drainage pattern to be developed in the sequence. Moving on to the Suffield area assets. So very much predictable and low decline production, the Suffield area assets, which delivered around 23,000 barrels of oil equivalent per day through Q1. We're very excited to be redeploying some capital into these assets, where we've sanctioned a 4-well production drilling campaign within the Basal Quartz area, just west of the Suffield block. Production from France and Malaysia for Q1 was in excess of 5,000 barrels of oil per day. We had some incremental activity that's also been sanctioned now in France. We look to drill 3 sidetracks in the FAB field and 1 sidetrack in the Villeperdue field. So very exciting to be drilling again in France. And in Malaysia, we also plan to do an operational activity of workover using a hydraulic workover unit later this year on our A13 well. So with that, I will hand it over to Christophe to go through the financial highlights. Thank you. Christophe Nerguararian: Thank you very much, Will. Good morning, everyone. So indeed, a good quarter with production at the high end of our Q1 guidance at 43,000 barrels of oil equivalent per day. And of course, during this first quarter, when the situation happened between Iran, the U.S. and Israel, the oil prices increased massively from the beginning of March. And so you really have a relatively high average Dated Brent oil price for the whole quarter, in excess of $81 per barrel, but that was really two sides of the story with lower oil prices in January and February and much higher in March. So overall, that really helped generate on that basis strong operating cash flows and EBITDA for the quarter at USD 68 million and USD 64 million. As we guided before and as most of our investors know, the capital expenditure in 2026 was always expected to be much front-loaded, and so you can see a disproportionate portion of the CapEx spent during this quarter translating into a free cash flow of negative USD 17 million. And it depends where oil prices will be on average for Q2, but it's fair to assume that the free cash flow may be negative again in Q2. But from that point onwards, we're expecting to turn the corner and to be again back into free cash flow territory for the second half, depending on where first oil kicks in at Blackrod. So USD 13 million of net profit for this quarter. The net debt increased during this first quarter by USD 30 million. Again, it's fair to assume that this net debt would increase again in the second quarter and from that point on progressively. Depending on where oil prices stand, we should see some deleverage from Q3 or from Q4. But certainly this year, we should start to see some accelerated deleveraging as the Blackrod production ramps up over time. Realized prices, so I mentioned, were strong. And I think it's interesting, a bit sad at the same time, but interesting to see that the physical market is quite dislocated. And so the Dated Brent has been trading at between $5 up to $30 premium on top of the future or the financial Brent, if you wish. And when we lifted our cargo in Malaysia, the last one in March, we had a good premium. And for the future June cargo, which we're going to lift in Malaysia, we can see that the physical market is very tight because the premium we can realize there are very, very high. So you can see we sold in March a cargo in Malaysia at USD 110 per barrel, while on average for the quarter, Dated Brent was USD 81. The Brent-WTI differential widened a bit at $9 and the WTI/WCS differential stood at negative $14 for the quarter. We're continuing in Canada to sell our heavy oil on parity or very close to the WCS. Gas prices were actually okay during this first quarter. But overall, the market again is quite disconnected between the U.S., and the Canadian market has been a new reality for the Canadian gas prices over the last 18 months now for the lack of infrastructure and communicating infrastructure between the Canadian gas pipeline network and the U.S. market. So you can see that we realized CAD 2.5 per Mcf during this first quarter. But the forecast is showing for the summer months lower gas prices, which is still a negative to IPC given that we are producing more gas than we're consuming at Onion Lake or that we will consume in the following quarters at Blackrod. Now the positive in the long run is that because we are consuming gas at Blackrod, it will be a relatively cheap feedstock gas going forward. In terms of financial results, it's interesting to compare '25 and '26. We had during this first quarter '26 similar production and overall revenues between the first quarter '26 and '25. Some of the difference between the 2 quarters in '26 and '25 was coming from the fact that we lost $10 million of hedges -- hedged losses in this first quarter because we had hedged around 40% of our WTI and Brent exposure at between $62 and $68 per barrel. And of course, we've been losing in the month of March mainly. And given that we are still hedged until the end of June at those around 40% level at current prices, we can expect to make a hedging loss of around USD 30 million during the second quarter. But I think it's important to flag as well that beyond the end of June, we no longer have any benchmark hedged. So we are totally exposed to the Brent and the WTI prices going forward into the second half of 2026. Looking at the operating costs. So we were below during this first quarter as a result of strong production level and relatively low electricity and gas prices. We can expect higher operating cost per barrel going into the second quarter with a bit of a slightly lower production in the second quarter. In the third quarter, when we're going to move progressively into commercial production at Blackrod, we're going to register some OpEx which will be a bit higher in the first months of operation. But you can see that as soon as the Blackrod production ramps up in the fourth quarter, the OpEx per barrel will progressively reduce, and we would expect that trend to continue into 2027. You can see the netback on the following graph with gross margin of close to $18 per barrel and operating cash flow at $17.5 and EBITDA at $16.5 per barrel of oil equivalent of netback. Looking at the evolution of our net debt. So we increased our net debt this quarter by USD 30 million given the reasonably high CapEx of $71 million we spent during the year. So we spent more CapEx than the level of operating cash flow. This is going to reverse in Q2 and even more so in the second half of this year. In terms of financial items, it's sort of a steady state now in the second half. Last year when we refinanced our bonds, we had some exceptional and one-off fees that we paid as part of that bond refinancing. From now on, it's going to be much more stable. And just to mention that the foreign exchange loss you can see here of $6.5 million during this quarter is a noncash item. Otherwise, the G&A remains reasonably stable and flat at around USD 4 million per quarter. So looking at the financial results. We generated net revenues of $173 million, netting a cash margin of $68 million and gross profit of USD 37 million, which net of the financial items, tax and tax elements yielded a net profit of USD 13 million for the quarter. The balance sheet has continued to evolve since we sanctioned the Blackrod project. As you expect, our level of cash has reduced and our level of net debt increased over the last 3 years. But again, we are almost touching distance from reversing this trend certainly going into 2027 but as well going into the second half of this year. And I will let Will conclude this presentation. William Lundin: Thank you very much, Christophe. So in summary, very exciting to be ramping up activity really across all regions of operations. Q1 capital came in at USD 71 million and the full year outlook is $163 million now, really leveraging our operatorship and increasing our production exposure to the high commodity pricing environment that we're seeing. We're well positioned to deliver within our production guidance, and our operating costs remain under control. Operating cash flow generation was robust for Q1 at USD 68 million. And the outlook for the full year is $220 million to $340 million. We have in excess of USD 150 million of undrawn liquidity headroom. There are no material environmental or safety incidents that took place in the first quarter. And with that, I'm happy to pass it over to the operator to begin questions, and you can also submit your questions online via the web. Thank you. Operator: [Operator Instructions] We'll now take our first question from Teodor Nilsen of SB1 Markets. Teodor Nilsen: Will and Christophe, first question there is around the small CapEx increase you announced. I just wanted to know what is driven by cost increases and what is driven by higher activity. And second part of that question is related to the activity increase. By how much should we assume that the exit rate production this year increases as a result of the accelerated investments? So that's the first two questions. And third question, that is on share repurchases. You've, of course, been very successful doing that for the past 2 years as you discussed. But you haven't been doing any repurchase. You have not done any material repurchases the past few months. So I just wanted a background for that. Do you think the share price approached a reasonable level? Or are there other reasons for why you have reduced the buybacks? William Lundin: Thanks very much, Teodor, for the questions. I'll head those off. First one being the small CapEx increase. So we had an adjustment of $122 million to $163 million for capital expenditure for 2026. So that $40 million some-odd increase, the lion's share of that is for capital activity in France and Canada. So we're going to be doing 4 sidetracks drilling program in France for approximately $15 million and also in Southern Alberta at our Suffield area assets, more on the more recently acquired in 2023 Core 4 property. We're also going to be drilling 4 wells there. So the total combined amount is around $23 million when you add the France plus the Brooks-related activity that we're undertaking. I also touched on the slight cost increase at Blackrod there as well, which was expanded on throughout the presentation. But really the vast majority of the cost increases are deliberate cost increases here to increase the activity for production contributing projects. And so that production increase for those 2 projects that I had noted, which will be more back-end weighted this year in terms of the production contribution, we expect to see in excess of 1,000 barrels per day on average delivered for 2027 from those 2 programs. So very attractive cost per flowing barrel metrics to undertake those capital activities and really a part of our whole strategy as well over the past couple of years while we've been accommodating the growth capital for Blackrod as well as buying back our shares at very cheap levels. Some of the capital activity that's been ripe and ready to go across our existing producing assets, we've elected to wait until more constructive oil prices present themselves. And here we are now. And that is the reason for why we've kind of prioritized the incremental capital going towards production contributing activity right now as opposed to share buybacks. We do have the flexibility to restart share buybacks, where we have the NCIB activated up until December of this year. We are steadfast on focusing on getting Blackrod on to production here. We continue to monitor market conditions and overall liquidity headroom. Safe to say we are very strongly positioned, and it's something that we're going to continue to monitor as the year progresses here in terms of restarting shareholder returns. Operator: [Operator Instructions] We will now move on to our next question from Mark Wilson of Jefferies. Mark Wilson: Excellent progress as ever and good look with the final steps in Blackrod, obviously. I thought the most interesting area now is the gas side of things in Canada. You mentioned that your hedges are rolling off for WTI. Just remind us where that stands for the gas, particularly as that is looking weaker in terms of infrastructure. And whether you think there's any longer-term impact from the M&A we've seen into Canadian gas, Shell coming in for ARC and further phases of Canada LNG. Just be interested to hear that. Christophe Nerguararian: Yes. Thank you, Mark, and very good questions. So I skipped the table on hedging as Will touched on it already in the opening slide. But you're absolutely right. It was very interesting to see Shell going after ARC, which is a large gas producer, and so this is just speculation at this stage, but probably paves the way or at least increases the chances and the odds that Shell would go and try to expand the LNG facility on the West Coast of Canada, North of Vancouver. And that's a fairly obvious move when you look at the massive arbitrage you can see between local domestic gas prices and international gas prices. So I think the projection in the very short term is to probably still have reasonably low gas prices onshore Western Canada, but the prospects of having more demand from that LNG Canada plant going forward has probably increased over the last few weeks. In terms of hedging, we have 50,000 GJ a day of gas hedged at CAD 2.7 per GJ or CAD 2.8 per McF. So unfortunately, that's probably going to be in the money. And so you know us. We remain very opportunistic. If we see any gas prices hike in the forward curve, you should fairly expect us to seize that kind of opportunities. And so that was your main question, around gas prices. No, you're absolutely right, that in terms of WTI or Brent exposure, the hedges are rolling off at the end of this quarter, at the end of June. And so we'll be fully exposed going forward to what looks to be reasonably constructive oil prices going forward. William Lundin: Sorry, just to add to that in terms of being a great signal in terms of Shell increasing its exposure in Canada just for the upstream overall Canadian landscape there. And now with that acquisition, Shell has secured roughly 3/4 of its feed gas requirements for both Phase 1 and Phase 2 of LNG Canada. So it certainly bodes well and signaling for an FID of Phase 2, but we're still yet to see that for that LNG project on the West Coast of B.C. there. Mark Wilson: Got it. Okay. And is it worth mentioning on the broader Canada side of things, what was it I heard recently, is it a sovereign wealth fund? Or is it an infrastructure fund? And any implications? William Lundin: Yes. That was Mark Carney, and he said a sovereign wealth fund. The extent of the details are yet to be understood in terms of where the funding is going to come from to be able to do that. But that is the headline that Mark Carney announced, was a sovereign wealth fund. Mark Wilson: Okay, okay. And then just one last point. I might have missed it in Teodor's question. But the short cycle in Suffield, that's obviously targeting liquids, I imagine. William Lundin: Yes, oil. Mark Wilson: Okay. Very good. Congratulations again. Looking forward to reading the rest of the news in the year as it ramps up. Christophe Nerguararian: Exactly, thank you. William Lundin: Much appreciate it. Thanks, Mark. Operator: Thank you. We have no further questions in the queue. I'll now hand it over to the company for online questions. Rebecca Gordon: Okay. Thanks, operator. So we've got a couple of questions here. Maybe we can just start with a bit of information on the short cycle, Will. Just a couple of questions on Ferguson and whether we have opportunity there to put some rigs in or maybe look at additional drilling there. William Lundin: Yes, for sure. So Ferguson, there's quite a few opportunities in terms of drilling as well as recompletion, refracking-related activity as well that we are looking into. Some of the activity is likely to be an operating expenditure-related item. So that is something that we do plan to do in terms of a few wells and recompletions on a few wellbores there. So look to see some minor production boost coming from the asset towards the tail end of the year. Rebecca Gordon: Okay. Very good. And then another question here. I mean, obviously, there's a lot of interest on Phase 2. Is there any intention to bring that forward now? Or how are we feeling about the timing given the oil price? William Lundin: Yes. I think the liquidity position as we've stated for quite some time now is going to change quite rapidly as Blackrod Phase 1 sets to come onstream in the back half of this year, and we look to generate significant free cash flow in the year of 2027 even at more modest oil prices. And if these pricing levels are to hold through 2027, it's going to put us in a very, very good place to look to continue pursuing our key capital allocation strategic pillars in terms of organic growth, shareholder returns and also staying opportunistic towards M&A. But for Phase 2 specifically, our future expansion potential at Blackrod behind the scenes is definitely something that's being worked up. But of course, we remain very, very much focused on successfully completing and bringing Phase 1 online from an oil-producing standpoint. Rebecca Gordon: Great. Thanks. And then just a quick question on capital structure, Christophe. Could you explain the increase in the RCF, why you went for that? Christophe Nerguararian: Yes. Well, if you look back at what IPC has been doing as a corporate, we try to raise and improve liquidity when we don't need it. So it's been a constant discussion with our banking partners and banking friends. We enjoy very good support from Canadian banks these days. There was the opportunity to increase the Canadian revolving credit facility from CAD 250 million to USD 250 million, which we just did and extended the maturity up to May 2028 as we do every year. So it's all positive for no other specific purpose than having ample liquidity. Rebecca Gordon: Fantastic. Thanks. Will, just a question on regulatory framework, so in Canada, the U.S. and our other operating jurisdictions. Have we seen any changes post the Iran war in those sort of regulatory frameworks or anticipate anything to come? William Lundin: No, there hasn't been any changes regulatory-wise in the stable jurisdictions where we operate and we have production operations taking place. And specifically in Canada also, they have a sliding framework based on oil prices for the royalties. So no changes expected there or elsewhere within the portfolio at this time. Rebecca Gordon: Okay. Fantastic. And then maybe one final question here. What would be your priority post Blackrod complete in terms of organic growth or shareholder returns or buybacks? William Lundin: Yes. The infamous question, I think. The punch line here is that we have the ability to do it all, and we look to strike the right cadence in terms of pulling forward organic growth and continuing to screen opportunities in the M&A landscape and balancing shareholder returns as well. And so I think we're going to be really strongly positioned to deliver on all three of those fronts. And the main lens, of course, will be to maximize shareholder value in our pursuit of that capital allocation strategy. Rebecca Gordon: Okay. Fantastic. That's what we have time for today. That's all our questions. So I leave it to you to close, Will. William Lundin: Excellent. Thanks very much, Rebecca, and thanks, everyone, for tuning in to our first quarter results update presentation. We're very, very strongly positioned, and It's a super exciting time for the company with the next major catalyst being Blackrod first oil. So that will come in due course very soon here. So thanks, everyone, and take care. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the analyst and investor presentation for HSBC Holdings plc First Quarter 2026 Earnings. This webinar is being recorded. I will now hand over to Pam Kaur, Group Chief Financial Officer. Manveen Kaur: Welcome, everyone. Thank you for joining. We have had another quarter of positive performance, which reflects further progress towards creating a simple, more agile, growing HSBC. Annualized return on tangible equity, excluding notable items, was 18.7%. We are confident in achieving the targets we set out to you at the full year. We are updating 2 pieces of guidance today, banking NII to around $46 billion and our expected ECL charge to around 45 basis points. I'll talk to the drivers of both shortly. In the quarter, we continued to make disciplined progress in simplifying the group to unlock HSBC's growth potential. We actioned a further $0.2 billion of simplification saves and remain well on course to deliver the $1.5 billion target. We completed the privatization of Hang Seng Bank, the sale of U.K. Life Insurance, Sri Lanka Retail Banking and South Africa. And as you will have seen, we have agreed the sale of our retail banking business in Indonesia. We expect to realize an up to $0.4 billion gain on completion anticipated in the first half of 2027. Our CIB business in Indonesia is unaffected. On outlook, the economic landscape remains complex and uncertainty will persist. Our thoughts are with all those affected by current events in the Middle East. We are fully engaged in supporting our colleagues, customers and partners across the region. We are well positioned to work with our customers and manage the uncertainties in the global environment from a position of financial strength. Let's turn first to the income statement, where I will focus on year-on-year comparisons unless I indicate otherwise. Profit before tax, excluding notable items, was $10.1 billion. Notable items this quarter include a loss of $0.3 billion on moving Malta to held for sale, a loss of $0.2 billion on the sale of U.K. Life Insurance and $0.1 billion of restructuring costs related to our simplification program. Revenue, excluding notable items, grew 4% year-on-year to $19.1 billion. This was driven by banking NII and strong growth in wealth fee and other income. Annualized RoTE was 18.7%, 0.3% higher than last year. It benefited from the removal of Hang Seng Bank minorities. Looking at capital and distributions. Our CET1 capital ratio is 14%, down 90 basis points on the quarter as expected following the privatization of Hang Seng Bank. Reflecting our strong organic capital generation, we are already back to our operating range of 14% to 14.5%. The dividend for the quarter is $0.10. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. This broad-based performance shows our strategy is working. I would just mention the $0.2 billion gain from a one-off property asset disposal in the Corporate Center, which is not a notable item. Moving now to banking NII. Banking NII increased $0.3 billion year-on-year to $11.3 billion. It fell by $0.5 billion quarter-on-quarter. $0.3 billion of this quarterly decline is day count. We also noted at the fourth quarter, $0.1 billion in gains that we did not expect to repeat. In addition, this quarter, HIBOR was lower in March, and we also recognized a $0.1 billion adverse one-off. We are now upgrading our full year banking NII guidance to around $46 billion. This reflects an improved interest rate outlook. I would highlight that interest rate curves have been volatile and can, of course, change further in either direction. Turning now to wholesale transaction banking. Recent economic, market and tariff situations have validated the strength of our franchise, both over the last 12 months and in this quarter. We grew fee and other income 2% year-on-year. Customers continue to turn to us to help them navigate volatility and uncertainty. Our balance sheet and franchise strength are particularly valuable in times like this. In the quarter, Securities Services grew fee and other income 11%, reflecting new mandates and higher transaction volumes. Trade grew 8%, driven by continued growth in volumes. Payments grew 3%, driven by growth in volumes across most regions. Foreign exchange fell by 1% compared to a strong first quarter last year. We continue to see growth in volumes and strong client engagement. Turning now to wealth. We grew fee and other income by 15% to $2.7 billion. I remind you that the first quarter of last year was a high base. Growth was driven by all 4 income lines, and we added 287,000 new-to-bank customers in Hong Kong. It is worth remembering there is typically favorable seasonality to the first quarter when compared with the fourth quarter. Having said that, we are pleased that the investments we are making in our wealth products, distribution channels and customer experience are translating into real results. Private Banking grew 8% and Asset Management, 3%. Investment distribution performed very well, up 21%, reflecting particularly strength in our customer franchise in Hong Kong. Insurance growth of 19% from a strong base was also pleasing, again, with Hong Kong, the standout. Our insurance CSM balance was $15.2 billion, up 19% versus the prior year. First quarter wealth balances were $1.6 trillion, up 12% or $170 billion year-on-year. Net new money in the first quarter was a strong $39 billion, of which $34 billion came from Asia. This is a broad-based and robust franchise. Our investments and focus are paying off. I will note that we saw a slowdown in flows in the early days of the conflict, but activity recovered in April across our wealth franchise in Asia. Turning now to credit. Our first quarter ECL charge was $1.3 billion, equivalent to an annualized charge of 52 basis points as a percentage of loans and advances. Given the ongoing uncertainty in the outlook, we are updating our full year 2026 credit guidance to around 45 basis points. This quarter includes a $0.3 billion charge related to the Middle East conflict. This is precautionary and related to the impact of the conflict everywhere, not just in the Middle East. We also include $0.4 billion for fraud-related secondary securitization exposure with a financial sponsor in the U.K. I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns. We have updated our risk appetite and are incorporating lessons in our due diligence processes. This remains an area in which we are comfortable, but it is not a significant growth driver in our plan. In Hong Kong commercial real estate, we had some small recoveries in the quarter. And overall, it remains broadly stable. You will see our usual detailed breakdown on Slide 21. On Slides 15 and 16, we have also set out our private market exposure. We have made these expansive definitions to give you a full picture of our full-service business in private markets. Let's now turn to costs. We continue to take a disciplined approach to cost management. We are on track to achieve our target of 1% cost growth in 2026 compared to 2025 on a target basis. Cost growth this quarter is 3% year-on-year. This included 1% driven by higher variable pay accrual based on business performance. If you exclude the variable pay accrual, target basis cost growth was around 2% year-on-year. We manage costs on a full year basis. So looking at a quarter in isolation is not meaningful. We remind you that our simplification actions provide a cumulative year-on-year benefit through 2026. For the avoidance of doubt, our 2025 target cost baseline is $34 billion when updated for FX. Now let's turn to customer deposits and loans. Our deposit momentum continues with $99 billion of deposit growth, including held-for-sale balances over the last 12 months. CIB deposits increased $10 billion quarter-on-quarter in what is usually a soft quarter. Hong Kong was a particular driver. This corporate inflow offset a slower retail flow in our Hong Kong pillar. You will see deposit seasonality on Slide 20. Excluding the movement of Malta to held for sale, IWPB deposit growth was $4 billion. You will see on Slides 18 and 19 that we have set out additional deposit disclosure. This shows you the deposit base split between fixed term and instant access accounts. The 70% instant access proportion should help you see the strength and breadth of our deposit base across our businesses. Turning to loans. Growth picked up in the quarter. CIB mainly reflects continued momentum in GTS, higher term lending in Hong Kong and drawdowns on committed lines by high-quality borrowers in the Middle East. We are pleased to be there for our customers when they need us most. Hong Kong returned to volume growth this quarter after a period of decline. We are pleased to see borrowing appetite return as the economy grows and as residential property prices recover. Our $13.7 billion investment in Hang Seng Bank is a signal of our confidence in the opportunity in Hong Kong. We are investing across both iconic banks, and we see significant growth runway for both ahead. In the U.K., we delivered another quarter of good growth. This was both mortgages and our commercial lending book. We see good momentum in our domestic portfolio. Low levels of household and corporate debt in the U.K. provide a platform for the continued growth of our franchise. Now turning to capital. Our CET1 capital ratio was 14%, down 90 basis points in the quarter. This follows the 110 basis point impact of the Hang Seng Bank privatization and Malta disposal loss. We also saw a 12 basis points impact from the fair value through other comprehensive income bond portfolio, as government yields rose following events in the Middle East. These were offset by ongoing strong organic capital generation. We are pleased to have remained within our CET1 operating range since the announcement of the Hang Seng Bank privatization. A decision on future share buybacks will be taken quarterly, subject to our normal buyback considerations. Let's turn to targets and guidance. First, targets. We reiterate the targets we set out to you at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. Finally, to guidance. Today, we are updating our banking NII to around $46 billion, given the higher rate outlook and our ECL charge to 45 basis points given macroeconomic and market uncertainty. In addition, to inform management planning, we have assessed a range of top-down stress scenarios. We have set these out for you on Slide 17. I'm happy to discuss these further in Q&A. All other guidance set out on this slide remains unchanged. To conclude, the intent with which we are executing our strategy is reflected in the growth and momentum in our first quarter. It shows discipline, performance and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from nonstrategic or low-returning businesses towards growth opportunities, while upgrading our operating model. This includes investing in artificial intelligence to empower our colleagues, simplify how we operate and enhance the customer experience by personalizing service at scale. Performance in our earnings. Each of our 4 businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items and delivery. Our first quarter results show we are creating a simple, more agile, growing HSBC built on the strong foundations of a robust balance sheet and hallmark financial strength. This is why during periods of greater uncertainties, our customers turn to us as a source of financial strength, and we remain confident in delivering against our targets. With that, I'm happy to take your questions. Operator: [Operator Instructions] Our first question today comes from Guy Stebbings at BNP Paribas. Guy Stebbings: The first one was on wealth. Clearly, another very good performance, particularly on investment distribution, insurance. Can you talk about what you're seeing in terms of flows in the competitive landscape in Hong Kong right now? I'm sort of mindful it's been a very good story and the benchmark comparisons is getting tougher in terms of growth rates. But equally, there's sort of no evidence of let up in momentum and can see another really good performance for new business CSM, which is well above what you're actually booking through the P&L right now. And then the second question was on private markets. Thanks for Slide 15 and 16. Interested in any changes you're making in your approach to this segment. You've called out the $400 million hit in Q1, and you've not identified anything comparable in the book. One of your peers has signaled sort of partially stepping away from some exposures in this segment, as they've assessed sort of levels of financial controls. I know you said this wasn't a big growth driver of the plan, but are you changing how you're thinking about this segment in any way? Manveen Kaur: Thank you, Guy. If I take your questions in turn. On the first question on wealth, we are really pleased with the growing CSM balance and as well as on investment distribution. First quarter is always a very strong quarter for us, but I'm pleased to say that even after some slowdown in the month of March, we again see momentum coming through in April. We have a very vast range of products that we offer to our customers. So we've seen some shift in the products. So people moving from bonds and mutual funds into structured products and equities and all that obviously contributes very well to our fee income in wealth. We have an iconic brand in Hong Kong. And yes, competition is fierce. But as you can see, we are also growing new customers despite putting the fee in January, and these new customers over time also become customers from a wealth perspective, but more in the near term for the insurance business. So those are all very positive signs for us. From a private credit perspective, our overall exposure on private credit has stayed the same, as I called out at the year-end of $6 billion on the chart. And then this is both drawn and undrawn and the private credit and related exposure stays within 2% of our balance sheet. So that, again, from our perspective, is a comfortable position in terms of the concentration. Following the, what I would call, experience that we've seen in the fraud perspective, I've always said that in this ecosystem, no one is immune to second order sort of exposures, which is where we have had from financial sponsors. Clearly, as a learning, what we are working on is looking at very specifically some of the additional due diligence processes we may carry even where we are relying on the due diligence of financial sponsors. In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall. And as I've said, we will not have this and it has never been a significant driver of private credit. So same as before, continue to be even more diligent where we are relying on financial sponsors related secondary exposures and their due diligence. Operator: Our next question today comes from Amit Goel at Mediobanca. Amit Goel: So 2 other questions from me. So one was just on the cost growth. So it seemed like the cost growth was a bit higher this quarter, even ex the VP than the overall target for the year. So just in terms of why you think the costs will be a bit more contained or at least the cost growth will be a bit more contained and the drivers there? And then also the second question is just on the Middle East scenario. So I appreciate the extra slide. Just curious on those stress scenarios. So what would we need to see or what would we have to see -- to be seeing some of that scenario play through and to have further impact on your ECL guidance? Manveen Kaur: Thank you, Amit. So I'll take the cost question first. So as we have said, our simplification actions will be completed by the middle of the year. And those simplification actions will give us cumulatively more savings in the second half of the year. And if we factor those in and phase out in line with our forecast and financial resource planning, we are very comfortable that we will be within our cost guidance of around 1% growth on a target basis. It is a timing of when you have the gross increase, which we said last year would be 3% and then the timing of when the 2% savings come so that you come to the net 1% cost growth. Now from a Middle East scenario, firstly, to be clear that our ECL guidance and indeed, when we reaffirm our targets, we look at all plausible downside scenarios, and we are, by nature, quite conservative in how we approach these matters. We have, in the fullness of an integrated top-down stress scenario called out a bookend stress scenario, which requires all 5 things to happen. So just to give you some perspective, in this kind of a scenario, you would expect stock markets to be down 35%. So it's pretty severe. You would also expect oil price at 145 basis points and market disruption as well as significant GDP slowdown across markets globally. So that is the context of this scenario. But as I said earlier, in terms of the right weightage of probability from an ECL perspective, that has already been factored in the 45 basis points guidance. And this scenario gets driven by not just an ECL number, but also an impact on the revenue line, and it assumes that the wealth business, which has continued to do really well even through the month of April will have a significant impact in this kind of a scenario as well as deposits, which typically in a stress position always become an inflow for large deposits. But because of the extreme market disruption, very high inflation that the deposits will come down because customers will need to get money in order to survive through a very stressful economic scenario. Operator: The next question today comes from Aman Rakkar at Barclays. Aman Rakkar: I just wanted to ask one quick follow-up on the Middle East scenario. Is there any chance -- I think just back of the envelope, it's a kind of $2 billion to $3 billion hit to PBT in terms of the mid- to high single-digit percentage on '26. Is there any chance you could just kind of round out the disclosure on that in terms of what the breakdown in that scenario is between revenues and impairments? I'm assuming it's literally revenues and ECLs and if you could just quantify that for us, that would be really helpful. The second question was just on banking NII, please. So first of all, I think you're calling out $100 million negative impact in the quarter. Just kind of adding that back in, I guess, to the underlying run rate, it looks like your Q1 banking NII is annualizing a shade above the $46 billion that you are guiding for your full year. So I'm interested in the sequential drivers of net interest income, please, from here, as you see them presumably rates not that much of a headwind and you've got some balance sheet momentum. So trying to work out what the negative is from here to offset that, please? Manveen Kaur: Thank you, Aman, for your 2 questions. So taking the first one. Firstly, to say, yes, the impact absolutely is equal between sort of revenues and ECLs broadly in this scenario and your numbers were right. I also want to say this is what I would call an unmitigated impact. In other words, it's prior to management actions. We are very comfortable that even in stress scenarios, we have a range of management actions we would be taking. And therefore, we are very confident in reiterating our RoTE targets for '26, '27 and '28. Now on banking NII guidance, as always, as you would expect, we tend to be quite conservative. We consider in the guidance all possible downside scenarios as well, at least the plausible ones. So in terms of the mathematical calculation, as you've done ex the one-off and looking at the day count, et cetera, it, of course, takes you above the $46 billion. Our guidance is around $46 billion, not just $46 billion. So that's the first point to call out. And the things that we have considered in terms of a possible plausible headwind would be, of course, there's an uncertainty on the interest rates. Also, we have seen the experience. There were a few weeks of impact of a lower HIBOR in the month of March, but I'm very pleased to note that the HIBOR has again come to the range that we are most pleased with, which is around 2.5% and obviously, there is the continuing tailwind of our structural hedge reinvestment. We've given you disclosures on that. And the deposit flow overall continues to be very strong, but we are happy to say around $46 billion with our usual conservatism. Operator: Our next question today comes from Andrew Coombs at Citi. Andrew Coombs: A couple of follow-ups from me, please. Just firstly, coming back on the private credit exposures on Slide 16. I think the exposure on which you booked the charge today falls within the $3 billion securitization financing bucket that you list on that slide. Can you just give us an idea, please, of how much of the exposure that you've taken a charge on today accounts for of that $3 billion total, please? And then secondly, coming back to wealth, it's difficult to quibble on 15% year-on-year growth, but that revenue growth does look slightly weaker than your peers. So can you just give us an idea of where you think the differences are? Is it business mix, which means you have lower transaction income benefit year-on-year? Anything you can comment on relative performance? Manveen Kaur: Thank you. So just in terms of the exposure, we have substantially provided for that exposure. And that exposure, when you can see mathematically, is not an insignificant part of the $3 billion that you've called it quite rightly, it really comes from that particular bucket. Coming back to your point on our revenue. So in terms of the revenue, I'll just bring to attention that the CSM balances have been growing, but the way they actually hit the P&L, it is really over a period of time. And therefore, what you capture in the P&L is 1/10 and that then flows through over the following years. So that is how I would look at it in terms of the fee income growth. If you ex that or adjust for that, we are very much in line or indeed ahead of peers in certain pockets. Operator: The next question today comes from Katherine Lei at JPMorgan. Katherine Lei: Pam, I would like to ask about the fraud cases. Like can we have more color about the fraud cases such as like what is our total exposure? Because the key concern is that is this $0.4 billion one-off or we were going to see more like step-up in impairment charges because of this particular case? I think this is the number one question. Number two question is like I look at the risk weighting, right? It seems like a downside scenario, now we aside, 45% versus like before the war, like, say, 4Q '25 is roughly about 15%. Can we get more color of like, say, in this scenario, would that be -- let's put it this way, under what situations do you think we will continue to see continue rise in this 45% of downside scenario? Manveen Kaur: Thank you, Katherine. So firstly, this fraud is an idiosyncratic fraud. We have gone back and reviewed all our highest risk exposures across our portfolio and specifically looked at the private credit exposures as called out on the slide, and we see no comparable fraud risks in this matter. And of course, we continue to review our risk appetite, tightened due diligence and so on. So therefore, we feel quite comfortable that this is a one-off fraud indeed, and it comes to us through a secondary exposure that we have through a financial sponsor and where there was reliance on the financial sponsor due diligence. So that's the first case. And second one, in terms of the downside scenarios, the 45% downside scenario is built also from a 30% Middle East-related specific scenario that we created, which was a fifth scenario. So we do not expect that 45% downside scenario to shift much. And I can just give you as a comparison as we went through periods of COVID, Russia, Ukraine, that's sort of a leaning on the downside scenario. It's pretty much at the top end of the downside scenarios. And then once the situation gets more normalized, we bring the scenarios back to what our normalized scenarios that you have called out. I also want to stress to you that the IFRS 9 downside scenarios factor in, what we think at this point of time, the full extent of the forward-looking guidance, as we would obviously calculate based upon what we're seeing on the ground as well as assumptions as well as the probabilities given to all the scenarios. And this is quite distinct and different from the bookend Middle East conflict stress scenario on Slide 18, which has a much holistic view and a range of things happening, including, as I called out, from very severe stock market disruptions as well as oil price distinction. So I just want to make a clear distinction between what you account for, what you have in your outlook versus what you keep as part of a planning exercise in terms of the range of scenarios that you should always be aware of as a good management practice. Operator: Our next question today comes from Chris Hallam at Goldman Sachs. Chris Hallam: Two for me. So the first, again, on wealth. So $5 billion of that $39 billion of net new money was deposits. So it feels as though sort of 90% of the flows were invested, whereas if I think about the stock of your wealth balances, it's closer to 60%. So how should we think about that? Is that a structural trend you're seeing? Are clients becoming more invested? And if so, what does that mean for fee margins and for returns going forward? And maybe just within the $39 billion, without the conflict in Iran, would that number have been higher or lower? And then second, on capital, like you said, well managed through the guidance range throughout the HSB privatization process. Obviously, this quarter, a couple of one-offs within the quarter, but the underlying business performance appears to be encouraging. So given all of that, can you comment on when you expect to restart share buybacks? Manveen Kaur: Thank you, Chris. So firstly, in terms of invested assets, we are very pleased with the growth in invested assets. But I just want to remind you, typically, Q1 is strong for investments. So there is some seasonality of money moving from deposits into investment assets into -- in Q1. We've also been very strong in terms of the new mandates we've got from private banking. So overall, wealth is a very robust story to call out, and it's very broad-based, not just dependent on one lever. In terms of the conflict, there was a bit of risk-off wait and watch in the second half of March. However, as April has come through, we continue to see high volume of transactional activity. And as I said earlier, our customers, they continue to readjust their portfolios and our strength lies in the broad range of products we have on offer. And we have really invested in this business. So going forward, from a fee income perspective, I do believe there is a huge tailwind for us in terms of how we build on this year-on-year. So coming back to capital now. Firstly, I'm really pleased that even with this very large core investment we have done in Hong Kong, which is a critical market for us where we are hugely confident about the future growth prospects, we have still remained throughout the entire period within our CET1 operating range, and that truly reflects the very strong capital generation capabilities of our business across all 4 businesses. So that is indeed very encouraging. Now in terms of share buybacks, you're right that even with all the one-offs we've had in the first quarter, we are in a good position, and I expect Q2 to be equally highly capital generative for us. But of course, a share buyback decision is done on a quarterly basis. Starting point is always capital generation, which looks strong. We have to also look at loan growth, then we have to look at our 50% dividend payout ratio, which is an important target for us and the residual is always in terms of share buybacks and distributions, notwithstanding any inorganic opportunities for which we have an extremely high hurdle rate. So we will look at it again starting from Q2. Operator: The next question today comes from Kunpeng Ma at China Securities. Kunpeng Ma: I got 2 questions for you. And the first one is about Hang Seng. I'm glad to hear the momentum in deposit and wealth management in the first quarter and the pickup in the momentum from April. But how -- what proportion of such momentum could be attributed to the synergies out of the Hang Seng deal? And also some color on future synergies, future synergy effects of the Hang Seng deal would be much more helpful for us. Yes. The second question is on HSBC's global footprint. Yes, this is out of the proposed disposal of the Indonesian retail business. I think the Indonesian market is quite important. It's not the kind of some marginal or less important market. So I want to know the HSBC's views on your global franchise. I mean, which markets are important to you or which markets and which business are less important? Yes. Manveen Kaur: Thank you, Kunpeng. So firstly, we have made a very good start on the Hang Seng privatization, but the synergies at the moment have been very little, if any, because it's just the start of the process. We have already started investing in Hong Kong, both in the red brand and the green brand in terms of technology, in terms of simplifying customer journeys and training and skilling of our colleagues. So we do expect progressively the growth from the synergies to come through starting from the second half of this year, but mainly through 2027, '28. So that's a very strong tailwind, again, to support our targets as we progress. And so far, everything is very much on plan and with a lot of engagement with colleagues on the ground, which is, I think, really important, both in terms of maintaining the momentum, the sentiment as well as reinforcing our strong optimism in Hong Kong, as you've already seen in the results as well as in the stabilization of the Hong Kong commercial real estate market. Now coming to our global footprint from an Indonesia perspective, we think Indonesia is a critical market for us from a CIB perspective. It is an important network market and the economy is significant from an Asian perspective. However, our retail business of the size and the scale it was and the scope it had was not within the strategy of our wealth business. It was a valuable business, remains a valuable business, as you've seen from the financials for the transaction that has been announced. But from our perspective, from a wealth perspective, it did not meet the high hurdle rate criteria we had. We have other markets where we are investing in a far more focused manner. Operator: Our next question today will come from Alastair Warr at Autonomous. Alastair Warr: Just a couple of follow-ups on the credit costs and on the insurance that we touched on just a moment ago. If you've got 52 basis points booked in for the first quarter on credit costs, it looks like, therefore, to get to your 45 over the rest of the year, you'd be looking at a little bit above 40 for the remaining quarters of the year? You were at 40 for the full year before. So is that just implicitly building in maybe a little bit more drag from the Middle East? Or is there anything else going on anywhere else for us to be thinking about? And just a second point, you touched on the CSM there and how it can make a difference to how you're booking your speed of growth of income at the wealth line. HSBC has been really strong on some big ticket quite short payment period and products that some of your big name peers in Hong Kong are not necessarily so keen on. So can I just confirm, you talked about 10 there -- that your release rate in years is about 10 years and that this shorter payment period thing doesn't turn up in a shorter release rate as well. Manveen Kaur: Thank you, Alastair. So firstly, on the credit costs. You're right, this quarter's credit cost of 52 basis points has 2 significant numbers in it. One is obviously the idiosyncratic one-off fraud-related. If you take that off, we are pretty much in line with where we would be in Q1 of 2025. Our books overall ex these 2 items have performed really well. The second being obviously the Middle East reserve. So if you take the Middle East reserve build of $300 million and the fraud number, then the actual credit cost would be lower than what it was in Q1 2025 at around $600 million. What we are looking -- $600 million, sorry. As we look at going forward into the next few quarters, we are always a bit conservative, and we do have a little bit of scope built in, both in terms of what happens on Stage 3s of the fraud-related item, obviously, that's a one-off, but the ex-fraud-related Stage 3 buildup increases because of a prolonged conflict in the Middle East. Also Q1 has been very benign on Hong Kong commercial real estate. We are very pleased that we are seeing the beginning of a stabilization, but we are not calling it the end of the cycle. So therefore, we keep that sort of a buffer for the rest of the year. So in terms of the CSM balances very specifically, there is no change in the accounting policy. Obviously, it's based upon IFRS 17 principles, hence, the drip feed over the 9- to 10-year period that we will see. And the key thing there is as long as with the new customers that we are onboarding, with the growth in the CSM balance, the growth in the CSM balance exceeds the P&L flow from the CSM balance because the trajectory is very positive in the growth of that business in Hong Kong. It is an iconic brand for us. So therefore, the demand for the product from a distribution perspective remains extremely strong. Operator: Thank you, Pam. We will take our last question today from Joseph Dickerson at Jefferies. Joseph Dickerson: I just wanted to ask in terms of the numbers you've given the guidance upgrade on the banking NII, is that taking into account the -- effectively marking the market for the current yield curve in the U.K. I note some footnotes around you were using rates, as I think mid-April. Does that take account of the yield curve in the U.K.? And then presumably, there's some outer year tailwind into that. And given you've got some outer year revenue growth assumptions, I'd be keen to know how that -- how any maturities at higher rates might influence the outer year revenue growth rate. Manveen Kaur: Thank you, Joe. So from a banking NII perspective, yes, we looked at the yield curves as -- at the middle of April across the currencies. So that's correct. In terms of the revenue growth projections that we gave for the outer years, they were based upon the yield curves as when we set our targets. So if the yield curves continue to be higher or grow, then everything else being equal, that will be a tailwind for revenue in future years. The banking NII guidance, as you know, we always only give for the current year. Operator: Thank you very much. That ends today's Q&A. So I'll now hand back to you, Pam, for any closing remarks. Manveen Kaur: So thank you all for your questions. As you've seen from our results, we are very pleased with our return on tangible equity of 18.7%. We have never printed a number of this size for nearly 20 years now. And that gives us a very good start in terms of where our targets are and how firmly we stand behind them for the next 3 years. Of course, there are macro uncertainties in the current environment, and we have given disclosures, which are very fulsome, both on private credit as well on extreme downside stress scenarios, bookends. So hopefully, in that context, I have answered all your questions. And obviously, if you have any more detailed questions, please reach out to the IR team. Thank you very much again for your patience and interaction. Operator: Thank you, everyone, for joining today. You may now disconnect.
Operator: Welcome to the 2026 First Quarter Results Announcement Conference Call for Budweiser Brewing Company APAC Limited. Hosting the call today from Budweiser APAC is Mr. YJ Cheng, Chief Executive Officer and Co-Chair of the Board; and Mr. Bernardo Novick, Chief Financial Officer. The results for the 3 months ended 31st of March 2026, can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser APAC websites. Before proceeding, let me remind you that some of the information provided during this result call, including our answers to your questions on this call, may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is possible that Budweiser APAC actual results and financial condition may differ possibly materially from the anticipated results and the financial condition indicated in these forward-looking statements. Budweiser APAC is under no obligation to and expressly disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, the risk factors in the company's prospectus dated 18th September 2019, the 2025 annual report published and any other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated, percentage changes refer to comparisons with the 2025 full year. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company disclosed the consolidated profit EPS, EBIT and EBITDA on a fully reported basis in the press release published earlier today. Further details of the 2026 first quarter results can also be found in the press release. It is now my pleasure to pass the time to YJ. Sir, you may begin. Yanjun Cheng: Thank you, Ari, and good morning, everyone. Thank you for joining today's call. We entered 2026 with a clear focus on recovering volume through disciplined execution across our market. For Bud APAC total volume returned to a positive growth, supported by continued strong momentum in India. In China, our increased investment shows a sign of progress. With the quarter-over-quarter volume decline tightening further as we remain committed to our strategy of enhancing our in-home route to market enriching our portfolio and innovating behind our mega brand to rebuild momentum. In South Korea, we gained market share in both on-premise and in-home channels. Before we go over our financial results, I wanted to take a moment to introduce Bernardo Novick, our new Chief Financial Officer, effective from April 1 this year. Novick joined ABI Group in 2009 through the global MB program and has worked across various functions in multiple markets. He brings deep finance and global resource allocation expertise, having led projects, delivering savings and meaningful value creation. I'm pleased to welcome him to the Bud APAC team. Let me now hand over to Novick for a brief introduction. Bernardo Novick Rettich: Good morning, everyone. I am delighted to join the Bud APAC team. I would like to thank you, YJ for your trust and invitation to join the team. I joined AB InBev 16 years ago and spent 5 years in finance roles, 5 years in commercial roles and 5 years in innovation roles where I led the corporate venture capital arm in New York. Most recently, I was responsible for our global capital allocation division reporting to the global CFO. I hope I can bring this experience to grow Bud APAC's business in a profitable way. I have already had the pleasure of meeting some of you joining the call today, and I look forward to meeting many more in the next weeks and months ahead. Let me share our financial results for the first quarter of 2026 in more detail. In the first quarter, APAC volume returned to growth, even if it's just 0.1% after many quarters, driven by strong growth in India, and a sequential improvement in the industry and our volumes in China, with volume decline narrowing quarter-over-quarter. This progress was driven by both enhanced execution as well as increased investments across channels and our portfolio, which added temporary pressure to our bottom line. We also maintained strong brand momentum in South Korea, despite a soft industry and a challenging comparable last year. In India, we continue to advance premiumization, delivering strong double-digit volume and revenue growth. In summary, for Bud APAC, total volumes increased by 0.1%. Revenue and revenue per hectoliter decreased by 0.7% and 0.8%, respectively. Normalized EBITDA decreased by 8.1%, while our normalized EBITDA margin contracted by 246 basis points. Now let me cover some of the highlights from each of our major markets. In China, volumes decreased by 1.5%, improving sequentially with a quarter-over-quarter decline continuing to narrow since the second half of 2025. Revenue and revenue per hectoliter decreased by 4% and 2.5%, respectively, impacted by increased investment to support our wholesalers and activate our brands in the in-home and emerging channel. Normalized EBITDA decreased by 10.9%, impacted by our top line performance and increased investments. We continue to make progress in expanding our distribution in the in-home channel, while increasing the distribution of our premium brands. This premiumization is more clear in the online to off-line or O2O channel, which grew strong double digits in the quarter. Now let me share with you some of the investments we are making on our brands through our marketing campaigns as well as liquid and package innovations to better connect with our consumers across more occasions and increased sales momentum particularly in the in-home channel. On Budweiser, we accelerated the national expansion of Budweiser Magnum, building on its strong consumer traction and sustained sales growth. In March, Budweiser Magnum, launched an integrated nationwide campaign, anchored by a strategic partnership with global football icon Erling Haaland, and the FIFA World Cup mega platform to drive geographic and channel expansion. Regarding our Harbin family, we introduced Harbin 1900, celebrating its brewing heritage as the birthplace of Chinese beer. Position in the Core++ segment, which is the RMB 8 to RMB 10 price range. This new innovation is 100% pure malt classic lager, pairing distinctive vintage packaging with a rich authentic taste. The launch reinforces Harbin's role in driving innovation and placing new bets in this growing and important Core++ segment. In South Korea, volumes decreased by low teens and revenue decreased by mid-single digits, mainly due to a challenging comparable in the first quarter of last year, driven by shipment phasing ahead of a price increase that if you recall, was in April 2025. Revenue per hectoliter on the other hand, increased by low single digits, also comparing with the first quarter last year before the price increase. This led to a normalized EBITDA decreasing by low teens. Having said that, we maintain a good commercial momentum in both in-home and on-premise channels, and we foresee a recovery in the second quarter. Finally, India continues to grow and will play a bigger role in our footprint. Industry momentum continued in the first quarter, and we gained total market share. We delivered strong double-digit volume and revenue growth led by a strong growth in our premium and super premium portfolio. We also continue to see momentum in the moderation agenda with states like Maharashtra and Karnataka introducing changes that decreased the current relative tax advantage of hard liquor versus beer. We see this as a step in the right direction and a sign that some states understand the importance of evolving towards an alcohol tax policies that are consistent with global policy standards where high alcohol products are taxed higher than low alcohol products like beer. And with that, YJ and I are here to answer any questions that you might have. Operator: [Operator Instructions] Our first question is coming from Xiaopo Wei from Citi. Xiaopo Wei: Can you hear me now? Operator: Yes, we can hear you very well. Xiaopo Wei: I'm sorry. That -- I have two questions on China. I'll ask one by one. The first one, in the past 2 years, we have seen a few senior management leadership changes in the company. So far is any achievement or breakthrough that the company would like to share with us with the new leadership? [Foreign Language] Yanjun Cheng: I'm YJ. Let me take these questions. So let me start in English, then let me turn to Chinese, if needed. So the changes we have, mainly happened first half year last year. And the reason for the change is kind of retention between either global other between the region in China. So and also between Headquarter in China versus operation in the field in each sales region. And the reason for that is to share some best practice and to further strengthen their strengths in each area or each function and also learn each other best practice sharing. So that's kind of a normal retention changes. And to be able to share the more the answer to your question about the changes of the people. As I mentioned earlier, we keep a consistency of our strategy which is focused on portfolio, brand portfolio, which is meaning Harbin and Budweiser and also focus on in-home and market. And third one is focus on execution. So those are the 3 strategies we set up early last year and we have no changes. And also, you see the progress we have been made as Novick just mentioned, quarter-over-quarter on decline narrow quarter-by-quarter and see very good trends. And also, we see the execution in each area make a huge improvement, and we put a lot of effort to invest in our brand and also further focus on the in-home channel that the channel changes reached which and that's our further opportunity in our operation. So we see starting from second quarter last year and the fourth quarter last year, and first quarter this year, the things getting improved quarter-by-quarter. So I think that's I tried to answer your question. Xiaopo Wei: Shall I start a second question? Yanjun Cheng: Yes, go ahead. Xiaopo Wei: Okay. The second question is about the channel inventory. As far as I can recall, the company in China start destocking the channel in 4Q '24. It has been a few quarters of destocking and I remember in the last quarterly earnings call, you mentioned that actually, our China inventory actually was young and lower versus historic level. But we know that China is a very dynamic market and the changing areas on a daily basis. So were you foreseeing the future that the China channel inventory will be below historic level as a new norm? Or is any factor you expect to see before you become more exciting and try to restock the channel looking forward. [Foreign Language] Yanjun Cheng: Thank you for your question. You're right. We have been proactively taking steps to adjust our inventory given the current business environment. [Foreign Language] Operator: Our next question is coming from Ye Liu from Goldman Sachs. Ye Liu: Thanks. Can you hear me? Yanjun Cheng: Yes. Ye Liu: This is Liu from Goldman Sachs. Thanks for the opportunity and welcome Novick for your first earnings call with Bud APAC. I have 2 questions. The first one is on China. So basically, our ground check shows that there has been some volume recovery in the super premium segment, including Corona, Blue Girl in the first quarter. So how to look at the sustainability of this trend? How to comment on the on-trade consumption recovery so far, including any color on 2Q to date on the on-trade performance in China? I will translate to Mandarin by myself. [Foreign Language] Yanjun Cheng: Let me take this question. I will start the summary of the answer first, then I'm going to talk a little bit detail in sort of answer in Chinese. Indeed we grow Super Premium volume by double digit in the first quarter 2026 as we focus on premiumization in the in-home channel and O2O. In terms of on-trade recovery nightlife channel contribution was stable, and we grew volume in the nightlife the first quarter 2026. However, Chinese restaurant channel remains under pressure. [Foreign Language] Ye Liu: The second question is to our new CFO, Novick. So I would like to know what's the 3 key focus for you this year, would you please share with the investors on the call. Thank you so much. Bernardo Novick Rettich: Thank you, Liu. Nice to hear from you, and thanks for the question. So let me share the 3 priorities that me and my team will focus this year. The #1 priority is growth. And the main objective here is to stabilize the volumes in China. The second priority is to improve execution. And the third priority is value creation. So on the #1, the #1 is consistent to the business strategy that YJ was describing. And the main objective of the business is to grow volumes here, right? And in order to do that, we really need to stabilize volumes in China. And the finance role to do that is increasing investments and making the investments more effective. I think it's important here, when we manage to stabilize volumes in China, given our footprint in India and in Southeast Asia, will be able to reignite growth for the whole Budweiser APAC. Number two priority is execution. I think here, finance has an important role, collaborating with our commercial team in China to enable and upgrade our route-to-market model to help on this transition to more volume in the in-home channel. That's another important priority for us. And the third one is value creation. Here, we are reviewing internal investment decisions, improving efficiencies, cost controls. One example here, for example, we are reviewing the unit economics of different packs to make decisions that can help us be more efficient with resource allocation. But ultimately, Liu we are here for growth, and that's our main priority for this year. Thank you very much for the question. Operator: Our next question is coming from Elsie Sheng from CLSA. Yiran Sheng: Thank you management for taking my questions. Thank you, YJ, and also welcome Novick. I have 2 questions. My first question is on China in-home development. Do you have any update or progress to share on the development of off-trade channel in China. I will translate myself. [Foreign Language] I will ask my second question later. [Foreign Language] Yanjun Cheng: Thank you, Elsie. This is YJ. Let me take this question. As a channel shift to in-home channel, we are taking actions to expand in the in-home channel to adapt. As we have a relative low exposure in in-home channel, which means we have a massive growth potential. We are investing to catch up. [Foreign Language] Yiran Sheng: My second question is on China commercial investment. So previously, management mentioned that you will increase marketing this year. Is that plan still on track? And what's the marketing plan for the coming peak season and sport events like World Cup? [Foreign Language] Yanjun Cheng: Yes. So as Novick mentioned, as I mentioned earlier, in 2026, our top priority in China is a stabilized volume. To achieve this, we have given room to the team, to the commercial team to increase commercial investment. So that's the direction we set up for the commercial team. [Foreign Language] Operator: Our next question is coming from Mavis Hui from DBS. Mavis Hui: My first question is on China. Could we have some more updates on the growth of your emerging channels such as O2O instant retail and e-commerce in China. More importantly, how do margins and pricing dynamics across these channels compared with traditional off-trade and how are we managing potential channel conflict with our distributors? But let me translate first. [Foreign Language] Yanjun Cheng: Thank you for your question. I will take this question as well. O2O is one of faster emerging channel in China. We have started to make a fair significant effort to increase our presence with it. And we see this as a great opportunity for us in 2026 and beyond. We partnered with a major O2O platform to further expand our participation. [Foreign Language] Mavis Hui: And my second question is on Korea. Excluding shipment phasing effects, are we still seeing underlying share gains in South Korea? What are the key challenges to sustaining outperformance in the market? [Foreign Language] Yanjun Cheng: Thank you. Let me take this question again. Total industry in Korea have remained soft in the first quarter 2026. With a soft consumer environment continued to impact overall alcohol consumption. However, our underlying momentum in Korea continued and we outperformed the industry in both the on-premise and in-home channel. [Foreign Language] Operator: Our next question is coming from Anne Ling from Jefferies. Kin Shun Ling: I have 2 questions here. First is on the cost of goods sold in general. We saw some raw materials price volatility, and this has been coming up recently for example, like aluminum. So what will be our view on the raw material costs for year 2027? [Foreign Language] Yanjun Cheng: In 2026 of first quarter our cost per hectoliter has decreased by 0.8%, mainly driven by efficiency improvement, partially offset by commodity headwind. [Foreign Language] Kin Shun Ling: [Foreign Language]. So my second question is on the India side. So could you share with us now on the Indian market update? How do we see the market competition and our strategy over there? I understand that we are focusing on more market share. So may I know when the company will start focusing on the profitability of the market? Is it still a little bit too early? And that competition is still very keen? Should -- I mean should Carlsberg be listed? What is your view on the competitive environment afterwards? [Foreign Language] Yanjun Cheng: Thank you. In India, we are focused on sustainable and meaningful top line growth that can translate to EBITDA and cash flow growth accordingly. [Foreign Language] Operator: Our next question is coming from Lillian Lou from Morgan Stanley. Lillian Lou: And thank you, YJ and Bernardo for the detailed answer previously. Congrats to Bernardo for your new role. I have two questions. The first one is on China pricing because YJ just mentioned that the raw materials are fully hedged and were relatively stable. But on the pricing side, any price action and mix shift that you observed that could improve the overall pricing in the market in general? [Foreign Language] Bernardo Novick Rettich: I can take this question YJ. Yanjun Cheng: Go ahead. Bernardo Novick Rettich: Lilian, nice to hear from you. Thank you for the question. I think all the answers should start with the same reminder that our main priority, right, is growth and particularly to stabilize the volumes in China. It's true that in the first quarter, our net revenue per hectoliter was below last year and this was impacted by investments, mainly in 3 objectives for the investments to support our wholesalers, to activate our brands and also to accelerate the growth in O2O. But on the other hand, we had positive mix effects coming from our brands, mainly driven by our Premium and Super Premium brands. I think it's important to mention to you and the press that we expect to continue to invest in 2026. Regarding price, we will continue to monitor always the prices in the market, and we are open to adjustments if something changes. But at this moment, we don't have any news regarding price increase for China. Lillian Lou: My second question is on Korea -- South Korea market. We all know that last year, April, you had a price increase, which still benefited the first Q this year on the pricing side. But what will drive the South Korea revenue and also pricing and the EBITDA growth for the rest of the year, in particular, the industry remain a little bit soft and the competition is still there. So this is the question on Korea. [Foreign Language] Bernardo Novick Rettich: I can take this one too. Very good question, Lillian, thanks. When we think about like a medium-term margin growth for APAC East and Korea, I think there are mainly 3 things that can drive this. One is, of course, pricing. The second one, operational efficiencies. And the third one, I think it's important to mention is mix and innovations. Maybe let me talk about each one of them. On prices, of course, we always consider our pricing decisions looking at what's happening in the beer market, but also the macroeconomic situation in the country. We'll continue to monitor similar to China. We don't have anything to announce at this point. On the second part, operational efficiencies. Here, we continue to implement cost management initiatives. This is one of our main strengths at Budweiser APAC, as YJ was talking about our efficiency and excellence programs that we have so this is something that we still see opportunities. And number three, I think mix and premiumization and innovations are very important for us in the future. Maybe I can share a couple of examples one of them is the growth of Stella Artois in the on-trade. I think that's a prudent healthy growth. The other one is the nonalcoholic beer, like example like Cass 0.0. I think both of them are good examples of innovations that can both drive volume growth, but also margin expansion. So overall, I think that we see opportunities to keep recovering margins in Korea in the future. Thank you for the question. Operator: In interest of time, our final question will come from Linda Huang from Macquarie. Linda Huang: My first one is regarding for the dividend. And given that Bernardo has really taken up the CFO role. So I just want to know that whether from the group perspective, whether you will change the capital allocation approach. Especially the last 2 years, right, we -- they paid out USD 0.0566 per share dividend to the shareholders. So whether this is the dividend per share policy under review. So this is my first question. [Foreign Language] Bernardo Novick Rettich: Thank you, Linda. Nice to hear from you. Thanks for the question. So I think it's important to remind everybody, right, we are working to deliver sustainable long-term results for our shareholders, right? And the other message is that our capital allocation strategy remains the same. Our first priority continues to be to invest in our business like we are doing this year to drive organic growth. followed by M&A when we see opportunities for acquisitions. That's the second one. And then the third one to return to our shareholders, for example, via dividend, but it's also what we have been doing, right? So I think we are very proud of our dividend track record since the beginning, recently with the announcement of the $750 million dividend that we announced for 2025, which by the way, was consistent to the dividend for the previous 2024. So I think if I have to summarize, we are working towards improving our business performance this year to be able to keep this consistency in the future. Thanks for the question. Linda Huang: My second question is regarding for our products, and I think this may be YJ can help. So when we compare China to the other Western countries. I think there's always plenty of alcohol product innovation. So I just want to know that, again, whether the management can elaborate more about our product innovation plans? And then what kind of the innovation strategy will fit well for our China market. [Foreign Language] Yanjun Cheng: [Foreign Language] Operator: Thank you. That concludes our Q&A session today. I would like to turn the conference back over to YJ for the closing remarks. Yanjun Cheng: Thank you. As I mentioned on our 2025 annual results call early this year, our priority is to stabilize volume and rebuild our market share momentum in China by investing in our in-home route to market and a leading permium portfolio. The progress we have been seeing in the first quarter and have been encouraging. On this positive note, thank you all for joining us today, and I'm looking forward to speaking to you soon. Operator: Thank you. And this concludes today's results call. Please disconnect your lines. Thank you.
Takeshi Horikoshi: So this is Horikoshi, CFO. I'd like to share with you the financial results for the third quarter of FY 2025. So Page -- Slide 4, this is a summary of the 3-months period of the third quarter FY 2025. The FX rate were JPY 152.8 per U.S. dollar, JPY 177.5 per euro, and JPY 100.2 per Aussie dollar. Compared to this year-on-year, the yen depreciated from the previous year. And also the sales increased and the OP increased by -- net sales increased 3.5% to JPY 1.02 trillion. OP decreased by 12.7% to JPY 142 billion. Operating income ratio declined by 2.5 points to 13.9%. Net income decreased by 13.1% year-on-year to JPY 94.1 billion. Slide 5 shows sales and profit by segment for the third quarter. Sales in the Construction, Mining & Utility Equipment business increased by 3% year-on-year to JPY 945.8 billion. Segment profit decreased by 17.9% to JPY 120.7 billion. The segment profit ratio declined by 3.2 points to 12.8%. In Retail Finance, revenues increased by 6.2% year-on-year to JPY 32.1 billion and segment profit increased by 29.9% to JPY 9.1 billion. Sales in the Industrial Machinery & Others business increased by 11.8% year-on-year to JPY 55.8 billion, and segment profit increased by 47.7% to JPY 10.7 billion. I will explain the factors behind these changes later. Slide 6 shows sales by region for the Construction, Mining & Utility Equipment business for the 3 months period. Sales in this segment increased by 3% year-on-year to JPY 943.2 billion. While sales decreased in Asia, mainly due to sluggish demand for both mining and general construction equipment in Indonesia, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales remained flat year-on-year. Slide 7 provides a summary for the 9 months period of FY 2025. The FX rates were JPY 148.5 to the dollar, JPY 170.4 to the euro and JPY 96.3 for the Australian dollar. Compared to the same period last year, the yen appreciated against the U.S. dollar and the Australian dollar, however, depreciated against the euro. Net sales decreased by 1.4% year-on-year to JPY 2.915 trillion. Operating income decreased by 10.1% to JPY 419 billion. The operating income ratio declined by 1.4 points to 14.4%. Net income decreased by 13% year-on-year to JPY 269.8 billion. Slide 8 shows sales and profit by segment for the 9 months period. Sales in the Construction, Mining & Utility Equipment business decreased by 2.2% year-on-year to JPY 2.688 trillion. Segment profit decreased by 14.7% to JPY 362.6 billion. The segment profit ratio declined by 2 percentage points to 13.5%. In Retail Finance, revenues increased by 1.1% year-on-year to JPY 93.1 billion. Segment profit increased by 19.1% to JPY 26 billion. Sales in the Industrial Machinery & Others business increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% to JPY 27.3 billion. I will explain the factors behind these changes later. Slide 9 shows sales by region for the Construction, Mining & Utility Equipment business for the 9 months period. Sales in this segment decreased by 2.2% year-on-year to JPY 2.6805 trillion. Although sales decreased in Asia, North America and Japan, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales decreased by 0.6% year-on-year. Slide 10 details the factors affecting sales and segment profit in the Construction, Mining & Utility Equipment business for the 9 months period. Regarding sales, the positive impact of improved selling prices was outweighed by the negative impacts of the yen's appreciation and reduced volume, resulting in a decrease of JPY 60.4 billion year-on-year. As for segment profit, despite the positive impact of improved selling prices, it was outweighed by the negative impact of the yen's appreciation and reduced volume and increased costs, resulting in a decrease of JPY 62.3 billion year-on-year. Slide 11 shows the result of Retail Finance for the 9 months period. Assets increased compared to the previous fiscal year-end, driven by increase in new contracts and the depreciation of the yen at the end of the period. New contracts increased year-on-year, mainly due to increased finance penetration. Revenues increased by JPY 1 billion year-on-year, primarily due to the increase in outstanding receivables. Segment profit increased by JPY 4.2 billion year-on-year, mainly due to lower funding costs. Slide 12 shows sales and segment profit for the Industrial Machinery & Others segment for the 9 months period. Sales increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% year-on-year to JPY 27.3 billion. The segment profit ratio rose by 6.5 points to 16.8%. Sales and profits increased due to higher sales of larger press for the automotive industry and increased maintenance sales for high-margin excimer lasers for the semiconductor industry. Slide 13 shows the consolidated balance sheet. Total assets stood at JPY 6.3079 trillion, an increase of JPY 534.4 billion from the previous fiscal year-end, mainly due to the yen's depreciation at the end of the period. Inventories were JPY 1.6896 trillion, an increase of JPY 282.9 billion from the previous fiscal year-end due to the impact of the yen's depreciation as well as U.S. tariffs. The shareholders' equity ratio decreased by 1.7 points from the previous fiscal year-end to 53.3%. The net debt-to-equity ratio was 0.30. Regarding the share buyback result, at the Board of Directors meeting on April 28, 2025, we completed the acquisition of the maximum amount of JPY 100 billion by November 28, 2025. We canceled all of the 20,612,500 shares acquired this time on December 29, 2025. This corresponds to 2.2% of the total outstanding shares before cancellation. Free cash flow for the 9 months period of FY 2025 was a positive JPY 115.7 billion. This concludes my presentation. Next, the projection for fiscal '25 will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, GM of the Business Coordination Department. From here, I'll explain the projection for fiscal '25 business results and the conditions in the major markets. Page 15 shows an overview of the projection for fiscal '25 business results. The full year outlook remains unchanged from the October projection. From Page 16, I'll explain the demand trends and projection for the 7 major products. Demand for the 7 major products includes mining equipment. The figures for the fiscal '25 Q3 are preliminary estimates by the company. Demand in fiscal '25 Q3 appears to have increased by 3% year-on-year. The full year demand outlook for fiscal '25 is set at 0% to minus 5% year-on-year, which is unchanged from the October projection. Page 17 shows the demand trends and outlook for the North American market. Demand in the fiscal -- demand in fiscal '25 appears to have increased by 1% year-on-year. Demand for infrastructure and energy remained steady. The demand projection for fiscal 2025 is 0% to minus 5% year-on-year, which is unchanged from the October projection. As in the first half, there was no downward pressure on demand from tariffs during the third quarter apparently. However, as cost increase due to tariffs gradually progress, we will closely monitor its impact on demand. Page 18 shows the demand trends and projections for the European market. Demand in fiscal '25 Q3 appears to have increased by 7% year-on-year. The projection for fiscal 2025 is at the same level as the previous year, unchanged from the October projections. In Europe, an improvement in the business climate has been observed, including upward revisions to GDP growth rates. And with infrastructure investment plans in various countries, demand has remained firm. However, we will continue to closely watch market future conditions. Page 19 shows the demand trends and outlook for the Southeast Asian market. Demand in fiscal '25 Q3 appears to have decreased by 6% year-on-year. As the decline in demand through the third quarter was smaller than expected as of October, the demand projection for fiscal 2025 has been revised to 0% to minus 5%. In Indonesia, demand for mining equipment declined significantly from the second quarter onward due to falling coal prices. In addition, reductions in public works budgets have continued and demand for construction equipment remains sluggish. Uncertainty remains high. And while distributor inventory adjustments are underway, a recovery in demand is not yet in sight. Page 20 shows the demand trends and outlook for the Japanese market. Demand in fiscal ' 25 Q3 appears to have decreased by 14% year-on-year. The projection for demand in fiscal '25 is minus 10% to minus 15%, unchanged from the October projections. Low utilization of rental equipment, labor shortages and rising material prices continue and no signs of demand recovery are being observed. Page 21 shows trends and projections for major mineral prices related to demand for mining equipment. We expect prices for low-grade coal in Indonesia to remain depressed, while prices for other minerals are remaining high or moving steadily. Page 22 shows demand trends for mining equipment. Demand in fiscal '25 Q3 appears to have decreased by 21% year-on-year. Coal prices declined in Indonesia, leading to a significant decrease in demand for equipment. The demand projection for fiscal 2025 is minus 10% to minus 15%, unchanged from the October projections. Coal prices in Indonesia have not recovered and demand has not rebounded. However, demand for equipment in other regions and for other minerals is expected to remain generally at high levels towards the fiscal year-end. Page 23 shows sales of mining equipment. Sales in fiscal '25 Q3 increased by 4.9% year-on-year to JPY 475.1 billion. Excluding FX impact, sales increased by 2%. Although sales declined in Asia, mainly Indonesia and in North America, increases in Latin America and Africa resulted in overall year-on-year growth. Page 24 shows the projected sales of equipment, parts and services and related items in the Construction, Mining & Utility Equipment segment. Parts sales in Q3 of fiscal '25 increased by 6.1% year-on-year to JPY 265.5 billion. Including services and others, the aftermarket accounted for 54%. And excluding FX impact, total aftermarket sales increased by 3.8% year-on-year. This concludes my explanation. Thank you. Unknown Executive: We would now like to receive questions from you. [Operator Instructions] The first question, please. UBS Securities, Sasaki-san. Tsubasa Sasaki: So this is Sasaki from UBS Securities. I have 2 questions. First question relates to the Q3 results. So I'd like you to do a recap on the Q3. So it has been progressing well vis-a-vis plan, especially in terms of sales and operating income, in terms of volume and also the selling price and FX inclusive. So what has been positive? And what were not as expected vis-a-vis plan? If you can give us a recap, that would be helpful. Takeshi Horikoshi: So this is Horikoshi. In terms of sales, JPY 145 was the expectation, but in actual JPY 153. So about JPY 71 billion or so of an excess that we have seen because of FX. In terms of volume, it's about JPY 5 billion short vis-a-vis plan. Also for the price differential, it's about JPY 3 billion short of our plan. So about JPY 63 billion in comparison to October PA, we have exceeded the initial expectation in comparison to October. So we mentioned in terms of volume that was short by JPY 5 billion. So in the construction, that was short by JPY 7 billion. And in terms of mining, JPY 2 billion of excess. So that is the breakdown. So in terms of construction, the breakdown for what was short. So in North America, JPY 5 billion is the shortage in North America. This relates to repair. So because of the constraints of the customers' budget, it has been pushed out. So that is why the number is short in North America. Also, the competitors have been quite aggressive, especially in the month of December. So this was prior to the price increase. So they have been quite aggressive. So that is why we had seen a negative impact. Also in terms of Indonesia and Asia, so actually, it was better than our initial plan. So where we have seen shortage, that was Japan. So in comparison to October announcement, it was worse. So if you were to net out all these factors, it's JPY 7 billion of short in terms of the construction equipment. Moving on to mining business. North America, we have seen a similar number in North America that was short vis-a-vis plan. This is specifically related to oil sand in Canada because of the constraints in budget, therefore, the service provision was pushed out. So that was one of the factors. Where was it positive, favorable, was Indonesia. It was better than our initial anticipation. The reasons why Indonesia was performing better than expected. First of all, in Sumatra, the island, there has been a huge -- the torrential rain, and there were some demand related to restoration. And because of that, there was a demand for construction equipment. Also, the coal prices, and that is the thermal, the coal, that is, the pricing wasn't as bad as initially expected. Therefore, Indonesia, it was actually excess in comparison to our plan. Oceania and also South Africa has been quite solid. So on a net basis, the mining business was in excess about JPY 2 billion or so. Now moving on to the PL. In terms of profit, so in terms of FX, the profit was a push up by JPY 20 billion. Also in terms of the volume, so vis-a-vis sales of JPY 5 billion in terms of profit was short by JPY 2 billion. Also, in terms of the selling price, that was a negative factor. And also for fixed cost, we have some excess in the fixed costs and others. So all in all, so we mentioned about FX differential was JPY 20 billion, and that amount in entirety, we were able to see an excess. So we were able to offset that. Did I answer your question? Tsubasa Sasaki: Thank you very much. So in terms of fixed cost, that was a positive of JPY 5 billion. So FX was JPY 20 billion then. Is my understanding correct? So of course, the production cost was a negative. Why do you see an excess in the fixed cost? Takeshi Horikoshi: So the budget execution was pushed out to Q4. Tsubasa Sasaki: Understood. So based on that, my second question, you mentioned about the situation in Indonesia. So I was able to understand why it was better than expected. When it relates to construction equipment and mining equipment, what is the expectation? And what is the current state of Indonesia? If you can also share with us your outlook for Indonesia. Kiyoshi Hishinuma: So this is Hishinuma. From the perspective of demand, the situation has not dramatically changed. However, after Q2 is over, in comparison to the demand outlook, it was somewhat better than our forecast at the end of Q2. And the reason is just as we have explained. So at the end of Q2, mining was expected to be not so favorable because the coal prices weren't faring. But Q2, it was about $42 to $43 or so. And in Q3, it was back to $45 or $46. So we have seen a push up because of that. And that is why Q4, we expect this positive trend to continue. And for construction equipment, for the public spending, the budget constraints hasn't changed. And therefore, the situation had not really changed from before. Now the expectations from Q4, it may actually deteriorate from the previous year. That was our initial forecast. But in terms of the holidays, it was end of March last year. But this year, it's about a week or 10 days more holidays in comparison to last year. So we have incorporated the maximum risk. But overall, we do not expect the situation to change so much. Tsubasa Sasaki: I was able to fully understand. Sorry, this is an additional question. I fully understand the situation in Indonesia. So already, the situation is not so favorable, but it appears as if it is stabilizing. Are there any risks that Indonesia may deteriorate further? So it was pretty, I know, not-so-good situation, but what are the risks that actually further deteriorate? Unknown Executive: That relates to next fiscal term then. So we are trying to revisit these plans. But as for next fiscal term, construction equipment shouldn't be so bad because in the recent months, it is somewhat getting stronger. So Indonesia is the area that we may see some decline. Given the current coke price, chances are we may see a decline in Indonesia for next fiscal term as well. Tsubasa Sasaki: So this fiscal term, it is pretty bad then. So the deterioration in Indonesia, could we expect the impact will be smaller from Indonesia? Apologies for going on. Unknown Executive: I don't know. We don't know. Unknown Executive: Let's move on to the next question. Maekawa-san from Nomura Securities, please. Kentaro Maekawa: This is Maekawa from Nomura Securities. I also have 2 questions. I have a question about overall mining. Regarding our demand outlook, we haven't really changed the overall picture. But for parts and services, have you been seeing demand pick up? And for equipment demand, there may be a chance that it's going to pick up due to investment plans. So based off the current market, can you share with us how you view mining equipment demand going forward? And I think this will cover next fiscal year as well, presumably. Unknown Executive: Well, regarding that question, actually, we are right in the middle of formulating our business plan for next fiscal year. So that -- it may be subject to change, but just to give you a feel of what we are thinking about right now. First of all, regarding minerals or commodities, for nickel and thermal coal, it is in a situation of excess supply. Due to a decline of demand in China, the prices are weak. And also for nickel, the greatest producer is Indonesia and production has been in excess. For mining equipment, since 2021, it has been expanding, but it has been reaching peak this year. And for next fiscal year, demand is expected to be flat. And we believe it's going to be shifting from greenfield to brownfield when it comes to investments. Our customer financials are sound, but due to inflation, costs have been increasing and mineral grade has been going down as well as the way to mine has become more complicated. Therefore, I think we have to be cautious in investments. So we believe the demand for rebuilds will become higher in aftermarket. For Africa, Middle East, Central Asia and emerging mining regions, we do believe mining developments will proceed. And like we announced Reko Diq in Pakistan have been new opportunities that have been presented to us. And for Indonesia, I talked about it earlier. Kentaro Maekawa: How about coal -- copper? I think the demand is high in Latin America. So how should we expect future activity? Unknown Executive: Next fiscal year, as of now, our thinking is demand is expected to decline in Australia this year. It was a peak year for replacement demand. That's what we thought. So demand is likely to decline next year. And we also expect Indonesia to go down as well, but we believe it will be brisk conditions in other regions. Kentaro Maekawa: Another question I have for you is regarding tariffs and increases in selling prices as well as its impact and if there are any changes there. Just wanted to check with you. The 9-month basis, Q3 results, JPY 25.1 billion was the tariff impact. I think that was in line with plan. And for this fiscal year, you haven't changed your outlook, but you're expecting JPY 55 billion. And for next fiscal year, 30 times 4 is JPY 120 billion. Has that expectation changed? And regarding selling prices, I think you're already working on it. But are you thinking about additional price increases? And are you expecting any impact on demand? Or have you been seeing any impact on demand? So those are the 3 things I would like to know. Takeshi Horikoshi: This is Horikoshi again. Regarding tariff-related costs, including mitigation measures, we said JPY 55 billion as of October, but we do believe our projections were quite accurate. So far, things have been developing in line with our expectations, and we follow the numbers on a monthly basis as to how it's hitting our P&L. For next fiscal year, we said as of October that it's going to be Q4 times 4x. That should be the expectation, which is around JPY 120 billion. For selling price increases, in August, we did a selling price increase or starting from August orders, that is. And we also have been increasing prices from January orders as well. For our U.S. peers, starting from January, we have been hearing that they also have been raising prices. So the environment for raising prices is now becoming quite established, and we do believe we will be able to do further increases next fiscal year. Kentaro Maekawa: So because of that, are you expecting any last-minute demand? Do you think there's going to be some prebuys or any risk that it's going to drop off after you raise your prices? Takeshi Horikoshi: In the case of our company, we did a campaign in October and in November, it went down, but it went up again in December. So no, we are not feeling such trends. Unknown Executive: We would now like to move on to the next question from Goldman Sachs Securities. Adachi-san, please. Takeru Adachi: This is Adachi from Goldman Sachs. So I also have 2 questions. First question, which is somewhat related to the previous ones relates to mining and the exposure to the metals and the precious metals. So I think Latin America and Africa, I believe it was better than expected. So the exposure to the copper and gold is quite high in those regions. So you had the backlog and it was realized as planned. Was that the case? Or were there more of a short-term aftermarket rebuild demand has increased. So what is the current state in terms of Africa and Latin America? So how has the demand changed in terms of exposure to gold and others? Unknown Executive: Within the analysis, we talked about the comparison with the October announcement. Africa was favorable. Last year, Anglo had conducted the business restructuring. So they have restrained from the investment. So it could be a reactionary the response to that. So South Africa was positive from the previous year and also in comparison to the October announcement. Also another point, the gold prices continues to rise. So we have large projects such as in Ghana. So we hear that a number of new projects are underway. Takeru Adachi: So in terms of the Q3 order intake, perhaps you haven't disclosed much, but how was the situation of order intake? Unknown Executive: It has been quite positive, very brisk. Takeru Adachi: My second question relates to cost. So the cost was higher than initially expected, but tariffs was in line. So I would imagine that the non-tariff-related cost was higher than initially expected. So if you can give us more details on the production cost, please. Unknown Executive: In terms of the steel prices in comparison to last year, it has come down. So we have seen some gains from that. But in terms of the production guarantee basis, there was some one-off cost. Also tires and power lines. So nonferrous metals. So these are non-steel, the parts, actually, the prices have risen from the previous year. So we have actually incurred some loss related to those nonferrous metals. Takeru Adachi: So excluding those one-off factors then, is inflation pretty much in line with your expectation? Or even excluding those, was the price increase not in line with your expectation? Unknown Executive: If you were to exclude the one-off, we have seen the gains as expected. Unknown Executive: Let's move on to the next one. From Nikkei, Mr. Otake -- Ms. Otake, excuse me. Unknown Analyst: This is Otake from Nikkei. Earlier, there was a question asked and my question may overlap somewhat. But the first question is about the circumstances in North America. Can you talk about now and your projection related to construction equipment and mining equipment? Can you talk about each, respectively? Kiyoshi Hishinuma: This is Hishinuma speaking. So first, regarding North America, relatively brisk conditions are continuing. When we were setting forth this fiscal year's projection, we were saying minus 5% to minus 10%. But since Q2 onwards, we've revised it up to 0% to minus 5%. And it was plus 1% for Q3. And therefore, we do believe that it has been quite steady. And we are aligning with the local people to capture the numbers, but we are not seeing any factors that will make our numbers change dramatically. So that's for construction equipment. For mining equipment, last year was quite good. So this year, we're guiding negatively, but it's not because the economy is bad, so we are not that worried. Unknown Analyst: You talked about Canada earlier. For mining, in next fiscal year, are you expecting further decline? Or are you not feeling such risks? Kiyoshi Hishinuma: Correct. We are not expecting such risks. Unknown Analyst: And secondly, my question is about price increases. You said that competition has been raising prices from January and the market is accepting higher prices. According to -- regarding that point, for selling price increases that are going to probably be ongoing, how much do you believe that will boost your profits? Can you give us some direction or a feel of how much that's going to look like? Kiyoshi Hishinuma: Well, at our October results briefing, I mentioned this in an interview, but the magnitude that we are experiencing now is what we are striving for next fiscal year as well. Unknown Analyst: That means around JPY 83 billion is the positive impact on profits, no? Kiyoshi Hishinuma: Well, JPY 3 billion might be a little extra, but we are striving for similar levels at this fiscal year, which means around JPY 80 billion. I am not definitively saying JPY 80 billion, but I have been saying that about the same level as this fiscal year. Unknown Analyst: My third question is, as you mentioned in the beginning, for Q3 compared to your plan, it has been exceeding and trending positively, and there has been some areas where you've been beating your profit expectations. When you look at the FX rates for the second half of the year, we are seeing the yen weaken. So I think there is sufficient opportunity for you to exceed your expectations for the full year. But what are the chances of that happening? What is your feel? Kiyoshi Hishinuma: For Q3, we talked about JPY 20 billion of positive impact coming from FX. And for -- when you net it out, it's 0. But I was saying we can exceed JPY 20 billion. But for Q4, due to fixed costs, there have been some pushouts or that's what we're expecting at least. Therefore, on a full year basis, we expect we're going to be under our expectation by JPY 10 billion. JPY 10 billion, meaning excluding FX impact. But FX-wise, we expect similar numbers to come through in Q4 as well. Unknown Executive: I'd like to move on to the next question from Citigroup Securities, McDonald-san, please. Graeme McDonald: Slide 13, please. About free cash flow. There wasn't much comment on free cash flow today. So we've seen the yen depreciated and also the pushout in terms of mining. You've talked about those factors and also their impact from the tariffs. So working capital appears to be somewhat deteriorating. So JPY 240 billion, the cash flow, that has been revised downwards in Q2, but it may be difficult to achieve on a full year basis. So what are your thoughts right now? Unknown Executive: Last year, we had -- so about JPY 306 billion or so for last year. So cumulative last year was about JPY 150 billion cumulative up until Q3 for last year. So Q4 in 3 months, we had JPY 150 billion of free cash flow, leading to JPY 300 billion and JPY 157 billion for this year up until Q3. So if you see the similar -- the free cash flows within Q4, we could possibly reach that JPY 240 billion. Chances are we may actually reach that number. So I think it's the FX. Graeme McDonald: If yen continues to be so weak, it may be challenging to achieve this number, isn't it? Unknown Executive: It doesn't necessarily relate. Graeme McDonald: Oh, it doesn't relate? Unknown Executive: No. Graeme McDonald: So right now then, it was in the course of 3 years, the SGP on the cumulative basis, JPY 1 trillion, you should be able to achieve this? Unknown Executive: We don't know yet. We don't know yet. Of course, we'll make the effort. But what we can say at this moment, if you look at the free cash flow numbers, so back in 2023, there's been a lot of fluctuation on the free cash flow. So I think 2023 was about JPY 240 billion or maybe I might be wrong, but that was the number. Last year was JPY 300 billion, and this year is JPY 240 billion for this year. So in comparison to the previous period, it has become more stable in terms of generation of free cash flows. So we still have 2 years to go until the end of the SGP. So we'd like to work hard to achieve that number. So of course, shareholders' return. So you have JPY 100 billion of share buybacks has been completed and you have retired the other shares. Of course, I fully understand nothing is decided for next fiscal year, but institutional investors see that there's a lot of cash piling up. And perhaps there is not much need of CapEx, for instance, construction of new plants. We do appreciate there is a demand in investment related to replacement of renewal. But unless there is a large-scale M&A, can we expect to see similar amount of shareholders' return? Graeme McDonald: That's a comment? Unknown Executive: Yes, that is a comment. Graeme McDonald: Horikoshi-san, I'm pretty sure it is hard for you to say that. Yes, we heard your comment. Also to a different note. So you mentioned the profit was slightly better than the plan. So my impressions are -- so industrial machinery and retail finance was positive. That was my impression. But there's a discussion related to best owner. But aside from that, in terms of industrial machinery, that is Gigaphoton continues to be in good shape. And the profitability as well as the top line is improving. So chances are this situation may continue for some time. What are your thoughts, Horikoshi-san? Takeshi Horikoshi: As you know, the semiconductor demand continues to be on the rise, and that is expected. Also, the Komatsu, the NTC, Komatsu Industries continues to be quite solid. So fortunately, on a total basis, the profitability is higher than the construction equipment. And Gigaphoton, we expect growth next year onwards. So we do expect that to happen for next year. So the sales on a cumulative basis, about JPY 50 billion or so. Graeme McDonald: So there are some comments related to maintenance. So how much does that actually account for within the sales right now? Takeshi Horikoshi: We don't have the number at hand. But as far as this fiscal term is concerned, about half relates to maintenance and the half is related to the equipment. Graeme McDonald: So just to confirm then, Gigaphoton's profitability is far superior to average. So I have this image that it's over 20%. Is that correct? Takeshi Horikoshi: Yes, your impressions are correct. Unknown Executive: Moving on to the next question. Taninaka-san from SMBC Nikko. Satoshi Taninaka: This is Taninaka from SMBC Nikko. I have 2 questions. The first one is about increasing selling prices, passing on the cost. The ones you have announced regarding the ones that are effective from January, inclusive of that, you didn't say JPY 80 billion definitively, but there was some conversation around increasing prices by the same magnitude next fiscal year. I think the cost increase expected for next year is about JPY 65 billion. But how much of the profit decline are you expecting to offset next fiscal year? Can you give us some food for thought? Unknown Executive: Regarding tariff impact, it's actually the difference between JPY 120 billion and JPY 55 billion. So yes, you are correct. But selling price increases, like mentioned earlier, is what we are striving to do. So you will be able to come up with the percentage if you do your math. Satoshi Taninaka: Secondly, for precious metals, prices are going up. And after service for the mining business, how has that been changing? Because copper prices are increasing, are there any situations where people are not able to develop new mines? Or is production stopping at any copper mines because of this backdrop? So is utilization -- I guess utilization is not really picking up. But due to higher precious metal prices, is that directly affecting your aftermarket business? Or is it because precious metal prices are going up due to a variety of factors, there's no direct relationship. Can you give us some perspective on this? Unknown Executive: Well, please look at Page 38 in the disclosed presentation. It breaks down the sales of equipment and parts and services. For FX, if you exclude FX impact, for the third quarter as well on a cumulative basis, too, for equipment compared to last year, the difference was quite negative and it went down. However, for parts and services, actually, we've been exceeding. So on a net-net basis, compared to last year, we have been seeing a decline in sales or that's what we're expecting projection-wise. So the aftermarket business compared to last year has been steadily rising, and the ratios are shown at the top. But for this fiscal year, we expect the aftermarket ratio for mining is going to reach around 65%. So yes, we perceive that the business is doing well. And even for precious metals, the same thing applies. Unknown Executive: The next question, please. From Nikkei, Kugai-san, please. Unknown Analyst: This is Kugai from Nikkei. I'd like to pose 2 questions. First relates to rare earth. So the export control by China is in place. So what are the impacts right now? And what are the expectations? So in terms of export control, what is the current state of inventory? And what is the procurement strategy going forward? If you can share with us your thoughts, that would be helpful. Kiyoshi Hishinuma: So this is Hishinuma. Internally, we are definitely investigating the details. So we're looking at the suppliers' inventory level. And if there is a shortage, we're trying to source from elsewhere. So those are definitely activities underway. So of course, if there is a complete suspension, the impact will be quite huge. So we are cautiously involved in the discussion and the investigation. Unknown Analyst: Also, I have another question. So weaker yen is prolonging. So that is posing some positive impact in terms of the performance. But of course, if this is prolonged, that may impact the investment overseas. So with the yen depreciation, how do you perceive the current state? Also, what is the optimal, the FX level for you? If you can share with us your thoughts on what is the optimal level, that would be helpful as well. Unknown Executive: So just to do a recap. It's been over 2 years, actually, we're trending about JPY 150 or so. So the yen depreciation started back in Q1 of 2022. And since then, there has been gradually rise or depreciated. And since 2 years back, it's been hovering around JPY 150 or so. So I think back in 2017 to 2021, it was JPY 120 to JPY 115 or so. That was the past trend. So for 2 years, we've had JPY 150. It is almost becoming a de facto as we consider the future investment. So if we -- so it is not possible for us to invest more, expecting that the yen would appreciate going forward. So basically, the basic stance is, wherever needed, we will make such investment. Unknown Executive: Thank you. We are running out of time. But there are no people who have raised their hands. So if there are no additional questions, we would like to conclude today's meeting. Any additional questions? McDonald-san, you have one more question? Graeme McDonald: Yes, it's a short one. Regarding your P&L analysis for the volume, product mix, et cetera, can you give me -- give us pure volume, product mix, area mix and so forth and the details of that? Unknown Executive: Are you talking about Page 10 on a 3-month basis, right? Out of volume, product mix, it's JPY 520.1 billion. The pure volume negative is JPY 27.6 billion. For product and area mix, it's JPY 21.2 billion in total, combining the two. And the third item is a one-off item, which is related to product guarantee, which was worth JPY 3.3 billion. For area and product mix, JPY 21.2 billion of a loss. For area mix, Indonesia compared to last year has been going down and therefore, has been deteriorating. And for Europe, it has been increasing. But year-over-year, it is contributing negatively. For product mix, due to mining, and this applies to construction equipment as well. Due to the mix between equipment and parts, it has led to a negative impact for this period. Unknown Executive: As we reached the time given, we would like to end Komatsu's fiscal '25 Q3 results briefing. Thank you very much, everyone, for joining today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, welcome to the Novonesis Q1 2026 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Cornelius Bjorklund. Please go ahead. Tobias Björklund: Thank you very much, operator, and welcome, everyone, to Novonesis' conference call for the first quarter of 2026. As mentioned, my name is Tobias Bjorklund, and I'm heading up Investor Relations here at Novonesis. In this call, our CEO, Ester Baiget; and our CFO, Rainer Lehmann, will review our performance as well as the outlook for 2026. Also attending today's call, we have Tina Fano, EVP of Planetary Health Biosolutions. We have Henrik Joerck Nielsen, EVP of Human Health Biosolutions; Andrew Taylor, EVP of Food & Beverages Biosolutions; and Claus Crone Fuglsang, Chief Scientific Officer. The conference call will take about 50 minutes, including Q&A. Let's change to the next slide. As usual, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs, and they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements. With that, I will now hand you over to our CEO, Ester Baiget. Ester, please. Ester Baiget: Thank you. Thank you, Tobias, and welcome, everyone. Thank you for joining us this morning. The year started strong with 7% organic sales growth against a high comparable, including around 1.5 percentage point effect from exiting certain countries and a good 1 percentage point from inventory buildup in animal. We delivered growth across all sales areas in both developed and emerging markets while achieving an adjusted EBITDA margin of 37.8%. Developed markets grew 8% with solid performance in both Europe and North America. Emerging markets grew 4%. We continue to drive growth through innovation and a stronger market presence with tailored solutions. We launched 5 new biosolutions in the first quarter, and we are well on track for our full year expectation. These launches are responding to an increasing consumer and societal needs from higher yields in food to replacing fertilizers in agriculture. Ten months into the Feed Enzyme Alliance acquisition, we're delivering in line with our initial expectations. And more importantly, we are continuously seeing increased traction with our customers through a broader and integrated offering of enzymes and probiotics. As a complement to our global footprint, we acquired an attractive production facility in Thailand in early April, and it's expected to be operational in 2027. The facility holds optionality to produce different biosolutions, including the scaling of HMO production, which would require additional investments. Such investments are already included in our communicated CapEx plans towards 2030. We are operating in a world with increasing global uncertainty, with rising pressure on economies in many different ways. Countries are seeking for homegrown solutions to strengthen energy and food security supply. Biosolutions are increasingly becoming central answers to resilience and productivity agendas, reducing exposure to global disruptions while enabling the creation of local jobs. In our dialogues with customers and policymakers, particularly in the energy area in Southeast Asia and in India, we see this momentum accelerating and Novonesis is uniquely positioned to support this shift. With a strong start to the year, we feel very confident about our full year outlook. Growth is expected to be mainly volume-driven, supported also by pricing. The outlook includes a close to 1 percentage point effect from exiting certain countries. For the adjusted EBITDA margin, we maintain the outlook at 37% to 38% with an expected margin expansion compared to 2025, more than absorbing currency headwinds and increasing raw material costs. With that, let us now look at the divisional performance in more detail, starting with Food & Health Biosolutions. Please turn to Slide #4. Thank you. Food & Health Biosolutions delivered a strong organic sales growth of 9% in the first quarter. The adjusted EBITDA margin was 35.7%, 130 basis points lower compared to last year, mainly driven by the ramp-up in commercial resources we did over the course of 2025, product mix effects from stronger growth in HMO and strong currency headwinds. These were partially offset by cost synergies and economies of scale. During the quarter, we launched 3 new products in Food & Health, including a new yogurt culture solution that improves taste and texture while also delivering higher yields and productivity benefits. For 2026, we expect the division to deliver organic sales growth in line with the group, primarily driven by Food and Beverages and supported by growth in Human Health. Food & Beverages deliver -- please turn to the Slide #5. Thank you. Food & Beverages delivered a strong organic sales growth of 11% in the quarter. Growth was mainly volume-driven, with pricing contributing a good 1 percentage point. Synergies contributed to growth and in line with expectations, supported by cross-selling and increased commercial scale. Growth was well anchored across geographies and industries. Performance was driven by increased market penetration, a strong adoption of innovation and positive market development. Despite muted consumer sentiment, we continue to see high demand for higher protein for clean label products and healthier solutions, supporting an increasing demand for biosolutions. Momentum in dairy continued to be strong and was led by North America and emerging markets. In fresh dairy, demand for efficiency, higher yields and high protein continues to drive strong demand, including bioprotection and probiotics. In cheese, customer conversion to high-yield solutions remains a key growth driver. Growth across the remaining industries was driven by innovation and increased penetration, led by plant-based solutions and beverages with solid performance from recent launches. Solid growth in baking and meat also contributed to growth. For 2026, growth in Food & Beverages is expected to be broad-based, supported by both synergies and pricing. Human Health delivered organic sales growth of 5% in the first quarter. Growth was primarily volume driven, while pricing and synergies contributed positively. Performance was driven by strong growth in Advanced Health & Nutrition, supported by both early life nutrition and advanced protein solutions. Early life nutrition was led by HMO with growth across regions, including cross-border trade into China. Advanced protein solutions grew alongside the anchor customer. Dietary supplements was impacted by a softening North American market, where our sales to women's health category continued to be strong. For 2026, growth in Human Health is expected to be supported by dietary supplements as well as Advanced Health & Nutrition led by HMO. Pricing is expected to contribute positively and deferred revenue is expected to add around 1 percentage point to growth. Please turn to Slide #6. Thank you. Planetary Health Biosolutions delivered organic sales growth of 5% in the first quarter against a high comparable. The anticipated inventory buildup at a key customer in Animal contributed a good 2 percentage points to growth. The adjusted EBITDA margin was 39.5%, up 10 basis points year-on-year, driven by the Feed Enzyme Alliance acquisition and cost synergies, including the ramp-up in commercial resources we did over the course of 2025 as well as currency headwinds. We launched 2 new products in Planetary Health in the first quarter. In Animal, we introduced the Bovacillus probiotic for cattle, benefiting from a faster route to market following the formation of Novonesis. These solutions enhances digestion and strengthens cattle immune system, resulting in an increase of up to 1 kilo of milk per cow per day, while also improving the feed efficiency. In plant, we launched the first product based on our new enzyme platform, ActiPhy, that enhances nutrition uptake in soil, improving the yield from agri of corn by around 3%. The solution initially targets corn in North America and is supported by several years of strong field trial data. For 2026, we expect the division to deliver organic sales growth in line with the group with relative stronger contribution from agricultural, energy and tech. Please turn to Slide #7. Thank you. Household Care delivered organic sales growth of 4% against a high comparable. Growth was mainly volume-driven, supported by positive pricing. Performance was driven by increased market penetration and adoption of new innovations across laundry, dish and other cleaning categories in both developed and emerging markets with particularly strong traction among local and regional customers. For 2026, we expect solid performance in Household Care in a market that carries some uncertainty related to weaker consumer sentiment. Growth will be driven by continued innovation, increased penetration in both developed and emerging markets and continued support from pricing. Agriculture, Energy & Tech delivered organic sales growth of 5% in the first quarter, driven by energy and agriculture, while tech declined due to order timing in biopharma, processing aids and high comparable. Strong growth in energy was driven by Latin America and Asia Pacific, particularly India, reflecting continued growth in corn ethanol production. North America also supported growth through increased adoption of innovation and higher ethanol production volumes, supported by growing exports. Additionally, increased penetration of biodiesel solutions and the ramp-up of second-generation ethanol production contributed to the strong growth. Following the increasing need for energy security and supply as countries are seeking further diversification from fossil fuels, we see an increasing strategic global interest for higher biofuel blending. Strong growth in agriculture was mainly driven by inventory buildup at a key customer in animal, contributing by around 4% to the organic sales growth for Agriculture, Energy & Tech. As mentioned, integration of the Feed Enzyme acquisition continues to progress in line with expectations with synergy milestones materializing as planned. Our plant business declined during the quarter due to timing and high comparable. For 2026, growth in Agriculture, Energy & Tech is expected across all industries, led by energy and supported by synergies and pricing. And now let me hand over to Rainer for a review of the financials and the outlook for 2026. Rainer, please? Rainer Lehmann: Thank you, Ester, and also good morning, everyone, and welcome to today's call from my side. Let's turn to Slide #8. In the first quarter, sales grew a strong 7% organically and 4% in reported euro, including around 1.5 percentage points effect from exiting certain countries. Sales synergies across both divisions and pricing each contributed around 1 percentage point, while the inventory buildup in Animal contributed a good 1 percentage point. Currencies provided 6 percentage point headwind, while M&A contributed positively with 3%, reflecting the Feed Enzyme Alliance acquisition. The adjusted gross margin improved by 120 basis points to 60.1% versus Q1 of last year. Pricing and productivity improvements as well as the Feed Enzyme Alliance acquisition supported the development, while currency and product mix had a negative impact. Total operating expenses adjusted for PPA-related depreciation and amortization were 29.1% of sales compared to 27.3% in Q1 last year. This development mainly reflects the planned increase in commercial resources over the course of 2025, driven by both organic expansion and the Feed Enzyme Alliance acquisition. The adjusted EBITDA margin for the quarter was 37.8% compared to 38.3% in Q1 2025. The margin benefited from the higher gross margin, cost synergies and around 50 basis points from the Feed Enzyme Alliance acquisition, in line with our expectations. This was offset by higher operating expenses and currency headwinds. Let's keep in mind that -- let's keep in mind also that last year's operating expenses were quite low in the first quarter. Adjusted earnings per share, excluding PPA amortization, were EUR 0.57, corresponding to an 8% increase compared to last year. Operating cash flow amounted to EUR 167.1 million in the first quarter, an increase of EUR 60.7 million year-on-year. It was mainly driven by improved net profit and a more favorable working capital development compared to Q1 last year. CapEx in the quarter amounted to EUR 93.1 million, equal to 8.3% of sales. Despite higher investment levels, free cash flow before acquisitions increased by 9% to EUR 74 million. On March 12, we successfully issued EUR 1.7 billion of senior unsecured notes to refinance the existing bridge loan related to the Feed Enzyme Alliance acquisition. Relating to this, I'm also very happy that S&P Global Ratings issued an A- stable outlook rating for Novonesis. With this, let us now turn to Slide #9 to talk about the outlook. Please note that the outlook presented today is based on the current level of global trade tariffs and the prevailing foreign exchange environment. As Ester mentioned earlier, we are very confident in the full year outlook and confirm our guidance for both organic sales growth and profitability on the back of a strong start to the year. The outlook for organic sales growth is maintained at 5% to 7% and includes close to 1 percentage point effect from exiting certain countries. Growth is expected to be mainly volume-driven, supported by around 1 percentage point from sales synergies and a good percentage point contribution from pricing across both divisions. The outlook also reflects some uncertainty related to consumer sentiment for the year. The recent situation in the Middle East and its broader implications to global market dynamics is difficult to fully assess and leads to increased uncertainty. However, based on our diversified end market exposure and flexible regional production footprint, including our pricing capabilities, we currently do not expect a material impact on our adjusted EBITDA margin. We continue to monitor the development closely. We expect a smaller positive timing impact also in the second quarter from the Animal business related to inventory buildup at a key customer. I want to reiterate, though, that for the full year, this effect is expected to be neutral. We continue to expect the adjusted EBITDA margin to be in the range of 37% to 38%, reflecting continued margin expansion compared to 2025. This improvement is expected to be driven by a stronger gross margin, the Feed Enzyme Alliance acquisition and synergies, partly offset by currency headwinds of around 0.5 percentage point and including somewhat higher input costs. As previously communicated, we'll see a temporary step-up in CapEx as part of our strategy to enable growth through 2030 and beyond. This includes continued expansion of our resilient global enzyme production footprint, completion of the doubling of our U.S. dairy culture capacities here in 2026 and investments related to the recently acquired facility in Thailand. In addition, we continue to invest in the implementation of our new ERP system, which will impact CapEx by around 1 percentage point annually over the next few years. As a result, CapEx is expected to be 12% to 14% of sales for 2026. Finally, Net debt-to-EBITDA is expected to be around 1.7x at year-end, supported by strong cash generation and continued deleveraging despite the increased CapEx level. We had a strong start to the year and remain very confident in the 2026 outlook. With that, I will hand back to Ester. Ester Baiget: Thank you very much, Rainer. Could you please turn to Slide #10? Thank you. In the current macroeconomic environment, demand for our biosolutions continues to be strong across all fronts, from customer needs for higher yield and efficiency, consumers' increasing demands for healthy nutrition and to growing needs to decouple from fossil fuels as countries seek greater energy diversification and security of supply. Quarter after quarter, we demonstrate the strength and the resilience of our business model, supported by strong innovation, a resilient global footprint and diverse end market reach. As the world continues to evolve, the relevance and the need for biosolution only continues to increase. And even with increasing global uncertainty, we are confident in our 2026 outlook as well as the 2030 targets, including the 6% to 9% organic sales growth CAGR. And with that, we're now ready to open the call for Q&A. Operator, please? Operator: [Operator Instructions] The first question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Could you just elaborate a little deeper as to how you see the Middle Eastern conflict playing out both within your business and within your customers? I guess there's -- the message that we hear is that Southeast Asia will be more impacted by cost inflation. And clearly, that then leads to a question about your emerging market exposure. So anything that you can share in terms of recent order pattern changes or freight rate constraints that are limiting or enabling your business would be very useful? Secondly, just in light of that, just on the bioenergy side, you've touched on seeing an uptick in interest in obviously, bioenergy solutions. Is that to say that this is going to be something that will happen in a couple of years? Or is there going to be a more immediate impact through 2026 as you see it? Ester Baiget: Excellent question, Thomas. And let me start answering to them and then also let Tina build up on each of them. So first, regarding Middle East conflict, important to mention that our direct exposure to Middle East and the sales in Middle East, they are small. So the impact effect of that, it's marginal to none on our overall revenue. Then building on your comments on what we see these changing dynamics in our -- in the world that we live in. We see from one side increased level of cost from raw materials that we have very good conversations with our customers, also including pricing, and we're confident that it will lead to a marginal neutral non-impact into the EBITDA. And then we see increasing continued interest from our customers around the globe. That was there. But now with this crisis in Middle East, if anything, we see it as a catalyzer of further momentum. We see a catalyzer of further momentum for diversification. And that's true across all segments. We see it on Food, the eagerness for healthier and cleaner and replacing stabilizers and texturizers and seeking for solutions that will continue to fulfill the consumer dynamics. We see it in Household Care. We see it in Energy. We see an increasing need, particularly in Energy. And then maybe tipping in your second question, particularly in countries that they had already in the past, taken decisions towards biofuels. We see Brazil, North America, Malaysia, Indonesia, the countries that they had already included biofuels into their diversification, benefiting from those decisions of the past. And then seeing a broader resilience and being able to absorb the constraints on supply and also access to competitive raw materials. And we see that momentum doubling up across the whole globe, but particularly with a strong pull here in Southeast Asia. These efforts are there. They are reflected -- maybe it's not so much on the sales year-to-date. We see in U.S. an increasing level of exports. But the big impact, it's for the long term, as you mentioned. Do we see the growing direction of increasing pull from mandates that will lead to continuous investment. And in any case, it gives us stronger comfort on the drivers of growth. So long answer, indicating that what we're doing with our customers, what we're doing on price. But then at the same time, the catalyzer of this crisis of momentum that was there for solutions leading to higher yields and high efficiencies and also decoupling from energy. Tina Fanø: Yes. And only adding a bit because I think Ester covered most of it. Short term, I would say, yes, you'll see it as a pickup in exports from the U.S. mostly. However, you will also see it elsewhere longer term. I am just coming back from Southeast Asia, in fact, here over the weekend. And there is a significant interest in, for example, biodiesel expansion. We talked about Indonesia going from B30 B40 to even B50. So I would say that diversification journey we have been on with feedstock diversification, with end market diversification and geographical diversification is serving us well here. But most impact, you should expect in the longer term, given the mandates are ramping up. So it's a good underlying growth driver for the energy segment. Shorter term, it is mostly from exports, but not only from exports. And in the quarter, you hardly see anything. Exports has been growing over the last year. So that is part of our numbers as well. Operator: The next question comes from the line of Thomas Lind Petersen from Nordea. Thomas Lind Petersen: Two questions also from my side. Both regarding the guidance for this year. So Ester, back in February, you said that you expect a sort of deterioration in the consumer sentiment. And I think perhaps you were alluding to North America. So I was just wondering if you could give us a bit of color on that. Is that still what you expect for the year? Or are you beginning to see a deterioration in the consumer sentiment? And perhaps also if you could comment a bit on the pricing and your ability to raise prices given the higher raw materials. So one question here regarding the revenue for this year. And then the second one is about the adjusted EBITDA margin. You end up here at 37.8% in the first quarter. And just wondering if how we can extrapolate from -- for the rest of the year. Also given I believe that your FX headwind, at least the large part of the FX headwind that you've seen has sort of been cycled now. So is there anything that speaks for a lower adjusted EBITDA margin going forward? Or how should we think about this? Ester Baiget: Excellent. Thank you, Thomas, for your questions. I'll answer the first one, and then I'll pass it to Rainer on EBITDA. Regarding the comments we made at the beginning of the year, as you so nicely indicated, we included in our guidance some softness on consumer behavior. We could foresee that coming, and that was included in our guidance, and it's already happening. We continue to include it in our guidance for the -- and it's included in our guidance for the full year. It's true that the strong start of the year gives us comfort, and it reduces the risk from the volatility and uncertainty of the market that we're living in. We continue to see, as I mentioned before, a strong underlying demand from our solutions, but we see some cases of that softening demand. Maybe particularly not reflected in Q1, but in the Q1 figures, but particularly in Human Health, this is a segment where we see consumers and in North America when they are sitting and choosing the -- where they're allocating their pocket money, decreasing the demand of probiotics. And we see some indications there of softer consumer demand in North America in probiotics, which, as I mentioned, included in our guidance and also coupled with a strong start of the year gives us full comfort of deliver of the full year guidance. And then I'll pass it to Rainer on EBITDA. Rainer Lehmann: Yes. Thomas, you're absolutely right. Of course, the biggest, let's say, spread between the FX side was in Q1, where we actually had last year, even tied to USD 1.06 and now we're running at USD 1.17, USD 1.18. Nevertheless, let's keep in mind that it's a gradual impact. So for the year, we still see the around 0.5 percentage point impact on the EBITDA margin. And then the -- of course, the strong margin in Q1, please look at the sales, right? There's quite some sales leverage in there. That was the highest sales quarter ever. That, of course, will come down a little bit. But therefore, we feel comfortable that this margin is going to be between 37% and 38%. Ester Baiget: Thank you, Rainer. And building on also on your comment on pricing, we have really good conversations with our customers, and we feel comfortable on the momentum there on bringing in the prices and then leaving, as Rainer mentioned, of no impact to the EBITDA margin for the year. Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: I was just curious on your announcement to buy this facility in Thailand. You are spending a lot of your own CapEx and then on top, you're buying this facility. I'm just curious from a timing perspective, why now? Because there is so much CapEx going on. Is this an indication of you thinking about yourself more capacity constrained? Or is this more a unique opportunity? Because I think this is much more an HMO type facility. So maybe it can speed up your go-to-market on HMO side? And the second question and maybe this is just a reminder because you are growing very, very strongly in dairy, but I was at DSM-Firmenich Capital Markets Day earlier this year, and they were actually indicating that they are at #1 in dairy enzymes from what I remember. And I was just curious how are you growing in dairy across both your cultures and enzymes? And is there a limitation from the Chr. Hansen merger that you had in place because of regulatory consideration that is probably limiting to some extent, your growth? Or can that be even better at some point once that limitation is taken away? Ester Baiget: Thank you, Chetan. I will let Andrew answer the question on dairy and enlight you on why now we are stronger and even more equipped to be the partner of growth for our customers with a bolder portfolio. But then bringing -- building on your first question on Thailand, we have investment -- we have announced announcement of increased CapEx of 12% to 14% to support growth, aiming also for the high end of our guidance. And this facility in Thailand is a good add to that path. It is bringing optionality for growth, including further investments that they are already included into the 12% to 14% and also comes with some capacity already today to produce HMO that supports the growth trajectory of this business. But then opportunistic acquisition that puts us in a good place in a region that we're growing, well embedded in our overall CapEx, included in our strategy and then with further investments to capture the potential of this optionality embedded already in the 12% to 14%. Andrew Taylor: Yes. And maybe taking on the second part of the question around dairy. So I'd begin with -- we have very strong customer relationships across the world in dairy, and we're seeing good growth in both cheese and fresh dairy and all its related subcategories. And when you think about cultures and enzymes, we're very strong in both of those and actively innovating. I think the thing that's probably most interesting for us right now is the combination of those pieces. So post the combination of the 2 companies, we're now able to do things in the combination of cultures and enzymes that help both the production of the cheese as an example, as well as the aging, oftentimes in one bag. And so a lot of what we're trying to do is expand those solutions that are both driving productivity for our customers, which is an ongoing demand, but then also new value, how can you create better tasting cheeses, how can you taste -- quicker ripening cheeses. So we're very comfortable in our position and the growth that we're seeing around the world supports that. Operator: The next question comes from the line of Lars Topholm from DNB Carnegie. Lars Topholm: I also have 2 questions. One is actually related. So let me start with that. So in Thailand, there's a lot of focus on production of ethanol from cassava, which requires enzymes. So I just wonder, maybe, Tina, if you can put some words to the significance of this for you guys? And are these enzymes some you can produce on your new Thai assets? And then my second question goes to Ag, Energy and Tech, which grows 5% organically. There's a 4% contribution from inventory buildup in Animal Health. And I assume bioenergy grows double digits. So it seems to me something is going terribly wrong with plant and with tech. I just wonder if you can put some words and maybe some growth rates on the 4 different components of this division and maybe also the reasons behind, what should we say, the less flamboyant growth in parts of that business. Ester Baiget: Thank you, Lars, and I'll pass it to Tina, who will also guide you on the optionality of the plant on Thailand with further investments. And remind us that we now look in our business on a quarterly level here for the long run, and we are confident on the full year guidance. Lars Topholm: I know, Ester, but you said the same after Q4. And now we have 2 soft quarters in a row. So the long term starts with a weak quarter. That's how it is. Ester Baiget: Every quarter is a quarter. And then I repeat myself, we were confident on the full year guidance, but I'll pass it to Tina, Lars. Tina Fanø: Yes, Lars. So let's start with Thailand. And yes, Thailand is one of the places in Southeast Asia where we operate in our bioenergy space as well. The plant which we have there gives us optionality also for producing the enzymes there. So this is good. In terms of Agriculture, Energy & Tech, and you're right, we saw a strong growth in bioenergy and the math then brings that tech and plant is in decline. I don't -- you said terribly wrong. I don't at all agree to that point. I would say I think sales is progressing according to plan. Yes, it's a declining quarter. And yes, it is a double-digit decline. But we remain confident for the full year. Agriculture, Energy & Tech is going to grow stronger than Household Care and all of Planetary Health is going to grow in line with group. So I feel quite good about where we are, including in plant and tech. Tech is, as you know, quite lumpy, especially given biopharma processing. And you could say we knew that we wouldn't get any orders here beginning of the year. We expect that to ramp up, and we see that ramping up for the full year. And that's why also tech is going to contribute to the growth of AT. Plant is super small. So -- and you know there is timing on when it's exactly planting. And then you have to remember also the tough comp, which there are in both plant and tech from 2025. Lars Topholm: Tina, I would just mention it didn't grow in Q1 '24. So the tough comp from '25 was a very easy comp, I guess, in '24. Ester Baiget: But what about '23 then? Lars, let's hold that question for end of the year. Then when we see the growth coming in, then we remind ourselves about the volatility of 2 small segments that they are by intrinsic nature, volatile, and they contribute consistently to growth for the company. Operator: The next question comes from the line of Alex Sloane from Barclays. Alexander Sloane: Two from me, please. First one, just on household. Obviously, with oil prices much higher and petrochemical-based surfactants under renewed cost pressure, are you seeing any acceleration in demand from your customers for enzyme substitution? And if so, when would you expect that to translate into your volumes? And the second one was just a follow-up on the food biosolutions. Obviously, the growth rate there, excluding the Russia exit, really strong, I think, close to 15%. Dairy, obviously, the standout. Could you maybe help us just disentangle what is you see as kind of structural growth within that from penetration and new customer capacity opening versus maybe any temporary customer behavior, if there was any maybe pull forward of orders, customer restocking, et cetera. I guess should we be expecting that food growth to slow and normalize in the second half, please? Ester Baiget: Excellent. Thank you, Alex. Tina will answer your question regarding the underlying drivers of the growing demand in Household Care and then Andrew, on Food & Beverages. Tina Fanø: Yes. So on Household Care, you could say, increased oil prices is increasing the discussions on substitution of surfactants. However, this is not something you do overnight. So this is something which we are going to see as time progresses. So this is an underlying good driver for our Household Care business. But I would more think of it in a more longer-term perspective, Alex. So we have, over many years, invested in emerging markets because there is a significant growth opportunity for us there. And this is a market where we have low single-digit growth when you look at both emerging as well as developed market when you combine it. So it's not a high-growth area. But we have been able to outgrow that given the investment, given our strong footprint in emerging markets. And as we also have talked about many times, the inclusion of enzymes in emerging market is less. So there is a significant opportunity for us to go for. Short term, you could say there's increased interest for surfactant replacement, but not only surfactants. It's also other oil-derived components. However, there is also the risk of taking out, for example, enzymes short term given the cost pressure they are under. This is not something we are seeing. We remain, you could say, confident in the full year outlook of solid growth in Household Care. Andrew Taylor: Yes. And then following up on the question with regards to food and dairy. So first off, the base most structural momentum continues to be very positive. We've talked the last couple of quarters about things such as the drive for productivity, the drive for high-protein yogurts for new texture experiences. So if you look across the world, those underlying structural drivers remain and actually are strengthening in some parts of the world. We do have some benefits from the annualization of some of the larger projects that have been queuing up in dairy, which we've noted before in the past. So the opportunity pipeline looks solid, but we wouldn't expect that to continue at the same rate. The thing that's also important is we're seeing good growth in food as well, so not just dairy. So if you think about the balanced portfolio, we are continuing to see acceleration. We talked a little bit last quarter, but we continue to see beverages as an example, back in the growth mode through some of the investments we've made. So we think it's very balanced across the 2 pieces. Operator: The next question comes from the line of Matthew Yates from Bank of America. Matthew Yates: A couple of follow-ups really from what we've discussed already. The first one for Rainer, just around the operating expenses. It looks like it was up about 13% on a reported basis, I guess, probably closer to 10% at constant scope. You mentioned, I guess, some annualization effect given spending ramped up through the course of last year. Just wondering when you think about the full year guidance for 2026, is the expectation that OpEx grows in line with sales or slightly faster? And then the second question, sorry to just circle back on Tina. I think it was Lars was asking about the animal performance. I mean it looks to me over the last 3 years, the animal business hasn't grown. I apologize if that's wrong, you're welcome to correct me. So it has been quite some time now. So can we just talk a little bit more about how that business is doing and where the confidence would come from just thinking that growth may pick up over the coming quarters? Ester Baiget: Thank you, Matthew. I will let Rainer answer your first question and then Tina build -- and your question was on animal or on plant then? Matthew Yates: On animal. Ester Baiget: Okay, perfect. Rainer Lehmann: So let me answer first on the OpEx side, absolutely right, we saw a step-up in Q1, exactly what you said, the rolling effect of annualization. But even on top of that, there's always a little bit of timing. So I do not expect actually to increase OpEx for the next quarters relatively to the Q1 number. We are here really going to see more flattish development. Tina Fanø: Yes. And on the Animal business, we feel quite comfortable with where we are on the animal side. We have seen growth over the last years. And it is a business where we see in the customer discussions, increased focus on the full biosolutions, which we are offering. Matthew Yates: But you can't share anything more specific about market conditions or product launches? Tina Fanø: Yes. So one of the things we're also calling it out this quarter is the launch of Bovacillus. Also, we have earlier years launched a number of new enzymes. Hiphorious is, for example, a new launch, which is coming. So it is, as you know, in the animal space, and you need to do trials in order to prove the benefits of it. And we feel, I would say, quite good at where we are. It is -- when we look at what we have, the combo solutions is something which there is quite some interest in both from enzymes as well as probiotics. We see, you can say, good pickup on our silent solutions. So overall, I would say we are, in fact, in a good place in the animal space. It is a bit more difficult on the numbers given the acquisition. So you'll have to look at both organic and the acquired and so forth. But overall, we believe we are in a good place there. But let's go into details on the discussion later on, if needed. Operator: The next question comes from the line of Soren Samsoe from SEB. Soren Samsoe: So I have 2 questions. One is more in dairy in China. Just if you could update us on growth in yogurt and also cheese. I understand, cheese is growing quite well, although from a low level still. And then my second question is on the human health weakness. I understand, of course, driven a bit by the weak consumer in North America. But are there any other dynamics we should be aware of here or changes to the dynamics? And how is the growth looking in Europe and Asia? Ester Baiget: Thank you, Soren. I love it when the question comes implied with the answer on -- particularly in human health on the isolation on North America on the softness, but I'll let Henrik build on that. And first, Andrew, shine you up with the efforts we're doing in China and that we continue to grow in the segment on any degree. Andrew Taylor: Yes, very good question. So as we all know, the fundamental dairy market in China has been challenged for a few years. What's exciting is we're continuing to see growth. So we saw growth last year. We're seeing growth again this year. That is both in fresh dairy as well as in cheese. On the drivers of that growth are different. So on the fresh dairy side, a lot of it ends up being around innovation and new products and new solutions that we're driving to help reinvigorate the category. And on cheese, that's where we're helping build that market over a long period of time. So we've been investing in the cheese team in China as a way to actually be the reference point as that market develops. So the drivers are different, but both positive. Henrik Nielsen: Thank you for the question, Soren. So yes, in human health, one theme is for sure, the U.S. market. Long-term underlying drivers are still healthy. Short term, we are seeing some signs of a weakening U.S. consumer. There is, of course, the consumer sentiment out. We see fewer searches on online platforms for probiotics. And we have yet to see that potentially become an effect, but this is something we are definitely keen on watching out for. Then you asked about Europe and Asia. Overall, the quarter was in line with our expectations. Europe also, it's a growth market, but at a more moderate pace as well as in APAC, where maybe I highlight the -- we're seeing some very nice growth in dietary supplements in China. That's still coming for Novonesis from a small base, but an area where we have high expectations. Operator: The next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: I have 2, please. One is on the Plant Health segment. So I'm trying to work out if the absence of growth here is a deliberate decision on Novonesis part or a result of market share loss that is not wanted. And I look at the Planetary Health segment margin, and I think to myself that maybe there is some removal of lower-margin products here that have either commoditized or were not quite what Novonesis was looking for. What intentions, what program has Novonesis been implementing in this segment? And what is the end goal? My second question is on the bioenergy segment. If you were to rank in order of importance, increase in ethanol production, change in market share and growth in 2G, what would have been the biggest drivers of the growth in Q1? Ester Baiget: Thank you, Sebastian. Regarding the question about Bioenergy, I mean growth in Q1 for 2G... Tina Fanø: Okay. So on plant health, yes, we talked about -- we had some restructuring of part of our planned activities last -- end of last year. And that was simply because we have a number of launches we want to get out. So you could say more securing that we get benefit from the things which we have developed. We are happy with the launch we have done just this quarter on ActiPhy. So you could say an example of what it is we want to get out and do some work for us. Overall, I would say, in plant, remember, plant is a very small part of Agriculture, Energy & Tech. It's 5-ish percent. So it's quite small. So it's not influencing in any significant way the margin. But it is -- Planetary Health is a good -- you could say it's big industries efficient with a nice profitability. In terms of Bioenergy, I would say, well, when you look at the ranking where you say increased production, change of market share and whether it's 2G growing, well, 2G is still very, very small. It is less than 5% of the energy segment. So although the growth rate is nice, it is still a small part of the growth. So if I were to rank them, the biggest one, which is driving our growth is the increased -- I wouldn't say penetration, but the increased production of ethanol. That is the main driver for our growth. Operator: The next question comes from the line of Nicola Tang from BNP Paribas. Ming Tang: Coming back on Household Care or actually coming back on the comments around cautious consumer behavior that you had flagged earlier in the year. I think today, you're referring to the probiotics business, but I think you've historically mentioned Household Care, particularly risks or the potential risk in North America. I was wondering if you've seen any deterioration at all in Household Care, specific to North America or generally? And conversely, I was wondering if perhaps there could have been any prebuying by some of your -- or safety stock build by some of your customers, either in Household Care or elsewhere, just in light of the kind of Middle East uncertainty. And then the second question, I was wondering if you could give a little bit more detail on your outlook for inputs. Is it fair to assume that the main potential impact from the Middle East conflict might be more around energy cost, where I know you have hedging. Could you talk a little bit about what you're seeing in terms of raw materials? Because as I understand, it's mainly naturals, where there's less inflation than on the synthetic side. So could you talk about the magnitude of input inflation that you expect for this year? And any commentary around specific inputs or availability of inputs? Ester Baiget: Thank you, Nicola. I'll comment on both questions, and then I'll pass it to both Tina and Rainer. The first one, important to mention that the 7% growth, it's underlying growth across all segments, robust growth, volume growth mainly, also a little bit of growth from pricing. And it is driven by continuous increasing demand of our solutions. We don't see changes on the consumers' buying behavior. This is underlying driving demand growth, where biosolutions continue to be the answer of our customers. We don't see the softness in North America on Household Care. Tina is going to further comment on that. And we see continued penetration of the -- collecting the fruits of the investment we've made in the past. Last year, we put 400 more people boots on the ground, sellers in the regions. And we see the benefits there. We see the closeness of the customers, the proximity where the growth is and then translating it on what it is the top line growth that also with the strong start of the year gives us full confidence for the year-end guidance. And then regarding the costs, Rainer will talk about this. But as I mentioned, we bring in pricing and conversations with our customers, and we're aiming and forecasting nonimpact to the EBITDA for the year. Tina Fanø: Yes. So as Ester said, I mean, when you look at, a, the Michigan Institute on consumer sentiment in the U.S. That is something which for sure we are watching. Also, if you watch the Nielsen data, then you will see, you could say, flattish/declining volumes in the U.S. in detergent volumes after a good 2025. So this is something we are watching, you could say, in the market. But when we look at our data, we don't see any impact. And in fact, I also want to highlight that given our broad base with different players in different segments, if people move between, you could say, private label and branded goods -- for example, in Europe, we have a broad exposure. If they move down in tier to less enzyme containing enzymes, then we are not immune to that. But that outlook of our sentiment and how we look at the world is included in our outlook for the full year. And as we have said, we expect solid growth in Household Care. Rainer Lehmann: And Nicola, regarding the input cost of the Middle East, as Ester basically said, this is mainly impacting us on the supply chain side. So meaning our basically transportation and packaging cost is affected by that, which we're basically recovering on the pricing side. So that is really the driver for it, not the other components on the COGS side. Ester Baiget: One more question, operator, please, last question. Operator: The next question comes from the line of Charles Eden from UBS. Charles Eden: I'll limit myself to 2 quick ones, if that's okay. Firstly, probably for Tina, can we just come back on the plant and tech? Obviously, you mentioned double-digit decline in tech in the quarter, but I think you obviously mentioned order timing. So is the expectation that reverses in Q2 or at least in the balance of '26? And if possible, could you quantify the magnitude of that order timing headwind in Q1? And then secondly, just to come back on Food & Beverage. Obviously, a lot of time focused on Ag, Energy & Tech, but Food & Beverage, in particular, sort of 11% organic, but 15% underlying, if you exclude the Russia exit, quite an incredible performance. Can you just sort of help us understand maybe that's well ahead of the end market growth. What is driving that? What's the success in your offering, which is allowing you to grow probably 4, 5x the underlying market? Ester Baiget: Thank you, Charles. I love that question. What is the driver of -- that we continue to outgrow the markets that we're present. And it's consistently across all areas, a single pattern, customer proximity and bringing answers that lead to value generation for our customers. And that's true for food. That's true for dairy. That's true for Household Care. That's true for Bioenergy. And in the environment that we live in today, we see that pool continue to grow. I'm going to tip toe on your first question and then pass it to Andrew. We saw a decline, double-digit decline in Ag and in plant and in tech this quarter mainly from timing. Both are going to contribute to growth through the year. That means implicitly that there's going to be growth on the remaining of the year to overcome the decline that we saw on a segment in AAT that contributed to growth with a strong growth from Bioenergy and also growth in Animal that we see good momentum and conversations with our customers. And with that, Andrew, I'm passing it to you. Andrew Taylor: Yes. Thank you. And so if you take a step back and think about what's driving Food & Beverage, I think there's a few things. One, we all see the same data on the underlying market growth. I would say that there are pockets of the underlying market that we are differentially exposed to. We always talk about the high protein trends around the world. That's clearly a piece. But the biggest piece is the increasing use of our biosolutions. It's actually driving penetration around substituting, in particular, for synthetics. And what's exciting is that is a continuing trend in many of the things that we see, for example, Maha, and other things actually are helping with that. So as an example, a culture can substitute for multiple things in the yogurt that are potentially at risk. So we do see that across Food and Food & Beverage. The third piece is really around how you share that value. So if we're helping our customers create productivity, if we're helping them get better end consumer and customer demand, we also work to share that value through the pricing. So we are excited about the progress. It's a very choppy market around the world, but we keep investing in that part of the business. And in particular, the capital investments we're making are very important because it signals to our customers, we're willing to grow with them for the long term. Ester Baiget: Thank you very much. And with that, we're closing the session of the day. Looking forward to continuing the conversations with all of you during the forthcoming days. Thank you so much. Bye.
Hiroshi Hosotani: I am Hiroshi Hosotani, CFO. I will now provide an overview of the business results for the fiscal year 2025. Page 4 shows the highlights of business results for fiscal '25. Foreign exchange rates were JPY 150.5 to the U.S. dollar, JPY 173.8 to the euro and JPY 99.2 to the Australian dollar. Compared to the previous fiscal year, the Japanese yen appreciated against the U.S. dollar and Australian dollar, but depreciated against the euro. Net sales increased by 0.7% to JPY 4,132.8 billion. Operating income decreased by 13.7% to JPY 567.3 billion. The operating income ratio was 13.7%, down 2.3 points. Net income attributable to Komatsu decreased by 14.4% to JPY 376.4 billion. Net sales reached a record high for the fifth consecutive year. ROE was 11.3%, down 2.9 points from the previous year. We plan to pay an annual cash dividend of JPY 190 per share, the same as the previous year, resulting in a consolidated payout ratio of 45.9%. Page 5 shows segment sales and profits for fiscal '25. Net sales in the Construction, Mining & Utility Equipment segment increased by 0.2% to JPY 3,806 billion. Sales exceeded the projection announced in October, as demand was higher than expected. Segment profit decreased by 18% to JPY 491.1 billion. The segment profit ratio was 12.9%, down 2.9 points. Retail finance sales increased by 2.4% to JPY 126.1 billion. Segment profit increased by 24.4% to JPY 36.6 billion. Industrial Machinery and Others sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. I will explain the factors behind the changes in each segment later. Page 6 shows the sales by region for the Construction, Mining & Utility Equipment segment for fiscal '25. Sales to outside customers for the segment increased by 0.2% to JPY 3,796.1 billion. Details of regional changes will be explained by Mining and Construction Equipment, respectively, on the following pages. Page 7 shows the sales by region for mining equipment within the segment for fiscal '25. Mining equipment sales decreased by 0.6% to JPY 1,904.4 billion. In Asia, sales decreased due to a decline in demand following low coal prices in Indonesia and demand decline. However, sales increased in Africa and Latin America, where demand for copper mines remained strong, keeping overall sales flat. Page 8 shows the sales by region for Construction Equipment within the segment for fiscal '25. Construction Equipment sales increased by 1.1% to JPY 1,891.7 billion. In real terms, excluding FX impact, sales increased by 0.2%. In Asia, sales decreased as it took time to adjust distributor inventories in Indonesia. Sales increased in North America, driven by demand for infrastructure, rental and energy and in Europe, where infrastructure investment is on a recovery trend. Page 9 shows the causes of difference in sales and segment profit for the Construction, Mining and Utility Equipment segment for fiscal '25. Sales increased by JPY 7.8 billion as price improvement effects outweighed the negative impact of decreased volume. Although we focused on improving selling prices, segment profit decreased. The negative effects of decreased volume, product mix and higher costs due to U.S. tariffs and production costs outweighed the price improvements, resulting in a JPY 107.8 billion decrease in profits. The segment profit ratio was 12.9%, down 2.9 points from the previous year. The impact of tariffs in fiscal '25 amounted to JPY 64.2 billion. Page 10 shows the performance of the Retail Finance segment for fiscal '25. Assets increased by JPY 238.3 billion from the previous fiscal year-end due to an increase in new contracts and the depreciation of the yen. New contracts increased by JPY 75.8 billion, mainly due to higher finance penetration in North America and Europe. Revenues increased by JPY 2.9 billion, mainly due to an increase in outstanding receivables. Segment profit increased by JPY 7.2 billion, mainly due to lower funding costs. Page 11 shows the sales and segment profit for the Industrial Machinery & Others segment for fiscal '25. Sales increased by 6.8% to JPY 238.8 billion. Segment profit increased by 38.5% to JPY 37.9 billion. The segment profit ratio was 15.9%, up 3.6 points. For the automotive industry, sales of large presses increased. For the semiconductor industry, sales and profits increased due to higher maintenance sales of excimer lasers with high profit margins. Page 12 shows the consolidated balance sheet and free cash flow. Total assets reached JPY 6,423.9 billion, an increase of JPY 650.4 billion, primarily due to the impact of the yen's depreciation. Inventories increased by JPY 195.2 billion to JPY 1,601.9 billion, affected by both the weak yen and U.S. tariffs. The shareholders' equity ratio was 54.7%, down 0.3 points and the net D/E ratio was 0.26x. Free cash flow for fiscal '25 was an inflow of JPY 249.7 billion, a decrease of JPY 56.8 billion from the previous year. From Page 13, I will explain the progress of the strategic growth plan. The current strategic growth plan, driving value with ambition, which started in fiscal ' 25, set 3 pillars of growth strategy, create customer value through innovation, drive growth and profitability and transform our business foundation. Under create customer value through innovation, we began operating a power agnostics truck at a copper mine in Sweden as part of our efforts to address various power sources. We also conducted a POC test of a hydrogen fuel cell powered hydraulic excavator at a highway construction site in Japan. As part of our efforts for advanced automation and remote control, we are advancing the development of SPVs for next-generation mining equipment in collaboration with applied intuition. We are also promoting the practical use of autonomous driving technology for Construction Equipment through collaboration with Tier 4. Next, under drive growth and profitability, we received the first major mining equipment order in the Middle East for the Reko Diq Copper Gold Project in Pakistan. We began deploying AHS in the U.S. and delivered the 1,000th unit globally. We will also strengthen our remanufacturing business through the acquisition of SRC of Lexington in the U.S. We have initiated the establishment of a training center in Côte d'Ivoire, and we'll work to strengthen our marketing and service capabilities in the Africa region. Lastly, regarding transformer business foundation, in addition to embedding risk management through ERM and strengthening our supply chain through cross-sourcing and multi-sourcing, we accelerated human resource development for innovation and business transformation through the utilization of AI and digital transformation. We succeeded in improving scores in our employee engagement survey. Also, our global brand campaign led to high recognition at international creative awards. Page 14 shows achievement of management targets in the strategic growth plan. Net sales for fiscal '25 increased by 0.7% year-on-year as improvement in selling prices offset the decline in sales volume. On the other hand, profit decreased year-on-year as the negative impacts of volume reduction and cost increases outweighed the effects of price improvements. Regarding management targets, in terms of profitability, the operating income ratio for fiscal '25 was 13.7%, a 2.3 point decrease from the previous year. Despite efforts to improve selling prices, the results were significantly impacted by volume decline, inflation-related cost increases and higher costs due to U.S. tariffs. In terms of efficiency, ROE was 11.3%, achieving our target of 10% or higher. For the retail finance business, we achieved our targets for both ROA as well as the net D/E ratio. Regarding shareholder returns, we expect to maintain a consolidated payout ratio of 40% or higher. Also, we executed the repurchase of JPY 100 billion of our own shares. Regarding the resolution of social issues, we have set 30 KPIs, and progress in fiscal '25 has been broadly in line. Among these, for the reduction of environmental impact, we achieved our target for CO2 reduction from production ahead of schedule. Reduction of CO2 emissions during product operation and the renewable energy usage ratio are also progressing largely as planned. That concludes my presentation. Operator: With that, fiscal year 2026 forecast of the business, and that will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, the GM from Business Coordination Department. I'd like to walk you through our forecast for fiscal year '26 in our primary markets. Page 16 summarizes the impact of the situation in the Middle East and the U.S. tariffs as well as the underlying assumptions that have been factored into the fiscal year 2026 earnings forecast. And then the fiscal 2026 forecast incorporates items for which estimates can be made based on information available at this time. Regarding the situation in the Middle East, assuming the turmoil in the Middle Eastern countries and soaring oil prices and supply chain disruptions will continue throughout the year. We have factored in a decrease in sales of JPY 90.1 billion and an increase in cost of JPY 18.8 billion. However, regarding the impact on production due to shortages of crude-oil-derived materials, while there is a risk, the situation is unclear at this time. Therefore, it has not been factored into the fiscal 2026 outlook. Now on to U.S. tariffs. Based on assumptions of Section 122, additional tariffs will apply throughout the year and the revised steel and aluminum tariffs will apply from April 6 throughout the year. We have factored in additional costs of JPY 67.8 billion. However, we have also factored in JPY 30 billion in refunds, resulting in a net cost increase of JPY 37.8 billion. Page 17 provides an overview of the outlook for fiscal year 2026. We anticipate exchange rates of JPY 150 to the U.S. dollar, JPY 170 to the euro and JPY 106 to the Australian dollar. We project net sales of the JPY 4,118 billion, a 0.4% year-on-year decrease and operating income of the JPY 508 billion, a 10.5% year-on-year decrease. Net income is projected to be JPY 318 billion, a decrease of 15.5% year-on-year. Furthermore, at the Board of Directors meeting held today, a resolution was passed to repurchase treasury stock up to a maximum of JPY 100 billion or 25 million shares and to cancel all repurchase shares during fiscal year 2026. ROE for fiscal '26 is projected to be 9.1%. The dividend per share is planned to be JPY 190, the same as previous year, and consolidated dividend payout ratio is projected to be 53.8%. In addition, when the JPY 100 billion share buyback announced today is included, the total payout ratio is projected to be 85.4%. Page 18 presents the revenue and profit forecast for each segment. Revenue for the Construction Machinery and Mining Equipment and Utilities segment is expected to decrease by 0.4% year-on-year to JPY 3.79 trillion, while segment profit is expected to decrease by 10.4% to JPY 440 billion. Revenue for Retail Finance is expected to increase by 1.1% year-on-year to JPY 127.5 billion, while segment profit is expected to decrease by 1.6% to JPY 36 billion. Revenue for Industrial Machinery and Others is expected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% to JPY 37 billion. We'll explain the factors behind the change in each segment later. Page 19 presents the regional sales forecast for the Construction Equipment and Utilities sector for fiscal '26. Sales of this segment are projected to decline by 0.5% year-on-year to JPY 3,778.2 billion. Details of the year changes by region are provided on the following pages, broken down by Mining Machinery and General Construction Machinery. Page 20 presents the regional sales forecast for Mining Machinery within the Construction Equipment and Utilities segment for fiscal '26. Sales of mining equipment are expected to decline by 2.4% year-on-year to JPY 1,858.5 billion. Sales are expected to decline in Asia and Middle East due to sluggish demand for coal and impact of situation in the Middle East. In North America and Oceania, demand is expected to decrease as mining companies complete their equipment renewal cycles, leading to a decline in sales. Page 21 shows regional sales forecast for general Construction Equipment within the Construction Equipment and Mining Equipment Utilities segment for fiscal '26. Sales of general Construction Equipment are forecast to increase by 1.5% year-on-year to JPY 1,919.7 billion, while sales expected to decline in Middle East and Asia due to regional situation. Overall sales of general Construction Equipment are projected to increase year-over-year, driven by growth in North America, where demand for infrastructure energy project remains strong and in Latin America, where public investment is robust. This page outlines the factors contributing to the projected changes in sales and segment profit for this segment. Although we are striving to improve selling prices, sales are expected to decrease by JPY 16 billion year-on-year due to negative impact of lower sales volume caused by situation in the Middle East. Segment profit is expected to decrease by JPY 51.1 billion year-on-year, although we will strive to improve selling prices. This is due to the negative impact of lower sales volume, the expanding impact of tariffs and rising procurement cost. The segment profit margin is expected to decline by 1.3 percentage points year-on-year to 11.6%. Page 23 presents the outlook for retail finance. Assets are expected to increase by JPY 23.6 billion compared to the end of the previous fiscal year as new lending exceeds collections. New lending volume is expected to increase by JPY 5 billion year-on-year as we anticipate a high utilization rate continuing from the previous year. Revenue is expected to increase by JPY 1.4 billion year-on-year, primarily due to an expansion in outstanding loan balance. Segment profit is expected to decrease by JPY 0.6 billion year-on-year, primarily due to higher costs. ROA is expected to decline by 0.1 percentage points year-on-year to 2.3%. Page 24 presents the sales and segment profit outlook for Industrial Machinery and Others. Sales are projected to increase by 0.1% year-on-year to JPY 239 billion, while segment profit is expected to decrease by 2.5% year-on-year to JPY 37 billion. In the Semiconductor Industry segment, sales are expected to increase due to customers ramping up production amid the market recovery. However, for the automotive industry application, revenue is expected to rise, while segment profit is expected to decline due to factors, such as decreased sales of large presses and automotive battery manufacturing equipment as well as rising procurement costs resulting from the situation in the Middle East. The segment profit margin is expected to decline by 0.4 percentage points year-on-year to 15.5%. Starting on Page 25, we will explain the demand trends and outlook for the 7 major Construction Equipment categories. The demand figures for the 7 major Construction Equipment categories include the mining equipment. The figures for the fiscal year '25 are preliminary estimates based on our projections. Demand for fiscal '25 appears to have increased by 5% year-on-year. For fiscal year '26, we anticipate a year-on-year decline in demand ranging from 0% to negative 5%. In addition to decline in demand in Indonesia, we expect a decrease in demand in Middle East and neighboring countries due to the deteriorating situation in the region. Page 26 outlines the demand trends and forecast for the North American markets. Demand for the 2025 fiscal year appears to have increased by 3% year-over-year. Demand remains strong in sectors, such as data centers and other infrastructure, rentals and energy. The demand forecast for '26 fiscal year is expected to remain on par with the previous year. We anticipate the infrastructure and energy sectors will continue to drive demand as we go forward. Page 27 shows the demand outlook and demand for European markets. The demand units for 2025 fiscal year is expected -- was expected to increase by 4% previous year. And the demand outlook for '26 is expected to be 0% to positive plus percent -- positive 5%. And Germany and the U.K. public investment demand is expected to lead overall demand, and we are expecting to see the robust demand. Page 28 covers demand trends and outlook for the Asia market. Demand for '25 fiscal year appears to have increased by 5% year-on-year. In Indonesia, although the demand for mining machinery declined due to sluggish coal prices, overall demand increased due to rising demand for general construction machinery, such as food estate projects. In India as well, demand increased driven by aggressive infrastructure investment. The demand outlook for fiscal '26 is projected to be a decrease of 5% to 10%. While demand in India is expected to remain robust, demand in Indonesia is forecast to decline significantly due to the government's policy to reduce coal production and the impact of the introduction of the B50, which is biodiesel fuel regulations. Page 29 outlines the trends and outlook for demand in the Japanese market. It appears that demand for the 2025 fiscal year declined by 13% compared to the previous year. We expect demand for '26 to remain at the same level as the previous year. Although nominal construction investment is increasing due to inflation, real-time growth -- real-term growth is stagnant due to soaring material and labor costs, and there are currently no signs of recovery in demand. Page 30 presents trends and outlooks for the prices of key minerals related to demand for mining machinery. We expect copper and gold prices to remain at high levels going forward. While both low grade and high-grade thermal coal are currently trending upward, we will continue to monitor future developments closely. Page 31 shows the trend in demand for mining machinery. It appears that the number of units in demand for fiscal '25 decreased by 10% year-on-year. Overall demand declined due to a significant drop in demand for coal-related machinery in Indonesia. The demand forecast for fiscal '26 is expected to be a 10% to 15% decline. Although demand for copper and gold mining equipment is expected to remain at a high level, overall demand is projected to decline due to weak coal-related demand and the completion of the replacement cycle in North America and Oceania and the impact of the situation in the Middle East. Page 32 presents the sales outlook for the construction machinery, mining equipment and Utilities segment, including equipment, parts and services. In fiscal '25, parts sales increased by 0.4% year-on-year to JPY 1,055.2 billion. The aftermarket segment as a whole, including services accounted for 52% of total sales. Excluding the impact of ForEx, total aftermarket sales increased by 1% year-on-year. For fiscal '26, parts sales are projected to increase by 2.2% year-on-year to JPY 1,078.5 billion. The aftermarket overall sales ratio, including services, is projected to be 53% and aftermarket sales, excluding ForEx effects are projected to increase by 3.1% year-on-year. The Page 33 presents outlook for capital expenditures and other investments for fiscal year '26. Excluding investments in rental assets on the left, capital expenditures are expected to increase year-on-year due to investments in production and sales facilities as well as the reconstruction of the head office. Research and development centers shown in the center are expected to increase year-over-year due to focused investment in adapting diverse power sources and automation. Fixed costs shown on the right incorporate the effects of the structural reforms. However, they are expected to increase year-over-year due to wage increases and higher R&D expenses. Next, I'll explain the main topics. Page 51 now. Komatsu has acquired a remanufacturing business for construction and mining machinery components and parts from SRC of Lexington through its wholly owned subsidiary, Komatsu North America, Komatsu America Corp. In 2009, Komatsu transferred its North American remanufacturing business to SRC Lexington, and since then, has continued to do business with the company as one of its most important suppliers for Komatsu's North American remanufacturing operations. With this acquisition of SRC of Lexington's remanufacturing business, Komatsu will further expand this operation by establishing a new dedicated manufacturing facility in North America, one of the largest markets for construction and mining equipment. Page 52. In December 2025, Obayashi Corporation, Iwatani Corporation and Komatsu conducted demonstration test of hydrogen fuel cell power hydraulic excavator during rockfall prevention work on the Joshin-Etsu Expressway. The test confirmed several benefits, including operational performance equivalent to that of conventional diesel-powered models and reduced operator fatigue due to the absence of vibration. At the same time, we reaffirm the challenges facing practical implementation, such as the need for higher capacity and the faster hydrogen supply and refueling systems. The three companies will continue to conduct the studies and verification tests aimed at practical implementation. Page 53. Komatsu exhibited at CONEXPO International Construction Machinery Trade Show held in Las Vegas, U.S.A. from March 3 to 7. The company showcased a new generation of vehicles, including bulldozers and hydraulic excavators equipped with the latest features, such as intelligent machine control as well as articulated dump trucks designed to further improve operational efficiency. Komatsu highlighted its initiatives to leverage data from vehicles and digital solutions to enhance customer productivity and safety while reducing total cost of ownership. Page 54. Komatsu has acquired Malwa Forest, a forestry machinery manufacturer through its wholly owned subsidiary, Komatsu Forest. By acquiring technological capabilities and product lineup for lightweight compact cut-to-length forestry machinery, specifically designed for thinning operations, a segment in which Komatsu previously had no presence, the company will contribute to value creation across the entire circular forestry process. Page 55. We have reached a cumulative total of the 1,000 units for our ultra-large autonomous dumb truck equipped with autonomous haul system, AHS, for mining operations. Since introducing AHS for the first time in the world in 2008, the cumulative total haulage volume has exceeded 11.5 billion tons. That concludes my presentation. Operator: Now we would like to move on to the Q&A session. So first, we would like to take any questions from the people here. Maekawa-san from Nomura, please. Kentaro Maekawa: This is Maekawa from Nomura. I have 2 questions. First, regarding tariff impact and price increases. Hosotani-san, you mentioned this in your presentation, but last fiscal year, JPY 64.2 billion was the cost impact. I think originally, you were expecting JPY 55 billion and about JPY 120 billion, which is 4 quarters -- a quarter multiplied by 4, what's going to be your expectation for fiscal '26? So what kind of changes did you experience in reaching your results for fiscal '25? Can you confirm that first? And what have you accounted for, for this fiscal year? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding U.S. tariffs, there are no major changes on a dollar basis. While we were converting it at JPY 140 before, but now it's at JPY 150 against the dollar or to be more exact, JPY 150.5 against the dollar. Therefore, on a U.S. dollar basis, it's not different. It hasn't changed. It's just because of the FX impact. For fiscal '26, the impact will materialize on a full year basis. So it was about around JPY 600 million before, but it should reach around JPY 900 million. Other than that, we have accounted for refunds as well, which is equivalent to the reciprocal tariffs that are likely to be refunded. So that's what we have accounted for. Kentaro Maekawa: So if it's $900 million, it's about JPY 135 billion. For steel and aluminum, how much of an increase? How much of a decrease are you expecting from reciprocal? And the JPY 30 billion refunds are also included in the JPY 135 billion. So when you look out at March '28, is it going to become JPY 165 billion? So can you break down the JPY 135 billion? What has been going up, what has been coming down? Or can you talk about how it's going to rise from the JPY 64.2 billion? Kiyoshi Hishinuma: Well, regarding the period, before, it was from the middle of the year. So at the beginning of the year, we did have inventory from the previous year. So we started paying the tariffs at a later timing from a payment point of view. From a P&L impact, we had year-end inventories. So it was relatively low. But in fiscal '26, from the beginning of the fiscal year, we are making payments. So there is a period difference. And regarding the details, reciprocal tariffs may be gone. But for steel and aluminum, we used to calculate the content in order to reduce the level of tariffs paid. But now it's at 25%. So the impact is greater. So that is one reason why it's greater than before. From that point of view, for the refunds, that's about last fiscal year's portion. So for fiscal '27, we won't have deferrals from the previous fiscal year. Therefore, we will see full impact. So if nothing changes, it's likely to be JPY 165 billion. Next year, of course, that 10% or Article 122, when that's going to end is a question mark. But well, if we're working off the assumption that the same thing is going to materialize for the next year, that's what we're accounting for, but we are not sure. In that case, it's JPY 135 billion, for next year, the following year, if sales and production is not going to change, it should be about JPY 130 billion for fiscal '27 as well. And this year, it's JPY 30 billion less, or excuse me, for the results for fiscal '25, we already said that it was JPY 64.2 billion. And for fiscal '26, originally, we were guiding JPY 130.7 billion or JPY 130.8 billion. But because of the refunds that we were explaining, which is worth USD 200 million, which we view as JPY 30 billion in terms. So when you account for that, it should be a little bit over JPY 100 billion of an impact on our P&L. Kentaro Maekawa: Got it. For price increases, and on Page 22, when you look at the projections for selling prices, it's plus JPY 68.9 billion. So hypothetically, even if you don't get the refunds at JPY 130 billion, you should be able to make up for it through price increases. Are you making progress? And have you gained visibility already? Can you also speak to that? Kiyoshi Hishinuma: This is Hishinuma speaking. Regarding pricing, we did a bottom-up approach looking at the business plans of our subsidiaries, but price increases are also accounted for, for the U.S. But Caterpillar is not raising prices, and those are the circumstances. So there may be a risk. However, for the tariff increases in the U.S., we won't be able to absorb it completely just with the U.S. So global price increases need to happen. So that's what we're accounting for. Kentaro Maekawa: Understood. My second question is for this fiscal year and your view on volume. Also going back to Page 16, in light of the Middle Eastern conflict, you have reduced sales by JPY 90.1 billion. And last year, when there were some tentative assumptions for GDP as much as you can see, what can you see, what can you not see? So what are the assumptions that led you to JPY 90.1 billion? Because in mining, when energy prices are high, I think that may also serve as a positive. So I was wondering how you view this situation. Kiyoshi Hishinuma: This is Hishinuma. First, regarding demand for the Middle East, a 60% decline is expected. So that has been accounted for, 6-0 percent. And also due to the impact from the Strait of Hormuz, we believe that costs are likely to increase and especially negative impact on countries in Asia. So we are expecting sales to decline. But when it comes to higher coal prices, there is a chance that they may stimulate demand. But when you look at countries like Indonesia, it's true that what originally used to be $40, $50 a ton are now reaching $60 a ton. But even so, we are seeing a higher idle standby rate of equipment, and we're not sure if this is going to continue or not in the future. So demand has not really picked up. So currently, people are still on the sidelines waiting and seeing. There may be an opportunity, but so far, we have not accounted for that in our expectations. Takuya Imayoshi: Just to add a comment to that. Last year, U.S. tariffs just started. So it was hard to account for it in our guidance. But based off IMF predictions and so forth, we have viewed how much GDP is likely to decline and what's going to happen to demand. And that is why we accounted for JPY 50 billion decline in sales. But the global economies have not yet fallen, but we try to account for risk as much as possible to the extent that we can calculate. And also the Middle Eastern crisis, we don't really know its impact clearly yet, but our way of thinking is the impact from the Strait of Hormuz is likely to continue. That's the assumption we have. But then because we are dependent on crude oil as well as LPG, like -- in regions like Africa as well as Asia are likely to be affected. So like Hishinuma-san explained, we are expecting a demand decline in Asia as well as in the Middle East, leading to a sales decline in turn. And also accounting for our gut feeling that we have experienced from the past, we have accounted for a JPY 90 billion impact. And also due to higher crude oil prices, we are already seeing material prices increase that are crude-oil-derived, and that impact is JPY 18.8 billion. So this is purely looked at as a cost increase. So JPY 90 billion of volume decline and JPY 18.8 billion of a cost increase SVM-wise is what we've assumed due to what I've just explained. On the other hand, of course, the impact may be greater than our assumptions or the crude-oil-derived goods may fall to a shortage, which may affect our production, but that is still not known. So we have not accounted for that negative impact. Operator: I would like to move on to the next one, Sasaki-san from UBS. Tsubasa Sasaki: This is Sasaki from UBS Securities. I've got several ones, but the first question is the figures I always ask you. Page 22, this waterfall chart and volume product mix and also the cost variance. Looking at the Page 9 and Page 22, the plan and actual performance, and there have been some figures related to tariffs, but could you please give us the details around those factors? And this volume mix has been negatively contributed to your performance. So the negative JPY 32.2 billion, that's in your plan, but what gets you to that number? Hiroshi Hosotani: This is Hosotani speaking. First, Page 9. Page 24 and Page 25 variance. First in segment profit, JPY 72.6 billion of the volume mix and product mix difference, just hold on a moment. I'm sorry on this one. First, JPY 25.8 billion for the volume difference, and that was a negative. And also product mix, JPY 25.1 billion, that's included. Now factors for this, is that as we explained, electric dump truck, as we explained those up until the last fiscal year, and it's not that they were able to enjoy the higher profitability, but the mix increased for this electrical dump truck. And also Chile contract business margin declined slightly. And also regional mix had negatives here. And among the region, the highest profitability comes from Indonesia. And sales volume significantly decreased in Indonesia market. And that's why regional mix has seen the impact from that and JPY 19.6 billion approximately. Now moving on to the right and production cost, JPY 81.6 billion negative. Let me give you the breakdown for that, which includes the U.S. tariff cost increase, JPY 64.2 billion. This is only applicable to the Construction Equipment of the JPY 64.2 billion and other ones, like the variance coming from industry others, Industrial Machinery and Others. And also cost variance, let me give you the breakdown for that. From third party, we purchased components, the major components, and those costs started to inflate. So that's why there is the major variance of cost of goods. And fixed cost variance, fiscal '24 to '25, the labor cost significantly increased. Apology, you talked about the volume variance, apology, hold on a moment. For fixed cost, JPY 20 billion comes from the labor cost and the SGP projects were underway. And also the variance in comparison between '25 and '26, JPY 31.8 billion of the volume that's been included here, and of which the volume mix amounts to JPY 40 billion. JPY 40 billion, the big chunk comes from Indonesia. Hold on a moment. Other than volume mix, the regional mix and product mix are written here. Fiscal '25, the losses we have to make were all gone for '26. So JPY 31.8 billion included volume mix and that amount to JPY 40 billion. That's all from me. Tsubasa Sasaki: What about the variance of cost of goods? Because I guess the cost increases comes from the conflict in the Middle East. Hiroshi Hosotani: Yes. Fiscal '25 and '26, JPY 49.6 billion for production. The U.S. tariff's impact is included here in this number. About JPY 67 billion is included here, but at the same time, the JPY 30 billion of the refund is included. So the net it all out, the JPY 37 billion of cost increase is included here. And also other cost of goods variance, JPY 10 billion-some is also included. Tsubasa Sasaki: My second question, let me take this opportunity to ask this question of Hosotani-san. You took office as CFO. Give us your commitment as a CFO as we look ahead. For example, as a Komatsu, the capital efficiency improvement and the better margin, I mean, there could be a number of the lists that you want to attain, but you're succeeding Horikoshi-san and took office as CFO. And as one of the members of the top management team, what are the things would you like to achieve? I mean this is your first time to be here in a financial briefing. Do you have any commitment would you like to make? That's my second question. Hiroshi Hosotani: Well, you set the high bar for me actually, but let me try to answer. My predecessor, Horikoshi-san, mentioned this too. But basically, we always have to be mindful of the shareholders in running the business. And I would like to be contributing to the way we run the business. So shareholder returns and balance sheet and ROE, those indicators are the things I always look. For example, in comparison '25 to '26, the net income -- I mean, volume declined because of the conflicts in the Middle East. So net income declined. Business size and the revenue size need to expand from our perspective. And to that end, we are engaged in various activities. As we expand the business size, I would like to be of a support for the better decision on the management level so that we are able to have a better top line. I'd like to engage in those activities as CFO. Tsubasa Sasaki: Is it more like a better top line? Is it one of the things, which you like to commit? That's what I get from your message. What made you think that way? Hiroshi Hosotani: Well, for example, as we look at the current status, the conflicts in the Middle East and there are impacts from that. It takes time until the situation will go back to where it has been. So in the longer term, this is the one-off factor. But the U.S. tariff is concerned, some say this is a one-off factor, but at the end of the day, this is about the balance of the export-import of the United States and other countries and try to correct this imbalance. So these costs are permanently are subjected to occur. So that's why we need to continue to contribute to the cost, but net profit size need to be secured to an extent, which means that we are able to -- we need to have a better top line. Operator: Let's take the next question from SMBC Nikko, Taninaka-san. Satoshi Taninaka: This is Taninaka from SMBC Nikko. Regarding mining equipment, mainly, I have 2 questions. For metal prices, including coal prices, they are rising lately. And in the new fiscal year, when you add up the after services, you're only accounting for about 3% growth year-over-year. I think you're being conservative when you think about the underlying trends. And when you look at the underground mining equipment manufacturers' results, their growth rates look stronger. So can you talk about the backdrop to how you derive these assumptions? Kiyoshi Hishinuma: This is Hishinuma speaking. For mining equipment, as you rightly said, prices have been going up for, obviously, copper and gold and so forth. But on the other hand, for equipment and the way we look at demand, the replacement cycle is pretty long. So there's ups and downs. And also when you look at it by region, there are regions where we're expecting higher demand and other regions where we're expecting lower demand. That's for equipment. And the growth we're expecting for the aftermarket business may look small. However, we did see drop-offs that were quite significant in Indonesia and also in the Middle East, including reman, we have been growing the business, but all in all, the numbers may not look as dynamic as you were expecting. Satoshi Taninaka: My second question is with respect to the replacement cycle and you talked that it has run its course. From 2011 through 2013, demand for mining equipment grew quite substantially. And then you have a replacement cycle. And are you trying to say that the message was that the replacement cycle is over? Or are you saying that over the short term, there are ups and downs and replacements are at a standstill at this moment? So for March '28, are you trying to imply that demand is going to go down even more? Kiyoshi Hishinuma: Well, the cycle we're referring to is not about the 2011 cycle. It's more about whether we have big deals or not in recent years. For example, in North America, in '24, '25, in North America, there were some big deals. And we have been explaining that some big deals have been absent in 2025 because there were more in 2024. So they were less in 2025. And in 2026, we are expecting at this moment less of large deals. But regarding the share volume of general deals, we are actually seeing an increase. So it's just a matter of whether or not we are carrying large deals or not. For example, in the case of Australia, in fiscal '26, we're not expecting that much of big deals, so to say. That's what we were referring to. But for super large dump trucks that we manufacture in North America, when you look at our production plans and compare '25 with '26, production volume is not going to change that substantially. Even if the sales may not be recognized in 2026, there is a possibility that it's going to go into 2027 sales. And rope shovels are being produced at 100% capacity. And we are also working on fiscal '27 already. And because copper is doing well, we're not really expecting that much a decline. However, we need to monitor closely the trends in Indonesia. Operator: I would like to take a question from Adachi-san from Goldman Sachs. Takeru Adachi: This is Adachi from Goldman Sachs. I have 2 questions, too. The first one, the mining equipment. As Hishinuma-san shared, Asian market, usually coal prices are on the rise, which is positive, but diesel prices and operating costs have been boosted, which is negative and negative outweighed the positive and the dormant that populated the vehicles is increasing. And what are the changes that you have seen for dormant and idle vehicles? And I think up until Q1 last fiscal year, there was a last minute demand was very strong and that sub demand in Q2. But as you look ahead, Q1, you see the sales can drop from the fiscal year, but do you think that, that will be flattish after Q2? Or do you think that Q2 and beyond, do you think the moderate decline continues, especially for the Indonesia mining equipment market? Kiyoshi Hishinuma: For Indonesia, as you raised a number of the points, the idle vehicles ratio and what are the historical trends? For example, 2024, the end, 5%, they used to be 5%. Then fiscal '25 in June, 8.5%. And then that was up to 9.6% in January and 10% afterwards and 17% in January. So the coal prices goes up and even the workload increases, and they are able to handle the increase in volume with the coal prices with the current volume. So B40 and now start in July, it starts B50 and production volume, 800 million tonnes, 600 tonnes -- 600 million tonnes. And there are some talks of increasing the volume. Throughout the year, we are not 100% confident that there are bound to increase. So fiscal '26, I believe that we are seeing this as a cautious note. Takeru Adachi: As Tanigawa-san and yourself discussed a bit, Indonesian coal and precious metal have been pretty strong in prices and the production plan is at full, as you said. In order to accelerate it, would you like to accelerate further on that point? Kiyoshi Hishinuma: In North America production capacity ramp-up, rope shovel might be at full. The electric dump truck production plan for fiscal '26 and '25 will be equivalent, I said. But versus what it has been in the past, there are some time where we produce more. So at the full capacity, if we produce them, and there could be some more availability. So in North American market, we are not -- we haven't gone to the point where we are dealing CapEx. Takeru Adachi: Okay. Next one is cash flow and the buyback is announced. And the previous year and two years ago, like those 2 years, you have announced JPY 100 billion. What are the decision-making process like? And behind that, free cash flow assumption were -- would have been calculated. How much free cash flow you're expecting, JPY 160 billion is expecting, I guess. So how much of the operating cash flow and the working capital level? And what are the production assumption to the working capital? Maybe you can have a breakdown approximately. Do you have any up and down of your planning for production? Hiroshi Hosotani: This is Hosotani speaking. For free cash flow, fiscal '24, free cash flow, JPY 300 billion-or-some. That's fiscal '24. And it's been a few years, the JPY 250 billion to JPY 300 billion of the free cash flow. That's our track record of the free cash flow. Now with this amount, dividend and buyback of the JPY 100 billion, we have enough excess capacity to do that with this amount because it amounts to JPY 300 billion. Now for fiscal '26, free cash flow or as planned of the JPY 250 billion plus and deposits and others, I mean, sales were not growing and profits declined, but the working capital is expected to improve. So as a result, so we are able to generate equivalent level. JPY 300 billion plus of the free cash flow are our commitment. So that will continue for 3 years. And M&A portion excluded, then JPY 1 trillion. And that's a commitment and goal we set ourselves. Operator: There are people raising their hands on Zoom. So we would like to take that question from [ Otake-san ], please. Unknown Analyst: Can you hear me? This is Otake speaking. Operator: Yes, we can. Unknown Analyst: Just wanted to confirm again. First question is regarding the impact from U.S. tariffs, please let me sort it out. For the year ended in March 2026, the impact was JPY 64.2 billion on your P&L. Is that correct? Hiroshi Hosotani: That is correct. JPY 64.2 billion for Construction Equipment. That's for Construction Equipment. But for Industrial Machinery, there are -- there is a bit of tariff's impact as well that has been incurred. Unknown Analyst: Up until the previous results, according to the materials, you were saying JPY 55 billion of impact from tariffs. So does this include Industrial Machinery as well on top of Construction Equipment? Kiyoshi Hishinuma: It's only several hundreds of millions of yen attributed to Industrial Machinery. So the level doesn't really change. There was about JPY 400 million of an impact from Industrial Machineries and Others. Unknown Analyst: Got it. And for -- from the assumption of JPY 55 billion, the reason why it increased to JPY 64.2 billion is due to FX impact, right? Kiyoshi Hishinuma: Yes, exactly. Unknown Analyst: No differences on the U.S. dollar basis, broadly speaking. It's just due to the differences in conversion FX rates. So for this fiscal year, for the year ending March '27, excluding refunds, you're expecting JPY 130.8 billion. Is that correct? Hiroshi Hosotani: That is correct. Unknown Analyst: Got it. And the impact amount, the reason why it's higher, you were saying that the content calculation has been abolished and that has had an impact. Can you walk me through what that means and entails? Kiyoshi Hishinuma: Regarding content, for steel and aluminum content, you calculate how much is included for -- as part of your product prices or cost. And that is subject to steel and aluminum tariffs and the rest to reciprocal tariffs. So by calculating the content, we have been able to reduce its cost. And even for derivatives, it is 25% now. So when we were calculating the content, it was less than 25% basically. Unknown Analyst: Or by doing a precise calculation of content, you have been explaining from before that you are able to reduce the cost. But I guess that is not possible anymore. Then in order to reduce tariff impact going forward, such as reviewing our supply chain or logistics, I think that will be key, but with respect to these measures, in order to reduce the negative impact, what are you focusing on? Or what would you like to focus on going forward? Takuya Imayoshi: Well, last year, in April, we shared with you various types of countermeasures we were planning for. For the products that used to go through North America that went to ultimately Canada or Latin America, by shifting to direct shipments instead and shipping out to Canada directly, we will be able to alleviate the impact, and that is fully contributing already. And there are some parts that are going through the U.S. as well. But by directly shipping and also creating warehouses in Panama, we are trying as much as possible to reduce the impact. And for countermeasures, for steel and aluminum tariffs, not by simply just paying for it, but by calculating the content, we had been trying to minimize the tariff impact. However, now it's going to be 25% across the board. So that countermeasure is no longer viable. However, reciprocal tariffs are now gone. So on a net-net basis, the actual amount of payments are slightly up. You referred to the P&L, but the impact on '25 and the impact on '26 because of more inventory impact, it's going to become a greater impact. And the difference in tariff rates have also been impact -- are expected to impact us as well. Unknown Analyst: I see. So you are working on various initiatives. But in order to mitigate tariff impact even more, one kinds of feels that it may be challenging. But what would you like to do additionally? Or do you feel that you will be able to reduce its impact? Takuya Imayoshi: Of course, increasing production in the U.S. is something we are considering. But from a cost point of view, it is also challenging, which is preventing us from doing so. So I think it's more of a buildup of various improvements. And hopefully, we could raise prices to make up for it globally or reduce costs globally as well so that we can ensure that we are profitable. And sorry for going on, but for price increases, you were talking about Caterpillar and that they are not raising prices recently, but currently, in the U.S. as well as in other regions. Unknown Analyst: When you look across the competitive landscape, how are the price increase trends from your point of view? How do you view the market? Takuya Imayoshi: Well, we have been communicating this from before. But from several years ago, in accordance with higher steel prices, we have been increasing prices, but our competitors have been more bullish in raising prices. So we were a little bit behind. But in order to catch up, we have continued to steadily raise prices. But now steel prices have calmed down and price increases just limited to higher tariffs is not really happening, and that is why we are seeing difficulty here. Unknown Analyst: My final question is about the Middle East and its impact. JPY 18.8 billion of a cost increase is what you're expecting. Can you break it down? How would it look like? Can you share it with us as much as possible the breakdown? Kiyoshi Hishinuma: It's -- costs are rising and parts are rising due to oil-derived products and also logistics, transportation costs because of higher fuel costs, that has been accounted for as well. The majority is because of higher parts prices and cost increases. Takuya Imayoshi: Meaning fuel, oils, paint, gas that are oil-derived, material prices have already been going up quite a lot. So that has been accounted for as a cost increase. Unknown Analyst: I see. So procurement cost increases is about maybe 80% of the cost increase and maybe 20% to 30% associated with seaborne transportation. Takuya Imayoshi: Maybe it's like a 70-30 split. Operator: I would like to take questions from anyone joining us online. BofA, Hotta-san. Kenjin Hotta: This is Hotta from Bank of America. I have 2 questions, too. First, with the conflicts of the Middle East and that has impacts on volume and other mix. On the production front, you have uncertainties, so you haven't incorporated them into the guidance, as you said. But if possible, on production front, how much impact do you think that there is? You said there is nothing for now, but given the current situation, how much potential impacts you might have to suffer from? Or are you saying that you have enough inventory, so you are able to have the muted impacts from that on the production front? Give us the details around production areas, if there's anything you can share with us. Kiyoshi Hishinuma: Well, first on production area or production front. First, we try to sustain production work, and we try to work with suppliers. We try to secure enough works and components. And how far we are able to secure them? It's not to say that we are able to secure them for 6 months and 1 year ahead. So we always have to cement where we are, and we try to secure production. To the worst-case scenario, naphtha and other materials could have issues in the future. And if and when, if we can secure some of the materials from plants for any of the one single supplier and the production itself could be impacted. But when would that happen? We're still not sure. That's why we haven't incorporated the potential factors into the guidance this time. Kenjin Hotta: Okay. My second question is the mining equipment. You said replacement cycle. And you said that there is a completed replacement cycle now, but fuel is on the rise. So a little bit outdated equipments. Needs to have -- needs to be a newer ones so that, that uses less oil or less fuel. Is that kind of the replacement demand that you're seeing? Kiyoshi Hishinuma: Well, it's not going to be a replacement cycle you're going to see in the passenger cars. Kenjin Hotta: Okay. But to stay on the same topic of the fuel prices, if you look at the Australian market, diesel shortages is very dire and SMEs mining companies started decide the shortage of diesel and they need to compromise the utilization ratio recently. And BHP has no issue whatsoever because they are big enough. But Australian market is primarily a market where the utilization ratio for the machine is declining. Is that something you're saying? Or isn't there any impact on your operation whatsoever in terms of the diesel shortage? Takuya Imayoshi: Well, we haven't witnessed any of the specifics, be it suspension of the operation itself, but there are risks, yes. Operator: There's another question from online, McDonald-san from Citigroup Securities. Graeme McDonald: Can you hear me? Operator: Yes, we can. Graeme McDonald: This is McDonald speaking. I have a question about Page 26 in North America. Looking at the right-hand side for Q4, for the 7PLs, it was plus 7%. And going back, I think for the first time in several occasions, it was a good number, maybe several years, where you're seeing an uptrend even so for this fiscal year. For volume, you're expecting flattish demand compared to fiscal '25. The non-housing space, when you look at the segments like mining, energy, road construction and data centers and so forth, for this fiscal year, I kind of think that you're conservative in your projections for North America this year. Of course, I'm sure you have a lot of concerns in your heads. But why are you guiding flattish demand? Shouldn't you be guiding having an assumption that is more positive? That's my first question. Kiyoshi Hishinuma: Thank you for the question. For North America, as you said, what we show in the material for Page 26, at the bottom right, we show the breakdown of demand by segment, divided into rental, energy, infrastructure that are performing positively across the board. It was only housing as well as government-related that was negatively contributing. So all in all, the trends are positive. And after completing fiscal '25, we saw plus 3% growth in demand. So when you listen to what customers are saying even, they have about order backlog of 6 months to 2.5 years. Therefore, we do believe the market is quite strong. So our assumptions are flattish, but we're not really anticipating any major negatives. Therefore, yes, you can say that we are being conservative. Graeme McDonald: Well, from a regional point of view, Indonesia apparently had the highest profitability in the past, but if you're so bearish about Indonesia, the highest profitability as a market, I guess, is coming from North America in the non-housing segments. Do you think that's true that it has the highest margins? Kiyoshi Hishinuma: If you just look at SVM, excluding fixed costs, the procurement cost inclusive of tariffs is quite big. So no, the margins are not the highest in North America. Graeme McDonald: Okay. So it will continue to be challenging. So I just wanted to confirm another thing about Page 9, I think. In your comments, Hosotani-san, for last fiscal year and the negatives from product mix was EDTs. Is this one-off? Or for electric dump trucks and its profitability, is it relatively low? I just wanted to confirm that point you made. Hiroshi Hosotani: This is Hosotani speaking. Our dump trucks is because of our dump truck mix. Globally, we sell -- the regions where dump truck margins were high was Indonesia. For Indonesia, we have been selling rigid dump trucks mainly. And for electric dump trucks are being made in the U.S. on the other hand, compared to rigid dump trucks, the costs are greater due to its structure. And sales in Indonesia, especially for mining has been dropping off. So product mix-wise, rigid went down, whilst EDT composition has increased. So from a product mix point of view, because of more electric dump trucks, average margins have come down slightly. Graeme McDonald: I see. So we shouldn't be that concerned, I guess. Hiroshi Hosotani: Correct. Graeme McDonald: Finally, I have a quick question on topics on Page 50, you talked about AHSs and reaching 1,000 units in volume. I think that's great. Going forward, do you have any numerical targets as to how to grow the business even more? That's my final question. Kiyoshi Hishinuma: Well, in the strategic growth plan and our targets, it was 1,000 units in fiscal '27. That was our original target, but we have been able to reach it beforehand. So we have been -- we are thinking about raising the target up to 1,200 units instead. So compared to the pace we saw back in fiscal '25, it looks like it's going to decelerate. However, new customer implementation is likely to increase. And in that case, the rate of increases is going to look like it's decelerating, but we will continue to work on its implementation. Graeme McDonald: How about margins? Compared to rigid dump trucks, is it lower? Kiyoshi Hishinuma: Well, we talked about electric dump trucks earlier. So that in itself is not that high, but this is an AHS system, and we receive income from subscriptions as well. So that is a positive. Operator: We are counting down some time. Anyone who has questions here? Okay. I'd like to take a final question from the floor. Issei Narita: Narita from Mizuho Securities. Sorry, I'm repeating myself, but Page 28, here in Indonesia, mining equipment demand doesn't look like it's declining so much. And yes, I do understand that there is a declining market, but the Chinese manufacturers try to make inroads into mining equipment more and more. And against the hard work in Latin America, the Indonesia and those smaller kinds of smaller dumps were utilized in those Indonesia. So other than the market, there have been anything that you can share other than the competitive landscape? And also, you said Indonesia, it has the highest margin, whereas coal prices will give you the headwind. And that might be changing in the future, but with your self-effort, do you see any capacity to increase further overall performance in Indonesia? Takuya Imayoshi: Well, as you see the bottom right, Page 28, you see the demand trend, and that might be misleading, but you see by sector here. So in terms of the size, the smaller equipment for mining are included here. And then fiscal year '25, we are shipping a lot of those smaller ones and 100 tons demand is on a decline. So that sounds like that doesn't add up. But the demand for 100 tons, the customer try to hold back the purchase. That's why we are struggling. And fiscal year '26, the coal production volume is going to be struggling, but we work with the distributors to secure enough volume here. Operator: So finally, Tai-san from Daiwa Securities, we would like to take your question remotely. Hirosuke Tai: Yes, I'll keep my question brief. I have a question for Imayoshi-san. With respect to the Middle East and tariffs, that was the main topic for today's call. Even if you add back those numbers into your guidance, profitability is expected to be about the same as last year or a little bit down, whether it be on a company-wide basis or for the C&ME segment. And I think it all comes down to inflation, maybe. But how about striving to raise profitability by making up for it? Do you have that intention? Or are you fine with this kind of margin? And would you like to instead raise top line? Because you have just started a new fiscal year. So Imayoshi-san, of course, can you talk about some themes that you're considering as a company? Of course, countermeasures for the Middle Eastern conflict may be one, but I was hoping that you could share 1 or 2 things on your mind. Takuya Imayoshi: Well, as stated in the strategic growth plan, we want to have profitability and growth rates that exceed industry levels. So it's not just about growing top line, but also profitability as well. Overall, demand-wise, we are at a juncture where it's broadly flat. It's not just tariffs impact, but Indonesia's drop-off is also a negative when it comes to profitability, but we will steadily implement the measures that we're stating in the strategic growth plan. We will work on product development as well as we'll think about ways to grow the aftermarket business. So we would like to ensure that we're able to generate results so that we can also enhance profitability. Operator: Thank you very much. This concludes the Q&A session.
Operator: [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ron Lataille, Chief Financial Officer. Please go ahead. Ronald Lataille: Thank you, operator. Good morning, and thank you for joining us on our 2026 First Quarter Earnings Conference Call. With me on today's call is our CEO and Chairman, Jeff Bailly. Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K, including disclosures of the factors that could cause results to differ materially from those expressed or implied. During this call, we will discuss non-GAAP financial measures, which include organic sales growth, adjusted gross margin, adjusted operating income, adjusted SG&A, adjusted earnings per share and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website. I'll now turn the call over to Jeff. R. Bailly: Thank you, Ron, and thank you to everyone joining the call. I am pleased with our first quarter results and start to the year, including important progress on our strategic growth initiatives. Our revenue grew 4.1% with medical sales growing 5.9% and our nonmedical sales declining 15% as we continue to focus our efforts on best fit fast-growing segments in the MedTech space. Growth in our robotic surgery, patient surfaces & support and interventional and surgical segments of 7%, 11% and 15%, respectively, were partially offset by declines in Wound Care as 2 major customers slowed temporarily due to excess inventory. EPS grew more slowly than revenue due in part to, number one, start-up costs related to our 4 simultaneous program launches, each of which is slowly ramping up and expected to make meaningful contributions in the second half of the year. Number two, softer results at AJR versus Q1 of 2025 as they continue to work through their labor inefficiency issues related to turnover following our E-Verify or legal right to work process last year. And number three, nonrecurring legal expenses related to a cyberattack and the CEO transition. A lot of exciting things are happening on the business expansion front. In addition to the 4 successful program launches, 3 of those 4 customers have already asked us to double our capacity on the new programs. We are also adding new buildings in both Santiago, DR and La Romana DR to expand capacity and accommodate forecast growth in patient surfaces & support and robotic surgery. In both locations, we are co-investing with our customers and will take possession of the buildings in the second quarter of this year. We're also in the planning stages to add capacity in the APAC region to meet growing demand in Asia. Our new product development labs in La Romana and Grand Rapids are performing well, adding new programs and new talent to meet growing customer demand. On the acquisition front, we are reviewing multiple opportunities. Although we have been outbid on a couple of recent opportunities, we remain disciplined in our approach to vetting and valuing strategic acquisitions. The 3 acquisitions we completed in 2025 and the 4 in 2024 are all performing well and have increased our value to customers and strengthened our position in the market. Mitch Rock is excited to take over as CEO in June and is well prepared to succeed. We have a deep team of talented managers supporting him who understand our strategy and how they fit in. This team, together with our vendor partners, add significant value to our blue-chip customers in growing market segments. Each of these 3 critical components of our success, our team, our customers and our vendor partners, trust and respects Mitch and looks forward to continuing to grow with UFP. So for these reasons and many more, I'm very excited about the future of UFP Technologies and the value it can create for our shareholders. Thank you, and I will now hand it back to Ron to provide more color on our financials. Ronald Lataille: Thank you, Jeff. Before reviewing operating results, I'd like to give a brief update on tariffs and the impact of the conflict in Iran on our raw material input costs. In general, effective tariffs are net down from our last update. This should have a positive prospective impact on margins. Additionally, as our suppliers seek refunds from the government, we will be looking for these to flow through to us in the form of vendor credits. Countering these savings are raw material inflationary increases caused by the increased price of oil stemming from the conflict in Iran. It is difficult to estimate the ultimate impact as the news changes daily, and therefore, the price of oil has been volatile. It remains our expectation that we will pass these through to our customers. Moving to operations, as Jeff mentioned, overall sales were up 4%, fueled by a 6% increase in medical sales. Strength in this area was driven by our robotic-assisted surgery, patient surfaces and support and interventional and surgical submarkets. As anticipated, organic sales growth for the quarter was essentially flat as we are slowly ramping our new programs and our non-medical business continues to soften. We anticipate that the new program revenue growth will accelerate in the second half of the year. In addition, approximately $1 million in sales pushed into the second quarter due to a cyber event at one of our key customers. Of note, sales to our 2 largest customers collectively grew 7.5% during the first quarter. Gross profit as a percentage of sales or gross margin increased to 28.8% from 28.5% last year. This improvement was despite continued labor inefficiencies at AJR, which, although diminishing, are still impacting cost of sales. Helping to drive the improvement was a more than 200% increase in revenue in Santiago, Dominican Republic, enabling us to leverage fixed overhead costs at this location. SG&A expenses for our first quarter of 2026 increased by $2.2 million to $21 million. This is largely due to approximately $750,000 in wages and benefits for back-office investments made at various times during 2025 to support our larger organization as well as approximately $0.5 million in noncash equity compensation. We also incurred approximately $0.5 million in nonrecurring legal expenses due to the cyber breach incident in mid-February as well as the anticipated CEO transition. Adjusted operating margin for the first quarter was 16.7% of sales and adjusted earnings per diluted share outstanding was $2.48, up slightly from last year. We generated approximately $3.2 million in cash from operations during our first quarter. This was lower than is typical as a much stronger March sales month created a correspondingly high working capital need. Since March 31, we have paid down approximately $4 million in debt. Capital expenditures were $1.7 million during our first quarter, and we ended with a leverage ratio of approximately 1.14x. With that, I now turn it back to the operator for questions. Operator: [Operator Instructions]The first question comes from Brett Fishbin with KeyBanc Capital Markets. Brett Fishbin: I just wanted to maybe start off with the robotics segment and I saw in the press release, you mentioned 7% growth in this category. I was hoping you could just discuss this a little bit more, maybe touch on the contribution from the new products that are starting to ramp in this segment? And then also just curious how growth is trending across your larger customer base outside of the large robotics customer? Ronald Lataille: Sure. Thanks, Brett. So the 7% growth was a blend, but it's primarily anchor programs at this -- or existing programs at this point. The new programs that we've launched are still in their infancy stage. But over time, they will be a bigger and bigger component of our growth. So we are pleased with the start to the year in the robotic surgery area, particularly at the 7%, it was a little higher than we had originally forecast. With respect to -- what was the second part of the question, I'm sorry? Brett Fishbin: I was just curious, I guess you kind of addressed it. I was asking about the new product launches and then also just how non-Intuitive customers overall are doing. Ronald Lataille: Yes. Our business is becoming more and more diverse, more and more diverse within Intuitive with additional programs and more and more diverse with additional customers. And I think you'll consider -- you'll continue to see less of a dominant position in that one customer as we go forward. R. Bailly: And then maybe just more broadly, you mentioned 4 large programs that are currently in the ramp phase. So maybe just a little bit more flavor around how you're thinking about those opportunities. I know you mentioned that they're expected to become significant contributors in the back half. Maybe just a little bit more detail on how you're thinking about that. Ronald Lataille: Yes. I mean 3 of the 4 programs are brand new and one was a transfer. And so the 3 new programs, each of those customers has already asked us to at least double our capacity with them. So 3 very successful launches, but the start-up revenue still is small. So the revenue will ramp into Q2 and be more robust in Q3 and Q4 and then continue on. And as we add new capacity, those 3 programs will be meaningful contributors. Two were robotic surgery and one was an infection prevention. Brett Fishbin: All right. Perfect. And last question for me. Just the nonmedical business was down a little bit more than we were expecting. I wanted to just ask if you think that's kind of the right way to think about it for the rest of the year from a growth perspective or if anything is changing in a notable way as the year progresses? R. Bailly: Yes, absolutely. So the dominant drop was in automotive, which I think is going to be the new normal as we literally phase out of this market. There was also a softer side in the aerospace and defense, and that will flip. We already have some activity that's going to take that from slowing back to growing. But I think you'll see advanced components continue to be little to no growth over time in certain markets like automotive, we will completely phase out of. Operator: The next question comes from Justin Ages with CJS Securities. Justin Ages: You mentioned the 4 large programs ramping and contributing in the second half. Can we dig down a bit and just talk about the impact to profitability from those? How long will those headwinds -- well, I don't want to call them headwinds, but how long will those like start-up costs be in there? Are we going to see that go down once the programs start contributing more in the second half? Ronald Lataille: Yes, absolutely. So the start-up costs relate to getting the whole team there prepared, trained, et cetera, before the volume follows. So all those hires have been made, those people have been trained. And as the volume ramps up, we'll be absorbing those costs. And so the fixed costs won't go up, but the revenue will. So I think you'll see just a smooth plus. They're very slow starts. We'll ship a handful of parts and then a pallet and then eventually, they'll sort of turn on the spigot. And by the second half of the year, I think it will be robust contributions from all 3 of those brand-new programs. Justin Ages: Okay. I appreciate that. And then you mentioned taking control of 2 buildings, one in La Romana and one in Santiago. Can you just remind us how many buildings you have in each location then and what the capacity looks like after that? Because you mentioned already customers you have are asking for increased capacity. So just wondering if there are new additional buildings that are already kind of on your pipeline coming down the pike. Ronald Lataille: So in La Romana, this will be our sixth building. And so it's not exactly even how much capacity it adds, but it's approximately 1/6 more capacity. And so that's primarily for robotic surgery. We set up a big infection prevention program in one of the other buildings. So the La Romana campus is dominantly robotic surgery. In Santiago, we're adding our third building, and that one is predominantly patient surfaces and support. And that will probably stay that way for the time being. So if we have new low-cost country applications, we'll probably be directing them towards La Romana in the short term because that team is very experienced and their quality systems and everything have been going for literally decades, whereas Santiago is a little more of a start-up situation still. [Operator Instructions] Operator: The next question comes from Andrew Cooper with Raymond James. Andrew Cooper: Maybe first, I just want to touch a little bit on the Wound Care drags you called out tied to inventory. I guess can you give a little bit of a sense of magnitude for those programs? And then what gives you the confidence and comfort that this is purely an inventory dynamic that should normalize as the year progresses? Ronald Lataille: So these are both -- I mean, they're large customers within wound care, but not necessarily large customers in the whole of UFP Technologies. Both had inventory issues that they thought were in the sort of 8-month range of impact to us. But at the same time, we have 2 major programs that were in the development stage in wound care. So I'm still long term, very bullish on wound care. There seems to be a resurgence of interest in this area. So to answer your question, probably a 3-quarter impact from the slowdown in wound care and then back to normal. And then probably next year, we'd be overlaying some new programs. Andrew Cooper: Okay. Helpful. And then shifting a little bit to the AJR business. I guess 2-part question. First, can you give us a sense -- I know you called out the 200% growth in what's coming out of Santiago, but what inning of that transition of getting those products from Illinois to Santiago, would you say we're in? And then a similar question when we think about the labor headwinds, where are we in terms of temp labor versus full-time hires and really sort of getting those hires trained and back to full capacity and where you would expect to be to start working down that backlog in a more meaningful way? Ronald Lataille: Yes, absolutely. So with respect to the transfers, we think in terms of 3 major programs. So number one, completely transferred and running at rate. Number two, now completely transferred and so about to ramp up in rate. So we had sort of a tripling of volume over the last 12 months, and that will continue to grow. Program #3 has not really started. So we have the space, the lease. We've got the equipment that's shown up on site, but there's a long sort of PPAP and protocol that we have to go through before that will get up and running. And that may take more than a year, frankly, to be a meaningful contributor to Santiago. With respect to AJR, as Santiago comes up, it takes some pressure off AJR. So we have a lot of employees in Chicago. We've really fueled -- or geared up quickly to get our backlog down. The problem is not only do we have backlog, but our customer was growing rapidly. So we've been working quite a bit of overtime with a less efficient crew. And so that overtime is already beginning to subside a little. And then as we transfer more work, the less efficient employees will sort of naturally fall off and the ones that are most efficient and eligible for overtime and incentives, et cetera, will be the ones that stay. So I expect to see a smooth plus on that. With respect to progress between Q3 and Q4, I think we cut the problem about in half. Between Q4 and Q1, we made about a 25% improvement. So there's still a ways to go. But I think it will accelerate when we ramp up in Santiago because, again, we have to keep all employees, whether efficient or not right now just because we're trying to get out of backlog situation. And then we'll end up with a more efficient crew when we're done, a smaller, more efficient crew in Illinois. Andrew Cooper: Okay. Great. Super helpful. And then maybe last one, just would love a little bit more color on sort of what you're seeing in the M&A landscape and how you're thinking about it. I know you called out a couple of opportunities that were interesting, but maybe not as interesting from a dollar perspective to you as others. So just would love maybe the latest thinking on what that landscape looks like. Ronald Lataille: Yes. We have a number of discussions underway. I would say that it's a little quiet right now, frankly. There were some big deals that went through that we bid on, a couple unsuccessfully, which we are absolutely fine with, by the way. And if we get outbid, we'd rather outbid by a lot than miss it by a little. So we are very disciplined in our process, both vetting strategically, vetting for culture and then vetting for value. We do have some small ones that we're working on, and we do have still one very large one that's percolating in the background that will probably take quite a while to come to fruition if it does. But the perfect deals for us are more the medium-sized ones. And there's not as many of those as we'd like to see in the pipeline, but we are looking at deals every single week, and we have meetings with prospects every single week. So the pipeline is constantly being refilled and then vetted and some stuff falls off. So I mean, I still believe that over the next multiple years, acquisition growth will still be 50% of our overall growth. It's just hard to time. That's it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Bailly, Chairman and Chief Executive Officer, for any closing remarks. R. Bailly: Yes. Thank you, operator, and thank you to everybody joining the call. Just to close, this is my last call as CEO, and I really appreciate all the support of our shareholders. I'm super excited about the future of the company. UFP is still the largest investment I have by multiples of greater than 10 over the next largest stock, and it's the most exciting stock in my portfolio. I think the team of people taking over is super fired up and super excited. And it's a very deep, deep team of people. And so Mitch is well respected. He is ready to go, and he's well prepared to succeed. I will be there for the next year as Executive Chair to support him with acquisitions, key strategic hires, et cetera. But I just want to say thank you, and I appreciate everybody. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Christian Gjerde: Good morning, and welcome, everybody, to this first quarter results presentation for Elopak. My name is Christian Gjerde, and I'm the Head of Treasury and Investor Relations. Today's presentation will be held by our CEO, Thomas Kormendi; and our CFO, Bent Axelsen, and will last for around 30 minutes, followed by a Q&A session, where we will take questions from the people here in the audience as well as the people joining us online. So with that short introduction, over to you, Thomas. Thomas Kormendi: Thank you, Christian, and a warm welcome to all of you here on the beautiful, beautiful spring day in Oslo. It's really great to see so many of you here in person. So Q1 let's get started. As you know, some of you will know, just 2 words on who we are. We are actually in the business of sustainable packaging. All we do, the only thing we do is fiber-based packaging. We do that with protecting essential commodities, not the least dairy products, but also other products such as juices, soups. And in all of this work, we are committed to reducing the use of plastics. So Q1, what -- let's look at the performance here. Well, first of all, we report a revenue pretty much stable in terms of -- stable when you look at the constant currency. We're reporting a 3.9% decline. But on constant currency, given the exchange rate primarily in U.S., we're looking at a stable development. Secondly, as you know, and some of you who have followed us, we've had a strong -- very, very strong development in Americas. And actually, our development in the U.S., in the Americas continues with 6% growth on a constant currency basis and also another strong quarter for Little Rock. Little Rock as you recall, that we started up last year in April, and that has now onboarded more and more customers in Line 1. So although we have seen and we have reported earlier, somewhat slower onboarding of our customers. And when I say onboarding, it's not about acquiring customers, but it's about onboarding their designs, onboarding their materials. That has been somewhat slower. We still remain absolutely confident in the midterm targets related to Americas. Second -- thirdly, the EBITDA. We came in at EUR 41 million, which corresponds to around just short of 14%. And we also came in at an earnings per share slightly above the previous -- the year-on-year quarter last time. What we also see, even though we have also during this last quarter, invested quite heavily in the expansion in Americas, we still come in at a very solid 2.2 leverage ratio, which is actually slightly impacted as well by the currency impact of Americas. Very importantly, of course, and I'm coming back to that in a little bit broader sense. But as everyone around us know, we have a turbulent world around us, particularly in the Middle East. It does impact a lot of the raw materials, including our raw materials. And it does have a cost impact on our side as well. I will come back to some of the mitigating effects that we are addressing this with in the coming slides. Now on the revenue. As I said, revenue overall stable, although we report a EUR 12 million lower revenue. This is primarily related to the commissioning of filling machines. And as you may remember from Q4, where we reported a very strong filling machine commissioning, the commissioning of filling machines is not a linear curve. It will vary a little bit between the quarters. If you look at the EBITDA, you could -- there is a decline of EUR 3.6 million versus same period last year. However, EUR 2.5 million of this relates entirely to currency impact from the U.S. dollar. And the remainder as well as the impact that we've had in this period relates to some one-off effects that we've had. We've also seen a tough margin pressure in India, including pressure on margin, pressure on volume. And we have also front-loaded some of the strategic initiatives that we have taken already in Q1. So all of that impacts the EBITDA for this period. Now we have also initiated a program and some of those initiatives have already taken place. During this quarter, we have had restructuring effects in the likes of EUR 1.3 million, which is part of the program of reducing our -- addressing our costs, and these will have been adjusted in the EBITDA from Q1. Back to the Middle East and the extraordinary cost impact. Now everybody in the world now knows where Hormuz Strait is, very exactly where it is. Everybody knows what the impact is beyond just the surrounding countries. What you see in our world is a very significant increase in LDPE. On the slide, you will see that the LDPE increase is around 160%, which is, by the way, a picture we -- some of us will recognize from '22, where we saw raw materials explode as well, not the least on the plastic side, but also aluminum foil and other raw materials in general. We are now seeing the increase, right? And what we have done is that we have, of course, addressed these increases by implementing and introducing extraordinary surcharges on the pricing side towards our customers, given the price -- the cost pressure that we are seeing. These have been introduced. They are being implemented as we speak. And they are, of course, related to an existing price level on LDPE, on polyethylene, on naphtha, but also an expected development. So this carries a certain uncertainty because none of us know exactly how this develops. So what we have introduced is a mechanism that will allow for this kind of uncertainty. And it also brings me to the strategy of Elopak. And we remain absolutely committed and confident in our strategy that consists of these 3 pillars. The global growth, as we know, is not the least related to America, which is the big growth driver we have. We have Little Rock up and running. Little Rock is accretive. Little Rock is producing in high volumes. Little Rock is producing in multiple shifts in Line 1. We are establishing Line 2 as we speak, and we have already agreed and announced that we will do Line 3 as well. Little Rock is the foundation or rather Americas is the foundation of the realizing global growth. But beyond that, it's also India, and it's also MENA, where we are now working as well as we have announced earlier on expanding our portfolio, getting more aseptic products in, getting more ESL long extended shelf-life products in. The second one is the leadership in the core. And as we have talked about earlier, we have a strong position in chilled fresh business in Europe, and we continue to build that with a number of initiatives related around sustainability, related around the PPWR, et cetera. But the third one is the one that I'd like just to spend a little bit of time on because the third one relates to the plastic to carton conversion. And of course, in times that we see now, right, LDPE increasing off the roof, we see that competitive solutions such as PET will have increased by 60% for a PET bottle with the impact of LDPE. So while -- actually, while clearly, it impacts everyone in packaging with rising raw materials, the situation we see now is that primarily the impact will relate to the plastics products, which will, at some point, potentially improve the understanding among customers, among retailers that the carton packaging in a much, much wider sense than what we have now creates stability in cost, creates a much better transparency in cost and is a an alternative not only for sustainability reasons, but also for cost reasons when it comes to packaging other products than just milk and juice. And that is what we do in the third box, leveraging the plastic replacement because this is the area where we work with the nonfood products. This is the area where we work with alternatives to plastics, which can be very closely related to our business or a little bit further related, where we can utilize our strong know-how in liquid products, in filling of liquid and semi-liquid products. So in short, the current development poses a certain amount of challenges for anyone in any industry, primarily because it's uncertain what comes out of the ongoing conflict, but particularly for the carton industry and for packaging in our case, it does also provide the understanding, the certainty among customers that carton actually provides a whole range of advantages in their cost portfolio and their product portfolio beyond the fact that it is the most sustainable solution. And with that, I think I will hand over to you, Bent. Bent K. Axelsen: Thank you, Thomas. Before we dive into the numbers, I would like to address 2 changes that we have done to how we report our figures. The first thing that we are doing is that we are moving the R&D activities and associated corporate activities from the EMEA segment to what we call other and elimination, simply because this unit is serving both segments, not only EMEA. So this will improve the comparability and clarity when we are reviewing the relative performance between EMEA and America. The second change that we are doing is reflecting an adjustment to our operating model where the aftermarket services and spares part are now run by the local regions together with the blanks, together with the closures. Today, or in the previous reporting regime, all these financials were reported in EMEA. Now the America part of these financials will now be reported in the Americas segment because these are services and spare parts sold to the American market. So we think this is a logical change. The 2025 figures are reclassified in this report, and there is more information in this presentation file and in the report. So let's start with the EMEA segment. In EMEA, we are reporting stable volumes with results impacted by one-off effects and timing effects related to filling machines. The revenues are EUR 208 million, down 7% from last year. If we look into this reduction of EUR 16.5 million, EUR 6 million is related to timing of filling machines sold by EMEA to external customers, while EUR 9 million is related to reduced sales from EMEA to Americas internal sales. So altogether, EUR 15 million is basically timing related to filling machines. If we go then to the carton and closure revenues, they are moderately down compared to last year, and that is a result of a negative mix impact, which I will dive into. The Pure-Pak volumes, they are stable in the EMEA segment. What you see here is that there is a decline in the aseptic juice segment. This is what we have reported before. It's a result of the consumer preferences combined with the very high citrus prices that we have observed for the last year. These products are -- we have attractive margins. We have growth in other segments in UHT milk, but they are sold at a lower price point compared to aseptic juice. We see year-over-year growth in MENA, driven by growth in North African markets and we also see growth of closures as we are growing with customers that both buy our blanks and our closures together. If we look at Roll Fed, we are happy to report that we are growing the Roll Fed volumes again after several quarters with decline. This comes from onboarding of customers in Poland. But as you know, the pricing points on the margin for Roll Fed is lower compared to Pure-Pak. So it's not enough to compensate fully. In contrast, in India, we are reporting a volume decline in Roll Fed year-over-year. And we are also having, as we reported before, a pressure on margin. The revenue decline is around 13% on a constant currency basis, 26% reported. So that is related to the weakening of the rupee. So as we have reported before, the supply-demand balance is pressured in India. And in this quarter, we saw, particularly in January, February, this also impacting our volume development. If we move to EBITDA, we are reporting EUR 36 million, down from EUR 40.7 million. The margin is 17.4%. This contains EUR 1.8 million one-off related to an operational matter. It also is a result of the mix effect that I talked about for Pure-Pak versus Roll Fed, but also the fact that India remains margin dilutive, and we also see the absolute impact as the results are down in India year-over-year. If we move to America, we are reporting around EUR 95 million. As Thomas explained, it's a 6% growth on a constant currency basis, but a decline of 4% because of the weakening of the U.S. dollar. The revenue growth is below our earlier expectations due to the weaker demand for plant-based which is important for our growth in America. We are seeing consumption patterns changing into lactose-free milk, other dairy products, and there's also concern related to cost inflation. We are working very actively to fill that shortfall with other types of business in the quarters to come. In addition, the quarter was impacted by destocking among our customers. In Q4, some of our customers were building inventory in Q4, and they're now taking the stock down to normal level, and that also impacted the top line in the first quarter. Finally, on the revenue side, we also have a timing effect of filling machines in America with a decline of EUR 5 million for the quarter. If we look at profitability, the EBITDA was EUR 21 million, up from EUR 19.7 million, and the margin is improving to 22%, as you can see. And this comes from the improved production output of Little Rock and with the operational leverage that we get from that ramp-up. And we also would like to remind that 1 year ago, we had negative results of Little Rock because we have pre-start-up costs in that quarter. The share on net income is EUR 2 million compared to EUR 2.5 million last year, and that is solely driven by the weakening of the Dominican peso against the dollar, while the underlying performance remained stable. And as Thomas explained, we have -- the U.S. dollar has significantly weakened year-over-year and in America results that is measured in euro, that is EUR 2.4 million down. That wraps up America. So let's look at the bridge from EUR 44.6 million to EUR 41 million. Here, the American development and the margin accretive development in America continues to be the most important growth driver for the company. We see -- in Europe, we see the negative effect because of the negative mix effect with less juice cartons and more Roll Fed, but also the impact from the result decline in India. Raw materials are largely stable. Behind that number, we have higher board cost as per our contracts. We see higher other prices, but lower PE prices giving this number. In this quarter, our raw materials are not significantly affected by the conflict in Iran. But as Thomas explained, we expect these costs to affect the Q2 cost base and also onwards. On the operational costs, we have the EUR 1.8 million one-off effects and the rest is related to the wanted increase in R&D is related to inflation is related to the onboarding -- sorry, the frontloading of strategic initiatives in the quarter. The JV results, we have addressed and it comes to the FX combined for the group, that's EUR 2.5 million. And I just want to reiterate the fact that in Americas, we are running this as a U.S. dollar business with dollar revenues and dollar raw material base. If we look at the underlying result, if it adjusts for the one-off, the margin is -- would then have been around 14.4% for the quarter, so in line with the same quarter last year. Let's move to the cash flow. So the -- if we look just starting at the net debt, that is increasing by EUR 21.6 million. The main contributor to that is actually the strengthening of the NOK against the euro that gives a loss on our green bonds. What is important to remember is that this is mitigated by our cross-currency swaps, but we don't report the positive gains, the gains from the currency swaps in our net debt. So that is EUR 16 million. If you start to continue with the cash flow from operations, we are reporting around EUR 20 million based on an EBITDA of EUR 41 million. We have taxes paid of EUR 4 million, and we are also reversing the accounting results from the joint ventures to get to the EUR 20 million. When it comes to cash flow from investing activities, that is around EUR 12 million. This is based on the continued expansion in Little Rock and also the normal maintenance programs, also the replacement of equipment in Europe. Maybe one more thing before I move on to the next element is to come back to working capital because I jumped that, that is EUR 14 million negative effect, and that can be split into 2 factors. It's the timing. EUR 17 million worsening is related to settlement of account payables for our filling machines. So that is really a one-off because we are settling machines that we have commissioned some time ago. Structurally, we see a reduction of inventory around EUR 5 million. This is a result of the structural work that we are doing to improve the inventory turnover. Now what we would like to say is that this reduction is a little bit more than what we think is sustainable. So we expect some moderate increase of the inventory to get back to normal levels. Filling machine inventories also went down following the sales in the quarter. Now we are ready to go to the cash flow from financing and loan payments, which is minus EUR 14 million. That is included in the lease payments, the interest payments and also purchase of treasury shares. This brings us then, including the FX effect to EUR 286 million net debt. The leverage ratio is 2.2 compared to 2 at the end of the previous quarter. This is following this, I would say, the technical increase of the net debt bringing by the FX effects, but also the continued investment in the U.S. plant. The ROCE declined by 0.6, and that is a result of a lower last 12 months adjusted EBIT. And the capital employed actually is now stabilized since year-end. The accumulated investment in the U.S. plant is $106 million, and we have around $22 million to go to get -- that will take us to the full 3 lines in Little Rock. Let's -- before I give the word back to Thomas, let's just address how we think about the -- where the quarter is ending to compared to what you would have expected. So as you know, we are not guiding individual quarters in Elopak. But if you go to our Q4 earnings release, we said that we would deliver on our midterm targets. So if you convert that into implied Q1 guiding, that could be an expectation of EUR 50 million and versus a reported adjusted EBITDA of EUR 41 million. This gap is 50-50 between structural market implications, market effects and one-offs. Within the 50% market effects, 30% is Americas, 10% is Europe and MENA and 10% is India approximately. And the remaining 50% is related to the phasing of filling machines and phasing of fixed costs and also one-offs. In addition to the price increases that Thomas was talking about, we are obviously working with our cost base to delay and reduce spend where it makes sense without jeopardizing our long-term value creation. With that, this concludes the financial section. So back to you, Thomas. Thomas Kormendi: Thank you, Bent. And so overall, I think it's fair to say that we have seen somewhat softer market conditions generally in Q1 than what we've seen earlier. And one of the impacts that Bent just mentioned was, of course, the plant-based, which is a significant business in U.S. and part of the growth that we are looking for in U.S. What we also see, and that is very important for us is to say the ongoing crisis, ongoing situation in the Middle East causes extraordinary cost increases in all industries, including ours, and we are now mitigating this with price increases, in fact. We call it surcharges, but it is higher prices to compensate for this. We are seeing that, but we are also doing, as Bent explained, the other side of the -- whatever it's called, but we're also looking at our own cost base and at the same time, taking some steps to ensure that we are adapting and keeping our costs at bay in times like these. I think also, though, it's very, very important to remember, and for those of you who were with us from the IPO, where we had a year of '22 with increasing costs, with increasing a lot of turmoil, this is a resilient business. This is a business of basic food, basic food stuff that people need. So even if we have ups and downs as we do have, like any other industry, we are in a very resilient world. And the demand for our kind of products will continue even when economies around the world and including the -- our part of the world will be more or less constrained through consumer spending. So what we are saying is despite this volatile political -- geopolitical situation that we're in and with all the potential impact, we expect to continuously also improve from Q2 and onwards, our results in a moderate and gradual way. That is how we look at the year and that is how we are going to address the year and the cost situation that we experienced thing. So with this, I'd like to thank from my side and hand over to you, Christian, please. Christian Gjerde: Thank you, Thomas. Thank you, Bent. So with that, we will move to Q&A, starting with the people here in the audience first. So if you raise your hand, I will come out with a mic. Please state your full name, the company that you represent and make sure to speak into the microphone. Elliott Geoffrey Jones: Elliott Jones from Danske Bank. Just firstly, you mentioned some plastics prices up 60%. Obviously, it's a near-term headwind to you guys. But I'm just wondering your -- some of your plastic competition. Is this something that customers have started talking about that you're hearing? And is that something you can capitalize on kind of longer term? Thomas Kormendi: So what I did say is that PET in specifics, you would look at the cost of a PET bottle will have increased about 60%. If you look at the LDPE that is being used in our carton as well, we're looking at, as you saw on the slide, somewhere around 160% cost increase, really, really, really significant. So what you typically see in the industry and many of our customers will have a mix of plastics and cartons, right? So what -- and they will, depending on where they are, provide private label and/or their own brands. The decision they make then is what kind of format am I using? If it's a brand, you don't easily change from one format to the next for all the obvious reasons. But what does happen in times like this is that the consideration is what is the right format moving forward is much more relevant when it comes to costs as well as sustainability. We have been very clear that from a sustainability point of view, the carton solution is the absolute superior solution versus plastics, both from a renewability point of view, from a CO2 point of view and also eventually, as we move on, you'll see it from a recycling point of view. Now what we are seeing then here is that with the insecurity that is created in PE pricing, when you are a customer, when you are a retailer, you're going to look -- you are looking now at carton saying, this creates a stability, it creates transparency. It creates a predictability in cost that plastics cannot guarantee because it's all about the oil price. It doesn't mean, though, short term that everyone changes into carton sadly. But that's not going to happen because of equipment, because of industrial production, et cetera. So these take time, but it's very, very important in the longer perspective and very important for the new areas that we're discussing where the consideration should we -- should we not suddenly tilt hopefully more towards, yes, we should go carton. Elliott Geoffrey Jones: And then just 2 more quick ones. Just on the Americas segment, you talked about this being affected by developments in plant-based. Can you kind of provide more color as to how that could affect maybe your medium-term growth targets in the Americas? Would that kind of delay the pathway to 100% utilization rates in the lines that you've announced? Or do you see it easy to kind of replace those volumes near term? Thomas Kormendi: I would never use the word easy, right? But I think what is very important is we commit to our midterm targets for Americas. That is the simple story. And we are absolutely convinced with the plans we have in place that we are going to deliver on this midterm target. Remember, that's EUR 480 million calculated on the exchange rate --. Bent K. Axelsen: At that time... Thomas Kormendi: At that time, right? So we don't know what happens to exchange rate, obviously. But that plan stands, will be delivered accordingly. Elliott Geoffrey Jones: Got it. And then just on the EMEA mix effect. Am I right in thinking that it's not obviously an easy fix in terms of reversing that in Q2? Should we expect that kind of mix effect to continue maybe in the next few quarters? Bent K. Axelsen: So when it comes to the juice development, that is a trend that we have reported for quite a few quarters. So we expect that trend to continue. It depends a little bit on the citrus prices. So I think we need to distinguish between the consumer preferences and focusing on sugar versus the cost of juice because of the citrus prices and the diseases that have been worse in recent years, Yellow Dragon disease, I think it's the name, and that has reduced the supply of citrus. So that is not a quick fix at all. When it comes to the Roll Fed business in the Europe, we have then finally been able to grow that business after several quarters with decline. Some of that decline was related to the cap regime back in the days, I think it was 1st of July 2024, which is more of a one-off, and there also have been increased pricing competition. What's going to happen to the Roll Fed business where we are able to continue to grow that business? It depends on the whole raw material situation and the whole Iran conflict because it's -- Roll Fed is the most competitive product group that we have in Elopak. So yes, to juice on Roll Fed, we will wait and see before we can call it a positive trend. We need some more quarters in the bank. Ole-Petter Sjøvold: Ole-Petter Sjøvold, SpareBank 1 Markets. So first, a question on the contracts for Little Rock. I mean, as we understand it, it's no take-or-pay, but it's when the customers take materially lower volumes, the price could be up to negotiation. So could you give some insight into this? And could we potentially then see some sort of compensation later this year that should relate to Q1? Thomas Kormendi: It's a little bit difficult to answer, but if you take the mechanics in this, right, the way we normally do this, and we have, of course, some very, very big customers around the world, including U.S. These customers will say to us, look, we would like to -- we would like you, please, to produce X amount of volume, and we will then agree a price on that volume. When they make that commitment, which is a commitment, it doesn't necessarily mean that if you do something less, then there is a compensation. There are -- we also have those models, I have to say. But in the bigger context, it is much more of, I say, can you fill our needs. So what would typically happen is after a while, if that volume is not -- we're not seeing the volume coming for different reasons. Typically, one reason is they have more stock than what they thought, honestly. You would think they know, but it's actually, in some cases, many plants and there are -- so the volume will arrive later. That's one area. The other area is, of course, there can be -- they say, well, we're going to use more suppliers simply for contingency reasons and procurement reasons, et cetera, et cetera. Now in the latter case, right, so we say on a more continuous basis, we're going to see lower volume than what we have agreed. We will renegotiate price. Price and volume always correlates. So if you're not delivering the volume, we need to have a different discussion on price. If you're saying we are not delivering volume because of some stock reasons, typically would not happen. Ole-Petter Sjøvold: Got it. And a final question for me. On the price surcharges you're implementing right now, I mean, you guys typically hedge LDPE prices and aluminum prices in Q3, Q4 on the majority of your exposure. Are you able to increase prices for the full extent of what your price or cost should increase if you didn't hedge? Or is it only your open exposure able to push out to increase prices? Thomas Kormendi: That's a very good question. And the reality is, of course, that we, as well as our competitors, right, everybody hedges as you would do normally. So when we increase our price, we have to think about our competitors as well, and we keep that in mind. So typically, what you would see in extraordinary situations like this is that everyone tries to limit the cost increases that are needed to cover the cost, right? And we live in a competitive world, so we do the same. But it's also very clear that hedges are for this year, right? So what happens next year when you need new hedges, and we don't know where the raw materials will be at that time, that's another set of increases that would come on top of that. But we are not in a position that we can increase only based on our own costing. We have to look at market conditions as well, of course. Christian Gjerde: If there are no further questions from the audience, then we will move to the questions that we have received online. So starting with a question from Geir Olsen. More than 90% of your revenues comes from cartons and closures. Could you provide some color on the revenue mix across key end markets such as milk, juice, liquid detergents and other categories and highlight where you are currently seeing the most -- the strongest growth? Bent K. Axelsen: Yes. So with our disclosure principles, we do not report on end user segments. I would say when it comes to the biggest contributor of growth, that continues to be America for us. And America for us is milk. It's a combination of plant-based, in particular for the growth in Little Rock, but also dairy. Juice in America is limited. So milk, America is the biggest contributor. As far as what we call nonfood is concerned, it's still a very, very limited part of the business as of today, but we believe that to be an interesting and significant business opportunity in the long term. That really depends on the hunger for green alternatives and to which extent green is back on the agenda again because of the new energy crisis. And there's a lot of discussions in media, whether this is now a forced green agenda coming from the conflict. And I think this is probably where I should leave that comment, IR. Thomas Kormendi: I think you're right, Bent. Christian Gjerde: So thank you for that, Bent. And then moving to the next question or questions, I would say, coming from Hakon Fuglu. I'll do them one by one to make it easier for you. First question, have you been impacted in the quarter by raw material cost and/or logistical costs? Bent K. Axelsen: The implications of the Iran conflict is very limited. So we haven't commented on those in Q1. There could have been some freight increases in the region in the beginning or in the end of the quarter. But when it comes to the raw material impact, which is a big part that has not impacted Q1. And let me remind that we have an inventory turn of around 2 to 3 months, so which means a spot price increase end of March will take at least 2 months for that to impact the reported costs in our accounts. Christian Gjerde: Thank you, Bent. And moving to Hakon's second question. What's your hedge position on raw materials for EMEA? And should we expect similar price increases this time as we witnessed during 2022? Bent K. Axelsen: So when it comes to PE, we are hedged south of 80%. When it comes to ALU, which is a smaller part of the cost, we are hedged mid-50s. PE is around 11%, 12% of the material cost as reported in our P&L. Aluminum is around 5%, if I remember correctly. To your second question, I think the difference between '22 and 2026 is that in '22, it was PE, it was ALU, it was electricity, which was maybe the biggest relative increase we had, it was pallets, it was inflation on almost everything. The situation that we're looking at right now is a situation mainly related to PE. We saw the price increases on the chart and also the ALU. So the breadth of the inflation is not the same so far. So it's not the same as '22. I think the situation reminds me more of 2021 when we saw the raw material start to increase following the aftermath of the pandemic. And in 2021, this was not yet a broad inflation. So '26 reminds me more about '21, and I hope that '27 will not become '22. Christian Gjerde: Thank you, Bent. Then a couple of more questions from Hakon. How much of the phasing/one-off costs for the quarter is related to Americas? Bent K. Axelsen: So I have to think about that. When it comes to America, there are some one-offs related to the destocking effect, but we have not quantified that in the report, but it's part of the picture. And it's -- when you start to generate the results, you see the impact of that destocking effect. It's there, but it's not a major effect in our numbers. The main proportion of the one-off is related to EMEA. Christian Gjerde: Thank you, Bent. And then the last question from Hakon. Is production Line 2 at Little Rock ramping up according to plan? Thomas Kormendi: Well, it's actually too early to ramp up production in Little Rock on Line 2. So -- and the plan was not that it would ramp up yet. So you could say it's according to plan, if you like. We are not ramping up yet. We're installing. We're preparing, but we have not ramped up the production yet on Line 2. Christian Gjerde: Thank you, Thomas. Then we have a question from [ Cole Hopen ]. Focusing on surcharges and price increases. Firstly, can you give some color on how you approach these commercially with customers? Are the surcharges just for logistics or polymers as well? I'll take that part of it first and then --. Thomas Kormendi: Yes. So what we do is we sit down with our customers. We explain them the situation in all of the agreements we have. We have what is called sit-down clauses. Clearly, this is an extraordinary situation, extraordinary event hitting pretty much all industries, definitely also ours. So there is a wide understanding that's needed. The cost increases are -- the cost surcharge that we are introducing relates to both PE as well as logistics. Christian Gjerde: Thank you, Thomas. And then the second part of Cole's question, have our liquid packaging board suppliers also approached you for logistical surcharge costs? Thomas Kormendi: If our suppliers -- so -- and this is actually -- maybe I should have qualified my previous statement. When we deliver our material from our plants to our customers, there's a mix of Incoterms. Some will pick it up themselves, somewhere -- in some cases, we will arrange the transport, et cetera. And with our suppliers, it's the same thing. It depends on who it is and what the Incoterms are. So if -- and in some cases, it's very transparent, we simply pay whatever the transport is and in some cases, included in the price. So it's difficult to give one answer on that. Christian Gjerde: Thank you, Thomas. Then we have a question from Niclas Gehin in DNB. You write in the report that you are confident in reaching your midterm target for Americas in 2028. Can we also expect for you to reach your midterm targets for 2026? Thomas Kormendi: Well, you have to look at the -- you have to take the outlook statement for what it is. And I think the way we have phrased it is we think the underlying business is doing well. We also recognize the fact that there is a lot of uncertainty around us out of our control, one of which relates to, of course, as we keep saying, the Middle East, but also other impacts. So for that reason, we are not guiding on '26 beyond what we said in the outlook statement. Christian Gjerde: Thank you, Thomas. Then we have a question from Marcus Gavelli at Pareto. Assuming price hikes, price increases will not be fully passed on to customers before later this year, so some lags in the implementation of that. Should we expect near-term margin squeeze? And are the ongoing price increases sufficient to fully offset the cost increase that you are seeing today? Bent K. Axelsen: So should I take the first part of the answer. So --. Thomas Kormendi: I can think about the second. Bent K. Axelsen: Yes. So I will speak slowly. Thomas Kormendi: Exactly. Bent K. Axelsen: So when we are looking at this, we need to consider a couple of things. So one thing is the inventory speed. So when we have a price hike in the spot prices, how long time will it take before it will hit the cost base in our P&L. The second element is the timing that these surcharges becomes effective and we are in the process of working and implementing those price increases as we speak. So based on the information we have today, it's difficult to assess which force is stronger, but we stick to what we say in the outlook that we believe that second quarter overall will start a gradual improvement compared to Q1. Thomas Kormendi: And then the -- just repeat the second question, please, exactly. Christian Gjerde: Second question he is basically asking, are we passing all the full net of the open price increase to our customers. Thomas Kormendi: So I think when you think of the price surcharge, right, this is based on partly what we know, i.e., the existing price levels of PE. It's also based on what we think and we don't know how long these price impacts will last. So what we have passed on now is actually what we need to cover the cost of the significantly increased cost that we are experiencing. If these costs tend for whatever reason become even higher, then it's a different situation, right? And we need to reassess and we need -- and as I said before, we've put in a mechanism that will allow for some movement in this. But it's very important to understand for everyone, including our customers, by the way, that this is a volatile time. We have little to very, very limited visibility on how cost will develop. And we have various indexes when it comes to PE, et cetera, but they tend to be, let's just say, not very accurate historically. So we have to look at it, but we are implementing a plan. We're implementing a surcharge to cover for the costs. And it's important that we cover for cost. And it's just like in '22, when you cover -- if you look at it from a margin point of view, it does have an impact. There is no way around it. If you increase by the cost levels you have in price, there is a margin impact on that. Christian Gjerde: Thank you, Thomas. Then we have a final question from Martin Melbye at ABG. Could you please comment on the change in the competitive situation in Europe? Thomas Kormendi: I'm not entirely sure what the question means when it changed compared to what and compared to when. Christian Gjerde: Yes. I think he's referring to the update that we gave to the market in February where we talked about increased price competition in Europe. Thomas Kormendi: Right. So what we have seen during the end of last year is more intense competition in the core markets of Europe, in the chilled business, in our core business. And that, in a way, to be honest, is not surprising given that we have had good development and success in building our market share from a strong point to an even stronger point. And of course, at some point, you will expect that there will be reactions and competitors trying to win back lost territory. That has been the case that attempts have been made. But so far, knock on wood, we have been in a good position to defend our positions and defend our strongholds where we are now. Since then, nothing significant has changed in that respect. And -- but I think it's also absolutely normal and expected, whether it's in Europe or in America, that competition as we are growing, as we are building our business, competition will try to fight back. And we will try to do our very best to defend our positions and keep growing the business as we have done for the last many years. Christian Gjerde: Thank you, Thomas. I see that concludes our online questions for today. So thank you, everyone, for joining this fantastic morning in Oslo. I wish everyone a good day. Thomas Kormendi: Thank you, everyone, for listening to me so many times. Thank you and all the best.
Takeshi Horikoshi: So this is Horikoshi, CFO. I'd like to share with you the financial results for the third quarter of FY 2025. So Page -- Slide 4, this is a summary of the 3-months period of the third quarter FY 2025. The FX rate were JPY 152.8 per U.S. dollar, JPY 177.5 per euro, and JPY 100.2 per Aussie dollar. Compared to this year-on-year, the yen depreciated from the previous year. And also the sales increased and the OP increased by -- net sales increased 3.5% to JPY 1.02 trillion. OP decreased by 12.7% to JPY 142 billion. Operating income ratio declined by 2.5 points to 13.9%. Net income decreased by 13.1% year-on-year to JPY 94.1 billion. Slide 5 shows sales and profit by segment for the third quarter. Sales in the Construction, Mining & Utility Equipment business increased by 3% year-on-year to JPY 945.8 billion. Segment profit decreased by 17.9% to JPY 120.7 billion. The segment profit ratio declined by 3.2 points to 12.8%. In Retail Finance, revenues increased by 6.2% year-on-year to JPY 32.1 billion and segment profit increased by 29.9% to JPY 9.1 billion. Sales in the Industrial Machinery & Others business increased by 11.8% year-on-year to JPY 55.8 billion, and segment profit increased by 47.7% to JPY 10.7 billion. I will explain the factors behind these changes later. Slide 6 shows sales by region for the Construction, Mining & Utility Equipment business for the 3 months period. Sales in this segment increased by 3% year-on-year to JPY 943.2 billion. While sales decreased in Asia, mainly due to sluggish demand for both mining and general construction equipment in Indonesia, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales remained flat year-on-year. Slide 7 provides a summary for the 9 months period of FY 2025. The FX rates were JPY 148.5 to the dollar, JPY 170.4 to the euro and JPY 96.3 for the Australian dollar. Compared to the same period last year, the yen appreciated against the U.S. dollar and the Australian dollar, however, depreciated against the euro. Net sales decreased by 1.4% year-on-year to JPY 2.915 trillion. Operating income decreased by 10.1% to JPY 419 billion. The operating income ratio declined by 1.4 points to 14.4%. Net income decreased by 13% year-on-year to JPY 269.8 billion. Slide 8 shows sales and profit by segment for the 9 months period. Sales in the Construction, Mining & Utility Equipment business decreased by 2.2% year-on-year to JPY 2.688 trillion. Segment profit decreased by 14.7% to JPY 362.6 billion. The segment profit ratio declined by 2 percentage points to 13.5%. In Retail Finance, revenues increased by 1.1% year-on-year to JPY 93.1 billion. Segment profit increased by 19.1% to JPY 26 billion. Sales in the Industrial Machinery & Others business increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% to JPY 27.3 billion. I will explain the factors behind these changes later. Slide 9 shows sales by region for the Construction, Mining & Utility Equipment business for the 9 months period. Sales in this segment decreased by 2.2% year-on-year to JPY 2.6805 trillion. Although sales decreased in Asia, North America and Japan, sales increased in Latin America, Europe and Africa. On a constant currency basis, sales decreased by 0.6% year-on-year. Slide 10 details the factors affecting sales and segment profit in the Construction, Mining & Utility Equipment business for the 9 months period. Regarding sales, the positive impact of improved selling prices was outweighed by the negative impacts of the yen's appreciation and reduced volume, resulting in a decrease of JPY 60.4 billion year-on-year. As for segment profit, despite the positive impact of improved selling prices, it was outweighed by the negative impact of the yen's appreciation and reduced volume and increased costs, resulting in a decrease of JPY 62.3 billion year-on-year. Slide 11 shows the result of Retail Finance for the 9 months period. Assets increased compared to the previous fiscal year-end, driven by increase in new contracts and the depreciation of the yen at the end of the period. New contracts increased year-on-year, mainly due to increased finance penetration. Revenues increased by JPY 1 billion year-on-year, primarily due to the increase in outstanding receivables. Segment profit increased by JPY 4.2 billion year-on-year, mainly due to lower funding costs. Slide 12 shows sales and segment profit for the Industrial Machinery & Others segment for the 9 months period. Sales increased by 10.9% year-on-year to JPY 162.7 billion. Segment profit increased by 81.1% year-on-year to JPY 27.3 billion. The segment profit ratio rose by 6.5 points to 16.8%. Sales and profits increased due to higher sales of larger press for the automotive industry and increased maintenance sales for high-margin excimer lasers for the semiconductor industry. Slide 13 shows the consolidated balance sheet. Total assets stood at JPY 6.3079 trillion, an increase of JPY 534.4 billion from the previous fiscal year-end, mainly due to the yen's depreciation at the end of the period. Inventories were JPY 1.6896 trillion, an increase of JPY 282.9 billion from the previous fiscal year-end due to the impact of the yen's depreciation as well as U.S. tariffs. The shareholders' equity ratio decreased by 1.7 points from the previous fiscal year-end to 53.3%. The net debt-to-equity ratio was 0.30. Regarding the share buyback result, at the Board of Directors meeting on April 28, 2025, we completed the acquisition of the maximum amount of JPY 100 billion by November 28, 2025. We canceled all of the 20,612,500 shares acquired this time on December 29, 2025. This corresponds to 2.2% of the total outstanding shares before cancellation. Free cash flow for the 9 months period of FY 2025 was a positive JPY 115.7 billion. This concludes my presentation. Next, the projection for fiscal '25 will be explained by Mr. Hishinuma. Kiyoshi Hishinuma: This is Hishinuma, GM of the Business Coordination Department. From here, I'll explain the projection for fiscal '25 business results and the conditions in the major markets. Page 15 shows an overview of the projection for fiscal '25 business results. The full year outlook remains unchanged from the October projection. From Page 16, I'll explain the demand trends and projection for the 7 major products. Demand for the 7 major products includes mining equipment. The figures for the fiscal '25 Q3 are preliminary estimates by the company. Demand in fiscal '25 Q3 appears to have increased by 3% year-on-year. The full year demand outlook for fiscal '25 is set at 0% to minus 5% year-on-year, which is unchanged from the October projection. Page 17 shows the demand trends and outlook for the North American market. Demand in the fiscal -- demand in fiscal '25 appears to have increased by 1% year-on-year. Demand for infrastructure and energy remained steady. The demand projection for fiscal 2025 is 0% to minus 5% year-on-year, which is unchanged from the October projection. As in the first half, there was no downward pressure on demand from tariffs during the third quarter apparently. However, as cost increase due to tariffs gradually progress, we will closely monitor its impact on demand. Page 18 shows the demand trends and projections for the European market. Demand in fiscal '25 Q3 appears to have increased by 7% year-on-year. The projection for fiscal 2025 is at the same level as the previous year, unchanged from the October projections. In Europe, an improvement in the business climate has been observed, including upward revisions to GDP growth rates. And with infrastructure investment plans in various countries, demand has remained firm. However, we will continue to closely watch market future conditions. Page 19 shows the demand trends and outlook for the Southeast Asian market. Demand in fiscal '25 Q3 appears to have decreased by 6% year-on-year. As the decline in demand through the third quarter was smaller than expected as of October, the demand projection for fiscal 2025 has been revised to 0% to minus 5%. In Indonesia, demand for mining equipment declined significantly from the second quarter onward due to falling coal prices. In addition, reductions in public works budgets have continued and demand for construction equipment remains sluggish. Uncertainty remains high. And while distributor inventory adjustments are underway, a recovery in demand is not yet in sight. Page 20 shows the demand trends and outlook for the Japanese market. Demand in fiscal ' 25 Q3 appears to have decreased by 14% year-on-year. The projection for demand in fiscal '25 is minus 10% to minus 15%, unchanged from the October projections. Low utilization of rental equipment, labor shortages and rising material prices continue and no signs of demand recovery are being observed. Page 21 shows trends and projections for major mineral prices related to demand for mining equipment. We expect prices for low-grade coal in Indonesia to remain depressed, while prices for other minerals are remaining high or moving steadily. Page 22 shows demand trends for mining equipment. Demand in fiscal '25 Q3 appears to have decreased by 21% year-on-year. Coal prices declined in Indonesia, leading to a significant decrease in demand for equipment. The demand projection for fiscal 2025 is minus 10% to minus 15%, unchanged from the October projections. Coal prices in Indonesia have not recovered and demand has not rebounded. However, demand for equipment in other regions and for other minerals is expected to remain generally at high levels towards the fiscal year-end. Page 23 shows sales of mining equipment. Sales in fiscal '25 Q3 increased by 4.9% year-on-year to JPY 475.1 billion. Excluding FX impact, sales increased by 2%. Although sales declined in Asia, mainly Indonesia and in North America, increases in Latin America and Africa resulted in overall year-on-year growth. Page 24 shows the projected sales of equipment, parts and services and related items in the Construction, Mining & Utility Equipment segment. Parts sales in Q3 of fiscal '25 increased by 6.1% year-on-year to JPY 265.5 billion. Including services and others, the aftermarket accounted for 54%. And excluding FX impact, total aftermarket sales increased by 3.8% year-on-year. This concludes my explanation. Thank you. Unknown Executive: We would now like to receive questions from you. [Operator Instructions] The first question, please. UBS Securities, Sasaki-san. Tsubasa Sasaki: So this is Sasaki from UBS Securities. I have 2 questions. First question relates to the Q3 results. So I'd like you to do a recap on the Q3. So it has been progressing well vis-a-vis plan, especially in terms of sales and operating income, in terms of volume and also the selling price and FX inclusive. So what has been positive? And what were not as expected vis-a-vis plan? If you can give us a recap, that would be helpful. Takeshi Horikoshi: So this is Horikoshi. In terms of sales, JPY 145 was the expectation, but in actual JPY 153. So about JPY 71 billion or so of an excess that we have seen because of FX. In terms of volume, it's about JPY 5 billion short vis-a-vis plan. Also for the price differential, it's about JPY 3 billion short of our plan. So about JPY 63 billion in comparison to October PA, we have exceeded the initial expectation in comparison to October. So we mentioned in terms of volume that was short by JPY 5 billion. So in the construction, that was short by JPY 7 billion. And in terms of mining, JPY 2 billion of excess. So that is the breakdown. So in terms of construction, the breakdown for what was short. So in North America, JPY 5 billion is the shortage in North America. This relates to repair. So because of the constraints of the customers' budget, it has been pushed out. So that is why the number is short in North America. Also, the competitors have been quite aggressive, especially in the month of December. So this was prior to the price increase. So they have been quite aggressive. So that is why we had seen a negative impact. Also in terms of Indonesia and Asia, so actually, it was better than our initial plan. So where we have seen shortage, that was Japan. So in comparison to October announcement, it was worse. So if you were to net out all these factors, it's JPY 7 billion of short in terms of the construction equipment. Moving on to mining business. North America, we have seen a similar number in North America that was short vis-a-vis plan. This is specifically related to oil sand in Canada because of the constraints in budget, therefore, the service provision was pushed out. So that was one of the factors. Where was it positive, favorable, was Indonesia. It was better than our initial anticipation. The reasons why Indonesia was performing better than expected. First of all, in Sumatra, the island, there has been a huge -- the torrential rain, and there were some demand related to restoration. And because of that, there was a demand for construction equipment. Also, the coal prices, and that is the thermal, the coal, that is, the pricing wasn't as bad as initially expected. Therefore, Indonesia, it was actually excess in comparison to our plan. Oceania and also South Africa has been quite solid. So on a net basis, the mining business was in excess about JPY 2 billion or so. Now moving on to the PL. In terms of profit, so in terms of FX, the profit was a push up by JPY 20 billion. Also in terms of the volume, so vis-a-vis sales of JPY 5 billion in terms of profit was short by JPY 2 billion. Also, in terms of the selling price, that was a negative factor. And also for fixed cost, we have some excess in the fixed costs and others. So all in all, so we mentioned about FX differential was JPY 20 billion, and that amount in entirety, we were able to see an excess. So we were able to offset that. Did I answer your question? Tsubasa Sasaki: Thank you very much. So in terms of fixed cost, that was a positive of JPY 5 billion. So FX was JPY 20 billion then. Is my understanding correct? So of course, the production cost was a negative. Why do you see an excess in the fixed cost? Takeshi Horikoshi: So the budget execution was pushed out to Q4. Tsubasa Sasaki: Understood. So based on that, my second question, you mentioned about the situation in Indonesia. So I was able to understand why it was better than expected. When it relates to construction equipment and mining equipment, what is the expectation? And what is the current state of Indonesia? If you can also share with us your outlook for Indonesia. Kiyoshi Hishinuma: So this is Hishinuma. From the perspective of demand, the situation has not dramatically changed. However, after Q2 is over, in comparison to the demand outlook, it was somewhat better than our forecast at the end of Q2. And the reason is just as we have explained. So at the end of Q2, mining was expected to be not so favorable because the coal prices weren't faring. But Q2, it was about $42 to $43 or so. And in Q3, it was back to $45 or $46. So we have seen a push up because of that. And that is why Q4, we expect this positive trend to continue. And for construction equipment, for the public spending, the budget constraints hasn't changed. And therefore, the situation had not really changed from before. Now the expectations from Q4, it may actually deteriorate from the previous year. That was our initial forecast. But in terms of the holidays, it was end of March last year. But this year, it's about a week or 10 days more holidays in comparison to last year. So we have incorporated the maximum risk. But overall, we do not expect the situation to change so much. Tsubasa Sasaki: I was able to fully understand. Sorry, this is an additional question. I fully understand the situation in Indonesia. So already, the situation is not so favorable, but it appears as if it is stabilizing. Are there any risks that Indonesia may deteriorate further? So it was pretty, I know, not-so-good situation, but what are the risks that actually further deteriorate? Unknown Executive: That relates to next fiscal term then. So we are trying to revisit these plans. But as for next fiscal term, construction equipment shouldn't be so bad because in the recent months, it is somewhat getting stronger. So Indonesia is the area that we may see some decline. Given the current coke price, chances are we may see a decline in Indonesia for next fiscal term as well. Tsubasa Sasaki: So this fiscal term, it is pretty bad then. So the deterioration in Indonesia, could we expect the impact will be smaller from Indonesia? Apologies for going on. Unknown Executive: I don't know. We don't know. Unknown Executive: Let's move on to the next question. Maekawa-san from Nomura Securities, please. Kentaro Maekawa: This is Maekawa from Nomura Securities. I also have 2 questions. I have a question about overall mining. Regarding our demand outlook, we haven't really changed the overall picture. But for parts and services, have you been seeing demand pick up? And for equipment demand, there may be a chance that it's going to pick up due to investment plans. So based off the current market, can you share with us how you view mining equipment demand going forward? And I think this will cover next fiscal year as well, presumably. Unknown Executive: Well, regarding that question, actually, we are right in the middle of formulating our business plan for next fiscal year. So that -- it may be subject to change, but just to give you a feel of what we are thinking about right now. First of all, regarding minerals or commodities, for nickel and thermal coal, it is in a situation of excess supply. Due to a decline of demand in China, the prices are weak. And also for nickel, the greatest producer is Indonesia and production has been in excess. For mining equipment, since 2021, it has been expanding, but it has been reaching peak this year. And for next fiscal year, demand is expected to be flat. And we believe it's going to be shifting from greenfield to brownfield when it comes to investments. Our customer financials are sound, but due to inflation, costs have been increasing and mineral grade has been going down as well as the way to mine has become more complicated. Therefore, I think we have to be cautious in investments. So we believe the demand for rebuilds will become higher in aftermarket. For Africa, Middle East, Central Asia and emerging mining regions, we do believe mining developments will proceed. And like we announced Reko Diq in Pakistan have been new opportunities that have been presented to us. And for Indonesia, I talked about it earlier. Kentaro Maekawa: How about coal -- copper? I think the demand is high in Latin America. So how should we expect future activity? Unknown Executive: Next fiscal year, as of now, our thinking is demand is expected to decline in Australia this year. It was a peak year for replacement demand. That's what we thought. So demand is likely to decline next year. And we also expect Indonesia to go down as well, but we believe it will be brisk conditions in other regions. Kentaro Maekawa: Another question I have for you is regarding tariffs and increases in selling prices as well as its impact and if there are any changes there. Just wanted to check with you. The 9-month basis, Q3 results, JPY 25.1 billion was the tariff impact. I think that was in line with plan. And for this fiscal year, you haven't changed your outlook, but you're expecting JPY 55 billion. And for next fiscal year, 30 times 4 is JPY 120 billion. Has that expectation changed? And regarding selling prices, I think you're already working on it. But are you thinking about additional price increases? And are you expecting any impact on demand? Or have you been seeing any impact on demand? So those are the 3 things I would like to know. Takeshi Horikoshi: This is Horikoshi again. Regarding tariff-related costs, including mitigation measures, we said JPY 55 billion as of October, but we do believe our projections were quite accurate. So far, things have been developing in line with our expectations, and we follow the numbers on a monthly basis as to how it's hitting our P&L. For next fiscal year, we said as of October that it's going to be Q4 times 4x. That should be the expectation, which is around JPY 120 billion. For selling price increases, in August, we did a selling price increase or starting from August orders, that is. And we also have been increasing prices from January orders as well. For our U.S. peers, starting from January, we have been hearing that they also have been raising prices. So the environment for raising prices is now becoming quite established, and we do believe we will be able to do further increases next fiscal year. Kentaro Maekawa: So because of that, are you expecting any last-minute demand? Do you think there's going to be some prebuys or any risk that it's going to drop off after you raise your prices? Takeshi Horikoshi: In the case of our company, we did a campaign in October and in November, it went down, but it went up again in December. So no, we are not feeling such trends. Unknown Executive: We would now like to move on to the next question from Goldman Sachs Securities. Adachi-san, please. Takeru Adachi: This is Adachi from Goldman Sachs. So I also have 2 questions. First question, which is somewhat related to the previous ones relates to mining and the exposure to the metals and the precious metals. So I think Latin America and Africa, I believe it was better than expected. So the exposure to the copper and gold is quite high in those regions. So you had the backlog and it was realized as planned. Was that the case? Or were there more of a short-term aftermarket rebuild demand has increased. So what is the current state in terms of Africa and Latin America? So how has the demand changed in terms of exposure to gold and others? Unknown Executive: Within the analysis, we talked about the comparison with the October announcement. Africa was favorable. Last year, Anglo had conducted the business restructuring. So they have restrained from the investment. So it could be a reactionary the response to that. So South Africa was positive from the previous year and also in comparison to the October announcement. Also another point, the gold prices continues to rise. So we have large projects such as in Ghana. So we hear that a number of new projects are underway. Takeru Adachi: So in terms of the Q3 order intake, perhaps you haven't disclosed much, but how was the situation of order intake? Unknown Executive: It has been quite positive, very brisk. Takeru Adachi: My second question relates to cost. So the cost was higher than initially expected, but tariffs was in line. So I would imagine that the non-tariff-related cost was higher than initially expected. So if you can give us more details on the production cost, please. Unknown Executive: In terms of the steel prices in comparison to last year, it has come down. So we have seen some gains from that. But in terms of the production guarantee basis, there was some one-off cost. Also tires and power lines. So nonferrous metals. So these are non-steel, the parts, actually, the prices have risen from the previous year. So we have actually incurred some loss related to those nonferrous metals. Takeru Adachi: So excluding those one-off factors then, is inflation pretty much in line with your expectation? Or even excluding those, was the price increase not in line with your expectation? Unknown Executive: If you were to exclude the one-off, we have seen the gains as expected. Unknown Executive: Let's move on to the next one. From Nikkei, Mr. Otake -- Ms. Otake, excuse me. Unknown Analyst: This is Otake from Nikkei. Earlier, there was a question asked and my question may overlap somewhat. But the first question is about the circumstances in North America. Can you talk about now and your projection related to construction equipment and mining equipment? Can you talk about each, respectively? Kiyoshi Hishinuma: This is Hishinuma speaking. So first, regarding North America, relatively brisk conditions are continuing. When we were setting forth this fiscal year's projection, we were saying minus 5% to minus 10%. But since Q2 onwards, we've revised it up to 0% to minus 5%. And it was plus 1% for Q3. And therefore, we do believe that it has been quite steady. And we are aligning with the local people to capture the numbers, but we are not seeing any factors that will make our numbers change dramatically. So that's for construction equipment. For mining equipment, last year was quite good. So this year, we're guiding negatively, but it's not because the economy is bad, so we are not that worried. Unknown Analyst: You talked about Canada earlier. For mining, in next fiscal year, are you expecting further decline? Or are you not feeling such risks? Kiyoshi Hishinuma: Correct. We are not expecting such risks. Unknown Analyst: And secondly, my question is about price increases. You said that competition has been raising prices from January and the market is accepting higher prices. According to -- regarding that point, for selling price increases that are going to probably be ongoing, how much do you believe that will boost your profits? Can you give us some direction or a feel of how much that's going to look like? Kiyoshi Hishinuma: Well, at our October results briefing, I mentioned this in an interview, but the magnitude that we are experiencing now is what we are striving for next fiscal year as well. Unknown Analyst: That means around JPY 83 billion is the positive impact on profits, no? Kiyoshi Hishinuma: Well, JPY 3 billion might be a little extra, but we are striving for similar levels at this fiscal year, which means around JPY 80 billion. I am not definitively saying JPY 80 billion, but I have been saying that about the same level as this fiscal year. Unknown Analyst: My third question is, as you mentioned in the beginning, for Q3 compared to your plan, it has been exceeding and trending positively, and there has been some areas where you've been beating your profit expectations. When you look at the FX rates for the second half of the year, we are seeing the yen weaken. So I think there is sufficient opportunity for you to exceed your expectations for the full year. But what are the chances of that happening? What is your feel? Kiyoshi Hishinuma: For Q3, we talked about JPY 20 billion of positive impact coming from FX. And for -- when you net it out, it's 0. But I was saying we can exceed JPY 20 billion. But for Q4, due to fixed costs, there have been some pushouts or that's what we're expecting at least. Therefore, on a full year basis, we expect we're going to be under our expectation by JPY 10 billion. JPY 10 billion, meaning excluding FX impact. But FX-wise, we expect similar numbers to come through in Q4 as well. Unknown Executive: I'd like to move on to the next question from Citigroup Securities, McDonald-san, please. Graeme McDonald: Slide 13, please. About free cash flow. There wasn't much comment on free cash flow today. So we've seen the yen depreciated and also the pushout in terms of mining. You've talked about those factors and also their impact from the tariffs. So working capital appears to be somewhat deteriorating. So JPY 240 billion, the cash flow, that has been revised downwards in Q2, but it may be difficult to achieve on a full year basis. So what are your thoughts right now? Unknown Executive: Last year, we had -- so about JPY 306 billion or so for last year. So cumulative last year was about JPY 150 billion cumulative up until Q3 for last year. So Q4 in 3 months, we had JPY 150 billion of free cash flow, leading to JPY 300 billion and JPY 157 billion for this year up until Q3. So if you see the similar -- the free cash flows within Q4, we could possibly reach that JPY 240 billion. Chances are we may actually reach that number. So I think it's the FX. Graeme McDonald: If yen continues to be so weak, it may be challenging to achieve this number, isn't it? Unknown Executive: It doesn't necessarily relate. Graeme McDonald: Oh, it doesn't relate? Unknown Executive: No. Graeme McDonald: So right now then, it was in the course of 3 years, the SGP on the cumulative basis, JPY 1 trillion, you should be able to achieve this? Unknown Executive: We don't know yet. We don't know yet. Of course, we'll make the effort. But what we can say at this moment, if you look at the free cash flow numbers, so back in 2023, there's been a lot of fluctuation on the free cash flow. So I think 2023 was about JPY 240 billion or maybe I might be wrong, but that was the number. Last year was JPY 300 billion, and this year is JPY 240 billion for this year. So in comparison to the previous period, it has become more stable in terms of generation of free cash flows. So we still have 2 years to go until the end of the SGP. So we'd like to work hard to achieve that number. So of course, shareholders' return. So you have JPY 100 billion of share buybacks has been completed and you have retired the other shares. Of course, I fully understand nothing is decided for next fiscal year, but institutional investors see that there's a lot of cash piling up. And perhaps there is not much need of CapEx, for instance, construction of new plants. We do appreciate there is a demand in investment related to replacement of renewal. But unless there is a large-scale M&A, can we expect to see similar amount of shareholders' return? Graeme McDonald: That's a comment? Unknown Executive: Yes, that is a comment. Graeme McDonald: Horikoshi-san, I'm pretty sure it is hard for you to say that. Yes, we heard your comment. Also to a different note. So you mentioned the profit was slightly better than the plan. So my impressions are -- so industrial machinery and retail finance was positive. That was my impression. But there's a discussion related to best owner. But aside from that, in terms of industrial machinery, that is Gigaphoton continues to be in good shape. And the profitability as well as the top line is improving. So chances are this situation may continue for some time. What are your thoughts, Horikoshi-san? Takeshi Horikoshi: As you know, the semiconductor demand continues to be on the rise, and that is expected. Also, the Komatsu, the NTC, Komatsu Industries continues to be quite solid. So fortunately, on a total basis, the profitability is higher than the construction equipment. And Gigaphoton, we expect growth next year onwards. So we do expect that to happen for next year. So the sales on a cumulative basis, about JPY 50 billion or so. Graeme McDonald: So there are some comments related to maintenance. So how much does that actually account for within the sales right now? Takeshi Horikoshi: We don't have the number at hand. But as far as this fiscal term is concerned, about half relates to maintenance and the half is related to the equipment. Graeme McDonald: So just to confirm then, Gigaphoton's profitability is far superior to average. So I have this image that it's over 20%. Is that correct? Takeshi Horikoshi: Yes, your impressions are correct. Unknown Executive: Moving on to the next question. Taninaka-san from SMBC Nikko. Satoshi Taninaka: This is Taninaka from SMBC Nikko. I have 2 questions. The first one is about increasing selling prices, passing on the cost. The ones you have announced regarding the ones that are effective from January, inclusive of that, you didn't say JPY 80 billion definitively, but there was some conversation around increasing prices by the same magnitude next fiscal year. I think the cost increase expected for next year is about JPY 65 billion. But how much of the profit decline are you expecting to offset next fiscal year? Can you give us some food for thought? Unknown Executive: Regarding tariff impact, it's actually the difference between JPY 120 billion and JPY 55 billion. So yes, you are correct. But selling price increases, like mentioned earlier, is what we are striving to do. So you will be able to come up with the percentage if you do your math. Satoshi Taninaka: Secondly, for precious metals, prices are going up. And after service for the mining business, how has that been changing? Because copper prices are increasing, are there any situations where people are not able to develop new mines? Or is production stopping at any copper mines because of this backdrop? So is utilization -- I guess utilization is not really picking up. But due to higher precious metal prices, is that directly affecting your aftermarket business? Or is it because precious metal prices are going up due to a variety of factors, there's no direct relationship. Can you give us some perspective on this? Unknown Executive: Well, please look at Page 38 in the disclosed presentation. It breaks down the sales of equipment and parts and services. For FX, if you exclude FX impact, for the third quarter as well on a cumulative basis, too, for equipment compared to last year, the difference was quite negative and it went down. However, for parts and services, actually, we've been exceeding. So on a net-net basis, compared to last year, we have been seeing a decline in sales or that's what we're expecting projection-wise. So the aftermarket business compared to last year has been steadily rising, and the ratios are shown at the top. But for this fiscal year, we expect the aftermarket ratio for mining is going to reach around 65%. So yes, we perceive that the business is doing well. And even for precious metals, the same thing applies. Unknown Executive: The next question, please. From Nikkei, Kugai-san, please. Unknown Analyst: This is Kugai from Nikkei. I'd like to pose 2 questions. First relates to rare earth. So the export control by China is in place. So what are the impacts right now? And what are the expectations? So in terms of export control, what is the current state of inventory? And what is the procurement strategy going forward? If you can share with us your thoughts, that would be helpful. Kiyoshi Hishinuma: So this is Hishinuma. Internally, we are definitely investigating the details. So we're looking at the suppliers' inventory level. And if there is a shortage, we're trying to source from elsewhere. So those are definitely activities underway. So of course, if there is a complete suspension, the impact will be quite huge. So we are cautiously involved in the discussion and the investigation. Unknown Analyst: Also, I have another question. So weaker yen is prolonging. So that is posing some positive impact in terms of the performance. But of course, if this is prolonged, that may impact the investment overseas. So with the yen depreciation, how do you perceive the current state? Also, what is the optimal, the FX level for you? If you can share with us your thoughts on what is the optimal level, that would be helpful as well. Unknown Executive: So just to do a recap. It's been over 2 years, actually, we're trending about JPY 150 or so. So the yen depreciation started back in Q1 of 2022. And since then, there has been gradually rise or depreciated. And since 2 years back, it's been hovering around JPY 150 or so. So I think back in 2017 to 2021, it was JPY 120 to JPY 115 or so. That was the past trend. So for 2 years, we've had JPY 150. It is almost becoming a de facto as we consider the future investment. So if we -- so it is not possible for us to invest more, expecting that the yen would appreciate going forward. So basically, the basic stance is, wherever needed, we will make such investment. Unknown Executive: Thank you. We are running out of time. But there are no people who have raised their hands. So if there are no additional questions, we would like to conclude today's meeting. Any additional questions? McDonald-san, you have one more question? Graeme McDonald: Yes, it's a short one. Regarding your P&L analysis for the volume, product mix, et cetera, can you give me -- give us pure volume, product mix, area mix and so forth and the details of that? Unknown Executive: Are you talking about Page 10 on a 3-month basis, right? Out of volume, product mix, it's JPY 520.1 billion. The pure volume negative is JPY 27.6 billion. For product and area mix, it's JPY 21.2 billion in total, combining the two. And the third item is a one-off item, which is related to product guarantee, which was worth JPY 3.3 billion. For area and product mix, JPY 21.2 billion of a loss. For area mix, Indonesia compared to last year has been going down and therefore, has been deteriorating. And for Europe, it has been increasing. But year-over-year, it is contributing negatively. For product mix, due to mining, and this applies to construction equipment as well. Due to the mix between equipment and parts, it has led to a negative impact for this period. Unknown Executive: As we reached the time given, we would like to end Komatsu's fiscal '25 Q3 results briefing. Thank you very much, everyone, for joining today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, welcome to the Novonesis Q1 2026 Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Tobias Cornelius Bjorklund. Please go ahead. Tobias Björklund: Thank you very much, operator, and welcome, everyone, to Novonesis' conference call for the first quarter of 2026. As mentioned, my name is Tobias Bjorklund, and I'm heading up Investor Relations here at Novonesis. In this call, our CEO, Ester Baiget; and our CFO, Rainer Lehmann, will review our performance as well as the outlook for 2026. Also attending today's call, we have Tina Fano, EVP of Planetary Health Biosolutions. We have Henrik Joerck Nielsen, EVP of Human Health Biosolutions; Andrew Taylor, EVP of Food & Beverages Biosolutions; and Claus Crone Fuglsang, Chief Scientific Officer. The conference call will take about 50 minutes, including Q&A. Let's change to the next slide. As usual, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs, and they involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statements. With that, I will now hand you over to our CEO, Ester Baiget. Ester, please. Ester Baiget: Thank you. Thank you, Tobias, and welcome, everyone. Thank you for joining us this morning. The year started strong with 7% organic sales growth against a high comparable, including around 1.5 percentage point effect from exiting certain countries and a good 1 percentage point from inventory buildup in animal. We delivered growth across all sales areas in both developed and emerging markets while achieving an adjusted EBITDA margin of 37.8%. Developed markets grew 8% with solid performance in both Europe and North America. Emerging markets grew 4%. We continue to drive growth through innovation and a stronger market presence with tailored solutions. We launched 5 new biosolutions in the first quarter, and we are well on track for our full year expectation. These launches are responding to an increasing consumer and societal needs from higher yields in food to replacing fertilizers in agriculture. Ten months into the Feed Enzyme Alliance acquisition, we're delivering in line with our initial expectations. And more importantly, we are continuously seeing increased traction with our customers through a broader and integrated offering of enzymes and probiotics. As a complement to our global footprint, we acquired an attractive production facility in Thailand in early April, and it's expected to be operational in 2027. The facility holds optionality to produce different biosolutions, including the scaling of HMO production, which would require additional investments. Such investments are already included in our communicated CapEx plans towards 2030. We are operating in a world with increasing global uncertainty, with rising pressure on economies in many different ways. Countries are seeking for homegrown solutions to strengthen energy and food security supply. Biosolutions are increasingly becoming central answers to resilience and productivity agendas, reducing exposure to global disruptions while enabling the creation of local jobs. In our dialogues with customers and policymakers, particularly in the energy area in Southeast Asia and in India, we see this momentum accelerating and Novonesis is uniquely positioned to support this shift. With a strong start to the year, we feel very confident about our full year outlook. Growth is expected to be mainly volume-driven, supported also by pricing. The outlook includes a close to 1 percentage point effect from exiting certain countries. For the adjusted EBITDA margin, we maintain the outlook at 37% to 38% with an expected margin expansion compared to 2025, more than absorbing currency headwinds and increasing raw material costs. With that, let us now look at the divisional performance in more detail, starting with Food & Health Biosolutions. Please turn to Slide #4. Thank you. Food & Health Biosolutions delivered a strong organic sales growth of 9% in the first quarter. The adjusted EBITDA margin was 35.7%, 130 basis points lower compared to last year, mainly driven by the ramp-up in commercial resources we did over the course of 2025, product mix effects from stronger growth in HMO and strong currency headwinds. These were partially offset by cost synergies and economies of scale. During the quarter, we launched 3 new products in Food & Health, including a new yogurt culture solution that improves taste and texture while also delivering higher yields and productivity benefits. For 2026, we expect the division to deliver organic sales growth in line with the group, primarily driven by Food and Beverages and supported by growth in Human Health. Food & Beverages deliver -- please turn to the Slide #5. Thank you. Food & Beverages delivered a strong organic sales growth of 11% in the quarter. Growth was mainly volume-driven, with pricing contributing a good 1 percentage point. Synergies contributed to growth and in line with expectations, supported by cross-selling and increased commercial scale. Growth was well anchored across geographies and industries. Performance was driven by increased market penetration, a strong adoption of innovation and positive market development. Despite muted consumer sentiment, we continue to see high demand for higher protein for clean label products and healthier solutions, supporting an increasing demand for biosolutions. Momentum in dairy continued to be strong and was led by North America and emerging markets. In fresh dairy, demand for efficiency, higher yields and high protein continues to drive strong demand, including bioprotection and probiotics. In cheese, customer conversion to high-yield solutions remains a key growth driver. Growth across the remaining industries was driven by innovation and increased penetration, led by plant-based solutions and beverages with solid performance from recent launches. Solid growth in baking and meat also contributed to growth. For 2026, growth in Food & Beverages is expected to be broad-based, supported by both synergies and pricing. Human Health delivered organic sales growth of 5% in the first quarter. Growth was primarily volume driven, while pricing and synergies contributed positively. Performance was driven by strong growth in Advanced Health & Nutrition, supported by both early life nutrition and advanced protein solutions. Early life nutrition was led by HMO with growth across regions, including cross-border trade into China. Advanced protein solutions grew alongside the anchor customer. Dietary supplements was impacted by a softening North American market, where our sales to women's health category continued to be strong. For 2026, growth in Human Health is expected to be supported by dietary supplements as well as Advanced Health & Nutrition led by HMO. Pricing is expected to contribute positively and deferred revenue is expected to add around 1 percentage point to growth. Please turn to Slide #6. Thank you. Planetary Health Biosolutions delivered organic sales growth of 5% in the first quarter against a high comparable. The anticipated inventory buildup at a key customer in Animal contributed a good 2 percentage points to growth. The adjusted EBITDA margin was 39.5%, up 10 basis points year-on-year, driven by the Feed Enzyme Alliance acquisition and cost synergies, including the ramp-up in commercial resources we did over the course of 2025 as well as currency headwinds. We launched 2 new products in Planetary Health in the first quarter. In Animal, we introduced the Bovacillus probiotic for cattle, benefiting from a faster route to market following the formation of Novonesis. These solutions enhances digestion and strengthens cattle immune system, resulting in an increase of up to 1 kilo of milk per cow per day, while also improving the feed efficiency. In plant, we launched the first product based on our new enzyme platform, ActiPhy, that enhances nutrition uptake in soil, improving the yield from agri of corn by around 3%. The solution initially targets corn in North America and is supported by several years of strong field trial data. For 2026, we expect the division to deliver organic sales growth in line with the group with relative stronger contribution from agricultural, energy and tech. Please turn to Slide #7. Thank you. Household Care delivered organic sales growth of 4% against a high comparable. Growth was mainly volume-driven, supported by positive pricing. Performance was driven by increased market penetration and adoption of new innovations across laundry, dish and other cleaning categories in both developed and emerging markets with particularly strong traction among local and regional customers. For 2026, we expect solid performance in Household Care in a market that carries some uncertainty related to weaker consumer sentiment. Growth will be driven by continued innovation, increased penetration in both developed and emerging markets and continued support from pricing. Agriculture, Energy & Tech delivered organic sales growth of 5% in the first quarter, driven by energy and agriculture, while tech declined due to order timing in biopharma, processing aids and high comparable. Strong growth in energy was driven by Latin America and Asia Pacific, particularly India, reflecting continued growth in corn ethanol production. North America also supported growth through increased adoption of innovation and higher ethanol production volumes, supported by growing exports. Additionally, increased penetration of biodiesel solutions and the ramp-up of second-generation ethanol production contributed to the strong growth. Following the increasing need for energy security and supply as countries are seeking further diversification from fossil fuels, we see an increasing strategic global interest for higher biofuel blending. Strong growth in agriculture was mainly driven by inventory buildup at a key customer in animal, contributing by around 4% to the organic sales growth for Agriculture, Energy & Tech. As mentioned, integration of the Feed Enzyme acquisition continues to progress in line with expectations with synergy milestones materializing as planned. Our plant business declined during the quarter due to timing and high comparable. For 2026, growth in Agriculture, Energy & Tech is expected across all industries, led by energy and supported by synergies and pricing. And now let me hand over to Rainer for a review of the financials and the outlook for 2026. Rainer, please? Rainer Lehmann: Thank you, Ester, and also good morning, everyone, and welcome to today's call from my side. Let's turn to Slide #8. In the first quarter, sales grew a strong 7% organically and 4% in reported euro, including around 1.5 percentage points effect from exiting certain countries. Sales synergies across both divisions and pricing each contributed around 1 percentage point, while the inventory buildup in Animal contributed a good 1 percentage point. Currencies provided 6 percentage point headwind, while M&A contributed positively with 3%, reflecting the Feed Enzyme Alliance acquisition. The adjusted gross margin improved by 120 basis points to 60.1% versus Q1 of last year. Pricing and productivity improvements as well as the Feed Enzyme Alliance acquisition supported the development, while currency and product mix had a negative impact. Total operating expenses adjusted for PPA-related depreciation and amortization were 29.1% of sales compared to 27.3% in Q1 last year. This development mainly reflects the planned increase in commercial resources over the course of 2025, driven by both organic expansion and the Feed Enzyme Alliance acquisition. The adjusted EBITDA margin for the quarter was 37.8% compared to 38.3% in Q1 2025. The margin benefited from the higher gross margin, cost synergies and around 50 basis points from the Feed Enzyme Alliance acquisition, in line with our expectations. This was offset by higher operating expenses and currency headwinds. Let's keep in mind that -- let's keep in mind also that last year's operating expenses were quite low in the first quarter. Adjusted earnings per share, excluding PPA amortization, were EUR 0.57, corresponding to an 8% increase compared to last year. Operating cash flow amounted to EUR 167.1 million in the first quarter, an increase of EUR 60.7 million year-on-year. It was mainly driven by improved net profit and a more favorable working capital development compared to Q1 last year. CapEx in the quarter amounted to EUR 93.1 million, equal to 8.3% of sales. Despite higher investment levels, free cash flow before acquisitions increased by 9% to EUR 74 million. On March 12, we successfully issued EUR 1.7 billion of senior unsecured notes to refinance the existing bridge loan related to the Feed Enzyme Alliance acquisition. Relating to this, I'm also very happy that S&P Global Ratings issued an A- stable outlook rating for Novonesis. With this, let us now turn to Slide #9 to talk about the outlook. Please note that the outlook presented today is based on the current level of global trade tariffs and the prevailing foreign exchange environment. As Ester mentioned earlier, we are very confident in the full year outlook and confirm our guidance for both organic sales growth and profitability on the back of a strong start to the year. The outlook for organic sales growth is maintained at 5% to 7% and includes close to 1 percentage point effect from exiting certain countries. Growth is expected to be mainly volume-driven, supported by around 1 percentage point from sales synergies and a good percentage point contribution from pricing across both divisions. The outlook also reflects some uncertainty related to consumer sentiment for the year. The recent situation in the Middle East and its broader implications to global market dynamics is difficult to fully assess and leads to increased uncertainty. However, based on our diversified end market exposure and flexible regional production footprint, including our pricing capabilities, we currently do not expect a material impact on our adjusted EBITDA margin. We continue to monitor the development closely. We expect a smaller positive timing impact also in the second quarter from the Animal business related to inventory buildup at a key customer. I want to reiterate, though, that for the full year, this effect is expected to be neutral. We continue to expect the adjusted EBITDA margin to be in the range of 37% to 38%, reflecting continued margin expansion compared to 2025. This improvement is expected to be driven by a stronger gross margin, the Feed Enzyme Alliance acquisition and synergies, partly offset by currency headwinds of around 0.5 percentage point and including somewhat higher input costs. As previously communicated, we'll see a temporary step-up in CapEx as part of our strategy to enable growth through 2030 and beyond. This includes continued expansion of our resilient global enzyme production footprint, completion of the doubling of our U.S. dairy culture capacities here in 2026 and investments related to the recently acquired facility in Thailand. In addition, we continue to invest in the implementation of our new ERP system, which will impact CapEx by around 1 percentage point annually over the next few years. As a result, CapEx is expected to be 12% to 14% of sales for 2026. Finally, Net debt-to-EBITDA is expected to be around 1.7x at year-end, supported by strong cash generation and continued deleveraging despite the increased CapEx level. We had a strong start to the year and remain very confident in the 2026 outlook. With that, I will hand back to Ester. Ester Baiget: Thank you very much, Rainer. Could you please turn to Slide #10? Thank you. In the current macroeconomic environment, demand for our biosolutions continues to be strong across all fronts, from customer needs for higher yield and efficiency, consumers' increasing demands for healthy nutrition and to growing needs to decouple from fossil fuels as countries seek greater energy diversification and security of supply. Quarter after quarter, we demonstrate the strength and the resilience of our business model, supported by strong innovation, a resilient global footprint and diverse end market reach. As the world continues to evolve, the relevance and the need for biosolution only continues to increase. And even with increasing global uncertainty, we are confident in our 2026 outlook as well as the 2030 targets, including the 6% to 9% organic sales growth CAGR. And with that, we're now ready to open the call for Q&A. Operator, please? Operator: [Operator Instructions] The first question comes from the line of Thomas Wrigglesworth from Morgan Stanley. Thomas Wrigglesworth: Two questions, if I may. Could you just elaborate a little deeper as to how you see the Middle Eastern conflict playing out both within your business and within your customers? I guess there's -- the message that we hear is that Southeast Asia will be more impacted by cost inflation. And clearly, that then leads to a question about your emerging market exposure. So anything that you can share in terms of recent order pattern changes or freight rate constraints that are limiting or enabling your business would be very useful? Secondly, just in light of that, just on the bioenergy side, you've touched on seeing an uptick in interest in obviously, bioenergy solutions. Is that to say that this is going to be something that will happen in a couple of years? Or is there going to be a more immediate impact through 2026 as you see it? Ester Baiget: Excellent question, Thomas. And let me start answering to them and then also let Tina build up on each of them. So first, regarding Middle East conflict, important to mention that our direct exposure to Middle East and the sales in Middle East, they are small. So the impact effect of that, it's marginal to none on our overall revenue. Then building on your comments on what we see these changing dynamics in our -- in the world that we live in. We see from one side increased level of cost from raw materials that we have very good conversations with our customers, also including pricing, and we're confident that it will lead to a marginal neutral non-impact into the EBITDA. And then we see increasing continued interest from our customers around the globe. That was there. But now with this crisis in Middle East, if anything, we see it as a catalyzer of further momentum. We see a catalyzer of further momentum for diversification. And that's true across all segments. We see it on Food, the eagerness for healthier and cleaner and replacing stabilizers and texturizers and seeking for solutions that will continue to fulfill the consumer dynamics. We see it in Household Care. We see it in Energy. We see an increasing need, particularly in Energy. And then maybe tipping in your second question, particularly in countries that they had already in the past, taken decisions towards biofuels. We see Brazil, North America, Malaysia, Indonesia, the countries that they had already included biofuels into their diversification, benefiting from those decisions of the past. And then seeing a broader resilience and being able to absorb the constraints on supply and also access to competitive raw materials. And we see that momentum doubling up across the whole globe, but particularly with a strong pull here in Southeast Asia. These efforts are there. They are reflected -- maybe it's not so much on the sales year-to-date. We see in U.S. an increasing level of exports. But the big impact, it's for the long term, as you mentioned. Do we see the growing direction of increasing pull from mandates that will lead to continuous investment. And in any case, it gives us stronger comfort on the drivers of growth. So long answer, indicating that what we're doing with our customers, what we're doing on price. But then at the same time, the catalyzer of this crisis of momentum that was there for solutions leading to higher yields and high efficiencies and also decoupling from energy. Tina Fanø: Yes. And only adding a bit because I think Ester covered most of it. Short term, I would say, yes, you'll see it as a pickup in exports from the U.S. mostly. However, you will also see it elsewhere longer term. I am just coming back from Southeast Asia, in fact, here over the weekend. And there is a significant interest in, for example, biodiesel expansion. We talked about Indonesia going from B30 B40 to even B50. So I would say that diversification journey we have been on with feedstock diversification, with end market diversification and geographical diversification is serving us well here. But most impact, you should expect in the longer term, given the mandates are ramping up. So it's a good underlying growth driver for the energy segment. Shorter term, it is mostly from exports, but not only from exports. And in the quarter, you hardly see anything. Exports has been growing over the last year. So that is part of our numbers as well. Operator: The next question comes from the line of Thomas Lind Petersen from Nordea. Thomas Lind Petersen: Two questions also from my side. Both regarding the guidance for this year. So Ester, back in February, you said that you expect a sort of deterioration in the consumer sentiment. And I think perhaps you were alluding to North America. So I was just wondering if you could give us a bit of color on that. Is that still what you expect for the year? Or are you beginning to see a deterioration in the consumer sentiment? And perhaps also if you could comment a bit on the pricing and your ability to raise prices given the higher raw materials. So one question here regarding the revenue for this year. And then the second one is about the adjusted EBITDA margin. You end up here at 37.8% in the first quarter. And just wondering if how we can extrapolate from -- for the rest of the year. Also given I believe that your FX headwind, at least the large part of the FX headwind that you've seen has sort of been cycled now. So is there anything that speaks for a lower adjusted EBITDA margin going forward? Or how should we think about this? Ester Baiget: Excellent. Thank you, Thomas, for your questions. I'll answer the first one, and then I'll pass it to Rainer on EBITDA. Regarding the comments we made at the beginning of the year, as you so nicely indicated, we included in our guidance some softness on consumer behavior. We could foresee that coming, and that was included in our guidance, and it's already happening. We continue to include it in our guidance for the -- and it's included in our guidance for the full year. It's true that the strong start of the year gives us comfort, and it reduces the risk from the volatility and uncertainty of the market that we're living in. We continue to see, as I mentioned before, a strong underlying demand from our solutions, but we see some cases of that softening demand. Maybe particularly not reflected in Q1, but in the Q1 figures, but particularly in Human Health, this is a segment where we see consumers and in North America when they are sitting and choosing the -- where they're allocating their pocket money, decreasing the demand of probiotics. And we see some indications there of softer consumer demand in North America in probiotics, which, as I mentioned, included in our guidance and also coupled with a strong start of the year gives us full comfort of deliver of the full year guidance. And then I'll pass it to Rainer on EBITDA. Rainer Lehmann: Yes. Thomas, you're absolutely right. Of course, the biggest, let's say, spread between the FX side was in Q1, where we actually had last year, even tied to USD 1.06 and now we're running at USD 1.17, USD 1.18. Nevertheless, let's keep in mind that it's a gradual impact. So for the year, we still see the around 0.5 percentage point impact on the EBITDA margin. And then the -- of course, the strong margin in Q1, please look at the sales, right? There's quite some sales leverage in there. That was the highest sales quarter ever. That, of course, will come down a little bit. But therefore, we feel comfortable that this margin is going to be between 37% and 38%. Ester Baiget: Thank you, Rainer. And building on also on your comment on pricing, we have really good conversations with our customers, and we feel comfortable on the momentum there on bringing in the prices and then leaving, as Rainer mentioned, of no impact to the EBITDA margin for the year. Operator: The next question comes from the line of Chetan Udeshi from JPMorgan. Chetan Udeshi: I was just curious on your announcement to buy this facility in Thailand. You are spending a lot of your own CapEx and then on top, you're buying this facility. I'm just curious from a timing perspective, why now? Because there is so much CapEx going on. Is this an indication of you thinking about yourself more capacity constrained? Or is this more a unique opportunity? Because I think this is much more an HMO type facility. So maybe it can speed up your go-to-market on HMO side? And the second question and maybe this is just a reminder because you are growing very, very strongly in dairy, but I was at DSM-Firmenich Capital Markets Day earlier this year, and they were actually indicating that they are at #1 in dairy enzymes from what I remember. And I was just curious how are you growing in dairy across both your cultures and enzymes? And is there a limitation from the Chr. Hansen merger that you had in place because of regulatory consideration that is probably limiting to some extent, your growth? Or can that be even better at some point once that limitation is taken away? Ester Baiget: Thank you, Chetan. I will let Andrew answer the question on dairy and enlight you on why now we are stronger and even more equipped to be the partner of growth for our customers with a bolder portfolio. But then bringing -- building on your first question on Thailand, we have investment -- we have announced announcement of increased CapEx of 12% to 14% to support growth, aiming also for the high end of our guidance. And this facility in Thailand is a good add to that path. It is bringing optionality for growth, including further investments that they are already included into the 12% to 14% and also comes with some capacity already today to produce HMO that supports the growth trajectory of this business. But then opportunistic acquisition that puts us in a good place in a region that we're growing, well embedded in our overall CapEx, included in our strategy and then with further investments to capture the potential of this optionality embedded already in the 12% to 14%. Andrew Taylor: Yes. And maybe taking on the second part of the question around dairy. So I'd begin with -- we have very strong customer relationships across the world in dairy, and we're seeing good growth in both cheese and fresh dairy and all its related subcategories. And when you think about cultures and enzymes, we're very strong in both of those and actively innovating. I think the thing that's probably most interesting for us right now is the combination of those pieces. So post the combination of the 2 companies, we're now able to do things in the combination of cultures and enzymes that help both the production of the cheese as an example, as well as the aging, oftentimes in one bag. And so a lot of what we're trying to do is expand those solutions that are both driving productivity for our customers, which is an ongoing demand, but then also new value, how can you create better tasting cheeses, how can you taste -- quicker ripening cheeses. So we're very comfortable in our position and the growth that we're seeing around the world supports that. Operator: The next question comes from the line of Lars Topholm from DNB Carnegie. Lars Topholm: I also have 2 questions. One is actually related. So let me start with that. So in Thailand, there's a lot of focus on production of ethanol from cassava, which requires enzymes. So I just wonder, maybe, Tina, if you can put some words to the significance of this for you guys? And are these enzymes some you can produce on your new Thai assets? And then my second question goes to Ag, Energy and Tech, which grows 5% organically. There's a 4% contribution from inventory buildup in Animal Health. And I assume bioenergy grows double digits. So it seems to me something is going terribly wrong with plant and with tech. I just wonder if you can put some words and maybe some growth rates on the 4 different components of this division and maybe also the reasons behind, what should we say, the less flamboyant growth in parts of that business. Ester Baiget: Thank you, Lars, and I'll pass it to Tina, who will also guide you on the optionality of the plant on Thailand with further investments. And remind us that we now look in our business on a quarterly level here for the long run, and we are confident on the full year guidance. Lars Topholm: I know, Ester, but you said the same after Q4. And now we have 2 soft quarters in a row. So the long term starts with a weak quarter. That's how it is. Ester Baiget: Every quarter is a quarter. And then I repeat myself, we were confident on the full year guidance, but I'll pass it to Tina, Lars. Tina Fanø: Yes, Lars. So let's start with Thailand. And yes, Thailand is one of the places in Southeast Asia where we operate in our bioenergy space as well. The plant which we have there gives us optionality also for producing the enzymes there. So this is good. In terms of Agriculture, Energy & Tech, and you're right, we saw a strong growth in bioenergy and the math then brings that tech and plant is in decline. I don't -- you said terribly wrong. I don't at all agree to that point. I would say I think sales is progressing according to plan. Yes, it's a declining quarter. And yes, it is a double-digit decline. But we remain confident for the full year. Agriculture, Energy & Tech is going to grow stronger than Household Care and all of Planetary Health is going to grow in line with group. So I feel quite good about where we are, including in plant and tech. Tech is, as you know, quite lumpy, especially given biopharma processing. And you could say we knew that we wouldn't get any orders here beginning of the year. We expect that to ramp up, and we see that ramping up for the full year. And that's why also tech is going to contribute to the growth of AT. Plant is super small. So -- and you know there is timing on when it's exactly planting. And then you have to remember also the tough comp, which there are in both plant and tech from 2025. Lars Topholm: Tina, I would just mention it didn't grow in Q1 '24. So the tough comp from '25 was a very easy comp, I guess, in '24. Ester Baiget: But what about '23 then? Lars, let's hold that question for end of the year. Then when we see the growth coming in, then we remind ourselves about the volatility of 2 small segments that they are by intrinsic nature, volatile, and they contribute consistently to growth for the company. Operator: The next question comes from the line of Alex Sloane from Barclays. Alexander Sloane: Two from me, please. First one, just on household. Obviously, with oil prices much higher and petrochemical-based surfactants under renewed cost pressure, are you seeing any acceleration in demand from your customers for enzyme substitution? And if so, when would you expect that to translate into your volumes? And the second one was just a follow-up on the food biosolutions. Obviously, the growth rate there, excluding the Russia exit, really strong, I think, close to 15%. Dairy, obviously, the standout. Could you maybe help us just disentangle what is you see as kind of structural growth within that from penetration and new customer capacity opening versus maybe any temporary customer behavior, if there was any maybe pull forward of orders, customer restocking, et cetera. I guess should we be expecting that food growth to slow and normalize in the second half, please? Ester Baiget: Excellent. Thank you, Alex. Tina will answer your question regarding the underlying drivers of the growing demand in Household Care and then Andrew, on Food & Beverages. Tina Fanø: Yes. So on Household Care, you could say, increased oil prices is increasing the discussions on substitution of surfactants. However, this is not something you do overnight. So this is something which we are going to see as time progresses. So this is an underlying good driver for our Household Care business. But I would more think of it in a more longer-term perspective, Alex. So we have, over many years, invested in emerging markets because there is a significant growth opportunity for us there. And this is a market where we have low single-digit growth when you look at both emerging as well as developed market when you combine it. So it's not a high-growth area. But we have been able to outgrow that given the investment, given our strong footprint in emerging markets. And as we also have talked about many times, the inclusion of enzymes in emerging market is less. So there is a significant opportunity for us to go for. Short term, you could say there's increased interest for surfactant replacement, but not only surfactants. It's also other oil-derived components. However, there is also the risk of taking out, for example, enzymes short term given the cost pressure they are under. This is not something we are seeing. We remain, you could say, confident in the full year outlook of solid growth in Household Care. Andrew Taylor: Yes. And then following up on the question with regards to food and dairy. So first off, the base most structural momentum continues to be very positive. We've talked the last couple of quarters about things such as the drive for productivity, the drive for high-protein yogurts for new texture experiences. So if you look across the world, those underlying structural drivers remain and actually are strengthening in some parts of the world. We do have some benefits from the annualization of some of the larger projects that have been queuing up in dairy, which we've noted before in the past. So the opportunity pipeline looks solid, but we wouldn't expect that to continue at the same rate. The thing that's also important is we're seeing good growth in food as well, so not just dairy. So if you think about the balanced portfolio, we are continuing to see acceleration. We talked a little bit last quarter, but we continue to see beverages as an example, back in the growth mode through some of the investments we've made. So we think it's very balanced across the 2 pieces. Operator: The next question comes from the line of Matthew Yates from Bank of America. Matthew Yates: A couple of follow-ups really from what we've discussed already. The first one for Rainer, just around the operating expenses. It looks like it was up about 13% on a reported basis, I guess, probably closer to 10% at constant scope. You mentioned, I guess, some annualization effect given spending ramped up through the course of last year. Just wondering when you think about the full year guidance for 2026, is the expectation that OpEx grows in line with sales or slightly faster? And then the second question, sorry to just circle back on Tina. I think it was Lars was asking about the animal performance. I mean it looks to me over the last 3 years, the animal business hasn't grown. I apologize if that's wrong, you're welcome to correct me. So it has been quite some time now. So can we just talk a little bit more about how that business is doing and where the confidence would come from just thinking that growth may pick up over the coming quarters? Ester Baiget: Thank you, Matthew. I will let Rainer answer your first question and then Tina build -- and your question was on animal or on plant then? Matthew Yates: On animal. Ester Baiget: Okay, perfect. Rainer Lehmann: So let me answer first on the OpEx side, absolutely right, we saw a step-up in Q1, exactly what you said, the rolling effect of annualization. But even on top of that, there's always a little bit of timing. So I do not expect actually to increase OpEx for the next quarters relatively to the Q1 number. We are here really going to see more flattish development. Tina Fanø: Yes. And on the Animal business, we feel quite comfortable with where we are on the animal side. We have seen growth over the last years. And it is a business where we see in the customer discussions, increased focus on the full biosolutions, which we are offering. Matthew Yates: But you can't share anything more specific about market conditions or product launches? Tina Fanø: Yes. So one of the things we're also calling it out this quarter is the launch of Bovacillus. Also, we have earlier years launched a number of new enzymes. Hiphorious is, for example, a new launch, which is coming. So it is, as you know, in the animal space, and you need to do trials in order to prove the benefits of it. And we feel, I would say, quite good at where we are. It is -- when we look at what we have, the combo solutions is something which there is quite some interest in both from enzymes as well as probiotics. We see, you can say, good pickup on our silent solutions. So overall, I would say we are, in fact, in a good place in the animal space. It is a bit more difficult on the numbers given the acquisition. So you'll have to look at both organic and the acquired and so forth. But overall, we believe we are in a good place there. But let's go into details on the discussion later on, if needed. Operator: The next question comes from the line of Soren Samsoe from SEB. Soren Samsoe: So I have 2 questions. One is more in dairy in China. Just if you could update us on growth in yogurt and also cheese. I understand, cheese is growing quite well, although from a low level still. And then my second question is on the human health weakness. I understand, of course, driven a bit by the weak consumer in North America. But are there any other dynamics we should be aware of here or changes to the dynamics? And how is the growth looking in Europe and Asia? Ester Baiget: Thank you, Soren. I love it when the question comes implied with the answer on -- particularly in human health on the isolation on North America on the softness, but I'll let Henrik build on that. And first, Andrew, shine you up with the efforts we're doing in China and that we continue to grow in the segment on any degree. Andrew Taylor: Yes, very good question. So as we all know, the fundamental dairy market in China has been challenged for a few years. What's exciting is we're continuing to see growth. So we saw growth last year. We're seeing growth again this year. That is both in fresh dairy as well as in cheese. On the drivers of that growth are different. So on the fresh dairy side, a lot of it ends up being around innovation and new products and new solutions that we're driving to help reinvigorate the category. And on cheese, that's where we're helping build that market over a long period of time. So we've been investing in the cheese team in China as a way to actually be the reference point as that market develops. So the drivers are different, but both positive. Henrik Nielsen: Thank you for the question, Soren. So yes, in human health, one theme is for sure, the U.S. market. Long-term underlying drivers are still healthy. Short term, we are seeing some signs of a weakening U.S. consumer. There is, of course, the consumer sentiment out. We see fewer searches on online platforms for probiotics. And we have yet to see that potentially become an effect, but this is something we are definitely keen on watching out for. Then you asked about Europe and Asia. Overall, the quarter was in line with our expectations. Europe also, it's a growth market, but at a more moderate pace as well as in APAC, where maybe I highlight the -- we're seeing some very nice growth in dietary supplements in China. That's still coming for Novonesis from a small base, but an area where we have high expectations. Operator: The next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: I have 2, please. One is on the Plant Health segment. So I'm trying to work out if the absence of growth here is a deliberate decision on Novonesis part or a result of market share loss that is not wanted. And I look at the Planetary Health segment margin, and I think to myself that maybe there is some removal of lower-margin products here that have either commoditized or were not quite what Novonesis was looking for. What intentions, what program has Novonesis been implementing in this segment? And what is the end goal? My second question is on the bioenergy segment. If you were to rank in order of importance, increase in ethanol production, change in market share and growth in 2G, what would have been the biggest drivers of the growth in Q1? Ester Baiget: Thank you, Sebastian. Regarding the question about Bioenergy, I mean growth in Q1 for 2G... Tina Fanø: Okay. So on plant health, yes, we talked about -- we had some restructuring of part of our planned activities last -- end of last year. And that was simply because we have a number of launches we want to get out. So you could say more securing that we get benefit from the things which we have developed. We are happy with the launch we have done just this quarter on ActiPhy. So you could say an example of what it is we want to get out and do some work for us. Overall, I would say, in plant, remember, plant is a very small part of Agriculture, Energy & Tech. It's 5-ish percent. So it's quite small. So it's not influencing in any significant way the margin. But it is -- Planetary Health is a good -- you could say it's big industries efficient with a nice profitability. In terms of Bioenergy, I would say, well, when you look at the ranking where you say increased production, change of market share and whether it's 2G growing, well, 2G is still very, very small. It is less than 5% of the energy segment. So although the growth rate is nice, it is still a small part of the growth. So if I were to rank them, the biggest one, which is driving our growth is the increased -- I wouldn't say penetration, but the increased production of ethanol. That is the main driver for our growth. Operator: The next question comes from the line of Nicola Tang from BNP Paribas. Ming Tang: Coming back on Household Care or actually coming back on the comments around cautious consumer behavior that you had flagged earlier in the year. I think today, you're referring to the probiotics business, but I think you've historically mentioned Household Care, particularly risks or the potential risk in North America. I was wondering if you've seen any deterioration at all in Household Care, specific to North America or generally? And conversely, I was wondering if perhaps there could have been any prebuying by some of your -- or safety stock build by some of your customers, either in Household Care or elsewhere, just in light of the kind of Middle East uncertainty. And then the second question, I was wondering if you could give a little bit more detail on your outlook for inputs. Is it fair to assume that the main potential impact from the Middle East conflict might be more around energy cost, where I know you have hedging. Could you talk a little bit about what you're seeing in terms of raw materials? Because as I understand, it's mainly naturals, where there's less inflation than on the synthetic side. So could you talk about the magnitude of input inflation that you expect for this year? And any commentary around specific inputs or availability of inputs? Ester Baiget: Thank you, Nicola. I'll comment on both questions, and then I'll pass it to both Tina and Rainer. The first one, important to mention that the 7% growth, it's underlying growth across all segments, robust growth, volume growth mainly, also a little bit of growth from pricing. And it is driven by continuous increasing demand of our solutions. We don't see changes on the consumers' buying behavior. This is underlying driving demand growth, where biosolutions continue to be the answer of our customers. We don't see the softness in North America on Household Care. Tina is going to further comment on that. And we see continued penetration of the -- collecting the fruits of the investment we've made in the past. Last year, we put 400 more people boots on the ground, sellers in the regions. And we see the benefits there. We see the closeness of the customers, the proximity where the growth is and then translating it on what it is the top line growth that also with the strong start of the year gives us full confidence for the year-end guidance. And then regarding the costs, Rainer will talk about this. But as I mentioned, we bring in pricing and conversations with our customers, and we're aiming and forecasting nonimpact to the EBITDA for the year. Tina Fanø: Yes. So as Ester said, I mean, when you look at, a, the Michigan Institute on consumer sentiment in the U.S. That is something which for sure we are watching. Also, if you watch the Nielsen data, then you will see, you could say, flattish/declining volumes in the U.S. in detergent volumes after a good 2025. So this is something we are watching, you could say, in the market. But when we look at our data, we don't see any impact. And in fact, I also want to highlight that given our broad base with different players in different segments, if people move between, you could say, private label and branded goods -- for example, in Europe, we have a broad exposure. If they move down in tier to less enzyme containing enzymes, then we are not immune to that. But that outlook of our sentiment and how we look at the world is included in our outlook for the full year. And as we have said, we expect solid growth in Household Care. Rainer Lehmann: And Nicola, regarding the input cost of the Middle East, as Ester basically said, this is mainly impacting us on the supply chain side. So meaning our basically transportation and packaging cost is affected by that, which we're basically recovering on the pricing side. So that is really the driver for it, not the other components on the COGS side. Ester Baiget: One more question, operator, please, last question. Operator: The next question comes from the line of Charles Eden from UBS. Charles Eden: I'll limit myself to 2 quick ones, if that's okay. Firstly, probably for Tina, can we just come back on the plant and tech? Obviously, you mentioned double-digit decline in tech in the quarter, but I think you obviously mentioned order timing. So is the expectation that reverses in Q2 or at least in the balance of '26? And if possible, could you quantify the magnitude of that order timing headwind in Q1? And then secondly, just to come back on Food & Beverage. Obviously, a lot of time focused on Ag, Energy & Tech, but Food & Beverage, in particular, sort of 11% organic, but 15% underlying, if you exclude the Russia exit, quite an incredible performance. Can you just sort of help us understand maybe that's well ahead of the end market growth. What is driving that? What's the success in your offering, which is allowing you to grow probably 4, 5x the underlying market? Ester Baiget: Thank you, Charles. I love that question. What is the driver of -- that we continue to outgrow the markets that we're present. And it's consistently across all areas, a single pattern, customer proximity and bringing answers that lead to value generation for our customers. And that's true for food. That's true for dairy. That's true for Household Care. That's true for Bioenergy. And in the environment that we live in today, we see that pool continue to grow. I'm going to tip toe on your first question and then pass it to Andrew. We saw a decline, double-digit decline in Ag and in plant and in tech this quarter mainly from timing. Both are going to contribute to growth through the year. That means implicitly that there's going to be growth on the remaining of the year to overcome the decline that we saw on a segment in AAT that contributed to growth with a strong growth from Bioenergy and also growth in Animal that we see good momentum and conversations with our customers. And with that, Andrew, I'm passing it to you. Andrew Taylor: Yes. Thank you. And so if you take a step back and think about what's driving Food & Beverage, I think there's a few things. One, we all see the same data on the underlying market growth. I would say that there are pockets of the underlying market that we are differentially exposed to. We always talk about the high protein trends around the world. That's clearly a piece. But the biggest piece is the increasing use of our biosolutions. It's actually driving penetration around substituting, in particular, for synthetics. And what's exciting is that is a continuing trend in many of the things that we see, for example, Maha, and other things actually are helping with that. So as an example, a culture can substitute for multiple things in the yogurt that are potentially at risk. So we do see that across Food and Food & Beverage. The third piece is really around how you share that value. So if we're helping our customers create productivity, if we're helping them get better end consumer and customer demand, we also work to share that value through the pricing. So we are excited about the progress. It's a very choppy market around the world, but we keep investing in that part of the business. And in particular, the capital investments we're making are very important because it signals to our customers, we're willing to grow with them for the long term. Ester Baiget: Thank you very much. And with that, we're closing the session of the day. Looking forward to continuing the conversations with all of you during the forthcoming days. Thank you so much. Bye.
Jaime Marcos: Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Today, our Chief Financial Officer, Pablo, will be the one presenting the first quarter trends. The presentation will last approximately 20 minutes, and it will be followed by our usual Q&A session. Without further ado, I would now like to hand over to Pablo. Pablo Gonzalez Martin: Thank you very much, Jaime. I will start on Page 3, where we show the main highlights of the quarter. Starting with our business activity, I would like to highlight that business volumes have accelerated their growth rate to over 3% year-on-year. This progress has been supported by an almost 4% growth in customer funds and supported by an increase of almost 11% in off-balance sheet funds, mainly mutual funds, where we are showing a 17% year-on-year growth, maintaining a 9% market share in net inflows. This improvement is also supported by a 2.4% growth in total performing loans, which for the second consecutive quarter continued to accelerate their growth. Turning to profitability. Net income for the quarter amounted to EUR 161 million. Both net interest income and fees showed year-on-year growth, something that combined with lower provisions more than offset the mid-single-digit increase in total cost. The adjusted return on tangible equity remained at 12%, while the cost-to-income ratio stood at 46%. Asset quality remained strong. The net NPA ratio stood at just 0.7%. The NPL ratio continued its downward trend, reaching 2% and its coverage further improved to 80%, significantly above the 70% reached a year ago. The cost of risk also showed a positive trend, declining to 20 basis points, marking one of the lowest levels in recent years and below our initial guidance. Lastly, we remain focused on value creation. Our CET1 ratio stayed stable at 16% during the quarter as we are allocating capital for shareholder remuneration and lending growth. Two weeks ago, we paid the 2025 final dividend which, together with the interim dividend paid in September reached EUR 443 million. This represents a payout of 70%, resulting in 9% dividend yield. Looking ahead to 2026, we expect to further enhance shareholder remuneration up to 95% of net income, thanks to our relatively higher capital position and also to our robust organic capital generation. Overall, our tangible book value per share adjusted for dividends was 9% higher than the previous year. In summary, all trends remained solid throughout the first quarter of 2026, confirming the recent positive momentum. We recognize that uncertainty has increased in the past couple of months, and it may be too early to provide more specific effects. Nevertheless, based on the information available so far and despite market volatility and the possible direct and indirect effects of the current geopolitical risks, we reaffirm all targets and commitments outlined in our strategic plan. The beginning of 2026 has been better than initially expected, which is obviously great news given the uncertain environment we are facing. All in all, we confirm our initial guidelines for the year. I will continue with the commercial activity on Page 5. As you can see, total customer funds increased by 3.9% year-on-year. On-balance sheet funds grew by 1.6% or 2.4% when excluding the public sector. Off balance sheet funds rose by 10.6%, driven by a remarkable 16% growth in mutual funds. It is worth mentioning that mutual fund balances have grown from EUR 14 billion to nearly EUR 17 billion over the past 12 months. On the next page, you can see the details regarding our assets under management and insurance business. As highlighted in the previous slide, assets under management increased by 11% year-on-year with mutual funds showing particularly strong growth of 17% despite challenging environment this quarter. Net inflows reached EUR 468 million, representing a strong 9% market share. On the right hand side, we show the revenues from these 2 business segments, which have risen by 4% compared to the last year and now account for 19% of total revenues. Now on Page 7. As you can see, loan volumes continue to grow. Total performing loans increased by 0.8% quarter-on-quarter and 2.4% year-on-year, reflecting a positive performance across all segments. Private sector loans rose by 1% compared to the previous quarter while corporate loans posted an increase of over 3%. Lending to individuals maintained its gradual growth trajectory. Mortgage volumes remained stable during the quarter and on a year-on-year basis, whereas consumer loans continued to expand at high single-digit rates like in the previous quarters. Overall, first quarter evolution demonstrates slightly better trends than previous quarters, driven mainly by improvement in the mortgage and SME segments, both of which showed some growth this quarter, while maintaining positive dynamics in corporates and consumer. On Page 8, you will find details regarding the new loan production. During the first quarter of 2026, new lending to private sector increased by 10% compared to the previous year, reaching EUR 2.5 billion. As we have just seen, we are delivering growth in the loan book in all main segments. You can see consumer lending maintains very good momentum Mortgages are close to our natural market share level. And in business lending, lower volumes are explained by some large tickets last year, but we are delivering a strong portfolio growth here on much better portfolio and customer management. Turning to Slide 9. We would like to briefly present some evolution of digital sales and customer acquisition. In the top left, 65% of consumer loans were granted digitally, significantly higher than the 49% in the previous year. It is also worth noting that digital consumer loans amounted to EUR 160 million, representing an 82% increase compared to the first quarter of 2025. In mutual funds, the weight of digital sales grew from 25% to 36%, reaching EUR 230 million, which is nearly 50% higher than last year. Also, as shown in the bottom right of the slide, I would like to highlight that more than 1 million clients use their Bizum with us, which is the instant payment tool most used in Spain, something that is quite relevant for the transactional business as you can only have one Bizum account per fund number. Also, it is worth noting that in the first quarter of 2026, the acquisition of new salary accounts has doubled, explaining the quarterly increase in the cost of deposit as we will see later. The commercial campaigns include an upfront compensation for the client in exchange for their formal commitment to maintain their salary with us in the future. As you can see, a strategy that is working very well to further improve the transactional business with our clients, which is one of the main commercial focus of the bank. Moving now to Slide 10. We highlight our continued progress in our sustainability strategy. We keep financing the transition and actively pushing green bond issuance. During 2025, our green bonds enabled the avoidance of 142,000 tons of CO2. Our pool of eligible projects continue to grow together with our ESG business, both green and social. We are well on track on the decarbonization targets over the lending portfolio. Overall, the evolution we are seeing is very positive, and this is clearly reflected in our sustainability ratings that show a consistent positive trend. We now continue with the review of the P&L in the next section in Slide 12. Net interest income increased by 1.3% compared to the first quarter of 2025. On the quarter, it fell by 1.2%, primarily due to the lower day count. Total fees were 1% higher than in the previous quarter and 3% higher than last year. Overall, revenues reached EUR 520 million, 1% higher than the first quarter of 2025. Total costs grew by 1% on a quarterly basis and 4.5% compared to last year, in line with our mid-single-digit growth guidance. Loan loss charges decreased by over 20%, both quarter-on-quarter and year-on-year, confirming the positive asset quality trends. Other provisions were 9% lower than last year and also significantly lower than last quarter when we booked some restructuring charges. Profit before tax stood at EUR 232 million. After accounting for EUR 71 million in taxes, which includes EUR 6 million of the banking tax, net income reached EUR 161 million, representing a 1.4% increase over last year. Now let's review the income statement in more detail. Starting with the net interest margin on Page 13. As you can see, the customer spread remained stable compared to the previous quarter, reversing a negative trend that began in the first quarter of 2024. Loan yield increased by 2 basis points, the same as the cost of deposits, which, as I mentioned earlier, grew due to the impact of our successful salary account campaigns. Net interest margin fell to 1.69% due to the volume effect, driven by higher balances in repo market activity. However, if we exclude this effect, net interest margin stayed stable during the quarter. On the following page, we show the details of the quarterly evolution of net interest income, which decreased by 1% during the quarter but was 1% higher than the previous year. The lower day count of the quarter amounted to EUR 6 million, while NII decreased by almost EUR 5 million. So, without this effect, NII would have actually increased during the quarter. As you can see in the bridge, the increase in deposit cost, mainly driven by customer acquisition campaigns and the lower lending income, which is fully explained by the lower day count, were partially offset by liquidity, ALCO, and wholesale funding. Turning to fee income, the trend observed in recent quarters was confirmed, with a slight decrease in banking fees, which is more than offset by non-banking fees growth, mainly from mutual funds and insurance. Despite the negative mark-to-market at the end of the quarter, fees from mutual funds continued to improve, increasing 19% year-on-year and nearly 4% quarter-on-quarter. Fees related to assets under management and insurance further strengthened their contribution this quarter, accounting for 53% of total fees, up from 48% last year and 43% in the first quarter of 2024. In Slide 16, we show you the details of the rest of revenues, which also show a relatively stable trend in recent quarters, with a slightly lower trading income this quarter owing to market conditions, but nothing material. Regarding total costs, personnel expenses continue to grow due to salary increases agreed with unions and new hirings. Other administrative expenses also reflect some of the initiatives needed to implement our business plan, leaving total costs 5% above the previous year, in line with mid-single-digit growth guidance. On the right-hand side, you can see our cost-to-income ratio, which grew to 46%, mainly owing to these initiatives that we expect will positively impact the future revenues. Something that going forward will help reverse this trend. All in all, the ratio remains below our 50% target. On the next page, we continue with the cost of risk and other provisions, which, in my view, are one of the most positive news of the quarter. As you can see on the left-hand side the cost of risk was 20 basis points, which is the lowest since the merger with Liberbank and below our initial guidance of less than 30 basis points for the year. The remaining provisions, including legal ones, were also lower, leaving total provisions at EUR 43 million in the quarter, which is 19% below 2025. Provisions showed a very positive evolution at the start of the year, which is obviously great news and leaves us in a comfortable position for the rest of the year. Moving now to Page 19, the bank's return on tangible equity continues its upward trajectory, reaching 10% as of March 2026, or 12% when adjusted for excess capital. As we frequently highlight, we consider the return on CET1 to be a reliable benchmark for us, as it effectively isolates the relatively larger accounting equity required due to solvency deductions, mainly from deferred tax assets. In the first quarter of 2026, the return on CET1 adjusted for excess capital stood at 17%. Lastly, on the right-hand side, you'll find the tangible book value per share plus dividends which has grown by 9% over the past 12 months. Let's move now to the credit quality section on Page 21. As you can see on the slide, positive trends remain in place. NPLs are down 20% year-on-year, with a coverage growing to 80%. Overall NPAs are also down 26% year-on-year, with coverage also improving to 79%, a very positive evolution that leaves total net problematic exposure at only 0.7%. If we now move to solvency on Page 23, you have the quarterly bridge. CET1 was very stable in the first 3 months of the year. Quarterly capital generation, including a positive contribution from the stake in EDP, was mainly allocated to shareholder remuneration and lending growth, which are the 2 main users where we plan to go toward our comfortable solvency position, leaving the CET1 stable at 16% in March 2026. On the next page, you will find our MREL position. As shown, our MREL ratio stood at nearly 27% at the end of March, providing a substantial buffer above the key requirements listed on the right, including an MDA buffer that was higher than 680 basis points. In terms of liquidity, all ratios remain among the highest in the sector with the NSFR at 159% and the LCR at 292%. Finally, our loan-to-deposit was 69% in March, summarizing the excess of retail funding of the bank that, among others, explains the size of our structural ALCO portfolio that we show on the following page. The yield of the portfolio grew from 2.6% to 2.7%, a small improvement owing to the reinvestment and active management. Duration and size also represented a modest increase in the quarter. It is also worth noting that 81% is public debt and that 83% is included in the amortized cost portfolio. Finally, as shown on Page 27, despite geopolitical uncertainties, we reaffirm our guidance for the year. We expect net interest income to exceed 2025 figure, net fees to grow at low-single digit and total cost to increase by mid-single digit. Regarding cost of risk, our initial forecast was to finish the year below 30 basis points, which we also maintained despite the strong first quarter of 20 basis points. It is obviously better than expected at the start of the year, but given the current situation, we prefer to be prudent. In terms of business volumes, we remain well on track to achieve the target of 3% growth. Finally, we confirm our expectation that net income for 2026 will surpass the EUR 632 million from last year. This concludes my quarterly update that as demonstrated, shows a continued improvement in the bank's overall financial position with a stronger commercial performance, enhanced results, consistently high solvency and very positive outlooks for shareholder remuneration. Thank you very much. And I will now hand over to Jaime for the Q&A session. Jaime Marcos: Thank you very much, Pablo. We will now begin with the Q&A session. [Operator Instructions] Operator, please open the line for the first question. Good morning, everyone, and thank you for joining us for our first quarter 2026 results presentation. First of all, I would like to confirm that earlier this morning, before the market opened, we published this presentation and the related financial information on the CNMV and our corporate website. Pablo Gonzalez Martin: Thank you. Maks. Regarding the cost of risk, as you can imagine, we are in an uncertain environment and geopolitical risks are part of our analysis, and we have considered with our post-model adjustment some impact in the quarter. So, we are quite aware that the potential cost of risk for the quarter was quite good and even below our guidelines for the year, but we want to be prudent for the year and maintain the guidelines for the time being. Jaime Marcos: The other one, the second one was related to a potential exit scheme because another competitor has announced one. Just as a reminder, in the fourth quarter 2025, we booked some restructuring charges to implement a similar exit scheme, a voluntary exit scheme. In our case, that exit scheme, it is more focused on renewal of part of the staff rather than specific cost cutting. So that was announced in the fourth quarter. It was booked in the fourth quarter, and it will be implemented throughout 2025. Pablo Gonzalez Martin: Yes. And was within our guidelines for total cost was considered this scheme. Jaime Marcos: Thank you, Pablo. Please, operator, can we go to the next one? Operator: Next question from the line of Miruna Chirea from Jefferies. Miruna Chirea: I just had 2, please, on NII and then one on the salary account campaigns. So firstly, on NII, you are maintaining your full year '26 guidance of NII greater than '25. But if I'm just analyzing your Q1 NII point, I'm already getting to a number that is more than 1% above '25. And presumably, you're also looking at some volume growth and potential further margin expansion for '26. So, it seems that there is some upside to your guidance. If you could just walk us through your expectations for quarterly NII provision? And then on the salary account campaigns, we showed the increase in your cost of deposits for the quarter. Could you give us some color on how successful the campaigns were and then some details on the pricing? I hear your comments about the upfront cost, but is there also a promotional rate? And if so, for how long does it last? And what does the rate reset afterwards? And if you could share any thoughts on the outlook for the cost of deposits for the rest of this year? Thank you very much. Pablo Gonzalez Martin: I'll try to give you some information on the NII. We maintain the guidance. If you consider the improvement compared to one year, it's only 1.3%. So, this is quite in line with what we were expecting. So, we maintain the NII. I think for the coming quarters and the expectation on a quarterly basis of what we expect, I think the first thing to mention is interest rate volatility is paramount and will have an impact mainly on 2027 and 2028. In the short term, in the quarterly, the impact of any interest rate shock is always smaller. So, our expectation remains that the first quarter was going to be slightly below last year. But if we consider the day count, it could consider the fourth quarter the bottom of NII. From this onward, our expectation is a gradual improvement, slower in the second quarter and then taking and picking up and having some momentum from the second half of the year and especially in 2027. So, we maintain that expectation, and we will see how this evolves. And regarding the salary account. I think this has been quite successful, and this is one of the reasons that we have some pickup in cost of deposits, but it's with our strategy to improve the transactional business with our customers and improve the transactional business down the line. And the overall cost of risk this quarter has been quite stable regardless of this impact. And going forward, obviously, we have higher rates on market prices, we will have some impact down the line, but within the expected beta that we have at the moment, and consider that we have only 25% of remunerated deposits in our book. Jaime Marcos: Thank you, Pablo. Please, operator, can we move to the following question. Operator: Next question from the line of Cecilia Romero from Barclays. Cecilia Romero Reyes: I have two. The first one on NII sensitivity and 1 year have moved higher again. Over a 24-month repricing horizon, how much incremental support can NII realistically receive from higher rates, including out of reinvestment at higher yield relative to the assumptions you had at the end of last year? And in a scenario where sector loan growth is affected by the macro backdrop and lending slows, will a stronger deposit growth support NII? And the second one on provisions, if the macro environment were to become more uncertain, how would that typically feed through into your provisioning models and cost of risk? I think you have a high weight in your base case. Are you thinking of changing your weight for each scenario? And do you have any overlays? Pablo Gonzalez Martin: Thank you, Cecilia. Regarding the NII sensitivity, I think as I mentioned, for the first year, any interest rate shock has very little impact since we started at the end of 2023 to lock in the level of rates for the next 2 years -- 2, 3 years. So, for this first 12 months, the impact will be very small. From a more second year impact, we think we have an impact for 100 basis points parallel movement of around mid- to high-single digit impact in NII. And this obviously, as you can imagine, will depend a lot on how customer deposits cost evolve. So, it's always with the assumptions that everything, the beta is maintained as it is now, which is -- has been quite stable. So, there's no reason to think in a different way. But obviously, we consider in this analysis that we have some renewed ALCO portfolio reinvestment, and we have also some new lending at higher rates after the shock. So, this gives us with a positive evolution in the second half of this year, a small one and then picking up some momentum from '27 onwards. Overall, I think it's important to remember that we have quite a significant NII sensitivity in the medium term due to our liability and the deposit -- the transactional deposit base that we have. And regarding the volumes in the impact of NII, we have given a more stable and constant balance sheet impact rather than dynamic impact. So, we haven't considered in this sensitivity the impact on volumes. I think in the short-term the impact of reducing expected volumes, we were expecting to have around 3% growth in volumes more or less for the year. So, if maybe anything of this geopolitical risk has an impact of some reduction in lending. Maybe we have an increase in the saving rate that support the deposit side. So, I'm not convinced this is negative or neither positive. We have some NII coming from the lending. The good news is the front book is ahead of the back book, and the deposits are behaving as expected. So, we're comfortable with the guidance that we give for the year and expect to improve next year. And regarding provisioning and how we consider -- we have a prudent approach in our model. And just to give you some color, the model of our IFRS 9 macroeconomic variables that consider our base scenario, we were expecting only 1.9% GDP growth for the year. And the last number that we have for the first quarter is we have an annualized 2.7%. So, still room for some reduction in the year in the GDP numbers. We consider the situation to have some impact, but not a very significant impact and still maintain positive momentum in the Spanish economy. And regarding the post-model adjustment and the 1-year cost of risk, I think we already have some buffer on top of this provisioning within our IFRS model, which is we already considered last year, and we mentioned that we consider geopolitical risk as one of the potential impact that our model didn't consider. So, we already have some provision last year, and we slightly increased this quarter, again, our post-model adjustment. So, we are comfortable with our guidance of below 30 basis points for the year, even in some stress scenarios as we are witnessing today. Jaime Marcos: Thank you, Pablo. Please can we move to the following question please, operator. Operator: Next question from the line of Borja Ramirez from Citi. Borja Ramirez Segura: I have 2 questions, please. The first is on the payroll accounts, if you could kindly provide more details on the volume outstanding and the average cost? And also, if you could provide details on the ongoing system competition in Spain? And then my second question would be, I understand that you have some ALCO maturities that I think it was between 80 and 90 basis points, around EUR 2 billion maturing this year. If you could kindly reconfirm this number. And I think you also have NII benefit from the maturity of an expensive bond at the end of this year, if I remember well. So, there could be some NII uplift on that. If you can this as well, please? Pablo Gonzalez Martin: Thank you, Borja. Regarding the customer acquisition campaigns, I think just to give you some color, we have spent around EUR 6 million in this quarter on these campaigns, which represent the successful of the campaigns, which is more than EUR 4 million more than the previous quarter. So, this strategy is picking up, and we pay slightly less than EUR 500 upfront with compromise from the customer to be with us at least for 2 years. And so, the impact on the cost is within those EUR 500 that I mentioned. And the amount, we gathered more than 12,000 new salary accounts for the quarter. Regarding the ALCO portfolio maturity, as I mentioned last presentation, we have for this year, slightly above EUR 2 billion. We still have remaining EUR 1.7 billion for the year, and the average cost is very similar to the number for the whole year. So, it's around 0.8%. And this has been considered when we say that we expect to have a slightly higher NII for the year than compared to last year. So, we already took this in consideration. And as you can imagine, we are reinvesting this at a higher level. Jaime Marcos: Thank you very much, Pablo. Operator, please, we can move to the following question. Operator: Next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So, my first question would be on cost growth. Some of the wage negotiations are coming due next year, if I'm not mistaken. So how should we think about cost growth beyond 2026, more in '27, '28? And what cost pressures do you see kind of on the horizon? And then my second question would be, could you just remind us how much DTA benefits we should be expecting every year going forward? Pablo Gonzalez Martin: I think regarding cost growth, I think as you can imagine, it's a combination of different things. As we mentioned within our strategic plan, we have a strategy to diversify our revenue sources. So in order to grow in corporate lending and in consumer lending and import/export lending and private banking and so on, this requires some deployment of IT developments process and people and talent. And we have been hiring some talent. So, you have to consider this on top of the actual salary increase that we mentioned. So, we maintain and we are comfortable with the 5%. I think to talk down the line for '27, '28 is too premature, and we will give more details on the future position for the bank. And on top of this, we have this, as I said, on top of these new hirings, we have some schemes, as we mentioned, to reduce some of our workforce. So, what we are doing is not a cost-cutting measure, but to renew and to uplift the capabilities of our workforce. And regarding your second question, Jaime, can you comment? Jaime Marcos: Yes. On the DTAs, very straightforward. I think that you can expect a run rate between 20 to 25 basis points per year of solvency generated by lower deductions from DTA at current profitability levels. That will be probably the summary. So, we can move please operator to the next question. Operator: Next question from the line of Carlos Peixoto from CaixaBank BPI. Carlos Peixoto: The first one would just be a little bit of a follow-up on fee income. Basically, you're maintaining the low-single digit growth for the year. Do you see any tailwinds here or headwinds, sorry, actually from the market -- the recent market volatility or potential hampering of your assets under management business because of this? And then the second one would be on capital distribution plans. So, you have already upgraded payout to very high levels. But I was just wondering whether there are any additional plans to distribute or to accelerate the distribution of the existing excess capital? Pablo Gonzalez Martin: Thank you, Carlos. I think on fee income, as we said, we have managed quite well the headwind coming from market volatility. I think that the market is performing quite well considering the geopolitical risk environment. And I think there's still some momentum in the Spanish and our customer base to increase their investment compared to their saving. And so, we haven't changed our expectations on off-balance sheet growth and mutual funds. This obviously will depend on how market evolves. But so far, I think the drawdown that we saw in March is almost recovered now. So, we don't think the customer and the investor base will change their attitude unless we have a more significant impact on the market that we don't foresee in the short-term. And regarding capital distribution plans, I think we have a quite generous level of 95% shareholder remuneration of net income. And just to recall, we will have a presentation in the second quarter. We will have the update of our interim dividend of 70% in the first half of the year. Then in the third quarter result presentation, we will announce how is going to be delivered, the 25% additional remuneration that we plan. And in the final year presentation, we will have the final dividend. So, we don't think we need to accelerate anything regarding shareholder remuneration, and we stick to our strategic plan. Jaime Marcos: Thank you very much, Pablo. Can we please move to the following question, operator. Operator: Next question from the line of Ignacio Ulargui from BNP Paribas. Ignacio Ulargui: About corporate lending, if you could elaborate a bit more on what has been the plan delivered in the quarter? And how should we expect growth in the future? Do you think that the strong quarter-on-quarter growth that you have delivered could be maintained or there was any specific one-off transaction that distorted the growth? And the second question is on capital linked to the previous question of Carlos. I wanted to understand whether you could use part of that capital for any inorganic growth and what will be the priorities and the capital hierarchy that you will be looking for in terms of businesses, whether you will prioritize fee-based business or whether you would like to, as the guy has been suggesting looking for diversification. Pablo Gonzalez Martin: I think I have got both of the questions, but thank you, Ignacio, for your question. I think regarding the corporate lending, although the quarter has been significantly good we think the year-on-year numbers are sustainable, and we will probably maintain this 6% growth for the coming quarters. I think you have to think that we have to catch up in terms of customer activity. We are deploying more resources for this business. And although the level is higher than the market growth, we have to do some catch-up in terms of market share in this business. And so, we still have plenty of opportunities to maintain the growth. Maybe not the growth on a quarterly basis, but the growth on an annual basis could be some guidance for how much we expect to grow in the high-single digit number, between mid- and high-single digit number for the coming quarters as well. And regarding the capital, on top of what I mentioned of shareholder remuneration, we also mentioned in our strategic plan that we will consider any bolt-on operation in M&A. And this will have a clear view on improving and accelerating our diversification of revenues that we were thinking. And as you can imagine, this diversification spans from fee business, but also in areas where we have a lower market share like consumer lending or other type of specialized lending that we have a smaller market share. So, we maintain that possibility. But I think to be clear, the whole idea of this bolt-on is not something that we need to do to deliver in our strategic plan targets. It's something that will help us to accelerate the process of diversification. But we will maintain hiring people and improving capabilities to do this diversification. Jaime Marcos: Thank you again, Pablo. Let's move to the following question, please. Operator: Next question comes from the line of Fernando Gil de Santivañes from Intesa Sanpaolo. Fernando Gil de Santivañes d´Ornellas: I hope you can hear me? Pablo Gonzalez Martin: Yes. Go ahead Fernando. Fernando Gil de Santivañes d´Ornellas: So I see headcount substantially up by 100 persons in the quarter. I just want to get a sense of how should we be thinking about headcount going into the year-end of 2026 and given that you [indiscernible] to be in Q4. Pablo Gonzalez Martin: I'm not sure I got your question properly, but I think you were looking at the headcount of employees and how this has evolved in the quarter, increasing slightly. You have to consider that we have 2 different forces. One is we are growing our capabilities in certain areas. In IT, in artificial intelligence deployment and some specialized areas like specialized lending and things like that. And on the other side, we have the redundancy, the voluntary redundancy plan. And in this quarter, we have the first impact, but we have not any impact from this plan. So, net-net, I think the headcount will be very similar, slightly up, but not very significant. So, we maintain our cost guidance of mid-single digit for the year, and this consider the employee and workforce. Jaime Marcos: Thank you very much, Pablo. Just to double check, I think that we don't have any more questions. But please, operator, can you confirm it? Operator: Yes. There are no other questions at this time. Jaime Marcos: All right. So, thank you very much, everyone. The IR team remains at your disposal. If you need further info, please do not hesitate to contact us. Thank you very much for your interest and your time. Pablo Gonzalez Martin: Thank you very much. Have a good day.
Operator: Thank you for standing by, and welcome to Enlight Renewable Energy's First Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the call over to Limor Zohar Megen, Director of Investor Relations. Please go ahead. Limor Zohar Megen: Thank you, operator. Good morning, everyone, and thank you for joining Enlight Renewable Energy's First Quarter 2026 Earnings Conference Call. Before beginning this call, I would like to draw participants' attention to the following. Certain statements made on the call today, including, but not limited to, statements regarding business strategy and plans, our project portfolio, market opportunity, utility demand and potential growth, discussions with commercial counterparties and financing sources, pricing trends for materials, progress of company projects, including anticipated timing of related approvals and project completion and anticipated production delays, expected impact from various regulatory developments, completion of development, the potential impact of the current conflict in Israel on our operations and financial condition and company actions designed to mitigate such impact and the company's future financial and operational results, and guidance, including revenue and adjusted EBITDA are forward-looking statements within the meaning of U.S. federal securities laws, which reflect management's best judgment based on currently available information. We reference certain project metrics in this earnings call and additional information about such metrics can be found in our earnings release. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our 2025 annual report filed with the SEC on March 30, 2026, and other filings for more information on the specific factors that could cause actual results to differ materially from our forward-looking statements. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Additionally, non-IFRS financial measures may be discussed on the call. These non-IFRS measures should be considered in addition to and not as a substitute for or in isolation from our results prepared in accordance with IFRS. Reconciliations to the most directly comparable IFRS financial measures are available in the earnings release and the earnings presentation for today's call, which are posted on our Investor Relations web page. With me this morning are Gilad Yavetz, Executive Chairman and the Co-Founder of Enlight; Adi Leviatan, CEO of Enlight; Nir Yehuda, CFO of Enlight; and Jared Mckee, CEO of Clēnera. Adi will provide a summary of the business results and turn the call over to Jared for a review of our U.S. activity, and then Nir will review the first quarter results. Our executive team will then be available to answer your questions. I will now turn the call over to Adi Leviatan, CEO of Enlight. Adi, please begin. Adi Leviatan: Good morning and good afternoon, everyone, and thank you for joining us to review Enlight's first quarter 2026 results. We are off to a very strong start to the year, delivering excellent financial performance and continued execution momentum across our global platform. Our results this quarter clearly reflect the strength of our operating assets, the scale and quality of our development portfolio and our ability to consistently convert projects into cash-generating capacity. Before diving into the numbers, I want to briefly address the broader environment. The first quarter once again demonstrated the resilience of Enlight's diversified platform. Despite ongoing geopolitical and macroeconomic uncertainty, our assets continue to operate reliably. Our projects advanced according to plan, and our financial performance remains strong. This resilience is the result of geographic and technological diversification and the fact that renewable energy and storage assets provide stability even in volatile conditions. Turning now to the quarter. In Q1, revenues and income increased 54% year-over-year to $200 million, while adjusted EBITDA reached $154 million, representing 58% growth year-over-year, excluding the impact of the sell-down of the Sunlight cluster. This growth was driven primarily by new projects entering operation in the U.S. alongside strong wind conditions in Israel and Europe, increased electricity trading activity in Israel and supportive foreign exchange effects. Importantly, this was organic operating growth and reflects the continued expansion of our income-generating portfolio and the future potential of advancing projects in our development portfolio over time. The U.S. became our largest geographic segment this quarter, contributing 37% of total revenues following the ramp-up of Roadrunner and Quail Ranch. This marks a meaningful milestone in the scaling of our U.S. platform. Beyond the financials, Q1 was another strong execution quarter. During the quarter, we grew our U.S. portfolio that successfully passed system impact studies by approximately 2 factored gigawatt, reaching a total of 20 factored gigawatt, significantly increasing interconnection certainty. More than 60% of our advanced development and development portfolio completed the system impact study. We expect additional projects to be safe harbored in 2026, bringing the total to 15 to 17 factored gigawatt or about 80% of our U.S. advanced development and development portfolio. Our U.S. portfolio expanded by 2.6 factored gigawatt, more than 10% sequentially and expanded in additional demand areas outside of WECC, supporting our medium- to long-term growth in the market. Last, we started construction at CO Bar 3, the 475 megawatt PV phase of the CO Bar complex, fully in line with our execution plan. These developments further reinforce our ability to deliver large-scale solar plus storage projects with speed, discipline and attractive economics and supports our growth potential beyond 2028. In Europe, the opportunity is equally compelling. While renewable generation continues to expand rapidly, energy storage deployment has not kept pace, creating a systemic need for flexibility and balancing capacity. According to Wood Mackenzie, this need amounts to 1.4 terawatts of storage capacity by 2034 globally. This gap is structural, not cyclical and supports attractive long-term economics for well-positioned storage projects. During the quarter, we continued to advance our European expansion and are now in advanced negotiations to expand our business in additional markets, including Finland and Romania as part of our strategy to deepen our presence in high potential storage markets. Energy storage remains a core growth pillar for Enlight in Europe with a vast portfolio of 14 gigawatt hour, of which 4.9 gigawatt hour in the mature portfolio fully aligned with our focus on disciplined capital allocation and attractive returns. In Middle East, North Africa, we are deploying the full scope of Enlight's capabilities, leveraging our position as a leading and trusted energy player. Israel remains a core market where we are active across utility scale wind and solar, energy storage, agrivoltaics and high-voltage infrastructure. Enlight's position in Israel, combined with our unique expertise in different energy generation applications enable us to significantly grow in Israel and develop new and innovative growth engines. In agrivoltaics, specifically, we continue to scale rapidly with dozens of land agreements signed over the past year, representing approximately 3 factor gigawatt of future solar capacity while strengthening synergies between energy generation and agriculture, enhancing food security and energy security at once. The agrivoltaics opportunity in Israel is huge. We estimate more than 120,000 acres will be needed to meet renewable energy targets by 2050 with a market size estimated at several billion dollars. At the same time, we're advancing high-voltage storage projects in Israel totaling more than 2 factor gigawatts, which enhance grid flexibility and resilience while enabling us to optimize revenue generation. Looking ahead, we believe Israel is on track to become one of the countries with the highest energy storage capacity per capita globally, and we are well positioned to take advantage of this opportunity. Across the portfolio, execution continued at a strong pace. We advanced 0.5 a factored gigawatt into construction during the quarter, mostly attributed to Phase 3 in the CO Bar complex advancing to construction and expanded our total portfolio to over 41 factored gigawatts, a sequential increase of 8%. Looking ahead, we expect approximately 7 factory gigawatts to be under construction during 2026, with over 90% of our mature portfolio either operating or under construction by year-end. This level of visibility is the outcome of years of disciplined development, extensive grid interconnection work and proactive risk management. Stepping back to the broader demand environment, we continue to see structural growth in electricity demand, driven in part by the rapid adoption of AI and data-intensive applications and the resulting expansion of data centers. Industry forecasts indicate that U.S. data center electricity consumption could triple by the end of the decade, requiring more than 300 terawatt hour of new capacity that is fast to deploy, scalable and cost effective. In this environment, solar combined with storage stands out. Compared to other generation technologies, it offers shorter time to market, meaningfully lower LCOE and the flexibility required to support modern grids. Enlight is well positioned to capture this demand, leveraging our large grid-ready sites, proven execution capabilities and deep experience delivering solar plus storage at scale. The business environment in which we operate remains extremely favorable with rising demand, constrained supply and attractive equipment costs. Recent geopolitical disruptions, together with the sharp increase in oil and gas prices have underscored the strategic importance of renewable energy as a reliable and competitive source. Turning to outlook. We are reaffirming our full year 2026 guidance. Revenues and income of $755 million to $785 million and adjusted EBITDA of $545 million to $565 million. More importantly, we continue to stand firmly behind our long-term growth trajectory. With approximately 7 factored gigawatts expected to be under construction in 2026 and the vast majority of our mature portfolio either operating or under construction, we see a clear and credible path to more than $2.1 billion of annual revenue run rate by the end of 2028. This growth is anchored in projects already in hand, supported by strong and increasing returns and executed with discipline. Before I wrap up, let me summarize the key takeaways. We delivered a strong start to 2026 with excellent financial performance and execution momentum. We continue to expand and derisk our U.S. portfolio, advancing key milestones, including system impact study completion, safe harbor progression and the start of construction at CO Bar 3. We see utility scale growth opportunities in Middle East, North Africa, a market in which we have a significant competitive advantage. We are well positioned to capture structural demand growth and systemic grid needs, leveraging the speed, cost and flexibility of solar and storage. And we remain focused on disciplined growth and long-term value creation while not compromising on returns, profitability and the strength of our balance sheet. With that, I will hand the call over to Jared. Jared McKee: Thank you, Adi. In the U.S., Clēnera continues to execute on its long-term growth strategy and remains firmly focused on disciplined construction execution, while at the same time, expanding our portfolio and customer base. This quarter, we have continued to grow and advance our development portfolio across U.S. markets, led by significant progress in PJM. We submitted interconnection applications within PJM for an additional 2,500 factored megawatts across 5 projects. PJM is a market with exceptional opportunities for new solar and storage, characterized by sustained utility demand, tight capacity dynamics and attractive power pricing that supports long-term profitability. Our operating assets continue to demonstrate the quality and durability of our portfolio. Energy generation across operating projects has been stable and predictable. We continue to monitor uptime closely. Clēnera is currently constructing 6 projects totaling 3.4 factored gigawatts. Our construction portfolio reflects deliberate investments in our internal processes, targeted hiring and retention and long-standing relationships with Tier 1 suppliers and contractors. It also demonstrates our ability to consistently deliver approximately 2 factored gigawatts annually. As a result, the construction progress we are reporting today reflects our expected baseline delivery level and our confidence in achieving commercial operations year-after-year. At the CO Bar complex in Northwest Arizona, ground clearing and other site construction activities are underway on the third phase of the project. Phases 1 and 2 are in full construction and making steady progress. Combined, these 3 phases include nearly 1.5 factored gigawatts. Initial CODs are on track for the second half of 2027 with CODs for the following phases in first half of 2028. For the final 2 phases of the CO Bar complex, CO Bar 4 and 5, we have secured a domestic source for the batteries totaling 3,176 megawatt hours. Our sourcing strategy mitigates tariff and supply chain risks for these critical phases. In Northeast Arizona, progress is steady at the construction of the Snowflake complex. The first phase, Snowflake A includes 594 megawatts of PV generation and 1,900 megawatt hours of energy storage. We are near the halfway mark of installing both the PV and battery components and remain on target for COD in the second half of 2027. The Country Acres project outside of Sacramento, California remains on schedule for COD at the end of this year. This project includes 403 megawatts PV and 688 megawatt hours of energy storage. When operational, it will generate enough energy to power over 85,000 California homes. Finally, work is underway at Crimson Orchard project located in Elmore County, Idaho. This project includes 120 megawatts of PV generation and 400 megawatt hours of energy storage. Spring weather has allowed us to make significant progress on the project's civil work and prepare the site for major equipment deliveries. Foundation work has begun for the batteries and switchyard. Our market strength has once again been confirmed with the closing of the construction financing package in March, totaling $304 million for the Crimson Orchard project. This clears the path for the project's successful commercial operation in 2027. Taking a step back from specific projects, I want to offer an update on our supply chain. Despite global disruptions in shipping due to geopolitical conflicts in the Middle East, we have seen limited exposure to availability or pricing of our materials. Looking ahead, we may see ripple effects on the supply chain and logistic inputs. Nevertheless, we continue to enhance our diverse pool of supplier resources, including U.S. domestic manufacturing to give us flexibility and resilience in the face of uncertainty. With one of the largest U.S. solar and storage construction pipelines, we are well positioned to be a preferred counterparty for our suppliers and vendors. To close, Clēnera remains firmly focused on what matters most to our investors. executing large-scale construction projects on schedule, maintaining reliable operating performance, advancing a deep and diversified development pipeline and expanding our customer base thoughtfully and strategically. I will now turn the phone over to Nir. Nir Yehuda: Thank you, Jared. Q1 '26 delivered a strong start to the year, setting the foundation for the quarters ahead. The company's total revenues and income increased to $200 million, up from $130 million last year, a growth rate of 54% year-over-year. This was composed of revenues from the sale of electricity, which amounted to $157 million, an increase of $47 million from the first quarter of '25 as well as recognition of $43 million in income from tax benefit, an increase of $23 million from Q1 '25 attributed to the new operational project Roadrunner and Quail Ranch. The increase in revenues from the sale of electricity was driven mainly by new projects, which contributed $16 million to revenues growth. It was also a strong quarter for our wind project with increased generation contributing $14 million. Electricity trade activity in Israel roughly doubled from last year, contributing $6 million to revenues growth. And finally, the appreciation of the Israeli shekel and euro versus the U.S. dollar contributed $12 million. The company adjusted EBITDA grew by 70% to $154 million compared to $132 million for the same period in '25, excluding the contribution of $42 million from the sale of 44% of the Sunlight cluster in Q1 '25 and follow-on sale of 11% of the cluster in Q1 '26, which contributed $12 million. EBITDA in Q1 '26 grew by 58% or $52 million. The increase of $70 million in revenue was offset by an additional $70 million in cost of sales linked to new projects and to the increase in electricity trade activity in Israel, while G&A and project development expenses increased by $6 million. In contrast, other income increased by $5 million. First quarter net income amounted to $38 million compared to $102 million in Q1 '25 and $21 million excluding the Sunlight cluster sale contribution. An increase of $52 million in EBITDA was partially offset by an increase of $70 million in depreciation and amortization attributable to the start of operation of new projects as well as an increase of $4 million in expense related to share-based compensation. Additionally, net financial expenses increased by $12 million, mainly as a result of the commercial operation of new projects and tax expenses increased by $4 million, net of the Sunlight sale impact. During the first quarter, Enlight continued to solidify its financial position, raising approximately $740 million, mainly from a private placement of 6 million shares to Israeli institutional investors for $422 million and $304 million from project finance. In total, our cash and cash equivalents at the topco level increased to $709 million. Additionally, we have $270 million held by subsidiaries. In addition, we have $525 million of credit facility with $360 million available and approximately $1.6 billion in LC and surety bond facility, including $1 billion available, further enhancing our financial flexibility. Our solid financial position and internal resources will continue to support our growth towards the $2 billion revenue mark and beyond. I will now turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Justin Clare of ROTH Capital Partners. Justin Clare: Congrats on the strong results. I wanted to started off... Adi Leviatan: Thanks, Justin. Nice to hear from you. Justin Clare: Yes, likewise. So I wanted to start out just asking about the unlevered returns here. It looks like the expectation for under construction and preconstruction projects increased to 13%. I think that's up from 12% to 13% last quarter and then 11% to 12% a couple of quarters ago. So just wondering if you could speak to what's driving the improvement? Is this better PPA pricing, lower equipment costs or other factors here? And then are you seeing further opportunity for improvements in the return profile, let's say, for future projects that are moving through the pipeline today? Adi Leviatan: Yes. Thanks again for the question. I will give a little bit of an answer, and I will also pass it over to my colleague, Itay Banayan, the Chief Corporate Development Officer. So we are constantly working on improving the rates of return in our projects. The projects that are currently under construction and preconstruction, we continue to do optimization work on the capital expenditure and on other aspects. Specifically, in this case, we did significant work to further improve the profitability or the -- to further reduce the CapEx on CO Bar's storage components of these projects, changing the sources of supply for the batteries to different suppliers, also making us eligible in this case for domestic content. So a double win in that sense. And we did additional moves, which we constantly again do to try to improve the economics of our projects, thereby reaching this 13% solidly. I'll pass it over to Itay Banayan, our Chief Corporate Development Officer. Itay Banayan: Justin, good to hear from you. Yes, everything that Adi said, and in general, it's something that we're very proud of. On the same slide, you see that the first 3.9 factored gigawatts that we connected to the grid over 17 years or so. And now we are in the process of the construction and preconstruction of 7.7. So almost doubling in 1 year or in 2 years, everything that we did in 17 years. And at the same time, we're improving and enjoying the economies of scale and the reduction in CapEx and the increase in the PPAs, and it's a global phenomenon. So we're not only growing, but we're constantly improving and taking a lot of -- putting a lot of attention on profitability, on cash flows, on the balance sheet and so on. Justin Clare: Okay. Great. Yes, it's good to see the improvements in the return profile here. Maybe just shifting over to the operational capacity here. It looks like the outlook for 2027 was reduced a little bit to 7.3 factored gigawatts, down from 8 last quarter, and then the ARR was stepped down to $1.4 billion from $1.6 billion. Wondering if you could just walk through that change, what potentially shifted out of the 2027 time frame? And then it does look like 2028 is -- remains intact in terms of your outlook there. So just wondering, is this a matter of just a project timing or any other factors? Adi Leviatan: Yes. And it actually relates to the previous point as well for specifically the purpose of improving further the rate of return on the CO Bar 4 and 5, the parts of the -- that are standalone storage in CO Bar, we actually did change the suppliers of the BESS, the battery energy storage system, and therefore, had to do some reengineering on site, which pushed the project's COD, like commercial operation date just from the end of '27 into the beginning of '28. And similarly, one additional project in Europe project, Bertikow which was also pushed forward just by a very short amount of time. Generally speaking, we like that these projects -- we have one chance to get them right and then they're going to be producing electricity and revenues for us for 20, 25, 30 years. So to push them out by a month or by a couple of months is something that we sometimes do in order to improve them. And they are all connecting just a very short delay, which is a natural normal course of the developer's life. Operator: Our next question comes from the line of Jon Windham of UBS. Jonathan Windham: I guess sort of a bigger picture question. Through your Clēnera subsidiary, you're going to be one of the largest customers for stationary storage in the United States over the next 5-plus years. I'm wondering, there's been a number of announcements of new entrants into the stationary storage market, namely LG Energy Solutions, General Motors and Ford. Have you had dialogues with any of these potential new suppliers? And how do you think that plays out in the supply-demand balance and pricing for batteries in the future? Adi Leviatan: Thank you for the question. I would like to ask Jared if you are comfortable taking this question forward. Jared McKee: Absolutely, Adi. Thank you for the question, and thank you for your insight into the market. We are constantly talking with potential suppliers on the battery and on the PV side. Specifically on the battery side, we welcome new domestic suppliers opening operations and manufacturing facilities in the U.S. It both adds rigidity and robustness to the supply chain and allows us to secure both domestic sources and reduce our risk overall from any sort of geopolitical occurrences throughout the world. We are engaged with multiple suppliers on the battery side. And as these battery manufacturing facilities get built out, the supply continues to grow. And so this supply is being distributed to the same amount of projects. And so we do like the supply and demand curves that this provides for us, and we expect that we will have very effective negotiations over the next period of time with our potential suppliers. It gives us the ability to leverage our portfolio, as you mentioned, we will be one of the larger customers in the United States for stationary BESS. And we intend to continue to deliver results like we shared today, where we are constantly increasing the profile of our projects and making them better. Operator: Our next question comes from the line of Corinne Blanchard of Deutsche Bank. Corinne Blanchard: The first question, can you talk about the cadence that you're expecting for the rest of the year? I think 1Q is showing a little bit of better seasonality maybe than we had anticipated. So just wondering how the rest of the year is going to shape up? And then maybe second question, can you talk about the safe harbor in your portfolio and how that has evolved during 1Q? Itay Banayan: Corinne, good to hear from you. This is Itay. What was the second part of the question? Adi Leviatan: Safe harbor. Itay Banayan: Safe harbor, okay. So with the first half of the question, in terms of the seasonality, the quarter and the year indeed started very strong and exceeded our expectations. Nevertheless, we do anticipated seasonality over the year. The first quarter is usually a very strong quarter in terms of wind, and it was even better than we anticipated. And in general, as Adi mentioned during the call, we are keeping our guidance for the year intact. It is only the first quarter. And as I mentioned, there was some -- I think there was some gap with the consensus, but our internal expectations were not that far away. And in terms of safe harboring... Adi Leviatan: We do have the opportunity to safe harbor an additional 2 to 4 factored gigawatt in the next couple of months until basically the end of June. And it is completely at our discretion. Obviously, as you know, projects that are being safe harbored, we need to then maintain like full activity, construction activity at the site from when we safe harbor them until their completion, and we need to make sure that they are connected that they arrive at commercial operations before the end of 2030. So we are taking our decisions to -- from the 2 to 4 factored gigawatt additional that we have options to safe harbor to bring the total amount to 15 to 17 factored gigawatts of safe harbor. We're taking those decisions in the next couple of months. Jared, anything to add on the safe harbor point? Jared McKee: Yes. Just that we are actively [indiscernible] the projects are being safe harbored through physical work of a significant nature, both on-site and off-site. Adi, I think you shared the numbers most accurately. And yes, we are excited to have this large portfolio of projects to be able to pull from over the next really several years of commissioning and CODs. Adi Leviatan: And I will come back just to say, Corinne, that when the One Big Beautiful Bill Act came out in May last year, exactly a year ago, there was obviously concern. And at the time, we promised or we anticipated that we would be able to safe harbor 6 to 8 factored gigawatt of projects by the end of 2028. We're now standing here towards the 16 -- sorry, 15 to 17 factored gigawatts that we would be able to safe harbor by the end of 2030. So significantly more than we predicted at the time, and we're really making the most of the safe harbor regime as long as it's in place. And we also are very confident about our ability to successfully develop and execute projects in the United States after the end of that regime, but we have enough time for that in solar projects after the end of 2030 and for storage projects even after the end of 2032. Corinne Blanchard: Right. Can I ask one more follow-up question? Can you talk about the 2028 target? It seems like you might be able to raise it or we kind of felt from the presentation like you are like $100 million ahead of the target. Can you just like give a little bit more thought on that one? Adi Leviatan: So we give the 2028 annual run rate as we forecasted today. The component that is today -- the $2.1 billion of this is already today in the mature portion of our portfolio. And then there's additional projects that are currently not yet in the mature, they're in advanced development. But nevertheless, they will make it to be connected by the end of 2028, which is why there's that $2.1 billion to $2.3 billion range. At this point, we cannot give a more accurate number, but that is the composition of the number. Itay Banayan: But Corinne, you can see that over the last couple of quarters, the percentage of the mature portfolio outside of the 2028 road map has increased over time. And with the start of construction of additional 3 factored gigawatts this year, the vast majority of the 2028 plan is going to be either operating or under construction this year, and thus reducing significantly any development risk and increasing the certainty that stand behind this road map. And again, you can see with all of the safe harboring that we're doing and the increase of the portfolio in the development and the advanced development that we are looking ahead at the growth beyond '28. And there is a lot of materials in the presentation and the earnings release when you analyze the portfolio to see that there is significant potential beyond 2028. Operator: [Operator Instructions] Our next question comes from the line of Maheep Mandloi of Mizuho. Maheep Mandloi: Maybe just like a follow-up on this safe harbor and on Slide 16. I presume like the main bottleneck for new projects is the interconnection of the completed system impact study, right? So I'm just trying to -- curious like if you could see more of the safe harbor come through before June and kind of hit this 19.9%, which you already have completed the system impact study for. Just curious like what would it take for safe harbor to ramp up to match that number? Adi Leviatan: Maheep, it's nice to hear from you. Jared, I'm going to please redirect the question to you. Jared McKee: Yes, no problem. Maheep, my apologies. I had a hard time hearing. Do you mind actually rephrasing the question? I just want to make sure I can answer it accurately. Maheep Mandloi: Yes, sure. I mean like talking to some of the developers or the industry, it looks like the interconnection is probably like a bigger bottleneck to get projects online by 2030 rather than just safe harbor. So was curious like if you have -- given you have 19.9 factored gigawatts of completed system impact study, can safe harbor ramp up to match that 19.9 by July 4 of this year? Or just curious like what would it take for safe harbor to grow from this 15, 16 -- 15, 17 gigawatts to the almost 20 factored gigawatts you have completed system impact study. Jared McKee: Got it. Okay. So just to confirm, it's really asking, is there the ability to match the safe harbor numbers with the completed system impact study that's sitting right around 20 factored gigawatts. Is that accurate? Maheep Mandloi: That's right. Jared McKee: Okay. So as you can see, one, we are very proud of the fact that we have 20 gigawatts of projects that have completed system impact study. This actually shows the success of what we are doing here in the U.S. at the Clēnera side, along with everyone at the Enlight team is to really go through and successfully go through that part of the process. On the safe harbor side, as Adi mentioned, we have optionality. What we are looking at is we are making a very strategic decision project by project to make sure that invested dollars into safe harbor and the work of significant nature is for projects that have ability to advance and COD by 2030. There are going to be some projects out of that 20 factored gigawatts that have time lines due to interconnection or other criteria that is going to be beyond the 2030 time frame. And so we probably won't see the safe harbor number go up to 20 gigawatts because there is going to be some projects. But as Adi mentioned, we are already significantly farther along on the safe harbor process for the majority of our portfolio than we had previously announced. There is some opportunity to hit that top end and maybe even a little bit more of the safe harbor on that 15 to 17 that Adi mentioned. The likelihood that it gets up to the 20 from a strategic standpoint is not completely likely just due to the fact that some of those 20 factored gigawatts are going to come online after 2030. Maheep Mandloi: Got it. Helpful. And are you seeing any interest from customers to have behind-the-meter solar, presumably that might not require interconnection study, right, I think. The limit over there would be how much would be able to safe harbor, right? So curious if you're seeing any customers ask about Island [indiscernible] behind-the-meter solar for you? Jared McKee: Yes. We've definitely seen this in the marketplace. I think our focus has been we have enough projects that are already through the system impact study that the projects that we are looking at by 2030 are those that are going to be connected to the grid, but we have seen interest in the marketplace, both from large load customers to really look at behind-the-meter solutions. We are always actively looking at ways to expand and to grow. And so we are looking at those types of opportunities. But our focus is really on our core business, which is very, very robust projects through the interconnection balanced by utilities that we can deliver on, and we have 20 factored gigawatts of projects that we can choose from. And out of that 20 factored gigawatts, we have another 15 to 17 that were going to have safe harbor. And so that is a very robust pipeline through the next 4 years. Maheep Mandloi: I appreciate that. And just one last one, just on cash sources, if you can kind of comment on how much of the current cash or what you might have in years can support growth beyond this 12 to 13 factor gigawatt post 2028. Itay Banayan: Maheep, so to remind, we have very strong access to capital globally, both at the assets level with project finance from Tier 1 lenders and at the corporate level with the access both to the Tel Aviv Stock Exchange and the NASDAQ, which we're seeing an improved liquidity -- significantly improved liquidity in the past year. At the moment, and there is -- there are details in the earnings release on the sources that we have on hand. At the moment, we have significant amounts to support the 2028 plan and beyond. So we don't need any outside resources of capital in order to support the 2028 plan and a significant factored gigawatts beyond it. Operator: Thank you. I would now like to turn the conference back over to the CEO for closing remarks. Madam? Adi Leviatan: Thank you. We highly appreciate your questions and also participating in our 2026 Q1 earnings report. We hope that you can also join us on May 19 for the investor conference where we plan to share more exciting content about our strategy going forward, and we highly appreciate you joining us here today. Thank you so much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the Q1 2026 results conference call and live webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Stohr, Senior Vice President, Investor Relations. Please go ahead. Christian Stoehr: Good morning, ladies and gentlemen, and welcome to our first quarter 2026 results presentation. Hosting our conference call today is Yves Muller, CFO and COO of HUGO BOSS. Before we begin, please be reminded that all revenue growth rates will be discussed on a currency-adjusted basis, unless stated otherwise. In addition, starting with Q1, we have adjusted our sales reporting structure. BOSS Menswear and BOSS Womenswear are now reported jointly under BOSS, while digital sales are included within retail and wholesale. As usual, during the Q&A session, we kindly ask you to limit your questions to 2, allowing for an efficient discussion. With that, let me hand over to Yves. Yves Muller: Thank you, Christian, and a warm welcome from Metzingen, ladies and gentlemen. Thank you for joining us today to discuss our first quarter results. As outlined in our release this morning, Q1 marked the first full quarter of execution under CLAIM 5 TOUCHDOWN following its introduction at the end of last year. As such, the first quarter was shaped by implementation, translating strategic priorities into concrete actions across brands, distribution and operations. Accordingly, our focus in the quarter was on disciplined execution. We implemented targeted top line measures to strengthen brand equity, continued to advance sourcing efficiencies and maintained rigorous cost control across the organization. These actions represent the first concrete outcomes of our realignment and are already translating into structural progress, particularly in gross margin and cash generation, which I will come back to shortly. Overall, we are pleased with the progress made in Q1. At the same time, we recognize that there is more work ahead, and we remain cautious on the near-term visibility given a high volatile macroeconomic and geopolitical environment. Let me now walk you through the quarter in more detail. Under CLAIM 5 TOUCHDOWN, 2026 is designed as a year of deliberate realignment rather than a year of chasing volume. In the first quarter, we made progress across all 3 pillars: brand, distribution, and operational excellence. This included refining product assortments, reinforcing our focus on full price execution, and taking targeted steps to optimize our distribution footprint. As part of this progress, we closed a net 15 freestanding stores globally, largely through expiring leases. As expected, these deliberate actions were reflected in our first quarter performance. Group sales declined by 6%, driven by the intentional quality focus embedded in CLAIM 5 TOUCHDOWN, alongside continued muted consumer sentiment. EBIT amounted to EUR 35 million, reflecting the planned impact of our strategic measures, partly offset by solid gross margin expansion and rigorous cost management. While these actions have a temporary impact on our top and bottom line performance, they represent important building blocks in strengthening the fundamentals of the business and laying the foundation for improved profitability over time. Beyond these deliberate actions, the external environment also remained demanding in the first quarter. Consumer sentiment was subdued across most key markets with continued pressure on traffic levels. Over the course of the quarter, conditions became more challenging, driven by the geopolitical developments in the Middle East. In this context, let me briefly put our exposure to the Middle East into perspective. The region accounts for around 3% of group revenues and is served through a limited and well-defined store network, primarily in the UAE and Qatar. The Middle East is also a high-quality and very profitable business for us, reflecting an upper premium store portfolio, a favorable channel mix and disciplined cost structures. From March onwards, store traffic in the region declined sharply, leading to meaningful disruption to overall retail activity and weighing on regional demand. As a result, developments in the Middle East reduced group sales by roughly 1 percentage point in the first quarter. In addition to these direct effects, developments in the Middle East also contributed to increased uncertainty more broadly. In particular, we observed early signs of a softening in consumer sentiment in selected markets alongside some moderation in international travel flows, which began to affect demand outside the Middle East towards the end of the quarter. Against this backdrop, we actively steered the business while remaining fully committed to our strategic priorities within CLAIM 5 TOUCHDOWN. With that, let me turn to our first quarter performance, starting with our brands. At BOSS, revenues declined by 3%, reflecting the challenging market environment as well as deliberate strategic actions. Menswear performed comparatively better, supported by continued strong demand in casualwear and athleisure, underlying the relevance of our 24/7 lifestyle positioning. This resilience was particularly evident at BOSS Green and BOSS Camel, both of which recorded growth in the first quarter. Womenswear by contrast was more affected by intentional assortment streamlining and targeted distribution refinement, measures fully aligned with our strategic priorities and aimed at strengthening brand positioning and long-term profitability. Turning to HUGO. Revenues declined by 21%, reflecting the strategic repositioning of the brand. During the quarter, we further advanced the streamlining of HUGO's product architecture into one overarching brand line, creating a clearer, more focused brand proposition and a more consistent market presence. While these measures continue to weigh on volumes in the near future, they represent fundamental steps to strengthen brand relevance, operational effectiveness and scalability over time. Speaking about our brands, let me emphasize once more: investing in powerful brand moments remain a core pillar of our strategy. While marketing investments were below the prior year level in Q1, primarily due to phasing effects, marketing spend amounted to 7.3% of group sales, fully in line with our CLAIM 5 TOUCHDOWN target range of around 7% of sales. Also for the full year, we continue to expect marketing investments as a percentage of sales to remain broadly in line with last year's level. In the first quarter, our brand investments focused on key initiatives such as the BOSS fashion show in Milan, which ranked among the top 10 most engaging brands during Milan Fashion Week; the launch of our Spring/Summer 2026 collections; and the third, BOSS BY BECKHAM. Together, these moments generated strong social media engagement and brand visibility. Importantly, these initiatives are designed to drive long-term equity and relevance rather than prioritizing short-term volume. From a regional perspective, revenues in EMEA declined by 8%, reflecting targeted measures to enhance distribution quality as well as muted consumer sentiment across several key markets, particularly the U.K. Despite the solid start to the year, revenues in the Middle East declined by a low double-digit rate in Q1, reflecting a sharp decline in store traffic in March, following geopolitical developments, which also weighed on overall EMEA performance. In the Americas, revenues declined by 5%, largely reflecting deliberate CLAIM 5 TOUCHDOWN measures in the U.S. market aimed at improving distribution quality across both wholesale and retail channels. As a result, reported revenues were intentionally impacted in the quarter. In addition, developments around Saks weighed on our U.S. concession business. Importantly, underlying performance in our U.S. brick-and-mortar retail business remained resilient with comparable store sales up modestly in the quarter. Outside the U.S., Latin America saw a slight normalization following a strong period of strong growth. In Asia Pacific, revenues increased by 1%, marking a return to growth. This was supported by renewed growth in China, aided by a successful Chinese New Year, as well as early progress in strengthening brand positioning and enhancing relevance in the market. Modest growth in Southeast Asia Pacific, particularly in Japan, also supports our regional performance. Turning to our channels. In retail, which includes brick-and-mortar and self-managed digital, revenues declined by 3%, also impacted by a negative space effect. On a comparable store basis, brick-and-mortar sales declined by 2%, reflecting lower traffic and our deliberate focus on full price execution, partly offset by a higher average basket size. Retail performance was also impacted by developments in the Middle East. Self-managed digital on the other side declined by 5%, reflecting our continued prioritization of full price sales in support of brand equity and margin quality. In wholesale, revenues declined by 10%, reflecting our ongoing focus on enhancing distribution quality through greater channel selectivity, a more curated assortment and a stronger emphasis on strategic partnerships. Performance was also influenced by a more cautious order behavior in the current environment as well as the known delivery timing shift of around EUR 20 million into Q4 2025, which has supported our wholesale business in the final quarter of last year. Turning to profitability. Q1 delivered a notable improvement in gross margin. Gross margin increased by 110 basis points to 62.5%, primarily driven by additional sourcing efficiency, including a further reduction in the airfreight share as well as improved pricing associated with the Spring/Summer 2026 collection. A slightly more favorable channel mix provided additional support during the quarter. Importantly, this performance demonstrates that the structural margin improvement we have been driving over recent years remain firmly intact even in a lower volume environment. Turning to cost and earnings. We maintained strict cost discipline in the first quarter. Operating expenses declined by 4%, supported by lower marketing spending due to phasing effects, ongoing efficiency improvements and further optimization of our retail cost structures, including rent renegotiations and productivity measures across our store network. As expected in a lower revenue environment, operating expenses deleveraged as a percentage of sales. As a result, EBIT amounted to EUR 35 million, corresponding to an EBIT margin of 3.9%, while earnings per share totaled EUR 0.24. Overall, this performance is fully aligned with CLAIM 5 TOUCHDOWN and our full year 2026 outlook. Let me now turn to cash flow and working capital. Building on the meaningful inventory reduction achieved at the end of 2025, inventory developed more moderately in Q1, in line with expectations. Year-over-year, inventories declined by 13% on a currency-adjusted basis, reflecting prudent buying, more focused assortments and targeted inventory optimization measures. As a result, inventory stood at 22% of group sales at the end of March, while trade net working capital declined by 10% currency adjusted. At the same time, capital expenditure remained at 3.2% of sales, continuing its normalization and remaining fully aligned with our midterm targets. Supported by both the improvement in working capital and continued CapEx discipline, free cash flow before leases improved by nearly EUR 100 million year-over-year, amounted to EUR 33 million. Let me conclude with a brief look at the remainder of the year. 2026 continues to be a deliberate year of realignment under CLAIM 5 TOUCHDOWN. Following our first quarter performance, we reaffirm our full year outlook. We continue to expect currency-adjusted group sales to decline mid to high single digits, reflecting targeted brand and channel measures. Currency effects are anticipated to remain a moderate headwind for reported sales. We likewise confirm our EBIT outlook of EUR 300 million to EUR 350 million. Gross margin expansion and continued cost discipline are expected to support profitability, while operating expenses are anticipated to deleverage due to lower revenues. At the same time, we expect macroeconomic and geopolitical volatility to remain elevated with heightened uncertainties related to developments in the Middle East. In this context, we remain vigilant and continue to closely monitor both direct effects and broader implications for consumer sentiment, international travel flows and overall trading conditions. Against this backdrop, we maintain a clear focus on operational delivery and the strategic priorities set under CLAIM 5 TOUCHDOWN. We will continue to prioritize profitability, cash generation, inventory discipline and flexibility over short-term growth. Ladies and gentlemen, let me close with 3 takeaways. First, the execution of CLAIM 5 TOUCHDOWN is firmly underway. 2026 is a year focused on strengthening the fundamentals of the business and elevating its quality rather than pursuing growth at any cost. In this context, we have made initial progress in sharpening brand focus, enhancing distribution quality and structurally strengthening the earnings profile of the business, marking an important milestone in delivering our strategy through 2026 and beyond. Second, Q1 delivered solid underlying performance. Gross margin improved, cost discipline remained intact and cash generation strengthened despite intentional top line effects from our strategic measures. Third, based on our Q1 performance, we reaffirm our full year outlook for 2026. While the external environment remains demanding and volatile, we are confident in our strategic direction and our ability to translate execution into stronger brand equity, improved profitability and long-term value creation. With that, thank you for your attention. We are now happy to take your questions. Operator: [Operator Instructions] The first question comes from Thomas Chauvet from Citi. Thomas Chauvet: Two questions, please. The first one on your introductory remarks, you said that demand outside the Middle East weakened towards the end of the quarter. Can you elaborate a little bit on what that means in the various regions? And how much was retail in April compared to the minus 3% you registered in the quarter? Secondly, on your comments about the resilience of menswear, particularly with BOSS Green and B Camel positive, can you comment on whether this is due to a very different customer profile you're now seeing in the store purchasing these 2 lines that are quite differentiated, I believe, or rather you think some relative weakness perhaps of the offering of black and orange, whether that's -- I don't know -- product quality or value for money proposition or simply the creative part. That would be useful. Also that you perhaps elaborate a bit on the 2 divisions you've created with menswear and womenswear and how this new unit of menswear is helping on the creative side? Christian Stoehr: Excuse me, this is Christian speaking, but we have to quickly follow up on question one, which was obviously a long question, but the quality was really bad on our end. I'm sorry for that. There was a bit of constraining in it. I remember you asked for retail trends in April, but what was the beginning of your question, if you can recall that, please? Thomas Chauvet: Yes. Sincere apologies for that to everyone. Yes, the comment -- can you hear me better now? Christian Stoehr: Yes, I'd say so. I mean, it's still -- it's not perfect but. Thomas Chauvet: Otherwise move to another question or two. You commented on demand weakening outside the Middle East towards the end of the quarter. And could you elaborate on what that means in the various regions? And was retail overall in April very different from the minus 3% you registered in the period? Yves Muller: So Thomas, you're asking whether the retail performance in April was different from the minus 3% in Q1. Is this your question? Thomas Chauvet: Yes. You mentioned that things weakened outside the Middle East at the end of the quarter because of the war. So I suspect that the consumer may have been impacted in the U.S. and Europe. So could you comment on the various geographies in April, please? Yves Muller: Yes. So perhaps let's take the first question regarding, let's say, current trading question. So firstly, I think we have to see that, of course, our retail business and the Middle East business is -- the Middle East business itself is predominantly a retail business, was definitely affected -- ongoing in April. So I think this refers to everybody. We are not alone in this, but we see that traffic is very low. It has slightly improved over the latest weeks, but now the last 2, 3 days have been also bad. So I would say it's a very, let's say, volatile environment. Secondly, I think this is the question around what do we see in terms of consumer sentiment. I would say here, we see in some selected markets that consumer sentiment is also affected, for example, like U.K. is affected -- was already affected in Q1, especially March, and is also affected in April. And we see that actually also the international tourist flow is also coming down and affecting the business. On the other side, I think I want to make the comment in terms of our strategic priorities. I think for us, it's also important to stay on track with regards to our strategic execution of CLAIM 5 TOUCHDOWN. And this means also for us in April, which is the month of, let's say, mid-season sale that you see very often due to the summer. For the summer collections, we decided in executing our CLAIM 5 TOUCHDOWN for this year that we don't take part in mid-season sale. So that is also one of the deliberate decisions that we have taken in order to improve the quality of our business and to have this long-term focus on brand equity. So definitely, of course, we are looking at the current trends up and down. But I think for us, it's now very important to keep our compass and to keep the course of our strategic execution. And therefore, we do not participate in April. And therefore, the month itself, it's difficult to read between the different effects that we have been seeing. With regards to your second question, actually, we are very happy with the development of BOSS Camel and BOSS Green. BOSS Green was actually up mid-single digit. You can see that our 24/7 lifestyle image is really working, especially with younger consumers. And you can also see that this is the current trend of the business with, like sports kind of activities. You've also seen that we have announced now the cooperation with Australian Open for next year. So this creates BOSS. We are working on kind of tennis and golf collection. So we are really deliberately driving BOSS Green going forward. And on top of this, we also opened some BOSS Green stores, especially in the Asian markets, where you can see this kind of positive trend. And we are following this kind of trend. With regards to BOSS Camel, which is, I mean, the majority is definitely a retail business. You can really see because of the outpricing of the luxury players and luxury competitors that some of the high value, high affluent consumers are trading down to us, and that's also driving BOSS Camel in selected markets, especially also we saw this in Asian markets, but also in the U.S., where we are actually happy. So I would view this -- I would see this positively in terms of that we have a certain portfolio to offer, and price value proposition for Black, I think, is good. Please keep in mind that we also increased the prices for the Spring Campaign 2026. And we get actually good feedback for this kind of measurement, and this is also driving our business. Operator: Then the next question comes from Manjari Dhar from RBC. Manjari Dhar: I also had 2, if I may. My first question was on COGS and raw materials. I just wondered if you could give some color on how you see the outlook on the raw material side as a result of what's going on in the Middle East? And does that have any impact on your own sourcing facilities in Turkey? My second question was on tourism. Yves, I know you commented on international tourist flow weakness. I just wondered if you could give some color on sort of how much of the BOSS estate is exposed to international tourist flows and perhaps maybe some more color on how you're seeing the performance in some of those stores. Yves Muller: Yes. Thank you very much, Manjari, for your 2 questions. First of all, regarding the COGS. So taking your concrete question regarding Turkey. So we -- for the time being, we don't see any implications regarding our factory in Izmir. Regarding raw materials, please keep in mind that the majority of the products that we have are coming from cotton and actually wool. So they are not so much influenced by this kind of high oil prices. We only have, let's say, limited exposure to polyester. You see price increases there. We have to look at it whether it's -- whether the duration will be longer. But I think what remains is that we are not as much exposed as perhaps like other sports brands, for example, and we don't see major implications for the year 2026. I think we have to observe the situation, but rather from the COGS development and also -- this also includes freight. We feel that we can compensate those effects that we might be seeing and that from -- with regards to the COGS, that we see further improvements regarding sourcing efficiencies, further reduction in airfreight share, and that these developments will support gross margin also going forward, alongside -- although we know that the Middle East has somehow implications on the oil prices. Regarding tourism, we know that our business is around overall 20% to 25% is coming out of tourism flow. We have seen some implications because of the Middle East, because of the big hubs in Dubai and Doha were closed for a certain period of time, there's less traveling. I think this has impacted the business in March and also in April, and we have to see how long it will last. I think it will also be slightly compensated in domestic revenues then, because people might be staying more at home or might be traveling less. So we have to observe this kind of development. Operator: The next question comes from Grace Smalley from Morgan Stanley. Grace Smalley: The first one would just be a quick clarification, please. So you mentioned that you are -- you're starting to see some impact from the Middle East in regions outside of the Middle East. And I think, Yves, if I heard you correctly, the U.K. was the main region that you pulled out. I just wanted to see if there were any other regions where you're also starting to see an impact outside of the Middle East or it's mainly centered within the U.K. Also on the answer on current trading, appreciate it. It sounds like April is very difficult to read given the Middle East disruption, but also the changes in the seasonal sales. But just if there's anything you can say to help us with how we should think about modeling Q2 relative to current consensus? My last one would just be on marketing. I believe you mentioned that the lower marketing spend in Q1 was partially due to timing and phasing. So if you could just help us with how we should think about the cadence of marketing spend throughout the rest of the year and how we should think about marketing on a full year basis? Yves Muller: Yes, another 3 questions. Thank you very much. So regarding marketing, I think -- so first of all, like I said during my presentation, we invested 7.3%. We have had the Milan fashion show. We have had BOSS BECKHAM. We had also the HUGO campaign, Red Means Go. So we -- you can really see that we invested. I think we invested wisely, and we get more out of the euro spend. And regarding -- and actually, this is all well in line with what we have said during CLAIM 5 TOUCHDOWN. There will be definitely a focus on the second half of the year, especially in Q4, which is actually the holiday season, which, as you know, Grace, is the strongest quarter for us. So we will, in terms of phasing, focus broadly on the second half of the year and especially on Q4 where we have the commercial and holiday moments of the year and where you have also some gifting in this kind of big quarter because as we know, the fourth quarter is between 20% to 30% higher than the first 3 quarters. Regarding the comment in terms of global sentiment, I think, like I said, and I can just repeat this, that we have seen in some selective markets like the U.K., some implications of the Middle East conflict, also slightly less tourists from the Middle East coming into the U.K. So these were also some implications that we have seen. But I think it's -- I think we have to observe the situation. And I think nothing more to comment right now because it's really changing on a weekly basis. Then was the question, was that regarding Q2? What was that question again? Christian Stoehr: Yes. It was -- Grace, you got your question, right? It was a bit of a quarterly phasing question, right? How to think about Q2 in terms of modeling, but also for the remainder of the year given the current trading comments that were made. Is that right? Grace Smalley: Yes, exactly. Christian Stoehr: So I'll take that, Muller, if that's okay for you. So I think the 2 comments we can make is, Grace, one related to Q4. I start with the final quarter of the year. And that's basically a reminder of what we have already said in March, the comps are particularly difficult in Q4. So that's something you will have to bear in mind. And I'm sure you're doing that in any case. On Q2, I think only the comments we've made on the Middle East, I guess, you probably will try to find these numbers or these comments finding the way into your Q2 modeling numbers. But that's all the comments we are making. Hard to be overly precise on current trading given the volatility we're seeing in the markets, and you said it, weeks can be quite different from one week to the other. But like I said, I think the implications from the Middle East in April were pretty clear, and that is something you should bear in mind -- and then Q4, as I just alluded to. Operator: Next question comes from Anthony Charchafji from BNP Paribas. Anthony Charchafji: The first one would be on the guidance. Curious to know the breakdown between the gross margin expansion and the OpEx. I mean, we've seen that the OpEx were down 4% reported, but rather 2% at constant FX. Do you see the OpEx cut, I would say, fading and being a bit less of a tailwind going into Q4? And in terms of gross margin, just to know if you have in mind gross margin expansion to be really back-end loaded Q4. So can we see Q4 gross margin expansion above the 110 bps that you just delivered? My second question is on pricing, but also pricing net of markdowns. Do you expect it to be net positive like in Q1 in each quarter in 2026? And do you expect to do more pricing versus the one that you did beginning of Q4 of mid-single digit? Is there anything planned? Yves Muller: Yes, Anthony, thank you very much for your questions. So regarding pricing, we have done now the pricing in Q4 2025, which will prevail in due course for 2026. There will only be, let's say, some slight adjustments, but not this kind of broad-based adjustment we have made. We might do it smartly. We will observe, of course, the competition, but nothing that I would call out in terms of pricing. What I would also -- what I would call out is definitely that we will give less promotions. We have started this already. And I think markdowns will go down and will turn over the course of the year also into a tailwind for gross margin in comparison to last year. We will strictly actually execute our CLAIM 5 TOUCHDOWN strategy. This means less discounts in the online channels. This will be shorter sales period. This will mean not participating in mid-season sale, like I said. So these are several measurements that we are taking to reduce our markdowns, always with the implication to drive the long-term profitability and the brand equity of the company. So it's -- all the measurements that we are taking are directed to increase our full price sell-throughs, and this will also help the gross margin going forward. I think we have been happy with our gross margin development already in Q1, which was primarily driven by sourcing efficiencies. But I also expect that we will see a good performance regarding gross margin over the next quarters regarding gross margin. As we have the history of having the OpEx overall under control -- minus 4%. I think it's -- for us as a management team, it's important to have the costs under control and to reduce the costs. I think you have also seen kind of deleverage this year, but this was overall well expected also in our guidance, and we will focus on those things that we can control on our own. And these are definitely gross margin things and also OpEx. And you have seen the direction also in Q1, and you can expect that this will continue in the next quarters, meaning gross margin being up and costs going down. Operator: The next question comes from Andreas Riemann from ODDO BHF. Andreas Riemann: Two topics. One is the HUGO brand. So the HUGO brand is written in red letter. So my question would be what actually happened to HUGO BLUE? Is HUGO BLUE still relevant within HUGO? The second topic, the tariffs. So in the press call, I think you indicated that you expect that U.S. tariffs will be paid back. Can you help us to guess how much that might be? And linked to that, what was actually the impact from U.S. tariffs on your gross margin in Q1? You didn't mention it. So was it that small? That would be my second question. Yves Muller: Andreas, thank you very much for your questions. Well, I will start with customs. Yes, of course, like every other brand is expecting that this kind of surplus that was introduced last year will be paid back. I think this is what might be expected. We are not quite sure because as we all know, the administration in the U.S. is also very volatile. So no effects have been included in our numbers so far. And actually, we are not disclosing the exact amount of the customs that we are having, but it's not such a huge amount that you can expect. Regarding HUGO, definitely, we streamlined the assortment regarding HUGO. We have the big campaign Red Means Go in terms of HUGO, and we are integrating the HUGO BLUE products into our HUGO -- in our HUGO appearance and have a clear focus on contemporary tailoring. So this means that we're going to streamline the assortment going forward. This has been a kind of -- also kind of strategic measurement. And of course, the effect regarding the net sales at HUGO are visible, but they were more or less expected from our side. And on top of this, we are also reducing here and there some of our distribution points also with HUGO. So these are the effects that we have seen with HUGO, but I think the most important thing is that we are streamlining the assortment and integrate HUGO BLUE into HUGO. Christian Stoehr: Ladies and gentlemen, that actually completes today's conference call. There is no more people in the queue wanting to ask questions. So we leave it with that. And we thank you for your participation. And of course, if there's any further open topics or questions you have, please reach out to the Investor Relations team. Thank you for joining today. Thanks for your interest and speak to you soon. Thank you. Bye-bye. Yves Muller: Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Aapo Kilpinen: Ladies and gentlemen, dear Remedy investors, welcome to the webcast for Remedy's Q1 Business Review of 2026. My name is Aapo Kilpinen from Remedy's Investor Relations. Joining with me today are Remedy's new CEO, Jean-Charles Gaudechon, also known as JC; and then our CFO, Santtu Kallionpaa. JC will briefly introduce himself and then guide us to the quarter. Santtu will then do a deeper dive on the financials of the quarter. We'll then look at the outlook for the year, and then we'll end with a Q&A session at the end of the webcast. [Operator Instructions] But without further ado, JC, please, the stage is yours. Jean-Charles Gaudechon: All right. Thank you, Aapo, and hello, everyone. Welcome to Remedy Q1 2026 Business Review. I guess I need to start by saying a few words about myself. So let me start with, I think, something that really defines me is my past as a software engineer. I think that's really what shapes how I think about games, how I think about running studios, companies like Remedy, and how we approach game development in general. Over the past 25 years, I've had a chance to work on games across many roles on all platforms really and across North America, Asia and Europe, so quite global. That has given me a good overview of our craft and now I have the immense privilege of bringing that experience to Remedy. One of the boldest, most original studios in gaming with some of the best talents in the industry, which is excellent. You know what Remedy has achieved is rare. Over more than 3 decades, this studio has built a voice unlike any other, supported by a strong and engaged community, which is extremely rare, as I said, and a great asset now and for the future. More broadly, in our industry today, I think the creative craft is under real pressure. Games with a genuine soul, games that take risks, that have a point of view are getting harder to find. And those are exactly the games that Remedy makes. My mission is not to change what Remedy is. My mission is to protect and grow that soul and to help this studio grow without losing what makes it Remedy. All right. Enough of me, let's go through our business performance together. Q1 2026 was a good start to what I believe is going to be a very exciting and pivotal year for Remedy. Revenue increased, driven by game sales and royalties that nearly doubled for the comparison period. EBITDA came in ahead of the same comp period at EUR 2.9 million and EBIT was positive at EUR 1 million. Operating cash flow was on a healthy level. So good signals as we start that year. And a good share of that performance is being driven by our back catalog, which continues to find its audience. That is very encouraging, especially as we are building the self-publishing muscle at Remedy. We have a number of exciting projects in development, but the most immediate focus for Remedy, the one closest to our players' hands with the 2026 launch is CONTROL Resonant, obviously. So let's cover that. Our goal with CONTROL Resonant is to deliver a great melee action in RPG. Again, that honors the Control universe but also expands it, and that players will truly appreciate because in the end, that is what really only matters. So we're doing that for players in our fan base. A lot of interest was captured with our December 2025 announcement, and the leading indicators are on track. Looking ahead, we will ramp up the marketing campaign leading up to release, and we expect the momentum to significantly intensify. We have an ambitious global campaign and a sizable marketing budget for execution. The reception has been incredible so far. We're extremely happy about traction. During Q1, we released 2 new trailers. The first was our gameplay reveal trailer featured in the PlayStation State of Play. As you know, one of the highest profile venues in the industry for a reveal like this one. And putting our gameplay in front of that audience -- in front of you all for the first time was a very important moment for us and for the game at Remedy. The second was produced with our long-term partner, NVIDIA. This partnership shines a spotlight on the technical ambition behind CONTROL Resonant. And of course, on our very own Northlight, our proprietary engine, which is what allows us to push the game's performance and cutting-edge graphics, extremely important for Remedy games, as you know. Beyond the trailers, sorry, we released a developer diary for our community called Beyond the Oldest House. This is the kind of content that really matters, we believe, to our most dedicated fans, direct access to the people making the game, our dev team speaking in their own voices, speaking honestly about what they are building. Remedy's community has always liked authenticity. And I think that's really what we've been doing here and what we want to keep doing. We also hosted an exclusive showcase for media and creators. We had over 70 outlets that attended, generating more than 140 articles and around 2 billion impressions across global media, which we believe are good numbers at this stage of the campaign and more importantly, the coverage was not just broad and just volume, it was also quality and it was positive, which obviously, for us, is very encouraging and kind of how we want to land the product. Outlets like Edge, Polygon, GAMINGbible, IGN, just to name a few, I don't want to hurt anyone in the process, but have all come away from their previews with a clear message, to be clear, this was a hands-off preview, but still very encouraging. And people really said, this is a Remedy game that takes risks and has its own identity. And that's always what we want to make at Remedy. And you'll see that more and more as I talk strategy moving forward, it's very, very important that these games feel Remedy and are more Remedy than ever. There are, of course, fair questions being raised. Action RPG is a new genre for Remedy, and the press, the fans are right to scrutinize how the gameplay holds up. We welcome that scrutiny, but we are also confident that as players and press get their hands on the game, they will see kind of how serious we are about earning our place in the action RPG space. I have the chance to play the game daily, and I can tell you that it's coming very well together. I'm very happy. All right. So beyond the press, the broader signals heading into launch are healthy, sentiment among fans and content creators has held up globally, which is great to see. That audience is sizable. The Control universe has been played by close to 20 million people over its lifetime. We are also making a deliberate push beyond our traditional strongholds, the U.S. and Europe. This time around, Asia and Latin America are real priorities for this launch. And we have invested in localization at a level we have never done before. Our thinking here is simple, Remedy's voice deserves to reach further, and we are giving it the means to do so. All right. So turning over to our games currently in market. Alan Wake 2 became available on Amazon's Luna service during Q1, alongside Alan Wake Remastered, generating a platform deal royalty. The game also continued to perform across other platforms throughout the quarter, and Santtu will explain a bit more how that impacted Q1 positively. Happy to -- I'm very happy to announce that the game has passed a 6 million benchmark in lifetime copies sold. Control retained its solid sales momentum in Q1. In fact, Control actually sold better than the comparison period driven by promotions and added visibility from CONTROL Resonant, obviously. This is a dynamic we plan for at attractive price points. Control is a great vehicle for new players to enter the world of Control ahead of the sequel. All right. FBC: Firebreak. The last major update, Open House was released in March, and the game has moved to maintenance mode after that. The game will remain online and a Friend's Pass feature was introduced to support the player base. It is very important for us at Remedy to let players enjoy the game for as long as they can and as long as they want. The game remains available on PlayStation Plus and Xbox Game Pass, sorry, and can be purchased on PC and console platforms. All right. Our development pipeline has 3 active projects. CONTROL Resonant, obviously, in full production. We already discussed about this one at length. Max Payne 1 and 2 remake is also in full production in partnership with our partner, Rockstar Games. And you know how close to our heart is Max Payne. So something that we're putting a lot of effort on also. And we have a new project currently in proof of concept, which unfortunately, I cannot tell much more about today. So building on what I shared earlier, 3 areas where we are sharpening our focus. One, focus on core strength. Remedy is exceptional at building single player narrative experiences on core platforms. This is what we do best, and we need to double down on that expertise. We cannot take it for granted, not our craft and certainly not our players. This does not mean we stand still. We will innovate and we will explore new ways of reaching players when the case is right. But every step beyond our core has to build on what we already do best. Franchise expansion as the second pillar. Today, we tend to think about our games one after another. I want us to evolve that mindset, managing more franchises. I think our IPs today can really give a lot more than what they already do. We need to think as long-term strategies that let us be bolder to connect the dots further within and between our world. That is something very important to me for the future of Remedy. And three, self-publishing. I think this is a unique opportunity to hone the whole chain. No one can really speak about Remedy games better than Remedy. I want our publishing voice to be as unique and distinctive as our games themselves. It's a chance to be heard like never before. And we are not going to play safe, you will see that with the CONTROL Resonant campaign. With that, I will hand over to Santtu to walk you through the Q1 financial results. Santtu Kallionpaa: All right. Thank you, JC, and good afternoon also on my behalf. Let's start reviewing the financials from the revenue. So in Q1 2026, our revenue was EUR 13.1 million, which is 2 percentage lower than in the comparison period. Game sales and royalties almost doubled from the comparison period being EUR 5 million for the first quarter. This was driven by the royalties from Alan Wake 2, which include also the onetime royalty accrual from the game becoming available in Amazon Luna. Also, Control games has performed well in Q1 and partly drove the game sales and royalties above previous year. Q1 2026 also includes revenue accruals from FBC: Firebreak's subscription service deals, which we didn't have last year Q1. Development fees, they decreased from the comparison period and still made over half of the total revenue for Q1 2026. Development fees were for the projects, Max Payne 1 and 2 remake and CONTROL Resonant. Revenue was impacted negatively by weak USD rate. With the FX-neutral revenue, we would have had a growth of 0.2 percentage. Then looking at the longer perspective, the share of game sales and royalties of the total revenue has started to increase during 2025. Alan Wake 2 started accruing royalties in the end of 2024. And as said, during the first quarter 2026, Control games and sales related to our older game titles were on a higher level than in Q1 2025, and FBC: Firebreak started accruing revenue from Q2 2025 onwards. Development fees have remained roughly on a similar range for the last 4 quarters, but there has been also a variation between the quarters due to the development milestones of CONTROL Resonant and Max Payne 1 and 2 remake. Then moving on to profitability. So the operating profit in Q1 2026 was EUR 1.0 million positive, being EUR 0.3 million less than in the comparison period. This decrease is mainly due to higher depreciation and investments to self-publishing in Q1 2026. EBITDA improved from the comparison period and was EUR 2.9 million positive. Growth from the comparison period is largely due to the decrease of external development expenses. Then let's look at the costs in more detail for transparency. So unnetted external development and personnel expenses in total decreased by 11 percentage from EUR 11.5 million in Q1 2025 to EUR 10.3 million in Q1 2026. External work expenses were EUR 1.9 million in Q1 2026, being 44 percentage lower than in the comparison period. This was driven by lower external development needs in the game projects. The unnetted personnel expenses were EUR 8.4 million in Q1 of 2026, increasing by 3 percentage from the comparison period. This growth matches the growth of average number of personnel during the reporting period, which also increased by 3 percentage. The amount of capitalized development expenses at EUR 3 million was on a similar level than in the previous year. The amount of capitalization is higher than in the previous quarters, mainly due to increased efforts on CONTROL Resonant. In Q1 2026, depreciation expenses in total were EUR 1.9 million, of which EUR 1.2 million were related to game projects. These included Alan Wake 2 and FBC: Firebreak depreciations. Q1 depreciations are on a lower level than in the previous quarter, and this is due to the depreciations following the level of game sales of the games, which we are depreciating. Currently, a major part of Remedy's intangible assets is from capitalized development costs of CONTROL Resonant. Also, the remaining capitalization of Control's publishing and distribution rights has been mainly allocated to CONTROL Resonant. Once the game is launched later this year, the depreciations related to CONTROL Resonant will start, which will impact the quarterly depreciation levels. So at the end of Q1 2026, our total cash level was EUR 34 million, including EUR 14.4 million in cash and EUR 19.6 million in short-term cash management investments. During Q1 2026, the cash flow from operations was EUR 8.3 million positive. Besides the cash flow from operations, our cash position was affected by a EUR 3.2 million negative cash flow related to investments and EUR 0.3 million negative cash flow from financing. Cash flow from investments, that includes payments related to capitalized development costs and machine acquisitions. Cash flow from financing includes IFRS lease liability payments. The cash position improved in relation to both the comparison period, Q1 2025 as well as to what the situation was at the end of year 2025. Then if you look at the cash flow from operations closure, there has been variation in timing of payments from quarter-to-quarter. Q1 2026 cash flow from operations was EUR 14.9 million higher than in the comparison period. Our outflowing operative payments were 23 percentage higher than in the comparison period. Due to timing of sales payments, we, at the same time, received significantly more inflowing sales payments than a year ago. Timing of development fees -- fee payments are agreement based, and there is difference compared to revenue accruals. Royalty and game sales-related payments follow the revenue accruals with delay. So in overall, year 2026 started with a profitable quarter for us with both EBIT and EBITDA being positive. This is, of course, ahead of marketing ramp-up and related spend to support the launch of CONTROL Resonant during 2026. And now, JC will continue with outlook. Jean-Charles Gaudechon: Thank you, Santtu. All right. Our outlook for 2026 is unchanged. We expect our full year revenue and EBITDA to increase from the previous year. And then handing it to Aapo for Q&A. Aapo Kilpinen: Thank you, JC. Thank you, Santtu. Let's move on now to the Q&A. [Operator Instructions] We already have a couple of good questions in the pipeline, so let's begin with those. JC, the first question is related to you. What are the short-term goals from the new CEO? And will those goals affect how Remedy operates? Jean-Charles Gaudechon: Yes. Good question. I mean, so I've been here for a few months, and I spent a lot of that time listening and getting to understand people, the studio where we're at. And honestly, the priorities are very clear. Today, it's to execute on CONTROL Resonant. We can have all the strategies in the world, if we don't make an incredible game, what's the point? So I think to me today, it's really to give the studio the support, the direction, the inspiration to really kind of get CONTROL Resonant across the finish line in the best possible way now. It now is, of course, the biggest one, but we have other great games in the pipeline, which also needs and deserves attention and support. So this is very much the focus right now. The strategy pillars I talked about, we'll surely get into it, get into that vision, but today, let's focus on product execution. Aapo Kilpinen: Excellent. Thank you, JC. The next question is on CONTROL Resonant. Can you give more color on the leading indicators that you're tracking on the game? Jean-Charles Gaudechon: So unfortunately, right now, we cannot yet. Of course, we're still being -- a lot of that is happening behind closed doors, and we apologize. I know both present players are antsy to hear and learn more about the game and trust us, it's going to come. But today, I can't say a lot more. What I can say, as I said in the presentation, we're happy about how it's tracking. We're getting the momentum we want to gain. We're getting the traction. The game is landing the right way. The message, what we're hearing back is very much in line with what was planned. So happy about that. Apologies that I can't go much deeper into details, into numbers, but that's what I can say today. Aapo Kilpinen: Very good. Next question is on China and broader Asia. Is there a local partner model with a distribution arrangement? And how does the economic split compare to core markets? Jean-Charles Gaudechon: So good question. And you know I spend quite a bit of time in Asia myself. So that allows me also to hopefully get a bit better understanding of that region, even though you can't make any generalities and it's a daunting market, but also a very attractive one. We're going to have a local strategy. We're going to have a local partner. I can't announce any of that just yet or have any more details, but there is a strategy around how to approach China specifically. I think for me, what's most important today is how do we position the product to be a success with Chinese gamers. I think action RPG is something that resonates well in China. And I believe Chinese gamers will, I hope, Chinese gamers will appreciate CONTROL Resonant, and we're going to do everything on the way to get there. It's tough to say how much this is going to play in economics of the game. But what I can tell you is we're going to push really harder. Also on the localization front, I touched on it earlier. It's pretty much the biggest localization investment Remedy has ever made. And we're very happy to tell our Chinese gamers that the game and in China, but across the world, Chinese speakers that the game will be both kind of text and audio localized, which I think will be great. Aapo Kilpinen: Super. Next question is to Santtu. With CONTROL Resonant nearing completion, how should we think about the development fee trajectory through the rest of 2026? Santtu Kallionpaa: Yes. So the general rule regarding the development fees is that they follow the agreed milestones of the game development and the contracts. And good assumption regarding, for example, CONTROL Resonant is that the development fees will continue to accrue as long as the development of the game takes. Aapo Kilpinen: Excellent. Continuing with the finance question, Santtu. Are there still some B2B payments accrued for the coming quarters in relation to FBC: Firebreak? Santtu Kallionpaa: Yes. I think we have said earlier that the B2B deal accruals continue as long as the B2B deals regarding the game being in the subscription services continue. So it's based on that. We have also said that the major part of the cash flow impact from these agreed deals for FBC: Firebreak, that's already in our balance sheet. Aapo Kilpinen: Excellent. Then back to JC. I would like to hear more about the social media marketing efforts in China and how big of a share of the CONTROL Resonant sales do you see coming from Asia? Jean-Charles Gaudechon: I think I've kind of already answered this one and the last one. Not much more to say that we're going to be present. We are present and we're going to intensify our presence on the Chinese social media, and in general, kind of try to create our voice, getting a share of voice in China. Aapo Kilpinen: Very good. Next question on CONTROL Resonant's budget, ahead of CONTROL Resonant's launch, does the estimated development budget of approximately EUR 50 million still hold? Jean-Charles Gaudechon: So I'm not going to -- this is Santtu already looking at me and saying, don't say it. It's -- what I can tell on the budget is the team has done and the studio has done excellent work to stay on track, has done excellent work to build a AAA game on a relatively short or small budget. And that's something we've seen from Remedy before. That's something we'll see again from Remedy because honestly, there's something pretty incredible about the way being -- the games are being built at Remedy the way they've been thought through and managed. So it's been -- it's not has always been the case. I know that. We've had some hiccups in the past, but I can tell you that the team has done incredible work on control resonance. Aapo Kilpinen: Very good. Next question then is in relation to Remedy's headcount. Remedy's head count is increasing. This seems to be counter to what is happening in many other game studios. What is the thinking behind the increase? Jean-Charles Gaudechon: I mean good segue from what we just -- the previous question. And let me answer it by telling you again that the studio has made incredible games on relatively small actually team size, a relatively small budget size. And I think that happened because, well, it's a studio that has its own engine that has its own kind of tools and ways of building it, which I've seen for the past 2 months, and I understand why they were able to pull it off that way. I think also one thing you can see about Remedy is Remedy has always been smart of not going too fast, too quickly, which you've seen in other parts of the industry, unfortunately. And when you get to that, then that's when you take the risk of potentially having to downsize. What I can say today from the size of the team, the size of Remedy and the games we're making, I think we're pretty much rightsized for it. Aapo Kilpinen: Excellent. Next question, again, on organizational topics. As you've gotten to know the company, do you see areas in Remedy's operating model or organizational structure where changes may be needed? Jean-Charles Gaudechon: I think you can always make improvements, and we will make improvements. Yes, I've seen parts of Remedy, which I think can be improved at many different levels. Today, what's really important is to keep a balance on what you can improve and when you do some of these improvements. And as I said right now, the studio is in full execution mode. You need to be cautious with that. We need to give the right support. And a lot of this is gradual anyway. So today, it's more about protecting, supporting, making sure that we stay on the right tracks, but not necessarily disrupt any of that. But yes, there will be changes here or there, kind of internal cuisine type of thing, which will help, I think, the studio even perform better in the future. Aapo Kilpinen: Perfect. Next question is about the new projects. Is there any information you can share about it? Will it be under the Remedy connected universe? Or will it be a completely new title, spin-off? Anything that you can communicate at this point? Jean-Charles Gaudechon: It's tough. I keep having to say that I can't say much. But unfortunately, no, I can't reveal anything about this new project, except that it's going to be yet again an incredible Remedy game. Aapo Kilpinen: Very good. The next, Remedy has always been a contender for the Game of the Year in TGA. So is winning Game of the Year with CONTROL Resonant in your playbook? Jean-Charles Gaudechon: It always is. This team, and I've seen it now, we know it from before, right? This team is always going for the highest possible quality. And I think CONTROL Resonant is not different on that front. So we're going to push hard. I heard that this is going to be a pretty hard year, but I'm not sure exactly what's coming out this year, but there's going to be competition. But I think we'll be up there fighting for it. Aapo Kilpinen: Excellent. Then would you consider adding a preorder option for the games you publish? Jean-Charles Gaudechon: So I can't say much once again on CONTROL Resonant specifically. Me personally, I think preorder is a good way to judge traction, to judge success of the game ahead of launch. So I think it's a good thing. Aapo Kilpinen: Yes. Super. Then I think the final question, might there be any collaboration with Epic Games to bring Jesse or Dylan Faden or maybe even Ahti the janitor to Fortnite to promote CONTROL Resonant like what was done with Alan Wake 2? Jean-Charles Gaudechon: I mean we're big fans of crossover. I think we've showed it in the past. I think it helps us expand our universe, our worlds, and that's something that I mentioned in some of the pillars in the presentation just now. And this is something we're going to keep doing because I believe strongly in RPs in our worlds, and they should even get deeper and connect the dots more, as I said before. So I can't, of course, say anything about whether we do something with Epic or Epic is a strong and close partner. So we're always talking to our partners about potential opportunities. And these are, again, a great opportunity to look into. Again, as I said, one filter we will, I think, use more and more is, is it building on our core strength? As I said, as the first filter -- first pillar, sorry, this is going to be something we do a lot. And I think you define the vision of a studio not by just saying yes, but also saying no, which is what we don't go after, what may not really help compound that culture and build on the core strength of Remedy. So this is the filter we'll be using moving forward on the crossover, et cetera. But so far, we've been really happy with it. Aapo Kilpinen: Very good. One final question came through. In what way do you think the rapid development of AI will impact Remedy's operations, perhaps regarding product price or game development costs? Jean-Charles Gaudechon: So you're casually dropping an AI question at the end, excellent. Of course, it's a big topic these days. We've had a clear stance as Remedy with AI. Today, we're not using generative AI to create any user-facing content or in general. I would also say, good luck trying to make Alan Wake with AI. I would love to see that happen, but I think that it's going to be very, very hard. So today, I would say it's a bit of a non-topic. Of course, we need to make sure this is framed. There is adoption here or there happening like in gaming in general, you can never really stop someone to tinker with it. But it's really important that we have a clear frame, and it's very important that this does not replace any parts of the creativity coming up in our games. And that's something that, to me, I'm going to be fearless about. Aapo Kilpinen: Thank you, JC, very clear. Excellent. Thank you so much for the questions. Excellent questions once again. If there are any additional questions you didn't have the chance to present, feel free to send those over to the e-mail address now visible on the screen. We'll be back next time with our half year financial report that will be on August 11. But until then, bye-bye from us.
Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Westlake Corporation First Quarter 2026 Earnings Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded today, May 5, 2026. I would like to turn over the call to today's host, Jeff Holy, Westlake's Vice President and Chief Accounting Officer. Sir, you may begin. Jeff Holy: Thank you, Crystal. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our first quarter 2026 results. I'm joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our 2 reporting segments: Performance and Essential Materials, which we refer to as PEM or Materials; and Housing and Infrastructure Products, which we refer to as HIP or Products. Today's conference call will begin with Jean-Marc, who will open with a few comments regarding Westlake's first quarter performance. Steve will then discuss our financial and operating results, after which Jean-Marc will add a few concluding comments, and we will open the call up to questions. During the first quarter of 2026, we agreed to pay $67 million to settle certain legal claims in our pipe and fittings business. We also incurred expenses of $18 million related to the shutdown of facilities undertaken last year. We refer to these expense items, which in aggregate were $85 million as the identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call all exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31, 2025, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our first quarter results. This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today's call will be available beginning today, approximately 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, May 5, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com. Now I would like to turn the call over to Jean-Marc Hilson. Jean-Marc? Jean-Marc Gilson: Thank you, Jeff, and good morning, everyone. We appreciate you joining us to discuss our first quarter 2026 results. During the first quarter, we delivered $2.7 billion in net sales and EBITDA of $235 million by supporting our customers' supply needs, managing our costs, executing our 3-pillar profitability improvement plan and driving long-term value creation. While the first 2 months of the quarter saw PEM sales reflect lower sales prices and continued soft global industrial and manufacturing activity, Sales improved significantly in March as the conflict in the Middle East brought about a significant disruption to global supplies of oil, chemical feedstocks and polymers from the Persian gas. Commercial conditions for Westlake and our industry changed dramatically with the outbreak of the Middle East conflict. Industry consultants estimate that this conflict has disrupted approximately 10% to 15% of global polyethylene supply and approximately 5% of global PVC resin supply. Furthermore, up to 20% of global oil supply is disrupted, which has reduced the availability of chemical feedstocks such as NAFTA for much of the global chemical industry. creating further declines in the global supply of polyethylene and PVC. The associated sharp increase in global oil and chemical fixed stock prices has significantly steepened the global cost curve for many of the material that PAM cells, which is supporting higher selling prices and margins for cost-advantaged producers in North America, such as Westlake. In response to the reduction in global chemical and polymer production created by the Middle East conflict and significantly higher feedstock cost in much of Asia and Europe, customers around the world thought supply from producers and affected by the production disruptions caused by the conflict, which drove increased demand for our polyethylene, PVC and epoxy resin and increased prices for our products. Our advantaged asset footprint in North America using gas-based feedstocks positions Westlake to benefit from the pricing momentum and expected associated margin expansion since the contract began. The evolving situation in the Middle East drove a significant improvement in PEM sales volume and earnings towards the end of the first quarter. PEM delivered net sales of $1.7 billion and EBITDA of $36 million and 3% sequential volume growth, excluding the impact to volumes from our 2025 plant shutdowns. While the conflict in the Middle East remains fluid, and we hope for a peaceful resolution, we expect the supply disruptions could persist throughout 2026. Turning to our hip segment. Sales volume and EBITDA were impacted by the unusually cold weather conditions in the first 2 months of the quarter. However, performance improved in March as the homebuilding season began along with the onset of milder weather. Excluding the impact of the SCI acquisition, HIP delivered 10% sequential sales volume growth, which drove net sales of $1 billion and EBITDA of $186 million. Hip sales and EBITDA in the first quarter were driven by continued solid infrastructure-related growth and seasonally stronger residential housing demand. as compared to the fourth quarter of 2025. In addition to the intra quarter earnings improvement from supply disruption in the Middle East and weather normalization, our first quarter results benefited from our 3-pillar profitability improvement plan, including delivering approximately $150 million of EBITDA uplift from footprint optimization and cost savings actions. While we still have some work to do to get our plant reliability, all the way to where I would like it, I'm pleased with the progress that we have made to date and the trajectory of our reliability initiatives. Overall, we remain confident that our 3-pillar profitability improvement plan will deliver. the targeted $600 million EBITDA uplift in 2026. Before I turn the call over to Steve, I want to provide some thoughts on our CFO transition. As you may have read on April 20, we announced that on June 15, John Baksht will join Westlake Corporation and Westlake Partners LP as Senior Vice President and Chief Financial Officer. John brings experience from the oil and gas, packaging and building products industries as well as investment banking to Westlake, and we look forward to him joining the company. On June 15, Steve Bender will transition to the role of special adviser and will continue to report to me as it supports the transition. We anticipate that Steve will participate in the second quarter earnings call in August. And with that, I would now like to turn our call over to Steve to provide more detail on our financial results for the first quarter of 2026. Steve? M. Bender: Thank you. Thank you very much, Jean-Marc, and good morning, everyone. In the first quarter of 2026, Westlake reported sales of $2.7 billion and a net loss of $100 million or $0.77 per share. which compares to a net loss of $33 million in the first quarter of 2025. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. The decisive actions we took last year to improve our profitability begin to meaningfully deliver results in the first quarter of 2026. Our footprint optimization actions significantly reduced PEMs fixed cost and returned our Epoxy business to profitability for the first time since 2023. As a reminder, prior to these actions, the Epoxy business was generating EBITDA losses of more than $100 million annually. In addition, we achieved substantial structural cost savings in the first quarter while also taking action to improve plant reliability. Taken together, our 3-pillared profitability improvement plan benefited first quarter earnings by approximately $150 million. That said, we did face several headwinds during the first quarter, most of which we view as transitory. Despite a favorable mix shift away from export volumes, our average PVC resin sales price declined sequentially from the fourth quarter of 2025 due to price resets that occurred late in 2025. In addition, North American natural gas prices spiked in January and remained elevated through February as a result of unusually cold weather across much of the United States, creating an approximately $45 million EBITDA headwind for PIM compared to the first quarter of 2025. That same weather also delayed the start of the homebuilding season contributing to a year-over-year sales volume decline in our hip business. Moving to the specifics of our segment performance. HIP did see the effect of solar start to a homebuilding season with net sales in our housing and Infrastructure Products segment of $1 billion, which were in line with the first quarter of 2025 as the January acquisition of ACI offset a 2% decline in average sales price and a 2% decline in sales volume, excluding the acquisition. Pipe and fittings continue to see strong sales volume driven by the infrastructure sector that was more than offset by declines in our exterior building products businesses and global compounds. HIP EBITDA of $186 million decreased $17 million from the first quarter of 2025 due to a slight decline in EBITDA margin largely due to lower average sales prices. When compared to the fourth quarter of 2025, HIP segment sales of $1 billion rose 10% by a 15% sequential increase in sales volume, including the ACI acquisition. that more than offset a 5% decrease in average sales prices. The sequential sales volume growth was driven by seasonal higher demand for exterior building products and solid growth in global compounds. Housing product sales of $788 million in the first quarter increased $21 million due to seasonal sales volume growth, particularly for Siding and Trim and roofing. Infrastructure products sales of $205 million in the first quarter of 2026, increased $71 million from the fourth quarter of 2025, primarily due to solid growth in global compounds, and the ACI acquisition. Moving to our PIMS segment. First quarter EBITDA of $36 million decreased by $9 million from the fourth quarter of 2025, largely as a result of a 34% higher natural gas price due to the impact of cold weather early in the quarter. Compared to the fourth quarter of 2025, PIM average sales price increased 3%, reflecting improved price realization for olefins, polyethylene, caustic soda toward the end of the quarter, while sales volumes increased 3%, excluding volumes associated with the 2025 plant shutdowns, while higher North American natural gas costs impacted the early months of the first quarter, by the end of March, natural gas prices declined to their lowest levels since 2024, where they remained during April. As a result, we don't expect the transitory impact to PIMS first quarter sales -- first quarter margins from higher natural gas prices to impact second quarter earnings. For the first quarter of 2026, our utilization of the FIFO method of accounting resulted in a favorable pretax impact of $37 million compared to what earnings would have been reported on the LIFO method. This is only an estimate and has not been audited. Now turning to the balance sheet and cash flow statements. We continue to maintain financial flexibility with a strong balance sheet as well as our long-standing commitment to a solid investment-grade credit rating. As of March 31, 2026, cash and investments were $2.5 billion and total debt was $5.6 billion with a staggered long-term fixed rate debt maturity schedule. In April, we provided a notice to call the remaining $500 million of debt in the second quarter of 2026 that otherwise was scheduled to mature later this year. For the first quarter of 2026, net cash used for operating activities of $94 million includes approximately $50 million of cash outlays associated with the footprint optimization actions that we announced in 2025. Our strong balance sheet provides us the financial flexibility to invest in growth initiatives such as ACI, and we have entered into a nonbinding letter of intent to acquire a PVC and VCM plant in Billman Germany. This facility, which is located on the North Sea Coast benefits from its advantageous logistical infrastructure. We remain focused on pursuing additional opportunities to strategically deploy our balance sheet in order to create long-term value. Now let me provide guidance for your models. Given the slower-than-expected start to the homebuilding season and the significant increases in transportation and raw material costs, particularly for PVC resin. We now expect 2026 revenue and EBITDA margin are HIP segment to be towards the lower end of our previously communicated range of $4.4 billion to $4.6 billion of revenue with EBITDA margin between 19% and 21%, excluding identified items. While we expect to pass these cost increases through the timing of changes in cost and sales prices could create a headwind in the near term. Expected 2026 total capital expenditures for the company are still expected to be $900 million, which is approximately $100 million lower than last year and in line with our annual depreciation. We continue to expect cash interest expense to be approximately $215 million. Now with that, I'll turn the call over to Jean-Marc to provide a current outlook for the business. Jean-Marc? Jean-Marc Gilson: Thank you, Steve. The impact of the conflict in the Middle East and global feedstock and energy cost serves as a powerful reminder of 1 of Westlake's foundational strength. Our globally advantaged feedstock and energy position in North America, where approximately 85% of our products are manufactured. The strategic value of our North American production capacity and globally advantaged cost position has arguably never been greater. In addition, the combination of investments, major turnarounds and restructuring actions that we made are now positioning us to benefit from more reliable production to capture the current upturn in PAM profitability and better serve our customers. While the commercial environment for PEM has improved significantly since our last earnings call in February, we remain laser-focused on achieving the full benefits from our profitability improvement plan. We are pleased with the progress that we have made to date, improving our profitability, but we recognize that we must remain disciplined with respect to cost in an increasingly inflationary environment. Turning to our outlook for sales volume and pricing. We have a constructive view on near-term trends. As I discussed earlier, global supply chain disruptions and elevated global energy prices are driving meaningful price increases for polyethylene, PVC resin and other products in our PEM segment. Concurrently, supply concerns are prompting global customers to source more material from North America in response to the conflict, which is supporting higher PAM sales volume and improved plant operating rates. Shifting to HIP, mortgage rates and increased building costs could place additional pressure on housing affordability. While it is too early to fully assess how this dynamic will impact HIPs building product sales volume, forward-looking indicators such as single-family housing permits and start add to the uncertainty. In this housing market, our Building Products business continues to benefit from a diversified product offering and broad national distribution. which provides builders with the products they need, when and where they need them. In Global compounds, we are pleased with the performance of the recently acquired ACI business. which has strengthened our position in the fast-growing high-voltage wire and cable market. This market is seeing significant demand growth driven by electric vehicles and data centers. Meanwhile, HIPs pipe and fittings business continues to deliver double-digit sales volume growth, supported by sustained strength in infrastructure spending. Beyond traditional municipal infrastructure demand, we are seeing increasing contribution to sales volume growth, driven by cooling what a need from the data center build-out underway across North America. We expect this trend to continue through the rest of the year as an offset to uncertainty in the North American new residential construction market. On the cost front, we are aggressively working to pass through the increases in costs being driven by Middle East supply disruption and elevated fuel prices. Longer term, continued infrastructure investment combined with over a decade of housing and the building continues to support a compelling growth outlook for HIP. Taken together, our outlook for the company's 2026 earnings has improved meaningfully since our last earnings call. While the conflict in the Middle East could result in global supply change disruptions extending to the end of the year or beyond, we will remain focused on controlling what we can control. including delivering the full $600 million of EBITDA uplift from our 3 pillar profitability improvement plan. And we will maintain our disciplined approach to capital allocation, while preserving our investment-grade rated balance sheet. Thank you very much for listening to our first quarter earnings call. I will now turn the call back over to Jeff. Jeff? Jeff Holy: Thank you, Jean-Marc. Before we begin taking questions, I'd like to remind listeners that our earnings presentation, which provides additional clarity into our results is available on our website. and that a replay of this teleconference will be available approximately 2 hours after the call has ended. We will now take questions. Operator: [Operator Instructions] Our first question comes from the line of Patrick Cunningham from Citi. Patrick Cunningham: Can you help us unpack a little bit more the PEM results down sequentially? You had material benefits from the profitability improvement plan, PE and caustic prices were up. I guess, first, can you help size the headwind from PVC price margin declines and whether or not there was anything else going on with operating reliability or any stranded costs from some of the closures? M. Bender: Yes. Patrick. And I would say that certainly, the price resets that we saw at the end of the year were certainly impactful across the product stream. And so I would say, and particularly, the increase that we've seen in PVC resin have not been fully catching up with some of the increases that we've seen in associated costs, especially, I would note the elevated natural gas cost that we saw in January and February. So while we've seen price increases in polyethylene epoxy and PVC, I would say certainly looking to continue to capture the value that we think that PVC represents and we certainly have not had the chance to fully recognize that throughout the entire quarter. But I would say that we've seen improved reliability and operability of the business. And so I'm improved. We're not to where we'd like to be at this stage, but we're making good progress as we move forward. Patrick Cunningham: Understood. And then just on the underlying outlook for the hip business, what are your expectations for pure price this year given some of the higher-priced PVC you're going to be pulling through -- have you gone out with additional pricing ahead of the construction season? And is any of that baked into your outlook? M. Bender: Yes. So good question. We have announced price increases to not only offset the increase in PVC resin, but also transportation costs. Certainly, fuel costs have also risen. So our price increases that we have already announced in the HIP segment have already reflected the cost that we expect to incur for PVC resin as it works its way through the manufacturing process and also to reflect elevated transportation costs driven by higher fuel prices. But nevertheless, that will take a little while, a few months, let's say, to work its way fully through each of the various material product streams. Operator: Our next question comes from the line of Bhavesh Lodaya from BMO. Bhavesh Lodaya: Just back to the PEM segment, you called out transitory impacts that happened in the first quarter. If you look at, again, the fourth quarter and the first quarter difference, there was a $150 million benefit which you saw from your actions, which did not show up -- would you say that transitory impacts are roughly equal to that $150 million. And in other words, is the base level of earnings for 2Q, is the starting point closer to, call it, like a $200 million level from which you will see additional benefits from margin improvements? M. Bender: Yes. So I guess what I would say is certainly recognizing with the elevated cost that we had in natural gas in the first quarter of a $45 million headwind was significant, but transitory. And I would say the price increase that we've seen in all of our products from be it polyethylene, PVC and Epoxy should have significant benefits as those have been announced in the first quarter, but the full effect of those really translate into real value in the second quarter. As I mentioned earlier, we've seen improved reliability as we've made progress on our 3-pillar strategy. the $150 million benefit that we achieved in the first quarter. Certainly, it was largely attributable to PEM, but not exclusively so. So we've made cost reductions, of course, that affect both segments of the business. Certainly, the optimization of our footprint certainly is directly attributable to the PEM segment. And certainly, some of the improvements we've seen in operability also are attributable to the PIM segment. But I would say we do see significant benefits accruing as a result of these price nominations and realizations that we expect in the second quarter. Bhavesh Lodaya: Got it. And then particularly on your PVC outlook, you have leveraged both from higher operating rates as well as pricing from PVC here. Could you share an outlook on these 2 metrics? How much could weights move higher in 2Q or 3Q? And what are your expectations for PVC pricing from here? M. Bender: Yes. As a result of some of the optimization actions that we took last year, we certainly have elevated the operating rates of our plants. Certainly, we had some planned maintenance at 1 of our units in the first quarter. But I would say operating rates throughout the first quarter were in the mid-80s, and we expect that as the construction season begins to start now with better weather, and I do expect that we'll see elevated demand levels for PVC and construction activities. that in the context of recognizing that housing starts have been somewhat lower than had been earlier forecast by the consultants. But we do expect that with the price initiatives that we've taken in PVC and the increase in construction and repair and modeling activities that we do expect to see improvements across only the core Vinyls chain but across the entire FM segment. Operator: Our next question comes from the line of Vincent Andrews from Morgan Stanley. Vincent Andrews: Wondering if you could just give us a little bit of direction on HIP for 2Q, just sounds like there's going to be a little bit of a lag between the higher PVC and so forth costs coming through versus your ability to price. So if you could just give us a sense on what that's going to do on the margin side. And then maybe also help us understand there was a mention about the season getting off to a slow start. So how did April go? And how does the order book look so far for the second quarter so that we can hopefully get our numbers in a good place for 2Q. M. Bender: Yes. So good question, Vincent. And I would say that the order book looks very good as we see the second quarter begin to start from a volumes perspective. But to your point, with the elevated PVC pricing we see coming through the channel and while we've announced price increases in our HIP segment to address those higher PVC resin prices as well as transportation costs, there could be a month or 2 lag between the realization of those price nominations that we've made in the market and the roll forward of PVC resin prices. So there could be some headwind in that second quarter as we see the price that we've announced in PVC in the first quarter worked their way through into the PIMS segment before they get full traction of their price announcements made in the first quarter, but them fully worked in, in the second quarter. Vincent Andrews: So is it fair to say then that we'll see the lowest margin in 2Q? And then by 4Q, you'll be high enough to get yourself back to the low end of the margin guidance for the full year. Is that the right way to think about it? M. Bender: I would say the fourth quarter seasonally is typically a slower season, but I would say that the front half of the second quarter will see the full impact of some of the lag in the back half of the second quarter, we'll see the benefit of some of the benefits of the price increase that the HIP segment have announced. I think we get the full benefit of all that in the third quarter, but the fourth quarter typically has a seasonal slowdown just because of the weather dynamics and is typically 1 of our lower margin and volume quarters. Operator: Our next question comes from the line of David Begleiter from Deutsche Bank. David Begleiter: Jean-Marc and Steve. Just on polyethylene, you got the $0.30 in April. What's your confidence level in getting some portion of all of the announced $0.20 per pound increase for me? Jean-Marc Gilson: Well, I'd say that, David, that we certainly have been able to achieve that $0.30, as you noted in April, and it's still early days in May. If you think back, the market has been able to absorb very, very significant price increases going back to the beginning of this year. And I would say it's still a little bit early days in May to call the May increase. But if you think about where the price levels are today relative to recent history going back to '21 or so, we're still below those price increases we had in 2021. And the market was able to absorb those prices in '21. So what we're looking for is to see where demand levels are. But I would say we're watching the market, but we're still pushing forward with price increases that we see that are reflective in the marketplace. David Begleiter: Very good. And just on PVC, are you increasing your export activity levels to take advantage of some of the spot opportunities we've seen in the marketplace? Jean-Marc Gilson: Yes, good question. The -- you are right. Price increase in PVC, I mean, we've seen a steady increase in PVC export prices. they kind of went to a peak a few weeks ago. They're now coming down a little bit, but still much higher than what they were last year. So you are correct. I mean we are with increased operational -- operating rates. And we are now increasing as much as we can PVC supply to take opportunities and to sell our volume in export markets where there is some good deal to be made. Operator: Our next question comes from the line of Frank Mitsch from Premium Research Eros. Frank Mitsch: Thanks Steve, let me offer you some early birthday wishes. And perhaps the second quarter starting out as a very nice birthday present for your last quarter as CFO. And again, thanks for all your help in that regard. I was wondering if you could offer some qualitative commentary with respect to the operating rates that you were able to realize in the PEM business in the first quarter and how your facilities are operating so far here in the second quarter? M. Bender: Yes. So Frank, thank you very much for those comments. I would say that in the polyethylene business, we're running full rates, as you would guess, demand levels seem to be very good. And even though we've seen significant price increases, operating rates are operating at full rates. In the PVC space, PVC rates are beginning to raise simply because we've optimize the operating rates having shuttered a number of sites last year and moved that production opportunity over to other existing sites. So operating rates in the PVC space were in the mid-80s. And I expect that to begin to kind of elevate as we work our way through into second quarter and third quarter, which is more peak wide construction season and some of our operating rates in our caustic and chlorine operations to support PVC. Frank Mitsch: Terrific. And as you think about higher pricing levels having an impact on working capital, what's your -- what are you working at capital expectations and impacts on free cash flow in 2026? M. Bender: Yes. Well, certainly, I do expect some of these higher prices, we'll see an increase in the receivables side. But when you recognize that gas and ethane remain very moderate and frankly, at pretty low levels. I do expect the second quarter to generate free cash flow as a result. Operator: Our next question comes from the line of Josh Spector from UBS. Joshua Spector: Two things I want to just clarify here is first, just on the cost savings points. I think the $150 million you're characterizing that as year-over-year -- can you talk about what that is sequentially? And does that build sequentially? Or are we at the full run rate today? M. Bender: Yes. That $150 million is a year-over-year result. And certainly, when we think about the contribution that we've seen, they're coming from all 3 of those respective pillars. So if you recall, we generated a significant amount of savings in the fourth quarter. So the $150 million full year result is well over $100 million above and beyond what we generated in the fourth quarter. Joshua Spector: Okay. But does that sequentially improve then into 2Q? Or are we just saying $150 million times 4, that's the $600 million that you're at -- and I did want to ask a follow-up just related with the pricing side on PVC. I mean, considering we're talking about pretty decent lags in pricing, I assume now in early May, you have a pretty good idea of the PVC price you're going to realize in 2Q. Can you give us some guidance about what that increase would be since there seems to be a pretty stark disconnect with some of the indexes that we're watching. M. Bender: Yes. Back to your earlier portion of your question on the cost savings initiatives in our 3 forward strategy, we do expect that we'll be able to achieve a relative portion over the course of the remaining 3 quarters of the year and fully achieve that $600 million savings. As it relates to the pricing initiatives, you're right, we announced a series of price increases, both in PVC as well as in polyethylene. And as I say, we expect that those will be very impactful in the second quarter. So in the first quarter, we achieved in PVC, a total of $0.01 in January, $0.02 in February, $0.03 in March. We've announced and achieved $0.05 in April, and we have $0.04 nominated out from May, still looking to achieve the full $0.10 that we had earlier nominated, $0.05 achieved in April and $0.04 right now, but looking with customers to achieve that full $0.10 that we announced earlier in the month of March for April and May. Operator: Our next question comes from the line of John Roberts from Mizuho. John Ezekiel Roberts: Are you seeing any shift in the destinations for U.S. export caustic and export vinyls? And do you think the pushback in pricing that you're seeing is some demand destruction going on? M. Bender: I'd say that what we've seen, John, is actually reasonably good demand levels for caustic just to remind you, we announced 2 price increases, 1 in December last year. 1 in January of this year, totaling $140 million -- $140. And so I'd say that to date, I'd say we've achieved the greater portion of that first announcement that we announced in December. And the indices that we track seem to indicate we'll get a greater -- a pretty good portion of that second price increase. So I'd say that demand continues to be reasonably good at this stage of the quarter. And as I say, demand fundamentally is stable. And I would say, ramping up. From a destination perspective, as you would imagine, logistics have been jocking around as a result of the conflict in the Gulf and many of our customers are being well served, but I can't speak specifically to all those individual customers. Operator: Our next question comes from the line of Kevin McCarthy from Vertical Research Partners. Kevin McCarthy: Can you elaborate on your letter of intent to acquire Vyova's vinyls plant in Germany? Maybe you could just talk a little bit about potential cost timing and the fit with your existing assets, including the legacy Vinnolit assets? M. Bender: Yes. Well, good question, Kevin. And we've entered into this nonbinding letter intent with the insolvency administrator in Germany, and we think it fits very well potentially. As I say, it's still nonbinding and so subject to a lot of contingencies, of course. But it does have access to a deep sea dock, which allows us access to low-cost potential feedstocks, which could be a significant advantage in servicing the European markets. In terms of talking about value, it's still preliminary at this stage, and so it's too early to get into evaluation at this stage. Kevin McCarthy: Understood. Then as a second question, was your PEM segment EBIT positive in the month of March. I wouldn't normally ask you about monthly trends, but I imagine March was night and day versus the prior month. So perhaps you can give us some sense for the exit velocity of earnings, so to speak, as you move through the quarter? M. Bender: Yes. It was, as you would guess, very positive. And given the pricing initiatives that we've got out in Epoxy, PVC and polyethylene, I expect the improvements to continue to be quite strong as we enter into the second quarter. with, again, the ability to recognize and realize those price announcements that we announced during the first quarter. Operator: Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Arun Viswanathan: I guess I wanted to try and maybe have a rough idea on if you could help us frame out Q2. So it looks like you'll get maybe some incremental extra cost reductions if you're expecting maybe $600 million for the year. I'm not sure if that actually does go up in Q2. Would it be kind of $20 million or $30 million higher in Q2 versus Q1? And then secondly, the PE, I think you have 2.5 billion pounds of capacity. So can we just apply that on the $0.30 for maybe $150 million to $200 million uplift there. And then PVC also on your [ 5.5 ] billion pounds, I'm getting maybe like a $75 million uplift. So HIP, I think, would be down maybe on higher costs as you flow through those items and that maybe cancel out the PVC increase. So maybe we're up sequentially on the order of $200 million to $300 million. Is that -- am I somewhere in the ballpark? Or how should we think about framing out the difference between Q1 and Q2? M. Bender: Yes. I think directionally, as you think about the price combinations and the volumes of production that we have and the demand levels that we're seeing that directionally, you're in the -- you're moving directionally in the right direction. I would say that the headwind we do expect with hip to be reflective of some of the higher PVC pricing moving through in the first portion of the second quarter. But I do think we'll get price realization in the back half of that second quarter as we've already made those announcements to deal with resin costs and transportation costs. But recognizing that we've got a number of price announcements, including PVC, polyethylene and epoxy, we should see significant traction in the second quarter. And so I think directionally, the way you're thinking about it is correct. Arun Viswanathan: Okay. And then if I could just ask, as you look into the second half, what is the durability of this pricing? Have you seen any larger-scale closures -- do you expect any -- maybe -- the chlorine chain was not necessarily impacted as much because of coal-based production in China. So -- do you expect conditions to kind of revert back to normal shortly after the straight reopens? Or what's kind of the outlook in the chlor alkali space with regards to some of these constraints? Was it just not affected as much. M. Bender: Yes, you can see from our comments that we expect the impact of this conflict in the Gulf that could persist all the way through the end of the year. And so it's unclear exactly what kind of price direction we may see as the conflict takes whatever path it chooses to take, but I would say that the PVC core vinyls chain was lesser impacted by this conflict than the polyolefins chain has been. And so we do expect to see some meaningful improvement in those chains that have been more directly impacted. Jean-Marc Gilson: Yes. I mean 1 additional thing is if you look into the chloralkali and specifically on the PVC side, and as you remember, the price was pretty much set by China last year. And it continues to be so, but in a different way, about 25% to 30% of the Chinese capacity as far as PVC is concerned, it's coming from using naphtha and the rest is a carbide base. So all the naphtha are uncompetitive now and have really reduced production level. The carbide side, on the other hand, has increased operating rates and that has put another now ceiling in terms of price increase. So that's why you saw a price ramp up very fast in China and then a little bit of a decline since probably early April, but it's stabilizing at a higher level than where it was last year, and we've seen stabilization around $900 -- $850, $900 per metric ton. So overall, we think that the price for PVC export will stay elevated. It could come down gradually over the year, but it's going to stay elevated for an extended period of time. Operator: Our next question comes from the line of Peter Osterland from Truist Securities. Peter Osterland: First, just wanted to ask on HIP. You highlighted data centers as a growth driver for pipe and fittings. Can you quantify the revenue contribution or the backlog growth that's tied to the data center market? And how does the margin profile for sales into this market compared to HIP overall? M. Bender: Yes, it's a good question. I would say in the first half, sales and orders in the first half represent mid-teens percent of our volume. and it's a growing market, as you know well. So we expect it to continue to be a nice contribution to the infrastructure side of our pipe infinians businesses. But I'd say -- as I say, the first half, both orders and the order book and sales for the first half of the year, it's mid-teens and growing. So we expect it to be a continued contribution to the pipe and fittings piece of HIP. Peter Osterland: Great. And then just as a follow-up, on the $67 million PVC pipe settlement, does this settlement resolve the entirety of your exposure to litigation related to this? Or is there a potential for any further onetime charges? M. Bender: Yes. This is tied really to the direct purchasers component of the litigation. And so there are 2 other categories of claimants that we're in conversation with. So we've got a reserve of $10 million for that second category, but there are further obviously, discussions to be had. Operator: Our next question comes from the line of Duffy Fisher from Goldman Sachs. Patrick Fischer: I was wondering, can you help me -- I'm having a hard time triangulating your hip numbers on revenue? So if you assume that PVC prices are up, you talked at least $0.10, so that's like a third and you said that you're going to get priced by the back half to offset that. So that would be pretty significant price increases rolling through HIP, but yet you're guiding us to the low end of your revenue guide, which would mean that volume must be down significantly in the double digits versus what you expected. So can you just kind of tie those together, the inflation rolling through into hip, the price that you're going to get and then how that changed your revenue outlook vis-a-vis volume? M. Bender: Yes. And Duffy, good question. We're seeing kind of mixed signals right now in the markets. You've seen housing starts, the latest report show that housing starts at 1.5 million housing starts, which is meaningfully higher, but I would say permits were only 1.3%, which is trending lower. So you see mixed signals right now in the marketplace. And as we start in robustness now, the construction season now that we're in May going forward. We're just being cautious in terms of what housing starts are likely to be. Remember, half our businesses, housing starts, the other half is repair and remodeling, but those are smaller volumes. And so housing starts tend to be higher volumes. So we're just really being cautious about kind of volume we could see with the potential slowdown in housing starts in this year. Patrick Fischer: Great. And then just 1 housekeeping. How much cash do you have left to spend on your expense cost-cutting program from last year? M. Bender: You're talking about the 3-pillar strategy that when you say your cost-cutting initiatives. Patrick Fischer: Yes, exactly. How you spent cash this quarter that was already expensed, I believe, as I read through it. Is that fair? And is there more cash yet to be spent on that? M. Bender: There is. And so -- I would say in the neighborhood of $50 million remaining in '26. Operator: Our next question comes from the line of Hassan Amed from Alembic Global Advisors. Hassan Ahmed: Earlier in the call, you talked a little bit about PVC export opportunities opening up. So just curious to sort of find out where you're seeing those opportunities, particularly in light of a bunch of countries, be it India, the EU and the like already having antidumping duties in place. Jean-Marc Gilson: Yes. I mean we are continuing to see the -- you are correct. I mean the demand from India and the rest has decreased a little bit. But overall, the supply is also -- even though over -- I would say, probably February, March, you saw an uptick in supply from China. Since then, we've seen still a steady demand for export, and we are pretty much selling everything we can to the export market at pretty good prices right now. M. Bender: I would say we continue to support the Latin America, South American markets as well. Hassan Ahmed: Understood. And just carrying on with that. I've read some recent reports about the Chinese removing their VAT export drawback on PVC. Are you hearing similar things? And if that is true, what does that do to the cost curve? What does that do to Chinese exports going forward? Jean-Marc Gilson: You're talking about the fact that they removed and that it was sometime after a question whether they were removing it. M. Bender: Yes, they were -- we're moving it really in April. And I would say that we did see some increase in exports just in advance of the April date. But certainly, that creates even a higher hurdle for those who are exporting because those that do have a higher cost, especially those that are ethylene-based certainly have now had an additional higher hurdle. As Jon Mark noted earlier in his comments, those that are acetylene-based certainly are on a lower end of the curve and not seeing the challenges of higher cost from the naphtha they're coming through. But I would say that revision or that recision, I should say, of that VAT is certainly an additional headwind that all exporters out of China are now facing. Hassan Ahmed: And Steve, just for me to get the numbers right, I mean, is it fair to assume that, that headwind would be maybe like $75 a ton to maybe like $100 a ton somewhere in that ballpark? Jean-Marc Gilson: [indiscernible] Operator: Our next question comes from the line of Matthew Blair from TPH. Matthew Blair: Could we circle back to these higher natural gas costs in PEM in the first quarter? It looks like -- if I just look at a Gulf Coast indicator like Henry Hub, it did spec over $7 at certain points in January. But overall, it looks lower quarter-over-quarter in Q1 versus Q4 as do most other Gulf Coast indicators. I do see higher natural gas indicators in Europe quarter-over-quarter. So maybe could you just help us understand your headwinds in natural gas? Were there any derivative impacts like maybe rolling out hedges from last year or any other sort of onetime issues there? M. Bender: Yes, Matthew. No, we had -- I'm just looking at some of the indices here and you're right, gas in late January and through much of February was north of $7 we're a buyer on large well on a spot basis from a pricing perspective. And so it was really that $45 million headwind that I mentioned that drove -- was a headwind that drove an impact on results in the first quarter. But with the poll on natural gas globally given what's happening in the Persian Gulf, you really have seen gas prices come down significantly. And we're probably just in the $280 to $290 range today. there is somewhat of a contango curve on gas, but what we continue to see is that gas curve continues to get pushed out. And month-on-month, we've seen low prices persist in this just under $3 range. Matthew Blair: Sounds good. And then for the FIFO impact, I think you said it was $37 million. Do you have a split between PAM and HIP for that impact in Q1? M. Bender: Yes. That was all PIM related, but it was $37 million. Operator: Our next question comes from the line of Abigail Ebers from Wells Fargo. Abigail Eberts: I'm curious about your expectations for caustic soda later in the year. Obviously, you're expecting prices to increase near term in line with consultants. But I'm seeing in their forecast pricing coming down around October, which they're saying is due to demand destruction from ongoing inflation and elevated interest rates. I'm just curious about your volume and pricing outlook for caustic soda in the back half of the year? M. Bender: Yes. Good question. As I mentioned earlier, we've had 2 price announcements, and we've realized the great majority of that first price announcement already. I'd say demand right now is stable. And as we look forward into kind of the second and third quarters, I actually see because of that stability, a pretty stable price and the consultants do have some small price increases between May and July -- that represent about $30 a ton. But I'd say demand really looks pretty stable at this stage. Abigail Eberts: Okay. Got it. And then just a question on hip and PVC -- how do you size the weather impact on the construction -- beginning of the construction season this year, where would things be if the weather had been more cooperative, do you think? M. Bender: It's a little bit hard to say, but I would say, given the very cold weather we had in January and persisted at least through much of February, it certainly slowed down a lot of the early order intake. And as a consequence, we did not get the full benefit of that in the first quarter. And so certainly, we'll wait and see kind of how the second quarter really translates as we get further into construction season now that the weather is much more milder throughout most of the country. Second quarter is usually when we see a real pickup. But I would say, as I mentioned earlier, housing start numbers that we've seen published are certainly elevated, but permits are looking more softer. And so that's really the cautiousness that we're looking as we look at our order books. Operator: Our next question comes from the line of Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: I think early in the call, you were talking about domestic PVC price increases as being $0.06 a pound for the first quarter, $0.01 than $0.02 and $0.03, but you also talked about discounts that were given -- in general, did PVC prices net of discounts rise in the first quarter? M. Bender: So I think your discount, you're referring to the price resets that took place at the end of the year, Jeff, I believe. Jeffrey Zekauskas: Yes, that's exciting. M. Bender: Yes, because certainly those -- as we think about the price domination that we had in January and February, I would say that beginning to kind of pick up traction from where we were at the end of December. And so when you think about the March increase, most of that is going to be reflected in the second quarter and not really in first quarter results. Jeffrey Zekauskas: Okay. And then if I can ask a naive question. Chinese PVC exports year-to-date, maybe they're up 45% of being up 45% for all of 2025. And there's really no PVC materially that's made in the Mid East. And so for me, why is it that PVC prices should be up at all? Does it have to do with European ethylene inflation because there doesn't seem really to be any disruption to Asian production and there's no disruption to U.S. production. And what we're seeing, of course, is we're seeing PVC prices begin to move down pretty sharply in Asia. But what's the source of the sharp move up in PVC. It's very clear what it is in polyethylene. But can you give us an idea of what pushed previously up? M. Bender: Yes. There is -- if you look into the situation in China, as I said, about 25% of the capacity is not carbide based. And so it's really sensitive to naphtha prices. So they've been hit pretty hard with the increase in naphtha prices, and they are economically, it's really impossible for them to export. And they barely at breakeven point when you look at current prices. So -- and quite a few of them have actually dramatically reduce their operating rate. If you look at the carbide, they are mostly in China, they're not really on the coast. So all the effect of transport cost increase and everything has put an increase on to the PVC prices -- you add on top of that, the duty go back removal of about 15%, and you get support for PVC price increase. And that's why right now after a spike I went over $1,000 per ton in China early on. It's stabilizing in the 850, 950 metric ton -- per metric ton when if you look back last year, PAUSE they were down to the 500, 550 million range. So that's still a significant increase. Operator: Our next question comes from the line of Matthew Deo from Bank of America. Matthew DeYoe: So if I square off the $45 million headwind from gas quarter-over-quarter for PEM and then I back out $100 million of EBITDA from the cost cuts sequentially. I don't know, maybe the PEM was down $60 million quarter-over-quarter, all else equal from like an operational perspective. Prices moved up over the quarter, but we just kind of talked through some of the PVC role discounting that was maybe unique to Westlake versus peers. But that doesn't feel like that fully explains the whole differential to me versus what your peers explained or put up in the quarter. And so is there any reason why the calendar role would have been more punitive to you in polyethylene or with some epoxy additional headwinds that maybe we're not catching -- because it still feels like there is some idiosyncratic drag that maybe wasn't so amply felt on your peers? M. Bender: I can't -- Matt, I can't -- I guess I'm struggling with your math here because we certainly have recognized the same price nominations that I think we've seen announced by Westlake throughout the quarter, both in Epoxy and in PVC and polyethylene -- maybe part of the equation is we also did planned maintenance in 1 of our sites earlier this year in the first quarter at Placement. And so that may be part of the equation that you did not have in your individual model. And so that was impactful in terms of opportunities, but it was a planned outage that we had taken. But I think when you walk through the and walk through the model or price nominations and price realizations, I think, are the same that we that we've nominated that I think many of the others have spoken to that I've read. Matthew DeYoe: Okay. And then if I look at I don't know, maybe this during 2022, right. European electricity costs are not up nearly as much, but European caustic profitability is pretty bad right now, maybe down $20 million, sorry, $200 sorry. But it's down $200 a ton. It seems like caustic rolling in Europe. Do you see an opportunity for export window on caustic to Europe to open up, maybe not a way it in 2022, but -- is that an area for kind of upside as we look through the course of the next quarter or so when this continues? And then can you modify how much of the plaque outage was now that we just mentioned that. M. Bender: Yes, I would say it's in the $20 million range. Jean-Marc Gilson: And in terms of caustic, you are correct. I mean caustic price might indicate that there is an opportunity to ship there. But when you look at the price for transport and everything, it completely offsets the spread that there is between the U.S. and Europe. So right now, there is really no good opportunities to export caustic to Europe. Operator: Thank you. This ends our question-and-answer session. Let me turn it over to Jeff Holy for closing remarks. Jeff Holy: Thank you. Thanks for participating in today's call. We hope you'll join us again for our next conference call to discuss our second quarter results. Operator: Thank you for participating in today's Westlake Corporation First Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed by Westlake website. Goodbye.
Operator: Welcome to the MPC First Quarter 2026 Earnings Call. My name is Julie, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Kazarian. Kristina, you may begin. Kristina Kazarian: Welcome to Marathon Petroleum Corporation's First Quarter 2026 Earnings Conference Call. The slides that accompany this call can be found on our website at marathonpetroleum.com under the Investor tab. Joining me on the call today are Maryann Mannen, CEO; Maria Khoury, CFO; and other members of the executive team. We invite you to read the safe harbor statements on Slide 2. We will be making forward-looking statements today. Actual results may differ. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. With that, I will turn the call over to Maryann. Maryann Mannen: Good morning. Our first quarter results demonstrated the impact of our strategy, the capability of our integrated system. Operationally, we delivered. Our refineries ran at 89% utilization with nearly 100% capture. This was our strongest first quarter on process safety as well as our lowest level of unplanned downtime this decade, all while completing approximately 40% of our full year planned maintenance activity. Given the constructive macro backdrop for the remainder of 2026, we proactively made decisions to enhance operational readiness. As a result, we are well positioned to respond to the strong level of demand we are seeing across the system. Late in the first quarter, geopolitical events tightened global markets, disrupted trade flows, and drove global cracks higher. While estimates vary, we believe approximately 6 million barrels per day, representing close to 6% of global refined products capacity has come offline during the conflict in the Middle East. And the time line for return of supply remains dependent on the extent of any damage to facilities and resumption of crude flows to those refineries. Against that backdrop, domestic demand for gasoline, diesel and jet fuel remained strong with exports providing incremental upside. We are largely insulated from global crude supply disruptions given our crude sourcing comes mainly from the United States and Canada. Combined with the depth and sophistication of our highly integrated value chains, we are well positioned to optimize through volatility. This market environment underscores the strength of our refining system, and it showed in our financial results this quarter. We invested nearly $330 million in our Refining and Marketing business this quarter with near-term projects focused on increasing jet optionality. High expected returns, clear line of sight and disciplined deployment, we are directing capital towards advantage assets with visible demand pool and a clearly defined path to monetization. Approximately 25% of our 2026 refining value-enhancing capital is directed to our Garyville refinery. In March, we brought more than 30,000 barrels per day of incremental jet production capacity online at our Garyville refinery. This investment strengthens one of the most competitive refining assets in the world and positions us to meet growing global jet demand. As we move into the second quarter, our El Paso yield improvement investment is expected to enhance the refinery's ability to produce specialty gasolines for the El Paso, Phoenix and Mexico markets, reinforcing its geographic advantage and its competitive position. Our Robinson Jet flexibility investment is expected to come online in the third quarter, enabling approximately 10,000 barrels per day of incremental jet fuel production and helping to address growing regional demand. Taken together, these investments strengthen our competitive position and support our commitment to peer-leading profitability across the regions where we operate. Over the past 2 years, we have meaningfully expanded our international LPG trading footprint, executing delivered business across Europe, Latin America and Asia. Building on that momentum, through an agreement with our South Korean customer, E1, we have secured long-term delivered demand for up to 40% of the volumes MPC will purchase from MPLX's new Gulf Coast fractionation facilities, which are adjacent to MPC's Galveston Bay refinery. Construction of MPLX fractionators as well as the JV export facility progress on time and on budget and are expected to enter service in 2028 and 2029. 2026 is a year of both execution and growth for MPLX. The business is investing over $2.4 billion with multiple investments anticipated to transition from construction to cash generation in the second half of the year. Approximately 90% of that growth capital is focused on natural gas and NGL opportunities. Against a backdrop of ongoing geopolitical uncertainty, global demand for secure and reliable energy continues to grow with international customers increasingly turning to the United States as a preferred supplier. U.S. natural gas and NGLs offer a compelling combination of supply abundance and demand visibility driven by LNG exports, power generation and industrial growth, supporting disciplined infrastructure investment. In the Permian, Secretariat I processing plant has entered service and is expected to ramp steadily over the next 9 to 12 months, increasing regional system processing capacity to 1.4 billion cubic feet per day. Building on that progress, MPLX's sour gas trading expansion, Titan remains firmly on schedule with expectations to exit 2026 with more than 400 million cubic feet per day of treating capacity. In the Northeast, Harmon Creek III remains on track for startup in the third quarter bringing regional system processing capacity to 8.1 billion cubic feet per day. Collectively, these investments provide a clear path to distribution growth, strengthen cash flow durability for MPC and demonstrate our leadership in capital returns. In the first quarter, we returned over $1 billion to shareholders. And today, we announced an additional $5 billion share repurchase authorization, reinforcing our commitment to delivering industry-leading returns through cycle. We will execute safely, invest strategically and generate significant cash, all at the same time. With that, I'll turn it over to Maria to walk through our financial performance. Maria Khoury: Thank you, Maryann. Our first quarter highlights reflect execution and discipline across the business. We delivered adjusted earnings per share of $1.65 and adjusted EBITDA of $2.8 billion. Refining & Marketing segment, adjusted EBITDA per barrel was $5.37. Cash flow from operations, excluding working capital changes, was $1.7 billion. And consistent with our capital allocation framework will return over $1 billion to shareholders, inclusive of $750 million of share repurchases. Overall, our first quarter illustrated the strength of our financial position and our ability to manage through market dislocations and honor our commitment to shareholder returns with a payout ratio of 62%. The next slide shows the year-over-year change in adjusted EBITDA from first quarter 2025 to first quarter 2026. It then connects EBITDA to net income providing clarity on key items, including depreciation and amortization, interest and taxes. Adjusted EBITDA was higher year-over-year by nearly $800 million, primarily driven by our Refining and Marketing segment. Refining turnaround costs totaled $530 million in the first quarter. We safely completed roughly 40% of our full year activity. Our full year outlook remains unchanged at $1.35 billion. Our earnings power continues to translate from operational performance into financial results, and we remain focused on what we can control through operations excellence and commercial execution. Moving to our segment results, slide 7 provides an overview of our Refining & Marketing segment, where R&M first quarter adjusted EBITDA was approximately $1.4 billion. We capitalized on a strong refining margin environment while safely executing planned maintenance. Our refineries ran at 89% utilization with total throughput of nearly 3 million barrels per day. Regionally, our utilization was 89% in the Gulf Coast, 88% in the Mid-Con, 92% in the West Coast region. Strong domestic and international demand drove increased Gulf Coast margins, resulting in an incremental $596 million of adjusted EBITDA. In the Mid-Con, increased margins were offset by lower volumes as well as costs that occurred during our planned maintenance activity, resulting in an adjusted EBITDA decline year-over-year. On the West Coast, we delivered an incremental $460 million of adjusted EBITDA as we capitalize on a strong market environment and had minimal plant turnaround activity. This quarter, our Los Angeles refinery run with the benefit of the completed investments on utility systems, improving reliability and efficiency. These improvements are expected to strengthen the sustainability of our refinery position is to be one of the most competitive players in the region. In an environment where market conditions can shift quickly a strong planning and tight operational control matters, and our teams deliver. Importantly, we are not just optimizing for the quarter. We're focused on sustaining performance through reliability, discipline spending and continuous improvement across our refineries. That's how we protect margins and position the business to perform across cycles. Turning to Slide 8. First quarter capture was 99%. Executing on our commercial strategy and integrated logistics gives us the ability to respond dynamically adjusting geos, optimizing feedstocks and placing products into the highest value markets. Favorable distillate margins were a key tailwind to capture performance. We maximize diesel and jet production to align with the market demand. As Maryann mentioned, our jet production capabilities will further expand with the Robinson Jet flexibility investment expected to come online in the third quarter. was also impacted by market-driven headwinds, primarily secondary products and derivatives used to manage price volatility. Our flexibility is a meaningful advantage, and we remain confident in the durability of the remaining -- the Refining & Marketing segment. Slide 9 shows our Midstream segment performance for the quarter. Segment adjusted EBITDA decreased $122 million compared to the first quarter of 2025. The decrease was primarily driven by derivative losses, the absence of a nonrecurring benefit in the first quarter of 2025 and the divestiture of non-core gathering and processing assets. MPLX continues to execute its value chain growth strategy and remains a source of durable cash flow for NPC. Now moving to our renewable diesel segment performance for the quarter on Slide 10. Results were uplifted by a stronger margin environment and recognition of clean fuel production tax credits from 45 regulatory guidance. As planned, we completed a successful turnaround at Martinez. We will continue to optimize our renewable facilities, leveraging logistics and pretreatment capabilities. Slide 11 presents the elements of change in our consolidated cash position for the first quarter, underscoring the contributions from both refining and midstream and reinforcing the strength of our business model. Operating cash flow excluding changes in working capital, was $1.7 billion. Working capital was at $573 million use of cash for the quarter, primarily driven by inventory build lower throughput partially offset by higher crude pricing. During the quarter, we returned over $1 billion of capital to shareholders, executing our capital allocation priorities. At the end of the quarter, MPC had roughly $2.2 billion of consolidated cash, including MPC's cash of $645 million and MPLX cash of over $1.5 billion. In this dynamic environment, we continue to generate substantial cash that supports reinvestment in the business and returns to shareholders, central to how we create value over the long term. Now turning to guidance on Slide 12. We provide our second quarter outlook for the Refining & Marketing segment. Our focus is to execute growing safely and reliably, managing costs, staying responsive to market conditions. With that, let me pass it back to Maryann. Maryann Mannen: Thank you, Maria. Safety and reliability are foundational to everything we do. They are ingrained in our decision-making and underpin the performance of our assets across the system. We are constructive on the outlook for U.S. refining and midstream. Structural advantages continue to support strong fundamentals and durable returns. We strive for excellence every day by leveraging our planning, commercial and operational capabilities to optimize our fully integrated value chains. This approach allows us to remain competitive, resilient through cycles and positioned to deliver peer-leading profitability in each region where we operate. A key differentiator for us is MPLX, which continues to enhance MPC's value creation opportunities. MPLX's advantage natural gas and NGL footprint combined with disciplined growth, strengthens our through-cycle cash flow profile and reinforces the integrated strength of our enterprise. MPLX expects to deliver 12.5% distribution growth for the next 2 years, underpinned by mid-single-digit adjusted EBITDA growth. This performance provides growing cash flow uplift to MPC and further supports our ability to deliver industry-leading capital returns. Confidence in the durability of our cash generation profile is reflected in our actions. In addition to returning significant capital this quarter, we announced an incremental $5 billion share repurchase authorization, reinforcing our commitment to lead the industry and capital returns through cycle. I'm confident in our ability to deliver improving results through our planning, commercial and operational capabilities. With that, I'll turn the call back to Kristina. Kristina Kazarian: Thanks, Maryann. As we open the call for your questions, as a courtesy to all participants, we ask that you limit yourself to one question and a follow-up. If time permits, we will reprompt for additional questions. We'll now open the questions. Operator? . Operator: [Operator Instructions] Our first question comes from Neil Mehta with Goldman Sachs. Neil Mehta: I just want to start off on Slide 12, the second quarter outlook. And Maryann, the utilization guide looked very good here at 94%, but maybe you can unpack the numbers a little bit more, give a sense of your plans for each of the regions. And to the extent uptime is surprising to the upside here, anything underneath the hood that would give us some sense of -- give us more confidence and reliability. Maryann Mannen: Yes. Thank you, Neil. So for our second quarter guidance, you're right. As you can see, we are planning for utilization at about 94% that comes off of a really strong turnaround in the first quarter. I mentioned in my comments that we pulled forward some of our turnarounds so that we've actually completed roughly 40% in the first quarter. And we did that because, obviously, we had a good view on what we saw the macro to be. And I'm sure we'll talk more about that here going forward. We didn't change scope. This is not a reduction of scope at all. This was just our intent to bring that cost forward so that we are prepared as we are running strong in the second quarter, given the demand that we're seeing. Also, you hear me talk about planning and commercial execution as well. We have been, as you know, for a long period of time, really leaning in on our commercial performance. The team is really optimizing on ensuring that we're expanding the crack in the quarter. And then more importantly, that we are developing sustainable changes through our organizational effectiveness through our technology use and the commercial planning opportunities that we have as well, trading also. And you'll see that come through. If you look at the quarterly performance first quarter, our capture would have exceeded 100%. And had it not been for as Maria mentioned in her comments, the timing impact of derivatives, all expected to unwind as we think about through the second quarter as that physical comes. And then frankly, given the volatility in the market from the commodity, we had headwinds coming on the secondary. So -- and then from a regional perspective, you see planning around our U.S. Gulf Coast clearly, export opportunities there continue to be strong. We can lean in on that as well. We made some changes in Garyville on expanding our jet flexibility there having yield capability around distillates and obviously having GBR running well. And then on the West Coast, obviously, when you look at the environment there, you look at our positioning, you look at the challenges being caused in the region as a result of lack of flows into the state from the Iran conflict. You can see, as you look at our regional performance that we should be able to lean in very strong there. So hopefully, that gives you a sense. We're really looking at our execution being sustainable. I mentioned in my comments that we had the lowest unplanned downtime in the first quarter along with outstanding safety and recognize Mike and the rest of the refining team there. It has been a core objective of this organization, and they truly delivered this quarter, and I think you can expect to see that sustainable through the year. Let me pause there, Neil, and see if I've got it your questions. Neil Mehta: No, you got it the question, Maryann, and that kind of brings us to the follow-up, which is what do you do with the cash. And if I think about some of the comments that you made on the last quarterly call, you said you did $4.5 billion of return of capital last year, 2025, and current market conditions, you think you could be higher this year. This first quarter, you did about $1 billion I guess the math would imply an acceleration of return of capital through the balance of the year. But any of your perspective on the cadence at the forward curve would be great. Maryann Mannen: Yes. Sure, Neil. I would say, look, we have no change to our capital allocation priorities. I mentioned we look at the strength of the MPLX growth and the distribution that it provides to MPC. This covers the $1.5 billion that we've committed to capital on the MPC side and our growing dividend. So it gives us the ability to truly lead in return of capital, you see the strength of that second quarter. My guess is your view on the long term is pretty consistent with ours. We should be able to generate cash flows as a result of this market, and we would continue to see return of capital via share buyback is -- as the vehicle to return capital to our shareholders. Operator: Our next question comes from Manav Gupta with UBS. Manav Gupta: I'm actually trying to get a little bit of handle on elevated earnings for the near term or medium term. And the two aspects I'm looking at is, one, is global refining macro, as you mentioned, a lot of capacity still offline. And eventually, even when it does come online, storage of products globally is depleted. So my hope is that cracks will be elevated for a longer period. But the other thing I also wanted to talk to you a bit about is there's a bear thesis which is floated around that as the refining crack tends to spike. There's a proportionate drop in capture. Now when I look at your 1Q results, your beat would not have been possible if March capture was not strong. So can you talk a little bit about a refining macro among the cracks? And then capturing as it capturing the higher track as it relates to your system? If you could talk a little bit about those two things. Maryann Mannen: Yes, Manav, thank you for the question. So maybe just our refining macro to begin with. So as you know, we've been saying, we've been very constructive, the refining macro for a longer period of time. When you look at demand that we see over the decade continues to be strong. When we look at supply, particularly past 2026. We think there's a true balance there. Actually, demand will ultimately outpace supply, a bit of supply coming online, as you know, some of that actually in the pet chem space. So even heading into -- before the Iran conflict, of course, we've been extremely constructive over the refining macro for the long term. then you add the impact of the Iran conflict to that. As I mentioned, obviously, estimates vary at least 6 million barrels off-line Middle East, China and then there's another 1 million Russia. I think you said it in your question to me. It will take time even if the straits were to be open rather immediately for global flows to normalize. I think this gives U.S. refineries in particularly MPC, an advantage. One, as we've mentioned, we are leaning in particularly on our export capabilities, and I'll pass it to Rick here in a moment and share a little bit more about that, we'll flex there when those economics are there, but we've been building capabilities there for a period of time. we source the majority of our crude, U.S. and Canada. So we're largely insulated. So as you can see from our guidance for the second quarter and frankly, we have confidence as we look throughout the year, we remain extremely constructive given the macro backdrop, long-term supply/demand and then most importantly, our commercial planning and operational excellence to be able to optimize in these crack environments. So let me pass it to Rick and he can give you more color. Rick Hessling: Yes. Manav, just a few comments. When we look at this unprecedented situation and scenario we're in, you're seeing extreme volatility. And I really want to make that point because that leads to incredible capture generation if and when we execute, and I think you're going to -- you've seen here in 1Q and you'll see going forward, our team is extremely energized in this environment and our ability to expand the crack was quite evident. And I think you'll continue to see that going forward. So just a few examples to give you and things I want to leave you with mainly by products. So if I start with crude, think of the theme on crude that we are utilizing our inland connectivity to buy advantaged barrels versus high-priced waterborne barrels that are being bid up throughout the world. So those who have access to inland barrels are the big winner in these events, such as the one we're in. We more than doubled our U.S. Gulf Coast Canadian volumes in response to the rising premiums on the U.S. Gulf Coast that we've seen. And April actually is going to be a record volume of Canadian volumes for us system-wide. We've never hit volumes like we've seen now. And as you know, the differentials are quite attractive. So it's a double win for us. But then as you maybe move a little bit more into the heartland of where we're at, we've increased Bakken volumes in the Mid-Con and we're actually taking Bakken to the Pacific Northwest, which is backing out higher-cost waterborne barrels. And then even a little closer home here to Finley, Ohio, when you look at what's in our backyard with the Utica Marcellus, we are blessed to have condensate right in our backyard, and we are running record amounts of local crudes at Canton and Catlettsburg. In addition, Manav, we purchased 5 Advantage Ven cargoes in 1Q. And the Ven cargoes are getting a lot of press. And what I would leave you with there is we would have bought more but we had better alternatives leaning into heavy Canadian. So we didn't have the need to buy any more than 5 cargoes of vents crude. But I will say the Vans crude being on the market, Manav, is quite a tailwind for us because it's putting pressure on other grades. And then on the crude side, I'll leave you with, lastly, you've probably seen in print that we've purchased approximately 10 million barrels of advantaged SPR crude directly from the DOE, taking out the middleman, we're we are advantageously working with the DOE to run those barrels in 2Q. And we're hopeful we may even get some barrels to run in with the bid -- SPR bid that came out yesterday. Moving on to products. I'll leave you with really a couple of comments that are in line with what Maryann previously mentioned. We're MAX diesel, as you would guess, and Jet across our system. And boy, the Garyville project came online at the absolute perfect time for us. And it's really a classic example of our strategic capital deployment to enhance our yields and our competitiveness to create capture tailwinds. Jet was a big story for us. As you know, we're large producers of Jet, not only on the Gulf Coast, Mid-Con, but especially in L.A. Manav, where you see the ULSD to jet differentials blow out. Then when you look at the Jones Act waiver, we leaned into that in a big way as well. We took jet from the Gulf Coast to Alaska. We took alkylate from the Gulf Coast to L.A. and we had various Jones Act waiver moves around L.A. and PNW amongst many other moves. And Maryann, I guess, said and mentioned exports in her prepared remarks. So I'll touch on that a bit as well. We really were creative and made some unique movements on the export glass of trade this past quarter. We moved ULSD from LAR to Australia. First time ever we've done that. I give the team huge kudos on creativity and capturing a market opportunity, and we moved naphtha to Asia, first time we've done that. So from a jet export gas, diesel export opportunity, we continue to see strong markets, I would say, especially Manav in Europe and in Latin America. So I guess, moving forward, if I were to kind of say what should you look for in 2Q, I think the tailwinds are going to be butane blending with the RVP waivers. Certainly, the JET ULSD spreads that we're seeing. We continue to expect those to persist. As Maryann and Maria have mentioned, we are ready to run in 2Q, and we postured this quite well going into driving season. And now with the conflict remaining, we continue to be in a great spot to capture margin. And then we have incredible optionality on our crude diet with our Mid-Con avails. And then the SPR barrels will be a nice shot in the arm for us as well. And then lastly, Manav, maybe from a headwinds perspective, we're going to watch backwardation very closely. Obviously, it is extremely steep. So we're keeping a very close eye on our inventories, making sure we don't have any more than we need. But I think what you've seen, Manav, there is the prompt month keeps rolling up and rolling up. So we do expect that to continue to happen as long as the conflict persists. And then certainly, we're going to keep our eye on the secondary products market with how cracks move and how WTI and Brent moved. So hopefully, that gives you some color, Manav, maybe the more color than we had given you in the past, but I really felt like it was appropriate for me to lean into it this quarter because our commercial team really responded well. Manav Gupta: This is a very detailed response. I'll be quick with my follow-up. First, thank you for providing adjusted EBITDA per barrel by region. So if you could talk a little bit about those additional disclosures you provided. But as I understand, some part of the management compensation is also linked to these. So you're trying to be top in terms of EBITDA per barrel, but now you're taking it a step further where you want to be top -- in the top end of the range for each specific region. So can you talk a little bit about that? Maryann Mannen: Yes, of course, Manav. Thank you. So you're absolutely right. We wanted to provide incremental visibility to our regional performance. As you know, for a while, we've been saying that we continue as an objective to have as a target for us to be the most competitive in every region where we operate. And you're absolutely right. Our executive compensation, the annual cash bonus element of that. It's a portion of that, about 20% actually is focused on the delivery of being the most competitive in every region where we operate. So we think this covers cost competitiveness. So as Mike and his team are making decisions about turnaround and making decisions about OpEx, that played through in our EBITDA per barrel. Similarly, as we think about capital allocation, I mentioned, right, we need to have returns of 25% in order to put capital to work on the refining side. Projects like Robinson Jet, Garyville Jet, the DHT all of those decisions should be yielding incremental returns and improving EBITDA per barrel. So we think this gives you the visibility that you need to see the performance in each of those regions, and have the ability to assess our planning, commercial and operational excellence as it plays through in our EBITDA. I hope that helps. Operator: Our next question comes from Sam Margolin with Wells Fargo. Sam Margolin: So this might be an elaboration on the last answer, but -- your refining capital is directed to all these optimization projects and yield enhancements. And so I wonder if there's any commercial constraints that come with the yield benefits. And it doesn't sound like there are based on the last answer, but maybe just to hammer the point home. And if so, how does MPLX potentially address those in the context of -- it seems like MPLX has an imperative to invest in the gas value chain. So I guess, to sum it all up, competition for capital across logistics with the backdrop of all these yield benefits coming to the refinery level? Maryann Mannen: Yes. Thanks, Sam. So maybe two parts to my answer for you. Let me focus first on MPLX. You're absolutely correct. Our capital program is targeted as you well know, toward nat gas and NGL. It's roughly 90% of the spend in 2026. And had a similar allocation in 2025 as we invested in the Titan North Wind processing treatment as we are progressing our 2 fractionation and U.S. Gulf Coast export dock. So we'll continue to allocate capital that meet our strategic objectives, and optimize our ability to deliver mid-teens returns and again, continue to support our mid-single-digit growth. As we move to the refining side, our target there, as I mentioned in the past, we're looking at returns in about 25%. We want yield optimization we want cost reduction. We want to continue to focus on those assets that are delivering the best profitability over the long term. You often hear us say our asset portfolio for the short term in our asset portfolio for the long term. These projects have high hurdles. But as you can see, when we put these to work, you look at Garyville, 30,000 incremental barrels a day of Jet. And then again, we got another one coming online in Robinson. And this has flexibility as well so that if we were to see changes in the Jet pattern, we can revert back to other distillates. And we think these projects give us outstanding capabilities. So again, both of these businesses, both MPLX and MPC have very specific mandates strategic focus, financial hurdles for which they need to allocate capital. I hope that helps. Sam Margolin: Yes, it does. And then this is a follow-up within kind of this gas theme. These gas exposure is very thematic. As you know, there's end market growth across the natural gas value chain in every category. And so the question is whether would ever want to participate in those end markets and leverage MPLX's growing exposure into that vertical? Maryann Mannen: Yes, Sam, it's interesting. Let me give you some thoughts, and then I'll pass it to Rick to give you some incremental color. You hear us often talk about this concept of value chain. When you look at our refining side as a house, so to speak, right? We have a natural short, so to speak, or assets, demand, natural gas every single data to operate. And then you look at the flip side of that on MPLX and you look at our exposure, we're processing, touching, if you will, over 10% of U.S. natural gas every single day and expanding that footprint. Rick and his team have a nat gas organization now, and we're looking how to optimize that focus on the U.S. Gulf Coast project that we're talking about. As you know, we've said MPC and MPLX will have a contract, meaning MPC will take all of the product from that -- those two fractionators. And then Rick and his team then takes a marketing of that, as I mentioned in my prepared remarks, right, we just concluded a potential contract here for 40% of our demand with E1. So we see this opportunity growing. I'm going to pass it to Rick and he can give you a little more color on how we're thinking through that. Rick Hessling: Yes, Sam, I think Maryann said it very well. Think of on the R&M side, we have a massive nat gas short. And so as you know, with the substantial footprint, we have through MPLX with our pipeline commitments and the equity they have in pipelines, that is absolutely complementary to our U.S. Gulf Coast refineries, especially. So -- we look to parlay those positions into advantageous nat gas for our refineries, especially along the U.S. Gulf Coast. And then I'll just give you another little nugget. On the power side, we have several cogens across our footprint that we participate in those markets commercially. And they supply us certainly with power for our refining assets. And so there are opportunities and synergies there that we're really pressing into. So a lot of opportunity in this space, Sam. Operator: Our next question comes from Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Maryann, I think we've got a very thorough answer on capture, but it's never enough, sorry. I wonder if I could just ask a really simple characterization question. You guys have run -- you've got a target of 100% capture your trading businesses, obviously had a big impact, especially in this kind of market. But there's a lot of moving parts. And particularly on secondary products and you already talked about physical crude markets and how you're swinging your portfolio. My simple question is this, if we look forward at the extraordinary indicator margins and acknowledge there's going to be some offsets. Do you believe you can sustain your 100% target in this extraordinary environment? That's my first question. My second question is really more -- I understand your comments about the macro and all the rest of it. I think none of us expected the situation we have currently. My question is, do you see this as a windfall as we secure currently. In which case, how does that inform the pacing or the decisions you make on Neil's question about cash returns. My point is simply this. couple of weeks ago, the Foreign Minister of Iran turnaround at the straightness reopened. Oil prices fell $17 that day and everything got hit pretty hard. I think missed time buybacks at this point in the cycle. The risk is a lot of that windfall cash flow goes away with a decline in the share price. So my question is how does that factor into your thinking? The first one capture and the second on the pacing of your cash returns. Maryann Mannen: Yes. Of course, Doug, sure. So on capture, first and foremost, we have been working on our commercial performance for a period of time. And the objective for the commercial team, as you know, in any quarter is really to expand the crack regardless of the market that we're given. So every quarter, the macro, they are diligently working to expand that crack and address all issues in the prompt. At the same time, the commercial team is working on sustainable changes for the long term, right? To your point, can we continue to say, capture should be improving period-over-period. Organizational changes, Rick has talked about those in the past or access to markets outside of the U.S., so that we've got, if you will, round-the-clock coverage. We're using other digital and other technology capabilities. We've got a planning organization now that is critical to identifying where those opportunities exist in the organization so that both commercial and Mike's team operationally can execute those and deliver the incremental value. So creating sustainable as well. But if we look at just the first quarter alone, our capture would have been in excess of 100% this quarter, if not for two things that you mentioned. One, secondaries; and two, the impact of derivatives. And you know secondary is not necessarily something that we've got complete control over. As that commodity volatility moves rapidly up or down, our ability to capture or hold pricing on the way down or respond to pricing on a rapid rise is a challenge, and we saw headwinds this quarter coming from that secondary market. Derivatives. Derivatives are a normal and ordinary course through our risk lens. We use hedges to protect a certain portion of our inventory, and that's a normal ordinary course and frankly, this quarter was absolutely no different. What was different was the volatility in the commodity. And so the timing of that, meaning when that physical barrel was actually received be it first quarter or second quarter also had a headwind. Now that will unwind in the second quarter, but that had an impact on our capture headwinds in the quarter. So I guess to try to answer your question, there are things that we cannot control, as you well know, and that volatility will create variability. We even try to look at tight correlations for -- so that we can actually do some projections ourselves. But the things that we can control the quarterly addressing the prompt market and responding and the long-term sustainability, we believe we have more opportunity to deliver incremental performance on an EBITDA per barrel across our regions, Doug. I hope that answers the question. Douglas George Blyth Leggate: Yes, it's very clear. And maybe on the windfall question, allocation of cash. Maryann Mannen: Yes, certainly. So on the windfall question. As you know, our capital allocation hasn't changed. We continue to believe that MPLX supporting our capital plan and covering the distribution gives us the ability to lead in capital returns. That should not change. Obviously, as the volatility persists. We will watch our balance sheet. We will be very disciplined in the manner in which we allocate capital, both through our capital return as well as across the system when we're thinking about projects, et cetera. But overall, our return of capital, if you will, philosophy hasn't changed. Douglas George Blyth Leggate: I think that's clear. Maybe just to clarify, would you pace the share buyback? Or is it ratable? Maryann Mannen: We try to do our very best across the system to make the best decisions that we can and be as disciplined as we can when we are returning capital, Doug. Operator: Our next question comes from Theresa Chen with Barclays. Unknown Analyst: Given the upside volatility in slot prices that we've seen, I would love to get an update on your demand observations and outlook across the products within your footprint. Are there any regions or areas that you're seeing any resistance as far as demand goes, any areas where we're testing that point of inflection for demand elasticity? Rick Hessling: Theresa, it's Rick. So I would say resilient is the word I would leave you with. We continue to see resilient demand for both gas and diesel across Mid-Con, Gulf Coast and the West Coast. And one ironic piece is even when you look at the differing prices throughout the United States, -- on the West Coast, we've actually seen a small increase in our wholesale class of trade with other players exiting that market. So -- we've seen the benefit of that, and we're seeing new markets for exports, such as diesel to Australia, as I mentioned earlier. And then I would say from a Jet perspective, we are not seeing any decline in the jet demand. We see strong jet demand in L.A., Gulf Coast and Mid-Con Chicago area. So across the board, we're not seeing any impacts yet, Theresa. Unknown Analyst: And turning to the LPG export project. Great to see the commercialization progress there in terms of getting third-party offtake for that facility. I'm curious as far as your plans for the remaining 60%, is the strategy or plan that you will farm that out to an off-taker to like a consumer on the other end? Or are you planning to keep a certain portion of that capacity for your own marketing purposes? And beyond the initial 200,000 barrels per day, given the call on U.S. resources and export infrastructure in general at large and this growing stores of volumes from a supply push perspective from the producing basins. What are your thoughts on incremental phases of expansion on that facility? Rick Hessling: Yes. So maybe I'll start with that, Theresa. So when you look at our strategy to continue to move LPG through our docs E1, as Maryann stated in her opening remarks, that's just the start. So that's a delivered barrel that will go to South Korea. We are looking at other Asian and other Asian and European markets, African markets. And so our ultimate plan is to contract up a significant portion more of those barrels before the project goes live in 2028 with Frac 1. So you'll see us lock down more volumes. We're leaning into both the delivered and FOB option. And you've heard me say this a lot over the years. We're going to look to what we believe is the best economic signal. Right now, we believe that's delivered with our expertise and with the VLGCs that we have on time charter and those that we will procure. So I would say it will be a combination of FOB, Delivered and then we'll leave some to the spot market just to make sure we're able to take advantage of volatile markets when those fracs come online, which we expect to be in our favor with the Qatar LNG facility going down as well as the other projects around the world being delayed, we believe the timing of our asset coming online couldn't be better. Maryann Mannen: And Theresa, it's Maryann. To the first part of your question, maybe just around the potential beyond that. When we announced this project, we did say that we saw this as a growth platform. We've been saying Frac 1 and Frac 2. So one that comes online in '28 and 2029, we've got a high degree of confidence, right, that both of those fracs will be full. We'll continue to evaluate that opportunity. But certainly, this is a growth platform for us. Operator: Our next question comes from Jason Gabelman with TD Cowen. Jason Gabelman: I wanted to start on what you're seeing kind of in the inland markets and West Coast and kind of we've seen a bit of inverse performance there in land was, I'd say, weaker than normal seasonality in 1Q. What do you think drove that? And do you see that kind of reversing back to normal seasonality as we move to 2Q and then kind of the inverse of the West Coast, which was very strong for 1Q, but has been volatile since 2Q started? Rick Hessling: Yes. Jason, it's Rick. So I will start with the Mid-Con and tell you in Q1, the Mid-Con was really performed exactly how we thought it would perform, and that's in line with seasonal trends. It was a tough Jan and Fab, but that's not to be unexpected. As we leaned into March, though, we saw the Mid-Con start to widen out. And as we look at the Mid-Con today, it is absolutely the best market we have right now within our system. We're seeing extreme tightness on gas and diesel inventories. EIA stats went from length on inventory in Jan and Feb to abnormally low levels now. And really, what's causing this is you have some turnaround us included at locations such as Robinson. But really what's driving this, Jason, is we're seeing good demand and you're seeing a lot of unplanned maintenance in the region. So the marker as we look today is very strong because of the supply/demand any qualities that exist in the market. And I would also say that everyone in max diesel mode, as you well know, to meet the demand signal, and we're seeing strong ag demand, which is positive. But that has led to tightness now on gas inventories as we head into driving season. So we feel very good about where we're at from a Mid-Con perspective and where we're headed as we enter into driving season. On the West Coast, I will tell you, you signaled a bit that it's fallen off a bit, but it has, but it's still at very robust cracks and we believe that will continue to persist because the West Coast is structurally short. As you know, from a refining perspective, and the volumes coming over from Asia, the import volumes coming over from Asia have been significantly reduced due to all of the refining issues that Maryann mentioned in her prepared remarks. So we continue to feel very confident that the West Coast will stay in a good ZIP code area that it is generally in at this 10 seconds as well. Jason Gabelman: Got it. That's a color. My follow-up is on the intercompany contracts between and MPLX. And I think over the next couple of years, you'll see a number of those contracts come up for renewal. Should we expect those contracts to get renewed at kind of similar terms as what they're currently at? And can you just talk through the process that you go through in renewing those contracts. And if I could just sneak one last one in for any voting of doubt, can you provide the derivative impact that you've alluded to a few times that you've incurred for 1Q? Maryann Mannen: Yes. Sure, Jason. It's Maryann. And then I'll pass it to Maria to give you the specifics on the derivatives in the quarter. On the MPLX MPC contracts, absolutely, you should expect us to renew those contracts. We typically, as we get within an 18-month period, we'll get those renewed. But we have all intentions of those contracts being renewed. As you know, the relationship between MPC and MPLX continues to be extremely important. When we look at the strategic focus of both of those organizations and, if you will, the inextricable relationship, so to speak, that we have and the ability, frankly, for us to use that overall, integrated system, it's critically important. So yes, you should expect that those contracts will get renewed. And then on the derivative side, I'll pass it to Maria in a moment, but let me just comment again. Our derivative program in the first quarter is no different than any quarter that we have ever executed. We use derivatives to cover a portion of those inventories to protect physical -- protect the price, obviously, the challenge in this quarter is just the extreme volatility of the commodity. I mean you can even go back and look at the crisis when Russia-Ukraine war, we would have seen similar except the change in volatility or the change in the commodity wasn't as severe. A portion of that physical came through in the first quarter and then the balance of that -- are largely balance of that, we would expect to unwind. Let me pass it to Maria. She can give you a little more color. Maria Khoury: Jason, so from a derivative perspective, in the first quarter, we had about $500 million of unrealized losses. And if you think about midstream was about $63 million. and then the impact on margin calls to working capital was about $340 million overall use of cash. Operator: Our next question comes from Joe Laetsch with Morgan Stanley. Joseph Laetsch: So I wanted to start on the renewable fuel -- so want to start on the renewable fuel side, with the rallying bins, I suspect we'll see results continue to improve in that business. Can you just talk about how you're thinking about the path for D4 RINs and margins broadly here in the outlook for the release segment? I know it's a smaller piece of the business, but it could flip to a tailwind here. Maryann Mannen: Yes, I'm going to have Maria give you that color, Joe. Thanks. Maria Khoury: Thanks, Joe. As you noted, the macro environment is improving with the higher rents and also higher diesel values. But most importantly for us, it's really focusing on what we control. You just saw that we completed our first major turnaround in the Martinez facility in the first quarter. And we are ready to run here in the second quarter, and we are looking to have utilization levels in the second quarter of low 90%. So that's really where we are going to anchor ourselves for performing in the second quarter in this environment. Joseph Laetsch: That's helpful. And then I wanted to follow up on some of the opening comments on refining and utilization in particular. First quarter came in 89% above the 85% guidance level. Can you just talk to some of the drivers of the performance during the quarter? Was that more efficient turnarounds or higher uptime when the assets were running? I think you also mentioned Lowes unplanned downtime, which is probably a factor here as well. Maryann Mannen: Yes, Joe, of course, and thank you. I think you did a nice job of answering the question. Our loss capacity, if you will, or unplanned downtime was at our lowest in a long period of time, and that clearly had a benefit over our operations. I'm actually going to ask Mike to give you a little bit more color. He and his refining team have been working diligently on operational effectiveness and excellence and ensuring their reliability. And I'd like to have him give you a little bit more color on what happened in the quarter. Unknown Executive: Sure. Thanks, Maryann. The biggest thing that we've been working on from a utilization standpoint or reliability and obviously reducing our is primarily of reliability projects. We had talked about some that we had pulled forward into the first quarter. In addition to that, we have a continued reliability focus program along with human reliability and upskilling our operations and the main focus for us around utilization has also been targeting just the basic operation steps, making sure we are the best operator. That has really -- the first quarter has been our primary, I guess, changes that we're making. But in the second quarter, we're just continuing on with that as we go through the additional growth projects that we have in our reliability projects, and that's really been target -- the biggest target for our utilization numbers. Kristina Kazarian: There are no other questions. Thank you for your interest in Marathon Petroleum Corporation today. Should you have more questions or want clarification on topics discussed this morning, please contact us, and our team will be available to take your calls. Thank you for joining us. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Operator: Thank you for standing by, and welcome to Eaton's First Quarter 2026 Earnings 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, Yan Jin, Senior Vice President, Investor Relations. Please go ahead, sir. Yan Jin: Hey, good morning. Thank you all for joining us for Eaton's First Quarter 2026 Earnings Call. With me today are Paulo Ruiz, Chief Executive Officer; and Dave Foster, Executive Vice President and Chief Financial Officer. Our agenda today, including the opening remarks by Paulo, then I will turn it over to Dave who will highlight the company's performance in the first quarter. As we have done on our past calls, we'll be taking questions at the end of Paulo's closing commentary. The press release and the presentation we'll go through today, including reconciliations to non-GAAP measures have been posted on our website, and a replay of this webcast will be accessible on our website after the call. Before we begin, I would like to note that our comments today will include forward-looking statements with respect to sales, earnings and other matters. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our recent SEC filings. With that, I will turn it over to Paulo. Paulo Sternadt: Thanks, Yan, and thanks, everyone, for joining us. Starting on Page 3, I'm happy to report we have delivered solid results to start the year. From a demand perspective, we continue to see tremendous strength. Rolling 12-month orders are up in all businesses, 42% in Electrical Americas and 13% in both Electrical Global and Aerospace. We are winning business at unprecedented rates, resulting in our backlog hitting a new record high in both Electrical and Aerospace with book-to-bill increasing to 1.2 combined on a rolling 12-month basis and even stronger than that year-over-year. Our accelerating orders driven by data center orders up 240% prove continued strong demand and our winning value proposition as an end-to-end solutions provider. Overall, the businesses are executing nicely to start the year. We posted record revenue of $7.5 billion, along with Q1 record segment profit of $1.7 billion and margins of 22.7%. We are pleased to beat our adjusted EPS guide and consensus. All the bid was operational. We also delivered strong total revenue growth of 17% and higher margins than anticipated. We are also executing well on our deals to boost growth. We closed Ultra PCS in January and Boyd Thermal in March, both ahead of schedule. Our partnerships with NVIDIA resulted in a complete solution for their generation of chips, Vera Rubin. Thanks to our teams for the strong work as we keep shaping our portfolio. As we look toward the rest of the year, with an unprecedented demand backdrop we raised our organic growth outlook by 200 basis points to a midpoint of 10% and also raised our adjusted EPS midpoint expectations to now $13.28 for the year, which covers the EPS dilution from the Boyd acquisition. Another important update, on March 2, we announced Dave Foster as CFO. We are thrilled to have you back, Dave, and he has 29 years career with Eaton, which brings deep understanding of our business and markets as well as a proven ability to drive performance. Dave and I will dive into Q1 and the 2026 outlook. But first, let's move to Slide 4. We continue to drive eaten forward with our bold strategy to lead, invest and execute for growth. All 3 pillars are designed to accelerate our growth and create sustained value for shareholders. Today, we will discuss how we are executing for growth in Electrical Americas investing for growth, including the Boyd Thermal acquisition and leading for growth with a customer-centric approach. Slide 5 includes an update on how we are executing for growth in Electrical Americas. Demand remains incredibly robust. We are winning like never before, and the order and the backlog growth supports that. Meanwhile, we're accelerating our production ramp in the Americas to meet demand. The investments we are making over $1 billion in CapEx are at record scale for us, but well within our capability to navigate. And most importantly, we are on track as planned and feel confident on our path forward, given our strong position in growing markets and proven track record of solid execution at Eaton. Americas recovered well from a tough January and February with impact from the winter storms in our facilities and across the supply chain. Our team recovered well in March. April was another strong month. From both sales and margin perspective, Q1 will be the trough and as mentioned in our last earnings call in February. We expect progress as we enter Q2 and momentum in Q3 and Q4, which will set up the business to meet or exceed our margin target of 32% by 2030. Turning to Page 6 and our investing for Growth strategic pillar where we are doubling down on high-growth, high-margin markets to capitalize on once-in-a-lifetime opportunities. We've taken both portfolio actions in the last year, including the successful integration of Fiber bond, which enhances our model approach. Resilient power, which fast tracks our solid-state transformer technology and various partnerships like the design partnership with NVIDIA and the on-site power partnership with Siemens Energy to help solve for global power constraints. Now Eaton's broad portfolio has been further enhanced by the acquisition of Boyd Thermal. Our complete offering to data centers now has leading liquid cooling solutions, a true grid to chip approach that is unique to Eaton. We have solutions from power generation and the grid, gray space power infrastructure and now a stronger presence in the white space, along with cooling solutions. More specifically on Eaton's Boyd Thermal, this business is a core design partner to leading hyperscalers and silicon providers. As [indiscernible] plates expand across compute, networking and rack-level components, Boyd system level position drives also increased CDU adoption. Embedded at a cheap and system level, Boyd Thermal expands Eaton's presence in the white space and gives Eaton early visibility into evolving data center platform requirements, advancing next-generation power and cooling management. The cooling business is on track to record $1.7 billion or better in revenue in the full year of 2026, of which about $1.4 billion will be included in Eaton financials for the year with margins generally in line with the prior expectations. The Boyd business had a very strong start of the year, up well over 100% in Q1 versus prior year. In fact, Boyd's backlog doubled over the last 6 months. Boyd's recent wins underscore strong momentum in liquid cooling, reflecting customer preference for its deep engineering integration, early design engagement, speed of execution, manufacturing readiness and ability to scale globally. Therefore, we are confident in 2026 outlook. We are very excited to welcome the strong team to the Eaton portfolio and look forward to continued success together. Turning to Page 7. We are leading for growth by striving to move fast, co-creating innovative solutions with our customers at the center of everything we do. Here, we highlight the Eaton [indiscernible] DSX platform as part of our collaboration with NVIDIA to support the next generation of AI factories with end-to-end grid to cheap infrastructure. AI factories represent a new class of infrastructure, and they are driving a massive global build-out, where data center power demand could nearly triple between 2025 and 2030. This unprecedented demand requires end-to-end solutions for faster builds and more efficient energy usage. That's why we developed the Eaton [indiscernible] DSX platform. It delivers a complete modularized implementation of AI factory infrastructure, spanning grid connection, power distribution, advanced cooling and structural architectures engineered for higher speed, efficiency and resilience, truly an ideal solution. By integrating Eaton's grid to cheap architecture, we are enabling our customers to move beyond custom designs toward efficient, reliable and modular solutions. It's a unique collaboration tailored to help our customers with their greatest challenges, and we couldn't be more excited for our customers to benefit from this technology. Now I will turn over to Dave to walk through the financials. David Foster: Thanks, Paulo. I would first like to say how honored I am to be back at Eaton. I've seen a lot of great changes in my almost 30 years with the company, but I've never been more excited than I am today to be part of Eaton's growth journey by how well positioned we are to deliver on our commitments. I'll start by providing a brief summary of Q1 results on Page 8. Organic growth for the quarter was 10%, driven by strength in Electrical Americas, Electrical Global and Aerospace, partially offset by lower sales and mobility driven by -- primarily by a deliberate action to fix the tail, exiting a low-margin North America light vehicle business. Excluding declines in mobility, our organic growth would have been almost 12%. We generated record Q1 revenue of $7.5 billion, and a Q1 record $1.7 billion of segment operating profit. Adjusted EPS of $2.81 is a Q1 record and $0.06 above the midpoint of our guidance range. We also had a strong quarter for free cash flow, which was up 245% over prior year. Now let's move on to the segment details. On Slide 9, we highlight the Electrical Americas segment. Demand is accelerating. Our negotiations pipeline was up 81% in Q1 over prior year, translated into record orders and backlog. The business maintained strong operational momentum, delivering record sales and Q1 record operating profit. Organic sales of 14% was driven primarily by strength in data centers, up about 50% along with strong growth in commercial and institutional and machine OEM. Operating margin was 25.6%. As we discussed last quarter, we expected early 2026 headwinds as America's ramping capacity at an unprecedented scale to meet the accelerating demand. While revenue growth was very strong, we faced additional headwinds in the quarter from higher input costs than originally planned, along with costs related to delivering higher volumes in the quarter. The higher costs are short-term timing headwind, which is being offset with an announced April 1 price increase and other additional price actions. We have confidence to execute on our commitments for 2026. Now I will summarize the results for our Electrical Global segment. Total growth of 21% included organic growth of 9% and 6% attributed to the Boyd acquisition. Overall, a very strong performance for the quarter. We had strength in data center, residential and machine OEM. Operating margin of 19.2% was up 60 basis points over prior years, driven primarily by higher sales and continued operational efficiencies. As you can see on the chart, demand in Global remains incredibly strong, driven by strong orders, up 13% on a rolling 12-month basis with broad end market momentum and exceptional strength in data center demand. This reinforces a powerful growth trajectory ahead for the business. Before moving on to our industrial businesses, I'd like to briefly recap the combined Electrical segment's performance. For Q1, we posted an organic growth of 13% and total growth of 20%, a great start to the year, and we are pleased with the progress we are making on all of our acquisitions. Segment margins were 23.4%. On a rolling 12-month basis, orders accelerated up 32%, and our book-to-bill ratio for our electrical sector grew to 1.2 from 1.1 last quarter. In the quarter, Electrical Sector orders were up 47%. As a result, total electrical backlog increased 48% over prior year. Demand continues to surge, providing tremendous visibility and underpins our confidence in the Electrical business. Page 11 highlights our Aerospace segment. Organic sales growth of 9% remained at a high level and resulted in record sales with particular strength in defense aftermarket along with strength in commercial OEM and commercial aftermarket. We closed the acquisition of Ultra PCS in January and the business performed in line with our expectations, contributing 5 points of total sales growth. Operating margin expanded by 360 basis points to a record 26.7%, driven primarily by sales growth and a onetime facility sale gain in the quarter. Even excluding the onetime gain, aerospace margin expanded 80 basis points over prior year, very strong performance to start the year. The robust orders and a growing backlog continue to position Aerospace for growth. Moving to our mobility segment on Page 12. In the quarter, the business now including both vehicle and eMobility, declined by 6% on an organic basis driven primarily by the decision I mentioned earlier to exit a low-margin business. Margins are flat year-over-year, primarily driven by mix and operational improvements to offset higher commodity and wage inflation. We remain on track to execute the spin of the segment by the first quarter of 2027. Now I will turn it back to Paulo to discuss our updated guidance and close out the presentation. Paulo Sternadt: Thanks, Dave. Page 13 includes our end market growth assumptions. The demand in data center and distributed IT market continues to grow even faster than we estimated 3 months ago. We now estimate 32 gigawatts of total data center capacity under construction in the U.S., of which 70% is AI. Total data center backlog has grown to 228 gigawatts or 12 years of backlog at a 2025 build rates, up from the 11 years in our last update. As you can see on the chart, data center is not our only strong market. We see durable strength in many electrical markets and in Aerospace. These many paths for sustainable growth gives confidence to deliver continued differentiated growth in 2026 and beyond. Moving on to Page 14. We summarized our 2026 revenue and margin guidance. Following a strong quarter, we now expect total company organic growth to be between 9% to 11%, up 200 basis points at the midpoint, with strength in Electrical Americas and Electrical Global, which both increased 300 basis points at the midpoint. For segment margins, our guidance range of 24.1% to 24.5% is 50 basis points lower than the prior guide, primarily due to Electrical Americas Q1 performance. We are taking decisive actions to offset temporary cost headwinds in Electrical Americas. And as we discussed earlier, we are confident with our sequential margin improvement in Electrical Americas and expect to exit the year with margins north of 30%. On the next page, we have the balance of our guidance for 2026 and Q2. For 2026, we are raising the low end of our adjusted EPS guide. Now we expect full year EPS to be between $13.05 and $13.50, $13.28 at the midpoint. For the full year, adjusted EPS guidance includes flowing through the full Q1 beat and absorbing the Boyd dilution to EPS. The tariff impacts are included in this guidance and considered immaterial. We are reaffirming our cash flow expectations for the year, and we have provided a guidance for Q2 on this page. Healthy end markets, combined with our record backlog provides strong visibility into our outlook for the year. With the industry's best positioned portfolio, we are highly focused on disciplined execution throughout 2026. I will close with a quick summary on Page 16. Our strategy to lead, invest and execute for growth is working. We continue to transform our portfolio, allocating capital and resources towards higher growth, higher-margin businesses. The demand environment remains exceptional. We are winning at unprecedented rates. Our orders accelerated once again and our record backlogs provide visibility going forward. This was another strong quarter for Eaton. We delivered record Q1 adjusted EPS and segment profit, along with record revenue reflecting improved execution, ramping capacity as well as the impact of strategic actions we have taken to drive earnings performance. Bottom line, we see a compelling and exciting runway ahead with our strongest growth opportunities still in front of us. And with that, I look forward to taking your questions. Yan Jin: Thanks, Paulo. [Operator Instructions] With that, I will turn it over to the operator for instructions. Operator: Our first question for today comes from the line of Scott Davis from Melius Research. Scott Davis: I'm sure you're going to get a lot of questions on margins, so I'll go in a different direction. But there's a lot of debate around the long-term architectures and data centers and I think a lot of confusion out there. Can you guys just talk a little bit about your competitive position in the landscape for solid-state transformers or on the medium voltage side? And maybe even a TAM, if you could address that? Paulo Sternadt: Sure. Well, thanks, and thanks for starting with a strategic question. I appreciate that. I will start talking about this in broader terms. You said it correctly, a lot of the discussion is around the medium voltage solid state transformers technology, but we're also leading the pack more broadly as a company on how to transform the complete data centers into direct current technology. So it's broader than just the power transformers, right, all the way from the utility down to the chips. So we got to think about power distribution as well, power protection, 800 [indiscernible] DC or higher actually for future applications. And this is exactly -- I want to clarify, this is exactly the broad scope of our partnership with NVIDIA that we launched for the new generation of Rubin chips. So that the [indiscernible] scope is already 800-volt DC. But the most important question for investors is, why does this matter? Why does it matter so much for data center operators and I would say it is because the industry wants to increase tokens per megawatt. In other words, to increase the efficiency the data centers. So if you look at where we operate as a company and other companies operate as well, the biggest lever to increase this efficiency is to reduce the use of chillers because today, chillers consume around 20% of the data center power. So with the new cheap technology, for example, the one that NVIDIA announced at the beginning of the year, as they can run hotter and counting our advanced cooling solutions from Boyd, we can make this possible. So that's the biggest lever. But the second biggest lever is exactly what you mentioned here, Scott, is to move from AC architecture to DC architectures. If you look at today's efficiency, even in the most improved designs in AC, efficiency runs at 93% and we estimate and all the industry leaders estimate that switching to this direct current technology 800 volts or above can save up to 5% from data center operations, moving the efficiency all the way up to 98%. So if you think about this, this is huge dollars and huge efficiency gains that can change completely the economics of the data center. So I want to get that out. I would say this, we as a company, we are in a leading position to commercialize our medium voltage solid-state transformers to get more specific to your question. The fact that we acquired Resilient Power Systems accelerate their [indiscernible] development because we acquired an immersion code offering that drives much more power density in a much smaller footprint. So it really leapfrogged our evolution here. And we have more than a handful of solid-state transformer pilots actually approaching 2 handful, including hyperscaler customers. What we are getting from those discussions with them, it's a lot of positive feedback. We are working through those pilots. And in the meantime, we start taking the leading role also developing industry codes and standards in the U.S. but also in Europe. And as I mentioned before, as we are taking the commercial lead here, we're already providing quotes on 800-volt DC projects now. We expect orders in the second half of the year for shipments starting in late 2027 and some of those also beginning of '28. So we're making solid progress there. So if I'm to conclude here in summary, while there are other companies working on this technology, which I would say is good for quicker adoption of the industry, we are very confident in our leadership position in the solid-state transformers, and I would say more broadly to lead the complete power conversion to DC. Operator: And our next question comes from the line of Chris Snyder from Morgan Stanley. Christopher Snyder: Maybe I'll balance for Scott and ask more of a near-term 1 here. So Q1 Electrical Americas margins came in below expectations. It sounded like there's maybe some unexpected cost inflation. So maybe just some incremental color on that. And then what gives you confidence or could you help unpack the drivers that get that Americas margin to 30% or maybe even a little bit higher into the back half. It sounds like from the prepared remarks that there's price coming. So just anything on how material that could be in the time line there to lift those back half margins. Paulo Sternadt: Thanks, Chris. Well, thanks for this question. Certainly top of mind for all investors, I'd like to get started by providing a little bit of context to this margin discussion because we need to take this discussion in a broader sense of our growth trajectory. And as you heard in our prepared remarks, the demand is fantastic. And I just want to give this team -- this group of people, 3 data points for us to reflect on. The first one, look at orders, right, 60% up year-over-year. And this is on top of a very strong base in '25, having data centers being 240% growth validating our strategic choices. So this is a one strong data point. The second one I will mention, as you heard, our backlogs are up 44% in Electrical Americas. So this was a high bar in '25, and this business added $4.4 billion to the backlog in just 1 year. It's incredible what the team was able to add, while we're still delivering double-digit growth on top line. So that's the second data point. The third one is the negotiation pipeline, as you heard from Dave, is up 81%. Now if you take a step back here and look at all those data points, I would say we are the precipice of a new growth cycle here for this business, a real growth cycle, an inflection point and we are starting to get ready for it. We need to get ready for that inflection point. So as a reminder to everyone, I'm getting to the weeds of the margin development. As a reminder to everyone, we finalized the construction, and we are currently ramping up 12 factories as we speak to handle this growth. The bulk of this ramp-up cost is concentrated in Q4 last year and the first half of this year and these expansions are going well. They are progressing as planned. Now to the details on the margin development, the year-over-year margin is temporarily impacted by 2 reasons. I reemphasize temporarily impacted. The first temporary impact is a negative price cost lag based on commodity inflation beginning of the year. This temporary impact will be more than offset in the full year by pricing that we already implemented on April 1. So that's the first part of the margin recovery. The second one, we accelerated ramp-up costs in Q1 to deliver 30% higher revenue growth. So as you remember, in February, when we discussed, we committed to a 10% midpoint growth for Electrical Americas. Now we are committing to 13% growth. So we needed to upload investments in Q1. So this is part of it. It's also a temporary effect, given this ordinance trends, we took this deliberate action and followed [indiscernible] investments in Q1, and we are accelerating our ramp. As you know, we discussed in the last earnings call, every time you add fixed cost, labor, depreciation of new CapEx and start-up expenses ahead of volume, it creates this temporary margin headwind. Most importantly, I want to report that if you look at the product unit economics, the product margins remain very healthy, and we continue to expect in this new guidance, we continue to expect our full year 2026 segment profit in dollars to be roughly the same, around $4.4 billion as per prior guide. And if you ask what the confidence we have, I have and the team has on our second half margins, I would say we're on the right trajectory to get started. We finished March with strong performance in Q1 and April was also a good start for Q2. So that's the first point I want to get out. But the second and most importantly, looking towards the second half as utilization increases and recent pricing actions take effect, we expect to have strong operating leverage and margin recovery over the coming quarters, which reflects into our guidance, as you see, that shows sequential margin improvement starting from Q2 and gaining momentum towards the second half. And as explained through our last 2 earnings calls, this is the year of execution for the Americas, for sure. And the team is very focused. I want to report the team is really focused and very supported by the whole corporation. And the progress is tangible at even weekly meetings we have with the team, we can see progress week over week. So we remain confident about the strong exit rate for 2026 and we are committed to the 32% margin by 2030. Operator: [Operator Instructions] Our next question comes from the line of Deane Dray from RBC Capital Markets. Deane Dray: Yes. Sorry, can you hear me now? Paulo Sternadt: Yes. Deane Dray: I'll also add my welcome back to Dave and my question is directed to Dave. I'd be really interested in hearing about your early observations now that you're back at Eaton and where are your priorities and focus as CFO? David Foster: Dean, thanks for the welcome. Let me start with culture, which is one of the reasons I've worked at Eaton for almost 30 years. So I can already see and feel positive changes within the company and we have an increased focus on our customers, and we've had a lot of focus on improving our team operating dynamics. It's been great to see. If I look at growth, I've never seen this level of organic growth across the company in my career. And it's more than just an Electrical Americas story. We see it in Electrical Global. We see it in Aerospace. And then Paulo talked about it a little bit in his last answer, but the commitment that we've made to invest to grow the company organically really stands out to me, both people and assets. I personally reviewed the growth projects in the Americas during my first 3 weeks on the job, and I came away very confident in our ability to deliver 2026. No, I'm going to -- this will be a little different take. But for me, coming back, I clearly see the benefits of functional transformation efforts that have been ongoing at Eaton over the last 4 years. I see it across the enterprise, but let me share 1 of the many examples from the finance function. So in late 2023, we went all in on centralized and specializing our credit collections teams. And I'm really happy to say that we delivered record past due percentage performance at the end of 2025, and then we beat it again by 100 basis points at the end of Q1. So the end result is improved cash flow and reduced risk, but it also helps us free up time in our plants and divisions to focus on operations. So very similar to what policies since I've been back for 9 weeks, I can see visible progress and improvement across the total company. I see it in the numbers. I see it in the reviews that I sit in. And again, secondly, what Paulo said, we finished March very strong and the preliminary results for April are continue to build the momentum that we take into the second half of the year. So if I look at the top priorities for myself and the company, one, obviously, deliver our commitments for growth, margins and cash flow in 2026 and make sure we're positioned well to exceed or meet or exceed our expectations for 2030. For me, personally, I get a chance to leverage my strong operations background and my pricing experience with large direct customers. I understand the Eaton business system very well and how we operate as a company. So it's made it very easy for me to plug back into the company. And then I have strong relationships with all the operating leaders across the globe, and that really helps to drive results and resolve issues as they come up. If I look at it, we're going to -- one of the big objectives this year is to successfully integrate the Boyd Thermal Ultra-PCS and fiber bond acquisitions as well as execute the spin of our mobility business. And maybe many of you don't know, but last year, I supported the businesses at Eaton on both the Boyd and Ultra PCS acquisitions. And I also spent some time on the mobility spend in the fourth quarter of last year. And that experience has allowed me to hit the ground running and engage with our efforts involving all of these projects. I clearly know what we need to do to deliver synergies in both of the deals as well as understanding the base business. And then finally, on a functional point of view, I'm going to continue to work with our leadership team in finance to drive finance transformation objectives. And personally, I'm going to really lead a continuous improvement culture across all the finance that mirrors the rest of the enterprise with the simple goal of just getting better every day. So hopefully, that answers your question. Operator: And our next question comes from the line of Nicole DeBlase from Deutsche Bank. Nicole DeBlase: I guess just kind of following on to all the highlights of the strong order growth that we're seeing and Paulo, what you said about this kind of being an inflection with respect to demand. I'm just thinking about do you have enough capacity to address that inflection in demand based on what's been done so far and what's ongoing within Electrical Americas? Or should we be expecting maybe another tranche of capacity expansion in the quarters and years to come? And if so, like could that expansion be of a similar size to what you guys have embarked upon in EA already? Or could it be a bit smaller? Paulo Sternadt: Thanks. As we stated before, we announced the expansion of 24 facilities, and we are done with 12 of them. We are ramping there are still 6 to come online by the end of the year that we're going to ramp next year and the other 6 beyond 2027. Of course, there's a lot of success in our orders. There's a lot of success in our combined portfolio and our growing backlog, negotiation pipeline, all of that, but I wouldn't expect to see such an increase in capacity investments all at once hitting our business anytime soon. It's going to be more like a continuous investment over time. and something that we are really focused as well as the team is to sweat those assets, right? We are inserting very good operators inside every part of the Electrical business, they're showing results. We're going to make those new plans work, and we're going to get the high returns our investment. So in short, I would say half -- more than half of the pain is gone, is highly concentrated in Q4. As I said before, and then starts to get back in a much better situation for the second half as we ramp those volumes. And there will be a continuous improvement and continuous investment, but nothing of this magnitude of 24 plants in the space of 2 years. Operator: And our next question comes from the line of Chad Dillard from Bernstein. Charles Albert Dillard: So I've got a question for you on competitors buying into the cold plate market. So I guess, part one is what share of cold places is represented in Boyd. And then part 2 is how do these acquisitions impact the competitive landscape? Paulo Sternadt: Great question, another top of mind topic for investors. Thanks for that question. I would just start by just showing my welcome and my excitement to have the Boyd team as part of Eaton. I would say, is a winning team in the fastest-growing portion of the data center market, the advanced liquid cooling. So we are really happy to be able to count the support of that talented team. And I'm glad I told you, I hope you were in our last earnings call, I made a short comment sarcastically that we should brace for comments around cooling coming up every month. And I would say this is truer than ever with the latest news we saw from the market. But now seriously, if I look back even a space of 3 months, I would say that I believe this investor community evolved in their thinking in the last months. And I believe most understand now that co plates are not commodities, I saw a couple of really good reports coming out from analysts. So there is understanding that cold plates are actually strategic assets for our customer co-development customer centricity and future wins that actually can be paired and can pull wins for system business like CDUs for cooling and power management, especially one of those 3 things under the same rule. So there is much more understanding of its growth potential. I'm happy that's the case now. If we start looking at the recent co plate acquisitions, I would say that a further, in my opinion, further validate our strategy because it demonstrates the attractiveness of this tremendous market growth opportunity we saw earlier on. And the other thing I want to highlight in terms of landscape -- competitive landscape to the second part of your question, before acquiring Boyd, the team really did -- our team really did the homework and we systematically evaluated the market landscape for over a year. So we did that on our own. We hired an external consultant. We hired a cooling expert from the Department of Energy. All those 3 independent data points of browsing the market pointed to Boyd. So we are confident we bought the BaaS business, the market leader at the right multiple, also very important to say that. And based on Boyd's world leading market position, we are also very happy about their capabilities and the scale they can implement in the next months and years. And as you said, there's a lot of deals. We are familiar with those deals. In my opinion, that does not change our view of the market because as I said before, we browse the market for the best deal possible. And this game around liquid cooling is a game, in my opinion, will define as a game of trust given the high stakes of being so close to the chips and keeping the servers working and the revenue generation assets operating well. It's a game of trust, it's a game of speed and cost on innovation. Constant innovation is what marks this market very strongly. So the other thing I want to say, and this is the mindset of our team here that we will protect you will learn from and will augment what made Boyd great, which is their speed, the superior engineering they have, the manufacturing quality at increased scale. So we are really focused there. Now if I stop, this is a big picture for the business and the cooling market. We know that the future is bright for this technology. But then we should ask ourselves what makes us feel good about the shorter term. And here, once again, if you look at the Boyd's business and now we call it our liquid cooling business at Eaton, revenues should meet or exceed this $1.7 billion in revenue, certainly a huge growth over $1.1 billion this team achieved last year. And we feel really confident. Why we feel confident on that number. Q1 revenues from this cooling business at Boyd more than doubled year-over-year. And also the backlog doubled from 6 months ago. So the business is really growing really fast and winning big. The second thing, I would say, the run rate in Q1 was already around $400 million. So we modeled to stay at that level in Q2 and raised the second half to $450 million per quarter, it's reasonable, it's conservative, and we think it's perfectly feasible as the business is ramping. Now we only owned the business for 3 weeks. So we thought it was premature to raise the full year forecast at this time. But I want to reassure everyone we are aiming for an upside and we'll be prepared for that upside. So in summary, just to give you my final words on this topic, market validation of our strategy given the last years, we're extremely happy to have Boyd in our portfolio, and I'm very confident in delivering our own growth plans for '26 and beyond. Operator: And our next question comes from the line of Andy Kaplowitz from Citi. Andrew Kaplowitz: Obviously, you raised your organic revenue guide for the year which seems like it's mostly coming from data center strength, but what are you seeing in terms of other mega projects? Are you simply further unlock there? And maybe your thoughts on broader economic trends impacting EA and Electrical Global, any impact from the Middle East on your business, for instance? Paulo Sternadt: Very good question. I'll give you a flavor on mega projects first. Another strong quarter, another strong quarter. The announcements were up 29% year-over-year, growing 36% in full year '25. So if you put a 2-year stack, the stack [indiscernible] 65% up. So a very strong development in mega projects. So the backlog of mega projects now is around $3.3 trillion and is up 31% year-over-year. But the most important thing for Q1 is that we saw an uptick on mega project starts, which is when people start spending money and buying equipment. So mega projects parts reached $54 billion in Q1. So it's more than double the same period last year. And since we start tracking that in 2021, it's the third best quarter on record. So very strong tailwinds that will come from mega projects in the years to come. You had a second and third part to your question. I will just give you some flavor on the other markets, so we allow other colleagues to ask questions. But we also had strength -- we see strength in utility orders, we see strength in machine OEM, we see strength in aerospace more broadly for the company. So we have different vectors of growth, which are not necessary data center only. So I'll not give full details now, so we allow other colleagues to ask their questions as well. But thanks for your highlights on the mega projects. So strong quarter once again. Operator: And our next question comes from the line of Patrick Baumann from JPMorgan. Patrick Baumann: I just had a quick one on the EA margin again for the commentary you made on March and April being better and then the incremental pricing you put through in April. I'm just wondering if you could give any insight into how much improvement that you saw in those months. And then what kind of improvement you expect in margin from first quarter to second quarter? Because it does sound like you expect it to get better. But it's not really clear to what extent? Paulo Sternadt: Great. So I would get started also allow Dave to make some comments later. We see the biggest mission for this business actually to reach the top line and keep growing. And they did that exceptionally well in March. We have a very strong end of the quarter. That performance repeated in April. And in terms of margin development, the 2 things I said before, I shared before, there are temporary headwinds. They will be solved as we execute on the volume ramp. So this is on the right track, and that give us confidence. The second thing, which hasn't hit our numbers yet entirely is the pricing that we implemented at beginning of April. So if you put these 2 together, the business is demonstrating top line growth and executing on the expansion well, also took the right measures in terms of pricing already implemented. So we'll see that coming in the second half. And to just go back to what we said last year in terms of the EPS split between first and second half is pretty much what we see in this guidance as well, right? So I will start by making those comments, and I'll allow Dave to give some color here from his perspective. David Foster: Yes. Based on our -- how we finished March and April, with our guidance, we're up 150 basis points from Q1 to Q2 and the Electrical Americas. And keep in mind, on the price actions we don't get the full take in the first quarter when we execute them. That tends to come through in the following quarter. So again, we're confident in our guide for Q2 for Electrical Americas. And again, April demonstrated that we're continuing the momentum that we saw at the end of Q1. Patrick Baumann: And that's 150 basis points you're saying from 1Q to 2Q is the expectation? David Foster: Correct. Operator: And our next question comes from the line of Andrew Buscaglia from BNP. Andrew Buscaglia: I just wanted to check on -- a lot of discussion on the data center front and orders were quite strong there. But can you give some commentary on what's going on order-wise and trend-wise by the other subsegments within Electrical Americas? Paulo Sternadt: Sure. I will give you a commentary. Let me talk about utilities because it's an important market, and it's tightly connected with the data center boom as well as you guys know. So we continue to see very strong momentum in terms of orders for the utility business here. So we had double-digit growth on a 12-month rolling basis for Electrical Americas and for Electrical Global mid-single digits. So strong orders coming our way on the utility side. And on the strategic commentary, I want to say that we continue to make progress gaining share in voltage regulators, capacitors and switchgear, which are actually 3 product groups we are ramping up with our investments, so we keep winning shares in that area. And that's our focus because it has most differentiated performance. We are a bit more selective on single-phase transformers because it's the smallest part of our portfolio, also the least differentiated and I would say this, we expect the market to remain strong for a very long period of time. Just if you recall all those data center announcements triggered, what I would say, everyone already sees the power generation and transmission investment. So it's very well reflected in power gen and power transmission, but it's not so much yet reflected in the power distribution utility business, right? We see this uptick in orders, but we believe the biggest wave in investment is going to come later. And just to remind everyone, how good it is to see investment in power generation for us at Eaton, every investment in generation creates a compounding opportunity for it. And first of all, when there is a power generation project, we sell the medium voltage gear required for this project. And then in a later stage, when there's power to get distributed by the grid once again, opportunity for us to distribute protect those [indiscernible]. And then lastly, and even more impactful to us is when this power reaches our end customers, being data centers, being commercial, institutional, any other end market because we need to manage that power reliably and safely. So we are very, very convinced that the utility business is going to remain stronger for longer. And we also -- I would say this, I will give you some color on the short cycle businesses we have. So again, short cycle, high single digits in Q1 revenues from mid-single digits in Q4. So we see this continued momentum quarter-over-quarter. And then if you go through the details of what makes the short-cycle businesses, we saw some recovery in Americas for resi, low single digits. And once again, we are not counting on the resi market to be strong for us to make our numbers by any means. And we saw also a stronger recovery in the EMEA business in the residential space. MOEM is back -- up for both Americas and Global. And distributed IT, we see high single digit in the Americas, up, right? High single digits up, and it was a little bit down global versus last year. So we see green shoots coming from Q4 extending into Q1 on the short-cycle markets. And I will say this, and I'm proud to say our team is capitalizing on this market recovery and recovery and winning. And this is important because we also drive utilization of our factories that serve those end markets. I hope that helps. Operator: And our next question comes from the line of Joe Ritchie from Goldman Sachs. Joseph Ritchie: I wanted to -- I wanted to circle back on Boyd. So clearly off to a great start this year. I'm curious, how are you managing like potential disruption from the integration of this asset with legacy Eaton? And then also as it relates to capacity, I know you addressed the capacity for your core business. But I guess, as Boyd coming in, what kind of capacity additions are necessary in order to fulfill like their backlog and how fast they're growing? Paulo Sternadt: Great question. So to the first 1 -- first part of your question, as I said before, it's a game of trust, it's a game of speed. It's a game of getting the technology implemented and also getting the ramp done in the right way. We are taking a very cautious and deliberate approach to integrating this business into Eaton. The reason we went after Boyd was that they were the market leader. We didn't want to go for a smaller asset, which we've found will be very difficult to make it work in our organization. So here, they know what they're doing. They were part of Goldman before and they were performing before. So our philosophy cannot be any harder or more difficult in side item at all. So we are taking very good care of the team, a very talented team. They are retaining them. They report directly to our COO at the sector level. They report directly to Heath, so high visibility, high attention. And in terms of investments, over time, this business grew fantastic rates at very low CapEx rates versus sales, like think about 3%, 4%. And with this explosive growth they have now, they have more investment in terms of sales approaching double digits temporarily is already part of our guidance for the year, and it's all been implemented. So the teams are running, and as I said before, a very good Q1 in terms of output and growth. We just got the April numbers yesterday, also very strong performance. So we are really excited about the business. We are respectful of what they built and we're actually leveraging some of their connections with cheap manufacturers to be a lead for other technologies of Eaton to win. And a good example of that could be also what we are doing with NVIDIA and other companies. So we keep high touch connection with this team. We want them to run fast, and we are supporting them to run fast. Operator: And our next question comes from the line of Julian Mitchell from Barclays. Julian Mitchell: Maybe just to circle back to the sort of ramp-up slope that the guidance is predicated on, and I suppose 2 sides to that. One is overall firm-wide EPS, is the sort of guide based on a $4 type number in Q4? And sort of allied to that, on the Electrical Americas division, I think incremental margins you're guiding year-on-year at about 10% in Q2 year-on-year. should we think about third quarter in the 20s and then fourth quarter in the sort of 50s percent type incremental margin? Paulo Sternadt: Yes. I will start, I'll also, Dave, to provide color. Thanks for your question. Here, I would say couple of things. Once again, you're perfectly right in analysis. That's exactly what we're committing to. And the reasons behind are, once again, twofold: One is the pricing already implemented; and two, we're going to get the leverage from the ramp-up investments that we have that's going to start implementing our profits, improving our incremental here. And also all the efficiencies we are dealing with as we learn how to operate in those plants will be behind us. So yes, absolutely in line, and this is perfectly feasible and aligned with the previous guidance we had between first half and second half EPS breakdown. Any additional comments, Dave? David Foster: The only thing I would add is, in addition to the benefits we see on the scale of the growth on the manufacturing costs, we also see the benefit on reducing support costs as a percentage of sales in the back half of the year. Paulo Sternadt: Okay. Thanks. I'd like to make a couple of comments just to close here the call, some closing remarks. Very interesting questions. I'm glad we moved to this one question per analyst format, maybe more dynamic. We could talk to more people. Let me just make a couple of comments to conclude the call. I will start by saying that I would say our strategy is working, right? We are, in my opinion, we are closer to our customers, and we are designing the future together with them. This is really important for the future development of this company. We are shaping our portfolio at fast pace. Just think about how much ground we covered last year, we allocated capital boldly, and I also say, surgically, the proof point in our numbers, you can see the Electrical business grew 20% total sales with 13% organic and Aerospace grew 16% total sales with 9% organic. So those were 2 markets where we decided to invest and allocate capital. And in terms of execution, I would just highlight once again, we are executing an unprecedented demand. Record orders and backlogs are paired with strong negotiation pipeline, and this give us very high level of visibility and confidence moving forward. I would say also, we showed demonstrated operational improvements that allow us to beat our top line commitment for the quarter and also to raise organic growth guidance for the full year. And in terms of margins and the Americas development, the ramp is on track. We are accelerating the execution. As I said before, we have confidence in the top line and the margin upside as the year progresses. So in a nutshell, this allowed us to beat the Q1 EPS, have confidence to absorb the EPS impact of our acquisitions and still be able to raise the full year EPS guidance. So thanks to everyone for your time, and thanks for your questions. Thank you. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Welcome to the Colliers International First Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian securities administrators and in the company's annual report on Form 40-F that was filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Tuesday, May 5, 2026, and at this time, for opening remarks and introductions, I would like to turn the call over to the Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir. Jay Hennick: Thank you for joining us. With me today is Christian Mayer, our Global Chief Financial Officer; and also Chief Executive Officer of our Commercial Real Estate division. This call, as always, is being webcast and the presentation materials are available on our website. Colliers delivered strong results for 2026 for the first quarter underscoring the durability of our company. We have made solid progress in a still uneven market, supported by continued strength in our resilient businesses and improving activity in commercial real estate. Colliers is built to compound shareholder value through 3 growth engines across the build environment. Commercial Real Estate, Engineering and Project management and Investment Management. From an earnings perspective, more than 70% of our earnings come from resilient businesses, Engineering, Project Management, Investment Management, Property Management and Mortgage Servicing. This mix gives Colliers greater stability through market cycles and more growth opportunity than others. These attributes, together with our enterprising culture and meaningful inside ownership have supported a 31-year record of delivering 17% compound annual growth in per share value. Importantly, we achieved these performance numbers at a time when our shares are trading well below their intrinsic value, creating significant upside potential for shareholders. During the quarter, we strengthened our leadership team to better capture growth opportunities in engineering, appointing Elias Mulamoottil as the CEO; and Christian as the CEO of our Commercial Real Estate business. We also increased our financial flexibility through a $400 million long-term debt financing and an extension of our revolving credit facility, supporting the acquisition of Ayesa Engineering, which we expect to close later this quarter. In Commercial Real Estate, the recovery continues to gain momentum. Transaction services, including both capital markets and leasing were up an industry-leading 25%, reflecting market share gains across the globe for Colliers and improved investor sentiment industry-wide. Engineering also delivered strong performance, providing highly technical support across attractive end markets like infrastructure, transportation, property and buildings, water and environmental. This work also has strong visibility and consistent margins while creating meaningful opportunities for growth and for collaboration across our other businesses. The acquisition of Ayesa will accelerate our momentum in engineering even further by expanding our geographic reach adding in-demand capabilities and extending our growth runway into new markets. In Investment Management, assets under management increased 9% year-over-year to almost $1.9 billion. At Harrison Street, we invest capital along institutional and high net worth individuals across high-growth infrastructure-related assets, including data centers as well as demographic driven defensive sectors such as senior housing, student housing, medical office and health care delivery. Over more than 2 decades, our differentiated investment strategies have delivered strong returns for investors and are supported by powerful secular and demographic tailwinds that continue to support our growth. We are very excited about Harrison Street's prospects as we continue to scale the business and capitalize on the many opportunities ahead. We believe we are well positioned to continue to generate attractive growth opportunities for our investors and for our shareholders. With that, I'll turn things over to Christian after which we'll open the line for questions. Christian? Christian Mayer: Good morning, everyone. Following up on Jay's overview of our strategic progress this quarter, I will now dive into the financial details that support our strong start to 2026. Please note that the non-GAAP measures discussed are defined in our press release and quarterly presentation. Unless otherwise noted, all revenue growth figures are presented in local currency. We have realigned our Engineering and Commercial Real Estate segments. This realignment resulted in a modest increase in CRE segment revenue with an offsetting decrease in the Engineering segment. Prior periods have been recast and historical comparative excel file is available on our Investor Relations site. Our first quarter consolidated revenues were up 12% and net revenues also increased 12% to $1.15 billion. Adjusted EBITDA was $125 million, up 8%. Adjusted EPS increased 5% to $0.91 and was tempered by a higher-than-expected tax rate related to certain European operations. We expect our tax rate to moderate in the coming quarters. The solid performance met our expectations and reflects effective execution across our business. First quarter Commercial Real Estate segment net revenue was up 13%. Capital markets revenues increased 43%, led by market share gains in the U.S. and in parts of Europe, both in sales and debt finance. We reported sales growth in all property types, most notably data center development land and office. The U.K., Germany and Japan also posted strong year-over-year gains in office and industrial sales. Leasing revenues were up 9% with U.S. industrial property leading the growth. Segment net margin was 6.3% and up 20 basis points over the prior year first quarter, with operating leverage from higher transactional revenues, partially offset by investment in recruiting across the segment. Third quarter Engineering segment net revenue was up 13% from a mix of recent acquisitions and solid internal growth. End market demand continues to be strong, especially in infrastructure and related areas. Net margin was 9.5%, slightly lower than last year, reflecting lower workforce utilization in residential development and telecommunications, both of which we expect will improve as we progress through the year. Our overall Engineering backlog continues to be robust. Investment Management net revenues increased 8%, driven by our recent acquisition and internal growth from new capital deployed. Net margin declined to 37.4% as expected, as a result of planned investments to integrate and streamline under the Harrison Street Asset Management brand. These costs will continue to impact margins for the next couple of quarters after which we expect to return to a low 40s net margin profile. The IM segment raised just under $1 billion in new capital commitments during the first quarter and we expect increasing momentum as the year progresses. Our fundraising target for 2026 remains unchanged at $6 billion to $9 billion. Our balance sheet is strong, with leverage at 2.3x, reflecting seasonal working capital usage and with $1.5 billion in total credit availability as of March 31. We expect to complete the acquisition of Ayesa Engineering in the coming weeks funded from available credit. We are maintaining our full year 2026 outlook for mid-teens revenue EBITDA and EPS growth. Our solid Q1 performance, which met our expectations is the foundation for this outlook. Our continued confidence stems from robust pipelines in Commercial Real Estate transactions and sustained momentum in our resilient businesses. While we acknowledge the recent increase in geopolitical risk and macroeconomic volatility, these risks are not expected to materially impact our 2026 results at this point, reflecting the inherent geographic service line and client diversification of our platform. That concludes my remarks. Operator, can you please open the line for questions? Operator: [Operator Instructions] Our first question is from Anthony Paolone from JPMorgan. Anthony Paolone: My first question relates to, I think, an engineer -- in Engineering, some of the utilization being down a little bit. And I think you mentioned it was related to residential. Can you just talk a bit more as to whether you see that as temporary and how you manage margin in instances where some of these end markets may ebb and flow? And just maybe give us a little bit more insight into how that business works in that manner? Christian Mayer: Yes, it's a great question, Tony. We have a well-diversified Engineering business that currently operates in 3 major markets: Canada, the U.S. and Australia. And in each country, we have a number of highly predictable and high demand end markets, including infrastructure, transportation, property, buildings, resi development, telcommunications, program management, institutional project management. So a wide variety of end users. And that is intentional. We try to also have a well-balanced business between public and private sector clientele so that we can manage ebbs and flows like we are seeing today in residential development and in telecom. So we manage the business for consistency and margins from time to time. A couple of these areas will be stronger or weaker and over time, we're able to generate a consistent margin, and we do expect that these 2 areas will rebound in the coming quarters. Anthony Paolone: Okay. And then my follow-up question relates to you are mentioning making some investments into the CRE segment. Can you talk more specifically about what types of investments those maybe whether it's people or other types of items and kind of where you see the opportunity in making those investments? Christian Mayer: Yes. Tony, there's really 2 areas, and you hit the nail on the head, it's people, first and foremost. We continue to recruit at an accelerating pace and bringing people into our cap markets and leasing business in major markets around the world. And so that's the primary focus. Secondarily, we've talked with us before, we are increasing the pace of our IT spending, both OpEx and CapEx. That is to enable AI and technology and efficiencies are going to come from that as well as enhanced abilities for our producers to be of service to clients and hopefully, more productive. So those are the areas that we're investing in. Operator: And our next question is from Frederic Bastien from Raymond James. Frederic Bastien: So we had some pretty solid results from the CRE segment. However, outsourcing was -- outsourcing growth was a bit on the soft side. Was there any tough comparables that you're lapping? Or -- I just want to get a bit more color on what transpired here. Christian Mayer: Frederic, no real notable tough compares. We had slightly slower than we had hoped, growth there, still in the low single digits, but nothing really of note. And then we hope on a full year basis that our growth will accelerate in that outsourcing area. Frederic Bastien: Okay. Switching gears to Investment Management. We saw some pretty good growth, obviously, some acquired growth in there as well. But as we look at the next couple of quarters, how do we -- how can we expect the pace of revenue to ramp both on an organic basis, fundraising, acquisition and the like? Jay Hennick: So IM is very interesting because, as you know, we have spent the last couple of quarters, and it's going to continue for a while, bringing together our 4 platforms under the Harrison Street brand. Needless to say that has a lot to do with bringing people together, rebranding funds, streamlining accounting systems across the board. IT and a variety of other areas. So we're very excited about the -- that particular platform. It's got some great momentum in terms of -- first of all, it's got unique and strong differentiated strategies, as I talked about in my comments, but fundraising in particular is gaining momentum as you -- as Christian mentioned. We're holding our forecast at $6-plus billion of new capital. We've also returned a lot of capital this past quarter to our investors in terms of property sales versus new assets acquired. So there's a lot going on in that segment. We're building what we think is a very strong Harrison Street Asset Management that's a truly global business with a streamlined and one management team. These things take time and building companies like this is something that we've done many times over the years. So we feel like we're on pace or ahead. We feel like we're walking into a fundraising environment that's -- that should be more buoyant going forward. And the teams are excited, and we have several new strategies all around infrastructure and deep relationships that we've built with leading academic institutions, hospitals, all of which we have been serving for over 2 decades. But now new opportunities in 3P partnerships and a variety of other things are materializing, which are creating unique investment opportunities for our investors. So a lot there to unpack. But suffice it to say, we're very excited about but where I am -- will be in the next several quarters. Frederic Bastien: Great. Last one. Maybe a follow-up. With respect to the pace of fundraising, do you expect it to be even over the next quarters or just more -- ramp up more into the back half of the year? Jay Hennick: I'm sorry, I didn't hear that full question there, Frederic? Frederic Bastien: Yes. With respect to the pace of fundraising, do you expect that to come evenly over the next quarter or be more back-end loaded towards back... Jay Hennick: It never comes evenly as you can appreciate. It is quite unpredictable. We have bigger pipelines in terms of fundraising than we've ever had before. We've had good first closes or we're in the process of having first closes in the Basalt fund and in the Harrison Street closed-end fund, all of which there's only a limited amount of capital we can take. So it's a function of when the final decisions are made and when that comes in. So we're expecting both of those to be substantially completed before the end of the year. But when the exact commitments are made is still up in the air, but -- and will be. I can't really predict it. Operator: Our next question is from Erin Kyle from CIBC Capital Markets. Erin Kyle: Maybe just a follow-up to that last 1 on the fundraising environment. Jay, I appreciate your comments around the unpredictability of the fundraising quarter-to-quarter. But maybe on that note, what gives you confidence on the trajectory towards that $6 billion to $9 billion in 2026? Maybe you have an idea of how much advanced fundraising is already soft circled or in discussions? And how that compares right now versus to where it did, yes, last year? Jay Hennick: Well, for sure, it's way ahead of last year. And the confidence that we have is that we have new strategies in the marketplace this year, which we didn't have last year. We were completing our investment cycle in several of the funds last year. And this year, we're open with new funds and new investment opportunities. So there's a lot of investors looking at some of the unique Harrison Street products. Infrastructure is all the rage, as you know. Everybody is talking about data centers. That's a significant part of our business. I think we own 64. We've been in the data center business and Harrison Street for 6 years now. So this is a well-worn path for us. In fact, we're considering in a couple of cases, selling assets early because of the heat to buy data center assets but our infrastructure doesn't end with data center. Data centers, there's all kinds of other infrastructure-related assets, long-term investment opportunities that are a part of our open-ended funds, new opportunities in our closed-ended funds. There's some separate investments that our teams are making. And then of course, let's go back to the demographically driven assets that we have in seniors, students, health care delivery, all of which have huge tailwinds. So one of the great things about this platform is that we have designed it to focus on a specific group of assets that have these tailwinds. And that's what's giving us the confidence that -- and our results have been very good over decades. So all of that gives us confidence that this will be a strong year for us fundraising-wise. And we hope that we'll raise more money than the range that we give you that we've given you, but we are optimistic. Erin Kyle: That's a lot of helpful color there. Maybe I'll switch gears to the Commercial Real Estate business. The capital markets growth was exceptionally strong this quarter. you're lapping a weaker comparative period, but are you able to identify like how much of that growth reflects pent-up demand versus a sustained improvement in buyer confidence here? Christian Mayer: So Erin, we won't watch our capital markets business very carefully. I believe this is our seventh quarter of capital markets growth on a quarter-over-quarter basis. So the conditions for transacting continue to improve, credit availability, bid-ask spreads, the desire of our clients and market participants to transact is improving because they see more transactions happening, which gives more confidence to investors as well as to sellers. So nothing really in particular to note this quarter, but it is a continuation of this multi-quarter recovery in capital markets activity that we think we're in the early to mid-innings of a recovery. We have a couple of years at least to go to recover to prior peak transaction levels. And I'd say we also have today, a bigger, stronger, more productive producer workforce in our Capital Markets business than we ever have had in the past. So we're feeling really positive. Jay Hennick: And I would underline a comment that I made, 45% in capital markets growth was significant. But when you take it together with our transactions, we were at 25% between leasing and capital markets, we were industry-leading. And that's very telling when you consider the other players in the industry on a global basis. Operator: Our next question is from Nevan Yochim from BMO Capital Markets. Nevan Yochim: Nevan on for Steve today. You provided a little bit of color so far on the Outsourcing segment. I was hoping you could just touch on your expectations for growth in capital markets as well as leasing for 2026 and how that's expected to trend through the year? Christian Mayer: Sure, Nevan. Obviously, we talked about the strong growth in our transaction business in the first quarter. I would expect that to continue on a full year basis. Capital markets growth on a full year basis somewhere in the 25% range. Leasing in the 8% range or so on a full year basis. And then rounding out our Commercial Real Estate business, outsourcing growing in the 5% range on a full year basis. So continuing to see strong growth, not necessarily at rates that we saw in the first quarter, which is the seasonal slow quarter. So growth there can be made to higher percentage numbers, but certainly on a full year base is looking very solid right now. Nevan Yochim: Great. And we're seeing a strong recovery here in the capital markets and the CRE business. I'm wondering if you're able to quantify the remaining upside in a full recovery scenario? Christian Mayer: Well, Nevan, I talked about we're probably a couple of years away from a full recovery. And as I mentioned, we have a bigger, better stronger and more productive workforce today than we've ever had in the past. We've been investing heavily into our debt finance business, capital markets, producers and various specialty asset classes. Multifamily being a big area of focus for us, which is a huge market that we have significant opportunity in for growth of market share. So we're -- we think we're going to have a nice long runway of recovery ahead here and looking to exceed prior high water marks at some point in the next couple of years. Operator: Our next question is from Julien Blouin from Goldman Sachs. Julien Blouin: Just curious any signs of caution in EMEA or APAC, maybe that decision-making is slowing one of your peers commented that they were seeing deals being canceled or delayed in Europe due to the geopolitical instability. So just wondering if you're seeing any of that and then how is that sort of working its way into your thoughts about the back half of this year? Jay Hennick: I think it's true that Europe and APAC both are slowing. The strength of our results in the first quarter really came from North America. And the North American market continues to do well. We have some insight into the current quarter as well. But Europe is slowing, and we're watching it very carefully. And it's -- I think it's -- the geopolitical piece is part of it. There's other reasons as well. There's not as much access to financing in Europe, which is an opportunity we see long term. Asia Pac is interesting because you've got some markets that are doing very well and you've got other markets that used to do well last year, for example, and all of a sudden, they're just stalled. So the beauty of having a global business and strong positions in many markets is you're geographically diversified. Not too many people talk about geographic diversification, and that creates another sort of stable business for us because you'll have some markets that will exceed in some markets that will be soft. And it will happen within service lines as well. I mean there was an earlier question, and I'm expanding your question here a little with an earlier question about outsourcing. Well, what's happened in some markets in property management, for example, as developers are running into financial difficulty, they're deciding that they're going to take property management in-house and in our view, it's -- we've seen it so many times over the years. They do it for -- they do it for a year or two. They realize it's a very difficult business. It's a lot of employees to manage over wide geographies. And the better way is to have somebody that has a national platform like us to manage nationally and focus on the asset management side, but that doesn't stop some of those property -- some of those property owners that in-source property management. So there's those kinds of things that are happening. But if you double-click and move back a little bit, the geographic diversification is what gives us confidence and strength in this wonderful platform we have called Colliers. Julien Blouin: That's really helpful. Maybe latching on to that last point I'm seeing some in-sourcing from property owners. Do you think at all this is being impacted by AI that some of them are feeling maybe bolder or more capable with sort of advancements in AI to go ahead and in-source the property management functions? Jay Hennick: There's no question like -- we have a massive property management business on a global basis. And there's no question that AI over time, will not only provide us with unique information that will hopefully differentiate us in this business, but also helps us streamline back office functions. But property management is -- it's a fair margin business. And so yes, there'll be a pickup in margin. We'll be better at what we do but I think you need a major player like us to be able to invest in the IT platforms necessary to bring better margins. And so when a small player is in-sourcing because he thinks AI is going to enhance its margin, I think, is a bit naive. Operator: Our next question is from Himanshu Gupta from Scotiabank. Himanshu Gupta: So first on Investment Management, IM. I mean, it looks like $1 billion of fundraising in Q1. Was it in line with your expectations? And was there any funding done in Q2 so far? Christian Mayer: Yes, Himanshu, we always want to raise more capital, of course. So our progress in Q1 was good. And I guess, what gives us more confidence and as part of the second part of your question, we have had closes here through April. So off to strong start. But look, we are continuing to focus on the full year fundraise with the products that we have in the market and our visibility and confidence is high. We raised over $5 billion last year, and we're very confident we're going to raise more than that this year with the -- the work we've done in terms of our products and our strategies as well as our fundraising capabilities, quite frankly. Himanshu Gupta: Okay. And then within IM, how much private credit exposure do you have? And have you seen any impact so far in terms of redemptions or any read through for your business? Christian Mayer: Himanshu, I want to be very clear on this. We have no corporate credit exposure at all in our business. We provide certain real estate asset-backed credit strategies and products. They're tied to real estate directly. We're not -- as I mentioned, not participating in any of this corporate type credit or these other troubled areas they may read about in the news. Jay Hennick: And it's part -- it's also a small part of our business. you guys -- you can correct me if I'm wrong, but I'm thinking it's 6% of the AUM. Christian Mayer: 8% or 10% of the AUM. Jay Hennick: 8% or 10% of the AUM. Christian Mayer: Backed by multifamily real estate very primarily very strong asset classes with strong underlying cash flows. Himanshu Gupta: Got it. And no redemptions as such, I mean regarding this exposure? Christian Mayer: No, exactly. Himanshu Gupta: Moving on. Q4 margins in IM expected to be in below 40% net margin you mentioned. Is it predicated on you raising this $6 billion to $9 billion of fundraising? Or do you think if the fundraising is softer, this margin expectation will be revised down as well? Christian Mayer: Well, Himanshu, our forecast, all assembles and fits together. So -- of course, we need -- we expect to raise $6 billion to $9 billion to expect to achieve the financial results that we've talked about for Investment Management, including that margin goal. A few things have to happen. Integration is progressing and we'll continue to progress towards year-end. And then, of course, fundraising will, by year-end, lead to higher quarterly revenues, which will which will give us the visibility going forward in terms of our margin profile. Jay Hennick: Yes. And just to be clear, you raise capital and then you have to put it to work. So if we raise a range of capital during the year, and we start to put it to work, it doesn't pay dividends until the following year. There'll be some modest pickup but not material. Himanshu Gupta: Yes, that's a good point. Okay. Maybe the last question here on CRE, Commercial Real Estate. Clearly, strong capital markets revenue, strong leasing revenues, as you mentioned. Maybe we did not see much operating leverage in Q1 in terms of incremental margins or incremental revenue. Is that correct? Christian Mayer: Well, we did see some operating leverage Himanshu, in the quarter as I mentioned earlier on the call, which was partially offset by our investments in recruiting and in IT infrastructure. So I'll just mention that, again, the Q1 is our seasonal slow quarter in the business. We achieved a good flow through. And we have a couple of things I've pointed out as well as some things like seasonality in our producer mix that impact the flow-through in the quarter, but we're confident that we'll have higher flow-through later in the year as we did last year. You saw our margins pick up significantly in the third and fourth quarters, and that will happen again this year. Himanshu Gupta: Got it. Maybe my final, final question here. So the question is really on synergies. Like synergies between Engineering and CRE, Commercial Real Estate. Have you identified? Can you even quantify and how did -- will be realized over time? And that's my final question. Christian Mayer: Yes. So Himanshu, your question is about synergies between Commercial Real Estate and our Engineering business, and I think we've talked about a couple of times over the last few quarters about how our engineers are working with our capital markets professionals to help identify opportunities to qualify land acquisition to help with design activities, environmental assessments, property condition assessments. So that work continues in our Engineering business in consultation with our capital markets professionals, and it's something that is bearing fruit. I don't have any exact numbers for you at the moment in front of me, but it's an exciting additional avenue to differentiate ourselves and provide additional value to our clients, including some of our largest clients. Jay Hennick: I mean let me just add some obvious ones we've talked about it on previous calls. If a client wants to assemble land, whether they want to build multifamily development, a data center, et cetera, et cetera, our CRE professionals know the land business, know where the opportunities are. They bring it forward. We are co selling to our clients, not only will we find the land, but we'll also entitle it. And that's where the engineers start getting involved, roads, power sources, water, a variety of other things. The client makes a decision, do you want to buy the land based on the engineering information. If they do buy the land, we then go into what can be built, we can project manage the construction of the project and deliver it at the end of the day. And frankly, our Investment Management team is also looking at opportunities to invest in some of those applications. So more and more, our complementary services are working more closely together to either find, finance, entitle, build, own, all of these types of assets. And that's one of the unique features of what Colliers is trying to build as a provider of multiple services across the build environment. We believe all of these things are complementary. It's the same client base or similar client base. It's high-value often very complicated services that need to be performed and having deep client relationships and knowledge of the market, both locally and internationally when it comes to financing these transactions gives our professionals huge advantage. So there's many examples, but I hope that 1 gives you sort of a deep understanding of what we're seeing out in the marketplace. This merger of these various professional services. Operator: Our next question is from Jimmy Shan from RBC Capital Markets. Khing Shan: Most of my questions have been answered. Just 2 quick ones for me. So first, just following up on capital markets. Are you seeing any impact from the recent rate volatility in decision-making even within North America, which has been strong? And then second, in terms of leverage. So on a pro forma basis, I think you'll be about 2.7x. And how should we think about the pace of M&A for the balance of the year? Christian Mayer: So Jimmy, rate volatility that we've seen in North America has been a little bit higher. But at this point, not a major concern. Obviously, we'd like to see rates lower and more stable. But with these rate conditions still seeing significant interest in capital markets activity. In terms of our leverage profile, you will see with the Ayesa acquisition closing in the next few weeks, you'll see our Q2 leverage at the 2.9 to 3x level based on the seasonality of the business that in Q1 as our starting point, and we will see that leverage come down meaningfully in Q3 and Q4. In the meantime, we're going to continue to be active looking at acquisitions of all kinds, but we're going to focus our efforts in the near term on tuck-in acquisitions that we can do at -- that are smaller, that we can do at reasonable prices and then make great strategic sense for us as we build out our platforms. Jay Hennick: Christian makes a very good point. Acquisition pipelines are very interesting right now. And yes, on smaller transactions that expand capabilities, fill white space, et cetera. And let's not forget the Ayesa acquisition. One of the key strengths of that is it opens up 4 or 5 major markets for our Engineering business. And since the transaction was announced and consistently since then, we've been approached both at Colliers head office, but also the Ayesa management team about potential additions those that want to join as partners in the Ayesa business. So we're quite excited about what the future holds there. And it was one of the great strengths of that potential acquisition for us because it gave us a significant foothold in so many different markets, mostly infrastructure related, highly complex. Ayesa's backlogs are stronger than ever. and the excitement level to enter the next phase of their growth is palpable. So all of these -- all -- the reason I raise all of this is we've got a buoyant pipeline of acquisitions. And -- but we are cognizant of our leverage ratio -- and that is -- that's something that we'll manage as we always have historically, but lots of stuff on the horizon. Operator: Your next question is from Daryl Young from Stifel. Daryl Young: Just one quick one for me on the Canadian Engineering and Project Management platform. Have you started to see any early signs of infrastructure spend or the defense industrial strategy working through into your pipelines? And do you anticipate that being an opportunity in the next few years? Christian Mayer: Daryl, it's a definite opportunity for us. I know we're working on the port expansion in Quebec as an example. Also defense construction, there's a number of things going on there that are active on, on both project management and engineering. So that is work in the -- on the East Coast, work in the Arctic. The opportunities there are going to be manifold over the next few years. Operator: Your next question is from Stephen Sheldon from William Blair. Matthew Filek: Jay, Christian, you have Matt Filek on for Stephen Sheldon. On leasing, are you seeing any change in average lease duration on new lease signings? Just curious if the current macro environment has tenants maybe taking a more cautious approach when it comes to making longer-term lease commitments? Jay Hennick: It's an interesting question because I think it's a bit of a bifurcated market. When you're -- when the leases are in AAA type properties, the duration seems to be longer. In suburban properties, it's about the same as it's always been. And that's primarily because people are returning to the office and -- number one. And number two, the lease rates in suburban office have fallen so much. It's very attractive for many to take on more space. Everybody is talking about increased spend around technology and that's helping office occupancy as well. So yes, those are the kinds of things that we're seeing out there. Matthew Filek: Okay. I appreciate that. And then I just had a quick one on data centers. I think you've previously mentioned that roughly 10% of AUM in Investment Management isn't tied to data centers. I'm just curious how you see that mix evolving over time given the obvious tailwinds supporting that asset class? And related to that, if you could provide any additional color on how other parts of the business are benefiting from the data center theme, that would be great. Jay Hennick: Well, I don't have the exact number, the exact numbers, but I do know that we've been in the business for 6 years. This isn't a Johnny come late lease situation. And we're looking at a lot of opportunity right now, but we're also looking at the opportunity of selling some strategic assets that we've owned for a while because the prices are significant. And so all of those types of things are being factored in. I know everybody's raving about data centers and is there enough computing power and all of those kinds of things. But our teams at Harrison Street have been deep in this area for a long time, and they're looking at it as they would any other real estate investment. And they believe that if they can deliver some significant returns to their investors because of the market timing right now, it will just help them raise capital for the next fund. So that's some additional color for you. Operator: Your next question is from Maxim Sytchev from National Bank Capital Markets. Maxim Sytchev: First, I was wondering if you don't mind mentioning the organic growth in the Engineering space because I guess we're lapping on Global suburb, but I'm not sure if you have the number for it somewhere? Christian Mayer: Yes. Max, the growth was in the mid-single digits, but we don't talk about quarterly growth on a segment basis, as you're probably aware. So not nice growth, though, as I mentioned, a mix of organic growth and acquisitions in the Engineering space. Maxim Sytchev: Okay. And then do you mind maybe talking about potentially digital investments in the Engineering business as obviously, some of the peers are sort of looking to ramp up the capability there? I was wondering what you guys are doing internally? Christian Mayer: Yes. Max, I didn't catch the first part of that question, if you could repeat it. Maxim Sytchev: Sorry, yes, just your strategy around digital investments and sort of augmented AI capability when it comes to the design side of the business as generally speaking, the bigger players seem to be moving in that direction. I'm just wondering what is sort of your color, your strategy from that perspective? Jay Hennick: Well, as I mentioned in my comments, we've increased significantly our spend around IT. A significant portion of that is around AI. We think, as we move down as we move down the decision -- and the other thing I should say is it is not only have we increased our expenditures, but we partnered with Google, and it's a very deep partnership. And Google brings with it leading cloud capabilities, world-class engineering talent and also additional databases, property databases that will help us differentiate ourselves in the marketplace, will help us streamline some of our back office functions, many of which we've been working on for the past couple of years. But the increased expenditure is in part because we believe that we have to take control of some of the delivery of technology for the first time perhaps in our history. And that's bearing some interesting fruit as we move through this. So that hopefully gives you a little bit of an overview. Operator: There are no further questions at this time. I will now hand the call back to Jay Hennick for the closing remarks. Jay Hennick: Thank you, everyone, for joining us on the first quarter conference call. We look forward to speaking to you again at the end of the second. Christian Mayer: Thank you. Operator: Thank you, ladies and gentlemen. This concludes the conference call. Thank you for your participation, and have a nice day.
Operator: Good morning, and welcome to Otter Tail Corporation's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. I will now turn the call over to the company for their opening remarks. Beth Eiken: Good morning, and welcome to our first quarter 2026 earnings conference call. My name is Beth Eiken and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our Q1 financial results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of this call will be available on our website later today. With me on the call today are Chuck MacFarlane, Otter Tail Corporation's CEO; Tim Rogelstad, Otter Tail Corporation's President; and Tyler Nelson, Otter Tail Corporation's Vice President and CFO. Before we begin, I want to remind you that we will be making forward-looking statements during the course of this call. As noted on Slide 2, these statements represent our current views and expectations of future events. They are subject to risks and uncertainties, which may cause actual results to differ from those presented here, so please be advised against placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements due to new information, future events, developments or otherwise. I will now turn the call over to Otter Tail Corporation's CEO, Mr. Chuck MacFarlane. Chuck MacFarlane: Thanks, Beth. Good morning, and welcome to our first quarter earnings call. Before I turn to my prepared remarks on the quarter, I want to briefly touch on our leadership transition we announced last month. These changes are a result of long-standing, thoughtful succession planning by the Board and management team. Effective April 13, Tim Rogelstad was elected President of Otter Tail Corporation. Tim will oversee our Electric and Manufacturing platforms and report directly to me. With over 35 years of experience at Otter Tail, he brings a deep understanding of the organization, our culture and strategy and has a proven track record of strong leadership and execution. At the same time, Todd Wahlund was elected Senior Vice President of the Corporation and President of Otter Tail Power Company, providing continuity and seasoned operational and financial leadership to the utility as it continues to deliver on its rate base growth plan. Todd brings years of operational utility experience to the role, having previously served in resource planning and renewable energy development prior to becoming Otter Tail Power's CFO and later Otter Tail Corporation's CFO. We also announced that Tyler Nelson has been elected Vice President and Chief Financial Officer of the corporation. Tyler has played a key role in our financial leadership for the last 6 years and brings a deep understanding of our financial operations and strategy to the role. These changes do not alter our strategy or priorities. They serve to strengthen our leadership bench as we remain committed to delivering long-term shareholder value. Now let's turn to Slide 4 as I provide an overview of recent operational and financial highlights. We are pleased with our first quarter financial results and are well positioned to achieve our financial objectives for the year. Across our businesses, our team members executed on our near-term priorities for the benefit of our customers and shareholders. Otter Tail Power delivered on our regulatory priorities while making significant progress on our customer-focused rate base growth plan. We achieved a constructive outcome in our South Dakota rate case and implemented new base rates on April 1. We also implemented interim rates for our Minnesota rate case at the start of the year. We completed our $230 million wind repowering project earlier this year, upgrading the wind towers at 4 of our owned wind energy centers. These upgrades are expected to result in a 20% increase in output and are economical for our customers due to the renewed renewable energy tax credits. Phase 2 of our Vinyltech expansion is complete. This marks the end of a multiyear expansion project that added 15% of additional production capacity for our Plastics segment, increased our manufacturing footprint and expanded our raw material storage capabilities. This multiyear expansion project was completed on budget, and we look forward to leveraging this investment to better serve our customers, pursue growth opportunities and enhance our employee experience. Slide 5 provides a summary of our first quarter financial results as well as our expectations for the remainder of the year. We produced diluted earnings per share of $1.73 in the first quarter compared to $1.62 last year. The increase in earnings was driven by strong performance in our Electric and Manufacturing segments. Plastics segment earnings continue to recede within our expectations. We are maintaining our 2026 diluted earnings per share guidance range of $5.22 to $5.62. Following my operational update, Tyler will provide a detailed discussion of our quarterly financial results and our 2026 outlook. Transitioning now to my operational update for Otter Tail Power beginning on Slide 7. We obtained approval from the South Dakota Commission on the settlement agreement reached between Otter Tail Power and commission staff during the first quarter, resulting in a constructive outcome and concluding the rate proceeding. The final outcome of the rate case achieved approximately 75% of our request when considering adjustments for rider treatment. Turning to Slide 8. Our Minnesota rate case continues to progress. Interim rate revenues of $28.6 million went into effect on January 1, subject to refund. Separately, Otter Tail Power is in the process of finalizing its next integrated resource plan. We have held stakeholder meetings to discuss our plan at a high level, and we are on track to file the IRP in Minnesota later this month. Turning to Slide 9. We are reaffirming our 5-year rate base compounded annual growth rate of 10%. Otter Tail Power is expected to continue to convert this rate base growth into earnings per share growth near a 1:1 ratio over the 5-year planning period. Slides 10 and 11 provide an overview of ongoing and future capital projects. Our 2 solar development projects are in the early stages of construction. During the first quarter, our team members secured the solar panels needed for these projects. This strategy eliminates tariff-related risk and helps to avoid any potential cost increases for the benefit of our customers. Our battery storage project remains under development. We are targeting to bring this 75-megawatt storage facility online in 2028. Development work also continues on our large regional transmission projects. We continue to work through areas of landowner and local government opposition associated with siting and certain permits for the Jamestown to Ellendale Tranche 1 project. We received a Minnesota route permit last week for the Big Stone to Alexandria Tranche 1 project, a nearly 100-mile transmission line. We're also monitoring the complaint filed by several states at FERC against MISO's Tranche 2.1 projects. We continue to expect these projects to move forward due to their reliability-related benefits, but believe there could be delays. Turning to Slide 12, which provides an update on our large load pipeline. We removed the 430-megawatt load previously under a term sheet from our pipeline. We no longer expect this project to move forward due to permitting-related challenges as well as failed tax incentive legislation in the South Dakota state legislature. Phase 1 of our pipeline increased by approximately 500 megawatts. We continue to engage with companies interested in adding a new large load to our system. We have and will continue to be prudent in our approach to ensure appropriate guardrails are in place to protect our customers and our shareholders. As a reminder, these changes to our pipeline have no impact on our current load growth forecast or capital spending as we will only adjust our internal forecast for loads that have a signed electric service agreement. We remain committed to providing low-cost electric service to our customers and have demonstrated our ability to do so. As Slide 13 illustrates, Otter Tail Power's electric rates have remained well below the national and regional averages for many years. Looking ahead, we are deeply focused on managing customer bills. We currently project bills to increase between 3% and 4% on a compounded annual growth rate over the current 5-year planning period. This is made possible by MISO's system-wide recovery for our transmission investments, the availability of renewable energy tax credits, reduced energy costs and other factors. Transitioning to our manufacturing platform. Slide 15 provides an overview of the industry conditions impacting our Manufacturing segment. We are optimistic that conditions are improving in several of our end markets. Manufacturing dealer inventory levels have largely normalized, and we experienced increased sales volumes in our construction and recreational vehicle markets. The industrial end market remains strong as our products are used to support the growing energy demand. However, agriculture industry conditions remain challenging due to the weak farm economy with elevated costs, lower relative commodity prices and ongoing trade disruption. T.O. Plastics horticultural end market remains stable with sales volumes improving during the first quarter compared to the same time last year. We continue to face formidable competition from low-cost importers. We are emphasizing our high-quality products and quick delivery capabilities to our customers and appear to be making headway. Slide 16 provides an overview of our Plastics segment pricing and volume trends. Average sales prices of our PVC pipe continued to decline, decreasing 19% from the Q1 2025 average. Sales volumes increased 7% from the same time last year. We benefited from an opportunistic sale of a specialty pipe during this quarter as well as increased distributor and contractor demand late in the quarter. Distributors and contractors sought to secure additional pipe in advance of potential PVC resin cost increases that have been announced by U.S. PVC resin manufacturers. Material input costs, including PVC resin, decreased 12% from the same time last year as the domestic supply of resin was elevated. We are now seeing an increase in PVC resin costs stemming from the conflict in the Middle East. Global PVC resin manufacturers are more heavily impacted by the rising cost of oil, leading to an increase in exports from U.S. resin manufacturers who utilize natural gas as a feedstock. I will now turn it over to Tyler to provide his financial update. Tyler Nelson: Thanks, Chuck, and good morning, everyone. Turning to Slide 18. We are pleased with our first quarter financial results. We generated diluted earnings per share of $1.73, a 7% increase compared to the same time last year. Please follow along on Slides 19 and 20 as I provide an overview of our first quarter results by segment. Electric segment earnings increased $0.25 per share or 43% in the first quarter, driven by increased electric rates and the recovery of our rate base investments. Interim rates in Minnesota and South Dakota went into effect in January 2026 and December 2025. In addition, new base rates in North Dakota were effective for all of Q1 2026, but only a small portion of the same period last year. Our quarterly results also benefited from higher commercial sales volumes across our service territory. These items were partially offset by the impact of unfavorable weather, higher operating and maintenance costs and increased depreciation expense stemming from our rate base investments. Manufacturing segment earnings increased $0.06 per share, driven by higher margins, primarily from a favorable product mix. Increased sales volumes and improved production efficiency also contributed to our quarterly results. Partially offsetting these items were higher general and administrative costs. Turning to Slide 20. Plastics segment earnings decreased $0.24 per share or 24%, primarily due to lower sales prices of our PVC pipe. As Chuck shared earlier, our average sales price decreased 19% from the same time last year. This pricing decline was generally in line with our expectation and continued the trend of receding pricing dating back to the middle of 2022. Partially offsetting the reduction in sales prices are higher sales volumes and lower input material costs. Our volumes benefited from an opportunistic sale of a specialty pipe product and near the end of the quarter, a broader increase in demand spurred by an announced increase in PVC resin costs. Corporate costs decreased $0.04 per share, primarily driven by a timing-based tax benefit compared to the same period last year. Turning to Slide 21. We continue to be in a position of financial strength with a balance sheet capable of funding our rate base growth plan without any external equity needs through at least 2030. Our available liquidity at the end of March was over $650 million, including almost $350 million of cash and equivalents. Our capital allocation strategy remains unchanged. We are focused on using our available cash to fund our utility rate base investments and return capital to our shareholders through our dividend. On Slide 22, we are affirming our annual diluted earnings per share guidance range of $5.22 to $5.62, which is expected to produce a return on equity of approximately 12%. We started the year with momentum and are well positioned to achieve our financial targets. I would like to highlight a few key items we are focused on for the remainder of the year. In our Electric segment, we have a planned major outage at a coal facility beginning in the second quarter and expect higher O&M spend midyear related to asset health and resiliency initiatives. In our Manufacturing segment, we are optimistic about increased sales volumes in the first quarter, but demand visibility becomes less certain in the second half of the year. In our Plastics segment, we expect second quarter sales volumes to be strong and our product pricing to temporarily stabilize as distributors and contractors accelerate pipe purchasing before potential PVC cost increases take effect. However, our annual sales volume forecast remains largely unchanged as we expect the second half of the year to be negatively impacted by the accelerated buying we are seeing now as well as broader macroeconomic conditions. Overall, we are pleased with the start to the year, and our team is focused on delivering upon our strategic priorities over the remainder of 2026. On Slide 23, we summarize and affirm our 5-year capital spending plan. Our planned investment in our Electric segment totals $1.9 billion and is expected to produce a rate base compounded annual growth rate of 10%. Our customer-focused investment plan will be a key driver of earnings growth for this segment over the 5-year period. We continue to project up to $750 million in incremental capital investment opportunity within our Electric segment over the planning period. This incremental opportunity stems from a potential wind generation resource, the acceleration of regional transmission investment and the potential delivery investment to serve a new large load in our service territory. Slide 24 summarizes our financing plan. We continue to expect to fund our 5-year growth plan without any equity issuances. Our robust utility capital program will be primarily financed through existing cash and cash generated from operations over the planning period. At Otter Tail Power, we expect to issue debt periodically to support our rate base growth plan and maintain our authorized capital structure. During the first quarter, we completed a $170 million private placement with $100 million funded in March, with the remaining $70 million scheduled to fund in June. We do not anticipate any further debt issuances in 2026. At the parent level, we have $80 million of debt maturing in the fourth quarter, which we plan to retire using available cash and do not expect to refinance. The value of our diversified portfolio is reflected in our financing strategy. By reinvesting incremental cash flow from our Manufacturing platform into utility rate base growth, we expect to eliminate the need for external equity for at least the next 5 years. On Slide 25, we are reaffirming our expected long-term Plastics earnings profile. We believe segment earnings will continue to decline through the end of 2027 and expect earnings in 2028 to be within a range of $45 million to $50 million. This assumption is based on a continuing decline in the average sales price of our PVC pipe products, higher sales volumes from our recently expanded production capacity and input cost increases generally in line with the rate of inflation. Due to seasonality and other factors, the rate of pricing decline can vary from period to period. Additionally, it continues to be difficult to predict with certainty long-term Plastics segment earnings. The timing or level of earnings could vary materially from our projection. Our Plastics segment continues to be an important component to our overall strategy with the enhanced returns, cash flow and earnings it generates. Even as earnings continue to recede, we expect the segment to produce an accretive return and incremental cash to help fund our electric utilities rate base growth plan. Slide 26 summarizes our investment targets. Underpinned by the significant growth in our Electric segment, we continue to target a long-term earnings per share growth rate of 7% to 9%, resulting in a total targeted shareholder return of 10% to 12%. We anticipate delivering on these targets once Plastics segment earnings normalize in 2028. As we continue to execute on our customer-focused growth plan, we are well positioned to deliver on our investment targets over the long term. Otter Tail Power continues to be a high-performing electric utility, converting its rate base growth into earnings per share growth near a 1:1 ratio. Our manufacturing and plastic pipe businesses consistently produce accretive returns and incremental cash, enabling us to fund our rate base growth plan without any external equity needs through at least 2030. It is this intentional strategic diversification that has and will continue to provide benefits to our customers and investors over the long term. We look forward to what the future holds and are grateful for your interest and investment in Otter Tail Corporation. We are now ready to take your questions. Operator: [Operator Instructions]Our first question comes from the line of Chris Ellinghaus of Siebert Williams Shank. Christopher Ellinghaus: Chuck, given the Iranian situation, does that alter your expectations for what sort of the global resin dynamics will be? Or are you sort of thinking that, that gets resolved before the second half of the year? Chuck MacFarlane: Thanks for the question, Chris. Yes, I think we believe that it long term will be resolved, whether it's completely resolved by the second half of this year, we don't know on that, but we just know that it is impacting the U.S. domestic export price of resin, which drives up the domestic price at this time. Christopher Ellinghaus: Sure. That makes sense. What is driving in manufacturing sort of the recovery in recreational vehicle market dynamics given sort of the negative consumer sentiment this year. Tyler Nelson: Chris, this is Tyler. So I think a couple of things. First, inventory levels in the channel, both at the dealer and the manufacturer have normalized. I think they're at a good level where we will see more throughput on any demand at the end customer level. We will feel that now that inventories have normalized. In addition to that, some of the higher-end models, we continue to see strength in product demand, whereas the lower-end models more subject to macroeconomic conditions, that's where we have seen some ongoing softness. But at the mid and higher levels, we have seen a bit of a pickup in demand. Christopher Ellinghaus: Okay. And in the pipeline side did that letter of intent customer slide back into the broader pipeline? Or they just give up altogether? Timothy Rogelstad: Chris, this is Tim Rogelstad. No, we continue to work with that customer. I would say they're not currently in the pipeline of projects, but I think we'll continue to explore options, and it's possible we could see them come back in. Christopher Ellinghaus: Okay. Are they -- was it more the permitting site issue or the tax issue that was particularly important to them? Timothy Rogelstad: From our understanding, I think both of them were definitely barriers for them to want to move forward in South Dakota. I'm not sure if one was more important over the other, but that's where the situation sits. Christopher Ellinghaus: Okay. And can you give us any update on the Minnesota rate case process? What's the next big hurdle for you? Timothy Rogelstad: Okay. Well, we are in the middle of discovery right now. And probably one of the unique things that's happened in this particular case is the pace of discovery started a little bit later than what we were used to. So the last 2 months have been -- we've seen what I'd characterize as heavy discovery. The next step will be the expectation of getting the intervenor testimony, which we expect sometime here in the second quarter. Christopher Ellinghaus: Okay. There's been a decent run-up in interest rates lately. Do you expect to make any adjustments to the case for what we're seeing today? Tyler Nelson: Chris, this is Tyler. No, we don't expect any adjustments for the interest rate environment that we're experiencing today. They do take into account the debt issuance, the debt offering that we completed that gets factored into the case. But outside of that, no other adjustments planned. Operator: As there are no remaining questions in the queue, I will turn the call back over to Chuck for his closing remarks. Chuck MacFarlane: Thank you for joining our call and your interest in Otter Tail Corporation. If you have any questions, please reach out to our Investor Relations team, and we look forward to speaking with you next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.