Q3 2026 CSX Corp Earnings Call
Speaker #4: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation's Q3 2026 earnings conference call.
Speaker #4: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star, followed by the number 1 on your telephone keypad.
Speaker #4: If you would like to withdraw your question, press star 1 again. Thank you. And I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Corporate Communications.
Speaker #4: Mr. Korn, you may begin.
Speaker #5: Thank you, Abby. Good afternoon, everyone. We're very pleased to have you join our third quarter 2026 earnings call.
Speaker #6: Joining me from the CSX leadership team are Steve Angel, President and Chief Executive Officer; Kevin Boone, Executive Vice President and Chief Financial Officer; and Marie-Claire Kenny, Senior Vice President and Chief Commercial Officer.
Speaker #6: In the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and our non-GAAP disclosures. We encourage you to review them.
Speaker #6: With that, I'm very happy to turn the call over to Mr. Steve Angel.
Speaker #7: Thank you, Matthew. Good afternoon. I'm pleased to report that CSX has delivered another quarter of strong financial performance. Earnings of $0.57 per share increased 30% compared to last year's adjusted results.
Speaker #7: Our volume grew 5% as more customers turned to our railroad to safely and reliably move their goods. Our operating margin improved to 39.1%.
Speaker #7: This was 420 basis points higher than last year's adjusted result. The progress we continue to make on productivity has helped drive substantial growth in profitability, earnings, and free cash flow.
Speaker #7: Our goal is to be the best-performing railroad in North America, and the entire CSX team is responding to that challenge. We are proud of how far we've come this year and excited about our position as we look ahead to 2027.
Speaker #7: Before we turn to the details, I want to recognize Mike Corey, who recently announced his retirement after a 45-year career. Mike is a true railroader who has made significant contributions to CSX.
Speaker #7: Our customers and our employees. He also developed a deep bench of operations leaders, and I am confident in Doug Ryerchuk, Casey Albright, and the entire operations team as we continue executing on our priorities of safety, reliable service, and long-term value.
Speaker #7: We thank Mike for his leadership and wish him all the best. Turning to slide 4, the work underway to strengthen our safety culture contributed to another quarter of year-over-year improvement.
Speaker #7: Our FRA injury rate decreased by 17%, and our accident rate fell by 4%. While we are encouraged by that progress, our work is never finished.
Speaker #7: We will continue our efforts to reduce risk, increase awareness, and improve communication to support our employees as they do their jobs. We do not, and will not, compromise on safety.
Speaker #7: We also continue to improve productivity. Third quarter fuel efficiency was not only the best ever achieved by CSX, but also the best ever reported by any U.S.
Speaker #7: Railroad and workforce efficiency, as measured by gross ton-miles per employee, improved substantially year over year. This next slide shows our key service metrics.
Speaker #7: We're encouraged by the sequential improvement in velocity, dwell, and customer switch data, which measure first-mile and last-mile performance. Trip plan compliance for our carload business also improved modestly, quarter over quarter.
Speaker #7: Though intermodal trip plan compliance declined, we are handling more volume safely and efficiently. We know our network can perform better. Operations is connecting more closely with our commercial team, giving us better visibility into demand and helping us get the right number of crews and locomotives to the right locations.
Speaker #7: Active crew management is improving engineering conductor availability. Better planning and coordination between Engineering and Transportation is leading to less network disruption as we execute our capital projects.
Speaker #7: And technology, such as autonomous track inspection cars, is helping us plan better and respond effectively to day-to-day events on the railroad, supporting faster trains and fewer delays.
Speaker #7: Service has started strong in October, with velocity averaging more than 19 miles per hour this month, and dwell approaching 10 hours. Our team also did an excellent job preparing for Hurricane Isaias, which we managed through with minimal impact.
Speaker #7: We intend to build on this momentum and ensure that our service supports our growing business. Kevin, please review our financial performance for the quarter. All right.
Speaker #7: Thank you, Steve, and good afternoon, everyone. In the third quarter, the CSX team improved safety, met increased demand from our customers, delivered substantial cost efficiency, and made sequential progress in our service metrics.
Speaker #7: Revenue increased 12%, driven by higher fuel surcharge, 5% volume growth, and pricing gains across the merchandise, intermodal, and coal markets. As a reminder, our prior year results included a $164 million goodwill impairment.
Speaker #7: Adjusting for that charge, higher revenue and lower non-fuel costs drove a 25% increase in operating income and 420 basis points of margin expansion, despite 70 basis points of fuel price headwinds.
Speaker #7: This translates to a 30% increase in earnings per share. Let's now turn to the next slide for a closer look at expenses. The team handled 5% more volume in the third quarter, while reducing non-fuel costs by 3%.
Speaker #7: Labor expense increased by $19 million, as improved workforce productivity and lapping of severance costs mostly offset over $90 million of higher costs from incentive compensation and inflation.
Speaker #7: Labor expense will have the typical sequential increase in the fourth quarter, but reported headcount will be lower due to temporary, seasonal reductions. First quarter 2027 headcount will be similar to current levels, as these employees return to work and we build our conductor trainee pipeline to start the year.
Speaker #7: PS&O expenses were 10% lower, reflecting our continued focus to drive efficiencies across this diverse pool of costs. Savings were driven by improved utilization of both locomotives and vehicles, reduced reliance on external labor in multiple G&A functions, absorption of intermodal volume growth, and maintenance efficiencies across rolling stock and fixed assets.
Speaker #7: Steve highlighted our record fuel efficiency this quarter. I will reiterate the team's great work to reduce engine idling and utilize fuel savings technology, both of which deliver greater value in the current higher price environment.
Speaker #7: Looking to the fourth quarter, on a sequential basis, we expect the normal seasonal increase in PS&O, combined with the typical weather-related reduction in fuel efficiency.
Speaker #7: Overall, consistent with past years, we would expect some step-up sequentially in the fourth quarter expense line as we enter the winter months.
Speaker #7: And while fuel volatility can create some near-term noise, we expect to deliver year-over-year margin improvement of over 350 basis points in the fourth quarter. We are building a culture of continuous improvement that positions us to deliver further safety, service, and efficiency gains in 2027 and beyond.
Speaker #7: This includes a robust pipeline of sustainable efficiency initiatives that we are now incorporating into our 2027 budgets, with clear accountability for results. With that, let me turn it over to Mary Claire to review our revenue performance.
Speaker #2: Thank you, Kevin, and good afternoon, everyone. Our commercial group continues to deliver in a favorable environment of solid customer demand and tight trucking capacity.
Speaker #2: The consistent network performance delivered by our operations team, together with the new services, added capacity, and growth initiatives we've brought online, have positioned us well to take advantage of the opportunities in this market.
Speaker #2: Our performance this quarter was strong, and I want to thank everyone at CSX for helping us maintain the momentum. Turning to Slide 10, let's go through the highlights of our third quarter volume and revenue results.
Speaker #2: Total CSX volume was up 5% in the third quarter, total revenue was up 12%, and our revenue per unit was up 7%. Fuel contributed about half of our revenue growth, as average diesel prices increased nearly 50% year over year.
Speaker #2: Our intermodal business continues to contribute the largest share of our volume growth, so mix remains a headwind to overall RPU. Even with that mix impact, revenue per unit excluding fuel increased 1% this quarter.
Speaker #2: We remain encouraged by the results of contract renewals as we progress throughout the year. In merchandise, revenue increased by 11%, with a 3% increase in volume.
Speaker #2: Merchandise RPU excluding fuel was up over 2%, despite unfavorable mix in markets, with the largest impacts within chemicals and fertilizers. Including fuel, RPU was up 8% year over year.
Speaker #2: Volume performance was more varied across our merchandise markets compared to the second quarter. Metals was the top performer, gaining 12%, as fuel demand—particularly plate—has been very good across infrastructure and energy markets.
Speaker #2: We're also benefiting from increasing output from the new steel mills located on our network that are ramping up at a favorable time. Chemicals was also a highlight, with volume up 7%, driven by conversions and good opportunities in waste and petroleum products.
Speaker #2: In contrast, fertilizers have been the softest merchandise area for us, with volume down 13% for the quarter. The headwinds in this market have persisted for some time, with supply issues limiting phosphate shipments, and low crop prices weighing on fertilizer affordability and demand.
Speaker #2: Reduced trucking availability, high truck rates, and elevated diesel costs continue to benefit our intermodal segment. Conversions from the highway remain strong, and the new service offerings through Birmingham, Myrtlewood, Baltimore, and other areas are performing well and attracting new business.
Speaker #2: In areas such as Atlanta, where substantial, profitable volume growth has led to temporary service tightness, we're working closely with our operations team as CSX invests in additional capacity.
Speaker #2: Total intermodal volume was up 7% year over year and reached a new all-time record, with revenue up 20% and RPU up 13%. Essentially, all of the RPU increase was driven by the fuel surcharge.
Speaker #2: As we've seen through Q3 '26, the domestic business drove this quarter, while international remained roughly stable year over year. I'm encouraged by the outlook into the fourth quarter, although please keep in mind that we have now lapped the gains from the service agreement with BN that added new business last fall.
Speaker #2: Lastly, coal revenue increased by 10%, driven by a 2% increase in volume and a 7% increase in RPU. Export tons grew by a solid 7% as mine output increased, while domestic tons declined modestly during a relatively mild summer, where natural gas prices remained around $3.
Speaker #2: On price, global coal benchmarks have moved higher this quarter, as supply constraints in China lifted pricing for Australian exports. This has gradually flowed to U.S. export prices, which provided a moderate benefit to our yields in the third quarter.
Speaker #2: We expect another small, sequential RPU increase in the fourth quarter from the lagged effects of these higher benchmarks. As we move into Q4, we're pleased with what we've accomplished and are working hard to finish the year strong.
Speaker #2: We expect normal seasonality in our merchandise markets, with some support in Ag and Food from a good Midwestern harvest. We also have several capacity expansions scheduled to ramp up into year end, particularly in chemicals and minerals.
Speaker #2: Demand indicators remain good for domestic intermodal, and we're pleased to enter this bid season with the benefit of full double-stack operations on our I-95 corridor through Baltimore.
Speaker #2: Finally, coal demand appears fairly stable in the near term. Utility burn will be driven by weather conditions, while on the export side, we've been successful in maintaining volume even as a customer mine works through a temporary closure following a fire in late summer.
Speaker #2: To sum up, as we move into year-end and anticipate the start of 2027, our focus will remain on consistent execution, winning business from the highway, and ensuring that our pricing reflects the quality of the service we provide.
Speaker #2: Thank you, and I'll now turn it back to Steve to close.
Speaker #1: Thank you, Mary Claire. Now we'll review our updated guidance for 2026 on slide 12. We now expect revenue growth in the high single digits, compared to the mid to high single-digit range we provided previously.
Speaker #1: The rest of our guidance is unchanged. I'm confident that we will achieve full-year operating margin expansion of more than 350 basis points. Our outlook for capital expenditures remains below $2.4 billion, and we expect free cash flow growth of more than 80%.
Speaker #1: This outlook reflects our strong performance through the first nine months of the year, as well as our expectations for the fourth quarter. As we move into 2027, we will be focused on ensuring we have sufficient resources across the network to support a growing business, which will include adding to our trained and engine employee pipeline.
Speaker #1: We remain committed to sizing our workforce to meet the needs of a safe, reliable, and efficient railroad. In summary, we feel very good about our railroad's position as we approach year-end and are encouraged by the opportunities ahead.
Speaker #1: I came to CSX just over a year ago, and I continue to be impressed by the dedication our employees bring to this company and the pride they take in being part of CSX.
Speaker #1: Together, we have made great progress towards our goal of being best in class as we build a high-performance culture that embraces continuous improvement. As we carry this momentum into 2027, we'll also mark CSX's 200th anniversary, tracing back to the founding of the B&O Railroad.
Speaker #1: It is a significant milestone and an opportunity to recognize our history, while showing how CSX continues moving the economy forward. So, Matthew, with that, I'll now open it up to questions.
Speaker #3: Thank you, Steve. We will now proceed with the question-and-answer session. To ensure that we maximize everyone's opportunity to participate, we ask that you please limit yourselves to one, and only one, question.
Speaker #3: Abby, we are ready to begin.
Speaker #4: And we'll now begin the
Speaker #4: question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue.
Speaker #4: If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker #4: And as a reminder, to be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, to join the queue, it is star one.
Speaker #4: And our first question comes from the line of Chris Weatherby with Wells Fargo. Your line is open.
Speaker #5: Yeah, hey. Thanks, and good afternoon, Steve and team. Obviously, the productivity that you've been able to drive so far in 2026 has been very solid.
Speaker #5: We've seen meaningful margin expansion. You noted, Steve, as we're starting to think about '27, I know the productivity and the planning is going on for that year.
Speaker #5: Thank you. Can you give us a sense of where you think you are in the...
Speaker #5: Process? I think the OR improvement has been better than we expected this year, but as you look at the opportunity ahead of you—volume is growing; you noted maybe rebuilding the pipeline of employees.
Speaker #5: Can you give us a sense of what the potential product productivity opportunity is from here?
Speaker #1: Well, we're still working on it, as you mentioned, but we already have a little over 100 initiatives that are contributing to our productivity target next year.
Speaker #1: Obviously, this year was a big year for productivity. I don't think '27 will be as big, but it will certainly be a significant number next year.
Speaker #1: But it's something we continue to work on. The team is very excited about Kevin playing a heavy role in that, and we feel very encouraged about productivity going into 2027.
Speaker #4: And our next question comes from the line of Brian Ossenbeck with JP Morgan. Your line is open.
Speaker #5: Yeah, thanks for taking the question. Maybe, Steve, we can just get your thoughts on the operating department and the structure going forward. Obviously, Mike's been a big part of building out the bench there.
Speaker #5: Do you think, if this is like a dual COO-type of role, you're going to take on some additional operating responsibilities? Are you doing an external or any type of search?
Speaker #5: Maybe just give us some context in terms of how you got to this decision, and how you're going to evaluate this going forward. Thanks.
Speaker #6: And this is because we're going to run—both Casey and Doug.
Speaker #1: We'll continue doing what they've been doing, and Casey's been in charge of network ops and service design, and Doug has been in charge of engineering, mechanical, and transportation, so they'll continue doing what they have been doing.
Speaker #1: They're just going to report directly to me. I look forward to that. I don't know how much most of you know about my background, but most people think of me as an operating CEO, and that's what I like to do.
Speaker #1: If you go back to my early days, I actually ran manufacturing operations for GE, and I installed one of the first lean production systems in the United States back in the '90s.
Speaker #1: Operations have always been in my blood, and I look—I'm not a lifelong railroader like a lot of people—but operations are in my blood, and I look forward to getting more involved with Doug and Casey.
Speaker #1: Casey, again, a 30-year veteran of CSX, started off in dispatch. Doug has four decades at CN, doing just about every job inside of operations, and he's been with us the last couple of years. They both do a great job.
Speaker #1: So I look forward to working very closely with them.
Speaker #4: And our next question comes from the line of Stephanie Moore with Jefferies. Your line is open.
Speaker #7: Hi, good afternoon. Thanks for the question—I really appreciate it. I would say I wanted to take a step back. I think there's a lot of really strong top-line momentum that we're seeing here.
Speaker #7: Clearly, we can all see this on the volume front. I think we can all see the fuel contribution. But as you think about just the pricing opportunity, even excluding fuel, maybe help us understand how we're thinking about that opportunity in 2027.
Speaker #7: Clearly, inflationary pressure— even beyond just the transportation environment—are more top and center at this point in time. So I'd love to get your thoughts on pricing as we look into 2027.
Speaker #7: Thanks. Yeah, thanks for the question. I'll tell you, pricing really remains a key focus area for the team. We've talked about that a lot this year.
Speaker #7: Steve's mentioned on previous calls, we're really taking a surgical approach to pricing. You mentioned inflationary pressures—we recognize those. We're having conversations around that with customers as we go through the renewal process.
Speaker #7: I would say, as a reminder, we can't touch every contract every year, but we are focused across markets. We still expect for this year our same-store sales pricing to be stronger than it was last year.
Speaker #7: And I would tell you, we have seen discretionary pricing on the merchandise accelerate as we've moved throughout the course of this year.
Speaker #4: And our next question comes from the line of Scott Group with Wolf Research. Your line is open.
Speaker #6: Hey, thanks. So, Steve, I think in the past you've said that you don't plan for growth, but this is going to be our third year in a row of volume growth, which I actually don't think has ever happened at CSX before.
Speaker #6: At least back to, like, the '90s. So I guess, what's the sustainability of this in your mind, and what does this mean for the network?
Speaker #6: Are we handling this well? Do we need more people? Do we need more locomotives? And is this what you get—continued volume growth?
Speaker #6: Is this just a sort of further opportunity for productivity if we get some continued growth?
Speaker #1: Well, I'm encouraged by all of our growth initiatives that Mary Claire and the team are driving, and it looks to me like we have some momentum on the growth side.
Speaker #1: I think you're correct. What I've said before is, when I look at the types of earnings per share growth I want to drive, I generally assume modest volume growth.
Speaker #1: And that generally is the case, but again, as I look at what's going on here with all the initiatives, it looks pretty positive going into next year with respect to our ability to handle the volume. We feel very confident we can handle the volume.
Speaker #1: We are adding some headcount. I think Kevin said that in his remarks. On the T&E side, to make sure that we're properly manned—from an operating standpoint, to a transportation standpoint—to serve the business that we have, and the business and the additional volumes we expect to come.
Speaker #1: So again, I'm encouraged by the initiatives that are underway, and I think we're going into the year from a pretty good position on the top line, and we'll be ready to serve that business.
Speaker #4: And our next question comes from Tom Waterwitz with UBS. Your line is open.
Speaker #8: Yeah, good afternoon. Wanted to get a sense if you could provide some help on the key pieces of intermodal volume growth, and then give us a sense domestic, to be clear, domestic intermodal volume growth, and then just how we think about how much runway is left whether it's available boxes in UMAX or whether it's just kind of how far the service has progressed on, let's say, Southeast Express with CP.
Speaker #8: But I just, I guess, think of the UMAX kind of new services related to Howard Street and things you could do, as that was the bottleneck. And then maybe CP Interline as potentially specific drivers.
Speaker #8: But if you could run through what are kind of the biggest drivers on domestic intermodal, and is there still a lot more to go in '27?
Speaker #8: Thank you.
Speaker #7: Yeah, sure. Thanks. So, domestic has really driven our growth this year. International has been relatively flat, particularly in the recent quarter.
Speaker #7: What I'd say on the domestic side is, we've got a number of initiatives out there. The team, as we've talked about on previous calls, has done great work in relation to SMX and the Howard Street Tunnel.
Speaker #7: And so, in both places, we continue to see volume growth, and we've been very pleased with that over the course of this year. SMX has been in play longer than Howard Street.
Speaker #7: We finished the work around the tunnel and the full double stack clearances after we were through the majority of bid season this past year.
Speaker #7: So, we have seen momentum build on Howard Street. But we're excited about getting into next year's bid season, which is really starting right now, and having that solution for more of the RFPs and the routing guides as we go forward.
Speaker #7: Beyond the new solutions, we're working closely, hand-in-hand, with our channel partners and, through our national accounts team, directly with shippers to look at opportunities for truck conversion.
Speaker #7: Truck capacity has obviously tightened pretty significantly over the course of the last couple of quarters, and we have customers—existing customers today—that are continuing to look to rail to move more of their business to an intermodal solution because of what they're seeing in the truck market.
Speaker #7: So we're very optimistic about the opportunities that continue to be in front of us as we close out this year and go into next year on the domestic intermodal side.
Speaker #4: And our next question comes from the line of Brandon Oglinsky with Barclays. Your line is open.
Speaker #8: Hey, good afternoon, and thanks for letting me ask a question here. Kevin, I know you spoke to guidance for, I guess, greater than 350 basis points improvement in the margin in the fourth quarter. But how should we think about that sequentially?
Speaker #8: I think you did give some detail around headcount and PS&O.
Speaker #1: Yeah, thanks, Brandon. When you think about the third quarter to fourth quarter, there's typical seasonality in that. We're hitting the winter months, so you'll see PS&O typically move up a little bit.
Speaker #1: On the labor side, as you move into vacations—heavier vacations around holidays and other things—capital programs move off, you'll see a little bit of labor cost come in.
Speaker #1: But that's typically normal seasonality. So if you look back over the last three to five years, 200 to 300 basis points of margin degradation from third quarter to fourth quarter.
Speaker #1: Obviously, all the initiatives we're doing—we're looking to offset as much of that as we can—but there is normal seasonality that we will see, and we anticipate that on both of those cost line items.
Speaker #4: And our next question comes from the line of Jonathan Chappelle with Evercore ISI. Your line is open.
Speaker #9: Thank you. Good afternoon. I don't know if Mike's on the call, and if not, I guess someone else could answer it. But Mary Claire mentioned some temporary issues in Atlanta.
Speaker #9: We watched the weekly data. It looks like there were some ebbs and flows, as the volume remained strong through the third quarter. How do you feel, as you're stepping away, about the resourcing?
Speaker #9: Not just labor—we've talked about headcount, but all the different things that go into it if we do have a peak season and a cyclical recovery over the next couple of quarters.
Speaker #9: Do you feel that you're operating efficiently enough and can add resources on a less than one-for-one basis to keep those service metrics, or would you like to keep them throughout the year?
Speaker #1: Yeah, so what we're doing—and again, we mentioned this, this is Steve—what we mentioned was coming out of the third quarter. The third quarter was an improvement over the second quarter; October was an improvement over the numbers you're seeing in the third quarter.
Speaker #1: But the focus is on the service side. We continue to refine our capacity plan, including positioning resources based on expected demand.
Speaker #1: And we do that by working very closely with Mary Claire's organization. Better planning and coordination between engineering and transportation are creating less disruption on our network, which gives our ops team more freedom to operate.
Speaker #1: We've been investing in capacity where needed, and Atlanta is a good example of that, where we've seen a 50% increase in volume over the last three years.
Speaker #1: And we're investing in track infrastructure to increase our switching and processing capacity by 50%. And, of course, good crew management is part of the equation to improve T&E availability, in addition to adding a modest number of T&E headcount.
Speaker #1: So that's what we're doing.
Speaker #4: And our next question comes from the line of Ken Hexter with Bank of America. Your line is open.
Speaker #8: Hey, great. Good afternoon. Good evening. So, Kevin or Steve, PS&O dipped 400 basis points year-over-year — maybe even more than you thought. Maybe talk about some of the specific programs, or just such a great achievement.
Speaker #8: How structural is this? What goes on? Because, I mean, we've seen waves at CSX of market improvement. Then there was slippage before you got there, Steve.
Speaker #8: So, just wondering how you do that. And then, in that 350 basis point target, if you're continuing to do this improvement—you did a 400 basis point improvement from Q3 to Q4.
Speaker #8: I guess, Kevin, is there any reason you could or could not do the same level of improvement in the fourth quarter, year over year?
Speaker #1: Again, yeah. Look, part of the guidance for the fourth quarter is we've seen some extreme volatility on the fuel side, right? So, when you think about the third quarter, we had peak diesel prices, and coming into the quarter, that accounted for probably a little over 100 basis points of margin.
Speaker #1: Pressure versus what we had expected coming in just from the fuel price increase, so we're keeping an eye on that. We'll have better clarity as we move through the quarter.
Speaker #1: But in terms of PS&O specifically, I would say the first area we always look at is the costs that we're paying others outside of CSX. And I have to give a lot of credit to the team—the procurement team, the operations team—to really take a closer look at those costs that we're paying, and really, some of those that we've insourced.
Speaker #1: Other times, we're challenging those costs and getting better rates through our suppliers, but it's across the board. Whether it's vehicles, equipment, or asset utilization—there's a big, big focus on the asset utilization side.
Speaker #1: Just rates in general, as I said, external labor rates. We've really looked closely at and making sure there's a level of accountability when we're paying others on the outside.
Speaker #1: And in terms of the pipeline—and Steve talked about it—over 100 initiatives already. We started in the second quarter. I think it's the earliest we've ever started in my nine years here at CSX, in terms of thinking about the next year.
Speaker #1: We're really building that muscle and building that continuous improvement kind of mindset around here. In fact, we're already thinking about '28 as well as we think about '27.
Speaker #1: So we're a deep bench. I would also say, on the technology side, that's another area where I see a lot of opportunity to provide greater resources and greater clarity in terms of where the spend is.
Speaker #1: And we're seeing some early signs of that. I would say there's more to be done in the next year and into 2028. But those visibility tools allow the leaders out there to really identify costs and go after them.
Speaker #1: But it's across the board. Great job by the team, and there's a lot of ownership across the organization for it.
Speaker #4: And our next question comes from the line of Dan Moore with Baird. Your line is open.
Speaker #10: Hey, guys. Thanks for the question. I can't remember if it was Tom or Chris who asked the question on intermodal earlier in the call.
Speaker #10: But maybe as a follow-on to that, it's pretty rare environment that we find ourselves in right now, specifically as it relates to domestic intermodal.
Speaker #10: And the spread between highway and rail costs is probably as great as I've ever seen in the last 30 years. With that in mind, recognizing that domestic intermodal tends to be higher touch in terms of renewals, and that it could be a fairly meaningful driver of yield moving forward, could you maybe just spend a minute refreshing our memories on how you approach a market like this and the potential impact it might have going forward?
Speaker #10: Thanks.
Speaker #2: Sure. Happy to. So on intermodal, just as a starting point, we got to remember that the business is split between domestic and international. And so maybe just starting into the questions around domestic, but on the international side, that is an important part of our overall intermodal portfolio.
Speaker #2: I think I've mentioned it before. A lot of that business is contracted under multi-year deals. That have fixed adjustments. And I would say it is not highly correlated to the trucking market.
Speaker #2: Like you see on the domestic side, on the domestic business, it's a mixture of how our contracts are structured. I would say we think about the domestic bid season kind of starting right now for 2027.
Speaker #2: I think you've heard from us, you've heard from others over the course of this year, that the truck market inflection that's occurred—the tightness in capacity—really started after we were a good ways into the 2026 bid season.
Speaker #2: And so there is a lag effect to that. Certainly, as we're looking at new renewals on annual contracts—which we see a lot in our rail asset product—we're going to price to the market.
Speaker #2: We're taking into account what's going out there. Going on out there, we're looking at capacity. We're looking at the value of the service that we provide.
Speaker #2: We have other business, though, that isn't necessarily on an annual application, so we will manage that and make sure we're continuing to price to the value of the service as those come up for renewal.
Speaker #4: And our next question comes from the line of Ari Rosa, with Citigroup. Your line is open.
Speaker #5: Yeah, hi. Good afternoon, and congrats on some strong results here, and also congrats to Mike on his retirement. I was hoping you guys could speak quickly about the rail partnerships—the progress there, the level of volumes that you're seeing across some of the partnerships with BN, CN, and CP.
Speaker #5: And how you're thinking about that, particularly in the context of the opposition that you've announced to what UPS is proposing, and how you see the partnerships reflected as a kind of counterweight to some of the issues that they've raised.
Speaker #5: Thanks.
Speaker #2: Yes, good afternoon. So I've talked about it before. I spent a lot of time in my career here on the intermodal side of the business.
Speaker #2: And I would tell you, it's been common practice for CSX to work closely with our interline partners to try to find new, and in some cases, better solutions for our customers.
Speaker #2: So that's nothing new for us. We've done this kind of thing year in and year out. We're always looking for ways across our lines of business.
Speaker #2: But I would say, in particular, when you think about intermodal—trying to find solutions that improve transit and improve reliability for our customers. And so we're committed to continuing to do that.
Speaker #2: We've been happy with the results we've seen from the partnerships we've formed over the last several years, and we'll continue to work on those going forward.
Speaker #4: And our next question comes from the line of Walter Spracklin, with RBC Capital Markets. Your line is open.
Speaker #6: Yeah, thanks very much, Albert. Good afternoon, everyone. I've got a question here for Kevin, and this is really on the cost side. I know if we look back at the second quarter, both truck and rail had pretty good quarters there.
Speaker #6: But here in the third quarter, we've seen some warnings in the truck segment, mainly on the back of higher costs. And I guess trucks are going to be more exposed to fuel costs and labor costs.
Speaker #6: And that might explain the difference in the relative cost experience that you're seeing relative to truck. But Kevin, is there outside of fuel, is there anything you're seeing in terms of cost pressure that worries you going into 2027?
Speaker #6: Anything that's popping up on the labor side with any of the—obviously, we're seeing driver shortages—but are you seeing any shortages on your end in terms of your attempts to hire?
Speaker #6: Anything on the cost side that's keeping you awake at night as we look into 2027?
Speaker #1: Yeah, thanks for the question. I’ve spent a lot of time with our quality team here recently. And look, the same driver shortages across the market—they’re experiencing that.
Speaker #1: That should obviously be a good demand environment, and that's something we've talked about at length. To put it bluntly, quality has a lot of opportunity.
Speaker #1: And there's a lot of opportunity on the cost side, and there's a lot of opportunity to price to the market. So we're looking at all those opportunities.
Speaker #1: We'll be meeting here next month to put together the 2027 plan. But I expect some improvement as we move into next year in that business.
Speaker #1: Driver recruitment is going to be a big focus of that team, but also driving costs out of the business. And then the pricing side, as the market turns and there's limited capacity, quality in particular should be benefiting from that.
Speaker #4: And our next question comes from the line of Bascom Majors with Stevens. Your line is open.
Speaker #6: Thanks for taking my questions. Can you talk about the tests you guys are doing on the zero to zero fuel savings technology? What are you getting in the field?
Speaker #6: What's your sense of the path to FRA approval there? And is any of that productivity factored into some of the comments you made about opportunities in 2027?
Speaker #6: Thank you.
Speaker #1: Yes, I mean, we've been using Trip Optimizer for some period of time, and we've seen benefits in terms of fuel efficiency from that. What you're mentioning is the zero to zero, which is start to stop.
Speaker #1: And that is partially implemented. We continue to work through the test process with the FRA, and I would expect eventually that will be approved and we'll be able to take that capability across the entire fleet.
Speaker #4: And our next question comes from the line of Jason Seidel with TD Cowan, your line is open.
Speaker #7: Hey, thank you, Albert. And thanks for taking the question here. First of all, the definite shout-out to the operations team there, impressive quarter. And congrats on the retirement there to Mike.
Speaker #7: Mary Claire, questions to you. I know a lot's been said about intermodal and the opportunity there, but obviously a tighter truck market and higher fuel costs to out East also present an opportunity for your carload business.
Speaker #7: Maybe you could talk a little bit about that and what your team is doing to sort of go after that for you.
Speaker #2: Yeah, absolutely. I would tell you we're working on opportunities across our markets, and we certainly have seen, as truck capacity has tightened, additional opportunities over the course of the last quarter.
Speaker #2: I think a great example of the impact, in terms of business trends, is in our forest products segment. We came into this year, and that was one of the areas we were most concerned about, quite frankly, because we saw quite a few closures on the paper and pulp side last year.
Speaker #2: And then, obviously, the segment's very tied to housing, which we all know has been lackluster for an extended period of time. While we really have not seen any improvement in the demand side of the equation in that market, the team has done a really nice job. As we've seen truck capacity tighten, this market does have a lot of truck utilization.
Speaker #2: And so with both our building product shippers as well as our paper shippers, working with them to identify new solutions that we can deliver and increase capacity that we can provide to help support their needs.
Speaker #2: But we're really doing this across markets as opportunities present themselves. And I feel optimistic about that as we close out this year and go into next year.
Speaker #4: And our next question comes from the line of Ravi Shankar with Morgan Stanley, your line is open.
Speaker #7: Good, thanks, Albert. Hi, everyone. Just on housekeeping here—the other revenue line was pretty strong this quarter. I just wanted to see if there were any unusual items there.
Speaker #7: And kind of, what do we think of the run rate of that line going forward? Thank you.
Speaker #1: Yeah, the biggest drivers of that upside that we saw on the third quarter really related around the in-transit reserve. And then a little bit higher in intermodal storage cost, as you've seen that market tighten.
Speaker #1: As you look at the fourth quarter, when you look at the average for the year, we've been averaging in that mid-130s per quarter when you average it.
Speaker #1: We'll probably do a little bit better than that in the fourth quarter, depending on intermodal continuing its tightness in some other areas, but around that level.
Speaker #4: And our next question comes from the line of David Vernon with Bernstein. Your line is open.
Speaker #5: Hey, team, thanks for taking the question. So, Mary Claire, within the carload business, back in June, you guys had turned on fuel surcharges for the carload business, I think.
Speaker #5: Can you share how much incremental fuel revenue that tariff traffic sort of generated with the introduction of those surcharges for the third quarter?
Speaker #2: Yeah, I don't think we're going to put our precise number out there. I would say just across the board, we're making sure as fuel costs have gone up that we're being thoughtful about that.
Speaker #2: And had that conversation with the customers, and they understand. They're seeing similar impacts on the trucking side.
Speaker #4: And our next question comes from the line of Richa Harnain with Deutsche Bank. Your line is open.
Speaker #8: Hey, so another one for Mary Claire. Sorry, you're getting so much airtime, Mary Claire. I just wanted to ask—you mentioned customers looking to push more growth to intermodal.
Speaker #8: I think we all see that, and you're finding more conversion opportunities. I guess, what are the biggest issues or bottlenecks to picking up this growth from customers that maybe are not so eager?
Speaker #8: What is left to solve to make this more seamless? And I guess, what more do customers want? And how are you ensuring that the growth is sticky and if TL rates begin to fall, that won't lead to an unwind of some of this tailwind?
Speaker #2: Yeah, absolutely. So I'll maybe start with the tail end of the question. I think customers see the value of rail. In all environments, but it's accelerated certainly as you think about where fuel prices are today and where capacity is.
Speaker #2: I think what's important and what I've seen since the 15 years that I've been here is the most important thing to customers is consistent and reliable service.
Speaker #2: And so that's why there's so much effort and work between my team and operating team to ensure that as we're converting business, we're making sure we're delivering a good service product to our customers so that it's long-term and it's sustainable.
Speaker #2: When I think about it, as I consider the conversion opportunity, there's certainly a lot of interest right now with what's gone on in the broader markets.
Speaker #2: Sometimes it's education with the customers, making sure they understand where there's opportunity to convert. We do have a national accounts program from an intermodal perspective, where we engage directly with the shipper.
Speaker #2: We'll look at their truckload file, confidentially for them. We'll evaluate the truckload file and show them where there are lanes that are opportunities for intermodal conversion.
Speaker #2: And then give them visibility to what service looks like in those lanes, so that they have more comfort in terms of transitioning that from truck to rail.
Speaker #2: As I think about the cycle that we're in right now, I know questions have been asked about box capacity, chassis, all of those things.
Speaker #2: I think the area that we're keeping the most focus on right now is the drayage driver. And so you've heard from some of our channel partners there's a lot of focus there.
Speaker #2: There has been an effort in terms of recruiting additional drivers. I would say, as you think about the broader market, obviously driver capacity is challenging, especially over the road.
Speaker #2: The benefit on the drayage side is that it's a more efficient move. You can make more turns in a given day, and so I think there's more opportunity there as we go forward.
Speaker #4: And our final question comes from the line of Jeff Kaufman with Citizens Bank. Your line is open.
Speaker #6: Thank you very much. Thank you for squeezing me in, and congratulations on a very solid quarter. Kind of a follow-up, actually. I'm going to give Mary Claire a break and go back to the operations team.
Speaker #6: We've seen a lot of productivity improvement and safety improvement this quarter. Can you give us an idea of where you'd like these metrics to be within, say, 12 months or 24 months?
Speaker #6: And what that could mean in terms of driving incremental operating ratio if you're able to hit those targets?
Speaker #1: Well, I think in terms of continuous improvement, as I look at the safety metrics, as I look at our operating ratios, operating margins, everything, I think in terms of what can we do to improve?
Speaker #1: And we have a whole company that's dedicated to that. Kevin alluded to the fact—and I did earlier—that we have a little over 100 initiatives that we're working on, 27 of those are focused on productivity now.
Speaker #1: We're starting to work on '28, too. To me, it's all about driving productivity; it's all about continuous improvement. It's all about improving our safety metrics, our service metrics, our financial metrics so that we can best deliver best-in-class performance.
Speaker #1: And best-in-class performance for our employees, our customers, and our shareholders.
Speaker #4: And ladies and gentlemen, this concludes our question and answer session. And today's conference call. We thank you for your participation and you may now disconnect.
