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Operator: To all sites on hold, we appreciate your patience. Please continue to stand by. To all sites on hold, we appreciate your patience. Please continue to stand by. Please stand by. Your program is about to begin. Welcome to the M&T Bank Corporation third quarter 2025 Earnings Conference Call. All lines have been placed in a listen-only mode and the floor will be open for your questions following the presentation. Press one on your telephone keypad when posing your question. We do ask that you please pick up your handset to allow for optimal sound quality. Lastly, if you should require operator assistance, please press 0. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Steve Wendelboe, Senior Vice President, Investor Relations. Please go ahead, sir. Steve Wendelboe: Thank you, Katie, and good morning. I would like to thank everyone for participating in M&T Bank Corporation's third quarter 2025 earnings conference call. If you have not read the earnings release we issued this morning, you may access it along with the financial tables and schedules by going to our Investor Relations website at ir.mtb.com. Also, before we start, I would like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in today's earnings release materials and in the investor presentation, as well as our SEC filings and other investor materials. The presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T's Senior Executive Vice President and CFO, Daryl Bible. Now I would like to turn the call over to Daryl. Daryl Bible: Thank you, Steve, good morning, everyone. M&T Bank Corporation continues to serve as a trusted partner for our customers and communities, bringing together people, capital, and ideas to make a difference. Earlier this quarter, we released our 2024 sustainability report, which highlights our community impact and the progress we have made towards meeting our sustainability goals. Highlights include $5 billion in sustainable lending and investments, and over $58 million contributed to nonprofits through corporate giving and the M&T Charitable Foundation. We are also proud to share that M&T Bank Corporation is now the top SBA lender across our footprint by total volume as of the end of the SBA fiscal year September 30. Our small business enterprise continues to be an important component of our support for entrepreneurs and the local economy. Turning to slide four, our businesses and leaders, notably our women in leadership, continue to receive accolades from the industry including recognition of our Wilmington Trust team, and individual recognition for leaders across the bank. Turning to slide six, which shows the results for the third quarter. Our third quarter results reflect M&T Bank Corporation's continued momentum with several successes to highlight. We produced strong returns with operating ROTA and ROTCE, of 1.56% and 17.13%. The net interest margin expanded to 3.68%, demonstrating a relatively neutral asset sensitivity, well-controlled deposit and funding costs, and the continued benefit of fixed rate asset repricing. Strong fee income performance we have seen throughout the year continued, with fee income excluding notable items reaching a record level. Revenues grew more than expenses, resulting in our third quarter efficiency ratio of 53.6%. Asset quality continues to improve with a $584 million or 7% reduction in commercial criticized balances and $61 million or 4% reduction in non-accrual loans. We increased our quarterly dividend per share by 11% to $1.50 and executed a $409 million in share repurchases while also growing tangible book value per share by 3%. Now, let's look at the specifics for the third quarter. Diluted GAAP earnings per share were $4.82, up from $4.24 in the prior quarter. Net income was $792 million compared to $716 million in the linked quarter. M&T's third quarter results produced an ROA and ROCE of 1.49% and 11.45%, respectively. The third quarter included a notable fee item of $28 million related to the distribution of an earnout payment to M&T associated with the 2023 sale of our CIT business, adding $0.14 to EPS. Slide seven includes supplemental reporting of M&T's results on a net operating or tangible basis. M&T's net operating income was $798 million compared to $724 million in the linked quarter. Diluted net operating earnings per share were $4.87, up from $4.28 in the prior quarter. Next, we look a little deeper into the underlying trends that generated our third quarter results. Please turn to slide eight. Taxable equivalent net interest income was $1.77 billion, an increase of $51 million or 3% from the linked quarter. The net interest margin was 3.68%, an increase of six basis points from the prior quarter. This improvement was driven by a positive four basis points related to the prior quarter catch-up premium amortization on certain securities. Positive three basis points from higher asset-liability spread mostly from continued fixed asset repricing, partially offset by a lower contribution of net free funds. Turn to slide 10 to talk about average loans. Average loans and leases increased $1.1 billion to $136.5 billion. Higher commercial, residential mortgage and consumer loans were partially offset by a decline in CRE balances. Commercial loans increased $700 million to $61.7 billion, aided by growth in our corporate and institutional fund banking and loans to REITs. CRE loans declined 4% to $24.3 billion, reflecting the full quarter impact of last quarter's loan sale and continued payoffs and paydowns. Residential mortgage loans increased 3% to $24.4 billion. Consumer loans grew 3% to $26.1 billion, reflecting increases in recreational finance and HELOCs, while our auto loans were largely stable from the second quarter. Loan yields increased three basis points to 6.14%, aided by continued fixed rate loan repricing, including a reduction in the negative carry on our interest rate swaps, and sequentially higher non-accrual interest. Turning to slide 11, our liquidity remains strong. At the end of the third quarter, investment securities and cash held at the Fed totaled $53.6 billion, representing 25% of total assets. Average investment securities increased $1.3 billion to $36.6 billion. In the third quarter, we purchased a total of $3.1 billion in securities, with an average yield of 5.2%. The yield on the investment securities increased to 4.13%, reflecting the prior quarter catch-up premium amortization on certain securities and continued fixed rate securities repricing benefit. The duration of the investment portfolio at the end of the quarter was three point five years. The unrealized pre-tax gain on the available-for-sale portfolio was $163 million, or an eight basis points CET1 benefit if included in regulatory capital. While not subject to the LCR requirements, M&T Bank Corporation estimates that its LCR on September 30 was 108%, exceeding the regulatory minimum standards that would be applicable if we were a category three institution. Turning to slide 12. Average total deposits declined $700 million to $162.7 billion. Noninterest bearing deposits declined $1.1 billion to $44 billion, mostly from lower commercial and noninterest bearing deposits related to a single customer client. We continue to consider the entirety of the customer relationships as we assess our overall deposit funding mix. Interest-bearing deposits increased $400 million to $118.7 billion, driven by growth in commercial and business banking, offset by a decline in consumer and institutional deposits. Interest-bearing deposit costs decreased two basis points to 2.36%, aided by lower retail prime time deposit cost and lower interest checking costs across other business lines. Continuing on slide 13, non-interest income was $752 million compared to $683 million in the linked quarter. We saw continued strength across all fee income categories. Mortgage banking revenues were $147 million, up from $130 million in the second quarter. Residential mortgage revenues increased $11 million sequentially to $108 million from higher servicing fee income. Commercial mortgage banking increased $6 million to $39 million. Trust income was relatively unchanged at $181 million as the prior quarter seasonal tax preparation fees were largely offset by growth in wealth management and fee income. Trading and FX increased $6 million to $18 million from higher commercial customer swap activity. Other revenues from operations increased $39 million to $230 million, reflecting a $28 million distribution of an earnout payment, a $20 million Payview distribution, and the gain on the sale of equipment leases. These items were partially offset by $25 million in notable items in the prior quarter. Turning to slide 14. Non-interest expenses for the quarter were $1.36 billion, an increase of $27 million from the prior quarter. Salaries and benefits increased $20 million to $833 million, reflecting one additional working day and higher severance-related expense, which increased $17 million sequentially. FDIC expense decreased $9 million to $13 million, mostly related to the reduction in estimated special assessment expense. Other costs of operations increased $23 million to $136 million, reflecting higher expense associated with the supplemental executive retirement savings plan. Due to market performance, the impairment of renewable energy tax credit investment. The efficiency ratio was 53.6% compared to 55.2% in the linked quarter. Next on slide 15 for credit. Net charge-offs for the quarter were $146 million, or 42 basis points, increasing from 32 basis points in the linked quarter. The increase in net charge-offs reflects the resolution of several previously identified C&I credits, the two largest of which totaled $49 million. CRE losses remained muted in the third quarter. Non-accrual loans decreased by $61 million. The non-accrual ratio decreased six basis points to 1.1%, driven largely by payoffs, paydowns, and charge-offs of commercial and CRE non-accrual loans. In the third quarter, we recorded a provision for credit losses of $125 million compared to net charge-offs of $146 million. Included in the provision expense is a $15 million provision for unfunded commitments related to the letter of credit to a commercial customer. The allowance for loan loss as a percent of total loans decreased three basis points to 1.58%, reflecting lower criticized loans. Please turn to slide 16. The level of criticized loans was $7.8 billion compared to $8.4 billion at the end of June. The improvement from the linked quarter was largely driven by a $671 million decline in CRE criticized balances. The decline in CRE criticized balances was broadly based with lower criticized balances across nearly all property types. Turning to slide 19 for capital. M&T Bank Corporation's CET1 ratio was an estimated 10.99%, unchanged from the second quarter. The stable CET1 ratio reflects capital distributions including $409 million in share repurchases offset by continued strong capital generation. In the third quarter, we also increased our quarterly dividend by 11% to $1.50. The AOCI impact on the CET1 ratio from available-for-sale securities and pension-related components combined would be approximately 13 basis points if included in regulatory capital. Now turning to the slide for the outlook. First, let's begin with the economic backdrop. The economy continues to hold up well despite ongoing concerns and uncertainty regarding tariffs and other policies. The passage and signing of the One Big Beautiful Bill Act into law removed one source of uncertainty and also gave businesses more incentive to invest in new capital. The economy bounced back in the second quarter after having contracted in the first. Consumer spending proved resilient despite tariff impacts. Businesses continued engaging in CapEx, though it was heavily in tech software and transportation and equipment, while spending on new buildings remained in decline. Although overall economic activity was resilient, we remain attuned to the risk of a slowdown in coming quarters, due to the weakening labor market. The possibility of declining jobs or a rise in the unemployment rate would likely cause weaknesses in consumer spending and possibly business CapEx too. We continue to monitor the possibility of a prolonged government shutdown and the potential impact on our customers, communities, and broader economy. We remain well-positioned for a dynamic economic environment with strong liquidity, strong capital generation, and a CET1 ratio of nearly 11%. Now turning to the outlook. We have three quarters of the year complete, so we will focus on the outlook for the fourth quarter. We expect taxable equivalent NII of approximately $1.8 billion, which implies full year NII excluding notable items to be at the low end of the $7 billion to $7.15 billion range, in line with the outlook we discussed in September. Fourth-quarter net interest margin is expected to be approximately 3.7%. Our forecast reflects two additional rate cuts in the fourth quarter. We expect continued loan growth and average total loans of $137 billion to $138 billion, with growth in C&I, residential mortgage, and consumer, and a moderating pace in CRE decline. Average deposits are expected to be between $163 billion and $164 billion. Our outlook for the fourth-quarter noninterest income was $670 million to $690 million, reflecting continued strength in mortgage, trust, service charges, and commercial services. We expect other revenues from operations to revert toward more normalized levels. This would imply full year noninterest income excluding notable items well above the top end of our prior range of $2.5 to $3.6 billion. Fourth-quarter expenses, including intangible amortization, are expected to be $1.35 billion to $1.37 billion. This would imply full year expense in the top half of our prior outlook of $5.4 to $5.5 billion. This is being driven by an increase in professional services. Net charge-offs for the fourth quarter are expected to be 40 to 50 basis points, with full-year net charge-offs of less than 40 basis points. Our outlook for the fourth quarter tax rate is 23.5% to 24%. We plan to operate with a CET1 ratio in the 10.75% to 11% range for the remainder of the year. We will be opportunistic with share repurchases, and also continue to monitor the economic backdrop and asset quality trends. As shown on slide 21, we remain committed to our four priorities, including growing our New England and Long Island markets, optimizing our resources through simplification, making our systems resilient and scalable, and continuing to scale and develop our risk management capabilities. Concluding on slide 22, our results underscore an optimistic investment thesis. M&T Bank Corporation has always been a purpose-driven organization with a successful business model that benefits all stakeholders including shareholders. We have a long track record of credit outperforming through all economic cycles while growing within the markets we serve. We remain focused on shareholder returns and consistent dividend growth. Finally, we are a disciplined acquirer and a prudent steward of shareholder capital. Now let's open the call up to questions before which Katie will briefly review the instructions. Operator: Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. Our first question will come from Ken Usdin with Autonomous. Your line is open. Ken Usdin: Good morning, Daryl. Thank you for taking my question. I wanted to ask first on loan growth. So, you know, we are seeing good traction in a few components of the loan portfolio, but the CRE is still moderating, albeit at a slower pace. Maybe just sort of a thought on where we stand with the actual inflection of the CRE book, sort of timing and magnitude, stuff like that. Daryl Bible: Yeah. So our if you wanna talk about CRE and our customers in CRE, I would say it's looking like much more of a rebound now. The amount of production that's being done and that's going through our system and our approval rates are double what they were in prior quarters. So we're really producing and have a lot more activity. Still having some payoffs and paydowns overall, but we feel very optimistic about the growth of that coming in the next quarter or two. You look at the areas that we are really focused on right now, it's primarily in multifamily with industrial close second. We also are interested in looking at retail, hotel, and healthcare on a case-by-case basis, but office, we know, pretty much we are still looking to reduce there. But net net overall, I think we're really moving in the right direction and feel very good at what we're seeing and have real good positive trends moving forward. Ken Usdin: Perfect. Okay, thank you. And then, you know, maybe just if you could expand upon your thoughts on sort of where M&T Bank Corporation fits in the now consolidating large regional environment, just kinda given all the events over the last few weeks. So I think you all have been, you know, quite transparent about you know, what you'd be interested in and have such a history of discipline. But, you know, just curious now that we're actually seeing activity, how do you sort of balance the maybe finite regulatory window need to have willing sellers? You know, does it cause you at all to sort of expand your geographic base a little to increase the number of possibilities, or will you simply kind of stay close to your knitting? Daryl Bible: Yeah, Ken. You know, we have been very successful with the model that we've had for a very long time. You know? And ours is really to continue to grow, share, and customers in the markets that we serve. So, you know, I'm sure an acquisition will come at some point down the road. Not sure when that's going to be. But when it happens, it will probably be within our footprint. You know, it may stretch into another footprint a little bit depending on who the company is that we partner with from that perspective. But it's gonna happen when it happens, Ken. Our strategy works, you look at our performance and our earnings, all really strong, and we're going to continue to execute on this strategy and be very successful. Ken Usdin: Perfect. Alright. Thank you very much, Daryl. Thank you. Operator: Thank you. Our next question will come from Gerard Cassidy with RBC. Your line is open. Gerard Cassidy: Hi, Daryl. How are you? Daryl Bible: I'm doing good, Gerard. How are you? Gerard Cassidy: Good. Thanks. Just to follow-up on what you just said about the approvals on commercial real estate. I think you said they're double from what they were prior. Can you share with us a little deeper what changed to have more approvals? Daryl Bible: You know, I think, you know, as we ramp back up with our new systems and processes that we have, you know, earlier in the year, we weren't running as smoothly as possible. That has eased up now. Both our team and Peter Darcy's, our first line folks, as well as in the credit area, with Rich Barry and his team. They're working much more closely together with the people on the line and are just flowing through a lot easier. And that's not just CRE. We're also seeing it on the C&I front. Both in commercial as well as in our business banking area. So I think the momentum is growing, and we're having a lot more success and a lot more wins, and seeing more loans go on the books. Gerard Cassidy: Very good. And then just a broader picture, if we step back for a moment, you've had in the past some very good insights on what's going on in Washington with the regulators. And we saw the notice of proposed rulemaking on matters that require attention, MRAs. Can you give us your view of how the regulatory environment is changing and how that may help your profitability going forward? Daryl Bible: Yeah. One of the big things that's happened and that we've started to see now is we used to always get when you have a review, you would get observations. Then if it was more serious, you might get an MRA or something really serious, an MRIA. From that perspective, observations are now being given. And the way we treat observations is, you have a year to get it fixed before they come back to next year. And if it makes sense, we go ahead and get them done. That's what's really helped a lot. By just having a recommendation to do something, you don't have the whole process and everything else that you have to do when you're trying to cleanse an official issue like an MRA or MRIA. So just that itself, the timeline to get it done is a lot faster, a lot fewer people working on it. As far as how much that actually reduces in headcount and all that, I think it's, you know, definitely will be fewer people needed in the remediation areas. But, you know, we'll probably try to redeploy those folks in other areas throughout the company because those people were really important, very expensive, experienced people that you would want to keep in the company. From that perspective. So I don't look at it as too much as an expense save. I look at it as a way of just things getting done a lot faster, a lot smoother. And it gives our teams a lot more energy to be more productive as well. Which is really, really important as we look forward. Gerard Cassidy: And just to stick with this for a second, obviously, the Basel III endgame is coming up soon, maybe by the end of the year or the first of next year. Many investors have identified the benefits to the money center banks. But in terms of regional banks, what do you see the potential benefits for M&T Bank Corporation from the Basel III endgame being a lot less onerous than what it was proposed in July 2023? Daryl Bible: You know, our hope is that it's a lot more straightforward really focused on key areas that we should try to figure out what the capital is. That original proposal, they had adjustments for PeopleBank our size, has a very low market operation markets that to build something out that really doesn't make a lot of sense for what we are looking for and charging for operational risk. It didn't seem very logical from that perspective either. So I'm sure it'd be much more streamlined, much more trimmed down, really focused on what's really needed from a capital perspective for the industry as well as for M&T Bank Corporation. Gerard Cassidy: Thank you. Appreciate the insights. Operator: Thank you. Our next question will come from Erika Najarian with UBS. Your line is open. Erika Najarian: Hi, Daryl. Thank you for taking my question. Just wanted to follow up on Scott's line of questioning. You mentioned production picking up, the things that you just talked about with Gerard. But, you know, rates are, in theory, supposed to trend lower from here. How should we think about the push-pull between some of these loans getting refied away from you and the production? In other words, is the fourth quarter still a good inflection point for when CRE balances would bottom? You know, when can we start seeing, you know, period-end balances start to tick upward in a more consistent way? Daryl Bible: Yeah. I would love to tell you that fourth quarter is the bottom. We hope it is, but, you know, you don't really know for sure. It really depends on what payoffs are coming through. I will tell you though, in 2026, for the amount of maturities that we see coming due in '26, it's much less in '26 than what we had in '25. So we're starting out of the blocks in '26 with just fewer payoffs coming through, which is a positive. And with our production that we're growing, I think it'll be really helpful. So, if I had to guess right now, it's probably bottoming in the first quarter. Maybe if we get fortunate enough, maybe it'll be sooner than that. But we feel really good that it's gonna bottom and start to grow up. Gonna be a really good earning asset. To get back to be positive momentum. Erika Najarian: Got it. And maybe the second question, Daryl, is you know, M&T Bank Corporation has been known to have a conservative culture and there has been a lot of credit noise recently, you know, whether it's related to NDFI or, you know, credit pre-announcements, which always makes the market nervous. So, you know, you're the first management team to call out NDFI. And, additionally, the, RWA treatment of NDFI via SSFA. So maybe my question is this. Maybe walk us through what the NDFI exposure is for M&T Bank Corporation. You did mention that loans to financial and insurance companies were the driver for C&I growth. And maybe help investors figure out what questions to ask in order to really properly assess the credit risk from a go-forward perspective. Because all we're getting from other banks is that oh, don't worry about it. This is way, you know, way less free and way less severe than a direct C&I loan. Daryl Bible: Yeah. No. Thank you for the question, Erika. So if you look at our NDFI portfolio, it is one of the lower exposures. We're probably 7% or 8% of total loans in that big bucket. We really focus on businesses in this bucket that you know, we believe in and are really good businesses that are on the lower end of the risk scale. So I'll start with our top three categories: fund banking, which helped with our loan growth, this past quarter and pretty much throughout the year. It has been growing nicely. Those are capital call lines. And we do those. But if you want to take more risk, which we don't, is you would do NAV lending, which we don't do. From that perspective. So in that case, it's our choice to stay on the more conservative end. The other category that we have that we have a fair amount in is in our industrial CRE, made up a lot primarily from our REIT activity that we have. And we stay with really good conservative-known REITs that perform well. So very good from an institutional performance. The other business I'd like to call out is residential mortgage warehouse. Done properly, from an operations perspective, you really can't lose money from a credit perspective. It's really an operational risk business. If you have good operations and good controls in place, you know, it's a really safe business to run from that perspective. So those are the ones that we have that are our largest. We do dabble in other ones. And we do lend to BDCs, but we only focus on public BDCs. We don't do private ones. We don't think there's enough disclosure and just more of a higher risk orientation. So we split that there. As far as your SSFA question goes, SSFA is basically transactions where you have securities or loans that are put on the balance sheet in a structure. So there's no recourse on the loans, your ability to get paid back is strictly from the assets. I think the way we're looking at it is we have a very small exposure today and you have to be selective on what assets you're going to put into these structures. And, you know, we have one structure that has loans, another structure that has mortgages. Most of our structures that we have is more in ABL right now. But the thing you have to really look at when you look at SSFA is that it's procyclical. So you start off with a lower RWA, and it's because of the structure that you have. But as delinquencies increase, as the economy turns down, your RWA automatically increases. In times of really bad stress, these portfolios will actually use up capital when you actually need capital the most from that standpoint. So we're aware of that and we're just trying to take it very conservative from that perspective. Times are very benign now. But times could get a lot worse at some point down the road. And you just want to make sure you don't have too much of this procyclical type structure on your balance sheet. Erika Najarian: Got it. Operator: Our next question will come from John Pancari with Evercore. Your line is open. John Pancari: Good morning, Daryl. Daryl Bible: Morning. John Pancari: On the capital front, I know you're at 10.99% CET1 and you are net of the $409 million in buybacks. As you look out, I know you have your 10.75% to 11% target. Can you provide us your updated thoughts around that target? What is keeping you from moving that lower? And as you get clarity on the regulatory front. And once you do have that confidence and the ability to move it lower, can you help us frame where you think a bank of your size and your regulatory considerations where you really could be operating at? Daryl Bible: Yeah. Thanks for the question, John. So first I'd start with when we look at where we're positioned right now, definitely feel comfortable in repurchasing shares. We didn't buy back as much as we could have this past quarter, just because we think the market was a little bit overheated. You know, and there was more risk into the environment. So we're a little bit cautious there. Our credit quality continues to improve really well. And that will probably continue, so we feel good about that. And the other thing is we're a little bit price sensitive on how much we buy depending on when we buy it. So, you know, it went up much higher last quarter, and we just bought less on a daily basis. So, I mean, right now, you know, we could buy anywhere from $400 million to $900 million this quarter depending on how we feel about the economy and the value of the stock. John Pancari: And in terms of your CET1 target, the 10.75% to 11% range, what would you need to see to move that lower? Daryl Bible: You know, that's a discussion we'll have with our board later this quarter. When we get our strategic plan approved and go through that. But, you know, as we continue to perform, we'll look for opportunities to potentially try to decrease our capital ratio down over time as that makes sense. But that's really a Renee and board question. And we'll probably have something to say about that come our January earnings call. John Pancari: Got it. John Pancari: Got it. Okay. And then if I could just throw in one more. On the loan front, I appreciate the color you gave around appetite around CRE and some of the loan growth dynamics. Can you maybe talk about competition a bit? What are you seeing in terms of loan spreads? We're hearing a little bit more that competition is starting to bear down again and that larger banks are becoming even more of a form of competitor to the regionals on the lending front. What are you seeing there in terms of front-end loan spreads on the commercial book? Daryl Bible: Yes. No, it's definitely much more competitive. You know, if you take and look at all of our commercial businesses, C&I and CRE together, I would say spreads are down maybe 10 or 15 basis points approximately from what we're originating maybe a quarter ago. But we're still seeing really good production. You know, we're doing really good in our business banking business. We don't talk much about business banking because it's really more of a deposit gatherer. It's 3x more deposits than loans, but you know, they've had really big success the last quarter or two in growing their loan book and continue to build that out, which is really good for us. It's the smaller end of the commercial space, and it's really serving our communities and our clients in the right space. So that said, you know, I think it's competitive, but from a pricing perspective, you know, we're pretty efficient, we can still get our returns with these pricing. John Pancari: Got it. Alright. Thanks, Daryl. Operator: Thank you. Our next question will come from Chris McGratty with KBW. Your line is open. Chris, your line is open. Please check your mute. Chris McGratty: There we go. Sorry about that. Daryl, if you think about operating leverage going into 2026 or the medium term, can you just speak to how you think this plays out in terms of widening, narrowing and then the drivers, between revenues and expenses? Daryl Bible: What would you say is narrowing? Chris McGratty: Just operating leverage. Is it gonna widen or narrow, I guess, is the deal. Yeah. Daryl Bible: Yeah. You know, Scott, you know, banking is simple when it comes down to this. Long term, but you know, it's really just growing revenue faster than expenses at the end of the day. We have a lot of momentum right now on our fee businesses. And if you look at our fees growing with trust, mortgage, and our commercial swath of products that we have in the commercial area to our customers there. We're going to grow that really strong again this next year. So that's a positive. We have positive momentum on our net interest margin. We guided up for the fourth quarter. Gonna hit three seventies. So we have momentum there. And CRE is going to start growing as well. So we'll have all of our portfolios growing. So I'm pretty positive that our earning assets will start to grow maybe a little bit faster. And still have good expansion on our net interest margin from that. So I feel good overall, and that should come down to a good operating leverage number. Chris McGratty: Thanks for that. And then I guess quick follow-ups. Kind of two-part. One, I guess the visibility into the improvement and the criticized that you've noted in the CRE book, I presume that'll continue. And then secondly, I just noticed in a nuance in kind of your geography question about M&A. I think you said adjacent markets. Just you could unpack that for a minute, that'd be great. Thanks. Daryl Bible: Yeah. So from a credit quality perspective, you know, our non-accrual loans came down to 1.1% and that was really driven by both C&I and CRE. When you look at the criticized balances, it is really a function of the CRE portfolio. CRE portfolio basically decreased in every category in CRE. But really driven by multifamily and healthcare. And those were the drivers there. Pretty optimistic that that will continue over the next several quarters. So we actually might think about pulling this slide out of our presentation in a quarter or two because we'll be pretty much back to normal credit quality and normal operating from that perspective. So we feel really good and excited about that. As far as geography goes, the only I say expanded geography is if you buy a bank that's, let's say, headquartered in one of the 12 states that we are, but they might have some exposure outside the 12 states that's really how you might get a little bit of more growth in another area. But it's still really focused on getting scale and density in the 12 states and in the District Of Columbia where we operate. Chris McGratty: Okay. Thank you. Appreciate it. Operator: Thank you. Our next question will come from Manan Gosalia with Morgan Stanley. Your line is open. Manan Gosalia: Hey, good morning. You noted in your credit comments a few one-time C&I NCOs that were embedded in the overall 42 basis point NCO number. And then I guess your guide for next quarter is 40 to 50. Are there more lumpy items that you're expecting next quarter? And, you know, I guess, the bigger picture question is, how do you expect that to trend into 2026? And, you know, what's a good normalized NCO run rate for M&T Bank Corporation? Daryl Bible: Yeah. No. Thank you for the question. So this quarter, I mean, net charge-offs were $146 million. It was really driven by two large C&I loans. They were two contractors that added up to $49 million and that's really what drove us higher than our, you know, 40 basis points this quarter. As further goes to next quarter, we could have maybe another one or so in the fourth quarter. But we still think that net net year to date, we'll come in for the year under 40 overall. So I think that's where it's kinda shaking out. From that perspective. As far as next year goes, we aren't going to give any guidance yet. All that. But the economy still overall is in relatively good shape. You know, there is stress in certain areas, but overall, it's still in really good shape. I wouldn't expect much change one way or the other. For '26, but we'll give you more of that in January. Manan Gosalia: Got it. And then separately, you spoke about, you know, more room on the operating leverage side. Some of your peers have spoken about accelerating investments in AI and tech. Can you talk a little bit about what M&T Bank Corporation is doing there? And if you will need to spend more next year as as you invest there. Daryl Bible: Yeah. We definitely are spending a lot of money in the company. I mean, the two and a half years I've been here, we've had some really significant projects that we've started and that we're starting to finish up. Like our my world, in the finance world, the general ledger will go live probably in the next quarter or so. So that that will be a big success and also a big drop in run rate. But, you know, we have other projects right behind that that we're going to be investing in. We're putting in a new debit platform for all to serve our customers. That's going in. We're looking at commercial servicing system that needs to get upgraded, consumer servicing system that needs to get upgraded, so there's other investments out there. You know, from a data center perspective, our two data centers are up and operating. We're still moving applications over there. That would take another year or two to get that fully accomplished. And Mike Whistler and his team are putting as many applications as we can up into the cloud. So we can maybe get out of doing some of the data centers. Which in the long run will actually reduce costs. So I think our costs will be controlled. I think our revenues will grow more than our expenses, but we're going to continue to invest in our company and do the right thing. And continue to have really strong service quality for our customers and really predictable sustainable platforms that serve. Manan Gosalia: Got it. Thank you. Operator: Thank you. Our next question will come from Matt O'Connor with Deutsche Bank. Your line is open. Matt O'Connor: Just a bigger picture question on credit, which is obviously driving the reasonableness of bank stocks today. We're seeing some of these kind of one-off in commercial that, according to the media, are fraud related. What are your thoughts in terms of why we're seeing these events now, you know, with rates kind of coming down? I thought that would have taken the pressure off, but just any big picture thoughts as you guys kind of sit around and think about the credit environment. I'm sure you have talked about some of these positions out there. If you don't have any, just any thoughts on that. Daryl Bible: You know, a lot of people have a lot of different ideas on this. I think one of the things we think about is, we've seen stress out in the marketplace for a while. So if you look at the consumers, you know, we've been saying for years that in the lower end, call it the 20-odd percent in the lower end, are really hurting in that space. And those are the ones that are paying the higher credit card yields and all that. And then it's just, it's really tough for them when they have to pay these high interest rates. If you look, we've tightened a little bit in our small business areas. So business banking has pulled back a little just because of some of the weakness we were seeing there in the last year or so. And have a leasing business that also we tightened up there as well. So on those areas, you know, we're things that we're just trying to tighten and see. But there's definitely stress out there. And sometimes people can only go so long. And then they have to kind of throw in the towel. On the larger end commercial, there's sectors that have been impacted in certain situations, whether it's tariffs or, you know, just other operating private equity coming into buy. Some of these companies sometimes it's a good thing, sometimes maybe not. They aren't experienced in trying to run these companies. Like the original teams were. So you see one-offs from that perspective. So there are things you have to be careful for. What we really focus on are the fundamentals, and really try to make sure we're underwriting and looking at everything we can, making really good sound decisions for the long term. We don't want to put loans on the books that aren't gonna be there in the next year or two in the credit situation. So, we're trying to do that and trying to be really holistic. You know, Rich Berry, our chief credit officer, has set up some verticals and some specialty areas for like our leverage lending area, and a couple of other areas just to focus, make sure that you know, we have controls in place in areas that we deem as higher risk. In place. So I think we're doing all the right things. Really trying to be guarded from that. But net net, if rates come down more, I think that will relieve some of the pressure. But right now, I think you're just seeing some of the pressures from it's been elevated for a while. Matt O'Connor: That's helpful. And then I'm sure it's a lot easier to kind of get comfortable with your book. You know, you originated them, and you can kind of evaluate it on an ongoing basis. And I guess, hypothetically, if you were kind of looking at an external book, do you still feel like there's enough visibility where you could evaluate it, or are there enough red flags again, just kind of generally in credit these headlines that you're seeing, that that might give you a little pause? All hypothetical, obviously. Daryl Bible: You know, it sounds like you're trying to lead to a question if we do a due diligence on a company and you're looking at a credit book and all that. I mean, if that's where you're going, it really starts with the culture and, I mean, do they underwrite similar to how we underwrite? And that needs to get established upfront from that perspective, and you really need to know that and trust that. Like, when we acquired Peoples, we knew day one that their culture was very similar to M&T Bank Corporation, that would fit in quite nicely from that perspective. But when you look at stuff, you have to be really careful and ask a lot of questions and information and keep digging until you get satisfied. I mean, I think that's the way it works. You have to do your homework. It all comes back down to fundamentals again. Matt O'Connor: Okay. That's helpful. Thank you. Operator: Thank you. Our next question will come from Dave Rochester with Cantor. Your line is open. Dave Rochester: Hey. Just back on your margin comment, you mentioned earlier you had some momentum there guiding to the 3.70 level in 4Q. Do you see any upside potential of that going forward given your outlook for more Fed rate cuts on the one hand and then given the repricing that you see you still have left to do on the fixed rate segments of your loan and securities books? Daryl Bible: So, I mean, what we have modeled right now is we have two cuts in this year and three cuts next year, so five cuts total. When we do our modeling, our base scenario embeds the forward curve. So when you look at that and then you look at it, down 100, or down 100 is basically flat from an NII perspective. So that's really rates going down 200 plus basis points over twelve months. So I think we're very neutral from that perspective. If rates go up 100, which is basically rates staying flat, because you got the forward curve embedded into that, we're off just a touch, so I'd say we're a little bit more liability sensitive on the way up a little bit. But the way our balance sheet is really structured is we have to hedge to have the position that we are at. And if we don't do any hedging on how we operate, within a year, we can become very asset sensitive very quickly. Just naturally as things happen. So we're constantly having to hedge to neutralize our interest rate sensitivity from that perspective. We feel really good about where our net interest margin is. We do have a piece of it obviously based upon the shape of the yield curve. That's also impactful for us. We're still benefiting from that from a roll-on roll-off basis. If you look at our loan book, in the consumer book that we have, we're still probably getting about 75 basis points spread positive there. The investment portfolio is probably going to be anywhere from 50 to 75 basis point positive there from that perspective. So still benefiting from the roll-on and roll-off from that perspective. So that's really good. And our deposit betas are 54% We came in and we think that's pretty much what it was when rates were going up. So coming down, we're gonna mirror that as well. So we feel very good that we'll stay in the low to mid-fifties from a beta perspective. I think we got things positioned pretty well from a sensitivity perspective on NII and feel good about what we're guiding to. Dave Rochester: So it sounds like it all adds up to some upside potential there to that 3.70 going forward. All else equal. Daryl Bible: Great. Dave Rochester: Maybe just back on your comments on the government shutdown and M&T Bank Corporation being ready for that. It doesn't sound like you're too concerned about it right now, given your comments, when would you start to get worried about it from a credit perspective? How long would this have to drag on before you guys get more concerned about it? Daryl Bible: You know, from a government shutdown, you know, we are monitoring and looking at various sectors that potentially could happen. Obviously, it hasn't been around long enough to know, but you know, we've seen some stress in gathering contractors. Obviously, this puts more stress on them because of the shutdown, so that's important. You know, the SBA business has gotten a shutdown right now. So that's some stress from that. HUD and FHA, we're looking at that to see what impact that might have. You have C&I healthcare from a reimbursement perspective. That will probably impact if it goes longer. Reimbursements might slow down or stop. And then nonprofits that get grants. Then government employees, which is the heart and soul of the government, those people at all. So we're monitoring all those areas. Haven't really seen anything yet. But if it goes on a few months, I think you're starting to see some stress maybe. Dave Rochester: Yeah. Okay. Maybe just one last one. Was hoping you'd just give a little update on your exposure if you have anything to the Tricolor situation. I know you have any credit exposure, but if you just talk about anything like a legal perspective or anything else there, it'd just be great to hear how you're assessing that risk, just given Wilmington's roles there. Daryl Bible: Yeah. Yeah. Happy to talk about it. So first of all, we publicly reported, there are allegations of fraud is never good for an industry overall. But we expect the industry will improve over time to make sure that such events happen less frequently. We are and always have been a very client-centric culture and company, and we will always strive to provide the best services and execution. We've got a thorough review of what we're looking at and enhancing our quality and service. We still believe in our corporate trust business, feel good about where we are, and just looking for better ways to partner with our clients. Know, regarding your current situate, question that you have, it clearly will play out over a long period of time. It's really not helpful to kind of speculate what's gonna happen from that perspective. You know, we were our roles in the transaction. We have no lender experience or exposure from M&T Bank Corporation or Wilmington Trust whatsoever. Our roles that we have there were focused in the warehouse account banking custodian and on the securitization roles, owner trustee, indenture trustee, custodian, paying agent, note register, and certificate register. Those were our roles that we have from that perspective. So there's no credit exposure that we have there. So I think that's really what we see right now, and we're just going through the process and seeing how things play out. And, you know, there will probably be people that sue other people just because of the bankruptcy and what happens, but we'll see, you know, if we're impacted or not from that. We don't know. Dave Rochester: Alright. Thanks, Daryl. Appreciate it. Operator: Our next question will come from Ken Usdin with Autonomous. Your line is open. Ken Usdin: Hey, great. Hey, Daryl. Just one quick one. You mentioned in the slides that the fourth quarter expense up, you pointed out professional services. I know you guys typically do have higher expenses, third to fourth. But I'm just wondering, is that a specific nuance that you're just finishing some projects or something like that and just obviously, you know, we'll hear more in January about what next year's expenses look like. But, I just wanna know if that's atypical or more of kind of the normal ramp that we typically see towards year-end? Daryl Bible: You know, Ken, we have a lot of projects going on and we're just trying to get some of them finished off. So it's kind of the cost of, you know, getting things done is just increasing expenses from a professional services perspective. We'll give you guidance for '26, and, you know, we will make sure that we have revenue growing faster than expenses. Ken Usdin: Okay. Alright. Got it. Thanks for that clarification. Operator: Thank you. Our next question comes from Christopher Spahr with Wells Fargo. Your line is open. Christopher Spahr: Hi. Thanks for taking the question. First, about the buybacks during the quarter, and you kind of indicated like you were being a little price sensitive. Just with the accumulation of capital, regulatory relief coming in, an AOCI becoming even more favorable for you. I'm a little surprised that you talked about being price sensitive, just given where the overall stock is and and your accumulation of capital. Daryl Bible: You know, we just have a grid that we have, Christopher, in that, you know, depending on what the tangible book level is, what we're trading at, we have certain amounts that we buy at certain levels. And adjust it fluidly from that perspective. But you know, just like investors out there, you know, we're investing in our company as well, and we think of it the same way. Christopher Spahr: Okay. And as a follow-up, with five rate cuts kind of in the forward curve, what is your outlook for deposit growth over the next year or so? Thank you. Daryl Bible: Yeah. You know, my guess is our deposit growth and we'll give you guidance in January. But deposit growth and loan growth shouldn't be much different than really the growth of the economy plus or minus a little bit. Is what it is. So economy grows two or 3%, I think it'd be in that same neighborhood. Christopher Spahr: Alright. Thank you. Operator: Thank you. This concludes today's Q&A. I will now turn the program back over to our presenters for any additional or closing remarks. Daryl Bible: Thank you all for participating today. And as always, if clarification is needed, please contact our Investor Relations department. Operator: Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the Q3 2025 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, Thank you. I would like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. Please go ahead. Matthew James Korn: Thank you, Colby. Good afternoon, everyone. We are very pleased to have you join our third quarter earnings call. Joining me from the CSX leadership team are Steve Angel, President and Chief Executive Officer; Mike Cory, EVP and Chief Operating Officer; Kevin Boone, EVP and Chief Commercial Officer; Sean Pelkey, EVP and Chief Financial Officer. And the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and non-GAAP disclosures. We encourage you to review them. With that, I am very happy to turn the call over to Mr. Steve Angel. Steve Angel: Thank you, Matthew. Hello, everyone. We are happy to have you join our third quarter calls today. First, I want to recognize Joe Hinrichs. He led this company through some difficult times and worked with this leadership team to make some real progress. Now we are all eager to move forward from a solid position. My connection to this industry goes way back. My career started at GE where I worked directly with locomotives and rail operations. That experience gave me a deep appreciation for railroading that has stayed with me. I spent the last couple of decades leading large industrial companies, specifically industrial gas companies, but the interest in rail never faded. There are some similarities between the industrial gas business and the railroad industry. First of all, safety. It is not just a nice thing to do; it is a sacred responsibility. Everyone must come home safe at the end of each and every workday. Industrial gas and railroads are both capital-intensive businesses. Our strategy at Linde was to build network density in targeted geographies. That is how you leverage your infrastructure to generate ever higher returns on capital. That concept applies to the railroad industry as well. I think of pipelines and railway track the same way. He who owned the pipelines, provided they were in the right locations, had a strong advantage over their competition. Same for railroad tracks. Another similarity is our vision. At Linde, our vision is to be the best performing industrial gas company in the world. And we achieved that, in some cases, by a large margin over the next best competitor. At CSX, the vision is to be the best performing railroad in North America. I like that. And when we say best performing, I am certainly talking about financial performance, operating margins, return on capital, cash flow, but I am also talking about safety, customer service, employee engagement, integrity, and ethics. And I do not see any of these as being mutually exclusive. You can be best in class in all these areas. In every important aspect of running a great railroad company. How do you do it? It takes a concerted effort. Sounds trite, but you have to make the most important things the most important things. Focus, execute, grind the details, repeat. Build a strong stable foundation and get better every day. In essence, you build a disciplined, high-performance culture. And you build a talent pipeline that will sustain the culture long after you are gone. That is enough about me. I will turn it over to Mike. Michael A. Cory: Thank you, Steve, and thanks to everyone for joining us today. First, I want to recognize the very good work of our teams across the network. Their dedication and their execution have really led us to deliver one of our strongest operational performances in recent years. And we are building on that great service cost momentum from last quarter, and it is really paying off. We are seeing improvements across the board, but it is really exciting to see the railroad become more efficient and even more responsive to our customers' needs, especially given the current market conditions. You can turn to the next slide. As Steve noted, safety is our largest shared responsibility. Our FRA personal injury frequency rate ticked up slightly from last quarter, but the bigger picture is very positive. Through September, we have seen a solid reduction in moderate and severe injuries with fewer cases requiring employees to miss work. This shows our SafeCSX program is working. Our culture is shifting to be more proactive, data-driven, and safety-focused in daily operations. On the train accident front, this quarter was the best since 2023. Human factor accidents are down 16% year to date thanks to targeted efforts, better training, and smarter tools that help our people make safer decisions. Next slide. Now let's take a look at the operational performance. This was our fastest quarter for train velocity since early 2021. For all time hit its lowest point since mid-2023, and average daily cars online were the lowest since 2020. That shows how disciplined the team has been in running a balanced, efficient network even while major construction continued on the Howard Street Tunnel and Blue Ridge Subdivision. Trip plan compliance continued to improve, Intermodal TPC rose to 93% from 90%, and carload TPC climbed to 83% from 75%. These are strong gains, a result of fluidity of the network. Next slide. I am proud of how this team has kept momentum on improving asset utilization. With market changes and mix shifts, our ability to be efficient and nimble is extremely important and was evident last quarter. Through disciplined cost asset and cost management, we reduced train miles and optimized horsepower utilization. Running efficiently without impacting customers. These improvements show up in our solid fuel productivity and horsepower management. Car miles per day also improved, reflecting both faster train velocity and our unwavering focus on yurt operations. Let's go to the next slide. And finally, I want to highlight two major wins for us. The Howard Street Tunnel and the Blue Ridge subdivision projects. Both were extremely complex efforts and finished slightly ahead of schedule. A tremendous accomplishment. And I want to give a big thank you to everyone on our team who was involved to make that happen. With these projects complete, we now have full network access. Positioning us for greater capacity and resiliency as we go forward. In closing, I could not be prouder of the team. The momentum this quarter is real and we are going to keep it going. We are not done improving, innovating, or delivering for our customers and shareholders and each other. With that, I will hand it over to Kevin. Kevin S. Boone: All right. Thank you, Mike. As Mike just mentioned, we are excited that both the Howard Street Tunnel and Blue Ridge projects are complete. As we move forward, customers will see benefits from reduced outer route miles that will improve on our best-in-class service levels. Starting in 2026, we will begin to capitalize on double stack clearance through Baltimore that will expand our intermodal service offerings into the Northeast Region. Looking across the markets we serve, business conditions are mixed. Customers face uncertainty and headwinds from shifting trade policies, weak global commodity prices, unsupportive interest rates, and a persistently soft trucking market. Now let's turn to merchandise revenue on Slide eight. Revenue and volume were down 1%. With RPU flat as core pricing gains were offset by lower fuel surcharge and unfavorable mix. On the positive side, Minerals volume and revenue were up 812% respectively. The team continues to capitalize on strong demand in aggregates and cement by leveraging our unique footprint into the Southeastern market. Fertilizer volume rebounded due to improved production at a key phosphate producer which helped drive 7% growth in the quarter. Metals and equipment volume was up 5% driven by increased wallet share combined with new capacity on our network. Increased automotive production drove 1% higher volume and moving forward production levels are expected to remain relatively steady through year-end with minimal anticipated impacts from the aluminum supply challenges. Broader market softness and tariffs continue to impact our forest product and chemical markets. Where we have some customers that have rationalized production for both volume was down 7% compared to the prior year. A positive core pricing has mitigated revenue declines. Ag and food volume was down 7% as a strong Southeastern crop has provided feed buyers a robust local supply. We have also seen increased competitiveness in the ethanol and weakness in certain food and consumer products. In the fourth quarter, we expect a stronger export market and improving domestic grain trends from the Midwest harvest. Now let's turn to Slide nine to review the coal business. Coal revenue declined 11% for the quarter on 3% lower total volume. All in coal RPU declined 9% year over year, but as shown on the slide, the headwind from export benchmark pricing continues to diminish as we move into the fourth quarter. Export tonnage was down 11% largely due to reduced production associated with mine fires we had noted earlier in the year. But recent trends have been encouraging. Our operational performance has been very strong and we are pleased with the recent reopening of a key export mine. Our domestic coal business continues to see steady trends through the year. Steel industrial tonnage was down 15% year over year due to softer market fundamentals and reduced domestic steel production. On the other hand, utility coal performed well over the quarter with tonnage up 22% year over year. Power demand remains supportive helped by higher natural gas prices. Turning to slide 10, Intermodal performed well despite a soft trucking market and muted pricing. Third quarter revenue was up 4% a 5% increase in volume. Our international business benefited from strong growth with key customers. Tariff impacts and general consumer demand remain watch items. Volumes have softened in recent weeks looks largely in line with typical seasonality. Domestic volumes grew modestly year over year, primarily due to new service offerings. Following a successful bidding season for our IMCs Strong East eastbound volumes we expect continued strength in our domestic business in the near term. As we look ahead to the end of the year, and start of 2026, we are excited about the opportunities to leverage the strength of our network performance. Win in the marketplace and find ways to create and creatively convert more business to the railroad. Now let me turn it over to Sean to discuss the financial. Sean R. Pelkey: Thank you, Kevin, and good afternoon. Third quarter reported operating income was $1.1 billion and earnings per share was $0.37. These figures include $164 million and $0.07 per share from impairment of the remaining goodwill related to quality carriers. I will now speak to adjusted third quarter income statement excluding the goodwill impairment charge. Revenue was lower by about $30 million or 1% as 1% volume growth and an increase in other revenue were offset by headwinds from unfavorable mix in coal pricing. Adjusted expenses increased by 3% and I will discuss the details on the slide. Interest and other expense was $19 million higher compared to the prior year while income tax expense fell by $46 million on lower pretax earnings and a lower effective rate that was driven by renewable energy and state tax credits. As a result, earnings per share fell by $0.02 reflecting a combined $0.02 of discrete unfavorable impacts. $35 million of restructuring, severance and regulatory advisory expenses, and approximately $25 million of network disruption costs related to the recently completed Blue Ridge and Howard Street projects. CSX is well positioned and building momentum. Year over year headwinds eased into the fourth quarter and strong operational execution and cost control provide a positive setup for improved results. Let's now turn to the next slide for a closer look at expenses. The total expense variance includes the $164 million charge based on impairment testing completed during the quarter. Despite the difficult trucking market, quality carriers has helped drive truck to rail conversions, maintained industry leading share and stable pricing across its end markets. We are working closely with the QC team to aggressively identify additional efficiency opportunities that will support an improvement in near term financial results while still positioning quality carriers to fully capture the upside when the trucking market recovers. Expenses excluding the impairment increased by $71 million or 3%. Including approximately $60 million of severance network disruption and other costs noted on the prior slide. This expense management reflects solid fundamentals and disciplined execution delivering increased volume with a lower rail headcount. And year over year efficiency savings across the expense base. Turning to the individual expense line items, Labor and fringe was up $9 million year over year including $22 million of management and executive severance. These costs plus the impact of inflation were mostly offset by lower incentive compensation and efficiency savings. Reflecting lower rail headcount and network driven improvements in T and E overtime and ancillary costs. Headcount will hold stable to slightly lower sequentially in the fourth quarter while cost per employee will see a normal seasonal increase as the benefit of lapping restructuring and severance costs will be at least partially offset by higher incentive compensation expense. Purchase services and other costs increased $54 million year over year. This was driven by cycling a prior year favorable inventory adjustment as well as network disruption costs this year trucking casualty and freight damage claims and inflation, plus $13 million of restructuring and advisory costs slightly offset by higher property gains. Importantly, the team delivered significant PS and O efficiency savings which were broad based. Continued execution and the easing of network disruption costs will help partially offset the normal sequential increase in PS and O in the fourth quarter despite $5 million to $10 million in regulatory advisory costs. Depreciation was up $8 million due to a larger asset base. Fuel cost was up $5 million driven by additional consumption due to network reroutes, and a slightly higher price per gallon. Partly offset by improvement in gallons per gross ton mile. Finally, equipment and rents decreased by $5 million year over year higher costs from inflation, and the negative impact of reroutes on car cycle times offset by savings from improved fluidity and increased income generated from company owned real estate. We are encouraged by the structural cost improvement the team delivered in the third quarter. These efforts position us well build upon strong resource utilization, identify additional efficiency opportunities. Now turning to cash flow and distributions on slide 14. Targeted and efficient investment in the safety, reliability and long term growth of our railroad is our highest priority use of capital. Copy additions are higher year to date including $440 million of spending towards the rebuild project on our Blue Ridge subdivision. In total, spending to rebuild the Blue Ridge is now expected to exceed $500 million before insurance recoveries. Year to date free cash flow is $1.1 billion which includes over $850 million of cash outflows for Blue Ridge and previously postponed tax payments. Lastly, CSX remains committed to shareholder distributions, and has returned over $2 billion year to date. Now for a review of our guidance. Given solid network momentum, new business wins and expanded service offerings, we still expect to deliver volume growth for the full year. Recall that our fourth quarter performance in 2024 last fall's major hurricanes. We expect our fourth quarter results to reflect the strong operating performance and cost efficiencies that we driven through the year. There is no change to our full year CapEx guidance of $2.5 billion excluding the Blue Ridge. Finally, expect to continue our demonstrated long term track record of powerful cash generation. Combined with a strong investment grade credit rating that enables value creation through the opportunistic use of share repurchases. While also annually reviewing the dividend with steady increases for over twenty years. With that, let me turn it back to Steve for his closing remarks. Steve Angel: We are encouraged by the progress made this quarter. Our team did a great job at working together and responding effectively to the test faced earlier in the year. The railroad is running well, and we have strong foundation to drive further improvements. While the underlying economy is mixed, our customer service is strong, and we have excellent relationships with those customers. We are working closely with numerous partners to help accelerate the build out of industrial capacity on our network. Our commercial team is actively developing new solutions that will help us expand our reach and gain share. We have received quite a few inquiries on strategic opportunities. We will of course pursue anything we believe can create compelling value for our shareholders. We are confident in our path forward and energized by our vision. To be the best performing railroad in North America. With that, Matthew, we will open it up for questions. Matthew James Korn: Thank you, Steve. We will now proceed with the question and answer session. To ensure that we maximize everyone's opportunity to participate, we ask that you please limit yourselves to one and only one question. Colby? Operator: Are ready to begin. Operator: Thank you. We will now begin the Q and A session. Your first question comes from the line of Brian Ossenbeck from JPMorgan. Your line is open. Brian Patrick Ossenbeck: Hey, good afternoon. Thanks for taking the question. So Steve, maybe to start off with the obvious one, you have been through industry before that had complex M and A. As you mentioned, there are some similarities there to railroads. So stepping into the role, realizing you have only been there for a couple of weeks, how do you believe the company's positioned versus your peers, obviously, pursuing a TransCon merger? Do you feel like that is part of the mandate in terms of why you are brought into this position? The first place? Was that something that interested you? Given your prior history? Steve Angel: Yes, thank you for that question. So if you you know, you alluded to my history. And if you go back and look, I ran Praxair for ten years. Before we concluded a merger with Linde AG. And so you could say I was very patient. But, you know, the way these things work, these strategic opportunities, you have got to wait the right timing. You have got to wait for when the conditions are right. So what you do in the interim, you run the company to the best of your ability every day, and you create value that way. And so, you know, if and when that time comes, you are going into that discussion from a position of strength. So that is really how I think about it. You have got to run you know, the franchise you have to the best of your ability, build value that way, keep your eyes open for strategic opportunities. And when they come, you put yourself in a good position to capitalize on it. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Your line is open. Stephanie Moore: Hi, good afternoon. Thank you. I wanted to touch on, as you think about two things that are happening, one is the completion of your large infrastructure projects, and then two is as obviously noted, some changes from a strategic standpoint in the industry. Maybe, Steve, if you wanted to talk about how you are positioning the company to essentially capitalize on both of those factors. One is directly in your control. And then the other might be in response to some of the actions of your peers. Thank you. Sean R. Pelkey: You will take the first question. Yeah. Sure. Yeah. Stephanie, happy this is Sean. Happy to kind of talk a little bit about Blue Ridge and how Street. And I think, you know, obviously, that sets us up very well as we go into next year. The network recovered really well this year. It is operating, you know, about the best that it has in quite some time, which is great. And we are building cost momentum on top of that. Now you have got, both our North South routes that are open It will take us into Q2 next year before we get that double stack capacity. From Howard Street. But that is exciting because it means cost reduction. It also means ability to sell into that. So a well run, network hopefully going into a year next year where we start to see a little bit of momentum build really helps us out. I think that is something to build on longer term as well. And I will take the second part of the question. So as you think about what is taking place strategically, in this industry, you know, when you have know, the prospect for merger, whether it is this industry or or any industry, there are you know, pluses and minuses associated with it. There are risk and opportunities that come out of any type of consolidation within an industry. And so it really behooves us to you know, mitigate those risk and capitalize on those opportunities. I think you know, a lot of it remains to be seen. You know, I was you know, interesting enough, I was involved in the the industry though tangentially when the first merger that I remember took place, it was UP and SP think it was back in the late nineties. And, you know, that did not go so well. That did not go swimming. And I think a lot of what is taken place with the STB in terms of the new standards that are now in place with respect to what is in the public good demonstrating enhanced competitiveness and and what might take place downstream, that really came about as a result of that. So I think it is it is interesting to watch. Obviously, as they move forward with their application. And they have to demonstrate the standards that that need to be met, have an opportunity to review that. What you can rest assured is we are going to make sure that we are competitive no matter what. So I talked about mitigating risk, taking advantage of the opportunities, but we also want to make sure that we have a chance to present our case in terms of what we need to be competitive going forward. And that is what we will do. Operator: Your next question comes from the line of Chris Wetherbee from Wells Fargo. Your line is open. Christian F. Wetherbee: Hey, thanks. Good afternoon. I guess maybe a question for Steve and maybe Kevin. I am kind of curious as you guys go through this period, Steve, noted maybe some inbound strategic opportunities. I do not know if that is coming from the customer side or maybe other partners in the rail industry. But as you think maybe customer response to what is going on with consolidation in the industry, do think CSX is well positioned to take advantage of that as we go through a period of uncertainty over time? I guess how do you guys think strategically about the in front of you as a stand alone right now while we are seeing integration going on in the industry? Steve Angel: Well, I mean, all starts with with you know, running this business to the best of our ability and that that positions us well from a customer service standpoint. Mike talked about the way the the railroad is running today and, you know, we feel very good about that going forward. Yes, I think there are some opportunities you could certainly say that maybe some of these opportunities are coming forward as a result of what might take place from a merger standpoint. But I think the opportunity set has always been there. For railroads to work more closely together to take trucks off the road. For example. And so we see those opportunities. We are working on those opportunities. You can look at our numbers and see we have already had some success. And I think that is definitely additive to our base case going forward, and and we will continue to pursue those opportunities. Operator: Your next question comes from the line of Ken Hoexter from Bank of America. Your line is open. Kenneth Scott Hoexter: Great. Good afternoon. It is Ken Hoexter from BofA. Steve, welcome. Congrats on the new role. It seems like service from Mike Cory's presentation is operating well. Sounds like things are progressing kind of actually very well given the improvements. Major costs are leaving the network as Sean detailed and maybe Sean can maybe detail the expenses where we are now, how quickly they leave But what do you look at and aim to do? It maybe is it selling quality to improve operation to improve? Is there something on operations that as you went through the the process, the interview process, that you were focusing on that was not right? Maybe talk to us about what at CSX you see that needs to be changed. Is it the culture? Operations? You know, what what are you brought in and what do you hope to? Steve Angel: Well, think, as I said in my remarks, I think the team really responded well to some challenges during the course of the year. And I think you know, they turned into solid quarter. So you know, I always you know, when you come into a situation like this, and I talked a lot about you know, driving productivity, efficiency, best in class best operating margins, all of those things, you know, you do that by building a high performance culture. And but you have got to start with stability. And whether you are talking about operations, you are talking about the company, you you must be stable. Because if you are not, you are not going to have a chance to work on continuous improvement every day. So I I like what I have seen in the team and the performance with respect to that during the third quarter, but really during most of the year. I think that gives us a good foundation going forward. And from that, you it is really you know, working all the profitability levers efficiency, productivity, price yield, volume, did you get into capital efficiency and all of that? And it is just that is what running a business is all about. That is what excites me. And, it all starts with a solid foundation in a, you know, great company and a great industry, and it is about building a high performance culture and and becoming best in class. Operator: Your next question comes from the line of Ari Rosa from Citigroup. Your line is open. Ariel Luis Rosa: Thanks. And Steve, let me echo the congratulations on the new role. Just if I could ask a kind of two separate but related questions. So following on Ken's point, is there anything that you see kind of doing differently versus kind of what is already been in place? Because we understand the network has been running quite well. And then you know, in terms of the the opportunity to double stack and some of the opportunities that are opened up by the by the new projects. Could you speak to and may maybe there is actually a better question for Kevin. But how much opportunity there is there in in terms of actually filling that capacity given, you know, the the completion of these projects now? Thanks. Kevin S. Boone: Yeah. Let me take the second one. You know, we have been talking about probably double stack. You know, we have people here that have been here for forty years about opening up the last of part of our network that needed that clearance for a long, long time. And so we are very excited about what that creates in terms of market access for us into the Northeast. And you will see us obviously start to market that during bid season. In the second quarter, start that service and we will grow into it. So it will not be an overnight you know, phenomenon, but, you know, we expect to work with customers, and they are very excited about what we can offer there. And then I will also add to Blue Ridge. You know, it is on us and it is on the sales team to to capitalize on, you know, that that route. And, there are opportunities in the works too that we are working on to continue to drive and obviously get a return on that reinvestment that we had to make. And with respect to your your first question, the way I would describe my priorities is drive best in class performance, And I talked about that and all that that entails. Build a high performance culture, develop a strong pipeline of talent, and then capitalize on strategic opportunities that can that can create compelling value for our shareholders. So that is my focus. Operator: Your next question comes from the line of Jonathan Chappell from Evercore. Your line is open. Jonathan B. Chappell: Thanks, Coley. Good afternoon, everyone. Sean, you cleared a lot of the disruption period. It seems like the costs are going to start to melt off really quickly now that these two big projects are done. Laid out a couple guideposts, so to speak, or, sorry, margin improvement year over year in 4Q and also EBIT growth next year with the absence of any type of volume Can you help us think about the exit rate some of these important cost line items starting in 4Q and going into 2026? You read that PS and O section, you are your release, and there is just, a litany of things that you cannot really tell if they are one time or not. So just any kind of help you can provide on the major cost line items for 4Q in addition to what you have already noted. How we think about then run rate into 2026? Sean R. Pelkey: Yeah, Jonathan. Let me let me see what I can do there. In terms of Q3 to Q4, so the unique items in this quarter, had severance and restructuring costs. Of about $30 million You got the advisory cost of $5 million That $30 million is roughly $20 ish in labor roughly 10 in PS and O. Then you had the the ongoing cost from the network reroutes. And so on and so forth. That was 25 in the quarter. About half of that was in PS and O. We will have a little bit of that that lingers into fourth quarter, call it about $10 million with demobilization and sort of some final costs coming through there. So between that, you have got about sort of $45 million of sequential benefits that see from Q3 to Q4 I will note, you know, you saw the other revenue line that was strong this quarter. That probably normalizes back down to kind of 120 to 130. And then incentive comp will likely be a little bit higher, 10 to 20 higher in Q4. So that is how to think about the sequentials. Those items kind of net out when you pull it all together. But at the end of the day, I think underlying all that is strong cost momentum, and we are seeing in labor you know, with headcount down, volume up. We will see that likely continue into Q4. You are seeing PS and O efficiency. You saw strong gains in fuel efficiency. Car cycle times are better that is impacting rents. All of that provides a nice setup as we get into next year. And, you know, just to tie a bow on that, all of that network disruption and whatnot gives us about a $100 million out of the gates going into next year of costs that will not repeat. Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is open. Scott H. Group: Hey, thanks. Afternoon. So Steve, you have said best in class multiple times. Today. And it sounds like in your mind that is inclusive of margins. I am not sure you are like ready to give like all the details yet, but just at a high level, like is when you sort of do your initial look, is this cost opportunity Can we get back to a better pricing algorithm? Or are you just thinking more of a volume growth and operating leverage kind of story? I just want to understand like your vision of how you get back to best in class. Steve Angel: Well, I am still working on it. I have not got there yet. So but the way I would think about it, Scott, is you know, obviously, you know, price yield is a part of the equation. Volume growth is important to leverage our cost structure and the margins fall through more heavily as get especially as you get the right kind of volume through the system. I think again, the railroad is running well. And so with that as a basis, can really work on continuous improvement within the railroad system. I think that falls through And, you know, those are kind of the levers to profitability. And so that is I I really think in terms of improving operating margins year over year. And I think if you work all three of those levers, you are able to grow your margin some basis points. I have not put a number on it yet. But some basis points per year and you can get to you know, best in class. Or if you are not best in class, you are rivaling best in class. And so that that is really the objective. Operator: Your next question comes from the line of Brandon Oglenski. From Barclays. Your line is open. Brandon Oglenski: Hi, good afternoon, and welcome to Raready, Steve. I guess I was wondering if you could give us your initial impressions of the commercial strategy at CSX because if you have looked at recent history books for railroads, and we can generally see these carriers getting price. You can get some cost efficiencies. But I think what is proved elusive for a lot of CEOs and maybe your predecessor is really converting that highway to rail opportunity So what do you see, you know, as maybe potentially limiting volume for the group and how are you going to pursue that differently? Thank you. Steve Angel: Well, I cannot say for sure how going to pursue it differently, but you know, there are some opportunities that are here with our other railroads working together to really take the friction out of the system. And you know, I think it is a fair question why it did not happen in the past I think there could be several reasons for that, but it does seem to be a concerted effort working with several of our partners to really take that truck volume off the highway and onto rail. And, you know, we are starting to see some of the benefits of that. I think if you look at the inner intermodal numbers this quarter, you know, it looks pretty good. And I think the projection going forward looks pretty positive. So I am, you know, I am optimistic based on what I have seen. I understand it really has not If you go back historically, we really have not had this level of cooperation as we are seeing today. I have seen a lot of people in this building that are from the other railroads, and I think we are clearly working together to make this So I I think there is reason for optimism. Operator: Your next question comes from the line of Tom Wadewitz from UBS. Your line is open. Thomas Richard Wadewitz: Yeah. So I guess, you know, Kevin, you are not getting as much airtime as you normally do, so maybe I will give you one. How do you think about markets and just kind of where you think they may go? I mean, you have got fairly considerable weakness chemicals, metals, forest products. Is there any kind of reason for optimism near term, any signs of improvement or or kind of things that you may be move beyond? And I guess as you look at it maybe into 2026, you think carload can kind of rebound? Or should we be thinking more about intermodal as the growth driver? Thank you. Kevin S. Boone: Thanks Tom. I have gotten a little less airtime. But look, there is a I think, in my opening comments, you know, talked about a lot of it is a mixed bag. The has done an incredible job on the aggregate side and cement side and we are continuing to capitalize on our only our footprint but just some of the strategic things we are able to achieve over the last year, and that is really showing a lot of momentum. And I think that can continue. There is a lot of confidence there. We have had some unique items that have really impacted us this year. We have had a few closures on us that I mentioned pretty concentrated in the forest products area, everybody is familiar with some of the consolidation that is happened in that that market. But I do think that market with a little bit of bump from the economy could could come back, for us. I am not predicting that at this point, but you know, some of these markets that are very are very low in terms of a cycle where they are. Chemicals has been one of those that we have highlighted all year long that have faced a lot of pressure from tariffs and other things. And I think just more certainty around where everything, lands in terms of what the tariffs look like, what the new rules going forward will create some certainty around investments and other things that are that will be helpful to our business. You know, the metal side, the team has done a excellent job of going after some market opportunities with the EFs and and scrap. Opportunities there. So I think we are controlling what we can control. Some of these markets undoubtedly have been, hit over the last couple of years and we have been able to offset them. I think that one thing that is probably surprised us this year is some of the temporary closures. We have had a number of outages, temporary outages on our network, whether it is in the the coal side with two mines or on the chemical side, we have really faced faced some challenges. And the hope there is that we will see some better performance as we move into next year. So I am not not here to call the cycle. You know, we had a we had one of our customers obviously talk about trucking capacity starting to come out. That is good to hear. We will see if that materializes in the next year. That would be extremely helpful for a lot of our markets where we compete against truck. And we have been in probably the longest down cycle than all of us have seen in a long, long time. So you know, the domestic coal side, you know, that story, was a challenge a year or two ago, and, I think there is a lot more optimism on what we can do there. Terms of utilization on the plants we serve today. So a lot of great work by the team. Lot of strategic thinking. We will continue to lean into where we find opportunities and to, you know, Steve's point, we will we will continue to work with all of our partners to create opportunities. The good thing is, I think, overall, the rail industry is performing pretty well versus where we have been in the last few years and that gives us all the opportunity to lean into those opportunities to convert. Model share across the network. Operator: Your next question comes from the line of Walter Spracklin from RBC Capital. Your line is open. Walter Noel Spracklin: Yes. Walter Spracklin here. Thanks for taking my question. My question here is for Mike. Steve mentioned best in class, and Kevin indicated that some of the capacity improvements might take maybe in the midyear next year. But is it unreasonable to think that operations can perhaps reestablish and put the quicker than that? Would you say whether there is anything stopping you in getting continued improvement through fourth quarter? Perhaps be in a position to run the railroad at fairly optimal performance level from an operational standpoint through 2026. Michael A. Cory: Thanks for the question, Walter. To get it to optimal, we are running very well right now. It is just go back. It is our fastest quarter for train velocity since 2021. Our cars online at the lowest in five years. Our dwell is down about as low as it is ever been. We expect improvement on each and every one of those. Now these projects are going to give us capacity, but really resiliency as well. You know, we suffered the first quarter with two of those two routes out and we may normally only handle 20% of our volume, but they could have handled about 40% at that time with what we were inflected with between Cincinnati and Birmingham. So our focus is always going to be to execute grind, sweep the corners, continue to improve on every one of those things, but it is it is all that together. So now Walter expect expect to continue to improve, like, you know, we we got still have weather coming up against this storm season is not over, and we have winter. But we learned a lot That capacity will essentially not just get its resiliency, but it gets us stable. That is where we have been this last two months. And as Steve said, that is the basis for us to improve on. So that is it. Operator: Your next question comes from the line of Ravi Shanker from Morgan Stanley. Your line is open. Ravi Shanker: Hey guys, thanks for the time. Just a clarification on earlier comment that you made in response to an M and A question. Did you say that you already seeing opportunities because of the merger? If you can clarify that or expand a little bit? And also how far in advance do customers think of their rail sourcing or rail versus truck ship or intra rail kind of share shift. Is that something that is kind of done pretty tactically on a year forward basis? Or is that something can be long term planning well? Thank you. Kevin S. Boone: Yeah. I you know, in terms of know, what you have seen in the market, these are these are things that the team consistently has been working on for the last few years. I think some of them have materialized, obviously, in the short term, but we have a very strategic thinking team that had these ideas. I think some of them probably have not materialized because the industry had to get to a a place where we are thinking about growth. From an operation standpoint. A lot of struggles obviously through COVID and then you know, digging ourselves out of the hole with the workforce. And you know, I think this is a natural progression out of that that we are now as an industry leaning into that. And I think we have a team that is forward leaning on that and bringing ideas to the table. And really working with every partner that can benefit and grow the business for the CSX franchise. So a lot of opportunities there. I am trying to understand second question, but maybe I will I will pass on that one. Operator: Your next question comes from the line of Richa Harnane from Deutsche Bank. Your line is open. Richa Harnain: Hey, gentlemen. Thanks. I want to go back to your Investor Day some time ago. You shared some pretty exciting stats regarding you know, the growth outlook, particularly in intermodal. The ability to grow maybe above GDP. Just as we fast forward from then to today and considering how well your service metrics have improved despite some of the headwinds that you have undertaken and and all of that. I mean, how should we think about you know, those growth projections? I mean, could they be stronger? And I know, Kevin, you said that you are going to be selling, Howard Street Tunnel during this bid season. And potential to sell in Q2 of next year. But any inklings from customers as far as how they are feeling about that product and, again, that ability to sort of grow, stronger than maybe you thought. A a couple quarters ago? Kevin S. Boone: Well, you know, we did lay some of the benefits that we expected to see from the Howard Street Tunnel in that presentation. So I think we are on track and now it is up to the team to deliver on that. In terms of, you know, we have a great service right now, and all all begins with the service team. And we are able to dynamically go after these opportunities as they come along. And we are always talking to customers about markets where they see the opportunity and we have one particular customer that is highlighted that within the East they see a huge conversion opportunity. And we are we are highly interested in that. We are highly, interested in working with everyone to convert that. Obviously, it is got to have a return. It is got to be attractive to all parties. Make the investments that might be required to go after it. But there is a lot of work being done. I think we have the best team up against it to understand where opportunities are and you are seeing a lot of momentum that is playing out in our weekly volumes. Operator: Your next question comes from the line of Jason Sadeel from TD Cowen. Your line is open. Jason H. Seidl: Steve, congratulations on the new role there. Definitely exciting for you. I am going to turn it back over to to give some time there to Kevin. Kevin, can you talk a little bit about the marketing agreement with the BNSF sort of how we should think about the build as you move through 2026? And then I guess are you guys looking to tie that freight up longer than the normal sort of one ish year on a domestic intermodal front in terms of contracts, given that you might have a competitor coming out after that? And I guess a follow-up on the coal. You mentioned, I think you have seen a little bit more positive. Is the positivity on the coal due to sort of increased demand for domestic coal and data centers? Or is it something else? Kevin S. Boone: Alright. Let me handle the coal one first. You know, I think you have clearly seen a a shift in just the political environment the regulatory environment there. And I think that provides opportunities for better utilization in some of the, obviously, the utilities that we serve. You know, data center is a hot topic right now. Everywhere, and that is certainly one of the demand pulls on electricity demand right now. So we are very positive on that market. You know, weather does impact that one. So, you know, we always look for a cold winter in the South. That is that is always helpful. So normal weather is is a good thing, and we kind of that played out this year. And so we continue to work with the plants that we serve to advantage them in the market to take you know, more more capacity there. So a lot of success, a lot of good work by the team. To really go after that opportunity. The intermodal side, you know, again, know, some of the things that we have announced recently have been in the works for a long, long time. The team has been is constantly having discussions with partners how we can create the best in class service and more options for our customers to reach markets, in a more efficient way. And so I think that is an outcome of, you know, not not something that we recently started, but things that we started last year and that have really materialized here recently. We got a lot of other ideas. You know, we are continuing to work on those things. I think the velocity of those things maybe to Steve's point, and our ability to execute them quickly is maybe improved with basically the industry in a better position to you know, grow with the, you know, service, and and we lead the way. With our best in class service in the East. So you will continue to see things there are opportunities for us to go and capitalize on. Operator: Your next question comes from the line of Jordan Alliger from Goldman Sachs. Line is open. Jordan Alliger: Yeah. Hi. Afternoon. Hi, Steve. Just sort of curious, you know, I know you have only been in the seat for a couple weeks or so. I am sure well, I I would imagine, you know, some customers, maybe some larger customers have been you know, calling to say hello and and what have you. I am wondering given what is going on with U and P Norfolk Southern, any read from folks you might be speaking to externally in terms of giving you thoughts on what you know, what might be good from a competitive standpoint for you guys? Thanks. Steve Angel: I would say, you know, since I have been here, we have not had that kind of discussion. Operator: Your next question comes from the line of Jeffrey Kaufman. From Vertical Research. Your line is open. Jeffrey Asher Kauffman: Thank you very much. Steve, welcome aboard. Best of luck to you. Figured I would ask a question to Sean here. Just based on the idea that you are not going to have the Blue Ridge expenditures year and you are not going to have these congestion costs and there are some things you are excited about, it looks like cash flow could double if the world goes right, maybe up 50% to 70% if it does not. Not that you have spent it before you earned it, but can you tell me about cash priorities for 2026? Are there projects that you have not been able to get to that are at the top of the list? Do you want to bring debt down to a certain level? Or would more of that free cash flow probably be aimed at shareholder capital return? Sean R. Pelkey: Jeff, I appreciate the question. As you can probably imagine, we are working through our plans for next year as we speak. We will give you an update certainly on that as we move along here. But just stepping back, I think the good news is we do not have any major construction projects that are planned for next year, you know, with the Howard Street and the Blue Ridge complete. There is nothing anywhere close to that scale that is on the horizon for us. And in 2026. So, you know, we will we will continue to maintain capital discipline focus, that capital on safety and reliability, and then look for projects that help drive strong returns and support the growth that we are looking to deliver. So it will be more of the same on that without the significant spend on those big projects. And then after that, you know, we we have we have been fairly consistent in our approach here you know, strategic and opportunistic use of cash flow, to to lean in when it is possible. On share repurchases and we have looked on an annual basis at the dividend and raised modestly for twenty plus years. So you will see more of the same from that. I think from our perspective. Operator: Your next question comes from the line of David Vernon from Bernstein. Your line is open. David Scott Vernon: Hey, good afternoon guys and thanks for fitting me in here. So, Steve, I wanted to ask you and maybe in the broader team a bigger picture question. Around the industrial logic on end to end railroad mergers. How do you view that And do you think it is possible to recreate those economics through partnership arrangements like you guys have been doing with the airline deals with BN and CN. What are the other platforms that is come out and obviously said, you know, they are not very interested in the merger and they are asking customers to object. I am trying to get a sense for kind of where you shake out on the topic of whether or not an in an end to end railroad merger is actually a good thing to pursue? Steve Angel: So the way I think about it is and I was reading your entire question here, is that you know, we have the whole focus is is really performing, you know, well as a standalone company. And then we talked about some of these opportunities. We have talked about it several times through the course of this. That I think are very interesting to us We see a good bit of potential and provided the economics are favorable, we will continue to pursue that. So I think that is how we will drive shareholder value. Now if there is a better path to drive shareholder value, downstream will certainly pursue that. But it is kinda hard to really say standing here today how all this is gonna shake out because there is a lot of it that has not been determined yet. There is a very rigorous approval process that two parties are gonna have to go through. And, you know, when I read the language of of the evaluation criteria of an STB, it is it is pretty onerous onerous. So I think there is a lot I think it is really too early to address some of which you have got up there. But I can say right now, we can improve the performance of the base business, capitalize on the opportunities in front of us And if there is a better path to shareholder value that presents itself later on, we will 100 pursue that. Operator: Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open. Bascome Majors: Steve, when you think about your philosophy on incentivizing your team, what do you think the right annual and long term incentive structures are? For senior management, the railroad industry and really CSX specifically? Thank you. Steve Angel: I think if you go back to my earlier comments, obviously, profitability, operating margins, I mentioned that. I think if you I think growth is important to this industry and if you are able to get right kind of volume, the right kind of growth, you know, there is tremendous leverage down the P and L statements. I think those are metrics that matter. An industry like this, you always have to have safety. I I do not think you should ever take that for granted. I think calling that out and having, you know, a thousand or so people, at least from a management, level, compensated based on safety performance is a very important metric. Customer service has not been the hallmark of this industry historically. So therefore, having calling that out is a metric that is important I think, is good idea and that is what we have here today. I think long term because this is a capital intensive industry a return on capital metric makes the most sense to me. That is that is what I am familiar with, and and that is what, you know, we utilized in my past life And I used to say that, you know, return on capital is the truth serum. It kinda encapsulate it encapsulates all the decisions you have made in the past plus the decisions you are making going forward. And how well and what kind of returns you are earning on your capital base. So you know, I, for one, like return on capital for an industry like this. Operator: This concludes today's question and answer session. As well this concludes today's conference call. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Interactive Brokers Group Third Quarter 2025 Earnings Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. If your question has been answered, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Nancy Stuebe, Director of Investor Relations. Please go ahead. Good afternoon. Nancy Stuebe: And thank you for joining us for our third quarter 2025 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman, Milan Galik, our President and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available at our Q&A. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. During the third quarter, the market climbed a huge wall of worry with little pause. There is no shortage of traditional reasons for investors to be concerned about the economy or the markets, but as they've cropped up, they are treated either as a positive like the huge sums of money being spent on AI, or the minor impediment like the government shutdown. The Federal Reserve cut interest rates this quarter for the first time since late last year. With a less restrictive regulatory environment and steady to declining interest rates, market sentiment in the third quarter was positive overall, with the S&P 500 Index rising 8% and showing strong positive returns in each month. Investors bought dips if the market declined, and participated in rallies as they occurred, showing a continued comfort with the current economic backdrop. At Interactive Brokers Group, in any given week this quarter, the most active names showed a preponderance of buying over selling. Our strong net new account growth came from all regions and all client types. This is organic account growth. We attract clients without temporary bonuses or incentives. Our products, pricing, and execution quality speak compellingly for themselves. During the quarter, we added our four millionth customer and reached $150 billion in client cash balances, both up over 30% from last year. For client equity, it took us from 2020 to 2024 to advance from $250 billion to $500 billion. It took just over one year to add the next $250 billion. This quarter, our client equity surpassed $750 billion, up 40% from last year versus 16% for the S&P. The 790,000 net new accounts we've added through the third quarter already exceed what we added in all of last year. More accounts meant more activity, which helped expand client trading volumes this quarter, especially in stocks and options. Our commission revenue increased by 23% compared to last year. It is slightly understated since the SEC fee rate, which is included within our commission revenue, was reduced to zero in May. Net interest income was up 21% on a combination of larger balances and securities lending opportunities from a greater number of accounts. Our total net revenues were up 21%. Volumes rose to a record $418 million in options contracts and were up 67% in equities, as more people globally continue to participate in the markets. In terms of newer products, we are seeing increasing activity by our clients in crypto, forecast contracts, and overnight trading hours. We now offer a wide variety of over 8,200 open forecast contracts, 27% more than last quarter, and contract volumes traded grew 165% in the second quarter. In crypto, our trade volumes rose 87% from last quarter and are up over five times versus last year. While this is from a base we want to grow much bigger, it is a sign of the growing strength of our offering. In addition, we introduced recurring buy orders for cryptocurrency and added Solana to our Hong Kong crypto offering. Overnight trading, where we offer over 10,000 U.S. stocks and ETFs, as well as equity index futures and options, and global corporate and government bonds, was up 90% from 2024, which itself has seen higher volumes surrounding the first Fed funds rate cut in years. As we've noted, for our global client base, U.S. overnight hours are their daytime trading hours, so this offering in particular resonates with them. We are continually making additions and enhancements to our as well as infrastructure upgrades. We added new liquidity providers for options, U.S. stocks, and our Lite program, and for U.S. Treasuries, corporate and international bonds, further enhancing execution quality for our active trading clients. Our pipeline of potential introducing broker clients remains healthy, with a steady stream of new prospects entering as we onboard the brokers who have previously signed up to offer the platform. Demand continues steadily around the world for our global introducing broker offering. In terms of new efforts and product introductions, we again had a busy quarter. We work continually to innovate and give our clients the products they ask for. We added both NESAs, tax-advantaged savings accounts for Japan, and ISKs, tax-advantaged accounts in Sweden, to our growing offering of country-specific savings plans. We introduced our proprietary Connections feature, where clients can discover multiple investing relationships connected to any one company. These include stocks, ETFs, forecast contracts, options, and economic indicators, as well as competitor data, related products, and option strategies. As an example, investors holding long positions in sectors like homebuilding can use connections to explore related businesses like mortgage financing, review forecast contracts linked to new home sales or housing starts, and gain insight into option strategies that could help reduce their exposure to economic fluctuations in the housing market. Decades of work expanding our product offering and geographic reach is what makes Connections possible, helping clients uncover opportunities other platforms can't. We have so far been averaging about 20,000 unique daily users, so it's a feature that has resonated with our clients. Connections complements the investment themes we debuted last quarter, where clients can use natural language prompts like quantum computing or artificial intelligence to find actionable investment opportunities. In recognition that our prime brokerage offering and its many features benefit our clients, giving them a competitive edge, the latest annual CREC and hedge fund rankings showed that Interactive Brokers rose to rank number four for the number of hedge funds serviced, behind only Sachs, Morgan Stanley, and JPMorgan, and ahead of all the other historically better-known names in the funds industry. This should serve as evidence that we must be doing something better than some of the entrenched players, and that potential clients may benefit from adding us as an additional prime broker. We have much on our plate for the remainder of the year, and even more to come in 2026. I look forward to sharing these developments with you as they are introduced. The trend towards more global investing across multiple client types and across jurisdictions and our ability to give investors the tools to invest in the companies and products they want, paying for them in currencies they wish, around the clock, continues. This trend and our ability to serve our clients' needs with a lower cost structure and a much broader product and toolset is what sets us apart and will continue to do so in the years ahead. I want to thank our team and especially our founder, Thomas Peterffy, for the hard work and dedication it took to bring Interactive Brokers from its humble beginnings all the way into the S&P 500 Index this quarter. It is an achievement in which we all rightfully take pride. With that, I will turn the call over to Paul Brody. Paul? Paul Brody: Thank you, Nancy. Good afternoon, everyone. I will review our third quarter results, and then we'll open it up for questions. Starting with our revenue items on Page three of the release, we're pleased with our financial results this quarter as we again produced record net revenues and pretax income. Commissions rose to a record $537 million, 23% above last year's third quarter. We continue to see higher trading volumes from our growing base of active customers outpacing industry volumes across major product classes. Our options volume rose 27% and set a new quarterly volume record, and equity volumes were up 67% from last year. Net interest income also reached a quarterly record of $967 million, despite lower benchmark rates in most major currencies. Higher segregated cash and margin loan balances and significantly stronger securities lending contributed to these results. Net interest income also received a benefit from lower benchmark rates on the interest we pay our customer cash balance. Other fees and services generated $66 million, down 8% from the prior year, driven by more cautious risk-taking by clients, leading to lower risk exposure fees, partially offset by positive contributions from higher FDIC sweep and market data fees. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these noncore items are excluded in our adjusted earnings. Other income was $85 million as reported and $50 million as adjusted, primarily driven by a gain on a long-held investment. Turning to expenses, execution and clearing, execution, clearing, and distribution costs were $92 million in the quarter, down 21% from the year-ago quarter primarily due to two factors. First, we had a full quarter effect of the SEC reducing its fee rate to zero after it was cut midway through the second quarter. SEC fees were $20 million in the third quarter last year and $24 million in 2025. And second, we achieved higher rebates and lower costs at exchanges resulting from our smart order routing optimization. These costs and rebates are largely passed through to customers, so these reductions don't have much impact on our profitability, but they are components of our clients' profitability and one of the reasons they execute through us. As a percent of commission revenues, execution and clearing costs were 13% in the third quarter for a gross transactional profit margin of 87%. We calculate this by excluding from execution, clearing, and $21 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $156 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 10%, down from last year's quarter. As always, we remain focused on expense discipline as reflected in our moderate staff increase of 5% over the prior year. Our headcount at September 30 was 3,131. G&A expenses were $62 million, down from the year-ago quarter, which included a legal settlement that added $78 million and a one-time charge of $12 million to consolidate our European operations. Without those items, last year's G&A expense would have been $63 million, about level with the current quarter. G&A was also driven by an increase of $10 million in advertising expenses. Our pretax margin was 79% for the quarter, both as reported and as adjusted. Income taxes of $126 million reflect the sum of the public company's $64 million and the operating company's $62 million. The public company's effective tax rate was 19.4% within a usual range. Moving to our balance sheet on Page five of the release, our total assets ended the quarter 35% higher than the prior year quarter end at $200 billion, with growth driven by higher margin lending and segregated cash balances. New account growth also helped drive our record customer credit balances. The numbers seem to be supporting our long-held view that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash. We have no long-term debt. Profit growth drove our firm equity up 22% over the prior year quarter to $19.5 billion. We maintain a balance sheet geared towards supporting growth in our existing businesses and helping us win new business by demonstrating our strength to prospective clients and partners, while also considering overall capital allocation. In our operating data, on pages six and seven, our customer trading volumes surpassed industry growth over the prior year quarter in our three major product classes. Options contract and share volumes rose 27% and 67%, respectively. Futures volumes declined 7% in an environment of weaker industry activity. Stock volumes were driven both by increased activity levels overall and by relatively higher trading in low-priced stocks. On page seven, you can see that total customer DARTs were 3.6 million trades per day, up 34% from the prior year, strong in options and stocks. Commission per cleared commissionable order of $2.70 was down from last year, primarily due to the elimination of the SEC fee and the performance of our smart order router leading to the capture of higher exchange rebates and minimizing exchange costs, which as pass-throughs, serve to lower both our commission revenues and our execution and clearing costs. Page eight shows our net interest margin numbers. Total GAAP net interest income was up 21% from the year-ago quarter to $967 million. Adjusted for the net interest margin presentation, net interest income was $999 million. We include for NIM purposes certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and service or as other income. Our net interest income reflects strength in segregated cash interest, margin loan interest, and securities lending, partially offset by a modest increase in interest expense that was moderated by lower benchmark interest rates on customer cash balances. Most central banks, including the UK, Canada, Australia, Hong Kong, and the US, reduced rates this quarter, while others, including Europe, Switzerland, and Japan, held steady. Year on year, the average US Fed funds rate fell 96 basis points or by 18%. Despite this decline, our segregated cash interest income was up 3% on higher balances, while margin loan interest was up 4%, bolstered by higher lending balances. The average duration on our investment portfolio remained at less than 30 days. The U.S. Dollar yield curve remains inverted from the short to medium term, so we continue to maximize what we earn by focusing on short-term yields rather than accept the lower yields and higher duration risk of longer maturities. Particularly in an unpredictable economic environment, this strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was stronger this quarter. We saw a higher level of short activity and a significant rise in the total notional dollar value of securities we lend. Contributors to this growth include several factors. As our account base has grown, our inventory of attractive stocks to lend has grown with it, including international securities around the world. We pay interest on short cash balances, which makes us attractive to investors who feel our short selling. Our fully paid lending program generally shares proceeds with clients on a fifty-fifty basis, which appeals to investors looking to maximize the return on their portfolios. And activity has picked up in some of the typical drivers of securities lending, including IPOs, and merger and acquisition activity. As most benchmark interest rates are now sufficiently above zero, a portion of what we earn from securities lending is classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, then total net revenue related to securities lending would have been $314 million this quarter, double the $156 million we earned in the prior year quarter. Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, rose slightly on the combination of 33% higher client cash balances from new account growth, and from lower benchmark rates. As we have noted in the past, the higher interest rates we pay on customer cash, currently 3.59% on qualified US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $25 billion versus $19.5 billion in the year-ago quarter. Now for our estimates of the impact of changes in rates, given the market expectations for the rate cuts in 2025, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $77 million reduction in annual net interest income. Our starting point for this estimate is September 30, with the Fed funds effective rate at 4.09% and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact. About 29% of our customer interest-sensitive balances is not in US dollars, so estimates of a US rate change exclude those currencies. We estimate the effect of decreases in all the relevant non-US benchmark rates would reduce annual net interest income by $35 million or a 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by $417 million. This takes into account rate-sensitive customer balances and firm equity. In conclusion, we posted another financially strong quarter in net revenues and pretax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. Our business strategy continues to be effective, automating as much of the brokerage business as possible, continuously improving and expanding what we offer while minimizing what we charge. With that, we will open up the line for questions. Operator: Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press *1 on your telephone keypad. And our first question comes from the line of Brennan Hawken from BMO. Your question, please. Brennan Hawken: Good afternoon. Thanks for taking my question. Paul, you spoke a bit in the beginning about how you're starting to see hard-to-borrow specials come back on the back of capital markets active ramping. Could you talk about how the trajectory that played out in the quarter? What impact we could expect if we were to see capital markets activity ramp, as is broadly expected, and what kind of benefits we could expect from that? Paul Brody: Yeah. I wouldn't exactly call it cyclical. However, as we know, the securities lending revenue is based on a general increase in our customer balances and shorting. And then on top of that, we see these specials, hard-to-borrow stocks that come up from time to time. And as a general statement, we might say that those specials tend to come up more in an environment of more IPOs and M&A activity. So it's not predictable, but we have spent a lot of time building out our systems to optimize and take advantage when these opportunities present themselves. Brennan Hawken: Okay. Thanks for that color. And then a couple of years ago, I seem to remember Thomas making comments that he was bullish on the prospect of AI leading to more velocity in trading and turnover. Are you where you can sort of see chatter around this in some of the various websites and blogs and whatnot? Are you actually seeing evidence of this in your business yet, or is that still something that has yet to play out? Paul Brody: I'm sorry. Are you asking whether we can see evidence in the trading volumes of AI? Is that what the question was? Brennan Hawken: Yeah. Whether you book Marcus, several years ago, Thomas had suggested that AI would lead to higher trading volumes. So I don't know whether or not you have any visibility or any idea about whether or not that thesis is actually playing out now that we see AI become much more broadly integrated into people's everyday lives. Milan Galik: Yeah. Unfortunately, we have no visibility into that. We obviously can see the increased volumes on our platform just like in the industry overall. I think the anticipation of AI permeating the financial industry causing higher volumes, I think that thesis in the long run should become real because if you think about it, you give a trader tools through which he can more easily research the stocks, his position, evaluating the news, he will be able to more quickly react to what's happening in the marketplace, how his portfolio is being affected. He will be able to make quicker decisions, and he will be able to make them with greater confidence. So I think if Thomas was anticipating that a couple of years ago, I'm not surprised that he would make a statement like that. But to repeat, we do not have an ability to see whether that's the reason behind the volumes or what percentage of those volumes would be attributable to that. Thomas Peterffy: So, Milan, you're absolutely right, but I do not recall ever saying that. Brennan Hawken: Alright. Thanks. Fair enough. Operator: Thank you. And our next question comes from the line of Benjamin Budish from Barclays. Your question, please. Benjamin Budish: Hi. Good evening, thank you for taking the question. Maybe just first on the interest rate sensitivity to non-U.S. balances. It looks like that stepped up a little bit from what you had disclosed last quarter. It also looks like for the last several quarters, the percentage of balances that are not in U.S. dollars is going up. Curious if you could unpack a little bit what's going on there? Any particular trends to be aware of? And what is impacting that sensitivity going forward? Paul Brody: Yeah. Yes, Ben. Fairly straightforward. As this business grows for us, we take on more clients, we get bigger balances. Bigger balances also mean more balances that are fully interest rate sensitive. And, therefore, it looks like the sensitivity goes up, but that's good news for us because it means the baseline is a lot higher than it was before. Benjamin Budish: Got it. But nothing specific this quarter to the non-USD balances other than platform growth? Paul Brody: Yeah. There was a bit of a change from the second quarter. Some of the several non-U.S. dollar currencies that had low rates actually approached zero again. And there's a bit of a nonlinearity there as you project rates to go down from there in terms of whether we're passing through negative rates or not. So, this quarter was a bit of a more normal-looking environment. Benjamin Budish: Understood. Thank you for that. Maybe just a follow-up. I was wondering if you could give us a little bit more color on Forecast X. There's been some press suggesting that you've made a filing preparing to launch contracts on sports. I'm curious if you can comment on that. But maybe otherwise, it sounds like there's a lot of momentum there, given the international customer base versus maybe what we see as a lot of headline noise in the U.S. What sort of products are seeing the most traction? And how are you thinking about the pace of product rollout from here? Thank you. Thomas Peterffy: So at this point, we're waiting for the courts to decide if the states have an exclusive right to regulate sports betting or not. But as far as Interactive Brokers is concerned, we are not currently contemplating getting into sports betting. We are focusing on election contracts and economic indicators and climate indicators, and we are taking that global, and so that's where our focus currently is. However, the exchange will be available for other brokers to carry sports contracts. So introducing brokers can come to Forecast X and carry sports contracts provided that the states will let us do that. Benjamin Budish: Alright. Thank you, Thomas. Appreciate it. Operator: Thank you. And our next question comes from the line of Patrick Moley from Piper Sandler. Your question, please. Patrick Moley: Yes. Thanks for taking the question. Maybe just following up on the prediction markets and Forecast X. Could you just maybe speak a little bit more to your strategy for growing that business, whether it's adding more broker partners? We've seen a number of JVs get announced in the space. What are your thoughts on how you're going to grow the number of users on that platform? Thomas Peterffy: Thanks. We are focusing on adding broker partners, but we're also focusing on our own Interactive Brokers direct customers participating more and more in forecast contracts. Patrick Moley: Okay. Thanks for that. And then just a follow-up. Margin loans were up 20% quarter over quarter. Could you maybe just provide a little color on the breakout of the types of customers that drove that growth? Was it retail? Was it hedge funds? And then given some of the choppiness we've seen here month to date, what are your expectations around margin loan growth from here? Do you think it's sustainable? Thanks. Thomas Peterffy: We do not look at the breakdown of where the margin loans are coming from. We do have some internal measures that obviously we understand what they are. We're not comfortable talking about it in public as to how exactly it happens. I think I could state in general that the appetite for risk has grown. That's what typically happens when the markets are going up, when they are momentum-driven. That is what we have seen. Our margin balances are at their all-time high. Should there be a sudden dislocation in the market, I would expect that it is likely to decrease. What we like in what we see is that our customers have been trading stock on leverage. They are not making as many bets with being short, cheap options as perhaps in some quarters in the previous year. We see that in the reduced income due to the exposure fees that we collect. So when we see the margin balance is going up, that's fantastic. We directly benefit from that to the bottom line. When we see the exposure fees increasing, that's somewhat of a mixed feeling for us because on the one hand, we like to see that revenue, but we are conscious that it's coming from the fact that the clients are making cheap option bets that can go bad. So high margin numbers, we like them a lot. Operator: Thank you. And our next question comes from the line of Dan Fannon from Jefferies. Your question, please. Dan Fannon: Thanks. Good evening. Just another quarter of strong account growth. Curious about the mix, any changes from either the profile of that customer and or geographies where you're sourcing those accounts from? Thomas Peterffy: It pretty much looks the same as in the previous quarters. Geographies, the different geographies are equally represented, different mix of clients. We still like all the segments that we have been growing, whether it's direct clients, introducing brokers, cross-trading firms, financial advisers. It's all growing well, hedge funds, of course. Dan Fannon: Okay. And thank you. And then as a follow-up, Paul, I was hoping as you think about 2026 and expenses and investments you're making, any preliminary thoughts on expense growth and where those areas of investment might be directed anywhere different than what you've been doing more recently? Paul Brody: Oh, we don't really make forward-looking statements as you know. I would say that this quarter's a typical run rate, I think, for most of the expense categories. Milan, you might want to add to that? Milan Galik: Of course. The way we look at things is we have always run our business in the way that we do not allocate budgets to certain activities. There are some ideas that we have. There are certain ways we like to grow our business. There are opportunities that we see. And we work on them. When we see that we fell behind in terms of our staffing, be it either technology folks or on the operational side, we adjust. That is how we have been running the business. So we should not think of that as we are allocating $25 million to a certain project. If we want to do something, we're fully in. We're obviously paying attention to make sure that we do not build our technology too extensively. But that has been the modus operandi since Thomas started this firm decades ago. And that approach has worked for us well. And that is what we're going to be continuing. Dan Fannon: Understood. Thank you. Operator: Thank you. Our next question comes from the line of James Yaro from Goldman Sachs. Your question, please. James Yaro: Good afternoon, and thanks for taking the question. You've seen a smaller percentage of U.S. clients over time. Could you just walk us through recent geographic client acquisition trends in your view? And then specifically, the regulatory environment in China around account opening has weighed on and will continue to impact your growth in this region? Thomas Peterffy: Yeah. There was a change. You noticed it. Chinese regulators clamped down on foreign brokers acquiring accounts in Mainland China. We have been getting some number of them. What basically changed was we now have to ask the account applicants to prove to us that they have a residence outside of the Mainland. And many have been doing that, and we are still getting clients in China as a result. It is a smaller number than before, but it is not something that would materially impact our figures. James Yaro: Great. Thank you. You recently led a new funding round for HashNote. Could you just update us on the extent there's anything new on your aspirations in digital assets and especially any update on the 30% limit, as regards what percentage of crypto customers can have in their accounts? Thomas Peterffy: You meant funding out in Zero Hash? Sorry. Zero Hash. Yeah. Sorry. Right. So the funding round was concluded. We have upped the dollar value of our investment. We have kept the percentage of the investment in roughly 30%. Zero Hash has been a good partner with us. We are working with them on a significant project together. They're going to be the provider we're going to use for our European offering. They're going to be getting their license. We anticipate that sometime in October or November of this year, they will receive a Dutch license, and they will be authorized to offer crypto services on the European continent. And that is what we will do. We will offer cryptocurrency trading to our European clients through Zero Hash. As far as other aspirations in the area, we are working on stablecoin deposits on the ability for account holders to fund their accounts with stablecoin. That's something that should be going online in October. We're working on the crypto asset transfers, which I'm cautiously optimistic about. And the reason for that is very simple. If you look at our pricing, despite the fact that we are latecomers to the crypto industry, our pricing is very good. We are significantly less expensive than our bigger competitors. Yet, we do not see an inflow of accounts, and part of the reason could be that if somebody wanted to switch their providers, let's say they wanted to come to us from Coinbase or from Robinhood or wherever, if they already have cryptocurrency positions with embedded tax gains, unrealized tax gains, the only way for them to come to us now would be to sell their investments and realize those gains. With the asset transfer, they will not have to do that. So when we put online the crypto asset transfers, I would hope to see an increase in the activity. Another thing that we have in the plans is to offer staking. Obviously, we are relying on Zero Hash to do their work first. Once they are ready to offer staking, we will offer that to our clients. James Yaro: Excellent. That's very helpful. Thank you. Operator: Thank you. As a reminder, ladies and gentlemen, you may press *1 to ask a question. Our next question comes from the line of Craig Siegenthaler from BofA. Your question, please. Craig Siegenthaler: Good evening, everyone. So my question is on total account growth. I'm actually going to ask a similar question to last quarter. So at a May conference, Thomas talked about a potential deceleration in account growth, and my question is, where is it? Because account growth is again showing no signs of slowing down through September. Thomas Peterffy: We have not seen any deceleration. As a matter of fact, we saw exactly the opposite. And we expect that to continue. Craig Siegenthaler: Got it. Thank you, Thomas. My thoughts are on crypto. More specifically with timing. So when will clients be able to transfer tokens in and out of their IBKR accounts? And how will the rollout work by geography? Will some regions move faster? And I believe IBKR will end up offering a noncustodial wallet just like some of the crypto exchanges offered today. Thomas Peterffy: So the rollout is going to be varied. At the moment, we are able to offer cryptocurrency trading to our U.S. clients and Hong Kong clients. And, hopefully, soon, we will be able to offer it to our European clients as well. The rollout schedule will be funding with stablecoins in October. Crypto asset transfers by the end of the year. Staking maybe the beginning of next year. That is roughly the schedule. It depends somewhat on our partner, Zero Hash. They have to complete their work first, and then, obviously, we have to integrate the feature into our platform. So unfortunately, I cannot give you better estimates than that. Craig Siegenthaler: Got it. Thank you, Thomas. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Nancy Stuebe for any further remarks. Nancy Stuebe: Thank you, everyone, for participating today. As a reminder, the call will be available for replay on our website, and we will also be posting a clean version of the transcript on our site tomorrow. Thanks again, and we will talk to you next quarter end. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Jeff Su: Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows: first, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance. Jen-Chau Huang: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx. During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter '24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.6, gross margin is expected to be between 59% and 61%, operating margin between 49% and 51%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter '25 and fourth quarter '25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. In addition, we also delivered better-than-expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2% to 3% in the early stages and widen to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers' growth. We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mass making and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. C.C. Wei: Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of USD 33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading edge process technologies. Moving into fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading edge process technologies. We continue to observe robust AI-related demand throughout 2025, while non-AI end market segment have bottomed out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid-30s percent year-over-year in U.S. dollar terms. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risk from the potential impact of tariff policies, especially in consumer-related and price-sensitive end market segment. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 by continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence and customer trust, to further strengthen our competitive positioning. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in AI market continue to be very positive. The explosive growth in token volume demonstrate the increasing consumer AI model adoption which means more and more computation is needed, leading to more leading-edge silicon demand. Companies such as TSMC, we are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly received very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening and we believe the demand for semiconductor will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and thorough capacity planning system. Externally, we work closely with our customers and our customers' customer to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customer is now at least 2 to 3 years in advance. Therefore, we probably get the deepest and widest look possible in the industry. Internally, our planning system involve multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approach to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related business. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and thorough in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' need as they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to -- and to a more advanced process technologies in Arizona, given the strong AI-related demand from our customers. Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multiyear AI-related demand. Our plan will enable TSMC to scale up through an independent giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural and local government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from European Commission and the German federal state and city government. Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2-nanometer fab in both Hsinchu and Kaohsiung Science Parks. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of global logic IC industry for years to come. Finally, let me talk about our end-to-end A16 status. Our 2-nanometer and A16 technologies lead the industry in addressing sizable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With full year, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P feature further performance and power benefits on top of N2 and volume production is scheduled for second half '26. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. A16 is best suited for specific HPC product with compressed signal routes and dense power delivery networks. Volume production is on track for second half '26. We believe N2, N2P, A16 and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention. Jeff Su: Thank you, C.C. This concludes our prepared statements. [Operator Instructions] Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line. Thank you. Operator: First one, Gokul Hariharan, JPMorgan. Gokul Hariharan: Great results again. So on the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? Definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in '22, CapEx has only grown about 10%. So how should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand like are we looking at much higher CapEx in the next couple of years, given all these conversations you've had. And I have a follow up after that. Jeff Su: Okay. So Gokul's first question, sorry, Gokul, let me summarize for everyone's benefit. So again, he wants to know, firstly, related to the AI-related demand that TSMC works with many, if not everyone, who is doing AI. And many of the customers seem to be even more positive today. So I guess he would like to ask C.C. sort of what are we seeing or hearing from our customers. And then we had previously said that the next 5 years from 2024 to '29, we expect AI accelerator to grow at a mid-40s CAGR. Is there any update to this? I think this is the first part, then I'll get to the second part on CapEx. C.C. Wei: That's a long question, isn't it? Gokul, the AI demand actually continue to be very strong, it's more -- more stronger than we thought 3 months ago, okay? So in today's situation, we have talked to customers and then we talk to customers' customer. So the CAGR we -- previously we announced is about mid-40s. It's still -- it's a little bit better than that. We will update you probably in beginning of next year. So we have a more clear picture. Today, the number are insane. Jeff Su: And then the second part of Gokul's question are related to CapEx. He notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. But he notes, this cycle, actually, though, while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth. Jen-Chau Huang: Okay. Gokul, every year, we spend the CapEx based on the -- our business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. And if we do our job right, the growth of our business, of our revenue should outpace the growth of the CapEx. And that's what we have been delivering in the past few years. Now going forward, assuming we're doing -- still doing a very good job, then we will continue to see that happening again. So a company of our size, the CapEx number, it's unlikely to certainly go up significantly in any given year. When we continue to invest and our growth is outpacing our CapEx growth, then you see the growth like what we have done in the past few years. Gokul Hariharan: Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. mentioned in terms of every customer asking you and every customers' customer requesting you for capacity addition, right? Jen-Chau Huang: Yes. As I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as C.C. said, next year looks to be a healthy year, and we are confident on the mega trend that we'll continue to invest. Gokul Hariharan: Yes. Maybe one more follow-up question from me. C.C., I think last year also, you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x, of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity would you be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure, I think last year, we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI? Jeff Su: Okay. So Gokul, your second question, really, he wants to understand can we provide any detail or color on the CoWoS capacity plan for 2026 in terms of year-on-year increase. And also in terms of our definition of AI accelerated revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%? C.C. Wei: Well, Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continue the 3 months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI everything related like front-end and back-end capacity is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard. Jeff Su: Okay. Thank you, Gokul. I think we need to move on in the interest of time. So operator, can we move to the next participant, please? Operator: Yes. Next one, Charlie Chan, Morgan Stanley. Charlie Chan: And again, congratulations for very strong results, C.C., Wendell and Jeff. So my first question is really about your business demand. As C.C. just mentioned, your front-end demand is also very strong into next year. But one of your major customer said that more so is that -- I think his point is that doing maybe a system-level innovation in thermal, et cetera, can boost up more kind of performance. So just a kind of a dumb question. How do we reconcile your very, very strong leading edge demand and the customers continue to migrate to your most advanced nodes? And also you continue to reflect value, whereas the customer continue to think that Moore's law is dead. Can we get some clarification from TSMC? Jeff Su: So Charlie's question is very specific although -- he wants us to comment on a customer saying Moore's law is dead but how do we reconcile this with a very strong leading edge demand into 2026 and also with system-level innovations? C.C. Wei: Okay. Charlie, this is C.C. Wei. Yes, one of my customers, very important customer say Moore's law is dead, but what he meant is it's not only we rely on the chip technology anymore, now we have to focus on that whole systems' performance. So he want to emphasize the whole systems' performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology both in front-end and back-end and also in all the packaging to meet his requirement. That's all I can say. Jeff Su: Okay. Thank you, C.C. Do you have a second question, Charlie? Charlie Chan: Yes, I do, Jeff. Yes. So anyway, I would interpret it as so-called Moore's Law 2.0 that your co-COO, Mr. Cliff Hou also comes here during the SEMICON Taiwan. But anyway, thanks, C.C., for your commentary. And my second question is actually a follow-up from last quarter's same question. Back then, I consulted you about China AI GPU demand, right, whether you can seize the market opportunity because China, certainly, they also expanding their AI infrastructure very rapidly. But given the recent kind of back and forth between U.S. and China, whether China can really import NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about? Jeff Su: Okay. So Charlie's second question is related around AI demand and specific to China. With the sort of the export control and restriction, his question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China. Charlie Chan: Yes. I think it's a little bit of both sides, meaning restriction from the U.S. but also China government's kind of discouragement to procure U.S. chip. Sorry for the interruption. C.C. Wei: Well, Charlie, to speak the truth, I have confidence on my customers, both in graphic or in ASIC, they are all performing well. And so if the China market is not available, but I still think the AI's growth will be very dramatically and as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them. Charlie Chan: So even with limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in coming years? C.C. Wei: You are right. Jeff Su: Operator, can we move on to the next participant, please? Operator: Yes. Next one, Sunny Lin, UBS. Sunny Lin: Congrats on the very strong gross margin. So my first question is how should we think about 2026. I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going to 2026. Especially, how should we think about the gross margin impact from 2-nanometer ramp for 2026? Jeff Su: Okay. So Sunny's first question is regarding gross margin. She would like to know directionally, how do we see the gross margin for next year 2026 in terms of certain puts and takes. And also if Wendell is able to comment specifically, Sunny, sorry if I heard you right, on the N2 dilution impact, correct? Sunny Lin: Yes, that's right. Jeff Su: Okay. That's her first question. Jen-Chau Huang: Okay. Sunny. Yes, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as all the new node, when they just come out, the N2 will have dilution in our gross margin in 2026. But at the same time, the N3 dilution is gradually coming down, and we expect the N3 to catch up to the corporate average sometimes in 2026. The other factors include like overseas fabs dilution, which will continue and which we said that it will be about 2% to 3% dilution in the early stage of the next several years. That will also be there. And also we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of dollar against NT will affect our gross margin by 50 -- 40 basis points. So that just gives you some rough idea. Sunny Lin: Got it. Sorry, if I may, yes, a very quick follow-up. And so on 2-nanometer, would the typical 2% to 3% dilution by new node for the first 7 to 8 quarters of mass production be a good reference for 2-nanometer as well for 2026? Jeff Su: Okay. So Sunny, a quick follow-up. She wants to know for the 2-nanometer dilution, if we're able to provide any detail. And can she still think about it in terms of 7 to 8 quarters or 6 to 8 quarters dilution to reach the -- time, sorry, to reach the corporate average? Jen-Chau Huang: Yes. Sunny, let me share with you. N2's structural profitability is better than the N3, okay? Secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach to a corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves and generally, it has been moving upwards. So less meaningful to talk about that, okay? Sunny Lin: Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. And so my question is now cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for cloud AI is also may be harder to forecast. So just want to maybe get a bit more color from you that now versus the prior rounds of capacity expansions, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly while still having good risk control? Jeff Su: Okay. Thank you, Sunny. So Sunny's second question is regarding capacity planning and expansion. In a capital-intensive business, she notes this is very important. But in the past smartphone and PC megatrends; today, it's AI and cloud AI. She is wondering, does that make this planning process more difficult to forecast? And what are we doing differently or how do we forecast this to make sure that we are investing appropriately? C.C. Wei: Sunny, indeed, right now because of -- I believe we are just in the early stage of the AI application. So very hard to make the right forecast at this moment. What do we do differently? There's a big difference because right now, we pay a lot of attention to our customers' customer. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media application, we talk with them and see how they view the AI application to those functions. And then we make a judgment about what AI going to grow. And so this is quite different as compared with before, we only talk to our customers and have an internal study, this is different. Did I answer your question? Sunny Lin: Got it. Yes, yes, yes, and looking forward to the CapEx guide in January. C.C. Wei: You're welcome. Jeff Su: All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Operator: Next one, Bruce Lu, Goldman Sachs. Zheng Lu: I think Jensen talked about like $3 trillion to $4 trillion AI infrastructure opportunity by 2030, right? This compared to like 600 billion CapEx recent -- for this year implies for about 40% CAGR growth. This is similar to Jensen's guidance for the AI growth, right? But for me, first of all, what I want to know is what's TSMC's view for the AI infrastructure growth for the next 5 years? And what's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide like semi industry growth, foundry growth and how much TSMC can outperform the industry, right? Given the context that can we assume like TSMC AI-related revenue can track -- will track with the CapEx growth of AI or the major cloud service provider? Or should we expect even higher growth rate for TSMC considering you're potentially getting more value out of it? Jeff Su: Okay. Let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a $3 trillion to $4 trillion infrastructure opportunity over the next few years compared to 600 billion current CapEx, implying a 40-something percent CAGR or growth rate, which is similar to ours. Bruce's question is, he wants to know what is TSMC's forecast or view for AI infrastructure growth. He would also like to know what is TSMC's forecast or view for the token growth. And then what is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? And his question is, should it be even higher -- shouldn't it be even higher given the value that we capture. That's actually several questions, but is that correct, Bruce? Zheng Lu: That's right. C.C. Wei: Well, Bruce, essentially just want to know that how accurate that we can predict the AI demand. We give you a number, roughly 40 -- the mid-40s is the CAGR, not including all the infrastructure build up and also align with our major customers' forecast for their view. More than that, I think if we are talking about the tokens, the number of tokens increase is exponential. And I believe that almost every 3 months, it will be exponentially increase. And that's why we are still very comfortable that the demand on leading edge semiconductor is real. And as I continue to say that we look at all the demand and look at our capacity expansion, we need -- TSMC need to work very hard to narrow the gap. That's what we are doing right now. Exact number that we probably will share with you in next year, so that when we have a very better, clear picture. Zheng Lu: I just had a quick follow-up. I'll use that as my second question anyway. I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance on TSMC, right? So the gap is actually enlarging if you compound in the outer years, right? That's why -- that's the differences between the -- what we see for the current TSMC outlook and the potential token consumption, right? So the gap is continue to see enlarging. How do we solve this? And do we really see that as a major issue? Jeff Su: Okay. So Bruce's second question, which is a follow-on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth, and this gap will only enlargen or widen in the next few years. So he wants to know -- sorry, Bruce, basically, what's the implication to TSMC or how do we see this? Is that correct? Zheng Lu: That's right. C.C. Wei: Okay, Bruce, you are right, you are right. The tokens and the number of tokens increase exponentially is much, much higher than TSMC's CAGR as we forecasted. And let me tell you that, first, our technology continue to improve. And so our customer moving from one node to the next node so that they can handle much more tokens number in their basic fundamental calculation. So that's one thing. We progressed very well for one node into the other node, and our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about 40%, 45%, CAGR, then the token number are exponentially increased because of our customer and TSMC's technology combined that can handle much more or much efficient than before. Did I answer your question? Zheng Lu: I see. So you believe your node migration plus your customer design change can fulfill or can meet the exponential growth for the token consumption? C.C. Wei: Exactly. Zheng Lu: Is that the conclusion? C.C. Wei: Yes. Jeff Su: Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce. Operator: Next on, Laura Chen, Citi. Chia Yi Chen: Appreciate C.C. sharing your view on TSMC strategy on the AI capacity planning. I think along with very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focus for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us an update here? And also, I mean, for the time being, just very stretched demand at the moment. So TSMC will work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question. Jeff Su: Okay. Thank you, Laura. So her first question is on capacity planning. We have talked earlier on the call about the planning for leading nodes. She wants to understand also on the CoWoS capacity and specifically, I guess, advanced packaging in Arizona and how do we work with our OSAT partners. C.C. Wei: Okay. We have announced our plan to build two advanced packaging fab in Arizona and to support our customers. But at the same time, actually, right now, we are working with one OSAT, a big company and our good partner, and they are going to build their fab in Arizona, and we are working with them because they're already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. And we are working with them. And our main purpose is to support our customer, and so we can many in the U.S. Jeff Su: Laura, do you have a second question? Chia Yi Chen: Yes. Certainly, I mean, obviously, we see that the advanced node, advanced packaging are quite strong. And also at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell in your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? And also, C.C., you mentioned some of the mild silicon recovery. So that may also drive some of the volume growth into next year. So just wondering, like if you look at the growth outlook, that will be more driven by the technology upgrade ASP increase or also more like a volume? That's my second question. Jeff Su: Okay. So Laura's, again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mix migration, things like N2? Is it more from ASP upgrade? Or is it more from just pure wafer volume growth? C.C. Wei: Laura, all the above. All right? You knew it, right? Chia Yi Chen: May I also follow up that because we see that actually N3 is very tight. And at the same time, we are also kind of expanding on N2. And C.C., you previously mentioned that you will migrate some of that to even N7, N6, and also N5G like -- but specifically on N3, do we also need to add more capacity into next year, newly added capacity? Jeff Su: Sorry, Laura is saying that will -- next year, will we continue -- sorry, Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at leading edge next year? Chia Yi Chen: Right. Yes. C.C. Wei: Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan. Jeff Su: Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you. Operator: Yes. Next one, Krish Sankar, TD Cowen. Sreekrishnan Sankarnarayanan: My first one is, C.C., about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering in today's world, can you talk about how much 1 gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? And then I have a follow-up. Jeff Su: Okay. So Krish's first question, he noted in the past, in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. So now with AI, is there a way to frame or quantify 1 gigawatt of data center capacity, what is the revenue opportunity for TSMC? C.C. Wei: We -- recently, as I said, the AI demand continue to increase, and then my customer say that 1 gigawatt, they need about -- invest about 50 billion, how much of TSMC's wafer inside, we are not ready to share with you yet because of different from different projects, okay? Sreekrishnan Sankarnarayanan: And then a quick follow-up. C.C. Wei: Yes, excuse me, I just want to say that right now, it's not only one chip. Actually, it's many chip together to form a system, all right? Sreekrishnan Sankarnarayanan: Got it, got it. Very helpful for that. Then a quick follow-up. Obviously, you first forecast long-term trend and then build capacity toward that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether it's -- that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix? Jeff Su: Okay. Thank you, Krish. So his second question is, again, with our business outlook. Again, we forecast the long-term trends. We plan our capacity, as C.C. said, in a thorough and disciplined manner. His question is, what are the implications, for example, of -- I believe you said GPU versus ASIC in terms of the AI market. Do we have a preference or what? Is there a difference for TSMC? Is that correct, Krish? Sreekrishnan Sankarnarayanan: That's right. The impact to revenue and gross margin, whether it's a GPU or an ASIC. Jeff Su: Right. Okay. C.C. Wei: Krish, no matter if it's GPU or it's an ASIC, it's all using that our leading-edge technologies. And from our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types. Jeff Su: Operator, can we take -- thank you, Krish. So we'll take the question from the final participant, please. Operator: Last one, Arthur Lai, Macquarie. Yu Jang Lai: Congrats on a strong outlook. I'm Arthur Lai from Macquarie. So my question is about competition. So C.C., you define the Foundry 2.0 market. And I wonder what's the strategic initiative that TSMC's undertaking to further strengthening your competitive landscape and also in this broader ecosystem. So some context. I got the question from the U.S. investor as your clients have announced they invest in Intel. Jeff Su: Okay. So Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? Is that correct? Yu Jang Lai: Yes, yes. C.C. Wei: Okay. Let me answer that one. When we introduced our Foundry 2.0, we set a purpose that -- as I said, one of my customers say that the system performance is very important in these days, they're not only a single chip. And also -- let me share with you that our advanced packaging revenue is approaching close to 10% and it's significant in our revenue, and it's important for our customer. So that's why we introduced Foundry 2.0 to categorize this foundry business. Not as usual, previously, we only look at the front-end portion. Now it's the whole thing, the front-end, the back-end and also important for our customer. That's why we introduced 2.0. Talking about our competition in the U.S. Well, that competitor happened to be our customer, very good customer. So in fact, we are working with them to -- for their most advanced product. Other than that, I don't want to make any more comment. Yu Jang Lai: Can I ask one more question? Jeff Su: Yes, you have two. So your second question, sure. Yu Jang Lai: Yes. My second question is very quick on the end demand. So I recall, C.C., you, last time, mentioned that we should also monitor and worry about the prebuild, especially in the consumer electronics. And then this quarter, our number suggest that there's a Q-o-Q 19% growth in the smartphone. So my question is, do you still worry about the prebuild? Jeff Su: All right. So Arthur's second question is on smartphone. Do we -- are we concerned about prebuild or sort of, I guess, pulling prebuild from customers in that regard? C.C. Wei: No. We don't worry about the prebuild because of -- when you have a prebuild, you have inventory. And in this stage, the inventory already go to the very seasonal level and very healthy. So no prebuild. Jeff Su: Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. So this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you, and have a good day.
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