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DATE
Wednesday, July 23, 2025 at 4:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Joseph R. Hinrichs
Executive Vice President of Operations — Michael A. Cory
Executive Vice President and Chief Commercial Officer — Kevin S. Boone
Executive Vice President and Chief Financial Officer — Sean R. Pelkey
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RISKS
Sean R. Pelkey stated, "cost per employee will step higher in Q3, as the majority of our union employees now covered by new labor agreements received a 4% wage increase effective on July 1st," and Labor expense in Q3 2025 will also include a $15–$20 million restructuring charge.
Coal revenue declined 15% year over year, with Kevin S. Boone noting this was driven by falling global benchmark pricing and "production constraints" impacting the export segment.
The Quality Carriers trucking subsidiary remains "a continued margin drag on our results and has been impacted by a challenged trucking market" according to Sean R. Pelkey.
Domestic and export coal remain exposed to ongoing pricing and outage headwinds, with ongoing uncertainty highlighted by management regarding recovery timing in related segments.
TAKEAWAYS
Total Revenue: Total revenue was $3.6 billion, declining 3% year over year but rising 4% sequentially, primarily due to lower coal and fuel prices and a volume rebound from Q1.
Operating Margin: Operating margin decreased by 320 basis points year over year but increased 550 basis points sequentially, supported by efficiency gains and improved network performance.
EPS: Earnings per share decreased by 10% year over year but grew by 29% quarter over quarter.
Volume: Total volume was flat year over year. Volume grew 4% quarter over quarter, led by gains in merchandise and improved total coal shipments.
Coal Segment: Coal segment revenue was down 15% despite 1% higher volumes, with all-in coal revenue per unit declining 16% year over year and 2% sequentially.
Merchandise Segment: Merchandise segment revenue and volume each declined 2%; Revenue per unit was flat despite lower fuel surcharges and negative mix, offset by pricing gains.
Intermodal Segment: Intermodal segment revenue decreased 3% on 2% volume growth, as lower diesel prices and mix pressured revenue per unit.
Capital Expenditures: Property additions are higher year-to-date, including approximately $295 million of spending toward the Blue Ridge rebuild project; Base capital expenditures excluding Blue Ridge are expected to remain flat at $2.5 billion, in line with the prior year.
Free Cash Flow: Free cash flow is lower year-to-date due to elevated capital investment and weaker net earnings, with second-half 2025 cash flow projected to improve by $250 million from bonus depreciation.
Industrial Development Pipeline: Twenty-five new projects entered service, totaling 49 year-to-date, with another 30 projects nearing completion by year-end.
Major Projects: Howard Street Tunnel and Blue Ridge subdivision reconstructions are on track for completion in Q4, with double-stack clearance on the I-95 corridor expected in Q2 2026.
Management Reorganization: A $15–$20 million charge will be recognized in Q3 2025, with $30 million in annualized expense savings targeted.
SUMMARY
Management confirmed guidance for full-year volume growth in 2025, noting a recovery trajectory driven by improved operational efficiency following early-year network challenges. Executives highlighted that persistent cost discipline, a large capital expenditure program, and the completion of key infrastructure projects position the company for incremental margin opportunities into 2026. Export coal remains pressured by a 24.0% drop in the Australian benchmark price compared to the same period last year, as well as by production outages, while positive core pricing and segment diversity helped offset some of these headwinds. The industrial development pipeline continues to expand, with management citing active conversions and progress on the Myrtlewood interchange partnership. Second-half 2025 free cash flow expectations have improved with the confirmation of permanent bonus depreciation, and management reiterated its ongoing commitment to returning capital to shareholders after investment needs are met, as stated during the Q2 2025 earnings call.
Sean R. Pelkey quantified, "Between commodity prices, you are looking at $200 million in the first half. That is going to be more like $100 million in the second half, with about two-thirds of that concentrated in Q3." directly framing the pace of price-driven headwinds.
Kevin S. Boone specified that the Howard Street Tunnel project will remove the final barrier to I-95 double-stack intermodal service, with full clearance targeted for the second quarter of 2026.
Monthly overtime expense for rail operations declined by over 15% in May and June 2025 compared to the first four months of the year, indicating labor cost management amid a higher workload per employee.
CSX achieved its highest-ever customer net promoter score in the second quarter of 2025, as stated by Kevin S. Boone, signaling record customer satisfaction and improved service delivery.
Railhead (core railroad) employment trended lower both year over year and sequentially in the second quarter of 2025, yielding improved rolling stock utilization and cost leverage against flat overall volumes.
The company expects incremental industrial development and mine restarts to support volume growth and margin expansion as 2026 approaches.
INDUSTRY GLOSSARY
RPU (Revenue Per Unit): Average revenue received for each railcar or container shipped, used to measure yield in rail transportation.
Double-stack Intermodal: The practice of stacking two containers vertically on railcars, improving efficiency and network capacity for intermodal transport.
Net Promoter Score (NPS): A standardized metric for assessing customer satisfaction and propensity to recommend a company, widely used in the logistics industry to benchmark service quality.
Gross Ton Miles: A volume metric representing the total freight weight multiplied by the distance hauled, tracked for rail productivity and efficiency.
Trip Plan Compliance (TPC): A railroad operational metric measuring the percentage of shipments delivered on time according to customer-specified schedules.
STB (Surface Transportation Board): The U.S. government agency regulating railroads, with authority over rate and service disputes, rail line sales, mergers, and excavations.
Full Conference Call Transcript
Joseph R. Hinrichs: Alright. Thank you, Matthew, and hello, everyone. And thank you for joining us for our second quarter call. When we last spoke, we acknowledged the challenges we are facing on our network and we had a commitment to act decisively to turn it around. You will see in the numbers and the momentum behind them is a result of deliberate and effective actions taken to return our network back to the efficient, well-run operation needed to provide superior service for our customers. This quarter shows what is possible when you put clear priorities with decisive action. Results are a testament to the One CSX culture we have been instilling across the business.
Now turning to slide one, as we think about what we accomplished in the quarter and what we see out in front, four things come to mind. First, as I have already highlighted, we are proud of how our network performance has bounced back from the challenges of the first quarter. As Michael A. Cory will cover later on, our velocity, dwell, trip plan compliance, and other metrics have steadily trended upward. In some areas, we are approaching or surpassing some of the best levels we have seen in recent history. Recovery reflects the strength of our operations and the team's ability to overcome challenges. We have to keep pushing, but this has been a great result.
Second, the entire CSX team's commitment to working efficiently helped us deliver improved cost performance that supported meaningful sequential margin expansion. We will continue this focus throughout the year. Third, we are very pleased with the progress being made at our Howard Street Tunnel and Blue Ridge rebuild projects. We expect completion in the fourth quarter, which will remove two key constraints from our network. Finishing these two projects will open back up two of our four north-south routes, and as you know, we are excited about removing the last impediment to double-stack intermodal on the I-95 corridor. Finally, as Kevin S.
Boone will discuss, we know that our customers are facing mixed markets, with activity holding strong in certain areas and slowing in others. That said, at CSX, we will continue to drive forward across all of our initiatives. We will not sit back and wait for the markets to turn. Now let's turn to slide two. We feature some of the most important results from our second quarter. Total volume was flat compared to last year, and we saw a 4% sequential increase in the quarter, driven by merchandise and improvement in total coal shipments. Total revenue was $3.6 billion for the quarter, down 3% from the same period last year, largely due to lower coal and fuel prices.
Quarter over quarter, total revenue improved 4% in line with the increase in volume. Our reported operating margin, which includes our trucking business, declined by 320 basis points compared to the second quarter of 2024, but increased by 550 basis points sequentially, supported by the solid cost performance that accompanied our operational improvement. Earnings per share decreased by 10% year over year, but grew by 29% quarter over quarter. And after a difficult start to the year, I am proud of all that we have accomplished. We also cannot let up or put off the gas. We are committed to maintaining this momentum. Now that our network has stabilized, we are positioned to pursue more opportunities to grow the business.
To do that, we will run safer, faster, and more consistently. We will provide attractive, profitable solutions for our customers even when economic conditions are uncertain. As we move forward, we will make sure that our execution remains effective and efficient. As an example, as part of our normal business review process, we recently reorganized management resources across several areas to improve alignment with the businesses and accelerate decision-making. These are positive steps toward our goal of sustainable profitable growth. With that, let me turn the call over to Michael A. Cory to discuss our operational performance.
Michael A. Cory: Thank you, Joe, and thanks to all of you for participating today. So after a difficult first quarter, the team has effectively responded to a recovery plan that we presented on our last call. While we still have many opportunities for improvement, I am really proud of the work the team has accomplished so far and truly appreciate their efforts. So let's go over to the next slide. Throughout challenges of late winter and into the spring, we remained committed to safely running our operations. Leading with our safe CSX values, our focus on eliminating significant injuries has resulted in a reduction of both life-changing injuries and missed workdays.
Also, improved alignment and engagement in safety leadership is occurring throughout the operations organization. Our managers and craft employees are learning how to have meaningful conversations about exposure reduction, leading to a culture that is eager to identify and mitigate hazards before they become exposures. However, improvement in our train accidents has not followed suit. Most of our incidents occur in the slow-speed environment of our yards and result in little damage to infrastructure or equipment. However, they still are disruptive to the operations of our network.
We continue to further implement yard inspection drones that will assist in identifying conditions that lead to track-caused derailments in our yards, and we continue to work on improvements to our wayside car health monitoring systems to prevent impact from equipment failures. An important area we have seen great improvement on is our human factor derailments, which continue to decrease. Over the next slide, train velocity continues to improve while being affected by the rerouting of traffic off our two corridors. Our cars online and dwell continued to improve and our back-end levels experienced prior to our disruptions.
Reducing cars online was a key focus during our recovery period, but we did so in a way that minimized customer supply chain impacts by avoiding the use of disruptive embargoes. We accomplished all of this while experiencing weekly volumes in line with our prior years. Our recovery is a real true testament to the hard work and dedication of every railroader at CSX. As we move into the third quarter, our efforts are concentrated on operating efficiently across our network. Over the next slide, our efforts over the last quarter have improved our service measures.
But while we are not yet at the TPC performance we strive for, our view is these measures will continue to improve as we improve our dwell and train velocity. With the completion of our network projects, we expect these numbers to improve. With respect to our local service delivery, we continue to work very closely with our customers to make sure our service to them is everything they need for success. And on to the last slide, at this time, both our major projects are tracking on schedule.
The Howard Street Tunnel portion of our I-95 project will be done in time for the fourth quarter, and the Blue Ridge subdivision used primarily for to and from the Carolinas will also be ready for the fourth quarter. While these projects unlock significant capacity for the entire network, we are also upgrading our capacity and throughput at our yard in Indianapolis with the extension of the hump pullback. While this project is small in nature relative to the other two, it will give us the ability to hump more cars with less handling at a very critical yard in our network.
The entire team has accomplished much over the last three months, but we are not done with converting opportunities that we have to make this railroad run better. And with that, I will turn it over to Kevin S. Boone.
Kevin S. Boone: Alright. Thank you, Mike. First, I want to thank the entire operations team for their hard work. Our service levels are approaching record levels, and our ability to communicate across our teams and react to any disruptions has never been better. Many of the industrial markets we serve continue to face challenges with uncertainty around tariffs, trade, interest rates, and the overall direction of the economy. Our focus remains on the customer and driving strategic discussions that deliver value to our customers and new growth opportunities to the CSX network. Now let's review our end markets. Turning to slide nine, merchandise in the second quarter saw both revenue and volume decline by 2%.
RPU was flat as lower fuel surcharge and negative mix were offset by core pricing gains. Our metals market and equipment volume was up 3% while revenue was down 3%. We captured volume from positive trends in the steel market, while lower equipment and higher scrap volumes did impact RPU. Continued infrastructure demand in the Southeast and strengthened new cement production led to 5% revenue growth for the minerals segment. Ag and food volume was up 2% compared to last year. As operational execution enabled us to fully capitalize on strong grain demand in the southeast region of our network. This was partially offset by weaker consumer demand, including alcoholic beverages. Automotive volumes were down 2% for the quarter.
Volume gains from a contract win with a new North American auto plant were more than offset by lower overall industry demand and production challenges at some CSX-served plants. Forest products have been impacted by challenges in the housing market in an overall sluggish demand environment. We continue to see industry plant consolidation along with several extended plant outages concentrated in the second quarter. Looking at the second half, we anticipate less downtime and expect to continue to drive incremental opportunities through our strategic partnerships with industry leaders. Chemical volumes decreased due to lower shipments of export plastics impacted by an extended unplanned outage at a customer location, as well as a decline in chlor-alkali shipments.
Fertilizer shipments declined 6% as we experienced softer phosphate volumes due to customer production issues, though revenues remained flat due to positive core pricing and mix. As we move into the third quarter, we will continue to monitor tariff policy and expect to see mixed demand within end markets, including auto and housing, which remain well below long-term demand levels. One area of the business that we continue to see reasons for optimism despite the uncertainty in the economy is our industrial development pipeline. We are still seeing great progress in that area, with another 25 projects that went into service in the second quarter, bringing the total for the year to 49.
As we look to the back half of the year, we have another 30 that are nearing completion and additional projects on top of that, which may go in service depending on permitting and construction timelines. These facilities consume raw materials or produce finished products for a wide range of markets, including natural gypsum, aggregates, rolled aluminum, steel, and food and beverage. And with support from recently passed tax legislation, we expect to continue to see more projects added to the roster for years to come. Now let's turn to slide ten to review the coal business. Coal revenue declined 15% for the quarter on 1% higher volume, as we continue to face headwinds from lower global benchmark pricing.
All-in coal RPU declined 16% year over year and fell 2% sequentially, slightly below previous expectations. The Australian benchmark averaged $184 per tonne in the quarter, versus $242 in the same period last year. Our export business was also impacted by production constraints. We knew 2025 would be challenging for this market, but we remain hopeful we will benefit from mine restarts towards the end of the year. Our domestic markets were mixed, as the utility coal segment was well supported by high burn rates, higher natural gas prices, and faster cycle times. At the same time, our steel and industrial markets were impacted by unfavorable source shifts and softer steel market fundamentals.
Moving forward, we expect the domestic segment to be supported by growing power demand and the deferral of coal plant closures. Turning to slide eleven to review the intermodal business. Second quarter revenue declined 3% on a 2% increase in volume as lower diesel prices and unfavorable mix dragged on RPU. Our international business performed well, with solid year-over-year unit growth supported by increased activity ahead of tariffs, especially early in the quarter. In recent weeks, we have seen a pickup in container arrivals as we expected, but the exporters are reacting to changes in tariff policy.
Domestic volumes were effectively flat year over year, as the ongoing soft trucking market remains a drag and interchange business from West Coast arrivals softened. Looking ahead, we are excited with the momentum we are building and expect to drive several new opportunities, including truck conversions through the new Myrtlewood interchange. Overall, just as Joe described, we are facing mixed markets into the second half of the year but are taking a proactive approach with our CSX-specific initiatives. Our service levels are allowing the team to drive positive engagement with our customers as we continue to convert wallet share opportunities.
It's important to highlight that our total net promoter score with customers over this last quarter was the highest it's ever been. It is clear that they see and appreciate our return to industry-leading service and that we accomplish this through teamwork and great communication across the One CSX team. We are also excited about the reopening of the Howard Street Tunnel and Blue Ridge subdivision later this year. That will improve on the positive service levels customers are experiencing today. We expect to achieve double-stack clearance through the Howard Street Tunnel in the second quarter of 2026 following the completion of bridge clearance work. This will open the CSX network to new markets and drive incremental growth opportunities.
Now with that, let me turn it over to Sean R. Pelkey to discuss financials.
Sean R. Pelkey: Thank you, Kevin, and good afternoon. Looking at second quarter results, revenue fell by 3% on flat volume as weaker export coal benchmark pricing, lower fuel recovery, and unfavorable mix all contributed to lower yields. Expenses increased by 2%. I will discuss the details on the next slide. Interest and other expense was $9 million higher compared to the prior year, while income tax expense fell by $40 million on lower pretax earnings. As a result, earnings per share fell by $0.05. Included in these numbers is Quality Carriers, which, as you know, has a continued margin drag on our results and has been impacted by a challenged trucking market.
We are working closely with the team to drive improved results. I also want to touch on sequential performance against the first quarter. As Joe mentioned, our railroaders worked tirelessly to help our network recover from an extremely challenging start to the year, and these efforts carried through to our financial performance. Operating income increased $242 million from Q1, and op margins improved by 550 basis points, well ahead of normal sequential seasonality. This reflects strong momentum, particularly when you consider that April was challenged by flooding across the Midwest, but the gradual recovery and operating performance through the month resulted in a strong May and June.
Let's now turn to the next slide and take a closer look at expenses. Total second quarter expense increased by 2% or $38 million against the prior year. This variance includes around $10 million per month of network disruption costs, plus the impacts of inflation and higher depreciation, partly offset by savings from lower fuel prices. Looking on a sequential basis, our service recovery during the quarter was complemented by improved efficiency, as expenses fell 4% or over $90 million from the first quarter despite a 6% increase in gross ton miles. Mike and the team delivered for our customers while also driving improved rolling stock utilization and operating with a rail headcount that was lower versus the first quarter.
Turning to the individual expense line items, labor and fringe was up $25 million year over year, mostly driven by inflation. An additional increase is attributed to our trucking business, where headcount was higher primarily due to the conversion of previously independent affiliates, with offsetting savings in the PS and O line. Railhead count was lower on both a year-over-year and sequential basis. Despite a higher workload with fewer employees, monthly overtime expense fell by over 15% in May and June relative to the first four months of the year.
Also, as a reminder, cost per employee will step higher in Q3, as the majority of our union employees now covered by new labor agreements received a 4% wage increase effective on July 1st, and labor expense will include accrued wage increases for the remaining employees. This will result in roughly a $20 million sequential increase to labor and fringe expense in Q3. Third quarter labor and fringe will also include a charge of $15 to $20 million related to the management restructuring Joe mentioned earlier, which will help position our workforce for 2026 and beyond. Annualized expense savings should be approximately $30 million, resulting in minimal net impact this year when you account for the Q3 charge.
Purchase services and other expense increased $19 million year over year, which includes about half the total network disruption costs as well as inflation and volume-related expenses, partly offset by multiple net favorable variances. The line also saw a significant improvement from the first quarter, benefiting from lower locomotive costs and other items on top of normal seasonal trends. Depreciation was up $17 million due to a larger asset base. Fuel cost was down $32 million driven by a lower gallon price, partly offset by additional gallons consumed due to network reroutes.
Finally, equipment and rents increased by $9 million year over year, reflecting costs from seasonally higher volume and other items that were partially offset from the benefit of sequential improvements in payable car cycle times of 5% and 12% in our merchandise and automotive fleets. We are encouraged that both operational improvement from Q1 as well as structural efficiency opportunities are resulting in cost momentum. As we continue to invest in emerging technologies, we expect to deliver further savings that will support strong incremental margins in 2026 and beyond. Now turning to cash flow and distributions on slide fifteen. Investing in the safety, reliability, and long-term growth of our railroad continues to be our highest priority use of capital.
Year to date, property additions are higher, including around $295 million of spending towards the rebuild project on our Blue Ridge subdivision. Excluding Blue Ridge, capital spending is still expected to be roughly flat to the prior year at $2.5 billion. Free cash flow is lower year to date as a result of the increased total CapEx and a decline in net earnings, as well as a smaller impact from the relative size of previously postponed tax payments in each year. As we look forward, second-half cash flow will be meaningfully stronger than the first half and is partially supported by now permanent bonus depreciation. This should positively impact our cash flow by approximately $250 million in the second half.
We expect continued benefits in future years. After fully funding our capital investments, we are committed to returning cash to shareholders, including close to $1.7 billion year to date. This reinforces our ongoing balanced and opportunistic approach to shareholder returns. With that, let me turn it back to Joe for his closing remarks.
Joseph R. Hinrichs: Alright. Thank you, Sean. We will conclude our remarks with a review of our guidance, which is effectively unchanged from the previous quarter. We continue to expect overall volume growth for the full year. As we have discussed, markets are mixed overall, with some very stable while others are showing some signs of softening. With our fluidity improved and incremental contributions expected from new projects and new service offerings, we feel very good about momentum. Consistent with our past statements, there will be a smaller year-over-year impact from lower coal and fuel prices over the second half of the year, as export coal benchmarks and diesel moderate over the back half of 2024.
Our intense focus on efficiency, including labor productivity, will continue through the rest of the year. Summing up, we are encouraged by the progress made this quarter. The team did a great job at working together and responding effectively to the tests we faced earlier in the year. It delivered a strong operational recovery and truly demonstrated the benefits of the One CSX culture that we have been building. And finally, we know there has been a lot of rumor and speculation about consolidation in the railroad industry in recent weeks.
While we cannot comment, we want to be clear that at CSX, we are absolutely focused on delivering shareholder value and are always open to anything that can help us achieve this objective. We have a strong franchise that we believe is the best in the east, and we are making it stronger every day. Our customer service is industry-leading, we have exceptionally strong relationships with those customers. We are working closely with numerous partners to help accelerate the build-out of industrial capacity on our network. And our commercial team is actively developing new solutions that will help us expand our reach and gain share. We are driving forward with major network projects that will prove to be valuable investments.
The Howard Street Tunnel project will allow us to compete in key intermodal markets. The Blue Ridge rebuild will ensure network balance, and our operations team continues to unlock added efficiency yard by yard and region by region. While we are confident in CSX's path forward, we welcome all opportunities that would allow us to deliver value for our shareholders, drive profitable growth, and serve our customers better. We actively evaluate these opportunities for their upside potential. This has been and remains the focus of our management and our board. With that, Matthew, ready to take questions.
Operator: Thank you, Jordan. We have not announced any of these opportunities to participate in the timely. We offer to please interest us to run care. Checking. Simply press star one again. We kindly ask that you limit yourselves to one question for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Patrick Ossenbeck with JPMorgan. Please go ahead.
Brian Patrick Ossenbeck: Good evening. Thanks for taking the question. And congratulations on the significant service recovery here over the last couple of months. Joe, I think you have a unique perspective as a former shipper, current railroad to offer some additional thoughts on potential rail consolidation. So, you know, as a former shipper, what are some of the benefits you think that potential consolidation, Transcontinental, as we have all seen, could bring the shipper community and then, in your current seat, at CSX, obviously, as well as momentum currently, and you have got some initiatives across the network. But where do you think there is some opportunity to add more value that shippers do not really have right now?
You might be able to do through something more strategic. Thank you.
Joseph R. Hinrichs: There is a lot there, Brian. Thanks for the questions. I mean, first off, you are right. I spent over thirty years in the automotive industry and was a long-time customer of the rails. And I will go back to where I started when I came here, which is that our thesis all along has been that improved customer service and making it easier to do business with railroads are paramount and important to support profitable growth for our industry. And we are not going to speculate or talk about any kind of merger or anything of that kind.
But clearly, customers are looking for railroads to provide better service, more reliable, dependable, repeatable, and also looking for us to be easier to do business with. As far as getting rates and not to do business with all of us. Opportunities are throughout to work together with all the real ecosystem to improve that. So from this seat here today and almost three years on the job, I continue to have that same feeling that there is an opportunity for us to continue to work together to serve customers better. To properly grow the business and to compete with trucks on a broader scale.
Again, I am not going to talk about how we do that or how are those and then as we said in our remarks, we are open to all those possibilities and all those conversations of how we could do that, how we could best create value for our shareholders. Properly grow the business, and serve those customers better and look forward to those opportunities. Thanks.
Operator: Your next question comes from the line of Ariel Luis Rosa with Citigroup. Please go ahead.
Ariel Luis Rosa: Hi. Good afternoon. Congrats on the strong quarter here. Folks, maybe for Mike or Joe, would be helpful, I think, if you could just talk about what you are doing differently that drove the improvement in service. To what extent was that kind of a function of better weather versus proactive steps that you took how do you think about the sustainability of that service performance And how much can we see kind of a further step up when the construction projects are finished? Thanks.
Michael A. Cory: Hi, Ari. It is Mike. Thanks for the question. Look. It started with weather improving, but we were at it far before that took place, and that was, you know, mid-April. By the time the weather came around, But, really, we did four things. First thing we focused on was the cars that we had online. And so whether they were at involved with the customers or their plants, their serving yard, our pipelines, or whether they were actually in our yards. We took action.
We worked with our customers to make sure that we were providing extra service where possible to work off the loads, the pipeline, work with them to reduce their pipeline, moderate for us, but help us get fluidity on our mainline. And then in our yards, we did everything from senior coverage around the clock to senior coverage in our war room, making sure we are going through every standard. We are following up on every area of opportunity to minimize the misses because we knew we were overcapacity. Along with that, we added some locomotives selectively.
We made sure our bulk network was looked after so the coal and the grain without going into our merchandise network that allowed our yards to stay fluid because of power flow. And then we did other things like create capacity online and road shifting our engineering work gangs out. So, again, we had that ability to run. You remember, we are compressing anywhere from seventeen to twenty-two trains that were traveling on other tracks onto other tracks that we lost that capacity. So really, that is what we did. But, you know, Ari, that is kind of what we do. We got setback pretty bad from the weather, and then compounded with the shutdowns. Especially the Howard Street.
But this remains the way we operate today. It is how we maybe, you know, we operated before, but really with more focus on the connectivity between the field the network, the seniors, the people in the field, giving them information, that we have that war room set up still. So I see from going forward with the two outages coming back to us, just improved metrics all around. The ability not only to grow, but to make sure that our customers benefit from the service we are providing and Kevin and the team can get out there and get more business. We are creating capacity, and I see more of that coming. Once we get the closures over with.
Operator: Your next question comes from Brandon Oglenski with Barclays. Please go ahead.
Eric Thomas Morgan: Good afternoon. This is Eric Morgan on for Brandon. Thanks for taking my question. I wanted to ask on the guidance. You know, you are still calling for volume improvement for the year. I think that maybe implies a little bit of acceleration in the business from Q2 levels. That you know, I think you called out some outage unexpected outages in Q2. So is this kind of some of those items coming back online or are you starting to see any momentum kind of across the business lines? Just relatedly, if you do see volumes improve sequentially, as I believe the guidance implies for Q3, do you think you will be able to improve operating margin as well?
Thank you.
Kevin S. Boone: Well, let me handle that first part of that, and I will hand it over to Sean on the on the Look, I think, you know, it was an unusual quarter for us broadly across the second quarter. We had a number of outages you know, quite frankly across several different, business units. You know, I can think of you know, on the metal side, we experienced some of that impact. On the fertilizer side.
You know, we are looking at a market today that has pretty good fundamentals from a demand perspective, and we are really hopeful that we will see improvement for some of our core customers there that have not experienced some production issues in those areas, and we expect that to kind of start to impact us in the third quarter, end of the four. Forest products that is another example where we saw an unusually high amount of just unplanned outages. That we see improving as we move into the third and fourth quarter. Particularly on the paper side, paper mill side, in that area.
And then on the chemical side, similarly, seems like a lot of these instances, we saw a large customer on that end that had some production issues that we see hopefully improving as we get in the third and fourth quarter and we already see the start of that happening. So yes, I think the short answer is yes. Some of it is driven by some of those factors I just mentioned. And then the other factor is we did see some of these markets start to experience some demand headwinds in the back half of last year, and so we will start to lap those.
So maybe a little bit easier comparisons for some of these markets there, and then expectation along with some of the things that the team is doing to drive some conversions. And we have, you know, despite a very, very weak truck market, we are still seeing conversions. And I credit to the team to really go out there and find those. And so those will impact us as well.
Sean R. Pelkey: Yeah. And just to add on in terms of the margins, this is Sean. You know, obviously, the volume helps. Anytime we are able to grow volumes and, you know, keep cost discipline, keep the resources the same or lower, that is going to help from an incremental margin perspective. That said, you know, normal seasonality, Q2 to Q3, Q2 is typically kind of the peak for both operating income and operating margin. You know, part of the reason for that is you have got the wage increases that go into effect in Q3 that will happen again this year. I quantified that at about $20 million.
We have also got that restructuring charge that will hit in Q3, $15 to $20 million in labor. And then, you know, on the cost side, one other thing I would point to is, you know, we talked about net favorable items in purchase services and other in the quarter. That is probably going to be about a $20 million headwind going into Q3 versus Q2 as well. So those would be a couple of things that work against us. And then, you know, export coal pricing will be a factor as well. See where that goes from here.
Operator: Your next question comes from the line of Stephanie Moore with Jefferies LLC. Please go ahead.
Stephanie Moore: Absolutely. Thank you. I wanted to circle on your commentary about reorganizing management resources. If you could just talk a little bit about, you know, what drove maybe those decisions? Is this an effort to go after maybe some incremental business? You know, being able to respond to customers more quickly. Any additional color there would be helpful. Thank you.
Joseph R. Hinrichs: Sure, Stephanie. Thanks. This is Joe. You know, we recognized in the first quarter that, you know, whether due to the fuel prices or export coal prices or even some of our operational issues, that our revenue was not coming in at the level that we were expecting. So months ago, we embarked on a process that we have been working on for a while, which is around how should we be structured to efficiently operate the business. And so we challenged each of the different business segments within CSX to define about 5% of efficiency by reorganizing. And prioritizing where we were going, but also then having to stop doing some things and reorganizing.
So for the know, took us a few months to get all that work accomplished, but I am really proud of how the work was done and, you know, in there are more significant changes since, like, for example, engineering inside operations or in technology. Some of those areas where we really had to prioritize some of our resources and really give what is going on. But I feel really good about how it was done and, you know, it just happened to be timed where we did it in early July. Again, it is all part of the discipline of the cost structure of our business, and you saw that in the operations in the quarter.
You saw that in the decisions we made on management structure. You will continue to see us be disciplined in cost. Why our revenue versus our costs very carefully, and we will take actions as appropriate. Thanks.
Operator: Your next question comes from Scott H. Group with Wolfe Research. Please go ahead.
Scott H. Group: Hey. Thanks. Afternoon. So Sean, just want to thought that the sequential cost comments were helpful. But maybe I would just like, April was certainly look like a challenging month, maybe even made it to some extent. Meaning, like, the operating metrics seem to get so much better throughout the quarter. I presume that means that cost got better throughout the quarter. So there any way to, like, think about, like, the exit cost run rate relative to the average cost rate? Is that an off to some of the cost items that you flagged or are we thinking about this wrong?
And then maybe just separately, Kevin, you sound a little different about coal just given everything going on with power and maybe just your expanded thought on, do we need to think about coal a little bit differently going forward?
Sean R. Pelkey: Hey, Scott. I will take that first part. I think you are in the right direction there in terms of, yes, April was more challenging from both the weather perspective and operational fluidity. We carried a little bit of extra cost, but it was pretty small in the grand scheme of things. You did not hear us call it out here. In the results that $30 million of reroute costs that we had includes a little bit of overhang in April. So, yeah, May and June were better.
We got a lot of focus in terms of cost as which, you know, the actions that we took in terms of the management restructuring, some of the things we are doing on the operating side. I mentioned overtime reduction, but there is a lot of things throughout the business that we are focused on that have already yielded some results here in Q2. So it would not necessarily model, you know, significant run rate improvements from Q2 into Q3. I think we are in a good spot. As we stand right now. We feel good about how this sets us up going into next year as well.
When, you know, we really see a good opportunity not only to kind of grow the top line, but also to see that flow through into strong earnings growth.
Kevin S. Boone: And I will add on the coal side. I think, Scott, you are referring to the on the domestic side. I will say, I think it is absolutely true that we are seeing more positive trends, above you know, what we had planned for this year and you know, when we broadly look across our utilities, particularly the ones in the south, you are sitting at around 40% utilization today, and we are seeing activity that could suggest that utilization rate goes up. And we are encouraged by that. We are seeing signs that a number of specific utilities that we serve today.
In fact, I know Mike and his team were working through the operation plan to make sure we are putting up enough coal against those plants today. So we are also we are hearing about, you know, extensions of life on some of these plants that had been targeted for closure in the years ahead. So I think all of that is encouraging and obviously offset some of the pressure that we have seen on the export side.
Driven by, obviously, the price that we have seen this year, but also the two temporary mine outages that we have seen that, hopefully, we will see later in this, you know, rather in the probably in the fourth quarter come back online for us.
Operator: Your next question comes from Jonathan B. Chappell with Evercore ISI. Please go ahead.
Jonathan B. Chappell: Thank you. Good afternoon. Sean, I know trying to forecast commodity prices is a fool's game, but in prior quarters, you typically give the sequential outlook on coal RPU, which is obviously very important. And then also, is there any way to quantify the quote unquote smaller revenue headwinds from termination both at Gold Benchmark and diesel prices as we think about 2H versus 1H?
Sean R. Pelkey: Yeah. Jonathan, I think when you think about total coal RPU, you know, mix can play into that for sure. But based on kind of what we are seeing right now, probably see a similar RPU in Q3 versus Q2, maybe down a heads, but it would be a modest decline in total coal RPU. And then in terms of those headwinds, you know, between commodity prices, you are looking at $200 million in the first half. That is going to be, you know, more like $100 million in the second half with, you know, about two-thirds of that concentrated in Q3.
The comps are a little bit easier as we get into Q4, which is why, you know, we think there is a good opportunity to return to year-over-year growth in Q4.
Operator: Your next question comes from Thomas Richard Wadewitz with UBS. Please go ahead.
Thomas Richard Wadewitz: Yeah. I so I wanted to ask you know, on the you know, Joe, you have talked a lot about know, kind of make the railroads easier to deal with. You mentioned earlier the call ease of doing business. I guess, you know, when you think about the ease of working with the single line railroad versus working with the interline service. Do you think ease of business is the difference between those two? That is something that know, kind of a lot of times people say, oh, it is, you know, it is tougher to work with two different railroads.
Do you think that is true, or you think that does not really have an effect on the shipper experience?
Joseph R. Hinrichs: Yeah. Tom, I am not going to really comment on, you know, anything that has to do with a merger of Transcontinental railroad. I will just stick by what I said before. We think there are all kinds of opportunities to work together to make it better for our customers, and we are open to talking about all those possibilities. Again, we are focused on creating value for our shareholders and looking for ways to properly grow. And we think that better customer service helps you do that. There are different all kinds of ways to deliver that better customer service. So looking forward to all those conversations and making that stuff happen. Thanks.
Operator: Your next question comes from Kenneth Scott Hoexter with Bank of America. Please go ahead.
Kenneth Scott Hoexter: Hey. Great. Good afternoon. Certainly a lot going on, Joe. Appreciate those thoughts and insights. Maybe Kevin, the thought on the state of the consumer. You know, we heard a lot about air pocket of volumes that stalled intermodal, and then it was not really as big or quick of a snapback. Looks like your volumes are trending up 2% overall for the quarter to date. Sounds like you are targeting a little faster. Maybe just dig into that. How is the consumer doing? And then Howard Street Tunnel, it sounded like Q2 2026 is when you expect that to open. Is that a delay from year-end?
It sounded like the project will be done in Q4, but you expect volumes in Q2. Just trying to understand the timing of when we would see intermodal ramp on that. Thanks.
Kevin S. Boone: Yeah. That was that is a good question on the Howard Street. We will be able to run trains through the Howard Street Tunnel in the fourth quarter. When will we get double-stack capability? We have to there are two bridges that remain that we will have to have clearance on to introduce the new double-stack capability. So basically, be able to go back to status quo before, then we will have the new capability on the intermodal side into next year. So that is what we will focus on introducing new service. You know, the state of the consumer is a real loaded question, and you know, I think we are all trying to figure out where that is.
You know, the reality is two very important end markets for us are auto and housing, and I think we all appreciate where those markets are today. Our hope is, you know, coming into the year that those would be more helpful than they have been to our business trends, and they touch a lot of the markets that we serve. And you know, despite that, to your point, I think we have held up relatively well. At some point, we will have the wind at our back with those markets. You know, a lot of talk on interest rates and those things. And obviously, lower interest rates are extremely impactful for those two markets.
So, you know, the intermodal has been volatile with the tariffs, and so we have to watch item for us. What does peak season look like? And we will defer to our trucking partners on that side to make that call. But you know, we are encouraged. We are encouraged because we are doing a lot of things to convert business and find new opportunities for us and not waiting around for the markets to turn. We are trying to be proactive. We are being proactive, and finding those opportunities and wallet share opportunities for us.
Operator: Your next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.
Ravi Shanker: Great. Thanks. Just a couple of housekeeping here. Can you just talk about kind of other revenue run rate and kind of what that things like what that could trend like in the next couple of quarters. And also, kind of thanks for the Q2 Q3 walk just to wrap that in a bow, was there anything in Q2 that surprised the upside kind of towards the end of the quarter? I am not just talking about service. But kind of something about intra-quarter commentary. It looks like the OR performance was much better than expected. So kind of any kind of lumpy items that we need to keep in mind kind of going from that two-year to three-year.
Thank you.
Sean R. Pelkey: Yeah, Ravi. So let me take the other revenue first, which benefited in the second quarter from the improvement in operations. What that did for us is it decreased the reserve for freight in transit. As cycle times improved. So there was a bit of a benefit within that line that would not necessarily continue unless we saw further improvement in our cycle times from where we are today. So I would project somewhere between $115 to $120 million a quarter on the other revenue line is probably our best guess outside of any unique items that pop up there.
And then in terms of other items in the quarter that were unexpected and unique, I did mention within purchase services and other, we did have a number of different moving parts, which were net favorable to us. In the quarter. You know, things like some favorable casualty results, real estate sales that were relatively minor but positive on a net basis. Add that together, that is probably about a $20 million headwind going into Q3. So those are the two things I point to.
But broadly speaking, I think what you are seeing is a team that is really energized around the progress that we have made in operations and how that is translating to service to the customer, how we are being able to sell that, and then focused on cost up and down the business from operations all the way into G&A and technology and other areas.
Operator: Your next question comes from Jason H. Seidl with TD Cohen. Please go ahead.
Jason H. Seidl: Thank you, operator. Afternoon, everyone. Mike, I want to stay on service a little bit. So congrats on the turnaround for sure. You know, how should we think about sort of trip plan compliance for Q3 given that you had a rough start to Q2, but, you know, you put it in some sequential gain on the carload side. Are you guys looking to sort of match the prior year numbers? And I guess on an off-topic one, Joe, since you have you are so close to the ground, are you hearing anything in terms of the potential appointment for a fifth board member for the STB?
Michael A. Cory: Thanks, Jason. I will take the first one. Easily. Yeah. To answer your question, yeah, we expect to get our trip plan compliant in both the merchandise and the intermodal back to where they were even better. It is certainly going to help once we get our two projects done. And we are tracking, you know, we are tracking well, but it is never good enough because this is the commitment to the customer. So big focus for us. But as we get the railroad continue to improve, continue to get capacity and fluidity, expect those numbers to be better than they were.
Joseph R. Hinrichs: Yeah. Thanks, Jason. I am really encouraged by the trip plan compliance results so far in July. You know, heavy vacation period. So it has been encouraging to see the continued progress there and as Mike said, we expect even more progress once we get the projects done in Q4. Regarding the STB, yes, we have a great relationship with the STB. Board. In fact, one of the things that was really exciting to hear from STB was that during the first quarter when we had some of our challenges, they did not hear from one customer about CSX. In fact, they heard they had customers call them and complimenting CSX on how we were handling.
They had no complaints, which is a testament to how the team worked together to take care of our customers even though we were performing levels we expect. We are not going to comment or speculate on the fifth board member. You know, that is for someone else to talk about, but we are looking forward to continuing to work forward to create value for our shareholders. Thanks.
Operator: Your next question comes from Christian F. Wetherbee with Wells Fargo. Please go ahead.
Christian F. Wetherbee: Hey, Kevin. I think you talked a little bit about this before, but maybe you could dig a bit into the sort of outlook on the volume side, what you think in the second half and sort of where the opportunity for growth for you to get to that full year back to positive? It sounds like there is a couple of moving parts there. Obviously, the consumer is tough to call, but what is your take in as you think about peak season?
Kevin S. Boone: Yeah. I kind of touched on it before. We did see some of these markets start to take a downtick in the third and fourth quarters of last year. So there is an element of a bit of easier comps in some of these markets. I did, you know, I touched on some of the outages. We had an unusual second quarter and the activity levels that we saw focused in forest products and focused in chemicals, but we do see opportunities in the markets like the fertilizer with good demand fundamentals for production to pick up, which would be a very good thing for our business and volume and for our customers.
So those are the markets I look to. I highlighted, you know, a chemical customer and we expect better volumes out of, in the second half of the year. I do think, fundamentally, having clarity around the tariffs you know, we got the announcement on Japan. Obviously, Europe is in the next important one. That impacts our export plastics. I think certainty around that, I think, will be helpful as we look to those markets in the back half of the year. So it is really it is not concentrated in one area. On the domestic side, certainly, you know, we talked about the strong demand. We see that continuing into the second half of the year.
And then on the export side, we highlighted it, but we do expect a couple of mines to come back online and have that additional volume that will be helpful as we move into the fourth quarter. So all those are factors. The good news is it is pretty diversified. Across a number of markets for us.
Operator: Your next question comes from Jeffrey Asher Kauffman with Vertical Research. Please go ahead.
Jeffrey Asher Kauffman: Thank you very much. I just want to go back to the detail on the cost of inconvenience here. You have mentioned $10 million a quarter, but does that capture everything? The reroute miles, the lost revenue, the extra crews, the extra time, etcetera. I am just trying to get a file of what costs will melt away in Q4, what costs will melt away next year, what costs, if any, may melt away in Q3.
Sean R. Pelkey: Hey, Jeff. Yeah. Just to clarify, it is $10 million a month. And so that has been going on pretty much all year long. That will continue until these projects get completed. You know, I think that yes. And it is all in. It includes all the cost of the reroutes. There really is not much lost revenue. We have done a really good job of finding solutions for our customers to minimize the lost revenue impact. Earlier in the year in the first quarter, in addition to those reroute costs, we had weather and congestion costs that were probably $20 to $25 million on top of that.
So when you think all in, you know, $120 to $125 million of impacts that go away as we turn the page to 2026. Not to mention the fact that, you know, we should see a benefit to the network and overall fluidity as we open those projects up and as Kevin talked about, you know, the Howard Street has got benefits that come along with it, we will get operational benefits from day one when we start double stacking next year. And then we will be able to sell into that capacity that we have created as well. So a lot to be excited about in 2026 and beyond.
Operator: Your next question comes from Walter Noel Spracklin with RBC Capital. Please go ahead.
Walter Noel Spracklin: Yeah. Thanks very much. And that actually dovetails into my very nice end of my question when I go back to your Investor Day targets of say roughly 10% you know, looking how you are trending this year, perhaps down in the negative 5% to 10% range. Can we use your can we go back to your investor day guidance and use that as a guidepost now for how we look at 2026 as we sharpen our pencil on your earnings growth for next year.
Taking it into perhaps from a two-year perspective, to iron out some of the one-time or discrete items you had this year, would it be out of the realm of possibility to say, you know, next year should be up mid-teen when we look at your earnings go for next year.
Sean R. Pelkey: Walter. Appreciate the question. I assume when you say 10%, you are talking about EPS. And our guidance there is high single-digit to low double-digit. So that is certainly within the range. And we would need strong growth in 2026 and a good year in 2027 to get there with some of the challenges that we faced this year. So we recognize that. It is probably too early to project exactly where we are going to come next year.
But I just walked through it with Jeff's question, kind of going through some of the things that go away, the opportunities that we have kind of right off the bat, which is going to get us to low to mid-single-digit operating income growth and EPS growth without doing anything, without lifting a finger. We have got the industrial development pipeline that Kevin talked about. Fifty-ish projects in place already. Another thirty coming on in the second half. Hundreds of projects that are out there over the next couple of years that will come to fruition.
So when you think about some relatively easy comps from earlier in this year, some of those headwinds that go away, I think it sets up for a year that is in 2026 that should be double digits. I am not going to go further than that yet until we get a better view on the economy and how things are shaping up there. But, we will certainly update you as we get a little bit closer.
Operator: Your next question comes from Richa Harnain with Deutsche Bank. Please go ahead.
Richa Harnain: Yeah. Thanks, everyone. So just on the prospects for better pricing, I know a lot of the pricing got eaten up by mix and fuel this past quarter, but as we think about, you know, the service improvement that you have garnered some momentum around, into the back half of the year. Could we expect some positive results on, like, net pricing? Thanks.
Kevin S. Boone: I can assure you it is something we are highly focused on. When you have a great service product and you are adding value to the customer, it is something I think it is an easier conversation to have. It is something that is important, obviously, for us to cover our costs. But we have got to continue to deliver value to the customer, and can we turn their assets? Can we save them cost in other areas that really pay for that and they see value in that? So I am hopeful that we have, you know, this truck market is bottomed. That is certainly a factor.
I think that will play into this and certainly accelerate some of those conversations. There are opportunities quite frankly right now where, you know, the truck is hyper-competitive. We were just with a customer last week that, you know, they know that they have seen three straight years of trucking their trucking rates going down. They realized that is not sustainable. So that will be a factor, I think, as we get into the back half of this year. Hopefully, we will see a little bit of momentum there, and then we will carry that into next year.
Operator: Your next question comes from David Scott Vernon with Sanford Bernstein. Please go ahead.
David Scott Vernon: Good afternoon, guys. Thanks for taking the question. So as you can imagine, we are getting a lot of questions on freight flow information. I just wanted to see if I could get your help, Kevin, understanding kind of what percentage of your revenue today originates west of the Mississippi? Thank or west of Saint Louis. Thanks.
Kevin S. Boone: You know, I think what we said is, you know, over half of our business touches another rail. I do not think we will go in more detail than that currently. We can certainly follow-up, but I think we will leave it at that.
Operator: Your final question comes from Oliver Holmes with Roth Child and Company, Redburn. Please go ahead.
Oliver Holmes: Hi. Thanks for having me on. You have spoken about CSX-specific projects supporting volume growth. I was just wondering, have conversations with customers increased, paused, or decreased as a result of the current tariff structure? And perhaps within that, could you size the opportunity you have with the CPKC partnership and over what time frame it should ramp up and hit maturity? Thanks.
Kevin S. Boone: Yeah. I think, you know, the tax policies are pretty new off the presses. It is certainly not unhelpful. I think, yeah. And I noticed this before, clearing the tariff uncertainty is, I think, going to hopefully, unleash a lot of this investment that I think we have some existing pent-up demand. And, you know, more importantly, you know, confidence in completing some of these projects that we already have in our pipeline. I think that is a big, big opportunity for us.
On the, you know, the CPKC Myrtlewood connection, you know, we just had another cross-functional, you know, team meeting the other day, and there are a number of truck conversions and opportunities that do not move over rail today that we are really going after and targeting. So we are excited about that. We are excited about the progress that we have made so far. So we are seeing those conversions occur, and it is a long, you know, it is a long sales cycle.
So we were encouraged that, you know, in the near term that we have really capitalized on some things that we can continue to see accelerate as we get in the back half of this year.
Operator: There are no further questions. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.