CSX Corp (CSX) — Q1 2022 Earnings Call Transcript

Thank you, Emma. Good afternoon, everyone and welcome. Joining me on today’s call are Jim Foote, President and Chief Executive Officer; Kevin Boone, Executive Vice President, Sales and Marketing; Jamie Boychuk, Executive Vice President of Operations; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In our presentation, you will find our forward-looking disclosure on slide two, followed by our non-GAAP disclosure on slide three. And with that, it’s my pleasure to introduce our President and Chief Executive Officer, Jim Foote. Jim?

Great. Thank you, Matthew, and thank you to everyone for again joining us on our call today. I will begin by expressing my thanks to all of CSX employees, who continue to put in tremendous efforts to serve our customers effectively and above all safely. I’d also like to welcome today, Steve Fortune, who’s with us in the room here today in Jacksonville. Steve serves in a newly created role of Executive Vice President and Chief Digital and Technology Officer, and will focus on harnessing transformative technologies to further growth and enable continued efficiency across the business. His experience leading technology organizations at a global industrial company will be very helpful as we continue to transform CSX. Now moving to the quarter, we are pleased with our results this quarter, though we are not yet satisfied with our service performance. The effects of COVID and severe weather across much of our network clearly led to a tough start to the year. But as we moved into March, operating conditions began to gradually improve and we do see indications that this momentum is continuing. For over a year, we have communicated to you that the key to rebuilding our service to pre-pandemic levels is to hire more trained and engine service employees. I am pleased to say that our efforts there are progressing well and our active train and engine count has moved steadily higher this year. The people and resources that we are putting in place today will allow us to provide reliable, efficient service to an expanding number of customers. The business environment remains very favorable for CSX, despite new uncertainties across global supply chains. We are dedicated to do our part to help our customers here in North America meet increasing demand, as business and consumers around the world look for reliable sources of the products that we transport. Meanwhile, domestic activity remains robust, and our business development and marketing groups are working hard to convert new opportunities. And as higher energy prices and increasing scrutiny on greenhouse gas emissions highlight rail’s efficiency advantages over trucks, we are in a great position. If we all do our jobs, adhere to our principles and deliver the service levels that we know we can achieve, this company has great potential for many years ahead. Lastly, I’d like to note that we are pleased with the Surface Transportation Board approved our acquisition of Pan Am Railways, which clears the way for the transaction to close this June. All of us are excited about the opportunities that will come as we design new service solutions for shippers and receivers in New England. Now let’s turn to slide four. Turning to the presentation, which highlights our key financial results, we moved nearly 1.5 million carloads in the first quarter and generated over $3.4 billion in revenue. Operating income increased by 16% to $1.28 billion. The operating ratio increased by 150 basis points to 62.4%. But remember, this range includes approximately 250 basis points of impact from quality carriers and the impact of higher fuel prices. And earnings per share increased 26% to $0.39 a share. I will now turn it over to Kevin, Jamie and Sean for details.

Thank you, Jim. Turning to slide five. First quarter revenue increased 21% year-over-year, with growth across all major lines of business. Merchandise revenue increased 6% on 2% lower volume as strong pricing gains and higher fuel surcharge revenue more than offset the volume decline. Current demand remains strong across most merchandise markets, with shippers prioritizing environmental benefits of rail and pursuing lower cost options to offset inflation. The ongoing semiconductor shortage impacted automotive volumes through the quarter. However, we did see sequential improvement as consumer demand remains strong with dealer inventory levels low. Our core chemical franchise saw strong demand that more than offset continued challenges in energy-related chemical markets. As we continue to add resources across the network, we expect to capture additional opportunities. Intermodal revenue increased 13% on 1% lower volumes, as truck conversions drove domestic growth. Offsetting declines in the international market that continues to be impacted by supply-side constraints. Intermodal demand remains strong, but continues to be challenged by takeaway capacity and equipment shortages, including chassis. Coal revenue increased 39% on 10% lower volume. Export coal revenue increase was driven by higher benchmark prices, partially offset by lower domestic and international thermal coal shipments. First quarter coal volumes were impacted by several factors, including mine disruptions and an outage at our Curtis Bay export facility. Demand across all of our coal markets remains strong and we expect volumes to improve in the second quarter, as some of these headwinds subside and additional network capacity is added. Other revenue increased primarily due to higher intermodal storage and equipment usage, but was partially offset by lower payments from customers that did not meet volume commitments. As we exit the quarter, concerns around the Omicron variant have been replaced by broader global supply chain uncertainty in the wake of the crisis in Ukraine. As Jim mentioned, we are committed to helping our customers in North America meet the increasing demand for their products from consumers around the world. We are working closely with our customers to understand the potential shifts in the global supply chain. And while it is early, we see opportunities that could benefit our network and the ports we serve. As we look across many of our markets, demand continues to outstrip supply. We expect this to improve as resources are added across the supply chain. Now turning to slide six. I’d like to provide more detail on CSX’s business development capabilities, which I briefly discussed last quarter. CSX has an experienced team of business development professionals to help existing and prospective customers identify, design and build facilities across the network. This team works closely with state and local economic developers to maximize investment incentives that will encourage more businesses to locate on CSX and our short line partners. These efforts continue to pay off. In 2021, over 90 new facilities and expansion projects were placed into service across our network, which represents over $3 billion of customer investment. Additionally, there are over 500 projects currently in an industrial pipeline. We are excited to work with these customers and provide them with efficient and reliable rail service that will enable them to grow their business for years while creating significant long-term value for CSX shareholders. Most recently, VinFast, the electric vehicle subsidiary of the large Asian conglomerate Vingroup announced that they will build a $4 billion electric vehicle assembly plant and battery manufacturing facility served exclusively by CSX. The team is proud to be part of North Carolina’s first car plant in the largest economic development announcement in the state’s history. This announcement is an excellent example of the kind of customer solutions that the team can deliver, as sales and marketing works closely with operators. The team is working diligently to direct even more customers to CSX by the Select Site program. CSX Select Sites feature nearly 10,000 acres of premium certified rail-served sites for full-scale industrial development and expansion. We are working to add even more sites to this program in 2022. I will now pass it on to Jamie to discuss our operations.

Thanks, Kevin. The safety of our operations will always be our first priority. Our concern for all of our employees, customers and the communities in which we live and operate drives us to make sure that we maintain the demanding standards of our safety-focused culture. The results that you see on slide seven show this clearly. Over the first quarter, we saw sequential and year-over-year improvements in the number of injuries and train accidents, which brought their frequency rates to near record-low levels for the first quarter. We are happy to see this improvement. We continue to push forward with the initiatives that we described to you last quarter, actively coaching safety awareness among our employees, encouraging best practice sharing across teams and expanding our application of technology, and we put a very strong emphasis on our efforts with our new hires to ensure that they respect and demonstrate the principles that make CSX an industry safety leader. Moving on to slide eight. For the last several quarters, you have heard us discuss the efforts we are making to address our staffing levels. This is a critical point, because our network's capacity and fluidity will improve when we have enough trained conductors and engineers. When we have these resources, it lifts our service performance in the near-term while also ensuring that we are ready to meet the substantial demand growth we anticipate in the years ahead. This slide also shows several important positive train and engine employee trends that reflect the hard work done by our recruiting and training teams. We have made great progress here and importantly, we are set up to build on the momentum we have created. First, you can see a strong ramp-up in the number of T&E employees we have in our training program. We averaged over 500 daily employees in training over the first quarter, which is over five times where we were a year ago. We expect to keep our training classes full to ensure that our pipeline remains healthy. Second, we have successfully increased our run rate of conductors who are completing their training and marking up into the active T&E population. We now have roughly 100 employees marking up each month who are ready to haul freight, generate revenue, and we expect this pace to continue. In the last chart, you can see the payoff, return in the corner, and we are now adding to our active T&E count month-over-month. We have said it again and again, our aim is to grow this railroad, so that we need to bring in good people, train them the right way, and deliver on service. It takes time, but this is exactly what we are doing. Now let’s turn to slide seven, which gives us a picture on where our operations stand today. This quarter started off with several key challenges. The Omicron wave was hitting our employees, coupled with the incident at our Curtis Bay facility, and the East Coast suffered under severe weather in early February. So for the full quarter, our key metrics of trip line compliance, terminal car dwell, and velocity were generally flat to slightly worse on a sequential basis. That said, as Jim highlighted in his remarks, early into the second quarter, we are seeing encouraging signs that these metrics are starting to move in the right direction. It’s clearly too quick to call the bottom with certainty, but with the success of our hiring initiatives, and a continued drive for discipline and consistency in the field, we see reasons to be optimistic. Consistent with the last quarter, we have made the tactical decision to keep additional locomotives active in the near-term to help with network balance while we remain short of employees in certain regions. As we successfully promote our new conductors, we will be focused on improving our asset utilization and driving efficiency as the additional crew resources facilitate higher volumes and improve service and reliability. As always, the key will be strong execution and I am excited by the level of higher engagement and enthusiasm that our operating team is bringing to this challenge. I am looking forward to showing what we can do over this next quarter, the rest of the year and the years to come. I will now hand it over to Sean to review the financial results.

Thank you, Jamie, and good afternoon. Our focus is on profitable growth and despite the challenges we faced in the quarter, we delivered $600 million of revenue gains, with operating income of 16%. Interest expense and other income were a combined $11 million favorable and the effective tax rate for the quarter was 23.9%. Earnings per share of $0.39 reflects growth in core earnings, as well as the impact of our ongoing share repurchase program. Turning to the next slide. Total costs increased $419 million or 24% in the quarter, but we are in line with our expectations outside of the spike in fuel prices. The acquisition of Quality Carriers represented approximately $215 million of expense. Higher fuel prices were also a significant factor, up about $110 million versus last year. All other expenses increased approximately $95 million, driven by inflation, as well as ongoing costs related to supply chain congestion and network fluidity. Turning to the specific line items, labor and fringe expense increased $72 million or 12% in the quarter. We invested $10 million more to onboard new train and engine employees, and we expect similar training costs next quarter, as we continue to convert our strong new hire pipeline. Quality Carriers drove about $35 million in additional labor expense. Incentive compensation increased $6 million, while inflation and other impacts drove just over $20 million of higher costs. Purchased services and other expense increased $203 million or 43% in the quarter. Quality Carriers represented approximately $140 million of purchased services and other expense. Costs incurred to maintain terminal and network fluidity added roughly $45 million of expense in the quarter, similar to last quarter’s impact. These costs are likely to persist into the second quarter and we expect to see improvement in the back half of the year, corresponding to labor and supply chain normalization. Additionally, a legacy environmental reserve adjustment drove $17 million of higher expense in the quarter. Depreciation and amortization was up by $15 million or 4% due to a higher asset base that also includes the quality impact. Finally, fuel expense increased to $141 million or 74%, reflecting a steep increase in highway diesel fuel prices, as well as the addition of non-locomotive fuel used for trucking. The rapid rise in fuel prices created approximately $45 million of fuel lag in the quarter. And lastly, the company recognized $27 million of real estate gains in the quarter, including $20 million related to the Virginia transaction. As a reminder, we expect to recognize the $120 million Virginia gain in the second quarter and receive the final $125 million cash payment in the fourth quarter. Now turning to cash flow on slide 12. Free cash flow before dividends increased on higher earnings to $976 million. Our highest priority use of cash is investing for the long-term reliability and growth of our railroad. After fully funding these capital projects, first quarter shareholder returns exceeded $1.2 billion, including approximately $1 billion in buybacks and over $200 million in dividends. Looking forward, we will remain balanced and opportunistic in our buyback approach as we continue to return excess cash to our shareholders. Finally, we are excited to close the Pan Am deal on June 1st. Pan Am will contribute about 1 point of annualized revenue, primarily within merchandise. Due to transaction and integration costs, Pan Am will have a negligible impact on earnings this year, and the capital we expect to invest to upgrade the Pan Am network is already contemplated in our guidance. We look forward to working with Pan Am and its customers to drive continued growth through our integrated rail network. With that, let me turn it back to Jim for his closing remarks.

Okay. So let’s conclude with our outlook for the year as shown on slide 13. We continue to benefit from strong markets and ample customer demand, and we are adding employees to capture more of the business opportunities that lie ahead. At the same time, we are of course keeping a close eye on inflation, interest rates, and the Fed. With support from higher coal prices and a supportive market environment, we feel comfortable projecting double-digit growth for both revenue and operating income for the full year. In the near term, we expect to continue to benefit from elevated export coal prices and higher fuel surcharge revenue. Full year CapEx is planned at approximately $2 billion, which is also unchanged. We have made progress since the beginning of the year and we still have a lot of work to do, but we are committed to supporting our customers by providing them with reliable, efficient, cost-effective rail solutions for their changing transportation needs. By adding the necessary resources and lifting our service levels, we will be well-positioned for years of profitable growth. Thanks and I will turn it back to Matthew.

Thank you, Jim. Now in the interest of time, I’d ask that everyone please limit yourself to just one question. And with that, Emma, we will now be happy to take questions.

Thank you. Good afternoon, everyone. Jamie, you spent a fair amount of time talking about the important labor aspects and your optimism about what that will mean for service? Is it just a function of getting the people trained in the right spots or are there any other challenges that you are seeing, it’s related to service reliability? These are things that you can control yourself, or things outside of your control, like customers turning over equipment more quickly and how do you think that all of that translates into the important service metrics like velocity dwell and cars online in the next couple of quarters?

Well, good evening or good afternoon, Jon. For us, it’s purely comes down to hiring numbers and getting more T&E folks where we need them. Kevin and I have been working closely with our customers to do everything we can to support those needs. Our customers are working with us in different areas with different solutions as we look at how we can turn cars quicker, whether it comes down to block loading by destination and other items that we have been working on for years and continuing to work with our customers that way, so we don’t have to handle cars as much. But definitely, when we are looking at that pure number with respect to our trainees out there, we talked about having 500 or 500 trainings out there right now. We have qualified up to 400 already this year since the start of the year. So we have come a long way in that area and we continue to pull whatever levers we can with respect to the design, if there’s cars we can move in different corridors that make more sense where our crew base has gotten healthier, we are doing that. But really as we continue to push forward here, the common theme that we know we will get our railroad back to where we need to is just continuing to train conductors.

Got it. Thanks, Jamie.

Hey. Good afternoon and thank you for taking my question. I guess, if we go back to last quarter, you guys were, I think, the only guides you provide those like volume above GDP. But now it seems you have some confidence to guide to double-digit operating income and revenue growth. Can you just talk to maybe the increased confidence as you have gone through the year here and what’s driving that guidance now?

Yeah. Brandon, look, there’s a lot of moving parts. Obviously, one, we get confidence and the hiring trajectory, and Jamie spoke to that. We are seeing good momentum as we get into April, and we will move through the rest of the quarter. Obviously, some other factors have occurred. You have seen the export coal market remain really, really strong here and supportive, and we had assumed probably that market would tail off a little bit sooner than what is expected now. Also, fuel surcharge has been a bigger factor going forward as well as oil prices have obviously moved up dramatically here with the Ukraine crisis going on. But the number of factors going, we still see the strong demand from all of our markets and we have confidence that we are going to begin to capture more and more of that as fluidity picks up through the network.

Thank you.

Thanks. And I guess to start with the follow-up on that last question. Does the guidance still assume that volumes outpace GDP this year? And then, is there any color you can give on the OR excluding the Virginia real estate sale that’s embedded in that assumption for double-digit operating income growth?

Sure. I'll address the first point. Our goal has always been to grow faster than the economy. There are several factors to consider, especially with the automotive sector, which will play a significant role in the second half of the year. Production in that sector needs to improve for us to reach our GDP plus growth targets. Coal is another area where we see strong demand, and we'll continue to monitor that. On the domestic side of intermodal, we are anticipating that chassis and other drayage capacities will return to the market, which should contribute to our growth. While there are various factors at play, our aim remains to exceed GDP volume growth, even as we navigate these new developments.

And Justin, this is Sean. Just to add to the operating ratio question, we believe that the incremental margins on growth will be robust and supportive for the operating ratio this year. However, there are factors to consider that may offset this. The quality impact will fully affect us in the first half of the year since the acquisition took place in the third quarter of last year. While higher fuel prices are generally neutral to operating income, they negatively influence the operating ratio. Additionally, as intermodal storage normalizes, it will affect the operating ratio in the second half of the year, particularly since storage revenues were significantly high during the second half of last year.

Okay. I will leave it there. I appreciate the time.

Hey. Great. Thanks and good afternoon. I guess I wanted to come back a little bit to the sort of bigger picture, freight demand comment that you made earlier in the call, Jim. I just maybe if you could talk a little bit about what you are seeing either on the consumer or the industrial side, we can kind of see what’s happening on the commodity side, but maybe those two end markets? And then maybe just sort of weave that into the market share potential opportunity? Congestion has probably kept some business off the rail and on other modes of transportation. How does that factor in? So, I guess, generally speaking, you see a slowdown in consumer-driven freight and is there enough upside potential in industrial commodity to offset that?

Since the middle of 2018, we've observed a divergence between the consumer economy and the industrial economy. This was initially influenced by tariff-related concerns among industrial producers, while the consumer sector thrived. This trend persisted during the pandemic years of 2020 and 2021, with industrial sectors, particularly automotive, suffering significantly, while consumer demand surged. Now, we're beginning to see these two economies align more closely, with strong industrial demand evident. Our comments reflect that we haven't fully met the demand on the industrial and bulk side of our railroad operations, although we've effectively managed the consumer side, especially in the intermodal sector over the last couple of years. Demand is robust as we improve our services moving forward, and we recognize substantial opportunities ahead. There may be shifts in various supply chains, including imports and exports of grain, as well as sustained demand for U.S. coal, steel, plastics, and chemicals. Despite these changes, we anticipate favorable outcomes across all these sectors in the future.

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

Hi. Thanks. This is Mike Toran on for Tom. You have made really good progress on adding the T&E employees. Do you have an idea of at which point this year you think you are going to be all kind of trued up from a T&E crew perspective? And also, is there a way to quantify how much volume you have left on the table because of the crew constraints that you will be able to capture once you are kind of fully trued up on crews?

Well, in terms of what we left behind, I will use a term that Tom uses quite often and I will leave it at that. In terms of where we are going to be, from a timing standpoint, where we will get, but I will say, what Jamie mentioned earlier, we are going to continue to hire. We are going to manage this employee pipeline differently than we have in the past. We are going to make sure that lessons learned here that we are going to make sure that this doesn’t happen to us again. And so that’s why we are doing everything we can from an employee relations standpoint to work closer with our employees because they are critical and key to what we want to do here, and that is provide a reliable truck-like product across all of our customers, because that’s the key to the company’s growth. Jamie, do you want any color about timing?

Our target is to achieve progress by the third quarter. As we ramp up training for our current employees, if they meet the qualifications and we maintain our hiring of 30 to 40 new employees each week, we should be in a strong position by the third quarter, likely towards the end. Additionally, we are actively hiring to manage attrition, which has been increasing. It's important for us to stay ahead of this trend both this year and into next year. We have multiple programs in place to continue training locomotive engineers and other roles, and we plan to keep this effort going. We are optimistic that, barring any unforeseen challenges, the third quarter will show significant improvement for us.

It is now easier for us to manage our workforce. With an attrition rate of around 7%, we are not worried about becoming overstaffed because we can always reduce numbers if needed. Over the past year and a half, we have realized that adding to the workforce is quite challenging in the current environment. Therefore, we need to approach this situation differently. This doesn’t mean we will have unnecessary employees; instead, we will manage our workforce in a way that accommodates the fluctuations in business, ensuring we do not find ourselves short-staffed as we recently experienced.

Thanks, Jim. Thanks, Jamie. Appreciate it.

Good afternoon. I’d like to consider the latter half of the year. Is it correct that this is when you expect to have the desired headcount and network in place? Do you still anticipate that volume growth will surpass headcount growth in this period? Additionally, Sean, how much are you investing in hiring and network efficiencies in the first and second quarters that might decrease in the second half of the year?

Scott, regarding your first question, we are achieving a net increase of about 1% each quarter sequentially. This means we'll see a cumulative rise of a few percent in headcount year-over-year by the second half of the year, and I believe we can exceed that growth rate. We have the capacity in our trains and network, along with locomotives available to transport freight, which should enable us to grow beyond that level. As for your question about costs, our training expenses have risen by $10 million compared to last year, which translates to about $15 million each quarter currently being invested in training. I expect this spending to continue, as we are committed to ongoing hiring throughout the year. The more variable expense is around $45 million related to purchase services and others, primarily driven by supply chain congestion. This includes costs associated with intermodal container yards, terminal labor, outsourced labor, and having more locomotives than necessary if the network were operating more efficiently. Rent is also affected. Overall, consider this $45 million as a chance to return to our previous status once we get everything functioning smoothly.

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

No, I think this is largely due to some of our contracts being capped. As a result, they don’t fully take advantage of these extreme prices. This is likely a good run rate, assuming that core prices remain at their current levels.

Okay. Thank you, guys. Appreciate.

Good afternoon. Thank you for the question. Regarding labor, Jim, could you explain how you plan to manage the workforce differently? I understand it's particularly challenging at the moment with all the various elements involved. Are you looking at more technology or implementing different types of rules? Additionally, concerning the up to $600 incentives announced yesterday, do you believe you have taken all necessary steps to ensure you have the right number of people in place?

Well, I think, anybody that’s followed the railroad business for a long time, like you have and everybody else on the call knows that the relationships between the railroads and the union workforce has not necessarily been one of mutual admiration, and we need to fix that and we are working extremely hard. Throughout this process, we have these guys out there for two years in the middle of a pandemic working every single day and night in a chaotic operating environment caused by surges in traffic and you name it, and at the same time did not receive a raise. That’s wrong in my opinion. And that’s why we decided to do something about it unilaterally without asking for some kind of get back in the labor agreement. We just thought it was the right thing to do, and so we made the offer and that’s a change. It’s not technology. It’s relationship building with your unionized workforce and we need to change that and we are dedicated to changing that. It is an ongoing long-term process, but CSX is committed to trying to do everything we can possibly do to change decades if not centuries of the somewhat dysfunctional relationship with our workforce, that’s the key and that’s what this is all about.

All right. Thank you, Jim.

Hey, good afternoon. You mentioned the double-digit operating income targets and the costs. I want to clarify what’s expected in terms of timing for fluidity. Is this solely focused on the second half of the year? In the past, we've noticed that railroads have often deployed additional assets to enhance fluidity. Is that something we'll need to consider beyond just staffing? Furthermore, Jim, as we approach next week, I’d like to know what steps are being taken to improve service. Is the main focus on staffing, or is there also a need for additional equipment or other resources to address the backlogs and enhance fluidity in the rail network? Thank you.

We have sufficient locomotives and physical infrastructure to operate effectively, and we still have excess capacity throughout the railroad. The primary issue preventing us from achieving our desired service levels, which we had in 2019 and aim to improve upon, is the lack of personnel in the engineer and conductor roles. This is our sole shortcoming; we do not require additional management staff or more people for track maintenance as they are performing well. Our focus is on recruiting more engineers and conductors. The hiring process is lengthy, starting from the search for candidates who are interested in becoming railroad conductors to their pre-employment screening, classroom instruction for over a month, and then six months of on-the-job training. We must ensure they are adequately prepared to work safely in a railroad environment. This extended timeline explains the delays we've experienced, which have been about nine months longer than anticipated due to a lack of candidates who are willing to enter this field. We have had to adapt our approach and put in significant effort, and we are now beginning to see the positive outcomes of this work. Each month, as qualified employees start performing their duties, we can expect ongoing improvements in operations and network speed. The shortage of employees is impacting train operations, causing a slowdown in the network. To restore optimal speed and reduce dwell time, we need to adequately staff the railroad, which will also help us manage our workforce effectively based on insights from Kevin and his team about potential opportunities. They actively communicate areas where they see growth, and we are keen to capitalize on that because it aligns with our business objectives and profitability.

And just to clarify there, the timing for fluidity returned, is that by the third quarter year end?

Well, I would hope, again, I hate to give projections, because I was already off by nine months on the last one. Yeah, you will see Mr. Boychuk always gets nervous when I start making projections. I wonder railroad is going to start running better. The railroad will start running better in this quarter and it will get better in the third quarter and it will get better in the fourth quarter. The operating performance of the company I hope then will continue to improve, improve and improve all the time. 2019 was not nirvana. 2019 is the base camp we want to get back to where we were, which was record level of performance, but there was not where we were satisfied being the way we wanted to run the company and run the railroad. We wanted to get even better from there and we hopefully will be able to do that. But it’s going to be a gradual improvement as we go through the remainder of this year.

Jim and team, I appreciate the time. Thanks.

Thank you, Operator. Good afternoon, everyone. I would like to inquire about yields since there are many factors involved, including fuel surcharges and accessorial charges. How would you guide investors in understanding the potential year-over-year development of your yield, assuming fuel prices remain constant? Are we likely to see yields decrease as some accessorial charges are lifted with improved fluidity, suggesting a more negative yield outlook rather than the typical expectation in the rail sector for prices to trend higher? Might there be some fluctuations in the near term due to the easing of fluidity and the removal of those charges?

Hey, this is Kevin. When you look at what’s happening right now, I think Sean covered it well. We expect some of the storage fees to decrease to a more normalized level, which is a positive development. It indicates that the supply chain is becoming more fluid. We are moving more freight using the rail network, which is exactly what we want to see, so that's encouraging. When we compare our current situation to last quarter when we had this call, inflation has increased even further, and we are having discussions with our customers. We adjust the pricing for about 50% to 60% of our business annually, and we are engaged in those conversations since our customers are also talking to their clients. This is the environment we are operating in, and there is a slight delay in pricing adjustments and realization that we will need to acknowledge throughout the year. We fully anticipate that these adjustments will start to materialize as the year progresses.

That’s great color. Appreciate it. Thank you.

Hey. Thank you. Maybe the question is to Kevin. I think you mentioned in your remark something about the supply chain changes that we are experiencing now and maybe trade flows and you mentioned that you see an opportunity for CSX’s network and specifically at the port. I am wondering if you can elaborate a little bit on that. And the second kind of point attached to that is, what do you think you would like to accomplish with the Pan Am specifically in terms of commercial and what carriers of traffic you think you have commercial opportunities to go after as you close on that transaction?

Sure. In terms of trade flows, what I was referring to there is probably two issues. One I touched on the second slide that I covered. We are seeing a lot more activity in terms of industrial re-shoring, more appetite for companies looking at their supply chain. Quite frankly, supply chain resiliency is a competitive advantage now, and companies are re-evaluating, do I want my production in Asia or do I want it overseas or would it be more appropriate to have it onshore closer to the consumers that are going to be buying the products? I am hopeful and we are seeing early signs that’s the case that they are making those decisions and spending capital behind it. The second one and this is extremely early and we are having a lot of conversations with customers. Jim talked about this a little bit; when you think about things like grain, which have largely huge amounts of supply that have come out of Ukraine and Russia and into Europe and other commodities and steel products and other things that are largely goners in the European market. All of a sudden, it doesn’t look like that’s going to happen and some of those things that we had traditionally moved out of the West Coast to supply Asia. Now maybe that’s going to come out of the East Coast and benefit the ports that we serve. And again it’s really, really early. We have to have conversations. We have to make sure that the capabilities are there to be able to deliver those products when that demand happens. So we are staying very, very close to the customer and understanding what could potentially move from the West Coast potentially into the East Coast, and working with them and being really dynamic in terms of how we think about it. That’s what I am thinking about. We are looking at everything that’s going out the ports today and how that could change over the next few months and it’s probably, it’s not a next-month phenomenon, it’s probably six months, nine months, 12 months from now, we are going to really start to see some impact if it happens. And then on Pan Am, look, it’s a very good consumer market. There are a lot of paper packaging customers that want more access to markets that we serve. The waste business in that market is going to continue to grow. We see great opportunities there. We think with a better rail service, that’s going to open up many more markets that quite frankly, just from a transit time or reliability standpoint, we were unable to serve previously. So we are really excited, and we are gearing up now that the approval has gone through, and going to work closely to really capture those opportunities.

Okay. Thanks. I appreciate it.

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

I believe we are at the forefront of intermodal growth in the industry. It's not just about volume this year; I am confident that next year will reflect significant progress. Intermodal is poised to become our largest segment of business. In 2017 and 2018, we dedicated considerable time and resources to re-engineering our intermodal operations to ensure we can achieve a strong return as we focus strategically on key growth lanes. We're starting to better utilize the East Coast ports, which have experienced significant growth compared to the West Coast, providing us with greater expansion opportunities in the East. Additionally, we are increasingly exploring participation in the Mexican intermodal market, where we currently have minimal involvement. Regardless of whether it's international or domestic, as more players invest in the intermodal sector, we'll see continued development, and we believe there is substantial potential for us to grow our intermodal business. However, I want to emphasize that we do not prioritize intermodal over our merchandise business. The merchandise sector is a fundamental part of our strategy, and we plan to develop both areas equally. Each business presents distinct opportunities, and we view them both as promising growth areas.

And Jim, and maybe just a quick follow-up, as you think about the UMAX fleet, do you look into adding boxes to that? Are you going to let the third-party sort of private fleet handle the investment in the actual boxes?

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

Yeah. Hi. Good afternoon. Just curious on the auto sector, if you could give a little color around that; what you are hearing from the OEMs, maybe how the parts business is doing and any update on the chip situation? Thanks.

We definitely noticed some improvement in March, which has carried over into April. We began shipping cars without chips, which has helped clear out some of the inventory that was previously waiting for chips. Although some features may not be available immediately, such as seat warmers, they will be added later. We have more finished goods ready to deliver, and we are preparing to get these products to the market. However, we need to keep an eye on potential disruptions in China due to the ongoing variant and shutdowns in areas like Shanghai. For now, we are seeing positive trends in the short term.