CSX Corporation (NASDAQ:CSX) Q1 2024 Earnings Call Transcript

CSX Corporation (NASDAQ:CSX) Q1 2024 Earnings Call Transcript April 17, 2024

CSX Corporation beats earnings expectations. Reported EPS is $0.46, expectations were $0.45. CSX Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

Matthew Korn: Thank you, Brianna. Hello everyone and good afternoon and welcome to our first quarter earnings call. Joining me this afternoon are Joe Hinrichs, President and Chief Executive Officer; Mike Cory, Executive Vice President and Chief Operating Officer; Kevin Boone, Executive Vice President, and Chief Commercial Officer; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In presentation accompanying this call, you will find slides with our forward-looking disclosure and our non-GAAP disclosures for your review. With that, it is now my pleasure to introduce Mr. Joe Hinrichs.

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.

Mike Cory: Yeah, thank you, Joe, and thanks for everybody for taking the time to be with us today. So let’s look at the first slide on safety. While we found improvement in the FRA train accident rate year-over-year, in my view, our overall performance results in this quarter pale in comparison to what this team is capable and will deliver. So as a team we’ve begun to really work collectively to elevate and integrate the beliefs and actions that a strong safety culture requires. We recognize that in order to successively change our safety performance, we need different and better skills. This includes proactive risk identification for our employees and their supervisors. And we thoroughly investigate every incident to determine the root cause and the necessary follow-ups for any recurrence.

And we pass that information on to our employees through portals to ensure the information is shared, learned from, and used in improving everything from training to oversight of all our employees. [Technical Difficulty] employees in both the union and their management provide a key opportunity to build a strong safety culture. We’re starting to partner with our union leaders to help us change risk tolerances across our property. And this partnership is starting to provide real benefit toward creating a strong safety culture. This takes time and effort on all sides, but I’m very pleased with our progress so far. We’re also listening to our employees’ suggestions and we’re applying it to our safety plan in order to become more responsive to our customers’ needs in a safe and efficient way.

Let’s look at the next slide. And looking at this slide, you’re going to see our standard velocity and dwell metrics that I’m sure we’ll talk about today. Our focus this quarter has been on providing strong customer service while controlling costs. And while we’ve seen a slight decrease in velocity and an increase in dwell, our train sizes have grown in line with the increase in volume we’ve handled for our customers year-over-year. Crew starts have remained flat with GTMs up 1.5% and carloads up 3%. Our cost focus also includes management of the large capital program we have our engineering crews working on. And we’re focused on making sure they have enough time for the work to be done properly. As a result, our crews are accomplishing all of their scheduled work and are also gaining efficiency.

In both [tie] (ph) and rails, we’ve seen reductions in unit costs, good reductions. As we’ve enforced stricter compliance with planned track time for crews, we’ve seen slight decreases in velocity increases as well. Our intent is to build and execute a more inclusive plan that provides the right work window while minimizing loss of velocity. And I expect to see improvement as we continue to refine and develop this plan for the rest of this year cycle and beyond. Our focus on cost has also identified some strategic locations that are not as productive as they could be. We see cost saving opportunities by reconfiguring and strategically utilizing these assets into our operating plan. This will reduce cars running out of route and excess handlings, and our customers will benefit as we increase speed and open up capacity in one of the corridors.

And that’s the most important part. It is we make these changes to our operation. There’s no change to our goal of servicing the customer the best way we can. Having an efficient network that can consistently perform to our customers needs will allow us to gain share, and build business from truck and attract new customers to rail. Over to the next slide. On this slide, you’re going to see some of our customer service metrics, which still remains strong. Intermodal trip plan compliance remains high. Truck drive return times and arrival to availability, which is a measure of efficiency at the yard, has also improved as we collaborate with our customers to improve the experience of their terminals. As an example, our Fairburn terminal, southeast of Atlanta, is a critical asset for our domestic intermodal business, but has not performed to our customers’ needs as well as our expectations.

Our intermodal leader put together a team and they developed better process for use of both the footprint and the assets, in turn creating fluidity that has reduced driver dwell at Fairburn by nearly 50% in recent weeks compared to earlier in the year and previous to that. This leads to capacity and more opportunity for conversion from truck. Our carload trip compliance declined slightly, but remained over 80% for the quarter and has improved in the first month of Q2. We’re very proud of the service that our customers experience with CSX. To show this, we’ve added another important metric to this slide, and that’s customer switch data, which represents our reliability to be able to deliver on our commitments at the first and last mile of service for our customers and most of our short-line partners.

As you can see, this remains very high. In closing, we have many opportunities ahead of us. The team is focused on creating a climate of success for all involved. Our focus on safety, service, and efficiency won’t waver as we continue to provide the best service product we can for our customers. With that, over to you Kevin.

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.

Sean Pelkey: Thank you, Kevin, and good afternoon. First quarter revenue fell by 1%, while operating income was down 8% or $110 million. These results include a number of discrete items versus the prior year with approximately $140 million of impacts from last year’s insurance recovery, changes in net fuel, as well as declines in other revenue and export coal pricing. Across merchandise coal and intermodal, revenue excluding fuel recovery increased 4% in the quarter, benefiting from 3% volume growth and strong pricing across the merchandise portfolio. Expenses were 4% higher and I will discuss the line items in more detail on the next slide. Underlying results reflect continued momentum generated by the ONE CSX team, both in our service-driven top-line performance and broad-based cost-control and efficiency initiatives.

Q1 was our second consecutive quarter of sequential operating income growth despite a $30 million net fuel headwind relative to Q4. In addition, sequential operating margins grew nearly 100 basis points, demonstrating this team’s focus on growth and efficient service performance. This momentum positions us well to deliver year-over-year gains in the back half of 2024. Interest and other expense was $9 million higher compared to the prior year, while income tax expense fell $25 million on lower pretax earnings net of a slightly higher effective rate. As a result, earnings per share decreased $0.02, including $0.05 of impact from the previously mentioned discrete items. Let’s now turn to the next slide and take a closer look at expenses. Total first quarter expense increased by $85 million.

Turning to the individual line items, labor and fringe increased $75 million, mostly impacted by inflation, higher headcount, costs from union employees’ sick pay, and higher incentive compensation. Even so, cost per employee was down versus the fourth quarter, and we expect cost per employee to again be favorable sequentially in Q2. Total headcount should remain stable despite higher seasonal volumes. Purchase services and other expense increased $23 million, which includes a $46 million impact from a prior year insurance recovery. Efficiency gains evident on this line represent significant cross-functional collaboration to drive sustainable cost improvements across both operating and overhead budgets. We expect this momentum to continue going forward.

Depreciation was up $17 million due to a larger asset base. Fuel cost was down $39 million, mostly driven by a lower gallon price. Progress continued in fuel efficiency, which improved year-over-year and saw smaller than normal seasonal degradation from Q4, despite severe winter weather earlier in the quarter. Finally, equipment and rents increased by $2 million, while property gains were unfavorable by $7 million. Now turning to cash flow and distributions on Slide 14, free cash flow of $560 million is lower year-to-date, driven by a decrease in net earnings, increased investment in the business, and deferred tax payments, partially offset by prior year back wage payouts. CSX exits Q1 with a healthy balance sheet and an A-rated credit profile.

Our first priority remains investing capital towards safety, reliability, and long-term growth. CSX also distributed nearly $500 million to shareholders, split between share repurchases and dividends, demonstrating our balanced but opportunistic approach to returning excess cash. We also believe a long-term focus on economic profit aligns our interest with that of our shareholders. While first-quarter economic profit declined due to previously mentioned discrete headwinds, we expect it to increase over time as we efficiently convert freight off the highway while maintaining strong asset utilization and attractive returns on our capital spending. Now with that, let me turn it back to Joe for his closing remarks.

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.

Matthew Korn: Thank you, Joe. We will now move to our question-and-answer session. In the interest of time and to make sure that everyone on this call has an opportunity to take part, we ask you to please limit yourselves to one and only one question. Brianna, we’re ready to start the process.

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

See also 30 Countries with the Highest Vulnerable Employment in the World and 35 Countries with the Lowest Poverty Rate in the World.

Q&A Session

Justin Long: Thanks. And to start, our thoughts and prayers are going out to Jim’s family. Obviously, he left a great legacy on the industry. But for my question, I wanted to ask about the second quarter. Typically, you see a seasonal improvement sequentially in both margins and earnings. Do you still think that’s possible despite the impact from the Baltimore port closure? And then I guess along those lines, curious if you have any thoughts around coal RPU in the second quarter as well? Thanks.

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.

Operator: Your next question comes from John Chappell with Evercore ISI. Please go ahead.

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?

Mike Cory: Yeah, sure, John. Thank you very much for the questions. But I just want to make it really loud and clear. These metrics are extremely important. We’re not happy with them. They’re not significant, and I’ll put it in perspective here. So some of the — we really shocked the system. And one of the first things we did was really start to look at the efficiency of our capital — engineering capital programs for $1.5 billion envelope. And quite frankly, last year we didn’t get the work done and we paid more than we should have for the work that we got done. So this year we decided that we were going to be very strict about the curfews. And those are anytime the track is out and either for between six and 10 hours across our network for these big giant gangs to get out there and do all their work with rail ties, bridges, you name it.

And again, we started this probably around — you can see the dip probably around early February, late January, because it was after the winter started. But after we went through the winter storms and it really impacted our southern corridors. We stuck to our guns. We held our trains at the terminals to run in line with the curfew that dwells the cars in the yard that also congests and bunches up traffic. And so we really let that go for a month. But then we’ve been working ever since that point to start to redefine the program that we’re doing, split up the work. And one thing we really did before was do all the work in the south during the winter time, because of the winter up north. We’ve got to find ways and we will to spread the work out.

But that in itself caused a fluctuation in train speed from previous years because we did not be that strict. We’ve come in under our rail and tie budget. So everything unit cost wise is the right way. But the biggest thing it provides that safety — that safety hardening of the track that we need to do every year with the volume we move. That’s number one. If you remember, we went into last quarter, we reduced 5% of our crew starts and we absorbed [1.5%] (ph) GTMs, 3% carloads, whatever you want to call it, without any more change in headcount. What that did was really focuses on increasing the tonnage on the train. That then starts to convert itself to better utilization of locomotives. Something as simple as going from three to two. Those things start to slow the trains.

But they’re still within an acceptable parameter. And as far as I am concerned right now, it’s not where we want to be, though. On top of that, we really took a strict view on our use of trip optimizer. And that’s really there to moderate the speed of the train, but again, get its fuel efficiency. We increased our use by over 10% this quarter. So we did all this over the backdrop of a typical first quarter. If you look last year, the numbers came down as well. And then you get whether you want to call it winter. They’re excuses, but these things on top of that, I’m comfortable with all the actions we’re taking that we will figure out a better way to do the work blocks. But at the same time, this is forcing the folks in our terminals that you don’t have as many outlets at times to move their cars.

And so we’re working through that. In fact, it got to the point now where in going through this exercise, we started to identify some yards that were closed for the right reason, I shouldn’t say closed, but they were disconfigured. I’m not talking about opening up pumps, but there’s some strategic yards that we’re going to look at using as we go forward that I’m looking at quite a few out of road car miles, handlings, all the good stuff that produces more speed, but at a reduced cost. And we don’t find that until you start to push the program. We could have easily just absorbed traffic, put some more trains on. PSR is not running the speed. PSR is providing the proper service at the right cost and being able to incrementally grow your margins and grow your business.

And so that’s really what’s going on. I see improvement in the future. I see it every day. I see the engagement of our folks. This has also provided a real opportunity for us to teach our operating supervisors how to balance. As Sean said earlier, there’s a lot of cost in everywhere we look on this railway. Obviously, the biggest is labor and fuel, and that’s what we’re tackling. But this is teaching them how to go about this exercise without at the end sacrificing customer service. And one dwell number we don’t show is our arrival to placement for our customers. It’s improved 10% in many of the major industrial areas. The reason for that is we have actually increased our local service. We’ve taken some of the money we saved on the liner although we make sure we’re trying to build trust with our customers, because now the next opportunity — one of the next opportunities to look at their fleets and get them to work with us, to trust us, to be there like we are and hopefully reduce some of the fleet that we have out there and still add more incremental business onto what we have.

I hope that answers it, but there’s a plan behind this. Thank you.

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

Tom Wadewitz: Yeah, good afternoon. I wanted to get some thoughts. I think just pricing and I know you got a bunch of moving parts. I’m thinking ex the coal item. But we’ve seen, I guess from J. B. Hunt and Knight and some of these surface transport-focused companies that there’s weak demand and there’s even more pressure on pricing. And so I just wanted to try to get a sense of if in your merchandise, you’re getting good price, is there some headwind that affects what you do on price and revenue per car from this ongoing weakness. So just, I guess, trying to think about is price stable, is it going to get better and the way we model price, which ends up being revenue per car? Thank you.

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.

Operator: Your next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

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.

Sean Pelkey: Sure, Brian. Yeah. So on the headcount side, I would say we came into the year, we actually added a little bit from Q4 to Q1. Most of that was for the engineering work that Mike talked about and making sure that we could get everything done this year. We’re going to manage that down through attrition. As we get to the second half of the year, we’re going to watch business levels. We’re going to see how we’re running. But I think it’s fair to assume that we’re going to be relatively stable as we get to the second half, if not down a little bit sequentially. And so you’re going to see a clear return to headcount labor productivity in the second half of the year. And then in terms of comp per employee, yep, second quarter will be another step down versus Q1.

A couple of reasons for that. One is, first quarter, we had some winter-related costs. And then secondly, as some of the capital-related programs get a little more ramped up in the second quarter that has a benefit to cost per employee sequentially Q2 versus Q1. And then you’re right, as we get to the second half of the year, the current labor agreement stipulates a 4.5% union wage increase. So we’ll feel the impact of that as we go from second quarter into the second half.

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

Scott Group: Hey, thanks. Afternoon. So, Mike, it sounds like you’re trying to find a balance right now between some of the service metrics and just OpEx. When you look cost, excluding fuel, was down just slightly from Q4 to Q1, how should we think about just overall cost ex fuel from Q1 into Q2? And then just — maybe just overall, like we’re a quarter into the year, it sounds like margins down year-over-year again in Q2, but inflecting positive in Q3, Q4. So full year, do we think we could see some margin improvement? Or is that — given the first half, is that too much to ask?

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.

Sean Pelkey: Thanks, Mike. Yeah. And what he says is true. We’re focused on how do we deliver growth and how do we do it at strong incremental margins by maintaining the fixed cost profile and not adding a whole lot of variable costs along the way. If not finding opportunities where we can run things more efficiently. So to your direct question about cost ex fuel, I think, yeah, it’s fair to assume we got a chance to improve that even further going from Q1 to Q2. And that ties in with the comments I just made about comp per employee and keeping headcount relatively flat. So we’ll build some momentum. I think the year-over-year comps are a little more difficult in Q2 given the Baltimore impacts. If that hadn’t happened, maybe could have even grown operating income and margin in the second quarter.

But with it, it makes it more challenging. Second half of the year, we feel good about the setup. Some of these headwinds that we’re facing, the first couple of quarters paid. And we’re going to have labor productivity. We’ll continue to grow the business. The industrial development projects Kevin talked about, a number of those start to come on as we get a little bit later into the year. So there’s a lot to like about it. We are not going to give any specific guidance about full year operating income growth, margin growth. But clearly, sticking with the low to mid-single-digit total volume and revenue growth is very helpful, particularly when we’re focused on what we can do to drive continued efficiency gains.

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.

Operator: Your next question comes from Brandon Oglenski with Barclays. Please go ahead.

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?

Kevin Boone: Yeah. I mean, look, we’re in the very early stages of this. And when the facility comes online, there’s usually — depending on the industry, a 12- to 24-month ramp, right? And so for this year, for example, we have in the aggregate side, really on the metal side as well as where we’ve seen some concentration in that activity as we look forward. You can see where the activity is going to take place. But these projects, some of them longer than others. But once they come online, there’s really a guide path of growth, as related to that as we bring that capacity on and enter the market. So — we’re excited about it. I think we’ll share a lot more as the year progresses on and give you a lot more detail on how that layers in over time.

But we thought we’d give a little more color just around how diverse that pipeline is and how it continues to build. And I think that’s exciting to have diversity around. We’re not concentrated in one single industry. It’s really — we’re seeing it across the board in the markets that we serve.

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

Ken Hoexter: Great. Thanks. And I’ll throw in my condolences also to the Foote family, always had fun discussions with Jim over the last 20 years and appreciated his insights. So thanks for the comments earlier. Mike, just following up on another step here. Looking at flat headcount, low to mid-single-digit volumes and revenues. So when should we expect to see the service stats improve? When do we get the flow through? Have you seen that already in the data in April? And then I guess thinking about Baltimore and the impact of coal volumes now down 12.5% last week. So Baltimore is now impacting the results. How should we think about what percent of volumes can be moved to Newport and maybe improve some of the metrics? Thanks.

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.

Kevin Boone: Yeah. I think just looking at last week, not that we live week to week, this is going to be a little bit choppy with some of the terminals we’re working with in terms of taking on some additional capacity. I don’t think last week necessarily the trend that we’re seeing, we’re seeing some good performance and then stepping up here this week on that. But when you look at the impact, I explained $25 million to $30 million net impact from the Baltimore incident, that will continue at least through May, and then we’ll probably have a hopefully glide path end of June of improving that. But we’re looking at offsetting a third of that business, maybe a little bit more if we can get all of the terminals to work with us.

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

Jordan Alliger: Yeah. Hi, thanks. Just curious, can you talk a little bit maybe specifically what the international intermodal growth was in the quarter versus domestic? And based on your comments, it seems like International is outstripping domestic, maybe by a wide margin. I’m not sure. Why is that the case? And what gets domestic Intermodal growth rate back up? You trip plan compliance looks really good. So I’m just sort of curious those dynamic plans.

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.

Operator: Your next question comes from Bascome Majors with Susquehanna. Please go ahead.

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.

Joe Hinrichs: Thanks, Bascome. This is Joe. As you know, certainly in the time frame that I’ve been here with this ONE CSX team, we’ve been really focused on our mission, which is really to focus on improving the employee culture and the employee experience through ONE CSX and to get better service to our customers, which we believe will lead to profitable growth for ourselves and importantly, growth with our customers. That hasn’t changed and hasn’t waned. I think in fact, what you’ve seen over the last couple of months is customers coming out and wanting that commitment to service and that commitment to — for our whole industry to be focused on what can we do to grow. So we’re not distracted by what’s going on and certainly not getting distracted by it.

We’re focused on what we can do, and as you saw in the quarter sequential improvement across the Board, and we talked about our confidence in to be able to continue to deliver that. And that’s what I’m really proud of our team, is not getting distracted and staying focused on our customers, on our employees. We need to improve safety, as Mike talked about and looking for opportunities to grow. And what we’re hearing from customers, they’re very happy with the service CSX is providing, and they’re very pleased with the continuity and the consistency of our messaging, but also our results, interactions. And that’s what we want to stay focused on. At the higher level, as you hinted at, as an industry, we have to continue to get better service to our customers.

I talked about it extensively at many different conferences and events, and we’re all working together to do that. I’m seeing more collaboration across the industry to make that happen, and I’m encouraged by that, and we want to be a part of that. And so to ultimately realize the potential of this entire industry, we all need to get better, at the fluidity of our network, how we work together and the service we provide to our customers. And that’s going to take us working better with all the stakeholders in this industry to help make that happen. So we can grow as industry if and when we all get better at customer service and working together. So that’s the focus we have at CSX. You’re not going to see us change our — there’s no 2.0 or 3.0, 4.0 plan.

It’s the same ONE CSX, focusing on our employees and our customers, and you’re going to see us continue to execute. Thanks.

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

Jason Seidl: Thank you operator. Sort of along those lines, we’ve seen a huge shift on the intermodal side back to the over-the-road operators mainly due to price. And then I guess, last year, some operational issues at the Class I rails and some declining diesel prices. I guess two things. What percent do you think the gap has to close between where trucking pricing is now for domestic intermodal to start getting business back? And have you been able to quantify just how much freight shifted to the over-the-road market? Thanks.

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.

Operator: Your next question comes from Ben Nolan with Stifel. Please go ahead.

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?

Kevin Boone: I’ll cover the revenue one. That one’s easy. It’s coal that we’re seeing there, maybe some slight opportunities, but they’re not large enough to be impactful to that number. On the cost side, Mike.

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.