CSX Corp (CSX) — Q4 2020 Earnings Call Transcript

Thank you, and good afternoon, everyone. Joining me on today's call are Jim Foote, President and Chief Executive Officer; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations. On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Thanks, Bill, and thank you to everyone listening in today. I want to begin by recognizing all of CSX's employees for continually responding to the challenges of 2020. Our results are a testament to our amazing people and the strength of our company. The core principles instilled over the last few years allowed us to act decisively with coordinated effort and alignment across the company. Over the course of the year, we reexamined every process from the ground up to identify and eliminate unnecessary steps across the railroad. As a result, we uncovered significant opportunities to build upon the progress made during our transformation. These changes will provide benefits for years to come. Now, let's turn to Slide 5 of the presentation and our fourth quarter financial results. Operating income grew 5% to $1.2 billion, and the operating ratio improved 300 basis points to a new fourth quarter record of 57%. Our reported earnings per share were $0.99, but I want to point out that this figure includes a $0.05 per share charge related to the early retirement of debt. For the full year, despite lower overall economic activity and historic demand volatility, CSX produced a full-year operating ratio of 58.8%, exceeding our initial guidance of a 59% operating ratio. Moving to Slide 6. Fourth quarter revenue declined 2% on 4% higher volumes as intermodal revenue growth was more than offset by lower fuel surcharge revenue and declines in coal. Merchandise revenue and volume were flat, and revenue growth in chemicals, agriculture and food, metals and equipment, and fertilizers was offset by declines in other markets and lower fuel surcharges. Intermodal revenue grew 6% on an 11% higher volume to new quarterly record levels. This performance was driven by a combination of strong demand for transportation services due to inventory replenishments and volume growth from East Coast Works. Coal revenue was down 18% with 9% lower volumes as the coal business continues to be negatively impacted by lower domestic utility demand, industrial production, and global benchmark prices. Other revenue was down 6% as increased intermodal storage revenue was more than offset by a higher reserve for freight in transit and lower demurrage charges. Turning to Slide 7, we remain committed to being the safest railroad. In the fourth quarter, we achieved a new quarterly record low number of personal injuries and full-year record lows for both personal injuries and train accidents. While our efforts to build a culture of safety can be seen in the annual performance trends, we can always be better. We have launched new near miss and workplace hazard reporting programs that encourage employees to report potential safety concerns. We are also working to increase awareness of incidents and trends by conducting joint terminal tours with CSX management and local labor representatives. This proactive approach to reporting and communications is helping drive increased employee engagement as we identify and eliminate unsafe practices across the railroad. Turning to Slide 8. We have previously discussed how the use of autonomous car and track inspection technologies is helping us meet our safety goals, and we will continue to invest in new programs to improve safety. However, we have a much broader vision for the increased use of technology in our business. Technology is foundational to our growth. We are actively investing in new technologies across the railroad, but we're barely scratching the surface of what is possible. We are making our intermodal yard smarter and more autonomous. We are piloting programs that will further fuel efficiency, such as allowing us to optimize speed across the full trip of a train. And in the field, we're getting rid of paper-based processes and converting to digital ones that allow faster communications and data capture, which improves safety compliance. As we look to the future, we are upgrading our dispatch system to lay the groundwork for enhanced network performance through dynamic real-time routing decisions. We see opportunities to implement predictive analytics in our maintenance programs to both reduce mechanical failures and more systematically identify areas of track most in need of investment. Additionally, beyond these significant operating benefits, we are investing to improve our customer experience and create easier and more streamlined processes for our customers to do business with CSX. Every action we take is designed to make CSX smarter, faster, and more reliable. Turning to Slide 9. We remain committed to sustainably managing our own business, as well as helping our customers reduce their emissions. In 2020, customers shipping with CSX avoided more than 10 million metric tons of carbon dioxide emissions. To put this into context, this figure is roughly equivalent to the emissions produced powering all the buildings in New York City for almost a full year. We remain focused on furthering these environmental benefits, not only by continuing to improve the efficiency of our own operations, but also by providing a reliable alternative to trucking that allows our customers to meet their emissions goals without having to sacrifice the reliability of their supply chain. We have set ambitious long-term goals in order to remain leaders in sustainability. And we are committed to expanding the benefits rail offers as the most sustainable mode of land-based transportation. Let's turn to Slide 10 and look at our operating performance for the quarter. Clearly, the simultaneous rapid increase in both volumes and COVID-related employee absences impacted the network, but overall, the railroad is running well, and we were still able to drive incremental efficiencies. Locomotive productivity achieved a new quarterly record for gross ton miles for available horsepower, and we set a new fourth quarter record for fuel efficiency at 0.94 gallons per thousand gross ton miles. On Slide 11, our improved efficiency is further illustrated, comparing volumes and asset levels against the pre-COVID and prior year periods. As volumes return, our revised operating plan is aligning us to operate at a sustainably higher level of asset utilization. This is reflected both in the sequential trends, where volumes have increased at twice the rate of asset redeployment, as well as double-digit productivity gains we have maintained between year-over-year volume and asset levels in the second half. While our team did an excellent job of working during this period to make the network more efficient, our number one priority remains providing our customers with a high-quality service product. There is still significant leverage built into the operating plan. But as volumes grow, we have been and will continue to add crews and locomotives as needed to serve our customers well. Turning to Slide 12, our carload trip plan performance was 75% for the quarter and intermodal trip plan was 84%. Like all transportation and logistics companies, we have faced challenges from both the rising number of COVID cases along with broader supply chain disruptions from volatile demand, inventory shortages, and imbalanced freight flows. This team has done an admirable job navigating this environment. But we expect these trip plan figures will return to and then exceed our results from the beginning of 2020. While our performance is still at industry-leading levels, we hold ourselves to a higher standard. I'll now turn it over to Kevin for a review of the finances.

Thank you, Jim, and good afternoon, everyone. After a challenging year, we are all excited to turn the page to 2021. That said we accomplished a lot this past year, which sets us up well as the economy recovers from the impact of the pandemic. While many markets remain challenged, we did see an improving business environment in the fourth quarter and as a result delivered both volume and operating income growth for the first time in 2020. We managed costs through the year and made sustainable improvements to the train plan, which will drive operating leverage as volumes return. We once again delivered a quarterly record operating ratio. Excluding real estate gains, this marked the third quarterly record in 2020, an extraordinary accomplishment by this entire team. This past year, we focused on what we could control. Navigating the uncertain and volatile business environment while successfully driving efficiencies across the business. Our goal in 2021 and beyond is to leverage the growth ahead of us by sustaining these efficiency gains and driving further improvement across the business. Looking at the fourth quarter income statement, revenue was down 2% as continued volume growth and pricing gains in our intermodal business were offset by the ongoing effects of weak coal demand and lower fuel recovery. Merchandise revenue was in line with the fourth quarter of 2019, but we have seen positive momentum as revenue improved 5% sequentially and from the third quarter, above normal seasonality. Total expenses were down 7% in the quarter on a 4% increase in volume. Walking down the expense line items, labor and fringe were 11% lower, reflecting the benefit of the train plan optimization and an 8% reduction in total headcount. Throughout 2020, our operating team continued to refine the train plan in response to the dynamic volume environment. These improvements enabled significant efficiency in the fourth quarter as crew starts were down 11% and, while overall volumes were up 4%. Lower crew starts in the quarter also translated to fewer active trains and, as a result, reduced the need for locomotives. The smaller fleet drove a 14% reduction in our locomotive labor expense. We were also able to hold the line on the significant reductions made earlier in the year to our engineering contract labor expense, as well as our intermodal terminal workforce, even as volumes continue to increase sequentially. Lifts per man-hour, a key measure of efficiency for our intermodal workforce improved 23% when compared to the fourth quarter of 2019. Moving forward, we are preparing for growth. The current environment remains challenging and unpredictable with COVID related mark-offs significantly impacting pockets of our network. We wish the best for these employees and hope for their speedy recovery. Moving forward, we will hopefully begin to see improvement from current levels. We continue to focus on crew availability and are currently accelerating our first half hiring efforts to be prepared in the event of stronger demand. We expect headcount will likely exceed attrition in the first half of the year to provide flexibility, should demand surprise positively, particularly in the second half. We will manage it closely and adjust accordingly as we monitor the trajectory of the potential volume recovery. MS&O expense increased 4% or $19 million in the fourth quarter. Adjusting for the $20 million headwind from real estate gains, MS&O expense would have been roughly flat, as efficiency and volume-related savings were offset by inflation and other items. The improvements to our train plan drove savings, including lower crew travel and repositioning costs, as well as lower locomotive materials and contracted service expense. Real estate gains were minimal in the fourth quarter. Looking beyond 2020, we continue to manage a pipeline of future properties that we will monetize when conditions are favorable. Our base case is for real estate sales activity to be roughly flat. As I've said before, we will also continue to pursue opportunities to leverage our real estate to generate recurring revenue streams. Fuel expense was $77 million favorable, a 36% improvement year-over-year, driven by a 33% decrease in the per gallon price and record fourth quarter fuel efficiency. We continue to invest in technologies that will drive further improvement in fuel efficiency, widening the advantage over truck and demonstrating our continued commitment to sustainability. Looking at other expenses, depreciation increased $3 million or 1% in the quarter. This reflects a larger asset base as well as the impact of a road and track depreciation study. Depreciation expense is expected to be a $10 million to $20 million headwind in 2021. Equipment rents expense increased $4 million or 5%, as higher days per load across all markets resulted in increased freight car rents. Turning below the line, interest expense was flat, as higher net debt balances were offset by a lower weighted average coupon. Other income decreased $48 million, reflecting a make-whole charge related to the early redemption of $500 million of long-term notes that were set to mature in 2023. Income tax expense increased $24 million or 11%, due to higher pre-tax income, as well as the cycling of certain state and federal tax benefits recognized in the fourth quarter of 2019. Closing out the income statement, CSX delivered operating income of $1.2 billion, reflecting a fourth quarter record 57% operating ratio. Turning to the cash side of the equation on Slide 15. On a full year basis, capital investment was relatively flat; even during the pandemic, we remain committed to investments that prioritize the safety and reliability of our core track, bridge, and signal infrastructure. This commitment will not change. And by level loading the maintenance spend, we are improving the safety and fluidity of our network without requiring a step-up in core infrastructure spend going forward. Capital allocation remains a focus. And we have a healthy pipeline of high-return investments, we expect to invest in this year. In 2020, free cash flow before dividends was $2.6 billion, down versus 2019, primarily reflecting lower operating income but also impacted by lower proceeds from property sales. Free cash flow generation remains a key focus of this team. Even during 2020's challenging environment, free cash flow conversion, while net income was about 95%. We expect to stay above 90%, even with slightly higher CapEx and an increase in expected cash tax rate. Our cash and short-term investment balance remains strong, ending the quarter at $3.1 billion. Our expectation remains that this balance will normalize over time as we continue to invest in the business and return capital to shareholders through dividends and share repurchases. With that, let me turn it back to Jim for his closing remarks.

Great. Thanks a lot, Kevin. Concluding with Slide 17, we expect to return to growth in 2021 for both CSX and the U.S. economy. While much debate remains around the pace of this growth as we've transitioned from COVID headwinds to potential stimulus fuel tailwinds, we believe CSX is well-positioned to grow volumes faster than the prevailing GDP growth rate in 2021. Merchandise volumes should outpace industrial production growth as we convert additional truck volumes off the highway and onto CSX. We expect intermodal volumes to grow even faster than merchandise as the business continues to benefit from the ongoing inventory restocking and a tight truck market. Following an extremely challenging year, we expect the coal business to begin recovering from 2020 trough levels. As volumes increase, we will drive incremental operating leverage by efficiently absorbing the additional cars and containers into our revised train plan. We still have significant opportunity to add volumes onto the existing trains, and we'll have train starts as needed to maintain high levels of customer service. We project full year CapEx of $1.7 billion to $1.8 billion. This spend reflects ongoing investments in our core infrastructure, combined with several high-return growth investments for technology and sales and marketing initiatives. We will continue to evaluate attractive growth investment opportunities as they arise. But from a network perspective, we still have ample line of road and terminal capacity. Lastly, we remain committed to returning excess cash flow to shareholders. We will repurchase shares through our ongoing buyback program, and we will look to be opportunistic with share repurchases as we utilize our roughly $6 billion of buyback authority. The actions taken in 2020 have positioned CSX for success, and we are taking the necessary steps to ensure that we are prepared to handle the expected growth in 2021. This past year has proven that although we have accomplished great things during our transformation, our team is still finding opportunities to push this company to new heights. I enter this year as excited as I have ever been for what the future holds for CSX. Thank you, and I'll now turn it back to Bill for questions. As you may have noted at the beginning of the call, Mark Wallace is unfortunately not joining us today as he's dealing with a non-COVID personal health issue. The rest of the team will do its best to answer any marketing questions you may have.

Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. With that, we will now take questions.

Hey, good afternoon, everyone, and thanks for taking my question. Well, Jim, I guess maybe we can start there. Unfortunately for Mark, he's not here, but you guys do sound like you have some confidence that merchandise, I think you've said, will grow in excess of industrial production and intermodal even better than your merchandise outcomes. So, I guess, are there any specific examples you can give us where you're winning in the network and delivering this new service product that we've heard about for a couple of years? Now how's that translating into confidence this year?

Well, in many respects, the conversion of trucks on the highway back onto the rail system has been something we've talked about for many years. We’re working with our existing customers today, where we're doing a lot of work with them already in their boxcar fleet. We know them very well, but we've never really had an opportunity to take a look at their book of business from what they're doing on the other side of the plant, so to speak, where they're sending it out in truck. Now that our service product has become more reliable, we've been able to capture more and more of that wallet share. This applies whether it's in forest products, pulp board, metals, or chemicals; you name it, we've been able to do that. This is clearly the strategy we will continue to pursue, along with looking at ways through our transflow opportunities, where we can reach customers' business that before we didn't have the capability to handle because we didn't focus on the last-mile business if we didn’t directly connect to a customer’s location. So it's a combination of different factors that spread out really across the entire spectrum of merchandise, and again principally because our service now is as reliable as a truck. And, obviously, maybe it's the easy way, but let's go to our customers that we already know and do business with and shake the tree there. There is a ton of opportunity for us. Similarly, in our intermodal franchise, we're getting more businesses, looking at lanes that before we couldn't compete in because we had somewhat of a disjointed network. We've worked hard to rationalize and improve the service on the network, and that's bringing us additional business. We've been building on this for a number of years, and we expect it to continue to pay benefits in 2021.

Thank you, Jim.

Great. Good afternoon. Jim, maybe you could just talk a bit about the missed business opportunity, given COVID. Kevin kind of threw out some thoughts that there was missed opportunity. Can you quantify your thoughts looking back and maybe what that means as how fast you bring employees back into 2021?

In terms of missed opportunities, we, CSX, are no different than anybody else in the country. Our employees have been impacted by the virus to the same degree as everyone else, if not more, in the transportation sector, because they're essential workers and are out there on the frontline every single day, making sure the goods get across the country. If we've missed any opportunities, it's been as the surge of traffic came back in the third quarter, just about the time the virus began to tick up, and then clearly, it took off with the Thanksgiving holiday. So we're aware of that. We're prepared for that. Maybe we've missed something along the way. I think what Kevin was more concerned about is that we have the potential for a rebound in the economy and government stimulus. We want to be ready to handle that. We have track capacity and assets in terms of locomotives; what we want to ensure is that we have the employees. It takes five to six months to train these people, so we have to manage to that trajectory. That's what Kevin was referring to in any missed opportunity—to make sure that we're prepared to handle growth when it comes.

Thanks, Jim.

Thank you, operator. Hi, everybody. Kevin, I guess, with the dynamic of intermodal growth outpacing merchandise growth this year, do you think yields can be up in 2021 versus 2020? And then if you could just also talk about the magnitude of OR improvement? How should we think about OR improvement, given the benefits of higher volume, but then obviously, some of the adverse mix that comes with the intermodal outpacing merchandise?

Yes. I think, as I mentioned last quarter, we had the greatest contribution from our intermodal business, which has traditionally been viewed as the least profitable segment of our business. But yes, we put up a record operating ratio. I think we again proved that in the fourth quarter. You saw the intermodal business, obviously, having the strongest growth. And again, we were able to deliver record OR performance. As we go into 2021, with any year, there are normal inflation costs that you have to offset and overcome as you want to improve your margins. We have labor inflation a little bit higher than what we saw in 2020. We have health and welfare costs ticking up a little bit more than what we saw last year. But really inflation, when I look over the long-term average, is probably a little bit under that long-term average, so not a huge significant headwind. But the variable here is going to be the growth. I'm very confident if growth exceeds our expectations that we'll drop that through at a very attractive incremental margin. Our goal here is to be prepared for the growth and grow operating income. That's what we're looking at. I mentioned in the first half of the year, we'll accelerate our hiring to make sure we're prepared for whatever environment comes in the second half. And Jamie will quickly adjust accordingly if things change on us.

Could you just answer the yield question in terms of whether you think yields will be up year-over-year in 2021?

Yes. I think when you look at the first half of the year, we'll have some fuel surcharge. Fuel will still be a headwind really in the first quarter; that will start to moderate as you get into the second quarter. So, in the second half of the year, you'll see a little bit less fuel surcharge headwind. Coal, in the first half of the year, probably on a yield basis, will be a little bit of a headwind. Obviously, that market is pretty dynamic, particularly on the export side. But see some support going into the second half of the year. I would say, definitely expect the second half to be improved over the first half, but that always goes back to mix as we see some of our higher revenue per unit business, whether it's chemicals or other areas, see continued strength; that helps the dynamic there. The coal dynamic should moderate in the first half of the year and really not be as much of a headwind going forward.

Okay. Thank you very much.

Thanks. Good afternoon, and great job on the quarter. Without specifically focusing on where the OR can go in 2021, I sort of wanted to ask a longer-term question. I mean, it sort of seems feasible to do a 55 OR this year. But, I mean, it just seems like you guys are pushing the boundaries of what we thought might have been either remotely possible for an Eastern rail. So I would just love to hear your thoughts on how you view the potential for the longer-term profitability of the business. I mean, obviously, you guys are gaining share. And Jim, you highlighted a number of efficiencies that will come in the future from technology investments. So any thought there? And then just sort of lastly, Jim, if you could sort of tell us what you think about the difference between a long-haul and a short-haul railroad as it comes down to, it's a long-term profitability and if there are truly already any structural differences? Thank you.

Great, Allison. Good one question. So, a couple of years ago, we were in New York talking about how we were going to take this worn-out, beat-up, run-down railroad to a 60% operating ratio in a couple of years, and everybody said, you guys are crazy; it can't be done. Now I think you said you want double nickels here next year. We're trying to grow operating income and earnings per share to reward our shareholders and not just get singularly focused on this operating ratio. The operating ratio will be what it is. Obviously, you saw what we can do when we get our hands dirty and focus on what needs to be done to run the company better. I truly believe, as Jamie and his team collaborate with Mark and the sales and marketing team, we need to get this company running reliably and faster to provide a better quality product to our customers. The necessary result of all of that is that we take a lot of unnecessary activities out of the system we do today, which drives down costs. Without focusing on a specific reduction in the operating ratio, I firmly believe that we will continue to drive efficiency while we focus on building a better product for our customers. In terms of the short-haul railroads versus long-haul railroads, every railroad is slightly different. Every railroad has its nuances. Previously, we used to have some nice long-haul routes across Western Canada, which were good. In our case, we're winding around with many customers all over the place, which comes with challenges. There is a lot of business activity in the east that we have the opportunity to take advantage of. Another part of my history goes back to my days at the Chicago Northwestern when we built lines into the Powder River Basin coal fields, achieving an operating ratio that started with a four handle. So every piece of railroad is unique. Our goal is to have the best quality product and do it efficiently. If we do those two things, we make a lot of money doing it.

Thank you.

Yes, good afternoon. I wanted to ask if you could provide some insight on the plans for increasing headcount beyond the rate of attrition. I understand that there is a lead time for recruitment and training. I would assume you have a clear idea of what that number looks like. Looking ahead to the next quarter or two, can you share whether that represents a sequential increase of 1% or 3%, or something else? Is it a significant jump, or will it be a gradual increase? Should we factor this into our margin modeling for the first half of the year, or is it a minor change that won't significantly impact the incrementals or margins?

No. Jamie can speak to the strategy a bit, but no, these aren’t huge steps up in our hiring process. A lot of it is to get ahead of the attrition rates that we see coming ahead in 2021. We’re confident that we’re going to have the operating leverage that we've continued to deliver. So I wouldn't expect headcount to go up more than the volumes that we're going to see. We'll adjust the model as we have more visibility in terms of where volumes are trending.

If I was to look at percentages, when you think about it, our attrition rate is somewhere around 8% per year, so what we want to do is front-load that attrition rate, keep a good eye on our discussions with Mark and his team to ensure we are ahead of that business coming our way throughout 2021. This allows us to backfill the rest of that attrition towards the back end of the year. If the business doesn't come, we'll be in a situation where we can at least manage through the end of the year and go from there. It takes four to six months to make a conductor offline, so if we don't get ahead of this now, and the business comes along, we will leave it on the ground. That’s the last thing we want.

So, the headcount increases sequentially early in the year. And then if the business is in there, attrition could kick in and could fall back off. Is that essentially what you're saying?

Absolutely. That's how we're setting it up.

Thank you.

Thanks, and good afternoon. Wanted to ask about compensation for employees. Kevin, any color you can provide on what you're expecting there over the course of 2021? And then maybe for Jamie, I was wondering if we could get an update on the number of locomotives in storage today and what you're anticipating for that utilization rate going forward?

Yes, I'll take the compensation per employee question. As I talked about in my opening remarks, we're going to see a little bit more labor inflation this year. We'll see the management increases take effect here January 1, which is different than what we've seen in previous years. So, that will be effective in the first quarter. Overall, I think historically, we talked about this 3% increase. Without knowing what really incentive comp can move around quarter-to-quarter, I think a 3% kind of range is a good starting point.

Look, on the asset side, in particular locomotives, we started with almost 4,000 locomotives; our fleet is down to around 2,150 today. We've got hundreds of locomotives still in storage ready to pull out when needed. We're continuing to invest in our locomotive fleet, our CapEx is coming up this year. We're going to continue to rebuild locomotives; we've got 67 in the plan this year, and we want to continue to invest in the assets that we have. That will allow us to introduce trip optimizers, distributed power, and other reliability features.

Okay, great. Thanks for the time.

Hey, thanks, afternoon guys. So, Kevin, any color you can give us on MS&O costs that you expect for the year? I know it's volatile, but any color there? And then on the OR, I know we're not getting guidance, but almost always the full year OR is better than the fourth quarter. Is there anything wrong with that line of thinking right now?

The first quarter being better than the fourth quarter? No. I think we gave relative revenue guidance because there's a bit of uncertainty as we get into the second half. But hopefully, some of these initiatives that Jim talked about will take hold and we'll see the economy strengthen through the back half of the year. I'm confident in the incremental margins that we've been able to deliver and we'll continue to do that, particularly if we get stronger revenue growth than we expect. On the MS&O segment, when you look at the fourth quarter, we delivered what we thought we were going to do from guidance in the third quarter. Real estate sales going into 2021 will be flat, so not a real big factor on those costs on a year-over-year basis. We do expect some inflation to hit us in 2021, but again, it's an area where we have a lot of focus, and we'll continue to try to find opportunities to take out costs. So I think expect some normal inflation impact but nothing real significant moving into 2021. It will move with volume, so if volume is a little higher than what we expect, you would see some variable costs move up with that as well.

Okay. Thank you, guys.

Yeah, hey. Thanks. Good afternoon. I guess, one last question about service. We think about the second half of the year; obviously, service was a little bit more of a challenge, still quite good, but down from where you were in the first half of the year. When you think about the headcount and maybe resources, is there a level number where you feel like you’re comfortable or maybe you need to address it to move the needle moving back up? And then second, when you think about a little bit of the front-load from a headcount perspective, does that have an impact on the service, or do you expect that to have an impact on services as you move into the first half of the year?

Yeah. Let me just make a general comment and then Jamie can answer you in detail. I think the railroads are not unique in the second half of the year. This situation with everyone trying to keep up with this unprecedented volume is creating issues whether it be in foreign ports, whether it be in ocean vessels, or ports across the country. Everybody is dealing with a situation where volumes are unprecedented and volatile. At the same time, we have hundreds of employees sick or in quarantine daily. We’re doing a fantastic job managing our way through this. I’ll let Jamie share more about what we are doing.

I think, Jim really nailed it with respect to some of the pockets we're seeing and why some of the levels aren't where they were historically. But you have to give credit to the performance metrics we've maintained in terms of record train length increases year-over-year and our fuel efficiency. We started seeing our employee counts get better. As I said, we had hundreds of employees off, and we are starting to see daily numbers coming down, and that will help us be more fluid. So as those numbers come down, we'll feel like we have the right number of people out there, and we get them back to work. There is still a lot of opportunity to improve dwell/velocity metrics, which we want to target moving forward and enable us to keep moving products efficiently.

Got it. Thanks for the color guys. Appreciate it.

Yes, good afternoon. Kevin, you talked about your excess cash balance and looking to normalize it over time. Is that something you're targeting for this year, or could that be more gradual? Just any thoughts on how you want to manage your liquidity and balance sheet with the cash flow you expect to generate would be helpful? Thanks.

Yes. I think I would expect something lower by the time we exit this year; so yes, I think that's probably a this-year event. We'll watch it closely here. As we get more comfortable with the trajectory of the economy, we'll have discussions internally about what makes sense. We always want to be opportunistic, so we will look for opportunities in the stock as well. It's a position of strength, and we'll do the best we can.

Thank you.

Hey, good evening. Thanks for taking the question. Jamie, maybe I'll take you up on the dwell and velocity one. They have deteriorated for a while here. Obviously, volumes have been quite volatile. They had longer trains to help offset that challenge. It doesn't seem to be a headwind financially now, but we've also seen cars online come up quite a bit. So could you give us a sense as to what has been the challenge outside of labor and what you see as opportunities, and maybe a timeframe for improvement? And then Jimmy, if you can comment on the growth opportunities you're seeing for the truck conversion side. That doesn't sound like any of the service challenges now or in recent quarters are really affecting anything but maybe if you can clarify that for us as well, if the customers are just needing capacity and you have it; it's tough out there for everybody.

When you look at the metrics, yes, our dwell and velocity have been impacted the past couple of months, but when you consider the overall flow of traffic, those numbers will start improving. We have a target now at a 100% fill rate for cars, and we are keeping a close eye on what those cars look like as they move around the network. We have a continued focus on our operating metrics, including dwell and velocity, despite the volatility in our market. We have to get to the point where we can drive reliability and if we miss targets at certain times, we will work through that. Our fill rate was significantly below 100%, but we believe the opportunity still exists to improve that moving deeper into 2021.

By doing all those things correctly in a coordinated fashion between operations and sales and marketing, that’s what's driving the business from highway onto rail.

Got it. Thank you.

Hi, guys. Thanks for taking the question. So Jamie, I was wondering if you could kind of help us understand that rate of resource addition in relation to volume growth. I think you guys are laying out a picture that says somewhere in the mid-single digits on volume. I'm not asking you to confirm that as a volume guide. I'm just trying to get a sense for if we're going to be at that level of volume growth, what level of resources do you need to add to the network from today's levels to keep pace with that at the service level you want to provide?

When you look at locomotives, we need to add more as we move forward. It's about balancing our headcount and pushing for reliability throughout. As we analyze our resources, we've started moving the right capacity in the right locations, but it will all depend on tactical resource deployments. We're confident we can position ourselves ahead of this growth.

We will observe capacity increases and the utilization will improve as volumes start trending back to where we expect, but Jamie and I are confident we can maintain operating efficiency while scaling headcount. We’ve done a lot of great work in the past in maintaining that balance.

Thank you.

Thank you. Good evening everyone. Thanks for confirming the view on coal improving from the 2020 trough levels. I wanted to get your views on how much of that is anticipation of the domestic market versus the export market? And as it relates to the latter, we're seeing shortages in certain regions of the world because of the bitter winter weather and some trade issues. Have you seen any uptick in your export coal opportunities given some of those issues?

When you look at our coal business, the fourth quarter showed a little bit of strength versus previous three months. We're exiting the year at a better position than we saw at the middle of the year. Going into next year, the strength we anticipate will really be on the domestic side with utility stockpiles below normal levels. We see some opportunity there. However, the risk/reward balance has improved a bit more than in previous years. You are likely referencing the China, Australia, spat over coal right now, which is not helping global prices. Hopefully, that situation gets resolved for potential net price upside going forward. On thermal coal, our business today in the fourth quarter is 75% metallurgical and 25% thermal. If polar vortex patterns affect global markets negatively, that could be an opportunity for us since we're delivering very little to Europe currently. We head into this year cautiously optimistic, seeing stability from the four quarter.

Sounds great. Thanks Kevin.

Yes hi. Just one quick question. To the extent you have it, do you have your economic thoughts that underlie the commentary you made on volume, in other words, volumes greater than GDP, merchandise greater than industrial production? What's your economic guys saying around those two measures?

There are a lot of different views regarding what the underlying number is going to be. We're trying to find what is the most reliable number for us to look at. Everybody is adjusting their numbers; largely, they are adjusting down. Our guys have an independent view, but it’s not something we are willing to bet the farm on as to how we run the company. We try to look at differing viewpoints and, as we progress further into 2021, hopefully, things become clearer.

Okay. Thanks so much.

Thank you, operator. Hey, gentlemen, my best to Mark; hope he feels better. I wanted to talk a little bit about your trip plan compliance. It looks like things are going in the right direction on the carload side. Talk a little bit about what you guys are doing there to improve that? And then is there really anything that the railroad can do right now to materially move the intermodal trip plan compliance, or is this all just congestion needs to work through some of the ports and some of the inland facilities?

Let me start with the intermodal plans. We have very stringent trip plans on both ends with respect to always measuring loads and empties for intermodal and merchandise sides. In the past couple of months, we felt the pressure in servicing peaks in demand. As international traffic isn't as time-sensitive, we can allow that to be impacted while fulfilling more urgent demand. I'm confident moving forward; we should target above 90% performance. Last month, we were hitting that as we moved past the peak, and that can improve going forward.

For carload trip plans, you miss by two hours, that’s it; it's a failure, whether it’s a load or empty. Our connections are tight from terminal to terminal. If you have COVID-19 pockets, that's going to impact the job. We are maintaining vigilant standards on these metrics and will continually get better with the processes we have in place.

That's great color, and I'm glad to hear things are moving in the right direction. Everyone stay safe out there. Appreciate the time as always.

Thanks. Good evening, everyone. As we conclude, I would like to know if I should expect a change in your operating ratio. You have mentioned that you will be pursuing growth aggressively in the future. However, as we consider the 3 to 5-year outlook, it seems like you are starting to echo the sentiments of the Canadian rail companies, emphasizing that the operating ratio isn’t the sole metric to focus on; you are aiming for growth and increasing EBIT dollars. Are you planning to maintain a high 50s operating ratio while significantly increasing revenue from here?

We’ve never said we're singularly focused on one thing only. Our objective has always been to improve our operating income at the same time growing the quality of the product for our customers. The operating ratio will be what it is; as you saw from our actions, they allow us to grow efficiencies while obtaining a better customer experience. If that turns into a lower operating ratio over time—great. It's always been about balancing optimal service while ensuring operational costs decline as we move forward.

Great. And maybe as a quick follow-up. We have a new administration this morning. Are there any kind of 2 or 3 things you're looking for from D.C. something you're watching out for either as a tailwind or a headwind?

Government stability would be a good start. We have a history of managing through government changes, whether on a federal level or at the state level in the 22-23 states we operate in. It's not something that we're worried about. We look forward to figuring out how to interact, which we have been doing adequately for many years.

Great, thanks guys.

Well, thanks so much. Hi, good evening. Just to follow up on that question with regard to Washington. Historically, a swing in power in favor of the Democrats has not been great for railroad regulatory standards. Now that your ORs are trending positively, Jim, do you see any risk that regulators start to pay close attention to the returns you're getting now and introduce new risks of changes or more leniency or favoritism towards the customer here?

No, not necessarily. It’s a mix on the Surface Transportation Board that goes back and forth, so again, this is something we always manage. We engage with our regulators, seeking constructive dialogues as do all regulated industries. We successfully navigate these situations for decades and will continue to do so as necessary.

Okay. Understood. And if I could, just a clarification question for Kevin here. On the question of yield, I know you answered that kind of on a segmented basis. If I lump it all together, am I right in interpreting what you said, that yield is going to be negative in the early part of the year and possibly turn positive in the back half. Is that the right way to look at yield? Because it's been so negative this year; it will obviously have a pretty big impact depending on which direction we go on the magnitude of the yield here?

Yes. Like I said, the fuel surcharge will be a headwind in the first quarter. That will weigh on yield the same way we saw in the fourth quarter here. That will moderate in the second quarter, and then I think you'll see some improvement. I have to caveat it with the fact that mix matters too. If strong markets on our chemical side and others continue to maintain some upside, that will also be a huge impact to yield performance. We will see some price strengthening in our higher revenue-per-unit businesses; coal can also stabilize and contribute positively. So while I may sound somewhat cautious about yields, I’m also optimistic because our operational positioning remains strong.

Okay. Appreciate the time. Thank you.

Thank you. Love the enthusiasm, operator. Kevin, I wanted to follow up on your last comment about intermodal, specifically related to intermodal pricing. Is the expectation for better-than-normal intermodal pricing, given what's going on in the truckload market, or is it going to be more of a cost recovery, low single-digit type yield improvement story?

We don’t see real-time price adjustments from our partners; we'd generally see a lag there. There's also inflation adjusters that occur on a lag basis as well. So mixed markets, there's optimism, but there's a solid opportunity for improved yields second half of the year. But we will see how it plays out as different markets face different dynamics. Our sales efforts continue regardless.

Good. Thanks.