CSX Corporation (CSX) Earnings Call Transcript & Summary

Hello, everyone. Hopefully, everyone can hear me okay. Okay. I'm Richa Harnain, and I welcome you to Deutsche Bank's Annual Transportation Conference. This is DB's fourth such dedicated transportation event and the second one in this shiny new -- relatively new New York headquarters here we have in Columbus Circle. So not breaking any new ground here from that perspective. That said, this one is especially meaningful for me considering it's my first time hosting as lead transportation analyst. I hope we can make it just as memorable for you all as I'm sure it's going to be for me and my team. In this conference here for sure, we have 10 corporates attending with 10 that we say are critical to the U.S. transportation landscape and very excited to have 140 people in the building to discuss the latest and trends on the transportation theme. So a special thanks to all of you who came out. We really appreciate the support, and we know how valuable your time is. So thank you. Now what an interesting time to have this coverage of transportation, right? All this tariff drama that could potentially jeopardize trade and good demand has made it especially challenging to recommend names in a space that thrives on trade and good demand. Given all the market risk out there, we've been really selective in our recommendations. In this context, we see rail as uniquely attractive subsector among the ones you cover, offering a blend of defensive and offensive characteristics. We're now by rated in all 3 Class 1 U.S. rails we cover. And we're very pleased to be kicking off the fireside chat for you today with the one we most recently upgraded on a much improved quarter, CSX with Kevin Boone, Chief Commercial Officer. So a warm welcome to you, Kevin.

Thank you.

Thank you for joining. Thank you for allowing me that probably too long of a preamble. And a big thank you to the Head of IR and Strategy, Matt Korn, who's also here; and General Counsel, [indiscernible] for attending as well. Yes, and a lot to dig into, so maybe we can get started.

Absolutely.

All right.

Great to be here. Thank you for having us. We got a lot to talk about.

Definitely. And I promise we'll get to the topic everyone really wants to talk about but maybe we can start with what you're making of the demand environment. Kevin, you talked about how unusual Q2 was in terms of production outages with customers. Those were expected to improve in Q3 and Q4. Are they starting to improve? It looks like volumes have been running up quite nicely. They're up 1% off of a flat base like in Q2, flat year-over-year. Now we're up 1% year-over-year. But maybe you can color that in for us and what's driving that? How optimistic are you that such acceleration can continue based on customer activity and feedback?

Yes. You touched on it. There's a lot of things, obviously, from a tariff perspective and other things that are impacting our customers. And we saw some of that in the second quarter. And I think it's fair to say in some of the markets that we anticipated maybe seeing a little bit of improvement, we are seeing it a little start to happen. I think further into the quarter, you'll hopefully continue to see that. On the chemical side, we mentioned one particular customer that had some outages. That's slowly coming back a bit, but it's been a little bit slow there. And then on the auto side, we have seen some quality holds, other things that have been a little bit slower, I would say, quarter-to-date, but we are seeing some signs of life there and are encouraged by what we see in the near term in terms of production, some of those production headwinds may be a little bit behind us. But it's been a little bit choppy here and there. And I think customers are more or less looking for direction in the market and certainty around where the tariffs are going to play out. And then I think you'll see investments being made. Aggregates still -- with the industrial development side still remains very, very robust in the Southeast. And so we're seeing those volumes very, very strong. The Metals team has done a particularly great job of winning business. We've seen some great momentum on that side. And then I will point out that you will see some strong performance out of our intermodal team. We've been working on a number of things, some new service lanes and other things that will start to pick up here in next month and into the fourth quarter, which we're really excited about.

Great. So maybe if you tie that into other drivers of near-term profitability. On the cost side, there's some headwinds Q2 to Q3, like the labor deal that you talked about. There's some 2Q good guys that maybe don't repeat. I think they were in the purchase services area. On yields, on your last call, you updated us that it was going to be very dependent on coal prices. Coal prices are running up nicely quarter-to-date. Nat gas prices are down. So lots of puts and takes there. I think consensus has modeled in something like 100 basis points of sequential OR deterioration Q2 to Q3. Is that a reasonable expectation? Or do you think you could do better than that, again, good volumes, service, export coal pricing offset by maybe some cost headwinds and nat gas trends?

Yes. I think first, on the export coal side or just pricing and generally said it would be slightly down quarter-over-quarter. We'll see where things trend through the quarter. You did mention we've seen a little bit of stability in the met coal prices, which is you got to start somewhere. So we're starting there. We still see very, very strong demand into the Southeastern utilities, and that continues to be a really good story for us that hopefully will continue through the remainder of the year and into next year. That's helpful. On the cost side, and I'll have, Matthew, correct me if I miss anything here is we've talked about a labor agreement, the step-up in the labor agreement that happens in July 1. That's roughly $20 million, I think we said, Matthew. We also highlighted some T&O purchase services headwind or benefits that we received in the second quarter that won't repeat in the third. And then finally, we did have a restructuring -- management restructuring, that will be a onetime item in the quarter that would I think we quantified around $15 million to $20 million in the third quarter. Obviously, that has benefits on an ongoing basis beyond the third quarter that we'll benefit from. But those are the things, distinct items, I think, that we pointed out.

Okay. And so are those the only items you would maybe take together and then bridge off of Q2 and then maybe like some volume help can help offset them and...

Yes. I think we're blessed with a great railroad that has a lot of operating leverage as we put volume -- good volume on it. Not all volume is made the same. We're really looking at profitable growth as the focus of our team. So as you see that volume come through, I think the incremental margins should be very powerful.

Okay. Any early thoughts on Q4? I think the Street is in flat sequential margins. Your margins have fallen 200 basis points on average in the past 10 years. Of course, is not a normal year though for CSX and coming off of some...

The good news is we're going to be finally lapping the export coal prices by fourth quarter. So that headwind on a year-over-year basis will be not what it has been this year. And so that's the good news. And as we turn the corner to '26, I think we'll see where interest rates and other things trend. Those are things. We obviously have the industrial development story, which I'm sure we'll dig into more that will continue to ramp up and benefit us. And then I talked about some of the intermodal momentum that we have that will really start to show up in the fourth quarter, which we're excited about.

Okay. But that the Howard Street intermodal, you can't sell until 2026, right?

So we can start actually taking all the outer route miles by fourth quarter. So some of those costs related to the rerouting, we talked about millions of miles that out. We'll be able to run trains through the Howard Street Tunnel in the fourth quarter. We just won't be able to double stack it until second quarter of next year.

Got it. Okay.

Yes. With both projects finishing in the fourth quarter, you're going to see about that roughly $10 million a month start to fall off in that fourth quarter.

Perfect. All right. And a point that really resonated with us from the last few earnings calls, and it was one that you made was around your NPS scores remaining near record highs despite all of this disruption that's happening that you faced to start the year. So as Chief Commercial Officer, I guess there's probably no one better suited to address this topic than you. Just with such high customer satisfaction, do you think you're in a better position to win more customers' wallet share as your network becomes more efficient? And have you quantified that?

Yes, I think 100%. I do want to point out that Shannon, who runs our customer service group is we've done an amazing job of staying up in front of customers. And things will happen day-to-day. There's storms happen. There's other things you have to adjust to. It's about communicating with the customers. And it's really about mitigating the big cases where you're really missing the service on a consecutive level. So there's been a lot of focus with our operating team and Shannon's group around consecutive misswitches. Like if you're going to have an issue, make sure you're delivering the service next day. And those are what really customers remember is that really prolonged service outage that they experience. And that's what really impacts their decisions on a long-term basis of whether they want to give more volume to the railroad. So we're running really, really well. Mike and I and the team have never been more aligned in terms of how we deliver that service to the customer. And it's also aligned around how do we take cost out, that's still a real focus of the team is how do we create a really efficient service at the same time and deliver what our customers want, so we can grow our volumes. But at the same time, we're constantly looking at the network, how we can speed up the network and how we can make it more consistent. So I think with an improving trucking market, at some point, this trucking cycle, which has been -- we're almost 3 years on a down trucking cycle will start to improve, and I think we'll really capitalize on that. I will say, despite a trucking market that's not really helpful right now, we are -- every week, we go through opportunities and new wins, and we are seeing truck conversions come in every week. I think that only accelerates as we get into next year and really capitalize on the service that we're delivering today.

And what about versus other railroads, your competitive position relative to maybe...

I think we have the best service out there in the East. And I think that's something that we hear from our customers, and it's consistency. We had a little bit of hiccup into that first quarter. But our ability to react to it, adjust, make sure we didn't shut down plants that we are proactive in our communication, I think, really went a long way. And so I think this time around was very different than maybe going back to 2017 or '18, where you saw some of that customer disruption, and that's why you saw the scores continue to outperform in terms of the feedback that we're getting from our customers.

Okay. Great. Finally, you probably figured it would be impossible to have a conversation with the sell-side analyst without at least an attempt to talk rail M&A, and I know Jason is here to help keep the guardrails on. But maybe I'll open the floor up to you first to speak very generally about what you can and can't say on the topic.

Yes. Certainly, following the news by Union Pacific and Norfolk Southern, I know there's it's a hot topic, right, that people want to discuss what are the implications of a transcon and those things. I will say I'm very limited in what I can share today. And I would like to reiterate what Joe said on the second quarter call, which was very clear in terms of we're open. We're engaging in ways to create shareholder value. We reiterated that. We're focused on driving profitable growth to the CSX franchise. And then finally, how can we improve service? Those are 3 really tenets of what we're trying to deliver, and it's all going to drive shareholder value. So I can tell you the Board is highly engaged and is well advised. And beyond that, I'm sure there will be a time to share more. But at this moment, that's probably all I'm going to talk to.

Okay. So maybe we can talk in broad strokes then, just on your competitive stance. You talked about you're getting rail conversion opportunities every week. How do you assess your competitive stance versus over-the-road trucking today, especially on transcon? And do you think there is significant opportunity for enhancement either by way of more rail collaboration or otherwise?

Yes. I won't comment specifically on the transcon but we're always collaborating as a team looking at our network and how can we deliver a faster service, more reliable service with Mike. And those opportunities are still pretty vast when we look at it. And we've gotten through this first quarter period where obviously, we had some service disruption and now the team is really leaning in. And you've seen -- you're going to continue to see us tweak different areas where we're driving out cost and speed and increasing speed on our network, which ultimately translates into greater volume. One specific area is intermodal. We're seeing algorithms right now that we can deliver at a certain time and a certain cost but the algorithms continue to give us more and more volume. So we're really trying to understand that with some of our customers that use those things and some of the opportunity that we're seeing in the near term to really drive that. But that's the fun part of where we are right now. We're really leaning in and I would say, playing offense around that and really understanding what are the lanes that really offer valuable, profitable growth and targeting those in a different way.

Okay. Great. And then when you do, I guess, lose to trucking. What are like some of the issues that customers say? Is it mainly speed that's the primary factor? Or are there other inefficiencies that you think you can work on to really rule like more customers?

Yes. I think it's -- first and foremost is reliability. That's what customers want to understand. You're not going to disrupt my customers that I'm serving. You're not going to disrupt my plants that I'm trying to run. That's first and foremost. And I think we've done a good job of continuing to build that trust with our customers over the last few years. And customers can have a long memory, and they remember in 2012, that time where something happened and they weren't in that plant shutdown. So time is on our side. And as we continue to consistently deliver month-over-month, quarter-over-quarter and year-over-year, those opportunities are more and more. We've got to lean into it as well and explain what we do and why we're different and how we're prepared when their business comes back or when they see a lot of demand come that we can serve it, right? And that's been the challenge for the industry is when you've seen an up cycle, typically, the railroads have struggled with that a bit. And so I think we're creating a lot of resilience in their network. That's why we're making these investments in Howard Street Tunnel. That's why we're reinvesting in the Blue Ridge. It creates a lot of resiliency in our network. And that quite frankly, makes our network more unique than most because we have alternative routes where other railroads are more reliant on single routes. We can adjust and if there's storms or other things, we have a lot of flexibility within there. So that's exciting as we look out. We know some of these markets like housing and auto will eventually be tailwinds. I think during my whole time in this role, they haven't been wind at my back necessarily. But at some point, that will change. And we talk a lot about how our network is going to be ready to handle all of that and grow that when we see it.

Okay. And just thinking about your competitive position, I know you talked about some of the unique positive characteristics of the network. But just your ability to compete, do you think it will be negatively impacted if there was this other merger? Or do you think there -- like I guess when customers look at your network, do they evaluate it differently on transcon versus your East Coast North-South service? Or do you think they look at it as one complete package, i.e., that your competitive positioning might be undermined if one of your competitors has a better transcon product?

Yes. I'm going to go back to the original statement but I am going to reconfigure your question here. We have a lot of things on our network that we're working on, whether it's the industrial development side, which we talked about going to provide a lot of growth opportunities. And it's only -- we're at the beginning stages of that accelerating. There's a lot of things that we think we can do on our network today and in some of our yards that are going to create a lot of out-of-route miles or eliminate a lot of out-of-route miles for our network. And that translates to a better service for our customers and allows us to go out and win share, convert modal share from mainly trucks. So we're excited about those opportunities. And I think that's the framework I think we're going to keep it in today in terms of that discussion.

No, I appreciate you attempting the question. I know Matt was shaking his head, I got a little nervous but I think. All right. So pivoting back to your CSX stand-alone, I guess. If M&A doesn't happen or it doesn't happen soon for you or your competitors, it sounds like you feel very confident in some of the operating momentum and ability to drive volume at CSX. But maybe you could just double tap on that, merchandise from attractive industrial project pipeline you've spoken about being a good source of growth, the enhanced intermodal franchise once Howard Street is done, coal demand potentially sustainable, especially with recent administration support. Just talk about the levers you have to win over the medium term, long term ex-M&A.

Yes. When I take a step back at the whole industry, I wouldn't trade our footprint for anybody else's footprint. When you look at where goods want to go, 2/3 of the U.S. population today are on our network. The most valuable consumers in the world are on our network. And then we have a lot of visibility to it, and we track this on a daily basis, the industrial development activity and industrial activity that we're seeing is concentrated on our network in our geographic footprint, whether it's the Southeast or the Midwest. And that's going to create a lot of value over time, and we're really leveraging into that. And we don't talk about the ports probably enough. The East Coast ports, given the dynamics around tariffs and other things are probably advantaged or will be advantaged, we believe they will be versus the West Coast ports. As you see trade volumes shift from China to other parts of the world, we'll really benefit from that. And you can see the investments that are happening, whether it's in Savannah or other ports along the East Coast, they see a bright future. And that's a big benefit from our network perspective of how can we push more of that West into the network and benefit from that. So there are a lot of things going on. You touched on the coal side, on the domestic side, what was a headwind for our business. We're seeing a lot of opportunities, data centers a huge draw on power demand over the next few years makes these assets more valuable. And I touched on it, I think, on the last earnings call, utilization rates on these utility plants are very low. And if you can go from 40% to 60% utilization on, it's a significant opportunity for us. And those are the things that we're working with our customers to really drive. And so utilities, maybe 2 years ago was a headwind. We're seeing a very different market. The pressure to idle those plants or even to ratchet down utilization is not there. We're feeling that given some of the demand that we're seeing here that we think is going to continue for the years ahead.

Maybe we can talk about coal first. You talked about year-over-year that headwind kind of goes away in the fourth quarter. Do you think that opportunity for utilization advancement could be something that we see in the next -- the near term, the next few quarters?

We're highly focused on it. I think there is an opportunity. I just think the overarching, obviously, regulatory dynamics, I think, are helpful and don't put that implied pressure on these utilities to maybe ratchet down their utilization. So that's helpful. Obviously, a very hot summer, and we're living through it in Florida, not unhelpful. And so that's been a positive for us. And the weather is a factor. So I hope for a cold winter as well. That's helpful for our network as well.

All right. Maybe we can talk about the industrial development pipeline that you referenced.

Sure.

You said it's unique to your franchise, a lot of these projects are on your network. You talked about like hundreds of projects, being a reason for the optimism for CSX despite the economic uncertainty out there. More specifically, I think Sean added there are 50 projects that are already in place this year and then another 30 coming online in the back half of the year. Can you provide just some color around the margin profile and market exposures attached to that pipeline maybe more near term?

Yes. Maybe if I could just take a step back and why this is an interesting dynamic, why over the long term, I think, is a very different trend. First of all, over the last several decades, we've had a lot of industry leave our network. And quite frankly, everybody's network in the U.S. from a rail perspective. And we believe that dynamic is shifting where we'll net up activity. When you think about the goods that come into the U.S. today, if they're coming into the Eastern ports, about 15% to 20% of those goods actually hit the railroad today. Most of them are being trucked to the dense population centers that are along the coast. If these goods are now being manufactured, let's say, in the Midwest or the Southeast, not only do we potentially move the input products that go into manufacturing those goods, we also get to have the outbound into the East Coast population centers from the Midwest and Southeast. So you go from maybe 0 move for a product to 2 moves. And that's pretty powerful when you think about those dynamics there. And so when we take a step back on the overall portfolio, it's really around a lot of different -- it basically touches every market we touch today. And so it's a diverse portfolio. It's not concentrated in one area. We put up charts in the past that show it's not about just automotive. It's not about just steel. It's really across every one of the markets that we serve. And so we're excited about it. When you think about the margin profile, it's similar to our current business today. Merchandise is a very good profitable business for us. So we should have similar dynamics. The incremental part of that is most of this volume will move on trains that exist today. So we will go on our manifest business on trains that are moving through our network today, which is very powerful from an incremental margin perspective.

What should we think about in terms of like the modeling and what's a good incremental margin profile to the -- for like the out years, I guess, on that.

Yes, I think it's similar to the rest of our merchandise business. It's -- we look at pricing levels that we're providing a great service and we get value for that service. And so that's -- there's -- and typically, the transportation costs aren't the driver of whether that project is going to come to life or not. It's the ability to have -- identify a great site that has great access to our network -- those are the really -- in power, power is a big factor in terms of decision-making on those sides. And I do have to give the team a lot of credit. We have a lot of sites available to customers that are shovel-ready, which has put us in the market and enabled us -- allowed us to capitalize on it very quickly.

Okay. He talked about auto and the housing market remaining constrained. Investors remain particularly concerned, I think, especially about the housing market getting worse in the near to medium term. Can you hit on your long-term earnings growth target of -- can you hit that long-term earnings growth target of high single digits, low double digits for 2024 to 2027 with those markets remaining under pressure? Or do you embed some sort of recovery in your long-term outlook?

Yes. Look, we have a diverse portfolio. That's what's great about what we do. And so when one market is not doing well, we've got to lean into other markets that have opportunities, and that's what the team is working hard on. And I talked about some of the things we're doing on the intermodal side and maybe a backdrop that where we're seeing industrial production not positive. And so you got to look for ways to grow. And we've got a very engaged team that engages with our operating team to create more opportunities for us. So we reiterated our guidance on the last earnings call. We see a path to delivering that. Obviously, having a little wind at our back is always -- I would prefer that than not. But we've got to find ways as a team to really find our own opportunities. We can't just rely on the economy to help us. We've got to gain share, modal share. And some of these things will eventually come. We can't predict if they're going to happen next year or in '27 or '28. So in the absence of not knowing what's going to happen, we've got to drive our own opportunities.

All right. Maybe shifting gears a bit, talk about the strategic value of your trucking business. Do you think it makes sense, synergies to your core business?

Quality, chemicals is our largest segment of our business today, as everybody is aware. And quality gives us a unique opportunity to go to market and understand that market at a really intimate level in terms of how volumes are moving throughout the U.S. and then identifying opportunities, whether it's transloading, whether it's an ISO tank product to really target a business that hasn't traditionally moved on the railroad. We are seeing a lot of momentum around that this year in a very challenged trucking market. We're seeing pretty extraordinary, pretty great growth, maybe not in triple digits, but close to that. on a year-over-year basis, which is exciting. We're starting off a pretty low number. So I wouldn't -- but Randy and the team have really found some momentum with some of the largest customers. The great thing about the chemical industry, it's very sticky once you win it, that's the challenge, too, as you introduce a new product into the market. But we've seen 2 very, very large customers start to adopt this product at a high level, and then you'll see others follow their lead, which we're encouraged by. The other thing that it really identifies or helps us is in our general discussions with our chemical customers, there's many discussions we've been able to bundle the product together and really offered us an opportunity not on the rail side -- not only on the rail side but also on the truck side to have a different discussion with our customers. Randy, who leads our quality carriers and I are going to go to Houston next week, and we're going to see 8 customers. And the unique thing about that experience is we're not only bringing the rail folks that work with us but also the trucking side of their business is coming into the room. And getting those 2 groups together at our -- the companies that we serve is usually a pretty tough task to do. But having that knowledge on both sides and being creative and coming up with solutions is really the opportunity that we're seeing. And we probably need to do a better job. That's why we'll be in Houston to continue to capitalize on that. But there's a lot of momentum around that and a lot of opportunities that it drives on the rail side, not just only on the truck side as well.

You mention if anyone in the audience has questions, feel free to raise your hand and jump in.

I just ask one on the chemicals. Is it all coming off the highway? Or is there some coming off barge? Or are there more...

Typically mostly off the highway. The barge is more difficult to compete with. We'll see opportunities. Obviously, there can be disruption on the Mississippi and other areas where we'll see opportunities here and there. But typically, barge is on water. Obviously, the economics you can move a lot of volume on water pretty cheaply.

Yes. And then on the coal, you made the comments about customers may be thinking about their business differently with the data centers backdrop. Like what...

The regulatory side, right? The regulatory pressure from an environmental perspective might not quite be as robust as it was. And I think at the margin, we're seeing that a bit and just the coal burn.

But they need a commitment to take the stockpiles. If they needed to take the stockpiles higher because they're not running at 40% anymore. Like how much would that mean to you at this point?

Well, if you think if we're in that 40% range and you could take it to 50%, 55%, 60%, that's fairly significant growth over time, if we can -- if we get to that point. And those conversations are happening and those are opportunities and something the team is working on all the time. We've got to -- in that case, which is a good problem, we're going to have to look at and make sure the mine capacity is there. And that's -- we've had a lot of mines, obviously, over the years shut down. So I think there is mining capacity but there'll have to be some investments there as well.

What do you think on the timing for any of these coal plants announcing this type thing? I mean you've seen small...

I don't think we'll announce it. I don't think it's going to be an announcement. No, no. I don't think you'll just see it show up in the carloads as an opportunity for us.

Opportunity to add customers in your portfolio that you call or are you pretty full on?

You can't move a coal plant around or a utility plant around. So I would say it's really protecting our base, making sure they're competitive in the market, which they are today. Obviously, with $3-ish nat gas prices, that makes coal burn economical, which we like. And we can all debate on, obviously, with the export of -- continued export of this product, whether that will tighten the market further. I think there's some optimism there that natural gas prices could trend higher. I make a prediction today but that's -- there's some thought out there, and that only helps our economics.

Maybe you can talk about your intermodal channel partners. Are you pleased with the relationship as you lean into more growth on the intermodal side, like is are you happy with that arrangement? Or do you think that there's no opportunity for you to do things on your own? I think E&P does a little bit on the margin on that front.

Yes. I mean we try to -- we work with all our customers. And obviously, I think you're alluding to, obviously, the industry and some of the things that are going on there. But we're here to deliver really good service. We have the best intermodal service in the East. We're taking time out of our -- the transit times, which translate to additional opportunities for us. Mike and team are very focused on running these trains on time, and we have the best on-time performance that we've had in my time here, and that allows you to capitalize on any opportunity. We're here to continue to grow that business. We'll make the investments and profitable growth. And then obviously, the Howard Street Tunnel from a network perspective is going to be a big deal. We outlined the opportunity at our investor conference. And having that access, basically the last major corridor on our railroad open to double stack capability, think about Southeast and the Northeast is a huge opportunity that we're going to capitalize on that all our customers, all our partners in that area can benefit from.

Maybe talk about the Howard Street opportunity a bit more. What does double stacking really mean for you? Like what type of opportunities is it going to open up that you don't have today?

Yes. There's -- today, we have the I-95 corridor, which largely is underutilized in our opinion. And a big part of that reason is the intermodal volume is not economical when you can't double stack. And so it was one of the things that surprised me when I came in to CSX in 2017 and was eventually in the CFO role is the economics really change when you can double stack that container. And so having that opportunity to reach markets that we haven't before and compete with perhaps the shortest haul from an Atlanta up into the Northeast is pretty powerful from that side. And so we're going to allow our customers that are aligned with us to compete for that volume. And I think it will also translate into additional opportunities to grow that market, which we're really focused on, take more trucks off the highway. We're unique. We have a unique franchise in Florida, like how do we look at that and continue to drive more volume that exist today on the truck that can move rail going forward.

Just wondering if you can share your observation about your partnership with CP, which extends your reach much beyond East Coast into Mexico and so on. How is that doing? And what's the kind of -- any kind of challenging point in terms of this logistically and smoothness of fluidity of the network.

Yes. I think when we made the announcement, and we had a lot of capital that we had to put in that line. And so you're going to continue to see that service continue to improve, which allows us to go after a different market there. So we have monthly, if not biweekly touch points with the CPKC on identifying additional volume, mainly concentrated in Mexico that we can go after. But there's a lot of opportunities with that line and that access is pretty unique for us. It creates a more efficient path into our network into the Southeast. And we're really -- we're excited about it. I know the CPKC would say similar things, but it's not just in the intermodal market. We're seeing auto, other areas with opportunity to grow that business. And the vast, vast majority of this is just truck conversion today. And so that's why we're excited about it. We're highly focused on growing the pie, and this is really an avenue to do that.

CSX is the railroad that's probably furthest away from its margin high for arguably temporary factors and reasons. But if you think about your ability to get back to an OR with a 5 handle on it, how do you feel? And could it even be better than what you had before considering all these positive things that you spoke about with respect to driving greater efficiencies, improving your networks, all these industrial projects, et cetera?

No. What I do know is the business we're targeting today has a very powerful incremental margin profile. We have a network with a lot of fixed costs. And as we identify more volume that the right volume to put on our network that we're very excited about, and I mentioned all the opportunities I think we're -- we think that drops through at a very meaningful incremental margin. And Sean has talked a little bit about that. At the same time, I can tell you, Mike is out there every day looking for ways to take cost out of the network. And so those 2 things in combination are very powerful and allow us to deliver, I think, on our expectations to continue to improve our margin profile over time.

What worries you the most, I guess?

There's always noise out there with, obviously, the political dynamics and those things. I think what the market is looking for is certainty, right? When I'm thinking as a corporate and I want to make an investment, you want to know what the rules of engagement are. And I think having that certainty, the sooner we can get to that, where are the tariffs ultimately going to land, where are these decisions ultimately going to land, the tax profile, all of those things are important. I think these policies, there's a real optimistic case for our business that could be made. But I think we've got to settle in and customers have to have the confidence to make the investments. And they're already making the investments to be clear. You see the tax policy around 100% depreciation of the structures is huge, it's huge, and it's a game changer. And I think you're going to really see that unleash hopefully in the next year, and that really benefits our network over time. But political uncertainty is up there in terms of worries. I think if we can settle down a bit and customers can get more clarity on where things are going. Obviously, we talk about interest rates. Some of our most important markets are sensitive to the interest rate environment. There is a case being made that we'll start to see rates come down a bit here. I think that would be really healthy as we move into next year for our business. We'll see. We know there's a deficit both on the auto side and on housing in general, there's deficits, right? We're running below what long-term demand would suggest in both of those areas. So eventually, we think we would -- we should get to a point where that would represent underlying growth in the markets. But in the absence of that, this team has got to work hard to go and find and capture share in the market. And I think we're doing a good job. We can always do better, but we're highly, highly focused on that.

I guess in light of that, just from last week's update and just last night's update, any -- we kind of touched on this but just customer conversations more near term, like do they feel better or worse? I know there's still a cloud of uncertainty out there but any changes in the customer conversation?

I don't -- no. I think it's still the uncertainty prevails right now. And I think there's hope, right? I think there's hope that as we turn into next year and maybe we can build a little momentum into the fourth quarter that we can see it. But I'm not breaking any news. The industrial economy is pretty anemic right now. And we're seeing it across our business. And so that's why we're so focused on driving opportunities that we can control, and we'll continue to do that. And then when those markets come back, we're going to be here to serve, and we'll benefit from those opportunities and the network will be ready to handle it, especially after all these investments that we've made.

Any other questions?

I know you're limited in terms of the mergers, but we know that the STB guideline is to enhance competition. So maybe I wanted to share some observation in terms of in your interfacing with other railroads and so on, there are kind of areas that competition can be enhanced, for example, reciprocal switching and access to network, those kind of things. Are there kind of areas that can improve with maybe some concession?

Yes. I won't -- I'm not going to speak specifically to that. We're going to have opportunities and Joe probably will lead the charge on that to discuss any part around specifically Transcon and those things. But I will say this hasn't changed for me since I've been in this position or for us, quite frankly, all the management team, we see a lot of things that we can do, right, from an efficiency standpoint, not only within our network, but interchanges, all those things, that hasn't changed, right? That continues to be an opportunity to drive modal share for the industry as we get better, more consistent and over half our volume touches another railroad. And so that the customer experience doesn't end at the CSX network. It extends through their total experience with, and then on the intermodal side, it doesn't end with just the rail service. It ends with how do we integrate with the truck better. And those things are things we need to continue to solve for, and they are opportunities for us. How do we use technology to create more visibility for the customers so they can manage their supply chain and their inventories better, right? We're behind the truck in that area. Those are the things that we talk a lot about internally. So all of these things remain opportunities to get better. And over time, they represent more opportunity to gain share in the market. And I'm very, very optimistic on that. Technology, we have Steve who is leading those efforts for us. There's a lot of things that we can do to really make that customer experience better where they're more willing to give some of their most valuable freight to the railroad and trust us with that freight because they can have confidence it's going to be delivered to their customers that need it on time.

Kevin, could you just give some more tangible examples of like what type of initiatives you're targeting and how maybe a more supportive regulatory backdrop is helping you implement some of those changes?

I don't think the regulatory backdrop has really anything to do with us pursuing growth. I think they've always been supportive of us going after modal share and if there are so many beneficiaries in that, the communities that we obviously serve, taking trucks off the highway, all those things. Transloading is something that we've highlighted that I would point out again. We've had a lot of success in our transloading business this year. It's far outgrowing our core business today, and you're going to continue to see us make those investments. It's a way to reach those merchandise customers that aren't traditionally on the railroad today. It's spreading our footprint out beyond just the physical infrastructure of the railroad where if we don't touch them with our rail infrastructure, this is a way where we can combine the truck and transloading to reach them. And it's something that's created a lot of valuable growth for us in a market that's pretty challenged this year. And so you'll continue to see us make those investments in that area. And that's -- we're really looking at ways where we can grow the pie because that's the best way we can create value over time is growing the pie. We're going to compete every day with the railroad, and we have the best service out there to compete and we have the best relationships. And so I expect us to win. But beyond that, if we really want to change the growth algorithm for what we've been able to achieve historically, it's really capitalizing on industrial development and finding new ways to win share with our existing customers. And I think we're doing -- we're along that path. And what I think you'll see is as the truck market tightens a bit, I think you'll really see that start to accelerate even more than what we're seeing today.

Last but not least, you can just touch on capital allocation real quick, priorities, you feel about where your stock is trading, buybacks.

Yes. I will say the first priority is always to reinvest in the network. We have this valuable asset. We have to continue to maintain the best service in the East. And so that's the first use of capital. And I will tell you, Mike is always looking for efficiencies on the maintenance capital side of things, and there's probably opportunities to do better. And I know Sean looks at that all the time. So being more efficient with our capital spend to maintain our railroad is something that we're highly focused on. And then growth opportunities, right, and profitable growth. That's going to be the first use of our capital. And then beyond that, we generate -- we're fortunate to generate a lot of free cash flow, and we've had a history of returning that to shareholders over time. And I think I don't see anything changing with that philosophy going forward.

Anything else? Okay. We'll wrap it there. Thank you again, Kevin.

I appreciate you having us.