Q1 2022 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 Q1 2022 C. S X Corporation earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and 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'd like to withdraw your question again press. The star one. Thank you Matthew Korn C. S X head of Investor Relations you May begin your conference.
Thank you Emma and good afternoon, everyone and welcome joining me on today's call are Jim Foote, President and Chief Executive Officer, Kevin Boone Executive Vice President sales and marketing, Jamie Wojciech Executive Vice President of operations, and Sean Pelkey, Executive Vice President and Chief Financial Officer.
In our presentation, you will find our forward looking disclosure on slide two followed by our non-GAAP disclosure on slide three and with that it's my pleasure to introduce our president and Chief Executive Officer, Jim Foote.
Yeah.
Great. Thank you Matthew and thank you to everyone for again, joining us on our call today I'll begin by expressing my thanks to all of <unk> employees, who continue to put in tremendous efforts to serve our customers effectively and above all safely.
I'd also like to welcome today, Steve Fortune Who's with us in the room here today in Jacksonville, Steve serves in a newly created role of executive Vice President and Chief Digital and Technology Officer.
And we will focus on harnessing tranche multiple transformative technologies to further growth and enable continued efficiency across the business.
His experience leading technology organizations at a global industrial company will be very helpful. Helpful. As we continue to transform <unk>.
Now moving to the quarter.
We are pleased with our results this quarter, though we're not yet satisfied with our service performance the.
The effects of Covid and severe weather across much of our network clearly led to a tough start to the year, but as we moved into March operating conditions began to gradually improve and we do see indications that this momentum is continuing.
For over a year, we have communicated to you that the key to rebuilding our service to pre pandemic levels is to hire more train and engine service employees.
I am pleased to say that our efforts there are progressing well.
Our active Genie count as moves steadily higher this year.
The people and resources that we're putting in place today will allow us to provide reliable efficient service.
To an expanding number of customers.
The business environment remains very favorable for <unk>, despite new uncertainties across global supply chains.
We are dedicated to do our part to help our customers here in North America meet increasing demand as business and consumers around the world look forward reliable sources of the products that we transport.
Meanwhile, domestic activity remains robust and our business development and marketing groups are working hard to convert new opportunities.
And as higher energy prices, increasing scrutiny on greenhouse gas emissions highlight rails efficiency advantages over trucks, we're in a great position.
If we all door jobs.
To our principles and deliver the service levels that we know we can achieve this company has great potential for many years ahead.
Lastly, I'd like to know that we are pleased that the surface transportation Board approved our acquisition of Pan Am Railways, which clears the way for the transaction to close this June .
All of US are excited about the opportunities that will come as we design New service solutions for shippers and receivers in new England.
Now, let's turn to slide four.
Turning to the presentation, which highlights our key financial results.
We moved nearly one 5 million carloads in the first quarter and generated over $3 4 billion in revenue.
Operating income increased by 16% to one point to $8 billion.
The operating ratio increased by 150 basis points to 62, four but remember this includes approximately 250 basis points of impact from quality carriers Andy.
And the impact of higher fuel prices.
And earnings per share increased 26% to 39 a share.
I'll now turn it over to Kevin Jamie and Sean for details.
Thank you Jim turning to slide five first quarter revenue increased 21% year over year with growth across all major lines of business.
Merchandise revenue increased 6% on 2% lower volume, a strong pricing gains and higher fuel surcharge revenue more than offset the volume decline.
Current demand remains strong across most merchandise markets with shippers prioritizing environmental benefits of rail and pursuing lower cost options to offset inflation.
The ongoing semiconductor shortage impacted automotive volumes through the quarter.
We did see sequential improvement.
As consumer demand remained strong with dealer inventory levels low.
Our core chemicals franchise saw strong demand, but more than offset continued challenges in energy related chemical markets.
As we continue to add resources across the network.
We expect to capture additional opportunities.
Intermodal revenue increased 13% on 1% lower volumes as truck conversions drove domestic growth.
Offsetting declines in the international market that continues to be impacted by supply side constraints.
Intermodal demand remains strong but continues to be challenged by takeaway capacity and equipment shortages, including chassis.
Coal revenue increased 39% on 10% lower volume.
Export coals revenue increase was driven by higher benchmark prices.
Partially offset by lower domestic and international thermal coal shipments.
First of all first quarter coal volumes were impacted by several factors, including mine disruptions in.
And an outage at our Curtis Bay export facility.
Demand across all of our coal markets remain strong.
And we expect volumes to improve in the second quarter.
Some of these headwinds subside and additional network capacity is added.
Other revenue increased primarily due to higher intermodal storage and equipment usage.
But was partially offset by lower payments from customers that did not meet volume commitments.
As we exited the quarter.
Concerns around the omicron variant had been replaced by broader global supply chain uncertainty in the wake of the crisis in Ukraine.
As Jim mentioned, we are committed to helping our customers.
In North America to meet the increasing demand for their products from consumers around the world.
We are working closely with our customers to understand the potential shifts in the global supply chain.
While it is early we see opportunities that could benefit our network and the ports reserve.
As we look across many of our markets demand continues to outstrip supply.
We expect this to improve as resources are added across the supply chain.
Now turning to slide six.
I would like to provide more detail on <unk> business development capabilities, which I briefly discussed last quarter.
<unk> has an experienced team of business development professionals to help existing and prospective customers identify design.
Design and build facilities across the network.
This team works closely with state and local economic developers to maximize investment incentives that will encourage more business to locate on C. S X and our short line partners.
These efforts continue to pay off.
In 2021 over 90, new facilities and expansion projects were placed into service across our network.
Which represents over $3 billion of customer investment.
Additionally, there are over 500 projects currently in an industrial pipeline.
We are excited to work with these customers and provide them with efficient and reliable rail service that will enable them to grow their business for years.
While creating significant long term value for <unk> shareholders.
Most recently been fast.
The electric vehicle subsidiary of the large Asian conglomerate <unk> group announced that they will build a $4 billion electric vehicles Assembly plant.
In battery manufacturing facility.
Served exclusively by <unk>.
The team is proud to be part of North Carolina's first car plant and the largest economic development announcement in the state's history.
This announcement is an.
Excellent example of the kind of customer solutions that the team can deliver as sales and marketing works closely with operators.
The team is working diligently interact even more customers to see us X where select site program.
<unk> select sites feature nearly 10000 acres of premium certified rail serve sites to full scale industrial development and expansion.
We are working to add even more sites to this program in 2022.
I will now pass it on to Jamie to discuss our operations.
Thanks, Kevin.
The safety of our operations will always be our first priority our concern for all of our employees customers and the communities in which we live and operate drives us to make sure that we maintain the demanding standards of our safety focused culture. The results that you see on slide seven show this clearly.
Over the first quarter, we saw sequential and year over year improvements in the number of injuries and train accidents, which brought their frequency rates to a near record low levels for the first quarter.
We're happy to see this improvement we continue to push forward with the initiatives that we described to you last quarter actively coaching safety awareness among our employees.
Encouraging best practice sharing across teams and expanding our application of technology.
We put a very strong emphasis on our efforts with our new hires to ensure that they respect and demonstrate the principles that make C. S X and the industry safety leader.
Moving on to slide eight.
For the last several quarters, you've heard us discuss the efforts, we're making to address our staffing levels.
This is a critical point.
Our networks capacity and fluidity will improve when we have enough trained conductors and engineers.
We have these resources.
It lifts our service performance.
In the near term, while also ensuring that we're ready to meet the substantial demand growth we anticipate in the years ahead.
This slide also shows several important.
Positive train and engine employee trends that reflect the hard work done by our recruiting and training teams.
We've made great progress here in.
And importantly, we're set up to build on the momentum we've created.
First you can see the strong ramp up in the number of <unk> employees, we have in our training program, we averaged over 500 daily employees and training over the first quarter, which was over five times, where we were a year ago, we expect to keep our training classes pull to make sure that our pipeline remains healthy.
Yeah.
Second we have successfully increased our run rate of conductors were completing their training and marking up into the active <unk> population.
We now have roughly 100 employees, marking up each month, who are ready to haul freight generate revenue and we expect this pace to continue.
And the last chart.
You can see the pay off for.
We're returning a corner and we're now adding to our active teeny count month over month.
We've said it again and again.
Our aim is to grow this railroad to that we need to bring good people and train them the right way and deliver on service. It takes time, but this is exactly what we're doing.
Now, let's turn to slide seven.
Which gives us a picture on where our operations stand today.
This quarter started off with several key challenges the omicron wave was hitting our employees.
We had the incident at our Curtis Bay facility.
And the East coast suffered under severe weather in early February so for the full quarter.
Our key metrics a trip plan compliance terminal car dwell and velocity were generally flat to slightly worse on a sequential basis.
That said as Jim highlighted in his remarks early into the second quarter, we're seeing encouraging signs that these metrics are starting to move in the right direction.
It's clearly too quick to call the bottom with certainty.
But with the success of our hiring initiatives.
And a continued drive for discipline and consistency in the field, we see reasons to be optimistic.
Consistent with the last quarter, we have made the tactical decision to keep additional locomotives active in the near term to help with network balance while we remained short of employees in certain regions.
As we successfully promote our new conductors who will be focused on improving our asset utilization and driving efficiency as the additional crew resources facilitate higher volumes and improved service and reliability.
As always the key will be strong execution and I am excited at the level of higher engagement and enthusiasm that our operating team is bringing to this challenge.
I'm looking forward to showing what we can do over this next quarter the rest of the year and the years to come I will now hand, it over to Sean to review the financial results.
Thank you Jamie and good afternoon.
Is unprofitable growth and despite the challenges we faced in the quarter, we delivered $600 million of revenue gains with operating income up 16%.
Interest expense and other income were a combined $11 million favorable and the effective tax rate for the quarter was 23, 9%.
Earnings per share of <unk> 39 reflects growth in core earnings as well as the impact of our ongoing share repurchase program.
Turning to the next slide total costs increased $419 million or 24% in the quarter, but were in line with our expectations outside of the spike in fuel price.
The acquisition of quality carriers represented approximately $215 million of expense.
Higher fuel prices were also a significant factor up about $110 million versus last year.
All other expenses increased approximately $95 million driven by inflation as well as ongoing costs related to supply chain congestion and network fluidity.
Turning to specific line items labor and fringe expense increased $72 million or 12% in the quarter.
We invested 10 million more to onboard new train and engine employees.
And we expect similar training costs next quarter as we continue to convert our strong new higher pipeline.
Quality carriers drove about $35 million and additional labor expense.
Incentive compensation increased $6 million, while inflation and other impacts drove just over $20 million of higher costs.
Purchased services and other expense increased $203 million or 43% in the quarter.
Quality carriers represented approximately $140 million of <unk> expense.
Costs incurred to maintain terminal and network fluidity added roughly $45 million of expense in the quarter.
<unk> to last quarter's impact.
These costs are likely to persist into the second quarter, and we expect to see improvement in the back half of the year corresponding to labor and supply chain normalization.
Additionally, our legacy environmental reserve adjustment drove $17 million of higher expense in the quarter.
Depreciation and amortization was up $15 million or 4% on a higher asset base that also includes the quality impact.
Finally fuel expense increased $141 million or 74%, reflecting a steep increase in highway diesel fuel prices as well as the addition of non locomotive fuel used for trucking.
The rapid rise in fuel prices created approximately $45 million of fuel lag in the quarter.
And lastly, the company recognized $27 million of real estate gains in the quarter include.
Including $20 million related to the Virginia transaction.
As a reminder, we expect to recognize a $120 million, Virginia gain in the second quarter.
And received the final $125 million cash payment in the fourth quarter.
Now turning to cash flow on slide 12.
Free cash flow before dividends increased on higher earnings to $976 million.
Our highest priority use of cash is investing for the long term reliability and growth of our railroad.
After fully funding these capital projects first quarter shareholder returns exceeded $1 2 billion.
Including approximately $1 billion in buybacks and over $200 million in dividends.
Looking forward, we will remain balanced and opportunistic in our buyback approach as we continue to return excess cash to our shareholders.
Finally, we are excited to close the Pan am deal on June <unk>.
<unk> will contribute about one point of annualized revenue.
Primarily within merchandise.
Due to transaction and integration costs Pan am will have a negligible impact on earnings this year and the capital we expect to invest to upgrade the Pan Am network is already contemplated in our guidance.
We look forward to working with Pan am and its customers to drive continued growth through our integrated rail network.
With that let me turn it back to Jim for his closing remarks.
Okay. So, let's conclude with our outlook for the year as shown on slide 13.
We continue to benefit from strong markets and ample customer demand and we are adding employees needs that our network and capture more of the business opportunities that are right in front of us.
At the same time, we are of course, keeping a close eye on inflation interest rates and the fed.
With support from higher coal prices in a supportive market environment, we feel comfortable projecting double digit growth for both revenue and operating income for the full year.
In the near term, we expect to continue to benefit from elevated export coal prices and higher fuel surcharge revenues.
Full year Capex is planned at approximately $2 billion, which is also unchanged.
We have made progress since the beginning of the year and we still have a lot of work to do but.
But we are committed to supporting our customers by providing them with reliable efficient cost effective rail solutions for their changing transportation needs.
By adding the necessary resources and lifting our service levels, we will be well positioned for years of profitable growth.
Thanks, and I'll turn it back to Matthew.
Thank you Jim now in the interest of time I'd ask that everyone. Please limit yourselves to just one question.
And with that Emma will now be happy to take questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star and then the number one on your telephone keypad.
First question today comes from the line of Jon Chapell with Evercore. Your line is now open.
Thank you good afternoon, everyone.
Jamie you spent a fair amount of time talking about the important labor aspects and what and your optimism about what that will mean for service is it just a function of getting the people trained and in the right spots or are there any other challenges that youre seeing as it relates to service reliability.
These are things that you can control yourselves or things outside of your control like customers turning over equipment more quickly and how do you think that all of that translates into the important service metrics like velocity dwell and cars online in the next couple of quarters.
We'll get a good evening or good afternoon John .
For us it's purely comes down to.
Hiring numbers and getting more teeny folks, where we need them.
Kevin and I have been work really close with our customers to do everything we can to support those needs of our customers and our customers are working with us in different areas with different solutions as we look at how we can turn cars quicker.
Whether it comes down to block loading by destination and other items that we've been working on for years and continuing to work with their customers that way. So we don't have to handle.
Cars as much but definitely.
When we are looking at.
At that pure number with respect to our trainees out there we've talked about having 500 over 500 training out there right now we've qualified up to 400 already this year since the start of the year. So we've come a long way in that area and we continue to pull whatever levers we can.
With respect to the design if theres a cars, we can move in different corridors that make more sense, where our crew base has gotten healthier we're doing that.
But really as we continue to push forward here.
The common theme that we know it will get a railroad back to where we need to is just continuing to train.
Conductors.
Got it thanks, Jamie.
Your next question comes from the line of Brandon <unk> with Barclays. Your line is now open.
Hey, good afternoon, and thank you for taking my question I guess, if we go back to last quarter. You guys were I think the only guidance you provided was like volume above GDP, but now it seems you have some confidence to guide to double digit op income and revenue growth can you just talk to maybe the increased confidence as you've gone through the year here and what's driving that.
That guidance now.
Yes, Brandon look Theres, a lot of moving parts, obviously with one that get confidence in Neil the hiring trajectory and Jamie spoke to that.
We're seeing good momentum as we get into April and we will move through the rest of the quarter.
Obviously, some other factors have occurred you've seen the export coal market remains really really strong year and supportive and we had assumed probably that market would tail off a little bit sooner than what is expected now also fuel surcharge has been a bigger factor going forward as well as oil prices.
Though obviously moved up dramatically.
Dramatically here with the Ukraine Christ.
Crisis going on but Im a number a number of factors going we still see strong demand from all of our markets and we are.
I have confidence that we're going to begin to capture more and more of that as we are its fluidity picks up through the network.
Thank you.
Okay.
Your next question comes from the line of Justin Long with Stephens. Your line is now open.
Thanks, and I guess to start with a follow up on that last question does the guidance still assume that volumes outpace GDP. This year and then is there any color you can give on the.
Excluding the Virginia real estate sale, that's embedded in that assumption for double digit operating income growth.
Okay.
Yeah I'll cover the first one.
That's been our target we want to we want to outgrow the economy, there's a lot of moving parts as you know the auto.
Business, our automotive business is going to be a big factor as we get into second half in that business on production needs to recover there to really hit those GDP plus targets. So that's one market to look at.
Cole as well, we see strong demand there, but we'll be watching that going forward and then the intermodal market, particularly on the domestic side, we're assuming chassis and other.
Drayage capacity comes back into the market and that will drive.
Some incremental growth for us as well so there's a few moving parts, but that's always our target and that's why we came out at the beginning of the year as we expect to exceed GDP volume growth, but realizing that there's a number of moving parts going on right now.
And Justin this is Sean just to add on with <unk> question I think it's as we've always said the we expect the incremental margins on the growth to be very strong and very healthy and that'll be supportive in terms of.
The or for the year, but there are some things to keep in mind that will be offsets, obviously, the quality impact, which will have the full impact of it in the first half of the year given that the acquisition occurred in Q3 of last year higher fuel prices are essentially neutral the op income, but they do have a negative impact on the.
<unk> ratio as well.
And then obviously intermodal storage as things normalize that will have an impact on the or particularly in the second half of the year.
Given that the storage revenues were quite elevated in the second half of last year.
Yeah.
Okay I'll leave it there I appreciate the time.
Okay.
Your next question comes from the line of Chris Wetherbee with Citigroup. Your line is now open.
Okay, great. Thanks, and good afternoon, I guess I wanted to come back a little bit to the sort of bigger picture.
<unk> demand.
Comment that you made earlier in the call Jim just maybe if you could talk a little bit about what you are seeing either on the consumer or the industrial side, we can kind of see what's happening on the commodity side, but maybe those two end markets.
And then maybe just sort of.
We have that into the market share potential opportunity congestion has probably kept some business off the rail and on other modes of transportation, how does that factor in I guess generally speaking.
These slowdown in consumer driven freight and is there enough.
Potential and industrial commodity to offset that.
Well I think we've been going through since really.
The middle of 2018.
Divergence between the consumer and <unk>.
In the industrial economy, whether it was driven by going back to the tariff issues that.
Began to create concern amongst the industrial producers and at the same time, you had a consumer economy.
That was going gangbusters.
And.
That kind of carry forward into the pandemic years, let's call it.
The plague years of 2020 one.
And industrial.
<unk> really got hammered, especially and still there are still lingering effects from that.
Look at the automotive sector.
And the consumer economy went nuts.
So.
Now I think youre starting to see those two divergent our economies come back more in line and industrial demand.
<unk> is very good.
I think it's clear in our comments.
We have not met the demand.
As the railroad on the industrial side in the bulk side of the business.
We have done I think we've done an amazing job in handling the consumer side of the business in the intermodal sector.
Throughout the last couple of years so.
Demand is there as the railroad begins to continue to improve as we go forward.
We see a lot of opportunity.
And there could be changes were there obviously.
Obviously, there are going to be changes.
In various the.
The supply chains, whether it's import export grain, whether it's continued demand for U S coal.
Steel plastics chemicals, you name it everything is going to be moving around a little bit.
But we see all of these sectors being.
Assuming the euro.
Everything in the world stays relatively saying, where we are today, if you don't want to call. This Saturday.
A great environment for us to excel in.
And the only reason we haven't achieved it.
In the last two.
Nine months ago, I said the numbers that we're talking about today in terms of where we would be with the hiring that's where we thought we'd be nine months ago.
Greenlee tight.
Labour market.
The higher somewhat higher attrition rates that we went through.
I have held us back and so we.
We figured it out we've done everything we could possibly do to take advantage of the situation and I think the.
I think the economy on both.
<unk>.
Especially so on the industrial side of the economy.
Sure.
Where traditionally railroads have excelled.
It looks favorable.
As we look forward.
Okay. That's helpful. Appreciate it thank you.
Okay.
Your next question comes from the line of Tom Lewis with UBS. Your line is now open.
Hi, Thanks, This is Mike triano on for Tom.
So you've made really good progress on adding the TNA employees.
I mean do you have an idea or which point. This year, you think youre going to be all kind of showed up from.
TNA crew perspective, and also is there a way.
To quantify how much volume you have left on the table because of the crew constraints that you'll be able to capture once youre kind of fully tuned up on crews.
Well in terms of what we left behind I'll use a term that Tom uses quite often lots.
And leave it at that in terms of where we're going to be.
Uh huh.
From a timing standpoint, where we'll get but I will say you know what.
Well, Jamie mentioned earlier.
<unk>.
We're going to continue to hire.
We're going to manage this we're going to manage this employee pipeline.
Differently.
Do we have in the past.
We're going to make sure that the lessons learned here that we're going to make sure that this doesn't happen to us again.
So that's why we're.
That's why we are doing everything we can.
Many employee relations standpoint.
To work closer with our employees.
Because there are they are critical and key.
What we want to do here and there.
That is provide a reliable truck like product across all of our wood truck like reliability.
To all of our customers because that's the key to our future for the companies.
Growth, Jamie do you want to add any color about timing.
Our timing is we're really shooting towards the third quarter as we push.
The number of employees, we have training right now.
If.
Those qualify and we continue to do our hiring of 30 to 40 every single week puts.
Puts us in a good position at some point in the third quarter it might be towards the tail end of the third quarter.
And then and to Jim's point.
We're continuing to hire for attrition as attrition moves forward.
We've seen attrition climb up and we've got to make sure that we stay ahead of that throughout this year and then into next year and we've got many different programs that we want to continue to train locomotive engineers and other pieces. So we're not going to be stopping at any point in time here soon but but we feel pretty confident as long as the.
World doesn't throw us some type of a curve ball again.
Q3 is going to be a much better quarter for us.
Just a little more color on.
It is easy for us to manage down.
We have an attrition rate of around 7%.
Uh huh.
So we're not concerned with getting fat.
Because we can always manage we can always manage.
Down what we have learned over the last year year and a half as it is extremely difficult. It is a completely different environment.
Troy and add to the workforce. So we just have to look at it a little differently that doesn't mean, we're going to get fat and happy and I have a bunch of employees that we don't need that means that we're going to manage the workforce differently.
Make sure.
With the ebbs and flows of this business, which is always the case that we do it in a more in a different manner.
So.
So we don't get caught so we don't get caught short like we just did.
Thanks, Jamie Thanks, Jamie I appreciate it.
Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.
Hey, Thanks, good afternoon. So I wanted to maybe think about the back half of the year is it sounds like that's when you think youll have the the head count where you want it to be in the network, where you want it to be do you still think that youll have volume growth in excess of head count in the back half of the year and then.
And maybe Sean how much is that.
How much are you spending in <unk> and <unk> on hiring and network inefficiencies that maybe potentially starts to go away.
The back half of the year.
Yes, Scott to your first part of your question I mean remember were.
With all we're doing in hiring we're netting up roughly 1% a quarter on a sequential basis. So.
You know that that the cumulative impact of that is a couple of percent year over year in head count by the time, we get to the second half of the year and yet I think we ought to be able to grow in excess of that we've got capacity on trains and in the network. We've got locomotives to move the freight so we should be able to outpace that in terms of growth.
And then in terms of your question on the cost side those training costs are.
It's up $10 million versus last year, so call it roughly $15 million a quarter that we're spending on training right now I don't see that going away like Jim just said, we're going to continue to hire.
So that that's probably pretty ratable across the balance of the year.
The piece that is probably more variable is the $45 million or so that we mentioned in purchased services and others most of which is really related to <unk>.
Supply chain congestion, whether it'd be cost related to intermodal container yards and.
And the terminal labor outsource labor or whether it be related to having more locomotives than we would otherwise need if the network we're running faster.
There's also an impact to rent so think about it in terms of that roughly $45 million is the opportunity.
To kind of get back to where we were.
Once we get this thing spending.
Okay, and if I can just sneak in one more quickly for Kevin.
On the call <unk> is this are we seeing the full benefit at this point of the met prices and everything or is there one more potential leg up here.
No I think this is largely yet.
Some of our on the met side some of the contracts are capped so they don't fully to participate in these extreme prices. So this is probably a good run rate I'm assuming.
Export prices stay at the current levels they are today.
Okay. Thank you guys appreciate it.
Your next question comes from the line of Brian <unk> with Jpmorgan Chase. Your line is now open.
Hey, good afternoon, thanks for taking the question.
It's come back to labor and Jim maybe if you can elaborate on how you expect to manage the workforce spit differently and it was challenging especially right now.
To manage everything all the different moving parts, but just more technology or are these different types of roles that you expect to put into place and on that line. If you've got the 600 dollar incentive up to 600 or incentives that you announced yesterday.
You feel like you've done everything you can at this point.
It's really getting people, where you need and the amount that you need them in place.
Well I think anybody that's followed the railroad business for a long time like you have.
And everybody else on the call knows that the relationships between the railroads and the union workforce has not necessarily been one of.
Mutual admiration.
And we.
We need to fix that.
We're working extremely hard and throughout this process we have.
I mean these.
These guys were out there for two years in the middle of a pandemic working every single day to day and night.
In a chaotic operating environment caused by surges in traffic and you name it.
And.
And.
And at the same time.
Didn't get a raise.
That's wrong in my opinion, and that's why we decided to do something about it unilaterally without asking for some kind of get back in the labor agreement. We just thought it was the right thing to do and so we made the offer and that's a change.
Uh huh.
It's not technology its relationship building with your with your unionized workforce.
We need to change that and we're going to we're dedicated to changing there.
It is an ongoing long term process, but.
C S X.
Committed to trying to do everything we can possibly do.
Change decades, if not centuries.
Somewhat dysfunctional relationship with our Union workforce, that's the key.
And that's what this is all about.
Alright, Thank you Jim.
Yes.
Your next question comes from the line of Ken <unk> with Bank of America. Your line is now open.
Hey, great good afternoon.
So you gave the double digit operating income targets and the cost I just want understand what's built in for the timing of the fluidity return is that just simply the second half and in the past we've seen I guess rail.
Rail throw a lot of assets to get the fluid moving or is that something we need to do to get things moving aside from the employees and then I guess to follow that Jim into next week's hearing as to what Youre doing to fix the services is just the focus here the key unemployed or again is there equipment need or anything to kind of throw at these these backlog.
To get the fluidity moving of the rail network. Thanks.
We are not short of locomotives, we're not short of any physical infrastructure in order to be able to perform and fifth continuing to still have excess capacity across the railroad. There is one thing and one thing only that we are short of that is hampering us from doing the job that we want to do and to get back to service levels, where we were in 2019.
And to get even better from that point on.
As we need more people in the engineer and conductor rates Thats. It we don't need them anywhere else in the organization, we don't need more management people, we don't need.
We don't need more people fixing fixing the track and lay in rail they're doing a great job out there we need more engineers and conductors and that's it and that's what we're dedicated to and that is why we will continue to focus on these numbers.
And.
It is a lengthy process from the time, we finally get someone.
Extremely lengthy process from the time, we start looking for somebody that in this day and age might want to be a railroad conductor until the time they have gone through the classroom first of all the pre employment screening then by the time they go through the months or more of class room and struck.
<unk> and then six months on the job training and then we have to make sure that at that point in time. They are equipped and ready to go out and work in a railroad operating environment and not get hurt and not heard somebody else. It's a long long process.
And that's why it has taken so long as I said earlier nine months longer because of the front end of the process was not went away from us the pipeline of normal candidates that might want that usually wanted to work in the railroad business.
They don't want to go to work they wanted to stay home or they wanted to do something else.
So we've had to revamp work extremely hard and now we are beginning to see.
Realize the benefits of all that hard work and it's going to be month. After month. After month. After month with these employees are then qualified they actually go out and start performing work.
As the year goes on on a month to month to month basis, We will see continued improvements in fluidity and increases in the speed of the network. When the net so you've got a compounding effect youre short of employees and you can't run the trains to the network slows down when the network slows down you need more people.
We need to get the railroad back.
Staff, so that we can get the velocity and dwell down to where it was that will then rightsize our workforce to work we need and then we can more effectively manage it.
With the with the view that Kevin and his team provide us about where the opportunity is listen.
Kevin and his team are not shy about telling us on a regular basis, where they see opportunity it's out there.
And we want to we want to get it we want to move it because that's what we do.
And make a lot of money doing it.
And just to clarify there the timing for the fluidity return is that.
Is that by the third quarter yearend.
Yes.
Well I would hope again, I hate that I hate to give predictions because I was already off by nine months on the last one.
It will yes youll see.
Okay.
Mr. Wojciech always gets nervous when I start making projections on when the railroad is going to start running better the railroad will start running better in this quarter. It will get better in the third quarter and it will get better in the fourth quarter.
And the operating performance of the company I Hope and we will continue to get better and better and better and better all the time that 2019 was not Nirvana 14 19 as the base camp, we wanted to get back to where we were which was record level of performance, but that was not where we were satisfied being the way.
We wanted to run the company and run the railroad we wanted to get even better from there and we hopefully will be able to do that but it's going to be a gradual improvement as we go through the remainder of this year.
Jim I appreciate the time thanks.
Yes.
Your next question comes from the line of Walter <unk> with RBC capital markets. Your line is now open thanks very much operator, good afternoon, everyone.
So I wanted to ask a little bit on yields and Theres a lot of moving moving parts, there with with fuel surcharges and accessorial charges. Just curious how you would point investors to how your yield might develop over on a year over year basis going forward.
Particularly where we are.
If we were to assume fuel prices remain constant.
Are we going to see yields come down as some of these accessorial charges come off as fluidity improves and therefore should we be more more looking at negative yield.
As opposed to our natural inclination in the rail sector to see pricing levels generally move higher.
Could we see some noise in the near term as a result of some of the rollover of.
As your fluidity improves and some of those charges come off.
Okay.
Hey, this is Kevin.
When you look at what's happening right now certainly I think John spoke to it we would we would expect some of the storage fees and those things to come down to more normalized level, but that's a good thing that means the.
Supply chain is becoming more fluid that means we're moving more freight through the rail network is exactly what we want to happen.
And so from that perspective, that's all good when we looked at where we are today versus where we were.
Last quarter, when we had this call inflation has gone up even more and we're having to have those conversations with our customer we repriced about 50% to 60% of our business every year and we're having those conversations because our customers are having those conversations with their customers and so that's the environment. We're in and so theres a bit of a lag when you think about pricing and realization of that.
We're going to have to realize through the year.
We fully expect that.
Those things will start to deliver as we move through the year.
That's great color I appreciate it thank you.
Yes.
Your next question comes from the line of Scottish Salmon with BMO capital market.
Line is now open.
Okay. Thank you maybe a question to Kevin. Thank you mentioned in your remark.
Something about.
The supply chain.
Changes that occur.
<unk> now and maybe trade flows.
You mentioned that you see an opportunity for CSI as network and specifically at the Port I'm wondering if you can elaborate a little bit on that.
And the second point attached to that is what do you what do you.
Whether you would like to accomplish with the Pan out of specifically on the commercial opportunity there.
Alright, good enough traffic do you think you have.
Commercial opportunities to go after.
Thank you.
Closed on that transaction.
Sure in terms of trade flows what I was referring to there is probably two two issues one.
Touching on the second slide that I covered was we're seeing a lot more activity in terms of industrial re shoring more appetite for companies.
Look at their supply chain and quite frankly supply chain resiliency as a competitive advantage now and companies are re evaluating do I want my production in Asia due I wanted it overseas or would it be more appropriate to have an onshore closer to the consumers that are.
We're gonna be buying the products and I'm hopeful and we're seeing early signs that that's the case that they're making those decisions.
Spending capital behind it.
Second one and this is extremely early and we're having a lot of conversations with customers and Jim talked about this a little bit is when you think about things like grain, which have largely you know huge amounts of supply have come out of the Ukraine and Russia into Europe .
And other other commodities and steel products and other things that are largely gone in the European market well all of a sudden it doesn't look like that's going to happen and some of those things that we had traditionally moved out of the west coast. The supply Asia now, maybe that's going to come out of the east coast and benefit the ports that we serve.
And again, it's really really early we have to have conversations we have to make sure that the capabilities are there.
To be able to deliver those products when that demand happens. So we're staying very very close to the customer.
Understanding what.
Essentially potentially move from the west coast potentially into the East coast.
And working with them.
And being a really dynamic in terms of how we think about it.
What I'm thinking about we're looking at everything that's going out of the ports today and how that could change.
Over the next few months and it's probably it's not a next month phenomenon. It's probably six 912 months from now where it will really start to see some impact if it happens.
Okay, and then I can go.
Yeah on the P&L.
Yes, sorry.
Hey, guys just cover the pandemic.
Yeah, and then on the Pan Am look it's a verb.
Good consumer market Theres a lot of.
Paper packaging.
Customers that want more access to markets that we serve.
The waste business and that market is going to continue to grow we see great opportunities there.
And we think with a better rail service, that's going to open up many more markets that quite frankly, just from a transit time or a reliability standpoint, just we were unable to serve previously so we're really excited we're gearing up now that the approval is gone through and I'm going to work closely to really capture those opportunities.
Okay. Thanks I appreciate it.
Your next question comes from the line of David Vernon with Bernstein. Your line is now open.
Hey, good afternoon, guys I have a question for you on the appetite to grow sort of the intermodal business generally I mean, I think trimming some of the internal model that <unk> was the first step and we obviously been dealing with some of these service issues, but.
I'm curious to.
To get your help on reconciling kind of where market rates are attractive at the margin that growth could be and what do you make of the third party industry sort of adding something like 50000 boxes to the fleet. This year and hunt is coming out with a even bigger number for the next couple of years. I mean is this a market that you guys.
We really want to lever into or are you going to remain a little bit more balanced between intermodal and merchandise growth I'm just trying to square the circle with with with what we're seeing in the container order book for the domestic players and your appetite to actually accommodate some of that growth.
Well I think we're leading the industry in intermodal growth.
So it is not.
<unk>.
And in terms of.
In terms of volume I think if not this year next year for sure.
In terms of volume in intermodal is going to be our biggest a piece of business.
That being said.
So we want to we.
We spent a lot of time and effort in 2017 and 2018.
And reengineering.
The the way the intermodal network operated for a reason so that we could have a <unk>.
Good return on that business, when we began to focus more intently.
Working in the key lanes, where it makes sense for us.
Two.
To grow.
<unk>.
We're beginning to I think have a better understanding of leveraging the east coast ports, which have gone through a dramatic transformation in terms of growth versus the west coast.
The much greater opportunity to expand that footprint in the east than they do in the west.
And we're also looking more and more and more at how we can participate in the Mexican intermodal market, which to date.
We do basically.
Nothing so.
So whether it's international or domestic.
More players put.
Asset towards the intermodal market the more these markets further develop.
We see great potential.
Potential for us to continue to grow.
Our intermodal franchise.
That's not to say that we are in any way shape or form favoring that over the merchandise business. The merchandise business is a core part of our franchise. So we intend to grow both of these businesses, we see both of them as equal opportunity.
Any business is any business is a divergent book of business.
And so we don't.
We look at them, both as exciting areas of opportunity.
And as you and maybe just a quick follow up as you think about the <unk> do you looking to add boxes to that are you going to let the third party sort of private fleet.
Handle the investment in the actual boxes.
Again, that's a different book of business.
Personally I'm more in favor of us being.
More involved.
On an asset ownership basis, because because.
Because we see we see great we see great opportunity there for potential.
And and whether it's.
Whether it's your mix or where whether it's every place else.
Uh huh.
I don't like the I don't like the model, where I do 95% of the work and get 75% of the money.
So to the extent that we can turn to some of this business around and make it more favorable to our bottom line.
I can guarantee you that any kind of an investment in asset in that area would have a great return.
Okay. Thanks very much.
Your next question comes from the line of Shannon Radbourne with TD Securities. Your line is now open.
Thanks, very much good afternoon.
In terms of the outlets recall you have touched on already but I'm wondering if you could comment on what you think the prospect is for increased call volume this year and within that could you touch on weather primarily export coal.
What's your outlook on both domestic and export.
Yes, I think when you look at some of the discrete items that I pointed out in the first quarter. We think some of those obviously are going to go away as we get through the year and then Jamie talked a lot about the additional resources, we are adding and I think there are opportunities as the mines reinvest and they're making a lot of money right now and that allows.
To reinvest and probably some deferred capital that they've they've had over the years you would see some probably some better production coming out of those as well so all else equal if the market stays strong.
We would anticipate some some volume upside through the year.
And is it primarily export coal that influence your outlook or no no. When you look at our southern utility.
Sorry I.
I didn't address that when you look at our southern utilities, and even our northern utilities right now they're at low levels and so theres a inventory replenishment that needs to happen that we're working diligently on and working closely with them to and with the mines to make sure that happens under the summer peak season.
And then on.
On the export side matters, then obviously very very.
Robust in terms of the demand you are now seeing some probably some thermal opportunities with the supply not there coming out of Russia, and so we'll see how that materializes right now it's not a lack of demand it's a supply constrained market.
Have you seen.
The coal producers, probably favor that export met business rather than.
The thermal business.
And Curtis Bay, Youll see that Jamie.
Jamie just remind me that will come on in the third quarter and that will.
For some additional opportunity.
That comes back on the full full capacity.
Thank you for the time.
Yeah.
Your last question today comes from the line of Jordan <unk> with Goldman Sachs. Your line is now open.
Yes, hi, good afternoon, just curious on the auto sector.
A little color around that.
What are you hearing from the Oems, maybe how the parts business is doing and any update on the chip situation. Thanks.
Yes, we certainly saw some improvement in the March and that's continued into April when he starts shipping cars without chips I guess that helps and so some of that inventory that was sitting on the ground waiting for that stuff to come in and they just decided to go ahead and ship it and maybe you don't have a see warmer right now, but youll get it maybe in six months from now, but so we've seen a lot more.
Sure.
Finished good inventory on the ground and we're ramping up to deliver those products to the market. So thats, but we'll see what some of the impacts.
In China with some of the disruption they are having over there with the.
The variant running through there in Shanghai shutting down in some other areas. So it's a watch item, but we're seeing some favorability at least in the near term.
Thank you.
Okay.
There are no further questions at this time. This concludes today's conference call. Thank you for attending you may now disconnect.
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Yes.
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