CSX Corp (CSX) — Q1 2021 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 two is our forward-looking disclosure, followed by our non-GAAP disclosure on slide three. With that, it's my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Great. Thanks so much, Bill, and welcome to everyone joining us on today's call. I want to begin by thanking all of CSX's railroaders for the hard work and the exceptional efforts they've made to keep the yards open and the terminals open to serve our customers throughout the severe weather we experienced this quarter, an amazing job. We entered this year cautiously optimistic about the potential for an improving economic environment, and I am pleased to see momentum steadily building over the last few months. Throughout the quarter, we remained focused on laying the foundations to prepare for growth, and I'm excited about our prospects for the rest of the year. It's nice to finally have an economic tailwind at our backs. Let's begin with slide five of the presentation for an overview of our first quarter financial results. Earnings per share decreased 7% to $0.93, and the first quarter operating ratio increased to 60.9%, reflecting a spike in COVID cases early in the quarter, winter storm impacts, and fuel surcharge timing lag. Turning to slide six, revenue declined 1% on 1% volume growth as intermodal and other revenue growth was more than offset by merchandise, coal, and fuel surcharge revenue declines. Merchandise revenue declined 6% led by declines in automotive and energy-related shipments within the chemicals and minerals segments. These declines were partially offset by growth in the metals and fertilizers businesses. Intermodal revenue grew 11%, reaching new first quarter record levels. This growth was driven by strong demand for transportation services due to continued inventory replenishments and growth from East Coast ports. Coal revenue decreased 5%. Domestic coal revenue increased due to growth in utility coal shipments. This growth was more than offset by declines in export coal, primarily from reduced international shipments of thermal coal. Other revenue increased 42%. The largest driver of this increase was higher revenue from storage at intermodal facilities. Turning to slide seven, we remain committed to being the safest railroad. With fewer recent COVID cases across the network, we are able to increase the number of in-person interactions and training sessions. We resumed hosting safety summits across the network and are even expanding these summits to cover additional crafts beyond our T&E workforce. Our top concern is eliminating life-changing events, and through increased engagement on critical rules compliance, we’ve seen a reduction in injury severity to start the year. Continued education and training will allow us to further reduce the total number of injuries by working with both managers and frontline employees on how to identify and eliminate unsafe behavior across the railroad. Additionally, we're finding new ways to improve safety through the increased use of technology. We are increasing drone usage to help ensure the safe movement of trains throughout our yards and are already seeing the benefits of this program in the positive train accident trends. We will look to expand these programs going forward as part of our ongoing efforts to identify and implement new tools to help us operate as safely as possible. On slide eight, let's review our operating performance for the quarter. Despite challenging conditions, the team did a good job of maintaining network fluidity throughout the quarter. Going forward, we are focused on driving velocity and dwell back to pre-pandemic records, and we expect to see improvement in both metrics throughout the year. We also remained focused on driving additional efficiencies across the network. We set a new record for distributed powertrains, averaging over 100 trains a day for the first time. Labor productivity also reached a new record. Even though we are adding headcount in the second quarter in preparation for the expected volume growth, we still plan to realize incremental labor productivity this year. Turning to slide nine, I wanted to take the opportunity to frame these recent operating metrics against where we started this transformation. Over this period, we have increased velocity more than 30% by reducing both line of road congestion and creating excess capacity within yards to limit how long fluid trains sit idle. While dwell has also improved over this period, we view this metric as an area of opportunity. Even though CSX currently has the lowest dwell in the industry, pushing this number back towards previous record levels will enable us to further reduce cars online and improve asset utilization. It is most important to note that this increased fluidity was enabled by redesigning the train plan to operate as a more balanced and efficient network. We are doing the same amount of work today with 1,500 fewer locomotives and dramatically improved locomotive utilization. These efforts have also driven significant improvements in fuel efficiency. Not only are we more fuel efficient, but we have retired older, less efficient locomotives and increased the use of distributed power and trip optimizer technologies to further expand the emission savings we offer our customers. Our train plan also greatly improves our crew productivity. One measure of this productivity is the total number of deadheads or the times we have to reposition crews using taxis or other vehicles because there isn't a return locomotive. The balanced plan reduced the number of deadheads almost 60% by better matching crews and locomotives in both directions. We have also increased the number of cars processed per hour worked by over 30%. This higher throughput is due to both a reduction in yard congestion and more strategic upstream blocking of cars. Anyway you look at the data, we have dramatically transformed how CSX operates, which has created the capacity to absorb significant growth for years to come. We remain focused on driving the network back to record performance levels as well as realizing the incremental efficiency benefits this will provide. Turning to Slide 10, I want to be clear that we are not done improving our network. The opportunities identified during the early stages of the pandemic last year continued to drive sustained efficiency improvements, and the more streamlined network is well positioned for growth. While this quarter's trip plan performance was negatively impacted by the winter storms and COVID-related absences, intermodal trip plan performance improved for the quarter and is currently running nearly 90%. We expect to see similar improvement trends for the carload business going forward. We are committed to providing our customers with an industry-leading service product and are proactively adding headcount and prepositioning locomotives across the network to ensure we are prepared to provide high-quality service while handling incremental volumes. I'll now let Kevin take us through the financials.

Thank you, Jim, and good afternoon, everyone. The team is encouraged by the positive economic momentum. Underlying demand is growing, truckload capacity is tight, and inventory levels are low. We are preparing the network for growth and focused on driving positive operating leverage. As Jim noted, we faced a challenging environment in the first quarter with winter storms and supply chain disruptions, creating headwinds both operationally and commercially. Looking at the first quarter income statement on Slide 11, revenue was down 1%, despite a 1% increase in carloads. Double-digit gains in our intermodal business were offset by lower fuel recovery and declines across several merchandise markets. Other revenue was also up significantly, primarily reflecting increased intermodal storage fees. For the year, we expect other revenue of approximately $500 million. This assumes intermodal storage fees return to more normalized levels. Total expenses increased 2% in the quarter. Walking down the expense line items, labor and fringe was up 2% driven by higher incentive compensation as well as inflation and other costs. The year-over-year increase in incentive compensation was largely due to our annual bonus program accrual as we lap the impact of the pandemic. Our long-term incentive comp costs also increased year-over-year as our growth outlook has continued to improve. Sequentially, we expect incentive comp in the second quarter to remain relatively flat based on our current outlook. Partially offsetting these headwinds, efficiency gains remain strong as T&E employee productivity was up nearly 10% and train length increased 13% to a first quarter record. Total headcount was down 7%, reflecting structural improvements made over the last year. On a sequential basis, headcount was roughly flat as increased T&E hiring was offset by improved labor productivity. Consolidation in our train plan has enabled a 23% reduction in locomotive maintenance headcount versus the prior year. We've also continued to drive efficiencies and yard support headcount, both through ongoing consolidation as well as technology. As you know, we are highly focused on ensuring we have adequate resources positioned to serve customer demand in a rebounding economy. We are actively recruiting and running important conductor training classes, and as a result, headcount should increase slightly going forward. MS&O expense increased 2% or $15 million in the first quarter driven by a $15 million headwind from lower real estate gains, while efficiency gains were offset by inflation and other items. As we run a tighter trading plan, asset-related efficiency gains continue to headline MS&O savings. Despite weather-related headwinds and some proactive actions to pull assets out of storage in anticipation of higher demand, locomotive and terminal productivity levels continue to achieve record highs. Real estate gains were minimal in the first quarter. However, as you likely saw last week, we announced the closing of an agreement with Virginia to sell certain interest in CSX-owned line segments. This project will generate meaningful value for CSX and enhance the safety and reliability of both passenger and freight rail service in the D.C. and Virginia area. The transaction will result in a significant gain of approximately $350 million in the second quarter this year. Cash proceeds of $525 million will be realized over time with approximately $400 million expected in 2021. Turning now to fuel expense, which was $2 million favorable year-over-year. Record first quarter efficiency helped offset the impact of a 4% increase in the per gallon price. We continue to invest in technologies that will deliver further improvement in fuel efficiency, widening the advantage that rails hold over truck and demonstrating our continued commitment to sustainability. Looking at other expenses, depreciation increased $1 million in the quarter, due to a larger asset base, partially offset by the 2020 road and track depreciation study, reflecting these effects going forward. We expect full-year depreciation expense to increase approximately $20 million. Equipment rent expense increased $7 million or 9% as network fluidity impacted car cycle times in the quarter. Turning below the line, interest expense improved $3 million or 2% due to a lower weighted average coupon. Other income decreased $2 million or 9% as favorable pension impacts were offset by lower interest on cash. Income tax expense decreased $12 million, or 5%, due to lower pretax income. The average tax rate increased slightly to 24.7% due to an unfavorable state legislative change. Closing out the income statement, CSX delivered operating income of $1.1 billion and a 60.9% operating ratio. Turning to the cash flow slide on Slide 13, in the first quarter, free cash flow before dividends was $934 million, up 15% when compared to the first quarter of 2020. Free cash flow conversion on net income exceeded 100%. Finally, as you can see from the chart on the right, shareholder distributions rebounded in the quarter. Share repurchase activity returned to prior year levels, and the recent dividend increase is also reflected. We expect to continue to be opportunistic in our buyback approach going forward, and we remain committed to returning cash to shareholders. With that, let me turn it back to Jim for his closing remarks.

Great, Kevin. Thanks a lot. Concluding with slide 15, we entered the year projecting volume growth in excess of GDP and still expect to achieve this target. We will continue to attract demand throughout the year and based on the combination of the strengthening economic outlook and our focus on converting additional volumes off the highway, we now expect to achieve double-digit full year revenue growth. We will drive incremental operating leverage by efficiently absorbing this growth, and we'll diligently monitor our train plan to address resources as needed to provide our customers with high-quality service. Our entire company is aligned to capture this growth opportunity. And as always, our focus is first and foremost on our customers and finding creative ways to help customers meet their own growth targets this year. Now, is the time to capitalize on all the work we have done to transform our network. Thank you. And now I'll turn it back to Bill for questions. And as you may have noted, Mark is unable to join the call again today. He continues to deal with a non-COVID personal health issue, but remains engaged in the business. The rest of the team will do their 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.

Jim, can you discuss the growth rate and the increase in employees related to the hiring you've mentioned? Also, what should we anticipate regarding expenses in relation to the ramp-up compared to revenue recognition as we progress through the second half, specifically in the second quarter?

Great, Ken. That's a good question, and I'll invite Jamie or Kevin to provide additional clarity as well. Generally, as you're aware, our hiring process takes time. We've been working on this since the beginning of the year and have been facilitating classes, which we couldn't do earlier due to social distancing. Now, we are getting these individuals trained and out into the field, and they are starting to join us. Although we are in a reasonably good position, our numbers were impacted in the first quarter due to some challenges across the railroad related to crude. These new employees are starting now and will continue to join during the second quarter at regular intervals. We anticipate seeing volume growth ongoing into the second and third quarters. Jamie, would you like to provide more details?

Yes, absolutely. Ken, what we're seeing right now is that each week, about 10 or 12 employees are qualifying as conductors. We've significantly increased our training classes. As Jim mentioned, over the past couple of months, we're training between 60 to 90 new conductors every two weeks, ensuring we adhere to all the necessary protocols in this COVID environment. We're also placing employees in areas where they're needed. There are still furloughed employees in the company who are not willing to relocate. In our industry, when we hire someone, it's for a specific location, and while we offer transfers and moves, it's ultimately the employee's choice. We plan to hire, as we noted last quarter, around 400 to 500 people throughout the year, particularly as we move into the second half. We'll continue hiring if our business levels reach what we anticipate, adding resources as needed. We're in a strong position that allows us to look towards growth.

Hey, Ken, the only other thing I would add is, while we're going to add some employees that we saw over time at a quite high level in the first quarter, and we would expect that number to come down over time as hiring, so largely offsetting some of the incremental costs there.

So, offsetting some of the incremental cost per employee?

Yes.

Or is that incentive comp? Okay.

That's right. You'll probably see the highest quarter in terms of cost per employee this quarter.

Great. Appreciate the insight.

Some of that's definitely related to the winter weather in this quarter. It was a very difficult quarter, as Jim had mentioned here with the polar vortex and the rest of it. So, you're going to see those numbers come down.

Great. Thanks for the insight guys. Appreciate it.

Thanks. I just wanted to ask about the service metrics. I mean obviously, you had the challenges of weather in Q1 and supply chains are quite clearly still in disarray. But Jim, you mentioned in your prepared remarks, you're expecting to get back to pre-COVID levels and record levels. How long do you think it will be before you guys can start to see some second derivative improvement, at least in the velocity numbers and dwell? And do you think that with demand increasing and strengthening, that it's going to take a few quarters? Just help us think through that. Thank you.

In the intermodal sector, we are achieving our best performance in the industry. Our velocity is already improving, but we closely monitor trip plan compliance, which considers all factors. It's not beneficial to move a train quickly if it then stops at the terminal, preventing us from unloading and delivering goods to customers on time. Everything must work in harmony, and this is reflected in our trip plan metrics. In intermodal, there is no leeway; on-time performance is crucial. Currently, we are achieving over 90% on-time performance in our trip plans for intermodal, which is slightly better than we were a year ago. I anticipate this number will continue to improve in the second quarter, provided we don't encounter significant weather issues or other disruptions. For the carload business, our on-time trip plan performance is in the mid-60% range, a considerable improvement from about 30% a couple of years ago. Our goal is to elevate that figure back to the mid-80% range, and I am challenging the team to accomplish this as soon as possible. I aim for our velocity and dwell metrics to return to previous levels by the end of the second quarter, which should subsequently enhance our trip plan performance throughout the year. This places significant pressure on our operations team, but we are making progress, and once we reach our prior performance levels, I believe we can improve even further.

Thank you. That is helpful.

Thanks and good afternoon. So I wanted to ask about the operating ratio. In the first quarter, I think intra-quarter, you talked about 100 basis points worse kind of year-over-year with your expectation late in the quarter. Just curious what changed, if anything in March relative to the reported number? And then going forward, the revenue guidance is very helpful, but anything you'd be willing to share on incremental margin targets as we look out over the rest of the year?

Yes. In terms of the quarter, late in the quarter, we probably experienced a little bit more fuel surcharge lag than we were expecting late in that quarter. Also, probably a little bit of after effects of the weather kind of creeped into the last couple of weeks of March as well. And then finally, as we saw the prospects for additional volume acceleration in the back half and even into the second quarter, we were proactive in pulling out assets to get ready for that volume. So we saw probably a little bit extra cost there, which we thought was the right thing to do given everything we're seeing out there. So that's probably the difference between what Jim talked about at the conference and what we ultimately saw this quarter. A lot of moving parts this quarter, obviously, with the impacts of the winter storms and then the revenue. Quite frankly after January, we were looking at a very, very good quarter. And then obviously, February hit us hard, and March was digging ourselves out of it. In terms of incremental margins, look, as we've said last quarter and the previous quarters, as we get volume growth and revenue growth, we anticipate dropping that through at positive incremental margins. So it will matter the pace of growth that we see. And if we continue to beat our expectations, I would expect OR to continue to beat our current estimates as well. So it's somewhat dependent on the strength of the revenue growth this year, which we obviously expect some strong performance. And if it continues to get better, you'll see the leverage in the model as well.

Okay, great. I appreciate the time.

Good afternoon, Jim. I wanted to get your thoughts on your first quarter earnings, which are impressive. However, there was another topic today that caught my attention. What impact do you see from a Canadian railroad acquiring KSU? Does that have much significance for you? I understand you don't interchange much traffic with KSU, but how should we approach this situation? Additionally, do you have any broader insights on whether this could lead to greater consolidation in the industry? Thank you.

We have certainly taken the time to understand the Canadian Pacific proposal over the last month, as well as recently absorbing the Canadian National proposal. Beyond what we've communicated to the regulator about our procedural concerns regarding the CP transaction, I'm not ready to share specific thoughts on either transaction until I can evaluate what they present and its potential impacts based on their reasoning for it being a beneficial deal. I have been in this industry for a long time and have witnessed its transformation from a state of near bankruptcy to a thriving sector, largely due to consolidations that have improved efficiency and led to significant reinvestment and service enhancements, all of which received regulatory approval in the public interest. My perspective is that if a transaction benefits customers by enhancing service quality and serves the public interest, I am open to considering it. However, the intricacies of any deal are crucial, and until I have the chance to review any proposals, I must withhold comments on these transactions.

Okay. But it sounds like you think it can be a constructive thing for the industry just in terms of being open to consolidation.

As I said, I think it's been a tremendous benefit to the shipping community, what's taken place to transform the North American rail network.

Yes, thank you for taking my question. I guess, Jim, I want to stay on that subject. I mean, strategically, I guess we've heard a lot of negativity, though, about the next wave of 'Class I mergers' if there ever is to be an ex-KSU, but thinking more about potential transcontinental tie-ups. I mean we've heard a lot of the negative input from certain groups when other deals have been tried unsuccessfully. But I guess we haven't talked about a lot of the potential benefits. I mean do you view strategically as that is the path forward for the industry looking out 10 or 15 years?

No, I can't speculate on what will happen in 10 or 15 years. I'm focused on understanding what occurred 10 or 15 hours ago. In my opinion, the transformation of the North American rail network into its current state has been beneficial for the shipping community. I believe that's what the regulators will consider, and I am confident they will conduct a thorough review of this transaction to see the outcomes.

Hey, thanks. Good afternoon, everyone. I have a couple of small questions for Kevin. Yields have been negative the last few quarters. How should we view the future direction of yields and pricing? Additionally, you have $3 billion in cash, with another $400 million on the way and generating cash flow. Is there a possibility for an accelerated buyback, or do you believe the current pace is appropriate moving forward?

Yes. As I mentioned on the buyback specifically, we will definitely be opportunistic if there's opportunities to accelerate that. And you could expect, given the visibility going forward that we'll be much more aggressive in that area, given the opportunity. So we have some flexibility in that. Clearly, as I've said, $3 billion of cash is not something that we're looking in the long term to keep on the balance sheet, and we'll move away from that. Second part of that question was, again?

Just the pricing momentum and yields have been negative, when you think we get to positive, how should we think about that?

Yes. We are going to overcome the fuel surcharge challenge this quarter, which will start to improve in the second quarter. We anticipate some positive revenue per unit growth beginning then. The coal segment will perform better as we face easier comparisons from last year across the board. Additionally, we noted that pricing renewals are above our average price, indicating some acceleration, which is expected in a competitive trucking market. Looking ahead, we foresee potential inflation, and we will continue discussions with customers on this matter. I expect the pricing environment to get better.

Thank you.

Yes, thank you. Good afternoon. I would like to focus on the revenue opportunity for a moment. Can you be more specific about the volume expectations for this year? I understand you mentioned a GDP-related aspect, but could you provide some parameters now that we've passed the most challenging comparison quarter? We have overcome the weather issues, and it seems there might be an increase in revenue from both volume and pricing. Could you separate those two factors for us and share your outlook on the volume opportunity for the full year?

We provided a revenue number, but I'm not sure we will break it down into specific volume. You can expect that both will start to improve as we move into the second half of the year, especially in terms of RPUs, based on the comparables from the prior year. Clearly, we anticipate significant acceleration in volume during the second quarter, considering the COVID impact. In the third quarter, we'll also be comparing against some COVID effects. By the fourth quarter, we began to notice some recovery, particularly in the intermodal business. Therefore, I expect the second quarter to show the highest growth, followed by the third quarter, while the fourth quarter is less certain. We will see how much the economy continues to improve. The second quarter presents the easiest comparison, with the third quarter being slightly more challenging. Nevertheless, we expect strong growth in the second half based on our current outlook.

And just maybe one point of clarification, since the last time we spoke three months ago, sort of the incremental upside, do you feel like it's coming a little bit more from volume or price, or a little bit of both? I guess, that's kind of what I was getting at.

I mean, clearly, volume will be, just based on what we saw last year, will be the bigger component of our revenue growth for the year, this year.

Thank you, operator. Hello, everyone. Kevin, I wanted to follow up on the incremental margin question. I certainly hope incremental margins will be positive as revenue growth turns positive. However, you mentioned feeling more optimistic about volumes, and that pricing is better than typical renewals. You've previously been specific about your OR targets, and while I'm not asking for those again, the way your cost structure has evolved suggests incremental margins could be between 60% and 70%. This is based on both the variable and fixed nature of your costs, and considering that pricing is improving. So unless I'm overlooking something, why shouldn't incremental margins reach 60%, 70%, or even higher, given the context of revenue growth, volume growth, and improved pricing?

Yes. First of all, as I mentioned earlier, the extent of revenue growth is a key factor here. The greater the projected revenue growth, the better the incremental margins will be. This is straightforward math. We are very optimistic about the outlook. As the network improves, that will positively impact our margins. I don't believe anything has changed since the first quarter regarding our ability to convert revenue into operating income this year. We are unlikely to set a specific target because revenue conditions are still dynamic; however, additional revenue growth beyond our current expectations will bring more benefits to our overall results.

Right. And maybe a better way to ask that question then, Kevin, if I could. I think you're talking about just the fact that you have regular weight inflation that doesn't make incremental margins linear as revenues come on, if I'm interpreting your comments correctly? So, is it right way to think about regular weight inflation kind of 2%, 3% off of your current OpEx base? And as revenue grows in excess of that, that will do much more significantly drop to the bottom line? Just help us think through the philosophy around what you're seeing.

Yes, that’s correct. We face fixed cost inflation that needs to be addressed each year, especially regarding labor costs. Additionally, while inflation for materials is currently low, there are indications that it may be rising. Therefore, once we manage to counteract all inflation with increased growth, we will witness a significant impact from the next level of growth beyond that.

And is that $200 million to $300 million a year as kind of that threshold point? Or is it less or more than that?

We're looking at about 3% overall inflation across our cost structure.

Got it. Okay. That’s very helpful. Thank you so much. Appreciate it.

Thank you. Jim, I just want to kind of circle back on the M&A topic a little bit. So I mean, we're kind of seeing the merits of kind of end-to-end mergers being outlined out there, like from a shipper's perspective, improving the capacity, improving the service, potentially improving the cost for the carrier as well. Why wouldn't that kind of scenario apply to East West merger? It feels like when it comes to TransCon mergers, there's always this idea that they're anti-competitive mergers. And I'm just trying to reconcile, why would that be the case, within the supply kind of the same logic, if we put aside all dwell’s new rules and all that kind of debate aside? Wouldn't, technically speaking, these end-to-end mergers provide the same kind of benefit that we would see in these other proposed transactions?

There is currently a discussion about the advantages of end-to-end transactions. Historically, railroad consolidations that were seen as end-to-end and did not decrease competition or limit options for the shipping community were generally viewed positively. I don't believe there has been a shift in that perspective. We will observe how this situation develops, as we are still in the early stages of what is likely to be a lengthy process, potentially ranging from a month to just a few hours. So, we will see how it turns out, but the fundamental principles still seem relevant today.

Good evening. Thank you for taking my question. I wanted to revisit truckload conversion. Jim, you noted your compliance with the intermodal trip plan is over 90 percent, with almost no cushion. That seems reminiscent of truck-like service. Are you observing a significant effect of this service on conversions? If not, what else can be done to encourage more shippers to make the switch? Furthermore, as we consider long-term conversions, what strategies are you implementing to ensure they are more enduring and advantageous for both parties, instead of just reacting to a tight capacity market?

In the intermodal business, we're achieving record volumes. This follows years of reengineering our intermodal network, which has positioned us to play a larger role in the shift to the e-commerce business model that many are embracing. By improving our railroad operations and service, we are now able to participate effectively in this growth, which is reflected in our numbers. I believe this trend will continue. As more consumers turn to online shopping, we aim to be increasingly involved in that supply chain and will strive to enhance our efforts in this area. Additionally, we are consistently focusing on converting truck shipments in the merchandise sector. This includes moving metals, plastics, steel, and cardboard that are currently transported in boxcars, with many shippers also relying on trucks from their production facilities. Increasing our involvement with these customers takes time, but we are successfully gaining business in these areas due to our service matching that of trucks. To enhance our reliability, we need to improve our trip plan compliance, aiming not only to return to previous levels but to surpass them. The better we become in this respect, the more we will expand these conversion opportunities.

And just to clarify, has the sales cycle sped up on this? Are you finding shippers and customers more agreeable to have these conversations to the extent you can separate that from service improvements versus just being tied on capacity across the freight network in general?

Conversations in those areas are progressing. We are increasingly relevant in the supply chain and are being recognized for our reliability. Additionally, many larger customers are seeking to implement more environmentally friendly practices, and we can assist them in reducing their carbon footprint, which is beneficial for our ESG efforts and fuel efficiency. Our willingness to adopt new approaches compared to our previous methods is yielding positive results.

All right. Thank you, Jim.

Jim, I understand your reluctance to comment on transactions that haven't been filed for approval yet. But you did mention that you have commented publicly on the procedural issue at stake here with the SDB. And I thought it was notable that CSX was the only Class I rail that suggested the waiver of the 2001 rules does stand up for KSU or ask that it did. Can you give us a little more information or context on that and why you look at that differently than, say, your competitors?

It began with the proposed CN/BN merger. I was present when it was put on hold, and a moratorium was established, along with various rules. Therefore, I have some understanding of how and why those rules were modified. At that time, the regulatory body determined that an acquisition of the KCS did not justify a speculative set of new ideas before granting approval. The regulatory body has had over 20 years to change any rules they wished but chose not to. When a new transaction arises, I believe the law must be upheld. We maintain that no situation exists that would justify altering the decision made previously or the reasons behind it.

Thank you.

Thank you. Good afternoon. Jamie, maybe a question for you. You guys have spoken pre-pandemic through the pandemic about having spare capacity to take more business as your performance continues to improve. Obviously, the people are a different story altogether. But Kevin also noted taking some locomotives out of storage. So, how do we think about new capacity coming online as you do see this economic ramp and the favorable volume backdrop? And what does that mean for costs? And I guess the part B to that is, how do you balance the super strength in intermodal today with your desire to expand with better mix and merchandise?

I am confident that there are many areas of our network where we can continue to handle 20% to 30% more business. In collaboration with Mark and his team, we are reaching out to customers to understand the sources of this increased flow, which will require additional train starts. This is based on our experiences from three quarters ago when we were managing a downturn during the pandemic with record low asset utilization. We are preparing with locomotives, though the number will still be lower than a year or two ago, even with improved productivity from our locomotives and personnel. The future performance depends on the mix of business we encounter, and we are focused on ensuring we provide the service that attracts customers. Additionally, during the pandemic, attrition among our workforce was higher than anticipated, leading some employees to retire earlier than expected. While we will see some of these resources return, they will not reach previous levels. However, as Kevin mentioned, we expect good returns as the business recovers. I'm not sure I fully understood the second part of your question regarding intermodal. What was that?

It was just balancing the equipment as intermodal has been incredibly strong, but you obviously have this desire to kind of improve the mix through merchandise growth.

Yes, we will run intermodal with freight where possible, and in other areas where intermodal keeps expanding, I still have capacity on the tail end of intermodal trains. Very few of my intermodal trains are fully booked at this point. We have cars in storage that we can utilize, and we will continue to take them out as needed. Growth has been robust, as Jim noted, and our terminals are in excellent condition. Scott Marsh and his team have done an outstanding job managing the intermodal assets upon arrival. We fully anticipate continued improvement in productivity as we move forward.

Hey guys. Good afternoon Jim. I appreciate you taking the time to share with us your sort of perspective on the historical sort of industry approach to consolidation. I wanted to ask you a question in a slightly different way. As you think about this opportunity to drive highway conversions on the CSX property. How would you think that an end-to-end merger might accelerate your ability to drive further highway conversions, whether it's carload or intermodal? And how is the Board thinking right now about the pros and cons of pursuing some sort of consolidation to help accelerate the highway conversion plan?

You can approach the question differently, but the answer will remain the same. As I mentioned, if the rail networks collaborate effectively and enhance the customer experience, mergers can help eliminate bottlenecks, leading to faster service and a product that feels more like truck services. However, it's not my place to assess the merits of any specific transaction; that's the role of the regulator, who will conduct a thorough analysis to determine whether it's anticompetitive and aligns with the public interest.

You mentioned that the slides highlighted the positive economic momentum. Could you elaborate on that? Are you primarily focusing on the intermodal recovery that you are seeing, or do you expect the industrial sector to play a significant role in the increased visibility, particularly in terms of insights into industrial versus intermodal? Thank you.

I believe there are several factors at play. Back in January, when we were looking ahead to the next year, I mentioned that it was challenging to make predictions. At that time, COVID cases were surging, and there was uncertainty about the chip shortages. Additionally, many were speculating about GDP growth, whether there would be a stimulus package or an infrastructure bill. As we moved into February, the situation became even more unclear. However, now that some uncertainties have been resolved, most people have adjusted their growth forecasts upward. We are beginning to see the impact of this in our discussions with real customers about their expectations for the second half of the year. This increased clarity is essential for guiding our management team at CSX in our planning and operations for the remainder of the year.

Thank you.

Thanks. Good afternoon everyone. Jim, if I can just follow up on the topic of highway conversions. I mean, when you look at the last three years, we've had two of the tightest truck markets in history. So this should be the time when you guys have more volumes that you can possibly handle on the intermodal side and yet kind of look over the last several years, kind of, intermodal volumes haven't really materially gone up. So I'm just trying to understand what's that hold up there? Is it just more resources and capacity on the rail side? And if that's the case, why don't you guys just put in billions of dollars into increasing capacity of the volumes are there? Or if not, does there need to be a material change in the service product to actually close that volume gap and drive material highway conversion to rail?

Let's concentrate on the intermodal aspect of our business. In 2017, we reduced about 8% of our intermodal operations. The same happened in 2018 with another 8% decrease. Following that, we faced an industrial downturn and the global pandemic. Despite these challenges, we are now achieving record volume levels for CSX. I'm not sure what you're missing. On the merchandise side of the business, we are performing well. As mentioned, we are beginning to shift business from highways to rail without a significant financial investment on our part. It requires a commitment to assure customers that we will offer them truck-like reliable service, which we are now delivering. I'm determined to reverse 50 years of decline in the railroad industry, but I recognize that achieving this won't happen overnight or with just a couple of billion dollars in spending.

Okay. Understood. And I'm sorry if I missed this in your prepared remarks, but what's the current kind of percentage of the workforce that's kind of impacted by the pandemic and kind of maybe kind of on leave right now pending either vaccination or kind of quarantine? I think in the past, you've said that in some locations up to 20% of your workforce was out of commission, kind of what's the updated number now?

The percentage of our workforce affected by the pandemic has not reached 20%. Currently, about 13% of our employees have contracted the virus, which is a more accurate reflection. There was a noticeable spike following Christmas, but the numbers significantly dropped leading into March, which gave me a sense of optimism. Everyone in Jacksonville received their vaccinations, but now we're seeing cases rise again, similar to trends elsewhere. Overall, our infection rates are at or slightly below the national average, which I view as remarkable considering our employees have been working consistently since January 2020. It's impressive that we maintain a lower infection rate than the national average, a testament to our employees' commitment to their health and that of their colleagues.

Understood. Thank you.

Thank you very much. My question, Jim, is about the potential effects of a surge in demand conditions. I know railroads typically do not favor surges and prefer stable conditions instead. However, what would you say is different this time in terms of how your network and organization are structured to manage surges? Can you handle this without significant disruption or negatively affecting customers, as we experienced during some inclement weather previously? I'm curious about that.

What's different now is the mindset and common focus among all the railroads in North America, aiming to move our customers' products more efficiently and effectively. We are also adjusting our workforce to think differently, be more agile, and respond to customer needs while striving for business growth. We've made significant changes, and one positive outcome of adopting a new business model is a shift in our workforce mentality. There is still much work to be done, but we're proactive in ensuring we can handle peaks in shipping volume. Previously, discussions about hiring were scarce, with most focusing on layoffs and cuts during tough times. Now, we are planning for how to manage increased shipping demands. Last year, for instance, we anticipated strong car sales heading into January, only to find ourselves moving zero auto traffic. We feared a slow recovery, but instead, manufacturers quickly resumed operations, and we managed to serve that segment with minimal disruption. This year, we prepared for another successful period, but once again faced shutdowns due to computer chip shortages. Despite these fluctuations, we have remained nimble and capable of supporting our critical customer base. We also see this adaptability with crucial intermodal customers who experienced an earlier and prolonged peak season. Our terminals have been operational 24/7, achieving record volumes. Overall, we have changed our approach to be more responsive.

That’s great. I appreciate it. Thanks.

Thank you, operator. Gentlemen, good afternoon. Wanted to talk a little bit about the intermodal side again, clearly, you're taking business off the highway and that seems to be working. Where do you think you stand competitively with your Eastern partner? Do you think you're taking market share there? And just in general, growing the intermodal business. You mentioned you have room on the back of the trains. Is there anything out there in the marketplace right now, limiting your ability to grow? Is it drivers for the drayage side? Is it actual physical boxes? Is there anything standing in your way of growing even more than you are now?

Well, that's a very good question. In terms of what it is that CSX has controlled over, I would say very little. We have train capacity. We have a very good service product. Our terminals are fluid. We can handle more volume and we can do that. In terms of the environment in which we're trying to be able to do all these things, there's not an area that I can look at. It's not in disruption or is a mess, whether its steamships backed up at the ports, West Coast, East Coast, sideways and the Suez, whether there's driver shortages, whether there's chassis shortages, whether there's box shortages. The entire global supply chain is stressed that I think everybody in the industry in all of the railroads and at all of our major channel partners are doing an amazing job of trying to keep up with things and meet the needs of the consuming public when you're seeing these big changes in buying and shipping habits.

And when you take a look at the driver shortage that's out there, a lot of the driver shortage is coming on the long-haul truckers. A lot of those truckers that like the long haul and wanted to move across the country, less and less of those are available. And when you look at drayage, when we bring it into town and we have someone who can dray it across town and go to bed every single night and be with their families, that seems to be the trend of what the new truck driver is out there, which again gives rail that advantage.

Thank you, everyone, for calling in today. I really appreciate your good questions and look forward to talking to you all soon. Thank you. Bye-bye.