Q4 2023 CSX Corp Earnings Call

Good afternoon, My name is Krista 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 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 that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again Press Star one we asked.

That you limit yourself to one question and then re queue.

Ma'am: Thank you I will now turn the conference over to your host not corn head of Investor Relations Ma'am you may begin.

Ma'am: Thank you Christa Hello, everyone. Good afternoon, and welcome to our fourth quarter earnings call. Joining me. This afternoon are Joe Hinrichs, President and Chief Executive Officer, Mike Cory Executive Vice President and Chief Operating Officer, Kevin Boone Executive Vice President and Chief Commercial Officer, and Sean Pelkey, Executive Vice President and Chief financial.

Ma'am: Officers are now in.

Ma'am: The presentation accompanying this call you will find our forward looking disclosure on slide two followed by our non-GAAP disclosures on slides three and with that it's now my pleasure to introduce Mr. Joe Hinrichs Alright.

Ma'am: Alright, Thank you Matthew Hello, everyone. Thank you for joining our conference call today.

Joseph R. Hinrichs: You will hear from our leadership team today, we are very happy with the momentum we carried into the start of the new year.

Mother nature gave us a few challenges over the last couple of weeks, but we are proud of the work our <unk> team has done to set us up for success this year.

Joseph R. Hinrichs: Our railroad is performing well and Mike Cory and the operations team are already bringing new ideas that are helping us run even better safer and more efficiently. Our customers are happy with the consistent service that our dedicated employees are delivering and Kevin Boone will discuss how this is translating into profitable business opportunities.

Joseph R. Hinrichs: Sean Pelkey will go over our financial position, which remains very strong as we continue to deliver healthy volumes favorable pricing strong operating margins and high levels of free cash flow.

Joseph R. Hinrichs: Before we talk about the details of the past quarter and our expectations for 2024. It is important to take a step back to appreciate all that our once yes X team accomplished in 2023.

Sean Pelkey: Everyone on this call knows it's been a very active period for our entire industry recall that it was just over a year ago that Congress took action to prevent a major rail strike <unk>.

Soon afterwards, I leave visible events last winter led to important public debates about railroad safety and through the year class. One railroads have completed major mergers and made significant leadership changes. Meanwhile, our customers have had to manage through higher interest rates and inflation on the one hand and boards and supply chain disruptions on the other.

Sean Pelkey: Through all of this the aim of our once U S team has been to keep moving forward.

Sean Pelkey: Our key goal of delivering sustainable profitable growth that benefits benefits all our key stakeholders, our customers our employees our shareholders and the communities we live in and serve.

Sean Pelkey: For example, <unk> was the first class one railroad to reach basically agreements.

Our Union partners and we were the first railroad can significantly change our attendance policies based on employee feedback. We were also the first U S class one class one railroad to be released from the additional service metric reporting by the STB back in May based on our improvements in service to our customers.

Sean Pelkey: Now here on slide five we have listed several key achievements from this past year and helped us take important steps forward.

Sean Pelkey: First and foremost our focus on safety has driven strong results over the year, especially in the fourth quarter, enabling us to report much improved accident and injury rates compared to 2022.

Sean Pelkey: Our service metrics that have consistently lead the industry and today <unk> remains ahead of our peers. Importantly, this is improving our customers' experience, which puts us in a great position to gain their trust and gained share.

Sean Pelkey: You've heard me reiterate this all year long our team delivered positive volume growth in merchandise the beat U S. Industrial production improved efficiency helped us grow coal volumes and our intermodal business gained traction led by our service and market initiatives.

Sean Pelkey: Our commercial and operating teams are more closely aligned than ever our customers know that when we offer them a solution, we have the commitment and the expertise to deliver it finally, we.

Sean Pelkey: We have seen our efforts to renew the culture here at the railroad start to really take shape.

Sean Pelkey: Through our site visits family days and a regular surveys and town halls, we see the increased pride and energy that our employees are feeling through one C. S X.

Sean Pelkey: And this is great progress and we are proud of what we've accomplished this past year. None of these efforts are done or a complete as this is a journey. There is so much more that we can accomplish as he worked together as one team.

Sean Pelkey: On slide six we highlight some of the key results from our fourth quarter.

Sean Pelkey: Total volume grew by 1%, reaching 1.5 dollars 6 million units in the quarter.

Sean Pelkey: Much of this growth was driven by our strong merchandise franchise, which gained 3% year over year.

Sean Pelkey: Total revenue decreased by roughly 1% to $3 68 billion as the effects of higher volumes and favorable pricing were offset by a decrease in other revenue and lower fuel surcharge due to lower diesel prices as compared to last year.

Sean Pelkey: We earned <unk> 45 per share compared to 49% or nine cents per share a year ago with that I'll now turn the call over to Mike Cory to go to the details of our operations. Yeah. Thank you Joe and good afternoon, everyone. Let's go to slide eight and let's just go to the Q4 recap you know as I've said many times before safety is found.

Mike Cory: <unk> not every success, we have we saw reduction in engineering and mechanical related accidents and a reduction in transportation injuries during the quarter and I really want to thank every <unk> employee for their continued efforts on creating a safe working environment for themselves and each other and that is extremely important.

Mike Cory: But we know we still have work to do for the full year numbers showed overall improvement we were flat on transportation related accidents and saw an increase in engineering engineering related accidents.

Mike Cory: All areas of opportunities, we aimed to improve in 2024 and beyond safety at its core is it solely about incidents it's about how employees still working within the organization.

Sean Pelkey: Have an environment, where employees still included respected values and listen to it.

Sean Pelkey: To identify areas of improvement as a team and changed in.

Sean Pelkey: In 2023, we listen to our employees and we made positive changes to the work environment in response.

Sean Pelkey: Converting these conversations and sound successful practices our results.

Sean Pelkey: We're beginning to demonstrate that this is already making a difference, but we have a ways to go.

Sean Pelkey: We'll continue to keep this dialogue open and learn from each other when done right entire Wednesday, <unk> will meet its great potential when it comes to operating safely and efficiently in service to our customers.

Sean Pelkey: Over the next slide and on the slides pretty self explanatory to me. It shows we've stabilized our network and its performed pretty well over the quarter or one of our key focus areas is on maintaining bettering your customer facing metrics.

Sean Pelkey: Fluidity has started to allow us to look deeper at our operating plan again to better align the hard assets needed to move the volume it seems to be focused on maximizing car connections and maximizing the train load while at the same time, reducing locomotive dwell in active horsepower on trains as.

As a result, we've seen both the reduction in active locomotive use and daily train starts.

Sean Pelkey: Titan connection standards in our yards are starting to drive changes to our operating plan to result in quicker connections driving strong focus on using our locomotive technology to reduce fuel usage on line of road has contributed to a savings overall fuel cost altogether, we're finding tangible opportunities to open up more capacity on this network and we expect these <unk>.

Sean Pelkey: Metrics to continue to improve as we go forward.

Sean Pelkey: Going over to slide 10.

Sean Pelkey: We believe we've made good headway in Q4, and especially over 2023.

Sean Pelkey: Key metrics continued to improve in our network fluid our head count is at the point that we are now able to manage through efficiency and attrition.

Sean Pelkey: Most attention and resource requirements for any new business coming online the needed focus on car connections and train tonnage closely closely matched horsepower along with network fluidity allowed us to reduced two 5% of our daily starts in the quarter start to store active locomotives.

Sean Pelkey: The other things this coming quarter will be performing full territory reviews with our team that will further improve our customer service and continue to identify opportunities to better align asset use and of course, we'll be working right along with Kevin and his sales and marketing team to deliver this great service and grow with our customers.

Mike Cory: In closing during my formats on the property I continue to learn more about this network and especially the women and men that makeup. This tremendous one C. S X team I'm extremely excited about our potential to deliver our customers better service with greater safety efficiency and teamwork and I'm excited to do this together as one group of great railroads. So thanks for the time and over to you Kevin.

Mike Cory: Yes.

Kevin: Thank you, Mike It really hasn't been great to see how well our teams have been working together and the positive momentum we are building with our customers as they recognize the sx is focus on service.

Kevin: Teamwork is allowing us to build on new opportunities and drive attractive and profitable growth across all of our end markets.

Kevin: Business conditions in 2023 were challenging for many of our customers with several of our key markets experiencing volatility driven by a number of factors, including inventory destocking on.

Mike: On the positive side, we saw many of these markets show improvement in the fourth quarter, which combined with our industry leading service provides optimism that the team can deliver strong revenue growth.

Mike: Turning to slide 12, and look at our merchandise performance.

Mike: As you can see our revenues were up 5% on both a quarterly and annual basis.

Mike: Even with the effects of reduced fuel surcharge.

Mike: Volume increased by a solid 3% for the quarter.

Mike: And 2% for the full year.

Mike: Excuse me.

Mike: Domestic industrial production, that's been effectively flat.

Mike: And we've delivered pricing results that reflect the higher inflationary backdrop that we've all experienced.

Mike: Looking at the details of the quarter automotive performed well even with the temporary disruption caused by the UAW strike.

Mike: As total volumes held up and we continue to see leverage.

Continue to leverage service to gain new business.

Mike: Chemicals was challenged over most of the year, but delivered positive growth in the fourth quarter driven by shipments in plastics sand and waste.

Mike: For fertilizers strong domestic demand and higher <unk> shipments of potash exports supported volumes.

Mike: Short haul phosphates shipments remained constrained by supply issues, which weighs on volumes, but provides a tailwind for yields.

Mike: Metals has continued to be an area, where our service provides growth opportunities.

Mike: And in minerals infrastructure related demand continued to be very healthy over the quarter with new cement production supporting volumes.

For forest products volume was modestly lower year over year, but increased sequentially as pulpboard demand has started to show signs of recovery.

Mike: While the ramp up in AG and food over the fourth quarter was challenged with southeastern feed buyers remaining well supplied from local crops combined with slower ramp up in exports.

Mike: Now as we head into 2024, we are encouraged with the momentum we built across the business and we see many opportunities across the end markets we serve.

Mike: Our service continues to differentiate <unk> in the marketplace and we are excited about the opportunities. This offers us to work with customers to collectively grow our businesses together.

Mike: Turning to slide 13.

Mike: Coal revenue decreased 1% for the fourth quarter as we lapped very strong export pricing from a year ago.

Mike: Volumes remain positive growing by 3% for the quarter and 8% for the year.

Mike: Our coal business continues to be strong with service levels accelerating in the fourth quarter and global export prices supporting U S production.

Mike: At the end of the last quarter, we indicated that export demand remains strong, but that lower natural gas prices and reduced restocking demand would likely weigh on domestic shipments.

Mike: And that's exactly what happened in the fourth quarter, but the export tonnage up a full 27% while domestic tonnage declined by 13%.

Mike: <unk> of just over 3200 per ton was up 5% sequentially in line with our expectations.

Mike: For the new year, we are optimistic supported by continued strength in export demand as global benchmarks for both met and thermal we.

Mike: Currently remain at healthy levels.

Mike: Also see incremental production growth on our network in West, Virginia, which will primarily be focused on the export market.

Mike: Domestic demand in 2023 was supported by months of aggressive restocking at utilities and a very hot summer.

Mike: With stockpiles at more normal levels demand upside will largely be dependent on weather conditions in 2024.

Mike: That said total electricity demand growth remains substantial, especially in the south east driven by new industrial capacity.

Mike: Two data centers and EV charging stations.

Mike: Turning to slide 14.

Mike: Fourth quarter intermodal revenue decreased 4% on flat volumes for the full year revenue decreased 11% on volumes that went were down 7%.

Mike: Lower fuel surcharge drove the largest impact to yields.

Mike: Our domestic intermodal business continue to perform well with volume increasing sequentially and growing in the mid single digits on a year over year basis, we saw growth with our key partners that continue to experience industry, leading service performance, which was recently highlighted in J O sees customer satisfaction results.

Mike: Our ability to deliver domestic growth was an extraordinary team effort, especially.

Mike: Especially given the significant challenges facing the trucking market.

Mike: And international volumes were lower compared to last year.

Mike: But we were encouraged to see improvement each month with December actually showing modest year over year growth as the positive effects of more normalized retailer inventories gained traction.

Sean Pelkey: Our team has continued to work hard to maximize our opportunities which showed up in the growth as we work to build new partnerships create new service offerings and leverage higher activity at the inland ports that we serve.

Mike Cory: Positive market trends are taking shape as we head into 2024, and we expect the combination of a more supportive market new conversion opportunities and service offerings to drive year over year growth in both the domestic and the international business we.

Mike Cory: We continue to.

Mike Cory: Monitor the evolving situations at both the Panama Canal and the Red Sea.

Mike Cory: We have not been a significantly affected by any changes in our customer behavior, but.

Mike Cory: We stand at the ready with the capacity and capabilities to adapt as needed.

Mike Cory: Finally, as we turn the page in 2024 I'm excited about the opportunities ahead. The team is accelerating our efforts in many areas of our business to work hand in hand, with our customers to identify areas for growth.

Mike Cory: Industrial development to identifying market specific operating metrics that enhance the customer experience.

Mike Cory: <unk> been working with closely with our rail partners to unlock growth. These are just a few of the focus areas for the team.

Sean Pelkey: Now ill hand, it over to Sean to review the financial review.

Sean Pelkey: Thanks, Kevin and good afternoon fourth quarter revenue fell by 1%, while operating income was down 10% or $139 million. Now. These results include 180 million of discrete year over year impact from declines in other revenue real estate gains and export coal benchmark prices.

Sean Pelkey: However, the underlying results also reflect the benefit of our sustained service levels throughout 2023 and growing momentum in the business.

Sean: Across merchandise coal and intermodal revenue, excluding fuel increased by 5% benefiting from strong core pricing across the merchandise portfolio and.

Sean Pelkey: And 3% volume growth in both merchandise and coal.

Mike Cory: Counter to normal seasonal trends the team delivered sequential volume gains, helping operating income increased by 25 million relative to the third quarter.

Mike Cory: Interest and other expense was $16 million higher compared to the prior year.

Mike Cory: Income tax expense decreased $23 million the effective tax rate of 22, 9% included $19 million of favorable adjustments, primarily for state tax matters relative to $33 million of favorable adjustments in the prior year.

Mike Cory: Our expected tax rate going forward remains 24, 5%.

Mike Cory: Earnings per share fell by four cents, including seven cents of impact from the previously mentioned discrete items.

Mike Cory: For the full year operating income fell by 8% or $462 million, while earnings per share was 5% lower.

Mike Cory: These results were impacted by the prior year, Virginia real estate transaction declining intermodal storage revenue and lower export coal benchmarks totaling nearly $700 million on a combined basis.

Mike Cory: The hard work of our one C. S X team provided our customers reliable and consistent service throughout 2023 and.

Mike Cory: Latest strong foundation for long term profitable growth.

Mike Cory: With profitable growth in mind.

We will also be making a change in how we report results going forward.

Mike Cory: Starting in the first quarter of 2024.

Sean Pelkey: We will transition to a more conventional approach of reporting operating margins rather than operating ratio.

Sean Pelkey: Our goal is to target margin improvement aligned.

Sean Pelkey: Aligning the business around a balanced approach that includes profitable volume gains and pricing to the value of our service.

Sean Pelkey: All while controlling costs and optimizing asset utilization.

Sean Pelkey: Let's now turn to the next slide and take a closer look at fourth quarter expenses.

Total fourth quarter expense increased by $89 million as the impacts of lower real estate gains inflation increased depreciation and higher head count, partly offset by lower fuel prices and efficiency savings in <unk> in rents.

Sean Pelkey: Turning to the individual line items labor and fringe was up $82 million impacted by inflation and additional head count.

Sean Pelkey: The quarter also included costs that related to the timing of union employee vacation and sick benefits.

Sean Pelkey: We expect this to adjust down resulting in a lower sequential cost per employee in the first quarter.

Sean Pelkey: Purchased services and other expense increased $4 million versus last year as inflation was mostly offset by savings from our intermodal and engineering teams.

Sean Pelkey: We expect a modest sequential increase in the first quarter similar to what we have seen in recent years.

Sean Pelkey: As a reminder, we will cycle of prior year insurance recovery of nearly $50 million in the first quarter.

Sean Pelkey: And while we expect increased technology carry costs and a need for more locomotive overhauls to impact expense. In 2024, we are actively implementing cost savings and efficiency initiatives that will help offset these headwinds.

Depreciation was up $24 million, including an $11 million adjustment related to prior periods.

Sean Pelkey: We are projecting roughly $40 million to $50 million higher full year depreciation expense in 2024.

Sean Pelkey: Fuel cost was down $59 million driven by a lower gallon price.

Sean Pelkey: While fuel efficiency was stable year over year, we saw strong sequential improvement these.

Sean Pelkey: These results are especially encouraging as we typically face seasonal efficiency headwinds in the fourth quarter.

And the team expect to continue the momentum in this critical measure into 2024 and drive meaningful year over year savings.

Sean Pelkey: Equipment rents was $9 million favorable driven by faster car cycle times across all markets.

Finally property gains were $47 million unfavorable in the quarter at this time, we do not expect any individually significant transactions during 2024.

Sean Pelkey: Now turning to cash flow and distributions on slide 18.

Sean Pelkey: Full year free cash flow remained strong at $3 $3 billion.

Sean Pelkey: Our first priority use of cash remains investing for the safety reliability and growth of our business.

Sean Pelkey: As such this figure includes $2 3 billion of capital spend across a wide range of projects to ensure the integrity of our network infrastructure as well as the high return strategic investment opportunities.

Sean Pelkey: Looking to 2024 note that free cash flow will be impacted by about $380 million of federal cash tax payments that were deferred from 2023.

Sean Pelkey: Cash flow generation also supported close to $4 4 billion and shareholder returns for the year <unk>.

Sean Pelkey: Including $3 5 billion in share repurchases and nearly $900 million of dividends.

Sean Pelkey: While economic profit finished lower for the year, largely due to lower intermodal storage revenue and export coal pricing.

Sean Pelkey: Our goal is to increase economic profit over time, which has been shown to strongly correlate with outsized shareholder returns.

Joseph R. Hinrichs: With that let me turn it back to Joe for his closing remarks, alright. Thank you Sean now we will conclude with our initial thoughts on our expectations for the full year 2024.

Joe: As of today and based on our visibility with our customers and our expectations for the <unk> specific initiatives that we're putting in place we.

Joe: We anticipate growth in total volume and total revenue in the low to mid single digit range. We.

Joe: We see encouraging momentum across our merchandise business, but we are benefiting from the service led gains in market share and wallet share and new industrial development activity.

Mike Cory: We expect growth in our intermodal business as it prolonged destocking cycle, finally winds down and our strategic initiatives continue to drive volume.

Mike Cory: Ann.

Ann: Export coal demand continues to be very strong with <unk>, gaining from the ramp up of a new mine on our network.

Ann: By growing volumes and utilizing our existing capacity we have.

Ann: Expect our profitability to benefit from a favorable combination of solid pricing better operational efficiency and a moderate easing and cost inflation.

Kevin: Kevin's team continues to do a great job, making sure that we're getting paid for the service, we provide and as Mike discussed we see all kinds of new opportunities run this network better safer faster and more efficiently.

Kevin: We expect an increase in our capital spending to approximately $2 5 billion. This year as we invest in safety infrastructure locomotive rebuilds upgraded to a portion of the new Alabama interchange with CB, Casey and other civic high return investments, including technology investments.

Sean Pelkey: Finally, as before there is no change to our balanced opportunistic approach to capital returns using our excess cash to fund share repurchases and dividends to benefit our shareholders.

Kevin: In closing I am very proud of what our entire team accomplished this past year to our <unk> team I want to thank all of you across all of our facilities in every state in province that we operating in for your hard work and for demonstrating that our one <unk> culture can be something real and impactful.

Sean Pelkey: We're in a great position as we head into 2024 and with your help we can make it an even better year in the strong one we just had.

Sean Pelkey: On this call. Thank you for all your interest in and support of <unk>.

Sean Pelkey: Matthew we're now ready to take questions. Thank you Joe we will now move to our question and answer session in the interest of time and to make sure that everyone. On this call as an opportunity to take part to ask you to please limit yourselves to one and only one question Christa ready to start the process.

Christa: Thank you.

Christa: A reminder, if you would like to ask a question. Please press star one on your telephone keypad. Your first question comes from the line of Jon Chapelle from Evercore ISI. Please go ahead. Your line is open.

Christa: Thank you and good afternoon.

Sean Pelkey: Sean I wanted to dig a little deeper on this part of the guide and maybe the some of the delayed productivity improvements that you spoke about is the volume commentary is low to mid single digit you have some of the productivity levers that you were hoping to Paul.

Sean Pelkey: Even though you have some of these I guess.

Sean: <unk> fixed cost increases in the form of DNA et cetera, how do you think about margin expansion in 2024 based on your base case volume and revenue.

Sean Pelkey: Thanks, Jonathan that's a bit of a loaded question a lot in there.

Jonathan Smith: Do my best I think when I step back.

Jonathan Smith: As to always expand margins and we can do that by growing the business profitably operating safely and running an efficient railroad.

Jonathan Smith: When I think about 2024 and sort of how that year progresses, we built some momentum coming from Q3 into Q4. We grew volumes. We grew operating income income that's not always the case.

Jonathan Smith: Our hope is to continue that momentum going into the first quarter weather notwithstanding here.

Jonathan Smith: And then build that momentum into the second quarter as well, we've got some headwinds year over year that we can talk about in the first quarter.

Jonathan Smith: They begin to ease in the second quarter and then by the time, we get to the second half of the year.

Jonathan Smith: The comps are a little bit easier and that's where I think you'll really see some very strong incremental margins.

Sean: Thanks, Sean.

Sean: Your next question comes from the line of Baskin <unk> majors from Susquehanna. Please go ahead. Your line is open.

Sean: Joe you opened the call talking about a lot of the progress you had made.

And your first year, leading the business can you talk about how your focus or at least investors will see your focus involved over the next 12 to 18 months. Following the success you've had improving a lot of stakeholder relationships in your first 16.

Joe: Yeah. Thanks, Patrick I think you heard a little bit of that in on the commentary from the team here, we now see our business has stabilized.

Joe: Reached a threshold on customer service.

Patrick Smith: That has been recognized in the industry and now you're seeing the opportunity for us to take advantage of that stability to to get more efficient.

Jonathan Smith: We're now at the manpower levels that we were targeting.

Jonathan Smith: He is going to be some needs here or there, but generally speaking where the manpower levels. We were targeting so we head into 2024 with an opportunity to be in a much more stable setting.

Mike Cory: The momentum we're building on culture, and how people are working together and a mic coming in and as his perspective and working closely with Kevin and his team are real.

Kevin: Feel really good about the opportunity going forward now is for us to leverage the strength, we have in our operating model and the people we have to get more efficient obviously, you want to see more safety improvement. This year as we saw in the fourth quarter of last year and building momentum there.

Kevin: And then take advantage of the opportunity to grow with our customers. We now have over a year of providing stable persistent reliable service that our customers are recognizing us for and we have the opportunity now to talk to each one of them about okay. What can we do together to grow and how can we work together with the journey on efficiency safety culture.

Kevin: Ever ends and we're going to keep working together, but I will tell you we come into 2020 for our network was in good shape, a very good shape, our manpower levels are in good shape.

Kevin: Team's working better together than I've seen it in the time I've been here.

Mike Cory: And so that gives us confidence that we can build on the momentum we've established over the last year.

Mike Cory: Your next question comes from the line of Brian Austin back from J P. Morgan. Please go ahead. Your line is open.

Mike Cory: Hey, good afternoon. Thanks for taking the question maybe just a quick follow up for Sean first can you just give us the commentary about the <unk>.

Sean Pelkey: Comp per employee stepping down.

Sean Pelkey: First quarter after the increase in <unk> and then maybe for Mike can you just give us a sense in terms of what youre seeing and it was still a bit early but a little bit further down the path where last call. It sounds like fuel efficiency is an area for some big improvement that you're targeting maybe some more network and taking out some of locomotives as the fluidity continues to improve so.

Mike Cory: What are you seeing there and maybe some rough order of magnitude would be helpful. Thank you.

Mike Cory: Yeah.

Mike Cory: Sure Brian I'll begin on the comp per employee. So we did have some some true ups in terms of vacation and sick leave that I mentioned in the quarter that was probably about $15 million.

Mike Cory: We also had work that moved from capital into OE, we typically have that in the fourth quarter. So those are both be a tailwind going into the first quarter on comp per employee. So I would expect if you're modeling that couple of percentage point improvement versus what we reported in Q4 should be pretty steady in the first half and then again.

We have that 4% wage increase scheduled in July so probably step up a little bit in the second half of the year notwithstanding the efficiency initiatives that Mike and the team are focused on.

Mike Cory: Yeah.

Brian Austin: Brian again.

Brian Austin: Sorry.

Brian Austin: I was just going to five years can Fisher Brooke.

Brian Austin: We're all asset is whether it's locomotives trains we run.

Brian Austin: Productive all of us are here.

Brian Austin: Front and center for what we look at and so for me. It's really a you know I'd say out of a scale of one to 10 of them about a four in terms of where I am and in understanding our network and understanding our people. However, we're really starting to focus in on the things that aren't working right. They arent working against what we you know.

Well, we think we can do with the with the franchise with the with the network. We have so whether it's size of trains.

Brian Austin: The state of the train the use of the technology, we have to get the most out of the locomotives.

Right now, it's blocking and tackling and it's everybody coming together. So we're learning we're teaching we're sharing best practices, we're doing the things that are.

In that in that fourth quarter. It was really the last couple of couple of months that we really started to see the things we could do because first of all we had the head count we had the reliability and the fluidity of the network and so we're just going to keep grinding that stone, but as I said in my remarks, we're going to really get deep into the operating plans over every corridor over the next few quarters and I'll lead that charge, but I'd tell you what.

I've got a lot of people that are that are out there ready to go and they're very qualified to do this so I see you know to Sean's point, we got further efficiency ahead of us, but never at the expense of safety. It never at the expense of customer service. So our hope is that we continue to provide this great product and the customers are going to come and that's how we'll also.

Sean Pelkey: Get the efficiency that we need.

Sean Pelkey: Your next question comes from the line of Justin Long from Stephens. Please go ahead. Your line is open.

Sean Pelkey: Thanks, Good afternoon, so with the 2024 guidance being the same for volumes and revenue low to mid single digit growth is it right to think that your assumption for revenue per unit. All in is flattish and either way I was wondering if you could provide.

Justin Long: <unk> some more color on your expectations for coal ARPA you maybe for the first quarter and then the full year as well thanks.

Justin Long: Okay.

Kevin: Hey, Jonathan This is Kevin I think you hit on it right. There on the call are obviously very healthy market right. Now you know how much you embed that going forward, we're optimistic but we know this market can move around quite a bit and so maybe a little bit of a conservative outlook as we move through the year hopefully, there's some upside to that but that's largely.

Impacting that as you mentioned from an RFP perspective, the other thing that I would highlight is we do expect the intermodal market. The bounce back here and that's a lower RPC business as well, but that will be contributory to our growth this year from a volume and.

Revenue perspective, so lower ARPA you overall, so that'll all me.

Kevin: Mix it down a bit but those are the two large factors that you just highlighted and you know about.

Kevin: Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead. Your line is open.

Hey, Thanks afternoon. So I wanted to just dig into the cost side, a little bit. So if I just look I understand some noise with vacations and paid sick, but cost X fuel up about 3% to 4% from Q3 with volume up less.

Less than 1%. So it's just we've seen a lot of cost creep.

Scott H. Group: And that continued in Q4, I guess, hopefully I'm trying to figure out.

Scott H. Group: Where do we go from here can we start to see overall.

Scott H. Group: Overall cost levels stabilize today still increase but increase just at a slower pace is there any chance they could start to come down a little bit I don't know Im just.

Scott H. Group: I'm struggling with how to think about the cost side, so any help there.

Scott H. Group: Yeah. Thanks, Scott I can take a stab at it here. So I think fourth quarter, let's remember we've got we've got the dynamic of some work moving off of capital and going to OE. That's that's normal.

We will typically see a little bit of a step up that reverses back in Q1, we.

Scott H. Group: We probably had you know call it $30 million to $35 million of costs in the quarter that were somewhat unusual items that we mentioned, but just as a reminder, we had a true up on vacation and secondly that was about 15 as I. Just mentioned, we had another $10 million on depreciation true up at the end of the year there for that that's not going to recur.

Mike Cory: And then Livingston, Kentucky derailment was about $10 million as well. So you kind of add all that together those costs roll off as we go into the first quarter and then we built some momentum I mean as Mike said.

Mike Cory: He has already looked at the train plan he has reduced some starts.

Driving tonnage up that's going to drive fuel efficiency as well.

Mike Cory: Taken some locomotives out we're not paying maintenance on those locomotives so.

Mike Cory: We're certainly building some momentum I think that's gonna gradual gradually add in as we go through the year and that's why I feel really good about where the incrementals are going to be second half of the year.

Your next question comes from the line of Tom Waterworks from UBS. Please go ahead. Your line is open.

Mike Cory: Yeah good afternoon.

Mike Cory: I wanted to ask I think its probably for Kevin just a little bit on the revenue side.

Mike Cory: You had a pretty meaningful storage revenue headwind in 2023.

Mike Cory: And I think you'd feel.

Mike Cory: Surcharge can be an impact to how do you think about.

Kevin: Those two factors as you go in 'twenty, four or they kind of neutral or is there still some lingering headwind and then in terms of price what kind of a price assumption do you have are you taking stable pricing.

Kevin: Versus we got in 'twenty, three or is it kind of up or down. Thank you.

Kevin: Yeah.

Kevin: Yes, so just on the first part of the question Tom I'll answer that on the other revenue piece, where I would go ahead and model something like $130 million a quarter, which is kind of what we've been running at the second half of this year, obviously, you do the math on that.

Tom Wadewitz: It'll be a big headwind in Q1 about call it $50 million plus.

Tom Wadewitz: Yes, that's why the comps are tougher in Q1, and then a little less in Q2 before we get to the normalized rate and then on on fuel.

Don't forget we had a pretty favorable lag impact in the first half of last year to the tune of almost $70 million across the first and second quarter. So prices have come down a little bit we are expecting somewhat favorable lag in Q1 of this year, but it still be a year over year headwind. So those are two reasons why we were.

Tom Wadewitz: Thinking about more sequential momentum in the first quarter as opposed to.

Tom Wadewitz: Being able to deliver growth until we get to the second half of the year.

Tom Wadewitz: Yeah, and then on pricing I think as we talked about all last year, we had to react to a much higher inflation environment that we all experienced quite frankly.

Brian Austin: You'll see a lot of that carryover right.

Brian Austin: Contracts are negotiated somewhat multi year period, some year over year.

Brian Austin: Negotiate every year so.

Sean Pelkey: It's fair to say you know our expectation coming into 'twenty four is cost inflation for our business will be a little bit lower so I would expect that number.

Sean Pelkey: Number to come down when we have our conversations but still very healthy when you look at historical rates, what we were able to achieve them.

Sean Pelkey: Obviously, that's an important part of our revenue growth story is both volume a balanced approach between volume and price.

Sean Pelkey: Your next question comes from the line of Brandon Glen Ski from Barclays. Please go ahead. Your line is open.

Sean Pelkey: Hey, good evening, everyone and thanks for taking my question.

Mike Cory: Mike I Wonder if you could speak more specifically to labor efficiency. This year, especially in reference to Kevin's remarks that youre going to have new merchandize business, bringing on about one point of volume. Additionally, so how are you planning or head count and what are the opportunities for efficiency. There. Thank you.

Mike Cory: Hey, Brandon hope you're well.

Mike: Look I'm not going to say at this stage that we can add incremental volume without head count it depends on what it is and where it's at.

Mike: But I'm very comfortable with the results. We had in Q4 of a run rate of more train train size and that obviously reduces the impact on the head count.

Mike: We've got you know areas that we just haven't thought too in my time, yet and I think I think the this isn't just about train size, but we really we have a very customer intensive network.

Mike: So we have a lot of yards in locals that first of all we're looking to button down and make the service reliable and that's it.

Mike: Our head count we have right now we see that we're able to do it so that leads us to know that we can do better and so I see I see the opportunities really are really in that touches of the cars that we do today. So I I see further you know further incremental improvement I see the ability with the capacity we are creating.

Mike Cory: With the locomotives that we have got added to the storage count to the capacity, we created online by having less movements I see us being able to handle incremental volume with what we have in many cases, but again there are those those key areas that we want to make sure that we have the right the right head count for.

Mike Cory: Your next question comes from the line of Ken <unk> from Bank of America. Please go ahead. Your line is open.

Mike Cory: Great good afternoon.

So just.

Yes.

Mike Cory: Thinking about the performance there either micro Joe it looked like your on time originations down at 71% and on time arrivals at 69%.

<unk> is still missing from the operations to get that efficiency improving have you changed the categories at all to see those sliding since the beginning of the year, maybe just what are your thoughts on how that gets increased efficiency to get those additional operating leverage savings.

Ken: Yeah. Thanks, Thanks, Ken.

Ken: I mean, it just goes back to what I'm talking about in our yards in our terminal performance and that's where our focus will be again.

Ken: <unk> been getting the folks to really focus on connecting cars, increasing train size. So we're going through some growth periods in that sense, yes, it's affecting the on time performance, but at the end of the day, we're counting on making sure we fulfill the trip plan at the customer and in some cases, it's going to change the way we design our network and at the time the trains go.

Ken: So I'm not concerned about that at this stage, it's certainly isn't anything to do with congestion or poor performance and these are the growing.

Ken: The growth.

Ken: What would I call it growth observations of the network is starting to change and really look to more maximize the assets that we have out there and create capacity. So it's not a cause of concern at this moment Trust me. We are we look at it in a lot measured at the minute. So this isn't a it's not like we've got trains that are late late late these are these are fracture.

Ken: <unk> of ours and so that's fine we know we know we have to operate on time, but at the end of the day. It's the it's the delivery to the customer so their first mile last mile their pain points that we're focused on and at the same time, we're driving efficiency through running are running a more condensed network.

Ken: Your next question comes from the line of Chris Wetherbee from Citi. Please go ahead. Your line is open.

Ken: Hey, Thanks, good afternoon guys.

Ken: I just wanted to follow up on the resources question I guess as you think about the portfolio.

Ken: We are the business opportunities yet to you that informs the volume growth outlook.

Chris Wetherbee: Can that be done or what are the resources required I guess as you think about the plans when we think about head count maybe specifically, but maybe also locomotives.

Chris Wetherbee: The growth associated with that that you guys have in the plan for 2024.

Chris Wetherbee: Yes, I mean, Chris one thing just to think about as we added head count through the year end 2023, right. So if we just held everything flat to where we ended the year last year, we'd be up 2% year over year with a little bit more of that year over year growth in the first half than in the second half.

Chris Wetherbee: I think our view right now is that by and large with a couple exceptions, we should be able to hold head count flat and absorb the new growth that's coming on the network.

Chris Wetherbee: And so we'll be able to do that first quarter. It won't look like tremendous employee efficiency, just because we added through the year last year, we get into the second half of the year, I think thats, where youre going to see the labor productivity show up.

Chris Wetherbee: Yeah, and I'll, just just on top of that too Chris.

Chris Wetherbee: Same with locomotives.

Chris Wetherbee: We still have opportunity.

Chris Wetherbee: To use <unk>.

Chris Wetherbee: The locomotives, we have out there working use them harder and so that's a big focus for us whether it's dwell whether its connection whether it's what they're pulling I believe we have the capacity to grow just up what we have out there right now.

Chris Wetherbee: Your next question comes from the line of Amit Malhotra from Deutsche Bank. Please go ahead. Your line is open.

Chris Wetherbee: Thanks, Operator, hi, everybody.

Sean Pelkey: Sean can you just help us I guess calibrate <unk> expectations in terms of operating ratio you talked about 30% to $35 million of kind of one timers in the fourth quarter I think that's like a point of or volume is down I guess, a little over 6%. So that's obviously a headwind whether it's tough so just talk about that and then on the cost side.

Sean Pelkey: P. S. At no cost you know Theres a lot of focus on labor again, Thats your biggest cost bucket, but <unk> is a pretty large bucket and if I look over the last three to four years the rate of inflation and so costs are like more than double revenue growth. So what's going on there what's the opportunity to kind of hold the line or bring that down because if I remember.

Amit Mehrotra: Correctly back in 17, and 18 that was really a great place to look for efficiency in opportunities just wanted to know if there's an opportunity there in 24 as well.

Amit: Alright, Amit.

Amit: Q1 margin question, I think I'll, just sort of stick to what I said before in terms of building momentum from Q4 to Q1, that's our goal it's to.

Amit Mehrotra: Deliver if we can operating income growth sequentially from Q4 to Q1.

Amit Mehrotra: The margins will be what they are based on what where fuel prices settle but.

Amit Mehrotra: Can we grow margins as well in Q1 sure.

Sean Pelkey: I think that's that that's within the realm of possibility again weather notwithstanding we had a rough couple of weeks, we're coming out of that things are certainly looking better across the network as we speak so you'll see the weekly volumes and see how that catches up from there.

Sean Pelkey: In terms of your comment on <unk> I think it's a good good reminder, for everybody to go back and understand we added quality carriers a couple of years ago.

A significant portion of the expenses within quality shows up in the <unk> line and that that is quite volume variable.

Sean Pelkey:

Tom Wadewitz: And so as we see increases or decreases in the trucking revenue line, that's going to impact.

Speaker Change: <unk> expense as well, we also added Pan am.

Speaker Change: Their rps are no expenses associated with the revenue that we added across that part of the network as well.

And then <unk> can also be somewhat volume driven particularly on the intermodal side.

Sean Pelkey: Terminal related expenses show up there.

On that line. So what I said was going from Q4 to Q1 <unk>.

Sean Pelkey: We normally do we would expect a little bit of a sequential increase in those costs and how.

Sean Pelkey: I have no doubt we are certainly focused on that line item amongst others as an area of opportunity to continue to drive cost savings.

Sean Pelkey: Your next question comes from the line of Allison <unk> from Wells Fargo. Please go ahead. Your line is open.

Allison M. Landry: Hi, Good evening I just wanted to go back to the commentary on domestic intermodal specifically around Chuck comparison. It does seem like Bristow really early stages I would love to get your perspective on what can drive that acceleration in some of those conversions is it.

Allison M. Landry: Liability improving further is it you know better truck capacity.

Allison M. Landry: Anything any comments there on what what could drive that acceleration for office space at this point.

Allison M. Landry: Yes, I would think I would I've heard many characterized last year I was maybe the worst trucking market they've seen in the last 40 years. So I think theres a lot of hope that we're at the bottom or have reached the bottom.

Allison M. Landry: I will say and we've been recognized on a highlight of this in the opening comments the customers are seeing.

Allison M. Landry: The service levels that we're delivering and I know Mike has plans to even improve some of our <unk> terminal fluidity. Even further we're looking at ways, where we're going to measure the customer experience in a different way.

Mike Cory: Measure their truck on time terminal and all of those things that really are important for those customers to drive value for their customers quite frankly, so a lot of those initiatives are underway and that gives us a lot of confidence as we move forward through the year that not only hopefully that the market has bottomed, but on top of that that we're going to be able to gain share with.

Mike Cory: A service product that we're able to deliver.

Mike Cory: Your next question comes from the line of David Vernon from Bernstein. Please go ahead. Your line is open.

David Vernon: Hey, good afternoon, guys. Thanks for taking the question. So Sean I think you called out I think it was like 280 or $380 million of deferred tax headwinds in $300 million of extra Capex I just wanted to confirm I got that $600 million headwind to cash flow rate for the year and then as we think about timing Sean you were very clear about incrementals.

Being better in the back half than the front half Kevin can you share anything on on the rate at which you would expect us mid to single low to mid single digit sort of volume and revenue to show up is that also back end loaded or how do we think about the cadence for the year. Thank you.

David Vernon: Yeah, David I'll I'll start so on your question there, yes, so deferred tax $380 million, which was essentially a benefit to 2023, we will make that payment in the first half of 2024.

And then on the Capex basically going from two three to $2 five so that's about a $200 million increase.

David Vernon: On that side.

David Vernon: Yes in terms of the cadence from a volume and a revenue perspective I.

David Vernon: I think we've been clear in the first quarter you know some coal dynamics other things from a pricing perspective are probably the high watermark that we'll have to lap, but it's pretty pretty even cadence through the year. After that you'll probably remember we started to see some weakness into the second quarter on the industrial side of our business.

David Vernon: That will you know when you think about chemicals in our forest products.

David Vernon: Business in particular has some very strong weakness.

Tom Wadewitz: That started to occur that we were what that will begin to lap quite frankly, as we get into the second quarter late second quarter and third and fourth so.

Tom Wadewitz: But when we look across the year, we think we're able to achieve growth throughout the year.

Tom Wadewitz: If you would like to ask a question. Please.

Tom Wadewitz: And your telephone keypad.

Tom Wadewitz: Our question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Tom Wadewitz: Thanks, Joe for anyone.

Ravi Shanker: Follow up on that can I have just on the operating leverage itself I mean.

In theory shouldn't we be seeing kind of the bulk of the operating leverage kind of show up now as we come off the floor off of volumes and kind of you have the maximum of fixed cost absorption.

Ravi Shanker: And kind of the the follow up question to that is if the market stays softer for longer in 2024 and truck rates going to need me to competitive do you think the volumes that you guys are converting will be enough to drive that operating leverage or do you also need price to come on top of that.

Yes, Ravi so one on the operating leverage point I would say that the leverages their underlying the business right. We've had some discrete headwinds that I mentioned in the script and as we go into the first half of this year Q1, <unk> got fuel lag from last year you have other.

Ravi Shanker: Revenue coming down you've got an insurance recovery those.

Those are things that we're gonna have to lap and get behind us.

Ravi Shanker: And then a little bit of a tail into Q2, as well, which is why in the second half on a reported basis, you'll you'll see it show up a lot more cleanly.

Ravi Shanker: In terms of the macro I think yeah.

Ravi Shanker: We feel pretty confident about our ability to grow even in the face of a macro that's relatively flat.

Ravi Shanker: We have some business wins that are carryover got some new business that's coming online.

And we should be able to absorb most of that with the existing resources if not.

Ravi Shanker: Tighten up the plan, a little bit and save some costs.

Ravi Shanker: Your next question comes from the line of Walter <unk> from RBC Capital markets. Please go ahead. Your line is open.

Ravi Shanker: Thanks, very much good afternoon, everyone.

I wanted to go back to the coal forecast I know you mentioned in your in your remarks here that domestic coal is expected to be modestly impacted in and when we're comparing it to.

Walter Spracklin: Other sources EIA are saying U S production's going to be down 16% in 2024, and that's on the back of solar and then retirement of coal fired capacity to use this just different market like it is the retirement of coal fired capacity just not in your catchment area is that you know what.

Walter Spracklin: What would what would lead to such a disparity between that kind of forecast and the one that youre, providing here on the domestic coal front.

Walter Spracklin: Yeah.

Walter Spracklin: Yeah, Walter we all read your notes here, obviously, we've been intimately are looking at that and we have our own sources. When we do we do a bottoms up build up right. We look at we talked to our customers we understand what the demand they're seeing in their business, how they're forecasting what they're telling their investors and their stay.

Walter Spracklin: Stakeholders in terms of what Theyre seeing and.

Walter Spracklin: Quite frankly this <unk>.

Walter Spracklin: Right now it's still a production.

Brian Austin: Production is going to either decide.

Brian Austin: Our upside or limit our upside is not we don't see a demand.

And right now where it is impacting our volumes next year, it's really a production constrained market for.

Brian Austin: From everything that we're seeing and as we see some weakness in the domestic market. We think there is an export market that can continue to put some of that volume into that market. So.

Brian Austin: There is optimism obviously I know this market can change quite quickly a global environment changes quickly, but for what we see right now and what our customers are telling us.

Brian Austin: There will be some weather impact as we get into the year well look at summer and see if it's hotter than usual or where that shakes out that will obviously.

Brian Austin: Impact our domestic business, but we do think theres an export business.

Brian Austin: As our outlet for some of the domestic side, if we saw some further weakness there.

Brian Austin: And we have no further questions in our queue and with that this does conclude today's conference call. Thank you for your participation and you may now disconnect.

Brian Austin: Please wait the conference will begin shortly.

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