Q1 2021 CSX Corp Earnings Call
Good day, and thank you for standing by and welcome to the Q1 2021.
S X Corp earnings Conference call at this time, all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today Bill Slater.
Net of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. Joining me on today's call are Jim Foote, President and Chief Executive Officer, Kevin Boone, Chief Financial Officer, Jamie boycott Executive Vice President of operations on Slide two is our forward looking disclosure followed by our non-GAAP disclosure on slide three with that it's my president to introduce <unk>.
And Chief Executive Officer, Jim Foote.
Great. Thanks, so much bill and welcome to everyone joining us on today's call.
I want to begin by thanking all of <unk>, Texas Railroad is for the hard work and the exceptional efforts made to keep the yards open and the terminals open to serve our customers throughout the severe weather we experienced this quarter.
An amazing job.
We entered this year cautiously optimistic about the potential for an improving economic environment.
And I am pleased to see momentum steadily building over the last few months.
Throughout the quarter, we remained focused on laying the foundations to prepare for growth and I'm excited about our prospects for the rest of the year.
It's nice to finally have an economic tailwind at our backs.
Let's begin with slide five of the presentation for an overview of our first quarter financial results.
Earnings per share decreased 7% to 93 cents in the first quarter operating ratio increased to 60.9%.
Reflecting a spike in Covid cases early in the quarter winter storm impacts and fuel surcharge timing lag.
Turning to slide six revenue declined 1% on 1% volume growth as intermodal and other revenue growth was more than offset by merchandise coal and fuel surcharge revenue declines.
Merchandise revenue declined 6% led by declines in automotive and.
<unk> energy related shipments within the chemicals and minerals segments.
These declines were partially offset by growth in the metals and fertilizer businesses.
Yeah.
Intermodal revenue grew 11%, reaching new first quarter record levels.
This growth was driven by strong demand for transportation services due to continued inventory replenishment and growth from east coast ports.
Core revenue decreased 5%.
Domestic coal revenue increased due to growth in utility coal shipments.
This growth was more than offset by declines in export coal primarily from reduced international shipments of thermal coal.
Other revenue increased 42% the largest driver of this increase was higher revenue from storage at intermodal facilities.
Turning to slide seven we remain committed to being the safest railroad.
With fewer recent Covid cases across the network, we are able to increase the number of in person interactions and training sessions.
We resumed hosting safety summit's across the network and or even expanding the so much to cover additional crafts beyond our T and E workforce.
Our top concern is eliminating life changing events and through increased engagement on critical rules compliance we have seen a reduction in engineered injury severity to start the year.
Continued education education, and training will allow us to further reduce the total number of injuries by working with both managers and front line employees on how to identify and eliminate unsafe behavior across the railroad.
Additionally, we're finding new ways to improve safety through the increased use of technology.
We are increasing drone usage to help ensure the safe movement of trains throughout our yards and are already seeing the benefits of this program in the positive train accident trends.
We will look to expand these programs going forward as part of our ongoing efforts to identify and implement new tools to help us operate as safely as possible.
Yeah.
On slide eight let's review, our operating performance for the quarter.
Despite challenging conditions the team did a good job of maintaining network blue fluidity throughout the quarter.
Going forward, we are focused on driving velocity and dwell back to pre pandemic records and we expect to see improvement in both metrics throughout the year.
We also remain focused on driving additional efficiencies across the network.
We set a new record for distributed powertrains, averaging over 100 trains a day for the first time.
Labor productivity also reached a new record.
Even though we're adding head count in the second quarter in preparation for the expected volume growth.
We still plan to realize incremental labor productivity this year.
Turning to slide nine I wanted to take the average true opportunity to frame. These race recent operating metrics against where we started this transformation.
Over this period, we have increased velocity more than 30% by reducing both line of road congestion in creating excess capacity within yards to limit how long blue train sit idle.
While dwell has also improved over this period, we view this metric as an area of opportunity.
Even though she is Texas currently has the lowest dwell in the industry pushing.
Pushing this number back towards previous record levels will enable us to further reduce cars on line and improve asset utilization.
It is most important to note that this increased fluidity was enabled by redesigning the train plan to operate as a more balanced and efficient network.
We are doing the same amount of work today with 1500 fewer locomotives and dramatically improved locomotive utilization.
These efforts have also driven significant improvements in fuel efficiency.
Not only are we more fuel efficient, but we have retired older less efficient locomotives and increase the use of distributed power and trip optimizer technologies to further expand.
The emissions savings we offer our customers.
Our train plant also greatly improves our crew productivity.
One measure of this productivity is the total number of deadheads.
For the times, we have to read are the times, where we have to reposition cruise using taxis.
For other vehicles, because it there isn't a return locomotive.
The balanced plan reduced the number of deadheads, almost 60% by better matching crews and locomotives in both directions.
We have also increased the number of cars processed per hour worked by over 30%.
This higher throughput is due to both a reduction in yard congestion as well as more strategic upstream blocking of cars.
Any way you look at the data we have dramatically transformed how CSR operates which has created the capacity to absorb significant growth for years to come.
We remain focused on driving the network back to record performance levels as well as reasonable realizing the incremental efficiency benefits. This will provide.
Turning to slide 10.
I want to be clear that we are not done improving our network.
Yep opportunities identified during the early stages of the pandemic last year continue to drive sustained efficiency improvements.
And the more streamlined network is well positioned for growth.
While this quarter's trip plan performance was negatively impacted by the winter storms and Covid related absences.
Intermodal trip plan performance will still improved was still improved for the quarter and is currently running nearly 90%.
We expect to see similar improvement trends for the carload business going forward.
We are committed to providing our customers with an industry, leading service product and are proactively, adding head count and pre positioning locomotives across the network to ensure we are prepared to provide high quality service, while handling incremental volumes.
Now I'll, let Kevin take us through the financials.
Thank you Jim and good afternoon, everyone.
The team is encouraged by the positive economic momentum.
Underlying demand is growing truck.
Truckload capacity is tight.
Inventory levels are low we.
We are preparing the network for growth.
Focused on driving positive operating leverage.
As Jim noted, we faced a challenging environment in the first quarter with winter storms and supply chain disruptions.
<unk> headwinds, both operationally and commercially.
Looking at the first quarter income statement on slide 11 Ret.
Revenue was down 1%, despite a 1% increase in carloads.
Double digit gains in our intermodal business, we're all set by lower fuel recovery.
And declines across several merchandise markets.
Other revenue was also up significantly high.
Primarily reflecting increased intermodal storage fees.
For the year, we expect other revenue of approximately 500 million. This assumes intermodal storage fees return to more normalized levels.
Total expenses increased 2% in the quarter.
Walking down the expense line items.
Labor and fringe was up 2%.
Driven by higher incentive compensation as well as inflation in other costs.
The year over year increase in incentive compensation was largely due to our annual bonus program accrual.
As we lap the impact of the pandemic.
Our long term incentive comps cost also increased year over year as our growth outlook has continued to improve.
Sequentially, we expect incentive comp in the second quarter to remain relatively flat based on our current outlook.
Partially offsetting these headwinds.
As you'll see gains remained strong as teeny employee productivity was up nearly 10% and train length increased 13% to a first quarter record.
Total head count was down 7%, reflecting structural improvements made over the last year.
On a sequential basis head count was roughly flat as.
As increased teeny hiring was offset by improved labor productivity.
Consolidation in our train plan has enabled a 23% reduction in locomotive maintenance head count versus the prior year.
We've also continued to drive efficiencies and yard support head count both through ongoing consolidation as well as technology.
As you know we are highly focused on ensuring we have adequate resources positioned to serve customer demand and a rebounding economy.
We are actively recruiting and running corn conductor training classes and as a result head count should increase slightly going forward.
<unk> expense increased 2% or $15 million in the first quarter.
Driven by a 15 million headwind.
From lower real estate gains.
Well efficiency gains were offset by inflation and other items.
As we run a tighter trading plan assay related efficiency gains continue to headline M. S N O savings.
Despite weather related headwinds and some proactive actions to pull assets out of storage in anticipation of higher demand locums.
Locomotives and terminal productivity levels continue to achieve record highs.
Real estate gains were minimal in the first quarter average.
However, as you likely saw last week, we announced the closing of an agreement with Virginia to.
To sell certain interest in CSI owned line segments.
This project will generate meaningful value for C. S X.
And enhance the safety and reliability of both passenger and freight rail service in the D C and Virginia area.
The transaction will result in a significant gain of approximately $350 million in the second quarter. This year.
Cash proceeds of $525 million will be realized over time.
With approximately 400 million expected in 2020 one.
Turning now the fuel expense, which was 2 million favorable year over year.
Record first quarter efficiency helped offset the impact of a 4% increase in the per gallon price.
We continue to invest in technologies that will deliver further improvement in fuel efficiency.
Widening the advantage that rail's holdover truck and demonstrating our continued commitment to sustainability.
Looking at other expenses.
Depreciation increased 1 million in the quarter due to a larger asset base, partially offset by the 2020 road and track depreciation study.
Reflecting these effects going forward, we expect full year depreciation expense to increase approximately $20 million.
Equipment rent expense increased $7 million or 9%.
As network fluidity impacted car cycle times in the quarter.
Turning below the line.
Interest expense improved $3 million or 2% due to a lower weighted average coupon.
Other income decreased $2 million or 9% as favorable pension impacts were offset by lower interest on cash.
Income tax expense decreased $12 million or 5% due.
Due to lower pretax income.
The average tax rate increased slightly to 24.7% due to an unfavorable state legislative change.
Closing out the income statement <unk> delivered operating income of $1 1 billion and a 60.9% operating ratio.
Turning to the cash flow slide on 13.
On the first quarter.
Free cash flow before dividends was $934 million up 15% when compared to the first quarter of 'twenty 'twenty.
Free cash flow conversion on net income exceeded 100%.
Finally, as you can see from the chart on the right shareholder distributions rebounded in the quarter share repurchase activity returned to prior year levels and the recent dividend increase is also reflected.
We expect to continue to be opportunistic in our buyback approach going forward and we remain committed to returning cash to shareholders.
With that let me turn it back to Jim for his closing remarks.
Great Kevin Thanks, a lot.
Including with slide 15.
We entered the year projecting volume growth in excess of GDP and still expect to achieve this target.
We will continue to attract demand throughout the year and based on the combination of the strengthening economic outlook and our focus on converting additional volumes off the highway.
We now expect to achieve double digit full year revenue growth.
We will drive incremental operating leverage by efficiently absorbing this growth and we will diligently monitor our train plan to address resources as needed to provide our customers with high quality service.
Our entire company is aligned to capture this growth opportunity.
And as always our focus is first and foremost on our customers and finding creative ways to help customers meet their own growth targets. This year.
Now is the time to capitalize on all the work we have done to transform our network.
Thank you and now I'll turn it back to Bill for questions and as you May have noted mark is.
Unable to join the call again today yeah. He.
Continues to deal with a non COVID-19 personal health issue, but remains engaged in the business.
The rest of the team will do the best to answer any marketing questions you may have.
Thank you Jim in the interest of time I would ask everyone to please limit themselves to only one question with that we will now take questions.
Yeah.
At this time and with lighter in line.
And everyone in order to ask a question Press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
We have our first question coming from the line of Ken Hector with Bank of America. Your line is open.
Hey, great good afternoon.
Jim can you talk about about the pace of growth in the employee ramp up as you need you talked about the hiring in advance and <unk> and maybe the pace of expenses, we should expect as we see that ramp up versus the revenue.
Revenue recognition as we move through the through the second half.
In the second quarter.
Gregg Ken Good question, and I'll ask Jamie or Kevin to add a little clarity as well, but you know generally and you will you will know how long it takes for us to hire so we've been at this since the beginning of the year are and have been running people through their classes, which we could.
Didn't do before because of the a social distancing for our issues and so we've been running people through the classes in now getting them out into the field.
And they're starting to come out in a while we're reasonably well positioned you know our numbers clearly have been impacted in the in the were impacted in the first quarter, because we were struggling in certain areas across the railroad because of a crew challenges are these people are becoming are coming on.
Now and will be coming on throughout the second quarter at regular intervals as we again expect to see our volume growth continue do increase now and into the second and third quarter, Jamie I want to give some more detail yeah, no absolutely, Ken where what we're seeing right.
Now as every week.
As it stands about 10 or 12 employees.
Employees on the network that are qualifying as conductors, but what we've really bumped up our classes as Jim has mentioned.
Over the past couple of months, we're training anywhere from 60 to 90, new conductors depending on the month for every two weeks, there's a new course, I'm, making sure that we follow all the protocol with the with those required within this COVID-19 environment.
And really we're positioning the employees in areas, where we need them, we still have furloughed employees around the company that arent willing to leave the locations where they're at and in our industry are when we hire somebody you hire them for a certain location you offer a transfers moves are temporary or permanent but it's up to <unk>.
The way to make those decisions. So we will we will continue to hire as we said last quarter.
You know for 500 folks here throughout the year, but really we're going to hit that I would say as we enter into the second half and will continue to hire if we see the business levels come to come.
Come to the point that we think they will and we'll just keep adding those resources. So we've got a great position that really puts us a puts us in that spot where we're looking at growth.
Ken the only other thing I would add is while we're going to add some employees.
We are we saw over time at a quite a high level in the first quarter and we would expect that number to come down over time as the hiring so largely offsetting some of the incremental cost there.
So offsetting some of the incremental cost per employee.
Or is that incentive comp okay. That's right, you'll probably see the the highest quarter in terms of cost per employee this quarter.
Quite some negotiating some some of that is definitely related towards our winter weather. The one this quarter. It was a very difficult quarter as Jim had mentioned here with the polar vortex and the rest of it so youre going to see those numbers come down.
Great. Thanks for the insight guys appreciate it.
We have our next question coming from the line of Allison Landry with Credit Suisse. Your line is open.
Thanks, I just wanted to ask about debt service metrics I mean, obviously you had the challenges with weather in Q1 and supply chain for quite clearly selling that's alright, but yeah. Jimmy mentioned in your prepared remarks E. Yeah, you're expecting to get back to pre COVID-19 levels at record levels.
Do you think it will be before you guys can start to see some second derivative improvement at least debt and the velocity of mirrors and dwell and do you think that.
With demand, increasing and strengthening that it that it's going to take a few quarters.
Just help us help us think through that thank you.
In the intermodal area as I said you know we're we're back.
For two two are best industry, leading performance I think and in terms of intermodal.
In terms of you know our velocity is already up but you know again, what we look at very closely as this trip plan compliance number which takes everything into consideration.
It doesn't do any good if you get the train across at a Super high speed and then it sits at the terminal and can't get yard and you can't get the box often the customer doesn't get it when he needs. It. So everything has to come together and that's what's reflected in this trip plan number and an intermodal there's zero Oh.
Cushion, it's not like yellow, we meet we met the trip plan, but you know give or take a couple of hours and in intermodal, it's zero or time. So we're back into the 90 90, plus our on time performance in our trip plans in intermodal today, which is.
You know we were doing a little bit better than that you know a year ago in January late late the year before.
And I expect that number to continue to creep up quickly.
Quickly in the second quarter, if we catch a break and don't have some other kind of crazy weather events or something else and then in the carload business.
Where are you now again, where our numbers are you now in this kind of mid 60% on time.
Trip plan performance range.
And that relates to about 30% a couple of years ago.
And we want to get debt number back into the mid 80 range, where it was and Ah you know my challenge is there is debt to Jamie is to get it done.
Sooner than later.
You know I'd like to see our velocity and dwell numbers get back to where they work on a you know by the end of the second quarter if possible and then the trip plan numbers will start to come together you know as the year progresses.
That puts the that puts the operating guys under a lot of pressure and but again you know, we're just getting back to where we are because once we're back to where we were we were we're going to get better from there.
Okay. Thank you that's helpful.
We have our next question coming from the line of Justin Long with Stephens. Your line is open.
Thanks, and good afternoon.
So I wanted to ask about the or in the first quarter I think intra quarter, you talked about 100 basis points worse kind of year over year.
Our expectation late in the quarter, just curious what changed if anything in March.
The reported number and then going forward. The revenue guidance is very helpful, but anything you'd be willing to share on incremental margin targets as we look out over the rest of the year.
Yeah in terms of the quarter late in the quarter.
We probably experienced a little bit more appeal surcharge lag than we were expecting.
Late in the quarter also probably a little bit of after effects of the weather on our creeped up to the last couple of weeks of the March as well and then finally as we saw day.
Our prospects for additional volume acceleration into the back half and even into the second quarter.
Jamie was proactive in pulling out assets to get ready for that volume. So we saw probably a little bit extra cost there, which we thought was the right thing to do given everything we're seeing out there. So that's probably the difference between what Jim talked about at the conference and what we ultimately saw this quarter.
You know a lot of moving parts this quarter, obviously with the.
Impacts of the winter storms and then the revenue you know quite frankly after January we were looking at a very very good quarter and then obviously February hit US hard in March was digging ourselves out of it in terms of incremental margins look as we've said you know last quarter in the previous quarters as we get.
Our growth and revenue growth, we anticipate dropping.
Dropping that through at a at a positive incremental margins. So it will matter the the pace of growth that we see and you know if we continue to beat our expectations I would expect Oh are to continue to beat our current estimates as well so it's.
Somewhat dependent on the strength of the revenue growth this year, which which we obviously expect some strong performance and if it can continue to get better you'll see the leverage in the model as well.
Okay, Great I appreciate the time.
We have our next question coming from the line of Tom <unk> with UBS. Your line is open.
Yeah good afternoon.
I wanted to see if you could offer some thoughts on.
Perhaps.
Your first quarter earnings is compelling, but there was another topic earlier today.
You probably noticed what what might be the impact for you guys from a Canadian railroad buying kits you is debt does that matter much E E.
Interchange a lot of traffic.
With KSU, but how would we think about that and I don't know if you have any kind of broader thoughts on whether that potentially could be a catalyst for.
A greater focus in the industry on bigger consolidation.
Thank you.
Well, we've certainly looked at yes, thanks Tom.
We certainly had an opportunity now over the like assets for the last month or whatever it's been to kind of have a understanding of.
The C P proposal.
We've had.
A matter of hours to absorb B is C N proposal.
And other than what we've you know kind of filed with the regulator.
Our concern E X.
Express Inc.
Our.
Our thoughts on the ports so far just on the procedural aspects.
The of the C. P transaction are you know I'm going to have to reserve comment about what I think.
In particular for either one of those transactions.
Until I day at a time to see what they put forth and see what we think are the impacts of whatever they would force to the regulator in terms of why they think their transaction.
<unk> is a good deal.
Uh huh.
You've known me for a long time, Tom I've been around this industry for forever now it seems like and started out in the days when the industry was.
Some would say collapsed if not near bankruptcy are facing the facing the prospects of <unk>.
The nationalization.
And over that period of time since deregulation the industry has transformed itself into a strong vibrant industry.
Industry and.
Most of that would be.
Associated are attributed to the consolidations that have happened and the efficiencies that have come from debt and the dramatic reinvestment and service improvement that has come to the industry. As a result of those consolidations all of which were approved by <unk>.
Regulators to make sure that they were in the public interest.
And a good for the customers. So I have a view of what I think is you know you know if it's good for the customer if it improves the quality of service for the customer and it's in the public interest.
I'm, clearly say hey, let's take a look at it and figure out what it all means but in all circumstances.
The Devil's in the details of any transaction and so until I get.
An opportunity to review.
Any proposals, yet and but you know I just you have to reserve comment.
On the transactions themselves.
Yeah.
Oh, okay, but it sounds like you think it can be a constructive thing for the industry just in terms of being open to consolidation.
Oh, Yeah like I said as I said, you know I think it's been I think it's been a tremendous benefit to the shipping community what's taken place to transform the North American rail network.
Great. Okay. Thank you Jim I appreciate it.
We have our next question coming from the line of Brandon Glen Ski with Barclays Capital. Your line is open.
Yeah. Thank you for taking my question I guess, Jim I want to stay on that subject I mean strategically.
<unk> I guess, we've heard a lot of negativity, though about the next wave of quote unquote class one mergers if there ever is to be one ex cashier, but thinking more about potential transcontinental tie ups.
We've heard a lot of that negative input from certain groups. One other you know deals have been tried unsuccessfully but I guess, we haven't talked about a lot of the potential benefits I mean do you view strategically as that is the path for for the industry looking out 10 or 15 years.
Oh, I can't speculate on what's going to happen 10, or 15 years and trying to figure out what happened you know 10 or 15 hours ago. So.
As I said you know there's been a.
I think that in my opinion, a it has been.
The transformation of the North American rail network into what it is today has been a positive for the shipping community and I think that's the that's the key thing that the regulators look at and I'm sure. The regulators are going to do.
Another.
Thorough review of this transaction and the and see what happens.
Alright, thank you.
We have for next question coming from the line of Scott Group with Wolfe Research. Your line is open.
Hey, Thanks afternoon guys.
So a couple of small ones for them.
Kevin can you just yields have been negative for the last few quarters, how should we think about the direction of yields and pricing going forward and then you guys have <unk> 3 billion of cash.
400, another $400 million coming in and generating cash flow.
Is there a potential for accelerated buyback or do you think this is the right pace going forward.
Yeah as I mentioned on the buyback specifically, we will definitely be opportunistic if you know, there's there's opportunities to accelerate that.
And you could expect given the visibility going for that.
We'll be much more aggressive in that area given opportunity. So we have some flexibility in that clearly as I've said 3 billion of cash is not something that we're looking long term to keep on the balance sheet and we will move away from that.
Second part of that question was again, just that pricing momentum in Europe have been negative when do you think we get to positive how should we think about that yeah, we're going to lap the on the fuel surcharge will lap that you know headwind. This quarter. So we will start you will see that kind of takeaway are starting in the second quarter, we'll see some positive ARPA.
<unk> growth as you guys look at it starting second quarter coal will be more favorable as we lap a easy.
Easier comps from last year are really across the group I will say we were looking at this yesterday is pricing renewals are above our average price. So we are seeing some acceleration there, which is which is good and would be expected in a tight trucking environment and you know we're looking ahead to more inflation potentially so those.
Or discussions I will continue to have with the customer, but I would I would expect the pricing environment to improve.
Thank you.
Our next question coming from the line of Chris Wetherbee with Citi. Your line is open.
Yeah, Hey, thanks, good afternoon.
Kind of sticking on the on the revenue opportunity for a moment when you think about volume for this year.
I guess I'm trying to hoping maybe you can get a little bit more specific when you're thinking about it or you take the sort of GDP plus but if you could give us maybe some parameters. After we've seen sort of the toughest comp quarter out of the way I wish we'd gotten through the weather, we don't sort of a run rate of opportunity is now.
It sounds like maybe there's upside from a revenue standpoint coming from both volume and price, but I don't know if they can kind of break those two apart for us a little bit and give us a little bit of sense of what you really see for the volume opportunity for you guys for the full year.
Well, we gave a revenue number I don't know if we're going to parse it down into specific volume.
You know I think you can assume that both are when we move into the back half of the year will be start to be positive and more positive certainly in the second half for the year when you think about.
ARP use just based on some.
Some of the comps that were lapping from.
From from prior year, So clearly second quarter volume will accelerate significantly given the COVID-19 impact third quarter Youre kind of lapping some COVID-19 impact as well in fourth quarter, we started to see some recovery, particularly in the intermodal business. So from from a pace I would expect you know obviously second quarter it'll be the <unk>.
This growth quarter third quarter, probably falls out and then in the fourth quarter.
It's probably a little bit more up in the air we will see how much the economy continues to accelerate.
From here, but the easiest comp in second quarter second easiest is probably third quarter and you know, while we still expect second half growth to be pretty robust from what where we see it today.
And just maybe one point of clarification since the last time, we spoke three months ago sort of debt the incremental upside do you feel like its coming a little bit more from volume or price or a little bit of both I guess, that's kind of what I was getting at.
I mean, clearly our volume will be just based on what we saw last year will be the bigger component of our revenue growth for.
For the year.
This year.
Okay. Thanks.
We have our next question coming from the line of Amit Mehrotra with Deutsche.
Deutsche Bank your line is open.
Thanks, Operator, hi, everybody, Kevin I wanted to follow.
Follow up on the incremental margin question I, certainly hope our incremental margins will be positive assets as revenue turns turns positive revenue growth turns positive.
But you know we're talking about you guys are talking about feeling better about volumes. You just said pricing is better than kind of typical renewals. So you've been pretty specific in the past in terms of giving specific O. Our targets I think I'm not asking you to do that but if you just look at the way your cost structure has evolved excuse me.
It would imply 60% to 70% incremental margins just all else equal just based on the variable and fixed nature of your cost and pricing is getting better so unless I'm missing something like why shouldn't incremental margins be 60, 70% or better than that in the context of revenue growth volume growth and pricing growth.
Yeah, I mean first of all as I was explaining before I think the the magnitude of the revenue growth is a factor here right and you know the more revenue growth that we are potentially project here are the better the incremental margins will you know that's just basic math.
On that side. So we are very positive on the outlook you know, we'll as the network improves that will drop through and no I don't think anything has changed from what we saw in the first quarter. What we said for the full year in terms of our ability to convert revenue and the margin and zone into operating income.
We're not going to probably get in the in the game of getting a point target because things are still fluid from a revenue.
Perspective, another point or two in revenue growth above and beyond what we have expect today are well we'll see.
For more benefit to where we ultimately land on the O R. So alright, well, maybe maybe a better way to ask that question and then Kevin if I could as I think you're talking about just the fact that you have regular way inflation that doesn't make incremental margins linear as revenues come on if I'm interpreting your comments correctly. So is the right way to think about.
Regular way inflation kind of two 3% off of your current Opex space and you know as as revenue growth in excess of that that will get much more significantly dropped to the bottom line just help us think through the force the philosophy around what Youre, saying, yes, that's exactly right. There's there's fixed cost inflation that you have to offset every year.
Particularly on the labor side, and then you know, we're probably seeing although in place. It remains low on the materials side seeing some signs of that picking up as well. So once you offset all day inflation.
With further growth and you'll see them.
More meaningful impact of the next point of growth above and beyond that.
Two to 300 million is that $2 million to $300 million here. It is it's kind of that threshold point or is it last for more than that we're looking at about 3% overall inflation.
Across our cost structure.
Got it okay. That's very helpful. Thank you so much appreciate it.
We have our next question coming from the line of fatty chairman with BMO capital markets. Your line is open.
Okay. Thank you.
Jim just on a kind of circle back on the M&A topic, a little bit so.
We're we're kind of seeing the merits.
Kind of end to end merger is being outlined out there like from a shipper's perspective, improving the capacity improving the service potentially improving the cost for the carrier as well.
Quite why wouldn't that kind of.
Scenario apply to east West merger it feels like when it comes to Transcon merger is there's always this this this idea that I was there their anti competitive merger is that I'm just trying to reconcile why would that be the case within the supply Kevin at the same logic.
If we put aside all gross new rules and all that kind of debate decide what didn't technically speaking.
Duane merger provide the same Kevin back a good and we would see in neither of the proposed transactions.
Well certainly there has been an ongoing dialogue right now about the merits of end to end transactions and a historically speaking.
A railroad consolidations that were viewed as end to end and didn't reduce.
The competition or we did not reduce our optionality.
For the shipping community. We reviewed is viewed favorably and I don't know that there's been any change.
Yeah.
In in philosophy on that point. So you know like I say, we will all see we'll all see how this begins to play out.
We're in the early stages as is everyone keeps being reminded of a long process.
In some cases, maybe a month and in some cases hours. So you know we'll see.
We'll see how it unfolds, but.
Again, the over over Oh, who.
Reaching our overriding our principles I think are applicable today.
Okay. Thank you.
We have our next question coming from the line of Brian often with J P. Morgan Your line is open.
Hey, good evening. Thanks for taking the question I wanted to come back to truckload conversion Jimmy mentioned, you're at 90 90 plus percent compliance with the intermodal trip plan with basically zero cushion it sounds like that's a pretty truck like service.
If you know are you seeing any material impact of of the service on conversions.
If if not what's left to really get more shippers over the line and then when you think about making this longer term conversions. How are you trying to make these stickier rather than a someone looking for capacity in a tight market. How do you make these conversions.
Longer term beneficial for both parties.
Well, yes in the intermodal business, Yeah, I mean, we were setting records in terms of our volumes.
In and this is debt after you know after Ah.
A couple of years earlier of our reengineering the intermodal network.
And which positioned us.
<unk> to be a bigger participant.
We are in this are in this transformation to the E Commerce, a business model that so many people are adopting so because we've fixed the railroad because we improve the service and because we've done all these things we're able to participate in this where I don't think we would've been.
Able to do that so effectively in the past and you know and it shows in our numbers and I don't see that changing it.
If people want to move more boxes are in buy more things online, we want to be more and more and more involved in that supply chain and will continue to work in that area to the best that we can.
The other area, where we're constantly focusing on truck conversions is in the merchandise side of the business and that's taking you know metals and plastics and steel.
They're in cardboard and you name it.
The debt today, we move in a boxcar.
In the same shipper in the same plant in many circumstances as load and truck out the other side.
<unk> of their production facility and that just takes us more and more time of getting involved working with the customer and.
And we continue to see.
Uh huh.
Continued to win.
Our <unk> business.
In those in those areas.
And Ah in and again, that's because.
Our service reliability.
<unk> not speed, but reliability.
It is equivalent to what they're they're getting it in a truck and so we have to get.
We have to get back to where we were in terms of and that's reliability as trip plan compliance.
We have to get back to where we were and then get even better and the better we get in that area and the more focused we are and it will continue to grow that.
That convert those conversion opportunities as well.
And just to clarify is it is the sales cycle sped up on this and you're finding shippers and customers more more grateful to have these conversations and to the extent you can separate that from surface.
Improvements versus just being tied on capacity across the freight network channel.
The conversations in those areas are yes, we're becoming more and more relevant in the in the supply chain, we're becoming recognized as being more reliable and a lot of other factors are aligning as well is bigger our bigger customers.
Want to do more and more things to become more environmentally friendly. We can we can help them with the reduction in their carbon footprint. So ESG plays in our favor fuel efficiency plays in our favor all of these are.
Our willingness to do things differently than the way we've done it in the past.
Or are we we're showing that we're showing good results.
Alright, Thank you Jim.
We have our next question coming from the line of Bascom majors, which has clean your line is open.
Thanks for taking my question, Jim I understand your reluctance to comment on transactions that happened it would be for me.
<unk> filed for approval yet but.
You know you did mention that you have commented publicly on the procedural issue at stake here with the STB and I thought it was notable that C. S. X was the only class one rail that suggested the waiver of the 2001 rules does stand up for for cash you were asked that it did could you give us a lot.
More information or a context on that and why you are looking at that differently than say your competitors.
Yeah.
Well.
Maybe to one in one day you know it started with the proposed E N B N merger and you know I just happen to be sitting in the in the room are when that was put on hold and a moratorium was put in place in all these rules for L. A in the in the place. So I have some sort of a knowledge.
About.
How and why.
For those rules were changed.
And at that point in time are the.
The ruling body.
<unk> felt a.
Debt that the.
And acquisition of the case, yes.
It didn't merit.
For some speculative.
The array of new ideas before they would approve it and the regulatory body is head 20.
20, some years to change the rules that they wanted to change the rules and they didn't so along comes a transaction.
And.
And you know I kind of a view the law is the law.
And that's what we said you know we don't see any circumstances that would merit.
A change.
From what was decided back in the day for the reasons it was decided.
Thank you.
We have our next question coming from the line of Jonathan Chappell Your line is open.
Thank you good afternoon Jay.
Amy maybe a question for you you guys have spoken you know pre pandemic through the pandemic about having spare capacity to take more business as your performance continues to improve.
Obviously, the people to different story altogether, but Kevin also noted taking some locomotives out of storage. So you know how do we think about new capacity coming on line as you do see this economic ramp and the favorable volume backdrop, and what does that mean for costs and I guess the part b to that is how do you balance the superstar.
Frank in intermodal today with your desire to expand with better mix in merchandise.
Yeah.
Look it on.
On our.
Capacity side out there in the network I still feel confident that theres. Many sections of our network, where we can continue to absorb.
20%, 30% business.
It's some sections that are as we work close with Mark and his team, where we are reaching out to customers and understanding where that flow is going to come from which will require a few more train starts we have.
And of course, I'm basing this off of.
US just over let's say three quarters ago. When we were looking in the midst of the pandemic and we were winding things down and record low numbers with respect to all of our assets. That's what we're basing this off of when we start talking about what we're going to need to pull out. So yeah, we're getting ready with locomotives are still going to be less than.
And than where we were a year ago or two years ago.
With where the volume was that we'll still see record levels with respect to our productivity out of our locomotives and our people.
So it comes down to the mix of business that we're going to see them, we're making sure that we're able to provide that service our.
That brings the customers to us so that's something that we're really working on.
And you know when we think about assets of people our attrition was a higher rate that we than we really expected throughout the pandemic. Those people I think it's just like the trucking industry, those who decided they may have thought they were going to hold on and not retire for awhile well they retired and they pack it in and it was a little too.
Much for them so.
Yeah, we're going to see some of these assets come back they're not going to be at the same levels that we had seen before so I think as Kevin mentioned, we're still going to see some good returns on all of this business that continues to come back in.
And and I'm sorry, the second part I think you mentioned was on the intermodal side. It was what was that question. It was just balancing the equipment is intermodal has been incredibly strong but you obviously have this desire to kind of improve the mix through our merchandise growth.
Yeah, I mean look at where we can we will will run intermodal with freight together and then in other areas, where intermodal continues to grow I still have room on the on the tailwind of intermodal trains are very few of my intermodal trains as it stands or sold out we have cars in storage that we're able to pull out and we continue to pull out as we see the need.
<unk> growth has been very strong as Jim has mentioned and in our terminals are in fantastic shape.
Scott Marshall and his team that take care of the intermodal side of the business.
Done an incredible job.
Turning the assets when they arrive and we continue for.
Fully expect to continue to see that productivity get better as we move forward.
Alright, great. Thank you Jamie.
We have our next question coming from the line of David Vernon with Sanford Bernstein. Your line is open.
Hey, guys. Good afternoon, Jim I appreciate you for taking the time to give share with us your your sort of perspective on the historical sort of industry approach for consolidation I wanted to ask you a question I find a different way you know as you think about this opportunity to drive highway conversions on the PSX property.
How would you think that an end to end merger might accelerate your ability to to to drive further highway conversions, whether its carload or intermodal and how is the board thinking right now about the pros and cons of pursuing some sort of consolidation to help accelerate the highway conversion plan.
Well yeah.
You can ask the question a different way, but you're going to get the same answer as I said, you know to the extent that the rail networks, our work together and however.
You go about debt and creating a better product for their customer.
You know.
And then in mergers eliminate them.
Eliminate the bottleneck in between that at speeds things up and makes the service product a lot better and more truck like.
So.
But that's you know that's that's not my job. That's my that's my that's my opinion.
It's not my job to rule upon the merits of any transaction based upon stacks and I'm sure. The regulator will do a very thorough analysis and determined.
Again, as I said before weather or net.
It's.
It's it's not anti competitive and it's in the public interest.
So it was put in your view the industrial logic for that end to end merger would help you to drive highway conversions, that's kind of what I'm trying to get at.
Yeah, you know.
Normally.
One one person.
One person who is managing.
The supply chain, the conveyer belt is better than having a one conveyor belt and having somebody take it off the conveyor belt and put the box under the next conveyor belt for somebody else to run it normally that seamlessness.
Results in a smoother.
Supply chain and.
And again like I said, that's my opinion.
But then you know somebody else has to look at it and say David think it's a good idea.
Alright, thanks for taking the question.
We have our next question coming from the line of Jordan Alegar when Goldman Sachs. Your line is open.
Yes.
Turning to slide increased visibility on for the positive.
Momentum.
Pinpoint.
Yeah.
Thoughts around that is it still focus primarily on the intermodal recovery you actually.
Adding insane.
For the industrial side.
Is that the biggest part of that.
Higher visibility inside for the industrial versus intermodal.
Well I think it's a number of factors are again in January when we were trying to take a view out for the next 12 months I said that you know it was difficult to predict.
And net my Crystal ball was a little fuzzy trying to determine about you know what at that point in time Covid cases were out of control.
At that point in time, there was just the speculation about what was going to happen with the chip shortages.
Uh huh.
And so then.
Now in a number of people.
We're forecasting GDP growth of X Y and Z are was there going to be a you know a stimulus package was they're not gonna be a stimulus package was there going to be an infrastructure bill was they're not going to be an infrastructure bill.
And then you added into my Crystal ball effect that it turned into a more of a snow globe in February well some of it smoke is cleared in and our people have taken there.
Most people have taken their forecasts for growth this year up.
And we're starting to now see it feel it.
Have conversations with real life customers about what they think there is going to happen for the second half of the year. So that's what I mean by.
Having more clarity.
In terms of trying to me tell the management team here at C. S X had a plan for cast.
And now we're going to run the business for the rest of the year.
Thank you.
We have our next question coming from the line of Ravi Shanker with Morgan Stanley. Your line is open.
Thanks, So for any one Jamie.
Jim if I can just follow up on the topic of highway conversions.
I mean, when you look at the last three years, we've had two of the tightest truck markets in history. So this should be the time when right. When do you guys have more volume as they can possibly handle on the intermodal side and yet when I look over the last several years kind of intermodal volumes havent really kind of materially gone up so I'm just trying to understand.
What's that hold up there is it just more resources and capacity on the rail side and if that's the case why don't you guys just put in billions of dollars and to increasing capacity and the volumes out there or if not and if it does there need to be a material change in the service product to actually close that volume GAAP.
And drive material highway conversion to rail.
Ah well again, let's focus on the intermodal side of the business are in 17, we took off.
Day market at about 8% of the intermodal business.
In 2018 with day market in about another 8% of the intermodal business.
We then went into kind of a.
The industrial recession, and a global pandemic and throughout all of that we're now producing a phenomenal record volume levels for C. S X.
So not sure what you missed.
On the merchandise side of the business, we're doing a really good job there as I've said you know, we're starting to convert our business from.
From the highway which involves really no financial investment it involves an investment on our part to make a commitment to the customer that we're going to provide them with truck like reliable service, which we're now doing and we're we're converting this.
So I'm very obviously I'd like to turn around 50 years of decline in the railroad industry and a couple of weeks and spend in a couple of billion dollars, but I don't think that's possible.
Okay understood.
And I'm sorry, if I missed this in your prepared remarks, but what's the current kind of percentage of the work force that that's kind of impacted by the pandemic and kind of maybe.
I'm kind of on.
On leave right now Ben.
Either a vaccination or kind of a quarantine I think in the past you've said that in some locations up for 'twenty for Senate Bill workforce, what's out of commission and kind of what what's the updated number now.
Ah well, 20% would've been kind of like on a terminal specific basis are really on the western side of the railroad, where we had a kind of a cluster.
Clearly, we don't have 20% of our work force are off sick I think the number of employees who have contracted.
Ah the viruses. So far is around 13% is a I think that's it I think that's the right number.
Yeah around 3%.
Clearly we had a spike we had a peak just like everybody sells in the U S coming out of Christmas there gradually declined.
For kind of going into a March the numbers were really really low I was feeling really really optimistic everybody year injects. It got their shots and now the cases are spiking back up just like they are every place else. So we're watching it but you know again, it's a much.
In total of the work force.
It's it's you know it's kind of around the national average, where a good day indicator of.
We're at or slightly below the average national average for infection rates.
Which I think is fantastic when you think that all of our employees are out there and had been out there since the very beginning of all of this.
<unk> ended January of.
'twenty 'twenty working going to work every single day.
And we have less than the national average of infection rate. That's phenomenal work by our employees have taken care of themselves and their coworkers.
Understood. Thank you.
We have our next question coming from the line of Walter sparkling wit RBC capital. Your line is open yes. Thanks very much I guess my question Jim is on on the potential impact.
They.
Further reacceleration in demand should we get a.
Kind of a surge here in demand conditions, I know railroads haven't always like surges.
Surges or big decline steady.
Kind of a better situation to be in but whats different now would you say and maybe Jamie.
In here, but what's different about how your your network. Your organization is set up to be able to handle surges and are we able can you do that without major.
Service disruption and the customers feeling the effect of those surges.
We did win when the weather was a little increment there just curious in that in that direction.
Well I think that I think that what's different first of all it is.
It is a mindset.
The common.
Focus.
Mongst all of the railroads.
In North America in terms of wanting to move our customers' products.
More efficiently effectively E.
And then adjusting your workforce.
So that its thinks differently is more nimble as responsive to customer needs it and wants to grow the business.
So I think we have changed to a large degree one one positive that comes out of it.
Adopting a different business model is a completely different mindset amongst your workforce, we've got a long ways to go there.
But uh huh.
And we're not afraid to you know how do we Ah Ah how do we make sure that debt you know, we don't get ourselves in a situation, where we can handle a peaks.
In shipping volume.
You know we were talking about a at the end of last year for months ago about hiring because we want to make sure when a positioned to run our move our customers freight.
In June July and August are Nobodies, Northern railroad Guy would ever talked like debt before they would Oh God you know, we're not going to hire we gotta layoff people things are bad we got to lay out for people, we got to cut the work for so I Gotta do we've got a furlough, we Gotta Park locomotives well then the business would a surge back and you wouldn't have been able to handle it.
So I think we do better job now as an industry are trying to look out in the future.
To make sure that we're in a position to be able to handle.
The peaks and valleys I mean think about what we went through in the last year.
So just take the auto business as an example.
The forecasted car sales are going to be very very strong we're going into January three months later I looked at the morning report about how much debt auto traffic, we were moving in it was zero.
And then we thought well this will never start back up this is going to be a very slow start up how are we going to handle this and the next thing we know we get a call saying all the manufacturers are going back the restart their plants three shifts a day.
We were able to move respond and be able to serve that customer segment.
In a manner.
That had very very little disruption, we all geared up into January of this year a figure in alright, its going to be another great year, and then guess what all the plants are shut down again, because they can't get a computer chip.
So throughout the peaks and valleys, we've been able to move and be nimble and take care of that debt is very very important customer base for us.
And it's no different than our you know take one of our a very very important intermodal customers that shipping boxes for the for the peak season. When the peak season started about three months earlier than peak season, and then never stopped so we've been there a art terminals have been open the 20th.
For hours a day seven days a week moving as much as we can record volumes and so.
We think differently and we respond differently.
That's great I appreciate it thanks.
Yes.
Gentlemen, good afternoon wanted to talk a little bit about the intermodal side again, clearly you're taking business off the highway and that seems to be working where do you think your stand competitively wished for eastern partner do you think you're taking market share there and just in general growing the intermodal business. You mentioned you have room on the back of the trains is there anything out there.
Out there in the marketplace right now limiting your ability to grow is it.
Is it drivers for the drayage side is it actual physical boxes is there anything standing in your way of growing even more than you are now.
Yeah.
Well that's a very good question in terms of what it is that she has sex his control over.
I would say very little.
We have training capacity, we have a very good service product our terminals are fluid.
We can handle more volume.
And we can do that in terms of the environment in which we're trying to be able to do all these things.
There's not an area that I can look at it's not hidden disruption or is a mess.
Whether it's our steamships are backed up at the ports on the West Coast East Coast sideways in the Suez, whether there's a driver shortages, whether theres chassis shortages, whether there's box.
Box shortages.
The the entire global supply chain.
As stressed and I think everybody in the industry.
Uh huh.
In all at all of the railroads at all of our major channel partners are doing an amazing job of trying to keep up with things.
And meet the needs of the.
The consuming public.
When you're seeing these.
Big changes in buying and shipping habits.
And in terms of your market share on the rail side.
I think again I think we're doing I think we're doing a really good job.
I think that the industry on a whole is clearly up and that's despite.
As I said.
All of the all of the supply chain being really under a lot of under a lot of pressure.
In some absolutely horrible weather conditions.
The continent.
In the middle of a pandemic.
One.
I just want one thing to add on that is.
I think we're really really proud of the team with respect to what Jim had mentioned we stayed opened 24 seven through the polar vortex and everything else that happened out there.
We were one of the only rails that never shut any gates, we were there for our customers. We supply the service that we said, we would and and we expect to be able to do that as we continue to move forward.
That's what we're hearing in the marketplace to appreciate your time guys.
Hello.
We have our last question coming from the line of Jeff Kauffman.
Vertical research your line is open.
Thank you very much and thank you for my taking my question.
Jim it's been a long call, but you mentioned something about the steamship backups that are still going on and the delays I.
I just wanted to ask you all these inefficiencies.
Is it getting better on the East coast ports for you and can your system handle when these.
Backups start to clear up and those volumes come to highway you know how much business do you think you could be doing thinking about right now.
Because of some of these inefficiencies that you were referring to an adjacent question.
Well, it's again, we're part where part of our profit we're part of a chain where a link in the chain.
And.
You know it's easier to move its.
It's easier to move the chain when it's not Kingston theres not problems in it and everything is working as smooth so I think debt.
I think that are all of us.
Would be.
Could move more listen the pork guys don't want to you know day.
I don't want to put boxes on the ground because they don't have a J S E. Because they don't have a truck that dray it because they can't the railroads are backed up because you know.
The railroads don't want to deal with that somebody put in the box on the ground because of this we all would like things to be smoother than we would all benefit for.
From this and I think that right now.
If you added up all the pluses and minuses rail versus truck.
I think the rail comes a rail comes out on top.
In it you know people want to.
People will talk to you know people start talking about autonomous trucks, and that's the solution and how do we do this and how do we run more and how do we become more energy efficient and how do we you know do I say put it onto rail and I will just take 200 of those trucks and we will take it across country with a crew or two.
Uh huh.
And save you, 75% in terms of your emissions and your fuel spend.
So we're there we're ready we're growing like I said, we're setting records and you know hopefully we can get into position, where we just continue to set record after record after record after record.
But it all takes a we've got the capacity we have the ability.
We just got to keep getting in there and fight every single day to get as much rate as we possibly can.
And when you take a look at the driver shortages out there a lot of the driver shortages coming out of long haul truckers a lot of those trucks.
Truckers at like the long haul and wanted to move across the country I'm less and less of those are available.
And when you look at drayage.
When when we bring it into town and we have someone who can dray it across town and go to bed every single night.
And be with their families that seems to be the trend of of what the new truck driver is out there, which again gives rail that advantage.
And there are no further questions at this time.
This combined with today's call.
Thank you everyone for calling in today I really appreciate are.
Good yeah, good questions and look forward to talking to you. All soon thank you bye bye.
Okay.
This concludes today's conference call you may now disconnect.
Okay.
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Sure.
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