Q1 CSX Corp Earnings Call
Thank you operator, Hello, everyone and welcome to our first quarter call.
Joining me. This afternoon are Joe Hinrichs, President and Chief Executive Officer, Jimmy Wojciech Executive Vice President of operations, Kevin Boone Executive Vice President sales and marketing and Sean Pelkey, Executive Vice President and Chief Financial Officer.
Presentation accompanying this call 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, Mr. Joe Hinrichs.
Hi, Good evening, everyone. Thank you Matthew and thank you all for joining our conference call.
Working together the ones, Yes X team delivered a strong first quarter driven by solid pricing as well as volume growth in our merchandise and coal businesses.
With sufficient resources in place we are able to use the benefits of our scale railroad model to deliver improvements in our customer service performance, there driving real tangible financial results.
Our network is running well and we intend to do even better and show that CSS and sustaining reliable service overtime, which is essential for us to profitably grow our railroad.
2023 has already proven to be a very active year.
One of our top priorities after the National Union agreements were finalized last December was to address the matter of paid sick leave for our union employees.
I am very pleased that <unk> demonstrated important leadership here starting in February we were the first U S class one railroad to reach new sick leave agreements with many of our local unions that will meaningfully improve our railroad is quality of life.
Our view is simple we are a service business and we need our employees to be positively engaged in order to provide our customers with excellent service to attract them.
All right.
Doing a work environment, where employees feel respected and valued as not just the right thing to do is also very good for business, if anything our shareholders as well.
I know there are serious matter that has attracted a lot of attention to our industry over this past quarter has been the issue of safety.
Statistics are clear when measured by the number of accidents or injuries relative to the enormous number of ton miles and our trains travel freight railroads are very safe when compared to other forms of transportation.
Proud of our excellent safety record at C. S X, but we know that we cannot be complacent, we all like to all of our stakeholders to push ourselves to be even better later on this call Jamie will give more details about the specific proactive steps, we've been taking to make C. S X paper.
I have also been actively involved in discussions with our leaders in Washington, and the states across our network about some of the legislation has recently been proposed.
They know it's better for our economy, our environment and our communities for railroads to move a greater share of the nation's rate.
You also know that CSS is eager to be part of solutions that are effective data driven and we'll make our and our whole industry safer.
We do not want safety performance to be a competitive advantage for C. S X who wanted to be something our entire industry is proud of.
We have been encouraged by our conversations with senior policy leaders and we will continue to engage with them in the months ahead and sharing best practices and building on our common ground. We are confident that the industry will emerge from this period stronger more aligned and better at sharing safety best practices.
Now, let's turn to our presentation and to review the highlights of the first quarter.
We moved nearly 1.5 million carloads in the first quarter and generated over $3 $7 billion in revenue, which was 9% higher than the previous year.
Operating income increased 14% year over year to 1.4 dollars $6 billion and our operating ratio was 65%, which includes the <unk> impact on the quality carriers trucking business as we've discussed in the past.
Finally earnings per share increased 23% to 48.
When I came to see Us X last fall, we were very clear with our intention to build on this company's excellent operating model by strengthening our relationships with our employees and serving our customers better is still early but you will hear clear examples of how we are starting to achieve this as Kevin Jamie and Sean talk about the details what was a very.
Quarter.
Now, let me turn it over to our team.
Thank you Joe and good afternoon, everyone.
Every quarter you hear us emphasize the importance of safety on our network. This is a fundamental part of our culture and defines how we execute our operating plan we.
We didn't take shortcuts, we don't compromise.
And we teach this mindset to every one of our new hires and continually re emphasize it to all of our employees.
In this slide you will see some of the real proactive steps that we're taking to keep our network running safely.
In 2023, we are installing 53 additional hotbox detectors across our network.
Out of detectors will reduce the average spacing from $16 two miles to $14 nine miles at C. S X. These detectors identify high bearing temperatures, but also transmit real time data.
For trend analysis.
So we can not only tell when a bearing is hot and are trained needs to stop but we can also use the data to predict bearings and issues before they reach critical temperatures.
We're also continuing to integrate newly hired employees into our safety culture, which begins on day one.
Only hired employees attend extensive training at our railroad education and development Institute in Atlanta.
The robust classroom combined with field based training gives these new employees the tools they need to operate safely in their new roles.
Autonomous track assessment cars, commonly called a tax are also used as part of our proactive safety plan.
Look and run like regular box cars that are loaded with advanced technology.
These cars operate on a regular trains and gather critical inspection data that allow us to closely monitor track conditions last.
Lastly, we are committed to being supportive partners and the communities in which we live and operate.
That is why we dedicate so much effort to developing relationships with first responders and those communities and teaching them how to properly respond to incidents, especially those with hazmat materials.
We have a dedicated fleet of railcars, including for tank cars that are specifically designed and used to offer multi day training sessions.
This is a program we had run for many years and in 2022, we trained nearly 4001st responders.
Turning to the next slide.
Or a personal injury rate ticked down sequentially, while the upper a train accident rate increased slightly however, both measures are up year over year.
It's important to consider that because of the success of our recent hiring efforts, we have a higher percentage of newer employees.
As they gain experience and learned from several railroads, we are confident that the frequency of these incidents will decline.
Now turning to slide nine.
Operating performance has improved significantly.
The appropriate resources in place.
We're doing what we do best.
Secondly, executing our operating plan the team's ability to deliver these operating results is a true testament to the.
Toss that hard work that we're doing as an operating team and a plan that shows no other than what we can do here at C. S X. Most importantly, the dedication that's given by all of our railroad.
I cannot thank our operating employees enough.
So overcoming the resource challenges and delivering such solid performance for our customers.
Carload trip performance of 86% reached an all time record level this quarter, while intermodal trip plan performance of 96% matched our record high while the team is pleased with these results we will keep improving and in fact, both measures have.
Continued to improve sequentially into the second quarter.
I'm happy with the compliments and support we have received from customers regulators and shareholders on our service improvement, but we're not done yet as Joe said, our goal is to keep improving our service and show that we can sustain this over time, so that we can drive long term growth for CSS with.
That I will turn it over to Kevin to discuss the topline results.
Thank you Jamie we are very pleased with our merchandise performance. This quarter revenue increased 13% benefiting from an 8% increase in revenue per unit and a 4% increase in volume.
We are seeing some encouraging signs as customers start to respond to our improve service and reduce cycle times.
The team is focused on combining best in class service with creative solutions to identify new growth opportunities and gain wallet share with existing customers.
While we did see positive growth in automotive customer production issues impacted volumes in the quarter.
On the positive side.
We see production issues moderating and expect a strong outlook for automotive volumes through the remainder of the year.
Minerals and metals, both outperformed driven largely by very strong aggregates and steel demand.
<unk> was up year over year, as we benefited from favorable contract repricing and higher fuel surcharge.
For the remainder of the year, we will continue to see benefits from a supportive pricing environment and improve rail service.
While the economic outlook remains uncertain, we continue to see positive momentum in many of our merchandise segments.
As the team focuses on the growth drivers that we can control.
It's still early but we're encouraged by our ability to convert improved service and the new business wins in segments, such as auto <unk>.
Minerals and food products.
There remains a significant opportunity to win share from truck across our merchandise portfolio.
Turning to slide 12, first quarter coal revenue increased 19% on 19% higher volume and flat revenue per unit.
Export volumes were strong as we leverage improved cycle times and improved production and performance at the origin bonds.
We also benefited as we lap the effects of reduced capacity at our Curtis Bay terminal.
Our domestic shipments also improved on utility restocking demand and improved rail capacity.
International met coal benchmark remained strong over the quarter and now sits just below $300 per metric ton, which continues to support strong production levels.
Looking ahead, the international coal market continues to be supported by healthy commodity prices that should drive positive year over year volume growth rhythm, meaning remainder of the year while.
While the domestic market could face a more challenging backdrop should natural gas prices remain low.
Turning to intermodal on slide 13.
First quarter revenue decreased by 5% as a 9% decrease in volume more than offset a 5% increase in revenue per unit.
Most of this volume decline was due to weakness in international intermodal markets, which as we expected have been heavily affected by slowing import activity as demand softened and retail inventories remained elevated.
Looking forward, while the intermodal market currently remains challenged we do expect second half year over year headwinds to moderate.
The team has a number of initiatives underway to continue to drive truck conversion by introducing new lanes in service, where there is market demand.
Now finally, turning to slide 14.
Many of you are aware of the major market shift developing over the last few years as more companies look to diversify their supply chains and bring capacity closer to their key end markets.
We have been encouraged by the acceleration in activity with manufacturers of all times announcing plans and committing capital to build capacity in the eastern U S.
For <unk> this represents a great opportunity our.
Our network connects the major population centers of the northeast with a fast growing areas of the south and southeast that are highly attractive for companies looking to expand.
The mission of our industrial development team as the partner with these companies and provide them with a rail served location, where they can leverage the benefits of the <unk> network and industry leading service.
We continue to invest in our lifestyle program that has expanded to include a wider range of rail service side opportunities.
Combined with new technology enhancements this will allow us to capture industrial projects of all sizes by offering shovel ready development sites with access to <unk> network.
As you can see on this slide we are excited about the success we are seeing.
In 2022 alone our customer partners brought nearly 90, new facilities online representing $8 2 billion of total investment across our network and on our short line partners.
The map shows how broadly these in service projects stretch across our service area.
Our pipeline remains robust with over 500 projects in process across our entire industrial development pipeline.
And we're adding to this total each month.
Over time, we expect the new business that these projects represent to be a key driver to our growth algorithm as we help our partners bring in an increasing number of expansion projects onto our network.
Driving volumes and revenue higher.
I would like to thank the entire team for all their efforts across our growth initiatives. We're very excited about the momentum we are building and the engagement as we partner with our customers to grow together now.
Now I will turn it over to Sean to discuss the financials.
Thank you Kevin and good afternoon looking at the first quarter results revenue increased 9% or $300 million on merchandising coal volume growth strong pricing and higher fuel recovery.
Operating income was up 14% to $1 $5 billion as topline growth outpaced several expense headwinds, which I'll discuss in more detail on the following slide.
Interest and other expense was $7 million higher compared to the prior year and income tax expense increased by $47 million on higher pre tax earnings.
Net earnings increased 15% to $1 billion, while EPS grew 23%.
Let's now turn to the next slide and take a closer look at expenses.
Total first quarter expense increased $111 million compared to the prior year. This.
This includes about $65 million of inflation headwinds as well as an $85 million impact from higher fuel and depreciation combined with a lower real estate gains.
Now turning to the individual line items labor and fringe expense increased $31 million as the impacts of additional head count and inflation were partially offset by lower incentive compensation expense.
<unk> expense increased $13 million, primarily due to inflation and the inclusion of Panam operations and scheduled locomotive overhauls.
These impacts were partially offset by a $46 million benefit due to an insurance recovery arising from a customer facility outage several years ago.
As well as lower intermodal costs as congestion eases.
There are also several smaller line item impacts with N. P. S. N O that were greater than expected this quarter and should improve sequentially.
Depreciation was up $33 million as a result of last year's equipment study as well as a larger asset base.
And fuel expense also increased by $33 million due to a higher gallon price and a 3% increase in gross ton miles.
Equipment and rents improved by $18 million benefiting from increased fluidity and faster car hire days per load across all markets.
Property gains were $19 million unfavorable in the quarter due primarily to lapping prior year gains from the Virginia real estate transaction.
Network and congestion related savings were evident within rents <unk>.
And across the intermodal terminal expenses this quarter and we expect sustained network performance to drive further efficiency savings through the year.
Now turning to cash flow on slide 18.
T S X generated over $800 million of free cash flow in the quarter, reflecting the impact of cash payments for retroactive wages and bonuses paid to union employees.
Adding back these payments free cash flow would have been up slightly versus last year, despite higher investments in the business.
You'll also recall that C. S X has introduced a measure of economic profit called C. S X cash earnings are C. C E within our long term incentive compensation.
It benefits, both our shareholders and the general public when we grow profitably by encouraging the conversion of freight off the highway.
And C. C. He is aligned with this shared interest by encouraging disciplined high return capital investments.
The calculation can be seen in the appendix and through Q1, TCE is up $165 million versus the prior year.
After fully funding infrastructure investments in strategic projects <unk> returned $1 $3 billion to shareholders in the first quarter, including close to $1 1 billion of share repurchases and over $200 million in dividends.
Looking forward, we will remain balanced and opportunistic in our approach to returning excess cash to our shareholders.
And with that let me turn it back to Joe for his closing remarks.
Okay. Thank you. Thank you Sean I'll conclude with some comments on our outlook for 2023 as shown on slide 20.
First as you heard Kevin described we are very pleased with the performance we've seen year to date of our merchandise business strong demand for grains metals minerals in automotive combined with significant new customer wins give us increasing confidence that we will be able to deliver solid volume growth of the year and merchandise.
We're also off to a strong start to the year for coal and we expect continued benefit from healthy export demand both thermal and met.
Our merchandize and coal have met or exceeded our expectations intermodal volumes have been below what we anticipated we knew the intermodal is right. We knew the international intermodal activity will be down substantially over the first half of the year and though parts of our domestic business are doing very well has not been enough to offset the effects of lower imports and <unk>.
The weighted inventories.
Together intermodal contributes less than one fifth of our revenues, but it does contribute roughly half of our volume and was a drag on our total volume over the quarter.
The softer intermodal performance will make it difficult for our total <unk> volume to meet our previous guidance and grow faster than GDP.
Especially as consensus GDP estimates.
2023 have moved up and are currently at 1.1% that said the effect on our business mix is favorable.
Revenue ton miles grew by a solid 4% in the first quarter driven by the strength in merchandise and export coal and we expect revenue ton miles to grow solidly in the low single digits for the full year.
The rest of our outlook is consistent what we told you at the beginning of the year.
We continue to benefit from a favorable pricing environment with customer negotiations supported by our transparency on costs and our improved service product.
We still expect supplemental revenues to decline by roughly $300 million compared to last year with much of that decline run rate already inherent in the first quarter.
International met coal benchmark remained very strong over the quarter and spot prices are just below $300 per ton today by year over year comparisons will get tougher from here.
We will continue our efforts to drive higher efficiency and reduced excess cost to counter the inflationary effects in our labor and other operating costs as best we can.
Still the best way for us to support our margin performance will be to drive more merchandise volume and benefit from the power powerful operating leverage potential of our network.
Lastly, we still estimate capital expenditures at $2 3 billion.
In closing I am very encouraged of what we accomplished in this quarter I am energized to see the one CSI culture start to take shape across this company every industry has challenges, but ours are addressable and solvable and I am confident that they are far outweighed by the opportunities that we have ahead.
As I said before all of US here at every location across our network share a common goal, we're buying the safe reliable service to our customers that drives profitable growth and we're taking meaningful steps towards that goal.
Thank you and we'll now take your questions.
Thank you Joe now in interest of time I could ask please ask that everyone. Please limit yourselves to one and only one question.
Operator, please open up the line.
Thank you.
Again, everyone. If you would like to ask a question Thats star one on the telephone today, if you would like to remove yourself from the queue compressed star one again.
We will take our first question from Brian <unk> with J P. Morgan.
Hey, good afternoon, thanks for taking the question.
Kevin with the backdrop of improving service in Japan compliance at very strong levels can you just talk about the order rates the fill rates across the network and we've heard some different comments clearly intermodal is suffering from poor bid compliance.
But where do you see when you talk to your customers across the different networks, I guess, primarily with a merchandise where it might be a little more service and truck sensitive. Thank you.
Yes, I think you probably remember the discussion over the last few quarters, where we said we werent up against the order rates I would say, we're probably more in line with that especially with our improved service levels, but where we're meeting the customer demand currently but we did see.
That's what gives us the confidence in the guidance as we as we move through the year.
We will take our next question from Ken <unk> with Bank of America.
Okay, great if I could just follow on that thought there Kevin.
So it seems like something changed economically kind of mid February right. If we if we look at spot rates and trucking can you talk about I don't know Joe you seem to be talking about intermodal being tougher and that's why switching from a GDP plus two.
Kind of at RPM type of outlook is there something changing economically in the backdrop more recently or is that just the weakness in the truck market, maybe just talk a little bit about on the intermodal side.
Or just the economics I think we certainly expected a weak market on the international side, but it's safe to say that I think that that market came in a bit weaker than what we had expected in the first quarter, but on the flip side I would probably make this tradeoff every time as we saw some strength in some of them. The merchandize markets that obviously have a much higher ARPA, you and revenue and revenue contribution.
So.
That's kind of what we saw through the quarter there are varying opinions on where in the international market will recover.
Some of our larger customers expect some kind of monitoring all pick up in the second half we have seen some stability over the last two to three weeks, which is encouraging but we will face.
Difficult comparisons through the third quarter, and then fourth quarter it gets a lot easier.
We'll take our next question from Jon Chapell with Evercore ISI.
Thank you good afternoon.
Kevin going to stick with you given these slides that Jamie put out, particularly number nine with all those service improvement and the trip plan compliance et cetera, do you feel like you are being appropriately compensated for your improved service both on an absolute basis, but especially on a on a relative basis as you go through these contract renewals.
Yes, another way to ask that is how far are you through the contract renewals that actually exemplify some of the service improvements that you've done over the last couple of months.
Yeah, typically when you look at our renewal rates and we renew a little over half our business every year and that's highly concentrated in the fourth and first quarters and I would say given the backdrop and inflation that we would certainly we're having those conversations with our customers to be able to cover our cost increases that are visible very visible to the market.
As we continue to prove our service customers.
We continue to reiterate there they're willing to pay for the service and the reliability that we can provide and the.
The plan is and we I think that's starting to occur as we believe we have a differentiated service in the market and so.
We're starting to see early success in our conversations with customers around more volume opportunities with them and I cannot reiterate enough in a market like this where we should be taking share our customers are looking for ways to save money and I'm usually rail.
A cheaper option for them and they're getting more and more confidence in our ability to deliver the service that we need to so.
The team is very very excited about some of the things that we've been able to do here over the last few months.
We'll take our next question from Brandon <unk> with Barclays.
Yes, hi, good afternoon. Thanks for taking my question and maybe this is for Joe or Jamie, but we've had obviously a lot of negative press on the railroads. Unfortunately in the last few months.
The <unk> concept is kind of been dragged through the mud a bit but can you guys compare and contrast, because you are delivering just like the last question in a very good service metrics here.
What's driving the difference between the rest of the industry and I guess, how do you leverage that going forward.
Yeah, Thanks, I'll start and let Jamie add some comments.
As I've said many times in the past I think the guiding principles of our operating model.
Our long standing and our sustainable and that's of course improve safety control costs.
Improved asset utilization improve the employee experience and then also improve customer service and we are working hard at all five of those.
And keeping them in balance as far as how we prioritize for salary always safety first.
I believe very strongly that the.
The results that we're seeing throughout our network and being delivered by our great <unk> team as a result of that and focusing on our employees and the customer service specifically.
Specifically and so I believe that the with the principles of scheduled railroading.
Just as valid today as they were five years ago. Obviously, it's how you keep things in balance and how you prioritize and how you're bringing everyone along and we're trying to lead by example in that regard.
While Joe Joe hit it really well.
For when I, when I think about and I hear people say Psa or what does that really mean I don't know I only know one way to railroad.
And this is the way I was taught the railroad many years ago back when I was at CN. So.
We've been able to teach the great folks at <unk> over the past six years, how to do this they've got unbelievable operating team some great bench strength, who are doing fantastic and we've got the resources in place in order to now actually operate the plan.
We struggled for years to do that through Covid, but we've come out of it the way. We said we would and we are a we're operating the plant and in the team that's out there that's exercising that in the field, but just the network folks who put the plan together, but the field team is executing it.
The folks on the ballast line, who are running the trains each and every day that are that are doing an unbelievable job or getting the trains from point a to Z. The way, we need them to and and servicing the customers the way that we've committed to servicing them and given Kevin and his team.
A product that gives them an opportunity to finally go out there and sell something that's different so.
I don't know call. It what you want I just call it railroad.
We will take our next question from Scott Group with Wolfe Research.
Hey, Thanks afternoon.
Kevin how should we be thinking about Rev per carload and sequentially.
<unk> can you just maybe walk us through some of the puts and takes and then similar things Shawn just 65 hour in Q1.
No there was the insurance recovery, but.
Do you think we see sequential improvement from here the rest of the year. Thank you.
Yes, I think Gil.
The biggest driver from Q1 to Q2, we continue to as I said see strong pricing in the backdrop of higher inflation and that's not going to that's going to continue throughout the year as we.
Obviously have contract renewals and we'll have those discussions with customers. The biggest swing factor quite frankly, as fuel surcharge and where you see diesel prices head into the summer here.
On a year over year basis, where they sit right now obviously that's.
Optical headwind, but we know how quickly those can recover and so we'll see where that trends but.
Other than that you know you look at export coal and sequentially probably.
You will you are probably looking at something that's flat to the first quarter on the on.
Nicole <unk>, which can swing around a little bit and that's one that you usually ask about.
But otherwise positive momentum on the core price and then we'll just have to wait and see where the diesel prices shake out.
Yes, and then Scott in terms of operating ratio 62.5 for the first quarter is obviously a great start for US I think as you think about sequentially you probably have to normalize that for both the insurance gain and then.
The favorable fuel lag benefit that we had in the quarter. So that gets you to around 62 and a half.
We almost always do better in the second quarter from an or perspective than the first and Thats, primarily as a result of the fact that volumes typically seasonally increase in Q2 relative to Q1, we don't see any reason to believe that we'll see anything different this year, particularly with some of the issues. We had in Q1 with auto production that should.
Easier have eased.
And as strong demand for aggregates. So it's a good setup I will say just one thing to caveat that with is other revenue was a little bit elevated in Q1 versus the run rate, where it likely will be the rest of the year. So that may be a little bit of a headwind.
On the flip side, we feel good about the cost momentum if service continues to be at these levels or even better we should see more costs come out sequentially.
We'll take our next question from potash amount with BMO.
Yes. Good afternoon, thanks for taking my question.
You had the slide talking about the 19, new facilities coming online, but obviously very strong pipeline that you've discussed in the past into 'twenty, four and 'twenty five but I'm just curious.
When you.
When you talk to existing customer your existing facilities are you seeing growth in your share of wallet. If you could give us. Some example from tangible example to kind of I appreciate that.
Yes, I think that's you know that's directly tied to our service product and we're in the very early innings of that I think we've seen some customers more willing to have those conversations and others that are in a wait and see and want to see more months or even quarters of good performance.
<unk> they are willing to have that conversation, but we've seen some early success. One example that comes to mind is in our food products.
Category, where we've gone from roughly a 60% share with that customer now, 90% share and doing some things operationally, thanks to Jamie and his team that provide a really really good service to them truck like service that.
It really benefits from a cost perspective, and and Thats, a direct truck conversion for us but I.
I see many many more of those examples starting to happen, we're working really diligently with jamie's team and having by boarding exercises with our customers, which is really thinking through the art of whats possible, putting our network against what their needs are and really figuring out if theres opportunities to grow and how we are we really convert the truck.
I think the customer acceptance on these meetings has been the highest I've ever seen because.
Theyre looking for ways to save save on costs, given the uncertain backdrop on the market, but a lot of momentum.
The team is working really hard we have a number of these set up over the next few weeks and quarters ahead.
Uh huh.
They have a lot of success.
We will take our next question from Tom Roderick with UBS.
Hey, this is Mike <unk> on for Tom.
So Japan compliance and carload at 86 seems to be a level, where you can make some good progress on truck conversions do you think that there are enough crew resources on our network to maintain our strong service product or is there. Some additional hiring that you have to do from here. Thanks.
Mike.
We're in a good number with respect to our people were still working on a I'd like to get another 150 to 200 folks as we try to get closer to a 7400 number.
In particular for vacation peak hour sitting around 70 to 80 I think today.
Close to 73, so we want to push towards that and I'll remember attrition is 10%. So we got to continue to stay up against attrition, which also gives us.
Another.
Trigger if something goes the other way, where we could react as Sean mentioned with some costs along the way if we needed to.
Resource wise, we definitely have enough locomotives out there. It's a matter of fact, the faster we get a more fluid we get we need less locomotives. So we'll continue to <unk>.
Analyzing those resources and pull them out where we need to keep them in a in a spot where we can use them as Kevin and his team brings more business on.
We're able to bring them back and of course everything that comes back earns its keep so we'll we'll continue to work those resources, but on the car side. That's the strategy. We continue to look at as a team.
Working with customers I know, Kevin and his team and my team are working close to make sure. We've got car supply as we need them as we work with customers.
And make sure that we have the right resources on that and at this point in time, we feel good with where we are but you see the growth that's coming in Kevin.
About some of those growth areas that are out there maybe he wants to touch a little bit on the car side on what he sees in his discussions with customers and those resources, but other than that.
We're we're in good shape with the evidence.
Yes, I think as Jamie mentioned, Joe got the team together.
The sales and marketing team along with the operations team and John's team and we we had a lengthy discussion near recently just on what the needs are in.
Encouraged of you know we have a plan.
To make sure that we can meet.
The coming demand in some of these markets that we see great growth and whether it's aggregates.
Some of the auto business, where we know that the car supply is going to be a differentiating factor, where we feel like we have a good plan in place.
We will take our next question from Justin long with Stephens.
Thanks, Shaun I think on prior calls you've talked about the elevated level of service related costs that should moderate this year during.
During the call in January I felt like you were suggesting this tailwind would be more second half weighted but could you share any updated thoughts on that cadence of these cost savings I'm curious if you saw this materialize in the first quarter and how you're expecting that number to trend in the quarters ahead.
Thanks, Justin.
Yes, I think we're off to a good start like I said, we had about $15 million to $20 million of what I would call congestion related cost savings in the quarter that was mostly you see that clearly on the rents line and then within <unk> related to intermodal terminals. So.
We are already seeing some of those costs come out as I mentioned sequentially into Q2, our forecast is that will we'll we'll see that pick up a little bit and then as we get to the second half.
That's where we will we will see the bulk of it like you mentioned so.
And that's going to be in.
Continue to be improvements in things like rents and intermodal terminals locomotive maintenance related to the engine count that Jamie talked about.
Overtime and other related crude costs, so and then on top of that we've got other initiatives not just related to cycling some of the congestion issues from last year that were working on and of course volume growth always helps in terms of productivity levels, both our crews and our assets.
We'll take our next question from Chris Wetherbee with Citigroup.
Hey, Thanks, good afternoon.
Maybe a question on the headcount side, Jamie gave some some good near term color I guess I'm curious in the context of sort of your progress towards that 7400 goal and then.
Reflecting the fact that the volume environment is maybe a little bit more questionable than it was earlier in the year is there a point, where maybe you can hit the pause button on hiring kind of reassess the volume environment and so after the second quarter, we could see that number potentially moderate depending on the economic conditions, we're seeing.
Hey, Chris.
I'm listen we wouldn't say we hit the pause button at all what we've done is this.
This time I would say last quarter. When we were talking we had a 550 trainees out there we're looking to keep ourselves around 350 to 400 trainees as we move forward on a constant basis. So we've dropped that number a bit knowing that we don't need to ramp up the way we were.
As I said, we look at 10%.
As our attrition rate, so we still need to ramp up that number a little bit and then of course, we'll review a little bit if we need to bring that down to maybe 300 or maybe that $3 50 is the sweet spot. We're always looking to reduce our attrition rate I think in the industry for many many years, 10% spin that rate but of course.
We're working really hard with our initiatives to see what we can do to get people to stay at the railroad.
And if we see those numbers come down then.
We'd be looking at our hiring needs, obviously drop with that but we're a we're in a good spot with a much better spot than where we were in the <unk>.
In the past with those numbers I feel comfortable in and Thats on a teeny side of course, we are still doing locomotive engineer training as we move forward is the right thing for us to do so we don't get ourselves in a situation, where we're short on engineers in the future, but you recycle conductors to make engineers.
And we're always hiring on our our engineering side of the house and mechanical side.
As we continue to look at that high end on the Union side. So our numbers are at a pretty good point I don't see any large jumps at all if anything it's a it's more just maintaining where we're at and if we need to look at if things really go into the <unk>.
Different direction, we know that we've got that 10% attrition rate, we've committed to our <unk> folks that we're going to keep them.
Gainfully employed.
As long as we can through through whatever we need to weather.
Any storms, we don't necessarily see any storms ahead of us, but we don't know what the markets show obviously, but.
But if.
If we need to we can we can pull that trigger on hiring really quick.
Our next question comes from Amit Mehrotra with Deutsche Bank.
Hey, thanks, everyone. Congrats on the results really impressive.
One question I wanted to ask so if I look at intermodal revenue.
As a percentage of the total enterprise it was like 13, 5%, which I I mean, I could be wrong, but I think that's the lowest number.
At least this decade over the last 10 years and so I guess I was just trying to understand your <unk> you showed good cost leverage the mix was really positive in terms of where that where the revenue growth came from and so I guess I'm just trying to understand what happens to cost X fuel as some of the intermodal mix normalizes as a percentage.
A rabbit I don't know if you think that's a fair question or not but it just seems like maybe that had something to do with some of the strong cost leverage.
Yes, I mean, Amit, we don't get into sort of specific margins within each each line of business.
To the extent that.
Intermodal volumes were down which of course, they were youre going to see savings at intermodal terminals, where we'll be able to see some savings on our crew starts you'll you'll have some savings on fuel.
But did that disproportionately impact our margins this year and would that would that disproportionately impact them.
If intermodal or I should say when intermodal recovers.
I don't think that's our view, we've got strong incremental margins within every segment of the business.
And I think as intermodal.
As those volumes normalize normalize and begin to grow again, it's going to have a positive impact on our operating ratio.
Our next question comes from Erin Rosa with credit Suisse.
Hi, good afternoon.
Congrats on a strong quarter here.
Kevin you laid out a pretty exciting pipeline of new business opportunities there.
Hoping you could maybe quantify the impact of that in terms of revenue or earnings and kind of what the timeline might look like for realizing whether it's about 500.
Set of opportunities that you talked about what that might look like over the next couple of years. Thanks.
Yes, I mean, when you look at a number of these projects that's going to take a couple of years, if not three years too.
Really complete some of the auto facilities that were seeing some of the on the metal side as well.
So really I think the momentum builds into 2025.
Aspirational Lee.
If you ask me, it's kind of 1% to 2% two points of growth that we.
We would aspire to on a gross basis now sometimes some of these can cannibalize a little bit of your business, but I would like to be able to gross up a point if not a little bit more just from the industrial development side given all the activity that we have as we really start to hit our stride and these projects come online.
We will take our next question from Ben Nolan with Stifel.
Yes, thanks, actually Kevin I might follow up there.
Because it is a.
It's a nice lift nice map.
I am curious as you look at that and you are competing for those projects.
How much of that is competing against another rail versus actual head to head against trucks are or how should we think about where.
Where the competition lies.
For that growth.
Well as you know.
Over the last 40 50 years.
The railroads have done a great job of attracting new industrial development to the railroad.
So it's all about getting the word out is all getting it.
Investing in our team, making sure that companies understand the advantages, particularly some of these new markets. When you think about battery production that is very very new to the United States.
And they need to you know theyre not.
Amir with necessarily rail infrastructure and what we can offer so a lot of exciting emerging markets, that's where you have to be out in front of it and make sure that you have you offer the relocations the infrastructure.
Energy resources that they need in order to move quickly and it's all about having shovel ready opportunities that touch the railroad in which you can develop quickly and the market's moving way quicker than it ever has and so that's why it's key to have these industrial sites ready for those customers to go.
We compete every day with our eastern peer as well.
Certainly we're learning leaning into the service that we can provide.
All of it.
We touch a lot of other <unk>.
Industrial companies that they want to reach and so those all things are factors in our selling points to the customers as they make these decisions.
Yes.
We will take our next question from Jordan <unk> with Goldman Sachs.
Hey, everyone. This is andreas filling in for Jordan. Thanks for taking my question I, just wanted to sort of follow up on the field piece. It looks like fuel surcharge revenue was up $121 million year over year, but fuel expenses only up 33 million. The net of the two the $88 million benefit EBIT in the first.
Quarter, I think that benefit was more like $63 million in the fourth quarter system, an acceleration here on the fuel benefit and your expectation for I guess, how that trends in terms of timing or magnitude of just or it seems like based on the diesel ships you might see some benefit in the second quarter still in Navy dropping the third quarter.
Can you just sort of curious in your thoughts here and what offset there might be thanks.
Yes. Thanks Andre this is Sean.
Your math is correct I think if you look into the second quarter and Youre looking on a sequential basis at least where fuel prices are and where the forward curve is it'll be a net drag I would put it in the category of $50 million plus versus the first quarter on a net basis thats the impact to both revenue and expense.
But I think what you were talking about is relative to last year in the second quarter. It will be likely a net benefit just simply because last year in the second quarter fuel prices were going up and we reported a negative lag in the fuel surcharge program. So we'll be cycling that assuming no change to diesel prices versus where they are right now.
We will take our next question from David Vernon with Bernstein.
Hey, Thanks for taking the question Sean.
Can you talk a little bit about expectations for average cost per head count about a year over year basis, and add any color to how much. The CTO. That's been added into the benefit packages is impacting cogs for full year 'twenty three.
Absolutely David So on cost per employee I think we came in right about where we expected maybe a little bit favorable just due to mix of mix impact of employees with with the driver accounts at quality, which are a little less in terms of dollars per employee.
As you go to Q2, I think it'll be fairly stable versus Q1, maybe up a little bit depending on that employee mix.
And then as we get into the second half of the year, you will see us step up just due to the timing of the wage increases for the union employees, which is scheduled to be a 4% increase.
In terms of the cost of the sick leave which we've now we've now got agreements with about 10000 of our Union employees.
We are we have added those costs into into the forecast the experience. So far has been very positive we are seeing.
Employees take advantage of the benefit.
And we are seeing.
When that's needed there is a little bit of additional over time, but there are some benefits to it as well and certainly quality of life is one of those benefits.
And on a net basis I would say a couple of million a quarter at this point.
Yeah.
We will take our next question from Allison <unk> with Wells Fargo.
Hi, good evening.
Just going back to the share gain.
Piece of that merchandise volume grew 4% is there any way.
Quantify or give us some perspective of what those share gains were this quarter, if any and as we think about that spread over what the market is growing in those areas is that 1% to 2% on top of that a pretty good guide and would that be more 2004, but that's already out there in 'twenty three.
Yes, I think you know.
Lot of the success that we had.
And particularly on that merchandise side is really.
The service improvement that we saw in our ability to capture the orders that our customers have and so that.
January February were really good months.
Weather.
It probably was a little bit favorable in those months as well that certainly help us but then.
Jamie would tell me March was pretty.
Pretty challenging from a weather perspective, so I would say overall normal weather through the quarter, probably a little better in January February but it really is about just this the service recovery and our ability on a year over year basis to capture more of the demand that was out there even though we've seen a little bit of softness in some markets.
We'll take our next question from Walter <unk> with RBC capital.
Yes, thanks, very much good afternoon, everyone. So I wanted to turn back to Shaun for a moment here and really just related back to Jamie and Joe's comments, I mean, and even Kevin So Jamie had a has a pretty good handle on operations here. The model is working very well.
Kevin's translating it into business wins and good growth opportunities in.
And then Joe in his outlook mentioned that asset productivity is going to exceed our approach prior record levels.
But when I go back and look at prior record levels at the time, when you were hitting kind of the low 58 or.
Is that a good I mean is that overly simplistic to say that you know when youre hitting those kind of record operating.
Our record asset productivity levels that you can't achieve those type of <unk> in 2023 or is that.
Is it a little too simplistic Sean.
Sean to look at it that way.
Well Walter I think you think back to the 58 or the first thing you have got a recognizes the quality acquisitions. Since then so that's about 250 basis points of headwind and we've had a lot of inflation, we're paying employees more.
The underlying cost of contractors and materials is higher.
And so those are headwinds that being said.
As we continue to run the business well and we deliver good productivity and we get great feedback from our customers. They've got this pipeline of wins that are that are setting up as well as delivering.
Against customer expectations and demands.
To deliver that at strong incremental margins and that's going to help out over the medium to long term on the or I can't give you a specific point destination, but as we go forward, we would expect improvement from where we are right now.
Okay.
We will take our next question from Jason Seidl with Cowen.
Thank you operator, everyone. Congrats on a good quarter, it's really nice to see the service doing so well here and that was reflected I think in our survey that we did this quarter I wanted to talk about your outlook and sort of what's baked in.
With an assumption on the west coast ports sort of coming to a labor agreement are you looking for some of that east coast volumes to shift back and if so how do you think that'll affect operations.
From that perspective, I don't I don't see a huge amount of shift.
Youre going to continue to sell you a secular advantage on the east coast and Theres a lot of investment going on as you know in Savannah, and other ports on the network.
But frankly the challenges on the West coast have hurt our intermodal business when you think.
Of what <unk> wants to come across through California through Chicago onto our network. So I view that as probably an incremental positive for us.
Some of that freight will.
We'll see through the interchange with some of our Western partners out there so.
That's that's a positive outcome in my mind in terms of our growth opportunity as we move into the back half.
Thank you and this does conclude today's presentation. Thank you for your participation and you may now disconnect.
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