CSX Earnings Call: Profit Shock Amid Cost Reset

CSX Corporation ((CSX)) has held its Q4 earnings call. Read on for the main highlights of the call.

CSX Earnings Call Balances Severe Profit Hit With Cost Discipline and Operational Gains

CSX Corporation’s latest earnings call struck a cautiously negative tone, as management confronted a dramatic collapse in quarterly profitability alongside tangible operational improvements and a credible, though execution‑dependent, turnaround plan. While volumes edged higher and intermodal business showed solid growth on better service, the quarter was overshadowed by a 97% drop in operating income and earnings per share, revenue and yield pressure, and a series of one‑time charges that magnified the headline decline. Management outlined extensive cost actions, tighter capital spending, and ambitious margin and free cash flow targets, but emphasized that a soft macro backdrop and mix headwinds will limit near‑term visibility.

Modest Volume Growth and Intermodal Strength

Total company volume grew 1% in the fourth quarter, underscoring some resilience in demand despite industry and macroeconomic headwinds. Intermodal was a clear bright spot: revenue increased 7% year over year on a 5% rise in volume, powered by new domestic and international customer wins, as well as faster transit times. This points to improved service competitiveness in a segment that has been pressured in recent years by trucking and broader freight softness. However, given mix and pricing pressure elsewhere in the portfolio, intermodal strength alone was not enough to offset broader revenue and earnings declines.

Safety and Operational Improvements

CSX highlighted meaningful gains in safety and network performance, positioning these as foundational to long‑term competitiveness. For the full year, both FRA injury and accident rates declined, with the fourth quarter delivering the best safety metrics of 2024. Operational fluidity also improved markedly from the first to the fourth quarter, as key indicators like train velocity, CarsOnline, terminal dwell, and trip plan compliance all moved in the right direction. Management argued that these improvements show the network is now more stable and capable of delivering higher‑quality service, which underpins the company’s efforts to win and retain freight, particularly in intermodal.

Cost Actions and Productivity Initiatives

In response to the profit squeeze, CSX is rolling out an aggressive cost‑reduction and productivity agenda. Management has identified well over 100 savings initiatives targeting labor, purchased services and other (PS&O), outside and professional services, asset utilization, and discretionary expenditures. The company’s financial roadmap calls for 200–300 basis points of operating margin expansion in 2026, driven largely by workforce optimization and tighter discretionary spending, while maintaining service and safety standards. These efforts are central to the investment case: if successfully executed, they could help rebuild margins even in a low‑growth environment, but they also introduce notable execution risk.

Non-Recurring Charges Mostly Addressed

Earnings were heavily distorted by a cluster of one‑time items, which CSX moved to quantify and largely confine to 2024–2025. In the fourth quarter, the company recorded about $50 million in charges, including roughly $31 million related to separation costs and $21 million tied to technology impairments. Management also flagged about $150 million in unique charges across 2025 for severance, additional technology write‑offs, and network‑related costs. Crucially for investors, CSX stated that these items are not expected to recur in 2026, suggesting reported results should better reflect underlying performance once the clean‑up phase is complete.

Capital Discipline and Free Cash Flow Outlook

CSX is pairing its cost program with tighter capital allocation, aiming to convert more of its earnings into free cash flow. The company plans to cut capital expenditures to below $2.4 billion in 2026, a substantial reduction from prior levels, without compromising essential network investments. Combined with expected earnings improvement, a more normalized cash tax rate, and the absence of the unique charges that weigh on 2025, management expects free cash flow to rise at least 50% in 2026 versus 2025. For shareholders, this sets the stage for potentially stronger capital returns if the company hits its targets.

Coal Domestic Recovery and Select Commodity Strength

Within the freight mix, coal and a few bulk commodities provided some support. Coal volume rose 1% in the quarter, driven by a 6% increase in domestic tonnage on the back of higher power demand and rising natural gas prices, partially offset by weaker exports. Fertilizer shipments climbed 7%, and minerals volumes benefited from ongoing infrastructure‑related activity. These pockets of strength helped stabilize overall volume but were not enough to offset pressure in higher‑value merchandise segments and weaker coal pricing that dragged on revenue per unit.

Howard Street and Network Infrastructure Progress

CSX reported key milestones on its infrastructure agenda that should enhance long‑term growth potential, particularly in intermodal. On the Howard Street project, the first of two bridges has been raised, a step toward enabling double‑stack container service through a critical corridor. Customers are already bidding on freight expected to begin moving double‑stack through the tunnel by the second quarter. Separately, the completion of the Blue Ridge project further improves network capability and fluidity. These projects are intended to underpin service reliability and open new growth opportunities as customers look for efficient rail alternatives.

Leadership and Governance Reset

The company emphasized changes in leadership and governance designed to sharpen execution and financial discipline. CSX has refreshed its leadership team and reoriented executive compensation toward a focused set of high‑impact metrics: operating income and margin, safety performance, and long‑term return on capital. By tying pay more directly to these outcomes, management aims to align incentives with shareholder interests and reinforce a culture of cost control, safe operations, and disciplined investment.

Operational Preparedness and Storm Response

Management devoted part of the call to operational preparedness, underscoring lessons learned from prior weather disruptions. CSX described stronger network conditions and a more comprehensive storm response framework, including enhanced senior‑level coverage, proactive snow and vegetation clearing, deployment of generators, and modified operating plans ahead of severe weather. The goal is to shorten recovery times and reduce the risk of persistent disruption, protecting both service levels and the cost base during peak storm seasons.

Sharp Decline in Operating Income and EPS

Despite these operational and structural improvements, financial performance in the quarter was starkly weak. CSX reported a roughly 97% year‑over‑year decline in operating income and earnings per share versus adjusted figures from the prior year, a severe setback that framed much of the call’s cautious tone. While one‑time charges and non‑recurring items amplified the drop, underlying revenue and yield pressure also weighed on results. The magnitude of the profit decline underscores the urgency of the company’s cost and efficiency initiatives and is likely to keep investors wary until evidence of a sustainable earnings recovery emerges.

Revenue and Yield Pressure

The company’s top line came under pressure even as volumes inched higher. Total revenue fell 1% in the fourth quarter, with total revenue per unit down about 2%. This reflected an unfavorable traffic mix and weaker export coal pricing that more than offset the modest volume growth. Coal revenue declined 5%, with coal revenue per unit dropping around 6% year over year due to softness in metallurgical coal benchmarks and wider discounts versus Australian exports. The interplay of mix and pricing is a key watch point for investors, as it can erode profitability even in a stable or growing volume environment.

Merchandise Weakness Across Several Commodities

CSX’s merchandise franchise remained under pressure, reflecting broader industrial softness and specific sector issues. Merchandise volume and revenue both declined 2% in the quarter. Within that, chemicals volumes fell 6%, forest products dropped 11%, and automotive was down 5%, with plant closures and subdued industrial activity dampening demand. These segments tend to carry higher revenue per unit, so weakness here has an outsized impact on yields and margins. The company’s outlook assumes limited near‑term improvement in these categories, reinforcing the importance of cost control and intermodal growth to support overall performance.

Rising Expenses and One-Time Charges

Beyond the impact of weaker pricing and mix, CSX faced rising operating expenses that further compressed margins. Excluding a 2024 goodwill impairment, fourth‑quarter expenses increased by about $73 million, or roughly 3%. The quarter also absorbed around $50 million in charges, including separation costs and technology impairments, with an additional roughly $150 million in unique 2025 charges identified. While management insists these burdens are largely limited to the current and upcoming year, they have materially clouded near‑term profitability and highlight the cost of restructuring and modernizing the business.

Labor Cost and Overtime Pressure

Labor remains a key area of cost pressure and a central target for the company’s efficiency program. CSX expects union wage inflation around 3.75%, with overall inflation assumptions in the 3–3.5% range. Overtime costs were singled out as a controllable component that still needs better visibility and tools to manage effectively. Workforce optimization efforts, including reductions in real headcount, are intended to mitigate wage inflation and overtime, but they must be balanced carefully against service reliability and safety, making this another area where execution quality will be critical.

Limited Near-Term Macro Visibility

Management was explicit about the lack of near‑term macro tailwinds. CSX sees a generally soft economic and industry backdrop, with no “short‑term catalyst” expected to significantly boost major industrial markets. The company’s planning assumes flat industrial production and only modest GDP growth, with fuel and coal prices near current levels. As a result, revenue expectations for 2026 are limited to low single‑digit growth. This cautious macro view suggests that any earnings recovery in the near term will need to come largely from internal improvements rather than external demand strength.

Execution Risk and Timing Uncertainty on Margin Targets

While CSX has put forward an ambitious target of 200–300 basis points of operating ratio improvement in 2026, management acknowledged that reaching “best‑in‑class” levels will take time and sustained execution. The company stressed the need to show multiple quarters of progress before investors can have full confidence in the trajectory. The breadth of planned initiatives—from headcount reductions to technology changes and process improvements—introduces operational complexity and timing risk, underscoring that the path to higher margins is far from guaranteed.

Segment Mix Headwinds

Another structural challenge is the shift in business mix toward lower‑yield segments. CSX expects 2026 growth to be skewed toward intermodal, minerals, and fertilizers, which generally generate lower revenue per unit. Meanwhile, higher‑RPU categories like forest products, chemicals, and some metals are facing ongoing demand headwinds. This mix evolution can weigh on overall yields and makes it harder to drive margin expansion solely through volume growth. It intensifies the need for cost efficiency and pricing discipline to protect profitability in a changing business mix environment.

Industry Merger Uncertainty

Management also pointed to an ongoing major industry merger under regulatory review as a source of external uncertainty. While CSX is focusing on running its own network well regardless of the outcome, the company acknowledged that the merger could have longer‑term competitive and strategic implications for the rail landscape. Investors will be watching how any changes in competitive dynamics may affect CSX’s pricing power, network flows, and potential partnership or interchange opportunities over time.

Guidance and Forward-Looking Outlook

Looking ahead, CSX’s guidance frames 2026 as a year of modest revenue growth but meaningful margin and cash‑flow improvement—if the company can deliver on its plans. Management is calling for low single‑digit revenue growth, based on expectations of flat industrial production, modest GDP, and relatively stable fuel and coal prices. Against this muted growth backdrop, CSX aims to expand operating margins by 200–300 basis points, supported by workforce optimization, tighter discretionary spending, productivity gains, and the roll‑off of one‑time costs. Capital expenditures are slated to fall below $2.4 billion, and free cash flow is projected to increase at least 50% versus 2025. Inflation is assumed at roughly 3–3.5%, with union wage increases around 3.75%. Real headcount ended the quarter more than 3% lower, reflecting early progress on cost initiatives that will need to be sustained to meet these goals.

In summary, CSX’s earnings call presented a mixed picture: operationally, the railroad is safer, more fluid, and increasingly competitive in intermodal, with disciplined capital plans and a sizable cost‑reduction effort underway. Financially, however, the company is working through a sharp profit downturn driven by weak yields, soft merchandise demand, and a heavy load of restructuring and impairment charges. With macro visibility limited and mix shifting toward lower‑yield segments, investors will be looking for clear, sequential evidence that management’s many initiatives are translating into the promised margin and cash‑flow gains before re‑rating the stock more positively.