CSX Corporation (CSX) Earnings Call Transcript & Summary

My name is Dan Moore. I'm the senior Transportation analyst here at Baird. I have the privilege of having Kevin Boone and the company here at CSX today. Thank you for being here. Fortunately, they made it in. No problems, clearly last night. So that's good. I know travel has been difficult for everyone for a variety of reasons.

So, look Kevin, it's been a heck of a year, right? A lot to process as an analyst, a lot to process as a management team. CSX has certainly seen some change with respect to management. There's a lot going on in the U.S. rail complex from the standpoint of proposed mergers. Can you talk a little bit about -- what all that means for CSX, given the change in management and some of the strategic considerations that accompany M&A and Ultimately, what you may think that could mean for '26?

Yes. Well, first of all, thanks for having me. Yes. I remember being at this conference in Trump's first turmoil when he was -- when he won that election. So I was on the investor side. So I go way back with this conference. But there has been a lot of change. That's been an interesting year. Not only in the industry, but just with our customers and the tariffs, no tariffs, more tariffs. All those things have been pretty dynamic. And coming from the commercial side now back to the CFO overall certainly have a lot of perspective from that end. What Steve has been clear in his -- what he's told the teams internally, and we just had a leadership meeting last week is we're going to run the best company we can and he has clear targets around that, and we've talked a lot about that internally of how can we drive efficiency, how can we grow the business profitably and focus on the things that are most important. And he has a phrase that he says a lot, is make the most important things, the most important things. And I think that's pretty refreshing to the team and -- when I talk to Mike and others, I think there's a lot of energy around that. We want to be at the top of our game, no matter what happens in the industry, and we'll wait to see how all these things play out, but we want to be in a position of strength. And that's, I think, what you'll see us really focus on over the next year as all these things evolve as we get the filing that's coming soon from the UP-NS. So we'll be in a position of strength to be able to react in whatever way we need to. But highly focused on shareholder value, creating as much shareholder value, whether it's on a stand-alone or other options.

Right. And maybe to dovetail on that and spend another minute just talking about Steve and his areas of focus out of that leadership meeting. What do you see as his areas of focus, the opportunities really specifically that he's prioritizing. So maybe taking a step further into that, how CSX might operate differently under his leadership compared to the last couple of years. Leadership changes inevitably bring ships in perspective. And anyway, what have you observed so far? I know it's still early days, but what should investors expect going forward?

Yes. He is laser-focused. His work ethic, it is pretty incredible. We're all trying to keep up with them. But he's got a lot of curiosity about learning the business, and he's met with dozens and dozens of people to understand the business. A lot of questions, a lot of listening. But he is very financially focused. He wants to understand operationally what are the drivers of our cost. Certainly, spending time with our new CCO, Maryclare, on pricing dynamics, he understands it from its previous industry, how important that is. So we want to understand that a lot more. But really looking across the business, understanding the talent that we have in meeting with the talent and understanding what our key objectives are and really setting the targets from a financial standpoint. We're doing a lot of discussion there, obviously, in the middle of our planning period right now. We have a board meeting in December, where we present our initial look at what that plan looks like. So a lot of work being done on that right now. But a lot of questions. He comes from an industry that was very focused on safety. So that remains a priority for him. And he comes from an industry that, quite frankly, served a lot of the customers that we serve. And so he understands our customers and their businesses. So he's asking all the right questions, which is very, very helpful.

Right, right. infrastructure. So the infrastructure narrative, I think, has been a very prescient one for CSX. You've completed 2 major projects recently completed may be a strong word, but very close to complete. Still got the double stack in front of us. But Howard Street Tunnel, Blue Ridge subdivision. I think that's expected to result in meaningful growth not only in the fourth quarter but certainly in '26 and beyond. There's also the cost-out component. You've been carrying more costs with you because of some of these investments. Can you talk about what that means in terms of operating performance and the opportunities you see now that these projects are beginning to find their way to completion?

Yes. I think 2 unique projects. One was planned for, for a while, right, the Howard Street Tunnel and then one, obviously, was a result of a once-in-100-year storm. Starting with Howard Street Tunnel, we've obviously completed the tunnel portion, the bridges, which are being done by the city. Those will be done. Late in the first quarter. So hopefully, by second quarter, we'll be running double stack through that whole corridor. And when you think about the cost, we had about $10 million a month this year and costs. So we're complete with that. So think about $100 million in savings or costs going away as we get into '26, will be helpful. And a lot of that was just out of route miles. When you think about, we had to reroute a lot of our freight creates congestion on other lines that aren't used to that much capacity. So there's a lot of efficiency, fluidity, benefits that we'll see coming out of that and a lot of resiliency in our railroad, having another corridor open. So when we think about the opportunity for growth, Maryclare will tell you, it takes time. I will tell you, coming from that role, it's going to take time to -- as bids come out for the intermodal as we start in the second quarter, we're going to go after new lanes and new opportunities. We're going to have a very, very efficient route from east to west and then north to south, which is going to create a lot of opportunities for us to work with some partners of ours to really unlock some truck volume that we see moving today. So that's -- we're really excited about that. We've probably been talking about Howard Street Tunnel for 40 years. There's been people around for 50 years that have been talking about that. So very, very happy to get that done. Blue Ridge, really, that's -- obviously, that line was wiped out by the -- by the hurricane impact, and we made a decision to rebuild that line because it creates a lot of resiliency in our network. And when you have storms, you have other things you want to reroute, it really, really is helpful to have an alternative. And I think that's the strength of our network. Mike would tell you that coming from the Canadian side where they had a single line if that line got taken out, there was not a lot of alternatives. When you look at our network, we have a lot of alternatives when things go when weather happens, other things. We do see a couple of growth opportunities there, but not nearly as large as Howard Street Tunnel working with a couple of customers that are interested in operating on that line, one intermodal opportunity that I'm pretty excited about. That will come hopefully and start in the next year.

And the double stack, when does double stack -- when will you be double-stacked complete?

Cleared? By the second quarter of this year.

Okay. Service improvements. So, yes. I think the service improvements that CSX has realized over the last year have been nothing short of best-in-class. The opportunity to parlay that into growth opportunities, getting deeper with customers. Can you talk about the level of service that Mike's help the network achieve and ultimately, what that does for your organization as investors think about the growth opportunity that exists apart from the infrastructure projects going forward?

Yes. I mean we had our bumps and obviously, with 2 lines out with storms earlier in the year, had -- had a few issues there. What we've done from a recovery standpoint is nothing short of phenomenal.

It's amazing.

I mean they come out of that. I think Mike beats himself up a little bit too much of that short brief period that we had. He's -- he's a competitor, and he likes to be best in the industry, and he's done a phenomenal job. That team between Casey, Cory and [ Care ], we're all working very well together. And I know Maryclare has a great relationship on the commercial side. So it's -- when we take -- there's nothing better than to have an aligned operating team when you're going into a customer and trying to sell a service. And Mike is a very, very good tool in that we've taken to a number of customers that are very important to us and having the ability to sell that and sell his commitment to service it's kind of -- it's separated us in the market, I believe. And when these markets return, and I'm sure we'll talk about that, I think we're going to be well positioned. We talk about a lot of resiliency in our network and making sure we have the T&E employees. We have the locomotives ready to serve the customers when this hopefully cycle turns. When you think about where we are today, we have a lot of our key segments that are arguably at cyclical lows, and we're thinking a lot about when that growth returns that we're prepared. And I have more confidence today than I ever have in the 8 years I've been at CSX that we're going to be prepared to handle it. The other thing that gives me confidence is Mike has created stability among the leadership out in the field. So our when you think about the MTOs and the superintendents out in the field and they're getting to know the customers and there's a lot of stability that really helps from a service perspective. And the customers really see that disruption when people are leaving or there's not continuity out there. So we're only continuing to grow on that. And I would -- if Mike was sitting up here today, he would say he expect things to get even better from a train speed, dwell and all those things.

Yes. It strikes me that improved service is also a proxy for better pricing, even if that's an intermediate-term type outcome. Price cost has been something the industry has struggled with. I think everybody has struggled with inflation through the COVID period. Could you talk about just the price/cost narrative, how you're thinking about price cost going forward, particularly in light of the service improvements that you guys have realized?

Look, we want to -- and Steve has reiterated this, we're not -- he mentioned industries where they're solely focused on market share. Those aren't necessarily the most successful industries. We're focused on driving business that has a good return that allows us to reinvest in our business. And that's something that he's reiterated. Price is important, price in terms of capturing our inflation, which has been extraordinary to your point, over the last few years. It's a competitive environment where everybody is talking about growth. Everybody wants volume, but we're not going to move volume at the sake of below our cost or go aggressively there. We're earn our customers' confidence and continue to deliver that. So there's a lot of dynamics there. It hasn't been a good trucking market, as we've all known. We faced that for a while now, the longest kind of down cycle, I think, that anybody in this room can remember. So -- but we're prepared to capitalize on that when it comes. With that said, Matthew and I were going through a list of the truck conversions we've had this year. And the list is pretty healthy despite the challenging market where you're getting down truck rates still to go and convert to rail says something about your service and says something about the value you can provide there. So we're optimistic that that's a lever that will really turn on once we see maybe a healthier trucking environment with supply starting to come out. I know there's a little bit of noise on a court ruling that occurred here recently. But supply does seem to be coming out. A lot of our customers are saying that. We just need the demand to come back a little bit here.

Yes, yes. Partnership announcements. There have been a number of joint service and partnership announcements, collaboration announcements recently involving CSX. I suspect you're not waiting to execute on those. Talk to us a little bit about the opportunities embedded in these collaborations and what investors may or may not fully appreciate about the increased level of cooperation across your partners and as you think about opportunities for growth.

Yes. I mean from day 1, when I was in that commercial role, I thought there was always an opportunity to work better with our Class 1 peers. And I think a bit of an issue when I first started the job is nobody was operating very well. So there wasn't a lot of -- initiatives or a lot of reception from our peers to go out and start new service or think about that. So this isn't anything new. People like to associate, obviously, some of the industry change, but things are different. I would say this is things that we've contemplated for the last 4 years, and now we're able to execute on it. For example, the recent intermodal win in the Southeast, that was something we worked on for 12 months. It wasn't something new. The timing happened to be around an announcement that came out from our competitor and the UP, but those are coincidental, if anything. The most significant thing that I can think of from a -- and I wouldn't even call it partnerships, just general working together better as Class 1 was the Meridian Speedway connection with what the CPKC. New interchanges aren't created every day, and that's been significant for us to connect Mexico and in other parts of the Southwest into our network. So that's a significant one. So you'll see us continue to push with all the other Class 1 railroads and UP remains a very important partner with us, and we'll continue to work with them. If there's a business to be had we're going to go after it. And I think what's changed and what's more of a driver today maybe than perhaps all these announcements going around industry consolidation is we're all operating well as an industry. And so I think you're allowing the commercial teams to lean into new opportunities and not being constrained by operational difficulties or things that are going on. And so I think that's what you've seen from us.

There's -- it strikes me. There's also been a lot of discussion around increased competition in the East, I think, to some extent, maybe a function of these collaborations and just some of the shifts that are occurring with respect to domestic intermodal. Norfolk Southern has certainly discussed this on their call and they may look to defend those markets ahead of a potential merger. One could also argue that there's business that could shift from between CSX and NS as a partnership -- partnerships force realignment with respect to domestic intermodal partners. Can you talk a little bit about the competitive environment in the East, domestic with respect to domestic intermodal -- what's occurring right now and what the implications of that are for CSX and domestic intermodal as a whole?

Yes. I mean a lot of moving parts right now. There's a lot of alignment, obviously, with our partners and other things. I think going back first, Steve's focus and our focus as a team is running the best intermodal operations as we can. And I think when you go back the last 6, 7 years, the consistency of our intermodal network is second to none. And I think our customers appreciate that and I've seen that. And when you look at some of the recent ones that we have announced, that was business that we enjoyed before and there's speculation. That's a business that's not naturally moving on our network. It's unnatural and there's an advantage on the other railroad. We would strongly disagree with that. I would -- the customers that have moved over with that business recently would tell you the service has been phenomenal, and they haven't seen a deterioration in that service level.

Right.

And we're actually offering them new markets like Florida, which we have a unique offering into. So a very, very efficient service offering. If you're not aware, BN has a haulage agreement into Atlanta. That creates a lot of efficiency that's existed for a long time, and it's really capitalizing on that relationship and helping our customers find really efficient ways to deliver value to their customers. So -- that's where we are. We're going to continue to contemplate. We're working with partners, whether it's the BN, CPKC, CN on ways to speed up the network. And I think you'll see opportunities for us to do that to be more truck competitive. Take time out of the -- how long it takes to get from L.A. into our network. Those things are a big focus of ours today. And we think we're making a lot of strides. And Mike and his team are very, very close to their counterparts over there, and that helps, right? The ability to collaborate on the operating side, I think it's been a challenge in our industry for a long, long time. We're always worried about what the other -- if the other person or the other railroads may be making a little bit more than I am, and that can get in our way sometimes. And I think you're seeing a lot more collaboration around that.

Yes. Makes sense. Another question I wanted to focus on was just the general notion of strategic optionality. It's no secret that Steve has a reputation for getting deals done that you thought possible. And I'd say there's still some who believe that CSX and BNSF could be ultimately best served by pursuing a merger. I recognize that any transaction requires 2 parties. But when investors ask about the potential for future consolidation, how would you like to frame that discussion?

Yes. I think going back to some of my initial comments, Steve has been very clear in the direction for our company is focus on all the things that we can do well, right, and put us in a position of strength, no matter what the environment looks like in a year or 2 from now. And that's going to be the best -- that's going to serve our investors the best, it's going to serve our employees the best, our customers invest and align around that. And then we obviously have to be open to all options. And whatever that looks like, that creates the most value for our shareholders and all stakeholders for that matter. And we want to be able to compete, right? And we have to continue to obviously, can communicate with our customers, make sure that we're making the investments and being able to reinvest in our network to create options for our customers. And those are the things, quite frankly, that we continue to focus on, and that Steve's reiterated over and over again internally.

Right. We've got a few minutes left here, quite a few people in the gallery. I'd like to give everyone an opportunity to ask questions to the extent anyone has any they'd like to present to Kevin?

[indiscernible]

Question was anything on the buyback front as Ancora pushed for anything there?

I don't think you'll see our strategy change there. We've been very opportunistic when we've seen opportunities. We certainly believe in the long-term story for CSX, and we generate healthy free cash flow, and I think you'll continue to see us to be in the market.

Any other questions? [indiscernible] Group. Capital budgeting, it's at the time of the year. You find yourself back in a role of thinking about those really important investment decisions that need to be made in the upcoming year. How are you thinking about this capital budgeting cycle, particularly in light of tax bill, whether or not there are any implications associated with that. But more importantly, I guess, maybe just from a strategic standpoint, new leadership where are you guys planning on focusing capital investment in '26?

Well, first, we got through a very large capital -- 2 very large capital projects, right, which are going away. So that's helpful. I do think -- there's a lot of focus on, obviously, operating expenses at every company. I do think coming back into this role that you'll see a lot of focus on capital discipline. It's really one area where I think we can be a lot more efficient and how we replace rail, how we spend our capital, and it's something that in my first 1.5 weeks, 2 weeks, have really spent a lot of time focusing on. So I think there's an opportunity to become a lot more efficient there. Cash is cash at the end of the day. I think you'll see Steve very focused on returns on invested capital. So that's an area that he's really focused on from his previous life. And obviously, capital plays into that in a way that really is important, right, to the calculations it's in the denominator. So -- that's an area where I think there's opportunity. And when you look at the last 5, 6 years, I think we can do better. And you'll see a lot of focus from me and Steve in that area going forward. And then when you look at our opportunities for investment, we'll continue to invest in the business for growth where it makes sense. We don't see anything on the horizon that's large or necessarily significant. But if those opportunities to invest come up, we'll certainly look at them. But nothing on the horizon like a Blue Ridge or Howard Street Tunnel that we see.

Automation. It's a subject that's garnering a lot of attention, a lot of focus from investors and companies. You talk about efficiency and productivity. And I'm just curious, at a high level, where do you see opportunities for cost out I don't necessarily think of AI as being impression narrative for the rail industry. But clearly, there are aspects of your business that are high touch and that can be automated. There are areas of the business that technology can probably effectuate improvements in productivity. Could you spend a couple of minutes just talking about the opportunities you see for enhanced productivity and reduced cost in back office and other areas to the extent that it's relevant?

Yes. We're going through a digital transformation at CSX and cloud transformation and putting all of our data in a place where we can access it easily. And we've had -- we've lived on the mainframe for a long time, and these systems don't really talk to each other, right? And it's really hard to aggregate data in a way where you can make -- where you can have decisions being made in real time. And Mike, I think, was surprised of our lack of systems and the lack of real-time visibility, and we've come a long way. under his direction to have some of those tools that are helpful going forward. But when I think about all the things that -- and we're a network and having all this data together and then those decisions are now becoming a network decision rather than individuals in each of their regions or each of their terminals making decisions that might be good for their terminal, but not good for the network. I think that's a huge opportunity for us. going forward. And then when I think about automation, if you go out to your rail yard today, we're doing the same things we're doing 100 years ago, in terms of how we switch cars and other things, and you look at that over the long term. And all these technologies to a large extent, exist today in other industries that you could apply here. You obviously have to have a willing regulator that will allow you to do those things. And I think we're optimistic that some of the technologies, particularly around the safety and inspection and other areas are going to be hopefully more receptive to those going forward because it is good for safety. And look, accidents cost us a lot of money, too, right? And it's not only good for our employees, which Steve has reemphasized over and over again, his goal is to get everybody home safe at night, but those things go hand in hand, and that creates a much more efficient network when you have less accidents, less incidents on the railroad. So it's across -- a broad range. The G&A side is the easy one. Everybody sees it. There's opportunities there that we'll look at over the next couple of years. But I do think technology as a opportunity to drive costs down, and we're at the very, very early innings of that. We haven't really had an opportunity to execute on that yet. But it's my expectation, I know it's going to be Steve's expectation that the technology efforts and what we spend on technology so far will start to drive cost out of our business.

Right. I've got one more question to ask, but we've only got 2 minutes left. To the extent anybody has a question they want to ask. I'll give you one more opportunity to do that. In the back of the room? Got a couple?

[indiscernible]

If you don't mind speaking up a little bit?

I'm just a little as there have been like a better sense of working safety [indiscernible] operate more quickly [indiscernible]

Yes, I think you'd be surprised at how many companies are still mainframes. But I agree, it's a very complicated endeavor. It's not just a lift and shift. If you're going to do it right, so it's been a multiyear kind of endeavor for us. And you have to -- first, we're running a network, right? And we can't -- you want to have 0 failure. So you have to make sure that the networks are reliable that you're going to, and we've run into those issues as we tested it. Fiber can be cut, all those things. You got to make sure that those who aren't going to stop your railroad from running. So -- it's been maybe slower than we all had hoped, but you got to make sure that it doesn't impair the business operations.

[indiscernible] how do you plan [indiscernible] .

Yes. The question was basically, how are we going to compete in intermodal with the potential UP-NS merger, and I think it's working with the partners and creating a seamless customer experience, and we've come a long way with that. When you think about the haulage agreement that BN has on us all the way into Atlanta, that's a pretty seamless experience. That's -- and so we're thinking differently when you think about another haulage agreement into the Northwest Ohio, similar experience. Taking -- when you think about cross towns in Chicago, density actually helps our networks. When you're building a whole train, and you can just hand the train off and run seamlessly. There shouldn't be a lot of difference between that and what the UP-NS could offer. And there are some advantages in our network, and we're going to really play up to those. There are some advantages in some of the other Western railroads networks. And how do we take advantage of those collectively together to work together to win share in the market. And so those are the things that we're discussing not only with obviously the other Western carrier, but the Canadians as well is we all want to be in a position to compete. And I think we're doing a really good job. I think you'll see a lot of key lanes. We're going to be faster or the most competitive.

We are out of time. All right. Kevin, thank you for being here.

I appreciate that. Yes, thank you.