CSX - Earnings Call - Q4 2024

Executive Summary

• Revenue decreased 4% year-over-year to $3.54B, driven by lower fuel surcharge and coal revenue; GAAP EPS was $0.38 and adjusted EPS was $0.42, with operating margin at 31.3% GAAP and 34.3% adjusted.
• Total volume rose 1% to 1.58M units, with intermodal volume +4% and merchandise flat; coal revenue fell 20% and fuel surcharge revenue declined sharply year-over-year.
• Management flagged discrete 2025 headwinds (coal benchmarks, fuel surcharge, and major projects), guiding to low-to-mid single-digit volume growth, a trough in Q1 operating income, and an expected effective tax rate of ~24.5%.
• Dividend raised 8% to $0.13 per share post-quarter, reinforcing capital return commitment despite near-term earnings pressure; project catalysts include Howard Street Tunnel enabling double-stack on the I-95 corridor and Blue Ridge rebuild benefits beyond 2025.
• S&P Global consensus estimates could not be retrieved at time of analysis; as a result, beats/misses vs Street are not quantified and should be rechecked once estimates access is available [GetEstimates error: “Daily Request Limit of 250000 Exceeded”].

What Went Well and What Went Wrong

What Went Well

• Pricing resilience and service-led growth: combined merchandise and intermodal revenue (ex-fuel) grew for the eighth consecutive quarter; management emphasized “strong, consistent customer service” enabling pricing according to delivered value.
• Intermodal and merchandise volumes: intermodal volume +4% in Q4; chemicals +6% volume; minerals and forest products up; Net Promoter Score reached an all-time high in Q4.
• Efficiency gains and fuel savings: fuel efficiency improved (+2% YoY), contributing to ~$45M in savings in 2024; locomotive fuel price -23% YoY supported lower fuel expense.

Management quotes:

• “We will remain disciplined in delivering safety, service, and operating efficiency performance… and look forward to delivering on the profitable growth opportunities ahead of us.” — CEO Joe Hinrichs.
• “Adjusted expenses decreased… the team delivered an eighth consecutive quarter of 3-plus percent growth in combined merchandise and intermodal revenue, excluding fuel.” — CFO Sean Pelkey.
• “Net Promoter Score reaching an all-time high.” — CCO Kevin Boone.

What Went Wrong

• Coal and fuel surcharge headwinds: total coal revenue down 20% YoY; fuel surcharge revenue down to $221M from $334M; all-in coal RPU and benchmarks pressured results.
• Safety and service metrics deteriorated: FRA train accident rate and personal injury frequency increased; dwell worsened 17% YoY; carload and intermodal trip plan performance fell 11%.
• Margin compression and impairment: operating margin fell to 31.3% (from 35.7% prior-year); a $108M goodwill impairment (Quality Carriers) reduced GAAP earnings by ~$0.04 per share.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CSX fourth quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. You may begin.

Matthew Korn (Head of Investor Relations and Strategy)

Thank you, Abby. Hello, everyone, and good afternoon. Welcome to our fourth quarter earnings call. Joining me on the call today 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, which is 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 now my pleasure to introduce Mr. Joe Hinrichs.

Joe Hinrichs (President and CEO)

All right, thank you, Matthew, and hello, everyone. Thank you for joining our fourth quarter call. As we look back and review 2024, we see that our railroad faced a significant number of challenges during the year, including weaker commodity prices, a bridge collapse, and multiple hurricanes. We had another year where U.S. industrial production was effectively flat, reflecting mixed end markets across our customer base. There were also some labor disruptions across the North American supply chain, which added economic uncertainty. What is so impressive is that through all of this, our OneCSX team continued working together to improve our overall business. We have been resilient, adapting to changing markets and operating conditions while remaining focused on our commitment to customer service. Last year was different than we planned, but we are proud of what we achieved and how we achieved it.

We are confident because we know that our momentum continues to build, and we are ready for the important year ahead of us in 2025. Now, as shown on the first slide, we achieved a lot over 2024. CSX achieved 2% volume growth for the year, outpacing the industrial economy yet again. We accomplished this even with a number of constraints on our coal franchise, including the collapse of the Francis Scott Key Bridge in Baltimore. Our leading merchandise business delivered 3% revenue growth even after absorbing the effects of much lower fuel surcharge, soft metals markets, and the hurricane disruptions. We delivered strong, consistent customer service, and our customers responded. You heard this for yourselves at our recent Investor Day, and you can see it in our financial results as we were able to price according to the value we are delivering.

Operationally, we worked across our network to reduce waste, unlock capacity, and improve responsiveness. We took more steps in building a successful culture that can deliver more sustainable, efficient performance and drive more positive momentum for the business. We also led the rail industry in reaching early agreements with our labor unions on our five-year contracts, working together to value our employees, avoid the prolonged labor battles of the past, and provide certainty for our customers. Now we can review some of the results of the fourth quarter. Slide 2 highlights key metrics for our fourth quarter compared to last year. As we expected, our underlying operations performed well, but we did see the impacts of substantially lower coal and diesel prices. Hurricane effects also weighed on revenues and expenses for the quarter, as we noted in our October call.

Total volume grew by 1% versus last year in the quarter. The largest contributor was growth in intermodal volume, which gained 4%. Quarterly revenue declined by 4%, largely due to lower global coal prices and a decline in fuel surcharge. earnings per share declined 7% on an adjusted basis, excluding the effects of the goodwill impairment this quarter. Overall, we executed well through a difficult period. However, we are not satisfied with these results. We have a clear vision of what we want to achieve at CSX, as we shared with you at our recent Investor Day, and we are committed to delivering on that vision for the benefit of our customers, our employees, and our shareholders. Now I'll turn the call over to Mike to discuss our operational performance.

Mike Cory (COO)

Thank you, Joe, and I really appreciate you all taking the time today to participate. So first, you know, I want to thank our team for the tremendous efforts through the quarter and the year, and I'm really, truly proud of this team. From weather to structural challenges like the Blue Ridge or Howard Street Tunnel, they've worked together to minimize the impact on our customers, and they did all of this while controlling costs and building a safer work environment for our employees and the communities they operate in. Let's go to the first slide. The fourth quarter saw a sequential decline in FRA injuries, which reflects our continuing initiatives around transforming our safety culture. However, the full-year rate remained elevated compared to last year. A positive result of our efforts has been a significant reduction in our employees' lost time associated with injuries.

We finished 2024 with the lowest total workdays lost in the calendar year in company history. For FRA accidents, we saw a quarterly year-over-year increase but finished largely flat on an annual basis. We strongly believe that our work in the field on hazard identification and exposure controls, combined with our focus on newly hired and trained employees, will continue to reduce significant injuries and accidents. And to improve efficiency in our capital work, we continue to harden our main lines and infrastructure more effectively. We clearly see how our SafeCSX initiative is creating positive fundamental changes in both our safety leadership and the workplace environment our employees are in. Over to the next slide. On this slide, you can see the impact of the strong hurricanes that passed through much of our service areas at the beginning of the quarter and flowed through to our customer service metrics.

Much of the impact to our trip plan compliance came directly from our inability to deliver cars to customers due to the effects of the storm. Our customer switch data shows that we maintained relatively good first and last-mile switching, considering the challenges. However, it remains our focus for improvement. I'm confident that our team will deliver in these metrics as we progress through the year. I'm also very pleased with the progress that we've made in developing our field employees to be more responsive to customer needs. As this development takes hold, we have a much better understanding at the local level on how to manage costs through proper service process. Over to the next slide. As I stated earlier, 2024 brought various weather-related challenges over the last two quarters that have affected our overall operating metrics.

We entered Q4 still dealing with the residual effects of the previous storm, such as the Blue Ridge reroutes. Hurricane Milton, in particular, caused long periods of recovery for the various commodities that moved into and out of Florida. This resulted in increased dwell for our traffic in our largest volume state. It also affected other parts of the network as we were unable to run our regular cadence on some flows throughout the storms up to recovery. On the velocity side, we were able to maintain, excuse me, we were able to continue increasing our capacity and maintain our speed through very close management of our train starts. This also benefited our locomotive utilization and overall transportation, engineering, and mechanical costs. As we worked hard in adverse conditions to maintain our network fluidity, we also drove strong improvements in efficiency.

The top right of the slide shows the gains we've made in fuel efficiency, which has resulted in millions of dollars in savings this last year. The chart on the bottom reflects how we're using less power per ton of freight moved, another indicator of better operating efficiency. Further, over 2024, our engineering, transportation, and network teams worked together to improve our work-block performance. This resulted in substantial improvements in the amount of rail, ties, and ballast replaced per man-hour compared to the previous year. And we're seeing great productivity gains here, but there's still much more improvement that we expect to get going forward. For the Howard Street Tunnel, we've commenced rerouting traffic, and our start date of February 1st is on target. This project was initially planned to take three years and create extensive daily track outages over one of our key corridors.

I'm extremely proud of the team for being able to turn this around from a three-year project to one that will take six to eight months for the tunnel to be operational. We'll benefit from this improvement forever and far faster than originally planned. At the Investor Day, I spoke about the opportunities at Cumberland. The team's 90% complete with the site's reconfiguration, and the results have been great. Already, we've doubled the number of cars processed per day, meeting our initial target, and with completion still to come, we are focusing on much more in terms of improvements. Overall, I'm extremely pleased with our progress on many of the fronts. All our initiatives discussed at Investor Day are proceeding, and while 2024 had numerous challenges, we made fundamental improvements in many areas that will benefit us over the long run.

We've increased transparency in the relationship between cost and service for our operating managers. As a result, our service continues to improve while our costs stay in line with expectations. Our SafeCSX program is well underway, and the team is defining and implementing key process changes with our operating employees, bringing benefits to employee retention as well as improving reliability and resiliency across our network. Considering the various challenges that came about last year, I'm very pleased and confident in the operating team's response and their collective work in both restoration and tackling our initiatives going forward. So looking forward, I believe we're well positioned to deliver our objectives in 2025 and beyond, and we're all looking forward to capitalizing on the opportunities as they present themselves. With that, over to you, Kevin.

Kevin Boone (Chief Commercial Officer)

All right, thank you, Mike. First, I do want to thank the entire sales organization for all their hard work throughout 2024. As Joe and Mike have described, we faced numerous challenges across our network this past year, and our team responded with a steady commitment to serving our customers, highlighted by our fourth quarter Voice of the Customer survey, where we saw the Net Promoter Score reaching an all-time high. We continue to see mixed conditions across the markets we serve. Industrial output remains muted, interest rates are still high, and the truck cycle has yet to inflect. With that said, we hear optimism from our customers as they consider the potential for supportive domestic economic policies, and we continue to see strong activity into 2025 with new project inquiries into our industrial development group.

Our focus remains to drive outgrowth in the markets we serve, continuing our track record of exceeding industrial production. Let's review merchandise business as shown on slide 8. For the fourth quarter, revenue and volume were flat compared to last year. On a full-year basis, revenue was 3% higher, with a 1% increase in volume. Looking across the end markets, chemicals remained strong in the fourth quarter, consistent with the full-year performance, with volume increasing 6%. Robust demand for plastics and LPGs has driven much of the growth throughout 2024. Minerals volume was supported by positive demand for cement and aggregates, and forest products volume was up 3% as CSX capitalized on continued demand in paper markets and pulpboard. On the other side of the markets, volume for fertilizers business was impacted this quarter as supply chains here in Florida felt the lingering effects of hurricanes.

Performance within metals remained sluggish, as it has been all year, largely due to continued soft demand for steel. Volume for our automotive business declined 2% for the quarter as higher dealer inventories have led to lower build rates. Looking ahead to 2025, we're seeing strong demand signals in our ag and fertilizer segments, along with continued strength in minerals and chemicals. Interest rate-sensitive markets, including automotive, metals, and housing, continue to remain challenged. While we anticipate a slower start in the first quarter, we do expect moderate merchandise carload growth for the full year, supported by steady service-driven conversions and new industrial development projects that should accelerate as we exit 2025. Now let's turn to slide 9 to review the coal business. Coal revenue declined 20% for the quarter on 7% lower volume as we've navigated the effects of reduced global benchmark pricing and production issues.

All-in-coal RPU declined 14% year-over-year and 4% sequentially, in line with previous guidance. Export volume fell modestly, largely due to lower supply availability from certain coal mines, with temporary geological issues limited production. That said, for all of 2024, export coal volume grew by 9%, even considering the impacts of the Key Bridge and a ship loader outage at Curtis Bay. Exports represented more than half of our coal carloads for the full year, a first for CSX. Domestic shipments were pressured during the quarter, driven by lower natural gas prices and ample utility stockpiles. More recently, we have seen colder winter weather that has begun to reduce utility stockpiles, providing incremental opportunities as we move into the summer months. As we look into 2025, we anticipate a decline in coal volume, with the weakest year-over-year performance in the first quarter.

This includes temporary production outages at a couple of CSX-served mines that will mainly impact the first half of 2025 from a year-over-year perspective. Based on current global benchmark prices, we expect all-in-coal RPU to be down roughly 3% sequentially in the first quarter. As we have highlighted previously, we also see a couple of plant closures at domestic utilities that are scheduled for later this year. Despite these challenges, our utility customers are facing accelerating growth in power demand across areas of our service network, where data center buildouts are in progress. Lower utilization rates at existing CSX-served utilities do provide opportunities to work with customers to meet increased demand. Turning to slide 10 to review the intermodal business, fourth quarter revenue declined 5% on a 4% increase in volume, with lower diesel prices year-over-year significantly impacting revenue per unit by 7%.

Our domestic intermodal business performed well for the quarter, converting traffic from over the road even in this challenging truck market. We have many initiatives underway, including continued growth in our direct business, new volume related to our Myrtlewood interchange, future improvements in double-stacking capabilities into the Mid-Atlantic, and many others that make us optimistic about our growth ahead. Within international, quarterly performance remained robust, allowing us to deliver strong growth for the full year as we gained from alignment with our key customers. Overall, we continue to compete and win intermodal business. Our inland port initiatives remain on track, and we're excited about the prospects of closer alignment with our channel partners. As the political and trade landscape shifts, we will remain in close contact with our customers, ensuring that we will be able to adapt to their needs.

As we look ahead to 2025 and beyond, there's a lot to be excited about. With that, let me turn it over to Sean.

Sean Pelkey (CFO)

Thanks, Kevin, and good afternoon. Reported operating income and earnings per share both fell by 16% in the fourth quarter, impacted by a $108 million or $0.04 goodwill impairment related to Quality Carriers. I'll now speak to the fourth quarter income statement on an adjusted basis, excluding the goodwill impairment charge. Revenue was lower by about $140 million or 4%. Declines in fuel and export coal benchmark prices, as well as business interruption from the hurricanes, drove a combined impact of around $200 million. Despite these challenges, the team delivered an eighth consecutive quarter of 3+% growth in combined merchandise and intermodal revenue, excluding fuel. We remained focused on operating efficiently and delivered an adjusted expense reduction of 2%, with more details on the next slide. Interest and other expense was stable compared to the prior year. Adjusted income tax expense decreased $33 million.

The effective tax rate of 22% included a $26 million benefit, largely driven by the revaluation of the state-deferred tax liability. Our expected tax rate going forward continues to be 24.5%. As a result, adjusted earnings per share fell $0.03, including a $0.06 combined impact from hurricanes, net fuel price, and lower export coal benchmarks. Let's now turn to the next slide for a closer look at expenses. fourth quarter adjusted expenses decreased $40 million. Turning to the individual line items, labor expense was $26 million lower, driven by lower incentive compensation expense and other items partly offset by inflation. As expected, headcount increased slightly from the third quarter, attributed to the timing of train and engine employee hiring, aiming to qualify the new employees ahead of the 2025 summer vacation season.

We expect to absorb volume growth in 2025, with average headcount remaining stable versus current levels, while cost per employee will be higher year-over-year in line with labor inflation. Purchased Services and Other expense increased $43 million. The variance includes approximately $25 million of smaller impairment charges, which were largely offset by a favorable legal settlement. Additional variances were driven by inflation, expenses related to the timing of locomotive modernizations, and storm recovery costs. Depreciation was up $17 million on a higher asset base, in line with the rate of quarter-over-quarter increase we expect in 2025. Fuel costs was down $86 million, driven by a lower gallon price and a fourth consecutive quarter of year-over-year efficiency savings. Finally, equipment and other rents increased by $7 million, while property gains were $5 million unfavorable in the quarter.

Now, turning to the discussion of full-year adjusted results on slide 14, revenue finished 1% lower for the year on 2% volume growth, while adjusted operating income was 3% lower and adjusted earnings per share increased by $0.01. This includes over $400 million of operating income headwinds from the discrete items we have discussed throughout the year. As a result of our increasingly collaborative approach with customers, consistent operational execution, and cultural improvements flowing to our frontline employees delivering the service product, our customers are rewarding us with steady and profitable volume growth. In fact, volume increased in all four quarters for the first time in 10 years, while full-year merchandise and intermodal pricing gains were once again above cost inflation. At the same time, we remain highly focused on controlling costs, eliminating waste, and improving efficiency.

Mike and the operating team made impressive strides in fuel efficiency during 2024, resulting in approximately $45 million of savings. PS&O costs increased by just $50 million versus 2023, inclusive of headwinds from prior year insurance recoveries as well as storm-related costs in 2024. Core PS&O expense was stable in the face of inflation and 2% higher volume, benefiting from numerous initiatives across operating and G&A functions. PS&O will be pressured in 2025 by the Howard Street Tunnel project, as well as ongoing locomotive modernizations and cloud computing expense, but we are committed to unlocking further savings. Our headcount stabilized during 2024, with volume gains outpacing employee growth over the second half of the year, and we expect to continue delivering labor productivity gains going forward. Turning our attention to 2025, this company is headed in the right direction.

We're building a strong culture, serving our customers at high levels, pairing new business wins and industrial development opportunities with ongoing efficiency to deliver strong bottom-line performance and investing for the future. That said, the three considerations listed on this slide could drive significant net unfavorable impacts this year. As we enter the year, export coal benchmarks and fuel prices are working against us, and if they remain stable, it would result in a combined $300 million impact versus 2024, with nearly half of that in Q1 alone. On the flip side, we expect a roughly $50 million net operating income benefit from cycling unique events, including hurricanes and the Key Bridge collapse, net of anticipated higher incentive comp in 2025.

Finally, as we've outlined before, major construction projects on the Howard Street Tunnel and hurricane-impacted Blue Ridge Subdivision will drive an incremental $10 million per month net impact into Q4. Q1 operating income will be our trough, well below prior year. Results will improve from there, and we expect to return to year-over-year growth in the second half. At our investor day in November, we presented a theme of proven model with powerful momentum and profitable growth. Despite the discrete pressures, the OneCSX team remains confident in our long-term guidance. Let's now discuss cash flows and distributions on slide 16. Investing in the safety and reliability of our infrastructure is our highest priority use of cash. Additionally, 2024 capital spending included increased allocations towards rolling stock and other return-generating investments that support a pipeline of future growth and efficiency opportunities.

The 2024 infrastructure figure also includes around $50 million of initial spend on our Blue Ridge Subdivision following the devastation caused by Hurricane Helene. We now expect total costs to exceed $400 million before insurance recoveries as we work diligently to reopen this important route that will serve our customers for generations to come. Strong cash flow also supported close to $3.2 billion in shareholder returns for the year, including over $2.2 billion in share repurchases and $900 million of dividends. The share repurchase program once again outperformed, with CSX purchasing shares at a 2% discount to the market price in Q4, delivering value to ongoing owners. While economic profit finished lower for the year, largely due to the discrete items mentioned on the prior slide, our goal is to increase economic profit over time, which has been shown to strongly correlate with outsized shareholder returns.

With that, let me turn it back to Joe for his closing remarks.

Joe Hinrichs (President and CEO)

All right, thank you, Sean. We'll finish up our prepared remarks by discussing our expectations for 2025. As you heard from Kevin, many markets remain uncertain as we look ahead at the full year. Operationally, we are undertaking substantial projects to rebuild the Blue Ridge Subdivision after Hurricane Helene and expand the Howard Street Tunnel in Baltimore. That said, the momentum we have built with our leading customer service gives us confidence that we can deliver volume growth in the low to mid-single-digit range, driven by our merchandise and intermodal business. We expect volumes in the first quarter to show the effects of weather and a slow start for the auto industry and then build over the course of the year. Given scheduled coal plant closures and a number of mine production issues, we do anticipate coal volumes to be lower year-over-year in 2025.

Next, consistent with our commentary over the last few months, we expect full-year revenue to be impacted by lower global benchmark pricing for coal and reduced fuel surcharge, particularly in the first half of 2025. Mix will also be a factor as the intermodal business has the lowest RPU but is likely to show the fastest growth this year. Our efforts to drive efficiency improvements and manage controllable costs will continue. As Sean discussed, the Blue Ridge rebuild and the Howard Street Tunnel project will add expense over the year, but our team is working hard to deliver productivity gains. Given our current outlook, we expect to hold our headcount effectively flat for the year. We plan on CapEx being roughly flat year-over-year, excluding spend on the hurricane recovery, which we report out throughout the year. And finally, our capital allocation priorities remain unchanged.

We will continue to invest in the safety and fluidity of our network, execute on high-return growth projects, and opportunistically distribute excess capital to our shareholders. To sum up, I am proud of how the one CSX team responded to the challenges that we encountered over 2024. There are great opportunities ahead in 2025 and the longer term. We will execute and deliver on them on behalf of our customers and our shareholders. I have no doubt that CSX will continue to move forward, and we look forward to keeping you updated on our progress. We'll now be happy to answer your questions. Matthew, let's begin the Q&A process.

Matthew Korn (Head of Investor Relations and Strategy)

Thank you, Joe. We will now proceed to our question-and-answer session. Now, 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.

Operator (participant)

Thank you. And if you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. And if you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of Tom Wadewitz with UBS. Your line is open.

Tom Wadewitz (Senior Equity Research Analyst)

Yeah, good afternoon. Wanted to see if you were pretty clear on some of the headwinds, and it sounds like a lot of those are in Q1 in first half. How do you think about full-year margin performance? And if you kind of come out with some strengthening and volume in second half, can you see it potentially improve, or is that tough to do given how meaningful some of the headwinds are?

Sean Pelkey (CFO)

Hey, Tom, it's Sean. So yeah, I mean, I think clearly the headwinds are going to be concentrated here in the first half of the year, worse in Q1 than Q2. So first half of the year, I think margin improvement is sort of out of the question unless something changes with commodity prices or what have you. As we get to the second half, yeah, I mean, I think it's quite possible we see not only growth in operating income, but margins as well in the second half, assuming that the environment that we're operating in remains stable, the core fundamentals remain in place. We're going to grow volumes low to mid-single digits, and that will be very supportive to operating income and margin growth over time, particularly as some of these headwinds ease given the capacity that we have on the network to absorb that growth.

Operator (participant)

And your next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Scott Group (Managing Director and Senior Analyst)

Hey, thanks. So similar question, but not about margin, just about operating income dollars. Do you think we grow operating income this year, or is it down a lot in the first quarter? Sounds like up in the back half. When you add it all up, do you think we grow operating income this year?

Sean Pelkey (CFO)

Hey, Scott. So obviously, we didn't give specific guidance on what that's going to look like over the course of the year. What I would say is if those headwinds that we outlined of $350 million weren't there, we would deliver pretty solid growth in operating income this year, low to mid-single-digit volume growth at 50%-70% incremental margins that we talked about at the investor day is a good setup. We do have some other challenges this year in terms of some of the utility coal headwinds that Kevin outlined, the mine issues that we've got right now, as well as some of the closures later on in the year. So that makes this year a little bit worse, but going forward, we feel pretty good about being able to hold those coal volumes relatively stable with some opportunity in exports.

So on an adjusted basis, what I would say is if you were kind of looking at our investor day guidance of mid to high single-digit operating income growth, this year we'd be towards the lower end of that if you adjust for the discrete headwinds. And then in the following years, we'll see a bit of a rebound, particularly as we cycle some of the issues around or some of the costs related to the construction projects we've got going on this year.

Operator (participant)

Your next question comes from the line of Stephanie Moore with Jefferies. Your line is open.

Joe Hoffman (Analyst)

Great. This is Joe Hoffman on for Stephanie Moore. Thanks for taking our questions. Maybe stepping away from the guidance for a second, relative to when we last spoke on your investor day, I was wondering if you could highlight any incremental conversations you guys have had with customers related to the industrial development pipeline, if there's any tangible things you can point to, just relative conversations with customers you've been having over the last couple of months post-election. Thanks.

Sean Pelkey (CFO)

Yeah, I think when we're coming into this year, obviously, given the political landscape changing pretty rapidly here, we thought there might be a pause in activity and new projects going out for bid. We've actually seen quite the opposite. We've seen that really stay healthy, and a number of new projects have come our way that we're working on, and the group is very, very busy. So I think that's a big positive for us. Obviously, there's a long tail to those projects. You have to get them permitted and then get them underway. But we see that strength that we noted at the investor day really continuing in the first quarter here and hopefully accelerating with some of the, obviously, policy that may take place here in the next few months.

Operator (participant)

And your next question comes from the line of Chris Wetherbee with Wells Fargo. Your line is open.

Chris Wetherbee (Senior Analyst and the Managing Director)

Hey, hey, thanks. Good afternoon. Sean, I just wanted to pick up on the comment that you mentioned. I think you said that CSX some of the cost items even in the sort of the mid-single digit or the lower end of sort of the EBIT range. I guess I want to make sure I understand that dynamic in the context of low to mid-single digit volume growth. So I guess when we think about some of the other puts and takes that would drop from revenue down to or volume down to profit, can you talk maybe a little bit about the pricing outlook that you think about 2025, how that compares to 2024?

Sean Pelkey (CFO)

Chris, I'll start and then maybe kick it over to Kevin on the pricing side. Yeah, so essentially what I was saying there is if you take those $350 million of headwinds, assuming commodity prices on the coal and fuel side remain flat, you've got the network disruption as well as some of the things recycling from last year, and adjust for that, we'd be roughly in the kind of lower end of the mid to high single-digit range, plus or minus a little bit, depending on what happens over the course of the year with the economic environment, but we feel very good about pricing, and I'll give Kevin an opportunity to speak to that.

Kevin Boone (Chief Commercial Officer)

Yeah, I think on the merchandise side, nothing really changing there. We continue to compete in the market and really leverage the service products that we have. The biggest difference versus last year, obviously, as you've seen on the commodity price for coal. So that's met coal prices have come down. As you know, our contracts reflect move with those prices. And so we've seen that. Hopefully, we'll see some strength pick up, but that market is very, very dynamic. And I will say on the intermodal side, it's encouraging to see at least some stabilization and maybe some contractual rates starting to move up slightly. So I'm not here to call a cycle. I think others are better prepared to do that.

But as we see, hopefully through the year and into the back half, we might see a little bit more support than what we certainly saw last year in 2024.

Operator (participant)

And your next question comes from the line of Ari Rosa with Citigroup. Your line is open.

Ken Hoexter (Managing Director and Senior Analyst)

Great. Good afternoon. So I just actually wanted to stay on that line of questioning. Maybe you could talk about the impact of tightening truck capacity and what's usually the lag in terms of where we would expect to see that reflected in results. And specifically, I assume it would be reflected primarily in intermodal, but if you could talk about kind of other areas where we might see that impact kind of flow through results, would be appreciated. Thanks.

Joe Hinrichs (President and CEO)

Yeah, the most obvious one is intermodal, but there is a lot of work that the team is doing on the merchandise side from a truck and diversion point of view, and when you think about an environment where in the do-nothing scenario, a customer can get savings by staying with truck, even though the value proposition might be greater with rail, there's not a lot of momentum to do that. Going into this year, I think some of our discussions are on the merchandise side and really accelerate as customers are looking for additional cost savings, and we can really lean into that. So I'm optimistic that's going to be the case, and that's the market that we can have a little bit of a supportive market, which we've been fighting the last couple of years here, will be very beneficial to us.

Intermodal, when we look at our pricing, it does lag the market a bit here. So contracts, even the shorter duration ones, can be a year, and a lot of that takes place in the first part of the year. And so if we start to see some momentum, the bigger impact probably starts next year, but we could see some benefit as we exit this year.

Operator (participant)

Your next question comes from the line of Brandon Oglenski with Barclays. Your line is open.

Jon Chappell (Senior Managing Director)

Hey, good afternoon, everyone, and thanks for taking the question. Joe, I'm sure investors are excited here at the opportunity long-term for growth, but obviously, with some of the earnings headwinds when GDP is up, that might be a little frustrating in the near term. But maybe can you talk to what this tunnel project will ultimately yield, getting beyond some of the hurricane damage in the Blue Ridge region? And should we be thinking that 2026 could actually be that much better when you think about margin opportunity, incremental margins, pricing, volumes, etc.?

Joe Hinrichs (President and CEO)

Thanks, Brandon. Yeah, I mean, I think what you've heard from, including other transports, is that while the GDP has been growing, the industrial side of the economy has been flat or down over the last couple of years, which more closely aligns with certainly the merchandise side of our business. So the interest rate-sensitive parts, automotive, is still well below pre-pandemic levels, housing market, and steel, other things like that. So we're obviously looking forward to hopefully, whether it be interest rates coming down or other policy changes that will help the industrial side of the economy, and maybe we'll see a little bit of growth this year for the first time in a couple of years. So certainly, that'll impact us. I think at a higher level, the Howard Street Tunnel Project is one of the most important projects in this company.

As Mike highlighted in his commentary, we've been waiting for a long time to do this, and we had a plan that was going to be a three-year plan that we've now accelerated into one year, which is going to be done in the 2025 calendar year. That, of course, means 2025 will have a lot more expenses tied to it for the rerouting costs and taking care of our customers while we do that. But we get the benefits much sooner than originally planned, which helps in 2026 and 2027. Those benefits include the ability for us to run double stack all the way up and down the East Coast, including places from Chicago. There are trains we can't take right now from Chicago double stack to the East Coast because we can't get through the Howard Street Tunnel and some bridges around that area.

So you can go all the way out to our interchange with our Western rails and talk about the advantages that will help us. It's one of the, probably it's not the largest competitive disadvantage we have right now on our modal business has been the inability to double stack and be able to reach the high population density sectors of the East Coast because of that. So this is a big deal. I mean, actually, if you step back between the MNBR interchange that's now open, which was one of our other competitive disadvantages we had on intermodal and other parts of our franchise, and now the Howard Street Tunnel, we're going to take care of probably the two biggest competitive disadvantages we had in our network by the end of 2025. So we're really excited about that.

And that's a big deal because right now, we have to double stack. We have to route basically up through Upstate New York and down. So you can imagine all the weather in the winter doing that. But also, the outer route miles are tremendous. And frankly, we can't run up and down that I-95 corridor with double stack right now. So a big deal to us. We're looking forward to those benefits. And so yes, that will contribute to more meaningful ability to grow profits in 2026 and 2027, along with other things that are going on, including industrial development, including the efficiency actions we're taking across the network, and including all the work that we're doing with our customers. So we continue to be very excited about the potential of this business and support the targets and the stuff that we outlined at our investor day in November.

Though that, if you can do the math now and say, "Okay, as Sean highlighted, 2025 is going to be the lower end of that," that means we're still very strongly believe in our plan that 2026 and 2027 will be more supportive of making that happen. Thanks.

Operator (participant)

And your next question comes from the line of Brian Ossenbeck with J.P. Morgan. Your line is open.

Brian Ossenbeck (Managing Director and Senior Analyst)

Hey, afternoon. Thanks for taking the question. So I guess maybe one for Mike. Should we expect as this tunnel project gets underway, there are going to be some meaningful deterioration or adjustments that we're going to see in some of the service metrics, just trying to figure out how that would play out considering it is such a big undertaking in a compressed period of time? And then maybe just also get your thoughts on just the general health of the network having absorbed a couple of hurricanes, a couple of port strikes, or one near miss. And just your thoughts on staffing levels because it sounds like you're already pretty well staffed up into next year.

So getting through all this in the near term, how do you feel like the network's positioned to hit that growth when it does come back, perhaps in the back half of the year? Thanks.

Joe Hinrichs (President and CEO)

Thanks for the question, Brian. I'm not going to get you to repeat the first part, but I can barely remember it now. I'm just kidding. In terms of the tunnel, Brian, we have already taken steps in the fourth quarter to start to move traffic and rerouted off the tunnel. So we're prepared. The cost Sean is talking about really is reflective of what we have to do to maintain some of our customer commitments and detour somewhere else that we're paying a haulage for. Effectively, I don't think the metrics are going to be affected that dramatically. We've pretty much moved everything off, so what you see is what you have now. In terms of the network, yeah, look, it was an interesting year.

We started off in the second quarter really trying to focus on crew starts and looking at how our capacity was, our trains, how they were operating. And our focus was to basically take crew starts down in line with the service offering we had to make. And we started to do that. And right up until and then we saw, again, as you reduce the crew starts or the train starts, your dwell goes up. So we made adjustments. And if you look in the middle of the year going into that third quarter, the first set of hurricanes, we were running very well. And so those fundamental principles are still there. You look, there's pockets, weeks where we didn't have the disruption from the hurricanes that I'm very, very happy with the performance of the railroad overall outside of those things. Going forward, yeah, our headcount is stable.

We do have more productivity improvements right in front of us once we get in the look. We just had three days of snow, two days of snow and record and all that. Once we get through this, we're back on track because going into the Christmas shutdown, we're in very good shape. And we really took action working with our customers as they reduced their needs to really, really reduce more starts. And our focus is, first of all, to run a safe railroad that employees know and come prepared for work and are able to do it. Number two, service those customers. But productivity is extremely important for us because we've made some great steps. We fought off the battles that we've had with these storms. And then the team is very entrenched in the principles that got us to where we were before the storm started.

So I'm happy with the network. We got work to do with all the different stuff going on right now, like we always will. But overall, fundamentally, we're on the right track.

Operator (participant)

Your next question comes from the line of Jon Chappell with Evercore ISI. Your line is open.

Jon Chappell (Senior Managing Director)

Thank you. Good afternoon. Sean, hate to get into minutiae on certain model line items. You said cost per employee will be aligned with labor inflation. So I assume you mean like four-ish %. That said, you have a really tough comp in 1Q24, where it was up 7%, and then a super easy comp in 4Q24, where it was down 4% because of the incentive comp. So do we think about it as 4% on average, but try to get the quarterly cadence more aligned with typically kind of lower cost per employee in the first quarter and peaking in the fourth quarter due to annual bonuses and incentive comp?

Joe Hinrichs (President and CEO)

Yeah, Jon. So here's how I think about it. I would take the Q4 number. I would add back the incentive comp adjustment. So that's about $1,500 an employee. And that's a pretty good run rate for the first half of the year. We may actually come in a little bit better than that in the first half of the year due to two reasons. One, looking very closely at overtime, trying to reduce that, and other unproductive costs. But also, it looks like likely lower health and welfare costs that kick in here this year. Then as we get to the second half, take that first half run rate, add 4% to that, which is what I would expect for second half wage inflation. That should give you a good way to model it for the full year.

Operator (participant)

And your next question comes from the line of Ken Hoexter with Bank of America. Your line is open.

Ken Hoexter (Managing Director and Senior Analyst)

Hey, great. Good afternoon. Two quick ones to clarify and then my question. I guess clarifying, Kevin, did you say Met coal at these levels, the 191, is that down 3% sequentially? Is that based on these levels, or does it go lower if rates hold at these low levels? And then you mentioned some outages, some mine outages. Does that include the recent fire at one of your mines? I presume that's what you meant when you said some mine outages. And then I guess, Sean, my big question is you kind of talked mid-single-digit growth. I guess that would have been about $260 million add to EBIT, offset by about $300 million discrete items. So I just want to understand, are you sending the I just want to understand your messaging.

Is it that the base case EBIT is down $50 million from the $5.35 billion that you've got for the target? I'm just trying to put together all the numbers you're throwing out there. Thanks.

Joe Hinrichs (President and CEO)

All right. Well, that was a lot. So let's start with the coal question. Yeah, current levels, that's where we see that was the guidance at current levels, what we see here. Hopefully, we'll see some as we get in the second, third quarter, more reflective of kind of the cost curves of our producers and global producers. Quite frankly, we think it's probably under market right now. And that should hopefully balance out above 200 as we get in the back half of the year. We'll see if that happens. And then the other question was the outage that you mentioned. Yes, that's related to the recent one. We expect that to come back online in the second half of this year.

I will say that the team is doing a great job of looking for other sources, and we do expect some of that to be made up at other mine locations to basically backfill the demand that still remains out there. So we don't expect that to be a full loss. We'll find other opportunities to offset, hopefully, a lot of that, more than half of that headwind that we'll see. Over to Sean.

Sean Pelkey (CFO)

Yeah, Ken. So I mean, your math is awfully precise. It's too early in the year to kind of give you that close of a range. But I think, generally speaking, kind of the way you're looking at it, if you take the adjusted number for 2024, the non-GAAP adjusted number, you subtract the 350 and then look at sort of mid-single-digit-ish growth.

I would say there's some things this year that could make it a little bit worse than that. That's really the coal challenges as well as the incentive comp piece that probably adds another $30 million-$40 million of expense this year versus 2024. There's a lot of other variables in there as well. We're very, very focused on the cost side to try to make sure we can manage through the first half of this year as we've got some big headwinds to manage with. There's levers that we can pull, but there's obviously things that we're watching in the economy as well. There's a range of outcomes that we could model from here. As we go through the year, we'll get much more line of sight into exactly where that lands and can give you a little bit more color there.

Operator (participant)

Your next question comes from the line of David Vernon with Bernstein. Your line is open.

David Vernon (Managing Director and Senior Analyst)

Hey, thanks, guys, for taking the question. So we've probably kicked this a couple of times, but Kevin, is there any way you can help us understand the 300, how much of that is volume, how much of that is price, kind of what you're making in there roughly, slices of the pie in any slice of the pie kind of thing? And then if you think about the outlook as we look into merchandise intermodal, it feels like the Q4 numbers ended a little bit below the full year numbers. And I'm just wondering if you're also seeing some volume pressure because some of the Blue Ridge outage and maybe even some volume because of the service issues that might be happening with the Howard Street Tunnel.

Should we be thinking that there's some additional sort of volume headwinds building into 2025 here with regard to this stuff, or is it just purely operating cost? Thank you.

Joe Hinrichs (President and CEO)

We handle the first part. That was quite a bit. Again, the $300 million that Sean highlighted in his opening comments was related to the Met coal price. And then obviously, the fuel surcharge was, so those two items, not a volume comment in that market. And then I'll hand it over to Sean.

Sean Pelkey (CFO)

Yeah, and I think, David, what you're pointing to in terms of the momentum there in Q4, you got to remember the hurricanes were a pretty big impact. We talked about a $50 million impact with roughly $30 million of that being revenue. The revenue number was probably even a little bit higher than that when all was said and done. So that was a big piece of it. I mean, Mike and Kevin, you correct me if I'm wrong, but I don't think we're anticipating any volume disruption from the shutdown of the Howard Street Tunnel.

In fact, the work that we're doing and the costs that we're adding are to preserve that volume and allow us, as we clear up that pinch point in our network, to actually be able to identify and pursue some growth opportunities that Kevin and the team are looking at.

Joe Hinrichs (President and CEO)

Yeah, I think with the Blue Ridge, there's small but immaterial, maybe some volume that would move off temporarily just given the additional length of haul. But the majority of it, given the great work by the team and Mike's team and Kerry and others to come up with a solution and really preserve that largely for us.

Operator (participant)

Your next question comes from the line of Bascom Majors with Susquehanna. Your line is open.

Bascom Majors (Senior Industrials Equity Research Analyst)

Thanks for taking my questions. Can you talk a little bit about the regulatory opportunity under the new regime, either at the FRA and the STB, and anything that has been held up or slow played that could generate needle-moving productivity for CSX in 2025 or 2026? Thank you.

Joe Hinrichs (President and CEO)

Yeah, Bascom, this is Joe. I'll take that one. I think, first of all, you already saw some activity on the waivers that have been long-standing. That's important. We need to get more technology on the inspection side into this industry, and we need to work with our union partners to make that happen, but there's a lot we can do at advanced efficiency and safety while still having plenty of work for our teams to do. That's a big one. I think if you look at, obviously, Patrick Fuchs being named STB chair, we know Patrick well, very much involved and engaged in our industry along with the other board members. So looking forward to that, working with the STB that's really focused on the data and what we can do to grow this business in a positive way.

The FRA, I mean, David, I think he was running Pan Am when CSX purchased it before my time, but so obviously knows the business and some of the stress points that the railroads faced in technology and also investment and capital and that kind of thing. So we're feeling really good about a supportive environment for the industry when it comes to safety and technology and working together to advance. I mean, I think everyone is aligned that the best thing we can do is work together collectively to get more volume on the railroads. It's better for safety, better for efficiency of our economy. It takes trucks off the road. It reduces taxpayer funding for the roads a little bit, and it also is more efficient and better for the environment. So I think the people that we're working with now understand all that.

And so I would say that the next several years look very supportive for us working together to make more advancements than we made in the last four.

Operator (participant)

Your next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open.

Ravi Shanker (Managing Director and Senior Analyst)

Great. Good afternoon, everyone. So it's a couple of years of a meaningful amount of discrete items now. And I recognize that a lot of these things are either issues outside of your control or investments in the future. But what are your conversations with customers like on some of these bottlenecks? Are they understanding? Is there a risk of share shift as a result of this? Or kind of how do you think this plays out in the coming years?

Sean Pelkey (CFO)

Yeah, I think from our customer discussions, there's a lot of excitement. You heard the service is not really going to be impacted. There's additional costs we have to absorb to maintain the service and maintain the level of service that we have provided. But these are significant investments that are going to allow them to reach new markets that they haven't had the opportunity to move on the CSX network. So I think there's a lot of excitement for our customers to see that we're willing to invest in our network, quite frankly. And that always hasn't been the case. So we continue to invest in the core infrastructure and invest there, but we're actually extending our network and creating single-line service that we haven't had the opportunity to deliver in the past. So there's a lot of excitement.

I know our teams are excited to kind of deliver on that growth.

Joe Hinrichs (President and CEO)

Yeah, this is Joe. Let me add really quickly to that. I mean, I'm really proud of the team, how both our operating and marketing sales teams have worked together. I mean, if you look at the third and fourth quarters, we had two pretty impactful hurricanes and some other things. But if you look at the data from our customers, actually our Net Promoter Scores in third quarter and fourth quarter were consecutively the best we've ever had.

And that, even though we had some disruptions and we had issues, and you see it in some of the data, the work we're doing to put the customer first, along with safety, of course, and to really work on finding solutions, even if we have issues, it goes a long way to them seeing the commitment we have. And that's really important for long-term growth, that the customers see that we're committed to when we have disruptions or have issues that we're proactively communicating with them. We're working to find solutions. And that makes them feel a lot better about investing back into rail and looking for longer-term growth. And we're seeing that play out. So yes, we've had a lot of discrete items, as you mentioned.

I mean, for a couple of years now, we're looking forward to stop talking about fuel surcharge and coal prices year over year or quarter over quarter. But we're continuing to see volume growth. And that's consistent exactly with what we're hearing from our customers. Our service levels are leading to volume growth. That volume growth has strong pricing with it. And we're continuing to get efficiency gains. We get some of this noise out of the system. I think you'll see the power of this network.

Operator (participant)

Your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is open.

Jordan Alliger (VP and Senior Equity Research Analyst)

Yeah, hi. Sorry, I just wanted to come back to the EBIT growth question again. We had suggested taking that 350 net headwind off of the adjusted 2024 and then growing by mid-single digit, which sort of is the low end of the mid-to-high single digit that you talked about at your investor day. But off that base, I'm just curious, what gets it to the upper end of that mid-to-high single digit? Is it more of a volume issue? Is it a productivity issue? Just sort of curious how you think about framing the range.

Joe Hinrichs (President and CEO)

Yeah, thanks for the question, Jordan. I think assuming commodity prices are not the driver, good or bad, versus where they are right now, what makes the year a little bit better? I think it's us continuing to push to drive even more efficiency across all of the groups between operations and G&A. We were able to hold Purchased Services and Other costs essentially flat on a core basis last year. That takes a lot of work when you've got volume growth and you've got inflation up against you. So keeping a very, very close eye on those things. We've got initiatives built into the plan, but we're sitting down every day looking at ways that we can continue to sort of find opportunity, negotiate new agreements that help us on the Purchased Services side to reduce costs. So that's one.

And then the other, I would say, is on the volume side, certainly looking at the economy, but also the momentum on the trucking side, as Kevin talked about. Do we start to see that turn? And these industrial development opportunities are coming online and the ramp in those volumes, the customer wins that we've got. We've got a number of those in the pipeline for this year. If our hit rate's higher, that obviously helps us grow operating income as well.

Operator (participant)

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

Walter Spracklin (Managing Director and Senior Analyst)

Yeah, thanks so much, Abby. Good afternoon, everyone. So I just wanted to come back to the investor day three-year forward compound annual growth rate targets that you gave, particularly on earnings per share. So you gave us high single digit, low double digit. If we look at that and just take the midpoint at 10% off 2024, it gets us to 243 for 2027, which is where consensus was. My question, I guess, is with the dip down now in 2025, it would imply you're going to have to run at a low teens for 2026 and 2027 to get back to that 243. And my question is, is the investor day target of 243 still relevant given where we are in 2024, where we're kind of stepping down in 2025, and therefore have that low teens growth rate in 2026 and 2027?

Or do we say, "Nope, the world's changed a little bit since investor day, and we should really model off a lower growth rate than that"?

Joe Hinrichs (President and CEO)

Yeah, Walter, I appreciate the question, but as I said in the script, no, we're sticking with the guidance. And so the numbers that you walked through, those are reasonable, high single digit to low double digit EPS growth. A couple of things I would just clarify. One is the $10 million a month of network disruption costs that we have this year. That's a headwind to this year, but that completely reverses in 2026 and turns into a net benefit for us as we grow volume and drive efficiency when all the construction is done. And then just the other sort of modeling point I would put out there is that the three-year guidance assumes that over that three-year period, we have stable commodity prices, both export coal and fuel. So we're at a lower point today on both of those than we were on average in 2024.

Our hypothesis, our modeling framework, is that by 2027, we're kind of back to where we were on average in 2024. Obviously, if that doesn't happen and met coal stays below 200, it's going to be tough to hit the numbers. But adjusting for that, we still feel very good about our three-year guidance.

Operator (participant)

And your next question comes from the line of Daniel Imbro with Stephens. Your line is open.

Daniel Imbro (Managing Director)

Yep. Hey, good evening, guys. Thanks for taking the questions. Kevin, maybe one more on the volume outlook. I guess there's a lot of headwinds out of your control, but I've got to ask one on the auto side. We've navigated elevated inventories for a few quarters here, and it's weighing on autos and metals. I guess any updates on when your customers are expecting that production to actually return to growth this year? Inventory is rationing down out there in the field. Just what are you hearing or seeing from your field as you think about that segment hopefully returning to growth at some point in 2025?

Kevin Boone (Chief Commercial Officer)

Maybe I'll take it and give Joe. He's obviously an expert in it as well. Look, we have seen a slower start to the year. That's shown up in everybody's carloads. It's out there. Certainly, the weather and loading autos in this kind of weather is a challenge as well, so that hasn't helped the volumes that we've seen here. We do expect them to improve from where we are at the levels that we've seen here over the last few weeks, but it is a, I think it's an open question of where rates go and profitability and those things. I wouldn't sit here and say there's a lot of optimism here. I don't think there's a lot of pessimism that it's going to get significantly worse as well.

So it feels like more of the same, basically, but we'll see how it plays out the rest of the year.

Joe Hinrichs (President and CEO)

Yeah, thanks, Kevin, and well said. I mean, you think about it right now, I think the estimates are for sales this year to be in the low 16 million range and the production to be in the mid-15s. So that maybe adjusts some inventory or just takes into account everything that happens with imports and everything. But before the pandemic, those sales SAARs were 17 million plus for a number of years in a row, and production was pretty close to that. And so there's a lot of potential there. We just have to see it realized. And that means interest rates have got to come down, and it has to be a balance between all those things.

So you have an administration now that is very focused on autos and U.S. manufacturing and interest rates. So let's see how that plays out. Probably isn't a big issue for 2025, but what could it look like for 2026 and 2027 is a big opportunity. Thanks.

Operator (participant)

And your final question comes from the line of Jeff Kauffman with Vertical Research Partners. Your line is open.

Jeff Kauffman (Partner)

Okay. Thank you. And thank you for squeezing me in. I'm going to go back and beat the dead horse a little bit here, but from a slightly different angle. You've talked a lot about the costs associated with Howard Street and Blue Ridge weighing on this year. And that cost is coming in a bunch of different areas: the out-of-route miles and the fuel burn, the extra crew, the asset-related costs, extra locomotive, extra cars. Can we talk about, I guess, kind of the same way? Once Blue Ridge is fixed, once Howard Street is done, can we try and quantify the savings on the other side? So for instance, you're going to have double stack where you didn't before. You should be able to drive more cars through there with fewer trains, fewer assets.

You should get to go out there and play for business that you weren't really eligible to do before. As I look at the net unwind of these projects and the opportunity for 2026, can you do anything to quantify that benefit the same way you quantified the cost of 2025?

Joe Hinrichs (President and CEO)

Yeah, Jeff, I appreciate the question. And you're right. Obviously, as we get past this, it's going to turn into a very nice positive for us. If we sort of look at the cost savings opportunity and then combine that with the growth opportunity that's out there, taking a kind of a midpoint of what we think that revenue opportunity is, I would say within a couple of years, we will have fully recovered that $100 million of, call it roughly $100 million of operating expense that we're going to take on this year. And that's just the initial growth opportunity. There's obviously more capacity that we're adding beyond that. So to my earlier point, it does turn into a nice positive for us over the three-year period.

Operator (participant)

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.