Q2 2021 CSX Corp Earnings Call

As we lap the most severe economic impacts of the pandemic on.

On our first thank all of the <unk> Railroad, there's further our unwavering commitment to our customers as they work very hard to deliver service in a very difficult operating environment.

As we enter the second half of the year, our focus is squarely on continuing this growth.

We have kept our yards and terminals open and freight moving throughout the recovery.

And we will continue taking the necessary steps to add resources and increased liquidity in order to help customers meet their own growth targets. This year, despite the orange zone supply chain disruptions.

Let's begin with slide 5 of the presentation, we will review of our second quarter financial results.

Operating income increased to 169 billion and earnings per share rose to 52.

These figures include $349 million.12 per share impact from the sale of property rights to the Commonwealth of Virginia.

Our operating ratio was 43, 4 including an 11 points at 7 percentage point impact from the Virginia transaction.

Excluding these impacts operating income increased 62% earnings per share increased increased 82% and the operating ratio improved 820 basis points.

Turning to slide 6 revenue increased 33% on 27% volume growth.

Merchandise revenue increased 26% on 21% higher volumes led by automotive metal drilling equipment, and AG and food markets.

Intermodal revenue increased 42% on 28% volume growth setting a new record for average daily volume.

Both domestic and international volumes increased significantly and continued to benefit from strong demand for transportation services as well as growth from East coast ports.

Core revenue increased 47% on 44% higher volumes with growth across all core markets.

That's the call benefited from higher utility and industrial demand and both export net and thermal coal volumes rebounded meaningfully.

Other revenue growth was driven by increased intermodal storage equipment users usage as well as higher revenue from affiliates.

Turning to slide 7 we remain committed to being the safest railroad in the second quarter, we achieved a new record low number of train accidents, driven by our focus on increased communication and education to reduce human factor caused accidents.

Safety on issue initiatives for the remainder of the year, we'll focus on culture communication and continuous education as.

As an example, we recently introduced a modified approach to operational testing for <unk> any employees.

The new program is designed to be instructive, rather than disciplinary to increase employee engagement and create lasting changes in behavior.

Combined with face to face safety summit and expanded education of comp causes of incidents. These new programs will further reduce risks and protect our workforce.

Moving to slide 8 let's review this quarter's operating metrics. The intermodal segment continues to perform well intermodal trip plan a trip plan performance average 89% for the quarter.

And through the use of our reservation system and the hard work of our intermodal team. We have kept all our intermodal terminals opened over the last year as volumes surged.

Carload trip plan performance improved sequentially to 69% for the quarter and we are focused on continuing this positive momentum throughout the rest of the year.

We're also working to further improved network fluidity.

Car dwell improved sequentially and remains the lowest in the industry.

<unk> began to trend positively exiting the quarter and we expect to see further improvements in both metrics in the second half of the year.

On slide 9 I want to take the opportunity to highlight some of the actions, we're taking to resource the network for growth.

As I mentioned on previous calls we entered the year planning to add key any head count in response to the expected growth.

And we will continue adding through the second half of the year.

Over the past several months, we have increased the size and number of our new conductor classes and then also enacted new programs to improve availability of existing employees to ensure that we have resources in place to capture the rising demand and serve our customers well.

We stage locomotive across the network as we prepared for the incremental volumes.

While these assets provide additional flexibility to react to customer demand.

We are maintaining a balanced operating plan.

And we are investing in the safety and we've locked the reliability of our network.

We demonstrated this commitment by maintaining our capital spend throughout the pandemic and we continue to invest with a focus on the long term growth and sustainability of our business we.

We still have ample compressed capacity across the network for growth and we are working to find new ways to improve the efficiency and impact of our capital spending programs.

Turning to slide 10, our focus on investing for the future extends to improving the safety productivity and sustainability of <unk> operations through the increased use of technology.

While we are driving further emissions reductions to our advancement of energy management software and the expanded use of fuel savings technology.

In addition.

To be almost 40% increase in distributed powertrains year over year, we continue to expand the number of distributed power equipped broker models.

We are adding that capability to approximately a 100 locomotives. This year in addition to including on all the locomotive rebuilds, we are performing well.

We're also expanding use of inspection technologies to improve the safety of our operations and increase the efficacy of our track maintenance and repair programs.

We're performing roughly 80% more drawn on inspection flights this year and our increased use of autonomous track inspection cars is improving safety by better highlighting areas in need of repair.

Lastly, we are providing our field employees with digital tools to replace inefficient manual or paper based processes to increase the speed of the communication across the railroad.

We have distributed roughly 9000 tablets to employees, which are improving both safety and productivity by allowing real time information sharing and feedback.

We are pleased with the success of these programs to date.

And we are only beginning to see the potential value. These investments can bring.

For more efficient network planning and dispatching the changing our customers interact with CSS, we see significant opportunities to leverage technology to improve the pace and quality of decision making across our business.

I'll now turn it over to Sean to run through the numbers.

Thank you Tim on.

Pleased to be here today, and I'm excited for the opportunity to continue serving this company and an important time in our history as we focus on culture innovation and growth.

Looking at the second quarter financial results on slide 12 revenue increased $735 million or 33% versus the prior year.

Reflects growth across every market as we cycle the impacts of COVID-19.

Revenue per unit growth of 5% includes a 2% impact from higher fuel surcharge revenue combined with favorable pricing and higher other revenue.

Total expenses were 9% lower in the quarter. These.

These results included a $349 million gain related to the sale of property rights to Virginia, which was partially offset by the impact of higher fuel price.

Excluding the property gain and the impact of fuel price expenses would've been up 9% on a volume increase of 27%.

Before I get into specifics by line I would like to address the topic of inflation.

The good news is we have secured adequate inventory and supply commitments for critical materials.

And we've worked to lock in the vast majority of unit costs for 2021.

Excluding locomotive fuel expense inflation this quarter was just above 3%.

And we don't expect that to move much going into the second half.

We are seeing cost pressures on capital materials for core infrastructure and are working to offset that through increased productivity sourcing shifts and inventory management.

We don't expect any change to the overall capital budget this year.

Several of our supplier contracts are based on lagging indicators. So we will continue to monitor things closely going into next year and ensure inventory levels for critical materials remain adequate.

Now.

Moving down to the specific expense line items for Q2.

Labor and fringe was up 18%.

Higher volume and inflation together drove a $75 million increase in expense additions.

Additionally, incentive compensation increased $60 million on higher projections for award payouts. This year, coupled with prior year downward adjustments related to Covid impacts.

We continue to absorb growth on the network and sustained productivity gains.

As we work to hire conductors we've increased the use of distributed power and continue to optimize the plan.

While total head count is roughly flat from year end 2020, the active paying accounts is up approximately 200 this year.

And we expect continued sequential increases in the third and fourth quarters.

And <unk> expense increased 6% or $23 million on the second quarter as higher volumes on inflation were the primary drivers.

Locomotive productivity measured in GTS per available horsepower hour improved 4% compared to the second quarter of last year.

We expect this to improve even further going forward as velocity on cycle times recover.

In addition, we are absorbing growth and driving efficiencies that our intermodal terminals with cost per container lift down 12% year over year.

Fuel expense increased $103 million driven by average fuel prices that nearly doubled as well as higher volume.

During the quarter. We also recorded an $18 million benefit related to the settlement of a state fuel tax matter.

Looking at other expenses.

Depreciation increased $4 million in the quarter, primarily due to a larger asset base.

<unk> expense increased $9 million or 12%.

The impact of higher volume on freight car rents was partially offset by higher net earnings at affiliates.

As a result of the Virginia transaction gains on property dispositions increased significantly in the second quarter.

As a reminder, the gain during the quarter was related to the first phase of the transaction.

Total proceeds are expected to be $525 million, including $200 million already received.

$200 million later, this year and the remaining $125 million expected next year.

Turning below the line.

Interest expense improved $10 million due to a lower weighted average coupon and lower average debt balances.

Other income increased $5 million as favorable pension impacts were partially offset by lower interest on cash held.

Income tax expense increased $204 million.

Mostly due to higher pretax income.

Effective tax rate was 23, 3% and was impacted by a state legislative change this quarter.

Closing out the income statement sales ex delivered operating income of $1.7 billion.

Reported operating ratio was 43, 4%, including a benefit of approximately 200 basis points from property gains.

Now these results do not include any impact from a quality carriers acquisition, which closed on July 1.

The acquisition will add approximately 6% to <unk> revenue and.

And is expected to be relatively neutral to operating income and EPS. This year due to the impact of transaction and integration related expenses.

Quality trucking revenue will be recorded in the other revenue line.

On the cost side.

2 thirds of the expense will be <unk>.

About 1 quarter of it is split between labor and fuel with.

With the rest hitting depreciation on rents.

Going forward, we expect to leverage the quality transaction to accelerate rail growth.

By offering new multimodal products, extending our reach and further integrating <unk> into our customer supply chain.

Now turning to cash flow on slide 13.

As you know free cash flow is a major focus for this team through.

Through the second quarter free cash flow before dividends was $1.9 billion.

Up 35% versus the prior year.

Just to put that in context, that's $300 million more free cash flow than we generated in all of 2017.

Year to date free cash flow conversion on net income is 100% and we expect it to remain near that level on a full year basis the.

The company's cash balance remains elevated at nearly $3 billion.

Our expectation remains that this will normalize over time as we continue to invest in the business and return capital to shareholders.

Year to date shareholder returns are nearly $1.7 billion, including approximately $1.3 billion on buybacks and $400 million on dividends.

We remain committed to returning excess cash to our shareholders with a balanced and opportunistic approach to buybacks.

Net.

Let me turn it back to Jim for his closing remarks.

Great. Thanks, Sean.

Concluding with slide 15, we are maintaining our full year revenue outlook.

Excluding the impact from quality carriers, we continue to project double digit revenue growth for the year.

As Sean mentioned, the acquisition will add approximately 6% incremental revenue growth on an annualized basis, and we expect the impact this year to be about half of that.

We will achieve these growth targets by providing our customers with a high quality service product.

As I said, we are taking the necessary steps to ensure we deliver on this commitment.

Our capital expenditure outlook remains at 1.7% to $1.8 billion for the year and we will continue returning cash to shareholders.

Demand remains strong and so does our commitment to customers.

We are resourcing the network for growth, we are driving operational improvements to add capacity through increased asset utilization.

We are investing in our business for the long term and.

And we continue to design, new and creative solutions to allow customers to move more freight with <unk> today and for years to come on.

Book to Bill for the Q&A.

Thank you Jim in the interest of time I would ask everyone to please limit themselves to 1 question with that we will now take questions.

If you would like to ask a question at this time he will need to satisfy standard number 1 on your telephone.

John a question for Bob.

Sure.

Your first question comes from Allison Landry with Credit Suisse. Your line is now open.

Good afternoon and thanks.

Hoping you could maybe talk about the underlying pricing environment.

Typically what youre seeing on contract renewals EBITDA just directionally from Q1, and then just given the myriad of inflationary pressure and very tight truck capacity, you think on scope for a more rapid acceleration in core price.

On the path Michael Thank you.

Hey, Alex this is Kevin.

In terms of <unk>.

Price inflation today.

On cost inflation, what we're seeing on keeping close with Sean.

On staying close to that so we can be transparent with our customers and explain to them. What we're seeing in the market. None of it it was a surprise for them, they're seeing in their business. They certainly understand.

The pressures that are out there in terms of labor and other material cost, but we're really trying to do is see if some of these things are transitory or whether they are really.

Here for the long term and we will continue to evaluate that throughout the year when you look at.

Generally our contracts we have a lot of those renewals that occur in the fourth and first quarter. They are concentrated in those quarters.

Really it represents about 70% of our annual contract renewal activity. So we.

We will continue to look at that.

We're communicating transparent with our customers and.

Expected obviously.

That cost inflation through our pricing.

Okay. Thank you.

Your next question comes from Amit.

Gotcha with Deutsche Bank. Your line is now open. Thank you operator, hi, everyone. Congrats on the on the Great performance, Sean If I look at the underlying operating ratio in the second quarter of <unk> 55.

1%.

Are there any reason that that moderates.

In the back half I guess, you have to add that we have to add the quality carriers into the mix. It looks like it's maybe 100 bps of negative impact.

This year given it is half of the 600 million or so in revenue, but I would just if you just take that and table it for a second.

Mix is getting better hopefully in the back half, Kevin just talked about 70% repricing towards the end of this year and maybe half of that towards the end of this year.

I would just expect that.

Underlying or extra quality carriers acquisition gets better in the second half.

The stellar performance in the second quarter. If you can just help us think about that thank you.

Yeah. Thanks, Amit.

When you think about the second quarter not a whole lot of unique items in there other than Virginia transaction, and then I talked about the impact of the fuel tax settlement. There so strip those out and carry it forward to the second half of the year, what's going to impact.

The operating ratio on the second half of the year quality Youre right I think youre doing the math correctly there.

We've got some hiring to do so we're going to be bringing on some crews if we bring on the cruise and network fluidity improves and we're able to move the volume that will that will be a positive.

But there'll be a cost to bringing those crews on we're also going to have some incentives here to increase the availability of crews. So that'll be an impact and then probably the biggest variable is what does volume look like in the second half.

We've been able to demonstrate here, albeit on a relatively easy comp that the drop through is pretty good.

On the margins in the second half on being highly dependent on what the volume looks like.

Right, but then on the labor side I think there are 6% to 7% of the work force that of trips every year. So when you are talking about growth and sequential labor or head count.

Is that a net number or gross number net of attrition. If you can just provide a little bit of color on that as well.

Yes, so I mean, we're going to continue hiring through the rest of the year and as long as we need to in order to move the volume and increased fluidity I would expect sequential head counts probably going to go up a little bit on a net basis, both in the third quarter and the fourth quarter.

Okay. Thanks, guys. Thank you very much appreciate it.

Your next question comes from Kevin.

Your line is now open.

Yeah, Hey, Thanks, Hey, good afternoon everybody.

Maybe a question on the revenue outlook for the back half of the year. So obviously, you're maintaining your outlook.

Tactic I guess, when we think about volume do you feel like the network if at all constrained in order to take on incremental volume do you think youre running kind of below what the the demand environment will be able to sort of provide you on that in that context, how do you feel about sort of service or are there some improvement that needs to be made whether those hedge coming back on or otherwise.

So you can kind of reach maybe full potential from a volume growth perspective on the back half.

Yes, Chris So look when you look at the transportation sector as a whole we're not unique.

Everyone is having their challenges the fluidity out there is not.

Very good right now when you look across.

All modes of transportation and those challenges we're facing the same challenges getting trumps the pick up.

Boxes out of our yards all of those things create challenges for us so yeah.

What I would say there was there is opportunity there.

We werent able to move into the second quarter.

A fair assessment as we get more fluid as we bring on crews.

We suspect that that will.

The right opportunity, we're certainly having those conversations with our customers today.

They want additional capacity and we're committed.

On to do everything we can.

To react as quickly as we can to bring on more.

More people more capacity to serve those customer needs.

It's already starting to have conversations around next year, So I'm communicating every day with Jamie.

And on having discussions with customers on what they need and so we can get out ahead of it with our resources. We can plan ahead, we can commit.

On to delivering on this.

The service that we expect to do.

Got it thank you.

Your next question comes from Capex plans with Bank of America. Your line is now open.

Hey, great good afternoon, and congrats on the solid results just wanted to talk a little bit about.

The congestion that's going on so obviously you just had a couple of questions on unemployed and ability to handle it.

We've seen the 2 western rail is kind of do embargoes on on traffic maybe talk a bit about we've seen youre your metrics kind of come down in terms of on time performance talk about if youre starting to see any of that spread to the eastern network is there a different congestion points that especially what's going on in Chicago that you hear us.

Starting to create any larger backlogs and then just on that note youre on your cost per employee really scale.

Can you address kind of if there is anything in that that we should look at going forward. Thanks.

Yes, Ken it's Jim.

A quick comment and then I'll, let Jim follow up with any details and things that are necessary.

We've been very very very committed to making sure that this railroad runs well.

It has been an unbelievable challenge.

I have never seen any kind of a thing like this in the transportation environment.

Entire career, where everything seems to be going sideways at the same time.

Despite all of that.

<unk>.

We have been able to keep our terminals opened in Chicago.

Hope, we can continue to do that.

In January when I got on this call I said, we are hiring because we anticipated growth.

Fully expected that by now we would have about 500, new <unk> employees on the property.

No way that I or anybody else in the last 6 months realize how difficult it was going to be to try and get people to come to work. These days.

It is an enormous challenge for us to go on firing people that want to be conductors.

In a row on the railroad just like it's hard to find people that want to be bereaved, those or anything else.

Sure.

Difficult nor did we anticipate.

There's a lot of the people, we're going to side they didn't want to work anymore. So our attrition was much higher in the first year to the year than what we had expected. So even though we brought on 200 new employees, we fell short of where we thought we would be by now.

Going into the year, because we anticipated that there was going to be strong demand. We continue to expect there to be strong demand and as long as there is continues to be the forecast for demand. We are going to continue to hire employees because you need employees to run a railroad.

What we are managing this company to do to serve our customers' needs and we will bring on the assets and put them into places where they need to be so we can move our customers free.

Simple as that.

Look at I think Jim's comments really mean.

Nailed it with respect to some of the some of the headwinds that we faced here with respect to <unk>.

The metrics on where they sit I am proud of what this team has been able to do on the environment we've been at.

We're quite confident that in the environment, we're in that Kevin and his team is providing us with some some great numbers on what we need to look forward going forward into the next 6 to 8 months as far as we can in this industry.

But we know we can do better on these metrics and Thats, what I think is the great opportunity as an operating team as we look forward.

We've got the rolling stock that we need we've got the assets that are sitting there.

And on people to Jim's point, and I think it was mentioned by.

It was 8% is where we look at for attrition, which means we're going to be hiring for attrition, but we are going to be hiring for above attrition as well we need to.

We've got 200 trains out there, we mentioned energy and new accounts up a couple of hundred.

There's more numbers, we know what our number is and we're going to go after that.

For us it's all about the reliability to the customer so as the fluidity picks up as dwell continues to drop.

Yeah, we see some benefits there with costs in the rest of that as we move along but ultimately we look at our trip plan performance, which is getting better and better, particularly on the intermodal side on the carload side of the reliability is on where we needed to be so we're going to take the steps required in order to get that reliability, where it has to be and Kevin and his team are able to grow.

There and sell the product.

Which is service and Thats key for us without service.

Not any different than anybody else. So we've got to continue to capture that which allows us to grow.

Can you to push forward so.

Maybe I'll, let Sean really touch on the cost per employee.

Yes, Ken just quickly on that so if you're looking year over year. There's a few things to think about first is the incentive comp I called out you've got inflation on the labor side.

And then we've got a little bit higher over time versus last year as we were obviously scaling down overtime with the plummeting volumes.

Just the other factor from last year, you remember we had those emergency reserve boards. So we had about 300 employees, who didnt have significant wages along with.

Their emergency status there so looking for the from the first quarter were actually down a little bit sequentially, reflecting some normal seasonal trends.

Great. Thanks, Jim Schott, Jamie I appreciate the balance.

Your next question comes from Tom Roderick.

Your line is now open.

Yes, good afternoon.

This is the question I think for Jim maybe Kevin as well.

On.

You've talked about.

I think for a couple of years about the opportunity with carload shippers to gain wallet share versus truck.

And I think you were developing some good momentum or had some good momentum on that.

Before COVID-19.

I am wondering if.

It's unusual circumstance, but does it hurt your ability to continue that program and to kind of gain further.

Share from these shippers.

Given that the rail network is having these challenges I mean theyre not.

A lot of it's not in your control, but how do you think that affects the ability to gain share and when do you think you kind of get back on track with that.

Share gains for carload shippers.

Sure Tom.

Many times, we tried to explain why we're so confident in our ability to grow above a traditional rates in our carload merchandise business was because we have if we can develop a product that's truck like we have a cost advantage that.

It gives the customer lower.

Cash transportation solution.

It will be similar level our reliability.

And as we were moving along as you said come on starting in 17 getting into 19.

Our reliability.

It was significantly better.

Then where it had been in 2017 our carloads.

Carload trip plan compliance number was.

80% mid to high 80% range.

And.

And so going in and having conversations with a customer who number 1 was skeptical about switching from truck to rail we had a very good track record and interesting product for him to look at.

It's unfortunate we have 9 now and you have to sit here and much to my Bill.

Solution.

Our trip plan compliance number of 69.

The debt is at 69 trip plan compliance much better than it was in 2017, yes. So we still have the ability to have.

A good narrative with our customer base about about why it makes sense for them to switch, but it's just simply not as compelling.

As it was.

18 months ago, 15 months ago or was it before the world went sideways on us so, but we're going to get that back.

That number would be much higher.

As I said, the 500 employees that we hope that we would have had here by now.

Conductors here by now.

That number would have been much higher and we are hiring and doing whatever we possibly we can do to run and improve the speed.

Velocity and reliability of the of our service.

As we do we will get there.

2.

Having being in a position to have similar conversations with our customers as we did before at the same time.

And any easy to find a truck right now.

So it's unfortunate that we are in that.

On the 1 hand.

We're not as good as we work.

But on the other hand.

When we get back where we were in the opportunity right. There is tremendous for us. So nothing has really changed about our optimism at all in terms of the strategy that will drive outsized growth for us as we move forward.

Just unfortunate that.

As I said the world went sideways on us here for a while.

But we're coming back we're coming back strong and will be and will be even better than where we were.

As we get more time.

To get things running rate.

Is that something that bounces back quickly like you could be on track in 2022, where you think the shippers have some kind of.

Readjustment period.

Gauge on that.

That share gain discussion again.

Again, I hope that I hope that our.

Our service metrics.

As I said I've kind of said on the last call we'd be we'd be in great shape.

By now so yes, I expect those numbers.

To get back by the end of the year and we position ourselves.

In the transportation community.

As it has had on them.

Extremely good service product.

So going into 'twenty zone into next year.

Again, we're getting we're getting truck conversions now.

Our intermodal growth.

So to do a large degree has come on.

From a converting long haul over the road trucking to intermodal.

Growth in certain segments with certain customers in the carload side has come on it.

<unk> expense of the truck so we're still seeing that.

I just think that the.

Again, we are not in it's not as E E.

Uh huh.

It's not as easy for themselves.

On a woman to go in and talk to a customer today about how great. We are and why they should convert more traffic to rail than it was.

In the fall of 2019, it doesn't mean, it's not a <unk>.

Cheesable. It just means it's not as easy and we'll just have to work harder.

Okay, great. Thanks, Bill perspective appreciate it.

Your next question comes from Scott Group.

Your line is now open.

Hey, Thanks afternoon, guys. So.

Kevin It sounds like for now we've got a favorable environment for coal, maybe just talk about what youre expecting from a volume and RP standpoint on coal going forward and then just separately Jim just any thoughts on on the executive order and how you guys.

Think about reacting responding in any way.

Yes.

On the coal market similar to a lot of the other markets that we are.

<unk> talked about today is the same day.

Demand is outstripping supply you are having on the coal mine is trying to catch up they've underinvested there.

Catching up on some of their investments, they're having some of the same struggles we are on.

On the people side.

So we're seeing all of that.

Today, you see the underlying commodity prices, whether its natural gas here in the U S.

Met coal prices internationally on thermal coal prices internationally. They are all supportive.

Of an uptick in volume and we will.

We start to lap some continue to lap some very easy comps into the back half of the year. So we do expect growth.

But non back to the levels that we saw on 2019 and a lot of that and based on.

The supply chain to try to catch up with the demand. So we're we're already having discussions with our customers is what does it look like for next year and how do we continue to replenish inventories, particularly here on the domestic side, where our inventory levels are very low.

We're in a situation right now where we're trying to keep inventory levels to above those critical levels. So they can continue to burn and serve their customers.

But the environment is quickly turned up.

It doesn't last week they didn't see this coming.

They were surprised by how quickly the market recovered and so we're all communicating and really.

Trying to understand.

How they can do better and how they can.

<unk> and how we can deliver the transportation services. So they can deliver to their end customer.

Very good outlook when you look at ARPA, you Theres, a little bit on the international side I will see favorability.

Favorability in particularly on the met side we're on.

Where our price followed the commodity price.

On the domestic will be relatively similar.

Kind of dynamics that you saw on the second quarter going forward. So good market there.

Yes, Scott on the executive order I guess, when we first heard about it before it actually been released.

<unk>.

It seems like.

The administration has for some reason single growth the railroads steamship businesses.

Once once the full information got out and we were able to digest it and find out that it covered.

Everything and everybody and especially tech.

We got a little better viewpoint of what it was all about and it appears to be pretty much.

Not a lot of new.

Items if any.

The agenda.

As it relates to railroads agenda that has been moving along at the surface transportation board for years.

So it was kind of like what are the everything that's going on at the surface Transportation Board and we will just kind of alluded to it along with every other regulatory.

Sure.

Move.

A foot.

In all industries.

And it's really my personal.

Personal opinion, it's really unfortunate.

When we supply chain.

All of these essential workers, who have been doing an amazing job now.

During a pandemic.

Our current of our.

Singled out because there are the railroad is made up of.

All of these employees that are out there working.

And all of these.

Regulatory.

Ideas.

Which are really pushing forward.

Forward buy.

Industry lobbyists, who want to change the rules and regulations.

<unk> at this point in time, when everybody is working so hard.

That we should.

Suddenly.

Up and take advantage.

A difficult time to try and push forward the regulatory agenda. So it's not as much new.

Somewhat disillusioned about what it really was.

But we're used to handling it in.

We'll move forward.

Thank you for the time guys.

Your next question comes from Jim on that.

Your line is now open.

Okay.

Yeah.

Great.

Hi.

However on mute sorry.

A question on quality carriers.

If you can give us maybe your first impression if he had some communication with clients.

Are they are perceiving this combination.

And secondly, as we go into 2022, I think you mentioned for this year, it's kind of breakeven on an operating income basis, but.

As we go into 2022, how are you thinking about.

The contribution of that business to operating income.

It was Kevin on the quality integration on July 1 you can imagine we got our teams together quickly after that our sales team along with quality sales team.

And their feedback so far from the customers has been overwhelmingly positive.

Theyre looking for capacity in the market.

Have several ongoing.

<unk> currently with customers.

That will offer that capacity that they're looking for.

Sure.

Doing all of our diligence, making sure we bring on the service to be communicated with Jamie and his team and how we can service on business.

To the standard that we expect.

We will do it very carefully and very methodically, particularly on AR.

This market today, but.

This is a product that in.

We knew that going in because we did our diligence ahead of it we survey our customers we surveyed their customers and we'd ask that this is something that they feel is needed in the market and the overwhelming response was.

Yes.

Like this in the market they see the value.

We will we'll be thoughtful on how we bring it on.

We have a lot of inbound call on customers calling us.

Going to come up with additional solutions.

We'll bring those on but it's been great. So far our teams are working very very closely together.

And we're working closely with us.

So they can understand the opportunity remains on we're thinking about bringing on.

Volume onto the network.

And I'll, let Sean on the MTO side of it yeah. So.

So in terms of the financial impact as we get into next year. The core trucking business has truck like margin. So you can expect to see that next year, but it's about the conversion that Kevin has been talking about when we're able to drive some of that business. That's moving over the road today over to the rail and do it on existing trains the incrementals on that growth.

Would be pretty significant we've got to ramp that up over time, we need to make sure we've got the equipment and all the banks.

I think in place, but what you should see a ramp up in that next year.

Okay. Thanks.

Your next question comes from Justin Long with Stephens. Your line is now.

Thanks, and good afternoon.

Jim I wanted to clarify the comment you made earlier on the progression of carload trip plan compliance going forward or do you think getting back to the mid to high <unk>.

Possible by year end, and then from a resource perspective, we've talked a lot about head count, but can you talk about your plans for redeploying locomotives in the back half of the year as well.

Yeah.

Yeah, I'll, let James talk about locomotives, but in terms of.

My goal.

To get back to where we were.

Yes, I would hope that we could.

Yeah.

Where we are right now would be challenges associated with being able to hire people.

I don't know if thats achievable. That's my goal, that's what I'd like to see happen and then I'd like to see us get better from there I can't I can't say right now whether or not until something changes dramatically in the hiring situation, whether or not we'd be able to achieve that.

When we look at on the locomotive side.

As we get faster and we can improve our fluidity out their firm for moving where we are now we're going to need less locomotives. So the question isn't necessarily where our numbers that now.

We're good with what we have for locomotives, we still got hundreds of locomotives in storage. We've got a great rebuild program that we're continuing to do we've got 60.

Bill locomotives coming out here over the next 3 months.

Which will allow us to put down some some more locomotives that are fuel efficient. So we will continue along that track.

Nothing but continued opportunities, particularly on the technology side as we continue to work with our zero to zero program.

Through optimize trip optimizer and electronics, there is a lot to gain as we continue to move forward on that front.

Okay, Great I appreciate the time.

Your next question comes from.

Brian.

Thank you Michael your line is now.

Hey, Thanks, good afternoon.

Just wanted to ask maybe Kevin if you would just for an update on the land portfolio of industrial pipeline.

How do you think those things are trending if those conversations are really changed given the demand backdrop, you know whats your timeline expectations for.

Site development or something like that they would come on come from those that first day would be more noticeable.

And then just to follow up on the question about labor and resources. It sounds like that's the key getting labor, but it's also it sounds like it's pretty hard for you and for everybody. So maybe you can just give us a sense on what your confidence in that and then if theres any other levers you can pull across the network of different assets appointments. They would hope you get there if the labor.

It doesn't end up being as hard as it looks right now.

Well, let me, let me touch on the industrial development on how we're thinking about it.

The pandemic really James.

<unk> the way the customers are viewing.

Our supply chain and we're really.

On 1 pushing the team to do is we need to be in that conversation on there.

Reevaluating it are there new facilities or the new warehouses as their new production that they're going to want to onshore and how do we.

So.

On the opportunity to put that on <unk>.

Ral.

<unk> make it rail served on the customers understand.

On the opportunity.

Does that give them in terms of options and be able to move their free, particularly in an environment, where on a global supply chain can be challenges that the freight railroads have been reliable and have continued to move free throughout the pandemic.

We're increasingly seeing the value of that so I'm excited about leveraging our <unk>.

Real estate portfolio.

On a a lot of them.

Ready sites that they can build on today.

Marketing and that along with our real estate team on closely on.

Seeing some traction there so it's exciting I think it's early.

But I am hopeful that we will start to see a little bit more opportunity over the next 12 months as we get out on and get in front of our customers there.

On the on the labor side have been working really close with our HR Department here on the store fleet in her for her crew.

Last 8 months, it's been difficult. There's no question number on it we've gone through some ebbs and flows with how our applications have come forward.

Making sure we get the right people to workers and new jobs.

Just recently there is a couple of things that we've done that has helped US we've come up with the deal with on a conductor smart TV.

For an availability agreement, which allows us to.

We're closer with our conductors and make sure that their availability is better than it has been so that agreement has been successful here over the past couple of weeks since its kicked in and believe it or not.

Being a fourth generation railroader I'm, a believer that sometimes the best degree net for railroads would stick around our actual people from railroad families. I think theres a few other around this table in the same situation.

We have put a referral program together offering incentives to our employees to refer.

People to a railroad to work for <unk> and we went from a <unk>.

<unk> application.

Just a few hundred people too I would say within a 2 week period well over a thousand.

Applicants that were going through right now to bring on as conductors. So the pipeline has gotten very strong and.

On this program has helped out on a course of referrals.

Within helped people stick around through they understand what the job is bidding on what it is.

<unk>.

I understand the lifestyle. So this program is really going on out help us move forward as we continue to do on hiring.

Alright, thanks for the time I appreciate it.

Your next question comes from Jordan Alastair.

Your line is now open.

Yeah, Hi, I was just wondering if you could talk a little about the international intermodal front with the issues.

On the West coast and some of the gating procedures on Chicago do you think that's is that or will that lead as we move towards peak season.

Retailers and others, perhaps diverting more traffic to the ports on the east coast and could that lead to.

Additional opportunity for you again, assuming your service could keep up effects.

Yes, I think.

You really identified a turned here.

West Coast ports have struggled particularly through the pandemic.

Great.

Demand has really picked up here in the <unk>.

<unk> trend that we continue to see more freight moving to the East Coast. This is another reason why I think the shippers are going to look for that option and that's the that's a very good thing for our franchise.

The east we remain fluid.

Jamie and his team have done a great job working with all of our.

<unk> partners.

Continuing to move freight on so.

So the intermodal terminals remain open we're continuing to move right on even more of it.

Continuing to invest in inland ports and other areas to make sure that we can serve it.

Thank you.

Your next question comes from David Vernon.

Your line is now open.

Hey, guys. Thanks for taking the time Jamie.

Clearly, whether the Resourcing issues you are having.

Firstly on having deep kind of on the way down but whether this is just sort of sand in the restart recruiting gear is trying to get guys off of the idle boys or whatever.

Could you talk more specifically to what what the core issue is here and then as a follow up Jim or Kevin when do you start getting worried that the service level issues. You are having now are going to impact <unk>.

<unk> to make hay on the price.

It would be a pretty good market next year.

It was a little fuzzy, but I think the question is.

On the issues associated with the employees and trying to hire people correct.

Yes.

Yes, no we're not.

I don't think.

I think this is the this is a trend for every business right now.

It's a challenge.

We are aware.

Evolving in the way we think about this.

And <unk>.

You have to try and figure out things to do.

Take the jobs.

More attractive.

They're extremely good paying jobs.

With.

Greenlee good benefits.

With all kinds of other bells and whistles.

But in today's world that's not enough.

So.

A lot of other things, we're doing right now in terms of.

As Jamie said getting referrals doing is doing that.

Are going to fill the need on a short term basis.

The.

I am convinced and I think the team has convinced that we need to kind of look.

At this from a long term perspective, and say what do we really need to do.

To make sure that we have.

A stable long term pipeline of people that enjoy coming to work.

And doing what they need to do.

And you know nights weekends holidays winter outside all of that.

Where people before Corona light.

Like that they don't want to do that anymore. So we have to we have to look at the whole big picture.

We will do that.

Because.

We need to we need employees around the world because that.

And so we're going to.

James our thoughts on our processes.

And.

Throwing money at people. These days is not the answer.

And I guess the other question there was whether and when you start to get worried that the service issues, maybe you have now.

That's the impact.

Your ability to kind of take rate up into 'twenty 2.

Hello.

I think that the.

Not worried right now because I think we have plans in place that will get us where we need to be by the end of the year.

As I said in my remarks earlier.

We were caught somewhat surprised and as much as we had a plan in place to get us to where we thought we needed to be.

And these issues that everybody is facing right now kind of Florida.

But we have been a full court press.

<unk>.

Jamie and on a personal on doing everything we possibly can to work with the Union leadership to help US there may have been tremendous.

In response to making sure that we're ready and willing and able to serve our customers.

So I feel pretty good about where we should be absolute.

Jacksonville, and working injecting growth today.

It's not like a pandemic and drawn out there how low.

It's alive and well right here so.

Who knows what things what's going to happen in the next couple.

A couple of weeks couple of months.

Let's assume that we have some renewable.

Health conditions in the country.

I feel pretty good will go into 'twenty 2.

Well positioned.

And we will.

And we will continue.

To make sure that we have a pipeline of.

Labor.

Coming at Us all the time.

In the future.

Your next question comes from Walter <unk> with RBC. Your line is now open.

Thank you very much and good afternoon, everyone just wanted to come back on pricing.

Taking a different angle in terms of how youre structuring or might be restructuring on changing at all.

Hi.

The type of contracts you're negotiating with.

With your customers.

We're in a period of.

Hi, pricing, particularly in trucking and intermodal and there are some questions whether that is sustainable. So my question is are you changing or can you change at all the terms on your contract length on the Mt.

To better capture and preserve the current pricing environment longer than you otherwise would have on your prior on the infrastructure your prior your prior contract.

Look I don't think Theres anything in this environment on the changes our overall approach on how we how we go to market, it's about being transparent with the customer.

The cost pressures that we're facing in our business.

They get it they are taking the same excuse.

Excuse on having a discussion around that I'm I'm more interested about on how we partner with our customers to grow their business and help them compete in the market.

The things that I'm really focused about you all realize we have to cover our costs.

That's really a secondary discussing when it comes on.

Conversations I'm trying to happen with the customer I'm trying to understand how their business is being impacted today, what they expect.

How do they expect to grow next year, what can we do.

From a service trends.

<unk>.

Helped them enter new markets help them advantages in zone, and the markets and compete and win win share. They are winning in the market we're going to win.

So a lot of those conversations are happening today.

Certainly we expect to cover our cost going forward, but really it's a combination of <unk>.

Volume growth, we want to volume, we want to grow with our customer and we want them to be successful in growing their business going forward, yes. It wasn't so much a take advantage, but more to come to an agreement where okay.

Thanks, very tight maybe a customer wants to lock in for locking higher for longer and you can accommodate that true true.

Longer terms, just curious if any of that is coming up where we're on.

Customers wanting to desperate for capacity wants to lock in for longer and if you can if you can keep that pricing and as a result for loan growth as well, but it sounds like that's not.

Not happening.

Look I'm on I'm, 100% confident I.

I felt the game every day that this network is going on.

Get better and better and we're going to enter next year.

Able to service our customers and we're having those discussions on how we bring on more volume.

We're asking our customers to do is tell us what that volume looks like so we can resource and prepare from a from a head count perspective, all the crews.

We certainly have the locomotives we have the assets out there to go on.

Service that business. So we want to get ahead of that.

It's been incredibly hard market to predict what volume we're going to do.

And we've all been surprised about.

The shape of the recovery.

But what we're trying to do and get out in front. So we know how much we need to hire and get on.

A way out ahead of it.

To make sure that we're there for the customer going forward.

Thanks, guys I appreciate the time.

Your next question comes from sharing at TD.

TD Securities. Your line is now open.

Thanks, very much good afternoon.

Wanted to ask a question about on ammonia where volumes are up on lot, but presumably not as much as they could be so could you talk about the extent to which you have visibility to when the chip shortage may improve and do you think that depends on demand might be released once that happened.

When that can contribute to above trend volume growth in 2022.

Well you are probably looking at the same data I am.

Find a used car you can jump on a new car.

It's another market where.

Demand is outstripping supply.

We're close and we stay close with our auto customers, we've seen rolling shutdowns.

And the auto plants that we serve and that continues to persist.

When we came into the year, we started to see the problem.

The problem is that continue to move to the right, it's going to impact our third quarter and the question remains.

How long into the fourth quarter that bill.

And does it extend into next year.

Are there going on other supply constraints in the market other materials will.

We will provide shortages, it's a global supply chain and so what's the next.

The thing that we could run out of that's what we're all watching but just staying close with the.

The customers and we do know there's pent up demand on going into next year that will have a lot of other markets that we sort of think of the metals market plastics all of those are inputs into the the auto industry today on.

Hopefully it provides another incremental growth lever that will be pulled as we move into 'twenty 2.

But there is.

Everybody sees that there is a lot of pent up demand.

<unk> per day.

Auto production today is continuing to come down.

Given the supply constraints out there.

Thank you.

Your next question comes from Ravi Shanker with Morgan Stanley.

Your line is now Allison.

Thank you good afternoon, everyone come on.

A follow up Jim I wanted to follow up on your comment earlier that net throwing money.

Not going to solve the labor problem, which which does it makes sense given some of the structural ratios.

But in the near term I think a lot of the other industries are throwing money at a problem, but it's trucking on Fox showed on the retail or whatever.

So I mean are you.

Are you, saying that youre not going to go down that route at all or.

At what point do you do that and.

Also on kind of how do we think about.

Revenue per employee in the back half a day.

Well.

Yes I E.

Personally.

I think as I said, we need to.

Look at.

Fundamentally look at what we need to do to make sure that we have.

The content happy work force over the long period of time.

And so that's what we're trying to do I think that kind of the <unk>.

Planned in most businesses.

Whether it's bringing EBITDA to work or whatever it is we might need to do to bank.

Job.

More fulfilling.

That's great.

If I'm, a trucking company or intermodal company.

I decide that the smart thing to do is to pay.

Truck driver.

A quarter of a $1 billion a year to drive the truck.

And then.

As always happens in the trucking business.

Net maybe next year, but the year after on the bottom drops out and there is excess capacity all over the street and people will run on driving trucks for the rates to in order to put gas in the tank that business model doesn't work and so good. So we've tried to take a longer term more whole.

Lipstick approach.

On to managing our workforce.

Got it if I can squeeze on a follow up.

The other revenue was it a lot over on a team on this.

Quarter is that a good run rate.

You look at the back half a day here.

Yes, Ravi so that was impacted by the intermodal storage fees.

Or due to the supply chain issues in the truck driver shortages that we've been talking about here. So.

Does that continue into the second half of the year I think it depends on what happens with the persistence of those issues, but that's really the fundamental driver here in the second quarter and and then of course, you've got the quality impact that will hit other revenue on the second half so don't forget about that as well.

Perfect. Thank you.

Your next question comes from Jon Chappell with Evercore. Your line is now open.

Thank you good afternoon, everyone.

Kevin just a quick 1 for you and you need to see is youre going to.

For the first time.

What impact their scope 3 emissions, having either for their interest in using the rail to give a bit more of their wallet or from your side pitching around addition to your cost benefits, having emission benefit as well.

As it is an opportunity to take more business.

Well I can tell you the environmental.

Definitely moved to the front of our our marketing deck, when we discuss with customers.

I think from the executive level down to starting to flow through the transportation buyers they realize that.

Initiatives coming from the top.

High priority.

And we're an easy solution to solve for that so.

It's something I've asked the sales team to continue to price we are.

Incorporating in in every discussion we have going forward and it's resonating quite frankly, and so it's a huge when I think about all of the secular trends that are going to help.

Such growth going forward you have the driver shortage I don't think it gets fixed anytime soon.

Huge advantage for us we can.

Supply.

Capacity into the market.

And then you have the environmental side.

Very very powerful and it will continue to grow.

We've seen all of the things that have happened in the market.

Industrial <unk> want it on.

Our employees want it and our customers.

On the consumer wants itself.

It's something I'm incredibly passionate about we're going to continue to sell it.

It's pretty exciting.

Have you seen it translate yet or do you think it's more on this.

The immediate future.

I think it's always it's hard to measure because we win that business, because we're more environmentally friendly than the truck.

It's another reason, we're winning business today.

The other reason.

Obviously capacity constrained we can we have capacity, we're going to continue to grow capacity will recover.

I'm confident our operating teams on a recovery, we're going to have the best most capacity to.

On to offer our customer going into next year.

Simple as that and so all those factors play into why we're winning business and why we're winning in the market.

Yeah.

On the tailwind or there from a growth perspective is just on them.

On my responsibility, along with Jamie to go out and deliver on that.

Got it thanks, Kevin.

Your last question comes from Jeff Kauffman for any color on research. Your line is now open.

Thank you very much and thank you for squeezing me in suddenly all the intelligent questions have been asked at this point, but.

Let me just come back to the customer side, Jim because that seems to be a focus on the market side right now.

You had your ability to put all the people you won at the Railroad day, you talked about the challenge in getting to the 500 <unk> by the summer, but let's just say you could and you could fix that element of what's going on how much of the service on the trip plan issues would that solve because when I talk.

2.

Transport companies. They tell me are where customers are holding onto equipment, a little longer than they should or we've had trouble getting our equipment back or just timely handoffs with some of our other service partners.

How much would be fixed if you had every assets internally that you want it.

The employee.

And deploy E issue.

Training engine service employee issue, we will clean up the day.

Majority of the issues, we have that show up in what we call our trip plan compliance number.

To improve our velocity, we will drive down our dwell.

We'll still be the noise in the supply chain.

Not going to correct.

A shortage of chassis.

Correct.

Containers.

Or drain.

Or port congestion and that sort of thing.

But it will.

So therefore, it's not nirvana, but it will certainly help us.

In terms of E.

Being able to improve the overall reliability of our product again.

And get a day to where it was.

So we can focus on making it even better and better.

Okay. So you would say the lion's share of getting to where you need to be as something you can handle internally with more resources.

Oh, Yeah, right I mean, we've always said that I mean, we use by changing fundamentally changing the way. This company runs over the last almost 4 years now.

We freed up capacity across the network we have.

Significant amount of track capacity, so we could add growth without.

Investing in track capacity as Jamie said earlier, we have locomotives available we have locomotives on standby we on locomotives in storage, if we need to use them.

So yes.

The impediment.

2 our performance right now.

This is primarily if not exclusively I'd like to see is primarily.

Primarily because certainly in this business we have to.

Throw in the occasional pandemic or hurricane.

But.

Primarily when we can hire is 5 figure out ways.

Like everybody else in the country too.

Replenish our workforce.

Yeah.

The problem was we had a pandemic we didn't hire during the pandemic.

The business went away, we have 7% of our workforce that retires every year, 7% of our workforce retired we thought okay. The business balance that we'll hire 7% of our employees back plus a little bit more of a gain on the growth.

And.

They are not available. So yes, we will fix that it's just taking us longer than we expected and when we get that done the railroad will be back running.

The way it did before and we'll get it even better.

Well congratulations to you on your team in a very challenging environment. Thank you.

Thank you.

There are no further questions at this time.

This concludes today's conference call. Thank you for joining you may now disconnect.

Yes.

Alright.

Okay.

Yes.

Okay.

Okay.