CSX Corporation (CSX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation's Third Quarter 2026 Earnings Conference Call. [Operator Instructions]. And I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Corporate Communications. Mr. Korn, you may begin.

Thank you, Good afternoon, everyone. Joining me from the CSX leadership team are Steve Angel, President and Chief Executive Officer; Kevin Boone, EVP and Chief Financial Officer; and Maryclare Kenney, Senior Vice President and Chief Commercial Officer. In the presentation that accompanies this call, which is available on our website. You will find slides with our forward-looking and our non-GAAP disclosures. We encourage you to review them. With that, I'm very happy to turn the call over to Mr. Steve Angel.

Thank you, Matthew. Good afternoon. I'm pleased to report that CSX has delivered another quarter of strong financial performance, earnings of $0.57 per share increased 30% compared to last year's adjusted results. Our volume grew 5% as more customers turn to our railroad to safely and reliably move their goods and our operating margin improved to 39.1%, which was 420 basis points higher than last year's adjusted results. The progress we continue to make on productivity has helped drive substantial growth in profitability, earnings and free cash flow. Our goal is to be the best-performing railroad in North America and the entire CSX team is responding to that challenge. We are proud of how far we've come this year and excited about our position as we look ahead to 2027. Before we turn to the details, I want to recognize Mike Quarry, who recently announced his retirement after a 45-year career. Mike is a true railroader, who has made significant contributions to CSX, our customers and our employees. He also developed a deep bench of operations leaders and I am confident in Doug Ryhorchuk, Casey Albright and the entire operations team as we continue executing on our priorities of safety, reliable service and long-term value. We thank Mike for his leadership and wish him all the best. Turning to Slide 4. The work underway to strengthen our safety culture contributed to another quarter of year-over-year improvement. Our FRA injury rate decreased by 17%, and our accident rate fell by 4%. While we are encouraged by that progress, our work is never finished. We will continue our efforts to reduce risk, increase awareness and improve communication to support our employees as they do their jobs. We do not and will not compromise on safety. We also continued improving productivity. Third quarter fuel efficiency was not only the best ever achieved by CSX, but also the best ever reported by any U.S. railroad and workforce efficiency as measured by gross ton miles per employee improved substantially year-over-year. This next slide shows our key service metrics. We're encouraged by the sequential improvement in velocity, dwell and customer switch data, which measure first mile and last mile performance. Trip plan compliance for our carload business also improved modestly quarter-over-quarter, though intermodal trip plan compliance declined. We are handling more volume safely and efficiently, but we know our network can perform better. Operations is connecting more closely with our commercial team, giving us better visibility into demand and helping us get the right number of crews and locomotives to the right locations. Active crew management is improving engineering and conductor availability. Better planning and coordination between engineering and transportation is leading to less network disruption as we execute our capital projects. In technologies such as autonomous track inspection cars is helping us plan better and respond effectively to day-to-day events on the railroad, supporting faster trains and fewer delays. Services started strong in October, with velocity averaging more than 19 miles per hour this month and dwell approaching 10 hours. Our team also did an excellent job preparing for Hurricane -- which we managed through with minimal impact. We intend to build on this momentum ensure that our service supports our growing business. Kevin, please review our financial performance for the quarter.

All right. Thank you, Steve, and good afternoon, everyone. In the third quarter, the CSX team improved safety, but increased demand for our customers delivered substantial cost efficiency and made sequential progress in our service metrics. Revenue increased 12%, driven by higher fuel surcharge 5% volume growth and pricing gains across the merchandise, intermodal and coal markets. As a reminder, our prior year results included $164 million goodwill impairment. Adjusting for that charge, Higher revenue and lower nonfuel costs drove a 25% increase in operating income and 420 basis points of margin expansion despite 70 basis points of fuel price headwinds. This translates to a 30% increase in earnings per share. Let's now turn to the next slide for a closer look at expenses. The team handled 5% more volume in the third quarter while reducing nonfuel costs by 3%. Labor expense increased by $19 million as improved workforce productivity and lapping of severance costs, mostly offset over $90 million of higher costs from incentive compensation and inflation. Labor expense will have a typical sequential increase in the fourth quarter, but reported headcount will be lower due to temporary seasonal reductions. First quarter 2027 head count will be similar to current levels as these employees return to work, and we build our conductor training pipeline to start the year. PSO expenses were 10% lower reflecting our continued focus to drive efficiencies across this diverse pool of the costs. Savings were driven by improved utilization of both locomotives and vehicles, reduced reliance on external labor and multiple G&A functions absorption of intermodal volume growth and maintenance efficiencies across rolling stock and fixed assets. Steve highlighted our record fuel efficiency this quarter. I will reiterate the team's great work to reduce engine idling and utilize fuel savings technology, both of which deliver greater value and the higher current price environment. Looking to the fourth quarter. On a sequential basis, we expect the normal seasonal increase in PSMO combined with typical weather-related reduction in fuel efficiency. Overall, a consistent and consistent with past years, we would expect some step-up sequentially in the fourth quarter expense line as we enter the winter months. And while fuel volatility can create some near-term noise we expect to deliver year-over-year margin improvement above 350 basis points in the fourth quarter. We are building a culture of continuous improvement that positions us to deliver further safety service and efficiency gains in 2027 and beyond. This includes a robust pipeline of sustainable efficiency initiatives that we are now incorporating into our 2027 budgets with clear accountability for results. With that, let me turn it over to Maryclare to review our revenue performance.

Thank you, Kevin, and good afternoon, everyone. Our commercial group continues to deliver in a favorable environment of solid customer demand and tight trucking capacity. The consistent network performance delivered by our operations team, together with the new services added capacity and growth initiatives we've brought online have positioned us well to take advantage of the opportunities in this market. Our performance this quarter was strong, and I want to thank everyone at CSX for helping us maintain the momentum. Turning to Slide 10. Let's go through the highlights of our third quarter volume and revenue results. Total CSX volume was up 5% in the third quarter, Total revenue was up 12%, and our revenue per unit was up 7%. Fuel contributed about half of our revenue growth as average diesel prices increased nearly 50% year-over-year. Our Intermodal business continues to contribute the largest share of our volume growth. So mix remains a headwind to overall RPU. Even with that mix impact, revenue per unit, excluding fuel, increased 1% this quarter. We remain encouraged by the results of contract renewals as we progress throughout the year. In merchandise, revenue increased by 11% with a 3% increase in volume. Merchandise RPU, excluding fuel, was up over 2% despite unfavorable mix in markets with the largest impacts within chemicals and fertilizers. Including fuel, RPU was up 8% year-over-year. Volume performance was more varied across our merchandise markets compared to the second quarter. Metals was the top performer, gaining 12% as fuel demand particularly plate, has been very good across infrastructure and energy markets. We're also benefiting from increasing output from the new steel mills located on our network that are ramping up at a favorable time. Chemicals was also a highlight, with volume up 7% and driven by conversion and good opportunities in waste and petroleum products. In contrast, fertilizers has been the softest merchandise area for us, with volume down 13% for the quarter. The headwinds in this market have persisted for some time with supply issues, limiting phosphate shipments and low crop prices weighing on fertilizer affordability and demand. Reduced trucking availability, high truck rates and elevated diesel costs continue to benefit our Intermodal segment. Conversions from the highway remains strong, and the new service offering through Birmingham, Myrtle Wood, Baltimore and other areas are performing well and attracting new business. In areas such as Atlanta were substantial profitable volume growth has led to temporary service tightness. We're working closely with our operations team as CSX invests in additional capacity. Total intermodal volume was up 7% year-over-year and reached a new all-time record with revenue up 20% and RPU up 13%. Essentially, all of the RPU increase was driven by fuel surcharge. As we've seen through '26, the domestic business drove this quarter while international remained roughly stable year-over-year. I'm encouraged by the outlook into the fourth quarter, although please keep in mind that we have now lapped the gains from the service agreement with BN that added new business last fall. Lastly, coal revenue increased by 10%, driven by a 2% increase in volume and a 7% increase in RPU. Export tons grew by a solid 7% as mine output increased while domestic tons declined modestly during a relatively mild summer where natural gas prices remained around $3. On price, global coal benchmarks have moved higher this quarter supply constraints in China lifted pricing for Australian exports. This has gradually flowed to U.S. export prices, which provided a moderate benefit to our yields in the third quarter. We expect another small sequential RPU increase in the fourth quarter from the lagged effects of these higher benchmarks. As we move into the fourth quarter, we're pleased with what we've accomplished while working hard to finish the year strong. We expect normal seasonality in our merchandise markets with some support in ag and food from a good Midwestern harvest. We also have several capacity expansions scheduled to ramp up into year-end, particularly in chemicals and minerals. Demand indicators remain good for domestic Intermodal, and we're pleased to enter the bid season with the benefit of full double-stack operations on our I-95 corridor through Baltimore. Finally, coal demand appears fairly stable in the near term. Utility burn will be driven by weather conditions. While on the export side, we've been successful in maintaining volume even as a customer mine works through a temporary closure following a fire in late summer. To sum up, as we move into year-end and anticipate the start of 2027, our focus will remain on consistent execution, winning business from the highway and ensuring that our pricing reflects the quality of the service we provide. Thank you, and I'll now turn it back to Steve to close.

Thank you, Maryclare. Now we'll review our updated guidance for 2026 on Slide 12. We now expect revenue growth in the high single digits compared to the mid- to high single-digit range we provided previously. The rest of our guidance is unchanged. I'm confident that we will achieve full year operating margin expansion of more than 350 basis points. Our outlook for capital expenditures remains below $2.4 billion. and we expect free cash flow growth of more than 80%. This outlook reflects our strong performance through the first 9 months of the year as well as our expectations for the fourth quarter. As we move into 2027, we will be focused on ensuring we have sufficient resources across the network to support a growing business, which will include adding to our train and engine employee pipeline. We remain committed to sizing our workforce to the needs of a safe, reliable and efficient railroad. In summary, we feel very good about our railroads position as we approach year-end and are encouraged by the opportunities ahead. I came to CSX just over a year ago, and I continue to be impressed by the dedication our employees bring to this company and the pride they take in being part of CSX. Together, we have made great progress towards our goal of being best-in-class as we build a high-performance culture that embraces continuous improvement. As we carry this momentum into 2027, we'll also mark CSX's 200 anniversary, tracing back to the founding of the B&O railroad. It is a significant milestone and an opportunity to recognize our history while showing how CSX continues moving the economy forward. So Matthew, with that, I'll now open it up to questions.

[Operator Instructions]. And our first question comes from the line of Chris Wetherbee with Wells Fargo.

Steve and team, obviously, the productivity that you've been able to drive so far in '26 has been very solid. We've seen meaningful margin expansion. You noted, Steve, as we're starting to think about '27 I know the productivity and the planning is going on for that year. Can you give us a sense of sort of where you think you are in the process? I think the OR improvement has been better than we expected this year. But as you look at the opportunity ahead of you, volume is growing. You noted maybe rebuilding the pipeline of employees. Can you give us a sense of what the potential productivity opportunity is from here?

Well, we're still working on it as you mentioned, but we already have a little over 100 initiatives that are contributing to our productivity target next year. Obviously, this year was a big year for productivity. I don't think '27 will be as big, but it will certainly be a significant number next year. But it's something we continue to work on. team's very excited about Kevin's playing a heavy role in that, and we feel very encouraged about productivity going into '27.

And our next question comes from the line of Brian Ossenbeck with JPMorgan.

Maybe, Steve, we can just get your thoughts on the operating department and the structure going forward. Obviously, Mike's a big part of building out the bench there. Do you think this is like a dual COO type of role? Are you going to take on some additional operating responsibilities? Are you doing an external or any type of search? Maybe just give us some context in terms of how you got to this decision and how you're going to evaluate this going forward?

We'll continue doing what they've been doing. And Casey has been in charge of network ops and service design, and Doug has been in charge of engineering and mechanical and transportation. So they'll continue doing what they have been doing. They're just going to report directly into me I look forward to that. I don't know how much most of you know about my background, but I most think can be as an operating CEO and that's what I'd like to do if you go back into my early days, I actually ran manufacturing operations for GE and I installed one of the first lean production systems in the United States back in the 90s. So operations always have been in my blood. And I look -- I'm not a lifelong railroader like a lot of people, but operations is in my blood, and I look forward to getting more involved with Doug and Casey. Casey, again, 30-year veteran the CSX started off in dispatch. Doug had 4 decades at CN doing just about every job inside of operations and he's been with us the last couple of years and that they both do a great job. So I look forward to working very closely with them.

And our next question comes from the line of Stephanie Moore with Jefferies.

Thanks for the question. Really appreciate it. I would say I wanted to take a step back. I think there's a lot of really strong top line momentum that we're seeing here. Clearly, we can all see this on the volume front. I think we can all see the fuel contribution. But as you think about just the pricing opportunity, even ex fuel. Maybe help us understand how we're thinking about that opportunity in 2027. Clearly, inflationary pressure even beyond just the transportation environment or more top in center of these at this point in time. So I'd love to get your thoughts on just pricing as we look into 2027.

Yes. Thanks for the question. I'd tell you pricing really remains a key focus area for the team. We've talked about that a lot this year. As Steve mentioned on previous calls. We're really taking a surgical approach to pricing. You mentioned inflationary pressures. We recognize those. We're having conversations around that with customers as we go through the renewal process. I would say, as a reminder, we can't touch every contract every year, but we are focused across markets. We still expect for this year, our same-store sales pricing to be stronger than it was last year. And I would tell you, we have seen discretionary pricing on the merchandise accelerate as we move throughout the course of this year.

And our next question comes from the line of Scott Group with Wolfe Research.

Thanks. So Steve, I think in the past, you said that you don't like plan for growth. But we're -- this is going to be our third year in a row volume growth, which I actually don't think has ever happened at CSX before, at least back to like. So I guess what's the sustainability of this in your mind? And what does this mean for the network? Are we handling this well? Do we need more people? Do we need more locomotives? And is this -- as you continue to get volume growth? Is this just a sort of a further opportunity for productivity if we get to continued growth.

Well, I'm encouraged by all of our growth initiatives that Maryclare and the team are driving. And it looks to me like we have some momentum on the growth side. I think you're correct. What I've said before is when I look at the types of earnings per share growth I want to drive, I generally assume modest volume growth. And that generally is the case. But again, as I look at what's going on here with all the initiatives, it looks pretty positive going into next year. With respect to our ability to handle the volume, we feel very confident we can handle the volume. We are adding some headcount. I think Kevin said that in his remarks on the T&D side to make sure that we were properly manned to from an operating standpoint, a transportation standpoint to serve the business that we have and the business and the additional volumes we expect to come. So again, encouraged by the initiatives that are underway, and I think we're going into the year from a pretty good position on the top line and we'll be ready to serve that business. And our next question comes from Tom Wadewitz with UBS.

I wanted to get a sense if you could provide some help on the key pieces of intermodal volume growth. And then give us a sense -- domestic , to be clear, domestic intermodal volume growth and then just how we think about how much runway is left, whether it's available boxes in UMAX or whether it's just kind of how far the service has progressed on, let's say, Southeast Express with CP. But I just -- I guess I think of the MAX kind of new services related to Howard Street and things you could do as that was debottlenecks and then maybe CP Interline is potentially specific drivers. But if you could run through what are kind of the biggest drivers on domestic intermodal. And is there still a lot more to go in '27?

Yes, sure. Thanks. So domestic has really driven our growth this year. International has been kind of relatively flat in particular in the recent quarter. What I'd say on the domestic side is we've got a number of initiatives out there. The team we've talked about on previous calls, the work the team has done in relation to SMX and Howard Street Tunnel. And so in both places, we continue to see volume growth, and we've been very pleased with that over the course of this year. SMX has been in play longer than Howard Street. We finished the work around the tunnel in the full double-stack clearances after we were through the majority of bid season this past year, so we have seen momentum build on Howard Street, but we're excited about getting into next year's bid season, which is really starting right now and having that solution and kind of more of the RFPs and the routing guides as we go forward. Beyond the new solutions, we're working closely hand-in-hand with our channel partners and then to our national accounts team directly with shippers to look at opportunities for truck conversion. Truck capacity has obviously tightened pretty significantly over the course of the last couple of quarters. And we have customers that are existing customers today, they're continuing to look to rail to move more of their business to an intermodal solution because of what they're seeing in the truck market. So we're very optimistic about the opportunities that are -- that continue to be in front of us as we close out this year and go into next year on the domestic intermodal side.

And our next question comes from the line of Brandon Oglenski with Barclays.

Here. Kevin, I know you spoke to guidance for, I guess, greater than 350 basis points improvement in the margin in the fourth quarter. But how do we think about that sequentially? I think you did give some detail on headcount PSO.

Yes. Thanks, Brandon. When you think about third quarter to fourth quarter, there's typical seasonality in that. We're hitting the winter month. So you'll see PSO typically move up a little bit. On the labor side, as you move into vacations, heavier vacations around holidays, other things, capital programs move off, you'll see a little bit of labor costs come in. But that's typically normal seasonality. So if you look back after the last 3 to 5 years, 200 to 300 basis points of margin degradation from third quarter to fourth quarter. Obviously, all the initiatives we're doing, we're looking to offset as much of that as we can. But there is normal seasonality that we will see and we anticipate on both of those cost line items.

And our next question comes from the line of Jonathan Chappell with Evercore ISI.

Thank you. I don't know if is on the call. And if not, I guess, someone else can answer it. But Maryclare mentioned some temporary issues in Atlanta. We watched the weekly data. It looks like there were some ebbs and flows as the volume remained strong through the third quarter. How do you feel, as you're stepping away about the resourcing, not just of labor, we've talked about headcount, but all the different things that go into, if we do have a peak season and a cyclical recovery for the next couple of quarters, do you feel that you're operating efficiently enough and can add resources on a less than one-for-one basis to keep those service metrics or you'd like to keep them throughout the year?

Yes. So what we're doing -- and again, we mentioned -- this is Steve. What we mentioned was coming out of the third quarter. Third quarter was improvement over the second quarter. October is an improvement over the numbers you're seeing in the third quarter. But the focus is this on the service side. We continue to refine our capacity plan, including positioning of resources based on the expected demand, and we do that working very closely with Maryclare organization. Better planning and coordination between engineering and transportation is creating less disruption on our network, which gives our ops team more freedom to operate. We've been investing in capacity where needed. And Atlanta is a good example of that, where we've seen a 50% increase in volume over the last 3 years. And we're investing in track infrastructure to increase our switching and processing capacity by 50%. And of course, good crew management as part of the equation to improve T&E availability in addition to adding a modest number of T&E headcount. So that's what we're doing.

And our next question comes from the line of Ken Hoexter with Bank of America.

Kevin or Steve, PSN dipped 400 basis points year-over-year, maybe even more than you thought. Maybe talk about some of the specific programs or just such a great achievement. How structural is this, what goes on? Because mean we've seen waves at CSX of market improvement, then there was slippage before you got there, Steve. So just wondering how you do that. And then in that 350 basis point target, if you're continuing to do this improvement, you did a 400 basis point improvement 3Q to 4Q. I guess, Kevin, is there any reason you could or could not do the same level of improvement in the fourth quarter year-over-year?

Ken, yes, look, part of the guidance for the fourth quarter is we've seen some extreme volatility on the fuel side, right? So when you think about the third quarter, we had peak diesel prices and coming into the quarter, that accounted for probably a little over 100 basis points of margin pressure versus what we had expected coming in just from the fuel price increase. So we're looking to eye on that. We'll have better clarity as we move through the quarter on there. But in terms of PSO, specifically, I would say the first area is we always look at are the costs that we're paying others outside of CSX. And I have to give a lot of credit to the team, the procurement team, the operations team, to really take a closer look at those costs that we're paying and really, some of those that we've in-sourced, other terms, we're challenging those costs and getting better rates through our suppliers, but it's across the board. And whether it's vehicles, whether it's equipment, asset utilization, a big, big focus on the asset utilization side, just rates in general, as I said, external labor rates, we really look closely at and making sure there's a level of accountability when we're paying others on the outside. And in terms of the pipeline, as Steve talked about it, over 100 initiatives already. We started in the second quarter. I think it's the earliest we've ever started in my 9 years here at CSX in terms of thinking about the next year. We're really building that muscle and building a continuous improvement kind of mindset around here. In fact, we're already thinking about '28 as well as we think about '27. So we're a deep bench. I would also say on the technology side, that's another area where I just see a lot of opportunity to provide greater resources, greater clarity in terms of where the spend is. And we're seeing some early signs of that. I would say some more to be done in the next year and those visibility tools allow the leaders out there to really identify costs and go after them. But it's across the board, great job by the team, and there's a lot of ownership across the organization for it.