Operator:

Thank you for standing by. My name is JL. I’ll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matthew Korn, Head of Investor Relations and Strategy. You may begin.

Joseph R. Hinrichs:

Alright. Thank you, Matthew, and hello, everyone. Thank you for joining our second quarter call today. Before we start, I want to acknowledge and appreciate all our CSX employees who are out there working throughout the Southeast United States as we deal with the weather effects from Hurricane Debby. We are prioritizing the safety of our employees and our communities in everything we do. Now, this was a strong quarter for CSX. I am pleased that our results reflect the momentum that we are building as a one CSX team. And I’m proud to see how teams all across our railroad are working together in better and more effective ways than ever before. Operationally, we are developing initiatives to take an excellent scheduled railroading model and make it safer, leaner and more cost effective while providing the consistency and flexibility that our growing customer base demands. And commercially, our sales and marketing organization is creating new, more targeted methods for us to go to market, create partnerships and use our leading value proposition to convert customers onto CSX rail. Now, there is much we have accomplished so far this year and we are eager to maintain and build on our momentum over the rest of the year. We keep reminding the entire ONE CSX team that when we are aligned with each other and work together as one team, there’s really nothing we cannot achieve. Our employees, our customers, and our shareholders are seeing how we are growing the business, controlling costs, leading in customer service, and leveraging our network capacity in ways we never could before. A successful culture we are building at CSX is delivering positive business outcomes. Now, we can go over some of the highlights. Let’s go to Slide 1. On Slide 1, we show that some of the key results from our second quarter compared to revised results from past periods. Later on this call, Sean will provide more detail on the review of the accounting treatment for engineering scrap and certain engineering support labor as described in our financial report. Total volume grew by 2% with our intermodal franchise again leading the unit growth of 5% versus last year. And, we are proud to achieve this result even with the constraints at the Port of Baltimore that impacted our coal shipments. Our coal team did an excellent job finding creative ways to respond to the key bridge collapse and deliver for our customers. Our operating margin reached 39.1% which represents a 280 basis point sequential improvement. Revenue adjusted over $3.7 billion was flat compared to the second quarter of 2023 and up modestly over last quarter as strong merchandise pricing and volume growth offset lower coal prices and decline in other revenue. Operating income was 1% lower than last year but up by 8% sequentially as our efficiency efforts helped reduce expense. Our earnings per share were flat versus last year and up by 9% sequentially. Overall, this was a good quarter that was right in-line with our expectations. Had we not faced the incident in Baltimore, our operating income would have been higher year-over-year. Our challenge now is to keep moving forward by focusing on our execution even as markets fluctuate and unexpected events occur as they always do. Now, I’ll turn the call over to Mike Cory to discuss our operational performance.

Kevin Boone:

Thank you, Mike. As Joe referenced, we are really seeing a lot of positive momentum, particularly around sales and marketing collaborating with operations. Highlighting these initiatives are the market reviews where our teams come together to discuss and evaluate opportunities to collaborate on operational efficiencies while delivering new solutions to target profitable business. Driving network efficiencies allows us to deliver a more competitive service product and expand the opportunity for growth. We are continuing to be very aggressive in pushing forward on our truck conversions, new industrial development projects, and creative solutions with the growing number of shippers who want to maximize their use of CSX rail. As you’ve heard from a number of our peers and competitors across the transportation industry over these past weeks, the trucking market remains challenged and industrial markets are mixed as we move into the second half of the year. Accumulating effects of interest rates including a sluggish housing market and fluctuating commodity prices creates headwinds for some of the markets we serve. It’s a volatile environment, but we continue to drive initiatives to accelerate modal share and expand CSX’s addressable market. Let’s turn to Slide 7, and look at our merchandise performance. We had a great result with revenues up 5% on a 1% increase in volume. RPU was higher by 4% even with fuel surcharge lower year-over-year. As we continue to get pricing results that reflect the strong service that the team is delivering. Throughout the second quarter, our chemicals franchise has performed very well as momentum has persisted in plastics, industrial chemicals, waste, and energy markets. Minerals revenues also saw positive results driven by industrial development wins and our unique network access into the southeast markets including Florida where we see a multi-year glide path for growth. Our Forest Products business began to accelerate driven by demand in pulp board and recent wins in the northeast portion of our network. We’ve been developing some very promising strategic partnerships in this market to take advantage of the capacity that our network has available, which puts us in a good position to gain more truck share as the housing market rebounds. Our Automotive business saw 4% revenue growth, leveraging our strong service product to deliver a competitive win with a key customer. Less favorable this quarter was metals, where high inventories and expectations of weaker steel prices weighed on volumes. This is probably the market with the most near-term uncertainty as we watch trends in coil, plate, and scrap prices for a recovery. Fertilizer volumes continue to be hurt by phosphate production issues here in Florida. As in past quarters, lower volumes of this short haul of business, does have a favorable mix effect on the total fertilizer RPU. And Ag and Food remains soft on unfavorable regional crop supply dynamics. So, we are very encouraged by the fundamentals into the back half of the year where we see a weaker southeastern crop leading to incremental opportunities for growth. For the remainder of the year, despite a sluggish economy and persistently weak trucking market, we expect to capitalize on our best-in-class service to deliver growth. Chemicals should remain strong supported by business wins, steady plastics and healthy waste moves. We also see opportunities in our Forest Product segment where we see operational focus differentiating us in the market. We’re also anticipating a much better second half for our Ag and Food business with demand supported by larger hog and chicken herds in the Southeast, which will need feed grain supplies from the Midwest. Turning to Slide 8 in the coal business. First, I want to reiterate Joe’s comments from the beginning of the call. Our team in Baltimore did a fantastic job of finding creative solutions to move coal after the Key Bridge collapse. Their efforts made a huge difference in reducing the negative impact that this incident had on CSX and the customers we serve. As we highlighted at a conference earlier this spring, operations at Curtis Bay were up and running at the end of May, several weeks ahead of our original projections. For the quarter, revenues were down 12%. We estimate that without the Key Bridge collapse, the year-over-year decline would have been more in the range of 5%. Volume was down only 3% with the decline driven by domestic shipments largely to utilities. Key here is that our team was able to grow export volume by 8% year-over-year which is an extraordinary result given the closure of the Port of Baltimore. Our PE was 9% lower year-over-year and 6% lower sequentially in-line with our expectations and driven by export benchmark prices and unfavorable utility mix. Looking ahead, the key benchmark for high-quality Australian coal remains above $200 per metric ton. Given the lag in our export coal contracts, we expect a mid-to-high single-digit sequential decline for all in coal RPU in the third quarter. The temporary idling of a recently opened export mine on our network should have little impact on our export volumes as we see strong production offsets at other CSX served mines. Just as we did this last quarter, the team is already finding some creative ways to pivot towards other opportunities in the marketplace where we see strong demand for export capacity at our Curtis Bay terminal. On the domestic side, low natural gas prices continue to impact volumes, but we’ve seen some good signs from the hot summer with several utilities in our service region maximizing their coal units in response to very strong demand. We’ve also seen inventory levels moderate from the highs seen earlier in the year. Finally turning to Intermodal on Slide 9, revenue increased 3% on 5% volume growth. RPU declined 2% as we felt the effects of lower fuel surcharge revenue and negative mix. Our International business drove our volume growth this quarter supported by higher East Coast import activity and favorable alignment with our steamship line partners. This has been the trend through the year and we’ve been pleased to see customer activity remain solid so far in the Q3. In contrast, momentum in our domestic intermodal business remains muted as weak trucking conditions persist. The weak trucking market has continued much longer than what was expected coming into the year, but in the meantime, we’ll keep pushing hard in a tough environment, leading with our best-in-class service. All-in, the collective team has been capitalizing on opportunities throughout the year, working together to win business and gain share for CSX. With mixed conditions across end markets, we’ve been able to grow total volume by 3% year-to-date while setting ourselves up for more profitable growth over the longer-term by demonstrating to our customers that CSX stands apart for our service, creativity, efficiency, and capacity. Now, let me turn it over to, Sean.

Joseph R. Hinrichs:

Alright. Thank you, Sean. Now, we will wind up our prepared remarks by reviewing our guidance for the full year 2024. If you look at Slide 16, we expect total volume and total revenue growth in the low to mid-single digit range for the second half of the year. Total first half revenue was slightly below our original expectations, largely due to lower fuel prices. The macroeconomic environment does appear a little more uncertain than it did a few months ago. That said, as Kevin described, in merchandise, we see promise across chemicals, forest products, ag and food, and minerals markets supported by increasing customer activity, the ramp up of new projects, and a growing portfolio of business wins. On the other hand, metals and fertilizers have both lagged and appear likely to remain softer through the end of the year. We expect momentum to gradually build in Intermodal supported by strong port activity and the strength of our service performance, which is facilitating new ways of working together with our channel partners. This is allowing us to drive small but meaningful modal conversions even while the truck market still remains soft. The reopening of the Port of Baltimore, return to full operations at Curtis Bay and consistent domestic demand should lead to a modest pickup in coal shipments in the second half of the year. We continue to price according to our leading service, work better together as a ONE CSX team and push forward on our efficiency initiatives. As a result, we expect to deliver a meaningful operating margin expansion on a year-over-year basis in the second half, supported by a very strong incremental margin on our revenues. Our CapEx forecast of approximately $2.5 billion is unchanged as is our balanced opportunistic approach to capital returns. We are encouraged by our accomplishments over the first half of the year. Now, we are very focused on executing our plan over the rest of 2024 as we position ourselves for sustained, profitable growth over the long-term. We have the capacity, the operating model, leadership team and the culture we need to ensure that we are the best run railroad in North America. We look forward to sharing more details about our strategy at our upcoming Investor Day in November. Thanks for your interest in our company. Matthew, we’re ready to take questions.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Brian Ossenbeck of J.P. Morgan. Your line is open.

Kevin Boone:

Yes. I guess that’s a magic question, right? When does the domestic market recover, given what we’ve seen on the export or the import side of the business. I think, I don’t we’re still not hearing from customers a major shift, in their activity from the east to the west. If that were to occur, I think it probably presents maybe more opportunities than risk for our business, especially if some things want to move further into the eastern part of our network where today that’s truck. So, it’s a watch item for us. We’ll be close with Mike and his team and able to capitalize on that if we see a shift, which this team is well prepared to capitalize on. Yes, we all listen to the earnings calls from our customers on the domestic side, and I think, we all came into the year a little bit more optimistic on the recovery. It will come, but it’s been pushed to the right. That’s for sure. And, I think, hopefully, the import business will be a precursor to, some better days ahead on the domestic side, but we’re not yet seeing that uplift necessarily as you’ve heard from a lot of our customers, on their earnings calls.

Scott Group:

Hey, thanks. Good afternoon, guys. So, Sean, the comments about meaningful margin improvement in the back half, any just directional color what that means? And, I know every quarter you give us some thoughts on sort of the sequential puts and takes for margins and earnings, two good quarters in a row with cost ex fuel coming down? Do you think that continues, stuff like that? Thank you.

Operator:

Your next question comes from the line of Jonathan Chappell of Evercore ISI. Your line is open.

Kevin Boone:

Yeah. I’ll let Mike, follow-up. But from a capacity standpoint, we’re working really close, with our team. I think we’re well-positioned to adjust as we have in the past, when these events happen, temporarily. But, like you mentioned, there’s opportunities probably for some longer haul, business should, we see a disruption on the East Coast and some more volumes that would traditionally move east local. Think about the New York markets and maybe some of the southeastern markets that are locally trucked, that would have to move through the West Coast. That that’s an opportunity for all of us to participate, and we’ll be more than ready to do that. But I’ll hand it over to, Mike to talk about capacity.

Operator:

Your next question comes from the line of Chris Wetherbee of Wells Fargo. Your line is open.

Sean Pelkey:

Chris, it’s Sean. I’ll take the restatement first. So, what I mentioned was a $16 million impact in the prior year split between labor and PS&O. Even though there was no restatement for Q2, obviously, because we’re reporting Q2 results of this year for the first time, that impact was similar in the second quarter, and that’s pretty similar to what we expect on a go-forward basis as well. I’ll turn it over to Kevin for pricing.

Operator:

Your next question comes from the line of Tom Wadewitz of UBS. Your line is open.

Mike Cory:

Sure. Thanks for the question, Tom. Look, we have really made a lot of changes here the last six months, most focused on two things. Well, safety first, as though you can’t tell by our metrics on that. But service, whatever we do in terms of whether it’s we make changes to the operating plan, which in some cases has caused trains not to run on time right down to making sure that the assets that we have out there are being pushed. So, locomotives being stored. We’re doing things right now just to test the railway. And, yes, there’s been some drop in some of the metrics, and, yes, they will improve, as we go forward. But, we have opportunities here, first of all, with a very young group of people to learn how to do this properly, and second, for them to partake in it. So, the changes we’re making, yes, they’re having some effect, nothing material, but some effect on some of our lagging indicators. But, what we’re able to do from a cost perspective and still maintain that service is powerful. And, really by focusing on the connectivity between our fields people and their customers, we’re starting to see the more benefits come out. So, yes, we’ll get our metrics back, but at the same time, we’re not running for a metric. We’re running for service. We’re running for a return, and that’s very important. And so, Tom, for me just learning as I go. I’ve been here 10 months now. I’m not overly concerned. Trust me. It’s a focus, as we go through to improve those metrics. And, prior to this storm we had going, we had a pretty good, pretty good July, on those regards. So, metrics will improve, but focus is on cost and service and safety. And, we’ll figure out the right metrics from there.

Ben Nolan:

Yes. I appreciate it. Thank you, guys. I was going to ask a little bit on the chemical side. That has been working pretty well for you guys. It was curious how you would, do you think it’s just fundamentally there’s just a lot more chemicals to be moved, or is this share gains maybe relative to the trucking side of the business or maybe competitors? And, any framing that you can, talk to on the chemical side would be helpful.

Operator:

Your next question comes from the line of Eric Morgan of Barclays. Your line is open.

Kevin Boone:

Yes. I mean, Joe mentioned at Investor Day in November, and we’re certainly going to put probably more of a bow on the story and, kind of open up, a lot more of the details and share with all of you. But, we are seeing that acceleration, this year, year-over-year, in that range that I mentioned. And, when you look at full run rate and some of these projects can take a year or two to really get up to full run rate volume, But, the pickup in terms of things that we’re seeing put in place this year has certainly accelerated this year, and we anticipate that’ll accelerate next year and then the following year. So, that means, several years of growth as those projects really come up to full rate production. On average, a lot of these projects are $2 million. So, it’s a lot of small things that add up to a fairly large number. We do have the larger projects in there as well, but it’s a very diverse, set of projects, opportunities that are that are coming online across a number of our merchandise network segments. So it’s exciting. We still see the momentum out there. I think, it’s going to be fun to talk about it in November and, and share more of those details with you.

Ken Hoexter:

Hey, great. Good afternoon. Sean, can you just, I guess, can you clarify when you say, meaningful improvement, in answering Scott’s question, but you didn’t say if you were going to see sequential improvement or decline. I just want to clarify if you were suggesting you’re going to see improvement sequentially. And then when you mentioned labor flattish, do you still see opportunities to cut costs there, or can we see progress on that, or is this kind of the refined level you expect to run at? Thanks.

Operator:

Your next question comes from the line of Daniel Imbro of Stephens. Your line is open.

Sean Pelkey:

Yes. I listened to the same call as you did. I think they’re obviously a lot closer to it, on a day to day basis, than we are. I think the environment’s persisted a lot longer, than what we expected than everyone expected, quite frankly, and we’re just, setting ourselves up for the recovery, and I think we’re well positioned there. But I don’t have any additional anecdotes to add to what we’ve all heard. I’m hopeful that, we’re further along in this cycle than not. And I think we’re set up, with what Mike mentioned on our intermodal ops side from a capacity standpoint, we’re better positioned than we ever have to bring on the volume.

Jason Seidl:

Thank you, operator. Joe, Kevin, Mike, Sean, good afternoon, gentlemen. Wanted to dig a little bit deeper, Joe, into a comment you made. You talked about it now. There appears to be, I guess, a little bit more uncertainty a quarter ago. Was that comment more related to what we’ve seen sort of over the past two weeks with, PMI being negative again and the job number that we saw last week? Or was this from what your customers might be telling you? And if it is from the customers, maybe you could elaborate or just give us more color on that.

Operator:

Your next question comes from the line of Stephanie Moore of Jefferies. Your line is open.

Joseph R. Hinrichs:

Not really any, slowdown. And I think we presented a slide last time that we do have a very, very diverse portfolio and there was a lot of focus on the EV market and certainly we’ve seen some of that be pushed to the right, but our portfolio is much, much larger than, just the EV segment. So other areas, continue to stay on trend, on pace, and we’ll, obviously have a ramp up period over time. But we have we have pretty clear line of sight. A lot of construction is already underway. So, a lot of some capital out there with these projects needing to be finished. So, we feel pretty good that despite maybe, even if the macro scene is a little bit weaker in the back half that these projects, in large part will continue on and be a positive factor for us in the back half and into the next year and the following year.

Walter Spracklin:

Yes, thanks very much. Good afternoon, everyone. I was wondering, I don’t know if this is a question more for Mike or for Sean with regard to long-term OR where your OR could go. I know that you and a number of your peers were able to achieve a 55 OR at least on a quarterly basis, in the past. But now with cost inflation, new work rules and I’m talking really just your rail operation if we would exclude your trucking from this conversation. If we look at the cost inflation, new work rules and the other factors that have come to play here in the current environment, do you still see your efforts and Mike you mentioned you’re making great efforts on cost efficiency, on service and on safety. Can they translate into 55 again? Or is 60 the new 55 or something else? And maybe if you talk a little bit conceptually about not so much the target itself, but if these are real impediments to you achieving the run rates you’ve had in the past.

Sean Pelkey:

No. Thanks, Mike. I agree. I mean, margin obviously is an indicator of financial health and in our industry, it helps us to understand how efficient we’re running the railroad. Clearly, as we’re able to grow the business as well and do that at strong incrementals that’s going to help the margin, but the margin really isn’t the destination. The goal is to grow earnings, to grow economic profit, be disciplined around the way that we spend capital and look for opportunities to invest in things that have a high return, whether those are growth oriented projects or projects that help us to drive further efficiency gains, technology investments, capacity investments across the railroad. That’s our primary focus. We think that’s the quickest, surest way, to grow the value of the company. And in terms of things changing versus previously, I think you make a good point in terms of the impact of inflation on the rail operating ratio, operating margin equation. That being said, I don’t see any reason why we can’t continue to see improvement in that metric as we expect across many other metrics, in our financial performance over time if the formula, the equation that we have going for us right now is able to continue, and we’ve got confidence that we’ll be able to do that.

Operator:

Your next question comes from the line of David Vernon of Sanford Bernstein. Your line is open.

Sean Pelkey:

Yes. No. Good question, David. If you look at the first half, I mean, I get to about $300 million of kind of unique year-over-year challenges between the Baltimore collapse, the lower export coal pricing, decline in other revenue, net fuel, that’s $300 million. Second half is not going to be anywhere near that significant. We will have coal pricing headwinds, but the rest is pretty clean. And then the other thing that’s different, in the first half of the year, we were still cycling, some of the labor additions that that came on over the course of last year. So, our labor productivity was negative in the first half of the year. That’s going to turn positive in the second half of the year, on our volume growth and, keeping headcount essentially flat from where we are right now. So, those are the two big factors there.

Ravi Shanker:

Thanks, everyone. So maybe also piggybacking on that operating leverage question. I mean, just to kind of summarize the call a little bit, and it seems like a little bit of a mixed message from you guys on cycle sentiment. On the one hand, you did say that the it appears the kind of inflection is kind of pushed out a little bit and the economy is a little more fragile. On the other hand, you are guiding to some pretty strong operating leverage in the back half of the year. Just trying to get a sense of how much visibility you have on that operating leverage because general, in comments you indicated that’s driven a lot by volume and price. And in a fragile market that maybe a little hard to come by, especially given some of the puts and takes in the end market there. Just trying to get a sense of how much confidence and visibility you have on that operating leverage in the back half.

Operator:

And your last question comes from the line of Jeff Kauffman of Vertical Research. Your line is open.

Mike Cory:

Thanks, Jeff. Just to clarify, what I what we’re speaking about before was an intermodal shift. So, I was speaking specifically about our intermodal trains and the capacity that we have in that network. But everything you talked about, the answer is, yes. Do we want to run with fewer locomotives? Will there be technology that enhances what it is we’re doing? Absolutely. The biggest thing we’re focused on right now is outside of the day to day sweeping the corners, making sure people understand what the standards are and how to go about, achieving them. We’re looking at infrastructure that we have. And so there there’s some opportunities to reduce out of route miles, reduce a lot of handlings, essentially create mass where we don’t have it today. This railroad has customers everywhere versus it being linear where you can accumulate all your traffic, you can switch it out, and it runs. So, we’re going to try. We are looking at our network to see areas where we can bring and create mass in certain places and eliminate all those touches that we do. We do a lot of work online and road with trains block swapping because we just don’t have the mass at the origin terminal. So, there’s opportunities there and at our in our Investor Day or when we get together, we’ll lay out far more than just me talking about it. We’ll show you what we’re talking about there.

Operator:

Good afternoon, everyone. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matthew Korn, Head of Investor Relations. You may begin your conference.

Joe Hinrichs:

All right. Thank you, Matthew. Hello, everyone. Thank you for joining our first quarter call. CSX had a solid start to 2024 that was in line with our expectations. I've learned that when it comes to routing, it never really is an easy quarter. And this year has already brought us a number of challenges. Thankfully, we have a great ONE CSX team of over 23,000 people. And as you've seen in our weekly volume performance, our railroad has kept moving forward after the early periods of severe weather in January. The latest incident, of course, has been the tragic Francis Scott Key Bridge collapse. CSX had a deep historical relationship with Baltimore and we have important operations there, particularly with our export coal business. We're committed to doing our part to help the city recover. We are happy to see the progress already being made for reopening the port. Later in the call, Mike Cory and Kevin Boone will tell you more about what we are doing now to mitigate the impact of this event for our customers. All that said, we are very pleased with the momentum that we built over the quarter and are seeing in the business today. We knew we had the opportunity to grow our profitability compared to the fourth quarter and we did just that. Our goal was to maintain our strong customer service levels while looking for ways to run the network more efficiently and we have done so. We have more work to do and we are confident in our railroad and are excited about the rest of the year. Now let's start with Slide 1 where we highlight some of the key results from our first quarter. Total volume grew by a solid 3% with strong support from our international -- our intermodal business franchise, which grew at 7% compared to last year. Our operating margin reached 36.8%, which represents a 90 basis point improvement compared to the fourth quarter. Revenue of just under $3.7 billion was about 1% lower than a year ago and flat compared to last quarter. Operating income was 8% lower than last year, but up 3% sequentially. While our earnings per share declined by 4% versus last year, EPS grew by 2% compared to the previous quarter. Now altogether, this was a good first quarter that reflected our solid progress. The entire ONE CSX team knows that there's much more that we can achieve given all the opportunities ahead and the great people we have across the entire railroad. But before we begin, I'd like to take a moment to recognize and remember Jim Foote, who passed away earlier this week. Jim was our President and CEO from late December, 2017, until I arrived in September of 2022. He guided this company through some very challenging and transformative times in our history, including rebuilding the network after the dramatic changes in 2017 and dealing with the COVID pandemic. I had several impactful and insightful conversations with Jim while I was being recruited to come to CSX. And I thank Jim for his support with our Board of Directors to bring an outsider in as CEO of CSX. We thank Jim for all his contributions to CSX and the railroad industry overall throughout his 40-plus year career. And our thoughts and prayers go out to his family and friends. Now let me turn the call over to Mike Cory who has brought a tremendous amount of new energy and new ideas to CSX to discuss our operational performance.

Kevin Boone:

All right, thank you, Mike, and good afternoon everyone. The team continues to build momentum with our customers, targeting modal share conversion and quickly bringing solutions to the market that target profitable growth. Our ability to react quickly and provide solutions for our customers was highlighted by our efforts in Baltimore, where we rapidly stood up an alternative solution to meet the intermodal needs of the community. Despite a continuing weak truck market, the team has done a great job focusing on developing new opportunities, including truck to rail conversion, industrial development, working closer with our rail partners to identify joint opportunities and accelerating strategic discussions that allow our customers to benefit from our best-in-class service. Communication and collaboration between sales and marketing and operations is a key differentiator for CSX. Our recent voice of the customer survey results for the first quarter shows the highest service scores since we began the survey, which highlights the positive trajectory that we are on. Let's turn to Slide 7 to look at our merchandise performance. Our merchandise revenues were up 1% compared to last year with flat volumes and a 1% increase in RPU as contract renewals and slightly favorable mix more than offset the effect of lower fuel surcharge. Across the business lines, automotive accelerated nicely after a slow start at several manufacturing plants. Chemicals, our largest market continues to gain momentum in plastics, food, and NGLs. Forest product volumes were flat overall but saw encouraging signs in pull board and building products as the construction season appears to be off to a stronger start. We told you that minerals face a tough comparison for aggregates, which were unseasonably strong in the first quarter of 2023. But total demand is very strong against a healthy backlog of large construction projects with infrastructure spending expected to accelerate. Metals volumes were a bit weaker year-over-year with the weather affecting flows in certain scrap markets. Finished steel has also been a bit sluggish, but we see opportunity for sequential improvement in the back half of the year. Fertilizer volumes continue to be unimpacted by phosphate production issues here in Florida, but an early application season in certain markets supported demand for longer-haul, higher-yield shipments of potash and other fertilizers, which lifted our RPU. Finally, our ag and food business remains relatively soft, constrained by a strong global soybean supplies, which limit demand for US exports and still high availability of local crops in many of our customer regions. Underlying demand across grains, feed, and food products is solid and we're optimistic challenging conditions will normalize into the back half of the year. Turning to Slide 8. For the first quarter, coal revenue was flat year-over-year as 2% volume growth was offset by a 2% decline in all-in RPU, largely due to fuel surcharge. Our benchmark-based export yields were slightly lower compared to last year, but we also got some benefit from favorable mix on the domestic side. As expected, shipments reflected the strength in export markets with export tonnage up 25% year-over-year. It really is a testament to the great work by the team, including the credible work by operations to meet the increased demand. We also anticipated that the domestic market would be challenged by low natural gas prices and lapping last year's restocking demand. Domestic shipments for the quarter were down 17% against a very tough comparison in the first quarter of 2023. With Baltimore and the effects of the collapse of the Key Bridge, I'm going to stress how important our partnership is with the city. As Joe noted before, we have a long history with Baltimore, going back to the very beginning of our railroad. And the ONE CSX team is working hard to find alternative solutions to help the community and our customers. In terms of the revenue impact to CSX, export coal will see a near-term headwind with both our Curtis Bay facility and the dual-serve console marine terminal that are unable to load vessels. Two days following the incident, Joe and I joined senior leadership from CSX to visit key alternative export facilities. We have already begun to divert a portion of our Baltimore volumes to other outlets. Currently, we estimate that the net revenue impact to CSX from the port closure is between $25 million and $30 million per month, including the benefit of diverting some of these tons. It's still very early in the remediation process, but the Army Corps of Engineers has projected that the full channel depth, which we need for coal vessels to be reopened by the end of May. It's also likely that you see a good amount of congestion immediately after reopening, but there's potential for it to take a few weeks to ramp back up to full run rate. In the meantime, we are studying in communication with our customers, business partners, state, local, and federal authorities. We are working closely with Mike and his team to make sure we are optimizing all available resources to serve our customers as successfully as possible. Turning the intermodal on Slide 9. Revenue increased 1% on 7% volume growth. Lower fuel surcharge and negative mix pulled our RPU lower by 5%. Growth was very strong for our international business as healthy consumer demand and more normalized inventories have supported higher import levels. We saw volumes increase year-over-year with many of our shipping partners as we gained from new contracts, new lanes, and a comparison with last year's weak market conditions. We are very encouraged by the recovery we are seeing and continued positive demand signals as we look over the rest of the year. Our domestic intermodal business also grew over the quarter at a more moderate pace than what we've seen over the last couple of quarters. What's been constant is our service performance, which continues to help us win new business and drive truck conversion even as the weak truck market conditions persist. We're optimistic that truck capacity will normalize in time, even benefit the intermodal market. More importantly, we are confident that we will be prepared when the demand rebounds. Finally, let's turn to Slide 10, where we have an update on our industrial development program. Our project pipeline remains strong with hundreds of companies eager to partner with us to find attractive ways to expand their production capacity on rail surf sites. Something that's often overlooked is how diverse these development projects really are. The chart on left shows the market split. Based on potential carload volume or the approximately 100 facilities that have come online over the last 12 months, these new sites and expansions represent $4.2 billion in total capital investment and have added new capacity in many of our key markets such as chemicals, minerals and forest products. But this is only scratching the surface. The chart on the right shows the market split for the full development pipeline ranging from projects we anticipate starting up later this year to project proposals that will be constructed several years from now. There are two key takeaways from this forward-looking view. First, the total estimated potential carload opportunity measured by expected capacity implies a meaningful acceleration in activity as we look-forward. Scopes can change and timelines can shift, but the setup is very encouraging for meaningful growth contribution over multiple years. Second, the long-term pipeline is also diverse. We are excited about the multiple electric vehicle manufacturing facilities that are scheduled to come online over the next several years. When combined together with related raw material or battery facilities, they represent approximately 12% of the total long-term volume potential. Minerals, metals, chemicals and other projects represent larger contributors. This is a big opportunity for CSX and our industrial development team has been working non-stop to build the partnerships that make all of this possible. We're excited to tell you that there's much more to come. With that, let me turn it off -- let me hand it over to Sean. Thank you.

Joe Hinrichs:

All right. Thank you, Sean. Now, we will conclude our remarks by walking through our guidance for the full year 2024, which has not changed. Led by our customer service, we continue to expect total volume and total revenue growth in the low to mid-single-digit range. We expect our merchandise business to gain momentum through the year as effects from new business wins, truck conversions, and the ramp-up of industrial development projects build on a favorable trends in many of our end markets. We look for steady growth in intermodal, supported by stable consumer demand and more normalized retail inventories, which are driving improved port activity. We continue to work closely with our channel partners, finding creative solutions to gain share even as the truck market remains soft. Global benchmark coal prices have fluctuated but remain high compared to history. And though the situation at the port of Baltimore limits some of the export volume in the near term, we are taking actions to effectively mitigate as much of the impact as we can. Our team at Curtis Bay and across the rest of the coal franchise will be ready to ramp back up as quickly as possible once the channel returns to full operation. On profitability, we made good progress this quarter and grew our operation margins -- operating margin sequentially. And as you saw in our results and heard from the team on this call, we benefited from volume growth, solid pricing gains, and focused efforts to improve efficiency and productivity. Our goal is to consistently grow our margins over time. And while Baltimore and global coal prices are near-term challenges, we feel very good about our ability to deliver strong incremental performance in the second half of this year. There is no change to our CapEx forecast of $2.5 billion. And as you heard from Sean, our balanced opportunistic approach to capital returns remains in place. To conclude, during the quarter, where there were many potential distractions, I am very proud of how the ONE CSX team stuck to our plan, focused on execution, prioritized our customers, and achieved good results. There is much more to come as we make every effort to run safer, faster, and more reliably for our customers so we can deliver profitable growth over the long term. Thanks to all of your interest in the company and, Matthew, we're ready to take questions.

Operator:

Thank you, Matthew. Your first question comes from Justin Long with Stephens. Please go ahead.

Sean Pelkey:

Hey, Justin, happy to take both of those questions. So yeah, in terms of sequential improvement, that's normally what we see from Q1 to Q2. While clearly, the Baltimore impact is going to be felt in the second quarter, we still feel that we should be able to grow earnings sequentially from Q1 to Q2. And what I would say is, that's both top-line as well as being able to do it while containing costs and deliver really strong incremental margins from Q1 to Q2. The headwind clearly is export coal, not just the Baltimore impact, but in terms of RPU, I think pricing has come down. What we're seeing right now in the marketplace is probably something that's going to lead to a mid-to-high single-digit decline in coal RPU from Q1 to Q2. But even with that backdrop, still feel pretty good about our ability to continue this momentum.

John Chappell:

Thank you, and good afternoon. Mike, as you indicated in your slides, you'd probably talk about velocity and dwell a little bit in this call. So obviously, there's been some disruption, whether it was weather in January or Port of Baltimore in the last part of March, but things have kind of filtered into a little bit into April as well. Can you just give us a state of the union on why some of those metrics have maybe moved in the opposite direction as when you first started and kind of how you get them back moving in the right direction as soon as in the next couple of weeks?

Operator:

Your next question comes from Tom Wadewitz with UBS. Please go ahead.

Kevin Boone:

Yeah, Tom. Nothing has changed on the pricing side. We're obviously a tough truck backdrop. That will improve and we'll see a lot of benefits from that I think, as we see the cycle hopefully has bottomed here from what we're seeing. But I -- when you look at-the market, what we do on the pricing side is obviously, we're able to capture that inflation and I don't see anything really changing there. It's always a balance and we manage the portfolio accordingly. And where there's opportunities, obviously to gain more-and-more volume, we work with our customers, but it's a core to what we -- how our growth algorithm works. It's volume and price as we look at it and nothing has changed there. As hopefully cost inflation comes down, then the customers will benefit from that going-forward. But obviously, not the environment that we had last year where inflation was very-high, that's starting to moderate some. Hopefully, the Fed gets a big-picture too and with the rates and things like that, but that's where we are today. Still as planned, I think I was very happy with what the results in the first-quarter, what the team was able to deliver, and we're right on-track.

Brian Ossenbeck:

Hi, afternoon. Thanks for taking the question. So I guess, Sean, I wanted to come back to your comments on headcount. I think you said that it's still relatively flat going into the second quarter, that was the plan. I don't know if that holds for the rest of the year, but it sounded like at least in the near-term, so maybe you can elaborate on that a little bit. And also the comp per employee stepped down sequentially and you expect it to step-down again into 2Q. Can you just explain that trend? And of course, we should probably be thinking that that moves up in 3Q sequentially as you hit the new labor agreement with the 4.5% adjustment. So some additional thoughts on that and how that progresses and headcount overall will be helpful. Thank you.

Operator:

Your next question comes from Scott Group with Wolfe Research. Please go ahead.

Mike Cory:

Thank you, Scott. I'm going to let the expert over here, Sean, talk about margin because as you know, I never talk about margin. But your theories are right, like, we're trying to balance without first of all, safety and the customer without damaging that and we have a long way to go on safety. So these things -- that these things we're looking at are all focused on really on the cost side. So whether if we can shift some of the capital that we're planning to use by being more productive into other areas that we hadn't planned and make some of these yards useful or more useful than they are, I see definite cost benefit. It's things like that. It's not something -- Sean is looking at me, he's going to start talking a bit about the numbers. But really, that is our focus to bring that margin up on the cost side. But I'll turn it over to Scott -- to Sean.

Joe Hinrichs:

This is Joe. Just to add one more comment. So we'll work hard to try and help tell our story a little bit better and differently going forward. But I just want to be clear, our focus on the customer and customer service have not waned at all. And as you heard Kevin mention in his comments, we get surveys from our customers on a regular basis, and we have the best score that we've ever had in the first quarter. So we have to find a way to tell the story that isn't just told by velocity and dwell or even trip plan compliance. That's why we introduced the customer switch data and some other things. For example, our tonnage went up for train. And so if we combine a train, two trains to one, maybe we go from three engines to two engines, on being used in that combination and that higher tonnage train might be a little slower and might tell a little more dwell time, but the customer is okay with it. It helps our efficiency and the customer is still happy. And so -- but that will show up as little more dwell and a little less velocity but better efficiency. And as long as the customer is happy, we're okay. So we check with the customer first and then we work backwards, as opposed to some of the stories you've heard in the past, which was about our internal focus and then tell the customer about it later. That's a very unique and important difference and distinction. But importantly, as you saw quarter-over-quarter, while some of our numbers may look like they degraded, but our efficiency got better and our customer responses and survey responses were the best we ever had. So we're walking that fine line. So we're going to have to find a way to help you guys see that, and at the same time, getting more efficient. And working with our employees as ONE CSX team to teach them how to do that and work together to do that in a positive way. And that's the balance we're trying to do, and I appreciate Mike and his entire operations team working with Kevin and the sales and marketing team to bring that to life, and it's a collaborative effort. And it's worked because it's teaching. It's also listening, is finding creative solutions and not being focused on one metric. And at the end of the day, we can deliver sequential improvements. And so as long as we deliver sequential improvement to our customers and in our earnings, we can show you how that it leads to growth over time. Thanks.

Brandon Oglenski:

Hey, good afternoon and thanks for taking my question. Kevin, I wonder if we can come back to the industrial development pipeline that you guys have been mentioning, the new graphic in the slide is somewhat helpful. But can you talk about the 100 facilities that have already opened and some examples where that's delivering volume today? And then how you expect that works through the end of '24 and into the beginning of next year?

Operator:

Your next question comes from Ken Hoexter with Bank of America. Please go ahead.

Mike Cory:

Yeah, Ken. That's a good question. I almost -- I thought I explained earlier. I'm not -- I can't give you an answer so much on when do we expect to see the service improve because the service is good. Like, we -- I expect to see over the next few quarters here, yeah, the velocity and dwell will continue to improve versus what they are. But the service level is going to be what the customer needs. And right now, that's what we're fulfilling. But -- so again, we're going to do a lot of different things here to test our facilities, our people that put -- we're trying to put stricter process in place. And that's going to have some effect until we learn to get through it. But I see the metrics improving. I see them now improving. It's just we still have -- we still have the odd thing that's taking place and lots of it's revolved around these engineering gangs that we are full hearted, like our full engineering team plus our operating, our transportation team are meeting as we speak, to continue to find a way to not have such restricted curfews, but we have to do. Other than that, the network is fluid. And I'll let Kevin talk about Baltimore and what we are doing with the shifting to Newport.

Operator:

Your next question comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Kevin Boone:

Look, I think, obviously, the comps on the International side were fairly easy in the first quarter. That's where we saw some pretty dramatic declines last year, as you saw destocking happening almost across the board in a lot of companies out there. So we benefited from that. The team has done an amazing job of identifying new services, some other areas, that identified some profitable growth that we went after, good contract relationships. We're aligned with the right partners, and we benefited from that. So you've seen double-digit growth on our international side, while our domestic was slightly up this past quarter and the domestic market is a lot more truck competitive, as we all know. And if you've been listening the last couple of days, it hasn't been -- the trucking companies have obviously struggled, and I think we're pretty proud of the results we were able to put up in that context. We think there's better days ahead, but certainly a challenging market and the results were good in that context for sure.

Bascome Majors:

Thanks for taking my question. Can you talk a bit about how some of the emerging uncertainty at your Eastern competitor has helped you perhaps capture some volume short term? And maybe longer term, has that uncertainty at another rail impacted the desire or intention of some of your customers to really start to use rail more as an outlet in their supply chains that you've been working for years now with industrial development and other efforts? Thank you.

Operator:

Your next question comes from Jason Seidl with TD Cowen. Please go ahead.

Kevin Boone:

Yeah. Thanks, Jason. Look, there's still a value proposition out there. Was it a little bit tighter than maybe a year ago when truck prices were a lot healthier? Absolutely. And I think the discussion is more about when you look at it, what can add value in the near term. I mean when you have to do nothing and you get price declines in your trucking business, then you're not as compelled to look at the intermodal option as you would be in a more normalized market. And so I think that all probably balances out as we get it through the year. It feels like we're at the bottom, bouncing along here. And as things solidify, I think those conversations accelerate. We've put up domestic growth, and we're pretty proud of that. The product that we're offering, the service that we're offering is compelling in the market even at these lows, and I can only imagine how compelling it’s going to be as the market recovers. So we're pretty excited about it. We're talking about it actively as a group of when the growth comes back, that we're going to be prepared more than anybody else to handle it. So that's exciting for us. When that recovery happens, we're not certain, I think it's fair to say the trucking market is probably a little bit worse than what people anticipated coming into the year, but we were pretty resilient in a very, very challenging market.

Ben Nolan:

Yeah, thanks. I was going to ask a little bit about the Baltimore impact, I appreciate the $25 million to $30 million a month. Just curious if that is predominantly coal or if there are any other impacts on maybe some of the other business lines? And then also in addition to the revenue impact, are there any cost impacts from rerouting to other ports or anything below the revenue line that we should think about?

Mike Cory:

Yeah. And I think Kevin alluded to it, we had a little bit of a rough start-up going over to Newport and that's now smoothed itself out. But really not a lot more cost then. The -- most of the traffic moves through, other than the [point of coal] (ph). So not significant in that sense, no.

Mike Cory:

And just one more point, Ben, I should mention this is. With this issue, we've been able to get a betterment in terms of our maintenance at Curtis Bay. We've been able to go in there and do work that we would have had to do it under load with a lot of volume moving through. So we've fully taken advantage of some pretty major restoration that we were able to accomplish that we're still working on. So that's been a good thing.

Amit Mehrotra:

Great. Thanks for taking the question. Sean, I just wanted to clarify one quick thing. I think in response to the first question, regarding 1Q to 2Q, you said profits up. I don't know if you said margins up. You may have said it, but I didn't catch it. Just want to clarify by that point. And then, Kevin, I just wanted to talk about interchange. So I think before -- unless I’m mistaken, maybe you interchange half your volumes. Any -- is that mostly evenly split between the two West Coast rails or I'm just trying to understand how much do you actually interchange with UP? And what proportion of kind of that interchange -- total interchange is actually represented by the EP? Thank you.

Kevin Boone:

Look, I think we said roughly half of our business touches another railroad. And certainly, when you look at the Western railroads, particularly UP, they are a very large part of that. So they're a very important partner to us. All of our partners are very important. So it's encouraging to hearing a lot of signs to go after more business, and we're working collaboratively to do that. So a lot of opportunities out there that we see.

Walter Spracklin:

Yeah. Thanks very much. Good afternoon, everyone. Sean, when I'm comparing your outlook, and I know your outlook is unchanged from prior. When I look at your -- what -- some of your commentary regarding the moving parts that have occurred in the first quarter and looking into the rest of the year, you did have a little bit of a tougher January. Mike pointed to some operating measures that aren't where we want them to be. You've got a worse coal market, there was a Baltimore outage. Trucking is worse but you maintain your guidance. So I'm just curious as to what -- if those are the puts, what are the takes in terms of what's the offset here to maintain your guidance despite kind of those headwinds that emerged a little bit here so far in 2024?

Operator:

Your next question comes from Stephanie Moore with Jefferies. Please go ahead.

Sean Pelkey:

Thanks, Stephanie. It’s Sean. We're still committed to the share repurchase as well as the dividend. It's certainly a step down in the first quarter of the year, but we -- the stock ran up pretty quickly. And so we try to be opportunistic and gauge the amount of buybacks that we do based on the momentum in the stock. So with the pullback that we've had recently, we're buying a little bit more. Still committed to do a significant amount of share repurchases this year. It will be a little bit less than it was last year, just simply because we came into the year with a little bit less cash on the balance sheet. And last year, we raised a little bit of incremental debt to help juice the system, and that led to some additional buybacks, but we're still very committed to that, and you'll see it go up and down quarter-to-quarter just based on the opportunity that we have in the market.

Ravi Shanker:

Thanks. Good afternoon, everyone. So, a two-parter here on the ports. One just on Baltimore, a follow-up. I think you've said you redirected about 33% of the traffic so far. Does that mean there's going to be like pent-up demand when the channel is kind of normalized in 3Q or late 2Q and beyond? Just wanted to confirm that. And also on the East Coast to West Coast kind of share shift, kind of what innings are we kind of on the normalization there? And are you hearing from your customers ahead of labor talks on the East Coast ports and maybe any preparations there? Thank you.

Operator:

Your next question comes from David Vernon with Bernstein Research. Please go ahead.

Kevin Boone:

I think generally, there's a lot of geopolitical risk out there. There's a lot of movement in terms of how companies post the pandemic are thinking about their supply chains. And we talked about this before, but a supply -- their supply chains are being viewed as competitive advantages and being closer to your end consumer, which we have the most valuable consumers in our network in the world, it's becoming a priority, and we're seeing those investments take place to really happen. So it's broad based, as I mentioned, a lot of activity, but I think that's the major draw. I think they saw through the pandemic, a lot of disruption with how much it costs to get things delivered to the end consumers. So now it provides an opportunity where we can maybe get the inbound and the outbound, which is pretty exciting for us. So it will happen over time. There's already a lot of capital on the ground, a lot of the capital that's already been spent. So we'll participate in that. But it's a really shift from what we've seen probably over the last three or four decades, in terms of activity. And rather than the industrial base decaying within our network, we see some growth in that industrial base, which should benefit us over time.

Jeff Kauffman:

Thank you very much. And our thoughts are with the Foote family as well, just a terrific guy. I want to go back to Bascome's question on any nervousness with customers using other rails, given all the media and the hype, maybe not so much in terms of customer wins, but at this point, what types of questions or what types of concerns are being raised to you? And is there an anxiety among the customer base?

Joe Hinrichs:

And Joe, Kevin and I have -- sorry, Kevin and I have spent, I don't know how many customers we've met with in the last couple of months, but we've had an FDA and a number of other events. I think we've touched almost every major customer we have and directly personally. And we've seen a lot of -- gotten a lot of feedback on the consistency, reliability and the continuity of our messaging and also our actions. And that's what customers want, having been on for decades myself just want to have reliability and they want constancy of purpose. They want to know what you stand for is you're going to deliver it. And that's what we're starting to show, and as Kevin said, our customer is starting to trust us again, which is the foundation for us to be able to grow with them as from the trust us, and that's the trust we want to keep delivering and building and gaining because of the constancy of what we're standing for, which is, of course, -- we're going to engage our employees with ONE CSX to serve our customers better and do that with better safety. The efficiency will come from the actions that we teach and what we do. And so we're going to stay on that course and it's delivering for us, and you saw it in the first quarter, and you'll see it again next quarter.

Operator:

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to your host, Matt Korn, Head of Investor Relations. Matt, you may begin.

Joe Hinrichs :

Alright, thank you, Matthew, and hello everyone. Thank you for joining our conference call today. As you will hear from our leadership team today, we are very happy with the momentum we carried in the start of the New Year. Of course, Mother Nature gave us a few challenges over the last couple of weeks, but we are proud of the work our ONE CSX team has done to set us up for success this year. Our railroad is performing well and Mike Cory and the operations team are already bringing new ideas that are helping us run even better, safer and more efficiently. Our customers are happy with the consistent service that our dedicated employees are delivering and Kevin Boone will discuss how this is translating into profitable business opportunities. Sean Pelkey will go over our financial position, which remains very strong as we continue to deliver healthy volumes, favorable pricing, strong operating margins, and high levels of free cash flow. Before we talk about the details of the past quarter and our expectations for 2024, it is important to take a step back to appreciate all that our ONE CSX team accomplished in 2023. Everyone on this call knows it's been a very active period for our entire industry. Recall that it was just over a year ago that Congress took action to prevent a major rail strike. Soon afterwards, highly visible events last winter led to important public debates about railroad safety. And through the year, Class I railroads have completed major mergers and made significant leadership changes. Meanwhile, our customers have had to manage through higher interest rates and inflation on the one hand, and wars and supply chain disruptions on the other. Through all of this, the aim of our ONE CSX team has been to keep moving forward on our key goal of delivering sustainable, profitable growth that benefits to all our key stakeholders, our customers, our employees, our shareholders and the communities we live in and serve. For example, CSX was the first Class I railroad to reach basically agreements with our union partners, and we were the first railroad to significantly change our attendance policies based on employee feedback. We were also the first U.S. Class I railroad to be released and additional service metric reporting by the STB back in May, based on our improvements and service to our customers. Now here on slide five, we have listed several key achievements from this past year, and helped us take important steps forward. First and foremost, our focus on safety has driven strong results over the year, especially in the fourth quarter, enabling us to report much improved accident and injury rates compared to 2020. Our service metrics that have consistently led the industry. And today CSX remains ahead of our peers. Importantly, this is improving our customers’ experience, which puts us in a great position to gain their trust and gain share. You've heard me reiterate this all year long, our team delivered positive volume growth in merchandise that beat U.S. industrial production, improved efficiency helped us grow coal volumes, and our intermodal business gained traction led by our service and market initiatives. Our commercial and operating teams are more closely aligned than ever. Our customers know that when we offer them a solution, we have the commitment and the expertise to deliver it. Finally, we have seen our efforts to renew the culture here the railroad start to really take shape. Through our site visits family days, and our regular surveys and town halls, we see the increased pride and energy that our employees are feeling through ONE CSX. And this is great progress. And we are proud of what we've accomplished this past year. None of these efforts are done or complete as this is a journey. There's so much more that we can accomplish as we work together as ONE CSX team. On Slide 6, we highlight some of the key results from our fourth quarter. Total volume grew by 1%, reaching 1.56 million units in the quarter. Much of this growth was driven by our strong merchandise franchise, which gained 3% year-over-year. Our total revenue decreased by roughly 1%, 3.68 billion as the effects of higher volumes and favorable pricing were offset by a decrease in other revenue and lower fuel surcharge due to lower diesel prices, as compared to last year. We earned $0.45 per share, compared to 49% -- $0.49 per share a year ago. With that. I'll now turn the call over to Mike Cory to go over the details of our operations.

Kevin Boone :

Thank you, Mike. It really has been great to see how well our teams have been working together and the positive momentum we are building with our customers, as they recognize CSX’s focused on service. The teamwork is allowing us to build on new opportunities and drive attractive and profitable growth across all of our end markets. Business conditions in 2023 were challenging for many of our customers, with some of our key markets experiencing volatility driven by a number of factors, including inventory destocking. On the positive side, we saw many of these markets show improvement in the fourth quarter, which combined with our industry-leading service provides optimism that the team can deliver strong revenue growth. Turning to Slide 12, look at our merchandise performance. As you can see, our revenues were up 5% on both a quarterly and annual basis. Even with the effects of reduced fuel surcharge. Volume increased by a solid 3% for the quarter, and 2% for the full year -- excuse me, outpacing domestic industrial production that's been effectively flat. And we've delivered pricing results that reflect the higher inflationary backdrop that we've all experienced. Looking at the details of the quarter, automotive performed well, even with a temporary disruption caused by the UAW strike, as total volumes held up and we continue to see leverage, and we continue to leverage service to gain new business. Chemicals was challenged over most of the year, but delivered positive growth in the fourth quarter driven by shipments in plastics, sand and waste. For fertilizers, strong domestic demand and higher CSX shipments of potash exports supported volumes. Short haul phosphate shipments remains constrained by supply issues, which weighs on volumes but provides a tailwind for yields. Metals has continued to be an area where our service provided growth opportunities. And in minerals, infrastructure related demand continue to be very healthy over the quarter, with new cement production supporting volumes. For forest products volumes was modestly lower year over year, but increased sequentially, as cardboard demand has started to show signs of recovery. While the ramp up in ag and food over the fourth quarter was challenged, with southeastern feed buyers remaining well supplied from local crops, combined with slower ramp up in exports. Now, as we head into 2024 we are encouraged with the momentum we built across the business and we see many opportunities across the end markets we serve. Our Service continues to differentiate CSX in the marketplace, and we are excited about the opportunities this offers us to work with customers to collectively grow our businesses together. Turning to Slide 13. Coal revenue decreased 1% for the fourth quarter as we lapped very strong export pricing from a year ago. Volumes remained positive, growing by 3% for the quarter, and 8% for the year. Our coal business continues to be strong, with service levels accelerating in the fourth quarter, and global export prices supporting U.S. production. At the end of the last quarter, we indicated that export demand remained strong that lower natural gas prices and reduced restocking demand would likely weigh on domestic shipments. And that's exactly what happened in the fourth quarter, with export tonnage up a full 27% while domestic tonnage declined by 13%. Coal RPU of just over 3,200 per ton was up 5% sequentially in line with our expectations. For the New Year, we are optimistic, supported by continued strength and export demand, as global benchmarks for both met and thermal we currently remain at half healthy levels. We also see incremental production growth on our network in West Virginia, which will primarily be focused on the export market. Domestic demand in 2023 was supported by months of aggressive restocking at utilities and a very hot summer. With stockpiles at more normal levels demand upside will largely be dependent on weather conditions in 2024. That said, total electricity demand growth remains substantial, especially in the Southeast, driven by new industrial capacity to data centers, achieving EV charging stations. Turning to Slide 14. Fourth quarter intermodal revenue decreased 4% on flat volumes. For the full year, revenue decreased 11% on volumes that were down 7%. Lower fuel surcharge drove the largest impact to yields. Our domestic intermodal business continued to perform well, with volume increasing sequentially and growing in the mid-single digits on a year-over-year basis. We saw growth with our key partners that continue to experience industry-leading service performance, which was recently highlighted in JOCs customer satisfaction results. Our ability to deliver domestic growth was an extraordinary team effort, especially given the significant challenges facing the trucking market. In International, volumes were lower compared to last year, but we were encouraged to see improvement each month with December actually showing modest year-over-year growth as the positive effects of more normalized retailer inventories gain traction. Our team has continued to work hard to maximize our opportunities, which showed up in the growth as we work to build new partnerships, create new service offerings and leverage higher activity at the inland ports that we serve. Positive market trends are taking shape as we head into 2024, and we expect the combination of a more supportive market, new conversion opportunities and service offerings to drive year-over-year growth in both the domestic and the international business. We continue to monitor the evolving situations at both the Panama Canal and the Red Sea. To date, we have not been significantly affected by any changes in our customer behavior but we stand at the ready with the capacity and capabilities to adapt as needed. Finally, as we turn the page to 2024, I'm excited about the opportunities ahead. The team is accelerating our efforts in many areas of our business to work hand-in-hand with our customers to identify areas for growth. From industrial development to identifying market-specific operating metrics that enhance the customer experience. Team has been working closely with our rail partners to unlock growth. These are just a few of the focus areas for the team. Now I'll hand it over to Sean to review the financial review.

Joe Hinrichs :

All right. Thank you, Sean. Now we will conclude with our initial thoughts on our expectations for the full year 2024. As of today, and based on our visibility with our customers and our expectations for the CSX specific initiatives that we are putting in place, we anticipate growth in total volume and total revenue in the low to mid-single digit range. We see encouraging momentum across our merchandise business, but we are benefiting from service-led gains in market share and wallet share and new industrial development activity. We expect growth in our intermodal business as a prolonged destocking cycle finally winds down and our strategic initiatives continue to drive volume, and Export coal demand continues to be very strong with CSX gaining from the ramp-up of a new mine on our network. By growing volumes and utilizing our existing capacity, we expect our profitability to benefit from a favorable combination of solid pricing better operational efficiency and a moderate easing in cost inflation. Kevin's team continues to do a great job making sure that we are getting paid for the service we provide. And as Mike discussed, we see all kinds of new opportunities run this network better, safer, faster and more efficiently. We expect an increase in our capital spending to approximately $2.5 billion this year as we invest in safety infrastructure, locomotive rebuilds, upgrades to our portion of the New Alabama Interchange with CBKC and other specific high-return investments, including technology investments. Finally, as before, there is no change to our balanced opportunistic approach to capital returns, using our excess cash to fund share repurchases and dividends to benefit our shareholders. In closing, I am very proud of what our entire team accomplished this past year. To our ONE CSX team, I want to thank all of you across all of our facilities in every state and province that we're operating in, through your hard work and for demonstrating that our ONE CSX culture can be something real and impactful. We're in a great position we had in 2024 and with your help, we can make it even better year than the strong one we just had. For everyone on this call, thank you for all your interest in and support of CSX. Matthew, we're now ready to take questions.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of John Chappell from Evercore ISI. Please go ahead. Your line is open.

Sean Pelkey :

Thanks, Jonathan. That's a bit of a loaded question, a lot in there. Well, I'll do my best. I think when I step back our target is to always expand margins, and we can do that by growing the business profitably, operating safely and running an efficient railroad. When I think about 2024 and sort of how that year progresses, we built some momentum coming from Q3 into Q4. We grew volumes. We grew operating income. That's not always the case. Our hope is to continue that momentum going into the first quarter, whether or not withstanding here. And then build that momentum into the second quarter as well. We've got some headwinds year-over-year that we can talk about in the first quarter. They began to ease in the second quarter. And then by the time we get to the second half of the year, the comps are a little bit easier, and that's where I think you'll really see some very strong incremental margins.

Operator:

Your next question comes from the line of Bascome Majors from Susquehanna. Please go ahead. Your line is open.

Joe Hinrichs :

Yeah. Thanks, Bas. And I think you heard a little bit of that in, on the commentary from the team here. We now see our business has stabilized. We've reached a threshold on customer service that has been recognized in the industry, and now you're seeing the opportunity for us to take advantage of that stability to get more efficient. We're now at the manpower levels that we were targeting. There's always going to be some needs here or there. But generally speaking, we're the manpower levels we were targeting. So we head into 2024 with an opportunity to be in a much more stable setting the momentum we're building on culture and how people are working together. Mike coming in and his perspective and working closely with Kevin and his team, I feel really good about the opportunity going forward now is for us to leverage the strength we have in our operating model and the people we have to get more efficient. Obviously, we want to see more safety improvement this year as we saw in the fourth quarter of last year and building momentum there, and then take advantage of the opportunity to grow with our customers. We now have over a year of providing stable, persistent, reliable service that our customers are recognizing us for. And we have the opportunity now to talk to each one of them about, okay, what can we do together to grow and how can we work together? The journey on efficiency, safety, culture never ends, and we're going to keep working together. But I will tell you, we come into 2024, our network was in good shape, very good shape. Our manpower levels are in good shape. The team is working better together than I’ve seen it in the time I’ve been here. And so that gives us confidence that we can build on the momentum we’ve established over the last year.

Brian Ossenbeck :

Hey, good afternoon. Thanks for taking the question. Maybe just a quick follow-up for Sean first. Can you just give us the commentary about the comp per employee stepping down into the first quarter after the increase in 4Q? And then maybe for Mike, can you just give us a sense in terms of what you're seeing? I know it's still little bit early, but a little bit further down the path over the last call, it sounds like fuel efficiency is an area for some big improvement that you're targeting. Maybe some more network in taking out some of the locomotives as the fluidity continues to improve. So what are you seeing there and maybe some rough order of magnitude would be helpful? Thank you.

Operator:

Your next question --

Operator:

Your next question comes from the line of Justin Long from Stephens. Please go ahead. Your line is open.

Kevin Boone :

Hey, Justin, this is Kevin. I think you hit on it right there on the coal RPU. Obviously, very healthy market right now, how much you embed that going forward? We're optimistic, but we know this market can move around quite a bit. And so maybe a little bit of conservative outlook as we move through the year. Hopefully, there's some upside to that, but that's largely impacting it, as you mentioned, from an RPU perspective. The other thing that I would highlight is we do expect the intermodal market to bounce back here, and that's a lower RPU business as well, but that will be contributory to our growth this year from a volume and revenue perspective. So lower ARPU overall. So that will mix it down a bit. But those are the two large factors that you just highlighted and you know about.

Scott Group :

Hey, thanks, afternoon. So I want to just dig into the cost side a little bit. So if I just look, I understand some noise with vacations and paid sick but cost ex fuel up about 3% to 4% from Q3 with volume up less than 1%. So it's just, we've seen a lot of cost creep that continued in Q4. I guess, ultimately, I'm trying to figure out where do we go from here? Can we start to see overall cost levels stabilize? Do they still increase, but increase just at a slower pace? Is there any chance they could start to come down a little bit? I don't know. I'm just struggling with how to think about the cost side. So any help there?

Operator:

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead. Your line is open.

Sean Pelkey :

Yeah. So just on the first part of the question, Tom, I'll answer that. On the other revenue piece, we're, I would go ahead and model something like $130 million a quarter, which is kind of what we've been running at the second half of this year. Obviously, you do the math on that, it will be a big headwind in Q1 about, call it, $50 million plus. That's why the comps are tougher in Q1 and then a little less in Q2 before we get to the normalized rate. And then on fuel, don't forget, we had a pretty favorable lag impact in the first half of last year to the tune of almost $70 million across the first and second quarter. So prices have come down a little bit. We are expecting somewhat favorable lag in Q1 of this year, but it's still be a year-over-year headwind. So those are two reasons why we're thinking about more sequential momentum in the first quarter as opposed to being able to deliver growth until we get to the second half of the year.

Operator:

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead. Your line is open.

Mike Cory :

Hey, Brandon, I hope you're well. Look, I'm not going to say at this stage that we can add incremental volume without headcount. It depends on what it is and where it's at. But I'm very comfortable with the results we had in a run rate of more train size. And that obviously reduces the impact on the headcount. We've got areas that we just haven't got to in my time yet. And I think the -- and this isn't just about trade and size, but we really, we have a very customer-intensive network. And so we have a lot of yards and locals and first of all, we're looking to button down and make the service reliable. And with the head count we have right now, we see that we're able to do it. So that leads us to know that we can do better. And so I see the opportunities really in the touches of the cars that we do today. So I see further incremental improvement. I see the ability with the capacity we're creating with the locomotives that we've got added to the storage count to the capacity we created online by having less movements. I see us being able to handle incremental volume with what we have in many cases. But again, there are those key areas we want to make sure that we have the right head count for.

Ken Hoexter :

Great, good afternoon. So just, I guess, thinking about the performance there, either Mike or Joe, it looked like your on-time origination is down at 71% on-time arrivals at 69%. What is still missing from the operations to get that efficiency improving? Have you changed the categories at all to see those sliding since the beginning of the year? Maybe just what are your thoughts on how that gets increased efficiency to get those additional operating leverage savings?

Operator:

Your next question comes from the line of Chris Wetherbee from Citi. Please go ahead. Your line is open.

Sean Pelkey :

Yeah. I mean, Chris, one thing to just think about is we added head count through the year in 2023, right? So if we just held everything flat to where we ended the year last year, would be up 2% year-over-year with a little bit more of that year-over-year growth in the first half than in the second half. I think our view right now is that, by and large, with a couple of exceptions, we should be able to hold head count flat and absorb the new growth that's coming on in the network. And so we'll be able to do that. First quarter, it won't look like tremendous employee efficiency just because we added through the year last year, we get into the second half of the year. I think that's where you're going to see the labor productivity show up.

Operator:

Your next question comes from the line of Amit Mahrotra from Deutsche Bank. Please go ahead. Your line is open.

Sean Pelkey :

Amit, on your Q1 margin question, I think I'll just sort of stick to what I said before in terms of building momentum from Q4 to Q1. That's our goal. It's to deliver if we can, operating income growth sequentially from Q4 to Q1. The margins will be what they are based on what, where fuel prices settle. But can we grow margins as well in Q1. Sure. I think that's within the realm of possibility. Again, whether or notwithstanding, we had a rough couple of weeks we're coming out of that, things are certainly looking better across the network as we speak. So you'll see the weekly volumes and see how that catches up from there. In terms of your comment on PS&O, I think it's a good reminder for everybody to go back and understand we added quality carriers a couple of years ago, a significant portion of the expenses within quality shows up in the PS&O line. And that is quite volume variable. And so, as we see increases or decreases in the trucking revenue line, that's going to impact PS&O expense as well. We also added PanAm. There are PS&Operator expenses associated with the revenue that we added across that part of the network as well. And then PS&Operator can also be somewhat volume driven, particularly on the intermodal side, the terminal related expenses show up there on that line. So what I said was going from Operator4 to Operator1 on PS&Operator like we normally do, we would expect a little bit of a sequential increase in those costs and have no doubt, we are certainly focused on that line item amongst others as an area of opportunity to continue to drive cost savings.

Allison Poliniak:

Hi, good evening. I just want to go back to the commentary on domestic intermodal specifically around truck conversion. It does seem like we're still really early stages. I would love to get your perspective on what can drive that acceleration in some of those conversions? Is it your reliability improving further? Is it better truck capacity? Just anything, any comments there on what could drive that acceleration of the space at this point?

Operator:

Your next question comes from the line of David Vernon from Bernstein. Please go ahead. Your line is open.

Sean Pelkey :

Yeah, David, I'll start. So on your question there, Yeah. So deferred tax, $380 million, which was essentially a benefit to 2023. We will make that payment in the first half of 2024. And then on the CapEx, basically going from 2.3 to 2.5 million, so that's about a $200 million increase on that side.

Operator:

[Operator Instructions] Your question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Sean Pelkey :

Yeah, Ravi. So on the operating leverage point, I would say that the leverage is there underlying the business, right? We've had some discrete headwinds that I mentioned in the script. And as we go into the first half of this year, Q1, you got fuel lag from last year, you have other revenue coming down. You've got an insurance recovery. Those are things that we're going to have to lap and get behind us and then a little bit of a tail into Q2 as well, which is why in the second half, on a reported basis, you'll see it show up a lot more cleanly. In terms of the macro, I think, yeah, we feel pretty confident about our ability to grow even in the face of a macro that's relatively flat. We have some business wins that are carryover, got some new business that's coming online, and we should be able to absorb most of that with the existing resources, if not tighten up the plan a little bit and save some costs.

Walter Spracklin :

Thank you very much. Good afternoon, everyone. So I wanted to go back to the coal forecast. I know you mentioned in your remarks here that domestic coal is expected to be modestly impacted. And when we're comparing it to other sources, EIA, you're saying U.S. production is going to be down 16% in 2024, and that's on the back of solar and the retirement of coal-fired capacity. Is this just a different market? Like is the retirement of coal-fired capacity just not in your catchment area? Is it, what would lead to such a disparity between that kind of forecast and the one that you're providing here on the domestic coal front?

Operator:

We have no further questions in our queue. And with that, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

Operator:

Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Matt Korn, Head of Investor Relations, you may begin your conference.

Joe Hinrichs:

All right. Thank you, Matthew, and hello, everyone. Thank you for joining our conference call today. Over this last year, CSX mission and message have remained clear and consistent. We have seen great progress with our ONE CSX initiatives, which are helping to build a focused, collaborative culture that enables all of our employees to feel engaged, energized and focused on working better together. At the same time, our service levels continue to lead the industry. These successes go hand in hand. And as our customers see that CSX is truly dedicated to providing consistent, reliable service over the long term, they're responding positively. As we look forward to all the opportunities ahead, we are confident that these efforts we are making will drive clear, sustainable, profitable growth. And we took another step forward on this path this quarter. Thanks to the hard work put in by our ONE CSX team, our railroad is running well. Our merchandise business remained steady, and our coal shipments were very strong. Our domestic intermodal volumes are growing well compared to last year. Our international intermodal business, though down year-over-year, has stabilized. Overall, our network continues to perform, and I am pleased with how the team has succeeded in managing the things that we can control. I continue to be very excited about all the potential ahead for CSX. Now, let's turn to Slide 5 to review the highlights for the third quarter. First, we moved over 1.5 million carloads this quarter, which was down just slightly from a year ago, with flat year-over-year performance in merchandise and 9% growth in coal. Our operating ratio ticked up into the low 60% as we faced challenges that we have been talking about all year, with lower fuel recovery, reduced intermodal storage revenue, lower export coal prices, and higher costs of inflation, most notably with our labor contract. As in previous quarters, our margin does include the impact of the Quality Carriers trucking business. Second, we generated $3.6 billion in revenue, which was 8% lower than the previous year. The last year we benefited from high diesel prices and record export coal benchmarks that were both much lower this quarter. Third, even with the year-over-year changes we faced, charges -- changes we faced, operating income still came in at $1.3 billion for the quarter compared to a little under $1.6 billion last year. And our earnings per share were $0.42, down from $0.52. I am proud of what we accomplished this quarter given all the challenges. None of us here are satisfied with these results. We're not sitting back and simply waiting for markets to turn. We're looking throughout the entire network to see where we can operate more efficiently. We continue to work closely with our customers to build our business pipeline and drive more volume onto the railroad. And we're emphasizing the importance of cost discipline to every team in every one of our locations. One of the reasons I am so confident about what is ahead for CSX is the great leadership team that we have in place. As you all saw last month, we are very pleased to announce that Mike Cory has joined our railroad as Chief Operating Officer. Mike brings great experience and a thorough understanding of schedule railroading, and he also shares our deep dedication and appreciation for customer service and the employees who provide that service day in and day out. Mike arrived in Jacksonville a few weeks ago and is now here joining us on this call. And so, I will now turn it over to Mike to say a few words and cover our operational performance over the quarter.

Kevin Boone:

Thank you. Mike and I have been spending a lot of time together and it is really great to have you on the team. To start, I'm pleased to say that our improving service levels are a key differentiator in the marketplace. I can't thank the entire team enough for all the hard work. These improvements are being recognized by our customers and are leading to new initiatives and discussions around how CSX can partner with our customers for growth. Our ability to grow profitably requires us to be proactive, quickly adapt to changing markets, and think differently. I'm proud of how well we have been able to coordinate with operations to drive both growth and efficiencies. With Mike in his role, we have only seen these efforts accelerate. It's no surprise that overall economic conditions remain uncertain, but it has been encouraging to see gradually improving sequential trends across several of our end markets over this past quarter. We see many, many reasons to be optimistic as we continue to build our business pipeline with an eye toward 2024 and beyond. Turning to Slide 10 to look at our merchandise performance for the quarter. Our revenues were down modestly compared to last year on flat volumes, as solid core pricing gains were offset by lower fuel surcharge and negative mix effects in certain markets. Our automotive business continued to show strength with higher production and business wins driving a 19% increase in volume year-over-year. Minerals continues to perform very well, sustained by infrastructure activity that is supporting new cement facilities and healthy demand for aggregates. Metals performance has also benefited from our service levels, leading to competitive wins and solid demand. Our chemical franchise, while challenged, has begun to stabilize and even showed some promising improvement in domestic plastics over the quarter. Fertilizer revenue growth was strong in the quarter, despite volumes that were impacted by weaker short-haul movements with production challenges in Florida. As we expected, the strong Southeastern corn crop meant less rail volume for grain, and forest products remains one of the most challenged areas with many mills still taking meaningful downtime. As we start the fourth quarter, we are encouraged by the early October volume trends with most markets showing sequential momentum. We anticipate a strong rebound for ag and food as a strong Midwest harvest kicks in. And across other markets, we expect our service improvements to drive opportunities to win in the marketplace as we focus on modal conversion. Turning to Slide 11. Third quarter coal revenue declined 5%, even though volumes were very strong, growing 9% compared to last year. Export demand continued to be a major volume driver, growing 26%, with the hot summer also supporting solid domestic demand. Strong coal volumes minimize the effects of lower international benchmark prices, which were setting all-time records this time last year. The key difference was met coal pricing where global benchmarks were much lower than in the same period last year. Sequentially, our coal RPU declined 11% compared to our guidance of mid-teens decline, with stronger-than-expected shipments to longer length of haul Southern utility customers driving the moderate outperformance. Looking ahead to the last quarter of the year, we expect export markets to remain strong and are pleased with the increases in international benchmarks that we've seen over the last several weeks. On the domestic side, we have seen stockpiles normalize and demand in the 2024 will be driven by winter weather and related demand needs. The increase in global benchmark prices should benefit our cold yields next quarter. So, I would remind you that we have a diverse portfolio of met customers and we have seen U.S.-based met coal benchmarks and those in other regions lag spot prices in Australia. Turning to intermodal on Slide 12. As a whole, the business remained challenged with revenue declining by 14% and total volume decreasing by 7%. Overall, RPU declined by 8% year-over-year with the impact of lower fuel surcharge accounting for the decline, partially offset by positive price. That said, we are seeing encouraging trends from our domestic business. Our volume turned positive on a year-over-year basis early in the summer, and that's continued to improve since then. We offer a diverse mix of transportation solutions within domestic intermodal, and we've seen great results from our strong channel partnerships and our direct relationships with major retailers. Our team has been successful in converting traffic off the highway in a market facing plentiful truck capacity, which is a testament to the team in the market-leading service product. Meanwhile, international intermodal activity has stabilized but remains weak. We haven't seen any clear signs of a positive inflection yet. Retailers remain concerned about the health of the consumer. And though de-stocking may have slowed, we haven't seen this turn into sustained increases in order rates or imports. For the rest of the year, we expect trends to largely continue as they were over the third quarter, with domestic gradually strengthening, supported by our team strong sales efforts. While we prepare for the turning point for international, recall that we saw meaningful drop offs in our intermodal volume in the back half of the fourth quarter in 2022, as markets slowed substantially, which will benefit our reported growth rate for the current quarter. Slide 13 provides a clear illustration of the encouraging signs we're seeing within our intermodal business. On a year-over-year basis, domestic intermodal has shown a favorable trend since the beginning of 2023, turning positive around mid-year and steadily improving since. While international volumes remain lower compared to 2022, we've seen stability in the past few months. Altogether, across all of our businesses, our team continues to push forward across multiple initiatives, aimed at winning wallet share, converting truck traffic and bringing new customers to the railroad. We remain confident that our leading service performance will continue to provide opportunities to win business. And we know that we have the resources and capacity in place to deliver growth when the market environment inflects. I'm proud of what the collective CSX team has accomplished this quarter. I'm excited about all the potential ahead. Now, I'll turn it over to Sean to discuss financials.

Joe Hinrichs:

All right. Thank you, Sean. Now as shown on Slide 19, we will finish with some updated comments on our outlook as we approach the final quarter of 2023. We continue to expect low single-digit growth in revenue ton-miles for the full year, supported by our consistent performance in merchandise and export coal. Automotive and minerals remain important growth areas. So, obviously, we're watching developments with the [Detroit Three] (ph) automakers and the UAW very closely. As Kevin mentioned, we also look for a substantial rebound in our ag and food business over the fourth quarter. Export coal volumes remain strong as global demand stays high for U.S. met and thermal coal. For domestic coal, we anticipate some slowdown from the third quarter, which benefited from hot summer weather, though so far this quarter we continue to be pleased with our shipment levels. For intermodal, as we mentioned, we expect domestic activity to keep gaining modest momentum through the fourth quarter. While for now, our international business looks largely stable. Overall, our volume growth rate in intermodal will reflect favorable year-over-year comparisons. As we've said all year, the pricing environment remains supportive, and we have been encouraged by the agreements that you've already reached for 2024. Note that with the slowdown in intermodal storage revenue that we have seen over the course of this year, we are now expecting supplemental revenue, excluding trucking, to decline by $325 million for the full year. Our commitment to efficiency and cost control remains in place as we keep our eye on service performance, not just in the near term, but also as we look ahead to improve market conditions and greater demand for rail capacity. Finally, our estimate of $2.3 billion in capital expenditures remains unchanged, along with our strong focus on innovation and growth. I will close by saying that I'm very proud of what we've accomplished as ONE CSX team as I finished my first year with CSX. When I spoke to all of you last fall, we talked about our belief that CSX could accomplish great things and create so much value by working better together as one team to serve our customers. We have made very good progress. And all of us know that there remains so much more we can do. I'm even more enthusiastic about our opportunities than I was last year. We all appreciate your support and interest in our company and we keep -- as we keep moving forward. All right, thank you. And Matthew, we're now ready for questions.

Operator:

[Operator Instructions] Your first question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.

Mike Cory:

Hey, Chris, it's Mike. Look, and again, I'm going to preface every -- probably most of my answers with, I've been here less than a month, but we still have the training pipeline. We still have people that we need to get into position that I spoke of earlier. But overall, I'm comfortable that we have enough to improve the size of train, the amount of trains, the velocity with the people we have. But however, there are areas where we're probably getting affected somewhat on the flow of the goods. And so, it's constant. We're working -- not just Kevin and I, but our teams together. So they really get the ground floor view of what we can do. And not having been here for that long, I haven't really stretched the opportunities out there yet. So, I'd say, to answer your question, we're where we need to be. We have people that are being trained that are going to be positioned. And remember, we have attrition, whether its retirement or whatever the case. So, we're filling that. And with the people we have. We're in good shape. We have to get in better shape, and a lot of that's going to come from self-help and how we utilize the assets.

Operator:

Your next question comes from the line of Brian Ossenbeck from JPMorgan. Please go ahead.

Kevin Boone:

Yeah. I would say on the truck conversion side, we're really, really early into this thing. The good news is customers are willing to start to have those conversations that quite frankly we just couldn't have a year ago, given where we were. And so, we're building momentum. I expect this to build on itself into next year. The great thing is, I think as an industry, we're starting to become aligned in terms of going after growth, going after some of the opportunities that exist out there collectively as an industry, and I think that's very encouraging as well. But it's a mixture. It's a mixture of going after new customers. Clearly, you pointed out, the trucking market is not very supportive right now. But even in this market, we're finding customers that, with ESG and with other things, are wanting to have that discussion. There's still value that we can drive. But I only expect as that trucking market firms up in the next year and the years ahead that this will accelerate on itself and see a lot of momentum coming.

Operator:

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Mike Cory:

Hey, Brandon. Thank you. Wow. I mentioned in my remarks, the visibility of information and it just -- it creates this connection where people see -- we have people that manage terminals, that manage the dispatch on the road, we have people that manage people from a crew management perspective, we manage -- look, we do all these things individually and to see that altogether and then again back to being understanding of what it is you can do, whether it's from a capacity or service perspective, but then cutting in with Kevin's team, we can get sticky because we can really understand all the work we're doing is really to get that business is to keep that business. And I see that here -- the opportunity here is -- look, the railway I came from, you got the business, you went 1,200, 1,500 miles and then there was more business here, it's everywhere. And it's not -- it's competitive, but there's lots of that. And Kevin -- we're not talking so much about the truck. Obviously, we're going to grow with the market and what it gives us, but I just -- I think the opportunity here when we connect our people, we are everywhere. We service, what is it, two-thirds of the U.S. market. And that's just opportunity in itself is. So, I don't know if I'm answering your question. Again, I've been here a month. But I see that, that's really what our goal is. We want to grow properly. We wanted to be ratable. We want to make sure that we're in position for it. And we're going to make sure that we rid ourselves of waste. So, we're not getting rid of the assets that we need when it does come.

Jonathan Chappell:

Thank you. Good afternoon. Mike, I kind of want to build on that and you kind of brought up your former role as well. You transitioned there from a PSR railroad to a growth railroad, and maybe that didn't go as smoothly as you would have hoped. So, you're not joining a fixer-upper here. CSX's service metrics have improved vastly over the last year or two, and now you're pivoting the growth. So, what are some of the lessons that you've learned from that transition at the last role on some of the dangers to avoid? And how you manage capacity as you're trying to fill the network without clogging up the network and causing service issues?

Operator:

Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.

Kevin Boone:

Yeah. Scott, there can be a lot of mix issues within our coal business. When you think about Southern utilities, longer length of haul, higher RPU versus Northern utilities. Export coal, very, very good business, can be shorter haul, so can sometimes be a little bit lower RPU as well. But [indiscernible] given some of the benchmark strength that we've seen, I would look for something in the low-single digits, maybe mid-single digits depending on mix.

Operator:

Your next question comes from the line of Justin Long from Stephens. Please go ahead.

Kevin Boone:

Yeah. I think it's really within our merchandise portfolio and it's broad-based. There's different initiatives across the board from our metals side of the business which I highlighted. Automotive has been a good strength for us. And it's all on the back of service that's differentiated in the market, and we've really been able to capitalize on that with the customer. The customers are looking for reliable service, and I think we've been a standout in the market here year-to-date, and our team has been selling it, and it's been incredibly helpful on that side. I will say we're going to start to see some benefits of the industrial development side, more in probably the '25, '26, but you'll start to see that layer in, in late '24 and got a lot of momentum there. And again, it goes back to the service product that we've been able to deliver and getting the confidence as these industries build new plants that are locating on our railroad. So, I actually just sat down with Christina this afternoon, and we were going through all the industrial projects that have been taking place throughout the U.S. And it's interesting, you look at a map holistically throughout the U.S. and it's almost focused on the East and that's all railroad. That's where we operate and that's where our team is really going after it today. And I'm very, very optimistic on what's happening in that side. So, a lot of opportunities. They are mixed across different industries, and every industry is created a little bit different, but we are being able to lean into those conversations, quite different environment than what was occurring last year, but very, very optimistic here.

Amit Mehrotra:

Thanks a lot. Hi, everyone. Sean, I wanted to just follow up on that question around 3Q to 4Q, but maybe ask it as it relates to 2024. I mean, obviously we're moving from a very inflationary environment to a less inflationary environment. You've got a little bit of labor -- another uptick in labor in the middle of next year. But then I also look at like PS&O, is that -- 19% of revenue, several years ago was as low as 14%, 15% of revenue. But there's obviously some opportunity to get more leverage on the cost structure, especially on that big PS&O item. So, I don't know if you can kind of help us enter your brain a little bit and think what is the cost structure look like in '24? Because, obviously, we're still in an inflationary environment, but you still got maybe these chunky, idiosyncratic opportunities to kind of leverage some parts of the cost structure.

Operator:

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.

Sean Pelkey:

Yeah, Tom. So, I mean, our plan is going to be to grow volume ahead of the economy, that's what we're going to shoot for, that's what we're going to plan for. So I think if we were to have no growth next year, I think it would be tough to improve the OR with the continued inflationary pressures that we're seeing. You're cycling. We had that insurance settlement earlier in the year. So, there's a few things there. Depreciation will continue to go up, things like that. So, we need growth. That's what the model requires and that's what we're building into the plan. Kevin, I don't know if you want to address the price piece.

Operator:

Your next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.

Joe Hinrichs:

Yeah, to reflect on the pandemic and that's -- the domestic intermodal and our intermodal franchise performed very, very well. It really was outshined the industry in a lot of ways. What minimized our growth opportunity was really the chassis and some of the equipment limitations that existed. So, obviously, we're in a very, very different world today. And so those limitations don't exist on a year-over-year basis. And we're really seeing the team able to capitalize on that. And the strength of our service product is really coming through. When you see what we talked about in the chart that we mentioned previously is, I think all those things are coming together. Service leading in the East, and then allowing our customers to grow with us with our service product.

Ken Hoexter:

Hey, great. Good afternoon. Mike, welcome back to the sector and happy to have you here. Joe or Mike, I guess, just operations seem pretty solid, right, in terms of how well you're operating and obviously you still want to improve. And maybe Mike, just talk about what -- I know you've been there for a month, but what do you see as, I don't know, if it's low-hanging fruit or opportunities on operations? It sounds like Sean saying or Kevin saying, you need the volumes in order to get that operating leverage, but are there things you can do on the cost side from what you see that can aid that leverage opportunity?

Joe Hinrichs:

Yeah, Ken, I just want to add a little thing. I think the timing of Mike joining us is perfect, because we've had a year of taking advantage of the operating model that we have, engaging with our employees, do a lot of things around culture and our ONE CSX. We've made tremendous progress, especially on the service metrics, as you've seen, and we have close industry-leading metrics across the board on the operating side. Now we have Mike coming in with his experience, fresh set of eyes, and all the opportunities that can now allow us to now step back and say, "Okay, we've come this far, great work. Proud of the team's work. Now, here's the opportunity that we have to advance even further." And so, the timing is perfect, I think, for us. Works out very nicely. Our team is excited and motivated. You've seen now, as Kevin has highlighted many times in his comments tonight, regarding the customers have acknowledged and they acknowledge that with me all the time, the service levels that we've sustained, almost reliably now and repeatedly for 12 months. And now we have the opportunity to get more efficient and to get even better. And Mike has come in with a great attitude and excited about how we can take it to the next level and still focus, of course, on improving our service metrics, but also teaching our team, which is a relatively young team, to understand what it takes now to take a next step forward. So, we're excited about it. I'm excited about it, and I think we can continue to outpace the industry when it comes to progress on our efficiency metrics.

Bascome Majors:

Thank you. To follow up on that earlier question, can you roll that out a little bit further, not just on the service side, but Mike, your role from -- in the mandate you've been given to focus on culture, sales, the integration of Kevin's department with yours, what we, like, see different from CSX over the next three to five years versus what we've seen over the last three to five? Thank you.

Kevin Boone:

Yeah, I would just -- I would highlight that the teams, Mike's team and my team, they coordinate daily. They're speaking better than they ever have to each other. It's important from a sales and marketing perspective. You talked about can we handle an upsurge in volume demand. Well, it's up to us to communicate that real time so the team can work, make sure we're prepared for that volume, communicate with a customer, and make sure it's rateable and that we have the people in place to handle it. I think a lot of the discussions we're having right now are around that. I don't think it's rocket science to figure out where things could come back very, very quickly. We're having those discussions around creating resiliency in this network. And we're going to get together in a couple of weeks, our teams again, go through it market by market. What do we see for next year? What do we see over the next three years? And how are we going to prepare for that? And those conversations are better than they ever have been.

Joe Hinrichs:

You guys can't see it, but Mike has the shirt on, it's ONE CSX. That's what we're talking about here. And that's the vision that our teams are seamless enough that people see CSX as one entity, not a bunch of different functions and silos, all focused on, of course, safety first of our employees and the communities we live in and serve, but ultimately the service we provide our customers, which leads to the growth potential that we've all talked about. And it doesn't take a rocket scientist to figure out in this business what incremental margins come with growth in this business. But from my year-plus experience here now, we will realize the most potential when we have operations and marketing sales as described by both Kevin and Mike as one team, looking at every opportunity together with a can do, let's find a way to make sure it's profitable, let's find a way to be able to serve the customer and do it efficiently. And that's the spirit of ONE CSX, focus on how on teaching and training our employees to be part of that team and to get excited by that opportunity and do it in a way that we're proud of how we work together in service of the customer. That's ONE CSX is what everyone's talking about.

Jason Seidl:

Thank you, operator. Joe and team, good afternoon. Mike, welcome back. It must be pretty exciting coming, hitting the ground running and railroad showing improving service numbers. So, we look forward to seeing what you could do in 2024. My question actually is going to be to Kevin. Kevin, you had some comments. You said you had many, many reasons to be optimistic. So, I noted the two manys there. You sort of touched on domestic plastics improving. I'd like to get some meat on the bone there with those commentaries. And then, you talked a little bit about some industrial development projects with Christina. Can you give us some numbers on what you're seeing now in terms of total projects and maybe what you had a year ago and maybe pre-pandemic?

Operator:

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Kevin Boone:

Yeah, I mean, obviously, we want a quick resolution. The quicker the better. As you're probably aware of the industry as a whole has been short on car supplies. So, to some degree that's probably helping us or helping the industry to a certain degree. There're certainly some impacts to us. We're seeing strong demand in other areas where we have a diverse portfolio. So we're able to probably supply more cars to those customers that have been wanting more cars here recently and diverting some of those as we've seen some impact. But my boss here knows that industry more than anybody else and I keep on asking him every day what his thoughts are. But we'll manage through it. I think more of this is deferred revenue. And we think the demand still remains out there. So, as we move into next year, we expect to capture all the demand that exists.

David Vernon:

Hey, good afternoon, guys. So, Kevin, I wanted to ask you about the drivers of that domestic intermodal growth from a channel perspective. The numbers sort of turned around in week 17 and it's been pretty straightened up to the right. Is this just general stuff you're getting through traditional IMCs or is it a parcel company that's doing a little bit more over the rails? Is it a retailer that you've got a direct relationship with? Is there any one single driver of what's looking like a pretty big divergence from industry intermodal performance that we should be thinking about there in domestic intermodal?

Operator:

Your next question comes from the line of Walter Spracklin from RBC Capital Markets. Please go ahead.

Sean Pelkey:

I think you've heard it over and over again the West Coast are challenged in terms of being able to add capacity. And so there's been tremendous investments that continue to be made on the East Coast and we're the beneficiary of that. So, we'll continue to work with our East Coast ports and expect that trend to continue going forward. You also see a migration out of China and other markets. And that's also helpful for what we're seeing in terms of imports coming off from new locations that can go, that are more likely to go to the East Coast than maybe the West Coast previously. So, a lot of good momentum, a lot of significant investments being made. We're making investments alongside of them to make sure we're prepared for the growth, but it's been a great story that I don't see any reason that that won't continue going forward.

Ravi Shanker:

Thanks. Good evening, everyone. Just a couple of questions here, one follow-up. Sorry if I missed this, but I was a little surprised to see the headwind on the accessorials get a little bit worse because it felt like you guys had a pretty good handle on that. Can you just kind of unpack that for us and kind of if that's now a final number? And also maybe for Joe, bigger picture, I know the rails are all trying to pivot very heavily towards growth, which has historically been challenging to come by. What do you think about inorganic growth potential opportunities maybe short-lanes, maybe trucking, like it -- is that something you guys looking at as well?

Joe Hinrichs:

Thanks, Sean. And Ravi, just a couple of other comments from your second part of your question. I mean, at the highest level, I wouldn't think that trucking is where we would see growth. We're proud of the acquisition of Quality Carriers and how that's progressed with us at CSX. But that was very specialized to serve our chemical customers where very strong franchise and very important business to us. We'll always be opportunistic, but I wouldn't say that trucking is where the growth comes from. But just a couple of areas to highlight that we haven't been highlighted so far tonight. And first and foremost, I'll start with the fact that, I think you get the sense from this team that we firmly believe that the best way to provide opportunity for growth is to continue to provide class -- best industry-leading service to our customers. And when we do that, it gives us more and more opportunities to win business with customers. So that is the foundation of where we see growth. But you have to remember, we've been investing in the New England region, which is the old Pan Am network that we purchased. And that's going to be an opportunity for growth. We're excited about that. We're going to start a new interchange point with CPKC in Myrtlewood, Alabama. We're very excited about that opportunity. And Kevin referenced it, but I want to highlight it, in order for this industry to see significant growth, we have to work better together to be motivated to serve customers in new and better ways. And we're starting to have some of those good conversations with other Class I railroads to be able to talk and think differently about how do we serve the customer and how do we get excited about that opportunity? So, there are a number of incremental steps we can take to grow the business beyond just getting better and all the work that we're doing and the cynical nature of our business, which will be some things that should help us going into '24, as both Kevin and Sean mentioned. But those are some incremental areas that we have opportunities. And then, as our intermodal product continues to get better and we continue to be in the 95%-plus trip plan compliance reliably, repeatedly, and get to the high 90%, as the truck market starts to rebound and as costs continue to increase there, we can be even more competitive versus truck and get some more business off the road there. So, a lot of opportunity for us. We have to continue down the path we're on of continuing to provide that reliable service. But there's some exciting developments going on in addition to all the projects that are going on industrial development side, as Kevin referenced earlier, we'll provide more guidance -- maybe some more information on that, not guidance, but information on the context of that. But there are hundreds and hundreds of projects in the works in that space. So, a lot to be excited about, and really excited about the capability of our network to take advantage of that.

Operator:

Good afternoon, and welcome to the CCSX Corporation Second Quarter 2023 Earnings Conference Call. I will now turn the call over to today’s speaker Matthew Korn, Head of Investor Relations. You may begin your conference.

Joe Hinrichs:

Thank you, Matthew, and good afternoon, everyone. Thank you for joining our conference call. Our performance over the second quarter met our expectations led by the strong results of our merchandise business. As we had indicated at year-end and again last quarter, we knew that we would have to manage through lower intermodal storage revenue and normalizing export coal prices. We expect the intermodal volume to be soft as imports slowed and destocking activity continued. That said, we also knew that we were gaining momentum with our customers, led by our improved service performance and in our own workplace as our ONE CSX efforts took hold. Our network continues to run well, and our company's initiatives combined with our employees' hard work and commitment to making a big difference and helping to set our railroad apart. There was much more to do, but our results this quarter show signs of the progress we are making as we lay the groundwork for long-term growth and value-creation. Turning to slide five. Let's review the highlights for the second quarter. We moved over 1.5 million carloads in the second quarter, led by a 3% volume growth in merchandise and 4% growth in coal, and our margins remained strong with an operating ratio below 60%, including the impact of the Quality Carriers' trucking business. We generated $3.7 billion in revenue, which was 3% lower than the previous year and flat from the first quarter. Operating income decreased 13% year-over-year to $1.5 billion and our earnings per share decreased by 9% to $0.49. When making comparisons to last year, it's important to remember that our second quarter 2022 results included a $122 million gain, representing $0.04 per share of EPS related to the Commonwealth of Virginia property sale. All in, this was a solid performance highlighted by great results in our core business. The fact that our team was able to drive 3% merchandise volume growth in such an uncertain macroeconomic market is a testament to what we are able to do when we work together. Now moving on to slide six. Earlier this month, CSX released its new 2022 ESG report, which highlights the tremendous progress that our team has made in moving our company forward. Since I started here last fall, you've heard me talk about ONE CSX, about building a supportive and positive culture and about the need to consider all of our stakeholders who are measuring our success as a company. Many of you have asked me, what this really means in practice. What does the railroad look like where its people feel valued and included, where its customers feel appreciated, and where the communities in which it operates you are respected? I think the picture and the highlight that you see here offer a small view into how we're making this happen here at CSX. To us, incorporating environmental, social and governance considerations into the priorities of our company goes hand-in-hand with our ONE CSX focus. Adding to the greater sense of purpose that we all share. These are real, authentic actions that we're taking today. We talk often about our environmental leadership and our clear advantage here over trucks as a core part of our value proposition to our customers and our shareholders. By expanding our use of technology, conducting practical testing of alternative fuels and offering support and encouragement to our suppliers, we continue to make progress. As we reported in our press release last week, we are testing biodiesel blends in locomotives in revenue service. Last month, you heard that we are in talks with CPKC to form a joint venture for the development of hydrogen-powered locomotives, which offer encouraging promise as a low emissions fuel solution. What we probably do not talk enough about are all the incredible efforts made by our railroaders, to build up the places in which we live and work. It's been a priority of ours to increase our company's positive cultural impact. And I am proud of how quickly the people in CSX have responded. As you see here, our volunteer hours are up substantially. Our CSX-sponsored community events have multiplied. And the number of people who we have been able to help and support has been incredible. I look forward to much more to come. There's one last item I'd like to mention. At CSX, safety is our top priority, and that's why we focus so much on our reported injury and accident rates. Our fundamental goal is to make sure that every one of our employees gets home safely every day. When that does not happen and we lose one of our colleagues as we lost Derek Little last month, it affects us deeply. As a reminder, why we make so much effort on safety and how much more work we need to do. Now let me turn it over to the team.

Kevin Boone:

Thank you, Jamie. As Joe noted, despite headwinds across many of our markets, the team was able to capitalize on strong year-over-year improvement in service. Importantly, as service has improved, there’s opening up opportunities to discuss new business with our customers where we are seeing in our year-to-date pipeline up 30%. I'm proud of the team and the progress we have made. There remains a lot of work ahead of us as we focus on building our pipeline of growth opportunities. Initiatives including whiteboarding sessions with customers, increasing direct engagement with small and medium-sized shippers, bringing new technology tools to better serve our customers and finally, expanding our reach by leveraging our transload network and collaborating with both with our short-line and Class 1 partners are just a few of the focus areas for the team as we move into the back half of the year. Turning to slide 11. Our strong merchandise performance continued into the second quarter, with revenue increasing 5% even as our fuel surcharge declined substantially on lower diesel prices. This growth was driven by 3% higher volume, compared to last year and a 1% all-in increase in revenue per unit. As we saw in the first quarter, our customers are seeing improved service levels, which is opening up opportunities and encouraging them to bring more of their business to our network. For the quarter, we saw many of the market trends continue from the start of the year. In automotive, we are seeing more consistent production and we've seen our improved service lead to new opportunities and business wins. Minerals benefited from strong construction demand for aggregates in our improving cycle times. And our metals and equipment business continues to be a bright spot, with volumes up across steel, scrap, and equipment. We've been successful in expanding our commercial relationships and translating our service product and to convert new business wins. I'm also pleased that our fertilizer business delivered higher volumes year-over-year, supported by strong domestic shipments of potash and nitrogen. On the other side, chemicals continues to be soft as demand remains challenged across our broad book of business. Forest products. [Technical Difficulty] products faces headwinds in paper and pulpboard. We've also seen some slowdown in export grains for ag and food. For the second-half of the year, we expect to build on the successes we've had to win more wallet share of our existing customers, while continuing our efforts to attract new customers away from truck. We expect auto, minerals, and metals markets to remain supportive and will be important contributors to volume growth over the remainder of 2023. We look for destocking activity to wind down in many of the markets we serve including chemicals, so timing there remains uncertain. What's most important is that our team is not sitting back and waiting for markets to turn. We are pushing forward with our own initiatives. Our business development group has been making great progress with our Select Site program and expanding our pipeline of partner projects. And we're strategically investing in developing new locations, providing additional transloading capabilities and investing in railcars to drive more business to CSX. Turning to slide 12. Second quarter coal revenue decreased 2% as a 4% volume gain was more than offset by a 6% decline in revenue per unit, driven by lower export coal benchmarks. We saw continued growth in export volumes due to beneficial cycle times, good performance at our Curtis Bay terminal and a push among our coal customers to move more tonnage into the overseas markets. Domestic utility shipments declined as we expected, as low natural gas prices weighed on coal burn. Though demand in Southern utilities remained favorable. We expect momentum in the export markets to continue over the second-half of the year, with CSX volume supported by new mine capacity and coal producers making opportunistic shipments into the international markets. On the domestic side, we see tougher comparisons versus a strong second-half last year. But the hot summer is providing a helpful tailwind early in this quarter and just recently we are seeing a few customers looking for additional sets. Of course, as international pricing benchmarks have eased from last year's record highs, we will see an impact on our revenue per unit into the third quarter. Most of our exports are met coal with the benchmark around $225 per metric ton. We anticipate our third quarter all-in coal RPU will sequentially decline by a mid-teens percentage. Current international benchmark prices remained very healthy and supportive of strong production into the back half of the year. Now turning to slide 13. Second quarter revenue decreased by 18% due to a 10% decline in volume and a 9% reduction in revenue per unit, reflecting the effect of lower fuel surcharge. As in the first quarter, international intermodal drove most of the volume decrease with the business seeing headwinds from declining imports and inventory destocking. Volumes in the domestic business showed a much more modest decline [Technical Difficulty] by the good progress we continue to make with rail conversions and the team's efforts to identify new markets and lanes. Our best-in-class Eastern service product continues to position us for truck conversion in the quarters and years ahead. Looking forward, while we and our customers are still looking for a rebound in the international business, pressing ahead with our own initiatives, we brought on a new shipper late in the quarter that recognize the value of our strong service product. And we're seeing other opportunities in new lanes, growing activity at inland ports. Domestically, we're encouraged by many opportunities to work more closely with all of our Class 1 partners to target truck conversion. Just one example of this is the agreement we reached with CPKC just a few weeks ago to create a new interchange in Alabama that will link our customers across the Southeast with key markets in Texas and Mexico. We think there's much more opportunities for new creative partnerships that can help bring even more business to all of the railroads. And we remain very excited about the opportunities ahead of us. Now I will turn it over to Sean to discuss the financials.

Joe Hinrichs:

Alright. Thank you, Sean. Now let's conclude with some comments on our outlook for 2023 as shown on slide 19. First, we reiterate our expectation that revenue ton miles will grow in the low-single digits for the full-year. We remain very happy with the performance of our merchandise business through the first-half of the year and we look for volumes to be supported by continued strength in automotive, minerals and metals and the successes we've had in the marketplace. We expect full-year coal volumes to be higher, driven by strong demand for export coal. As we noted last quarter, domestic coal shipments will likely soften as demand is impacted by low natural gas prices. For intermodal, as Kevin said earlier, we have seen modest signs of improvement for domestic intermodal activity starting late in the second quarter, but there are no signs yet of a near-term recovery for the international business. We're still benefiting from a favorable pricing environment, though our expectation for $300 million decline in supplemental revenues is unchanged, with most of that year-over-year reduction occurring in the second-half of the year. Lower international met coal benchmark prices will also impact our coal revenue per unit over the remainder of the year. As before, we are making our best efforts to drive efficiency and control costs to offset real inflationary pressures, and we are committed to staying focused on improving service to our customers. And finally, we still estimate capital expenditures at $2.3 billion with a strong focus on innovation and growth. To sum up, I am proud of the progress that the ONE CSX team continues to make. There is no doubt that we face some mixed economic conditions in the near-term. However, there are so many opportunities opening up for us to win share, expand our markets and achieve profitable growth if we remain focused on safety, service, execution and working together. I am very excited about what is ahead for CSX. Thank you, and we'll now take your questions.

Operator:

Thank you. [Operator Instructions] Your first question today comes from the line of Chris Wetherbee with Citigroup. Your line is now open.

Joe Hinrichs:

Thanks, Chris. It's Joe. I think at a high level, we've noted some of the things that won't repeat from last year's second-half as you referenced. So we're really focused on getting our manpower levels up to continue to sustain the improved customer service levels that we've been delivering. And Jamie highlighted the trip plan compliance in the second quarter around 84%. We've been in the 80s now pretty regularly since November of last year and that's really resonating with our customers. We're watching very carefully what's happening with the volume. And we have a mixed kind of market out there. And Kevin highlighted, we've seen growth in metals and automotive and other parts of our business. Intermodal has been softer as we highlighted. And chemicals, you know, little down, you know, we'll see when that turns. But generally speaking, our volume has been holding up on the merchandise side. We've been growing merchandise business. So we're watching the volumes very carefully and making sure that we have the staffing levels to support sustained high levels of customer service. And the reason why it's so important is that, Kevin and his team have really started to have some really good conversations with our customers. We gained share in the first-half of the year and that picked up momentum in the second quarter. And we're having very good conversations with our customers now that we're sustaining these high levels -- higher levels of service, and as Jamie noted, we want to continue to improve. But our focus is really on making sure we have the manpower to be able to sustain that. And also, at the same time, of course, if we see volume reductions further than what we're seeing right now it will respond accordingly. But right now, the volumes that we're seeing are supporting this merchandise volume growth and our high levels of service.

Jon Chappell:

Thank you. Good afternoon. Sean, I wanted to ask you about the productivity improvements. In the first quarter, you said $15 million to $20 million. You said more than $20 million in the second quarter. I think the plan was to eventually get to $30 million. So I guess the question is essentially, do you get to $30 million by the back half of this year as a quarterly run rate? And kind of along the lines of Chris' question, if the volume environment is a bit softer than you had anticipated six months ago, could that $30 million even become greater as you think about 2H ‘23?

Operator:

Your next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Kevin Boone:

Yes. I mean when you look at our coal market, and particularly the export market, it moves with the benchmark prices. So that's something that as a swing producer keeps the producers here in the U.S. in the market, and it's worked very, very well and it's a great mechanism. We participate, obviously, when the pricing is very good. I mean it remains very, very supportive. We just had extraordinary prices last year that nobody expected would continue. But again, we participated in that. When you look across our -- the rest of our portfolio, particularly on the merchandise side, it remains supportive of the inflationary environment out there. And our customers are getting price in the market and they're not surprised that our ability to go and have those discussions are similar to what they're having with their customers. So the alignment is there. Certainly, I think the market would be -- people are looking for inflation to come down a little bit, and we'll see how the market continues. But market from a pricing perspective, both in merchandise and maybe a little bit less so in the spot market on the intermodal side, obviously, that's been a little bit softer, but still very, very healthy and will carry forward into next year.

Scott Group:

Hey, thanks. Afternoon, guys. Sorry about my voice. Hopefully, you can hear me. So the coal RPU guidance was helpful. How should we think about the fuel impact in the third quarter? What are the other puts and takes as I think about operating ratio, profit Q2 to Q3? And then just like bigger picture, it feels like there's still a pretty good gap between underlying pricing and some really elevated inflation. Like, when does that normalize in your mind?

Kevin Boone:

Yeah, I think that's right. We've seen the pricing reflect the inflationary environment. And there's multiyear contracts that we'll still have to touch at the back half of this year that probably need a little bit of catch-up. But beyond that, I think it's well in line with what the inflationary market is out there, particularly on the merchandise business today.

Ken Hoexter:

Hey. Great. Good afternoon. So just to understand this environment, Joe or maybe Kevin, as you move into the third quarter, you're targeting -- still targeting low-single-digit revenue ton-mile growth. I guess you're running about 2% or so year-to-date. So do you think that moves negative based on the current weak volumes that we're seeing so far right now? And then if we do get that weak environment that we're talking about, can you still improve operating ratio as we move into the third quarter if you're looking at revenue stay above cost of inflation? Thanks.

Sean Pelkey:

Yes. And Ken, just on the second part of your question, I think the commentary you heard from Kevin suggests we're not calling a pullback in volumes. But to the extent that the macro presents something like that, there's things that we can do, there's levers that we can pull. And certainly, we would look to do that but not to jeopardize the ability to continue to gain momentum and gain share off of the truck, which is the ultimate goal here to kind of grow the pie and grow our profitability.

Brian Ossenbeck:

Hey, thanks. Good afternoon. So maybe just on the topic of truckload conversion, it's been mentioned several times on the call. Obviously, it's a big opportunity. But can you give us any context in terms of the wins you're getting or you have line of sight to? Would you be able to quantify that at some point in time because clearly, making the long-term decision to go after that and sounds like you're getting some -- but it's hard to say what relative size that could be? And then, Sean, if you could just clarify cost per employee that we should expect for the next quarter? I know payments go up or the wages go up another 4%, but you got mix over time, a few other things in there as well. So it would be helpful if you can clarify that, too. Thank you.

Sean Pelkey:

Yeah. Thanks. And in terms of cost per employee, it should be fairly stable other than the 4% wage increase on the union piece. I think there are some opportunities to drive some efficiencies there. So we hope to do better than a 4% increase from the first-half to the second-half, but we'll certainly feel the impact of higher wages.

Justin Long:

Thanks. I wanted to ask about intermodal, because there's a big divergence between the domestic intermodal and international intermodal volume trends. And I was wondering if you could share how those numbers compared in the second quarter. And looking into the back half, around your comment about the domestic intermodal market gaining momentum. Is that a function of demand getting better or your expectation for business wins starting to kick in? Thanks.

Operator:

Your next question comes from the line of Tom Wadewitz with UBS. Your line is now open.

Kevin Boone:

Yes. I probably won't put numbers around it, but there's a reason we're hiring. There's -- we see all the things that we can control internally, setting us up nicely for when the markets rebound. And yes, I think the combination of markets returning at least to -- in some cases, just the current demand levels is going to create a lot of leverage in our business to do that. And I think you'll see some of these businesses where we're having discussions around truck conversion as the market firms up, more willing to move that freight back over to rail or move it to rail for the first time. So it's -- the pipeline takes a while to build up. It's been -- as Joe was pointing out earlier, it's been about nine months since we've seen that rail improvement. And the customers are reacting to it, some sooner than others. But yeah, that's the idea of all these investments, obviously, will help us participate when that cyclical upside starts to occur.

Fadi Chamoun:

Yes. Thank you. My question on the service level, like obviously, you have done a great job in rebuilding the service and doing the -- a comprehensive work on building the culture to sustain that longer term. But as we know, like some of the service issues we saw in the last two or three years were all rail related. You had obviously a lot of friction coming to you from outside of your own network. I'm just wondering, how are you kind of thinking about some of these problems that are affecting your service from outside your network. Some of these partnerships that Kevin talked about, try to kind of iron out some of these friction areas that you see in the supply chain? Or are there opportunities to kind of build the service level that can be sustained even as demand comes back, which historically has been a challenge to service levels?

Operator:

Your next question comes from the line of Amit Mehrotra with Deutsche Bank. Your line is now open.

Kevin Boone:

Yes. Obviously, putting coal aside, obviously, that we've talked about on the international side. When you look at yield broadly, there's always mix, right? And when you look at our merchandise business, in general, one of the markets we've highlighted is obviously under cyclical pressure right now is the chemical market, which typically has a higher RPU. So that's weighed on the overall benefit you've seen from the merchandise side, and there's a lot of moving parts within it. But if you look at what we were able to achieve within the individual markets is quite healthy I think despite some of the fuel surcharge headwinds that you saw. The intermodal market obviously is unique, given some of the challenges on the truck and what we have to do there, particularly on the spot market. But again, fuel surcharge is a much larger impact there. And absent that, you saw a flattish-type RPU, and that was mainly impacted by some of our longer-term contracts, obviously had positive rate. But on the flip side, some of the spot markets saw some significant downgrade along with the truck. But the market held in, obviously, a lot better than some of the trucking rates out there and what the markets do there. But overall, I was very pleased in some of the NPA results as we measure it or some of the highest results that we've seen in a long time, if you look broadly across the markets.

Operator:

Your next question comes from the line of David Vernon with Sanford Bernstein. Your line is now open.

Kevin Boone:

Yes, I think that's fair. Obviously, there's bottoms, right, and there's -- we protect ourselves both on the bottom and then on the top end. We don't participate in some of the extreme stream cases, but I think that's fair. $225 is kind of embedded in what we're coming into the quarter. We've seen a little bit of positive uplift in that so even as recently as the last couple of days. So we'll see where that trends. But we've seen a lot of stability, if not a little slight uptick in that market here recently, and we'll see what the fourth quarter brings.

Paul Stoddard:

Hi. This is Paul Stoddard on for Jordan. I guess with the recent agreement on the West Coast for the Long shoremen, there's some anticipation that there could be some more freight being diverted back to the West Coast. I guess how are you thinking about that in terms of international intermodal long-term? And do you think that's going to be offset by domestic intermodal? Thanks.

Operator:

Your next question comes from the line of Allison Poliniak with Wells Fargo. Your line is now open.

Kevin Boone:

Look, I think the most important thing for a customer is reliability, right? And in some customers' eyes, they want to see more of that reliability. They like what they see today. We've got to continue to perform and have those conversations. And sometimes it's lane-by-lane. It's carload-by-carload where we get that confidence from a customer. And so we're in the very early innings of this, and we feel the acceleration from first quarter to second quarter, and I expect those conversations to pick up even more in the third and fourth quarters as we continue to perform. Sharing what we're doing on the hiring side is incredibly helpful. Sharing with them what we plan to do to make our network more resilient, winning their confidence, but that's the number one issue. It's not price. 99% of the time, we have a pricing advantage versus our truck competitor. So that's the opportunity for us. We have the environmental advantages. So we have all these things, we've just got to get the reliability and prove that the reliability is sustainable.

Walter Spracklin:

Thanks very much, operator. I just wanted to shift focus from -- the pipeline looks really good, Kevin, and presumably that's merchandise base mainly. But looking into 2024 on some of your bulk areas and in particular, ag and coal, the EIA has just revised downward its forecast for next year by quite a bit? And then on the ag side, it looks like there's some severe drought conditions forming that's going to impact the current growing season. So looking into 2024, I mean that suggests that we could be bracing for some down double digit volume growth in those two categories. Is there any offsets there that you would flag for next year that would offset some of those fairly negative forecast for those two particular commodities?

Operator:

Your next question comes from the line of Jason Seidl with TD Cowen. Your line is open.

Kevin Boone:

I don't -- I wouldn't read any of our comments that there's been any type of inflection down. We're just -- I don't think there's -- we're seeing in real-time an inflection up in the market. And I mentioned earlier, in the fourth quarter, we obviously start to lap a lot easier comps on a year-over-year basis. So I think from a overall growth perspective, fourth quarter will be a much easier comp than what we've seen throughout the year. And hopefully, that momentum will carry into next year. But there's no indications that the market is necessarily picking up. I don't -- I think we bottomed from that perspective. The question is how quickly the market recovers. And that will be heavily relying on the consumer and how that pans out into the holiday season going forward.

Operator:

Good day, everyone, and welcome to the First Quarter 2023 CSX Corporation's Earnings Conference Call. Today's call is being recorded. And I would now like to turn the conference over to Matthew Korn, Head of Investor Relations. Please go ahead, sir.

Joseph Hinrichs:

All right. Good evening, everyone. Thank you, Matthew, and thank you all for joining our conference call. Working together, the ONE CSX team delivered a strong first quarter, driven by solid pricing as well as volume growth in our merchandise and coal businesses. With sufficient resources in place, we are able to use the benefits of our scaled railroad model to deliver improvement in our customer service performance that are driving real tangible financial results. Our network is running well, and we intend to do even better and show that CSX can sustain reliable service over time, which is essential for us to profitably grow our railroad. 2023 has already proven to be a very active year. One of our top priorities after the national union agreements were finalized last December was to address the matter of Paid sick leave for our union employees. I am very pleased that CSX demonstrated important leadership here. Starting in February, we were the first U.S. class [Technical Difficulty] more details about the specific proactive steps we have been taking to make CSX safer. I have also been actively involved in discussions with our leaders in Washington and the across states our network about some of the legislation that has recently been proposed. They know that it's better for our economy, our environment and our communities for railroads to move a greater share of the nation's freight. They also know that CSX is eager to be part of solutions that are effective, data-driven and will make our whole industry safer. We do not want safety performance to be a competitive advantage for CSX, but wanting to be something our entire industry is proud of. We have been encouraged by our conversations with senior policy leaders and we'll continue to engage with them in the months ahead, sharing best practices and building on our common ground. We are confident that the industry will emerge in this period stronger, more aligned and better at sharing safety best practices. Now let's turn to our presentation to review the highlights of the first quarter. We moved nearly 1.5 million carloads in the first quarter and generate over $3.7 billion in revenue, which was 9% higher than the previous year. Operating income increased 14% year-over-year to $1.46 billion, and our operating ratio was 60.5%, which includes the OR impact of the quality carrier destruction business, as we've discussed in the past. Finally, earnings per share increased 23% to $0.48. When I came to CSX last fall, we were very clear with our intention to build on this company's excellent operating model by strengthening our relationships with our employees and serving our customers better. It is still early but you will hear clear examples of how we are starting to achieve this as Kevin, Jamie and Sean talk about the details, what was a very strong quarter. Now let me turn it over to our team.

Kevin Boone:

Thank you, Jamie. We are very pleased with our merchandise performance this quarter. Revenue increased 13%, benefiting from an 8% increase in revenue per unit and a 4% increase in volume. We are seeing some encouraging signs as customers start to respond to our improved service and reduced cycle times. The team is focused on combining best-in-class service with creative solutions to identify new growth opportunities and gain wallet share with existing customers. While we did see positive growth in automotive, customer production issues impacted volumes in the quarter. On the positive side, we see production issues moderating and expect a strong outlook for automotive volumes through the remainder of the year. Minerals and Metals both outperformed, driven largely by very strong aggregates in steel demand. Pricing was up year-over-year as we benefited from favorable contract repricing and higher fuel surcharge. For the remainder of the year, we will continue to see benefits from a supportive pricing environment and improved rail service. While the economic outlook remains uncertain, we continue to see positive momentum in many of our merchandise segments as the team focuses on the growth drivers that we can control. It's still early but we are encouraged by our ability to convert improved service into new business wins in segments such as auto, minerals and food products. There remains a significant opportunity to win share from truck across our merchandise portfolio. Turning to Slide 12. First quarter coal revenue increased 19% on 19% higher volume and flat revenue per unit. Export volumes were strong as we leverage improved cycle times and improved production and performance at the origin mines. We also benefited as we lap the effects of reduced capacity at our Curtis Bay terminal. Our domestic shipments also improved on utility restocking demand and improved rail capacity. International met coal benchmarks remained strong over the quarter and now sits just below $300 per metric ton, which continues to support strong production levels. Looking ahead, the international coal market continues to be supported by healthy commodity prices that should drive positive year-over-year volume growth through the remainder of the year. While the domestic market could face a more challenging backdrop should natural gas prices remain low. Turning to intermodal on Slide 13. First quarter revenue decreased by 5% as a 9% decrease in volume more than offset a 5% increase in revenue per unit. Most of this volume decline was due to weakness in international intermodal markets, which, as we expected, have been heavily affected by slowing import activity as demand softened and retail inventories remained elevated. Looking forward, while the intermodal market currently remains challenged, we do expect second half year-over-year headwinds to moderate. The team has a number of initiatives underway to continue to drive truck conversion by introducing new lanes of service where there is market demand. Now finally, turning to Slide 14. Many of you are aware of the major market shift developing over the last few years as more companies look to diversify their supply chain and bring capacity closer to their key end markets. We have been encouraged by the acceleration in activity with manufacturers of all times, announcing plans and committing capital to build capacity in the Eastern U.S. For CSX, this represents a great opportunity. Our network connects the major population centers of the Northeast with the fast-growing areas of the Southeast that are highly attractive for companies looking to expand. The mission of our industrial development team is to partner with these companies and provide them with a rail serve location where they can leverage the benefits of the CSX network and industry-leading service. We continue to invest in our select site program that has expanded to include a wider range of rail serve site opportunities. Combined with new technology enhancements, this will allow us to capture industrial projects of all sizes by offering shovel-ready development sites with access to CSX network. As you can see on the slide, we are excited about the success we are seeing. In 2022 alone, our customer partners brought nearly 90 new facilities online, representing $8.2 billion of total investment across our network and on our short line partners. The map shows how broadly these in-service projects stretch across our service area. Our pipeline remains robust with over 500 projects in process across our entire industrial development pipeline, and we're adding to this total each month. Over time, we expect the new business that these projects represent to be a key driver to our growth algorithm as we help our partners bring in an increasing number of expansion projects onto our network, driving volumes and revenue higher. I would like to thank the entire team for all of their efforts across our growth initiatives. We're very excited about the momentum we are building and the engagement as we partner with our customers to grow together. Now I'll turn it over to Sean to discuss the financials.

Joseph Hinrichs:

Thank you. Thank you, Sean. Now let's conclude with some comments on our outlook for 2023, as shown on Slide 20. First, as you heard Kevin describe, we are very pleased with the performance we have seen year-to-date from our merchandise business. Strong demand for grains, metals, Minerals and Automotive, combined with significant new customer wins give us increasing confidence that we will be able to deliver solid volume growth for the year in merchandise. We're also off to a strong start to the year for coal, and we expect continued benefit from healthy export demand, both thermal and met. Our merchandise and coal have met or exceeded our expectations. Intermodal volumes have been below what we anticipated. We knew the intermodal -- sorry, we knew the international intermodal activity will be down substantially over the first half of the year. And though parts of our domestic business are doing very well, has not been enough to offset the effect of lower imports and elevated inventory. Altogether, Intermodal contributes less than 1/3 of our revenues, but it does contribute roughly half of our volume and was a drag on our total volume over the quarter. The softer intermodal performance will make it difficult for our total CSX volume to meet our previous guidance and grow faster than GDP, especially as consensus GDP estimates for 2023 have moved up and are currently at 1.1%. That said, the effect on our business mix is favorable. Revenue ton miles grew by a solid 4% in the first quarter, driven by the strength in merchandise and export coal and we expect revenue ton miles to grow solidly in the low single digits for the full year. The rest of our outlook is consistent with what we told you at the beginning of the year. We continue to benefit from the favorable pricing environment with customer negotiations supported by our transparency on costs and our improved service products. We still expect supplemental revenues to decline by roughly $300 million compared to last year, with much of that decline in run rate already in [indiscernible] in the first quarter. International met coal benchmarks remained very strong over the quarter and spot prices are just below $300 per tonne today, but year-over-year comparisons will get tougher from here. We will continue our efforts to drive higher efficiency and reduce excess costs to counter the inflationary effects in our labor and other operating costs as best we can. So -- the best way for us to support our margin performance will be to drive more merchandise volume and benefit from the powerful operating leverage potential of our network. Lastly, we still estimate cash flow expenditures at $2.3 billion. In closing, I am very encouraged by what we accomplished in this quarter. I'm energized to see the ONE CSX culture start to take shape across this company. Every industry has challenges, but ours are addressable and solvable, and I am confident that they are far outweighed by the opportunities that we have ahead. As I said before, all of us here at every location across our network share a common goal of providing the safe, reliable service to our customers that drives profitable growth, and we are taking meaningful steps towards that goal. Thank you, and we'll now take your questions.

Operator:

[Operator Instructions]. We'll take our first question from Brian Ossenbeck with JPMorgan.

Kevin Boone:

Yes. I think you probably remember the discussion over the last few quarters where we said we weren't up against the order rates. I would say we're probably more in line with that, especially with our improved service levels. So we're meeting the customer demand currently, but we did see weakness kind of starting last year during the third quarter, fourth quarter period. So as we look through the back half of the year, in many of our markets, particularly on the merchandise side, we see -- we should see some easier comparisons based on the current economic activity that we're seeing. So that's what gives us kind of the confidence in the guidance as we move through the year.

Kenneth Hoexter:

Great. If I could just follow on that thought there, Kevin. So it seems like something changed economically kind of mid-February, right, if we look at spot rates in trucking. Can you talk about -- I don't know, Joe, you seem to be talking about kind of intermodal being tougher, and that's why switching from a GDP plus to a kind of an RTM type of outlook. Is there something changing economically in the backdrop more recently? Or is that just the weakness in the truck market? Maybe just talk a little bit about on the intermodal side or just the economic background.

Operator:

We'll take our next question from Jon Chappell with Evercore ISI.

Kevin Boone:

Yes. Typically, when you look at our renewal rates, and we renew a little over half our business every year, and that's highly concentrated in the fourth and first quarters. And I would say, given the backdrop in inflation that we would certainly we're having those conversations with our customers to be able to cover our cost increases that are very visible to the market. As we continue to prove our service, customers continue to reiterate, they're willing to pay for the service and the reliability that we can provide. And the plan is, and we -- I think that's starting to occur as we believe we have a differentiated service in the market. And so it's -- we're starting to see early success in our conversations with customers around more volume opportunities with them. And I can't reiterate enough in a market like this is where we should be taking share. Our customers are looking for ways to save money. Usually, rail is a cheaper option for them, and they're getting more and more confidence in our ability to deliver the service that we need to. So the team is very, very excited about some of the things that we've been able to do here over the last few months.

Brandon Oglenski:

And maybe this is for Joe or Jamie, but we've had, obviously, a lot of negative press on the railroads, unfortunately, in the last few months. And the PSR concept has kind of been dragged through the mud a bit. But can you guys compare and contrast because you are delivering just like the last question, very good service metrics here. So what's driving the difference between the rest of the industry? And I guess, how do you leverage that going forward. .

Jamie Boychuk:

Well, Joe hit it really well. For -- when I think about -- and I hear people say PSR, what does that really mean? I don't know. I only know one way to railroad. And this is the way I was taught the railroad many years ago back when I was at CN. So we've been able to teach the great folks at CSX over the past 6 years how to do this. I've got an unbelievable operating team, some great bench strength and we are doing fantastic, and we've got the resources in place in order to now actually operate the plan. We struggled for years to do that through COVID, but we've come out of it the way we said we would. And we're operating the plant and the team that's out there that's exercising that in the field, not just the network folks who put the plan together, but the field team who is executing it and the folks on the [indiscernible] line who are running the trains each and every day that are doing an unbelievable job are getting the trains from point A to Z the way we need them to and servicing the customers the way that we've committed to servicing them and giving Kevin and his team a product that gives them an opportunity to finally go out there and sell something that's different. So I don't know, call it what you want. I just call it railroading.

Scott Group:

Kevin, how should we be thinking about rev per carload in sequentially even from 1Q, 2Q. Just maybe walk us through some of the puts and takes. And then similar things, Sean, just 60.5% OR in Q1. I know there's the insurance recovery, but do you think we see sequential improvement from here the rest of the year.

Sean Pelkey:

And then, Scott, in terms of operating ratio, yes, I mean, 60.5% for the first quarter is obviously a great start for us. I think as you think about sequentially, you probably have to normalize that for both the insurance gain and then the favorable fuel lag benefit that we had in the quarter. So that gets you to around a 62.5%. We almost always do better in the second quarter from an OR perspective than the first, and that's primarily as a result of the fact that volumes typically seasonally increase in Q2 relative to Q1. We don't see any reason to believe that we'll see anything different this year. Particularly with some of the issues we had in Q1 with auto production that should ease here, have eased and a strong demand for aggregate. So it's a good setup. I will say just one thing to caveat that with is other revenue was a little bit elevated in Q1 versus the run rate where it likely will be the rest of the year, that may be a little bit of a headwind, but on the flip side, we feel good about the cost momentum if service continues to be at these levels or even better, we should see more costs come out sequentially.

Fadi Chamoun:

Yes. You had the slide talking about the 19 new facilities coming online and obviously, a very strong pipeline that you've discussed in the past into '24 and '25. But I'm just curious when you talk to existing customers, your existing facilities, are you seeing growth in your share of wallet? If you could give us some examples, some tangible example to kind of appreciate that.

Operator:

We'll take our next question from Tom Wadewitz with UBS.

Jamie Boychuk:

Mike, we've got a good number with respect to our people. We're still working on a -- like to get another 150 to 200 folks as we try to get closer to a 7,400 number, in particular, for vacation peak. We're sitting around 70% to 80%, I think, today, close to 73%. So we want to push towards that. Now remember, attrition is 10%. We've got to continue to stay up against attrition, which also gives us another trigger if something goes the other way, where we could react, as Sean mentioned, with some costs along the way if we needed to. Resource-wise, we definitely have enough locomotives out there. As a matter of fact, the faster we get the more fluid we get, we need less locomotives. So we'll continue to analyze those resources and pull them out where we need to, but keep them in a spot where we can use them as Kevin and his team brings more business on we're able to bring them back. And of course, everything that comes back earns its keep. So we'll continue to work those resources. But on the car side, that's a strategy we continue to look at as a team. working with customers. I know Kevin and his team and my team are working close to make sure we've got car supply as we need them as we work with customers and make sure that we have the right resources on that end. At this point in time, we feel good with where we are. But you see the growth that's coming, and Kevin talked about some of those growth areas that are out there. Maybe he wants to touch a little bit on the car side and what he sees in his discussions with customers in those resources. But other than that, -- we're in good shape with everything.

Operator:

We'll take our next question from Justin Long with Stephens.

Sean Pelkey:

Yes. I think we're off to a good start. Like I said, we had about $15 million to $20 million of what I would call congestion related cost savings in the quarter. That was mostly -- you see that clearly on the rents line on a within PS&O related to intermodal terminals. So we are already seeing some of those costs come out, as I mentioned, sequentially into Q2. Our forecast is that we'll see that pick up a little bit. And then as we get to the second half, that's where we'll see the bulk of it, like you mentioned. So -- and that's going to be in -- continue to be improvements in things like rents and intermodal terminals, locomotive maintenance related to the engine count that Jamie talked about, over time and other related crew costs. So -- and then on top of that, we've got other initiatives not just related to cycling some of the congestion issues from last year that we're working on. And of course, volume growth always helps in terms of productivity levels, both our crews and our assets.

Christian Wetherbee:

Maybe a question on the headcount side. Jamie, you gave some good near-term color. I guess I'm curious in the context of sort of your progress towards that 7,400 goal. And then reflecting the fact that the volume environment is maybe a little bit more questionable than it was earlier in the year. Is there a point where maybe you hit the pause button on hire and kind of reassess the volume environment? And so after the second quarter, we could see that number potentially moderate depending on the economic conditions we're seeing.

Operator:

Our next question comes from Amit Mehrotra with Deutsche Bank.

Sean Pelkey:

Yes. I mean, Amit, we don't get into sort of specific margins within each line of business. To the extent that intermodal volumes were down, which, of course, they were. You're going to see savings at intermodal terminals. We'll be able to see some savings on our crew starts. We'll have some savings on fuel -- but did that disproportionately impact our margins this year? And would that disproportionately impact them if intermodal or I should say, when intermodal recovers I don't think that's our view. We've got strong incremental margins within every segment of the business. And I think as intermodal -- as those volumes normalize and begin to grow again, it's going to have a positive impact on our operating ratio.

Ariel Rosa:

Congrats on a strong quarter here. Kevin, you laid out a pretty exciting pipeline of new business opportunities there. I was hoping you could maybe quantify the impact of that in terms of revenue or earnings and kind of what the time line might look like for realizing whether it's that 500 set of opportunities that you talked about, what that might look like over the next couple of years.

Operator:

We'll take our next question from Ben Nolan with Stifel.

Kevin Boone:

Well, as you know, over the last 40, 50 years, the railroads haven't done a great job of attracting new industrial development to the railroad. So it's all about getting the word out. It's all getting investing in our team, making sure that companies understand the advantages particularly some of these new markets, when you think about battery production that is very, very new to the United States, and they need to -- they're not familiar with necessarily rail infrastructure and what we can offer. So A lot of the exciting emerging markets, that's where you have to be out in front of it and make sure that you have -- you offer the locations, the infrastructure, the energy resources that they need in order to move quickly. And it's all about having shovel-ready opportunities that touch the railroad, which you can develop quickly. And the market is moving way quicker than it ever has. And so that's why it's key to have these industrial sites ready for those customers to go. We compete every day with our eastern peer as well. And certainly, we're learning -- leaning into the service that we can provide. We touch a lot of other good industrial companies that they want to reach. And so those all things are factors in our selling points to the customers as they make these decisions.

Unidentified Analyst:

This is Andre filling in for Jordan. I just wanted to sort of follow up on the fuel piece. It looks like fuel surcharge revenue was up $121 million year-over-year, but fuel expense was only up $33 million. So the net of the 2 is an $88 million benefit to EBIT in the first quarter. I think that benefit was more like $63 million in the fourth quarter. So some acceleration here on the fuel benefit. Any expectation for, I guess, how that trends in terms of timing or magnitude, It just -- or it seems like based on the diesel strips, you might see some benefit in the second quarter still and maybe drop in the third quarter. You just sort of curious in your thoughts here and what offsets there might be.

Operator:

We'll take our next question from David Vernon with Bernstein.

Sean Pelkey:

Absolutely, David. So on cost per employee, I think we came in right about where we expected. Maybe a little bit favorable just due to mix impact of employees with the driver count at quality, which are a little less in terms of dollars per employee -- as you go to Q2, I think it will be fairly stable versus Q1, maybe up a little bit depending on that employee mix. And then as we get into the second half of the year, you will see a step-up just due to the timing of the wage increases for the union employees, which is scheduled to be a 4% increase -- in terms of the cost of the , which we've now got agreements with about 10,000 of our union employees -- we are -- we have added those costs into the forecast. The experience so far has been very positive. We are seeing the employees take advantage of the benefit, and we are seeing when that's needed. There's a little bit of additional overtime, but there are some benefits to it as well and certainly quality of life is 1 of those benefits. And on a net basis, I would say, a couple of million a quarter at this point.

Allison Poliniak:

Just going back to the share gain piece of it. Merchandise volume, you grew 4%. Is there any way to quantify or give us some perspective of what those share gains were this quarter, if any? And as we think about that spread over what the market is growing in those areas, is that 1% to 2% on top of that a pretty good guide. And would that be more of '24 for this? Or do you think you can get there in '23?

Operator:

We'll take our next question from Walter Spracklin with RBC Capital.

Sean Pelkey:

Well, Walter, I think you think back to the 58 OR, the first thing you've got to recognize is the quality acquisitions since then. So that's about 250 basis points of headwind. And we've had a lot of inflation. We're paying employees more. The underlying cost of contractors and materials is higher. And so those are headwinds. That being said, as we continue to run the business well and we deliver good productivity, and we get great feedback from the customers. We've got this pipeline of wins that are setting up as well as delivering against customer expectations and demands. We're going to deliver that at strong incremental margins, and that's going to help out over the medium to long term on the OR. I can't give you a specific point destination. But as we go forward, we would expect improvement from where we are right now.

Jason Seidl:

Congrats on the good quarter. It's really nice to see the service doing so well here, and that was reflected, I think, in our survey that we did this quarter. I wanted to talk about your outlook and sort of what's baked in with an assumption on the West Coast ports sort of coming to a labor agreement. Are you looking for some of that East Coast volumes to shift back? And if so, how do you think it will affect operations?

Operator:

Thank you. And this does conclude today's presentation. Thank you for your participation, and you may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Before beginning, the Company would like to remind you that the forward-looking disclosures have been provided on slide 2, and non-GAAP disclosures are on slide 3. I would now like to turn the call over to CSX President and CEO, Joe Hinrichs. You may begin your call.

Kevin Boone:

Thank you, Joe. Turning to slide 7. Merchandise revenue increased 7% in the quarter, as a 9% increase in revenue per unit more than offset a 2% decline in volume. For the full year, merchandise revenue increased 9% on 1% lower volume. 2022 merchandise growth was driven by higher fuel surcharge combined with an increasing pricing environment as inflation accelerated through the year. Looking forward to 2023, we have significant network momentum as we began the year, and we expect to leverage industry-leading service into growth opportunities with our customers. This is reflected in our recent customer surveys where we have seen a significant improvement in overall customer satisfaction scores. We see opportunity for solid volume growth in merchandise for the year, led by continued strength in automotive, our growing export plastics business and share gains as customers respond to our improving service. This growth is likely to be partially offset by weaker housing-related and domestic chemical shipments as we start the year. On slide 8, you can see fourth quarter coal revenue increase 20% on 9% higher volume and a 9% increase in revenue per unit. Full year revenue increased 36% on 1% lower volume and a 38% increase in revenue per unit. In 2023, we expect export coal volumes to grow in both, met and the thermal markets. So, we do expect benchmark indexes to decline from the elevated averages of 2022. We're optimistic about the potential positive demand impact of China's reopening. While on the supply side, we have a new 4 million ton met coal mine coming online this year. We also anticipate volume opportunity as we lap 2022 issues, including reduced production at some CSX-served mines and capacity limitations at the Curtis Bay and Mobile export terminals. We expect domestic volumes to be low -- be driven by low thermal stockpiles that remain below historical averages. Healthy inventory levels will allow utilities to better respond to natural gas volatility and more readily dispatch capacity to reduce stress on the U.S. power grid. U.S. steel production, which drives domestic coal consumption to benefit from a recovery in the automotive industry as well as higher infrastructure demand. Now turning to slide 9. Fourth quarter intermodal revenue increased 4% as a 9% increase in revenue per unit more than offset a 5% decline in volumes. For the full year, revenue increased 13% on flat volumes due to a 14% increase in revenue per unit. International intermodal markets continue to be negatively impacted by slowing activity, which looks likely to continue into the first half of 2023. Imports have declined and warehouses have seen elevated inventory levels. To help counter this, we are pursuing several initiatives to bring new solutions to our customers to help them reach new and existing markets. With our domestic intermodal business, we see opportunities even as the trucking market has softened. The team is focused on accelerating truck-to-rail conversions, and now with equipment constraints largely behind us, the team has more opportunity to pursue these initiatives. We are seeing existing customers and those that are new to intermodal adopt strategies to drive more of their transportation spend to rail. The team is doing a great job of identifying these opportunities and building the relationships to drive this growth. Finally, moving to slide 10. Let's discuss CSX's role in reducing our customers' emissions. As we pursue truck-to-rail conversions across the markets we serve, we are actively promoting rail's environmental advantages to our customers. We are increasingly looking for ways to reduce their own emissions. These are board level initiatives for our customers and the opportunity to choose rail over trucks provides real, measurable savings across the entire supply chain. In 2022, CSX customers avoided emitting 10 million tons of carbon dioxide by choosing to ship with CSX versus truck. We continue providing an emissions advantages for our customers, we need to keep innovating. We are not only piloting new technologies that should provide fuel savings like zero to zero, but we are exploring emerging technologies that can be implemented in the future and keep CSX at the forefront of delivering best-in-class efficiencies. Providing visibility to our customers is also a priority. I'm excited about the additional insights we will provide to customers to help them identify and convert incremental freight to rail by utilizing our updated carbon calculator platform that will launch in the first quarter. Lastly, we are proud of the recognition CSX has received for our sustainability efforts, with several of our awards listed on this slide. It is a priority for us to remain an industry leader in environmental stewardship, and we look forward to sharing more details on the several projects we have underway throughout the year. Now, let me turn it over to Jamie to discuss operations.

Sean Pelkey:

Thank you, Jamie, and good afternoon. Looking at fourth quarter financial results, revenue increased 9% and operating income increased 7% to $1.5 billion as top line gain outpaced several expense headwinds that I will discuss in more detail on the next slide. Interest and other expense was $6 million favorable compared to the prior year and income tax expense increased by $15 million. The effective tax rate in the quarter was 21.9% as a result of favorable adjustments to deferred state taxes. Our expected tax rate going forward continues to be 24.5%. Fourth quarter net earnings increased 9% to $1 billion, while EPS grew 17%. Full year 2022 results were highlighted by top line growth of 19%. Operating income was up 8%, which includes a 4-point impact from the Virginia real estate transaction, resulting in 12% growth when adjusting for these gains. Let's now turn to the next slide and take a closer look at fourth quarter expense. Total fourth quarter expense increased $210 million compared to the prior year, driven primarily by higher fuel costs and inflation. Fuel expense was the most significant driver of $129 million due to higher prices. Labor and fringe expense increased $23 million as the impacts of additional headcount and wage inflation were partially offset by lower incentive compensation. PS&O increased $54 million, primarily due to higher operating support and terminal costs, which will remain somewhat elevated near term as operations continue to improve. PS&O inflation is also running around 5% and the quarter included about $10 million of expense from obsolete inventory and technology write-offs. Depreciation increased by $33 million in the quarter, which includes an ongoing quarterly impact of about $20 million related to the completion of a periodic equipment study. As a result of this study and a higher net asset base, full year depreciation expense will be up approximately $100 million in 2023. Equipment and rents was relatively flat versus the prior year and gains on property dispositions increased $31 million. While we are always looking for opportunities to leverage excess real estate, we'll likely have a few small gains. We aren't expecting any significant sales activity in 2023 at this point. Overall, congestion-related expenses were slightly above $30 million in the fourth quarter, and part of that cost was incurred during winter storms at the end of the period. Despite elevated inflation and increased headcount, we expect to deliver strong cost efficiency throughout 2023, as better fluidity reduces terminal costs, overtime pay and other expenses. Now turning to cash flow on slide 18. Full year free cash flow of $3.7 billion decreased $100 million but was approximately $100 million above prior year results adjusting for the Virginia transaction. Operating cash flow increased over $500 million on higher earnings, more than offsetting approximately $350 million of additional capital spend from our continued focus on both, investing for the long-term reliability of our network, as well as identifying and executing high-return strategic projects. After fully funding capital needs, we returned nearly $5.6 billion to shareholders in 2022, including over $4.7 billion of share repurchases and $850 million in dividends. We exited the year with a strong balance sheet and liquidity position, including $2.1 billion of cash and short-term investments. Looking forward, we remain committed to a balanced and opportunistic approach to returning excess cash to shareholders. With that, let me turn it back to Joe for his closing remarks.

Operator:

Thank you. [Operator Instructions] With that, our first question comes from the line of Amit Mehrotra with Deutsche Bank.

Sean Pelkey:

Amit, this is Sean. Yes. So, in terms of the yields, I think Joe sort of laid out our expectation on the coal side, perhaps a little bit lower just looking at the comparison versus some of the record levels last year, fuel potentially a little bit of a headwind on a yield basis as well. We'll have a little bit of positive mix, at least in the first half here with the pressures on intermodal, specifically relative to the growth that we expect in merchandising coal. So, that's the yield story. And then, in terms of the costs, I think there's a number of different categories. Certainly, with the intermodal terminals becoming more fluid as some of that traffic moves its way out of the system and start spinning again. We should see some costs come down and the terminals are in very good shape right now. We should see reduction in freight car rents as our cycle times improve and they have already, things like overtime and ancillary costs related to the crews getting hung up last year with delays in service and then locomotive maintenance as we're able to spend the assets faster here. So, those are a few categories where I would say we ought to expect some improvement this year.

Sean Pelkey:

No specific number, no. I mean, we're going to have inflation headwinds, right? I think, probably in the 4% to 5% range. And our goal is going to be to offset as much of that as we can, both through taking out some of those extra costs that we carried last year as well as continuing to find efficiency gains across the business.

Justin Long:

There are a lot of moving pieces this year in the outlook. So, I was just curious if you could give us any directional color on the year-over-year change you're anticipating for both revenue and operating income? And maybe you could comment on what that trend line could look like throughout the year, if things are going to get better or worse? Would just love some additional thoughts.

Operator:

We'll take our next question from Brandon Oglenski from Barclays.

Joe Hinrichs:

Yes. Thanks, Brandon. I think -- this is Joe. First off, thanks for recognizing the pretty significant service improvements and operating performance that we're seeing continuing into January. Our team works great together. So for what it's worth, and clearly, Jamie and Kevin, their offices are next to each other, and they're talking all day long. I'll let them talk more about that. But you referenced the fact that there's been some conversation for quite some time that our challenges were manpower levels and then how that affected the fluidity of the network, we're seeing, as you just referenced, the performance that comes from game of manpower levels where we want them to be and running this network the way it was run prior to the pandemic, which is a very strong operating team. So, the conversion opportunity is to demonstrate some repeatability and predictability around our performance and to show our customers that we now only have -- we have the capacity in place and we have the performance to demonstrate that you should come back to us. And I'm feeling optimistic about that. And the conversations we're having with customers, they're recognizing the improvements that we've shown for the last several months. And they're also confident in our ability to continue that, especially now that we have the manpower levels where we want them to be. So, if you look at it, we're still not meeting all the demand that’s out there for carloads at our business -- for our business. And as we go through the year, we'll look for every opportunity to do that. I'll let Kevin talk more about some of the opportunities in the markets themselves. And then I'll let Jamie talk about the operations. Thanks.

Jamie Boychuk:

I think really, the only thing I can add to that is there's a lot of capacity out there. So what Kevin and I talk about is where is that capacity, what can we do with that capacity, and how do we get out there and sell it. My team is out in the field, ensuring that they are talking with customers more than they ever have because they have time to do that. Previously, we were trying to find a crew to run a train here or there or wherever else. Now they have the time to sit back and deal with any of those customer demands that might be out there that helps Kevin and his team grow. Some of those discussions we have are what does the customer really looking for? Is it the right metrics that we're looking at that the customers are looking for and that first mile, last mile improvement that the team has been able to put together is really record-breaking for us. If I look back at the last 6 years, we haven't -- '22, unfortunately, wasn't the best year for us, but exiting '22 with our customer service and in '23 are some of the world record numbers we just haven't seen. So, our job is to keep producing those numbers and making sure Kevin and the team has what they need to get out there and sell and commit to the customers that -- what you see out there is what you're going to continue to see. So some great collaboration between our two groups.

Chris Wetherbee:

So I guess, thinking about the outlook and the optimism around growing merchandise and coal and good incremental margins with that coming on sort of compared, contrasted against some of these what are perceived to be very high-margin sort of revenue headwinds that you have, whether it be the accessorials coming down $300 million or the coal -- export coal yields coming down. When you think about those two relative to each other and the potential for cost out, I guess, any help in terms of how to think about operating ratio or the outcome of that whether it be maybe first half versus second half or across the whole year would be helpful. Just I think that perception of high margin on those headwind pieces is something that we're struggling with a little bit.

Operator:

We'll take our next question from Scott Group with Wolfe Research.

Sean Pelkey:

Yes. Scott, on your question about how much growth, I don't think we're in a position to answer that one right now that you kind of run it through the model, but I think we've given you enough of the factors. And I think the fact that we sort of pointed to coal and merchandise as areas where we think we can sort of meaningfully outperform whatever the economic indicators that are out there is a reflection of the fact that we feel good about where we are from a capacity and service standpoint and the ability to sell into that market. But, we're not going to give you a specific number there.

Operator:

Our next question comes from Jon Chappell with Evercore ISI.

Kevin Boone:

Yes. I think when you look at -- and look, three years -- or three weeks doesn't make a year, so we've got a lot of work to do as a team. But we -- I think you'll see over the last two years and through the pandemic that we really outperformed the industry and a lot of that growth that we mentioned before came on the international side. And we don't pay -- we don't spend a lot of time thinking about the other Class 1 railroads, but I do believe we probably have a little bit higher percentage of our businesses, obviously, exposed to that international market where we've had a great, great success, and we see a long-term outlook that's very positive for us. So, I think that's probably contributing to some of the things we're seeing here recently. But we've obviously had great performance and continue to think we'll win share in the market. The team has got a number of initiatives that will take form later on in the year and that will drive incremental business to the railroad. So excited of what we can do in the quarters ahead.

Tom Wadewitz:

I just had a clarification for you first, before the question. I don't know if I caught what your GDP assumption is or which forecast you're referring to just in terms of how we anchor to the volume comment? And then, Joe, I wanted to see if you could offer some more thoughts about your comments on relationships? And I think tying into labor, how do you think about how you want that relationship to change? Does that cost you something to do that? And what's the benefit over time? Is it just probably attrition is running 15% a year, we wanted to get down to 5%, and that saves us sort of help service. Just some broader thoughts on when you talk about relationships and labor, what do you mean by that? And how do you think about what that does over time?

Joe Hinrichs:

Yes. Tom, this is Joe. Thanks for the question regarding labor. So lots of thoughts here, but I'll try to be concise. First, just a reminder to everybody that this is a service business. And we provide our service to our customers. We move their goods from point A to point B, and we're proud of the way we do that. But remember that in the service industry and service business, it's all about the employees. You're not selling a product, you're not developing a product. You're really relying on your employees to represent your company in the service of your customers. I start there because that's so critically important to understand why it's so critical to have a really strong relationship with your employees, including those represented by unions because they are the individuals doing the work, providing -- moving goods to make Point A to Point B and serving our customers. And so, the motive here isn't to try and leverage relationships to try and decrease costs or find a dollar here and there. It's all about building a culture where our employees feel valued and appreciated, included in the service of our customers in a way that we can demonstrate that CSX is unique and different from the other options they have, and provides a value proposition to our customers that we think can be very, very special. And so, there's a lot of -- I've been spending a lot of time out in the field, Jamie and I travel almost every week. And as I've learned a lot about this industry, about this business, there's a lot of variability and a lot of independence when it comes to the work that's done now in the field, because this is not a factory assembly line where you're stationed in a certain position and you've got a cycle time to meet, and if you don't make it, all bells and whistles go off. When you have your employees motivated, engaged and feeling valued, their efforts to support what your initiatives are, are greatly enhanced. And that's just human nature, and that's really what's important about this relationship is that listening to our employees, resolving their issues, working on things that improve their efficiency and their work life balance and their work life experience and safety and other things, leads to a better service product for our customers, which ultimately leads to a better business for everyone, including our employees. From the labor side, it's really about building relationships and generating trust and getting to the point where you're going to have real dialogue around solutions and around ideas and around understanding each other's desires and perspective so that we can find the best solutions. I have found in my past experiences that when you get to that point, you have a healthier business and you have happier, safer employees who are working better together to serve the customers. That's really the desire here is to provide that kind of opportunity for our employees. Now, what comes with that? Lower attrition, better recommendations for the referrals, for new hires and in the family and fund network, and just a better experience for everybody. So that's really a big part of the ONE CSX culture initiative is all around building this team, working all together and labor is a big part of that. And so, it's a little more complicated in the rail industry with 12 different unions. However, we feel really good about where we are with our team, Jamie and his team are working every day, having lots of good discussions. We voluntarily on our own, changed our attendance policy based on feedback. That's really impactful to our employees. That's a great first step in this relationship. We're listening to them every day. We're working on problem solving, and ultimately, with the purpose in mind of creating that environment where employees want to be a part of that and want to serve our customers better. And with that comes a much more efficient operation and, frankly, better service for our customers, which ultimately leads to opportunity for growth.

Ken Hoexter:

Hey. Good afternoon. And thanks for the rundown there, Joe. Just maybe can we clarify? Sean, I guess you're looking for volume growth offset by accessorial and cold yield declines, efficiency gains with service costs gone, but inflation up. But I just want to clarify, you're not specifically committing to income or operating improvement for the year, right? There was no outlook on what that means for collateral or the EPS line?

Ken Hoexter:

And then Jamie, the on-time originations fell to 54%. I think they've fallen now 12 of the past 13 quarters. Isn't the whole name of the game of what you're doing with precision railroading to leave on time and get that moving? Maybe talk to me about what the network needs to do to fix that? And Joe, I don't know if you've come in what your thoughts are on operations, what balance of operations versus top line growth.

Joe Hinrichs:

Yes. So Ken, thanks for the question. A couple of just additional comments. We spend a lot of time as a team talking about our customer service metrics, whether it's on-time, originations and arrivals, whether it's in the last mile, first mile, those kind of things. And I'm really pleased with how the team is looking at everything. And we want to make sure that we're seeing the world through the lens -- through the eyes of our customers, which is why we get feedback on surveys. And Kevin referenced, we've seen the best results in our customer surveys that we've seen in quite some time. So, I feel really good about that. Now, the balance between top line growth and operations, I think they're intertwined. And I said this in October. I feel even more strongly about it now. We have a phenomenal opportunity here at CSX to leverage our strength in our operational performance that you've seen pre-pandemic. You're seeing now again to earn the right to talk to our customers about getting more business. And that is a lot better than chasing top line growth, and to be able to demonstrate that you can rely on us with our capacity and our service levels and our prioritization on your service to be there for you. And I believe very strongly, there's business opportunity there. So, we can allow that to happen naturally organically because we have a better product. We have a lower price than most trucking. And we have a better ESG solution and to do that the right way. So that's why we've been so focused on getting the manpower where it needs to be and really getting -- making sure that we're focusing on the right metrics for the business, and I'm really pleased with where we are. So, I feel even more strongly today than I did in the call in October about this opportunity. We can't predict what's going to happen in the economy this year, and that's part of what you're seeing in some of this dialogue is we're not exactly sure what happens in the second and third quarter. We're very pleased with how the year has started. However, we don't know exactly where the economy is going to go, given rising interest rates and some of the other things that are going on. Actually, you could say that in the data that we've been seeing that some parts of the economy started slowing down really in October-November. And we just didn't see it in our business because we couldn't meet some of that demand back then. But we feel really good about where we are. We're not going to chase top line growth. We're continuing to leverage our operating model, but we believe it's there to be earned, and that's the conversation we're having with our customers.

Brian Ossenbeck:

Maybe just on that last part about unmet demand. We heard that a lot across the different Class I rail conference calls. And is there a way, since you're counting on it and you're seeing some of it through surveys and clearly, the service has improved. Is there a way you can sort of try to quantify that for us in terms of what you lost or what you think is coming back with fill rates or anything else you can put around there in terms of a metric? And what gives you that confidence that you can count on that coming back, not just the interest level is there, especially when you have a softer macro and probably contract truckloads heading lower as well?

Brian Ossenbeck:

And would you expect that to be more heavily weighted on the merchandise side because that probably was a carload before, or are you seeing real momentum on truckload conversion, maybe more on the intermodal side?

Operator:

Our next question comes from Ariel Rosa with Credit Suisse.

Kevin Boone:

Yes. The truck market is obviously -- centers around our intermodal product. That's where we go direct with truck, not that we don't compete on our carload business as well, but that's where you see the sensitivity sometimes. In international market, as everybody is aware of, has been weak, and we've got -- we've had great growth there, and we have a great market that we continue to expect to grow over time. But, as I mentioned in my recent comments -- opening comments that that market probably will be down somewhat double digits in the first half of the year. And hopefully, as the economy stabilizes and there's some green shoots out there that we'll see some better growth into the second half of the year, at least, not the decreases that we're experiencing today. I think, every bit of intention here is across our portfolio that we're going to outgrow the macro economy. And I think there's a lot of things at tailwinds at our back. But we've had a huge success rate on our industrial development side. We have a lot of new projects that are coming online when you look out beyond this year. Big, big backlog, probably the largest backlog that anybody here can remember in a long time whether it's new auto plants, metals plants, all those across the board, we've really had a good success rate there, and that will give us growth going forward. So, our intention is to outgrow the economy. And I know that's not something that the railroads have been able to do. But I think there's -- with the service product that we're going to have, I think that's really, really possible going forward.

Kevin Boone:

I think -- I don't know a business that we're bringing on where the incremental margins aren't very attractive and are in a very good rate of return for us. I put my finance hat on every time I look at the business, and we're not going to chase unprofitable business just to show top line growth.

Fadi Chamoun:

Maybe first on those two boxes and the guiding principles, and Joe, you highlighted improving customer service and developing the employees. And especially with respect to some of the conversation maybe you're having with customers, do you feel that there's going to be a lag between when you start demonstrating the success on the service side and really penetrating that share of wallet with these customers, or do you think there is really a quick potential turnaround between kind of making those improvements in the time, that market share improvement? And second, maybe a follow-up on the test conversation with Kevin, now like looking over into 2024 to 2025 and assuming we're back into a normalized GDP, given the backlog that you have and given some of these initiatives and the investments you've made in QC and PanAm. Outside of coal, is there a reason why you can't grow volume mid-single digits as we get into this more normalized environment? Ex coal, obviously.

Kevin Boone:

Yes. I think the question was, is there a reason why we can't grow mid-single digits. I think Jamie answered the question on the network side, we have a lot of capacity to grow into and it's -- we're going to use that capacity and go after wallet share with our existing customers and identify new customers. So, there's no constraints from that perspective. Obviously, that putting up mid-single digits volume and then with price is a pretty attractive algorithm, we'll see what we can do and what the market conditions are at the time. It's a more normalized GDP growth rate, 3% or 4%, then that's different than maybe 1% to 2%. So, we'll see how things materialize as we get out of '23, and '24, '25. The great thing is we have some tailwinds from new customers that will be on our railroad, and that will give growth above the economy, hopefully, that will add to that algorithm over time as we build the funnel of all the projects that we've been able to develop and that will be coming on line in the future.

Ravi Shanker:

Two quick ones here. First, you've said you can grow GDP plus. Many of your peers are using industrial production as a benchmark. In fact, I think one of them has come out and said a couple of years ago that they don't think they can grow faster than GDP going forward, and they think they can try and outpace industrial production instead. So, a, do you think GDP is the right benchmark for you and kind of what gives you the ability and confidence to think that you can grow faster in GDP in the long run? And just as a quick follow-up. I think you had said that incentive comp was a tailwind to numbers in '22. How do we think about incentive comp in '23? Thank you.

Operator:

We'll take our next question from Cherilyn Radbourne with TD Securities.

Joe Hinrichs:

Well, Cherilyn, thanks for the question. We've got the same stance as we did last quarter. Our T&E workforce is not a workforce that we would look at furloughing as we move forward. We're future -- we're looking into the future, really important that we -- Kevin and I obviously are -- as we stated here today, work really close together to see not only what's happening today, but what's happening in six months from now, what's happening a year from now. We know that there's customers coming on. And you're absolutely right. The conductors and filling those positions takes a long time. It can take up to six months to fill a conductor's position. And we can pull the trigger. Look, if there's a downturn in business, we can use the attrition that's there, which is up to 10%. So, it's easy for us to hold back classes if we need to, to bring those numbers down and rightsize it if we need to. But as we continue to move forward, we're looking at continuing to build our numbers up so we can get to a point where we can cover vacation time and making sure that our employees get the time off that at times they've struggled over the last couple of years. So, we're very close to that number, as you can see from our results that we're quite happy that we're moving in the right direction with our service. And it's a commitment that we've made that we're going to continue to be looking forward and not doing any knee-jerk reactions and pull that trigger with respect to attrition if required.

Bascome Majors:

Joe, last time you spoke with us on the October call, you had a few days on the job, that's a few months now. Can you talk a little bit about when you'll be able to -- or I think you'll be able to roll out your strategy to the Board and investors? And any events like an Investor Day, other format around that as you look forward to kind of getting to where you want to be to really kind of put your stamp on the business? Thank you.

Operator:

We'll take our next question from David Vernon with Bernstein.

Joe Hinrichs:

Yes. Thanks for the question. I'm not going to get into specifics about what our targets are long term. But just conceptually, let's talk about it. Just stepping back and learning about this industry and staring at it more closely over the last many months, even before I joined CSX. We interchange a lot with a number of our Class 1 colleagues. And so, this is an industry issue as well as a CSX issue, and that is around real growth, volume growth. So you referenced it. So how do we make that happen? We have capacity. We have a strong fixed cost base, a very -- a substantial fixed cost base and incremental margins are really good. So, that lends itself to really wanting to grow, like most businesses, those kind of -- and we have strong margins to start with. So, how do we grow? As an industry, as a company, I mean that's the discussion we're having and the opportunities we're pursuing over the next several years. So, from our perspective, we need to demonstrate to ourselves and to others that we can grow volume ideally above either GDP or industrial production, whatever, where do you want -- ways you want to measure it year after year and bring the margins that come with that to show growth in the business, not just on pricing, but also on volume. That is something we're looking to do, and we'll continue to challenge ourselves to do. With that comes the customer service metrics and demonstrating continual progression there in things like trip lane compliance and first mile last mile, but also in with the way the customers measure things. Are the MTs there when they need to be there? Did the load get there when they need to be there? So they can manage their manpower and their business, et cetera. So, continual progress, Jamie referenced it on the customer side. And then on the employee side, with our employee surveys and with our relationships with our union leaders and our union partners, et cetera, how do we become the kind of environment where -- back what we've had over time where you have just all this multigenerational activity because people are so proud to be a part of the CSX team and how we work together and the culture that we have around each other. So, there's ways to measure those things and challenge ourselves to be accountable with showing progress. But, if you bucket them into those areas and then, of course, we will never forget the financial results. Those are largely outcomes of all the things we're talking about, but continuing to look at our operating efficiency, continue to look at our operating income, of course, -- and our cash flow, we will always do that. So without getting into specific, you can just think about where the emphasis points are and where the priorities are. And then, I've referenced technology a couple of times here tonight, and I want to come back to that. How do we leverage technology to be more efficient, to be safer, to better serve our customers and to modernize our business across the enterprise, whether that's in the office or in the locomotive. And we see a lot of potential there. Steve Fortune has joined us. We've got a great technology team. We're excited about that, too. So, a number of things to think about and challenge ourselves for the future. And we'll have more to say about it over time. But when we get to a point where we are definitely where we want to be with our employee relationship and we have a safe, trusting environment with our union partners, where we look for solutions and work for both sides and then improve the work-life of our employees while also serving our customers better and having a more efficient business, we can achieve all those things together. Those are the objectives. And I believe we'll get there, and we'll do it the right way.

Jamie Boychuk:

I would say we are continuing to qualify conductors every week. We still have another 600 folks out there in training out in the field and some in Atlanta. And what we're doing as we move forward -- now remember, the retention rate has not been all that good with the new hires. So, if we continue to work on that retention rate, and we have a 10% all out with respect to just regular attrition as we move forward. I'm looking for another few hundred folks onto our headcount to get us into vacation season as we move forward and some of the growth that Kevin and the team see as we continue to move into the year. So, I'm comfortable with the headcount we have now, while the vacation season is low, but over the next few months, we're going to see that spike come up. And the way that we are guiding into that or gliding into that, our numbers are going to be able to hold up for what we need to not only continue where we are with our metrics, but to actually continue to improve on them as we move into the year. So, we are -- it's probably one of the first times in a couple of years, I've been on one of these calls, and I can say we're comfortable that our headcount is at a good spot and continuing to move into a good spot as we move into the year.

Allison Poliniak-Cusic:

Just want to circle back to that last question a little bit more. Joe, you had talked about some of the processes in doing business easier with rails. Could you maybe expand on that a little bit? Do you feel like in these customer surveys, the ease of doing business with rails is sort of a key limitation right now for some of that structural share gain? And is that something that's maybe within the next 2 to 3 years that you guys can attack that, or is it much longer-term opportunity there?

Operator:

Our next question comes from Walter Spracklin with RBC Capital Markets.

Kevin Boone:

Yes. I mean, first of all, quality is a very, very unique asset in a lot of ways. First, it touches our most valuable market in our largest market, which is chemicals. And I can't tell you how insightful. They have different contexts than we do on the trucking side, where those purchase managers have never dealt with truck and introducing that product to them has been eye-opening and it's something very, very new. When we talk about the CapEx related to QC this year is really a rail product, it's not more trucks that we're investing in. It's the ISO tanks that go on the railroad. And I am -- if Randy was sitting here today talking about it, he is very, very happy with how it's gone so far. The customer uptake has been pretty incredible so far. We've seen a lot of success. And our only issue is we haven't gotten them fast enough. And so that's a good problem to have, and we're going to continue to take delivery of those. Randy has come from the trucking market for a long time, and he has even been surprised about the service product and how quickly we can turn these assets for him on each side. So, things have gone extraordinarily well there. The intermodal network is ideal to convert a lot of this traffic that moves over truck today. It's meeting the customer requirements, and we're getting more and more demand from those customers out there as it gets into the market. So, that's really where the focus and the uptick in the CapEx that we talked about earlier are coming on that rail product that we're extraordinarily excited about. And we just think that the chemical customers, in particular, are looking for a holistic solution and it's pretty powerful to go in there and be able to talk and look at their network and tell them what we think fits from a rail perspective and what fits from a trucking perspective.

Operator:

Our next question comes from Jeff Kauffman with Vertical Research Partners.

Sean Pelkey:

Yes. Jeff, I think on a gross basis, right, on a full year basis, the impact of inflation on the labor line is in that ballpark, right, mid-single digits. And if you look at the headcount, if we didn't hire anybody additional all year long, we'd be up 4% year-over-year. Jamie talked about adding a couple of hundred to the headcount, so call that 5% up year-over-year. So, there's your 10%, but we are confident that as we -- as the network continues to spend, we'll be able to drive some efficiency on the labor line. We’ll also cycle, as you alluded to, the true-up that we had to make in the third quarter on the back wages. So, that will be a little bit of an offset.

Sean Pelkey:

Well, yes, we've got targets and we're going to reduce over time. We're going to reduce crude travel and some of the ancillary costs that go along with that as the network spins faster, and we'll be able to offset a good chunk of it, offsetting 5% inflation or sort of in that range and another 5% headcount would be a lot in a single year. So, we're on the right track.

Operator:

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. It is now my pleasure to turn today's call over to Mr. Matthew Korn, Head of Investor Relations.

Joe Hinrichs:

All right. Thank you, Matthew, and hello, everyone, and thank you for joining our conference call. I'm excited to be here with you today on my first earnings call as President and CEO of CSX. The entire CSX leadership team is here with me this afternoon, and we appreciate the opportunity to discuss our strong third quarter results with you. Our whole team is very motivated to build on our current momentum, strengthen our key relationships, provide better service to our customers and deliver profitable growth for years to come. We will achieve this through our One CSX culture, which at its core means one team working together to serve all our key stakeholders. As Matthew mentioned, also joining us on tonight's call is Jim Foote, who as you all know, led this company through its remarkable -- remarkably successful transformation over these last five years. Jim cares deeply about this railroad and its employees, and he has already been a great resource during my first several weeks in this role. I'll be happy to have his invaluable advice in the months ahead, and I want to thank him for all the help you have given me personally as I get the privilege to follow him. Jim, on behalf of everyone here at CSX, thank you.

Joe Hinrichs:

Thanks, Jim. I promise you this team won't let you down. I am honored to be here on behalf of the entire CSX team. I've spent the last month traveling all across the network, visiting our facilities and meeting with our customers, our employees, union leaders, regulatory partners and government officials. At this point, I can tell you two things for certain. First, this is a fantastic railroad. Our people and our infrastructure are second to none and the principles of scheduled railroading that drive our successful resilient operating model are deeply embedded throughout the company. I knew that CSX was a very impressive place when I started did not appreciate how impressive it really is until I saw for myself how this team of skilled, dedicated men and women work together to move thousands of box cars and containers for our customers each and every day. Second, for as much as this company has achieved over its transformation during the last several years, there is still so much more that CSX can do. Rail is a low-cost freight solution. Rail is a freight solution with low emissions. Manufacturing investment in the United States is accelerating. We have great advantages in this market, and our customers should have every reason to ship more by CSX rail, but we have to focus our efforts to make this happen. We have to make it easier for our customers to use our service. We have to provide better service to our customers. We have to engage with all of our employees, especially those out in the field serving our customers every day to ensure that we deliver the reliability that we promised. And we have to challenge ourselves to nurture the kind of culture that fosters a nimble creative and market-leading company, while staying true to the operational discipline that makes this all possible. The concept of one CSX as one team working together to accomplish great things can be very powerful. We have to bring one CSX to life. We'll talk more about that in a few minutes. But now let's turn to our presentation to review the financial highlights for the third quarter of 2022. CSX moved nearly 1.6 million carloads in the third quarter and generated approximately $3.9 billion in revenue. Operating income increased 10% year-over-year to $1.6 billion, which include the effect of additional labor and fringe expense related to the tentative agreements reached with our unions last month. Results this quarter also reflected lower real estate gains compared to last year. Earnings per share increased 21% to $0.52 a share. Our operating ratio for the quarter was 59.5%. Now let me turn it over to Kevin, Jamie and Sean for the details.

Jamie Boychuk:

Thanks, Kevin. Safety remains our top priority at CSX and operating safely is the foundation to our service restoration efforts. In the third quarter, our personal injury rate and train accident rate decreased sequentially. Though we are not satisfied with our performance, I'm encouraged by our success, especially given the number of new employees across the network. As we mentioned last quarter, it is critically important to instill a culture of safety in our new T&E employees from day one. That emphasis on safety does not end when new employees graduate from training. It requires continuous attention throughout every railroader's career. To reinforce this, we are actively engaging with new hires and all of our employees in the field to discuss recent injuries and accidents, to ensure that we take each opportunity to learn from each other. In the fourth quarter, our efforts will continue to focus on making sure our employees are protected from incidents that commonly occur as weather changes. Increased education and awareness of seasonal safety risks will help our team become safer. Turning to slide 7, we are encouraged by the recent improvement in our operational performance. These strong results are a testament to the one CSX team and their unrelenting devotion to serving our customers. If we only look at the third quarter averages, train velocity, the well and carload trip plan performance all showed the deterioration versus the prior year, though intermodal trip plan compliance continue to improve 240 basis points. However, on the right side of each chart of this slide, shows the substantial improvements we have made throughout the quarter and continue into recent weeks. As shown here, in the most recent four week performance, all of these four key operational measures are above the averages for the third quarter 2022. But they're also ahead of third quarter 2021 performance. We are confident that these metrics show that our efforts to hire, train and retain new employees are starting to take hold and make a difference for our customers. Though we are encouraged by the operational momentum, we will not let up. We will continue to push forward and take actions necessary until service is fully restored to a level that our customers expect. We are promoting new conductors, allocating the appropriate number of assets and improving the overall reliability and operational resilience of our network. Turning to slide 8, in the third quarter, active T&E headcount reached the highest level since March 2020. Though the quarterly average shows a sequential increase of less than 100 employees, we exited the quarter with over 6,800, total. The hiring pipeline remains robust. And we averaged over 500 trainees again in the third quarter. We are determined to keep the pipeline full, allowing us to continue filling classes as we work towards our goal of 7,000 active T&E employees by year-end. Currently, we have over 700 employees in training and have additionally started locomotive engineer training. The number of conductors that finished training and marked up was down slightly in the third quarter as we cycled lower class sizes from earlier in the year. We anticipate this number to increase in the fourth quarter, as the class sizes have remained elevated through the late spring and summer months. Conductor promotions will continue to increase the active T&E headcount. Our efforts to minimize attrition that we highlighted in the last quarter are bearing fruit. We hire attrition in the preceding months have trended lower, and we believe our hiring initiatives and recent pay agreements for new conductors are a contributing factor. I will now hand it over to Sean to review the financial results.

Joe Hinrichs:

All right. Thank you, Sean. Now let's conclude with a review of our outlook as shown on slide 12. There is no change to our expectation for double-digit revenue and operating growth for the full year, excluding the effects of the Virginia real estate transaction. While there is uncertainty in the global economy, we feel confident in our ability to deliver on this guidance as we look over the remainder of this year. As we mentioned in our earlier remarks, we are pleased with the positive momentum in our service metrics. And we continue our hiring and training efforts to ensure that we have the resources needed to build on these trends and drive improved network fluidity. We remain committed to returning excess capital to shareholders, as you saw over this past quarter. And finally, we reiterate our priority to building a unified cohesive culture of ONE CSX that will strengthen the relationships we have with our employees, customers and all other stakeholders. This is a great company. And working together, there is so much more that we can accomplish. And that's why I'm so excited to be here. Thank you all. I'll now turn it back to Matthew for Q&A.

Operator:

[Operator Instructions] Your first question comes from the line of Ken Hoexter with Bank of America. Your line is open.

Joe Hinrichs:

Okay. Thanks, Ken. Well, I think Jim highlighted a couple of things, but certainly, the labor side of the business experience in the automotive industry is certainly very applicable to our situation that we're in now, when you look at working through -- with our labor union partners, tenant agreements and ratification and working through those issues. But more importantly, I had the opportunity to be a customer for 20 years of the rail industry and have shared a lot of those experiences with our team and have challenged us to continue to look at things from a customer perspective to make sure that we are holding ourselves to a higher standard of service and accountability for our side of this relationship. And I'm really proud of the work that Jamie and the operations team are doing to really show improvement in that area. Jim mentioned that obviously, the auto industry is a complex business. And so is the rail industry, there's different types of complexities. But from my background experience, I think a lot of that's applicable. But I would step back for a second and say, at the end of the day, it's the workforce, it's the people here that serve our customers. And when we bring everybody together and align around our core objectives and around our opportunity to serve our customers better and work together better, we can create an even better CSX, and that's an opportunity for us to bring home and to bring to life and really excited to be a part of that. I'll let Kevin handle the second part.

Ken Hoexter:

Yes. Kevin, I guess, just obviously, what we're seeing in the market is just how pricing collapsing right on the spot basis. And I just want to understand, is the chemical business different in terms of the revenues we can expect from the trucking and other business, or is that something that's maybe more sustainable?

Ken Hoexter:

Great. Thanks, Jim. Thanks, Kevin

Scott Group:

Hi, Thanks, afternoon, guys. Sean, maybe just any near-term color guidance on the other revenue, the labor comp per employee, anything on operating ratio in Q4. And then, Joe, just it sounds like more of a focus on service culture, so maybe, I guess, more of a growth focus. I guess how are you thinking about the ability to grow and improve operating ratio over time, or is it more just about growth, or is it both? Just your big picture strategy going forward.

Joe Hinrichs:

Thanks, Sean. And thanks, Scott. I think the way I'd like to describe it really is just on how we're looking at this is just to step back for a second I had the opportunity throughout the summer with all my conversations with Jim and the Board to really take -- to get educated on tailor railroading and get educated on CSX. So the way I like to describe is how we're looking at things is the five guiding principles of scale in are really around improved safety, improved customer service, control costs, improve your asset utilization and engage and then ultimately, value and evolve your employees. And so if you take a look at all five of those things, they're all very important. And so operating ratio is a big part of looking at controlling costs and your asset utilization and frankly, a number of other pieces that go in there. So clearly, that's a very important number for us and a very important part of our objectives. Improving safety, as Jamie talked about earlier, is really important and we'll never ever get away from that in this industry. The other two areas around our customers and employees are opportunities for us. So how do we leverage our strong operating model that we have here that Jim and the team have built over a number of years to continue to improve the service we provide our customers and the experience and the engagement our employees feel as part of one CSX team. Now how does that lead to growth? I'll tell you a couple of ways. One, with the increased service performance and the manpower that we're putting on that increases our capacity, which we now can leverage to quickly provide for our customers. I've had the opportunity to reach out and have video calls with about eight of our largest customers over the last couple of weeks and almost every single one of them has told me directly to our CEO or COO of all those customers, they've all told me that when you deliver a better service and more reliable, predictable service, we want to do more business with you. So, we'll have to chase growth by trying to do unnatural things. We need to continue to do the things we're doing, leverage our operating model to continue to deliver better service and with that increase the headcount and with that comes the opportunity to serve our customers better. And because we're a lower cost, because we're better for the environment because of all kinds of other reasons, there's opportunities for us to grow the business that way. And that's the way we look at the opportunity through better customer service through increased capacity through the manning, we have the opportunity to serve our customers and there's more opportunity for us there.

Operator:

Your next question is from the line of Ben Nolan with Stifel.

Kevin Boone:

Yes. I think probably the gating factor as we get into next year, and we obviously are confident in resolving our labor issues as what can the producers actually produce. Coal mines are – have been undercapitalized, quite frankly, and now have a lot of money in there looking for equipment, reinvesting. And so, I anticipate it will get better. We also do have a mine coming online middle of next year that will help us and we have a number of them that are still ramping up. So. production looks like it could be up next year, knock on wood. We probably would have said that last year at this time, too. So -- there's a lot of things that can happen as you – we mentioned previously on the call, we've had some mines that have struggled, but are coming out of that here recently into the fourth quarter. So optimistic on the production side. There's clearly a need when you look at the utility coal mines are the utilities that we serve, particularly in the South. They have a lot of inventories; they need to replenish and so we anticipate a lot more consistent deliveries over the next year to really replenish those levels and we continue to see the export market very, very strong and a lot of geopolitical risk out there in Europe and other areas where you probably didn't see as much demand a year ago, continue to have a lot of demand. So mind you want to serve that, it's profitable for them, and we anticipate to have the resources to be able to deliver going into next year.

A – Kevin Boone:

I think on the volume side, remember, we kind of moved with the commodity price on the international market. So depending on what that does, they're at very, very healthy levels today. A little bit down from the highs that we saw previously in the year, but that I think that will be the biggest factor as we look at overall coal revenue for the next year.

Operator:

Your next question is from the line of Amit Mehrotra. Your line is open.

A – Sean Pelkey:

Thanks, Amit. I'll get started on the cost question. So I mean, think about the fact that the labor cost has now been reset. So we know what our base is kind of going into next year. Inflation doesn't show any signs of abating here more broadly outside of labor and recognize that some of our costs are based on lagging indicators, meaning they'll get set based on where the inflationary rates are in 2022 for next year. So there's no doubt we'll be in a sustained inflationary environment going into next year between labor and some of those outside party contracts that we have. That being said, we've been carrying extra costs here throughout the year as the network has not operated the way we would have wanted it to based on not having enough proves in the right places. That problem is rapidly getting fixed here. You can see it in the numbers over the last couple of weeks. And so some of those costs are probably going to be a bit sticky going into the fourth quarter. But as we get into next year, I think there's plenty of opportunity for us to drive some efficiencies and take some of the cost out to help offset the inflationary headwinds that we're going to see.

Amit Mehrotra:

Yes. That makes sense. And Sean, I just wanted to follow-up just one quick point on what you said. So if I look at your cost base ex-fuel this year, it's kind of like $7.3 billion. It seems like 4%, 5% inflation off that number is kind of the right structural costs that go up. But, I guess, what you're saying is, listen, there's a lot of inefficiency $40 million a quarter in 2022. So maybe there's an opportunity to actually, if the fluidity gets better, is actually an opportunity to see net inflation lower than that. Is that -- would you say that's a fair characterization?

Amit Mehrotra:

Thanks, guys. Appreciate it. Thank you.

Jon Chappell:

Thank you. Good afternoon. Jamie, I think last quarter, I asked you about capacity as you're still trying to ramp up the labor force. Now it feels like you're pretty close to rightsizing the network from a labor perspective. We've talked a little bit about some of those excess equipment you have on the network today, what would you estimate the spare capacity is today on the network to take on new business, meet this demand that you've been leaving on the table for much of the last 12 months. And, I guess, the other way to phrase it, too, is if we do go into a pretty deep downturn, is that capacity that you'd be willing to kind of flex off the network for a short period of time, or it's something you want to keep to make sure you're never short, again, given some of the labor issues?

Jon Chappell:

That’s great detail. Thanks so much Jamie.

Tom Wadewitz:

Great. Good afternoon. Wanted to see if you could offer maybe a quick thought on operating ratio in fourth quarter versus third quarter. Another railroad reported earlier today, Union Pacific and I think, surprised people a bit with talking about worse to normal seasonal OR in 4Q versus 3Q. So I wanted to see if you could offer a quick thought on that. And then for Kevin, I think in a higher inflation environment, you'd like to get more price, but the counterpoint to that is that the truck market is weaker and you do compete with truck. So how do you think about those factors? Can you get more priced because you have more inflation, or should we be mindful of lower truckload pricing and that's kind of a barrier to getting more price. Thank you.

Kevin Boone:

Hey Tom, on the trucking environment and other things, I think what you have to remember is we don't really operate in the spot market when the truckers are getting 30%, 40% rate increases, that's not what was occurring on our end, and we have a lot of long-term agreements with customers that they understand. And the good news right now, we're seeing our customers get price, and they understand some of the cost pressures we're facing. And so we're having those constructive conversations with them. And I think the spreads maybe versus truck aren't as great as they were before, but you have fuel surcharge, which is very high right now, and we know that flows through the truck rates. And so there's still a very, very compelling value proposition for customers to shift from rail -- from truck to rail. And so, we're still leaning into that, and there's a lot of appetite that we continue to hear of companies wanting to do that and for the environmental reasons as well.

Kevin Boone:

Yeah. That was participating in the 30%, 40% rate increases, maybe that would be more of a risk, but that wasn't the reality of our business model.

Operator:

Your next question is from the line of Brian Ossenbeck with JPMorgan. Your line is open.

Sean Pelkey:

So on your comp per employee question, yeah, the math is right, and it really is just the inflationary impact over and above the settlement. So, I get to right around $2,000 per employee for that -- for the $50 million, a little bit more than that. The small mix impact from having more drivers at quality, which is a little bit lower comp per employee than a railroad worker, but that's really the only offset.

Brian Ossenbeck:

Understood. Sean, was there any incentive comp impact in this quarter like there was last quarter?

Brian Ossenbeck:

Thanks for time. Appreciate it.

Chris Wetherbee:

Yes, thanks good afternoon. I guess I think there's been a perception that the demand level that's out there is decently been above what the service has allowed you guys to carry? And I guess – as you think about some of the macro crosscurrents out there, potential headwinds, is that still the case? Do you think that demand is still maybe meaningfully above what you're able to provide from a service perspective? And I guess, as you think out maybe shorter term, 4Q in particular, should we start to see the weekly carloads begin to ramp up as the service improvement become sort of more realized in the numbers? Just want to get a sense of kind of how you guys are thinking about that? And then maybe a second point, but related is if we do see things get a little bit worse, how quickly do you think you can respond in terms of heads, whether it be your willingness to furlough or just using attrition Jamie, I think you talked about a pretty heavy attrition number. Is that something that you guys would be able to use relatively quickly in response to slowing demand?

Jamie Boychuk:

Well, when I -- looking at the question, kind of as I answered it earlier, we got to stay forward looking. Can we pull costs out quick? Well, absolutely, we can. I mean, our locomotives, when you think about that, that's a daily cost. You put it down tomorrow, you stop paying for it tomorrow. I mean these are assets that have been around a long time. And we haven't bought a new locomotive in many years, even though we have a rebuild program other than depreciation, the heaviest cost of a locomotive is which you use every day on them. So, I mean, that is one example of costs that we can handle. And on our T&E side, it's important that we continue to build our T&E workforce where we need it to be. And if we get into a position where things get deeper or things look differently, that attrition, as you mentioned, Chris, it is a heavy attrition rate, and we're able to use that as just a natural way to control our numbers. And by pausing classes, if we get to that, those numbers will take care of themselves. But we -- on the T&E side, and I'm going to keep emphasizing that, we -- it's a very important position like any other in the company, but it takes four months to six months to make a train conductor. And if we get softening market and we come out of this, we are going to be prepared to handle all the traffic that comes back at us and that's a commitment that we're making, and we're going to continue to follow through on that. So all those other levers, there's a lot we can pull in this industry. We want to make sure that we're prepared to come out of any softening if we get to that point.

Operator:

Your next question comes from the line of Justin Long with Stephens. Your line is open.

Kevin Boone:

I guess, I'll take the coal one. I think you could expect -- we're hopeful that some volume step up given the network starting to get more fluidity and some of our producers starting to perform a little bit better. So at the margin, maybe a little bit of better to the benchmark prices. So those have come down. They're still very, very healthy, but that would also impact what we would see in the fourth quarter from an export coal RPU perspective. So a little bit down probably sequentially there, given that we're already a little bit into the quarter and those numbers are down from third quarter.

Q – Justin Long:

Got it. Thank you.

Q – Ari Rosa:

Hey, good afternoon. So Joe, I wanted to stick on this question of your background and your experience. But maybe you could talk about what are the learnings that you take from dealing with labor unions in the auto industry that you think carryover to railroads. And then from a customer standpoint, maybe you could give a little more color on what you've shared with your new teammates at CSX about what the customer experience is like from a customer standpoint? And maybe what was being missed internally or if there was anything that was being kind of misunderstood internally about what that experience is like? Thanks.

Ari Rosa:

Okay, wonderful. Thanks for the thoughts.

Brandon Oglenski:

Hey. Good evening, everyone and thanks for the question. Jim, I don't know if you're still on, but congrats on retirement. And you want to comment on what you found the most successful the last five years and what was left unturned, I think we'd all appreciate it. And Joe, welcome to railroading. And I guess to your answer on that last question, how do you see the ONE CSX culture fitting into that customer relationship and focusing on the right priorities?

Joe Hinrichs:

Thanks, Jim, and I thank you from the above of my heart, because I'm equally excited about the team we have here, and I'm blessed to be able to work with everyone that you put together, and it is a great team. On your question on ONE CSX, the initiative -- the culture initiative was rolled out before I got here by the team, which I really appreciate the attention and the focus on that. At the end of the day, if we're going to make more progress as in rail industry and then here at CSX, we have to have a better relationship with our union partners and with our workforce out in the field doing the work that creates the value for our customers every day. So really focusing our energy on CSX about being -- recognizing we're all part of one team. We're all valuable. We should all be appreciated, and we should all be respected and really getting our team to recognize that if we're here to serve and make -- and help make our employees in the field more successful, that ultimately, the company and our customers will be more successful, and really channeling that energy in that way. We have a great operating model. We have a great process. We have great people. And if we can get people working better together, solving problems, helping us deliver better for our customers, I believe, and I think our team -- I know our team believes that we can have a better railroad and better performance overall on aspects of our business. So that's the real impetus around ONE CSX is bringing our team together, after all we've been through with the transformation of the operating model and COVID and labor negotiations and all these things to build from where we are and say, we're going to be one team working together, supporting each other, appreciating each other and delivering for our customers. And ultimately, that will deliver better performance financially for our business and for our shareholders. And it really starts internally -- if we're going to provide better service, we have to really engage with our employees to make that happen.

Operator:

Your next question comes from the line of Fadi Chamoun with BMO. Your line is open.

Jamie Boychuk:

Well, I'll take this one, Fadi. I believe from – no. We're coming out of this stronger than we ever have and we're coming out of this learning lessons, okay? If we haven't learned lessons along the way, as an industry, it's not just CSX than we haven't been watching or listening to our customers and seeing what's going on out there. So yes, is there opportunities with their union agreements, there absolutely is. Let's get past the ratification now before you get any comments. But as Joe mentioned, the relationships between our unions and as we continue to do things differently and improve those relationships, it's going to open up opportunity for us to retain employees like we haven't been able to before. And provide possibly a schedule and Jim has talked about this a number of times, provide a better schedule for our employees. So when they come to work, they come to work with a smile on their face. They come to work rested, they come to work being that facing the face that delivers cars to our customers to the docs and they have a positive attitude and they're wanting to grow this company. And believe me, our employees want us to grow. There is no question about it. They want us to give them the tools to grow and they want us to give them the opportunity to do that. So that's a big opportunity as we move forward. We are staffing up. We are staffing up to make sure that we can handle the demand that Kevin and his team brings forward to the operating team. Kevin and I talk every single day. Weekly, we go through numbers together. Our teams are very close. We know where the opportunities are out there. A number of great announcements that have been made through Kevin and his team through some big wins on customers who are opening up facilities on us. So going forward, over the next couple of years, those are great opportunities and we're going to make sure we're staffed up for that. We've got locomotives in storage. I've said that a number of times. I think when I took Joe into Waycross, he saw the number of locomotives we had in storage out there, it's a surprise. I like to call that the field of dreams and one day, maybe we'll have all those locomotives pulling freight and pulling tonnage out there. And if we get to that point, we know that we've really grown this company beyond where we think we can. So we are continuing to prep ourselves to move great, I think I answered the question on what happens if there's a bit of a downturn in business, we're going to stay forward-looking and we're going to try to drive this opportunity like it's never been done before. And if there is a softening, we're going to make sure that we are fully prepared no matter how it comes to provide that service to the customers like they've never seen before. And that's our goal. And you're right, that's the theme you've heard tonight. And I'm happy that you said that, that is a theme you've heard, because I believe all my colleagues and everyone around the -- the table here, we all believe the same thing.

Operator:

Your next question comes from the line of Ravi Shankar with Morgan Stanley. Your line is open.

Joe Hinrichs:

Okay. Thanks. I'll take the second one first, and then I'll talk about the autos. As Jamie mentioned, we're going to let the process play itself out. We have a lot of respect for our union leaders, and we've reached tentative agreements and they're in the ratification process. I think, Union Pacific talked a little bit about some of the issues with BMW ED this morning. And I think the opportunity here is for us to really just work together to let the process play out. I want to respect that process on the union labor side. On the auto side, I mean, there's a lot of things going on. I mean, there's been a number of significant investments announcements in --, especially the Southeast, many of which have been -- we've been a beneficiary of having a relationship with or having the rail access to, whether it's on EV batteries or whether it's on new manufacturing assembly plants. So I think, you'll continue to see obviously, with the government's health increased production for things that support electrification of the automotive industry, and we were well-positioned to take advantage of that, frankly, with how these are playing out. I'm not going to comment on the chip shortage, but you are hearing from the autos that production is picking up. We're seeing more opportunity to deliver more vehicles. So that's a good thing for us in the near-term. And we're watching what's happening on the demand side, but certainly, we're seeing increased opportunity to deliver more vehicles for our automotive customers here at CSX. And longer term, of course, there's significant investment going in electrification. And we're seeing, again, that opportunity to be a part of that as CSX has been a successful part of a number of these announcements. So that will continue, and we're excited to be a part of it. Thanks.

Operator:

Your final question comes from the line of David Vernon with Bernstein. Your line is open.

Jamie Boychuk:

Well, thank you for that one. I would say our target, as we said, at the end of this year, 7,000 active T&E. We are pushing up to 72 as we move forward. And look, we're doing locomotive engineered training. We don't want to get ourselves caught behind on that. We're still good for a number of years, but we want to take advantage of that. And the trickiest part of headcount on the railroad is getting the headcount in the red spot. And as market conditions change and as things move around out in the field, we're very fortunate that right now we have over 60 employees who have taken temporary transfers to areas where we're short right now, and we're hiring. And we're taking advantage of some of those areas where we do have excess employees. So I'm quite happy with where our numbers are heading. And let's see what that number looks like as we continue to move forward and see where our attrition rate continues to take us to. But yes, absolutely heading into next year, we will see our class sizes most likely start to decline to more normalized attrition rate. We're going to make sure that we keep up with attrition. We don't want to fall behind on that. And we mentioned that, that's an 8% to 10% depending on which area of the network as we continue to rightsize and rightsize in the right places. So yes, you will see our class sizes start to drop when we start hitting those numbers, and we feel quite confident that we're heading in the right direction with those numbers. I wish I had the headcount today that we need it, but it will take a little bit of time and we'll get there. But you will see those class sizes drop to normalize class sizes as we move forward. I appreciate the question.

A – Jamie Boychuk:

Yeah. We're definitely seeing it change lately, and I would not necessarily put that to the contract at this point in time since it's still out for ratification. I think that is a hard work that our labor group has done and the great relationships that we're continuing to build with our union groups on changing pay scales. The pay scale where we went from a step scale of 80%. It takes over five years before we get to 100%. As soon as we started offering to our new hires that they would make the same money as the person sitting next to them in the cab, we definitely saw a change in our retention rate in a positive way. So we are doing things differently. And I think as we continue to make some of those changes and build those relationships, that's only going to get better as we move forward.

Matthew Korn:

Thank you, operator, and thank you, everyone, for your interest in CSX. We look forward to speaking with you again on our next quarter. Thank you.

Operator:

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2022 CSX Corporation Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. Matthew Korn, Head of Investor Relations. Please go ahead.

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. And 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 in 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 estates 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. And 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.

Jamie Boychuk:

Thanks, Kevin. Safety remains our top priority at CSX, and operating safely is a critical foundation to 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 creating an environment that facilitates ongoing coaching and education 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, 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 improvement 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 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.

Jim Foote:

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.

Operator:

[Operator Instructions] Your first question comes from Scott Group with Wolfe Research. Your line is open.

Jim Foote:

Well, hi, Scott, I'll take the first part of your question about the hiring. And 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 -- with 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. And a significantly higher attrition rate from the new people that we brought on. 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 as we -- 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 so I think that is the -- I think that's the issue. I also what I said was we had a target out there of 7,000 people. And 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 of employees off 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. And 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.

Scott Group:

Thank you guys. I appreciate it.

Bascome Majors:

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.

Bascome Majors:

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?

Bascome Majors:

Thank you.

Tom Wadewitz:

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 at the same time, it seems like the velocity metrics really haven't necessarily reflected that. So, I was wondering if you could offer thoughts maybe why that would be the case. And then also just like level of confidence that 7,000 is the right number. Is that pretty good visibility? I mean you talked about end of 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.

Jim Foote:

Tom, it's Jim, too. And we've learned a lot over the last 18 months in terms about -- what the current state of affairs are when it comes to hiring and the difficulties associated with that, which were not fair historically. And so there's a lot of -- at the end of this quarter, are we going to know what our attrition -- what our true long-term attrition rates are going to be, where we know -- are we going to be in a situation where we get hit with another surge of some variants, and we have another couple of hundred employees off at any given time. So, we're trying to get back to the number that we put out publicly is what we had in 2019 when the -- end of 2019, early 2020 when the railroad is really running at a record performance. And so that's -- it's kind of a starting point for us to have better visibility as to what we should really do going forward.

Operator:

Your next question is from the line of David Vernon with Bernstein. Your line is open.

Jim Foote:

David, let me answer that. It's kind of confused 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. And so these are all new things for us. So one thing we know, we can easily manage down just simply by taking advantage of attrition if that's what's necessary. What we do know it's a lot more -- what we have experienced anyway in the recent times here, it's a lot more difficult for us to manage up. So in the short term, we're going to learn about what we need to do differently and how we need to do it. And until that point in time, we're going to do everything we can to not run short.

Jim Foote:

Well, we're trying to do analysis of every different type to try and figure out why, so we don't make the -- so if we can identify factors we don't bring people in because there's a lot of cost and time and effort associated with training somebody. So we're trying to -- we're trying to do a psychological union at whatever analytics we can do to try and help us better -- have a better understanding of the profile of worker that we need to hire upfront. And this is just new for us and -- but we're learning and we'll get it figured out, and then we'll be able to better manage on a more consistent basis, the headcount.

Operator:

Your next question is from the line of Chris Wetherbee with Citi. Your line is open.

Kevin Boone:

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 the here. So we're encouraged on what's happening there. We've had some disruption on the coal side of the business. So we think that will continue to improve in the back half of the year. So there are some things that just from a comparison point of view get better as we move into the back half of the year. And then as the crews come online, we'll go and get -- chase those opportunities that we know are out there in terms of market share and then the existing opportunities that we know that are out there in terms of order fill rates, things like that, that we're highly focused on as a team and see the opportunity going forward. So nothing has really changed from the last quarter when we see a pretty robust environment, but we're not -- we're also keeping an eye on what's going on. Clearly, the housing markets had some pressure out there, but we have exposure there, but there's other areas where, quite frankly, there's a lot of inventory restocking that still needs to happen.

Kevin Boone:

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

Operator:

Your next question is from the line of Ari Rosa with Credit Suisse. Your line is open.

Jim Foote:

Well, we're glad that the emergency board was appointed. It's unfortunately, as I've said quite often, that it took so long to -- for us to get to this point. But the wall has worked for a long, long time, and we're hopeful that the emergency board puts out a recommendation, it's a win-win for both sides. Do we hope that once the labor issue is resolved -- and our employees are not happy that they didn't get a raise for 2.5 years, let me tell you that. They tell me that all the time. And so we're hopeful that once this is resolved, and we're expecting that they'll get a very better rate is that that will help with morale and that might help with the retention. And then final, the Board are seasoned veterans of dealing with labor issues and they are going to make a recommendation based upon the inputs and hearing from both sides. And as I said, I hope it comes out that it's a reasonable win-win solution. And if that's the case, we're certainly able to accommodate that in our economics going forward.

Operator:

Your next question is from the line of Jon Chappell with Evercore ISI. Your line is open.

Jamie Boychuk:

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, Dan and Dale, for us that are working more than they ever have filling in some of those gaps. But the operating team is just doing a fantastic job from the network side to the guys out in the field, making tough decisions. And in this environment, look at intermodal has a priority on our railroad. We make sure that the 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 then the utility and the lights stay on. So, there's 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. So, when you are 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. So, 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. So, 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 on this week. We're worried about the lights in the Southern Carolina area or we're worried about the chickens down in Alabama or different areas, yes, you're going to start to see that flow move better and the capacity. Back in 2019, we talked about it a lot. We have a lot of capacity on this network. We have a great network. We have more than enough assets out there. As a matter of fact, I've always said and I stand by it, that hiring the folks that we are and any expenses that come along with that, we're going to be able to pull that out through assets. So, we're quite confident that we're making the right moves that we can today in order to try to keep everybody happy. But the one metric I did talk about is that the customer metric is, if you want to call it that first mile, last mile metric, which is something we're watching to continue to improve that we're showing up with the customers. They may get -- merchandise customers may have a 24-hour delay in transit time. But when we're actually showing up when we say we're going to be there and the cars we say we're going to bring in are coming in, that's making a difference to those customers, and that's something that we're continuing to work on to be able to give the customers a better experience than what they're feeling. So, don't -- the metrics that are out there, you're right. They're not the way we want them to be. I wouldn't be fooled completely by how you read into some of those metrics because we're running the railroad differently. And my final comment really on this is it's the hard-working folks who are out there running this operation are doing a fantastic job with the tools they have.

Jon Chappell:

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

Justin Long:

Thanks. I know previously, you had talked about volumes this year, outpacing GDP growth. I was curious if that's still your expectation. And 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.

Sean Pelkey:

And Justin, on the second part of the 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. And 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. But 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.

Operator:

Your next question is from the line of Amit Mehrotra with Deutsche Bank. Your line is open.

Kevin Boone:

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 and 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 of the really, really high prices. The environment is still very, really good for us. We would take these price levels any day. It's just that they're coming off the stream level. So we'll see some moderation there. But 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, and we're having to recapture that value in those discussions. So as things reprice, we're or making sure we stay in line with what's happening out there in the market and what we're having to pay expense-wise. So we probably would still see some underlying momentum there as well. But outside of that, nothing really changes into the back half of the year.

Amit Mehrotra:

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

Brian Ossenbeck:

Hey, thanks. Good afternoon. I just wanted to go back to the comments on -- Jim, I think you made a comment about offering a little bit more incentives or compensation for some of the folks that are coming on to the network? Or are there any other things you can do to break down that rate of attrition with other things, or you do have to wait on the official agreement to get settled? And where do you think that might be? And then for Jamie, are there any other things you would consider, we saw one of the Western rails put in embargo, which is pretty disruptive, but I seem to get them a little bit of relief. Is that something that you would consider at this point? Or would that be unnecessary?

Brian Ossenbeck:

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

Brian Ossenbeck:

Yes.

Brian Ossenbeck:

All right. Thank you, Jim. Appreciate it.

Walter Spracklin:

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? And 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 about by what you've seen with quality that you would ask for -- or you would look for more opportunities like that in the, call it, 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?

Walter Spracklin:

I appreciate that color, Jim. Thank you.