Q1 2024 CSX Corp Earnings Call
Yeah.
Good afternoon, everyone. My name is Brianna and I will be your conference operator today at this time I would like to welcome everyone to the C. S X Corporation first quarter 2024 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. Please press star followed by the number one on your telephone keypad.
To withdraw your question Crestar, one a second time.
I would now like to turn the conference over to Matthew Korn head of Investor Relations you May begin your conference.
Matthew Korn: Thank you Breanna Hello, everyone. Good afternoon, and welcome to our first quarter earnings call. Joining me. This afternoon are Joe.
Matthew Korn: <unk> Henricks, President and Chief Executive Officer, Mike <unk>, 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 Officer.
Presentation accompanying this call you will find slides with our forward looking disclosure and our non-GAAP disclosures for your review.
It is now my pleasure to introduce Mr. Joe Hinrichs.
Alright, Thank you Matthew Hello, everyone. Thank you for joining our first quarter call.
<unk> had a solid start 2024 that was in line with our expectations.
And then when it comes to routing and never really isn't an easy quarter and this year has already brought us a number of challenges thankfully we have a great <unk> of over 23000 people I mean as you've seen in our weekly volume performance. Our railroad has kept moving forward. After the early periods of severe weather in January.
Since then of course has been the tragic Francis Scott Key bridge collapse.
<unk> had a deep historical relationship with Baltimore, and we have important operations, there, particularly with our export coal business.
Committed to doing our part to help the city recover we're happy to see the progress already being made for reopening. The court later in the call, Mike Cory and Kevin Boone, We'll tell you more about what we're doing now to mitigate the impact of this event for our customers.
All that said we are very pleased with the momentum that we built over the quarter and are seeing in the business to date.
We knew we had the opportunity to grow our profitability compared to the fourth quarter and we did just that our goal is to maintain our strong customer service levels, while looking for ways to run the network more efficiently than we have done so.
We have more work to do and we are confident in our railroad and are excited about the rest of the year.
Now, let's start with slide <unk>, where we highlight some of the key results from our first quarter.
Total volume grew by a solid 3% with strong support from our international intermodal business franchise, which grew at 7% compared to last year. Our operating margin reached 36, 8%, which represents a 90 basis point improvement compared to the fourth quarter.
Revenue of just under $3 $7 billion was about 1% lower than a year ago and flat compared to last quarter.
Operating income was 8% lower than last year, but up 3% sequentially.
Our earnings per share declined by 4% versus last year, EPS grew by 2% compared to the previous quarter.
So altogether. This was a good first quarter that reflected our solid progress the entire <unk> team knows there is much more that we can achieve given all the opportunities ahead and the great people, we have across the entire railroad.
And before we begin I'd like to take a moment to recognize remember Jim Foote, who passed away earlier this week.
Jim with our President and CEO in late December 2017 until I arrived in September of 2022.
Guided this company through some very challenging and transformative times in our history.
Including the building the network after the dramatic changes in 2017 and dealing with the Covid pandemic.
I have several impactful and insightful conversations with Jim <unk> was being recruited to come to <unk> and I. Thank Jim for his support with our board of directors to bring an outsider and as CEO of <unk>.
Thank Jim for all his contributions to <unk> in the railroad industry overall, Florida's 40, plus year career.
Thoughts and prayers go out to his family and friends.
Now, let me turn the call over to Mike Cory was brought a tremendous amount of new energy and new ideas to <unk> to discuss our operational performance.
Okay.
Thank you Joe and thanks for everybody for taking the time leave with today. So let's look at the first slide on safety, while we saw an improvement in the ancillary train accident rate year over year in my view, our overall performance results in this quarter pale in comparison to what this team is capable and will deliver so as a team and we've begun to really work collectively to elevate.
Integrate the beliefs and actions that a strong safety culture requires.
We recognize that in order to successfully change our safety performance, we need different and better skills. This includes proactive risk identification for our employees and their supervisors.
We thoroughly investigate every incident to determine the root cause and the necessary follow ups to prevent a recurrence and we pass that information on to our employees through portals to ensure the information shared learned from the used in improving everything from training to oversight of all our employees.
And both a union engine management provide a key opportunity to build a strong safety culture, we are.
Starting to partner with our Union leaders to help us change risk tolerance is across our property.
Partnership is starting to provide real benefit toward creating strong safety culture.
Takes time and effort on all sides that I am very pleased with our progress so far and we're also listening to our employee suggestions and we're applying them to our safety plan in order to become more responsive to our customers' needs in a safe and efficient way.
Let's look to the next slide and looking at this slide you can see our standard velocity and dwell metrics and I'm sure. We'll talk about today I'll focus this quarter has been on providing strong customer service, while controlling costs, while we've seen a slight decrease in velocity and increasing dwell our train sizes have grown in line with the increase in volume handled for our customers year over year Chris.
Does it remain flat, but <unk> is up one 5% in carloads up 3% our cost cost focus also includes management of the large capital program, we have earnings and increased working on and we're focused on making sure. They have enough time for the work to be done properly as a result, our crews are accomplishing all of their scheduled work and they are also gaining efficiency both.
Tie in rail we've seen reductions in unit costs, good reductions as we've enforce stricter compliance with planned track time for crews we've seen slight decreases in velocity increases in dwell our intent is to build and execute a more inclusive plan.
The right work window, while minimizing loss of velocity and I expect to see improvement as we continue to refine and develop this plan for the rest of this year's cycle and beyond.
Our focus on cost has also identified some strategic locations that are not as productive as it could be we see cost saving opportunities by reconfiguring strategically utilizing these assets into our operating plan.
Used cars running out of route and excess handling and our customers will benefit as we increase speed and open up capacity and the corridor.
Most important part even as we make these changes to our operation. There is no change to our goal of servicing the customer the best way we can.
Having an efficient network that can consistently performed to our customers' needs will allow us to gain share convert business from truck and attract new customers to rail.
Over the next slide on <unk>.
This slide youre going to see some of our customer service metrics, which still remains strong intermodal trip plan compliance remains high truck drive return times, an arrival to availability, which is a measure of efficiency at the yard.
So improved as we collaborate with our customers to improve the experience that our terminals as an example, our stubborn terminal southeast of Atlanta is a critical asset for our domestic intermodal business, but has not performed to our customers' needs as well as our expectations of intermodal leader put together a team and EBITDA better process for use of both the footprint and the assets in turn creating fluidity there.
It has reduced driver dwell at fairburn by nearly 50% in recent weeks compared to earlier in the year and previous to that which leads to capacity and more opportunity for conversion from truck.
Our carload trip compliance declined slightly but remained over 80% for the quarter and has improved in the first month of Q2, we're very proud of the service that our customers experience with PSX. So this we've added another important metric to this slide next customer switch data with <unk>.
Represents our reliability to be able to deliver on our commitments at the first and last mile of service for our customers and most of our short line partners. As you can see this remains very high.
Closing, we have many opportunities ahead of us and the team is focused on creating a climate of success for all involved our focus on safety service and efficiency won't waver as we continued to provide the best service product, we can for our customers with that over to you Kevin.
Alright, Thank you, Mike and good afternoon, everyone. The team continues to build momentum with our customers targeting modal share conversion and quickly bringing solutions to the market that target profitable growth.
Ability to react quickly and provide solutions for our customers was highlighted by our efforts in Baltimore, where we rapidly stood up an alternative solution, maybe intermodal needs of the community.
Despite a continuing weak truck market. The team has done a great job focusing on developing new opportunities.
<unk> truck to rail conversion industrial development working closer with our rail partners to identify joint opportunities and accelerating strategic discussions that allow our customers to benefit from our best in class service.
Communications and cloud collaboration between sales and marketing and operations is a key differentiator for <unk> a recent voice of the customer survey results for the first quarter. So it was the highest service scores since we began the survey which highlights the positive trajectory that we're on.
Let's turn to slide seven and look at our merchandise performance, our merchandise revenues were up 1% compared to last year with flat volumes and a 1% increase in <unk> as.
As contract renewals and slightly favorable mix more than offset the effect of lower fuel surcharge across the business lines automotive accelerated nicely.
Low startup several manufacturing plants chemicals, our largest market continues to gain momentum in plastics crude and Ngls.
Forest products volumes were flat overall, but saw encouraging sides in pulpboard in building products as the construction season appears to be off to a stronger start.
We told you that minerals face a tough comparison for aggregates, which were unseasonably strong in the first quarter of 2023.
Total demand is very strong against a healthy backlog of large construction projects with infrastructure spending expected to accelerate.
Metals volumes were a bit weaker year over year with the weather affecting flows and certain scrap markets Dennis.
Finished steel has also been a bit sluggish, but we see opportunity for sequential improvement in the back half of the year.
Fertilizer volumes continued to be impacted by phosphate production issues here in Florida, but an early application season in certain markets supported demand for longer haul higher yields shipments of potash and other fertilizers, which lift lifted our RP yield.
Finally, our AG and food business remains relatively soft constrained by a strong global <unk> soybean.
Slides, which limit demand for U S exports and still high availability of local crops and many of our customer regions.
Underlying demand across grains feed and food products is solid.
Optimistic challenging conditions will normalize into the back half of the year.
Turning to slide eight for.
For the first quarter coal revenue was flat year over year as 2% volume growth was offset by a 2% decline in all in yield.
Largely due to fuel surcharge.
I benchmark based export yields were slightly lower compared to last year, but we also got some benefit from favorable mix on the domestic side.
As expected shipments reflected the strength in export markets with export tonnage up 25% year over year.
It really is a testament to the great work by the team, including the credible work by operations to meet the increased demand.
We also anticipated that the domestic market will be challenged by low natural gas prices and lapping last year's restocking demand.
Domestic shipments for the quarter were down 19, 17% against a very tough comparison in the first quarter of 2023.
With Baltimore and the effects of the collapse of the key bridge I'm going to stress how important our partnership is with the city as.
As Joe noted before we have a long history with Baltimore going back to the very beginning of our railroad and the <unk> team is working hard to find alternative solutions to help the community and our customers.
In terms of the revenue impact to <unk> export coal will see a near term headwind with both our Curtis Bay facility and the dual served console marine terminal that are unable to load vessels.
Few days following the incident.
Julien senior leadership from PSX, So does a key alternative export facilities we.
We have already begun to divert a portion of our Baltimore volumes to other outlets.
Currently we estimate that the net revenue impact to <unk> from the port closures between 25 and $30 million per month, including the benefit of diverting some of these tons.
It's still very early in the remediation process.
The Army Corps of engineers has projected that the full channel depth, which we need for coal vessels to be reopened by the end of May.
It's also likely that youll see a good amount of congestion immediately after reopening so there's potential for it to take a few weeks to ramp back up to full run rate.
In the meantime, we are studying and communication with our customers business partners state local and federal authorities.
Looking closely with Mike and his team to make sure we are optimizing all available resources to serve our customers.
Secondly, as possible.
Turning to intermodal on slide nine revenue increased 1% on 7% volume growth.
Lower fuel surcharge, a negative mix pulled our RPM lower by 5%.
Growth was very strong for our international business is healthy consumer demand and more normalized inventories have supported higher import levels. We saw volumes increase year over year with many of our shipping partners as we gained from new contracts new lanes.
Ericsson with last year's weak market conditions.
We are very encouraged by the recovery. We are seeing continued positive demand signals as we look over the rest of the year.
Our domestic intermodal business also grew over the quarter, but a more moderate pace than what we've seen over the last couple of quarters.
Been constant is our service performance, which continues to help us win new business and drive truck conversion, even as a weak truck market conditions persist we.
We're optimistic that truck capacity will normalize in time.
Benefit the intermodal market.
More importantly, we are confident that we will be prepared.
The demand rebounds.
Finally, let's turn to slide 10, where we have an update on our industrial development program.
<unk> pipeline remains strong with hundreds of companies eager to partner with us to find attractive ways to expand our production capacity on rail served sites.
Something that's often overlooked is how diverse these development projects really are.
The chart on left shows the market split based on potential carload volume or the approximately 100 facilities that have come online over the last 12 months.
Added new capacity in many of our key markets such as COO.
<unk> minerals and forest products.
But this is the only scratching the surface the chart on the right shows the market split for the full development pipeline ranging from projects that we anticipate starting up later this year. She project proposals that will be constructed several years from now.
There are two key takeaways from this forward looking deal.
The total estimated potential carload opportunity measured by expected capacity implies a meaningful acceleration in activity as we look forward.
Scopes can change in timelines can shift of the set up is very encouraging for meaningful growth cantata contribution over multiple years.
Second the long term pipeline is also diverse we are excited about the multiple electric vehicle manufacturing facilities that are scheduled to come online over the next several years.
And together with related raw material or battery facilities. They represent approximately 12% of the total long term volume potential.
Minerals metals chemicals, and other projects represent a larger contributors.
This is a big opportunity for <unk> and our industrial development team has been working nonstop to build the partnerships that make all of this possible.
Excited to tell you that there's much more to come.
With that let me turn it off and let me hand, it over to Sean. Thank you.
Thank you Kevin and good afternoon first quarter revenue fell by 1%, while operating income was down 8% or $110 million.
These results include a number of discrete items versus the prior year with approximately $140 million of impacts from last year's insurance recovery changes in net fuel as well as declines in other revenue and export coal pricing.
Across merchandise coal and intermodal.
Revenue, excluding fuel recovery increased 4% in the quarter benefiting from 3% volume growth and strong pricing across the merchandise portfolio.
Expenses were 4% higher and I will discuss the line items in more detail on the next slide.
Underlying results reflect continued momentum generated by the <unk> team within our service driven topline performance and broad based cost control and efficiency initiatives.
Q1 was our second consecutive quarter of sequential operating income growth, despite a $30 million net fuel headwind relative to Q4.
In addition, sequential operating margins grew nearly 100 basis points demonstrating this team's focus on growth and efficient service performance. This.
This momentum positions us well to deliver year over year gains in the back half of 2024.
Interest and other expense was $9 million higher compared to the prior year, while income tax expense fell $25 million on lower pre tax earnings net of a slightly higher effective rate.
As a result earnings per share decreased to <unk>, including <unk> <unk> of impact from the previously mentioned discrete items.
Let's now turn to the next slide and take a closer look at expenses.
Matthew Korn: Total first quarter expense increase by $85 million.
Turning to the individual line items.
And fringe increased $75 million, mostly impacted by inflation higher head count costs from union employee sick pay and higher incentive compensation.
So cost per employee was down versus the fourth quarter, and we expect cost per employee to again be favorable sequentially in Q2.
Total head count should remain stable despite higher seasonal volumes.
Purchase services and other expense increased $23 million, which includes a $46 million impact from a prior year insurance recovery.
Efficiency gains evident on this line represents significant cross functional collaboration to drive sustainable cost improvements across both operating and overhead budgets.
We expect this momentum to continue going forward.
Depreciation was up $17 million due to a larger asset base.
Cost was down 39 million, mostly driven by a lower gallon price.
The address continued and fuel efficiency, which improved year over year and saw smaller than normal seasonal degradation from Q4, despite severe winter weather early in the quarter.
Finally equipment and rents increased by $2 million, while property gains were unfavorable by $7 million now.
Now turning to cash flow and distributions on slide 14 free.
Free cash flow of $560 million is lower year to date driven by a decrease in net earnings increased investment in the business and deferred tax payments, partially offset by prior year back wage payouts.
Hey, FX exit Q1, with a healthy balance sheet and an a rated credit profile.
Our first priority remains investing capital towards safety reliability and long term growth.
<unk> also distributed nearly $500 million to shareholders split between share repurchases and dividends, demonstrating our balanced but opportunistic approach to returning excess cash.
We also believe a long term focus on economic profit aligns our interests with that of our shareholders.
While first quarter economic profit declined due to previously mentioned discrete headwinds we expect it to increase over time as we efficiently convert right off the highway while maintaining strong asset utilization and attractive returns on our capital spending.
Now with that let me turn it back to Joe for his closing remarks.
Alright, Thank you Sean.
Now we will conclude our remarks by walking through our guidance for the full year 2024, which has not changed.
By our customer service, we continue to expect total volume and total revenue growth in the low to mid single digit range.
We expect our merchandise business to gain momentum through the year as effects from new business wins truck conversions and the ramp up of industrial development projects build on a favourable trends in many of our end markets. We.
We look for steady growth in intermodal supported by stable consumer demand and more normalized retail inventories, which are driving improved port activity.
Continuing to work closely with our channel partners, finding creative solutions to gain share even as the truck market remains soft.
Global benchmark coal prices have fluctuated, but remained high compared to history and though the situation at the port of Baltimore limit some of the extra volume in the near term we are taking actions to effectively mitigate as much of the impact as we can our team at Curtis Bay and across the rest of the coal franchise, we are ready to ramp back up as quickly as possible once the channel returns.
Operation.
On profitability, we made good progress this quarter and grew our operation margins operating margins sequentially and.
And as you saw in our results and drew and the team on this call. We benefited from volume growth solid pricing gains and focused efforts to improve efficiency and productivity.
Our goal is to consistently grow our margins over time, and while Baltimore and global core prices are near term challenges, we feel very good about our ability to deliver strong performance in the second half of this year.
There is no change to our Capex forecast of $2 5 billion.
Heard from Sean our balanced optimistic or opportunistic approach to capital returns remains in place.
To conclude during a quarter, where there were many potential distractions I am very proud of how the <unk> team stuck to our plan focus on execution prioritized our customers and achieved good results. There is much more to come as we make every effort to run safer faster and more reliably for our customers. So we can deliver profitable growth.
Over the long term.
Thanks to all of you here in the company and less Matthew we're ready to take questions.
Thank you Joe we will now move to a question and answer session in interest of time and to make sure that everyone. On this call as an opportunity. It's a part we ask you to please limit yourselves to one and only one question Brandon we're ready to start the process.
Thank you Matthew.
Our first question comes from Justin Long with Stephens. Please go ahead.
Thanks, and just our thoughts and prayers are going out to Jim's family. Obviously, he left a great legacy on the industry.
But for my question I wanted to ask about the second quarter typically do you see.
All improvement sequentially in both margins and earnings do you still think that's possible. Despite the impact from the Baltimore Port closure and then.
I guess along those lines just curious do you have any thoughts around call RP you in the second quarter as well thanks.
Hey, Justin.
Happy to take both of those questions. So in terms of sequential improvement that's normally what we see from Q1 to Q2.
Well clearly the Baltimore impact is going to.
Be felt in the second quarter, we still feel that we should be able to grow earnings sequentially from Q1 to Q2, and what I would say is that as both topline as well as being able to do it while containing costs and deliver really strong incremental margins from Q1 to Q2.
The headwinds clearly is export coal not just not just the Baltimore impact but.
In terms of <unk> I think pricing.
Pricing has come down.
What we're seeing right now in the marketplace is probably something that's going to lead to a mid to high single digit decline in <unk> from Q1 to Q2, but even with that backdrop still feel pretty good about our ability to continue this momentum.
Your next question comes from Jon Chapell with Evercore ISI. Please go ahead.
Thank you and good afternoon.
Mike as you indicated in your slides you would probably talk about velocity and dwell a little bit on this call. So obviously, there's been some disruption whether it was weather in January or portable tomorrow and the last part of March.
But things have kind of filtered into a little bit into April as well can you just give us a state of the union on why some of those metrics that may be moved in the opposite direction as when you first started and kind of how you get them back moving in the right direction.
As you know in the next couple of weeks.
Yes sure John Thank you very much for the questions.
I just wanted to make it really loud and clear. These metrics are extremely important we're not happy with them.
They're not significant and I'll put it in perspective here. So some of it we've really shock the system.
And one of the one of the first things. We did was really start to look at the efficiency of our capital engineering capital programs.
$1 $5 billion envelope and quite frankly last year, we didn't get the work done and we paid more than we should have for the work to be done. So this year, we decided that we were going to be very strict about the curfews and is there any time to track as needed for between six and 10 hours across our network for these big giant gangs to get out there.
Do all their work with rail ties bridges, you name it and again, we started this probably around you can see the depth probably around early February late January because after after the winter started.
We went through the winter storms and it really impacted our southern corridors.
We stuck to our guns, we held our trains at the terminals to run in line with the curfews that dwells the cars in the yard that also congestion bunches of traffic and so we really let that go for a month, but then we've been working ever since that point to start to redefine the program that we're doing split up the work and one thing.
One thing we really didn't before was do all the work in the south during the winter time because of the winter up North we've got to find ways and we will to spread to work out but that in itself.
<unk>.
<unk> and train speed from previous years, because we did not do that strict we've come in under our rail and tie budget. So everything in the unit cost wise is the right way and the biggest thing that provides that safety.
That is the hardening of the track that we need to do every year with the volume growth.
That's number one if you remember we went into the last quarter, we've reduced 5% of our crew start.
And we absorbed one five <unk>, 3% carload, whatever you want to call it without any more teeny head count what that did was really focuses on increasing.
The tonnage on the train and then starts to convert itself to better utilization of locomotives.
And as simple as going from three to two those things start to slow the trains.
That there is still within an acceptable.
Parameter and sorry as far as I'm concerned right now, it's not where we want to be though on top of that.
Took a strict view on our use of trip optimizer and that's that's really there to moderate the speed of the train, but again get fuel efficiency, we increased our used by over 10%. This quarter. So we did all of this over the backdrop of the.
Typical first quarter. If you look last year the numbers came down as well and then you get it whether you want to call. It winter their excuses, but these things on top of that I am comfortable with all the actions. We're taking that we will figure out a better way to do the work blocks, but at the same time. This is forcing the folks in our terminals.
You don't have as many in as many outlets at times to move their cars and so we're.
Working through that and in fact, he got to the point now where in going through this exercise we started to identify some yards that were closed for the right reason I shouldn't say close.
They were just configured and I'm talking about opening up pumps, but theres some strategic yards that were going to look at using as we go forward that I'm.
Im looking at quite a few other rail car miles handling all the good stuff that produces more speed, but at a reduced cost and you don't find that until you start to push the program.
We could've easily absorb traffic put some more trains on <unk> is not running the speed <unk>, providing the proper service at the right cost and being able to incrementally grow your margins and grow your business.
And that's really what's going on I see improvement in the future I see it every day I see the engagement of our of our folks. This has also provided a real opportunity for us to keep our operating supervisors how to balance as John said earlier. This is there's a lot of cost in every everywhere. We look at them. This railway obviously, the biggest is labor and fuel and that's where we're tackling that.
This is teaching them how to go about this exercise without at the end.
Sacrificing customer service and one one dwell number we don't show is on arrival to placement for our customers. It's improved 10% in many of the major industrial areas. The reason for that is we've actually increased our local service. We've taken some of the money we saved on the line of road, but we make sure we're trying to build trust with our customers because now the <unk>.
Next opportunity one of the next opportunity is to look at their fleets and get them to work with us to trust us to be there like we are and hopefully reduce some of the fleet that we have out there and be able to add more incremental business into what we have I hope that answers it but there is a plan behind this thank you.
Your next question comes from Tom Waterworks with UBS. Please go ahead.
Yes, good afternoon.
I wanted to get some thoughts.
I think I'd just pricing and.
I've got a bunch of moving parts.
Thinking extra KOL item, but we've seen I guess from JV, how tonight and some of these.
Is there some headwind that affects what you do on price and revenue per car from this ongoing weakness. So just I guess trying to think about it.
Nice stable is it going to get better.
And the way, we model price, which ends up being revenue per car. Thank you.
Yes.
Nothing has changed on the pricing side.
Obviously, a tough chunk backdrop that will improve and we'll see.
You'll see a lot of benefits from that I think as we see the cycle.
So he has bottomed here from what we're seeing but.
When you look at the market.
What we do on the pricing side is obviously, we're able to capture that inflation and I don't see anything really changing there it's always a balance and we manage the portfolio accordingly.
And where there's opportunities obviously to gain.
More and more volume, we work with our customers, but that's a quarter what how our growth algorithm works, it's volume and price as we look at it and nothing has changed there as hopefully cost inflation comes down then the customers will benefit from that going forward, but.
Obviously, not the environment that we had last year, where inflation was very high that's starting to moderate some hopefully the thud.
But they sure too and with the rates and things like that but that's where we are today still as planned I think I was very happy with what the results in the first quarter.
The team was able to deliver and we're right on track.
Your next question comes from Brian <unk> with Jpmorgan. Please go ahead.
Hi afternoon, thanks for taking the.
The question, So I guess, Sean let me come back to your comments on head count.
Said that that's still relatively flat going into the second quarter that was the plan and if that holds through the rest of the year, but it sounded like at least in the near term. So maybe you can elaborate on that a little bit and also the comp per employee stepped down sequentially and you expect it to step down again.
<unk> can you just explain that trend and of course, we should probably be thinking that that moves up in <unk> sequentially as you hit the new <unk>.
Labor agreement with the one 5% adjustment.
Additional thoughts on that and how that progresses and head count overall would be helpful.
Thank you.
Thank you.
Sure Brian Yes, so on the head count side I would say we came into the year, we actually added a little bit from Q4 to Q1. Most of that was for the engineering work that Mike talked about and making sure that we can get everything done this year, we're going to manage that down through attrition.
As we get to the second half of the year, we're going to watch business levels were going to see how we are running but I think it's fair to assume that we're going to be relatively stable as we get to the second half if not down a little bit sequentially and so youre going to see a clear return to head count labor productivity in the second half of the year.
And then in terms of the comp per employee, yes, second half second quarter will be another step down versus Q1.
A couple of reasons for that one is.
First quarter, we had some winter related costs and then.
Secondly, as at some of the capital related programs get a little more ramped up in the second quarter that has a <unk>.
Benefit cost per employee sequentially Q2 versus Q1, and then Youre right as we get to the second half of the year. The current labor agreement stipulate.
Stipulates, a four 5% union wage increase that will feel the impact of that as we go from second quarter into the second half.
Okay.
Your next question comes from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon. So.
Mike It sounds like you are trying to find a balance right now between some of the service metrics and just opex.
You look at cost.
Excluding fuel was down just slightly from Q4 to Q1, how should we think about just overall cost ex fuel from Q1 into Q2, and then just maybe just overall.
We're a quarter into the year it sounds like margins.
Year over year again in Q2, but infecting positive in Q3 Q4 full year or do we do we think we could see some margin improvement or is that given the first half is that too much task.
Thank you Scott I'm going to let I'm going to let the expert over here Shawn talk about margin because as you know and we're.
Talk about margin.
Youre series right.
We are trying to balance without without first of all safety and the customer without damaging that.
And we have a long way to go on safety.
So these things that these things we're looking at are all focused on really on the cost side. So whether if we can we can shift some of the capital.
We're planning to use by being more productive in the areas that we hadn't planned to make some of these yards useful are more useful than they are I see I see definitely cost benefit.
It's things like that.
It's not it's not something I, Sean looking at and he's going to start talking to you a bit about our numbers.
That is our focus to bring that bring that margin up on the cost side, but I'll turn it over to Scott for Sean.
Thanks, Mike.
Yes.
What he says is true we're focused on how do we deliver growth and how do we do it at strong incremental margins by maintaining the fixed cost profile and not adding a whole lot of variable costs, along the way if not finding opportunities where we can run things more efficiently. So.
To your direct question about cost X fuel I think yes, it's fair to assume.
We got a chance to improve that even further going from Q1 to Q2 at that ties in with the comments I just made about comp per employee and keeping head count relatively flat.
So we will build some momentum I think.
The year over year comps are a little more difficult in Q2, given the Baltimore impacts if that hadn't happened.
Maybe could have even grown operating income and margin in the second quarter.
But with it it makes it more challenging second half of the year, we feel good about the setup. Some of these headwinds that we're facing the first couple of quarters paid and we're going to have labor productivity will continue to grow the business the industrial development projects, Kevin talked about.
A number of those start to come on as we get a little bit later into the year. So there's a lot to like about it we are not going to give any specific guidance about full year operating income growth margin growth, but clearly sticking with the low to mid single digit total volume and revenue growth is very helpful, particularly when we're focused on what we can do to drive continued.
Missions against.
This is Joe is to add one more comment.
So we'll work hard to try and help tell our story, a little bit better and differently going forward, but I just wanted to be clear our our focus on the customer and customer service has not waned at all.
As you heard Kevin mentioned in his comments, we get surveys from our customers on a regular basis and we have the best quarters, we've ever had in the first quarter. So we have to find a way to tell the story that isn't just told by velocity and dwell or even trip plan compliance. That's why we introduced the customer switch data and some other things for example.
You went up per train and so if we combine a train two trains to one maybe we go from three engines two engines being used and that can combination and that higher tonnage crane might be a little slower it might tell a more dwell time, but the customers okay with it it helps our efficiency and the customers still happy.
And so but that will show up as more and more dwell and little less velocity, but better efficiency and as long as the customers happy we're okay. So we check with the customer first and then we work backwards as opposed to some of the storage you've heard in the past, which was about internal focus and tell the customer about later, so that's a very unique and important difference.
Stinker, but.
As you saw quarter over quarter.
Some of our numbers may look like they've degraded, but our efficiency, you've got better and our customer responses and survey responses were the best we've ever had so we're walking that fine line. So we're going to have to find a way to help you guys see that I'm at the same time getting more efficient in working with our employees at <unk> to teach them how to do that and work together to do that in a pause.
Ziv way and that's the balance we're trying to do and I appreciate Mike and his entire operations team working with Kevin and the sales and marketing team to bring that to life and it's a collaborative effort.
And it's work because its teaching it's also listening, but is finding creative solutions and not being focused on one metric at the end of the day, we can deliver a sequential improvement and so as long as we deliver sequential improvements to our customers.
And in our earnings we can we can show you how that leads to growth over time. Thanks.
Your next question comes from Brandon <unk> with Barclays. Please go ahead.
Hey, good afternoon, and thanks for taking the question.
Kevin I Wonder if we can come back to the industrial development pipeline that you guys have been mentioning the new graphic in the slides is somewhat helpful. But can you talk about the 100 facilities that have already opened in some examples where that's delivering volume today and then how you expect that works through the end of 'twenty four and into the beginning of next year.
Yes look we're in the very early stages of this.
He comes online there's usually depending on the industry at 12 months to 24 month ramp rate.
So for this year for example, we have in the.
Aggregate side.
On the metal side as well as where we've seen some concentration that activity as we look forward you can see where the activity is going to take place, but these projects some of them longer than others, but once they come online there is really a guide path.
Of growth that's related to that is as they bring that capacity on in the market. So.
We're excited about it I think we'll share a lot more.
Year progresses on and give you a lot more detail how that layers in over time, but we thought would be give a little more color just around how diverse that pipeline is and how it continues to build and I think that's exciting that diversity around we're not concentrated in one single industry.
Really we're seeing it across the board on that.
In the markets that we serve.
Your next question comes from Ken <unk> with Bank of America. Please go ahead.
Great. Thanks.
And I'll throw in my condolences to the foot family always had fund discussions with Jim over the last 20 years and appreciate his insights. So thanks for the comments earlier, Mike just following up on another step here looking at flat head count low to mid single digit volumes and revenues. So when should we expect to see the service stats improve.
When do we get the flow through have you seen that already in the data in April and then I guess thinking about Baltimore and the impact of coal volumes now down 12, 5% last week.
So Baltimore is now impacting the results how should we think about what percent of volumes can be moved to Newport and maybe improve some of the metrics. Thanks.
Yeah I can.
It's a good question.
Yes.
I almost thought I.
Explained earlier I'm not.
I can't give you I can't give you an answer so much on when do we expect to see the service because the service is good.
Like we I expect to see over the next few quarters here, yes, the velocity and dwell will continue to improve versus what they are but the service level is going to be what the customer needs and right now that's what we're fulfilling.
<unk>.
But so again.
We're going to do a lot of different things here to test our facilities our people.
We're trying to put stricter process in place and Thats going to have some effect until we learn to get through it.
But I see that I see the metrics improving I see them now improving.
We still have.
We started the odd thing that has taken place and lots of its revolved around these engineering gangs that were full hearted. Thank our full engineering team plus our operating their transportation team.
Our meeting as we speak to continue to find a way to not have such restricted curfews, but.
We have to yet other than that the network is fluid.
And I'll, let I'll let.
Kevin talk about talk about bolstering, what we're doing with the shifting to Newport.
Yeah, I think just looking at last week not the free live week to week. This is going to be a little bit choppy with some of the terminals. We're working with in terms of taking on some additional capacity I don't think last week necessarily the trend that we're seeing we're seeing some good performance in them stepping up here. This week on that but when you look at the impact I explained 'twenty.
The $30 million net impact from from the Baltimore incident that will continue at least through May and then we'll probably have a.
Hopefully glidepath ended June of improving that but we're looking at offsetting a third of that business.
A little bit more.
We can get all of the terminals to work with us.
Your next question comes from Jordan <unk> with Goldman Sachs. Please go ahead.
Yeah, Hi, Thanks, just curious can you talk a little bit maybe specifically what the international intermodal growth was in the quarter and versus domestic and based on your comments. It seems like international is.
Outstripping domestic made by a wide margin I'm not sure why is that the case and what gets domestic intermodal growth rate back up you could plan compliance looks really good. So I'm just sort of curious those dynamic plan.
Speaker Change: Well I think obviously the comps on the international side were fairly easy in the first quarter, that's where we saw some pretty dramatic declined last year as you saw destocking happening in almost across the board and a lot of companies out there. So.
We benefited from that the team has done an amazing job of identifying.
New service some other areas to identify some profitable growth that we went after good contract relationships.
Lined with the right partners.
We benefited from that so you're seeing double digit growth on international side, while our domestic was slightly up this past quarter.
The domestic market is a lot more truck competitive as we all know and if you've been listening last couple of days that hasnt been the trucking companies have obviously struggled and I think we're pretty proud of the results we were able to put up in that context. So.
We think there's better days ahead of us certainly a challenging market and the results were.
Good in that context for sure.
Your next question comes from Bascom majors with Susquehanna. Please go ahead.
Thanks for taking my question could you talk a bit about how some of the emerging uncertainty at your eastern competitor has.
Helps you, perhaps capture some volume short term and.
Maybe longer term has that uncertainty got another rail impacted the desire or intention of some of your customers to really start to use rail more as an outlet in their supply chains that that you've been working for.
For years now with industrial development in all of our efforts. Thank you.
I think past and this is Joe.
As you know certainly in the timeframe that I've been here with the switches <unk>, we've been really focused on.
Our mission, which is really to focus on improving the employee culture and the employee experience through <unk> and to get better service to our customers, which we believe will lead to profitable growth for <unk>.
For ourselves and importantly growth with our customers that hasnt changed and Hasnt waned I think in fact, what you've seen over the last couple of months as customers coming out and wanting that commitment to service and that commitment to offer our whole industry to be focused on what can we do to grow.
So we're not we're not distracted by what's going on.
And certainly not.
Not getting distracted by it we're focused on what we can do and as you saw in the quarter sequential improvement across the board and we talked about our confidence in to be able to continue to deliver that and that's where I'm really proud of our team is not getting distracted and staying focused on our customers on our employees, we need to improve safety as Mike talked about.
And looking for opportunities to grow and what we're hearing from customers, they're very happy with the service CFO, providing them theyre very pleased with the.
The continuity and the consistency of our messaging, but also our results interactions.
That's what we want to stay focused on at the higher level as you hinted at as an industry. We have to continue to get better service to our customers I've talked about it extensively at many different conferences and events and we're all working together to do that I'm seeing more collaboration across the industry to make that happen and I'm encouraged by that and we want to be a part of that.
So.
Ultimately realize the potential of this entire industry, we all need to get better.
At the fluidity of our network, how we work together in the service provider customers and Thats going to take us working better with all the stakeholders in this industry to help make that happen. So.
We can we can grow as industry, if and when we all get better at customer service and working together. So that's the focus we have as CFO.
See us change our.
There's no two point over three or 4.0, a plan. It's the same in <unk>.
Focusing on our employees and our customers and youre going to see us continuing to execute.
Your next question comes from Jason Seidl with TD Cowen. Please go ahead.
Thank you operator sort of along those lines we've seen.
Jason H. Seidl: Huge shift on the intermodal side back to the over the road.
Operators and mainly due to price and then I guess last year.
Operational issues with the class one rails and some declining diesel prices I.
I guess two things what percent do you think that gap has to close.
Between where trucking pricing is now for domestic intermodal to start getting business back and have you been able to quantify just how much freight shifted to the over the road market.
<unk>.
Yes, thanks, Jason.
There is still a value proposition out there or is it a little bit tighter than maybe a year ago and one truck prices were a lot healthier absolutely.
And I think the discussion is more about when you look at it looking at value in the near term and when you have to do nothing and you get price declines in your trucking business then.
You are not as compelled to look at the intermodal option as you would be in a more normalized market and so I think that I'll, probably balances out as we get through the year.
It feels like we're at the bottom bouncing along here and as things solidify I think those conversations to accelerate.
Jason H. Seidl: We put up we put up domestic growth.
We're pretty proud of that video product that we're offering a service that we're offering is.
<unk> in the market, even at the lows and I can only.
How compelling is going to be as the market recovers. So we're pretty excited about it we're talking about it actively.
<unk>.
When the growth comes back that we're going to be prepared to more than anybody else to handle it.
So thats exciting for us when that recovery happens and we're not certain I think it's fair to say the trucking market is probably a little bit worse than what.
People anticipated coming into the year, but we.
We're pretty resilient in a very very challenging market.
Your next question comes from Ben Nolan with Stifel. Please go ahead.
Yeah. Thanks, I was just going to ask a little bit about the the Baltimore impact on appreciate the $25 million to $30 million a month just curious if that is predominantly coal or if there are any other impacts on maybe some of the other business lines and then also in addition to the Red.
<unk> impact are there any cost impacts from.
From rerouting to other ports or anything below the revenue line that we should think about.
Speaker Change: Now I'll cover the revenue on that one is easy it's call that we're seeing there maybe some slight opportunities, but they're not large enough to.
Be impactful to that to that number and then on the cost side Mike.
Speaker Change: I think Kevin alluded to it we had a little bit of a rough startup.
Going over to new court, that's now smooth itself out but.
Really not a lot more cost then.
The most of the traffic moves through the <unk>.
<unk> coal so.
Significant in that sense no.
What I'd tell you guys a little story, because I get often asked all the time what are the benefits of <unk> and the <unk>.
Culture, we're trying to achieve here.
Within two days of the incident in Baltimore, we put out.
A request for transfers from them from our engineers and conductors who are in other locations to be able to relocate temporarily for a couple of months to help with the change in the train setup and schedule, we needed to support the movement of coal elsewhere.
And we needed maybe a dozen people to go and we had seven to eight times that.
People immediately sign up to help.
And that's a testament to what we're seeing here is that our people are willing to be a part of the solution and to serve our customers and know how important that is no. It's just a great example, and so theres a little bit of cost of that relocation in a temporary transfer, but I can tell you a little over a year ago, we were trying to get temporary transfers and we struggled.
At this time.
With so many people sign up it was great to see and those are the signs you want to see a healthy culture and people are really service oriented but also understand the bigger picture of what we're trying to do here and serving our customers.
And so we have not been the constraint or the bottleneck.
At all in fact, we've been able to really.
Kevin and I were with one of our largest coal customers. The other day and he was just so proud of the work we've done and our team have done to respond so quickly and be able to react and that's a testament to our people. So that's just another example of why it's so important to stay consistently focused on our culture and our people.
Can I understand that we're here to serve customers and that's why we exist.
Safely, obviously and efficiently but.
That message is resonating and our people are responding.
And just one more point Ben I should mention this is.
With this issue we've been able to.
Betterment in terms of our maintenance at Curtis Bay, we've been able to go in there and do work that we would have had to do it under load, which is a lot of volume moving through so it's fully taken advantage of some pretty major.
Aspiration that we were able to accomplish that we're still working on so that's been that's been a good thing.
Yeah.
Your next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.
Great. Thanks for taking the question Sean I just wanted to clarify one quick thing I think in response to the first question regarding <unk> you.
You said profit up I don't know if you said margins up you may have said it but I didn't catch it I just wanted to clarify that point and then Kevin I just wanted to talk about interchange. So I think before unless I'm mistaken maybe your interchange have your volumes.
Is that mostly evenly split between the two west coast rails are.
I'm trying to understand how much do you actually interchange the new Pea and.
What proportion of kind of that interchange total interchange is actually represented by by the E&P. Thank you.
It's John I'll take the first part, yes profit up Q2 versus Q1 and margins up I think that's a fair expectation on both sides.
Look I think we said roughly half of our business such as another railroad and certainly when you look at the western railroads, particularly U P. There. They are a very large part of that so they are a very important partner to us all of our partners are very important so.
It's encouraging and hearing a lot of signs to go after more business and working collaboratively to do that so a lot of opportunities out there that we see.
Your next question comes from Walter <unk> with RBC capital markets. Please go ahead.
Yes, thanks very much good luck.
Afternoon, everyone, Sean Im comparing your outlook and I know your outlook is unchanged from prior but when I look at your some of your commentary regarding the moving parts that have occurred in the first quarter.
And looking into the rest of the year you did have a little bit of a tougher January.
Mike pointed to some operating metrics that that term.
He wants whether it be you've got a.
Where is coal market there was the Baltimore outage trucking is worse, but.
Maintain your guidance. So I'm just curious as to what if those are the puts.
What are the takes in terms of let's see offsets here to maintain your guidance despite kind of those headwinds that emerged a little bit here so far in 2024.
Yes, Walter I'll do my best on that one so yeah, I mean, certainly a little bit of winter in January a couple of things.
There and then of course, the Baltimore outage was unexpected and.
That's a hit to the forecast but.
Still feel very confident about what the second half looks like in particular from a volume and revenue perspective, and what it looks like on the cost side. We did an exercise here, where we looked at every dollar of every budget and.
There's a lot of small wins that we're getting here.
Million $2 million here and there across every line item both within operations and across the business. So I think it's it's everybody.
Focused on how do we deliver the kind of economic financial performance that sort of backs up all the momentum that we've got with once the sx goodwill that we've got with the customer.
To the extent Theres revenue headwinds how do we how do we close the gap on some of those but still.
Still a lot of confidence I think from the <unk> team.
Yeah.
Your next question comes from Stephanie Miller with Jefferies. Please go ahead.
Hi, good afternoon. Thank you.
I wanted to maybe switch gears, a little bit and talk about.
On the capital allocation, our capital allocation and maybe your focus on share repurchases have seen it kind of come down a bit over the last couple of quarters. So I just wanted to gauge your appetite in terms of incremental share repurchases as the year progresses.
Thanks, Stephanie Sean.
Speaker Change: We're still committed to the share repurchase as well as the dividend.
It's certainly a step down in the first quarter of the year, but we.
The stock ran up pretty quickly and so we try to be opportunistic and gauge the amount of buybacks that we do based on the momentum in the stock so with the pullback that we've had recently where buying buying a little bit more.
Still committed to do a significant amount of share repurchases this year.
It'll be a little bit less than it was last year, just simply because we came into the year with a little bit less cash on the balance sheet and last year, we raised a little bit of it.
Speaker Change: Incremental debt to help out.
Due to the system and that led to some additional buybacks, but we're still very committed to that and youll see it go up and down quarter to quarter, just based on the opportunity that we have in the market.
Your next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, Good afternoon, everyone. So a two parter here on the ports one just on Baltimore a follow up.
I think you've said you redirect of about 43% of the traffic so far.
Does that mean, there's going to be like pent up demand when the channel is kind of normalized and <unk> led to a Q1 beyond just wanted to confirm that and also on the east coast to West coast kind of share shifts kind of what any of that would be kind of all the normalization there or are you hearing from your customers.
Labor talks on the East coast ports, and maybe any preparations there. Thank you.
Yeah look in terms of pent up demand there's outages in the summer that happen for the coal mine <unk> and we'll see how they handle that with some of the obviously slowdown that we've seen is there opportunity to make up some of this volume in the third and fourth quarter.
There is that's not in the plan right now, but we'll see how that plays out.
Prices remain strong I'm sure, there's going to be a lot of incentives.
Those contracts will obligations and those things on the east Coast West Coast.
Look if you've been to Savannah lately, there's huge huge investments going on investments, obviously, when you're spending billions of dollars you got to have visibility to the demand out there.
There's tremendous demand that they see coming in.
We're not hearing any anticipation of.
Significant trade moving from the east to West obviously, if that happened and they wanted to move to the east there could be a net benefit to us. So I think from our perspective, it's probably a neutral outcome if that happened.
In some cases, you could see some visits that normally would come into the ports then moved truck that would that would come over the west then move over our railroad, which would be an incremental opportunity for us. So.
I don't see a high probability to risks there may be some more opportunities if that happens, but we will continue to watch it but over the long term.
We see a lot of capacity growth in the east and this is not there in the west.
Yeah.
Your next question comes from David Vernon with Bernstein Research. Please go ahead.
Thank you for taking the questions into the chase them around for David Vernon.
Yes, Kevin going back to the question on the 10 X opportunity can you give us some more color on what is driving this massive tenfold increase.
Traffic coming on from the highway to rail or is it more of an increase.
On the efforts from your team.
Color on that would be helpful. Thank you.
I think.
And generally the Theres a lot of.
Geopolitical risk out there theres a lot of movement in terms of how companies post the pandemic or thinking about their supply chains and we've talked about this before but it's supply their supply chains are being viewed as competitive advantages in being closer to year end consumer, which we have the most valuable and consumers in our network in the world.
It's becoming a priority.
We're seeing those investments take place there really.
It happens so it's broad based as I mentioned.
A lot of activity, but I think that's the major draw I think they saw through the pandemic a lot of disruption with how much it costs to get things delivered to the end consumers. So now it provides opportunity.
Where we can maybe get the inbound and the outbound which is pretty exciting for us. So it'll it'll happen over time, there's already a lot of capital in the ground a lot of the capital that's already been spent so.
We'll participate in that but it's a really shift from what we've seen probably over the last three or four decades in terms of activity.
Rather than the industrial base decaying.
Within our network, we see some growth in an industrial base, which should benefit us over time.
Your next question comes from Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much and our thoughts are with the foot family as well.
Terrific.
I want to go back to bask homes question on any.
Any nervousness with customer and is using other rails given all the media hype.
Hi.
Maybe not so much in terms of customer wins, but at this point what types of questions or what types of concerns are being.
Reis to you and is there an anxiety among the customer base.
Well look I mean.
I'd see more activity with our customers willing us to share their truck files.
Really open up the book in terms of what their supply chain looks like given some of the service performance, we've been able to have been able to achieve over the last few quarters. So thats exciting for us we're really looking internally about what we can deliver I think.
Customers want certainty.
And then one visibility and I think we're providing that they understand the path we're on.
They're supportive of the path and they're seeing the service along with it so.
Many customers.
Last year said, Hey, we want to we want to see the service and then we can talk about.
More and more opportunities for you and now we're in the midst of a lot of those discussions and it's.
The team is working really hard.
The backdrop the wins not at our back clearly we have a lot of markets that are at cyclical lows those will come back in but the opportunity right now is the win wallet share.
You wouldn't wallet share in the markets turn.
Would translate into a lot of growth for us so.
Incredibly excited were internally focused on what we can accomplish those discussions where we can deliver.
And I think we're having a lot of those conversations.
Yes.
And I have.
So sorry, it's Kevin and I have spent.
Oh I don't know how many customers we've met with in the last couple of months, but we've had to FTA and number of other events I think we've touched almost every major customer we have.
And directly personally and we've seen a lot I've gotten a lot of feedback on the consistency reliability and the continuity of our messaging and also our actions and that's what customers want having been one for decades myself just want to have reliability and they want constancy of purpose I wanted to know what your standpoint, you're going to deliver it and that's what we're starting to show and its Kevin.
He said our customers starting to trust US again, which is the foundation for us to be able to grow with them as fund to trust us and Thats. The trust, we want to keep delivering and building in and gaining because of the constancy of what we're standing for which is of course.
Engage our employees as <unk> to serve our customers better and do that with better safety.
Since you will come from the actions that we teach and what we do and so we're going to stay on that course, and it's delivering for US and you saw it in the first quarter and Youll see it again next quarter.
This will conclude our question and answer session.
And that does conclude today's conference. Thank you all for your participation you may now disconnect.
Please wait the conference will begin shortly.
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