CSX Corporation (CSX) Earnings Call Transcript & Summary

Good afternoon, everyone. We're going to get this keynote lunch started here. So appreciate everyone coming down to Barclays 43rd Annual Industrial Select Conference. This is our third day. So thank you for making it through. It's been a very eventful conference again. I'm Brandon Oglenski, airline and transport analyst. But I just wanted to very quickly thank our corporate access and event marketing teams. There's a lot of folks that work around the clock at Barclays that really made this event possible. So thank you, Martel and to all of your team and Aaron Bruno and everyone else. So today, we're going to have a keynote with CSX and new CEO. Steve is not foreign to this conference. In fact, he has been here before in his capacity at Linde and Praxair historically and started your career at GE and on the Board of Vernova, correct?

Yes.

So Steve's got quite a bit of perspective here. I really appreciate you coming and spending a little bit of time with us today.

Thank you, Brandon.

So definitely have a lot of questions about railroads, M&A, CSX, your new job. But maybe more broadly, given that this is such a great industrial conference, the themes that we've been hearing over the last 3 days of like AI disruption, reindustrialization, and yet we haven't seen really much industrial production growth for the last 3 years. So just from your perspective, are these big themes going to drive some growth across these industries? Or are we just looking at another 2026 of flat growth?

Let me just start with start kind of with the AI question. When I -- and there are some people in this room that I think are better positioned to answer that question than I am on AI. But I'll just tell you what I observed because to your point, I just came off -- I was at the GE Vernova Board meeting yesterday. And every Board meeting has some discussion around the impact of AI, the impact of automation, the impact of robotics. And I would say everybody is kind of figuring it out. I think it's -- I do think it's going to be the traditional industrial businesses that potentially could benefit the most. When you look at simple things like the way they prepare proposals, which can be very complex in certain industries, AI can help a great deal there. The whole customer service, the whole backroom, the way they manage their entire fleet of assets, the whole service side of the equation, the repair side of the equation. If I talk to people -- I sit around a table and ask people like the people in this room, I said, "Do you think AI really is going to bring benefit to what you do?" And I get a lot of extreme positives in terms of real-time applications that they're using, that can save either a lot of time, more efficient, whatever, better customer service, the whole gamut. And I was kind of surprised myself because I thought I'd get something more high level in terms of their opinions and their views. They gave me very practical applications. So I do think about it in terms of -- there's a lot of discussion about AI and the company is leading that charge, but I really think it's going to be a lot of the traditional older industries that could reap the most benefit from the whole AI side. You asked me about industrialization. And I can tell you, I'm in the railroad today, but I used to think about this in my prior job in chairing that Board and so forth. When you look around the world, there really isn't much growth. China was a growth engine. China is not a growth engine today. Europe has never been a growth engine. It's not going to be a growth engine. So I hope I don't offend anybody by saying that, but I've lived -- I've seen that movie for so long. I know what's going to happen. A lot of people talk about India. Yes, India is growing. It's nowhere near on the scale of China or the U.S. or the EU. It's a positive. But what I kind of figured out in my old job, I said really all roads lead back to the United States because when -- in terms of growth potential and sustained growth, the U.S. is still your best bet. And this tariff noise aside, which I do think creates issues in terms of people's willingness to commit capital. The latest tax law that went into effect basically cemented a low tax rate for business. It also provided accelerated depreciation benefits. So if you're a global company and you're sitting here thinking, I need to grow. A lot of companies ask that question. They go under strategy reviews, the Board meetings. A lot of it is about how do I grow? And if you think through that, your best bet is going to probably be in the United States. And now there are benefits to doing that, which I just described. Is it happening? If it is, it's a very low level today. And I do think all the tariff noise creates enough doubt in people's mind that maybe we should wait, let's see how this plays out. Let's let all these things be decided and then we can decide whether or not to pull the trigger. But when I look at the long-term prospects of the United States, I think it's in a favorable situation. So we'll see how fast it comes. It isn't coming in '26. I certainly didn't build it in my guidance that I gave for '26, but I have to think it's going to come. And so I think if you're looking for a positive, I'm usually not a guy that goes around sprinkling positives in meetings like this. But if you're looking for a positive, I think that is a positive.

Appreciate that response, Steve. I guess you've been at CSX now about 4 months or 5 months?

Yes. I'm an expert.

Well, as an outsider to the railroad industry, what's been your perspective thus far?

It's -- I mean, there's nothing like railroads anywhere, anywhere on the planet. I've never seen an industry like this. In many ways, railroads are the heartbeat of the American economy. And the U.S. was built on railroads. There's a lot of lore and history in this industry. You're not going to walk into the offices at Meta or Google and meet fourth and fifth generation employees. I mean it's that kind of heritage. It runs that deep. And it's a fascinating industry. And I enjoy it. I used to sell many years ago, actually, the last century. How about that? You don't have many people sit up here and can relate back to the last century. But I sold locomotives when I worked for GE to the railroad industry. And I got a chance to interact with all of the characters, saw how they ran the railroads, their operating philosophy, really got an appreciation for the history of the railroads and the importance to the American economy. And a lot of times, people would ask you, especially after career as long as I've had, what was the best job you ever had? But you didn't have that question on there, did you?

No.

Okay. So what's the best job you ever had? A lot of people would think, well, CEO of Linde, CEO of Praxair or whatever. Actually, I think one of the most fun jobs I ever had. interesting jobs when I sold locomotives to the railroads back in the late '90s. And so that kind of was an attraction to me. It never really left me, even though I went off and had a long career with GE and other electrical products and industries, then chemical industries and whatnot, that never really left me.

Well, and I guess what attracted you to CSX? Can you talk to that process?

Well, I flunked retirement. I tried that. It's boring. I chaired a couple of Boards. It's boring. It's -- I'm kind of wired for the day-to-day. What I really enjoy is working closely with the teams, helping them solve problems, making progress. I don't want my whole day to be about solving problems, but that doesn't bother me too much either. So I kind of like the grind of the business, working with the teams, progressing the business, learning the business. I think it's a fascinating business, fascinating industry, fascinating company. So I was not out actively seeking. I had -- people would call me and say, how would you -- would you be interested in this company? And I'm not going to throw names out there because it wouldn't be a good thing to do. But would you be interested in this company? And I think about it and I go, "No, I don't really like what they do. I don't like the product." In some cases, I knew something about the culture. I don't really want to be part of that. But when this hit me, I remembered what it was like in the old days, and I remember the fact that I really think it is a fascinating industry. So everything about this industry is fascinating to me. And so that brought me off the sidelines.

Well, specific to CSX, how did you find the culture when you arrived?

Great group of people, like I said, fourth, fifth generation employees. They love what they do. There's something about -- there's a magnetism about the railroad industry. People come to work in the railroad industry, they don't leave. And if they leave, a lot of them come back because I just think there's something about this industry that's very attractive to people. And once it gets in your blood, you stay. But it's a great group of people in Jacksonville, Florida and all up and down our system on the East Coast. I think they're very receptive to leadership. They want people to come in that care about what they do, that are going to be there for a sustainable period of time. And work with them and stabilize the business and improve the business and kind of restore performance to where it has been in the past. But they take a lot of pride in what they do in the company. And as I come into it, I really want to help. I kind of want to help everybody accomplish what they want to accomplish. Obviously, I want the company to be successful, and that's kind of how I'm wired. But it's been a great reception, and I couldn't be happier with that. No regrets after 4 months, how about that?

Well, we've covered CSX for quite some time. And your predecessor when he took over a few years ago, CSX was running quite well. And then obviously, you had some network issues, some investment projects. But nonetheless, the company maybe wasn't running quite as well as it could be. Do you think today you've got that resolved?

I wouldn't say I've got everything resolved after a short period of time. And keep in mind, everything I do is working with somebody else. I can't -- I don't know how to do anything, but I can work with the team, help focus them on what's most important and help them execute. But if you look -- there was some misfortune for the CSX team back to the hurricane that unfortunately created those floods in Appalachia that wiped out a 60-mile corridor rail. And if you think about that, something that stood for 150 years is gone with 40-foot floods that roar down that tight little Canyon and wiped out the entire rail system. And if you want to think about heroic efforts, a lot of times you want to go build a project, you say, well, show me the drawings, let me look at the drawings. There are no drawings. There's nothing. You're going to rebuild a railroad from scratch, from people who have experience, intuition, can get the right teams together, and they did all that in 1 year. And the reason that's important is we basically have 2 corridors that connect us north and south, and that was one of them. So if you take that out, you can imagine the issues, you know the issues. You were here, Matthew was here, you saw the issues that created an entire railroad system. But as of the end of September last year, reopened that subdivision. They also completed a project called the Howard Creek Tunnel that enables double stacking through that system. So there were some major infrastructure projects that were -- particularly the Blue Ridge was completed last year that helped alleviate a lot of the issues that we had last year that we don't have this year. So I think it's always a very positive sign when those things are behind you, and you can look forward to a stable railroad, a railroad that runs more fluidity, it has more resilience because of the completion of those major projects.

We also made some moves on the executive leadership team as well. Do you feel you have the right people in the right place?

Yes. And if I said no, people would be worried about that. But look, I've been around long enough that you can walk into a business, you can spend some time with the people. And you can kind of quickly figure out who's in the right spot. And is this -- I mean, I look for 2 things. I mean, if you talk to Heidrick & Struggles, Korn Ferry, you talk to people, they'll give you 64 attributes you should look for in any kind of leader. I look for 2 things. I look for people who have great leadership skills. And there's a lot that goes into that statement, but people that are great leaders of people. And then I look for people that can move the needle. So in its simplest form, when I look at Matthew, I said, "Does he have great leadership skills? Can he move the needle?" And the answer is yes, by the way. So -- but I look at that, and I start with the most important jobs. It kind of makes sense, doesn't it? And you kind of work through that. And if you don't, you need to make a change. And if there's anything I've learned over a long career is you're better off making those changes sooner than later. And so it looks like I made a lot of radical changes quickly. To me, I was very thoughtful and deliberate in terms of how I went through that. But at the end of the day, that's what I'm trying to figure out, do I have someone who's got outstanding leadership skills and can they move the needle in that role? And I want to make sure with the key positions in the company, and I start with that, that I get that right. Then you kind of work down the rest of the organization. So in any company, and I did this at Linde and I do this at CSX as well, I kind of look at what are the 20 most -- 20, 25, pick a number, most critical positions to get right in the company. And then you kind of go through and you look at it from the standpoint of, okay, who's in that role? Do we have the right people in that role? The answer is yes. Let's work with them. Let's develop them. And if we don't, then we need to make a change, and we need to build a pipeline of talent underneath that. And I'll give you an example in the old -- in my Linde life, I would look at one of the key 20 positions in the company was the person that ran China. And -- but it wasn't the person who ran Asia. And I say, don't take this personally, but the individual running China is more important to me than you running -- sitting in Singapore running Asia. So you got to have that thought process around what are the critical positions, do you have the right people in the critical positions and build a pipeline of talent underneath it so that it can -- you can have sustainable performance. And a lot of these things are basic, but you kind of learned over time that it's important to do. It's important to spend my time and the time of the organization to get those things right.

Well, you came into the industry in a pretty interesting time, too, because as we all know, there's a pending merger application with Union Pacific and Norfolk Southern, which, in our view, would be very transformative and obviously change up an industry dynamic that has been in place for a number of decades now. I guess what's your broader perspective on rail M&A?

Well, I've been -- I was a proponent of M&A. I mean, I led a merger where I put Praxair and Linde together. I'm going to answer your question, but there's a couple of points. It's a long process. People forget that. From the time I picked up the phone and called my peer at Linde till the time we were able to run the company without restrictions, it took 3 years. And a lot of that was a regulatory approval process. Some of that was social issues that need to be sorted out, a lot of stuff. But it's a much longer process than I think people give it credit for. And it was -- it took me -- I ran Praxair for 10 years before I did that. So when I look at this, I think any time you have consolidation inside an industry for the rest of the participants, it can create some challenges in terms of risk that you need to go manage, which is what CSX will do, but it also creates opportunities at the same time. And so you kind of need to manage the risk, manage the challenges and capitalize on the opportunities. And it's going to be a long process. We really don't know how it's going to play out in the end. I don't know what conditions may be part of that. I don't know how this whole thing gets resolved. Keep mind kind of new to the industry. I've worked with regulatory authorities before. I do know they listen to customers very closely. So whatever customers are going to have to say about this pro or con, they're going to listen very carefully to that, but it's a long process. And so you've got to -- what do you have to do in the interim, somebody like me, you're running the company well every day. And that's our focus. And what I like about CSX, first of all, I wouldn't trade our geography with another railroad anywhere. I like our footprint. I like our infrastructure. I like where we are. If you think in terms of industrial development, which we started off this conversation with reindustrialization, if it's going to happen, it's going to happen on our network. And it is -- we do see those opportunities coming along. We work on a lot of it from a development standpoint. But it's going to be a long game. It's a long process. It takes time. There's a lot of opinions that are going to have to be factored in. There's a lot of comments that people are going to have to wade through, and you'll have to see how this plays out in the end from a condition standpoint. And having been through this, I went through this with Linde and Praxair, and I know with my Board, you have a lot of Board meetings when you got mergers going on. And one thing I had a line across the chart, and I said, if the value creation falls below this, I should pull the plug. And I probably showed them that math, that thermometer probably 8 times because it was important to me because I went into this with a certain set of assumptions that value is going to be created, and I need to make sure that, that was real. And every drop of the shoe, turn of the screw, this regulatory authority decided this. Sometimes it works in your favor, sometimes it's more negative than you think. I went back and make those adjustments. And I'd say we started off this merger discussion. We approved this value creation. So where are we now based on the latest information. And that goes on for many months and even years before I got to the final resolution of that. So that's why I always caution people that it's a long process. And we may have 5 people, maybe not that many at Jacksonville that work on this every day, and I got 23,000 people trying to run a railroad better. And so we have lots of opportunity to improve CSX as a stand-alone company, which is where we're focused. And we'll participate in this consolidation phenomenon that's taken place. And we'll be well positioned. I'm confident we're going to be well positioned no matter how it shakes out. But I'm not going to get hyper focused on that when I know what I've got to do every day and can do every day running CSX.

I want to ask specifically about the plan at CSX. But let's say, we fast forward a year, 1.5 years, merger is approved. Is this a significant competitive dynamic that you view negatively?

I don't know what the conditions are. I don't know what may happen between now and then. It's -- how about this, Brandon, it's a hypothetical, I'm not going to answer.

Okay. Well, have you spent any time with customers, I'm sure you have, at CSX?

Yes.

What's been the feedback that they are providing you?

It's kind of interesting. That's a very interesting question because some of these are very sophisticated customers. What I've probably heard more than once is they're going to keep their options open. And so they're not going to make any statements or express a strong viewpoint until at some point down the path. And keep in mind, it's still early days. You know this. It's we're going to have an application that's going to be filed again. I forgot what the date is by such and such a date and then the clock starts and then they go through the valuation process. But I think there's -- I think I would -- and it would make sense. I think keeping your options open probably is a smart thing to do at this point for anybody, and it's too early to declare anything.

Okay. I guess, feedback specifically too on what CSX could do better, regarding service...

There's always opportunity. I mean, -- every day, you can -- one thing that's nice about this industry is there's a lot of information. There's a lot of data available. And so I can go in every day and see what's the train velocity, how many cars do we have online? What's the dwell time, trip compliance, on-time departures, on-time arrivals. If you add 2 hours, what's the percentage? And there's been certainly improvement. And it kind of goes back to an earlier question you asked me. As we came into this year, we have had some stability that we didn't have certainly during the early part of '25 that we're benefiting from. But as I look at that and I look at the improvement, I mean, we're nowhere near and Mike Cory and his team that run operations will tell you, we're nowhere near where we could be or what we can be in terms of our potential. I think the improvement is great. And I definitely recognize the team for a lot of good work they've done, a lot of hard work they've done. And you probably -- some of you probably noticed, we had some severe weather in the eastern part of the United States that pushed all the way down to places like Jacksonville, Florida. We had heavy snows and severe cold. And that's a difficult environment when you're running trains in the middle of the night at 10 degrees below and your crews have got to go out there and man that train. So it was a challenging environment, and I thought they did a great job coming through that. So that gives me encouragement that we can weather things like that, no pun intended, and we can kind of build from that going forward. But back to your specific question, I do think we have opportunity on the service side. And of course, the better we are at service, the more consistent we are at service the better our prospects are at increasing volumes and being able to penetrate markets like you know as well as anyone, like the intermodal market because if you ask -- I have asked those customers, how they feel about rail service. And what they will say is it's not the cost, it's not the service when you provide it, it's the consistency of service. So I think being consistent in our performance, I think, is really important. And I know that hasn't been our history over sustained periods of time, but I think consistency of service is really important.

And by the way, if there's any audience questions, just raise your hand. I think we have mic runners. But Steve, I guess I still want to come back to this idea, though, because I've covered the rails for so long. If we look at volume growth relative to economic growth, the industry really hasn't shown a lot of expansion. Now there's been a shift in coal because obviously, we used coal a lot more to generate power. That's more nat gas today. But even then the merchandise business hasn't shown a ton of growth. I guess from your perspective, can CSX get to a better volume profile in the future?

Well, if you look at our guidance, I've often said, I love growth, but I trust costs. And we guided to kind of a low single digit and said we're going to increase operating margins 200 to 300 basis points during the course of the year, and we're going to increase free cash flow 50%. But we didn't put a lot on the top line. And what I'll say is, Brandon, that there's a lot of industrial companies that are struggling with growth because industrial production has been flat pretty much around the world and in the United States for several years. So it's not a phenomenon, I think, that's unique to the railroads. So what I look at -- and I don't think of it in terms of, gosh, I need mid-single-digit growth to really be able to deliver the kind of operating performance I want to deliver. a little bit of growth is all we really need. And if we get a lot of growth, if the macro economy blesses us, if housing starts pick back up, automotive picks back up, GDP picks back up because interest rates came down enough that it triggers some economic activity. If that happens, then by working so hard on productivity and leaning out our cost structure, I know those margins fall through very heavily. So that's the way I think about it. So I don't come at this as, gosh, I need 5% volume growth. I come at the standpoint of we just need a little bit of volume growth every year, a little bit of price every year, productivity every year, and we can deliver the kind of result we want. If I look kind of within the merchandise category, you asked a very good question. I don't think it's any secret. And there's like 100 categories within chemicals alone. I don't think there's any secret that chemicals has struggled globally. There's an oversupply situation coming from China that weighs on that industry. Obviously, a lot of chemicals go into housing starts, automotives, the broader industrial marketplace. And it's a mature industry, just like you brought up coal, which is seeing a little bit of a rebirth of the domestic side for reasons that we all understand, but it's kind of a mature industry. I think forest products is kind of a mature industry. And unfortunate for us, and part of this is why was inherent in our guidance is we've got the full year effect of plant closures in pulp and paper that really started in 2025. But then I can also go through it and see pockets like minerals, which is basically rock aggregates that are used to build out infrastructure. Go back to what I said earlier. We have a great geographical footprint, and a lot of that infrastructure is right here in the Southeast. So that's a market that's growing for us. Fertilizers happens to be a market that's growing for us because we've got some new phosphate production that's come online that's helping us. We said domestic coal is seeing a -- doing a little better. Obviously, our intermodal growth is better year-over-year, and there's some good reasons for that. So it's a little bit of a mixed bag. At the end of the day, I'm not sitting here saying, gee, if you just give me 5% volume, I'll be fine. I'm sitting here thinking I don't really need that much. I'll take it. And if it comes, we'll capitalize on it. But I think I, like a lot of probably people in the railroad industry and people in broader industrial world, generally speaking, have gotten used to having a low-growth environment to work in.

What are the financial metrics that you are holding the team accountable to? What do you like to look at? Because railroad investors will fixate on the operating ratio or the EBIT margin.

Yes. And that's kind of a bit humorous to me because it's an operating ratio, which no other industry uses that, by the way. And so I go, well, isn't that kind of like operating margins flipped upside down. So what they're focused on is how they're compensated, which is -- and we simplified the compensation structure. We -- it was -- and I've seen this play out before on other companies because I've been on a bunch of boards. I've had a lot of things. And people like to add things to the compensation structure around. I'm not picking on any one thing. I'm just saying sustainability, diversity, you name it. They come with lots of things they want to hold management accountable for. And they think, well, if I just make it part of the incentive compensation scheme, they'll do. The problem is the organization loses track on what's most important. And so one of the things I did with the team was we simplified the metrics. So the most important metrics to me are operating income growth to get earnings per share growth, I need operating income growth. I don't think I got to explain that to anybody. Operating income percent margin. And the reason that's important is, to me, that says what's the quality of the business you're running? How good a job are you doing running your business? And the best metric for that is operating margin. So I've always found that very important. And then the other metric, and I talk about annual incentive is safety. It's a sacred responsibility in this industry, and you have to get that right. So safety is an important metric and the other 2 on the financial side, operating income, dollar growth, operating income percent, I think, are the most important. And the other things we had are gone. We had some other stuff, they're gone. And then on the long-term incentive side, it's really for performance shares, it's down to 2 metrics. It's return on capital. It is a capital-intensive industry. So I think return on capital is a very important metric for this industry. In my old job, I used to say it's the truth sum. It's -- it encapsulates all the decisions you made in the past, good or bad and the quality of the business you're running today, and that all gets netted out in a return on capital metric. So I think that's a very important metric, and then total shareholder return, which I think people in this room, I don't have to explain that one to them either. So that's it. I mean the metrics are very simple. And the reason that's important, I know you get this is, you got to be able to stand up in front of the organization and say, what I've said is the most important things in running the railroad, it's also how you're compensated. So everything I repeat and harp on every day is also how we're compensated. And by the way, this is how we're doing. When I said we need to improve x number of basis points of return on capital, this is how you do it. You got a numerator, you got a denominator. This is how it works. We're going to improve the quality of the business. We're going to get more productivity, more pricing, more operating income, and we're going to manage our capital tightly. We're going to be very disciplined. And guess what, you get an improved return on capital performance out of that. So that was a longer answer than probably you were anticipating, but...

No, I appreciate it. We're down to just a few minutes left. What is the right level of return on invested capital for CSX?

Well, in a regulated industry, that's probably -- you got to give a thoughtful response to that. Higher than what it is today. If you go back to Linde is at 25%, about 2x the next competitor. I'm not guiding that. Matthew looks up, thank you. But I do think we can improve every year. Just like I think we can improve operating margin percent every year. I do think we can improve return on invested capital every year. And I think doing these things, and then it's not all about financial metrics, right? You got to have -- you got to be very safe. You got to have good service. You need to have an engaged workforce if you want to have sustainable performance. All of those things are important. You got to have the highest integrity and ethics and you never compromise on that. All of those things are very important and kind of a continuous improvement mindset that we can get better. There's plenty of potential. I know there is, everybody believes there is. We can get a little bit better all the time every year, and we keep moving these metrics north.

And just given the unionized nature of the business with all your frontline employees, what's achievable with the unions?

Well, it's interesting when I went through the merger with Praxair and Linde, I basically was told, well, "Steve, you know that codetermination is the law of the land in Germany." And works councils are represented all the way up to the Board of Directors. And it's really impossible to do anything. And I thought some of that, not that I'm relaying it to this, but I thought some of that was a smoke screen because when you really sat down with them and said, this is kind of how we're performing, we would like to do better here. You kind of go, yes, I understand that, but how are you going to do it? So actually, they asked very good questions. They would say things like, okay, Steve, I buy into, we need to be more cost competitive. We need to do those things so we can win more business, we can provide better service to customers. The business will be better off going forward in the long term. So show me though, the organization chart looks like this today. What will it look like in the future? That's a good question. So we go back and go through that iteration and you come back and say, this is what it looks. And they go, okay, well, now we got to go through the social hierarchy in terms of who occupies the chart. But it's very sophisticated. But I didn't -- I never felt sitting there talking to them like they're diametrically opposed to everything I say. And I don't believe that's the case here. I mean, I've been out of road trains. I haven't done enough, and I've met with people talk to people. They're good people. And I think you really have to have an engaged workforce. And again, I'm not here to do things drastically. I'm not here to say operating -- we get 10,000 basis points out of operating ratios next year. That's not how I think. I think everything has to be done in balance. We've got a lot of criteria we want to perform well against, a lot of metrics, and we can do that together and kind of holistically, but just do it in a very intentional way. And I believe that if we work in a very respectful way, if we engage them, I think we can do a lot. So long-winded answer, but that's my answer.

Stephen, and on that note, I think we're running over time here, but...

Yes. Thank you, Brandon.

I appreciate you coming down. Thank you.

All right. Thank you.