CSX Corporation (CSX) Earnings Call Transcript & Summary

This is Justin Long with Stephens. I want to welcome everybody back to our Nashville conference in 2023. Next up, we have CSX, and representing the company, sitting to my right is Sean Pelkey, CFO. As a reminder, this will be a fireside chat format. I'll start with a few questions, and then, open it up to the audience as well.

So Sean, thanks a lot for being here and continuing to support this event. And maybe I'll just turn the mic to you to give an update on how the business is trending now that we're roughly halfway through the quarter relative to your expectations, and then, we can dive into some additional questions after that.

Yes. Sounds great. Thank you, Justin. And it's great to be here in Nashville. For those on the webcast, you may not know, but they built this hotel right next to Kane Avenue Yard, which is one of CSX's main yards here in Nashville. And so while those who slept here last night may have been a little annoyed by the sound of the train traffic, that is the sound of cash flow to me. So I actually really appreciate being here.

I took a video of those trains. I actually did.

Absolutely. So yes, I mean, the quarter is going well for us. What I would say is when we had the earnings call last month, we were very encouraged by what we were seeing in terms of the core volume trends. We were off to a pretty good start in the fourth quarter. And by and large, that has continued. I think the big unknown at the time was the UAW strikes and how long that was going to last and how deep the impact might be in terms of our volumes. We were very thankful to see that get to a point where those plants are now back up and running. If you looked at the weekly car-loading volume, you saw a bit of a rebound in our auto volumes last week. So we're not quite back to full production yet, but we're pretty darn close. So it's been nice to see that rebound. What we are seeing sort of on the flip side of that, that the downstream impact to the metals market, metals has been off a little bit from Q3 to Q4, likely due to just the sort of lag in time that it took from those production facilities shutting down to the impact in metals. But outside of that, we've actually been fairly encouraged, right? I think the industrial economy is maybe not as supportive as we'd like it to be, but it's stable. We're seeing signs of growth in domestic intermodal. We shared a chart in our earnings presentation. If you haven't seen it, go back and take a look, but the year-over-year growth in domestic intermodal has been picking up over the last couple of months. And we're now in sort of that mid- to high single-digit growth in the domestic intermodal market, and that's nice to see. That's a combination of growing with some of our partners as well as, I think, the illustration of what the service product is able to deliver, the confidence that customers have in us, and the way that the sales and marketing team can sell that service. So it's an encouraging start, and I'd be remiss if I didn't mention the ag market as well. You may remember, in Q3, we had a significant impact from a strong local crop in the Southeast. So our grain volumes were depressed relative to where they, otherwise, would have been. We're starting to cycle that as the Southeast crop has finished, and now, we're getting crop from the Midwest. So we're seeing a sequential uptick in ag volumes as well, which is nice to see.

And I feel like one of the themes from your earnings call was that you're seeing sequential improvement in various end markets. I guess my question around that is how much of that is attributed to market share gains as your service product has been better for some time now versus the underlying end markets getting better?

Yes. So like I said at the beginning, it's not an extraordinarily supportive market in terms of the industrial economy. You look at industrial production, and it's kind of flat to down this year. Kevin Boone has said, it sure feels like it's worse than that when we talk to our customers. I was at a CFO conference a couple of weeks ago and talking with a number of industrial manufacturing companies, and I asked them, how is the year going? And most of them gave me a word that, that brine was spitty. And that's kind of the environment that we're in. But the benefit of that is you start to lap that at some point and you start to grow off that base. So really, the fact that we've been able to grow merchandise volumes by 2% this year, and 2% is not a wow, big headline number. But in an economy that feels like it's actually -- demand levels are down quite a bit this year relative to where they were maybe a year ago. That's something that we kind of hang our hat on and a lot of that has been wins that we've gained because of the service product that we've been able provide to the customer and the scrappiness of the sales and marketing team going out and selling that. I think one of the benefits of where we are right now is the fact that we have actually 1 business that is not at full production right now. So as we start to see the industrial economy recover, and I don't know exactly when that's going to be, but an opportunity that we won that maybe has $10 million of annualized revenue opportunity might only be running at $8 million today. And so we're going to actually see growth on that business without actually winning any additional pieces of business from that customer in the future.

Okay. That's helpful. And one other thing you talked about on the earnings call was the potential to buck the seasonal trend on the OR. Typically, you see a little bit of deterioration as we move from third quarter to fourth quarter. What's your confidence level as we sit here today that you can buck that seasonal trend and see some margin improvement sequentially?

Yes. So Justin, what we have seen over the last 5 years, if you look from the third quarter to the fourth quarter, is the operating ratio always gets worse from Q3 to Q4. And in 4 of those 5 years, operating income has gotten worse with the only exception being the COVID year, 2020, and in some cases, by a fairly significant amount. The reason for that is largely twofold. The first is, seasonally, our volumes are typically down a touch from Q3 to Q4. So you've got fixed costs that you now have got to spread over somewhat fewer loads. And then on top of that, you've got some seasonal costs that get added into the base in Q4, whether that's winter weather, storm prep, fuel efficiency seasonally gets a little bit worse. You've got some labor costs that get added in. We've got vacation time. We've got now sick pay, some of that will hit because it's fully guaranteed in Q4. And then, on top of that, you've got some capital-labor that's been working and charging against capital all year that's going to flip to OE at the end of the year. So that's normally what drives that Q3 to Q4 degradation in margins and operating income. What gives us some confidence that we should be able to buck that trend this year is, one, just the fuel lag. We had negative lag in Q3. It's trending to be roughly flat this quarter. So that will be a little bit of a pickup. Our fuel efficiency, Mike Cory, our new Chief Operating Officer, has been really focused on how do we get back on trend in terms of the fuel efficiency gains we've seen in the last couple of years. Last month, we had the best month of fuel efficiency in roughly the last 6 or 7 months, so really, really nice. And usually that happens in the summer. And then on top of that, the business has been supportive. We've seen a sequential uptick in grain. We've seen an uptick in coal. We think autos is going to come back and be very strong for us, not just in Q4, but going into next year. So I would say we've got a really nice shot of holding OR flat or maybe a little better and keeping operating income flat or maybe even growing it.

Okay. Very helpful. Maybe we could talk about price for a moment, just because the service product has been better for over a year now. At what point do you feel like that started to impact your ability to price? And as we look forward, is there an opportunity to really push more on price given how you've executed operationally?

Yes. It's price and volume. I mean, that's the winning equation. If we can price at or above inflation long term and we can grow the business a couple of points ahead of the economy that, that really is a winning equation with strong operating leverage, strong incremental margins, combined with the share buyback can lead to some really nice EPS growth going forward. But in terms of price specifically, the team has been very successful in being able to price in a very high inflationary environment last year in 2022 and again in 2023. Those conversations last year, Kevin tells me, were extraordinarily challenging. But we were in an environment where everybody was seeing mid- to high single-digit inflation in their business and passing that on to their customers. So it was more palatable to the customer even if the service product that we were delivering was not up to our standard. The conversation this year was easier from the standpoint of, hey, the service product is what the customer expects. We are, in most cases, meeting or exceeding their expectations today. But on the flip side, we took some pretty healthy price gains the year prior. So price on price gets more challenging. But as you go into next year, I would say we've already got a decent amount of the portfolio locked up. We've got more conversations that are happening in the coming months, and the results that we're seeing coming in are supportive. I'm not going to give you an exact number or tell you exactly where that comes out. But it's been supportive to the narrative around being able to price at or above inflation and grow our business ahead of the economy.

And as you think about the inflation portion of that, obviously, there's been a lot of pressure this year. Do you have any initial thoughts on what inflation could look like in 2024 relative to 2023?

Yes, absolutely. So we're in the middle of the planning process right now, but we look at 2022 and 2023, the amount of inflation that we had in the business was a record, at least going back 20 years or as long as we really have good records around that. That's going to moderate to a degree going into next year. Not so much on the labor side. I think everybody knows the story there. We're in the last year of the union contract. We've got 4% increases that went in July 1, 4.5% will go in July 1 of next year. So we'll have elevated labor inflation again next year. But on the purchased services, materials, outside vendor side of things, we've done a really nice job of managing those contracts. We feel like we're in a pretty good position to see. This year, we were running kind of mid-single-digit inflation within purchased services, and materials will be materially south of that. We're not going to be at sort of a long-term Fed 2% level just yet, but somewhere between that and mid-single digit is kind of what we're looking at on the nonlabor inflation side next year.

Okay. So maybe some easing in inflation, maybe the opportunity for an acceleration in price, which obviously helps that gap.

Yes. I mean I think the acceleration in price is all relative to where inflation is, right, so at 5%, 6%, 7% inflation, if we're getting pricing at or above that, the absolute percentage of pricing that we're getting might be higher. But if you look at that gap relative to inflation, we should be able to manage that very nicely next year.

Okay. Fair enough. I'll pause there, if there are any questions from the audience. Okay. We'll take one right here.

In your intermodal franchise, you guys are a little more adventurous than most of the class 1s we see trying to straddle both the retail and the wholesale approach. And then we had that -- I'm not sure it's an adventure or misadventure on I-95, but do you feel that, that is sustainable for growth when it kind of scares some of your biggest customers?

Do you want to repeat the question or...

You can just go ahead with it.

Okay. So the question is kind of how are we approaching the marketplace on intermodal, right, and what are we doing differently, and how is that working? I think the proof is in the pudding. On the domestic side, you're seeing us outgrow most of the rest of the industry. And I know not everybody breaks out domestic versus international, but we are trying a couple of things. I think when you look at the railroads historically, you look at companies that are as large as us, we love to go after big chunks of business. And so when those are out there, and we can compete for them, we're going to do that. But we also recognize that if we want to create a nice mid- to long-term growth strategy, we're going to have to try some things. We're going to have to dabble, right? And it's, historically, the cultural mindset amongst the railroads has been fear of failure, right? We are not going to try things if there's any chance that we might fail at it, right? We're going to dabble in things in a way that doesn't require significant amounts of capital. You talk about the I-95 project with the refrigerated fleet that we have. We haven't invested really a dime in that product. Those containers are leased. Trailers are leased. We've seen a nice uptick in the volumes this year. We're not at the point now where it's, hey, we could say it's great profitable growth for us. But as we dabble in some of these things, some of them are going to stick, and the more you try, the more opportunity you have going forward, and we're going to be very judicious in the way that we allocate capital to those growth opportunities. But the investor surveys always come in and what they always tell us is that the first priority ought to be reinvestment in the business, and that's something that CSX has been focused on historically in terms of keeping the infrastructure in good shape. But recently over the last couple of years in investing more in growth and strategic capital.

Okay. Great. Maybe we could talk about headcount for a minute just because that's been a focus for everyone in the industry. Any updated thoughts on the headcount trend sequentially in the fourth quarter? And then, as we move into next year, if the industry and your business starts to experience some nice volume growth again, fingers crossed, are you in a position where you can keep headcount relatively stable and experience that operating leverage?

Yes. So we certainly have added a decent amount of headcount this year as well as last year, primarily to the train and engine forces. And what we saw in 2022 as the -- as operations was far below where we wanted it to be, we recognized that we didn't have the right number of people to run the operating plan that was most efficient for our network. So we've hired for that. We are now at a point where I would say we are hiring still in targeted locations where we're still short or where it's a really challenging labor market. We're seeing higher levels of attrition in certain areas of the network. And the philosophy being, look, if we have to pay a little bit in guarantees, and we're talking about a little, not a lot of dollars, for the opportunity to make sure that we have the crews where we need them to run an efficient plant and meet the customer needs, that's something that we're going to do. And we're going to err on the side of having a few extra people in those key locations as opposed to a few short just given the lead times on the train and engine side in particular. In terms of sequential headcount, Q3 to Q4, I think you'll see us be up a little bit again as we get into next year. If we were to hold headcount flat to where it is today, we'd be up about 1% on average year-over-year. That's just the carryover impact. We'll probably add a little bit here and there strategically. And if we do that, and when we do that, I think that does give us tremendous capacity to grow into it. One of the things that Mike Cory, our new Chief Operating Officer, has really been focused on is where do we have opportunities to fill up trains that have capacity or in places where those trains are running well below the length that they ought to be running, where do we have opportunity to maybe make some tweaks to the train plan, which could reduce the need to hire those crews in those select locations. So I do think there's a lot of opportunity to grow into the level of headcount that we're in right now. Obviously, if it comes in unit trains, it's coal or grain, what have you, those, you're going to have to hire to run those unit trains. But across most of the merchandise network as well as intermodal, we've got space.

Okay. That's helpful. Maybe we could talk about coal for a moment just because it's been an area of significant volatility. And I don't think you mentioned it earlier in your remarks. Any update on the coal market? What you're seeing in the fourth quarter from both a volume perspective, but also coal RPU, which can move things around pretty significantly in terms of earnings?

Yes. So I would say the coal market is holding up fairly well for us. I think if you look sequentially, Q4 volumes in coal are actually up a little bit versus the Q3 run rate. That really is across both export and domestic, which is nice to see. On the export side, there's plenty of demand out there and not enough supply on the global market. And so the U.S. has become a really important supplier, and we don't see that changing. We have some new mine capacity that's going to be coming online towards the end of this year, maybe into next year. And that will support continued strong demand for export coal coming out of our service territory. On the domestic front, it's been holding in probably better than we expected over the course of the year. We did see some inventory restocking earlier in the year, and our customers have continued to place orders as we've gone throughout the year. As we go into next year, I know there's some questions in terms of what coal burn might look like domestically. We're not necessarily hearing doom and gloom from the customers that we serve. I would say we're not necessarily projecting growth either within the domestic coal space, but we think we will continue to move a decent amount of domestic coal. And then in terms of the pricing side of the equation, I think the one that's most sensitive to our business is met coal prices on the export side. And those have been supportive, albeit a little bit lower than the record levels that we saw in 2022 for most of the year. And they can change very quickly. We saw about a week ago Australian coal was trading at $350 a ton. I think the last I checked, it was right around $300. So that can have a pretty big impact in terms of our RPUs because most of those contracts reset either monthly or quarterly -- far be it from me to predict exactly where that's going to go into next year. But we do think that regardless of where met coal prices go next year, we're still likely going to be above kind of that long-term historical average, just given where the supply-demand dynamics fall out.

Okay. In near term, I think Kevin had mentioned coal RPU sequentially being up kind of low mid-single digits in the fourth quarter. You still feel comfortable with that?

Yes. Still consistent with our expectation, yes.

Okay. Great. We'll rotate to a question in the back, and then, we'll go over here.

A question on technology [indiscernible].

The first part -- so a question on technology. I heard about OT, but what was the first part?

So how much have you invested in those areas?

Yes. Yes. So -- look, we're a company that has been around for almost 200 years. Our technology, in many cases, is on very antiquated platforms. We're one of the few companies outside of the banking industry that still uses a mainframe. And so -- I got a team together about a year ago, and I called the team Data to Dashboards to Decisions. And the idea being that when we're trying to make real-time business decisions, most of the time, we're spending 95%, if not more, of our time bogged down in issues with getting the right data, scrubbing the data, and then building the dashboard. We're not spending enough time making real-time decisions. So we are investing in moving that data out of our data center and on to the cloud, which I think is going to make us tremendously more nimble in our ability to not dissect and figure out what happened yesterday, but to actually look at what's happening right now and what do we think is going to happen in the future and how are the decisions that we're making today going to impact the trip plan in the next 24 to 72 hours. And so I think there's a tremendous amount of opportunity there. When you talk about investments in technology across the railroad, I think all the rails have been talking a lot about inspection technology. The FRA has not quite come along with the rail industry in terms of our ability to effectively leverage these technologies to their full capability. But that being said, we still are getting tremendous benefits from being able to use autonomous inspection cars across most of our core network. They're traversing the entire core network once a week. They're picking up small variations in track health that we -- otherwise, the human eye would not have been able to pick up. And that's resulting in a significant decrease in mainline derailments. We're seeing the ability to better visually inspect through a machine the railcar and have better predictive technology around locomotive health. And when you put all that together, you're talking about a network where we might run 400 trains a day. If we have 10 of those trains across the network that shut down because of a mechanical failure or a derailment or whatever it might be, you think about the impact that, that has not only to our cost structure, but also to the customer. It is meaningful. And so the more of that, that we can eliminate through investments in technology, the better off we're at. I think we've got a really good story to tell. There's more meat that needs to be put on the bone in terms of the way that we share that with investors, and that will come in time. But our investment in technology has gone up a little bit. It's still a relatively small portion of our overall capital spend.

Okay. There's a question over here.

Yes. Mine is just a follow-up on the railways. Just in terms of [indiscernible].

Yes. And Matthew is here in the front row. Matthew, do you have the latest split? It's right around half and half, I think.

Yes. Exports continue to grow [indiscernible].

Yes. So just below half and half. And we do break that out in our financials, the tonnage. Yes.

And before we go to this next one, you mentioned some new mines that were coming on. Is there any way to size up what that impact could look like?

Yes. So I mean it's 4 million tons of new capacity that's going to be coming online. Now, there may be some offsets with some mines that ramp down a little bit, but we definitely think it's a net gain for us.

Okay. Great. Next question here.

Just in terms climate change is a global issue, as a macro level on your coal business, how do you foresee that?

Yes. So question is around climate change. I mean I think the -- look, the demand for met coal globally continues to be very strong. We don't see that changing anytime soon. And even if that demand goes down a little bit, the U.S. continues to remain a key swing supplier. There are certain types of coal that we move that aren't as readily available on the global market. So we think there's a nice longer-term outlook for that. In terms of domestic coal, look, we've got a lot of capacity that's come off over the last 10-plus years off of our network that we used to move. We've been able to absorb that, continue to grow margins, continue to grow our profits. And so the utility coal business will continue to be in secular decline. We don't think that that's going to accelerate. If anything, we're seeing some of that get pushed back when you think about the demands on the grid between EVs and data centers and those types of things. The demand to continue to run coal-fired utilities is out there. Those will, at some point, come to end of life, but I think we've got a little ways to go.

You don't -- just as Bob, you don't see [indiscernible].

That -- I think our coal plants are going to continue to run for a little while here. There will be some that will come off-line over time, but we don't see the kind of decline that we saw in the early 2010s coming again any time soon.

Maybe we could talk about truck-to-rail conversions for a moment because I feel like that's a pretty significant piece of the story going forward. We had Union Pacific doing a fireside chat just a moment ago. And their comment was just because service is better for 30 days, a customer isn't going to pull the trigger on that conversion, but your service has been better for some time. So I'm curious, one, when you started to see that inflection point in conversions based on a sustainably better service product? And how you're thinking about the potential for an acceleration in that area into next year?

Yes. No, that's a great question. So I've been to several customer locations over the years. And every time I go, I'm really frustrated because I look at the number of truck base they've got and all the outbound product getting loaded up into the trucks and the empty railcars are sitting right next to them. But you just see the amount of opportunity that's there. Most of the plants that are rail-served, in many cases, are also truck-served. So in some cases, those plants that might be running 50-50 rail and truck, can they very quickly shift to 60-40 rail? Absolutely. If we're running well for 30 days, those kinds of shifts occur. And you know what, if we're not running well for 30 days, they're going to shift right back to truck very quickly. But there are other customers to the point you made that are going to take a little longer, right, because they've been burned in the past. And so that now they are 80-20 truck, right? And to get them back to 50-50 is perhaps a monumental shift in thinking, a significant amount of trust that needs to be put back in the railroad, and you've got to be able to demonstrate that over a period of time. Are we seeing some of that happen? Absolutely. Like I said earlier, some of those wins that we've had, we haven't seen the full impact of it show up yet in the volumes because of where the industrial demand is at. That's going to work its way in over the next couple of years. And then, I think there are more to come as well. And I'd be remiss if I didn't also mention industrial development, which is such a really exciting opportunity for us in terms of the number of new facilities, manufacturing plants that will be coming online across our service territory over the next couple of years. So yes, you've got truck-to-rail conversion. Yes, you've got rails competing with each other and how can we win in the marketplace there? But you also have this dynamic of industrial development, which is as exciting as it's been in my nearly 20-year career at CSX. I don't think we've seen this much activity in that in those 2 decades. And so that -- Kevin has talked about -- our Chief Marketing Officer, has talked about that adding 1 to 2 points of growth for us on a net basis over time, even next year -- we were looking at the numbers on the merchandise space, we think industrial development projects that are coming online or came online this year could add roughly 1 point of growth to our merchandise business as early as next year with more to come in '25 and '26.

Okay. That's great to hear. And it's also hard to quantify the truckload conversion opportunity. When you think about that in comparison to the industrial development opportunity you just described, is it similar, is it greater, especially as we move into next year?

Yes. No, I think it's reasonable to assume 1 to 2 points from industrial development, 1 to 2 points above the economy from truckload conversions. Is that all going to come together to 4% growth in excess of the economy? That might be a bit aspirational. But I think those opportunities are certainly out there for us to go win as we do a better job of serving the customer. And I think it's also in -- let's not forget, it's in the public interest to move more of this freight by rail, not only from an environmental friendliness perspective, but I've got 2 teenage drivers, and I would much rather not have those trucks on the highway, I'd rather have them on the rail. So I would ask you, please remember that the next time you're sitting at a siding or at a crossing and you're frustrated because you've got a 130-car train coming by, that's 400 to 500 trucks that are not on the highway next to you and your teen drivers. So...

Okay. Well, I think the jury is still out on 2024 in what happens with the economy. But when you think about these opportunities you just described, do you have a pretty high degree of confidence that you'll be able to outgrow IDP or GDP?

Yes. I mean we looked at our merchandise volumes, right, all the way back to over the last 10 years, and there's really only been 2 times when we've been able to outgrow IDP, one is this year, and one was back in 2014 during the crude-by-rail boom. And during that period of time, we choked on the volume we were operating about as poorly as I've ever seen in my career at CSX. This year, we're outperforming the economy, and we're doing it with some of the best service we've ever had. So am I confident that we can do it again? Yes. Next year? Yes, I am. One of the things I've been doing financial planning at the company for most of my career. One of the things we love the most when we're doing financial planning is carryover, right? Things that happened in 1 year that are absolutely going to continue into the next year, and you'll get a 6- or 9-month impact. We've got a decent amount of that. The other is known wins, whether that's on the expense side, where you've got a technology project that's going to reduce headcount or improve efficiency and you know it's coming online or you've got a new customer that's building a plant and you know that plant is coming online, you're going to serve it. We've also got that going into next year. So you put those 2 things together, and I think we've got a pretty good formula that gives us a lot of confidence we'll be able to grow next year.

Okay. Great. And maybe we could pivot to the cost side of the equation and the OR. I know we mentioned it in the fourth quarter earlier. But any update on the impact quality is having to the OR this year? And then let's just kind of set that aside and think about the OR opportunity into 2024, obviously, operating leverage if volumes grow. But outside of that, are there any swing factors we should be mindful of?

Yes. So when we acquired Quality, which is now just under $1 billion revenue for us, but it is truck-like margins, what we said is it's about a 250-basis-point impact to the OR, and it continues to be. So yes, if you strip that out, we are operating at a sub-60 OR so far this year. Can we do better than that over time? I think that's -- if you lay out the formula I talked about earlier, where we're growing because of industrial production and truck conversion and competitive wins ahead of the economy, we're pricing at or above inflation, we're seeing decent incremental margins and flow-through, yes, our operating ratio should improve from where it is today. Now, as we get into next year, I'm not going to give guidance in terms of 2024 just yet as we have the plan come together. Inflation on the labor side is going to be a little bit higher than what we're used to. We are cycling that insurance gain that we had earlier in the year, roughly $50 million. There are some technology expenses that are coming in. The more cloud computing you do the more operating expense you have on the tech side versus capital. So there's elements of those things that will -- that add to the cost base somewhat. So we'll talk about margins specifically in 2024, but the longer-term story, yes, we absolutely can improve.

But there's nothing high level that looks like it could be a big swing factor into next year, whether it's something like gains on sale or anything else that's unusual.

Yes. No, I think the big gains on sales are behind us at this point. We're looking at how do we leverage real estate for growth at this point, not to say there aren't some things still out there. But no, the biggest swing factor is going to be are we able to grow in excess of the economy and what does the economy look like going into next year. Fuel price has a big impact on margins as well, just given the nature of the surcharge program, so that's hard to predict.

Okay. A question over here.

Yes. I think if we just go back to what you said. I am just trying to [indiscernible].

Okay. Yes. So the question was with inflation as high as it was over the last couple of years, and it coming down a little bit next year, can we catch up on the pricing side? I think -- I don't want to forecast price. We don't get into specific discussions about where that's going to land. So I'm going to stick to the commentary, which is really just we're going to continue to price to the value of the service and if we can price at or above inflation that is success for us.

We have one in the back.

[indiscernible].

Yes. So the question was if the economy -- industrial economy softens, can we improve OR? Again, I don't want to get into specific guidance for next year. I'm going to stay away from that at this point. We'll come back in January and go a little bit deeper into that, and hopefully, have a bit of a clearer view of where we're headed from an economic perspective. But certainly, the more support of the economy is, the better that is for topline growth and the better that is for margins. We do have some cost pressures going into next year. So you look at those cost pressures and you say, okay, how much growth do I need in order to offset the known increases in costs that I'm going to be facing? If the economy is down and our volumes are down with it, then no, we're not going to improve margins. But our plan is to grow volumes and to grow the topline next year.

And maybe you could talk about CapEx as well, just from a high level, how you're thinking about CapEx going forward? If it should hold pretty steady? If there's an opportunity to maybe be more productive or efficient on that front and how that influences free cash conversion?

Yes. So we had a tremendous reduction in our capital spend in 2017, '18, '19 after Hunter came and we went through scheduled railroading. And the reason for that was because we were able to free up a tremendous number of assets that we no longer needed to use because we were running a much more efficient rail operation, right? And so we continued to invest in the core infrastructure, the rail, the ties, bridges. We're going to continue to do that, and the benefit of that we're seeing show up in terms of our operating performance, a reduction in mainline track-caused derailments. In fact, we haven't talked about the Pan Am acquisition. But one of the things that we've been doing early on in that acquisition is getting the rail lines up there to CSX standards. And we were just seeing yesterday -- we looked at the data versus last year, this time, we've actually seen on a year-to-date basis a 65% reduction in derailments in the Pan Am territory. So that shows you the power of getting your infrastructure at a level that supports safe, efficient operations and the benefit of that in terms of fluidity as well as in terms of predictability and reliability to the customer. It's really hard to quantify. So we're going to continue to invest in the core infrastructure. We do have inflationary pressures, both on the labor side as well as materials that show up there. We're going to try to offset that with efficiency gains for the most part. And then, in terms of the growth investment, we've gone from, just a couple of years ago, spending maybe only $150 million-or-so in terms of growth in strategic capital to nearly $400 million this year. So it's not a huge chunk of our overall capital spend, but it's a part of the story that supports growth, whether that's rolling stock assets, new car investments to support some of the industrial development and business wins or its investments in the network, siding expansions, the Howard Street Tunnel in Baltimore, which is a bit of a choke point for double stacking our intermodal trains through the I-95 corridor; investments in technology, like we talked about earlier. I think there's a lot of things that we can do to support customer service and grow through efficient use of our capital.

And could you maybe talk a little bit more about the rolling stock percentage of that just because the industry as a whole has not been very active in terms of new locomotive purchases? Could that change for you? And then maybe anything on locomotive modernizations and any tweaks you could be making to that plan?

Yes. So I think the car capital, we have been investing in freight cars as needed, both for fallouts as well as for growth. That's been a fairly steady number last year and this year and likely going into next year. In terms of the locomotive capital, I don't think we bought a new locomotive in nearly a decade. And part of that is because we had about 1,000 units in excess that post-scheduled railroading, we no longer need, but part of that also is as we think about where is locomotive technology going to go from here between battery electric, hydrogen, the use of bio-diesel in certain parts of the network. I think we're -- like we said earlier, in terms of our approach to growth, we're dabbling in a lot of different areas right now, trying to figure out what ultimately is the strategy long term. But we are also rebuilding some of our older units, and we've been doing that over the last couple of years. So we'll continue to do that across both types of units in the fleet. A rebuild gives you a tremendous benefit. It's less than half the cost of a new locomotive. It extends the life of the unit for about 20 years. And the level of reliability of those rebuilt units is some of the best reliability that we have in the fleet. So that's a wise investment to make right now, and we're kind of in this shoulder period, figuring out what is locomotive technology going to look like. And as we grow, at some point there's going to be a need to reinvest in locomotives. I would not say that's coming next year or the year after. But as we look a little bit further out, we'll have those discussions.

Okay. Great. Maybe we could talk about share repurchases as well because I noticed in the 10-Q, there was a new $5 billion authorization. You've kind of been running at this rate of roughly $1 billion-or-so of share repurchases every quarter. Is that a reasonable way to think about the run rate going forward or is there any reason that would change?

Yes. So you're right. I think we did about $5 billion last year. We're on track to do $3.5 billion, $4 billion this year. So I think our approach to share repurchases has been, let's first reinvest in the business, let's make sure we are doing everything we can to maintain the infrastructure and invest in high-return growth projects. And then, we try to increase the dividend every year if cash flow supports it modestly, and then, use the rest for share repurchases. We try to do that opportunistically through the year. As we see opportunities with the share price pulling back, we'll step in a little bit and -- all while maintaining a strong investment-grade credit profile. And I think if you look at us from 2017 to today, our leverage has been pretty darn constant, plus or minus a little bit here and there. So we are managing to that level, and we're using that additional cash flow to support the buyback program. As we go forward, it will be a function of how much -- how many investment opportunities do we have in other things that are core to the business as well as how much incremental capacity do we have on the debt side based on growth in earnings.

Okay. Any other questions from the audience? One in the back.

[indiscernible].

So the question is who's going to have the best relative to margins? I'm not going to weigh in on all the other rails and where their margins ought to be. We're going to stay focused on what CSX can do. And we could have much better margins if we shrunk the business and got rid of some of the business that's over here. But the business that's over here is still extraordinarily profitable for us in terms of return on capital. And so we're going to continue to invest in growing the business. And that should translate into margin growth over time through the kind of the equation that we've been through here. Does that mean we're the best OR in the industry or not? I don't know. We'd like to be the best total shareholder return in the industry. And we think the winning formula there is service growth. And we haven't talked about it yet, but how do we make sure that we continue to empower the employees? Joe Hinrichs, our CEO, is a big believer in the fact that we are a service-related industry. I think historically, the rails have kind of been seen as a commodity. They're going to show up whenever they show up, and you take it or you leave it at whatever price they're offering. But Joe doesn't see the world that way. He sees us as a service provider. And we've got 18,500 employees out in the field every day who are interfacing with our customers, and the more discretionary effort that they are giving, the better the experiences that the customer is having and the more that unlocks our ability to grow longer term. And so the investments that we're making in our frontline supervisors and the way that they interact and treat with -- treat their people, the investments that we're making in training new employees and mentoring and coaching them, I think are going to pay off long term as well in terms of that winning balance profile for us.

Okay. Great. Any final questions from the audience? If not, I'll end with one. Obviously, it's a tricky macro environment. So as you think about 2024, what's the economic backdrop that you're planning on as you put together your budget? And then, maybe longer term, there have been some questions around a 3- to 5-year strategy. Could we see more details around that from CSX? Any thoughts about doing an Investor Day or providing more numbers around that multiyear outlook?

Sure. Sure. So I don't think we're smarter than anyone else in terms of where the economy is going to be next year. We are not banking on a huge rebound in this immaculate soft landing, but we're also not banking on a deep recession either. So I think we're in the camp that most are, which is it's maybe not going to be the most supportive environment, but we are kind of coming off of comps this year that have not been great either. So that's sort of the baseline as we go into next year. And then, in terms of the longer-term vision, I think the team is in place, and with Mike Cory on board, there's a lot of energy and excitement about the initiatives that we've got in terms of growth and service as well as some of the efficiency opportunities that he and the team are finding. So I think it's a really good story to tell, not only on the growth and service side, but also in terms of the technology side. There's a lot of interesting stuff that's happening there. So I'm not going to put a stake in the ground in terms of what that means and how we communicate to investors yet. But I think you'll see more specificity, more meat on the bone from CSX as we get into next year.

Okay. Great. Well, we'll wrap it there to stay on time. Thank you so much, Sean. Appreciate it.

Thank you.