Q4 2022 CSX Corp Earnings Call

Ladies and gentlemen, thank you for standing by my name is Lisa and I'll be your conference operator today.

At this time I would like to welcome everyone to the C. S X Corporation fourth 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. During this time simply press star followed by the number one on your telephone keypad if.

If you would like to withdraw your question. Please press star one again.

Before beginning the company would like to remind you that these forward looking disclosures have been provided on slide two and non-GAAP disclosures are on slide three.

I would now like to turn the call over to see Xx, President and CEO John Hinrichs, you may begin your call.

Hello, everyone and thank you for joining our conference call I'm here with Kevin Boone, Jamey Boy, Chuck and Sean Turkey, and we are excited to update you on our quarterly results and share our initial views on the upcoming year.

First wanted to thank all our employees for their dedication as they work diligently on behalf of our customers through all the challenges and uncertainties that we face in 2022 because of their efforts. Our network has continued to run safely and our branch opened up the performance has been very strong.

We have accomplished a lot over the last four months since I joined the company. This in between my visits to our railroad is out in the field visits to our customers our investors and our many partners and the government, we finalize agreements with our labor unions.

We reached a positive solution for the Gulf Coast with our colleagues at Amtrak and we started to make updates to the nuts and bolts policies on tenants that make a big difference for our employees quality of life.

I'm, particularly proud to report that our service metrics continued to show real improvement into the fourth quarter. After starting a clear upward trend in the early fall and we are very pleased this progress has continued throughout this month.

As we anticipated our hiring successes have allowed us to deliver better customer service that will allow us to capture more business with more volume over time.

Going forward, we are focused on building on our momentum leveraging our industry, leading operating model and growing this railroad.

As we go through the details and the answer to your questions. I believe that you will get a great sense of energy and optimism that we all share across the organization about the opportunities ahead for <unk>.

Now, let's turn to our presentation to review the highlights for the fourth quarter and the full year.

Yes X generated over $3 $7 billion in revenue up 9% in the previous year on $1 5 million carloads in the quarter revenues benefited from higher fuel.

Higher fuel surcharges strong core pricing and higher storage and other revenue.

Operating income increased 7% year over year to $1.46 billion and our operating ratio was 69%.

As we've reminded you before our quality carriers trucking business as roughly 250 basis points to our O. Our earnings per share increased 17% and 49 cents.

Quickly looking at the full year 2022, our revenues of nearly $15 billion were up almost 20% compared to 2021.

Full year operating income up $6 billion increased 8%.

Excluding the gains from the 2021 real estate transaction with the Commonwealth of Virginia, Our operating income grew in line with our guidance for double digit growth.

Operating ratio was 59, 5% for 2022.

Finally earnings per share increased 16% in 2022 to $1 95.

Now, let me turn it over to Kevin Jamie and Sean for details.

Thank you Joe turning to slide seven merchandize.

Revenue increased 7% in the quarter as a 9% increase in revenue per unit more than offset a 2% decline in volume.

For the full year merchandise revenue increased 9% on 1% lower volume.

2022 merchandise growth was driven by higher fuel surcharge combined with an increasing pricing environment as inflation accelerated through the year.

Looking forward to 2023, we.

We have significant network momentum as we began the year and.

And we expect to leverage industry, leading service and to growth opportunities with our customers.

This is reflected in our recent customer surveys, where we have seen a significant improvement in overall customer satisfaction scores.

We see opportunity for solid volume growth in merchandise for the year led by continued strength in automotive.

Our growing export plastics business and share gains as customers respond to our improving service.

This growth is likely to be partially offset by weaker housing related and domestic chemical shipments as we start the year.

On slide eight you can see fourth quarter coal revenue increased 20% on 9% higher volume and a 9% increase in revenue per unit.

Full year revenue increased 36% on 1% lower volume and a 38% increase in revenue per unit.

In 2023, we expect export coal volumes to grow in both met and thermal markets.

So we do expect benchmark indexes the decline from the elevated averages of 2022.

We're optimistic about the potential positive demand in fact, China's reopening.

While on the supply side, we have a new 4 million ton met coal mine coming online this year.

We also anticipate volume opportunity as we lapped 2022 issues.

Including reduced production at <unk> served mines and capacity limitations at the Curtis Bay and mobile export terminals.

We expect domestic volumes below.

To be driven by low thermal stockpiles that remained below historical averages.

Healthy inventory levels will allow utilities to better respond to natural gas volatility and more readily dispatch capacity reduce stress on the U S power grid.

U S steel production, which drives domestic coal consumption.

The benefit from a recovery in the automotive industry as well as higher infrastructure demand.

Now turning to slide nine.

Fourth quarter intermodal revenue increased 4% as a 9% increase in revenue per unit more than offset a 5% decline in volumes.

For the full year revenue increased 13% on flat volumes due to a 14% increase in revenue per unit.

International intermodal markets continued to be negatively impacted by slowing activity.

It looks likely to continue into the first half of 2023.

Imports have declined and warehouses have seen elevated input inventory levels.

Help counter this we are pursuing several initiatives to bring new solutions to our customers to help them reach new and existing markets.

With our domestic intermodal business, we see opportunities even as the trucking market has softened.

The team is focused on accelerating truck to rail conversions and now with equipment constraints largely behind us.

Team has more opportunity to pursue these initiatives.

We are seeing existing customers and those that are new to intermodal adopt strategies to drive more of their transportation spend derail.

The team is doing a great job of identifying these opportunities and building the relationships to drive this growth.

Finally, moving to slide 10.

Let's discuss the essex's role in reducing our customers' emissions.

As we pursue truck to rail conversions across the markets. We serve we are actively promoting rails environmental advantages to our customers were increasingly looking for ways to reduce their own ambitions.

These are board level initiatives for our customers and the opportunity to choose rail over trucks provides real.

Measurable savings across their entire supply chain.

In 2022.

The S X customers avoided emitting 10 million tons of carbon dioxide.

Using the ship with <unk> versus truck.

To continue providing an emissions advantages for our customers.

Need to keep innovating.

Not only piloting new technologies that should provide fuel savings like zero to zero, but we are exploring emerging technologies that can be implemented in the future.

Keeps the S X at the forefront of delivering best in class efficiencies.

Providing visibility to our customers is also a priority.

I'm excited about the additional insights we will provide them to customers to help them identify and convert incremental freight derailed by utilizing our updated carbon calculator platform that will launch in the first quarter.

Lastly, we are proud of the recognition PSX hasnt received for our sustainability efforts.

With several of our awards listed on this slide.

It is a priority for us to remain an industry leader in environmental stewardship.

And we look forward to sharing more details on the several projects we have underway throughout the year.

Now, let me turn it over to Jamie to discuss operations.

Thank you, Kevin and good afternoon, everyone safe.

Safety remains our top priority at C. S X has been the foundation for our service restoration.

As shown on this slide our personal injury frequency index was flat from the third quarter and unchanged for the full year.

Or a train accident rate increased from the third quarter, but improved versus the prior year.

Most importantly for the second year in a row, we ended the year without a life changing event.

These results were delivered.

With Onboarding over 2000, new conductors during the year.

And underscores the safety culture that runs deep within our one C S X workforce.

New hires learned the importance of operating safely in the classroom.

But the most impactful lessons of current day in and day out on locomotives and in terminals and working with more experienced employees.

Daily interactions are reflected in our recent safety performance and emphasize the commitment to our operating safely at C. S X.

I would like to recognize the over 6200 employees within C. S X is engineering Department, which set a record for the lowest number of train accidents in the department history.

This is a true accomplishment given the nature of their balanced level work.

In the year ahead, we will continue to instill the safety culture within our new hires maintain that culture, among our experienced employees and focus on the training and discipline, we need to reduce human factor incidents.

Moving to the next slide you can see the success that our entire team has had in driving meaningful service improvement with a clear trend emerging around the middle of the third quarter, our staffing levels at many of our locations reached a key thresholds.

Even with the temporary hit from the weather towards the end of the year average velocity was up 11% sequentially in the fourth quarter.

It was down 13% and trip plan compliance improved by several percentage points for both intermodal and carload.

This progress has not stopped as we cross into 2023 with our service metrics continuing to trend towards pre pandemic high water levels of late 2019 and early 2020.

Our team is focused on improving network fluidity and delivering the consistent reliable service that will encourage our customers to shift business onto our network and the data shows that we are well on our way.

Now turning to hiring.

Our robust training pipeline and over 350 conductor promotions over the fourth quarter allowed the team to achieve our long stated goal of 7000 active teeny employees.

Getting our resources to this level has driven the service momentum Joe discussed a few minutes ago.

We will continue to support improved service into 2023.

Going forward, we expect to stabilize active teeny headcount with targeted hiring continuing for key locations and to offset attrition.

I'll turn it over to Sean to discuss the financials.

Thank you Jamie and good afternoon.

Fourth quarter financial results revenue increased 9% and operating income increased 7% to $1 $5 billion as topline gains outpaced several expense headwinds that I will discuss in more detail on the next slide.

Interest and other expense was $6 million favorable compared to the prior year and income tax expense increased by $15 million the effective tax rate in the quarter was 21, 9% as a result of favorable adjustments to deferred state taxes.

Our expected tax rate going forward continues to be 24, 5%.

Fourth quarter net earnings increased 9% to $1 billion, while EPS grew 17%.

Full year 2022 results were highlighted by top line growth of 19%.

Operating income was up 8%, which includes a four point impact from the Virginia real estate transaction, resulting in 12% growth when adjusting for these games.

Let's now turn to the next slide and take a closer look at fourth quarter expense.

Total fourth quarter expense increased $210 million compared to the prior year.

Driven primarily by higher fuel costs and inflation.

<unk> expense was the most significant driver of $129 million due to higher prices.

Labor and fringe expense increased $23 million as the impacts of additional head count and wage inflation, partially offset by lower incentive compensation.

<unk> increased $54 million.

Primarily due to higher operating support and terminal costs, which will remain somewhat elevated near term as operations continue to improve.

He has a no inflation is also running around 5% in the quarter included about $10 million of expense from obsolete inventory and technology write offs.

Depreciation increased by $33 million in the quarter, which.

Which includes an ongoing quarterly impact of about $20 million related to the completion of a periodic equipment study.

As a result of this study and a higher net asset base.

Full year depreciation expense will be up approximately $100 million in 2023.

Equipment in rents was relatively flat versus the prior year.

And gains on property dispositions increased $31 million.

While we are always looking for opportunities to leverage excess real estate and will likely have a few small gains we arent expecting any significant sales activity in 2023 at this point.

Overall congestion related expenses were slightly above $30 million in the fourth quarter and part of that cost was incurred during winter storms at the end of the period.

Despite elevated inflation and increased head count we expect to deliver strong cost efficiency throughout 2023 is better fluidity reduces terminal costs overtime pay and other expenses.

Now turning to cash flow on slide 18.

Full year free cash flow of $3 $7 billion decreased $100 million, but was approximately 100 million above prior year results adjusting for the Virginia transaction.

Operating cash flow increased over 500 million on higher earnings more than offsetting approximately $350 million of additional capital spend from our continued focus on both investing for the long term reliability of our network as well as identifying and executing high return strategic projects.

After fully funding capital needs, we returned nearly $5 $6 billion to shareholders in 2022 <unk>.

Including over $4 7 billion of share repurchases and $850 million in dividends.

We exited the year with a strong balance sheet and liquidity position.

Adding $2 $1 billion of cash and short term investments.

Looking forward, we remain committed to a balanced and opportunistic approach to returning excess cash to shareholders.

With that let me turn it back to Joe for his closing remarks.

Thank you Sean.

Before we discuss our outlook I want to briefly touch on a couple of key ideas that we think about the <unk> concept and how it fits together with the fundamentals of scheduled railroading.

Core of this company.

This past year has seen a lot of commentary from many different parties about what scale railroading is and how it's supposed to work.

It really is quite simple operating philosophy based on the five principles that you see across the top of slide 20.

The key.

Adjusted it is with the railroad network is to keep everything in balance optimize your assets and ensure mutual respect for your employees be disciplined in cost control and maintain your commit to good service if he can't service your customers well and reliably all the cost control and the world won't deliver a healthy growing business.

<unk> has been tremendously successful over the last several years as the company has undergone its transformation in my view, we've done, particularly well across the first three of these scale railroading principles.

The opportunity for US now is to focus on getting to an even better balance of those last two we will redouble our efforts in serving our customers and ensuring that our employees. The people who are delivering that service to our customers feel valued and appreciated and included.

To address this and bring out the best this operating model can deliver we are building a one <unk> culture that prioritizes, our relationships and leverages our common goals.

Whether you're an employee or customer or a shareholder you want a strong and thriving C. S X a healthy culture leverages that alignment to do better together.

Under each heading Youll see a couple of the ways. We have brought these principles to life over the last year at the bottom we give examples of what we aim to do as an example, our customer service. We've added the TNT resources. We have added we have needed to increase capacity and we have built resilient momentum as our services measures have improved.

Now looking forward. It is critical that we ensure that our service metrics reflect our customer experience and that we are measuring and evaluating ourselves in the right way.

We also know that we have to improve the way that we interface with our customers and make it easier to do business with us if we're going to win market share from trucks.

Every week we.

We get together as a leadership team we're.

We are challenging ourselves to find new ways to address these issues and taking advantage of the great energy that we're creating here at <unk>.

We have tremendous talent here and with these principles at our roadmap roadmap, we have a clear collective goal.

Now, let's conclude with a review of our outlook when we three as shown on slide 21 first at our service levels keep improving we expect to achieve overall volume growth for the year, which will outpace real GDP growth driven largely by strong contribution from merchandise and coal as Kevin discussed.

That said, we do believe the interim national intermodal volume is likely to be soft, particularly over the first half of the year as imports have slowed in retailer inventory levels have recovered.

Next the pricing environment means available for us our customers have experienced substantial inflation and understand that we face our own cost pressures, including the effects of the recent labor agreements.

This transparency has helped us as we renew our pricing agreements.

Which will support our top line performance that said there are a couple of important things to note for 2023 first we do expect revenues mineral modal storage to decline through the year as supply change conditions improve we currently believe it is reasonable to expect we will see a reduction of approximately $300 million.

Intermodal storage revenue compared to last year, which would imply a quarterly average close to levels seen in early 2021.

Second international met coal benchmark have recovered from the lows of last fall, but remain volatile.

The quality of Australia met coal average roughly $355 in 2022.

And so it's a brief $15 today is likely at the average this year will be lower year over year, which will impact our coal our view and our total revenue.

Now regarding profitability, we will face cost measures in 2023, but we know that we can get better operationally.

It is possible and where it makes sense, we will make every effort to realize efficiency gains and reduced some of the extra cost that we had been carrying and managed through the congestion and resource constraints of that post pandemic period in.

In the end our margin performance will largely dependent on our success in driving more volume through our network and realizing potential operating leverage.

Finally, we estimate that our capital expenditures will increase to approximately $2 3 billion.

Driven by a full year of studying for Pan am additional equivalent per quality carriers truck to rail conversion opportunities.

<unk> in strategic high return growth projects and the effects of inflation.

Before we close I want to emphasize what an exciting time. It is for all of us to be a part of the <unk> team.

We have a common goal to profitably grow this railroad and you are seeing the real progress we are making toward that goal, we put people and resources in place.

I am personally very optimistic about the opportunities ahead and explore the updating you on the achievements throughout the year.

Thank you and with that we'll now take your questions.

Thank you Ken if he would like to ask a question on the phone line stay that is star one on your telephone keypad.

The company has ask participants to limit themselves to one question with that our first question comes from the line of Amit Malhotra with Deutsche Bank.

Thanks, Operator, hi, everyone.

I wanted to ask about yields.

Kind of on a consolidated basis for this year, obviously, the supplemental revenue and fuel will be somewhat of a headwind.

I guess standing here today would it be fair to say kind of few youll be flattish on a net basis.

And Sean I guess, if revenue is kind of flat can you just remind us of kind of the costs that are in the system that you think can be reversed to maybe offset some of the cost inflation. Thank you.

Hey, Matt This is Sean yeah, so and in terms of the yields I.

I think Joe sort of laid out our expectation on the coal side, perhaps a little bit lower just looked at looking at the comparison versus some other record levels last year.

Fuel potentially a little bit of a headwind.

On a on a yield basis as well.

A little bit of positive mix at least in the first half year with the pressures on intermodal specifically relative to the growth that we expect and in merchandising coal. So that's that's the yield story and then in terms of the costs I think there's a number of different categories, certainly with the intermodal terminals because.

More fluid as some of that traffic moves its way out of the system and start spending again, we should see some costs come down in the terminals are in very good shape right now we should see reduction in freight car rents as our cycle times improve and they have already.

Things like overtime and ancillary costs related to the crews getting hung up last year with delays in service and then locomotive maintenance as we're able to spend the assets faster here. So is there a few categories, where I would say we ought to expect some improvement this year.

We're going to have inflation headwinds right.

Probably in the 4% to 5% range and our goal is going to be to offset as much of that as we can both through taking out some of those extra costs that we carried last year as well as continuing to find efficiency gains across the business.

Okay. Thank you very much.

We will take our next question from Justin long with Stephens.

Thanks, Good afternoon.

There are a lot of moving pieces this year and the outlook. So I was just curious if you could give us any directional color on the year over year change Youre anticipating for both revenue and operating income and maybe you could comment on what that trend line.

Look like throughout the year, if things are going to get better or worse, we'd just love some additional thoughts.

Okay.

Yeah, Justin we're not going to get specific in terms of the guidance itself when.

When you look at first half second half.

The volume comps on coal or a little bit tougher in the second half than in the first half.

In terms of intermodal, Kevin talked a little bit about some of the headwinds we're seeing on the international side here in the first half of the year.

Those are really sort of the big drivers on the volume side.

And then in terms of other revenue that coming down about $300 million for the year, obviously second half of 2022 was.

It was higher than first half of 2022, so we'll be we'll be facing sort of a bigger headwind there.

And in terms of overall operating income you know I think we've laid out some of the factors right I think we feel great about our ability to recapture some of the share that we missed in 2022, given where the service product is given that we've got the head count that we need.

And we've got the assets that we need which is why we're going to grow above GDP, we're going to see gains in merchandise and in coal. We've got a strong price environment. We've got the cost opportunities that I've talked about and on the flip side of that we have a few headwinds between the supplemental revenue the other revenue piece higher depreciation and probably lower real estate gains.

So those are the those are the factors, but that being said I think the fact that we are expecting growth and as we add that growth to the system, we're going to add it at strong incremental margins.

Okay got it thanks.

We will take our next question from Brandon <unk> from Barclays.

Yes.

Hey, guys. Thanks for taking the question. So I guess, maybe piggybacking off that answer there.

Joe and I know, you've only been there a couple of quarters now, but we've heard for a year plus that a real limitation here was head count.

Resources more importantly service levels that you're delivering I mean, we're seeing that come through the data I think pretty strongly in the fourth quarter and as we start out here in January . So can you talk to how you're going to convert that and Kevin and Jamie maybe how closely are your teams working together to ensure.

Or that you are growing in the right places because I think in the past we've seen growth that can come in the wrong places and we indeed more op challenges for the other carriers.

Yes, Thanks, Brian I think as Joe.

First off thanks for recognizing the pretty.

Pretty significant service improvements in operating performance that we're seeing.

Turning into January .

Our team works great together, so for what it's worth and clearly Jamie and Kevin there. After the next to each other and they're talking all day long I'll, let I'll, let them talk more about that but you you.

You referenced the fact that there's been some conversation for quite some time that our challenges were manpower levels and then how that affected the fluidity of the network. We're seeing as you just referenced the performance. It comes from gains of manpower levers manpower levels, where we want them to be and you're running this network the way it would run prior to the pandemic.

Which is a very strong operating team.

So the conversion opportunity is to demonstrate.

Repeat ability and predictability around our performance and to show our customers that we now only have it we have the capacity in place and we have the performance to demonstrate that you should come back to us and I'm feeling optimistic about that in the conversations we're having with customers there.

They're recognizing the improvements that we've shown for the last several months.

And they're also confident in our ability to continue that especially now that we have the manpower levels, we want them to be so.

Brandon you did mention obviously the remarkable of improvement in our in our service that we've seen and it's a real change in.

There's a lot of excitement around this organization about it and what we can do going forward.

Joe has brought both Jamie and ice teams together to talk about some of the key markets and Theres been a lot of interesting ideas that will come out of that where we can really leverage what we can do service was and what we can do creatively to create those opportunities for us and those those things are the fun part of what we do every day and.

We're doing a lot less of that and a.

A lot less of customer service and a lot more of coming up with new ideas and having those discussions with our customers about growing I'll.

I'll tell you you know I've had a chance to meet with a lot of customers over the last month or two and every time, probably 90% of those conversations we walk out with a lot more opportunities to pursue.

Sometimes it means that we have to think differently, we have to introduce customers to what the intermodal product is or what we're capable of and what we're capable of today is a much different obviously than what we were capable of a year ago and so.

The team is getting together the whole sales and marketing organization, Jamie is going to spend time with them that was going to spend time with them next week and it's off to the races. So it's up to us.

And those opportunities and really pursue them, but I'll hand, it over to Jamie to talk about the upside.

I think really the only thing I can add to that.

Is there is a lot of capacity out there so what Kevin and I talk about is where is that capacity what can we do with that capacity and how do we get out there and sell it.

My team is oh out in the field, ensuring that they are talking with customers more than they ever have because they have time to do that.

Obviously, we are trying to find a crude to run the train here or there wherever else now they have the time to sit back and deal with any of those customer demands that might be out there that helps Kevin and his team grow.

Some of those discussions we have or what does the customer really looking for is it the right metrics that we're looking at that the customers are looking for in that first mile last mile <unk>.

Prudent that the team has made all that put together is really record breaking for us if I look back at the last six years, we haven't <unk>.

Twenty-two unfortunately, it wasn't the best year for us, but exiting 'twenty two with their customer service and in 'twenty. Three are some of the world record numbers, we just havent seen so our job is to keep producing those numbers and making sure Kevin and the team.

Has what they need to get out there and sell and commit to the customers that that what you see out there is what youre going to continue to see so some great collaboration between our two groups.

Thank you.

We will take our next question from Chris Wetherbee with Citigroup.

Hey, Thanks, good afternoon.

Yes, so I guess, you're thinking about the outlook and the optimism around growing merchandise in coal and good incremental margins of that coming on sort of comparative year contrasted against some of these what are perceived to be very high margin revenue headwinds that you have whether it be the accessorial is coming down $300 million of the coal export coal yield.

It's coming down.

When you think about those two relative to each other and the potential for cost out I guess any help in terms of how to think about operating ratio of the outcome of that whether it be maybe first half versus second half or across the full year would be helpful. I think that perception of high margin on those headwind pieces is something that we're struggling with.

<unk>.

Yes, Chris so so on the asset obviously, the coal yields there's no costs associated with that on the <unk> there are costs associated with.

Congestion in the terminals as well as meeting to rent out space that container yards.

To move those containers around so that's part of the call it $150 million or so of additional costs that we carried over the course of this year.

So some of that will adjust down and then as we grow the business you know our confidence is and the fact that we can grow it at very strong incrementals and so you put those together and I think I think the question around what happens to the or really depends on how much growth can we convert.

We talked last year about the fact that.

There was demand out there that we weren't able to meet because we didn't have the crews that we need it in the right places we've got those crews now.

So theres a real opportunity in front of us.

Okay. Thank you.

We'll take our next question from Scott Group with Wolfe Research.

Hey, Thanks afternoon, so maybe I'll try it this way how much volume growth.

You think you need to be able to grow earnings this year and then.

It sounds like Theres going to be some more pressure. This year, you've got some headwinds I think that's understood I guess, Joe I guess, one what's your commitment to longer term or improvement beyond 2023, just thinking out the next.

Several years.

Yeah, Scott on your on your question about how much growth.

I don't think we're in a position to answer that one right now I'll, let you kind of run it through the model, but I think we've given you enough, though that factors and I think the fact that we sort of pointed to.

Colon merchandize, there's areas, where we think we can sort of meaningfully outperform whatever the economic indicators that are out there as a reflection of the fact that we feel good about where we are from a capacity and service standpoint, and the ability to sell into that market.

But we're not going to give you a specific number there.

This is Joe on the on the or question.

I think theres a couple of points here I'm very confident that our.

He will continue to deliver.

On the denominator side operating improvements and continued to show strong operating results.

On the numerator side of the equation, you're right in the sense of there have been.

There were some things that were you know strong tailwind last year the fuel surcharge.

Intermodal storage coal pricing et cetera.

We'll see how much of that repeats in 'twenty 2023.

But that certainly helped the numerator side of or last year, and maybe some of those things won't be quite as strong.

In 2023.

But having said that.

On the numerous side the volume growth opportunity that we can now go after with the confidence that we have in our operating model and our performance and knowing that.

For our customers, who are feeling cost pressures at fueling inflation pressures and potentially even feeling.

Effects of a slowing economy are going to be looking for cost reduction opportunities and so we feel very very strongly that this year and beyond continuing to demonstrate the capacity that we have in our performance there the growth opportunity will be there for us.

As we earn the right to do that and get that business and our customers will be wanting to do more business.

In addition of course, we have the environmental advantage with ESG submissions when it comes to rail. So all that being said is we're not going to put a target out there for or we're very proud of our performance last.

Last year with quality carriers, we still had a you know.

And operating ratio for the year under 60.

And so we know what is slight and that was not at our optimal performance level as well all with MIT. So we believe there is a strong performance inside of this company that will continue to be delivered.

The uncertainty is around some of those revenue pieces in this year and beyond.

So our challenge is to deliver real growth in the business, which does deliver strong incremental margins and continue to control our costs utilize our assets well.

And so that should lead to very strong performers.

Within an operating band of or that you know that will be comfortable with at the end of the day.

You know this company is very focused on delivering margins.

Delivering growth with profitable growth with margin improvement, which should lead over time to a good or.

Okay. Thank you guys appreciate it.

Our next question comes from Jon Chapell with Evercore ISI.

Thank you good afternoon.

Kevin as we watch these service metrics improve significantly since really the middle part of last year intermodal trip plan performance consistently.

Around 90, an industry best standards, it's a little confusing.

Even given the headwinds maybe your intermodal volumes are running later on the year over year basis.

Most of the other class ones.

Help us explain any disconnect between those improving metrics.

And some of those intermodal shortfalls that may be unique to you and maybe that also ties into that into explaining a bit more of that some of those strategic opportunities that you noted in your prepared remarks.

Yes, I think when you look at it.

And look our three years or three weeks doesn't make a year and so we've got a lot of work to do as a team but I.

I think youll see over the last two years and through the pandemic that we really outperformed the industry and a lot of that growth that we mentioned before came on the international side and.

And we don't pay.

I've spent a lot of time thinking about the other class one railroads, but I do believe we probably have a little bit higher percentage of our businesses.

Obviously.

Exposed to that international market, where we've had great great success, and we see a long term outlook, that's very positive for us. So I think that's probably contributing to some of the things we're seeing here recently.

But we've we've obviously had great performance and continue to think we'll win share in the market. The team's got a number of initiatives.

That will.

Take form later on in the year that will drive incremental business to the railroad. So excited of what we can do in the quarters ahead.

Thanks, Kevin.

We will take our next question from Tom <unk> with UBS.

Yeah, great good afternoon.

Just had a clarification for you first.

For the question.

Don't know if I caught what did your GDP assumption is or which forecasts you're referring to just in terms of how we anchor to the volume comment.

And then Joe I wanted to see if you could offer some more thoughts about your comments on relationships and I think tying into labor. How do you think about how you want that relationship to change.

That cost us something to do that.

And you know what's what's the benefit.

But over time is it just you know pay attrition is running 15% year, we wanted to get down to five and that saves us should help service just some broader thoughts on when you talk about relationships and labor you know what what do you mean by that and how you think about what that does over time.

Tom on your GDP question, roughly half a percent growth as is the GDP number that we're looking at and so our guidance is to grow in total above that with intermodal headwinds and solid growth across the other markets.

Yes, Tom this is Joe.

Thanks for the question regarding labor, so lots of thoughts here, but I'll try to be concise.

First just a reminder to everybody that this is a service business.

And we provide a service to our customers we move their goods pointing to point B and we're proud of the way, we do that but remember that in the service industry and service business is all about the employees.

You're not selling a product youre not <unk>.

Developing a product you are you really relying on your employees to represent your company in the service of your customers.

I start there because that is so critically important to understand why it's so critical to have a really strong relationship with your employees, including those represented by unions.

Because they are the individual's doing the work providing the moving goods from eight point data point being in serving our customers.

And so the motive here isn't to try and you know.

Leverage relationships to try and decrease costs or.

Or find a dollar here and there it's all about.

Building, a culture, where our employees feel valued and appreciated included in the service of our customers in a way that we can demonstrate.

The <unk> is unique and different from or from the other options they have.

<unk> provides a value proposition to our customers that we think can be very very special and so there's a lot of you know when I've been spending a lot of time out in the field, Jamie and I travel almost every week.

As I've learned a lot about this industry. This business there is a lot of variability and a lot of.

Independence when it comes to the work is done out in the field because.

This is not a factory some relying where your station in a in a certain position and you've got a cycle time to meet and if you don't make it all the bells and whistles go off.

You know it.

When you have your employees motivated and engaged and feeling valued.

Their efforts to support what your initiatives are a greatly enhanced and that's just human nature and that's really what's important about this relationship is at listening to our employees resolving their issues.

Working on things that improve their efficiency in their work life.

Balance in their work life experience and safety and other things leads to a better service product for our customers, which ultimately leads to a better business for everyone, including our employees on the labor side is really about building relationships and Engendering trust and getting to the point, where you can have real dialogue around solutions and around idle.

Is it around.

Understanding each other's desires and perspectives. So that we can find the best solutions I've found in my past experiences that when you get to that point.

You have a healthier business and you have happy.

Happier safer employees, who are working better together to serve the customers. That's really the desire here is to provide that kind of opportunity for our employees now what comes with that lower attrition and better.

Recommendations for referrals for new hires and when the family and friend network.

And just a better experience for everybody. So that's really a big part of the one <unk> culture initiative is all around during this team working well together.

And labor is a big part of that and so it's a little more complicated in the rail industry with 12 different unions.

However, we feel really good about where we are.

With our team Jamie and his team are working every day, we're having lots of good discussions we voluntarily on our own changed our attendance policy based on feedback Thats really impactful to our employees as a great first step in this relationship we're listening to them every day, we're working on problem solving and ultimately with the purpose in mind.

Creating an environment, where employees want to be a part of that and want to serve our customers better and with that comes a much more efficient operation and frankly better service for our customers, which ultimately leads to opportunity for growth.

Great. Thank you for all the perspective I appreciate it.

Yes.

We will take our next question from Ken <unk> with Bank of America.

Hey, good afternoon, and thanks for the rundown there Joe.

Just maybe can we clarify so Sean I guess youre looking for volume growth offset by accessorial and cold yield declines efficiency gains with service costs gone, but inflation up but I just want to clarify youre not specifically committing to income or operating improvement for the year right. There was no.

Outlook on what that means for that or why the EPS side okay.

That's right.

And then Jamie the on time originations fell to 54% I think they've fallen now 12 of the past 13 quarters.

Isn't the whole name of the game of what Youre doing with precision railroading to leave on time.

And get that moving maybe maybe talk to me about what the network needs to do to fix that and Joe I don't know if you've come in what your thoughts are on operations what balance of operations versus.

Topline growth.

Okay.

You're right. The last couple of years really we've seen are on time originations drop and that's been it.

Been consistent unfortunately, because of the manpower situation, we've been in I'm happy to say over the past three weeks into this year, we started to get back up to a record highs.

The team is hitting up over 85% on time.

Which is great.

It starts to get us balanced and and as we continue to onboard some more folks.

We will continue to get that driven up to to that record of I think in 2019 were up around 80 80, 990% on time origination and so that's what we're shooting for so.

It is important it's an important metric we watch.

We made some decisions last year to back off a little bit on that so we can connect as much traffic as we could and not leave things behind when we did have a crew and made sure. We took advantage of that crew and we maximized what we could on those train starts.

Not saying that we're letting that go at all we're going to maximize our what's on each one of these trains that we run out their car wise, but but we've now got the people to balance the assets across the network and you can see it if you take a look at velocity and you take a look at our dwell numbers just in the past three four weeks.

You can see that the network is running much more fluid we hit that magic number just enter the new year that we were looking for that 7000, Tami channel and actually as a matter of factor at 7100.

Today.

And and we're going to push that number a little bit more to.

To cover vacation coming up right next to a next few months. So we're going to make sure that we've got the right head count going to make sure that we've got the right people in the right places and we continue to drive those metrics that'll that'll drive the rest of the service metrics.

I mean again TPC weathers carload intermodal all the rest of it that you see that we've put out there.

We're starting to get back to our rack as a matter of fact, we're beyond our record numbers on some of those service metrics. So we're going to provide a product that Kevin and his team.

You can go out there and selling and started growing this company.

Yeah. So Ken Thanks for the question in a couple of additional comments.

We spend a lot of time as a team and talking about our customer service metrics, whether it's on time originations arrivals letters and the last mile or smile.

Things and I'm really pleased with the with how the team is looking at everything.

We want to make sure that we're seeing the world through the lens through the eyes of our customers, which is why we get feedback on surveys and Kevin referenced we have seen the best results in our customer surveys that we've seen in quite some time.

So I feel really good about that now the balance.

Between topline growth and operations I mean, I think they are intertwined and I said this in October I feel even more strongly about it now.

No we haven't.

Nominal opportunity here at <unk> <unk>.

To leverage our strength and our operational performance that <unk> seen pre pandemic youre seeing now again.

To earn the right to talk to our customers about getting more business and that is a lot better than chasing top line growth.

And and to be able to demonstrate that you can rely on us with our capacity and our service levels and our prioritization on your service.

To either for you and I believe very strongly there is business opportunity. There. So we can we can allow that to happen naturally organically because we have a better product we have a lower price.

As most trucking and we have a better ESG.

<unk>.

And to do that the right way and so that's why we've been so focused on getting the manpower where it needs to be and really getting making sure that we're focusing on the right metrics for the business and I'm really pleased where we are so I feel even more strongly today that didn't earn in our call in October about this opportunity.

We can't predict what's going to happen with the economy. This year and Thats part of what Youre seeing in some of this dialogue is we're not exactly sure what happens in the second and third quarter. We're very pleased with how the year has started.

However, we don't know exactly where the economy is going to go given rising interest rates and some other things are going on.

Actually.

You could say that in the data that we've been seeing that in some parts of the economy started slowing down really in October and November .

And we just didn't see it in our business because we couldnt meet some of that demand back then, but we feel really good about where we are but we're not going to chase top line growth, we're continuing to leverage our operating model, but we believe it's there to be earned and that's the conversation, we're having with our customers.

Thanks, Sean Jamie Joe I appreciate it.

Our next question comes from Brian I'll start back with J P. Morgan.

Hey, Thanks, good afternoon.

Conference calls and is there a way you since you are counting on it and you're seeing some of it through surveys and created the service has improved is there a way you can sort of try and quantify that for us in terms of what you've asked to what you think is coming back.

Fill rates or anything else you can put around there in terms of a metric what gives you that confidence that you can count on that coming back not just the interest level is there, especially when you have a softer macro and probably contract truckload rates heading lower as well. Thank you.

Yes, Brian Hey, its Kevin.

I think Joe actually touched on this really really well.

And I think what's probably a little bit underappreciated, what's happen in some of the things that we've seen in some of the major markets that we serve today as well.

And I had referenced this previously on other earnings calls, we're in that 60% 70% type.

Type of order fill rates.

<unk> much through.

Most of the 2022, what happened starting in let's call. It the late third quarter fourth quarter and some of these markets. We saw those orders come down and obviously.

Our fill rates kind of remained or mix or whatever our volumes that were serving for those customers remained relatively flat and so we saw our or our fill rates start to increase in there.

Higher levels now in the markets, we see maybe the.

The the demand what they're requesting is down 30% yet our volumes are slightly down today, what my expectation is and what we're starting to see us.

You know that they've already ordered already overshot what they saw what would be a normal demand environment and we're seeing order flows start to increase and so that's encouraging that it feels like in some of these markets.

We've established the bottom.

Anything can happen in the economy, but it feels that way as of right now and we'll see how it plays out but my point on that is as those orders come back in as we're able to meet that demand going forward that would imply growth versus last year and so that's.

Embedded in what some of the guidance that we provided today and why we have a confidence around.

Accelerating or beating that GDP number is that we're going to go and capture those.

Those orders in those.

Demand that the customer has out there this year with the replenish workforce and all the things that the operation team is doing.

And would you expect that to be more heavily weighted on the merchandise side because that project was a carload before or are you seeing real momentum on truckload conversion.

Maybe maybe more on the intermodal side.

Yes, I think I think youll see it really start on the carload side, that's where we you know when I reference.

The order fill rates that's really carloads.

Specific youll remember on the intermodal side is really wasn't equipment issue.

Good thing is those equipment issues, whether it's chassis.

Containers I think we have plenty of those in most locations now.

As a market and.

<unk> heard different commentary around that but there is some softness in the truck market today.

There is some optimism hopefully as we get into the back half of the year that that will firm up a bit and we have every intention of taking advantage of that market as it comes to US we have the premier service in intermodal and then reflected in our growth over the last couple of years and we continue to expect to capitalize on that.

Okay. Thank you Kevin appreciate it.

Our next question comes from Ariel Rosa with credit Suisse.

Hey, good afternoon. So I wanted to stay on that topic, you mentioned some softness may be in the trucking market I wanted to ask to what extent that's an impediment.

To intermodal.

Volume growth and then in a more normalized environment, how do you think about.

<unk> ability to kind of outgrow GDP or maybe something around kind of the magnitude at which you could outgrow GDP versus this kind of a loose truck market.

The truck market is obviously centers around our intermodal product, that's where we go direct with truck.

Not that we don't compete on our carload business as well, but thats, where you see the sensitivity sometimes in international market AUM is everybody's aware of has been.

Weak and we've got we've had great growth there and we have a great market that we continue to expect to grow over time, but as I mentioned in my recent comments opening comments that that market probably will be down.

Somewhat you know double digits in the first half of the year.

Hopefully as the economy stabilizes and there are some green shoots out there that we'll see.

Some better growth.

Second half of the year at least.

Not the decreases that we're experiencing today.

I think everybody intention here is across our portfolio that we're going to outgrow.

The macro economy, and I think theres, a lot of things that tailwind at our back but we have.

A huge success rate on our industrial development side, we have a lot of new projects that are coming online when you look out beyond this year.

Big Big backlog, probably the largest backlog that anybody here can remember in a long time, whether it's new auto plants.

Metals plants all of those across the board, we've really had a good success rate there and that will give us growth going forward. So are our incentives that will grow the economy.

I know thats not something that the railroads have been able to do.

But I think there is with the service product that we're going to have I think it's really really possible going forward.

Thanks for that Kevin and then just really quickly on some of those projects and any thoughts on kind of what the incremental margins could look like around that.

I think.

I don't know business that were bringing on where the incremental margins arent aren't very attractive and earn a very good rate of return for us.

But that's how I put my finance that on every time I look at the business and we're not going to chase unprofitable business just to show topline growth.

Alright, and we will take our next question from <unk> <unk> with BMO capital markets.

Yes, good evening, Thanks for taking my question.

Maybe first on those two boxes and guiding principle, Joe you highlighted improving customer service and developing the employees.

Especially with respect to <unk>.

Some of the conversations maybe you're having with customers do you feel that that is going to be a lag between.

When you start demonstrating the success on the service side and really penetrating that share of wallet will discuss novartis.

Or do you think that is really a great potential turnaround between kind of making those improvements and the time that market share improvement and second maybe follow up on that.

Conversation with Kevin now.

Looking over into 2024 to 2025, and assuming we're back into a normalized GDP.

Given the backlog that you have and given some of these initiatives and the investments you've made in QC and Panna.

Outside of call is there a reason why you can't grow volume mid single digits as we get into more normalized environment.

<unk>, obviously, yes, thanks, Rob I'll take this is Joe I'll hit the first part and ask Kevin I'll take the second part since you directed to him.

<unk>.

From my perspective.

The the opportunity here.

Two to grow the business really comes from increasing that service product now your question around the timing of that it's all really individually dependent on each customer where they are.

Where are there cost pressures where their capacity issues.

And what are they looking for so we can use a blanket statement that we demonstrate these.

These levels of performance for three months. The next comes from it really in our conversation with our customers it's really around.

Their confidence in our ability to be repeatable and reliable and so that adds to the answer that question is different for each customer, but I can tell you, they're all watching and theyre, all noticing and they're all letting us know that they are really appreciating.

The progress that we're making so it'll it'll play out over time.

But theres nothing inconsistent that we're hearing from our customers about their appreciation for it and recognizing how important it is.

Kevin.

Yes, I think the question was is there a reason why we can't grow mid single digits I think Jamie answered. The question on the on the network side, we have a lot of capacity to grow into and Thats.

We're going to use that capacity and go after wallet share with our existing customers and identify new customers.

So theres no constraints.

From that perspective, obviously that.

Adding up mid single digits volume and then with prices are pretty attractive algorithm, let's see what we can do and what the market conditions are at the time.

It's a more normalized GDP growth rate three or 4% then.

That's different than maybe one to two so.

So we'll see how things.

Materialize as we get out to 'twenty three 'twenty four 'twenty five the great thing is we have we have.

Some tailwind from.

New new customers that will be on a railroad and that will.

<unk> growth above the economy, hopefully that will add to that algorithm over time as we build the funnel of of all the projects that we've been able to develop and that will be coming online in the future.

Thanks I appreciate it.

Our next question comes from Ravi Shanker with Morgan Stanley .

Thank you good evening, everyone. Two quick ones here first you've said that you can grow at GDP plus.

Many of your peers are using industrial production as a benchmark in fact, I think one of them has come out and said a couple of years ago that they don't think they can grow faster than GDP going forward and they think they can Brian outpaced industrial production instead so.

Do you think GDP is the right benchmark for you and kind of what gives you the ability and confidence that you can grow faster than GDP in the long run and just a quick follow up I think you had said that incentive comp was a tailwind to the numbers in 'twenty two how do we think about incentive comp in 'twenty three thank you.

Yeah. Ravi this is Shawn so on your on your GDP plus comment look I think gives you look historically and you run the correlations are business tends to move more closely with the underlying IDP indicators, particularly across the merchandise segment, maybe a little more on GDP.

Intermodal, but you look at this year specifically the projection for IDP is a decline in the projections for GDP growth and we think we can grow the business. So.

So it made a lot of sense this year to peg it off of GDP.

On your question on incentive comp.

I mean, the year has to play itself out we always go into the year.

Lanning they hit the targets that we set internally.

So on that basis incentive comp would be down a little bit year over year versus 2022, but we'll see how that plays out as the year continues.

Alright, we will take our next question from Cherilyn Radbourne with TD Securities.

Thanks, very much good afternoon.

A question on Rover from me some of your peers have talked about taking a different approach to store alone going forward just given the labor has become more scarce and valuable. So I was hoping you could offer some thoughts on how you would approach head count.

The event that demand surprises to the downside. So that you don't lose the investments we've made in hiring and training this year.

We're sherlin sure. Thanks.

Thanks for the question.

Okay.

We got the same stance as we did last quarter, our teenie workforce is not a workforce that.

We would look at Furloughing as.

As we move forward, we're future we're looking into the future really important that we Kevin and I. Obviously are as we've stated here today work really close together to see not only what's happening today, but what's happening in six months from now what's happening a year from now we know that there's customers coming on.

And Youre absolutely right its the conductors and filling those positions takes a long time it can take up to six months to fill our conductors position.

And we can pull the trigger if there's a downturn in business.

We can use the attrition that's there which was up to 10%. So it's easy for us to hold back classes, if we need to.

To bring those numbers down and right size. It if we need to but as we continue to move forward.

We're looking at continuing to build our numbers up so we can get to a point, where we can cover vacation time, and making sure that our employees get the time off that at times they've struggled over the last couple of years. So we're very close to that number.

As you can see from our results that we are quite happy that were moving the right direction with our service.

And it's a commitment that we've made that.

We're going to continue be looking forward and not and not doing any knee jerk reactions and pull that trigger with respect to attrition if required.

Thank you for the time.

We will take our next question from Vasco majors with Susquehanna.

Joe The last time, you spoke with US on the October call you had a few days on the job Thats. A few months now can you talk a little bit about when you'll be able to I think you'll be able to roll out your strategy to the board and invest.

Do you have any events like an investor day other format around that as you look forward to kind of getting to where you want to be to really kind of put your stamp on the business. Thank you.

Yeah. Thanks for the question.

Just.

First from a philosophy standpoint, this is a really talented team and so we were.

We're doing all of this together as a leadership team we get together every Monday, we talk about the business go through all elements of it.

So I want to just emphasize that I'm one piece of that team, but this is a team effort and I'm really proud of him and get to work with every day.

It has been.

Four five months.

Heart rules Fastly fast together, but.

You know 20, some visits out in the field and all the other discussions with all customers and regulators and everything else.

I'm learning very quickly, but there's still a long way to go on that learning curve as far as the core business.

I'm really excited about the emphasis we have on the customer and I'm really proud of the progress. The team has made on the operating side.

I would like to say I'm not sure that you know.

I'm not sure it makes sense to have an investor day, just to have an investor day, we wanted to do that when we really have some meaningful things to talk about from strategy or technology or some other things. So we.

Trust that we'll do that at the right time, when when it can be a meaningful and not just.

Some of them, we put on the calendar every year just to do.

We wanted to be impactful, we know everyone takes everyone's time, and we want to be important.

As far as you know the strategy and especially with the board.

You know I hinted at this a little bit in October , but I spent a lot of time with the board.

As individuals and collectively in consideration of doing this in their consideration of me.

So we had a lot of good conversation over multiple months about the opportunity here and where.

You know where to put the emphasis and where and where to really take advantage of the strengths that exist here.

And so I feel really really good about the alignment we have with our board with our team here and the work we're doing.

And I'm very pleased with the progress we've made on one C. S X in just four months time or so.

You can feel the momentum on the culture side, you can feel the momentum on what that means for how employees are working together and the and then the resulting effects on our service.

So.

I don't feel compelled to come out with some major strategy.

Just because they put my fingerprints on it.

Or in some short time period I think the key thing is.

We have a talented team here, we have a strong operating model we have a good business I mean, we made $6 billion in less than $15 billion of revenue last year, and we didn't perform at our best last year.

So we're now starting to demonstrate those performance levels that we showed pre pandemic levels. So that's a long way of saying that I am very optimistic about the business and excited about it.

And you'll see incremental ideas initiatives come out but.

But we really have a strong foundation.

And really executing off of that foundation and leveraging the strengths. We have is our biggest near term opportunity as you've heard the team talk about talk about Tonight.

So just trust that when we're ready to have some more meaningful dialogue on some new initiatives and whatnot. Then we will have the right for them to do that in the near term, we'll continue to see us on a weekly monthly basis talking about the things we're doing.

<unk>, demonstrating where our priorities are.

And that's really around as we've said many times, improving our customers' experience with us and our service we deliver to them and.

The experience our customers our employees have as team members of ours as part of <unk> and just getting the most out of them.

Working together to make that happen so those points won't change over time.

But how we use technology, how we use our operations and other initiatives will change and we'll talk about that at the right time, but just summarize with our teams and saying here Tonight.

We're very confident about the things we can control.

And our business.

Operating performance our capacity now with our manpower team, we have the skills and the capabilities we have.

As Lou uncertainty about what happens to the economy. This year, so watch that very carefully, but we feel really good.

Good about how we come into 2023, how we're performing so far in 2023 and the feedback we're getting from our customers and so we will leverage that.

Two to show that we can deliver growth and that we can build an even stronger business.

Thank you.

We will take our next question is from David Vernon with Bernstein.

Hey, guys. Thanks for taking the question. So Joe I wanted to ask you a question on the intermodal share take a little bit differently I'm. Just curious about your thoughts on what kind of targets you're going to be holding the team accountable to delivering over call. It a three or five year view.

Step back and look at the intermodal market in the east it's growing at about 38 basis points a year for the last seven years.

As we're doing about 3 million units in Europe , and about 3 million units in 2015 16.

What should we be thinking about on a five year view about how much share you can actually put onto the railroad.

Yes.

Not looking at the guidance for this year because the economy is weak and again, it's tough to forecast.

But I'm just trying to think like like like what kind of targets you are putting out there for the team to hit.

Yes. Thanks for the question I'm not going to get into specifics about what our targets are long term, but just conceptually let's talk about it.

Just stepping back and learning about this industry and starting it more closely over the last many months, even before I joined <unk>.

No.

We interchange a lot with a number of our class one.

And so this is an industry issue as well as the <unk> issue and that is around real growth volume growth. So you referenced it but how do we make that happen we have capacity.

We have a strong fixed cost base.

A substantial fixed cost base and income our incremental margins are really good.

So that lends itself to really wanting to grow like most most business at those kind of and we have strong margins start with so.

How do we grow.

As an industry as a company.

The the discussion, we're having and the opportunities we're pursuing over next several years so.

From our perspective.

We need to.

To demonstrate to ourselves and others that we can grow volume ideally.

Above either GDP or industrial production wherever.

Do you want where do you want to measure it.

Year after year and bring the margins that come with that.

Growth in the business not just some pricing, but also in volume.

That is something we're looking to do and we will continue to challenge ourselves to do.

With that comes.

The customer service metrics and demonstrating continual progression there in <unk>.

Things like trip plan compliance and first mile last mile but also in with the way the customers measure things are the MTS there when they need to be there to the low to get there when they need to be there. So they can manage their manpower in their business et cetera. So.

Continual progress Jamie referenced it.

On the customer side, and then on the employee side with our employee surveys and with our relationships with our Union leaders and our Union partners et cetera, how do we become.

The kind of environment where backup.

Over time, where you have.

Just all of those multi generational activity because people are so proud to be a part of the <unk> team and how we work together and the culture that we have around each other.

Theres ways to measure those things and challenge ourselves to.

To be accountable to showing progress but.

If you bucket them into those areas and then of course.

We will never forget the financial results along those are largely outcomes of all of the things we're talking about but continuing to look at our operating efficiency continuing to look at our operating income of course will in our cash flow, we will always do that.

So without getting specific you can just think about.

Where the emphasis points are and where the priorities are and then ive referenced technology a couple of times here.

Right and I want to come back to that.

How do we leverage technology.

To be more efficient to be safer to better serve our customers and.

And to modernize our business across the enterprise, whether that's in the office or in the locomotive and we.

We see a lot of potential there Steve fortunate has joined US we got a great technology team, we're excited about that too so.

<unk> of things to think about them.

And challenge ourselves for the future and we'll have more to say about it over time.

But when we get to a point, where we are definitely where we want to be with our employee relationship.

We have a safe trusting and bond with our Union partners, where we look for solutions and will work for both sides and then improve.

Work life of our employees, while also serving our customers better and having a more efficient business. We can achieve all those things together those are the objectives and I believe we'll get there and we'll do it the right way.

Okay.

Jamie if I could just sneak a follow on in there as you think about the headcount plan from where we are today.

Are you expecting to continue to grow it into the year or do you think we've got enough sort of resource on the property to maintain the service improvements.

I would say.

We are continuing to qualify conductors every week.

We still have another 600.

Folks out there in.

In training out in the field and some in Atlanta.

And what we're doing as we move forward.

I remember.

Retention rate has not been all that good with the new hires.

We continue to work on that retention rate and we have a 10%.

Paulo with respect to just regular attrition as we move forward.

I'm looking for another few hundred folks onto our head count to get us into.

Vacation season, as we move forward and some of the growth that Kevin and the team as we continue to move into the year. So I am.

I'm comfortable with the head count we have now while the vacation season is low but over the next few months, we're going to see that spike come up.

And the way that we are guiding into that are gliding into that.

Our numbers our numbers are going to be able to hold up for what we need to not only continue.

Where we are with our metrics, but to actually continue to improve on them as we move into the year. So we are.

Every one of the first times in a couple of years I've been on one of these calls and I can say, we are comfortable that our head count is that a good spot and continuing to move into a good spot as we move as well.

Moving to the year.

Alright, thank you.

Okay.

We will take our next question from Allison <unk> with Wells Fargo Hi.

Hi, good evening.

Wanted to circle back to that last question, a little bit Joe you had talked about.

The process isn't doing business easier with Ralph could you maybe expand on that a little bit do you feel like you know in these customer service surveys the ease of doing business with rayos as sort of a key limitation right now for someone that structural share gain and is that something that maybe within the next two to three years that you guys can attack that or is it much.

Our term opportunity there.

Yes, thanks, it's a great opportunity in there that we do need to.

Make it easier to do business with we recognize and we referenced that in our commentary Tonight I mean.

Think about the level of visibility that we have in the rail industry compared to.

No.

Packaged goods.

EPS Fedex those kind of things.

We have to improve in that area and we will improve in that area. It's an industry issue.

Well see FX issue. That's an example.

How do we get even more predictable.

And and give more.

Visibility to our performance and et cetera. So there's a number of ways, we need to improve to improve the customer experience.

And our business make it easier to do business with us Kevin referenced we've got some new.

Things in ship <unk> to help with calculations for emissions reduction and those kinds of things how do we keep helping customers get better and be able to use our systems better and be able to work with us betters number of ways. We can make that happen at the end of the day.

Then they want most from US of course is to be there on time and to deliver on time and to be.

Reliable in doing that so that's where obviously where our number one focus is but clearly we can make it easier for our customers do business with us and we can provide more information and visibility.

Some of the things we're working on.

Great. Thank you.

Okay.

Our next question comes from Walter <unk> with RBC capital markets.

Very much good afternoon, everyone. My question, Kevin looking back now at quality trucking and I know this was a little bit of an experiment when you made that purchase and I see in your <unk>.

Capex Blayne, you're devoting a bit of capital towards it. So just curious as to what your take is been audit now that it's been under your umbrella for a little while now.

Is it by calling it out and Capex are you expanding the fleet are you strategically looking at growing your trucking operation relative to your rail operation and could you be looking for any other avenues outside of the company and from an M&A perspective into.

And is that trucking space, if if you see those opportunities.

Pop up here in 2023.

Yes, I mean first of all quality is a very very unique asset.

And a lot of ways. It first it touches our most valuable market, our largest market which is chemicals.

I can't.

Can't tell you how insightful they have different context than we do on the trucking side, where.

Those purchase those purchase managers I've never dealt with truck and introducing that product to them has been.

Been eye opening as something very very new and we talk about the capex related to QC. This year is really a rail product it's not more trucks that we're investing in is it's the ISO tanks.

That go on the railroad.

I am.

R&D was sitting here today talking about it he is.

Very very high.

Happy with how it's gone so far the customer uptake has been.

Pretty incredible so far we've seen a lot of success and our only issue is we haven't got an ambassador and so that's that's a good problem to have and we're going to continue to take delivery of those.

Randy it's come from the trucking.

Market for a long time.

He was hasnt, even been surprised about the service product and how quickly we can turn these.

Assets for him.

On each side so.

Things have gone extraordinarily well there.

The intermodal network is ideal to convert a lot of this traffic that moves over truck today.

It's meeting the customer requirements, and we're getting more and more demand from those customers out there as it gets into the market. So that's really where the focus and the uptick in the capex that we've talked about.

Earlier are coming on that rail product.

We are extraordinarily excited about and we just think that.

The chemical customers in particular are looking for a holistic solution and it's pretty powerful to go in there and be able to talk.

And looked at their network.

Tell them, what we think thats from a rail perspective on what fits from a trucking perspective.

And just when you think about quality even on the operating side.

We are utilizing our current terminals.

And yes that Capex is exactly right, where we're buying the ISO tanks, and we're preparing but but everything else is already there that fixed assets. There. So this.

When we went into this.

Kevin and I are somewhat hand in hand looking at this business, saying is this what we want because it's going to work and it's really fallen in really well and I would say.

On the asset side is just we didn't get the ISO tanks, we'd like to get them quicker, we'd like to get more of them because theres more business I believe that that Randy and his team can get working with Kevin and his team.

And in our intermodal terminals.

The capacity and the trains have the capacity so it's just.

It is it's a great product on the operating side, a very easy for us to move as well so it fits really really well.

That's great color, Kevin Jamie I appreciate it thank you.

Our next question comes from Jeff Kauffman with vertical research partners.

Thank you very much and thanks for squeezing me in I'll just be quick Shawn you were talking about employee levels and it looks like.

Cost inflation on the new contract probably around 5% per employee.

Year on year employees about seven 8% for the first half of 2023, so if I, if I look away from fourth quarter, where the incentive comp help lower that and I looked at kind of what's the right run rate for modeling for labor cost inflation.

Should I be thinking about something in the high single digit 10% ish range for the first half of the year before productivity offsets that.

Yes, Jeff I think on a gross basis right on a full year basis, the impact of inflation on the labor line as is in that ballpark right mid single digits.

And if you look at the head count.

If we didn't hire anybody additional all year long, we'd be up 4% year over year.

Jamie talked about adding a couple of hundred to the head count so call that 5% up year over year. So there is your 10%, but we are confident that as we.

As the network continues to spend we will be able to drive some efficiency on the labor line, while also cycle.

As you alluded to the true up that we have to make in the third quarter on the back wages.

So that'll be a little bit of an offset alright. So it will be a little better in the second half, but I guess end of day, how much of that labor costs. Do you think you can offset through productivity is there a target out there do we just kind of see what we can achieve.

Well, yes, we've got targets.

We're going to reduce over time, we're going to reduce crew travel and some of the ancillary costs that go along with that as the network expense faster.

And we'll be able to offset a good chunk of it.

Offsetting 5% inflation or sort of in that range in and another 5% head count would be would be a lot in a single year. We're on the right track.

Okay, Great. That's my only question. Thank you.

Thank you and that does conclude todays presentation. Thank you for your participation and you may now disconnect.

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