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spk12: 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 Q4 2021 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. Thank you. Matthew Korn, you may begin your conference.
spk04: Matthew Korn Thank you. Good afternoon, everyone, and welcome. Joining me on today's call are Jim Foote, President and Chief Executive Officer, Kevin Boone, Executive Vice President of Sales and Marketing, Jamie Wojciech, Executive Vice President of Operations, and Sean Pelkey, Acting Chief Financial Officer. In our presentation, you will find our forward-looking disclosure on slide two, followed by our non-GAAP disclosure on slide three. And with that, it's my pleasure to introduce our president, Chief Executive Officer Jim Flynn. Jim?
spk10: Thank you, Matthew, and thank you to everyone for joining us for today's call. First, I'm pleased to welcome Matthew to CSX and believe his investment research background, including coverage of many of our customers, will make him a great contributor to our team. And I wish Bill success in his new role as head of finance and treasuries. As we exit 2021, every CSX employee deserves recognition for their dedication to our customers in what has been another unbelievable year operating through the ongoing impacts of the pandemic and supply chain disruptions. As these challenges continue into the start of the new year, we continue to take the necessary steps to move more freight for our customers. We are putting the resources in place to deliver a high-quality service product and are working hard every day to make rail a more meaningful part of our customers' transportation solutions. Throughout this period, we have remained true to our core principles – operate safely, reliably and efficiently, and are committed to providing customers with additional capacity to help overcome the current challenges. These actions, combined with expected easing of supply chain disruptions, position CSX for growth. Turning to our presentation, let's start with slide four, which highlights our key financial results. We moved nearly 1.6 million carloads in the fourth quarter and generated over 3.4 billion in revenue. Operating income increased by 12% to $1.37 billion. The operating ratio increased 310 basis points to 60.1%, which includes approximately 250 basis points from the impact from quality carriers and 50 basis points from higher fuel prices. And earnings per share increased 27% to 42 cents a share. I'll now turn it over to Kevin, Jamie, and Sean for details.
spk05: Thank you, Jim. Turning to slide five, fourth quarter revenue increased 21% year over year with growth across all major lines of business. Merchandise revenue increased 4% on 3% lower volume as the impact of ongoing automotive semiconductor shortages was more than offset by revenue growth across all other merchandise markets. Industrial and construction-related end markets continue to demonstrate the strongest growth. Even though declines in energy-related markets remain a headwind for our chemical business, it's important to highlight that our core chemical, plastics, and waste markets continue to show solid year-over-year growth. Intermodal revenue increased 16% on flat volumes as international growth driven by strong underlying demand and continued growth in rail volumes from East Coast ports was offset by domestic declines due to ongoing driver and equipment shortages. Coal revenue increased 39% on 2% lower volume. Increases in export coal shipments driven by the impact of rising benchmark prices was partially offset by the effect of declines in domestic volumes, largely related to producer outages. Other revenue increased primarily due to higher intermodal storage and equipment usage driven by supply chain disruptions resulting from truck driver shortages, chassis availability, and the lack of warehouse capacity. As we exited the fourth quarter, we clearly saw the effects of Omicron, with December volumes impacted by labor and supply chain disruptions. These challenges have continued into the new year, where we are seeing customers face labor shortages in their operations. As we look across merchandise, intermodal and coal markets, demand signals remain strong. As supply chain challenges normalize, we would expect volumes to align more with demand. Finally, I would like to highlight the positive results we have achieved by working with customers on new business development projects. Over the last few months, we have seen three significant announcements of new production and facilities to be located on the CSX Railroad, including two electric vehicle plants and a new steel mill. These projects are a team effort and show the ability of sales and marketing team in partnership with operations to creatively come up with solutions that meet the requirements of our customers. Importantly, these projects represent significant long-term value to CSX. Now let's discuss the progress CSX is making when it comes to our commitment to sustainability, as summarized on slide six. Rail is the most efficient form of land-based transportation, and CSX is the most fuel-efficient Class I railroad, U.S. Class I railroads. By using CSX Rail in 2021, our customers avoided 11 million metric tons of carbon dioxide emissions, which is equivalent to taking 2.3 million passenger vehicles off the road, an amount greater than all the hybrid and electric vehicles operating in the U.S. today. We are proud of the recognition we have received for these efforts to date by organizations such as CDP, Dow Jones, and Forbes, but we are certainly not done CX continues to invest in existing technologies to drive further improvement, and we continue to evaluate emerging technologies so we are prepared to realize those benefits when available. We are excited to see our customers' increased focus on improving their carbon footprint. Customer engagement on ESG has accelerated, and we have seen them double their usage of CSX-provided tools that help them calculate emission savings from switching to rail. You will also see later this quarter we will be recognizing customers for their efforts in prioritizing carbon emission savings by converting traditional truck volume to rail. I will now pass it on to Jamie to discuss our operations.
spk19: All right, thank you, Kevin, and good afternoon. As Jim referenced, we're working very hard to provide customers the capacity to help overcome the persistent supply chain challenges. One of the areas we've discussed in our ongoing T&E hiring initiative This effort is beginning to pay dividends as more employees finish training and begin moving freight. We are also encouraged to see ongoing hiring momentum to start the year as we continue to consistently fill weekly training classes while maintaining a strong pipeline of candidates. In total, we roughly doubled the average number of active trainees in the quarter. Also, the number of employees qualifying and moving to active status increased almost 50% sequentially in the fourth quarter to approximately 150. And we expect this number to double to over 300 employees in the first quarter. Recently, the benefit of these additional employees have been offset by the rapid rise in COVID cases across the network. Average daily cases have increased by several hundred employees since early November and are approaching prior peak levels. That said, there is no doubt that the hiring actions taken to date have allowed us to better manage the current situation. We have also supplemented this hiring by bringing additional assets online to help offset network imbalance caused by pockets of concentrated case counts. We will maintain these tactical asset increases as needed to protect service, but we'll look to improve asset utilization and drive increased operating efficiency as employees return to work and our ongoing higher initiatives provide the necessary resources to move incremental volumes and deliver the expected high-quality service to our customers. Additionally, until Holloway capacity improves at intermodal terminals, investments to keep terminals fluid by providing the overflow space and supplemental labor required to move long-dwelling boxes out of our terminals. We're also continuing to take a long-term approach to network and infrastructure planning and have identified several strategic siting extension opportunities that will provide additional long-term capacity by helping to alleviate congestion while also supporting growth for years to come. As always, we will pursue these initiatives while maintaining a balanced train plan and a continued focus on strong execution to maximize both reliability and service for our customers i want to thank the entire operating team for the hard work and long hours they've put in to keep freight moving for our customers despite the incremental headwinds this quarter service metrics remain consistent with the prior quarter And we are taking the necessary steps to drive these metrics back towards pre-pandemic levels over the course of 2022. Turning to slide eight, safety remains fundamental to everything we do at CSX. And we hold ourselves to the highest standard for our employees, customers, and the communities in which we work and operate. Our hard work to instill a culture of safety at CSX continues to drive positive results. as shown by the reduction in our train accident head count, this train accident rate this year. Heading into 2022, we continue to target further reductions in human factor incidents through a combination of increased awareness, best practice sharing, collaboration across regions, and expanding our successful drone program. We are also engaging with our new hires to instill our principles of safe operations and emphasize our commitment to make CSX the safest running railroad. I will now hand it to Sean to review our financial results.
spk05: Thank you, Jamie, and good afternoon. As you've heard, operating income grew double digits, up $151 million, with revenue up 21% on gains across all major markets. Below the line, interest in other expense was $60 million favorable, reflecting the prior year debt repurchase expense. Income taxes were up on higher pre-tax income, though we recognized 25 million in benefits this quarter, primarily related to state tax adjustments. As a result, EPS of 42 cents was up 27% versus the prior year. Now, I'd like to take a minute to walk through operating expense in more detail on the next slide. Total costs increased $451 million, or 28% in the quarter. The addition of quality carriers drove approximately $200 million of the increase. Higher fuel prices were also a significant factor, driving costs up about $115 million versus last year. Non-locomotive fuel inflation remained consistent with prior quarters, just above 3%. Though as we turn the page to 2022, we expect a number around 4%. Filling into a few specific line items, labor and fringe increased $115 million for 20% in the quarter. Quality was about $30 million. Incentive compensation was a nearly $40 million headwind in the quarter, largely due to higher expected payouts versus last year and the impact of accelerated expense for certain employees. As Jamie discussed, we continue to focus on hiring and retaining train and engine employees. we invested over $20 million in new programs targeting our T&E workforce. In line with these efforts, average headcount increased by 230, or 1%, sequentially. Labor inflation remained in line with prior quarters, though it was expected to be slightly higher in 2022. Purchase services and other expense increased $198 million, or 44% in the quarter. As a reminder, This is where most of the quality expense shows up, approximately $130 million. Also, you may recall that we expected investments in supply chain fluidity to result in higher costs on this line, and we saw about $45 million of increased expense as we worked tirelessly to drive network and terminal fluidity in light of unprecedented challenges. We expect these costs will persist until we see a normalization of labor in the broader supply chain. remaining increase reflected both the impact of inflation as well as a number of smaller items depreciation was up four percent on a higher asset base fuel costs were up on higher price and trucking fuel rents were up slightly and we had about 20 million dollars of higher real estate gains going forward you can expect a modest level of base real estate gains similar to the 35 million we recognized in 2020 as we shift our focus towards leveraging the real estate portfolio to support growth initiatives. However, the Virginia transaction will continue to impact results in 2022 with a $20 million gain in Q1 and a $120 million gain expected in Q2. We anticipate receiving the final $125 million of cash in Q4. Now turning to cash flow on slide 11, On a full-year basis, free cash flow before dividends increased 45% to $3.8 billion. As a reminder, this includes $400 million from Virginia and over $500 million of total proceeds from property dispositions. Cash and short-term investments finished the year at $2.3 billion. While this remains elevated, we nevertheless expect to continue to work the balance down this year to levels more in line with our historical liquidity needs. After fully funding capital investments, shareholder returns exceeded $3.7 billion. We will continue to be balanced and opportunistic in our buyback approach, and we remain committed to returning excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.
spk10: Great. Thanks, Sean. Let's conclude with our outlook for the year on slide 13. We remain optimistic about the opportunity to grow this year, driven by a combination of strong underlying economic momentum and supply chain recovery. Based on these expected tailwinds, we are targeting GDP-plus volume growth for the year. Volume should build sequentially throughout the year as supply chain bottlenecks ease, As a result, growth in the second half of the year is expected to be greater than in the first half. This growth will be supported by the initiative Jamie reviewed to appropriately resource our network for the current demand environment and to ensure we can provide customers with a consistently strong service product. We also expect pricing to benefit from a combination of market forces, including very strong demand for transportation services. Full-year capital expenditures are planned at approximately $2 billion. Our top capital priority is and always has been maintaining and improving the safety and reliability of our networks. In 2022, we will replace an excess of 500 miles of rail as we continue to focus on the core infrastructure. The cost of this capital work has been offset by significant improvements in the efficiency of our engineering programs. While we expect to drive further efficiencies in 2022, our plan reflects the impact of increased inflation and a number of discrete strategic investment opportunities. We will continually evaluate future strategic opportunities as they come along, but still have ample capacity across our network to absorb future volume growth. And finally, after investing in the railroad and high return growth projects, we remain committed to returning excess capital to shareholders through a combination of dividends and share buybacks. We are entering the year with strong demand across the economies. But shippers are facing ongoing challenges from the lack of capacity in labor, materials, and transportation. Our focus remains supporting our customers by providing effective rail solutions to overcome these persistent bottlenecks. As I said earlier, We are encouraged by the progress we are making, and we expect our actions combined with an improving global supply chain will provide a year of steadily improving growth. Thank you, and I'll turn it back to Matthew for questions.
spk04: Thanks, Jim. Now, in the interest of time, I'd ask that everyone please limit yourselves to one question. And with that, operator, we will now take questions.
spk12: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from Brandon Oginski with Barclays. Your line is now open.
spk08: Hey, good afternoon, everyone, and congrats, Matt. I guess you guys didn't provide any discussion on forward profitability or margins, and I get it. You know, you have the lapping of quality carriers plus lower land sale gains. So I guess, can you talk to the core efficiencies in the business and how you plan to leverage growth this year. Are there incremental opportunities for you guys to drive core profitability and network higher?
spk05: Yeah, thanks, Brandon. This is Sean. So just to clear the record, so you're going into full year 2022. We're going to have the full year impact of quality. We're going to have lower real estate gains, as I just outlined. That together is about a 350 basis point impact. So kind of on a like for like basis, you're starting at a 59 OR. Fundamentally, nothing has really changed about our story, right? Our expectation as we come out of the pandemic this year is for supply chains to normalize. As they do that, some of the costs that we've added in order to better serve our customers will start to come down a little bit. Obviously, the incremental growth that we see stronger in the second half than in the first half of the year. should be at good incremental margins. And so at the end of the day, I think the core story that you've seen over the last couple of years with us is the same next year or this year as it's been. The only unknown is what's the pace of the normalization? How quickly do we overcome what we're seeing right now out there in the environment?
spk07: Thank you.
spk12: Your next question comes from the line of Brian Ostenbeck with JPMorgan. Your line is now open.
spk07: Brian Ostenbeck All right. Thanks. Good evening. I just wanted to ask, Kevin, maybe you can go through some of the puts and takes of the outlook for some of the key end markets. I know Sean just talked about some of the uncertainty around the supply chains, but where you feel like you have some maybe more opportunities that could come to bear and where you see some of the challenges And then if you can layer in some of the impact of those new business development wins, sounds like they might be a little bit more longer dated, but is it too early to see some benefit from those?
spk05: Yeah, thanks, Brian. Look, there's a lot of demand tailwinds that we see. There's pretty robust demand across pretty much every end market. uh currently so you know we're optimistic there Sean pointed out that supply chain challenges and I think the timing of those uh normalizing is probably the biggest question as we move into second third or fourth quarter kind of when does that really uh translate into um some more better fluidity out there for us but you know starting with merchandise uh really it's a story of auto um when did the autos really start to uh in production really start to come back online uh when you look at current estimates it's really for a back half story on the volume and certainly autos drives more than just the the current car loads in the auto side it's you know touches the metals business plastics business for us as well so autos is going to be very very important uh certainly we all know the demand we've all been to the local dealership and they don't have any new cars and if you want a new car you probably got to wait 12 months But that's the demand is there. There's no question about it. Where we see right now, you know, the metals business is very strong. Plastics remains very, very strong. Probably the only thing that we're really seeing weak, and I touched on a little bit, is the energy market. And then that's just all about spreads. And spreads can, you know, collapse and then gap out again. So we'll continue to watch those and we'll benefit if those, you know, get more positive in the future. on the intermodal side uh we really benefited from the international market and we see no slowdown at this point uh there's still a lot of ships waiting at the port uh to get in and we've been very successful in moving that parade and we continue to uh have the operations and uh you know i think we'll continue to benefit from that the domestic side is really where we've seen the disruption uh and that's been largely due to the driver shortage the equipment uh shortages that we're seeing on the chassis side. And to be honest, I think the chassis problem seems to be being pushed out every month. I know the suppliers are having a hard time ramping up production, but that's probably going to be a second half story in terms of the chassis as far as we see it right now. But we do see the underlying demand there, and I think that's a good positive story for us into the back half of the year. And then finally, moving to coal, the demand is outstripping supply. You see it in the export benchmark prices. They're incredibly strong right now. We're at all-time highs almost. And when you look at the net and thermal markets today, and, you know, so we have some opportunity there. The mines have struggled, quite frankly. They've underinvested. They've had a hard time ramping back up production. Some have dealt with strikes. Some have dealt with other problems. But those things should normalize, hopefully, and we should see the benefit of that. We've also seen recently a new mine come online, and so that should help us as we get through the year. But, you know, I think the biggest question is how long do the export prices stay at these levels? But we would expect, hopefully, volume to pick up as we move through the year. Those are some of the moving parts through the markets.
spk07: All right. Thanks, Kevin. If I can ask for just a quick comment on coal inventory levels. Do you think you can see some restocking given some of the dynamics you talked about with demand and outstripping supply, specifically on the domestic utility side?
spk05: Yeah, coal levels, particularly in our southern utilities, are very low. So there's restocking that's needed. We're working really closely with our customers. And, you know, I would expect that to persist through this year and probably in the next. All right, thanks very much.
spk12: Your next question comes from the line of Tom Wadowitz with UBS. Your line is now open.
spk09: Yeah, good afternoon.
spk05: I wanted to ask you a bit about how closely we should tie your own capacity and your growth in UBS conductors coming out of the training classes. Seems like you have a nice pipeline and a nice ramp up in that. But how closely should we tie that volume growth to that ramp in your capacity? And is that the right way to think about it? Or do you think that the factors outside your control in broader supply chain are kind of a bigger variable in terms of your volume growth?
spk10: Tom, it's Jim. Just generally, it clearly, CSX is no different than any other industry right now where we have been challenged finding people to come to work. And because we have been short on our train and engine service employees, simple fact is we have not been able to move the amount of freight we could have had we been staffed up at the appropriate levels that's why we've been talking for the last year at least about our attempts to try and ramp up the hiring of operating employees And as Jamie said, we're starting now, just now, after 12 months of very, very hard work, to get back to a positive growth number in terms of the number of employees. And when we do that, we'll be able to move more freight. Jamie, do you want to add more detail?
spk19: Yeah, I think Jim pretty much nailed it. This is probably one of the most difficult environments we've ever seen. You think about all the stuff the rail industry's gone through over the past 10, 20 years. My 25 years of railroading, I can tell you when you come in one week and you've got 60 people off on COVID and a new variant comes through, and you've got 350 off on COVID on your T&E side, you really start to feel the effects and believe me kevin and i are talking all the time about the opportunities of moving as much product as we can for our customers and not only just the product that we currently have with our current customers but the growth side of things and what else can we move out there so uh to jim's point our our hiring classes have over i would say probably the past two months have been extremely successful We are putting 150 plus T&E, well, new conductors, I guess, through our training center in Atlanta. And we continue every single week to hold a new class. And I'm proud to say that all the hard work our HR team has done through Deanna Soar Fleet, it's paying off. And honestly, when we start looking at where we're going to be in three or four months from now, We're going to be a different looking railroad, and these opportunities that Kevin is talking about is going to be opportunities that we're going after.
spk14: So are you optimistic about a quick improvement related to Omicron or really just focus on second quarter for that improvement in capacity?
spk10: Yeah, Tom, it's Jim. We're thinking about maybe getting an epidemiologist on staff, so if you're ready to step up and tell us, you know, this is it, this is going to be over in two months and we're not going to see another one, come on in. You can start tomorrow.
spk14: Sounds like second quarter. Thank you, Jim. You bet.
spk12: Your next question comes from the line of Chris Weatherby with Citigroup. Your line is now open.
spk05: Yeah, hey, thanks. Good afternoon, guys. Maybe I wanted to ask a question on pricing. So, Kevin, maybe when you think about renewals for 2022, maybe what the opportunity set is there, maybe how those are progressing as we've gotten through the month of January here. And then on the coal side, any help you can give us with how to think about yields maybe just the first half of the year or over the course of 2022? I know the thermal exports are probably a full-year renewal, so maybe you have some uplift there. But I think some of the MET stuff is a little bit more closer to market. So if you could just help us with those points, that would be great. Yeah, sure. Let me cover the pricing side first. I obviously knew we were going to get this question. The market is clearly tight from the supply chain, from the transportation side. You've seen our primary customers. competition, truck rates are up significantly, and we're having to react to that, obviously, in what we're doing, but also working with customers on opportunities for them to convert more freight over to rail. In this high inflation market, they're looking for ways that they can save on their transportation costs, and rail is almost every time the most economical solution for them. And so those discussions I'm happy to say are really accelerating now and talking to Jamie every day on what we can do. So that's a really, real positive for us. So I would say certainly the market is better than it was last year. We're working with customers. They understand the cost pressures that are out there across the world. They're seeing it. They're asking their customers for the same. so um you know we're seeing some positive momentum on that side in terms of coal i mentioned it on the on my opening remarks uh export coal prices you know benchmarks are at highs uh what we've assumed and your guess is probably as good as mine is that will moderate through the year uh but what i can tell you is you know if the economy re-accelerates post uh omicron and China demand continues to be strong, then who knows? It could last much longer. But what our assumption is going forward is that likely those prices will come down. So that will impact yields somewhat in the back half of the year. But offsetting that somewhat, we would expect maybe some volume progress as the producers continue ramp up some of their production as one of the new coal mines that I mentioned comes online, as perhaps one of the coal mines that we served resolves their strike, and there's another major mine that we have right now that's shut down completely. So hopefully some of those things come back online and help us on the volume side. That's great. And just quickly, merchandise and intermodal, how much of the contract come up for renewal at the beginning of the year? Yeah, we see about 50 to 60% renewed annually and about, you know, call it 75% of those in the first and fourth quarters of the year. Great. Thank you very much.
spk12: Your next question comes from the line of Ken Hexter with Bank of America. Your line is now open.
spk06: Great. Good afternoon. Jim, Union Pacific this morning talked about growing faster than industrial production, about 4.8% for their level of carloads. You picked GDP in your outlook. I just want to understand, kind of trying to parse your growth target, you know, which includes services on GDP. So can you kind of talk about that overall target? Or maybe that's a Sean question. And then you're now more than half a year in with quality. Are you seeing any of the contributions that you expected at this point from the acquisition? Thanks.
spk10: Hey, I'll talk about Ken. Good to talk to you. Yeah, I think we're comfortable with the quality so far. I mean, it's playing out as we had expected. uh the customer enthusiasm about the pro this product that we have in the marketplace now is very good a lot of conversations ongoing about converting to a transload type of operation versus truck truck direct so uh and we haven't even Got the equipment yet here to utilize some of the ISO containers, which will help this conversion even more. So all in, yeah, I mean, they're a great team, really smart people, extremely enthusiastic and excited about this opportunity so far. I think Sean's probably better to mediate between Lance's view of growth and mine.
spk05: I don't know about that, but I can just kind of give you a little bit of color, which I think Kevin really sort of already went through in terms of each of the markets and the puts and takes there. But, you know, I think the first half of the year, first quarter, at least on the auto side, we're going to continue to remain challenged. So, you know, and you can see it in our weekly numbers in terms of how that's trending. So the hope is that as we get into the second half of the year, that's part of kind of what drives the above GDP growth. Kevin also talked about some of the growth initiatives, and the three he mentioned aren't the only three. Obviously, there's a lot going on within the sales and marketing team in terms of attracting new business to the railroad. And then fundamentally, our ability to capture the demand picture that's out there, assuming that the recent momentum we've had on the hiring front continues. and the tools that we're using in terms of retaining the employees we have continue to be successful, we grow the active T&E count, we're going to be able to move more volume. Great.
spk06: Thanks, Jim. Thanks, Sean.
spk12: Your next question comes from the line of John Chappell with Evercore. Your line is now open.
spk11: Thanks, Anna. Good afternoon, everybody. Jamie, We spend a lot of time on labor for obvious reasons. It's not just impacting you, it's impacting your customers as well.
spk05: But if we could go all the way back to a few quarters ago before it really kind of reared its head and the supply chain got into a real bad congestion issue,
spk11: I know you're out in the field kind of looking for other type of improvements you can make within the network. So as we think about right-sizing the organization, getting to some of the supply chain congestion and to normalize, quote-unquote, fluidity, you guys seem to have a head start here. So are there other opportunities for you within the network, whether it's just on trip plan performance or some of the cost levers in the back half of the year into 23, that you think that being a front-runner here, you have a real opportunity on a relative basis?
spk19: John, we are always analyzing the railroad. So I'm going out there again next week to spend some time on the railroad. And we'll be analyzing again what we're doing with our plan out there. So of course, as market conditions change and other factors that go on out there, we analyze what we do. Yeah, we just finished finding different opportunities to service our customers better, particularly in the Carolinas. We spent a lot of time out there just over this past quarter. But as I mentioned, we've put some assets out there in order to ensure that we can provide the service that our customers require right now. So there are some expenses that go along with that. You know, we see, you know, a quarter or two from now, as our hiring catches up to where we need it to be, we'll be able to pull those assets back and or use those assets for continued growth as we move forward. So there absolutely is always an opportunity on our railroad. You know, the job of the folks out there who are working really hard on the ground, their job is to execute. The network center's job is to analyze. and and i work between those those folks to make sure we're making the right decisions and we'll continue to do that so yeah there there's always opportunities but i can tell you right now our our focus is is on growth our focus is on service and our focus is to make sure we continue to balance those expenses along the way so that's going to be where we continue to push in towards 2022. great thanks jamie
spk12: Your next question comes from the line of Meet Mahotra with Deutsche Bank. Your line is now open.
spk13: Thanks. Hi, everyone. I just had a couple quick questions and then one kind of maybe broad one for Jim. But first, Sean, I wasn't sure about this when you answered it earlier. Are the margins of the business going to improve on a year-over-year basis against the 58.1 or that you did in 2021 and i'm obviously excluding virginia i understand the timing of the quality carriers acquisition and all that but you know ex-virginia are the margins going to improve year-over-year relative to the 58 spot one and um and i and related to that can you just talk about maybe what the expectations are on essential oil revenues year-over-year because i think that'll probably be a little bit of a headwind in 22. and then um Sorry, Jim, one out of the box question a little bit. You've had great success leading CSX and the whole team over the last many years under very difficult circumstances, for sure. What is the thought process around succession planning? Do you plan or are you willing to lead CSX for many, many more years to come? Or do you think there's some scope for change?
spk05: internal external can you just talk about that because it's a question that i get and we get a lot and i thought it would be interesting to to get your thoughts on it as well thank you amit this is sean i'll take the first two uh uh to begin with so on on your operating ratio question you've got the 58.1 um pull your impact of quality so what i was saying is that kind of takes you to a 59. um so i think your question is can we do better than that in 2022 And, you know, we're not going to give our guidance today. But that being said, I think we've kind of walked through all the factors that are going to drive growth, both in terms of our volumes, our revenues, as well as operating income and what that means for OR. We go into the year with a little bit of an elevated cost profile. um probably in q1 you're going to see costs that are that are largely similar to q4 given that things have not gotten better from a supply chain and labor availability perspective as we go through the year we think that does improve and if it does then then we also see volumes come along with it and we think that sets us up very very well there are other uncertainties what happens in the coal market export coal pricing and other factors like kevin talked about And then the other piece of it that you hit on was the other revenue. I think largely other revenue is going to trend with the broader supply chain because the issues that we're facing that are causing containers to dwell on the intermodal side are the same factors that we're facing more broadly in the economy between driver availability, chassis availability, and so on. And so it's likely other revenue is going to remain elevated here in the first quarter. And then I would say our baseline expectation is that it begins to normalize starting next quarter and then hopefully sort of back to normal by the second half of the year, which means we're probably moving more volume. So those are the factors.
spk10: On the question of succession, clearly it's been a topic since I got here, you know, started in the beginning of 2018. You may recall there was could change in the management makeup here over that four year period. And it has always been my goal and has always been the goal of the board to make sure that we add in place a rock solid, diligent succession planning process and procedure to follow for all of the executive management jobs. And I think when you talk on the call today and you hear these great new voices here that are doing such an exceptional job, that's because of the diligence that went into making sure that we always have an available pipeline of qualified talent. And I can tell you from working with the board, that's no different from my job. Our job and the board's job is to make sure when Jim decides to go, whenever that might be, hopefully it's when I decide, not when they decide. But whenever we're going to fill that job that we have qualified people, both internally and externally, that can step right in. And being a significant shareholder, I hope you can do a better job than I think I've done.
spk09: interesting ride. I appreciate you entertaining that question. Thank you very much.
spk12: Your next question comes from the line of Ben Nolan with Stiefel. Your line is now open.
spk15: Yeah, I have two probably quick ones if I can squeeze them in. The first is just when we're looking at the $2 billion of CapEx. Curious if you might be able to parse that out between or what portion of that might actually be growth-related. And the other one is you talked a little bit about coal allergies, and I know there was an issue at Curtis Bay. How should we think about coal in the first quarter specifically?
spk05: Hey, Ben, this is Sean. I'll take your first question around the CapEx. And I would say, you know, CapEx up about $200 million versus 2021. About half of that is related to growth investments. So Jamie talked a little bit about the sightings already, which set us up very well for the long term. to grow into the capacity that he'll be creating. We're making some incremental investments on the technology side. Some of the quality investments in the ISO tanks fall into that category and then some commercial facilities. So lots of good high return growth oriented investments. The balance of the increase in capital is really driven by sort of inflation in the core infrastructure spend as well as a slight increase in hardening the core infrastructure for safety and reliability.
spk19: I would just add on the CAPEX side that the siding extensions we're looking at is mostly on our L&N part of our property, which was down in the southwestern part of the railroad where we had smaller sidings. It worked for us, but the growth coming out of some of that area through Alabama and other stuff that's going on, the need is there. So that's where the majority of this... this capex money is going to, and we're excited to get it out in that area to support that growth that Kevin and his group are bringing. With respect to Curtis Bay, yeah, we were down for a couple of weeks, but we're back up doing direct dumping. We did redirect a few trains to a couple of different locations, but we are back in business.
spk15: All right, thanks.
spk12: Your next question comes from the line of Justin Long with Stevens. Your line is now open.
spk11: Thanks and good afternoon. I was wondering if you could talk about the impact you expect from quality in 2022 from both the revenue and operating expense perspective as we try to model that out. And then circling back to some of the labor commentary, can you help us think through what you're expecting for the sequential change in headcount as we progress through this year?
spk05: Yeah, Justin and Sean, I can take both of those. So the quality impact is pretty straightforward. What you saw in the second half of this year, both in terms of revenue and expense, is probably a pretty good run rate going into the next year, into 2022. We'll have kind of a happier impact in Q1 and Q2. And then as we get into the back half, it should be pretty similar. The things that are going to drive any difference would really have to do with driver availability. The demand is very strong on the quality side, but that's how I would think about it. So a little over $400 million of revenue in the second half of this year, that's probably a good run rate, around $200 million a quarter. In terms of sequential labor headcount, so you saw an increase of 1% from the third quarter to the fourth quarter. I think that's probably a pretty good estimate of what we might see over the next couple of quarters. The good news is, as Jamie talked about, the headcount we report to you includes both P&E employees who are in training as well as those that are marked up in revenue service. The mix between those that are in training and in service will change a little bit over the course of the first half here, which is great news. But the headcount should go up very modestly on a sequential basis over the first couple of quarters here.
spk11: Okay. Helpful. Thank you.
spk12: Your next question comes from the line of Scott Group with Wolf Research. Your line is open.
spk18: Hey, thanks. Good afternoon. So, Sean, we have some pretty big headwinds from Comper Employee and Purchase Services in the quarter, I think, including some accelerated costs. How should we think about those two pieces this year? And then, Kevin, just circling back on coal for one second, was your point about the met prices at highs suggesting that there's another sequential uptick in coal RPU and 1Q?
spk05: Scott, so comp for employee, you're right. It was elevated here in the fourth quarter, and that was one of the big factors there, obviously, was the incentive comp piece. So that should normalize as we get into 2022. I think if you look at it, excluding that for the back half of this year, that's probably a good baseline to build off of. We're going to have some higher labor inflation, which includes health costs as well as payroll tax and railroad unemployment. That'll be partially offset by the incentive comp, and then there's some favorable mix from the quality addition in the first half of the year. Hopefully, as we get later into the year and the network is cycling better, we also see a reduction in in overtime and things like that so um you know they're they're probably as a result of inflation will be a modest increase versus the normalized comp for employee um but but not significant And then in terms of purchase services, you know, that's a line that has a lot of different moving pieces. What I can tell you is that you're probably going to see something similar in the first quarter to what you saw in the fourth quarter. But a lot of the costs that we added recently have to do with, you know, off-site storage and animal facilities, supplemental labor, adding some locomotives. things like that. And that ties directly to overall fluidity within not only our network, but the broader supply chain. So as that gets better, the purchase services costs should come down commensurate with that. Yeah, and then on the coal RPU, we would expect something probably flattish in first quarter versus fourth quarter. Mix always matters. I would say the mix in terms of our domestic coal side uh should we see some of the uh supply issues uh at the at the mine improve uh could help some of that southern coal uh longer haul um pull uh maybe later here in the quarter that could help but largely flat is the way we see it today okay sean if i can just clarify one thing so it sounds like the purchase services headwind is is an offset to this accessorial stuff so
spk18: As the accessorial goes lower, the purchase services costs go lower, too. So don't think about the accessorial as a 100% margin.
spk05: Yeah, that's correct. I think it's – that's right. That's right. Now, you know, probably accessorial may come down a little bit faster than purchase services just as, you know, just from a timing perspective, but they will trend together. Okay.
spk01: Thank you.
spk12: Your next question comes from the line of Bascom Majors with Susquehanna. Your line is now open.
spk16: Yeah, thanks for taking my question. Jim, you talked a little bit about having a lot of new faces in management over the last few years since you've been in the company. Can you talk about potentially updating the investing community with an investor day or other type of event? I mean, it's approaching four years. You've acquired some non-rail businesses. You know, you've got new faces, and we've been through the global pandemic. Just curious when you think it might be time to kind of share your vision of where you think you take CSX kind of midterm and how we're going to get there. Thank you.
spk10: I think we had probably planned on doing another investor day at least a year ago, if not longer. But I don't know. I personally have not felt that it's really that useful via Teams or via Zoom. And every time we've kind of talked about, you know, getting out to New York or doing something here or whatever it is, something else comes along and kind of puts the kibosh on our plans. So as soon as Tom Waterwood gets here and tells me when the pandemic is going to end, then we'll schedule it up and get out and talk to all of you. We'd love to show this team off. They're fantastic.
spk17: Yeah, thanks for the color.
spk12: Your next question comes from the line of Jason Seidel with Cohen. Your line is now open.
spk08: Hey, thank you, Dr. Rav. Afternoon, gentlemen. Wanted to talk a little bit about the performance in the quarter on the operational side. I think this was the first time your trip plan compliance for the carload division got above 70%. So wanted to find out what was going on there and what else needs to be done to sort of try to close that gap between carload and intermodal.
spk19: Thank you, Jason. It's a, as you've all probably quarter to quarter, it is a slow climb. We're working really hard on this service product. It really comes down to the availability of people. Our COVID numbers were down, you know, into October, November, where we had maybe 30 or 40, maybe up to 60 T&E employees. And then towards the end of the year up to where we are today, well over 300, 350 folks off. So for us to really get this service product where we're arriving on the hour as we continue to commit to, it really comes down to people. And we've been saying this for probably over a year now as we've struggled to even get that pipeline going. Now we've got a great pipeline We continue to fill those classrooms and the folks in Atlanta are doing an absolute amazing job under Jim Switzenberg and his team. It's all about producing conductors. And as this quarter continues, we should see that number come up. But again, I think Jim's mentioned a couple times it all comes down to what happens in the world with respect to COVID or whatever the next pandemic or item might be that affects our crewing of our trains. So that for us is the dial that really turns us up and down when we think about our service product.
spk08: So I guess we'll just wait for Mr. Waterwood to confirm the end of COVID. But good job on the numbers, and we'll look for the more steady improvement as the year goes on. Appreciate the time.
spk10: Well, you'll see that number. I mean, we publish our velocity and dwell every week. And, you know, that's a good proxy for understanding how fluid the railroad network is, whether you're trying to look at it from a service standpoint, a customer perspective, and where are we in terms of trip plan compliance. or how much extra cost we're having out there because we're running slow uh and the reason we run slow is not that the locomotives moving at a slower rate of speed it's mean to sit in some place because it gets to a terminal where it's supposed to be recruited and there's nobody we don't have an employee to get on the train because he got sick um and uh so as that velocity number uh uh increases as that goal number goes down the result is that our customer performance metrics or our trip plan compliance numbers will just improve over time.
spk08: Well, I've always appreciated the fact that you guys published this because trip plan compliance is what most shippers look at anyway, so I much appreciate it on my end.
spk10: Yeah, great.
spk12: Your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is now open.
spk02: Good afternoon. Just wondering if I have some thoughts around revenue per carload sort of from a total company perspective. Obviously, coming off two strong quarters, we talked a little about the first quarter with coal. But as you think about moving through the year, you know, taking into account mix, how do you think about revenue per carload, you know, first half, second half, or wherever you want to talk through it? Thanks.
spk05: Kevin, I'll take this one. Clearly, yeah, we had some strong performance. Some of that obviously was due to the impact of fuel surcharge. We see that probably being a favorable impact into the first quarter and probably less so as you move into the back half of the year and just face tougher comparisons there. There's a couple probably larger swing items. We've talked about it quite a bit already, but the export coal side will be a large swing item into the second half of the year. If the benchmark prices remain high, that will obviously be a good impact. We've talked about how we reprice 50% to 60% of our business every year, and so you'll start to see that impact. start to flow through probably more heavily in the back half of the year. And then those are probably the major moving parts across the business. And obviously mix always matters. If Intermodal is outgrowing your merchandise side of your business, that's always a negative mix. So we would expect merchandise to remain strong, but Intermodal has proven over the last few years to be outgrowing merchandise, which is a good thing, but can have a negative impact on the overall RPU.
spk02: Okay, thanks for the call.
spk12: Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is now open.
spk17: Yeah, thanks very much, Roberta. Good afternoon, everyone. Just a question here on the environment that we're in right now and how different it is and whether that creates opportunities for you to kind of re-envision some of the historical practices you do, particularly around contracts and with customers and contracts with employees. So given, Jimmy, you mentioned you just can't get, and Jamie as well, you can't get people wondering if this sets the stage possibly for a bigger push on automation. Perhaps it's a little easier to get automation through if the workforce is short people. And secondly, same thing on the customer base. If you've got a customer base that appears to be extremely high demand for transportation services, does it allow you to perhaps restructure aspects of the contract that you might not have been able to do in the past, open up that door, whether it's on duration to your favor, longer or shorter, I'm not sure which one you would prefer, but
spk10: items like that on either of those two love to hear any color they might have well on the customers you know we have uh and for good or bad and yeah maybe you know this the last two years has caused us to rethink everything uh because things that we never thought were possible to happen have happened so we look at i think we look at the world differently um our relationships with our customers is, you know, this is big business to big business. You know, we have relatively long term, not as long as some contracts, but, you know, a couple three-year duration with a customer who is making huge capital investments into his plants in order to produce, and he has to have some level of longer-term reliability on what his transportation costs are going to be for him to be able to plan how to run his business. So trying to change that is difficult. I think, again, our customers are reasonable people. So I think there's dialogue about what works. There's always what works for both. It's a partnership arrangement in terms of how we help our customer be successful in his market. In some circumstances... It may have, you know, accelerated our views to a certain degree in terms of, you know, there's been a modification. There's certainly been a change in the e-commerce arena about who buys and sells transportation in the marketplace. And so, you know, we're dealing in certain circumstances more directly with the customers as opposed to third parties that we did in the past. And I think that's something that probably will evolve and continue to change. In terms of working with how we interact and how we contract with people that want to work for us, I think this is a big challenge and a huge opportunity for us to really upfront address what we think the worker who wants to work for the railroad is, what's the profile of that individual, not six months from now and not a year from now, but five years and 10 years from now, and how do we evolve this industry in an extremely um again in in most circumstances you know how would you do this differently how could you do this better uh you know we can't put kiosks in place to do the work of a conductor or an engineer but there's certainly technology out there that would allow us to do things more effectively easier and probably with fewer employees but we also work in an extremely heavily unionized environment that is also very heavily regulated with at times a bent on telling us how we should do things. So, you know, we're always in the middle of going through the process. But, yeah, it's opened our eyes, and I think it's opened everybody's eyes in the transportation business about what we need to do to be more effective and handle these types of issues in the future.
spk17: Have you found that the automation question has been easier to enter into with unions in the current environment compared to previously? No. No, okay. Okay, I appreciate the time, Jim.
spk12: Your next question comes from the line of David Vernon with Bernstein. Your line is now open.
spk03: Hey, guys. Good afternoon. Thanks for taking the time. Two for me. Jamie, could you talk a little bit about where you expect headcount to be as we exit sort of the 2022 timeframe? And then, Jim, I'd love to get your perspective, having had some time presumably to review Norfolk's ask in the CPKC transaction, kind of what you think about that and what you think about the implications of that, what you think the implications of that ask would be for CSX in the long run.
spk19: Just touching, I think Sean talked a little bit about it, but we have six to 8% attrition per year. We have to remember that. So not only do we have to hire to cover attrition, we've got to hire to get that number where we need to be in our minds to be able to provide the service that's required and the growth that Ken and his group are going after. So I'll leave it, I'll kind of leave it at this. We are actively hiring. We have over 500 conductor trainees right now between Atlanta and what's out in the field, and we're not stopping. We're going to continue to get folks out there qualified as conductors, and we've got a round of qualifying for locomotive engineers here at some point within the next year or two. So we want to make sure that we can provide that service and grow this company.
spk10: As it relates to the other railroads filings in the KCS deal, I'm not surprised at all that some of the other railroads have weighed in with the requests to make sure that their franchises and their customers primarily are protected. And each railroad has its own unique requests And, you know, that process is just starting. We're just getting involved in the substantive conversation around what the impacts are of that transaction. And you may have seen that, you know, we took the position with DFTB that we didn't have enough information basically yet to formulate an opinion. So until we have gone on the record, so to speak, with what it is, uh what it is that we're going to ask for uh and we're still kind of looking at what it is we're going to ask for and what did other people ask for and what does that mean that sort of thing uh it's really you know i'm not going to comment on any specific uh uh filing that any other railroad that made yet
spk03: That's fair, but I guess if I could just press you a little bit, is the scope of that Norfolk ask surprising to you, or is that kind of as expected? Again, I'm not going to characterize it.
spk10: No, like I said, it's not appropriate for me to comment really one way or the other where I thought it was aggressive or not aggressive. We're trying to figure out what everybody – is doing, and that takes time. It's a long, long, long process here for us to gather information, to look at everything, and then we'll formulate what we think is the right thing for CSX to do, and then at that point in time, I'll be in a better position to comment on what I think about what everybody else asked for.
spk03: All right. That's fair. Thanks a lot for the time. That's fair.
spk12: Your next question comes from the line of Sherilyn Radborn with TD Securities. Your line is now open.
spk01: Thanks very much. Good afternoon. We're starting to run a little long, so I'll just ask a quick one here in terms of coal and the producer outages that you experienced during the quarter and the new mine you have coming online. Just wondering if you can help us frame that a little better in terms of the tonnage impact and the timing of when it could come back or or come online initially in case of the new mine?
spk05: Yeah, I wish I had a crystal ball. You know, there's one particular mine that keeps on telling us that they're going to come back online and it seems to get pushed out every week. And so, no, I don't have a lot of visibility. I have probably more confidence that as we get in the second, third, fourth quarter that we'll see some pick up there. The good news is they have a lot more cash to reinvest in their business. uh, whether it's equipment and other things. So I would think, uh, we'll see some benefits of that, uh, as well. Um, I mentioned, you know, uh, one particular customer dealing with a strike, uh, you know, those things, uh, have continued for quite a while, but, uh, eventually those things get resolved as well. Uh, the, the other one, uh, the mine that I mentioned that's coming online, it will be a slow ramp up and we would expect more volumes in the second half, uh, and that's mainly into the export market. So we're positive there. It's a supportive market, obviously, and we're going to look for opportunities to move more coal as we get more crew availability into the second half.
spk01: Thank you for the time.
spk12: Your last question comes from the line of Ravi Shankar with Morgan Stanley. Your line is now open.
spk09: Thank you. Hello, everyone. One big-picture question and one follow-up. The big-picture question is on domestic intermodal. Just based on your conversation with your customers, do you have a sense of what it's going to take for shippers to move a significant amount of volumes off truck and turn on rail? Is it as simple as just clearing the congestion, or are there more complex issues with speed and service and flexibility that kind of take longer to resolve? And just in terms of the follow-up, Kevin, you kind of mentioned the cadence of your contract renewals. We are seeing on the truck side that customers are trying to push for shorter contracts or more frequent price resets on the contract side. Are you seeing anything similar?
spk05: Thank you. On the contract side, nothing's really changed. We're obviously working with customers uh to create more you know even cadence uh through the railroad network and i work with jamie all the time and we uh we go out to customers and explain the challenges that they create um and they can create more rateability of their volumes through our system that's extremely helpful uh so working with them a lot uh on that side um so that's that's a that's a big opportunity uh there and then what was the first part of the question just intramodal and kind of what it takes to get okay yeah Yeah, on the intermodal side, you know, I think having spoken to recently just one of our many customers, I think consumer behavior is actually going the other way. The expectation is not that they necessarily need something next day. So I would say the emphasis on speed is actually going the other way to some degree, and we're seeing conversations around that. You know, maybe I don't need to move it over truck and get it there in 24 hours that, you know, the 48, 72-hour option is valuable. It's obviously cost-effective where a lot of our customers are looking to offset, you know, very, very high prices. I would say on the domestic side, really the challenge has been equipment. It's not a lack of demand. You know, we get calls every day. They want to put more volume on us. But if they can't get the volume out of the terminal, that's a problem. And that's what we've been dealing with. But we think that will resolve itself. uh it's obviously going to be easier to get truck drivers that you can get home at night that are doing the short haul and that really plays into our sweet spot the long haul truck truckers aren't there and i don't think that uh the drivers are are going to come back to that market but we do think uh the shorter haul drivers are going to become more and more available um but it's not just the drivers it's the chassis and We know there's a lot of orders out there, and so that will resolve itself. And then the container side, a lot of containers being ordered right now. So we do think as we get into the second half, we'll have a lot of tailwinds that will help us really accelerate growth.
spk09: Great. Thank you.
spk12: This concludes today's conference. Thank you for attending.
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