Okay. Fantastic. All right. We're going to get going with our next session with CSX. Really happy to have Kevin Boone, Chief Commercial Officer back at our conference. Thank you, Kevin, for being here again. I'm going to pass it to you for some opening comments, and then we will get right into it.
Okay. I don't have opening comments. I do want to -- Matthew Korn is joining us here. I would like to say the award-winning Matthew Korn. He leads our IR and strategy. Great to be here. He'll be supporting me all day.
Look, I've been at this conference for a number of years. It's great to be back. I've been in a number of different venues, always good discussion, and a lot going on in the world that we can discuss. Clearly, a lot of policy that's changing trade flows and other things that I'm sure we'll get into. But a lot of exciting things that are happening also at the company and we'll talk about some of the challenges that have occurred here over the last quarter or 2 and what we're doing to solve those issues and some of the optimism that we have as we move out of '25 into '26 and '27.
Fantastic. All right. So I always -- we always start pretty near term, just talking about recent volume trends and we'll get into all the other big things to be talking about. So we're starting -- seemingly starting the quarter pretty well from a volume standpoint, volumes are tracking up, I think, over 3% quarter-to-date. What is from respect to what's doing better than you would thought, anything doing worse than you would have thought?
Yes. I think that's a fluid question. Obviously, expectations are changing pretty rapidly in market-to-market, but intermodal has clearly been a bright spot. We'll probably see a lull here as we get into the next month and then as you've heard in the news, we expect a lot of volume coming into the ports here as we move into July and into the third quarter with the 90-day obviously, relief on the tariffs from China. And we've heard from a number of customers, there's 800,000 loaded containers ready to go. And so we're seeing that in the market right now. So we expect that to happen.
From market to market, let's move around -- aggregates. It's a very, very strong market. We continue to see strength in the Southeast, a lot of road infrastructure activity. We're staying up against that volume pretty well, probably some opportunities there from a network perspective.
Grain is a very, very strong market. We're starting to see a lot better performance from our network on the grain side the last couple of weeks, and we see additional opportunity there. I guess on the other side, obviously, coal continues to be strong as well. We are seeing some more domestic demand. So we're looking at moving a few more sets into our system thoughtfully. Obviously, given some of the challenges, the Blue Ridge sub and our Street Tunnel create. So we want to do that in a very thoughtful network aware way.
But we see opportunities on the domestic side that will benefit us and we've had some issues on the mine side. We have 2 mines that are out currently. One of them should come back and hopefully operational in the third quarter and then the other one probably late this year and the next year.
Chemicals has been a little bit -- we've seen some choppiness in the chemical side. We do have one particular large customer that's been down. Their production should be back up this week, and we'll start to see that ramp back up. But that was fairly significant for our network. And a lot of other moving parts that we're trying to watch and stay up against.
Forest products is probably the one where we've seen some near-term weakness, just some more idling maintenance outages as they're trying to figure out where the market goes. Some optimism as we move in the back half of the year, but we've seen some paper mills and box plants slow down here probably in the last 2 to 3 weeks. So that's probably on the watch item list for us.
Great. So there's been this very well sort of publicized import cliff into the U.S. It doesn't feel like we've seen that show up in rail volumes yet? And I guess the question is, is it a yet and it's -- we're going to start to see it over the next few weeks and there's just a natural lag of when it comes into a port versus when it shows up on a rail or is there just not going to be the same degree of volatility in even in international intermodal volume what we're seeing on the ocean side?
Yes. I think cliff is a strong word. We'll see some softness on the -- on our port side of our business, and that hasn't yet to show up, especially on the East Coast yet. But I do think there is strong inventory levels on warehouses, particularly on the West Coast and California, where we'll continue to see shipments.
There was a lot of anticipation that this was going to happen. So you had some prestocking that will help our domestic intermodal business, I think, over the next few weeks, kind of hang in there as we see this lull in the import side.
And then does that mean if -- we had some healthier inventories and we're going to get a big drop off as should we then not count on a big spike in volume later in Q2 or in Q3 as this next wave of imports comes in? Or do you think we can sort of see a big benefit to the volume as we look out to Q3?
Yes. we'll certainly see a benefit. I think the magnitude is still debating item right now. But we'll see some healthy growth, I think, as we move into later July, maybe into August is our anticipation. And then I think the question is, are we going to see a second kind of pause if we don't get more clarity on the tariffs, obviously.
And then I know you've talked about positive volume growth for the year. Are you still comfortable with that sort of view? And I guess how dependent your mind is your ability to grow volume on macro versus, hey, we are -- if we can just get some better service, we can grow volume just because we're underserving demand right now?
Yes, I don't think our -- when we came into the year, we were expecting a macro environment that was improving. We certainly can't have a macro environment that falls off a cliff necessarily, and that's not our expectation. And then we're not seeing that just to be clear.
But we do think as a service, as the network becomes more fluid as we gain speed on our network that, that will manifest in additional opportunities and also obviously help our cost structure as well. So I think the big focus when we just had a meeting earlier this week as a leadership team is we're going to build momentum into the into '26 and you should see quarter-over-quarter improvement, both on the cost side and hopefully, the revenue as we build on some of the network improvements that we're achieving. I think the markets, we obviously have an easier comp in many of the markets that we serve on the merchandise side as we get in the back half of the year, and we hopefully can take advantage of that from a year-over-year growth perspective.
And then as I mentioned on the coal side, we should have a large substantial mine come back online. We're going to see some more domestic demand. We had a very good winter from a domestic coal demand perspective and expect a very, very hot summer as well. So we'll continue to be thoughtful of adding more sets into our system to handle that demand. So those are things that should be positive for us.
And hopefully, on the product side, we'll see a little bit of a pickup from where we've seen a lull here over the last few weeks, months, and that should be helpful as well.
So maybe let's spend a minute or 2 on coal because it's rare that we talk about that as a bright spot. Europe mid-single digit on volume and NS is up 20% on volume. UP is up over 30% on volume. Why is it so broadly strong across the rails? And in the context of what I just said about Norfolk and UP, like does your coal volume actually get even better from here?
Yes. I mean the Western, obviously, railroads are more focused on the domestic side. When you look at UP's business, not really an international business for them for business. And I think that's where you're seeing the strength year-over-year. Strong winter in terms of what we saw in the South, and a lot of inventories are at levels where they're going to want to be replenished.
And so we're seeing that I think from a policy perspective, we are seeing on the margin from some of our customers, maybe a little bit more willingness and that pressure is not there. There are instances where we're in the early stages of hearing some hopefully, extensions on some of the plants that we serve. They weren't going to be shut down, but well into the future now, and that's benefiting us as well. So I think that's the strength we're seeing.
Obviously, where we are on met coal prices, not horrible market, not a great market. And hopefully, we'll see above $200 and then into that $225 range, which I think is a lot more supportive for us to see additional volume. Right now, I don't think you're seeing producers really run full out to try to meet that demand that's out there just given the lower prices that we're seeing.
But very strong on the domestic side, I think versus the expectations coming into the year. That's an opportunity as we get into the back half of the year. And then the export market is pretty dynamic right now. We'll see how that happens.
The hope I have on the international side is purchase agreements. A lot of talk about balancing trade deficits. And if you have agreements, let's put it out there where -- whether it's China or India or another market makes commitments to take more of our coal, I think that could be a very, very bullish outcome for domestic -- for our production to go into the international market.
Just a couple of quick flows. How long do you think this domestic strength can last?
We're being really thoughtful and it's not going to be -- you're not going to have a peak and then come down. I think it will be sustainable through the end of the year. And then obviously, it will be weather-dependent on another strong, hopefully winter this year. and then into next year. But yes, we see it kind of sustaining over the rest of the year.
And on the met side, it sounds like you think that we're going to get back above $200. When -- why do you think that's the right -- is that just the historical average? And -- or is there some fundamental reason why the price should go higher from here?
Yes. We've looked at this a lot. The cost curves, when you look at the significant inflation that has been absorbed in that industry, the cost curves are much higher than they have been obviously pre-pandemic. So we think the balancing the right area is kind of that $225 where it makes it sustainable where you can reinvest and support production. So we think over time, that's probably the right price.
And let's -- at some point, let's say we get to $225, do you think about going to the customers and say, "Hey, like, we don't -- this volatility in the price that what it does to our earnings and our stock -- it's just not worth it?" Like, can we just lock in, can we shift away from this quarterly reset of price that gets so much sort of attention relative to what's -- again, it's still not a huge part of the business, right? Do you think about going back to the guys and say, let's just do a normal rail pricing set up again instead of this quarterly reset?
I would love to do that. I think when you look at their business models, they have to compete in the global market, and we have to make sure they're competitive in the global market. And so our ability -- we're not -- we're a fairly good portion of the cost, deliver cost, then we have to move with the market to make sure that they're sustained through downturns and then we participate, obviously, when the market is very healthy. And I think that's worked really well to keep them in the business.
The great thing right now is they're all delevered. They have strong balance sheets. So we're going to help them through a little bit of a lull in this market, and then we'll participate when the market really gets stronger here, hopefully, maybe as early in the back half of this year and the next year.
Okay. I want to think a little bit longer term for a minute. I go back to the Analyst Day last year, and you talked about -- we've got 600,000 to 700,000 carloads of opportunities from -- discrete opportunities. You talked about TRANSFLO, quality carriers, inland ports, Pan Am and NBR. You talked about, at some point, the Howard Street Tunnel project double-stack trains and 500 new customer sites and merchandise pipeline more than $1 billion, I'm like "Oh my like there's like this huge opportunity, right?"
And then you end up -- you and the analyst saying, but -- and volume is going to grow low to mid-single, right? And like it felt like there was a disconnect a little bit in terms of this huge opportunity that you laid out versus sort of what you actually think you're going to actually do. Help me sort of connect the dot.
Yes. I think I look at '25 and quite frankly, '24 as investment years, when you look at what we started to put in place, and you'll see a lot of these investments starting to ramp into the back half of the year. When I think about industrial development, you're going to continue to see more and more of a contribution from those efforts into this year and certainly in the '26 and then '27.
When you think about things like the largest steel plan on our network that's being built. That's going to obviously be hugely beneficial to us. That's coming. We're not seeing volume today from that, but that will really start to be fairly substantial as we get into the '27 period, which was the end of the 3-year guidance.
So those things are happening. Shovels in the ground, the projects are moving along, and so we have a lot of confidence in those things. NBR very, very early on, working with the CPKC on that one. We're very positive on what we are doing from an incremental volume perspective.
So how we're transitioning some volume and from a cost savings perspective and having some benefits there. Inland ports, I think we not only have some announced projects, we're working on a number of other things, I think you'll see benefit us in the '26 and '27. And certainly, with all of the port activity and what's happening in the world, the decoupling from China, I think we're well positioned as that more and more freight wants to move on the East Coast, and we'll benefit from that.
Which one did I miss here? Howard Street Tunnel obviously not seeing a benefit from that. We'll -- by the first quarter, we'll be double-stack capable. Remember, fourth quarter, we'll finish the project, the tunnel project and then -- in the first quarter, there's 2 other bridges that have to be double-stack cleared for us to run the double stack by next year.
And so you'll see some substantial new routes opportunities for us as part of that. So these will certainly be benefiting us more as we move into '26 to '27. You'll start to see some signs of that, hopefully, in the back half of this year.
And so just to follow up on Howard Street. So are we on track for completing that in Q4. And then as I think about '26, is the -- is it just lapping $10 million of cost per month? Or is there actually like a tangible volume opportunity that starts right away? Maybe it sounds like it starts right away in Q2.
Yes. I think Q2, we'll start turning it on. Obviously, you can't fill a train day 1, and we'll grow into that. But we do think that will you'll see quarter-over-quarter benefits from Howard Street Tunnel from a growth perspective from second quarter all the way in the fourth quarter. And then ramping into '27, that's certainly going to be a big benefit.
The project is on time, on schedule. We haven't run into any major issues, knock on wood. So Mike and I, Mike is monitoring that every week and both that and the Howard -- both the Blue Ridge sub are on track by the fourth quarter, and those will be very, very beneficial to our network for sure.
Maybe let's just talk about the network. Obviously, in Q1, we saw some pretty material pressure on some of the service metrics. Just looking backward, is this just those couple of areas? Or is there sort of broader issue here? It feels like we're starting to see some improvement off the bottom as we're going out to Q2. How do you think the network is performing now? And where do you think we go?
Yes. I think there's -- Mike would tell you there's a lot of -- been a lot of lessons learned from what we had. I think the storms were pretty significant, what we saw in the first quarter, and that didn't help. And when you take out 2 main lines in your network, you have 4 north-south lines. You take 2 of them out.
Obviously, the resilience is not there that you normally would have. I think the benefit of our network and the uniqueness of our network is how adaptable it is and how much optionality we have when things happen normally when you have access to all your lines to be able to adapt and adjust when weather comes or other things hit you. We haven't had that capability, obviously, with those 2 lines being under construction right now.
So that's hurt us probably in hindsight, probably hurt us a little bit more than what we had expected. But I think we've got a good plan. Mike and the team are working around the clock. I can tell you that every day and are finding opportunities and I think we're learning from it. You'll see adjustments.
We're making some adjustments on our intermodal. You'll see 50 lanes here that we made announcement on Monday, 50 lanes that will improve transit times, and that's going to benefit us from going to the market as well. So a lot of things going on, a lot of learnings, a lot of focus on kind of improving. And I expect sequential improvement as we move through the year. And then obviously, there's going to be probably a step function opportunity as we get these projects behind us.
And so maybe it's like a chicken and egg question, like we've got some pressure on ServiceNow. Do we need to spend additional cost to get service better? Or is it the opposite that as service gets better, cost comes out? Or maybe it's both, I don't know.
Yes. This is kind of the second time I've seen since I've been at CSX 8 years where you were in kind of a service recovery mode. I can tell you as a network expends faster, costs fall out. The recrews, there's a lot of things, you need less locomotives, all of those things. And we're in that curve. We're bending that curve right now.
Obviously, Matthew wanted me to remind you that the Blue Ridge was out for 2 months in the first quarter, 3 months this quarter. So it's 3 months that we're dealing with in this quarter that will be a little bit of a cost headwind. But that's an opportunity as we move through the year. So I think you're going to see cost momentum and then hopefully, with these revenue projects and a lot of the things that we're focused on, you'll see that revenue really start to come through the things that we can control and drive as we move into the year.
Maybe just a quick follow-up to that. So we're seeing some sequential improvement in service metrics. The volumes are pretty good. We just published labor productivity, actually now head count down for the first time, I was in 4 years or something year-over-year. But you're saying, hey, we've got now 3 months of this project instead of 2 months? Like any way to sort of frame how to think about sequential margin improvement Q1 to Q2?
Yes, I am the sales and marketing guy now, but second and third quarter generally are better quarters from a margin perspective. And I don't think there's any reason to believe that seasonality has changed. So we do expect some improvement there. In order of magnitude, obviously, there's a lot of different factors, but we do expect that.
Obviously, we're getting burdened by about $10 million a month related to the Howard Street Tunnel. And there are some, obviously, additional costs related to just the network fluidity that will continue to improve as we get into the back half of the year. But we do think -- I think we said this, Sean has said this. First quarter was the bottom. And from that, we expect better performance.
I want to talk about price and yield a little bit. It feels like for -- so many years, right, price above inflation was the constant given for the rails. And it feels like that's become much less of a given in the last few years, and we don't get same-store pricing disclosures anymore. But where are -- where do you think we are now from a price cost standpoint and as you look ahead, does that get incrementally better? Does it get worse?
I don't think anything has really fundamentally changed in our merchandise business. When I look at it, when inflation was running a lot hotter, we went out, obviously, to recover that. As it comes down, we still want to obviously exceed the cost inflation that exists there. But nothing's really fundamentally changed.
You have movements within markets. If the chemicals is having a very good year, what you did last year, you'll see obviously, good RPU performance overall for our merchandise franchise when that's a little bit weaker, you'll see that be a drag.
The big -- the fundamental issue that we've had is the trucking market has been down for a prolonged period of time. So when you look at our intermodal business, that obviously has a direct impact. We participate with our -- a lot of our customers when pricing improves and obviously, don't participate when the pricing not improving. So it's -- that has been a challenge. It's been a challenge in some of the markets on the merchandise side. to a much, much lesser degree, but it does help when you have pricing strength on the trucking side.
So we are optimistic coming into the year that at least we would bottom and I think we have bottomed on that side, and we've seen it. What we would like to see as the next leg of supply starting to come out of the market and starting to see some opportunities there. We'll see what this wave of imports does to the market in the near term. That will be an interesting case study here.
And we are seeing signs that supply is coming out of -- you obviously track that, Scott, but we are seeing some supply come out from the driver side, which is encouraging as well. But that's been the challenge. And I think that's the next step in our progress towards better pricing, it's having that trucking market more supportive.
Now we benefited substantially from obviously, export coal pricing, and that's been a drag on us. And we'll hopefully, by the end of the year, obviously, that's not going to be the drag it has been from an RPU perspective. So we'll lap that. And hopefully, we'll see some positive contribution from that as we move into next year.
As I think from a reported yield standpoint, down 6% in Q1, yields ex fuel down 4%. Do you think that was the peak decline? Do those declines moderate as we go to Q2? And then when do you think that could turn positive?
Yes. I think just export coal alone, you're going to see that moderate as you get through the year, and that's a substantial drag fuel surcharges, unfortunately, we've seen fuel go down a little bit, not substantially, but that's going to be a little bit of a drag here in the back half of the year. That would be nice to see that as a tailwind as well.
But yes, I think you'll see that moderate. Mix is always an important component. You look at RPU overall. But we don't see any major shifts in RPU story. Domestic coal, when you think about the strength that I talked about earlier, that's a lot of southern utilities, longer length of haul, so good RPU on that side.
And then intermodal, that's -- if you see a lot of influx of international coming in, Obviously, that runs at a lower RPU than the rest of our business, still good business from a profitability standpoint, but lower RPU. So mix is always going to play a part in this, but we don't see any major shifts and then some of these headwinds that we've experienced over the last 18 months kind of start to moderate a lot into the back half.
But overall, you still feel we've got -- coal is going to do what it's going to do. But outside of that, the ability to sort of get back to and sustain inflation plus pricing, you still feel very good about?
I do. Yes, over the medium, long term, I do. And obviously, a more supportive trucking market as part of that component. I don't think it's sustainable where pricing is today. Despite where pricing is today, we -- I can rattle off 20 wins that we've had on the trucking side in terms of conversion. So we're still going after that market. I would expect that to substantially improve as we got to have a better backdrop on the trucking side.
I want to spend a couple of minutes on margins. I know you're not -- you said that's not your hat, but you're here. Exactly. So I've got -- you don't have a long-term operating ratio target anymore, but relative to where we were pre-pandemic right?
Based on our model, the margins are now about 800 basis points worse. And even if we adjust for quality carriers, right, it's 500, 600 basis points worse. I guess, ultimately, at what point does margin become a sort of bigger focus here again? Do you like -- is this railroad? Should this be a low 60s sub-60 type or railroad? Or is that just not the focus? Or how do you want to answer that?
I don't think it's not the focus. We've had a lot of discussion. I think this team is competitive. We obviously didn't like the results in the first quarter. I think we're talking a lot about that internally. Certainly, in a model like ours is we have a lot of fixed costs. And I need to go out and find a lot of profitable business, obviously, to put on the network that can help margins.
But I think Mike would tell you, Joe would tell you there's opportunities for us to look at costs, and we're going to do that. And as I mentioned at the beginning of this talk is I think the goal is, and I think we have line of sight to that is both the -- improve the momentum on the revenue side and the cost side as we move into 2026.
And I think we have a plan to do that, working all together, and it's across the board. There's efficiencies you can drive I can tell you a better network, that's more fluid. It's just going to cost fall out. I've seen it over and over a number of times that occur. And we're in the beginning of that.
You're looking at our network today, and we're going to see sequential improvement. And with that will come opportunities on locomotives, the crew side, Deadheads, all those things have costs that are associated with them right now that should naturally fall out as the network improves.
So what I'm hearing is the service, we're past the trough, right, as that gets better, and you think it continues to get better costs come out. And then hopefully, some of the company-specific volume opportunities build, right? The coal headwind, we're going to start to lap at some point. And so we're going to get to a point where we can see volume, productivity, better price and sort of in your view, like this could all come together in 2026?
Yes. I think it's not going to be like you wake up in '26 and tada, I think you're going to see the natural progression that we're working on this year. And hopefully, you'll see line of sight that we're going to build momentum into 2026 and see some visible improvement as we get into the back half of this year.
And when like I go back to the -- again back to the Analyst Day when you talked about the 3-year high single digit, low double digit earnings growth. Even then you sort of said, hey, '25 is not going to be that. Now maybe it's worse than -- I don't know, maybe it's worse than you originally thought, but is that still the right high single digit, low double digit? Is that still the right full year CAGR? Or should we say, hey, kind of '25 is '25, and we go back to high single digit to low double digits starting in 2026 and just sort of ignore '25?
Yes, 1.5 quarter into this 12-quarter endeavor that we guided to, and I don't think we've lost any confidence in our ability of all the investments, what they can deliver from a growth perspective.
There's a lot of things. I'm very confident in the team of what we've built, the foundation of all the industrial development projects that have been years in the making, quite frankly, these things take a lot of time and can be frustratingly slow, but we're ready to reap the benefits as we get into next year in 2017. And so I think all the things are set up very, very well for us.
Obviously, you need the macro to be stable at a minimum. If we had markets like housing and auto, which are incredibly important to our franchise, and I've been down for, obviously, the last 2 or 3 years, if we could get some lift from those. I think that would be additional opportunity for us. So those things were added cyclical lows in some of the markets that we serve right now. And it would be nice to have a little bit of cyclical tailwind. As we get into '26 and '27, we haven't assumed that when we did that, and that provides hopefully some upside to what we can do.
We are running out of time, but maybe just where the next session is going to be with Chairman of the STB. I don't see him in here yet. But maybe just help us transition to that. There's been a little bit more for whatever reason, chatter about rail M&A, I don't know. Why do you think we're hearing a little bit more chatter? Does it make sense? Or is this just sort of like fake news and we should move on?
Well, the timing is well because I think you should let Patrick handle that question. Look, I think we're really focused on what we can do. We think there's a lot of untapped value that we can control and drive from a share price perspective. You heard about our confidence in what we think we can deliver as we move into the next year and the following year. So I'll let others kind of comment on that. It's not really the focus of this team. I can tell you that.
Awesome. Thank you, Kevin. This was great.
