CSX Corporation (CSX) Earnings Call Transcript & Summary

My name is Daniel Imbro. I'm the Transport Analyst here at Stephens. Pleased this morning to be joined by CSX. From the company up here, we have Chief Commercial Officer, Kevin Boone. So thanks for joining this morning. As a reminder, this will be a fireside chat format. So I'll start with Q&A. Please ask questions as we go. I want it to be interactive if you have questions. And this is webcast, so we'll pass around a microphone for audience questions if you have them just so we can have the transcript to be accurate.

But yes. Well, Kevin, I want to start a little bit maybe high level. Since the Analyst Day coming off a bit, a lot of focus on long-term growth and opportunities. But when you look across the network and execution, just how is service handling the disruption this year? Maybe more of a state of the union on the rail itself and then we'll get into Q&A after that.

Yes. I mean, look, it's been a challenging year from the Key Bridge incident that occurred. And then probably the most disruptive hurricane that we've had in the last 10 -- last decade plus. So it's been challenging. But I can tell you, Mike and the team really recovered quickly. We had disruptions in Florida and obviously, Georgia, North Carolina, all those markets. And our customers got disrupted, too, but we're back up and running, feeling very, very good about where we are. Obviously, we have a line, the Blue Ridge that we'll have to work on to get back up and running, but we're diverting traffic around that line today and serving the customers as best we can there. But hopefully, by midyear next year, we'll have that back up and running. So I feel very good about the momentum we have. Our intermodal product still remains, I think, best-in-class in the East. And we're really leaning into that. I think you're seeing some of the results there. And I think the team is hitting their stride. Mike will tell you, our network is a lot more complicated than where he came from in Canada. And he's really starting to hit his stride after a year and you can see some of the creative things that we shared at the Investor Day in terms of taking out-of-route miles and other things that are really impactful, both from -- the service gets better, but also the cost. And so those things, we expect to only accelerate over the next few years as those ideas come forward and he continues to coach and bring those ideas forward with his team. So yes, I think we've got a lot of momentum. It's a better product and better service than I've ever had in terms of -- from a sales perspective and being able to go into a customer and really lean into that. So it's been incredibly helpful.

It's great. Well maybe moving a little bit in more near term to start it off. Let's say quarter-to-date. So volumes are still down modestly but improving week-to-week as we move away from the hurricanes. Your outlook assumes modest volume growth if I recall correctly this quarter. So how are you feeling about trucking versus that in the quarter? And how are conversations going with shippers as you think about -- you mentioned going and selling the business?

Yes. I think when we started off the quarter, we were dealing with the strike, right, at the East Coast ports. And so that got a slower start on our international business. That's fully recovered, and we're seeing really nice volume growth there. Obviously, we had the deal with the Blue Ridge as well and the impact there and we've kind of sized that impact for the quarter. Otherwise, we've experienced a little bit of outage at some of our coal mines in terms of just longwall moves and things like that. So that's been a little bit slower in November, but we expect that it could recover in December, and you've seen that in the carloads. That should hopefully improve, and that's mainly on the international side of our business. And then everything else, I would say, is steady. We did have the best domestic intermodal week last week since 2020. So second best week since 2020 on the domestic side, so that's encouraging. I think we're seeing more of a normal kind of peak season. The last 3 years have been anything but normal. So we're seeing that into the Christmas holidays and all of those things probably play out here a little bit more normally. So that's good to see as well. But we'll see. We're going to talk to a lot of truckers. I'm not here to say the truck cycle is back. But hopefully, I think we have seen some stability at least, right? It doesn't seem like it's going down further. So that's encouraging as well.

Yes. I don't blame you if you do not want to call it out. Leave me to be wrong. Well, I do want to ask about intermodal a little bit. You mentioned the second strongest week in years. Can you talk about -- you guys have gained a lot of share in the business, in your service. Obviously, the truck market is tightening. When you maybe rank order the drivers of that improvement, like how do you think about how much is CSX specific and maybe share gain versus the intermodal market itself improving a bit due to the truck market or anything else?

We're not sitting around waiting for the truck market to recover, and we've laid out a lot of those initiatives at the Investor Day, whether it's the Meridian, right, and accessing Mexico into the Southeast and Texas and the Southeast. We think that's a great opportunity for us. And that service will start up in December, a partnership with CPKC. So we're really driving forward on that, and we'll be ready to start moving trains over that corridor. We also have a number of other initiatives. We talked about the Howard Street Tunnel. That will be a project next year that will add some costs, but we're going to do it very, very quickly. And hopefully, by the middle of the year, third quarter, late third quarter, fourth quarter, we're going to have new service. And it really opens up our network. It's going to be a huge opportunity. I can tell you, people that have been in our intermodal team for 20, 30 years, they've always talked about it, but now we're actually doing it and doing it very, very quickly. There was a previous plan to do it over 3 years. That would have been highly disruptive. So now we're doing it in 6 to 8 months. And so we're excited about that. But there are a lot of other initiatives we're working with our customers on. So I think those are accelerating. You'll see that accelerate. Certainly, from a trucking perspective, I think one of the challenges is the last 2 years and a lot of the procurement, the decision-makers, our customers that are making the decision, they were getting savings without doing anything. And when you're looking at that proposition to go in and say, "Hey, I can sell you savings" the do nothing scenario is driving a lot of cost savings for them. I think we're going to go into next year where that's not going to be the case. I think they're going to see truck rates, hopefully at least modestly, increase. And I think that catalyzes another discussion where if they're looking for further savings, they're going to look harder at intermodal. So we're going to be ready to capitalize on that. We think we have plenty of capacity to grow. And so we're ready to take it on.

And you mentioned the Meridian there. But for those who may be less familiar with it, can you just unpack or talk a little bit about what that is, why that's now an opportunity for you guys, how it came to be. And then really, what it opens up in terms of new lanes in that business for you.

Yes, we had a lease line to the G&W that essentially connects to the existing Meridian line, which we didn't have an interchange access to. And it's a very efficient route when you look over from the -- over Texas into the Southeast that we didn't have access to before. And CPKC acquired the other portion of the line that we hadn't leased out. And now we are connecting our lines together. And Schneider has been out there as the first one to kind of market this new service. There'll be others as well. So we'll not only hopefully capitalize on the intermodal side, but there's some carload business as well that we'll see. And being able to access that market in a very efficient way is a huge benefit for our network. Quite frankly, the routes before and the connections we had weren't as competitive to truck and where we want to compete as they will be now. And so that's really what catalyzed it. A lot of conversations of how we can just continue to create opportunities for our network. And when we look at all the strategic initiatives that we're doing, it always is based on how can we drive more volume to our current network and really capitalize on the strengths that we have, which is a triangle on accessing those. So more contact points. It will actually create some resiliency in our network, too. When you think about New Orleans sometimes, right? It has some issues. Another opportunity for an interchange over that if you need that backup plan.

That's helpful. And while we're on intermodal, as I think about the focus on revenue per carload, and that's been challenged here for a while. Part of it's in mix, part of it's just been a competitive pricing backdrop. How do you view the puts and takes as we view the sequential move to 4Q and into next year? Can we get back into a more inflationary kind of revenue per carload growth on the intermodal side into next year? How do you think about that shaping up?

Yes. I mean if you look at it, a big factor this year was the fuel surcharge, right? A huge, huge factor, particularly for this quarter, down quite a bit, fuel is down. And obviously that, from an RPU perspective, that impacts it. It's largely a pass-through. But as we become more efficient on fuel, obviously, that's gained some benefits for us. But yes, I think we've got to see the truck market turn to really become bullish on pricing. Like I said before, I think we feel like we're at the bottom and we participate with a lot of our customers as the pricing environment improves. We have a portion of our business that plays in the spot market. So we would see that pretty immediately. But others are a little bit deferred. As they see pricing goes up, there's a little bit of benefit that comes.

Yes, I was going to ask that. Historically looking at past cycles, what is the typical lag before we see the truckload market tighten and then we see it in your report?

Yes, we see a quarter or two of kind of lag before we'll start to see the real pickup there for us.

Got it. At the start of the quarter, you mentioned one of the disruptions was the strike. And while that was nice to be passed, it is kind of just pushed to January. So curious, I'm not sure if you have any update, but how you're hearing negotiations are going? Do you think there's any potential we avoid a disruption again in January? Or do we just replay this playbook again to start 1Q, given what you see out there now?

Yes. I really have no inside look at how those negotiations are going, I feel like there's confidence that something will get done, hopefully. I will say, our network and the way they operated it going in, we were ready to run really, really quickly coming out of it, and that really helped us in the market, staging trains and doing all those things. So I have to point out, our intermodal team did a fantastic job of kind of balancing that and reacting in a way, and we recovered very, very quickly following that and a lot quicker than I think we normally would have in prior strikes or any other disruption.

Maybe moving off of intermodal, thinking about metals and auto remain topical. They've been the weak spots for the whole industry really for the last few months, and it sounds like into 4Q. Curious, one, how are those customers thinking about a time frame when that picks back up? Are those customer conversations getting any better, rates come down? Are you thinking these headwinds stay into kind of first half of next year? Just how do you think about those markets actually shaping up?

Yes. It's probably been one of the more disappointing markets for us this year. And there's a lot of different factors that drive it. Auto has also been a disappointing market overall. And obviously, that's a big driver of steel market and metals, our metals business. So those go hand-in-hand a bit. I was with a customer last week, and there's definitely some optimism coming out of the election and what that could potentially mean. There's obviously the U.S. deal transaction that's out there, that's going to play out, and that's going to have ramifications of where production is going to want to go and what that means for the business. But I do think there's a little bit more optimism. A lot of our story on the industrial development side is coming in the metals market. We, quite frankly, don't touch as many of the steel producing facilities today. And when you see the new investments being made, we're going to have a lot more access to that market, which we're incredibly excited about. And so that's happening in real time, and you'll start to see that impact our numbers as we move into this 3-year period that we talked about. So the move away -- the move to electric arc furnace is really going to benefit us and our access to that volume, particularly in the '26-'27 time frame.

Helpful. So we don't need -- we don't foresee a near-term macro improvement in those markets, but the investment you guys are making and some of the visibility you have gives you more confidence looking a little further out, fair to say?

Yes. What I do know is that market can turn really, really quickly. And so we'll see. It's one of the -- at the Investor Day, I said, I think when you look across our portfolio, I think there's cyclical opportunity when that comes. We'll see when that actually materializes. But when you think about housing, which is a very important part of our business, the auto business, steel and the metal side, those things are all relatively depressed versus where we would normally see that. So hopefully, we'll see that wind at our back. We're not necessarily expecting that next year, but that is an opportunity versus where we are today.

And in your mind, when you think about it, that's the hole in the portfolio right now, those are the weak categories, those are all interest rate sensitive. Is that really the biggest linchpin you think that catalyzes demand of those categories? Or is there something else you guys are seeing, whether autos have inventory issues, things like that? What are the things that need to change that would necessitate an increase in those end markets?

Yes. I think interest rates are incredibly important. When you think about why we're probably below where we thought we'd be on the auto side, I think it's largely to do with interest rates and affordability. We also haven't seen the manufacturers really cut prices as much as they normally would, I think, in a cycle, so they're holding price a little bit longer than normal. And then on the housing side, it's just really, really impactful, even to our intermodal business, shipping household goods, things like that are really helpful to our network. So those things recovering, and those are really interest rate sensitive, would be helpful to our volumes and pretty impactful.

[indiscernible]

Sorry, can we get a microphone real quick cause we're webcast.

Just on coal, maybe just what your outlook and sort of forecast? And then maybe how the new administration, like there's obviously big power needs or power growth across your guys' service territory, how that might change the outlook for that over the next sort of 4 years?

Yes. I know on the domestic side, and when you think about our business today, about 1/4 of that is now domestic coal, right? The one that a lot of people want to talk about, secular headwinds and things like that, that we have. We have said that we have a couple of shutdowns happening next year that Sean talked about. But beyond that, what I see, particularly in our Southeastern sort of plants is utilization rates have opportunity. And there's been a lot of, obviously, political pressure on that and other things, where natural gas prices really matters when we get up in that $3.50 range, I think we're around $3 today. I know that really accelerates their dispatching decisions and favors -- starts to favor coal. So we'll see where that goes. Behind the scenes, many of coal plants and customers that we serve had a plan for each administration. And I think you'll see some of these plants getting, at least from a retirement perspective, getting pushed out given all the demands from the data centers and other things that they see coming. And quite frankly, it's a very, very resourceful power source to basically, when demand is peaking, to really serve that. And when you talk about the resiliency of the grid and all those things, I think in the next 5 years, we'll probably see something there that is going to make folks maybe change their mind about how quickly you want to retire these things because they're very helpful in those environments.

[indiscernible]

Yes, we haven't -- we're not taking a -- I think we laid out kind of flat volumes on the coal side over the next 3 years. And we see some declines on the domestic side and a lot of that volume continue to get pushed in the international market, which we still see a lot of demand. Places like India continue to grow in those markets. So we think where we are today, even some of the thermal coal will get pushed in that international market, and we're already working on solutions to do that.

I'm glad we shifted to coal. There was too much talk about affordability. For a recovering autos analyst, I can't keep going back there. But if I do think about maybe coal pricing, that's obviously been topical for the last 6 months. We saw a big drawdown kind of in export coal pricing. How do you see that backdrop shaping up? Can you remind us how you expected the fourth quarter to look for pricing backdrop? And then how we're seeing that play out so far just to help level set that?

Yes, we're right in line on the pricing side. It's probably been the first few months where we've seen stability and that has moved around quite a bit the last 2 years. So it's been pretty stable here. So nothing's really changed from a pricing assumption. I did mention some of the slower longwall moves and some other things, a belt outage at one of our export terminals that's impacted the last 2 or 3 weeks here, that will move through and we expect a much better December hopefully from just a volume perspective. But yes, I think it's -- I do think longer term, we're sitting at that kind of $200 met coal benchmark price today. Talking to a lot of folks, I think the price wants to be higher given the cost curve and where, globally, costs have risen over time. So I think hopefully, we'll see that migrate a little bit upwards next year, global demand picks up just a bit.

And I know you guys haven't shared it as much, but you talked in the past about moving up the minimum contracts around your export coal. And as I think about where we are at the $200-ish level, are we near the floor, that sensitivity getting lessened if there were declines from here? How should investors think about the sensitivity of export coal pricing from today's level?

Yes, I think we would have sensitivity both to the upside and obviously on a lower price from the $200s area. Every contract is different. Over time, you want to take up the floors because your costs are going up. There's cost inflation over time. So we actively work to do that. But yes, there would be price sensitivity on both sides.

Helpful. And then you mentioned kind of that $3.50 benchmark for when nat gas prices get there, we'd see domestic coal. Is it binary that we get there and it flips or as we've even moved up towards $3, how do domestic coal -- how do demand pick up at all? Have you seen any trend change there?

Yes. Typically, a lot of our customers will just have a baseload assumption they go into every year, and they give us pretty good visibility, particularly after COVID and all the disruption we had of so we can even load it, make it ratable through the year. So we'll have that base load. And then if you see additional demand opportunity with natural gas prices going up, and that's when we could see some acceleration there. We're not assuming that in the next year, but that could be an opportunity.

And just one more on that. [indiscernible]

Yes. The question was just around coal inventories on the domestic side. And they have gone back to normal levels. That could change quickly. We get a cold winter here. But they're more normalized today.

That's helpful. Moving over to the merchandise kind of side. If I look back at the Analyst Day, 2 weeks ago, you laid out a pipeline of projects coming online. And do you think the pipeline has changed from the one you guys laid out about previously? Just how do you feel about the business coming on to the rail today? And what's the feasible timeline you think of some of those projects fully materializing into more merchandise carload volume?

Yes. It's been a lot of work in the last 3 years, putting process together, making sure we're following up on the pipeline. And really as a team, investing in our capabilities there. And so it's starting to materialize, obviously, a huge backlog of over 500 projects there. If you think about a normal project, particularly the larger ones are on the metal side and others, you'll have a startup and then it will be a 12- to 18-month ramp, hopefully, 12 months. And I think that's demand-dependent. Obviously, that impacted it as well. So I would -- you should expect over the 3 years, that will continue to be a bigger driver of our growth year-over-year. That's how I think about it and where we see the timeline of these projects. And a lot of the shovels are in the ground today. A lot of those -- a few of those, we're going to hit kind of back half of next year. So you'd see the big benefit in '26. So more of a story in '25 versus '24, and then '26 and '27, a bigger story than the previous year. So there is a ramp up.

And earlier in this discussion, you mentioned how metals are becoming a bigger piece of the business, I think, over time and minerals, I think, were a bigger pie, piece of that pie. Is that more CSX seeing an opportunity there and proactively growing into that with some of your projects you're doing or happens to be what's coming on to the rail? Just from where you were, kind of curious how much a proactive growth you had in certain categories because of whatever you see as an opportunity versus what's coming to you.

Yes. I think on the metal side, more probably a proactive approach where we really saw where the market was going and made sure we were in front of it and the trends, and had the sites and all those things available and really capitalize on that. From an aggregates perspective, we have a unique position in Florida, and we're the only Class I that goes all the way into Florida, and that's just a market today that's at a big deficit for rock, and we're seeing the need to have to move that rock further and further, and that just benefits the railroad and what we're doing. So a lot of investments, we're seeing by our customers create new load outs. We're actually seeing more investments also on new aggregate locations that will be directly served by CSX as well just to serve that Florida market. So the Southeastern market in general is very good. I would say Florida is the crown jewel of that market, and we really benefit from that. And so that's more of where we've been positioned and really capitalizing on that.

And merchandise pricing, always topical, but remains a question for investors, especially just given competitive dynamics out there. I guess how do you feel about price cost here today on the merchandise side? And how do you feel about that into next year as maybe inflation -- headline moderates, hopefully? How do you feel about your ability to continue to get price cost next year?

Yes. I mean, first of all, it's a lot easier to have that discussion with the customer when you're delivering value from a service perspective. And I think we continue to do that. We continue to think we're going to get stronger. A lot of my conversations, even I've visited a number of customers last week, is how do you deliver value outside of price? And there's asset turns, there's capital avoidance and those things, and I think we're being a lot more strategic in how we're thinking about it. A lot of our merchandise customers, they own cars, like how can we partner to reduce our fleets because that's huge cost savings. So we're trying to get -- obviously, price is an important component to our customers, but we're having those conversations where we can put together our value proposition that get savings that maybe justifies us and our ability to get rate. And nothing fundamentally has changed. We've always competed with our Eastern peer. That hasn't changed. I don't see anything fundamentally different this year than last year. I would say we've had a more consistent service for a longer period of time. And I think we've been able to capitalize on those relationships and build that trust. My big goal is to not see our customers view us as a commodity, view us as a partner, and we deliver a lot more than -- moving back and forth from one railroad to another is going to create a lot of disruption. And both -- I think we have a great technology product that gives them a lot more visibility than maybe they experienced on other railroads, and we're continuing to work on that. And then how are we really actively looking to take out costs in their network. And so the switching costs get higher. And that's the focus of the team, it's really working towards those and kind of decommoditizing our business a bit in every way that we can.

And I think the answer here might be both, but I'm hoping it isn't. When I think strategically from your seat, though, when you look at the service outperformance for years now, it's been a couple of years of really strong service. Do you hope that gives you more pricing power as you go to bid on the same business? Or is that more of a way to keep pricing more stable and drive more share to the rail because you're more differentiated? What is the priority when you go to market? How do you view pitching that service agreement you've had for a couple of years and technology you have when you go to customers?

I mean, look, it's not loss to me. The pricing is still a very, very important component of what we do. And I'm in a much better position today given the value we're driving. And we compete, right? We compete with other modes and our service is more reliable. And asset turns are better, and they're having to invest less. We should be able to get a better price for that. And so we continue to focus on that. What I do think is longer term sustainable is volume and price. I think if you go in one direction and you over -- weigh one or the other, I don't think that's a long-term sustainable approach. And we want to have customers that want to give us more of their wallet share. And we are seeing that. Three years ago, there's -- I can name off of the top of my head, probably 20 customers that wouldn't even have the discussion with me about share, about particular opportunities, given where our service was and given all the challenges we had. And those conversations are just vastly different, and it's exciting. We're still really early on in it. I mean, to be honest with you, about given where we are, given the leadership support that we have. Mike's support, working with Mike and taking him in to a customer meeting, there's nothing more valuable than that. His team, Doug on his team, we just took them on a trip to meet some large customers last week, and that's really an asset for the customer to see that there's alignment, right? And I don't think that always exists at a railroad. I can tell you it doesn't from personal experience, but I'd see it across this industry for a long, long time. And we think that's a differentiator, really, creating that alignment across. We're not always going to do what the customer wants, but we're going to have the discussion in that quickly. And our ability to react, these markets are changing constantly. And I think the railroads have always thought of themselves as a static network. You can't do that in the environment we are in today and really grow your volumes.

Still on intermodal and thinking about trucking business. [indiscernible].

Yes. I think this always has to be valued, and I still think even a weak truck market today that exists, to your point, the rate of change and just having that next lever to say, okay, my trucking rates, maybe they're modestly up next year and now I'm looking for another source of value, is really something, I think, is a catalyst for us. And we're starting to see little signs of that happening. And then you have the environmental benefits as well. And those are still important even post, obviously, this election, which they're probably going to be a little bit deemphasized. But it's still important. And I still hear from customers every day is, okay, I get savings and I get this environmental benefit because we have strategic goals at the top to hit those. And so yes, I do think the rate of change is probably more important and be different than obviously the last 2 years that we've experienced.

And maybe to go back to the idea of partnering more with your customers. That was a big theme, I thought, from the Investor Day was that partnership. And something -- I think it was Christina, who spoke about it. Forgive me, there were a lot of speakers. What was the real estate projects you guys are working on and really kind of investing for your customers proactively? For those who may have missed it, can you just talk about what some of those investments you're making are and how the customer response has been? I'm curious to hear that.

Yes. The industrial development and new projects doesn't come with a lot of investment from CSX. It's how are we partnering, how are we creating shovel-ready sites. In many cases, we don't own the site, but we might spend some of the pre-engineering to make sure they're ready and available and make that investment up front. Those are hundreds of thousands of dollars of investments. Those aren't tens of millions or millions of dollars of investments. In the rare case we have bought plots of land where we think they're just strategically positioned, where we want a rail serve customer on it, and we want to make sure that, that property doesn't get sold to a customer that wouldn't use the rail service. But those are really the exception, and we've made one of those -- one or two of those smaller acquisitions this year. But it's really at this point in the market is having the inventory available, that shovel-ready where customers can act quickly. And one of the key differentiators is power source, and having a power source that they can claim as green or suggest that is green is incredibly helpful, too. So we're looking at the markets. We have a great partner in identifying these areas and getting out in front of it. We're also using technology to identify and make sure we're at the forefront of these conversations because a lot of times, we're seeing in even emerging industries, they are not necessarily aware of rail and what the benefits are, and how are we staying in front of it is really key. And I think we've had a lot of success. We're aggregating all of the projects around. You probably saw some of the work at the investor conference, using AI to go out there and scrub the -- because there's not a central location to find these projects and what's happening. And if you miss that opportunity when they're making the decision, it's lost for 40, 50 years potentially. And so it's been a lot more -- have a larger team on that side and continue to make investments in that team.

Is there a technology on the engine side that you think shows the most promise [indiscernible].

Yes. The question was, is there a technology on the engine side that we see as like a game changer from a diesel perspective. I think it's too early. I don't think where battery technology exists today that, that's viable yet. We obviously are experimenting with hydrogen and some other sources. But I think the challenge with hydrogen is obviously getting enough of the hydrogen. And when you think about recapitalizing our locomotive fleet, it's a pretty large investment. So you want to make sure that directionally, where things are going before you make a $10 billion, $15 billion type of investment over time, that you're right. And I think it's -- it's really too early. We're experimenting with it. We have battery locomotives at yards and things like that, that we're experimenting with. And obviously, the hydrogen engine, we're partnering with CPKC on that one as well. So staying close to technology as it evolves. And at some point, I think we'll be at a place where a decision from an industry perspective needs to take place because remember, a lot of our engines will go offline to other Class Is, and we'll share engines. And so there's got to be some industry standard over time that we'll have to adopt.

[indiscernible]

Not yet. So we haven't seen anything like the California regulations and where -- it will be interesting to see where the federal government wants to intervene over the next 4 years and how that plays out as well.

Yes. I don't know anyone knows what's going to happen with CARB yet, so we'll see. Well, maybe shifting over to the cost side of the equation and how you guys are handling that right now. Maybe start in the near term. You mentioned some disruption from hurricanes here in 4Q. I think you said about $50 million, if I recall correctly, on the last call. I guess we are about a few weeks out from the month end of the quarter. How are we trending there? How are we tracking versus expectation from a cost and an operations standpoint recovery from the hurricane?

Yes, that $50 million included revenue and costs associated with it. I think there's really no update to that. Probably been more or less in line to what we expected. And obviously, we're working on our plan to go out there and get that line back up and running and a lot of engineering work is being done right now to work on that. So we'll probably get an update in January on what that looks like from a capital perspective and other things. But yes, it's created some challenges, but we've gone through it.

And maybe net of those headwinds, I think you guys had expected margins to slightly deteriorate sequentially. Are these costs isolated though and revenue headwinds to the fourth quarter? I guess I want to make sure about that, nothing lingering into 1Q. And then can you remind investors what the normal 4Q to 1Q margin progression is and what the puts and takes are as you look at the network today as investors should think about that?

Yes, I know, Matthew would want me pun on first quarter. We'll probably get to next year in January, and we're still working on our plan for 2025. The Blue Ridge, when you think about having to go the out-of-route miles and things like that, that will continue for a couple of quarters. Revenue, probably less impact there because our customers have gotten back up and running. And that was as much about them getting shut down and the damage that they incurred than anything. But we've still seen some challenges. Florida got hit, too. That's the other one that we saw. Tampa Bay area, we do a lot of activity there and export activity through the port there, and that's been chop a block for a little bit, and we're starting to get our feet underneath us there, but we had to make some capital reinvestments in that area as well. So we, more or less, dug ourselves out of it. When you think about those headwinds, they'll continue from out-of-route miles, which is not a significant cost, but it is a cost. And then we'll bring on the Howard Street Tunnel, which will probably be a larger impact when you think about out-of-route miles and things we have to do there to keep the freight running, why we double stack that tunnel capability.

Makes sense. And I had to ask. Sorry, Matthew, I had to go there. Maybe from a productivity standpoint, it's been a bright spot. I feel like you guys have grown carloads in excess of headcount growth even -- especially when you exclude the Quality Carriers headcount for a while here. How much longer can we continue to grow productivity? I guess that's the first question. When you look at the operations across the network, where is there still that faster trim or opportunity? And I think you're expecting modest head count growth in 4Q, but just curious maybe longer term, how you think about headcount growth and maybe decoupling it from carload growth?

Yes. We just -- we talked about this at our exec meeting just on Monday. And I think Mike feels pretty good about where we are from a headcount perspective. There's little pockets in New York and other areas, but they're very small where we continue to need to invest in a few more people. When you think about all the supply points we have around our network, over 100, you can't fungibly move them around, right? So you got to make -- you got to get it right in over 100 different locations and make sure you're resourced appropriately. And so there's a lot of analytics that go around it. I think we're going to get a lot better on how we manage it. And then obviously, bringing attrition rates down and managing those things are helpful as well and having visibility. But I think where we are today, from a train capacity, whether it's intermodal or merchandise, that we feel we're in a position to really take on volume with very little incremental cost to grow. And so that's something that we'll leverage. I think Mike's very pleased in the condition of our track, and a lot of it's double track that gives us capacity to continue to grow. But the initial growth won't even come with a lot of additional train starts or things like that. I think, we think from a capacity standpoint on both merchandise and intermodal, as I mentioned, that there is excess capacity and train length to go after.

And you mentioned there's a few pockets to add headcount maybe across the network. But overall good. Is there still opportunity to take down headcount anywhere when you look across, whether it's on service or anywhere else? Where do you see opportunity to actually reduce the cost?

Yes. I think we've gotten a little bit long in some areas. So we'll let that probably play out through attrition. And then some of the areas -- I mean, it's really complicated. It's probably the most complicated resource we have to manage is those people and making sure T&E and that they're there for our trains so they don't delay trains running, which could add a lot of cost. And as we get better and better at that, that's significant costs that will come out. I know where Mike is right now with his team, they're finding -- they're really looking at the network and the network design and finding out-of-route miles and those things, which are incredibly impactful, not only from just a cost perspective, but if we can speed up the service especially on the intermodal side, it creates opportunities. One of our larger intermodal customers today literally runs by algorithms, right? And the algorithm says, "Hey, the intermodal can be the service that we require. We're going to put it on intermodal." And so as we speed it up, as they get more comfortable that our transit times are consistent and reliable and fast, then you'll continue to see them. And they told me this a few weeks ago, you'll continue to see the migration of truck to rail for them.

That's helpful. And how about on the equipment side, you mentioned you think you can grow volume without maybe adding more train starts. But longer term, you guys have been investing in modernizations and getting more fuel efficiency. Is there still either an optimization of the fleet you can do investments on that side that would drive cost efficiencies as you look forward to support volume growth?

There's still technologies out there and having a regulatory backdrop that's supportive of looking at technologies and being able -- particularly on the safety side is going to be tremendously helpful to us to advance those things because they're good. From a fuel consumption standpoint, they're good for the environment, and you want to be able to do those. So we'll continue to look at those and partner with, obviously, the regulators and all those things to really advance those. But yes, I would -- if Mike was sitting up here today, he would say, there's absolutely opportunity to continue to drive fuel efficiency improvements, and we have expectations to do that next year.

Helpful. And I know you talked about this a few times, but I do want to follow up just on the union agreements that you and others have done this year. It's a little bit different cadence than the last negotiation cycle. And while maybe it is a higher headline rate than some investors expected, it feels like it does give you flexibility around the work rules. And so can you talk why you did that again this year? And then maybe as you think about the work rule offsets, should we think about that as limiting maybe the comp per employee growth next year as you just think about how that actually impacts the business? Or how should we think about that?

Yes. I think Joe has talked at length about this. And having your workforce go without a pay increase for 2, 3 years during one of the most inflationary periods we've had wasn't a great place to be for anyone. And so I think it's -- we've gotten out ahead of it. It's kind of a historical first for us to be out ahead of it. And it allows, to your point, a lot of other discussions on how can we partner together, and both drive value for both sides. Having trains set and those things are highly disruptive and create a lot of costs and how can we partner in solving some of these things and where we both can benefit and they can have more visibility and line of sight to their workdays and things like that. We're really trying to focus on that. But if you have an overarching contract that's not -- that's being negotiated, then not a lot gets done until that contract is negotiated. So that's the theory behind it that we can move on to the next steps of how do we partner together in a more collaborative way and get this out of the way. We'll have 4 or 5 years of clarity of where things are, and we can really move on to these points that I think impact both sides.

Makes a lot of sense. Well, we haven't really talked about it yet, but we've mentioned a few times. But 2 weeks ago, we did have an election, a bit of a big deal here in the U.S. Just curious, other than regulatory may be easing, which you talked about a few times. Any puts and takes on potential legislative policy discussions you've heard that will be good or bad for the rails and the overall backdrop as you see for CSX?

Yes. I probably know as much as everybody else. We're following the nominations and other things. I think the corporate tax rate certainty, that is not going to go higher when you think about the investments being made. And do I think some of those were being paused a bit here going into the election to see what the outcome is going to be? Absolutely. And so I think that created clarity for some of the customers that I know were making investments to move forward. So I think that's a positive, certainly. And then -- but on the flip side, you have the tariffs. And what are the impacts of those, there is a scenario where that could benefit our rail a lot if you think about industrial production coming back, where those goods being manufactured here rather than being imported. You think about the New York, New Jersey port in particular, only 15% of that volume that moves into that port goes over rail because most of that is consumed in that local market where it's obviously heavy on consumers. We start manufacturing those things in the Southeast and Midwest, not only do I get the input volume, the raw materials and things like that, I get to move those goods potentially to the coast and participate in those moves that we didn't before. So that's where I think you could see a very bullish scenario for our network and our growth.

Hopefully, we'll see that play out. If I look back at the Analyst Day, maybe talking numbers a little bit here. You guys got, I think, long-term double-digit earnings growth. You did talk about some headwinds over '25. And so thinking about the headwinds in '25, can you help us parse through, directionally or quantitatively would be great. But directionally at least, kind of what those headwinds are? You mentioned some of the disruption as you prepare to double stack that one line. But yes, what the put the takes are in '25 that would be below that guide?

Yes. I think the guidance, Matthew, would want me to clarify this, it was high single digit to low double-digit EPS growth over the 3 years. I don't think each year is going to be unique. I talked about some of the industrial development accelerating. So I think we have a lot of confidence in what those numbers look like. The economy is always going to be there. We're not making a big assumption on next year. If that accelerated, I think that would certainly be opportunities for us. But the things we've outlined, Blue Ridge, sub, the Howard Street Tunnel, and then you have the coal, you have the coal on the price side. And every year, we try to predict where the price is going to be. We're probably going to, as always, take a conservative approach and hopefully, it's higher than what we assume there as we move through the year. Then on the domestic side, Sean pointed that out, but we do have a couple of plant closures. Now if we saw a more favorable environment with nat gas, more in the $3.50-plus range. I think we can make up some of that volume. But we'll see how that plays out.

And so when you think about the implied acceleration without getting numbers around it in years 2 and 3, is that -- that's more top line driven? That's not more cost-driven coming down? That's more top line accelerating?

Well, I think you have obviously the absence of the Howard Street Tunnel cost and the absence of the Blue Ridge would benefit on a year-over-year basis, '26 versus '25. And I think some of these things continue to drive positive economics where by '26, we're fully in on the Meridian, right? There's some cost, startup costs there that will be incurred, not very large, but we really, just on the cost side, start to hit our stride hopefully in '26, '27. So those things. The absence of those cost headwinds in '26 will obviously benefit us. But we do pipeline of growth opportunities, particularly on the industrial development side do accelerate into '26 to '27.

Great. Let me wrap it up. Just on capital deployment. I mean for CSX for years, feels like share repurchase has been a very steady piece of the return for investors. It feels like we have visibility into margin improvement over time, we have visibility into volume growth getting better. I guess, how do you think about capital deployment? Does that make share repurchase more attractive today given the accelerating returns you see in future years? Or how do you guys view that balance for investors?

Yes. I think you've seen us be opportunistic in the market. And I think we feel very, very confident in our growth story moving forward. And I think consistency, timing the market is difficult sometimes. So we generate -- we spend our capital, our cash on capital cost first and we want to reinvest in the business, but we always have excess cash flow that we've used into the market to take advantage of that, and it's paid off over time, and we showed -- I think Sean showed a couple of charts of how that's been value accretive over time. And I don't expect our strategy to really change around that.

Makes sense. Well, I know we are up on time. But Kevin, thank you so much for joining us.

Appreciate it. And thank you for having me.

Thank you for your participation.