CSX Corporation

Thank you, Krista. Hello and good afternoon, everyone. We're very pleased to have you join our first quarter conference call. Joining me from the leadership team are Joe Hendricks, President and Chief Executive Officer, Mike Corey, EVP and Chief Operating Officer, Kevin Boone, EVP and Chief Commercial Officer, and Sean Pelkey, EVP and Chief Financial Officer. In the presentation accompanying this call, which is available on our website, you will find slides with our forward-looking disclosures and our non-GAAP disclosures for your review. With that, it is now my pleasure to introduce Mr. Joe Hendricks. Joe Hendricks All right.

Thank you, Matthew, and whoever won. Thank you for joining our first quarter call. Since I came to CSX, we have been clear about our commitment to lead with service. Consistent, reliable, excellent service is what shareholders, strengthens our relationships with customers, expands our markets, and ultimately drives proper growth. Now fulfill that commitment this quarter. The start of the year typically brings operational challenges that we manage the network through the worst of winter weather. These challenges will be more difficult this year because of the constraints associated with our two major infrastructure projects, the Howard Street Tunnel and the Blue Ridge Subdivision rebuild. Unfortunately, our performance fell short of our expectations. As a result, we left good business on the table, reduced our revenues, and our inefficiencies meant we incurred more expense. We take full accountability for our performance this quarter, and we are not standing still. The team is aligned, our expectations are clear, and we are taking actions to stabilize our operations, improve efficiency, and enhance coordination across the entire OneCSX team. All that said, I want to reiterate the underlying strengths of our business. This is still the same great network and OneCSX team. Our customer relationships are strong, and the fundamentals of our strategy are sound. I want to thank our employees for their resilience and our investors for their continued support as we move forward with urgency and clarity. Now, let's go over some highlights. Let's start with slide one, where we feature some of the key results from our first quarter. Total volume decreased 1% compared to last year, but we did see intermodal volumes increase 2% on the quarter as we saw an uptick in port traffic. Total revenue was $3.4 billion for the quarter, down 7% from the same period last year. As we anticipated, much of this decline was due to the commodity effects of lower benchmark coal prices and reduced fuel surcharge. Earnings per share decreased by 24%, reflecting the effects of our margin from reduced revenues and our challenge network performance. I know that trust is earned through consistency. One quarter doesn't define us. What defines us is how we respond, how we learn, and how we come back stronger. That is our focus. We are committed to delivering better results, and most importantly, to executing in the quarters ahead. Now I will turn the call over to Mike to provide details around our operational performance.

Thank you, Joe. And thanks to all of you for taking the time to participate today. As Joe highlighted in his opening remarks, this was a difficult quarter for the CSX network and the team. We've talked about how we have two major infrastructure rebuilds in progress that are causing us to reorganize and reroute a significant amount of our daily traffic. As a result, we were hit by severe weather and faced other tough railroading challenges. It has become more complicated for us to recover and is just taking us longer to stabilize our operations. These effects are clear in our service metrics, as all of you have noticed. Let me say this as firmly as I can, improving the fluidity of the network is essential in order to deliver on our promises to our customers, and we are committed to getting this done. We expect our performance to improve from first quarter, even as we manage the ongoing infrastructure projects. I'll talk more in a moment about what steps we're taking, but let's first discuss safety results for the quarter. The first quarter saw a third straight sequential decline in our FRA injury rate, which also brought us lower on a year-over-year basis. The continued education and mentorship programs that we've put in place are having a measurable effect, helping our employees understand how to reduce their risk exposure every day that they're on the job. I'm pleased that our F4A train accident rate also declined sequentially and improved year over year. Our team sees this as an encouraging affirmation that our Safe CSX program is taking hold and driving positive results. We will continue our work to build a safety-focused culture here at CSX. always with the goal of everyone returning home safe and sound after every day. Let's move to the next slide. At the top of this page, you'll see metrics reflecting our network fluidity. After working through the storms in the second half of 2024, our velocity was affected early in the first quarter of 2025 after closing the Baltimore Tunnel, and it continued to be challenged as we managed through the after effects of harsh winter weather. Well demonstrated a similar unfavorable trend over the last several weeks, As yard congestion persisted, making it difficult for trains to depart on schedule. We're working hard to address the increase in cars online as having excess inventory has slowed the network. With particular flooding on our southwest and midwest regions, Nashville and Cincinnati in particular, we have much to do in this regard. The charts on the bottom show important customer facing metrics. Our intermodal business is highly service sensitive. We have to get this right to stay competitive in this market. As this chart shows, our internal trip plan compliance rebounded nicely in the first quarter after the hurricane-related disruptions that hit last fall. The team has worked hard to keep our terminals fluid and minimize the amount of time drayage drivers are waiting to drop off or pick up boxes. We're encouraged by this result, but we didn't do nearly as well with carload TPC, which was negatively impacted from the quarter's fluidity constraints. This is a primary area of attention for the team, We have to deliver here in order to support our current merchandise business and the substantial amount of new business that Kevin and his team won and expect to win going forward. Finally, our CSD, or first mile, last mile measure, shows fairly steady performance, but we know that for our customers, every percentage point represents important freight that they've entrusted to CSX. So we understand where we are, and we are certainly committed to getting back to where we need to be. Top to bottom, our team is focused on speeding our operations back up and rebuilding the positive momentum that comes from a fluid, balanced network. We know we're not going to get back to our true potential until we get these major projects completed, but we are doing the hard work to drive incremental improvement step by step as we go through the year. One of the first things we're doing is to get the resources in place that will enable us to run a consistent operating plan, even with the two major closures to work around. We're bringing online a modest number of locomotives to help get the network in balance and reduce train delay. This is scheduled railroading. When trains leave on schedule, everything else is able to fall in place. We're also taking steps to drive our asset utilization. Our field leaders are connecting with our customers to identify and flush cars off our network. As cars accumulated, network fluidity declined, so we're working closely with our customers and taking immediate action to get these levels back to where they need to be. We're making sure that everyone in this organization acts according to the priority that we at CSX place on delivering customer service. There's no single measure for the railroad that accounts for everything, but for years, TPC has served us as a very good guide to effective statistics. When we miss, we hold ourselves accountable, find a solution, and make it right with our customers. We have a lot of work to do, but remember this. We have the same people and the same assets that we had a year ago, and we take a lot of pride in knowing how to apply the core principles of an effective scheduled railroad. On top of that, we're adding improved tools such as the real time operations portal system that we previewed at our investor day. Hundreds of railroaders across the network use our top every day to strengthen communication and support faster, more effective decision making. The bottom line is that we're aligned across the team and we're going to deliver for our customers and our shareholders. With that, I'll turn it over to you, Kevin.

All right. Thank you, Mike. Right now, CSX and our customers are navigating elevated levels of macro uncertainty. Clearly, there's an added market volatility when global trade policy is shifting day to day. We're staying close to our customers to understand the changing landscape, partnering to ensure supply chains remain resilient and efficient, as well as looking for opportunities to grow together, including investments in U.S. manufacturing. Year to date, in-market demand has remained relatively stable. While some areas are clearly stronger than others, we have not seen any major negative inflections. That said, we are unsatisfied. The disruptions we face across the network resulted in missed opportunities in some of our key end markets. As you've heard, our entire team is 100% engaged, and we have confidence that we will show improvement as the year progresses. As an example of our commitment, I want to quickly highlight the CSX's TDSI Automotive Terminal Team, set a record with four terminals, winning the auto industry's premier awards for origin and destination operations. as recognized by the AAR. We are incredibly proud of our TDSI team and how they represent service excellence here at CSX. Now let's turn to the slides. Starting with our merchandise business as shown on slide six, in total for the first quarter, both revenue and volume declined 2%. RPU increased 1% year over year as higher core pricing gains offset lower fuel surcharge and the effects of negative mix. Looking across the different end markets, Fertilizer volume was up 2% compared to last year, benefiting from modest improvement in short haul, bone valley shipments, but revenue was flat as RPU was affected by this mixed shift. Market demand was strong for ag and food, but operational challenges limited our ability to meet this demand, reducing our shipments compared to the market opportunity. Minerals volume was lower by 1% as weather impacted aggregate shipments, but underlying construction activity remained robust. Cement volume was favorable over the quarter, supported by the ramp-up of new production, which contributed to favorable RPU mix and helped lift revenues by 4% for the quarter. Chemicals revenue was up 1% against a 1% decline in volume. We saw positive demand in plastics and energy-related areas, such as propane and LPGs, but cold weather had an impact on asphalt shipments. Forest products volume declined 4%, reflecting an uncertain building products environment when considering interest rates and changing trading policies. Metals and equipment continue to be sluggish, with volume down 7% for the quarter. Automotive production was slow to start the year, and though we saw improvements in March, volume and revenue declined 7% and 8% respectively. As we look to the second quarter and the rest of the year, we're closely watching the daily changes in trade and tariff policy. As I said before, based on what we observed from our merchandise customers now, demand across merchandise is relatively steady. There are even some encouraging recent signs, with a good seasonal pickup in aggregates, strong in-market demand in some of our ag markets, and some early favorable effects from tariffs as steel prices have improved. If markets hold, we see opportunities to capitalize on improved network performance, allowing us to capture and fulfill more of the demand in some of our key markets. Now let's turn to slide seven to go over the coal business. Coal revenue declined 27% on 9% lower volume as a team navigated lower export prices, producer issues, and operational challenges in the quarter. All-in coal RPU declined 20% year-over-year and fell 4% sequentially, slightly more than the 3% decline that we anticipated last quarter. We saw year-over-year declines in both our export and domestic businesses. Export tonnage declined by 12%, partially driven by the impacts of two significant temporary mine outages. While domestic tonnage was lower by 4%, we did see positive demand trends through the quarter. Utility demand has been supported by higher natural gas prices, and we see positive signals from some of our key customers for increased demand into the summer and beyond. Domestic shipments to steel mills were also down year over year, reflecting soft conditions in the metals market to start the year. For pricing, the Australian benchmark averaged $185 per ton over the first quarter and currently sits around that level. On a lag basis, this would be a modest headwind to RPU in the second quarter, although we could see a slight positive yield offset if we're able to increase our deliveries to the southern utility customers. Turning to slide eight to review the intermodal business. Quarter revenue was down 3% despite a 2% increase in volume. RPU was lower by 5% with a 3% impact due to lower fuel surcharge and the remainder largely due to stronger international shipments. The volume growth for the quarter was driven by international activity as we saw positive trends in container import flows sourced from our global partners. While some of this may have been due to a moderate pull forward ahead of anticipated tariffs, We do not see any real step change in the trend line until we approach the end of March. Domestic was effectively flat, with grain in our rail asset shipments and new initiatives offsetting mixed results among some of our other channel partners. Again, we're encouraged by what we've seen over the quarter, but visibility is low into the rest of the year. The trucking market has not inflected, but does not seem to be past the bottom, but does seem to be past the bottom, which is moderately favorable for the intermodal overall. Finally, let's turn to slide nine for an update on industrial development at CSX. It's been very encouraging to see how our overall program has continued to progress. As you've heard us say at recent conferences, inbound calls to our team remain at very high levels, and our total pipeline of projects continues to grow, reaching nearly 600 by quarter end. Even better, one quarter of these projects are already under contract or nearing the final site selection. activity within this pipeline continues to move forward with 24 new facilities going live on our network over the first quarter these new plans and expansions will ramp up over the next few years contributing to our positive outlook on growth we expect to keep this momentum up through the rest of the year with up to 50 additional facilities scheduled to start service over the next nine months we remain confident that as the program continues to mature and accelerate we're on track towards realizing the volume growth path we outlined at the November Investor Day. We've been very excited about this unique growth opportunity and will continue our efforts to attract more and more customers who will benefit from growing their business on the CSX network. With that, let me turn it over to Sean.

Thank you, Kevin, and good afternoon. Looking at first quarter results, revenue fell by 7% or $258 million. from a 1% drop in volume, as well as lower export coal benchmark prices, lower fuel recovery, and declines in other revenue in trucking. Expenses increased by 2%, and I'll discuss the line item details on the next slide. Interest in other expense was $14 million higher compared to the prior year, and we expect this amount to step up slightly following our debt issuance in March. Income tax expense fell by $76 million on lower pre-tax earnings. As a result, earnings per share decreased by 11 cents. Declines in export coal benchmarks and net fuel prices drove a 4 cent headwind to EPS. We expect a similar commodity price headwind in the second quarter, which should ease throughout the back half of the year. Going into the year, we knew that Q1 would represent an earnings trough, both on a year-over-year and an absolute basis. Then, difficult operating conditions faced during the quarter led us to miss our own expectations for both revenue and expense. Despite new challenges from storms and flooding early in the second quarter, our team of railroaders is working tirelessly to clear congestion and deliver the service product our customers deserve, which will drive revenue and expense benefits moving through the year. Let's now turn to the next slide and take a closer look at expense. Total first quarter expense increased by 2% or $38 million. This includes around 45 million of additional costs related to network disruptions, congestion, and severe winter weather. These headwinds, plus the impact of inflation, were partly offset by savings from lower fuel prices. Turning to the individual line items, labor and fringe was up 16 million, primarily due to inflation. Headcount has remained stable over the last year, and we expect it to be about flat through the year. Purchase services and other expense increased by $54 million. About half of this increase was tied to network disruptions and weather, with inflation and other items driving the remainder. Depreciation was up $15 million due to a larger asset base. Fuel costs decreased $50 million, driven by a lower gallon price and savings from efficiency and lower volume. Gallons per GTM has now improved on a year-over-year basis for five consecutive quarters, driving over $50 million in cumulative savings over that period. Finally, equipment and rents increased by $3 million. Now turning to cash flow and distributions on slide 13. Investing for the safety, reliability, and long-term growth of our railroad continues to be our first priority use of capital. Q1 property additions were higher. including $133 million of spending towards the rebuild project on our Blue Ridge subdivision. For the full year, our expectations are unchanged, with non-Blue Ridge spending roughly flat to 2024 and the total Blue Ridge rebuild expected to exceed $400 million before insurance recoveries. Free cash flow was stable in the first quarter, as lower earnings were offset by cycling a previously postponed tax payment in the prior year. Now, as a reminder, cash outflows in the second quarter will include a roughly $425 million tax payment that was postponed from 2024 due to hurricane-related tax relief. After fully funding capital investments, we are committed to returning cash to shareholders, including nearly a billion dollars in the first quarter. Our approach will remain balanced and opportunistic, factoring in an attractive current share valuation while closely monitoring shifts in demand for our services and the broader economic climate. With that, let me turn it back to Joe for his closing remarks.

Okay, thank you, Sean. Now we will conclude our remarks by walking through our updated guidance for the full year 2025. First, we continue to expect overall volume growth for the full year. As Kevin said, demand remains fairly stable, but the near-term effects of rapidly changing trade and tariff policies are uncertain, which makes it difficult to project a reasonable range. That said, we remain very well positioned to facilitate and benefit from the continued long-term trend toward expansion of U.S. manufacturing capacity. As we have called out in the past, our revenue will reflect the challenges of lower commodity prices and changes in mix. So the year-over-year impact of lower export coal benchmarks should be smaller than what we reported in the first quarter. As Sean highlighted, we expect first quarter to be the trough for our probability for this year as we improve the fluidity of our network As we continue to drive a greater efficiency and we deliver labor productivity, we should see sequential improvement. A CapEx forecast is unchanged, as you heard from Sean, and as you've seen this past quarter, a balanced, opportunistic approach to capital returns also remains in place. To conclude, while this Corps did not meet our expectations, I appreciate the commitment, focus, and the efforts of our entire 1CSX team. That said, we recognize that the effort must translate into better outcomes. And that is where our attention is right now. We're fully committed to running a safer, faster, and more reliable railroad. And we know that doing so consistently is the path delivering the long-term, proper growth we expect of ourselves. Thanks to all of you for your interest in our company. Matthew, we're ready to take questions.

Thank you, Joe. We will now proceed to the question and answer session. Now, to make sure that everyone has the opportunity to participate in the time that we have, we ask you to please limit yourselves to one and only one question. Krista, we're ready to start the process.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your first question comes from the line of Tom Waterwicks with UBS. Please go ahead.

Yeah, good afternoon. Wanted to see if you could, I guess, I don't know, break down into maybe high level, but kind of buckets of the operational challenges. You know, you obviously make making the strategic move with Howard street tunnel and the investment there. And that's an effect is that, you know, is that half of the challenge on the operating side or how, how do you view that? Was that a greater impact? And then you talked about weather. I don't know how big that is. I guess the other piece would seem to be, I don't know if there's some that's from like, you know, kind of longer train strategy that maybe there's noise related to that or, or maybe just, just not as good at execution, but just wanted to see if you could kind of attribute a little bit more, And then also give a sense of, you know, how quickly maybe you can see improvement in any operating performance. Thank you.

Thank you for the question, Tom, but got no excuses for where we are. What we're dealing with are the results of significant compounding events, basically that have built over several months, you know, right up to last week's flooding and line closure of one of our most critical lines. So what we're doing, is really focusing on a series of things. And it's, first of all, reducing the cars online. And that's what's accumulated through all these events. And there was like six of them in there every month coming up to this point. We're working really close with our customers to identify, first of all, the excess cars in our serving yards and our active inventory. And then we're working with them where we can to provide extra service to work these cars off. And then also providing enough service so they understand and can reduce their pipelines to help us create the fluidity we need. Lastly, we always have embargoes as an option, but that's not really our preferred move. The next thing is we're adding locomotives into areas that we know were congested and we need that ability to be flexible to be able to move the traffic that we have. And we're also placing additional mechanical folks out in the field to reduce the amount of time to cycle back locomotives that go to major shops. In terms of our crews, we're transferring employees from other jurisdictions as they become available into these affected terminals. We're temporarily adjusting our planned capital track and structures program to reduce activity in those affected areas. That will allow us, again, to provide more flexibility, more capacity. And, you know, to get back, really, Tom, again, I have no excuse as to where we are other than a buildup of a series of significant events that really, took away the capacity that we had planned once we took down the Howard Street Tunnel. If you remember, it's about 17, 18 trains each way prior to that with the Blue Ridge gone. And we've been affected severely in our other two westernmost routes. And that's what we're working through. So it's not an effect of any plan we had in terms of long trains or anything else. This is just a series of events that we have got to work through. And that's what the team is absolutely committed to. And we will improve through this quarter And our goal is to get to the summer where we see normal seasonality of some traffic tapering off, whether it's auto or ag, to allow us to fully reset ourselves into Q3. But it's going to take the time and definitely it's going to get the effort from everybody from neon down. Hope that answers you.

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

Hey, good afternoon, and thank you for taking the question. Mike, maybe if we can follow up there. So it sounds like this is going to take maybe longer than a quarter to resolve, and you might need to see lower levels of demand to push through here. But I guess thinking about this from a margin perspective, and sorry, maybe the question is more for Sean, but normally you see like a 400 basis point improvement from 1Q to 2Q operating ratio or operating margin, however you want to look at it. Is that on the table here, or with these additional resources maybe taking longer time to recover, is that kind of off the table at this point?

Hey, Brandon. Thanks for the question. You know, I think Q1 versus Q2, typically Q2 is always better, right? The magnitude each year is a little bit different depending on how challenging the winter was in Q1 and other factors that go through there. Our expectation is that clearly Q2 results are going to be better than Q1 this year. You know, I want to clarify one thing, which is, you know, Mike talked about putting a couple of resources here and there, really not adding costs. These are very small things that at the end of the day, when we run more fluid, we actually save costs. It's cheaper, right? And not only that, you know, we wanted to make it clear that there's a revenue opportunity there as well. There's demand. that we weren't able to meet in Q1, that as operations begin to improve, we're going to be able to go get those opportunities, assuming that the demand environment remains stable. So those things will help. And I think the pace of margin improvement and operating income improvement from Q1 to Q2 will largely depend on that macro environment, as well as the pace of improvement that you see in operations, which will translate to cost, but also, and arguably more importantly, to the revenue side of the equation.

Your next question comes from the line of John Chappell with Evercore ISI. Please go ahead.

Thank you. Sean, I'm going to stick with that topic a little bit here. I mean, in Investor Day and in January, you laid out a bunch of one-off specific items for this year. That $45 million that you laid out in slide 12, is that all incrementals? to what you'd identified in January? And is that all ring fenced to 1Q so we know what an appropriate starting point is for 2Q? Or I guess is there some overrun? And Mike just mentioned another flooding situation last week. So just, again, trying to figure out how much of this is incremental to the already one-off things and how we think about 2Q going forward.

Sure. Thanks, John. So the 350 million, the biggest part of that is the commodity price headwind of about 300 million. We still think that's a good number for the year. You know, met coal prices came down a little bit over the course of Q1, you know, hopefully found a bottom here. But we'll see a big impact again year over year in Q2, probably pretty similar to what we saw in Q1 from the commodity price perspective. When it comes to the cost side, that $45 million that we called out, that includes the $10 million a month that we expected due to reroute costs around both the Howard Street Tunnel and the Blue Ridge. You have to remember in the first quarter, we had two months of Howard Street reroute costs with that project beginning February 1st. So call it $20 to $25 million of reroute costs and then another $20 to $25 million of you know, weather, congestion, you know, lack of fluidity. That's the opportunity for us going from Q1 to Q2. I don't think you're going to see that whole 20 to 25 million come out, particularly given some of the challenges we've had to start the quarter, but you'll see it improve as we continue on in the next couple of months. And again, you know, don't forget, I think there's a sizable revenue opportunity for us as well as things get fluid.

Your next question comes from the line of Ari Rosa with Citigroup. Please go ahead.

Great. Good afternoon. So you mentioned some of the lost customer contracts. I was just hoping maybe you could quantify that. And then either Joe or Kevin, if you could talk about kind of where customer conversations are on the tariff impact and kind of how you see customers positioning for kind of the policy uncertainty. that we're kind of working through right now, you know, I think that would be helpful. Thanks.

Yeah, I want to clarify that. It's an important point. There's no lost contracts that we've seen. In fact, it's more about being able to lean into some of the growth opportunities that were out there for us to capture. And a lot of that was on our unit train side of our business. So that's where it's concentrated, but there's other instances and I would also point out that given the communication that we have with the operating team and the great job that Shannon, who runs our customer service group, does, we really mitigated the real issues at the customer sites and continue to prioritize where it really makes sense, those shipments and making sure those things are getting delivered and we're not creating disruptions for our customers. But it was really about leaning into further growth opportunities. On the tariff side, it changes every day. There's a lot of conversations. Joe, myself, I've been spending a lot of time with our customers. We've had a number of conferences and other events, and it's obviously a fluid situation. There's a lot of positives that can come out of this, and clearly there's some uncertainty on the consumer side and what that means for consumers. basic consumption in the U.S., but there's obviously longer term. If you see more industrial production coming to the U.S., that's a very, very big positive for the U.S. and our network because we're well positioned to capture a lot of that activity given where we are in the Southeast and Midwest primarily. So I think, you know, right now we're trying to stay as close as we can in each one of these markets, trying to understand how the freight flows are going to change. Clearly with these tariffs, they will change. I think you could see a lot of benefits from decoupling from China that could benefit the East Coast potentially. And we're watching that and making sure we're staying in front of it, both with our investments and how we're thinking about that and really working with our customers to position them so they can capture the markets as they change.

Yeah, let me just add real quick. This is Joe. You know, I think last earnings call we talked about we had during the fourth quarter of last year, we had our highest ever net promoter score from our customers. And we were really proud of that because that happened during a very difficult time period during the hurricanes and everything. We still declined a little bit in the first quarter. We still have one of our highest scores ever and significantly up from the year before when we were running a lot better, frankly. So it's a testament to the work that's going into our customer service and the focus we have on communicating with customers, prioritizing where they tell us to prioritize and making sure that they know what we know so that we can you know plan our business accordingly so that's a major improvement that we've made as an organization over the last several years that connectivity with the customer and that constant communication so when things don't go as planned we're still in touch and we're all making sure we adjust and they adjust as appropriate we'll continue to obviously continue to prioritize that As Kevin mentioned, the biggest opportunity we left on the table was really on unit trains, really coal in January and February. We had much better performance in coal in March, and then really the grain throughout the quarter because we had so many issues through that Midwestern corridor that's been a lot of traffic has pushed over from the east, given the shutdowns we have right now. But we'll get back on that as weather certainly cooperates better, but also as our network gets better. Thanks.

Our next question comes from the line of Brian Ossenbeck with JP Morgan. Please go ahead.

Hi, thanks for the evening. So maybe just to clarify the revenue opportunities, is that still sitting there that you can go after again and just wasn't readily picked up on service, or did you potentially lose it and then just be kind of getting back to normal? So first, clarification. And then secondly, maybe, Sean, if you can update us on the guidance he gave last quarter, which was the low end of the target mid-single to high single digit EPS, or I'm sorry, EBIT growth from the investor day for this year when you back out the sort of the normalization that you called out. So given everything that's happened, just wanted to see if you could update us on that as well. Thanks.

Yeah, I'll start off on the, you know, some of that revenue, I think you could say it was perishable, but a lot of it is getting back up to the demand levels that the markets are seeing right now. And so that's an opportunity in the second quarter where we see strong demand in some of these specific markets that we're meeting that demand level and they're not having to use alternatives. And so some of it was perishable, but there's a big opportunity in 2Q versus 1Q.

And Brian, I would just add on the second part of it. On the second part of the question, I think given what we did on the volume guide and the uncertainty that's out there, I think that bleeds over into sort of what we're thinking when it comes to EBIT or operating income as well as margins. I think it's challenging to pin down exactly how things are going to play out over the course of the year. There's opportunities there for sure, as Kevin's outlined here and Mike's talked about in terms of improving the fluidity of the network. Both of those things are important. The demand environment is important as well. And all of that will feed into how well we're able to do on a full year basis. That being said, when you look at what we're hit with this year, some of the things that relate to the outages we've got and the costs associated with that, but also what we were hit with here in the first quarter, it's all uh temporary impacts right these are things that will cycle so as we exit 2025 and think forward to the next couple of years we still feel good about the guidance that we gave in november on the three-year caregivers down the line your next question comes from the line of christian weatherby with wells fargo please go ahead yeah hey thanks good afternoon guys um sean maybe a quick follow-up on on that and then one for kevin i guess the

Just to make sure I understand, I think you guys talked about potentially growing profit in the back half of the year. I guess when you think about that, is that something that is maybe a little bit harder to do with the sort of uncertain volume environment and maybe thinking about that separate from some of the costs that you're carrying from the service challenges that you're facing? And I guess just for Kevin, I think you said in the remarks earlier that maybe something on the intermodal side had changed a bit in early April. Just want to get a sense of what that was or if I heard that correctly.

Yeah, Christian, we'll stay away from guidance quarterly or full-year guidance. Of course, that being said, Joe outlined the commodity price headwinds that we're facing will ease as we go through the year, assuming that met coal prices remain stable, fuel prices remain relatively close to where they are right now. the comps get a little bit easier in the back half. And, you know, we also had the hurricane impacts from last year in the fourth quarter. So that makes year over year growth a little easier in the second half of the year, but a lot depends on, you know, what happens in the macro and, and of course the improvement in the operations.

Yeah. And on the intermodal side, the point was, we saw some acceleration in late March and kind of continuing in through this month and We believe, you know, a portion of that's probably related, some pull forward related to the tariffs. So some strength in the international market that we're seeing currently.

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

Hey, good afternoon. Joe, maybe just talking about that same thing, the big picture here on volume. We're talking positive volume growth, and one cue was mentioned to be trough, but what I guess if we start thinking about maybe a cliff of volumes, it seems like if China is down 20%, 25%, when you mentioned things like, hey, we can pick up some industrial activity, I presume that's longer term, or are you suggesting that there are things near term that can kind of offset that? And then just a quick number question for Mike, that the on-time arrivals of 55% and origination of 68%, is that adjusted for the construction projects, or is that just weather impacts. I'm just trying to understand what normal would look like. Thanks.

Hey, Ken. No, that's regular schedules. That's not adjusted for any of the outages. That's just the performance that we have right now and that we need to improve.

Yeah, Ken, I'll answer the rest of your part of your question. I mean, first of all, we have to remember and recognize that the industrial part of the economy has been in kind of a negative growth environment for the better part of almost two years. And so there may be some opportunity as that starts to pick up. What we're seeing in real time is our orders coming from steel plants is going up. As you might imagine, there's a lot going. a discussion around increased steel production in the U.S. given the tariffs that are happening. You know, you could see a scenario where the U.S., certainly you expect to see a scenario where the U.S. auto production picks up in the United States, maybe not North America in total, but in the U.S., and that will drive both steel and aluminum, but also other parts, but also, of course, finished vehicle deliveries. You can see that scenario playing out. Housing is still, as Kevin mentioned in his remarks, still down, and I'm not going to be one to try and predict when that recovers. But you can start to see a little bit of movement, certainly in the auto space, and we'll watch that one very carefully, especially for us in the east, where a lot of the U.S. plants are in our footprint. But medium term, we're still bullish on industrial development projects that we continue to talk about. And as Kevin mentioned, the first quarter was a lot of activity, even an increased level of activity for their team, which that's a good sign. And so that's going to continue. We talked about it already, you know, 20-some coming online in the first quarter and more coming online this year. uh you know we're watching to see what happens on the industrial part of the economy that could be helpful but to reiterate cold demand volume wise is still there i mean certainly met coal prices have come down but export volumes we've had some mine outages um which have affected us a little bit but there's still some increased activity now on the domestic utility side so coal volume's still there it grows a very strong grain harvest especially a lot of grain you need to move to the southeast so the grain volume has continued to be strong aggregates we expect to continue to be strong. Minerals should, you know, and minerals should be okay with all the construction projects and everything going on. So we go sector by sector. Obviously, there's some weakness in some areas. We watch chemicals very closely because our largest sector and that one was kind of, you know, kind of flat year over year in the first quarter. But you can see That one, hopefully, holding firm. And then you've got these other areas where you can see some growth. So in the medium term, we can see – in the near term, rather, we can see some opportunity in the second quarter, and we've got to make sure we have the network flowing to be able to realize it. Thanks.

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

Hi. Yeah, I just wanted to come back to the industrial development. It seemed pretty optimistic. I'm just sort of curious – I know it's still early probably with the tariffs and potential boost to domestic industrial production, but are you actually hearing that maybe there's some thought about accelerating decisions to go ahead? And then secondly, have you thought about the previous tailwind you talked about for the projects long term? I think it was about 2%. I mean, are you thinking maybe there could be some potential upside to that? Thanks.

Yeah, you know, in terms of upside, I think the potential is these current projects are brought online quicker and ramp up faster if the demand environment supports it. You know, we look at the metal side and obviously timing could be very, very good when you think about tariffs and needing domestic production there on aluminum and other parts where we're well positioned to really benefit from that. That's what we're watching. I don't think at this stage, given that it's a very fluid situation, that we're seeing a lot of acceleration of decision-making. I think the rules need to be set for that to happen, but clearly the administration is pointing to trying to incentivize domestic production, and that would be a very good thing for our network.

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

Thank you, Joe and team. Good afternoon, everyone. I wanted to focus a little bit on the intermodal side and how we should think about sort of the reported yields going forward. Because if you take a look at the international trade, the booking numbers are down pretty drastically. So there could be a shift coming your way soon. And one of the major intermodal players was talking about at least some of the slightly disappointing numbers on the pricing side of the domestic market. So I was hoping maybe you could work through that with us for the modeling purposes.

Yeah, we've largely gone through bidding season. I think you got some pretty good commentary through one that's already reported and that is a partner of ours. So probably we are where we are for the remainder of the year. Probably not a huge opportunity for an inflection in the back half of the year from a pricing perspective. If you saw more strength in domestic versus our international business, that generally is a positive from a yield, from an RPU perspective. And so we'll see if that plays out as we get through the year. And if domestic business picks up, that would be a positive from that aspect. But there's a lot of moving parts right now. And we're just working with our customers and our partners to make sure that we're meeting the demand and looking at the freight flows. And if they're changing, working with Mike and his team to make sure we're on top of that.

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

Great. Good afternoon. Just a couple of housekeeping items here. Can you just remind us of the updated coal contracts, if there is a floor to pricing on the benchmark price? I think there was before or not. And second, any color on the other revenues? A little bit of a step down here. What's a good run rate for the rest of the year?

Yeah, every contract's unique, so there's not a certain floor, but yeah, we're above those floor levels today, but they all have floors embedded in it, and hopefully we don't touch those floors where we are based on what we've seen here recently with a little bit of stabilization over the last couple of months.

And Ravi, on the other revenue, yeah, it came in a little bit lower. I'd say there's a lot of items that go into that line item from subsidiary revenue to storage to revenue reserves. So it can be a little bit more challenging to predict. I'd say, you know, where we are now is a pretty good run rate going forward, maybe plus or minus a little bit from the 115 that we saw in Q1.

Your next question comes from the line of Daniel Imbrow with Stevens Inc. Please go ahead.

Yeah, hey, good evening. Thanks, guys. Maybe you'd want to dig in on the cost side a little bit here. On headcount specifically, I think volume has been softer to start the year. I think last quarter the expectation was maybe flattish headcount this year. Sean, can you just talk about how volume-dependent that headcount trajectory is through the year? Could you flex it lower if volume remained underwhelming? And then similarly, I think you've baked most of your union contracts now for the back half of the year. So how should we be thinking about maybe comp per head inflation as we move through the year? Thanks.

Yeah, thanks for the question. I'll answer it. Mike, if you have anything to add, feel free. But on the headcount side, I mean, I think where we are in Q1, yeah, we didn't move as much volume. But because the network's not as fluid as it should be, you're using your crews inefficiently. So as service recovers, volume goes up and the crews are working more efficiently and running the trains on schedule. So I think we're in a good spot when it comes to crews. I think we're in a good spot really across the support functions as well. Clearly, if there's a major drop-off in volume, we adjust to that and we flex, but that's not the base case for us. I think we'll see headcount remain relatively flat through the year. There'll be some timing impacts with training and all of that, but nothing significant. from quarter to quarter. And then in terms of comp for employee, I think you hit on it in terms of second half, you'll see the 4% wage increase hit. That's really the only Difference between first half and second half, you know, the expectation would be that going from Q1 to Q2, we should see a little bit of a decline in copperhead, especially when you consider, you know, some of the overtime we were running related to weather issues and storms in the first part of the year. So but but then the second half, just really just the inflation.

Your next question comes from the line of Rika Hernane with Deutsche Bank. Please go ahead.

Hey, everyone. Thanks for the time. I guess just one on the revenue opportunity that was sort of left behind. I guess, can you quantify that maybe further? And how easy, I appreciated the comments around the net promoter scores being still very, very good despite some of the disruptions you faced in the first quarter. But how easy is that share shift opportunity to come back to your network?

Yeah, you know, we've obviously done a lot of work internally with the math and what the math would suggest is, you know, somewhere, you know, million plus a day in revenue opportunity. If you look at cycle times that were more normalized in some of these markets. So, you know, sometimes you don't know the exact demand because you're not up against it, but that's, you know, that's rough math that we've done here internally and then on the net promoter score, I think we've earned a trust. We have some great relationships with our customers, and the team has done a great job of staying in front of them, communicating, sharing when we're going to have issues, when we have storms on the network. Our communication levels have never been better about getting in front of it so our customers can plan. So we have every expectation as we run better that the customers have stayed with us. They trust what we're doing. We're over-communicating where we can, and We've really built that trust with our customers. So we expect, and I mentioned before, you know, the contracts, we've continued to maintain our share in the market, we believe, and you'll see that as we improve our network operations.

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

Thanks so much, operator. Good afternoon, everyone. Kevin, you called out a favorable partner alignment in your international intermodal side as an opportunity. Can you expand a bit on that and if that's going to create any additional opportunities as any of those partner alignments perhaps get a little bit more or get deeper or if you can expand them to other partners as well?

I wasn't necessarily being specific to any one specific partner relationship. I think we are well positioned when you look at our portfolio on the international side longer term with some partners that are really focused on growth and we think are winners in the market. So that wasn't a specific reference to any new contract or anything like that on that side, but we are well positioned there. And we're doing a lot of unique things, I think, from an inland port perspective and other things to really work with our customers to find growth opportunities for them. We're thinking a lot about the shift away from China, and certainly we believe that helps the East Coast and working with the ports there and really making sure we're positioned where there's opportunity and where freight flows want to come into the East and move further into our network that we're well ahead of it and have the capabilities, quite frankly, to handle that business.

Your next question comes from the line of David Vernon with Bernstein. Please go ahead.

Yeah, good afternoon, Devin. Thanks for taking the question. So, Mike, as you think about the resiliency part of restoring service levels, is this a resource issue? Is it just a scheduling issue and a lack of weather issue? I'm just wondering if you're going to be able to kind of get the service metrics back on track here before some of the work is done and like Howard Street or whether we're going to be kind of living with this, these challenges for the rest of the year.

Thanks for the question, David. It is going to be a gradual process to get the network back, and so it's not going to be overnight. Our focus is really over this next quarter to get us into position to take advantage of some of the tapering of some of the commodities. Again, the compounding weather that's affected us has really made us so go back to the position of we have to start from scratch this last piece of flooding really affected a key corridor for us that we counted on you know to take the traffic off the howard street and the blue ridge reroutes so it's going to be it's going to be a process but uh we'll get through it it's just not going to be overnight it's going to be throughout the quarter your next question comes from the line of bascom majors with susquehanna please go ahead

As you work through a lot of disruptions, many of them out of your control, some of them chosen like Howard Street and Digout and also face a demand picture that's more uncertain today than it was a month ago. I mean, clearly 2025 is going to be a challenging year in a lot of ways. But Joe, as we look to next year, is there 2026 the year that investors should judge the financial output of your strategy or do you think it makes more sense to look to 2027 and year three of the three-year plan to really get a clean comp and enough time to really have the outcomes that you've driven thank you thank you yeah thanks for the question um i'll answer the question but first want to take a step back because

We've been on this journey for over two and a half years. And if you look at, now that we have some of our segment reporting in our 10Q and then we had the 10K, you can kind of see more clearly the trucking and the rail side of the business. If you look at in 2023, our margins were 40% best in the rail margins. We're 40% best in the industry. Last year, we're 39%, second best in the industry. And so our strategy, if you want to call it that, has been working and providing leading levels of customer service and margins. uh, clearly when you start to look at the data, um, late fall of last year, fall of last year, um, our cars online started to go up a little bit. Our dwell started going up a little bit and then the hurricanes hit. And, and then you've seen the data since then you can do a direct correlation between the dwell, the cars online, um, the trip plan compliance and what's happened. And, you know, we're all committed to getting back to those levels. So the, the, The three-year kind of thesis we laid out in Investor Day in November is still something we believe in and we actually feel we can and will deliver. Obviously, we had, you know, a first quarter than we were expecting, to be sure. But the fundamentals of the first quarter that we were projecting still held true. Lower net coal prices, lower fuel surcharge, the Howard Street Tunnel and the Blue Ridge rebuilds having some impact on our network. And so as we cycle through all that and we continue to execute the levels we know we're capable of doing, getting the dwell, the velocity back to where it was prior to the hurricanes, getting the cars on line down and realizing the potential of the fluidity of this network and how we focus on customer service and relationships we have with customers. We haven't lost a major contract, and I'm really proud of that because it's really important as we build for the future. All those fundamentals should continue to deliver exactly what we talked about in November and yesterday. So it's a 26-27 story, to be sure. Our expectation is, of course, as Sean laid out in November, that we see, and Kevin, we see some industrial production improvement over that time period. And if you take out all the volatility of met coal prices and fuel, we should see those kind of improvement levels that we talked about. Now, we have a more near-term prove-it scenario, which is we've got to demonstrate to you and to all of our shareholders and to all of our stakeholders that we can get ourselves out of the situation we're in. And I feel confident we'll be able to do that, and we have the team to do that. We know what it takes. We know how to do it. Actually, we did it in the fall of 22 pretty quickly without the power-free tunnel and the Blue Ridge issues, but we had fewer people. So our team knows how to do this, and Mike and his team are working around the clock seven days a week on looking at everything that we can do to make that happen. So in the near term, we need to show you we can get our network back to kind of up to industry-leading levels and service and margins, and then realize that growth and volume that we believe will come from industrial development and from industrial production and hopefully economic growth as well. So I'd say 26, 27, but in the near term, we got to get our network back and give you confidence that we can deliver those volumes. Thanks.

Your next question comes from the line of Jeff Kaufman with Vertical Research Partners. Please go ahead.

Thank you very much and thank you for squeezing me in. A question more for Kevin and it might be a tough one to answer, but if you were to try to put some circles around buckets of pre-ship or some tariff accelerated related business you may have seen, what's your best shot at that.

That's a tough one. I think, you know, obviously it's probably concentrated on the international intermodal side, on the container side. And, you know, it's consumer products, things like that, if you can. But, you know, they lead times on these things. First, you got to get, you know, you got to put the order into the factory. It's got to get to the, obviously the port where it's being manufactured. And then it takes weeks on a ship. And so, yeah, The ability to really get ahead of this is probably pretty limited, but I did want to recognize there's probably a few points, a couple points that we're seeing probably on our international side here currently related to some of that dynamic. I do think, you know, from an export perspective, as things really shift, we're thinking more and more about the advantages of the East Coast versus the West. Obviously, the West has been very leveraged to China. And as freight flows change, if ag products don't want to go to China, where are they going to go? Are they going to go to Europe and other places as those are supplemented from other areas? So there's a lot of moving parts. I think some of these things could really benefit where we're positioned as a network, but all these things are very, very fluid right now. And we're just trying to stay ahead of it and make sure we're actively thinking about it with our customers. And so We can deliver the solutions when they decide where these freight flows want to go. We're there for them.

Your final question today comes from the line of Scott Group with Wolf Research. Please go ahead.

Good evening. This is Ivan Yee on for Scott. Thanks for the time. Last question related to tariffs again. Roughly what percent of your volumes or revenues are in fact tied to China? I imagine it's mostly international and remodeled. But is there any material China exposure in any other commodity segments? Thank you.

Yeah, we don't, you know, obviously given our East Coast position, we're really not as leveraged to China as others. So it's pretty, you know, it's probably concentrated on that intermodal side for us that comes over the West Coast and in our network.

And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.