Q3 2022 CSX Corp Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
This time I would like to welcome everyone to V. C. S X Corporation third quarter 2022 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 about that 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.
It is now my pleasure to turn today's call over to Mr. Matthew Kim head of Investor Relations.
Thank you operator, good afternoon, everyone and welcome to our third quarter call. Joining me on today's call are Joe Hinrichs, President Chief Executive Officer, Jim Foote, our outgoing President and Chief Executive Officer, Kevin Boone Executive Vice President of sales and marketing, Jimmy Wojciech Executive Vice President of operations.
And Sean Pelkey, Executive Vice President and Chief Financial Officer.
The earnings 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, Joe Hinrichs.
Alright, Thank you Matthew and Hello, everyone and thank you for joining our conference call I'm excited to be here with you today on my first earnings call as President and CEO of C. S X.
Entire C. S X leadership team is here with me this afternoon and we appreciate the opportunity to discuss our strong third quarter results with you.
Our whole team is very motivated to build on our current momentum within our key relationships provide better service to our customers and deliver profitable growth for years to come.
We will achieve this through our one <unk> culture, which has its core means one team working together to serve all our key stakeholders.
As Matthew mentioned also joining us for Tonight's call is Jim Foote, who as you all know led this company through its remarkable remarkably successful transformation over these last five years.
Jim cares deeply about this railroad and its employees and he has already been a great resource during my first several weeks in this role.
I'll be happy to have us invaluable advice in the months ahead and I want to thank him for all the help he has given me personally because I get the privilege to follow him Jim on behalf of everyone here at C. S X. Thank you.
Thanks, Joe as I have said on every earnings call since I took over as CEO five years ago I am incredibly proud of every C. S. Ex employee who has been by my side as we transformed this organization into the best run Railroad in North America.
A company that's safer.
Our efficient or profitable and far more successful than when we started.
I have the utmost confidence that Joe and his team will take this organization to even higher levels of success.
This transition process has been underway for a long time.
It was critically important that the board and I ensure that a succession plan was in place when the right time King.
Having said C C S X through the initial phases of our transformation.
Unusual to say the least challenges.
And now with our operating performance starting to get back to normal. It's the right time for me to step away.
Joe is a great guy.
He is very talented.
And he brings a tremendous amount of operations experience in running a large complicated industrial company.
His years working with a diverse unionized workforce will come.
Clearly serve him very well.
It's truly been an honor to serve as president and CEO of C. S X and I wish all of you.
And everyone connected to this railroad the best.
Now back to Joe.
Thanks, Jim.
Promise you this team won't let you down.
I am honored to be here on behalf of the entire C. S X team I've spent the last month traveling all across the network visiting our facilities and meeting with our customers our employees Union leaders regulatory partners and government officials at this point I can tell you two things for certain.
This is a fantastic railroad our people and our infrastructure are second to none and the principles of scheduled railroading that drive our successful resilient operating model are deeply embedded throughout the company.
I knew that theater sector with a very impressive place when I started that did not appreciate how impressive. It really is until I saw myself. How this team of skilled dedicated men and women worked together to move thousands of box cars and containers for our customers each and every day.
Second for as much as this company has achieved over its transformation during the last several years. There is still so much more that <unk> can do.
Rail is a low cost freight solution rail is a great solution right solution with low emissions.
Manufacturing investor the United States is accelerating.
We have great advantages in this market and our customers should have every reason to ship more by C. S X rail but.
But we have to focus our efforts to make this happen we have to make it easier for our customers to use our service react to provide better service to our customers we have to engage with all of our employees, especially those out in the field serving our customers every day to ensure that we deliver the reliability that we promise.
And we have to challenge ourselves to nurture the kind of culture that fosters a nimble creative and market leading company, while staying true to the operational discipline that makes this all possible.
The concept of <unk> as one team working together to accomplish great things can be very powerful.
We have to bring once the S X lite.
We'll talk more about that in a few minutes, but now let's turn to our presentation to review the financial highlights for the third quarter of 2022.
<unk> moved nearly one 6 million carloads in the third quarter third quarter and generated approximately $3 $9 billion in revenue.
Operating income increased 10% year over year to $1 6 billion.
Which include the effect of additional labor and fringe expense related to the tentative agreements reached with our unions last month.
Results. This quarter also reflected lower real estate gains compared to last year.
Earnings per share increased 21% to 52 cents a share.
Our operating ratio for the quarter was 59, 5%.
Now, let me turn it over to Kevin Jamie and Sean for the details.
Thank you Joe turning to slide five.
Third quarter revenue increased 18% year over year.
With revenue growth across all markets.
Overall volumes were up 2% as modest volume growth in merchandise and intermodal more than offset a minor decline in coal.
Merchandise revenue increased 14% on 1% higher volumes driven by pricing that reflects rising cost inflation and higher fuel surcharge revenue.
We saw strength in the automotive market, where revenues rose, 31% on 13% higher volume.
Semiconductor challenges continue to ease and we see significant finished vehicle inventory that needs to move.
AG and food was also a bright spot as improving cycle times as well as stronger demand for grain wheat and ethanol resulted in revenue growth of 25% on 10% higher volume in the quarter.
Fertilizers and metals and equipment.
Modest revenue growth despite volume declines in the quarter.
Fertilizer shipments continue to be impacted by reduced phosphate shipments and production facility turnarounds.
Lower metals and equipment shipments reflect volatile commodity pricing and mill maintenance outages.
Intermodal revenue increased 19% on 2% higher volume as yields remained strong and supported by high fuel prices.
International shipments were partially offset by lower domestic volumes, which reflected tight equipment availability and softer truck market.
Intermodal demand remained strong in the quarter, but the team continuing to collaborate with customers and identify new opportunities, including a new International service Lane that contributed to growth.
Customers continue to recognize our industry, leading service product in a challenging market as they seek lower cost and lower emission alternatives to truck.
Coal revenue increased 36% on 2% lower volume as pricing continues to benefit from strong export benchmarks.
Volumes remain limited in the quarter.
Due to production issues at the mine infrastructure constraints at the export terminals and general manpower shortages.
Though our crew availability did show improvement into the end of the quarter.
We were also able to reopen portions of our Curtis Bay terminal in September .
Which provides additional volume opportunities as operations normalize.
Demand remains strong and we see opportunities to move more volume of some of these constraints ease.
Trucking revenue increased 26%, mainly due to strong core pricing and higher fuel recovery.
Other revenue increased largely due to higher intermodal storage and equipment usage fees the.
The strong sequential increase was driven by continued limited warehouse capacity.
At customer sites.
Looking forward there is obvious macroeconomic uncertainty as the fed remains committed to raising rates and addressing high inflation.
Given this backdrop. The team is highly focused on his efforts to drive strategic growth opportunities that target truck and.
And expand <unk> addressable market.
As you've seen our.
Select site program continues to facilitate new customer partnerships.
Last month, a key emerging domestic lithium supplier for the EV and battery markets announced.
Construction of our 600 million refining and manufacturing facility on a C. S X serve site in Tennessee.
We also have several other potential projects in various stages of development.
We continue to see customers investing in new projects across our network.
We're also moving forward with efforts to facilitate ESG solutions for our customers.
Before year end, we will be releasing an updated version of our carbon calculator that is integrated within our ship C. S X interface.
This new calculator will enable customers to drive into much deeper detail and understand in real time.
The environmental benefits that C. S X rail can provide.
Finally, we are also encouraged that service performance is on an upward trend and we expect to turn that this positive momentum into additional opportunities with customers.
I will now turn it over to Jamie to discuss operations.
Thanks, Kevin safety remains our top priority at C. S X and operating safely is the foundation through our service restoration efforts and.
In the third quarter, our personal injury rate and train accident rate decreased sequentially.
While we are not satisfied with our performance I am encouraged by our success, especially given the number of new employees across the network as.
As we mentioned last quarter. It is critically important to instill a culture of safety in our new T any employees from day one.
That emphasis on safety does not end when new employees graduate from training.
It requires continuous attention throughout every railroad is career.
To reinforce this we are actively engaging with new hires and all of our employees in the field to discuss recent injuries and accidents to ensure that we take each opportunity to learn from each other in.
In the fourth quarter, our efforts will continue to focus on making sure. Our employees are protected from incidents that commonly occur as weather changes.
Kris the education and awareness of seasonal safety risks will help our team become safer.
Turning to slide seven.
We're encouraged by the recent improvement in our operational performance.
<unk> results are a testament to the one C S X team and their unrelenting devotion to serving our customers.
If we only look at the third quarter averages train velocity dwell and car carload trip plan performance.
All showed a deterioration versus the prior year, though intermodal trip plan compliance continue to improve 240 basis points how.
However, the right side of each chart of this slide shows the substantial improvements we have made throughout the quarter and continuing into recent weeks.
As shown here in the most recent four week performance all of these four key operational measures are above the averages for the third quarter 2022.
But there are also ahead of third quarter 2021 performance.
We are confident that these metrics show that our efforts to hire train and retain new employees are starting to take hold and make a difference for our customers.
So we are encouraged by the operational momentum we will not let up we will continue to push forward and take actions necessary until service is fully restored to a level that our customers expect.
We are promoting new conductors allocating the appropriate number of assets and improving the overall reliability and operational resilience of our network.
Turning to slide eight.
In the third quarter active teeny head count reached the highest level since March 2020.
The quarterly average shows a sequential increase of less than 100 employees, we exited the quarter with over 6800 total.
The hiring pipeline remains robust and we averaged over 500 trainees again in the third quarter.
We are determined to keep the pipeline full allowing us to continue filling classes as we work towards our goal of 7000 active teeny employees by year end.
Currently we have over 700 employees in training and have Additionally started locomotive engineer training.
The number of conductors that finished training are marked up was down slightly in the third quarter as we cycled lower class sizes from earlier in the year.
We anticipate this number to increase in the fourth quarter as the class sizes have remained elevated due to late spring and summer months conductor.
Conductor promotions will continue to increase the active teeny headcount.
I referenced the minimized.
Attrition.
That we highlighted in the last quarter are bearing fruit.
Higher attrition in the preceding months have trended lower and.
And we believe our hiring initiatives and recent pay agreements for new conductors are contributing factor I will now hand, it over to Sean to review the financial results.
Thank you Jamie and good afternoon.
The favorable operating momentum Jamie discussed was accompanied by strong revenue growth of 18% or $600 million, including gains across all markets.
Operating income was up 10% to $1 $6 billion as topline gains outpaced expense headwinds from higher fuel costs inflation and tentative Union agreement impacts that I will discuss in more detail on the next slide.
The operating ratio was 59, 5%, which as a reminder includes roughly a 250 basis point ongoing impact from quality carriers.
Interest and other expense was roughly flat as was income tax expense.
The effective tax rate in the quarter was 21, 9%.
Lower than our statutory rate as a result of a favorable state legislative change.
As such net earnings of $1 1 billion was up 15% with EPS up 21%.
Now, let's take a closer look at expense on the next slide.
Total third quarter expense increased $460 million versus the prior year.
Fuel was up nearly $200 million, primarily due to higher prices.
Inflation remains above historical levels with $82 million of inflation of cross labor P. S <unk> in rents.
Labor inflation alone was around $50 million, which reflects the proposed wage rate increase from the tentative Union agreements.
In addition, we recorded $42 million of out of period expenses related to adjusting union labor accruals for the tentative agreements the.
The most significant piece of this is the impact of the proposed union bonuses.
When you think about labor expense going forward the $42 million is a net catch up and will not recur.
The base labor per employee excluding this impact is expected to be the new run rate for Q4 and into the first half of next year.
Of course comp per employee will also be impacted by seasonality mix and other factors, but the full impact of the tentative Union agreements is now in our base labor costs.
Next quality and Pan am combined for $46 million of higher expense with the increase split about evenly between the two.
Quality expenses correlate with higher revenues.
While Pan Am reflects the first full quarter of C. S X ownership.
The Pan Am integration process is well underway and we continue to receive positive customer indications around strong growth opportunities as we invest to increase the speed and reliability of the former Pan Am network.
Real estate gains were $33 million less than prior year.
With volume in all other expenses, increasing $66 million.
While operating fluidity improved through the quarter, our hiring focus remain and we incurred approximately $40 million of incremental costs related to TNT training higher locomotive count additional intermodal terminal activity and other congestion related items.
Volume related costs and higher depreciation represented the balance of the expense increase.
We do expect some of the congestion related expenses to continue into the fourth quarter, but view these costs as the first efficiency opportunities to be realized as we achieve sustained improvements in network performance.
Now turning to cash flow on slide 11.
Year to date free cash flow before dividends is down nearly $30 million, but up approximately a 120 million when adjusting for after tax cash proceeds from the Virginia transaction.
This is despite close to $225 million of additional capital spend as we continue investing for the health of our network to support the quality and Pan am acquisitions and position for future growth.
After funding all of the capital needs of the business shareholder distributions have exceeded $4 $3 billion. This year.
Including over $3 7 billion of share repurchases and nearly $650 million of dividends.
Additionally, we ended the quarter with a strong balance sheet, including $2 4 billion of cash and short term investments.
Looking forward, we expect to maintain our balanced opportunistic approach to returning excess cash to shareholders.
And with that let me turn it back to Joe for his closing remarks.
Alright, Thank you Sean.
Now, let's conclude with a review of our outlook as shown on slide 12.
There is no change to our expectation for double digit revenue and operating growth for the full year, excluding the effects of the Virginia real estate transactions.
Are there is uncertainty in the global economy, we feel confident in our ability to deliver on this guidance as we look over the remainder of this year.
As we mentioned in our earlier remarks, we are pleased with the positive momentum in our service metrics and we continue our hiring and training efforts to ensure that we have the resources needed to build on these trends and drive improved network fluidity.
We remain committed to returning excess capital to shareholders as you saw over this past quarter.
And finally.
We reiterate our priority to building a unified cohesive culture of <unk> that will strengthen the relationships, we have with our employees customers and all other stakeholders.
This is a great company and working together there is so much more that we can accomplish.
And that's why I'm, so excited to be here.
Thank you all I'll now turn it back to Matthew for Q&A.
Thank you Joe now in the interest of time I'd ask that everyone. Please limit yourselves to only one question.
With that operator, please open up the line.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Ken <unk> with Bank of America. Your line is open.
Okay.
Okay.
Yeah.
Can you talk a little bit about your learning curve, you know why why youre right background for the role what you hope to accomplish and I mean, it's a general question.
And then my more specific one would be on trucking right.
You talked about the <unk>.
Rate ramp and is that something that gets impacted by loose capacity or is the chemical business just different from the trucking side, but I'll stick with the big one on for you Joe to start with.
Okay. Thanks, Ken.
As Jim highlighted a couple of things, but certainly.
You know the labor side of the business experience in the automotive industry is certainly very applicable to a situation that we're in now.
When you look at working through with our Labor Union partners incentive agreements and ratification and and working through those issues, but more importantly, I had the opportunity to be a customer.
For 20 years of the rail industry and have shared a lot of those experiences.
With our team and have challenged us to continue to look at things from a customer perspective to make sure that we are holding ourselves to a higher standard of service and accountability for our side of this relationship.
Very proud of the work that Jamie and the operations team are doing to really show improvement in that area.
Jim mentioned that you know obviously, the auto industries of complexity complex business and so as the rail industry is different times of types of complexities.
But from my background and experience I think that's applicable.
But I would step back for a second and say at the end of the day.
It's the it's the workforce is the people here that serve our customers.
And when we bring everybody together and align around our core objectives and around our opportunity to serve our customers better and work together better we can create an even better C. S X and that's an opportunity for us to bring home and to bring the life and I'm really excited to be a part of that.
I'll, let Kevin handle the second part.
I think if I got your question if I got your question right on the the chemical Youre asking about the chemical trucking quality and.
Yes, Kevin I guess, obviously, what we're seeing in the market is just how.
Pricing collapsing right on the spot basis, so I just want understand.
As the chemical business different.
In terms of the revenue. So we can expect from the trucking and other business.
Or is that something that's maybe more sustainable.
Yes, I mean, you have to remember when we were looking at those business. That's it's a high touch customer.
Customers really care about product quality and the brand awareness that they have for quality is very very high does not business that typically moves around and so.
What you've seen us.
Actually they've done a great job of attracting some drivers this year and so that's been I think they've done an excellent job versus a market. There and then you know pricing has been very very good and continues to remain that way and so that's what we continue to see it as a very very different market. It's not people have to be highly trained highly skilled to do that business and they have a great work.
It's doing it.
Great. Thanks, Charles Thanks, Kevin.
Okay.
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Hey, Thanks afternoon guys.
Sean maybe just any near term color or guidance on the other revenue the labor comp per employee and anything on operating ratio in Q4, and then Joe just sounds like more of a focus on service.
Sure. So maybe I guess more of a growth focus I guess, how are you thinking about the ability to grow and improve operating ratio over time or is it more just about growth or as opposed to just your big picture strategy going forward.
Scott I'll start with the sort of modeling questions in terms of other revenue what we've said for a while here is that we do expect it to normalize that as supply chains.
Get back to normal clearly that didn't happen here in the third quarter with the increase that we saw in in the other revenue line.
But the expectation remains the same that we should see it come down in the fourth quarter and again into next year.
To your other point around comp per employee.
The best way to think about that is to take the $42 million, we talked about which was the out of period expenses related to the tentative union agreements stripped that out of labor.
And that's that's the comprehensive <unk> run rate that you are probably going to want to use going into Q4 as well as into the first half of next year.
Before the next increase takes place in July of 2023.
And I'll, let Joe take the second part of the question. Thanks, Sean and Thanks, Scott I think the way I like to describe it.
Really it's just step.
We're looking at this as just to step back for a second I had the opportunity throughout the summer with all my conversations with Jim and the board to really take a.
Get educated on schedule Railroading and you get educated on C. S X.
So the way I like to describe how we're looking at things as you know the five guiding principles of the scheduled railroading are really around improved safety improved customer service control costs.
Improve your asset utilization and engage in and then ultimately.
Value and if all of your employees.
And so if you took a look take a look at all five of those things. They are all very important so operating ratio is.
Big part of looking at controlling costs and your asset utilization and frankly, a number of other pieces that go in there.
So clearly that's a very important number for us and very important part of our objectives.
Improving safety as Jamie talked about earlier, it's really important and will never ever get away from that in this industry. The.
The other two areas around our customers employees are opportunities for us.
So how do we leverage our strong operating model that we have here and that Jim and the team have built over a number of years to continue to improve the service, we provide our customers and the experience and the engagement of our employees feel as part of one C. S X team.
How does that lead to growth.
I'll tell you a couple of ways one with the increased service performance and the manpower that we're putting on that increases our capacity, which we now can leverage too.
Quickly provide for our customers I've had the opportunity to reach out and have video calls with about eight of our largest customers over the last couple of weeks and almost every single one of them has told me directly to our CEO or COO of all those customers.
All told me that when you deliver a better service and more reliable predictable service, we want to do more business with you.
So we don't have to chase growth.
By trying to do unnatural things, we need to continue to do the things we're doing leverage our operating model to continue to deliver a better service.
And with the and increase their head count and with that comes the opportunity to serve our customers better and because were lower costs were covered better for the environment because of all kinds of other reasons, there's opportunities for us to grow the business that way and Thats. The way, we look at the opportunity through better customer service through increased capacity through her manning we have the opportunities.
Serve our customers and theres more opportunity for us there. Thanks.
Your next question is from the line of Ben Nolan with Stifel. Your line is open.
Hey, thanks.
At the time, you guys I wanted to get back to the coal side of it a little bit.
As outages of kind of continuing both at the mines and ports and.
Appreciating that we're sort of now getting back to normal.
Given the demand that you're seeing from your customers.
Is it possible to give any color as to where we are.
How much incremental volume is achievable lets say in the next six months or however, long it takes for for some of these bottlenecks.
Bottlenecks to normalize it.
How much better is it than than it used to be or than it currently is stealing.
Okay.
Yes, I think I think probably the gating factor as we get into next year and you know.
We obviously are confident in resolving our labor issues is what can the producers actually.
Produce.
Coal mines are hadn't been undercapitalized quite frankly, and now have a lot of money and they're looking for equipment reinvesting and so I anticipate it will get better. We also do have in our mind coming online middle of next year that will help us and we have a number of them that are still ramping up so production looks like it could be up next year knock.
One would be probably what I said that last year at this time too so.
There's a lot of things that can happen as you as you. We mentioned previously on the call with we've had some mines that have struggled but are coming out of that.
Here recently ended the fourth quarter so.
Optimistic on the production side, there's clearly a need and when you look at the utility coal mines are the utilities that we serve particularly on the cell.
They have a lot of inventories they need to replenish and so.
Anticipate a lot more consistent.
Liver he is over the next year to really replenish those those levels.
And we've continued to see the export market very very strong in.
A lot of geopolitical risk out there in Europe , and other areas, where you probably didn't see as much demand a year ago continue to have a lot of demand. So.
<unk> you want to serve that it's profitable for them and.
We anticipate to have the resources to be able to deliver going into next year.
Okay I appreciate it.
Sort of if youre, just categorizing areas of the business that probably the one area. We're looking into next year. There is the best growth potential for you to think of it that way.
I think I'm a volume side you will remember you know, we kind of move with the.
Commodity price on the international market, so depending on what that does they're at very very healthy levels today.
A little bit down from the highs that we saw previously in the year, but that I think that will be the biggest factor as we look at overall coal revenue for the next year.
Alright, alright I appreciate it thank you.
Your next question is from the line of Amit Mehrotra. Your line is open.
Thanks, Operator, hi, everyone joke hearty congratulations to you wish you the best and Jim will Miss you I'm sure you'll Miss.
All the 50 conferences and all the questions that we ask you, but hopefully.
You will find something else to do so congratulations to both of you all.
Sean I wanted to ask you about the cost structure.
X fuel.
Obviously, the fourth quarter.
But I'm really kind of interested in how you think about it for 2023.
Because that.
We're obviously still in a pretty pretty high inflationary environment, and and just related to that Kevin one Shawn talks about that can you just talk about.
So your confidence in being able to.
To grow the franchise enough to actually see.
Earnings growth in <unk>.
EBIT growth next year relative to 2022.
Just what your level of confidence it is and given some of these idiosyncratic volume factors netted out against obviously some uncertainty on the macro side.
Thanks, Amit I'll get started on the cost question. So I mean think about the fact that the labor cost has now been reset. So we know what our base is kind of going into next year.
Inflation doesn't show any signs of abating here more broadly outside of labor.
And recognize that some of our costs are based on lagging indicators, meaning they'll get set.
Based on where the inflationary rates are in 2022 for next year.
So there's no doubt we'll be in a in a sustained inflationary environment going into next year between labor and some of those outside party contracts that we have that being said.
We've been carrying extra cost here throughout the year as the network has not operated the way we would have wanted it to based on not having enough crews in the right places that problem is rapidly getting fixed here you can see it in the numbers over the last couple of weeks and so.
Some of those costs are probably going to be a bit sticky going into the fourth quarter.
But as we get into next year, I think there's plenty of opportunity for us to drive some efficiencies and take some of the cost out to.
To help offset the inflationary headwinds that we're going to see.
Yes, my confidence level I'll tell you where my confidence level is this I'm confident in what the team is doing and what we're gonna be able to control going into next year and there's a number of factors. Obviously that are out of our control, but we have a tremendous amount of initiatives that are.
Really taking hold and are really going to capitalize on the service product that we expect to deliver next year.
Joe mentioned.
There's a lot of customers that I want to give us more share.
But what they're.
Producing and what Theyre, making out there and so we have a lot of those initiatives in place.
That will reap benefits as we move into next year and that's where my confidence lies we started the process very very early in terms of looking at those realizing that there could be different markets that can move around on us next year.
But we know we know through the what's happened during the pandemic as the railroad in particular all of US are really haven't participated in the growth that existed out there and so that's a start rejected the position ourselves no matter what the economy holds that we're taking our fair share and then more of it and so that's where the confidence is very very high okay.
The whole team and we were just with our short line partners and I think theres a lot of confidence there that that they have opportunities to go out into the market and take share from truck.
Yeah that makes sense as Shawn I just wanted to follow up just one quick point, what you said so if I look at your cost base ex fuel this year, it's kind of like.
Seven 3 billion.
It seems like four 5% inflation off that number is kind of.
The right structural costs.
Go up but I guess, what youre, saying is listen there's a lot of inefficiencies $40 million a quarter in 'twenty. Two so maybe there's an opportunity to actually if the if the fluidity gets better there's absolutely an opportunity to see net inflation lower than that is that would you say that's a fair characterization.
Yeah.
Well I mean.
We're going to see how much cost we can take out based on how well the network expands but I think the general premise that youre thinking about is is there a contract we've got $40 million to $50 million a quarter. This year that as we cycle better should go away.
Is there more opportunity beyond that sure.
Okay. All right. Thanks, guys appreciate it thank you.
Your next question is from the line of Jon Chapell with Evercore ISI. Your line is open.
Thank you good afternoon.
Jamie I think last quarter I asked you about capacity as you are so I'm trying to ramp up the labor force now it feels like you are pretty close to right sizing the network from a labor perspective, we've talked a little bit about some of those excess.
Equipment, you have on our network today, what would you estimate that spare capacity is today in the network to take on new business to meet this demand that you have been leaving on the table for much of the last 12 months and I guess the other way to phrase. It too is if we do go into a pretty deep downturn is that capacity that you'd be willing to kind of flex off the network for a short period of time, where it is.
You want to keep to make sure Youre never sure.
Again.
Some of the labor issues.
Thanks for the question John .
When we take a look at the capacity that we currently have out there right now it's all about people people people and we've been saying this quarter after quarter after quarter and you're right we are getting closer to that.
Our targets, but we are still a few hundred people off so we have pinch points out there.
That isn't as fluid as we want and you can see in our numbers that we're starting to the velocity is picking up our dwells coming down.
Even our trip plan performance is creeping up but definitely not where we want it to be so over the next couple of quarters really youre going to start to see that momentum.
Some continue to pick up and as Sean mentioned, Yeah, we still have too many locomotives out there and the velocity will help us on that and and and and even our cars online are higher than where they should be so as we continue to move forward. There is there is a lot of cost opportunity there for us to pull out but.
And as we do that and as we move quicker.
Easily.
I mean, we've said this years ago, but theres easily.
The capacity that's out there with the right manpower.
<unk> always said 10 15, 20% capacity with the way that this plant is set up isn't isn't really that big of an issue as long as we have the people to move it we've got all the assets we need.
And we are blessed with a fantastic.
Network here at <unk> with double track long sidings and.
Some good yards that can handle handle a lot in an operating team out there. That's just doing fantastic. So they've proven to us time and time again that we have that capacity to continue to grow. So this is still a people story for us as we move forward.
Got it now when we talk about that and as you mentioned I mean that pent up demand that has been discussed a number of times from Kevin and other folks what is that pent up demand. That's out there is at 4% is it 5% is at 10% I mean I've heard of a number of different number.
What that really can be out there. So if we see a dip.
And the economy.
We expect to be able to start picking up some of that freight that we can pick up today and for US. We just need to have a just to stay with a forward looking view on what's going to happen and.
And not just next month or two months from now but.
We want to look at nine months from now 10 months from now and.
And and really protect that teeny headcount that we have.
And if we get into any type of situation, where we needed to do something different there is natural attrition or natural attrition is 8% to 10% each year and if we needed a pause classes, we're able to do that but ultimately we want to protect that teeny workforce. That's there.
As we just mentioned.
Sean mentioned and I did I guess at the start of the question Theres a lot of other levers we can pull.
Throughout the organization so as a team.
I think we would all sit down and have that discussion and we will make sure that we rightsize our assets and railroads are always heavy on assets. So we've got a lot of great cost savings. We can do on that end, but all in all we want to protect that teeny workforce and forward looking and as if some type of a softening in the market comes we're going to be prepared.
Come out of its strong we'll be prepared to get all the traffic that's out there and we're going to come out of the stronger than we ever have if we get into that situation.
That's great detail. Thanks, so much Jamie.
Your next question is from the line of Tom Water-witch with UBS. Your line is open.
Great. Yeah. Good afternoon wanted to see if you could offer maybe a quick thought on operating ratio in fourth quarter versus third quarter.
Another railroad reported earlier today Union Pacific.
I think surprised people a bit with talking about worse than normal seasonal or in <unk> versus <unk>. Just wanted to see if you could offer a quick thought on that and then for Kevin.
I think at a higher inflation environment, you'd like to get more price, but the counterpoint to that is that the truck markets weaker than you do compete with truck.
So how do you think about those factors can you get more price because you have more inflation or should we be mindful of lower truck price truckload pricing and thats kind of.
A barrier to getting more price. Thank you.
Tommy I'll start on the Q4 O. R question. So I think typical seasonality and it's not always this way, but usually.
It's a little bit worse from Q3 to Q4, and that's primarily because we start to wrap up some of our capital projects and we've got some winter related expenses that hit.
So.
All all reason to believe that that same dynamic would occur this year.
Some of the other things that will impact the operating ratio going from Q3 to Q4.
Fuel was a benefit here in the third quarter because of the positive lag that we had.
If fuel prices stay relatively constant or follow the forward curve. We would expect that fuel is going to be a bit of a sequential headwind to the or it could be it.
It could be a 100 basis points or more based on where the forward curve is right now. So that's that's just a little bit of noise.
Beyond that hopefully, we're able to pick up some some volume as the network starts spinning take some costs out. So those are good things and then I think it's it's a matter of what do we see on the intermodal storage side, because that can be a bit of a swing factor for us as we sit right now.
Hey, Tom on the <unk>.
Trucking environment and other things I think what you have to remember as you know we don't really operate in the spot market. When the truckers are getting 30, 40% rate increases that's not what was occurring on or are on our end and we have a lot of long term agreements with customers that.
They understand and know the good news right now, we're seeing our customers get price and they understand some of the cost pressures, we're facing and so we're having those constructive conversations with them and.
I think.
The spreads maybe versus truck arent as great as they were before but you have fuel surcharge, which is very high right now and we know that flows through the truck rates and so theres still a very very.
Our compelling value proposition for customers the shift from from rail from truck to rail and so we are still leaning into that and Theres a lot of appetite that we've continued to hear of.
Companies wanting to do that and for the environmental reasons as well.
Okay. So it sounds like youre not overly concerned about that kind of maybe falling truckload contract rates are still pretty optimistic on price.
Yes.
Yes that was participating in the 30% 40% rate increases maybe that would be more of a risk but that wasn't the reality of our business model.
Makes sense, okay. Thanks for that perspective.
Your next question is from the line of Brian Austin back with J P. Morgan.
Your line is open.
Hey, good afternoon, thanks for taking the question.
Maybe a quick labor follow up first for Sean looking at taking out that $42 million as you mentioned.
Getting around 33000 per employee.
So it's not a huge step up really from a year over year perspective from what you reported so I think she can help you.
<unk> that a little bit something I'm missing, maybe there isn't some incentive comp or maybe mix with PNM now in the first full quarter.
Any thoughts on that would be helpful. As we take that and run forward with it and then just maybe a quick one on for Jamie as well when you think about the.
The service recovery and Youre performing I think best against some of the STB targets that we see and track.
How long does it you mentioned the pent up demand like are you seeing that come back our shippers still worried about the potential.
Slowdown or a potential shutdown with the union agreements still not completely in hand.
So what do you think about the near term and how long does it really take for you to benefit from some of those service gains. Thank you.
Hey, so on your comp per employee question, Yeah. The math is right.
And it really is just the inflationary impact over and above the settlement so.
I get to right around 2000 bucks per employee for that Oh.
For the $50 million, a little bit more than that.
They're small mixed mixed impact from having more drivers that quality, which is a little bit lower comp per employee than a railroad worker, but that's really the only offset.
You can already see our gains in service with the head count that we've seen rise. So as we continue to qualify our you know.
2030, sometimes some of the weeks coming up here 40 employees a week.
You should continue to see that trend move forward now we've got winter coming so winter always throws a few challenges at us when we look at our our service metrics, but our customers are.
Our feeling better now I can tell you that far from where we need to be.
And we're feeling it out in the field are the discussions that we.
We have Joe and I've spent a lot of time out in the field over the last few weeks and the discussion points.
You know, our our our men and women who are making this happen each and every day, whether it's on the ground or in the towers are on the service side delivering everyone's feeling it we're starting to feel a railroad run better we're starting to feel.
The numbers of <unk>.
Cars moving faster so that's the big highlight that we're excited about and confident that we're going to continue to move forward on these metrics.
And look we.
We don't like to comment on any.
Anything that is out for ratification I think it's important that we allow our our union leaders to our to have those discussions with the employees that are out there and then any other ongoing discussions and negotiations.
We prefer to really not make any comments on that and allow the folks who are working on that to just continue doing what they're doing.
Understood John was there any incentive comp.
Packed in this quarter like there was last quarter.
No.
Okay great.
Thanks for the time I appreciate it.
Your next question is from the line of Chris Wetherbee with Citi. Your line is open.
Hey, Thanks, good afternoon.
I guess.
I think there's been a perception that the.
<unk> level, that's out there is decently above what the service has allowed you guys to carry and I guess as you think about some of the macro crosscurrents out there potential headwinds.
Is that still the case do you think that demand is still maybe meaningfully above what youre able to provide from a service perspective, and I guess as you think out maybe shorter term <unk> in particular should we start to see the weekly carloads begin to ramp up as the service improvement become sort of more <unk>.
And the numbers just trying to get a sense of kind of how you guys are thinking about that and then maybe a second point related is if we do see things get a little bit worse.
How quickly do you think you can respond in terms of heads whether it be your willingness to furlough or just using attrition Jamie that you talked about a pretty heavy attrition number is that something that you guys will be able to use relatively quickly in response to a slowing in demand.
Why don't I.
Touch on the first one and maybe I'll hand, it off to Jamie on the on the second part of that look.
I think youre, well aware, our network more than well over half of our business such as another network out there or another railroad and so it was important for the industry to work together to capture some of these opportunities. We continue to talk about clearly there is market like like housing that are.
We're seeing.
Slower signals, but theres other areas like coal and some.
Some of the UGG products that we're seeing great signs there.
Even if in some markets, where there could be some slowdown I think the magnitude of the slowdown is what would be a question for us because there is demand that we haven't been able to meet.
Quite frankly, a lot of our customers haven't been able to meet.
Because of some of their labor issues the demand that they see out there. So this does not all CSR because its the whole supply chain catching up and work.
One part of that so where demand ultimately settles out I think is somewhat of a question, but we do see from a share perspective, and that's an important thing a lot of opportunity.
To win wallet share with existing customers and we all we see a lot of new customers.
Willing for maybe the first time.
Coming to us and saying well, how does where it will work and how can we provide a service for us and those are the things that we.
We have to lean into as we go in and we have some uncertainty in the market.
I hand, it over Jamie.
Well, then I when I.
Looking at the question you know kind of as I answered. It earlier, we got to stay forward looking can.
Can we pull cost so quick well absolutely we can I mean, our locomotives. When you think about that that's a daily costs you put it down tomorrow and start paying for it tomorrow. I mean these are assets that have been around a long time.
And we haven't bought a new locomotive the many years, even though we have a rebuild program other than depreciation the heaviest cost of a locomotive is which you use everyday on them. So I mean that that is one example of of cost. So we can handle and an.
And our Teeny said, it's important that we continue to build our teeny workforce, where we need it to be and if we get into a position where things get deeper things look differently that attrition as you mentioned, Chris It is a heavy attrition rates and we're able to use that as just a natural way to control our numbers.
And by pausing classes, if we get to that those numbers will take care of themselves but.
We are you know on the <unk> side, and I am going to keep emphasizing that we are it's a very important position like any other in the company, but it takes us four to six months to make a train conductor and if we get softening market and we come out of this we are going to be prepared to handle all the traffic that comes back at us and that's a commitment that we're making in.
We're going to continue to fall through on that so all those other levers there is a lot we can pull in this industry, we want to make sure that we're prepared to come out of any softening if we get to that point.
Okay. That's very helpful. I appreciate it thank you.
Your next question comes from the line of Justin Long with Stephens. Your line is open.
Thanks, Good afternoon.
Sean are there any thoughts that you can share on your expectation for total volumes and call <unk> moving into the fourth quarter and then Joe Congrats on the new role congrats to Jim as well going back to the question on growth versus margin I think its clear you are focused on improving service.
Improving the customer experience do you think that requires additional costs and a need for margins to take a step back in 2023 to set the stage for future growth or do you think theres enough cost opportunity from running a more fluid network.
So that margins can improve next year.
Yeah.
I guess I'll take the coal one.
I think you could expect you know we're hopeful that some volume step up given the network starting to get more fluidity in some of our producers starting to form a little bit better. So at the margin, maybe a little bit of better volume there.
You have you have access to you know the benchmark prices. So those have come down there is still very very healthy, but that would also impact what we would see in the fourth quarter from our export coal our view perspective, so a little bit down probably sequentially there.
Given that you know, we're already a little bit into the quarter and those those numbers are down from third quarter.
Yes. Thanks. So this is Joe again from my perspective.
First of all the very clear our goal is to leverage our strong operating model and our operating ratios.
To give ourselves some more capacity to give that incremental volume opportunity that should be very complementary to our R.
Our margin performance. So we should not have to chase share by integrating our margin.
In fact that would not be wise. It takes a lot of volume to make up for a point of margin.
So to be clear.
We're really focused as you've heard over and over Tonight about the opportunity that should keep this momentum going and leverage our great operating model. The team was put in place here.
Free up that capacity with the manpower to then allow for us to naturally provide more volume to our customers that they're asking for and that's really what our focus is for the growth side.
Got it thank you.
Your next question is from the line of Ari Rosa with Credit Suisse. Your line is open.
Hey, good afternoon, So Joe I wanted to stick on this question of your background and your experience maybe you could talk about what are the learnings.
That you take from dealing with labor unions in the auto industry that you think carryover to railroads.
And then from a customer standpoint.
Maybe you could give a little more color on what you've shared with your new teammates at <unk> about what the customer experiences.
It is like from a customer standpoint, and maybe what was being missed internally or if there was anything that was being kind of misunderstood internally about what that experience is like.
Yeah. Thanks, so on the labor front.
I really applaud Jim over last couple of quarters has spoken very openly about the need and the desire of this industry to have a better relationship with its with its union partners. It's a complex relationship there are 12 different unions and their industry bargaining.
So those those things are a little bit different than the auto industry, but at the core.
I believe that if you can develop relationships and spend the time listening to each other you can get into interest based bargaining, which this team has some success doing here at C. S X to find solutions that are in the best interest on both parties' and can find win win solutions. So we were able to do that it took time maybe decades.
They're in the auto industry, but certainly I was fortunate to be a part of that.
And you won't take us that long here, because we're already we've already experienced what we've experienced lately and I think.
We all recognize if we keep doing the same thing we're going to end up in the same place in a couple of years and I don't think any of us want that to happen. So big opportunity, there and really leaning into that I've already met with some of our key Union leaders and Jamie mentioned, we went out in the field talking to employees, we've been talking to Union leaders here and out in the field and really just wanted to start building that relationship.
So we can form opportunity to work together to find solutions that are in the best interest of our employees. If we put our employees first because of the one in serving our customers every day I believe we can mutually find areas of opportunity to to make progress together.
And so on the customer side.
You know challenging our team, especially.
You know Steve was coming on the technology side and all of US here to think about what would it take to be able to provide the type of service our customers should expect from us.
In 2022 and beyond in terms of not only living up to our commitment around you know the trip plan compliance or having cars ready or those kind of things, but also around visibility around transparency and communication.
Because some of the frustration that we experienced on the other side of this was really around transparency and visibility and theres lots of opportunity for us to get better as an industry and frankly as a company in that regard.
And just really go back to our core principles.
You know why we're here, we're in business to serve customers and and so they pay us two two and they always pay us.
To honor, our commitment and we need to do a better job of honoring that commitment and you heard Jamie talk about that allow you for Kevin referenced it and this team is really committed to delivering to our customers and in a better way.
<unk> was able to show significant improvement really right before the pandemic does put this place we are showing dramatic improvement in those kind of metrics and then of course got little sidewalk, but that's going to happen with COVID-19.
Want to get back to their as Jamie said, that's our base camp, but want to get back to there and then we wanted to we expect ourselves to go further from there. So it's really just keeping the employees and the customers.
At the forefront of everything we do because theyre mutually exclusive and how they work together if our employees are engaged and feeling good about the culture and about about how they're working together, we can deliver we can deliver a better service to our customers, obviously help with less attrition and attracting more people and all that stuff reinforces itself. Thanks.
Okay wonderful thanks for the thoughts.
Your next question comes from the line of Brendan Glinski with Barclays. Your line is open hey.
Good evening to everyone and thanks for the question Jim I don't know if you saw him, but congrats on retirement and if you want to comment on what you found the most successful the last five years and what was left unturned I think we'd all appreciate it and Joe you know.
Welcome to railroading and I guess to your answer on that last question. How do you see the one <unk> culture fitting into that customer relationship and focusing on the right priorities.
Well sure I've, just taken a little nap here that's okay.
The biggest success is what you listen into today in this room.
Five years ago.
There wasn't an executive team that was me.
These guys are all in the new roles all doing phenomenal phenomenal job.
Uh huh.
I said and oftentimes everybody.
Our owners agree. This is the best Railroad team. This is the best management team in the railroad business since it's the.
That puts a big smile on my face, especially today with them.
Getting out of here.
Thanks, Jim.
Thank you for the bottom of my heart, because I, usually am excited about the team we have here and I'm blessed to be able to to work with everyone that you've put together and it is a great team on your question on once U S ex the.
The initiative the culture initiative was rolled out before I got here by the team, which I really.
I appreciate the attention and the focus on that.
At the end of the day, if we're going to make more progress as in rail industry and then.
S X we have to have a better relationship with our with our Union partners and with our workforce out in the field doing the work that creates the value for our customers every day, so really focusing our energy on.
<unk> about being up recognizing we're all part of one team were all valuable, but we should all be appreciated and we should all be respected.
And really getting our team to recognize that if we're here to serve and make and help make our employees in the field more successful.
Ultimately the company and our customers will be more successful and really channeling that energy and that in that way. We have a great operating model. We have a great process, we have great people and if we can get people working better together solving problems, helping us deliver better for our customers I believe and I think our team I know our team believes.
So we can have a better railroad and better performance overall on all aspects of our business.
That's the that's the real impetus around once the Sx is bringing our team together after all we've been through with the transformation of the operating model and Covid and labor negotiations and all of these things to build from where we are and say we're gonna be one team working together to support each other appreciating each other and delivering for our customers and ultimately that will deliver a better <unk>.
Performance financially for our business and.
And for our shareholders.
It really starts internally and we're going to provide better service, we have to really engage with our employees to make that happen.
Thanks for the response.
Your next question comes from the line of Foggy Salmon with BMO. Your line is open.
Thank you congrats.
Congratulations to both Jim and Joe on on a roll on the retirement.
I wanted to ask a question about kind of theme that was going on kind of all night on this call.
I think that there is I believe agreement generally trails Ken.
Can grow share across many markets because of cost and environmental benefits and so on but I think the issue has been and what we hear all of it from shippers is not just the level of service, but the consistency the consistency of service over seasons over cycle.
Im not sure coming out of this pandemic and some of these labor issues, we have experienced over the last year weather.
Approach that kind of a different framework for the operation and that kind of capacity going forward is there.
Kind of framework, where.
You look at search capacity maybe.
A differently than you have in the past or is that a.
An opportunity may be on labor agreement due to change how.
Availability of crews is managed through through those kind of time to kind of remove some of that volatility that we're seeing service, which I think is.
Probably a big hindrance to the growth in the.
<unk>.
Well I'll take this one on body and I I believe.
Where we're coming out of this stronger than we than we ever have and we're coming out of this learning lessons. Okay. If if we haven't learned lessons along the way as an industry. It's not just C. S. X then we haven't been watching or listening to our customers and seeing what's going on out there. So yes as there are opportunities with their <unk>.
Union agreements are absolutely is let's let's get past the ratification now before we get any comments, but as Joe mentioned the relationships between our unions and as we continue to do things differently and improve those relationships is going to open up opportunity for us to retain employees like we haven't been able to before and provide.
<unk>, possibly a schedule and Jim has talked about this a number of times provide a better schedule for our employees. So.
So when they come to work they come to work with a smile on their face they come to work rested they come to work.
That facing.
You know that.
The face that that delivers cars to our customers to the docs and they have a positive attitude and they're wanting to grow this company and believe me our employees want us to grow there is no question about it they want us to give them the tools to grow and they want us to give them the opportunity to do that so.
You know that.
That's a big opportunities move we move forward.
We are staffing up we're staffing up to make sure that we can handle the demand that Kevin and his team brings forward to the operating team Ken.
Kevin and I talk every single day.
Weekly we go through numbers together our teams are very close we know where the opportunities are that are out there a number of great announcements that have been made through Kevin and his team through some big wins on customers, who are opening up facilities on us so going forward over the next couple of years those are great opportunities and we want to make sure we're staffed up for that.
We've got locomotives in storage I've said that a number of times and I think when I took Joe into a way cross and he saw the number of locomotives, we hadn't storage out there it's a surprise.
Like to call it the field of Dreams, and one day, maybe we will have all those locomotives pulling pulling freight and pulling tonnage out there and if we get to that point, we know that we've really grown this company beyond where we think we can so we are a we are continuing to prep ourselves to move.
I think I answered the question on what happens if there's a bit of a downturn in business. We're gonna stay forward looking and we're going to try to drive this opportunity like it's never been done before and if there is a softening we're going to make sure that we are fully prepared no matter no matter how it comes to provide that service to the customers like they've never.
<unk> seen before and that's our goal and you're right. That's the theme you've heard Tonight and I'm happy that you said that that is the theme you've heard because I believe all my colleagues and everyone around the table here, we all believe the same thing.
Thank you.
Your next question comes from the line of Ravi Shanker with Morgan Stanley . Your line is open.
Thank you good evening everyone.
Probably the last one hoping you'd have to do is still wearing two hats.
But can you just help share with us what do you think.
Future of auto as an end market and so the railroads I E.
Nearshoring production base is when do you think that the.
The chip shortage, eases et cetera, et cetera, and kind of how that industry kind of ramps up in the near term and long term and as a follow up any commentary on.
I think today that the rail is rejected BMW.
Kind of.
And the labor contract and then make some Canadian this increases the likelihood of a strike.
How does that eventually end up thank you.
Okay. Thanks, I'll take the second one first and then I'll talk about the autos as Jamie mentioned, we're going to let the process play itself out we have a lot of respect for our union leaders and we've reached tentative agreements and they are in the ratification process.
Union Pacific talked a little bit about some of the issues with B M. W. E. D. This morning.
And I think the opportunity here is for us to really just worked together to let the process play out going to respect that process on the union labor side on the auto side I mean, there's a lot of things going on I mean, there's been a number of significant investments announcements in the especially the south east.
Many of which have been we've been the beneficiary of having a relationship with or having the rail access to whereas whether it's on EV batteries or whether it's on new manufacturing assembly plants. So I think youll continue to see.
With the government's help incur.
Increased production for things that support electrification, the automotive industry, and we were well positioned to take advantage of that frankly with how these are playing out.
I'm not going to comment on the chip shortage, but you are hearing from the autos that you know production is picking up we're seeing more opportunity to deliver more vehicles. So that's a good thing for us in the near term.
And we're watching what's happening on the demand side, but certainly we're seeing increased opportunity to deliver more vehicles for our automotive customers.
Here at <unk>.
And longer term of course, there is significant investment going in electrification.
And we're seeing again that opportunity to be a part of that as <unk> has been a successful part of number of these announcements. So that will continue and we're excited to be a part of it.
Thank you.
Your final question comes from the line of David Vernon with Bernstein. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question Jim Congratulations and good luck hopefully we can stay at us down the road.
Wanted to come back to you Jamie on the head count the guidance says we're going to continue to increase transportation head count to restore service can you frame what your expectations are for how large you need to get the head count to get the service levels, where you want it to be and as you think about adding those resources into next year should.
We be expecting the training rooms to be as full in terms of the productivity drag that we're we're going to be trying to model out here.
Well, thank you for that one.
Would say you know our target as we said at the end of this year 7000 active <unk>.
<unk>.
We're pushing up to 72.
As we move forward.
And we're doing a locomotive engineer training, we don't want to get ourselves caught behind on that were still good for number of years, but we wanted to take advantage of that and the trickiest part of.
<unk> head count on a railroad is getting the head count in our rent spot and as market conditions change and as things move around out in the field. We're very fortunate that right now we have over 60 employees, who have taken temporary transfers to areas where were short right now and we're hiring.
And we're taking advantage of some of those areas, where we do have excess employees. So.
I'm quite happy with the with where our numbers are heading and.
<unk>.
What.
Let's see what that number looks like as we continue to move forward and see where are our attrition rate continues to take us through but yes, absolutely heading into next year, we will see our class sizes most likely.
<unk> declined to more normalized.
Tricia right, we're going to make sure that we keep up with attrition, we don't want to fall behind on that and we mentioned that that's an 8% to 10% depending on which area of the network as we continue to right size and right size in the right places. So yes, you will see our class sizes start to drop when we start hitting those numbers and we feel quite confident.
That's a that we're heading in the right direction with those numbers.
I wish I had the head count.
Today that we needed, but it'll take a little bit of time, and we will get there, but you will see you will see those class sizes dropped two normalized class sizes as we move forward.
I appreciate it.
And if I could just squeeze one little one in there at the end here.
As you think about the attrition rates on our recent graduates.
Have you seen any sort of noticed any differences.
As a result of some of the changes that are coming in the contract are you seeing like maybe some of the labor stick around a little bit longer than maybe we saw earlier in the pandemic when you're trying to ramp up.
Yes.
Really seeing a change lately and I would not necessarily put that to the contract at this point in time since it's still up for ratification I think that is a hard work that our labor group has done and the great relationships that we're continuing to build with our union groups on on changing pay scales the pace.
Scale, where we went from <unk>.
Step scale of 80% Oh, it takes over five years before you get to 100% as soon as we started offering to our new hires that they would make the same money is the the person sitting next to them in the cab, we definitely saw a change in our retention rate in a positive way. So we are we are.
We're doing things differently and I think as we continue to make some of those changes and build those relationships, that's only going to get better as we move forward.
I appreciate you letting me squeeze that in there. Thanks again.
I would now like to turn the call back over to Mr. Matthew Korn.
Thank you operator, and thank you everyone for your interest in <unk>, we look forward to speaking with you again on our next quarter. Thank you.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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Okay.
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