Next, fireside chat. Joe Hinrichs, President and CEO. Been, still less than a year? Less than eight months, actually. Less than eight months. Okay. Well, first time at our conference. Thank you for being here. We are going to get right into questions. Again, I'll start, but if you have any, raise your hand. Not good to see a full room. Maybe just Joe, give us a state of the railroad. What you're seeing from a demand standpoint, what you're seeing from a service standpoint. Obviously, you know, lots going on in the industry with labor, politics. Maybe just, you know, quick state of the state, and then we'll get into all the nitty-gritty. Good morning, everyone. I thought I was joining a industry that got less attention than the auto industry. Since my tenure here, it's gotten a lot of attention. I mean, at CSX, we're obviously very proud of the progress we've made on the service front. Talked about it on earnings call for the Q1, we had our best ever service metrics in the Q1, and we're seeing that continue in the Q2. We've had a number of kind of third-party endorsements of that recently. The Surface Transportation Board came out and said we no longer needed to do the incremental enhanced reporting because of our service levels and because they weren't really hearing about complaints about CSX from customers, which was good. In the last week or so, The Journal of Commerce came out with a survey with the customers, and CSX, by far the largest, first place votes for the best intermodal service provider on the rails. Those are good, you know, indicators of where we are making progress. It's been an interesting time, though, as you said. You know, so we're looking at the things we can control on the operating side, our service levels, how our network is flowing, you know, manpower levels, those kind of things. I'm encouraged by the things that are progressing, the things that we can control. The overall economy is a mixed bag. You've seen it. Intermodal business is down, you know, so far this year, double digits. You know, we have a higher percentage of international intermodal of our intermodal than perhaps some others. The international business has been softer. We are hearing that, you know, that should get better in the second half of the year, as we've heard a number of retailers talk about that on their earnings call about they think they're getting their inventory levels in sync, but we'll have to watch the consumer there. Domestic intermodals come back a little bit. Even all the intermodal shipments, even the international shipments, have sequentially increased the last couple of months, but still much lower than they have been the last several years. Intermodal, we're watching very carefully. On the merchandise side, we're having a strong start to the year. I guess we're almost through May, so it's almost halfway through the year. Our merchandise business is up, which is really good for us, being driven by a number of factors. It's a mixed bag. I think the consumer-facing stuff is a little softer, but the, for us, because of our service levels, we're gaining share, we're gaining share of wallet on the merchandise side, which includes coal and auto. We're seeing a good start to the year. Great. You know, I typically start, you know, with short-term volume trends, but there's one thing you said I just, you know, stood out. Just wanna follow up on it. You talked about, you know, as The Journal of Commerce ranked number one, twice as many votes as anybody else. You know, we've seen in the last year or so some big shifts in channel partners out west. Yeah. Seeing some in Mexico. We haven't really seen any out east. To your point, right, you've got a much bigger international than domestic intermodal franchise, right? Are there opportunities for you to get bigger with some of the big, you know, larger IMCs and get some market share wins given the service product? Yeah. We do believe there's an opportunity for CSX. Okay. We're obviously talking to everybody when we have partnerships or relationships with everybody. You know, Schneider moved to Union Pacific. We already had pretty much the strong relationship with Schneider. We've been growing business with J.B. Hunt. On the rail side, you know, there's two factors. Of course, there's the CPKC opportunity, which is creating some different dynamics in the industry, and we see that as opportunity to have good conversations because we can lead with our service product. When you're talking to a customer and you're shipping from Mexico or from the west, obviously the eastern piece of it's important, but so is the western piece of it or the Mexican piece of it. We're having good conversations. I'd much rather be leading with our service levels where they are compared to our competition in those conversations. We're having good conversations, and for us, I see it as opportunity. Let's bring it back more near term. Overall, volumes down 2%, 3% to start Q2. What's doing better than you thought? What's doing worse than you thought? It looks like mix, which was a nice positive in Q1, will be a nice positive again in Q2. Yeah. You know, overall, you know, how are things doing versus plan from a volume standpoint? Yeah. I'd say intermodal is a little softer than we expected, even though we expected it to be soft. The merchandise business has been even stronger than we expected. Coal has been stronger. Now, the thermal coal, you know, in the Q1, replenishing a lot of inventories and with natural gas prices where they are, you know, thermal coal may, you know, come off in the second half of the year if natural gas stays where it is. Met coal has been strong. We expect that to continue throughout the year. Exports. Other areas, automotive year-over-year has been strong. Metals, grain, aggregates have been very strong year-over-year, actually, which is really good for us. On balance, I think so far this year, we're up about 4% on merchandise, which is, you know, in a healthy pricing environment. We feel good about that part of the franchise. Obviously we wanna see the intermodal come back as well. On the softer side, on the merchandise side, chemicals have been a little bit softer than we expected. Mostly export plastics and some things of that nature. That's the one that kinda sticks out. It's a big part of our business. It's not down a lot, but it's down a little bit, but that's still, you know, a big one to watch. As you think out to the second half of the year, it sounds like you're hopeful international intermodal gets something better? It's starting. Right ...get a little better, although it's still. Right ...low. Yeah. Coal, domestic coal, maybe with gas price, gets a little bit worse. What's the visibility on merchandise? That's been a, I think, a nice positive surprise to start the year from a volume standpoint. Is that sustainable into the back half of the year? Given macro, is that a, is that more of an upside, you know, sustainability or risk in your mind? Well. ...merchandise? Yeah Yeah the things that are working for us this year will continue in the second half of the year. Aggregates for sure, which have been a good positive surprise. Metals, automotive, we see automotive being strong for the year. Grain, you know, probably it's more seasonal, but certainly grain could be as well. You know, for us, those things should continue. We're winning some business. You know, we're not giving out specifics, but we're winning some business, winning some shares. That will help us in the second half of the year as well. There's some other things happening that will help us on the merchandise side. I think domestic intermodal has shown in the last couple of months progress, so maybe it's bottomed. We don't know if international has bottomed, but perhaps domestic intermodal has bottomed out, so maybe that we can see some sequential improvement there. On the met coal side, you know, that should continue. Exports should continue to be strong. We'll see where pricing is. I mean, pricing's still healthy. It's not the levels it was last year when it peaked, but it's still healthy. There's a lot of puts and takes, but on balance, you know, we're seeing good positive revenue per unit growth, largely due to the merchandise side. Okay. I wanna talk about, and you just mentioned revenue per unit. Let's talk about underlying pricing. Yeah I kind of see, you know, there's some crosscurrents as I see it. It feels like we got surprised on inflation in the middle of last year, it feels like maybe rail's underpriced a bit versus their own inflation, Maybe there's some catch up there. Your service has gotten a lot better. That should help pricing, right? Truck rates are under pressure. Maybe that hurts pricing at the margin. I guess with those crosscurrents, how are you feeling about overall pricing? Could it still actually accelerate from here? Does it naturally just start to slow? You know, then, you know, maybe just near term, like any color you wanna share on how to think about like overall revenue per unit? Yeah rate per car, Q1, Q2. As you know, we don't guide on pricing, but we have said, we did say in the earnings call, we'll continue to say that the pricing environment's been positive. We're pleased with where we are. You know, we can easily discuss our inflation because the labor contract was very visible and things of that nature, and our customers are doing the same thing to their customers. The pricing environment should continue to be strong. We've already gotten through most of our contract negotiations for the year for the bigger ones, and so we feel pretty good about where we are. Our service levels being so much improved helps those conversations, 'cause clearly it's easier to have a conversation when you're serving the customer better than you have been. You know, and I, and I think that from our standpoint, you know, we should continue to see a healthy ability to price certainly over the medium term above inflation. That's a good environment for us to be in. We're not really exposed to spot rates too much. I mean, maybe on the fringe a little bit of domestic intermodal, but not a lot. Most of our stuff's contract pricing, so we don't get we didn't, you know, we didn't get the benefits of it a couple years ago when it spiked up, and we don't really get exposed to it too much right now. Okay. You guys have been transparent and helpful around this storage revenue, $300 million headwind this year. Is that still the right number? Yeah. No change. We still see it, that being the right number, yeah. Okay. We should see one more step down in Q2, and that'll sort of be the, you know... Yeah, I don't know if we'll be quite there at the run rate, but we think the number's still the right number for the, for the year. Okay. One other area where you've maybe been a little less sort of, you know, transparent and helpful is, like, just the sensitivity around met, right? We've seen met come in a little bit. How should we think? If we're in this low to mid $200 range, right, what is the sensitivity we should think about for coal RPU? Does it go back to where it was in 2018, 2019, or does it stay above that? I don't know, any sort of help color you wanna give? Yeah. I mean, I don't have the experience from 20 18, 2019 rather. We think if it's, you know, north of $200, it's still pretty healthy environment. We feel pretty good about that. Curtis Bay is running really well, knock on wood, which is, you know, our port in Baltimore. That's allowing us to have more throughput through there. We feel really good about where we are. If it stays north of $200, we should be in, we'll be in good shape. You're certainly bringing some fresh perspective, some fresh ideas. Just a thought, right? Do you ever think about, hey, we've got this met coal business that creates this earnings volatility? Let's sort of reduce that volatility and not we maybe lose a little of the upside on the way up, but not you know, not feed the risk on the way down. We're sort of in this healthy range, you know, around, you know, low to mid $200s. Yeah. Let's sort of try and go back to our customers and try and lock it in. Is that something you think about? It's a fair question. We've given some thought to it. On our list of priorities of things we're working on right now, that's not making the highest priority list. Actually, what we've been really more focused on is getting more volume and with our customers who are seeing the service differentiation or talking to us about how can we get more volume flowing. There's another mine coming on this year on our network. You know, we'll look at everything, but that's not something that we're working on right now. One more sort of near-term question, then we'll get to some of the longer term opportunities. I always think it's helpful to just help sort of get expectations, you know, where they need to be, right? Q1, you know, excluding the insurance gain, $0.46, 61.7% OR, excluding that gain, right? That's usually your seasonally weakest quarter of the year. You know, From that level, should we expect to see sequential margin earnings growth Q2, the rest of the year? How are you... How do you see the model playing out? Well, as Sean Pelkey said in our earnings call, historically Q2 and Q3 are the better earnings or better margin quarters. I don't think there's anything that changes that from a seasonality standpoint. However, there are things still evolving, right? We talked about fuel surcharge, you know, as a lag, you know. As fuel has come down, we had more benefit in the Q1 than we'll have in the Q2, as an example. met coal prices have come off a little bit from where they were in the Q1. There are a few things that will change in the Q2 versus the Q1. Generally speaking, I think the trends are comparable. That's one of the things where you have to, you know, watch those on a year-over-year basis and also even sequentially quarter-to-quarter. What are the things that are outside of our control that are changing? Those are two of them. We've already talked about demurrage, but fuel surcharge is lagging. Met coal, while it's... it also lags. You know, we'll see some effect of that if the prices stay down in the Q2. One of the offsets, though, in a good way, is, right, we had a lot of costs last year with some service. Service has gotten a lot better, right? We started to see some of that cost come off in Q1. Yeah. Is there more cost just from better fluidity that comes off in Q2, the rest of the year? I think, Scott, that Sean, you know, mentioned this at the end of that Q1 earnings call. I think we should see some of that. We are still hiring a little bit. We're trying to get to 7,400. We're about 100 shy of that right now, so we're still doing some hiring every week, you know, trying to offset attrition and get ready for the summer months. The network is flowing pretty well. I mean, obviously we have incidents occur on occasion, but I think generally speaking, you know, we've done more paid sick leave deals, which, you know, are not significant increases in cost, but are slight increases in cost. We have the fluidity of the network. If we can keep the network flowing the way it is, we should be in pretty good shape. Let's turn to the network. Obviously, net service metric's really good right now. Do we need to get service even better, or is it from here, we just sort of, "Let's keep what we've got, maintain it," and then with that in mind, do we need to be, you said maybe 100 more people, do we need to add more than that? Or is that, you know, we get to that, and then we're sort of, you know, done on the headcount growth side? Yeah, I think. On the service levels, we always want to get better, but I think the highest priority is providing consistency and predictability over an extended period of time, so the customers get confident that we're committed to these levels and that we're gonna be able to support them. The most important thing now for us is to sustainably do this over time. We'd like to get better. I mean, still, I mean, if you look at it, depending on the metrics, and you look at the merchandise side, 85%, 86% of the time in the Q1 we were there. You know, that still means 14% of the time we weren't there in the window that we were supposed to be. And they're pretty big windows. I mean, they're not like, you know, trucking, which is usually a two hour window. We have room to improve, and we should expect ourselves to improve. The most important thing that we're hearing from customers is, "We're really happy with the improved service, you know. Just keep it going, and make sure we can count on it." On the manpower front, you know, I wouldn't be surprised if given, you know, what we're seeing in some of the business, if, especially if intermodal comes back, that we, you know, may need 100 more people or so. It's not a big, significant number. It would be to support keeping our network flowing and also support vacation and whatnot. I don't see dramatic, you know, improvements in, or increases in headcount required to support more improvement or sustained improvement on the service side. We feel pretty good about where we are. It's been a little struggle to kinda continue to grow the headcount because of attrition and hiring in the right spots. We feel I mean, say 300 is about where we are now. Say 400 is close to where we wanna be. We're feeling pretty good about that. We had a intermodal panel yesterday with some of your channel partners, and I asked them, "What's... Give me a rank from 1- 10, what's rail service right now?" They said, "Well, overall rail service right now is a seven, but by the way, I would put CSX at a 10." They said, "But," right, "all of our history says that volumes and service have an inverse correlation. As soon as volumes get better, service gets worse." I guess my question is, right, what, you know, what are you gonna do differently to ensure that whenever we get this volume recovery, right, that we can maintain the service? Yeah. I mean, I don't think there's a fundamental reason why there has to be that inverse correlation. I mean, if you think about it, if you're adding a few cars onto an intermodal train, you know, it's not gonna dramatically change your network fluidity and should actually, you know, actually help your incremental margins. I don't understand why that's happened in the past because I wasn't here. You know, I think the key, the key thing is the operational discipline and focus on the service metrics. It's fundamental and it sounds pretty basic, but it's all about each yard, each terminal watching on-time originations and arrivals. Those are the building blocks. If the trains leave on time and arrive on time at the different destinations along the journey, they'll eventually get there on time. It's getting back to those building blocks. If we keep that discipline and keep that focus, I'm really proud of our operating team, how they've been able to do this, there's no reason why some, you know. Yeah, if we had a 50% increase in volume, we'd have a problem. If we have, you know, a somewhat marginal increase in volume, you know, the 10% that's been down, let's say in intermodal, we should be able to handle that. To be candid, our intermodal service over the last several years maintained a pretty high level at higher volumes. It was the merchandise, you know, side that really struggled. Obviously, they go across the same tracks, go through the same yards. I'll just reiterate what I said. There's no fundamental reason why that has to be the case. I think we have to just make sure that we keep the disciplines that are working for us now if volumes come back on the intermodal side to support the service levels that we expect of ourselves. It sounds like in some respect, we're not... Like, we want a more... We want a volume recovery, maybe a gradual volume recovery. It's maybe a V recovery, that huge snap back that could be tougher. Yeah. Because again, if you need manpower, it's hard to get it quickly. Right. Number one. number two, you know, the one thing that I've learned in my first eight months in this job is just how important it is to keep those yards and those terminals flowing. When things get gummed up, it's like the airline industry, you know. You get people and equipment in the wrong place. It takes a lot of work to get it back into sync. Gradually, obviously, it's easier to make sure that you can maintain that. If you bombard the system with a bunch of new trains, you have the risk of, you know, a certain yard or terminal getting locked up, and then you've got the corresponding effects across the network. For us, we're watching all that every day. We'll take volume increases either way and we'll make it work. It sounds like you don't feel like you necessarily need to do something in a very different... that sort of limits the incremental margin- Correct on the way back up. We don't. Right. Again, I have a lot of confidence demonstrated by how they've You know, how well they've been making the improvements the last six, seven months with our operating team, Jamie Boychuk and the whole team. I believe that, you know, we can handle it and do it the right way. Just as I think about as not if, when volumes start to grow again, do you think, We'll add headcount with that. Do you think over time that volume should grow faster than headcount as we add some cars to existing trains? Do you think it's more one for one? How do you think about that longer term algorithm? Yeah. I think the volume can grow faster than headcount just because the nature of- Right If you're adding cars to existing trains, you don't need additional headcount really to do that. We wanna make sure we're growing headcount to support that as well. You know, the nuance here that's really important is that this is a service industry and a service business. It's highly reliant on our employees to provide that effort. Making sure that that balance of taking care of them and their needs in support of the service we're providing is critical. If we tip over where people aren't getting time off, if they're, if they're feeling rushed in the yard, we've got to add some people to help make that happen. You know, we still have very healthy incremental margins in that scenario. You know, there's. The nature of our business is such that the incremental margins are substantial. You just mentioned employees. Like, you've taken a leadership role here. Obviously, the whole industry, we've... We're paying a lot more. Now we've done some stuff with paid sick leave. Like, are we in a place where... Like, are we in a healthy place or do they... Is there now, "Okay, we got this, we got this. Now we want that." Like, is there... What's the next thing that they want? Are we now in a place where, like, things are good again? Well, I wouldn't say they're good again. Right. I think we're in the early innings. Yeah of a baseball game. We made some progress, some substantial progress and important progress. There's a long, you know, 100-plus year history of acrimonious relations between the companies and the unions and the employees in this rail industry. You know, we believe at CSX, I personally believe very strongly that if we're gonna achieve the optimum results of our business, we've got to get our employees to feel valued, appreciated, included. The things we're doing, changing our attendance policies, the paid sick leave deals, which we led the industry on, established the templates, which are now progressing nicely, all those things are part of moving us forward. The union contract taking three years was a step backwards. Having to go to Congress to do that was a step backwards. We have to continue to make progress. We start negotiations again at the end of next year on a five-year contract because we took so long to do the first one or the last one. I'd say we're in early stages, but we're making progress. Especially at CSX, we're making progress. We're hearing from our employees that they also, like our customers, they wanna make sure this is sustainable, that we're committed to, you know, listening and solving problems to be able to make it a place. It's in our interest to do so, not just because they provide the service, but because we need to attract and retain people in this industry to do the work. It's getting harder and harder to do that 'cause the youth of our country don't, you know, they don't think about these kinds of jobs when they're playing video games or when they're, you know, at home doing their homework. We've got work to do. By the way, if there are any questions, raise your hand. I'll keep going. you know, it very much feels like this whole industry wants to start growing, and I talk to investors, they're like, "Yeah, but they haven't done it," right? Yeah. I mean, I look at CSX like, your volumes have declined eight of the last 11 years, right? What fundamentally changes going forward that takes you from a down a little bit historical volume CAGR to an up a little bit volume CAGR? Is there anything that you see that's specific to either CSX or the East that sort of says, "Hey, we can forget about starting to grow. We can become a leader on growth. Yeah. I think there are a number of factors that help support us in that conversation. Our location, we're, you know, we're in the East. The Southeast is where a lot of the industrial development is happening. The nearshoring or onshoring or reshoring whatever word you wanna use, is helpful to us 'cause it's in the South, a lot of it's in the Southeast, which is where we're based, and we've had a number of big wins there with our industrial development team. I think on the intermodal side, we have to continue to demonstrate our service capabilities and then continue to partner with people to make that happen. There are other things like we, you know, our acquisition of Pan Am, we can you know, we see growth longer term in the New England region of our business as we get the Pan Am network, you know, where we want it to be to be able to run the speeds and, you know, double stack, et cetera, that we want. Quality Carriers over time should be additive to our business as well with the solutions we're providing there with the ISO tanks. There are a number of things unique to CSX, our industrial development work. That being said, the fundamental improvement in service and sustainability of service makes it a lot easier to get with customers and say, "Okay, you can trust us now. We're committed to this. Let's talk about what your needs are, and you can rely on rail to provide those needs." Because we haven't given them that confidence or that reason. What we've been doing lately is going to customers and saying, "Okay, you see what we're doing. We're committed to it. Let's do a whiteboard process where we, you know, we get in a room and say, 'What do you really... How much do you move, and where does it go? And how can we be part of the solution?'" We're seeing more and more acceptance and even excitement around that because of our service levels. Service begets the opportunity to talk about growth. In addition, we have some unique things to CSX on the southeast part of the country especially that help support us as well. We've already have a number of wins, which you heard Kevin Boone say in our last earnings call, that we think you could get 1-2 points of revenue growth from the industrial development wins in 2024, 2025 and beyond. That's also supportive. Okay. Let's, I'm gonna assume we're gonna start to get some growth. Okay? You're a railroad. You're gonna get price. If we get volume and price, is there any reason why we don't continue to get margin? There's no fundamental reason why you shouldn't see improved margin with growth because, again, the incremental margin is greater than the whole margin in most cases. Almost all cases. Now, the opportunity to dramatically improve margins from here is limited. That's already, at least at CSX and some other places, has already happened. As you said, if you can show growth, you can have some you know, small incremental margin improvement and return a lot of capital to shareholders, you can show strong earnings per share growth beyond your growth in volume and-or in price. Because you'll be returning, as we have, you'll be returning some of the excess capital to your shareholders. I mean, right. If you do volume, price, a little margin and buyback, right? The, the pieces should be there to... Right? If you can sustain that's a double-digit earnings algorithm. Is that kind of- Well, I'm not gonna. Right you know, I'm not gonna provide that guidance. Right. Right. Right. Right. Yes, so that equation can work. Right. We've shown the ability to improve margins. We've shown the ability to price certainly beyond inflation. We at CSX have shown the ability to start delivering much higher levels of service, sustainable now for, you know, five or six months, and we'll keep doing that. And we're showing some wins and some- Right merchandise growth volume. merchandise volume growth, sorry. Intermodal is where it is. Yes, those fundamentals should work for us, and they should work for CSX in a strong way. Let's keep going. If we get the volume growth, right, does something have to change about the capital intensity? You know, when revenue grows, I'm sure CapEx grows, but does CapEx grow faster, or can we keep this sort of 15%-16% of revenue on CapEx? I'm just trying to. Yeah, we don't see substantial capital growth beyond where, kind of where we are. Remember, we're investing in Quality Carriers ISO tanks, we're investing in Pan Am, and we're investing in, obviously, most of our capital goes into investing in our network. I will say, I'm very impressed and pleased with what the team has done over the last several years. The CSX network is very, I mean, it's not perfect, but it's very healthy. We've got big projects like the Howard Street Tunnel in Baltimore and great projects in Chicago and stuff that we're working on with other government partners. Generally speaking, we don't see a significant increase in capital required to support growth. If the earnings come through, the cash conversion should be very strong. It should be, yes. Let's just We're getting close on time. I just want to wrap up just on the D.C. environment. You've been very involved there. We've had some conversations. What, if anything, are you expecting out of this Safety Bill, it feels like we've had some progress taking some of the stuff on train length and train weight out. Is there more stuff we wanna get out of this Safety Bill? Do you think we'll end up with a two-person crew mandate? What are you expecting from the Safety Bill? I think, you know, the Senate bill is moving forward and, you know, we think there are things in the Senate bill that aren't good for the industry and don't belong in that bill. The House is being more thoughtful, more, you know, waiting for the NTSB to give its comments and et cetera. Usually it's the Senate that takes more time and is a little more thoughtful. In this case, it seems like the House is where that's happening. We think that's productive. I mean, at CSX, we weren't pursuing, you know, single-person crew or conductor on the ground, as you know. We don't believe a two-man crew mandate should be in a safety bill. There's no evidence of that what happened has anything to do with how many people were in the crew. We don't know where technology's gonna take us over time. We don't believe that should be in the bill. We're not pursuing that. There are other things like that that are in the bill, restrictions on automatic inspection and time standards and it gives a lot of authority to the Secretary of Transportation to have a lot of oversight. Those are the kind of things where like we wanna talk about. There's a lot of good stuff in the bill around, you know, tank cars, first responder training, some other things that we're really supportive of. We will definitely end up with a bill, I think, between both houses. I think it's gonna take a little more time as the House is taking its time to make sure it's thinking it through. In the end, I think the industry will be better off because we've learned a lot from what's happened working together on safety, et cetera. There's still more work to do in D.C., and we gotta make sure that the Rail Safety Act is about rail safety and not about other agendas or other objectives that other parties have. That's what we're staying focused on. Do you feel like you're making progress to that point, embedding the Safety Bill and-? I think we're making progress. I think there's still things in the Senate bill that we think don't belong in there. We are making progress. Okay. We're gonna have to wrap. Thank you so much, Joe. This was great. Thank you, everybody. Appreciate it. Thanks. We're gonna be starting in two minutes with-