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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. 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 1 on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. Matthew Korn, CSX Head of Investor Relations, you may begin your conference.
Emma
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 Boychuk, 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 two, followed by our non-GAAP disclosure on slide three. And with that, it's my pleasure to introduce our President and Chief Executive Officer, Jim Foote.
Emma
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 technologies to further growth and enable continued efficiency across the business. His experience leading technology organizations at a global industrial company will be very helpful as we continue to transform CSX. 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. I am pleased to say that our efforts there are progressing well, and our active T&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. 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 know 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 four. Turning to the presentation, which highlights our key financial results, we moved nearly 1.5 million carloads in the first quarter and generated over $3.4 billion in revenues. Operating income increased by 16 percent to $1.28 billion. 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 percent to 39 cents a share. I'll now turn it over to Kevin, Jamie, and Sean for details.
Matthew
Thank you, Jim. Turning to slide five, first quarter 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. The ongoing semiconductor shortage impacted automotive volumes through the quarter. However, we did see sequential improvement as consumer demand remained 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. 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. First quarter coal volumes were impacted by several factors, including mine disruptions. Demand across all of our coal markets remains strong, and we expect volumes to improve in the second quarter. An 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 commitment.
Jim
Concerns around the Omicron variant will supply chain uncertainty.
Matthew
In the wake of the crisis in Ukraine, 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 in the global supply chain and while it is early we see opportunities that could benefit our network as we look across many of our markets demand continues to outstrip supply we expect
Jim
Now turning to slide six, capabilities, which I briefly discussed.
Matthew
ESX has an experienced team of business development professionals to help existing and prospective customers identify, design, and build facilities.
Jim
The team works closely with state and locally customized investment incentives that will We encourage more business to locate on CSX and our short line partners.
Matthew
These efforts continue to pay off. In 2021, over 90 new facilities and expansion projects were placed into service across our network. Additionally, there are over 500 projects currently in an industrial pipeline. We are excited to work with these customers and reliable rail service that will enabled them to grow their business for years while creating significant long-term value for CSX shareholders. Most recently, VinFest's Asian conglomerate, Vingroup, announced that they will build a $4 billion battery manufacturing facility served exclusively by CSX. The team is part of our plan and the largest economic
Jim
development announcement in the state's history. Excellent example of the kind of customer solutions that the team can deliver as sales.
Matthew
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 rail serve sites to full scale industrial development and expansion. We are working to add even more sites to this program in 2022. I will now pass it on to Jamie to discuss our operations.
Jamie
Thanks, Kevin. The safety of our operations will always employees, customers and the communities in which we live and operate drives us to make sure that we maintain the demanding. Seven show this clearly. Over the first quarter,
Jim
We saw sequential and year-over-year improvements in the number of injuries and train accidents. This improvement, we continue to push forward with the initiatives that actively coaching, encouraging best practice sharing across teams and expanding our application of technology.
Jamie
we put a very strong emphasis on our efforts with our new hires to ensure that they respect and demonstrate the principles that make css an industry safety leader moving on to slide eight for the last several quarters you've heard us discuss the efforts we're making to address our staffing levels this is a critical point because our networks Capacity and fluidity will improve our resources. It lifts our service performance in the near term while also ensuring that we're ready to meet the substantial needs that we anticipate in the years ahead. This slide also shows several important positive train and engine employee trends that reflect the hard work done by our recruiting and training teams.
Jim
We've made great progress
Jamie
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&E employees we have in our training program. We averaged over 500 daily employees in training over the first quarter, which is over five times where we were a year ago. We expect to keep our training classes full to make sure that our pipeline remains healthy. Second, we've successfully increased our run rate of conductors who are completing their training and marking up into the active T&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&E count 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 seven, which gives us a picture on where our operations stand today. This quarter started off with several key challenges. The Omicron wave was hitting our employees. We had the incident at our Curtis Bay facility. and the east coast suffered under severe weather in early february so for the compliance terminal cardwell and velocity were generally flat to slightly worse on a sequential basis that said as jim highlighted in his remarks early into the second quarter we're seeing encouraging signs that these metrics are starting to move in the right direction it's clearly too quick to call the bottom with certainty But with the success of our hiring initiatives and a continued drive for discipline and consistency in the field, we see reasons to be optimistic. 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 will be focused on improving our asset utilization, and driving efficiency as the additional crew resources facilitate higher volumes and improve 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. I will now hand it over to Sean to review the financial results.
jim
Thank you, Jamie, and good afternoon. Our focus is on profitable growth, and despite the challenges we faced in the quarter, we delivered $600 million of revenue gains, with operating income up 16%. Interest expense and other income were a combined $11 million favorable, and the effective tax rate for the quarter was 23.9%. Earnings per share of 39 cents reflects growth in core earnings, as well as the impact of our ongoing share repurchase program. Turning to the next slide, total costs increased $419 million, 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 million of expense. Higher fuel prices were also a significant factor, up about $110 million versus last year. All other expenses increased approximately $95 million, driven by inflation as well as ongoing costs related to supply chain congestion and network fluidity. Turning to specific line items, labor and fringe expense increased $72 million, or 12% in the quarter. We invested $10 million 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. Quality carriers drove about $35 million in additional labor expense. Incentive compensation increased $6 million, while inflation and other impacts drove just over $20 million of higher costs. Purchase services and other expense increased $203 million, or 43% in the quarter. Quality carriers represented approximately $140 million of PS&O expense. Costs incurred to maintain terminal and network fluidity added roughly $45 million of expense in the quarter, similar to last quarter's impact. 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. Additionally, a legacy environmental reserve adjustment drove $17 million of higher expense in the quarter. Depreciation and amortization was up $15 million, or 4%, on a higher asset base that also includes the quality impact. Finally, fuel expense increased $141 million, or 74%, reflecting a steep increase in highway diesel fuel prices, as well as the addition of non-locomotive fuel uses created approximately $45 million of fuel lag in the quarter.
Jim
And lastly, the company recognized
jim
Now it's $27 million of real estate gains in the quarter, including $20 million related to the Virginia transaction. As a reminder, we expect to recognize a $120 million Virginia gain in the second quarter and receive the final $125 million cash payment in the fourth quarter. Now turning to cash flow on slide 12. Pre-cash flow before dividends increased on higher earnings to $976 million. Our highest priority use of cash is investing for the long-term reliability and growth of our railroad. After fully funding these capital projects, first quarter shareholder returns exceeded $1.2 billion, including approximately $1 billion in buybacks and over $200 million in dividends. 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 1st within merchandise due to transaction and integration costs 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 with that let me turn it back to jim for his closing
Jim
13. it's an ample customer domain employees we need so that our network can capture these that are right in front of us of course keeping a close eye on inflation interest rates and the fed with support from higher coal prices and a supportive market environment
Emma
we feel comfortable projecting double-digit growth for both revenue and operating income for the full year. In the near term, we expect to continue to benefit from elevated export coal price and fuel surcharge revenues.
Jim
CapEx is planned at approximately $2 billion, which is also unchanged. Progress since the beginning of the year
Emma
and we still have a lot of work to do but we are committed to supporting our customers by providing them with reliable efficient cost-effective rail solutions for their changing transportation needs lifting our service levels we will be well positioned for years of profitable growth thanks and i'll turn it back to matthew
Jim
I'd ask that everyone please limit yourselves to just one question. And with that, Emma, we will now be happy to take questions.
Operator
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. Your first question today comes from the line of John.
John
Thank you. Good afternoon, everyone. Jamie, you spent a fair amount
Jim
time talking about the important labor aspects and what in your optimism about what that'll mean and in the right spots or there any other challenges that you're seeing it's relates to service reliability these are things that you can control your yourselves or things outside of your control like customers turning over equipment more quickly and how do you think that all of
John
All that translates into the important service metrics like velocity, dwell, and cars online in the next couple quarters.
Jamie
Well, good evening or good afternoon, John. For us, it's folks where we need them. Kevin and I have been working really close with our customers to do everything we can 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 work with our customers that way so we don't have to handle cars as much. But definitely when we are looking at that pure number with respect to our trainees out there. We talked about having over 500 trainees out there right now. 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 theme that we know will get our railroad back to where we need to is just continuing to train conductors.
John
Got it. Thanks, Jamie.
Operator
With Barclays. Your line is now open.
spk09
Hey, good afternoon, and thank you. Above GDP. But now it seems you have some confidence to guide to double-digit op income and revenue growth. Can you just talk to us through the year here and what's driving that?
Matthew
Yeah, Brandon, look, there's a lot of moving parts. Obviously, we want to get confidence and, you know, are seeing good momentum as we get into it. 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. So fuel surcharge has been a bigger factor going forward as well as oil prices obviously moved up dramatically.
Jim
crisis going on. We still see strong demand from all. So we're going to begin to capture more and more of that up through the network. Thank you.
David Vernon
Your next question comes from the line of Justin Long with Stevens.
Operator
Your line is now open.
spk11
thanks and i guess to start with the follow-up on that volumes outpace gdp this year and then is there any color you can give on the the or excluding the virginia real estate sale that's ending income growth the first one um i'll grow the economy um there's a lot of moving parts as you know the auto
Matthew
automotive business is going to be a big factor as we get in the second half. And that business production needs to recover there to 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 drainage capacity comes back into the market and that will drive uh some incremental growth for us as well so there's a few moving parts but that's always our target and that's why we came out at the beginning of the year as we expect to exceed gdp volume growth but realizing that there's a number of new moving parts going on right now
jim
And Justin, this is Sean. Just to add on with the OR question, I think it's, as we've always said, we expect the incremental margins on the growth to be very strong and very healthy, and that'll be supportive into 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 up income, but they do have have a negative impact on the operating ratio as well. And then, you know, obviously, intermodal storage as things normalize, that will have an impact on the OR. These were quite elevated in the second half of last year.
spk11
Okay. I'll leave it there. I appreciate the time.
David Vernon
Your next question comes from the line of Chris Weatherby with Citigroup. Your line is now open. Now open.
Chris Weatherby
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. Just maybe if 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 two end markets. And then maybe just sort of, you know, 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 commodities to offset that?
Emma
Well, I think we've been going through since really the middle of 2018 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 years, let's call it, you know, the plague years of 20 and 21. And industrial really got, you know, look at the automotive sector and the consumer economy went nuts. So now I think you're starting to see those two divergent economies come back more in line, and industrial demand is very good. You know, I think it's clear in our comments, we have not met the demand. and as the railroad on the industrial side and the bulk side of the business. I think we've done an amazing job in handling the consumer side of the business in the intermodal sector throughout the last couple of years. So the demand is there as the railroad begins to continue to improve as we go forward. We see a lot of opportunity and there could be changes. Well, there are obviously there are going to be changes. uh in in various uh supply chains whether it's import export grain whether it's continued demand for u.s coal steel plastics chemicals you name it everything is going to be moving around a little bit uh but we see all of these sectors being uh assuming that you know everything in the world stays relatively sane and where we are today i think i want to call this sanity uh a great environment for us to excel and the only reason we haven't achieved it in the last uh You know, nine months ago, I said the numbers that we're talking about today in terms of it and the higher, somewhat higher attrition rates that we went through have held us back. And so we've figured it out. 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, uh where where traditionally railroads have excelled uh looks favorable as we look forward okay that's helpful appreciate it thank you your next question comes from the line of tom wadowitz with ubs your line is now open hi thanks this is mike triano on for tom
spk17
So you've made really good progress on adding the T&E employees. Do you have an idea at which point this year you think you're going to be all kind of trued up from a T&E crew perspective? And also, is there a way to quantify how much volume you've left on the table because of the crew constraints that you'll be able to capture once you're kind of fully trued up on crews?
Emma
Well, in terms of what we left behind, I'll use a term that Tom uses quite often, lots. And I'll leave it at that. In terms of where we're going to be, you know, from a timing standpoint of where we'll get. But I'll say, you know, 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. And so that's why we are doing everything we can from an employee relations standpoint to work closer with our employees uh because they're they are critical and key uh to what we want to do here and that is provide a reliable truck-like product across all of our with truck likes reliability to all of our customers because that's the key to uh the future for the company's uh growth jamie do you want any color about you know timing
Jamie
Our timing is we're really shooting in towards the third quarter. As far as we have training right now, if those qualify and we continue to do our hiring of 30 to 40 every single week, it puts us in a good position at some point in the third quarter. It might be towards the tail end of the third quarter. And to Jim's point, We're continuing to hire for attrition as attrition moves forward. We've seen attrition climb up, and we've got to make sure that we stay ahead of that throughout this year and then into next year. And we've got many different programs that we want to continue to train locomotive engineers and other pieces. So we're not going to be stopping at any point in time here soon, 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.
Emma
Just, yeah, and a little more color on that. You know, 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 down. 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. So we just have 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 workforce differently to make sure with the ebbs and flows of this business, which is always the case, that we do it in a different manner so we don't get caught short like we just did.
spk17
Thanks, Jim. Thanks, Jamie. Appreciate it.
Operator
Your next question comes from the line of Scott Group with Wolf Research. Your line is now open.
Scott
Hey, thanks. Good afternoon. So I want to maybe think about the back half of the years. 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 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.
jim
Yeah, Scott, to your first part of your question, I mean, remember, with all we're doing in hiring, we're netting up roughly 1% a quarter on a sequential basis. So, you know, the cumulative impact of that is a couple percent year over year in headcount by the time we get to the second half of the year. And, yeah, you know, I think we ought to be able to grow in excess of that. We've got capacity, you know, 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... you know it's it's up 10 million versus last year so call it roughly 15 million dollars a quarter that we're spending on training right now i don't see that going away like jim just said we're going to continue to hire um so that that's probably pretty rateable across the balance of the year the the the piece that is probably more variable is the 45 million or so that we mentioned in purchase services and others most of which is really related to Supply chain congestion, whether it be costs related to intermodal container yards and terminal labor, outsourced labor, or whether it 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 million as the opportunity to kind of get back to where we were once we get this thing spinning.
Scott
Okay, and if I can just sneak in one more quickly for Kevin. The coal RPU, are we seeing the full benefit at this point of the net prices and everything, or is there one more potential leg up here?
Matthew
No, I think this is largely it. 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. That's where prices stay at the current levels they are today. Okay.
Scott
Thank you, guys.
Matthew
Appreciate it.
Operator
Your next question comes from the line of Brian Ostenbeck with JPMorgan Chase. Your line is now open.
Brian Ostenbeck
Good afternoon. Thanks for taking the question. Let's 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 parts. But, you know, is this more technology? Are these different types of roles that you expect to put into place? And, you know, on that line, you've got the $600 incentive, up to $600 incentive 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?
Emma
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 extremely hard. And throughout this process, we have, I mean, You know, these guys were out there for two years in the middle of a pandemic working every single day, day and night in a chaotic operating environment caused by 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 give back in the labor agreement. We just thought it was the right thing to do. And so we made the offer. And that's a change. It's not technology. It's relationship building with your employer. with your unionized workforce. And we need to change that. And we're dedicated to changing that. And 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.
Operator
and that's what this is all about all right thank you jim your next question comes from the line of ken hexter with bank of america your line is now open
Kevin
hey great good afternoon um so you gave the double digit operating income targets and and the cost i just want to understand what what's built in for the timing of the fluidity return is that just simply the second half and and in the past we've seen i guess rails throw a lot of assets to get the fluidity moving are we 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
Emma
the service is is just the focus here the key on employees or or again is there equipment need or anything to to kind of throw at these these backlogs to get the fluidity moving of the rail network thanks well we are not short of locomotives we are not short of any physical infrastructure in order to be able to perform in fact 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 ranks. That's it. We don't need them anywhere else in the organization. We don't need more management people. We don't need a lot. You know, we don't need more engineers. people fixing the fixing the track and laying rail they're doing a great job out there 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. First of all, the pre-employment screening. Then by the time they go through the month or more of classroom instruction, and then six 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 nine months longer because of the front end of the railroad business didn't want to 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 going to be month after month after month after month when 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. So you've got a compounding effect. You're short of employees, and you can't run the train, so the network slows down. When the network slows down, you need more people. So we need to get the railroad back staff so that we can get the velocity and 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, Kevin and his team are not shy about telling us on a regular basis where they see opportunity. 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.
Kevin
And just to clarify there, the timing for the fluidity return, is that by the third quarter, year-end?
Emma
Well, I would hope. Again, I hate to give predictions because I was already off by nine months on the last one. Yeah, you'll see – Mr. Boychuk always gets nervous when I start making projections on when the railroad is going to start running better. The railroad will start running better in this quarter. It will get better in the third quarter. And it will get better in the fourth quarter. And the operating performance of the company, I hope, then will continue to get better and better and better and better all the time. You know, 2019 was not nirvana. 2019 is... is the base camp we want to get back to where we were, which was record level of performance. But that was not where we were satisfied being the way we wanted to run the company and run the railroad through the remainder of this year. Tim, appreciate the time. Thanks.
Operator
Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is now open.
Walter Spracklin
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 accessorial charges come off as fluidity improves, and therefore should we be more looking at negative 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 as your fluidity improves and some of those charges come off?
Matthew
Hey, this is Kevin. 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 uh supply chain is becoming more fluid that means we're moving more freight through the rail network that's exactly what we want to happen and so from that perspective that's that's all good uh when we looked at you know where we are today versus where we were uh 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 percent of our business every year And we're having those conversations because our customers are having those conversations with their customers. And so that's the environment we're in. And so there's a bit of a lag when you think about pricing and realization of that that we're going to have to realize through the year. And we fully expect that those things will start to deliver as we move through the year. That's great, Collar. I appreciate it. Thank you.
Operator
Your next question comes from the line of with BMO Capital Market. Your line is now open.
Jim
Okay, thank you. Maybe a question 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 specifically at the port. I'm wondering if you can elaborate a little bit on that. 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 do you think you have commercial opportunities to go after?
Matthew
Sure. In terms of trade flows, what I was referring to there is probably two issues. One, you know, 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.
Jim
And quite frankly,
Matthew
Supply chain resiliency is a competitive advantage now, and companies are re-evaluating, do I want my production in Asia, do I want it overseas, or would it be more appropriate to have it onshore closer to the consumers that are going to be buying the products? And I'm hopeful, and we're seeing early signs that that's the case, that they're making those decisions and spending capital behind it. 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 have 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, it 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 East Coast and benefit the ports that we serve. And again, it's really, really early. We have to have conversations. 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 not a next month phenomenon. It's probably six, nine, 12 months from now where you'll really start to see some impact if it happens. Okay. And then I think on the Pan Am. Yeah. Sorry? You want me to cover the Pan Am now? Yes, please. Yeah, 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. 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 reliability standpoint, just we weren't able 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.
Jim
Okay, thanks. I appreciate it.
Operator
Your next question comes from the line of David Vernon with Bernstein.
David Vernon
Your line is now open.
Jim
Hey, good afternoon, guys.
Jordan Alliger
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 the first step, and we've obviously been dealing with some of these service issues. But I'm curious to get your help on reconciling kind of where market rates are, how adding something like 50,000 boxes to the fleet this year and Hunt 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 are you going to remain a little bit more balanced between intermodal and merchandise growth?
Emma
Well, I think we're leading the industry in intermodal growth.
Jim
So it's not, you know, in terms of volume, I think, in terms of volume, intermodal is going to be our biggest piece of business. That being said,
Emma
So we spent a lot of time and effort in 2017 and 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... to grow, 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 much greater opportunity to expand that footprint in the East than they do in the West. And we're also looking more and more and more at how we can participate in the Mexican intermodal market, which to date we do basically nothing in. So whether it's international or domestic, we see great potential. for us to continue to grow our intermodal franchise.
Jim
That's not to say that we are in any way, shape, or form favoring that over the merchandise business.
Emma
The merchandise business is a core part of our franchise. So we intend to grow. You know, any business has urgent book of business. And so we don't as exciting areas of opportunity.
Jordan Alliger
And as you just a quick follow up, as you think about the UMAX fleet, do you look into add boxes to that? Are you going to let the third party sort of private fleet handle the investment in the actual boxes?
Emma
Again, that's a different book of business. Personally, I'm more in favor of us being because we see great potential. And 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.
Jim
turns some of this business around, I can guarantee you that any kind of an investment in asset in that area would have a great return.
David Vernon
Thanks very much. Good afternoon. In terms of the outlook for coal, I wonder if you could comment on what you think. the prospect is for increased coal volume this year.
Jamie
And within that, could you touch on whether it has influenced your outlook on both domestic and export?
Matthew
Yeah, I think when you look at some of the discrete items that I pointed out in the first quarter, we think some of those obviously are going to go away as A lot about the 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's probably some deferred capital that they've had over the years.
Jim
Coming out of those as well. So all else equal, we would anticipate some volume.
David Vernon
And is it primarily export coal that's influenced your outlook, or is that... No, no.
Jim
When you look at our southern utility... Oh, sorry.
Matthew
Yeah, I didn't address that. When you look at your southern utilities and even our northern utilities right now, they're at low levels. And so there's an inventory we plan with the mines to make sure that happens. And then on the exports, obviously very, very...
Jim
robust in terms of the demand. You're now seeing some probably some thermal opportunities with supply not there coming out of Russia.
Matthew
And so we'll see how that materializes. Right now, it's not a lack of demand. It's a supply constrained market. And we've seen the coal producers probably favor that export met business rather than, you know, the thumb. Jamie, just remind me that will come on in the third quarter and that will offer some additional opportunity as that comes back on to full capacity.
Jamie
Thank you for the time.
Operator
Your last question today comes from the line of Jordan Alliger with Goldman Sachs. Your line is now open.
Jordan Alliger
Yeah, hi. Afternoon. Just curious on the auto sector, if you could get a little color around that, what you're hearing from the OEMs, maybe how the parts business is doing.
Jim
Improvement in the March, and that's continued in the April.
Matthew
Chipping cars 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 six months from now. So we've seen a lot more finished good inventory on the ground, and we're ramping up to deliver those products to the market.
Jim
So we'll see what some of the inventory is.
Matthew
impacts uh in china with some of the disruption they're having over there with the uh you know the variant running through there and shanghai uh shutting down in some other areas so it's a watch item but we're we're seeing some favorability at least in the near term thank you there are no further questions at this time this concludes today's conference call thank you for attending you may now disconnect
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