CSX Corporation

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 this time, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, please press star one. Thank you. Mr. Matt Korn, Head of Investor Relations, you may begin your conference.

Thank you, Krista. Hello, everyone, and welcome to our third quarter earnings call. Joining me this afternoon are Joe Henrichs, President and Chief Executive Officer, Mike Corey, Executive Vice President, Chief Operating Officer, Kevin Boone, Executive Vice President and Chief Commercial Officer, and Sean Pelkey, Executive Vice President and Chief Financial Officer. In the presentation accompanying this call, you will find our forward-looking disclosure on slide two, followed by our non-GAAP disclosure on slide three. And that is now my pleasure to introduce Mr. Joe Henrichs.

All right. Thank you, Matthew. And hello, everyone. Thank you for joining our conference call today. Over this last year, CSX mission and message have remained clear and consistent. We have seen great progress with our one CSX initiatives, which are helping to build a focused, collaborative culture that enables all of our employees to feel engaged, energized and focused on working better together. At the same time, our service levels continue to lead the industry. These successes go hand in hand. And as our customers see that CSX is truly dedicated to providing consistent, reliable service over the long term, they're responding positively. As we look forward to all the opportunities ahead, we are confident that these efforts we are making will drive clear, sustainable, profitable growth. And we took another step forward on this path this quarter. Thanks to the hard work put in by our one CSX team, our railroad is running well. Our merchandise business remained steady, and our cold shipments were very strong. Our domestic intermodal volumes are growing well compared to last year, while our international intermodal business, though down year over year, has stabilized. Overall, our network continues to perform, and I am pleased with how the team has succeeded in managing the things that we can control. I continue to be very excited about all the potential ahead for CSX. Now let's turn to slide five to review the highlights for the third quarter. First, we moved over 1.5 million car loads this quarter, which was down just slightly from a year ago, with flat year-over-year performance in merchandise and 9% growth in coal. Our operating ratio ticked up in the low 60s as we faced challenges that we had been talking about all year, with lower fuel recovery, reduced intermodal storage revenue, lower export coal prices, and higher costs for inflation, most notably with our labor contracts. As in previous quarters, our margin does include the impact of the quality carriers trucking business second we generate $3.6 billion in revenue, which was 8% lower in the previous year. The last year we benefited from high diesel prices and record export coal benchmarks that were both much lower this quarter. Third, even with the year-over-year changes we faced, operating income still came in at $1.3 billion for the quarter compared to a little under $1.6 billion last year. And our earnings per share were 42 cents down from 52 cents. I am proud of what we accomplished this quarter given all the challenges. None of us here are satisfied with these results. We're not sitting back and simply waiting for markets to turn. We are looking throughout the entire network to see where we can operate more efficiently. We continue to work closely with our customers to build our business pipeline and drive more volume onto the railroad. And we are emphasizing the importance of cost discipline to every team in every one of our locations. One of the reasons I am so confident about what is ahead for CSX is the great leadership team that we have in place. As you all saw last month, we were very pleased to announce that Mike Corey has joined our railroad as Chief Operating Officer. Mike brings great experience and a thorough understanding of Skid Row Railroading. And he also shares our deep dedication and appreciation for customer service and the employees who provide that service day in and day out. Mike arrived in Jacksonville a few weeks ago and is now here joining us on this call. And so I will now turn it over to Mike to say a few words and cover our operational performance over the quarter.

Well, thank you very much, Joe. And I truly appreciate the words. And I'm extremely thankful for the opportunity to work with such a committed team of people. with so much potential to lead this industry with great customer service. Safety, service, efficiency, and along with engagement with each other, customers and stakeholders, is how we're going to leverage this great franchise to be best in class. I've been here a short time, pretty much less than a month, but I've been really busy. I've visited major yards, coal export facilities, and I've spent time in headquarters meeting with an array of people from different functions of the railroad. In person, I've listened to and I've spoken with employees from all across the company. From people on the ground executing the plan, from people developing the plan, to sales and marketing, finance, field and network ops, IT facilities, and the list goes on. But what really resonates with me is their collective desire to be the best they can be for our one CSX team and our customers. We've got great talent in all our functions, and our job is to connect the talent and maximize the value of their efforts. We're doing this in order for our team to be the best at providing what our customers need in the safest and most efficient way. We're doing this because decision-making, acting on what they see and know, must be quick and done as close to where the opportunity is taking place. That said, I see opportunities, one of which, and to me, the most important at this stage, is to create and share a robust and visible flow of information that will drive improvement through the continuation of the lean principles that define scheduled railroads. We all need to see the effects of our collective decisions as fast as possible, to be more nimble and responsive to our customers' needs. As well, collectively we'll learn and share best practices throughout the organization from this and other available data as it gives us a platform to learn as it happens. This will create the speed and the trust that we need to move together as one team. So let's go over to the slides and we'll start looking at our safety metrics. Our third quarter injury and accident rates increased as we saw a track caused and human factor incidents trend upward. These aren't acceptable outcomes for us and we're taking action to continuously improve the environment our employees operate in, as well as the overall safety culture. Human factor incidents, especially with newly hired employees, have been one of the trends this year that have driven the increase. In Q3, the team added additional time for initial training for our new conductors at our Ready Center in Atlanta. We also looked at the length of training when new hires graduate from Atlanta and report back to their home terminals, and increased the length of that training as well. Increased training gives us more time to develop skills with our new hires, but we also determined we needed to place resources to spend that time with them. So we train unionized mentors, and now we have them across the property with the new hires. These mentors are available to teach and answer questions, reinforcing the one CSX culture by being part of developing and coaching their newly hired peers. Lastly, on safety, we're not taking our focus off life-changing events. We've partnered with DECRA, a specialty risk management group, to roll out training to help employees self-identify risk in an ever-changing environment. Now, traditionally, railroads train on operating rules, but we can't write a rule for everything or test our way to a positive safety culture. Both identification of risk and eliminating that risk when possible is one of our major goals moving into Q4 and beyond. So, let's go over to the next slide on our operating highlights. Our end-to-end train velocity averaged 17.6 miles an hour. in the third quarter, slightly lower than last quarter, but still up substantially from the same period in 2022. Dwell averaged 9.6 hours, an improvement of nearly 20% compared to the same period last year. Intermodal trip plan performance was 94% and increased by 4 percentage points year over year, while carload trip plan performance was 82% and improved by 25 percentage points. Our service performance remains fluid, and though we did see a slight seasonal dip during the middle of the quarter during peak vacation and holiday season, Our metrics are rebounding into the fourth quarter. We all know and we will, we all know we will, and we're all working together to improve these results. Our ability to leverage this great franchise by connecting the people and the vast talent they bring will allow us to improve all key aspects of our business with a strong focus on those lean management principles that drive reliable, consistent service. I'm really confident that connecting all these dots together is going to result in a strong team now and more importantly, bench strength for the future. This is really our one CSX goal. And so with that, over to you, Kevin.

Thank you. Mike and I have been spending a lot of time together, and it is really great to have you on the team. To start, I'm pleased to say that our improving service levels are a key differentiator in the marketplace. I can't thank the entire team enough for all of the hard work. These improvements are being recognized by our customers and are leading to new initiatives and discussions around how CSX can partner with our customers for growth. Our ability to grow profitably requires us to be proactive, quickly adapt to changing markets, and think differently. I'm proud of how well we have been able to coordinate with operations to drive both growth and efficiencies. With Mike in his role, we have only seen these efforts accelerate. It's no surprise that overall economic conditions remain uncertain, but it has been encouraging to see gradually improving sequential trends across several of our end markets over this past quarter. We see many, many reasons to be optimistic as we continue to build our business pipeline with an eye toward 2024 and beyond. Turning to slide 10 to look at our merchandise performance for the quarter. Our revenues were down modestly compared to last year on flat volumes as solid core pricing gains were offset by lower fuel surcharge and negative mix effects in certain markets. Our automotive business continued to show strength, with higher production and business wins driving a 19% increase in volume year over year. Minerals continues to perform very well, sustained by infrastructure activity that is supporting new cement facilities and healthy demand for aggregates. Metals performance has also benefited from our service levels, leading to competitive wins and solid demand. Our chemical franchise, while challenged, has begun to stabilize and even showed some promising improvement in domestic plastics over the quarter. Fertilizer revenue growth was strong in the quarter, despite volumes that were impacted by weaker short haul movements, with production challenges in Florida. As we expected, the strong southeastern corn crop had less rail volume for grain, and forest products remains one of the most challenged areas, with many mills still taking meaningful downtime. As we start the fourth quarter, we are encouraged by the early October volume trends, with most markets showing sequential momentum. We anticipate a strong rebound for ag and food as a strong Midwest harvest kicks in. And across other markets, we expect our service improvements to drive opportunities to win in the marketplace as we focus on modal conversion. Turning to slide 11. Third quarter coal revenue declined 5%, even though volumes were very strong, growing 9% compared to last year. Export demand continued to be a major volume driver, growing 26%, with the hot summer also supporting solid domestic demand. Strong coal volumes minimized the effects of lower international benchmark prices, which were setting all-time records this time last year. The key difference was met coal pricing, where global benchmarks were much lower than in the same period last year. Sequentially, our coal RPU declined 11% compared to our guidance of mid-teens decline, with stronger than expected shipments to longer length of haul southern utility customers driving the moderate outperformance. Looking ahead to the last quarter of the year, we expect export markets to remain strong and are pleased with the increases in international benchmarks that we've seen over the last several weeks. On the domestic side, we have seen stockpiles normalize, and demand in the 2024 will be driven by winter weather and related demand needs. The increase in global benchmark prices should benefit our cold yields next quarter, so I would remind you that we have a diverse portfolio of MEC customers We have seen U.S.-based met coal benchmarks and those in other regions lag spot prices in Australia. Turning to intermodal on slide 12. As a whole, the business remained challenged with revenue declining by 14% and total volume decreasing by seven. Overall, RPU declined by 8% year over year with the impact of lower fuel surcharge accounting for the decline partially offset by positive price. That said, we are seeing encouraging trends from our domestic business. Our volume turned positive on a year-over-year basis early in the summer and has continued to improve since then. We offer a diverse mix of transportation solutions within domestic intermodal. We've seen great results from our strong channel partnerships and our direct relationships with major retailers. Our team has been successful in converting traffic off the highway in a market facing plentiful truck capacity. which is a testament to the team and the market-leading service product. Meanwhile, international intermodal activity has stabilized, but remains weak. We haven't seen any clear signs of a positive inflection yet. Retailers remain concerned about the health of the consumer, and though destocking may have slowed, we haven't seen this turn into sustained increases in order rates or imports. For the rest of the year, we expect trends to largely continue as they were over the third quarter, with domestic gradually strengthening supported by our team's strong sales efforts. While we prepare for the turning point for international, recall that we saw meaningful drop-offs in our intermodal volume in the back half of the fourth quarter in 2022, as markets slowed substantially, which will benefit our reported growth rate for the current quarter. Slide 13 provides a clear illustration of the encouraging signs we're seeing within our intermodal business. On a year-over-year basis, domestic intermodal has shown a favorable trend since the beginning of 2023, turning positive around mid-year and steadily improving since. While international volumes remain lower compared to 2022, we've seen stability in the past few months. Altogether, across all of our businesses, our team continues to push forward across multiple initiatives aimed at winning wallet share, converting truck traffic, and bringing new customers to the railroad. We remain confident that our leading service performance will continue to provide opportunities to win business. And we know that we have the resources and capacity in place to deliver growth when the market environment inflects. I'm proud of what the collective CSX team has accomplished this quarter. I'm excited about all the potential ahead. Now I'll turn it over to Sean to discuss financials.

Thank you, Kevin, and good afternoon. The third quarter operating income of $1.3 billion was lower by 18% or $284 million. These results include nearly $350 million of year-over-year impacts from lower intermodal storage revenue, export coal benchmark prices, and fuel recovery. partly offset by $42 million of favorability related to last year's labor agreement adjustment. Suffice it to say, this quarter should represent the peak year-over-year impact from these discrete items. Revenue fell by 8% or $323 million despite strong pricing across the merchandise portfolio, along with positive volume trends across many merchandise markets, as well as domestic intermodal. The operating team also worked tirelessly to meet customer needs and deliver a 9% increase in coal volume. Across merchandise, coal, and intermodal, revenue excluding fuel recovery increased 2% in the quarter and was up mid-single digits, excluding the impacts of coal RPU headwinds. Expenses were lowered by 2%, and I will discuss the line items in more detail on the next slide. Interest in other expense was $13 million higher compared to the prior year. Income tax expense decreased 32 million as the impact of lower pre-tax earnings more than offset a prior year favorable state tax item. And this quarter's effective tax rate came in at 24.9%. As a result, earnings per share fell by 10 cents, including nearly 12 cents of impact from the previously mentioned discrete items. Let's now turn to the next slide and take a closer look at expenses. Total third quarter expense decreased by $39 million. Lower fuel prices and cycling the prior year labor true-up were mostly offset by the impacts of inflation and higher depreciation. Turning to the individual line items, labor and fringe expense decreased $7 million as the prior year union labor adjustment was largely offset by inflation and increased headcount. Heightened attention to overtime benefited cost per employee, particularly in our mechanical workforce where overtime ratios are now running at multi-year lows. Purchase services and other expense increased $25 million versus last year, including $16 million associated with higher casualty expense. Turning to sequential performance versus Q2 on the right-hand side of the page, network performance and numerous cost control initiatives in the quarter drove a nearly $20 million reduction in PS&O across our operating departments. We expect these savings to remain in the fourth quarter, aside from normal seasonality. Depreciation was up $21 million as a result of last year's equipment study, as well as a larger asset base. Fuel cost was down 89 million, mostly driven by a lower gallon price. This was partially offset by higher consumption, including approximately 2.5 million gallons recognized from prior periods. Adjusting for this, fuel efficiency was still unfavorable versus the prior year. And Mike has brought an increased focus on this critical measure. Seasonality will impact fuel efficiency in Q4. We fully expect to get back on trend. Equipment and rents was $10 million favorable, driven by faster freight car cycle times across all markets. These benefits were partly offset by costs related to higher automotive volumes. Finally, property gains were $21 million unfavorable in the quarter. As a reminder, we are cycling over $50 million of prior year gains in Q4 and expect sales this year to be minimal. Now turning to cash flow and distributions on slide 17, reflecting the discrete factors I discussed earlier, free cash flow is down from the prior year, but remains strong, supporting investments in the safety and reliability of our network, as well as an increased level of high-return strategic investments. Robust cash flow has also supported over $3.5 billion in shareholder returns so far this year, including $2.9 billion in share repurchases and over $650 million of dividends. Economic profit, as measured by CSX cash earnings, is about $160 million lower year to date, impacted again by intermodal storage revenue and export coal pricing. Nevertheless, the focus on economic profit is helping to incent a pipeline of high return initiatives that will deliver growth and ongoing efficiency gains. Now with that, let me turn it back to Joe for his closing remarks.

All right. Thank you, Sean. Now, as shown on slide 19, we will finish with some updated comments on our outlook as we approach the final quarter of 2023. We continue to expect low single-digit growth in revenue ton miles for the full year, supported by our consistent performance in merchandise and export coal. Automotive and minerals remain important growth areas, though obviously we're watching developments with the 23 automakers in the UAW very closely. As Kevin mentioned, we also look for a substantial rebound in our ag and food business over the fourth quarter. Export coal volumes remain strong as global demand stays high for U.S. met and thermal coal. For domestic coal, we anticipate some slowdown from the third quarter, which benefited from hot summer weather. So far this quarter, we continue to be pleased with our shipment levels. For intermodal, as we mentioned, we expect domestic activity to keep gaining modest momentum through the fourth quarter, while for now, our international business looks largely stable. Overall, our volume growth rate in intermodal will reflect favorable year-over-year comparisons. As we've said all year, the pricing environment remains supportive, and we have been encouraged by the agreements that we've already reached for 2024. Note that with the slowdown in intermodal storage revenue that we have seen over the course of this year, We are now expecting supplemental revenue, excluding trucking, to decline by $325 million for the full year. Our commitment to efficiency and cost control remains in place as we keep our eye on service performance, not just in the near term, but also as we look ahead to improved market conditions and greater demand for rail capacity. Finally, our estimate of $2.3 billion in capital expenditures remains unchanged, along with our strong focus on innovation and growth. I will close by saying that I'm very proud of what we've accomplished as one CSX team as I finished my first year with CSX. When I spoke to all of you last fall, we talked about our belief that CSX could accomplish great things and create so much value by working better together as one team to serve our customers. We have made very good progress, and all of us know that there remains so much more we can do. I'm even more enthusiastic about our opportunities than I was last year. We all appreciate your support and interest in our company as we keep moving forward. All right, thank you. And Matthew, we're now ready for questions.

Thank you, Joe. We will now move to our question and answer session. But in the interest of time, and to make sure that everyone on this call has an opportunity, we ask you to please limit yourselves to one question. Krista, we're ready to start the process.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Chris Weatherby from Citigroup. Please go ahead.

Hey, thanks. Good afternoon, guys. Maybe Joe or Mike, kind of wanted to start with your sense of where you are in terms of resources and services relative to the volume environment. So headcount moved up again. Maybe if you can give us a sense of where do you think you need to take that, or if you're at reasonable staffing levels, and maybe how we think about, like I said, that resource base relative to the volume environment. Do you have the ability to do more at these current levels, or are we still in a little bit of the recovery phase?

Oh, hey, Chris. It's Mike. Look, and again, I'm going to preface probably most of my answers with I've been here less than a month, but we still have a training pipeline. We still have people that we need to get into positions that I spoke of earlier. But overall, I'm comfortable that we have enough to improve the size of train, the amount of trains, the velocity with the people we have. But however, there are areas where we're probably getting affected somewhat on the flow of the goods. And so it's constant. We're working, not just Kevin and I, but our teams together. So they really get the ground floor view of what we can do. And not having been here for that long, I haven't really stretched the opportunities out there yet. So I'd say to answer your question, we're where we need to be. We have people that are being trained that are going to be positioned. And you remember, we have attrition, whether it's retirement or whatever the case. So we're filling that. And with the people we have, we're in good shape. We have to get in better shape. And a lot of that's going to come from self-help and how we utilize the assets.

Yeah, Craig, the last thing I'll add is, as Mike mentioned, we're still hiring in a few key locations. That's down to a little more than a handful. And largely, we're in pretty good shape in most other spots. And with the natural attrition we have, we're still hiring to replace some of that because our merchandise volume is up this year. So we're still seeing some growth in volume. But we feel pretty good about our ability to manage that. And Mike's really challenged the team to come up with a new fresh new set of eyes to look at how we can do some self-help to free up some of our crews to help us, you know, even be more efficient. Thanks.

Your next question comes from the line of Brian Ossenbeck from J.P. Morgan. Please go ahead.

Hey, thanks for taking the question. And Mike, welcome back to the industry. Congrats. Just wanted to ask more about the, excuse me, on the service side, maybe for Kevin, you're seeing some conversion you mentioned off of areas that have excess truck capacity. So is this stuff that you thought you lost before and was going to come back? Or has the service been so good for so long that people are actually going to convert and stay there? Just trying to get a sense of the stickiness of that. And then, Sean, if you can just give us some comments on the cost per employee. For the fourth quarter, it looks like overtime is coming down quite a bit. There's always mix and trainees involved. So any color on that would be helpful. Thank you.

Yeah, I would say on the truck conversion side, we're really, really early into this thing. The good news is customers are willing to start to have those conversations that, quite frankly, we just couldn't have a year ago, given where we were. And so we're building momentum. I expect this to build on itself in the next year. The great thing is, I think as an industry, we're starting to become aligned in terms of going after growth, going after some of the opportunities that exist out there collectively as an industry. And I think that's very encouraging as well. But it's a mixture. It's a mixture of going after new customers. Clearly, you pointed out the trucking market's not very supportive right now. But even in this market, we're finding customers that with ESG and with other things are wanting to have that discussion. There's still value that we can drive. But I only expect as a trucking market firms up in the next year and the years ahead that this will accelerate on itself and see a lot of momentum coming.

Brian, on your follow up question around cost per employee, we did made a lot of progress on the overtime front in the third quarter. You know, that's an area that Mike's been focused on right from the very beginning, trying to figure out ways we can restructure the work and eliminate waste in certain locations. So that's going to help. I will say, though, sequentially, Q3 to Q4, you probably will see still an uptick in cost per employee like we normally do. That's driven by some capital work labor that'll go over to OE in the fourth quarter. We also have some seasonal vacation and some accruals that'll hit in the fourth quarter. So I would say sequentially Q3 to Q4, you'll probably see comp or employee up a few percent.

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Hey, good evening. And thanks for taking my question. And Mike, welcome back as well. And I guess, Mike, can I just ask you, you know, the U.S. roads historically just haven't had a great track record of organic growth. And we know things like coal have been a long-term headwind. But what have you seen in your first month or so, you know, that you like to see at the CSX plan or, you know, changes you want to make that, you know, will help with this idea that CSX can outgrow the market looking ahead?

Hey, Brandon. Thank you. well you know i i mentioned in my remarks the visibility of information and it just it creates this uh connection where people see you know we have we have people that manage terminals that you know manage the dispatch on the road we have people that manage people from a crew management perspective we manage local we do all these things individually and to see that all together and then again back to being understanding of what it is you can do, whether it's from a capacity or a service perspective, but then cutting in with Kevin's team, we can get sticky because we can really understand all the work we're doing is really to get that business, to keep that business. And I see that here. The opportunity here is, you know, look, the railway I came from, you got the business, you went 1,200, 1,500 miles, and then, you know, there was more business here. It's everywhere. And it's competitive. But there's lots of it. And Kevin, we're not talking so much about the truck. Obviously, we're going to grow with the market and what it gives us. But I think the opportunity here when we connect our people, we are everywhere. We service, what is it, two-thirds of the U.S. market. And that's just opportunity in itself. So, I don't know if I'm answering your question. Again, I've been here a month, but I see that that's really what our goal is. We want to grow properly. We want it to be rateable. We want to make sure that we're in position for it, and we're going to make sure that we rid ourselves of waste so we're not getting rid of the assets that we need when it does come.

Your next question comes from the line of Jonathan Chappelle from Evercore ISI. Please go ahead.

Thank you. Good afternoon. Mike, I kind of wanted to build on that, and you kind of brought up your former role as well. You transitioned there from a PSR railroad to a growth railroad, and maybe that didn't go as smoothly as you would have hoped. So you're not joining a fixer-upper here. CSX's service metrics have improved vastly over the last year or two, and now you're pivoting to growth. So what are some of the lessons that you've learned from that transition at the last role and some of the dangers to avoid and how you manage capacity as you're trying to fill the network without clogging up the network and causing service issues.

Thanks, Jonathan. One of the wounds just opened up. Look, it's no different. We have to be really aligned. First of all, we have to understand what our assets and our people can do for us and expand on that, obviously. But I just don't see the market, the commodities we move, being the same as the growth is where I came from. And so, again, I have a long way to go to understand the market, and I'm working extremely hard with Kevin to understand it. But look, the principles are the same. We sell a service, we deliver a service. And how fast we recover from any service disruptions is key to keeping the customer knowing that our goal is to be the reliable provider for them. So I don't see any difference. And you can go back and take a look at the hockey stick recovery and all that great history, but I'm looking forward. And I don't think anything changes, in my view, as to how we approach this. We know what we can do, and we continue to really stay close. And again, the teams being together from the ground floor up, There shouldn't be surprises. And if there are, we're going to build our resiliency so that we can attack it again and again be reliable for the customer. So I don't see that big of a difference in terms of the model that we have here or wherever we have what I had before. It's sell the service, deliver the service. And Kevin is really working hard with this team on readability. So there shouldn't be surprises.

Your next question comes from the line of Scott Group from Wolf Research. Please go ahead.

Hey, thanks. Good afternoon. Maybe, Kevin, any color on how much of an uptick in the coal yield we should expect in Q4 and into Q1? And then maybe just, Sean, just help us think about some of the puts and takes for Q4. It just sounds like better volume, less of a fuel headwind, maybe some net uplift, but maybe some continued cost pressure. So you put it all together. Do you think operating ratio gets better or worse from Q3? Any directional call you want to give us?

Yeah, you know, Scott, there can be a lot of mixed issues within our coal business. You know, when you think about southern utilities, longer length of haul, higher RPU versus northern utilities. Export coal, very, very good business. It can be shorter haul, so it can sometimes be a little bit lower RPU as well. But given some of the benchmark strength that we've seen, I would look for something in the low single digits, maybe mid-single digits, depending on mix.

And Scott, on your question around Q4, I think you did a good job of kind of summarizing the factors. We're off to a good start in terms of the volume, and that's obviously one of the most important factors in terms of not only seeing OR stay stable to improve but also, more importantly, growing our earnings. As you mentioned, fuel should be a little bit less of a negative here in Q4 than it was in Q3. We'll see what the direction of fuel prices is, but we have $30 million of lag in the third quarter that we don't expect to repeat. And then, you know, in terms of the cost seasonally, we typically do see higher costs in Q4 than Q3. So if you were to look over the last five years, each and every one of those years, the OR has been worse in Q4 than Q3. And everything except for 2020, the COVID year operating income has been down sequentially from the third quarter. Now, We're off to a good start, like I said, and we've got our eyes fixed on places that we can eliminate waste and control costs. So I think we've got a good shot of bucking that seasonal trend and doing a little bit better than that.

Your next question comes from the line of Justin Long from Stevens. Please go ahead.

Thanks, and good afternoon. Kevin, it sounds like you've recently had some early success with market share gains, both truck and rail, but could you expand a little bit more on the commodity groups where you're seeing the most meaningful tailwinds on that front? And as we move into 2024, where you see the most opportunity to keep that momentum going?

Yeah, I think it's really within our merchandise portfolio and it's broad based. Um, there's different initiatives. across the board um you know from our metals side of the business which i highlighted automotive has been a good strength of uh for us and it's all on the back of you know service that's differentiated in the market and we've really been able to capitalize on that with the customer the customers are looking for reliable service and i think we've been i stand out in the market here uh year to date and our team has been selling it and it's been uh incredibly helpful on that side i will say you know you're gonna start to see some benefits of the industrial development side um you know more in probably the 25 26 but you'll start to see that layer in uh in late 24 and got a lot of momentum there and again it goes back to the service uh product that we've been able to deliver and getting the confidence as these industries build new plants that they're locating on our railroad. So I actually just sat down with Christina this afternoon, and we were going through all the industrial projects that have been taking place throughout the U.S. And it's interesting. You look at a map holistically throughout the U.S., and it's all focused in the east. And that's our railroad. That's where we operate. And that's where our team is really going after it today. And I'm very, very optimistic on what's happening in that side. So A lot of opportunities. They're mixed across different industries, and every industry is created a little bit different. But we are being able to lean into those conversations in a quite different environment than what was occurring last year. But, you know, very, very optimistic here.

Your next question comes from the line of Amit Mehertra from Deutsche Bank. Please go ahead.

Thanks a lot. Hi, everyone. Sean, I wanted to So just follow up on that question around 3Q to 4Q, but maybe ask it as it relates to 2024. I mean, obviously we're moving from a very inflationary environment to a less inflationary environment. You've got a little bit of labor, another uptick in labor in the middle of next year. But then I also look at like PS&O, you know, is that, you know, 19% of revenue several years ago was as low as 14, 15% of revenue. So there's obviously some opportunity to get more leverage on the cost structure, especially on that big PS and O item. So I don't know if you can kind of help us enter your brain a little bit and think what, what is the cost structure look like in 24? Because obviously we're still in an inflationary environment, but you still got maybe these funky idiosyncratic opportunities to kind of leverage some parts of the cost structure.

Yeah, Amit, obviously we're still in the planning phases for 2024, so I don't want to get too far ahead of ourselves here, but you know the story on labor, and just to make sure everybody understands and it's level set, we're going to have a 4.5% wage increase mid-year next year. That's the last year of the contract with the union employees. That's a step up from the 4% increase that we had mid-year this year. In terms of PS&O, at least on the inflationary side, it's early in But I think it's fair to say that we'll start to see some normalization of the inflationary pressures from this year. So we had mid single digit inflation this year. It'll probably be a little bit less than that, but certainly higher than the five year average as some of those outside service contracts are based on lagging indicators or labor indices that are going to reset. So suffice it to say, I do think we've got fewer headwinds overall going into next year than we did going into this year. And that sets us up well. We've got cost and efficiency opportunities, but I think more importantly, Kevin and the team are building a really nice pipeline of growth that really stems from the way that we've been serving the customer over the last year. And that sustained service level, as well as some of the initiatives the team's been working on, that's really what's going to drive growth as we get into next year and beyond.

Your next question comes from the line of Tom Wadowitz from UBS. Please go ahead.

Yeah, good afternoon. Wanted to see, I guess it's kind of the same topic, Sean, but if you think about 2024 and volume sensitivity in terms of how the OR performs, do you think that there's a chance that you could see improvement in the OR if you don't see volume growth? And perhaps related to that, from a pricing perspective, I think sometimes people think that there is a time delay on some of the pricing with multi-year contracts, and there might be catch-up on pricing related to inflation. So I guess it's kind of two things within that, just OR sensitivity to volume and also potential catch-up on pricing. Thank you.

Yeah, Tom. So, I mean, our plan is going to be to grow volume ahead of the economy. That's what we're going to shoot for. That's what we're going to plan for. So I think if we were to have no growth next year, I think it would be tough to improve the OR with the continued inflationary pressures that we're seeing. You know, you're cycling. We had that insurance settlement earlier in the year. So there's a few things there. Depreciation will continue to go up, things like that. So we need growth. That's what the model requires, and that's what we're building into the plan. Kevin, I don't know if you want to address the price piece.

Yeah, on the pricing, roughly 60% of our business reprices every year, and 30% of that is kind of carryover of what we've already touched this year. So we'll touch the other half going into next year. And the environment is still supportive, and it certainly helps when the service product is vastly improved and We'll continue to price to our service levels, and those are up. And so it's a conversation that customers expect. Our labor inflation is very visible to the world. We have those discussions. They're not unexpected from the customer.

Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.

Hi. Thanks for taking the question. Just want to go back to the domestic intermodal side. You're starting to see some conversion from truck here. When you're talking to customers, what's really holding them back from converting at this point? Is there something in the service product that you have to evolve, or is it just simply building that trust with the reliability that you guys have had over the past few months? Just any thoughts there?

yeah you know to reflect on you know the pandemic and uh that's you know the domestic intermodal um in our intermodal franchise performed very very well um it really was outshined the industry um in a lot of ways um the uh what minimized our growth opportunity was really the chassis and some of the equipment limitations that existed so obviously we're in a very very different world today and um so those limitations don't exist on a year-over-year basis and we're really Seeing the team able to capitalize on that and the strength of our service product is really coming through when you see what we talked about in the chart that we mentioned previously. I think all those things are coming together. Service leading in the east and then allowing our customers to grow with us with our service product.

Your next question comes from the line of Ken Hexter from Bank of America. Please go ahead.

Hey, great. Good afternoon, Mike. Welcome back to the sector and happy to have you here. Joe or Mike, I guess just operations seem pretty solid, right, in terms of how well you're operating. And obviously, you still want to improve. And maybe, Mike, just talk about what, I know you've been there for a month, but what do you see as, I don't know if it's low-hanging fruit or opportunities on operations? You know, it sounds like Sean saying or Kevin saying you need the volumes in order to get that operating leverage. But are there things you can do on the cost side from what you see that can can aid that leverage opportunity.

Yeah. Hi, Ken. Thanks. Look, visibility of waste and getting it and collating that information so that I can... What I do is I try to teach and learn, learn and teach. That's really what it's about. So we have a good group of people, many of them younger, haven't been experienced in the positions they're in. So that's really where I've been focusing. First of all, to get a temperature read, but really start to share with them how to go about getting at that waste. And it's not easy in a network like this. And, you know, it's something that we will do as a team, but I'm not big on, you know, the next day looking at a report. I want it visible right away so they see their actions. And so I see great opportunity in that. They're hungry to do it. They're more than motivated. And it's up to me to teach them and help them get there. And I have all the confidence in the world that's where we'll get. But we'll see just through the waste exercise at first, and then it starts to allow you to get into understanding how to devise the network, to Kevin's point, to keep and even get better service and get the businesses out there.

Yeah, Ken, I just want to add a little thing. I think the timing of Mike joining us is perfect because we've had a year of taking advantage of the operating model that we have, engaging with our employees, you know, through a lot of things around culture and our one CSX, um, we've made tremendous progress, especially on the service metrics, as you've seen. And we have, you know, you know, close to industry leading metrics across the board on the operating side. Now we have Mike coming in with his experience, fresh set of eyes and all the opportunities that can now allow us to step back and say, okay, we've come this far. Um, great work, proud of the team's work. Now, uh, here's the opportunity that we have to advance even further and so the timing's perfect i think for us works out very nicely our team's excited and motivated um you've seen now as kevin has highlighted many times in his comments tonight regarding this the customers have acknowledged and they acknowledge that with me all the time the service levels that we've sustained you know almost reliably now and repeatedly for of 12 months and And now we have the opportunity to get more efficient and to get even better. And Mike's come in with a great attitude and excited about how we can take it to the next level and still focus, of course, on improving our service metrics, but also teaching our team, which is a relatively young team. to understand what it takes now to take a next step forward. So we're excited about it, I'm excited about it, and I think we can continue to outpace the industry when it comes to progress on our efficiency metrics.

Your next question comes from the line of Bascom's Majors from Susquehanna. Please go ahead.

Thank you. To follow up on that earlier question, can you roll that out a little bit further? Not just on the service side, but Mike, your role in the mandate you've been given to focus on culture, sales, the integration of Kevin's department with yours. What would we see different from CSX over the next three to five years versus what we've seen over the last three to five? Thank you.

That's a tough one, Bascom. I'm still out there trying to learn, and that's important to me because I don't want to block anybody or make them feel they can't come forward with an idea. That's number one. But going forward, I want to share the experience I have so that they're incorporating that into the things they do today. And to me, we'll see improvements in all our metrics. a bigger focus on, you know, when I say velocity, I'm talking both trains and cars, but fluidity. And we run a pretty condensed network here. Everything is really close. We don't have, in many cases, a lot of time to recover. So it's the plan we put into effect and the discipline about executing it. And so what I'm trying to share with them is the availability of data and how to use it. It hasn't, I don't see that they've had enough time. They've gone through a pretty tough period here over the last couple years. They've rebounded extremely nicely to Joe's point. This is to get to the next level so where they're self-sufficient. And I know they can be. They know they can be, but I'm here to show them that way. And maybe, Kevin, if you have

Yeah, I would just, I would highlight that the teams, Mike's team and my team, they coordinate daily. They're speaking better than they ever have to each other. It's important from a sales and marketing perspective. You talked about, can we handle an up, surge in volume demand. Well, it's up to us to communicate that real time so the team can work, make sure we're prepared for that volume, communicate with the customer, and make sure it's rateable and that we have the people in place to handle it. And I think A lot of the discussions we're having right now are around that. And I don't think it's rocket science to figure out where things could come back very, very quickly. And we're having those discussions around creating resiliency in this network. And we're going to get together in a couple of weeks, our teams again, go through it market by market. What do we see for next year? What do we see over the next three years? And how are we going to prepare for that? And those conversations are better than they ever have been.

Yeah, and I'll just finish up. I've been, like I said, pretty much to... Well, not pretty much everywhere, but a lot of locations. And I really focus on bringing everybody that has a role in servicing the customer. I was up in Baltimore, Curtis Bay. I had everybody from facilities to Kevin and his marketing team, to the people that run the plant, to our engineering, mechanical. Everybody has a role to play. And when they see their actions actually doing it together, they become... More than customer advocates, they know and can respond to the customer much faster because they know exactly what they can offer. And so going forward, this is not operations and marketing. No, this is CSX. This is how we approach this. This is how we build the business and keep it and drive it even better for the customer. That's what I see in three to five years.

You guys can't see it, but Mike has the shirt on. It's one CSX. um that's what we're talking about here and that's the vision that our teams are seamless enough that people see csx as one entity not a bunch of different functions and silos um all focused on of course safety first of our employees in the communities we live in and serve but ultimately the service we provide our customers which leads to the growth potential that we've all talked about and doesn't take a rocket scientist to figure out in this business what what incremental margins come with with growth in this business and um but From my year-plus experience here now, we will realize the most potential when we have operations and marketing sales, as described by both Kevin and Mike, as one team. Looking at every opportunity together with a can-do, let's find a way to make sure it's profitable. Let's find a way to be able to serve the customer and do it efficiently. And that's the spirit of OneCSX. Focus on teaching and training our employees to be part of that team and to get excited by that opportunity and do it in a way that we're proud of how we work together in service of the customer. That's OneCSX is what everyone's talking about.

Your next question comes from the line of Jason Siddell from TD Cowan. Please go ahead.

Thank you, operator. Joe and team, good afternoon. Mike, welcome back. It must be pretty exciting coming, hitting the ground running in a railroad showing improving service numbers. So we look forward to seeing what you can do in 2024. My question actually is going to be to Kevin. Kevin, you know, you had some comments. You said you had many, many reasons to be optimistic. So noted the too many there. You sort of touched on domestic plastics improving. I'd like to get some meat on the bone there with those commentaries. And then you talked a little bit about some industrial development project with Christina. Can you give us some numbers and what you're seeing now in terms of total projects and maybe what you had a year ago and maybe pre-pandemic?

Yeah, you know, on, you know, We're exposed to a lot of cyclical businesses and we're talking about, everybody's talking about a looming recession. Well, in my opinion, a lot of the businesses we touched have been in recession for the last year and many of them are at cyclical lows. And maybe we went beyond that with the destocking that occurred. So when we talk about some of the plastics and we talk about forest products and some of these other markets, there's significant destocking headwinds that we've been dealing with for the past three, four quarters. And so just based on that, obviously the comparisons get much easier from here as we look into 2024. And hopefully in a world where demand is relatively stable, that would imply hopefully some growth beyond just having the economy snap back a bit here. So That gives me a little bit of optimism. Obviously, if you turn the TV on right now, it can make you a little bit hesitant to be bullish. But the things that we can control, as I mentioned before, that pipeline has never been bigger. I don't think, you know, I've only been here for about six, seven years, but, you know, talking to my colleagues that have been around a lot longer, the things that we're doing from an industrial development side, the things we're doing, working with other class ones, the things, you know, yeah, the Western class ones going after the Mexico business, we can participate in that. We're really happy to work with them. There's a lot of things, a lot of momentum just around us all working together to create opportunities for ourselves where I think um for decades we've been pushing volume quite frankly off the railroad on the truck and now we're all going to work collectively to really change that trend and that's exciting um forget the second part of that question the industrial projects um you know we did highlight a number of those uh i think we'll put a fighter We'll come back probably at the end of, as we look into next year and kind of put up more numbers around that. But the activity levels are just tremendous. And then we haven't seen any slowdown. And like I said before, the biggest challenge is to create the inventory of, you know, readily available industrial sites that are shovel ready. tomorrow, basically. As these companies, as we're seeing more onshoring, we're seeing more industrial development, they want to go quickly and we've got to be ready to serve their needs. So that's the focus of this team is how can we create more opportunities throughout our network to react to where they need to go and create a service so they can reach their customers. But we'll put some more numbers around that as we develop it. But the team's done a great job and we've got a lot of momentum there.

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Yeah, hi. I was wondering if you could maybe give some color or thoughts around the auto sector. Obviously, it's been an area of a lot of strength. The strikes, work stoppages are going on. How much cushion do you guys have relative to the inventory that's out there versus how long this drags on before it really starts to impact Carlos? Thanks.

Yeah, I mean, obviously, we want a quick resolution. The quicker, the better. As you're probably aware of, the industry as a whole has been short on car supplies. So to some degree, that's probably helping us or helping the industry to a certain degree. There's certainly some impacts to us. We're seeing strong demand in other areas. We have a diverse portfolio, so we're able to probably supply more cars to those customers that have been wanting more cars here recently and diverting some of those as we've seen some impact. But my boss here knows that industry more than anybody else, and I keep on asking him every day what his thoughts are. But we'll manage through it. I think more of This is deferred revenue, and we think the demand still remains out there. So as we move into next year, we expect to capture all the demand that exists.

Your next question comes from the line of David Vernon from Bernstein. Please go ahead. Hey, good afternoon, guys.

So, Kevin, I wanted to ask you about the drivers of that domestic intermodal growth from a channel perspective. You know, the numbers sort of turned around in week 17, and it's been pretty straightened up to the right. Is this just general stuff you're getting through traditional IMCs, or is it, you know, a parcel company that's doing a little bit more over the rails? Is it a retailer that you've got a direct relationship with? Is there any one single driver of what's looking like a pretty big divergence from industry intermodal performance that we should be thinking about there in domestic intermodal?

Well, I think there's not one single driver. It's the teams working together on the operating side and the sales and marketing side. They're going after every opportunity there is. whether it's identifying new lanes, other things that are profitable, we're going after it right now and really being able to lean in. And I have to commend the team for their creativity, their ability to work with our partners in operations and really go after things and adapt quickly and react quickly to market demand out there. So we still have a significant value proposition, even with the truck as weak as it is today. And that will only accelerate once the truck firms up a little bit here in the next year, but really, really proud of what they've been able to accomplish, and we've got a lot of momentum around it.

Your next question comes from the line of Walter Spracklin from RBC Capital Markets. Please go ahead.

Hey, this is James McGarigal. I'm on for Walter today. Thanks for having me on. I wanted to ask a question on U.S. port shareships. toward the U.S. East Coast and away from the U.S. West Coast over the past number of years? Given the agreements with the unions on the West Coast, do you expect this share shift to trend toward the East Coast to continue? And any early indication you can share from your conversations with the shipping lines and your strategy to capitalize on these trends longer term? Thanks.

I think, you know, you've heard it over and over again. The West Coast are challenged in terms of being able to add capacity. And so there's been tremendous investments that continue to be made on the East Coast and we're the beneficiary of that. so we'll continue uh to work with our east coast ports um and expect that trend to continue going forward you also see a migration you know out of china and other other markets and that's also helpful for what we're seeing in terms of imports uh coming out from new locations that can go that are more likely to go to the east coast than maybe the west coast previously so A lot of good momentum, a lot of significant investments being made. We're making investments alongside of them to make sure we're prepared for the growth, but it's been a great story that I don't see any reason that that won't continue going forward.

Your next question comes from the line of Ravi Shankar from Morgan Stanley. Please go ahead.

Thanks. Good evening, everyone. Just a couple of questions here. One follow-up. Sorry if I missed this, but I was a little surprised to see the headwind on the accessorials get a little bit worse because it felt like you guys had a pretty good handle on that. Can you just kind of unpack that for us and kind of if that's now a final number? And also maybe for Joe, bigger picture, I know the rails are all trying to pivot very heavily towards growth, which has historically been challenging to come by. What do you think about inorganic growth potential opportunities, maybe short lines, maybe trucking? Is that something you guys are looking at as well? Thank you.

Ravi, this is Sean. I'll start with the question around the accessorials. So it's been trending down all year long. I would say we took our kind of last sequential step down from Q2 to Q3, a little bit more than we expected, but it wasn't just intermodal storage. There were some other components of other revenue that were down slightly. There's a lot of different things in there from subsidiary revenue to switching charges to lots of different factors. So this is probably a good run rate to use going forward. It is also impacted by volume to a degree. So it'll trend to a little bit higher when the intermodal volumes recover likely. But the level that we're at right now, we do think is kind of the bottom. And that's why

we just didn't want to uh we wanted to make sure everybody understood where we were headed for the fourth quarter on that line thanks sean and robbie just a couple other comments from your second part of your question i mean at the highest level i wouldn't uh think that you know trucking is where we would see growth we're proud of the of the acquisition of quality carriers and how that's progressed with us at csx but that was very specialized you know to serve our chemical customers where very strong franchise and very important business to us. We'll always be opportunistic, but I wouldn't say that trucking is where the growth comes from. But just a couple areas to highlight that we haven't been highlighted so far tonight. First and foremost, I'll start with the fact that I think you get the sense from this team that we firmly believe that the best way to provide opportunity for growth is to continue to provide best industry-leading service to our customers. And when we do that, it gives us more and more opportunities to win business with customers. So that is the foundation of where we see growth. But you have to remember, we've been investing in the New England region, which is the old Pan Am network that we purchased. And that's going to be an opportunity for growth. We're excited about that. We're going to start a new interchange point with CPKC in Myrtlewood, Alabama. We're very excited about that opportunity. And Kevin referenced it, but I want to highlight it. In order for this industry to see significant growth, we have to work better together. to be motivated to serve customers in new and better ways. And we're starting to have some of those good conversations with other Class 1 railroads to be able to talk and think differently about how do we serve the customer and how do we get excited about that opportunity. So there are a number of incremental steps we can take to grow the business beyond just getting better and all the work that we're doing and the cynical nature of our business, which will be some things that should help us going into 24, as both Kevin and Sean mentioned. But those are some incremental areas that we have opportunities. And then as our intermodal product continues to get better and we continue to be in the 95 plus percent trip plan compliance reliably, repeatedly and get to the high 90s. As the truck market starts to rebound and its costs continue to increase there, we can be even more competitive versus truck and get some more business off the road there. So lots of opportunity for us. We have to continue down the path we're on of continuing to provide that reliable service. But there's some exciting developments going on. In addition to all the projects that are going on industrial development side that Kevin referenced earlier, we'll provide more guidance, maybe some more information on that, not guidance, but information on the context of that. But there are hundreds and hundreds of projects in the works in that space, so a lot to be excited about and really excited about the capability of our network to take advantage of that.

This concludes today's conference call. Thank you for your participation, and you may now disconnect. This concludes today's conference call. Thank you for your participation and you may now