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Operator: Good day, and welcome to Integra LifeSciences First Quarter 2026 Financial Results. [Operator Instructions] Also note, this call is being recorded. I would now like to turn the call over to Chris Ward, Senior Director of Investor Relations. Please go ahead. Christopher Ward: Good morning, and thank you for joining the Integra LifeSciences First Quarter 2026 Earnings Conference Call. Joining me on the call are Stuart Essig, Chairman, President and Chief Executive Officer; and Lea Knight, Chief Financial Officer. This morning, we issued 2 press releases, the first announcing the CEO transition and other organizational changes and the second announcing our first quarter 2026 financial results. The releases and earnings presentation that we will reference during the call are available at integralife.com under Investors, Events and Presentations and a file named First Quarter 2026 Earnings Call Presentation. Before we begin, I want to remind you that many statements made during this call may be considered forward-looking. Factors that could cause actual results to differ materially are discussed in the company's Exchange Act reports filed with the SEC. Also in our prepared remarks, we will reference reported and organic revenue growth. Organic revenue growth excludes the effects of foreign currency, acquisitions and divestitures. Unless otherwise stated, all disaggregated and franchise level revenue growth rates are based on organic performance. Lastly, our comments today will include certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in today's press release, which is an exhibit to Integra's current report on Form 8-K filed today with the SEC. And with that, I will now turn the call over to Stuart. Stuart Essig: Thank you, Chris. Before we turn to the quarter, I want to address the leadership change that we announced this morning. As you have seen from our announcement, I have stepped back into the role as President and CEO and will retain my current role as Chairman. I want to thank Mojdeh Poul for her leadership and for the meaningful progress made during her tenure. Under her leadership, the company advanced a number of important initiatives, including enterprise-wide portfolio and program prioritization, risk-based approach to quality remediation work, operations resiliency improvements and the more recent transformation and business process optimization efforts. Those efforts matter, and they are progressing well, and we remain fully committed to them. As I step back into the CEO role, my focus will be on strengthening the culture of the organization while increasing our customer and commercial focus. We want to be more connected to our customers, more aligned with the field, more collaborative across functions and clearer and faster in our execution. We are building on the important work already underway while improving how we work together and how quickly we make things happen. We remain committed to the quality, compliance, capacity and transformation work underway across the company. That work is progressing well and remains central to how we improve performance and build a stronger Integra. As we also announced this morning, Mike McBreen has been appointed Chief Commercial Officer. Some of you already know Mike well. He is exceptionally well suited for this role with more than 30 years of commercial experience in the medical technology industry. This newly created role is an important part of how we move forward, and Mike will help drive the next phase of our commercial organization. This move reflects the importance we place on making sure the commercial organization has a strong voice at the leadership table and that customer and market-facing priorities are fully represented in how we operate and make decisions. This is not about changing direction in the commercial organization. It is about raising its profile, strengthening leadership support around it and better positioning us to succeed. Our commercial teams have many strengths, and Mike's expanded role is intended to help us build on that momentum, sharpen execution and support stronger coordination across the market-facing parts of the business. This appointment also reflects something broader that matters deeply to me as I return to the CEO role. I want to make sure we are developing the next layer of leadership across the company and giving strong leaders the opportunity to take on larger responsibilities. Mike's new role as CCO supports that objective and will allow me to devote more direct time and attention to the areas that still require the greatest focus. This is the kind of leadership model that I want to reinforce across Integra, one that is customer-centered, commercially aware, collaborative, accountable and focused on helping the organization succeed. We want our support functions and leadership teams working in a way that enables the business, supports the field and drives results. That is a cultural tone we intend to reinforce. I also want to be clear that I'm not stepping in as a transitional CEO. I am assuming this role with a long-term commitment and deep familiarity with the company and its operations. I have served Integra in various capacities as CEO, Executive Chairman and Chairman for almost 30 years. Over the past 2 years, I have been actively involved in key initiatives as Executive Chairman, including active oversight of key operational and quality matters. These included the implementation of the Compliance Master Plan, the Integra Skin capacity expansion, the initiation of the Braintree facility program and direct communication with investors about the company's progress and path forward. I know this company deeply. I understand what it takes to run it, and I have a clear view of what I believe it will take to move Integra forward from here. So the message today is straightforward. The important work already underway is continuing. It's going well, and it remains central to building a stronger Integra. At the same time, we are sharpening our focus on culture, customers and commercial execution at the top of the organization. I remain confident in both the progress we've made and the opportunity ahead. It is an honor and a privilege to lead this fine organization once again. With those important announcements in mind, I'd like to now turn to our results on Slide 4. We had a very strong first quarter, and the team demonstrated what it can achieve as we continue to improve product availability. For the first quarter, we delivered total revenue of $392 million and adjusted earnings per share of $0.54, both above the high end of our guidance ranges. Based on our first quarter performance and the strengthening of our foundation, we are maintaining our 2026 revenue guidance of $1.66 billion to $1.7 billion and updating our adjusted earnings per share guidance to a range of $2.40 to $2.50. Lea will now walk through our first quarter results and guidance in more detail. Lea Knight: Thank you, Stuart. Good morning, everyone. I'd like to first thank our team for their contributions to our first quarter results. We delivered strong revenue and adjusted earnings per share in the quarter, reflecting solid product demand, improving supply execution and remediation and the continued positive impact of our transformation. These results were made possible by the foundational work we have implemented over the past year, setting us up for better visibility and execution against our commitments. We are seeing that work translate into more consistent, predictable performance, exactly what we set out to achieve. Turning to Slide 5, I will cover our first quarter financial results. Our first quarter revenues were $392 million, representing an increase of 2.4% on a reported basis and an organic increase of 1.3%, reflecting continued strong demand for our portfolio, improved supply, increased visibility and strong performance in tissue reconstruction. Adjusted EPS for the quarter was $0.54 compared to $0.41 in the prior year, primarily due to revenue growth, favorable product mix and savings driven by our recent transformation activities. We also saw a $0.02 net tariff benefit driven by the anticipated IEPA refund, partially offset by non-IEPA tariffs expensed in the period. Gross margin for the quarter was 64.1%, up 190 basis points from the prior year, reflecting favorable product mix, IEPA tariffs and reductions in remediation costs. Adjusted EBITDA margin was 19.4%, up 280 basis points versus Q1 2025, with the above-name factors impacting gross margins with additional benefits from our recent transformation. Cash flows from operations totaled $9.8 million in the first quarter and capital expenditures were $14.8 million. Before transitioning to our segment performance, you likely noticed in this morning's earnings press release that we are renaming our global business segments. Codman Specialty Surgical will now be called Specialty Surgery, and Tissue Technologies will now be called Tissue Reconstruction. Our product brand names will remain unchanged. Turning to Slide 6. We'll take a deeper dive into our Specialty Surgery revenue highlights for the first quarter. Specialty Surgery revenues was $283 million, up 0.9% on a reported basis, including a 140 basis point benefit from foreign exchange. On an organic basis, revenue was down 0.6% compared to the prior year. Global Neurosurgery delivered 1.9% organic growth, supported by broad demand strength, including Certas Plus, CUSA and BactiSeal, and we expect supply reliability and fulfillment to continue to improve. Sales of capital equipment grew low single digits, benefiting from continued capital funnel strength, including double-digit growth in CUSA and CereLink. Instruments posted a high single-digit decline, primarily due to order timing, which can vary quarter-to-quarter. We do expect growth for the full year. In ENT, revenue declined low single digits, reflecting strong growth in MicroFrance ENT instruments, offset by continued pressure in sinus balloons and commercial disruption impacts in other products. Revenue in our international markets declined low single digits as continued demand was offset by supply timing in the first quarter. Moving to our Tissue Reconstruction segment on Slide 7. Tissue Reconstruction revenues were $109 million, representing 6.7% growth on a reported and 6.4% on an organic basis compared to the prior year. The strong growth was partially offset by the impact of MediHoney, where we recorded sales for MediHoney in the first quarter of 2025 prior to the recall. In the first quarter, sales within our wound reconstruction franchise increased 6.2%. This robust performance was primarily fueled by double-digit growth in Integra Skin, mid-double-digit growth in DuraSorb and the PriMatrix launch. These results include a favorable comparison on Integra Skin, but also underscore the momentum we are seeing in our Wound Reconstruction business, and we remain highly optimistic about the continued growth in this segment. I'd like to now spend a few moments discussing the recent changes in Medicare reimbursement for skin substitutes. I want to provide clarity on what these changes mean and what they don't mean for our business. In the first quarter, CMS implemented several important changes to Medicare reimbursement rates and related billing rules for skin substitutes in the outpatient wound reconstruction market. Currently, approximately 90% of our Wound Reconstruction revenue is generated from the inpatient market. The inpatient market is not impacted by these changes. We remain excited by and confident about the inpatient market and the strength of our portfolio and market position. We do believe over time, the updated reimbursement framework will level the economic playing field and create upside opportunities for us. Our portfolio is priced in line with the new reimbursement rate with multiple size options available and supported by strong clinical evidence. We are already seeing increased demand from physicians for education and clarity on appropriate product selection, sizing and clinical considerations. Our market access and commercial teams are actively engaging customers as they adapt to the new reimbursement landscape, and we are seeing early indicators of incremental volume opportunities. Overall, we remain confident in our differentiated position in wound reconstruction, where we have the optimal portfolio to address a wide range of clinical needs and the economic value to compete effectively in both inpatient and outpatient markets. During the first quarter, private label sales increased 7.1%. This growth was primarily driven by a favorable comparison to the prior year. Finally, international sales in tissue reconstruction declined high single digits, reflecting double-digit growth in Integra Skin, which was offset by MediHoney. If you turn to Slide 8, I will provide a brief update on our balance sheet, capital structure and cash flow. Operating cash flow for the first quarter, which is historically our lowest quarter of the year, was $9.8 million, a $21 million improvement over the first quarter of 2025. This positive trend aligns with our full year expectation of an approximate $150 million increase in operating cash flow compared to 2025, driven by improvements in EBITDA, working capital and significantly reduced expenditures related to EU MDR compliance and the start-up costs for the Braintree facility. Free cash flow for the quarter was negative $5 million with a free cash flow conversion rate of negative 12.1%. As of March 31, net debt was $1.6 billion, and our consolidated total leverage ratio was 4.1x within our current maximum allowable leverage of 5x. We expect to continue reducing our leverage over the course of the year, approaching the upper end of our target leverage range of 2.5 to 3.5x by the end of 2026. The company had total liquidity of approximately $488 million, including approximately $266 million in cash and short-term investments, with the remainder available under our revolving credit facility. Turning to Slide 9. I will provide our consolidated revenue and adjusted earnings per share guidance for the second quarter and full year 2026. For the second quarter, we expect revenues to be in the range of $410 million to $425 million, representing reported growth of minus 1.3% to positive 2.3% and organic growth of a range of minus 1.5% to positive 2.1% -- turning to the full year 2026. We are maintaining our revenue and organic growth guidance of $1.66 billion to $1.7 billion and 0.8% to 3.3%, respectively. We expect reported revenue growth in a range of 1.6% to 4.1%, which continues to reflect an approximate 80 basis point annual foreign exchange tailwind. The first half revenue at the midpoint of our guidance of approximately $809 million gives us confidence in our full year expectations. We anticipate a sequential increase in revenues as we progress through the year with an approximate $26 million step-up in the second quarter, driven by normal seasonality, supply improvement and instrument order timing. We then expect modest sequential growth in the third quarter and a further increase in the fourth quarter. This cadence is consistent with our typical seasonal pattern and underscores the improving stability and predictability of our revenue trends. Turning to adjusted earnings per share guidance for the second quarter and full year. For the second quarter, we expect adjusted earnings per share in the range of $0.44 to $0.52, representing approximately 6% growth at the midpoint. For the full year, we are updating our adjusted earnings per share guidance by $0.10 to a range of $2.40 to $2.50 as a result of favorable tariff outcomes in the first quarter relative to our February guidance. Our operational expectations for the year remain unchanged from our original full year guidance. At the midpoint of our updated guidance range, we now expect gross margins and adjusted EBITDA margins to improve 60 basis points and 100 basis points, respectively, compared to 2025. For your reference, we have included the key assumptions underlying our second quarter and full year guidance as well as the key modeling inputs on Slide 10. With that, I will now turn the call back to Stuart. Stuart Essig: Thank you, Lea. Before moving to Q&A, I would like to highlight our key takeaways from the first quarter. We are pleased with the performance as we saw strong growth for tissue reconstruction and several of our key products within Specialty Surgery. We continue to execute our foundational and systemic transformation plan to drive consistent durable performance over the long term. We are looking forward to starting production at our Braintree facility by the end of June and relaunching SurgiMend by the end of the year, while we continue to advance the PMA strategy for both SurgiMend and DuraSorb for implant-based breast reconstruction. Together, these products will strengthen our position in the large and growing $800 million implant-based breast reconstruction market with a biologic as well as a resorbable synthetic solution, representing a meaningful future growth opportunity. We remain confident in our ability to deliver on our 2026 financial commitments, and are equally excited about the longer-term opportunities ahead for Integra. With a strong position in attractive specialized markets, a more capable and aligned organization and a pipeline of clinical evidence and new products, I am excited about this opportunity to lead Integra again. And I believe the company is well positioned to create significant value for all of our stakeholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] First question comes from Matt Taylor with Jefferies. Matthew Taylor: Stuart, welcome back, and I'd love to hear a little bit more about why this is the right time for this transition. And any differences in your approach versus prior management in terms of how to execute on the significant priorities you have in this compliance plan and the recovery of the products that have been out of the market. Stuart Essig: Thank you, Matt, and I am excited to be back speaking with the analysts again. I think by my count, this is my 57th earnings call. So hopefully, I can do as well as we did a few years ago. Let me first talk about Mojdeh.Mojdeh's decision to step down was mutual between her and the Board. We had differences in certain strategic topics, but the transformation initiatives that we put in place remain the right ones and they're going to continue. All the initiatives taken under Mojdeh's tenure were approved by me as well as the full Board, and they continue unchanged. I really do appreciate Mojdeh's contributions, and I'm confident with the transition and how it will move smoothly. Going forward, my focus is on execution and going on the offense commercially as we're in a stronger position to meet customer needs. I'm also excited about Mike McBreen's role stepping into the Chief Commercial Officer's role, so we can present a consistent face to customers. Do you have a follow-up, Matt? Matthew Taylor: Yes. Maybe just on a different topic. You provided some color on the call for Q2 and the phasing here. I just wanted to better understand key assumptions around the step-up in revenue through the year? And then what's weighing on earnings in Q2 and how that evolves through the second half as well? Lea Knight: Yes. Certainly. Thanks for the question, Matt. So to your point, Q1, we had a very good quarter. We were pleased to see a lot of the foundational work that we've been doing to strengthen our quality management system, improve supply reliability is really translating into more consistent execution. To your point around Q2, right, and how we move through the year, we do expect a sequential step-up as we move from Q1 into Q2. That will be driven by some of the normal seasonality that we see coupled with improving supply reliability as well as some instrument order timing. As we move from Q2, we expect Q3 to be fairly consistent with Q2, which is where we've been in prior years, the exception being a year ago where we did have some unique supply interruptions. But we do expect Q3 to be in line with Q2, and then we'll see a further step-up in Q4, which again is consistent with some of our historical patterns. I think the other part of your question related to kind of profitability in Q2 relative to what we actualized in Q1. And a lot of that is driven by expectations that we have for how gross margins will move throughout the balance of the year. So let me step through that. On a full year basis, we are now expecting gross margins to be about 62.5%. In Q2, we'll see gross margins below that. We'll see a little bit of a step-up in Q3 in gross margins and then Q4 will step up even more meaningfully to be above that full year average. The variability that we see in gross margins are largely driven by evolving assumptions in terms of tariffs as well as manufacturing variances that will have an impact and create that variation quarter-to-quarter. So hopefully, that addresses your profitability question. But if not, let me know. Stuart Essig: Yes, I'll just summarize by saying -- I'm just going to summarize by saying it's steady as she goes on the transformation. We're well on our way and things are improving. And we're confident enough that we can start what I think of as doubling down on our commercial folks being able to go out and speak with customers and be confident that they've got supply in many of our products. Operator: Our next question comes from Jayson Bedford with Raymond James & Associates. Jayson Bedford: Welcome back, Stu. Maybe just to tag on the last question, what is the status of the Compliance Master Plan? And is there a way to kind of level set us on what products are on ship fold and when you'd expect these products to come off? Lea Knight: Yes. So let me start, Jayson, on that. As we've mentioned, right, we've been making very good progress through the Compliance Master Plan. We've completed our site assessments. We've been doing our mediation work, which is well underway. We mentioned that, that remediation work would continue into 2026. And we're pleased with the results that we're seeing to date. As I mentioned, we see improving supply availability, which has allowed us to more consistently meet demand, which is a driver of some of the execution that we saw in Q1, and it will be a driver of how we deliver against our full year outlook. At this point, our full year guide right now doesn't assume a meaningful contribution from returning products back to the market that aren't already on the market. So that does not become a big feature, if you will, or element in terms of driving our full year performance. Jayson Bedford: Okay. That's helpful. Maybe just as a second question here. I appreciate the increased focus on the commercial side of the business. I guess the question is, does this involve expanding the size of the sales team? Stuart Essig: So the answer is no. We, in the last several quarters, had the opportunity with the transformation to ensure that our sales teams were focused, had the right staffing and we're focused on the right customers. It does not imply an increase in sales headcount, and it doesn't imply a decrease in sales headcount. What it really is, is about coordination of how we present ourselves to our customers and having that centralized under one individual to make sure our divisions are presenting themselves consistently. One of the real advantages that Integra has with our neuro business or our Codman business is that it is so present in most hospitals that it gives us access to many hospitals that wound care companies can't always get into. So the opportunity to drive collaboratively our 2 divisions, use the relationships we have on the Codman side to continue to drive our hospital-based wound care business into the sites. And then furthermore, we have GPO relationships with almost every major GPO, again, from our Codman business and particularly with the changes going on with wound care reimbursement, having access to the hospital market and the GPO market is going to be critical. Operator: Our next question comes from Ryan Zimmerman with BTIG. Ryan Zimmerman: Stuart, welcome back. I want to ask about a few different things. Stuart, there's no question, I think you know the company, you have the history to -- given your tenure with the company. But as you think about the composition of Integra today, the segments you're in, the businesses you're in, do you view every single one of them as the right ones? Is there a portfolio optimization that you see that needs to be done, whether that's expanding into certain markets, leaving certain markets? I'm just curious kind of as you sit here today, kind of what your view of the portfolio of the company is. Stuart Essig: All right. Thank you, Ryan. First of all, it's nice to be working with you again. I think you and I are dating ourselves. You may be one of the few analysts on this call who actually covered the company when I was CEO last. And if you go back to when I retired as CEO in 2012, one of the things we did shortly thereafter is a major portfolio review. And at the time, we concluded we couldn't be in the top 1, 2 or 3 spots in orthopedics, and we spun off our spine business to our shareholders, and we sold our Extremity business. Subsequent to that, we've done a number of divestitures, typically smaller ones, one of a commodity wound care line, and we exited all of our dental disposable business. So I want to be clear, Integra is always looking at the portfolio and always trying to make sure that we've got the right products to be able to be competitive. So then to answer your question, at the moment, I like the markets we're in. For the most part, they're niche markets. We have opportunity to be in the top 1, 2 or 3, particularly in neuro, ENT and in surgical wound care. And so I'm not expecting any portfolio movements in the near future. Again, like always, we'll look at individual product lines. And if they're not profitable, we can discontinue them or harvest them. But I like the mix. We're in very defensible markets, and we have an opportunity to grow, particularly as we get our product availability back to where it used to be. Ryan Zimmerman: Understood. Appreciate that. And Lea, very pointed comments on outpatient wound care. I appreciate clarifying the exposure to the outpatient side of things relative to inpatient. When you sit here today and given what we're seeing in the wound care market, particularly on the outpatient side, it sounds as though you're going to kind of let things settle and kind of come to you as it may on the outpatient side, where you see opportunity. But I'm just curious, as you think about what Bob has in his portfolio and the scale you need to bring to compete in outpatient wound, appreciating that you're not going to hire sales forces to focus on that. I guess what is your view of kind of how you capitalize on the outpatient wound opportunity as the market kind of settles out? And what do you need to do to become bigger in that market if that's truly what you guys want to pursue? Lea Knight: Yes. So thanks for the question, Ryan. A couple of things. So to your point around our portfolio and maybe what makes us unique and from our perspective, creates the opportunity for us to drive upside on that part of our business. As you know, across our portfolio, we have a couple of things. We have product price, size and science that work to our advantage. From a product perspective, we have a broad portfolio that offers clinicians choices in terms of how they treat patients. From a price perspective, our product has already been priced at levels that are in line with the new reimbursement rates of $127 per square centimeter. So we haven't had to change our pricing nor have we seen any impact on our margins as it relates to this outpatient space. From a size perspective, we have multiple sizes, including small sizes that allows us to minimize some of the wastage that others have been experiencing in this evolving landscape. And then from a science perspective, our portfolio is backed by strong clinical evidence that lends itself to building confidence in terms of delivering the desired outcomes. And so for us, what that means in short is right now, we're evaluating what's happening in terms of changes in where these where treatment is occurring. To the extent it remains in the outpatient setting, the position of our portfolio allows us to play there, recognizing that there will be other competitors that can no longer play in that space, right? So we remain viable in ways that competition won't. To the extent we see procedures or volumes moving in the inpatient setting, where 90% of our business already is, we believe we're also well positioned to take advantage of that, right? You saw in our results across wound reconstruction, if we just look at the products that are in that space, we delivered low double-digit growth in Q1, right? So we're well positioned to take advantage of demand as it flows into the inpatient setting should that happen. So there's a little bit of a wait and see, Ryan, right? We're going to see kind of how the market evolves. But we do think we're well positioned from a product portfolio perspective, along with kind of the strength that we already have in inpatient. And then again, as that market evolves, if we need to pivot to continue to capture it, we'll make those necessary changes. Operator: Our next question comes from Lawrence Biegelsen with Wells Fargo. Ross Osborn: This is actually Ross Osborn on for Larry. So going back to guidance, you guys had a nice revenue beat in the quarter. How should we view the reiteration of revenue guidance for the year? Is this conservatism? Or are there incremental headwinds we should be thinking about since you established guidance at the beginning of the year? Lea Knight: So no, to your point, we were pleased with how this year started. We saw solid demand across much of the portfolio, along with an improving supply reliability outlook that drove what you saw in terms of our Q1 performance above the high end of our guide. That said, we are still early in the year, and there's still more work to do. If you look through the first half, our guide is exactly where we expected it to be. So at this point, we believe maintaining a balanced and disciplined approach in terms of our full year guidance is both prudent and appropriate. Ross Osborn: Okay. That makes sense. And then how is adoption of CUSA trended for the surgical market? And what types of procedures are you seeing traction since your clearance last year? Lea Knight: I'm sorry, Rob, can you repeat the first half of that question? How is the adoption of what? Ross Osborn: CUSA since the surgical clearance, I think, in November of last year. Stuart Essig: CUSA Okay. Got it. Lea Knight: So how is the adoption of CUSA -- and then the second part of the question was? Ross Osborn: Yes. Just what types of procedures you're seeing initial traction with? Lea Knight: So from a Q1 perspective, overall performance across our business was largely in line, certainly in our tissue reconstruction side of the business, but we did see upside, specifically in the neurosurgery side of the business, and that upside was driven in part by CUSA. So demand for us there continues to remain strong, and we're pleased with kind of how that product is performing along with how we expect it to contribute on a full year basis. Stuart Essig: One thing I'll add, over the last 3 or 4 months, I visited Integra's sales team in Japan and Korea and India. And in those markets, CUSA is very in demand for gynecology, for liver surgery and increasingly for cardiosurgery. And so the opportunity to drive those into the U.S. market where we have clearances now is a big opportunity for our U.S.-based sales force. It's -- there's published papers internationally. There's key opinion leaders internationally. And so we have confidence the product is going to work well when those clinicians in the U.S. have it available to them. Operator: Our next question comes from Robbie Marcus with JPM. K. Gong: This is Alan on for Robbie. I had one question just on the products that you're expecting to bring back to market as we look at the back half of the year and into 2027. I think you've been off the market for a decent amount of time now. So what gives you confidence that you're going to be able to -- or I guess, like what are your expectations for share recapture once you get these products back onto the market and your ability to both recapture share and get back on the offensive? Lea Knight: Yes. So a couple of things. So one, from a full year guide perspective, I do want to be clear on this. Our guide does not require or rely on bringing back to market products that currently are off in a meaningful way, right? So we do have obviously assumed the -- what we've already announced as a return to market assumption around SurgiMend. That will come back in Q4. But again, it's not necessarily a material contributor to our full year guide. To your point, we are being very thoughtful, right, around how we approach that return to market. We're leveraging the learnings from PriMatrix and Durepair. If you recall, we brought them back in Q4 of 2025 after having been off the market for over 2 years. And we're excited about the uptake that we're starting to see for both of those products. We continue to get good positive feedback from physicians as we started to recapture some of our prior users. And so that relaunch in Q4 of 2025 and the continued demand that we're seeing for those products as we move into 2026 is absolutely informing how we're thinking about the SurgiMend relaunch. We understand this is going to be a multi-quarter journey in order to get back our share. But we also know that the market dynamics for both PriMatrix and SurgiMend have changed meaningfully since they were both in the market last, right? And so this isn't just about getting our shelf space back. We believe there's additional upside opportunities that we can take advantage of. For PriMatrix, it's because of what's happening in the evolving outpatient wound setting. And for SurgiMend, it's the opportunity that exists in terms of implant-based breast reconstruction and the work we're doing to secure our PMA. So we're excited about the outlook on both. But again, as it relates to 2026, does not require a meaningful contribution from the return of SurgiMend to the market. K. Gong: Got it. And then I just wanted to follow up a question previously on earnings and the earnings cadence, right? I think relative to expectations, you -- and your own guidance, you came in close to $0.10 above the top end of the range. And it sounds like tariffs should potentially be a tailwind to the balance of the year as well. So when we think about the delta between that proved outlook, the better performance you got in first quarter and the benefit from the tariff rebate and the fact that you only raised the guide by $0.10, should we think of that those manufacturing variances you talked about as being the primary driver of that shortfall? Or is there anything else that you would think that you should call out that we should be aware of? Lea Knight: Yes. Yes, certainly. So let me step through that because you asked a number of questions in there. First, in terms of our EPS performance for Q1, -- we did perform above the high end of our guide. It was driven by a couple of factors. It was driven by stronger-than-expected revenue, along with the $0.10 benefit from tariffs that we talked about. And in addition to that, also some margin improvement that is reflective of the transformation efforts that we have underway. So all 3 contributed to that result. It's worth noting because even ex tariffs, we performed close to the high end of our guide. To your point on tariffs and expectation for the balance of the year, we did adjust our full year EPS outlook by that same $0.10 to reflect the benefits that have been realized as it relates to tariffs. We also outlined our tariff assumptions as part of the earnings deck, so you can see what we're assuming for the balance of the year. It is possible that we'll continue to see additional favorability as it relates to tariffs as we move throughout the year. We have not reflected possible benefits in our full year updated adjusted EPS at this point. It's still very early in the year. There's still a lot we expect to unfold when it comes to tariff policy. And so as that unfolds, we'll update appropriately. Operator: Our next question comes from Ravi Misra with Truist Securities. Ravi Misra: Just on -- 2 questions for me. So first, just on PMA timing in breast recon and just kind of commercialization prospects, assuming you get those, could you provide some more detail? And then I have a follow-up. Stuart Essig: Sure. So first of all, SurgiMend is expected to be ready for pre-approval inspection in the second half of 2026 following our Braintree restart. The actual PMA approval timing depends on the FDA review process, which obviously is not in our control. We do expect SurgiMend's PMA to be approved sometime in 2027, and we expect approval for DuraSorb shortly thereafter in the same year, so also 2027. Our view of implant-based breast reconstruction surgery as a long-term growth opportunity is very impactful, and we expect meaningful contribution beginning in 2027 and beyond. And again, just to reiterate, there's no contribution from the PMAs in our 2026 guidance. Ravi Misra: Great. And then just, I guess, another one on the tissue recon business and wound recon, kind of what you're seeing in the inpatient setting. That growth that you kind of disclosed, is that a function of really market and procedures going into inpatient or more so you capturing more share disproportionately in the quarter? Lea Knight: Yes. Thanks. So overall, across our tissue reconstruction business, we grew kind of high single digits. And then if you look at just the products that are in wound reconstruction, that's where I cited earlier, we were up low double digits. From a year-on-year perspective, we did benefit from a favorable comparison based on supply availability for Integra Skin. So that is a function of the performance that we're seeing. We do continue to see strong underlying demand in terms of procedures in that space that has continued through 2026. Stuart Essig: So I'll just add 2 points in terms of the way in which the selling process works. So first of all, as it relates to Integra Skin, because of our issues with manufacturing over the last few years, it's been tough for our sales team to open new accounts. Their objective is to make sure that the existing accounts are well stocked with our products, so they're available for surgery. As the sales force develops greater confidence in our ability to manufacture, and they should be getting that confidence based on production in the last few quarters, they'll be more comfortable bringing the product to new customers and ensuring that additional customers feel confident using the product. So there is a time frame over which -- we've got to get our sales force comfortable and we've got to get customers comfortable for availability. But that should and will increase over time. Similarly, one of the exciting things about bringing PriMatrix back is -- and this is really anecdotal, but I've heard from a number of our salespeople that bringing PriMatrix back into certain accounts has also driven growth in our other wound care products. The ability to go into a hospital with a "new product" and for some hospitals, it is new because it hasn't been there for a few years. It provides an entree for our sales team to talk about our other products. And again, our strategy over the years has been to have the broadest portfolio of surgical reconstruction products for wound care. that allows our reps to not be in particular, selling one thing. Rather, it's collaborative with the surgeon, it's consultative, and we don't -- we can offer them lots of different choices for the particular wound that they're treating. It gives our reps a lot of credibility with customers. Operator: Our next question comes from Joanne Wuensch with Citi. Joanne Wuensch: Stu, great to have you back. I had a question. The tax rebate -- sorry, tariff rebates, forgive me. I'm going to assume that went into gross margins, but there is still a fair amount of leverage on SG&A and R&D. Was there anything onetime in there? Or is there anything that we can sort of take as a base case and leverage forward? Lea Knight: Yes. So let me step through that. So to your point, gross margins for the quarter were 64.1%. It was up 190 basis points versus a year ago. Tariffs did benefit that performance. But even ex tariffs, our gross margins would have been up 140 basis points year-on-year. And that performance was driven in large part by lower remediation costs as well as lower manufacturing variances versus what we saw a year ago. And that's where, as I gave the cadence earlier about gross margins and performance throughout the year, we will see variability as we move throughout the year from Q1 to Q2 through the back half of the year. That is a function of how manufacturing variances will play out along with tariff impacts. Again, full year basis, we expect gross margins to be 62.5%. Q2 will be below that. We'll see a slight step-up in Q3 and then Q4 will be above the full year average to get us back to 62.5% -- so that should address your profitability question. If not, let me know. I do want to be clear on one part, and this goes back to the tariff question I got before. The adjustment we made in our full year outlook, again, reflects just the tariff benefit we realized in Q1. There's been no change to the underlying operational performance of the business. We're holding to that commitment that we made back in February as it relates to operational dynamics. We're excited about the performance that we saw in Q1. We think that gives us confidence in terms of our ability to perform against the full year guide. So whether it be top line or bottom line operationally, we remain committed to the full year guide that we communicated from earlier this year. Operator: Our next question comes from Travis Steed with Bank of America. Unknown Analyst: I guess to build on Ryan's question previously, Integra has been an acquisitive company over the last 20 or so years and acquisitions were part of your strategy last time as CEO. How are you thinking about continuing to add to the business either in the markets that you're currently in or expanding into other markets when would that make sense? And when it does, what kind of opportunities would you be looking at? Stuart Essig: Okay. A couple of points there. First, in the near term, -- our #1 priority is debt reduction and returning our leverage ratio to the target 2.5 to 3.5x levels. And we'll get there by reducing debt and also driving EBITDA. In the meantime, we're focused on our organic growth drivers, and we're strengthening our R&D processes, and we're increasing program management and execution discipline. I'd mentioned we brought aboard a highly experienced Chief Technology Officer in Q1 to help us accelerate innovation with greater focus, speed and impact. But we will continue to grow through a combination of impactful organic and inorganic levers. As we get our ratio back in order, we will start to look at acquisitions again, but they will always be close to home. We like the markets that we're in, neuro, ENT and then tissue reconstruction, and that's where you'll see any acquisitions that we do. But I want to be clear, while acquisitions have been a great contributor over the years to Integra, our focus at this moment is on debt paydown and frankly, execution. Unknown Analyst: Got it. That makes sense. And then just one follow-up. Regarding order timing in instruments and supply timing and general weakness in international markets, how much of that is related to normal seasonality? And how much is related to more macro events like the Middle East conflict or inflation? And if it was -- if the impact from macro-related things was seen in the quarter, how much of that was seen? And how should we think about the rest of the year? Lea Knight: Yes, there was a lot in that question. So let me throw it. As it relates to kind of some of the macro events that are playing out, we didn't see any material impact to our business in the first quarter as it relates to developments in the Middle East conflict. Our direct revenue exposure in that region is modest. And so based on what we know today, we do not expect to realize a material impact. But obviously, we're going to continue to monitor and see how that unfolds. As it relates specifically to instruments because you asked about that, it's typical for us to see some variability quarter-to-quarter in that part of the business, and that's what I was referencing in my remarks regarding an expectation of a sequential step-up in Q2 due to instrument order timing. So on a full year basis, though, we do expect that business to get back to low single-digit growth. Operator: Thank you. This does conclude the question-and-answer session, and you may now disconnect. Everyone, have a great day.
Operator: Good afternoon, and welcome to PennyMac Mortgage Investment Trust's First Quarter 2026 Earnings Call. Additional earnings materials, including the presentation slides that will be referred to in the call as well as an Excel file with supplemental information are available on PennyMac Mortgage Investment Trust's website at pmt.pennymac.com. Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now I'd like to introduce David Spector, PennyMac Mortgage Investment Trust Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Mortgage Investment Trust's Chief Financial Officer. David Spector: Thank you, operator. Good afternoon, and thank you to everyone for participating in our first quarter 2026 earnings call. Starting on Slide 3. PMT's first quarter net income was $14 million or $0.16 per diluted common share, representing a 4% annualized return on common equity. These results were impacted by a lower contribution from our interest rate sensitive strategies primarily due to a decrease in servicing fees as a result of seasonality and a larger-than-expected MSR runoff related to higher note rate loans. These impacts were partially offset by improved results in our aggregation and securitization segment. PMT paid a quarterly dividend of $0.40 per share and book value per share on March 31 was $14.98, down 2% from the end of the prior quarter. Turning to Slide 5. I would like to note we have renamed what was previously the Correspondent Production segment to the aggregation and securitization segment. We believe this name more accurately captures the breadth of PMT's participation in the mortgage ecosystem, specifically our focus on aggregating high-quality loans for execution in the secondary market to drive organic asset creation. In total, during the first quarter, PMT purchased $4.3 billion in UPB of loans from PFSI. $2.8 billion in UPB was through its correspondent purchase agreement with PFSI, for which PMT pays fulfillment fees. The remaining $1.5 billion represented loan sales from PFSI to PMT outside of their loan purchase agreement where PMT's private label securitization platform provided optimal secondary market execution for PFSI. Slide 6 highlights the continued success of our organic investment creation engine. Similar to last quarter, we completed 8 private label securitizations totaling $2.8 billion in UPB. This activity resulted in the retention of $190 million of new subordinate bond investments in the credit-sensitive strategies and $12 million of new senior bond investments in the interest rate-sensitive strategies. We also generated $40 million of new MSR investments. Our momentum has continued after quarter end, with 2 additional securitizations completed and another 1 priced totaling $1.1 billion in UPB, and we remain on pace to complete approximately 30 securitizations in 2026, which we expect will build a substantial foundation of investments with returns on equity in the low to mid-teens to support future earnings. On Slide 7, we provided a snapshot of the high-quality investments we are creating through our private label securitization program. At quarter end, the fair value of subordinate bonds within our credit-sensitive strategies totaled $744 million. 66% of this portfolio is comprised of bonds from nonowner-occupied loan securitizations. 20% is comprised of bonds from general loan securitization with the remainder primarily from agency eligible owner-occupied loan securitizations. As you can see, these investments feature exceptional credit characteristics. including a weighted average FICO origination of 774, a weighted average LTV and origination of 72 and negligible delinquencies. Within our interest rate-sensitive strategies, as of quarter end, we held $94 million in fair value of senior and mezzanine bonds. These investments are diversified across our jumbo non-owner occupied and agency eligible owner-occupied loan securitizations. And similar to our credit-sensitive bonds, these investments are backed by high-quality collateral with weighted average original FICO scores in the 770 range and original loan-to-value ratios in the low 70s. This consistent credit quality across these organically created assets underscores our ability to produce attractive, high-yielding investments on Slide 8, approximately 60% of PMT's shareholders' equity remains deployed to long-standing investments in MSRs and our unique GSE credit risk transfer investments. Mortgage servicing rights account for nearly half of shareholders' equity, providing stable cash flows from the portfolio with a low weighted average coupon of 3.9%. Our organically created GSE CRT investments represent 12% of shareholders' equity and consists of seasoned loans with a weighted average current LTV of 46%. Turning to Slide 9, while our diversified portfolio is constructed of investments with strong underlying fundamentals, we acknowledge our earnings, excluding market-driven value changes have been below our dividend level for the past several quarters. As you can see, we are showing an average run rate return of $0.31 per quarter for the next year. And focusing on the interest rate-sensitive strategies, increased amortization on higher coupon loans as well as reduced expectations for declines in short-term interest rates, which drive financing costs have lowered expected returns on MSRs in the near term. As is our long-standing practice, we continue to actively evaluate our overall equity allocation and investment opportunities to refine and optimize our returns on a go-forward basis. We are working diligently to reposition PMT to capture the opportunities more aligned to our long-term return hurdles. Our momentum in organic investment creation remains strong, and we have successfully positioned PMT as a leader in the private label securitization market. By leveraging our unique ability to create credit-sensitive, high-quality assets, and drive our overall returns higher through disciplined capital allocation, I remain confident in our strategy to support our dividend and create long-term value for our shareholders. Now I'll turn it over to Dan to review the first quarter financial performance. Daniel Perotti: Thank you, David. Net income to common shareholders was $14 million or $0.16 per diluted common share in the first quarter or a 4% annualized return on equity to common shareholders. Our credit-sensitive strategies contributed $16 million to pretax income, generating an annualized return on equity of 17%. Gains from organically created CRT investments were $10 million, which included $7 million of realized gains and carry and $3 million of market-driven value gains from credit spread tightening. Investments in subordinate MBS from our private label securitizations generated gains of $6 million, $2 million of which were market-driven value gains. Interest rate-sensitive strategies contributed pretax income of $8 million for an annualized ROE of 3%. Income excluding market-driven value changes for the segment was $11 million, down from $21 million in the prior quarter, impacted by increased prepayment speeds during the quarter, particularly on higher note rate MSRs, which drove higher runoff of our MSR assets, as well as lower servicing fees from seasonality and lower placement fees on custodial balances as a result of lower short-term interest rates. Regarding market-driven value changes, our hedging activities during the quarter yielded a small net decline as the $40 million MSR fair value increase was more than offset by $46 million of net declines in fair value of MBS and interest rate hedges, including the related tax expense. Additionally, during the quarter, we sold $477 million of agency fixed rate MBS to capitalize on intra-quarter spread tightening, resulting from the GSE MBS purchase announcement, and we redeployed the capital into retained investments from our private label securitizations. The aggregation and securitization segment reported pretax income of $16 million compared to a pretax loss of $1 million in the prior quarter. The prior quarter amount was primarily driven by spread widening on jumbo loans during the aggregation period and lower overall margins. In total, PMT reported $28 million of net income across strategies, excluding market-driven value changes, up from $21 million in the prior quarter, primarily due to an increased contribution from the aggregation and securitization segment. I want to address our dividend in the context of our current results and the updated run rate return potential. While projections for income, excluding market-driven value changes remain below the dividend level, it is important to note that we expect to maintain the common share dividend of $0.40 per share, which is supported by our taxable income and which we expect to be sufficient to fully cover the dividend at its current level. Turning to Slide 13. We highlight the flexible and sophisticated financing structures PMT has in place to support its diversified portfolio of investments. During the quarter, we redeemed $345 million of exchangeable senior notes originally due in March 2026 using capacity from existing financing lines. And finally, on Slide 14, we continue to believe that debt to equity, excluding nonrecourse debt is the best metric for measuring our core leverage and that ratio declined to 5.6x at quarter end from 6x at the prior quarter end within our expected range. PMT's total debt to equity increased to approximately 11:1 from 10:1 at December 31 as we continue to retain investments from securitizations. The increase in our total debt-to-equity ratio reflects growth in nonrecourse debt associated with these transactions, where all securitized loans are required to be consolidated on our balance sheet for accounting purposes. As a reminder, the source of repayment for this debt is limited to the cash flows from the associated loans in each private label securitization mitigating any additional exposure to PMT. We expect the divergence between these 2 metrics to continue increasing as our securitization program grows. We'll now open it up for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Trevor Cranston with Citizens JMP. Trevor Cranston: Question related to your comments on Slide 9 about actively evaluating the asset allocation of the company and some new investment opportunities. Can you elaborate on what you guys are looking at in terms of kind of new investments if that includes things like non-QM or home equity. And also was curious if sales of maybe some lower returning assets are part of the valuation that's ongoing? David Spector: Well, I think it's all of the above would be my response. I think first of all, if you look at Slide 9, when you look at the annualized return on equity, you can see that the -- in terms of achieving that minimum required return of, call it, 13%, 14%. Means that the sector that's really under delivering and has been the net interest rate sensitive strategies and, in particular, MSRs. And so as we look across our MSR portfolio, I mean, clearly, there's parts of that, that have real value and there's demand in the marketplace for it. And there's others that have real value that perhaps there isn't as much demand in the marketplace. So we're strategically evaluating the MSR portfolio to help accelerate perhaps the weighted average equity allocation down in that operating strategy and moving more to the credit-sensitive strategies. The point you raised in the credit-sensitive strategies, of course, there's more opportunity to do additional securitizations in nonowner-occupied loans and agency-eligible loans even jumbo loans. But given what we're seeing in the non-QM originations, both in correspondent and over a PFSI in their broker division, the ability to aggregate for securitization is very apparent to me. So I wouldn't be surprised to see us do a non-QM securitization over the next year. And to your point, there's other assets that we see in the marketplace that you can create investments that achieve our return target. And so as we've done in the past, we're going in and we're evaluating how to -- where can we recycle out of lower returning assets in the higher returning assets. Operator: And your next question comes from Bose George with KBW. Bose George: So first, just the change in the ROE expectation that you gave for the $0.31 down from $0.40, it looks like it's mainly on the Agency MBS, but can you just walk through the drivers of that change. Daniel Perotti: So the -- so really, the bigger driver of those is on the MSRs, which -- where the return came down a few percentage points in the allocation, weighted average equity allocated there is a larger proportion. The Agency MBS also did decline. That was really related to -- if you look at the expectations for short-term rates going back from last quarter versus this quarter, there was obviously a sharper decline and thus a greater expected carry from the agency MBS in that -- in the prior run rate scenario. But the bigger impact is related to really the prepayment speeds and expectations that we see in the short to medium term on the MSRs. Bose George: Okay. That makes sense. And -- the -- and in terms of the bridge now from the $0.16 you guys did this quarter up to the normalized. Can you sort of walk through just the bridge there? Daniel Perotti: Well, certainly, obviously, rates have increased a bit, and so we are expecting slower prepayments on the MSRs. But still below -- still elevated from what we saw earlier in prior quarters or in earlier quarters in 2025. And then as David has mentioned, there we mentioned some allocation out of MSRs and into -- if you look at the allocation here, for example, some ability to ramp up other investments as we move through the next few quarters. Operator: And your next question comes from Jason Weaver with Jones Trading. Jason Weaver: In your prepared remarks, you mentioned the sale of roughly $0.5 billion of MBS on tightening to redeploy towards retained securitization, which looks like a material rotation in the interest rate-sensitive book. All else equal, is this a sort of glide path we should think about for the remainder of 2026? Or was this more of a tactical rotation? Daniel Perotti: I think that was really more opportunistic or tactical. We wouldn't necessarily expect to continue to wind down that portfolio, especially, although we will adjust as we're looking at rotating out of certain portions of the portfolio. But given the returns that we expect from the Agency MBS portfolio and what we have here overall, we wouldn't expect to drawdown necessarily further on the MBS portfolio, but it's something that we'll continuously evaluate based on where spreads are in the market. Jason Weaver: Got it. And I think you redeemed about $350 million of exchangeable senior notes from the existing financing book. What is the unsecured corporate debt stack look for the next 24 months, if you can just guess. And are you targeting any sort of opportunistic refinancing or extension given current spreads? Daniel Perotti: So we issued about $150 million of additional convertible debt towards the end of Q4 last year. We additionally in 2025 issued a few unsecured baby bonds. That was effectively a pre-refinancing of the convertible debt that was retired in Q1 of this year. So we don't have a need to necessarily raise additional unsecured debt. It is something that we will continue to look at and see if there are opportunities. but no immediate plans necessarily, but it's something that we will be opportunistic with to the extent that we see opportunities. Operator: [Operator Instructions] Your next question comes from the line of Doug Harter with BTIG. Douglas Harter: As you think about the opportunity in the non-agency securitization, do you view it as more opportunity limited today or more capital constrained and as you think about the ability to scale -- continue to scale that business? David Spector: I think it's really capital more than opportunity. I think the great story about PMT is obviously, the synergistic relationship it has with PFSI and the ability to source the underlying assets, the ability to underwrite and process the loans on the front end and where we have the ability to actively select the loans that we want in our investments is a really important feature that we have in PMT. And so the -- whether it's investor or non-owner securitizations where we create subordinate bonds or general loan securitizations and even the agency eligible loans where we're not securitizing just for best execution purposes, we're securitizing to create investments for PMT. And so I think that it's really more of a capital issue for us. And I think that's why we're focused on opportunistically getting out of lower returning assets and most likely reinvesting the capital into our credit-sensitive strategies sector, which, by the way, from the very beginning of PMT is what the -- is what the investment thesis was for PMT looks to be a credit-sensitive strategy vehicle. And so that's really the guiding -- the kind of the guiding force here. We're -- I think we've done a great job in being the preeminent securitizer of these non-agency loans and creating the investments behind them. And you look at the performance of these, and they're really remarkable. And I think that we've done a nice job when CRT was discontinued to be able to move to figure out, okay, how do we create a like investment without the CRT opportunity, and that's how we ended up where we are today. But I think you're going to continue to see us grow the equity allocation in the credit sensitive strategies over time. Douglas Harter: And David, as you mentioned, you're seeing increased non-QM volume, how much crossover is there in your traditional agency originator that's a correspondent partner versus non-QM or some of these other products that you haven't necessarily gotten as large in yet? David Spector: I'm really -- I've been really pleasantly surprised and I think it's a function of the size of the market that we're seeing a good amount of our correspondent getting into non-QM lending. And so I think that they are -- they're recognizing that they need to expand their product base. And so this is where being the leading correspondent aggregator with over 700 plus [ clients ] is really an advantage to us and being really good, meaningful deliveries of non-QM correspondent. And I expect that to meaningfully grow. I think the important part of non-QM, like all non-Agency products, you have to keep an eye on the fact that you don't want to get caught in a market disruption or with spreads widening. And so we're being really diligent at least initially in selling and forward selling the non-QM product to really lock in the margin until such time as we want and we decide to do a securitization. And that's where again, the synergistic relationship with PFSI to be really valuable because similar to the correspondent side on the PFSI side, we're seeing really good receptivity to non-QM with our broker partners. And so I think when we decide that we want to do a securitization and really deploy capital there, we'll be able to do so. But by and large, I think there's part of the non-QM market that we're participating in is getting more readily accepted in the broker and correspondent communities has more akin to their credit profile and their risk management framework than when it was originally -- when a vision was born some 10 years ago and people thought of it as maybe a little less than prime. But I've been pleasantly surprised by this. Operator: We have no further questions at this time. I'll now turn it back to David Spector for closing remarks. David Spector: Well, I'd like to thank everyone for joining us on our call today. If you have any questions, please don't hesitate to reach out to me or our IR team, Dan and I look forward to speaking to all of you in the near future. Thank you. Operator: The concluded today's call. You may now disconnect.
Operator: Hello, everyone. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coupang 2026 First Quarter Earnings Conference Call. [Operator Instructions] Now I'd like to turn the call over to Mike Parker, Vice President of Investor Relations. You may begin your conference. Michael Parker: Thanks, operator. Welcome, everyone, to Coupang's First Quarter 2026 Earnings Conference Call. I'm pleased to be joined on the call today by our Founder and CEO, Bom Kim; and our CFO, Gaurav Anand. The following discussion, including responses to your questions, reflects management's views as of today's date only. We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today's call may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. As we share our first quarter 2026 results on today's call, the comparisons we make to prior periods will be on a year-over-year basis, unless otherwise noted. We may also present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures are included in our earnings release, our slides accompanying this webcast and our SEC filings, which are posted on the company's Investor Relations website. And now I'll turn the call over to Bom. Bom Suk Kim: Thanks, everyone, for joining us today. I'd like to cover a few things where we stand in the recovery from last quarter's data incident, how we see the path forward on growth and the nature of the temporary dislocation in margins and how we think about it over the longer term. Starting with where we are. Customer obsession, operational excellence and disciplined capital allocation have guided us since our inception, and they're the same principles guiding us through this period. As we shared previously, January marked the low point in our Product Commerce revenue growth rate. Each month since has improved on a year-over-year basis and the pace of improvement strengthened through February and March. Our recovery is powered by the same drivers that have shaped our business since we launched Rocket Delivery over 10 years ago, a relentless focus on [ WOW-ing ] customers across selection, price and service. That experience was built or many years and billions of dollars of investment and one which we believe continues to widen its lead in the market. The customer behavior we've seen since the data incident reinforces this. For example, the vast majority of WOW members never left, and they have continued to compound their spend at double-digit rates throughout this period. Of those who did leave, the majority have come back and picked up where they left off, resuming the levels of spend they were at before the incident, and they're now compounding alongside the members who stayed. Through the end of April, we've closed nearly 80% of the decline in WOW memberships that followed the incident through a combination of those returning members and strong new sign-ups. New WOW sign-ups and churn have returned to historical stable levels. Across the board, customers are reengaging in ways that reflect the conviction they've long placed in the Coupang experience. It's worth to spend a moment on how this recovery shows up in the reported numbers in Product Commerce. Year-over-year growth will take time to fully reflect the underlying recovery. The months of pause compounding from the effective period continue to weigh on the comps even as customer behavior normalizes. Our revenue growth rate trajectory from January to March is running ahead of historical patterns, and we expect the year-over-year comps to continue improving throughout the year. Turning to margins. Two distinct factors are pressuring profitability this quarter, and I want to describe them separately because they behave very differently going forward. The first is the customer vouchers we issued in response to the incident. These are onetime in nature. The bulk of the impact is contained to Q1, with a modest tail into the first part of Q2. The second is a set of temporary inefficiencies in our network. Our capacity build-out and supply chain commitments are all made well in advance, calibrated to a demand trajectory we project based on a stable, predictable customer pattern. That's how we manage cost to serve efficiently, and that's the path we were on before the incident. When an external event of this kind disrupts that pattern, actual demand falls short of what those commitments were sized for, and we carry the cost of underutilized capacity and inventory secured through the period. As demand returns to a predictable curve, we expect our capacity and supply chain to come back into balance and the inefficiencies to work their way out. We're adapting our network and supply chain through this period as we did when we came out of COVID, and we expect those adjustments will show up progressively in the P&L. Stepping back from the near term. We believe the long-term drivers of margin expansion at Coupang remain intact and continue to improve. We expect operational efficiencies across our network, supply chain optimization, ongoing investment in automation and technology and the scaling of our margin-accretive categories and offerings to drive further margin expansion over the long term. We expect annual margin expansion to resume next year, and we have strong conviction in the underlying margin potential of the business over the long term. Beyond the recovery, the work of building the business continues. Selection remains the primary lever for unlocking the underlying growth potential in our Product Commerce segment. A meaningful portion of what customers want to buy is still not available on Rocket. And we believe the combination of our first-party catalog and Fulfillment and Logistics by Coupang is the path to closing that gap at scale. Automation and AI across our services, including our Fulfillment and Logistics network, continue to improve service levels and lower cost to serve in parallel, and we expect them to be meaningful contributors to both the customer experience and margin expansion in the years ahead. Turn to Developing Offerings. In Taiwan, we're building the foundation for a truly differentiated customer experience. Our own last-mile delivery network, which guarantees next-day delivery now covers the vast majority of our volume and that coverage continues to expand. We're still in the early stages of bringing the full Rocket Delivery experience to Taiwan customers. But even at this stage, the response from customers has been remarkable. Cohort retention behavior is reminiscent of what we saw in the early years of Product Commerce in Korea. Our conviction in the long-term opportunity, both to WOW customers and to generate attractive returns on the capital we're deploying grow stronger each quarter. Given that conviction this year, our focus in Taiwan is on building the foundation for an unparalleled customer experience and durable growth over the long term. That means deliberate long-term investments in network design, last-mile logistics build-out and supply chain improvements, the kind of foundation that takes time to lay, but that will define the customer experience and competitive position of the service for years to come. In Eats, as I mentioned, the recovery is following a similar path to Product Commerce, which speaks to the strength of the customer value proposition we are building across both services. In Developing Offerings, our approach is unchanged. We start with small investments, test rigorously and deploy more capital only into opportunities we believe can generate lasting customer WOW and durable cash flows. We remain disciplined capital allocators taking the long view. Our recovery is ongoing, and we have more work ahead. We're focused on continuing to build and improve on the experience that brought customers to Coupang in the first place across Product Commerce and Developing Offerings. I'll now turn the call over to Gaurav to walk through the financials in more detail. Gaurav Anand: Thanks, Bom. As we guided coming into the year, Q1 reflected the impacts from last quarter's data incident, and our results are consistent with the trajectory we outlined in February. The underlying business has continued to strengthen as we have progressed through this period, and we expect the impacts on Product Commerce to diminish as we now move further from the affected quarter. I will first walk through the segment operating results and then speak to our consolidated performance. In Product Commerce, we reported segment net revenues of $7.2 billion, growing 4% on a reported basis and 5% in constant currency. As we look at each month within the quarter, the constant currency growth rate adjusted for timing of holidays reached its low point in January and accelerated sequentially in February and March, consistent with the recovery that we had described earlier. Product Commerce active customers for the quarter were 23.9 million, growing 2% year-over-year but down 3% over last quarter. The sequential decline reflects the lagging effect of the data incident on the metric because active customers are measured on a trailing 3-month basis and the incident occurred late in Q4. The affected period is more fully reflected in this quarter's count than in the last quarter. The most recent trend is the more meaningful signal. We have seen stabilization and improvement in the underlying metrics this quarter with encouraging momentum in account reactivations and new customer growth. The recent positive momentum in WOW membership, we spoke to last quarter has also accelerated over the past few months. As we noted, the vast majority of our members never left, and through the end of April, we have closed 80% of the decline in WOW membership that followed the incident. And the majority of WOW members who left have returned and they have resumed the levels of spend they were at before the incident. Product Commerce gross profit for the quarter was $2.2 billion, with a gross profit margin of 30.3%. This represents a contraction of approximately 100 basis points year-over-year and 160 basis points quarter-over-quarter. The decline in gross profit margin is the result of near-term factors tied to the data incident, including the impact of vouchers we issued in response to the incident and the temporary inefficiencies in our network such as excess capacity and supply chain commitments positioned against our pre-incident demand curve. We believe the long-term drivers of margin expansion at Coupang remain intact and will continue to compound, including operational efficiencies, supply chain optimization, ongoing investment in automation and technology and the scaling of our margin-accretive categories and offerings. We expect them to resume driving margin expansion and their underlying impact to become more evident as we move past these temporary inefficiencies. Segment adjusted EBITDA for Product Commerce was $358 million for the quarter, resulting in an adjusted EBITDA margin of 5%. This represents a contraction of roughly 300 basis points year-over-year and 270 basis points quarter-over-quarter, driven primarily by the gross profit dynamics I just described, along with the near-term pressure from operating costs that were sized for a pre-incident demand curve. We expect this to normalize as we work through those commitments, and we make adjustments. Turning to Developing Offerings. We reported segment net revenue of $1.3 billion, growing 28% on a reported basis and 25% in constant currency. The growth is primarily driven by the hyper growth rate in Taiwan, along with a continued high growth rate in Eats and Rocket Now in Japan. We generated $123 million in gross profit for the quarter in Developing Offerings, down 25% over last year as we continue to make investments in response to the encouraging customer engagement we are seeing across these early-stage offerings. Segment adjusted EBITDA losses were $329 million, consistent with our expected cadence of investment, underlying our full year guidance of between $950 million and $1 billion in segment adjusted EBITDA losses that we communicated last quarter. On a consolidated basis, we reported total net revenues of $8.5 billion for the quarter, representing growth of 8% on both a reported and constant currency basis. This is consistent with the 5% to 10% constant currency growth rate range we guided to last quarter. Consolidated gross profit was $2.3 billion with a gross profit margin of 27%, a contraction of approximately 230 basis points year-over-year and 180 basis points quarter-over-quarter. This margin compression reflects the temporary impact that I outlined in Product Commerce from the data incident along with the increased level of investment in Developing Offerings. OG&A expense was $2.5 billion or 29.9% of total net revenues, roughly 250 basis points higher than Q1 of last year. The year-over-year increase largely reflects 2 dynamics. Much of our cost base was sized for the demand trajectory we were on before the incident, which creates a near-term gap between cost base and current revenue. And the increase in operating costs within Developing Offerings consistent with the levels of investment we are making to support those growth initiatives. Our losses before income taxes was $255 million and we incurred income tax expense of $11 million. Our effective tax rate this quarter was elevated because the losses in our early-stage operations in Taiwan and Japan don't generate offsetting tax benefits at the consolidated level. We anticipate an effective tax rate of between 75% to 80% for the full year. We continue to expect this to normalize closer to 25% over the long term. We are reporting an operating loss for the quarter of $242 million and net loss attributable to Coupang stockholders of $266 million, resulting in a diluted loss per share of $0.15. Consolidated adjusted EBITDA was $29 million, resulting in an adjusted EBITDA margin of 0.3%. This represents a contraction of approximately 450 basis points year-over-year and 270 basis points quarter-over-quarter, driven primarily by the Product Commerce gross profit dynamics from the data incident and the increased level of investment in Developing Offerings. On cash flow, for the trailing 12-month period, we generated operating cash flow of $1.6 billion and free cash flow of $301 million. The year-over-year decrease in trailing 12-month free cash flow is primarily driven by the increased losses in Developing Offerings as well as higher levels of CapEx. This quarter, we also repurchased 20.4 million shares of our Class A common stock for $391 million. Our Board of Directors has recently approved an additional $1 billion to be added to a stock repurchase program as part of our broader capital allocation strategy to generate meaningful returns for our shareholders. Now a few final comments on our outlook. For Q2, we anticipate consolidated constant currency revenue growth of 9% to 10%. We also expect our top line growth rates to continue improving over the course of the year as the impacts from the data incident diminish. We also expect consolidated adjusted EBITDA margin year-over-year contraction of approximately 300 to 400 basis points for Q2, primarily reflecting the near-term factors from the recent data incident. As we have noted, the long-term drivers of margin expansion remain intact. As we work our way through the temporary inefficiencies in our network, we expect margins to improve throughout the year with annual margin expansion resuming next year. The levels of service and value we are able to consistently provide to customers and the response we increasingly see from those customers give us confidence that the recovery will continue to build through the year, and we remain intensely focused on delivering moments of WOW for our customers every day. Operator, we are now ready to begin the Q&A. Operator: [Operator Instructions] The first question is from Eric Cha with Goldman Sachs. Minuh Cha: I have 2 questions. First one is, would you say, given the returning WOW members and probably higher demand visibility into the second half, the timing difference of demand and investment could be somewhat resolved in second half. And if so, would the 2027 margin would have profitability expansion over 2025 level? So that's the first question. And the second question is, did the Developing Offerings guidance you gave previously, did that include the voucher impact? And I don't think it is, but any likelihood the annual guidance may be revised higher, given the annualized loss in first quarter was a bit higher than expected. Bom Suk Kim: Eric, thanks for your question. I think it's worth going a little bit deeper into the margin point that you raised. I mentioned earlier that some short-term factors are in play, like customer vouchers as well as temporary inefficiencies. On the latter point, let me take a moment to explain how our cost structure works because I think it's important context for understanding both this quarter and the path forward. A meaningful portion of our cost base is fixed and built in advance. That includes our fulfillment centers, logistics network, supply chain commitments we make to partners as well as headcount we secure to operate all of it. And none of these decisions are made on a quarter's notice. A new fulfillment center takes substantial time to plan, build and bring online. Supply chain commitments are negotiated with significant lead times. And as you can imagine, hiring and training our people is something we do well in advance of when we need them. And we size all of these against the projected demand curve. That's what we expect customer demand to look like quarters and in some cases, even years from now based on the trajectory we're on. When demand follows that curve, our fixed cost base operates at the utilization we plan for and our cost to serve looks the way it should. And that's how we've consistently expanded margins over time. When an external event temporarily disrupts that curve, demand falls short of what those costs were sized for. The fulfillment centers are still there. Supply chain commitments are still in place. The teams are still on payroll, but the volume flowing through is lower. So our utilization of those costs is temporarily below target. And that underutilization shows up directly in our gross margins and our adjusted EBITDA. It's the same dynamic that played out when we came out of COVID, when capacity built for one demand curve, we're suddenly serving a different one. And when this happens, we have typically 2 choices. The first is to make dramatic changes in the short term to try to hit some short-term number, close facilities, reduce head count and so forth. That option is available, but we believe it's the wrong one for our business and our customers in the long run. We'd be unwinding capacity that we know we'll need again as the recovery continues and unwinding now to rebuild it later, especially with the lead times so that some of these things have is not only disruptive but highly inefficient. And the second choice that we have is to absorb that temporary underutilization knowing that as growth recovers demand catches up back up to the cost base and the utilization returns to target. And that's the choice we're making. And we're making this -- we're managing this period actively. We're adapting our network where appropriate, much like we did coming out of COVID. But our overarching posture is that the cost base we've built is the right one for the path we're on, and we're not going to dismantle it for a temporary dislocation. And as the recovery progresses, utilization rebalances and the margin pressures work their way out. And that's the mechanism that gives us confidence in resuming annual margin expansion next year. Gaurav Anand: Eric, on your question regarding the DO losses, the $329 million loss in Q1 is in line with what we had expected. And our full year Developing Offerings investments remain tracking to the $950 million to the $1 billion range we had given. It includes a voucher program that we have provided. So Developing Offerings, again, is in early foundational building stages with lots of moving pieces across initiatives and a lot of decisions being made at regular intervals. We are watching -- continue to watch it closely, and we'll continue to update you as the year unfolds, if anything changes. Operator: Our next question will come from Jiong Shao with Barclays. Jiong Shao: I have 2. I'd like to perhaps ask one at a time if that's okay. I was just wondering, firstly, would you able to sort of sort of help us quantify a bit about the voucher impact in Q1 on revenue or EBITDA for Product Commerce and to deal given some vouchers for [indiscernible] some vouchers for Product Commerce or to whatever degree you are willing to share? That's my first question. Gaurav Anand: Sure. Let me take that. So regarding the $1.2 billion voucher program, our primary objective has been to ensure that our customers felt valued and supported during this challenging period. The redemption levels were consistent with our internal expectations. And from an accounting perspective, the vouchers are netted against the revenue. So they did have an impact this quarter on both revenue growth and margins. So as we noted earlier, with the voucher utilization period extending into the first few weeks of April, we do expect there to be a modest impact in Q2 also. Jiong Shao: Gaurav, if I may, just follow up on that. I believe your vouchers are expiring in about 10 days, so the impact for Q2 should be much smaller. But at the same time, you are guiding your Q2 EBITDA to be down 3 to 4 points year-over-year. Was that just because of the sort of the scale of the operation Bom talked about earlier, like you sized that up for certain scale. Now there's a lot of fixed cost? Are there other reasons that's driving the 300 to 400 basis points decline year-over-year on the group EBITDA for your Q2 guide. Gaurav Anand: Yes. Jiong. As Bom mentioned earlier, we had planned fixed capacity, both that shows in gross margin and our OG&A to be at the levels which were higher than the current trends that were created by this event. So because of that, the continued margin Q2 guidance is what we said it is. Jiong Shao: Okay. Okay. My second question is that we have seen some media reports -- my apologies if they're not final or official, that Bom has been designated as a head of the [ Jabil ]. For those of us who are not super familiar with this sort of thing in Korea. I don't know. Could you talk about like what does that mean? Does that mean anything different for shareholders for corporate governance if that matters at all? Gaurav Anand: Sure. We are aware of the recent designation in Korea and are carefully reviewing it. As always, we continue to be committed to complying with all regulatory requirements in all the jurisdictions where we operate. We'll continue engaging consecutively with all our regulators and work through all our obligations as needed. That's as much we can share at this time. Operator: [Operator Instructions] Our next question comes from Stanley Yang with JPMorgan. Stanley Yang: I have 2 questions. First question is, you mentioned already about the WOW members trend. So when do you expect your WOW users to be recovered to your pre-data bridge level? And what would be the normalized annual addition of WOW users after your full recovery? My second question is, is there any change in your Developing Offerings loss mix between Taiwan and Japan. When or at which scale do you expect Taiwan loss to pick up and start declining? I also would appreciate your comment on the operating trend of the Rocket Now in Japan? Bom Suk Kim: Stanley, thanks for your question. In terms of specific dates, I think we're focused more on the trajectory and the underlying customer behavior more than on any date for recovery. I think there are some very helpful and informative signals that we're seeing in the customer behavior that's worth noting around our WOW membership. And as we mentioned, not only is WOW membership numbers being driven by new sign-ups, but it's also driven by members who are returning. The vast majority of our WOW members never paused in the aftermath of the incident. They continue to compound at double-digit rates, the same way they have for years. And the minority who did pause are returning rapidly. And the majority of them have returned in a very short period of time. And just as importantly, they're resuming their prior levels of spend, not splitting that share of wallet with the alternatives. And we've now closed nearly 80% of the decline in WOW memberships that occurred after the event with a combination of those returning members and strong new sign-ups, which are along with churn back to historical levels. And I think what's helpful to know is that all of those patterns are consistent with an event-driven disruption working its way out, not with a structural shift in our position. And the fact that our -- the vast majority of the customers never paused, they continue to compound at double-digit rates, and the members who paused are returning rapidly and picking up their spend right where they left off and continuing to compound is confirmation of our view that we're returning to the same drivers that have been powering our growth for years in the past. Those customers continue to value the Coupang experience and are not finding that value proposition somewhere else. And that's what we believe will continue to power our growth in the years ahead. Gaurav Anand: And regarding your question on Taiwan and investment. Taiwan continues to grow at hyper growth rates. We are very excited about it and the future that it holds for us. The investments, we were not splitting out investments between different initiatives. Right now, we allocate capital, just based on where we see the opportunities are the strongest. And each initiative is at a different point in the life cycle. But... Bom Suk Kim: In Taiwan, as I mentioned earlier, we're prioritizing, building the foundation for an unparalleled customer experience. We're excited to be entering a lot of these very exciting foundational building -- foundation-building stage of the journey, such as network design, supply chain improvements. We now have provided access to our next-day delivery experience to a majority, a vast majority of consumers in Taiwan, and it already represents the vast majority of our volume, and we're continuing to strengthen that last-mile delivery network, not only to increase access, but to improve the levels of service that we provide. And we're also investing to expand aggressively the selection that customers can purchase on that network across more categories. Operator: Our next question will come from Seyon Park with Morgan Stanley. Seyon Park: I also have 2 questions. First is just on the macro picture overall. I think industry-wise, we've started to see a bit of the acceleration in e-commerce growth. And just given the K-shaped economy that we're kind of seeing, I kind of wanted to get your views as to whether we are seeing any signs of slowing for the e-commerce industry overall or whether it's some seasonal factors that are also impacting it, given Coupang is now a big chunk of that e-commerce. Clearly, the impact that we've seen from the data breach may also have impacted the growth of the overall industry as well. So I just kind of wanted to get management's view on how they see just the overall industry growth. There seems to be a lot of conflicting data. Obviously, GDP was also stronger. So any views there would be much appreciated. The second question is really on the buyback. You announced that another $1 billion has been approved. It does seem like the cadence of the buyback is starting to accelerate. And hence, just wanted to get some guidance or any comments as to whether we should see a higher cadence of buybacks in the coming quarters? Bom Suk Kim: Seyon. I think from our perspective, we're always much more focused and obsessed with our customers, how our customers are behaving. And we ultimately believe the biggest drivers of customer behavior are -- is the experience that we're providing. We've seen that consistently through ups and downs in the macro over the many years that we've served our customers and the markets that we operate in. I think there's some important, again, things to maybe point out again that we've always seen for years our customers compounding their spend, and the vast majority of customers who remain with us and did not pause continue to compound at double digits, very healthy rates. The customers who have returned, the majority of customers who -- of the minority that paused, who've returned have picked up exactly where they've left off and are now also compounding alongside them. So I think a lot of the behavior that we're seeing is still very strong on that front. I do think it's also important, maybe you are seeing some discrepancy also in the underlying behavior that I'm talking about and the numbers you may be seeing this quarter and -- because the year-over-year growth rate this quarter doesn't move in lockstep with that underlying customer behavior that I'm pointing out. And maybe I'll take this opportunity to explain also how growth at Coupang normally compounds. Each month, our existing customers grow their spend with us and new customers join and start building their spend over time. Both of those streams add to our base and keeps getting larger. That's the engine that has produced our historical growth rates. That's been remarkably consistent for us. And I think we've shared [ core ] data in the past. We shared it regularly. That's really an important health metric for us. And through again, ups and downs on the macro, that engine of existing customers continue to compound, new customers joining and building their spend over time, those 2 streams are really the engine that produces our growth rate. Now when an external event interrupts that cycle for a period, 2 things happen. First, the customers who pause stop adding to that base for the months that they've paused. And the new customers who would have joined during that period don't join at the usual pace. And second, this is the subtle part, we lose the months of compounding of that customer spend that we typically observe with both streams. And once a month is gone, you can't get it back. And now even if everything underneath fully recovers, past customers come back at prior spending levels, new acquisitions return to historical pace. The year-over-year comparison still carries the weight of those lost months. And this year's revenue is now missing the months of compounding that didn't happen during that affected period, while last year's revenue also included -- sorry, the last year's revenue included all 12 months of uninterrupted compounding. So the 2 sides of the comparison are no longer symmetric. And this effect works its way out as we've lapped the affected period. And after we've lapped the affected period, that's the point at which the comp returns to being apples-to-apples. And this also probably gets to a little bit to Eric's earlier question as well about our growth rate this year. While we see very encouraging and positive signs in our customers returning, picking up their spends where they left off, growing and compounding. We see very healthy compounding behavior underneath because of the lost months of compounding. You'll see our Y-o-Y growth lag and will be behind the demand curve that we projected for our fixed cost. And a lot of the -- that's the earlier point that I made about cost dynamics. So some of the things that Eric was asking about, I think, are -- can be gleaned from -- or some of the things that we want to point out can be gleaned from what I'm sharing here. But hopefully, this gives you a fuller picture of how we think about growth and the drivers of growth. Operator: We will now take our last question from the line of Wei Fang. Wei Fang: I have 2. First one is a follow-up on an answer to the prior question on your 2Q EBITDA guidance. I don't think you mentioned any impact from the fuel inflation. Just want to understand if that's included there and also if you can help quantify for us? And the second question is on competition. I understand that some Chinese e-commerce players are now growing their MAUs nicely in Korea as well. I think they combined maybe more than 10 million of already in terms of users. I know maybe the spending levels is not there yet, but can management give us some overview on the landscape, maybe today versus a year ago, anything has changed. And maybe anything -- any comment you can give in terms of like a 3P take rate in the business? Bom Suk Kim: Wei, thanks for your question. We've always operated in a in highly competitive markets. And we've had many new entrants, many players. It's one of the most dynamic spaces and industries that you can operate in. And over many years, what we've learned over and over again that kind of what matters most is the customer experience and staying relentlessly focused on customers and not what any set of competitors or individual competitor does. The markets that we're operating in are large. We represent just a small share in each of them, and there's room for many winners. I think what we believe ultimately drives growth is the differentiated value we provide to customers, the combination of selection, price and delivery that no one else offers. I think we're very encouraged, as I mentioned, that the customers who -- the vast majority of customers who stayed with us through the affected period over the last couple of quarters have continued to compound at double-digit rates as they have for years. The customers who've come back have not split -- have returned to their old levels of spend and have not split that spend with other alternatives. That's also, we think, a good sign that they really value what we're providing, the Coupang experience and not finding that value proposition elsewhere. And that value proposition is really the engine of our growth. It's really what we're focused on making even more valuable for our customers every day. And that's what we believe will really determine our success in the years ahead. Gaurav Anand: Yes, I'll take the -- I'll respond to your question on the impact of oil prices. So with the increase in fuel prices, not going really into effect until late Q1, we saw a very small impact on our operations this quarter in Q1. We benefit from the efficiencies created by our end-to-end owned supply chain and logistics infrastructure and processes. And looking into the near future, we keep our focus on continuing to create the best experience for consumers, while we also are driving operational excellence. We don't see this -- the oil prices having a significant or material impact in Q2 so far, and we'll continue to monitor it. On Q2, again, even though we guided our margins to where we did, there is no structural change in our entitlement and over time, what we see. Operator: This concludes today's conference call. Thank you, and you may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Corebridge Financial Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Isil Muderrisoglu, Head of Investor and Rating Agency Relations. Please go ahead. Isil Muderrisoglu: Good morning, everyone, and welcome to Corebridge Financial's earnings update for the first quarter of 2026. Joining me on the call are Mark Costantini, President and Chief Executive Officer; Chris Filiaggi, our Interim Chief Financial Officer and Chief Accounting Officer; and Lisa Longino, our Chief Investment Officer. We will begin with prepared remarks by Mark and Chris, and then we will take your questions. Today's comments may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations and assumptions. Corebridge's filings with the SEC provide details on important factors that may cause actual results or events to differ materially from those expressed or implied by such forward-looking statements. Except as required by the applicable securities laws, Corebridge is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change and you are cautioned to not place undue reliance on any forward-looking statements. Additionally, today's remarks may refer to non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on our website at investors.corbridgefinancial.com. With that, I would now like to turn the call over to Mark and Chris for their prepared remarks. Marc? Marc Costantini: Good morning. and thanks for joining us. I'd like to formally welcome our CFO, Chris Filiaggi, to the call as well as our Chief Investment Officer, Lisa Longino, I'll begin this morning with a recap on the strategic rationale of our transformative merger with Equitable and an update on progress we've made to date followed by some observations on the current market environment and our corporate business model performed in the first quarter. I'll also spontalize some of the actions we're taking to win with customers. Turning to Slide 3, we are bringing together 3 outstanding franchises to create a diversified financial services company with leading positions in retirement, life, wealth and asset management. Together, we will have more than 12 million customers and $1.5 trillion in assets under management and administration. Our combined distribution capabilities will be formidable. We will have a large multichannel distribution ecosystem to reach the broadest possible customer base. Our enhanced scale will drive significant synergies, $500 million in expense synergies plus meaningful upside opportunities from additional revenue tax and capital synergies. Our greater scale should reduce our cost of capital to help us provide better customer solutions at lower cost, allow for greater investment and strengthen our ability to attract top talent. The transaction will allow us to further diversify our source of income, which helps provide resilient earnings across market cycles. Our growth prospects will be considerable across the combined company's businesses with our integrated model allowing us to capture the full value chain. The balance sheet of the combined company will be robust. By 2027, we expect earnings to exceed $5 billion per year, cash generation will be strong and consistent, topping $4 billion per year. The merger will be immediately accretive to both earnings per share and cash generation. both of which should increase to 10-plus percent by year-end 2028. Turning to Slide 4. The upside potential for all our businesses will be strengthened with the merger. In individual retirement and life, we will have meaningful revenue synergies. For example, our fixed and fixed index annuities will complement Equitable's annuity offerings and their variable universal life product will complement our life offerings. Together, we will be a leader in the [indiscernible] group retirement space with a large workplace distribution force. We will have more capabilities and balance sheet capacity to support our growth in institutional markets. In the combined company's asset management and wealth management businesses, Alliance Bernstein will have nearly $1 trillion in AUM and we'll have over 5,000 advisers to drive growth. We are making good progress on steps required to close this transformative transaction. We already have completed a vast majority of our regulatory filings, our Form S-4, including the shareholder proxy statement will be filed with the U.S. Securities and Exchange Commission shortly. We believe the shareholders of both companies will approve the transaction, given its compelling rationale. The executive team of the combined company has been determined and will be communicated soon. I'm confident we have the right leadership to execute on all our strategic objectives. Both companies have established integration management offices that are hard at work planning a seamless integration that captures the full value of the synergies. Finally, an important update on the timing of share repurchases. As we indicated in the 8-K filed earlier this month, we are exploring undertaking share repurchases prior to the closing of the merger including during the period from filing the preliminary proxy with the SEC until we mail the final proxy to shareholders. We also continue to expect another opportunity when we can repurchase shares after the shareholder board December, subject to normal blackout periods. Any remaining capital we plan to deploy will be facilitated post close likely through an accelerated share repurchase. Turning to Slide 5. Corebridge demonstrated strong performance driven by favorable industry demographics and sustained customer demand in the first quarter. Despite facing heightened market volatility and competition, our disciplined approach continues to deliver solid results. Our wide array of product and service offerings enable us to meet a wide variety of customer needs, enhance the stability of our financial results and allow us to allocate capital where returns are the highest. Our powerful balance sheet continues to give us financial flexibility and our disciplined execution shows up in everything we do. Our overall performance in the quarter was strong. Excluding variable investment income and notable items, year-over-year operating earnings per share were up 13% and adjusted return on equity was up 120 basis points. The foundation of our success is winning with customers and I include our distribution partners and plan sponsors in that category. We were proud to be ranked #1 by J.D. Power for partner satisfaction and annuity distribution. This validates our strategic focus on the adviser experience and our goal of being the easiest firm in the industry to do business with. We also continue to see strong momentum in our Group Retirement NPS and with planned sponsor satisfaction rising year-over-year. I'll have more to say about how we're investing in customer experience in a minute. In Individual Retirement, we delivered strong sales of $4.3 billion, while maintaining pricing discipline and consistently positive net flows. The market outlook remains positive -- the Peak 65 surge is continuing with another 4 million Americans hitting that retirement milestone this year. In Group Retirement, we continue to see the transition from a spratifee-based business. Fee-based earnings are approximately 60% of the total with advisory and brokerage assets rising to all-time highs, growing 14% year-over-year, benefiting from record levels and net inflows. In life, excluding VII and seasonally higher mortality, we continue to deliver earnings within our guided range, reinforcing a stable earnings for the company. And in institutional markets -- the underlying business continues to grow with an 18% increase in reserves. We issued $1 billion of guaranteed investment contracts in January, including our first-ever Canadian dollar-denominated GIC. The pension risk transfer pipeline remains healthy with greater activity expected in the second half of the year. I believe the key to our success will be a relentless focus on putting the customer at the center of everything we do. Our road map is simple: to deliver a differentiated customer value proposition, be the easiest company to do business with and maintain a world-class distribution. That is how we generate more value for customers and investors alike. As I said on my first earnings call 3 months ago, we're going to make the investments needed to improve the customer experience. Those efforts are well underway at Corebridge in 2026. A few highlights. We've launched a customer council steered by the executive leadership group and comprised of cross-functional senior leaders from across the company. They are showcasing key initiatives, sharing best practices, identifying quick wins and above all, ensuring we maintain a customer-first mindset. Across our retail operations, we're modernizing how new business is onboarded by further enhancing digital submissions, strengthening upfront suitability checks and improving real-time application status, all of which has removed uncertainty, delay and friction from the process. We've launched a new wealth management digital experience last month that allows clients to seamlessly navigate their product and service relationship with us and stay connected with their financial adviser. We're moving permanent life products onto our digital submission platform, and we're launching a new payroll platform that makes it easier for group retirement plan sponsors to integrate their payroll data with us. In closing, we're excited about the future of our business. Externally, powerful demographic tailwinds are creating a large market opportunity. Internally, our customer-first mindset and emphasis on operating at speed will enable us to capture a significant share of that opportunity. The result will be a company that delivers significant growth in earnings per share cash generation and shareholder value. This is true of Corebridge today and will continue into the future as a combined company. With that, I'm pleased to turn the call over to Chris. Christopher Filiaggi: Thank you, Marc. I'm excited to join today's call and will provide further color on our performance for the first quarter. Starting with Slide 6. Our results this quarter underscore the strength of the Corebridge model, consistent growth and active capital deployment balanced by expense control and portfolio optimization. Performance was largely in line with our guidance from the fourth quarter, highlighting our diverse stable earnings patterns and agility and capital management. We reported adjusted pretax operating income of $629 million and earnings per share of $1.05. The first quarter results were impacted by underperformance of our variable investment income. Excluding the impact of VII and notables, EPS increased by 13% year-over-year, demonstrating the underlying strength of our core businesses. VII returns were impacted by several components including positive alternative investment returns, offset by unrealized mark-to-market losses on investments accounted for at fair value with changes in fair value reported in adjusted pretax operating income. Adjusting for long-term alternative investment returns and notable items, we delivered a run rate operating EPS of $1.17, representing a 9% increase year-over-year. Finally, adjusted ROE was 10.6% or approximately 12% on a run rate basis. Excluding VII and notables, this reflects a 120 basis point increase year-over-year, underscoring our commitment to consistent profitable growth. Turning to Slide 7. Our businesses continue to evolve, delivering highly diversified sources of earnings and strong, stable cash generation regardless of the market environment. Our core sources of income, excluding alternatives and notable items, increased 1% year-over-year with some variation in the underlying components. Fee income increased by 9%, driven by growth in assets under management and advisory alongside favorable market tailwinds. Spread income increased by 1%, which is in line with our guidance around the earning of the majority of the 2025 fed rate cuts. To put that in perspective, had those rate cuts not occurred base spread income would have been approximately $20 million to $25 million higher. Underwriting margin decreased 2% year-over-year due to exceptionally favorable mortality in the first quarter of 2025. Lastly, general operating expenses were in line with our expectations. This reflects ongoing investments we are making in our platform, as Mark highlighted earlier, as well as typical first quarter seasonality. Looking ahead, we remain fully committed to disciplined expense management and improving our operating leverage over time. Turning to Slide 8 and looking at our capital position. Our balance sheet continues to be healthy and strong. We ended the quarter with over $1.7 billion in holding company liquidity, supported by our U.S. insurance companies distributing $925 million of dividends in the quarter and our level of liquidity exceeds the holding company's needs for the next 12 months. Capital return to shareholders reached $1.4 billion in the quarter. This included the completion of our planned capital returns related to the VA reinsurance transaction totaling $1.8 billion. Excluding those VA reinsurance proceeds, we maintained our payout target with a payout ratio of 88%. Lastly, our insurance companies remain well capitalized with capital ratios exceeding our targets. Next, I'll review a few highlights from each of our businesses. The details of which can be found in the appendix to our earnings presentation. These results exclude the impact of notable items and variable investment income. Starting with Individual Retirement, we continue to be very positive about this business. The outlook is backed by strong fundamentals and demographic tailwinds that continue to drive demand for our retirement solutions. Premiums and deposits were $4.3 billion, demonstrating growth both sequentially and on a year-over-year basis. Leveraging [indiscernible] first quarter industry projections, we maintained our market share of total annuity sales year-over-year. This includes our newer Vila product, highlighting our success with key distribution partners. Net flows into the general account remained positive at approximately $0.5 billion, contributing to continued growth in the underlying business. We saw surrender activity in line with our expectations. This reflects fixed and index annuities reaching the end of their tender charge periods. As we look at the full year, we reaffirm our estimate for big spread income to be approximately $2.55 billion. While we continue to see some spread compression, we still expect it to level off by the end of 2026, assuming the current market outlook and 2 additional Fed rate cuts. Lastly, AP TOI increased 1% year-over-year, supported by growth in spread and fee income, highlighting the growth in the underlying business. Turning to Group Retirement. We are seeing this business evolve as a growing percentage of the American workforce is reaching retirement age. This demographic shift and the steps we are taking because of it are fundamentally changing how we generate value, moving us toward a more diversified and resilient earnings profile. Continued momentum in our advisory and brokerage initiatives resulted in a record level AUMA and net flows of over $300 million in the first quarter. The strong performance is directly related to our efforts focused on the adviser experience and operational ease of doing business, which is delivering early measurable wins as we continue to invest in the platform. APT line decreased 17% year-over-year. This reflects lower spread income, partially offset by growth in fee income. This transition is intentional. As our clients move into the decumulation phase, we are seeing a natural mix shift away from the spread-based products and towards fee-based income. This aligns with our broader strategy to emphasize capital-light earnings, which now account for nearly 60% of group retirement earnings. Our Life Insurance business delivered another strong quarter, in line with the guidance we provided back in the fourth quarter, reflecting higher seasonal mortality in the range of $15 million to $20 million. This performance is consistent with both our historical experience and seasonal expectations for the start of the year. We generated $850 million in sales this quarter, in line with first quarter expectations. [indiscernible] declined 5% year-over-year. While mortality trends are favorable and aligned with first quarter expectations, they were below the exceptional mortality experienced in the prior year quarter. Going forward, we remain confident in the steady cash flow and stability this segment provides for the broader portfolio. Institutional markets continues to be a consistent growth engine with both underlying reserves and total earnings trending upward. First quarter sales included over $1 billion in GICs maintaining the consistent momentum we've seen highlighting our ongoing commitment to the GIC and FABN market. APT OI increased 15% year-over-year. This growth was underpinned by an 18% expansion in our reserves and a 13% increase in assets under management and administration. Lastly, a comment on pension risk transfer. Sales in this space are inherently episodic. While we expect volume variability from quarter-to-quarter, our pipeline remains strong. We anticipate an uptick in activity we move into the second half of 2026. Next, I'd like to take a moment to address recent headlines regarding the life insurance industry and its investment portfolios. Corebridge has a long-standing history in private placements recognizing that the vast majority of companies today are privately held rather than public. We are able to utilize this asset class to achieve diversification across our portfolio that isn't available through public issuance alone. These assets are a natural fit for our liabilities and allow us to not only capture an illiquidity premium, but to do so with the protection of financial covenants, while maintaining a high-quality investment grade profile. Corebridge maintains control over all aspects of our asset portfolio and risk profile, whether our private debt is originated internally or externally, we maintain rigorous ongoing processes to underwrite, reunderwrite, rate and model our private assets. Out of the $284 billion statutory investment portfolio, $49 billion is in private debt, which is a high-quality diversified book, where 91% of the assets are rated investment grade. To provide further context on our private debt, I'll address a couple of recent areas of focus, beginning with private credit over what we categorize as middle-market lending. Our allocation here stands at $3.3 billion, representing only 1% of our total portfolio. These investments have attractive risk-adjusted returns and we continue to expect [indiscernible] losses in the middle market lending will be yield adjustments and not credit events. Further, within the middle market allocation, our debt exposure to the software sector is less than $300 million and all of it is currently performing. Another area of focus in the financial press has been BDCs, like middle market lending, this represents a small part of our portfolio where we hold $1.7 billion of debt issued by BDCs. Our entire exposure consists of debt instruments with no equity holdings in these originations. We Generally, we are a senior lender in these investments and the average asset coverage ratio is approaching 2x, meaning significant asset impairment would be necessary to impact our position in the capital stack. Given our current exposure, robust management processes and the alignment of our liabilities, we remain very comfortable with our positioning. Our rating migration has been net positive over the last 4 years, and we routinely perform sensitivity testing to ensure we remain well capitalized across all market cycles. In clothing, we remain focused on maintaining a strong balance sheet while generating growing returns to shareholders. Our guidance laid out in the fourth quarter remains largely in place, and we continue to believe 8% to 9% is the appropriate expectation for alternative investment returns over the long term although we do anticipate continued market-driven headwinds based on the current environment. With that, I will turn the call back to Isil. Isil Muderrisoglu: Thank you, Chris. As a reminder, please limit yourself to one question and one follow-up. Operator, we are now ready to begin the Q&A portion of the call. Operator: [Operator Instructions] Your first question comes from the line of Suneet Kamath with Jefferies. Suneet Kamath: Marc, I wanted to start on distribution. Just curious what you're hearing from your distribution partners post the merger announcement, is there anything that we should be thinking about in terms of sort of limitations on how much product they want to get from any one counterparty? Or is that not really a concern? Marc Costantini: Yes. Suneet, thanks for the question. I appreciate it. It's actually a very good question because as we were going through the process with Equitable when we're looking at various levels of synergies, we did challenge ourselves in terms of what I guess I would refer to as dis-synergies. And as we announced it, and both firms obviously reached out to all of our distribution partners. I must say to to our delight, we haven't heard any, I would say, apprehension about the depth and breadth of the the presence will have across these channels. And part of it is because the suite of products, both companies are bringing to the merger are very complementary. So -- so if you even pick the largest distributors on each side, the overlap is de minimis, so and the overall volume and -- at the end of the day, we feel strongly, and this is a strong premise around this transaction that scale matters and the manufacturing depth and breadth matters. And it's easier, we feel for an adviser for he or she to learn a handful of stories and be comfortable dealing with a handful of manufacturers, but when it comes to obviously, the distribution side, but there's a servicing side as well and how they live the brand. So we feel that's value add. So the answer to your question is we haven't heard of any, and we were obviously very pleased by that outcome. Suneet Kamath: Okay. That's helpful. And then, I guess, I just want to make sure we're thinking about this right. When you talk about the $4 billion of cash and the $5 billion of earnings, mean that would sort of imply free cash flow conversion of like 80%, which seems high. So I'm assuming that $4 billion of cash is sort of before holdco expenses, but -- just wanted to get a little bit more color on how you're coming up with those numbers and what they include. Marc Costantini: Yes. Thank you, Suneet. Yes. So the short answer is, you are correct. And that's kind of the pro forma that both firms put out there when we obviously communicated this transaction a month or so ago. And so I'll leave it at that, but that's right. And that's pro forma guidance of where we expect the obviously, operating income to be in the flows, obviously, from the operating entities. And and it reflects, obviously, the very attractive synergies we'll get out of the transaction as well. Operator: Your next question comes from Alex Scott with Barclays. Unknown Analyst: First on how you envision health management strategy evolving over time? I know you're not ready to give revenue synergies, that kind of thing. But Mark, I've heard you talk about Wealth Management. I know Equitable, I think, is maybe even gotten a little further down the road with their build-out of wealth management. How do you expect to leverage that? What are you planning to do on that front, even if you could just provide something more qualitative. Marc Costantini: Yes. Alex, it's great to take here, Voice. So you're right. We -- and the collective we are very bullish on the wealth management space. I think if I objectively look at what Equitable advisers has done and what they've done with that business and the margins and the accretion and the growth of the margins over time and the volume and the AUMs, I think they have wonderful story. And obviously, they have an operating model that's proven to be successful. And they've got 4,500, 4,600 advisers, obviously, in the market. So on our side, I'm going to around about 1,000 advisers we have as part of that business. And we are investing a lot on the infrastructure there to, as you know, cross-sell and upsell, obviously, into those plan participants, and we feel there's a great opportunity there. I think we mentioned in the last call that we think that's upwards of $30 billion of upside there, and we're as Chris mentioned in his remarks, we are harvesting that opportunity right now. Having said all that, your implicit observation there that their platform is more mature and advanced is true, right? And -- so in the category of the devil is in the detail that we are working through now and between now and close that into after close, how we bring both organizations to bear and ensure that 1 plus 1 equals 3, but we are very sensitive to the fact that we're talking about individuals that are larger have clients that want to grow their own book of business opportunistically, and we are being obviously attentive to that as we bring the 2 organizations together and it's too early to tell exactly what it looks like. But we are very, very, obviously, bullish on that business as we look forward. Unknown Analyst: Got it. Helpful. Second one I had is just on artificial intelligence and investment that you're going to make there over time. I heard some of the comments in your introductory commentary around the initiatives you've already got going on some of the digital interfaces that I think you mentioned. How are you coordinating those efforts with Equitable? I mean how quickly can you start working together on AI adoption just given -- I know this transaction probably takes some time to get the closure and so forth, but that a lot of these initiatives are taking shape very quickly in the background. Marc Costantini: Yes. Thank you. That's obviously a very important topic, and I'll give you 3 perspectives. The first one is that each firm is operating independently between now and close, right? So let's assume closest towards year-end. What we do now is compare notes about the history and what we've done and not and develop plans as to how we come together and to integrate the firm, but we operate very much independently until they close. So some of the initiatives that they have ongoing will, I'm sure, continue and some of that we have, which I'll talk about in a second here, we'll definitely continue. We are being thoughtful though if there's overlap in some of these initiatives so that we identify, let's say, the go-forward platform or approach so that when we plan for integration, we reflect that. So the second point I'll make is that, yes, we are accelerating our investment and deployment of AI capabilities. And I want to highlight the point that we want to invest in differentiated outcomes. And what I mean there is that we want to invest heavily in the front end and how do we enable and accelerate the distribution of our products and services to our various channels. And I say this by wanting to arm and facilitate our distribution to provide a better service and guidance and identify faster, the better clients for the products and services that we offer and help people retire with. So that will be -- and that is a very key focus of ours. Then it's enabling a differentiated, I would say, brand and how they live our brand and that comes to the tail end servicing and claims. And I would say that a simple example of what we've deployed over the last few months is digital agents that help our group retirement plans manage their affairs. And as you can imagine, when people call and want to do certain things with their group retirement plan, there's a lot of complexity for the servicing individuals to get to the right information and get the right outcome, and we've got digital agents there now helping surface the right characteristics of every plan and contract that individual has. So that would be one example of how we've deployed it. And I think there will be more as time goes on now. The one aspect, and you've heard me say this last quarter is that obviously, winning with customers and putting the customer at the forefront of everything we do is very important. And obviously, the digitization and implementation of thoughtful AI to our platform will be a key part of getting to that outcome. Operator: Your next question comes from Tom Gallagher with Evercore ISI. Thomas Gallagher: One question on the deal then a separate question on investment exposure. The -- so my question on the deal is the revenue synergies. And Marc, I know you're you're still getting through more detailed estimates for what these opportunities represent. But the fact that you're highlighting it as one of the parts of the strategic rationale for doing the deal, is it fair to assume that this could be material to earnings. I'll define that as 5% or more as a percent of earnings when we look to 2028 and beyond in terms of the potential opportunity here. Or is it more modest? I just want to get a broader sense because I think this is part of the strategic rationale for doing the deal. Marc Costantini: Yes. So thanks for the question. I guess there will be ample revenue synergies that we expect on our transaction. I think we obviously guided towards the $100 billion of assets coming from the corporate side of the equation to AllianceBernstein over time. And that will be from the general account and obviously, the separate account assets. There's a lot of cross revenue synergies about us, corporate selling some of our fixed annuities and fixed index and the resented the accruable advisers channel, which I think -- you've heard, obviously, that there's billions there being written that we have access to. There's a VUL product on their side that was on our design table that we'll be able to introduce and then there's the cross-sell and upsell into these group retirement plans that I was just talking to [indiscernible] actually, I think it was Alex asking. So -- but -- so those now -- it's too early to put a number on it. I wouldn't want to say above or below your number and and provide guidance that we haven't worked through at this point. I think as Robin and I have been mentioning to all of you, we will have an Investor Day in the first half of next year. And at the top of the list or as part of the key aspects of that will be to provide additional guidance on this revenue synergies. So far, obviously, we've indexed on the expense synergies given they were easier to identify as we went through the process, and that's what we're guiding to. And -- but there will be obviously some capital tax and revenue synergies as well tied to the transaction, which is why -- we think this one -- this transaction is obviously appealing on across many dimensions, including this one. Thomas Gallagher: Okay. Fair point. I guess my question on the investment side is -- I appreciate the disclosure on the BDC debt, the $1.7 billion. We've gotten a number of questions on that. And can you -- can you just give a little more clarity on -- I think there's this perception out there that since a lot of the BDCs own risky debt, 10% plus yielding pipe loans, single B quality, how certain investors sort of equivocate that to that must be the risk for that exposure. And I think it's not. But can you talk about how you think about that $1.7 billion of BDC debt, is it all investment grade? I assume it largely is, but how that's very different than the underlying exposures that the BDCs have themselves? Marc Costantini: Yes. Tom, I was going to have Lisa, who's on our call and give you context there. So Lisa, please? Unknown Executive: Okay. Tom, it's nice to meet you. Thanks for the question. Look, the way we think about BDCs is, first and foremost, we look at the larger ones. We look at ones that could be public or really the majority of ours are nontraded. So given they're closed-end funds, they are regulated under the 40 Act, and they have some regulatory covenants in there that help. We view it as the portfolios are highly cash generative diversified pool, first liens with -- I mean, the conservative leverage in the low LTVs. And we spend a lot of time looking at that. And our asset managers will go in and regularly look at the portfolio monthly, how is it doing? What does the cash look like? What is picked, what trades are they doing because it is loan investments and there is leverage at the portfolio of companies, we spend a lot of time doing that. And the risk mitigants really are a significant portfolio diversity in the low LTV and even when we look at stress cases there, it does point to some solid recovery through the unsecured BDC debt because of the structuring. So -- and we really -- we constantly review the asset coverage ratio. So -- and all of this is investment grade, solid investment grade. And as Chris mentioned, we don't have any equity exposure. Operator: Your next question comes from Ryan Krueger with KBW. Ryan Krueger: I think your Individual Retirement sales were roughly flat year-over-year. And I think you said market share was pretty consistent. So that suggests that the industry was also about flat. Just any commentary on why you think sales have slowed at this point. I think the rate environment is still pretty similar to what it was. We obviously have the continued aging of the population. So I just was wondering if you had any perspective on why you think annuity sales have been slowing a bit after the big uptick in the last several years. Marc Costantini: Yes. Ryan, it's Marc. So thank you for your question. Yes, I think as you mentioned, our sales are relatively flat year-over-year and quarter-over-quarter across our individual retirement side. I would note that we continue to have very robust activity in the individual retirement side on [indiscernible] side. And as you mentioned, we continue to believe that the demographic trends are very positive and a tailwind, right? We don't have yet the Q1 market share data, right? So when we guide that we've maintained our share from our perspective, it's based on us accumulating data from our distributors and all that. But our gut tells us that actually our share will have somewhat increased, which which does mean as well, obviously, that the flows across the industry maybe have tempered a bit. I feel that, that is very temporary. And we feel, obviously, here at Corebridge that we purposely obviously have a depth and breadth of product for different obviously, solutions for the Americans as they accumulate savings for retirement and then draw on retirement income, right? And we believe there's robust demand and we don't make a quarter a trend or a conclusion as to what the direction of travel, and we feel that there's still a lot of growth in that space overall. So -- but more to come as all the actual stats come out is what I would say as well. Ryan Krueger: And then just had a question on the Japan commercial partnership you're pursuing with Nippon Life. When you think that could become operational? And how many of an opportunity do you think that could actually be for the company over time? Marc Costantini: Yes. It's a very good question. And we have a very rich and ongoing discussions with Nippon. As you know, and you -- you've mentioned here, Nippon is a very important strategic investor in our firm. There will be obviously a or investor in the go-forward firm. And that stems as well from the core manufacturing opportunities we have with them. Like -- as you've heard me say many times, like brand and distribution matters and you need world-class and they have that in spade and Japan. And -- so we are working on co-manufacturing products. Their economy there is reflating. There's a need for the same products we sell. Having said so, they have a process as well as they evaluate what goes through their distribution channels and what's right for the end consumer there. And we're trying to develop products with them that meet those needs and then they got to be filed. They got to be approved, and they got to be deployed. So I would say that if there's anything that would be announced at a through the course of 2026, if that happens, it takes at least another 9 to 12 months from then to actually have something in market, right, because of the nature of the regulatory process and the finding process and making sure it gets on the appropriate distribution shelf appropriately. So -- so that's kind of the frame I would give you. But we're working in collaboration with our -- obviously, with Nippon there, and I am cautiously optimistic that there will be something that we will do with Nippon over the course of time, but that's kind of the time line. The other thing I'll say maybe is that -- if we look post merger, we have obviously some great asset management, to Alliance Bernstein, and they have a great global presence and that is another part of the equation where we think there's great revenue synergies eventually as we partner across the world. Operator: Your next question comes from Wes Carmichael with Wells Fargo. Wesley Carmichael: First question was on individual retirement. Just on the surrender rate in fixed annuities and FIA that ticked up a little bit sequentially. So just curious if you think that's going to continue to kind of stay that level from here? Was there a bit of maybe just volatility in the quarter from product exiting surrender charge. And did you see any elevated surrender charge income come through in the quarter? Marc Costantini: Yes. Thank you, Wes. I appreciate the question. So I think as we've guided in prior quarters, there is some business that is approaching the surrender charge period across our fixed annuity and fixed connect annuity typically, those products have a 5- to 6-year kind of surrender charge period, and they're getting to the end of that point. So over the course of the '26, '27 and '28, we do see spike in that business maturing, and we would expect to see, obviously, more redemptions out of that just natural behavior and maturity of the block. And -- we do expect and always strive to have net positive flows, right? And -- to the question earlier about the $4.3 billion of flows in a quarter, I'd like to think of our business as a $5 billion of quarter gross flows through various cycles, right? So you're looking at a circa $20 billion annuity book on an annual basis. And we feel that the maturity of the block and as business flows out, that will generate a steady stream of net positive kind of flows to our book. And that's how I would think about it versus looking at any given quarter, but that's -- so we do expect a heightened. But it's natural maturity of the business, not necessarily any type of unexpected behavior from our policyholders. And -- so -- and there's no -- to your -- I think the other question you had was around surrender charge revenue. There's no unexpected, I would say, revenue or headwind tied to that in our business right now. Wesley Carmichael: Got it. That's helpful. And I guess just second question on the insurance company cash distributions in the quarter. I think that was nearly $650 million when you exclude the VA proceeds. And that's up nicely sequentially and year-over-year. Do you kind of view that as indicative of a new run rate? Was there anything in the quarter that maybe favorably impacted that? Marc Costantini: Yes. So I think I'll offer a comment, and then I'll hand it to Chris. I think we had heightened flows from the insurance companies in Q1, and I would expect the run rate to be lower. But Chris, maybe you want to give some color there? Christopher Filiaggi: Yes, sure. Thanks, Wes. Appreciate the question. So first, let me reiterate our guidance on the insurance company dividends. So our expectation was that we would have insurance company distributions at around $2.3 billion in 2026. That does include the dividend to the final $300 million from the Benra Bulls transaction. So that leaves us with about $2 billion of normalized insurance dividends. We did accelerate a portion of our dividends in 1Q. So directionally, you should expect dividends to be lower for the rest of the year, more in the $450 million to $500 million range. Operator: Next question comes from Cave Montazeri with Deutsche Bank. Cave Montazeri: Both of my questions are going to be on the Marc's comment on making [indiscernible] the easiest company to do business with. The first one is on this newly created customer council, the initiatives that they're working on -- are they mainly digital initiatives? Or does that go beyond technology? And maybe can you share some of the quick wins you've identified that you want to start working on next? Marc Costantini: Okay, Cave. I appreciate that question. And we are striving to be the easiest company to do business with. So I appreciate you spiking that out. And yes, so when we launched and rolled out the win with customers, I would say that win with customers was always part of the fabric of corporates and AIG Life and Retirement business. And I think the separation, obviously, to precedents and priorities. So it was always there in the DNA. And when we launched it internally and we communicated this broadly to our employees that we had a mentsense of excitement across the organization to to pivot to and pivot back to this kind of focus. So -- and it was as part of that, that this idea of forming a customer council is that we have a significant, I would say, members of our senior leadership for participating. So now what are they up to -- so they're sharing best practices, they're sharing ideas, they're implementing, to your point, right? And I would say that you saw in some of my prepared remarks there, that we've deployed capability and a lot of it is through digitization to answer your question, right? A lot of it is how do we make the lives of our distributors, of our plan sponsors and our customers easier when they do business with Corebridge, how do we make it more predictable. So -- and I think as you saw there, we are deploying some digital assets and new infrastructure to help employers through payroll deductions and distributions on the Group Retirement side. We are facilitating more straight through processing on the life insurance side, and we are digitizing some of the interactions on the annuity side. And that I'm getting over a cold here, but -- so that's kind of the things that we've been doing, I guess, I would say, Cave. Cave Montazeri: Great. And then my follow-up, somewhat linked to this is, and obviously, merging with Equitable is going to help you be an easier company to do business with, you have more products, et cetera, to offer. But there could also be a bit of a nightmare in terms of integrating the different platforms, IT systems, et cetera. So do you guys plan on kind of trying to run all of the back office for like a better terms separately for a while and just to make sure nothing breaks. Or is there a plan to really just integrate everything under one umbrella as quickly as possible in order to just really optimize the data that you guys have and that they have and really just offer kind of the best experience for the customers going forward. Marc Costantini: Yes, Cave, that's another very good question. And I would say when we worked very closely with our Equable colleagues as part of the identification of the $500 million of run rate synergies, kind of platform kind of what we did with the platform, how they came together and how we pick the best platform on a go-forward basis to best serve the customers was a key part of the -- some of the outcomes here. And there's a lot of dollar investments tied to that, that were planned for. And the teams right now are working through the details of that. And I think as with anything that comes with this type of territory, every business and every function and every infrastructure will be a bit different. And the idea will be to enhance the customer experience, but not be disruptive to the customers as well, right? So I think it's kind of the -- it will depend -- depending on the business and the product line, how we approach it. But the spirit of what you're saying is definitely what we're aiming to achieve over time. But it won't happen day 1, as you can imagine, given the nature and intricacy of the model we need to operate under so. Operator: The next question comes from Joel Hurwitz with Dowling & Partners. Joel Hurwitz: I wanted to touch on variable investment income. Can you just provide some color on on what flows through other variable investment income that was negative in the quarter? And then are you seeing any rebound thus far in Q2? And maybe talk about what you're expecting for VII in the second quarter. Marc Costantini: Yes, I'll have Lisa answer that one. Unknown Executive: Joe, nice to meet you. Thanks for the question. So as Chris went through on VII, we -- in the quarter, we had a bit lower in [indiscernible] in the non-- that was really just nonrecurring marks on otherwise fixed income assets that are held in vehicles. And so it gets marked through operating income versus OCI. That has reversed. So we're not expecting to see that again. In addition, as we look forward into second quarter, in general, we're seeing VII slightly better. We still think second quarter could be below expectations, just given the volatility in the market. Joel Hurwitz: Got it. That's helpful. And then just on buybacks, you have a nice liquidity cushion at the holdco versus your needs. I guess just any commentary on your willingness to significantly draw that down in this open window and particularly if AIG comes to the market with the rest of its stake? Marc Costantini: Yes, Joe, it's Marc. Thanks for the question. So as you noted, obviously, we did $1.25 billion of buybacks in Q1 before, obviously, we went quiet because of the the proceedings that took place with Equitable. As I mentioned in my remarks and as we -- as part of our 8-K filing not too long ago, as we file our proxy, and we expect to later today, we do plan obviously in concert with Equable to go back in the market to do buybacks between the, obviously, the filing and the mailing of the proxies. And we won't guide us to the amount we'll do, obviously, in the market. And -- and we can certainly not speak to what AIG will be -- I know their CEO, I guess, and as part of their year-end call said that the they would like to be out of their holdings of Corebridge by year-end, but we have no insight otherwise, to provide here and know would it be our place to do so. So -- but we -- as we said, we will be active in the market between the the filing and the mailing. And obviously, we intend to be in the market as well after the vote later this summer. So -- and we do have liquidity to deploy, as you say. But we've guided obviously to how much we would do over the course of the year, and we're going to hold to that guidance right now. Operator: Your next question comes from Jack Matten with BMO Capital Markets. Francis Matten: Maybe one on group retirement. I know it's been in transition. I guess, can you help us frame the time line for when Corebridge expects earnings to stabilize in that business? Are we getting close to that point now? Or do you think it's more likely maybe after the merge closes and you see some synergies from that combination? Marc Costantini: Jack, thanks for the question. Our expectation is that there's another 12 to 24 months for this transition to take place. So we we feel that we are trying to pivot this business and are providing this business from fee spread spread business to fee business. And we're seeing green shoots there. As Chris mentioned in his prepared remarks, obviously, we had some very good flows into that business. We're getting to the $20 billion point in terms of fee-based businesses. But there's still room to make headway there. And obviously, the spread level income on that business is heavier than the fee-based, which is why it creates that, obviously, headwind that will take 12 to 24 months from here to work true. To your comment and question, as we try to make that dividend cross-sell and upsell to the participants. Obviously, the merger presents opportunities here in terms of the discussion we had earlier about the Equitable advisers and teaming up with that platform and those individuals to further penetrate our plans. Now -- do I expect that to happen day 1 after the close, No, right? It takes some time for the teams to get together as we mentioned earlier, before we close, we operate independently, right? So we can plan, but we can execute. So -- so I suspect that execution will take place in the first half of 2027, and then we see the green shoots appear afterwards across the various platforms, including this one. So that's kind of our perspective on that. Francis Matten: That's helpful. And then maybe a follow-up on the annuities marketplace. I guess, is your view that the competition is still intensifying in any of the product categories where you currently focus? Or do you think the market is settling in to do a new equilibrium at this point? And then maybe gives you kind of cogen some spreads stabilizing by the end of this year. But I think you said earlier that higher surrenders could potentially persist into next year or 2028. Just looking for any color there. Marc Costantini: Yes. So sure. So 2 perspectives there in your question. The first one was the -- how intense the competition is. And I always find that a very interesting question because I never felt any quarter there was no competition. So the intensity of the competition ebbs and flows depending on who wants to pick their spots where. And you are correct that there's -- at the low end of the curve, there is a lot more capital being deployed there. And as you in our sales, we're being judicious on how we allocate that capital, and we typically redeploy it to our institutional markets business, and you saw us do obviously $1 billion plus of gigs in Q1. And that's how we kind of judge the allocation of capital, but that's what I would say about the market competitiveness of the business. In terms of spreads, we continue to believe that our spreads on the IR business will level off towards year-end. And then given where we are in the interest rate cycle and where spreads are that we will basically expand from that point on. So we still expect, let's say, this year and or thereabouts to be where they would level off and then start growing and we would still guide to what we have set out there last quarter about that business as well. Operator: Your next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Given the combined scale of Corporate and Equitable and the investments you plan to make in wealth. Is it possible to accelerate the goal of making the wealth business self-clearing? If I'm recalling correctly, this would add quite a bit of margin and I'm estimating over $100 million of annual wealth earnings. So any color you can provide there on the plans? Marc Costantini: Yes, Wilma, thanks for the question. I think you're primarily referring to Equitable's Wealth Advisors business that is not self-clearing yet, and obviously, scale gets you there. And I'm not going to offer a view yet. I'm not -- we're not informed enough to really have any view on that. I understand the economics we're referring to and the potential benefits, but we're not ready to guide to that. And I will wait again to what we do tied to any Investor Day or [indiscernible] about our view on that business and how we think we will continue to grow it. And as I said -- as I mentioned earlier, we are very, very bullish on this business and it's one that's core to our future. Wilma Jackson Burdis: Makes sense. And -- we looked at the commentary that you all have given on capital and tax benefits and calculated that you sort of back calculated it implied about $500 million to $1.5 billion of capital freed up, just the synergies between the 2 companies. Just wanted to check if that estimate is in the ballpark or if there's anything that we are missing or any other directions on [indiscernible]. Marc Costantini: Yes. thank you for that follow-up. I would say that we have not guided to specific capital and tax benefits. I think we've guided to the fact that we think we'll have 10-plus percent EPS accretion run rate after 2028, which will be a combination of factors, which will include those you're mentioning. But more to come on all of that, including the revenue synergies, and I would point back to the discussion with Tom earlier about Investor Day and Robin and myself and others coming to all of you with more specifics across all of that. But we do firmly believe the transaction will be double-digit accretion over the next 24 months, for sure. Operator: Your next question comes from Mike Ward with UBS. Michael Ward: So I was just wondering about kind of the Corebridge brand in the merger scenario. It's certainly younger than the equitable brand. Just wondering based on what you guys saw coming out of AIG, thinking through any kind of shock lapse. Is that kind of done with? Or could there be a temporary uptick post-merger. Marc Costantini: Yes, Mike, thank you for the question. So yes, so we have decided that we are going to go forward with the [indiscernible] brand post merger. Obviously, the [indiscernible] has an incredible history in legacy, a 167-year-old brand. We are obviously going to continue to maintain and invest in the Alliance Bernstein brand, on the asset management side, that brand itself has an incredible cache across all our markets. And which means that we are moving on from the Corebridge brand. And it was not that easy of a even though it's a 3-, 4-year old brand, a lot of people associated with Corebridge had a lot of pride in the brand, and we're a purple very proudly. I think -- but having said so, it's a 3-, 4-year old brand versus a 167-year-old one. So the right decision is to move forward with the [indiscernible] brand, which we will do probably as a combined company. So -- and we don't expect any business ramification out of bringing the brands together, and we actually think it will be value add to represent the collective firm with Equitable and go-forward basis. Michael Ward: Okay. And so -- and then on the -- these proposed changes to the RBC factors for CLOs and collateral loans. Just I was wondering if you guys had any early reads on the potential impact for you? Unknown Executive: Mark, this is Lisa. Nice to meet you. Thank you for the question. Regarding the changes for CLOs, where is going to have incrementally more capital charge for the lower rated tranches and less for the upper -- all our indications are it's going to be a minimal impact to us given the structure of our CLO portfolio. So we're pretty comfortable with that. Operator: We have run out of time, and therefore, we have reached the end of the Q&A session. This does conclude today's call. Thank you for attending. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. [ Mom ], the floor is yours. Melanie Skijus: Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast. Now let me turn the call over to Robbert. Robbert Rietbroek: Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past 4 months, I've been getting to know the team visiting our facilities both domestically and abroad and meeting with many of our customers around the globe. Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that is consistently validated during by site visits and in discussions with our major customers. Second, we have talented experienced teams, including world-class operators support growth with customers. And lastly, our integrated high-quality asset base and production footprint, enhance our service capabilities, expand innovation opportunities and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive focused actions to strengthen our operations and position the business for improved profitability. In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year. with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year. As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer, our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to store volume growth. Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of every essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends. Now I will provide an update on the results of our 90-day review of the business. The decisive actions we have begun taking to achieve our strategic priorities and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead. Our path forward is clear. We're focused on advancing our 5 near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders. Over the last 4 months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities. Waco in Texarcana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with 6 global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions. I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter. Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to highest value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles. The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and element to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles. Though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process. One that demands every dollar of spend be justified against our highest priorities. As we continue to progress, we are confident we will deliver on our full year 2026 capital spend commitment of approximately $450 million. To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams. Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities. Concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway Graphic Packaging, reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further. I would like to focus now on the aspect of our business that I'm very passionate about, our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different ages and market conditions. Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception. Leveraging price pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard. This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expense to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share. We continue to see customers selectively upgrade to our premium packaging solutions as our innovative differentiated designs, allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their coffee collective take-up launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom 2-piece box set utilizing our unbleached paperboard for stiffness and applied mat and glass coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals. In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands. Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth. And we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents. Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life. From our childproof laundry pod box to our double wall cups have retained heat and cold to our produce pack [ puts ] for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic to paper packaging conversion. Representing opportunities we have solutions for right now. Over time, we anticipate regulatory retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase with the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us. We recently commercialized an innovation in partnership with a health focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back to box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage. These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey. In January 2026, two of our solutions earned World Star Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our produce Pack Pet tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application. In addition, Enviro [ Club Duo ] received an award of distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic bile-preserving functionality and shelf appeal. This award was one of 8 PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications. This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer at large events select the upcoming World Cup. 24 brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators advance. For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines can execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy. Finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets. The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands and making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's -- most -- just Companies by -- just Capital and Fortune World's -- most Admired Companies shows that others recognize the values our people put into action every day. Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance, Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June. Daniel brings more than 2 decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities. Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead. Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest return opportunities. Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026. Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network, we are on offense. Now I will turn it over to Chuck to provide more details on our financials. Charles Lischer: Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team. Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange. Partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes and bleach paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025. Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment. Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities. In addition, heavier scheduled maintenance in the quarter and our decision to curtail production, produce inventories resulted in additional costs of $20 million each as compared to the year ago period. Robbert discussed, we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year. Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year. Attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x. As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which embedded our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchase in Europe and have commodity cost recovery mechanisms embedded in many of our contracts. However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index before we can pass it through our packaging business. Looking ahead to second quarter. From a volume standpoint, our expectation for Q2 is consistent with our full year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations. Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance. Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo resulted in a onetime primarily noncash write-off of approximately $40 million. Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory. In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds. With that, I will turn it back to Robbert. Robbert Rietbroek: Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions. Operator: [Operator Instructions] Our first question today is from Ghansham Panjabi with Baird. Ghansham Panjabi: First off, welcome back memory -- Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point? And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there? Robbert Rietbroek: Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have you back, Melanie. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share investing in product quality that specifically applies to food and value perception, pack size and pricing promotions and there is an increased emphasis on overall across the categories of price pack architecture as well as novel pack designs and obviously, a localized, reliable supply chain. And the consumer environment of which food is a part remains very value driven, and there is a focus on affordability. And we are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends. If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care, perfume, beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment. With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level, in some cases, international level where we see more and more procurement team centralized in locations like Switzerland or the Netherlands or even Ireland, so we are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization. And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met 6 global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers. Ghansham Panjabi: Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half? Charles Lischer: Yes. Ghansham, this is Chuck. I'll take those. So on the -- what we have in the special charges bucket, I mentioned on the prepared remarks, the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter, that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition. So those components are the majority of what you see in the quarter. On the inflation, so yes, what we called out is $10 million of incremental inflation in Q1 $10 million incremental to that in Q2. So for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year. That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call, the contractual recoveries and pass-throughs, and that will account for about 1/3 of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings, procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see. Operator: Our next question is coming from Mark Weintraub with Seaport Research. Mark Weintraub: Chuck, just a point of confusion for me. So the -- I think that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia, were those not noncash write-downs primarily? Or maybe if you could just clarify for us? Charles Lischer: Yes, it's primarily noncash, but just in the add back to get to the -- effectively the number that the EBITDA is, of course, an all-in number. It does include depreciation and amortization, but it does include noncash charges before you adjust for them. Mark Weintraub: Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year to the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets, volume, price, the big drivers, where the majority of that $200 million would be shown up? Charles Lischer: Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step up second half versus first half. Think about a few things. So first of all, our first half includes several unfavorable items as we talked about the January weather that caused facilities downtime that we don't expect to recur in the second half. Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half. And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full year EBITDA guidance. Mark Weintraub: Okay. Super. I mean any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you -- roughly downtime would be about $50 million -- inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing kind of just round numbers to where they might come from, it's not understood, but just trying to get a bit more granular. Charles Lischer: Yes. I'll just give you a couple of more nuggets and then we can talk more offline. The phasing of the cost savings that we called out $10 million in Q1. It will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline. Operator: Our next question is coming from Hillary Cacanando with Deutsche Bank. Hillary Cacanando: So just the breakdown that you were just -- you were talking about to get to your guidance. Last quarter, you actually had guided to $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in like net performance in the first quarter? And like what type -- what phasing should we expect for incentive compensation through the year? Charles Lischer: Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in that performance. Hillary Cacanando: It's all included in the first quarter. So there's -- we're not -- you're not expecting any additional incentive comp this year for the remainder of the year? Charles Lischer: Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1. Hillary Cacanando: Okay. And then -- and then how much should we expect for the remainder of the year? Charles Lischer: Again, we embedded about the $100 million in our full year guide. Hillary Cacanando: Okay. Got it. And then just on pricing, I know you had asked for price increase. Does that have to go -- like is [ RISI ] involved in this? Or do you have is it pretty fast? Like is it just between you and the customer? Or is it really involved? Like is it like -- is it going to depend on what they come up with -- in terms of like what the final number will be or if there will actually be an increase? Charles Lischer: Yes, a couple of components of our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once [ RISI ] recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our, let's say, around $1 billion of revenue that we have that's not under direct pricing contract. Operator: Our next question is coming from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess maybe I can just clarify maybe the walk on free cash flow. So it looks like you have kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect kind of less contribution from work capital and then related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo? Charles Lischer: Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost. What we -- the benefits we have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume that we -- then that's when you'll see the additional impact of the fixed cost. But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt in next year as we talked about or as Robbert mentioned, we expect to get the 17% to of inventory -- inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%. So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post 2027 free cash flow number of $700 million plus. Arun Viswanathan: And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is, I guess, that may not necessarily have the impact as to reduce supply to tighten up that market enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CUK and CRB as well? Maybe you can just comment on kind of potential pricing in those -- across the different substrates to cover inflation. Robbert Rietbroek: Yes. Let me take that question. With regards to the paperboard grades, the 2 grades that really matter most to us, as you know, are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycle lose volume to bleached, but it does have to respond to price competition. So switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability, but it's 100% recycled and cheaper to make. And we continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in '23. We decommissioned our K3 machine in Kalamazoo in '23, and we closed Middletown, Ohio, which was a CRB mill in '25. Then we closed East Angus in Quebec in '25 and '26, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity, as you know. So what we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged. Operator: Our next question is coming from Anthony Pettinari with Citi. Anthony Pettinari: Just following up on, I think, Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a [ RESI ] index versus like a custom index, maybe what the lag is in terms of price increases if it's realized in RESI versus you see it in a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier? Charles Lischer: Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to [ see ] than we do in our other models. And so the majority of our packaging volume is indeed tied to [ res ] that's for the cupstock business, a couple of hundred thousand tons and generally would be recognized in price 3, 6 months after it's recognized by [ RISI ] depending on the timing during the quarter that is recognized by RESI. Robbert Rietbroek: Okay. We don't disclose exact details around the percentage of our contracts that are tied to [ RESI ], but Chuck did refer to the $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question. Anthony Pettinari: Got it. Got it. And then I guess, fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing or anything like that. But can you just talk about maybe your philosophy on pricing? Do you expect graphic to be a price leader? How do you think about it? We've seen price improvement in other containerboard graphic paper grades this year. Can you just talk to us kind of how you think about pricing generally? Robbert Rietbroek: The majority of our business is converted to finished product packaging. So -- and the majority of that is either recycled or bleached. And so -- unbelieve, sorry. And so we are not necessarily spending our entire day thinking about paperboard pricing, graphic, and we continue to focus on customer service, operating excellence and taking share and growing our business by delivering better products, better finished products, which are essentially converted finished packages. That is how we think about pricing. Operator: Our next question is coming from Phil Ng with Jefferies. Philip Ng: Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation now, is there a path where you could grow EBITDA next year with our prices going high? I just want to think through that just because, obviously, it's a big earnings reset this year. Robbert Rietbroek: Yes. Look, I just -- thank you for raising the 90-day review. I just want to give a little bit of color on that, and then I'll talk a little bit about how it's all going to impact EBITDA. We have we have concluded that review and confirmed that we have a strong foundation, an opportunity to drive better financial and operational performance as we talked. And we've taken 500 roles out of the organization. As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place, which include contractual cost recovery mechanisms, those have some timing lags. There are some target price actions in the noncontractual business that we just discussed. And then we just announced a recent price increase on [ cut ] stock and primarily cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates. That's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore, EBITDA Philip Ng: Okay. So it sounds like you feel like you got enough lease to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize or... Robbert Rietbroek: We're not in guidance for next year at this point. It's early, we're still early days in 2026. So give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a great 2027. Philip Ng: Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Your guidance, does that embed the SBS cup stock sticking? Granted there is a lag, I don't know how impactful it's going to be. And then some of the packaging price increases that are not tied to research some of these contracts? Is it embedded that you get price? I asked just because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices, right, not necessarily in [ SBI ], the other grades. Have you seen that component like stabilize? Like what are you seeing on some of that packaging price in the last few months? Charles Lischer: Yes. A couple of things there. So we don't embed anticipated [ RESI ] moves until they are announced. And so any impact to that on our [ track ] from our [ Cove ] would not be reflected we will embed what we see in the open market business, of course. From time to time, we would have bet packaging prices, but right now, we're still working through exactly the size of all of that. And -- and so we'll embed that as we go. So that's what we see on the price. Philip Ng: Have you seen a stabilization there, Chuck, on the packing price? What you've said that it's been unusual coming the year? Charles Lischer: What we see there is our customers, however, there's geopolitical uncertainty that the assurance of supplier becomes a bigger deal to our customers and they talked about local supply and our integrated model really sells well to them. And so it certainly gives us the opportunity to stop in negative trends or to introduce the idea of a packaging price. Operator: Our final question today will be coming from Gabe Hajde with Wells Fargo Securities. Gabe Hajde: Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting, I think, in the slide that you gave us, it's the 1 category that decelerated, it was pretty strong over the last 2 quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all to the industry to get price or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other [ two ] grades you participate in? Robbert Rietbroek: Yes. On the -- there is a higher input cost, of course, that cup stock is barrier coded with resin. And so there's a an impact when you see [ resin ] prices increase. And so yes, a higher input cost. And then cup stock has historically been a strong grade for us and so down had a lot of excess capacity. Gabe Hajde: Okay. And then as you have conversations with your customers, I mean, you are trying to reduce inventories. Maybe they were looking around the corner at oil above 100, and we might envision some price increases. Do your sales folks in using any sort of prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with that 1 discrete or those 2 discrete winder projects I've seen remember there were some, I guess, greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board? Robbert Rietbroek: Yes. Let me take the one on customers, and you could talk, Chuck, about the -- how we got to the $200 million capital investment reduction and what that [ entails ], that's one project or more projects. So the question around customer stock is a good one. We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding surety supply or assurance of supply. That's primarily related to having multiple sites producing their packaging, so that they're not relying on one side in case of a natural disaster, more so than anything related to oil and gas right now. And as Chuck said, they do really value our integrated business model. But the customers, they want value, they want to balance costs. They want to see the best performance especially in our beverage sector, you need certain properties in the packaging. They want sustainability. And most recently, there's more and more discussion on [ assurance ] of supply, as I discussed. And they are focused on cost can and are looking for ways to optimize packaging formats, reduce material usage and improve cost. So those are most of the things we're seeing, Gabe. Charles Lischer: And then, Gabe, I'll build on the I'll build on the CapEx. The $200 million that we called out, that was those two projects specifically, but that was over the next several years that, that $200 million would come out not primarily this year that the $450 million is the number that we had originally guided to for this year and clearly we've gone in and shored up our path to get there, and we'll continue to look for opportunities to even cut further. Robbert Rietbroek: So with regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that announce cost-efficient season to [ generate ] the right returns for our portfolio. So that's how we're viewing this. And there are obviously a number of projects in the future that we are currently evaluating, including the ones that you're referring to. Operator: Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.
Operator: Good morning, and welcome to the Diversified Healthcare Trust 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 Matt Murphy, Manager of Investor Relations. Please go ahead. Matt Murphy: Good morning. Joining me on today's call are Chris Bilotto, President and Chief Executive Officer; Matt Brown, Chief Financial Officer and Treasurer; and Anthony Paula, Vice President. Today's call includes a presentation by management, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon DHC's beliefs and expectations as of today, Tuesday, May 5, 2026. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO, net operating income or NOI and cash basis net operating income or cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website at www.dhcreit.com. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And finally, we will be providing guidance on this call, including NOI. We are not providing a reconciliation of these non-GAAP measures as part of our guidance because certain information required for such reconciliation is not available without unreasonable efforts or at all, such as gains and losses or impairment charges related to the disposition of real estate. With that, I would now like to turn the call over to Chris. Christopher Bilotto: Thank you, Matt. Good morning, everyone, and thank you for joining our call today. DHC delivered a strong first quarter, demonstrating the powerful combination of our active asset management and the deep expertise of our expanded operating partners. The strategic changes we made within our SHOP portfolio in 2025 continue yielding results with the first quarter aligning with our outlook focus on driving revenue, expense synergies and overall margin improvement. Looking ahead, we are well positioned to capitalize on powerful tailwinds, including the burgeoning demand from an aging population and a historically low new supply pipeline for senior housing. We are confident that our best-in-class operators and strengthened balance sheet will continue to drive superior performance and create significant long-term value for our shareholders. Turning to the quarter. After the market closed yesterday, DHC issued first quarter results that reflect continued progress across our business. We reported normalized FFO of $33.1 million or $0.14 per share and adjusted EBITDAre of $74 million, both well ahead of the analyst consensus estimate. Consolidated NOI increased 4.7% year-over-year to $75.9 million. Our same-property SHOP portfolio delivered a robust 13.5% increase in NOI year-over-year, reaching $44.3 million. This was driven by same-property occupancy growth of 110 basis points and average monthly rate growth of 5.9%. Our sequential performance reflects the benefits of our active asset management strategy with contributions from new operator partnerships becoming even more apparent. Our same-property NOI margin expanded by 160 basis points to 14.9%, with occupancy holding at 82.4%. This margin improvement was driven by progress on both the top and bottom line. On the revenue side, growth was largely supported by an average annual rate increase of 4.5% across 70% of the portfolio in January, complemented by a favorable shift in resident levels of care. On the expense side, our progress has been equally impressive and demonstrates the immediate impact of our new operating partners. For example, during the quarter, we secured new dietary and food and beverage contracts that simultaneously enhance the resident experience while locking in significant cost savings for the year. Furthermore, a key area of focus, labor costs continues to moderate with reduced contract labor and the rightsizing of regional and community labor costs. These early results are a direct testament to the enhanced discipline and tighter cost controls our operators are bringing to the portfolio, and we remain optimistic about our ability to capture further efficiencies. Building on our operational momentum, we are increasingly focused on selectively deploying capital into high-return ROI projects to drive organic growth. Our strategy targets the repositioning of underutilized or closed skilled nursing wings and converting them into independent living, assisted living or memory care. We have identified a pipeline of opportunities across 16 communities, including 6 communities as part of the first phase. These 6 initial projects are expected to cost approximately $20 million and will add roughly 150 units to the portfolio, representing a significantly lower cost per unit relative to our view of the replacement cost and creating immediate embedded value. Because we currently absorb carrying costs on these vacant wings, these projects are expected to be immediately accretive to earnings upon completion with expected returns starting in the mid-teens. Beyond the direct financial returns, these conversions enhance the marketability of the entire community, improving the sales cycle and expected length of stay for residents. We believe these projects represent a compelling and disciplined use of DHC's capital, and we expect these repositionings to begin over the coming quarters. Turning to our medical office and life science portfolio. During the first quarter, we delivered solid results as same-property occupancy increased 60 basis points year-over-year to 95.3%, generating $25.4 million of NOI, a 3.7% increase over last year and a 4.8% increase sequentially. Leasing activity was healthy with 169,000 square feet of new and renewal leasing at rents that were 12% above prior rents with a 9.5-year weighted average lease term. Looking ahead, just over 9% of annualized rental income in our Medical Office and Life Science portfolio is scheduled to expire through 2026, of which 304,000 square feet or approximately 4.9% of annualized rental income is expected to vacate. Subsequent to the quarter, we signed leases totaling 390,000 square feet, which primarily include renewals representing 29% of our 2027 expirations. Turning to our capital markets and balance sheet initiatives. In March, we sold 13 unencumbered non-core SHOP communities for aggregate proceeds of $23 million. And in April, we also exercised land lease purchase options on 2 of our properties for an aggregate purchase price of $14.5 million. By eliminating ground rent on these well-performing communities, we are able to capture the full economics of the assets and expect to generate low to mid-teen returns on this investment. With DHC's large-scale capital recycling program now complete, we have transitioned from portfolio transformation to value creation. Given our current capital structure, including relatively low-cost debt and no maturities until 2028, we believe that one of the best uses of our capital today is reinvesting in our own assets. In conclusion, our strong first quarter results validate our strategy and reinforce our confidence for the remainder of 2026. Demand fundamentals in senior housing remain compelling, supported by favorable demographic trends and limited new supply growth. We believe these actions we have taken to enhance operations, reduce leverage and empower our best-in-class operators have positioned DHC for continued earnings and cash flow growth, and we remain committed to delivering attractive total returns to our shareholders. With that, I will turn the call over to Anthony. Anthony Paula: Thank you, Chris, and good morning, everyone. During the first quarter, our consolidated same-property cash basis NOI was $75.9 million, representing an 8.6% increase year-over-year and a 7.8% increase sequentially. We continue to see upside in our SHOP segment as same-property NOI increased 13.5% year-over-year. When adjusting for insurance proceeds received in Q1 2025, our SHOP same-property NOI would have increased 22% year-over-year. As Chris highlighted earlier, our operators have had early success in managing expenses as evidenced by the following in our SHOP same-property portfolio, a 370 basis point decrease in dietary costs sequentially, a 70 basis point sequential reduction in labor when adjusting for the number of days in the period and a nearly 35% decrease in contract labor year-over-year and that has led to moderation in our same-property expense growth, which was 350 basis points year-over-year and 120 basis points since last quarter. We also continue to see strength in pricing as our same-property average monthly rate increased 590 basis points year-over-year and 320 basis points sequentially. Turning to G&A expense. DHC shares have delivered the highest total shareholder returns across all REITs in the U.S. over the past 1-year and 3-year measurement periods. Year-to-date alone, DHC's stock price has appreciated 60% versus a 5.2% gain in the S&P 500 and a 7.9% gain in the Vanguard REIT ETF. As a result of this, our first quarter G&A expense includes $6.6 million of incentive management fees. Excluding the impact of the incentive fee, G&A expense would have been $7.4 million for the quarter. During the quarter, we invested approximately $21.8 million of capital, including $17.2 million into our SHOP communities and $4.6 million into our Medical Office and Life Science portfolio. As a result of our recently completed disposition program and disciplined capital allocation, we are reaffirming our 2026 recurring CapEx guidance of $100 million to $115 million, representing approximately 18% reduction at the midpoint. Now I'll turn the call over to Matt. Matt Murphy: Thanks, Anthony, and good morning, everyone. Overall, our first quarter results further demonstrate the meaningful progress we have made strengthening our balance sheet, reducing leverage and positioning the company for sustainable earnings and cash flow growth. At quarter end, we had total liquidity of $272 million, including $122 million of cash and cash equivalents and the full $150 million available under our secured revolving credit facility. This strong liquidity position provides us with flexibility to support our operating strategy while maintaining appropriate balance sheet discipline. Net debt to annualized adjusted EBITDAre was 7.8x at quarter end, down from 8.8x a year ago, driven primarily by improved operating performance. Adjusted EBITDAre to interest expense improved meaningfully to 2x from 1.3x at this time last year. We remain confident in reaching our near-term leverage target range of 6.5 to 7.5x with the majority of that improvement expected to be driven by continued growth in SHOP NOI. In April, Moody's upgraded DHC's corporate family rating to B3 from Caa1 and revised the outlook to positive. This upgrade reflects the progress we have made improving operating performance and strengthening the balance sheet over the past several quarters. Following the completion of our debt transactions in 2025, we have a well-laddered debt maturity profile with no maturities until 2028, allowing us to remain primarily focused on operations. Our portfolio includes 197 unencumbered properties, representing nearly 64% of the portfolio's gross book value, which provides meaningful balance sheet flexibility as we look ahead. Turning to guidance. For the full year 2026, we are reaffirming the ranges outlined in our fourth quarter earnings as follows: $175 million to $185 million of SHOP NOI, $94 million to $98 million of Medical Office and Life Science segment NOI, $28 million to $30 million of NOI from our triple net lease senior living communities and wellness centers, adjusted EBITDAre of $290 million to $305 million and normalized FFO of $0.52 to $0.58 per share. We are pleased with our first quarter results, particularly the continued growth in SHOP NOI, which is tracking ahead of our initial expectations. The performance is partly being driven by early success in expense management and margin improvement from our new operators. As we look ahead, the momentum we are seeing in the business gives us increasing confidence in our earnings outlook. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question is from Michael Carroll with RBC Capital Markets. Michael Carroll: Chris, I wanted to touch on some of the recurring CapEx expectations. I know within the guidance, you're assuming $80 million to $90 million of recurring CapEx within the seniors housing operating portfolio. Is that true maintenance CapEx? And is that the correct run rate to think about going forward? Or is there still some additional deferred CapEx in those numbers and the run rate as you kind of look beyond '26 would be lower than that? Christopher Bilotto: Yes. The $90 million includes maintenance capital and some refresh capital. So that's a blended number. But I think more broadly, to answer your question, maintenance capital, we've got that run rate we're expecting to continue to come in a little bit in overall costs. We're spending a lot more time with our operators just dialing into overall needs of the communities. And so we'd like to see some modest pullback in maintenance capital as the years progress. And then on the kind of the -- what we call a redevelopment capital or the ROI capital, that number as it stands today, I think will stay pretty firm for 2026 despite doing some of these incremental ROI projects I discussed, just given the fact that those will really start to kind of commence later on in the year and a lot of that is just soft cost work. And then in 2027, kind of all things considered, that's where we'll start kind of pulling levers on incremental dollars for that bucket depending on how much of these ROI projects we have in the pipeline. Michael Carroll: Okay. And then I think you previously said that the recurring CapEx number would run around 3,500 a unit once kind of you're through some of the deferred stuff that was completed in prior years. Is that still a good number? Or is it going to be lower than that as you kind of progress in '27, '28 with these new operators? Anthony Paula: Yes. So the 3,500, we expect to go down in future periods. We think that's a good run rate for 2026. I think to keep in mind, that's going to exclude refresh capital. So kind of piggybacking on what Chris had mentioned for 2026, we expect $5 million to $10 million of refresh capital, which is embedded within that recurring CapEx number that we're guiding towards. Michael Carroll: Okay. And then on the investment side, should we think about the new investment opportunities really focused on these wing expansions that you kind of discussed in the prepared remarks? I mean, are there potential acquisition opportunities that you would look at pursuing too? Or is it going to be mostly these renovations? Christopher Bilotto: Mostly the renovations, I think our position today is we've got a lot of opportunity within the portfolio. We talked about a lot of things in the prepared remarks and our investor materials have teased out some items, but there's real opportunity dialing in with these operators to kind of pull in expenses in different areas, some of which we've touched on continuing to kind of drive top line performance and occupancy. And then, again, I think kind of from a capital deployment, really kind of putting that money towards improving these communities and then I think equally important on expanding acuity within the communities before we consider acquisitions. Michael Carroll: Okay. And then just last question for me. I guess, within guidance, you reaffirmed the G&A number. I know with the stock performance, I would assume the base management fee is kind of ticking up a little bit. I mean is that the right way to think about it? Or is there something in there that keeps that base management fee lower throughout 2026 that I'm not calculating correctly? Anthony Paula: Go ahead, Anthony. Yes. From a G&A perspective, the most volatility we're going to see is from the business management fee, you're right. Depending on fluctuations in share price, it will adjust that number. Michael Carroll: Okay. And then within guidance, you just assume that SHOP NOI is probably exceeding that. So even if G&A goes up, then your overall guidance range is still pretty accurate and maybe even trending higher? Anthony Paula: That's right. Operator: [Operator Instructions] The next question is from John Massocca with B. Riley. John Massocca: So I appreciate the color and the reminder on the onetime items that were impacting 1Q '25 kind of comps. Is there anything else kind of onetime to be aware of either in how same-property SHOP NOI growth is being calculated or even anywhere else in kind of the financial reports for 1Q '26... Matthew Brown: No, that's the most material item that $2.7 million of business interruption insurance proceeds we received in Q1 '25. There's a little bit of other noise, but nothing of that scale. John Massocca: Okay. And any kind of direct impact from the Aleris or the former Aleris property transition still flowing through 1Q '26 results? And I mean bigger picture, how are those kind of transitions going in your mind? I know you touched on it a bit in the prepared remarks, but anything kind of tangible that's already been achieved or left to be achieved over the remainder of '26? Matthew Brown: Sure. So I can start and then hand it off to Chris on operator performance. So as it relates to the transition and costs associated with that, we capture that in transaction-related costs. So a lot of that is kind of below the line and outside of NOI. Christopher Bilotto: Yes. I think the follow-on, John, to your question, I mean, the AlerisLife, the transitions are going very well. As you're aware, they were completed at the end of the year. The first couple of months in the year, a lot of these operators were just kind of revisiting kind of the overall employment and kind of structure within the communities, retooling kind of their sales teams, et cetera. And again, we touched on other areas where we found pockets of opportunity to reduce costs. And so there's still incremental pieces there that are flowing through. I think we've identified kind of the more material items and those are some of the things that are in progress and underway, and we expect to continue to get incremental benefit each quarter as time progresses, at least through 2026. But I would say, overall, the transitions are going very well. And again, I think we forged some really good relationships with some great operators. John Massocca: Okay. And then maybe specifically on occupancy or same-property occupancy in the shop space. I know it was kind of flat quarter-over-quarter. I mean does that just reflect seasonality in that? Or is that still some maybe friction from operator transitions? I mean is that going according to maybe your expectations versus your initial guidance? Matthew Brown: Yes, it's both. I mean there's some seasonality in there. And then as I just touched on, as these operators have come in predominantly starting in January and kind of reevaluating and retooling kind of the business specific to kind of their outlook, that takes time. And so I think given the fact that we can hold occupancy while we're going through a major transition across our portfolio, I think, is a real win. And I think it kind of reflects well for setting the pace, meaning that we can -- we can run stabilized in Q1 with a lot of disruptions. And then as we get kind of to the more kind of seasonal or higher seasonal period, we can kind of hit the ground running focused on really pushing occupancy now that we have all the pieces in place. John Massocca: And any updates? I mean how is 2Q trending thus far on kind of SHOP performance? Matthew Brown: No. I mean, technically, the April just finished, Numbers are still coming in. So there's nothing kind of specific to speak to. I just think as we referenced, we're reaffirming guidance -- we feel good about our positioning. We're seeing other opportunities as we've referenced. And so I think we feel generally good about the outlook and potentially further improvement, but nothing specifically to touch on just given where we are in the second quarter. John Massocca: Okay. And then if I think about kind of the difference in the SHOP NOI growth kind of implied in guidance versus what we kind of achieved in 1Q, I mean, is that mostly the higher comps in 1Q '25? Or is there something else to be kind of aware of on either what you're expecting for 2H occupancy or kind of even rate growth? Anthony Paula: Yes. I would say that on occupancy, we're continuing to guide to that 300 basis point increase in occupancy year-over-year. We didn't see much progress in Q1, as Chris talked about. As it relates to rate growth, we are expecting 5-plus percent rate growth. And then as we think about just quarterly run rate, we're definitely expecting some NOI increase in Q2. We may see that increase come down a little bit in Q3 with just some seasonal expenses and then ramp back up again in Q4 to come into the overall guide of $175 million to $185... John Massocca: Okay. And then lastly, I know you talked on it a little bit earlier in the call, but just for kind of the impact on bottom line or even on kind of NOI performance, how much kind of the flow-through from previous year CapEx spend are you expecting to kind of be impactful to 2026 NOI? And is there stuff that's maybe more -- even that was completed years ago or a year ago, that is really more of kind of a 2027 event in terms of a tailwind for NOI or even bottom line numbers? Matthew Brown: Yes. I think the best way to kind of think about that is a typical kind of stabilization period following a renovation is kind of 18 to 20 months. So if you think about we had a fair amount between 60 and 70 communities that were renovated kind of in 2023 and '24 those themselves are starting to kind of produce real meaningful results in the form of kind of a more stabilized event. And again, layering on kind of the new operator transition, we'll get other incremental benefits from that, whereas the 2025 refreshes, which was between 20 and 25 communities, we would expect that to show incremental benefit towards the back half of this year and into next year. And then that cadence will continue. Operator: As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Bilotto to close the call. Christopher Bilotto: Thank you, everybody, for joining the call. We look forward to seeing many of you at our upcoming industry conferences, including NAREIT conference in New York this June. Please reach out to Investor Relations if you are interested in scheduling a meeting with DHC. That concludes our call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Cipher Digital's business update for the first quarter of 2026. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Drew Armstrong. Please go ahead. Thomas Armstrong: Good morning, and thank you for joining us on this conference call to address Cipher Digital's business update for the first quarter of 2026. Joining me on the call today are Tyler Page, Chief Executive Officer; and Greg Mumford, Chief Financial Officer. Please note that our press release and presentation can be found on the Investor Relations section of the company's website where this conference call will also be simultaneously webcast. Please also note that this conference call is the property of Cipher Digital, and any taping or other reproduction is expressly prohibited without prior consent. Before we start, I'd like to remind you that the following discussion as well as our press release and presentation contain forward-looking statements. These statements include, but are not limited to, Cipher's financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition, and our goals and strategies. Forward-looking statements and risks in this conference call, including responses to your questions, are based on current expectations as of today, and Cipher assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measures, and you are encouraged to examine those reconciliations, which are filed at the end of our earnings release issued earlier this morning. I will now turn the call over to our CEO, Tyler Page. Tyler? Rodney Page: Thanks, Drew. Good morning, everyone, and thank you for joining us today. I'm Tyler Page, CEO of Cipher Digital, and I'm pleased to welcome you to our first quarter 2026 business update call. 2026 is the year of execution for Cipher, and we kicked the year off with a strong first quarter. We signed our third data center campus lease with an investment-grade hyperscale tenant, completed a $2 billion high-yield bond offering for Black Pearl, fully funding the project through completion, closed a $200 million revolving credit facility from a syndicate of leading global financial institutions and made substantial progress on the construction of our Barber Lake and Black Pearl HPC data centers. Execution, that is what defines this quarter and what will continue to define the rest of this year. When we rebranded to Cipher Digital, we did so with a declaration, "We are Built for Hyperscale." That phrase carries real meaning for us, and I want to spend a moment on what it means in the context of this quarter's results. Built for Hyperscale is not a marketing tagline. It is a description of the foundation of this company and the best-in-class team we have built, in-house power origination, engineering, construction management, and operations, all purpose-built to deliver bleeding-edge data center infrastructure at the speed and precision hyperscalers require. Each quarter, we add another point of proof. Our first lease at Barber Lake was proof of concept. Our second at Black Pearl was the proof of repeatability. Our third lease this quarter is proof that Cipher Digital itself is a leading development platform Built for Hyperscale. As we move through 2026 with 2 data centers under construction, a third preparing for mobilization and an extensive pipeline behind it, our differentiation will become increasingly visible to the market. Slide 4 provides a snapshot of Cipher Digital as it stands today. We are a vertically integrated developer and operator of industrial scale data centers built to serve the world's leading companies. Our in-house capabilities support the delivery of power dense, large-scale facilities to exact hyperscalers specifications at speed. As of today, we have 907 megawatts of operating and contracted capacity, anchored by 3 signed data center campus leases with world-class hyperscalers. That portfolio carries approximately $11.4 billion in contracted revenue across base lease terms of 10 to 15 years, providing Cipher with durable, high-quality, and long-term cash flows. Beyond that, we have an approximately 3.3 gigawatt pipeline of grid capacity, providing an extensive runway for future growth. The quality and scale of our pipeline is a competitive advantage that is difficult to replicate, representing years of disciplined power origination work. We are no longer an aspirational HPC developer. We are a company with signed contracts, billions of capital raised, and multiple data center construction projects progressing toward completion. Zooming out, Slide 5 shows the full geographic reach and scale of our development platform. Our portfolio consists of approximately 4.2 gigawatts of grid power across operating, contracted, and pipeline sites. Roughly 78% of that capacity represents pipeline HPC opportunities with the remaining balance split between our existing contracted capacity, our newly contracted capacity from this quarter's third lease, and our operating Bitcoin mining site at Odessa. The geographic concentration in West Texas is intentional. For years, the conventional wisdom in the traditional data center industry was that hyperscalers would not venture outside major metropolitan areas and that our sites were, as I described once before, at the edge of the known world. We disagreed and the market has proven us correct. West Texas has become one of the most sought-after regions in the country for large-scale AI infrastructure development, and Cipher is well positioned to execute on this unique opportunity. The addition of our Ohio site at Ulysses reflects our intentional geographic diversification. Major hyperscalers require data center capacity across multiple markets and power grids. Our ability to offer sites in both ERCOT and PJM strengthens our value proposition as a development partner for tenants with multi-market capacity requirements. This portfolio, the scale of it, the quality of the sites, and the geographic reach is the product of years of on-the-ground sourcing work. It cannot be assembled overnight, and it will continue to be a source of competitive advantage as demand for large-scale data center capacity continues to intensify. Let's now turn to the future trajectory of Cipher's contracted cash flow profile. Our 3 executed data center campus leases are expected to generate approximately $787 million of average annualized net operating income from October 2026 to September 2036. In 2035, we expect to have approximately $892 million of contracted net operating income. The addition of our third lease this quarter further strengthens this profile of contracted cash flows and adds meaningful net operating income to our projections. As a reminder, this is contracted net operating income, not a projection based on assumed future leases, not a model dependent on speculative outcomes. These are signed long-term agreements with investment-grade counterparties that create visible, stable contractual growth over the next decade. This slide shows the fundamental change in the financial character of this company. We are a business defined by stable long-term cash flows. The leases are signed, the financing is in place, and the construction is underway. The cash flows on this chart are not aspirational. They are contracted. Let me now walk through the specific highlights that defined our first quarter. On the corporate side, we accomplished 3 significant execution milestones that speak directly to the strength and maturation of this platform. First, we signed our third data center campus lease, a 15-year initial term agreement with an investment-grade hyperscale tenant. This is now 3 consecutive long-term leases with world-class counterparties in the span of approximately 8 months. We also completed a successful bond offering for $2 billion at a 6.125% coupon, fully funding the build-out of Black Pearl through delivery. The offering was significantly oversubscribed, and it included a reimbursement of approximately $233 million to Cipher for our prior equity contributions to the site. And finally, we closed our inaugural $200 million revolving credit facility, supported by a syndicate of leading global financial institutions. This was a landmark moment for Cipher. For the first time in our history, we now have a corporate level committed credit facility, a reflection of the maturation of our platform, the quality of our contracts, and the confidence of the world's strongest institutional lenders in Cipher. On the physical execution side, our results are equally impressive. At Barber Lake, we had over 1,100 daily active workers on site in April with more than 1,400 expected in May. More importantly, we have exceeded 1 million cumulative labor hours on site with 0 lost time incidents. That is an extraordinary safety record for a project of this scale and complexity, and it reflects the culture of operational discipline we have built within our construction team. At Black Pearl, we completed the demolition of the existing Bitcoin mining infrastructure for the Phase I retrofit within 1 month of kickoff. Phase II broke ground just 3 months after design kickoff. With both sites tracking, we have entered the second quarter with significant momentum. Now let's take a more detailed look at our current development portfolio. At Barber Lake, construction is well advanced, and the focus is entirely on delivery. I am pleased to report that Barber Lake is tracking well. In April, the building officially topped out, marking the completion of the primary structural steel. From the first column to the last structural beam, it took 127 days to stand up a roughly 800,000 square foot structure. This achievement is a testament to the quality of our construction management team and the depth of our supply chain relationships. Mechanical, electrical, and networking work fronts are now progressing in parallel, and the project continues to track toward meeting all contractual early access and substantial completion milestone dates. From a procurement standpoint, we have secured approximately 99% of the equipment required to complete this project. Equipment delivery schedules are aligned to support our construction completion targets, which means the risk of supply chain disruption to our timeline is minimal. Our design is 100% complete. All design milestones have been achieved on schedule, which eliminates another meaningful source of construction risk at this stage of the project. The next slide gives investors a visual representation of what has been accomplished at this site, and I encourage you to take a moment to look at it closely. Slide 10 shows an aerial photograph of the Barber Lake campus taken last week. Look at this image carefully because I think it captures something that numbers and bullet points cannot fully convey. Eight months ago, this was an open field in West Texas. Today, it is one of the largest data center structures under active construction in the United States. The scale of what this photograph shows is immense, a facility built to deliver 207 megawatts of critical IT load for some of the world's most sophisticated technology companies rising from the ground with a speed and precision that we believe is unmatched in this industry. When I think about how we got here, the years of site sourcing, lease negotiations, the financing work, the design and engineering, the procurement, the construction management, and I look at what stands on this site today, I am genuinely proud of every member of this team. This is what Built for Hyperscale looks like in practice. We look forward to welcoming our tenants to the campus later this year. Similar to Barber Lake, Black Pearl is progressing with the same level of discipline and velocity. The decommissioning of Bitcoin mining infrastructure is complete. The site has fully transitioned to data center development mode. Phase I of the retrofit is progressing well with mechanical, electrical, and networking work fronts in full swing. Crews are actively working to install the cooling and electrical infrastructure to enable the legacy building to accommodate the new HPC equipment. On the procurement front, approximately 93% of Phase I equipment is secured and delivery schedules are aligned to support our completion targets. On Phase II, site layout and earthwork began in April, just 3 months after design kickoff. We have also secured approximately 80% of Phase 2 equipment and delivery schedules are aligned to support our completion targets. The project is tracking to meet contractual early access and rack ready dates across both phases, and we remain confident in our ability to deliver this campus on schedule. Slide 12 provides a first look at construction progress at our Stingray site in Andrews County, Texas. As a reminder, this site has 100 megawatts of gross capacity fully approved with a target energization date in the fourth quarter of 2026. Development activity at Stingray began during the first quarter. Earthwork and pad preparation are currently in progress. Electrical work for the substation has commenced, consistent with our Q4 2026 energization timeline. We look forward to providing further updates on this site as construction mobilization progresses. Odessa continues to mine Bitcoin and the site performed well in the first quarter. As a reminder, Odessa's fixed price power purchase agreement at approximately $0.028 per kilowatt hour continues to position Cipher among the lowest cost Bitcoin producers in the industry. Today, we are operating 207 megawatts of capacity, generating approximately 11.6 exahash per second of total hash rate at a fleet efficiency of approximately 17.2 joules per terahash. In the first quarter, we mined approximately 346 Bitcoin at Odessa. Our mining operations remain fully self-funded. We do not anticipate additional capital investment in this part of the business as we continue prioritizing our platform towards HPC. Odessa continues to generate healthy cash flow as our data center leases ramp towards revenue commencement later this year. Let's now shift to an update on our development pipeline. Turning to Slide 15. I want to walk through the specific sites in our near-term pipeline and give investors a sense of where each stands today. Reveille and Ulysses represent our most advanced precontracting opportunities and are both fully interconnection approved. Reveille, located in Cotulla, Texas, has received ERCOT interconnection approval for 70 gross megawatts, and substation development has been initiated. We are in active and advanced discussions with multiple potential tenants for an HPC hosting lease at this site. Given Reveille's capacity falls below the threshold that would trigger ERCOT's batch process and given that its interconnection is already approved, the site's energization timeline of Q3 2027 is not subject to batch process uncertainty. The load is firm, the approvals are in hand, and we are actively converting this site into a contracted asset. Ulysses, our 200-megawatt site in Southeastern Ohio, has all necessary approvals to participate in the PJM market, and we are similarly in advanced discussions with prospective tenants for an HPC hosting lease here. This site is Cipher's first in PJM, and it is well suited for HPC data centers. We are targeting energization in Q4 2027 and remain highly confident in that timeline. Looking beyond these near-term sites, we have McLennan, Mikeska and Colchis. Each is advancing through the ERCOT interconnection process and tracking well. We continue to push all required workflows forward, fund all deposits on schedule, and ensure these energization timelines are preserved. All 3 sites are expected to energize in 2028, and all 3 sites are expected to be in batch 0 of the new ERCOT batch process. We have strong conviction in the quality of our pipeline positioning and continue to engage proactively with prospective tenants at each of these sites. Slide 16 brings the entire portfolio together in one view and illustrates the depth of the platform we have built. On the left, our current operating and contracted capacity, 207 megawatts of Bitcoin mining at Odessa, 300 megawatts contracted at Barber Lake with FluidStack and Google, 300 megawatts contracted at Black Pearl with Amazon Web Services, and 100 megawatts contracted under our newly signed third lease. Together, that totals 907 megawatts of operating and contracted gross capacity today. On the right, the pipeline capacity timeline tells the story of what comes next. In the 2027 window, Reveille and Ulysses together represent 270 megawatts of near-term pipeline capacity. In 2028 to 2029, Mikeska, McLennan, Milsing, and Colchis add up to 2.5 gigawatts of additional pipeline capacity. And looking to 2030 and beyond, an additional 500 megawatts at Barber Lake represents a further upsized opportunity at an already contracted and operating site. Altogether, this represents up to 4.2 gigawatts of total portfolio capacity from the grid. Our conviction has only strengthened over the past quarter. We believe Cipher is among the best positioned companies in the world to continue converting this pipeline into contracted long-term cash flows, and we look forward to demonstrating that over the quarters ahead. I'll now turn the call over to our CFO, Greg Mumford, who will walk through our financing activities, capital structure, and financial results for the first quarter. Greg? Greg Mumford: Thanks, Tyler, and good morning, everyone. Over the past year, Cipher has taken significant steps to reshape the financial profile of the company, transitioning from a start-up Bitcoin miner to an institutionally backed digital infrastructure platform with long-term contracted cash flows and a purpose-built capital structure. In the first quarter, we continued to strengthen that financial foundation in ways that meaningfully derisk execution and improve forward visibility. We entered 2026 focused on strategic capital allocation, isolating construction risk via nonrecourse financing, and improving our corporate liquidity. In Q1, we successfully completed 2 additional financings, the $2 billion Black Pearl project level financing that fully fund our second data center campus through completion and a $200 million revolving credit facility. This revolver marks the first of its kind amongst our peer group, securing multi-year committed liquidity from leading financial institutions, including Morgan Stanley, Goldman Sachs, JPMorgan, Wells Fargo, Santander, and SMBC. Each of these transactions highlights the continued maturation of Cipher's platform. The Black Pearl financing represents our third successful project-level bond issuance, demonstrating repeat access to the capital markets and a growing diversified institutional investor base following our story. We achieved highly competitive pricing while maintaining structural flexibility through a callable format, which we believe positions us to actively manage and optimize our capital structure over time. The revolving credit facility supported by a broad syndicate of leading global banks further underscores the increasing confidence of institutional lenders in Cipher as a scaled and creditworthy counterparty and provides the liquidity foundation to support our continued growth. Turning to Slide 18. I want to walk investors through our full capital structure and liquidity position as at March 31, 2026. At the corporate level, we have a 4-year committed revolver for $200 million and 2 unsecured convertible notes. Revolving facility bears interest at SOFR plus 125 to 175 basis points, subject to the company's total debt-to-market capitalization ratio. This facility was undrawn at quarter end, but provides us the flexibility to support working capital, issue LCs, and fund growth initiatives. At the project level, we continue to pursue nonrecourse financing through construction, reflecting our disciplined approach to capital allocation. Cipher Compute LLC, the entity that holds the Barber Lake lease, carries approximately $1.7 billion of 7.125 senior secured notes due November 2030. These notes amortize aligning debt service with the cash flows generated by the lease. Black Pearl Compute LLC carries $2 billion of 6.125 senior secured notes due February 2031. Both bonds are currently trading at a premium to par, reflecting investor confidence in our ability to execute on both projects. In aggregate, total principal outstanding on our debt was approximately $5.2 billion. Unrestricted cash and cash equivalents stand at $715 million, providing substantial corporate liquidity in addition to Bitcoin totaling $76 million and our undrawn revolver availability. Restricted cash of approximately $3.5 billion includes approximately $1.8 billion at Cipher Compute or approximately $1.5 billion net of DSRA and interest-bearing construction accounts and approximately $1.8 billion at Black Pearl Compute or approximately $1.5 billion net of DSRA and interest-earning construction accounts. Both projects remain sufficiently capitalized through construction based on our current estimate to complete. This capital structure is purpose-built and our liquidity position is sufficient to fund our near-term development pipeline without requiring additional equity, providing clear visibility into execution. Importantly, the majority of our debt is nonrecourse and tied to contracted assets, isolating risk through construction and aligning debt with cash flow. Let's now turn to review of our financial results for the first quarter of 2026. Revenue for the first quarter was $35 million, down from $60 million in Q4, reflecting the planned wind down of mining operations at Black Pearl and our transition toward contracted data center revenue. Mining at Black Pearl was fully decommissioned in February. For the quarter, we reported a GAAP net loss of $114 million or $0.28 per diluted share compared to a GAAP net loss of $734 million or $1.85 per diluted share last quarter. The Q1 loss was primarily driven by a decrease in revenue from the planned wind down of mining operations at Black Pearl, the decrease in the fair value of our PPA, and the increase in interest expense from our new debt facilities. The Q4 loss was primarily driven by noncash and onetime items, including the embedded derivative revaluation on the 2031 convertible notes and mining asset write-downs. Cost of revenue for the first quarter was $18 million, down from $24 million in Q4, reflecting the transition to Odessa as our sole operating site. Compensation and benefits were $35 million in the quarter, in line with last quarter. Year-over-year compensation increased from $14 million, primarily reflecting headcount growth and equity-based compensation associated with scaling the platform. We increased headcount from 50 people in Q4 to 70 in Q1, and we're starting to normalize and slow hiring around 85 full-time employees. General and administrative expenses were $12 million, up from $10 million last quarter, primarily reflecting increased legal and professional fees associated with our lease negotiations and financing transactions. Depreciation and amortization decreased to $19 million from $52 million last quarter, primarily due to mining asset sales and decommissioning associated with the Black Pearl retrofit. The change in fair value of our power purchase agreement was a $28 million decrease this quarter compared to a $12 million decrease last quarter. As we've consistently noted, this is a noncash item. The value of the Luminant contract lies in its long-term fixed price power, supporting industry-leading power costs of approximately $0.028 per kilowatt hour, among the lowest in the industry. Moving below to the operating line. We generated $32 million of interest income in the quarter, up from $19 million last quarter, reflecting higher average cash balances following the Black Pearl financing. Interest expense was $59 million, up from $33 million last quarter, reflecting our project level financings. The change in fair value of our warrant liability was $44 million noncash gain this quarter compared to a $13 million loss last quarter, reflecting the changes in the value of the Google warrants associated with the Barber Lake lease. Turning to our balance sheet as of March 31, 2026. Total assets grew to $6.4 billion at quarter end, up from $4.3 billion last quarter, primarily driven by the Black Pearl project financing reflected in growth in both property and equipment as well as restricted cash. Cash and cash equivalents were $715 million. Restricted cash ring-fenced at the project entities and dedicated to construction spending totaled approximately $3.5 billion across current and noncurrent portions, including proceeds from the Black Pearl financing. Property and equipment net of depreciation grew to $1.3 billion from $633 million at year-end as a result of ongoing construction across multiple projects. On the liability side, borrowings totaled approximately $4.7 billion. Accounts payable grew to $198 million at quarter end from $40 million at year-end, consistent with the ramp-up of construction activity and normal timing of vendor payments. Balance sheet reflects the company in an active investment phase, deploying capital across multiple large-scale construction projects with associated contracted revenues ramping as assets come online. We are executing in line with plan, and we remain well positioned from a liquidity and capital allocation perspective to execute on our commitments and scale the platform. Before we open the call to questions, I want to take a moment to reflect on the full picture of where Cipher Digital stands as we close out the first quarter of 2026. We have executed 3 long-term data center campus leases, generating approximately $11.4 billion of contracted revenue over the base lease terms. We have 2 data centers under active construction, both tracking well. We have a third site where we will begin mobilizing construction in Q2. We have a strong balance sheet and have demonstrated a repeatable ability to finance construction projects competitively. We have retained flexibility in our financings and our capital structure will continue to evolve over time. Finally, we have approximately 3.3 gigawatts of additional capacity in our pipeline that positions us for continued growth well into the back half of this decade. We remain firmly committed to disciplined execution, capital efficiency, and delivering long-term value to our shareholders. The next 12 months will be defined by construction milestones, revenue commencement, and the continued conversion of our pipeline into contracted assets. We look forward to updating you on each of those fronts throughout the year. Thank you for your continued support. Tyler and I would be pleased to take your questions. Operator: [Operator Instructions] Our first question comes from Paul Golding with Macquarie. Paul Golding: Congrats on all the progress on the sites. I just wanted to ask, first off, around pricing. It seems just doing the back of the envelope math that the incremental Stingray lease, the NOI seems to be per megawatt at least, an improvement on the other 2 on average. Just wanted to ask as you're engaged in these incremental conversations with prospective tenants, how pricing is trending? Is it continuing to trend in a positive direction relative to your existing deals? And then as a follow-up, I just wanted to ask, in general, given the strength of these leases and lease negotiations, how you're thinking about compute? Is that sort of a business that you're considering at all? Has your thinking changed there? Or is the leasing environment for colo just so strong that you're sticking with that for now? Rodney Page: Thanks, Paul. Let's start with pricing. So I think it's hard to give a one-size-fits-all answer for leasing because it's a dynamic question that's really linked to speed to market, speed to availability. I think when you've got a site that is already energized or energized in the very near future, there's no question it trades at a premium as far as what it can get for a lease. I think as you continue to demonstrate the ability to build things at an accelerated pace like we are capable of doing, that also makes those timelines more realistic and gives you more pricing power. So yes, fair to say we continue to see premium pricing in our negotiations. But that's also because we have had sites that are available in the near term. So we still have 2 sites that we are currently marketing in Reveille and Ulysses that I would consider near-term availability that have a fair amount of interest. And I expect our pricing power to maintain there. Based on the conversations we're having, I do not see lease rates going down for premium sites with good timelines. And then I guess related to that, on the compute question, it's interesting. I think we have said historically, we -- if you are getting those premium lease rates for colocation, it's just a better business than owning the GPUs or TPUs or whatever chips you're running. I'd say we are looking at an interesting test case at Reveille. Given that Reveille is still a big data center at 70 megawatts, but maybe below the targets of the kind of massive colocation tenants, we are looking at a variety of business models at Reveille, including ones where we may participate in the ownership of the computers. There are some interesting trends going on right now with credit support for Neoclouds. There's a variety of larger, more creditworthy supporters of Neoclouds that will provide credit support to try to ensure their success. And so at Reveille, we are looking at, given its scale, it is an attractive site for Neoclouds. Those Neoclouds can now get investment-grade support or other forms, whether it's a guarantee or in the form of prepayment, et cetera. And so we are considering potential structures where we would also participate in owning and operating the compute at that site. I think on a risk-adjusted basis, the returns there could be very favorable because we could get some support participating in that side of the business. And at that scale, the returns can become pretty interesting. So I think that's our test kitchen site. We have had inquiries also at Ulysses on that. I think our appetite may be more the scale of Reveille if we were going to participate in the compute side of the business. But in general, we favor -- when you can get very elevated lease rates, we favor the colocation business. Paul Golding: That's really interesting. Do you see that decision being more prospective counterparty led or internal business model driven? Rodney Page: I mean it's a little bit both. If you're speaking to Neocloud, in general, they're trying to leverage the credit support that they can get because these are expensive data centers as they try to ramp up. And they're not the really big Neoclouds that have access to broader capital markets that are kind of in the on-deck circle to become large or go public in the future or whatever. They may live in the ecosystem of an NVIDIA or an AMD or someone like that. And our understanding from those conversations is they have plenty of compute offtake ready to go. Like, they've got their 5-year contracts for compute offtake lined up if they can find a good site within a good time window. So as far as it goes for our discussions, it's kind of -- it's a whole mix of factors as we look at it because we're talking about things like what kind of credit support makes a smaller Neocloud attractive as a tenant. Obviously, full backstop from an investment-grade supporter is kind of a gold standard. Prepayment of fees, if you stretch it out, we've seen and heard anecdotally some larger prepayments coming through, which significantly derisked the project. And then it really comes down to math. I mean when you look at enough prepayment or a strong enough credit support, that can influence our willingness to participate in the compute side. I mean, I think high level -- that business has not been as attractive because while you can get a compute offtake agreement that will pay back the computers in 5 years, typically, there is a debt overhang on the data center after 5 years. And so you're taking this either extended life risk on how long is the useful life of today's machines. Obviously, those numbers have been really favorable recently. But as we know from our past lives with ASICs, that doesn't necessarily hold consistent forever. And then the other question is sort of how much debt overhang are you comfortable with if in 5 years, you're done with your compute tenant and you have a not fully paid for data center, which is why I often say like the risk-adjusted returns are just extremely compelling in colo, when you get higher lease rates and longer contracts, you have a fully paid for asset at really attractive returns. And then frankly, it ties into our broader thesis about places like West Texas, having a ton of terminal value in those sites that the market does not fully appreciate yet. So it's a complex mix. I guess, it's a long-winded way of saying we want to get the best risk-adjusted returns for shareholders. And so as credit support developments have evolved in that space, it has become more interesting for us to potentially participate in owning the computers at a site like Reveille. Operator: Our next question comes from Joseph Vafi with Canaccord Genuity. Joseph Vafi: Congrats on all the great progress, really great to see. Maybe, Tyler, any update on the Odessa PPA? Obviously, the market is really strong, and I'm sure that this is a top-of-mind issue. And then I have a quick follow-up. Rodney Page: I mean, look, I'll tell you this, Joe, it's lovely to have the cheapest cost of electricity in the Bitcoin mining space because we make nice margins there every day as we mine Bitcoin, and that's locked in at a really low rate for the next 14 months or so. We do have a lot of interest in Odessa. We have a hyperscaler interest in that site. I think I've mentioned before, we would be interested in potentially evolving that site much like we did Black Pearl from a Bitcoin mining site to an HPC campus. That will involve several counterparties because, of course, we have to renegotiate that PPA, and we'll be working with the counterparty there. So the PPA continues to be one of our very strong points that we negotiated a long time ago. And look, it certainly gives us a very strong bargaining chip as we think about what the future of that site may be. By the way, the future of that site could be that we decide to mine Bitcoin there for the next 14 months and make lots of money in Bitcoin mining there. We don't have to be in a rush because we're very favorably situated because of the low price. Joseph Vafi: Sure. That make sense. And then just sticking to the behind-the-meter theme. I know, Tyler, in previous calls, you've mentioned exploring behind-the-meter options. I mean, clearly, you got a big power portfolio, but an update on your strategy and what you're thinking on behind-the-meter opportunities. Rodney Page: Yes. So this has been a spot where we've had some of our best people spending most of their time in recent months. I think the potential for behind-the-meter on-site generation is extraordinary for us and our sites given where they are. We have access to a tremendous amount of cheap natural gas at our sites in West Texas. Pulling together all the pieces that need to be pulled together for a successful behind-the-meter generation data center is challenging. You've got to sort of solve some of the engineering challenges given the nature of the load profile for an HPC data center. Bringing your own generation will not have the same characteristics and consistency as grid-connected power. So you've got to solve some engineering challenges. You've got to solve sort of the gas infrastructure piece. You typically are going to have IPPs involved where you're going to have to pick a source of generation, potentially get air permits, finance the whole thing, guarantee power purchase agreements for billions of dollars. And so, it's complicated. I think the good news is we are in the kitchen with the best shifts, and we have all the ingredients to make a Michelin 3-star meal. It's just pulling all those pieces together has pretty much not been done. I mean, Elon has done it, and I'll put him in his own special category of having sort of dictatorial powers over the entire ecosystem, whereas the rest of us mere mortals have to deal with real-world humans from these different disparate parts of the ecosystem. And so it is an engineering challenge, a financing challenge, an emotional intelligence challenge, et cetera. I think we are extraordinarily well positioned for that opportunity. And it may be the most upside convexity potential in our stock, frankly, because, again, theoretically, there is gas that could power gigawatts of generation that we're not even talking about in our presentations because it's just early. But the potential is exciting enough and the tenants are interested enough that we're spending a lot of time on it. So stay tuned. Operator: Our next question comes from Brian Dobson with Clear Street. Brian Dobson: So congratulations on the new contract. Can you give us any color, are there any potential options to expand on the initial 100 megawatts? Rodney Page: So it's just 100 to start. But as I mentioned, we've got -- all the sites certainly are located above an entire ocean of natural gas. And we own lots of land, and we're in favorable locations. So stay tuned to see if there's a continuing behind-the-meter story there. But as per the contract, no, it covers the 100 megawatts. Brian Dobson: Okay. Excellent. And then as you're looking out over the next few years, do you see a point where you could exit Bitcoin mining entirely? And what do you think the business looks like, call it, by 2030? You spent some time talking about the long-term goals of Cipher. Rodney Page: Yes. I mean -- so look, it's a great question that keeps me up at night because I'm so excited about the potential. So first of all, I see Bitcoin winding down. As I mentioned, we do not plan to deploy further CapEx into Bitcoin mining. We have an operational site that could run until the end of July 2027 with really favorable economics. So we're not in a rush to turn it off. It brings in positive cash flow every month, several million dollars. So we're happy to have that. That said, that is kind of an outside date for that, either we may repurpose that site or alternatively have it run down in the next 14 months and say thank you. Probably, we are also liquidated of our Bitcoin position, I would imagine, this year. We're not in any rush. We continue to sort of manage the inventory down. We have not been aggressive sellers at low levels because, frankly, we're reasonably bullish on Bitcoin here. We collected a fair amount of premium by selling some calls above the market price of Bitcoin at different times in the first quarter because we'd be happy to sell at higher prices, and if not, we collect a premium. So we're prudently managing that down. I think Bitcoin will not be a part of our story by 2030, like you said, I mean, I would say by 2020 -- end of '27 at the latest, if not sooner. And it's already sort of dwindling as you look at the NOI that will be coming in from the leases, it will become immaterial as far as our financials go before it is completely wound down. Now by 2030, I mean, this is where you get really exciting about the upside. We are anxiously awaiting the results of ERCOT's batch process. I think we tried to be very clear that we feel we are in a very strong position with our sites to be in batch 0 there. And again, I view the HPC business as a bit of a flywheel where you're signing leases, demonstrating excellence in the execution of the quality of what we're building, the quality of our relationship management, the timeline on which we are delivering, the ability to finance at the best rates in the space. I checked our debt for the 2 projects this morning, and I think the yields were about 6.2% and 5.7%, both trading above par. So clearly, the debt investors of the world believe in our ability to construct and deliver on time. That positivity and access to finance then begets the ability to do more big data centers, and we've got that pipeline and those tenant relationships continue to flourish. I don't think any of our competitors has the tenant relationships we have. And so by 2030, to answer your question, I expect to have high-quality long-term leases with the best tenants in the world at all of the sites in our portfolio. And I would hope that we'll be operating 4 gigawatts plus of HPC at really attractive colocation rates. A lot of work to do between now and then. That's aspirational, but I'm very positive this team can do it. Operator: Our next question comes from Michael Donovan with Compass Point. Michael Donovan: Congrats on the progress. Can you discuss what equipment remains outstanding for Black Pearl's Phase I and II? Rodney Page: Sure. So for most of the equipment that is outstanding, it's -- that has not been acquired. It is all sort of on the expected procurement timeline that we laid out at the front end, and it tends to be commodity-like items. So I think we said in the presentation, we've got 93% of the Phase I equipment secured and 80% of the Phase II equipment secured. What remains outstanding are not the, like, long lead time items that tends to be stuff like, again, cable, office furniture. I think there are some like miscellaneous mechanical equipment, et cetera. Michael Donovan: Great. That's helpful, Tyler. And then a follow-up. As your contracted backlog has expanded, has your view changed on how far in advance of expected site energization you would sign a new lease? Rodney Page: Yes. So that's a good question. I think having the interconnect in hand is an important piece of that. So we're watching the batch process in ERCOT very carefully. If we end up where we think we're going to end up and have interconnects at a couple of large sites that we expect to energize in 2028, I think we'll proceed with lease negotiations reasonably quickly. Frankly, a gigawatt site is just so attractive that -- and you need enough time to build it. That -- I think that would be well within the window to begin fast-paced lease construction. So -- but I still think having the interconnect has tended to be a proof point that tenants need to see because I think there's like 1,000 people that are suddenly data center developers and have a site somewhere. And when you kind of diligence just how far along and reliable the grid connection is, it often falls through. We see this as we look at corporate development opportunities, when we look at site acquisitions, fair to say to go through the rigors of a lease negotiation with a hyperscaler, you're going to have to have a really buttoned-up timeframe on your interconnect. So I still think that factor is probably what drives it. And then look, it's construction timelines. I think for us, a huge advantage we've got is our ability to deliver quickly. We have a little bit of a different setup here than a lot of folks. I mean, we handle procurement in-house. We have a team of experts, ex-hyperscalers or the construction firms that serve them. And I think that's one of our biggest advantages to manage supply chain move quickly and control our own destiny. I think that's why we're in such a good position at our sites. I mean, at this point, I think we are more likely to deliver a site ahead of schedule than behind schedule. That's how strong our timeline management is. So hopefully, we'll have some upside surprises before too long. But at any rate, I think managing that is one of our greatest strengths. And I see that playing into the flywheel, as I described earlier. Operator: Our next question is from Ben Sommers with BTIG. Benjamin Sommers: So you mentioned earlier on the inquiries you've gotten to potentially own your own compute at Ohio at Ulysses. I guess kind of just zooming out here, curious on the broader demand you are seeing for the site. And is there anything to call out here given that it is in a different power market than the rest of the portfolio? Rodney Page: Yes, sure. I mean I think we have had inquiries, but we've also had inquiries and live discussions with multiple hyperscalers for that site. So I think fair to say if we're going to dip our toe in the compute ownership business, it's probably more likely to happen at Reveille just given the size and the risk exposure there. That said, never say never. If credit support continues to evolve among amazing counterparties for Neoclouds and that touches owning the computers, and we can make a better return for shareholders, we'll do it. But given that Ulysses has also interest from really great names just for traditional colocation, that's -- I mean, at this point, that's probably more likely. Stay tuned. As far as being a different power market, like PJM is a market we have targeted for a long time. So we're excited to have a site there. I visited the site 2 weeks ago. It looks great. We're very excited about the potential. So I think a high degree of interest in the site, a little bit closer to a traditional location given that it's in the Greater Columbus area, sort of extended, which is a popular traditional data center market. So I think there's also a pretty big demand in PJM because you asked about the nature of the markets. As a broad generalization, there are higher deposit requirements there than ERCOT. So I'd say it's a little more demanding. So it's sort of harder, I'd say, to get an attractive site in PJM. So that's another thing that puts a bit of a premium on that site. There's not as many opportunities. Benjamin Sommers: Awesome. Super helpful. Then on to the financing side, just kind of curious if there's anything to call out on potentially project level financing for the new 100-megawatt contract. And I guess just anything you're seeing kind of the project level financing for colocation contracts that you want to call out? Rodney Page: Greg, do you want to handle that one? Greg Mumford: Yes, happy to jump in. And thanks for the question. So look, we've raised 3 successful project level bonds now. I think we've really demonstrated the ability to access capital markets. We have a diversified institutional investor base that's now following the name. I'm very confident that if we were to go out and doing another bond that looks similar to what we've done today, we would be very successful and price at similar, if not better terms. We're comfortable with that, and we're happy with how we finance to date. At our stage of growth, I really want to emphasize the fact that maintaining flexibility in our capital structure is so critical to us right now. I think the way that this whole industry evolves over time still remains to be seen. So noncallable long-duration financings can look great from a headline number, but I think you could trap cash and limit your ability to optimize assets over time. So I think what we're focused on is flexibility in the capital structure kind of up and down. We're focused on nonrecourse financing to really isolate construction risk through construction. And then we're focused on optimizing the capital structure as we grow and we add more assets to the portfolio and more stabilized assets that provide collateral. So every time we look at financing, we'll kind of put everything on the table, and we'll evaluate it, and we'll pick what the best option is. But we're confident that we'll be pursuing something with similar or better terms than what we've seen to date. Rodney Page: Judging from the pace of calls from investment bankers to Greg eager to do more debt financing for us, I'm confident there is an extraordinary appetite for our paper out there. Operator: Our next question comes from Mike Grondahl with Northland. Mike Grondahl: See, I'm going to assume Reveille and Ulysses are pretty baked here. And I kind of want to look at McLennan, Mikeska, and Colchis. Tyler, what are the major hurdles or challenges to get those 3 energized? And then what does demand look like today for that 2028 power? How is those conversations going? Rodney Page: Sure. Thanks, Mike. So the challenge here is that ERCOT is going through this batch process where they're doing constant meetings, considering all the final tweaks to how they want to implement it. There was a meeting yesterday that was several hours that we participated in. So we are -- what we have done at those 3 sites and the reason why we highlight them is that we have done everything that has been laid out to us to have those sites qualify for what will be in this batch 0 approval as it winds its way through ERCOT, which should be done next month. Given that, we believe -- and again, this has been like an evolving process, right? ERCOT has changed requirements and they've delayed the batch process as we've gone along. So we're trying to be as transparent as possible. We believe we have done everything, but until we have the final okay, we won't have the interconnect. As I mentioned earlier, having that interconnect is probably the gateway to rapidly advancing tenant discussions. So again, we have a great team that is following this and participating, and I feel like we have our ear to the ground very well with what's going on with the evolution of the batch process. We are confident that these 3 sites have done what is necessary, and they have been done for a while. So from a sort of chronological ordering perspective, they are in a good spot. We are hoping for a good outcome from the finalization of that batch process in June. And then I think we then flip to the next question, which is, okay, so if you've got about 1.5 years, you're going out to 2028, what's the level of interest. Historically -- well, by historically, I mean the last year or so, as you get into that kind of 1.5 years out window, there has been the greatest level of interest from tenants. That starts to be squarely in their wheelhouse where they can match up demand forecasts for what they need. I have every reason to believe that there will be significant demand. And when you're talking about sites that have a gigawatt at the site or 500 megawatts, those are really big attractive sites. They're in Texas, which is data center friendly. We've got kind of really NIMBY issues across the country. We're managing those very well in Texas at our existing sites. Texas is set up for a favorable outcome on those kinds of issues. So I am just very, very, very bullish on the level of appetite for those sites once we get through the final unknown of the ERCOT process. And then hopefully, there's lots of upside stories to report in the coming months. Mike Grondahl: Got it. Yes, a month isn't that far away. And then maybe just a follow-up. How should we handicap the odds that on your pipeline slide at, say, year-end 2026, there's new sites that you've acquired on there. Would you say that's low, medium, high? Rodney Page: That one is really hard to say. I'd say we have seen quite an amount of inbound opportunities, I think, as we've gotten better known and people do channel checks on our tenants and the success of our construction projects and see our financings. That said, most of the opportunities we've seen that are coming in are way far out, and they haven't made as much sense for us. So an opportunity in 2030 or something like that. What I would say will be interesting, is that with the advance and finalization of the ERCOT process, a big part of that will be putting down large deposits. Historically, we've acquired a lot of our sites from less well-capitalized speculators that find a good spot, but they're not prepared to really develop it or pay double-digit millions of dollars in deposits to show how real they are, which is part of the test in ERCOT. So it's hard to answer your question, but I'm actually cautiously optimistic that the finalization of this process may produce some opportunities where we have inbounds from people we know and follow in that ecosystem of kind of smaller developers that may be looking for a partner. So I can't give you an exact forecast. All I can say is we're looking at site opportunities all the time. I think we may have a wave of them coming in an area where we have historically had a lot of success. So it's another stay tuned. That said, working on building the 4-plus gigawatts we've got will definitely keep us busy in the meantime. Operator: Ladies and gentlemen, this does conclude the Q&A portion of today's program. I'd like to turn the call back over to Tyler for any further remarks. Rodney Page: Just to say thanks again for everyone for dialing in and your continued support. We are really excited about what's going on, and look forward to talking to you again soon. Cheers. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.
Unknown Executive: Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended March 31, 2026. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC. David B. Golub: Hello, everybody, and thanks for joining us today. I'm joined today by Tim Topicz, our Chief Operating Officer; Rob Tuchscherer, Senior Managing Director and Officer of GBDC; and Chris Ericson, our CFO. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended March 31, 2026, and we posted an earnings presentation on our website. We'll be referring to that presentation during the call today. We're going to change from our usual format today. I'm going to start with headlines and some commentary on what I think is happening in private credit. And then Tim, Rob and Chris are going to walk you through our operating and financial performance in detail. Following that, we'll open the line for questions. So let me start with headlines. GBDC had a small loss for the quarter, about 1% of NAV, and that was primarily because of mark-to-market fair value write-downs. Adjusted NII per share for the quarter was $0.34. That corresponds to an annualized adjusted NII return on equity of 9.5%. Nonaccruals remain low in both absolute terms and relative to BDC industry peers and performance ratings for GBDC's borrowers not only remain strong, they actually improved modestly quarter-over-quarter. Now let's drill down on that first headline. I said the loss this quarter was primarily from fair value markdowns. To remind long-time BDC investors and to educate new ones, GAAP for a BDC loan investments isn't the same as GAAP for loans made by banks. When a bank makes a $100 loan, the asset stays on the bank's balance sheet at $100 regardless of what happens to market interest rates. There's a separate impairment reserve that the bank can use to buffer potential credit losses, but bank accounting doesn't account for changes in spreads. BDC accounting does account for changes in spreads. We mark our loans to fair value every accounting period. So when spreads widen, we write down our loans even when they're paying interest on time and even when we expect them to pay off at par. So this last quarter saw meaningful spread widening and that caused us to write down fair values even on our well-performing credits. Now whenever we have a quarter with this kind of meaningful spread widening, you'll hear us talk about how there's a big difference between temporary losses and permanent losses. Realized credit losses are permanent. They don't come back. If we can avoid realized credit losses, the mark-to-market adjustments, they reverse over time as borrowers move toward payoff or as their credit attributes improve or as market spreads narrow. The good news is that we currently think that most of this quarter's fair value write-down will reverse in future quarters. Tim is going to walk you through why in a few minutes. I want to talk before handing the mic over about the bigger picture here. The spread widening that we saw this last quarter, it's part of a larger macro picture. I want to spend a few minutes talking about the forces that are causing changes in the private credit landscape, the impact of those forces and where I think we're likely to go from here. In the last several earnings calls, we've talked about headwinds facing direct lending. We've talked about how base rates have declined by about 1.5 percentage points since 2022. We've talked about how spreads have narrowed over the same period. Spreads have come down by more than 1 percentage point. So between base rates and spread reductions, that's 2.5 to 3 percentage points of return headwinds. We've also talked about elevated credit stress and how that's been reflected in higher default rates, more frequent restructurings and utilization of PIK amendments. In the last quarter, we can say we can add a new headwind, concerns about AI and software. So these 4 headwinds, lower base rates, lower spreads, elevated credit stress, AI fears, they've had a big impact. We've seen lower returns across the public BDC sector with average returns on equity falling from about 9% in 2023 and '24 to between 4% and 5% last year. We've seen a big increase in dispersion, too. The dispersion of performance between top quartile managers and bottom quartile managers has always been large in the BDC space, but it's been particularly large in the last year with top managers performance going down a little and bottom manager performance going down a lot. The third impact, shareholders have spoken. We've seen a sell-off in publicly traded BDCs, which now trade at large discounts, and we've seen a spike in redemption requests in nontraded BDCs. All of these impacts, they've contributed to a final impact. And I'd characterize that final impact as a shift in wind direction. We've moved from a market that for years was becoming more borrower-friendly to one that's now becoming more lender-friendly. Now this trend is new, but we're already seeing wider spreads and more attractive deal terms. So what does this mean? Where are we headed from here? I'm usually very cautious about making predictions. You've heard me talk many times about how challenging the prediction business has been since COVID. But I'm going to offer the following thoughts about where I think the market is headed based on what I see today. My first prediction is actually a repeat from last quarter. I think we're in a Darwinian moment for private credit. Firms that have sustainable competitive advantages, that have strong performance from a credit standpoint, that have well-diversified long-term capital bases, they're going to adapt and take share. Firms with not so good credit performance or with an overreliance on retail products, they're going to struggle. Private equity sponsors are very soon going to know which credit firms can provide them with consistent, steady access to compelling financing solutions and which credit firms can't. All this is going to lead to a pattern we called out last year, a growing separation between what we call winners and whiners. Second prediction. I expect this period of credit stress to continue for a while. We're not through this credit cycle yet. We at Golub Capital try very hard to identify and escalate problems early. So we tend to be ahead of the market in recognizing and dealing with credit issues. My observation based on what I'm seeing in industry data and to a lesser extent in our portfolio is that there remains a subset of companies that are not adapting well to current economic conditions that are ultimately going to need to restructure and that hasn't happened yet. A third prediction, I think market conditions are going to become even more lender-friendly, especially if M&A continues to rebound. Capital has left and in some respects via continuing redemptions, continues to lead direct lending. Supply and demand, it's going to drive wider spreads. These wider spreads are going to create short-term losses from the fair value adjustments that we talked about earlier, but the same wider spreads are also going to create medium- and long-term benefits from higher earnings on new loans and from reversal of prior period fair value markdowns. We're confident that Golub Capital and GBDC are going to be among the winners. We're very optimistic about our medium- to long-term ability to produce premium returns for our investors, consistent with our nearly 16-year track record with GBDC since it went public. Now I'm going to pass the call over to Tim, Rob and Chris to discuss operating performance in the quarter in more detail, and I'll be back at the end for questions. Tim? Timothy Topicz: Thanks, David. Let's start on Slide 3 and discuss the drivers of GBDC's $0.34 per share of adjusted NII and negative $0.18 per share of adjusted earnings. First driver, overall credit performance remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories and investments on nonaccrual status remained very low at just 1.4% of the total investment portfolio at fair value. This level is well below the average of GBDC's listed BDC peers. Second driver, GBDC's investment income yield of 9.7% annualized was down 30 basis points sequentially. The decrease was primarily driven by the full quarter impact of lower SOFR following the interest rate cuts of late 2025. Third driver, GBDC's borrowing costs declined by 20 basis points to 5.2% annualized, one of the lowest borrowing costs in the listed BDC peer group. The decline was similarly driven by the impact of lower SOFR, an offset that highlights one of the advantages of GBDC's predominantly floating rate debt capital structure. Fourth driver, GBDC's earnings continued to benefit from a gold standard fee structure and one of the lowest operating expense loads in the listed BDC peer group. And finally, as David previewed, credit spread widening drove the majority of the $0.52 per share of net realized and unrealized losses, resulting in a $0.18 per share loss in the quarter. Regarding balance sheet changes and distributions in the quarter, NAV per share declined to $14.35 per share. We ended the quarter with net debt to equity of 1.24x, consistent with prior quarters and within our targeted range of 0.85 to 1.25, while average leverage throughout the quarter was 1.21x, a modest decrease from prior quarters. Total distributions paid in the quarter were $0.33 per share. Our Board of Directors declared a $0.33 per share distribution for the third fiscal quarter of 2026. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. The company repurchased 2.2 million shares in the quarter at a weighted average price of $12.43 per share or an approximately 16% discount to December 31, 2025, net asset value. In addition, the Golub Capital Rabbi Trust purchased approximately $19 million or 1.5 million shares of GBDC during the quarter for the purposes of awarding incentive compensation. Turning to Slide 7. You can see how the earnings drivers I just mentioned translated into GBDC's March 31, 2026, net asset value per share of $14.35. Adjusted NII of $0.34 fully covered the $0.33 per share base distribution that was paid out during the quarter. Adjusted net realized and unrealized losses were $0.52 per share. and $0.02 per share of net asset value accretion from share repurchases. Taken together, these results drove a net asset value per share decrease to $14.35. Now let's unpack the $0.51 per share of unrealized losses on Slide 8. It's important for investors to note that unrealized losses are not all created equal. When they are credit related, they often don't come back. On the other hand, when borrowers perform, the unrealized losses reverse over time as loans mature or spreads tighten. So a key question to ask when interpreting GBDC's results is how much of the unrealized loss in the March 31 quarter is likely to prove temporary. While there's no way to be sure except in hindsight, we find it informative to look at how much unrealized loss is embedded in borrowers that are performing in line or better than expectations at underwriting. In our experience, such unrealized losses are likely to reverse over time. Our preliminary analysis suggests the vast majority of unrealized losses were attributed to borrowers that are performing at least as well as we expected at the time of underwriting. You'll recall that GBDC's internal performance ratings categorize borrowers on this basis. For example, borrowers with ratings 4 or 5 are performing in line or better than expectations at underwriting, and we expect them to continue to perform as expected. Approximately 70% of the $0.51 per share of net unrealized losses this quarter or $0.35 per share came from borrowers rated 4 or 5. Because the borrowers are performing well, our view is that the fair value adjustments taken in the quarter were primarily driven by market spreads and are likely to reverse over time. Put differently, if GBDC were a bank and we didn't have to make fair value adjustments based on market spreads, the quarter would have been profitable. That said, we're not taking the expected reversal of unrealized losses for granted. We are keenly focused on avoiding permanent credit impairment and minimizing realized credit losses. Long-time GBDC investors are familiar with our playbook, careful underwriting, proactive portfolio monitoring, early detection of potential vulnerabilities and early intervention to address those vulnerabilities. The remaining 30% of net unrealized losses or $0.16 per share came from borrowers rated 3 or lower. These markdowns reflect the impact of the mix of market spreads and further credit deterioration in known troubled credits. In fact, the majority of the $0.16 per share of unrealized losses were related to borrowers on nonaccrual status as of March 31, 2026 or previously restructured portfolio companies. I will now turn the call over to Robert Tuchscherer to walk through our portfolio in more detail. Robert Tuchscherer: Thanks, Tim. I will now highlight our second fiscal quarter investment activity and provide some additional context on portfolio performance. Turning to Slide 9. In the first calendar quarter of 2026 at the Golub Capital level, our team originated over $3.3 billion of new investment commitments. GBDC participated in these new originations on a limited basis with $17.7 million in new investment commitments in the quarter, given slow repayments and our desire to focus on accretive share repurchases. We remain highly selective and conservative in our underwriting, closing on just 1.9% of deals reviewed in the quarter at a weighted average loan-to-value of approximately 42%. We leaned in on existing sponsor relationships and portfolio company incumbencies for approximately 69% of our origination volume, and we made loans to 10 new borrowers. We continue to leverage our scale to lead deals, acting as the sole or lead lender on 94% of our transactions in the quarter. We focused on the core middle market, defined as borrowers with between $10 million and $100 million of annual EBITDA, which we believe continues to offer better risk-adjusted return potential than the larger end of the market. The median portfolio company EBITDA for originations for this quarter was $76 million. About 57% of our new origination volume in the second fiscal quarter supported M&A-driven transactions such as LBOs and add-on acquisitions, which builds on the momentum we saw last quarter and highlights our ability to benefit from the early signs of a more active and M&A-driven market environment. Of GBDC's $18 million in new investment commitments in the quarter, 98% were in senior secured debt investments. New investments carried a total weighted average rate of 8.8%, which included a 4.9% weighted average spread. Turning to Slide 11. As of March 31, 2026, GBDC's $8.3 billion portfolio remains well diversified across 420 different borrowers. The number of portfolio companies in GBDC's portfolio has increased nearly 26% over the past 3 years, further enhancing our diversification. The granularity of our portfolio can also be seen in our small position sizes. Each of our investments represents less than 0.2% of the overall portfolio on average, and our top 10 investments comprise just 13% of the overall portfolio, which represents a concentration level that is less than half of the average of our listed BDC peers. GBDC's portfolio is also well diversified by industry subsector with 52 individual subsectors represented. Software portfolio companies represent approximately 26% of GBDC's portfolio at fair value. Before moving on to credit quality, I'd like to expand on our software portfolio in light of recent investor interest in the potential for AI disruption. But before I go into detail, I want to remind everyone of what informs our view. In short, we're specialists in software investing at Golub Capital. We have been investing in software companies for a long time, more than 20 years. We've completed over 1,000 software deals representing in excess of $90 billion in commitments over that period. We're also good at it. Over those 20 years, we've had an annualized default rate of just 0.05% or 5 basis points. We've also got a great team, including 25 dedicated investment professionals with over 230 years of combined experience through multiple credit and technology cycles. We've got a well-developed underwriting approach. It starts with a long-held view that the most creditworthy software companies are dominant players in a niche market. These winners typically provide enterprise-critical platforms with sticky and embedded workflows, long implementation cycles and high switching costs. In 2023, we began including a systematic framework for assessing AI risk at the borrower level for all new software deals and across our software portfolio. This framework assesses potential AI risk at both the product and end market levels. We continue to believe that AI risk is not the same across all software companies and subsectors and therefore needs to be evaluated at the borrower level on a case-by-case basis. Finally, 95% of our software investments are in first lien senior secured loans with significant equity cushion behind them. In many instances, we are lending at a 35% loan-to-value, which means that enterprise value of the borrower would have to decline by 65% before our senior debt position even begins to be impaired. As we look at Slide 12, you can see that within our existing software portfolio, which represents approximately 26% of GBDC's portfolio, 95% of the software investments are in internal performance ratings categories 4 and 5, our highest-rated categories. The performance ratings of our software portfolio compares favorably to the overall GBDC portfolio. During the quarter, we re-underwrote our software portfolio and established a new metric, degree of AI disruption risk. Our analysis has led us to conclude that only 8% of the software portfolio is subject to an elevated level of AI disruption risk. We plan to continue to monitor AI disruption risk over the coming quarters and plan to report back on our findings. On Slide 13, you can see that nonaccruals increased slightly quarter-over-quarter to 140 basis points of total investments at fair value, but remain at very low levels in absolute terms and relative to the broader listed BDC sector. During the quarter, the number of nonaccrual investments increased to 19 with the addition of 5 portfolio company investments. The financial health of our portfolio companies generally remains strong. Our portfolio's average interest coverage ratio of 1.8x increased quarter-over-quarter. The portfolio's average leverage level also showed strength, declining about 0.25 turns of debt to EBITDA from year-end 2024. Additionally, healthy enterprise values continue to underpin our loan positions as loan-to-value ratios remained stable at approximately 45%. Slide 14 shows the trend in internal performance ratings for the entirety of GBDC's portfolio. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance ratings categories and investments rated 3 signaling a borrower may have the potential to or is expected to be performing below expectations, decreased quarter-over-quarter to 8.7%. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 2.2% of the portfolio at fair value. I'm going to turn it over to Chris now to take us through our financial results in more detail. Christopher Ericson: Thanks, Rob. I'll now cover GBDC's performance and liability profile for the second fiscal quarter of 2026. First, on performance. The economic analysis on Slide 15 highlights the drivers of GBDC's net investment spread of 4.5%. Let's walk through this slide in detail. We start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell approximately 30 basis points sequentially to 9.7% annualized, largely reflecting the full quarter impact of the rate cuts from the fourth calendar quarter of 2025. Our cost of debt, the teal line, decreased approximately 20 basis points to 5.2%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined slightly. Moving to the balance sheet on Slide 18. We ended the quarter with over $8.3 billion of total portfolio investments at fair value, $4.7 billion of outstanding debt and $3.7 billion of total net assets. Net debt-to-equity leverage was 1.24x at quarter end, relatively flat compared to the prior quarter, reflecting the impact of lower average investments outstanding during the quarter, but offset by the impact of fair value markdowns and share repurchase activity. Turning to GBDC's liquidity on Slide 21. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.4 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unsecured revolver provided by our adviser. Our debt funding structure highlighted on Slide 22 remains highly diversified and flexible. Our weighted average borrowing cost of 5.2% annualized remain low and what we believe to be one of the lowest in our listed BDC peer group and is underpinned by a differentiated investment-grade ratings profile. Consistent with our asset liability matching principle, 80% of GBDC's total debt funding is floating rate or swapped to a floating rate, which positions us well to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on our borrowings. 51% of our debt funding is in the form of unsecured notes across a well-laddered maturity profile. Our next unsecured note maturity is in August 2026, and we continue to evaluate new issue pricing levels in the unsecured debt market. Importantly, we have the requisite liquidity available under our revolving credit facility and balance sheet flexibility to mitigate refinancing risk associated with these maturing bonds. With that, operator, could you please open the line for questions? Operator: [Operator Instructions] Your first question comes from Kenneth Lee with RBC Capital Markets. Kenneth Lee: Just one on the software loan side of the portfolio. And you talked about the new AI risk framework, and I think it's about 8% of the investments being at risk there. Wonder if you could just talk a little bit more about the -- some of the characteristics that underlie some of those investments, commonalities there? And what sorts of mitigation could you see being performed over time on those types of investments? David B. Golub: Sure. Thanks, Ken. I'll start, and Rob, maybe you can add to what I'm going to say when I'm done. So for some context, we started investing in software at a time when almost no other lenders did. So the idea of being a lender to this space at a time that's contrarian is, for us, not uncomfortable. In some ways, all of the noise that you're hearing right now about risks in software is good for us because we understand the difference between good software credits and bad software credits, and it means less competition. What we're seeing in the marketplace right now is many pure lenders who had started to get into software lending in the last few years want to be able to report to their shareholders how they're reducing their software exposure. So they're literally not participating in marketplace opportunities for new loans. So that's just some context for you. The exercise that Rob talked about involved looking at our portfolio from the standpoint of degree of AI disruption risk. And he correctly said that 8% of the roughly 25% of our portfolio that's in software. So it's roughly 2% of our overall portfolio is in a category of elevated AI risk. That doesn't mean we think we're going to lose money on these loans. They could be low leverage, they could be near maturity. There are a lot of other factors that go into whether we're going to see elevated risk of credit loss in these loans. But this is a very important rating system from the standpoint of both evaluating new loans and helping us figure out from a monitoring perspective, what should be our goals with those borrowers. So for example, it would be reasonable to conclude that if we see elevated risk of AI disruption, we're going to want to reduce exposure or we're going to want to get paid for the exposure that we're taking. We may want to increase pricing. We may want to increase equity cushions. We may want to take other steps that reduce risk. So what kinds of companies fall in this category. The most significant element of the category are companies that are involved in providing tools that enable others who are writing code to do so more effectively. This has historically been a significant category of software companies. It's not a category that we've historically been attracted to, but we do have a couple of exposures that fall in this category. I'd say that's the largest component of the group. Rob, if you want to add more color, please do. Robert Tuchscherer: Yes. Thanks, David. Yes, building on what David is talking about in terms of the different attributes. As I mentioned in my remarks, we look at it at 2 levels. One would be on the product side and then the second would be at the end user level. So if you look at the handful of businesses that are falling into what we would categorize as potential for higher AI disruption risk. David mentioned one category of products, which we develop in tools. The other would be something that is more reliant on content creation. So a business such as Pluralsight, which we're all well aware of. And then on the end market side, you would have businesses that serve end markets that maybe are not seeing headcount reductions today, but could see them in the future. So for example, contact center or call center type businesses are ones that we will be monitoring more closely. But again, this is really a forward-looking metric given that the performance of the portfolio has remained really strong. But I think from our perspective, as I mentioned, we're going to continue to monitor for AI disruption risk and roll this analysis forward and report back on our results in the coming quarters. Kenneth Lee: Great. Very helpful there. And just one follow-up, if I may, just on capital allocation. I saw that you repurchased some stock in the quarter. Looking out, is the preference to lean more towards repurchases versus new investments? David B. Golub: I think we're going to continue to evaluate the best ways in which to allocate our capital. So it's hard to answer your question in an absolute sense. We've got to look at the opportunities in front of us and that includes share repurchases that includes new investment opportunities, that includes working within our target leverage framework. So there are many factors that go into that. Operator: Your next question comes from Ethan Kaye with Lucid Capital Markets. Ethan Kaye: Kenneth covered a couple of my questions, but just maybe one for David. In your introductory remarks, you kind of mentioned based on some industry data you're seeing, there's perhaps a subset of companies across the industry that -- portfolio companies across the industry, borrowers that are really not adapting well to these economic conditions. I guess just kind of curious like what's your diagnosis as to why these companies either have not adapted or have not been able to adapt? And is it something that -- is the capital structure related? Is it something related to the fundamental business, the sector they're in? Just any kind of through lines you can draw regarding those companies would be helpful. David B. Golub: Sure. So first off, let's talk about some of the indicia that we're seeing of elevated credit stress. So you can see it in Fitch default data. You can see it in the degree of business of restructuring advisers and restructuring lawyers. You can see it in the quantum of PIK amendments that are coming through. You can see it in the broadly syndicated market and the proportion of the market that's trading below 85. There are a whole variety of data points that I think are visible that illustrate that we're in a period of some elevated credit stress. In some prior periods like this, that elevated credit stress has been concentrated in a single industry. So think about the fiber telecom crisis of the early 2000s. We don't really see that right now. It's not all in one industry. There are though some red threads that are common themes. So one common theme, people talk about the K-shaped recovery are companies that are focused on the lower end consumer. The lower-end consumer is stretched right now. You can see it in subprime auto data, subprime credit card data. And so with the recent increases in gas prices, my expectation is that's going to get worse. A second red thread is companies that are beneficiaries of moving of people selling their house and moving to a new house. The rate of moving is very low right now because of people locked in by low interest rate mortgages that they put in place before interest rates went up. So if you're in the furniture business or the home decor business or the HVAC business, these are all linked to a significant degree to moves. And so those have been under some pressure. A third red thread is some areas where we've seen changes in consumer behavior. During COVID, there was a very significant increase in interest in purchasing in virtually all outdoor sports, hiking, fishing, hunting, boating, many of bicycling. Many of those areas have seen decreased spending levels in the period since, and it didn't kind of go back to previous normal. It's gone lower than previous normal. So those are some examples. And then there are some that I'd say are more specific to the private equity ecosystem. There are some companies that were overleveraged, bought at very high multiples and overleveraged in the peak LBO boom of 2021 and early 2022. And in some cases, those companies weren't designed from a capital structure standpoint to be able to tolerate plus 5% on interest rates. I don't think it's a one factor, Ethan. I think there are a bunch of different themes that you see in the market today. And I think that's one of the reasons that this credit cycle is unusually elongated. It's not like there's just one industry that needs to go through a restructuring process. There are a large number of companies in a variety of industries that need to do so. Operator: [Operator Instructions] Your next question comes from Robert Dodd with Raymond James. Robert Dodd: I don't want to go back to software, but I'm going to anyway. Can you give us any color on kind of growth dynamics like net revenue, revenue retention, which is recurring revenue or same-store sales concepts. I mean when I look at the Altman data that you published, which is obviously, I think, a platform-wide set of data, there has been a noticeable slowdown in software growth. I mean everything is still growing over the last several quarters. I mean, how relevant is that to the assets that are in the BDC? And can you give us any color on kind of like -- any metrics about how they're doing versus, again, the Altman numbers paint a certain picture? David B. Golub: So thank you, Robert. So for those who are not familiar with what Robert is alluding to, we publish a quarterly index called the Golub Capital Altman Index and it looks at the growth in both revenues and EBITDA for the first 2 months of each quarter. And we're able to show those numbers by some industry sectors where we have a sufficient -- and a sufficient number of companies to make the numbers meaningful. And Robert is correct that if you look at the data over the last, I'd say, half dozen quarters, the good news is we're continuing to see growth across the U.S. economy generally and across the software sector, both growth in revenues and growth in earnings, and we're seeing a slowdown in growth in revenues and earnings. Interestingly, that slowdown is not just in software. That slowdown is broad-based. It's across industries. Among the stronger industry segments that we've seen is software. So there isn't a selectivity, Robert, where the software companies that are included in the index are meaningfully different from the software companies that are in the GBDC portfolio. Wherever we have data, we're showing the data. I think what the data says is that the software industry remains healthy, that you're not seeing -- as of now, you're not seeing AI eat the software industry. But -- but you are seeing across the entirety of the U.S. economy, you are seeing a bit of a slowdown in growth. Robert Dodd: Got it. Moving on to kind of the outlook for active -- kind of market is somewhat slower Q1, beginning of Q2 has started to see a pickup, but not a rocket ship exactly. What's your view on how you think -- I mean, all the things were pent-up exits, et cetera, those all still stands, but it doesn't mean they happen this year. I mean what's your view on kind of how that could trend? We've gone through a period of volatility. Sometimes that takes a period to recover from spreads are wider, et cetera. I mean what's kind of your view on how and it is a crystal ball moment, how the rest of the year could play out in terms of activity and general market trends. David B. Golub: Yes. We haven't yet talked today about an elephant in the room, which is the oil markets and the situation in the Strait of Hormuz. I think that's a very large factor in respect of your question. So predicting the future of M&A trends almost requires an assumption about the straits. In one scenario, we get near-term resolution, oil prices come down, there's reasonable predictability about energy prices going forward. I think that scenario points to significant momentum and recovery in M&A. The alternative scenario, which is continued uncertainty, not lack of clarity, higher oil prices, increasing shortages in parts of the world of jet fuel and fertilizer and petrochemicals, I think that scenario points to an extended period of relatively impaired M&A activity because uncertainty is not the friend of deals. You can have bad news and still have deals, but uncertainty is very challenging for deals. So I'm not sure, Robert, as to which of those 2 paths we're going to see. I'm hopeful that we'll see some resolution and that we'll be in the first of those 2 scenarios. But I don't think anybody can be certain right now which of those is going to transpire. Operator: Your next question comes from Derek Hewett with Bank of America. Derek Hewett: Could you talk about the sustainability of the dividend following the reset last year? Dividend coverage is lower versus kind of -- kind of the pro forma number last quarter and relative to where it is today, especially when we're in an environment where you have the uncertainty in the Middle East, plus you have normalized -- you have credit normalization that could be a drag on earnings in the coming quarters. David B. Golub: So great question. You provide context again. We did a dividend reset recently, and it was challenging to figure out what the right level is because of uncertainty about base rates, uncertainty about spreads, uncertainty about credit. There are many different factors that impact earnings power. I think where we came out was a good place. I think if you look at our NII per share this last quarter, it's an illustration of the earnings power of the company today. And I think we talked in the call about several different paths to increasing that earnings power, including higher spreads and including gains, realized and unrealized gains. So this is something we're going to need to continue to watch and study and make sure that we continue to put our dividend in the right place as a floating rate loan fund, we need to be responsive to market. Derek Hewett: Okay. And then I might have missed this in the opening comments, but could you provide a little bit more color on what caused the increase in PIK? And then of the total, like what percentage of PIK was just like your typical PIK by design versus amendment PIK? David B. Golub: I don't think we disclosed that in our comments today. And to be honest, I don't remember what exactly is in the queue on that. So I'm going to ask to come back to you after we've reviewed what we've disclosed, and we can share that with you. Timothy Topicz: Derek, it's Tim. I might just jump in there and just say, generally speaking, the vast majority of our PIK interest is associated with borrowers that we've structured a PIK toggle into the credit agreement at the time. of underwriting as opposed to PIK amendments to support portfolio companies from a liquidity perspective. So that's the vast majority. We did see an uptick in PIK interest income for the quarter versus the prior quarter, but that was largely driven by one portfolio company that elected to toggle more PIK interest in this quarter than it did in the prior quarter. Hopefully, that gives you more context. Operator: Your next question comes from Paul Johnson with KBW. Paul Johnson: Just going back to software, 1 or 2 questions there. I'm just curious how do you, I guess, approach any sort of software restructuring or discussions around the topic with the software company in this environment. And I'm just thinking most of those companies probably would prefer to avoid any sort of insolvency or any sort of indication of a potential restructuring, certainly any sort of bankruptcy for any sort of concerns around obviously, retainment of clients. So I would imagine maybe you would be getting involved there a little bit earlier on than normally you would. But I'm curious kind of is it just more of a recurring check-in with most of these companies? Or do you look to take potentially be a little bit more aggressive in taking action sooner in the current environment? David B. Golub: So again, I'll start with some comments on that, and then I'm going to ask Rob, who's been leading our software underwriting efforts for years to comment as well. Our approach is always the same. You want to identify problems early. When you identify problems early, there are more options that we, as lenders, as sponsors, that management teams can undertake to resolve them. So we're big believers in not sweeping things under the rug and instead in escalating issues and having discussions about them early. That's true in software. That's true in other areas as well. In software, we also maintain very close dialogue with both our sponsor clients and our management teams. Again, we view ourselves as having 2 sets of partners when it comes to portfolio companies, both the sponsor and the management team. And sometimes one is more important, sometimes the other is more important. This is not an asset class where you make a loan, put the document in the drawer and pray. That's not an effective strategy for running a direct lending program. It's -- our approach is the polar opposite of that. We really work very hard to engage with our sponsor clients and our portfolio companies to help them during both good times and in bad times. Rob? Robert Tuchscherer: Yes, I don't have much to add. I would agree that we have a pretty methodical portfolio management process that spans all 4 of our industry verticals. So I don't think there's much of a difference in terms of our process or approach. I think the other point that I think is important in these situations is that although it's always a balancing act, given the fact that 95% of our software portfolio is in first lien senior secured loans and well diversified, I think that when we come into these discussions, we feel pretty good about where we sit in the capital structure and our position. So I think that helps when we're having these discussions with sponsors if there is an ask on an amendment or there's some degree of underperformance. Paul Johnson: Got it. Appreciate it. That's all very helpful. One just higher-level question. I mean in terms of just market activity, where is that kind of gravitated to in this environment? I mean is the market still available in terms of kind of the large buyouts, the more of the large unit tranche, $1 billion-plus type of financing acquisitions in the market? Or is it, at this point, a little bit more averse to the larger transaction size and you're seeing potentially more activity kind of further down the market? That's all for me. David B. Golub: I think we're seeing activity across the size range. So I don't think it's restricted to just small or just big. I think that it's -- in terms of putting together a larger group of lenders interested in a particular transaction, it's harder in software right now. And in some respects, it's harder for very large deals because some of the bite sizes of some players in the market who are interested in the large market, those bite sizes have come down in the context of slower subscriptions and redemptions in the nontraded space. Paul Johnson: Got it. And then I guess one more further -- just one more on that point, if you don't mind me putting one more in here. But have you seen that the pressure from redemptions and the subs you just mentioned, has that impacted the market in any way from some of your more kind of usual competitors, as you mentioned here, commitment sizes or pricing by any means. David B. Golub: Look, I think we all live in a world of supply and demand. So there's a lower degree of capital that's looking for new investments right now. That's part of the -- that may be the biggest factor contributing to what I referred to in my prepared remarks is this shift in wind direction that's caused the market to go from blowing toward more borrower-friendly to now where it's blowing more lender-friendly. Operator: This concludes the question-and-answer session. I'll turn the call to David Gallop for closing remarks. David B. Golub: Thank you. So just wanted to thank everybody for listening this morning and for your questions. As always, if there's a topic that you're interested in that we did not cover or did not cover in the depth you want, please feel free to reach out. Look forward to talking to you all next quarter. Timothy Topicz: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good morning and thank you for standing by. Welcome to Dorman Products First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I would now like to turn the conference over to Alex Whitelam, Vice President of Investor Relations. Thank you, sir. Please go ahead. Alexander Whitelam: Thank you. Good morning, everyone. Welcome to Dorman's First Quarter 2026 Earnings Conference Call. I'm joined by Kevin Olsen, Dorman's Chairman, President and Chief Executive Officer; and Charles Rayfield, Dorman's Chief Financial Officer. Kevin will begin with a high-level overview of the quarter and share our segment level performance and market trends. Charles will then walk through our first quarter financial results in more detail, discuss capital allocation and then turn it back to Kevin for closing remarks. After that, we'll open the call for questions. By now, everyone should have access to our earnings release and earnings call presentation, which are available on the Investor Relations portion of our website at dormanproducts.com. Before we begin, I would like to remind everyone that our prepared remarks, earnings release and investor presentation include forward-looking statements within the meaning of federal securities laws. We advise listeners to review the risk factors and cautionary statements in our most recent 10-Q, 10-K and earnings release for important material assumptions, expectations and factors that may cause actual results to differ materially from those anticipated and described in such forward-looking statements. We'll also reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the schedules attached to our earnings release and in the appendix to this earnings call presentation, both of which can be found in the Investor Relations section of Dorman's website. Finally, during the Q&A portion of today's call, we ask that participants limit themselves with one question, one follow-up, and rejoin the queue if they have additional questions. With that, I'll turn the call over to Kevin. Kevin Olsen: Thanks, Alex, and good morning, everyone. Thank you for joining us today. I'll begin with a brief overview of our first quarter results and then provide commentary on the performance and key trends we're seeing across our business segments. Turning to Slide 3. We delivered solid performance in the first quarter with results that were largely in line with our expectations. Consolidated net sales were $529 million, representing an increase of 4% compared to the first quarter of last year. The year-over-year growth was primarily driven by pricing actions implemented across the business, partially offset by lower volumes compared to the exceptionally strong first quarter we experienced in 2025. Adjusted operating margin for the quarter was 12.1%, down 490 basis points compared to the prior year period. This margin performance reflects the highest levels of tariff-related costs that we expect to see in 2026. Again, due to our use of FIFO, the costs recognized in this year's first quarter are associated with the inventory we purchased last year when tariff rates peaked in the earlier stages of the tariff implementation. Similarly, the sourcing, productivity and automation initiatives that we executed over the last several months and continue to drive today are expected to support improved margin performance as we move through the balance of the year. Adjusted EBITDA margin, a new metric we've included this quarter was 15.2%, down 440 basis points compared to the same period last year. This decrease is driven by lower operating margins, as I just covered. Please see the reconciliation in our appendix for details on this metric. Adjusted diluting earnings per share for the quarter was also in line with expectations at $1.57, down approximately 22% year-over-year. As we've discussed over the last several quarters, this decline was primarily driven by higher levels of tariff-related costs that were recognized in our cost of goods sold during the quarter. Cash generation continued to improve sequentially as expected with operating cash flow in the quarter of $44 million. We also invested in opportunistic share repurchases, deploying $51 million in the quarter, a record for our company. Charles will cover this in more detail shortly. Overall, we began the year with solid performance and met our expectations. Combined with our positive outlook for the remainder of the year, we have reaffirmed our 2026 guidance. Turning to Slide 4 in our Light Duty segment. Net sales increased approximately 4% year-over-year, driven primarily by the pricing actions we undertook in 2025. Volume was lower compared to last year's first quarter, but let me highlight a few driving factors. First, this year's performance was up against a difficult comparison to last year's first quarter, where we drove exceptionally strong 14% year-over-year growth in net sales. Looking back over the last 2 years combined, we delivered 18% growth in net sales. Second, ordering patterns with the customer we discussed on our last call began to normalize during the quarter. Lastly, I'd call out that we estimate POS with our large customers was up mid-single digits in the quarter. While there was inflation embedded in that growth, we remain confident in the non-discretionary nature of our portfolio, and we'll continue to monitor the overall economic conditions of our end users and the impact that the ongoing geopolitical tensions are having on the broader economy. Operating margin performance in the quarter was consistent with our outlook as Q1 2026 reflected the highest level of tariff expense. As the ongoing benefits of our supplier diversification, productivity and automation initiatives are recognized, we expect Light Duty's margin performance to improve as the year progresses. From a market perspective, underlying Light Duty fundamentals remain positive, with vehicle miles traveled increasing year-over-year in the first quarter. Also, higher used vehicle values are impacting consumers' buying decisions, which we believe will result in extended vehicle life and support sustained aftermarket demand for repair and replacement parts. In addition, Light Duty trucks and SUVs continue to represent a growing portion of the VIO, providing further opportunity for product portfolio expansion with higher average selling prices. A good example of how our innovation strategy supports this opportunity is our OE fix air suspension compressor for a broad set of GM SUV models. This product addresses a common OEM failure mode caused by overheating, which can lead to cascading failures throughout the air suspension system. Our patent-pending design improves heat dissipation by approximately 25%, incorporates thermal protection and utilizes proprietary software to optimize performance and reliability. By delivering an upgraded repair solution designed to last longer and at an attractive aftermarket price point, products like this not only create value for installers and end users, but also reinforce Dorman's leadership in product innovation. Just an excellent job by our Light Duty team to deliver another OE fixed solution. Turning to Slide 5 in our Heavy Duty segment. Net sales increased approximately 12% compared to last year's first quarter, driven by pricing initiatives and the year-over-year impact of certain commercialization initiatives we have installed in the business. While the dollar change is relatively small, operating margin improved 110 basis points versus the prior year. I'll also point out that the lower overall margin reflects tariff-related costs that were elevated in the first quarter of 2026. With the impact that tariffs will have on our margins this year, along with the infrastructure investments we've made in the business, we're not expecting significant year-over-year incremental operating margin improvement in 2026. That said, we'll continue to appropriately manage the business in the short term while executing on our strategy to drive a significantly improved operating margin profile for Heavy Duty over the long term. On the broader sector, market conditions remain challenged. The great freight recession continued through the first quarter and geopolitical tensions created further economic uncertainty for consumer demand. As a result, near-term visibility remains limited, and we are not expecting meaningful growth in freight tonnage throughout the year. However, we continue to capture market share in certain channels such as the OE dealer network, where there has been an increased appetite for aftermarket solutions. Overall, we continue to see opportunities for growth. We remain focused on balancing our approach with cost discipline and strategic investment that will allow us to continue capitalizing on these opportunities when the market improves. As a great example, we are encouraged by the opportunity we see within our diesel aftertreatment portfolio, which we believe represents a meaningful long-term growth driver for the Heavy Duty segment. Modern diesel engines rely on diesel exhaust fluid or DEF systems to meet increasingly stringent emissions regulations. These systems are subject to high failure rates due to harsh operating conditions, temperature extremes and sensor degradation, making reliable aftermarket solutions critical for fleet uptime. Through our Dayton Parts brand, where we offer one of the most comprehensive portfolios of replacement parts for diesel after treatment, including DEF, headers and pumps. Our solutions provide plug-and-play installation and meet or exceed OE performance at an aftermarket price. These products are built with durable materials, subjected to extensive testing and incorporate best-in-class sensor technology designed for long service life. As the installed base of DEF-equipped vehicles continues to age and fleet acceptance of aftermarket solutions increase, we believe our leadership in after-treatment systems positions us exceptionally well to serve fleet customers and capture incremental share over time. Congratulations to our Dayton Parts team for bringing this opportunity to market. Turning to Slide 6 and our Specialty Vehicles segment. Net sales were flat year-over-year as pricing actions in certain categories offset slightly lower volume year-over-year. Keep in mind that from a seasonality standpoint, Q1 is typically the slowest quarter of the year. Operating margin performance was in line with our expectations, reflecting higher tariff-related costs. We're also investing in our expanded dealer network to drive more wallet share and optimize our footprint. From a market perspective, we are seeing early signs of stabilization as we enter the 2026 riding season with new vehicle sales increasing year-over-year in the first quarter. We also continue to see strong engagement with our ridership as attendance at the national UTV-ATV events remain high. Additionally, we're seeing new lower-cost entry-level vehicles entering the market that offer improved opportunities for aftermarket enhancements. One new product that illustrates this opportunity well is the power steering kit developed for the new Polaris RANGER 500 platform. As many of you know, Polaris recently introduced the RANGER 500 as a more stripped-down cost-effective utility vehicle designed to appeal to a broad customer base, including fleet users, recreational riders and first-time buyers. By design, this platform ships with more basic features, which creates an attractive opportunity for the aftermarket to enhance functionality and performance to accessories and add-on components. Power steering is a good example. While the RANGER 500 does not include power steering as standard equipment, demand for steering assist remains high, particularly among users operating in rough terrain or using the vehicle for work applications. Super ATV power steering kit provides a bolt-on solution that significantly reduces steering effort and feedback, improving control and reducing operator fatigue. This system is engineered for easier installation and features sealed input and output shafts along with water tight connectors designed to withstand harsh riding environments. Congratulations to the team at Super ATV for being the first to bring this solution to market. With that, I'll turn it over to Charles to cover our results in more detail. Charles? Charles Rayfield: Thanks, Kevin. First, let me say it's been great getting to know a number of our analysts and investors since joining the company in January, and I'm looking forward to spending more time with all of you in the future. Turning now to Slide 7. I'll walk through our consolidated financial performance for the first quarter. Total net sales for the quarter were $529 million, up 4% compared to the prior year period. The increase was primarily driven by pricing actions across our segments, partially offset by volume declines versus last year, where we had an exceptionally strong quarter from a volume standpoint. As Kevin mentioned, compared to Q1 of 2024, our 2-year net sales growth rate was a strong 18%. Adjusted gross margin was in line with our expectations of 36%, down 490 basis points compared to last year's first quarter. As the company has previously covered, our pricing initiatives have been implemented to address a range of incremental costs, including tariffs, while considering the competitive dynamic of our parts in the marketplace. This has resulted in a negative impact to our overall margin profile in the short term. That said, we expect our margin profile will meaningfully improve as the year progresses for 2 main reasons. First, as we discussed previously, this first quarter had the highest level of tariff expense we'll see in 2026, given the inventory we sold was associated with the highest level of duties that were levied in 2025. Second, we anticipate that our supplier diversification, productivity and automation initiatives will make significant contributions to our margin profile as the year moves forward. While our teams did an excellent job managing discretionary costs during the quarter, our adjusted operating income margin was 12.1%, down in conjunction with our gross margin. Adjusted diluted EPS was $1.57, driven by lower operating income, partially offset by lower interest expense and lower shares due to repurchases. Turning to Slide 8. Operating cash flow for the quarter was $44 million and free cash flow was $35 million. As you can see on this slide, our cash flow improved sequentially from Q4 2025 and has rebounded nicely from this time last year when our cash payments for tariffs peaked in the middle of 2025. I'll add that we've reduced inventory significantly year-over-year, and we remain on track to generate a more normalized level of free cash flow for the year. On the capital allocation front, we deployed more than $51 million in the quarter to retire approximately 435,000 shares at an average price of approximately $118 a share. This represented a quarterly record level of repurchases for our company and also our view that there was a dislocation in the market valuation for our stock, which prompted us to utilize our strong balance sheet to return capital to our shareholders. We currently have $408 million remaining in share repurchase authorization, which extends through 2027. Turning to Slide 9. Our long-term capital allocation strategy remains unchanged. We first review our debt levels and leverage ratios, then we deploy capital on internal initiatives as this is where we see our greatest returns. Next, we invest in M&A, which continues to be a key component of our growth strategy. Finally, we will continue to return capital to our shareholders through opportunistic share repurchases. With this consistent approach, we've deployed $1.8 billion of capital since 2020 and expect that our overall strategy will continue to drive long-term growth. Turning to Slide 10. Our balance sheet remains a significant strength for Dorman. We ended the quarter with net debt of approximately $413 million and total liquidity of $627 million. Our total net leverage ratio at the end of the quarter was 0.99x our adjusted EBITDA, demonstrating our ample flexibility to support the business, manage through tariff-related working capital demands and continue investing in strategic growth opportunities. As we highlighted on the previous slide, our target net leverage ratio is less than 2x adjusted EBITDA and approximately 3x for the 12 months following an acquisition. Turning to Slide 11. We are reaffirming our full-year 2026 guidance. We continue to expect net sales growth in the range of 7% to 9%, driven by the full-year impact of our pricing initiatives, along with a modest level of volume growth that we expect to be primarily in the back half of the year. Looking across the segments, we expect all 3 segments to directionally perform within this range. We also continue to expect adjusted operating margin to be in the range of 15% to 16% for the full-year with a more normalized high teens rate as we exit the year. Adjusted diluted EPS for 2026 is expected to be in the range of $8.10 to $8.50. This guidance includes the expected impact of tariffs enacted as of May 4, 2026. Due to uncertainty around the recovery of IEEPA tariffs previously paid, our guidance excludes any impact from the potential IEEPA tariff refunds. Additionally, our guidance does not include any potential tariff changes after May 4, 2026, future acquisitions or divestitures or additional share repurchases. Lastly, we continue to expect a full-year tax rate of approximately 23.5%. With that, I'll now turn the call back over to Kevin to conclude. Kevin? Kevin Olsen: Thanks, Charles. I'll just reiterate what we've said throughout the call. Our first quarter performance was solid and in line with our expectations. While uncertainty persists in the broader economic landscape, we remain confident in our strategic positioning, our ability to navigate near-term challenges and our long-term growth opportunities driven by innovation, operational discipline and our leadership position in the aftermarket. We appreciate your continued interest and support. With that, we'll open the call up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Jeff Lake with Stephens. Jeffrey Lick: Kevin, I was wondering if you could maybe just elaborate a little more, provide a little more color as the year plays out. Obviously, this is probably one of the trickier quarters you're going to face selling the most tariff-affected inventory from last year with the FIFO and then obviously, you had the added wrinkle of the major customer disruption. I was wondering as you just think through as you step Q2, Q3, Q4, how that's going to progress? Then maybe if you could weave in anything with regards to complex electronic parts and product innovation, that would be great. Kevin Olsen: A lot there, Jeff, but let me give that a shot. Good questions. Jeff, let me start with the sales progression. You mentioned the dislocation we had with a large customer that we mentioned in the fourth quarter. I'll just comment that as we entered the quarter, we saw some dislocation continued, but as we exited the quarter, it was more normal rates and ordering patterns kind of fell more in line with the out-the-door POS sales. When you look at the overall growth rate, you got to keep in mind that last year, particularly in the first half was an extremely strong volume growth period for us. Light Duty grew 14% in the first quarter last year, so a very difficult comp. The first half of the year was up about 12% in light duty. We know that growth from a year-over-year perspective will be challenged in the first half. As we exit the back half, we're still very comfortable with our 7% to 9% full-year guide as we have a full-year of the pricing initiatives in play. We also have a lot of new business coming online as well as continued new product launches. We still feel very comfortable with that guide. In terms of the margin progression, as we've said multiple times that Q1 was going to be our most difficult quarter as the tariff rates coming through our P&L because of FIFO will be the highest. As we move through the year, those tariff rates reduce because they were the highest when they first implemented starting back in April of last year. Also, all the initiatives that we undertook since April of last year in terms of further diversification, productivity initiatives, dealing with our supplier community, those also have to go through FIFO. We have very good visibility to what that looks like going forward because of FIFO. We feel confident that we'll continue to see margin progression as we move through the quarters. As we said in the guidance, operating margin should be in that 15% to 16% for the full-year, and we expect to exit Q4 at a higher rate in the high teens area, which is kind of back to normal levels. Jeffrey Lick: Then anything further on just the complex parts and innovation? Is the environment just moving along at a linear pace? Or are you seeing it maybe step up a little more exponential? Kevin Olsen: Yes. Great question, Jeff, and I didn't address that first time through. Complex electronics in the first quarter met our expectations. It's a category that continues to -- the growth continues to outpace our overall portfolio, and we expect that to continue. We did highlight a few new products that we launched in the quarter that have complex electronics embedded in them. Yes, it's a category we're going to continue to invest in, and it will continue to grow at an outsized pace in the overall portfolio. That is our expectation. Operator: Our next question comes from the line of Scott Stember with ROTH Capital. Scott Stember: Maybe talk about the Heavy Duty. We've seen granted coming off of a low base, but we've seen a nice recovery here in sales, but the margins -- you talked about the margin recovery just really not being there for the most part for this year. Maybe just give us an idea of when you're putting through price increases for tariffs, are you able to get all of it in this segment like you are in light duty? Then maybe just talk about the level of investments that we should expect in new product development there. Kevin Olsen: Yes. Good question, Scott. I'd tell you that the tariff -- we continue to pass tariffs through in all 3 of our segments. Heavy Duty is no different. We will see early on in the process of passing through some margin dilution as we continue to -- we have to continue to be competitive where we have competitors. You just get some margin percent compression if you pass through dollar for dollar. In general, that's been our approach. We're able to recover the tariffs, but you do see some margin compression, and we did kind of call that out in the prepared remarks. Growth in the quarter was very strong, up 12%. Some of that was due to tariff pricing, but we also did see some nice share gains in the quarter. We expect that to continue. However, as we also said in our prepared remarks, we're not expecting the market to recover at this point just based on some of the freight indexes that we're looking at. We don't have any major expectation. We're going to continue to focus on taking share where we can take share and working on driving productivity initiatives throughout the business and driving new product launches and commercialization through that channel, which we've had some good success, but we still have a long road ahead of us there. Scott Stember: Then related to tariffs, a lot has changed in the first quarter with the IES going away, the 232s changing and the 122s coming in. It sounds, at least from the tenor of your comments regarding guidance that the changes there were essentially net neutral. Is that correct? Kevin Olsen: Yes, Scott, that's correct. When the IES went away, the Section 122, which is essentially 10% across the board came into play. There just wasn't a major change either way just based on how the HTS codes are applied. Most of our codes now are Section 232, whether that's the steel and aluminum tariff or the auto parts tariff on top of the 122 tariffs. Now, as everyone knows that there will be a new tariff regime coming into place when the Section 122s expire later in the summer. We don't know what that's going to look like. Our assumption is basically it's going to be roughly in the same neighborhood as it is today. Operator: Our next question comes from the line of David Lantz with Wells Fargo. David Lantz: POS for large customers grew mid-single digit in Q1, but curious if you could talk about how that trended through the quarter, what you're seeing quarter-to-date and expectation through 2026? Kevin Olsen: David, I'd say the progression was very similar of POS, up mid-single digit in the quarter. Frankly, it's been very similar to what we saw in Q3 of last year and Q4 of last year, so not a lot changed. This continues to be very solid out-the-door growth at our customers. No real change in progression. I'll say that April is very much in line with what we saw in the first quarter. To answer the second part of your question, our expectation is similar as we move through the rest of the year. David Lantz: Then considering the really healthy balance sheet, curious how you're thinking about M&A through the balance of 2026 with potential tuck-ins or geographic expansion? Kevin Olsen: Yes. I mean M&A, as we talk quite a bit about, it continues to be a large part of our strategy, our growth strategy. I would tell you that as we look at our pipeline today across all 3 segments, it continues to be very healthy. I would say that deal activity was muted or has been muted since liberation day, at least in our industry. I think we're now starting to see that loosen up a little bit as there's more understanding of the impact of tariffs on different companies, different parts of the industry. We expect deal activity to pick up as we move through 2026 and into 2027. Our strategy in terms of the segments has not changed. I mean when we look at Light Duty, we're very interested to continue to geographically expand our business there and continue to enhance our technological capabilities. In Specialty Vehicle, we continue to look to expand geographically. We also look to grow our portfolio of brands through a series of tuck-ins, still very highly fragmented space. In Heavy Duty kind of similarly where there are opportunities in the Heavy Duty market. We're a very small player in a very large market for us to enter different segments of that space via tuck-in acquisitions. Operator: Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: On the single-digit POS, could you sort of carve out what is actual price versus units? I guess, specifically within units, could you comment on the chassis category? Did it benefit from any seasonal demand creation this winter? Kevin Olsen: Bret, I'll first answer. I mean, we don't -- historically, we've never broken out price versus units for competitive reasons. I will say, look, the POS, there is certainly inflation embedded in those numbers just based on the tariff impact across the industry. There's no question about that. I would say that it's remained relatively steady the last 3 quarters and into April. We don't specifically comment on any specific category, but I will say in regards to chassis question, look, it was a good solid year in terms of the weather. Weather, as you know, does impact certain categories more than others and undercar. -- chassis is certainly one of those. That season really starts late in the first quarter into the second quarter, and so far, we feel really good about that category. I think we had certainly a good winter with a lot of precipitation that helps that category from a growth perspective. Bret Jordan: Could you give us a sort of idea of what you paid in IEEPA last year just in case we could get a windfall out of that this year? Kevin Olsen: Yes. Look, I'll tell you that we've just started the process of recovery on IEEPA, and it's still too early to tell how everything is going to settle out and whether or not there'll be any appeals. It doesn't appear that there's going to be at this point. At this point, we're not going to disclose it because we need to work through the process, and we don't want to get ahead of ourselves because it's just such an unprecedented situation. More to come, Brett, as that plays out. Operator: Our next question comes from the line of Justin Ages with CJS Securities. Unidentified Analyst: This is Will on for Justin. A lot of my questions have been asked, but you noted light trucks and SUVs is a growing portion of prime vehicles in operation. Can you give us some more color on how that breaks down further with electric vehicles? Kevin Olsen: Well, let me just clarify for electric vehicles, are you talking about in heavy and specialty or light duty? Unidentified Analyst: Light duty. Kevin Olsen: Light Duty, yes, certainly. Light Duty right now, from a VIO perspective in North America, Light Duty is still less than 2% of the VIO, slightly larger portion of that we would consider alternative drivetrains like hybrid. The vast, vast majority is still ICE, and it's going to take a very long time for that mix to change substantially. Irregardless, we continue to be drivetrain agnostic, right? Our technologies and our capabilities can address any drivetrain. We see a lot of opportunities across the new drivetrains. Obviously, in a hybrid, there's 2 drivetrains. There's a lot more addressable content. We're comfortable with whatever drivetrain becomes prevalent in the future from a BIO perspective. Operator: Ladies and gentlemen, this concludes our Q&A session and today's conference call. We would like to thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Unitil Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Goulding, Vice President Finance and Regulatory. Please go ahead. . Christopher Goulding: Good afternoon, and thank you for joining us to discuss Unitil Corporation's First Quarter 2026 Financial Results. Speaking on the call today will be Tom Meissner, Chairman and Chief Executive Officer; and Dan Hurstak, Senior Vice President, Chief Financial Officer and Treasurer. Also with us today are Bob Hevert, President and Chief Administrative Officer; and Todd Diggins, Chief Accounting Officer and Controller. We will discuss financial and other information on this call. As we mentioned in the press release announcing today's call, we have posted information, including a presentation to the Investors section of our website at unitil.com. We will refer to that information during this call. Moving to Slide 2. The comments made today about future operating results or events are forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that can cause actual results to differ materially from those predicted. Statements made on this call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-K and other documents we have filed with or furnished to the Securities and Exchange Commission. Forward-looking statements speak only as of today, and we assume no obligation to update them. This presentation contains non-GAAP financial measures. The accompanying supplemental information more fully describes these non-GAAP financial measures and includes a reconciliation to the nearest GAAP financial measures. The company believes these non-GAAP financial measures are useful in evaluating its performance. . With that, I will now turn the call over to Chairman and CEO, Tom Meissner. Tom Meissner: Great. Thanks, Chris. Good afternoon, everyone, and thanks for joining us today. I'll begin on Slide 3 where today, we announced adjusted net income, excluding transaction-related costs of $33.8 million and adjusted earnings per share of $1.88 for the first quarter of 2026. This represents an increase of $0.14 per share or 8% compared to the first quarter of 2025. We are fully earning our authorized returns on a trailing 12-month basis with a GAAP return on equity of 9.6%. We have several positive business updates to share this quarter. Integration work for our main gas acquisitions has proceeded as planned. Bangalore natural gas was fully integrated last year and the integration of main natural gas is now substantially complete with most corporate services now being provided by Unitil. In other business, we recently received an order for our New Hampshire electric rate case, approving the settlement agreement in its entirety. We also recently filed a rate case for Northern Utilities gas subsidiary in New Hampshire. We expect to file a gas rate case for Northern Utilities in Maine on or about June 1. Dan will provide additionaldetails about these rate filings later during this call. Given the strong results for the first quarter, we are reaffirming our 2026 guidance range of $3.20 to $3.36 per share with a midpoint of $3.28. We are also reaffirming our long-term earnings growth of 5% to 7%. Turning to Slide 4. We are now the largest natural gas utility in Maine serving approximately 90% of all gas customers. The acquisitions of Bangor Natural gas and main natural gas meaningfully increased our rate base and will be accretive to earnings over the long term. In the most recent quarter, Bangor natural gas contributed $5.1 million and Maine natural gas contributed $6.1 million to adjusted gross gas margin, resulting in a combined $4.1 million of incremental net income before considering financing costs to Maine natural gas that are currently being incurred by Unitil Corporation in the short term. As I mentioned, all integration work for Bangor Natural gas was completed last year, and we recently completed the integration work for most corporate services for Maine natural gas. The success of these integration efforts was made possible by leveraging our experienced workforce and by our seasoned locally managed operational framework. We continue to realize the operating and financial benefits of these transactions consistent with our original expectations. The next significant milestone for these companies will be to establish cost of service rates under Unitil's ownership with rate filings expected in the first half of 2027. Turning now to Slide 5. We continue to monitor regulatory approvals in Connecticut pertaining to the sale of Aquarion from Eversource Energy to the Aquarion Water Authority. This sale received approval from the Connecticut Public Utilities Regulatory Authority on March 25. More recently, on April 30, the authority denied a petition for reconsideration and we understand the current appeal period will now expire in mid-June absent any additional filings in this proceeding. The closing of this transaction between Eversource Energy and the Aquarion Water Authority must occur prior to our transaction with the Water Authority. As I've said before, the Aquarion water companies are an ideal fit with our existing utility operations given their geographic proximity, potential for synergies and strong growth profile. We view the pending acquisition is highly complementary to our fully regulated portfolio, supporting rate base growth above the upper end of our long-term range and enabling opportunities for future growth. Building on our successful integration of the Maine gas acquisitions, we are well positioned to integrate these water companies following the closing of the transaction. With that, I'll now pass it over to Dan, who will provide greater detail on our first quarter financial results. Daniel Hurstak: Thank you, Tom. Good afternoon, everyone. I'll begin on Slide 6. As Tom mentioned, we announced first quarter 2026 adjusted net income of $33.8 million and adjusted earnings per share of $1.88, representing an increase of $5.4 million in adjusted net income or $0.14 per share compared to the same period of 2025. We are reporting adjusted earnings that exclude transaction costs related to our gas acquisitions and the announced water transaction, which we view as not indicative of the company's ongoing costs and operations. Our first quarter results were supported by higher distribution rates and customer growth, partially offset by higher operating expenses. Our first quarter results also include a charge of approximately $900,000 related to the FERC transmission formula rate proceeding in the ore that was issued by FERC in this proceeding on March 19, 2026. This charge represents the refund obligation for a retroactive reduction to the return equity for transmission assets from 10.57% to 9.57%. The company's transmission rate base subject to this FERC decision is approximately 0.5% of total rate base. And the company does not expect this order will have a significant effect on future earnings. Turning to Slide 7. I will discuss our electric and gas adjusted gross margins. I will begin with our electric operations. Electric adjusted gross margin for the first quarter was $29.6 million an increase of $2.1 million as compared to the same period in 2025. The increase reflects higher rates of $2.8 million, partially offset by the onetime reduction of FERC transmission revenue of $0.7 million for the return on equity matter that I previously mentioned. The company also recorded approximately $200,000 of interest associated with the transmission return equity matter, which is recorded in interest expense. As noted during prior calls, all of our electric customers are under decoupled rates, which eliminates the dependency of distribution revenue on the volume of electricity sales. Moving to gas operations. Gas adjusted gross margin for the first quarter was $82.1 million, an increase of $11.2 million compared to the same period in 2025. The increase in gas adjusted gross margin was driven by higher rates and customer growth of $10.3 million and the favorable effects of colder winter weather in 2026 of $0.9 million. Gas adjusted gross margin for the quarter includes $6 million related to Maine natural gas. The higher rates in the first quarter of 2026 were driven by inflation adjustments under our performance-based rate plan for our Fittsburgh subsidiary and capital trackers. The company added approximately 7,100 new gas customers compared to the same period in 2025, including 6,400 customers from the acquisition of Maine Natural Gas. Approximately 52% of the company's gas customers are under decoupled rates with main representing our only non-decoupled service area. Moving to Slide 8. We provide an earnings bridge comparing first quarter 2026 results to the same period in 2025. The combined adjusted gross margin for our electric and gas divisions increased by $13.3 million, which reflects higher rates, colder winter weather and customer growth. Operation and maintenance expenses increased $0.8 million due to higher utility operating costs of $1.1 million, partially offset by lower transaction costs of $0.3 million. Operation and maintenance expense includes $1.3 million of utility operating costs related to maine Natural Gas. Excluding Maine Natural Gas and transaction costs, Operation and maintenance expenses for legacy operations would have decreased by $0.2 million compared to the first quarter of 2025. The increase in depreciation and amortization expense and taxes other than income taxes reflect higher levels of utility plant in service as well as the inclusion of amounts related to Maine Natural Gas in 2026. Moving to Slide 9. I'm pleased to note that last week, the New Hampshire Public Utilities Commission issued an order approving the settlement agreement in its entirety for permanent rates for our New Hampshire Electric Company. The order approved a base rate increase of $13 million based on pro forma rate base as of December 31, 2024, of $289 million, which reflects a post-test year adjustment to include the Kingston Solar facility. The authorized return on equity is 9.45% with an equity layer of 52.7% compared to the previously approved return on equity of 9.2%, an equity layer of 52%. The settlement maintains revenue decoupling. However, the decoupling methodology changed from an authorized revenue per customer model to a total authorized revenue target. As a reminder, in Hampshire, permanent rate case awards are reconciled back to the effective date of the temporary rate award and are subject to recruitment or refund. In this case, because the permanent rate award was greater than the temporary award, the company will record approximately $1.7 million of pretax income in the second quarter. The settlement also included a multiyear rate plan that provides for accelerated cost recovery for investments made in 2025 and 2026. The first step adjustment request which is currently pending approval of the New Hampshire Commission includes a $3.2 million rate increase effective September 1, 2026. We believe that the constructive outcome reached in this proceeding will allow us to continue to provide the safe and reliable service our customers expect and offers the company opportunity to earn its authorized rate of return. Turning to Slide 10. As Tom noted at the outset of the call, we filed a base rate case in New Hampshire for our gas subsidiary, Northern Utilities on April 1, 2026. The filing requests a permanent base rate increase of $9.8 million a temporary rate award of $6 million. I'm pleased to say that the company has reached a settlement agreement for temporary rates with the Department of Energy and the Office of Consumer Advocate that allows for a temporary rate increase of $5.5 million. Temporary rates are expected to take effect June 1, pending commission approval, and permanent rates are expected to take effect April 1, 2027. The filing also includes the continuation of revenue decoupling but similar to our New Hampshire Electric Company, we have proposed a decoupling methodology change from a revenue per customer model to a total authorized revenue target. We've also proposed a multiyear rate plan with 2-step adjustments to recover all 2026 and 2027 system investments. We are expecting to file a base rate case for Northern Utilities with the Maine Public Utilities Commission on or around June 1. On April 1, we filed a notice of intent in Maine, which included a rate request of approximately $7.5 million. Similar to our previous rate cases in Maine, we intend on utilizing a historical test year with adjustments to forecast rate base revenues and expenses through the rate effective year to reduce earnings attrition. We will provide additional details regarding these proceedings on future calls. Turning to Slide 11. As noted during our previous earnings call, our current 5-year capital investment plan through 2030 totaled approximately $1.2 billion, which is an increase of $200 million or 20% compared to our previous 5-year plan. This updated investment plan includes approximately $65 million for Bangor Natural Gas and Maine Natural Gas, but does not reflect any amounts for the pending Aquarion Water acquisition. With the addition of the 2 main gas companies, rate base increased 17% compared to the prior year, and average rate base growth has been 8.1% over the past 5 years, which is near the upper end of our long-term rate base growth guidance of 6.5% to 8.5%. Moving to Slide 12. We continue to prudently manage our balance sheet, targeting a balanced mix of common equity and long-term debt to maintain our investment-grade credit ratings. Our primary funding source for our 5-year investment plan is our stable cash flow from operations with additional funding from long-term debt and equity. On April 30, we issued $40 million of senior notes at our Fitchburg subsidiary to repay short-term debt and for general corporate purposes. As of today, the company has approximately $160 million of capacity available on its revolving credit facility. The company also has access to equity via its ATM program, which has $48.5 million of available capacity. As a reminder, the company has committed debt financing for the pending Aquarion acquisition. We anticipate that the ultimate funding for the pending water transaction could be satisfied by a combination of ATM proceeds and senior notes at the holding company or operating companies. We plan to maintain a level of holding company debt consistent with rating agency expectations. As we discussed last quarter, our annualized dividend for 2026 is $1.90 per share, representing an increase of 5.6% compared to 2025. Our dividend payout ratio target range remains at 55% to 65%. Turning to Slide 13. With our strong first quarter and constructive rate case outcome for our New Hampshire Electric Company, we reaffirm our 2026 earnings guidance of $3.20 to $3.36 per share with a midpoint of $3.28 per share. The midpoint of our 2026 guidance represents 6.1% growth relative to the midpoint of our 2025 guidance. We have also presented our expected 2026 quarterly earnings per share distribution, which highlights the seasonal nature of our earnings. I will now turn the call back over to Tom. Tom Meissner: Great. Thanks, Dan. Ending now on Slide 14. The first quarter provided a strong start to the year. Our core businesses are performing well, and we are executing on our strategic initiatives. Our value proposition remains unchanged, investing in low-risk regulated assets to generate stable cash flows while ensuring our customers are provided with top-tier utility service. We look forward to providing additional updates on our progress throughout the remainder of the year. With that, I'll pass the call back to Chris. Christopher Goulding: Thanks, Tom. That wraps up the prepared material for this call. Thank you for attending. I will now turn the call to the operator who will coordinate questions. Operator: [Operator Instructions] Our first question comes from Andrew Weisel with Scotiabank. Unknown Analyst: This is Rebecca Gabler on for Andrew Weisel. Given the recent updates with respect to Alarion Will the terms and conditions of the Aquarion approval have any impact on your earnings outlook? Daniel Hurstak: Rebecca, are you speaking about an state in particular? Unknown Analyst: No. Just in general? Daniel Hurstak: So I think as Tom mentioned earlier, the transaction between Eversource Energy and the Aquarion wire Authority is a condition for our transaction to move forward. So we are keenly watching what happens in Connecticut, and we understand that the current appeal period for the Pure order goes through mid-June. As far as the other states, if you look at the Massachusetts order that was issued earlier this year, it contains conditions, 1 related to the sale of Hingham assets and 1 related to a stay-out period. As we said in the motion for reconsideration and clarification, the risk matters posed to us is something that is unacceptable for us and would likely prevent us from moving forward with the Massachusetts operations as part of the transaction. . Unknown Analyst: Got it. That's helpful. And then just a quick second question. Given the spike in oil prices since the conflict in Iran started, have you guys seen any changes in customer behavior pace of conversion from oil or even the tone of conversations with regulators around customer behavior related to these issues? Tom Meissner: Rebecca, this is Tom Meissner. I think it's too soon to see any of those trends emerge because it's been really just a short period of time. But to your point, the cost of oil has increased dramatically for home heating and realistically, we probably enjoy almost a 2:1 price advantage right now. So we do hope to take advantage of that, and we do believe that natural gas offers a much more affordable choice for customers to heat their homes. Operator: [Operator Instructions] This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good afternoon. Thank you for standing by. Welcome to the Westlake Chemical Partners First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 5, 2026. I would now like to turn the call over to today's host, Jeff Holy, Westlake Chemical Partners' Vice President and Chief Accounting Officer. Sir, you may begin. Jeff Holy: Thank you, Kelly. Good afternoon, everyone, and welcome to the Westlake Chemical Partners First Quarter 2026 Conference Call. I'm joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During this call, we refer to ourselves as Westlake Partners or the Partnership. References to Westlake refer to our parent company, Westlake Corporation, and references to OpCo refer to Westlake Chemical OpCo LP, a subsidiary of Westlake and the Partnership, which owns certain olefins assets. Additionally, when we refer to distributable cash flow, we are referring to Westlake Chemical Partners MLP distributable cash flow. Definitions of these terms are available on the Partnership's website. Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in our regulatory filings, which are also available on our Investor Relations website. This morning, Westlake Partners issued a press release with details of our first quarter 2026 financial and operating results. This document is available in the Press Release section of our web page at wlkpartners.com. A replay of today's call will be available beginning 2 hours after the conclusion of this call. The replay can be accessed via the partnership's website. Please note that information reported on this call speaks only as of today, May 5, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at wlkpartners.com. Now I would like to turn the call over to Jean-Marc Gilson. Jean-Marc? Jean-Marc Gilson: Thank you, Jeff, and good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 results. In this morning's press release, we reported Westlake Partners' first quarter 2026 net income of $14 million or $0.40 per unit. Compared to the fourth quarter of 2025, our first quarter sales and earnings benefited from a higher third-party average sales price that was offset by slightly lower production and sales volume. The stability of Westlake Partners' business model is consistently demonstrated through our fixed margin ethylene sales agreement, which minimizes market volatility and other production risks. The high degree of stability in cash -- in cash flow when paired with the predictability of our business has enabled us to deliver the long history of reliable distribution and coverage. This quarter's distribution is the 47th consecutive quarterly distribution since our IPO in July 2014 without any reductions. Before I turn the call over to Steve, I want to provide some thoughts on our CFO transition. As you may have read, on April 20, we announced that on June 15, Jon Baksht will join Westlake Corporation and Westlake Partners LP as Senior Vice President and Chief Financial Officer. Jon brings experience from the oil and gas, packaging and building product industries as well as investment banking to Westlake, and we look forward to him joining the partnership. On June 15, Steve Bender will transition to the role of Special Adviser and will continue to report to me as he supports the transition. We anticipate that Steve will participate in the second quarter earnings call in August. And with that, I would like to turn our call over to Steve to provide more detail on the financial and operating results for the quarter. Steve? Steven Bender: Thank you, Jean-Marc, and good afternoon, everyone. In this morning's press release, we reported Westlake Partners' first quarter 2026 net income of $14 million or $0.40 per unit. Consolidated net income, including OpCo's earnings, was $82 million on consolidated net sales of $306 million. The Partnership had distributable cash flow for the quarter of $18 million or $0.51 per unit. First quarter 2026 net income for Westlake Partners of $14 million was $9 million above the first quarter of 2025 Partnership net income due primarily to higher production and sales volumes as a result of last year's planned turnaround at Petro 1. Distributable cash flow of $18 million for the first quarter of 2026 increased by $13 million when compared to the first quarter of 2025 due to higher production and sales volumes and lower maintenance capital expenditures as a result of last year's Petro 1 planned turnaround. As compared to the fourth quarter of 2025, net income for Westlake Partners in the first quarter of 2026 declined by less than $1 million due to lower production and sales volumes that was mostly offset by higher third-party average sales price. Sequentially, our trailing 12-month coverage ratio improved to 1x from 0.8x, reflecting the aging out of the impact of the Petro 1 turnaround that occurred in the first quarter of 2025. Additionally, our operating surplus improved by $1 million as we achieved a coverage ratio above 1 in the first quarter. Turning our attention to the balance sheet and cash flows. At the end of the first quarter, we had consolidated cash and cash investments with Westlake through our investment management agreement totaling $81 million. Long-term debt at the end of the quarter was $400 million, of which $377 million was at the Partnership and the remaining $23 million was at OpCo. In the first quarter of 2026, OpCo spent $6 million on capital expenditures. We maintained our strong leverage metrics with a consolidated leverage ratio of approximately 1x. On May 4, 2026, we announced a quarterly distribution of $0.4714 per unit with respect to the first quarter of 2026. Since our IPO in 2014, the Partnership has made 47 consecutive quarterly distributions to unitholders. We have grown distributions 71% since the Partnership's original minimum quarterly distribution of $0.275 per unit. The Partnership's first quarter distribution will be paid on June 1, 2026, to unitholders of record on May 14, 2026. The Partnership's predictable fee-based cash flow continues to prove beneficial in today's environment and is differentiated by consistency of our earnings and cash flows. Looking back since our IPO in July of 2024 (sic) [ 2014 ], we have maintained a cumulative distribution coverage ratio of approximately 1x and the Partnership's stability in cash flows, we were able to sustain our current distribution without the need to access capital markets. For modeling purposes, we have no planned turnarounds in 2026. I'd like to turn the call back over to Jean-Marc to make some closing comments. Jean-Marc? Jean-Marc Gilson: Thank you, Steve. We are pleased with the Partnership's financial and operational performance during the first quarter. Solid operating rate at OpCo's ethylene facilities during the quarter resulted in a quarterly coverage ratio of 1.0x. Turning to our outlook. The conflict in the Middle East has significantly disrupted the global supply of oil, chemical feedstocks and polymers. Resulting supply concerns are prompting global chemical customers to source more material from North America in response to the conflict, which is supporting higher demand and prices for North American ethylene. While most of OpCo's ethylene volume is contracted to Westlake at a fixed margin of $0.10 per pound, margin for the approximately 5% of production that OpCo typically sells to third parties is benefiting from higher selling prices as a result of the factors I just discussed. Turning to our capital structure. We maintain a strong balance sheet with conservative financial and leverage metrics. As we continue to navigate market conditions, we will evaluate opportunities via our 4 levers of growth in the future, including increases of our ownership interest of OpCo, acquisitions of other qualified income streams, organic growth opportunities such as expansions of our current ethylene facilities and negotiation of a higher fixed margin in our ethylene sales agreement with Westlake. We remain focused on our ability to continue to provide long-term value and distribution to our unitholders. As always, we will continue to focus on safe operations, along with being good stewards of the environment where we work and live as part of our broader sustainability efforts. Thank you very much for listening to our first quarter earnings call. Now I will turn the call back over to Jeff. Jeff Holy: Thank you, Jean-Marc. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available 2 hours after the call has ended. We'll provide instructions to access the replay at the end of the call. Kelly, we will now take questions. Operator: [Operator Instructions] Our first question comes from the line of James Altschul of Aviation Advisory Service, Inc. James Altschul: In your prepared remarks, you mentioned that you anticipate or I don't know if you anticipate, you're seeing, I believe, increased margins on the 5% of your sales to third parties as a result of the war and thus the increased interest in sourcing your products from a North American-based supplier. Did we really see the impact of that in the first quarter because the war started at the end of February and the -- I'm not remembering exactly when the price of oil started to jump and the shipping was intercepted. Are we going to see a more significant impact in the second quarter? Steven Bender: Yes, it's a very good question. And I will say that as a result of the run-up in ethylene pricing, we did take the opportunity in the first quarter, in March to actually sell more third-party ethylene volumes than would be normally the case. We typically try to take opportunities to maximize the margin in this business when we see opportunities like this. And we did sell more volume in the first quarter than might be typically done as an example, last year's first quarter. And it did improve the margins associated with the business as a result of doing so. As we look into the -- I was going to say, as we look into the second quarter, if we see opportunities of this nature and continue to see elevated ethylene, we'll continue to do so. James Altschul: Okay. But I'm looking at the income statement and it says on the revenue, the figure for third-party sales is a few million less than the comparable quarter last year. But of course, that's sales, not margin. Steven Bender: Yes. And so again, just the impact of only 1 month of activity. I do expect that if the ethylene remains as elevated as it has been recently, you'll see more of a positive impact in the second quarter. Operator: I am showing no questions at this time. I will now turn the call back over to Jeff Holy. Jeff Holy: Thank you, Kelly. Thanks, everyone, for participating in today's call. We hope you'll join us for our next conference call to discuss our second quarter 2026 results. Operator: Thank you again for your participation in today's Westlake Chemical Partners First Quarter 2026 Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended and may be accessed until 11:59 p.m. Eastern Time on Tuesday, May 19, 2026. The replay can be accessed via the Partnership's website. Goodbye.
Operator: Good morning. My name is Vincent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SOPHiA GENETICS First Quarter 2026 Earnings Conference Call. [Operator instructions] Kellen Sanger, SOPHiA GENETICS VP of Strategy, you may begin. Kellen Sanger: Thank you, and good morning, everyone. Welcome to the SOPHiA GENETICS First Quarter 2026 Earnings Conference Call. Joining me today to discuss our results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; Ross Muken, our Company President; and George Cardoza, our Chief Financial Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meanings of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release issued by SOPHiA GENETICS today and in the documents and reports filed by SOPHiA GENETIC from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I'll now turn the call over to Jurgi. Jurgi Camblong: Thanks, Ken, and good morning, everyone. I'm pleased to report that SOPHiA is off to a strong start in 2026. In the first quarter, we delivered revenue growth of 22% year-over-year. We also performed a record 108,000 genomic analysis as demand for SOPHiA DDM accelerates across the globe. In addition to processing more data volume than ever, we also achieved adjusted gross margin of 75.4%, demonstrating the unique scalability of our hyper-efficient analytics platform. Ross and George will walk you through the commercial and financial details in a few minutes. But first, let me step back and frame why this quarter matters strategically. The precision medicine landscape is at an inflection point. Sequencing costs are declining, data per patient is exploding, and AI is becoming essential for delivering the highest standard of care. As a result, hospitals and labs around the world are increasingly looking to scale their genomics testing capabilities. With the right partners, turnaround times become faster, economics become profitable and data generated becomes invaluable for performing research and making discoveries. SOPHiA DDM was built for this moment. Our platform streamlines testing and allows any institution anywhere in the world to quickly scale their own world-class precision medicine capabilities. SOPHiA DDM provides customers with not just a tool, but an AI native service that delivers workflow outcomes, generating highly accurate insights and faster speeds while also unlocking profitable economics for institutions. But that's not all. SOPHiA DDM also makes patient care more intelligent by breaking data silos and allowing clinicians to tap into a collective intelligence of the smartest minds in health care. As hospitals use SOPHiA DDM to generate insights and treat patients, they also contribute a stream of data and knowledge back into the platform. As more data flows through the platform, our algorithms become smarter. This in turn enables boost and clinicians to get better insights, building trust along the way. Deeper trust, smarter insights and better outcomes ultimately accelerates new platform adoption, creating a virtuous loop with compounding growth effects. As of Q1, this adoption loop has enabled us to connect 537 institutions across the globe who use SOPHiA DDM every day for genomic analysis. In the quarter, this institution uploaded real-time real-world genomic data for 108,000 patients. And in March, we set a new company record with more than 40,000 patients analyzed in a single month. This diverse real-time real-world data stream includes patient data from 75 countries worldwide, creating breadth and globe exposure and is unmatched in our space. Over the past 2 years, our rich diverse data set, which includes nearly 2.5 million genomic profiles since inception has enabled us to build some of the most sophisticated AI in health care. New applications in liquid biopsy, solid tumor, MRD for AML and enhanced exams are impressing our users with their accuracy, flexibility and AI-powered insights. And the good news is we're just getting started. Our top innovation priorities going forward will focus on deepening clinical relationships and getting closer to the patients. To accomplish this, we will expand platform capabilities to new areas as the market evolves. This includes supporting larger, more complex NGS applications like all transcriptome and methylation, tracking patients longitudinally with MRD, mastering data compute at scale, optimizing the end-to-end workflow and developing increasingly regulated products. It also includes expanding capabilities beyond genomics into multimodal to support clinical decision-making and accelerate the future of data-driven medicine. Our planned innovations are also designed to resonate with biopharma. Throughout the year, we will invest in evolving our data sets into durable commercial assets for real-world evidence. In addition, we are working hard to create a global decentralized companion diagnostics offering that brings life-saving therapies to patients across our network. In short, our unique positioning and data set are enabling us to build for the future. We have been a technology company since day 1, building real AI to solve the world's most difficult biological challenges. The market is coming to us, and I couldn't be more confident in our ability to deliver products for future growth. As we continue to invest in the future, we also must remain committed to growing in a sustainable way. Across the organization, our teams are hyper focused on continuous improvement, efficiency and operational excellence. We benefit from a young, agile and tech-centric workforce that has been quick to adopt and deploy emerging productivity tools, including the new AI technologies in the market. Early results from our internal rollout of these AI tools has been overwhelmingly positive. In Q1, we materialized the benefits of recent efficiency gains and took a series of targeted cost actions, which modestly reduced headcount and nonlabor spend across the business. These actions, which mostly focused on support and operations functions have allowed us to invest even more in high-growth areas while also ensuring that we meet our profitability commitments going forward. As the year continues, we will look forward to updating you on our progress in showcasing the impressive operating leverage that is inmates to our business model. In closing, Q1 was a strong quarter for SOPHiA. The market is reshaping itself around intelligence, and we are perfectly positioned to accelerate this movement. Our network is compounding and our data is unmatched. We continue to scale and our path to profitability is becoming increasingly clear. As I close out my final earnings call as CEO before I transition to Executive Chair in June, I'm happy to transition leadership of a business that is in excellent shape to a capable leader who will propel SOPHiA to its next stage of growth. With that, I will now turn the call over to Ross, who will provide a more detailed update on the business and growth drivers for the year. Ross Muken: Thanks, Jurgi. I certainly share your excitement about the business. And today, I'm pleased to share an update on our progress to start the year. In the first quarter, 3 major themes defined the quarter. First, the U.S. business continues to gain momentum. Decentralized testing has always been a widely accepted characteristic of the European and global market. However, in the last 12 months, demand for decentralized testing has materially increased in the U.S. as reimbursement rates become more established and denial rates improve, hospitals and labs are waking up to the benefits of scaling their own testing capabilities. Central labs have proven that testing is profitable and that genomic data has significant value. Now U.S. hospitals and labs are making testing part of their core strategy, and those who move are seeing significant benefits. In the first quarter, we announced an expanded partnership with Mount Sinai, one of the leading academic health systems in the U.S. who is using SOPHiA DDM to bring haemato-oncology and solid tumor testing to the New York market. They joined a growing number of New York area institutions to partner with SOPHia, including NYU Langone Health and Memorial Sloan Kettering Cancer Center. As more institutions adopt SOPHiA DDM, the cost of not having our platform becomes real. Regional density causes patients, providers and even payers to push testing volumes towards sites which offer the best insights at the lowest cost with the fastest turnaround times. We're proud to work with our partners to bring these positive structural changes to the New York testing market and welcome a decentralization revolution to the New York City area. The second key theme for the quarter was continued growth of new applications such as the MSK Impact and MSK Access test. In Q1, less than 2 years after decentralizing and deploying these tests globally, we have already reached a total of 100 customers worldwide who have signed on to adopt the applications. A few of these include prestigious Q1 signings such as Master UMC, a leading Dutch academic medical center, Hospitalia Niguarda, one of Italy's leading hospitals in Milan and Rural University Bulcum in Germany. These customers, along with half of the 100 signed accounts are currently implementing SOPHiA PBM, which means they should begin generating revenue over the next 12 months. Among those who have completed implementation, we are pleased to record 3,000 liquid biopsy analysis in Q1, up more than 100% year-over-year. We look forward to this number continuing to grow as more customers finish their implementation, and start using the sophisticated high SP application. New applications such as liquid biopsy and enhanced exomes help our sales team expand within accounts. As a reminder, we landed a large amount of new customers in 2025 with 124 new signings throughout the year. As we turn to 2026, a major focus will be expanding across these customers by encouraging them to adopt additional applications. I'm proud to say that our expand engine is off to a strong start in the first quarter. Net dollar retention, or in other words, same-store growth increased to 117%, up from 103% in the prior year period. Moreover, forward-looking indicators show no signs of stopping. In Q1, we signed many notable expand deals, including 3 in Europe that were each valued at over $1 million in annual contract value. This serves as another impressive proof point for the virtuous loop fueling our platform's growth. It also shows that hospitals are excited to consolidate their data strategies with trusted partners in a market where winner take most dynamics are forming. The final theme for the quarter was substantial increased momentum with biopharma. In the first quarter, biopharma revenue growth was positive and contributed modestly to overall growth as some of the recent new contracts we signed began to generate revenue. We continue to make progress with a growing number of biopharma partners and momentum is strong. Coming out of AACR and World CD and CDx Summit Europe 2026, it is clear that biopharma customers are looking to develop comprehensive AI investment strategies with trusted partners. It is also clear that every biopharma company we speak to recognizes that SOPHiA provides differentiated value across the drug continuum. They recognize that our diagnostic network is unmatched in global reach and that the data streaming through our platform has incredible value. They also appreciate our deep AI expertise in the field of biology. Our offering is continuing to resonate as one of the only companies in this space that could support a drug across its entire life cycle from companion diagnostics to post-launch monitoring with real-world evidence to patient selection and trial design. In the last 6 months, increasing momentum has materialized in the recent signing of contracts with major biopharma such as AstraZeneca and Johnson & Johnson as well as biotechs like Kartos and others. Moreover, our partnerships with Myriad Genetics in the U.S. and added innovations in Japan continue to progress as we work on building out the infrastructure for a hybrid global CDx offering. We look forward to updating you more on these items over the coming weeks and months. Looking ahead to the remainder of 2026, our pipeline across clinical and biopharma remains strong and healthy even after strong bookings conversion. Deal size continues to grow and the number of opportunities in our pipeline above $1 million are becoming even more numerous. The market is moving in our direction, and we are excited to continue capitalizing on our opportunity. With that, I will now turn it over to George, who will provide a more detailed look at our financial results and the outlook for 2026. George Cardoza: Thank you, Ross. As Jurgi and Ross highlighted, Q1 results were strong and our outlook remains positive. Total revenue for the first quarter was $21.7 million compared to $17.8 million for the first quarter of 2025, representing year-over-year growth of 22% I will note that year-over-year revenue growth would have been slightly stronger if not for a onetime benefit in the prior year period from a customer true-up. Platform analysis volume was approximately 108,000 in Q1 compared to 93,000 in the first quarter of 2025, representing solid growth of 16%. From a regional perspective, U.S. volumes continue to expand at healthy levels, growing 28% year-over-year in Q1. APAC also outperformed with 31% volume growth. In EMEA, revenue grew 30% year-over-year, impressively above the company average, mostly driven by great performance in the U.K., Belgium and Switzerland. In Latin America, revenue remains soft, and we have made changes there to turn around our performance. From an application standpoint, Hem/Onc revenue grew 24% year-over-year. Rare and inherited growth also picked up in the quarter with volumes growing over 20% as our enhanced exome product begins to come online. As Ross mentioned, liquid biopsy, which carries a higher ASP, continues to ramp and contribute to our revenue growth as well with more growth expected for the second half of the year. Core genomic customers were 537 as of March 31, up from 490 in the prior year period. Annualized revenue churn remained world-class at less than 1% in Q1. As Ross mentioned, net dollar retention for the quarter was 117%, up from 103% in the prior year period. Gross profit was $14.7 million compared to $12.2 million in the prior year period, representing growth of 21%. Gross margin was 68.0% compared to 68.7% for the first quarter of 2025. Adjusted gross profit was $16.4 million, an increase of 22% compared to adjusted gross profit of $13.4 million in the prior year period. Adjusted gross margin was 75.4% compared to 75.7% for the first quarter of 2025. Total operating expenses for Q1 were $32.0 million compared to $28.2 million in the prior year period. Some specific items temporarily impacted reported operating expenses and are worth calling out directly as they do not reflect the company's underlying operating performance. First, foreign exchange headwinds continue to negatively impact reported results, primarily due to the strengthening of the Swiss franc. The Swiss franc strengthened approximately 14% against the U.S. dollar from Q1 2025 to Q1 2026, meaningfully increasing the dollar translated costs of our Swiss payroll and facilities. This is a pure translation effect as our underlying cost structure in local currency remains disciplined. Second, as previously disclosed, Guardant Health filed patent infringement claims against us in the United Kingdom and at the Unified Patent Court in Paris during Q3 last year, alleging that our MSK access application infringes their patents. We incurred approximately $1.4 million in related legal expenses during Q1, which is reflected as a litigation adjustment in our adjusted EBITDA reconciliation. Importantly, in January, the UPC rejected Guardant's request for provisional measures and ordered them to pay us $700,000 in interim costs, $500,000 of which we received in mid-March and an additional $200,000, which we received in mid-April. Net of this recovery, litigation impact on Q1 operating expenses was approximately $700,000. Operating loss for the first quarter was $17.3 million compared to $16 million in the prior year period. Adjusted EBITDA was a loss of $9.2 million compared to the prior year loss of $9.5 million. Lastly, cash burn, which we define as the change in cash and cash equivalents, excluding cash received from borrowings and stock sales as well as FX impacts, was $19.5 million compared to $11.7 million in the prior year period. This year-over-year increase reflects 2 expected dynamics. First, coming off a strong 2025, annual bonus and commission payouts were meaningfully higher than the prior year, and these were paid in March. Secondly, we also invested in the build-out of a new lab at our Swiss headquarters with increased capacity to support revenue growth for years to come. This impacted our cash burn by approximately $1 million in the quarter. Third, we continue to vigorously defend ourselves against the patent infringement lawsuit filed by Guardant Health, and we paid several bills for expenses incurred in the first quarter of 2025. The $500,000 from Gardens in Q1 and the additional $200,000 received in April only cover a portion of our total litigation costs. We ended Q1 with cash and cash equivalents of $65.4 million as of March 31, which includes $14.5 million in ATM proceeds received in the first quarter of 2026. In January, as previously disclosed, we also expanded our credit facility with Perceptive Advisors, increasing total available liquidity by $25 million. We remain confident in our current capital position with respect to the achievement of our long-term goals. I'll now turn to the 2026 outlook. Given the promising revenue growth in Q1, SOPHiA GENETICS is reaffirming our full year revenue guidance for 2026 of $92 million to $94 million, representing 20% to 22% growth on a reported basis. We still expect 2026 growth to be mostly back half weighted as new business signed in 2025 comes online in the second half of the year and as more MSK ACES, MSK IM PACFLEX and enhanced exome business ramps up to routine usage. We also expect that exchange rates will remain volatile due to macro uncertainties, which may have an impact to reported results. Beyond revenue, we are also reaffirming our full year adjusted EBITDA loss guidance of $29 million to $32 million compared to $41.5 million in full year 2025. As demonstrated this quarter, we continue to make targeted investments in our platform to further optimize cloud compute and storage costs and expect gross margins to slightly expand beyond 2025 levels. As a global company, we are monitoring the ongoing conflict in the Middle East closely, particularly with respect to shipping and customer activity in the region. So far, the conflict has not materially impacted our results, and we do not believe it will have a material impact this year. In Q1, as Jurgi mentioned, we took a series of cost actions and realized benefits of adopting AI across our teams. These actions reinforce our conviction to grow revenue without increasing headcount. They also give us confidence that we will be able to continue holding the line on operating expenses in local currencies and reach our profitability guidance. All said, we continue to believe that we are on track to be approaching adjusted EBITDA breakeven by the end of 2026 and crossing over to positive adjusted EBITDA in the second half of 2027. With that, I would like to turn the call back over to Jurgi for closing remarks before we take your questions. Jurgi Camblong: Thank you, George. As I wrap up my last earnings call as CEO of SOPHiA GENETICS I feel confident as ever in our long-term trajectory. Forward-looking indicators remain strong across the business. We continue to see a steady stream of customer signings across new and existing customers. Biopharma interest is growing and our pipeline is expanding across regions and applications. At the same time, we continue to be laser-focused on optimizing costs and delivering sustainable growth. Thank you to the SOPHiA team, customers, partners and investors for your continued trust and partnership. 15 years ago, we had an ambitious vision to transform health care through data and AI. Today, we operate the most widely used AI-driven platform in precision medicine, impacting 40,000 patients per month and 2.5 million patients since inception. I'm so proud of what our team has accomplished over the past 15 years, and I know we are just getting started. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Mark Massaro from BTIG. Mark Massaro: Congrats on the quarter. Jurgi, I appreciate the network that you've built globally to decentralize this testing and look forward to working with you as you move to the Executive Chairman role. Sure thing. Yes. So moving into my question, I guess, the adjusted gross margin of 75% was certainly a key highlight of this print. Can you just give us a sense, guys, for your degree of confidence to maintain or how do you think about this gross margin profile going forward? I know that you are planning to onboard some higher mix applications. So is this something that you think you can build on here? Or were there some onetime items that might be lumpy on the gross margin line? Jurgi Camblong: Ross? Ross Muken: So Mark, we've really spent quite a lot of effort modernizing the platform over the past 24 months as we've talked about our Gen 2 transition, and I think you're seeing the benefits of that. And I think there's a lot more scalability left even as we bring on more complex solutions that require a lot more compute. And so in general, I'm super happy with how the team has executed here. I think fundamentally as well, we're seeing positive pricing dynamics in our environment. So you have both the mix of trade up to more complex solutions as well as more value realized for solutions like ours as a percentage of total cost of diagnostic or as a percentage of revenue. So I think on both of those parameters, this is quite constructive for us. And so I'll let George comment on what's contemplated going forward. But for me, I still think there's some room to go, but certainly, we're very pleased with how we've executed. George Cardoza: Yes. No, Mark, as Ross said, I mean, we're very pleased with the performance of our tech team, and we were pleased with where gross margin came in for the quarter. We do have some pharma business. And if anything could be lumpy on the margin side, it would probably be more of the pharma business. Our full year guidance was modest improvement in gross margins, and we're still holding to that. But certainly, we were pleased with where Q1 came in. Mark Massaro: Okay. Great. And it looks like you guys took some cost reduction actions in the month of April. It looks like it's a small action, but can you just speak to which regions were impacted? Anything in the U.S. that was material? And how should we think about that in terms of headcount? Ross Muken: So a couple of things, Mark. So one, the action was quite small, right? So it was a very modest change to the cost structure. We are an organization very focused on continuing improvement. We've also seen some gains in parts of the business from -- and so we wanted to be able to drop some of that down and then reinvest other parts. So I would say, in general, again, this was quite isolated and generally, I would say, in the G&A functions where we gained efficiency. And so this was our ability to show that, obviously, we're an organization very committed to our profitability targets. And also as a software and AI business, we're one that could not only obviously deploy games to our customers, but also utilize some of that on our own operations, which will help us again, as we scale as growth continues to reaccelerate here. George? George Cardoza: Yes. No. And again, we've -- in our guidance for the year, we said EBITDA -- adjusted EBITDA of $29 million to $32 million. And this was an important part is maintaining that cost discipline across the organization. And like Ross said, that's just part of what we're doing and making sure that we continue to have that discipline going forward. And as mentioned, Mark, regionally, most of it was G&A. So I would say probably a bit more concentrated in the Swift operations. But honestly, no real geographic bias to it. And actually, the U.S. is where some of the headcount redeployment, particularly on the commercial side will go. It will be modest. And that's because we're seeing really great characteristics in that business and really are confident in our ability to continue to grow market share in the territory. Mark Massaro: Great. And maybe just my last question. You alluded to the fact that you signed a lot of new customers in 2025, many of which are planning to turn on to the DDM platform in the second half. I just wanted to get a sense for -- obviously, you did reaffirm the revenue guidance, but I just want to get a sense for whether or not you believe that you're tracking to initiating the go-lives for many of these customers and wanted to test your degree of confidence on these folks coming on to the platform. Ross Muken: So Mark, we came in ahead of our plan in the first quarter. So we're very happy with our performance. You know we're conservative. And so given it's early in the year, despite we're really pleased with the signals and we remain extremely confident in sort of the customer onboarding and progression. We want to make sure that we're well set up for the year. So I would say stay tuned. But ultimately, we're feeling very good around delivering on our commitments and ideally, obviously outperforming. I would say, overall, on the onboarding side, I'm really pleased with our implementation team on our tech side and our bioinformatics group as well as in services. We've seen the pacing of some of the large customers pick up. We have quite a number of them coming online, including some that came on late in March, which helped with that record month that you saw. and helped us have a record quarter. And so my expectation is that we will -- that cadence will continue to improve. Again, a lot of the AI and other initiatives we have are focused on speeding up that time to revenue. And so again, as George talks about the back half ramp, a good portion of that is highly visible and is obviously tied somewhat to some of those customers, particularly some of the large U.S. ones coming online, and we remain super confident on our ability to execute on that. And ideally, if they ramp consistent with what we've seen historically, that may provide some cushion for upside as we tend to initially guide fairly conservatively for the on-ramp of new business. So again, a lot to look forward to on our side as that growth ideally continues to move in a favorable direction. Operator: Your next question comes from the line of Dan Brennan from TD Cowen. Kyle Boucher: This is Kyle on for Dan. I wanted to jump into your net dollar retention, which accelerated again this quarter to 117%. Can you just discuss some of the drivers a little bit more? I mean is this more driven by customers expanding into multiple applications on DDM? Or is it more a mix of the uptake of higher ASP tests like MSK ACES that's driving that performance? Ross Muken: Thanks, Kyle. Obviously, we're happy to see that metric get back to, I would say, really high-quality standard among software businesses. So we're quite pleased with the organic growth. As you mentioned, it's coming from a mix, right? So we were very intentional this year versus the last 2 years of really focusing on the expand -- and so that obviously will benefit the NBR line. And ideally, this will continue into next year. This is a very high ROI acceleration as well as it carries with it very little incremental cost. And so it helps as we think about our shift to EBITDA profitability. I would also say, and you can see it by the strong EMEA results, the underlying growth in our industry, I think, has become healthier. You see it in one of the large equipment vendors numbers relative to clinical consumable growth. But I think overall, customers are healthy. New technologies are coming online. For us, that would be things like liquid biopsy or exomes. And in general, pricing remains, as I mentioned, favorable. So I think the component of all of that with incredibly low churn all of that comes together to give us confidence that the improvement in sort of that organic underlying growth rate will sustain. Kyle Boucher: Got it. And then maybe just on your Latin America business. You noted it was soft in the first quarter. I think in your 6-K, it said it was down over 30%, but I believe you had a really tough comp there year-over-year. Can you just dig into some of the trends that you're seeing in Latin America and just expand upon that a bit? Ross Muken: Yes. So thank you for the question. Obviously, we've been disappointed in that region, albeit it's a small one, but it's strategically important for the last number of quarters. So we did make a change there in leadership. I was actually just there myself very recently as was our CSO in Brazil and Colombia and Argentina, all 3 critical countries. I would say Brazil at the moment is where some of that softness is kind of isolated. And so we've got some ideas and thoughts of how we're going to reaccelerate the territory. I would say I'm quite optimistic on Mexico and Colombia and to a lesser degree, Argentina. But I think overall, we expect the region to return to growth. We think we're going to make the necessary changes there, and we think the portfolio is also well positioned. It's also a region that's highly pharma sensitive. And so sometimes as well, it's dependent on where pharma pipelines are, and there are a few key new drugs coming online that will be highly relevant for Latin America. And so we would expect that as well to drive an increase in testing in some of the geographies. And so overall, I would say we're cautiously optimistic, but certainly, we've taken actions to ensure that we get back on track in this strategic territory. Operator: Your next question comes from the line of Bill Bonello from Craig-Hallum. William Bonello: A couple of questions here. First of all, I want to follow up on one of the questions that Mark asked just about implementation time. But more specifically to MSK ACES. I'm just curious what you're seeing these days in terms of sort of typical onboarding time once a customer has said that they want to adopt MSK Access? And then what you're kind of seeing as a typical ramp once they're up and running the test? Ross Muken: Bill, it's a great question. Thank you. So obviously, as you know, MSK Access is incredibly important to us. We're really proud of the 100 accounts that have come online, if you just put that in context. the world didn't really have liquid biopsy testing outside of the United States. And so we're really pleased to see it adopted at this great rate. And we're also really proud to have great pharma partners in that journey that have helped us in that adoption rate. And so I would say, overall, I wish I could tell you that there's a pattern on some of the adoption. I would say several accounts have come online and oncologists have really, I would say, understood how to utilize the technology, and we've seen volumes ramp. I think others take more education. And so again, there's varying degrees of sophistication and understanding on different sort of cancer types dependent on where we look around the world. But at the moment, about half of the accounts are online. I would say they're all ramping. We continue to believe this will be a very material part of the incremental growth. And so overall, I would say we're pleased. But certainly, you start to see some of that impact the revenue line, but I would say more is to come over the next several quarters and into 2027. And so far, it's hitting our internal expectations, but we'd obviously like to see that inflect more materially. And we think we, again, better doctor education or oncologist education in some of the territories. And then if you see some of what's going to be presented at ASCO as well as at ESMO, our expectation is all of this will help drive with that utilization to much higher levels over time. But it's been pretty broadly adopted, right? And so you should expect to see different adoption curves in each of the different nations. William Bonello: That's helpful. And then just a follow-up on the pharma side. And you touched on this just slightly in your response to that question. It's great to see the recovery there. It does seem like typically pharma revenue might capture a lower multiple just because it's not seen -- it is seen as potentially less recurring. Could you maybe talk to us about how you think about the pharma business vis-a-vis the clinical business? In other words, how does pharma drive clinical if it does? Ross Muken: Bill, it's another great question. So -- and it ties, frankly, into your first question because a product like MSK ACES, which is really a platform for pharma, does have a fantastic flywheel between biopharma and clinical usage, as you alluded to. So I would say, overall, we're very pleased finally with where our pharma business is performing. We've now gotten back into the green, and we're starting to see some nice momentum where I think over the next several quarters, you'll see that acceleration play out in the total revenue performance. So certainly, quite a different picture than where we were 24 months ago. As you know, we made some tough decisions in that business, and we really refocused and we're seeing the benefits now of that play out in the numbers. And so I would say, again, one of the key things we've strategically decided to do is less kind of large one-off project type business that doesn't yield strategic and/or recurring revenue benefits. So we're much more confident that the type of business we're bringing online is recurring, can be repeated and can be scaled. And as you think about, again, some of the types of CDx projects even that we do, much of that is done with the intent of not only being able to serve pharma through the CTA and CDx portion, but obviously, on the clinical side thereafter. And the idea that you can have one harmonized global solution in all markets, right? Think about that in liquid biopsy that doesn't require large bridging studies that doesn't require some hybrid mix of 7 or 10 laboratories around the world solving for a geographic or a global picture. I think it's a super compelling offering. And it's also different in that for us, we're already embedded in so many of these accounts. And so once we flip the switch from some of the pharma work into the clinical market, it's the same solution, right? And we can start relatively quickly serving customers in that market post approval for a drug. So I think for us, again, that flywheel is hypercritical. We're really happy with the progress pharma has made. And I would say, overall, you can hear from us our confidence is up. Again, we're not declaring victory. We're just starting to show kind of the right level of performance here, but it's certainly materially better than where we were even 12 months ago. Operator: Your next question comes from the line of Subu Nambi from Guggenheim Securities. Subhalaxmi Nambi: This is Ricky on for Subu. So in the slides, you have the average price per analysis ranging from $100 to $500. And for the first quarter, just some back of the envelope math here, it comes in around $195 per sample analysis -- per analysis. So what is your expectation for the ASP trend through the remainder of the year? And what are you assuming for this in guidance? Jurgi Camblong: George? George Cardoza: Yes. If we exclude the pharma business and just look at the clinical business, our price sequentially was up $2. So as Ross said, we're building in terms of selling more higher-value tests. So our expectation is to continue to see that lift as the quarters go on during the year. And we continue to see the access clients, the 100 clients that we booked ramp up. So we're optimistic about ASP. Now there's a balance there because, obviously, we are expecting growth now in our Latin America business and some emerging markets like India and Turkey. But still, in terms of modeling, we do expect the ASP to have lift in it for the remaining quarters of the year. Subhalaxmi Nambi: Got it. That's helpful. And a lot has been asked on biopharma, but maybe just a slightly different approach of the question. You mentioned how this is a modest positive contributor to growth in the quarter, and there was lots of positive color on signings and outlook. But did the quarter turn out the way you expected? Or was it above your expectations? And did it change what you're expecting for the remainder of the year? Ross Muken: Yes. So as I mentioned before, we're quite conservative, Ricky. So despite the fact that pharma performed quite well, and I would say we're optimistic for continued sequential improvement and a step-up in the second half of the year as well. We did not change our expectation in the guide. I'll let George give some color. But I think just fundamentally there, since we're early in that reacceleration, we want to remain conservative. But what we're trying to convey is if we look at the picture in terms of -- and even for myself, I was at two large conferences during the quarter. If we look at the level of interactions we're having with pharma and what we're discussing and the comprehensive nature of that, if we look at the RFPs we're responding to, if we're looking at what's in the pipeline and what's late stage and then what we've now executed on over the last several quarters in terms of new pharma customers as well as new contracts with our existing customers. It's a much better mix than what we've seen in the past, both across, frankly, diagnostics and data. And we haven't talked about data or our evidence generation business in a while, but we're actually seeing as well there subtle improvements. And so I think overall, what we're trying to kind of point to is our increased confidence that, that will improve, but we remain conservative, right, George, in terms of how we factor that into the forecast. George Cardoza: Yes. We're very pleased with the performance of the Pharma business. As Ross said, I mean, it's really been building momentum. It's tangible. We can see it. And again, I think in 2026, it's going to be an accelerator, but it's really going to be an accelerator in 2027 and beyond as that business just continues to build and build. Operator: There are no further questions. Please continue. Jurgi Camblong: Well, thank you so much for joining us today and for joining us and me in a journey of 15 years. I'm very happy to basically let the driving seats to a fantastic leader who sits next to me here in Switzerland today, surrounded by a very talented team and with a technology that is better than ever to be able to capture even more opportunities in the market. So I'm very, very pleased with what we have achieved, and please continue following us. As you will see, we will continue to transform precision medicine over the next years. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome, ladies and gentlemen, to Embecta Corp.'s Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's website following the call. I would now like to turn the call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Sir, you may begin. Pravesh Khandelwal: Good morning, everyone, and welcome to embecta's fiscal second quarter 2026 earnings conference call. The press release and slides to accompany today's call, along with webcast replay details are available on the Investor Relations section of our website at www.embecta.com. With me today are Dev Kurdikar, embecta's Chairman and Chief Executive Officer; and Jake Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides, including those referenced on Slide 2 of today's conference call presentation. Such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, which can be accessed on our website. We do not intend to update or revise any forward-looking statements, including any charts, financial projections or other data referenced in this presentation, whether as a result of new information, future events or otherwise, except as required by applicable law. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation, which are also included in the Investors section of our website at embecta.com. Our agenda for today's call is as follows. Dev will begin with an assessment of the company's performance during the second quarter and associated financial guidance implications. We will also share the progress we have made on our strategic objectives and will discuss the expected imminent closing of the Owen Mumford acquisition. Jake will then take you through our second quarter financial results in more detail as well as our updated fiscal year 2026 guidance. Dev will then conclude with our updated approach to capital allocation, and we will open the call for questions. With that, I will now turn the call over to Dev. Devdatt Kurdikar: Good morning, everyone, and thank you for joining us today. I want to start the call by addressing our second quarter performance and full year guidance revision. This was a difficult quarter for embecta. Our results were below expectations with consolidated revenues down 14.4% year-over-year on an as-reported basis or 17.4% on an adjusted constant currency basis. As a result, we are updating our full year guidance to account for the underlying factors that impacted performance during the quarter and that we expect to persist for the remainder of the year. We have a number of initiatives underway already to counteract them as we transition from our roots as a spun-out insulin injection delivery company toward a more diversified broad-based medical supplies company. We are actively laying the foundation to one day serve patients beyond those solely with diabetes. Our strategic priorities, along with our recent acquisition of Owen Mumford, will help us get there. Turning to the second quarter. While our International business performed in line with our prior outlook, our U.S. business fell short of expectations due to a combination of factors that I'm going to take you through now. The largest contributor to the lower year-over-year U.S. revenue is share loss within our pen needle product category, most of which is concentrated at a single customer. We estimate that the remainder is spread across smaller regional and independent pharmacy customers. It is important to understand that the patients switching to competitive products are likely not on payer plans where we have preferred access. That means that the revenue impact of the switching is estimated to be greater than what is indicated by an average unit price. The second largest contributor is overall market volume softness for insulin pens and pen needles in the retail channel. We believe this contributes to most of the remaining pen needle revenue decline. And as it relates to the insulin pen market, we are seeing signs of decline in overall insulin pen prescriptions. This is driven by a decline in the retail channel, but is being partially mitigated by growth in the long-term care channel. We are also seeing volume softness in longstanding accounts where we have a stable share position. Additionally, more patients choosing to acquire pen needles from channels where we do not participate or where products are lower priced is driving additional pressure on retail pen needle volumes. The remaining pen needle decline is related to inventory reductions at certain accounts and additional net pricing pressure. Finally, a reduction in syringe and safety products revenue comprised the remainder of the overall U.S. revenue decline. As a result, we are revising our fiscal 2026 revenue guidance to a range of between $1.015 billion and $1.035 billion. This reflects both the U.S. revenue shortfall in the second quarter and our updated expectations in the U.S. for the remainder of the fiscal year. International is performing as expected, and our outlook there is unchanged. Additionally, the revised range includes approximately $30 million in revenue contribution from the acquisition of Owen Mumford, which is expected to close by the end of this month. This compares to our previous guidance range of between $1.071 billion and $1.093 billion. As a reminder, during our first quarter earnings conference call, we had commented that we expected to be closer to the lower end of that revenue guidance range. Excluding the anticipated 4-month contribution from Owen Mumford, our current organic revenue outlook at the midpoint is approximately $995 million or a reduction of approximately $75 million from the low end of our prior expectations. Pen needles account for approximately 70% of the $75 million revenue guidance reduction or approximately $53 million. Given that pen needle market volume estimates can be somewhat imprecise, it is not possible to exactly calculate the individual contributions of competitive share loss and market volume softness on our product volumes. Our estimate is that share loss accounts for nearly half of the pen needle revenue reduction or approximately $25 million, while overall market volume softness is estimated to account for approximately $20 million. The remaining pen needle headwinds we are seeing are related to inventory reductions at certain accounts and additional net pricing pressure, which together accounts for approximately $8 million of the revenue guidance reduction. Turning to syringes. They account for approximately $13 million of the remaining $22 million revenue guidance reduction, most of which stems from lower syringe use associated with compounded drugs. While our decision to discontinue our swab products accounts for approximately $5 million of the revenue guidance reduction. For context, in late 2025, our sole supplier of the active ingredient in our alcohol swabs exited the API manufacturing space. Despite extensive efforts, we were unable to qualify an alternate supplier under applicable FDA standards. And while we remain committed to supporting our customers and patients through this transition, we recently made the decision to cease production of alcohol swaps. This product line had lower gross margins than our insulin injection devices. Finally, a reduction in estimated growth of safety products accounts for the remaining amount of approximately $4 million. Our guidance assumes that share loss and softness in market volumes persist throughout the remainder of the year without any further deterioration or recovery. Taken together, these are the drivers behind our performance in the second quarter as well as the full year revenue guidance revision. Considering the magnitude of the guidance reduction, we have initiated a review of our cost structure and organizational footprint. We will communicate findings and resulting actions as part of our standard quarterly reporting once that work has been completed. Now let me briefly touch on our strategic priorities. First, we continue to advance our global brand transition program during the quarter. More than 75% of embecta revenue is now represented by products commercially launched and shipped under the embecta label, and we remain on track for substantial completion by the end of calendar year 2026. Second, in terms of the development of market-appropriate pen needles and syringes, we continue to make meaningful progress during the quarter. These products are designed to compete in price-sensitive markets and may help mitigate share loss. Market appropriate syringes have launched commercially in China, and we are monitoring customer feedback. We plan to expand availability of these products in additional geographies upon the receipt of regulatory approvals. Regarding new pen needles, we have active regulatory submissions under review by the U.S. FDA, Brazilian authorities, and BSI for CE Mark certification in Europe. Third, portfolio expansion. During the quarter, we made meaningful progress on our GLP-1 B2B strategy, building directly on what we shared with you last quarter. At that time, we reported that we were collaborating with over 30 pharmaceutical partners with more than 1/3 having selected embecta as their preferred device supplier or having executed agreements in place. Three months later, the pipeline has continued to develop and now approximately 40% of our identified partners are either in active contract negotiations or have executed agreements in place. We also note that our partners have received Canadian approval and the first U.S. FDA tentative approval for a generic semaglutide injection product. Additionally, this quarter, we moved from pipeline to execution as several of our partners launched generic GLP-1 therapies co-packaged with embecta pen needles in India. That is a meaningful proof-point of our B2B value proposition and our commercial execution. Furthermore, our small pack GLP-1 retail configuration launched in Canada and Australia. These products are designed specifically to meet the needs of the growing out-of-pocket GLP-1 user population, and we expect to extend availability of such configurations into the U.S. market in the coming months to serve those patients who need pen needles to administer Zepbound in a pen injector. Regarding our fourth priority, financial flexibility, during the first 6 months of the year, we repaid approximately $75 million of outstanding principal of our Term Loan B. Disciplined deleveraging has been a consistent priority and this repayment of debt is consistent with our track record of applying free cash flow to strengthen the balance sheet and preserve strategic optionality. That financial discipline is what creates the capacity to pursue transactions like Owen Mumford. When we announced this acquisition in March, we noted that Owen Mumford had earned a global reputation for innovation, quality and patient-centered design. The more time we spend with this team in this business, the more confident we are in that view. At its core, this acquisition accelerates our transformation into a broad-based medical supplies company, one that serves both pharmaceutical partners seeking drug delivery platforms and chronic care patients across diabetes, obesity, autoimmune diseases, and the anaphylaxis markets. More specifically, we are adding a differentiated drug delivery platform designed to support pharmaceutical companies seeking a device to deliver injectable drugs. In addition, we will expand our product portfolio beyond insulin injection devices and capitalize on our global presence, thereby diversifying our revenue base. Finally, given the nature of the products being added to the portfolio, we expect to be able to leverage our core manufacturing strengths and optimize our manufacturing and distribution network, all of which is consistent with the strategy we presented at our 2025 Investor Day. Next I'll provide a brief overview of the business we are acquiring. Owen Mumford is a privately held U.K.-based innovator with a 70-year track record of developing medical devices and drug delivery technologies. OM brings a diversified portfolio of devices that serve chronic care and point-of-care testing markets, including self-injection systems, lancing devices and venous blood collection solutions. These are durable, clinically established franchises with long-standing customer relationships. Their top 10 customers have maintained relationships averaging 20 years, which speaks to the stickiness of their platform and the quality of their execution. Like embecta, Owen Mumford also has a September 30 fiscal year-end. And during fiscal year 2025, they generated revenue of approximately GBP 69.4 million with approximately 80% of their revenue concentrated in the U.K. and the United States. Their business is split between medical devices, which represents approximately 60% of revenue, and pharmaceutical services, which represents the remaining 40%. We view the pharmaceutical services business as the higher growth area of the 2, anchored by the Aidaptus auto-injector platform, which I will discuss next. Aidaptus is an award-winning next-generation auto-injector designed with a single form factor that accommodates both 1 ml and 2.25 ml fill volumes. What that practically means is that Aidaptus has a single final assembly process and was designed from the start to address customers' needs for reduced manufacturing changeovers, simplified supply chain logistics and large-scale production. We estimate the total addressable auto-injector market to be approximately $2.4 billion, growing at a double-digit CAGR. This is driven by the adoption of biologics, the emergence of generic GLP-1 therapies and the broad shift towards self-injection as a preferred modality across multiple chronic care categories. Aidaptus is well positioned to capture a meaningful share of that growth as the platform is already supporting customer clinical development programs with a commercial contract pipeline that includes secured long-term agreements with several partners. The strategic alignment with our existing GLP-1 B2B strategy is also worth highlighting as Aidaptus deepens our relevance to pharmaceutical partners who need a drug delivery device to go alongside their injectable therapy. During fiscal year 2026, Aidaptus is expected to generate a small amount of revenue as market penetration and growth are expected in future years. To that point, the acquisition of Owen Mumford was structured as an upfront payment of GBP 100 million at closing and up to an additional GBP 50 million in performance-based payments based on the net sales of Aidaptus. Regarding synergies, we have assumed a modest level of operational synergies in our financial model, reflecting opportunities to leverage embecta's manufacturing scale and infrastructure alongside Owen Mumford's capabilities. And while we have not assumed any revenue synergies in our financial model, given that OM generates approximately 80% of their revenue in only 2 countries, we believe that the commercial opportunity of pairing Owen Mumford's portfolio with embecta's presence in over 100 countries could be significant. That completes my prepared remarks at this time. And with that, let me turn the call over to Jake to take you through the financials in more detail. Jake? Jake Elguicze: Thank you, Dev, and good morning, everyone. Since Dev outlined the items impacting Q2 revenue, I will keep my comments brief. During the second quarter, embecta generated approximately $222 million in revenue, which is a year-over-year decline of 14.4% on an as-reported basis or 17.4% on an adjusted constant currency basis. Within the U.S., revenue for the quarter totaled approximately $95 million, reflecting a year-over-year decline of 29.4% on an adjusted constant currency basis. The lower U.S. revenue is attributed to the factors that Dev described earlier. Turning to our International business. Revenue for the quarter totaled approximately $126 million, representing an increase of 2.1% on a reported basis, but a decline of 4.1% on an adjusted constant currency basis. Results within International were in line with our expectations as revenue within China was lower as compared to the prior year period, given ongoing market dynamics and the broader geopolitical and trade environment. These declines were partially offset by continued strength across Latin America, Asia, and Canada. Meanwhile, from a product family perspective, during the quarter, adjusted constant currency pen needle revenue declined 20.4%, syringe revenue declined 14.6%, safety product revenue declined 2.3%, and contract manufacturing revenue declined 43.2%. GAAP gross profit and margin for the second quarter of fiscal 2026 totaled $127.8 million and 57.6%, respectively. This compared to $164.1 million and 63.4% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted gross profit and margin totaled $131.8 million and 59.4%. This compared to $165 million and 63.7% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year revenue in the U.S. as well as lower year-over-year revenue in China. These headwinds were partially offset by net changes in profit and inventory adjustments and FX. Turning to GAAP operating income and margin. During the second quarter of 2026, they were $35 million and 15.8%. This compared to $62.9 million and 24.3% in the prior year period. While on an adjusted basis, our Q2 2026 adjusted operating income and margin totaled $48.6 million and 21.9%. This compared to $81.4 million and 31.4% in the prior year period. The year-over-year decrease in adjusted operating income was driven by the decline in adjusted gross profit as operating expenses remained consistent with the prior year period. Turning to the bottom line. During the second quarter of 2026, we generated a GAAP net loss of $4.1 million and a loss per diluted share of $0.07. This compared to GAAP net income of $23.5 million and earnings per diluted share of $0.40 in the prior year period. While on an adjusted basis, during the second quarter of fiscal 2026, net income and earnings per share were $16.1 million and $0.27 as compared to $40.7 million and $0.70 in the prior year period. The decrease in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed as well as a higher year-over-year adjusted tax rate driven by the lower U.S. revenue in the quarter. Turning to the balance sheet and cash flow. During the 6-month period ended March 31, 2026, we generated approximately $47 million in free cash flow, and we repaid $75 million of outstanding debt. While our last 12 months net leverage as defined under our credit facility agreement was approximately 3x. This compared to our covenant requirement, which requires us to stay below 4.75x. That completes my prepared remarks on our second quarter 2026 results. Next, I'd like to discuss our updated 2026 financial guidance and certain underlying assumptions. Beginning with revenue. On an as-reported basis, we are lowering our guidance from a range of between $1.071 billion and $1.093 billion to a range of between $1.015 billion and $1.035 billion. This new range assumes an organic as-reported revenue range of between $985 million and $1.05 billion. It also assumes that we will close the acquisition of Owen Mumford by the end of this month, which would then generate 4 months of contribution or approximately $30 million. In terms of adjusted operating margin, given the expected decline in U.S. revenue as compared to our prior projections, we are lowering our adjusted operating margin guidance from a range of between 29% and 30% to a new range of between 22.25% and 23.25%. We are also lowering our adjusted earnings per share guidance from a range of between $2.80 and $3 to a new range of between $1.55 and $1.75. The largest driver of this reduction is the impact of the lower U.S. revenue and associated gross profit, which accounts for most of this change. In addition to the U.S. revenue and gross profit impact, the addition of Owen Mumford, including the interest expense on the associated borrowings is expected to be dilutive by approximately $0.15. Over the longer term, we continue to expect that the acquisition of Owen Mumford will contribute to revenue growth in fiscal year 2027 and beyond, that OM will be immaterial to embecta's fiscal year 2027 adjusted operating income and to be accretive thereafter, that OM will be dilutive to adjusted net income in fiscal year 2027 to be immaterial to embecta's fiscal year 2028 adjusted net income and to be accretive thereafter, and that the acquisition will generate high single-digit return on invested capital by year 4 with increasing contribution thereafter. Lastly, because of the lower expected U.S. profitability, coupled with the addition of Owen Mumford, we now expect that our adjusted tax rate will increase from approximately 23% to approximately 28%, thereby reducing our adjusted EPS as compared to our prior expectations by approximately $0.10. Turning to the balance sheet and cash flow. Despite the reduction in our revenue and profitability guidance ranges, we continue to target repaying approximately $150 million in debt during 2026. Lastly, in terms of free cash flow and inclusive of the addition of Owen Mumford, we now expect to generate free cash flow of between $95 million and $105 million. This compares to our prior guidance range of between $180 million and $200 million. This updated guidance range includes approximately $40 million in one-time use of cash associated with brand transition and the Owen Mumford acquisition. That completes my prepared remarks. And at this time, I would like to turn the call back to Dev to discuss our updated capital allocation framework. Dev? Devdatt Kurdikar: Recently, our Board authorized a 3-year share repurchase program of up to $100 million and concurrently reduced our quarterly dividend from $0.15 per share to $0.01 a share. We believe that this change in our capital allocation will provide us with additional flexibility to deploy capital towards share repurchases or additional debt reduction, which are currently our primary focus areas. We expect to commence share repurchases beginning in the current quarter, subject to market conditions and our share price, amongst other factors. That completes my prepared remarks, and I will now turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Marie Thibault with BTIG. Marie Thibault: I want to spend a little time better understanding the U.S. weakness this quarter and assumptions going forward. I think you said in your commentary that in the U.S. pen needle segment, the losses were concentrated at a single customer. I wanted to understand if that was the same customer as was referenced last quarter, where there were pricing concessions made and why, if so, the volumes weren't stabilized by that move? And then secondly, you called out weakness in insulin pen prescriptions. Can you tell us a little bit more about what's driving that? Could that be short-lived? Or is that a long-term trend? Devdatt Kurdikar: Let me start by taking the market question first on insulin pens and pen needles, and then go to the competitive loss question. So first on insulin pens, if we look at prescriptions for insulin pens, we have now begun to see a decline maybe more pronounced in the most recent quarter that we reported. That decline is actually greater in the retail channel than it is in other channels. And insulin pens are sold primarily in retail, but some in long-term care and very little in the specialty care channel. So insulin pen is mostly stored and sold in retail, and there has been a decline. That decline is greater in long-acting than fast-acting. And it seems to be driven by a decline in new prescriptions. That obviously translates into the pen needle market as well, but maybe a bit exacerbated in the pen needle market because what we are also seeing is a decline in retail that maybe is a little bit faster for pen needles than there is for insulin pens. Now some of this is likely being caused by shift in purchasing patterns from retail to perhaps lower cost channels or where pen needles are available at a lower price. We've also seen declines in accounts, as I referenced, where we believe we have a stable share position, so more indicative of market than anything else. And those are the market trends that we are seeing. Of all the variables that we try to account for in our guidance, this is perhaps the one where there is maybe more uncertainty because what we are observing is more of a recent shift than certainly what we've seen over the past several years. So that's about the market. Now with respect to the competitive loss, yes, it was the same customer that we had referred to earlier. Obviously, I don't want to talk about pricing at any specific customer or even broadly in the U.S. market. But I think what we've ended up is the share loss at that customer is a little bit deeper than we anticipated. But I want to point out a couple of factors that I referenced in my prepared remarks. So when there is a shift in share at a particular retailer, we believe that much of that share loss occurs with patients who are not on preferred plans with us. And so they can move to a different brand of pen needles and still use their insurance plan. And so when that happens, the revenue impact of that share loss is higher since if we are not on a preferred plan for that patient, obviously the rebate amount for that payer plan is less for us. Secondly, while, yes, most of that competitive loss was concentrated at the aforementioned account, we are seeing some declines in smaller regional players as well as independent pharmacies. Now with these smaller regional players and independent pharmacies, the rebates that these retailers get are obviously less than our large customers. And so that has an impact on the revenue as well. And so the competitive share loss affects us maybe at a higher rate than one might imagine just by using an average unit price. So those are the 2 factors that are impacting the U.S. results this quarter and drove the majority of the guidance revision for the year. Marie Thibault: Okay. That's helpful. And just to clarify, could GLP-1s be an impact on the insulin prescriptions? Is that anything you're seeing in the field? Devdatt Kurdikar: It's hard to definitively state what it is. But certainly, as we explored what the factors were that could be leading to market softness, right? The 2 factors that actually bubbled to sort of the top of the mind are, one, GLPs. And now you could ask sort of what's changed in GLP-1s and GLPs have been around. And we do wonder whether the increasing affordability of GLP-1 drugs certainly over the past several months could have played a factor in increasing penetration rate. Now if that were to be the case, what would result is obviously a larger number of patients sort of would try GLP-1s before they start insulin. And could that be having an effect? Certainly, that's possible, but it's hard to conclusively state that. The second thing, obviously, that occurred in December of 2025, so the beginning of our fiscal second quarter, is the expiration of the ACA subsidies. And could that be having an impact on the insured population, particularly as it affects sort of insulin uptake and doctors' visit and getting sort of progressively treated for type 2 diabetes? Maybe. Those are the 2 factors that potentially have shown an inflection point at the beginning of the quarter, Marie, but it's hard at this point to conclusively state the contribution of those factors or whether there are others. Marie Thibault: Yes. Lastly for me, and then I'll hop back in queue. I understand it's early right now. But as we think about embecta long term, beyond this fiscal year, do you envision that you can return to sales growth here from this level? Devdatt Kurdikar: Yes, absolutely. That's certainly what our intention is, that's what our target is, and that's what we believe the Owen Mumford acquisition will position us for, right? So let me zoom back a little bit. Almost 1.5 years ago, we announced the termination of the patch program. And then at the Analyst Day a year ago, we sort of conveyed our strategic intent to diversify into being a broad-based medical supplies company and really get further into chronic care drug delivery and build out our B2B segment. Prior to the acquisition of Owen Mumford, we started some initiatives. We wanted to expand our portfolio of syringes and pen needles, and you heard today about the advances that we've made over there. And we laid out a plan to really go deeper into the B2B segment and establish relationships with generic drug companies wanting to enter the generic GLP-1 market. And we, at that point, pointed out that that was a $100 million opportunity for us. Everything that we've seen since then, I think, further validates that $100 million opportunity, including the launch of generic GLP-1 therapies in India that actually have our pen needles co-packaged with them. Obviously, we noted with excitement, Canadian approvals. We still expect Brazil and China to launch generic GLP-1s as well. Obviously, timing is a little bit uncertain. China might actually end up being in 2027 rather than 2026. But certainly, the advances that we are making over there do position us to get back to revenue growth. And then on top of that, if you add the Owen Mumford acquisition, it really diversifies our product portfolio into chronic care, broad-based medical supplies. Their medical devices business is really concentrated in a few countries. And while we haven't assumed any revenue synergies in our model, certainly we are excited about the prospect of taking that bag of products and putting it into the hands of our commercial people all over the world. And then the auto-injector platform that I talked about Aidaptus, we believe that that is certainly a product that's differentiated. It allows for reducing supply chain complexity and manufacturing changeovers, which we believe pharmaceutical partners will accept. And over time, by the way, it has a list of secured customers, a pipeline that's developing, and it fits in very nicely with what has been our focus, which is establishing smaller -- deeper relationships with pharmaceutical companies that are looking for drug delivery options. I think you take that and you combine it with our efforts on developing a pen injector, certainly will leverage Owen Mumford's expertise since they have right now a reusable pen injector in their portfolio. And over time, we see ourselves as being a company that can provide an auto-injector, a pen injector and pen needles as a suite of products that will be available to pharmaceutical companies. And I think all of these initiatives absolutely are designed and with the intent of really returning us to revenue growth. One final point I want to mention, sorry Marie, is talking about Aidaptus. I mean, we certainly believe that that could be a $100 million product line for us. Operator: Our next question comes from the line of Anthony Petrone with Mizuho Financial Group. Anthony Petrone: So maybe on the pen needle contract, obviously a competitive loss there. But just wondering the length of the contract in terms of the loss there and when maybe it comes up for renewal, do you think looking ahead, whenever there is another request for proposal there, an RFP that you can look at that contract and be more competitive on the next go around. And then I'll have a couple of follow-ups. Devdatt Kurdikar: Yes. Anthony, on that, maybe it's worth clarifying. It's not like we've lost all the share. It's just our share position is reduced versus what it was. So it's not like we are out of that customer entirely. Now with respect to when we can get back, look, I mean, we have action plans right now underway to not only stem competitive losses, but also figure out ways to get back and win that share. So I don't want to sort of forecast exactly when that will happen, but I do want to convey that we are not going to be standing still waiting for contract renewals or what have you since it's not like we are completely out of those accounts. I think our share position has been reduced in those accounts, and we are certainly going to work as hard as possible to bring our share position back up. Anthony Petrone: That's helpful. I don't know, is there any timing you can put around those efforts? Is that a multiyear effort? Or is it something that you can see in a range of a 12- to 15-month time frame? Or is it, again, longer term? Devdatt Kurdikar: Yes. Look, I don't expect it to be a multiyear effort, honestly. So again, I don't want to put a specific time frame on it, obviously, for competitive and other reasons, but maybe I'll leave it at that. I don't expect it to be a multiyear effort, no. Anthony Petrone: No, all good. And then just when you think about the pressure, you kind of highlighted almost 3 areas here. There's lower-cost providers coming in. There's the GLP-1 question that Marie asked. And then just legacy, there was this pressure moving away from multiple daily injections to patch pumps as well as automated insulin delivery devices. When you think of those 3 buckets, it seems like the lower cost strategy kind of won the day here. But if you had to bucket those 3 headwinds, how would you kind of weight, if you had to put a weighted average on those 3 competitive headwinds in the pen needle business, how would you weight those? And then just a real quick one here would be, you had a trade receivables factoring agreement where there were receivables sold, I think, to Becton. It was roughly like $64 million. Just given the impacts in the business here, I want to make sure that that trade receivable agreement is intact. Devdatt Kurdikar: Yes. I'll let Jake take the trade receivable agreement. But with respect to sort of putting a weight on each of the factors, maybe there are 3 different things, I think, factors that affect the market in 3 different ways, right? The increasing affordability of GLP-1 drugs potentially affects insulin pen prescriptions. And we have seen insulin pen prescriptions trend downwards most recently. Could that be because of the increasing affordability of GLP-1 drugs? Maybe so. And what we've seen over there is the long-acting insulin, which is what you would expect the GLP-1 effect to be concentrated on, is decreasing faster than long-acting insulin. With respect to movement towards maybe lower-priced products, what it is is really maybe more a shifting of where patients are buying pen needles. So instead of the traditional retail channel and maybe they are going to retail, but maybe more patients buying sort of cash pay products or over-the-counter products or in channels where lower-priced products are available, that affects the pen needle market. And then thirdly, you asked about pump adoption. The way sort of we think about that is we look at fast-acting, right, so mealtime insulin prescription trends. And yes, while there has been a decline in fast-acting insulin, really what's driving, I believe, the total prescription decline has been the decline in long-acting. So really, pump adoption is something that, as you know, this business has been dealing with for a number of years. It's hard at this point to look at the data and say that that is the primary factor, Anthony. So I would say it's more towards a shift towards lower-priced products and potentially the 2 other factors I outlined earlier in my question -- in my answer to Marie, is that the increasing affordability of GLP-1 drugs. Could the impact of the ACA subsidies have had some impact on the overall market volume as well? Potentially. But it's going to take months, maybe a couple of quarters to really get the data. Jake Elguicze: And then, Anthony, on the receivables factoring program, this is a standard AR factoring program that we have actually with a third-party bank. So very common in the industry to have something like this. It doesn't have anything to do with Becton, Dickinson in any way. It was something, I think, that we put into effect around a year or so ago. We continue to factor receivables under normal due course, and we would continue to expect to do so in the future. So none of that has necessarily really changed by this. And in terms of liquidity and whatnot, we continue to expect good free cash flow, continue to expect to repay $150 million in debt during the course of this year, which was our original guidance assumption coming into the year. And obviously that's despite the revenue call down in the U.S. today. Operator: [Operator Instructions] Our next question comes from the line of Ryan Schiller with Wolfe Research. Ryan Schiller: I was hoping we could look out further to next fiscal year. Understanding there is no formal guidance in place, but maybe how are you thinking about the FY '27 revenue growth given all the pressure in the U.S.? Devdatt Kurdikar: Yes, Ryan, I think it's too early to comment on that. As you heard me say, right, some of the trends that we are observing now in the most recent quarter are all sort of early. So really, our plan right now is to focus on executing on 2026, closing the impending Owen Mumford acquisition, getting those products in our bag, advancing the pipeline, both on our B2B products for pen needles as well as the auto-injector platform. And really, then we'll talk about 2027. It's far too early at this point for me to comment on 2027. Ryan Schiller: Okay. And then OUS finished in line with your expectations in the quarter. I'm hoping you can give us the latest on what you're seeing in China and any updated growth outlook there? Devdatt Kurdikar: Yes, very pleased with our International performance, certainly performing per expectations. With regard to China, just as a reminder, obviously we don't disclose China separately, but we think about Greater China, which includes Mainland China, Taiwan, and Hong Kong. And over there, we sell the product to 3 or 4 national distributors that then go on to sell to sub distributors. Certainly, last year, fiscal 2025, there were significant declines and we took a bunch of steps to stabilize the situation. We are seeing early signs of sequential stability. We really reordered our sales team, that had a more price competitive pen needle that we launched over there. We will see likely some headwinds this year, but certainly it's going to be significantly less than what we saw last year. And look, over the long term, our view on China hasn't changed, right? The market is growing there in mid-single digits. We have a strong commercial and manufacturing infrastructure over there. The new pen needle that I referenced where we've already submitted for regulatory approvals, that is being developed and manufactured over there. And finally, I also mentioned in the GLP-1 generic space that there are Chinese companies that want to get into the generic GLP-1 market as well. And obviously, we want to partner with them. So for all those reasons, we continue to remain optimistic on how China will end up. Now obviously cognizant of the fact that China -- the geopolitical considerations when it comes to China can impact in the short term, but we still remain optimistic in our long-term view on China. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Dev for closing remarks. Devdatt Kurdikar: As we close the call, I just want to thank my colleagues across embecta for their continued focus and commitment. This was a difficult quarter. But I do want to be clear, we are not standing still and actions are already underway to address the issues we face. The steps that we are taking, closing the Owen Mumford transaction, reshaping our capital allocation and executing on our strategic priorities, are purposeful steps to build a stronger, more flexible company for the long term and are aligned with our strategic road map. Thank you for joining us today and for your continued interest in embecta. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: [Audio Gap] Scott Lauber: Vantage has stated that it is expected to invest $15 billion to complete this phase in 2028. Construction continues and the first facility could come online late in 2027. We currently have 1.3 gigawatts of demand for this Vantage site in our forecast over the next 5 years. Looking to the future, this site has the potential to reach 3.5 gigawatts of demand over time. And there's other notable growth in the state. As a recent example, Milwaukee Tool has announced plans to further expand its campus in our territory, including a new research and development facility. Waukesha Engine also announced plans to expand upon its local operation and employee base. In addition, we're starting to see good housing development. In fact, realtor.com recognized Racine County, Home of the Microsoft side as 1 of the nation's hottest housing markets. We're committed to meeting the growing demand across our service areas as we invest in our system for increased capacity and reliability. Our 5-year capital plan includes $37.5 billion of projected investments -- it's based on projects that are low risk and highly executable with a good portion dedicated to the very large customers. In total, by the end of 2030, we expect approximately 15% of our asset base to be attributable to these very large customers. As you recall, we project long-term earnings per share growth of 7% to 8% a year on a compound annual basis between 2026 and 2030. This is based on the midpoint of our 2025 adjusted guidance. We expect that growth rate to accelerate to the upper half of the range starting in 2028. Now let me give you an update on our capital projects. This March, we had a solar facility going to service with total capital of about $225 million. The Wisconsin Commission has approved the purchase of 3 additional solar projects and a battery storage project. In total, we plan to invest approximately $730 million in these newly approved projects. Construction continues on the new natural gas facilities in Paris and Old Creek, Wisconsin, -- we have our labor force and supply chain lined up to bring these projects online according to schedule. We expect the Paris Race units in the Yield Creek combustion turbines to start coming online in late 2027. Also at our Old Creek site, we recently announced plans to extend the operating lives of units 7 and 8. We expect to have units available to meet high energy demand periods through 2027 rather than retiring them at the end of this year. The decision is based on 2 critical factors: reliability and affordability for our customers. Overall, we have a highly -- a high level of confidence in our ability to execute on our capital plan and continue our growth trajectory. Now turning to the regulatory front. First, let's update you on Wisconsin and our VLC tariff. After completing its review, the Public Service Commission verbally approved the tariff structure on April 24. We expect the written order in the few weeks. As a reminder, this tariff provides a balanced approach, reliable electric service for our very large customers with a predictable cost profile, protection of other customers from bearing any cost to serve these very large customers, protection of the company's financial health and support for economic development and growth in the region. The commission approved the return on equity in the range of 10.48% to 10.98% and an equity ratio of 57%. For our non-VOC customers, on April 1, we filed rate request with the Wisconsin Commission for forward-looking test years 2027 and 2028. Our proposed plans would help us continue to strengthen key infrastructure and deliver the energy our customers depend on while remaining focused on affordability for our customers. We expect final orders by the end of the year with new rates effective in January 2027 and 2028. And in Illinois, just last week, we filed a proposed settlement with the Illinois Congress Commission if approved, these agreements will resolve all open proceedings related to the customers' uncollectible and QIP riders. As you recall, we filed a rate request for our Illinois utilities in January for test year 2027. A key driver of this request is support the pipe retirement program in Chicago. The Illinois Commerce Commission continues to review our filings, we expect the decision by the end of the year. In summary, we remain focused on executing our capital investment plan. Now I'll turn things over to Shaw. Liu Xia: Thank you, Scott. Our first quarter 2026 earnings of $2.45 per share reflects an $0.18 increase compared to the first quarter of 2025, our earnings package includes a comparison of first quarter results on Page 12. I'll walk through the significant drivers. Starting with our utility operations, earnings were $0.17 higher versus the first quarter of 2025. Let me highlight a couple of key drivers. Weather negatively impacted quarter-over-quarter earnings by approximately $0.02. Compared to normal conditions, we estimate that weather had a $0.01 negative impact in the first quarter of 2026 versus a $0.01 positive impact for the same period in 2025. Rate-based growth contributed $0.17 to earnings, including $0.09 of incremental AFUDC equity from projects under construction. Day-to-day O&M was $0.05 favorable in the first quarter. This includes a $0.02 gain from a planned asset sale in Illinois during first quarter of this year. The rest of the favorability was largely due to the timing of certain maintenance and benefit costs, which we expect to reverse throughout the rest of the year. For 2026, we continue to expect day-to-day O&M to increase 3% to 5% when compared to 2025 actuals. Next, let me give you some color on our weather-normal retail electric deliveries, excluding the iron ore mine. Compared to Q1 last year, we saw 1.3% growth this quarter led by the large commercial and industrial costs, which grew 3%. This is in line with our forecast. For the year, we still expect electric sales to grow around 1.5%. At American Transmission Company, earnings increased $0.01 compared to the first quarter of 2025 as a result of continued capital investment. Turning to our Energy Infrastructure segment. Earnings were $0.04 higher in the first quarter of '26 compared to the same period in 2025 driven largely by higher operating income from WEC infrastructure. WEC also benefited from a full quarter of operations from the Harden 3 solar projects acquired in February 2025. Next, you'll see that earnings from the Corporate and Other segment increased $0.03 driven by favorable tax timing. In terms of common equity, we locked in about $455 million in Q1 this year. This includes $25 million issued under our employee benefit plan and $430 million via the ATM program under forward contracts that we will settle in the future. Remember, we expect to issue up to $1.1 billion of common equity this year. So through the first quarter, we have accounted for almost half of our expected equity needs for 2026. Going forward, as a reminder, any incremental capital beyond the current plan is expected to be funded with 50% equity content. Now let me comment on guidance. As Scott mentioned earlier, we are reaffirming our 2026 earnings guidance of $5.51 to $5.61 per share, assuming normal weather for the rest of the year. For the second quarter, we're expecting a range of $0.76 to $0.82 per share. This accounts for April weather and assumes normal weather for the rest of the quarter. With that, I'll turn it back to Scott. Scott Lauber: Thank you, Shaw. Now as you may recall, our Board this January meeting increased the dividend by 6.7%. This marks the 23rd consecutive year that our shareholders will be rewarded with higher dividends. The increase is consistent with our plan to grow the dividend rate at the 6.5% to 7%. We're optimistic about continued growth in the region and our company's future. Operator, we are now ready for the question-and-answer portion of the call. Operator: [Operator Instructions] Your first question comes from the line of Shar Purreza with Wells Fargo. Unknown Analyst: It's actually Alex on for Shar. Janis good, Alex. So just obviously, you're seeing a lot of growth on the data center front. You have Microsoft and Vantage projects and you kind of highlighted some upsides there. But can you maybe talk a little bit more to the extent that you can? Are you seeing additional interest from other hyperscaler customers in the state -- and just to add on, there's been obviously a lot of local opposition in some parts of the state. So can you just talk about your strategy and overall confidence level around attracting new customers despite some of the headlines we've seen. Scott Lauber: Sure, sure. Let me kind of phrase this and look at it in total. When you think about -- we've got Microsoft and the Southeastern Wisconsin region and then North and Advantage site -- when you look at that, we have about 3.9 gigawatts in our 5-year plan. And if you just look at the acreage and do some back of the envelope math, you could see how these sites which have already been approved and have the ability to put data centers on could add another 4 to 5 gigawatts of capacity on those sites alone. So we see tremendous growth on already the available sites that we have in the works and construction is starting on a good portion of them. And then you think of the other data centers, we are in discussions with a few others. I think very optimistic now that we have the final VLC tariff, and we'll see that final order come out in the next few weeks, a little more clarity. I expect to have more information on our third quarter call and anticipate we hopefully we'll have another announcement debate on that third quarter call. Unknown Analyst: Got it. That's very helpful. I guess just switching gears here. Just want to touch on Point Beach. You've obviously mentioned in discussions there. Just if you were to go ahead with building sort of incremental generation, can you maybe provide some sort of sensitivity around the CapEx opportunity there and just maybe any sense on possible timing. Scott Lauber: Sure. And we're going through the planning process right now, we always go through the summer and go through our generation planning process and working with our very large customers to factor in additional growth along with what we need on the generation side to serve our native load. And as we talked about in the last call, the Point Beach PPA, the prices are pretty high. We're going to look at affordability for our customers. At this time, we're planning that we're going to have to replace that, and we'll put that in our 5-year plan this fall, most likely replace it with some gas, perhaps a combined cycle. -- remember that PPA ends -- the first unit end in like 2030 and the second unit ends in 2033. So we have some time, but it'll start working into our planning cycle. As just a lot it's about $2 billion to $2.5 billion, and this is over those 2 units, it's about 500 for each. So that's about a gigawatt. But when we look at our planning assumptions, it's about $2 million to $2.5 million. Unknown Analyst: Picking up some of the commentary on the VLC tariffs. I think the revisions from the commission saw the threshold move down to a lower level, maybe 100 megawatts if I'm recalling correctly. Curious if that captures more load than you were expecting to run through the VLC tariff and any ramifications on your plan as a result of that? And then it sounds like sort of customer interest overall, now that you've gotten to the other side of a VLC outcome, is sort of firming up. But again, just curious more broadly in the context of that load side revision, how you're thinking about the tariff impacting economic development going forward? Scott Lauber: Sure. And great question. And when you think about it, we proposed 500 megawatts, which is smaller than the 2 data centers that we have going right now. the load going down to the 100 megawatts, we don't have any current customers that fall into that range. So it doesn't affect any of our current customers. And we'll see as we talk to a future load -- is there something in that 200 megawatt? How does that deal? And how does it look at the economics with our tariff and we'll address that if we see something at the time. But right now, moving to 100 does not affect our economic development in either direction, maybe a little positive that it actually opened up the door for some smaller data centers and we can show that they're paying their full share. So not concerned at all about going to 100 megawatt. Unknown Analyst: Perfect. And then turning to Illinois, it sounds like, again, more progress that you've been able to put up in the state, although still more to come on the rate case as well. Could you speak a little bit more to the data points that are sort of emerging along the way here? How you see conversations trending overall in the state and kind of what you have an eye to over the balance of the year to get those rate orders? Scott Lauber: Sure. So a couple of things. We just filed the settlement, which I think has taken off 12 cases related to uncollectibles in the previous QIP rider. So an extremely long period. We filed that just the other day that had the support of the AG the ICC staff and the Citizens Utility Board was involved in that signing. So it's great to see that sign and that in front of the commission now. We have our rate case in front of the commission. Of course, 1 of the key elements there is going to be the pipe retirement plan and as we're ramping that up. That we expect to see the first testimony from our the ICC staff and other interveners I think by the end of the day to day, we'll see where that comes out. And then we're just executing on our plan, starting to ramp up the pipe replacement program that we've talked about. We're ramping it up this year. It will get about 200 -- I think we're about $200 million this year, and it will ramp up in 2027 and 2028. And we're just going to execute on the program. We're following along all the direction that we received in the order from the pipe retirement program on having workshops in working through those workshops and really have a lot of transparency on our program. So we're hitting the ground running feel really good about the progress we're having in our communication with our customers and keeping the ICC informed along with the safety monitor. So those are kind of the 3 key elements, and that will evolve during the summer here as we start seeing the testimony and more results of the settlement with Illinois. Operator: Your next question comes from the line of Nick Campanella with Barclays. Nicholas Campanella: Hey, good afternoon, and hope everyone is doing well. Can you hear me? Nick. Great. So I just wanted to ask on the -- you talked about the acreage that you have that is kind of fully permitted and ready to go. And I think you said like up to 4 gigawatt potential number. And maybe just acknowledging the fact that the hyperscaler CapEx is continuing to kind of increase here -- and if customers want to kind of maximize that, can you just kind of talk about your ability to execute on that from a supply chain and equipment standpoint? And then just how do we kind of think about how much could actually fall into the plan in the third quarter just based on the conversations you're having? And now that the DLC is finalized and it seems that everyone is happy with that. Maybe you could just expand on that a little bit more. Scott Lauber: Sure, sure. So as we kind of peel back that question, and we've been working with these very large customers, as you know, behind the scenes for years and working with our developer and our generation and planning team, and we feel very confident we can deliver all that needed to supply the load growth as we ramp this up. It's a little early before I talk about what gave you on that third quarter call, but feel for sure, there'll be increment add it in our third quarter. It's just -- we're still working with them on this individual amounts and a little more to come on third quarter, but feel good about the update we'll have there. Nicholas Campanella: Great. And then just maybe just 1 more thing, just keeping with the megawatts here on Point Beach. Is it the base idea that you're going to bring in the full replacement? Or could you just be kind of targeting half of that to start? And then on the next plan, look at the next part of the PPA that rolls off, I think, in the mid-2030 time frame? Scott Lauber: Yes, that's a great question. And when you think about that first 1 is -- so for sure, that first 1 will be in this plan and then probably some dollars as it relates to long lead time equipment for that 2033. So you may start to see a little bit tweak in on that last 500 in this plan. Nicholas Campanella: Great. Great. And then maybe if I could just 1 more. The GRC just given all that's kind of in front of you and you had a successful VLC with this commission, we're still very early innings of this case, but is this something that you expect to go fully litigated? Or do you think there could be an opportunity to settle depending on where the starting points of testimony are? Scott Lauber: Sure. As you look at it, and remember, we filed the case at the beginning of April. I think we have a real -- a modest increase out there on our base rates in the electric side of 4.7% and 4.5% in each of the -- in '27 and '28. -- we'll we don't even have a procedural schedule out, but I think we'll get through the staff audit sometime this summer. And when we see that audit and probably the first run to testimony, that will be an opportunity for us to take a step and see if there's an opportunity to settle you noticed last year, this commission did sell cases with a couple other utilities in the state. So optimistic that we're going to have a reasonable audit and then we can make progress later in the year, but a little early before we can make any decisions on that. Operator: Your next question comes from the line of Julian Damon Smith with Jefferies. Julien Dumoulin-Smith: Appreciate the time. Nicely done. Again, I got to hand it to you on the ICC backdrop here with the QIP resolution. Scott Lauber: Excellent. Thanks, Julien. Julien Dumoulin-Smith: Absolutely. Just a couple of things if I can come back to the VLC tariff with that approved here, at least verbally, -- are you having other discussions with other days developers? I know this was asked a little bit earlier in a different permutation, but -- how is this enabling or catalyzing developments? And can you speak to the expansion opportunity a little bit more specifically again, just if I can link this to another subject, how do you think about Point Beach enabling data centers as well. I just want to ask that explicitly here, if I can. Scott Lauber: Sure, sure. Well, the VLC and when we see the final order, I think that's just going to be a lot more transparency for everyone. And we wanted to make sure we filed as a tariff to make sure it's transparent not only for other VLC customers, but also for the public and the community to see that they're paying their full share. So very happy about that. It's good. I think all the people we've been talking to are well aware of what the VLC filing was and what the tariff and the discussion from the commission. So a lot of people are watching that decision to see what was going on in that. As you think about Point Beach, there's -- that's in 2030, 2033, we'll see what opportunities are there. But potentially, right now, we're looking at it, how do we serve our native load and actually provide a capital investment and probably some bill headroom as you think about affordability in that 2030 and '33 time frame. Julien Dumoulin-Smith: Yes. Yes, absolutely. I hear you here. And then just to ask it explicitly, I know it's brought up a little bit earlier. But given this rate case, I mean, it seems fairly benign in many respects, my words. How do you think about settlement and any specific items that might stand out here in the filing, right? I mean mid-single-digit increase, it seems fairly down the fairway. Scott Lauber: It's too early. We want to see what the final audit is. But when you think about our rate case filing, it's really balanced. There are some a little bit of new generation. There's a little bit of transmission. There's a little bit of reliability that we put in on the distribution system, some general inflation, some truing up for sales. So it's sprinkled throughout -- so it's not like we are having any 1 big initiative here. And remember, when we filed our case now, we laid out that those very large customers are paying a significant amount of our capital additions that we're putting into our plan. So you're not seeing it come through to these individual non-VOC customers. It's all being paid for by the large customers. But too early to talk about. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank. Your next question comes from the line of Sophie Karp with KeyBanc. Sophie Karp: I wanted to ask you guys, yes, not a bit this horse to that, but I wanted to ask about Point Beach, and it sounds like since you're thinking about replacing that power that you're contemplate a scenario where it won't be available to serve our retail customers. And I just kind of -- can you give us some reminder what other options the owners of this asset would even have on the Wisconsin or which, and I don't think they're able to serve retail directly themselves. So what kind of an outcome is actually contemplated here with respect to point Beach? Scott Lauber: I can't speak with -- for NextEra. So you'd have to ask them that question. They could always enter into a financial transaction or something like that. But you'll have to run that by NextEra on to what their thoughts are. Sophie Karp: All right. And then I guess, on the VLC, what kind of feedback, if any, have you heard so far from the existing hyperscale customers and the potential others, just given the modifications that were made at the commission. Scott Lauber: Yes. And we've been talking -- and you could kind of see it through the testing only where those potential adjustments will be made. So the initial indication is -- there's nothing major right now. But of course, we all want to see the written order to see what's really in that final written order, but nothing surprising at this time. Operator: Your next question comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: Okay, terrific. I don't know what happened there, but thanks for giving it a second track. Okay. So I first want to ask another -- the Port Washington situation. My question is, to what degree do you see the referendum on data centers? Is there either challenging the current 1.3 gigawatt build-out? Do you see that at all being at risk? Or do you think it might make it harder for the customers to expand to the full 3.5 gigawatts or could this potentially defer other customers from looking into opportunities in or around that area or across Wisconsin more broadly? Scott Lauber: Well, I think you're referring to the referendum related to the TIF district. And when you look at that, it should not affect any of our any of that site up to the 3.5 gigawatts based on all of our understanding, it potentially could affect not just data centers, but any other just economic development in an area that would need a TIF district for that particular county. So more of a challenge just in general for economic development, but it should not affect any of the data center growth we had outlined in our script. Andrew Weisel: Okay. So not only the $1.3 billion, but the full $3.5 million you think would be safe. Okay, great. And then do you think it's isolated to that specific area? Do you think other -- from your conversation with customers, -- do you think it's isolated? Or do you think it's more of a broad issue in your conversations? Scott Lauber: We haven't seen any other issues out there as it relates to like a referendum. We have seen a couple of areas across the state, just put like a 1-year moratorium on reviewing data centers just because I think everyone wants to understand a little bit more of the facts in the data centers to get the facts out, but we have -- I have not seen any other type of referendum like that. Andrew Weisel: Great. Very helpful. And just a final 1 maybe for Shaw. The weather-adjusted natural gas deliveries were down over 2 point--or down 2.1% year-on-year. I know the weather was extremely mild that always messes with the normalization models. But volumes were also down 0.5% for the full year in -- what are you seeing in terms of trends or patterns? Is there anything worth calling out? Or was the 1Q maybe just a blip with the models? Liu Xia: Yes, Andrew, we looked at that. I think we expected some usage of decline in the forecast. So what played out was a little worse than what we expected by not much. But we filed in the test year '27, '28, the expected decline in the filing. So hopefully, we catch it up for the future. And there's some details about in which metropolitan area, you see a little more decline. So as people continue to come back to the office or reduce their residential usage, so you may see that naturally happen in the metropolitan area. So nothing surprising in the first quarter. Operator: Your next question comes from the line of Michael Sullivan with Wolfe Research. Michael Sullivan: Good afternoon. Scott, maybe I'll just try in Illinois, and this might be unfair because we're about to get the testimony, but is there any scenario where you think you can settle in that jurisdiction? And maybe just longer term, like how you think about the future of rate case cadence in that state? Scott Lauber: Sure. And you're right, we haven't even seen the testimony yet. So pretty hard to handicap anything there. Historically, Illinois has been a hard place to actually settle when you look across other jurisdictions. So I don't know all the opportunities there, but we got to see the testimony, but very happy as you could see, we actually got a settlement on those old historical riders. So that's a step in the right direction. And your second question was... Michael Sullivan: Just like the future rate case like is this going to be like every year, every other year? How do you think about that? Scott Lauber: Yes. I anticipate, especially as we ramp up this rider, and we start getting increases in 27, 28 and then an ongoing. I expect that it'll be more of an annual rate case kind of cadence as you think of Illinois specifically as it relates to putting in this pipe retirement program. Michael Sullivan: Okay. Very helpful. And then we saw -- I think you mentioned pushing out the retirement dates on some of your coal units. Just as you think about your remaining coal fleet holistically. What are kind of some of the options like in terms of conversions, further push outs? How you're thinking about some of those many units holistically? Scott Lauber: Sure, sure. And we're going to look at conversion of those to natural gas. For the most part, as you think about the EPA rules, we need to be in compliance with the current EPA rules. We'll see will those EPA rules go -- at this time, the reason we pushed out 7 and 8, we just wanted to make sure we get other dispatch a generation online and those parasites and the new CTs will start to come online at the end of '27. So we wanted to make sure we had -- as we retire old dispatches capacity, we had new capacity online. We also reviewed this to make sure there was no significant capital investments we had to make to keep these units running another year. And basically, they're only running on days that we really need it. So we're really running on a limited basis but we just want to make sure we have that capacity around to make sure we had that reliability. But as you look at the other units, we're still looking at converting to natural gas, and we'll follow the EPA rules as they evolve. Operator: Our next question comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Just 1 for me. Just wanted to check in kind of on -- I know you've talked about the construction activity at the Vantage site. -- has sort of started. Just any color you could provide on how execution is kind of tracking there relative to the time line, I think that the company has laid out? And perhaps just if you do see any slippage there, maybe can you refresh us kind of on the protections in place on if timing slips there related to the investments that WEC is making? Scott Lauber: And we don't see any slippage in we're in contact with the site. We have like a beating every other week with them on the site. We don't see any slippage there. And the other significant item is approval of a transmission line to serve that site, which there is data request and information going around with the commission right now. We expect to get approval for that in the fall of this year. So we don't think there's any issues in the slippage of that in service at this time. So things are going well there. If you think about in service, some of the fixes and fine-tuning that happened in the VLC tariff as it relates to transmission, will be more on a nominated basis, which will make sure that everyone pays their fair share and full cost as we build this cost and put that in. So it's not getting subsidized by anyone else. And it should not be a slippage also for any of our generation plan. So we feel good about the tariff and the protection plus but more importantly, we feel really good about the execution of that site and getting it online. Operator: Your final question comes from the line of Paul Fremont with Ladenburg. Paul Fremont: When I look at the $2 billion to $2.5 billion for 1 gigawatt in terms of replacement capacity, should I assume that what you're looking at is a combination of renewables and gas Point Beach. Scott Lauber: Yes. I think you got to kind of think about all of the above as we think -- and we'll look at our entire generation plan, it may be a combination of renewables and TT, but we also may be looking at a combined cycle as we look at our plan to continue to get more energy since it also provides a lot of energy. So we're going through that process. We look at it every year, not just as it relates to like the Point Beach, but also adding additional load on for our very large customers and the other economic development in the region. So we're going through that process right now and what makes sense and cost-effective value for our customers. Paul Fremont: Great. And then in terms of the nonregulated renewables, I imagine you're getting to a point where you're reaching sort of the end of the on some of the units. For those units, what type of uplift, if any, are you seeing in recontracting those assets? And does that sort of -- should we assume that, that offsets the BTC? Or how should we think about that? Scott Lauber: Great question. So 2 things. One is we're going through the process right now. And in fact, last year, we had safe harbored a lot of the materials to make sure those early PTCs that fall off. We have safe harbor materials so we could actually repower them to get to another 10 years of -- so we're evaluating that right now, and we'll talk about that on our third quarter conference call, but an opportunity to get another 10 years of PTCs. And then as those contracts come up, the value of renewable resources today and capacity across the country, it's more valuable than when we initially contracted those. So you also see some upside as those contracts come due. Now they just remind you, they don't all come due at the same time as the PTC. So there's a different timing there. But I think there's value on both sides of it. Paul Fremont: Great. And then I guess, last question that I have is, is it was the Microsoft Council plant, was that to be located near where the Oak Creek plant is located? Or was that in a different vicinity? Scott Lauber: Well, there was a potential option to purchase some land by the Oak Creek plant for a potential Microsoft expansion that is no longer moving forward but I mean, in total, they still have about 2,200 acres and that was by the Oak Creek site. Paul Fremont: So I guess my question, has there been any reconsideration by that community of potential benefits for having a data center located in their community? Scott Lauber: I haven't talked specifically with them, but I think every community is looking at potential for data centers or the discussion of data centers because there's a lot of discussion in the region. And I think a lot of these communities are looking at like Port Washington and Mt Pleasant look at the value of property taxes and the other value these hyperscalers bring to the community, especially when you talk about affordability and people talking about property taxes. So I think there's opportunities there. We haven't had direct discussions with them, but there's potential there. I think it's a great site. It requires very little transmission and is right by our power plant. So it's a great power supply with very little transmission, an ideal spot for something like that. All right. That concludes our conference call for today. Thank you for participating. If you have any more questions, please feel free to contact Beth Straka at (414) 221-4639. Thanks, everyone. Liu Xia: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
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 Innovative Industrial Properties, Inc. First Quarter 2026 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Eli Kanter, Director of Finance. Eli, please go ahead. Eli Kanter: Thank you for joining the call. Presenting today are Alan Gold, Executive Chairman; Paul Smithers, President and Chief Executive Officer; David Smith, Chief Financial Officer; and Ben Regin, Chief Investment Officer. Before we begin, I'd like to remind everyone that some of the statements made during today's conference call, including statements regarding our capital raising activities and those regarding potential lease transactions that are subject to letters of intent are forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and subject to risks and uncertainties. Actual results may differ materially, and we refer you to our SEC filings, specifically our most recent report on Forms 10-K and 10-Q for a full discussion of risk factors that could cause actual results to differ materially from those contained in forward-looking statements. We are not obligated to update or revise any forward-looking statements, whether due to new information, future events, or otherwise, except as required by law. In addition, on today's call, we will discuss certain non-GAAP financial information such as FFO, normalized FFO and AFFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in our earnings release issued yesterday as well as in our 8-K filed with the SEC. I'll now hand the call over to Alan. Alan? Alan Gold: Thanks, Eli. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. First, I'd like to touch on the rescheduling of cannabis from Schedule 1 to 3, a significant regulatory development impacting the cannabis industry. In our view, the administration's recent action with respect to the medical cannabis market represents a major milestone for the industry and a clear sign of continued progress at the federal level. Although it does not yet extend to the broader adult-use market, it reinforces momentum toward a rational regulatory environment. Against that backdrop, the first quarter represented a strong start to the year, and our team remained focused on disciplined execution across the business. While persistent inflation, elevated interest rates and broader macroeconomic headwinds continue to challenge the operating environment, our team has worked tirelessly to optimize our portfolio, allocate capital thoughtfully and maintain a strong and flexible balance sheet. Now we have been active on the debt and equity capital raising front, raising $128 million of gross proceeds year-to-date. In addition, we are working on several secured and unsecured financing transactions that have not yet closed totaling nearly $130 million. including a $56.5 million financing at a rate of 8.75% that we expect to be funded today. If completed, we expect to use the net proceeds of these financings to address our unsecured bond maturity this month and to provide additional capital to support future growth and the execution of our strategic priorities. This approach reflects our continued focus on disciplined capital management and maintaining balance sheet flexibility. As for the quarter, we generated total revenues of $69 million and AFFO of $53.4 million or $1.88 per share, which was the same as last quarter. Operationally, we made meaningful progress across our portfolio as we continue to execute on our leasing strategy. During the quarter, we signed new leases at 4 properties totaling approximately 331,000 square feet, underscoring the progress we are building across the portfolio and the demand for our high-quality mission-critical facilities. Turning to IQHQ. We continue to view this investment as a compelling strategic opportunity and an important extension of our platform. To date, we have funded $175 million of our $270 million commitment and continue to believe our entry point and timing of this investment will prove attractive over the long term. At the same time, we remain focused on executing across the business, driving performance in our existing portfolio, pursuing attractive opportunities in cannabis and allocating capital where we see the strongest risk-adjusted returns. With a diversified platform spanning cannabis and life science, a strong balance sheet with demonstrated access to capital and an experienced management team, we believe we are well positioned to build on our momentum and progress to deliver long-term value for our shareholders. With that, I'll turn the call over to Paul. Paul Smithers: Thanks, Alan. Last month, the DOJ and acting Attorney General issued a final order moving FDA-approved cannabis products and cannabis produced by state licensed medical operators to Schedule III, a landmark development and in our view, the most significant development affecting our business since our founding in 2016. This action eliminates the burden of 280E for qualifying medical operators, may create opportunity for retrospective tax relief and establishes an expedited DEA registration process for medical operators. Just as importantly, the DEA has now restarted the broader hearing process on whether marijuana as a category should move to Schedule III, with hearing set to begin on June 29 under an expedited time line. Taken together, we believe these developments mark a major step forward for the industry and powerful catalyst for improving operator economics, expanding access to capital and supporting a healthier environment for longer-term growth and investment. At the state level, we are monitoring the expansion of existing medical programs, particularly in Texas. In April, the Texas Compassionate Use Program awarded conditional licenses to our tenant partners, Green Thumb Industries and Cresco Labs, joining Texas Original, Trulieve, Verano and others in the market. We are encouraged by this progress and look forward to the continued expansion of the program and the opportunities it creates for our tenants. Regarding our current portfolio, as we highlighted in our March press release, we reached a resolution with PharmaCann on all pending litigation related to its lease defaults, and we are actively working to retenant the properties being returned to us later this month. Across the portfolio, we have now executed leases for the former Gold Flora assets, made substantial progress on the former PharmaCann assets and reached tentative agreements with prospective new tenants for all 4 former 4Front properties, subject to diligence and licensing approvals. I want to thank our team and all parties involved for their hard work in helping us navigate these challenges. The actions we have taken leave us better positioned to drive portfolio performance going forward. With that, I'd like to now turn the call over to Ben to provide additional details on our leasing activity and discuss our other investment activities. Ben Regin: Thanks, Paul. Year-to-date, we have executed new leases totaling 389,000 square feet across 5 properties located in California, Illinois and Ohio and completed the sale of a dispensary in Arizona. As Paul described, we are pleased with the progress we have made stabilizing our portfolio and bringing Revolution to the former 4Front, PharmaCann and Gold Flora assets. All 3 former Gold Flora properties comprising 330,000 square feet are now leased. We executed lease agreements for our 70,000 square foot Palm Springs property in November 2025, our 204,000 square foot Desert Hot Springs property in January 2026 and our 56,000 square foot Palm Springs property in March 2026. For 4Front, we have reached tentative agreements with prospective new tenants for all 4 properties, representing approximately 488,000 square feet across Illinois, Washington and Massachusetts. These tentative agreements remain subject to customary diligence and licensing approvals and are expected to take effect following the conclusion of the receivership proceedings, which we currently expect later this year. With respect to the former PharmaCann assets, we executed a lease agreement in March for our 66,000 square foot property in Dwight, Illinois with Grown Rogue, a publicly traded multistate operator new to our tenant roster. In April, we executed a lease agreement for our 58,000 square foot property in Ohio with Curaleaf, a public multistate operator and long-time tenant partner of ours. In addition to these executed leases, we executed a nonbinding LOI for our 234,000 square foot facility in New York and are currently in lease negotiations subject to customary due diligence, including licensing and regulatory approvals. We also continue to work through diligence and are in negotiations with a prospective tenant for our 71,000 square foot property in North Adams, Massachusetts. With respect to our 270,000 square foot property in Pennsylvania leased to the cannabis company as of quarter end, we regained possession of that property on April 15 and are in active discussions with a potential new tenant. While there can be no assurance that any of these discussions or negotiations will result in the execution of a definitive lease, we are very pleased with the demand we are seeing for our assets. For our 157,000 square foot property in Columbus, Ohio, remains leased to Battle Green, which defaulted on its lease obligations in March. We are actively enforcing our rights under the lease, including commencing eviction proceedings and pursuing available remedies under applicable guarantees. Turning to our life science portfolio. We have funded $175 million of our $270 million IQHQ commitment to date, with the remaining $95 million expected to be funded over time. The broader life science real estate market continues to show signs of stabilization and improving momentum as we move through 2026. Recent reports from CBRE and Colliers indicate that demand has held near pre-pandemic levels, while stronger equity performance and venture funding are supporting a more constructive backdrop for growth. At the same time, the market is still working through elevated vacancy from the prior supply wave, but new development has fallen sharply and the pipeline is at historically low levels, which should support a healthier supply-demand balance going forward. We also continue to see favorable long-term demand drivers in areas like manufacturing, onshoring and AI-enabled research, which we believe will position the sector for continued improvement over time. With that, I'll turn the call over to David. David Smith: Thank you, Ben. Before diving into our quarterly results, I want to begin with our bond maturity that we have this month, which, as we discussed on prior calls, has been a key focus for the company. During and subsequent to quarter end, we have undertaken a series of capital raising actions to address this maturity. Year-to-date, we have raised $128 million of gross capital comprised of $72 million of preferred equity, $36 million of common equity and $20 million of secured debt through a 3-year secured term loan with a fixed rate of 9% that we recently closed on. As Alan mentioned, we are also currently pursuing multiple secured and unsecured financing transactions totaling nearly $130 million, including a $56.5 million financing that we expect to be funded today. Based on the terms currently under discussion, these financings would carry an attractive blended rate of just over 8%. We are encouraged by the level of interest from multiple new lenders and by the opportunity to access attractively priced capital to address this maturity and provide additional capital to support future growth. These potential financings remain subject to a number of contingencies, and there can be no assurance that they will be completed on the terms currently contemplated or at all. Turning to our results. For the first quarter, we generated total revenues of $69 million, a 3.5% increase compared to the fourth quarter. This increase was primarily driven by payments received from PharmaCann totaling $3.2 million. In addition, as previously disclosed, we received $1.5 million in the first quarter in settlement of all remaining unpaid administrative rents due from the Gold Flora receivership. Adjusted funds from operations, or AFFO, for the quarter totaled $53.4 million or $1.88 per share, which was in line with our results for the fourth quarter of 2025. Turning to the balance sheet. As of March 31, we had total liquidity of approximately $177 million, consisting of $89 million of cash on hand and $87.5 million of availability under our revolving credit facilities. Once again, our balance sheet credit metrics remained excellent this quarter with a debt service coverage ratio exceeding 11x and net debt to adjusted EBITDA of 1.1x. And with our recent capital raising activity, we continue to maintain very strong credit metrics with a balance sheet positioned for growth in 2026. With that, operator, could you please open the call for questions? Operator: [Operator Instructions] Your first question comes from the line of Tom Catherwood with BTIG. William Catherwood: Ben, I just want to start with you. If my math is right, I think you have 8 leases that you've signed that have not yet commenced. And with the agreements for the 4Front assets, that could go to 12 properties. I know each deal is different and you don't control every aspect of commencement. But is there a way to bucket those 12 leases as to how many you expect to contribute in 2026 versus 2027 or even beyond that? Ben Regin: Tom, I guess I think the way I would think about it is just what we see in a typical deal from lease execution there's usually some sort of regulatory approval, license transfer. And after that, once the lease goes into effect, you could have a free rent period. So we've seen that average anywhere from 3 months to 12 to 18 months on the outside. I appreciate you mentioning the leasing activity. We've been very pleased with the demand we're continuing to see really across the portfolio. When you think about some of the previous tenant issues, PharmaCann, 4Fronts, Gold Flora, we've now addressed well north of 90% of those assets through LOIs, executed leases and lease discussions that we're currently having. And I would also add, when we think about the modeling is there can be the free rent period, there can be a license transfer period. But typically, the triple net expenses will be transferred over to the tenants upon lease execution. which is another pickup for our earnings. William Catherwood: And then I think last quarter, you mentioned, obviously, as I said, before each deal being different, but you had a range in execution as far as the rents that you achieved on those. I can't remember the exact numbers that you gave, you gave everything from nearly in line to down 50% in some cases. For those that you've executed this quarter, how have they come in compared to prior rents? Ben Regin: I still think that's the right way to think about it. I think that range applies across the board. And I think the other aspect of that to keep in mind is just the minimal capital outlay that we've seen really across the board. I mean these are I would say, on average, $5 to $10 a foot, sometimes as is deals, which is very unique, I think, in the real estate industry to be able to re-tenant these assets and really the volume of leasing that we've achieved really minimal cost to us. William Catherwood: Got it. Got it. And then this one might kind of seem a bit out there at the moment. But we've seen this increase in M&A activity come across the cannabis space, kind of early stages of it. But like, for example, what's happening with cannabis with -- they announced your tenant Holistic is taking over their operations in Ohio. As we see more resolutions and workouts like that, is there an opportunity for IIPR to get involved and provide the next wave of operators with capital for assets that had previously been owner-occupied? Or are we kind of thinking too far ahead? Ben Regin: No. I mean I don't think that we're thinking too far or anybody is thinking too far ahead. I think that the -- with the first phase of the rescheduling, and I know there's a lot more to go with that, we do see the strengthening of our -- of the tenants in general in the industry. And we do see, I think, an increased interest in the industry and potential growth opportunities in the cannabis industry. Now whether that's 6 months or 12 months or 36 months out there, it's an evolving story. William Catherwood: Got it. And then just last one for me, Paul, on the rescheduling. I know you mentioned the June 29 administrative hearings starting back up again. And what we're wrestling with is there's obviously the legalization on the medical cannabis side with the DOJ's final order. It sounds like there's a potential for the administrative hearings to expand that order. And it's obviously too early to tell, but what are the chances we might end up with kind of a split outcome where medical is exempt from 280E, but adult use still remains subject to more stricter taxation. Paul Smithers: Yes, Tom, I think that's a fair question. I think in the short run, and by short run, I mean the next 30 days, that's somewhat unclear. But what the executive order did state was an expedited hearing, and that means within 30 days. So once the June 29 process starts, they expect to have that wrapped up with 30 days and compare that to what we had under the Biden administration, much different. So I think there will be a clear resolution of how cannabis is treated across the board, including medical and adult use at the conclusion of that hearing. So we are very excited about where this is going, as you can imagine. We've talked in the past about rescheduling what we think this is going to do for the industry and our operators. And I think we are thrilled that it's on this expedited time line. And I think we're going to see certainly more capital to the bottom line for these operators. And we've had discussions, and we do expect that there will be much more interest in growth once the 280E tax situation is resolved and operators have a clear idea of where to go, and we think that's going to happen pretty quick. But we think that, that capital will be used to expand and they'll come to us for that expansion, we believe. We also see, of course, other advantages of rescheduling. We think that there's certain states that have maybe been kind of on the fence for a medical program or converting medical to adult use. We think that this rescheduling will really help those states make the move towards new programs. And lastly, I think rescheduling is wonderful for R&D there's a lot of companies going to be very interested in testing a plant and coming into particularly medical uses for the plant. So we are thrilled as these developments and the expedited time line. Operator: Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Just wanted to -- Paul, I just want to continue that same line of questioning. As we look at the -- certainly, the present on this is a bit confusing because there's a war on drugs and yet there's a promotion of medical use. So the -- what exactly happened is that medical use was downgraded to Schedule III, but adult use is still Schedule I. Is that what's happened? Or like what is technically in place right now? We know where ultimately, you can see where this path is sort of ending up. But what does it stand technically as of today? Paul Smithers: As of today, and the acting Attorney General Blanche is very clear, I think, Alex, in where it stands today. Licensed medical use operators have the benefit of Schedule III. And that's 100% medical licenses. And as you know, our operators all hold medical licenses. So that accounts for 100% of our operators in our portfolio. I think it's clear too of the decision they made as far as other use cannabis, they put it on expedited schedule starting June 29 and to have that resolved within 30 days. So we don't expect any extended period like we saw in the past. So I think it's pretty darn clear about the decision to bifurcate, that's fine. But in the interim, where we are today is great because it's 100% covers our medical license holders, and that's in our portfolio. Alexander Goldfarb: Okay. So as far as the 280E exemption goes then, so even though -- so 100% of your tenants are covered because they're medical, which is the way I understood it, so that's good. But as far as the 280E, those same tenants through their operating businesses get the full deduction? Or does the IRS sort of split out their sales? Paul Smithers: So what the DOJ order suggested was retroactive tax relief available for all qualifying medical operators. So that should be 100% for the medical operators. And as mentioned, that's our portfolio. I think what we will see through Treasury and the order does also request Treasury to give an opinion sooner than later as to what the retroactive effect of 280E will be for both medical and adult use. But in the short term, it's clear 280E relief, 100% for medical license holders. Alexander Goldfarb: Okay. So basically, it doesn't matter whether they sell rep or not, they're medical, and then we'll find out how long this retroactive is. In your view, and then as you guys look at your credit, as your tenants who have had credit issues, and this has been a few years from now, I mean, ongoing, is it your view that once the 280E relief comes in, that will basically eliminate any future pending credit issues? Or is your view that we're still going to have potential for credit issues even though there's this 280E relief? I guess that's -- as you know, that's what we've been focused on is just this continued sort of whack-a-mole and it'd be great to move past it and have everyone be in a stronger position. But I'm just curious if the 280E relief on its own and the retroactivity sort of solves that? Or if those credit issues are still going to be there because the tenants just -- the ones who have issues or debt refinancing, whatever, still have that and the 280E isn't really going to help in that front. Paul Smithers: Alex, businesses run all the same. They all have risks. All of them have -- all industries have tenants that -- or companies that grow, shrink, disappear. This 280E allows these businesses to have better operating environments and better operating statistics, but they're still businesses. And they all go through -- they all have good management, okay, management that needs to refocus on their business. So we're going to experience what all industries experience and just like any other real estate company out there that leases space to any business. Alexander Goldfarb: Okay. And then just final question. You mentioned the IQHQ and more doing life science, your deck indicated that. Alan, as you look over the company, let's call it, the next 5 years, do you think it's more like 50-50 or 25-75 as far as life science contribution? Or I'm just trying to think is life science going to be heading towards 50% or will still be a small sliver of the company over the next, call it, 5 years? And I'm not going to hold you to that. It's just trying to understand where you guys see the best investment path forward over the next several years. Alan Gold: I think that that's a very difficult question to answer. But what we can say is that we're now in a situation where we have a strengthening cannabis industry. And if you see the level of activity that's going on in the life science industry, we -- our entry point was, I think, at one of the lowest parts of the industry over a long period of time. And we're seeing a very strong and resurging life science industry. So we have positioned ourselves to be very opportunistic with 2, I think, growing industries that will help us drive growth for our shareholders in the future. Operator: Your next question comes from the line of Aaron Grey with Alliance Global Partners. Aaron Grey: Kind of piggybacking off that last one a bit, more specifically on IQHQ and incremental investments. I know in the filings, you talked about commencing more investments 2Q '26. Just want to -- sure, is that still the case? And maybe just give us some more color in terms of those incremental investments on IQHQ preferred stocks and the timing of it through the near to medium term. Alan Gold: Yes. I mean I think that we have scheduled the investment in the IQHQ organization out through 2027, mid-2027. And we have been able to opportunistically bring forward a couple of those scheduled investments for our benefit because they're a very accretive transaction. If you recall, it's on average, north of 14% and we have a cost of capital with our credit facility associated with making those investments in the 6% range. So extremely accretive investments, and we have been able to bring some of that forward. We continue to believe that the industry, the life science industry, of which IQHQ is involved with is doing really well. And we think that our investments will -- we will continue to look at opportunistically making the investments at the appropriate time. Aaron Grey: Okay. Great. Really appreciate the color there. Second question for me on cannabis. Great to see some of the progress you're making on new leases of the previously defaulted tenants. As we talk about Schedule III creating more opportunities for you, can you talk about maybe some of the near to more medium-term opportunities? You seem to have alluded to your ability to get more aggressive on acquisitions, bringing on more new -- net new tenants. Where would you see those in the near term, would it strictly be medical given the clarity that we have there and maybe markets like Texas, Kentucky or Georgia? Just giving more color and granular in terms of where you might be able to see some opportunities in the near term where we have clarity on just medical only versus more longer opportunities as we wait for the second phase of rescheduling. Alan Gold: I appreciate that question. We do -- we are looking at all acquisition opportunities and for growth in the second half of 2026 and certainly into 2027. But our #1 priority and focus is right now making sure that we complete the refinancing of our unsecured debt, which we have done -- the team has had tremendous success, and we're highly confident. And once we complete that and complete our commitment to IQHQ, I think we can then look at additional opportunities going forward. Operator: Your next question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: I wanted to keep going on rescheduling and try to get some perspective on whether you think the possibility of interstate commerce exists out of rescheduling? And if it did, would you consider the cultivation assets you have an opportunity in that environment? Or would there be a risk in that environment? How do you prepare, I guess, for the scenario or the possibility of interstate commerce? Paul Smithers: Bill, it's Paul. So I think there's 2 questions there. And I'll address the first part of the question is the answer is no that rescheduling does not address interstate commerce. It does not address banking. And those are 2 things that some people were looking for some clarity on and that the Attorney General was clear that interstate commerce and banking and uplisting were issues that were not addressed in this piece. But your further question about interstate commerce is really, I think, something we've talked about over the years. And we don't really see that happening until there is a complete legalization of cannabis across the board. And we believe that is many years out. But as we've discussed in the past, even if we do have some type of interstate commerce, we believe that our assets and our operators will do fine because what we have are indoor growth for the most part and medical, highly specialized product. And that's probably not going to be what's going to go rolling across some trucks across the country. So even if we are in interstate commerce situation, we think we're well positioned. But again, we don't see that for many years out. William Kirk: Okay. And then there is a possible demand unlock that would benefit your tenants in November unless something changes intoxicating hemp basis a federal ban. I imagine most of your properties aren't growing much of it. So I wanted to get your perspective here on what intoxicating hemp going away could mean for your tenants and the demand for the products that they are growing. Paul Smithers: Yes. I think that's accurate, Bill, that our tenants do not grow hemp. They are cannabis growers. And we've been watching that the whole litigation issue with the hemp really just kind of by standards in the sense that we don't believe hemp one way or the other is really going to affect our operators' business. But that being said, I think if there is a ban on intoxicating hemp products, that does put some clarity into the issue, and it will take away some of the Delta 8 stores that we see popping up in nonmedical states. So I think it's a good thing for the cannabis industry to get clarity in the intoxicating hemp legislation. Operator: That concludes our question-and-answer session. I will now turn the call back over to Alan Gold for closing remarks. Alan Gold: Thank you, and thank you all for joining today. I'd certainly like to thank the team for all their hard work, great work and our stockholders for their continued support. That ends the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to Angel Oak Mortgage REIT First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. KC Kelleher Please go ahead. KC Kelleher: Good morning. Thank you for joining us today for Angel Oak Mortgage REIT's First Quarter 2026 Earnings Conference Call. This morning, we filed our press release detailing these results, which is available in the Investors section on our website at www.angeloakreit.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This morning's conference call is hosted by Angel Oak Mortgage REIT's Chief Executive Officer, Sreeni Prabhu; and Chief Financial Officer, Brandon Filson. Management will make some prepared comments, after which we will open up the call to your questions. Additionally, we recommend reviewing our earnings supplement posted on our website. Now I will turn the call over to Sreeni. Sreeniwas Prabhu: Thank you, KC, and thank you all for joining us today. First quarter unfolded in a global environment that was largely supportive to uneven economic growth and geopolitical tensions, including renewed conflict in the Middle East weighed on investors towards the end of the quarter. Inflation showed gradual improvement, while labor markets cooled modestly, and the Federal Reserve maintained a measured data-driven approach to policy decisions. Uncertainty weighed on risk sentiment at times, but also reinforced the values of discipline, liquidity and steady execution. Within this setting, our platform performed well, supported by our focus on credit quality, funding discipline and repeatable processes. Despite broader macro pressures, securitization markets remained open through the quarter. Investor demand continued to favor high-quality collateral and experienced issues even as spreads reflected global headlines, rate volatility and a period of reduced risk appetite. We were pleased to complete the AOMT 2026-2 securitization shortly before the onset of the conflict in the Middle East, taking advantage of favorable market conditions and underscoring the benefits of our methodical, repeatable securitization approach. We remain selective in our use of these markets, staying focused on sound structures, conservative leverage and economics that meet our return thresholds. Our first quarter results reflected our established operating growth trend with another consecutive quarter of net interest income expansion and prudent expense management. The positive earnings trend helped offset unfavorable valuation impacts during the quarter, which were driven by rates and spreads increasing and becoming more volatile. Looking forward, the need for non-QM lending solutions remains durable, and we see value in maintaining a cautious but active posture. Our priorities remain consistent, growing earnings, executing reliably in capital markets and positioning the portfolio to perform across a wide range of economic outcomes. With that, I'll turn it over to Brandon, who will walk us through our first quarter financial performance in greater detail. Brandon Filson: Thank you, Sreeni. First quarter results from an interest income and expense perspective were in line with expectations and reflected contributions from assets added in the quarter and in prior periods, along with a continued focus on cost control. To that end, as Sreeni mentioned, we continued our earnings growth trajectory established in 2025 with another consecutive quarter of net interest income growth. Interest rates were generally stable throughout the quarter, supporting consistent mortgage market activity and enabling continued purchases of accretive non-QM loans. Execution of the AOMT 2026-2 securitization in early March, which I will detail shortly, was strong and well timed, and we expect to continue our trend of 4 securitizations per year or roughly 1 per quarter. While spread widening and rate increases associated with global pension drove a decrease in book value of our portfolio, underlying fundamentals remain supportive and strong operating earnings mitigated the impact of valuation decreases, which we believe are temporary due to the ongoing conflict in Iran. In the first quarter, we had a GAAP net loss of $7.4 million or a loss of $0.30 per common diluted share. Loss was driven by unrealized valuation changes on our securitized and unsecuritized loan portfolios, largely tied to macroeconomic market volatility towards the end of the quarter, which offset positive operating growth. Comparatively, in the first quarter of 2025, we had GAAP net income of $20.5 million or $0.87 per diluted common share. That income was attributable to unrealized valuation gains of our securitized and unsecuritized loan portfolios as well as operating income. Distributable earnings for the quarter were $4.6 million. Differences versus GAAP results were primarily driven by the removal of the unrealized fair value movements just described. Our securitized loan portfolio and residential loan portfolio combined for $13.1 million of unrealized losses, which were offset by $1.6 million of net unrealized gains in our trading securities and hedge portfolios. In the first quarter of 2025, distributable earnings were $4.1 million. Interest income for the quarter was $40.7 million and net interest income was $12.1 million. This compares to interest income of $32.9 million and net interest income of $10.1 million in Q1 2025, showcasing 24% and 20% growth, respectively. Compared to the fourth quarter of 2025, interest income and net interest income grew by 4% and 11%, respectively. Performance has been supported by targeted asset purchases, growing net interest margin and consistent securitization market access during all of 2025 and specifically Q4 '25 and Q1 '26. Operating expenses for the quarter were $5.2 million. Excluding noncash stock compensation expenses and securitization costs, first quarter operating expenses were $3.4 million. The increase compared to a year ago and prior quarter is due to increases in professional service fees and loan diligence fees associated with a larger overall balance and consistent purchases of target assets. Going forward, we expect to maintain similar operating expense levels, and we'll continue to be as efficient as possible with our expense structure. Loan purchases during the quarter totaled $246.2 million and continue to reflect conservative credit profiles, moderate loan-to-value ratios and current market coupons that we believe remain attractive on a risk-adjusted basis. The weighted average coupon of loans purchased during the quarter was 7.3%, the weighted average CLTV was 67% and the weighted average credit score was 759. Our credit underwriting metrics have continued to improve over time as we target our desired credit and return profile. As of the end of the quarter, our loans and securitization trust portfolio carried a weighted average coupon of 6.1% with a weighted average funding cost of approximately 4.5%. We intend to continue to access securitization markets through our disciplined, methodical securitization strategy. As mentioned, we are able to take advantage of favorable market conditions with our AOMT 2026-2 securitization in March just before the onset of the renewed conflict in the Middle East. We were the sole contributor to AOMT 2026-2, which had a $272 million unpaid principal balance and a weighted average coupon of 7.1%, a weighted average non-zero credit score of 757 and a weighted average CLTV of 70.7%. The AAA rated senior bonds priced favorably at 113 basis point spread over the treasury yield curve. As of quarter end, GAAP book value per share was $10.31. Economic book value, which fair values all nonrecourse securitization obligations was $12.28. Compared to the end of 2025, GAAP book value per share decreased 4% and economic book value decreased 3.3%. Changes in book value during the quarter were reflective of operating income, offset by our quarterly dividend payment and the previously discussed market-driven valuation decrease within the portfolio. While the market continues to display volatility tied to geopolitical tension, we estimate that as of today, book value has increased slightly since the end of the first quarter due to continued accretive asset purchases and incremental earnings generation. Balance sheet remained well positioned with cash of $42 million and recourse debt to equity of 1.3x. We aim to maintain liquidity and available financing capacity to provide flexibility to respond to changing market conditions. We ended the quarter with unsecuritized residential whole loans at a fair value of $245.5 million financed with $192.2 million of warehouse debt, $2.2 billion of residential mortgage loans and securitization trust and $238.3 million of RMBS, including $25.7 million of investments in co-mingled securitization entities, which are included in other assets on our balance sheet. We finished the quarter with undrawn loan financing capacity of approximately $1.1 billion with 4 high-quality lending partners. Credit performance continued to be solid with portfolio-wide 90+ day delinquency at approximately 2.7%, which is inclusive of our residential loan, securitized loan and RMBS portfolios. This is materially flat compared to Q1 of 2025 and represents an increase of approximately 50 basis points from Q4 '25. Despite the increase compared to the prior quarter, performance across the Angel Oak shelf remains strong, and we believe that the performance of our collateral relative to the non-QM securitization market is a key differentiator of our platform. We expect our differentiated credit performance to translate into lower losses than comparable non-QM platforms across the full credit cycle. This view is supported by our proactive migration of credit spectrum, conservative LTVs and disciplined underwriting approach, which we believe position the portfolio to perform consistently even in more challenging environments. 3-month prepay speeds on our non-QM RMBS and securitized loan portfolios were 12% as of the end of the quarter compared to 11.2% in the fourth quarter of 2025. As we have mentioned in previous quarters, we expect prepay speeds to increase as rates decrease and homeowners are incentivized to refinance. With that said, we model our returns based on historical prepayment speeds of approximately 20% to 30%. While prepay speeds are likely to tick upward if newly originated coupon rates continue to decrease, the majority of our portfolio still has coupon rates that are below newly originated coupon rates, and we expect that mortgage rates would need to fall meaningfully in order to produce a significant impact to the returns on our portfolio. Lastly, the company declared a $0.32 per share common dividend payable on May 29, 2026, to common shareholders of record as of May 22, 2026. For additional details on our financial results and portfolio composition, please refer to the earnings supplement available on our website. Sreeni? Sreeniwas Prabhu: Thank you, Brandon. The proven well-established Angel origination, purchase and securitization platform provides us with confidence to perform well in a variety of macro environments. The fundamental backdrop of our business is positive. And while risk remains, we will continue to focus on what we can control, expansion of earnings, consistent securitization market activity and disciplined credit selection and management. With that, we will open the call for your questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Marissa Lobo from UBS. Ameeta Lobo Nelson: On HELOCs, you participated in one securitization in 2025 and you guided to about two a year. So how is the HELOC pipeline building relative to non-QM? Brandon Filson: We are building our current HELOC pipeline right now. After the securitization '26-2, we went bought some HELOCs as well. We kind of have enough to co-mingle with some other Angel Oak entities. So we're looking forward to another HELOC securitization in the coming months. But I think that the pacing is still about correct. Ameeta Lobo Nelson: Okay. Great. And then just looking at the loans and securitization trust, noticed the 2024 vintages picking up in speeds about '23, up a bit from last quarter. Delinquency a little bit up. So how should we think about that? And how is that impacting the valuation of the retained tranches on those deals? Brandon Filson: I think the -- yes, I think the speed increase is a little bit expected as rates started to come down. So the '24 deals had a lot of loans that were generated with much higher coupons. So the increase isn't necessarily a surprise to us. We expect to model the 25 to 30 CPR kind of over the life of the securitizations and like a normal kind of rate environment. The return profile seems about the same during that period from certainly what we model. The delinquencies are something we're monitoring, but nothing that's sticking out to us. And if you remember, some of the retained tranches we have, we have a little bit of a hedging effect on our retained positions because we have the interest-only bond and then we have the junior unrated equity piece. And as speeds increase, obviously, the valuations or anticipated returns of the IO would start to decrease, but the B3 or unrated bond and the bonds directly above it start to -- the valuation increases as it's expected, they'll get paid off soon. Operator: Your next question comes from the line of Matthew Erdner from JonesTrading. Matthew Erdner: In prior quarters, you've talked a little bit about calling legacy securitizations, kind of the '21s, '22s. As of last quarter, you guys kind of intended to call two of those throughout the year. Is that still the plan? And then what are you guys seeing there in terms of resecuritization that you could achieve? Brandon Filson: Yes. That's something we're literally monitoring every day. As you probably have good visibility to that decision based a lot on what the funding cost of the deal you're calling, what -- how they are levered, what's left in the stack and current funding cost, which over -- if we're talking in the middle or late February, that answer is a little different than it is today, but it's something we're monitoring. So what we probably have to see is a little cessation or dramatic reduction in some of the volatility in the rate markets for that go/no-go decision to effectively be accretive to call the deals. Matthew Erdner: Got it. Yes, that's helpful. And then as a follow-up to that, what kind of ROEs are you guys seeing in the market? I think it was mid-teens last quarter, trending a little bit lower. Is that still kind of the expectation and then low 20s on HELOCs? Brandon Filson: Yes. I mean I think that's our long-term expectation. If we were to do a deal today with the increase in treasuries and increase in the spreads, we'll be looking maybe lower teens to high 12s. So it has taken a little bit off, but we're not necessarily in the market right now with the securitization. We hope that when things come back into play for us to securitize, we're back up to that 15% to 20% number. Operator: Your next question comes from the line of Timothy D'Agostino from B. Riley Securities. Timothy D'Agostino: Regarding operating expenses, it seems like this quarter, it was elevated a little bit at about $1.7 million. I was wondering if there's anything in particular in that line item that increased it. Brandon Filson: Yes. Mainly, that's going to be professional service fees and loan diligence fees as we continue to buy loans. Our professional service fees in this instance are really related to our ATM program that we have out there that we didn't issue any shares on this quarter. So we had -- we expensed those costs versus putting it through like a contra equity account. Timothy D'Agostino: Okay. Great. And then I just want to touch on the securitization costs as well. If you do one securitization a quarter for the non-QM space, is the pricing on that generally going to be around $1.5 million? Or would it be less? And then the price for a non-QM or the cost for non-QM securitization, how does that differ to HELOC securitization? Just trying to understand that expense line item better as well. Brandon Filson: Yes. I mean securitization expense, there's a decent amount of fixed costs that go into that, and then there's obviously some variable costs. So it's kind of sensitive on how big the deal is, especially on the HELOC securitization, how much of the HELOC securitization we are participating in because we'll take our pro rata share of the deal cost. But really, you can kind of back into like a basis point percentage on securitization based on the amount that we securitized in the quarter, which typically is somewhere around 50 basis points. It could be a little less, could be a little more. But certainly, if we got a larger deal out, it would be a little less than that and about as small as we've been doing lately, $300 million or so it's about 50 basis points. Operator: [Operator Instructions] Your next question comes from the line of Doug Harter from BTIG. Brendan Matthew Greaney: This is Brendan Greaney on for Doug. How did whole loan pricing of non-QM loans hold up in March versus securitization spreads? Brandon Filson: Yes. I mean the whole loan pricing decreased quite a bit. That's really where most of that valuation decrease we have and the losses we had on the unrealized during the quarter. We lost about 1 point off of our whole loan pricing in Q1, and that's really just a reflection of where the current spreads are and the current treasury base rates. Brendan Matthew Greaney: Okay. And where are spreads today on AAAs and securitization? Brandon Filson: It'd probably be about $135 million to $145 million depending on the exact timing and exact collateral that was out there. Operator: Thank you. There are no further questions at this time. I would like to turn the call back to Mr. Brandon Filson for closing comments. Sir, please go ahead. Brandon Filson: I would like to thank everybody for your time and interest in Angel Oak Mortgage REIT. As always, if you have any further questions or comments, please feel free to give us a call and reach out. Otherwise, we look forward to connecting again with you next quarter. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Welcome to SelectQuote's third quarter earnings conference call. [Operator Instructions] It is now my pleasure to introduce Matt Gunter, SelectQuote Investor Relations. Mr. Gunter, you may begin the conference. Matthew Gunter: Thank you, and good morning, everyone. Welcome to SelectQuote's fiscal third quarter earnings call. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today's call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker; and Chief Financial Officer, Ryan Clement. Following Tim and Ryan's comments today, we will also have a question-and-answer session. As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management's current expectations and beliefs concerning future events impacting the company. And therefore, involve a number of uncertainties and risks, including, but not limited to those described in our earnings release, annual report on Form 10-K for the period ended June 30, 2025, and subsequent filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. And with that, I'd like to turn the call over to our Chief Executive Officer, Tim Danker. Tim? Timothy Danker: Thank you, Matt, and appreciate everyone joining us this morning. We're pleased to report another quarter of strong financial results across each of our segments. We reaffirm our outlook for fiscal 2026 and continue to execute our goal to drive profitability and cash flow. We're especially proud of the results given the headwinds our industry has faced over the past year plus. This is a testament to our people and strategy. SelectQuote continued to advance our goal to expand cash flow, and the company is very well positioned to accelerate that effort in fiscal 2027. To summarize, SelectQuote generated $431 million in revenue, driven by solid results across each of our segments. Adjusted EBITDA totaled $45 million, growth of 18% year-over-year. In Senior, we grew revenue by 8% year-over-year to $183 million. Growth was driven by healthier OEP, strong agent productivity and customer retention, as well as a positive change to our commissions receivables that Ryan will detail. As we have mentioned before, we firmly believe the SelectQuote's strategy and our agents make the difference. This now marks 4 consecutive years of strong operating performance in Senior, despite widely varying Medicare Advantage backdrops each year. To say it lightly, we're very proud of the results and our differentiated model. Senior adjusted EBITDA totaled $59 million, which includes the positive $14 million adjustment I just mentioned. It is important to note that the adjustment reaffirms the value of the commissions receivable on our balance sheet and the approximate $1 billion in assets we expect to receive in the quarters and years ahead. When we offer bespoke advice to American seniors and do so year-in and year-out, they get the best care, and we and our carrier partners benefit through strong retention. That said, excluding and normalizing the adjustment for comparison purposes, SelectQuote's model once again drove strong Senior margins of 26% and a Medicare Advantage backdrop that was mixed this season. Turning to Healthcare Services, revenue grew 5% compared to a year ago, totaling $199 million. Our revenue and profitability in SelectRx was impacted by both carrier-specific actions on reimbursement, which we detailed earlier this year, and the implementation of the Inflation Reduction Act. Ryan will provide detail on that impact shortly. Those headwinds notwithstanding, our adjusted EBITDA improved sequentially to $5 million, and we maintain our view that Healthcare Services will be a significant driver of profitable cash flow growth in fiscal 2027 and beyond. Overall, including our Life Insurance segment, we expect to exit fiscal 2026 on very strong footing in spite of what was a challenging environment. Looking ahead to 2027, we are encouraged by increasing visibility within the Medicare Advantage ecosystem. We're excited about SelectQuote's ability to compound cash flow growth in the near future and see significant value for shareholders as a result, especially at what we believe is a wildly dislocated valuation for our company. To that end, let me be clear that we will take all necessary action to maintain our listing on the New York Stock Exchange. We remain confident our stock will continue to be traded on the NYSE for years to come. Lastly, I'd like to take a minute to highlight a new and important initiative called SelectQuote Local. As you know, we have longed and proud of our company's ability to help underserved Americans. SelectQuote Local is a natural extension of our model and allows local community healthcare and life insurance participants to leverage our information and market advantages to help more people in need. The business offers our leading marketing, technology, products and customer service platform through a franchise model with local sales and service. Put another way, we're offering local providers the information engine of SelectQuote on a fee-based arrangement, and we can do so with minimal capital investment. Similar to the expansion of our revenue to CAC metric with the growth of Healthcare Services, we see SelectQuote Local as another extension of how our model can help more Americans with the same scale dollar of investment. SelectQuote Local won't be a meaningful revenue driver in the near term, but strategically, it broadens our reach and addressable market. Now let's flip to Slide 4, and let's take a look at the KPIs from our very strong quarter. We've shown these before, primarily for our Senior business, but we've also included additional detail on SelectRx. Starting with Senior on the left, we drove another strong quarter measured by agent productivity and OEP. Agent service and productivity are an evergreen goal of ours, but I'd remind you that this is all the more impressive considering the very strong compares in the previous 2 years. Specifically, we drove a 1% improvement in policies per agent over this timeframe despite historically wide swings in the environment from one season to the next. Moving down the page, we saw even better results on marketing efficiency, spending 14% less per approved policy compared to 2 years ago. Ryan will speak to elevated approval rates this season, but even excluding that unique impact, we saw a strong return on marketing spend beyond just policy booking. Senior engagement was high across the full range of our channels. We're underscoring our Senior division efficiency performance here, because we oftentimes find investors and analysts overlook the progress we've made on cash conversion in this segment. Moving to the right side of the page, we highlight the significant progress we've made with onboarding of SelectRx members. As you can see, we have driven a 64% increase in prescriptions shipped compared to 2 years ago relative to a commensurate 55% increase in SelectRx members. Progressive maturity and onboarding of our membership, combined with the improved operating efficiency of our Olathe, Kansas distribution facility has driven significant leverage on a relatively fixed cost base. As a result, SelectQuote generated a global revenue to CAC multiple of 6.7x. Only SelectQuote offers this unique combination of capabilities to help patients in multiple ways. This increases the value we bring to consumers and drives additional profitability with each senior we engage with. For products and services that are inherently recurring, especially when done at our level of care, the cash flow streams from our customers drive very compelling returns on invested capital. As we've noted, there is a wide disconnect between the value we see in our platform and cash flow streams and the valuation of common equity. Take one simple example. Our Medicare Advantage commissions receivable balance at the end of fiscal third quarter totaled nearly $1 billion, which compares to our market cap of under $200 million today. We have fielded questions about the LTV assumptions in our commissions accounting going all the way back to our IPO, but I'd simply note that SelectQuote has just operated in 2 of the most disruptive Medicare Advantage environments on record. Over those 2 years, we had a recapture rate of over 33%, and we're able to recognize a favorable adjustment to our receivables. The point being, we have visibility and conviction in our balance sheet asset and multiple capital markets transactions would suggest others analyzing the business closely share that conviction. Before I hand the call over to Ryan, we're very proud of the great progress we've made over the past 4 years, both operationally and on our capital structure. We continue to prioritize cash flow generation and will deliver significant year-over-year improvement in operating cash flow in fiscal '26. We expect to build upon that meaningful cash flow improvement in fiscal '27 and beyond with a stated goal to delever our balance sheet in the years to come. I'll end my comments by underscoring our commitment to remedying the disconnect in our equity value and see a very compelling opportunity in SelectQuote for investors in the future. With that, let me turn the call over to Ryan to review our third quarter. Ryan? Ryan Clement: Thanks, Tim. I'll pick it up on Slide 5 with a summary of our consolidated financial results. As Tim noted, SelectQuote had a strong quarter with revenue growth of 6% year-over-year, totaling $431 million. The growth was driven by both our Senior and Healthcare Services businesses, reflecting a strong OEP and continued demand for SelectRx. Adjusted EBITDA of $45 million was aided by the positive change in estimate to our commissions receivable that Tim noted. Excluding the favorable adjustment, our consolidated EBITDA margin for fiscal 3Q would have been 7%, which is a strong result for an OEP quarter. Overall, given the volatile backdrop, we are proud of the progress we continue to make on profitability and cash flow generation. The fiscal third quarter was strong operationally, and we are very well positioned to end fiscal 2026 on a positive note and carry momentum into 2027. Let me begin the segment overview on Slide 6 with a summary of our Senior business. As Tim noted, Senior revenue grew 8% compared to last year, totaling $183 million on 4% growth in approved MA policies and the positive change in estimate. Let's detail those 2 drivers, starting with approved policies. While growth in approved policies was strong, it's important to note that approval rates this OEP were materially higher than in previous years. While we are encouraged by these strong carrier approval rates, we will continue to monitor as it's possible some of this increase may reflect approval timing and volume that was pulled forward from 4Q, contributing to the outsized strength this quarter. Shifting to the positive adjustment, the majority of the $14 million increase in receivables was due to a change in our estimate of expected renewals driven by additional anticipated renewals from our policyholders as we continue to gain visibility to retention through this most recent renewal event. Having now operated through 15 Medicare seasons, we are proud to say we still have customers from our earliest cohorts. As a reminder, our LTV accounting assumes 10 renewal years and also assumes a 15% constraint. We think this is yet another indicator that our commissions receivables balance represents a large and perhaps not appropriately understood source of future cash flow to the business. Moving to adjusted EBITDA, Senior generated $59 million, including a favorable $14 million adjustment to our commissions receivable. Excluding that adjustment, the Senior segment produced an EBITDA margin of 26%. We have now maintained profitability of at least 25% during the AEP and OEP seasons for each of the last 4 consecutive years. Over that timeframe, the SelectQuote Senior business has averaged EBITDA margins of over 25% on a full year basis. Moving to Slide 7, our Healthcare Services business performed in line with our expectations against the pressures Tim mentioned. As we forecasted, membership growth in the quarter was strong at 11%, but moderated compared to the recent past. To be clear, demand remains very strong, but we continue to focus on driving further improvement in segment profitability. Our nearly 117,000 members drove revenue of $199 million for the fiscal third quarter. Let me take a moment to speak through the dynamic that changed booked revenue sequentially. The Inflation Reduction Act went into effect on January 1 of this year and set maximum fair prices for 10 higher-priced drugs. Essentially, all of the sequential drop in revenue was driven by that specific price change in the quarter. It's important to note that while the IRA drove a notable change to our top line, the actual impact to EBITDA was in the low single-digit millions and was fully accounted for in our original forecast. To that point, moving down the page, we drove adjusted EBITDA of $5 million despite the headwinds mentioned. As we noted last quarter, we see significant profit and cash flow in our base of SelectRx members. We are driving profit improvement through the seasoning and higher utilization of our membership base. Additionally, we continue to grow more and more optimistic about the cost efficiency of our Olathe distribution facility, which came online in April of 2025. At this time, less than 20% of our prescriptions shipped from that facility, but we are already recognizing 30% plus efficiency gains on those shipments relative to our 2 legacy locations. We have been investing in the development of a proprietary pharmacy management system to support all of our locations, and we are in the testing phase at this point. Upon successful completion of our testing, the new pharmacy management system will allow us to fulfill many more SelectRx members through the Olathe facility in the quarters to come. We currently use less than half of the facility space and run only 1 shift in that facility. So there's ample room to scale into this highly efficient operation. Flipping to Life Insurance on Slide 8, the business remains steady with cross currents between our 2 main products, Final Expense and Term Life. Final Expense continues to be a tailwind for the business with commissions up more than 8% year-over-year at highly attractive margins. We continue to see strong demand for this product and believe it will be a consistent growth driver well into the future. Strength in Final Expense was partially offset by Term Life, which remains a competitive market as consumers are shifting where and how they consume media. Overall, Life revenue grew 4% to $48 million and generated adjusted EBITDA of $6 million. While small, it's worth noting that the Life business generates sufficient cash flow similar to our Healthcare Services segment. In summary, our Life division remains a steady contributor of profitability and cash flow. Finally, on Slide 9, we are reaffirming our revenue range of $1.61 billion to $1.71 billion and adjusted EBITDA range of $90 million to $100 million. Despite realizing a positive adjustment this quarter, we believe it is prudent to maintain our guidance ranges at this time. As mentioned earlier, 3Q results were aided by approval rates in Senior that were materially higher than previous years. While we are encouraged by this approval rate increase, we want to continue to monitor whether some of this goodness may be timing related, impacting our fourth quarter approved policy levels. To echo Tim's comment, the SelectQuote model is generating visible and strengthening cash profitability, and we are highly focused on closing the disconnect between our equity market value and the real value of those cash flows. With that, let me now turn the call back to the operator to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Drew Sterrett from RBC Capital. Andrew Sterrett: This is Drew Sterrett on for Ben Hendrix. You previously noted that PBM headwinds have continued for SelectRx. I mean for this quarter, it appears reimbursement came in a little ahead of our expectations. Do you have any additional commentary around this? And how should we think about the PMB (sic) [ PBM ] reimbursement environment going forward? Timothy Danker: Yes, Drew, thanks for joining. This is Tim. I'll take the first part of the call and maybe have Ryan also speak to the IRA impact. But as far as the PBM reimbursement environment, it remains very stable. As we talked about earlier this year, we faced a challenge with the change in our reimbursement rate. We have successfully resolved that issue and have seen reimbursement rates normalize in the third quarter results. So, would categorize the environment from a reimbursement rate is stable, and we're happy to have secured a multi-year agreement with our largest PBM partner. Ryan, maybe you can elaborate a little bit more on the IRA dynamic Inflation Reduction Act that impacted revenue for the quarter. Ryan Clement: Yes, happy to. As Tim noted and I mentioned on the call, the revenue sequentially declined and the biggest driver there or the driver is the Inflation Reduction Act, which when you look at it optically, revenue obviously dropping, but the bottom line impact, very different from what we see in the top line, top line is outsized. And the reason for that is we're receiving refunds from the drug manufacturers, and that's actually flowing through in the cost of goods line item. So for the quarter, we actually received $13 million in refunds. But again, there's a little bit of a geography change that's happening. And certainly, optically, it looks like there's a sequential decline, but that's really driven by the IRA impacts, which were fully accounted for in our guidance. Operator: Your next question comes from the line of George Sutton from Craig-Hallum. George Sutton: That's a new way to say, Craig-Hallum. So nice results. I wondered, Tim, if you could talk about, you mentioned in your prepared comments, you're positioned to accelerate the cash flow dynamics in 2027. Can you just give us a little picture of that? Timothy Danker: Yes, I'd be happy to, George. And I appreciate you being on, George. As far as cash flow dynamic, we feel like we're making substantial progress year-over-year. I think it's a byproduct of the positive changes that we made in the capital structure and kind of cash interest obligations. Certainly, as you've seen the results for OEP, which I think we have highlighted is there's been a lot of change over the past 2 years around the environment. So we feel really good about the OEP results and the underlying efficiency that we're driving in our Senior distribution business, both from an agent productivity as well as from a marketing efficiency standpoint. And clearly, we had a bounce back quarter in terms of SelectRx. And that's a big part of the story moving forward, really those 3 factors that would emphasize SelectRx is a significant opportunity for us to continue to improve the cash flow generation. So we highlighted the Olathe, Kansas or Metro, Kansas City facility and some of the things that we're doing there that are driving 30% plus efficiency relative to our legacy pharmacies, and we expect that to continue to compound as we exit fourth quarter this year into next year. George Sutton: Great. You also mentioned increased visibility in the Medicare Advantage ecosystem. I wondered, you've got some fairly public comments from a large carrier about their plans, which don't necessarily align with the brokers. I'm curious where you're seeing this increased visibility? Can you give us a sense of the discussions that you're having with the carriers? Timothy Danker: Yes, I'd be happy to. Great question, George. I think we are certainly seeing some positive developments relative to maybe a few quarters ago in the broader MA market recovery, if you will. But I think we would still caution at the pace of recovery. The things that we're seeing, I know that you and other analysts are covering from the payers that have reported is we're seeing some of the medical cost trends easing a bit, still expected -- forecasted to be up in high single-digit year-over-year, maybe coming in slightly favorable to that. But a reimbursement trend that's not fully sufficient to cover those costs. So that's a bit of a mixed story there, if you will. Some of the changes to the stars rating changes, we think is a positive tailwind if the payers can manage the enhanced focus on the clinical factors. And then you're seeing the payers' margin improvement recovery happening. I think when you put all that into the blender, if you will, we think there will be a continued discipline in the market for plan year 2027. We believe that there's some potential reemergence to targeted growth for plan year 2028. So we're anticipating that there could be some elevated disruption again this next year as carriers try to get to those target margin goals. But we have performed very well over the past 2 years. We certainly take the position that SelectQuote has been in this business for 15 years. Many members of this exec team have been in Medicare for 20 years. And we know these cycles don't last forever. We continue to have an optimistic outlook, I would say, cautious optimism. George Sutton: Lastly for me, if I could. Both you and Ryan were pretty adamant about wanting to remedy the disconnect of your equity. And I'm just curious how broad you're thinking there. Obviously, execution is one factor, but I'm curious outside of that, how broadly you're thinking in terms of things like segment sale or monetizing receivables or other M&A. Just curious on that side? Timothy Danker: Yes. Fair question, George. I mean we definitely plan to remedy it, and we made the public comments about ensuring that this company will be listed on the New York Stock Exchange. But beyond that, which we will certainly accomplish, we continue to evaluate a series of options. And I think we've been on record as a company that continues to evaluate various capital markets transactions, securitization, obviously, we've accomplished one. We think the positive development of how we've worked through the past 2 years on the renewal side and this positive change in estimate gives us more conviction, even increased conviction around our back book receivables, that's certainly an option. And there's other M&A, we certainly believe that -- and we've said this before, there's -- the market is at the point where consolidation might make sense. We think there'll be a small handful of sophisticated and capability-rich players, and SelectQuote will certainly be one of those. We think the strength, the diversification, the durability of our business creates an option set for us that's quite wide. Operator: Your next question comes from the line of Steven Couche from Jefferies. Steven Couche: I'm on for Dave. Maybe we can start on SelectRx. Do you still expect to exit the year at the $40 million to $50 million EBITDA run rate that you had previously messaged? Timothy Danker: Hello, Steven, I appreciate you joining, and I'm happy to answer that. I think we are highly confident that in the very near term, this business will be at a $40 million to $50 million EBITDA run rate business. We continue to gain operational efficiencies like we've commented on in our Kansas City facility, and we expect that to continue to compound as we exit 4Q and enter fiscal '27. Steven Couche: Okay. Great. And then I actually wanted to ask about Kansas City and how you think about taking volumes out of the other 2 facilities, I believe they're in Indy and Pittsburgh and moving them into Kansas City. And I mean, does it create some sort of stranded costs or decremental margins in the other 2 facilities when you move into Kansas City? Timothy Danker: Yes. I can take that one. As far as getting volume in, we are -- we've been very open that we've been working on kind of a new pharmacy management systems and things like that. And in order to really take more volume in, we are really close, but we're working on getting that done. We've sent our first patients through that process, it's gone very, very well. So pretty soon, we will be kind of moving more patients over. It doesn't -- actually, that should help the margins in the other facilities, because it should take a little bit of a burden off of some of the later night shifts and things that we have to do. So again, that cost savings that Ryan was talking about is very real. So we feel like that will just enhance margins even more as we run more volume through there. Steven Couche: Okay. And then maybe 1 or 2 on Senior. So the $14 million positive change of estimate, did I hear you correctly when it sounded like those -- that better performance was on recent policies. I don't know if it was this most recent AEP or maybe the one before that. And I guess the underlying question is how much of that $14 million should we think about folding into the underlying EBITDA run rate? Timothy Danker: Yes. So I think with respect to -- obviously, the guide, we've kind of set that out, there is $90 million to $100 million, we weren't adjusting it. With respect to the positive tail adjustment, that's really -- we've been through another renewal event. We're sitting looking at our book of business, looking at persistency, making adjustments based off our expectations. And so through this enhanced visibility, it became clear that we would expect to collect more than what we currently have on the balance sheet, which led to the change in estimate. So I think it's less about any specific cohort and more broadly as we assess the book of business, it became clear that it made sense to go ahead and make this adjustment. But again, at this time, we're not modifying the guidance. I want to see how Q4 develops. And obviously, we've talked about the approval rates. And so just seeing how that develops, but we're very pleased with the overall business results as well as the way the book is holding up. Steven Couche: Okay. Great. And maybe I can sneak in one more here. So when we think about the LTV calculation, obviously, this last AEP was extremely disruptive, probably max disruption. And so when we think about moving forward the LTV calculation, do we just need the industry-wide enrollment disruption to be less and that would theoretically benefit the LTV calculation? Or are there other variables at play where just if the environment just stabilizes, that wouldn't necessarily result in the LTV also stabilizing or improving? Timothy Danker: Yes. So I would say there are many factors that impact the LTV, it's customer retention, carrier mix, payment structures. Obviously, we have been through 2 disruptive seasons, and that does put some pressure on persistency. We're incredibly pleased with the 34% recapture rate. We've done phenomenally well navigating the season. And I think it's worth calling out that when we do help someone with a new policy that may have a plan term, we're actually putting that policy on the books at a very low cost. All that being said, I think clearly, strong performance and the ability to navigate through a range of Medicare seasons. Your question around stability, if we do see increased stability within the system, that would be a tailwind to lifetime values. And so again, I think that's what we're hoping for in the future, but clearly been able to navigate 4 very different Medicare seasons. Operator: Your next question comes from the line of Michael Kupinski from NOBLE Capital Markets. Michael Kupinski: Congratulations on your quarter. Tough to kind of go a little bit later in asking questions. Most of my questions have been answered. I was just wondering in terms of the marketing spend by national carriers, have you seen any changes there? And then also just in trends on your Senior, I know that you've kind of touched around this. Just wondering if you can just kind of give us your thoughts in terms of the back half of the year and how that's trending, particularly? And I know you touched on all of this in terms of submission volumes, approval rates and average revenue. But just wondering if you can kind of give us your thoughts in terms of how things are trending as we kind of look into the next quarter? Timothy Danker: Yes, Michael, thanks for joining. Just to clarify, your first question is regarding kind of a carrier marketing investment. I just want to clarify before I respond. Michael Kupinski: Yes, the carrier marketing spend. Timothy Danker: Yes. Thank you, Michael. So the short answer to that, Michael, is no additional updates beyond what we shared on our second quarter call regarding strategic marketing investment other than to say what we had projected is what we're experiencing. So we're certainly in line there. Carriers will go through their annual planning cycles with us this summer, and we'll expect to have a clearer picture when we provide our fiscal '27 guide. But I think if you look at how we navigated this OEP, we obviously had to absorb some of the aforementioned $20 million impact, a material amount of that came through in our fiscal 3Q, and we were able to still drive, we believe, outsized results. So we think this is all certainly manageable. I think the second part of your question was additional detail on how the back half of the year is going. And I would say that, again, we just went through our second biggest quarter in OEP, we think, with flying colors, and we're really proud of the results and the efficiency and how that also builds towards oFur commissions receivable as well as 4 straight years of 25% plus full year EBITDA margins, we're quite proud of that. We now enter into the SEP period, and we are seeing -- honestly, SEP period looks a lot like last year. No substantial changes for us year-over-year. We do believe that our year-round model and the viability of our economics, inclusive of the quieter SEP periods is very unique amongst other direct-to-consumer players in our category. We're really able to make the quieter periods work economically and also enhanced by this unique asset we have called SelectRx and how our enterprise economics work even when the heartbeat might be a little slower during SEP. So everything is kind of in line, while early, and expect to finish the year strong. Operator: At this time, there are no further questions. I will now hand the conference over to CEO, Tim Danker, for closing remarks. Timothy Danker: Yes. Thank you all again for your time, and we appreciate your support of SelectQuote. As Ryan and I have both noted, the SelectQuote model continues to drive consistent and reliable value to our customers and insurance carrier partners. We know the underlying cash flows for our services are real and significant, and we look forward to convincing more and more investors of that value in our equity in the months and years ahead. We appreciate your time. Have a great day. Operator: This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the UL Solutions First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. It is now my pleasure to introduce to you, Yijing Brentano. Please go ahead. Yijing Brentano: Thank you, and welcome, everyone, to our first quarter 2026 earnings call. Joining me today are Jenny Scanlon, our Chief Executive Officer; and Ryan Robinson, our Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at ul.com. Our earnings release is also available on the website. I would like to remind everyone that on today's call, we may discuss forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements about UL Solutions results of operations and estimates and prospects that involve substantial risks, uncertainties and other factors that could cause actual results to differ in a material way from those expressed or implied in the forward-looking statements. Please see the disclosure statement on Slide 2 of the earnings presentation as well as the disclaimers in our earnings release concerning forward-looking statements and the risk factors that are described in our annual report on Form 10-K for the year ended December 31, 2025, and subsequent SEC filings. We undertake no obligation to update any forward-looking statements to reflect events or circumstances at the date hereof, except as required by law. Today's presentation also includes references to non-GAAP financial measures, a reconciliation to the most comparable GAAP financial measures can be found in the appendix to the earnings presentation, which is posted on the Investor Relations section of our website at ul.com. With that, I would like now to turn the call over to Jenny. Jennifer Scanlon: Thank you. Good morning, everyone, and thanks for joining us. Let me start off by saying that we had an excellent quarter. We entered 2026 with strong momentum and the first quarter results confirm the trajectory we saw building throughout last year. We are executing with greater precision expanding our margin profile and positioning ourselves to grow with structural mega trends that are propelling our industry's long-term growth. Our resilient business model continues to serve us well as we innovate with our customers while they embrace rapid technological change. Of course, I also want to recognize the incredible team behind these results. executing consistently at this level across geographies and service lines with the backdrop of ever-changing conditions takes real skill and commitment. Our nearly 15,000 employees are both and I don't take that for granted. The decisions we have made to refine our portfolio, optimize our cost structure and allocate capital to growth areas are paying off. Before Ryan walks through the detailed financial results, I'll cover 3 areas: first, highlights of our first quarter performance; second, notable achievements in strategic development since we last reported, including the anticipated acquisition of Eurofins Electrical & Electronics or E&E business; and third, some perspective around the macro and geopolitical factors impacting our end markets. Let me start with the quarter. Our results were excellent. We delivered consolidated revenue growth of 7.5% as compared to the prior year period with organic revenue growth of 5.7%. Adjusted EBITDA grew over 22% and adjusted EBITDA margin expanded 320 basis points. Adjusted diluted EPS increased 31.5% year-over-year. These results exceeded our expectations. Importantly, this performance was not the result of a single factor or a onetime tailwind. It reflects operating efficiency that is increasingly embedded in our business model. The benefits of disciplined expense management higher utilization across our engineering and lab teams and the accelerating impact of our previously announced restructuring program. We are moving quickly on durably improving our costs, and it is showing up in our results. Each of our 3 segments: industrial, consumer and risk in compliance software delivered strong organic growth and several hundred basis points of adjusted EBITDA margin expansion in the quarter. Now let me turn to our milestones achieved and strategic actions from the first quarter and in recent weeks. First, in our core business, we granted our first ever global safety certification for a robot operating in a public environment, certifying Simbe's Tally, an autonomous shelf-scanning robots deployed in retail stores. Tally earns certification to the UL 3300 standard for service robots operating in dynamic spaces where they encounter unpredictable human behavior. As robots expand in the grocery stores, airports, hotels and even homes at scale, we expect the need for rigorous independent certification will continue to grow, and we are a trusted leader in that space. We also issued the world's first certifications for AI-enabled products under the UL 3115 AI safety certification program awarded to Qcells for its data center energy management system and to Omniconn for its smart building platform. Both systems were independently evaluated for robustness, reliability, transparency and degree of human oversight as their operations become increasingly autonomous. As AI moves into critical infrastructure at scale, independent certification is essential to public trust, and we are positioned as a leader. Next, in keeping with our renewed focus on M&A. Last month, we announced a definitive agreement to acquire the Eurofins Electrical & Electronics business, including the MATLAB certification mark. This carve-out is a compelling strategic transaction that we expect to extend our capabilities in key geographies, including EMEA and Asia Pacific, and it will help drive continued growth in the consumer segment. by bringing together a global infrastructure of complementary electrical testing and certification services to meet customer needs. We expect it to close in the fourth quarter of 2026, subject to applicable regulatory approvals and customary closing conditions. The stand-alone business is expected to generate approximately $200 million in revenue for the full year 2026. The transaction is anticipated to be accretive to adjusted diluted EPS in the first full calendar year after closing, excluding intangible amortization and integration costs. We look forward to welcoming the E&E team when the time comes. These are highly skilled colleagues who share our mission of working for a safer world. And we are excited about what this combination means for our customers, and for the long-term growth of UL Solutions. Now let me offer some perspective on the macro environment and what we are seeing across our end markets. The global backdrop is more complex than it was a year ago. but our business is navigating it well. The leading demand drivers of our business remain durable, electrification of products, data center build-outs, advanced product development, fire safety and building construction, supply chain compliance software and the ongoing certification services that support the products carrying the UL mark. We do not view these as cyclical tailwinds. These are structural and they align directly with our capabilities. The characteristics that make us resilient remain strong, recurring revenue, global diversification, long-term customer relationships and a mission-critical role in the product development life cycle. Based on the strength of our first quarter and our visibility into end markets, we are raising our full year 2026 adjusted EBITDA margin outlook. Now I'll turn the call over to Ryan for a detailed review of our first quarter results. Ryan Robinson: Thank you, Jenny, and hello, everyone. I also want to thank all of our team members for delivering a strong start to 2026. The first quarter results reflect the work that has been done to improve our efficiency and earnings quality, and that work is increasingly visible in our numbers. I also want to highlight that Q1 2026 marks the first quarter in which we are reporting under our updated segment structure. As we noted previously, the primary change is the reallocation of certain activities formerly reported in software and advisory into industrial. The remaining software business is now reported as a segment called Risk and compliance software. Recast historical financial data is included in our earnings material and should provide a helpful view of the underlying performance and trajectory of each segment. Now let me walk through the quarter in detail. Consolidated revenue of $758 million was up 7.5% over the prior year quarter, including organic revenue growth of 5.7%. The organic revenue growth was led by our industrial segment, supported by solid contributions from consumer and risk and compliance software. Adjusted EBITDA for the quarter was $197 million, an improvement of 22.4% year-over-year, outperforming our expectations. Adjusted EBITDA margin was 26.0%, up 320 basis points from Q1 2025. Adjusted net income increased 33.8% year-over-year, resulting in a 35.1% increase in adjusted diluted earnings per share. Expenses were well controlled in the quarter. The combination of higher revenues, improved productivity and higher utilization, prudent head count management and restructuring savings contributed meaningfully to our operating leverage. In Q1, revenue benefited by $13 million or 1.8% from FX, and this was offset by higher expenses from FX as local expenses were translated to USD. These changes reduced adjusted EBITDA margin by roughly 40 basis points. Now let me turn to our performance type segment, beginning with Industrial. Revenues in Industrial were $375 million, up 10.3% in total and 8.2% on an organic basis from the first quarter of 2025. Growth was led by ongoing certification services and certification testing with particular strength in energy and automation and materials. Adjusted EBITDA for Industrial increased 20.6% to $123 million in the quarter. Adjusted EBITDA margin improved 280 basis points to 32.8%, driven by operating leverage from revenue growth and disciplined expense management. Turning to Consumer. Revenues were $318 million, up 4.6% in total and 3.0% on an organic basis from the first quarter of 2025. Growth in the first quarter was driven by certification testing and ongoing certification services with particular strength in consumer technology, appliances and HVAC. We noted when we first provided full year 2026 guidance, we expected Q1 to be the most challenging year-over-year comparison period for consumer, given the elevated demand in Q1 2025. In addition, as part of the restructuring program that we announced in November, we exited nonstrategic lines of business with lower profitability. These exits reduced consumer organic revenue growth by about 1% and Considering these dynamics, the underlying consumer growth trajectory remains solid. Consumer adjusted EBITDA increased 25.0% to $55 million. Adjusted EBITDA margin improved 280 basis points to 17.3%, driven by operating leverage, higher employee productivity and expense management, including the head count reductions from the restructuring point. Moving to our Risk and Compliance Software segment. Revenues were $65 million, an increase of 6.6% in total and 4.9% organically from the prior year period. This was led by increased demand for supply chain insights for the retail industry. Adjusted EBITDA for risk and compliance software was $19 million in the quarter, up 26.7% year-over-year with adjusted EBITDA margin expanding 460 basis points to 29.2%. This improvement was primarily driven by operating leverage and higher employee productivity. I want to note that our risk and compliance software segment will look different beginning in Q2 as we completed the divestiture of our EHS software business on April 1. EHS software contributed revenue and profitability to Q1 results and its absence will affect year-over-year comparisons and margin profiles of this segment going forward. We will provide further context when we discuss our outlook. Turning to cash generation and the balance sheet. For the trailing 12 months ended March 31, 2026, we generated $665 million of cash from operating activities and $450 million of free cash flow. During the first quarter, capital expenditures were higher year-over-year, consistent with the commentary we provided on our Q4 2025 earnings call regarding the timing of certain investments from the back end of last year. Our balance sheet remains strong, supported by our investment-grade credit ratings, including Moody's recent upgrade of our rating to Baa2. This provides efficient access to capital to fund both organic investment and strategic M&A. This includes the financing of the E&E acquisition which we expect to fund through a combination of portfolio management activities, cash on hand and available capacity under our credit facility. Approximately 45% of the purchase price is anticipated to be funded through our portfolio management activities. This includes the sale of the EHS software business. In addition, just last week, we signed a definitive agreement to sell our shares in DQS Holdings GMBH for approximately EUR 105 million in cash. We expect the sales to close in the second half of 2026, subject to the receipt of applicable regulatory approvals and satisfaction of closing conditions. The sequencing of our portfolio management actions reflects our deliberate strategy to sharpen our focus on TIC and risk and compliance software while redeploying capital into businesses that extend our core capabilities and global reach. Now turning to our 2026 full year outlook. While the macro environment is more complex today than when we set our original guidance, we have remained focused on our customers. Our execution has been strong, and our performance has been largely unaffected to date. These reasons, among others, have strengthened and allowed us to strengthen our adjusted EBITDA margin guidance. We continue to expect 2026 consolidated organic revenue growth to be in the mid-single-digit range versus full year 2025, anticipating contributions from all 3 segments. As a reminder, the EHS software business accounted for approximately $56 million of 2025 revenue and had margins roughly similar to our consolidated margins. The revenue impact of the EHS software divestiture which was pretty similar each quarter last year will be reflected in the acquisition and divestiture portion of our revenue change starting in Q2, and we do not expect it to affect our organic revenue growth rate. At this time, the forward FX forecast implied an approximately 1% tailwind on revenue growth for the year, and we would anticipate that to be offset with an expense increase from FX. Based on our strong performance in Q1 and the above considerations, we are strengthening our expectation for 2026 adjusted EBITDA margin to be approximately 27.0%, assuming current forward FX rates that I just mentioned. This margin outlook reflects progress on our continued improvement in productivity and restructuring efforts. Q1 was outstanding, and we expect to continue to improve margin. Our capital expenditure outlook for 2026 remains a range of approximately 7% to 8% of revenue. Our current tax rate expectation for the year is approximately 26%. We now expect our remaining expenses related to the previously announced restructuring program to be approximately $3 million as compared to the $5 million to $10 million previously communicated. We anticipate achieving the expense reduction targets we previously communicated. Overall, we are pleased with the start to the year and we believe that we are well positioned to deliver on our objectives while continuing to invest in long-term growth. Now let me turn the call back to Jenny for some closing remarks. Jennifer Scanlon: Thanks, Ryan. For this quarter's highlights some interesting things going on here at UL Solutions, I want to talk about some great events that have been taking place. UL Solutions continues to host data center infrastructure Summit, a series of in-person and virtual events that bring together key stakeholders to align on critical issues surrounding these globally proliferating facilities. Our events began last September at our Northbrook campus and has been a huge hit with our customers and other interested parties around the world. In the first quarter, we hosted our third event in Silicon Valley. This one alone drew more than 150 attendees from 41 different companies. These well-received events really underscore the importance of data center infrastructure and how our customers are looking to us for leadership and help in navigating the complex data center landscape. To close, we are proud of our Q1 results, and we remain dedicated to carrying out our focused strategy on behalf of our customers, our employees and our shareholders. With that, let's open the line for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Andrew Nicholas of William Blair. Daniel Maxwell: This is Daniel on for Andrew this morning. Just curious if you're seeing any notable changes in customer behavior yet, that's attributable to the conflict there on? And then should we think about that similar to how the tariff narrative has played out? Or is it more of a get pressure that can't be resolved by changing factory locations? Jennifer Scanlon: Thanks, Daniel. And we appreciate the question and certainly, in some areas of the world, but everybody is paying attention to. But for us, our demand drivers in the Middle East are a very small portion of our EMEA. And what we're seeing on customer behaviors continues to be what I would term a normal reaction to the uncertainty that they're facing, but no material effect on our business at this point. Of course, we're paying very close attention to the safety of our employees in the region. Operator: The next question comes from Andrew... Jennifer Scanlon: Hold on, I think there was a second part to that question, Daniel? I just want to make sure we got it all. Daniel Maxwell: Yes. It was just how that compares to the tariff impact and whether it would be sort of a similar reaction process from customers or wonder it's something that's a little less avoidable by restoring operations. Jennifer Scanlon: Yes. I think in this situation, again, with regard to comparing it to tariffs. As I always say, our customers just continue to make ongoing decisions that are the smart right answers for their business around where they want to conduct their research and development and where they want to manufacture and how their supply chains all fit together. So we're not, again, seeing anything unusual we're seeing just normal logical decision-making out of customers, and we're positioned to follow them wherever they go. But again, the Middle East for us is a very, very small portion of our customer base amount revenue. Operator: The next question comes from Andrew Wittmann with Baird. Andrew J. Wittmann: Yes. Great. So I guess the question that I wanted to ask about was about the AI adoption, the UL 3300 standard. I'm glad you brought it up, Jenny, because I think this should be an opportunity for the company. And I just -- just given that this is a new standard and kind of rolled out there and its importance, I just was hoping you could give us a little bit more context about where the standard sits relative to the innovation curve of the industry against competitive standards that might be being made other places. I want to get a sense of how well bought into the industries that are making robotics are into this standard versus other things, what may be industry organizations have signed up to use this one as a standard, just kind of the competitive positioning overall for this? And anything you can give us about your outlook in terms of what this means financially over the next couple of years would obviously be helpful as well. Jennifer Scanlon: Yes. Thanks, Andrew. It's a fun topic, and it's certainly an interesting topic. And actually, what it highlights, and I'm going to kick out for a second here, is the confluence of the UL 3300, which is robotics, and safety of robotics in areas where there's a lot of human interaction. And UL 3115, which is really the transparency and the bias and the use of AI when it gets embedded in products. And it's just a perfect example of the confluence of technologies and the complexity that our customers are looking to us to help them address and solve. So certainly, specifically on robotics, what we're seeing is service robotics, that sector has had steady growth. And it is becoming more complicated raising the bar for that safety and that reliability. So we are -- and in particular, our consumer sector, working very closely with a series of customers. This will continue to play out in that space. And it also brings together other service elements that UL provide such as our EMC wireless safety or cybersecurity safety and, of course, just embedded software and functional safety of these products. So it's always hard to point to one trend to say this is how that affects growth and opportunity. But certainly, it's the perfect example of the type of digitalization and megatrends that we've been pointing to. Operator: The next question comes from [ Ryan Rivera ] of Bank of America. Unknown Analyst: I was wondering on the software business, post the EHS divestiture and the move of advisory into industrial. How should we think about the underlying run rate growth of the remaining compliance and risk business? Ryan Robinson: Yes, I would say, overall, we're excited about Risk and Compliance Software. We think the focus in being more transparent about the underlying economics of the software business will be helpful for people. the portion that we divested -- to be divested is slightly slower growing than the remainder of the portfolio. So all things to consider it should mix up a bit more. We don't give specific segment-level revenue guidance, but we would anticipate continued growth in that segment, both based on underlying factors, but our continued efforts to improve our go-to-market sales processes. Operator: The next question comes from Seth Weber of BNP Paribas. Seth Weber: Ryan, I wanted to ask about the strength in the free cash flow in the quarter, unusually strong here. Anything that you'd call out attribute the strength to? And just maybe bigger picture, your view towards larger M&A, your appetite to do a bigger deal and kind of thoughts on leverage. Ryan Robinson: So first of all, we're pleased with our continued growth in cash flow from operations and free cash flow, I think it's more appropriate to look at it on a longer-term basis, and we quote some trailing 12-month figures. In the first quarter, we did have particularly strong cash flow from operations that was driven by our increases in net income margin, but also we had some working capital items like accounts payable growth that can occur in a short period of time like 1 quarter. So we're pleased with the continued growth in free cash flow, and particularly over a longer time period. So we're pleased to be able to fund the Eurofins E&E acquisition relatively easily from portfolio management activities, cash on hand and modest draw on our existing credit facility. We do continue to be very well capitalized and have capacity to do more. It is important for us to maintain a robust capital structure, and we're targeting continuing of metrics that are consistent with investment-grade credit ratings, but that leaves us a lot of flexibility and capacity to do other things. Operator: Our next question comes from Seth (sic) [ Jason ] Haas of Wells Fargo. Jun-Yi Xie: This is Jun-Yi on for Jason Haas. You guys have previously talked about seeing more EBITDA margin improvement to occur in the second half of '26. Is that still the expectation? Or have you seen some of the restructuring initiative improvements been pulled forward into 1Q given the outperformance? Ryan Robinson: Yes. Increase margin comparisons as we progress in the year. And I would expect it to be relatively smooth for the remainder of the year. We continue to make progress on some of the restructuring initiatives that we discussed. We're not free of those. So we expect those to continue to provide some additional benefits. Jennifer Scanlon: Is there a follow-up? Operator: Sorry. I've lost you there, the line had fade its way. The next question comes from George Tong of Goldman Sachs. Jinru Wu: This is Anna on for George. My question is, we're actually hearing a lot about manufacturing capacity looks back to the U.S. in government budget increases for U.S. manufacturing, Along the trend, are you seeing any higher utilization rate of industrial TSC services driven by U.S. specific regulatory that your consumer [indiscernible]? Jennifer Scanlon: And the second half of your question cut out, but I think we got it. But can you just repeat after you said, are we seeing anything affecting industrial? And then... Jinru Wu: Yes. So just with the onshoring trends also impact your consumer segment demand as well from the end market perspective? Jennifer Scanlon: Thank you. I think what we're seeing is continues to be consistent. We're not seeing a dramatic shift on reshoring to the United States, but certainly, there's movement. There's movement all over the world. The places where we're seeing the most movement is across Asia. And again, this is just -- we're able to track where our ongoing certification services are performed. So the areas that we're seeing the greatest increase, but remember, off of a low base are areas like Southeast Asia, Vietnam, India, Malaysia, Indonesia, as well as some miles increase off of a large base in the United States and a mild slope increase off of a large base in China. So as far as affecting our 2 businesses, we test wherever our customers need us to test, and we will perform ongoing certification services wherever they need it. Operator: The next question comes from Stephanie Moore of Jefferies. Stephanie Benjamin Moore: I wanted to touch on the margin performance in the quarter and just to make sure I'm understanding correctly. So obviously, very strong performance at the start of the year. And note, this is with 40 basis points of FX headwinds. I just want to confirm that the actual underlying performance was actually better. So as you think about just the margin expectations for -- as you progress through the year, maybe just talk about your level of confidence just given the momentum in the first quarter and really the decision to still raise our guidance and maybe opportunity for additional upside as the year progresses? Ryan Robinson: Thank you very much for the question, Stephanie. And I'll start with FX just mechanically and then go more deeply into the fundamentals. So yes, you're correct. The first quarter revenue increased by about 1.8% due to translation of non-U.S. revenue in the U.S. dollars, but also expenses that are non-U.S. dollar denominated translated in group. So it had an offsetting effect in our earnings, but because revenue went up, it reduced our reported adjusted EBITDA margin by about 40 basis points. The comment we made in outlook is be volatile, but the current rates would estimate a similar effect by about 1% and have that 1% offset. So some margin headwind as a result going forward. In regard to the underlying we're pleased with the performance in the quarter, and it's 1 quarter. So that allowed us to raise the range from 26.5% to 27.0%, and we're pleased with the progress, and we'll continue to monitor it through the year. We did have some changes. We're divesting that EHS software business that started April 1. We're having a more fulsome impact of some revenue that we're exiting. As a reminder, with our restructuring initiatives, we're stepping out of some service lines that collectively have about 1% revenue impact and we'll continue to monitor the business as we go forward. But we're pleased with the progress so far, and that collectively, 1 quarter in gave us confidence to at least raise the bottom end of the range. Jennifer Scanlon: And let me just add, I want to give a shout out to our 15,000 employees around the world. I'm really pleased with the ways in which they are embracing opportunities to improve productivity is the right use of tools and process improvements. And I'm also really pleased with the way that we've approached our cost discipline. So it put us in a position to move guidance upward. Operator: The next question comes from Josh Chan of UBS. Joshua Chan: Jenny, Ryan, congrats on the quarter. I was wondering about the growth rate in Q1. I guess, you were lapping some tougher compares in at least consumer. So Q1 was supposed to be the lowest growth quarter of the year? Do you think that will still be the case? So how are you thinking about sort of the performance in growth after the strong Q1? Jennifer Scanlon: Yes. There's a lot of nice things that we saw in growth in Q1. And as we look forward, we continue to believe that the trends that we've seen will be consistent. If you look at our industrial growth, as Ryan mentioned, our power and automation opportunities continue and that hits both ongoing certification and certification testing. In consumer, we were certainly pressured by excess of certain typically non-certification testing growth. But again, these were areas that were nonstrategic and lower margin for us. So that will continue to suppress consumer growth year-on-year as we exit those businesses. And then in Risk and Compliance Software, as Ryan indicated, the exit of EHS, while it was a nice margin contributor was on the lower growth side of Risk and Compliance Software. So we're not seeing really any -- as we look at our outlook, it's grounded in fundamentals, and we very confident in our mid-single-digit guidance here. Operator: The next question comes from Arthur Truslove of Citi. Arthur Truslove: The first question I had was just around the the margin development. So essentially, you managed to grow revenue organically by 40 million organic expenses up by just also down by 3. I was just wondering if you could sort of explain how you've had so little cost pressure in there. So I guess, with that in mind, it'd be interesting to know what proportion of the organic revenue growth was pricing versus volume? And ultimately, how you managed to grow revenue so much with so little incremental cost pressure? Jennifer Scanlon: Yes, I'll start, and then I'll let Ryan comment on pricing and volume. But really, when you look at the approach of the messages that we've been delivering, we do see operating leverage off of a stable cost base and continue to have opportunities to better use capacity and have our teams focus on productivity based on the trends and processes that they continue to use and to improve. We did see the restructuring begin to flow through. So that has certainly been beneficial. And then we've been very focused on the value that we provide our customers and increasing the billable utilization in both of our lab teams as well as our engineers. And what's exciting about that is that's the technical leadership that our customers want. And so making sure that we're getting the value from that technical leadership is really important. So I would say those are the kind of the headlines on where we're focused on this margin expansion, and then Ryan can talk about pricing volume. Ryan Robinson: Yes. Thank you for the question, Arthur. So as we said, we report 4 revenue categories, the 2 that are most amenable to looking at price and volume, our certification testing and non-certification testing and other services. So together, those grew 7.1%. And in the first quarter, more of that growth was actually from volume than price. And we're encouraged by that. We believe volume growth reflects real underlying demand for new products. We're expanding in new geographies and there's healthy new activity regarding product introduction. Pricing remains constructive, and the cost of our services is just a small fraction of the total product development costs for manufacturers. We also had growth of 8.2% in ongoing certification services. And in that case, there were meaningful contributions from both price and volume. Operator: And does that conclude your questions, Arthur? Ladies and gentlemen, with no further questions in the question queue. We have reached the end of the question-and-answer session. I will now hand back to Jenny Scanlon for closing remarks. Jennifer Scanlon: Thank you, everyone, for joining us today. We, as always, appreciate your support, and we look forward to updating you on our progress next quarter. Operator: Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.
Operator: Greetings, and welcome to Palladyne AI 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, Brian Siegel with Hayden IR. Thank you. Please go ahead. Brian Siegel: Good morning, and welcome to Palladyne AI's First Quarter 2026 Earnings Conference Call. Joining me on the call today are Ben Wolff, President and Chief Executive Officer; and Trevor Thatcher, Chief Financial Officer. Earlier this morning, Palladyne issued a press release announcing financial results for the first quarter ended March 31, 2026, along with updated commentary regarding backlog and reiterated its 2026 revenue guidance. A copy of that release, along with the accompanying financial tables, is available on the IR section of Palladyne AI's website. Today's call will include prepared remarks from Ben and Trevor, followed by a question-and-answer session. During the call, management will make forward-looking statements within the meanings of the federal securities laws. These statements include, but are not limited to, statements regarding Palladyne's 2026 revenue guidance, expected backlog conversion, anticipated quarterly operating cash usage, product development milestones, commercialization timelines, defense program activity, potential customer adoption, market opportunities and future strategic positioning across aerospace, land and maritime domains. Forward-looking statements are based on current expectations, assumptions and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties include, among others, Palladyne AI's ability to execute on development programs, convert backlog into revenue, scale production, manage operating expenses, integrate acquired businesses, secure additional contracts, maintain liquidity and navigate evolving defense and commercial market conditions. These and other risk factors are described in detail in Palladyne AI's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and subsequent filings. Palladyne undertakes no obligation to update any forward-looking statements, except as required by law. In addition, during this call, management will reference certain non-GAAP financial measures. In general, management will adjust for acquisition and other transaction-related expenses, stock-based compensation expense, noncash warrant income or expense that are marked to market quarterly based on changes in the company's stock price, expenses related to the change in contingent consideration liabilities associated with closed acquisitions and any tax impact these items may cause. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in this morning's press release. With that, I'll turn the call over to Ben. Benjamin Wolff: Thank you, Brian, and good morning, everyone. I want to cover 3 things this morning. First, I'll walk you through the first quarter's results. Second, I'll discuss what we accomplished operationally across the business in Q1. And third, I'll talk about what's on deck because the opportunity in front of us is larger and more concrete than it has ever been. Our revenue for the first quarter increased 107% year-over-year to $3.5 million, which was in line with our internal expectations. Having said that, revenue for the quarter could have been even better were it not for the federal government shutdown, which temporarily delayed program activity across several of our defense contracts. That work was not canceled and the contracts remain in place. The work simply shifted in timing, and it remains in backlog. I want to be clear about this because I know it will come up when we get to questions. The shutdown created a revenue timing issue, but not a demand issue. In short, the business performed as we internally expected. With respect to backlog, we entered Q1 with approximately $13.5 million, recognized $3.5 million in revenue during the quarter and exited with approximately $17 million. So we added approximately $7 million in new contract awards during the quarter, net of revenue recognized. That is a meaningful bookings number, and it gives you a sense of the activity level that doesn't show up in our reported revenues. That backlog provides us with good visibility into the revenue ramp ahead, and we are reiterating our full year 2026 revenue guidance of $24 million to $27 million, which implies approximately 357% to 415% growth compared to 2025. We expect revenue to grow sequentially each quarter with the growth rate accelerating in the second half of the year as backlog converts and new contracts are awarded. Our operating cash usage for the quarter came in modestly above our guided range of $8 million to $9 million on average per quarter. This was driven largely by 3 things. First, we began building inventory for BRAIN flight computer production for existing customers. That inventory build is not a cost issue, it is a working capital investment tied to near-term revenue, and we expect it to convert as we fulfill those orders. Second, we accelerated some hiring based on the strength of new opportunities we saw in the first quarter. And finally, we incurred costs in our manufacturing business to develop and produce first articles for some of our more recent contracts, but have not yet transitioned to full rate production in large part due to the government shutdown. Again, this is simply a timing issue. We expect quarterly cash usage to tend -- to trend toward and remain within the previously guided range as revenue and margins ramp through the remainder of the year. Liquidity as of March 31 was $43.7 million, and we believe we remain well positioned to execute our 2026 plan. Before I get into the operational highlights, I want to spend a few minutes on a topic that I think provides important context for everything else I'm going to say. There remains a lot of confusion in our industry about what our technology actually does and how it is different from what other companies are offering. I published 2 white papers with my co-Founder, Denis Garagic, during the quarter, specifically to address that confusion, and I want to walk you through the core ideas. The first paper is about what we call Decentralized Embodied Collaborative Autonomy, or DECA for short. The central point of that paper is pretty straightforward. Most software platforms that people associate with modern artificial intelligence lives in massive centralized data centers. They are optimized for thinking, analyzing data, recognizing patterns, generating language, supporting human decision-making, and they are very good at that. The challenge is that machines operating dynamic real-world physical environments cannot rely on that kind of centralized cloud-based intelligence. A drone can't wait for a round-trip comms link to a data center. A robot on a factory floor needs to react in fractions of a second. A missile system operating in a communications denied environment has to be self-sufficient. Nature actually solved this problem a long time ago. Think about how human intelligence works. At any moment, the human body is generating an enormous amount of sensory data from sight, sound, touch and our other sensors. Almost none of that ever reaches conscious thought. The vast majority of it is filtered, processed and acted upon locally, automatically by fast systems that operate far below the level of conscious reasoning. You don't think about how to keep your balance when you walk. You do not reason through catching a falling object. Those things happen automatically, locally in real time. And that architecture works because it has to work that way. There is no other way. The physics does not allow for anything else in a world where reaction time and energy efficiency are constrained. Our technology is modeled on that same biological principle. Intelligence lives on the machine. Perception is filtered locally, not centrally. Decisions are made predictively rather than reactively. Machines collaborate through decentralized interactions rather than waiting for instructions from a centralized controller. That is the essence of DECA, and that is what we have built into our products. The second paper applied to the SAE automotive autonomy framework developed by the auto industry for self-driving cars and applying that to drone autonomy and swarming. For reasons we did this -- the reasons we did this is that there is enormous confusion in the market about what autonomy and swarming actually mean. We recognize that all software is not the same. It has different purposes, uses, capabilities and compute requirements. Similarly, not all autonomy is the same and not all swarming is the same, but the same basic words are used to describe a myriad of different capabilities. We are changing that narrative. The paper walks through a clear taxonomy from basic remote control all the way up to what we call Oracle-Class Wolf Pack Swarming, which is decentralized, predictive, collaborative autonomy where the swarm is not just reacting to what it observes in the moment, but participating -- but anticipating what is likely to happen, positioning assets and allocating sensing resources in advance of events rather than in response to them. As far as I know, we are unique in having developed this capability, and we are actively working to bring it into the commercialized version of SwarmOS. Our current SwarmOS product already operates at the Wolf Pack Swarming level, which is genuinely different and more capable than what anyone else in this space is offering, regardless of how they describe their systems. Oracle-Class is the next step, and we are further along toward it than any competitor we are aware of. I encourage investors to read both papers. They are on our website. They're not long, and I think they will give you a much clearer framework for understanding what we are building and why we believe it is different and highly valuable. Now let me walk you through what actually happened in the business during the quarter. The most significant operational milestone of the quarter was a demonstration of true heterogeneous autonomous swarming. We flew Gremlin-X, our reusable mini bomber UAV platform, that was previously known as Project Banshee, running our IntelliSwarm product in a coordinated test swarm alongside multiple Red Cat platforms also running our SwarmOS autonomy software. I want to explain why this is different from what you typically hear described as drone swarming because the distinction matters a great deal. A lot of what's called swarming in our industry is really preprogrammed flight coordination, where the only function that happens automatically is collision avoidance. This is akin to lane-changing sensors on a modern car. Otherwise, the drone follows a script. If you have seen drone light shows, that is a form of swarming, but every drone knows exactly where it is supposed to be at every moment because someone programmed it that way in advance. If something unexpected happens, the system does not know what to do. What we demonstrated in Q1 is fundamentally different. Each drone running SwarmOS was perceiving its environment independently, reasoning independently about what to do, acting on its own judgment within the mission parameters and collaborating with other platforms in real time. There was no script, there was no centralized controller calling plays. It is the distributed adaptive intelligence that the Department of War says we need, but many thought was 5 to 10 years away at best. It is resilient in ways that preprogrammed systems simply are not, particularly in contested and communications degraded environments. What makes that kind of distributed autonomous operation deployable at scale is the hardware underneath it. During the quarter, we progressed the development of our BRAIN flight computer variants, including a scaled-down version of the commercialized X2 variant called FC1. BRAIN is the hardware that when combined with SwarmOS forms IntelliSwarm, a product deployable at scale across autonomous platforms. We recently received a $500,000 first order from a defense tech company for the BRAIN X2. Next, we expanded the Draganfly partnership during the quarter by conducting a lab simulation of SwarmOS running on Draganfly's commercial defense platform. The next step is to integrate SwarmOS into their drones and run flight tests. Q1 was also the quarter we established a real presence in the space domain through 2 separate engagements. Through our HANGTIME award with the U.S. Air Force Research Lab, or AFRL, we will integrate SwarmOS with a space-based satellite sensor grid, enabling UAVs to develop even better situational awareness. This is the first planned integration of our collaborative autonomy platform with space-based assets, demonstrating that our AI can leverage data from all domains, air, land, sea and space, to improve mission effectiveness. Separately, we secured a contract with Portal Space Systems to support development of next-generation maneuverable spacecraft platforms, providing navigation, guidance, spacecraft modeling, embedded software and avionics support. Portal is building spacecraft designed to reposition across orbits on compressed timelines with minimal ground intervention, a class of problem well suited to our edge native architecture. Looking ahead, we see opportunities to expand the partnership to include Palladyne's autonomy capabilities. Through Palladyne Aerospace and Defense, we secured a contract with a major U.S. defense prime contractor to deliver a mission-critical propulsion subsystem for an existing U.S. missile system program, and we expect that contract to contribute nearly $1 million in revenue this year. This is a validation of our precision manufacturing capabilities and continues to expand our footprint in long life cycle defense programs. This contract is an example of the government shutdown impacting our first quarter revenue as we are still waiting for the evaluation of our first article. On the industrial autonomy side of our business, we are in active deployment with our first IQ 2.0 customer with the initial robot system integration currently underway. This is a non-contact surface treatment application, and it is a use case where IQ's combination of teleoperation and simplified path planning addresses a real industrial problem that no robot manufacturer or AI company currently solves with an off-the-shelf product. The customers' operations offer what I would describe as a potential land-and-expand opportunity. The initial deployment is one robot. As the customer builds confidence in the system and experiences all that it can do, the natural progression is to add more robots and expand use cases. We think that is going to be the typical adoption pattern for IQ, and is -- it is consistent with how enterprise automation technology tends to scale in industrial environments. Matt Muta transitioned from the Board to an operating role during this past quarter, joining us as President of Commercial and Industrial. Matt has real experience building and scaling enterprise technology businesses and his focus will be on converting the IT pipeline into customers. We also received a new patent during the quarter supporting advanced swarming and decentralized autonomy architectures, and we filed 2 new patent applications related to our AI software products and technologies. Our intellectual property portfolio is growing alongside our product portfolio, which is important for the long-term defensibility of what we are building. Next, I want to spend a few minutes on the broader context because the environment we are operating in has changed significantly, and I think it is worth being explicit about what that means for us. The Department of War is committing an unprecedented amount of resources to autonomous systems, collaborative swarming, counter-UAS, long-range precision fires, hypersonics and missile defense. These are not abstract priorities, they are specific trackable programs and budget lines that we are actively engaged with. The Defense Innovation Unit has seen its budget grow substantially and its funding programs, specifically around multi-domain collaborative autonomy. PAE Fires, the Army's portfolio acquisition executive responsible for artillery, missile defense and sensor systems, oversees a set of programs spanning long-range precision weapons, hypersonic weapons, integrated air and missile defense and counter UAS, each of which represents a potential opportunity for our product and service lines. And Golden Dome, the administration's flagship missile defense initiative, is one of the largest single defense investment priorities in a generation. We are pursuing opportunities across these and other programs and budget lines for SwarmOS, BRAIN, IntelliSwarm, Gremlin-X, SwarmStrike and our engineering services and research and development groups, including the Mark XL program. I want to be honest about this, we are a relatively small company pursuing very large programs, and not every pursuit is going to result in a win, but the alignment between what the Department of War is prioritizing and what we have actually built has never been stronger, and this is the environment in which we are operating. One of the most meaningful near-term proof points for what I just described is our invitation to participate in Northern Strike 26-2. Northern Strike is a premier Department of War joint exercise hosted August 2 through August 14 at the National All-Domain Warfighting Center at Camp Grayling, Michigan, which was designed as the drone dominance -- which was designated as the drone dominance range in the recently enacted National Defense Authorization Act. It is a joint national training capability accredited exercise involving more than 9,000 participants operating across contested multi-domain environments. It serves as one of the most demanding operational validation environments available to emerging defense technology companies as well as a recognized gateway to operational programs of record. We will be demonstrating SwarmOS on 4 distinct UAV platforms from 4 different OEMs, including our own Gremlin-X, with each drone collaborating autonomously and managed by a single operator, by a single ATAC interface. The exercise will validate cross-platform swarm collaboration across multiple UAV classes and manufacturers, decentralized decision-making that is resilient to denied or degraded communications, real-time mission adaptation across dynamic conditions and significantly reduced operator burden relative to conventional approaches. For us, Northern Strike is also a direct engagement with military end users and acquisition stakeholders who influence programs of record, which is exactly where we need to demonstrate this technology. I also want to highlight something that happened just after quarter end, but that directly reflects the work we did throughout Q1 and before. GuideTech was selected as one of only 14 companies invited to participate in the AFRL Relentless Wolfpack Industry Day hosted by the Air Force in collaboration with the Doolittle Institute on April 28 and 29. We were the only company in that group that most people would describe as a small cap. Our inclusion reflects the maturity of what we have actually built. GuideTech's submission combines SwarmStrike, our internally developed low-cost cruise missile, with SwarmOS to deliver a networked collaborative autonomous weapon solution. We are targeting a cost of less than $150,000 per swarm strike, which means you can put 10 of them in the air for the price of a single conventional cruise missile and then network them through SwarmOS to combine the effects on targets simultaneously. That cost per effect argument is precisely what the Department of War is focused on right now. SwarmStrike has completed its initial flight test, and we are actively advancing the program through multiple government channels. Separately, and I want to be clear, this is a distinct development, a different defense prime participating in the same relentless Wolfpack cohort independently chose to incorporate SwarmOS into their own submission. They evaluated the platform on its merits and built it into their own hardware solution. We didn't arrange that. That is the beginning of the platform adoption story we have been working toward where SwarmOS becomes the autonomy layer that other companies build on, not just a product we sell directly. Taken together, Northern Strike and Relentless Wolfpack are not isolated events. They are evidence of something broader. The strategy is working. The products are being validated in real operational and acquisition context, and the market is beginning to recognize what we have built. That is what I want investors to take away from everything I have described today. Let me close by putting all of this in context of where we are in the progression. On our Q4 call, I described our strategy as crawl, walk and run progression, not as separate strategies, but as stages of maturation. I want to come back to that framework because I think it is the right lens for understanding Q1 and what comes after it. 2026 is the crawl year, as I said before. Crawl is about proving that the integrated model actually works at scale, converting backlog into revenue, executing live demos and trials and advancing development stage assets towards defined milestones. Our wins in the first quarter achieved all of these objectives, $7 million in new contract awards, a successful swarm demonstration across multiple platforms from different manufacturers, 2 new space engagements, active deployment of our first Commercial IQ customer, 2 white papers that established our intellectual framework on the public record, a Northern Strike invitation, a key patent issuance and 2 new patent applications. That is a lot of activity that progresses us towards our objectives. In 2027, we will walk. Walk is when proof becomes repeatable. We expect broader SwarmOS and IntelliSwarm integrations, more IQ wins, more BRAIN wins and expanded defense programs with multiple product-based revenue streams running concurrently. That is when growth starts to become more systemic and less dependent on individual contract timing. And then we run. Run is where the full vision becomes operational across aerospace and eventually land and sea, where IntelliSwarm enables larger and more complex distributed systems, where the autonomy and propulsion architectures we are developing today start to converge and where the revenue is systemic rather than episodic. In conclusion, we know what we are building. We know why it is different, and we believe the work we are doing in 2026 is laying the foundation for everything that follows. With that, I will turn it over to Trevor. Trevor Thatcher: Thanks, Ben. I'll focus on our first quarter results, liquidity position and capital outlook. Revenue from the first quarter of 2026 increased 107% to $3.5 million. compared to $1.7 million last year. The increase was due to the inclusion of post-acquisition revenues from the acquired companies. Within that $3.5 million, product revenue, which today is mainly derived from our manufacturing business, was $1.7 million. Engineering services revenue, which includes GuideTech, was $1.8 million. We did not recognize meaningful product development contract revenue this quarter, but we expect this will pick up beginning in the second quarter as awarded business turns into signed contracts as we execute on recently signed contracts and as our existing contracts get extended through contract options. This quarter represents the first full quarter of revenue flowing from the businesses acquired in November of 2025. Cost of revenue for the quarter was $2.5 million compared to $0.4 million in the prior year period. Consolidated gross margin for the quarter was approximately 30%, which reflects the current revenue mix. Product margins in our manufacturing business were compressed by low capacity utilization and first article costs. As utilization improves and revenue ramps, we expect manufacturing product margins to improve accordingly. Our software products, when they begin generating meaningful revenue, are expected to carry the highest margins in the portfolio, in line with typical software margin costs. The 30% consolidated figure is not representative of where we expect to be as revenue ramps and mix evolves. Research and development expense was $3.9 million compared to $2.9 million last year, reflecting continued investment in autonomy software, avionics and product development programs from both Palladyne and the acquired companies. As we've discussed in prior quarters, we are investing in Gremlin-X and SwarmStrike development, the former of which was a major focus during the quarter. We expect continued investment over the next couple of quarters to bring that platform closer to commercialization. General and administrative expense was $6.9 million compared to $4.2 million in the prior year period. This increase reflects the incremental scope of G&A and overhead functions from the acquired businesses as well as select hiring to drive and support growth. Sales and marketing expense was $1.9 million compared to $1.2 million last year, reflecting expanded marketing programs and business development efforts. Operating loss for the quarter was $11.9 million compared to $6.9 million in the prior year period. GAAP net loss for the first quarter was $12.6 million or $0.28 per share. On a non-GAAP basis, net loss for the first quarter was $10.2 million or $0.23 per share. The primary differences between GAAP and non-GAAP results were a $1 million noncash loss related to change in fair value of warrant liabilities this quarter, driven largely by the change in the price of our common stock and public warrants. In the year ago quarter, we saw a $29.2 million noncash gain from warrant liabilities, $1.2 million of stock-based compensation expense and $150,000 loss related to change in our contingent consideration liability. We believe excluding these items provides a clearer view of our underlying operating performance and cash usage. Turning to liquidity. As of March 31, we had $43.7 million in cash, cash equivalents and marketable securities. During the quarter, we incurred minimal CapEx and used approximately $10.2 million in operating cash, partially offset by $6.5 million in net proceeds from our ATM program. Backlog as of quarter end was $17 million, up from $13.5 million at the end of 2025, reflecting gross additions of $7 million, offset by this quarter's recognized revenue of $3.5 million. Ben has already announced that we are reiterating our full year 2026 revenue guidance of $24 million to $27 million. This outlook reflects the contribution of the businesses acquired in November, and we continue to expect organic growth across each part of the company on a full year comparable basis. We also continue to expect total CapEx and OpEx cash burn for the year to be in the range of $32 million to $36 million or approximately $8 million to $9 million per quarter on average for the remainder of the year. The increase from our 2025 run rate reflects ongoing OpEx investments in SwarmOS and IQ, bringing acquired programs to operational readiness and the incremental headcount costs I mentioned earlier. This also includes CapEx for our manufacturing business and the acquisition of several third-party drones to validate SwarmOS's collaborative swarming capabilities on new platforms. Based on our liquidity position and expected backlog conversion, we believe we are well positioned to execute our 2026 plan. Operator, we're now ready to take questions. Operator: [Operator Instructions] Our first question is coming from Michael Latimore of Northland Capital Markets. Mike Latimore: Congrats on the start to the year here. So Ben, I think you mentioned -- I just want to clarify that a defense prime is integrated to ROS. I want to just clarify that you said that? And if so, can you elaborate a little bit? Are you exclusive? Is this related to UAVs or is it multi-domain? Any particular end programs you're dealing with? Benjamin Wolff: So they have not actually done the integration yet. What I said was -- and the key takeaway is that on a major defense program where they are trying to become the prime on a contract award, they have included our autonomy software as an important element of that submission. So we would -- if they wind up winning that contract, we would wind up being a subcontractor to that prime. It does relate to machines that are flying as opposed to something that's in space or in -- on the sea or on land. So it is an aeronautical type of application. Mike Latimore: Okay. Interesting. Okay. And then maybe talk a little bit about just your manufacturing operations. What is the capacity utilization now? Where might that go by year-end? Benjamin Wolff: So right now, we think that we are roughly stated around 30% of our total utilization capability. So we have a lot of excess capacity that is not going to be able to produce significant more revenues and increase our margins. As Trevor referenced, we don't have to do a lot more in terms of additional investment to be able to drive a lot more revenue through those production facilities. Mike Latimore: Great. And then just last on gross margin. It sound -- sort of sounds like you feel like gross margin probably improves by year-end? Or is that the takeaway? Benjamin Wolff: No question. When you have these new start-up defense contracts where we're producing -- expecting to produce large volumes of particular components for aircraft and missile systems, one of the important milestones to unlock go-forward revenue is to produce a first article that gets evaluated for tolerance and precision, et cetera, and we have to get the government to approve that first article so then we can open up the gates on the high-volume manufacturing. That has been delayed on some of our key contracts. So when you look at our margins, as Trevor referenced, we have all of the costs incurred to develop that first article, but none of the revenue that associates with it. So when you look at our overall margins across manufacturing, it looks depressed this quarter because of that investment in getting to first article. Operator: The next question is coming from Greg Konrad of Jefferies. Greg Konrad: Maybe just to go back to a couple of things that you talked about. Just on the SwarmOS, I mean, you talked about that being on 4 platforms and kind of laid out the crawl walk scenario for the next 2 years. Can you maybe talk about just kind of next steps? And if you can just remind us on when you think about like autonomy software, like what is the monetization? How do you get paid and how we think about that kind of going forward? Benjamin Wolff: Sure. So we have -- I'm really delighted with the progress that we've had. When you and I have talked before, we've talked about the fact that our primary goal for '26 is to get different customers within the Pentagon to be able to understand that this technology exists that it works, that it's not just on PowerPoint and how differentiated it is from everything else that people talk about in terms of swarming and autonomy. I think we're hitting all the marks on that. And frankly, we're doing it even earlier in the year than I had expected us to do. So I think we're seeing great traction. We're actually out on an exercise right now, where we are operating in a real battlefield environment. And soldiers are telling us that this should be the standard platform going forward for collaborative autonomy and swarming. So we're getting great feedback. It's going really well. In terms of what our business model looks like, our expectation and what we've talked with government customers about is that our software will cost the government about 10% of the overall UAV platform cost. So if we're talking about $40,000 drone, our cost will be $4,000. If we're talking about $1 million drone, the cost for our software will be $100,000. And if you're talking about a $4,000 drone, the cost will be $400. That makes sense to the government, and it makes sense to us because when we talk about these larger, more exquisite drones that cost more, they have more sensor capabilities on them. They have longer duration in the air. They are far more capable. And the more capable the platform, the more value and utility our software brings to the battlefield. So it is really a value pricing proposition. It is a onetime upfront license fee. Most drones aren't expected to survive in the battlefield for longer than 1 year. So this is almost like a razor blade business in that we're continually selling more software on more drones. They get used, they get expended and the government buys more of them. Greg Konrad: And then just on the full year guidance, I mean, you called out some of the issues, including the government shutdown in Q1 and kind of how you expect that to ramp through the year. Thinking about like backlog and what's maybe not in backlog with expected awards, I mean, how do you think about visibility into year-end and some of the expected awards? How much is competitive versus just follow-ons and just kind of how you think about visibility for the rest of the year? Benjamin Wolff: So when you take a look at the $7 million of new contracts in the first quarter, obviously, if we just did that every quarter and if all of the revenue was coming in on kind of a very scheduled basis, 4 quarters' time $7 million, you've got $28 million. We believe that every quarter will increase and that -- consistent with our internal plan, we knew first quarter was going to be lower. We expect second quarter to be larger than first and so on and so forth throughout the rest of the year as we continue to build the business. And we executed on Trevor Thatcher: all 3 aspects of the business, the software side, the manufacturing side, the engineering services side and the drone hardware side included in that. So we believe that with what we have in backlog and with the go-gets that we have that are in the pipeline, we are highly confident at this point with where we -- with being able to hit that $24 million to $27 million guidance. Greg Konrad: And then maybe just last one for me. I mean you called out the award with Portal. How are you thinking about the space opportunity in general? I mean, how is that emerging and just kind of how you're thinking about that going forward? Benjamin Wolff: I think volume in space is going to be far more limited than what we look at terrestrially. But there's obviously much larger dollars on individual discrete efforts going into it. And so I think it is a very potentially large opportunity set for us, potentially lucrative. But to be candid, it is an area that we see as kind of a growth opportunity for us, but not something that we're putting anywhere near the kind of investment of effort and resources into the way we are on kind of terrestrial UAV efforts. So we are taking those opportunity sets and pursuing them on a more discrete basis. I'd say that's more of a rifle-shot approach, whereas what we're doing with trying to get our software anywhere and everywhere that it can be relevant on UAV, that's more of a scatter gun or a shotgun approach. In both cases, I think we're applying the appropriate amount of resources to realize the opportunity. I think space can be big. I think it will be longer duration to get too big than it is near term the way we are with terrestrial drones. Operator: Our next question is coming from Max Michaelis of Lake Street Capital Partners. Maxwell Michaelis: First one, I just want to go back to Draganfly. So you guys finished up a few successful flight simulations in the quarter. I think you mentioned you're going to be moving on to live flight tests. Kind of help us out with sort of a timeline, what it looks like in 2026, when you guys are going to start these flight tests and kind of when this becomes more of a -- I guess, not meaningful partnership, but when does this start to kind of turn into some revenue? Benjamin Wolff: So we're expecting to have some of our demonstrations on the Draganfly platform, I think, starting in this current quarter, in the second quarter. Certainly, I know we've got some plan for the third quarter where we're actually out with the government customers. I mean you know the drill with the defense contract. You have to show them that it works, that it exists. They then decide to go allocate dollars towards it, you negotiate a contract and you get an award. So I can't give you a prediction on when this becomes -- when that specific partnership results in revenue for us and Draganfly. But what I can tell you is our partnership with them is very important because they are one of the core platforms that we've identified has a unique capability set that with our software on it can show increased value to the government customer. So it's an important partnership for us, and we expect to be getting that integration done in this quarter, the second quarter and doing demonstrations for the government as soon as that integration is done. Maxwell Michaelis: Okay. And then last one for me. I don't think anybody has touched on sort of the commercial side of business with the IQ 2.0. I mean you talked about this customer that you're actively deploying with. I mean I'm assuming this initial deployment, you have a few systems in there, but does this customer have sort of the capacity to bring on -- to become a meaningful customer sometime in the future? Benjamin Wolff: So the important thing about this customer is, yes, to answer your question, they have the ability to scale to more machines with our software on it once they become delighted with what they see from the first installation. More importantly is this is the first time that we've had an active partnership with systems integrator, an indirect channel partner, if you will, and I mentioned on our prior call last quarter that one of the things we needed to figure out was how we create an attractive economic value proposition, both for ourselves, for our end customer, but also for the systems integrator because there -- as you know, there are some 1,800 systems integrators and maybe even more at this point across the United States. Getting them to be out selling for us was kind of a holy grail moment for us, and that happened in the first quarter. So we've got this partnership now with the first systems integrator. We've got several other discussions underway where we've been able to figure out how we talk about this product and the economic opportunity associated with it in a way that works for both the systems integrator and for us and the end customer. So the reason that's important is systems integrators obviously deal with a lot of different customers, and they can be an indirect channel to get our message out there more broadly. So that's what we're really excited about. Yes, the first deployment is going very well. I mentioned in my prepared remarks that it is about surface preparation. So think about doing things like sand blasting, sanding, grinding, those kinds of applications, even paint application on surfaces. Those are all the kinds of jobs that have historically required a human to do the job because of the variability associated with that kind of task. And we're showing the end user and the systems integrator how it can be done now with a robot on an automated basis using our IQ 2.0 software. Operator: The next question is coming from Brian Kinstlinger of Alliance Global Partners. Brian Kinstlinger: Can you quantify how much revenue was delayed due to the government shutdown? How would you characterize the procurement environment now? And then can you quantify TCV or bids outstanding in pipeline? Benjamin Wolff: So, I can't quantify what was the amount associated with the delay because it's frankly difficult, Brian, to know had we gotten first articles approved, how much would have actually been taken based -- in the quarter based on when that approval had happened. So I can't really quantify that. Again, I'll tell you, reiterate that even with the government shutdown, we actually achieved what our internal projections called for. And so I'd ask you to take that plus the guidance that we've given and assume we're going to ramp over the remaining 3 quarters to achieve what we expect to achieve. In terms of the pipeline, I can't quantify pipeline. I mean we obviously have internal numbers, but I don't want to throw that out there. The thing that we feel very solid about is backlog, which means it's contractually committed. I don't want to speculate beyond what's contractually committed. Brian Kinstlinger: Well, in one of the prior questions, you talked about needing something like $7 million of bookings per quarter. Maybe talk about what the sales cycle generally you're seeing right now? Is it months? Is it things you've been bidding on for a very long time? Just kind of help us understand what that sales cycle looks like? Benjamin Wolff: Yes, sure. So on the software side, we're seeing stuff that we had expected was a 12- to 18-month sales cycle, and we're seeing things now coming in, in less than 6 weeks. That might be an anomaly. It might just be the particular circumstances of those handful of different engagements that we've had. But we've landed some things that frankly surprised us with how quickly they came in. There are some other opportunities that we've been picking away at for 12 months now, and they still haven't come to fruition. I think the thing that is encouraging to me, though, without kind of changing my own expectations about the sales cycle is that we are definitely, particularly on the defense side, seeing money come in faster than what we -- or at least contracts come in faster than what we would have expected 3, 4 months ago. So I think it's very bullish. It doesn't have to take as long as it has historically taken. And stay tuned. We'll hopefully be announcing some additional contract wins that have come in faster than what we would have expected. Brian Kinstlinger: Great. Can you provide an update on the Red Cat partnership testing and integration? I think last quarter, it sounded like you were very close to signing a production agreement, but we didn't hear anything about that this -- on this call? I think I didn't. Benjamin Wolff: So -- Yes. So we have a solid partnership with them. We have -- I think we inked the new expanded partnership agreement, and we are out doing demonstrations with their drones. In some instances, Brian, those demonstrations are being done jointly with the Red Cat team. In other cases, we take their drones out and we are demonstrating our software on their drones and their team isn't necessarily needed to be there. So -- but the Red Cat drones are kind of a cornerstone of the demonstrations that we're doing for government customers. Sometimes, as I said, it's in collaboration and sometimes it's just we've been invited to something and we go do it. Brian Kinstlinger: So just to be clear, the economics are in place and the contracts in place for... Benjamin Wolff: Yes. Brian Kinstlinger: That determines your piece of the Red Cat sale and you can go-to-market now? Benjamin Wolff: That's correct. Brian Kinstlinger: Okay. Lastly, can you tell us how many shares did you sell in the ATM in the first quarter? It looks like you sold -- you raised $6.5 million. What was the average price of that? Or what were the shares? Benjamin Wolff: Trevor, do you have that information? Trevor Thatcher: Yes. We sold just under 890,000 shares. So if you do the math, it ends up being about $7.35 a share. Operator: [Operator Instructions] We're showing no additional phone questions at this time. Brian Siegel: We've got some questions from online. First one, there have been numerous expanded contracts with Air Force and other Department of War initiatives. These have been smaller scale thus far. How is the company positioning at this time to ramp production if a large purchase order is received? Benjamin Wolff: So yes, I think that the correct way to characterize the contracts that we're seeing with DoD both directly and through primes is they start small and then we do everything we can to try and expand them. The key is getting those first contracts inked and demonstrating what we can do and then having it grow from there. The question about ability to scale, I'll take that in 2 different parts. One is on the software side. Software is easy to scale. We've got the code. The product is locked, and it's just about pushing software onto whatever hardware platform is being used, and we can do that quickly. So there's a lot of opportunity to scale the software side. Responding to the manufacturing side of the business, I think in response to a question I was asked earlier, we're only at about 30% capacity on our manufacturing facilities. So there's a lot of room to scale there. And we rely on a lot of automation and advanced technologies in that business. So it does not require a lot of ramp-up of human personnel to be able to leverage that capacity that we have, that isn't being used at this moment. So I think we've got a ton of capacity without additional costs that gets incurred to be able to ramp up revenues significantly. So we feel like we're in very good shape on that front. Brian Siegel: Next question for IQ 2.0, can you help us understand what's behind the customer and the land-and-expand opportunity? And then in general, how many qualified opportunities or kind of what does the pipeline sit at today for this product? And how are some of those conversations progressing? Benjamin Wolff: So the -- I think I mentioned before that the surface prepped use case is what this first customer and the systems integrator is focused on. There are -- there is a massive amount of market need for automating that kind of task, whether you're talking about stripping corrosion or paint off of a part, whether you're talking about applying new surface treatment to the part to be ready for delivery to an end customer, whether it's painting or other types of prep. This is historically an area that has been very labor-intensive. And what we're seeing is that, that is a greenfield opportunity for automation, and just a tremendous amount of interest and therefore, demand in what we're doing. The pipeline, not backlog, but pipeline is filled with dozens of conversations that we are having. But again, we believe that on the IQ side of our house, historically, it has been a 12- to 18-month sales process. If you want to say historically, that's what we've historically thought it would be. The one that we're deploying now, I think, came together in about 8 weeks. So that's on the short side. But if our 12- to 18-month expectation is correct, and we just launched IQ 2.0 at the beginning of this year, we got some ground to cover. So our expectations are modest for '26. That's part of the crawl, walk, run approach that we've talked about. But we could be pleasantly surprised. I hope we're pleasantly surprised, and we'll see more like this first one that come in, in shorter than the 12- to 18-month time frame. Brian Siegel: Next question, and this kind of relates more to some of the things you said in the white papers. Recently, there was a Bloomberg article stating that Google is dropping out of the $100 million Pentagon prize challenge to create tech for voice controlled autonomous drone swarms. The article says OpenAI, Palantir and xAI are still competing. There's no mention of Palladyne for SwarmOS. Does this mean others have equally as good swarming technology and don't have to use Palladyne? Or should we be expecting some future growth as those companies need our SwarmOS? Benjamin Wolff: Yes, I think it's the latter. So let's break this down. The ability to give voice commands to a drone, while that certainly is easier than using joysticks, it is still a one soldier to one drone operating environment, and there's nothing collaborative about it between drones and there's nothing swarming about it. It certainly makes giving direction and manually managing multiple drones easier if you can just have a soldier say, do X, Y or Z without having to have your fingers and thumbs on joysticks and controllers. But that is -- that's like a Band-Aid on the problem. And so the great part about that program is the Pentagon is saying, "Hey, we want to put money and resources into trying to make this ease of operation a real focus of ours." They want to lighten the cognitive load on the operator. That's all great tailwinds for us because we have the ultimate solution to that. It's not about -- I mean, whether you're typing in a command or giving a verbal command, there's certainly some efficiency there. But that's just like the -- that's step one. We're at step 5 or 10 already where we are able to very, very easily with a very small amount of input, get a whole swarm of drones working collaboratively to achieve an objective or a mission. So I think back to the question, we are the endpoint that, that program ultimately wants to get to, and they're kind of looking at stop-gap measures. So that's very exciting to us. Brian Siegel: So that concludes the question-and-answer session from online. Operator, we can close out. Operator: Thank you. Ladies and gentlemen, this brings us to the end of today's teleconference. We would like to thank you for your participation and interest in Palladyne AI. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
Operator: Greetings, and welcome to the Alkermes First Quarter 2026 Financial Results Conference Call. My name is Carrie, and I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Sandra Coombs, Senior Vice President of Investor Relations and Corporate Affairs. Sandy, you may now begin. Sandra Coombs: Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended March 31, 2026. With me today are Richard Pops, our CEO; Joshua Reed, our Chief Financial Officer; Todd Nichols, our Chief Commercial Officer; and Blair Jackson, our Chief Operating Officer. A slide presentation, along with our press release, related financial tables and reconciliations of the GAAP to non-GAAP financial measures that we'll discuss today are available on the Investors' section of alkermes.com. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business. During the quarter, we closed the acquisition of Avadel Pharmaceuticals plc. The financial results announced today reflect the mid-February closing of the transaction and the integration of Avadel into our business, including 6 weeks of contribution from LUMRYZ, Avadel's once-at-bedtime sodium oxybate for the treatment of narcolepsy. Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning and our most recent annual report filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we'll open the call for Q&A, and I'll turn the call over to Richard for some opening remarks. Richard F. Pops: Thank you, and good morning, everyone. So, we had an excellent financial first quarter with another strong period of commercial execution and business performance. The quarter was consequential in other ways. Perhaps most significantly, we completed the acquisition of Avadel, a key element of our strategy to become a leader in the sleep medicine space. With LUMRYZ, we add a new differentiated medicine to our portfolio, one that's early in its commercial life and has significant potential for growth. LUMRYZ addresses a clearly defined patient need and fits logically into our portfolio, consistent with our focus on medicines delivering meaningful clinical benefit to patients. From a financial standpoint, the acquisition further enhances our financial growth and provides additional resources and flexibility to advance our development portfolio. Beyond the financial consideration, the acquisition allows us to establish a commercial footprint in sleep medicine now, well in advance of the potential approval and launch of Alixorexton. This early presence enables us to engage directly with sleep specialists and other key stakeholders critical to ensuring access to prescribed medications. Building these relationships now provides a strong foundation to accelerate our potential launch trajectory for Alixorexton. Another consequential event occurred at the very end of the quarter with the announced entry of Eli Lilly into this therapeutic space. This is an important external validation of the breadth of the scientific and commercial potential in developing new medicines targeting the orexin pathway. I think it underscores important aspects of this emerging therapeutic class, namely the limited number of competitive entrants and the scarcity of available intellectual property around the chemistry as well as the broad potential clinical and commercial opportunity. It starts with diseases of hypersomnolence and extends beyond that to a range of potential conditions in neurology, psychiatry and other rare diseases. For Alkermes, we believe Alixorexton and our other development candidates represent substantial opportunities to advance patient care and drive significant value for shareholders. We have a clear strategy, and we're well positioned to advance these programs. Blair and I will provide an update on our development efforts at the end of the call. But first, I'll turn to Todd and Joshua to review our commercial and financial performance for the first quarter. Todd? Todd Nichols: Thank you, Rich. Good morning, everyone. I'm pleased to report that we're off to a strong start to the year with first quarter performance ahead of our expectations and solid execution across the commercial organization. It is exciting to note the evolution of our commercial team as our portfolio of commercial products expands. We now have commercial capabilities in 3 distinct categories: in addiction with VIVITROL, in psychiatry with ARISTADA and LYBALVI and now following the closing of the acquisition of Avadel and sleep medicine with LUMRYZ. The integration of Avadel commercial team is progressing well, and we entered the second quarter with the combined team fully in place. Looking ahead with clear strategic priorities, a seasoned commercial team and a portfolio of important medicines in addiction, psychiatry and sleep disorders, we are in a strong position to deliver on our performance goals for 2026. Turning to our first quarter results. Net sales from our proprietary product portfolio increased 38% year-over-year to $338.1 million, reflecting solid demand across our psychiatry and addiction portfolios and certain favorable gross to net adjustments during the quarter and 6 weeks of commercial contribution from LUMRYZ. Starting with VIVITROL. Net sales in the quarter were $112.4 million. VIVITROL performance continued to be driven by our ability to capitalize on highly localized market dynamics in certain states and payer systems. Looking ahead, we continue to expect VIVITROL net sales for 2026 in the range of $460 million to $480 million. For our psychiatry franchise, in the first quarter, net sales for the ARISTADA product family were $93.8 million, reflecting solid underlying demand. In 2026, we continue to expect ARISTADA net sales in the range of $365 million to $385 million. LYBALVI net sales grew 32% year-over-year to $92.4 million. Underlying TRX growth was 21% year-over-year, driven by sustained momentum in new patient starts and continued expansion of prescriber breadth. Gross to net adjustments were approximately 33%, which we expect will continue to widen into the mid-30s during the course of the year as we continue to build on our market access profile. For the full year, we continue to expect LYBALVI net sales in the range of $380 million to $400 million. The first quarter results for these products benefited from gross to net favorability of approximately $14 million, driven primarily by favorable patient mix. Approximately 2/3 of this favorability related to VIVITROL and the remainder related to ARISTADA and LYBALVI. Across the brands, inventory levels in the channel were relatively stable in the first quarter of 2026. As a result, we expect Q1 to Q2 growth trends to generally track end market demand. Turning to our sleep franchise. We are now 10 weeks post close of the acquisition of Avadel. As we build on our commercial presence in this space, we are pleased with feedback from the sleep medicine community regarding the LUMRYZ commercial organization, the utility and expected durability of the oxybate class and the differentiation of LUMRYZ within this category. The LUMRYZ team is off to a strong start since joining Alkermes. For the first 6 weeks following the close of the acquisition in mid-February, we recorded LUMRYZ net sales of $39.5 million. For the full quarter, LUMRYZ generated approximately $72 million of net revenue. We exited the quarter with approximately 3,600 patients on therapy and with solid momentum in new patient enrollments, which we expect to build on as we move through the year. For the full year, we expect LUMRYZ to generate total net sales in the range of $350 million to $370 million. Of this, we expect Alkermes to record $315 million to $335 million, reflecting the period since the mid-February close of the transaction. In sleep medicine, our near-term focus is on driving growth and executing against the LUMRYZ opportunity while advancing our broader strategy in the space, including preparation for the potential launch of Alixorexton. Narcolepsy and idiopathic hypersomnia represent multibillion-dollar market opportunities. And our goal is to establish Alkermes as the leader in sleep medicine based on deep expertise in this disease area and differentiated and competitively positioned product portfolio. With solid performance from our established franchises and the recent addition of LUMRYZ, we are operating from a strong position of increasing scale and diversification. As we move forward, our focus remains on disciplined execution, driving demand across our brands and advancing our strategy in psychiatry, addiction and sleep medicine. The first quarter was a strong start to the year, and we are well positioned as we work toward achieving our 2026 objectives. With that, I will pass the call to Joshua to review the financial results for the quarter. Joshua Reed: Thank you, Todd. In the first quarter, we delivered financial results that reflect continued growth across our proprietary product portfolio and the initial contribution from LUMRYZ following the close of the Avadel acquisition. Post acquisition, our financial profile is further enhanced and diversified. We manage the business to drive significant operating cash flow and maintain a strong balance sheet, and we do so now with increased scale and flexibility. We are in a strong position to invest in the expanding development pipeline that will shape the future of our business. Turning to our financial results. During the quarter, we generated total revenues of $392.9 million. These results provide a solid foundation for the year. Today, we are updating certain noncash elements of our 2026 financial expectations to reflect refinements to the purchase price accounting for the acquisition of Avadel. These adjustments improve our full year expectations for GAAP net loss and EBITDA. For our portfolio of proprietary products, we generated net sales of $338.1 million, ahead of the expectations we outlined on our fourth quarter call. As we move into the second quarter, we expect Q2 net sales from our proprietary portfolio, including a full quarter of revenues from LUMRYZ in the range of $385 million to $405 million. Manufacturing and royalty revenues were $54.8 million for the quarter, including revenues of $27.3 million from VUMERITY and $18 million from the long-acting INVEGA products. Turning to expenses. Cost of goods sold were $61.6 million, which includes the purchase price accounting of LUMRYZ inventory. Recall that at closing, LUMRYZ inventory held by Avadel was marked to fair market value. Net of the LUMRYZ inventory step-up charge, cost of goods sold would have been $48.9 million in Q1 of this year compared to $49.2 million in Q1 of the prior year. In the second quarter, we expect COGS to be in the range of $85 million to $95 million, reflecting a full quarter of LUMRYZ sales and associated inventory step-up charge. R&D expenses in the quarter were $103.3 million compared to $71.8 million in Q1 of the prior year, reflecting the initiation of the Alixorexton Brilliance Phase III clinical program in narcolepsy, which began in the first quarter, the ongoing Vibrance-3 Phase II study of Alixorexton in idiopathic hypersomnia and the Phase I studies and development efforts for our next Orexin 2 receptor agonist candidates, ALKS 7290 and ALKS 4510. In the second quarter, we expect R&D expenses to be in the range of $110 million to $120 million. SG&A expenses were $264.6 million for the quarter, which included approximately $55 million of costs associated with the closing of the acquisition of Avadel, including transaction expenses and share-based compensation. Excluding these onetime expenses, SG&A would have been $209.4 million compared to $171.7 million in Q1 of last year, primarily reflecting the addition of the Avadel commercial infrastructure mid-quarter. As we look ahead to the second quarter, we expect SG&A expense to be in the range of $210 million to $220. During the quarter, we also recorded amortization of intangibles of $11.7 million and net interest expense of $12.4 million. In Q1, we generated GAAP net loss of $66.5 million and EBITDA of minus $30.1 million. We also generated positive adjusted EBITDA of $80.3 million, well ahead of our prior Q1 expectation of adjusted EBITDA of $30 million to $50 million due to higher-than-expected revenues and the timing of R&D expenses. Looking ahead to the second quarter, we expect adjusted EBITDA to be in the range of $100 million to $120 million. Turning to our balance sheet. We ended the first quarter with approximately $538 million in cash and total investments. To finance the acquisition of Avadel, we used approximately $775 million of cash from our balance sheet and entered into term loans totaling $1.525 billion due in 2031. We expect to pay down this debt quickly with cash flows from the business. During the quarter, we also deployed $28 million to repurchase approximately 1 million shares at an average price of approximately $28 per share. We continue to have $172 million of remaining share repurchase authorization. As I mentioned, in connection with the purchase price accounting related to the Avadel acquisition, we have refined our expectations for several noncash expense items, including the inventory step-up charge, which flows through cost of goods sold and the amortization of intangible assets associated with LUMRYZ. These changes have a net positive impact on our 2026 expectations for GAAP net loss and EBITDA. We now expect to expense approximately $105 million of LUMRYZ inventory fair value step-up in 2026 compared to a prior estimate of approximately $150 million. As a result, our 2026 cost of goods sold is now expected to be $320 million to $340 million, an improvement from our prior estimate of $365 million to $385. For amortization of intangible assets, we now expect full year amortization expense in the range of $75 million to $85 million compared to our previous estimate of $95 million to $105 million. For income tax, we now expect no income tax expense or benefit for the year from our prior estimate of an income tax benefit of $20 million. Taken together, these purchase price accounting adjustments improved our expectations for GAAP net loss, which is now projected to be in the range of $70 million to $90 million as well as for EBITDA, which is now expected to be in the range of positive $105 million to $135 million. All other components of our 2026 outlook, including adjusted EBITDA, remain unchanged. Taking a step back, with a strong start to the year, and we look forward to carrying this momentum into the second quarter and beyond. With that, I'll now hand the call back to Rich. Richard F. Pops: Thank you, Joshua. So, the commercial and financial elements of the business are strong. With expected revenue of more than $1.7 billion and adjusted EBITDA of more than $370 million, we have the financial resources to invest aggressively in our pipeline and generate significant cash flow. I think it's becoming increasingly clear that our orexin program has brought us to the threshold of substantial value creation. To date, we've developed and shared with you comprehensive clinical data sets across the first area of focus for this therapeutic class, disorders of hypersomnolence. That data set reflects the design and execution of a broad Phase II program, randomized, controlled, multicenter, multiweek across multiple doses and indications using established clinical endpoints as well as additional measures such as fatigue and cognition that relate specifically to the brain circuitry that we're activating. At the same time, we're broadening our development efforts beyond disorders of hypersomnolence, leveraging our portfolio of Orexin 2 receptor agonist candidates. In this area, more than most, we believe that chemistry-based intellectual property represents an important strategic asset. Blair will speak in more detail about our expansion strategy and development plans. But first, I want to update you on where we are with Alixorexton. This year, our focus is on continuing the momentum we built in Phase II to enroll the Phase III Brilliance studies in narcolepsy. Phase III for us is all about execution. We're on the path now to potential registration. The Brilliance Phase III program is now open for enrollment in narcolepsy type 1 and type 2 with site initiation and patient screening underway. Because of the strength of the Phase II results, investigator interest in the studies is strong. We're working to enroll these studies quickly with a sharp focus on quality and execution to support the strongest competitive positioning. From an operational perspective, the duration and scale of the Vibrance Phase II studies generated important and proprietary data that inform the design of our Phase III program. With Alixorexton, we're building a broad and robust clinical data package across narcolepsy and idiopathic hypersomnia. In June, we'll present data from the Vibrance-2 narcolepsy type 2 study at the Annual Sleep Meeting in Baltimore. We reported the positive top line in November, so much of the data set will be familiar to you. Along with the positive outcome of the study, Vibrance-2 is important because it's one of a very small number of clinical studies ever conducted exclusively in patients with NT2. As such, it provides a depth of insight into the characteristics and variability of this population that is largely absent from the existing literature. The Sleep Meeting gives us an opportunity to share the data with a broader sleep community. One-on-one engagements with clinicians and investigators over the last several months have already given us a clear sense of the treatment community's high level of interest and excitement about these data. For idiopathic hypersomnia, or IH, our Vibrance Phase III -- I'm sorry, our Vibrance-3 Phase II study is ongoing and on track to be completed in the fourth quarter of this year. We've initiated enrollment of a split dose cohort of approximately 30 patients across sites in both U.S. and Europe, with patients randomized to Alixorexton or a matching split dose placebo. As a reminder, in IH, the Epworth Sleepiness Scale and the idiopathic hypersomnia severity scale are the established and preferred clinical and regulatory endpoints. In addition to those measures, Vibrance-3 also includes mean sleep latency assessed by the maintenance of wakefulness test, which will help us to characterize the durability of wakefulness over the course of the day. The clinical development program for Alixorexton has been deliberately designed to support strong competitive positioning, both in the quality of the clinical data generated and the breadth of potential dosing options and regimens being evaluated to address individual patient needs. We believe this approach positions Alixorexton, if approved, to become the orexin of choice across both narcolepsy indications. Importantly, Alixorexton has the potential to be the first-in-class in narcolepsy type 2, and our lead in development in NT2 continues to widen. In the meantime, while the orexin development story in narcolepsy continues to mature, with LUMRYZ, we now have an important new medicine being used in current clinical practice. Later this quarter, we expect to announce top line data from the LUMRYZ Phase III REVITALYZ study in IH. Data from this double-blind, placebo-controlled randomized withdrawal study, which enrolled approximately 150 patients would serve as the basis for an sNDA submission with a potential launch in early 2028, if approved. This represents a potential growth opportunity for LUMRYZ in an underserved patient population, and we look forward to data this quarter. So now I'll turn the call over to Blair to provide an update on our expanding development work in orexin portfolio. Beyond central disorders of hypersomnolence, there are many adjacent disease areas that may benefit from modulating the orexin pathway. We identified this opportunity early on, and we're moving aggressively with new molecules. Go ahead, Blair. Blair Jackson: Thank you, Rich. As we outlined earlier in January, this year, we are expanding our orexin development programs into disease areas outside of sleep medicine. We are doing so with 2 new molecules from our portfolio, ALKS 7290 and ALKS 4510. Each of these Orexin 2 receptor agonists has been advancing through single and multiple ascending dose cohorts in healthy volunteers, and we're pleased with the profiles we have observed to date. This year, our development plans take us into patient populations in ADHD and fatigue. Early on, based on our emerging data and feedback from clinical investigators, we identified attention deficit hyperactivity disorder as one of the most compelling initial opportunities for Orexin 2 receptor agonists outside of sleep medicine. ADHD is a common neurodevelopmental disorder characterized by persistent difficulty in maintaining attention and concentration and is frequently accompanied by hyperactive and impulsive behavior. Despite the availability of some treatment options, many patients continue to experience residual symptoms: functional impairment, tolerability issues and adherence challenges even when receiving current standard of care treatment. Against that backdrop, Alkermes is working to advance the evidence base supporting the potential use of Orexin 2 receptor agonist in ADHD. We have established a foundation of data from validated preclinical behavioral models, assessment of neurotransmitters and human EEG that support our conviction in this program. Based on this foundation, we are initiating our first clinical studies of ALKS 7290 in adults with ADHD this year. The first is a Phase Ib randomized placebo-controlled proof-of-concept study designed to enroll approximately 50 adult patients. Participants will receive 2 weeks of treatment with ALKS 7290 or placebo. In this study, we will assess the safety and tolerability of ALKS 7290, along with the effects of treatment on translational measures where we expect to see more rapid changes, including quantitative EEG and certain neuropsychological performance measures. These assessments are designed to evaluate sustained attention, vigilance and impulse control in a shorter duration study. For exploratory purposes, we'll also assess changes from baseline on established clinical ADHD scales. Results from this Phase Ib study are expected in the fourth quarter of this year, and we will provide the first clinical data generated with the Orexin 2 receptor agonist in patients with ADHD. Enrollment in that study is already underway with the first patients dosed in April. As enrollment in the Phase Ib study progresses, we plan to initiate a well-powered Phase II study in adult patients with ADHD this summer. This randomized double-blind study is expected to enroll approximately 300 patients and will evaluate ALKS 7290 versus placebo over a 4-week treatment period. The primary endpoint will be change from baseline in the adult ADHD investigator rating scale. Data from this study, which we expect to complete in 2027 may serve as the foundation to advance to a potential registrational program in ADHD. We are excited to be the leaders in this exciting area of clinical development, and we look forward to updating you on our progress. For ALKS 4510, we are advancing in single and multiple ascending dose studies in healthy volunteers and plan to initiate a multi-dose Phase IIa study later this year in patients with fatigue associated with multiple sclerosis and Parkinson's disease. Fatigue is one of the most common and burdensome symptoms in neurodegenerative disorders and remains a significant unmet need in MS and Parkinson's. Our interest in fatigue in these populations is also informed by observations from our Phase II narcolepsy studies, where we saw improvements in patient-reported fatigue that appeared distinct from effects on sleepiness or wakefulness alone. Fatigue represents a novel area of pharmaceutical development, and we'll provide more details regarding the design of the development program as the Phase II study opens later this year. As we advance through the development program, our strategy will be stepwise, data-driven and informed by interactions with regulatory authorities as we seek to make a meaningful contribution to patient care. Taking a step back, the potential utility of Orexin 2 receptor agonist across a broad range of indications is a significant and striking opportunity. This will be the year that we generate a substantial new increment of data to the clinical evidence base supporting these potential opportunities. With that, I'll turn the call back to Sandy to manage the Q&A. Sandra Coombs: Thanks, Blaire. We'll now open the call for Q&A. Operator: [Operator Instructions] And our first question will come from David Amsellem with Piper Sandler. David Amsellem: So, on the orexin programs beyond sleep wake, in ADHD, can you talk about your thought process regarding development as monotherapy versus adjunctive therapy in ADHD? And how you -- what preclinical data you can point to that gives you confidence that a monotherapy approach makes sense? And then regarding the fatigue program, it might be a little early to talk to this, but can you talk about endpoints that you're exploring? And I realize this is going to be informed by your discussions with regulators, but what are you going to be looking at in terms of early outcome measures on fatigue? Blair Jackson: Sure. David, it's Blair. So, with regards to ADHD, we have a substantive amount of data with regards to orexin agonist in this space. And in fact, it's probably the most tangential of the indications out there for the next place for us to go. We did a lot of preclinical work looking at neurotransmitter release, looking at behavioral models, EEG. We saw increased levels of acetylcholine in the prefrontal cortex, which is a high indication of activity and attentiveness. We also use what's really a highly translatable model within the preclinical testing where it's called the 5-choice serial reaction test. And our initial hypothesis was exactly where you started was what if we did an adjunctive therapy perhaps with a non-stimulant, would that provide a really beneficial outcome. But when we did that model, what we found is across all our studies, we were performing as well as or better than stimulants themselves as a monotherapy. So, we feel that both in the attention and the impulsivity aspects of those programs that we have a really good opportunity here. And our clinical studies that we're kicking off are actually designed to look at just that. So, we'll be looking at monotherapy across a broad population, both intention and impulsivity. And I think the 2 studies that we've set up are going to be really well positioned to give us a full idea of how this could proceed moving forward. With regards to fatigue and that program, we're moving into the clinic with a drug called ALKS 4510. And that's a really interesting area. And we are looking very carefully at the scales to be used within those studies. So, we're going to be testing this in MS fatigue patients and Parkinson's disease patients. And one scale that we're going to use is the PROMIS Fatigue Scale. This is a scale that we used in our NT1 study, where we showed a really strong benefit within the NT1 patients, taking them really from severe to normal on that scale. And that hasn't been shown very widely within clinical literature. We also saw similar outcomes as we moved into the NT2 patient population. So that bodes well as we go to an intact orexin tone system. But the other thing to keep in mind is a lot of these disease areas, they also have their own scales that have been developed as part of that patient population. So, we're going to be testing those 2 and trying to understand best how the different characteristics of the scales work and also how these drugs perform within different subcategories of fatigue. Operator: Our next question will come from Umer Raffat with Evercore ISI. Umer Raffat: I have a 2-part question. And clearly, there's been a ton of interest, strategic interest in the orexin space. And what I'm wondering is twofold. Number one, can you lay out time lines for indications beyond narcolepsy? Because I feel like that aspect of the value has not been captured by much of the valuation numbers that have been thrown around so far. And I ask that in particular because it seems like Lilly's early interest in Centessa was perhaps not even on the lead program. And number two, more importantly, is Alkermes and the Board open to the idea of asset sale rather than a whole company sale if that were to be a possibility at any point? And I'm thinking back to examples like Biohaven. Richard F. Pops: Maybe I'll start and then I'll hand over to Blair as well. Yes, I think Blair just referred to it in the prepared comments, which is the 2 most immediate adjacencies to the hypersomnolence are fatigue and ADHD. We're enrolling patients right now in the first ADHD study, that translational study in adult patients. So that will be a 50-patient study. We'll get data this year on ADHD. So, give us our first sense. And we won't even wait for those data before we light off a bigger proper Phase II program, which we'll light off this summer in ADHD because we feel like the preclinical evidence in that space is quite compelling. And the enrollment in the fatigue studies in Parkinson's and whatever, that starts this year as well. So, we're right on the threshold of new data sets that expand the understanding of the pharmacology in patients without demonstrable orexin deficits. And as you know, the first hints of that come from our NT2 data and our IH data that we've already developed. So, with regard to the second question, our company and our Board, we are a public company. We react to whatever circumstances present themselves. But we feel like right now, we're right on the threshold of major valuation changes as we mature this program. And I think Lilly coming into the market underscores the fact that there's more than just hypersomnolence here at play. This circuitry is directly associated with human wakefulness defined broadly. And I think that opens up a whole bunch of adjacencies. And we start with hypersomnolence and we go from there. Blair, any other thoughts? Blair Jackson: No, I'd just reiterate what Rich said, which is we're in a process right now. We're going to be turning over a lot of cards with regards to a number of these clinical areas, and we're looking to really execute and drive value over the next couple of years. So, I think it's a little premature to talk about any potential sale process. Operator: And moving next to Paul Matteis with Stifel. Julian Pino: This is Julian on for Paul. And I guess just to piggyback again on the orexin program and the pipeline, it would be great to hear about, for this larger Phase II that you're kicking off this summer, what types of patients are you hoping to enroll? And can you just talk a little bit about the translatability of what you'd expect based on past clinical data literature in terms of success on the primary endpoint and how may that translate to a larger randomized Phase III? And I guess, in comparison, how large are Phase III studies relative to the Phase II that you plan on kicking off? Blair Jackson: Yes. Thanks for the question. I think with regards to the ADHD, as we said -- as I said earlier in the call, we saw pretty broad activity in some of our early models with regards to this asset and this mechanism. And so, as we look to enroll our patients in the Phase II study, we think a broad base of patients will be beneficial from this. So, we're not going to look at individual subtypes. Our key primary endpoint for this is the [ ACERs ], which is the adult tool that's been used widely in the industry. And what we're really looking to do is see the relative effect size across the patient population. And just to give an idea of what people have seen in the past, there's typically -- it kind of breaks into 2 main areas. You typically see the nonstimulants and they typically have Cohen effect sizes that are kind of 0.3 to 0.45 or so. And then what you see is a very different result with stimulants. Stimulants typically can be 1 and above with regards to Cohen's d, but it comes with trade-offs. And so, what we're really looking to see is how we perform on that over a 4-week period. That study, as we said in the prepared remarks, is going to be about 300 patients. And that's roughly the size that you see in some of the Phase III programs. And you go a little longer. Usually, you're looking at 6-plus weeks on the primary endpoint. But we'll determine that, and we'll indicate more of that after we see the data in the Phase II. Richard F. Pops: I just want to add a couple of things on that. Number one, what we did in narcolepsy is what we want to do in ADHD, i.e., have a significant amount of clinical data before we launch the Phase III program and run a Phase II program that almost mimics the Phase III program. That's a major risk mitigator in the program. Second thing is we're going to start using the tools that exist, just like we did in narcolepsy. But what's interesting about this pathway is it is activating the brain in different ways than the stimulant activates the brain. And I think with the benefit of additional clinical data, we'll be able to dial into some of the differential efficacy potential of an orexin agonist compared to just a stimulus, which is revving up the brain in a more general way. Julian Pino: And sorry, just one quick question, if I may as well. I think you said you'd be completing the IH study in 4Q, Rich. Are we expecting data this year? Or could it potentially run into next year? Richard F. Pops: That's the translational study, the first study where we're looking at more -- I'm sorry. I'm sorry. Yes, the IH Orexin study, we'll complete that in Q4, and we'll get the data as fast as we can thereafter. It could be right at the end of the quarter or right in the beginning of the second quarter according to the current plan. Operator: And moving next to Jessica Fye with JPMorgan. Jessica Fye: Just a question on LUMRYZ and your guidance for that product this year. Can you just talk about what's embedded as it relates to your expectation for any potential net price pressure as non-AG generic sodium oxybate gains traction in the marketplace? Todd Nichols: Yes. Yes, sure. I'll take that one. So, at this point right now, as I stated, we're guiding to $350 million to $370 million. We had a really solid first quarter, and so we feel really good about that heading into Q2 and for the remainder of the year. At this point, we haven't seen any impact on multisource generics for Xyrem. Again, the most important point is this is a multisource generic for Xyrem, not for LUMRYZ. So, we haven't seen any impact on demand, any impact on physician behavior, any change in payer behavior at this point. A really solid part about the LUMRYZ story is really the diverse patient mix. We get a sizable portion of patients from new to oxybate, from returning oxybate and from the switch market. So, it's a very durable product. So, it's something that we're watching very closely. We're going to have to see how it plays out. But with our full year guide, we do incorporate a range of gross to net scenarios. Operator: And our next question will come from Ben Burnett with Wells Fargo. Benjamin Burnett: I wanted to ask about the Vibrance-3 data that you will provide in the fourth quarter or thereabouts. I guess what dose cohorts will be included in the update? And will this include split dosing at therapeutically relevant doses? Sandra Coombs: Yes. We expect to have top line results from the entire study when we read out the data from that, which would include the split dose arm. Benjamin Burnett: Okay. Fantastic. And can I ask, the split dosing that's being tested, how is that split? Are they evenly split? And are you testing sort of higher total doses in the split dosing cohorts relative to the single-dose cohorts? Richard F. Pops: We haven't disclosed the specifics on the split dose strategy either for the IH study or for the other studies as well, partly because we feel like we've learned so much from our clinical program that is proprietary that we're going to keep that close to our vest until we have the data. Operator: We'll go next to Marc Goodman with Leerink Partners. Marc Goodman: Yes. On LUMRYZ, can you talk about the net patient starts that got you to the 3,600 patients that ended the quarter? And then now that you own the asset, can you give us an update of how you plan to develop valiloxybate? Todd Nichols: Yes. Mark, I'll take the first part of that. So overall, as I said in my prepared remarks, the brand in Q1 realized 3,600 patients on therapy. We actually think that total patients on therapy is the best metric. That's a 28% year-over-year growth overall. That's really the durable part of the brand. That really incorporates any type of demand perspective, access and also persistency. So, our focus is really on total patients. We're always going to be focused moving forward on growing net patient adds, and we feel really good about the enrollment trends we saw coming at the end of the quarter, which is going to set us up very well for Q2 and beyond. And that's really based upon just the overall strength of the mix between new to oxybate switch and also returning. So, we feel good about the patient mix that we're seeing. Blair Jackson: Mark, this is Blair. I'll take the valiloxybate question. So that's an asset that came over as part of the Avadel acquisition, and that's an opportunity for us to potentially develop a no-salt once-nightly product for patients. And so, our plan for that is to take multiple formulations into the clinic and really try to assess a rapid development program. And this is really right up our wheelhouse. As you know, we're a formulation company at our roots and especially when it comes to PK/PD relationships. So, we right now have multiple formulations that are in the clinic and being assessed. And as we have more data later in the year, we'll share that. Marc Goodman: Blair, do you think you're going to have to do a full -- like a full Phase III study? Or will you be able to do like some type of bridging study that is quicker? Blair Jackson: Well, that will really depend on the clinical data that we generate. So, our hope is that we can do some bridging. But again, we'll have to see how this asset performs in the clinic. Operator: And Rudy Li with Wolfe Research has our next question. Rudy Li: Can you talk about your current understanding of the competitive landscape for orexin agonist? And specifically, what key endpoints being measured in your Brilliance Phase III trial that could provide additional label differentiation? Richard F. Pops: I think the major differentiating feature in the orexin space now is the fact that Alkermes has the only program that has a range of doses that have been credentialed in large randomized Phase II studies. And in so doing, we've been able to explore other domains other than just the classic maintenance of wakefulness test and the cataplexy scale by extending into fatigue and cognition. So, while we don't expect fatigue and cognition data to be in our initial label, what we do expect to have a clinical data set that encompasses all those features of the treatment. So when we come to market, if the drug is approved, we expect to come to market for NT1 and NT2, which differentiates us from the first market entrant as well as a range of doses across NT1 and NT2 both as once a day as well as in split dose formats, which further differentiates us from the first market entrant. And I think following the acquisition of Centessa, I think our lead in NT2 as well as NT1 continues to grow. So, we're really happy with the competitive positioning, and we think this is going to open up the beginning of a brand-new class of pharmaceuticals that will continue to grow from the diseases of hypersomnolence. Operator: And we'll go next to Luke Herrmann with Baird. Luke Herrmann: One on 7290 in ADHD, you laid out the effect sizes we've seen across different standards of care. So based on the preclinical data, do you think the more likely outcome as a monotherapy is sort of a more tolerable asset that sits in the middle of stimulants and nonstimulants in terms of efficacy? Or do you think efficacy could actually exceed what we've seen with stimulants? Blair Jackson: Well, again, what we've seen in our preclinical data is we performed as well or better than stimulants in our early models as monotherapy. So obviously, if we're able to achieve that clinically with the tolerability profile that we see with this class of drugs, that's a great outcome for us. But I think there's a wide range of market opportunities regardless of what we see in the clinic, but our goal will be to get the strongest efficacy possible. Luke Herrmann: Great. And then just one follow-up on the Alixorexton Phase III studies. I believe you commented on the high level of patient interest. Has this exceeded what you anticipated? And would this maybe lead to more expeditious enrollment? Richard F. Pops: The difference between Phase III and Phase II for us is that when you go into Phase II, no one's used your drug before. And now we go into Phase III with a major data set that's been presented at major meetings and a buzz about this program. What mitigates against the rate of enrollment, though, is the control and the rigor that we learn from Phase II about which sites to use and how to select patients and how to make sure that you're not just enrolling for the sake of enrollment numbers, but to enroll the finest cohort you can over the period because those data become your label. So, the quality of that study is sacrosanct. So, we expect to enroll the study correctly at the rate that we'll determine as we activate sites, and we'll keep you guys posted as we go on that. Operator: We'll hear next from Joseph Thome with TD Cowen. Unknown Analyst: This is Jacob on for Joe. I was wondering if you were planning on studying LUMRYZ in combination with an OX2R agonist in the future? And if so, what would a trial for that look like? Richard F. Pops: Yes. Jacob, it's something we're hearing so frequently from clinicians now that we've completed the acquisition. And we'll go to the sleep meeting in Baltimore, representing both once-nightly oxybate with extended efficacy as well as the Alixorexton program. And so we will be harnessing that energy into a clinical program over time. We won't -- we're not going to start that right away. We need to finish some other things first, namely the registration program for Alixorexton as monotherapy. But I think there's increasing interest in understanding both the nighttime and the daytime aspects of the disease. Operator: We go next to Ami Fadia with Needham & Company. Ami Fadia: I've got 2. Just with regards to Vibrance-2 that's going to be presented at the sleep meeting in Baltimore. What additional data on top of what you had announced at the initial data readout that we can expect at the meeting? And with regards to the LUMRYZ study that's expected to read out in the second quarter, maybe talk about your expectations for what that profile is likely to look like, the market opportunity and what you're doing in terms of preparing for a potential launch of that indication? Richard F. Pops: Ami, it's Rich. I'll start. As I mentioned, we presented most all of the data on the Vibrance-2 study in November, and that's available on the website if people want to look at that again. But we will give a bit more sleep in 2 principal domains. One, we'll try to give a little bit more dimensionality to the efficacy effect that we saw. And the other is we do have data from the extension phase now that we can tack on to the double-blind phase. And that's always instructive to see what happens as patients stay on therapy for a longer period of time. And of course, at the sleep meetings, those data are presented by investigators and you have the ability to talk to people who actually have hands on in the use of the drug. Your second question was about LUMRYZ in IH and the market opportunity for that. I'll start and then I'll ask Todd to comment on that. What's interesting is that the competitive product is Xywav the principal growth of that drug now is driven by the IH indication. And part of the reason we went into IH for Alixorexton was talking to patients and patient advocacy groups, there's a huge unmet need for new medicines in IH. And we just had a thought leader here at the company yesterday saying that he thought oxybates at this moment are probably the best treatment for idiopathic hypersomnia, which is interesting. I think that's underappreciated. So, we will be able to enter this market with LUMRYZ in 2028. So, we have some time to prepare for that type of launch if it's approvable. But we're quite excited about that as a life cycle growth tool for LUMRYZ. Todd, do you... Todd Nichols: Yes. The only thing I would just add a couple of things. We continue to validate all of the research that we've done, listening to the community, listening to HCP. We believe it's a really underdeveloped category right now. There's 40,000 patients that are diagnosed. We think that's underrepresented. And there's only one FDA-approved product on the market. We think that LUMRYZ has an opportunity to be the second product. And we know how well LUMRYZ is received in the community now for narcolepsy. So, our expectations are very high on what the opportunity is for LUMRYZ in IH. As Rich said, as the data is presented, as we go through the approval process, we'll be continuing to build what our launch plan looks like, but it's something that we are very excited about. Operator: And we'll go next to Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. Just on ADHD, can you talk about what's unique about the molecule PK or dosing profile that could help you mitigate insomnia or urinary frequency, the class of adverse -- class adverse events you have observed in narcolepsy patients? And would you expect the ADHD patients to be more or less sensitive to these class AE so far? And just a quick follow-up on Vibrance-2. Would you provide any sort of kinetics on weekly MWT data to better contextualize data comparison relative to a key competitor of yours, which had 2-week data, and you've talked about observation of tachyphylaxis in the past with Vibrance-2. Blair Jackson: Chi, it's Blair. I'll start with ADHD, and then I'll get Rich to answer you on the Vibrance-2 stuff. So, with regards to ADHD, I think a couple of things I want to make sure we're clear on. One is the adverse events that we typically see with this class of orexin agonist. It's a very wide therapeutic window. As you saw from our programs in NT1 and NT2, we have a really nice AE profile overall. There's -- the main effects associated with this class are really [ polyuria ] and some transient insomnia that we see at the beginning of the study. As we talk about the ADHD program and the PK dosing profile, I think with regards to any of the new programs that we move outside of narcolepsy, we're developing them with new drugs. So ALKS 7290 is its own unique molecule. It's been designed by itself specifically. It's optimized for the patient populations that we're going after. And so, it will have its own unique PK and dosing profile that will match that patient population. As you know, what we saw in our NT2 program is that patients who have an intact orexin system, so who have natural orexin tone, we tend to see a very mitigated overall AE profile due to that fact. And so again, I think we're well positioned to test a wide range of doses within that patient class. Rich, do you want to do... Richard F. Pops: Yes, the Vibrance-2 data at sleep, you will see time course data on a multi-week basis for the ESS score. And I just want to make the point that there is no competitive data that's been presented so far. There's only one company that's shown multi-week successful data in NT2 and that's Alkermes. Operator: And we'll hear next from Akash Tewari with Jefferies. Anastasia Parafestas: This is Anastasia on for Akash. So, when you previously talked about NT2, you've kind of segmented the pop into a couple of buckets of patients. You have the ones who would benefit from BID dosing and then the ones with kind of a more modest effect size. So how are you thinking about that dynamic as you consider orexins working in other indications where patients have more normal hypocretin levels at baseline like ADHD or fatigue? Richard F. Pops: We just think overall, dosing flexibility will be a really important thing because people have different physiologic set points for their base orexin tone and they have different lifestyle expectations, whether they want to stay up until 10:00 at night or they want to go at 7:00 p.m. So, our feeling is that we've established in data so far in NT2 patients as well as IH in early stage that patients with normal orexin tones can benefit from an orexin agonist. So then that degree of that benefit will be determined by each individual set point, as I just described. So, the prerequisite for addressing that commercially is just a range of doses with data supporting those -- that range of doses in the label, which is exactly why we've designed the pivotal study, the Brilliance study to include once-daily dosing, split dosing across that range of doses that we elaborated in Phase II. Operator: Moving next to Ash Verma with UBS. Unknown Analyst: This is [ Ho ] on for Ash. Our first question is for the pending LUMRYZ IH study. How do you think about the placebo arm here given the patients may have some bias knowing that sodium oxybate works in IH? And our second question is, so it's good to see the decent beat on VIVITROL. Can you help us understand your latest thoughts on how the VIVITROL revenue trajectory could be in 2027 and beyond as Teva Generic enters? Richard F. Pops: I'll take the first and Blair and Todd talk about the second. The LUMRYZ -- just understanding the LUMRYZ IH Phase III study is a randomized withdrawal study. So, patients would have all been on the oxybate. So, there's no blinding issue. And then it's withdrawn on a blinded basis. So, this is the same design that Jazz used with their Xywav study. Blair Jackson: Yes. And I think with regards to VIVITROL, as we move into 2027, there's a number of interesting scenarios in front of us. Obviously, we have the potential entrant of Teva into the space in the beginning of 2027. And we're looking at a lot of scenarios related to that, including some scenarios where Teva actually doesn't -- isn't able to make it into market. What we don't expect, though, is to have a really dramatic impact on VIVITROL as these -- as the new entrant comes into the place. VIVITROL is a unique asset. It requires a lot of manufacturing capability. It requires a lot of commercial infrastructure and handholding with patients and physicians. And Todd can give you a little more on that. Todd Nichols: Yes, absolutely. Just to kind of reiterate, we have really 2 key priorities right now, and that's delivering for 2026 for VIVITROL. We're right on track to be in the range of our full year guidance, really driven by the alcohol dependence indication. And to reinforce what Blair said, we've been working on this for a number of years. We have a range of scenarios that we're playing through, and our research continues to reinforce that we don't see this as a typical erosion if Teva were to make it into the market, it's a durable product. And so, we'll be prepared regardless of what those scenarios are to flex our resources if we need to and also be prepared to compete. Operator: Our next question will come from Uy Ear with Mizuho Securities. Uy Ear: So maybe -- apologies for missing this, I dialled in a little bit late. Could you maybe just help us understand if there's a reason or not on why the patient mix may change going through the year given the nice patient mix that led to better-than-expected gross to net? And the second question is on ADHD, is there anything else in terms of potential differentiation other than efficacy? Todd Nichols: Yes. I'll take the first one regarding patient mix. We did see some favorability, some Medicaid favorability in the first quarter of the year. We don't expect -- we don't actually forecast on favorable patient mix. We do expect that for the full year that we would see the access profile for LYBALVI expand. So, we do have better line of sight to what that profile would look like. We're always in active negotiations with payers and our full year range actually assumes that, that could play through. But that's the real logistics of the business right now. We're just not forecasting any additional favorability for the remainder of the year. Blair Jackson: And then with regards to ADHD, look, we're looking for differentiation both on efficacy and tolerability. I think if you look at the ADHD market and how it's evolved, it really was started around the stimulants and the amphetamine use within adults and children. And that comes with significant trade-offs. It comes with side effects. It comes with potential abuse. And I think people have been really looking for more tolerable agents that are maybe nonstimulant for a long time. And up until now, really the efficacy of those agents really just hasn't matched what you've seen in the stimulant class. So, I think the really holy grail for this indication in this area is to create an asset that has the efficacy of a Vyvanse or something like that, but also is really well tolerable. And the orexin agonist class has the potential for that. It's a new mechanism of action. It operates on the alertness centers in the brain. We've seen attention and impulsivity benefits in preclinical models. We've seen the right neurotransmitter release and profile as we look at these assets. So we think there's a real opportunity here to really thread that needle and provide a new benefit to this patient population. Operator: And our final question will come from David Hoang with Deutsche Bank. David Hoang: I just had 2. Maybe first with the Vibrance-3 IH study. When we do get that data for the split dosing arm, I guess, ideally, what would you like to see for that split dose versus a single dose to help validate your hypothesis? And I guess do you just have any sense of in the real-world setting if a split dose or a single dose would be preferred? And then on the LUMRYZ opportunity in IH, if LUMRYZ is approved for IH, how do you think about where your patients may come from? Do you think that would be mostly oxybate naive in IH? Or would you think that there'd be a good proportion of switches from Xywav as well? Richard F. Pops: David, it's Rich. I'll take the first. The hypothesis for the split dose in IH is driven by the observations that we saw in the NT2 study. And so the simple readout would be to look at the MWT and see whether we're extending the later time points and elevating the latencies in the later time points, recognizing that it's almost a laboratory measure that we're using in the IH population because the MWT is not a preferred endpoint for IH, but it's simply a way for us to demonstrate the pharmacodynamic effect of the split dose and to confirm our dosing assumptions. In the real world, we've talked to a lot of different folks in the course of market research. I think that the once daily will continue to be probably the modal approach that patients use. But over time, as the category continues to mature, I think we analogize it's the ADHD space where there's a whole range of dosing alternatives and people can tailor their dose to their lifestyle. And that's why we think there will be a real virtue to having a suite of once-daily doses as well as accompanying split doses that people can then dial in to the level of wakefulness that matches their lifestyle and their disease. Todd Nichols: Yes. And in terms of the IH opportunity for LUMRYZ, we clearly see a high unmet need here, and we think there's a significant opportunity for expansion potential as we think that the market right now is very modest, even with one product approved, there's only a very modest penetration. So, we see market expansion opportunity, which will be a new patient start opportunity that LUMRYZ will have the ability to tap into. That's what we've seen with narcolepsy. But at the same time, it's also going to create another market, which is a switch market. And that's what we've seen with narcolepsy. So, we think that it will mimic kind of the patient patterns that we've seen in narcolepsy, which is new to oxybate patients, switch patients and returning patients. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Sandra Coombs for closing comments. Sandra Coombs: Great. Thank you, everyone, for joining us on the call today. Please don't hesitate to reach out to us at the company if we can be further helpful. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.