And gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation's Third Quarter 26 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number 1 on your telephone keypad.
If you would like to withdraw your question, press star 1 again. Thank you. And I would now like to turn the conference over to Matthew James Korn, Head of Investor Relations and Corporate Communications.
Mister Korn? You may begin.
Thank you, Abby. Good afternoon, everyone. We are very pleased to have a July third quarter conference call.
Joining me from the CSX leadership team are Steve Angel, president and chief executive officer Kevin S. Boone, EVP and chief financial officer Maryclare Kenney, Senior Vice President and Chief Commercial Officer. In the presentation that accompanies this call, which is available on our website, you will find slides with our forward looking and our non GAAP disclosures. We encourage you to review them.
With that, I am very happy to turn the call over to Mr. Steve Angel.
Thank you, Matthew. Good afternoon. I am pleased to report that CSX has delivered another quarter of strong financial performance.
Earnings of $0.57 per share increased 30% compared to last year's adjusted results. Our volume grew 5% as more customers turned to our railroad to safely and reliably move their goods. And our operating margin improved to 39.1%.
Which was 420 basis points higher than last year's adjusted result. The progress we continue to make on productivity has helped drive substantial growth and profitability, earnings, and free cash flow. Our goal is to be the best performing railroad in North America.
And the entire CSX team is responding to that challenge. We are proud of how far we have come this year, and excited about our position as we look ahead to 2027. Before we turn to the details, I want to recognize Mike Corey who recently announced his retirement after a 45-year career.
Mike is a true railroader who has made significant contributions to CSX, our customers, and our employees. He also developed a deep bench of operations leaders and I am confident in Doug Ryhorchuk, Casey Albright, and the entire operations team as we continue executing on our priorities of safety, reliable service, and long term value. We thank Mike for his leadership and wish him all the best.
Turning to slide 4. The work underway to strengthen our safety culture contributed to another quarter of year over year improvement. Our FRA injury rate decreased by 17%, and our accident rate fell by 4%.
While we are encouraged by that progress, our work is never finished. We will continue our efforts to reduce risk, increase awareness, and improve communication to support our employees as they do their jobs. We do not and will not compromise on safety.
We also continued improving productivity. Third quarter fuel efficiency was not only the best ever achieved by CSE but also the best ever reported by any US railroad. And workforce efficiency as measured by gross ton miles per employee improved substantially year over year.
This next slide shows our key service metrics. We are encouraged by the sequential improvement in velocity dwell, and customer switch data. Which measure first mile and last mile performance.
Trip plan compliance for our carload business also improved modestly quarter over quarter. Though intermodal trip plan compliance declined. We are handling more volume safely and efficiently but we know our network can perform better.
Operations is connecting more closely with our commercial team giving us better visibility into demand, and helping us get the right number of crews and locomotives to the right locations. Active crew management is improving engineer and conductor availability. Better planning and coordination between engineering and transportation is leading to less network disruption as we execute our capital projects.
In technology such as auto-- Autonomous track inspection cars, is helping us plan better and respond effectively to day to day events on the railroad. Supporting faster trains and fewer delays. Service started strong in October.
With velocity averaging more than 19 mph this month and dwell approaching 10 hours. Our team also did an excellent job preparing for Hurricane Isaias which we managed through with minimal impact. We intend to build on this momentum, ensure that our service supports our growing business.
Kevin, please review our financial performance for the quarter.
All right. Thank you, Steve, and good afternoon, everyone. In the third quarter, the CSX team improved safety, met increased demand for our customers, delivered substantial cost efficiency, and made sequential progress on our service metrics.
Revenue increased 12% driven by higher fuel surcharge. 5% volume growth, and pricing gains across the merchandise, intermodal, and coal markets. As a reminder, our prior year results included a $164 million goodwill impairment. Adjusting for that charge, higher revenue and lower nonfuel costs drove a 25% increase in operating income, and 420 basis points of margin expansion despite 70 basis points of fuel price headwinds.
This translates to a 30% increase in earnings per share Let's now turn to the next slide for a closer look at expenses. The team handled 5% more volume in the third quarter, while reducing nonfuel costs by 3%. Labor expense increased by $19 million as improved workforce productivity and lapping of severance costs mostly offset over $90 million of higher costs from incentive compensation and inflation.
Labor expense will have a typical sequential increase in the fourth quarter but reported headcount will be lower due to temporary seasonal reductions. First quarter 27 headcount will be similar to current levels as these employees return to work and we build our conductor trainee pipeline to start the year. PS&O expenses were 10% lower reflecting our continued focus to drive efficiencies across this diverse pool of the costs.
Savings were driven by improved utilization of both locomotives and vehicles. Reduced reliance on external labor and multiple G&A functions, absorption of intermodal volume growth, and maintenance efficiencies across rolling stock and fixed assets. Steve highlighted our record fuel efficiency this quarter.
I will reiterate the team's great work to reduce engine idling, and utilize fuel savings technology. Both of which deliver greater value in the higher current price environment. Looking to the fourth quarter, on a sequential basis, we expect the normal seasonal increase in PS&O combined with typical weather related reduction in fuel efficiency.
Overall, a consistent-- and consistent with past years, we would expect some step up sequentially in the fourth quarter expense line as we enter the winter months. And while fuel volatility can create some near term noise, we expect to deliver year over year margin improvement above 300-- 350 points in the fourth quarter. We are building a culture of continuous improvement that positions us to deliver further safety, service, and efficiency gains in 2027 and beyond.
This includes a robust pipeline of sustainable efficiency initiatives that we are now incorporating into our 2027 budgets with clear accountability for results. With that, let me turn it over to Maryclare Kenney to review our revenue performance.
Thank you, Kevin, and good afternoon, everyone. Our commercial group continues to deliver in a favorable environment of solid customer demand and tight trucking capacity. The consistent network performance delivered by our operations team together with the new services, added capacity, and growth initiatives we brought online have positioned us well to take advantage of the opportunities in this market.
Our performance this quarter was strong, and I want to thank everyone at CSX for helping us maintain the momentum. Turning to slide 10. Let's go through the highlights of our third quarter volume and revenue results.
Total CSX volume was up 5% in the third quarter. Total revenue was up 12% and our revenue per unit was up 7%. Fuel contributed about half of our revenue growth, as average diesel prices increased nearly 50% year-over-year.
Our intermodal business continues to contribute the largest share of our volume growth. So mix remains a headwind to overall RPU. Even with that mix impact, revenue per unit, excluding fuel, increased 1% this quarter.
We remain encouraged by the results of contract renewals, as we progress throughout the year. In merchandise, revenue increased by 11%, with a 3% increase in volume. Merchandise RPU, excluding fuel, was up over 2% despite unfavorable mix in markets.
With the largest impacts within chemicals and fertilizers. Including fuel, RPU was up 8% year-over-year. Volume performance was more varied across our merchandise markets compared to the second quarter.
Metals was the top performer, gaining 12% as fuel demand, particularly plate, has been very good across infrastructure and energy markets. We are also benefiting from increasing output from the new steel mills located on our network that are ramping up at a favorable time. Chemicals was also a highlight.
With volume up 7% driven by conversion and good opportunities in waste and petroleum products. In contrast, fertilizers has been the softest merchandise area for us. With volume down 13% for the quarter.
The headwinds in this market have persisted for some time, with supply issues limiting phosphate shipments and low crop prices weighing on fertilizer affordability and demand. Reduced trucking availability high truck rates, and elevated diesel cost continue to benefit our intermodal segment. Conversions from the highway remain strong, and the new service offerings through Birmingham, Myrtlewood, Baltimore, and other areas are performing well and attracting new business.
In areas such as Atlanta, where substantial profitable volume growth has led to temporary service tightness, we are working closely with our operations team as CSX-- CSX invests in additional capacity. Total intermodal volume was up 7% year-over-year, and reached a new all time record. With revenue up 20% and RPU up 13%.
Essentially, all of the RPU increase was driven by fuel surcharge. As we have seen through 2026, the domestic business drove this quarter while international remained roughly stable year over year. I am encouraged by the outlook into the fourth quarter, although please keep in mind that we have now lapped the gains from the service agreement with BN that added new business last fall.
Lastly, coal revenue increased by 10%, driven by a 2% increase in volume and a 7% increase in RPU. Export tons grew by solid 7%, as mine output increased while domestic tons declined modestly during a relatively mild summer where natural gas prices remained around $3. On price, global coal benchmarks have moved higher this quarter as supply constraints in China lifted pricing for Australian exports.
This has gradually flowed to US export prices which provided a moderate benefit to our yields in the third quarter. We expect another small sequential RPU increase in the fourth quarter from the lagged effects of these higher benchmarks. As we move into the fourth quarter, we are pleased with what we have accomplished while working hard to finish the year strong.
We expect normal seasonality in our merchandise markets with some support in ag and food, from a good Midwestern harvest. We also have several capacity expansions scheduled to ramp up into year end, particularly in chemicals and minerals. Demand indicators remain good for domestic intermodal, and we are pleased to enter this bid season with the benefit of full double stack operations on our I 95 corridor through Baltimore.
Finally, coal demand appears fairly stable in the near term. Utility burn will be driven by weather conditions, while on the export side, we have been successful in maintaining volume even as a customer mind works through a temporary closure following a fire in late summer. To sum up, as we move into year end and anticipate the start of 2027, our focus will remain on consistent execution winning business from the highway, and ensuring that our pricing reflects the quality of the service we provide.
Thank you, I will now turn it back to Steve to close.
Thank you, Maryclare Kenney. Now we will review our updated guidance for 2026 on Slide 12. We now expect revenue growth in the high single digits compared to the mid to high single digit range we provided previously.
The rest of our guidance is unchanged. I am confident that we will achieve full year operating margin expansion of more than 350 basis points. Our outlook for capital expenditures remains below $2.4 billion and we expect free cash flow growth of more than 80%.
This outlook reflects our strong performance through the first 9 months of the year as well as our expectations for the fourth quarter. As we move into 2027, we will be focused on ensuring we have sufficient resources across the network to support a growing business. Which will include adding to our train and engine employee pipeline.
We remain committed to sizing our workforce to the needs of a safe, reliable, and efficient railroad. In summary, we feel very good about our railroad's position. As we approach year end and are encouraged by the opportunities ahead.
I came to CSX just over a year ago, and I continue to be impressed by the dedication our employees bring to this company. And the pride they take in being part of CSX. Together, we have made great progress towards our goal of being best in class as we build a high performance culture that embraces continuous improvement.
As we carry this momentum into 2027, we will also mark CSX's 200th anniversary tracing back to the founding of the B and O Railroad. It is a significant milestone and an opportunity to recognize our history while showing how CSX continues moving the economy forward. So, Matthew, with that, I will now open it up to questions.
Thank you, Steve. We will now proceed with the question and answer session. Now to ensure that we maximize everyone's opportunity to participate, we do ask that you please limit yourselves to 1 and only 1 question.
Abby, we are ready to begin.
Thank you. And we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue.
If you would like to withdraw your question, simply press 1 again. If you are called upon to ask your question and are listening via speaker phone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And as a reminder, to be able to take as many questions as possible, we ask that you please limit your to 1 question.
Again, to join the queue, it is star 1. And our first question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.
Yes. Hey, thanks and good afternoon. Steve and team, obviously, the productivity that you have been able to drive so far in 2026 has been very solid.
We have seen meaningful margin expansion. You noted, Steve, as we are starting to think about 2027, I know the productivity and the planning is going on for that year. Can you give us a sense of sort of where you think you are in the process?
I think the OR improvements are better than we expected this year. But as you look at the opportunity ahead of you, volume is growing. You noted maybe rebuilding the pipeline of employees.
Can you give us a sense of what the potential product productivity opportunity is from here?
Well, we are still working on it as you as you mentioned, but we already have, a little over 100 initiatives that are contributing to our productivity target next year. You know, this year was a big year for productivity. I do not think 2027 will be as big, but it will certainly be a significant number next year.
But it is something we continue to work on. Team's very excited about Kevin's playing a heavy role in that. And, we feel very encouraged about productivity going into 2027.
And our next question comes from the line of Brian Ossenbeck with JPMorgan. Your line is open.
Yeah. Thanks for taking the question. Maybe, Steve, we can just get your thoughts on the operating department and the structure going forward.
Obviously, Mike's a big part of building out a bench there. Are you thinking if this is, a dual COO type of role? Are you gonna take on some additional operating responsibilities?
Are you doing an external or any type of search? Maybe just give us some context in terms of how you got to this decision and how you are gonna evaluate this going forward. Thanks.
This is the call you are going to want. It was Casey and Doug to continue doing what they have been doing. And, Casey's been in charge of network ops and service design and Doug has been in charge of engineering and mechanical and transportation.
So they will continue doing what they have been doing. They are just gonna report directly into me I look forward to that. I do not know how much most of you know about my background, but, I am.
Most people think of me as an operating CEO and that is what I like to do. If you go back in the. My early days, I actually ran manufacturing operations for GE.
And I installed 1 of the first lean systems in The United States back in the nineties. So operations always have been in my blood and I look. You know, I am not a lifelong railroader like a lot of people, but operations is in my blood, and I look forward to getting more involved with Doug and Casey You know, Casey, again, 30 year veteran of CSX, started off in dispatch.
Doug had 4 decades at CN doing just about every job inside of operations and he is been with us the last couple years, and then they both do a great job. I look forward to working very closely with them.
And our next question comes from the line of Stephanie Benjamin Moore with Jefferies. Your line is open.
Hi. Good afternoon. Thanks for the question.
Really appreciate it. I would say. I wanted to take a step back.
I think there is a lot of really strong top line momentum that we are seeing here. Clearly, we can all see this on the volume front. I think we can all see just the fuel contribution.
But as you think about just the price opportunity, even ex fuel, maybe help us with how we are thinking about that opportunity in 2027 Clearly, inflationary pressure even beyond just the transportation environment are more top and center of these at this point in time. So I would love to get your thoughts on just pricing as we look into 2027. Thanks.
Yeah. Thanks for the question. I would tell you pricing is really a key focus area for the team.
We have talked about that a lot this year. Steve mentioned on previous calls, we are really taking a surgical approach to pricing. You mentioned inflationary pressures.
We recognize those. We are having conversations around that with customers as we go through the renewal process. I would say, as a reminder, we cannot touch every contract every year.
But we are focused across markets. We still expect for this year our same store sales pricing to be stronger than it was last year. And I would tell you, we have seen discretionary pricing on the merchandise accelerate as we have moved throughout the course of this year.
And our next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Hey. Thanks. So, Steve, I think in the past, you said that you do not plan for growth.
But we are. This is gonna be our third year in a row of volume growth, which I actually do not think has ever happened at CSX before. At least back to, like, the nineties.
So I guess what is the sustainability of this in your mind? And what does that mean for the network? Are we handling this well?
Do we need more people? Do we need more locomotives? And is this.
Should we get continued volume growth? Is this just a sort of a further opportunity for productivity if we get some continue growth.
Well, I am encouraged by all of our growth initiatives that Maryclare and the team are driving and it looks to me like we have some momentum on the growth side. I think you are correct. You know, what I have said before is when I look at the types of earnings per share growth I wanna drive by, I generally assume modest volume growth.
And that generally is the case. But, again, as I look at what is going on here, with all the initiatives, it looks pretty positive going into next year. With respect to our ability to handle the volume, we feel very confident we can handle the volume.
We are adding some headcount. I think Kevin said that in his remarks. On the T&E side.
To make sure that we, we are properly manned to from an operating standpoint, a transportation standpoint, to serve the business that we have in the business and the additional volumes we expect to come. So again, encouraged by the initiatives that are underway, and I think we are, going into the year from a pretty good position on the top line and we will be ready to serve that business.
And our next question comes from Tom Wadewitz with UBS. Your line is open.
Yeah. Good afternoon. wanted to get a sense if you could provide some help on the key pieces of intermodal volume growth. And then give us a sense domestic to be clear, domestic intermodal volume growth.
And then just how we think about how much runway is left whether it is available boxes in UMAX or whether it is just kind of how far the service has progressed on, let's say, Southeast Express with CP. But I just, I guess, I think of the, You Know, UMAX Kind Of New Services Related To Howard Street and things you could do as that was debottlenecked, and then maybe CP Interline is potentially specific drivers. But if you could run through what are the kind of biggest drivers on domestic intermodal and is there still a lot more to go, in 2027?
Thank you.
Yes. Sure. Thanks.
So domestic has really driven our growth this year. International has been relatively flat, particular, in the recent quarter. What I would say on the domestic side is we have got a number of initiatives out there.
The team. We have talked about on previous calls, the work the team has done in relation to SMX and Howard Street Tunnel. And so in both places, we continue to see volume growth, and we have been very pleased with that over the course of this year.
FMX has been in play longer than Howard Street. We finished the work around the tunnel in full double stack clearances after we were through the majority of bid season this past year, so we have seen momentum build on Howard Street. But we are excited about getting into next year's bid season, which is really starting right now.
And having that solution and kind of more of the RFPs and the routing guides as we go forward. You know, beyond the new solutions, we are working closely hand in hand with our channel partners. And then through our national accounts team directly with shippers.
To look at opportunities for truck conversion. Truck capacity has obviously tightened pretty significantly over the course of the last couple of quarters. And we have customers that are existing customers today, are continuing to look to rail to move more of their business to an intermodal solution because of what they are seeing in the truck market.
So we are very optimistic about the opportunities that are. That continue to be in front of us as we close out this year and go into next year on the domestic intermodal side.
And our next question comes from the line of Brandon Oglenski with Barclays. Line is open.
Hey, good afternoon, and thanks for letting me ask a question here. Kevin, I know you spoke to guidance for, I guess, greater than 350 basis points improvement in the margin on the fourth quarter. How do we think about that sequentially?
I think you did give some detail around headcount and PS&O.
Yeah. Thanks, Brandon. When you think about, the third quarter to fourth quarter, there is typical seasonality in that We are hitting the winter months, so you will see PS&O typically move up a little bit.
On the labor side, as you move into vacations, heavier vacations around holidays, other things, capital programs move off. You will see a little bit of labor. Cost come in, but that is typically normal seasonality.
So if you look back out after, the last 3 to 5 years, 200 to 300 basis points of margin degradation from third quarter, fourth quarter. Obviously, all the initiatives we are doing, we are looking to offset as much as. Of that as we can, but there is new.
Normal seasonality that we will see and we anticipate on both of those cost line items.
And our next question comes from the line of Jonathan Chappell with Evercore ISI. Your line is open.
You. Good afternoon. I do not know if Mike's on the call.
And if not, guess someone else could answer it. But, Maryclare Kenney mentioned, some temporary issues in Atlanta. You know, we watched the weekly data.
It looks like there were some ebbs and flows as the volume remained strong through the third quarter. Do you feel as you are stepping away about the resourcing not just of labor, we have talked about headcount, but all the different things that go into if we do have a peak season and a cyclical recovery for the next couple of quarters. Do you feel that you are operating efficiently enough and can add resources on a less than 1 for 1 basis to keep those service metrics?
Or you would like to keep them throughout the year?
Yeah. So what we are doing, again, we mentioned. This is Steve.
What we mentioned was coming out of the third quarter third quarter is improvement over second quarter. October is improvement over the numbers you are seeing in the third quarter. But the focus is this, on the service side.
We continue to refine our capacity plan including positioning of resources based on the expected demand, and we do work. Do that working very closely with Maryclare Claire's organization. You know, better planning and coordination between engineering and transportation is creating less disruption on our network, which gives our ops team more freedom to operate.
We have been in. Investing in capacity where needed. And Atlanta is a good example of that where we have seen a 50% increase in volume over the last 3 years.
And we are investing in track infrastructure, to increase our switching and processing capacity by 50%. And, of course, good crew management is part of the equation to improve T&E in addition to adding a modest number of T&E headcount. So that is what we are doing.
And our next question comes from the line of Ken Hoexter with Bank of America. Your line is open.
Hey, great. Good afternoon, good evening. So Kevin or Steve, PS&O dipped 400 basis points year over year, maybe even more than you thought.
Maybe talk about some of the specific programs or just such a great achievement. How structural is this? What goes on?
Because, I mean, we have seen waves at CSX of market improvement. Then there was slippage, before you got there, Steve. So just wondering, how you do that.
And then in that 53 basis point target, if you are continuing to do this improvement, you did a 400-basis-point improvement 3Q to 4Q I guess, Kevin, is there any reason you could or could not do the same level of improvement in the 4 quarter year over year?
Again, yeah, look, part of the guidance for the fourth quarter is we have seen some extreme volatility on the fuel side, right? So when you think about the third quarter, we had peak diesel prices. And coming into the quarter, that accounted for probably a little over 100 basis points of margin pressure versus what we had expected coming in just from the fuel price increase.
So we are we are looking to eye on that. We will have better clarity as we move through the quarter on there, in terms of PS&O, specifically, I would say, first, first areas we always look at are the costs that we are paying others. Outside of CSX and I have to give a lot of credit to the team, the procurement team, the operations team to really take a closer look at those costs that we are paying and, really, some of those that we have, insourced other times, we are we are challenging those costs and getting better rates, through our suppliers, but it is across the board.
And, whether it is vehicles, whether it is equipment, asset utilization, a big, big focus on the asset utilization side. Just rates in general, as I said, external labor rates, we really look closely at and making sure there is a level of accountability when we are paying others on the outside. And in terms of the pipeline, as Steve talked about it, over 100 initiatives already, we started in the second quarter.
I think it is the earliest, we have ever started in my 9 years here at CSX in terms of thinking about the next year. We are really building that muscle and building that continuous improvement kinda mindset around here. In fact, we are already thinking about 2028 as well as we think about 2027.
So we are a deep bench. I would also say on the technology side, that is another area where I just see a lot of opportunity to provide greater resources, greater clarity in terms of where the spend is. And we are seeing some early signs of that.
I would say some more to be done in the next year and 2028. But those visibility tools allow the leaders out there to really identify costs and go after them. But it is across the board.
Great job by the team. And there is a lot of ownership across the organization for it.
And our next question comes from the line of Dan Moore with Baird. Your line is open.
Hey, guys. Thanks for the question. cannot remember if it was Tom or Christian that asked a question on intermodal earlier in the call. But maybe as a follow on to that, it is a pretty rare environment we find ourselves in right now, specifically as it relates to domestic intermodal.
And the spread between highway to rail costs probably as great as I have ever seen it in the last 30 years. With that in mind, recognizing that know, domestic intermodal tends to be higher touch in terms of renewals, and that it could be a fairly meaningful driver of yield moving forward. Could you maybe just spend a minute refreshing our memories on how you approach a market like this?
And the potential impact it might have going forward? Thanks.
Sure. Happy to. So on intermodal, just as a starting point, we gotta remember that the business is split between domestic and international.
So maybe just starting, I know the questions around domestic. But on the international side, that is an important part of our overall intermodal portfolio. I have mentioned it before.
A lot of that business is contracted under multiyear deals. That have fixed adjustments. And I would say it is not highly correlated to the trucking market like you see on the domestic side.
On the domestic business, know, it is a mixture of how our contracts are structured. I would say, we think about domestic bid season. it is kind of starting right now for 2027. I think you have heard from us.
You have heard from others over the course of this year that the truck market inflection that is occurred, the tightness in capacity really started after we were a good way into the 2026 bid season. And so there is a lag effect to that. Certainly, as we are looking at new renewals on annual contracts, which we see a lot in our real asset product, know, we are gonna price to the market.
We are taking into account what is going on out there. We are looking at capacity. We are looking at the value of the service that we provide.
We have other business, though, that is not necessarily on an annual application, and so, we will manage that. And make sure we are continuing to price to the value of the service as those come up for renewal.
And our next question comes from the line of Ariel Rosa with Citigroup. Your line is open.
Yeah. Hi. Afternoon and congrats on some strong results here and also congrats to Mike on his retirement.
I was hoping you guys could speak quickly about, just the rail partnerships, the progress there, the level of volumes that you are seeing across some of the partnerships with BN, CN, and CP and how you are thinking about that particularly in the context of the opposition that you have announced to what UPS is proposing and how you see the partnerships reflected as kind of a counterweight to some of the issues that they have raised. Thanks.
Yes. Good afternoon. So, I have talked about it before.
I spent a lot of time in my career here on the intermodal side of the business, and I would tell you it is been common practice for CSX to work closely with our interline partners. To try to find new and, in some cases, better solutions for our customers. So that is nothing new for us.
We have done this kind of year in and year out. We are always looking for ways across our lines of business. But I would say, in particular, when you think about intermodal, trying to find solutions that improve transit and improve reliability for our customers.
And so we are committed to continuing to do that. We have been happy with the results we have seen with the partnerships we formed over the last several years. And we will continue to work on those going forward.
And our next question comes from the line of Spracklin with RBC Capital Markets. Your line is open.
Yeah. Thanks very much, operator. Good afternoon, everyone.
Got a question here for Kevin. And this is really on the cost side. And I know if we look back at second quarter, both truck and rail had pretty good quarters there.
But here in the third quarter, we have seen some warnings in the in the truck segment, mainly on the back of higher costs. I guess truck is going to be more exposed to fuel costs and labor costs, and that might explain the difference in the relative cost experience that you are seeing relative to truck. But, Kevin, is there.
Outside of fuel, is there anything you are seeing in terms of cost pressure that worries you going into 2027 Anything that is popping up on the labor side with any of the know, obviously, we are seeing driver shortages, but are you seeing any shortages on your end in terms of your attempts to hire Anything on the cost side that. that is keeping you awake at night as we are looking at 2020 Yeah.
You know, thank you. Thanks for the question. I spent a lot of time with the quality team here recently, and look, it is the same driver shortages, across the market.
They are experiencing that. That should be obviously a good demand environment, and, that is something that we have talked at length about. You know, to put it bluntly, quality has a lot of opportunity.
And, there is a lot of opportunity on the cost side, and there is a lot of opportunity to price to the market. And so we are looking at all those opportunities. We are.
We will be meeting here next month to put together the 2027 plan but I expect some improvement as we move into next year in that business. Driver recruitment is going to be a big, big focus of that team, but also driving cost out of the business. And then the pricing side, as the market turns and there is limited capacity, quality, in particular, should be benefiting from that.
And our next question comes from the line of Bascome Majors with Stephen. Your line is open.
Yep. Can you talk about the tests you guys are doing on the zero-to-zero fuel savings technology. What are you getting in the field? what is your sense of the path to FRA approval there?
And is any of that productivity factored into some of the comments you made about opportunities in 2027? Thank you.
Yes. I mean, we have been using trip optimizer for some period of time, and we have seen benefits in terms of fuel efficiency from that. What you are mentioning is the zero to zero, which is start to stop, And that is partially implemented.
We continue to work through the test process with the FRA, and I would expect eventually that will be approved, and we will be able to take that capability across the entire fleet. And our next question comes from the line of Jason Seidl with TD Cowen.
Thank you, operator, and thanks for taking the question here. First of all, definite shout out to the operations team there, impressive quarter and congrats on the retirement there to Mike. Maryclare Kenney, questions to you.
I know a lot's been said about intermodal and the opportunity there, but obviously a tighter truck market in fuel cost out east also presents an opportunity for your carload business. Maybe you could talk a little bit about that and what your team is doing to sort of go after that freight.
Yeah. Absolutely. I would tell you, we are working on opportunities across our markets, and, we have certainly seen as truck capacity has tightened additional opportunities over the course of last quarter.
I think a great example in the impact in terms of business trends is in our forest products segment. So we came into this year. That was 1 of the areas we were most concerned about quite frankly, because we saw quite a few closures on the paper and pulp side last year.
And then, obviously, the segment's very tied to housing, which we all know has been lackluster for an extended period of time. While we really have not seen any improvement in the demand side of the equation in that market, The team has done a really nice job. As we have seen truck capacity tighten.
This market does have a lot of truck utilization, and so with both our building product shippers as well as our paper shippers, working with them to identify new solutions that we can deliver and increase capacity that we can provide to help support their needs. But we are really doing this across markets because there is opportunities that present themselves and I feel optimistic about that as we close out this year and go into next year.
Our next question comes from the line of Ravi Shanker with Jordan Stanley.
Just a housekeeping here. The other revenue line was pretty strong this quarter. I just wanted to see if there were any unusual items there and kind of what do we think is the run rate of that line going forward?
Thank you.
Yeah. You know, the biggest drivers of that upside that we saw in the third quarter really related to an in-transit reserve and then a little bit higher in intermodal storage cost as you have seen that market tighten. As you look at the fourth quarter, when you look at the average for the year, we have been averaging in that mid-$130s.
Per quarter when you average it. We will probably do a little bit better than that. In the fourth quarter depending on intermodal continuing its tightness in some other areas, but around that around that level.
And our next question comes from the line of David Vernon with Bernstein. Your line is open.
Hey, team. Thanks for taking the question. So Mary Claire, within the carload business, back in June, you guys had turned on surcharges for the carload business, I think.
Can you share how much incremental fuel revenue that tariff traffic sort of generated with the introduction of those surcharges for the third quarter?
Yes. I do not think we are not going to put a precise number out there. I would say just across the board, we are we are making sure our fuel cost have gone up, that we are being thoughtful about that and have conversation with the customers, and they understand they are seeing similar impacts on the trucking side.
And our next question comes from the line of Richa Harnain with Deutsche Bank. Your line is open.
Hey. So another 1 for Maryclare Kenney. Sorry.
You are getting so much airtime today, Maryclare Kenney. So I just wanted to ask. You know, you mentioned customers looking to push more growth to intermodal.
I think we all see that, and you are finding more conversion opportunities I guess, what are the biggest issues or bottlenecks to picking up this growth from customers that are not so eager? What is left to solve to make this more seamless? And I guess, what more do customers want?
And, how are you ensuring that the growth is sticky and if TL rates begin to fall, and that will not lead to an unwind of some of this tailwind.
Absolutely. So I will maybe start with the tail end of the question. I think customers see the value of rail.
You know, in all environments, but it is accelerated certainly as you think about where fuel prices are today and where capacity is. I think what is important and what I have seen since, the 15 years that I have been here is the most important thing to customers is consistent and reliable service. And so that is why there is so much effort and work between my team and operating team to ensure that as we are converting business, we are making sure we are delivering a good service product to our customers so that it is long term and it is sustainable.
When I think about, what as I think about the conversion opportunity, there is certainly a lot of interest right now with what is going on in the broader market. Sometimes it is education with the customers, making sure they understand, where there is opportunity to convert. We do have a national accounts program from an intermodal perspective where we engage directly with the shipper.
We will look at their truckload file confidentially for them. We will evaluate the truckload load file and show them where there is lanes that are opportunities for intermodal conversion, and then give them visibility to what service looks like in those lanes so they have more comfort in terms of transitioning that from truck to rail. As I think about the cycle that we are in right now, I know questions have been asked about box capacity, chassis, all of those things.
I think the area that we are keeping the most focused on right now is the drayage driver. And so you have heard from some of our channel partners there is a lot of focus there. there is been an effort in terms of recruiting additional drivers. I would say as you think about the broader market, obviously, driver capacity is challenging over the road.
The benefit on the drayage side is it is a more efficient move. You can make more turns in a given day. And so I think there is more opportunity there as we go forward.
And our final question comes from the line of Jeffrey Kauffman with Citizens Bank. Your line is open.
Thank you very much. Thank you for squeezing me in, and congratulations on a very solid quarter. Kind of a follow-up.
Actually, I am going to give Maryclare Kenney a break and then go back to the operations team. You know, a lot of productivity improvement and safety improvement this quarter Can you give us an idea of where you would like these metrics to be within, say, 12 months, 24 months? And what that could mean in terms of driving incremental operating if you are able to hit those targets?
Well, I think in terms of continuous improvement. You know, as I look at the safety metrics, as I look at our operating ratios, operating everything, I think in terms of what can we do to improve. And, we have a whole company that is dedicated to that.
You know, Kevin alluded to and I. Or I did earlier that, we have little over 100 initiatives that we are working on 2027 productivity. Now, we are starting to work on 2028. So to me, it is all about driving productivity. it is all about continuous improvement. it is all about improving our safety metrics, our service metrics, our financial metrics so that we can deliver best in class performance.
And best in class performance for our employees, for our customers, and for our shareholders.
And ladies and gentlemen, this concludes our question-and-answer session and today's conference call. We thank you for your participation, and you may now disconnect.
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