CSX Corporation 2026 Q3 Earnings Call

Thank you, Abby. Good afternoon, everyone. We are very pleased to have you join our third quarter of 2026 earnings call. Joining me from the CSX leadership team are Steve Angel, President and Chief Executive Officer, Kevin Boone, EVP and Chief Financial Officer, and Mary Claire Kenney, Senior Vice President and Chief Commercial Officer. In the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and our non-GAAP disclosures. We encourage you to review them. With that, I am very happy to turn the call over to Mr. Steve Angel.

Thank you, Matthew. Good afternoon. I am pleased to report that CSX has delivered another quarter of strong financial performance. Earnings of $0.57 per share increased 30% compared to last year's adjusted results. Our volume grew 5% as more customers turned to our railroad to safely and reliably move their goods. Our operating margin improved to 39.1%, which was 420 basis points higher than last year's adjusted result. The progress we continue to make on productivity has helped drive substantial growth in profitability, earnings, and free cash flow. Our goal is to be the best-performing railroad in North America, and the entire CSX team is responding to that challenge. We are proud of how far we have come this year and excited about our position as we look ahead to 2027.

Before we turn to the details, I want to recognize Mike Cory, who recently announced his retirement after a 45-year career. Mike is a true railroader who has made significant contributions to CSX, our customers, and our employees. He also developed a deep bench of operations leaders, and I am confident in Doug Ryhorchuk, Casey Albright, and the entire operations team as we continue executing on our priorities of safety, reliable service, and long-term value. We thank Mike for his leadership and wish him all the best. Turning to slide 4, the work underway to strengthen our safety culture contributed to another quarter of year-over-year improvement. Our FRA injury rate decreased by 17%, and our accident rate fell by 4%. While we are encouraged by that progress, our work is never finished.

We will continue our efforts to reduce risk, increase awareness, and improve communication to support our employees as they do their jobs. We do not and will not compromise on safety. We also continued improving productivity. Third quarter fuel efficiency was not only the best ever achieved by CSX, but also the best ever reported by any U.S. railroad. Workforce efficiency, as measured by gross ton miles per employee, improved substantially year-over-year. This next slide shows our key service metrics. We are encouraged by the sequential improvement in velocity, dwell, and customer switch data, which measure first-mile and last-mile performance. Trip plan compliance for our carload business also improved modestly quarter-over-quarter, though intermodal trip plan compliance declined. We are handling more volume safely and efficiently, but we know our network can perform better.

Operations is connecting more closely with our commercial team, giving us better visibility into demand, and helping us get the right number of crews and locomotives to the right locations. Active crew management is improving engineer and conductor availability. Better planning and coordination between engineering and transportation is leading to less network disruption as we execute our capital projects. Technology such as autonomous track inspection cars is helping us plan better and respond effectively to day-to-day events on the railroad, supporting faster trains and fewer delays. Service has started strong in October, with velocity averaging more than 19 miles per hour this month and dwell approaching 10 hours. Our team also did an excellent job preparing for Hurricane Isaias, which we managed through with minimal impact. We intend to build on this momentum, ensure that our service supports our growing business.

Kevin, please review our financial performance for the quarter.

All right. Thank you, Steve, and good afternoon, everyone. In the third quarter, the CSX team improved safety, met increased demand for our customers, delivered substantial cost efficiency, and made sequential progress in our service metrics. Revenue increased 12%, driven by higher fuel surcharge, 5% volume growth, and pricing gains across the merchandise, intermodal, and coal markets. As a reminder, our prior year results included a $164 million goodwill impairment. Adjusting for that charge, higher revenue and lower non-fuel costs drove a 25% increase in operating income and 420 basis points of margin expansion, despite 70 basis points of fuel price headwinds. This translates to a 30% increase in earnings per share. Let us now turn to the next slide for a closer look at expenses. The team handled 5% more volume in the third quarter while reducing non-fuel costs by 3%.

Labor expense increased by $19 million as improved workforce productivity and lapping of severance costs mostly offset over $90 million of higher costs from incentive compensation and inflation. Labor expense will have the typical sequential increase in the fourth quarter, but reported headcount will be lower due to temporary seasonal reductions. First quarter 2027 headcount will be similar to current levels as these employees return to work and we build our conductor trainee pipeline to start the year. PS&O expenses were 10% lower, reflecting our continued focus to drive efficiencies across this diverse pool of a cost. Savings were driven by improved utilization of both locomotives and vehicles, reduced reliance on external labor and multiple G&A functions, absorption of intermodal volume growth, and maintenance efficiencies across rolling stock and fixed assets. Steve highlighted our record fuel efficiency this quarter.

I will reiterate the team's great work to reduce engine idling and utilize fuel savings technology, both of which deliver greater value in the higher current price environment. Looking to the fourth quarter on a sequential basis, we expect a normal seasonal increase in PS&O combined with typical weather-related reduction in fuel efficiency. Overall, and consistent with past years, we would expect some step-up sequentially in the fourth quarter expense line as we enter the winter months. While fuel volatility can create some near-term noise, we expect to deliver year-over-year margin improvement above 350 basis points in the fourth quarter. We are building a culture of continuous improvement that positions us to deliver further safety, service, and efficiency gains in 2027 and beyond. This includes a robust pipeline of sustainable efficiency initiatives that we are now incorporating into our 2027 budgets with clear accountability for results.

With that, let me turn it over to Mary Clare to review our revenue performance.

Thank you, Kevin, and good afternoon, everyone. Our commercial group continues to deliver in a favorable environment of solid customer demand and tight trucking capacity. The consistent network performance delivered by our operations team, together with the new services, added capacity, and growth initiatives we've brought online, have positioned us well to take advantage of the opportunities in this market. Our performance this quarter was strong, and I want to thank everyone at CSX for helping us maintain the momentum. Turning to slide 10, let's go through the highlights of our third quarter volume and revenue results. Total CSX volume was up 5% in the third quarter, total revenue was up 12%, and our revenue per unit was up 7%. Fuel contributed about half of our revenue growth as average diesel prices increased nearly 50% year over year.

Our intermodal business continues to contribute the largest share of our volume growth, so mix remains a headwind to overall RPU. Even with that mix impact, revenue per unit excluding fuel increased 1% this quarter. We remain encouraged by the results of contract renewals as we progress throughout the year. In merchandise, revenue increased by 11% with a 3% increase in volume. Merchandise RPU excluding fuel was up over 2%, despite unfavorable mix in markets, with the largest impacts within chemicals and fertilizers. Including fuel, RPU was up 8% year-over-year. Volume performance was more varied across our merchandise markets compared to the second quarter. Metals was the top performer, gaining 12% as steel demand, particularly plate, has been very good across infrastructure and energy markets. We are also benefiting from increasing output from the new steel mills located on our network that are ramping up at a favorable time.

Chemicals was also a highlight, with volume up 7%, driven by conversions and good opportunities in waste and petroleum products. In contrast, fertilizers has been the softest merchandise area for us, with volume down 13% for the quarter. The headwinds in this market have persisted for some time, with supply issues limiting phosphate shipments and low crop prices weighing on fertilizer affordability and demand. Reduced trucking availability, high truck rates, and elevated diesel costs continue to benefit our intermodal segment. Conversions from the highway remain strong, and the new service offerings through Birmingham, Myrtlewood, Baltimore, and other areas are performing well and attracting new business. In areas such as Atlanta, where substantial profitable volume growth has led to temporary service tightness, we are working closely with our operations team as CSX invests in additional capacity.