All right. Good morning. Welcome to Barclays' 42nd Annual Industrial Select Conference. I'm Brandon Oglenski, Airline and Transport Analyst, and very excited to have CSX up as our third panel here, and actually, we have all five of the publicly traded rail CEOs here today. I know. So, Joe. Good morning. So. We also have Sean Pelkey, CFO of CSX, so we're going to have a great conversation here. If we can just queue up the first audience response question, I'm sure you folks know how to do this at this point. Do you currently own CSX? One, overweight. Two, market weight. Three, underweight. Four, no. I'm one. Joe, everyone's on. I'm one. Yeah. We tend to keep the voting buttons off of the stage. Yeah, probably why. But I'll tell you my answer. Got some owners in the room. Question number two. What is your general bias towards CSX right now? Positive, negative, or neutral? And we do appreciate everyone participating because we get some pretty good aggregate data out of this conference every year. A little bit mixed there. And then question number three, please. In your opinion, through cycle EPS growth for CSX will be above peers, in line with peers, or below peers? All right. So Joe, Sean, thank you guys very much for coming down to Miami. Really appreciate you being here. I guess I'm going to lead off, Joe, with maybe a slightly difficult question, but when you took over as CEO, your rail operating ratio was among the industry's best, especially if we strip out the impact from your trucking operation. And that has deteriorated a little bit here, where some of your peers and your competitor in the East is actually looking maybe a little bit better in the near term. But can you talk to the long-term ambitions of where you want this company to be from a profitability perspective? Sure. I mean, if you look at the facts, if you set Quality Carriers aside for a second, and you'll be able to see more of that over time, our rail business in 2023 had the highest margins in the industry. Last year, we had the second highest margins in the industry, only a point behind one other one. That's inclusive of the hurricanes and Francis Scott Key Bridge collapse and things that we don't control. If you look at our absolute rail performance, it's at or above the whole industry. Quality Carriers, we said, is about 250 basis points of effect on margin, so it gets in there. No one else really has a trucking business of that size, $900 million roughly in revenue. So if you set that aside for a second, the rail business continues to have margins at or near the top of the industry. Having said that, as you're alluding to, our earnings peaked in 2022. And when you look at that, that's a year where kind of everything came together. The things we don't control all kind of came together to help us, right? Supplemental revenue was kind of at an all-time high. Fuel surcharge was high, and met coal prices were probably at an all-time high during that calendar year or near there. So some of that's been weaning off. And Sean showed a good chart at our investor day in November that our core earnings (so if you take the earnings from our merchandise intermodal coal business over the last several years, even 2022, 2023, 2024, what we expect in 2025) has been growing. We're the only railroad last year that had more volume than 2019, the pre-pandemic period. So the thesis that we had, which is if you can deliver better service, leverage what we think one of the best operating systems in the network, in the rail industry, we can grow the business while still maintaining those high margins. Now, of course, we've had some things that have weaned off, as you said, and met coal prices have been moving around a lot. Matter of fact, we're seeing that effect in this quarter as well. But I want to be very clear. Our operating ratio, or as we look at it, margin is at or near the top of the industry for our rail business. We obviously bought a trucking company right before the trucking downturn, so we felt the effects of that in the trucking side. So our commitment is to stay efficient, obviously, but also looking at that merchandise volume growth we've had the last couple of years, and we expect that to continue. That's building the foundation, we think, for even more to come. I definitely want to get into the industrial development story that you have on your network. We're getting feedback from investors, right? It seems like the strategy at CSX has shifted a little bit in the last couple of years to be a little bit more frontline employee-focused. I think you guys were the first ones to come out with new labor agreements, if I'm not mistaken. What benefits are you getting from that renewed strategy? I think there are several. I mean, we were the first ones to do the paid sick leave deals when that became the cost labor issue in that time period, and there are others in the industry who have done it as well, but we thought very strongly that it wasn't in anybody's interest to repeat what happened last cycle on the union negotiations. It put our customers through a lot of stress, especially at the end, and they told us that. They had to make decisions that we were going to prepare for a strike or not, and of course, our employees didn't feel good about that, and you have to go back and remember that in that 2022, 2023 time period, the whole industry, but certainly CSX, was having trouble attracting employees to fill the jobs. All these things are related to each other. So fast forward to today, we're not having any trouble getting highly qualified people to apply for our jobs, which is good. We're a service business. And so any service business, in order to create the service levels that you want to create, you have to have a workforce that feels like they're on the same team as management and that feels like they have the same motives and the same agenda. And we felt if we could set a pattern early with some of the unions that we could establish a path forward for the industry and for ourselves that would take away that noise, but also allow us the freedom to start working on other issues. Well, let me give you an example. When you can get the, because we spent three years out of the last five in the last cycle fighting over the national agreement, right? So we didn't get anything else done with our union partners during that time period. Right now, we're already moving forward. We've already been working with our unions on both our dispatchers and our conductors to move to a system-wide agreement. That's been in the works for 20 years and hasn't happened. We had two different agreements for our dispatchers, and we had five different agreements for our conductors. Our engineers have one system-wide agreement. So you get to work on those types of important structural issues when you get the national contract stuff out of the way and people are not fighting or not waiting for that to happen. So that's an example of what we're seeing. Also, you're seeing industry-leading service. That's because of our employees. That's because our employees are focused now on, instead of being distracted and anxious, they're focused on doing the task at hand and being able to serve our customers. I guess along the lines of service right now, Joe, I guess if we look at some of the metrics like dwell, that has been up significantly, but maybe we don't fully appreciate what's going on just from the outside looking in. Where would you put operations and service right now? Yeah, I mean, it is a mixed story because we're certainly feeling the effects of the weather over the last six months or so, including right now in Kentucky and other places across the Midwest. What's happened to our network is right now, with the Blue Ridge Subdivision being shut down because of the Hurricane Helene effects, one of our four north-south routes is closed. And then right now, with the Howard Street Tunnel work being done this year, the I-95 corridor is kind of closed. So our ability to recover from weather events is taking longer because we don't have as many options when you look at it. At the same time, our customer switch data, like the last mile, first mile, we've been really protecting that. And so what's interesting is even though we had the hurricanes hit us in the fall and in the early part of the fourth quarter, and we saw some disruption in our network, our Net Promoter S cores with our customers were the highest they've ever been in that quarter. So it's a really fine line to balance. Our dwell is higher than we want it to be, and a lot of that has to do with there's about 13 trains right now that are not going their normal routes because of those two blockages. So that's causing - we have to - February is a month we just started the Howard Street Tunnel, so we got to settle things down and see where we can move some people and make some effects. But we're staying committed to our customers, keeping in contact with them. And I think you'll see throughout the year, especially as we finish these two major projects, which one we didn't expect, you'll start to see our network come back to levels that we would expect. But importantly, our customers aren't feeling that effect. We're seeing it ourselves a little bit with some of the things happening inside our network, but. I guess strategically, the importance of the tunnel project this year and looking ahead, what benefits do you derive from that? Yeah, I mean, I think we can, and Sean can talk to a little bit too, but if you look at where we compete and how we compete, we had the inability to double-stack intermodal containers up and down the I-95 corridor on the East Coast, and it was more because of the Howard Street Tunnel and some bridges that were nearby that didn't have clearance, but it's more than that. If we were taking a train from, let's say, an intermodal train which double-stacked from the UP in Chicago and wanted to take it over to the East Coast, we can't go through the Baltimore area, so we have to go all the way up through upstate New York and down, so we had the physical impediment, but we also had the inability to compete on time, distance, and rate because of how all this plays out. So when the Howard Street Tunnel gets completed, including some bridge clearances around it, we'll be able to run a shorter route to the East Coast, let's say from Chicago. Also, we'll be able to double-stack that train the whole way, including up and down the East Coast. So it's a big deal to us, and we're really excited about it. It's a big part of when Sean talked about how we see the opportunity to grow in 2026 and 2027. That's one of the major components of it. Any way to quantify what that could potentially have an impact on the network? Yeah, I mean, I think what you'll see once the Howard Street Tunnel opens immediately is you'll see some operational benefits, fluidity. We'll be able to run with fewer trains, fewer crews and locomotives, and so on and so forth. So there'll be some immediate cost savings once we get that tunnel open and all the clearances are finished. The bigger opportunity over time is being able to grow into the capacity that we'll be creating when that tunnel is completed. And we've put that around 75,000-125,000 incremental loads. Do the math in terms of average intermodal RPU. You can see it's a pretty significant opportunity over the next couple of years. Okay, and Sean, maybe can you, I don't want to be too near-term focused here, but Joe, you did mention that the first quarter, you're going to see some volatility with export coal rates, but Sean, can you help put in context your guidance for the first quarter and how some of this is playing out right now? Yeah. So going into the year, we're going to be at a point where we're cycling higher export coal prices last year, and we price based on the value of the commodity, and we're cycling some fuel headwinds as we go into the year. We also have cost impacts from rerouting those trains around the closures, both for the Blue Ridge as well as the Howard Street Tunnel. There are some things that happened last year that we'll cycle. It'll be a net positive. But put all that together, we've got about a $350 million headwind if commodity prices stay stable to where they are today this year. That's over the course of the year. That will be concentrated mostly in the first half of the year. Those reroute costs will be basically ratable through most of the year. But the commodity price impacts are primarily concentrated in the first half and even more so in the first quarter. So what we've said is that Q1 is likely to be our trough for earnings, and then you'll start to see us accumulate some momentum coming out of that. And as we get to the second half of the year, we should be in a position to start showing earnings growth on a fully reported basis again, set aside all the impacts of the coal prices and fuel prices. I guess, as we sit here in February, are things tracking as you thought maybe during the earnings call? Yeah. So we're not too far into the year, and as Joe mentioned, we've gotten off to a challenging start when it comes to the weather. But all things considered, we said low to mid single-digit volume growth for the full year. We're flat out of the gates through the first six weeks or so, a little bit behind where we would have wanted to be. But again, most of that is largely weather-driven. Coal has been off a little bit. We haven't been able to load due to frozen coal, flooding. We've had some producer issues. We had a fire at one of the mines that Kevin talked about in January. So coal side's been a little bit weaker, though our forecast for domestic coal, given the cold weather that we've seen really across the network, has actually come up from the beginning of the year. Though near term, we're running a little bit lower than we'd like to be on the coal side. Auto got off to a little bit of a slower start to start the year, but we're seeing that start to pick up over the last couple of weeks. And there are pockets of strength as well. Feed grain's been very good to start the year. We've got a good start in terms of fertilizers, good projections in terms of what's going to go into the spring planting. So there's reasons to be optimistic as we get out of the challenge of the winter weather here. In the last few weeks, the trucking numbers look better too. It's early, but at least some signs of life on the trucking side, which will help intermodal, but also Quality Carriers. Is that just from a supply-demand perspective, Joe, or? Yeah, well, definitely supply-demand on what we're seeing in Quality Carriers over the last several weeks. And I think across the whole trucking segment, hopefully, we're starting to see some movement up in rates. That'd be good for everybody. Intermodal's off to a good start too, in fact. If you look at January versus normal Q4 seasonality, intermodal actually beat a little bit versus what we would have normally expected. And merchandise was right in line even with some of the challenges related to weather. And I know a hot topic here at this conference is tariffs. Do you think you've seen a lot of pull forward in your intermodal business in the last few months? We're not hearing that from customers. I mean, obviously, there's been a lot of discussion about it. I mean, remember, we had the East Coast ports dynamic, and then we kind of go into the elections, and then we have this topic. So we've not heard a lot from our customers on that. I mean, it's a long cycle, as you know, so you've got to kind of start planning pretty far out. I think, obviously, it's died down, but a few weeks ago, the big topic was, of course, Mexico, Canada, which there really wouldn't be much pull forward from those dynamics. Clearly, there could be some coming from China, but that would be more on the West Coast side than the East Coast. But the customers, the ocean shippers that we've talked to, at least for the tariff topic, there haven't been much pull forward. Now, that may change. I mean, who knows what the timing is, but we haven't heard that. How do you build or how do you account for variability from things like tariffs that could be volatile this year in the operating plan? Well, I mean, look, operations and sales and marketing meet on a regular basis. Customer service is involved in those conversations to understand how the dynamics of what our customers are asking for are changing. When we have small variations, plus or minus a couple percentage points within our customer base in terms of volume shipped, we can generally adapt to that without really making any changes to the train plan. What we're more focused on is where do we need to adjust based on new or expanded capacity that's coming online. And as you know, we've talked about the industrial development opportunity. We have a couple new facilities that'll be coming online in the second half of this year across multiple different merchandise segments. Those will ramp over the next couple of years. We have projects that were completed in 2023, 2024 that are continuing to ramp this year. It's making sure that we are appropriately resourced from a crew perspective in those areas to be able to handle the incremental volume as it comes. For the most part, when we're talking about relatively minor changes in flows or something that can be absorbed into the existing train plan, there's really not a whole lot of change that we need to make on the fly. Again, the first and most important thing is communication, open lines of communication, and that is much better than it's been in the past. Okay. I want to come back to export coal specifically. And again, not to be too near-term focused, but that is a line that's, I think, difficult for a lot of folks to model for your company. So maybe tactically, coal yields are going to come down sequentially, is that right, in the first quarter? 3% sequentially, yeah. Is that going to continue into the second quarter? We haven't guided forward to the second quarter, but the biggest factor in coal yields sequentially is what happens to the price of export met. It's been stable through most of this quarter, so I guess if that continues, you would expect not much of a change from Q1 to Q2, but we'll update you as we get closer. Maybe strategically, I'm not sure that we always had commodity variable pricing or maybe to the extent that we have it now. Does it make sense to keep this pricing structure in place given the volatility that it creates in earnings? Yeah, let me just give you a little bit of historical perspective on export coal. If you go back 20 years and compare the volumes that we were moving on the export side to what we're moving today, we're doing eight times more export coal volume today than we were 20 years ago. We're doing twice what we did 10 years ago. And met has become a much larger part of that picture. Our met export revenue has tripled in the last 10 years. That's a good thing. It's a good thing for us. It's a good thing for our investors. What it means and the structure that we have moved to over those last 10 years is one that adjusts rates based on the price of the commodity. We do that because we think that maximizes our profit. Again, that's a good thing for the shareholder. What it does is introduce a little bit more volatility, both because the absolute size of met coal (met coal is almost $1 billion of revenue today, or in 2024 at least) is much bigger than it's been in the past. And we are taking advantage of opportunities in the marketplace when prices go up, not only to move more volume, but to do it at higher prices and to adjust pretty much real time. Okay, and if there's audit. There are collars on that, and we're not that far away from the bottom of the collar. So this would not be a good time to say, "Oh, let's change." You tend to talk about it when you're towards the lower end, but when we were at 325, two years ago, we weren't talking about. We did raise some of the caps when we were up at those higher levels to provide for more upside if we go back there. So if prices went materially lower from here, there might not be quite as much. Yeah, I think you'd probably see more of a volume impact than a price impact. Right. Okay. If there's any audience questions, just raise your hand. We'll get you a mic. I guess, Joe, a couple of years ago, you came out and said, "Look, we're going to have industrial development on CSX. Customers are making capital investments, long-term commitments." I think at the time, these projects were supposed to start delivering a point to maybe two points of excess growth on your network as of late last year. So can you just give us an update on how that initiative is tracking? Yeah, I mean, we're very pleased with how it's tracking. Like anything, when a company launches a new plant, the cycle of launch takes a little while. So in the year of launch, typically, the volume contribution isn't that dramatic, but it does escalate over time. And for various reasons, it could be accelerated. And that's one of the things that possibly could be affected by tariffs. For example, there are some new aluminum and steel investments being made on our network. And if tariffs continue, as they've just been announced, perhaps those manufacturers will be motivated to try and launch faster. That could be something to watch for. But we're very pleased. I'd say everything that we've said was going to happen has happened. There's a lot of noise around the EV side of things, but that's a very small percentage of the total. Those things have been largely, in many cases, delayed, but they're less than 10% of our total, and more is replacing that with other opportunities. So I think Sean can give you some numbers, but what happened in 2024 was what we expected. What's going to happen in 2025 is what we've been planning for and expecting. And lately, we're getting even more, our industrial development team is telling us we're getting even more calls than usual. And that may be a cascading effect of all this talk around tariffs again and other localization efforts. But our guys say the phone's been ringing much more than it has been even recently. So more to come on that, but we do expect that contribution to come. And so far, so good. Yeah, just to size it, last year, those industrial development projects, the ramp of existing projects, contributed about one percentage point to overall merchandise growth. We think this year will be pretty similar. What's exciting is we actually have projections that tell us that that impact is going to go up over the next couple of years. It'll be more like one to two percentage points of total CSX growth. Okay. So when we're looking at this, trying to measure performance from the outside, we should be looking at merchandise initially. But when do we actually see CSX aggregate volumes outperforming the industry by that 1%-2%? I think we've been in a muted industrial development economy over the last couple of years, so it's harder to see. It's the first time for two consecutive years we've materially outperformed industrial production in our merchandise business going all the way back to 2013, 2014. If you remember back then, that was when the rails were taking advantage of crude shipments that were coming from the west. If you exclude crude, we didn't do that. It's the first time effectively in recorded history that we've been able to outperform the industrial economy two years in a row. Our merchandise revenue over the last two years is up 8% with fuel down. Excluding fuel, up 12%, or $900 million of merchandise revenue that's been added at very high incremental margins. It's harder to see because of what's happened with storage revenue going down and export coal prices and fuel prices, but it's there. It's underlying it. And that's what's driven the core growth in the business the last couple of years. Yeah. So I mean, you're accurate, and it's okay to talk about it because there's been so many moving parts. It's hard to see what's happening a little bit at CSX. But we're confident that the underlying strength of the business continues to improve. And we have data, and we've shown some of that, as Sean has alluded to. And the strength of our business is around the merchandise business. And we've outgrown the industry over the last couple of years on volume, with one exception of outgrowing everybody else on revenue. And that's due to some unique dynamics with the merger or the coming together of CP and KCS. But when you look at it, that's continuing. And it's industrial development, and it's also service levels. Because in many of those cases, those contracts come up, and when you're renewing them, service is a big topic because they have long memories from just a few years ago. Big companies, so they have long memories. And we're going to have your competitor here in the East in a little bit, but they're talking about potential share gains within the East Coast. How competitive of an environment is it right now? And do some of these near-term headwinds actually put you at a relative disadvantage, or are you working through that? We don't feel we're at a disadvantage because our service levels continue to be, especially on the merchandise side, continue to be stronger. Yeah, obviously, there's a competitive dynamic always when contracts come up. We haven't lost anything of any magnitude or size that would be concerning. We watch it very carefully. But again, we're in a competitive environment, and Norfolk Southern is running better. We're running better. It's all about taking care of your customer. But we have the benefit of a couple of years now of treating our customers at a higher level. And they value that, and they remember that. So when the contract comes up, that's part of the conversation. Obviously, rates and all that and distance and time and everything is a conversation as well. But we feel really good about what's been happening with renewals on our merchandise contracts. Pricing has been good. And so we feel we like the hand we're dealt. We've created that hand with some of ourselves, and we feel good about it. And you've seen it again in the strength of our merchandise business. We haven't lost share even year to date. We've lost a little bit of coal because of some of the dynamics that Sean was talking about, but we haven't lost share on the merchandise side. I guess from a yield perspective, removing coal from the equation, I guess, I think in general, and this isn't just specific to CSX, but yields, as we contract them, haven't been that great for the industry the last couple of years. Apparently, the price environment underlying this has been okay. How should we think about yield performance looking in 2025 and 2026? Yeah. I mean, I think, again, it's stripping out fuel, stripping out coal. Our merchandise and intermodal pricing on a combined basis has been quite strong the last several years. The percent price that we're getting is lower than we were two years ago, but inflation is also dramatically lower than it was two years ago. So the contribution to operating income from the difference in price gains in merchandise and intermodal versus cost inflation has been actually pretty stable the last couple of years, and we think that will continue going into this year. We actually renewed a lot of our merchandise contracts in January. It's a heavy renewal season for us. We did over $1 billion of renewals in January. And 85% of those renewals actually came in higher than what we had planned going into the year. So we're capitalizing on the service. We're able to price to the value of that service. There's always going to be puts and takes in terms of mix, and that can sometimes be hard to predict. Aggregates, as an example, is off a little bit to start the year. That's low RPU. That's weather-driven, so that helps merchandise RPU. You're going to have those things every quarter, but if you look past that noise underlying the performance within merchandise is core growth and pricing, and we look at it on a combined merchandise and intermodal pricing. Intermodal pricing has not been great, particularly on the domestic side, the last couple of years, so we get a little bit of an uplift from that as the trucking market normalizes. You could be looking at that spread actually growing over the next couple of years between price and inflation dollars. Okay. And if we can cue up question number four, we have a couple of minutes left here. In your opinion, what should CSX do with excess cash, bolt-on M&A, larger M&A, share repurchase, dividends, debt pay down, or internal investment? Something interesting. Share repurchase, right? Question number five, please. Good answer. In your opinion, what multiple of 2025 earnings should CSX trade? This is why you didn't give me a vote. My unbiased responses here. Yes. Yeah. All right. And then question number six, please. What do you see as the most significant headwind for CSX? Core growth, margin performance, capital deployment, or execution and strategy? And, Joe, as we await the results here, I guess wrapping this up, I think everyone understands you have some headwinds between coal and the Howard Street Tunnel project this year. But is there a strong commitment from yourself and the team to getting back to significant up-and-coming growth? Because I think you guided long-term compound growth of mid to high single digits. Mid- to high single digits, yeah. I mean, should we see that really rebound in 2026? Is that the commitment? That's what we expect. That's the commitment we made at the investor day. We think we're on a path to make that happen. We think we'll continue this year. It'll be a year of cycling through, hopefully, for the last time, some of those things we've been talking about, met coal prices, fuel surcharge, etc. We get the Howard Street Tunnel done. We get the Blue Ridge Subdivision done or the Blue Ridge rebuild done. MNBR continues to grow, and you can start to see where we start to see an opportunity to see that happen. In the areas where we have strength, like autos, like met coal, we expect 2026 to be a good year for that, volume-wise as well, so the fundamentals that we're looking at continue to be strong, and the operating margin and the operating system of our railroad continues to be well-run. That will bear fruit as we get through and cycle through some of these things. All right. Joe and Sean, thank you so much for coming out. Thank you. Appreciate you being here. Thank you all for being here. Thank you.