Q3 2021 CSX Corp Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Q3 2021 C. S X Corporation earnings Conference call.
All lines have been placed on mute to prevent any background noise.
It was a marks there will be a question answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Bill Slater head of Investor Relations you May begin your conference.
Thank you.
And good afternoon, everyone. Joining me on today's call are Jim Foote, President and Chief Executive Officer, Kevin Boone Executive Vice President of sales and marketing Jamey Boy truck Executive Vice President of operations, and Sean Pelkey acting Chief Financial Officer on Slide two is our forward looking disclosure followed by.
Our non-GAAP disclosure.
On slide three with that it's my pleasure to introduce President and Chief Executive Officer, Jim Foote.
Great. Thanks, Bill and thank you to all who are joining us today for the call.
I want to begin by thanking all of <unk> employees for their extraordinary efforts to help our customers navigate.
The strained global supply chain okay.
Cross virtually every industry there are challenges presented by extended lead times.
Congestion shortages of labor and key materials and lack of storage capacity.
While the current operating.
Operating environment is challenging we are not sitting idle.
We're designing new solutions to help reduce congestion, adding container yards and drayage to keep intermodal terminals fluid.
And we are investing in both people and network capacity to ensure <unk> is able.
To reliably meet customer needs today and for years to come.
In a few minutes, Kevin will go through the revenue numbers and discuss some of the steps we are taking to provide new service offerings to our customers to help them overcome these challenges.
And Jamie will provide an update.
Eight of our hiring initiatives as well as actions, we are taking to keep our network fluid.
So, let's first turn to the presentation and begin on slide four with an overview of our third quarter results.
Operating income increased 20.
6% to $1.44 billion.
Earnings per share increased 34% to 43 cents.
And the operating ratio improved by 50 basis points to 56.4.
These figures include.
The results of quality carriers.
Which did not have a significant income.
Impact on operating income but increased.
Third quarter operating ratio by approximately 250 basis points excluding transaction.
Integration expenses.
And I'll kick it over to Kevin.
Okay.
Thank you Jim turning to slide five third.
Third quarter revenue increased 24% year over year with.
With growth across all major lines of business.
<unk> a quality carriers revenue.
And at roughly eight percentage points of the total increase.
Supply chain challenges, including a lack of labor and equipment continue to impact almost every market we serve.
Diving volatility and freight flows and uneven volumes.
Merchandise.
Represent increased 6% on 2% lower volumes.
As higher revenue across all other markets was offset by declines in auto.
And by the ongoing semiconductor shortages.
The industrial and construction related markets.
Revenue, such as metals and equipment.
Forest products and.
And minerals, all showed strong year over year volume growth.
In addition, our core chemical chemicals business grew but was partially.
<unk> all set by declines in crude oil and other energy related.
Intermodal revenue increased 14% on 4% higher volumes.
Due to increased international shipments.
As a result of strong demand.
Inventory replenishment and growth in rail volumes from East Coast ports.
The domestic side was more.
<unk> funds.
Multiple supply side constraints, including container and chassis shortages have resulted in our inability to meet the strong demand.
Coal revenue increased 39% on 16% higher volumes.
With growth across all.
Channel end markets.
Domestic coal benefited from higher utility and industrial demand.
And export coal revenue increased from the combination of higher demand and higher export benchmark prices.
Other revenue increased primarily.
Paul do higher intermodal storage and equipment usage due to the broader supply chain disruptions.
Truck driver shortages.
I see your availability and a lack of warehouse capacity.
Turning to slide six.
This is an extraordinary time.
<unk> as customers and global supply chain faced challenges we have never.
Experienced before.
From trucks to chassis.
Supports two containers.
Lack of truck drivers.
The labor challenges at the warehouse and.
And facilities.
We are seeing shortages everywhere.
Entire <unk> team has been highly focused on delivering new innovative solutions and partnering with customers to address the supply chain challenges by driving more volume to the.
<unk>.
Across the network, we have accelerated investments to create new capacity.
To address the truck driver shortages, we have added 13, new overflow container yards.
Implemented new steel wheel options for West coast cargo.
Railroaded trans flow sites that offer customers additional options to move their freight at a lower cost.
To address the port congestion and container shortages.
We have added new solutions.
Accelerate repositioning of containers.
And analyzed port support lanes to alleviate marine terminal congestion.
We are working closely with partners, including G. P. A.
To utilize additional inland rail yards to help reduce congestion at the port.
We have also been aggressively.
And expanding our customer solutions team to further supplement the significant investments we are making in customer facing technology.
Our team is working diligently.
To create new solutions and options for shippers with supply to supply.
<unk> unlikely to improve in the near term.
Finally, we are starting to see early signs of customers, making long term investment decisions.
Reinvest in onshore production and supply chain solutions.
To address these customer needs we continue.
Changes to develop and invest.
Our new CFO at select sites.
Offer a shovel ready CSF served solution to meet customer requirements.
With that I will hand, it over to Jamie to discuss operations.
Thank you Kevin.
<unk> our teams are working closely together to find new ways to overcome the supply chain disruptions and provide new solutions for our customers. In addition to the ongoing supply challenges. This past quarter was further impacted by a rise in COVID-19 mark costs due to the Delta variant.
At peak, we had several hundred employees marked off.
As noted in our regional concentrations that required us to adjust our network plan in real time to get customers their freight.
Despite these challenges we were able to maintain network performance compared to the prior quarter and we expect the initiatives we have underway to drive improved fluidity going forward, Kevin touched on many of the things we're doing.
And culp reduce congestion at the ports and keep containers moving and I want to thank my intermodal team for the exceptional work. They are doing to accomplish these goals. These efforts are highlighted by the nearly 90% intermodal trip plan compliance they continue to deliver in a challenging environment.
We entered the year focused on hiring.
The people required to respond to the rising demand and I am proud of how our team has been able to think creatively and act decisively to overcome the challenges presented by the tight labor market over the course of the year, we have redesigned our recruiting process to eliminate unnecessary steps and significantly shortened.
And from application to offer we have also implemented new recruiting tools and referral programs that are improving our application.
Through different conversation rates and better at identifying highly qualified candidates. These efforts have successfully increased the size and frequency of our conductor classes.
The time provided strong ongoing higher visibility by expanding our new higher pipeline almost 300% since July.
We are also increasing intermodal head count and supplemental labor to keep the terminals fluid and allow us to continue moving containers for our customers.
While these hiring initiatives are under.
This is a we're taking steps to increase the availability of our existing teeny workforce, we have implemented new attendance base initiative programs, which allow us to better utilize our existing head count to move more freight for our customers.
We are also making upgrades to our network to increase throughput and create additional capacity.
We are installing more automated equipment at our hump yards, we are converting intermodal terminals to ground facilities in order to increase capacity and we are expanding our investment in autonomous cranes to increase intermodal terminal throughput.
While we still have sufficient line of road capacity, we are strategically investing in growth by extending.
Underweighted writings in select locations across the network deciding investments will allow us to continue to refine our train plan and provide growth capacity for years to come.
Every action we take is focused on network reliability that begins and ends with running a balanced train plan to minimize delay and maximum.
Standings as network performance running our scheduled network ensures assets are in the right place at the right time, we will continue to maintain network balance.
And the principles of scheduled railroading as we add resources to meet current demands. These principles have allowed us to keep the intermodal network open and running well this.
Maximize and we're focused on continuing the strong performance as we enter into peak season.
Turning to slide eight.
Maintaining a safe operation is the foundation to the success of any other operating goal, we want to pursue and we remain committed to being the safest railroad.
In the third quarter personal injury.
Year, it improved sequentially and ongoing safety initiatives also drove a decrease and injury severity while train accident rate increased slightly from last quarter's record result accidents rates have improved year over year.
Focus for the remainder of the year will be critical rule compliance and reducing.
Andrea Raymond factor accidents, we are leveraging the approximate 9000 tablets distributed to field employees to more productively deliver these messages not only to the tablets allow real time communication of key safety information, but we are also able to more effectively combine electronic and inputs.
<unk> communications to increase the impact of our training programs and drive lasting changes in the behavior that will better protect our employees I will now turn the call over to Sean for the financials.
Thank you Jamie and good afternoon.
Looking at the income statement on slide nine operating income grew nearly 300 million.
<unk> are 26%.
Revenue was up 24%, reflecting gains across all major markets higher fuel prices and the impact of quality carriers.
The operating ratio of 56, 4% is a third quarter record for <unk> as we focus on operating efficiently.
Growing the business.
As a reminder, this includes an impact of approximately 250 basis points from the ongoing operations of quality.
Looking below the line interest and other expense was $16 million favorable to last year due to a lower weighted average coupon and lower average debt balances.
And as well as favorable pension impacts.
An income tax expense was up on higher pre tax earnings the.
The effective tax rate for the quarter was 24, 3%.
Looking at expenses in more detail on the next slide.
Total cost increased $349 million or 23% in the quarter.
Including transaction related expenses, approximately $200 million of the increase was driven by quality carriers.
Iron locomotive fuel prices were also a significant factor up about $90 million versus last year.
Partially offsetting these items real estate gains were $56 million higher.
Non.
Inflation remained steady versus last quarter at around 3%.
As I mentioned last time, we have some lagging contracts that may drive higher inflation going into next year.
As Jamie discussed we continue to focus on hiring and retaining train and engine employees.
While head count was roughly flat sequentially.
Fueling excluding the addition of quality carriers.
Conductor count was up and was offset by reductions in other areas of the business.
As a result, we experienced $16 million more in hiring and retention costs versus last year.
You'll note that we have renamed the prior M. S N O line to purchased services.
<unk>.
The base expenses are identical to the prior M. S N O category, but the new description better reflects the cost in this line post acquisition.
Increased costs on this line reflected the addition of quality as well as higher intermodal terminal and locomotive expense.
Depreciation was up on a higher asset base.
Another so includes the acquisition impact.
Finally, we are proud to report another all time record for fuel efficiency in the quarter.
This reflects continued focus and investment by C. S X demonstrating our commitment to sustainability and the ongoing environmental advantage of rail.
Looking into the fourth.
That order, we typically see a seasonal increase in operating expense due to weather lower capitalized labor as well as holidays and vacations.
That trend should continue this year.
In addition to expected headwinds from higher incentive compensation and lower sequential gains on property sales in the fourth quarter.
<unk> expenses are also likely to be higher than normal as a result of ongoing supply chain disruptions.
Now turning to cash flow on slide 11.
With operating income up 34% on a year to date basis free cash flow before dividends. This year is $2 $9 billion.
Up nearly 50 per.
Percent free cash flow conversion on net income is exceeding 100% year to date and we expect it to remain near this level on a full year basis.
The company's cash balance of $2 2 billion is beginning to normalize.
The lower balance reflects the acquisition in the quarter and a step up in distributions to shareholders.
Perfect cash to continue to normalize over time.
After fully funding capital investments in our core infrastructure year to date shareholder returns have exceeded $2 9 billion, including approximately $2 3 billion in buybacks and over $600 million in dividends.
We will continue to be balanced and opportunistic.
We and our buyback approach and we remain committed to returning excess cash to our shareholders.
With that let me turn it back to Jim for his closing remarks.
Great. Thank you Shawn.
Concluding with slide 12, we are maintaining our full year outlook for double digit revenue growth.
Mystic or the impact from quality carriers.
We expect capital expenditures to be at the top end of our initial one seven to one $8 billion range.
Due to materials cost inflation there.
Capacity investments, we just reviewed and the inclusion of quality carriers.
The capital spending.
I'll conclude my remarks, the same way I began we are committed to helping our customers overcome the current supply chain challenges.
And as you heard today, our entire team is aligned around this goal.
And we will continue to act.
We have a store.
Strong hiring pipeline and we will hire until we have staffed our network to match demand, we expect to hire above attrition throughout the rest of this year and into next year.
Economic demand remains strong and <unk> will help customers capture that demand.
Everything.
Oh, SKU begins with a commitment to providing customers a high quality service.
We will build on the positive momentum from actions taken to date, we will continue putting resources in place to drive growth and.
And we will provide customers with creative new offerings that makes <unk>.
We do a meaningful part of the customer supply chains.
Thank you Bill.
Thank you Jim in the interest of time I would ask everyone to please limit themselves to one question with that we will now take questions.
Yeah.
At this time I would like to remind everyone.
In order to ask a question press Star then the number one on your telephone keypad.
Pause for a moment to compile the Q&A roster.
Your first question comes from the line of Ken Hester.
Your line is open.
Great Good afternoon congrats.
And one on some really solid results in a tough environment.
To see.
Maybe just a follow up either Jim or Sean just talking about your thoughts on pricing I know you were kind of running through some of the category. There maybe how much you can you can still address and some of the opportunities to catch this rising market.
Gratz, obviously call up 20% it seems like Youre touching some of that may be even faster than that thought or there's different kind of moves maybe just delve into the pricing outlook. Thanks.
Hey, Ken I'll take a shot at it this is Kevin.
I think it's clear that.
Cost inflation over the last year expectations have.
And in our arising in the next year.
This is not surprising to our customers are facing the same cost inflation pressures that we see and what we strive to do is be transparent around that in our conversations with customers.
<unk> fourth quarter and first quarter are heavy renewal periods for us so we'll be having those discussions.
Citing.
Risen, though as we get into a higher inflation environment is really the value proposition. We offer when you when a customer is looking to offset some of that cost inflation rail is such a great alternative.
The ship more of their volumes over to the rail and then you add on top of that the persistent driver shortages that were likely to see.
Ah well into next year and probably of the years ahead the.
The value proposition is there and then then on top of that the environmental discussions that we're having increasingly with customers is really resonating with those so.
It's no. It's no surprise cost inflation is is higher than what we saw last.
The part that will be a higher cost inflation environment than what we've probably seen in the last number of years.
We've got to have conversations with our customers around that.
Okay, I guess, if any just to follow up any detailed thoughts on kind of the trend of pure pricing and pace of acceleration or any level of that detail.
Well, we got to touch.
Sure as I mentioned contracts into the fourth and first quarter, that's a heavy renewal period.
And we will continue to you know how those discussions I think I'll probably leave it at that.
Alright, Thank you very much guys.
Okay.
Your next question comes from the line of Amit Malhotra.
Your line is on mute.
Thank you operator, hi, everybody.
Kevin can you just update us on the quality carriers acquisition.
Status of the revenue opportunity youre seeing converting some of those and to chemical carloads and just when we may see kind of a more meaningful uplift obviously.
Great offset too.
Intermodal carloads, which are growing just.
It's a great idiosyncratic opportunity if you could just give us a little bit an update there and then just any initial thoughts on you know.
Margins or performance next year, obviously, you've got a big pricing cycle ahead of you just any any any.
Honestly that out willingness to opine about what the opportunity is from an or perspective next year.
Would be highly appreciate it thanks.
Well, maybe I'll, let Sean take the LR question, but no I don't think we're giving guidance today on next year, but.
On the quality carriers as you will remember that that really is focused on our chemical franchise.
The customer reception has been overwhelmingly positive and a market where.
Supply is constrained.
Our customers are looking for more options to move their freight and so Randy and his team combined with our transfer team have found a number of options and we're moving freight today.
Now that we are doing it.
Xander is thoughtful and calculated in that the customer is seeing a good service on that product and we will continue to build momentum in the market.
But I think everything that we thought before we made the acquisition is coming true.
The only thing I will say is.
From a.
From a equipment standpoint, obviously with things tight right now.
In a way would have meant backlog is going to take a little bit longer in the next year to really ramp that up when we think about some of the ISO tank solutions that.
We're contemplating out there so other than that everything is full speed ahead, I would say there's customers that we believe would be longer it would take a lot longer to adopt that.
That had been first to it.
<unk>, which is exciting for us are market leaders in the industry and their adoption I think is going to really set the tone for this to really take off in the market. So.
The other thing that I think is positive and it shows other partners that we have that we're capable of doing this of using the trans flow solution in unique ways and.
<unk> always have to do it ourselves, we would love partners to bring our freight and through our all of our different.
The capabilities that we have so I think that momentum is starting to be seen in the market as well.
Do you want to John do you want to talk about.
Maybe you can.
We know our guidance, but maybe another way to ask it is there is obviously a lag on this call.
Coal revenue.
Opportunities just wondering are we or are we going to see more uplift in coal yields in the fourth quarter.
Some of that lag gets cut off just talk to us maybe about the cadence.
I'm going to answer that question next year.
Yes.
Clearly on the export coal side, you've seen some favorability on the.
The prices there and as we mentioned before our price is tied to the benchmarks and you will see some favorability sequentially into the fourth quarter versus third quarter.
It's a strong market.
So if you don't continue to see.
The favorability in the next year, how long it holds up at these levels.
It probably won't hold here, but these are extremely elevated levels that will probably carry into next year and hopefully create some favorability there but.
It's let's say.
Everybody is trying to produce more coal and we're trying to move more of it.
We today and at.
At the mine Ah Theres been some struggles here in the third quarter as you can see with some of the production hiccups that some of the producers have had so we're working through that as diligently as we can and really ramping up.
Our ability to serve those customers.
Okay. Thank you very much.
At the time.
Your next question comes from the line of Tom Lewis Your line is muted.
Yeah good afternoon.
This is probably for you Kevin but.
Maybe for others also how do you think about.
I appreciate the.
The impact of capacity constraints on on volumes.
You know you think intermodal would have been meaningfully stronger.
Do you how much.
Optimism do you have as you look forward that maybe into 'twenty, two that capacity constraints get alleviated quickly.
And how does that.
Kind of inform your perspective on growth looking to next year is it reasonable to expect.
Easing of constraints in a pretty good acceleration I guess, it's primarily around intermodal, but you know you may have capacity constraints other areas as well.
Thank you.
Hey, Tom it's Jim.
Let me take a shot.
I would say, yes, we're clearly constrained.
There was more business out there this quarter there has been more business out there throughout this year.
That we could not handle.
And the primary reason for that.
Oh.
Our inability like everyone else in the world right now.
To ramp up our workforce.
Coming out of the steep declines of the early phases of the pandemic and as Jamie talked about we are now starting to see the the.
His roots of all of our hard work for the last nine months or more and are beginning to bring on more people.
And actually deploy those people into the field.
So we're able to operate a little bit better and we fully expect.
Flip that that trend will continue.
As we go forward unless there's some other crazy curve ball gets thrown at us and.
And being a much much better position.
We exited this year and move into next year, and hopefully be able to take advantage of what.
<unk> to be.
A continuation of strong demand for transportation services.
Into 2022, and now some people are even saying 2023.
Do you think a lot of that is in your control or is it hard to have visibility.
<unk> given the warehouse labor dredge labor other pieces.
My first the number one priority is getting enough of the <unk> employees in the training.
Principally conductors on the train.
We can operate.
More fluidly.
And to get back to some of the.
Performance metrics.
That we were putting up pre pandemic and are in the end of 2019 and the beginning of 2020.
The fluidity the dwell.
The on time performance.
<unk>.
The customer served.
Service metrics that we put out there the trip plan compliance numbers.
These numbers are all down.
And that's principally a result of our having an extremely difficult time.
Getting people to.
Come to work for us and it's taken a complete.
Pete.
I would say reengineering of the hiring process a complete review of everything that we do when we onboard employees.
For us to get to this point this has been extremely difficult.
No different than.
You know.
Every.
Every business.
At least in the United States every business I think.
Every business every hospital every school everybody is struggling with the same phenomena.
Trying to get people to come to work.
I am confident that we have done everything we can do right now in our.
A debt.
That numbers are increasing in terms of the number of employees that we can put into our training programs and begin to qualify them to go to work and.
And.
You know like I said unless something.
Else comes along that.
Disrupts that process.
I hope, we're going to be in a lot better shape at the end of this year beginning of next year than we have been over the last nine months.
Great. Thanks for the insights Tim.
Yeah.
Your next question comes from the line of Justin long.
Yes, Thanks, and good afternoon, Shawn I think you called out a few sequential headwinds to opex in the fourth quarter I believe it was incentive comp lower gains on sale and then some peak season expense any way you can put a finer point around those three items to just help us understand.
Long order of magnitude here in the next quarter.
Yeah. Thanks, Justin So you've got the items right higher incentive comp lower lower gains on property sales and then.
Just some additional costs related to the supply chain. If you put all those together, you're probably looking about a couple of pennies over and above.
We normally see from the third quarter to the fourth quarter.
Okay very helpful. And then any thoughts on other revenue as well I know it was pretty elevated and took out.
A decent step up here sequentially ex quality, but thoughts on that into the fourth quarter and maybe into next year.
Yeah.
So if.
What we would just have to peer other revenue line not not considering the trucking revenue line, which should tracking revenue should be pretty consistent quarter to quarter.
Really the big driver as Kevin said, there is the intermodal storage on premise use charges as well as to marriage.
And that's a direct result of what's going on in the supply chain that we've been talking about here.
If you look though as things start to Hum.
Improve that line the other revenue line will come down but.
Here, we sit in October were probably in about the same places where we were in Q3, and we'll see where it goes from here.
Okay I appreciate the time thanks.
Your next question comes from the line of Scott Group. Your line is open.
Hey, Thanks afternoon, guys. So just back on head count.
If you can get all the people that you'd like to get.
Two thoughts one leg.
How much it sounds like you want to be above.
There are some directionally like what what what kind of percentage increases in head count or are you thinking about and.
Is there a way to think about if you add back 5% of head count what do you think that means to volume growth and things like that do you still think you can grow volume in excess of head count.
I'm just I understand that.
The spreads there and things.
Patricia Thank you.
Yes, Scott so.
What were looking on a sequential basis as modest increases in head count right, where we're bringing on trying to fill classes of 40 every week.
And then getting getting those folks are trained up and out into the field right. So.
Youre not going to see dramatic increases in head count I think it's also fair to assume that we've got capacity still on on our existing trains in capacity on the network. So we are hiring for growth.
But it's not it doesn't need to be one for one.
Okay. So I didn't I, probably didnt ask that so do.
Do you think next year is a year, where you could grow volume in excess of head count.
I don't see any reason why that wouldn't be the target.
Okay Alright. Thank you guys appreciate it.
Thank you.
Our next question comes from the line of Brian Glinski. Your line is open.
Hey, guys. This is Brandon.
So I just wanted to ask a quick one about the fourth quarter cost commentary I guess I don't know if it was directly ask what does that mean, that's going to be hard to show or permit the near term and then I guess longer term if I can sneak a two part question.
Yeah, Kevin what are some of the structural things that you think you can leverage with our head count kind of building off of Scott's question there.
Yeah. So just on the or question, we're not going to give our guidance, but I think it's fair to assume sequentially given some of the cost pressures as well as just the normal seasonality.
<unk>, probably see <unk>.
A little bit higher in the fourth quarter than the third quarter.
Brandon I guess the question was what can we do with more head count.
My name is Jonathan.
Strategically we're going to we're going to move a lot more freight.
When we talk to customers right now Theyre looking for.
Both cities.
And.
And they're trying to offset a lot of cost inflation Jill.
Environment couldn't be any better for us to go out and sell the product we have so.
We're going to we're going to move more freight and we're going to get more wallet share with the customer.
It's a perfect environment for us.
Alright.
Capacity Thanks, Sean.
Yes.
Your next line comes from the question. Your next question comes from the line of Brian <unk>. Your line is open.
Hey, Thanks for taking the question.
So Jim I just wanted to ask.
Bigger picture question about just.
Thanks, Kevin and interplay with the regulators.
In D. C. You know, let's say what your peers put out there later this week and next week, but it looks like you have some.
A lot of capacity solutions here that you're ramping up on your own.
Do you think you need additional help on that for some of your supply chain partners.
Some perspective on what you can do on your own versus what you sort of need help with and then just contrasting that with obviously the big or the revenue just mentioned clearly is to emerge as a cost for everybody at this point.
But there have been some fairly pointed comments out of the STB.
Growing and focusing.
And maybe just on <unk>.
And then on growth. So maybe you can address all of that.
In terms of adding capacity, if you need help and what the regulators.
We will take away from all of that thank you.
I think Kevin did a very good job of outlining all of the activities that we've been undertaking here over the last.
Maybe about a six months or so too.
Do on our own.
Without any.
Without any rod.
Robbing.
To improve and increase capacity.
We were way ahead of the curve the Chicago was biggest terminal for us in terms of intermodal capacity.
Our 59th Street facility that we bought that property.
Years ago, we had it we had another yard right down the street.
Which was ready to go cranes available.
So we you know we've always.
Tried to be.
We expect visionary and trying to determine where the COVID-19, where the growth would be and make sure that we were properly positioned some of these new initiatives like Kevin talked about moving traffic inland from the Georgia from Savannah into a facility in Atlanta, We had a yard available there wasn't an intermodal yard created in intermodal.
Somewhere.
And so we're taking the steps that we think are appropriate and necessary in order to make sure that our railroad.
<unk> continues to operate the more fluid and provide better service all the time.
And.
And.
That's always been the case it will always be the case and thats, whether that's mainline track that moves.
Merchandize business or whatever it is we're always.
Being thoughtful in our planning process to make sure that we have the capacity available.
<unk>.
To handle.
Traffic growth as it comes on the Lucky the luckier.
It is that we over the last four years.
By changing the methodologies, we use to run the railroad have freed up an enormous amount of capacity across the rail network.
Just simply by running the trains.
On.
A more reliable and efficient manner, and so we don't need to make.
Big Big Big investments in the railroad.
In order to handle future growth, we've got locomotives in storage.
So we're ready to go.
Had thought.
I believe it.
The year end conference call in January where I called out the fact that we're going to be hiring.
I fully.
Believed.
And as much as at that point in time, we had about 300 of our train and engine service employees off on Covid.
We would just simply do what we've always done with over 500 employees.
He was on employees would come back from Japan, sick, and we'd be rocking and rolling and we'd be moving freight no one.
No one ever.
It gave me a heads up that says Oh by the way when you want to hire somebody and nobody is going to want to work for you.
Plus all the people that are.
You are.
300, and furloughed as the railroad had traffic declined so dramatically.
So many more than was usual they called back and said we want to come back to work. They said no I've decided to go do something else I've changed my lifestyle.
I'm going to go enjoy.
Enjoy the scenery on the Jersey coast to coast or whatever it might be.
This is not a phenomena that is unique to <unk>. This is a phenomenon that nobody saw coming.
And.
And it is a phenomena that everybody in.
By chain, whether you're a trucker, whether you're a steamship company, where your port whether youre a warehouse operate or whatever you do this is a phenomena that is.
Impacting every one and everyone is trying to deal with this what is now the new norm. So we've had to change.
On the supply everything the way, we think about it.
But have done that as we always do we adapted we recognize the situation and we adapted and we made changes and that's why we're reasonably confident that we'll be in better shape.
As we move forward this year and in pretty good shape as we move in to next year.
I don't need the.
I don't need any help from the government in order to figure out what I'm supposed to do I, just don't want to make sure. The government does something that the screws it up worse.
Yeah.
Understood. Thanks, Tim if I could sneak one quick one and all the stuff on page six do you think that would be permanent.
Going into the future of these things.
<unk> pulled forward from from prior plans or do you think this is more more of a case of reacting to kind of what we see here. Thank you.
Well I think we're I think we're what we're doing is we're responding.
The situation.
It's simple as that.
<unk>.
We can.
We can think we can plan, we can do all kinds of things.
Unfortunately, I think we've hit them.
More black Swan events in the last two years than most people would experience.
Our lifetime, so as I said.
You had whats the next thing so.
I am a started up my remarks.
Going.
Saying, how proud I was of our employees.
All of this going on.
All of these challenges all of these changes all of these.
Demand all of these people, saying you know first of all Jesus you know the entire supply chain issue was as a result of the railroads Oh My God.
The railroad so screwed this thing up or then as time went on everybody to figure it out and it's not related to the railroads, we don't own the warehouses, where the stuff goes we don't have the trucks that bring it there if I need to buy a truck and bring.
Bring it there I'll bring it there and I'll put the box in the warehouse parking lot there'll be somebody else's problem, but.
Most of the issues associated with everything that is talked about.
Railroads are doing an extremely good job their employees have been critical of workers.
Throughout the entire pandemic.
He had been out there working have not been home in the basement there've been complying with all of the requirements and making sure that the economy keeps going and so the railroad guys not just C. S expert to be entire railroad industry has done a phenomenal job under unbelievably difficult circumstances.
Thank you Jamie I appreciate it.
Okay.
Our next question comes from the line of Chris Wetherbee. Your line is open.
Hey, Thanks, good afternoon guys.
Jim I think you mentioned on the call that the quality impact more than 200 basis points on the operating ratio.
Ratio and so I guess it sort of struck me that you guys are running sort of the core rail business at an operating ratio, we really haven't seen before.
And I guess in the context, and I understand the pricing environment, particularly on the asset side.
Certainly elevated and that probably has some impact on how we should be thinking about operating ratio, but maybe big picture as we think forward.
Forward you are growing volume arguably better than your peers pricing is going to be a cycle here for a period of time.
And you are talking about bringing some folks back but services is good can we talk a little bit about maybe we need to think about it in a new way to think about or over over the long run I guess I just want to make sure I understand what.
This business is capable of in terms of incremental margins and the ability to take on some of those new freight and these new opportunities, which seems to be very very good margins going forward.
Yes, you did the math.
And yeah that was excluding some of the transaction.
<unk> costs and some other things too so it's pretty simple math, yeah. The railroad is running.
<unk>.
When we stretch.
When we stretch there's always said, there's a million a million times does not about or this is not about you know how low can we go ahead.
Heads can we take out when we.
We run the railroad good when we stretch like we're doing right now and the reason we're stretching us because we're trying every single hour of every single day to move our customers freight and when you do that and you focus on getting it there as quickly as you can and efficiently as you can you know it.
<unk>.
Yes.
Unfortunately, not a perfect service product, but a very good service product in difficult times, you do it efficiently and as a result of that the score adds up that says you know you've got a low operating ratio, but that's not the goal.
That's just the result, and so yeah, we run a pretty good number.
I.
Would have preferred.
To do a lot more business as we said we could have.
And we try to do every single day, we try to move more freight Kevin is out there right now constantly trying to figure out how it can provide solutions to our customers. Our goal here is to move more freight that's what we.
We do we move freight.
And the more freight we move more revenue you're pouring the top the more efficiently you operate it simple as that it's just math.
Sure.
Thank.
Think about what they think about you want to worry about what the operating ratio was think about what the operating ratio could be for the railroad industry.
We were able to grow more than it has historically grown then you can start talking about what the operating ratios might be stop thinking about how much cost you can take out.
Okay.
It's helpful color. Thanks, very much appreciate it.
Okay.
Your next question comes.
From the line of Vasco majors your line is open.
Yes. Thanks for taking my question, Jim as you alluded to earlier, you've been talking here about hiring to support growth since January certainly double down that.
That in July and it's been a big topic today.
But you know at this point it doesn't feel like your U S competitors are talking as much about labor and some of the challenges there that they're having as you are today and and you know maybe why that's a messaging difference rather than a fundamental difference you've got a letter from the STB on Monday about.
C S X service specifically so.
Can you help us understand is there something different with your situation with labor versus your other public peers in the U S is that a messaging difference just anything to help us on scramble. This would be helpful. Thank you.
Yeah, well I'm trying to unscramble it for myself.
Hum.
Hum.
Yes, I've said from the very beginning of this year that we've had a challenge in terms of.
Hiring.
We needed to hire.
I thought we would be able to hire like we always had.
We arent able to hire like we always yet.
Said that now for three quarters.
Yep My.
Metrics as reported to the STB in terms of all of the railroads, whether it would be velocity, whether it'd be dwell my service metrics are continuing to lead in most areas. So.
The railroad here is still running better than most.
During that period of time, where we were finding out that a lot of people wanted to make career choices and leave the company that we hadn't expected we were having the difficulties that everybody else was having.
During that period of.
Time.
We were at the epicenter of the world in terms of the pandemic here in Jacksonville.
So I think.
Hmm.
We got probably hit during that period of time, a little more severely.
The states of Florida, Georgia, Alabama, Louisiana, Tennessee, Mississippi have had a little more rough time, and I'm not calling out any reasons why that might be that's just the facts.
And so while we have been saying publicly we are hiring.
Irene as fast aggressively 81, right now that will want to come and work here during the midst of the worst.
Of the pandemic in the world ongoing in our service territory.
Guess, what I got a letter.
Well the STB takes.
Complaints from customers.
<unk>.
And they really them to me, though will respond theyre just doing their job will respond.
I found it a little unfortunate that under the circumstances of everything we're doing based upon what our overall service metrics. So our performance to be based upon how the.
The STB measures us in terms of how we operate that we got the letter.
I'm, a big boy I've been around we'll deal with it we'll respond well work with the regulator and our customers to try and join.
Try and address any customer issues. The letters posted if you can figure out who the customer is having a problem from the letter.
I don't know why they just don't call me.
Well every customer I mean, I give them my business card I'd give him my cell phone number and so have you got and it should give me a call and Jimmy Boy checks. The same way so I wish they'd just call me if there's a challenge.
Thanks for the candid response Jim.
Okay.
Your next call comes from the line of Jon Chapell. Your line is open.
Yeah.
Good afternoon, and good evening.
Some of the earnings season spin our pricing power and obviously there are things like accessorial that are helping intermodal, but your whole core business has been kind of reset a bit higher on the revenue per carload front.
So the question is what's the stickiness of some of these price increases that have gone in.
Where does the total portfolio set on a contractual.
So as we think about maybe the ability to.
Push pricing higher next quarter or two.
Yeah, you know look Gardner.
Couple pricing questions already and I'm going to stick to the script for the most part it's it's a discussion we're having with our customers we're being transparent around the cost pressures that we face and that we expect to cover those costs, but we also want to talk about volume growth with our customer's wallet share and all those other things.
We do have parts of our business that you're well aware of coal, which moves with a benchmark prices. So we have seen some favorability there we participate.
When our customers are participating and have a good market and obviously when those markets come down we participate.
On the other side as well.
Intermodal businesses are some other.
<unk> of our business are tied directly to inflation.
Hum metrics and those have moved up and so we will see some favorability in those parts of our business that are tied to those indices and those will continue to.
Really flow through into the fourth quarter and into next year. So we'll have some momentum there and then obviously this is probably a our expectations.
Hardware for inflation into next year are higher than the previous year last year and so we.
Well, we'll have those discussions.
You know.
So price accordingly.
Probably leave it at that.
Thanks, Kevin.
Yeah.
Your next question comes from the line of Jason Seidl. Your line is open.
Thank you operator afternoon, gentlemen, and congratulations on that impressive or.
Wanted to.
Drill down a little bit on the comment you made about some onshoring production due to sort of supply.
Fly chain issues.
Is that sort of a one off customer is this a trend you're seeing and then also are you having customers coming to you and telling you that they might change sort of how they run their inventories in the future.
Oh, absolutely I, there's I can think of multiple.
Industries, right now and you've seen some announcements from.
Some large producers out there that are making incremental investments in U S. Production I think theyre looking at the volatility are and how much how costly it is to get freight from overseas.
Labor is less of a component in some of these production facilities.
<unk> Internet <unk> ever been so that that labor.
Differential moving an ear to us it doesn't matter as much it's more about having our availability to the inventory and the onshore.
Phenomenon I hope it has legs here, we're seeing the early signs of that have you seen some big announcements I hope we will see.
<unk> further announcements coming forward.
And we talked about this with the energy Renaissance here, a number of years ago, when we had cheap.
Energy with gas and oil in the in the fracking.
Now I'd never materialized I think this time in my opinion could be different I think.
See some things are starting to line for.
Our customers and others to reconsider whether they want to have production and more balanced.
So they don't run into the same issues that they're having currently.
And in terms of total inventories carried or are you seeing a change there as well.
Certainly.
All of the thing more.
Our customers are reevaluating you know Ford.
<unk> inventory levels were having those discussions around our transport product.
You know so they don't need.
Next day shipping or things like that that their forward positioning.
Those things so they can make sure that their production facilities remain.
Think they're not up and running that's very very important so all of these.
Factors I think playing into investments that will see customer to make over the next couple of years.
Kevin I appreciate the color and gentlemen, thanks for the time as always.
Your next question comes.
It's from the line of Ben Nolan Your line is open.
Alright, Thanks, guys I appreciate you.
Fit me in here.
I guess I wanted to we've talked a lot about labor and some of the some of the issues that are impacting there, but just thinking about maybe the opportunity to actually get a little bit more volume through and specific.
Obviously, we.
Talk about coal, but curious what your customers are talking about with respect to sort of further ramp up there and also on the intermodal side, we've seen steam.
Steamships diverting cargoes away from Savannah for instance to get into Jacksonville, or other places on the east coast trying to fit more.
More volume through the system, but I guess the question is how capable are you.
Of accommodating some of those things.
Well look you know you've seen the east coast ports outgrow the west coast ports for the last number of years, that's going to continue to.
Ongoing.
Savannah is making significant investments all the ports that we operate in so you are making investments to be able to handle that so.
We're well positioned are you know, whether it's you know Savannah, Charleston, Jacksonville, and Tampa all of those locations are.
Areas, where we have the ability to serve so we're ready to.
To take on a volume we've made some investments our intermodal network continues to be the best network in the East operationally, there's no question around that.
Just look at the service metrics look at the growth, we've been able to handle that better than anybody else and we will continue to leverage.
That product into the market.
Sure. So so theres not theres, no near term inhibitor to being able to get more and more volume through some of the network that I guess.
Uh huh.
We talked about all the capacity we have clearly we have the rail clearly we have the rail capacity, we're well positioned with all of the ports.
You know and again, it's not.
Just the international Steamship companies that are kind of in its plastics imports exports as the there's a lot of merchandise business Coke business that we move through these ports as well and so yeah, we're working with them through the trans load facilities, either our own facilities or partnering with people who are building a big big big trends.
Trans load facility is on the on the Coke along the coast.
To be able to handle.
Handle the capacity and we clearly as I said earlier, you know 30% the meru.
Room on the railroad.
To handle the traffic without making any more big investments.
Yeah.
Alright, Thanks, a lot guys.
Yeah.
Yeah.
Our next question comes from the line of Jeff Kauffman. Your line is open.
Hey, Thanks for squeezing me in and congratulations.
Just some questions for Kevin and I'm trying to get used to my model with quality carriers in.
Sure.
Non locomotive fuel expense was up about $38 million year on year.
How much of that was attributable to the inclusion of quality.
Just a little over $20 million.
Okay and just.
Just one other net depreciation Uh huh.
And that was up about $19 million sequentially about how much of that would have been attributable to quality.
Jeff It's Sean again, yeah about half of that is related to quality, you will see that that impact carry forward.
Okay. That's all I have congratulations terrific quarter. Thank you.
Okay.
Okay.
There are no further questions at this time and this concludes today's conference call. Thank you for attending you may now disconnect.
Yeah.
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Yeah.
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