CSX Corporation

Hello and thank you for standing by. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2025 CSX Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. I would now like to turn the call over to Head of Investor Relations and Strategy, Matthew Korn. Mr. Korn, please go ahead.

Thank you, Tiffany. Good afternoon, everyone. We're very pleased to welcome you to our second quarter conference call. Joining me from the leadership team are Joe Hendricks, President and Chief Executive Officer, Mike Corey, EVP and Chief 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 my pleasure to introduce Mr. Joe Henrichs.

All right. Thank you, Matthew, and hello, everyone, and thank you for joining us for our second corner call. When we last spoke, we acknowledged the challenges we were facing on our network, and we made a commitment to act decisively to turn it around. What you'll see in the numbers and the momentum behind them is a result of deliberate and effective actions taken to return our network back to the efficient, well-run operation needed to provide superior service to our customers. This quarter shows what is possible when you pair clear priorities with decisive action, and the results are a testament to the one CSX culture we've been instilling across the business. Now turning to slide one, as we think about what we accomplished in the quarter and what we see out in front of us, four things come to mind. First, as I've already highlighted, we are proud of how our network performance has bounced back from the challenges of the first quarter. As Mike will cover later on, our velocity, dwell, trip plan compliance, and other metrics have steadily trended upward. In some areas, we are approaching or surpassing some of the best levels we've seen in recent history. This recovery reflects the strength of our operations and the team's ability to overcome challenges. We have to keep pushing, but this has been a great result. Second, the entire CSX team's commitment to working efficiently helps us deliver improved cost performance that supported meaningful sequential margin expansion. We will continue this focus throughout the year. Third, we are very pleased with the progress being made at our Howard Street Tunnel and Blue Ridge rebuild projects. We expect completion in the fourth quarter, which will remove two key constraints from our network. Finishing these two projects will open back up two of our four north-south routes, and as you know, we're excited about removing the last impediment to double-stack intermodal on the N95 corridor. Finally, as Kevin will discuss, we know that our customers are facing mixed markets, with activity holding strong in certain areas and slowing in others. That said, at CSX, we will continue to drive forward across all of our initiatives. We will not sit back and wait for the markets to turn. Now let's turn to slide two, where we feature some of the most important results from our second quarter. Total volume was flat compared to last year, and we saw a 4% sequential increase in the quarter, driven by merchandise and improvement in total coal shipments. Total revenue was $3.6 billion for the quarter, down 3% from the same period last year, largely due to lower coal and fuel prices. Quarter over quarter, total revenue improved 4%, in line with the increase in volume. Our reported operating margin, which includes our trucking business, declined by 320 basis points compared to the second quarter of 2024, but increased by 550 basis points sequentially, supported by the solid cost performance that accompanied our operational improvement. Earnings per share decreased by 10% year over year, but grew by 29% quarter over quarter. After a difficult start to the year, I am proud of all that we have accomplished, but we also cannot let our foot off the gas. We are committed to maintaining this momentum. Now that our network has stabilized, we are positioned to pursue more opportunities to grow the business. To do that, we will run safer, faster, and more consistently. We will provide attractive, profitable solutions for our customers, even when economic conditions are uncertain. As we move forward, we will make sure that our execution remains effective and efficient. As an example, as part of our normal business review process, we recently reorganized management resources across several areas to improve alignment with the businesses and accelerate decision-making. These are positive steps toward our goal of sustainable, profitable growth. With that, I'm going to turn the call over to Mike to discuss our operational performance.

Thank you, Joe, and thanks to all of you for participating today. So after a difficult first quarter, the team has effectively responded to our recovery plan that we presented on our last call. While we still have many opportunities for improvement, I'm really proud of the work the team has accomplished so far and truly appreciate their efforts. So let's go over to the next slide. Throughout challenges of late winter and into the spring, we remained committed to safely running our operations. Leading with our safe CSX values, our focus on eliminating significant injuries has resulted in a reduction of both life-changing injuries and missed workdays. Also, improved alignment and engagement in safety leadership is occurring throughout the operations organization. Our managers and craft employees are learning how to have meaningful conversations about exposure reduction, leading to a culture that is eager to identify and mitigate hazards before they become exposures. However, improvement in our train accidents have not followed suit. Most of our incidents occur in the slow speed environment of our yards and result in little damage to infrastructure or equipment. However, they still are disruptive to the operations of our network. We continue to further implement yard inspection drones that will assist in identifying conditions that lead to track caused derailments in our yards. And we continue to work on improvements to our wayside car health monitoring systems to prevent impact from equipment failures. An important area we have seen great improvement on is our human factor derailments, which continue to decrease. Over to the next slide. Train velocity continues to improve while being affected by the rerouting of traffic off our two corridors. Our cars online and dwell continue to improve and are back at levels experienced prior to our disruptions. Reducing cars online was a key focus during our recovery period. But we did so in a way that minimized customer supply chain impacts by avoiding the use of disruptive embargoes. We accomplished all of this while experiencing weekly volumes in line with our prior years. Our recovery is a real true testament to the hard work and dedication of every railroader at CSX. As we move into the third quarter, our efforts are concentrated on operating efficiently across our network. Over to the next slide. Our efforts over the last quarter have improved our service measures. But while we're not yet at the TPC performance we strive for, our view is these measures will continue to improve as we improve our dwell and train velocity. With the completion of our network projects, we expect these numbers to improve. With respect to our local service delivery, we continue to work very closely with our customers to make sure our service to them is everything they need for success. And under the last slide, at this time, both our major projects are tracking on schedule. The Howard Street tunnel portion of our I-95 project will be done in time for the fourth quarter, and the Blue Ridge subdivision, used primarily for access to and from the Carolinas, will also be ready for the fourth quarter. While these projects unlock significant capacity for the entire network, We're also upgrading our capacity and throughput at our yard in Indianapolis with the extension of the home pullback. While this project is small in nature relative to the other two will give us the ability to hunt more cars with less handlings at a very critical yard in our network. The entire team has accomplished much more over the last or much over the last three months, but we're not done with converting opportunities that we have to make this railroad run better. And with that, I'll turn it over to Kevin.

All right. Thank you, Mike. First, I want to thank the entire operations team for their hard work. Our service levels are approaching record levels and our ability to communicate across our teams and react to any disruptions has never been better. Many of the industrial markets we serve continue to face challenges with uncertainty around tariffs, trade, interest rates and the overall direction of the economy. Our focus remains on the customer and driving strategic discussions that deliver value to our customers and new growth opportunities to the CSX network. Now let's review our end markets. Turning to slide nine, merchandise in the second quarter saw both revenue and volume decline of 2%. RPU was flat as lower fuel surcharge and negative mix were offset by core pricing gains. Our metals market and equipment volume was up three percent while revenue was down three percent we captured volume from positive trends in the steel market while lower equipment and higher scrap volumes did impact rpu continued infrastructure demand in the southeast and strengthened new cement production led to five percent revenue growth for the mineral segment Ag and food volume was up 2% compared to last year, as operational execution enabled us to fully capitalize on strong grain demand into the southeast region of our network. This was partially offset by weaker consumer demand and food products, including alcoholic beverages. Automotive volumes were down 2% for the quarter, Volume gains from a contract win with a new North American auto plant were more than offset by lower overall industry demand and production challenges that some CSX served plants. Forest products has been impacted by challenges in the housing market in an overall sluggish demand environment. We continue to see industry plant consolidation along with several extended plant outages concentrated in the second quarter. Looking at the second half, we anticipate less downtime and expect to continue to drive incremental opportunities through our strategic partnerships with industry leaders. Chemical volumes decreased due to lower shipments of export plastics impacted by an extended unplanned outage at a customer location, as well as a decline in chloralkali shipments. Fertilizer shipments declined 6% as we experienced softer phosphate volumes due to customer production issues The revenues remain flat due to positive core pricing and mix. As we move into the third quarter, we will continue to monitor tariff policy and expect to see mixed demand within markets, including auto and housing, which remain well below long-term demand levels. One area of the business that we continue to see reasons for optimism, despite the uncertainty in the economy, is our industrial development pipeline. we are still seeing great progress in that area with another 25 projects that went into service in the second quarter, bringing the total for the year to 49. As we look to the back half of the year, we have another 30 that are nearing completion and additional projects on top of that, which may go in service depending on permitting and construction timelines. These facilities consume raw materials or produce finished products for a wide range of markets, including natural gypsum, aggregates, rolled aluminum, steel, and food and beverage. And with support from recently passed tax legislation, we expect to continue to see more projects added to the roster for years to come. Now let's turn to slide 10 to review the coal business. Coal revenue declined 15% for the quarter on 1% higher volume as we continue to face headwinds from lower global benchmark pricing. All-in coal RPU declined 16% year over year and fell 2% sequentially. slightly below previous expectations. The Australian benchmark averaged $184 per ton in the quarter versus 242 in the same period last year. Our export business was also impacted by production constraints. We knew 2025 would be challenging for this market, but we remain hopeful we will benefit from mine restarts towards the end of the year. Our domestic markets were mixed as the utility coal segment was well supported by high burn rates, higher natural gas prices, and faster cycle times. At the same time, our steel and industrial markets were impacted by unfavorable source shifts and softer steel market fundamentals. Moving forward, we expect the domestic segment to be supported by growing power demand and the deferral of coal plant closures. Turning to slide 11 to review the intermodal business. Second quarter revenue declined 3% on a 2% increase in volume as lower diesel prices and unfavorable mix dragged on RPU. Our international business performed well with solid year-over-year unit growth supported by increased activity ahead of tariffs, especially early in the quarter. In recent weeks, we've seen a pickup in container arrivals as we expected with exporters reacting to change in tariff policy. Domestic volumes were effectively flat year over year as the ongoing soft trucking market remains a drag and interchange business from West Coast arrivals softened. Looking ahead, we're excited with the momentum we're building and expect to drive several new opportunities, including truck conversions through the new Myrtlewood interchange. Overall, just as Joe described, we're facing mixed markets into the second half of the year, but are taking a proactive approach with our CSX specific initiatives. Our service levels are allowing the team to drive positive engagement with our customers as we continue to convert wallet share opportunities. It's important to highlight that our total net promoter score with customers over this last quarter was the highest it's ever been. It is clear that they see and appreciate our return to industry-leading service and that we accomplish this through teamwork and great communication across the OneCSX team. We are also excited about the reopening of the Howard Street Tunnel and Blue Ridge subdivision later this year that will improve on the positive service levels customers are experiencing today. We expect to achieve double stack clearance through the Howard Street Tunnel in the second quarter of 2026, following the completion of bridge clearance work. This will open the CSX network to new markets and drive incremental growth opportunities. Now with that, let me turn it over to Sean to discuss financials.

Thank you, Kevin, and good afternoon. Looking at second quarter results, revenue fell by 3% on flat volume, as weaker export coal benchmark pricing, lower fuel recovery, and unfavorable mix all contributed to lower yields. Expenses increased by 2%, and I'll discuss the details on the next slide. Interest in other expense was $9 million higher compared to the prior year, while income tax expense fell by $40 million on lower pre-tax earnings. As a result, earnings per share fell by 5 cents. Included in these numbers is Quality Carriers, which, as you know, has a continued margin drag on our results and has been impacted by a challenged trucking market. We are working closely with the team to drive improved results. I also want to touch on sequential performance against the first quarter. As Joe mentioned, our railroaders worked tirelessly to help our network recover from an extremely challenging start to the year, and these efforts carried through to our financial performance. Operating income increased $242 million from Q1, and margins improved by 550 basis points, both well ahead of normal sequential seasonality. This reflects strong momentum, particularly when you consider that April was challenged by flooding across the Midwest with a gradual recovery in operating performance through the month that resulted in a strong May and June. Let's now turn to the next slide and take a closer look at expenses. Total second quarter expense increased by 2% or $38 million against the prior year. This variance includes around 10 million per month of network disruption costs, plus the impacts of inflation and higher depreciation, partly offset by savings from lower fuel prices. Looking on a sequential basis, our service recovery during the quarter was complemented by improved efficiency as expenses fell 4% or over $90 million from the first quarter despite a 6% increase in gross ton miles. Mike and the team delivered for our customers while also driving improved rolling stock utilization and operating with a rail headcount that was lower versus the first quarter. Turning to the individual expense line items, labor and fringe was up $25 million year over year, mostly driven by inflation. An additional increase is attributed to our trucking business, where headcount was higher primarily due to the conversion of previously independent affiliates. with offsetting savings in the PS&O line. Railhead count was lower on both a year-over-year and sequential basis. Despite a higher workload with fewer employees, monthly overtime expense fell by over 15% in May and June, relative to the first four months of the year. Also, as a reminder, cost per employee will step higher in Q3, as the majority of our union employees now covered by new labor agreements received a 4% wage increase effective on July 1st. and labor expense will include accrued wage increases for the remaining employees, this will result in roughly a 20 million sequential increase the Labor and fringe expense in Q3. Third quarter Labor and fringe will also include a charge of 15 to 20 million related to the management restructuring Joe mentioned earlier, which will help position our workforce for 2026 and beyond. Annualized expense savings should be approximately $30 million, resulting in minimal net impact this year when you account for the Q3 charge. Purchase services and other expense increased $19 million year-over-year, which includes about half the total network disruption costs, as well as inflation and volume-related expenses, partly offset by multiple net favorable variances. The line also saw significant improvement from the first quarter, benefiting from lower locomotive costs and other items on top of normal seasonal trends. Depreciation was up $17 million due to a larger asset base. Fuel cost was down $32 million, driven by a lower gallon price, partly offset by additional gallons consumed due to network reroutes. Finally, equipment and rents increased by $9 million year over year, reflecting costs from seasonally higher volume and other items that were partially offset from the benefit of sequential improvements in payable car cycle times of 5% and 12% in our merchandise and automotive fleets. We're encouraged that both operational improvement from Q1, as well as structural efficiency opportunities, are resulting in cost momentum. As we continue to invest in emerging technologies, we expect to deliver further savings that will support strong incremental margins in 2026 and beyond. Now turning to cash flow and distributions on slide 15. Investing in the safety, reliability, and long-term growth of our railroad continues to be our highest priority use of capital. Year to date, property additions are higher, including around 295 million of spending towards the rebuild project on our Blue Ridge subdivision. Excluding Blue Ridge, capital spending is still expected to be roughly flat to the prior year at $2.5 billion. Free cash flow is lower year to date, as a result of the increased total capex and a decline in net earnings, as well as a smaller impact from the relative size of previously postponed tax payments in each year. As we look forward, second half cash flow will be meaningfully stronger than first half and is partially supported by now permanent bonus depreciation. This should positively impact our cash flow by approximately $250 million in the second half, and we expect continued benefits in future years. After fully funding our capital investments, we are committed to returning cash to shareholders, including close to 1.7 billion year to date. This reinforces our ongoing balanced and opportunistic approach to shareholder returns. With that, let me turn it back to Joe for his closing remarks.

All right. Thank you, Sean. We will conclude our remarks with a review of our guidance, which is effectively unchanged from the previous quarter. And we continue to expect overall volume growth for the full year. As we have discussed, markets are mixed overall, with some very stable, while others are showing some signs of softening. With our fluidly improved and incremental contributions expected from new projects and new service offerings, we feel very good about our momentum. Consistent with our past statements, there will be a smaller year-over-year impact from lower coal and fuel prices over the second half of the year, as export coal benchmarks and diesel moderate over the back half of 2024. Our intense focus on efficiency, including labor productivity, will continue through the rest of the year. Summing up, we are encouraged by the progress made this quarter. Our team did a great job of working together and responding effectively to the tests we faced earlier in the year. It delivered a strong operational recovery and truly demonstrated the benefits of the one CSX culture that we have been building. And finally, we know there's been a lot of rumor and speculation about consolidation in the railroad industry in recent weeks. While we cannot comment, we want to be clear that at CSX, we are absolutely focused on delivering shareholder value and are always open to anything that can help us achieve this objective. We have a strong franchise that we believe is the best in the East, and we are making it stronger every day. Our customer service is industry leading, and we have exceptionally strong relationships with those customers. We are working closely with numerous partners to help accelerate the build out of industrial capacity on our network. And our commercial team is actively developing new solutions that will help us expand our reach and gain share. We are driving forward major network projects that will prove to be valuable investments. Our Howard Street Tunnel project will allow us to compete in key intermodal markets. The Blue Ridge rebuild will ensure network balance. And our operations team continues to unlock added efficiency yard by yard and region by region. While we are confident in CSX's path forward, we welcome all opportunities that would allow us to deliver value for our shareholders, drive proper growth, and serve our customers better. We actively evaluate these opportunities for their upside potential. This has been and remains the focus of our management and our board. With that, Matthew, we're ready to take questions.

Thank you, Jeremy.

And I'll proceed to the question and answer session.

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad.

To withdraw your question, simply press star one again. We kindly ask that you limit yourself to one question for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Ostenbeck with JP Morgan. Please go ahead.

Hey, good evening. Thanks for taking the question, and congratulations on the significant service recovery here over the last couple of months. Joe, I think you have a unique perspective as a former shipper at Current Railroad to offer some additional thoughts on potential rail consolidation. So as a former shipper, what are some of the points, the benefits you think that potential consolidation transcontinental that we've all seen could bring the shipper community? And then in your current seat at CSX, obviously there's a lot of momentum currently and you've got some initiatives across the network, but where do you think there's some opportunity to add more value that shippers don't really have right now? you might be able to do for something more strategic.

Thank you. There's a lot there, Brian. Thanks for the questions. I mean, first off, you're right. I spent over 30 years in the auto industry and was a longtime customer of the rails. And I'll go back to where I started when I came here, which is that our thesis all along has been that improved customer service and making it easier to do business with railroads are paramount and important to support profitable growth for our industry. And we're not going to speculate or talk about any kind of merger or anything of that kind, but clearly customers are looking for railroads to provide better service, more reliable, dependable, repeatable, and also looking for us to be easier to do business with as far as getting rates and how to do business with all of us. opportunities throughout to work together with all the rail ecosystem to improve that. From this seat here today and almost three years on the job, I continue to have that same feeling that there's an opportunity for us to continue to work together in this industry to serve customers better and to properly grow the business and to compete with trucks on a broader scale. So again, I'm not going to talk about how we do that or how are those, and as we said in our remarks, we're open to all those possibilities and all those conversations of how we could do that, how we could best create value for our shareholders, properly grow the business, and serve those customers better and look forward to those opportunities. Thanks.

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

Hi, good afternoon. Congrats on the strong quarter here. Folks, maybe for Mike or Joe, it would be helpful, I think, if you could just talk about what you're doing differently that drove the improvement in service. To what extent was that kind of a function of better weather versus proactive steps that you took? And how do you think about the sustainability of that service performance? And how much can we see kind of a further step up when the construction projects are finished? Thanks.

Hi, Ari. It's Mike. Thanks for the question. Look, it started with weather improving, but we were at it far before that took place, and that was mid-April, by the time the weather came around. Really, we did four things. The first thing we focused on was the cars that we had online, and so whether they were involved with a customer, so their plants, their serving yard, our pipelines, or whether they were actually in our yards. We took action. We worked with our customers to make sure that we were providing extra service where possible to work off the loads, the pipeline, work with them to reduce their pipeline, moderate it for us, but help us get fluidity on our main line. And then in our yards, we did everything from senior coverage around the clock to senior coverage in our war room, making sure we're going through every standard. We're following up on every area of opportunity to minimize the misses because we knew we were overcapacity. Along with that, we added some locomotives selectively. We made sure our bulk network was looked after. So the coal and the grain without going into our merchandise network that allowed our yards to stay fluid because of regular power flow. And then we did other things like create capacity online and road and shifting our engineering work gangs out. So again, we had that ability to run. You remember we're compressing anywhere from 17 to 20, 22 trains that were traveling on other tracks. onto two, you know, onto other tracks, we lost that capacity. So really, that's what we did. But, you know, Ari, that's kind of what we do. We got set back pretty bad from the weather and then compounded it with the shutdowns, especially the Howard Street. But this remains the way we operate today. It's how we maybe, you know, we operated before, but really with more focus on the connectivity between the field, the network, the seniors, the people in the field, giving them information. We have that war room set up still. So I see from going forward with the two outages coming back to us, just improved metrics all around. The ability not only to grow, but to make sure that our customers benefit from the service we're providing and Kevin and the team can get out there and get more business. We're creating capacity and I see more of that coming once we get the closures over with.

Your next question comes from Brandon Oklinski with Barclays. Please go ahead.

Hey, good afternoon. This is Eric Morgan. I'm for Brandon. Thanks for taking my question. I wanted to ask on the guidance, you know, you're still calling for volume improvement for the year. I think that maybe implies a little bit of acceleration in the business from 2Q levels. Is that, you know, I think you called out some unexpected outages in 2Q, so is this kind of some of those items coming back online, or are you starting to see any momentum kind of across the business lines? And just relatedly, if you do see volumes improve sequentially, as I believe the guidance implies for 3Q, do you think you'll be able to improve operating margin as well? Thank you.

Let me handle that first part of that and I'll hand it over to Sean on the margin side of it. Look, I think it was an unusual quarter for us broadly across the second quarter. We had a number of outages, quite frankly, across several different business units. I can think of on the metal side, we experienced some of that impact. On the fertilizer side, we're looking at a market today that has pretty good fundamentals from a demand perspective and we're really hopeful that we'll see improvement from some of our core customers there that have experienced some production issues in those areas. And we expect that to kind of start to impact us in the third quarter into the fourth. Forage products, that's another example where we saw an unusually high amount of just unplanned outages that we see improving as we move into the third and fourth quarter, particularly on the paper side, paper mill side in that area. And then on the chemical side, similarly, it seems like a lot of these instances, we saw a large customer on that end that had some production issues that we see hopefully improving as we get in the third and fourth quarter. And we already see the start of that happening. So yes, I think the short answer is yes. Some of this driven by some of those factors I just mentioned. And then the other factor is we did see some of these markets start to, um, experienced some demand headwinds in the back half of last year. And so we'll start to lap those. So maybe a little bit easier comparisons for some of these markets there and then some expectation along with some of the things that the team's doing, the drives and conversions. And we, you know, despite a very, very weak truck market, we're still seeing conversions and it's credit to the team to really go out there and find those. And so those will impact us as well.

Yeah, just to add on in terms of the margins, this is Sean. Obviously, the volume helps. Anytime we're able to grow volumes and keep cost discipline, keep the resources the same or lower, that's going to help from an incremental margin perspective. That said, normal seasonality, Q2 to Q3, Q2 is typically kind of the peak for both operating income and operating margin. Part of the reason for that is you've got the wage increases that go into effect in Q3. That will happen again this year. I quantified that. at about 20 million. We've also got that restructuring charge that'll hit in Q3, 15 to 20 million in labor. And then, you know, on the cost side, one other thing I'd point to is, you know, we talked about net favorable items in purchase services and other in the quarter. That's probably going to be about a $20 million headwind going into Q3 versus Q2 as well. So those would be a couple of things that work against us. And then, you know, export coal pricing will be a factor as well. We'll see where that goes from here.

Your next question comes from the line of Stephanie Moore with Jefferies LLC. Please go ahead.

Absolutely. Thank you. I wanted to circle on your commentary about reorganizing management resources. If you could just talk a little bit about, you know, what drove maybe those decisions. Is this an effort to go after maybe some incremental business? being able to respond to customers more quickly. Any additional color there would be helpful. Thank you.

Sure, Stephanie. Thanks. This is Joe. You know, we recognized in the first quarter that, you know, whether due to the fuel prices or export coal prices or even some of our operational issues, that our revenue wasn't coming in at the level that we were expecting. So months ago, we embarked on a process that we've been working on for a while, which is around how should we be structured to efficiently operate the business. And so we challenged each of the different business segments within CSX to find about 5% of efficiency um by reorganizing and um prioritizing where we were going but also then having to stop doing some things and reorganizing so but you know it took us a few months to get all that work accomplished um but I'm really proud of how the work was done and you know in there are more significant changes in like for example engineering inside operations or in technology Some of those areas where we really had to reprioritize some of our resources and really given what's going on. But I feel really good about how it was done. And it just happened to be timed where we did it in early July. Again, it's all part of the discipline of the cost structure of our business. And you saw that in the operations in the quarter. You saw that in the decisions we made on management structure, and you'll continue to see us be disciplined in cost. We watch our revenue versus our costs very carefully, and we'll take actions as appropriate. Thanks.

Your next question comes from Scott Group with Wolf Research. Please go ahead.

Hey, thanks. Afternoon. So, Sean, just one thought that the sequential cost comments were helpful, but maybe And I would just, like, April would certainly look like a challenging month, maybe even made it to some extent, meaning, like, the operating metrics seem to get so much better throughout the quarter. I presume that means that costs got better throughout the quarter. So is there any way to, like, think about, like, the exit cost run rate relative to the average cost rate? Is that an offset to some of the cost items that you flagged, or are we thinking about this wrong? And then maybe just separately, Kevin, you sound a little different about coal just given everything going on with power and maybe just your expanded thoughts on do we need to think about coal a little bit differently going forward?

Hey, Scott, I'll take that first part. I think you're in the right direction there in terms of, yes, April was – More challenging from both the weather perspective and operational fluidity. Yeah, we carried a little bit of extra cost, but it was pretty small in the grand scheme of things. You didn't hear us call it out here in the results, that $30 million of kind of reroute costs. that we had includes a little bit of overhang in April. So yeah, May and June were better. We got a lot of focus in terms of cost discipline, which the actions that we took in terms of the management restructuring, some of the things we're doing on the operating side. I mentioned overtime reductions. There's a lot of things throughout the business that we're focused on that have already yielded some results here in Q2. So it wouldn't necessarily model significant run rate improvements from Q2 into Q3. I think we're in a good spot as we stand right now. We feel good about how this sets us up going into next year as well when we really see a good opportunity not only to kind of grow the top line, but also to see that flow through into strong earnings growth.

And I'll add on the coal side, I think, Scott, you're referring to on the domestic side. I will say I think it's absolutely true that we're seeing more positive trends above what we had planned for for this year. And when we broadly look across our utilities, particularly the ones in the south, you're sitting at around 40% utilization today, and we're seeing activity that could suggest that our utilization rate goes up. And we're encouraged by that. We're seeing signs that a number of specific utilities utilities that we serve today. In fact, I know Mike and his team were working through the operation plan to make sure we're putting up enough coal against those plants today. So we're also hearing about extensions of life on some of these plants that had been targeted for closure in the years ahead. So I think all of that is encouraging and obviously offsets some of the pressure that we have seen on the export side, driven by obviously the price that we've seen this year, but also the two temporary mine outages that we've seen that hopefully we'll see later in this, you know, rather probably in the fourth quarter come back online for us.

Your next question comes from Jonathan Chappell with Evercore ISI. Please go ahead.

Thank you. Good afternoon. Sean, I know trying to forecast commodity prices is a fool's game, but in prior quarters, you typically give the sequential outlook on coal RPU, which is obviously very important. And then also, is there any way to quantify the quote-unquote smaller revenue headlamps in combination of both that coal benchmark and diesel prices as we think about 2H versus 1H?

Yeah. Jonathan, I think when you think about total coal, RPU, you know, mix can play into that for sure. But based on kind of what we're seeing right now, probably see a similar RPU and Q3 versus Q2, maybe down a little bit depending on where the benchmark heads. Um, but it'd be modest decline in total coal, RPU. And then, um, In terms of those headwinds, between commodity prices, you're looking at $200 million in the first half. That's going to be more like $100 million in the second half with about two-thirds of that concentrated in Q3. The comps are a little bit easier as we get into Q4, which is why we think there's a good opportunity to return to year-over-year growth in Q4.

Your next question comes from Tom Wadowitz with UBS. Please go ahead.

Yeah, so I wanted to ask, you know, on the, you know, Joe, you've talked a lot about, you know, kind of make the railroads easier to deal with. You mentioned earlier in the call ease of doing business. I guess, you know, when you think about the ease of working with a single line railroad versus working with interline service, do you think ease of business is the difference between those two? That's something that, you know, kind of a lot of times people say, oh, it's, you know, it's tougher to work with two different railroads. Do you think that's true, or do you think that doesn't really have an effect on the shipper experience?

Yeah, Tom, I'm not going to really comment on, you know, anything that has to do with a merger of Transcontinental Railroad. I'll just stick by what I said before. We think there are all kinds of opportunities to work together to make it better for our customers. And we're open to talking about all those possibilities. Again, we're focused on creating value for our shareholders and looking for ways to profitably grow. And we think that better customer service helps you do that. There are all kinds of ways to deliver that better customer service. So looking forward to all those conversations and making that stuff happen. Thanks.

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

Hey, great. Good afternoon. Certainly a lot going on, Joe. Appreciate those thoughts and insights. Maybe, Kevin, the thought on the state of the consumer, you know, we heard a lot about air pocket of volumes that stalled intermodal and then it wasn't really as big or quick of a snapback. Looks like your volumes are trending up 2% overall for the quarter to date. Sounds like you're targeting a little faster. Maybe just dig into that. How's the consumer doing? And then the Howard Street tunnel, it sounded like 2Q26 is when you expect that to open. Is that a delay from year end? It sounded like the project will be done in 4Q, but you expect volumes in 2Q. Just trying to understand the timing of when we'd see intermodal ramp on that. Thanks.

Yeah, that's a good question on the Howard Street. We will be able to run trains through the Howard Street Tunnel in the fourth quarter. When we will get double-stack capability, there's two bridges that remain that we'll have to have clearance on to introduce the new double-stack capability. So we'll basically be able to go back to status quo before, and then we'll have the new capability on the intermodal side in the next year. And that's where we'll focus on introducing new service systems. So, you know, state of the consumer is a real loaded question. And, you know, I think we're all trying to figure out where that is. You know, the reality is two very important end markets for us are autos and housing. And I think we all appreciate where those markets are today. Our hope is, you know, coming into the year that those would be more helpful than they have been to our business trends. And they touch a lot of the markets that we serve. And, you know, despite that, to your point, I think we've held up relatively well. At some point, we'll have the wind at our back with those markets. A lot of talk on interest rates and those things. Obviously, lower interest rates are extremely impactful for those two markets. The intermodal has been volatile with the tariffs. That's a watch item for us. What does peak season look like? We'll defer to our trucking partners on that side to make that call. You know, we're encouraged. We're encouraged because we're doing a lot of things to convert business and find new opportunities for us and not waiting around for the markets to turn. We're trying to be proactive. We are being proactive and finding those opportunities and wallet share opportunities for us.

Your next question comes from Robbie Shanker with Morgan Stanley. Please go ahead.

Great, thanks. Just a couple of housekeeping here. Can you just talk about kind of other revenue, run rate, and kind of what that could trend like in the next couple of quarters? And also kind of thanks for the 2Q to 3Q walk, but just to wrap that in a bow, was there anything in 2Q that surprised the upside kind of toward the end of the quarter? I'm not just talking about service, but kind of based on some of your intro quarter commentary, it looks like the OR performance was

much better than expected so kind of any kind of lumpy items that that we need to keep in mind going from that two years thank you thank you yeah robbie so so let me take the other revenue first which um benefited in the second quarter from the improvement in operations uh what what that did for us is it decreased the reserve for freight and transit as cycle times improved. So there was a bit of a benefit within that line that wouldn't necessarily continue unless we saw further improvement in our cycle times from where we are today. So I would project somewhere between $115 to $120 million a quarter on the other revenue line is probably our best guess outside of any unique items that pop up there. And then in terms of other items in the quarter that were unexpected and unique, I did mention within purchase services and other, we did have a number of different moving parts, which were net favorable to us in the quarter. Things like some favorable casualty results, real estate sales that were relatively minor, but positive on a net basis. Add that together, that's probably about a $20 million headwind going into Q3. So those are the two things I'd point to. But broadly speaking, I think what you're seeing is a team that's really energized around the progress that we've made in operations and how that's translating to service to the customer, how we're being able to sell that, and then focused on costs up and down the business from operations all the way into G&A and technology and other areas.

Your next question comes from Jason Seidel with TD Cohen. Please go ahead.

Thank you, operator. Afternoon, everyone. Mike, I want to stay on the service a little bit, so congrats on the turnaround for sure. How should we think about sort of trip plan compliance for 3Q, given that you had a rough start to 2Q, but you put in some sequential gains on the car load side? Are you guys looking to sort of match the prior year numbers? And I guess on an off-topic one, Joe, since you have your ear so close to the ground, are you hearing anything in terms of the potential appointment for a fifth board member for the STB?

Thanks, Jason. I'll take the first one easily. Yeah, to answer your question, yeah, we expect to get our trip plan compliance in both years. both the merchandise and the intermodal back to where they were even better. It's certainly going to help once we get our two projects done. And we're tracking well, but it's never good enough because this is the commitment to the customer. So big focus for us. But as we get the railroad continue to improve, continue to get capacity and fluidity, we expect those numbers to be better than they were.

Yeah, thanks, Jason. I'm really encouraged by the trip plan compliance results so far in July. You know, heavy vacation period. So it's been encouraging to see the continued progress there. And as Mike said, we expect even more progress once we get the projects done in Q4. Regarding the STB, yes, we have a great relationship with the STB board. In fact, one of the things that was really exciting to hear from STB was that during the first quarter when we had some of our challenges, they did not hear from one customer. about CSX. In fact, they had customers call them and complimenting CSF on how we were handling. They had no complaints, which is a testament to how the team worked together to take care of our customers, even though we weren't performing the levels we expect. We're not going to comment and speculate on the fifth board member. That's for someone else to talk about, but we're looking forward to continuing to work forward to create value for our shareholders. Thanks.

Your next question comes from Chris Weatherby with Wells Fargo. Please go ahead.

Hey, Kevin. I think you talked a little bit about this before, but maybe you could dig a bit into the sort of outlook on the volume side. What you think in the second half is sort of where are the opportunities for growth for you to get to that full year back to positive? It sounds like there's a couple of moving parts there. Obviously, the consumer is tough to call, but what's your take as you think about peak season?

Yeah, you know, I kind of touched on it before. We did see some of these markets start to take a downtick in the third and fourth quarters of last year. So there is an element of a bit of easier comps in some of these markets. And I did, you know, I touched on some of the outages. We had an unusual second quarter in the activity levels that we saw, you know, focused in forest products and focused in chemicals, but we do see opportunities in the markets like the fertilizer with good demand fundamentals for production to pick up, which would be a very good thing for our business and volumes and for our customers. So those are the markets I look to. I highlighted a chemical customer in particular that we expect better volumes out of in the second half of the year. I do think fundamentally having clarity around the tariffs. We got the announcement on Japan. Obviously, Europe is an the next important one that impacts our export plastics. I think certainty around that, I think will be helpful as we look to those markets in the back half of the year. So it's really, it's not concentrated in one area on the domestic side. Certainly, you know, we talked about the strong demand. We see that continuing into the second half of the year and then On the export side, we highlighted it, but we do expect a couple of mines to come back online and have that additional volume that will be helpful as we move into the fourth quarter. So all those are factors. The good news is it's pretty diversified across a number of markets for us.

Your next question comes from Jeff Kaufman with Vertical Research. Please go ahead.

Thank you very much. I just want to go back to the detail on the cost of inconvenience here. You'd mentioned $10 million a quarter, but does that capture everything? The reroute miles, the lost revenue, the extra cruise, the extra time, et cetera. I'm just trying to get a profile of what costs will melt away in 4Q, what costs will melt away next year, what costs, if any, may melt away in 3Q.

Hey, Jeff. Yeah, just to clarify, it's $10 million a month. And so that's been going on pretty much all year long. Well, that'll continue until these projects get completed. You know, I think that, yes, and it's all in. It includes all the costs of the reroutes. There really isn't much lost revenue. We've done a really good job of finding solutions for our customers to minimize the lost revenue impact. Earlier in the year in first quarter, in addition to those reroute costs, we had weather and congestion costs that were probably 20 to 25 million on top of that. So when you think all in, you know, 120 to 125 million of impacts that go away as we turn the page to 2026. Not to mention the fact that we should see a benefit to the network and overall fluidity as we open those projects up. And as Kevin talked about, the Howard Street's got benefits that come along with it. We will get operational benefits from day one when we start double stacking next year, and then we'll be able to sell into that capacity that we've created as well. So a lot to be excited about in 2026 and beyond.

Your next question comes from Walter Spracklin with RBC Capital. Please go ahead.

Yeah, thanks very much. And that actually dovetails very nicely into my question. When I go back to your investor day targets of, say, roughly 10%, you know, looking how you're trending this year, perhaps down in the negative 5% to 10% range, can we go back to your investor day guidance and use that as a, a guidepost now for how we look at 2026 as we sharpen our pencil on your earnings growth for next year, taking it perhaps from a two-year perspective, iron out some of the one-time or discrete items you had this year. Would it be out of the realm of possibility to say next year should be up mid-teen when we look at your earnings growth for next year?

Hey, Walter, I appreciate the question. I assume when you say 10%, you're talking about EPS and our guidance there is high single digit to low double digit. So that's certainly within the range. And we would need... you know, strong growth in 26 and a good year in 27 to get there with some of the challenges that we faced this year. So we recognize that it's probably too early to project exactly where we're going to come out next year. But I just walked through it with Jeff's question, kind of going through some of the things that go away, the opportunities that we have kind of right off the bat, which is going to get us to load them in single digit, you know, operating income growth and EPS growth without doing anything, without lifting a finger. We've got the industrial development pipeline that Kevin talked about, 50-ish projects in place already, another 30 coming on in the second half, hundreds of projects that are out there over the next couple of years that'll come to fruition. So when you think about some relatively easy comps from earlier in this year. Some of those headwinds that go away, I think it sets up for, you know, a year that's in 2026 that should be double digits. I'm not going to, you know, go further than that yet until we get a better view on the economy and how things are shaping up there. But we'll certainly update you as we get a little bit closer.

Your next question comes from Richa Harnayan with Deutsche Bank. Please go ahead.

Yeah, thanks, everyone. So just on the prospect for better pricing, I know a lot of the pricing got eaten up by mix and fuel this past quarter. But as we think about the service improvement that you've garnered some momentum around into the back half of the year, could we expect some positive results on net pricing? Thanks.

I can assure you it's something we're highly focused on. When you have a great service product and you're adding value to the customer, it's something I think it's an easier conversation to have. It's something that's important, obviously, for us to cover our costs. But we've got to continue to deliver value to the customer. Can we turn their assets? Can we save them costs in other areas that really pay for that and they see value in that? Um, I'm hopeful that we've, you know, this truck market is bottom. That's certainly a factor. I think that'll play into this and, uh, certainly accelerate some of those conversations. Uh, there are opportunities quite frankly, right now where, um, you know, the truck is, it's hyper competitive. We were just with a customer last week that, you know, they noted they've seen three straight years of, uh, trucking, uh, their trucking rates going down. Um, they, they realize that's not sustainable. Um, so, uh,

that will that will be a factor i think as we uh get into the back half of this year hopefully we'll see a little bit of momentum there and then we'll carry that in the next year your next question comes from david bernan with sanford bernstein please go ahead hey good afternoon guys thanks for taking the question um so as you can imagine we're getting a lot of questions on sort of freight flow information i just wanted to um see if i could get your help kevin understanding Kind of what percentage of your revenue today originates west of the Mississippi or west of St. Louis? Thanks.

You know, I think what we said is, you know, over half of our business touches another railroad. I don't think we'll go in more detail than that currently. We can certainly follow up, but I think we'll leave it at that.

Your final question comes from Oliver Holmes with Rothschild and Company, Redburn. Please go ahead.

Hi, thanks for having me on. You've spoken about CSX-specific projects supporting volume growth. I was just wondering, have conversations with customers increased, paused, or decreased as a result of the current tariff structure? And perhaps within that, could you size the opportunity you have with the CPKC partnership and over what time frame it should ramp up and hit maturity? Thanks.

Yeah, I think, you know, the Texas policy is pretty new off the presses. It's certainly not unhelpful. I think, and I noted this before, clearing the tariff uncertainty is, I think, going to hopefully unleash a lot of this investment that I think we have some existing pent-up demand. And more importantly, you know, confidence in completing some of these projects that we already have in our pipeline. I think that's a big opportunity for us. on the CPKC Myrtlewood connection. We just had another cross-functional team meeting the other day, and there's a number of truck conversions and opportunities that don't move over rail today that we're really going after and targeting. So we're excited about that. We're excited about the progress that we've made so far. So we are seeing those conversions occur, and it's a long sales cycle. So we're encouraged that in the near term that we've really capitalized on some things and we can continue to see it accelerate as we get in the back half of this year.

There are no further questions. ladies and gentlemen that concludes today's call thank you all for joining you may now disconnect