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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.
Operator: Greetings, and welcome to Great Elm Capital Corp.'s First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Adam Yates, Managing Director. Thank you. Mr. Yates, you may begin. Adam Yates: Hello, and thank you, everyone, for joining us for Great Elm Capital Corp.'s First Quarter 2026 Earnings Conference Call. If you would like to be added to our distribution list, you can e-mail investorrelations@greatelmcap.com or you can sign up for alerts directly on our website, www.greatelmcc.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. On our website, you can also find our earnings release and SEC filings. I would like to call your attention to the customary safe harbor statement regarding forward-looking information. Also, please note that nothing in today's call constitutes an offer to sell or a solicitation of offers to purchase our securities. Today's conference call includes forward-looking statements, and we ask that you refer to Great Elm Capital Corp.'s filings with the SEC for important factors that could cause actual results to differ materially from these statements. Great Elm Capital Corp. does not undertake to update its forward-looking statements unless required by law. To obtain copies of our SEC filings, please visit Great Elm Capital Corp.'s website under Financials, SEC filings or visit the SEC's website. Hosting the call today is Jason Reese, Great Elm Capital Corp.'s Chairman of the Board and newly appointed CEO. He'll be joined by Matt Kaplan, Portfolio Manager; Chris Croteau, Head of Research; Chief Financial Officer, Keri Davis; Chief Compliance Officer and General Counsel, Adam Kleinman; and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's Chairman and CEO, Jason Reese. Jason Reese: Thanks, Adam, and thank you, everyone, for joining us today. In March, I assumed the role of Executive Chairman of GECC at an important inflection point for the company. On May 4, I was appointed CEO. The company was established to create income and protect and grow NAV. In the near term, I am reprioritizing. We will protect and grow NAV first and secondarily create income. We will accomplish this by strengthening oversight, protecting shareholder value and reinforcing accountability across the platform. We are well underway, making progress on these fronts. I noted last quarter that as Chairman and CEO of Great Elm Group, the parent company of GECC's investment manager, I bring deep familiarity with both the team and our investment process. That familiarity enables a seamless transition into my role as both GECC Chairman and CEO, and I'm working closely with management to reinforce disciplined underwriting and thoughtful capital allocation. Before turning to the quarter, I would like to thank Matt Kaplan for his leadership during his tenure as CEO. Matt will continue in his role as Portfolio Manager. Turning to results. Recent quarters have been challenging for the broader BDC sector, and GECC was not immune to the macro environment. Our NAV declined this quarter, driven primarily by unrealized losses in select investments, most notably our CLO JV and one private investment with an idiosyncratic event. Our CLO investments can exhibit volatility given their inherent leverage. Additionally, in the first quarter, the broader CLO equity market declined. Despite the volatility of the quarterly mark, CLO exposure provides additional diversification to GECC's portfolio of secured investments. Our CLO investments continue to generate meaningful cash flow, diversify our income streams and support the sustainability of our net investment income. In light of these unrealized losses, Great Elm Capital Management, GECM, investment adviser, has waived all accrued and unpaid incentive fees through June 30, 2026, marking the third consecutive quarter of fee waivers. As of March 31, 2026, that waiver amounted to approximately $2.8 million or $0.20 per share of direct benefit to our shareholders. This action is immediately accretive to NAV and underscores our alignment with shareholders. We have also taken decisive action to deleverage the balance sheet. Recently, we called and repurchased all $57.5 million of GECCO notes due later this year. Once these notes are fully retired, GECC will have no funded debt maturities until 2029. This eliminates near-term refinancing risk and enables our flexibility to deploy capital strategically. In addition, we continue to improve portfolio credit quality through active investment rotation. During the quarter, we deployed approximately $22 million across 12 investments while exiting investments we viewed as higher risk. As a result, first lien investments now comprise nearly 75% of the corporate portfolio, the highest level in the company's recent history. This reflects a deliberate shift towards senior secured investments with stronger downside protection and is a direct outcome of the underwriting discipline we have instilled across the platform. At the same time, we're expanding our proprietary sourcing efforts. During the quarter, we closed 3 transactions sourced through institutional partnerships, committing approximately $15 million to new private investments. We closed on one additional proprietary private investment in April, and we expect to close additional investments in the near future, building on this momentum as our sourcing network continues to deepen and differentiate our platform. At Great Elm Specialty Finance, or GESF, we continue to execute on the strategic transformation aimed at streamlining the platform for enhanced growth and profitability. Great Elm Commercial Finance is building a robust pipeline of asset-based lending opportunities, while Great Elm Healthcare Finance has successfully repositioned the business and recently closed on another transaction. Prestige, our invoice financing business generates durable returns, but can exhibit quarter-to-quarter variability due to the spot nature of its business. I'm pleased to say all 3 of our core verticals under GESF are profitable and generate cash distributions. Collectively, GESF is poised for continued growth and represents an increasingly important source of diversification across both assets and income. Today, GECC's high-quality portfolio is strong, composed primarily of performing cash-generative investments. We closed the quarter with less than 1% of fair value of all investments on nonaccrual, stark contrast to our peers. In addition, in the last quarter, we opportunistically purchased shares at a discount to NAV under our stock repurchase program. Through May 1, 2026, under our $10 million stock repurchase program authorized in October 2025, we have repurchased approximately 1% of all shares outstanding at an average 36% discount to our March 31 NAV, leaving approximately $9.5 million of remaining capacity under the program for future repurchases. Stepping back, GECC is well capitalized and supported by a strong balance sheet. At quarter end, we held approximately $10 million in cash, $4 million of liquid exchange-traded assets and had full availability under our $50 million revolving credit facility. With no near-term debt maturities, ample liquidity and a higher quality portfolio, we are well positioned to act decisively when compelling opportunities arise. Now I'd like to turn the call over to Keri Davis to walk through the financial details. Keri Davis: Thanks, Jason. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation and SEC filings for greater detail. NII for the first quarter of 2026 was $5 million or $0.36 per share compared to $4.4 million or $0.31 per share in the fourth quarter of 2025. The approximate 13% growth quarter-over-quarter in NII was driven primarily by the benefit of the incentive fee waiver, accounting for approximately $0.20 per share. Net assets were $107.5 million or $7.74 per share as of March 31, 2026, compared to $112.9 million or $8.07 per share as of December 31, 2025. Details for the quarter-over-quarter change in NAV can be found on Slide 11 of the investor presentation. Our balance sheet remains strong and liquid. GECC's asset coverage ratio was 161.8% as of March 31, 2026, compared to 158.1% as of December 31, 2025. Our debt-to-equity ratio also improved to 1.62x from 1.72x in the prior quarter, reflecting the continued deleveraging Jason noted. As of March 31, 2026, total debt outstanding was $174 million, and we had no borrowings on our $50 million revolver. Cash and money market fund investments totaled approximately $10 million. Importantly, our Board of Directors approved a quarterly dividend of $0.25 per share for the second quarter of 2026, equating to an 18% annualized yield on GECC's May 1, 2026, closing price of $5.56. I'll now hand it over to the operator for questions. Operator: [Operator Instructions] The first question comes from the line of Erik Zwick with Lucid Capital Markets LLC. Erik Zwick: Jason, if I could start with a question for you. You mentioned in your prepared comments, some efforts to deleverage the balance sheet. I know there's no additional maturities until 2029. I guess at this point, have you kind of completed those deleveraging opportunities or efforts? Or are there still more you could do through, I guess, maybe deleveraging? Jason Reese: At the end of the -- I'm sorry, at the end of the quarter, there was still $18 million of our 2026 paper outstanding. Approximately, we called that paper. It hasn't been paid off yet, but it will be in the next few weeks. At that point, we've probably completed our deleveraging for the moment, although our 8.5s do become callable at the end of this month. Erik Zwick: Okay. So that could potentially be something that you would look at. Okay. That's helpful. And maybe switching gears a little bit just in terms of the pipeline, and maybe this is kind of a two-part question. One is, as you look at what's in your pipeline today, the opportunities there that you're seeing as you look at through kind of a risk-adjusted lens, but then also looking at the opportunity to continue using the share repurchase authorization kind of given where the shares are trading today, how do you weigh those two opportunities and choose which to -- where to deploy capital at this point? Jason Reese: So, we're obviously going to balance and look at all opportunities and look where we think the best risk-adjusted returns are. As far as our opportunities, we are much more focused on more traditional private credit deals than broadly syndicated loans right now. We think that there's better yields, actually, with less risk there right now, and we've closed a number of those transactions already this year, and we're working on a number more. As for looking at share repurchases or debt paydown versus investments, I mean, we're constantly looking at what the return is. Obviously, paying down debt is riskless for us, and so that's important. But we're very serious about rebuilding NAV, as I've tried to say. And as you've seen with us waiving for 3 quarters our investment (sic) [incentive] fee, and by actually buying back shares, which a lot of BDCs don't do, we're looking to rebuild that NAV piece. Did that address your question? Erik Zwick: Yes. No, it does. And maybe just a follow-up on that as I try and kind of look at the future run rate of earnings and think about that incentive fee waiver. And you mentioned that the priority #1 now is protecting and growing NAV. So, is it safe to assume that you would potentially continue considering waiving the incentive fee if the kind of run rate of earnings without the incentive fee waiver is less than the current level of the dividend, the new kind of $0.25 per share level? Jason Reese: We will continue looking at what's in the best interest of the shareholders for sure. And yes, we definitely want to be covering our dividend. So, I'm just changing emphasis, right? We've done a pretty good job of generating income and covering our dividends. We haven't done as good a job as protecting our NAV. And so, we're going to really focus on that. I think there's times when you take more risks and there's times when you take less risk in your investments. And the last couple of quarters have shown to be a time to take less risk. Erik Zwick: Got it. And then just in terms of trying to get kind of a better understanding of the CLO cash flow timing. I know that depending on when you made those and the scheduled payments that can be a little bit kind of bumpy quarter-to-quarter. To the extent that you have some visibility over the next few quarters, anything you can communicate there in terms of expected timing of cash flows? Jason Reese: We will be getting cash flows every quarter now. I mean, in part, when you first make CLO investments, there's a lag, and that's created a lot of the variability, but it will also depend on how those CLOs continue to perform. I mean we're very comfortable about the cash flows we're going to receive over the life of those equities. But like in the first quarter, obviously, the broadly syndicated loan came down. But we expect -- we've already received $2.5 million this quarter, which is kind of at the same rate as the first quarter. That's probably a reasonable number for you to look at going forward, but they will vary. Erik Zwick: Okay. And so if you -- correct me if I'm wrong, I don't think you made any new CLO investments in the last quarter or 2. So some of that kind of initial as it goes through the warehouse period and then makes its first distribution, most of that should be in the past, barring any new investments you might make? Jason Reese: Correct. There should be less volatility going forward than there has been in the past unless we decide to make new investments, which we, at the current moment, are not looking at making any new CLO equity investments. We're pretty happy with where our position is. Operator: [Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor over to Jason Reese for closing comments. Jason Reese: Thank you again for joining us today. Our priorities remain clear: Protect capital, methodically rebuild NAV and generate sustainable net investment income. During the quarter, we advanced each of these objectives. GECM again waived incentive fees to the direct benefit of GECC shareholders. We took action to retire all near-term funded debt, and we increased first lien exposure to its highest level in recent periods. We have instilled greater rigor, transparency and accountability across the platform, and I am encouraged by both the trajectory of the portfolio and the strength of the team executing on our strategy. As we move through the second quarter, GECC's solid foundation and strong liquidity positions us to deliver more consistent and durable returns over time. We remain focused on disciplined execution and long-term value creation. We appreciate your continued support and look forward to updating you next quarter. Thank you. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the MSA Safety First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria. Please go ahead. Lawrence De Maria: Thank you. Good morning, and welcome to MSA Safety's First Quarter 2026 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO; Julie Beck, Senior Vice President and CFO; and Gustavo Lopez, Vice President, Product Strategy and Development. During today's call, we will discuss MSA's first quarter 2026 financial results and provide an update on our full year 2026 outlook. Before we begin, I'd like to remind everyone that the matters discussed today during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, all projections and anticipated levels of future performance. Forward-looking statements involve a number of risks, uncertainties and other factors that may cause our results to differ materially from those discussed today. These risks, uncertainties and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We've included certain non-GAAP financial measures as part of our discussion this morning. These non-GAAP reconciliations are available in the appendix of today's presentation. The presentation and press release are available on our Investor Relations website at investors.msasafety.com. Moving on to today's agenda. Steve will first provide an update on the business. Julie will then review our first quarter 2026 financial performance and 2026 outlook. Steve will then provide closing remarks. He will then open the call for your questions. With that, I'll turn the call over to Steve Blanco. Steve? Steven Blanco: Thanks, Larry, and good morning, everyone. Again, we appreciate your continued interest in MSA Safety. I'd like to start with a brief comment on the conflict in the Middle East, which I'll discuss in more detail in a few minutes. While the situation remains volatile, our top priority is the health and safety of our associates in the region. We have an outstanding team, and I'm pleased to report that our employees are safe, and we remain close to our customers to ensure their safety needs. We'll continue to prioritize our team's safety while serving our customers and managing the inherent business risks. I'm on Slide 6. The team achieved a solid start to the year as we continue to execute and deliver on the commitments outlined in our Accelerate strategy. Our first quarter results included consolidated reported sales growth of 10% with a 3% organic increase and adjusted earnings per share of $1.99, up 18% from last year. Organic sales performance in the quarter was driven by high single-digit performance in the Americas, which was partially offset by a decline in the International segment. Geographically, we saw strong growth in North and Latin America and weakness across our European and Middle Eastern markets. Our results reflect the resilience of our diversified business despite the lower growth environment in Europe and the potential impact due to the Middle East conflict. Looking at sales by product category, organic sales in Detection were consistent with the prior year as double-digit growth in portable gas detection was offset by double-digit declines in fixed monitoring solutions in International. This decline reflects the impact of softer European and Middle Eastern markets. The M&C TechGroup acquisition contributed $15 million to the quarter. Organic sales in fire service increased 3% year-over-year, driven by strength in the Americas. As we expected, SCBA sales partially benefited from AFG funding related to the U.S. government shutdown in late 2025. Organic sales of industrial PPE were up 7% on continued momentum in fall protection and growth in industrial head protection, reflecting healthy performance in our short-cycle businesses and nice momentum in our new H2 hard hat. In international, growth in protective ballistic helmets provided additional tailwinds. Organic orders were also healthy and in line with normal seasonality and book-to-bill was above 1. We're pleased to see the reopening of the Department of Homeland Security, which should further enable fire departments to access the AFG grants that were approved in 2025. Strength was notable in our industrial PPE business, supporting broad-based strength across our short-cycle businesses. Moving to Slide 7. We continue to execute our Accelerate strategy to drive value for our stakeholders and serve our mission. We're encouraged by the solid start to the year, especially given the challenging operating environment in certain areas of the world. The business demonstrated resilience through top line growth and margin expansion with Americas strength outpacing international results. We also achieved positive price/cost in the first quarter. I'd now like to provide some context on the impact of the conflict in the Middle East. While we've not seen any meaningful business cancellations in the short term, it's been affecting customer order and delivery patterns in the region. While the Middle East is a long-term growth market for the MSA, for reference, sales represent about mid-single-digit percentages for our overall business. Now let's pivot to discuss a few strategic highlights from the start of 2026. We continue to innovate and bring industry-leading products and solutions to market. We began shipping our newly launched ALTAIR io 6 portable gas detector, which joins the io 4 for expanding our MSA+ connected ecosystem. The io 6 is a long-term growth opportunity for the business. We continue to see strong demand for both traditional and connected portable offerings. We also announced the launch of the Bacharach X30 and X50 refrigerant monitoring solutions. These fixed gas detectors were designed to help customers comply with regulations around refrigerant gas monitoring and leak detection. The launch of these new solutions expand upon our end-to-end refrigerant management and monitoring offerings in the HVAC-R market. From a financial perspective, we announced a new $500 million share repurchase authorization in February, which we began to execute on in the first quarter. This authorization reflects our commitment to our disciplined and balanced capital allocation strategy. Finally, I recently attended the Fire Department Instructors Conference, FDIC, in Indianapolis, where it was my pleasure to interact with our customers, channel partners and the MSA Fire Service team. It was inspiring to showcase MSA's extensive solutions for the fire service and our commitment to continued innovation through the connected firefighter platform of the future. Along with our Globe apparel business and Cairns Protective helmets, we once again demonstrated the strength of our market-leading head-to-toe fire service solutions. Industry feedback was excellent. Moving to Slide 8. I'm pleased to share that we've signed a definitive agreement to acquire Autronica Fire & Security in a transaction valued of $555 million. We expect the deal to close in the third quarter. Autronica is a leader in fire and gas detection systems and is highly complementary to our existing fixed detection portfolio. The acquisition is well aligned with MSA's mission and Accelerate strategy, including our financial and strategic M&A objectives. With a history of mid-single-digit plus sales growth, the company generated 2025 sales of approximately $160 million and adjusted EBITDA margins of about 20%. Through numerous synergy opportunities, we expect to increase adjusted EBITDA margin to meet or exceed the corporate average over the next several years. From a balance sheet perspective, the transaction implies pro forma net leverage of approximately 2x at close, well within our target range. We expect to finance the acquisition through a combination of cash on hand and our revolving credit facility. And we remain well positioned to invest in our business and delever post close while maintaining a healthy M&A pipeline. Strategically, this business is a great fit with our existing fixed detection platform. It is accretive to growth and enhances MSA's ability to participate earlier in project design to deliver more integrated fixed gas and flame detection solutions. It also expands our addressable market by $3 billion and is similar to our existing detection business from a customer, technology, distribution and regulatory perspective. Moving to Slide 9. Autronica is a leader in mission-critical gas and flame detection technologies used across diverse end markets, including critical infrastructure, energy and marine. Headquartered in Trondheim, Norway, the company was founded in 1957 and is known for its technology leadership and growth mindset, deep customer intimacy and a large installed base, underpinned by a mission of safety. These attributes align closely with MSA's culture and our strategy. Autronica serves markets around the world with a strong footprint across the Nordic countries and the rest of Europe with other businesses across the globe. And it complements and strengthens our global footprint with its world-class brands. And like M&C, we expect to enable growth in markets where MSA is stronger, most notably in the Americas by leveraging distribution and relationships. I look forward to welcoming the Autronica team to the MSA family upon closing the deal sometime in the third quarter. With that, I'd like to turn the call over to Julie to walk us through the financial results for the first quarter in more detail and our 2026 outlook. Julie Beck: Thank you, Steve, and good morning, everyone. We appreciate you joining the call this morning. Starting on Slide 11 with the quarterly financial highlights. First quarter sales were $464 million, an increase of 10% on a reported basis over the prior year. Sales were up 3% on an organic basis, while currency translation was a 4% tailwind, and M&C added 3% to overall growth. The foreign exchange benefit was primarily related to the euro, Mexican peso and Brazilian real. As expected, GAAP gross margins improved, rising to 47.4%, an increase of 50 basis points sequentially and 150 basis points over the prior year. Year-over-year gross margin reflects strong operational performance from our team, including strategic pricing, productivity, as well as positive mix and favorable transactional foreign exchange, which offset pressures from tariffs and inflation. On an adjusted basis, gross margin increased 170 basis points year-over-year to 48.1%. GAAP operating margin was 20.1%, a 160 basis point increase driven by the gross margin expansion. Adjusted operating margin was 21.8%, up 100 basis points over last year, with an adjusted incremental operating margin of 32% within our annual target range. We continue to invest in our innovative safety products and solutions with R&D expenses of $16 million in the quarter. SG&A increased from the prior year due to the addition of M&C as well as foreign exchange. Quarterly GAAP net income increased 20% to $71 million from the prior year, while diluted earnings per share increased 21% to $1.83. Revenue growth and margin expansion were primary drivers of earnings per share growth with incremental benefits from foreign exchange, M&C, share repurchases and a lower year-over-year effective tax rate. On an adjusted basis, diluted earnings per share were $1.99, up 18% from last year. Now I'd like to review our segment performance. In our Americas segment, sales increased 11% year-over-year on a reported basis, 7% of that was organic. We delivered broad-based organic growth across our product categories with high single-digit contributions from fire service and detection, along with mid-single-digit performance in Industrial PPE. M&C contributed 2 points to total growth and currency translation added a 2% tailwind. The adjusted operating margin was 30.2%, a 340 basis point increase compared to the previous year. The margin improvement was primarily due to strong execution from the team, including strategic pricing, productivity, favorable transactional foreign exchange and positive mix. In our International segment, sales increased by 8% year-over-year on a reported basis with an 8% contribution from M&C and a 7% tailwind from foreign exchange. Organic sales declined 7% on a double-digit contraction in detection and fire service, partially offset by double-digit growth in Industrial PPE. Organic growth headwinds, especially in detection, were primarily attributable to softer economic conditions in Europe and headwinds associated with the Middle East conflict. Fire service was temporarily unfavorably impacted by order timing. Growth in industrial PPE was primarily due to strength in fall protection and protective ballistic helmets. Adjusted operating margin was 10.5%, 410 basis points below last year. Margin contraction was mainly due to inflation, tariff pressures and lower volumes, partially offset by strategic pricing and favorable transactional foreign exchange. Now turning to Slide 12. We generated free cash flow of $65 million, which was 91% of earnings, marking a 28% increase in free cash flow generation compared to a year ago. Free cash flow was strong relative to normal first quarter seasonality, driven primarily by the year-over-year increase in net income. Returning capital to our shareholders is an important part of our disciplined capital allocation. We returned $71 million to shareholders via $50 million of share repurchases, fully offsetting expected dilution for the year and $21 million of dividends. Capital expenditures returned to a more normalized level of $11 million. In addition to repurchasing shares, we also announced the authorization of a new $500 million share repurchase program in February, our largest ever. The program replaces the previous $200 million program authorized in 2024. There is no set termination date and $475 million remains under the new program as of quarter end, with half of our repurchases in the first quarter under the prior authorization. Yesterday, we also announced our 56th consecutive annual dividend increase. We ended the quarter with net leverage of 0.9x and a weighted average interest rate of 3.8%, both consistent with fourth quarter levels. Our strong balance sheet and ample liquidity of $1.2 billion at quarter end continue to provide significant strategic capital allocation optionality within the framework of our Accelerate strategy. As Steve discussed with the acquisition of Autronica, we are actively deploying capital as part of our M&A strategy. We expect our pro forma weighted average interest rate post-acquisition to be approximately 4.5%. We expect the $555 million acquisition to add approximately 1 turn of net leverage and be accretive to adjusted earnings per share in year 1. Following the transaction, we expect net leverage to be approximately 2x. With Autronica, our 2025 pro forma detection revenues increased to approximately 45% of our total sales mix. The acquisition adds scale to our European business and is accretive to our international adjusted EBITDA margin. We expect to begin realizing the benefits of the synergies in the second half of the first year of ownership with a full run rate value to be realized over the next 3 years. Let's turn to our 2026 outlook on Slide 13. Our outlook does not reflect any impact from the Autronica acquisition. Given the solid start to the year and the overall health of our business, we are reaffirming our mid-single-digit organic sales growth outlook for 2026. Broadly speaking, our full year assumptions remain unchanged from the outlook we provided in February. However, we do recognize and are proactively managing the potential challenges posed by the volatile tariff, geopolitical and macroeconomic landscape. While we are encouraged by the reopening of the Department of Homeland Security, we are mindful that AFG grants previously awarded to our fire service customers were suspended during the shutdown and may face continued short-term delays as DHS reopens. That being said, our outlook assumes continued strength in our Americas segment and an improvement in our international results from the first quarter. Our outlook is supported by a mid-single-digit year-over-year order increase and a double-digit backlog increase sequentially in our International segment. For modeling purposes, below-the-line items also remain unchanged from our previous outlook. In conclusion, although the macro and geopolitical environment backdrop remains fluid and continues to shape a dynamic operating environment, we executed well to begin the year and remain laser-focused on delivering our traditional growth algorithm, including mid-single-digit organic sales growth in 2026, consistent with our Accelerate strategy. With that, I'd like to pass it back to Steve. Steven Blanco: Thank you, Julie. I'm on Slide 15. To close, I'm proud of our team's execution to begin the year and thank all of our associates for their continued commitment to serving our customers. With that, I'll turn the call back over to the operator for Q&A. Operator: [Operator Instructions] And the first question will come from Tomo Sano with JPMorgan. Tomohiko Sano: Congrats on the quarter. Steven Blanco: Thanks, Tomo. Tomohiko Sano: And could you talk about the guidance regarding the mid-single-digit organic growth? For the remainder of the year, do you expect the strong momentum in the Americas to continue? Or will the recovery in international be necessary to achieve your full year guidance, please? Steven Blanco: Yes. Thanks for the question. I think you'll see both of those businesses perform. If you think of international, as Julie said in the prepared remarks, the fire service piece was really planned given tender timing. The major market activity in the pipeline comes in the second half of the year. Certainly, the detection with what's going on in the Middle East and Europe was challenged. But even that, you look at the Middle East, our incoming business is higher through April this year than last year. It's just a matter of us getting that invoiced. So we expect that to turn. And by and large, we're expecting a nice recovery in the international markets while we continue to see Americas perform. So I think it's going to be broad-based across the business and the incoming supports that to date. Tomohiko Sano: And then just one follow-up on the acquisitions of Autronica. How do you assess the cultural fit between MSA and Autronica? And what measures are you taking to ensure successful integrations, both operationally and culturally, please? Steven Blanco: Yes. Thanks for the question. So that's critically important to us. If we look back even last year, we -- as we got close to some opportunities, culture was so important to us. It's not just about looking at the business growth. It's really about how do we fit for the long term because this is a long term -- we like to use the term New Member Of The Family, and how they integrate culturally is just as important as how the business looks. We feel really good. The team was just super stoked about what we saw there, the leadership there, their engagement and their focus on safety, Tomo, it's really nice. I would also add, if you think about how we look at the synergies here and we look at the forward multiple, we're looking at that, that's cost only. But most of our upside, which we haven't modeled in that, frankly, is what we see in the revenue side. So long term, we expect this business to grow, help MSA grow, and we expect it to be a nice fit. And if you look back as you talk about our success or how effectively -- confidence, I guess, in effective execution, we've done a really nice job with M&C, which obviously, we've done nice on some acquisitions previous to that. But I think the business system really comes alive with these acquisitions. And we saw that with M&C, we'll see that with Autronica. Operator: The next question will come from Quinn Fredrickson with Baird. Quinn Fredrickson: First, just on fire service. Any way to quantify how much recapture the deferred fourth quarter sales you saw this quarter? Just wondering how much of that $20 million recapture opportunity remains? And then perhaps any color you can give us on the near-term outlook as well since you mentioned some order timing influences from the DHS shutdown? Steven Blanco: Yes, sure. So again, thanks for the question. But if we look at fire, it was solid. We only realized roughly 1/3 of the AFG-related delayed orders coming through. So that implies a little over 2/3 are left. And that expected timing, we had hoped kind of the first half, we expect some in the second quarter. But certainly, with the government shutdown, that has put some pressure on them getting access to their grants. Probably plays out in late the second quarter into the third quarter at this point. So you'll see, I think, that 2/3 kind of play out in those 2 quarters. That's how we're seeing it right now. Quinn Fredrickson: Okay. Julie, one for you. I think you mentioned being positive price/cost in the quarter. Just any way to quantify? And then for the year overall, do you now anticipate being price/cost positive? Julie Beck: We're on track. We talked about sequential margin improvement, which we saw, and we continue to expect margins to improve. We reaffirm our 30% incrementals and I think it's going to be a nice year for us. Operator: The next question will come from Steve Volkmann with Jefferies. Unknown Analyst: This is James on for Steve. I wanted to touch on the acquisition. You talked about there is a potential for revenue synergy, which is not baked in. But can you kind of just talk about the mechanism there? And on the cost synergy, what's the kind of timing of realization after close? Steven Blanco: I'll let Julie jump into the cost. I mean it's a multiyear plan. But I think when you think of the acquisition broadly, it really helps us. It expands our capability to participate earlier in designs. You think about the engineering design work that goes on very early that fire detection is integral for, that's key in our view. It's a business that's highly engineered and they really are in a highly regulated business, not dissimilar to us, but they have a solution for complex applications with their product portfolio. So I think for us, it's the ability to participate in markets where we're strong and they're not. So we can take those solution sets and expand that into those markets. That's part of that addressable market we talked about. If you think about a couple of markets we have real strength, one in the Americas, where they don't. I mean they just don't have that coverage there. They want to, and we're going to help them do that. And the Middle East, which they're starting to grow in, we're very strong in those. And that's representative of over 2/3 of that addressable market growth we talked about. So you think their solution set, you combine that with ours, you now have the full suite that our end customers really look for, and we can get earlier access when they're really designing out based on the regulatory requirements, they're designing out that platform for fire and gas detection. We think that's going to be a real big win here. Julie Beck: And just a follow-up on the cost synergies. Just we see those starting maybe in the second half of the first year of ownership, and we expect to fully realize them all within about 3 years. They consist of various things, typical operational and supply chain items, maybe a little bit of back office but it's those types of things, and we're just really excited about the potential and margin expansions going forward. Unknown Analyst: Great. And I guess I wanted to touch on the international detection here. Again, kind of -- I mean, organic sales came in weaker and you talked about like the weakness in Middle East and Europe. So like what's embedded in guidance? Like when do you think those will normalize? And kind of what gives you confidence that they will normalize kind of going forward? And I think also there was kind of onetime like large detection orders in Latin America that gave a tough comp. So can you also size that like for us so that we can kind of think about like the impact by components? Steven Blanco: Certainly. So last year, we did have -- we had a couple of points of what would have been 2026 growth, which we executed in '25 based on the customer funding availability. And so they pulled that forward. So it is certainly a tough comp there because that gave us, I think, 12% growth overall. But when you look at '26 as we are in now, we still expect nice growth overall. The first quarter with what's happened with the conflict and really some of the related pausing that we saw in Europe certainly put a bit of a crimp for a quarter. But as I noted, we're seeing some nice incoming and the pipeline is really strong. What's happened is you've seen a delay and slowdown in project business. So the project awards have really slowed. So that's affected certainly the Middle East, but also Europe. And even though Asia Pacific performed well in the first quarter, their detection business was affected to some degree because of those projects. What I would say is the Middle East adds uncertainty, certainly, and we know that. And most importantly, I would note that for our employees and customers and all there, our thoughts and prayers are with them. But our expectations is if we get past this by midyear, we have pretty good line of sight for the year and confidence with where we're at. Julie Beck: And just to add just a point of clarification, the large order that Steve was referring to is in the Americas segment, not in the International segment. Steven Blanco: Yes, right, the Latin America. Operator: [Operator Instructions] The next question will come from Brian Brophy with Stifel. Brian Brophy: Just following up on the Middle East discussion. I guess we've heard anecdotally about some damaged equipment over there in need of a replacement. Are you guys having conversations with customers on the topic -- on this topic at this point? And how should we be thinking about this potentially translating into a tailwind for your business at some point in the future? Steven Blanco: Yes. Thanks for the question. Well, I think, broadly speaking, it has been difficult for our end customers to operate on a normal condition. with what you talked about. And certainly, that damage is part of it and just the normal operation. We've seen the day-to-day business and replacement component business in the Middle East really slowed down in the first quarter, which is indicative of what you just talked about. We are certainly staying close to the customers and ensuring that we are ready and able to support them as they come back up to speed. And obviously, they're already trying to figure out how to do that. And that's part of what we hope to see some of that. There might be some tailwinds in the second half of the year as we try to support that, and we'll be prepared for that. At this stage, that's an added piece to the business. But at this stage, I would say it would be upside. Brian Brophy: Yes. That's helpful. And then just wanted to ask about gross margins. Obviously, some nice improvement from the first quarter a year ago. I guess I'm curious how much -- yes, how much of the benefit was transactional FX related? Was this really more just a price/cost tailwind? And just any updated thoughts on how you're thinking about gross margins this year? Julie Beck: Yes. Thanks for the question. Yes, I would say that the gross margin expansion is really a bulk of it comes from price/cost but we also saw some nice productivity and some nice initiatives from our ops folks contributing as well. And the FX piece is a smaller portion of the total pie. It really was operational primarily. Steven Blanco: Yes, Brian, if you remember, what we talked about last year is that we were going to manage these inputs and combine our productivity with the appropriate strategic pricing to help manage our customers' needs and impacts with the value. And that's exactly what the team has done. So getting those efficiencies and productivity flow through along with the pricing actions have resulted in what we had expected and certainly where we're at. Julie Beck: Yes. And we're on track for those 30% incrementals and gross margins in that 47%, 48% range for the year, just to follow up. Operator: The next question will come from Jeff Van Sinderen with B. Riley FBR. Jeff Van Sinderen: Let me add my congratulations on the Autronica acquisition. It sounds great and I understand it's a multiyear plan. Just wanted to clarify, should we anticipate that it would be dilutive to consolidated EBITDA margins in the first few quarters? Or how should we think about that? Julie Beck: Yes, slightly. Yes. Yes. Their margins are -- we disclosed it approximately 20% EBITDA margins, slightly under but they will improve over time, and we'll have gross margin expansion there as well. Jeff Van Sinderen: Okay. And then just thinking about that, do you think we're looking at -- I realize there's a lot of inputs there, but do you think we're looking at something that's like a few hundred basis points or because there's a pretty sizable gap between the 20% and where you guys are running. I'm just wondering sort of order of magnitude we should anticipate? Julie Beck: Not terribly much, point or something like that, 50 basis points, not a huge impact. Jeff Van Sinderen: Okay. That's helpful. Terrific. And then just, I guess, kind of looking at the supply chain, I know there's disruption, there are certain supply chain things that are a challenge for some folks. Just wondering kind of considering the geopolitical backdrop and so forth, and where there are some constraints out there, are you guys seeing any of that, anything that's challenging that you're watching for supply chain? Steven Blanco: We certainly are. And I would say that, that's likely to continue. We've actually -- in some of our inventory positions, we've added on an electronic basis to protect ourselves. Supply chain hasn't -- I don't think we've had any normalization of supply chain since COVID. But we have seen some. We haven't seen it to have a material impact on the business. I mean we've had costs that we're watching and managing from a logistics perspective, especially with what's going on in the Middle East, which may necessitate some pricing actions, but we're watching that closely. Julie Beck: The other thing that we would have an impact on is resins, just to add to that, that we're watching those as well. Operator: Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Larry De Maria for any closing remarks. Lawrence De Maria: Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety. If you missed the portion of today's call, an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We look forward to updating you on our continued progress again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Williams First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Danilo Juvane, Vice President of Investor Relations. Please go ahead. Danilo Juvane: Thank you, [ Antoine, ] and good morning, everyone. Thank you for joining us and for your interest in The Williams Company. Yesterday afternoon, we released our earnings press release and the presentation that our President and CEO, Chad Zamarin; and our Chief Financial Officer, John Porter, will speak to this morning. Also joining us on the call today are Larry Larsen, our Chief Operating Officer; and Rob Wingo, our Executive Vice President of Corporate Strategic Development. In our presentation materials, you'll find a disclaimer related to forward-looking statements. This disclaimer is important and integral to our remarks, and you should review it. Also included in the presentation materials are non-GAAP measures that we reconcile to generally accepted accounting principles, and these reconciliation schedules appear at the back of today's presentation materials. So with that, I'll turn it over to Chad. Chad Zamarin: Thanks, Danilo, and thank you all for joining us today. We're off to a great start in 2026. Our teams delivered another quarter of growth. We advanced our critical pipe and power projects in execution, and we commercialized 3 new major projects and upsized a fourth. First quarter earnings per share grew by 22% and adjusted EBITDA grew 13% to a record $2.25 billion. Our momentum continues to build, demonstrating the scalability of our strategy, the ongoing strength of our assets and the growing contribution from our expansion projects. Our teams continue to execute high-return expansions at a steady pace while adding new projects to our robust backlog. And during the quarter, we made consistent progress across our projects in execution. Most notably, we placed the Naughton Coal Conversion project into service, a critical milestone that again demonstrates how we help customers transition to cleaner burning natural gas while maintaining affordability and grid reliability. We also kicked off construction on NESE, the Northeast Supply Enhancement project and SESE, the Southeast Supply Enhancement project. Moving these large-scale pipeline projects into the construction phase is a testament to our team's ability to navigate complex permitting to deliver the infrastructure our country so desperately needs. I'm also excited to report that we have now placed on foundation all of the turbines at our Socrates Plato South location. In addition, we've completed construction on the first phase of the Aristotle pipeline, which will serve as a natural gas energy artery for several of our power innovation projects in Ohio, including Socrates. And we aren't slowing down. We continue to sign new deals at attractive multiples that will drive growth through the end of the decade and beyond and help us achieve the 10-plus percent earnings CAGR we set out at Analyst Day. Based on the strong start to the year and our visibility into the remainder of the year, we are currently pointing toward the upper half of our full year EBITDA guidance, as John will detail shortly. Looking forward, we continue to find new ways to solve the energy challenges of today, including the massive power needs of next-generation data centers. Today, we're announcing 3 new major projects that further advance our strategy. The first project, Neo, is our fifth commercialized behind-the-meter power innovation project with a high-quality hyperscaler counterpart. Neo is the largest power project Williams has announced to date, consisting of 682 megawatts of installed capacity, a 12.5-year contract and an in-service date in the second half of 2028. Like our other power innovation projects, we expect to execute Neo at an attractive 5x build multiple and the project is expected to represent an investment of approximately $2.3 billion. Our second new project is Atlas, which consists of a gas infrastructure agreement to provide up to 164 million cubic feet per day of pipeline capacity to serve a large investment-grade customer data center in the Northeast. This project has a 13-year term, and we expect it to be in-service by the end of this year. While relatively modest in CapEx, Atlas demonstrates our ability to deliver an efficient natural gas solution for providing backup energy supply to existing data centers in lieu of diesel generation. Our third new project is Silver Spur, which is a significant expansion of our Northwest pipeline system and includes the installation of compression and the construction of a 90-mile transmission pipeline into the Idaho market that will add 275 million cubic feet per day of natural gas pipeline capacity. Silver Spur represents the first phase of our previously discussed Rockies Columbia Connector project and is one of the first major expansions of pipeline infrastructure in the Pacific Northwest in over 2 decades. We are targeting an in-service date of early 2030 for Silver Spur. Beyond the 3 new major projects, we are also announcing an upsizing of the Transco's Power Express project in response to the continually growing need for natural gas to power data centers and market growth in Virginia. With the addition of a new customer and the upsizing of an existing commitment, Power Express has been increased to 750 million cubic feet per day of new Transco capacity that is scheduled to come online in 2030. And as we continue to see very strong demand for natural gas translating into new projects and a growing backlog, we are also seeing the supply response across our footprint. In the first quarter alone, we sanctioned roughly 700 million cubic feet per day of new expansion projects across our gathering and processing portfolio. Collectively, the first quarter results further highlight our position at the intersection of incredible potential and the energy required to achieve it. By achieving another quarter of record results while commercializing and progressing key growth projects, the strategic direction is clear. Natural gas demand is rising. Our contracted project backlog is growing, and we are staying laser-focused on execution and value creation. That combination will continue to drive the higher earnings and cash flow that will deliver strong long-term return for our shareholders. And with that, I'll now turn it over to John for a deeper dive into the financials. John Porter: Thanks, Chad. As Chad shared, we've had a strong start to 2026 with record first quarter '26 EBITDA, up 13% over '25. Bridging from last year's $1.99 billion to this year's $2.25 billion, our overall financial performance continues to be led by our Transmission and Gulf businesses, which improved nearly $150 million or about 17%. It was a great first quarter with growth across every business in this segment. Transco grew about 10% year-over-year, driven by higher tariff rates following last year's rate case settlement as well as the effects of numerous expansion projects. Our Deepwater Gulf businesses grew more than 60%, reflecting the combined effects of our recent Gulf expansion projects. We also saw a 35% increase from our natural gas storage businesses. Our Northeast G&P business grew $10 million or 2% as strong growth in the rich gas areas was offset by volume declines in certain dry gas areas. The West grew $56 million or about 16%, led by our Haynesville investments, including a full quarter of service from our Louisiana Energy Gateway Pipeline. Our Sequent Marketing business had another strong start to the year with $227 million of adjusted EBITDA. And I'll note that about $15 million of the overall $72 million increase for Sequent was related to the Cogentrix investment acquired in March of '25. And as a reminder, we expect to divest our Cogentrix investment later this year. Finally, our other segment, which includes our Upstream businesses was down about $20 million, primarily due to our divestiture of the upstream Haynesville assets, which closed in January of '26. And of course, we've excluded the roughly $180 million book gain on these assets from all our recurring financial metrics. So it's a great way to start the year with 13% adjusted EBITDA growth, which also fueled a 22% increase in our adjusted earnings per share. Now before I hand it back over to Chad, I'll offer a few thoughts on our full year '26 guidance. As we've mentioned, based on the strong start we've had in the first quarter, if everything else goes according to plan, we are now guiding to the upper half of our original adjusted EBITDA guidance. As a reminder, 2026 is another year where we expect seasonally lower EBITDA results in 2Q before resuming sequential growth through the second half of the year, including the partial startup of the Socrates facility beginning in the third quarter. Shifting now to CapEx, leverage and our financing plans. We're excited to add another significant power innovation project in Neo. As a result, we're increasing our growth CapEx midpoint for '26 to $7.3 billion. With the addition of another power innovation project, leverage moves modestly above our target range of 3.5 to 4x to 4.1x. Importantly, as we've previously discussed, the balance sheet leverage tightness is primarily an issue for '26 and '27 before the historic earnings growth we expect in '28 and beyond. In the meantime, we're preserving multiple options to manage leverage while continuing to advance these projects and other opportunities on the horizon. As I previously discussed, those financing options include bringing in partners, and we continue to see robust interest from a broad group of potential counterparties. But we're not locked into any single path, and we have great flexibility based on timing, market conditions and cost of capital. I'd expect us to firm up our financing plans over the next couple of months. Overall, we're very encouraged by the strength of our first quarter results, the ongoing strong execution across our project portfolio and the continued commercialization of new business, and we feel well positioned with the flexibility to fund growth. With that, I'll turn it back to Chad. Chad Zamarin: Thanks, John. I recently had the opportunity to join an incredible group of leaders, including Secretary of Interior, Burgum; Secretary of Energy, Wright; EPA Administrator, Zeldin; and FERC Chairman, Swett as we celebrated the groundbreaking of our NESE project, the first new gas pipeline in a New York City in over a decade, a project many thought impossible. Looking out at the crowd, which included Williams employees and union workers who will support their families and communities through their work on this project, I was reminded of the role we play in a stronger, more resilient America. Not just through pipelines and power, but through livelihoods, through the meaning and purpose of the men and women who do the essential work of delivering the energy infrastructure of America. These are the real heroes of our energy and our environment. They work every day to bring affordable energy to homes and businesses, and they work every day to preserve and advance the quality of life that we are blessed to have, and they do it while advancing sustainability and a better world for future generations. As we look forward throughout 2026 and beyond, we will continue to stay focused on smart and sustainable growth and efficient and reliable operations. We will also continue to advocate for permitting and judicial reform to help America further accelerate the infrastructure needed to increase affordability, bolster reliability and enable economic prosperity and national energy security. Of course, none of the work and progress is possible without the investors who support Williams. Thank you for your support of our company and our team. I want to close by thanking our employees for their unwavering commitment to safely and reliably serving our customers and our nation. The Williams leadership team is incredibly proud to work with such a talented group during this exciting era of growth for our company. And with that, we'll now open up the line for questions. Operator: [Operator Instructions] Our first question comes from Jeremy Tonet from JPMorgan. Jeremy Tonet: Thanks for all the color today and details on the Neo project there. I was wondering if I could dive into, I guess, the power market a little bit more. If you could provide any more incremental color, I guess, on the relative level of appetite that you're seeing now versus where you were before? And I guess, how you think deal formation could proceed going forward here after this large deal? Chad Zamarin: Yes. Thanks, Jeremy. And by the way, a great job on your note yesterday. I love the May the fourth be with you theme. I would just say that we've continued to see very strong interest in our projects. We've -- I think you've seen the challenges that we're going to have as a country. We've been living the difficulty of building infrastructure on the pipeline side for some time, but we're also seeing that clearly on the data center side. And I think our ability to bring tailored energy solutions to data center projects is continually being recognized as a smart solution to balance grid reliability, affordability for consumers and the need for speed for these facilities. And so you've seen our backlog, we talked about it at Analyst Day. Neo represents the single largest project that we've announced to date. You will likely, as you do the math, also see that the cost and efficiency of our projects continues to also improve. And so we continue to see robust demand. The backlog, I'd say, remains as robust, if not more so than we discussed at Analyst Day. And yes, I'd say we continue to expect the cadence of projects to layer in as we've discussed kind of over the next several years. And so no change, if nothing else, I'd say, stronger recognition that a combination of solutions, including behind-the-meter hybrid solutions and grid complementary solutions are going to be required for not just the near term, but for a long time to make sure that we can meet the needs of data centers without compromising the grid or consumer affordability. Jeremy Tonet: Got it. And I was just curious, I guess, the industry has long talked about the need for permitting reform and the importance of gaining that to develop the needed infrastructure in the country. And as you talk to your local state senators, what do they say about the prospects for this in D.C. right now? Chad Zamarin: Yes. Look, I mean, we remain hopeful. I've spoken about last year, the House passed a bill that had many of the provisions that we'd like to see passed into law. The Senate is working on advancing permitting reform this year. And we're lucky to have a very strong delegation from here in Oklahoma, including Alan, who was appointed recently to fill Markwayne Mullin's seat. We will continue to advocate for meaningful permitting reform. The 2 primary issues that we're going to keep focused on. There are a lot of great, I think, improvements that we can see and the House bill had many of those. But the 2 primary ones are for us, addressing the 401 permitting process and making sure that, that -- when you get a FERC certificate, when you've gone through the very robust and rigorous environmental permitting process, you have your federal permit that a single state can't stop a project through the 401 process. And so we haven't asked that, that not be required, but that, that be a part of the federal permitting process. I think that's pretty reasonable. And then also, we, as a country, not just for pipelines, we need judicial reform. And so we are advocating for any bill to have strong judicial reform so that -- I've said this before, we spent 13 years in litigation on Atlantic Sunrise. We won every lawsuit along the way. All that did was delay the project and increase the cost to the consumer. Unfortunately, that's not unique to Atlantic Sunrise. That's every infrastructure project in our country. It's just too easy to tie projects up in litigation. So those are the 2 big ticket issues with a lot of other, I think, improvements that can be made. And we are hopeful that the Senate will act this year. And I know there's a lot of good effort going on across the Senate, including just recently, Senator, McCormick, from Pennsylvania released a bill. We love the effort and the leadership on that front. We think there's more that we should build upon, but we're seeing a lot of good efforts from the Senate. We'd like to see something get passed this year. Operator: Our next question comes from Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Nicely done yet again, bigger and better. Just if I can needle you a little bit on how you think about the cadence of the 6-gigawatt backlog here. First, has that been replenished here when you think about Neo folding out of that -- folding into moving forward here? How do you think about actually seeing the time line of some of this materialize? You talk about time to power. Just be very curious on what you're seeing out there. A lot of your peers talking about some pretty rapid activity out there. So again, obviously, well done on Neo, and here we are asking about the next and the time line around it. So... Chad Zamarin: Yes, I'll start. I would just say, Julien, I wouldn't try to focus on precision with the 6-gigawatt that we've spoken to. I think order of magnitude, we still see that type of robust backlog out there. I think more importantly, we're very focused on layering in projects in a way that work from an execution perspective that work from a steady and predictable growth perspective that complement the equipment and supply chain availability that we've secured in support of the projects. John spoke to, and I'm sure we'll get deeper into the financing and making sure that we are being very thoughtful and disciplined with respect to the balance sheet. And so right now, we see plenty of backlog to allow for us to effectively balance all of those factors and do more than we would hope to from a growth and performance perspective. And so the backlog remains, frankly, is robust. And I would actually say the team does a great job of high-grading the backlog to make sure that we do have this bounty of opportunities, but we're being very disciplined in making sure that the projects really fit to where we have competitive advantage and strength, but also where it fits nicely into the growth cadence that we're looking to achieve. And so I wouldn't try to do the math on the 6 gigawatts as much as to say that I think that, that is reflective of an order of magnitude that we still think is more than available for us to work through as we layer in projects. Julien Dumoulin-Smith: And actually, if I can keep going on that, you alluded to it. I mean, what about creative financing solutions here, right, for PI? Obviously, you had some latitude here on the balance sheet as is. But what are you evaluating? What are the structures? How do you think about the capacity here as it stands as you ratchet up further here? I'll pass it back to you. John Porter: Thanks, Julien. John Porter here. Appreciate that question. Obviously, we are seeing leverage temporarily move modestly above our long-term target range of 3.5 to 4x. And of course, this is really being driven by the execution now on 5 of these high-quality, fast cycle power innovation projects. So the first thing I'd really emphasize is that this is really a timing dynamic where in '28, we will see enormous earnings growth that will completely reset the leverage capacity of the company. But in the meantime, I'd say we're being very intentional in preserving financing flexibility. We're not going to rely on any single lever. We have multiple well-established options available to us. But for example, we really have seen great interest from some really terrific potential partners around these power innovation projects. And these structures are attractive. They would allow us to recycle capital while retaining our strategic and operational roles where that makes sense. So overall, we remain very focused on executing within our overall capital allocation priorities. Obviously, dividend growth stays intact, and we're committed to returning leverage to our target range over time. Stepping back, we feel really good about where we're at and our ability to fund this CapEx program efficiently and to continue to add to it. We do have multiple paths. We're not locked into any one solution. We expect the strong earnings growth profile of the business will naturally delever the balance sheet, especially as the projects come online in '27 and '28. And as I mentioned earlier in my prepared comments, I expect to hear more details on this about our specific financing plans here in the next couple of months. Operator: Our next question comes from Praneeth Satish from Wells Fargo. Praneeth Satish: Chad, I think you made a comment earlier that the project costs and efficiencies are improving for the power projects. Maybe in that context, could you provide an update of how much redundant capacity you think is appropriate for the future power projects and what you're doing for Neo? Has that evolved relative to Socrates? I think Socrates is being built with about 50% kind of redundant capacity. So I guess, are you seeing that ratio trend down with the more recent projects or kind of waiting to see how Socrates performs before making any changes on that front? Chad Zamarin: Yes. Thanks, Praneeth. I'd say a little bit of both. We are continually seeing kind of a more efficient combination of assets in order to meet the needs of the customer. But I also would say we are in the middle effectively of starting the commissioning -- or we're in the middle of commissioning of the first phase of Socrates. And I think we will learn a lot through that process. We do expect that as we bring Socrates online, we'll be able to create even more efficient operating modes and create more capacity as we, I think, prove up the fact that we've got plenty of redundancy. But it's been -- I think it's been a combination of both. I will say that the team is also doing a great job even as we've just been building out Socrates and then our follow-on projects, Aquila, Apollo, we continue to take lessons learned from each of those projects and apply them to the new projects. And so we continue to see that efficiency gain. And I expect that it's like we see in a lot of different areas. Think about the efficiency curve of the upstream producer. It's very similar. I mean these are the early days. We have to remind ourselves, we're only really about a year into this program already announcing our fifth project. And so I think we're going to continue to see pretty impressive efficiency gains over time. Praneeth Satish: Got you. And then maybe shifting gears to the transmission side. Can you talk about the opportunities that you're seeing in the Rockies and whether the Silver Spur expansion that you announced today could be the first of more projects on Northwest. I think you ran several open seasons last year. So any color on customer interest from that process and how -- and whether we should stand by for additional expansions there? Larry Larsen: Yes, Praneeth, this is Larry Larsen. I'll take that question. And yes, you are right. We initially went out with the Rockies Columbia Connector expansion open season last year. And as we kind of mentioned in the prepared remarks, the Silver Spur, it's really the first phase as we started looking at both the market needs within Idaho as well as in the Pacific Northwest in Washington, Oregon. The Idaho market was clearly mature and ready to move forward. I mean it's hard to believe that Idaho is the second fastest-growing state from a population standpoint in the nation. And the thing that they were lacking was additional infrastructure. And so excited to be able to get this first phase of what was originally the Rockies Columbia Connector project commercialized, and we're going to progress forward with that project. But yes, we still see interest both longer term in Idaho, but we're also still progressing discussions with our key customers within Washington and Oregon. And hopefully, we'll see some progress on the second phase of that expansion project this year. Operator: Our next question comes from Ameet Thakkar from BMO Capital Markets. Ameet Thakkar: Just a couple more follow-ups on Neo, if I may. Is the counterparty kind of the same that you have for Socrates the Younger and Socrates for this particular project? Chad Zamarin: Yes. I mean we're in a stage of the project where just from a confidentiality perspective, we're still not able to disclose the counterparty. But as soon as we can, we'll be sure to do that. Ameet Thakkar: And then relative to, I guess, the other projects from an air permitting standpoint and whatever kind of regulatory approvals that maybe the Public Utility Commission of Ohio would need to provide, where does that project stand relative to the others? Larry Larsen: Excuse me, which project you're referring to? Ameet Thakkar: Neo. Larry Larsen: Yes. I mean it's just in the early phases. We'll be filing for those permits here later this year as we progress forward now that we've got it commercialized. Operator: Our next question comes from Brandon Bingham from Scotiabank. Brandon Bingham: I wanted to maybe try to pry a little bit more on the financing side of things, hopefully from a different angle here. There have been a couple of deals announced recently for gas pipeline assets, and the chatter suggests the marks were quite healthy. And in the past, you've looked to take advantage of sort of the disconnect between private market valuations. So just curious if there's any consideration of doing so again in light of these deals and the potential funding needs. John Porter: I think -- this is John again, Brandon. I think right now, what we're primarily focused on is really understanding what's possible in terms of partnering around the power innovation projects. Those projects have turned out to be, I think, highly attractive to some of these potential partners just given the quality of the opportunity, the customers that are involved. We've had some very productive management presentations with, again, some really terrific partners. We're very excited about the opportunity set there. Some of those partners, I think, could even perhaps provide an opportunity to enhance our opportunity set in the space as well. So that looks like a pretty fertile area for us in terms of being able to do something at size at a very attractive cost of capital with the right governance structure and again, perhaps even an ability to add to our opportunity set in the space. So I think that's our main area of focus right now. But like I said earlier, we've got a lot of different things that we could tap into. And a lot of that just depends on how fast these projects keep coming at us and how big those projects are. We are still trying to -- myself and the Treasurer, trying to make sure we stay ahead of the commercial teams, and there's a lot out there. Chad Zamarin: Yes. And I think thematically, Brandon, it is consistent with, I think, where you were going. There is -- we are seeing a tremendous amount of interest in investing alongside us in these projects and in a way that we think will significantly enhance our economics from a cost of capital perspective. Brandon Bingham: Okay. Great. Very helpful. And then maybe just quickly looking at the Haynesville. Wondering what some of the latest and greatest commentary you're hearing from producer customers in that basin, just in light of Henry Hub sitting comfortably below $3 right now, but knowing that the Gulf Coast LNG ramp is coming in quickly. Larry Larsen: Yes. This is Larry Larsen. I'll take that one. I mean I think commentary we've kind of mentioned in the past that the producer is obviously cautious drilling into kind of the pricing dynamics right now. But I think the fundamentals are really strong. And I think as you've seen, we've announced some expansion projects of our gathering system in the Haynesville, and that's really to start building up for a potential ramp for the demand that's materializing. And so I think they're cautious right now and are going to be balancing around where they see pricing in the near term, but recognizing that there is such a huge demand pull that is continued to ramp up over the next few years. I think we're optimistic that we'll continue to see that pull from the Haynesville continue to build up with our producer customers. But I would say majority of them are somewhat cautious in the near term, but wanting to be ready for that growth that's going to be coming here quickly over the next year or 2. Chad Zamarin: Yes. We have seen, I mean, Larry -- I mean, if you look at Haynesville rig counts, they're up, DUCs are building. The natural gas curve, I mean, is still in contango. And so are the fundamentals around natural gas. I mean the amount of demand growth that we're -- clear demand growth that we're seeing, I think, is recognized. And so the Haynesville will be the most responsive gas basin in the U.S. to meet the ramping LNG demand. And we do expect another strong -- we actually had a relatively modest power load last summer, but we expect with the way supply and storage is coming into the summer, we expect a pretty robust power demand this summer. And so I think the producers recognize that the Haynesville is going to be incredibly important and needs to be positioned to meet this growing demand. Operator: Our next question comes from Spiro Dounis from Citi. Spiro Dounis: I wanted to go back to the growth cadence. Just looking back at the Analyst Day, you talked about 8% of that 10% CAGR being locked in. Just curious where that stands now. Do incremental projects from here take you beyond 10%. It just seems like these announcements are coming in faster than expected. So I wanted to level set on that Analyst Day outlook. John Porter: Thanks, Spiro. Yes, we do feel really good about how we're tracking against the long-term growth targets that we presented back in February. Again, 10% plus CAGRs for EBITDA and EPS for 2025 through 2030 is what we're targeting. And like you said, in February, I said that our current book of contracted business supported around an 8% CAGR and I'd say with these new projects that we've announced today, that base growth rate is definitely now around 9%. So we've moved it up a point with these projects. And I would just say, overall, we're feeling really good about kind of the 3 areas of focus that we're focused in on for fueling this industry-leading growth rate. And first, project execution on the projects that we currently have in flight. Project execution has been going great for Socrates and the other projects that we currently are working on, including Southeast Supply Enhancement, other important transmission projects. Second, we're feeling really good about being able to continue to win new opportunities based on what we're seeing in the commercial backlog. And then third, we've got our teams really focused on driving more value out of the Legacy businesses as well. And I talked about that a little bit at Analyst Day that we remained -- I felt fairly conservative about volumes and margins across the Legacy businesses, and we've got our teams really focused in on that component as well. But -- so overall, I think we're at about 9% now and feeling like that's still a pretty conservative look at that number. Spiro Dounis: Second question, just going back to the behind-the-meter strategy. Chad, you touched on this a bit, but seeing the landscape shift a bit here. There's some nimbyism coming in on the data center side. And I think we're also seeing a trend maybe towards bring your own power, which is a little bit different than behind-the-meter. I'm just curious how you're assessing that shifting landscape on how data centers are powered, your ability to maybe even pivot toward to bring your own power strategy and potentially even develop a CCGT at some point? Chad Zamarin: Yes. I'd say we remain focused on creative, innovative infrastructure solutions. We've lived in some of the most difficult kind of infrastructure challenging environments. So it's not unusual for us to have to deal with being thoughtful, creative, disciplined and persistent through challenging infrastructure development. I think it positions us actually really well to help hyperscaler customers figure out where to site, how to design and how to build projects. And so I do think we've always said like don't think of us as just a behind-the-meter solution provider. I mean our goal is to figure out how to bring infrastructure solutions that unlock the grid through partnering with our utility customers, but also create a larger footprint across which you could site projects by opening up the natural gas grid to become a backbone for projects as well. And that's really our focus. And so if that means bringing speed to market, bring your own power solutions that are a bridge to grid power or a complement to grid power or over time, scale with larger units with adding steam turbines and other solutions. I would just say that our team has done a phenomenal job of building the capability to explore all of those options. And we want to be recognized as an infrastructure solutions provider. And so if there is a unique set of tools that we can bring. We're not going to limit ourselves to kind of one model. We really do want to be able to help bring our expertise in building large-scale complex infrastructure in challenging environments to do it in a way where we can actually not only meet the customers' needs, but do good for the community and get the support of the communities in which we operate. And so yes, that will continue to be our focus. So I think that's a long way of saying, yes, we are exploring and prepared to provide more comprehensive solutions if needed. Operator: Our next question comes from Keith Stanley from Wolfe Research. Keith Stanley: First question, so Neo was a 12.5-year contract, which is good to see. How are discussions going on trying to lengthen contract duration further? What's achievable? And how willing are customers to do this? Chad Zamarin: Yes. I think there are still plenty of opportunities for longer contracts. I mean we've seen the extension of the 12.5-year. We do have ongoing discussions that extend well beyond that 15 to 20 years as well. And so we continue to see, I think, a growing recognition that longer-term solutions are also going to be required. And so yes, I'd say stay tuned, but we continue to see, I think, momentum towards longer commitments. Keith Stanley: Great. Second question, what still needs to happen on Constitution in order to move forward? What's the main gating items there and potential time line? Chad Zamarin: Yes. Thanks. Well, you saw we kicked off NESE, which was a great, I think, sign that New York and markets that we might have thought weren't open for business or back [ open for ] business. I think that the Silver Spur and the progress we're making on also moving that further towards Oregon and Washington are a good sign that markets recognize that natural gas is our most affordable solution. So we've got to embrace and build more natural gas infrastructure to these markets that are -- frankly, have very high energy costs. And so Constitution I think, growing real recognition that New England and New York need more gas infrastructure. I mean we've grown gas demand by 50% over the last 10 years. We've grown no pipeline infrastructure into New York and New England. And that's why they now see the highest utility prices in the country for many parts of the year. And so we are seeing strong support from the New England states. I'd say the challenge with Constitution, NESE was a single -- effectively a single customer, single state with Constitution. No one of those states are large enough to support a project on its own. And so we do have to coalesce enough critical mass to get the project moving forward. And so we continue to work. The team is very actively working Constitution. The frustrating, I'd say, part is it's not for a lack of need and desire, frankly, from the market. It's the complexity of the politics and just the fracture and fragmentation of that market that's making it harder to put together. And so it's a lot of herding cats. But we're still -- at the end of the day, I mean, we absolutely know that, that market needs energy, natural gas infrastructure. And so we're going to keep at it. But yes, that's really the challenge with Constitution, it's just a much more fragmented market and a lot of different constituencies that need to come together. And so at the end of the day, we're on file with FERC. That process is moving forward and will, I believe, be successful through the FERC process. But for -- we have to be able to show customer commitments on the project. So that is the last gating item. I don't know, Larry, if there's anything you want to add to that? Larry Larsen: No. I mean I think you hit it really well. And a lot of great discussions going on with the utilities. There's a strong recognition. I think going through Winter Storm Fern and just the fragileness of that market, I think it was really highlighted through that. And so I think all of the utilities are just trying to figure out how do they get the right support through their states as well as additional infrastructure that they want to do on their systems to be able to help build up robustness in the market area as well. So conversations are going well. It's just, as Chad mentioned, just trying to bring all of the different parties together to be able to get something that we can commercialize and progress forward. Operator: Our next question comes from Jean Ann Salisbury from BOA. Jean Ann Salisbury: Is the Marcellus gathering expansion at all driven by integration and pull-through into one of your pipeline projects or behind-the-meter projects? And I guess as my follow-up, a little bit more broadly, you obviously have some very large competitive advantages in Ohio and Utah that have helped you get the behind-the-meter projects. Can you discuss where you see yourself as having similar competitive advantages elsewhere? Larry Larsen: Yes. This is Larry Larsen. I'll take the question as it relates to the gathering expansion up in the Northeast. It's not directly related to our power projects. It's just an expansion as our producer customers are going and developing in different parts of our system as an opportunity for us to provide some additional compression and gathering pipe infrastructure to be able to get them access to market. So it's not directly related to it. But I think as you see us creating more and more demand tied back into that area, it will help us provide more solutions to be able to grow both the gathering and processing side of the business. So I think we're well positioned on that front, but it's not a direct correlation to the projects that we've announced. Chad Zamarin: Yes. And I'll start and maybe Rob add in. On power innovation projects, obviously, Ohio and Utah. But I would also say it is a layering of both our footprint and capabilities, but also in places where you can build infrastructure efficiently. And so I would think about the footprint along Transco and certainly as you move to the West, but also -- and Rob can speak to this, he spoke to it at our Analyst Day, the incredible footprint that Sequent opens up across the entire United States, but importantly, layering that on top of, I think, areas where you can still build infrastructure. And so Louisiana, the Southeast, Mid-Atlantic, you think about Ohio, Pennsylvania, you go further West, Utah. But Rob, anything else to add? Robert Wingo: Jean Ann, it's Rob. I mean I often talk about our virtual footprint. Sequent, our marketing platform, I mean, we've got capacity positions on every major pipe across the country. And that's why we've been able to bring projects to places where we don't have physical footprint but can build to interconnecting pipelines near pipelines to the extent we need to. So when you look at the data center hubs, I mean, in our earnings presentation, we have a slide that shows sort of where all the data center hubs across our virtual and our physical footprint. And you can see we can pretty much touch any data center hub in the country. And our opportunity backlog has sort of reflected that. You've seen us do projects in places where we have a physical footprint, but also places where we were able to use and leverage our Sequent marketing platform. Chad Zamarin: Yes. One thing I would also note, I mentioned it in the prepared remarks, the Aristotle pipeline, which we are commissioning now. We've introduced natural gas and it's prepared to deliver gas for Plato South. But basically, the team designed an artery that now moves across that Columbus New Albany area, which has been a very large data center corridor. And so we overbuilt the capacity of that pipeline for the purpose of being able to not just serve Socrates but be an energy artery along which other projects could be developed. And you're going to continue to see, I think, that kind of strategy play out where in Utah, we're building the pipeline that will serve the Aquila project. And that's an area of growth, both from a just demographic perspective, but also a lot of technology and power and data center. So those are areas where we're going to continue to, I think, see development. But as Rob mentioned, I think Slide 17 in our materials shows a good footprint of how we truly can touch just about anywhere. But I would also say there are unfortunately going to be winners and losers. I mentioned the lack of a gas infrastructure and frankly, any infrastructure in New England and New York, we've got 20% of the nation's population in New England and New York, and they'll see less than 2% of economic development over the next year. And so that -- there are areas of our country that frankly are going to struggle to develop projects even though the demand might be there. Operator: Our next question comes from John Mackay from Goldman Sachs. John Mackay: Let's stay on the behind-the-meter piece, I suppose. We're seeing kind of more entrants into the space, particularly from the services side, but kind of across the board. Could you just spend a minute or 2, and you've touched on a lot of these pieces, but spend a minute or 2 kind of talking about your view of your relative competitive advantage. And we'd love to hear more about kind of specifically the balance of plant and how this is more than just, "Hey, we've gotten our hands on a turbine." Maybe walk through that a little bit, if you can. Chad Zamarin: Yes. Thanks, John. I do think what we provide is fairly unique. I mean Rob talked about the Sequent footprint. We've obviously got a really robust Gathering and Processing business. So we touch every producer in the country. We've got our Transmission business. We touch effectively every major utility in the country. That positions us really well to put those pieces together and provide full value chain solutions for customers. And so I think that the ability for -- we're not just a company that's showing up with a turbine or a site that we're trying to develop. I mean our strategy is to provide energy infrastructure solutions for American consumers and companies. And so we want to be able to make sure that if there is a hyperscaler that wants to develop a project that we can help find a way to take care of all of the needs upstream of the project. And so I think that's a fairly unique at scale solution. Look, this is a really big market, and I think there's lots of opportunities for a lot of players to help solve these problems. But along our footprint across kind of natural gas infrastructure at scale, a company that can deliver projects, I think Williams is pretty unique. I mean we've been the most focused natural gas infrastructure company in our space. And so I think that serves us well. And truly, our goal is to make sure that our customers can rely on us to take care of all the complexities of getting energy to their facility. Whether that today is primarily behind-the-meter solutions or over time, working to be in complement with the grid or other solutions that come to bear. You mentioned kind of the balance of plant just on site. I mean not only are we doing power generation with turbines. Those are turbines of different size and scale. We're also providing battery storage solutions. We're working with customers on load following and understanding AI loads so that we can not only protect energy systems that are on site, but over time, protect the grid. Our Atlas project, relatively small from a capital perspective, but that's an important project that demonstrates the ability to move data centers away from diesel backup generation to natural gas generation. The natural gas grid is this massive flexible storage system. And so leveraging natural gas is a much cleaner, more affordable, efficient solution for backing up existing data centers as a solution. So we want to be able to provide comprehensive creative solutions. And that's really the focus for us. I think that's fairly unique because we can do that at scale across every part of the value chain. John Mackay: That's great. You touched on it, but my second question was just going to be on Atlas, and I think you answered it, but just to clarify, are you saying you're effectively working with the customer to swap out their diesel backup at a data center for gas? And if you could just clarify, it looks like it's relatively low CapEx, but I wanted to check on that. Chad Zamarin: Yes, I'll let Larry fill in any gaps. But basically, yes is the answer. This is some pipeline infrastructure that allows the customer to convert their backup generation to natural gas and leverages the compressibility of gas in the pipeline system to basically be a storage solution and a backup generation solution without having to have diesel on site, without having to burn diesel. But Larry, I don't know if you want to add anything to the scope of that. Larry Larsen: Yes. I think you hit it pretty well. And from a scope standpoint, you're right, it's not a large CapEx number. It's probably just slightly under $50 million but be able to provide lateral interconnection facilities and a lot of redundancy just so that they aren't having to burn diesel fuel and be able to rely on the Transco system and some of the flexibility there. So I think it's a great solution for the customer at the end of the day in a way that we're able to provide a lower emission solution and something with some really strong reliability. Chad Zamarin: And again, I'd say credit to the team, I think it's proving up what I hope and expect to be a solution that we can provide for other facilities. I mean there was an assumption that you had to have compressed natural gas or on-site liquefied gas as a storage solution. I think we're showing that the pipelines because of the compressibility of gas actually have tremendous storage capacity. We have storage across the natural gas footprint. And so yes, this is basically proving up that ability to rely on natural gas as a reliable backup solution. Operator: Our next question comes from Manav Gupta from UBS. Manav Gupta: I have 2 questions. I'll ask them together. My first one is on your Analyst Day, you also highlighted besides transmission and power, you are looking at multiple nat gas storage opportunities. So if you could elaborate a little bit how those decisions are moving ahead, how customers are looking at nat gas storage within the U.S. in terms of reliability? And then quickly, if you could talk a little bit about the upsizing of the Power Express project. Larry Larsen: Manav, this is Larry. I'll take that. Thanks for the questions. And yes, we're definitely seeing very strong interest in the storage space. I think as you see just from the volatility that we've seen through some of the winter storms, but also as you see increased demand and especially along the Gulf Coast. We've got our Pine Prairie project that's progressing through permitting. We've got another expansion of some of our Gulf facilities that's in progress. We're actively working right now to finish commercialization. Hopefully, we'll have some announcements on that in the upcoming quarters. And then we've also got some projects out west with some of our facilities around Mountain West that we're working on. So definitely seeing strong interest. And I think we'll see some progress on a couple of projects here later this year, and I think we'll continue to look at others. We've got a pretty large footprint across the Gulf across all the different facilities and excited to see some of those commercialized. Chad Zamarin: Then Power Express. Larry Larsen: Yes. On Power Express, yes, it's a great one. I think as we've highlighted the strength of Transco and how you can kind of scale projects to meet the actual customer needs, I think as you've seen, we've moved around the scope of this project and continue to work with customers in that area within Virginia. And we had one of the customers that they firmed up their ultimate needs ended up having an upside. And then additionally, we've had another customer come to the table that fit really nicely within the scope of that project, able to keep returns and scope within something that was manageable and not impact timing of the overall project. And so I think it just demonstrates the value of the Transco system and how we can make minor adjustments to scope of expansion projects and be able to flex to meet the customers' needs. So a great job by our commercial team staying connected with those markets and finding ways to continue to upsize where it makes sense. Operator: Our next question comes from Sunil Sibal from Seaport Global. Sunil Sibal: I wanted to touch base on the LNG opportunity. It seems like with all the geopolitical events happening currently, there is an increased focus on U.S. as a LNG supplier. You obviously have a position in one of the LNG projects. So I was curious if you could give us an update on that market. Chad Zamarin: Yes, I'll start, and Rob may want to fill in. First thing I'd say is things are progressing well on the Woodside LNG project. We've taken over and now are the primary owner of Line 200, which will connect from Transco, also our Louisiana Energy Gateway system and will be the primary source of delivering gas into the Woodside LNG terminal. I think we like our position and the scale of it on the LNG front. So right now, on that project, primary focus is on execution. More broadly, I mean, obviously, I think things that are happening in the world today further reinforce the need for the U.S. to be a reliable supplier of LNG to the market. I mean saying this, we produce 40% more natural gas in the U.S. than we consume domestically. And if anyone had concerns that exporting gas in the form of LNG would impact domestic prices, I think we've actually proven that by overproducing gas, overproducing a commodity, you protect yourself from price shocks around the world, and we've certainly seen that. You see natural gas today much lower than it was price-wise before the start of the conflict in the Middle East, where on the liquid fuel side, we only produce about 3% more than we consume domestically. And you can see we've seen much higher price shocks on the oil and liquid fuel side and other things. And so we feel really good about the fundamentals that will support very strong growth in LNG, and we'll continue to look at ways to participate. And Rob, I don't know if you have anything. Robert Wingo: Yes. I mean the only thing I'll say is that we're still a few years out from first LNG. Woodside is still on track for a 2029 first cargo. And so we're a few years out from that. But we've got 1.5 MTPA. We have an option to hold on to that, but not an obligation. And we have been talking to producers and looking at trying to use that to sort of help attract more volume through our Haynesville system and help complete that wellhead-to-water strategy that we've been working on. Sunil Sibal: Okay. We'll stay tuned on that 1.5 MTPA. Changing topics. I think there were some comments in the press about power trading opportunity for Williams. I would -- wanted to see if you could clarify how are you looking at that opportunity around your existing assets or the assets that you're building? Chad Zamarin: Yes. I mean right now, I'd say the most important thing to just recognize is we're building a very significant power business and a pretty large set of diverse power assets. But our primary focus is going to be on serving the customer and then optimizing the power that we're producing. And so I'd say stay tuned on that front. But for today, we're not a -- as we are -- as we would say with Sequent, we're not a speculative trader. We're not looking to create any kind of speculative Power Trading business. But we want to make sure that we can provide the most efficient, optimized solution to the customer. And so that's really the focus of the capability that we're looking to grow so that we can be as flexible and optimized as possible for the customers as we have a fairly large fleet of power generation coming online over the next couple of years. Operator: Our next question comes from Craig Shere from Tuohy Brothers. Craig Shere: So first, I just want to kind of talk through the equity partner opportunity in power innovation. It seems like there's 3 prospective drivers for that, but you're kind of emphasizing one over the others. And in my mind, that's staying within near-term leverage targets, enjoying carried interest upside on individual deals. But then you've kind of repeatedly talked about recycling capital into potential wider range of projects. And then in Q&A, John mentioned the potential for strategic relationships that could further add to project opportunities. So maybe you want to opine a little more on that is accelerating the growth of this the primary focus? John Porter: Craig, this is John. I think the primary focus is making sure from a treasury financing perspective that, again, we can stay ahead of the wonderful kind of book of business, we see the commercial teams reviewing with us and making sure that we don't get caught limiting our abilities to continue to grow and to win that business by having any sort of financing issue. We are committed to the 3.5x to 4x leverage target. That's not -- that gives us a lot of breathing room relative to our current ratings. So that's not a ratings agency issue. That's more of an internal target that we've agreed to with the Board that we all feel comfortable, it's a good leverage range for the business. We also want to be able to continue to grow our dividend. And so I think overall, we're just trying to find ways to finance the CapEx in a very efficient manner in a way that really add value to our shareholders over the long term. And I think what we've seen with these meetings that we've been having with potential partners is very encouraging on a number of fronts, including all of those that you mentioned. So I think there's a lot of compelling reasons why that might end up being the answer. But at the same time, yes, there's a lot of different options that we could have, and we'll continue to look across the entire portfolio, too. There could even be assets that we would want to sell over time, too. So we have a number of different things we can do. We're trying to make sure we're not locked into any one path. But I feel really optimistic we're going to have a very attractive financing solution for shareholders to announce at some point in the near future. Craig Shere: And last one for me. Chad, in answer to John, I think you mentioned the energy storage component. I believe that was a major contributor to some prior project upsizings that you all had announced. I wanted to inquire about the BESS factor evolution as a part of power innovation solutions. And what exactly are customers looking for with this? Is it more second to second responsiveness? Or is there an increasing interest in longer duration backup support? Chad Zamarin: Yes. Thanks. I think primarily, it's the very rapid response to changing power loads at the facilities, right. And this is the same issue that you'll see on our grid. I mean our grid, our projects are obviously primarily rotating equipment driven, and those don't respond well to very rapid kind of millisecond changes in demand load. And so this is primarily to serve as a solution to respond to dynamic AI loads. And so we continue to look at projects from just a power efficiency perspective with batteries, but the primary for the projects that we've announced, the primary role of the battery system is to be that effectively buffer between the rotating equipment and the data center to respond to these rapid changes in load. Operator: That concludes the Q&A portion of our call. I will now turn it over to President and CEO, Chad Zamarin, for closing remarks. Chad Zamarin: All right. Well, thanks for the always robust Q&A, and thank you for your interest in Williams. We look forward to speaking with you again soon. And in the meantime, we wish you luck. Thanks. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to IPG Photonics' First Quarter 2026 Conference Call. Today's call is being recorded and webcast. At this time, I'd like to turn the call over to Eugene Fedotoff, IPG's Senior Director, Investor Relations for introductions. Please go ahead with your conference. Eugene Fedotoff: Thank you, and good morning, everyone. With me today is IPG Photonics CEO, Dr. Mark Gitin, and Senior Vice President and CFO, Tim Mammen. On today's call, Mark will provide a summary of our first quarter results as well as the overall demand environment and then walk you through the progress we are making on our long-term strategy. After that, he will turn it over to Tim to provide financial details. Let me remind you that statements made during this call that discuss our expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties are detailed in our Form 10-K for period ended December 31, 2025, and our reports on file with the Securities and Exchange Commission. Any forward-looking statements made on this call are the company's expectations or predictions as of today, May 5, 2026 only, and the company assumes no obligations to publicly release any updates or revisions to any such statements. During this call, we will be referencing certain non-GAAP measures. For more information on how we define these non-GAAP measures and the reconciliation of such measures is the most directly comparable GAAP measures as well as additional details on reported results, please refer to the earnings press release, earnings call presentation and the financial data were posted on our Investor Relations website. We will also post these prepared remarks on our website after this call. With that, I'll now turn the call over to Mark. Mark Gitin: Thanks, Eugene. Good morning, everyone. First quarter revenue exceeded our expectations, increasing 17% year-over-year. We continue to see improved demand for our laser solutions, particularly in battery manufacturing and medical applications, which drove our strong performance in the quarter. We maintained a disciplined focus on our growth initiatives across all of our markets, delivering solid first quarter results and building momentum for future growth. Before looking more closely at our first quarter sales performance, I would like to highlight our updated revenue reporting framework, which better aligns with our strategic growth initiatives, making it easier to understand and track our progress. It also provides a clear separation between our industrial and nonindustrial revenue streams, giving better visibility into our focus areas and splitting the business into 2 distinct buckets, with unique performance and growth profiles. This reporting combines applications into 2 categories: Industrial Solutions and Advanced Solutions. Today, most of our business is in industrial solutions where we are building on our strong foundation, expanding our addressable market by displacing incumbent technologies and enhancing our value proposition by offering differentiated system and subsystem solutions. This includes applications such as cutting, welding, cleaning and additive manufacturing and other industrial offerings. In the first quarter, Industrial Solutions revenue accounted for 86% of total sales increasing 21% year-over-year as our design wins took hold and general industrial demand improved, welding, cutting, marking and cleaning applications drove higher revenue. Welding and cutting, our 2 largest applications posted double-digit growth benefiting from solid demand and new orders from battery manufacturing. Sequentially, Industrial Solutions revenue was relatively flat and outperform typical seasonality driven by business wins in cutting and additive manufacturing. In Advanced Solutions, which is another important driver of our future growth. We are applying our laser technologies and applications expertise, solving challenging problems for customers. Advanced Solutions serves markets such as medical, defense, micromachining, semiconductor manufacturing and others that present strong growth opportunities and collectively represent a $5 billion TAM. We've already established a solid presence in these markets and are excited about the opportunities that lie ahead. Advanced Solutions represented 14% of our revenue in the first quarter and declined modestly year-over-year. Revenue growth in medical and semiconductor applications was offset by lower micromachining sales due to cyclical demand in solar cell manufacturing. Sequentially, revenue declined due to lower medical sales following an exceptionally strong fourth quarter of 2025. We were particularly encouraged by increased sales in semiconductor applications as we gain traction with large equipment manufacturers. Total bookings were strong in the quarter with book-to-bill firmly above 1 for the second consecutive quarter. This gives us confidence in our outlook it points to robust demand for our solutions despite elevated levels of macroeconomic uncertainty. We see the strong demand to remain focused on executing our key growth initiatives across Industrial Solutions and advanced solutions, building upon our strong foundation and industrial innovation, expanding our leadership in laser technology into new high-growth applications such as medical, micromachining and defense. While our initiatives target a wide range of opportunities, our path to success is consistent, leveraging differentiated laser technology and deep applications expertise to deliver clear performance advantages that incumbent approaches cannot match. Together, these initiatives represent compelling opportunities to meaningfully expand our addressable market and support sustained long-term growth. In Industrial Solutions, welding revenue is growing, driven by our advanced capabilities for battery manufacturing across both electric vehicles and stationary storage applications. Global stationary storage deployment is growing rapidly to support data center energy requirements and is gaining increasing share of battery manufacturing. These batteries use larger cells with thicker bus bars, requiring higher power lasers, process monitoring. This aligns directly with our strengths. Our unique combination of adjustable mode beam lasers, advanced beam delivery and real-time process monitoring ensures well quality and sets us apart from the competition. Beyond lasers and subsystems, we continue to make meaningful progress in our systems business, which posted another strong quarter. We're moving up the value chain by integrating our fiber lasers into differentiated complete systems which, together with our applications expertise enables us to tackle complex problems that incumbent technologies cannot address. This approach allows us to deepen our partnerships with customers across a wide range of markets from welding to cleaning. Turning to Advanced Solutions. We continue to make progress with our growth strategy by targeting opportunities across defense, medical and micromachining applications. In February, we announced that Lockheed Martin placed a $10 million follow-on order for Crossbow our scalable, cost-effective, high-energy laser defense system for countering Group 1 and Group 2 drone threats. Shipments for that order are expected to begin in the second quarter. We also showcased Crossbow at the 2026 AUSA Global Force Symposium in Huntsville, Alabama, where we engage with defense industry leaders on how our solutions can address escalating drone threats at a significantly improved cost exchange ratio. Crossbow continues to generate interest from potential customers we're gaining traction on converting that interest into orders. In Medical, revenue grew significantly year-over-year driven by sales to a new customer as our solutions continue to deliver clinically meaningful outcomes. We are advancing our innovation road map and expect several new product approvals and introductions in 2026 and in 2027. We have a very strong backlog for 2026, giving us excellent visibility into full year revenue that points to another good year in medical. In semiconductor, revenue grew this quarter as we ramped up new lithography, metrology and inspection business with large semiconductor equipment manufacturers. This market is being driven by the accelerating adoption of AI, which is fueling demand for GPUs and high-bandwidth memory chips. We continue to advance our product development and are working closely with customers on design and opportunities, supported by the clear performance advantages of our solutions. Our strategic progress is enabled by the organizational changes and investments we have made. We have streamlined operations, strengthened decision-making and accelerated product development, translating into better performance and greater consistency across the business. While our entrepreneurial and innovative spirit remains at the heart of IPG, we are building the operating discipline required to scale these capabilities effectively. In summary, our team delivered another over-year growth. Customer demand for our differentiated laser solutions continue to strengthen across our markets. We are making meaningful progress on our strategic objectives, outperforming the market and creating lasting value for our customers and our shareholders. With that, I will now turn the call over to Tim. Timothy P.V. Mammen: Thank you, Mark, and good morning, everyone. My comments will generally follow the earnings call presentation which is available on our Investor Relations website. I will start with revenue trends by application on Slide 5. Industrial Solutions revenue increased 21% year-over-year in Q1 and driven by growth in welding, cutting, cleaning and marking. This was partially offset by lower revenue in additive manufacturing. On a sequential basis, revenue was basically flat, down 1% and as lower revenue in welding and additive manufacturing was largely offset by growth in cutting and marking. Cleaning revenue is flat. Advanced Solutions revenue decreased 5% compared with last year as growth in medical and semiconductor was offset by lower revenue in defense and micromachining. Revenue is down 13% quarter-over-quarter on lower medical sales from a very strong fourth quarter. Micromachining, semiconductor and scientific revenue all improved sequentially. Sales of our emerging growth products continued to increase and accounted for 53% of total revenue in the first quarter, consistent with the prior quarter. Following our annual review, we made a slight adjustment to the product list. Many of these products are benefiting from growth in battery manufacturing and the medical market. Moving to revenue performance by region on Slide 6. North American revenue increased 27% compared with last year, driven by growth in welding, cutting, additive manufacturing and medical applications. Sequentially, revenue was down 4% due to declines in Cleaning and Medical, partially offset by strength in welding, cutting, additive manufacturing and micro machining. European sales were up 4% year-over-year, driven by cutting and down 13% sequentially versus a strong fourth quarter due to lower sales in welding, cleaning and additive manufacturing. Revenue in Asia improved 14% year-over-year driven by strong demand in welding, cutting, marking and cleaning applications, which primarily benefited from capacity additions for battery manufacturing. Revenue is flat quarter-over-quarter. Moving to the financial performance review on Slide 7. Total revenue was $265 million, up 17% year-over-year, marking our second consecutive quarter of double-digit sales growth. Foreign currency benefited revenue by approximately 4% this quarter compared to the same period in the prior year. GAAP gross margin was 37.5%, and adjusted gross margin was 37.8%. Adjusted gross margin came in close to the midpoint of our guidance range and improved sequentially. Gross margins benefited year-over-year from lower inventory provisions due to improved inventory management. While product margins have been stable over the last few quarters, we did experience headwinds from tariffs compared to the first quarter of 2025. We continue to target improvement in product margins based on pricing and cost reduction initiatives that are starting to take hold. Underabsorbed expenses continue to run at a higher level than we are targeting in the medium term. And we have specific initiatives underway to improve our operational efficiency. We expect the impact from tariffs to persist in 2026 and continue to work on ways to offset their impact, including cost reduction and pricing initiatives. Total GAAP operating expenses were $107 million. This includes a $13.5 million payment and license related to an agreement with TRUMPF Laser System technique, settling all parts of litigation between us worldwide. The license will have an immaterial impact on our future results. Excluding the settlement payment, litigation expenses, amortization of intangibles and other acquisition-related expenses, adjusted operating expenses were approximately $91 million, as we continue to invest in our strategic initiatives to drive future growth. GAAP operating loss in the quarter was $8 million, and GAAP net income was $2 million or $0.04 per diluted share. Excluding onetime items, FX and amortization, adjusted operating income was $9 million, and adjusted net income was $13 million, with adjusted earnings per diluted share of $0.29. Adjusted EBITDA was $35 million. Both adjusted EPS and adjusted EBITDA came in above the midpoints of our guidance ranges. Moving to a summary of our balance sheet and cash flow on Slide 8. We ended the quarter with $813 million in cash, cash equivalents and short-term investments. We had $71 million in long-term investments and no debt. Cash used in operations was $5 million. The first quarter is typically weaker for cash generation, as it is impacted by annual bonus payments. During the first quarter, we spent $16 million on capital expenditures, below the expected run rate given our CapEx budget of $90 million to $100 million this year due to the timing of investments in our major fiber manufacturing facility in Germany. Excluding the German investment, underlying CapEx is running at about 5% of revenue and we expect to maintain this level going forward. Moving to our outlook on Slide 9. Orders remained strong with book-to-bill staying firmly about. For the second quarter of 2026, we expect revenue of $260 million to $290 million, and we expect adjusted gross margin between 37% and and 40%, including an ongoing impact from tariffs of about 150 basis points. We estimate adjusted operating expenses in the range of $92 million to $95 million in the second quarter and anticipate that these expenses will increase moderately during the year to support opportunities to further accelerate our key growth initiatives. For the second quarter, we expect to deliver adjusted earnings per diluted share in the range of $0.25 to $0.55 and with approximately 43 million diluted common shares outstanding. Our adjusted EBITDA is expected to be between $32 million and $48 million. In summary, we are pleased with our first quarter results with both bookings and revenue moving in the right direction. The underlying strength of the business is good to see, but we'd like to remind you that we do face tougher comparisons in the second half of 2026 relative to a strong second half in 2025. Although first quarter gross margin was a little light given the level of revenue, we continue to strive for margin increases through cost reductions, pricing initiatives and reducing underabsorbed costs. While we are monitoring freight costs that may be influenced by geopolitical developments in the Middle East, our direct exposure to petrochemicals and energy markets is limited and our vertical integration provides resilience against potential adverse impacts arising from conflicts in the region. I will now turn the call back over to Mark. Mark Gitin: Thanks, Jim. As Tim said, we are pleased with the strong start to the year, reflecting robust demand for our solutions despite elevated macroeconomic uncertainty. While we are closely monitoring current geopolitical events and have yet to see an impact on demand for our solutions, we remain cautiously optimistic in our outlook. We focus on what we can control executing on our growth strategy, supported by operational excellence and an innovation engine that continues to unlock significant areas of incremental opportunity. This foundation gives us confidence in our ability to achieve above market growth and deliver lasting value for our customers and shareholders. With that, we will be happy to take your questions. Operator: [Operator Instructions]. Our first question comes from Ruben Roy with Stifel. Ruben Roy: Tim, I guess I'll start with one of your last comments on the margin structure. And maybe if we just think about sort of medium to longer term, you've sort of talked about mid-40s as a structural area that the business can run from a longer-term perspective. And if you think about the tariff regime, higher input costs, sort of the puts and takes on product improvements, et cetera. I'm just wondering if you still think that mid-40s target is valid on a multiyear basis? Or has the structural feeling moved around at all based on what you're seeing at this point? Timothy P.V. Mammen: In general, that's a target we're still striving to get to. We are starting to see some of the cost reduction initiatives and some of the pricing that we talked about last year paid through. The other critical aspect of that, Ruben, is really balancing the fixed cost manufacturing structure with the total level of capitalized absorbed costs so that we can get absorption down as a percentage of sales, and we've certainly got room to drive overall gross margins up. I think relative to the mid-40s when we gave that guidance, the only real headwind at the moment is the tariffs impacting that by 150 basis points or so. But that tariff regime is obviously pretty fluid right now. And I think, overall, for Q2, the guidance at the top end of the range reflect some of that momentum on gross margin that we want to continue to drive forward with. Ruben Roy: Right. Okay. That's helpful. And then I guess a higher-level question for Mark. I get the new framework here with Industrial Solutions and Advanced Solutions, I think that makes strategic sense the way you've been sort of managing the business and looking at the business. So glad to see that. Maybe, Mark, if you could maybe talk through in a little more detail some of the drivers across some of the businesses that you discussed in your prepared remarks. As you think about Q2 and maybe the rest of the year, that would be helpful, given that you're bringing this out differently. So I mean, -- if we think about some of the moving parts in medical, for instance, which you've been pretty excited about, it sounds like there is a little bit of a sequential decline with unevenness and customer ordering. Is that a scheduling dynamic? Is that related to product timing? And maybe if you could talk about some of the other bigger parts of the business, cutting and welding and how you're seeing sort of backlog against those big pieces of the business playing out now? And sort of do you have any extended visibility, that would be helpful for us. Mark Gitin: Yes, absolutely. Good to talk to you, Ruben. So first of all, we continue and we expect to see continued growth in both of the areas, both Industrial Solutions and Advanced Solutions. And of course, we saw overall the business strongly quarter -- year-over-year, we saw a 17% growth. We saw that across a wide range of areas in both the -- in both the industrial as well as the advanced. If we look at the particular areas in industrial, we saw growth and continue to see growth in in Welding, specifically in the battery area. We've seen good growth actually in cutting as we also start to start to impact some of the plasma cutting area with our new RAC integrated lasers at very high powers, with new cutting heads. We're also making good progress in additive manufacturing and cleaning all of that Industrial Solutions area. And then as we look at the areas of advanced -- we've seen year-over-year strong medical. We've also seen growth in semiconductor, an area that we're starting to make impact on, as I mentioned in the call, in some of the areas of inspection, metrology, lithography areas. And then you specifically asked about the quarter-on-quarter about on medical. We just had a very strong quarter in medical -- we have a strong backlog in Medical in the year 2026. So we continue to expect to see growth in that specific area as well. Ruben Roy: Got it. Mark, if I could just sneak in one follow-up question. Congrats on the Lockheed Martin follow-up order. Can you just help me think about the revenue recognition profile on that cross program? Is this sort of spread over multiple quarters, I would assume it would be. And it sounds like you're going to be shipping for revenue in Q2. So is that starting this quarter for sort of the initial orders that you had -- or does that just reference the follow-on order and you've been shipping for revenue. Maybe you could just help us frame the scale production ramp for that program that I all had. Mark Gitin: Yes, sure. Sure. No, we're making great progress in Crossbow -- as we've talked about, obviously, we launched that at the end of last year. We brought that to a number of key shows -- we have a very strong pipeline. Lockheed was a first mover in that area. And yes, we did ship initial systems to them. So they have done a considerable amount of work with that. And then we got the $10 million follow-on order. And yes, we are beginning to ship that here in Q2, and that will be delivered over multiple quarters. And I can tell you that we have great interest from a number of key customers that we're working through the funnel, very excited about it. The they're really understanding the benefit of the IPG system. The Crossbows, as we mentioned in the past, this is based upon our high-power single-mode lasers, which IPG is the strongest at. We've demonstrated and shown lasers up to 8 kilowatts single mode, which is tremendous, and we have we're making very, very good progress with customers as we launch this forward. Operator: [Operator Instructions]. Our next question comes from James Ricchiuti with Needham & Company. James Ricchiuti: Something to get maybe some additional color on the booking strength that you saw, whether there's much variability by geography perhaps in the 2 business categories that you're now presenting to us. Mark Gitin: Yes. Jim, I'm happy to talk about it. I can talk about it for you regionally. We're not breaking it out by the 2 areas for bookings. But in the regional standpoint, we were very strong in North America and Asia, especially in China and Japan. Europe was a bit more stable. James Ricchiuti: Okay. And Mark, just on the strength in China. I wanted to -- it looks like you had a pretty good quarter in China, yet there seems to be a couple of moving pieces in China. I think Tim alluded to Ablative being a little weaker, but is the strength that you saw year-over-year or you're seeing in China, is that coming from the battery side of the business? Mark Gitin: So Jim, we're actually seeing strength across the board. Sometimes there's a little bit of movement quarter-to-quarter, but we've been quite strong in welding, especially in the battery area because we have very strong differentiation there, as you know, with our adjustable beam lasers, combined with the combined with the scanning and beam delivery as well as the process monitoring that we have. And that's very critical in that battery area, we're seeing significant growth and that's not just EV, but actually the bigger grower right now or a similar grower is actually the stationary storage for for the data center work. And those take the thicker bus bars because they are higher capacity batteries and that really zeros in on our solution. So that area of battery plus the additive and there are some areas of micromachining also where we're strongly differentiated in China, and we've seen some of that growth. And actually, when I talk about the battery, I can tell you also that, that's happening, we're seeing some of that globally. In fact, in the U.S., we're actually seeing some of the battery factories convert from EV to stationary storage, which is good for us as well. James Ricchiuti: Got it. And maybe a related strong growth in systems the last couple of quarters. And I know there are a couple of moving pieces in that as well. Anything in particular stand out? Mark Gitin: We've had some -- yes, thanks for the question. We've seen strong growth in cleaning is one of the key areas, the whole area of systems is a strength for us now because, again, it combines the laser capability plus the applications capability that we have and the ability to deliver that in subsystems and systems and really deliver a solution and cleaning is 1 of those key areas, and we're bringing out some new products in that area as well. So excited about the growth in systems. James Ricchiuti: Got it. And just one final quick one for Tim. Tim, any way to think about OpEx as we look out to the back half of the year? Any major changes that we would assume. Timothy P.V. Mammen: Yes. We sort of got maybe a moderate pickup in OpEx in the second half of the year with continued investments in the organizations and really driving these growth initiatives forward. But pretty moderate from where we are today. We know we need to we know cognizance of having invested significantly in OpEx to get the company turned around and we need to manage that cost base as we go forward and ensure getting the growth coupled with those investments. Operator: [Operator Instructions]. There are no further questions at this time. I'd like to turn the call back over to Eugene Fedotoff for closing comments. Eugene Fedotoff: Okay. Thank you for joining us this morning and for your continued interest in IPG. We will be participating in several investor events this quarter. And I'm looking forward to speaking with you again soon. Have a great day, everyone. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Hello. Thank you for standing by. Welcome to Sunoco LP and Sonoco Corp. Q1 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Scott Grischow, you may begin. Scott Grischow: Thank you. Good morning, everyone. On the call with me this morning are Joe Kim, President and Chief Executive Officer; Karl Fails, Chief Operating Officer; Austin Harkness, Chief Commercial Officer; Brian Hahn, Chief Sales Officer; and Dylan Bramhall, Chief Financial Officer. Today's call will contain forward-looking statements that include expectations and assumptions regarding Snokolp's future operations and financial performance. Actual results could differ materially, and we undertake no obligation to update these statements based on subsequent events. Please refer to our earnings release as well as our filings with the SEC for a list of these factors. During today's call, we will also discuss certain non-GAAP financial measures, including adjusted EBITDA and distributable cash flow as adjusted. Please refer to the Sunoco LP website for a reconciliation of each financial measure. The partnership started off 2026 with a strong quarter, delivering adjusted EBITDA of $867 million, excluding approximately $9 million of onetime transaction expenses. The first quarter benefited from a onetime gain on a sale of inventory of approximately $102 million. With the acquisition of Parkland Corporation here and the elevated commodity price environment in the first quarter, we proactively optimized our inventory levels, which resulted in this onetime gain. Karl will provide more detail on the impact from these inventory reduction efforts and discuss segment performance in his remarks. We continued our growth efforts in the first quarter with the closing of the Tank wood acquisition on January 16. Following the acquisition, Sunoco is Germany's largest independent terminal operator with a network of 16 assets across Germany and Poland. We expect this acquisition to be immediately accretive to distributable cash flow per common unit in 2026. During the quarter, we spent $106 million on growth capital and $93 million maintenance capital. First quarter distributable cash flow as adjusted was $535 million. On April 21, we declared a distribution of $0.9899 per common unit for both Sunoco LP common units and Sunoco Corp. shares. This 6.25% increase represents a onetime step-up of 5% and a quarterly increase of 1.25%. This distribution represents an increase of over 10% versus the first quarter of 2025 and as the result of Sunoco's continued financial stability, execution of highly accretive acquisitions and growth projects and confidence in future distribution increases. Our trailing 12-month coverage ratio was 1.9x, and we continue to target a multiyear distribution growth rate of at least 5%. Our balance sheet and liquidity position remains strong. We had $2.2 billion in availability under our revolving credit facility at the end of the quarter and leverage at the end of the quarter was approximately 4x, in line with our long-term target. In summary, our financial position continues to strengthen, which will provide us with continued flexibility to pursue high-return growth opportunities while maintaining a healthy balance sheet and a secure and growing distribution for our unitholders. With that, I'll now turn it over to Karl to walk through some additional thoughts on our first quarter performance. Karl Fails: Thanks, Scott. Good morning, everyone. Our results this quarter continued the trend of accretive and sustainable growth for Sunoco. As we benefited from a full quarter of operations from Parkland and the closing of our Tank wood acquisition in Europe. Each of our segments delivered strong performance in the first quarter, and they are all well positioned to contribute meaningfully toward achieving our 2026 EBITDA guidance. Starting with our fuel distribution segment. Adjusted EBITDA was $538 million, excluding $9 million of transaction expenses. This compares to $391 million last quarter, excluding transaction expenses and $220 million in the first quarter of 2025. This growth reflects continued strength in our legacy Sunoco operations, coupled with a full quarter of operations from Parkland. It is also supported by our ongoing gross profit optimization and growth strategies both through roll-up acquisitions and growth capital. As Scott mentioned in his remarks, these results also include a onetime benefit of inventory reduction. The level of fuel inventory we hold is always a trade-off between holding more to provide reliable supply and carrying less to deliver better returns on capital. This is especially true as we grow our fuel distribution business. Naturally, our inventory also grows, but we frequently look to optimize our inventory levels to ensure we are delivering on our target returns. This quarter, as a result of inventory reductions we delivered a $92 million benefit in this segment, unlocking additional cash to reinvest in future growth. While the size of the benefit was clearly impacted by market prices during the quarter, this was a result of active management of our inventory to a level that is sustainable on an ongoing basis. We distributed 3.8 billion gallons, up 15% versus last quarter, up 82% versus the first quarter of last year. We continue to see volume growth in our legacy Sunoco business with an increase of almost 6% and over prior year compared to a relatively flat U.S. demand profile. This growth is a result of effectively deployed capital via our growth capital plan and roll up M&A transactions. We continue to work on optimizing our volumes in the legacy Parkland assets as we implement our gross profit optimization approach that we've evolved over the years. Reported margin for the quarter was $0.17 per gallon compared to $0.177 per gallon last quarter and $0.115 per gallon for the first quarter of 2025. There were many factors influencing our margin this quarter with the 7-Eleven makeup payment, the gain on inventory reduction and the return of market volatility compensating for the margin compression experienced with dramatic increases in commodity prices during the quarter. For reference, RBOB futures increased over $1.60 a gallon during the quarter with diesel futures increasing over $2 a gallon. In our Pipeline Systems segment, adjusted EBITDA for the first quarter was $179 million compared to $187 million last quarter and $172 million in the first quarter of 2025. On the volume side, we reported 1.3 million barrels per day of throughput, slightly down from the seasonally strong throughput last quarter and slightly up from the same quarter last year. This segment continues to provide steady and stable income. Moving on to our Terminals segment. Adjusted EBITDA for the first quarter was $107 million. This compares to $87 million last quarter and $66 million in the first quarter of last year. We reported around 1 million barrels per day of throughput, which is up from both last quarter and the first quarter of last year. Growth in both earnings and volumes in this segment were supported by the inclusion of Tank wood and a full quarter of legacy Parkland operations. This segment continues to deliver stable results that predictably and accretively grow as we add to the portfolio. Turning to our refining segment. Adjusted EBITDA for the first quarter was $43 million compared to $41 million last quarter. There was a $10 million benefit in this segment from our inventory reduction efforts that I discussed earlier. Refinery throughput was 22,000 barrels per day compared to 50,000 barrels per day last quarter. As we shared previously, throughput was down as a result of a planned 50-day maintenance turnaround that began at the end of January, which was completed on time and on budget. During the turnaround, we continue to meet regional demand by sourcing supply through our refinery tank farm. The refining margin was strong during the periods of refinery operation and that continues into the second quarter. To provide more clarity to the market on our refinery performance, we posted an updated indicator crack on our website yesterday and expect to post updates at the beginning of each month. This calculation is intended to be an indicator of general profitability for the refinery using market prices. Before I wrap up, I wanted to make a few comments on the integration of the recent Parkland acquisition. The balance sheet has returned to our long-term target. We are already delivering on synergies, both expense and commercial, which puts us well on track to deliver on 10-plus percent accretion before our year 3 commitment. In summary, we continue to build on the strong momentum over the past few years. Each of our segments is delivering, and we will continue to remain focused on safe and reliable operations, expense discipline and accretive growth. I will now turn it over to Joe to share his final thoughts. Joe? Joseph Kim: Thanks, Karl, and good morning, everyone. Every quarter presents a new set of challenges. This first quarter provided more than most. Obviously, the events in the Middle East created a volatile market. Costs and prices rose dramatically and at times fell and went back up. Furthermore, normal supply patterns were disrupted specifically within Sonoco, we completed a turnaround at our Burnaby Refinery and made significant progress on the Parkland integration. And despite all these events, we still delivered an outstanding first quarter. More importantly, we're confident that we'll deliver on our full year EBITDA guidance even without the onetime gain from optimizing our inventory. Operationally, our refining team completed the turnaround on budget, our fuel distribution and midstream teams maintain reliable supply for our customers. And finally, we're on track to deliver 10% plus accretion from the Parkland acquisition. We have proven year after year and crisis after crisis that we can distinguish ourselves in challenging environments. And thus, we have gained a reputation as a strong defensive play. However, we're also a proven growth play. Already this year, we closed on the Tank wood acquisition in Europe, a multi-island acquisition in the Caribbean and various smaller field distribution bolt-on acquisitions in the U.S. We're on track to complete over $500 million of bolt-on acquisitions in 2026. Separately and in totality, these are immediately accretive while maintaining our balance sheet target. When you combine our ongoing accretive growth with the resilient-based business, we're stronger than any point since the establishment of Sunoco LP. As a result, we're able to announce a meaningful increase in our quarterly distribution 2 weeks ago. The decision to materially increase the distribution had to meet the following criteria: maintain a strong coverage ratio, protect our balance sheet, remain a growth company and finally, provide a clear path to increase distributions quarter after quarter over a multiyear time frame. We're confident the answer is yes on all these factors. Operator, that concludes our prepared remarks. You may open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Justin Jenkins with Raymond James. Justin Jenkins: I guess maybe just to start on a housekeeping item here, the inventory gain. You gave us a lot of detail on the impact here in the quarter. And I think, Karl, you suggested you're at an overall level you're comfortable with, but does that inventory level fluctuate with where commodity prices sit -- or how should we think about the moving pieces going forward here? Karl Fails: Yes. Thanks, Justin. This is Karl. Yes, as I talked in my prepared remarks, inventory decisions are really a trade-off between supply reliability and return on capital. And as part of that inventory management, we use derivatives to hedge inventory in the normal course of business. So as you mentioned, based on market conditions, we actively manage those inventory positions. So in periods of high prices and steep backwardation like we've had in the past few months will typically draw. And then in the less frequent periods of contango, we would build and our hedging practices are set up accordingly to make sure we can optimize that. I think if you look at what we reported in the first quarter, that's just a larger step we took as a result of a lot of the growth that we've done over the last 6 to 9 months, including the recent Parkland acquisition. So the level that we reduce our inventory, too, we feel is responsible and we could stay there for a long time some of those minor optimizations that I talked about base to market conditions, yes, we'll continue to do regularly. But this $100 million was sized and impacted by the higher prices, but it's something that we would have done regardless to manage our business. And it does differ from some of the other companies that have reported so far in the quarter, talking about timing-related inventory impacts because like I said, we're confident we can operate at this level going forward, and there is no symmetric risk if and when prices fall, that this gain is reversed. Justin Jenkins: That's helpful. Second question here on the distribution. Certainly, the step-up in the quarter very well received. I guess, how does this play into your overall views on capital allocation for the long term? And then maybe for 2026, more specifically, Joe, you hinted at this, but presumably, this shows a very high degree of confidence in your outlook for the year, even if it might be just a little too soon to update the guidance. Is that right? Joseph Kim: Justin, this is Joe. Just to build off on Carlson, I'll take your first question first. On the inventory optimization, that was just a result of gossip and good timing. With that said, the recent 5% step up, we would have done with or without the inventory optimization. As far as kind of giving you some better background as to our step up in our capital allocation, think maybe kind of talking through how we made this decision would be helpful. Our past investments have paid off, especially the NuStar acquisition we did 2 years ago in the Parkland acquisition we did last year. And just as importantly, our base business has proven to be year after year very resilient. As a result, our DCF per common unit has grown materially, and we believe a step-up followed by continued quarterly distribution increases would be highly valued by our unitholders. As far as the step-up, we wanted that step-up to be material. But at the same time, we didn't want to affect our ability to increase distributions over a multiyear period nor affect our ability to continue to grow. And we think that the actions that we've taken recently have put us in a very good position to achieve these goals. As far as -- I think, Justin, if I understand you correctly, the second part of the question was really more about guidance. Is that how I should read it? Justin Jenkins: Yes. Yes. Joseph Kim: The 1 key message that I hope that you and the rest of the people on this call take away from today is that we're going to have an outstanding year and deliver on guidance. That's even after you take out the onetime inventory optimization. Our established practice is not to give guidance after the first quarter unless there's a major acquisition. So is the question -- is there upside, of course. However, the amount is still to be determined, and our history shows that we're good at capturing the upside as well as protecting the downside. Operator: Our next question comes from the line of Spiro Dounis with Citigroup. Charles Douglas Bryant: This is Chad on for Spiro. Just starting off, could you provide an update on how the conflict in the Middle East is impacting your business and trends today? And have you started to see any demand impacts from the higher prices yet? Unknown Executive: Yes. Chad. Yes, let me -- I'll answer your questions kind of in order there in terms of impact to our operations given the current market volatility and then I can touch on margins and demand separately. If you take a step back, given our scale, supply chain optionality and logistics capabilities, it's really -- the business really shines during these types of periods of extreme market volatility. Just to give you 1 example, we normally supply our Hawaii business out of South Korea. What we're finding though right now is it's actually economical to load vessels out of the U.S. Gulf Coast and supply the business via the Panama Canal. I share that because that's really only a move that's available if you have our scale and logistics capabilities. There's literally countless other examples of how our operations have been impacted by some of the global disruption of product flows, but that's not always a bad thing. In fact, in our world, a lot of times, that can mean value creation. Just quickly touching on margins. We've always talked about flat price volatility, being bullish for margins in the long run. But the way that you get there is margins compress as flat prices on the way up, but then it widens disproportionately on the way down. And I'd say you get an overall kind of net bullish margin environment. If you were to pull an RBOB or ULSD chart for year-to-date, I think what you'd find is we've been on a pretty sharp up and to the right for -- essentially through the first 4.5 months or 4 months in a week of the year. Despite that, we just closed out a really strong first quarter for the segment. The second quarter is off to a great start. And we haven't even gotten to the part of the story where flat price comes off and margins widen. So we feel really good about where we're positioned there. And then I think you mentioned a question around impact to consumer demand. We haven't seen any evidence of demand destruction yet. I say that because it's kind of a function of how high flat prices go and for how long they remain there. That said, I think those of you who follow our story know that if we do encounter a scenario where there's demand destruction that creates a really strong margin environment as retailers are forced to respond to rising breakeven by taking price. So all that said, we're out of the gate really strong to start the year, and we feel really good about both the second quarter and delivering on an outstanding 2026. Charles Douglas Bryant: Okay. Got it. That's very helpful. And just wanted to get your thoughts on kind of your M&A outlook with the current macro environment in 2 quarters of sort of the pro forma business. it sounds like you're tracking the $500 million of annual M&A cadence this year. But has there been any changes in the way that you view M&A as a cadence or a scale standpoint from your business yet? Joseph Kim: Chad, this is Joe. The simple answer is no. We view it exactly the way that we outlined it late last year and early this year. So just to kind of give you an update if you take a step back and you look at all the recent acquisitions that we've done, we've greatly expanded our scale and our geographic footprint. It wasn't too long ago that we were a U.S.-only business predominantly on the East Coast and in the South. Now we have investment opportunities in the U.S., Canada, Latin America, Greater Caribbean and Europe. And so to give you an example, already this year, we have almost $200 million of bolt-on M&A that are either closed or signed are going to be closed in the very near future. And this doesn't include the $500 million plus tank with acquisition that we started the year with. So the $500 million a year plus bolt-on acquisition is very reasonable for us. And bottom line, we're in a good position to deliver on an attractive long-term growth story. Operator: Our next question comes from the line of Theresa Chen with Barclays. Theresa Chen: First question is related to the Burnaby Refinery. Post your planned turnaround, how are operations trending at this point? And given the significant disruption to the liquids markets over the past 2 months plus following the Middle East conflict -- can you talk about your ability to capture these elevated margins not only on the West Coast of North America, but broadly across the Pacific Basin into Asia and Australia, given your fleet of assets from an infrastructure perspective as well as the refining facility at Burnaby. Karl Fails: Yes, Theresa. Thanks for the question. This is Karl. As Joe and I mentioned in our prepared remarks, the team and the refinery did a great job delivering on the turnaround on time and on budget, and that really allowed us to restart the refinery in the back part of the quarter into the higher cracks that were in the market. Our -- we've used this phrase a lot, but our crystal ball is in perfect as far as how long those refining margins will last. But I think the possibility of a period of longer cracks is reasonable and would be a tailwind for overall results. If you look at that, the refinery business, it really is a foundational piece of our overall business in British Columbia. And most of the refinery production goes into that market in British Columbia, -- and so I think that's a tailwind for that overall business that we'll be able to see the results as we go through the year. Now clearly, so far into the year, the refinery is outperforming assumptions we made for the Parkland acquisition or even the midpoint of our guidance, as Joe talked about. The refinery is an important part of the portfolio. not a large part of the portfolio. It's our smallest segment, but it fits well into our overall business. When there are big price movements, and we have the higher cracks that can help offset some of the margin compression that Lawson talked about in our fuel distribution business and the opposite is also true. And as far as your broader question for the rest of the Pacific I think Austin has come do a great job of looking at what the market is giving us and supplying as an example of how we supply Hawaii, of choosing the options we have to supply our base business in the most economical way possible and then finding additional opportunities to supply fuel to new customers. So yes, I think there's going to be opportunity. Theresa Chen: And going back to your earlier comments about synergies post the acquisitions and the broader more comprehensive set of assets you have under 1 portfolio now. Can you speak to the progress made both on the commercial side as well as any existing cost synergies still to be harvested at this point and what your outlook is for that? Karl Fails: Yes, I think the outlook is good. You know us, and we've looked backwards on various acquisitions we've done. We start the synergy process even before we close, and that was true in the Parkland acquisition. So there were changes that we made, particularly on the expense side as soon as we took ownership in the fourth quarter, and those are continuing. I think the breadth of the Parkland portfolio means that, that runway of getting to the end result on the expense side takes a little longer than some of the other deals we've done, but that work is all going well. I think on the commercial side, there are significant commercial synergies that we outlined over the last year since we announced the Parkland deal and many of those have already been delivered. Many are in flight, and there are some still to come. So our guidance was based on $125 million of in-year synergies and to be able to hit that number, we needed to exit the year much higher than that, and we're still on pace with that and expect that to continue and us to the final kind of run rate of $250 million plus, we feel very comfortable with, and that should be a floor. You bet. Operator: Next question comes from the line of Gabriel Moreen with Mizuho. Gabriel Moreen: Can I maybe just ask for an update on sort of the midstream side of things and to the extent you're planning to spend on the capital there this year. I noticed that your parent announced an expansion in the Bayou Bridge going into same game. So just curious if maybe that would necessitate more storage there, for example.. Karl Fails: Yes, Gabe, this is Karl again. Clearly, our midstream portfolio, we really like, whether it's the pipeline systems assets, our terminal network. Joe talked about, we're excited to have tanked as part of that portfolio. So -- we spend capital on those, whether it's maintenance capital to keep our tanks ready to go when market opportunities come or some growth capital. I think our current portfolio is we're always looking for opportunities for larger projects. But as we sit here right now, I think our sweet spot is kind of the these small to midsize projects. And so we have a portfolio of those and then really looking for accretive M&A and any projects we do in the midstream space would be to optimize and to help us gain synergies on the M&A. So that -- as we sit here today, that can change down the road, but that's our current plan. Gabriel Moreen: And then maybe I can follow up. I think 7-Eleven is doing a bit of portfolio repositioning in terms of their store base. Can you just talk about whether there's any implications at the 7-Eleven from any of those moves? Joseph Kim: Gabe, it's Joe. As far as -- we've got a great relationship with 7-Eleven. So as far as the supply agreement we have with them, nothing changes on that one. That's a rock solid take-or-pay contract with highly profitable investment-grade company. So we feel good on that one. As far as the 7-Eleven doing portfolio optimization, obviously, with our scale and our geographic footprint, anytime there's anything on the market, I think we're a viable partner for a lot of people that are looking to exit and we -- with the synergies we bring to the table, we're always going to be competitive. Gabriel Moreen: Joe, maybe if I just squeeze 1 more in, the M&A question from a different angle. Is the current volatile backdrop making it easier to transact in your mind or harder. I'm just curious what your thoughts are on there. Joseph Kim: Yes. harder, easier, I would probably say all things equal, maybe harder overall may be more opportunistically better for Sunoco. I think we have -- we know what we're good at and scale and geographic diversity -- and given our midstream assets, especially on the term level, we're in a good position. So I think from that standpoint, it's not going to affect us. As far as now that we're more than just a U.S. company and we're in various geographies. As far as opportunities in foreign markets, there's always going to be some level of tension between countries. The extent of it and Magia always kind of evolving. But the 1 thing that we do believe in is that cross-border foreign investment is going to continue across the world, and we're in a good position to find the right assets wherever it may be. And with the synergies that we bring to the table, we're going to be in a good position to be highly competitive. Operator: [Operator Instructions] Our next question comes from the line of Ned Baramov with Wells Fargo. Ned Baramov: Could you maybe talk about the interplay between Burnaby refining margins and the margins on the fuel distribution side in British Columbia. Does the higher crack spread imply lower potential FD margin? Or is this market also not seeing any change in demand from higher fuel prices as you commented earlier. Karl Fails: Yes, Ned, this is Karl. I'll try to pull together to answer your question, a couple of points that Austin made in his overall answer on margins. and then some of the things I talked about at Burnaby. The short answer is -- as far as the refinery margin, the fuel distribution margin, as we look at it, we use internal transfer prices like most people do, and those are based on the market. So as most we can run the business while we like having the integrated margin, and we're always making choices to optimize the overall result for Sunoco, as we're looking at those 2 businesses, we also look at them independently. And so I think on the overall margin and consumer demand question, I think Austin hit the nail on the head that those margins will adjust -- and I would expect that the overall fuel gross profit and the EBITDA that we get in British Columbia should stay the same or grow over time the refining margin is going to vary more, right? That's going to really flow based on supply/demand going on in the world. And so right now, we're in a period of higher cracks, but -- while we manage that supply chain as an integrated supply chain. I wouldn't necessarily imply that when refinery cracks are high, that the fuel distribution margins are low, sometimes they're both higher together. Hopefully, that answers the first question. Ned Baramov: Yes, very clear. And then second 1 on the housekeeping side. Was the Burnaby turnaround spending included in your $93 million of maintenance CapEx for the quarter? Karl Fails: Yes. And there was some component of growth CapEx there as well that was included in our reported capital. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Scott for closing remarks. Scott Grischow: Well, thank you for joining us on the call today and for your continued interest in Sunoco. As we said, there's a lot of great things to look forward to in 2026, and we look forward to updating you across the year. Please reach out if you have any questions. Thanks for tuning in, and I always appreciate your support. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the AGCO 2026 Q1 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Greg Peterson: Thanks, and good morning. Welcome to those of you joining us for AGCO's First Quarter 2026 Earnings Call. We will refer to a slide presentation this morning that is posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of the presentation. . We'll make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts. We'll address demand, product development and capital expenditure plans and timing of those plans, and our expectations concerning the costs and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production and farm income production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. All of these forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the safe harbor included on Slide 2 in the accompanying presentation. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2025, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements, except as required by law. We will make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; as well as Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead. Eric Hansotia: Thank you, Greg, and good morning, everyone. AGCO delivered very solid results in the first quarter, reflecting effective execution against our strategy and the growing impact of the actions we've taken over the recent years to streamline our cost structure. Net sales were approximately $2.3 billion, up 14% year-over-year. driven primarily by stronger performance in [indiscernible] compared to the challenging prior year period. With differing industry conditions across regions, the year-over-year improvement highlights our ability to perform consistently and deliver solid results across varied demand environments. Operating income increased more than 60% year-over-year to $80.7 million with reported operating margin expanding 100 basis points to 3.4%. On an adjusted basis, operating margin improved 50 basis points to 4.6% driven by better volume leverage and ongoing benefits from business optimization initiatives, partially offset by higher cost inputs, including tariffs. These results underscore the pragmatic focused manner in which we are operating the business. Over the past 2 years, we have taken deliberate actions to simplify and focus our operations and sharpened execution, including a leaner cost structure, more disciplined production planning and improved channel alignment. The performance delivered this quarter supports the increased durability and resilience of our earnings model. While near-term demand remains uneven across regions, we continue to believe the business is operating around the trough of the cycle, with inventories normalizing and underlying conditions beginning to set the stage for the next phase of recovery. Adjusted operating income increased nearly 30% and adjusting EPS more than doubled year-over-year to $0.94, highlighting the operating leverage inherent in the business from lower cycle levels as well as a lower adjusted tax rate in the quarter. We also continue to emphasize structured working capital management and inventory alignment. Dealer inventories improved in the first quarter. positioning us in a more balanced position to support customers while maintaining better operational stability through the remainder of the year. We are encouraged by the progress delivered this quarter and remain fully focused on executing our plans to drive sustainable margin enhancement, cash generation and long-term value creation. Slide 4 details industry unit retail sales by region for the first quarter. While fleet ages continue to increase, farmer purchasing activity reflects a measured and thoughtful approach shaped by the current macro environment, trade policy dynamics, higher interest rates and input costs tighter credit conditions and currency volatility are influencing buying decisions globally, particularly for larger equipment. In North America, overall industry tractor volumes trended lower relative to the prior year with the most pronounced weakness in higher horsepower tractors. Farmers continue to defend more capital-intensive purchases amid current farmer economics, evolving grain export demand and elevated input costs. In Western Europe, industry tractor sales increased compared to softer prior year period with growth across most of Western European markets. Combined demand; however, remain cautious as farmers wave financing conditions and capital allocation decisions. In Brazil, industry retail demand moderated across both tractors and combines with larger equipment most affected by higher interest rates, credit availability and currency effects, while demand for smaller and midsize equipment remain relatively more resilient. Against the evolving macro backdrop, farmer purchasing decisions remain deliberate with customers balancing operational requirements, alongside financing costs and broader economic conditions. Investment activity continues to prioritize solutions that deliver clear productivity gains and cost benefits, including precision agriculture and technology upgrades while larger equipment replacement decisions are sequenced thoughtfully. This environment continues to support disciplined production planning and inventory alignment across the industry. AGCO's factory production hours are shown on Slide 5. First quarter production hours increased 15% year-over-year, reflecting a lower level of production in the first quarter of 2025. The year-over-year increase was driven primarily by Europe, where production levels rebounded from a particularly reduced first quarter 2025 base. Importantly, first quarter 2026 production was aligned with our operating plan and reflected intentional timing and product mix rather than a change in underlying demand trends. Full year 2026 production hours are still planned to be broadly flat to modestly lower than 2025. We are executing a deliberate and measured step down in production as the year progresses. This approach reflects our continued focus on inventory optimization in North America and Latin America, active support of dealer destocking and close alignment of output and market demand. Turning to regional inventories. In Europe, dealer inventory months of supply improved modestly to just under 4 months aligned with our target. This reflects effective execution across the channel with sent operating below the regional average in MessyFerguson Valter modestly above. This well-balanced position provides operational flexibility across product categories and supports continued focus on margin quality and mix optimization in our largest and most profitable region. In Latin America, dealer inventories moved to 4 months of supply from 5 months at year-end, continuing progress toward our 3-month target. Dealer inventory units declined approximately 10% during the quarter, reflecting disciplined coordination of shipments and production with a slightly softer industry outlook. In North America, dealer inventories closed the quarter at approximately 7 months of supply, consistent with our year-end levels and slightly above our 6-month target. Large egg units decreased sequentially and but were offset by the normal increase in the low horsepower segment this quarter in anticipation of the spring retail selling season. Production continues to be managed intentionally with a clear priority on channel health, and long-term stability. Slide 6 highlights our strategy to outpace the market and drive margin improvement to our adjusted operating margin target of 14% to 15% at mid-cycle over time. What is increasingly evident is that AGCO is delivering stronger and more resilient financial outcomes across a range of demand conditions compared to prior cycles. The structural actions implemented over recent years are translating into a more durable margins, improved earnings stability and higher quality cash generation, demonstrating the effectiveness of our evolved operating model. Our 3 growth levers: high-margin products, technology-driven differentiation and a growing higher-value aftermarket business continue to provide meaningful support in the current environment. each lever contributes distinct value and together, they reinforce a business model that is less reliant on unit volumes and more centered on value creation. This foundation underpins our ability to consistently deliver mid-cycle adjusted operating margins in the 14% to 15% range over time. It reflects a structurally improved AGCO more focused on higher-value revenue streams, more disciplined on costs and investment and increasingly driven by technology solutions and services. Importantly, this operating model also supports strong cash generation with free cash flow conversions of approximately 75% to 100% through the cycle. That financial flexibility enables continued investment in innovation and business advancement, while supporting capital returns to shareholders as evidenced by our recent increased dividend and share repurchase announcements. Taken together, these elements highlight why AGCO is operating today from a more favorable and resilient position and why our business is well positioned to deliver consistent performance across future market cycles. Turning to Slide 7. We are seeing a series of tangible strategy wins as we execute against our farmers first priorities. These actions demonstrate how we're building a durable competitive advantage by combining engineering leadership with increasingly advanced digital and enabled capabilities. Our approach reflects a focus on prioritizing growth while also delivering efficiency, as we apply AI where it delivers measurable value for farmers and strengthens business performance through better decisions and execution. AI is increasingly becoming a significant enabler in that road map and across the organization to support long-term value creation and differentiation. AI solutions on the farm and in our products are designed to help farmers to achieve more with fewer inputs such as land, labor, fuel and chemicals. Solutions, including Symphony Vision use intelligent cameras intended to optimize precision application in real time, improving effectiveness and helping to reduce waste. At our PTX Winter Conference, we introduced AI-enabled innovations, including Symphony Vision Dual and AROTube to advance real-time precision applications and automated seed placement. These innovations reinforce our position in high-value technology-enabled solutions. We use AI in customer support and service to connect machine data, customer needs and AGCO expertise to reduce downtime and strengthen long-term customer relationships. It is transforming how we work with thousands of parts leads generated for dealers and tools like product information assistant to more closely connect dealers and farmers. And third, AI inside AGCO is improving efficiency, quality, cost and speed. Use cases range from AI-powered financial forecasting to AI-driven market analytics that automate used equipment price analysis and free up experts to focus on more value-driven actions. These capabilities are being deployed in a structured and purposeful manner to support margin expansion and growth. We are seeing strong and growing demand from our employees to leverage and deploy VVI solutions to better support our dealers and farmers. We view this momentum, along with our project reimagine run rate cost savings as a clear opportunity to drive measurable efficiency gains and productivity improvements across the organization over time. In short, we are taking an enterprise view with AI using human in the loop oversight and aligning with the evolving regulatory frameworks to support trusted, responsible and scalable usage. On Slide 8, we also continue to see strong external validation of our innovation and technology leadership. Our outrun mixed fleet retrofit technology are in the prestigious Davidson Prize for the second consecutive year. This time for them is tillage, reflecting our step-by-step progress towards our ambition for full firm autonomy by 2030. Our AGCO Parts shop received the Digital Engineering Award for a next-generation unified B2B platform that improves dealer efficiency, order accuracy and visibility at scale, which supports aftermarket growth and reinforces our farmer first focus on uptime. As EGCOPower's Core [indiscernible] 0 was named Diesel Engine of the Year, reinforcing our continued leadership in efficient powertrain innovation. The family of core engines were designed to run on an array of fuel options, helping them deliver the performance our farmers' demand around the world. I want to recognize and thank the teams across AGCO whose work continues to set a high bar for our industry. With that, I'll turn it over to Damon to walk through the financial results for the quarter. Damon Audia: Thank you, Eric, and good morning, everyone. Slide 9 provides an overview of regional net sales performance for the first quarter. Net sales increased approximately 5% in the first quarter compared to the prior year period, excluding the favorable impact of currency translation. By region, the Europe/Middle East segment delivered a 9% increase in net sales on a constant currency basis, higher sales resulted from increased unit volumes compared to the first quarter of 2025, which included dealer inventory destocking. Sales growth in Germany and the United Kingdom was partially offset by lower activity in Turkey and France. The increase was driven by strong growth in high horsepower tractor sales. North American net sales also increased 9%, excluding currency impacts. Higher unit sales compared to the prior year, together with positive share growth supported the increase. The most significant gains were in high-horsepower tractors, hay equipment and sprayers highlighting continued customer investment in productivity-enhancing solutions. Net sales in Latin America were 30% lower on a constant currency basis, reflecting very measured purchasing activity across virtually all product categories as the environment in Brazil and Argentina remain challenging in the quarter. Asia Pacific Africa net sales increased more than 20%, excluding currency impacts, driven by higher sales in Australia and South Africa partially offset by lower sales across most Asian markets. Consolidated replacement part sales were approximately $447 million in the first quarter, increasing 3% year-over-year on a reported basis and down nearly 6%, excluding favorable currency translation. Results reflected wet weather in Europe early in the quarter that limited parts consumption. And in North America, where dealers remain focused on inventory optimization amid continued cautious farmer sentiment. Turning to Slide 10. Adjusted operating margin was 4.6% in the first quarter, an improvement of 50 basis points year-over-year. This reflects strong execution in the Europe, Middle East region, once again, combined with continued operational and cost discipline across the broader organization. By region, Europe, Middle East income from operations increased by over $104 million compared to the first quarter of 2025 with operating margins exceeding 16%. These strong results were driven by sales growth, a richer mix and increased production compared to the prior period. North America income from operations reflected an approximately $27 million year-over-year reduction with operating margins remaining below breakeven. Results heavily reflect the year-over-year impact of tariff-related costs along with factory under absorption associated with our disciplined approach to reduce production levels. Latin America operating income decreased roughly $47 million year-over-year with results below breakeven, driven by several factors, including significantly lower sales volume and negative pricing. Asia Pacific Africa operating income increased about $7 million in the first quarter, supported by higher sales and increased production during the quarter. Slide 11 outlines our first quarter cash performance and full year estimated free cash flow. Free cash flow represents cash used and are provided by operating activities less purchases of property, plant and equipment. Free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $455 million of cash in the first quarter of 2026 reflecting the normal seasonal inventory build, consistent with our operating cadence. The prior year quarter reflected unusually low production levels, mainly in Europe that limited inventory investment and reduced cash usage. Our 2026 production schedule reflects a return to our typical seasonal patterns, resulting in higher inventory investment and cash usage early in the year. This profile was fully aligned with our plan and remains consistent with achieving free cash flow in a targeted range of 75% to 100% of adjusted net income for the full year. Our approach to capital allocation remains disciplined and consistent, prioritizing reinvestment in the business, maintaining an investment-grade balance sheet, pursuing targeted acquisitions that accelerate technology adoption and returning capital to shareholders. This framework continues to guide both our decision-making and the sequencing of capital deployment. As part of this approach today, we announced that we are evolving our long-standing AGCO Finance U.S. and Canadian joint ventures to better align with increasing regulatory and compliance requirements on enhancing capital efficiency. On April 30, the company executed various agreements with wholly owned subsidiaries of Rabobank to sell AGCO's 49% equity interest in its U.S. and Canadian joint ventures for approximately $190 million, while establishing new financing framework agreements that are intended to strengthen the strategic and commercial benefits of these partnerships. AGCO Finance remains the predominant financing partner for AGCO and our customers. This structural evolution strengthens AGCO's farm refer strategy by ensuring continued access to competitive finance offerings. These actions optimize regulatory capital deployment, strengthen our commitment to providing competitive financing solutions to our farmers and dealers and bolster our financial flexibility. The proceeds from these transactions are incremental to free cash flow and are being used to support capital returns to shareholders. Building on both our record free cash flow generation in 2025 and these proceeds AGCO has increased our capacity to return capital to shareholders. We continue to execute share repurchases under our $1 billion authorization. Following the initial $300 million announcement in October last year, we are initiating an additional $350 million in repurchases during the second quarter of 2026. In addition, the Board of Directors also improved an increase in our regular quarterly dividend to $0.30 per share, up from $0.29. At this rate, annualized dividends would total [ $1.20 ] per common share. Collectively, these actions demonstrate a continued focus on disciplined capital deployment, balancing enhancing near-term shareholder returns with long-term financial flexibility. Turning to Slide 12, which summarizes our 2026 market outlook across our 3 major regions. Global agricultural markets entered 2026, reflecting conservative purchasing behavior shaped by high borrowing costs, extended margin compression and evolving policy and trade dynamics. Recently, geopolitical developments have contributed to higher fertilizer and fuel costs, reinforcing cautious behaviors across the industry. Current conditions point to a gradual and uneven recovery, rather than a near-term rebound. We are maintaining our forecast for North America and Western Europe and adjusting our Latin American forecast from flat to down modestly in 2026. In North America, farm income dynamics and increased input costs continue to shape demand, particularly for large equipment. Deal activity continues to focus on managing used inventories and limiting new commitments, which is weighing on large tractors and combined purchases. Higher fertilizer and diesel cost tied to recent geopolitical developments have added to grower caution heading into the planting season, further limiting discretionary capital spending. Smaller equipment continues to demonstrate relatively stable demand compared to large ag supported by livestock and hay related demand. While performance has improved year-over-year, early year activity has been more modest than anticipated amid recent macro events, reinforcing our views that upside remains limited for the remainder of the year. Overall, we expect the North American large ag equipment market to be down around 15% below 2025 levels with the small ag segment modestly higher. In Western Europe, near-term demand has demonstrated select areas of strength. At the same time, confident remains fragile. Farmer profitability challenges, increased input costs evolving regulatory uncertainty and prudent capital spending behavior continue to weigh on sentiment. Recent geopolitical developments, including the development in the Middle East have added to this environment, particularly around energy cost despite near-term demand strengths. Subsidy frameworks and relatively favorable interest rate dynamics continue to provide a stabilizing foundation for the region. Taken together, we still expect Western Europe to be up modestly in 2026. In Brazil, in broader Latin American region, interest rates and tighter credit conditions continue to influence purchasing patterns, particularly for large machinery. Increasing input costs and financing dynamics are guiding investment decisions, contributing to equipment demand variability. Brazilian retail tractor volumes in '26 are now projected modestly below 2025 levels, but with long-term fundamentals remaining relatively constructive. Overall, the agricultural equipment cycle in '26 reflects discipline, selective purchasing and delayed replacement activity. As financing conditions normalize, input cost pressures moderate and grain prices improve, the aging fleet and structural foundation supporting recovery remain in place with regional timing varying by market and segment. Slide 13, highlights the key elements underlying our full year 2026 outlook. Global industry demand in 2026 is now positioned in line with prior year levels, operating at approximately 86% of mid-cycle demand, consistent with the stabilization phase of the cycle. Our sales plan reflects continued market share gains, pricing in the range of 2% to 3% and roughly a 3% foreign currency benefit. While pricing helped moderate the impact of material inflation and tariff-related costs, the incremental increases in these pressures from events in the first quarter will now more than offset pricing actions resulting in margin dilution and lower profitability in 2026. Inventory management remains a priority in 2026, particularly in North America and Latin America, supporting our ongoing dealer inventory alignment and a balanced demand-driven go-to-market approach. Our outlook reflects the current tariff environment and our established mitigation actions, including cost initiatives and pricing. Since the fourth quarter earnings call, the tariff environment has evolved with the Supreme Court ruling related to EPA tariffs as well as new guidance on the calculation methodology related to Section 232 tariffs. We now expect tariff costs of approximately $135 million in 2026, which is around $90 million increase from 2025 and $25 million higher than our previous estimate. These estimates could change as things evolve during the year. Our adjusted operating margin and earnings per share outlook do not assume any refunds related to the [ EPA ] tariff. We are currently evaluating the impact to our business and the ultimate timing and amount of any potential refunds remain uncertain. We are prepared to adjust our outlook should tariff or trade policy conditions change. Engineering expense is planned at around 5% of sales in 2026, representing an increase of nearly $40 million year-over-year, supporting innovation across the portfolio while maintaining investment discipline. Operational efficiency initiatives are increasing and we now expect them to deliver approximately $60 million to $70 million of benefit in 2026, up from $40 million to $60 million, reinforcing our ongoing transformation progress. Production hours in 2026 are expected to be flat to slightly down compared to 2025 with a measured step down as the year progresses to support inventory normalization and demand alignment. Based on these assumptions, adjusted operating margin is still targeted in the range of 7.5% to 8% reflecting structural portfolio improvements and cost actions, partially offset by price cost pressures, increased tariff costs as well as increased freight costs. Finally, although our effective tax rate was 24% in the first quarter, we still expect our effective tax rate for 2026 to be in the range of 31% to 33%. Turning to Slide 14 for 2026 outlook. We have modestly tightened our full year net sales outlook to $10.5 billion to $10.7 billion, reflecting improved performance in certain regions slightly higher foreign exchange effects and continued execution, partially offset by ongoing market volatility. Adjusted earnings per share are targeted at approximately $6 supported by continued strong cost discipline and execution consistency. This revised outlook reflects our strong first quarter performance, along with the incremental tariff costs and other cost headwinds I mentioned previously. The current earnings per share outlook also assumes approximately $0.15 per share benefit associated with the share repurchase announced today. Capital expenditures are planned at around $350 million, positioning the company for future demand while preserving investment discipline. Free cash flow conversion remains targeted at 75% to 100% of adjusted net income, supported by strong working capital management and ongoing inventory efficiency. Second quarter net sales are targeted between $2.7 billion and $2.8 billion. Second quarter earnings per share are targeted between $1.35 and $1.40, reflecting the alignment of production with demand cost execution and timing of efficiency initiatives. The second quarter EPS target excludes any impact from the potential [ IEP ] tariff refunds or the sale of our equity interest in the AGCO Finance U.S. and Canadian joint ventures. The AGCO Finance transaction in North America will accelerate cash flows from the existing portfolio and result in a second quarter earnings lift. However, for the full year, we do not expect a meaningful change in the portfolio's earnings contribution. Slide 15 outlines the details for our 2026 tech data be held near Chicago, Illinois. A strategic business update will be held on October 6, followed by a live field demonstration of our precision agricultural stack and farmer core initiative on October 7. We look forward to hosting you just outside of Chicago. With that, I will turn the call over to the operator to begin the Q&A. Operator: [Operator Instructions] The first question is from Jamie Cook with Truist. Jamie Cook: I guess 2 questions. Damian, just unpacking how we think about -- I mean we had losses in North America and in Latin America in the first quarter. Just trying to understand, in particular, it was like the restatement with Mexico, how do we think about the full year potential loss in cadence, I guess, of earnings throughout the year, I guess, would be my first question. And then my second question, can you just dig a little deeper on some of the pricing commentary that you referred to like by region. You know what I mean, I guess I was impressed that we actually held the 2% to 3% price increase. Unknown Executive: Sure. So I think if we look at the cadence here with the incremental tariff costs that we alluded to in the scripted remarks, we're going to see North America sort of stay at this sort of the mid-teens margin loss for the balance of the year here. despite the solid pricing, that incremental $25 million is going to really be concentrated in North America, as you would expect. It will fluctuate a little bit in the quarter with volume here. But generally, you're looking at sort of an earnings kind of in that negative 10%, negative 12% for the full year. South America, we had a challenging first quarter -- or at -- excuse me, we had a challenging first quarter see that sort of rolling into the second quarter here with a slight breakeven, the slight loss likely in Q2. And then as we hopefully see the industry recover, we've talked about the election year some of the incentives as we get to the FINAME funding in the middle of the year, we see that turning certain positive. I think net for the full year, when you look at the first half headwinds second half opportunities probably closer to a breakeven business for Latin America as we look at the full year. I think, Jamie, on the second question on pricing, again, we did reaffirm the 2% to 3%. When I look at how pricing panned out in the first quarter, overall, I would say total company, it was modestly a little bit better than what we had expected. Now we saw stronger performance in pricing in North America and in Europe and then we saw a significantly weaker pricing in the Latin American region. So for total company, again, I still feel good that we're in that 2% to 3% range. But as I look at how things are unfolding, so far, I would say it's going to be a little bit stronger coming from North America and Europe and a little bit weaker coming out of the Latin American region, at least to start the year. Operator: Next question is from Kristen Owen with Oppenheimer. Kristen Owen: Damon, you walked through a lot of puts and takes on the guidance. It's easy to look at it and say, okay, you beat by $0.50 in the first quarter, so we're going to raise the guidance by $0.50. But it sounds like there's a lot more to it than that. So maybe just help us with the bridge on the updated guidance, what got better, what got worse? And then I have a follow-up on some of the cost-related items. Damon Audia: Yes. Sure, Kristen. So I think if you look at our prior guidance, we were $5.50 to $6. So we'll use the midpoint there. We rolled through the $0.50 beat in the first quarter. I alluded on the call, tariffs are around a $25 million incremental headwind, so call that around $0.25 of a headwind. Kristen, we tweaked our volumes, our industry outlook for South for Latin America and a little bit, I would say, in Eastern Europe, Turkey mainly. So the industry being a little bit softer for the balance of the year, that's around a $0.20 headwind. We've had incremental freight costs as we look at diesel fuel, ocean freight charges, other costs that we're seeing given the Middle East conflict, that's around a $0.20 headwind flowing into our cost of goods sold. To offset that, we included the share repurchase. We've estimated that at around $0.15 of a positive for the full year. And then we've also increased our restructuring savings outlook, which was $40 million to $60 million. We now have that at $60 to $70 million. So that, coupled with a little bit of other cost of goods sold savings opportunities, that's around a $0.20 positive relative to our original outlook. And so when you put those together, you get around $6. Kristen Owen: Fantastic. So the restructuring savings then the $40 million to $60 million now, $60 million to $70 million. In some of the prepared remarks, you talked about some of the internal initiatives. Can you maybe help us understand how much of that is just an acceleration or maybe a pull forward of the bridge that gets us to 14% to 16% by the end of the decade? Or how much of that is sort of incremental upside that maybe gives you greater confidence in that mid-cycle margin target? Damon Audia: Yes. So I'd say, Kristen, it's probably about 50-50. So we did have some savings that was planned more into the Q3, Q4 time frame. Given the industry, we've been able to pull as we did a little bit last year, we pulled some of that ahead. So if you remember on the fourth quarter call, we said we were run rating at around $190 million. I would tell you now after the end of the first quarter, we're run rating just a little bit over $200 million. So part of that was pulling some things ahead. But in this environment, as we leverage technology, more of the teams are seeing more opportunities. So there is some incremental long-term savings. So again, for this year, I would say it's kind of split between a pull ahead and an incremental. So that will carry over to some incremental savings as we get into 2027 given the annualization. But generally, I'd say we're run rating a little bit north of $200 million now. Operator: The next question is from Mig Dobre with Baird. Unknown Analyst: This is Peter Kalanarian on for Mig this morning. I guess I have one on Europe here. How confident are you in the relative strength in Europe holding through the remainder of the year? It's my understanding that EU farmers maybe don't preorder their inputs to the same extent as we see in North America. So could you maybe help me understand the dynamics there, what you're seeing in terms of farmer health? And then second part of the question on margin progression for Europe, I believe it's previously been a pretty steady mid-teens through the year. Is there any change there that we should be aware of? Eric Hansotia: Yes, I'll start off with that answer. So if you think about the crops that are planted in Europe, the biggest crop planted is wheat, and it's often -- it's a winter wheat predominantly. So that's planted in the fall. It starts growing over the winter and then it continues to grow in the spring and in the summer and is harvested early summer. So the cycle is a little different than what we think about in North America of most of the planting happening in the spring because of the mix of grains that they put in. So that's one dimension. They still do prebuy a fair amount, not quite as much as North America, but a fair amount. And so I think it really comes down to how long is this war going to last and how big of an impact is the increase in cost for fertilizer. Fertilizer is up somewhere between 35% and 50%, but it all depends on if that lasts through the rest of the year. Most predictions right now, of course, this is unpredictable, but many folks are using the assumption that this war is not going to last in terms of quarters, it's going to last in terms of several more weeks in terms of cutting off the street. So if that's true, then flow can normalize in time for the next big use of fertilizer in the Northern Hemisphere, which is more weighted toward the fall. Damon Audia: And then, Peter, if I -- in answer to your second question about the European margins and the cadence, again, Europe continues to be very strong for us if I think about the margins. generally speaking, likely in the mid-teens for each of the remaining 3 quarters, a little bit lower here in the second quarter as we'll have some of that incremental engineering expense. Remember, we have a high concentration of engineering expense in Europe. I'd say probably closer to flat to last year's margins and then picking up modestly here in the back half of the year as we introduce some new products and some of that new product pricing kicks in. But generally speaking, kind of in those mid-teens here for the balance of the year. Unknown Analyst: Awesome. And then a quick follow-up here on Latin America. How many -- do you have the pricing in place you feel to clear the channel here in the next couple of quarters? Or do you think that price will have to come down even further -- and I guess, tangential to that question, how many quarters of destock do you think we have left before inventory can get down to that target level of, call it, 3-ish months? Damon Audia: Yes. I think, Peter, for us, we're always looking market back from a pricing standpoint and our relative value to the farmers and also relative to the competition. I don't see a significant change in pricing, but again, subject to market conditions. I think we're trying to be much more proactive on our side. We will have inventory -- production will come down probably around 20% year-over-year in Q2 as we look to better adjust the production schedule. We made great progress on the dealer inventories this last quarter. As I mentioned in my part of the remarks, units were down around 10% -- so we are taking the units out. We're reducing the production here. We'll reduce it again another 20%, trying to get closer to that 3-month target here, hopefully by the end of the second quarter. But again, remember, for us, when we give you the dealers' month of supply, that's a 12-month forward look. So as that industry is changing either positively or negatively, that 12-month forward calculation can also influence even though the units may come down. So I feel good about what the team is doing in managing a very challenging situation. We know South America is likely the most susceptible to the diesel fuel cost, the fertilizer increases that Eric just alluded to. So the team is doing a good job sort of managing the production schedule to try to keep the retail and production as closely aligned as possible, but at the same time, getting the dealer inventory levels down, but still servicing the demand we're seeing. So a lot of work down there, but we feel good about how the team is managing it. Eric Hansotia: Maybe one more thing on Brazil. It's a very, very tight presidential race. And last week was AgrShow. There was a lot of talk at AgrShow about favorable terms coming into the market from the government. Unfortunately, there's no detail on what those terms are going to be, but certainly a lot of talk about they're coming. And so farmers, I think, to some degree, are a bit on hold until they get clarity on what that environment will be. But if you anticipate the chapter we're in right before an election is probably going to be something positive for farmers. Just don't have any clarity on it yet. Operator: The next question is from Steve Volkmann with Jefferies. Stephen Volkmann: I apologize if I missed this, Damon. I think you said that '26 production hours are going to be flat to slightly down, but it sounds like they're going to be down quite a bit in the second quarter, and you obviously reduced inventory in the first. So is the cadence that we're going to have like some big increases in the second half? Just how does that sort of play out? Damon Audia: Yes, Steve. So we had the big increase here in the first quarter. It was heavily in Europe because of the year-over-year comparison. It wasn't that we were running in excess. If you remember last year, we had a slow start as we were sort of destocking a little bit in Europe. If I look at Q2 here, you're looking at North America is likely going to be relatively flat to year-over-year. The big change will be the South American market. We'll be slowing production there in Q2 and likely in Q3 based on the current industry outlook. But as Eric just alluded to, such a volatile market or uncertain market there, we manage it one quarter at a time. But at least our outlook right now, this flat to down guide assumes more underproduction in the Latin American region, but relatively stable production in Europe and in North America for the balance of the year. Stephen Volkmann: Okay. I see. And then just anything to call out relative to your view of kind of how Precision ag sales kind of flow this year? Is there any upside or downside to your views there? Damon Audia: I don't think there's any upside or downside. Again, the first quarter was very much in line with our expectations. I think the sales for PTX as a whole were relatively flat year-over-year. So I think, Steve, when you look at the industry being down here in North America, down in the challenge in South America, the fact that PTX delivered relatively flat sales year-over-year is a testament to the retrofit market and how well that business is doing. For the full year, we still expect it to be flat to modestly up for the full year. Operator: The next question is from Joel Jackson with BMO Capital Markets. Joel Jackson: I wonder if you can provide any -- like we're talking about traversing the bottom here, things getting better as the year progresses. Do you have any updated views on what you think this cycle will look like in the next year or 2 as we get back into growth and maybe compare that to prior cycles? Eric Hansotia: Yes, it's a pretty uncertain environment we're in, but I would say we expect that -- you look at what are the drivers of cycles. And the primary one I'd look at is the age of the existing fleet in the farm. And in all of our regions, it's at peak levels. So when the farmer looks out into their machine shed, they see old equipment and they see a lot of technology coming into the market. And so there's a draw or replacement demand. that's going to happen. And there's other turbochargers that could happen and could boost that. Brazil is putting a lot more of their corn into ethanol. The U.S. ethanol blend may move from 10% to 15% may move to year around. I don't know yet, but that's under a heavy discussion. Biofuel policy and sustainable aviation fuel are getting a lot of attention right now. There's more protein demand with Li and the GLP drugs. So you combine all of those things, and those all give us -- those are the ones we've been talking about for several years. Those are natural tailwinds for this industry to recover tactically because of the fleet age and more strategically because of these macro drivers. And we see all of those as playing for the farmer. They need some more certainty. They need the straight to open up. They need their cost to settle back down and they need the trade flows to open up, which is a relatively short-term thing. Once that happens, I think the cycle will progress like it usually does. We've been 2 to 3 years now at the bottom, and then it usually works its way back up. It's depending on the situation, 7- to 10-year overall cycle. So we expect a migration back up to mid-cycle volumes and then hopefully above mid-cycle after that. Joel Jackson: Going in the background. I apologize for the noise. And just my second question, the buyback less announced, would that be very upfront like the buyback last year or more spare? Damon Audia: Yes, normally, we do the buyback in the form of an ASR. There is a portion that is directly done with TaFI, our largest shareholder. So you can assume that 85% of it directionally is done through the form of an ASR and then the balance comes from Tafi at a later date. Operator: The next question is from Kyle Menges with Citigroup. Kyle Menges: This is Randy on for Kyle. It would just be great to get some more color on some of the changing tariff dynamics as it relates to your outlook, maybe bifurcating between impacts from the IEPA overturn, the new Section 232 ruling. And then any color on how you're thinking about what potential Section 301 impacts could be would be helpful. Damon Audia: Yes, Randy. So with the IEPA ruling, we have now taken that out of our guidance and factored in the new cost calculation for 232. When we look at the net of those 2, that's around a $24 million headwind relative to our prior guidance. And so that's sort of been factored into our outlook. as I mentioned in my pre-scripted remarks, we've not assumed any refund or anything related to the IEPA in our current EPS outlook. If something was to be monetized, that would be incremental. As it relates to the pending 301 tariffs, again, we have not assumed anything beyond what's currently in place today into our outlook. I think it's important to remember, though, as if there is something that comes as a result of 301, the question of when do those take effect when do they hit our inventory and then when does that flow through cost of goods sold. So as we think about something maybe coming this summer, the reality of that hitting 2026 is quite low, just given the flow of inventory and finding its time to our cost of goods sold. So again, we're monitoring the situation. The teams are doing a great job in trying to mitigate these tariffs, looking for offsets or ways to ship directly to Canada, which historically we would have flown those European products into the U.S. and then up to Canada. So looking for ways to avoid some of these where possible to limit the impact on our dealers and our farmers. But overall, as I said, around $25 million is the net headwind this year. Operator: The next question is from Kevin from Wells Fargo. Unknown Analyst: Can you talk about what you're seeing in terms of used inventory destocking in North America during the quarter? And what do you expect in terms of the pace going forward? Damon Audia: Yes, Kevin, I think overall, we don't have as much visibility as maybe some of our competitors do on the used. But overall, generally speaking, it's not as big of an issue for our dealers versus the new. We're probably directionally about maybe a month in a better position than we are in the news in the new. So overall, not a huge issue, but something that we're watching closely. Unknown Analyst: Got it. And then maybe switching gears, how should we think about the sales of the stake in the joint ventures in terms of the impact on the equity income line on a go-forward basis? Damon Audia: Yes. I think the -- so Kevin, thanks for asking the question. I guess the way to think about this is the $190 million of cash that I mentioned is reflective of the equity value and the cash flow considerations of the existing portfolio as of April 30. So if you think about that, the transaction, it's going to accelerate the cash flows from the existing portfolio, and that's what's going to result in this Q2 earnings benefit. But on the full year basis, the contribution from the portfolio hasn't really changed. So that's the way to think about it here in 2026. As I think about '27 and beyond, what's happened that equity and earnings is now going to disappear for those 2 entities, and you're going to see that show up at a smaller percentage, but show up as a reduction in sales discount. So it will be slightly accretive to the operating margin and a little bit negative from an earnings per share perspective. Operator: The next question is from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: This is Esther on for Angel. I just had a question around North America market share. Can you unpack a bit more about what you're seeing in North America and just provide a little bit more color on the market share gains? Also curious to know if farmers are telling you anything that's driving the switch of brands and whether there are any particular regions in the U.S. where you're seeing this? Eric Hansotia: Yes, I'll take that one. So globally, we had our highest market share. We grew again market share in quarter 1. We've now got our all-time record highest market share for the company globally. And a big driver of that is North America. We're getting market share gains in both of our brands, Massey Ferguson and Fendt in terms of machinery brands. And essentially, we've gone through a few phases here. The first phase was getting our parts and service performing at a record level, and that's been done for several years now. Then getting our product portfolio to the best in the industry. We've got that in place solidly. And now we're working with our dealers to really raise their performance. That's the focus of this chapter, working with all of our dealers to implement farmer Core, which is a changing of the distribution model where they do the work on the farm. They move from reactive to proactive, monitoring the machinery on the farm and doing everything proactively instead of having the customer having to come to the brick-and-mortar store, we come to the farmer, way more convenient, way more proactive. So this establishment of the world's best products has been done. Now we're working on the world's best distribution and service support that can be delivered to the farmers. And we're seeing once farmers experience that. They love it. They love the convenience of having everything done with them and on their location. So that's the primary thing. It's more of a large ag focus. You asked kind of where is it happening? It's more large ag than small ag because it's -- that's the focus of Farmer core. But it's geographically, I wouldn't say that there's a specific area in the country. Did I capture all your points? Or was there anything... Angel Castillo Malpica: Just like a quick follow-up. Just like what you laid out, is there any concerns about any like aggressive pricing from competition just due to the market share gains that you're seeing? Eric Hansotia: Well, we always have to keep our eyes on that. But in general, I think we're all public companies, disciplined players and working on generating value as opposed to trying to take margin hits to go after price discounts. We've not seen that in the past on any kind of broad scale, not saying it can't ever happen, but we haven't seen it in the past, and we're not seeing it now. Operator: The final question today is from John Peter with Bernstein. Unknown Analyst: This is filling in for Chad. Can we double-click on your order book by region, please? Damon Audia: Yes, sure. I'll take care of that. So for North America, our order board is kind of in the range of 2 to 4 months depending on the product type. I would say for the lifestyle or the rural lifestyle, so the lower horsepower, we're about 2 months. As I mentioned in my remarks, we're into the spring selling season right now, so very customary to see the order board at the low point. For Fendt, we're probably closer to 4 months. In Europe, we're at 3 to 4 months, so relatively consistent to where we've been for the last several quarters. And in Latin America, if you remember, we only opened the order board up 1 quarter in advance. And so we're sitting at around 3 months of orders in South America. So again, fairly consistent as to where we've been in the last few months -- last few quarters, excuse me. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Eric Hansotia: Thank you for joining us today for our continued -- and your continued interest in AGCO. The first quarter highlights our continued progress in building a more focused and resilient AGCO, executing with discipline and staying anchored to what we control while advancing our Farmer First strategy. The performance delivered this quarter reflects the effectiveness of actions taken over several years, including portfolio sharpening, execution enhancement and improved earnings durability. We remain focused on delivering for all of our stakeholders. For our farmers, we continue to invest in practical innovation spanning precision agriculture and AI-enabled solutions, service and uptime. -- all designed to help them operate more productively and profitably. We've achieved the highest Net Promoter Score for quarter 1 in the history of our company and have a record high market share globally with big gains in North America. For shareholders, our record 2025 cash generation enables balanced capital deployment, including increased dividends and ongoing share repurchases alongside continued investment. Looking ahead, we remain focused on cost management, production alignment, technology advancement and market share growth, positioning the company to perform effectively through the current environment and capture opportunity as demand grows over time. Thank you for your continued support for AGCO. We value your partnership and look forward to building long-term value together. Operator: Thank you for joining the AGCO earnings call. The call has concluded. Have a nice day.
Operator: Good day, everyone, and welcome to Pfizer's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Francesca DeMartino, Chief Investor Relations Officer and Senior Vice President. Please go ahead, ma'am. Francesca DeMartino: Good morning, and welcome to Pfizer's earnings call. I'm Francesca DeMartino, Chief Investor Relations Officer. On behalf of the Pfizer team, thank you for joining us. This call is being made available via audio webcast at pfizer.com. Earlier this morning, we released our results for the first quarter 2026 via press release that is available on our website at pfizer.com. I'm joined today by Dr. Albert Bourla, our Chairman and CEO; and Dave Denton, our CFO. Albert and Dave have some prepared remarks, and we will then open the call for questions. Members of our leadership team will be available for the Q&A session. Before we get started, I want to remind you that we will be making forward-looking statements and discussing certain non-GAAP financial measures. I encourage you to read the disclaimers in our slide presentation, the press release we issued this morning and the disclosures in our SEC filings, which are all available on the IR website on pfizer.com. Forward-looking statements on the call are subject to substantial risks and uncertainties, speak only as of the call's original date, and we undertake no obligation to update or revise any of the statements. With that, I will turn the call over to Albert. Albert Bourla: Thank you, Francesca. Good morning, everyone. Thank you for joining our call. It's a wonderful day here in New York. We've had a strong start to the year. Our business continues to perform well, and we are making strategic progress. One of our great strengths is the ability to execute. And we are delivering on our financial commitments while we also invest to strengthen Pfizer for future growth and impact. In the first quarter, we exceeded expectations for both total revenues and adjusted diluted earnings per share. We have made progress so far this year in delivering our 2026 critical R&D milestones, including 3 positive Phase III readouts and encouraging mid-stage readouts for both approved and investigational medicines. We are keeping pace with our robust agenda of approximately 20 planned pivotal study starts this year. We also had 2 significant legal developments that improved our growth profile post-2028 and of course, our cash flow outlook. Our recent settlement agreements resolving infringement of patents related to Vyndamax have the potential to change the growth profile of the company significantly post-2028. This gives us greater confidence that starting in 2029, we will enter a 5-year period of high single-digit revenue CAGR. Additionally, we view the recent Belgian court ruling regarding Comirnaty contracts with EU member countries as a positive for future EPS and cash flow. The improved visibility into our cash flow provide is a positive for our longer-term capital allocation priorities, including, of course, our ability to preserve and support the dividend. As we look to the rest of the year, we are clearly focused on our most impactful opportunities to create value for patients and our shareholders. We previously shared our strategic priorities for 2026, and I will walk you through the progress we are making on all 4. Our launched and acquired products had a tremendous start to the year with 22% growth. Three of our business development transactions represent about 8% of the invested capital in recent years, and they are all progressing very well. Oncology represents our most advanced and concentrated area of research and commercial focus and our Seagen acquisition is a central reason why. Since beginning -- since bringing the company to Pfizer, we have transformed our oncology organization, unifying our team, expanding our commercial portfolio and advancing a leading ADC platform. The 20% year-over-year operational revenue growth in the quarter of our Seagen products shows that we have made good progress in deepening our presence within the oncology community. We continue to strengthen physician engagement and drive greater recognition of the clinical value of our medicines. We are also executing with focus to maximize the value of our Metsera acquisition. This underpins the strategy intended to position Pfizer as a leader in the next generation of obesity therapies. We intend to advance 10 Phase III studies this year, and we are targeting a first approval in 2028 from a portfolio that includes ultra-long-acting peptides with the potential, if successful, developed and approved for competitive efficacy and tolerability with a differentiated monthly maintenance dosing schedule. The success we have achieved with Nurtec since our Biohaven acquisition shows the power of our leading field force and commercial capabilities at work. Nurtec contributed in the first quarter with 41% operational growth driven by robust demand and both -- for both acute and preventive migraine treatments. We continue to see a meaningful growth opportunity in the oral CGRP class of medicines for patients with migraine. Of course, 2026 is a pivotal year for R&D, and I'm pleased with our early progress this quarter. While we have a large active pipeline, we rely on a rigorous and disciplined approach to focus resources where we see the greatest potential. We are targeting approximately 20 pivotal study starts, 8 key data readouts and 4 regulatory decisions this year. Our critical R&D milestones reinforce how we are concentrating investment in key areas such as oncology, metabolic disease and vaccines, where we have existing commercial infrastructure, scientific expertise and significant opportunity for competitive differentiation. Roughly half of our anticipated key data readouts and regulatory decision in 2026 are expected to come from oncology where we are advancing multiple programs across areas such as breast, [ genitourinary ] thoracic, gastrointestinal and blood cancer. During the quarter, we presented notable EV-304 study findings for Padcev at ASCO GU. The results show that Padcev and pembrolizumab reduces the risk of recurrence or death by nearly 50% in patients with cisplatin-eligible muscle-invasive bladder cancer. Combined with the recent compelling data from the EV-303 trial, this highlights the potential for this regimen to become the new standard of care for patients with muscle-invasive bladder cancer, regardless of cisplatin eligibility. Bladder cancer is diagnosed in more than 600,000 (sic) [ 614,000 ] patients each year globally, including an estimated 85,000 in the U.S. MIDC represents approximately 30% of all these bladder cancer cases. The positive top line results we shared last week from the Phase III MagnetisMM-5 study of Elrexfio represent a meaningful step toward our goal of reaching more patients earlier in the course of their disease. In this study, Elrexfio significantly improved progression-free survival for double-class exposed patients with relapsed or refractory multiple myeloma who received at least one prior line of treatment. This is a significant opportunity to address patient need. Multiple myeloma, an aggressive and currently incurable blood cancer, is the second most common type of blood cancer worldwide with over 36,000 new cases each year in the United States and over 187,000 new cases globally. During the quarter, we also shed randomized Phase II data for atirmociclib, our potential first-in-class CDK4 inhibitor, in patients with HR2/HER2 negative breast cancer who received prior CDK4/6 inhibitor-based treatment. These data suggest that atirmociclib has the potential to differentiate from the CDK4/6 inhibitor class with improved efficacy and tolerability, reinforcing our confidence in the molecule. Looking ahead, we remain focused on accelerating this investigational medicine's development in first-line and early breast cancer, where it may provide even greater impact for patients. We view this as an important opportunity to deliver a next-generation backbone therapy, building on Pfizer's long commitment to patients with breast cancer. In vaccines, we have been working with regulators on the pathway for expanding coverage through our next-generation pneumococcal conjugate vaccine to extend our leadership in this competitive space. Yesterday, we initiated our Phase III program for our 25-valent pediatric vaccine candidate with increased valency and next-generation serotype 3 technology. I'm also pleased to provide an update on our strategy in the adult market. We have decided to advance directly to our fifth-generation adult vaccine candidate. And, today, I am proud to share for the first time that it includes coverage for 35 serotypes. We believe this gives us the strongest opportunity to maintain our current market leadership in the adult market over the long term, and we expect to enter clinical development this year. In I&I, we announced a positive readout in March from a Phase II trial of tilrekimig, our investigational trispecific antibody, in atopic dermatitis. We intend to advance a broad clinical development program for this investigational medicine, which was discovered in-house at Pfizer and is currently being evaluated in atopic dermatitis and also in asthma and COPD. We remain on track with our commitment and our continued focus on what matters most: maximizing the long-term value of our pipeline for patients and shareholders. We are investing with strategic discipline and focus to build a foundation supporting our aim of high single-digit 5-year revenue CAGR. It's vital that our R&D organization has the resources to advance our robust pipeline, including both internally discovered programs and opportunities we have added through strategic moves such as our acquisition of Metsera and our in-licensing agreements with 3SBio and YaoPharma. Our commercial teams are the leaders in translating scientific progress into real-world impact. We are furthering investments to provide them with capabilities, technology and support helping our medicines reach the right patients at the right time so we can deliver sustained value. We also remain deeply committed to our shareholders. We intend to maintain and over time, grow our dividend as we continue to delever and build long-term value. Embedding the use of artificial intelligence across our company is a key strategic priority, and we are driving continued progress in R&D, commercial, manufacturing and core enterprise functions. We are empowering our colleagues to accelerate innovation by pairing frontier AI tools, tailored to function and role, with comprehensive and continuously updated training. One of the areas where we see the most substantial promise is the discovery, development and delivery of new medicines and vaccines. Leveraging the power of AI to compress timelines and improve decision-making is central to our innovation strategy. We are embedding AI into each functional line of R&D. Pfizer has a vast repository of small and large molecule, translational and clinical data and AI is creating the opportunity to unlock insights that could drive a significant impact on how we discover and develop medicines and vaccines. So with that now, I will turn it over to Dave to speak about the financial performance of the company. David Denton: Great. Thank you, Albert, and good morning. Let me begin by highlighting that our strong first-quarter performance reflects the continued disciplined execution across our strategic priorities, and importantly, continued progress in repositioning the company for sustainable growth. We are making targeted investments today to drive revenue growth later in the decade and beyond. Looking ahead, Pfizer is entering a new phase. Our launched and acquired products, combined with the strengthening pipeline, are positioning the company with the ability to deliver growth towards the end of the decade. While we remain focused on managing near-term LOE headwinds, we are actively building the foundation for durable long-term value creation. And with that as context, I'll review our first quarter results, discuss our capital allocation priorities, and conclude with an update on our '26 guidance, which we are reaffirming today. In the first quarter of '26, revenues were $14.5 billion, exceeding our expectations and representing an operational increase of 2%. Excluding our COVID products, the underlying business delivered approximately 7% operational revenue growth, reflecting solid demand across key brands and continued strong commercial execution. On the bottom line, first quarter reported diluted earnings per share was $0.47, and adjusted diluted earnings per share was $0.75, also exceeding our expectations. In addition to our strong revenue, this outperformance also reflects our ongoing commitment to managing our cost base and to drive productivity across the organization. Our results this quarter demonstrate the effectiveness of our refined commercial strategy. We saw solid contributions across our product portfolio, primarily driven by Padcev, Eliquis, Nurtec, Lorbrena and the Vyndaqel family, each reflecting focused execution in our key therapeutic areas. Our launch and acquired products delivered $3.1 billion in the first quarter revenues and grew by approximately 22% operationally. These results demonstrate the early impact of our portfolio transition and our investment strategies. We continue to invest behind these product groups to support their growth, which we expect will enable the company to partially offset upcoming LOE headwinds over the next several years. Adjusted gross margin for the first quarter was approximately 76%, primarily the result of product mix during the quarter and ongoing cost control measures. I do want to note, accrued royalty expense was higher this quarter and dampened gross margin compared to the first quarter of last year. With that said, strong cost management across our manufacturing footprint remains a top priority. As a reminder, over the past several years, our adjusted gross margins have generally remained in the mid-to-upper 70s when excluding Comirnaty, which is a 50-50 profit split with our partner BioNTech. We continue to expect approximately $700 million in savings from our Phase I of our manufacturing optimization program this year with approximately $175 million realized in this quarter. Total adjusted operating expenses were $5.5 billion for the first quarter of '26, an increase of 4% operationally versus the first quarter of last year. And now looking at the components. Adjusted SI&A expenses decreased 5% operationally, primarily reflecting lower marketing and promotional spending on various products from more targeted investments and ongoing productivity improvements, as well as lower spending in corporate enabling functions. Adjusted R&D expenses increased 11% operationally, primarily driven by an increase in spending in certain oncology and obesity product candidates. First quarter 2026 adjusted operating margin was strong at 38% and above pre-pandemic levels, demonstrating effective cost management as well as revenue performance. We have already made meaningful progress on our productivity initiatives and remain on track to deliver the majority of the anticipated $7.2 billion in total net cost savings by the end of '26. And looking ahead, we will continue to identify opportunities to further enhance efficiencies while prioritizing investments that support future growth. Turning to the bottom line. Q1 reported diluted earnings per share again was $0.47, and our adjusted diluted earnings per share was 75% -- $0.75, which benefited from our strong non-COVID revenue and efficient operating structure. Now with that, let me turn to our capital allocation strategy. Our strategy is designed to enhance long-term shareholder value while preserving flexibility. It includes reinvesting in the business at appropriate returns, maintaining and over time growing our dividend and preserving optionality for future value-enhancing actions, including share repurchases. In Q1, we invested $2.5 billion in internal R&D, returned $2.4 billion to shareholders via the quarterly dividend and our completed business development activity was minimal. We closed on the sale of our stake in ViiV in the second quarter, providing us with approximately $1.65 billion in net proceeds, after taxes and customary closing costs. Our BD capacity, when including the ViiV proceeds, is approximately $7 billion. First quarter '26 operating cash flow was $2.6 billion and leverage ended the quarter at approximately 2.8x. And as just a reminder, given the LOE headwinds over the next few years, we expect leverage to remain around the current levels or even slightly higher through the transition period. I will also mention that we made our final TCJA repatriation tax payment of approximately $2.6 billion in April. Based on our performance to date and continued execution, we are reaffirming our full year '26 guidance today. We continue to expect total company revenues in the range of $59.5 billion to $62.5 billion and adjusted diluted earnings per share in the range of $2.80 to $3 a share. This outlook reflects our expectation of strong contributions across our product portfolio, adjusted gross margins in the mid-70s range, disciplined cost management and continued investments to support growth by the end of this decade. As a reminder, sustained low disease levels of COVID will likely continue to weigh on Paxlovid utilization over the next several months. And additionally, our plan assumes that the majority of Comirnaty sales will occur towards the end of the year and consistent with the vaccination season. And as always, we continue to monitor currency fluctuation as the year progresses. In closing, over the next several years, our focus remains on investing in key assets while managing upcoming LOE events, primarily from this year through 2028. As we look towards the end of the decade, growth is expected to be driven by our advancing R&D pipeline and the continued progress of our launched and acquired products. Following the Vyndamax settlement, we now have a clear line of sight to a high single-digit 5-year revenue CAGR post-2028. Furthermore, this event, combined with our legal win in the Belgium court regarding the EU Comirnaty contract will enhance our cash flow post-2028. We continue to position Pfizer for durable long-term growth and shareholder value. And with that, I'll now turn the call back over to Albert to begin the Q&A session. Albert Bourla: Thanks, Dave. Nice quarter. Now operator, please assemble the queue. Operator: [Operator Instructions] And our first question today comes from Vamil Divan with Guggenheim. Vamil Divan: I'll keep it to one. I think a lot of focus on the upcoming ADA meeting. Just curious if you can just kind of clarify exactly what we should expect to see. I know we obviously see VESPER-3, but any other data that we should expect from a Pfizer perspective? And I think hosting an investor event in conjunction with [indiscernible]. So curious if there's any other details you can share around that? Albert Bourla: So Chris, the question is for you. How much of the data we're going to disclose in the ADA? Chris Boshoff: Thank you very much for the question. It's obviously a very important program. We're excited with the progress. And since the close of Metsera, as you know, we had exceptional execution, not only in the clinical development, but also on the commercial development side and as well as CMC and on the pharmaceutical sciences as well as the devices. Detailed data from VESPER-3 will be shared, the top line data we presented last time at the 4Q '25 earnings. Data from VESPER-1, the open-label extension, will be shared as well as data from VESPER-2, which is weekly [ danuglipron ], our new name for GLP-1, with or without titration in participants with type 2 diabetes will be shared. We will not share yet at ADA data on amylin mono. We expect 24 weeks monotherapy and 28 weeks combination with the amylin and GLP-1 that will be shared in the second half of this year. Operator: Our next question comes from Dave Risinger with Leerink Partners. David Risinger: So my questions are on your oncology readouts this year that could move the needle for the company. Could you comment on your expectations for SV and Mevro pivotal readouts this year? And then separately, if you could just please provide an update on your restructuring of corporate strategy and business development operations at the company? Albert Bourla: Thank you very much, Dave. Let me take the second one and then Chris will address the SV and Mevro. We did some changes in our organizational structure that are aligned with our constant effort to simplify. We have reduced the members of my executive team by 4 over the next couple of years -- over the last 2 years. So the business development moved under Chris Boshoff because most of the business development are right now related with R&D pipeline and choices. We see significant improvement in any friction that could exist and how smooth things could work by doing that. We also moved the commercial development, which is all the commercial strategies that we're sitting in that group into the global marketing of the organization. And that creates also a significant amount of synergies by having global and new products, global market with new products and with our old products. That went under -- Alexandre took over the responsibility to manage the portfolio management team. He's the new Chair, and he is focusing on prioritizing the pipeline. And then the strategy group moved to my Chief of Staff, so in the office of the CEO, where I can have also better supervision. So this is the change that happened into our organization. And we feel that they are consistent with everything we were planning, which is simplification of our business. Chris? Chris Boshoff: Thank you very much. So to start with SV, important program for us. Integrin B6C is a highly differentiated target overexpressed in 90% of lung cancers and little expressed in normal tissue in the lung. And we were encouraged by the first-line data, which we -- I mean, the Phase I data, which we shared, albeit a single-arm experience with a median overall survival of approximately 16.3 months. The second-line study, just a reminder, is focused on non-squamous based on the signals we've seen and Phase III study against docetaxel. The study is statistically powered should it be positive for overall survival. It will also be clinically meaningful. Just a reminder, we also have an ongoing Phase III trial in the TPS high, TPS more than 50. And data will be shared at ASCO from the Phase I experience. This is pembro versus pembro plus SV. A reminder that last year, we shared data for that combination in PD-L1 high handful of patients, but everyone responded in that population. So it was 100% response rate in a small population. And for mevrometostat, again, an important differentiated, highly specific differentiated EZH2. The first study that will read out is MEVPRO-1, which is in patients post abiraterone of significant unmet need and enzalutamide versus -- sorry, enzalutamide plus EZH2 versus physicians' choice of enzalutamide or docetaxel. And that should read out middle or second half of this year. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott: Maybe 2 for me. First, maybe for Dave or the broader team. I know you typically don't raise guidance with 1Q, but does seem like a very solid start to the year from a revenue perspective. Can you just talk generally about the business trends versus your expectations and just how you're thinking about the year progressing from here? And then second question for me was on BD capacity. You mentioned $7 billion. I guess just given the Vyndamax clarity, could the company look at larger transactions if the right deal were to present itself? Or is the focus still much more on the internal pipeline and maybe small tuck-ins from here? David Denton: Yes. Chris, Dave here. Thank you. Yes, I think to your first question, company is off to a really solid start in Q1. If you look kind of up and down and across the board from a product perspective, we exceeded expectations on top line and bottom line and really strong cost control and cost management and very disciplined execution. So yes, setting ourselves up really well for delivery for the balance of the year. As you well know, Chris, I have a philosophy of not really adjusting in Q1. I think as you well know, if you look at our COVID franchise, it will always be back half weighted because of the seasonality of this. And so we are, if anything, have derisked delivery on that without raising guidance. So absent that, we probably would be raising guidance. How is that? So again, strong performance. Secondly, as I said, we do have $7 billion in BD capacity. Obviously, this development from a legal perspective actually gives us more confidence in our cash flow delivery over the next several years. And we constantly look at BD and understand what is appropriate strategically to do from a BD perspective to support the needs of the company and deliver long-term value. Operator: Our next question comes from Kerry Holford with Berenberg. Kerry Holford: Just on Comirnaty, I wonder if you can just talk a little bit more about the vaccination rates you're expecting this year within the U.S. and international regions? And then just coming back to the international region, can you talk a little bit more about the existing European contracts, remind us of those existing phase payments. And in the context of that recent Belgian court decision, the 2 items together, how should we think about the evolution of ex-U.S. sales for that vaccine? Albert Bourla: Okay. Let's start with international, and then we move to with Alexandre and then Aamir will speak about the vaccination rates in the U.S. Alexandre de Germay: Yes, good question. Just to put context, the decline that you see in Q1 on Comirnaty has nothing to do with vaccination. It's really the effect of last year. We shipped our last contract elements of our contract with the U.K. So we don't have that contract anymore in 2026, and that's why you have a reduction. But it doesn't really talk about the vaccination rate. Actually, we went through the vaccination numbers in Europe in 2025 and mostly stable versus 2024. Of course, you have differences. For instance, in France, the vaccination rate is around 25% in adult. In Spain, it's going to be around 35%. But those rates are stable, and we see government's willingness to continue to invest and increase awareness of their older and at-risk population to get vaccination. In 2026, we will work with those governments across the European Unions to actually continue to execute our contract the same way we did in previous years. Now with regard to the legal case and the court judgment on April 1, 2026, the court judgment is very clear, and we've started to work with the governments in Poland and Romania to actually execute the judgment and we're discussing the best path forward to implement that judgment. Albert Bourla: Thank you, Alexandre. So Aamir, what about the U.S.? Aamir Malik: Vaccination rates in the U.S., obviously, is very different for every segment. In COVID with Comirnaty, there was a narrowing of the label. So we did see a shrinking of the market a bit. In the case of RSV, we obviously now going past our third season with a tougher to activate adult population, but growing on the maternal space, and there's population dynamics with infants and adults. So we see ups and downs in the vaccination rates as a result of those dynamics. But what I feel very good and very confident about is the way that we're executing in that market. So if you look at every single one of our teams, we have market-leading positions. [ Prevnar ] more than 60%, Comirnaty more than 60%, [ Abrysvo ] now at 84% and [ Prevnar ] adult, even after many months of competition from Merck holding share steady at 70%. So I feel very good about the way that we're executing in a slightly turbulent market. Albert Bourla: Thank you for the confidence, Aamir. Operator: Our next question comes from Umer Raffat with Evercore ISI. Umer Raffat: And I appreciate some of the comments you made around maintaining the dividend. I just thought I would approach it from 2 different angles, if I may. First, I guess, what's the likelihood that Pfizer entertains a transformative M&A in near or medium term, which could end up impacting dividend as we've seen in history? And then secondly, Albert, I guess, how are you personally, but also the Board thinking about your tenure at Pfizer and how it ties to dividend integrity beyond? Albert Bourla: Look, we never say never, and we always look at every business -- possible business combination for an M&A. If you are asking me if right now, we think that we are going to go for something very big, a big merger, no. We think that right now, in the next few years, it is the time to execute on AI transformation of these organizations. And that requires not the disruption of mega merger. So I would say that we are open to everything and we are looking at everything that can create shareholder value, but it is not right now very high in our list to find something like that. The second question, how I see my tenure? I see it like continuing. And I said multiple times that I was very proud of what we were able to achieve with COVID. But then if you are spoiled with this feeling of satisfaction, you want to do it again. So I'm planning to do it again and hopefully, with cancer and obesity and vaccines. Operator: Our next question comes from Asad Haider with Goldman Sachs. Asad Haider: Albert, just going back to last December's guidance call, you highlighted $17 billion of annual revenue impacted by LOEs by 2030. And now with the [ Vyndamax ] patent settlement extending that to mid-2031, your comments that you are aiming to achieve high single-digit 5-year revenue growth starting in 2029. Just if you could double-click on that a little bit more, just looking at the pipeline and the current BD aperture that you just described, just level set us on any updated thoughts on bridging the gap around how we should be thinking about the levers to drive this growth against the stacked LOEs? And then just related, embedded in this high single-digit CAGR, what are the assumptions around your base business such as COVID and the current oncology products? Albert Bourla: Yes. It is easier, of course, to forecast the base business because it's a constant. So that it is following the normal trend that we expect based on product by product. The LOEs also are easy to predict because they have the certainty of occurrence. Right now, you're right, with this 2.5 years delay of the LOE of a product that is $6 billion plus, it is providing significant, as you can understand, opportunity for cash flows, EPS and change the growth profile. So that's why we spoke now because with this uncertainty going about our projections about the growth profile, which we said it is starting in '29, it's a 5-year high single-digit CAGR. How that is built is built with the current portfolio with the decline through the LOEs and with the additions of pipeline that they are heavy risk adjusted. So it's not that we are having [ binary ] events. So the pipeline are multiple, as you know. We have a series of readouts right now that will affect the revenues in the '29. And so I think when -- I feel confident about that because when it is a large number of pipeline assets risk adjusted, statistics usually work. And those that will fail will fail and those that will succeed will succeed, but the risk adjustment takes into consideration about that. So very confident about the growth trajectory of the company starting in '29. And I'm also very confident that we navigate the LOEs, as you saw right now, very well starting already this year, the LOEs. I also want to emphasize that always the strategy for LOEs was new and acquired products to do well because they were launched and acquired to offset the LOEs. They are growing 22% this year. They are already on $3.1 billion in a quarter. If you -- without saying that that's the guidance, but if you multiply by 4 just to give you [indiscernible], we are talking about over $12 billion this year and growing. And the $17 billion of LOEs now after [indiscernible], they are more $14 billion to $15 billion rather than $17 billion. So I think it's manageable. Operator: Our next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: I really want to touch on capital deployment, specifically when it comes to share repurchases. Dave, I know that, that's been a method that you wanted to employ now with clarity on [indiscernible] and the CAGR post-2028, what other -- what else do you need to see to potentially start buying back shares, especially at these levels? David Denton: Yes, Evan, great question. We always look at our capital allocation strategy of balancing between the 3 options that we have. At the moment, our focus is really on investing in our R&D platform and in business development to drive long-term value. With the development in these court cases, that does give us a bit more confidence in our cash flow over time. So you'll see us the capital allocation share repurchase level will come back into greater consideration going forward. So great question. Something we always look at, and we're always looking to do what's best for the company and shareholders long term. Operator: Our next question comes from Courtney Breen with Bernstein. Courtney Breen: I just wanted to probe a little bit more on [ sigtolimod vedotin ] and positioning in that frontline setting, all comers relative to the Symbiotic-Lung-01 study that you've already started with the PD-1 VEGF. I also note that you've got kind of a Phase I/II running combining these 2 assets. And can you help us contextualize that new Phase III all-comers that you intend to start this year for SV first line and how that may be positioned relative to Symbiotic-Lung-01? Albert Bourla: All right, Chris? Chris Boshoff: Thank you very much for the question. Lung cancer is obviously a very significant unmet need and having a number of shots on goal now with a very differentiated portfolio gives us confidence that we can continue to play an important role in lung cancer beyond just in the targeted therapies like [ lorlatinib ]. For SV, we are very encouraged by the data we've seen for the combination of pembrolizumab plus SV in the PD-L1 high population, where we've previously chosen a small number -- a small cohort of patients that they all responded in the PD-L1 high to that combination. So the Phase III study that's ongoing of pembrolizumab versus pembrolizumab for SV, that study is recruiting well in the first-line setting, and we're confident for the readout for that study. And ongoing also is the second-line study, which is against docetaxel, which was encouraged by the previous data we've seen obviously in a single-arm experience with a median overall survival of 6.3 months. So that study should read out midyear. That's docetaxel versus SV second line powered for -- obviously, for overall survival. And if it's positive, as I said earlier, it will be clinically meaningful. And then ongoing studies being planned also for the broader population in combination with chemo plus pembrolizumab, and we will share some of the data later this year for the early data for that combination. In terms of 4404, at ASCO, we will share the Phase II data of 4404 monotherapy in first-line PD-L1 expressing non-small cell lung cancer. As you know, we recently shared data at AACR, where we repeated the preclinical and early data generated by [ Bio China ]. So we're really confident that this is a differentiated molecule. And the binding against VEGF is -- we've shown at AACR is better, is higher affinity than what's seen with [ bevacizumab ]or that's seen with competitive VEGF/PD-1 molecules. So confident in the molecule. We'll share more data later this year with a broad program starting, including in combination with chemo. And just a reminder at ASCO, we will also share data and with 4401 plus chemo in first-line advanced recurrent endometrial cancer, another program that we plan to start a Phase III program. Operator: Our final question comes from Louise Chen with Scotiabank. Louise Chen: I wanted to ask you, which key products do you think will drive the reacceleration of your growth in 2029 and beyond? And then regarding the international obesity opportunity, just curious what you've learned from the launch of your GLP-1 in China? Albert Bourla: Alexandre, let's start with you again this time because of visiting international has, of course, the Lilly numbers have surprised how big the international market is. And then also speak about key products that will drive your growth in '29. And then Aamir, U.S. key products that will drive growth in '29, please? Alexandre de Germay: So a good question on the ecnoglutide launch in China. Of course, it's very, very early day. We really launched the product Monday last week. So I mean, it's only a week, so I can't really talk to you about the penetration of ecnoglutide in China. But what is really interesting is actually the incidence of chronic weight in China is quite high, 15% of the Chinese population. And considering the size of the China population, that makes it one of the larger market for chronic weight management. And that's the reason why we decided on March -- on February this year to actually do this collaboration with Hangzhou Sciwind Biosciences for the commercialization of ecnoglutide in China. And since then, we got the approval and commercialized these assets. Ecnoglutide has a very interesting profile. And actually, its demonstrating in a placebo-controlled study, a 15.1% weight loss at 48 weeks, which is in par with the best GLP-1. With this biased mechanism of action of GLP-1, we think that we have -- we are bringing to market a very effective asset with a good tolerability profile. And of course, we're going to leverage our very strong primary care capabilities in China that puts Pfizer China as one of the leading in primary care. So the combination of a very attractive clinical profile plus our knowledge in this area, we believe matters a leader in this category. And we're not coming very late into the market because remember, Lilly really introduced their asset in -- at the beginning of last year. So it's not like we're coming many years after the introduction of those assets. So as I said, I'm very optimistic, both due to the profile of this asset and the capability that we have developed in China. Now when it comes into the growth engine of the international, there are -- I just want to step back one second. If you look at the quarter and the fact that our non-COVID primary care grew double-digit growth, we delivered $2 billion this quarter. Remember, we closed last year with a double-digit growth on primary care. Now if you look at the Specialty Care, about $1.5 billion this quarter, we're delivering a double-digit growth again. That was on the back of a double-digit growth last year. And there are assets in those different areas that will continue to power our growth. I come back to Primary Care, our vaccines are growing very strongly. And the reason why we are growing very strongly on vaccine is because both on [ pneumococcal ] and on RSV, we have a large population. If you look at -- as you know, in [ pneumococcal ], this is a very -- this is -- it's a very large population and 2/3 of our vaccine business come from pediatrics. And of course, we have a large pediatric population to continue to grow so both in maternal immunization and [indiscernible]. So the vaccines have a potential to grow in pediatric and in adults. Of course, a big growth in the -- at the end of the decade will come from the Metsera access in chronic weight management because there are 2 elements of that. One, it's an underserved category with a large epidemic across the world, right? In some of the emerging markets, we have a very high prevalence in Saudi, in Brazil, in Mexico of obesity. And our presence in those markets will -- with a strong primary care will allow us to actually tap this potential. But also, it is a cash market, which also is a big advantage in Europe, in Japan and other developed markets where right after approval, we can introduce those products, which is not the case today in many of our categories because it takes a lot of time for reimbursement negotiation with the payers. So you see we have an in-line asset that will continue to power the growth, and we are bringing assets like the Metsera that will go straight to market. And of course, the oncology asset will come, but it will take longer for reimbursement negotiation. Albert Bourla: Thank you, Alexandre. Aamir, now your thoughts for U.S.? Aamir Malik: Louise, thanks for the question. There's many things that give us confidence about driving growth in the U.S. in '29. If you take the first category, we have products that are on the market today that have a lot of upside to them. So if you think about Padcev, all of our recent growth has been primarily driven by LAM UC. We're at the high 50% penetration there. And we've got lots of upside in MIDC, 303 and 304. So there's a lot of headroom for growth there. Secondly, you look at products like Nurtec, we've got a lot of tailwind behind us now, but only 60% of people who write a triptan have yet to write an oral CGRP. So there's a lot of headroom for growth, and we're executing really well against that. Second, you look at some of our existing large franchises. We have a lot of confidence in what's going to happen with [ Vyndamax ]. Now with 5 years of additional exclusivity gives us the opportunity to invest and to continue to grow diagnosis. And we are doing a great job defending our existing patient base as well as ensuring that it is the choice -- the top choice for new patient starts. And so we think we have a lot of momentum on franchises like that as well. And then just to complement what Alexandre was saying, if I think about new areas of growth, we talked a lot about the oncology assets already, but obviously, we're very excited about what we have to bring to the market in obesity. The assets speak for themselves, but what I'm particularly excited about is the fact that we have unique capabilities as a company to win in this area, both in terms of our ability to activate consumers and patients in very different ways as well as our legacy in this space and the fact that almost 60% of physicians who are going to write these products we already touch today through a combination of our field forces. So those combinations are just some examples of what gives us confidence to grow in '29 and beyond. Albert Bourla: Thank you, Aamir, and thank you, everyone, for your attention. Our strong performance in the quarter reflects the impact of our continued focus and disciplined execution. We are engaging with precision to maximize the value of our commercial portfolio, and we are seeing the results in our financial performance. In R&D, we are making meaningful progress with a robust slate of critical milestones ahead in 2026 that we believe will further demonstrate the strength and breadth of our pipeline. I want to thank my Pfizer team. I believe we have the best team Pfizer ever had. They are dedicated to our purpose, continue to deliver and embrace our commitment to creating long-term value for patients and for our shareholders. Thank you for joining the call today, and thank you for your interest in Pfizer. We look forward to sharing further updates as we execute our priorities throughout the year. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to KKR's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Craig Larson, Partner and Head of Investor Relations for KKR. Craig, please go ahead. Craig Larson: Thank you, operator. Good morning, everyone. Welcome to our first quarter 2026 earnings call. This morning, as usual, I'm joined by Rob Lewin, our Chief Financial Officer; and Scott Nuttall, our Co-Chief Executive Officer. We would like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. And as a reminder, we report our segment numbers on an adjusted share basis. This call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our earnings release as well as our SEC filings for cautionary factors about these statements. So first, beginning with our results for the quarter. Fee-related earnings per share came in at $1.13. That's up 23% year-over-year. Total operating earnings of $1.47 are up 18% year-over-year and adjusted net income of $1.39 per share is up 20% compared to 1 year ago. All of these figures are among the highest we've reported in our firm's history. Now going into a little more detail. Management fees in the quarter were $1.2 billion. That's up 30% on a year-over-year basis. driven both by continued fundraising momentum alongside deployment activity really across the platform. Excluding catch-up fees in both periods, management fee growth was strong at a touch north of 20%. And as we've highlighted previously, our fee base continues to be diversified with private equity, real assets and credit each contributing approximately 1/3 of total fees over the trailing 12 months. Total transaction and monitoring fees were $253 million in the quarter. Capital markets fees were in line with last quarter at $224 million, driven by activity across PE, infrastructure and credit. And fee-related performance revenues in the quarter were $24 million. Turning to expenses. Q1 fee-related compensation was again right at the midpoint of our guided range or 17.5% and other operating expenses were $195 million. So in total, fee-related earnings were over $1 billion or the $1.13 per share figure that I mentioned a few moments ago, up 23% year-over-year. And our FRE margin increased slightly quarter-over-quarter to approximately 69% at March 31. Insurance segment operating earnings were $260 million. Now as a reminder, we report the insurance investment portfolio largely based on cash outcomes. So to give you a sense of the embedded profitability as we've done in the last couple of quarters. Our insurance operating earnings would have been slightly north of $300 million in Q1 if we included the impact of marks on investments where a significant portion of the return relates to appreciation rather than cash yield. And as a reminder, Insurance segment operating earnings alone do not capture the full economics of GA to KKR. Page 22 of our earnings release details the management fees under our investment management agreement, fees from IV-related vehicles, where we have over $60 billion of AUM that wouldn't exist without GA. Alongside GA related capital markets fees. When you take all of that together, total insurance economics over the LTM were $1.9 billion. That's net of compensation, up 14% versus the prior period. Strategic Holdings operating earnings were $48 million in the quarter, and we continue to track nicely towards our expected $350-plus million of operating for 2026 with earnings here expected to be more back-end weighted over the course of the year. So altogether, total operating earnings, which, as a reminder, represents the more recurring components of our earnings streams, were $1.47 per share, up nearly 20%. And over the last 12 months, 85% of total pretax segment earnings were driven by these more recurring earnings streams demonstrating in our view, the durability that you're seeing across our business model. Moving to investing earnings within the Asset Management segment. realized performance income was over $750 million and realized investment income was approximately $120 million, bringing total monetization activity to around $880 million, up over 50% versus Q1 of 2025. This activity was driven by a combination of public secondary sales and strategic transactions alongside of dividends and interest income. After interest expense and taxes, adjusted net income was $1.2 billion for the quarter, or $1.39 per share. Turning to investment performance. Page 10 of the earnings release details performance we're seeing across asset classes, both this quarter and over the last 12 months. Broadly, you're seeing healthy investment performance on behalf of our clients across asset classes, including through this recent period of heightened volatility. And given investment performance, importantly, total embedded gains that's comprised of gross carry together with the gains that sit on our balance sheet across asset management and strategic holdings were $18.3 billion at $331 billion. That's up 11% compared to 1 year ago and remains elevated even as we've been generating healthy monetization activity. Now as you can imagine, we've been filling a lot of questions on direct lending, so we've added a couple of pages to our earnings release. First, just to level set, if you turn to Page 20, you see the size of our direct lending platform. In total, direct lending is $39 billion or 5% of our AUM. It's an important business for us, but in the framework of KKR, it's of modest size. And with a lot of focus on redemption activity in the wealth space, we note the size of our private BDC footprint in the second bar from the right. It's even smaller, around $3 billion of AUM or 0.4% of our AUM in total. In terms of our public BDC, FSK is a little less than 2% of our AUM. FSK reports its Q1 earnings next week. We're not going to get ahead of that. It's important, though, not to conflate FSK's portfolio with other pools of capital. So looking at Page 21, you see investment performance across our institutional strategies as well as our private BDC, all vintages since 2017. You see very consistent outperformance versus benchmark. We thought the more granular framing of investment performance here across the direct lending platform would be helpful context for everyone. And then finally, consistent with historical practice, we increased our dividend to $0.78 per share on an annualized basis beginning with this quarter. This is now the seventh consecutive year we've increased our dividend since we changed our corporate structure increasing our annualized dividend over this time frame from $0.50 per share to $0.78. And with that, I'm pleased to turn the call over to Rob. Robert Lewin: Thanks a lot, Craig, and thank you, everyone, for joining our call this morning. I'm going to cover 4 topics today. First, our continued momentum around capital raising; second, our monetization activity, which has been increasing at a healthy pace in spite of the recent market volatility. Third, we have been making some important decisions around capital allocation. And finally, I'm going to go through how we think about the earnings power of our business. So let me start with capital raising. We raised $28 billion of new capital in the quarter with demand really widespread across asset classes and geographies. A real bright spot for us this quarter was in credit where we raised $15 billion across our platform. That momentum was driven by our asset-based finance business, which represents over $90 billion of AUM today. Given the current sentiment around private credit, it may be surprising that when you look at new capital raised, so this is excluding GA, this was one of our larger credit fundraising quarters. Inflows here more than doubled quarter-over-quarter, and our capital raising pipelines remain strong. Most recently, over the last few weeks, we've received meaningful inbound interest from institutions around our direct lending business with several viewing the current dislocation as an interesting entry point, given the redemption activity that exists today in the private BDC space. Another milestone for us this quarter was the final closing of our North America 14 fund at $23 billion, eclipsing the prior $19 billion fund. Across the most recent vintages of KKR's flagship regional funds, so that's Americas, plus Europe, plus Asia, we have $46 billion of total capital to invest across this vintage. We are the clear market leader in private equity. And finally, in wealth, across all of our asset classes, our K-Series suite brought in $4 billion of capital in Q1. Redemptions totaled around $250 million and AUM now stands at over $38 billion. Our performance, deployment and capital raising continue to be in line or ahead of our expectations. Given all the market noise, we were candidly surprised by the strength of flows in Q1. But we also do expect a slowdown in Q2, consistent with what we saw after the tariff announcements last year. We're still operating off of a relatively low base of AUM. And we continue to believe that this channel will be a long-term source of meaningful growth for our industry and us. Turning now to monetizations. As we have explained on prior calls, we are very pleased with the performance of our portfolio, and we are seeing the benefits of our focus on linear deployment and portfolio construction. You can see our continued monetization activity in our financial results. As Craig noted, we generated around $880 million of monetization revenue in the quarter. Realized carried interest was $720 million. That is up 120% year-on-year, and we have a healthy pipeline of realizations across strategies and regions. Over the past month or so, we have announced several encouraging transactions including the closing of the sale of OneStream Software for 4.5x our cost and the sale of CoolIT Systems, a global leader in liquid data center cooling for almost 15x our cost. We have also agreed to sell 2 of our 2021 investments despite the more challenging vintage year, 1 in infrastructure, which would generate approximately 2x multiple of money and 1 in traditional private equity at nearly 3x our cost. And most recently, we completed a secondary of our remaining shares in Hyundai Marine Solution in Korea, resulting in a 7-plus x multiple of capital for the full life of that investment. I'd like to next shift to capital allocation. It is an area of critical importance to our long-term performance and we have been making some important and deliberate decisions. As a reminder, we have focused on 4 key tools available to us to allocate our cash flow. Strategic M&A, insurance, share buybacks and strategic holdings. Each of these tools takes full advantage of the KKR ecosystem, and as a result, have the potential for high ROEs. Importantly, we do not have a framework that assigns a specific amount of capital spend into any one of these areas. Our approach here is all about how we take our marginal dollar of cash flows and drive the most amount of recurring durable and growing earnings on a per share basis. That is the mindset we have consistently taken to capital allocation, and it is one that is highly aligned with our shareholders given employees here own roughly 30% of our stock. We believe that we have delivered a lot of value to our shareholders through strategic capital allocation, and we are very confident in our ability to continue to do so in the future. So starting here with strategic M&A. This morning, we announced the closing of our acquisition of Arctos. As a reminder, Arctos is the leading investor in professional sports franchise stakes and a leader in GP solutions with approximately $16 billion of AUM and $10 billion of fee-paying AUM. If we are able to achieve our objectives in partnership with the Arctos management team, and we are confident that we will, it is hard to find a better allocation of capital. Next, in insurance. In the first quarter, we continued to see increased levels of competition here, particularly in the retail channel. Given that backdrop, alongside tight spreads on the asset side, we were disciplined around pricing and a lot more selective in that channel. That said, as spreads have widened a bit more recently, we are starting to see a more attractive entry point. On the other hand, an area where we leaned in this quarter was share repurchases where we saw attractive risk-adjusted returns given the volatility across our sector. We repurchased or retired $317 million of stock this year through May 1 at an average price of approximately $91. And our Board recently authorized an increase to our share repurchase program by an additional $500 million. Taking a step back, there is clearly a lot of noise in some of the markets where we operate. But from our seats, there is a big disconnect between perception and our long-term prospects across our diversified business model. That's why we have been leaning into buying back our stock. And you would have also seen our co-CEOs and a number of our directors buying stock personally in the quarter. Whether it's our performance in Q1 or the long-term earnings power of our franchise, our positioning stands in contrast to some of that market noise. Looking at Q1 in particular, we've grown our headline profitability metrics FRE, total operating earnings and ANI, all on a per share basis, each around 20% year-on-year. It's actually the second highest quarter we have reported in our history for FRE and OE and the third highest for ANI. And we continue to feel great about the durability of our model and the earnings power that we continue to create, which provides us with significant visibility into future earnings growth. Over 90% of our capital is perpetual or committed for 8 years or more. Today, we have $125 billion of committed but uncalled capital, nearly as much as we've had at any point in our history. Looking at our management fees and fee-related earnings over the LTM, we've grown at a high teens CAGR over the last 3 years. Alongside this growth, the quality of these fees has significantly improved as we've diversified by strategy, and geography. And finally, our embedded gains, which Craig mentioned, stand at over $18 billion, one of the highest levels in our history, and they provide a lens into the strength of our portfolio, and our ability to create meaningful outcomes in the future. So we benefit from real stability and durability of our earnings and increased visibility on how they will grow. Finally, before I'm going to hand it over to Scott, I did want to provide an update on our 2026 guidance. First, based on the underlying momentum that we are seeing across the business, we continue to feel very confident in our ability to exceed our targets for fundraising, strategic holdings operating earnings and FRE on a per share basis. Turning to ANI. As we said last quarter, following our bottoms-up budgeting process, we entered the year expecting 2026 ANI to reach $7-plus per share, assuming a constructive and more normalized monetization environment. At that level, earnings growth would be approximately 45% year-over-year. So it's clearly an ambitious target, but one that we did have line of sight to achieving. That said, the operating environment 4 months into the year has, of course, bit more challenging than what was embedded in our plan. Importantly, we are still seeing healthy monetization activity. Gross monetization revenues in Q1 were up more than 50% year-on-year. And when we look at exit since March 31 as well as signed transactions expected to close in the coming quarters, that represents over $1.2 billion of gross monetization revenue for KKR. Notably, that is the largest forward monetization figure we've discussed on a call in our history. So while we continue to generate very strong outcomes, we do have modestly less visibility today than what our budget would have suggested at this point in the year. As a result, if you were handicapping our ability to reach $7 per share, we do think it is more likely that we land below that level. Importantly, if that were to happen, any delayed monetizations that impact 2026 would not be lost as we would expect them to shift to 2027 and beyond. And stepping back, the broader portfolio remains in very good shape. Embedded gains are at or near record levels. The earnings power of the firm continues to grow at an attractive rate, and we feel extremely well positioned for the future. With that, I'm going to hand the call off to Scott. Scott Nuttall: Thank you, Rob, and thank you, everybody, for joining our call today. The first thing I want to do is welcome the Arctos team to KKR. Our new partners highly creative and entrepreneurial, and we could not be more excited to work together to build a $100 billion-plus AUM business. KKR had its 50th birthday last Friday. We are very proud of this milestone. As a firm, we are not very good at celebrating. We are, however, good at gratitude. So it was nice to be able to thank all our clients for their partnership and trust and all our people for their dedication and hard work. We would also like to thank you, our shareholders, for your partnership. We have been a public company for about 1/3 of our 50 years, a period of time that has seen significant evolution and growth in our firm, all of which happened with your support. Thank you for helping us get to where we are. So let's talk about how we see things. We asked our team to pull together some slides recently to help frame the current volatility in our stock relative to our results. simple. Just multiple years of AUM, fee paying AUM, FRE, total operating earnings and ANI on 5 pages. All of which metrics are steadily up and to the right with growth rates generally between 10% and 25% per year for the last several years. We then overlaid our stock price on those same charts, picture worth a thousand words approach. What do you see when you do that? Our operating metrics are very steady with consistent growth over a long period of time. The fact is perception of the volatility of our business and industry, is disconnected from the lived experience. And that's okay. We are focused on what we can control and executing our plan. And as we do that, we'll continue to prove out the durability of our business model, and we're confident that the volatility in our stock will come down over time. If you step back, the first quarter was no exception to our long-term trend. All of our key metrics grew about 20% in the quarter relative to Q1 last year. We raised a lot of capital, deployed a lot of capital and monetized multiple investments. And as you heard, the volatility in our stock gave us an opportunity to adjust our capital allocation priorities and buy our shares back at what we believe is a significant discount to intrinsic value which is why Joe and I had bought more stock as did multiple members of our Board. So our suggestion is don't trust the headlines. Stay focused on the fundamentals and how we are executing. That's what ultimately matters and how we are spending our time. This approach has served us well for the last 50 years, and we expect will continue to for the next 50. With that, we're happy to take your questions. Operator: [Operator Instructions] Our first question today will come from Craig Siegenthaler with Bank of America. Craig Siegenthaler: My question is on General Atlantic. So one of the big public annuity competitors pulled back in that business in 1Q and actually cited increased competition. And we know the [ alt ] models, including GA, have gained a lot of share versus the legacy players in the U.S. fixed index and fixed indexed annuity markets. So I was curious if you could update us on competition, underlying ROE potential and how we should think about the growth trajectory, especially with the institutional funding market potentially a little softer near term? Robert Lewin: Craig, it's Rob. Thanks a lot for the question. We are seeing that competition. Competition on the liability side is very high. And we know on the asset side, spreads are as tight as they've been in a very long time. And so the combination of those 2 things is putting some increased competitive pressure on ROEs. That's why you saw us also pull back on the origination front in Q1 as well. Now with that said, we think it's best to look at insurance businesses through the cycle. And where we're spending a ton of time at both Global Atlantic and KKR is making sure when there is increased levels of volatility. And by the way, when that happens, 2 things will happen simultaneously. We believe liabilities will become cheaper. And definitionally, you're going to see spreads come out on the asset side and so the ROE potential is outsized. And so what we're spending our time is how do we make sure we are best positioned for that environment. And one of the real competitive advantages that we have on our platform relative to the broader insurance space is the fact that we sit on $6 billion of dry powder equity that we can draw down to invest into that dislocation, much like you would in a private equity fund. And as a reminder, that $6 billion of equity, we think translates into $60-plus billion of buying power on the liability side. So a lot of effort here making sure we're ready to go when that volatility does come. But today, we are seeing those increased levels of competition. We also know that that's not going to last forever. Scott Nuttall: Yes. The only thing -- Craig, it's Scott. Hope you are well. The only thing I would add, I think that the narrative is exactly right in the U.S., call it, retail market, where there has been significant competition I think the recent move we've seen in spreads and kind of some of the volatility is maybe dissipating some of that a bit. So opportunities are looking a bit more interesting, as Rob mentioned in the prepared remarks. But two things I'd mention. Remember, our business has a good balance to it. We have a retail business and an institutional business. This block does flow some PRT. Not all of those markets are seeing that same level of competition that we're seeing in the retail side. So it's nice to have that diversification across the platform. And then the other thing we've talked about in prior calls, one thing that makes us a bit different is by virtue of being able to marry our origination franchise with the -- on the investment side with the origination franchise and liabilities we are emphasizing a more longer duration liabilities. And I think it's harder for other people necessarily to be able to generate the returns we think we can with those longer-duration liabilities matched with assets that we can originate. So I wouldn't pay everything with the same brush, but I think your overall comment is well placed. Robert Lewin: Yes. I'm going to jump in with one last point on the -- on gating our liabilities because I think it's an important one to get across. If you look at our Q1 originations across the franchise, approximately 80% of those originations had 7 years of duration or more. Just to contrast that relative to full year 2024. So that's the year where we made the pivot around elongating our liabilities for that full year, we were 37% 7-plus year duration. So we've almost doubled or we have doubled rather our exposure to those longer duration liabilities. Operator: And next, we'll move to Glenn Schorr with Evercore. Glenn Schorr: So I'm curious that the -- you've had better DPI and better monetization than most. You mentioned the over $18 billion of embedded gains in the markets at all-time highs. So I'm curious on the attribution of what changed and what holds back the timing and the ability to get to the ANI targets now. Is it as simple as there's a war there and it delayed things? I don't know if you can give us any attribution of parts of the portfolio that despite having these huge embedded gains, the market is just not ready to accept. Robert Lewin: Yes. Thanks, Glenn. It's Rob. I think it's all a matter of degree is the reality. And so there's a lot of really good things going on across our business today as we went through on the prepared remarks. Our monetization guidance of $1.2-plus billion is higher than it's ever been at any point in our history. But at the same time, 3 months ago, we were on this call, we said we would be very transparent on our quarterly calls around where we stood on the $7. And if we were handicapping it now, and when you look at some of the volatility that we have experienced over the first 4 months of the year, we tell you on balance that we're going to be on the other side of $7, and we wanted to share that as we noted we would and keep you all updated on our progress. Scott Nuttall: Glenn, it's Scott. The only thing I'd add, overall, as you heard, the portfolio is in great shape. I think we're seeing real benefits of our focus on portfolio construction and linear deployment diversification, all the things we've talked about on this call for the last several years. And that discipline is really coming through in the results. And so the value is there. To your point about the embedded carrying in gains, this is really a question of when do you want to monetize it. And so the IPO market feels good. We've got several companies in the pipeline. But obviously, an IPO isn't necessarily an exit per se. It can be a partial exit in the beginning of one. But another way that we exit is obviously through strategic sales. And so the one thing to your comment if you've got an asset that you've built value in for 5, 7 years. And if the backdrop in terms of war energy prices, et cetera, is a bit uncertain or uncomfortable I'm not sure you'd want to necessarily sell that wonderful asset into that environment if it's a strategic buyer and give them a little bit more time for the world to write itself. And so that's really what's happening on the margin. You heard from Rob, it didn't really impact anything in the first quarter. This is more of an expectation that if things go on for a longer period of time, there may be some things that we delay the launch of a sales process because we want that clarity in the market for the buyer on the other side. That's all we're talking about. But this is just timing. This is in magnitude. Operator: Our next question, we'll hear it from Alex Blostein with Goldman Sachs. Alexander Blostein: So really nice momentum on fundraising, obviously, despite what's been a tough backdrop and management fee growth north of 20% normalizing for catch-up fees is all good. As you think on the forward, it might be helpful just to get a mark-to-market on your expectations for fundraising for the rest of the year given the bulk of the larger flagships are now in the run rate. particular how you're thinking about Asia, I think that one is about to start. But I guess, more broadly, your confidence in maintaining this type of fundraising outlook for the rest of the year, which I think is what embedded in your FRE growth assumptions. Craig Larson: Alex, it's Craig. Why don't I start on that. And thanks for the question. I think it's probably worth beginning on the breadth and diversification of fundraising. So if you look over the last 12 months, as Rob noted, we raised $127 billion in total. So $35 billion of that roughly is from GA within our credit platform, around $35 billion in real assets, around $35 billion is the non-GA portion within credit and the balance of $20 billion, a little over that in private equity. So you're seeing a very healthy balance and diversified result in terms of our fundraising. Rob talked about that in terms of our management fee growth, where, again, you're seeing real breadth and diversification in management fees as a result of that. And I think the other point that kind of highlights this relates to flagships. So flagships were around 15% of new capital raised in the quarter, 12% over the trailing 12 months. Again, that number was very different at KKR 5-plus years ago, as I know you'll remember. And then I think on the go-forward, look, there's lots of opportunities for our fundraising team across strategies, across geographies. I think if we look in the strategies where we expect to be active in the next 12 to 18 months. In private equity, that includes Asia private equity, our private equity, tech growth, health care growth. We've got our K-Series. And then we have Capital Group as well. Within Real Assets, Global and for core infra, we have a climate strategy, Asia Infra as well as K-Series infrastructure, opportunistic real estate credit. Again, just big -- a wide group of opportunities in real assets, credit, across direct lending, leverage credit, asset-based finance. Again, you heard Rob note in our prepared remarks some of the momentum that we're feeling and seeing last quarter as it relates to high-grade ABF in particular, Asia private credit, Asia leverage credit, crack capital solutions, CLOs, K-Series as well. And then insurance, again, reinsurance co-investment opportunity. So I think that breadth of opportunity that we have is what you're hearing in the confidence when we talk about the go forward from a fundraising standpoint, what that then can mean in terms of management figure out. And again, what ultimately that can mean in terms of FRE growth. Scott Nuttall: Alex, it's Scott. I would say -- I mean, if you can't tell from Craig's list there, the fundraising feels really good. I'd say we had a lot of momentum on a number of fronts. It's global including the Middle East, which I would very much put in the business as usual category, pensions, sovereign wealth funds, insurance companies, high net worth, wealth. So it all feels really strong right now. And some of the things we've talked about on prior calls, for example, this consolidation theme that we see more and more clients wanting to do more with fewer partners is absolutely playing out, especially as they see more dispersion of results. We're heading towards more of a K-shaped industry. And so we think there's opportunity for us to continue to take share and we think the addition of Arctos to the family only adds to that as another set of asset classes, which are able to generate differentiated kind of returns. So bigger relationships and partnerships would be another theme I would point to on the back of that consolidation. But hopefully, that gives you a bit of color. Operator: And next, I'll move on to Bart Dziarski with RBC Capital Markets. Bart Dziarski: Congrats on the CoolIT realization. And I noticed you implemented a employee ownership program at acquisition. So could you maybe speak to how that program contributed to the successful outcome of that deal? And then maybe more broadly on KKR's ownership program at the portfolio company level? Robert Lewin: Bart, it's Rob. Thanks for bringing that one up. CoolIT was obviously an awesome outcome for our investors. It is not often that we exit a business at almost a 15x multiple of money. And as you noted, CoolIT is one of 85 KKR portfolio companies globally now that are part of our broad-based employee ownership programs where every employee, so it's not just senior management our equity owners. And in the case of CoolIT, most tenured employees there are going to receive roughly 8x their annual base salary at exit. So a really meaningful outcome. And deservingly given the progress and the returns that we were able to generate at CoolIT. So more broadly, if you look at those 85 businesses that I referenced, we now have approximately 200,000 nonmanagement equity owners in those businesses. And we're really proud of this initiative. We know for sure that it drives better outcomes at our portfolio companies. We see it in the numbers. You've got higher engagement scores. You've got higher retention rates, working capital efficiency is up, margins are up, and ultimately, profitability is up. And so we have developed this program in a way where we've got the full employee base at these companies feeling like owners in the business, and they're delivering better results. And because of that, they're able to share in those results. So we think it's great, and we're really proud of that across our firm. And then maybe finally, while we're on this point, I do think it's worth mentioning that we are also a founding member of ownership works. This is a nonprofit that our partner, Pete Stavros, who co-runs our global Private Equity business founded a number of years ago. And we now have greater than 100 partners alongside of us in this effort. And that's really what it's all about. We want this to become a movement beyond what we're doing at KKR. And so a big focus of what we're doing across the portfolio. And then one that we're excited to be able to hopefully share results like this with you all in the future. Operator: And next, we'll move on to Steven Chubak with Wolfe Research. Steven Chubak: So wanted to ask on strategic holdings and AI risk more broadly. Certainly encouraging to hear the operating earnings target for strategic holdings get reaffirmed. Digging into the sector exposures, about 1/3 of the last 12-month EBITDA is concentrated in the business services sector. It's an area that's viewed as being more at risk of AI disintermediation. I was hoping you could speak to just how you've underwritten AI risk in the strategic holdings portfolio and even across the border universe of KKR portfolio companies? And is there any KPIs you can speak to, to help folks better handicap that risk? Craig Larson: Steve, it's Craig, why don't I start? So just look to level set, software represents around 7% of our AUM. In private equity, it's a higher percentage. It's around 15% across our credit platform in total, it's 5%. And in Global Atlantic, that number is about 2.5% of our AUM. Now I think first, why don't we -- and in terms of that percentage of EBITDA in strategic holdings, that percentage is about the same. It's -- you're correct. It's a low double-digit percentage of EBITDA in the quarter. And then why don't I first talk about Mark's and then from the one we talk about AI and from both an underwriting standpoint and then opportunities for us. But I think in terms of the quarter, probably 2 things to note. First, software companies broadly are performing. So looking at revenue and EBITDA growth, we're still seeing healthy year-over-year revenue EBITDA growth, I think high single digits. But at the same time, obviously, in the quarter, we saw weakness across equity markets in the software space. So given the way that our valuations work, this dynamic from a public market standpoint, had a negative impact on the markets, right? So when you put those 2 pieces together, really, despite the operating and financial performance marks across the software names largely declined in the quarter. Now in terms of AI and how we're approaching AI as a firm, I think from a couple of things. One, look, the implications won't be a surprise to anybody on this call from AI are really far reaching, right? Like the barriers to adoption are low gains are real. AI can be very helpful at parts of workflows. And there will be businesses where the fundamental strategic positioning is either materially enhanced or in some cases, on the flip side could be replaced. Now from an investing standpoint, AI, we look at both from a diligence lens as well as from a value creation perspective. So from an underwriting standpoint, kind of the part of the question that you focused on. Look, we're focused on AI, how it affects margins, pricing power, workflow relevance and cash flow resilience. And so the focus is not just on AI exposure, it's really on the durability of unit and business economics, and that's through trailing lines as well as on the go forward. And how does AI impact those dynamics for us. And then I think perhaps even more importantly, in terms of value creation, look, we think we're really well positioned. Like AI at this point is deployed across 150-plus companies to automate workflows, enhanced products, drive new growth. And I'm sure we have multiple AI initiatives across every one of those companies. And so as a firm, how we're focused on this is ensuring that our operational team at Capstone, we talk about Capstone a lot is helping ensure that lessons travel across our teams and our companies. What works, what doesn't work? What's easy, what's hard. And again, as I know you know, we work in a very collaborative firm. So it's very much within the framework of our culture to help each other. I don't think that's necessarily to the same degree at every firm because a really siloed firm is not going to benefit in the same way. And then on the flip side of all of this relates to the opportunity on the investment front. So digital infrastructure remains a massive theme for us. We've deployed over $40 billion of capital KKR plus our partners across a variety of digital infrastructure themes have over a 20% gross IRR return to date in terms of that activity for us. And again, obviously, we already touched on the CoolIT example. Again, an example of an investment that, again, when everything comes together, kind of shows you the art of the possible. So hopefully, that's helpful. Operator: And next, we'll hear from Bill Katz with TD Cowen. William Katz: Thank you very much for two things, the extra disclosure and Finding Your Own Data report earnings. Very helpful. Just coming back to insurance for a moment. So doing the back-of-the-envelope math, if I take your slide, you are slightly north of $300 million sort of pro forma first quarter you get just below 11% ROE for the business, if I did the math right, a, let me know if that's right. So as you think forward, just given all the puts and takes of the business, I think you mentioned spreads widening out a little bit into 2Q. What do you think is a normalized level of ROE and maybe the time line to get to that? Robert Lewin: Yes. Bill, it's Rob. Why don't I start and maybe 3 or 4 points. as it relates to profitability and ROE of the insurance business. Point one, you hit on it was the mark-to-market benefit relative to the accrued income that's a little north of $300 million. But in the quarter, given some of the volatility we actually didn't hit our targeted return from a market perspective. So our target return is low double digits. If we had achieved that targeted return in the quarter, our run rate was probably closer to $330 million, just to give you a sense of the magnitude. Point three, I hit on this a little bit but it is a competitive market today as it relates to the asset and liability side, and we know for certain that it won't always be this way. And so how do we make sure that we really capitalize on that environment where there is volatility. And we talked earlier on how we think we're incredibly well positioned to do that. And honestly, it's a big reason why we bought 100% of GA because last time this happened, we felt like we missed it. And then finally, I would point you, as always, to Page 22 of our press release of our earnings release where you could see the all-in ROE figures that we have, but I think always instructive to take a look at that page as you're thinking about the performance of our broad-based insurance business. Operator: Next, we'll move to Mike Brown with UBS. Michael Brown: So I wanted to ask on Arctos. So $10 billion of fee paying AUM, can you just talk about the current fee rate profile there? And then any fundraising expectations over the, call it, next 12 to 24 months? And then strategically, how do you view the long-term opportunity in the wealth channel with Arctos. Is that something that could kind of feed origination into [ PayPac ]? Or over time, do you think you could even have like a dedicated sports fund or a dedicated secondaries product? Robert Lewin: Great. Thanks for the question. Let me start, and I know Craig and Scott might jump in. But just as it relates to the financials, we're not planning to disclose given the size of the Arcus business relative to KKR specific Arctos' related financial information. I think we can tell you that the profile of the business is generally pretty consistent with the profile of KKR's business. You've got, we think, best-in-class teams raising third-party capital they've done in a pretty lean way on the employee front. And with fee terms that generally look like fee terms that you would expect to see across some of the private closed-end funds here at KKR. As Arctos and what we're building in broader solutions business gets bigger, it becomes a much more material part of the firm, I can certainly see a world in the future where we're disclosing that solution-specific P&L information. But for the foreseeable future, I suspect you'll see it embedded in our private equity business line in coming quarters. Craig Larson: And Mike, it's Craig. Just on the fundraising piece. First, thanks for asking about Arctos. Scott Rob and I had a head fun this morning in our internal firm call welcoming the Arctos team to the family post-close, obviously. And look, on fundraising, it's a really exciting opportunity for us. And I think our fundraising team we know is excited both to support the distribution of existing Arctos strategies. And I think in particular, if you think of the footprint that we have and the boots on the ground that we have on a global basis, we think there's the opportunity for us to be really helpful right out of the gates. And then secondly, to your question on wealth, nothing to announce specifically this morning, but certainly lots of ideas, and we're excited to develop and think through potential new wealth solutions together with the Arctos team. This could include things like an evergreen vehicle that would include sports as well as some type of secondary/GP solutions vehicles as well. So more to come over time, but just a really exciting long-term opportunity for us. We're excited to get after it. Operator: And next, we'll move on to Michael Cyprus with Morgan Stanley. Michael Cyprys: Just wanted to ask about AI deployment across portfolio companies. Curious where specifically you're seeing AI-driven revenue uplift versus AI-driven cost savings in the portfolio? And how might you quantify that so far? And curious any expectations as you look out from here, and I was also hoping you can elaborate a little bit to your earlier point on what's been easy so far? What's been hard and any sort of lessons learned from adoption? Craig Larson: Mike, it's Craig. Why don't I start? Look, we're very early in broadly what we think the opportunity set is, I think we're seeing broad adoption of AI and the next step of that is really understanding the execution and bringing the power of AI to life, both from a revenue standpoint as well as an EBITDA standpoint. I'm sure there'll be points in time or a point in time when it will make sense for us to both talk about specific progress as well as guideposts for us. To be clear, we are seeing an EBITDA uplift broadly across the portfolio. And we think there's a lot more to do. It has been interesting to see the evolution of AI to date and how it's almost started in ways that are interesting, like I think on various language applications. It's just interesting to see really begin to disrupt that part of the landscape most broadly first. But as we think about things like broad efficiencies whether that's sales force or operating efficiencies across the platforms and workers. And there's going to be even broad businesses and opportunities in things like robotics or you think of what AI can do in terms of in terms of the health care space. There's just really long-term broad opportunities for us across the spectrum of the business, and there will be more to come from us over time. Operator: And we'll move on to our next question from Brian McKenna with Citizens. Brian Mckenna: So within our private equity business, what's the typical markup on an investment when it's realized versus the prior unrealized mark? And then is there a way to think about the incremental carry that's created in this markup. And I'm just trying to figure out at the $2.6 billion of net unrealized performance income is understated in any meaningful way. Craig Larson: Brian, it's Craig. Why don't I start. Look, in our experience, when you look at the final mark of those private equity investments that we monetize, you see a healthy markup relative to the prior quarter. And that's been our experience over time. I think it does speak to the rigor of the valuation process. Again, this is an exercise that has been very similar for us for well over a decade at this point in time. We work with third-party firms as part of all of this exercise. And so I think it speaks to the rigor and if anything, mild conservative that we have as it relates to marks as we go through this process. Robert Lewin: Yes. I think that covers most of it. I think really the only things from my seat to add on here is we've been doing these types of valuations really close to 20 years now with the advent of our vehicle that was listed on the Euronext back in 2006. There is a high degree of rigor. We feel really good with how we value Level 3s across the firm, not just in private equity, but everywhere. The vast majority of our holdings, anything of any size and scale is going to be either validated or the valuation will be created and performed by a third-party valuation agent. And then as it relates to whether our accrued carry numbers understated. I wouldn't say that. I mean we feel like our valuations are very appropriate at quarter end, given all of the information that we know. Operator: And our next question, we'll hear from Brennan Hawken with BMO Capital Markets. Brennan Hawken: Wanted to follow up on Glenn Schorr's question. So -- couldn't resist, [indiscernible] sorry. So look, the struggle with the $7 is, I think, probably not that surprising, like the environment, given where it is, you can look at consensus and saw the basically it was anticipated. But the one part that I'm sort of curious about is on the realizations and the timing. I know you guys have been a lot stronger on DPI. But how is the potential for further delays in monetization and realizations going across with the LP community. This has been an ongoing delay across the industry. And so is that leading to some frustrations and how are you managing that? Robert Lewin: Yes, sure, Brennan. I mean there's obviously a lot of nuance in that question. And -- but what I'd tell you is as we entered the year, and we talked about this last quarter, we have put together really a bottoms-up budget for how we thought the year would play out based on normalized and constructive monetization environment. And as we're 4 months into the year, I think it's fair to say that through that 4-month period of time, it's been anything but a normalized environment. And so as we thought about what needed to get sold in order to achieve our target for the year and our budget for the year, we -- today, as we're mark-to-marketing it, some things have potentially been delayed. And that's all we're trying to convey because we did really want to be transparent for how we're tracking at this point of the year. That said, I think it's also important to really understand that our DPIs remain, we think, industry-leading, certainly relative to our larger competitors. And if anything, that's accelerating. You look at our realized carry in Q1, it was up 120%. I think most importantly is our forward monetization guide of $1.4 billion plus as it relates to monetization related revenue, that is the highest we've ever had in our history. And so things feel really good on that side of the ledger. But at the same time, we're also cognizant of the environment. What that can mean as Scott noted in processes. What that could mean maybe as it relates to delayed deployment and pushing back some processes that could happen and the impact across our platform. And we're trying to give you a mark-to-market balance view on where we are at May 5 of '26. Scott Nuttall: Brandon, it's Scott. Just to add a couple of things, one, thanks for the question. I wouldn't confuse the message around we may delay some strategic exits with kind of what we're hearing from the LPs. We have, I think, in the deck, the IR deck on the website, a slide somewhere that talks about how we've given cash back from our private equity fund in the U.S. or that business, we've given more back than we called 9 out of the last 10 years. So what we're hearing from the LPs is we're like best-in-class in terms of DPI and cash back, and they know that there's more coming. So the LPs are happy with us. That's why you see a record fundraise in private equity, the $23 billion that Rob mentioned, which is just the U.S. component of our private equity business. But overall, fundraising is up, and we're finding investors want to do even more with us. And I mentioned this dispersion we're seeing across our sector. There is extreme bifurcation, and we're getting a lot of very positive feedback on how we're performing and sending so much cash back relative to others. So I wouldn't confuse the 2 topics. This is helping us grow the firm faster by virtue of the performance. Operator: And next, we'll hear from Dan Fannon with Jefferies. Daniel Fannon: I was hoping you could discuss the broader kind of private wealth backdrop given the challenges in certain private credit vehicles. How do you see that impacting the lineup for the rest of your retail or private wealth products or even the road map with your partnership with Capital Group going forward? Craig Larson: It's Craig. Why don't I start? We thought we'd get a question on this topic. We think it's important just to begin to level set, and I touched on this earlier, but really the size and breadth of fundraising, right? So over the trailing 12 months, we've raised $127 billion, in K-Series it was 12% of that. So it is an important piece, certainly, but we benefit from all the strategies and geographies where we're raising capital. We're wonderfully diversified from a fundraising standpoint. And then we think it's important to take a step back and think about K-Series and the growth in that platform. So AUM across K- series at 3/31 was $38 billion. A year ago, that was $21 billion. So think of all the volatility that we've all experienced over the last 12 months, Liberation Day, all that's unfolded with the ramp. And K-Series AUM is up 80% year-over-year, actually a little north of that. It's pretty good. So I think as we look about the backdrop for wealth and what that means for us, no change in our view of the path we're on, the long-term opportunities that we see and just feel, a, very excited about how we're positioned against this opportunity. And again, recognizing that this is just one of the pieces of the puzzle that we have given the breadth and the diversification we have across the firm. Scott Nuttall: Yes. The only thing I'd add, Dan, is this is a multi-decade build for us, and it is all about performance. If we can generate performance and keep earning the trust of the advisers and the clients, we think this can be a meaningful part of the firm. And as you know, it's early products are relatively early in the development. And I think people are learning as we go here. But in terms of your question on the other -- impact on other things we're doing, I think Rob mentioned it, we were surprised by how strong and resilient flows were in the first quarter. If history is any guide, all of the media attention will likely slow things down for a bit. I don't know what a bit is yet because it's so early. But to Craig's point, this is a relatively small percentage of how we're accessing capital today. and we're working hard to earn the right for it to be a larger and more meaningful part of the firm. In terms of your question about Capital Group, also even earlier there with respect to our partnership, which is developed extraordinarily well. And overall in terms of kind of how we think about it ahead of our expectations, but we're still very much in the product development mode and just starting to deploy different products across credit and private equity, as we've discussed before. Operator: And our next question will hear from Arnaud Giblat with BNP. Arnaud Giblat: Yes I've got a question on data centers. You mentioned earlier that you're investing actively there. I was just wondering if you could flesh out a bit more. In particular, I think you've signed a $50 billion JV with Energy Capital Partners. So how far down the pipeline of investments are you? what you -- how far process coming on board. I understand there's quite a bit of capital in the space. So I'm just wondering what the prospective returns are shaping up to look like in this space. Craig Larson: Sure. Why don't I begin. Look, it remains a massive theme for us. And I think, one, there remains a lot of interest and focus on data center, no question. And look, this focus is for good reason. Like the CapEx we're seeing out of the hyperscalers continues to be massive, if anything, it feels like it continues to accelerate. And all of that builds on what's already a pretty powerful backdrop given tailwinds in cloud. So the digital impa opportunity is massive, but it's more than just data centers, as I mentioned, because again, you're going to need massive investment alongside of data centers and alongside of all of these aspects. From data standpoint, in terms of fixed line opportunities, mobile infrastructure, at the same time, again, to support the growth in data in all the consumption. And I think when we look at our firm and how we're positioned for the past 15-plus years, we've been incredibly active across all of these themes. So we've invested over $40 billion across the digital infrastructure space broadly on data center, specifically, we've got 6 global data center platforms. In terms of your question on frothiness, look, we're going to be thoughtful in how we invest. And I think you've seen lots of capital put against this opportunity. And so you should expect to continue to see us be very disciplined as we look at opportunities. We're going to care about who our counterparties are. We're going to care about location. We're going to look to continue to be thoughtful around terms. And then I think finally, part of this also gets back to one of the reasons we think we're well positioned gets back to connectivity and culture because we do invest across these themes across a number of pools across KKR depending on geography and risk return. So that would encompass global infrastructure, Asia infrastructure, our diversified core infrastructure strategy, real estate, core private equity, wealth as well as within global landing. So we've got a number of different pools, different risk return across geographies. So lots of progress and exciting for us more to come. Operator: And our next question will hear from Crispin Love with Piper Sandler. Crispin Love: The elevated redemptions wells have been highly publicized, but curious if you can detail further what you're seeing from institutions given the noise in wealth. Rob, your comments seem positive there. So I'm curious if you can dig in that a little bit deeper, how aggressively are institutions leaning into direct lending today in other areas like ABF? And then how has that evolved in recent months, just given the sentiment shifts? Was there a pause and then started to dip in further? Just curious on that trajectory and thought process from the institutions. Scott Nuttall: Great. Thanks for the question, Crispin. Very different dialogue with institutions. If anything, I would say, 12, 24 months ago, as it pertains to direct lending institutions, we're frankly spending less time. little bit of a question of the retail flows a bit ahead of deal flow. Are spreads compressing and turns a bit less attractive. And a number of them, I think, pivoted a bit to asset-based finance as another component of private credit. And as you heard from Craig and Rob, that part of our credit business is more than 2x the size of our direct lending effort. And so we definitely saw that movement. The shift we're seeing in the last several weeks has been the institution is kind of coming back to direct lending a bit and saying, okay, I see all these headlines about wealth, that should mean that risk/reward is getting better. on new deals. And therefore, I'm going to take a fresh look at it again. So we continue to have all the ABF dialogues we've been having and the pipeline is really robust there. But the shift has been the institution is actually coming back a bit to direct lending and thinking about, well, spreads are up. Fees are up, terms are better and leverage is down. And that's what we've seen in terms of our pipeline in the last several weeks. And so on the back of that, they are more intrigued. So very, very different dialogue relative to all these headlines that you're reading about in the wealth space, which are very small dollars in the grand scheme of things. Operator: And next, we'll hear from Patrick Davitt with Autonomous Research. Patrick Davitt: Follow-up to Steven's question, been a lot of focus on software actually, but we are starting to get more incoming around the potential for AI to be a problem for Indian positions in both private equity and real assets. I think India has been a big part of your Asian investment strategy. So could you update us on the exposure there? And more specifically, have you done a scrub to identify how exposed those positions are to potential AI disintermediation of things like India outsourcing? Craig Larson: Patrick, it's Craig. I'll start. Look, I think when we go through the exercise and look across the portfolios, like again, that's obviously done on a global basis. That's both with a focus on whether that's revenue or EBITDA growth, whether that's AI exposure, whether that is the investment teams and the approach to AI from a defensive and an offensive standpoint. So I don't think of that differently based on geography. We haven't disclosed any specific portions of India. I would note that I think as we think about Asia and our footprint broadly, I think we think of Asia split broadly between the developed part and then the growing part. So India is certainly an important part of our franchise as we think about our positioning going forward. Scott Nuttall: Yes. I think -- Patrick, it's Scott. The answer to your question is yes, we have scrubbed our India portfolio. No don't have any elevated level of concern there. you're right. One thing you watch is what does this mean for employment in India, given the amount of that economy that historically has been driven by what's happened with outsourcing to that part of the world, and we have seen hiring across that part of the Indian business sector come down meaningfully, dramatically. We are not exposed to that. If anything, I think right now as we sit here today, given our focus on infrastructure, electricity grids and otherwise in India. We've been getting ready for what we see as AI deployment and the opportunity set across digitalization in that market, where as you know, we have a lot of history and expertise. Operator: There are no further questions at this time. I would like to turn the floor back to Craig Larson for closing remarks. Craig Larson: Rachel, just thank you for your help this morning, and thank you, everybody, for your interest in KKR. We look forward to following up in 90 days or in the interim, if you have any questions, of course, please feel free to reach out directly to the IR team. Thanks so much. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Greetings, and welcome to Cummins Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nick Arens, Executive Director of Investor Relations. Thank you. Please go ahead. Nicholas Arens: Thank you, Donna. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2026. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer, and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of several risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our Chair and CEO, Jennifer Rumsey to kick us off. Jennifer Rumsey: Thank you, Nick. Good morning, everyone. I'll start with a summary of our first quarter accomplishments and financial results, then discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2026. Mark will then walk you through additional detail on our first quarter performance and our full year forecast. Before getting into the details of our performance, I want to highlight a few major events from the quarter. In February, Cummins marked a significant milestone with the deployment of the world's first Commercial Hybrid Electric Ultra-class Mining Truck, now in operation, in production at the Caserones open-pit mine in Chile. This pilot represents our first retrofit of a 300-ton Komatsu haul truck using First Mode hybrid technology in daily operations. It reflects our strategy of delivering solutions that reduce CO2 emissions today, while advancing our customers' long-term decarbonization goals. In March, Mack Trucks announced the integration of the Cummins X10 engine into the Mack Granite Chassis. This milestone reflects the strong collaboration between the Mack and Cummins teams and our shared commitment to delivering reliable, high-performing solutions for vocational customers. The X10 is well suited for demanding work applications and its integration into the Granite platform will provide customers with a compelling option in the vocational truck segment. Finally, during the quarter, we took targeted actions in our Accelera segment by completing the sale of our Low-pressure Fuel Cell business and related customer commitments for this business. This sale will enable continued improvement in our trajectory of our financial results in the Accelera segment. Together, these actions demonstrate how we are executing against our strategy across our businesses. Now I will turn to our overall company performance for the first quarter of 2026 and cover some of our key markets. Sales for the first quarter were $8.4 billion, an increase of 3% compared to the first quarter of 2025. Growth was driven primarily by higher demand in power generation markets, particularly from data centers. This increase was partially offset by weaker North America heavy and medium-duty truck demand with unit volumes down 20% from a year ago. EBITDA was $1.3 billion or 15.4%, which included a net charge of $199 million related to the sale of our Low-pressure Fuel Cell business. Excluding this net charge, EBITDA was $1.5 billion or 17.7% compared to $1.5 billion or 17.9% a year ago. Lower North America truck volumes and higher compensation expenses were partially offset by higher power generation demand, favorable pricing and increased joint venture income. In Power Systems, we delivered record EBITDA dollars, reflecting continued operational improvements and strong end market demand. Our first quarter revenues in North America decreased 6% compared to 2025. Industry production of heavy-duty trucks in the first quarter was 50,000 units, down 23% from 2025 levels. While our heavy-duty unit sales were 18,000, down 16% year-over-year. Industry production of medium-duty trucks was 27,000 units in the first quarter of 2026, a decrease of 20% from 2025 levels, while our unit sales were 25,000, down 19% year-over-year. We shipped 30,000 engines to Stellantis for use in the RAM pickups in the first quarter of 2026, up 4% from 2025 levels. Revenues for North America power generation increased by 23%, driven primarily by continued strong data center demand. Our international revenues increased by 16% in the first quarter of 2026 compared to a year ago. First quarter revenues in China, including joint ventures, were $2.1 billion, an increase of 19% year-over-year, driven by accelerating data center demand and strong off-highway export activity by our OEM customers. Industry demand for medium- and heavy-duty trucks in China was 353,000 units, an increase of 20% from last year driven by strong export demand. Our sales in units, including joint ventures, were 55,000, an increase of 14%. Industry demand for excavators in China in the first quarter was 73,000 units, an increase of 19% from 2025 levels. We sold 14,000 units, an increase of 25%, primarily driven by strong export demand. Sales of power generation equipment in China increased 84% in the first quarter due to accelerating data center demand. First quarter revenues in India, including joint ventures, were $814 million, an increase of 12% from the first quarter a year ago. Industry truck production increased 21% from 2025 driven by tax incentives that are accelerating underlying demand. Now let me provide our outlook for 2026, including some comments on individual regions and end markets. We are pleased to share that our expectations for 2026 have improved since our initial guidance issued in February. We are raising our forecast for total company revenues in 2026 to a range of up 8% to 11% compared to our prior guidance of up 3% to 8%. We are raising our 2026 North America heavy-duty truck forecast to a range of 230,000 to 250,000 units, up from our prior guidance of 220,000 to 240,000 units. This increase reflects the trend of strong recent orders and improving spot rates. We now expect the first half of the year to be stronger than previously anticipated while the second half remains largely consistent with our prior outlook, including a modest prebuy ahead of the 2027 EPA regulations. In the North America medium-duty truck market, we are increasing our forecast to 125,000 to 135,000 units in 2026 compared to our prior guide of 110,000 to 120,000 units, reflecting stronger-than-anticipated demand in the first half and momentum expected to continue into the second half of the year. Consistent with our prior guidance, our Engine shipments for pickup trucks in North America are expected to be 125,000 to 140,000 units in 2026. In China, we now expect total revenue, including joint ventures to increase 10% in 2026, an improvement from prior outlook of down 1%, driven by stronger data center demand. For heavy and medium-duty truck demand, we continue to expect a range of down 10% to flat versus prior year, consistent with our prior guidance and reflecting moderation and the benefits of scrapping policy, partially offset by continued strength in export demand. In India, we now project total revenue, including joint ventures, to increase 2% in 2026, up from our prior guide of 5% decline. We expect industry demand for trucks to be down 5% to up 5% for the year compared to our prior guidance of down 10% to flat, supported by tax rate reductions, improving underlying demand. For global construction, we now expect demand to range from flat to up 10% year-over-year, an improvement from our prior outlook of down 10% to flat. In China, strong export demand is expected to partially offset continued domestic weakness. While in North America, we expect demand to remain largely flat given ongoing tariffs and interest rate uncertainty. We expect our major global high horsepower market to remain strong in 2026. In global power generation, we now project revenues to increase 15% to 25%, and up from our prior guidance of 10% to 20%. This reflects accelerating data center demand supported by capacity additions we brought on in North America at the end of 2025. We are also seeing stronger-than-expected international growth, particularly in China and the broader Asia Pacific region, along with increased demand for lower output gen sets to meet customer demand amid ongoing capacity constraints and larger configurations. In mining, Engine sales are expected to be flat to up 10%, driven by replacement demand and consistent with our prior outlook. For Aftermarket, we expect a range of 2% to 8% increase for 2026 consistent with our prior outlook, supported by aging fleets, higher part consumption and increased rebuild activity. In summary, coming off a strong first quarter, we are raising our full year sales outlook to 8% to 11% increase and increasing our EBITDA margin guidance to a range of 17.75% to 18.5%. This reflects improving momentum in North America heavy and medium-duty truck markets, with volumes recovering from cyclical lows, faster than previously anticipated, a higher outlook for global power generation, improvement in Accelera and continued strong execution across our businesses. Additionally, this quarter, we returned $519 million to shareholders, including $243 million in share repurchases, consistent with our long-standing commitment to return approximately 50% of operating cash flow to shareholders. I want to thank our employees and leaders around the world for their commitment to our customers and to each other. Their focus and execution are delivering strong financial results while continuing to strengthen our ability to invest in future growth, advance sustainable solutions and create long-term value for shareholders. I look forward to discussing our long-term strategy and updated financial targets at our Analyst Day on May 21. Now let me turn it over to Mark. Mark Smith: Thank you, Jenn, and good morning, everyone. We delivered strong revenue and profitability in the first quarter. Let me start with some key highlights that we want you to leave with today. First, we see stronger demand in multiple end markets, resulting in an improved outlook for Engines, Components, Distribution and Power Systems. Second, we completed the sale of the Low-pressure Fuel Cell business to Alstom, representing another step in reducing operating losses in Accelera and we raised -- or we improved our 2026 forecast in that segment for EBITDA losses. And third, we took advantage of equity market volatility in the first quarter to repurchase shares consistent with our plans to return excess capital to shareholders. Now let's look at the first quarter in a little bit more detail, and hopefully, I can head off some of your questions with some of these comments. First quarter revenues were $8.4 billion, up 3% from a year ago. Sales in North America decreased 6%, while International revenues increased 16% and driven by China, where the data center demand is accelerating. EBITDA was $1.3 billion or 15.4% of sales compared to $1.5 billion or 17.9% a year ago. First quarter 2026 results included the net charge of $199 million related to the sale of the Low-pressure Fuel Cell business. Excluding these net charges, EBITDA was $1.5 billion or 17.7%, down 20 basis points from a year ago. Lower North American truck volumes and higher compensation expenses partially offset by higher power generation demand, favorable pricing and increased joint venture income. The net impact of tariffs to our EBITDA dollars in the first quarter was immaterial, and although the exact amounts in total and by segment will vary quarter-to-quarter, we currently expect that the net impact of tariffs will continue to be immaterial to our EBITDA for the remainder of 2026 as we've worked hard with our supply chain partners and customers to mitigate the impacts. Now let me go into more detail by line item. Gross margin for the quarter was $2.2 billion or 26.7% of sales compared to $2.2 billion or 26.4% last year. The improved margins were driven by favorable pricing and higher power generation sales, partially offset by lower North American heavy and medium-duty truck volumes and higher compensation expenses. Selling, administrative and research expenses were $1.2 billion or 14.3% of sales compared to $1.1 billion or 13% of sales -- 13.6% of sales a year ago, and this increase was driven primarily by higher compensation, especially variable compensation expenses. Joint venture income of $148 million increased $17 million from the prior year, primarily driven by stronger performance in our on- and off-highway joint ventures in China, benefiting the Engine and Power Systems segments. Other income was negative $178 million compared to favorable $23 million from the prior year. This [ decrease ] was primarily driven by $199 million of net charges related to the sale of the Low Pressure Fuel Cell business. Interest expense was $76 million, a decrease of $1 million from the prior year. The all-in effective tax rate in the first quarter was 27.2%, including the unfavorable discrete tax impact related to the sale of the Low Pressure Fuel Cell business, and $7 million or $0.05 per diluted share of other favorable discrete items. All-in net earnings for the quarter were $654 million or $4.71 per diluted share, which included $1.44 per diluted share related to the sale of the Low Pressure Cell business. Excluding the sale, net earnings were $853 million or $6.15 per share compared to $824 million or $5.96 per diluted share a year ago. Operating cash flow was an inflow of $309 million compared to an outflow of $3 million in the first quarter of 2025. Additionally, we returned over $0.5 billion of cash to shareholders in the first quarter. We executed $243 million in share repurchases at an average price of $536.97 and paid $276 million in cash dividends this quarter, consistent with our long-standing commitment to return approximately 50% of operating cash flow to shareholders. Now let me comment a little bit more on segment performance. For the Engine segment, first quarter revenues were $2.7 billion, a decrease of 4% a year ago. EBITDA was 10.4%, a decrease from 16.5% a year ago as weaker North American truck volumes, higher compensation expenses related to overall company performance, higher research and development expenses as we approach our 2027 launches and increased [ product average ] costs were partly offset by higher joint venture income. For the full year 2026, we now project Engine business revenues to be up 7% to 12%, up from our prior guidance of flat to an increase of 5%. We've also raised our EBITDA margin projections now to be in the range of 12.5% to 13.5%, up 50 basis points at the midpoint of the guide. This improvement is primarily driven by higher expectations for North America heavy and medium-duty truck demand with demand in the first half of the year, particularly proving stronger than we'd anticipated, just 3 months ago. Components segment revenue was $2.5 billion, a decrease of 5% from a year ago. EBITDA was 13.3% a decrease from 14.3% a year ago, as weaker North American truck volumes and higher material costs were partially offset by pricing. For Components, we expect 2026 full year revenues now to be up 5% to 10%, an increase from our prior guide of flat to 5% up due to stronger demand for heavy and medium-duty trucks in North America, and we expect EBITDA margins to be in the range of 13.5% to 14.5%, up 50 basis points from our prior guide at the low and the high end due to higher earnings in North America and China. In the Distribution segment, revenues increased 7% from a year ago to $3.1 billion, EBITDA increased as a percent of sales to 14.2% compared to 12.9% a year ago, driven by higher power generation demand partially offset by higher variable compensation expenses. We now expect full year '26 Distribution revenues to be up 9% to 14% from our prior year guidance about 5% to 10% due to stronger demand for power generation equipment mainly. We also expect EBITDA margins to be in the range of 13.7% to 14.7% an increase from our previous forecast of 13.25% to 14.25%. In the Power Systems segment, revenues were $2 billion, an increase of 19% and EBITDA was a record increasing from 23.6% to 29.5% of sales as increased volumes, positive pricing, net tariff recovery and higher joint venture income and some onetime cost recoveries all helped boost results. For 2026, we now expect Power Systems revenues to grow 14% to 19%, up from our prior forecast of 12% to 17%, due to stronger demand, especially in international markets. We also expect EBITDA margins in the range of approximately 25% to 26% compared to our previous guidance of 23% to 24%. The margins for the remainder of the year are expected to be strong, but a little below first quarter levels due to the uneven nature of tariff cost and recoveries and the benefit in the first quarter of some onetime modest non-tariff cost recoveries. Accelera revenues decreased 2% to $101 million, driven by lower electrified powertrain sales, partially offset by higher electrolyzer sales, as we meet our remaining sales commitments in the electrolyzer business. EBITDA was at loss of $277 million, including a net charge of $199 million related to the sale of our Low-pressure Fuel Cell business. Excluding these charges, EBITDA was a loss of $78 million, an improvement from the loss of $86 million in the prior year reflecting the benefit of the actions that we've been taking over the last couple of years starting to gain traction across the segment. In 2026, we anticipate Accelera revenues to be in the range of $300 million to $350 million, unchanged from 3 months ago. We now expect net losses excluding the charge related to the Fuel Cell sale to improve to a range of $270 million to $300 million better than our previous projection of EBITDA losses of $325 to $355 million. This improvement reflects actions previously taken to reduce losses in existing operations as well as the benefits of the targeted decisions taken in the first quarter. In summary, we now expect stronger full year top and bottom line. We expect total company revenues to increase between 8% and 11% and EBITDA to be in the range of 17.75% to 18.5%. And whilst Power Systems and Distribution naturally have been gaining the headlines over recent quarters, I hope you take away from these comments that we're seeing an improved profit outlook for all of our segments for the remainder of this year. Our effective tax rate is expected to be approximately 23% in 2026, excluding any discrete items. Total investment is expected to be in the range of $1.35 billion to $1.45 billion as we continue to make critical investments to support future growth. In summary, we delivered strong profitability in the first quarter despite weaker production levels in North America on-highway markets, as those markets improve through the year, along with the continued robust global demand for power generation equipment, we are well positioned to further improve our financial performance yet this year. The actions we have taken in Accelera are improving the cost structure and reducing ongoing losses while we continue to invest in the products, which we believe have stronger prospects for adoption and future profitable growth. Cash generation remains a clear priority, enabling continued investment in our portfolio, returning excess cash to shareholders and maintaining a strong balance sheet that allows us to weather any economic volatility and continue investing for the long run. We look forward to seeing some of you in person when we provide an update on our medium-term financial targets at our Analyst Day on May 21. That's enough for me. Let me turn it over to Nick. Nicholas Arens: Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we're ready for our first question. Operator: [Operator Instructions] Today's first question is coming from Angel Castillo of Morgan Stanley. Angel Castillo Malpica: Congratulations on the strong quarter here. So just wanted to, Mark, go back to the point on Power Systems. Can you just, I guess, unpack how much the onetime was in the first quarter here? The non-repeating I guess, yes, just onetime cost there benefit. And then as you think about the cadence of the rest of the year, just curious if you could kind of help us understand, is it just kind of normal seasonality absent that onetime? Or how we should think about kind of the cadence of the margin for that segment? Mark Smith: Yes. So I don't want to diminish the extraordinary achievements of the Power Systems business into a really short answer because they're doing incredibly well and investing and raising capacities to meet even stronger demand as we'll talk more about in May. But yes, if you look at the guidance, you can back normal seasonality for the rest of the year, we should expect Q4 is usually just a short of production quarter generally. But otherwise, there shouldn't be enormous variation in the margins quarter-to-quarter. As I mentioned, there were a number of factors that contributed to margin performance above our expectations. You've got stronger demand in China, which is usually weighted more to the first half of the year. That will -- that line item will probably be weaker in the second half of the year. It's just the way that buying patents tend to have in China. You've got net tariff recoveries, which you heard me say at the start for the company were immaterial. They've really been immaterial to several quarters and will remain immaterial, but it were a net boost at Power Systems, and then we had some onetime cost recovery. So if you factor -- if you just factor in a slightly slower Q4 because of the lower production days, the rest of the quarter should look pretty even for the remainder. Operator: The next question is coming from Kyle Menges of Citigroup. Kyle Menges: Great. It would be good to hear just an update on the EPA '27 Engines and number one, curious if there could actually be some meaningful fuel efficiency gains with the new heavy-duty engine based on what you're seeing and hearing thus far? And then number two, just would be great to get an update on the medium-duty engine and when it might be ready? And any potential ramifications if it might not be ready, say, until later in 2027? Jennifer Rumsey: Yes. Great. Thanks, Kyle. Well, we remain very excited about launching our HELM platform. The diesel variant of those, along with the EPA '27 Regulation and do anticipate bringing a lot of performance value to our customers, including fuel efficiency improvements and other service and performance optimization. And as I've talked about in the past, it's really unusual at this stage in the development cycle for regulations to be uncertain. We have been working very closely with EPA over the last year, as they've been evaluating ways to move forward with the regulation, as I've said, they will, while taking some of the cost associated with that regulation out, and we anticipate changes in the longer emissions, warranty and emissions useful life, that were in the the previous version of that regulation. Based on kind of the late changes, we have made the decision to delay the launch of our B platform to January '28, that will be the final launch of our Diesel HELM platform. We continue to plan to move forward with X15 and X10 in '27. And as I've shared previously, the B platform, in particular, is the one that we sell that the most number of customers and diversity of applications we've been transparent with EPA about our our plans on the launch and are looking forward to seeing the draft out of their revised rule anticipated this quarter and getting the final version of that before we start launching our new platforms next year. So excited about the value we're bringing to the customer and just continue to work closely with the EPA as they finalize their plans. Kyle Menges: Got it. And I'm just curious what the ramifications could be or maybe a range of outcomes for next year if that medium-duty engine is not ready until 2028? Jennifer Rumsey: So we'll continue to offer the current version of the B Series platform through '27, and this will allow us to kind of phase out the launch of our products to our customers and through our plants. And we are, as we said, continuing to anticipate some amount of prebuy in the second half of the year, in particular in the heavy-duty market. Operator: The next question is coming from Jerry Revich of Wells Fargo Securities. Jerry Revich: Good morning, everyone. I'm wondering if you folks can comment on how far out lead times extend for your 95-liter engines. We're hearing that for some folks into the back half of '28, even at higher production levels. Can you comment how far you folks are? And then, Mark, you folks have consistently put up really attractive incremental margins in that line of business for a number of years now as we think about production continuing to ramp higher, anything that we should keep in mind as we think what incremental margins might look like in the medium term compared to the 45% incrementals that you folks have consistently delivered here? Jennifer Rumsey: Thanks, Jerry. Well, as you know, we doubled the capacity of the 95-liter, finished that investment last year, really taking advantage of that and continuing to see strong demand, multiyear discussions with our customers around their needs, and that's underpinning the stronger guidance this year. And we've been continuing to look closely at longer-term demand expectations and if there are additional capacity investments we want to make across our plants and supply chain and Jenny will be sharing more with you at our upcoming Analyst Day on how we're thinking about those investments in the capacity. Mark Smith: Right. But I think yes, I think we're going to have -- you're going to see a strong presentation in the next couple of weeks about Power Systems. We're very enthusiastic about the prospects going forward. And quite frankly, they've only strengthened, Jerry, even in in the last few months. So we are very optimistic, confident, maybe optimistic, is not the right word, confident in the performance in the Power Systems business. Right now, we're focusing -- whilst we are ramping up production. We have been increasing margins. We'll also continue to invest going forward, and you'll hear more about those plans here coming up. But certainly, as revenues grow, obviously, we have the goal of expanding margins. Jerry Revich: Super. And can I ask in Engine it's nice to see the positive margin revision for the year? It looks like you're going to exit potentially in the 14% plus EBITDA margin range. Every time a new regulation, you folks tend to drive margins higher. Can you just talk about the puts and takes as we think about EPA '27 and the EBITDA margin opportunity for you folks on the new platforms? Considering its been a while since we've had a new platform in the U.S. Mark Smith: Yes. It's been a while since we've had this many new platforms at the same time. So yes, obviously, there's going to be -- there are going to be significant content adds primarily on the powertrain for the new trucks. So that's going to benefit not only the Engine business but also Component story. We're expecting -- we're not here to give guidance for next year, but we expect some volatility in demand between the second half of this year and the first half of next year. But yes, I think you're going to hear a positive story from Brett, coming up in the next couple of weeks. We've been through a peak investment period because all the platforms, not just the current ones, we've launched other platforms in the past couple of years that have gone well. And we are moving beyond this peak investment period. So yes, you're going to hear from us that we expect our performance to improve over time. Operator: The next question is coming from Stephen Volkmann of Jefferies. Stephen Volkmann: Can I just continue on that thread, if possible here? The Engine incrementals this year are sort of low teens, I guess, if I'm doing my math right, Mark, you talked about some of your spending on new platforms rolling off as we go forward. But I assume warranty tends to be higher when you launch these new platforms. So just trying to think about like what's the fair kind of value for incremental margins in Engines? Mark Smith: Yes. I think over an extended -- first of all, you're exactly right. So when we launch a brand-new platform, we start with a new warranty accrual rate, and that's usually fixed for the first 6 quarters until we get enough field experience, and then history has shown overtime, that we've been able to bring down those accrual rates quite significantly. Certainly, over, it's one of the highlights of my time as CFO was seeing that improvement -- significant improvement over time and quality. So yes, we'll start next year with our new Engine platforms that are launched with higher accrual rates. That will be a portion of all this demand may be lighter in the first half of the year as -- to the extent there is some prebuy, it's always hard to know exactly what's prebuy versus slightly improving freight conditions. Demand could be weaker, yes, over let's say, we get through the first half of next year and into '28, we should be seeing improved incremental margins for the Engine business. The tariffs, of course, probably the biggest single burden for the company has fallen on the Engine business, not only. So that even though we've done a great job in trying to mitigate those and minimize the dollar impact that's been somewhat dilutive last year and this year on top of the peak investment period. So yes, I would expect the incremental margins to improve from what we're seeing this year as we get through the next 18 months. Operator: The next question is coming from David Raso of Evercore ISI. David Raso: The rest of the year, the top line for the 4 major segments were all up 12% to 16%. So solid breadth there with incrementals in Engines and Power both above 30% for the rest of the year. But I was curious why Distribution, the incremental for the rest of the year are only 7% and Component are 19%. I'm just curious, particularly in Distribution, but also as Components may be bearing more of those investment dollars. Just trying to understand why the incremental is that low on those 2 businesses, the rest of the year? Mark Smith: Yes. I think the -- one of the factors in the Distribution business is we're seeing more growth -- I'd say, the rate of growth at parts is not keeping pace with the rate of growth in whole goods, as we refer to them, or power generation equipment. So that's one factor. And then I would say we had -- last year, we had more pricing in the middle of -- particularly in the middle of the year, and that's why one of the factors why the margins stepped up so well in the second. So I think you're getting into tough comparisons, Q2 and Q3 in particular, long term, medium term, we're bullish on Distribution growth and margin expansion. But those are some of the factors. We did pretty well in Q1. So we just got to keep doing more of the same and over time, differences in mix and other factors will take care of themselves, and I think the prospects are very encouraging. But that's probably the main factor that there's no other onetime special item or anything like that, David. David Raso: And a follow-up on the availability of the '27 heavies. What are your customers telling you for '26 build slots? And when would they expect to be sold out and then have to ask you to introduce your '27 engine? Jennifer Rumsey: Yes. Thanks, David. And we've seen -- I'm sure you've been paying attention like we have to truck orders that have gone up over the last several months. Spot rates have improved. So you've got a combination of improved economics for the truck customers along with anticipation of EPA 27 regulation and the industry, of course, was at a cyclical low. So what we're seeing is things starting to step back up. In fact, right now, we're adding a third shift at Rocky Mount, so we really saw medium-duty demand improving starting in Q1 and quite strong here as we go to the second quarter, and then we're seeing heavy-duty stepping up. And we do think that we're watching the supply base to see if there's going to be some constraints we're getting to the point where you -- part of our top end guide is how much can everybody take up build rates and supply to meet that ahead of the '27 regulatory changeover. And then we're really focused on making sure that we can execute to meet our customer commitments as we do that. In fact, we had a a big supplier conference last week with all of our key suppliers to make sure that they're ready just for all of our businesses, we're ramping up capacity at our plants and investing in new products. Operator: The next question is coming from Jamie Cook of Truist Securities. Jamie Cook: A nice quarter. I guess one question for you, Mark, as we think about the second half and I guess sort of I guess, longer term, we're getting lots of questions on your ability to put up the incremental 25% margin with some of the concerns on tariffs perhaps are actually are potentially R&D not being as big of a tailwind as we would have thought if the medium-duty engine doesn't meet the 2027 emissions, maybe that's higher? Puts and takes with the seller losses. So just sort of your confidence level there? And then I guess, second question. pace of a seller loss is decelerating. Obviously, we saw some nice progress in the quarter and what's implied in the guide, just how we're thinking about that as a potential again, offset into losses in 2027 and beyond? Mark Smith: Good. Well, I think we'll address probably very specifically, incremental margins here in a couple of weeks over -- through 2030, we'll give you an update and compare that to what we said a couple of years ago, so that should be fairly clear in aggregate. I think there are a lot of moving parts right now. That's true. Obviously, we've raised the guide for this year. So our confidence is improving. It's going to be a little bit bumpy probably in the first half of next year. But I think overall, we feel like we've taken the tough actions in Accelera. We are seeing-out some remaining commitments on electrolyzer. We expect that those losses get the converse quarter-to-quarter, but on a clear downward trajectory right now. So that's positive for our underlying performance. And then yes, I think the theme is still we've been through peak investment period. Yes, the odd program, costs could extend through next year, but I think the theme is still going to be primarily the same. And I think we should be able to answer all of those questions pretty well without spoiling what's going to happen in a couple of weeks. Jennifer Rumsey: And I'll just add on the Accelera business, Jamie, I think that team has really done a remarkable job through a rapidly changing landscape for adoption of zero emissions technology and green hydrogen, and we've really been able to focus that business now. The actions we took at the end of the year on the electrolyzer business, as Mark noted, we're still meeting some customer commitments there. And over time, that will continue to ramp down a big action in the first quarter with a Low-pressure Fuel Cell sale and the associated customer commitment to that. So we're really focused now on battery-electric powertrain pacing investments as that market evolves and we've got some good customer wins in that space. And so we'll focus on that part of the Accelera business going forward. Operator: The next question is coming from Steven Fisher of UBS. Steven Fisher: Just wanted to ask about the heavy-duty truck market, as a follow-up. I think you said there's no change to your second half expectation at this point. I'm just curious how you're thinking about that because it seems like you cited an improving market and orders are good. It may just be the answer that you gave David Raso about concerns about supply chain, being able to to meet that, but curious how you're thinking about the potential upside for the second half of the year on the trucks? Jennifer Rumsey: Yes. If you recall back to our original guidance, we kind of projected this year kind of the inverse of last year with weak first half and then improving in the second half. And now what we're seeing is that improvement is coming sooner. So going up and then still, we think that as you get into the second half, that the build rates that we had projected are probably still accurate because of some of those supply constraints, potential supply disruption risk. So we'll certainly do everything we can to meet the demand that comes into us and think it will be a good second half of the year, but probably some -- just constraint in days in the year to the upside. Mark Smith: And without getting too much [indiscernible] a strong Q2 ahead, right? The first half is just -- underpin that the first half better than we anticipated, and that's what's primarily driving the guide. So Q2 should be good. Steven Fisher: Okay. Great. And then I know you said the net tariff impact was pretty unchanged and still immaterial, and you got some supply chain benefits that were part of that. Is it possible to talk about some of the underlying kind of dynamics that netted out there in terms of the different rules and kind of where you saw benefits and where you saw incremental headwinds and how you offset those various things? Mark Smith: Well, if we start doing that by segment, we'll be on all night. What I would -- I'd just take you back to, yes, Power Systems had a net improvement that's not going to persist the company has had -- when I say immaterial very, very small net impact to EBITDA. So we could do a whole lot of talking and come back to a very small dollar impact. I think the main thing is the tariffs are changing. Right, probably the gross impact to Cummins because if you recall last quarter, I tried to simplify as much as possible. We were expecting to get to net neutral and we thought that would take about 0.5% of our EBITDA for the full year just because of recovering a large number for tariffs. That large number is still large, is probably just a little bit less now, 20 to 30 basis points full year impact. So lots of moving parts, but a little bit lower outlook overall. Jennifer Rumsey: I'll just add a little. The change in tariff policy continues to happen. And we continue to be really focused on managing it with our suppliers and our customers. Remember, we predominantly make and source in the U.S. We're making engines in the U.S. for the U.S. market. We're making gen sets in the U.S. for the U.S. market, much of our supply comes from the U.S. And what I will say is as we've come into this year, at least in the truck space, with the 232 tariffs, we're working really closely with the Department of Commerce to make sure they understand how do we meet our mutual goal of encouraging U.S. manufacturing and how the engine offset program is going to work. That has not been finalized yet, but our guidance does reflect our assumptions of what that will look like for our Engine and Components business. And that's kind of a key change to make sure that we're getting the appropriate credit, if you will, for manufacturing and sourcing and work that we're doing in the U.S. Mark Smith: Yes, we've really just been battling to mitigate and recover, right? There's no windfalls to Cummins that we're not trying to make money out of tariffs. We're just trying to collaborate across the supply chain to mitigate the impact and we've done well on that. And yes, there's some little bit of variation quarter-to-quarter in segment, but really pleased with the net impact, better than I would have anticipated from this time last year when when this really became a big deal. Operator: The next question is coming from Tim Thein of Raymond James. Timothy Thein: I just wanted to circle back and Jenn, to an earlier comment about the delayed launch of the B Series engine. Is it fair to assume that through the use of credits or other means that Cummins would be able to defray or potentially offset any potential penalties that may arise in that situation? Jennifer Rumsey: Yes. So as I said, we've been working closely with the EPA as they're kind of working on a revision to the regulation. We've been transparent on what we're planning. We're waiting to see the final rule and the details of that in terms of the exact implications, but we anticipate being able to continue to offer our current product through '27 on the B Series and launch, the new 7-liter at the beginning of '28 and the details of the pricing and all of that, we won't be able to finalize until that [indiscernible] itself is finalized. Timothy Thein: All right. And then maybe just we used to talk a lot about in the Cummins call, just the role of China and there's a pretty big change in terms of the full year growth expectations from what you were thinking earlier from a top line perspective. I'm just curious about the kind of the underlying profit dynamics in China that's -- we've obviously been in a pretty long deflationary cycle in that economy. So I'm just curious just how the underlying kind of pull-through dynamics may exist in for Cummins in China today versus years ago? Jennifer Rumsey: Yes. So just from a market perspective, the big change in China has been this dramatic increase in power generation to support data centers and you, like all of us are reading this strong investment in data centers in the U.S. and China. And we have a strong position in both of those markets with the products that we're offering and really saw an increase over a year ago in China for that data center demand as well as Asia Pacific more broadly. And we've -- our team has done an excellent job of positioning Cummins in the market with very favorable business, but I'll let Mark... Mark Smith: I think the things that have helped us even though top line growth in the traditional truck market and construction equipment has not been as dynamic upwards as it was in a 5 to 10 years ago, the themes that have been helping us are commitment to tighter emissions regulations, that's continued to drive content when we were first talking about new emissions regulations in China. And I think there was some investor skepticism as to what China would follow through on those regulations. And in fact, they have. So that's continued to drive significant content adds. We are very successful at localizing content. That's a big advantage of what we do, and that's a big strength of being such a significant player in China. And then you see in rising displacement, right? In power generation needs that tends to help overall. So I think those combination of factors combined, of course, with our leading position in partnerships that have been there for a long period of time. Those are all helping. So yes, China is definitely more of a tailwind than a headwind right now, and it looks like the enthusiasm for data centers there is very robust, and we are very well positioned to benefit from that or support the customers and what they need. So we're excited about that. Operator: The next question is coming from Rob Wertheimer of Melius Research. Robert Wertheimer: First just on electrification. Obviously, China has had surge maybe for their own reasons. And then I think Tesla has taken a few orders for the semi. Can you just kind of talk about -- I think you touched on it China for a little bit. you talk about what the demand pull from your customers is in North America right now? And what do you think the shape of that market looks like over the next 2 or 3 years? Jennifer Rumsey: Yes. I mean the demand pull in North America, with the change in greenhouse gas regulations has outside of bus, gone to very low levels, very low levels. Interest in diesel remains very high, and we are continuing to sell electric school buses. But really, the demand in trucks is very low and not projected to improve anytime soon. And so that's why we're really focusing on some of the global opportunities we have, being ready for the market here, developing in the school bus markets that we have and monitoring signposts that say there's going to be a shift here. Mark Smith: Yes. And if you track our recent earnings calls, you can see, generally, our demand has been outpacing the market, and not demand, demand for our existing combustion engine products has been outpacing the market. Things can change, but that's what we're seeing right now. Operator: The next question is coming from Tami Zakaria of JPMorgan. Tami Zakaria: A couple of questions. First, could you share what was the price realization in the quarter? Mark Smith: Yes. I mean price/cost was a very modest positive overall, I would say, not significant. Tami Zakaria: Understood. Okay. And Mark, maybe I wanted to get some color. You said 2Q would be great, good in terms of builds -- sorry, I didn't catch that. I apologize. So I think 2Q builds, you're expecting to be better than 1Q. And so sequentially, are we talking about maybe 20%, 30% growth and then another step up in 3Q. So is 3Q sort of the peak of builds and Engine segment margins? Is that how we should be modeling? Mark Smith: Well, I hope the margins keep growing long beyond Q3. But yes, usually, Q4 is not the strongest because of the holiday periods and then you're going into product transitions. It may be strong right through till the end. But you're right, we should see a step-up in Q2 and then remaining strong in Q3. There are just usually less production days by the OEMs because the holiday periods in Q4, and that's why it tends to be a little bit lower. I mean there's many factors that go into our EBITDA margins, but of course, demand is one of the biggest. But certainly, we're expecting the rest of the year to be as good or better than the first quarter. That's the simplest way to put it. Jennifer Rumsey: But yes, as you said, trucks or Engines and Components will step up in Q2, step up again in Q3. And then as Mark said, that year-end dynamic in Q4 seasonally. Mark Smith: Right. We've even been adding a production shift in medium duty in our plant in Rocky Mountain, North Carolina, here to deal with extra demand that just went down the slippery slope and now we're climbing back up again rapidly. So we're excited about that. And so always managing those downturns gives us the platform to really capitalize on the way back up. So overall, looking up, yes, a strong quarter. Operator: The next question is coming from Cole [indiscernible] of Wolfe Research. Unknown Analyst: Implied engine pricing is down year-over-year and sequentially in 1Q. What's driving this in the context of an improving demand backdrop and visibility to higher engine prices next year, when do you think we can start to see engine pricing start to move higher this year? Mark Smith: Well, I think there's a number of things. There's no significant change on a per unit basis to most -- what you've really got is a mix going on between what's being sold in the quarter, whether that's on-highway versus off-Highway, North America versus international, parts are in the revenue numbers, but not in the unit's numbers. So there is no significant decline in prices per unit. There's some variation between content is going up for the 2027 emissions regulations in North America, but the trucks and our understanding is most of that's going to be related to the powertrain going forward, but that's going to be content driven. Unknown Analyst: Okay. And maybe just a follow-up on the EPA '27 rule. If they do decide to introduce noncompliance penalties. Can you confirm that this should impact your competitive position in the Class 8 market as it seems like every OEM has a compliant engine ready at this point? Jennifer Rumsey: Yes, I'm not going to speculate on what the EPA is going to do and how we respond to that. But as I said, we've been having a lot of conversations to make sure they're revisiting the rule-making, they understand our business and that they're developing a fair rule that makes sense for our customers. Operator: Thank you. This brings us to the end of today's time for questions and answers. I would like to turn the floor back over to Mr. Arens for closing comments. Nicholas Arens: Thank you. That concludes our call today. Thank you very much for your continued interest in Cummins. We're excited to continue the conversation at our Analyst Day on May 21, where the leadership team will share how the business has strengthened and what's next, having achieved our 2030 profitability targets early, you should expect updates on our targets, capital deployment and the growth opportunities ahead, including data centers. We look forward to seeing you there. Thank you very much. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the New Jersey Resources Fiscal 2026 Second Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Adam Prior, Director of Investor Relations. Adam, please go ahead. Adam Prior: Thank you. Welcome to New Jersey Resources Fiscal 2026 Second Quarter and First Half Conference Call and Webcast. I'm joined here today by Steve Westhoven, our President and CEO; Roberto Bel, our Senior Vice President and Chief Financial Officer; as well as other members of our senior management team. Certain statements in today's call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations as found on Slide 2. These items can also be found in the forward-looking statements section of yesterday's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures such as Net Financial Earnings or NFE. We believe that NFE, net financial loss, utility gross margin, financial margin, adjusted funds from operations and adjusted debt provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. Our non-GAAP financial measures are discussed more fully in Item 7 of our 10-K. The slides for today's presentation are available on our website and were furnished on our Form 8-K filed yesterday. Steve will start with this quarter's highlights and business unit overview beginning on Slide 5. Roberto will then review our financial results. Then we'll open it up for your questions. With that said, I'll turn the call over to our President and CEO, Steve Westhoven. Please go ahead, Steve. Stephen D. Westhoven: Thanks, Adam. NJR reported excellent second quarter results during one of the most demanding winter periods in recent years. January and February brought sustained freezing temperatures in the Northeast region of the country. New Jersey Natural Gas experienced the highest send-out days in its history in our infrastructure, planning and operations delivered. Our teams provided safe, reliable service to home schools, hospitals and critical services across our communities. Our system operates exactly as designed when customers needed us most. This reflects years of disciplined investment in our infrastructure and a continued focus on safety and reliability. At S&T, Adelphia Gateway had multiple days of operating at maximum capacity and Leaf River had withdrawals that exceeded Winter Storm year of 2021. Finally, our Energy Services team delivered exceptional results. As a result of Energy Services outperformance, we were able to raise our fiscal 2026 NFEPS guidance for the second time this year. Roberto will provide additional details on our financial projections later in the call. With that, I'll turn to New Jersey Natural Gas and walk through how our efforts directly benefited customers on the next slide. Natural Gas remains by far the most cost-effective option for home heating, particularly during periods of extreme cold, affordability and reliability go hand in hand. The same planning and operational discipline that allows us to meet record demand this winter also helps customers manage costs during periods of higher usage. That's why we take a proactive approach to managing gas costs. Each year, we secure a significant portion of winter gas supply well advanced, limiting our customers' exposure to sharp commodity price increases. As we noted last quarter, going into this winter, the projected gas supply requirements at New Jersey Natural Gas were over 87% hedged, securing cost-effective supply to serve our customers. The average hedge price used for our customers was approximately $3.27 per dekatherm per storage in LNG compared with Citygate price, which we avoided that traded in excess of $135 per dekatherm. This winter, New Jersey Natural Gas also delivered meaningful savings to our customers under the state-approved basic gas supply service incentive program. This helps to further manage gas costs during the periods of high usage and elevated commodity prices, which we highlighted on the slide. Under this program, we generated over $93 million in gross customer savings over the winter season. Over the life of the program, we have generated over $1.6 billion in gross customer savings by optimizing our gas supply while also creating value for our shareholders. In parallel, we continue to invest in energy efficiency through our SAVEGREEN program. More than 115,000 customers have taken part in our programs to date with those utilized in our whole home offerings, realizing bill savings of up to 30%. Finally, we provide payment flexibility and offer targeted assistance that helps customers manage usage and bills over time. Turning to Slide 7. The cost advantage of natural gas continues to support steady customer growth across our service territory. That growth reflects a combination of new construction, conversions and targeted infrastructure expansion all driven by customer demand. A recent example is Chester Township in Morris County, which is now formally included in New Jersey Natural Gas' regulated service territory. This reflects our ability to partner with communities and regulators to thoughtfully expand our footprint while continuing to deliver safe, reliable service. Now turning to our Storage and Transportation business on the next slide. As we discussed on our year-end earnings call, we expect net financial earnings from this segment to more than double over the next 2 years and we remain on track to achieve or surpass that goal. Over the next 2 years, our growth is driven by strong recontracting activity at both Philadelphia and Leaf River. These are fixed price fee-based agreements with high-quality credit-weighted counterparties, providing a high degree of predictability in our earnings. Moving to longer-term growth at Leaf River, we continue to make steady progress on our expansion plans. During the first quarter, we filed a FERC application in which we proposed increasing working gas capacities by more than 70% over the next few years. We recently received the environmental accession from FERC which represents another important step in the review process, and the filing is progressing as expected. We've also secured a long-term contract supporting the initial expansion at our existing caverns with the remaining phases to be underpinned by long-term fee-based contracts as well. Overall, this project remains on track with regulatory review proceeding in line with our expectations, and we'll continue to provide updates as we move through the process. Moving to Clean Energy Ventures on Slide 9. During fiscal 2025, CEV increased installed capacity by almost 25%, and this momentum has continued with 33 megawatts of new capacity brought into service this year. We expect to increase installed capacity by an additional 50% through the end of fiscal 2027. And supported by a pipeline of safe harbor investment options in markets with supported policy and strong demand growth. This is diverse project pipeline that grant us the right, but not the obligation to invest is over 1.2 gigawatts, well in excess of our capital deployment targets. Deal flow has been strong in this segment, a result of broad industry relationships and steps taken last year to preserve investment tax credits. CEV is positioned to be increasingly selected with our investment decisions with strong investment returns in the high single to low double-digit unlevered after-tax range. In addition, New Jersey and PJM require incremental electric capacity to meet rising demand. And solar offers the most expedient path to add a new supply to the grid in the near term. CEV stands ready to be part of the solution. The team at CEV is in the early stages of exploring was to leverage our portfolio of operational assets and existing PJM interconnections to add more supply to the grid in the near term. Technologies like linear generators, fuel cells and batteries offer CEV a potential opportunity to optimize existing solar sites to benefit from investment tax credits into the 2030s. Moving to financing. We've historically utilized sale leasebacks as the main mechanism to efficiently monetize the tax attributes of our solar investments. In the future, this may include the use of tax credit transferability as an additional tool. We will continue to evaluate the most economically advantaged structures available to support long-term shareholder value. Finally, last month, we reached an important milestone in CEV, surpassing 500 megawatts of in-service capacity. I want to thank the entire CEV team for their strong execution. With that, I'll turn the call over to Roberto for a financial review, and then I'll return for a few closing remarks. Roberto? Roberto Bel: Thanks, Steve. Turning to Slide 11. The second quarter reflects strong execution across the portfolio and continued momentum into the second half of the year. We delivered solid net financial earnings across both our regulated and nonregulated businesses with continuous outperformance at energy services. As a result, our raising fiscal 2026 guidance for the second time this year, while continuing to fund our capital plan and maintain a strong balance sheet. Moving to a brief walk for the quarter 2. Fiscal 2026 second quarter consolidated net financial earnings was $221.5 million or $2.20 per share, a significant increase over the $17.3 million or $0.38 per share reported in the second quarter of fiscal 2025. Net financial earnings reflect solid performance across the portfolio with a notably higher contribution from energy services. For the year-to-date period, the higher net loss at CEV simply reflects last year's onetime gain resulting from the sale of our residential solar business. Overall, the mix of results restore the value of our diversified model. With that, let's turn to our capital plan on the next slide. We deployed approximately $400 million of capital across our businesses year-to-date. New Jersey Natural Gas represented roughly 2/3 of total catalog spending with investments focused on strengthening core infrastructure, enhancing safety and reliability and supporting continued customer growth. We do not have any change to our estimate for fiscal 2026 and fiscal 2027 and have reassuring our 5-year CapEx outlook of $4.8 billion to $5.2 billion through fiscal 2030. More than 60% of this capital is expected to be invested as a utility with clean energy ventures and Storage and Transportation comprising the balance. Collectively, these investments support our 7% to 9% long-term net growth target while remaining well within our long-term credit parameters, which I'll cover on the next slide. On Slide 14, we highlight the strength of our balance sheet, which continues to improve during periods of strong performance like this winter. We raised our adjusted debt-to-capital to adjust the debt ratio expectations for fiscal 2026 and are projected to remain around 20% for the next 5 years. Energy Services incremental cash flow this quarter enhances our ability to find capital investment, support credit metrics and reinforces that we see no need for block equity in the foreseeable future. In addition, ample liquidity and a well-laddered debt maturity profile led near-term refinancing risk and preserve financial flexibility. And finally, as shown we're generating our indicative guidance range for fiscal 2026. During our prior conference call, we raised our guidance by $0.25 per share, driven by Energy Service outperformance in January 2026. With favorable results as energy services continued into February and March, while increasing our NFEPS guidance by an additional $0.20 to a higher range of $3.48 to $3.62 per share. We are also revising our expected NFEPS contribution by segment. with Energy Services percentage rising as a result of its outperformance and all the other businesses digesting accordingly. New Jersey Natural Gas will represent approximately 60% of the company's NFEPS for fiscal 2026. With that, I'll turn to Steve for concluding remarks on Slide 16. Stephen D. Westhoven: Thanks, Roberto. NJR, once again, delivered exceptional results that are demanding winter period, reinforcing the reliability of our system and the durability of our business model. Our long-term growth continues to be anchored by our regulated utility with clear visibility into capital investment in New Jersey Natural Gas and a continued focus on operating safely and reliably when customers needs us the most. Storage and Transportation remains well positioned with clear earnings visibility in the near term and additional upside over time as capacity expansion opportunities progress. Clean Energy Ventures, our portfolio continues to scale, as expected, supported by a secured development pipeline and disciplined capital deployment. Taken together, execution across our complementary businesses provides momentum into the remainder of the year and reinforces our confidence in the path ahead. Finally, I want to thank our employees across NJR, your dedication, professionalism and commitment, especially through another challenging winter are the foundation for our success. With that, let's open up the line for questions. Operator: [Operator Instructions]. Your first question comes from the line of Gabe Moreen with Mizuho. Dylan Lipner: Hi, everybody. This is Dylan Lipner on for Gabe. Good quarter. Just want to kind of hit back on CEV. If you guys could provide some more color on what you're seeing in the sense of solar project opportunities and outreach from PJM in the state particularly as New Jersey looks to generation gap? Stephen D. Westhoven: Yes. Really, it's been playing out just like we said all along, we see [ harbor ] a number of projects. We've got a 1.2 gigawatt number of projects available to us and the state has been certainly encouraging for development with the capacity shortfalls in PJM, the quickest way to bring new capacity to market is through solar. So yes, we're continuing to make investments, and we've got a number of really attractive choices in that space and we're continuing to develop solar. So all things that go and certainly playing out just like we've said over the past few calls. Dylan Lipner: Got you. And do you guys see this playing out more in the near term or towards the end of the day? Stephen D. Westhoven: I mean we're not changing our CapEx guidance. So we're still continuing to move forward to hit those numbers. So really, the things that I was talking about the pressure on the market developed and bringing more capacity to electric customers in New Jersey is moving forward and certainly an important part of the Shell Administration's goals of trying to lower electric. Operator: [Operator Instructions]. Your next question comes from the line of Travis Miller with Morningstar. Travis Miller: Good morning, everyone. Thank you. I wonder if you can go into a little more on energy services. What's happening fundamentally since February that's changed both your outlook and what you're actually realizing in that business? Stephen D. Westhoven: Are you just referring to the raising guidance rating? Travis Miller: Yes, the raising guidance, yes. Relative to what you talked about in February, obviously, last winter in March and April. But wondering what's going on there, what you're seeing differently? Stephen D. Westhoven: Yes. Really, when we raised guidance back in February, that was previous period. So much of the winter had not transpired to that point. And through February and March, that book continues to increase in value and add value and conclusions of the winter, we're able to close the books and look at those numbers. And certainly the earnings guidance raise that you see here is reflective of that. Energy Services continues to be a business that performs just good things for us long term. Lowers our debt and equity needs by the cash that they are able to bring in and all at a low-risk profile. So we hope it continues going forward.But really, the whole reason for the raise before and now a raise now was really just timing and having winter conclude. Travis Miller: Okay. So the initial one incorporated firm right? And then subsequent here now, this has incorporated additional post per. Is that right? Stephen D. Westhoven: Yes, that's right. Travis Miller: Okay. And then Leaf River, when does that expansion CapEx start to come into the plan? And related to that, at what point do you need some extra financing above and beyond your plan either equity or debt to support the Leaf River expansion? Stephen D. Westhoven: So we won't need any additional financing for Leaf River, but capital expenditures are starting now. We started to make commitments on equipment and arrange for contractors and other things that begin that process of construction. You saw that we received the environmental assessment for FERC not too long ago. So everything is moving along as it should according to schedule. And of course, we've got that all backed by a long-term contract. So we're moving over that project and expect to have that service in fiscal year 2027-'28. Operator: That concludes our question-and-answer session. I will now turn the call back over to Adam Prior for closing remarks. Adam Prior: Thanks so much, and I'd like to thank everybody for joining us this morning. As always, we appreciate your interest and investment in NJR. We'll see many of you in Scottsdale at AGA in May, and have a good rest of your day. Appreciate it. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day and welcome to the Alamo Group, Inc. First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Rizzuti, Executive Vice President of Corporate Development and Investor Relations. Please go ahead. Edward Rizzuti: Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746 and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (855) 669-9658 with the pass code 1646754. Additionally, the call is being webcast on the company's website at www.alamo-group.com and a replay will be available for 60 days. On the line with me today are Robert Hureau, President and Chief Executive Officer; and Agnes Kamps, Executive Vice President and Chief Financial Officer. Management will make some opening remarks and then we will open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachment to our earnings release. Before turning the call over to Robert, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand, supply chain disruptions, labor constraints, competition, weather, seasonality, currency-related issues, geopolitical events and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Robert Hureau. Robert, please go ahead. Robert Hureau: Thank you, Ed. I'd like to thank everyone for joining our first quarter earnings conference call. We appreciate your continued interest in the Alamo Group. Overall, we're pleased with the first quarter financial results. We made good progress with many of our key initiatives. In particular, the Vegetation Management division reported solid improvement in terms of both sales and profitability. I'll turn the call over to Agnes to review our financial results in detail. When she's finished, I'll come back and discuss the performance of each of our divisions and make some remarks regarding our long-term strategic priorities. Agnes? Agnes Kamps: Thank you, Robert. Good morning, everyone. Net sales for the first quarter of 2026 were $417.1 million, an increase of 6.7% compared to the first quarter of 2025. Gross profit for the first quarter of 2026 was $104.8 million compared to $102.8 million for the first quarter of 2025. Gross margin for the first quarter of 2026 was 25.1%, down 118 basis points compared to the first quarter of 2025. The year-over-year decline was primarily driven by Vegetation Management division reflecting lower net sales in our municipal mowing business and certain manufacturing facilities, which are continuing to ramp up in terms of efficient throughput. Importantly, Vegetation Management margins improved meaningfully on a sequential basis as we exited the quarter reflecting operational progress in both facilities. While there's still work to be done, we are encouraged by the traction we are seeing and expect continued improvement as the year progresses. Selling, general and administrative expense or SG&A expense for the first quarter was $57.8 million, up 6.3% from the first quarter of 2025. SG&A expense in the first quarter of 2026 included approximately $3.5 million related to acquisition and integration costs, restructuring costs and the addition of Petersen and Ring-O-Matic acquisitions. SG&A expense, as a percentage of net sales in the first quarter of 2026, was 13.8% compared to 13.9% in the first quarter of 2025. Net interest expense for the first quarter of 2026 was $3.1 million compared to $2 million in the first quarter of 2025, higher year-over-year as a result of Petersen acquisition. The effective income tax rate was 25.3%, in line with our current and longer-term expectations. During the first quarter of 2026, we recognized $2.5 million of acquisition, integration and restructuring expenses. These costs included $0.6 million primarily related to acquisition and integration of Petersen Industries and $1.9 million in restructuring expenses. Approximately $1.6 million of this cost was recorded in SG&A and $0.9 million in cost of sales. All of these amounts are treated as adjustments for certain non-GAAP measures as shown in the press release. Adjusted EBITDA for the first quarter of 2026 was $59.3 million or 14.2% of net sales compared to $58.3 million or 14.9% of net sales in the first quarter of 2025. On a sequential basis, adjusted EBITDA improved significantly from the fourth quarter of 2025 when it totaled $44.8 million or 12% of net sales. Adjusted earnings per share on a fully diluted basis for the first quarter of 2026 were $2.56 compared to $2.70 for the first quarter of 2025 and compared to $1.70 for the fourth quarter of 2025. Now I'll share some comments regarding the results of each of the divisions. Net sales in the Industrial Equipment division for the first quarter of 2026 were $241.7 million, an increase of 6.5% compared to net sales of $227.1 million in the first quarter of 2025. Excluding acquisitions, net sales declined $2.4 million or 1% compared to the first quarter of 2025 largely due to timing of orders in our snow group. Adjusted EBITDA in the Industrial Equipment division for the first quarter of 2026 was $39.7 million or 16.4% of net sales compared to $37.4 million or 16.5% of net sales for the first quarter of 2025. We are pleased with the continued strong performance in this division and particularly with the successful integration of Petersen acquisition. Net sales in Vegetation Management division for the first quarter of 2026 were $175.4 million, an increase of 7% compared to net sales of $163.9 million in the first quarter of 2025. The increase is a result of operational improvement in our facilities and modest support from the agricultural end market offsetting weakness in municipal mowing. Adjusted EBITDA in the Vegetation Management division for the first quarter in 2026 was $19.6 million or 11.2% of net sales compared to $20.8 million or 12.7% of net sales for the first quarter of 2025. Moving on to the balance sheet and cash flow. Cash provided by operating activities for the first quarter of 2026 was negative $23.5 million due to strong sequential growth especially in the Vegetation Management division where the net sales increased by $36.7 million or 26.4% in the first quarter of 2026 compared to the fourth quarter of 2025. The operating cash flow on the last 12-month basis was $139.8 million or 138.2% of net income. Cash used in investing activities for the first quarter of 2026 was $169.8 million and reflects cash used for the acquisition of Petersen Industries in January 2026 and $4.5 million used for capital expenditures. We funded Petersen acquisition with $120 million draw on our revolver and approximately $50 million cash on hand. We're excited about the acquisition of Petersen given its leadership position, attractive margins and commercial synergies. As of March 31, 2026, our gross debt was $290.5 million and we had $195.2 million in cash on the balance sheet resulting in net leverage ratio of less than 1x. Total liquidity remains very strong, positioning the company well to continue pursuing disciplined M&A opportunities. To conclude, I would like to emphasize our commitment to delivering long-term value to our shareholders. We are pleased that our Board has approved a quarterly dividend of $0.34 per share. As we move forward, we remain focused on driving growth and optimization of our operations. Thank you. I'll turn it back over to Robert. Robert Hureau: Thank you, Agnes. Let me start by providing more color on the operating performance for each of our divisions. First, the Industrial Equipment division. As Agnes mentioned, net sales in the Industrial Equipment division increased by about 7% during the quarter. The increase in net sales during the quarter was driven primarily by our acquisitions, including the Petersen acquisition, which closed earlier in this first quarter and Ring-O-Matic acquisition, which closed during the middle of 2025. Net sales in our excavator and vacuum business performed well during the quarter. Net sales in our sweeper and safety business, excluding the effects of the Petersen acquisition, were flattish. And net sales in our snow business declined compared to the prior year. The decline in net sales in the snow business, as we've discussed, was due to the change in our sales strategy and our placing more emphasis on the quality of its earnings. We believe this strategy is and will continue to prove successful. As for profitability, the adjusted EBITDA margins in the Industrial Equipment division in the quarter were good at around 16%. This was roughly level to the adjusted EBITDA margins in the same quarter in the prior year and reflects positive pricing, procurement savings and the inclusion of the Petersen business given its above-average margin profile partially offset by material inflation, including tariffs and various investments we're making in the division to support long-term growth. As for the Petersen business, although it's still early, we're very pleased with the initial financial results, the integration activities, the leadership team and the progress related to both the commercial and operational synergies. We'll keep you posted on the performance of this acquisition as it continues to evolve. The book-to-bill in the Industrial Equipment division for the first quarter of 2026 was around 1x. Net orders for the Industrial Equipment division during the first quarter of 2026 were down 11% compared to the prior year. Net orders in the snow business were robust, up double digit year-over-year again this quarter. This strength reflects the continued end market demand and the strength of our brands, commercial organization and our customer partners. Net orders in the excavation and vacuum business were down. Within the excavation and vacuum business, we're seeing strong order growth in the European markets, which bodes well for our expanded manufacturing facility in France, with softer activity in the U.S. Net orders in our sweeper and safety business, excluding the newly acquired Petersen business, were down but reflect an unusually large multiyear order in the first quarter of 2025 making comparability challenging. Lead times in all the businesses within the Industrial Equipment division are in a good competitive position. Today, our Industrial Equipment division represents 58% of our total net sales. As a reminder, the products in the Industrial Equipment division serve end markets, including public works, utilities, infrastructure and construction. These are very attractive long-cycle markets. As I mentioned during our last call, net sales in this division and its end markets have been very robust, growing in the high teens over the past few years and were fueled in part by various government-driven investments in infrastructure. Looking forward, we expect the rate of growth in several of these end markets to slow in 2026 as the near-term effect of those prior external investments and the overall rate of construction spending slows before normalizing and then returning to steady long-term growth. Now the Vegetation Management division. Net sales in the Vegetation Management division increased 7% compared to the first quarter of 2025. This is the first year-over-year increase in quarterly net sales in the Vegetation Management division in 9 quarters. This is a very positive development and it is another data point indicating certain end markets might be settling. The 7% increase in net sales was due to several factors including the ramping of our production activities in certain key manufacturing facilities, the improvement in underlying demand in certain end markets and favorable pricing partially offset by continued weakness in other end markets. Net sales in our North American ag business were positive reflecting a slightly more constructive end market and ramping manufacturing activity. Net sales in our tree care business were also positive. Performance in the North American portion of this business reflect improved manufacturing efficiencies not necessarily a recovery in the end markets. On the other hand, performance in the European markets reflect improving end market demand and overall strong commercial and operational performance by that team. Net sales in our municipal mowing business were down in the first quarter of 2026 reflecting continued cautiousness we're experiencing with dealers and the related state DOT offices that use our products as they navigate their fiscal budgets. As for profitability, the adjusted EBITDA margins in the Vegetation Management division in the first quarter of 2026 were about 11%. This is up significantly from the second half of 2025 and just shy of the margins in the first quarter of 2025. This is a positive development. The adjusted EBITDA margins of 11% compared to the first quarter of 2025 reflect volume leverage and favorable pricing offset by material inflation including tariffs and various investments we're making to support long-term growth. While there's much more work to be done, we're pleased with the margin progression during the quarter. The book-to-bill in the Vegetation Management division for the first quarter of 2026 was 1x. Net orders for the total division during the first quarter of 2026 were up 5% compared to the prior year. Net orders in the North American and European ag businesses were strong. Net orders in tree care were soft reflecting the state of those end markets including the U.S. housing market, which remains weak. And net orders in municipal mowing were down for the reasons I previously highlighted. Today, our Vegetation Management division represents 42% of our total net sales. As a reminder, the products in the Vegetation Management division serve end markets, including tree care and recycling, agriculture, public works and landscape maintenance. As I mentioned on our last call, net sales in this division and its end markets have declined over the past few years rolling over a period of significant growth that occurred between 2021 and 2023. Looking forward, we expect the rate of decline in the end markets to slow. While we're pleased with the improvement in net sales in the Vegetation Management division during the quarter, we would not necessarily expect the end markets to support this level of year-over-year growth over the balance of the year. I'd now like to share some comments regarding the broad framework of our long-term strategy. As mentioned before, there are 4 pillars of the strategy, which will focus into both resources: first, people and culture; second, commercial excellence; third, operational excellence; and fourth, capital deployment. Within each of these strategic pillars, there exists a series of prioritized initiatives on which our teams are working. We made good progress on all initiatives during the quarter. Today, I'd like to provide an update on our product innovation activities. Over the past 2 calls, we highlighted a few exciting new products. As a reminder, these included: first, our new non-CDL vacuum truck that can be purpose-built as a hydro excavator or a sewer combo cleaner providing greater appeal in the urban and rental applications due to its compact size and the operator not needing to hold a commercial driver's license. This product was engineered for efficient manufacturing and economical international shipping. Interestingly, this product is already sold out in 2026. And second, our next-generation hybrid sweepers that run on diesel, CNG or electric chassis globally and use a proprietary electric sweeping architecture delivering superior efficiency, safety and performance. We have a smaller NiteHawk hybrid air sweeper that's already in commercial production and generating significant customer interest. And we have a larger Schwarze hybrid mechanical sweeper that is smashing performance standards in testing in advance of a commercial launch in the second half of 2026. Operators love these products. Today, I'd like to highlight our new Wide Wing System introduced by our snow business. This innovative snow plow operates an extendable side wing system attached to a tri-drive chassis offering a clearing capacity up to 27 feet, which is roughly 80% greater than standard large plows. This dramatically improved productivity, lowered total cost of ownership and increased operational flexibility is a game changer for state DOTs and road maintenance contractors. In addition, its technology is patent protected in both the United States and Canada demonstrating once again our first-mover advantage. This product is quickly becoming the industry standard in the heavy-duty category and will eventually obsolete the traditional tow plow approach to snow removal. We highlight this and the other products today not necessarily to support or help you forecast what sales might be in coming quarters, but simply to provide color around and share a vision regarding how Alamo Group and all our wonderful brands will revolutionize the vocational truck and land maintenance segments through our engineering expertise, adaptive technologies and entrepreneurial culture over the next 3 to 5 years. Much more to come in future calls. In summary, I'd like to express our thanks and appreciation to all our employees who work tirelessly to produce, sell and develop the very best brands of vocational trucks and mowing and tree care products in the industry. I'd also like to thank our customers and our investors for their trust and support. This concludes our prepared remarks. Operator, please open the lines for questions. Operator: [Operator Instructions] Our first question comes from Chris Moore of CJS Securities. Christopher Moore: Maybe we can start on the Industrial side. So Industrial organic growth declined 1% in Q1. You said book-to-bill was about 1. I guess the question is what are the puts and takes to doing that 5% organic growth for Industrial in '26? Robert Hureau: Yes. I think maybe we can start with net sales expectations and then move into end markets and orders. Overall, Chris, I think as we said in the past when we take a look at the industrial business and we look out over the course of the year, we think the year is likely to be excluding acquisitions kind of a flattish year, anywhere between flattish to up very low single digits and then acquisitions on top of that. The basis in part for that is as we reflect over the last several years as we mentioned a number of times, really extraordinary growth over the past few years; 17%, 18%, 19% year-over-year growth for nearly 8 quarters in a row. We simply think it's going to be really difficult to keep that pace. Although we think the markets are constructive and healthy, that order pattern is going to slow in 2026 and that's going to result in roughly flattish net sales over the course of the year and then of course adding acquisitions on to that. We think the end markets are really constructive long term. This is a place we're going to continue to invest particularly around M&A. We like the end markets. It's just that this year is going to be a little bit of a transition year coming off the robust highs of the prior 2 years, if you will. Christopher Moore: Got it. Very helpful. And maybe just 1 on Vegetation. So it sounds like some of the challenges in the plant consolidation, you could see significant improvement as the quarter ended. Just trying to get a feel for how we should be thinking about Vegetation operating margins for the balance of '26. Robert Hureau: Yes. So the first comment would be or the first response to that would be that we made really good progress during the quarter. We're not where we want to be. The margin profile and the sales performance in the quarter were roughly in line with expectation. We've done well. We've got more work to do to get those margins where we want. But generally speaking, we were fairly pleased with those overall results. With respect to the Vegetation business and as we think about it long term, kind of conversely to what I said about the Industrial division, the Vegetation business has been declining for the last few years having come off those really highs of '21 and '22. We think that rate of decline is going to slow over the course of 2026. That's likely to put us in a place where over the course of 2026, Vegetation end markets are flattish, maybe still down a little bit; but definitely sequentially improving, if you will. Versus where we were a few months ago when we last talked, I would say we're a bit more cautious on Vegetation despite the good quarter, despite the 7% year-over-year growth. And for that, we point to some of the third-party data that's out there certainly with respect to inflation. We know fertilizer cost is rising. Those input costs at farmers and ag are rising. Freight is rising. We've seen retail tractor sales in that 40 to 100 horsepower range decline for the last few months. So while we still think 2026 is a stabilizing year, I would say that we're a bit more cautious today than we were a few months as we look out. Nonetheless, pleased with good performance during the quarter and expect continued margin progression as we move forward over the course of 2026. Christopher Moore: Very helpful. I was going to ask you about inflation and interest rates on Vegetation. You answered it already so I will leave it there. I really appreciate it. Operator: Our next question comes from Mike Shlisky of D.A. Davidson. Michael Shlisky: I want to start off on the snow business. I think your comments, Agnes, were about delayed orders and you've been kind of rolling out a single-family of brand strategy, if you will, or that's what it seems like in the marketplace as Alamo snow in general as opposed to Tenco and Henke separately. Are the delayed orders due to the changeover in strategy or are there budget release or something else? I guess I'm kind of wondering if your comments, Agnes, and your comments, Robert, are related to each other. Robert Hureau: Well, we'll step back and we'll cover a couple of pieces here on snow just to make sure we're aligned on some of the things we've said. The first comment again is just to remind everybody that the year-over-year sales decline in the snow group, if you will, is really a function of us not chasing every last single dollar of sales. In the past we would do so even if that meant outsourcing the upfitting then drives a much lower margin profile and so we've deliberately stopped that. We're being a bit more selective on the orders we take, if you will. The order pattern is good, it's strong, it's growing, it's healthy. Importantly, our lead times are in a good competitive spot. We actually think we're in a much better position in terms of lead times relative to our competitors and so that kind of gives us confidence that this strategy is still the right strategy. And so what you're going to see as a result is top line pressure year-over-year not a tremendous amount, but you're going to see top line pressure, but we'll at the same time see improved profitability over the course of the year. Again, the robust order pattern really speaks to the health of the brand, the innovation, the commercial team, the end market demand. Again the lead times are better positioned we feel than our competition and so we're not concerned about the growing backlog in that business. Does that help, Mike? Michael Shlisky: Yes. I guess I also just wondering about operationally your sales strategy has changed it seems and how that was going? Robert Hureau: Yes, it's working well. I mean I think we're not going to share the level of granularity here in the call. But when you look at the profitability of that business, it's definitively moving in the right direction and we're pretty pleased with that. Agnes Kamps: Mike, maybe if I could add just the reference that I had made about timing of orders. I mentioned that revenue was down due to timing of orders, but that just means when those orders are placed and revenue recognized. The order intake is actually very strong in our snow business. Michael Shlisky: Got it. Outstanding. Just also want to move on to Vegetation quickly as well. Was there -- in the first quarter, I think you mentioned you were getting production ramped up. If I'm wrong, correct me there. But just give us a sense as to the overall dealership inventory levels in that business. Did you increase throughput to meet inventory demand or end user demand in the quarter? Robert Hureau: Yes. I would say that overall, speaking broadly, the inventory in the dealer channel is in a reasonably good spot. In the ag business, it's fairly low. In the tree care space, it's reasonable. In municipal mowing, it's low and in the European markets, it's in a reasonable position. So we feel good about that. We have in the U.S. ag business strong orders. We've had strong orders now for several quarters and that's continuing. The ramping of production in both the U.S. ag business and the tree care business really reflect the ramping of the manufacturing efficiencies which, as you know, we struggled with during the third and fourth quarter, therefore delivering orders that were in backlog, if you will. But at the same time, continuing to refill that backlog with robust order patterns. So the comments we made in the prepared remarks, I would say the end markets are still very -- moving in a very positive manner for U.S. ag and Europe ag, but the sales were driven in part by delivering on those orders that we had from prior quarters. Something similar with the tree care space although I would say that there really isn't a recovery yet in the end markets in the tree care space. We drove positive sales performance in tree care because the team there -- the new team there really drove that the manufacturing productivity improvement and throughput during the quarter and we're pleased with that. That will be very helpful as we continue over the balance of the year. Operator: The next question comes from Mig Dobre of Baird. Joseph Grabowski: It's Joe Grabowski on for Mig this morning. So I wanted to start off asking about Petersen. You've owned it for about 90 days and you talked a little bit about it in your prepared remarks. But maybe just flesh out any early impressions you have and how the integration is proceeding and maybe any updated thoughts on the commercial and operational synergies you see. Robert Hureau: Yes. Overall, really pleased and impressed with the team at Petersen. I think as you may know as we may have mentioned as the founders exited the business, we put in a leader from our group; somebody who's very strong, very familiar with that business. The integration of that leader and the team has been really positive, smooth. The culture is strong. We've been working on the back end of the business, the systems, things of that nature. That has all gone well. Initial impressions now having owned it for a few months as we look at the commercial opportunities and the operational opportunities, I would say 2 thumbs up. We know where there are commercial opportunities meaning dealers particularly on the West Coast of the United States where we have presence, but Petersen doesn't where we think there's an opportunity to roll those products out. As we said, we're making investments certainly on the commercial side to drive those sales to capture that share. So we're really enthusiastic about that. And we also see and have validated the operational synergies, particularly around chassis and what we can do there, leveraging the broader Alamo purchasing power, if you will. So overall, really pleased, no hiccups, should be a good year for us. Joseph Grabowski: All right. That sounds great. And then my last question, you mentioned tariff impacts a couple of times. Obviously tariff levels and calculations have been moving around a lot lately. Any change in your outlook for the impact from tariffs maybe versus where we were last quarter? Robert Hureau: No, not really. A few things maybe just to highlight for folks. On a year-over-year basis of course no tariffs in Q1 of 2025. They're in there in our operating results in Q1 of 2026. So on a year-over-year basis, that would have been a margin headwind. We've also said that in the aggregate on a 12-month basis, tariffs should generally be running somewhere slightly short of 1% of sales, if you will, something in that zip code. We've done the math and we've looked at what the impact of the IEA tariffs rolling off and the new ones coming in. We think generally we're in about the same spot. But by business unit, depending on where the country of manufacturing is, we might see some differences now with the new rules by business unit and between divisions generally. But overall, the overarching theme is we're still in about that same spot at 0.8% or 0.9%, something like that as a percentage of sales. Operator: [Operator Instructions] Our next question comes from Greg Burns of Sidoti & Company. Gregory Burns: So I just wanted to kind of little better understand the positive revenue and order trends you've seen in recent quarters around ag versus your more cautious outlook maybe given some of the macro data points you're seeing. Are you seeing it anywhere in your -- that caution, are you seeing it anywhere in your business yet or is it just looking at the market and assuming maybe there could be a little bit more caution amongst dealers and end customers given what you're seeing in the future? Robert Hureau: Yes. I would say there wasn't a lot of impact in the first quarter that we experienced in our financial results. I would say that we're starting to see higher levels of freight costs from the rise in fuel costs, et cetera. We are looking at a number of third-party data that would suggest things might be a little bit more negative than where we were 2, 3 months ago prior to the war. The other internal data point would be as we speak with customers, those conversations would validate that a slightly more cautious tone at this point is warranted. Now that said, we still see really robust year-over-year order growth in the North American ag business and in the European ag business. Just the tone is changing slow here over the course of the last 30 days or thereabouts and so really just cautious. That's all. Gregory Burns: Okay. When we look at your longer-term consolidated margin targets that you laid out a couple of quarters ago, obviously volume will benefit there and the integration of some of the more recent acquisitions. But can you maybe outline some of the other maybe internal initiatives that you're putting in place to bridge the gap from where you are now in terms of maybe EBITDA margins versus what those -- where your kind of medium-range goals are? Robert Hureau: Yes, definitely. So let me back up and remind everyone of what some of those goals were and how we intend to get there and then, Greg, just point us in the direction where you want to drill down deeper. So we have said that long term through the cycle, we have a number of financial objectives and targets. That is 10% plus growth in terms of sales, 15% adjusted operating margins, 18% plus adjusted EBITDA margins and free cash flow as a percentage of net income of 100%. Today, I would say as we think about where we are and the initiatives that we have over the next several years, those financial targets are still intact. We still have a high degree of confidence of getting there. It does importantly require a recovery in the Vegetation end markets. As we've said, we're starting to see that. Things are moving in the right direction. First quarter was a very positive sign of that. We've also outlined those 4 strategic pillars: culture and engagement, commercial, operational and capital deployment. Within commercial and operational, there are 3 things that we think will help drive 300 basis points or thereabouts improvement in the operating and adjusted EBITDA margins, if you will. And for simplicity's sake, you can say equal weight between the 3. Procurement savings, we've launched a company-wide project. That is well under -- Phase 1 is well underway. In fact the work that's being done not only is it validating what we think is out there, but there appears to be some upside. So the procurement initiative is a big and important one. Secondly, we expect continued investment in our manufacturing, our lean team, our continuous improvement team to drive manufacturing efficiencies, some robotics and automation added on where we need, upgrading technologies within the plants and continued manufacturing footprint optimization. We think long term there's another 100 basis points there. And then the third one that falls within the commercial pillar is around parts and sales. We ran in 2025 somewhere in the neighborhood of 16% of sales. We believe we are underweight. We know we're down on a year from prior years. We think there's good opportunity there. A simple 200 basis point to 300 basis point improvement of that overall mix should drive 100 basis points of margin improvement. That project is just getting started. We're making the investments. We're working with the business units to get that going. That's a longer-term project. But all 3 of those we think are the foundation for driving margin improvement over the next several years. One caution I would put there is on the procurement side. Given the level of inventory, we don't really expect to see much improvement until the latter part of 2026. We need to burn through that inventory, which the business units are doing. So those are some of the drivers that get us to those 15% and 18%. The gap, if you will, if you're doing the math quickly and based on what I said; the gap really is the recovery in the Vegetation business. We ran 11% adjusted EBITDA margins in the quarter. We need to get that 200 basis points or 300 basis points up more, which we think will come as that Vegetation division and its end markets settle and begin to grow again. We think it's very achievable. We're very encouraged with the progress that we're making so far. And perhaps the last thing I would say, all of that is underpinned by creating a wonderful place for the nearly 4,000 employees here at Alamo Group to work and that speaks to the culture and engagement pillar that I alluded to. That was a long-winded answer, sorry about that. But hopefully, it provides the color you're looking for. Gregory Burns: Perfect. That's exactly what I was hoping for. Thank you for that and good luck. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Robert Hureau: Thank you. Again we appreciate your support and interest in the Alamo Group and look forward to speaking with you on our next call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, good day, and welcome to the Leonardo DRS First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the call over to Steve Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead. Stephen Vather: Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and outlook. Today's call is being webcast on the Investor Relations section of the website, where you can also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation other than as may be required by law, to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. With that, I will turn the call over to John. John? John Baylouny: Thank you, Steve, and welcome, everyone. We appreciate you joining us to discuss our first quarter 2026 results. This morning, we're pleased to report strong quarterly results and an excellent start to 2026. The team's steadfast execution is translating into tangible financial outperformance as results clearly demonstrate. Revenue for the first quarter was up 6% year-over-year. Adjusted EBITDA grew 28% year-over-year, allowing us to deliver adjusted diluted EPS of $0.26 a share. Importantly, we're delivering these results while maintaining healthy levels of organic investment in R&D and capital expenditures. This disciplined approach reflects our commitment to meeting both current and future customer needs as we continue to build on our foundation of growth. Let me share a few performance highlights from the quarter. Robust customer demand drove our 17th consecutive book-to-bill of at least 1x revenue, bolstering our funded backlog to new company records and enhancing visibility and growth for the full year. That momentum, coupled with favorable material receipt timing, accelerated revenue growth and enabled outperformance against our expectations in Q1. Increasing volume, favorable program mix and solid operational execution unlocked higher profitability and margin expansion. Overall, the strength delivered in the first quarter gives us confidence to raise our expected growth and profitability for the full year. Our differentiated technology portfolio and exceptional people are foundational to these results. I want to thank the entire team for their dedication and unwavered commitment to our customers, partners and shareholders. The global threat environment remains elevated with limited signs of near-term easing. Against that dynamic backdrop, our focus remains on delivering differentiated technologies that drive overmatch and mission success for our customers. Our customers are operating with a clarity of a full year appropriations for fiscal year '26. Additionally, there are indications that supplemental defense funding enacted through last summer's reconciliation package will be deployed this fiscal year, accelerating the procurement of critical capabilities. The overall funding and budget environment continues to be favorable. Last month, the administration released its fiscal year '27 budget request, proposing $1.5 trillion in total defense spending. As usual, Congress will consider and negotiate the final funding allocations. Importantly, we remain strongly aligned with our customers' spending priorities, including shipbuilding and industrial base resiliency, layered air and missile defense, counter UAS, unmanned systems, space and missile replenishment. Furthermore, the recent tensions in the Middle East, along with ongoing conflict in Ukraine continue to reinforce several key lessons shaping requirements and budgets. First, missiles and one-way drones are now so widespread that attacks that were once anomalous are expected at scale and are proliferating. This reality is fundamentally reshaping requirements and the nature of warfare. Layered air defense and counter UAS are no longer optional. They are now required. Second, adversaries are increasingly targeting large radars and other high-value assets to degrade infrastructure, sensing and defensive capabilities to quickly create exploitable vulnerabilities. This is accelerating the shift towards distributed, resilient and modular sensing and battle management architectures that can be rapidly proliferated, replaced and scaled. We are already seeing this trend in space with the shift from geosynchronous to low earth orbit satellites and is also beginning to manifest in the ground and naval arenas, where unmanned vessels can be utilized as sensor and effector equipped perimeters deployed around manned platforms. Third, volume scalability and effector cost symmetry are essential to counter growing threats. Magazine depth and munition stockpiles are a key factor in operational endurance. We are supporting production ramps across several weapon systems, advancing seeker capabilities for improved sensing on next-generation missile platforms and introducing lower-cost seekers to enable more symmetric countermeasures. Each of these trends represents a fundamental shift and plays directly to DRS' strengths. DRS is a market leader in tactical radars, and our technology continues to deliver significant operational and mission impact. Additionally, our tactical radars continue to see immense global demand, and we are aggressively increasing throughput and production capacity to satisfy that appetite. Recent hostilities have again demonstrated that force protection cannot be confined to fixed sites. It must also be embedded in maneuver units and proliferated at scale. Our force protection solutions span multiple domains. In the quarter, we received a $533 million production contract IDIQ with the Distributed Aperture Infrared Countermeasure System, or DAIRCM for aircraft survivability. DAIRCM combines both missile warning and infrared countermeasures into one system and leverages multiple sensors to provide a 360-degree threat picture, each with a laser director to defeat increasingly capable missiles that threaten aircraft. As recent operations have demonstrated, both rotary and fixed wing platforms without this capability are vulnerable in contested airspace. Across our portfolio, our capabilities are modular and platform agnostic, optimized for size, weight, power and cost to meet customers' specific needs. Let me illustrate that with a few examples. We can deploy power and propulsion technologies on a platform as compact as a medium unmanned surface vessel and scale all the way to the Columbia class submarine. That modularity approach is one we strongly advocate for as the Navy considers future service combatant platforms. Similarly, our infrared sensing capabilities span deployment from attritable Class 1 drones to the most sophisticated ground combat vehicles. And because our technologies are domain agnostic, that same sensing capability can be deployed across ground, air, sea and space. We also stand to benefit as customers accelerate modernization and expand production rates, a tailwind evident throughout our portfolio. We're investing in both research and development and capital against that broader demand. Overall, we view these trends as part of an enduring structural shift, and they align directly with our core strengths. The business continues to perform well, and we remain focused on 3 key strategic priorities: innovation, growth and execution. The diversity and differentiation of our portfolio creates multiple growth avenues. Our increased investment in innovation is evident through the accelerated pace of procurement-ready prototypes that meet the needs of our customers. Those capabilities include next-generation multi-domain counter UAS solutions, key technologies underpinning next-generation command and control architectures and cutting-edge space sensing capabilities, among others. In the quarter, we demonstrated counter UAS mission execution from both unmanned ground and unmanned naval platforms, further validating our platform-agnostic approach where our enabling technologies can be integrated into virtually any platform. We also released THOR, a tactical high-performance embedded computing product. THOR is an open architecture, rugged chassis designed to deliver high-density processing at the tactical edge with native support for AI-enabled operations and multi-sensor data fusion. We remain deeply committed to a truly open architecture approach. giving our customers the flexibility to deploy best-of-breed hardware and software solutions, not locked to a single provider. Our approach is open, flexible, modular and affordable, enabling customers to scale sustainably. Our capabilities extend beyond hardware into integration and software. We apply the same open and modular philosophy to software as we do hardware. A platform level operating system, SAGEcore accelerates data fusion across disparate sensor and effective solutions, converting that data into actionable intelligence for improved and faster decision-making. SAGEcore is a key component of the integrated counter UAS solution being tested with our customers today. Our innovation and growth initiatives are backstopped by customer trust earned through consistent execution. As we add new efforts to the portfolio, including the SDA tracking layer Tranche 3 program, we're applying the same operational rigor that guides execution across the company. Our customers operate in some of the most demanding and consequential environments in the world and earning their trust requires more than great technology. It requires consistent, reliable delivery and partnership. We take that mandate seriously, and our ultimate measure of success is ensuring that our customers have what they need when they need it. We believe that solid execution enables growth and that philosophy and that philosophy is embedded in everything that we do. With that, I'll turn it over to Mike to walk through the financials. Michael Dippold: Thanks, John. John covered the strategic backdrop and why our portfolio remains well positioned. Let me walk through first quarter results by key metric and then discuss our revised 2026 outlook. Overall, our first quarter results were well above the framework we provided on our last call as both revenue and profitability came in stronger than expected. Revenue in the first quarter was $846 million, up 6% year-over-year. Quarterly revenue exceeded expectations on favorable receipt timing and the year-over-year growth came from programs related to tactical radars, infrared sensing and electric power and propulsion. The strong contribution from tactical radars and infrared sensing was evident in the increased ASC segment revenue. In IMS, Q1 revenue growth was more modest as electric power and propulsion strength was offset by a tough compare in force protection program, mostly attributed to timing. Moving to profitability. Adjusted EBITDA was $105 million in the first quarter, representing year-over-year growth of 28%. Adjusted EBITDA margin was 12.4%, reflecting 210 basis points of year-over-year margin expansion. The increased adjusted EBITDA and margin came from strong program execution across the business, favorable mix and operational leverage from higher volume. Shifting to the segment view. In Q1, ASC adjusted EBITDA was up 48% with margin expanding by 290 basis points, reflecting improved execution, better mix and operational leverage. For IMS, adjusted EBITDA growth of 8% outpaced the top line with margin expanding 90 basis points driven by strong program execution, including on the Columbia Class. Turning to the bottom line metrics. First quarter net earnings were $62 million and diluted EPS was $0.23 a share, up 24% and 21%, respectively. Our adjusted net earnings of $69 million and adjusted diluted EPS of $0.26 a share were up 28% and 30%, respectively. The favorable year-over-year compares were driven primarily by strong operating profitability and lower net interest expense. Moving to free cash flow. Free cash flow in the quarter reflected typical seasonality with a modest outflow. However, relative performance improved meaningfully versus last year. Higher profitability, better working capital management and solid program execution drove the improvement. We are only 1 quarter into the year. Our strong start to that year gives us confidence to increase our full year outlook across metrics. We are increasing our range for revenue to $3.9 billion to $3.975 billion, implying strong year-over-year organic revenue growth of 7% to 9%. Our funded backlog continues to provide healthy visibility into growth. That said, the timing and level of material receipts, pace of program execution and the capture of book-to-bill revenue remain as the primary drivers behind the variability in the range. Additionally, we are increasing the range of adjusted EBITDA to between $515 million and $530 million, which also assumes an improved margin expectation over our prior guide. As you know, we do not provide granular guidance on our segments, but to help with your modeling, let me provide some directional color. We continue to expect strong revenue growth from both our segments. Adjusted EBITDA dollar growth is expected across both segments, but the margin improvement over the as-reported 2025 will come from IMS. The stronger operational execution, combined with reduced assumptions for net interest expense is flowing through to our bottom line metrics. We are now projecting adjusted diluted EPS to be in the $1.26 to $1.30 per share range. Our underlying assumptions for tax rate and diluted share count for the year remain unchanged at 18.5% and 269 million, respectively. We are now targeting free cash flow generation at approximately 75% of adjusted net earnings for the year. Despite the lighter capital expenditures in the quarter, we still expect increased capital investment for the balance of the year. The slight revision to our free cash flow conversion for the year is largely driven by increased assumption for working capital investment to fund future growth. Finally, let me give you some color on our current expectations for the second quarter. We expect revenue to trend around $900 million and adjusted EBITDA margin should be comparable to Q1 in the mid-12% range. Additionally, we expect to be modestly free cash flow positive in the quarter, alleviating some of the cash generation load from the second half. Let me turn the call back over to John for closing remarks. John Baylouny: Thanks, Mike. I want to recognize our team for the dedication and mission focus they bring every day in support of our customers and the nation's most important security priorities. Our team understands the stakes. Our nation is at war and our service members are counting on the technology and products that we deliver. That's why we're operating on a wartime footing across the company. Our first quarter performance, along with the progress we've made over the last several years, highlights the quality of our portfolio and validates the strategy we've been executing. We're starting this year from a position of strength, and we intend to build on that momentum, driving meaningful growth in the near term, while continuing to develop the longer horizon opportunities that will shape the next phase of DRS. We're investing in innovation and capacity at the moment when the demand for these capabilities is both urgent and enduring. Looking forward, our priority is clear: provide differentiated next-generation solutions with speed, quality and the ability to scale so we can deliver the consistent performance our customers and shareholders have come to expect. With that, we're happy to take your questions. Operator: [Operator Instructions] And your first question comes from the line of Peter Arment from Baird. Peter Arment: John, Mike, Steve, nice results. John, maybe just to kick things off at a high level. We've gotten a lot of materials out from the budget and the request. Obviously, you mentioned the reconciliation bill and opportunities there. But when you look across kind of some of those details on the fiscal '27 request, anything that jumps out at you, whether the opportunities that you're seeing for DRS and space or force protection or maybe you just want to comment on broadly the portfolio. John Baylouny: Yes. Thanks, Peter. I appreciate the question. First, the budget request represents a very high priority for defense in the United States, the $1.5 trillion. The budget is very clearly rich with opportunity and with urgency, as you probably know. Obviously, Congress will need to weigh in on the overall budget and the budget level. What I want to highlight, though, is the most important element of that budget is really what's inside it. And the prioritization of the elements that are in there really align very nicely with DRS' capabilities. For instance, shipbuilding, air missile defense, counter UAS unmanned, space and missiles are all very prevalent in the budget. So we see a huge alignment between where we are and where that budget is. And each of those elements is growing. It's growing very quickly. Again, we'll have to see what Congress does with the overall funding levels, but we're encouraged by the prioritization that's inside that budget. Peter Arment: Got it. And then just quickly, Mike, as a follow-up, CapEx to start the year started a little light. Any change? Or just how should we think about kind of cadence of CapEx for this year? Michael Dippold: Yes. I would say the light CapEx in Q1, Peter, was attributed to timing. You're going to see that pick up over the subsequent quarters. And as we laid out in our last call, kind of that 5% of sales threshold is where we anticipate being at the end of the year. So no real change, just kind of ramping up as we go across the year. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Alexander Ladd: This is Alex on for Seth today. I wanted to ask kind of on the IMS margin specifically. I mean, it got off to a good start here in Q1 at 14.6%. It comes off of Q4, where if you kind of adjust out that one-timer, it kind of ends up in the high teens range. Curious kind of if you guys could elaborate a little bit more on the recent momentum you've been seeing with IMS profitability. Has there been any sort of unlock with respect to maybe the Columbia class program specifically? And I know you guys talked about the IMS margin expansion kind of expected to drive the overall company's margin expansion for the rest of the year. So curious if you guys could kind of elaborate a little bit more on that. Michael Dippold: Yes, sure. I'll take that, Alex, and thanks for the question. The IMS margins were notably strong, really execution based across the segment. but the largest contributor being Columbia Class. So we're continuing to see strong execution on that program. The team is performing very well, and that continues to be the catalyst for the margin expansion within the segment. But more broadly than that, we did see program level efficiency throughout the segment. We managed costs well, and I think that's what's driving the EBITDA growth. I think you should think about this segment being kind of in this range as we progress throughout the course of the year. I think this is a good kind of revised baseline for the segment. Alexander Ladd: Okay. Great. That's very helpful. And then maybe kind of for this next question, focus a little bit more on ASC. I certainly appreciate you guys are kind of at a record backlog level and the overall company's book-to-bill has been one-time or greater for the past 17 quarters. So if we kind of look at the book-to-bill specific for ASC over the past couple of quarters, it looks like it's dipped below 1x. Kind of curious if you guys can maybe provide a quick update on what you're seeing in the order environment there. Michael Dippold: Yes. I wouldn't be too overly concerned with the kind of the quarterly trend here that you see -- saw last quarter and now this quarter from an ASC perspective. If you kind of zoom out a little bit on the time period, the segment over the last 12 months is right around 1:1. But I think more importantly, as John kind of went through on the call, we continue to see solid demand signals from the customer. Our tactical radars are continuing to see global demand and how they're important in the air defense domain. John mentioned a $500 million DAIRCM IDIQ contract that we haven't started to see order flow come through on. If you couple that with some of the next-gen sensing programs where we have just recently been awarded some IDIQ contracts and also what's happening in space, I think the book-to-bill trend is one that's going to reverse pretty quickly in a favorable manner. Operator: Your next question comes from Andre Madrid from BTIG. Andre Madrid: I wanted to talk a bit more about capital deployment and more specifically about what you guys are seeing on the M&A front. I know you talked last quarter about M&A being mainly focused on closing specific technology gaps. With -- can you maybe talk about the current M&A pipeline with that context? Operator: This is the operator. You have your question repeated for them, please? Andre Madrid: Yes, sure, sure. I was just pointing out like I think M&A focus last quarter was said to be mainly on closing technology gaps. With that in context, I mean, can you maybe talk about what the pipeline currently looks like? John Baylouny: Yes, Andre, thanks for the question. We have a little bit of a gap in your question, but I think we got it. Look, our primary focus for capital deployment is really, as we've talked about before, organic. We're spending more on R&D, more on CapEx, focusing a lot on building capability inside the business. That said, we are still looking for technology gap fulfillment and kind of tuck-ins in the M&A pipeline. That pipeline does span the gamut of capabilities from hardware to software, where we see areas of growing demand and growing market pull, if you will, as well as aligning with gaps and -- and when I talk about gaps, I'm talking about areas where -- for want of a piece of technology, we could provide a solution to the customer. And so those are the kinds of things that we're looking for. Typically, we do a lot of partnerships for fulfilling those kind of gaps, but we look for them in the M&A market as well. Hopefully, that answers your question. Andre Madrid: Yes. Yes. No, that's definitely helpful. And I guess on that point, you mentioned the organic investments you're making, higher IRAD spend. I guess when you look at IRAD, like what is most of your attention going towards? If you can maybe provide like a top 3 kind of areas in which you're looking to invest specifically through the balance of '26? John Baylouny: Well, what I would tell you that those -- our focus -- our investment is definitely focused in areas of highest demand. And when I say highest demand, I'm talking about growth, right? So if you go back to that -- the budget request, you kind of see that shipbuilding, you're seeing missiles, and we provide seekers for missiles, counter UAS, where you're seeing kind of in the $14 billion, $15 billion in the request for counter UAS. Those capabilities are really well aligned. Our investments are really well aligned to those growing demand, space, et cetera. That's where we're putting our money. Operator: And your next question comes from Austin Moeller from Canaccord Genuity. Austin Moeller: So just my first question here. The adjusted EBITDA margin improvement within ASC, is that partially being driven by improvement in germanium availability and supply? Is it being driven by any inflation cost escalators or renegotiations of contracts? Or is it just more favorable mix of tactical radars and DAIRCMs and volume moving through the factory? Michael Dippold: Yes, Austin, thanks for the question. I would say that the margin expansion, first and foremost, is driven by the favorable mix coming out of the tactical radar piece that we had and demand we saw there. Also, we're starting to see the operational leverage materialize as the IRAD wasn't a headwind to margin. So that certainly helped the margin expansion. But the last point of the margin expansion is where you directed the question. We certainly have had a better result on the margin side because of the raw material costing, especially germanium. So that helped the segment outperform the prior year. Austin Moeller: Okay. And I think you guys said in your prepared remarks, you alluded to underwater platforms or counter UAS for underwater platforms. Could you elaborate on that a little bit more? Is that radar? Is that Sonar? Is that like the tactical MHRs? How should we think about that? John Baylouny: Yes, Austin, we were referring to unmanned surface vessels. And what we've done is we've taken our counter UAS mission equipment package, really kind of taking it off a tank and putting it on -- we did unmanned surface vessels and we put it on unmanned ground vehicles. So we believe that the future of warfare is increasingly going to be robotic. So you're going to have unmanned platforms out in front, protecting manned platforms. And so what we've done is we put these on the ground vehicle side, on the surface side, we put it at sea, and we demonstrated this capability. Again, there's a lot of money that the Navy will spend on unmanned surface vessels. The money is in the reconciliation bill from '26. The question is, what are they going to do with the unmanned surface vessels. We believe that there's a market here for counter UAS. That's why we went and did this demonstration as part of our IRAD to put that to see. So I think really an incredible capability. Our team really did a great job here. If you look at some of the LinkedIn post, you can see the pictures of that platform. Operator: Your next question comes from Jon Tanwanteng from CJS Securities. Jonathan Tanwanteng: Really nice quarter and outlook there. I was wondering if you could give us an update on the status of your radar operations in Israel, if you're seeing any disruptions there just from the conflict and if there's any resolution to that as you move forward? John Baylouny: Well, first and foremost, our -- the backlog and the revenue there is rising pretty quickly. The demand for those capabilities is nearly insatiable. We're investing in infrastructure to be able to increase production at a very high rate. The team is doing a great job of doing that. We -- of course, some of our employees have to do some reserve duty and things like that. That hasn't really impacted us in any material way. And I think the team is doing a great job of increasing production. So -- but the demand is there for sure. Jonathan Tanwanteng: Got it. That's good to hear. And then I was also wondering if you could talk about maybe your expectations for this fall and what happens if Congress changes hands. Would you expect to see friction or vulnerability in any specific parts of the budget or overall? And where would you expect to see continued strength? John Baylouny: Yes, it's a great question. Look, I'm not going to kind of predict what happens to the overall to Congress or to the budget. But I would just go back to the point of what's in the budget. I think that the prioritization of capability that we provide is clear in that budget request. No matter what happens on the Hill, no matter what happens with the funding level, first of all, there'll be an increase in budget, whether it goes to $1.5 trillion or not is another question. But there'll be an increase. But the more important point is that the focus of attention and the prioritization in that budget is aligned to DRS and aligned to our capabilities. Operator: And your next question comes from Alexandra Mandery from Truist Securities. Alexandra Eleni Mandery: Nice results. Given the strong defense demand environment across domains, how are you prioritizing resources internally given opportunities across naval, ground, space and in the air? And where do you expect the most growth in 2026 and into 2027? John Baylouny: It's a great question. We're really prioritizing our internal capital based on growth rates, on market growth rates. And so the areas that we're focusing attention, which I mentioned already, shipbuilding and air and missile defense, counter UAS, unmanned space and missiles are all prioritized in our internal efforts. I think we're going to see growth in all of those areas of our plan -- of our portfolio. I wouldn't want to guess as to which one is going to win, but we certainly run a competition here. So we'll see which one wins. Alexandra Eleni Mandery: Great. And can you provide additional color on what drove improved execution and operations in the quarter? Michael Dippold: Yes. I would -- I'll take that. I'll say one of the major elements was what I alluded to earlier on the call, which is we've got a little bit more line of sight for what we've done from a raw material and supply perspective. So the material favorability that we've seen, both from a timing perspective, driving the revenue as well as from an execution perspective helped on the margin side there. The other elements were really more attributed to the actual volume of revenue and the operational leverage driving that additional revenue and gross margin contribution down to the bottom line as the IRAD spend and the G&A spend were much less of a headwind in Q1 of '26 than they were in the prior year. Operator: [Operator Instructions] And your next question comes from Ron Epstein from Bank of America. Alexander Christian Preston: This is Alex Preston on for Ron today. If we could start maybe on shipbuilding, right, output continues to expand. At the same time, outsourcing is expanding as well and the supply base seems to be making, call it, slow and steady progress. Can you just update us maybe on any options or discussions to expand content or second sourcing perhaps in addition to what's already in progress at Charleston? John Baylouny: Yes, sure. Let me take that. First of all, we are working with our customer on second sourcing the steam turbine generators for the submarine industrial base. We're seeing that, look, at the end of the day, the Navy deserves to have at least 2 sources for these capabilities. Right now, they have one. We're starting to see some of the money move out of the reconciliation bill out of OMB to the customer set. Some of that money has made its way to us already. So this is one area of focus for us is to continue growing content to be a steam turbine generator second source. Another area that I'll point you to is the Navy is focused on a battleship. And one of the things that we believe is that whatever the Navy ends up trying to design in a next-generation surface combatant, they need to have an electric propulsion system. That electric propulsion system is really necessary to be able to move power around within the ship. We know that those ships are going to have to fight from a longer distance because the anti-ship missiles are -- have a greater range today. And so having an electric propulsion system allows those ships to provide power to radars for longer-range radars for directed energy weapons for electronic warfare for a longer range. And so we believe that's the architecture of the future. Going one step further than that, we believe that the Navy should be focused on a modular architecture, an architecture that would provide the capability from -- all the way from a battleship down to a cruiser to a destroyer or a frigate or a corvette, even a USV, medium-sized USV. And so when the Navy would design an architecture once and then move forward. So we're investing in these components, power components that would provide that flexibility for the Navy to basically build whatever they want to build once they've designed and tested an architecture. And so we're focused there on providing that capability for the Navy. We think that the Navy is moving in that direction. We're helping them with some ideas here on how to do that. And so we'll -- I think that's another big vector for us, and that's where we're investing some money. Alexander Christian Preston: Got it. And then I know the budget has been brought up a couple of times, but maybe to ask a question from a slightly different angle. I'm curious if you can talk maybe more specifically about your assumptions between the base and reconciliation budgets into '27, right? Some of the largest items in reconciliation seem maybe more relevant to DRS. I'm curious if reconciliation is sort of considered upside for you or in your plans and maybe broadly how that's influencing your planning into '27 and beyond. John Baylouny: It's a great question, Alex. I think that as you look at the bill, a lot of the reconciliation elements are things that are needed right now. And I think that the administration did that purposely. So -- but I would say that if you looked at the base budget, they have the same kind of prioritization that aligns well with DRS' capabilities. Certainly, our capabilities are applicable to the reconciliation portion of the bill, but very well aligned to the base bill as well. I would tell you that our plan does not include -- it's not dependent on a $1.5 trillion budget. We're -- I wouldn't say we're expecting, but this isn't -- we're not dependent on a $1.5 trillion budget. So whatever comes out of the hill on the other side is going to have the same prioritization that, that base bill has, which aligns directly with DRS' capabilities. Operator: There are no further questions at this time. And now I would like to turn the call back over to John Baylouny, Chief Executive Officer, for the closing remarks. Please go ahead. John Baylouny: Well, I want to thank everyone for joining today's call. This quarter underscores the momentum in our business, strong profitability, sustained organic growth and a disciplined approach to investing. We're off to a strong start in 2026. Our execution and visibility support raising our full year outlook. As I discussed earlier, we continue to see a rapid rate of change in the nature of warfare, and we believe the theme of capability proliferation is enduring and it's driving the shift toward distributed, resilient, modular architectures that can be quickly replaced and scaled. DRS has a strategic advantage because we provide enabling technologies and we pair that with deep integration expertise and growing software capabilities. As our funded backlog reaches new company records, we continue to invest in innovation and capacity to execute on the clear multiyear demand in front of us. If you have any further follow-up questions, Steve and the team will be available after the call. And we appreciate your time and continued interest in DRS. We look forward to updating you again next quarter. Thank you. Operator: Ladies and gentlemen, thank you all for joining, and that concludes today's conference call. All participants may now disconnect. Stephen Vather: Thanks for your help today. John Baylouny: Really appreciate it very much. Operator: Thank you very much as well. And I hope everyone will have a good day ahead of them. Stephen Vather: Thank you. Have a good one. Bye. Operator: Thank you. Bye-bye.
Operator: Greetings, and welcome to the Lifetime Group Holdings, Inc. Q1 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Connor Wienberg, Senior Vice President, Treasury and Investor Relations. You may begin. Connor Wienberg: Good morning. Thank you for joining us for the First Quarter 2026 Lifetime Group Holdings Earnings Conference Call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Eric Weaver, Executive Vice President and CFO. During the call, we will make forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from those forward-looking statements made today. There is a comprehensive discussion of risk factors in the company's SEC filings, which you are encouraged to review. The company will also discuss certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, net debt to adjusted EBITDA or what we refer to as net debt leverage ratio and free cash flow. This information, along with the reconciliations to the most directly comparable GAAP measures are included when applicable in the company's earnings release and earnings supplement issued this morning, our 8-K filed with the SEC and on the Investor Relations section of our website. With that, I will turn the call over to Erik. Erik Weaver: Thank you, Connor, and good morning, everyone. We appreciate you joining us for our Q1 business and financial update. Please note that this morning, we posted an earnings supplement on our Investor Relations website which includes additional detail on our membership mix and comparable center revenue. Starting with our first quarter revenue. Total revenue increased 11.7% to $789 million driven by continued strength and performance across our portfolio, including higher dues revenue and strong utilization of our in-center businesses. Comparable center revenue grew 8.6%, slightly above our expectations. As outlined in the earnings supplement, components of our comparable center revenue were as follows: improved membership mix, which contributed 3.5% growth. This includes changes in membership types, the replacement of lower dues memberships with higher dues memberships, which we refer to as churn and continued expansion of clubs into more affluent, higher use markets. Price contributed 3% growth. This includes legacy membership dues increases and changes to the new join price of clubs within the previous 12-month period. And in center businesses contributed 2.3% growth due to continued strength in utilization of our in-center businesses, particularly dynamic personal training. Volume contributed a negative 0.2% to comparable center growth. This was driven by a reduction in qualified medical memberships, which I'll discuss shortly. As expected, comparable center revenue growth continues to move towards our long-term target of 6% to 8%. Average monthly dues were $230, up approximately 10.5% year-over-year, and average revenue per center membership was $930, up 10.2% year-over-year. Growth in average dues was driven primarily by positive membership mix trends and execution of our pricing strategy, as I just described. We ended the quarter with nearly 838,000 center memberships, which reflects 1.4% growth. As we've discussed on past calls, we have been managing our membership mix. Part of our strategy has been to limit certain qualified memberships, specifically those administered by third-party medical insurance providers. We refer to these as qualified medical memberships. These memberships have significantly lower average dues. In Q1 2026, qualified medical memberships represented only 3.4% of our total dues revenue. We expect this to be approximately 3% by the end of the year and continue to represent a smaller proportion of our dues revenue over time. In the first quarter, qualified medical membership declined by approximately 15,000, down 14.9% year-over-year, while all other memberships grew by approximately $27,000, up 3.7% year-over-year in total, resulting in 11.9% growth in total dues revenue. Due to further year-over-year reductions in qualified medical memberships, we expect total center membership growth of 0.5% to 1% in the second quarter, 1% to 1.5% in the third quarter and 2% to 3% in the fourth quarter. However, we expect membership growth, excluding qualified medical memberships of 3.5% to 3.8% in the second quarter and 4% to 5% in both the third and fourth quarter. With this strategy, we expect to deliver revenue growth of 10% to 12% for each quarter and the full year. Moving on to net income. For the quarter, net income was $88 million, an increase of 15.8% year-over-year. First quarter net income included approximately $8 million of net tax affected items excluded from adjusted net income, primarily consisting of share-based compensation. Net income in the prior year benefited from approximately $1 million of net tax affected items, driven primarily by $12.6 million of income tax benefits resulting from a significant exercise of stock options by our Chief Executive Officer, ahead of their 2025 expiration, partially offset by share-based compensation. Adjusted net income, which excludes the tax-affected impact of these items was $96 million, up 27.4% year-over-year. Adjusted EBITDA was $227 million, an increase of 18.3% over the prior year quarter, and our adjusted EBITDA margin improved by 160 basis points to 28.7%. The primary factors for our margin expansion included greater leverage on our center operating costs and corporate G&A, an overperformance of dues revenue and timing of sale leasebacks. Of the 160 basis point margin expansion, approximately 30 basis points relates to employer payroll taxes associated with the CEO's option exercises incurred in Q1 2025. As noted in our earnings release, we updated the midpoint of our full year adjusted EBITDA margin guidance to 28%. This guide includes the impact from a majority of our clubs that are opening in the second half of 2026. And the associated preopening expenses and early operating ramp impact on margin. Net cash provided by operating activities increased to $199 million, approximately 8% higher compared to the prior year quarter. Total capital expenditures were $260 million, up 82% from the prior year, reflecting construction activity in support of our new club openings for 2026 as well as the start of construction on clubs planned for 2027. As of today, we have opened 5 of the 14 clubs scheduled for opening this year. The remaining 9 clubs and the number of the clubs scheduled for 2027 opening are under construction. In April, we closed on sale-leaseback transactions that generated approximately $200 million of sale-leaseback proceeds and expect to complete approximately $400 million for the full year, supporting our ongoing focus on generating annual positive free cash flow. With that, I will now pass the call to Bahram. Bahram? Bahram Akradi: Thanks, Erik. Good morning, everyone, and thank you to our teams across the company for their outstanding work this quarter. As Erik mentioned, we continue to see strong performance across all aspects of our business. We're not seeing any impact from the broader macro environment at this time. Demand has been particularly strong for our new clubs, including 4 clubs we just opened in the last 30 days. They're all performing extremely well. Our real estate pipeline continues to be robust. And we expect to continue growing both revenue and adjusted EBITDA in the low double-digit range. I'm going to keep my prepared remarks very brief as the results of our business speak for itself. But I would like to focus and provide clarity on our positive free cash flow outlook. Last week, we announced the close of $200 million of sale leaseback and raised our full year sale leaseback target to $400 million, delivering positive free cash flow in 2026. We expect to deliver growing positive free cash flow each year going forward, while selling only a portion of our fee-owned real estate assets built in any given year, resulting in an increase to the value of real estate portfolio that could be used at any time as additional liquidity. All of this puts us in a very strong position with very low leverage, robust and growing operating cash flow and a significant portfolio of real estate assets. We will continue to invest in our existing clubs, take advantage of our white space by opening new clubs and thoughtfully return capital to our shareholders. With that, we will open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of John Heinbockel with Guggenheim Partners. John Heinbockel: When we look at what we know about right, it looks like another year of suburban ground-ups very significantly. How do you think about beyond '27? Do you think '28, '29 look like '26 and '27 in very much? And then what's your thought on takeovers. You had done a bunch -- you haven't done many in a while. I don't know if you like that use of capital. What's your thought on that that type of project. Bahram Akradi: Great question, John. Great to hear from you. The market is incredibly exciting ahead. We have some amazing club openings, nonsuburban an incredibly amazing urban markets. We've been dying to get into these with significant-sized clubs. Interestingly, right now, our urban clubs are performing with incredible return on invested capital as we go into those into leases and we put some leasehold improvements, the returns are incredible. They ramp exceptionally well. And the suburban clubs have never been better. Like what we are opening right now anywhere suburban, semi suburban is the best results I have ever seen in for the years. So we're just excited. We're excited about all the sites in the pipeline, whether they're in a super, super hot urban markets where we are going to be part of larger developments, and we've been negotiating on some of these things for 5 years, 6 years, 7 years, I mean they just -- they take longer. So they're closer to the other side. And then we have a -- we still have a growing number of suburban prototype opportunities as the demographic shifting into markets like we just on Monday opened the club in Akatio. It's a second location in Gilbert, Arizona, not only that one, all 4 clubs, incredible results. But there are -- that market 5 years ago, there was nothing there. And right now, it's one of the hottest market. So we have continued to explain, we are not having a concern about an outlook where we're going to run out of opportunities to build urban semi-urban or suburban clubs. I don't -- that is the last thing on our list of concerns here, just amazing opportunities, and they're all performing exceptionally well. The most important thing that I think is just misunderstood about this business is the return on -- the cash-on-cash return doesn't matter which way we do it. When we go into these clubs, into a lease with our leasehold improvement dollars in, we are always north of 30% in aggregate. And when we are doing our clubs and take them to sell leaseback we do that or better. So I just don't -- it doesn't really matter to me. If it doesn't matter to me at all. if it's more suburban or urban or what markets right now, they're all doing exceptionally well. Hopefully, that answers you and others in regards to that. John Heinbockel: Maybe as a follow-up to that, has that changed your -- that success to maybe lack of competition in some respects, has that changed your view on what the whitespace opportunity is whether it's -- I think at points you've said 600 maybe or more than that. In your mind, has that increased? And if so, by how much do you think. Bahram Akradi: Fortunately or unfortunately, I think, is going to be way past your time and my time, John. I don't think we are concerned about running even -- we do 14 clubs a year. I don't see when we're going to get to the point where we have a hard time. And we have been looking at so much opportunity in the United States that, that always makes us ponder taking the time to engage in all the requests to go 10 hours, 20 hours, 30 hours away on an airplane to get to the international demand that there is for our brand. So that's because the amount of opportunity here in North America is enormous. So there is really no concern. I think that we've always said 450, 500, I don't think we see any -- I don't think we see any window that is going to be smaller than that probably is going to continue to grow. Operator: Our next question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel: Congratulations on a very nice quarter. And also very much appreciate the press disclosure on numbers, -- so -- thank you. So the question I have -- the first question, we've talked about this before, but in the release again today, you talked about within the inset of offering a dynamic personal trading has been a driver there. So the question I want to ask is how do you look at the current penetration of DPT -- where is kind of the slack there -- and then with regard to membership and the disclosure we gave today, as you continue to sort of say, upgrade these memberships in these clubs, does that, in a way, give you more opportunity in DPT assuming that these nonqualified members are more likely to uptake that. Bahram Akradi: Let me just first give credits to our entire DPG team from every DPT themselves all the way to our Senior Vice President who runs that. They do an amazing job that the brand of dynamic personal training has been understood. The quality of our trainers are exceptional -- we are continually seeing an increase to the number of productive dynamic resonate trainers. And the execution is exceptional. And we continue to see more opportunities. And you're correct, as we are executing our new brand positioning, which we have been in progress for the last 3, 4 years, positioning Lifetime as an acolyte country club with the exceptional desirability where the price is really not a factor. The kind of customers who are coming to us they're not talking about the price. We're not promoting. We're not advertising. We're not giving a 3 month for them to join. They're just coming in and wanting to be part of the lifetime brand and experience. when those members also engage in in-center businesses way easier than the ones that you pull in of trying to give them a 3 month or 2 months or something like that to get them signed up. Lifetime has never been in a better position, brand. We have never been in a better position, and it's entirely because of the change in the positioning of our company and our brand over the last 4 or 5 years. Erik Weaver: Yes. And if I can just add to that, Brian, Bahram talked about a number of trainers as we look to serve the demand. As we look across the portfolio, they're up -- trainers are up low double digits and new business is actually up even more. So again, that just speaks to the increased demand that Ron is talking about. Brian Nagel: That's very helpful. And then my follow-up question, different topic. But thanks for the commentary on the cash flow dynamics here at '26. But as we look at that CapEx number, either what was closed from Q1 or guidance for '26. I mean, how should we think about that relative to the clubs that you're opening in '26. In other words, me, how much of that growth CapEx that you earmarked, so to say, is actually associated with clubs beyond the current year. Bahram Akradi: Yes. So that's a great question. But we kind of Erik has covered this multiple times. It's roughly half and half, about half of the capital that we are -- we launched this year as a new club growth CapEx, half of it was the clubs are opening in 2026 and half are the clubs that they're starting -- we have already started construction. We bought the land for -- mostly for '27 and some of the '28 even. That's going to be always the case with the way we build our business, these are -- this is what the advantage of lifetime business is the incredible moat that is around this company that also don't think has been appreciated because it takes such a long time to develop these things and it takes stamina and capability. For us, it's a routine process. We are investing in 2026, 2027, 2028 and maybe even some beyond at any given time. The interesting thing that I just really wanted to cover is that we are in an amazing financial position as well as our brand position. We have very, very low leverage significantly below my maximum target of 2x debt to EBITDA. That's flexibility. We have zero balance on our revolver. We're sitting on several hundred million dollars of cash. We build every year more than $400 million, $500 million, $600 million in what I would call fee-owned sellable assets. So if we sell $400 million of that, this is not the portion of the CapEx that goes to leasehold improvements. This goes into the assets we buy the land, we build, we own the fee that it goes into the pool of fee-owned real estate assets that we can sell and add and think of it as additional liquidity. Over the next 4, 5 years, our expectation is that, that number will continue to grow even after -- if you kept building 14 clubs a year constant, if you build that constant, if you build that you're going to do $400 million a year constant. These are just make it simple assumptions for clarity for people. We will be adding to the value of our net sellable assets fee-owned sellable assets,[indiscernible] assets. And we will be adding to our free cash flow from '26 on every year. Our long-range plan shows by roughly about 2030. That free cash flow will be more than $400 million, which basically will give you an option I don't want to sell any of my real estate. That's not really how we're thinking about it. Our assumption is we're going to continue to sell that number, roughly that. And then otherwise, now we have an extra $400 million of free cash flow, and we have added. We're not trading our real estate assets to be cash flow positive. We are adding to that. We're cash flow positive. We're growing that -- and that puts us in a position we can start thinking about all different ways of return of capital to the shareholder. Hopefully, this creates really, really nice clarity for everybody. Operator: Your next question comes from the line of Arpine Kocharyan with UBS. Arpine Kocharyan: So you raised revenue for the full year by about $20 million and EBITDA is going up by about $15 million. That is a very healthy flow through as we think about incremental revenue upside. So maybe if you could go through drivers of that. But more importantly, your underlying members seem to be growing in that 4% to 5% range, which is definitely healthier than what meets the [indiscernible] right, with the qualified down double digit, the blended number. Can you maybe expand a little bit more how you think about member growth in light of revenue optimization versus just chasing volume, sort of your updated views on that? And then I have a very good follow-up. Erik Weaver: Yes, I can take the flow through there. Yes, on the revenue, we're seeing extremely strong performance in our dues line, which, of course, as you know, most of that is going to fall that's going to flow through to the bottom line. And we're also seeing continue to see strong performance in DPT, which, of course, has a little lower margin than Dues does. So that's how kind of that relationship dues and flow-through is coming in. And what you're talking about on the membership mix versus volume is exactly the strategy as we kind of laid out instead of just chasing raw volume, it's all about the membership mix. So that means number of members per membership, that has a higher LTV. So that's a better outcome for us, both from revenue and just strategically. Bahram Akradi: And if I can add to that another way for you guys to think about. We are really prioritizing revenue, quality of that revenue, quality of membership, the ability to do in-center business retention, we prioritize those, and of course, all of that results in the EBITDA pass-through. And that the mix that he's talking about is naturally taking place. It's been a continued quarter-after-quarter result of changing the positioning of the company are -- we were very, very decisive. We wanted to create a brand that the desirability brings the customer who is not price sensitive is experience sensitive. That's taken us 4 or 5 years, and we're still getting some churn through that. We love our older customers as we love the young ones and the middle age ones, all of them. However, as time goes on, we're going to see that some transition from that into more direct memberships also add to this mix shift that he's talking about. At the end, all we are working on is what does a club do in revenue? What is it doing a contribution margin? And how is the retention, what's the experience? And the focus that the team has on executing that is delivering these results. Arpine Kocharyan: That's great. And then just a quick follow-up on buybacks, just really quickly. You have a $500 million of authorization and you just raised sale-leaseback target even before reporting today. Could you just give your broad take on how you think about capital allocation at this point as far as buybacks go, and where the stock is and the potential to be a little bit opportunistic. Bahram Akradi: Well, I think that we are going to definitely use our authorization here as long as we see the stock below a fair value to us, we're going to be able to take advantage of that opportunity and buy some shares back. Yes. Ultimately, as I mentioned, as the cash flow grows, we're going to be analyzing with our Board and capital allocation committee on how to think about different ways to deliver return on capital to the shareholders. But right now, we have this vehicle in place, and we're definitely going to be looking at the share prices and at the right times, we're going to take the opportunity to buy some of the shares back. Operator: Your next question comes from the line of Randy Konik with Jefferies LLC. Randal Konik: Look, I think the theme I'm getting from this is appreciating the continuous growth of quality of the product, the experience and the membership. So I guess for Bram, to you first, kind of maybe give us some perspective on some of the product services and amenities you're thinking about over the next few years and some of the ones in existing that are existing today that you can see adding more penetration into the centers and for your members? And then I guess then for Erik, have you kind of looked at revenue per membership into -- in different quintiles -- and are there any kind of interesting dynamics between what you see in the first quintile of revenue per member ship versus the fifth? And how you can try to grow that fit quintile or fourth quintile to get it closer in spread to what you're seeing with the first quintile of spending in their highest-performing membership kind of members. Can you give us some perspective there, guys? Bahram Akradi: Let me start by giving you. We have CTR in the rollout right now. We are only in 30, 40, 50 locations, targeting to about executions, maybe we can beat that by end of the year. We're working as fast as we can to roll those programs out we are launching hybrid XT, that's just at the infancy got tons of potential. Dynamic stretch has got significant opportunity going forward. We are working on lifetime health and wellness hub, which basically aggregates the opportunity for people to come to the most qualified registered dietitians in the country to basically get direction about where they go in a world where people are advertising all kinds of things, and some are fantastic, and some are snake oil. So I think we can be -- the authority to help people navigate through all that information. And then, of course, channel number there is Tamura to lifetime health LTH products, our personal trainers, dynamic stretch, CTR classes, whatever. So I -- we got so much that is into their thinking and strategy and rollout. Some are further along the way. They've been proven. It's just a more rapid rollout and some are at the earlier stage where we're still fine-tuning the model before we put into a heavy rollout plan. We are busy, I don't -- I mean we're not running out of ideas or concepts on how to improve what we run. And I have said this repeatedly, Adaptation is a necessity of survival, Lifetime has demonstrated over the last 35 years, how we adapt. This team is poised to adapt as fast as necessary to deliver the best experiences for the customer that is relevant to the customer in today's world. In 5 years, these customers are going to want different things. I can't tell you exactly what that is. All I can tell you is whatever it is, we will have adapted and delivered it to them as they desire. Erik Weaver: Yes. And then on your second part of your question there, I would say exactly what Rob said, we're always doing things to add value to the memberships at all levels in all quintiles. But I guess I would just point you to what we're doing around our qualified medical because that is the biggest opportunity. When you look at our ability to -- because our clubs are busy, right? So where can we make the most impact to improve average dues and increase in center utilization, it's exactly what we're doing with those qualified medical. Operator: Your next question comes from the line of Chris Woronka with Deutsche Bank. Chris Woronka: So I also appreciate the expanded disclosure, especially around those qualified memberships, I think, super helpful. Maybe just go one step further a little bit. I mean, when you guys are evaluating a new club and you're looking at different locations, you're underwriting, I mean, how important is a metric like membership per club that you could put in there versus what kind of does do you think you can get? What kind of ancillary do you think you could get, what kind of engagement you get? Just trying to kind of put a button on the idea that members per club is the most important metric to look at for you guys on development because I don't think that it is, but if you guys would like to opine on that, that would be terrific. Bahram Akradi: It isn't. This is where I want to be clear, that has been the, I think, the gap between what we keep trying to explain to the Street and is being misunderstood -- what I care about is we spend x amount of dollars on a facility. We want a rate of return on that. That demands we want to be looking for a certain amount of revenue and a contribution margin out of that. The -- when I launched this company, I have said this 100 times, we've envisioned comprehensive delivery of all experiences under one roof. And we sold it way too cheap. That caused actually a contrary outcome to what was -- what I wanted. I wanted this exceptional experience in the clubs. We couldn't get it with 11,500 memberships in 100,000 square feet club. We just couldn't get it. it wasn't there. So mistake was -- it was too cheap and the vision of delivering exceptional quality just would not work with that much volume. Today, every time we do a business plan in the last 2, 3, 4 years, and this is why I want to avoid giving you guys a number. We thought we do these clubs for like 5,000 members instead of 10,000 and then what it really boils down to is that the number is actually a lower number that brings in fetches a higher revenue and higher margin and better experience. So what's happening is we are -- the way we have our position, the demand for our business and the amount of people in a wait list, we generally end up launching a club at a higher price than we had initially in the business plan. Therefore, it's just an easy mathematics. It's fewer memberships, but we end up with better revenue, better margin, better results, better experience. So we are curating 100% of that experience. And that is the magic to winning to make sure the experience remains wow. And as long as we deliver that, the numbers will work. And so we don't want to emphasize membership. I want to emphasize revenue and EBITDA and our margin pass-through. And I couldn't be more pleased with what our team is executing with that results speak for themselves. Chris Woronka: Yes. Thanks, Bahram. That's a very, very helpful answer, I think, hopefully, for folks here. As a quick follow-up, I know at one point, there has been talk on the app or monetization, things like advertising, other forms of revenue generation. Maybe can you spend just a minute on where some of those initiatives are? Is that still on the table? Bahram Akradi: Not in the near term. The reality of AI and the way AI is advancing in such a fast pace -- our focus has been delivering, again, the best. Right now, there are features of our lacy that I think if you experienced it, you will be impressed in terms of like a workout generator, answering any questions regarding health and wellness. It's way more in depth -- we are continually executing the same strategy to deliver something exceptional on that. But our main focus is delivering the best experience inside of our clubs, we want Lacy to be that navigator for the customer to help them find what they want to find. One of the challenges for our company is that we offer so many things. And often, if you are doing one service, it's easy to create an app that gives you the great experience for that one business. We're delivering 20, 30 different businesses inside of umbrella of lifetime. It becomes way more complicated even if the components are good for people to even find a navigation. So Lacy is lifetime AI companion. It's your AI companion to help your experience get better. And right now, we are singularly focused on making sure that experience. The subscribers are growing still at 100,000 rough and tough additional subscribers month. At some point, we will focus on how naturally start thinking about benefiting from that. But right now, we're getting more members coming through from our 3 million, 4 million people on that list it's easier for them to join the club, and we're seeing that starting to kind of get ramped up. So we will find the wins as long as we stay focused on delivering something exceptional. Operator: Your next question comes from the line of Stephen Grambling with Morgan Stanley. Stephen Grambling: I guess in order to not necessarily surprise investors, I think everyone appreciates the focus on ROIC and your confidence in the new clubs hitting very healthy ROIC. But as we think about some of the KPIs perhaps over this year, thinking through whether it's members per club in center spend, margins as they ramp, any reason to believe that these will be different than what we've seen historically or relative to what's in the pipeline? Bahram Akradi: Yes. I mean, from a margin perspective, no, I mean you take the revenue per membership and the growth that we've seen there. We expect that to continue. That's obviously an important KPI for us. So no, nothing that I could point you to, to suggest that we're going to have anything significantly different from kind of what we've been showing with our existing KPIs. Erik Weaver: I think our execution right now, as I mentioned, is best ever is like the term we hear when we're going through our analytics best results ever best results ever across so many aspects of our business -- we're just -- our opportunity is to look at individual clubs to see within a particular club what is the embedded additional opportunity. But systematically, if you look at the entire system, results are fantastic. And I think we don't have a reason to believe they're going to do anything is going to deteriorate any shape or form. Bahram Akradi: No. But I do think it's worth reemphasizing. We already covered this when you talk about a number of memberships per club. Ron covered it, but I think it's worth emphasizing as we open these new clubs, we're doing so with fewer memberships to reach our desired call it, utilization. So when you look at that metric today, it's roughly 4,400 per club. The trend that we're seeing is, again, intentional as part of the clubs that we're opening at the number of memberships we're planning. Operator: Your next question comes from the line of Anthony Bonadio with Wells Fargo. Anthony Bonadio: So I just wanted to ask about EBITDA margin. It looks like another all-time high there in Q1. Can you just talk about what drove the performance you saw there and I know you've historically pushed... Bahram Akradi: Erik drove that performance. Erik. Erik Weaver: Well, I can speak to it. I didn't drive it. Yes. I mean so it was a good quarter. Like we mentioned, I mean, we saw -- obviously, I talked about does, and that was a portion of the flow-through center ops margin, as you saw, improved as well. I mean that was just really great execution from the business in expenses across the board, really. And we -- the timing of sale leasebacks and the overall rent that we executed later in Q2 all of that really combined, whether it was G&A or center ops, we got leverage and scale. Bahram Akradi: Yes. I want to add. I think actually, I want to give credit to our team starting the year with all the uncertainties in the macro, our focus was making sure we execute the customer experience at the highest level however, don't waste any dollars anywhere that doesn't need to be wasted. And so the team has executed exceptionally well. And I think the -- I always try to caution -- the Street is not asking for more, more and more because this is the Doomsday for public service public companies on a long-term basis is that you keep trying to squeeze more and you cannot pinch the customers' experience or the team members' experience. We are in a phenomenal place, we are in a great place. We have some additional clubs opening significantly more. We've got 9 more clubs to open. There are some preopening expenses with those, albeit the clubs are performing so well, many of them starting did a contribution margin positive in the second month. But still, from an EBITDA standpoint, they can have some margin compression. But for the most part, again, I cannot see anything that's ever executed in better across the lifetime. So I'm proud of our team, but don't expect more. Anthony Bonadio: Got it. That's helpful. And then maybe just on the consumer, can you just talk a little bit more about the demand side of the equation? It seems like in-center spend growth remained strong in Q1, reads on the high income consumer remained good. But there's also been a lot of headline fatigue out there -- just any thoughts on whether appetite to spend has changed at all in that cohort would be helpful. Bahram Akradi: Absolutely zero. We're not seeing any any negative pressure. I have expected it. I have thought this macro cannot deliver this. But right now, we haven't seen -- as of right this second, we haven't seen anything. It is the customer, the demand is strong for the clubs. Again, we're doing this without hardly do any marketing spend. It's just naturally coming to us. And the in centers are doing great, and we're super weight lists are substantial for our new clubs. And so we're just basically navigating through giving people the desired service or expectation, and it's just -- it's all working extremely well. Operator: Your next question comes from the line of Eric Des Lauriers with Craig Hallum. Eric Des Lauriers: Congrats on the very strong results here. You've already touched on it, but just wondering if you could expand on that improving membership mix. How much runway do you have here before we sort of reach kind of a new normal balance of members here? And just kind of how long do you expect this to be a tailwind to your overall dues here? Bahram Akradi: I think that as you look at our business, we still have roughly, I want to say, 2/3 of our membership that they're paying somewhere below the rack rate. And we've gone through this. And we expect to see some pass-through as some of the older legacy paying customers drop out because they move or something happens and we get a new customer replacing that. No additional membership count, but we get more dues from that. As of right now, we don't have any immediate change in the outlook. I think it's going to continue. But eventually, it will slow down. But right now, it is still. Erik Weaver: Yes. The thing I would point out is we highlighted in our Q3 supplement, where we really began deemphasizing the qualified medicals, right? And so that's why we kind of gave that guidance over the next couple of quarters to kind of help as we see Q2, Q3 and even into Q4. But as we get into -- we're opening up the larger -- opening up the clubs in -- and as you look at those qualified medical as a proportion of our total membership mix, that's going to continue to become smaller and smaller. So I think when you talk about it, when is it going to be maybe a little more pronounced, again, I'd take you back to the guidance we gave for Q2, Q3. Eric Des Lauriers: Awesome. That's very helpful. And then overall, just looking at the sort of, I guess, macro category horizon here. It's great to hear earlier comments that you even have 14 clubs per year, the saturation point is basically not even on the horizon. You've got an extremely long runway. How do you view the competitive dynamics in the space between sort of overall growing pie, increased demand for premium fitness, third places, et cetera. And then your ability to sort of increase your size of the pie. I mean seems like there's great tailwinds on both sides. I'm just sort of wondering how you view this kind of longer-term outlook here and your positioning within that? Bahram Akradi: It's a great question. I don't and I've kind of often said this. If I took off on my own and I brought some of the best people with me, we couldn't put a dent into a lifetime. You're looking at a couple of hundred locations that they are open this year. We have another 50 to 75 AD facilities in the pipeline. These things take several years of gestation and massive amount of dollars, an incredible amount of detail to execute the complexity. The competition for a to lifetime will not be a head on operator that can execute the complexity, the scale, the size, and the brand recognition of lifetime, you will have to compete with somebody opening sort of a recovery space. Somebody opening up a stretch play, somebody doing a yoga place. I mean -- or some combination, we really don't feel like any concerned that there is going to be somebody taking on this model, good luck if they want to try it. But we're just kind of executing, flowing through the opportunities we have. It's not a real concern. I just don't think it's real. Operator: The next question is coming from the line of Logan Reich with RBC Capital Markets. Logan Reich: Congrats on the solid results I want to ask first just on how visits per member or anything you can share on retention was trending in the quarter? I know it's been an area of strength for you guys. Just curious if you can provide an update there. Bahram Akradi: Yes. The visits for membership is up. Retention is absolutely great. I mean, it's just -- the more they use the club, the less they are likely to want to drop out -- so all those metrics are working in our favor right now. Logan Reich: Got you. That's helpful. And then I wanted to ask on the on hold memberships. That number actually declined on a year-over-year basis for the first time I think it was 23%. Just any color there on what that -- what drove that decline on a year-over-year basis? Bahram Akradi: Yes. I mean there's really nothing there. I mean that number is -- I think it went down maybe 3,000 or something in that range. But from time to time, you're going to see that fluctuate as people come on or off hold, but there's nothing in there to point you to a trend or anything like that. Operator: Our next question is coming from the line of Owen Rickert with Northland Capital Markets. Owen Rickert: Congrats on another pretty unbelievable quarter. Just quickly for me. Can you guys talk about the vision behind this new lifetime innovation hub and how you see it influencing future member experiences, potential ancillary revenue opportunities and maybe the broader long-term growth strategy there? Bahram Akradi: Well, look, if you don't have innovation hub, you need to go home. You need to be thinking about how to innovate and how to -- and our company has all been directed to be thinking about how we can navigate through what is the new ways we can serve the customer, whether the new products, new services, that people are sort of seeking and then how do we create an engine to deliver what's being asked for. But is part of the things we're talking about, the delivering -- coming up with rolling it out and executing that. And the dynamic stretch which happened a little before that, now hybrid XT. So we're constantly working on doing those things. And then the next piece is, like I told you, is that building this lifetime health and wellness hub and try to create a whole sort of a robust registered dietitian center that basically can navigate people through all different aspects of our business. So we're working on all different types of things at all times. Now we still got tons of runway in thinking about what else we need to add to the clubs, how do we transform the clubs. So people continue to come in as the place they want to stay in, whether for entertainment to work, to eat to meet other people or exercise and get their hormone replacement done. I mean all of those things are endless opportunities for us to innovate through.; Owen Rickert: Awesome. Got it. And then secondly for me, just on MIORA maybe can you just tell us how many locations you're currently in? And is the long-term vision there still about 1 to 3 per region. Bahram Akradi: Look, I think with that, what we are doing right now is we're in massive, massive sort of period of making sure we fine-tune the customer journey to an exceptional experience. My belief in this space is that it is going to be a main sort of the main street in terms of what people are going to want to engage in and then once they get on it, they'll probably -- there's really no way to get away from it. They want -- they would want to do that. It's being done in mom-and-pop clinics across the country. So it's a huge opportunity for us. And for a clinic of a couple of providers, one lifetime location has all the customers they would need and more. So can we have a more in just about every club eventually? The answer is yes, just like we have personal training in every club. But we just got -- we got a crawl walk run. We need to sort of kind of do that with the complexity of the medical aspects of it, the HIPAA compliance and all the rules and regulations around it, it's a little more complex than rolling out the dynamic threat or CTR. So we got to make sure we execute that exceptionally well, but I am an incredible believer in the potential of MIORA. And myself and our senior VP that is in charge of that with me, we're all over it in terms of making sure we have a model that we want to roll out much faster in the next 12 to 24 months. We're working on it, and I'm really excited about it. Operator: Our next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Just looking at Slide 5 in the supplement, kind of conceptually in terms of the building blocks for the comp, when I think about maybe 2 or 3 years out, -- is it the right way to think about it that the membership volume piece kind of reverses as a headwind maybe related to qualified memberships kind of no longer churning off but membership mix might come down a bit? And then just in terms of membership price and in-center business, any thoughts around kind of those building blocks over the next couple of years, too? Bahram Akradi: Yes. I'll take the price 1 first. I mean we've kind of -- we've given our long-term algorithm and we've kind of stated in there as we look at the pricing component of that roughly 2% to 3%. So I think that's a very sustainable part of this model. And yes, you're right, like as we work through kind of some of these membership dynamics with qualified, right, the -- those things kind of work themselves out. And in your matures, you're basically, call it, flattish, and you're getting your growth from your ramping in your new clubs. So I think that's a directionally fair expectation. Noah Zatzkin: Got it. Really helpful. And then maybe just one on GLP-1s. I wanted to get any updated thoughts there in terms of that being a tailwind to the industry. Anything you guys are seeing around maybe benefit to new adds as well as retention. Any thoughts there would be helpful. Bahram Akradi: Me, I'm going to take this question for you. It is going to be a home run win for all exercise facilities across the country. It is an absolute no-brainer science it will make people lose weight, so they're going to be happy and celebrating there. It's going to kill their muscle mass, which then is going to kill their bone density, which is going to be an absolute issue for them. It will be an epidemic if it's not handled correctly. I believe that the doctors, the pharmaceuticals will continue to improve their education to people that they need to do this along with weight-bearing exercise. So I don't believe the net outcome. I can say from the 40 years of experience that a lot of times, people have not come to the clubs to exercise because they feel self-conscious, they feel like they're overweight. They don't want to go in because they feel like they're fat. I think actually now, they're going to be able to feel like, "Oh, God, I'm comfortable going in but they absolutely and positively need to combine exercise with GLP. We're going to -- in Miura, we're going to -- basically, we are telling people come in and get your GLP here. But what we're doing is -- if you look at the history of what we -- if you look at the results of what we are delivering with people who are coming to us through Morato do GLP, they actually are not losing muscle mass. Because we're combining that with the proper regiment of nutrition exercise, that is going to help every health club operator long term. It's a zero concern. It's a wrong bet, thinking that GLP is going to hurt the Health Club business. Operator: Your last question comes from the line of John Baumgartner with Mizuho Securities. John Baumgartner: Maybe first off, Erik, I wanted to come back to your outlook for membership growth. Placing the qualified membership to the side -- can you speak to the mix from that bucket of all other memberships? I realize there's some noise from the mix of club locations, more locations in urban areas now. But -- what are you seeing broadly in terms of families versus singles and the influence of programs like Pickleball on drive membership growth? Bahram Akradi: Yes. I mean, as we look across directionally in our mix, when we take the number of couples and families as a percent of our mix, that continues to increase. So when we're talking about improved mix, we're talking about more members per membership. That trend continues. We're talking about our mix of clubs that are opening in locations that have higher average dues. So again, those trends are all part of kind of that mix story, and those are continuing. John Baumgartner: Okay. And then, Bahram, in terms of your programming, exiting COVID, I think a lot of the programming investments seem to focus on enhancing your offerings of classes that we're they were available outside of lifetime in the specialty boutique segment and doing it better and giving members more for their money. But now I look at CTR, hybrid XT, which seem more specific or exclusive to lifetime and your ecosystem that you're building. And I'm curious the extent to which this is maybe a new angle in your strategy to I don't know, maybe lead more and more visibly than maybe you have in the past with classes that are different than what's available outside of lifetime and that you can leverage to drive new members going forward? Bahram Akradi: Yes. Look, we are navigating through a couple of hundred clubs, new and brand new coming in and existing clubs -- and then we work on specialization efficiency. We look at the spaces that we have. We look at how they're being used, the services the customer -- the services the customers are receiving and so it takes a tremendous amount of thought process on how to change the space from one program to the other. And then really the longevity of the program that is coming versus the longevity a program that maybe is being deemphasized. So it's a complicated equation that we are working on, but there is tremendous opportunity for us to think about these programs and how we can accelerate our growth through different channels. I'm not going to get into too much detail on that. But right now, I am most excited about how well we are rolling out these different programs and how well they're being sort of accepted or covered by the members. Altogether, what we're looking for is maximizing the visits in a club and a spread throughout the day as much as possible throughout the week, so that the club gets a steady utilization but doesn't create sort of a discomfort for too much traffic at one given time. It's -- it's quite a bit. Hopefully, I answered your question, but we're not out of ideas in terms of how to kind of roll out new programs is navigating through all that we are delivering at 1 given time in a club. Does that help, John? Operator: John is no longer in queue, sir. Bahram Akradi: I guess it did. Operator: There are no further questions at this time. I'll turn it back to management for closing remarks. Bahram Akradi: Thank you, operator, and thank you, everyone, for joining us this morning. We look forward to having you on the next quarter call. Operator: This concludes today's conference. You may disconnect your lines. Thank you for your participation.
Operator: Good morning, and welcome to the Vornado Realty Trust First Quarter 2026 Earnings Call. My name is Rocco, and I will be your operator for today's call. This call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporation Counsel. Please go ahead. Steven Borenstein: Welcome to Vornado Realty Trust First Quarter Earnings Call. Yesterday afternoon, we issued our first quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com, under the Investor Relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q and financial supplement. Please be aware that statements made during this call may be forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, for more information regarding these risks and uncertainties. The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening remarks are Steven Roth, Chairman and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steven Roth. Steven Roth: Thank you, Steve, and good morning, everyone. Business at Vornado continues to be excellent, and it's getting better and better. We are riding the wave of strengthening more and lasting landlords market. And New York is by far and away the strongest real estate market in the country. Michael will get into the details shortly. But today, I have different fish to fry, and I will ask the first question. question. What do you make of the spat between Mayor Mamdani and Ken Griffin and how will it affect your 350 Park Avenue development? Answer, let me begin by saying that I do not and cannot speak for Ken but I do unambiguously stand with him. And notwithstanding the mistakes and bad form of the recent video that went viral, we are pulling for Mayor Mamdani to succeed. Let me establish my credentials. Vornado was a New York company and I am in New Yorker, born in Brooklyn and attended [indiscernible] public high school in the Bronx. Both Vornado and I are lucky to be New Yorkers. My daughter and three granddaughters live in the Bronx. And my son and his family have in Brooklyn. My wife of 56 years, and I lived and worked in Manhattan. We follow the rules, and we pay our fair share. Vornado will pay $560 million in real estate taxes this year, and I'm pretty sure that's in the top 3. And that doesn't begin to count the personal income taxes that I and our Vornado population paid to the city and state of the York. We work our asses off, and we are not [indiscernible]. We are very proud of our lifetime of achievements. We are the company that is investing billions to transform the PENN district. New York is a union town, and we are a union shop, employing thousands of hard-working New Yorkers in our buildings and on our construction sites. The ugly unnecessary video stunt is personal to Ken and sort of personal to me too. You see Vornado and I as the developers of both 220 Central Park South Residential building and the 350 Park Avenue Citadel Tower. We are all shocked that are young Mayor would pull this stunt in front of Ken's home and single him out for ridicule. This was both irresponsible and dangerous. As I said, Vornado was the owner of the 65-year-old building on the Park Avenue [indiscernible] front that will be raised to make way for the Citadel New York [indiscernible] tower, which will employ thousands further cement in New York at the financial capital of the world, that pay significant taxes and on and on. This building is being designed by the same enforcer and partner architectural team that designed JPMorgan Chase's new headquarters down the block. This is now the if-we-move-forward project. Now a project of this scale takes years, and we have already worked with two prior city administrations, both of whom have recognized the benefits and have been enthusiastically welcoming and supporting as evidenced by the rare unanimous [ ULIP ] approval for this project. Demolition began literally days ago, and we at Vornado are ready to go. I must say that I consider the phrase "tax the rich" was spit out with anger and intent by politicians, both here and across the country to be just as hateful at some discussing racial slurs and even the phrase "from the river to the sea". What these [indiscernible] calls seem to be saying is that the rich are evil or the enemy or the targets or maybe even just suckers. But the rich home the politicians are targeting, started [indiscernible] on the epitome of the American dream. They are our largest employers and largest philanthropist, and it is the 1% that made 50% of New York income taxes. They are at the top of the great American economic pyramid for a reason. They should be praised and thank. Ken, our partner and friend, is the best of the best. So where are we now? As we discussed last quarter, Ken exercise this option to enter our development joint venture and build a new 1.9 million square foot tower with Citadel as the anchor tenant. We have until the middle of July to decide whether to participate with Ken in the venture or to sell there. It's a good bet that we will go all in. This fund cannot be amended by a short-term insincere private apology. What I beg my Mayor to do is to begin every day being business welcoming and business friendly as his first priority. That's the only way to get the growth and financial way that will accomplish these programs, some of which I must say are interesting and balance, both with safety schools, child care, clean streets, housing affordability, homeless programs, et cetera. The election is over and now is the time for hard work and management not show boating. New York is an enormous enterprise with a city budget of $120 billion and a state budget of $250 billion. If there is a $5 billion or $10 billion budget shortfall shortly, that can be found -- that money can be found by managing rather than by taxing. It is interesting to note that high tax New York spends more than double per capita that low tax or no tax Florida or Texas. There is a lesson here. Maybe something good can come out of this blunder. Maybe we can draft tend to become active and lead an effort to educate New York voters and to elect right-minded candidates. Ken can do it. He's the one who could galvanize the entire business community. Here is an interesting fact for us. The members of the partners in to New York City alone deploy 1 million voters. Hundreds of our business leaders with Lion up to support Ken, I would be first in that line. I was taught and I believe that -- I believe in America, where after an election, all slides get behind us and support the winning candidate for the greater good. Our Mayor is young, smart and energetic. With a little tweak and a little tweak there, his leadership could make this great city even greater. He will learn over time that growing the tax base is a winner, and raising taxes is a loser. I will say it again, he will learn over time that a growing tax base is a winner, and raising taxes is a loser. And that's a hard-working 1% are allies, not enemies, but learn from them this mistake and move upward. Turning to Vornado. We now have a lineup of assets and in-process projects, which I am confident will deliver the highest growth in our industry. Executing on all this is now our singular focus. In this year, 2026, we will complete the heavy lifting of leasing at PENN 1 and PENN 2, as Michael and Tom have already been saying quarter after quarter, our published numbers will reflect all this by the end of 2026 and going into 2027. As part of our focus on enhancing our portfolio and making great deals, we announced last week the acquisition of a 49% interest in Park [ and ] Plaza a 1.2 million square foot Class A office building along the prime stretch of Park Avenue. This asset is directly across the street from our 350 Park Avenue project. The building is 99% occupied by blue-chip tenants with an 11-year weighted average lease term and rented a 40% to 50% below market. Prime Park Avenue AAA assets rarely trade, and we believe we made an excellent purchase. We're buying the asset at $950 per square foot, which is 65% to 70% discount to replacement cost. And we are inheriting a fixed rate -- a sub-3% loan through 2031 to leverage off an enhanced return. We expect the transaction to be approximately $0.10 accretive in on a full year basis in the first year. We are happy to be partnering with the Fisher family who owned other 51% of the assets. We have a long relationship with the Fisher family. They are first-class operator who think much like we do. With Park Avenue Plaza, our recent acquisition of 623 Fifth Avenue and the pending development of 350 Park Avenue, we will be adding [indiscernible] 2 million square feet at share of the very highest quality prime asset [indiscernible] portfolio. at very accretive economics. Speaking of 623 Fifth Avenue, our 383,000 square foot assets, which we are redeveloping to be the premier boutique office building in [ Baha ]. We are far along in our design and planning. We are receiving outstanding reaction from the market and already have active tenant interest at or above our underuse. Demand for our retail assets is robust and accelerated. We have a handful of assets for sale in the market. I covered share buybacks in my recently posted shareholders ever. To date, under our $200 million share buyback program, we have repurchased 7 million common shares at an average of $25.80 per share totaling $180 million. Last week, our board authorized an additional $300 million buyback program. Now to Michael. Michael Franco: Thank you, Steve, and good morning, everyone. First quarter comparable FFO was $0.52 per share compared to $0.63 per share for last year's first quarter. This decrease is consistent with our comments from the prior quarters is primarily due to the reversal of previously accrued PENN 1 ground rent expense in the prior year's first quarter to higher net interest expense, partially offset by higher FFO resulting from the execution of the NYU master lease at 770 in the prior year. and strong income growth at PENN 1 and PENN 2. We have provided a quarter-over-quarter bridge on Page 2 of our earnings release and on Page 6 of our financials. . We now expect full year 2026 comparable FFO to be slightly higher than 2025, ramping up each quarter due to GAAP rents coming online, lower interest expense after June 2026 bonds are repaid and some seasonality relating to our sites. As previously indicated, we expect there to be significant earnings growth in 2027 as the positive impact from PENN 1 and PENN 2 lease-up takes effect as well as the positive impact of the recent acquisition of Park Avenue Plaza. Turning to leasing. The Manhattan office market is head and shoulders the best in the country and is off to its strongest start to a year in over a decade. Manhattan leasing volume reached nearly 12 million square feet, the highest first quarter level since 2014. There is a significant supply-demand imbalance in the $180 million Class A better building market in which we compete, as the availability rate in the prime submarkets in Midtown and the West side has tightened significantly, and there's a little new supply coming for the foreseeable future given the significant cost and duration to build. This is all resulting in tenants competing for space and rents rising aggressively. The landlords market we have been long predicting is very much here. While the macro environment we offer today operate in today, has gotten even more complicated in our last call. And the geopolitical volatility is as high as we've seen in some time. The U.S. economy just continues to chug along as it does in New York. While there is a risk of the Middle East conflict last much longer and has a greater economic impact, to date, we have not seen any change in [indiscernible]. Moreover, while there has been a lot of AI fear monitoring out there, and while we are respectful to risk, we believe it is overblown. Over the past 50 years, office-using jobs have continually evolve based on new technologies. From the computer revolution of the 1980s and personal computers and water processes were introduced to the 2000s and the Internet transform workflows and the way we communicate and now with AI improving efficiencies and increasing productivity. In every example, office-using jobs were not reduced, but they shifted from clerical based functions to knowledge-based rules. And each new revolution spurred productivity and economic growth with new businesses and net positive jobs created. There will be winners and losers by industry, a job function and by geography. But make no mistake, New York and San Francisco will be winners as the intellectual and innovation capitals of the country, where talent will continue to aggregate and in the best buildings. At Vornado, we are coming off our second best leasing year in our company's history, where we leased 3.7 million square feet with 960,000 square feet of New York office in the fourth quarter. Business continues to be very good, and the momentum from last year has continued during the first quarter of 2026. In the first quarter, we released 426,000 square feet of office space overall, including 311,000 square feet in New York. Our metrics were very strong. Average starting rents in Manhattan were $103 per square foot with mark-to-markets of positive 11.7% GAAP and positive 9.7% cash and an average lease term of 9 years. Our New York office pipeline is robust and has over 1 million square feet of leases in negotiation in various stages of proposal. Turning to the capital markets. The financing markets continue to be strong and liquid for Class A New York office assets. though pricing has widened a bit given the current geopolitical environment. The investment sales market continues to heat up as well with a broadening set of buyers keenly focused on New York City. We are very active in the capital markets in the first quarter most of which we covered on the last call. Given we've dealt with almost all of our 2026 and 2027 purities, we don't have any significant financings we need to complete for the next 18 months. We do still have a few loans that we need to order through at lenders over the next 2 to 3 years. Finally, our liquidity remains strong at $2.6 billion, which is comprised of cash of $1.2 billion and our undrawn credit lines of $1.4 billion. With that, I'll turn it over to the operator for Q&A. Operator: [Operator Instructions] First question comes from Stephen Sakwa at Evercore ISI. Steve Sakwa: Steve, thanks for your opening comments on the city and the administration. I guess maybe going to Michael's commentary on just the pipeline of the 1 million feet. I didn't know if Michael or Glen could maybe expound a little bit on how much of that is for upcoming lease expirations, how much of that is for kind of vacancy within the portfolio? And I guess most of that's probably in New York, but maybe discuss kind of the New York versus Chicago versus San Francisco demand trends. Glen Weiss: Stephen, it's Glen. So our pipeline is extremely well balanced of the 1 million feet. It's right down the middle, 50% new expansion, 50% renewal. The other thing I'll note is on renewals due to the lack of quality state available in the market, we're seeing many of our tenants coming to us early on renewals since they can't find quality alternatives, which is a key indicator of a rising landlord market. As it relates to City to City, San Francisco is coming on very strong. While we have some vacancy, as you see from the first quarter numbers, we have tremendous activity on all the vacancy. Our deals in the Tower 555 are now north of $160 a foot. Volume in San Francisco overall is strengthening week-to-week. And certainly, everyone out there is doing a lot better and deals are happening in a very rhythmic pace. Chicago is starting to come on demand is improving. The deals are tough, but there are certainly tenants coming new to the market, and we're seeing a lot more foreign proposals coming at the mark as we go into the second quarter and into the summer. Steve Sakwa: Great. And then maybe just as a follow-up. We did notice that in terms of lease commencements, the Verizon lease kind of had a little bit of a change in status. And I'm just wondering if you could maybe talk about kind of what their, I guess, ultimate status is with the building? And did that lease kind of start earlier? And is that a benefit to the '26 earnings growth? Thomas Sanelli: Stephen, it's Tom Sanelli. I'll take the first part of it, and I guess, Glen, you could talk about the status. So [indiscernible] Verizon told us they're not going to build out their space and they put them a sublet market, GAAP allows us to start revenue recognition early, so you'll see that flow through all of 2026. It started in the first quarter. Glen Weiss: On the leasing front, the block of space is excellent. It's 200,000 feet and includes 30,000 feet of outdoor space. We're in a great position. We have a rise in public parent guarantee for the entire week to begin with great credit. We continue to show this pace as does Horizon. There's very good action. And whatever the outcome, Vornado in a great spot as it relates to that position. Operator: And our next question today comes from John Kim at BMO Capital Markets. John Kim: Steve, really appreciate your opening remarks and really provide a lot of clarity on how you're thinking about moving forward. But I wanted to ask you about your statement that you're all in at 350 Park. Are you all in even if Citadel would not commit to the building? And how should we think about the put option you have in July? . Steven Roth: I didn't hear the last part. Michael Franco: How should we think about -- how should we think about the put options as you said, John? John Kim: Yes, that's right. Is that something that you'll let pass? Or is that something that could be -- the day could be extended? Steven Roth: The answer is that can exercise to go ahead. We have until the summer to decide whether we are a participant or a seller. And I expect that we will take all of that time, which is the smart and correct thing for us to do. There are still some documents and other details to be hired now. But my remarks that I say where I expect we will be all in, I do expect we will be all in, but that's not a legal commitment at this time yet. John Kim: And that's all in with or without Citadel's commitment? Michael Franco: No, the answer is -- the question is, is it all in regardless of whether Citadel is committed or not from a lease standpoint? Steven Roth: Just -- Citadel has to be committed. They will be committed. So I mean, this whole deal is based upon the fact that [indiscernible] will be the anchor tenant taking no less than 850,000 square feet, although we expect more. And [ Ken Griffin ] is the 60% partner, we are a 36% partner and the [ Rudi ] family is a 4% partner. That's the state of play. This whole thing Ken has committed to start this whole thing will all come together and become very clear in the mid-summer. John Kim: Okay. And then I wanted to ask about the $200 million of signed leases not commenced figures that you provided last quarter. If there's an update to that figure in terms of dollar value timing? And if there's any offsets through known move-outs during that time frame? Michael Franco: I would say the number is still in that general neighborhood. It's probably a touch larger today, but it's generally in the same ballpark. And I think in terms of thinking about it, probably 10% to 12% comes in per quarter over the next couple of years from a pacing standpoint, there are some offsets whether it's expiries, vacancies, et cetera. I think, Steve, on the last call sort of said from a modeling standpoint, assume $0.40 a share flow through to the bottom line. So we're going to stick with that for now, but that will give you a sense in terms of the pacing of that $200-ish million, and that started this first quarter. Operator: Our next question today comes from Floris Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: I appreciate some more color on that large [ SNO ] pipeline. Could you maybe just expand on that a little bit, what percentage of that [ SNO ] pipeline is in the PENN District. And how much of your -- does it include retail leases, you've done some leasing on Upper Fifth Avenue in particular. Maybe you could give us a little bit more color of the PENN District versus other areas in your portfolio? Michael Franco: Floris. That number is pretty much all office. So I can't give you the retail number as we sit here right now. obviously, the lease with Meta is a big positive. And in terms of the $200 million in terms of PENN versus others, I would say it's probably 2/3 in it should not be imposing given the lease-up of PENN 2 and the balance in PENN 1. Floris Gerbrand Van Dijkum: And maybe my follow-up question, as it relates to your Park Avenue Plaza acquisition, I mean, what caused that deal to happen? Why did the Fisher Brothers, I guess, sell out? It looks like it's like a 6%, 7% yield on cost, if I'm not mistaken, to get to the $0.10 accretion, that seems pretty attractive. Is that a cash yield or is that a GAAP yield? And how much of a mark-to-market -- how much more growth in terms of earnings do you expect to get from that property going forward? Michael Franco: I can remember everything you asked here, Floris. Look, we're thrilled about the acquisitions. These types of assets don't trade very often on Park Avenue. It's certainly one of the best assets on Park Avenue. And in terms of the yields on a cash basis, given the in-place debt, it's roughly 8% on a GAAP basis, it's well in the double digits. And as Steve said in his remarks, rents are well below market here, probably at least $50 a foot below market. So over time, things are not static. There's action with tenants, we'll capture that and that's without rents growing. So if rents go further, that gap should widen. So we're excited. The Fishers did not sell out. They remain -- they still hold their 51%. And I think their track record of performance on the asset is stellar. It's a blue-chip set of tenants, at least long term. They're quite effective at signing long-term leases with high-quality tenants and that's reflected in this asset. So -- and the tenants, some of which we spoke to about their experience, couldn't have raved anymore about the quality of the asset, and they have grown over time there. So -- we're excited about the asset. We think there's tremendous value to be created over time. And so I think I addressed all your comments, questions. Operator: Our next question today comes from Alexander Goldfarb at Piper Sandler. Alexander Goldfarb: Steve, yes, echoing I appreciate your comments upfront, just crazy. But thank you for your statements. Michael, just following up on Floris' question. The two items in the '26 guidance. One, the $0.10 accretion for Park Avenue, was that the GAAP impact or that's the cash just as we think about FFO? And then the second part of that guidance question is, there was an item about the master lease changing at 350 and just want to know how that impacts the earnings for this year. That's my first question. Michael Franco: Park Avenue Plaza the $0.10 is a full year run rate. So obviously, we're not going to have that for '26. That's a GAAP number. And on the 350, the change there was done given Citadel wanted to kick off the development. They want to vacate. We couldn't start demolition without defusing the old CMBS loan. And so that along with the fees as you saw in our Q, the master lease was modified, there were a number of changes made in the documents. And so that was a negative to '26 earnings, which when we talked about it given our comments. Steven Roth: Alex, the deal always contemplated that when Citadel vacated the building so that the building would be demolished that the rent would be reduced. Unknown Executive: Or even go away. Steven Roth: The earnings sting by that reduction, much of it will be made up by capitalizing interest, et cetera. So while the earnings what exactly is going to happen. Glen Weiss: So in 2026, for the next few months until we decide whether we're going into the JV, there's a wash. There's no earnings coming out of 350. Once we make that decision, assuming we go into the JV, we're going to start capitalizing interest in cost. We start seeing... Steven Roth: Will that equal or exceed or be less than the [indiscernible] at? Alexander Goldfarb: Initially be a little less and then eventually over '27, '28, '29, basically equates to what we were getting. Michael Franco: Like for 5 or 6 months, there's a negative thing given the master lease. But again, that's previously communicated out. Does that satisfy you, Alex? Alexander Goldfarb: That's awesome. Second question, Steve, is big picture. With regard to Citadel and the whole attention with the Mayor, back in 2019, Amazon wanted to open in Queens, they were a bust. But I don't recall this amount of instant negativity in political nervousness today, it's clearly escalated a lot quicker. What do you think has changed? I mean certainly, politics have become more left, more progressive here. But why do you think can this time the politicians seem to be much more eager to make this everyone be happy versus Amazon, the city and the state seemed happy it wasn't even a ripple when Amazon walked from Queens, it doesn't seem that. What's the difference now versus then? Steven Roth: Yes, I don't know. But you're correct that the body politic doesn't seem to have any remorse about losing Amazon. On the other hand, the body politics thinks that the civil team is important and an enormous contributor and there is a significant feeling amongst the political leadership and the business leadership that this was a mistake which I described as a blunder and this is something that should be repaired. And we'll see where it goes. Operator: Our next question today comes from Dylan Burzinski at Green Street. . Dylan Burzinski: Michael, I think you mentioned that pricing has widened given some capital markets volatility associated with the Warner on. Curious if you can just provide more color on that. And then maybe if you can sort of flavor in some commentary around, I think, last quarter, you guys mentioned looking to put assets in the market. Just sort of any sort of color you can provide on sort of how that -- those processes are going? Michael Franco: On the financing markets, financing markets were incredibly strong in the last year, beginning of this year as tight as spreads as we have seen in some time. Given the volatility, it's back off a little bit, like there's still depth in the market. Deals still can get done, particularly for high-quality assets. I wouldn't call it a huge impact, but the reality is, look, treasuries are probably up 30 basis points or so, and spreads have widened out a little bit. So that makes the borrowing costs a little wider, but not wildly different. Just -- this is still a very functioning marketplace for high-quality assets, but off maybe 40, 50 basis points. I'm glad we did what we did when we did it. So we're not really dealing in today's markets, but again, you can get deals done. On the asset sales side, where -- I think Steve referenced, we're working on some asset sales. And that is true. And when we have some rate of announce, we'll announce. But the answer is, we got a few things that are meaningful in the pipeline. We're in active discussions with potential buyers. I would say the interest in New York City. As I said in my remarks, continues to expand in terms of the type of buyer. I think there is consensus on New York being head and shoulders best market. Assets are -- rents are rising assets at a discount or placement cost, it's a recognition, there's not a lot of supply coming. And so I think Global Capital has a lot of comfort in it. I think one of the things we're hearing from capital sources around the world is the U.S. remains the safest, most liquid market, particularly given everything going on around the world. And I think you're going to continue to see capital M&A from other parts of the world to come into the U.S. I mean, New York City is going to get a heavily disproportionate share of that. So that's what we're seeing. And when we have specifics to announce, we'll announce it, but we're encouraged by what we're working on. Dylan Burzinski: And then just on the rent growth piece, I think several quarters ago, I asked 20%, 25% rent growth if you saw that over the next 5 years, what were your thoughts to be on that, Steve, I think you mentioned like while that's good, that would be disappointing given everything you're seeing on the supply and demand imbalance, especially for high-quality office. I mean can you guys just talk about how far rent growth could go in your mind? And has your thoughts around that cumulative rent growth that you changed at all? Michael Franco: I think we'd still be disappointed in that, Dylan. Look, as I think we've said in the last couple of calls, right, the backdrop for of is as favorable as it's been in a long, long time. And it's very difficult to add supply here, which at some point, we're going to meet. So there's going to be a building a year maybe as we get into the next decade. But that's very little. At the same time, we have supply coming out of the bottom end of the market. So the fundamentals are great companies, as we've said, continue to want to grow here. We're seeing still significant activity from the financial service sector, law firms, accounting firms, frankly, AI has picked up more recently. So I think all that results in rents continue to rise. So I don't know that it makes sense to give you a prediction, but we'd be disappointed at 25% over a I don't know if you want to add any comments on what you're seeing from... Glen Weiss: I mean, look, a tenant, rent sensitivity is not even high on the list right now, tenants want to be in the best buildings with the best landlords. And if you think about our leasing performance, $100 a foot become a norm for us, because of the quality of our product. When over the PENN [indiscernible], our average starting rent is $100 a foot, that's a great trend. So as we go on here and the way we're shaping the portfolio, with the addition of 623 Park Avenue plus of the New 350 Park. And we think rents are going to continue to spike. And the way we're balanced on the west side and on Park Avenue, and we're really excited about that. We think we're in a perfect position for what's to come on rents and tenant demand. Operator: Our next question today comes from Jana Galan with Bank of America. Jana Galan: Congrats on the strong start to the year. Michael, I appreciate your comments on the 2026 FFO now expected to exceed [ $25 million ] just curious if that's primarily from the Park Avenue Plaza closing in 2Q or also from 1Q being slightly ahead and carrying throughout the year? Michael Franco: I'd say it's the latter. Jana Galan: Great. And then maybe on 555 California, if you could give some update on kind of demand, leasing and rents there? And are AI tenants becoming a bigger part of the pipeline there and in the New York pipeline as well. Glen Weiss: So rents in San Francisco are rising a lot. As I said earlier, our rent in the tower have now gone north of $160 a foot, for substantial leases, 50,000 feet and great are not small deals. So we are leading the market by far at 555 [ Cal ]. We're also seeing a lot of really good activity at 315 Montgomery in the campus, with more technology, AI type tenants. So certainly, that activity we're seeing at our projects that are complex as well. But other than tech and AI, Financial services is growing in San Francisco, something we've kept a very keen eye on as well as law firms. So it is in just AI, although it's helping a lot as the city improves, but the other industry sectors are really coming on strong. And the city overall feels great. I was out there a few months ago, walking the streets, meeting with people. It's really feeling good out there, and people are already positive again in San Francisco. Operator: Our next question today comes from Anthony Paolone with JPMorgan. Anthony Paolone: You talked about having some assets out in the market for sale. But if we think about just whether it's 350, 54th Street and then Fifth Avenue, some of these projects that are going to be on the pipeline. How are you thinking about just your pro rata leverage level over the next couple of years and whether there's going to likely be a bigger disposition program or whether you think you'll just use project financing and take on a bit more leverage? Michael Franco: Tony, we've got the capital earmarked for all these opportunities in our cash forecast. We've got some asset sales in the works that -- like we obviously have a lot going on between these investments that we've made recently, 623, Park Avenue Plaza, the buybacks, some of the future developments. And I would say about the future development, something like the 350. The bulk of our equity is coming from our land contribution, right? So any incremental capital is really not required from Vornado for probably close to 3 years. So we've got ample time to plan for that and so forth. So when you look at our sort of capital needs, if you will, over the next few years, it's fairly well laddered. But at the same time, as we execute hopefully, on some of these asset sales, that's going to give us some additional firepower, frankly, beyond just we're talking about in term of these developments. Steven Roth: If you look at our history, with respect to capital planning, we have three or four things that we have historically done. Number one, we generally hold $1 billion-plus cash balance. The second is that we almost always prefund well in advance of our capital needs. So for example, we loaded in, I don't know, $2 billion, $2.5 billion of capital 2 years before we started the PENN 1 and PENN 2 developments. So that notwithstanding the fact that the capital markets got a little bit rough and volatile when we were actually building, we have the capital on our balance sheet. So that's what you can look at for what we do. The other thing is that we like to operate with lower rather than higher debt levels for the obvious reason. The last is that our philosophy is that we like nonrecourse project level debt as opposed to unsecured credit, which basically makes the entire corpus. I guess you could say personally liable, so we like nonrecourse project level debt, which is the majority of the way we finance our business. Anthony Paolone: Okay. Got it. And then just follow-up question on the leasing side. I think there's about 600,000 square feet in the fourth quarter that comes up. Is there anything larger in there that's a known vacate. I just can't remember if there's any big deals in that mix to watch out for? Glen Weiss: There is two larger tenants ties in the second half of this year, and we believe both will renew their leases. So we feel good about our exploration, and as you would expect, we're all over the '27, '28 expirations as well. But 26, we're pretty well taken care of. We feel good about what's going to happen. Operator: Our next question today comes from Vikram Malhotra with Mizuho. Vikram Malhotra: I guess first one, given all the kind of activity you've had with all the PENN assets. Any update on Hotel PENN and PENN [indiscernible] Mall in terms of users, monetization, et cetera. Steven Roth: No update. Vikram Malhotra: Okay. And then just on the earnings side, you mentioned 2027 FFO, nice pickup. I'm wondering two things. One, are there any offsets we should be thinking about for '27? And then in particularly FAD, given the ramp in FFO, I'm assuming there's still going to be elevated TI into' '27. So should we think about FAD really perhaps picking up on 2028? Michael Franco: Vikram. On the... Steven Roth: I would make one comment, okay? I can't wait for the free rent to burn off. That's when this business will get to be real fun and will generate substantial positive cash, that happens over the next year or 2. I can't wait for that. Now go ahead, Michael. So Glen, take note of what I say. Michael Franco: So on the Fed side, Vikram, your comment is right, right? There will be continued elevated TIs this year, next year, even on deals we've committed this year, tenants on don't call those for a while. So that will go into next year. And then we expect to see that drop materially and cash flow be much higher. So I think your general direction is accurate. On the earnings side, there's always ins and outs. So there's always offsets. I can't tell you specifically what those are, but in the history of Vornado, I think we've given you as much guidance as we can give you with respect to next year in terms of what the bottom line is going to be. Operator: Our next question today comes from Nick Yulico at Scotiabank. Nicholas Yulico: I just wanted to go back to 350 Park and just be clear on a couple of things. One, in terms of the new $16 million annual rent versus the old rent, did that already happen in the first quarter? Is that a second quarter accounting impact? And then I also want to be clear on that new rent that's being paid. Does that -- what is the maturity on that lease? Is that concurrent with the debt, the new mortgage that matures next year? Or does it extend beyond that? Michael Franco: Nick. So on your first question, new rents started -- I mean there are a few days in March where it started. But by and large, it will be second quarter. So I don't know, maybe 15 days in the first quarter where the new rent was reflected. Steven Roth: Because the new rent is coterminous with the execution of the new mortgage. So I don't know what that data is, but it's a couple of weeks or 3 weeks ago or whatever. Michael Franco: Yes. So that's a new lease runs until early your question why is that? Because there be a resolution on the other. The venture will be formed, we'll put the asset, something will happen prior to that maturity. Nicholas Yulico: Okay. So the rents and new rents is only in place until the point at which the mortgage matures. There's no rent being paid beyond that date under the new agreement? Michael Franco: Correct. But there'll be a resolution or A or Board B before that, which the rent have gone away anyway. Steven Roth: There's no building for the tenant to pay rent for. Nicholas Yulico: Got it. Okay. I just wanted to be clear on that. And then I guess second question is, obviously, I mean, you've talked a lot about giving some of the bread crumbs on 2027, how to think about that. It is also 2027 FFO is a piece of the executive comp per the proxy plan. So I guess I'm just wondering like if you -- any new thoughts on this, Steve, about finally giving earnings guidance. You're at the point now where the tide is turning, you're being measured by that from a comp standpoint. Why not give formal FFO guidance at some point? Steven Roth: Oh Lord, how do I answer that question? The two sides of it is that we have a simple business which has complexity, and the numbers are moving. It's very -- I mean, we find that it's sort of difficult to guide and counterproductive. So Warren Buffett, who's not a friend of mine, but an acquaintance of mine. He didn't guide for his whole career. So that's one thing. And the big bank guy, he doesn't guide either. So -- but all of our competitors seem to be able to guide to what's wrong with us. But right now, we have no plan to guide other than the snippets that we put in these calls here and there, which I think -- I hope you find helpful. Now what I think you're saying is that if our earnings are slow up with, why don't we just take a pad on the bed for that and guide to that. So that's something that I'm going to put under my pillow and think about because that sounds like maybe it's a good idea. But as of right now, our policy is we selectively in a limited way guide, but we don't give full guidance. And I think you could probably guess that, that's going to continue for the future Tom, what do you think? Thomas Sanelli: I agree. Steven Roth: Tom saying he's happy doesn't that the guide. Operator: Our next question today comes from Seth Bergey at Citi. Seth Bergey: In the annual shareholder letter, you kind of referenced the no sacred cows policy again. It sounds like the New York office trends market is improving. You mentioned possible kind of inflows given it's a liquid market in the U.S. is just safety. How do you kind of think about potential asset sales. Should we think about those being more noncore dispositions or any core asset sales that you're kind of thinking about? Michael Franco: Some asked the questions for me. It's come -- mentioned you add it in no sacred cows. Is that just New York or is that some other assets we should think about noncore dispositions. Steven Roth: I mean I don't want to shock you, but basically, I'm in it for the money. And so therefore, there are no sacred cow. There are assets that are critical to the business. There are assets that are important to the business. There are assets that we love more than other assets. But based upon price economics and business strategy, there are no sacred cow. Now what does that mean? There's a handful of assets that we actually have already determined that we don't want in the business mix, and those assets are for sale. Our intensivity, if that's a word, to liquidate those assets, rises and falls with the market. But over a short period of time, there's a handful of assets that will not be part of our portfolio. Now getting to the rest of it, there are assets that we hold near India that we think are very valuable that we underwrite as being much more valuable than apparently the stock market underwrite it. Even those assets, if I think [ San ] say that Garth [indiscernible] phrase the Godfather bid, it's some very aggressive bid came in for one of those important assets we would execute on that because that would be the right thing to do, that's the right thing for us for the management to do, and more importantly, it's providing to the shareholders. So there are no sacred assets. There are prices that are critical. But in terms of whether we would execute on selling something, it's over a function of what the price is. Seth Bergey: Great. And then for my second question, I guess, how do you think about kind of incremental potential acquisitions versus accelerating the share buyback and balancing that versus your current leverage levels? Steven Roth: So there's three things inherent in that question. There's acquisitions versus stock acquisition and leverage levels. So the answer to that is, is that we think -- no, let me rephrase that, we are certain that we can basically do over it. We are certain that we can buy selectively important assets that come up in the bulls-eye location of our heartland. We are certain that we can -- we have the capital to buy back our stock in a measured way. And we are also certain that we are able to keep our leverage in -- through a measure of the control level. So we think we can do all of that, and we have some things that are in process that will augment all of that. So our two most recent acquisitions of 623 Fifth Avenue which we think -- I mean I've written about that, we think is a terrific deal. And the Park Avenue Plaza acquisition that we just announced a couple of weeks ago, we think is equally terrific deal. And we think buying back our stock is $30 a year is a terrific deal as well. So we're doing all of that. And I hope that answers your question. Operator: Our next question today comes from Caitlin Burrows at Goldman Sachs. Caitlin Burrows: Maybe just on the pricing side. I realize the reported leasing spread drilling on a second-generation space. So first, I was just wondering if you can go through your expectations today of portfolio mark-to-market across New York, San Francisco and the mark? And then also whether you expect that portion that gets included in the spreads to increase as in like could downtime become smaller? Glen Weiss: It's Glen. So on the question of mark to markets, we expect to continue the performance we've had over the past couple of years, which are positive, positive and positive. During the last 2 years, we've only had 1 quarter negative, which we like, and we expect to continue. Many have been in the double-digit positives. We expect free rent to continue to reduce and even TIs are starting to come down. So we're working hard on that piece, of course. And San Francisco is the same. With the rents we're achieving, the mark-to-markets will continue to improve. Chicago, as I said, is still most challenging, although demand is picking up. renter same firm, concessions are high in Chicago, those have yet to break downwards, but demand is certainly improving. Steven Roth: I mean think about just economics at or macroeconomics, focusing on New York for the moment. I mean we've said and I've written about that we compete in a subset of better building Class A space, which is under 200 million feet. So the fact that there may be 400 million feet in New York is relevant because we really compete in a market which is about half that size. The availabilities of space in that market is evaporating very quickly. I mean somebody used the analogy of an ice cube at a microwave. We are getting -- I mean, we know that because we are a key factor in the market. We know that because the incoming calls from brokers looking to place for their clients deciding to get more access and even more desperate. So as the availability of space shrinks, obviously, the price goes up. Now there's something else going on, which is equally important, and that is the cost of a new building has gone from whatever to somewhere around thickener $2,500 a foot. Interest rates and the cost of capital has gone from 0% to 2% to 5%, 6% and 7%. So the rent that has to be achieved to make a new building economic are well into the $200 a foot and even touching $300 of it. That's never happened before. So obviously, rents on older buildings, which are still great buildings and great locations are going up because of scarcity and because of the cost of new supply coming on the market. So this is just basic economics 101. The next bottom is that I believe and my team can speak for themselves. I believe that we are in a long, long, long-term landlord market where these dynamics will continue. Why is that? Because there's nothing in the short term that can change that other than if interest rates dip down to 2% or something like that, which you can make your own judge whether that might or might not happen. So if that happens, basically I'm not in a big rush to rent space at today's prices because I think tomorrow's prices are going to be higher and maybe even a are a lot higher. Caitlin Burrows: I guess maybe just to follow up on that last point. I know leasing volume in the first quarter was relatively low. So would you just say that that's lumpy. Is it more about that you're not in a rush because rents could be rising or something else? Steven Roth: Glen is in the business of lending space as quickly and aggressively and as hungry as he can be. So if there is any falloff in volume, it's not because I direct the led to get out of the market. Glen's in the market every day working his ass off. Thank you, Glen. Operator: Our next question today comes from Ronald Kamdem at Morgan Stanley. Ronald Kamdem: Okay. Great. Just two quick ones. Just number one, I think last call, you talked about some guidepost for occupancy over the next 12 to 18 months and thinking sort of mid-90s on a lease basis. Just wondering if you could provide an update both on the lease and on a physical occupied basis. What that occupancy target to look like over the next 12 to 18 months again? Michael Franco: Look, we've historically run our portfolio in the mid- to high 90s, and we expect to get back there. So that probably is over a couple of year period. But that's -- and again, I think given all the dynamics that Steve alluded to and we've talked about in the market and the lack of space availability, that's going to happen. So obviously, leasing up 10% is a key part of that. But -- and I think one of the analysts picked up this quarter that our occupancy actually went up 70 basis points, not the 40 because we took 350 Park out of service. So that's what we expect in it. I can't tell you exactly what quarter it's going to be, but over the next couple of years or so, that's where we expect to get back to. Steven Roth: But there's a couple of things to focus on. There is a couple of buildings that we are not winning. Why is that? Because they are overleveraged and underwater, and we -- it's uneconomic for us to rent bases in those buildings which really -- they're almost owned by the banks. And if we put TI into those buildings, it's basically burning money. So if you take those -- as we have chosen, I don't know whether this is a good decision or not, we've chosen to leave those in the aggregate statistics with some of the folks in our industry have taken those buildings out of the numbers, which makes their occupancy higher. So if you take those numbers -- those buildings out of our numbers, our occupancy goes to what something like that, 95% -- 94%. So we know that number, although we don't publish that number, and maybe we should. Although right now, I'm publishing. So that's the first thing. The second thing is that I look upon in a landlords market like this, I look upon vacant and available space as it has been because that will -- as we ramp that space, and we will with 100% certainty that will grow our earnings. So when you think about investing, maybe the best company to invest in a company that does have available space in this market as opposed to a company that has a space already rented. You can make out of that whatever you will. Ronald Kamdem: Really helpful color. And then my second one, if I may, was just a lot of the footnotes in the supplement. Just on -- I guess on PENN 1, any idea when that litigation will be -- just in terms of timing, obviously, can't comment either way, but just in terms of timing, is that something that can be done this year? And also the change in retail from the base of the office buildings being put in the office segment, just the thinking there. Steven Roth: I'll take the litigation. I have absolutely no comment on anything having to do with that litigation other than I'm optimistic. What about the retail? Glen Weiss: Yes. So we didn't change our segment reporting. Obviously, we have two segments in New York and other. This is a subsegment. Ron, what we did here is we tried to align the subsegment more on how we view the assets. So we grouped over retail assets together and the office assets. So the base of 1,290 retail is now included an office as opposed to being in retail. And any ancillary office space that's in a retail building is obviously in the retail subsegment. And it's all disclosed, obviously, in the supplement, and we give you the exact buildings that are in each subsegment, so you could follow along. I think this is the better way of looking at it. as opposed to the way we would do in previously. Operator: Our next question today comes from Brendan Lynch at Barclays. Brendan Lynch: First one on Sunset Pure Studio. Is there any interest in the current term tenants and converting to longer-term leases? And just some update on that? Glen Weiss: It's Glen. There's great interest in Sunset and the studios. We're at least right now place is great. unbelievably great, I would say, best in a great location. We have very good activity, long-term folks looking short-term folks looking. So we expect to of the project once this year's leases expire. But it's off the chart. The reception has been plus what we expect to do really good things are on the leasing. Steven Roth: But a direct answer to your question, I would definitely prefer to be in the long-term leasing business with that asset rather than in month-by-month leasing in that asset. So the answer is the ownership of that asset prefers to be in the long-term leasing if the market gives us that opportunity. Brendan Lynch: Okay. That's helpful. And then a follow-up on the Verizon space at PENN 2. Can you just walk us through if they find a subtenant versus you finding a tenant and how we should think about potential termination fees? And any accounting around the TIs that you might still be responsible for if it's just a sublease instead of a cancellation in new lease. Steven Roth: Glen, for first ad, I don't talk about it. Go ahead. Glen Weiss: As I said earlier, we're in a great spot to matter how it comes up out. And we will only be opportunistic to make money on this space. We have a very good lease position, and we'll see how it plays out, but that's as much as I think I want to talk about it for now. Steven Roth: What do we have? It's basically a 19- or a 20-year lease. So we have a long-term lease with a super credit, that lease will -- we will never terminate that lease under any conditions. So the only thing that might happen is around the dynamics of a subtenant coming in because Verizon wants to reduce their liability. But we don't have anything to say other than that long-term credit lease is not something that we are going to terminate or monkey with. Operator: There are no further questions at this time. So I'd like to hand it back to Steven Roth for any closing remarks. Steven Roth: Thank you all very much. I mean, the -- I think the team and I are delighted with our activity over the last 3, 4, 6 months, we are excited. We think we -- and I didn't make the statement in my remarks this morning. that I am certain that over the next year or 2, we will have the highest growth performance of any company in our sector. And we're excited about that. We've got a lot of great stuff going on and thank you for participating. We'll see you next quarter. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good day, everyone, and welcome to Pfizer's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Francesca DeMartino, Chief Investor Relations Officer and Senior Vice President. Please go ahead, ma'am. Francesca DeMartino: Good morning, and welcome to Pfizer's earnings call. I'm Francesca DeMartino, Chief Investor Relations Officer. On behalf of the Pfizer team, thank you for joining us. This call is being made available via audio webcast at pfizer.com. Earlier this morning, we released our results for the first quarter 2026 via press release that is available on our website at pfizer.com. I'm joined today by Dr. Albert Bourla, our Chairman and CEO; and Dave Denton, our CFO. Albert and Dave have some prepared remarks, and we will then open the call for questions. Members of our leadership team will be available for the Q&A session. Before we get started, I want to remind you that we will be making forward-looking statements and discussing certain non-GAAP financial measures. I encourage you to read the disclaimers in our slide presentation, the press release we issued this morning and the disclosures in our SEC filings, which are all available on the IR website on pfizer.com. Forward-looking statements on the call are subject to substantial risks and uncertainties, speak only as of the call's original date, and we undertake no obligation to update or revise any of the statements. With that, I will turn the call over to Albert. Albert Bourla: Thank you, Francesca. Good morning, everyone. Thank you for joining our call. It's a wonderful day here in New York. We've had a strong start to the year. Our business continues to perform well, and we are making strategic progress. One of our great strengths is the ability to execute. And we are delivering on our financial commitments while we also invest to strengthen Pfizer for future growth and impact. In the first quarter, we exceeded expectations for both total revenues and adjusted diluted earnings per share. We have made progress so far this year in delivering our 2026 critical R&D milestones, including 3 positive Phase III readouts and encouraging mid-stage readouts for both approved and investigational medicines. We are keeping pace with our robust agenda of approximately 20 planned pivotal study starts this year. We also had 2 significant legal developments that improved our growth profile post-2028 and of course, our cash flow outlook. Our recent settlement agreements resolving infringement of patents related to Vyndamax have the potential to change the growth profile of the company significantly post-2028. This gives us greater confidence that starting in 2029, we will enter a 5-year period of high single-digit revenue CAGR. Additionally, we view the recent Belgian court ruling regarding Comirnaty contracts with EU member countries as a positive for future EPS and cash flow. The improved visibility into our cash flow provide is a positive for our longer-term capital allocation priorities, including, of course, our ability to preserve and support the dividend. As we look to the rest of the year, we are clearly focused on our most impactful opportunities to create value for patients and our shareholders. We previously shared our strategic priorities for 2026, and I will walk you through the progress we are making on all 4. Our launched and acquired products had a tremendous start to the year with 22% growth. Three of our business development transactions represent about 8% of the invested capital in recent years, and they are all progressing very well. Oncology represents our most advanced and concentrated area of research and commercial focus and our Seagen acquisition is a central reason why. Since beginning -- since bringing the company to Pfizer, we have transformed our oncology organization, unifying our team, expanding our commercial portfolio and advancing a leading ADC platform. The 20% year-over-year operational revenue growth in the quarter of our Seagen products shows that we have made good progress in deepening our presence within the oncology community. We continue to strengthen physician engagement and drive greater recognition of the clinical value of our medicines. We are also executing with focus to maximize the value of our Metsera acquisition. This underpins the strategy intended to position Pfizer as a leader in the next generation of obesity therapies. We intend to advance 10 Phase III studies this year, and we are targeting a first approval in 2028 from a portfolio that includes ultra-long-acting peptides with the potential, if successful, developed and approved for competitive efficacy and tolerability with a differentiated monthly maintenance dosing schedule. The success we have achieved with Nurtec since our Biohaven acquisition shows the power of our leading field force and commercial capabilities at work. Nurtec contributed in the first quarter with 41% operational growth driven by robust demand and both -- for both acute and preventive migraine treatments. We continue to see a meaningful growth opportunity in the oral CGRP class of medicines for patients with migraine. Of course, 2026 is a pivotal year for R&D, and I'm pleased with our early progress this quarter. While we have a large active pipeline, we rely on a rigorous and disciplined approach to focus resources where we see the greatest potential. We are targeting approximately 20 pivotal study starts, 8 key data readouts and 4 regulatory decisions this year. Our critical R&D milestones reinforce how we are concentrating investment in key areas such as oncology, metabolic disease and vaccines, where we have existing commercial infrastructure, scientific expertise and significant opportunity for competitive differentiation. Roughly half of our anticipated key data readouts and regulatory decision in 2026 are expected to come from oncology where we are advancing multiple programs across areas such as breast, [ genitourinary ] thoracic, gastrointestinal and blood cancer. During the quarter, we presented notable EV-304 study findings for Padcev at ASCO GU. The results show that Padcev and pembrolizumab reduces the risk of recurrence or death by nearly 50% in patients with cisplatin-eligible muscle-invasive bladder cancer. Combined with the recent compelling data from the EV-303 trial, this highlights the potential for this regimen to become the new standard of care for patients with muscle-invasive bladder cancer, regardless of cisplatin eligibility. Bladder cancer is diagnosed in more than 600,000 (sic) [ 614,000 ] patients each year globally, including an estimated 85,000 in the U.S. MIDC represents approximately 30% of all these bladder cancer cases. The positive top line results we shared last week from the Phase III MagnetisMM-5 study of Elrexfio represent a meaningful step toward our goal of reaching more patients earlier in the course of their disease. In this study, Elrexfio significantly improved progression-free survival for double-class exposed patients with relapsed or refractory multiple myeloma who received at least one prior line of treatment. This is a significant opportunity to address patient need. Multiple myeloma, an aggressive and currently incurable blood cancer, is the second most common type of blood cancer worldwide with over 36,000 new cases each year in the United States and over 187,000 new cases globally. During the quarter, we also shed randomized Phase II data for atirmociclib, our potential first-in-class CDK4 inhibitor, in patients with HR2/HER2 negative breast cancer who received prior CDK4/6 inhibitor-based treatment. These data suggest that atirmociclib has the potential to differentiate from the CDK4/6 inhibitor class with improved efficacy and tolerability, reinforcing our confidence in the molecule. Looking ahead, we remain focused on accelerating this investigational medicine's development in first-line and early breast cancer, where it may provide even greater impact for patients. We view this as an important opportunity to deliver a next-generation backbone therapy, building on Pfizer's long commitment to patients with breast cancer. In vaccines, we have been working with regulators on the pathway for expanding coverage through our next-generation pneumococcal conjugate vaccine to extend our leadership in this competitive space. Yesterday, we initiated our Phase III program for our 25-valent pediatric vaccine candidate with increased valency and next-generation serotype 3 technology. I'm also pleased to provide an update on our strategy in the adult market. We have decided to advance directly to our fifth-generation adult vaccine candidate. And, today, I am proud to share for the first time that it includes coverage for 35 serotypes. We believe this gives us the strongest opportunity to maintain our current market leadership in the adult market over the long term, and we expect to enter clinical development this year. In I&I, we announced a positive readout in March from a Phase II trial of tilrekimig, our investigational trispecific antibody, in atopic dermatitis. We intend to advance a broad clinical development program for this investigational medicine, which was discovered in-house at Pfizer and is currently being evaluated in atopic dermatitis and also in asthma and COPD. We remain on track with our commitment and our continued focus on what matters most: maximizing the long-term value of our pipeline for patients and shareholders. We are investing with strategic discipline and focus to build a foundation supporting our aim of high single-digit 5-year revenue CAGR. It's vital that our R&D organization has the resources to advance our robust pipeline, including both internally discovered programs and opportunities we have added through strategic moves such as our acquisition of Metsera and our in-licensing agreements with 3SBio and YaoPharma. Our commercial teams are the leaders in translating scientific progress into real-world impact. We are furthering investments to provide them with capabilities, technology and support helping our medicines reach the right patients at the right time so we can deliver sustained value. We also remain deeply committed to our shareholders. We intend to maintain and over time, grow our dividend as we continue to delever and build long-term value. Embedding the use of artificial intelligence across our company is a key strategic priority, and we are driving continued progress in R&D, commercial, manufacturing and core enterprise functions. We are empowering our colleagues to accelerate innovation by pairing frontier AI tools, tailored to function and role, with comprehensive and continuously updated training. One of the areas where we see the most substantial promise is the discovery, development and delivery of new medicines and vaccines. Leveraging the power of AI to compress timelines and improve decision-making is central to our innovation strategy. We are embedding AI into each functional line of R&D. Pfizer has a vast repository of small and large molecule, translational and clinical data and AI is creating the opportunity to unlock insights that could drive a significant impact on how we discover and develop medicines and vaccines. So with that now, I will turn it over to Dave to speak about the financial performance of the company. David Denton: Great. Thank you, Albert, and good morning. Let me begin by highlighting that our strong first-quarter performance reflects the continued disciplined execution across our strategic priorities, and importantly, continued progress in repositioning the company for sustainable growth. We are making targeted investments today to drive revenue growth later in the decade and beyond. Looking ahead, Pfizer is entering a new phase. Our launched and acquired products, combined with the strengthening pipeline, are positioning the company with the ability to deliver growth towards the end of the decade. While we remain focused on managing near-term LOE headwinds, we are actively building the foundation for durable long-term value creation. And with that as context, I'll review our first quarter results, discuss our capital allocation priorities, and conclude with an update on our '26 guidance, which we are reaffirming today. In the first quarter of '26, revenues were $14.5 billion, exceeding our expectations and representing an operational increase of 2%. Excluding our COVID products, the underlying business delivered approximately 7% operational revenue growth, reflecting solid demand across key brands and continued strong commercial execution. On the bottom line, first quarter reported diluted earnings per share was $0.47, and adjusted diluted earnings per share was $0.75, also exceeding our expectations. In addition to our strong revenue, this outperformance also reflects our ongoing commitment to managing our cost base and to drive productivity across the organization. Our results this quarter demonstrate the effectiveness of our refined commercial strategy. We saw solid contributions across our product portfolio, primarily driven by Padcev, Eliquis, Nurtec, Lorbrena and the Vyndaqel family, each reflecting focused execution in our key therapeutic areas. Our launch and acquired products delivered $3.1 billion in the first quarter revenues and grew by approximately 22% operationally. These results demonstrate the early impact of our portfolio transition and our investment strategies. We continue to invest behind these product groups to support their growth, which we expect will enable the company to partially offset upcoming LOE headwinds over the next several years. Adjusted gross margin for the first quarter was approximately 76%, primarily the result of product mix during the quarter and ongoing cost control measures. I do want to note, accrued royalty expense was higher this quarter and dampened gross margin compared to the first quarter of last year. With that said, strong cost management across our manufacturing footprint remains a top priority. As a reminder, over the past several years, our adjusted gross margins have generally remained in the mid-to-upper 70s when excluding Comirnaty, which is a 50-50 profit split with our partner BioNTech. We continue to expect approximately $700 million in savings from our Phase I of our manufacturing optimization program this year with approximately $175 million realized in this quarter. Total adjusted operating expenses were $5.5 billion for the first quarter of '26, an increase of 4% operationally versus the first quarter of last year. And now looking at the components. Adjusted SI&A expenses decreased 5% operationally, primarily reflecting lower marketing and promotional spending on various products from more targeted investments and ongoing productivity improvements, as well as lower spending in corporate enabling functions. Adjusted R&D expenses increased 11% operationally, primarily driven by an increase in spending in certain oncology and obesity product candidates. First quarter 2026 adjusted operating margin was strong at 38% and above pre-pandemic levels, demonstrating effective cost management as well as revenue performance. We have already made meaningful progress on our productivity initiatives and remain on track to deliver the majority of the anticipated $7.2 billion in total net cost savings by the end of '26. And looking ahead, we will continue to identify opportunities to further enhance efficiencies while prioritizing investments that support future growth. Turning to the bottom line. Q1 reported diluted earnings per share again was $0.47, and our adjusted diluted earnings per share was 75% -- $0.75, which benefited from our strong non-COVID revenue and efficient operating structure. Now with that, let me turn to our capital allocation strategy. Our strategy is designed to enhance long-term shareholder value while preserving flexibility. It includes reinvesting in the business at appropriate returns, maintaining and over time growing our dividend and preserving optionality for future value-enhancing actions, including share repurchases. In Q1, we invested $2.5 billion in internal R&D, returned $2.4 billion to shareholders via the quarterly dividend and our completed business development activity was minimal. We closed on the sale of our stake in ViiV in the second quarter, providing us with approximately $1.65 billion in net proceeds, after taxes and customary closing costs. Our BD capacity, when including the ViiV proceeds, is approximately $7 billion. First quarter '26 operating cash flow was $2.6 billion and leverage ended the quarter at approximately 2.8x. And as just a reminder, given the LOE headwinds over the next few years, we expect leverage to remain around the current levels or even slightly higher through the transition period. I will also mention that we made our final TCJA repatriation tax payment of approximately $2.6 billion in April. Based on our performance to date and continued execution, we are reaffirming our full year '26 guidance today. We continue to expect total company revenues in the range of $59.5 billion to $62.5 billion and adjusted diluted earnings per share in the range of $2.80 to $3 a share. This outlook reflects our expectation of strong contributions across our product portfolio, adjusted gross margins in the mid-70s range, disciplined cost management and continued investments to support growth by the end of this decade. As a reminder, sustained low disease levels of COVID will likely continue to weigh on Paxlovid utilization over the next several months. And additionally, our plan assumes that the majority of Comirnaty sales will occur towards the end of the year and consistent with the vaccination season. And as always, we continue to monitor currency fluctuation as the year progresses. In closing, over the next several years, our focus remains on investing in key assets while managing upcoming LOE events, primarily from this year through 2028. As we look towards the end of the decade, growth is expected to be driven by our advancing R&D pipeline and the continued progress of our launched and acquired products. Following the Vyndamax settlement, we now have a clear line of sight to a high single-digit 5-year revenue CAGR post-2028. Furthermore, this event, combined with our legal win in the Belgium court regarding the EU Comirnaty contract will enhance our cash flow post-2028. We continue to position Pfizer for durable long-term growth and shareholder value. And with that, I'll now turn the call back over to Albert to begin the Q&A session. Albert Bourla: Thanks, Dave. Nice quarter. Now operator, please assemble the queue. Operator: [Operator Instructions] And our first question today comes from Vamil Divan with Guggenheim. Vamil Divan: I'll keep it to one. I think a lot of focus on the upcoming ADA meeting. Just curious if you can just kind of clarify exactly what we should expect to see. I know we obviously see VESPER-3, but any other data that we should expect from a Pfizer perspective? And I think hosting an investor event in conjunction with [indiscernible]. So curious if there's any other details you can share around that? Albert Bourla: So Chris, the question is for you. How much of the data we're going to disclose in the ADA? Chris Boshoff: Thank you very much for the question. It's obviously a very important program. We're excited with the progress. And since the close of Metsera, as you know, we had exceptional execution, not only in the clinical development, but also on the commercial development side and as well as CMC and on the pharmaceutical sciences as well as the devices. Detailed data from VESPER-3 will be shared, the top line data we presented last time at the 4Q '25 earnings. Data from VESPER-1, the open-label extension, will be shared as well as data from VESPER-2, which is weekly [ danuglipron ], our new name for GLP-1, with or without titration in participants with type 2 diabetes will be shared. We will not share yet at ADA data on amylin mono. We expect 24 weeks monotherapy and 28 weeks combination with the amylin and GLP-1 that will be shared in the second half of this year. Operator: Our next question comes from Dave Risinger with Leerink Partners. David Risinger: So my questions are on your oncology readouts this year that could move the needle for the company. Could you comment on your expectations for SV and Mevro pivotal readouts this year? And then separately, if you could just please provide an update on your restructuring of corporate strategy and business development operations at the company? Albert Bourla: Thank you very much, Dave. Let me take the second one and then Chris will address the SV and Mevro. We did some changes in our organizational structure that are aligned with our constant effort to simplify. We have reduced the members of my executive team by 4 over the next couple of years -- over the last 2 years. So the business development moved under Chris Boshoff because most of the business development are right now related with R&D pipeline and choices. We see significant improvement in any friction that could exist and how smooth things could work by doing that. We also moved the commercial development, which is all the commercial strategies that we're sitting in that group into the global marketing of the organization. And that creates also a significant amount of synergies by having global and new products, global market with new products and with our old products. That went under -- Alexandre took over the responsibility to manage the portfolio management team. He's the new Chair, and he is focusing on prioritizing the pipeline. And then the strategy group moved to my Chief of Staff, so in the office of the CEO, where I can have also better supervision. So this is the change that happened into our organization. And we feel that they are consistent with everything we were planning, which is simplification of our business. Chris? Chris Boshoff: Thank you very much. So to start with SV, important program for us. Integrin B6C is a highly differentiated target overexpressed in 90% of lung cancers and little expressed in normal tissue in the lung. And we were encouraged by the first-line data, which we -- I mean, the Phase I data, which we shared, albeit a single-arm experience with a median overall survival of approximately 16.3 months. The second-line study, just a reminder, is focused on non-squamous based on the signals we've seen and Phase III study against docetaxel. The study is statistically powered should it be positive for overall survival. It will also be clinically meaningful. Just a reminder, we also have an ongoing Phase III trial in the TPS high, TPS more than 50. And data will be shared at ASCO from the Phase I experience. This is pembro versus pembro plus SV. A reminder that last year, we shared data for that combination in PD-L1 high handful of patients, but everyone responded in that population. So it was 100% response rate in a small population. And for mevrometostat, again, an important differentiated, highly specific differentiated EZH2. The first study that will read out is MEVPRO-1, which is in patients post abiraterone of significant unmet need and enzalutamide versus -- sorry, enzalutamide plus EZH2 versus physicians' choice of enzalutamide or docetaxel. And that should read out middle or second half of this year. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott: Maybe 2 for me. First, maybe for Dave or the broader team. I know you typically don't raise guidance with 1Q, but does seem like a very solid start to the year from a revenue perspective. Can you just talk generally about the business trends versus your expectations and just how you're thinking about the year progressing from here? And then second question for me was on BD capacity. You mentioned $7 billion. I guess just given the Vyndamax clarity, could the company look at larger transactions if the right deal were to present itself? Or is the focus still much more on the internal pipeline and maybe small tuck-ins from here? David Denton: Yes. Chris, Dave here. Thank you. Yes, I think to your first question, company is off to a really solid start in Q1. If you look kind of up and down and across the board from a product perspective, we exceeded expectations on top line and bottom line and really strong cost control and cost management and very disciplined execution. So yes, setting ourselves up really well for delivery for the balance of the year. As you well know, Chris, I have a philosophy of not really adjusting in Q1. I think as you well know, if you look at our COVID franchise, it will always be back half weighted because of the seasonality of this. And so we are, if anything, have derisked delivery on that without raising guidance. So absent that, we probably would be raising guidance. How is that? So again, strong performance. Secondly, as I said, we do have $7 billion in BD capacity. Obviously, this development from a legal perspective actually gives us more confidence in our cash flow delivery over the next several years. And we constantly look at BD and understand what is appropriate strategically to do from a BD perspective to support the needs of the company and deliver long-term value. Operator: Our next question comes from Kerry Holford with Berenberg. Kerry Holford: Just on Comirnaty, I wonder if you can just talk a little bit more about the vaccination rates you're expecting this year within the U.S. and international regions? And then just coming back to the international region, can you talk a little bit more about the existing European contracts, remind us of those existing phase payments. And in the context of that recent Belgian court decision, the 2 items together, how should we think about the evolution of ex-U.S. sales for that vaccine? Albert Bourla: Okay. Let's start with international, and then we move to with Alexandre and then Aamir will speak about the vaccination rates in the U.S. Alexandre de Germay: Yes, good question. Just to put context, the decline that you see in Q1 on Comirnaty has nothing to do with vaccination. It's really the effect of last year. We shipped our last contract elements of our contract with the U.K. So we don't have that contract anymore in 2026, and that's why you have a reduction. But it doesn't really talk about the vaccination rate. Actually, we went through the vaccination numbers in Europe in 2025 and mostly stable versus 2024. Of course, you have differences. For instance, in France, the vaccination rate is around 25% in adult. In Spain, it's going to be around 35%. But those rates are stable, and we see government's willingness to continue to invest and increase awareness of their older and at-risk population to get vaccination. In 2026, we will work with those governments across the European Unions to actually continue to execute our contract the same way we did in previous years. Now with regard to the legal case and the court judgment on April 1, 2026, the court judgment is very clear, and we've started to work with the governments in Poland and Romania to actually execute the judgment and we're discussing the best path forward to implement that judgment. Albert Bourla: Thank you, Alexandre. So Aamir, what about the U.S.? Aamir Malik: Vaccination rates in the U.S., obviously, is very different for every segment. In COVID with Comirnaty, there was a narrowing of the label. So we did see a shrinking of the market a bit. In the case of RSV, we obviously now going past our third season with a tougher to activate adult population, but growing on the maternal space, and there's population dynamics with infants and adults. So we see ups and downs in the vaccination rates as a result of those dynamics. But what I feel very good and very confident about is the way that we're executing in that market. So if you look at every single one of our teams, we have market-leading positions. [ Prevnar ] more than 60%, Comirnaty more than 60%, [ Abrysvo ] now at 84% and [ Prevnar ] adult, even after many months of competition from Merck holding share steady at 70%. So I feel very good about the way that we're executing in a slightly turbulent market. Albert Bourla: Thank you for the confidence, Aamir. Operator: Our next question comes from Umer Raffat with Evercore ISI. Umer Raffat: And I appreciate some of the comments you made around maintaining the dividend. I just thought I would approach it from 2 different angles, if I may. First, I guess, what's the likelihood that Pfizer entertains a transformative M&A in near or medium term, which could end up impacting dividend as we've seen in history? And then secondly, Albert, I guess, how are you personally, but also the Board thinking about your tenure at Pfizer and how it ties to dividend integrity beyond? Albert Bourla: Look, we never say never, and we always look at every business -- possible business combination for an M&A. If you are asking me if right now, we think that we are going to go for something very big, a big merger, no. We think that right now, in the next few years, it is the time to execute on AI transformation of these organizations. And that requires not the disruption of mega merger. So I would say that we are open to everything and we are looking at everything that can create shareholder value, but it is not right now very high in our list to find something like that. The second question, how I see my tenure? I see it like continuing. And I said multiple times that I was very proud of what we were able to achieve with COVID. But then if you are spoiled with this feeling of satisfaction, you want to do it again. So I'm planning to do it again and hopefully, with cancer and obesity and vaccines. Operator: Our next question comes from Asad Haider with Goldman Sachs. Asad Haider: Albert, just going back to last December's guidance call, you highlighted $17 billion of annual revenue impacted by LOEs by 2030. And now with the [ Vyndamax ] patent settlement extending that to mid-2031, your comments that you are aiming to achieve high single-digit 5-year revenue growth starting in 2029. Just if you could double-click on that a little bit more, just looking at the pipeline and the current BD aperture that you just described, just level set us on any updated thoughts on bridging the gap around how we should be thinking about the levers to drive this growth against the stacked LOEs? And then just related, embedded in this high single-digit CAGR, what are the assumptions around your base business such as COVID and the current oncology products? Albert Bourla: Yes. It is easier, of course, to forecast the base business because it's a constant. So that it is following the normal trend that we expect based on product by product. The LOEs also are easy to predict because they have the certainty of occurrence. Right now, you're right, with this 2.5 years delay of the LOE of a product that is $6 billion plus, it is providing significant, as you can understand, opportunity for cash flows, EPS and change the growth profile. So that's why we spoke now because with this uncertainty going about our projections about the growth profile, which we said it is starting in '29, it's a 5-year high single-digit CAGR. How that is built is built with the current portfolio with the decline through the LOEs and with the additions of pipeline that they are heavy risk adjusted. So it's not that we are having [ binary ] events. So the pipeline are multiple, as you know. We have a series of readouts right now that will affect the revenues in the '29. And so I think when -- I feel confident about that because when it is a large number of pipeline assets risk adjusted, statistics usually work. And those that will fail will fail and those that will succeed will succeed, but the risk adjustment takes into consideration about that. So very confident about the growth trajectory of the company starting in '29. And I'm also very confident that we navigate the LOEs, as you saw right now, very well starting already this year, the LOEs. I also want to emphasize that always the strategy for LOEs was new and acquired products to do well because they were launched and acquired to offset the LOEs. They are growing 22% this year. They are already on $3.1 billion in a quarter. If you -- without saying that that's the guidance, but if you multiply by 4 just to give you [indiscernible], we are talking about over $12 billion this year and growing. And the $17 billion of LOEs now after [indiscernible], they are more $14 billion to $15 billion rather than $17 billion. So I think it's manageable. Operator: Our next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: I really want to touch on capital deployment, specifically when it comes to share repurchases. Dave, I know that, that's been a method that you wanted to employ now with clarity on [indiscernible] and the CAGR post-2028, what other -- what else do you need to see to potentially start buying back shares, especially at these levels? David Denton: Yes, Evan, great question. We always look at our capital allocation strategy of balancing between the 3 options that we have. At the moment, our focus is really on investing in our R&D platform and in business development to drive long-term value. With the development in these court cases, that does give us a bit more confidence in our cash flow over time. So you'll see us the capital allocation share repurchase level will come back into greater consideration going forward. So great question. Something we always look at, and we're always looking to do what's best for the company and shareholders long term. Operator: Our next question comes from Courtney Breen with Bernstein. Courtney Breen: I just wanted to probe a little bit more on [ sigtolimod vedotin ] and positioning in that frontline setting, all comers relative to the Symbiotic-Lung-01 study that you've already started with the PD-1 VEGF. I also note that you've got kind of a Phase I/II running combining these 2 assets. And can you help us contextualize that new Phase III all-comers that you intend to start this year for SV first line and how that may be positioned relative to Symbiotic-Lung-01? Albert Bourla: All right, Chris? Chris Boshoff: Thank you very much for the question. Lung cancer is obviously a very significant unmet need and having a number of shots on goal now with a very differentiated portfolio gives us confidence that we can continue to play an important role in lung cancer beyond just in the targeted therapies like [ lorlatinib ]. For SV, we are very encouraged by the data we've seen for the combination of pembrolizumab plus SV in the PD-L1 high population, where we've previously chosen a small number -- a small cohort of patients that they all responded in the PD-L1 high to that combination. So the Phase III study that's ongoing of pembrolizumab versus pembrolizumab for SV, that study is recruiting well in the first-line setting, and we're confident for the readout for that study. And ongoing also is the second-line study, which is against docetaxel, which was encouraged by the previous data we've seen obviously in a single-arm experience with a median overall survival of 6.3 months. So that study should read out midyear. That's docetaxel versus SV second line powered for -- obviously, for overall survival. And if it's positive, as I said earlier, it will be clinically meaningful. And then ongoing studies being planned also for the broader population in combination with chemo plus pembrolizumab, and we will share some of the data later this year for the early data for that combination. In terms of 4404, at ASCO, we will share the Phase II data of 4404 monotherapy in first-line PD-L1 expressing non-small cell lung cancer. As you know, we recently shared data at AACR, where we repeated the preclinical and early data generated by [ Bio China ]. So we're really confident that this is a differentiated molecule. And the binding against VEGF is -- we've shown at AACR is better, is higher affinity than what's seen with [ bevacizumab ]or that's seen with competitive VEGF/PD-1 molecules. So confident in the molecule. We'll share more data later this year with a broad program starting, including in combination with chemo. And just a reminder at ASCO, we will also share data and with 4401 plus chemo in first-line advanced recurrent endometrial cancer, another program that we plan to start a Phase III program. Operator: Our final question comes from Louise Chen with Scotiabank. Louise Chen: I wanted to ask you, which key products do you think will drive the reacceleration of your growth in 2029 and beyond? And then regarding the international obesity opportunity, just curious what you've learned from the launch of your GLP-1 in China? Albert Bourla: Alexandre, let's start with you again this time because of visiting international has, of course, the Lilly numbers have surprised how big the international market is. And then also speak about key products that will drive your growth in '29. And then Aamir, U.S. key products that will drive growth in '29, please? Alexandre de Germay: So a good question on the ecnoglutide launch in China. Of course, it's very, very early day. We really launched the product Monday last week. So I mean, it's only a week, so I can't really talk to you about the penetration of ecnoglutide in China. But what is really interesting is actually the incidence of chronic weight in China is quite high, 15% of the Chinese population. And considering the size of the China population, that makes it one of the larger market for chronic weight management. And that's the reason why we decided on March -- on February this year to actually do this collaboration with Hangzhou Sciwind Biosciences for the commercialization of ecnoglutide in China. And since then, we got the approval and commercialized these assets. Ecnoglutide has a very interesting profile. And actually, its demonstrating in a placebo-controlled study, a 15.1% weight loss at 48 weeks, which is in par with the best GLP-1. With this biased mechanism of action of GLP-1, we think that we have -- we are bringing to market a very effective asset with a good tolerability profile. And of course, we're going to leverage our very strong primary care capabilities in China that puts Pfizer China as one of the leading in primary care. So the combination of a very attractive clinical profile plus our knowledge in this area, we believe matters a leader in this category. And we're not coming very late into the market because remember, Lilly really introduced their asset in -- at the beginning of last year. So it's not like we're coming many years after the introduction of those assets. So as I said, I'm very optimistic, both due to the profile of this asset and the capability that we have developed in China. Now when it comes into the growth engine of the international, there are -- I just want to step back one second. If you look at the quarter and the fact that our non-COVID primary care grew double-digit growth, we delivered $2 billion this quarter. Remember, we closed last year with a double-digit growth on primary care. Now if you look at the Specialty Care, about $1.5 billion this quarter, we're delivering a double-digit growth again. That was on the back of a double-digit growth last year. And there are assets in those different areas that will continue to power our growth. I come back to Primary Care, our vaccines are growing very strongly. And the reason why we are growing very strongly on vaccine is because both on [ pneumococcal ] and on RSV, we have a large population. If you look at -- as you know, in [ pneumococcal ], this is a very -- this is -- it's a very large population and 2/3 of our vaccine business come from pediatrics. And of course, we have a large pediatric population to continue to grow so both in maternal immunization and [indiscernible]. So the vaccines have a potential to grow in pediatric and in adults. Of course, a big growth in the -- at the end of the decade will come from the Metsera access in chronic weight management because there are 2 elements of that. One, it's an underserved category with a large epidemic across the world, right? In some of the emerging markets, we have a very high prevalence in Saudi, in Brazil, in Mexico of obesity. And our presence in those markets will -- with a strong primary care will allow us to actually tap this potential. But also, it is a cash market, which also is a big advantage in Europe, in Japan and other developed markets where right after approval, we can introduce those products, which is not the case today in many of our categories because it takes a lot of time for reimbursement negotiation with the payers. So you see we have an in-line asset that will continue to power the growth, and we are bringing assets like the Metsera that will go straight to market. And of course, the oncology asset will come, but it will take longer for reimbursement negotiation. Albert Bourla: Thank you, Alexandre. Aamir, now your thoughts for U.S.? Aamir Malik: Louise, thanks for the question. There's many things that give us confidence about driving growth in the U.S. in '29. If you take the first category, we have products that are on the market today that have a lot of upside to them. So if you think about Padcev, all of our recent growth has been primarily driven by LAM UC. We're at the high 50% penetration there. And we've got lots of upside in MIDC, 303 and 304. So there's a lot of headroom for growth there. Secondly, you look at products like Nurtec, we've got a lot of tailwind behind us now, but only 60% of people who write a triptan have yet to write an oral CGRP. So there's a lot of headroom for growth, and we're executing really well against that. Second, you look at some of our existing large franchises. We have a lot of confidence in what's going to happen with [ Vyndamax ]. Now with 5 years of additional exclusivity gives us the opportunity to invest and to continue to grow diagnosis. And we are doing a great job defending our existing patient base as well as ensuring that it is the choice -- the top choice for new patient starts. And so we think we have a lot of momentum on franchises like that as well. And then just to complement what Alexandre was saying, if I think about new areas of growth, we talked a lot about the oncology assets already, but obviously, we're very excited about what we have to bring to the market in obesity. The assets speak for themselves, but what I'm particularly excited about is the fact that we have unique capabilities as a company to win in this area, both in terms of our ability to activate consumers and patients in very different ways as well as our legacy in this space and the fact that almost 60% of physicians who are going to write these products we already touch today through a combination of our field forces. So those combinations are just some examples of what gives us confidence to grow in '29 and beyond. Albert Bourla: Thank you, Aamir, and thank you, everyone, for your attention. Our strong performance in the quarter reflects the impact of our continued focus and disciplined execution. We are engaging with precision to maximize the value of our commercial portfolio, and we are seeing the results in our financial performance. In R&D, we are making meaningful progress with a robust slate of critical milestones ahead in 2026 that we believe will further demonstrate the strength and breadth of our pipeline. I want to thank my Pfizer team. I believe we have the best team Pfizer ever had. They are dedicated to our purpose, continue to deliver and embrace our commitment to creating long-term value for patients and for our shareholders. Thank you for joining the call today, and thank you for your interest in Pfizer. We look forward to sharing further updates as we execute our priorities throughout the year. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. First Quarter Earnings Conference Call occurring today, May 5, 2026, at 8:00 a.m. Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin. Steven Marotta: Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter of fiscal 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the first quarter performance is a comparison to the first quarter of 2025, unless otherwise indicated. And with that, I will turn the call over to Chris. Christopher Tomasso: Good morning, everyone. Thank you for joining us to discuss our first quarter results as well as our plans for the balance of 2026. First, I want to express my appreciation to our entire team across the country, more than 17,000 dedicated employees whose commitment to making days brighter drives our success. We're pleased with our first quarter performance as several of our key growth initiatives supported solid financial results. We delivered same-restaurant sales growth of 2.8%, generated restaurant-level operating profit margin of 18.5% and expanded the system to 648 restaurants with the opening of 16 new locations. We believe our first quarter results and the benefits we are realizing from our growth initiatives line up well with our full year expectations. As a result, we are reiterating our fiscal 2026 same-restaurant sales growth and total revenue growth guidance. We're also raising the low end of our adjusted EBITDA guidance. Early last year, we began investing in digital marketing programs and accelerated that effort in the first quarter of 2026. We expanded the rollout of our digital marketing campaign to approximately 75% of our restaurant base, up from roughly 1/3 in 2025. Based on early analytics, we are already realizing a positive ROI on the increased expense in the markets receiving support for the first time in addition to the positive ROI in markets benefiting from a second year of investment, reinforcing our conviction in the strategy and plan. The campaign is built around a targeted multichannel approach that spans paid social, online video, paid search and connected TV, allowing us to reach consumers in a relevant and engaging way. We're encouraged by the engagement across several key measures. The campaign is attracting first-time customers who may not have previously considered the brand, reengaging customers who had lapsed in frequency and driving greater frequency among our existing customer base. At the same time, we are seeing improvement across key metrics, including gains in both unaided brand awareness and future purchase intent, which we believe are critical indicators of First Watch's long-term growth potential. These early results demonstrate that our increased investment is not only driving near-term traffic and engagement, but also strengthening the brand and building a higher lifetime customer value, so much so that we are pulling forward several million dollars of marketing spend into the second quarter from the back half of 2026. We're also pleased with the performance of our new core menu. As we discussed on our last conference call, we conducted extensive testing of the menu in 2025, our first comprehensive menu update in more than a decade. The primary objective was to elevate the overall guest experience while also simplifying execution and improving efficiency for our restaurant teams. Following the positive test results, we rolled out the new core menu system-wide by late February. Early reads have been positive across a host of KPIs. For instance, the 2 prior seasonal menu fan favorite items we highlighted, the Barbacoa Breakfast Tacos and the Barbacoa Chilaquiles Breakfast Bowl are both mixing above our expectations and both are higher-margin entrees. In addition, the menu enhancements are driving positive mix of our fresh juices, shareables and add-ons. The new core menu is constructively impacting our consolidated sales mix and overall check composition. We're seeing higher attachment rates and more frequent trade-ups, which have translated into per person check average growth in the first quarter that was incremental to our carried pricing. That dynamic indicates that customers are not only responding well to the updated menu, but also that the new design is encouraging them to explore deeper into our offerings, validating both the strategic intent and the financial discipline behind this important initiative. We also made a tactical decision to extend the duration of our Jumpstart seasonal menu from the traditional 10-week to 20 weeks, a first for our company. This move was motivated by 3 key objectives. First, the increased repetition realized in the longer LTO menu window enables our operators to focus on the exceptional execution of the new core menu. Second, we are using the extended time frame of our Jumpstart seasonal menu to evaluate how a longer-tailed marketing campaign could influence future seasonal menu mix as a percentage of consolidated sales. Encouragingly, attachment of our seasonal menu items has improved alongside the launch of the new menu. Even alongside the positive mix we are seeing from the core menu, it's exciting to see attachment to our seasonal offerings strengthen as customers respond enthusiastically to both. Third, we brought back several of our most successful limited time offerings to the menu in order to generate excitement and strengthen customer engagement. Among these returning favorites were the BEC, a Bacon Egg and Cheddar sandwich served on thick artisan Sordough and the Strawberry Tres Leches French Toast. The newest introduction, the Chimichurri Steak & Eggs Hash is now our highest performing seasonal entree of all time. Successful innovations in our restaurants, like those I've been sharing on this call, illustrate the power of the entrepreneurial First Watch culture. Promising ideas quickly rise to in-restaurant testing, which provides for optimization through the working partnership of our culinary and operations teams. The result is our rich portfolio of new initiatives and upcoming offerings. We recently wrapped up testing of the highest mixing new shareable item is Million Dollar Bacon, which will launch in just a few weeks. Moreover, a suite of offerings that are driving higher attachment and boosting the guest experience is going into test now with an expectation that they will earn their way under the core menu early next year. Shifting the spotlight to development and growth. We remain the fastest-growing full-service restaurant brand in the United States and the success of our recent classes reflects the benefits of following our disciplined real estate site selection criteria and our broad appeal. Our preopening period marketing builds anticipation and trial, which has been supported by our operations teams, who work together to ensure we are executing at a high level upon opening in the critical early months following and for years to come. The class of 2025 annualized sales remains solidly ahead of both our underwriting targets and our comp base. And while still early, our recent class of 2026 NROs is performing even better. Looking ahead, our priorities for 2026 and beyond are focused on driving durable, profitable growth. We're going to expand our presence in the new markets we've recently entered, moving briskly from market entry to market densification. By increasing restaurant density within a local market, we enhance regional efficiencies, broaden our customer base and build additional brand awareness. At the same time, we will continue to be disciplined about where we expand. We are strategically filling in core markets where we already have strong operating leverage while also expanding in emerging markets where we have identified compelling long-term demand and significant white space. The bottom line is First Watch works everywhere. Considering our proven portability, we have the competitive advantage of opening new restaurants in a balanced fashion across core, emerging and new markets on our march to 2,200 locations. We have established ourselves as the leader in daytime dining and continue to grow market share, strengthening our leadership position. When one looks across the landscape, there is simply no other daytime dining brand that brings together our scale, our discipline, our proven ability to grow consistently and the size of the white space still in front of us. Taken together, these attributes truly differentiate First Watch. We're energized by what lies ahead with ongoing innovation leading to growth, and we remain focused on doing what we do best, creating a wonderful place to work for our teams and delivering an experience that keeps customers coming back. And with that, I'll turn it over to Mel. Mel Hope: Thank you, Chris. Total first quarter revenues were $331 million, an increase of 17.3% with positive same-restaurant sales growth of 2.8%. Our top line growth results from the positive same-restaurant sales growth, coupled with contributions from 194 noncomp restaurants, including 68 company-owned new restaurant openings and 19 franchise locations acquired since the fourth quarter of 2024. Same-restaurant traffic growth was negative 2%, with weather negatively affecting the quarter by around 100 basis points in addition to our customary planned sales transfer. Excluding those impacts, underlying traffic trends remain consistent with our expectations. Food and beverage expense was 22.6% of sales compared to 23.8%. As a percentage of sales, costs benefited from carried pricing of around 4% and commodity deflation around 1.6%. The commodity deflation was driven primarily by eggs, avocados and a brief favorable market trend in bacon prices. Labor and other related expenses were 33.7% of sales in the first quarter, a 90 basis point improvement from 34.6% reported in the first quarter of 2025. Carried pricing offset 3.7% of labor inflation, while our labor efficiency was essentially flat as compared to last year. We realized restaurant-level operating profit margin of 18.5% in the first quarter of 2026, a 200 basis point improvement over last year. We realized a percentage margin of 0.3% this quarter at the income from operations line. At $39.9 million, general and administrative expenses were 12.1% of total revenue. The increase compared to last year was largely due to the scheduling of our leadership conference in the first quarter and the expansion of our 2026 equity compensation program. First quarter G&A expenses were lower than our plan due largely to the timing of certain activities. Although, our full year G&A expense plan remains unchanged, we are applying to the second quarter a portion of the marketing expense planned for the back half of the year, leading to our expectation that total second quarter G&A expenses will approximate the first quarters. Adjusted EBITDA increased 22.2% to $27.8 million, a $5 million increase versus the $22.8 million reported last year. Adjusted EBITDA margin was 8.4% as compared to the 8.1% margin we realized in the first quarter of 2025. Net loss was $2.7 million. We opened 16 new system-wide restaurants during the first quarter, of which 13 are company-owned and 3 are franchise owned and ended with 648 restaurants across 32 states. The net effect of acquisitions in the quarter, which includes only the impact of purchases made within the last 12 months, increased revenue by about $8 million and adjusted EBITDA by just over $1 million. For further details on the first quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Now, I'll provide our updated outlook for 2026. We are reiterating the 1% to 3% range of same-restaurant sales growth, and we continue to expect positive same-restaurant sales growth in each quarter of 2026. Our guidance includes carry pricing of around 4% in the first half of the year, which blends to 2% for the full year. As a reminder, we did not take any price at the beginning of 2026. And as we have done in the past, we'll revisit menu pricing in the coming months. We continue to expect total revenue growth of 12% to 14% with around 100 net basis points of impact from acquisitions. We are reaffirming a total of 59 to 63 net new system-wide restaurants, which will result from 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants. We also plan to close 3 company-owned restaurants this year. Our company-owned new restaurant development pipeline is weighted to the second half of 2026 Q4 in particular. We continue to expect full year commodity inflation of 1% to 3%. Restaurant level labor cost inflation is expected to be in the range of 3% to 5%. We're raising the lower end of our 2026 adjusted EBITDA guidance range. Our new range is $133 million to $140 million, up from $132 million to $140 million previously. We're reiterating the net impact from the 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year. We continue to expect capital expenditures of $150 million to $160 million. I want to acknowledge the execution across our entire organization this quarter. I'm proud of our operators, our field leaders and our home office staff who navigated a dynamic environment, including weather impacts, welcoming and training a host of new employees, opening high-volume new restaurants and adjusting to our new core menu. Our updated outlook for the year underscores our confidence in our operators and in our new restaurant development pipeline. We appreciate your continued interest in First Watch. And operator, we'd now like you to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc. James Salera: Chris, I wanted to start by just asking if you could give us some detail around the outperformance that you guys have seen relative to maybe the overall perception of breakfast. I think a lot of investors are concerned that breakfast is one of the more pressured dayparting restaurants given the kind of economic backdrop and yet you guys continue to deliver pretty durable same-store sales. So can you just help us kind of bridge that delta you guys are doing versus kind of the broader breakfast category? Christopher Tomasso: Sure. Thanks. I think for us, it comes down to really 3 things: experience, execution and value. So I think a lot of the news and noise around breakfast and the softness around breakfast really has been targeted more and coming more from QSR. And I think you've seen a lot in the environment here about consumers really looking for value, consistency and the experience. And I think we bring that every day. And so I just think that the consumer is putting a high value on that and finding time in their mornings and middays to come see us. James Salera: If we think about some of the potential impacts on the commodity front, given the energy cost increase following the Iran conflict. Is there anything you are keeping an eye on or we should be keeping an eye on as you start to contemplate pricing in the back half of the year? I know eggs have still come down significantly, but there's been some fluctuation on some other commodities. Christopher Tomasso: Yes, we'll be collecting all that information, and it's part of the consideration. We need to know where the customer is, and we consider that as part of the pricing philosophy and thinking that we'll go through. So it's -- the short answer to your question is absolutely, we think about the pressures that are on the customer from either gas or any other inflation that we see out there. Operator: Our next question comes from the line of Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Just following up from the comp trend perspective. Obviously, there was a spike in gas prices later in the quarter with the geopolitical concerns and the Iran conflict. I'm just wondering if you could maybe share your thoughts on your ability to work through that, whether there was any change in trend late in the quarter and perhaps into 2Q, if you're willing to share April, just related to the gas price spike. If you can share those sequential trends, that would be great. And then I had one follow-up. Christopher Tomasso: Yes. I think a couple of things from kind of what we just said that I could expand upon. One is the traffic pressure that we felt really was impacted more by weather than gas prices and fuel prices and other pressures. So -- and then when you heard me talk about the performance of our menu and our seasonal menu and how the guests are electing to spend more and go deeper on our menu and add shareables and things like that. That came a little bit later, obviously, because we didn't launch that menu until February. So we've actually been very pleased with how our consumer has interacted with us despite what's going on in the macro. So we're fortunate that we -- our core demographic is higher income. And I think we have a little more insulation to that. And I think the behavior that we're seeing from our customer, certainly as we innovate and give them new reasons to come in and work around our menu has been something that we've been very encouraged by. Mel Hope: And Jeff, our development team does a really good job of locating our new restaurants and the business is close to our customers. So in terms of just convenience, I think that's a helpful attribute that our system enjoys in terms of being near the customer and convenient to them. Jeffrey Bernstein: Understood. And then just a follow-up. Well, first of all, whether you're willing to share April trends or whether there's been any change in trajectory. But otherwise, you did reiterate that you expect positive comps each quarter of this year. The compares are clearly much more difficult. In fact, the third quarter, they're like 600 basis points more difficult than the quarter you just completed. So just wondering your confidence in that. Maybe there are particular initiatives to support such confidence. I'm assuming marketing is near the top, but your willingness to guide to positive through the rest of the year and what gives you that confidence? Mel Hope: Yes. We haven't seen a big shift in the trend in terms of the overall growth or what we have planned for the year. Operator: Our next question comes from the line of Brian Vaccaro with Raymond James. Brian Vaccaro: Just to ask on the First Watch value proposition and kind of your thinking on menu pricing. And maybe you could just talk about how you view the relative value proposition and price points kind of specifically versus some direct peers of the broader category. And when you think about menu pricing, assuming something material doesn't change in terms of the consumer backdrop, do you plan to take something in the second half, given there's still some underlying inflation, whether it be food, labor, et cetera? Christopher Tomasso: Brian, you know us well. You know you're not going to get that answer, but I appreciate you asking. Our philosophy does not change despite the macro environment. You saw what we did when we had record inflation. We will always lean towards the consumer whenever we can. And sometimes that means taking it on the margin. And sometimes it means we catch up a little bit later on. So I'd just tell you that we go into the beginning of the year and the middle of the year, really looking at things that we control. I think you heard me say that the seasonal menu is driving mix above our carried pricing. We love that, obviously. It's -- that's very different than taking price on a like-for-like item and a consumer paying one price one day and another price another day. So -- that's how we like to build check is through innovation and things like that. That said, we see the realities of inflation and other things, labor and all of that, and we try to keep that nice balance. We do know from our research that we have tremendous pricing power, but we also know that the consumer is under pressure. So we really try to walk that fine line. But we go into, and we're about to do it here in the next couple of weeks, a full evaluation of that. And I will say that we feel good that our consumer, our customer is behaving a little bit differently than what we're seeing and hearing out there. And I think it's because of the cocktail of things that we've put out there and put in place 18 months ago. The menu that we launched now has been something we've tested for 18 to 24 months. Same with the marketing and media. You know how we've kind of done the crawl walk run on that. Well, that's all leading to kind of bring together of all those things for our benefit and for the consumer's benefit. So the direct answer to your question is we're going to evaluate it here for a midyear price increase, and we'll do what we think is best. Brian Vaccaro: All right. You know, I had to take a shot at it, but I appreciate that. On commodity inflation, just a quick follow-up. Obviously, nice to see a little bit of year-on-year relief here in the first quarter, Mel, you noted some brief bacon relief maybe, but you obviously reiterated the guide for the year. So can you help us square those 2 a bit? And any color you can provide sort of on your Q2 expectations versus what's embedded in the second half? Mel Hope: So we did have some first quarter relief. The pork prices were a little bit unexpected relief in terms of price for us because our contracts are priced off published agency rates. And during the period that the government shut down, the agency prices were held flat rather than continue to ascend during the period. So that was a little bit of a surprise to us on an important commodity, but also our crop-related commodities of avocados and coffee continue to be expected to rise some through the year. So even though we enjoyed some relief in the first quarter, we are seeing sort of the seasonal increases in some of those. So we're -- our 1% to 3% guide on inflation in COGS, we're standing on that pretty firmly. Brian Vaccaro: All right. And then maybe just one more quick one. Thanks for the color on the G&A pull forward into Q2. Pretty clear on that. But can you just remind us what your expectations are for G&A for the year? Mel Hope: We don't guide to G&A for the year. It's just embedded in our adjusted EBITDA guidance. Operator: Our next question comes from the line of Andrew Charles with TD Cowen. Zachary Ogden: This is Zach Ogden on for Andrew. So you talked about the 1Q mix being driven by the new menu, but that was only fully rolled out for about a month. So is your expectation that mix can actually accelerate further in the balance of the year relative to 1Q? Christopher Tomasso: Yes. Just for clarity, it was about 2 periods in the quarter. So -- and again, it's also -- that mix is also driven by the seasonal menu that is out right now that has our highest mixing item ever. So that's driving it, too. But yes, we don't plan for mix, but based on what we've seen as long as the rest of our seasonal menus deliver the way the first one has or similar to it or on a year-over-year basis, I wouldn't be surprised to see positive mix. Zachary Ogden: Got it. And then you talked about the class of 2026 actually being even stronger than the class of 2025. So can you talk about what's driving that? Is that more of a function of the second-gen sites you're shifting into this year? Or is that a separate factor? Christopher Tomasso: I think the mix of second-gen sites is similar from a percentage standpoint, about half. So I wouldn't say it's necessarily that. I just -- to Mel's point, we're just -- that's an area where we are constantly learning and adapting as we either in site selection or prototype execution, design, those type of things. And that's one of the beauties of our model where we can kind of do those things. We have a kit of parts that we apply to each restaurant. So no 2 of them look alike, but they have very recognizable elements. And we're just constantly getting better. I think if you go back and look at our -- the performance of our new restaurants over the last 7, 8 years, you'll see that every year has gotten better than the last, and we have some standouts in each class. And so that's something that we just continue to innovate around and get better. Actually, I want to add one more thing to that. We've also -- with that comes the evolution of our preopening marketing and building the anticipation for the openings and that type of thing. So we're seeing stronger openings than we've ever seen before, and then they just carry on from there as well. Operator: Our next question comes from the line of Sara Senatore with Bank of America. Sara Senatore: I wanted to ask about marketing. You mentioned that you're pulling forward marketing, but your annual G&A target is unchanged. I guess is the implication that even if the ROI remains quite high, you wouldn't increase the annual spend on marketing? I'm just looking at -- I think last year, I know what you report in your 10-K is maybe not comprehensive, but it looks like you kind of doubled marketing last year. So just trying to understand, given how high the ROI appears to be, whether you would think about just stepping up the marketing budget for the full year? And then a quick follow-up. Christopher Tomasso: I guess -- probably an easy way to think about it is that G&A is the cocktail of a lot of different items, too. So when we maybe throttle up or down the marketing spend. There may be some other areas where we can dial back or push it out. So we manage G&A throughout the year. So the timing shifts from time to time based on what we think is important and what people will respond to at certain times of the year. So those adjustments, I mean, they're ordinary and normal. So we are continuing to manage our G&A inside what our full year plan is. Mel Hope: But specific to marketing, what I would say is by pulling that forward and getting more time to read the results of those dollars being spent gives us the flexibility and optionality to consider doing what you mentioned, Sarah, later in the year should the environment be conducive to that. Sara Senatore: Okay. Got it. And then, Mel, just on the -- you also mentioned that the G&A in the first quarter was slightly below to the same point, below your expectations. And is that the reason your EBITDA beat was a little bigger this first quarter than the full year guidance raised at the low end. Is that how I should think about it, which is some of that beat was maybe timing of G&A? Mel Hope: Yes, that's right, some favorability. Operator: Our next question comes from the line of Brian Mullan with Piper Sandler. Brian Mullan: Just a question on marketing also. If you look at the restaurants that have had the enhanced marketing tactics in place for longer, so maybe the first third of stores, are those performing differently than the stores they got it only more recently? I think what I'm really trying to ask is do the benefits build over time, do you get an initial lift and maybe followed by more benefits? Any color you could shed on that? Mel Hope: Yes. The lift in the restaurants that enjoyed some additional marketing spend last year has been sustained. So we're continuing to spend in those as well. So it's been effective for them not only last year when it was introduced there, but now in this year as well. Christopher Tomasso: And obviously, that was part of what we wanted to evaluate was the cumulative effect of a class, if you will, or a group receiving support and then receiving it again the following year what we should or could expect when that happens. And so that's part of our overall marketing planning as well, certainly as we go through the rest of the year and then into next year. Brian Mullan: Okay. And then as a follow-up, could you just comment maybe on the delivery channel broadly or generally speaking, really strong growth last year, you have to lap it. Is that kind of in the base now and you can grow more slowly? Or would you expect a little mean reversion this year? Just any comments on the balance of the year? Mel Hope: We've continued to see growth there, not to the level that we saw last year. But what we said earlier was that it's kind of in the base now, and we expect it to grow similarly to the rest of the system. And we're pleased that we kind of set a new level that we're growing from organically at this point. Operator: Our next question comes from the line of Jon Tower with Citi. Jon Tower: Chris, this one is for you. I'm just curious, obviously, you mentioned earlier that your new stores are performing exceptionally well, and they continue to build new class year after year after year, getting better in terms of productivity. The backdrop, though, within the competitive set has certainly weakened, at least based on what we can look at in terms of where you guys were thinking around the time of the IPO versus today. So I'm just curious if you can comment on the company's thinking around development over time and the commitment to that long-term low double-digit percent growth for units that you've spoke to over time. Christopher Tomasso: Sure. I think if you look back at how we've grown and how we got to this leadership position over the years, it was through our organic company-owned growth, acquisitions, sizable ones for that matter, external M&A and franchising at some point. This was really at a time when we had a lot of players in our space, in our direct space, at least espousing that they were going to have aggressive growth. And so we absolutely took the opportunity to take footholds in markets -- key markets for us and did so aggressively, and we continue to do that now. But that said, we're always looking at our capital allocation, what's the best strategy for the next 5 years, that type of thing. And so we're comfortable with our current unit growth outlook right now, but we are always evaluating. And if that changes, we'll obviously communicate that appropriately. Jon Tower: Okay. And then maybe just switching up a little bit. In terms of -- you talked about the new menu and the marketing helping with building brand awareness and it sounds like traffic too, to some extent. Can you speak to maybe any complexion of the customer base that you're drawing in with the new marketing campaigns? Are you seeing maybe younger guests come in relative to your existing base? Are you seeing less affluent consumers move into the stores for the first time versus kind of the core base that you have out there? Christopher Tomasso: Yes, that's a great question. We have seen our average age go down for the entire system. And a lot of that's driven by the new market entries, the new restaurants. And if you look -- I mean, if you look at the way our marketing is the channels that we're using, it's a little bit of a self-fulfilling prophecy with our focus on digital and social and that type of thing. So it's something that we're targeting. But we've actually seen quite a bit of growth in millennials. And so just the overall mix of our customer base now is dynamic and is changing, but it's going in the right way. And that's why we talk about attracting the next generation of First Watch customers so that we've been around 43 years and to kind of set us up for the next couple of decades by having a strategy like this. And as we've seen with other concepts, that's not an easy thing to do to keep your current customer base happy and engaged and coming while you engage and onboard, if you will, that next generation. So I think our teams have done an incredible job doing that. And I'm really pleased with the mix of our consumer. We haven't seen anything from -- you mentioned about higher income and that type of thing. Obviously, millennials from an income standpoint, act more like a high-income cohort in the way they choose to prioritize certain things that are important to them. And I think experience is one of those things. So that's a group that's willing to lean in on that. So I just think our offering is so ideal for this kind of transition to broadening our demographic appeal, the social occasion, the social gathering, group dining, brunch, those type of things. So yes, just long answer to it, we are seeing our customer cohort skew a little younger. Operator: Our next question comes from the line of Todd Brooks with Benchmark StoneX. Todd Brooks: Chris, you had said on the last call that you were equally as excited about the potential for the new menu versus the expansion of the enhanced marketing activities to be drivers of the business. here in fiscal '26. I guess, a, any surprises in how things performed across Q1 that either increased or maybe have you favoring one of the initiatives as a driver versus the other? And b, how is kind of the Q1 performance and what these key tactics are delivering kind of bolstering your confidence to still maintain the commentary about positive same-store sales in each quarter for the balance of the year? Christopher Tomasso: Yes. My comment comes from my philosophy of the menu being really the #1 marketing tool. It's something every one of our customer touches. We can -- there can be a cause and effect relationship immediately that you can see and how customers respond to what you've done, how you've innovated. And so I'm not surprised by what we're seeing from the new menu. I think even before we got it in test, there was a level of excitement around here about how it's being presented. We derisked it by bringing on some customer favorites from the past. And so I'm just really pleased that the consumer responded the way we expected them to. We've been very pleased by some of the add-ons like potatoes becoming million potatoes and add an egg and adding salmon to your avocado toast. And these aren't things that we just sat around and talked about. These are things that through our Y tour in speaking with our hourly employees, we hear that customers were adding salmon to the avocado toast. And so why not put it out there and see, okay, if people are willing to ask for it when it's not on the menu, if we put it on there and raise the profile of that, would we see the penetration and we absolutely have. So building the check that way in a way that the consumer wants to do it, again, versus just increasing prices on like-for-like items to me is the most healthy way to drive check, and we've seen that. I will say that, I think all of these things together, whether it's all the work that we did a couple of years ago with the KDS system and the dining room optimizations and the digital waitlist management improvements now coupled with the evolved menu and the increased marketing, I think, is all a really nice mix that's helping us to outperform the industry and deliver results like this. Todd Brooks: That's great. My follow-up and then I'll jump back in queue. Obviously, a really strong opening quarter here in Q1. And I think, Mel, you talked about still looking for a second half and fourth quarter focused balance to the openings for the year. Any cadence you give us first half versus second half on openings? And you talked about densifying markets here in '26. You had the strong same-store sales performance, almost up 3%. But what -- can you share with us kind of the anticipated sales transfer that you plan to absorb this year with more of a focus on backfilling in existing markets? Mel Hope: Yes. So in terms of the cadence of openings, we historically kind of have a big fourth quarter just because human nature tends to push projects a little bit heavier into the fourth quarter. And so I think at least for the average throughout each of the remaining quarters of the year, it's probably pretty similar this year to last year as we continue to try and improve that over time so that we can eliminate bulges in the development that put strain on our operators. So I would -- I'd kind of look to the cadence that we had last year as pretty similar for us this year. And then in terms of densification and sales transfer, when we underwrite new projects, we always consider the sales transfer and we -- and the new restaurants need to cover for that. They need to perform a little bit better in order to sort of pay back the other restaurants that experienced some temporary sales transfer. But that's all pretty planful for us and built into our overall underwriting. So when we say that, restaurants are outperforming or they're doing according to plan, we've already determined what we believe is the sales transfer. And it's generally within our range of expectations overall. We don't typically quantify it, because there's lots of factors that go into the success of building out a market or fortifying a market or cutting off competition or some of those other advantages as well. So we know what it is internally. We don't speak to it publicly very much. But generally, it's part of all the strategic consideration of how we build out a market and how we fortify the brand against a competitive intrusion as opposed to our own sales transfer. Christopher Tomasso: And Todd, I think that's one of the things that -- the point that sometimes gets lost on us because there aren't many, if any, high-growth full-service concepts out there that we do have -- we're a high-growth concept. We have sales transfer as we fortify these markets and do that. It's not immaterial, and it's just a natural headwind to restaurant traffic. But we view it as a positive one rather than any weakness in the core business because for us, same-restaurant traffic is certainly one of the metrics we look at, but there are so many other ones that we do as well. But for us, the profitable market share growth, the attractive new unit returns, all of those things together for us is what we look at and evaluate. So as Mel said, we model for it. We plan for it in the new restaurants, and it's something we've had for a while. Operator: Our next question comes from the line of Gregory Francfort with Guggenheim Partners. Gregory Francfort: I have 2 questions. My first is just labor per operating week growth and it was obviously a lot slower this quarter. And anything to call out maybe besides wage rate, just any other kind of onetime drivers? Mel Hope: Of the labor inflation, you kind of got garbled at the first part of your question on our phone. Can you just say it again? Gregory Francfort: Yes. Sorry, just labor operating week growth. You got more leverage on that line than maybe I expected. Any call-outs or anything else that might continue through this year? Mel Hope: No. I think our operators -- just compared to the first quarter of last year when there was -- when our traffic was under so much pressure and the inflation was affecting everybody. I think our operators had to adjust, but it wasn't sort of a linear adjustment. This year, we have a better operating environment, and that makes it a little bit more predictable in the restaurants in order to manage the crews and to drive operational initiatives through the organization that are efficiencies or staffing, that kind of thing. So nothing remarkable. It's the hard work in Elbow Grease of a good operating crew. Gregory Francfort: Got it. That's helpful. And then maybe this question is for Chris. Obviously, the stock has been maybe more pressured than you or I would have expected. And the returns are still better to develop than they are maybe to buy back stock. But I guess, have you considered potentially doing that? And are there other ways to maybe signal to the market your enthusiasm? And I'm just curious kind of how you think through that piece of the capital allocation, maybe the returns on buying stock versus developing stores, even if it's a lower return, maybe it's more certain. Just any thoughts there? Christopher Tomasso: I'd say the answer to your question is that I agree with you on the stock performance. And I'll just go back to my point that we are evaluating capital allocation. And we have very good returns on our new restaurants. We're creating a vast network of cash-producing machines at high returns and something that the consumer is interested in, right? So we wanted to take advantage of that. But overall, I'd say that from a capital allocation standpoint, we, as a management team and our Board, always look at opportunities to optimize that. And so we'll continue to do that. Mel Hope: And I think Chris is exactly right. Right now, the right thing for the company to do and our strategy is to continue to grow that cash engine, cash production engine. And the day that there is a shift in strategy, we owe the market a lot of explanation about how we -- how that would take place. But you want that cash engine to be as big as it can be. Therefore, you have more options of what to do with the excess cash at the time you make that shift. So I think continuing to build with the kind of returns we get out of our restaurants, the -- our capacity, the way we're building out markets, I think taking advantage of that now is important in the life cycle of the company right now. So building that cash engine is building a lot of value for the future. Operator: Our last question comes from the line of Chris O'Cull with Stifel. Christopher O'Cull: Chris, can you just elaborate on the decision to eliminate the COO position? And maybe what you see as the biggest areas of opportunity with operations to drive efficiency and maybe even improved guest experience? Christopher Tomasso: Yes, absolutely. I think as we looked at our overall G&A setup, and there were a couple of things. It was just a natural evolution for us. And -- but more specifically, it got me closer to operations, which I think is important. It's something that I've done for a long time here in this company and the opportunity to work more closely with the operations leaders. The way we restructured it, it only added one direct report to me. We created 2 SVPs of operations and basically split the country, and I'm able to now be more involved in a day-to-day basis on ops execution and ops strategy, frankly, and kind of be that one foot here, one foot in the field. And I'm excited about it. I think the team is excited about it, but I know we'll be a lot more efficient and effective because I can be more involved. Operator: Thank you. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Greetings. Welcome to the AudioCodes First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Roger Chuchen, Vice President of Investor Relations. You may begin. Roger Chuchen: Thank you, operator. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; and Niran Baruch, Vice President of Finance and Chief Financial Officer. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans and objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters are forward-looking statements as the term is defined under U.S. securities law. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks, uncertainties and factors include, but are not limited to, the following: the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, including governmental undertakings to address such conditions, shifts in supply and demand; market acceptance of new products and the demand for existing products; the impact of competitive products and pricing on AudioCodes and its customers' products and markets; timely product and technology development upgrades, the advent of artificial intelligence and the ability to manage changes in market conditions and evolving regulatory regimes as applicable; possible need for additional financing; the ability to satisfy covenants in AudioCodes' financing agreements, possible impacts and disruptions from AudioCodes acquisitions, including the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes' business; possible adverse impacts attributable to any pandemic or other public health crisis on our business and results of operations; the effects of the current and any future hostilities involving Israel, including in the regions in which we or our counterparties operate, which may affect our operations and may limit our ability to produce and sell our solutions, any disruption in our operations by the obligations of our personnel to perform military service as a result of current or future military actions involving Israel and any other factors described in AudioCodes filings made with the U.S. Securities and Exchange Commission from time to time. AudioCodes assumes no obligation to update the information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to its net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. With all that said, I'd like to turn the call over to Shabtai. Shabtai, please go ahead. Shabtai Adlersberg: Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our first quarter 2026 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice President of Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and the summary and discuss trends and developments in our business and industry. We will then turn it into the Q&A session. Niran? Niran Baruch: Thank you, Shabtai, and hello, everyone. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we will post shortly on our Investor Relations website an earnings supplemental deck. On today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the first quarter were $62.1 million, an increase of 2.9% over the $60.4 million reported in the first quarter of last year. Services revenues for the first quarter were $34 million, an increase of 4.3% over the year ago period. Services revenues in the first quarter accounted for 54.7% of total revenues. Revenues by geographical region for the quarter were split as follows: North America 49%; EMEA 34%; Asia-Pacific 13%; and Central and Latin America 4%. Our top 15 customers represented an aggregate of 53% of our revenues in the first quarter, of which 34% was attributed to our eight largest distributors. GAAP results are as follows: Gross margin for the quarter was 66.2% compared to 64.8% in Q1 2025. Operating income for the first quarter was $3.4 million or 5.4% of revenues compared to operating income of $3.6 million or 6% of revenues in Q1 2025. Net income for the quarter was $2 million or $0.07 per diluted share compared to net income of $4 million or $0.13 per diluted share for Q1 2025. Non-GAAP results are as follows: Non-GAAP gross margin for the quarter was 66.3% compared to 65.2% in Q1 2025. Non-GAAP operating income for the first quarter was $4.8 million or 7.7% of revenues compared to $5.4 million or 8.9% of revenues in Q1 2025. And non-GAAP net income for the first quarter was $3.8 million or $0.14 per diluted share compared to $4.7 million or $0.15 per diluted share in Q1 2025. At the end of March 2026, cash, cash equivalents, short-term bank deposits, short-term marketable securities and long-term financial investments totaled $68.1 million. Net cash provided by operating activities was $12.8 million for the first quarter of 2026. Days sales outstanding as of March 31, 2026, were 104 days. On February 3, 2026, we declared a cash dividend of $0.20 per share. The dividend in aggregate amount of approximately $5.3 million was paid on March 6, 2026. During the quarter, we acquired 1.7 million of our ordinary shares for a total consideration of approximately $13.7 million. We reiterate our guidance for revenues for 2026 to be in the range of $247 million to $255 million and non-GAAP earnings per diluted share of $0.60 to $0.75. I will now turn the call over to Shabtai. Shabtai Adlersberg: Thank you, Niran. I'm pleased to report solid first quarter results, reflecting continued effective execution against our strategic priorities as we continue our transformation into a voice AI-driven hybrid cloud software and services company. Our top line growth accelerated during the quarter, driven by ongoing momentum in our two primary growth engines, our Live Managed Services and Voice AI. Combined, these two units contributed to $80 million annual recurring revenue exit first quarter '26, growing nearly 20% year-over-year and highlighting the increasing contribution of recurring high-quality revenue to our model. By segment, our connectivity business sustained well in the quarter, while conversational AI business grew above 50% and accounted in the first quarter for roughly 8% of revenue, underscoring the rapid uptake of our Voice AI offerings. As discussed previously, over the past several quarters and more so in the first quarter '26, we have reallocated and increased investments in Voice AI in both R&D and sales and marketing in order to scale our channel presence and better leverage our enterprise installed base through cross-selling of value-added services. These initiatives are clearly delivering tangible results and returns and our strong start to the year on the Voice AI puts us on track to achieve our target of 40% to 50% growth for this segment in '26 and to ultimately reach roughly $80 million of business in 2028. First quarter growth improved to 2.9% year-over-year. Enterprise revenues accounted for over 90% of revenues in the quarter, highlighted by ongoing strength in the Microsoft business, which grew 6% year-over-year. Overall, first quarter product revenues were about flat, while services grew 4.3% and accounted now for 55% of total revenues. Within services, the strength was driven by strong traction in our dual growth engines, namely the live family of UCaaS and CaaS, connectivity services and conversational business. We are growing ever more optimistic about the continued strong annual recurring revenue momentum and growth prospects for the overall company, fueled by a recent next-gen live platform wins and meaningful pipeline of opportunities; and second, growing demand for productivity-enhancing GenAI value-added services. This conviction is further reinforced by the growing backlog of Live and Managed Services that will convert to revenues in coming quarters. We exited first quarter '26 backlog with backlog at $79 million compared to $67 million from the year ago period, growth of close to 15%. Now to our business strategy. Modern enterprise communications are highly fragmented with the organization relying on a mix of telephony, networking, security, cloud and edge computing architectures, collaboration tool like Microsoft Teams and Zoom and emerging AI-driven technologies. As voice remains the main channel for real-time interactions, ensuring seamless, reliable, secure and compliant, integration across these diverse environments is increasingly challenging. This highlights the growing need for a unified strategy to orchestrate voice, cloud and AI application effectively and this is where AudioCodes is service. AudioCodes utilizes a 3-layer architecture comprising infrastructure, platforms and applications to address modern voice communication and collaboration challenges. The infrastructure layer delivers secure and reliable voice communication through SBCs, gateways and devices. The platform layer enables integration and orchestration of telephony networking, cloud communication platform and AI systems supporting environments of market leaders such as Microsoft Teams, Zoom Phone, Cisco Webex and Genesis Cloud. The application layer provides AI-driven solutions for business outcomes, including contact center functionality, compliance analytics, recording and meeting intelligence. As such, AudioCodes is transforming from a traditional voice infrastructure provider into a leader in an AI-driven voice communication by integrating advanced voice and conversational AI technologies. This approach enables enterprises to adopt AI solution without disrupting existing systems, reducing complexity and accelerating Voice AI adoption. This positions AudioCodes at the forefront of the evolving enterprise voice communication landscape where voice and AI are becoming increasingly interconnected. Now to Edge Computing. Lately, cloud computing has captured most of the workload moving from premises computing. And so while cloud remains an important deployment modality, there's a growing consensus that not all workloads belong into cloud, particularly when considering data sovereignty, security, latency and cost. This becomes even more critical as we move towards an enterprise authentic AI environment where complex multistep workflows are autonomously executed by AI systems and latency directly impacts performance and reliability. This shift from a cloud-first or cloud-only philosophy towards a hybrid architecture optimized by use case is well-articulated in a recent report published by a leading industry analyst firm called Aragon Research. In its report titled 2026 Edge Computing Pivot, Privacy, Control and Latency, Aragon provides in-depth analysis of edge computing as a fundamental trend shaping the future of enterprise software. The report further highlights key verticals such as government, defense, health care and financial services as early adopters, areas that are also core targets for our meeting insights on-prem solution. We were early in the game addressing this market need, having launched MIA OP service in Israel over 8 months ago. Today, we are in the leading -- we are a leading provider of organizational meeting intelligence for edge-based deployments. Customer interest has accelerated meaningfully with a notable expansion in pipeline opportunities initially in Israel and increasingly across other geographies. In summary, our on-prem GenAI capabilities, combined with a broad and mature portfolio of cloud-based offering uniquely position us to capture the AI opportunity regardless of how customers choose to consume our services, cloud or edge. Before turning to some of our business lines, let me quickly shift to our profitability metrics. As mentioned earlier, last quarter revenue totaled $62.1 million and grew 2.9% year-over-year. Non-GAAP gross margin for the quarter of 66.3% is within our long-term target range of 65% to 68% compared to 65.2% in the first quarter '25 and 65.9% in the previous quarter. First quarter non-GAAP operating expenses of $36.4 million compared to $35 million in the first quarter -- fourth quarter of '25 and $34 million from the year ago period. On a year-by-year basis, the higher expenses are attributable mainly to targeted investment planned to support long-term growth in the conversational AI business, our main growth engine for coming years. In terms of workforce, we have concluded first quarter with 1,000 full-time employees, representing an increase of 2% from the 920 employees in the previous quarter and 960 employees in the year ago quarter. Adjusted EBITDA for the quarter was $5.8 million, reflecting a 9.4% margin compared to $6.2 million or 10.2% in the year ago quarter. Non-GAAP EPS was $0.14 compared to $0.15 in the year ago quarter and in line with our plans for the year. Net cash provided from operating activities was $12.8 million for the quarter. As you can see, we have a long list of core behind us, each generating positive cash flow. Let's go to Microsoft highlights. First quarter Microsoft business increased 6%. This was driven by ongoing health of our live business and connectivity franchise, coupled with increasing attach rate of Voca CIC, our Teams-certified contact center solution. Some representative wins in the quarter include the following: we signed a 48-month contract with a Tier 1 system integrator to deliver SBCs and gateways on a recurring revenue basis. The solution supports a global Teams voice deployment of a European multinational company. Important to note that following an architectural review of the required solution, the end customer determined that its existing approach is no longer meeting its operational requirements and goals based on our assessment and recommendation, the customer transitioned to a direct routing architecture to better align with its global voice strategy. Turning to our live platform. During first quarter, we signed a multiyear low single digit million-dollar agreement with an existing Tier 1 global care customer to transition their on-premise deployment of our services to our cloud-based service. This managed service deployment will enable this carrier to seamlessly provision connectivity service for its enterprise clients. Finally, in first quarter '26, we recognized bookings for our initial phase of migration covering 20,000 users to the on-premise Live Pro platform for Teams voice supporting high security prison facilities in the major countries. Upon full completion of the migration, we expect the platform to support at least 70,000 users alongside gateways, SBCs and incremental IP phone sales. Our sales team will also be looking to cross-sell our conversational AI services on top of the existing platform. Now to Conversational AI. First quarter '26 was very successful in growing our Voice AI business. Quarterly business grew above 50% compared to the year ago quarter. We believe we are creating a strong growth engine for years to come. Just to remind everybody that the revenue trend in that business, the Voice AI business was about $12 million in 2024, grew 40% to $16.7 million last year in 2025 and we now plan to grow by 50% and achieve $25 million at the end of this year. Ultimately, we aim to achieve business revenue of $50 million by 2028 with strength in telephony, networking, security, cloud and edge computing, collaboration tools and AI-driven technologies. We believe we are well-positioned for growth and success in this market. Let's now shift to a detailed discussion of each of those major business lines in the conversational AI business. Let's start first with VoiceAI Connect and Live Hub. We delivered another strong quarter, led by continued growth in our VoiceAI Connect service and our Live Hub self-service platform. Momentum remained broad-based with steady new logo wins across the U.S., Europe and APAC, alongside meaningful expansion within our existing customer base. Main highlights of the first quarter on the opportunity side were substantial increases of bookings, more than 80% year-over-year and steep growth in new creative opportunities of about 100% compared to the year ago quarter. So very strong uptake in bookings and newly created opportunities. Let me mention a few notable wins. This quarter, we secured a Tier 1 win with a major North American retail conglomerate adopting VoiceAI Connect to power its virtual agent customer experience. We also see a clear path to expanding this use case into additional division. On the Live Hub front, we continue to see encouraging traction, including traditional purchases from a multinational insurance carrier that has now tested and deployed our full suite of conversational AI capabilities, namely virtual agent, Agent Insights, IVR and code summarization. More broadly, seeing Tier 1 enterprises adopt Live Hub underscores the strength, scalability and appeal of our all-in-one platform. Live Hub's financial performance reflects this with annual recurring revenues growing more than 20% sequentially and more than 100% year-over-year. Overall, our VoiceAI Connect and Live Hub offerings are scaling rapidly and we are well positioned to build on this momentum as the voice agent market keeps -- continues expanding substantially in coming years. Now to Voca CIC. We reported record invoicing in first quarter '26, growing more than 60% year-over-year. Key highlights include: first, a new contact center as a service entry in Europe, a Swiss banking institution selected Voca CIC as its exclusive platform for customer service engagement on top of Microsoft Teams, replacing its legacy contact center system. We beat out a major Swiss contact center as a service competitor to secure this win. The selection underscores the maturity of our platform and validates its ability to meet the stringent security and data protection requirements demanded by leading banking institutions. Extending our momentum in higher education in the U.S. was another point to mention. We further extended our leadership in North American higher education segment with the addition of another U.S. university customer who selected Voca CIC omnichannel CCaaS solution as part of a broader Microsoft Teams deployment. This marks our 10th university customer in the region, reinforcing Voca CIC position as a trusted CCaaS provider for complex multi-stakeholder environments where Microsoft Teams is the leading ecosystem. On the new product front, following the recent launch of Agent Insights in fourth quarter '25, our AI-driven summarization and sentiment analysis service, we successfully deployed the solution across multiple existing enterprise customers. Early customer feedback has been highly positive, particularly around the value of custom AI-generated summaries and in surfacing actionable insight and triggering downstream CRM workflows that improve end customer outcomes. Importantly, Agent Insights represents a meaningful upsell opportunity with this service accounting for more than 50% of agency's value. Agent Insight has been deployed with some large enterprises, including universities, airports and manufacturing facilities. Feedback so far has been extremely positive, particularly around the customer AI summary capability, which allows contact center managers to tailor and surface specific insights from customer interaction using this new generative AI-based add-on. We identified a hot entry-level AI use case for the SMB market. We have created a stand-alone offering purely focused on the AI receptionist use case, namely providing support for automatic call routing, Q&A-based documents and web by scroll, CRM integration, appointment scheduling and outbound SMS. Moving on to Meeting Insights Cloud Edition. Meeting Insight Cloud Edition maintained strong momentum this quarter with continued growth across key metrics. Both the number of meetings and active users again reached record levels, contributing to strong year-over-year monthly recurring revenue growth exiting March 2026. This operational momentum was supported by ongoing product innovation. Following the extension of support with Google Meet in the fourth quarter, we expanded the platform this quarter by integrating Cisco WebEx. With this milestone, Meeting Insight is now positioned as the go-to meeting intelligence service across all the 4 top leading UCaaS systems. We have launched new features to boost enterprise efficiency and productivity, including pre-built templates for specific roles and personas and customizable tools for business verticals. Positive customer feedback is driving increased adoption. These value-added features, combined with our continued focus on customer workflow solutions for verticals such as higher education, municipalities, local governments, HR and finance position us well for sustained momentum in the foreseeable future. Moving on to MIA OP. In first quarter, we experienced a significant pickup in business opportunity in both Israel and international markets with the recent geopolitical environment acting as a further catalyst to already emerging demand for edge computing. In Israel, we signed several new customers across diverse public sector organization, each with meaningful expansion potential. We executed an agreement with one of Israel's largest health care service organization to provide transcription services for both meetings as well as customer conversation within its contact center. We also inked an initial purchase order with the Israel national regulatory and centralized purchasing entity municipalities for municipalities. Assuming successful implementation, this customer is expected to recommend MIA OP and make it broadly available to municipal organization via its internal procurement marketplace, creating a scalable distribution channel across 200 municipalities. Additionally, we signed a contract with a regional IDF command responsible for civilian production during emergencies. Under this engagement, MIA OP will deliver transcription and summarization services for all incoming citizen interactions, further validating our solution in mission-critical environments. Outside of Israel, our direct sales efforts complemented by strategic channel relationships are gaining traction and driving awareness of MIA OP as a differentiated innovative solution. As an example, we are working closely with a prominent system integrator in North America that operates a proprietary UC system serving major U.S. government agencies. Recently initiated an MIA OP proof-of-concept trial to provide meeting transcription and summarization. Subject to successful results, we expect this relationship to serve as an entry point into broader adoption of service across large U.S. government agencies. And with that, I'd like to wrap up my portion of the call. We had good operational momentum in the first quarter of 2026, particularly with the continued strong growth of our 2 primary engines, our live family of managed services and Voice AI. With the progress we are making in increasing our recurring revenue, we are on track with our target of delivering improved healthy top line growth in 2026 and beyond. And I would like to turn now the call to operator. Thank you. Operator: [Operator Instructions] We have reached the end of the question-and-answer session, and I will now turn the call over to Shabtai for closing remarks. Shabtai Adlersberg: Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in our UCaaS and CCaaS operation and continued growth in our emerging Voice AI business, we believe we are on track to continue growth in the next coming years. We look forward to your participation in our next quarterly conference call. Thank you all. Have a nice day. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.