CSX Corporation (CSX) Earnings Call Transcript & Summary

Thanks for joining us here. I'm Brian Ossenbeck, I cover Airfreight and Service Transportation for JPMorgan. We're excited to have a fireside chat here with CSX. We have Joe Hinrichs, who's the President and Chief Executive Officer; Sean Pelkey, CFO; we've got Matt Korn, Head of IR and Strategy in the Office as well here. So it's great to have you guys here. I know we've got some slides to go through. It's a little bit maybe early for our friends on the East Coast, but I'm sure you can wake up and get them up to speed because a few things going on in the industry. So why don't we go ahead and kick off with the slides of the presentation, talk about the network, and then we'll jump into the conversation. So thanks again for coming back to London.

Thanks for having us, Brian. Sean is going to take us through a couple of slides.

Yes. Thanks, Brian, and great to be here. I wanted to take just a few minutes upfront kind of level set. We've got investors here, and many of them know us very well, but some don't as much. So I just want to give everybody kind of a sense. We'll go through forward-looking disclosures here, which will cover all of our comments. But just want to give folks a sense of when you think about East Coast railroading, what is it that makes CSX different and unique? And I think there's a lot of things on this page. I'll spend just a second on them. I think one of the most powerful is, we're the best run railroad in the East and arguably in North America in terms of our operating discipline and the efficiency at which we run our operations. We also have a fantastic reach. When you look at our network, we've got the core triangle that goes across from Chicago to New York down the I-95 corridor, the Eastern seaboard and right up the southeastern part of our network. But we also extend all the way up into New England with our recent acquisition of Pan Am Railways and all the way down into the state of Florida uniquely. We're in a position right now where we've got a number of railroads that are very interested and eager to work with CSX; we'll talk more about that as we get into the conversation. But we are leveraging that competitive position that we're in. We've announced a couple of partnerships that we've already entered into, and we're working on a number of other things as well that we think will serve us very well in the near and the midterm as we go forward. Our business is quite diversified. A majority of what we move is within the segments that make up merchandise, that's driven by the industrial economy, which in the United States has not been particularly robust in the last couple of years. That being said, in 2023 and '24, both of those years, our merchandise business exceeded the pace of industrial production growth, which is the first time that we've been able to deliver that kind of outperformance in over a decade. The intermodal business is a growth segment for us. It is up in the third quarter here and doing quite well for us. We just announced a partnership with BNSF that will drive even more growth as we get into the fourth quarter, and we'll get into the details of that. And then the Coal segment is an interesting one as well that we've said likely to be flat over the next couple of years, but domestic is holding up a lot better than we expected it to going into the year, that's kind of a combination of weather-driven drawdown in utility stockpiles, but also the fact that there's been huge electrical generation needs in the eastern part of the country. With the advent of AI and increase in data centers, it's driven an extension of the life of the coal plants that we serve and an increase in the overall demand. The export market has been down a little bit for us this year, which is due to global conditions, but also due to some unique idiosyncratic issues on our network, namely 2 fires at major mines that serve export production and output for CSX that will reverse as we get into next year. One of the most exciting stories that you'll see on this page is the industrial development story. You've heard a lot about the President's priority on bringing manufacturing back to the United States, and we often get asked, is it real? Are you seeing it? And the answer is yes, absolutely, we are. We've seen a ramp-up in the amount of inbound calls that we've been getting over the last year or 2 relative to customers that are looking to expand facilities that are already on our network or build brand-new facilities. And I think CSX has a distinct competitive advantage here. Not only do we have that network reach that I talked about in the breadth, but we also have an extraordinarily strong team and a regional footprint to partner with developers and local authorities, local governments to bring new manufacturing facilities to our network. So we've got sites across the Southeast and the Midwest. That heat map shows you where all of this activity is taking place. And if you overlay our network, which are those blue lines in the Eastern part of the United States, you'll see we are almost perfectly aligned with where all of this is occurring. We've had about 60 projects that have started up already this year. We had several that started last year as well. There's a multiyear ramp-up from those projects. And what we've said is, over the next couple of years, all of this should net us 1 to 2 percentage points growth, mostly in merchandise, but highly diversified. It is not concentrated in a single segment, it's across many, many of the markets that we serve within merchandise. And I'll leave you with this, which is: It's been a challenging year for the industrial economy in the U.S. and also for CSX this year relative to the expectations that we had going into the year. But as we begin to look forward to turning the page into 2026, there's a lot to be excited about. The picture that you see there is the Howard Street Tunnel, our major infrastructure project, that we've been talking about for a decade. We broke ground on the project officially February 1. We will be completing that project roughly in the next 10 days. So very exciting to get to the end of that. That's a 150-or-so-year-old tunnel that now is going to be double-stacked cleared. We've got a couple of bridges that we've got to raise, not us, but the state's got to raise over the next couple of months. But once that is complete, we'll have full double-stacked clearance on the I-95 corridor; big volume opportunity there and big efficiency gains. We've had a number of plants this year that have idled capacity a little bit longer than expected. I think a lot of that has had to do with the uncertainty in the U.S. economy. We'll cycle that as we go into next year. Industrial development ramps up. And we'll leverage the performance that we've delivered so far this year to drive some nice growth as we get into 2026. So with that, Brian, we'd be happy to take your questions.

Great. Thank you, Sean. So I'll probably go back to some of the slides to refer them a little bit, but just maybe focus more on the near term. The network is obviously bounced back pretty well, which we'll talk about in more detail, but just relative to where you thought you were tracking for the third quarter from a carload perspective, maybe from a cost perspective because some of these are actually probably coming back better than certainly we thought, but maybe even yourself. So what's sort of the state of the quarter and how you're progressing into the end of the year here?

Yes, I can take that one. So I think from a market carload perspective, it's been a little bit mixed. Intermodal has been off to a solid start to the third quarter, we're up a little bit. And international, particularly over the last month-or-so has been doing fairly well. The domestic side, we've sort of been flat, domestic intermodal has been flattish. That being said, the new partnership we just announced with BNSF, we just started moving some new freight a couple of days ago. We'll have another ramp up as we get to the beginning of October. So you'll start to see that show up in the weekly numbers here very, very soon. Domestic coal, I mentioned, that continues to be strong, particularly the utility coal side. Steel and industrial, not as much on the domestic side. Export has been down a little bit, but in line with our expectations. I would say the segment that's been off probably the most has been merchandise as a whole, but specifically within merchandise, ag and food and chemicals. Though this month, knock on wood, chemicals has held up a little bit better. So we'll see what that foretells for the fourth quarter. A little bit of negative mix within merchandise as well that you'll see show up in the revenue per unit this quarter, nothing dramatic. But -- and then on the cost side, you saw a very, very good momentum. We had about 550 basis points of sequential margin improvement from Q1 to Q2. When we were struggling operationally in Q1, came out of that in Q2, there's a little bit of a swing that we get on the cost side. We talked about maybe $20 million of PS&O benefits that were unique to the second quarter, we won't see in the third quarter. But overall, on the cost side doing very well, continuing to drive efficiency gains and the network is running well. So you'll see more of the same from Q2 going into Q3. The only thing I'd caveat on the cost side is the restructuring is now complete. We talked about kind of $15 million to $20 million of restructuring charges, we'll be within that range. But we also have about a $10 million charge we're going to take because we made the choice to change outsourced tech vendors and there's a termination fee of about $10 million related to that, that will drive better efficiency and lower costs on a go-forward basis. So it's the right decision for us, but that will drive an impact in the quarter. And the other thing I'd point to is, with all the things going on, that I'm sure we'll get into here, advisory fees will be part of the expense base in Q3 and Q4, probably $5 million to $10 million-or-so each quarter.

And the restructuring was more of the corporate office and labor force is not -- the bigger restructuring...

Correct.

We took a 5% management reduction in our costs in early July and affects the third quarter for the restructuring.

It's been a while since coal has been a positive, at least to talk about for a couple of quarters. It seems like it's always volatile for reasons we all know. But is there something more constructive for domestic as we get to these power generations? Obviously, not aware of any new plants being built. If anything, maybe some of the retirements just get pushed out. So is that something we should be a little bit more optimistic on or is it maybe not something we want to count too much on?

So 2 things are driving the domestic coal volume increase lately. One was a hotter summer. And so the domestic utilities, especially in the South, use more coal. So as Sean mentioned, we're replenishing the piles they used. That's part of it. And there's been some extensions. I think you'll probably see of utility plants that were failed to close have been extended. One more recently that was a couple of months. We'll see if it gets it again. That's because of power needs and also because the political environment has changed. So I think you will see some extensions going into the near future, which could help with that as well. What's exciting for us, too, is when the Blue Ridge reopens in a few weeks, that's a normal path for -- the most efficient path for a lot of that coal to go to the South utilities. So we're anxious to get that back up and running again. But definitely, domestic coal has been stronger in the quarter than we anticipated, and that likely may happen again in the next quarter if we continue to see some of these extensions.

So the network obviously was in a pretty tough spot for a while. It certainly bounced back a lot better than we had thought. And if you look at our op dashboard we put out each week, like you guys have been the best of anybody for the last couple of weeks. So certainly noticeable, but you're doing this before these big infrastructure projects are finished, right? So what happened to really get that turnaround? I think there was some skepticism that usually rail networks when they get into challenges like that, take a while to also get out of them.

Yes. I mean, I think one of the things that surprised a lot of people was how quickly we were able to rebound. If you look at our numbers operationally, even in the third and fourth quarter, they were very competitive. But February, we had -- we started to see a significant decline, and that carried over into March and early April. The team really came together and put some processes in place, but also just regrouped and with the reality of what we were dealing with at the time and was able to really overcome that. Importantly, I think it's another example of why we get a benefit of all the activity we've done in investing in our employees and our relationships. If you can get your employees engaged and motivated to be a part of the solution, they can get a much faster recovery, which is what we saw. And so it's very sustainable. These are the same processes that we've been running for quite some time. If you go back and look at our data in '23, we probably had the best year we've ever had, and we're now running at those levels really since May. And hopefully, we will continue that. I don't see a reason why. Now the exciting thing for us is this is all happening while we have those 2 North-South routes closed. So what that will do when they open back up is make more natural routing of trains and take some of the out-of-route miles and the cost out that Sean mentioned, but it also gives us a lot more resiliency and redundancy if something were to happen somewhere. Because really what happened to us last year was just the sequence of things kept getting worse and worse. And so Milton and then Helene and then some bad winter and then the flooding in the Midwest, and it all kind of kept pushing our problem into the same areas where the weather was hitting us. But now that we have the cars online down dramatically, we have the dwell times, the velocity where we want them to be, we have a lot more resiliency in our network. So I think you should expect to see continued performance around the levels that we're used to and that we have been performing for the last couple of years.

And Brian, as we look forward, I think one of the things that's really exciting is where we're at from a technology perspective. We've got a real-time operations portal, which allows Mike and the entire operations team to see where are the trains, what's running late, how can we catch it up and fix things. But the methodologies that we're using are still good old-fashioned railroading. It's getting on the phone, calling the terminal managers, adjusting things on the fly. We're investing in some technologies now that will allow us to model out what's happening on the railroad to help predict what decisions are going to make the best network-wide impact for us. We're making some very quick advancements in that. And I think by the end of the year, we'll have some prototypes out there that we'll be able to start using to help continue to make operational improvements. And in particular, when we see challenges across the network, whether that be weather or whether it be a locomotive that has a stoppage, what decisions do we make in order to maintain the health and fluidity of the network?

The human brain cannot simulate all the scenarios that we deal with on a daily basis. And so we get asked all the time about AI or technology, where does it have the most ripe opportunity in railroading? And this is one of them is in decision-making on a real-time basis because you may think you're making the right decision for Toledo, but that train is going to go all the way to Jacksonville. And so how do we optimize all the decision-making that we do, a really exciting time for us. But as Sean said, we've been making major investments. It's not just the will to put AI or to put that kind of learning into place, you have to have the data -- you have to have the data in the right place, we're getting the data in the cloud, getting all the data organized. We had a very traditional mainframe data center kind of methodology. We had lots of old systems that weren't talking to each other. We're investing in all of that. And so that's going to give us tremendous capability going forward. That will be a next big step opportunity for us is to be able to make those simulated best decisions in real-time and across the benefit of the network, not just the local yard.

And how about the technology just in the field? Because for a while the industry was not really able to move much of anything forward, whether it's automated inspections, some of the wheel cars, stuff like that, like it seemed like it made a lot of sense from a safety and a cost perspective. But is that now on the agenda? It seems like the industry is pushing that a little bit more forward, which makes sense. So is that another possible technology...

No question. We lost 4 years of advancement really across this industry when it came to technology, during the last administration. They just were not open to anything that might someday possibly affect someone's job. And we really, as an industry, are excited about the partnership we have with the Department of Transportation and the FRA right now on working through how to improve safety. If you look at the major reasons why we have derailments, it's usually track related, separation or cracks or whatever or something around bearings, both of these technologies -- but technology can help significantly, wheels and bearings. Both these -- on the track inspection side, in bad weather, all conditions, all the time, automatic track inspection keeps working. Our goal is to keep our talented employees working, but have them fixing problems, not finding them, let technology find those problems much more accurately and efficiently, and that's the goal that we're all working on.

But you mentioned labor, obviously, is part of the technology discussion. But a little while ago, you've been -- you're coming up on what your 3-year anniversary, I think one of the more debatable things at least from the investor community was moving forward with labor negotiations maybe a little bit different than in the past. Now with the benefit of hindsight, I think we've seen just about everybody match that. So was there an advantage from being a first-mover having -- like you mentioned, people getting back in the system and helping the network? Like is that one thing? Are there other things that we should continue to think of here?

Yes. I think when it comes to labor negotiations, there's almost always an advantage for going first. One, the unions are more collaborative and want to find solutions if they have a willing partner. And second of all, you just get the noise and the anxiety out of the system, which is -- can be counterproductive, especially when there's so much discretionary effort in an industry like ours out in the railroad in the network. Importantly, there was a lot of work done, though, as an industry going into the negotiations about what the important topics were. So there wasn't a misalignment, I think, from the entire industry perspective. It's just a willingness to go forward and get things done. I think when you talk to employees, unions and customers and even government officials and regulators, all of them have a bad taste in their mouth of what happened last time. It took almost 3 years, had twice the threat of a strike, had to go to Congress. There's a lot of anxiety. Took 3 years in some cases for people to get a raise. They got them in arrears, but it just didn't feel the same. Our employees told us loud and clearly they didn't want to go through that again. It was really important. And so what was really good about this agreement was it's been pattern, so it's been consistently across all the other agreements have done nationally have been all the same economics, which is important for all of us collectively and the unions themselves. But it also was really important to get behind us so that when we had the issues we had, we could get to our workforce and say, "Hey, we are one CSX, we're one team, let's go together and work to fix this -- get this network back where we're capable of." And you saw how quickly we were able to do that. And lastly, I'll say that spirit of partnership is really important to make efficiencies because if you're fighting for years over the economics or other issues related to a national contract, you don't spend any time working on the local issues because the union will just say, we're not working on it until you [indiscernible] And now we're working through how do we make each yard more efficient? How do we look for the -- combine our pools of people? How do we better utilize our really talented employees to be more efficient? And we have a lot of that going on, including how do we implement electronic bidding in the north of our network where we didn't have that before. Now that's coming forward. So we're able to move forward on other things that are more CSX specific because we have the national negotiations behind us.

So one of the other areas we've seen a lot of partnership, of course, is with the M&A, the Transcon merger that's been proposed. We've seen a number of different announcements. So before we get further into the details, the one question we get and try to think through is can a partnership, and this is, I guess, what we're going to see play out real-time, but pros and cons of mergers, obviously, there's quite a bit on either side, depending you talk to. But from your perspective, what do you feel like a non-merged partnership in the spirit of cooperation that we're seeing in these press releases, like can that compete against potential UP-NS merger when you look further down if that's the steady state of where this all ends? Of course, there's a lot happening between now and what that means, but how do you approach it here and now as you start to launch some of these partnerships?

So the way we were thinking of it all along is what problem are we trying to solve? Obviously, you want, from a CSX perspective, to get more efficient, to improve your margins, grow volume, profitably grow the volume, those things. But from an industry perspective, what problems are we trying to solve? And a lot of it has to do with this notion of how do we get back to growth? How do we get back to converting business that should be on rail that's on truck today or other modes? And what we're really excited about is that we have an industry now that's talking about solving those problems, whether it's the interchanges and the inefficiencies there or just the spirit of partnership to go and find new solutions or ways to go about this. And for the longest time, the industry was so focused on each railroad's own piece of the pie, and that pie was getting smaller, but we were all focused on can we marginally get a bigger piece of that pie? And the real opportunity here is can we find an opportunity to grow that pie significantly? And the largest opportunity has been pronounced by a lot of people is this what they call the watershed, which is volume that goes through the interchanges or through the different regions of the different railroads. And one of the most exciting things going on right now is the partnerships that we have about trying to go after that business and solve these problems. For the longest time, all of us thought it didn't make any sense to have the inefficiencies of the interchanges that we have. But we've tolerated them and that we've kind of -- because of our own existence for lots of different reasons. But the threat or the concept of a transcontinental railroad has put all of the other railroads in a position where we need to be able to -- if that ever comes to fruition, we need to be able to compete. And so now everything is on the table to say from a -- and the problem to be solved is from the customer standpoint, how do you offer the same level of service that one could possibly offer if they're in control of the entire transcontinental railroad. There's nothing physically or technically stopping us from solving those problems today. You need willing partners that are willing to go make it happen. And I believe we have willing partners now wanting to make that happen, and we're working on it as we speak. From a technical and a physical standpoint, just how do you not have all that waste at the interchange. The recently announced agreement that we just started this week, the new service with BNSF, that train comes from Phoenix to Birmingham, Alabama, it has BNSF locomotives on it, it's a complete intermodal train. We just do a crew change in Birmingham and take that train with their BNSF locomotives over to Atlanta, to the Fairburn terminal, unload all that, then load the boxes back, bring it back and then give it back to BNSF. So it's not going through Chicago where that volume went through Chicago before and had to be trucked between 2 different rail yards. And so how do we now go after every single waste that's in our system and don't tolerate it, it's going to provide better service for customers, more competition for truck, hopefully more volume for railroads and get trucks off the roads, but also make those interchanges a lot more efficient. And we also then need to rationalize our capacity at these interchanges. How do we make it more efficient that way because we all have so many assets that we've grown up with over time. So the short line -- the short answer here is that the 3 other railroads, CN, CPKC and BNSF and CSX have come together to say, "Okay, if the STB does approve this UP-NS transaction, how do we collectively compete with that and what's it take to do that?" And we don't have to wait for an STB approval. We don't have to spend $2 billion of capital to make that happen. We don't have to pay a premium. We don't have a breakup fee risk. How do we do all of this as one team trying to figure out to do that? And that is exciting. And is there -- are there benefits, if you have control of the entire experience? There could be. We have to then offset that by saying what does it take to compete with that? And that's the work that we're all working on making happen.

So obviously, there's more willingness because of the transaction or the announcement of the transaction, however it takes shape. But in terms of the practicality of it, maybe you can use the Birmingham as an example, like with the haulage rights, which I think a lot of us are still getting up to speed on how that's different than trackage rights. But maybe you can get a little bit of detail on how that came to pass, how many more of those can potentially be put in across the network? Because I think that's really what the industry is now evolving into, which was maybe not even discussed before. So is it too early to even tell how much is potentially...

The trackage rights are typically more permanent and actually require STB approvals and things of that nature. But haulage agreements can be reached any time, and they're not as permanent and they're a lot simpler. Sean needs to make sure the economics make sense for all parties, of course. But the -- there's so much opportunity if you just have willing partners to find solutions. And again, the objective here is to say what's the fastest, most efficient, best route for the customers? And how do we make that happen? And so of course, it doesn't make sense if you're going to go to Atlanta to go up to Chicago, get stuck in Chicago and then come back to Atlanta. But where are all the other -- and there are lots of them, a lot of those opportunities. Nothing against Chicago, but there's a lot of interchange traffic there and a lot of things happen and a lot -- there's a lack of connectivity that probably we need to fix. But the most important thing is just to say what's the best, fastest -- the best route, the fastest route and the lowest cost route for everybody involved and how do we do that efficiently and offer that to customers? Some of that may be on UP and some of that may be on BNSF or CPKC or CN to the East. Our objective at CSX is to have the most efficient, fastest network in the East and to be the preferred partner for customers and for the other railroads to want to work with. And as long as we make that happen, we're in a good position. And that's what we're focused on. And that's what's exciting about this. But now that we have willing partners, we get to step back and say, "This doesn't make any sense. Why do we do it this way," and not be beholden to the past. And that's what the most exciting thing what's going on right now is to be able to make that happen. That's the nature of competition. It forces you to change, adapt, innovate and we're starting to see that. There are a lot -- to answer your question, Brian, there are many opportunities like that to go after, and you'll hear more about that over time. From our standpoint, we need to sequence these things in a way that we can manage them so that we're -- because we're the beneficiary of a lot of this. So we need to make sure that we're able to manage it in a way that continues to execute well for customers and to perform well for customers. So we're working hard to make sure that we're sequencing those things so that we can execute.

I'd just add on the economics of haulage, and haulage is just one of the options on the menu for how we solve some of these issues that Joe is talking about. But on haulage specifically, acknowledge, yes, your revenue per unit on that move is going to be lower than your average within that business segment, but it's because it's not our assets, right? It is our track, it is our crew. But the return -- the margins are attractive and the returns on assets on those moves are actually quite attractive. So it can definitely work as a solution, not the only one to unlock some of the value that's out there.

So the one service you just were talking about earlier that started, I think, this week, and we'll see more volume shift over in the next month and into next quarter, is there a way that we can think about conceptualizing the size of that? Is it an example of what that might look like? I think it's another train service being put into place. Obviously, it's converting from a different service over the rail. So what should we think about in terms of relative size? Are we going to start to see these be meaningful, be able to quantify the quantum?

So we haven't quantified it yet, and we're not going to go through and quantify each individual opportunity. But what I will say is you're going to see it start to show up in the weekly numbers, and you'll get a very good sense of the magnitude of the opportunity. Not all of them will be discernible in the weekly volumes, but this particular partnership with BNSF will be.

The other one that's interesting, Joe, I think, is the CN one that also came out with Memphis to Nashville, which I think is, at least from my perspective, is kind of emblematic of how maybe the perception of the industry and how they're working together is changing. So can you give us a little bit more background about that, how it came up?

Yes. So all 3 of those railroads are working with us right now. We're spending time with our operations and our commercial teams, and we're just -- everyone is getting to the table saying, what's the flow of traffic and where can we find opportunity to work together and how can we demonstrate this efficiency across the interchanges and whatnot. And what came up was CN has a lot of volume that moves from Prince Rupert to Memphis that wants to get to Nashville, but it stops on Memphis because that's the end where their business ends. And so we said, "Well, we have a train running every day from Memphis to Nashville that's not full." So we could just take it to Nashville and offer that service and take trucks off the road and offer a better service as long as we do that seamlessly, and we share an intermodal terminal, we kind of cross a lot of work together there with CN in Memphis. And so that was what we announced. So that's truck conversion. It's incremental margin for us. It's a better service experience collectively for the customer. It's a win for everybody. Now in the past, the railroads were always looking for to make sure if they did anything, it was 50% had to be -- benefit you. And what's going on right now is we're all looking for all the opportunities to serve customers better and to demonstrate that we can work better together to grow the whole pie. So there may be an example where this more benefits CSX, and we're working on other examples that will benefit CN or CPKC or BNSF. A lot of the traffic flows from West to East. So in the near term, you're going to see a lot more of the volume in the East because -- but over time, if we can work on this interchange and this watershed, it benefits everyone. So that's all the work that's going on. And that's the difference that's happening right now. We couldn't get railroads to kind of just work on growing the whole pie because it was always about, well, make sure I get the biggest benefit. But now we're working together collectively to say, let's just make it all better for customers, for the economy and for society and demonstrate we can do this through these partnerships.

What's sort of the feedback from shippers and customers now that it seems like it's almost a brave new world in some ways from a railroad perspective? Obviously, things are still changing, there's a lot of uncertainty, but we've seen several headlines filings, shippers voicing their concerns and big ones against potential merger and what that might mean for them. So is that an opportunity? Are they trusting of putting more freight on the rail networks or does it still need to show us the service, the reliability?

Well, at the highest level, I think the service improvements across the entire industry have been pretty meaningful in the last couple of years, especially compared to coming out of COVID. So that's good for all of us. Certainly, we think we've been leading the way over the last several years in that regard. I think in general, the customers want more business on rail. It's safer, it's better for the economy, it's better for the environment and in most cases, it should be lower cost. What they've always been looking for is more repeatability, reliability, dependability of the service levels and also a partnership that is more conducive of how a customer relationship should be. And so we've been working hard on that. I think you'll see that changing in the industry. I think that will be a good thing. I won't speak for all the different associations and groups that have come out regarding the proposed consolidation. But I think that what you're seeing is customers are preferring -- many of them preferring this partnership agreement because it still allows for a lot of the basic tenants of the existing network to be there, but also us working on the inefficiencies that are impacting customers. So we've seen very positive response from customers so far on what we've been announcing and what we've been working on with all the other railroads.

In terms of new interchange points, which I guess would be another aspect to the whole network dynamics, the shifting, you can do partnerships, you can do haulage rights, but like actually creating new interchanges. We saw one with CPKC and yourselves in Myrtlewood, which took a little bit of time to get put into place. But are those -- are they ready-made ones for that? Is this part of, obviously, the network...

Yes, I think this is -- again, this is the rethinking that's going on is just get the maps out and say, what's the best route and can we make it happen? And if you get out of thinking the way they always -- the paradigm of how we always do it, we should be able to avoid Chicago more than we do. Nothing against Chicago personally, but I mean, just traffic flow-wise. We should be able to -- if we're not establishing new interchange points, are we establishing new crew change points, which -- and how do we do that, whether it's haulage or whether kind of agreements like that. It's all about getting the traffic across the interchanges efficiency -- again, efficiently so that we can compete with someone who might be able to do that on their own. And that rethinking is really critical right now because you don't have to go there necessarily. It might not be the most efficient route, but we always did that way because it was the easiest or more natural. And importantly, for us, especially, if we can get some meaningful more volume, this is largely -- a lot of this is intermodal, okay? Not exclusively, but lot of this is intermodal. If we can get a lot more intermodal volume, which I think will come CSX way, that density provides new solution opportunities because it wouldn't make sense if you had a 5,000-foot intermodal train to go around Chicago because you want to combine it to make a 10,000-plus foot train. But if you have enough volume that wants to go around Chicago, you can make that train go around Chicago, but you don't need to go to Chicago. So a lot of this is a lot of give and take between where the volume flows are going to go. But certainly, we're excited about the partnership opportunities that are being presented to us about that will bring more volume opportunity to CSX, which then will create the opportunity for new solutions. So a lot of these things go together. We create density, we can create new solutions. And that's what the work that's going on with all the other parties right now.

And when we think about working with the other parties, what's the speed to market to service? Like part of the idea of the strategy with not doing a merger is you can do it quicker, but the industry is not typically known for innovation or speed historically. But as we're talking about on stage here, a lot of things are changing. So will this be a gradual process? Will it take some proof of concepts to really get more support behind it? Obviously, there's probably some capital involved, maybe some rationalization. So I know we're in still early innings, but do you feel like this momentum is going to build or are we going to have to see this a little bit slower steps...

Yes, I believe the momentum will build. I think it will be cadenced. I mean, because, again, we need it to be -- can't be disrupted to the system because it needs to be managed. But I think it will build. I know it's going to build because the stuff we're working on. The more structural changes will take some more time if there are -- if those are what we decide to do. But as far as service offerings and the rerouting and all of that, that can happen pretty quickly and is happening pretty quickly. I mean the CN stuff we announced -- we made the decision and announced it within like a couple of weeks, and then it's happening. I mean, literally, that's how fast. The BNSF stuff was in the works for many months, many months ago. But once we kind of collectively made the decision, it didn't take that long to execute. So I think you'll see a lot -- especially with intermodal, you'll see a lot of that. On the carload side, again, contracts come up, we'll work around that. But those routes are pretty well established. But I'm encouraged by what we're going to see. There may be new solutions that we haven't thought of yet, technology or otherwise that may take a little more time. But the good news is that right now, the spirit is: let's not assume anything has to be the way it is today, everything is on the table. And what's the art of the possible? What's it take to create a seamless experience for the customer? And that's the mindset that all the railroads have right now.

And so yesterday, we saw the preliminary proxy come out, several hundred pages. We'll have several thousand pages in the filing when that comes out later, your application rather for UP-NS. Does that really -- are you going to find anything new and exciting in there? Does that really change the course of the strategy? Obviously, there's still a lot of moving pieces. So I'm assuming something would change. But do you kind of already know potentially...

So I haven't read it yet, I've been busy, but I'm going to try and read it on the plane right back to the U.S. later today. But there weren't any surprises. At least our team that's gone through it, didn't see any surprises. We're all waiting for the application to the STB. I think that's the real meaningful data information. What's being proposed, what are the scenarios, what are the conditions or whatever words you want to use. So we're waiting for that. I mean we -- obviously, that's pretty important for us to see before we have really a strong opinion one way or another on certain things. In the meantime, as Sean mentioned, we have a number of resources in place working on our thoughts around the proposed consolidation, our thinking around competitiveness and different locations and things because we want to be prepared for the STB process. So we're spending a decent amount of money with advisers and lawyers and whatnot going through everything to make sure that we're prepared because obviously, this is important for all of us. But we didn't see anything in that, that was anything that was surprising to us. But again, the real important document is the application itself, so we can really see what they're proposing in detail, and then we can take a look at what that means for CSX and for the industry and then what we propose as solutions to some of those things.

So there's some misconception that you compete with the Western railroads and actually partners you're doing a lot of interchange work. But in this case, maybe the idea is that you -- one of them be buy as your competitor in the East. So does that -- are you worried about foreclosing opportunities? Obviously, the review process is going to look at that pretty extensively, but you have a big chemical franchise, UP has a big chemical franchise. So there's, I guess, reasons why the market thought that would be a natural pairing. So if that's not the case, is there certain end markets or areas that are more at risk if you were looking at that versus the status quo?

Yes. So I mean I'd like to say that, first of all, we do have a very strong interchange business with Union Pacific. I anticipate we'll still have a strong interchange business with Union Pacific, no matter how the STB rules because the customers vote on the routes and the partners. And there's a reason why we have significant interchange business with Union Pacific today, chemical franchise being one of them, autos being another, it's because we -- the customer votes for CSX and in this case, UP, for the route, for the offering, for the service. And I would anticipate that will still be the case for certain scenarios in the future. As long as CSX continues to be the best running railroad in the East, we'll have lots of options with customers who want to do business with us. And I'm pretty confident the STB will be looking at this very carefully to make sure that customers still have options in the East, no matter what scenario plays out. And so yes, that -- some of those franchises are really important to us, they're important to CSX. The nature of competition will bring new solutions, presumably on all sides. So we want to be a part of that or be able to compete with that. But we're confident that our ability to serve our customers, our current route system, our current relationships, current service levels are all going to help us with customers who will eventually decide where the traffic flows because we lose sight of the fact that the customers are the ones that decide which partners they pick to move the goods. And we offer them solutions, they pick a choice. So the key is to be able to offer them competitive solutions. But I'm confident that one of those competitive solutions will still maintain the ability for Union Pacific and CSX to move freight together. And so that will have to play itself out as it plays out. But I'm sure the STB will be looking very closely into that. And that will be a large ask we know because they talked to us about it via the customer groups is to maintain that ability to choose which route is best for the customer.

Right. But there's no single -- I mean the perception is a single line back to the concept of control that a single-line service can beat everything and so therefore, you're potentially not the most competitive in the East, but then pair that against what the shippers want and what they're asking for from a balance perspective. So I think that's...

Well, it's our job and our partnership with the other railroads to be able to offer a competitive solution that doesn't disadvantage us or another railroad in that interchange or that business. Again, we're talking about right now, 25% to 30% of our revenue comes from interchange, 75% to 70% of our revenue today is within our region. So that's not going to change. We're talking about the piece that should grow the interchanges -- that goes across the interchanges, but it's our collective jobs to offer a solution to the customer that competes with, if there is a combined entity, both in terms of operational effectiveness and routes and timing and speed and cost, but also in terms of the experience. So we have to find a solution that makes it seamless for the customers to deal with 2 railroads if they're going to have an option of dealing with 1. So that's technically feasible. It's an interface, but we got to find those solutions. So that's the stuff we're all working on together to be able to offer to customers.

Technology, one bill those sorts of things?

Yes. Again, part of that is the STB process itself by billing. And so that will be part of the conversation if they do and if the STB does move forward with allowing this consolidation is how do you allow the other railroads to compete on pricing and offerings as well, that will be part of the conversation. Again, it's our responsibility to offer the customers something that's competitive, and we will -- that's our commitment to do so.

So maybe we can finish up with going back to the watershed, which I think before this year, a lot of us hadn't really focused on that and the industry hadn't really focused on it as well. So reasons why you think that wasn't the case? I mean, clearly, there's more emphasis on it, maybe more excitement about it. But was this just harder to do, margin dilutive? Like if customers were asking for it, I thought the railroad industry might have already progressed down this path. But what's really changed? And I guess, how quickly can that market be addressed?

Well, this has always been interested to CSX. As a matter of fact, Sean and the team, before I got there, had a consultant doing a full analysis of this 4 years ago or something like that. So we already have a lot of that data. We refreshed it lately. It was hard to do, and you need willing partners on both sides. And a lot of this has to do with the interchanges. And so if you weren't in for fixing the interchanges, then you really couldn't compete for that watershed. And now we have motivated partners to do that. So I think the moment is right. We've got to take advantage of it. And the devil is in the details. It's by lane, by customer, and we're all going through that. But if you have motivated railroads to find solutions, I believe we'll find those solutions. And so that will be good for the industry collectively for everyone, and it will be good for customers and for the society as well. So that's an exciting time for us, and that's one of the big opportunities we're all working on.

Well, certainly, it's an exciting time for the industry and also for CSX. So thanks for making time to come to London...

Thank you for having us, Brian. Thank you all for being...

Thank you.

Thanks a lot.