CSX Corp (CSX) — Q2 2022 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone, and welcome to our second quarter call. Joining me on today's call are Jim Foote, our President and Chief Executive Officer; Kevin Boone, our 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 disclosures. And with that, it will be my pleasure to introduce our President and Chief Executive Officer, Jim Foote.

Thank you, Matthew, and thank you, everyone, for joining us today. I'll start by expressing my thanks to all CSX's employees for their hard work during another quarter of tough operating conditions. I am very pleased to welcome everyone from Pan Am who joined the CSX team in June. We look forward to working together to build new single-line service across our combined network. Our second quarter results were solid as we continue to benefit from strong customer demand and firm pricing. But our ability to hire and retain new workers, which is vital to improving our service and growing the business, remains challenged. We are not alone in facing this problem. The labor market is tight, prospective recruits have many job options, and the pandemic has had a profound effect on employees' work and lifestyle preferences. Our truck hiring process has been steady but slow. We will not let up in our efforts to grow our engineer and conductor headcount and improve network fluidity to pre-pandemic levels. Since the time of our last earnings call, our uncertainty and volatility have clearly increased in the financial markets and in parts of the economy. Inflationary pressures have moved higher and interest rates have risen. We're staying diligent by keeping in close touch with our customers, monitoring our order rates, and constantly updating our forecasts. But what remains constant is that right now, as we have seen this entire year, there is more demand for rail service than what we are able to satisfy. The efforts we are making now to grow our workforce and add capacity to our network are not just a status by current demand. We are investing because we see plentiful long-term opportunities for rail, driven by customer demand for more fuel-efficient, environmentally friendly transportation options, and growth in domestic manufacturing. We're excited about our potential, but to realize it, we must focus on near-term execution. Our entire team is aligned in our goals, and I look forward to keeping you updated on our progress in the quarters ahead. Turning to our presentation, let's start with Slide 4, which highlights our second quarter key financial results. We moved nearly 1.6 million carloads in the quarter and generated over $3.8 billion in revenue. Operating income was $1.7 billion, which includes a $122 million gain from our Virginia real estate sale. Recall that in the second quarter of 2021, we recognized a much larger $349 million gain from this transaction. Earnings per share increased 4% to $0.54 a share, which also includes a smaller contribution from the Virginia sale compared to a year ago. Our operating ratio was 55.4%, which includes a 320 basis point tailwind from the Virginia real estate gain but also includes combined headwinds of roughly 450 basis points from the impact of quality carriers, higher fuel prices, and Pan Am acquisition costs. I'll now turn it over to Kevin, Jamie, and Sean for details.

Thank you, Jim. Turning to Slide 5. Second quarter revenue increased 28% year-over-year with revenue growth across merchandise, coal, and intermodal. Overall volumes were flat, where we saw strong demand across many of our markets, limited by resource constraints across the supply chain. Merchandise revenue increased 10% on flat volume, driven by price and higher fuel surcharge revenue. Looking at some of the highlights, we are encouraged by strength in the automotive market, where revenues rose 24% on a 10% increase in volume. There are clear signs from auto manufacturers that semiconductor challenges are easing. Our minerals business benefited from improved shipments of aggregates and salt. Our ag and food segment saw growth from ethanol and export grains. Less favorable was our fertilizer business, where volumes and revenues declined year-over-year on reduced phosphate shipments. Volatile fertilizer prices, combined with some production issues, impacted volumes in the quarter. Forest products along with metals and equipment saw positive revenue growth, offset by modest declines in volumes, mainly driven by resource constraints. Intermodal revenue increased 18% on 1% higher volume, as growth in the international business was partially offset by lower domestic shipments, driven by continued equipment challenges through the quarter. Intermodal demand remains strong, and customers continue to recognize our industry-leading service product in a challenged market. Coal revenue increased 54% on 3% lower volume. As we have discussed, coal demand remains strong across our domestic and international markets. Volumes have been constrained by production issues at the mine, infrastructure constraints at the port, including Curtis Bay, and general manpower shortages, including crews. We still expect volumes to improve through the year as some of these constraints moderate. Other revenue increased primarily due to higher intermodal storage and equipment usage. Although macro uncertainty is clearly elevated as we enter into the second half, we still see positive drivers favoring rail, including environmental benefits as customers prioritize ESG, lack of truck capacity with driver shortages, onshoring of industrial production, and inflation that will all benefit our growth opportunities. Currently, we are still seeing demand in many markets limited by the global shortage of labor. We believe this will continue to benefit rail's value proposition and the opportunity to increase mobile share over time. Going forward, we remain committed to making the investments needed to serve our customers and help them grow their business. Let me now turn it over to Jamie to discuss operations.

Thanks, Kevin. Safety remains our top priority at CSX, and operating safely is a critical foundation for achieving any of our operating goals. We work hard to instill a culture of safety across our railroad, and this begins with the moment that our employees enter our training facility. We focus not only on teaching employees the right way to work but also creating an environment that facilitates ongoing coaching and education on our safety protocols. This is particularly important for the almost 700 new T&E employees that have completed training year-to-date. The coaching does not end with the training program. We have created new programs to significantly increase touch points with managers to ensure new employees are protecting both themselves and their fellow railroads. These efforts have helped drive another strong quarter of safety results. In the second quarter, the injury rate increased modestly from the near-record levels in the first quarter but remained flat year-over-year. Train accidents ticked up slightly in the prior quarter but continued their positive trend as we focused on minimizing human factor accidents through proactive employee communications. Turning to Slide 7. We remain committed to delivering strong service, and we are taking action to improve network performance. We are seeing signs of this improved performance in our local service measures. This is our second consecutive quarter of improved results and our best since exiting the pandemic downturn in 2020. We continue to actively coordinate with customers to further improve these metrics and are encouraged that we are seeing some of the largest improvements in some of the areas that were most challenged entering the year. Our intermodal trip plan performance remained strong and crossed back above the 90% threshold this quarter. Looking forward, we continue to focus on keeping terminals open and fluid during the ongoing supply chain constraints. We expect merchandise performance to improve throughout the second half of the year as network fluidity increases. To offset the impact of crew shortages, we have added additional assets to the network to better meet our customer commitments. As employees mark up, we will be able to refine the network plan to reduce congestion, shorten transit times, and improve reliability. Now turning to Slide 8 and our ongoing hiring initiatives. We continue to have a strong hiring pipeline that averaged over 500 trainees in the second quarter. This pipeline will allow us to continue filling classes as we work towards our headcount targets. For the second consecutive quarter, over 300 conductors qualified, and total active T&E increased to nearly 6,700 employees. We expect this number to increase sequentially throughout the second half as our newly qualified employees more than offset attrition. In addition to focusing on hiring, we are also working to minimize attrition. These initiatives will help us with our new hires throughout the early years of their career, including a recent agreement that will lift the pay for newly qualified conductors. As I said last quarter, this will all take time, but we know that to deliver our service, we must have the right level of resources, and that starts with our people. I'll now hand over to Sean to review our financial results.

Thank you, Jamie, and good afternoon. In the face of these challenging labor market conditions, as well as ongoing supply chain issues, CSX delivered over $800 million in revenue growth with gains across all major markets. Expenses were also up over $800 million and as a result, reported operating income increased 1%. However, as I will explain in more detail on the next slide, costs were heavily impacted by lower real estate gains, the addition of Quality Carriers, transaction costs, and higher fuel. Interest expense was $10 million favorable to the prior year, while other income improved $6 million. The effective tax rate for the quarter was 24.4%. Turning to the next slide, total costs increased $813 million. Nearly $500 million of the higher expense was due to the inclusion of Quality Carriers, lower gains on property dispositions, and Pan Am acquisition costs. Real estate gains were driven by the Virginia transaction, with a $122 million impact this quarter versus $349 million in the prior year. This represents our last significant gain from Virginia, and we expect to receive the remaining $125 million of cash proceeds in the fourth quarter. Higher fuel prices were also a significant factor, with fuel expense up over $200 million, excluding the Quality impact. Not surprisingly, inflation is running above historical levels. The $56 million on this slide represents inflation across labor, purchased services, and rents. All other expenses increased by $50 million, with approximately $20 million higher depreciation, about $10 million lower incentive compensation expense, and nearly $40 million of higher operating costs. This $40 million reflects increased hiring and retention, the impact of a larger active locomotive fleet, intermodal terminal costs from supply chain disruptions, and slower car cycle times. As service levels normalize in the coming quarters, we would expect the opportunity set on the expense side to come first from these operating categories. Now, turning to cash flow on slide 11. On a year-to-date basis, free cash flow before dividends is down by approximately $125 million, but up about $75 million when adjusting for proceeds from the Virginia transaction in the prior year. Capital spending is up nearly $60 million, and for the full year, we still expect to invest approximately $2 billion in our network. This ensures safety and reliability with roughly 80% of these investments going to core infrastructure and a growing amount being allocated to strategic and return-based projects. After fully funding capital demands, year-to-date shareholder returns have exceeded $2.9 billion, including over $2.5 billion in buybacks and over $400 million in dividends. This brings our cash and short-term investment balance down to a more normalized $800 million. As we go forward, we will remain both balanced and opportunistic in our commitment to return excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.

Great. Thanks, Sean. Let's conclude on Slide 12 with our outlook for the year. Having benefited from high export coal prices over the first half of the year and with fuel prices still elevated, we continue to expect double-digit revenue and operating income growth for the full year. As I mentioned in my opening remarks, our customer demand for rail freight remains greater than what we're currently able to supply. Export coal benchmarks have moderated over the last couple of months, but our guidance had already anticipated a correction over the second half of the year. Consistent with our commentary all year, we believe that increasing our train and engine employee headcount is the key factor necessary for improved service and network performance, and our hiring efforts will continue. Our aim is still to reach an active transportation headcount of 7,000 as soon as possible. As Sean said, full-year capital expenditures are planned at approximately $2 billion, which is also unchanged, as is our commitment to return excess capital to our shareholders. As we stressed last quarter, we are moving forward, but real progress takes time and is often challenging and gradual. There is plenty left to do, but the whole CSX family is committed to delivering on our goals, supporting our customers, and growing this company. Thank you. And I'll turn it back to Matthew.

Thank you, Jim. Now as we start Q&A, in the interest of time, I’d ask that everyone please limit yourselves to one question. With that, operator, we will now take questions.

Hey, thanks. Good afternoon, guys. So if I look, headcount's down sequentially, excluding Pan Am. And you guys were the first rail to talk about ramping up hiring, but perhaps maybe struggling the most. Curious, why do you think that is? And then maybe just separately for Kevin, any thoughts on just guidance on other revenue and coal RPU in the third quarter? Thank you.

Well, hi, Scott. I'll take the first part of your question about the hiring. Yes, I don't know if we're struggling more than everybody else or not. I think everybody is struggling. We've hired over the last two years since we started talking about this issue, which we saw coming again a couple of years ago, 2,000 employees, and our numbers haven't gone backwards. So the question has been not really as much as our ability to get employees into the pipeline and get them through the process, but a much, much higher attrition rate than we had expected from our current workforce. Unfortunately, after we get them through the classroom training part and the on-the-job training part, and they actually go to work in the outdoor operating environment, we've seen a significantly higher attrition rate than what we had ever normally experienced or than what we had anticipated. So I think a couple of us, Jamie and myself, Sean mentioned during here, we've done a lot of work in terms of focusing on attrition now in terms of what we can do from a compensation standpoint to make sure that we keep the employees that we invest in. And I think that is the issue. I also what I said was we had a target out there of 7,000 people. Based upon where we stand today with the number of people that should be qualifying over the next two to three months, we certainly hope when we put that target out there, our employee number at that time was around 20 or so daily with COVID, it's now north of 80 to 90. So we hope that number comes down. If those two factors come through as we expect and as we plan, we'll hit that 7,000 number. It's achievable by the end of the third quarter.

Yes. And then on the coal RPU, obviously, the met coal prices have come down, as everybody has seen. Our expectation right now, given where things are, is probably you'll look at the RPU in line with what we saw in the first quarter, so a little bit down from the second quarter. On the other revenue line, supplemental other revenue will probably be something flattish versus this quarter outside of the market changing dramatically, which we don't see right now.

Thank you, guys. I appreciate it.

Thanks for taking my question. Sean, there's obviously some uncertainty as to what the actual union wage increases from 2024 will ultimately be. Can you talk about how CSX has managed that uncertainty with its accruals so far? And if the actual wage increases were to come in different than your expectations, when do you true that up retroactively communicated prospectively? Thanks.

Yes, Bascome, I can speak to that. When we look at the union wage issue, we have been accruing for increased wages ever since the expiration of the last contract. When we do get to a settlement, we'll take a look back at that and see if an adjustment is necessary. If it is, we would take that all at once. It's probably also worth noting that we've been accruing for back wages, which means that when we do get to a settlement, the employees who've been working with us for several years and not getting wage increases will likely get back pay. So there will be a cash impact around the time of whenever that settlement occurs.

In that accrual in this period where we don't have certainty, has that been consistent with historic rail inflation or different reflecting the environment we're in today?

Yes, Bascome. I'm not at liberty to give any specific insight in terms of what we, CSX, are accruing. That's based on our best guess of where the negotiations come out.

Thank you.

Yes, good afternoon. I guess I want to go back to the headcount question a little bit in the network operation. You have made some progress on active T&E headcount, and yet it seems like the velocity metrics really haven't necessarily reflected that. So, I was wondering if you could offer thoughts on maybe why that would be the case. And also just the level of confidence that 7,000 is the right number. Is that pretty good visibility? I mean, you talked about end of the third quarter, if you achieve that, should we expect to see stronger volume and just a lot of confidence that that's really the right number and you don't need to go beyond that. Thank you.

Thanks, Tom. First, I want to discuss our numbers. We believe that reaching 7,000 will bring us back to pre-pandemic levels, but that doesn't mean we will stop there. We plan to continue hiring for the growth opportunities that Kevin mentioned, which remain untapped. The 7,000 is a figure we are comfortable with as it aligns with our metrics and helps reduce train delays and other issues across the mainline and various locations. However, I want to emphasize that we will not halt our hiring efforts. We need to ensure we are prepared for anticipated growth over the next year or two. As for the numbers, you are correct; we have observed an increase in our T&E quarter-over-quarter. Each week, we have 20 to 30 individuals qualifying for conductor roles, which is making a positive impact. The past few months have been a peak vacation period for us. Normally, our employee availability ranges from 84% to 85%, but recently it has fallen to around 80% to 81% due to vacation seasonality. Each percentage point reduction translates to roughly 70 employees. Considering this, we are all experiencing challenges due to vacation schedules, which will likely continue until after Labor Day in September when vacation patterns stabilize. This situation is why our numbers are increasing, yet our velocity and other railroad metrics are not reflecting those benefits.

Tom, it's Jim too. Over the past 18 months, we've gained significant insights into the current hiring situation and its associated challenges, which were previously underestimated. By the end of this quarter, we expect to determine our actual long-term attrition rates and assess the potential impact of any new variants that could temporarily affect our workforce. We aim to return to the staffing levels we reported in 2019 when the railroad was performing at its best. This will provide us with a clearer understanding of our direction moving forward.

Great. Thanks for the perspective.

Thank you for your time. Over the last two quarters, you’ve been maintaining a high single-digit percentage of employees and training relative to your active T&E account. I’m curious, once we move past this situation, wouldn’t having more employees be preferable? What do you consider the ideal long-term number of employees and training in relation to the active headcount? I assume there’s some additional cost involved with having a portion of your active T&E account on payroll without actively moving freight. I’m trying to determine the best way to normalize that. Any insights you have on this would be greatly appreciated, Sean.

David, let me answer that. It's kind of confusing to what I just said a few moments ago. We're going to have to learn our way through this as we get into the end of this year and beginning of next year to have a better understanding of what these attrition rates are. It's been somewhat of a surprise to all of us, the number of people that have dropped out after again, going through all of the classroom training, all of the on-the-job training, and then working a few months and deciding that they don't like railroading as a profession. These are all new things for us. So one thing we know we can easily manage down just by taking advantage of attrition if that's what's necessary. What we do know is what we have experienced anyway in the recent times, it's a lot more difficult for us to manage up. In the short term, we're going to do everything we can to not run short.

Okay. So I get that it's probably too early to figure out what that number should settle at. But I guess if you think about kind of what you're hearing from the folks that are bouncing out pretty quickly, is there some qualitative sort of assessment that you can share with us in terms of the rationale for why some of these folks are leaving what has historically been a pretty attractive job?

We are analyzing various factors to understand the reasons behind employee turnover so we don't face challenges in hiring. It's important for us to identify these factors because recruiting comes with significant costs, time, and effort involved in training new hires. We're focusing on psychological assessments and analytics to gain a clearer understanding of the type of workers we should hire. This process is new for us, but we are learning and will figure it out. Once we do, we'll be able to manage our headcount more consistently.

All right. Thanks very much for your time.

Hey, thanks. Good afternoon. Maybe could you help us a little bit with your expectations around volume in the second half of the year and sort of how you think that might play out? And then, I guess, maybe a little bit bigger picture. I think there's just a general sense that there's more demand out there than you guys are able to capture. So as you see operating performance and headcount improve, there's the ability to sort of lean into that. Can you sort of help us with your confidence around demand levels in the back half, what you're hearing from the customer? Are you seeing anything slow down? So just kind of curious about generally speaking the volume and demand dynamics as you go into the back half of the year?

Hey Chris, this is Kevin. As I mentioned and Jim mentioned it, I think, a couple of times, demand continues to outstrip supply chain. We're not alone. It's the supply chain in general, and we're part of that supply chain with the crew issue that we're having. Right now, if you look at the back half of the year, when you look on just a purely comp basis, we have easy comps on the auto business, and we clearly have seen that production start to pick up here. So we're encouraged by what's happening there. We've had some disruption on the coal side of the business. We think that will continue to improve in the back half of the year. There are some things that just from a comparison point of view get better as we move into the back half of the year. As the crews come online, we'll chase those opportunities that we know are out there in terms of market share and existing opportunities that we know that are out there in terms of order fill rates, things like that. We're highly focused on as a team and see the opportunity going forward. Nothing has changed from the last quarter when we see a pretty robust environment, but we're also keeping an eye on what's going on. Clearly, the housing market's had some pressure out there, but we have exposure there. However, there's other areas where, quite frankly, there's a lot of inventory restocking that still needs to happen.

Okay. So if operations get better, then the volume goes up, I think as simple as that as far as you guys are concerned, right?

Yes, that's our view, given the demand environment that we're seeing right now.

Got it. Thank you very much.

Hey, good afternoon guys, and congrats on a solid result here. Jim, I was hoping I could just get your reaction to the announcement of a presidential emergency board in relation to the negotiations with the union. Do you see any risk around your ability to achieve margin targets based on that appointment or based on these negotiations? Alternatively, do you think that maybe some of these attrition issues could be solved if there's a resolution to some of these labor negotiations standstill that you've been facing?

We are pleased that the emergency board has been appointed. It is regrettable, as I have mentioned multiple times, that it took so long to reach this point. The board has been working for an extended period, and we are optimistic that the emergency board will provide a recommendation that benefits both parties. We believe that once the labor issue is settled, and given that our employees are unhappy about not receiving a raise for 2.5 years, this resolution will improve morale and potentially aid in retention. The board consists of experienced individuals who are well-versed in handling labor matters, and they will make a recommendation after considering input from both sides. I hope the outcome will be a fair solution that works for everyone, and if so, we will certainly be able to incorporate that into our future economics.

Understood. Okay. Thank you.

Thank you. Good afternoon. Jamie, when we look at the weekly metrics, obviously, we've already addressed we're moving in the wrong direction, yet your intermodal trip plan performance back to 90%. Your volumes, which I'm sure you're disappointed with, but probably not as bad as some others or maybe what the metrics would be indicating. Can you speak a little bit to that apparent disconnect where velocity dwell is moving one way, volumes kind of rebounding in other? If you get to that velocity dwell that you're targeting with the right resources, how much free capacity that would free up for your network?

Yes, Jon, look, it's a great question. It comes down to the hard work of those operating folks on the ground, right from the union folks who are working for us, Dan and Dale, filling in some of those gaps. The operating team is just doing a fantastic job from the network side to the guys out in the field, making tough decisions. In this environment, intermodal has a priority on our railroad. We make sure that intermodal trains get across within their schedule for the best that we can. We're in an environment where we have concerns to make sure that chickens get fed and that the utility and the lights stay on. There are times when we actually have to prioritize some of our bulk traffic, which we would never have done before because normally, bulk traffic goes to a stockpile. When you're prioritizing different flows of traffic that you never really had before, it goes against a little bit of your principles of making sure you take care of that merchandise traffic. At times, the merchandise traffic might take a 24-hour delay or something across the network getting from terminal to terminal. That's where you're seeing some of those areas where we're just not moving as quick as we could and some of the congestion that's out there. Yes, you're absolutely right that when we can get back to a little bit normalized workforce with respect to being able to move every train and not having to make those tough decisions, that's where you're going to start to see that flow move better and the capacity free up.

Yes, this is Jim. Just to follow up on what Jamie mentioned, in 2019, the railroad was operating at exceptionally high rates in terms of reliability, speed, and dwell time. At that time, we recognized that we had an additional 25% to 30% of capacity that we had made available over the previous two years without significant changes to the rail network. In the last 2.5 years, we have maintained our capital program, continuing to invest in the infrastructure and extend sidings, which is important as we prepare for a return to normalcy and enhance efficiency across the network. We are well-positioned to manage any traffic that comes our way. The only limitation we currently face is on crews, and we are doing everything possible to hire as many people as we can.

Okay. Very helpful. Thanks, Jim. Thanks, Jamie.

Thanks. I know previously, you had talked about volumes this year outpacing GDP growth. I was curious if that's still your expectation. Sean, last quarter, you gave some color on your expectations for operating expenses ex-fuel on a sequential basis. I was curious if you could do that again for the third quarter, especially with Pan Am being layered in.

Hey, Justin, it's Kevin. Our outlook hasn't really changed. The GDP numbers are fluctuating quite a bit, but there's been significant transformation since the start of the year. Clearly, inflation has risen more than many anticipated at the beginning of the year, and this has likely impacted prices. Additionally, the recovery from supply chain issues has not been as swift as we expected. However, due to the favorable comparisons we have for the second half of the year, we anticipate growth.

And Justin, on the second part of your question around OpEx, I think it's fair to assume that OpEx is going to be fairly stable quarter-over-quarter. We will begin accruing for higher wages, the compounding impact of higher wages that would reset at mid-year. So you should see a little bit of an increase sequentially in the labor line. To your Pan Am question, recognized on a fully integrated basis, it's about 1% of revenue or a little less than that. Figure the operating ratio on that business today is a little worse than our average and then spread the cost similar to our current spread, and that will probably get you there in terms of the Pan Am impact. Everything else relatively stable, and the hope would be as crews continue to mark up and become available towards the latter part of next quarter as the vacation peak subsides, the network begins spinning, we begin to take some of those $40 million or so of costs out.

Okay. That’s helpful. I appreciate the time.

Thanks, operator. Hi, everybody. Kevin, I just wanted to ask about yields in the back half of the year relative to where they were in the second quarter. There's a few puts and takes. I mean, obviously, fuel is moderating off of a very high level. So maybe that's a little bit of a debit to yield. Then we're obviously still in a high inflationary environment, so maybe there's some pricing opportunity. I understand mix is going to be what it is. Could you just talk about maybe how you think back half yields would be relative to what you did in the second quarter? Sean, that was really helpful on the cost comment, non-fuel costs. I guess with fuel moderating, that optically releases some pressure on EOR. Would you kind of expect EOR to continue sliding down in the back half of the year? Obviously, not as big of a jump improvement from 1Q to 2Q. But would you expect the sliding down of OR in the back half of the year as well? Thank you.

Hey, on the yields, I think you covered one of them. Obviously, the fuel surcharge, and there's a bit of a lag there as we move from second quarter to third quarter. So that can move around quite a bit, but you understand how that works, and we'll adjust as that moves around a bit on the diesel prices. The other one that I covered earlier was really on the export coal pricing. What we're seeing today is obviously some moderation from the really, really high prices. The environment is still very, really good for us. We would take these price levels any day. The prices are just coming down from the extreme level. We see some moderation there. Outside of that, clearly, when we're having contract negotiations with our customers, they understand the high inflation environment we're dealing with today and obviously on the labor side and other parts of our business. We're having to recapture that value in those discussions. As things reprice, we're making sure we stay in line with what's happening out there in the market and what we're having to pay expense-wise. We probably would still see some underlying momentum there as well. But outside of that, nothing really changes in the back half of the year.

Yes, and just adding to that, in terms of the operating ratio, I think the two things that are non-core or less inside our control, we had about $85 million in real estate gains last year. We're obviously always working on potential deals, but we'll see whether we have a similar number that materializes in the second half. Fuel prices, if they tail down and continue to go down, we'll have that favorable lag benefit that will help the OR. But if you set both of those items aside, we have sequential volume gains into the second half of the year, and if expenses are relatively flat, excluding Pan Am and the wage increase impact, I think it would be fair to assume that we'll continue to have good momentum on the margin side.

Right. Okay. Very good. Thanks for the help. I appreciate it.

Hey, thanks. Good afternoon. I wanted to revisit your comment about providing additional incentives or compensation for some new members joining the network. Are there any other strategies you can implement to reduce the rate of attrition, or do you need to wait for the official agreement to be finalized? What are your thoughts on that? And for Jamie, are there any other measures you would consider? We noticed one of the Western rails imposed an embargo, which caused some disruption, but it seemed to provide them with a bit of relief. Is that something you would think about at this stage, or would it be unnecessary?

Well, we're working in a unionized environment, and we're not able to do too much without an agreement with the unions, including increasing their pay. But we have tried many options, and we'll continue to innovate. We'll continue to come up with ideas and try to make this the place where everybody wants to work. In terms of embargoes, an embargo is a pretty draconian step that one would not take without a lot, a lot of forethought. We would only do embargoes if it was absolutely, absolutely necessary. I'm going to stay with that.

And then the timing of the labor resolution, do you have any ideas on that? Or is it still too early to tell?

The outcome of the current negotiations is expected to be completed in the next 60 days. The initial 30-day cooling-off period has expired, which included the time when the emergency board meets. I believe there will not be any delays, and they should conclude in about 28 days or so. Following that, there will be another 30-day cooling-off period for the parties to consider the emergency board's recommendations. Based on past experiences, if the parties cannot come to an agreement, the government may intervene and impose decisions on them.

All right. Thank you, Jim. Appreciate it.

Yes, thanks very much. Good afternoon. I guess you've had a chance to have at least an early look at an assessment of quality and have a sense of how it's fitting in with your network? My question, I guess, from an acquisition standpoint, strategically, do you think, Jim, you need more of that type of business? Are you impressed enough by what you've seen with Quality that you would look for more opportunities like that in, call it, the trucking space or the specialized trucking space? Or do you think with what you got with Quality is enough and you're happy with what you have and focused on more organic opportunities going forward?

We're extremely impressed with Quality Carriers. They're a great company. They have great people. They do a great job. They're industry leaders, and that's what piqued our interest when they became available. That's not the only reason we pursued that. It aligned so well with our existing core business in the road. What comes first is our existing core business. I don't see us necessarily going out and doing something along the lines of another quality of that size, unless it met those same criteria. If it met those same criteria, of course, we'd be interested in it. But we're going to continue to try and expand our footprint through everything we've talked about on the trans flow and the reloads and the warehousing, everything we can do in those spaces that brings greater connectivity to the core rail network to our customers. Oftentimes, we don't go all the way to the door where there's a gap. Whatever we can do to try and fill that gap between connecting the core railroad to a more extensive base of customers, that's what intrigues us, and we'll continue to pursue that.

I appreciate that color, Jim. Thank you.

Good evening. Jim and team, on-time performance has declined to 50% for originations, down from 62%, which we haven't seen since before the PSR rollout at CSX and likely before Hunter arrived in 2017. Do you believe this might impact your ability to secure business with the current service levels? Kevin, if you're indicating that there is demand but you're unable to accommodate it, could you elaborate on whether this issue is specific to certain areas of your network where hiring is more challenging? Additionally, Jim, can you clarify the lift you mentioned for newly qualified conductors? You noted that you can't proceed without a union agreement, so could you explain what you meant by that statement?

I guess I would be concerned that we had slipped back to the points before to the metrics or operating performance metrics before we've done so much hard work over 2017, 2018, and 2019 to get this company running at spectacular rates. I find hard to believe that we're still doing an extremely good job under very difficult circumstances. It's clearly not every company in the world is doing fantastic, and everybody is running at 100% on time while we're running at 62%. This issue affects everybody in the logistics chain because it affects truckers, it affects this kinship companies, it affects terminal operators. Everyone has slowed down, is struggling; it's not just the railroad industry. The same things have been happening at airports and ports.

Our other metrics show that our velocity has stabilized. Our dwell times have also stabilized, and we are starting to see improvement. In the second quarter of this year, we are handling more carloads than we did in 2019 when we were operating at full capacity. It's not that our velocity is down 21% and our volumes are also down by the same percentage. We are still moving more freight than before. We are confident that as we recover our volumes and velocity to previous levels, the key aspect for our customers will be reliability.

Great. Thanks, Jim. Appreciate it.

Thanks, operator. Good afternoon, gentlemen. I wanted to clarify a little bit on the operating ratio. You talked about some of the puts and takes going forward. Obviously, the Pan Am costs aren't going to continue into the second half of the year. Just how much of that 450 basis point headwind was Pan Am in the quarter?

Yes, Jason, about 50 basis points was Pan Am.

Okay. Just 50 basis points for Pan Am. If I could just follow-up very quickly. You talked about how much demand, sort of, pent-up demand for rail that there is. If we just assume that you do start improving even more on the operational side, is it really intermodal and maybe boxcar that a lot of these gains are going to jump out in terms of where you can open up and take on business?

I think it goes beyond just intermodal and boxcar. Think about coal network. Some of this is on the coal mines and some of the export facilities that have had a lot of issues as well. We're part of that puzzle piece with the crew issue on that side of the business. I would say it's limited to just the boxcar intermodal, but I would say there are opportunities across almost every market that we serve today.

Fair enough. Appreciate the time as always.

Yes, thanks. Hey guys. I had a sort of a big picture question. Just given all of the uncertainty with respect to the economy, as you guys have mentioned, if we do move into a little bit more of a challenging environment or a recession, do you think that the railroad is positioned any differently than it had been historically or not? And if so, how would that be?

Thank you, Ben. I believe the railroad industry, particularly CSX, is exceptionally well-positioned for both the short and long term. With everything happening globally, including reshoring and highway congestion, I believe the railroad industry is very well-positioned to become a more significant player in the transportation network and the shipment of goods. Our service is returning to the reliability we experienced before the pandemic. We offer a strong option for companies looking to cut costs and reduce transportation expenses, especially those making decisions based on cost rather than speed. This will ultimately be beneficial for us in the long term. While I can't fix global hunger or solve the pandemic, I have complete confidence in the team at CSX to get the railroad running even better.

All right. Appreciate it. Thanks for that.

Hi, thanks for taking my question. I just wanted to ask about the capacity of the network outside labor. I think you talked about how much additional capacity has been freed up to PSR. Looking at things now, does that kind of still exist today? Or are there bottlenecks that you think need to be resolved with additional capital once your labor situation is on their footing?

No, Eric, it's purely labor that's holding us back. Our network has improved over the past three years. As you heard Jim, we put just as much tie rail and ballast as we have. We've done siding extensions in areas we've invested, and we've got more locomotives than we need. We're really in a great spot if we had the folks that we need to move the business. Our terminals, as a matter of fact, 90% of our home terminals are running very well. Our flat-swapping terminals are running well. We get congestion and bottleneck is different crew change points where we don't have crews to keep those trains moving.

Thank you.

Yes. To follow up on the last operational question, it seems you are getting closer to addressing the headcount issue and your network is in good condition. However, is there anything that needs to be adjusted, such as reconfiguring schedules? You mentioned making decisions about which trains to operate. Are there larger changes needed in either the intermodal network or carload network besides hiring more employees? Once you reach the 7,000 target, how quickly does the volume and service improve? It seems like we are not far off, and I'm trying to understand how that service gap reacts and how swiftly it changes. Thank you.

Yes, Jordan, we are in a much better position regarding our terminals and operations than we have been in a long time. We analyze the railroad daily and weekly. When we make decisions, the unscheduled network of coal and grain is prioritized more than ever before. This network is where we make decisions based on crew availability. Kevin, our teams, and I are constantly working to ensure that when there is a location that requires service, we deliver it. The on-time service has improved significantly. The same goes for coal for the Southern utilities, which had been stockpiled and is now being handled with just-in-time service. We are prioritizing different traffic flows that were not emphasized before, even if it sometimes means that merchandise traffic might face a delay of 24 hours across the network. This is why you may notice some areas where we are not moving as quickly due to congestion. So, you are correct; once we can normalize the workforce and move every train without making tough decisions, we will see improved flow and capacity.

Yes, this is Jim, too. We are grinding here every day. We're doing all this with hand-to-mouth in trying to make sure we serve every customer we possibly can. Yes, our velocity is down, our dwell is up but we still move more carloads in the second quarter of this year than we did in 2019. So it's not like, oh my god, what are these guys or velocity is down 21%. What we know is that we're running more freight than we did. We're confident that when we get the volumes back, the velocity and reliability we had, that we’ll be able to be a much bigger participant in the transportation game, all the way to the door for our customers.

Thanks so much.

Thank you very much, and thanks for taking my question. Jim, I'd like to go big picture on you here. You talked about, okay, if we could just get to 7,000 and get our trains where we need to be, everything comes down quickly, we start running well. Then you said, well, it's not really that simple, right? Because we've got shippers that need to accommodate. We've got ports that need to accommodate. I guess my thought is if you had all the crew you needed tomorrow or a year from now, right? You pick your target. How long would it take you to get the network running the way you want to run it? And then I guess, on the tail end of that, the world's changed a lot in the last year. Has your thought about what kind of returns this business can generate changed at all as part of that macro?

Thank you, Jeff, for the straightforward question. We are currently in a strong position for long-term growth. One major trend we are observing globally is the increased need for reshoring to enhance service and efficiency. We are well-prepared for the future of the railroad industry, and CSX is no exception. Our historical performance shows that we are better equipped now. As logistics chains evolve, we are becoming more involved in that space, allowing us to position ourselves for broader participation in the economy as demand for rail services continues to grow.

Okay. Thank you very much.