CSX Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2022

There are 18 speakers on the call.

Operator

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2022 CSX Corporation Earnings Conference Call. Thank you. Matthew Korn, CSX Head of Investor Relations, you may begin your

Speaker 1

Thank you, Emma. Good afternoon, everyone, and welcome. Joining me on today's call are Jim Foote, President and Chief Executive Officer Kevin Boone, Executive Vice President, Sales and Marketing Jamie Boychuck, Executive Vice President of Operations and Sean Pelkey, Executive Vice President and Chief Financial Officer. Now in our presentation, you will find our forward looking disclosure on Slide 2, followed by our non GAAP disclosure on Slide 3. And with that, it's my pleasure to introduce our President and Chief Executive Officer, Jim Foote.

Speaker 2

Great. Thank you, Matthew, and thank you to everyone for again joining us on our call today. I'll begin by expressing my thanks to all of CSX employees who continue to put in tremendous efforts to serve our customers effectively and above all safely. I'd also like to welcome today Steve Fortune, who's with us in the room here today in Jacksonville. Steve serves in a newly created role of Executive Vice President and Chief Digital and Technology Officer and will focus on harnessing transformative technology organizations at a global industrial company will be very helpful as we continue to transform CSX.

Speaker 2

Now moving to the quarter. We are pleased with our results this quarter, though we're not yet satisfied with our service performance. The effects of COVID and severe weather across much of our network clearly led to a tough start to the year. But as we moved into March, operating conditions began to gradually improve and we do see indications that this momentum is continuing. For over a year, we have communicated to you that the key to rebuilding our service to pre pandemic levels is to hire more trained and engine service employees.

Speaker 2

I am pleased to say that our efforts there are progressing well and our active G and E count has moved steadily higher this year. The people and resources that we are putting in place today will allow us to provide reliable, efficient service to an expanding number of customers. The business environment remains very favorable for CSX despite new uncertainties across global supply chains. We are dedicated to do our part to help our customers here in North America meet increasing demand as business and consumers around the world look for reliable sources of the products that we transport. Meanwhile, domestic activity remains robust and our business development and marketing groups are working hard to convert new opportunities.

Speaker 2

And as higher energy prices and increasing scrutiny on greenhouse gas emissions highlight rail's efficiency advantages over trucks, we're in a great position. If we all do our jobs, hold to our principles and deliver the service levels that we know we can achieve, this company has great potential for many years ahead. Lastly, I'd like to note that we are pleased that the Surface Transportation Board approved our acquisition of Pan Am Railways, which clears the way for the transaction to close this June. All of us are excited about the opportunities that will come as we design new service solutions for shippers and receivers in New England. Now let's turn to Slide 4.

Speaker 2

Turning to the presentation, which highlights our key financial results. We moved nearly 1,500,000 carloads in the Q1 and generated over 3.4 $1,000,000,000 in revenue. Operating income increased by 16% to $1,280,000,000 The operating ratio increased by 150 basis points to 62.4%. But remember, This rate includes approximately 250 basis points of impact from quality carriers and the impact of higher fuel prices. And earnings per share increased 26% to $0.39 a share.

Speaker 2

I'll now turn it over to Kevin, Jamie and Sean for details.

Speaker 3

Thank you, Jim. Turning to Slide 5. Q1 revenue increased 21% year over year with growth across all major lines of business. Merchandise revenue increased 6% on 2% lower volume as strong pricing gains and higher fuel surcharge revenue more than offset the volume decline. Current demand remains strong across most merchandise markets with shippers prioritizing environmental benefits of rail and pursuing lower cost options to offset inflation.

Speaker 3

The ongoing semiconductor shortage impacted automotive volumes through the quarter. However, we did see sequential improvement as consumer demand remains strong with dealer inventory levels low. Our core chemicals franchise saw strong demand that more than offset continued challenges in energy related chemical markets. As we continue to add resources across the network, we expect to capture additional opportunities. Intermodal revenue increased 13% on 1% lower volumes as truck conversions drove domestic growth, offsetting declines in the international market that continues to be impacted by supply side constraints.

Speaker 3

Intermodal demand remains strong, But continues to be challenged by takeaway capacity and equipment shortages, including chassis. Coal revenue increased 39% on 10% lower volume. Export coal's revenue increase was driven by higher benchmark prices, partially offset by lower domestic and international thermal coal shipments. 1st quarter coal volumes were impacted by several factors, and additional network capacity is added. Other revenue increased primarily due to higher intermodal storage and equipment usage, but was partially offset by lower payments from customers that did not meet volume commitments, in the wake of the crisis in Ukraine.

Speaker 3

As Jim mentioned, we are committed to helping our customers in North America meet the increasing demand for their products from consumers around the world. We are working closely with our customers to understand the potential shifts and the global supply chain. And while it is early and the ports we serve, many of our markets, quarter. Now turning to Slide 6. I would like to provide more detail on CSX's business development last quarter.

Speaker 3

CSX has an experienced team of business development professionals to help existing and prospective customers identify, design and build facilities across the network, economic developers to maximize our ability to leverage our business to locate on CSX and our short line partners. These efforts continue to pay off. In 2021, over 90 new facilities and expansion projects were placed into service across and

Speaker 4

we expect to continue to

Speaker 3

deliver over $3,000,000,000 of customer investment. Additionally, There are over 500 projects currently in the industrial pipeline and provide them with efficient Reliable rail service that will enable them to grow their business for years, while creating significant long term value for CSX shareholders. Electric vehicle subsidiary of the large Asian conglomerate, Ben Group, served exclusively by CSO. We're proud to be part of North Carolina's first car plant and the largest economic

Speaker 5

Q1. This announcement is an

Speaker 3

excellent example of the kind of customer solutions that the team can deliver as sales and marketing works closely. The team is working diligently to direct even more customers to CSX through our select site program. CSX select sites feature nearly 10,000 acres of premium certified sales serve sites to full scale industrial development and expansion. We are working to add even more sites to this program in 2020 queue. I will now pass it on to Jamie to discuss our operations.

Speaker 6

Thanks, Kevin. The safety of our operations will always be our first priority. Our communities in which we live and operate drives us to make sure that we to maintain the demanding standards of our business. The results that you see on Slide quarter. Over the Q1, we saw sequential and year over year improvements in the number of injuries and train accidents, which brought their frequency rates to a near record low levels for the Q1.

Speaker 6

We're happy to see this improvement. We continue to push forward with the initiatives that we described to you last quarter, actively coaching safety awareness among our employees, encouraging best practice sharing across teams and expanding our application of technology. And we could put a very strong emphasis on our efforts with our new hires to ensure that they respect and demonstrate the principles that make CSX and Industry Safety Leader. Moving on to staffing levels. This is a critical point, because our networks, capacity and fluidity will improve when we have of train conductors and engineers.

Speaker 6

When we have these resources, it lifts our service performance in the positive train and engine employee trends that reflect the and training teams. We have made great progress here. And importantly, we're set up to build on the momentum we've created. First, you can see the strong ramp up in the number of T and E employees we have in our training program. We averaged over 500 daily employees in training over the Q1, which is over 5 times where we were a year ago.

Speaker 6

We expect to keep our training classes full to make sure that our pipeline remains healthy. 2nd, we've successfully increased our run rate of conductors who are completing their training and marking up into the active T and E population. We now have roughly 100 employees marking up each month who are ready to haul freight, generate revenue, and we expect this pace to continue. In the last chart, you can see the payoff. We're turning the corner and we're now adding to our active T and E count month over month.

Speaker 6

We've said it again and again, our aim is to grow this railroad. To that, we need to bring good people in, train them the right way and deliver on service. It takes time, but this is exactly what we're doing. Now let's turn to Slide 7, which gives us a picture on where our operations stand today. This quarter started off with several key challenges.

Speaker 6

The omicron wave was hitting our employees, where the incident at our Curtis Bay facility and the East Coast suffered under severe weather quarter in early February. So for the full quarter, Our key metrics of tripline compliance, terminal card well and velocity were generally flat to slightly worse on a sequential basis.

Speaker 4

That set

Speaker 6

the expectations that we have made in the right direction. It's clearly too quick to call the bottom with certainty, but with the success Consistent with the last quarter, we have made the tactical decision to keep additional locomotives active in the near term to help with network balance, while we remain short of employees in certain regions. As we successfully promote our new conductors, we'll be focused on improving our asset utilization and driving efficiency as the additional crew resources facilitate higher volumes and improved service and reliability. As always, The key will be strong execution, and I'm excited at the level of higher engagement and enthusiasm that our operating team is bringing to this challenge. I'm looking forward to showing what we can do over this next quarter, the rest of the year and the years to come.

Speaker 6

I will now hand it over to Sean to review the financial results.

Speaker 7

Thank you, Jamie, and good afternoon. We continue to

Speaker 4

see strong growth in our business and strong growth in our business and strong growth

Speaker 7

in our business. With operating income up 2018%. Interest expense and other income were a combined 11,000,000 and the effective tax rate for the quarter was 23.9%. Earnings per share of $0.39 reflects growth in core earnings as well as the impact of our ongoing share repurchase program. Turning to the next slide.

Speaker 7

Total costs increased $419,000,000 or 24% in the quarter, but were in line with our expectations outside of the spike in fuel price. The acquisition of Quality Carriers represented approximately $215,000,000 of expense. Higher fuel prices were also a significant factor, up about $110,000,000 versus last year. Supply chain congestion and labor and fringe expense increased $72,000,000 or 12% in the quarter. We invested $10,000,000 more to onboard new train and engine employees and we expect similar training costs next quarter as we continue to convert our strong new hire pipeline.

Speaker 7

Quality carriers drove about $35,000,000 in additional labor expense. Incentive compensation increased 6,000,000 while inflation and other impacts drove just over $20,000,000 of higher costs. Purchased services and other Increased $203,000,000 or 43 percent in the quarter. Quality carriers represented approximately $140,000,000 of PS and O expense. Costs incurred to maintain terminal and network fluidity added roughly $45,000,000 of expense in the quarter, similar to last quarter's impact.

Speaker 7

These costs are likely to persist into the second quarter, and we expect to see improvement in the back half of the year corresponding to labor and supply chain normalization. And a reserve adjustment drove $17,000,000 of higher expense in the quarter. Depreciation and amortization was up $15,000,000 or 4% on a higher asset base that also includes the quality impact. Finally, fuel expense increased $141,000,000 or 74 percent, reflecting a steep increase in highway diesel fuel prices as well as the addition of non locomotive fuel used for trucking. The rapid rise in fuel prices created approximately $45,000,000 of fuel lag in the quarter.

Speaker 7

And lastly, The company recognized $27,000,000 of real estate gains in the quarter, including $20,000,000 related to the Virginia transaction. As a reminder, we expect to recognize a $120,000,000 Virginia gain in the 2nd quarter and receive the final $125,000,000 cash payment in the 4th quarter. Now turning to cash flow on Slide 12. Free cash flow before dividends increased on higher earnings to $976,000,000 our highest priority use of cash is investing for the long term reliability and growth of our railroad. After fully funding these capital projects, 1st quarter shareholder returns exceeded $1,200,000,000 including approximately $1,000,000,000 in buybacks and over $200,000,000 in dividends.

Speaker 7

Looking forward, we will remain balanced and opportunistic in our buyback approach as we continue to return excess cash to our shareholders. Finally, we are excited to close the Pan Am deal on June 1. Pan Am will contribute about one point of annualized revenue, primarily within merchandise. Due to transaction and integration costs, Pan Am will have a negligible impact on earnings this year and the capital we expect to invest to upgrade the Pan Am network is already contemplated in our guidance. We look forward to working with Pan Am and its customers to drive continued growth through our integrated rail network.

Speaker 7

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

Speaker 2

Okay. So let's conclude with our outlook for the year as shown on Slide 13. We continue to benefit from strong markets and ample customer demand, and we are adding the employees we need so that our network can capture more of business opportunities that are right in front of us. At the same time, we are, of course, keeping a close eye on inflation, interest rates and the Fed. With support from higher coal prices and a supportive market environment, We feel comfortable projecting double digit growth for both revenue and operating income for the full year.

Speaker 2

In the near term, we expect to continue to benefit from elevated export coal prices and higher fuel surcharge revenues. Full year CapEx is planned at approximately $2,000,000,000 which is also unchanged. We have made progress since the beginning of the year and we still have a lot of work to do. But we are committed to of Profitable Growth. Thanks, and I'll turn it back to Matthew.

Speaker 6

Thank you, Jim.

Speaker 1

Now in the interest of time, I'd ask that

Operator

Thank you. Your first question today comes from the line of Jon Chappell with Evercore. Your line is now open.

Speaker 8

Thank you. Good Good afternoon, everyone. Jamie, you spent a fair amount of time talking about the important labor aspects and what and your optimism about what that will mean for service. Is it just a function of getting the people trained and in the right spots? Or are there any other challenges that you're seeing as it relates to service reliability, These are things that you can control yourselves or things outside of your control like customers turning over equipment more quickly.

Speaker 8

And how do you think that all of that

Speaker 6

Well, good evening or good afternoon, John. For us, it's purely comes down to hiring numbers and getting more T and E folks where we need them. Kevin and I have been working really close with our customers to do everything we can to to support those needs of our customers. And our customers are working with us in different areas with different solutions as we look at how we can turn cars quicker, whether it comes down to block loading by destination and other items that we've been working on for years and continuing to at that peer number with respect to our trainees out there. We talked about having 500 over 500 trainees out there right now.

Speaker 6

We've qualified up to 400 already this year since the start of the year. So we've come a long way in that area and we continue to pull Whatever levers we can with respect to the design, if there's cars we can move in different corridors that make more sense where Our crew base has gotten healthier. We're doing that. But really, as we continue to push forward here, the common That we know will get our railroad back to where we need to is just continuing to train conductors.

Speaker 8

Got it. Thanks, Jamie.

Operator

Your next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Speaker 6

Hey, good afternoon and thank you for taking my question. I guess, if we go back 2. Last quarter, you guys were I think the only guidance you provided was like volume above GDP, but now it seems you have some confidence to guide to double

Speaker 3

Yes, Brandon, look, there's a lot of moving parts. Obviously, we want to get confidence in the hiring trajectory and Jamie spoke to that. We are seeing good momentum as we get into April and we'll move through the rest of the quarter. Obviously, some other factors have occurred. You've seen the export coal market remain really, really strong here and supportive and we had assumed probably that market would tail off a little bit sooner than what is expected now.

Speaker 3

Also fuel surcharge has been a bigger factor going forward as well as oil prices have obviously moved up dramatically here with the Ukraine crisis going on, but a number of factors going. We still see strong demand from all of our markets, and we I have confidence that we're going to begin to capture more and more of that as we as fluidity picks up through the network.

Speaker 6

Thank you.

Speaker 9

The Virginia real estate sale that's embedded in that assumption for double digit operating income growth.

Speaker 3

Yes, I'll cover the first one. Look, that's been our target. We want to outgrow the economy. There's a lot of moving parts, as you know. The auto business.

Speaker 3

Automotive business is going to be a big factor as we get into the second half and that business on production needs to recover there really hit those GDP plus targets. So that's one market to look at. Coal as well, we see strong demand there, but we'll be watching that Going forward and then the intermodal market, particularly on the domestic side, we're assuming chassis and other drayage we expect to exceed GDP volume growth, but realizing that there's a number of new moving parts.

Speaker 7

And Justin, this is Sean.

Speaker 5

Just to add on, fiscal 2020.

Speaker 7

As we've always said, the we expect

Speaker 5

to be very strong and very healthy and and we'll

Speaker 7

be supportive in terms of the OR for the year, but there are some things to keep in mind that will be offsets, obviously, the quality impact, which will have the full impact of it in the first half of the year, Given that the acquisition occurred in Q3 of last year, higher fuel prices are essentially neutral to op income, but they do have a negative impact on the operating ratio as well. And then obviously, intermodal storage as things normalize that will have an impact on the OR, particularly in the second half of the year, given that the storage revenues were quite elevated in the second half of last year.

Speaker 9

Okay. I'll leave it there. I appreciate the time.

Operator

Your next question comes from the line of Chris Wetherbee with Citigroup. Your line is now open.

Speaker 9

Hey, great. Thanks and good afternoon. I guess I wanted to come back a little bit to the sort of bigger picture freight demand comments that you made earlier in the call, Jim. I just maybe You could talk a little bit about what you are seeing either on the consumer or the industrial side. We can kind of see what's happening on the commodity side, but maybe those 2 end markets.

Speaker 9

And then maybe just sort of weave that into the market share potential opportunity congestion has Probably kept some business off the rail and on other modes of transportation. How does that factor in? So I guess generally speaking, Do you see a slowdown in consumer driven freight and is there enough upside potential in industrial commodity to offset that?

Speaker 2

Well, I think we've been going through since really the middle of 20 The divergence between the consumer economy and the industrial economy, whether it was driven by Going back to the tariff issues that began to create concern amongst the industrial producers and at the same time, you had a consumer Economy that was going gangbusters. And that kind of carried forward into The pandemic year, let's call it the plague years, especially in still there's still lingering effects from that. Look at the automotive sector and the consumer economy went nuts. So now I think you're starting to see those 2 divergent economies Come back more in line and industrial demand is very good. I think it's clear in our comments, we have not met the demand.

Speaker 2

And as the railroad on the industrial side and the bulk side of the business, we've done a I think we've done an amazing job in handling the consumer side of the business in the

Speaker 4

and beyond. And as we

Speaker 2

go forward, we see a lot of opportunity and there could in various supply chains, whether it's importexport grain, whether it's continued demand for U. S. Coal, steel, plastics, chemicals, you name it, everything is but we see all of these Assuming that everything in the world stays relatively sane where we are and the only reason we haven't achieved it in the last 9 months ago, I said the numbers that we're talking about today in terms of where we would be with the hiring, That's where we thought we'd be 9 months ago. The extremely tight labor market and the higher somewhat higher attrition rates that we went through have held us back. And so We figured it out.

Speaker 2

We've done everything we could possibly do to take advantage of the situation. And I think the economy on both Especially so on the industrial side of the economy, where traditionally railroads have excelled, It looks favorable as we look forward.

Speaker 9

Okay. That's helpful. Appreciate it. Thank you.

Operator

Your next question comes from the line of Tom Wadewitz with UBS. Your line is now open.

Speaker 10

Hi, thanks. This is Mike Traiano on for Tom. So you've made really good progress on adding the T and E employees. Is there do you have an idea or which point this year you think you're going to be all kind of trued up from a T and E crew perspective? And also, is there a way to quantify how much volume you've kind of fully trued up on Cruise?

Speaker 2

Well, in terms of what we left behind, I'll use a term that Tom uses quite often, lots. And leave it at that. In terms of where we're going to be from a timing stand point of where we'll get, but I'll say what Jamie mentioned earlier, We're going to continue to hire. We're going to manage this employee pipeline differently than we have in the past. We're going to make sure that lessons learned here that we're going to make sure that this doesn't happen to us again.

Speaker 2

And

Speaker 4

so

Speaker 2

That's why we are doing everything we can from an employee relations standpoint to work closer with our employees because they are critical and key to what we want to do here and that is provide a reliable Trucklike product across all of our with Trucklike's reliability to all of our customers because that's the key to the future for company's growth. Jamie, do you want to add any color about timing?

Speaker 6

Our timing is we're really shooting in towards the Q3 as we push the number of employees we have training right now. If those qualify and we continue to do our hiring of 30 to 40 every single week, puts us in a good position at some point in the Q3. It might be towards the tail end of the Q3. And then and to Jim's point, we're continuing to hire for attrition as attrition moves forward. We've seen attrition climb up and we got to make sure that we stay ahead of that throughout this year and then into next year.

Speaker 6

And We've got many different programs that we want to continue to train locomotive engineers and other pieces. So we're not but we feel pretty confident as long as the world doesn't throw us some type of a curveball again. Q3 is going to be a much better quarter for us.

Speaker 2

Just, yes, and a little more color on that. It is easy for us to manage down. We have an attrition rate of around 7%. So we're not concerned with getting fat, because we can always manage What we have learned over the last year, year and a half is, it is extremely difficult. It is a completely different environment to try and add to the workforce.

Speaker 2

So we just yet to look at it a little differently. That doesn't mean we're going to get fat and happy and have a bunch of employees that we don't need. That means that we're going to manage the work differently to make sure with the ebbs and flows of this business, which is always the case, So we don't get caught short like we just did.

Speaker 10

Thanks, Jim. Thanks, Jamie. Appreciate it.

Operator

Your next question comes from the line of Scott Group with Wolfe Research. Your line is now open.

Speaker 11

Hey, thanks. Good afternoon. So I want to maybe think about the back half of the year as it sounds like that's when you think you'll have the headcount where you want it to be and the network where you want it to be. Do you still think that you'll have volume growth in excess of headcount in the back half of the year. And then maybe Sean, how much is the How much are you spending in 1Q and 2Q on hiring and network inefficiencies that maybe potentially starts to go away in the back half of the year?

Speaker 7

Yes. Scott, to your first part of your question, I mean, remember, we're with all we're doing in

Speaker 5

hiring. The cumulative impact of that is a couple of

Speaker 7

percent year over year in headcount by the time we get to the second half of

Speaker 5

the year. And yes, I think we ought to be able to grow

Speaker 7

in excess of that. We've got capacity on trains and in the network. We've got locomotives to move the freight, so we should be able to outpace it in terms of growth. And then in terms of your question on the cost side, those training costs are it's up $10,000,000 versus last year, so call roughly $15,000,000 a quarter that we're spending on training right now. I don't see that going away.

Speaker 7

Like Jim just said, we're going to continue to hire. So that's probably pretty ratable across the balance of the year. It'd be related to having more locomotives than we would otherwise need if the network were running faster. There's also an impact to rent. So think about it in terms of that roughly $45,000,000 as the opportunity to kind of get back to where we were once we get this thing spinning.

Speaker 11

Okay. And if I can just sneak in one more quickly for Kevin. The coal RPU, is this are we seeing the full benefit at this point of the net prices and everything or is there one more potential leg up here?

Speaker 3

No, I think this is largely it. Some of our on the met side, some of the contracts are capped, so they don't fully participate in these extreme prices. So This is probably a good run rate, assuming export prices stay at the current levels they are today.

Speaker 11

Thank you, guys. Appreciate

Speaker 4

it. Your

Operator

next question comes from the line of Brian Ossenbeck with JPMorgan Chase. Your line is now open.

Speaker 12

Good afternoon. Thanks for taking the question. Please come back to labor and Jim, maybe if you can elaborate on how you expect to manage the workforce a bit differently. I know it's challenging, especially right now, to manage everything, all the different moving But is this more technology? Are these different types of rules that you expect to put into place?

Speaker 12

And on that line, you got the $600 incentive up

Speaker 4

to $600 incentive that you announced yesterday. Do you feel

Speaker 12

like you've done everything you can at incentives that you announced yesterday. Do you feel like you've done everything you can at this point to really get the people where you need and the amount that you need them in place?

Speaker 2

Well, I think anybody that's followed the railroad business for a long time like you have and everybody else on the call knows that the relationships between the railroads and the union workforce has not necessarily been one of mutual admiration, and we need to fix that. And we're working These guys were out there for 2 years in the middle of a pandemic and quirk in every single day, day and night in a Surges in traffic and you name it. And at the same time, Didn't get a raise. That's wrong in my opinion. And that's why we decided to do something about it unilaterally Without asking for some kind of giveback in the labor agreement, we just thought it was the right thing to do.

Speaker 2

And so we made the offer and that's a change. It's not technology, it's relationship building with your unionized workforce. And we need to change that And we're going to we're dedicated to changing that. It is an ongoing long term process, But CSX is committed to trying to do everything we can possibly do to change decades, if not centuries, of a somewhat dysfunctional relationship with our union workforce. That's the key and that's what this is all about.

Speaker 12

All right. Thank you, Jim.

Operator

Your next question comes line of Ken Hoexter with Bank of America. Your line is now open.

Speaker 13

Hey, great. Good afternoon. So you gave the double digit operating income targets and the costs. I just want to understand what's built in for the timing of the fluidity return? Is that just simply the second half?

Speaker 13

And in the past, we've seen, I guess, rails throw a lot of assets to get the fluidy moving. Is that something you we need to do to get things moving aside from the employees. And then I guess to follow that, Jim, into next week's hearing as to what you're doing to fix the services, is just the focus here, the key on employees or again is there equipment need or anything to kind of throw at these backlogs to get the fluid any moving of the rail network? Thanks.

Speaker 2

So we are not short of locomotives. We are not short of any physical infrastructure in order to be able to perform at that. We continue to still have excess capacity across the railroad. There is one thing and one thing only that we are short of that is hampering us from doing the job that we want to do and to get back to service levels where we were in 2019 and to get even better from that point on is we need more people in the engineer and conductor range. That's it.

Speaker 2

We don't need them anywhere else in the organization. We don't need more management people. We don't need a lot. We don't need more people Fixing the track and laying rail. They're doing a great job out there.

Speaker 2

We need more engineers and conductors. And that's it. And that's what we're dedicated to. And that is why we'll Continue to focus on these numbers and it is a lengthy process from the time we Finally get someone. It's an extremely lengthy process from the time we start looking for somebody that in this day and age Might want to be a railroad conductor until the time they have gone through the classroom.

Speaker 2

First of all, the pre employment screening. Then by the time they go through the month or more of classroom instruction and then 6 months on the job training and then we have to make sure that at that point in time they are equipped and ready to go out and work in a railroad operating environment and not get hurt and not hurt somebody else. It's a long, long process. And that's why it has taken so long. As I said earlier, 9 months longer because of the The front end of the process was not it went away from us.

Speaker 2

The pipeline of normal go to work. They wanted to stay home, but they wanted to do something else. And so we've had to revamp, work extremely hard, and now we are beginning to realize the benefits of all that hard work. And it's

Speaker 4

going to

Speaker 2

be month after month after month after month with these employees are then qualified to actually go out and start performing work. And as the year goes on, on a month to month to month basis, we will see continued improvements in fluidity and increases in the speed of the network. Now when the network slows down, you need more people. So we need We get the Railroad back staff so that we can get the velocity and the dwell down to where it was that will then right size our workforce to what we need and then we can more effectively manage it with the view that Kevin and his team provide us about where the opportunity is. Listen, they're not Kevin and his team are not shy about telling us on a regular basis where they see opportunity.

Speaker 2

It's out there. And we want to get it and we want to move it because that's what we do and make a lot of money doing it.

Speaker 13

And just to clarify there the timing for the fluidity return, is that by the Q3, year end?

Speaker 2

Well, I would hope again, I hate to give the projections because I was already off by 9 months on the last one. Mr. Boychick always gets nervous when I start making projections on

Speaker 12

when the railroad is going to

Speaker 2

start running better. The railroad will start running better in this quarter, It will get better in the Q3 and it will get better in the Q4. And the operating performance of the company, I hope, then will continue to get better and better level of performance, but that was not where we were satisfied being the way we wanted to run the company and run the railroad. We wanted to get even better from there. It's going to be a gradual improvement as we go through the remainder of this year.

Speaker 13

Tim, team appreciate the time. Thanks.

Operator

Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is now open.

Speaker 14

Thanks very much, operator. Good afternoon, everyone. I just want to ask a little bit on yields and there's a lot of Moving parts there with fuel surcharges and accessorial charges. Just curious how you would point investors to how your yield might develop over on a year over year basis going forward, particularly where If we were to assume fuel prices remain constant, are we going to see yields come down as some of these yield as opposed to our natural inclination in the rail sector to see pricing levels generally move higher. Could we see some noise in the near term as a result of some of the rollover of as your fluidity improves and some of those charges come off?

Speaker 3

Hey, this is Kevin. I when you look at what's happening right now, certainly, I think Sean spoke to it. We would expect some of the storage fees and those things to come down to more normalized level, but that's a good thing. That means that supply chain is becoming more fluid. That means we're moving more freight through the rail network.

Speaker 3

That's exactly what we want to happen. And so from that perspective, that's all good. When we looked at where we are today versus where we were last quarter when we had this call, inflation has gone up even more and we're having to have those conversations with our customer. We reprice about 50% to 60% of our business every year and we're having those conversations because our customers are having conversations with their customers. And so that's the environment we're in.

Speaker 3

And so there's a bit of a lag when you think about pricing and realization of that, that we're I have to realize through the year and we fully expect that those things will start to deliver as we move through the year.

Speaker 14

That's great color. I appreciate it. Thank you.

Speaker 4

Your

Operator

next question comes from the line of Fadi Chamoun with BMO CMO Capital Markets. Your line is now open.

Speaker 15

Okay. Thank you. Maybe questions to Kevin. I think you mentioned in your remark something about the supply chain changes that we're experiencing now and maybe trade flows. And you mentioned that you see an opportunity for CSX's network and I'm wondering if you can elaborate a little bit on that.

Speaker 15

And the second kind of point attached to that is, What do you would like to accomplish with the Pan Am specifically in terms of commercial opportunities? In what areas of traffic You think you have commercial opportunities to go after as you close down that transaction?

Speaker 3

Sure. In terms of trade flows, what I was referring to there is probably 2 issues. 1, and I touched on the second slide that I covered, was we're seeing a lot more activity in terms of industrial reshoring more appetite for companies to look at their supply chain. And quite frankly, supply chain resiliency is a competitive advantage and the company's are reevaluating, do I want my production in Asia? Do I want it overseas?

Speaker 3

Or would it be The second one, and this is extremely early and we're having a lot of conversations with customers and Jim talked about this a little bit is when you think about things like grain, which Largely, huge amounts of supply have come out of the Ukraine and Russia into Europe and other commodities and steel products and other things that have largely gone in the European market. Well, all of a sudden, Doesn't look like that's going to happen. And some of those things that we had traditionally moved out of the West Coast to supply Asia, now maybe that's going to come out of the coast and benefit the ports that we serve. And again, it's really, really early. We have to have conversations.

Speaker 3

We have to make sure that the capabilities are there to be able to deliver those products when that demand happens. So we're staying very, very close to the customer, understanding what could potentially move from the West Coast potentially into the East Coast and working with them and being really dynamic in terms of how we think about it. That's what I'm thinking about. We're looking at everything that's going out of the ports today and how that could change over the next few months. And it's probably it's not a next month phenomenon.

Speaker 3

It's probably 6, 9, 12 months from now where you'll really start to see some impact if it happens. You want me to cover the Pan Am now?

Speaker 15

Yes, please.

Speaker 3

Yes. And then on the Pan Am, look, it's a very good consumer market. There's a lot of paper packaging customers that want more access to markets that we serve. The waste business in that market is going to continue to grow. We see great opportunities there.

Speaker 3

And we think with a better rail service, that's going to open up many more markets that quite frankly just From a transit time or a reliability standpoint, just We were unable to serve previously. So we're really excited. We're gearing up now that the approval has gone through and going to work closely to really capture those opportunities.

Speaker 15

Okay, thanks. Appreciate it.

Operator

Your next question comes from the line of David Vernon with Bernstein. Your line is now open.

Speaker 16

Hey, good afternoon, guys. I have a question for you on the appetite to grow sort of the intermodal business generally. I mean, I think trimming some of the intermodal network as part of PSR was a first step and we've obviously been dealing with some of these service But I'm curious to get your help on reconciling kind of where market rates are, how attractive at the margin that growth could be And what do you make of the 3rd party industry sort of adding something like 50,000 boxes to the fleet this year and Hunt's coming out with an even bigger number for the next couple of years. I mean, is this a market that you guys really want to lever into or you're going to remain a little bit more balanced between intermodal and merchandise growth? I'm just Square the circle with what we're seeing in the container order book for the domestic players and your appetite to actually accommodate some of that growth.

Speaker 2

Well, I think we're leading the industry in intermodal growth. So it's not and in In terms of volume, I think if not this year, next year for sure, in terms of volume, Intermodal is going to be our piece of business. That being said, so we want to we spent a lot of time and in 2017 2018 in reengineering the way the intermodal network operated for a reason so that we could have a good return on that business when we began to focus more intently on working in the key lanes where it makes sense for us to grow. We're beginning to, I think, have a better understanding of leveraging the East Coast ports, which have gone through a dramatic transformation in terms of growth versus the West Coast and have the Intermodal market, which to date, we do basically Nothing in. So whether it's international or domestic, The more players put asset towards the intermodal market, the more these markets further develop, We see great potential for us to continue to grow our intermodal franchise.

Speaker 2

That's not to say that we are in any way shape or form favoring that over the merchandise business. The merchandise business is a core part of our franchise. So we intend to grow both of these businesses. We see both of them as equal opportunity. Any business has a divergent book of business.

Speaker 2

And so we don't we look at them both as exciting areas of opportunity.

Speaker 16

And as you and maybe just a quick follow-up. As you think about the UMAX fleet, do you look into add boxes to that? Or are you going to let the 3rd party sort of private fleet handle the investment in the actual boxes?

Speaker 2

Again, that's a different book of business. Personally, I'm more in favor of us being more involved on an asset ownership basis because We see great opportunity there for potential and whether it's U. Max or Whether it's every place else, I don't like the model where I do 95% of the work and get 75% of the money. So to the extent that we can turn some of this business around and make it more favorable to our bottom line, I can guarantee you that any kind of an investment in asset in that area would have a great return.

Speaker 11

Thanks very much.

Operator

Your next question comes from the line of Cherilyn Radbourne with TD Securities. Your line is now open.

Speaker 17

Thanks very much. Good afternoon. In terms of the outlook for coal, you have touched on ARPU already, but I wonder if you could comment on what you think the prospect is for increased coal volume this year. And within that, could you touch on whether it's primarily export call that has influenced your outlook on both domestic and export.

Speaker 3

Yes, I think when you look at some of the discrete items that I pointed out in the Q1. We think some of those obviously are going to go away as we get through the year. And then Jamie talked a lot about additional resources we're adding and I think there are opportunities as the mines reinvest and they're making a lot of money right now and that allows them to reinvest in Probably some deferred capital that they've had over the years. You would see some probably some better production coming out of those as well. So all else equal, if the market stays strong, We would anticipate some volume upside through the year.

Speaker 17

And is it primarily export

Speaker 3

No, no. When you look at our Southern utility sorry, yeah, I didn't address that. When you look at our Your Southern utilities and even our Northern utilities right now, they're at low levels. And so there's an inventory replenishment that needs to happen that we're working diligently on and closely with them and with the mines to make sure that happens into the summer peak season. And then on the export side, Met has Obviously, very, very robust in terms of the demand.

Speaker 3

You're now seeing some probably some thermal opportunities with supply not there, coming out of Russia. And so we'll see how that materializes. Right now, it's not a lack of demand, it's a supply constrained market and seeing the coal producers probably favor that export met business rather than the Thermal business. In Curtis Bay, you'll see that, Jamie, just remind me that will come on in the 3rd quarter and that will offer some additional opportunity, as that comes back on to full capacity.

Speaker 17

Thank you for

Speaker 4

the time.

Operator

Your last question today comes from the line of Jordan Alliger with Goldman Sachs. Your line is now open.

Speaker 7

Curious on the auto sector, if you could give a little color around that, what you're hearing from the OEMs, maybe how parts business is doing and any update on the chip situation? Thanks.

Speaker 3

Yes, we certainly saw some improvement in the March and that's continued into April. When you start shipping cards without chips, I guess that helps. And so some of that inventory that was sitting on the ground waiting for the chip to come in, they just decided to go ahead and ship it and maybe you don't have a sea warmer right now, but you'll get it maybe in 6 months from now. So that we've seen a lot more finished good inventory on the ground and we're ramping up to deliver those products to the market. So that's we'll see what some of the impacts in China with some of the disruption they're having over there with the variant running through there and Shanghai shutting down in some other areas.

Speaker 3

So it's a watch item, but we're seeing some favorability at least in the near term. Thank you.

Operator

There are no further questions at this time. This concludes today's conference call. Thank you for attending. You may now

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Earnings Conference Call
CSX Q1 2022
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