Thank you for waiting. My name is Jay and I will be your conference operator today. I would like to welcome everyone to the CSX Corporation Third Quarter 2024 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers have finished, there will be a question-and-answer session. I will now hand the conference over to Matthew Korn, Head of Investor Relations and Strategy. You may begin.

Thank you, operator. Hello, everyone, and good afternoon. Welcome to our third quarter earnings call. Joining me on this call are Joe Hinrichs, President and Chief Executive Officer; Mike Cory, Executive Vice President and Chief Operating Officer; Kevin Boone, Executive Vice President and Chief Commercial Officer; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In the presentation accompanying this call and available on our website, you will find slides with our forward-looking disclosures and our non-GAAP disclosures for your review. With that, it is my pleasure to introduce Mr. Joe Hinrichs.

All right. Thank you, Matthew, and hello, everyone, and thank you for joining our third quarter call today. First, I want to thank our entire ONE CSX team who've been tireless in helping our employees and their communities recover from the hardships caused by two hurricanes in a matter of weeks. Helene, in particular, had a big impact on our network, and we'll talk more about that today. We have largely recovered, and we have made sure that CSX has been able to support our railroaders who have needed the systems for themselves and their families. That said, there's more work that we will need to do to repair and replace some of the physical infrastructure that we lost, which Mike and Sean will discuss later on this call. Now stepping back and looking at this entire quarter, I am proud of what we accomplished. Our aim was to grow volume, revenue and operating margin compared to last year, and that is exactly what we delivered. Our merchandise franchise continues to grow at an impressive pace, benefiting from our service leadership and the numerous initiatives that Kevin and his team are pursuing to bring new business to CSX. Operationally, our efficiency and cost controls remain solid - we're still only getting started with some of the ways that we are using valuable, real-time data to optimize our network. We have had our challenges. This quarter, we had to adapt and respond to significant weather events, equipment issues at our coal terminal and lower diesel prices. Throughout, we've kept our focus on our long-term goals to deliver consistent, sustainable, profitable growth over time. Now let's go over some of the highlights. On Slide 1, it shows our key results from our third quarter compared to last year. Despite the severe weather, we were still able to publish some very good results across the Company. Looking across the highlights listed on this top line. Total volume grew by 3% versus last year, driven by strong performance in our core merchandise business where volume also grew by 3%. Merchandise revenue grew by an impressive 6%, supported by 3% growth in volume and favorable pricing. Our operating margin reached 37.4%, inclusive of our trucking business, and improved 180 basis points compared to last year, demonstrating strong year-over-year expansion as our guidance indicated. Now these charts summarize a solid quarter for CSX. Total revenue reached over $3.6 billion for the quarter, up 1% from the same period last year, even with lower fuel surcharge and coal prices. Operating income increased by 7% compared to last year as we delivered strong general margins from top-line growth and cost control. Earnings per share grew by 12%, supported by solid results for the business and our commitment to capital returns. Our results this quarter demonstrate strong execution as we build powerful momentum behind our proven operating model. We remain motivated as a team, keeping in mind that I've told you since I joined CSX over two years ago, talented people working together as ONE CSX team with a common goal can accomplish just about anything. Now, I'll turn the call over to Mike to provide details around our operational performance.

Thank you, Joe, and thanks to all of you for joining us today. So, here's a rundown on the operating activities in the quarter. Let me start first, though, by thanking our ONE CSX team for their extremely hard work and their teamwork to deliver solid results through a challenging quarter at times and specifically in certain locations. So, let's go to the first slide on safety. For FRA injuries, not much has changed since the last quarter in terms of metrics. Although we see a higher frequency than our desired target, we're finding the injury severity rate is lower. And as a result, we've seen a reduction in lost days of work for injured employees. For FRA train accidents, we continue to see a year-over-year decrease in incidents. Our biggest improvement has been driven by a reduction in human factor yard train accidents. Through our safe CSX initiative, we are improving our ability to reduce workplace exposures and this will continue to drive positive results across the network. We recorded our lowest number of human factor train accidents in September, and human factor incidents are our leading cause. And that progress is remarkable, and it's a great achievement by our employees here at CSX. So looking at the next slide. Our railroad remains fluid, albeit we have had and still have some weather-related challenges. Our overall velocity, considering the effects of the weather, showed the resiliency of our network. Our ability to maintain our fluidity came directly from the effective response of our field forces and our ops teams and managing changes to our service plan to provide needed service to our customers in an efficient manner throughout this period. Collectively, we're able to ensure our strategy of safe restoration of service was accomplished without injury or accident. And while network speed is extremely important, our focus has been equally strong on ensuring our major engineering work gets accomplished according to the plan. With multiple weather constraints, we were able to stay on plan while maintaining our network velocity. While our dwell metric was affected by weather, we did see an increase of 3% more carloads moved with 2% less train starts. So, we continue to manage the inventories in our yards for our customers and always look for a more efficient way to move the cars. Regardless, the team is focused on service and efficiency, and the lessons learned from our response and actions as a team will certainly help in the development of our operating leaders going forward. Over to the last slide, we continue to work with our sales and marketing team to align our operations with the needs of our customers. Excellent service and cost discipline are always at the forefront. Our metrics do reflect weather-related difficulties. However, our field forces, as I mentioned earlier, worked extremely efficiently to get us back operating as fast as possible. But the big thing is we did this collectively as a team, with our service group staying close to our customers and communicating important two-way information throughout. Our vast network resilience and faster recovery over our network has allowed us to remain in line with our customers' needs throughout this weather. And I'm very proud of how well the entire team has come together and worked to provide service throughout some challenging disruptions. Communication between our service network and field operations team is very strong and continues to strengthen. These last couple of months have provided plenty of opportunities to show what we can do for and with our customers. So, all in all, I'm very proud of the team, and I'm thankful for their efforts in this tough, but very good quarter. Thank you, and over to you, Kevin.

All right. Thank you, Mike. In the third quarter, as Joe and Mike both mentioned, we were presented with a number of challenges from storms, a strike at our East Coast ports and another temporary outage at our Curtis Bay terminal. We are very proud of the level of communication throughout the CSX team and our focus on serving our customers through these challenges. This was highlighted by our most recent customer survey out just this week with our Net Promoter Score at the highest level since we started measuring. With major storms impacting our network, we are working with our customers on the rebuilding efforts to ensure CSX can deliver the building materials and other essential supplies to the areas where they are needed. There's been a lot to manage through even for a railroad with the experience of CSX. But working together, we've been able to find creative solutions to keep freight flowing. At a high level, market conditions remain a bit mixed, we are seeing continued strength in some of our merchandise markets. And while truck rates appear to have bottomed, there remains a soft market. Diesel and natural gas prices remain low and benchmark coal prices have moderated. All that said, we grew total volumes and revenue over the quarter as our service-led initiatives continue to bring new business to our railroad. The team has continued to build momentum by working with our customers as we're going to continue to push hard against the mixed economic backdrop. And I'm excited about our upcoming Investor Day, where you will hear more from our commercial leaders who are laying the foundation to deliver profitable growth for CSX. Let's first review our merchandise business, as shown on Slide 7. As a whole, merchandise continues to be a great contributor for us. As we anticipated, volume growth accelerated this quarter, supported by new business wins, truck conversions, and the ramp-up of industrial development projects. Revenue gained 6% compared to last year, driven by a 3% gain in volume and solid pricing. Note that with lower diesel prices, fuel surcharge was a drag on both total revenue and reported RPU. On a core basis, our same-store basis, our merchandise pricing remains solid. Chemicals continued its positive performance for the year, delivering a 9% volume increase year-over-year. We see consistent broad strength across plastics, industrial chemicals, LPGs and waste. And ag and food, the second half inflection has taken off as we had hoped with volume also up 9%, led by grain and feed ingredients that customers turn to the Midwest for supplies. Close collaboration with our operating team has ensured consistent service as the strong seasonal demand has kicked in. Those products also saw great year-over-year growth with healthy improvement in pulp board demand contributing to a 9% volume gain. Some of this new forest product business is shorter length of haul, which was a factor in 3Q reported RPU. Results in our Minerals business were mixed with volume up 1%. Cement is doing very well, supported by construction demand and the ramp-up of new customer facilities, but wet and rainy weather was a modest drag on aggregate shipments over the quarter. All that said, the underlying long-term trend remains very favorable. Other markets we serve are facing more near-term challenges. As we've highlighted throughout much of this year, the metals market, particularly steel, remains soft with sluggish demand, ample supply, and low commodity prices. One reason for softer metals demand is a weaker-than-anticipated automotive market where conditions have deteriorated. Volumes inflected negatively for us this quarter and mix was also a modest headwind to auto RPU. As Joe mentioned at an investor conference last month, the industry has seen consumer demand diminish due to high retail prices and interest rates, leading to higher dealer inventories and slower production. Our belief is that the interest rate easing cycle will help these markets normalize. Lastly, total fertilizer volume continued to trend negatively in the third quarter. So, we were able to pick up some favorable spot moves. For the remainder of the year, we expect to see a carryover of solid year-over-year momentum in chemicals, ag and food, forest products and Minerals, while trains and metals continue to be challenged in the near term. Now let's turn to Slide 8 to review the coal business. For the third quarter, total coal revenue declined 7%, a 2% decline in volume. As shown in our financial report, we saw exports and domestic shipments move in opposite directions, with export tonnage increasing by 10% year-over-year and domestic tonnage decreasing by 12%. Low natural gas prices continue to limit the utility burn. All-in coal RPU was down 5% compared to last year and 7.5% sequentially, in line with our guidance from last quarter and largely driven by the declines in global benchmarks for metallurgical coal. Looking ahead to the fourth quarter, markets seem relatively stable. Utility stockpiles are sufficient and though natural gas prices recently approached the $3 mark, we do not anticipate any near-term step-up in volumes. Export demand remains consistent, particularly from buyers in Asia, and the Australian benchmark has stabilized around the $200 level toward the end of the last quarter. Given the lag in our export contracts, we anticipate a modest to low single-digit sequential decline in all-in coal RPU in the fourth quarter. Turning to intermodal on Slide 9. Total revenue declined 2% year-over-year, while volume increased 3%. International shipments grew at a solid mid-single-digit rate, while domestic shipments effectively ended up flat for the quarter. As we talked about in past calls, we did see a shift towards West Coast arrivals over the summer, which lifted our transcontinental interchange businesses to the East. We also opened up new business with several customer partners. Overall, we did see the domestic business gain modest momentum over the quarter, but activity with some of our main channel partners remains relatively soft. Total intermodal RPU decreased 5%, largely due to lower fuel surcharge and a mix with international outgrowing the domestic business. We're pleased to see a relatively quick short-term solution for the ILA as we did see the effects on our volumes during the strike. The trucking backdrop has remained challenged through 2024, but we do see signs of market conditions bottoming and are well-prepared to handle more volumes as the market continues to improve, and the team continues to find new business for the CSX intermodal network. Summing it up, the team performed very well this quarter, especially given the number of external challenges we faced. Still conditions for the fourth quarter are mixed, with certain markets continuing to show positive momentum while other markets remain challenged, including those more impacted by the current interest rate environment. We remain consistent throughout market cycles in our commitment to serving our customers, and we remain confident that our creativity will continue to create opportunities next year and well into the future. We look forward to sharing more with you in November. Now I'll turn it over to Sean.

Thank you, Kevin, and good afternoon. I'd like to start by reiterating our appreciation for the tireless work of our fellow railroaders to help friends, communities, and the network recover from the devastating impacts of recent hurricanes. From a business standpoint, Helene impacted revenue by $10 million to $15 million at the end of the third quarter and drove a small amount of incremental expense. It appears the fourth quarter storm-related impacts will be larger than Q3 with a current estimate of around $50 million. That includes storm recovery and rerouting costs near $20 million, as well as roughly $30 million of net revenue impacts. Additionally, a significant rebuild process is already underway for miles of track and multiple bridges across our Blue Ridge subdivision. While we're still evaluating the scale and timing of these capital expenditures, our early read is that rebuild costs will likely exceed a total of $200 million, and the construction will take us into next year. Now to the discussion of the third quarter results. Capitalizing on powerful momentum generated over the last several quarters, the ONE CSX team delivered 7% operating income growth in the quarter, with EPS up double digits. Our proven operating model and increasingly collaborative approach with customers delivered profitable growth at strong incremental margins. In fact, combined merchandise and intermodal revenue, excluding fuel, has grown by at least 3% for seven consecutive quarters, including 5% growth in the most recent quarter. Total revenue increased by 1%, impacted by lower coal revenue as well as declines in fuel recovery, other revenue and trucking. Expense momentum continued as costs were down 2%, with more detail to come on the next slide. Interest and other was stable compared to the prior year, while income tax expense increased by $16 million, with higher pretax earnings, partly offset by a lower effective rate. Let's now turn to the next slide and take a closer look at expenses. Total third-quarter expense fell by $36 million. While lower fuel prices were a key driver, other costs were up just slightly with efficiency gains and other items mostly offsetting costs from inflation and 3% volume growth. Turning to the individual line items. Labor and fringe was up $45 million due to inflation and a higher total head count. The sequential cost increase from the second quarter was driven by the July 1 union wage increase along with higher incentive compensation. Employment levels have remained stable throughout this year, with carload growth of 3% in excess of 2% headcount growth in Q3. I would also note about half of the year-over-year headcount increase is from quality trucking conversions of outside party drivers to company drivers. Adjusting for this head count would have been up just 1% versus the prior year. Purchased services and other expenses decreased by $25 million, driven by lower casualty expense and a favorable inventory adjustment in the quarter, with ongoing efficiency gains mostly offsetting inflation. Depreciation was up $13 million due to a larger asset base. Fuel costs decreased by $73 million, driven by a lower gallon price and improved efficiency. The operating team delivered our best quarter of fuel efficiency in three years, benefiting from both tactical operating initiatives and increased utilization of fuel-saving technology. Equipment and rents decreased by $3 million, while property gains were unfavorable by $7 million. Now turning to cash flow and distributions on Slide 13. Free cash flow continues to be strong at over $2.2 billion. Investing for the safety, reliability, and long-term growth of our railroad continues to be our first priority use of capital. After fully funding these investments, we remain committed to our balanced and opportunistic approach to returning cash, and have distributed over $1.9 billion to our shareholders year-to-date. Economic profit highlights our priority to grow operating income while maintaining capital discipline and pursuing high-return investments. While lower year-to-date economic profit grew in the third quarter. We remain focused on increasing economic profit over the long term and are confident that focus aligns with the interests of our shareholders. With that, let me turn it back to Joe for his closing remarks.

All right. Thank you, Sean. Now I will finish our prepared remarks by going over the guidance updates for the remainder of the year. As I outlined at the beginning of the call, we are proud of what our ONE CSX team delivered in the third quarter. As planned, we grew volumes, revenue and operating margin. Now going into the fourth quarter, near-term conditions look modestly more challenging. As I mentioned at an investor conference last month, we knew that lowered diesel prices and the decline in global benchmarks for metallurgical coal will be a drag on revenue over the second half and the fourth quarter specifically. Since then, we've gone through two hurricanes in our service region, and have also seen volumes softened in a couple of key customer segments like metals and automotive, a bit more than we were expecting. Practically, this means that we expect modest volume growth in the fourth quarter supported by favorable markets, like chemicals and ag as Kevin talked about, that continue to perform very well for us. Lower fuel and coal prices, together with that modest volume growth are leading us to expect a slight decrease in total revenue for the fourth quarter. As we show here, we estimate that lower fuel surcharge and the total effects of a slightly softer coal market will lead to roughly $200 million in revenue effects year-over-year just on their own. Our merchandise franchise continues to run very well, and our operations team is pushing ahead with efficiency measures that are having real benefits. However, slightly lower revenue combined with additional expenses as we reroute and rebuild after the hurricanes are going to limit our near-term margin gains. We are still aiming for $2.5 billion in total CapEx this year. As Sean described, we will likely see some additional capital needs for hurricane rebuilding, some of which will occur in the 2024 calendar year. Finally, there is no change to our commitment to a balanced and opportunistic approach to capital returns via buybacks and a growing dividend. Let me close with this. We give many updates today. There is some near-term uncertainty in the market, and we are rebuilding after two major hurricanes. So we have had to adjust our short-term assumptions in response. All that said, the bottom line is that CSX is running very well, and we are building momentum across the railroad. This continues across the second half of 2024, and we'll keep building into 2025. We are excited and just in a few weeks, we'll be hosting many of you at our Investor Day in Amelia Island, where we are going to give you more detail on our strategy to deliver sustainable, profitable growth. We encourage you to bring your best questions for the whole team. For now, we're ready to answer your questions about the quarter. Matthew, please start the Q&A process.

Thank you, Joe. We will now proceed to our question-and-answer session. As you all can appreciate, to make sure that everyone has the opportunity to take part in the time that we have, we ask you to please limit yourselves to one and only one question. Operator, we're ready to start the process.

The floor is now open for questions. Your first question comes from Brian Ossenbeck of JPMorgan. Your line is open.

Just wanted to ask a big picture question about price cost and your ability or how strongly you think you can get back to a positive spread in price cost next year. You have the labor negotiations that have already set a price for increase on the average comp side. So maybe you can give us a little bit of sense in terms of how those conversations are going with customers now that, that market is already being set in the market? And if there's anything on the other side you have to get out of those negotiations while you work towards more of the work-rest tools?

Brian, it's Sean. I'll begin and then pass it over to Kevin for insights on customer discussions. Regarding price cost dynamics, we've consistently mentioned that the gap between price and inflation costs has remained positive throughout the year, achieving one of the strongest positions we've seen in the last decade. There's nothing negative in this area, and we don't anticipate a change, which is encouraging. Looking ahead to next year's inflation environment, we foresee wage inflation exceeding 4%. Some tentative agreements, already ratified, are set at 4% by midyear next year, with our recent increase of 4.5% in July. This positions us for a wage inflation expectation of 4.25% for next year. Health and welfare costs might actually fall below that. Therefore, including health and welfare costs, we expect wage inflation to be under 4%. Additionally, general inflation across other factors is anticipated to align with overall PPI trends, around 2% to 3%. Thus, the situation doesn’t appear excessively challenging. Now, I'll hand it over to Kevin to discuss conversations with customers.

Yes. I think there's a couple of factors. Certainly, I think we've been highly successful this year and exceeded our plan coming into the year, despite a trucking market that obviously has been more persistently down than what we had thought. So, I think that's probably an opportunity next year. So, it's a watch item, but probably more an opportunity than a risk. Hopefully, as we move through the year. And that's where we're competing today more and more versus that truck. And so that would be a helpful dynamic for us. But overall, we do expect inflation to come down over time, and that would be reflected in some of our prices, but we still obviously look for ways to cover our costs and do those things in the right way, but really focus on delivering service. And if we deliver the right service and that service continues to improve, then customers see the value in that and we're able to price to that service.

And Brian, it's Joe. One last thing. You mentioned work rules at the end there, three-part question. The reality is, Mike, myself, and many of us believe that in order to have the real meaningful conversations with our union partners on safety and work rules, you have to get beyond the wages and the benefits conversation. And that's one of the reasons why we've been so fortunate to reach these types of agreements, and be able to get past that so that we can then spend the time over the next several years working together on improving our efficiency, improving our safety, but also listening to our employees on their needs for work rules, work-life balance, and those kinds of things we're scheduling. We're excited about the opportunity to do that in partnership once we get past the kind of national bargaining type topics of general wage increases and benefits. And Sean mentioned that we're really excited about the fact that we're actually going to be able to reduce some of the health care-related costs associated with our union employees next year. So, a lot more to come on that.

So, I'm curious. Obviously, we're dealing with a loose trucking market. It's been that way for a while. In terms of upside to intermodal pricing for next year, maybe you could give us some indication on how those conversations are progressing with customers? And then obviously, 1% revenue growth is a little bit soft, is there anything you can do in terms of mix to maybe accelerate that beyond that kind of low single-digit type number, whether it's focusing more on the merchandise side or again, fixing that mix on intermodal pricing?

Yes. Well, obviously, the success we've had in merchandise is a very good mix factor for our business. And you'll hear in November that there's a lot of exciting things that we see, but within our merchandise markets and what we're doing and the teams that got a lot of great work, but I won't to preempt that today, and we'll share that in November. But when we think about intermodal pricing, there was an intermodal customer of ours that spoke yesterday, and they're certainly closer to the market dynamics on a day-to-day basis than maybe we are. But I think there is some hope that at least we brought them here and at some point next year, we would anticipate some increases because the truckers out there aren't very profitable right now, and they end up having to cover their costs at some point. So, we're seeing probably slower than people expected supply coming out of the market, and that will adjust, and I think that will provide opportunities to convert more volume in the East and hopefully at better rates. And as you know, in many cases, we're tied to that. So, we have some spot market business and others, we follow the price as our customers benefit from that. So, it will be a gradual path forward, but I do think it's probably a better backdrop than what we saw in 2024.

Sean, you threw a lot of numbers at us on the short-term stuff, $200 million from fuel and coal and then the $50 million from the hurricane impact. I know it's still early in the quarter, I know there's a lot that can happen. But when you take those things, mix in kind of the softer auto and metals, when you talk about revenue being down moderately and operating margin reducing. So, I'm guessing that's deteriorated sequentially. What kind of magnitude are we looking at there? Are we talking about tens of basis points or substantially greater based on what you see today?

Yes, Jonathan. There are a lot of numbers. So yes, and you got them all right. So, thank you. So, Joe mentioned the revenue headwinds, those are year-over-year in terms of fuel and coal. That probably translates into about $100 million of operating income headwinds year-over-year in Q4. And then add on that, what we're estimating for now to be roughly $50 million from the hurricane, that's a significant headwind on a year-over-year basis that will make it challenging to grow operating income and challenging to grow margins. What that means on a sequential basis is normally, you would see seasonality Q3 to Q4 margins might get a little bit worse. They'll probably be worse than normal seasonality as a result of all the dynamics that we're seeing there including the impact of the storms. In terms of how much worse, I think we're still working through cleanup and recovery, still hoping that we can recover some of the revenue that's been lost and obviously, keeping focused on efficiency efforts. Mike mentioned, even with volume up 3%, we took starts down 3% in the third quarter. So, there's a lot of momentum there. There are some things that we can do to help offset it. But it will certainly be worse than normal seasonality in terms of margins and operating income from Q3 to Q4.

So, Mike, as you're trying to balance service and efficiency, any thoughts on head count trends from here and overall sort of cost trends? And then, Sean, I know you had a comment about comp per employee stepping up sequentially, any thoughts on how to think about that going forward?

Let's begin with headcount. Our main priority is retention regarding our workforce. We are currently hiring to address attrition, which is higher than we'd prefer. Reducing this rate is crucial because we are experiencing churn, with employees leaving after about two years. Overall, we're doing well in most areas, though there are a few spots in the Northeast where we are still looking to hire, but it's a small number. I believe our headcount will improve as we become more adaptable. It's worth noting that July was our best month for operational and customer service metrics this year, followed by some significant challenges. Therefore, getting our operations back on track in the coming weeks is our top priority. Concerning costs, our goal is to maintain service while ensuring efficiency, focusing solely on what it costs to achieve our objectives. I expect our costs to continue to improve, though disruptions in our network are affecting that. As Sean mentioned, this upcoming quarter will not meet our expectations, but the strategy we've implemented—minimizing new starts during this disruption—has still allowed us to manage greater volume. I anticipate this trend will continue.

Yes. I would like to add regarding the headcount. Last year, we observed an increase in headcount from Q3 to Q4, and we expect a modest increase this year as well. This is primarily due to our current hiring efforts for next year's midyear peak. The new hires will be onboarded and qualified around that time, which tends to coincide with a rise in attrition. However, this increase will be modest, and we anticipate that volume will grow more than headcount, particularly when we account for the quality of company drivers I mentioned earlier. In relation to compensation per employee, we generally see a slight uptick from Q3 to Q4 due to several factors. One factor is that some capital programs begin to wind down, leading employees to charge more of their time to operating expenses during this period, in addition to vacations. This year, we also have the effects of the storm, which is contributing to higher overtime in the early weeks of this quarter. While I don't expect these factors to lead to significant changes, we should see a small increase in labor costs per employee.

I have two questions for Kevin. How do you view the sensitivity of your multiyear work and industrial development, which often requires a long-term perspective? Do you believe these projects are somewhat sensitive to the economic cycle? It seems you mentioned a mixed outlook, and you observed some weakening in certain markets in the third quarter. Could this potentially slow down project timelines? I'm also curious if there could be any election-related impacts. I would appreciate your thoughts on how the economic cycle and other uncertainties might influence the pace of project initiation in 2025 and 2026.

Yes, it's definitely a consideration. We've observed some announcements on the electric vehicle side, which is a small segment of our portfolio that will be reflected in November. This factor plays a role. The current economic conditions can either speed up or slow down these initiatives. However, once projects are underway and capital has been invested, the goal is to maximize their use and returns. Many of these projects are currently in progress, giving us confidence that they will move forward. There may be some delays of three to six months, which is a possibility, but those aren't prevalent across the board, aside from the electric vehicle announcements from six to twelve months ago. While it's a consideration, we remain very confident due to the substantial capital already invested in several major projects, which will serve as positive support for us. We will provide further clarity on this in November.

Joe, I know you addressed this with the first one, but maybe I think it's worth coming back to the new five-year agreement that you guys signed with, I think, 3.5% inflation locked in. A lot of investors just question, like why go early there, especially as inflation is coming down, like couldn't you get a better deal if you waited? But in your response, you said, like there's things we're looking to do differently here. And I know when you came to this industry two years ago, you said, look, labor relations are something I want to focus on. So, can you elaborate on what you hope to get out of this on the other end?

Sure, Brandon. Thank you. When we engage with our employees across the network, the main concern expressed, aside from safety, is their dissatisfaction with the past experience. They felt disconnected and unappreciated, especially after going three years without a raise during a time of high inflation and COVID when they were essential workers. Both the union leaders and employees have made it clear that they do not want to endure that situation again. Congress indicated that we should not return to that scenario. It's crucial to note that nobody was satisfied with the previous outcomes. If we continue down the same path, we risk repeating the cycle of discontent. As Mike mentioned, one of our core objectives is to stabilize our workforce, retain experienced staff, and foster a work environment where employees are motivated to deliver excellent service safely and efficiently. As an industry, we reflected on our previous experiences and attempted, as a coalition, to reach a voluntary agreement early with our union partners. While we faced challenges initially, we successfully reached an agreement with CSX and soon thereafter with Oakland Southern and BNSF. The positive takeaway is that we have established a pattern regarding economic expectations moving forward. Sean noted there will be some reductions in healthcare costs for both the company and employees next year, which is a favorable development. The agreement begins with a 4% increase next year, tapering down to 3% in the fifth year, which is significant. Although inflation is decreasing, employees are still exposed to unsettling news from other companies regarding larger wage increases, which can create confusion about our approach. We believe this strategy is the right direction for CSX and essential for creating a unified team where employees feel valued and heard. Once we finalize national agreements on wages and benefits, we can concentrate on collaborating to enhance network efficiency, safety, and address other important issues. We now have five years to focus on these matters without the distractions of national negotiations. In previous years, we struggled to address local work rule issues due to the lengthy national agreement process. The efficiency we achieved in the third quarter and the significant margins on volume demonstrate the strength of our network when all employees work together to meet customer needs effectively.

I know it sounds like fourth quarter from a margin standpoint, difficult to make year-over-year headway given some of the headwinds that you're talking about, which makes sense. I guess, when you think about it for a full year, I think that probably means sort of little margin in '24. I know I'm asking you guys to look out a little bit here, but kind of conceptually, with the environment that we have today with sort of weakness in some areas, maybe some strength in some company-specific strengths in other parts of your network. Is this the type of environment that you think you can consistently grow margins in? I guess what are the sort of puts and takes that you think you need to see as we move into '25 for that to continue to happen or resume to happen again?

Yes, Christian, thanks for your question. Obviously, for '25 specifically, we're still in the middle of the planning process, so it's a bit early to kind of definitively say anything. But what I would say, broadly speaking, and longer term, we'll highlight this at the investor conference in a few weeks as well is the setup for CSX in terms of where the service product is at how that's impacting the customer experience and the interactions that that's creating, which translate into growth opportunities, not to mention continuing to be able to price at or above inflation is very supportive. The other piece of that, of course, is the fact that the network has capacity. We have locomotives, we have crews. Like Mike mentioned, there are some places we're still hiring. But for the most part, we're only hiring for attrition; we've got line of road capacity. So, you take all that together, it's a good setup for strong incremental margins. There are always things we can't control that could make it more challenging or easier for us to achieve margin improvement and operating income growth, which, frankly, is the first goal. Operating margin is really sort of the outcome of all of it as we grow into the existing capacity. Fuel prices are down. If you look at where they're expected to be next year, it should be another headwind for us. Export coal prices seem to have stabilized. But if you carry that out to next year, that would be a headwind for us next year. We're going to do a lot of construction on the Howard Street Tunnel next year in Baltimore that will cause some reroutes, some network disruption, not to mention the rebuild coming out of these storms. So, there are some things that will make it a little more challenging. We may see some tailwinds from the trucking market. We're watching that closely and hopeful that the environment there is a little easier next year than it was the previous year. But certainly, longer term, having the capacity to grow and continuing to deliver a consistent high level of service to the customer is a winning equation for us.

I guess, Kevin, I wanted to dig into just the volume growth side. I mean you mentioned some share wins in truck to rail conversions. I'm curious if you can just add more color around maybe the cadence of wins or what categories they fell into during the quarter. And then I think there's some concerns out among investors around merchandise pricing. So, I'm curious how is merchandise pricing out in the market today? And are you seeing business that you're winning being more price competitive than past bids? Or is there any change in that as you win this business?

Yes, we compete every day, and our service product continues to improve, as highlighted by customer surveys. This makes it easier to sell compared to when we faced challenges with headcount and other issues a couple of years ago. The team's focus remains on delivering value to our customers, and when we achieve that through service, customers are willing to pay for it. We constantly seek ways to provide value beyond just price, such as by cycling their assets to reduce capital expenditures and creating efficiencies. These discussions are happening more frequently, especially with Mike and his team supporting those conversations. As we approach next year, the trucking market is crucial. We are successfully converting truck volume in our merchandise franchise, achieving results greater than in my past experience. This momentum could increase, particularly if the trucking market tightens and customers realize they are missing savings by doing nothing. If that environment changes, the team is prepared to take advantage of it. Despite the challenges in the trucking market, we have seen conversions in various areas, including forest products and metals and equipment. We anticipate continued conversion opportunities as we move into next year and beyond.

Just a question. You indicated in your remarks that you're seeing a modest improvement or uptick or something along those lines for domestic intermodal. I'm wondering if you can give a little more color on that kind of looking now relative to international, which I know had been really driving things in intermodal. And is it enough to sort of move the needle on your yield for intermodal at this point?

I believe we're in a position to suggest that it feels like we have reached the bottom, which gives us optimism about what the upcoming changes will look like. This is something we are closely monitoring. There was previously discussion about pull forwards, but we aren't hearing much about that now, so it's still to be determined. We had hoped for a more typical peak season, and while we are optimistic about that happening, we are still keeping a close eye on it as well. We believe the fundamentals do not support the current level of trucking supply, and we expect a rebalancing, which may take longer due to the substantial profits experienced during the pandemic. As a result, many in the industry have more cash available to weather this cycle than in previous ones. We hope that insights from the earnings calls of other trucking companies will confirm some stability in the market. However, right now, we are seeing stability but wouldn’t necessarily call it a turning point.

I was hoping you could talk a little bit about some of the diverted volumes that you called out ahead of just the labor negotiations and potential strike on the East Coast. Maybe if you could talk about the impact that you did see during the quarter? And then kind of what you're hearing and seeing now in terms of those volumes returning back to normal flows and normal to the East Coast?

Yes. I mean it was a little bit modest. We did see some shipments naturally move over to the West Coast, and then we would have benefited from that moving from the West to the East, but it was relatively modest. We did see some impact, obviously, with the port shutdown on the East Coast. You saw that for a few days, and then I've got to tell you that our operating group on the intermodal side was ready to ramp back up immediately. So very little disruption coming out of it. But those were some lost days that we would expect to recover through the rest of the quarter, but it did impact us on a near-term basis.

Maybe you could talk a little bit about export coal demand and the stability in the market given the growing importance and volatility, how stable can we look at this level of demand? Because obviously, we talked about the benchmark pricing and what happens on the yield side. And then Joe, Mike, you mentioned the service levels multiple times. How do we align the service levels with what we get to see, which is the erosion in the on-time originations and arrivals down into the low 70s and upper 60s? Maybe you can just walk us through that?

Export coal is a topic I'm quite passionate about. When examining this market over an extended period, it's evident that supply typically responds when prices are high, while demand reacts when the global macro environment is less favorable. What's different moving forward is the diminished supply response compared to the past; the necessary financing and investments to introduce new volume into the market simply aren't available. This presents a more favorable backdrop for the mines we support in this competitive global environment. I believe this might lead to greater price stability in the long run. Additionally, global costs have also risen, suggesting that the natural price for coal is likely to stabilize at a level above its current state, which fuels my optimism for an improved pricing scenario ahead. Recently, the talks around stimulus from China have generated a sense of hope, especially since China is a major coal consumer. This brings optimism for potential recovery. It’s essential to remember that we operate in a global market, just as our customers do. However, I genuinely believe that the lack of supply response in the future could create a healthier environment for us, which makes me particularly optimistic about our met business and the prospect of increased stability going forward.

Sorry, it was a two-part question. To put it simply, we primarily focus on the CSD number. If you are looking for a specific number, that's the one we consider as our main indicator. It reflects what our customers need from us, and we work to deliver that. How we transport the cars on trains, regardless of weather conditions, relies on our extensive automotive network. While we operate on a scheduled plan, it can vary significantly during loading. We do not alter train schedules except for adjusting the destinations. Consequently, on-time performance is not as crucial as the car cycle, which is how we assess our operations. You are correct that we aim for seven out of ten trains running on time, but our key concern is ensuring that the cars on those trains reach their destinations to meet customer demands. We look at dwell time and car velocity, among other factors, while trying to balance the promised service product and the CSD number that we prioritize. Our goal is to transport these cars in the most cost-effective and efficient manner. While it is important, our focus has been on enhancing efficiency and service over the past six months. The current numbers are all significant, and we are working to strike a balance between them. Disruptions have negatively impacted our on-time performance, which was evident in the last quarter. If you review our progress from July, you will see where we are heading. It is a priority, but just one of several factors we are balancing to achieve our end goals.

I wanted to ask about pricing. It appears that we've been able to improve pricing in the chemical segment. Is this a result of a healthy market with some pricing leverage, or are we starting to see effects from quality improvements? Can you discuss how the chemical part of the business is evolving?

Yes. I think there's a lot of factors that obviously play in the RPU length of haul, all those things. I don't see the chemical market really that different from some of our other merchandise markets where we've been successful. So, I know, optically maybe on an RPU basis, that appears to be the case. But I think when you look at across that merchandise portfolio, there's really not a big deviation between the markets. As our service continues to get better, as I mentioned before, as we deliver, as we can cycle their cars faster and save them capital, all those things factor in and deliver value to the customer in other ways where we can monetize that through price.

I wanted to talk a little bit about intermodal yields. I mean there was a lot of movement of freight from the East Coast to the West Coast in anticipation of the port strike. Do you see that switching back? And if so, what sort of impact should we expect on the yields? And then I guess I'd throw a quick one here, too. How are you feeling going into that January 15 date with the ILA, do you think it could be Strike fears 2.0?

I don't have direct insight into how things are progressing, but it will be something we monitor closely. I'm optimistic that the agreement will be reached well in advance and help reduce some of the uncertainties that could arise for us. When considering freight movement, it tends to favor specific ports for efficiency, and we've observed the East Coast consistently outperforming the West Coast over time. This is partially due to the manufacturing shift occurring away from China and other regions, which naturally favors the East Coast. I believe this trend will persist as we try to distance ourselves from China, which is beneficial for us. The investments being made on the East Coast, compared to those on the West Coast, are encouraging for growth, and we intend to take part in that. However, we remain somewhat neutral; if freight chooses to move west or east, it's beneficial for us, as it would typically involve trucking, presenting an opportunity. I anticipate that as East Coast volumes rise, we can extend our reach further into Chicago and other areas, representing another opportunity that will unfold over time. Our underlying port strategy is set to generate significant value and will encourage our customers to reconsider shifting more freight to the East Coast, given our efficient inland transportation options from those ports. While there may be some challenges regarding labor negotiations in the near term, the overall trend appears favorable, and we expect to gain from it as a railroad.

Your next question comes from the line of Walter Spracklin of RBC Capital. Your line is open.

I'm curious about the competitive landscape. There has been a lot of discussion regarding trucks, but I know your main competitor in the rail sector is making significant changes that are impacting their service. Are you noticing any effects from this in the market? Are there any major contracts on the horizon that you see as potential opportunities or risks? I'm trying to understand how improvements in your competitor's operations might be influencing your ability to gain or lose business.

Yes. I think we compete every day, and we do so with a strong service that is continually improving. Customers recognize the stability of our leadership team, the consistency in our messaging, and our objectives, which focus on growing alongside them. This understanding aids our discussions, reassuring customers about our direction and the continued stability of our team. We maintain an effective cost structure, allowing us to compete both on service and price. In these scenarios, we are confident in our competitiveness and success. Additionally, we are exploring other growth opportunities, aiming to expand the market and transport freight that is not currently on rail. Engaging in these discussions while retaining our business is critical for us. Our current focus is on growth, and we have experienced considerable success this year, which we expect to continue into the next year and beyond.

So, Joe, it sounds like you invested a lot in the cultural part of the equation. I'm wondering if you can share some perspective on how some of the churn rates or turnover rates, however you guys measure them internally, internal Net Promoter Scores, that kind of stuff, have changed as a result of those investments?

Thank you, David. We consider various metrics, but culture is challenging to quantify. It's similar to love; you recognize it when you experience it, but measuring it precisely is difficult. Nonetheless, we observe its effects in multiple ways. For instance, we conduct Net Promoter Scores with our employees, and we've seen significant improvements in those numbers, particularly among management and union members, over the past two years. While we're still working to improve the union side, the numbers have risen notably from where they were two years ago. As Mike pointed out, we're also focused on attrition rates for new hires and mid to long-term employees. The attrition rate for new hires is crucial since we invest over six months in their training. Losing them after that would mean restarting, especially in key locations. Additionally, if we look at the efficiency gains we've achieved on a quarter-by-quarter basis this year, and as Kevin noted, our highest Net Promoter Scores for customers since we started measuring, it's evident that these improvements are connected to our employees' engagement and morale. When employees feel included, heard, appreciated, and valued, they are likely to provide better service to our customers and create a safer work environment. Although measuring this is complex, we strongly believe that our efforts are yielding positive results. We've organized about 20 family days with around 30,000 attendees, contributing to a sense of community. Employees are increasingly expressing pride in representing CSX in their communities. These aspects are crucial for both retention and attracting talent, as well as enhancing collaboration among colleagues. I often emphasize that this is a service business, and it's essential to focus on culture and employee engagement because our employees are the ones delivering the services. This year, we received numerous notes from employees expressing gratitude for our outreach to those affected by hurricanes, ensuring they had the necessary support. These gestures reinforce that employees are valued beyond just being numbers. Such factors are vital not only for retention but also for fostering an energetic environment that ultimately benefits our customers. We believe our approach is effective, evident in the numbers. As Sean mentioned, we have had seven consecutive quarters of merchandise and intermodal revenue growth of 3% or more, despite a challenging environment. This is also reflected in the resilience of our network and our swift responses to issues. Regarding the recent weather impacts, those with over 30 years of experience have indicated that the impact of Helene on our network is the second most significant hurricane, following Katrina. We're facing substantial challenges, yet we've only seen a $50 million impact in the quarter. As Sean noted, we face considerable capital costs for network rebuilding, but it's the collaboration and motivation of our people that makes a difference. Moreover, having national agreements finalized before their expiration is unprecedented in the railroad industry, showcasing our cultural strength and teamwork. Ultimately, this influences our customer service and safety outcomes. As Mike indicated, our injury severity rate has significantly decreased over the past several months. Although the overall injury rate remains stable, the reduction in severity is a significant achievement that stems from effective collaboration and a strong culture.

Thank you. This concludes our time that we have for Q&A. And with no further questions, this concludes today's conference call. We thank you for your attendance. You may now disconnect.