CSX at Bank of America Conference: Strategic Recovery and Growth

On Tuesday, 13 May 2025, CSX Corporation (NASDAQ:CSX) participated in the Bank of America Industrials, Transportation & Airlines Key Leaders Conference 2025. The discussion, led by Ken Hoexter with CSX’s EVP and CFO Sean Palki, highlighted both challenges and opportunities for the company. While CSX faced difficulties in Q1 due to weather and project disruptions, the company is optimistic about operational improvements and future growth, driven by strategic capital allocation and enhanced service levels.

Key Takeaways

• CSX experienced underperformance in Q1 2025 due to weather and infrastructure projects but expects recovery in Q2.
• Operational improvements, such as enhanced network fluidity and trip plan compliance, are underway.
• The company is committed to strategic capital allocation, including share repurchases and infrastructure investments.
• Positive volume trends in coal and intermodal sectors are expected to drive growth.
• CSX is focused on maintaining strong customer relationships and securing new business opportunities.

Financial Results

CSX faced significant headwinds in Q1 2025, but improvements are anticipated in Q2. Despite market uncertainties, the company expects full-year volume growth.

• Q1 underperformance impacted by $10 million monthly due to rerouting from construction projects.
• Export coal prices are projected to increase from $187 to $200 in 2026 and 2027.
• $750 million in share repurchases in Q1, totaling $1.1 billion year-to-date.
• Projected CapEx of $2.5 billion, rising to $2.9 billion with the Blue Ridge rebuild.
• Wage inflation at 4.25% offset by deflation in healthcare costs.

Operational Updates

CSX has focused on improving service levels and operational efficiency to enhance network performance.

• Trip plan compliance reached 80% for four consecutive weeks.
• 45 new locomotives added and 20 rebuilt to improve network flow.
• Volume trends show a 6% increase in coal and a 12% rise in fertilizers quarter to date.
• Howard Street Tunnel rebuild set to complete by Q4 2025, with bridge clearances extending into 2026.

Future Outlook

CSX sees robust growth opportunities, driven by industrial development and strategic investments.

• Expecting low- to mid-single-digit volume growth over the next three years.
• Over 30 new projects added, with 600 now in the pipeline.
• Potential surge in pre-shipping activities ahead of tariff deadlines.

Q&A Highlights

During the Q&A session, CSX addressed key operational and strategic initiatives.

• Volume levels rebounding to peak levels, with improved handling of seasonal fluctuations.
• 24 industrial development projects announced through Q1.
• 75% of employees are under new labor contracts, simplifying labor agreements.

For further details, please refer to the full transcript.

Full transcript - Bank of America Industrials, Transportation & Airlines Key Leaders Conference 2025:

Ken Hoexter, BofA Analyst, BofA: Started this morning. Good morning, everybody. I am Ken Hoexter, BofA’s air freight and surface transportation and marine shipping analyst. Welcome to our thirty second annual BofA’s industrial transportation and airlines key leaders conference, the twenty fourth one that I have hosted. We are back.

We’re bigger than ever in our second year return to New York after a thirteen year shift to Boston. We host the event along with our fellow industrials analysts, Andrew Obin, who covers multi industrials, Ron Epstein, who covers aerospace and defense, Michael Feniger for machinery, engineering construction, and Andrew Dodora covering the airlines and cruises with some of those presenting on the Second Floor concurrently with this track. We have a great lineup for you over the next two days or three days. We’ve got 98 companies with more than 500 investors registered for our largest event in more than a decade. We have 24 companies from the transport side.

We have Canadian National participating for the twenty fourth consecutive year, becoming the record holder after carrying a tie for the last few years. So we appreciate the support of so many of these companies. Last night, we kicked off the conference with FedEx’s CFO, John Dietrich, and chief commercial officer, Brie Carrera, And we heard about tariffs, the end of de minimis, but not really as shippers move under a 50% tariff plus lots of form filling filings. Its win of of Amazon big and heavy business, which it noted will lift its average weight and yields at its ground segment. Its drive $6,000,000,000 cost savings program, network2.o, its $2,000,000,000 integration of Ground and Express, Tricolor, its planned freight LTL segment spinout, and more.

It noted domestic ecommerce packages were resilient right now that the consumer was trending in line with seasonality. May domestically was stronger than normal seasonality. However, the April to the May and Transpacific volumes were worse than anticipated. And so while domestic was holding on the ecommerce side and B 2 B parcel was about what it thought, which means that it was somewhat weak, less than truckload was a bit softer in May, softer than it thought it would be at this point of the year this year the year. May is is softer than seasonality given that freight is more IP, and 90% of freight is b two b related, just a reflection of the weakness in in IP.

Back to the conference, we’re hosting a dinner tonight with the Port of Los Angeles in Kirby, tomorrow night with Norfolk Southern. And today, within the transport lineup, we’ll hear from the railroads, trucking carriers, intermodal service providers, truck brokers, freight forwarders, and more. We’ll hear more on the state of the air freight market from UPS, and DHL is hosting one on ones throughout the day. But, clearly, our entire investing world has been turned upside down this year. One thing our group needs is is freight that moves.

We don’t make stuff. We just move it, and we started with excitement into early January. It looked like we were coming out of a three year freight recession well ahead of the April tariffs. The excitement at the start of the year turned into a slide on consumer growth concerns. Spot rates dropped from a dollar 65 a mile down to a dollar 50 cost per mile.

Our truck shipper survey, which has an 82% correlation in leading ISM by a month with a point seven r squared fell to 48, its lowest level in a few years, and into the forties for only the second period of time outside of COVID alongside recession freight recession periods of 2012 and 2019. So container flows from China have to The US West Coast have stalled with that long awaited air gap hitting right now. In our call with the Port Of Los Angeles 2 Weeks ago, it noted volumes had trended at about 900,000 TEUs from July of twenty four through January of twenty five, dropped down to 800,000 TEUs in February and March, and would be in the 700,000 range in April. That was expected to fall to about 700,000 in May or less than 700,000 in May, creating air pocket of freight due to the April 9 launch of the tariffs. That would result in 16 blank sailings of the 80 ships, so about a 20% reduction in ships and a 30 to 60% decline in containers.

With this past Sunday’s pause of reciprocal comps with reciprocal tariffs with China for ninety days out to mid August and dropping to 30% from a 45%, we would expect peak holiday shipments to be accelerated ahead of the August expiry. Nevertheless, the air pocket for the next few weeks will impact the transports, but the return of business thereafter can see quite the rebound as inventories are replenished and a race is on to move holiday goods. Over the next three days, we’re gonna have some great discussions, fireside chats, and topical panel discussions. We’ve got all five public railroads. We’ve got the railroads have posted volume growth for the sixth consecutive quarters, showing some nice gains into early second quarter.

We believe this early cyclical group will set the stage for an improving outlook. Following FedEx’s discussion last night, we have UPS’ CFO as a keynote luncheon speaker today, and peer DHL is hosting one on ones. Following FedEx’s less than truckload freight discussion last night, we have virtually all major carriers on the less than truckload side, including XPO, SIA, Old Dominion, and and TFI. We also have a paddle with private carrier Pit Ohio and a shipper to delve into the state of the LTL market. Look for the less than truckload carriers to discuss the April to May data given the impacts of the freight pocket, the weight and mix shift, and capacity utilization.

Our intermodal and truck discussions will include multimodal carrier JB Hunt and Covenant Group. JB Hunt will definitely not hit on guidance and pull forward, but they will likely address the delay in intermodal pricing benefits due to contract signing, improved service levels, particularly with the rails posting great service and their ability to use its available capacity. Broker CH Robinson and the Broker Wars panel will feature RXO and load board operator DAT freight and analytics on the state of the brokerage market and what signs we can look for on a spot market inflection. Also, C. H.

Robinson’s operational turnaround and their AI investments will be a key focus. In a switch to shipping, we’ve already talked about the Port Of Los Angeles, but a joint panel with Chris Chase and and BofA’s federal government relations officer on tariffs and global trade. We will hear about resurgent tank barge operator Kirby on their decade long correction that has arrived in the supply demand market along with opportunities it has in the power gen market. As such, this is a good with with two minutes left to run over our latest thoughts before we open up to CSX at 8AM. While the ninety day tariff reprieve with China has finally spurred optimism, the switch to growth policy has begun and can be aided with proposed tax cuts that are now on the table.

FedEx noted last night that it expects a surge in preshipping during the ninety day reprieve and concerns regarding the air pocket of freight flows that are dissipating. Could these be early signs of reaching the end of the downturn? Rail carloads have been up for 11 of the past twelve weeks. Class eight net orders as measured by ACT cratered to 7,600, its third consecutive month below 20,000 replacement levels. It remains early, but given the cyclicality of trucking, this mosaic of high frequency data is worth focusing on.

So that’s the market news. What are the stocks telling us? Our coverage is still down about 10% year to date on average, lagging the 1% decline in the S and P. Trucking stocks, which are the leading indicator, typically the leading indicator, are down about 15% year to date. Less than truckloads are down 20% overall, although Old Dominion is flat and XPO is down only three and a half percent after yesterday’s moves.

And while the rails have been the best performer at up 1%, they’ve outperformed the market as they take share with with their service improvements. So we focus on opportunities. We look for areas that are idiosyncratic on cost cutting opportunities. We we focus on the continued tariff negotiations, focus on growth policy such as the potential for tax cuts, mid investments, deregulation, and we’ll press to see where the market is shifting and how companies can take advantage of opportunities. So we thank you for taking time out of your busy schedules to join us for these three days in New York.

Enjoy the next few days. And with that, let me launch right into CSX.

Sean Palki, EVP and CFO, CSX: Alright.

Ken Hoexter, BofA Analyst, BofA: So to open our conference, good morning, everybody. We welcome CSX and and Sean Palki, EVP and chief financial officer, a position he has held since 2021. Also here from CSX is Matt Korn in the front row. We welcome Sean to the to the conference for the second time in four years and for CSX for its seventeenth consecutive time and twenty second time in the twenty four years we’ve hosted the conference. So just let me start off with thank you to CSX for your steadfast commitment to our conference.

We truly appreciate it. Thank you. The company had size as sizable headwinds in in 2025 given its Blue Ridge subdivision rebuild, Howard Tree Tunnel project. Nevertheless, volumes are hitting some of the highest levels of the year. Operations are improving, and it’s and and and you talked about the capacity for growth.

So we’ve got a lot to cover in in the next thirty five minutes. So, Sean, let me let me turn it over to you. Thank you. Good morning. Welcome to to you.

Understand you have a few thoughts and updates you wanna just kick off, and and then please include in that, if you could, the three key takeaways you would want us to walk away with from today. Great. Thanks, Ken,

Sean Palki, EVP and CFO, CSX: and it’s great to be here with everybody. You know, I think you you hit on some of the key themes already. You know, we coming out of the first quarter, we got hit. Obviously, some of that was projects that we knew were happening. The Blue Ridge rebuild coming out of hurricane Helene last year was significant.

It was a major outage of one of our routes. It’s gonna take the better part of this year to get that completed. We knew the Howard Street tunnel project was critical for the long term health of our network and growth opportunities. So we went into those full force, and then we got hit with a difficult winter. And, you know, frankly, we didn’t perform as well as we expect.

So coming out of that, I think there was a reset in April. Mike and his team have been spending every hour of every day in the Operations Center. I’ve had the opportunity to go over there several times. You know, it is a it is a focused team that’s looking at every detail to unlock the fluidity of the network, and it’s working. You can see it in the numbers over the last several weeks.

We’re seeing, you know, one of the first and most important things that we talked about was we need fewer cars online, not because we want fewer traffic. We just have too many cars sitting in yards at customer locations. We’ve got to get them offline. That helps with the fluidity of the network overall. And you’re seeing that happen.

You’re seeing trip plan compliance go up. That’s one of the key measures in terms of our commitment to the customer. We’ve been running at 80% or more trip plan compliance now going on our fourth week in a row. So, you know, we were down in the sixties earlier this year. So intense focus on getting back to running a scheduled railroading, and I don’t wanna imply that we went away from that necessarily, but we faced some challenges in q one and we needed to to adapt and figure out how to run without two of our four major Northwest North South routes, and I think we’re getting much better at doing that.

These projects are for the long term health of the network, and I think the establishment of the customer relationships that we’ve built over the last couple of years and the differentiated service product that we’ve been able to provide the customers is carrying us through this period of difficult operating conditions. We’ve won a lot of new business. Industrial development opportunities are as strong as they ever have been. We’re really excited about what the second half looks like, what twenty twenty twenty twenty six looks like. We outlined all of that at our investor day, and nothing fundamentally has changed despite a little bit of a hiccup over a couple of months.

So, you know, if you’re looking at CSX, you’re looking at one of the best run railroads in North America. The team that produced that performance in 2022, ’20 ’3, ’20 ’4, it’s the same team that’s there today. And, you know, we’re undervalued because we didn’t perform as well as we’d like in q one, so it’s a great opportunity. Alright.

Ken Hoexter, BofA Analyst, BofA: So we’re here we are halfway through second quarter. And and just looking at at, you know, public carloads, some of the best levels of the year. Right? You you posted a 25,000 carloads in in week 18, just a thousand off your your peak in week 13 and the fourth best level of the year. So talk about what what’s driving the gains.

Don’t mean by commodity, but is this catching up from the weather? Is it the service? You you mentioned kind of service catch up. Is it preshipping? You know, how should we think about just the volume levels running through the network?

Sean Palki, EVP and CFO, CSX: Yeah. I mean, part of it is just normal seasonality typically as we get into the spring, volumes do pick up. But beyond that, you know, I think in the first quarter, it’s evident we missed demand that was out there, and Kevin put a number around that somewhere around a million dollars a day. Call it roughly a hundred million dollars of revenue opportunity that we missed in the first quarter. So we’re doing a much better job of filling customer orders today than we were in the first quarter.

We’re still not back up to where we would like to be. So we’re not missing a million dollars a day, but we are still missing a little bit of demand, particularly in the unit train business. So if you think about grain and coal, there’s actually more for us to go get versus what we’re actually serving today. And as the network continues to get fluid and we’re able to free up some of the assets, we think we’ll be able to actually, you know, grow into some of that demand as well. But we’re meeting, you know, we’re meeting greater order fill rates in in products like metals, fertilizer, know, some of the merchandise products that are out there, and that’s translating into some of the the volume numbers that you’re seeing.

Is there

Ken Hoexter, BofA Analyst, BofA: a a capacity you would think there the the network can handle, right, if one twenty five? Is it one forty? Is it one fifty? What’s your you would be a rough kind of

Sean Palki, EVP and CFO, CSX: Yeah. It’s it’s tough to put an exact number on it. I would say, you know, where we sit right now with the network constraints that we’re operating under, we probably have less capacity than we will once we get past these projects later on in the year. That being said, you know, I think when we laid out the vision for low to mid single digit volume growth over the next three years, we weren’t talking about needing to invest in a significant number of new infrastructure projects, locomotives, increasing crew counts. We think we’re in pretty good shape when it comes to assets and resources to be able to handle that kind of growth over the next couple of years without really having to spend a lot more.

Yeah.

Ken Hoexter, BofA Analyst, BofA: I know we’ve had a lot of change in terms of tariff policy and things over the last few days, let alone on Sunday. So what’s your thought given the ninety day end of reciprocal tariffs coming up? You know, do you think we get a surge in in preshipping to beat those deadlines? Do you think this is new policy? How I I just wanna understand how are your shippers thinking about talking to you in terms of volumes movement as we get into kinda summer season and then it’s a peak?

Sean Palki, EVP and CFO, CSX: Right. So, I mean, I think it’s fair to say that we saw I don’t if I would call it a surge, but we certainly saw impacts of preshipping ahead of Liberation Day, and that showed up in not just our numbers, but but all the numbers that you track out there. We do expect to see a little bit of, I think you called it an air pocket or or whatever you called it in your opening remarks there. We do expect that’s probably gonna come maybe less of an impact for us on the East Coast than it would be for some of the on the West Coast. We also think there’s a lot of inventory that’s sitting in warehouses on the West Coast that will make its way east while ships are you know, the the volume of ships coming into the West Coast is a little bit diminished the next couple of weeks.

Will we see a similar phenomenon if we get to the end of another ninety day pause? It’s entirely possible. I will say one of the things that, you know, maybe a lesser known benefit is if we do see a little bit of an air pocket or a little bit of a lull in intermodal volumes making their way across Chicago, that actually gives us an opportunity to combine some trains together and divert some of those locomotives over to the unit train business we talked about earlier. So there’s an opportunity to actually pick up some incremental business while still running the trains and meeting the demand on the other parts of the business. Does the China agreement over the weekend, does that

Ken Hoexter, BofA Analyst, BofA: change your economic outlook? I I think

Sean Palki, EVP and CFO, CSX: it certainly helps. You know, Kevin Kevin had an opportunity to speak to the senior leaders of the company yesterday and coming out of the weekend, he was very encouraged. He said he’s he’s pretty excited about where we’re headed in terms of second half and more importantly, where we’re headed in terms of 2026. You know, the the and we’ll talk about it in a minute, but the industrial development activity continues. We’re winning a lot of new projects there, and I think it’s a great setup for us going into next year.

Ken Hoexter, BofA Analyst, BofA: Mike Mike note on the quarterly call, Mike talked about some additional flooding that started off with 2Q. I think you mentioned some in in your opening comments that that impact has subsided. Is that what we’re seeing in terms of some of the catch up business or sustained demand? Just want to understand the impact, the lasting impact of that flooding he was talking about at start of

Sean Palki, EVP and CFO, CSX: the quarter. Yeah. So we you know, they had been hunkered down probably about a week in in the operations center in Jacksonville, and they were just starting to kinda gain some momentum. And I went in there one morning, and this happened to be the morning right after the floods hit and we had some tornadoes and all that stuff that came across and you could tell it was like crap, we gotta deal with this now. These things happen in railroading, we’re flexible, we can deal with it, but it definitely, you know, it wasn’t just us, There were interchange partners who had, you know, one of them in particular had a bridge out in a key area in our network.

So that takes a little time to kind of work its way through. It’s normal. Once we got past that, it that probably took a week or two. That’s when we really started to see the network fluidity take off. So if you look at our weekly service metrics, you can really pinpoint it to coming out of that flooding.

That’s where we really started to turn things around, and that’s that’s where you saw the volume inflect as well.

Ken Hoexter, BofA Analyst, BofA: So you had your own Friday surprise. Right? We certainly had the weekend surprise with with tariffs. We had FedEx surprise about an hour before our presentation. You you get the the good Friday surprise.

You signed the contract with the BLET, the engineers, Noted that only the conductors are left with with 75% of employees under under the new contract. I wanna get into a couple things on this. One, Joe talked a little bit about the the system wide contract. Maybe talk to us about what does that mean? How is that different than what you’ve been working on for a decade?

And it sounded like something may be coming with the conductors and the same thing. Just a little background and what does that mean?

Sean Palki, EVP and CFO, CSX: Sure. Yeah. So the essentially, all the crafts except for conductors and engineers were were finished for the most part. And so we got to an agreement with the engineers. It’s the same agreement that everybody else has got in terms of wages and and health and welfare benefits.

There’s a couple other nuances there in terms of trade offs, but same economic value that that all the other unions got. BLET went to a single system agreement many years ago. I think it was fifteen years ago or something like that. We’re still we still have multiple agreements on on the conductor side, smart TV. And so what does that mean?

You think about we have a hundred or so crew hiring locations across the network. But we’ve got some geographic territories where you literally have a single terminal and you’ve got four crew bases. One that can run north, south, east, and west. So they show up. They can only run-in those specific directions.

If we were able to consolidate that into a single system agreement, you can think about the kinds of efficiencies we would get there. Not just, you know, labor efficiencies, but also just being able to have crews available when we need them to run the trains that are most important to run. So that’s really what we’re angling towards. It’s not gonna be easy. It wasn’t easy when we got it with the BLET, but it’s it’s an important priority for CSX.

Ken Hoexter, BofA Analyst, BofA: Stunning that that is still being debated years after mergers. So the if if the the the three

Sean Palki, EVP and CFO, CSX: and a

Ken Hoexter, BofA Analyst, BofA: half percent, maybe go back to August when you signed your first one, you know, was coming down. What was your thought in I mean, you obviously decided to do it early, right, set the tone, get it done early versus last rounds, which was more contentious and had to go to the government. What what is your thought now as as CFO in terms of the impact of that wage increase? What you have to do to get benefits, work rule changes, what what do you do to offset that?

Sean Palki, EVP and CFO, CSX: Yeah. So look, I mean, we’re we’re gonna have four and a quarter percent wage inflation this year, which is above what we’re gonna see on the cost side. Thankfully, we’ve moved to more of a cost sharing model on the health and welfare side, the health benefits. And that’s actually driving a change in employee behavior, which is what we had hoped for as an industry and what we’re actually experiencing. So we’re actually seeing deflation in healthcare costs.

We’re optimistic that that could continue over the next several years, which would help to offset what we’re seeing on the wage side. So when you blend the two together this year, we’re actually running south of 3% in terms of overall labor inflation. So we can offset that with price for sure. And those numbers come down over time. Certainty is always better than uncertainty.

Right? I think we’re seeing that play out in the macro environment, but even within our own business, having certainty on what those contracts look like is hard to put a price tag on. Getting this done before those those wage increases are set to to come into effect on July 1 is incredibly valuable, not just not just for for us, but for the employees as well. It keeps them coming to work. It keeps them motivated and engaged.

The amount of bad will that we built up over the course of the last round of negotiations is is hard to put a a price tag on.

Ken Hoexter, BofA Analyst, BofA: Wonderful. Alright. Let’s go back to business. Joe talked about still expecting volume growth in in 2025, though noted as you did market uncertainty, trade policy increases the range of of outcomes. So first quarter, you had down 1% in in in volume growth, up 3% in second quarter.

Do you see positive second half growth at at this point from from your crystal ball?

Sean Palki, EVP and CFO, CSX: Yeah. I mean, still expecting full year growth in volumes. It’s hard to say where exactly we’ll come in terms of overall volume growth because there’s a lot of different variables that play into that, obviously. But we’re encouraged by what we’re seeing in terms of the demand picture. I would say there’s a couple of markets where that uncertainty around trade and tariffs has shown up in terms of a little bit of, you know, change in demand.

So we’re watching that carefully. But there’s other markets where, you know, I think there’s there’s strength, and that strength is gonna continue. Markets like aggregates, there’s a lot of grain that wants to move, and we’re ready to move it. So and and intermodal has been very, very strong so far this year. We may hit that air pocket, but I think once we get past that, we’ve got some opportunities ahead of us.

Ken Hoexter, BofA Analyst, BofA: Alright. Let let’s dig into some of those commodities for a second. Right? So coal actually is up 6% quarter to date. Right?

You know, it’s it’s it’s a a pretty strong move, 11% of carloads. That seems to be the biggest uptick for the quarter to date outperformance. Yep. Anything driving that? And it and that’s not just CSX.

It seems like that’s Yeah. Across the board at the

Sean Palki, EVP and CFO, CSX: Yeah. I mean, I think for for us two thing well, probably three. The the first is, you know, just reminder, Keybridge outage was right around this time last year, so we’re cycling that on the export side. But we’re cycling more coal this quarter than we did last quarter just because of our ability to meet the demand that’s out there. So that that plays into the coal market as well.

And then on the domestic side, you know, we had a we had a cold winter that that caused a drawdown in utility stockpiles. So we’re seeing more demand for domestic coal. We’re moving more of it. We have several customers that have requested more sets. Those sets are coming in in the coming weeks.

So we actually think there’s some demand that’s out there that we we will be able to meet in the coming weeks that will actually be incremental to what we’re doing today. And on the export side, we feel pretty good. I mean, we had a we had a pretty strong year last year. I think overall, we were up 6% in domestic tonnage or, excuse me, in export coal tonnage. And and we think the set setup for this year is continues to be very strong, albeit with lower prices year over year.

Ken Hoexter, BofA Analyst, BofA: So let let’s dig into that. Right? So let’s start off with the coal export. You know? Now exports more than half of your of your mix.

Right? So 53%. Last year, you did 44,000,000 tons of export. It seemed like that 40,000,000 was kind of the run rate target for a long time. Now you’ve you’ve kinda exceeded that by a healthy 10% growth.

Is that a sustainable level just on I don’t know whether it’s geopolitics or global demand. What what is your thought on sustainability of that that global export?

Sean Palki, EVP and CFO, CSX: I mean, it it it does seem like it is sustainable from a demand perspective. We have, you know, customers that wanna ship more product out of our export terminals. We’ve actually put some investments into the greatest bay terminal to increase the reliability of that terminal. The less downtime you have, the more you can ship, the more ratable cars can make their way through the facility. So, you know, it’s it’s fascinating what’s happened to the coal markets over the last decade.

If you look back, you know, to where we were in terms of domestic coal a decade ago, we’re moving 60% less than we were. We’re actually moving 10% more export coal. So and it it is very profitable for for us, some of the most profitable business that we move. So we welcome it, and, you know, we’re con gonna continue to serve the demand to the extent that we can.

Ken Hoexter, BofA Analyst, BofA: Yeah. It’s amazing. We’re still talking about coal. Everybody thought it was just secularly dead, and and yet it’s it’s it’s definitely showing some growth. It hit some smaller commodities just for a second just because I noticed some outsized gains.

You mentioned fertilizers up 12% quarter to date. Is there a catch up to start the quarter? I guess same thing as was there something a year ago?

Sean Palki, EVP and CFO, CSX: Yeah. Within fertilizers, we had a we had a fire at one of our customers last year that we cycled earlier in the quarter.

Ken Hoexter, BofA Analyst, BofA: So but demand in terms of fertilizers has been pretty pretty steady this year. And and same thing, metals and comp, it it went from down three and a half percent to up a half a percent is I mean, I know I’m picking on things, but that’s odd to me given autos Right. Are still negative mid single digits. So is there anything there? Was that preshipping to get steel in or anything?

Sean Palki, EVP and CFO, CSX: Yeah. I mean, our our metals business serves not just the auto market, but the construction markets as well. So there is certainly still some demand there. I would say within metals, you’re seeing in our dynamic is a higher order fill percentage. I think we were kinda in the 70% order fill.

Now we’re right around 90. I’ll pick on some

Ken Hoexter, BofA Analyst, BofA: of the smaller commodities. Sorry. Intermodal, let’s go big. 47% of carloads steady at at up up mid single digits. Is that is that still truck gains?

I mean, that it’s surprising given how cheap trucking is at a dollar 49. So Yeah. You’re talking about below cost per mile to operate, and yet you’re still winning services. Is that new lanes that your service bouncing back? What what is driving it?

Yeah. It’s a

Sean Palki, EVP and CFO, CSX: combination of factors. I mean, international clearly has been the the biggest driver of intermodal growth so far this year, up double digits year to date. And to what extent is that pre shipping and and, you know, freight going to inventory, we’ll see here in the coming weeks. But domestic has held up okay. I would say it’s flat to up just a little bit.

And, you know, I think that speaks to the service product even even during the worst and most challenging weeks for CSX, the intermodal service held up. In fact, in the first quarter, ’1 of our premium intermodal customers actually recognized CSX as having the best service amongst all the class one rail carriers. So the priority that we were able to place on that intermodal traffic and continue to place on it is paying dividends in terms of that volume growth.

Ken Hoexter, BofA Analyst, BofA: Alright. So time frames for the Blue Ridge rebuilt and the Howard Street Tunnel, I I think you had mentioned eight eight months from the start of the project at at Howard Street. How are those time frames working, and and what what is the end date for them? Yeah.

Sean Palki, EVP and CFO, CSX: So eight months is still a a good time frame. You know, we are on track with the Howard Street rebuild. It is a massive, massive project. The, you know, the the amount of digging and water that’s under there and drainage issues and all the things, nothing that that, you know, the team that’s on the ground can’t handle, but it’s it’s we’re moving along right on schedule, if not, maybe just a touch ahead of schedule on the Howard Street project, which is which is great. We do still have some clearances that we’ll need to get done once the tunnel is double stacked.

There’s a couple of bridges that need to get done that’ll extend into the first half of next year. We’re working to get those done as quickly as possible. We rely on, you know, the state as well to help with that. But so that that is on track. We should have that route open as we get into q four.

And then the Blue Ridge is a similar timeline. You know, October, November is probably a good good timeline for that one, and we’re we’re making a ton of progress. There’s still a lot of work to do. Massive amounts of rocks that are that are being placed alongside the the right of way to make sure that we don’t have the same kind of issue that we had with the flooding.

Ken Hoexter, BofA Analyst, BofA: Let’s let’s go back to pricing, and I’ll ask you a Kevin question. But the export coal benchmark, right, is actually up to a hundred 87. Yeah. It was a hundred 75 at the start of the quarter, maybe when we were starting to talk about outlooks. Can can that actually be felt already and can that be a tailwind to to to queue?

Or Yeah.

Sean Palki, EVP and CFO, CSX: I think it’s probably just a minor q two impact, really really not that big. Now what I will tell you is that our coal team believes the benchmarks at one seventy five, one 80 are unsustainable. They see that as a floor. So a lot of optimism about where we might see those benchmarks go as we get into 2026. And I I would think I, you know, I I know our our projection into ’26 and ’27 is to be in the 2 hundreds.

Okay.

Ken Hoexter, BofA Analyst, BofA: Thoughts on the pricing environment overall. Can can you talk about how core pricing is ex fuel mix? Are are we still you mentioned kinda easily getting above the the cost of the labor contract still three to 4% better? What what’s your thoughts on the pricing?

Sean Palki, EVP and CFO, CSX: Yeah. You know, we don’t normally give a a number in terms of same store sales pricing. What’s important is that the the pricing dollars we’re getting exceed our inflation dollars. And we talked about that at the Investor Day. That dynamic is continuing to play out this year.

Now inflation has come down. Pricing from the the peak in, you know, 02/2022 has come down across the industry, but that’s reflective of the inflationary environment. So the spread we’re seeing between price and cost is pretty steady over the last couple of years. I’m encouraged overall by the portfolio of renewals that we’re seeing. Chemicals has been an area that, you know, our competitors spent a lot of time talking about.

We’ve renewed about a billion dollars of that business this year and done it on the price plan. So very encouraged by that. Overall, if you look at our merchandise business, which is where a significant amount of the revenue is, we’re actually a little bit ahead of the price plan in total. Alright.

Ken Hoexter, BofA Analyst, BofA: Sticking with short term first quarter, operating ratio deteriorated six ten basis points given the operational impacts you opened up talking about. Thoughts on on second quarter, so a normal sequential change would be about a 260 basis point improvement from first quarter. We started talking about flooding at the start of the fur of the second quarter. It seemed like that got resolved pretty quickly. You’re talking about really good service levels.

So given those larger first quarter impacts and maybe decent volumes kicking off here and certainly better coal volumes, better coal pricing, can we look to see outperformance versus normal trends in 2Q versus 1Q?

Sean Palki, EVP and CFO, CSX: Well, we’re not going to give 2Q guidance, so I can’t give you any specifics on that. What I would say is that, you know, every year pretty much with with very few exceptions, we see an improvement from Q1 to Q2. Volumes are picking up, service levels are getting better, the pricing momentum is there. So all signs are positive there. I think we also said Q1 was going to be a trough and clearly we underperformed relative to our expectations coming into the year.

So it’s a setup for sequential growth. The magnitude of that growth is dependent upon a lot of different variables, many of which we control, but not all. So watch the volumes, watch the service, and I think that will give you a good indication of where we’re headed

Ken Hoexter, BofA Analyst, BofA: in q two. Alright. So let’s jump right into service. Right? So since that’s a a great segue.

Right? So in an environment where velocity was down to to seven and a half million, dwell was up to eleven and a half hours, You mentioned on time originations at in in the 68%. You know, kinda hitting hitting lows, and now you bounce back pretty quickly. So talk about the resiliency that you, the team, Mike Corey, have built into the network, and and how do we fix the on time arrivals originations, and and where do you think it could Yeah.

Sean Palki, EVP and CFO, CSX: It’s a it’s a process. I think, you know, one one of the first things we had to do was clear out the yards. There was a lot of congestion in the in the yards. When you look at the cars online spiking up to about a 40,000, a lot of those cars were sitting at our facilities. And when you’ve got too many cars in a yard, you don’t have as much ability to do the switching that you need to do in order to get the network fluid.

So how do we get the those those cars out of the yards? Well, we added 45 locomotives that we took out of service. We’ve rebuilt 20 locomotives. Those have come back into active service. And then we took a hard look at how do we divert some of our other locomotives to the yards to start to clean those out.

Once you do that, you start to push all of that offline. We reduced the amount of time that we were giving engineering to do curfew work. We moved some of that work onto the weekend. Not a popular move amongst the engineering group, but very thankful that that, you know, they’ve had the flexibility to do that. And that’s freed up some of the line of road capacity that we’ve needed in order to get the network spinning.

And now you’re looking more tactical at where do I have opportunities to combine trains to to save on resources and allocate those locomotives and crews over to the unit train business to pick up more revenue. It is very methodical. One thing I will tell you is that as we’ve gone through this, and we’ve we’ve spent a lot of time talking about technology, advanced analytics, you know, AI, how that can impact the railroads, the railroads have not unlocked that capability yet. I think that has come to the forefront in the midst of service challenges that we experienced in the first quarter. A lot of the decisions that are being made are using visibility tools that allow us to see what’s happening now, but not necessarily run scenarios about what’s gonna happen in the future and flow that through the network and see where we might have capacity constraints that we’ve gotta deal with.

So there’s been an acceleration of focus on investments in that kind of technology. Thankfully, we’ve laid the groundwork for that with a cloud migration that we did over the last couple of years. So we can really leverage that data and build some really powerful tools that will allow us to run scenario analysis, do digital twins the way that many other industries are doing. And we think we can do that this year.

Ken Hoexter, BofA Analyst, BofA: Yeah. I think that’s an exciting part of the railroad to just especially with the FRA now granting some waivers.

Sean Palki, EVP and CFO, CSX: Yes.

Ken Hoexter, BofA Analyst, BofA: And I know you’ve done some testing on on a lot of different things that that can be. And let’s dig into that in a minute. But coming back to kind of the cost side of the equation, I mean, actually, I’m gonna stick on the capacity, which you just talked about. Used to run about seven and a half million carloads a year. I know that was a while ago, more more than almost two decades ago.

Right? And we’re looking at 6,300,000 carloads this year. Given PSR, the elimination of equipment, and I know we’ve got a huge mix shift. Right? You mentioned coal being down 60%.

Is that, you know, are you prepared to be the the double digit growth engine in ’26 now that you’re gonna have the end of the Howard Street tunnel project, the the end of the Blue Ridge subdivision? That should bought you bought you into into kind of a good growth trajectory into ’26. Does that

Sean Palki, EVP and CFO, CSX: I hope you don’t mean double digit volume growth. That would be that’d be a lot of

Ken Hoexter, BofA Analyst, BofA: volume growth. I would

Sean Palki, EVP and CFO, CSX: say. Yeah. We’ll see. It it’d be a good problem to have. But but, no, I think I think there’s capacity.

Right? There’s clearly capacity. Can we do seven and a half million loads with the current assets and crews that we have? Probably not. If we got there, you know, we we we need to address some of those needs.

But we’ve got the ability to grow, you know, easily load to mid single digits over the next several years without having to add assets. There’s infrastructure investment that we’ve done to add sidings along the Southeast Corridor. We’ve done that now for, you know, fifteen years at a pretty steady pace. We don’t talk about it a lot, but that that has functionally improved our capacity along that part of the corridor. We did the Cumberland Yard investment last year.

That was a significant not a significant investment, but a significant impact on our ability to process cars and get them off of the the the heavily trafficked water level route to allow us flexibility going into New England that will serve us very, very well once we get the Howard Street Tunnel open. So there are investments that we’ve made. We’ve made investments in trans flow to to capture more customer demand where there isn’t necessarily rail infrastructure at their facility. So we’ve done a lot in order to capture growth, I think we’ve got an opportunity to absorb that growth over the next couple of years at a fairly steady CapEx level. Let’s talk about the assets for a second.

Ken Hoexter, BofA Analyst, BofA: Where where does your fleet stand today? You talked about locomotives and are you doing remanufacturers? Are you build buying new? What do you need any more? No

Sean Palki, EVP and CFO, CSX: no new purchases at this time, but we’ve been doing rebuilds now for the last, you know, five, six years. I think we’re doing, you know, I think 60 of the AC 44 hundreds this year. We’ve got some SD seventies we’re rebuilding as well. So we’ve got, you know, locomotives that were taken out of service temporarily that’ll be coming back. We talked about the 45 units that were in long term storage that we pulled out.

They needed some work, but we got that done and and they’re back and running. So we do have, you know, more units in storage, not a lot. So I think there will be a day when we do need to to take a look at locomotive purchases, but it’s not in the next couple of years.

Ken Hoexter, BofA Analyst, BofA: Years. Okay. And and thoughts on the employee target? You’ve got 23,000 employees today. What where do you think that are we looking at flat employees in this environment?

Do you still see need to keep building?

Sean Palki, EVP and CFO, CSX: Yeah. I mean, what we’ve said is that flat employees allows us to grow and and, you know, we have the capacity within that headcount level. Now, you know, I will say employee efficiency is a key metric for not just us, but for the industry more broadly. And we do a lot of benchmarking, so it is not lost on us, the trends that the other rails are are seeing in terms of headcount versus volume and and where we are relative to that. So taking a deep look at that and finding out ways where we can continue to drive efficiencies is a key part of the story in the next several years.

Ken Hoexter, BofA Analyst, BofA: So when we get Blue Ridge and Howard Street coming online next year, what how should we think about the operating leverage we should see kick into into ’26? You know, you mentioned so many of the cost impacts, weather impacts $2,025,000,000. You noted that there was the impact of rerouting. Anything as CFO you you kind of wanna re for us?

Sean Palki, EVP and CFO, CSX: Yeah. I mean, remember, you know, we talked about 10,000,000 a month of, you know, overall impact from the rerouting. And, you know, we’re gonna see that for the vast majority of this year. So call it roughly a hundred million dollars of costs that will go away as we get into next year. We saw 20 to $25,000,000 of weather related expenses in the first quarter.

On top of that, you know, we missed demand by a million dollars a day. And don’t forget, you know, when when we are able to meet that demand, we do it at very healthy incremental margins. And it doesn’t matter whether it’s coal or merchandise or intermodal. Those incremental margins are all within the 50 to 70% range. So the ability to drop that through and have that drive not only operating income growth and EPS growth, but also margin expansion, I think provides a very nice setup for 2026.

We’re not gonna give any specific guidance, of course, but we do you know, if you can go back to the Investor Day and look at the guidance we put out there, we still feel good about that. Okay.

Ken Hoexter, BofA Analyst, BofA: The partnership to develop more business in the Southeast, I think with with CPKC. Mhmm. How is that how is that Yeah. Beginning?

Sean Palki, EVP and CFO, CSX: Well, we’re running a train a day right now. It’s mixed freight. You know, Schneider announced new service across the interchange. So we look to build into that. We’re looking for some new partnerships as well with with other players.

Nothing to announce at this time, but it’s steady, and we got a close eye on it. We feel good about what the setup is for that over the next couple of years as well.

Ken Hoexter, BofA Analyst, BofA: Alright. Going to your CFO hat. You bought back $750,000,000 in the first quarter. Yeah. It was well above our $400,000,000 target, so a nice a nice price point.

Opportunistic accelerated buying, how do you think about the buyback? You know, is is a $2,000,000,000 number the right now? Have you put out a number for Yeah. For ’25? And and based on first quarter, could we see that be more aggressive?

So we

Sean Palki, EVP and CFO, CSX: don’t we don’t typically set a number for the year because our approach is opportunistic. So when we’ve got an opportunity to lean in and we see a dislocation between what our perception of of the stock value is versus what it’s trading at, we’re gonna lean into that. You saw that in q one. That’s continued into q two. We’ve now done, you know, about 1,100,000,000.0 of share repurchases year to date.

And, you know, we’ve we’ve done that at very attractive prices. So, you know, when when we’ve got an opportunity like this and we weren’t operating as well and and weren’t running the volume that that was out there to get, It showed up in terms of the stock price. The macro uncertainty added to that, and we saw an opportunity to lean in. Alright.

Ken Hoexter, BofA Analyst, BofA: So then leverage has crept up to 2.9 times. What what’s your target level capital objectives? Do you need to rebuild cash on the and and the balance sheet if if we see this extended downturn?

Sean Palki, EVP and CFO, CSX: We we don’t have a specific leverage target, but we do manage to high investment grade. So we feel good about what our what our ratings are today. We continue to have conversations with the agencies and feel comfortable that we’ll be able to continue with with the same ratings. You know, we’ll we’ll take a look at the balance sheet. Obviously, always take a look at the balance sheet.

We’ve got the Blue Ridge rebuild. We had some tax payments that just went out May 1 from the the hurricane last year that we were able to defer. So, you know, we’re certainly looking at that and more to come. CapEx roughly flat I’m sorry.

Ken Hoexter, BofA Analyst, BofA: Yeah. Roughly flat year over year from $2,500,000,000 last year, plus the $400,000,000 for the rebuild gets us about 2,900,000,000.0. So from 17% of revenues up to 20, do you return back to 2 and a half billion? Is that your target high teens?

Sean Palki, EVP and CFO, CSX: Yeah. So 7 and a half to 8,000,000,000 over the three years from ’25 to ’27 excluding the Blue Ridge. So the base run rate is 2 and a half billion. That’ll be our target. It is our target for this year.

It’ll be our target going into next year, you know, barring any idiosyncratic investment needs for growth opportunities. Alright.

Ken Hoexter, BofA Analyst, BofA: Let me just wrap up with the industrial pipeline. Right? So when you talk about growth, that was something you talked a lot about with with 24 facilities in place, forty, fifty more scheduled start this year. You had some great customers come out and and present, you know, your thoughts on on where does that roll out, you know, given your your ability you know, are customers slowing down in terms of the environment? Are they keeping that pace?

You know, these are long term projects.

Sean Palki, EVP and CFO, CSX: Not slowing down. In fact, we had 24 projects announced through q one. We’re now up to 37 projects. Not not announced. Sorry.

That have come online since the start of the year. So very encouraged by that. We’ve got more in the pipeline. We think this year, the annualized run rate of those projects that’ll come into service will absolutely support that one to 2% overall volume growth that we talked about at the Investor Day. And even with those 37 projects that have come online, we’ve added over 30 new projects to the pipeline.

So we’ve replaced almost one for one. We’re still right around 600 projects in the pipeline. So if you’re looking for a differentiator, I think that’s a key one for CSX. Well, this is a

Ken Hoexter, BofA Analyst, BofA: great run through. So, Sean, if I were just to summarize. Right? So volumes, your your services come back in in a few weeks. Volumes are running, as I mentioned, on 25,000.

So right right back toward toward peak levels. You had mentioned the seasonality that it it usually does, but it’s it’s good that you’re handling that and getting ahead of that pricing above inflation dollars. Operating ratio first quarter, it’s usually a trough. Watch the service levels improvement. You’re not gonna give us a target, but but we can we can watch what’s going on with weather and other impacts and the and the improvements you made.

Locomotives and and employees, there’s there’s room to grow without adding a lot of capacity right now. And obviously, part of that volume, the coal ramp up, the intermodal pace, all all working in in your favor, it sounds like. Anything else I I missed or you wanna add on as we as we wrap up? I you know, the

Sean Palki, EVP and CFO, CSX: team is focused. It’s it’s a great team. Mike’s a great operator. Joe’s a great leader, and Kevin’s a good great marketer. So I think between the four of us, the pieces are in place to execute on the vision that we outlined in November, and we’re excited about it.

Ken Hoexter, BofA Analyst, BofA: Well, Sean, thank you very much. We’re happy to have you back. Hopefully, you enjoy the view while you’re here. And and everybody, thank you very much Thanks. For having.

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