Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2021 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-answer session. Thank you. Matthew Korn, you may begin your conference.

Thank you. Good afternoon, everyone, and welcome. Joining me on today's call are Jim Foote, President and Chief Executive Officer; Kevin Boone, Executive Vice President of Sales and Marketing; Jamie Boychuk, Executive Vice President of Operations; and Sean Pelkey, Acting Chief Financial Officer. In our presentation, you will find our forward-looking disclosure on Slide 2, followed by our non-GAAP disclosure on Slide 3. And with that, it's my pleasure to introduce our President and Chief Executive Officer, Jim Foote. Jim?

Thank you, Matthew, and thank you to everyone for joining us for today's call. First, I'm pleased to welcome Matthew to CSX, and I believe his investment and research background, including coverage of many of our customers, will make him a great contributor to our team. I wish Bill success in his new role as Head of Finance and Treasury. As we exit 2021, every CSX employee deserves recognition for their dedication to our customers in what has been another unbelievable year operating through the ongoing impacts of the pandemic and supply chain disruptions. As these challenges continue into the start of the New Year, we continue to take the necessary steps to move more freight for our customers. We are putting the resources in place to deliver a high-quality service product and are working hard every day to make rail a meaningful part of our customers' transportation solutions. Throughout this period, we have remained true to our core principles, operate safely, reliably, and efficiently, and we are committed to providing customers with additional capacity to help overcome the current challenges. These actions, combined with expected easing of supply chain disruptions, position CSX for growth. Turning to our presentation, let's start with Slide 4, which highlights our key financial results. We moved nearly 1.6 million carloads in the fourth quarter and generated over $3.4 billion in revenue. Operating income increased by 12% to $1.37 billion. The operating ratio increased 310 basis points to 60.1%, which includes approximately 250 basis points from the impact from Quality Carriers and 50 basis points from higher fuel prices, and earnings per share increased 27% to $0.42 a share. I'll now turn it over to Kevin, Jamie, and Sean for details.

Thank you, Jim. Turning to Slide 5. Fourth quarter revenue increased 21% year-over-year with growth across all major lines of business. Merchandise revenue increased 4% on 3% lower volume as the impact of ongoing automotive semiconductor shortages was more than offset by revenue growth across all other merchandise markets. Industrial and construction-related end markets continued to demonstrate the strongest growth. Even though declines in energy-related markets remain a headwind for our chemical business, it’s important to highlight that our core chemical, plastics, and waste markets continued to show solid year-over-year growth. Intermodal revenue increased 16% on flat volumes as international growth driven by strong underlying demand and continued growth in rail volumes from East Coast ports was offset by domestic declines due to ongoing driver and equipment shortages. Coal revenue increased 39% on 2% lower volume. Increases in export coal shipments, driven by the impact of rising benchmark prices, were partially offset by the effect of declines in domestic volumes, largely related to producer outages. Other revenue increased primarily due to higher intermodal storage and equipment usage, driven by supply chain disruptions resulting from truck driver shortages, chassis availability, and the lack of warehouse capacity. As we exited the fourth quarter, we clearly saw the effects of Omicron, with December volumes impacted by labor and supply chain disruptions. These challenges have continued into the New Year where we are seeing customers face labor shortages in their operations. As we look across merchandise, intermodal, and coal markets, demand signals remain strong. As supply chain challenges normalize, we would expect volumes to align more with demand. Finally, I would like to highlight the positive results we have achieved by working with customers on new business development projects. Over the last few months, we have seen three significant announcements of new production facilities to be located on the CSX Railroad, including two electric vehicle plants and a new steel mill. These projects are a team effort and show the ability of our sales and marketing team in partnership with operations to creatively come up with solutions that meet the requirements of our customers. Importantly, these projects represent significant long-term value to CSX. Now let's discuss the progress CSX is making regarding our commitment to sustainability as summarized on Slide 6. Rail is the most efficient form of land-based transportation, and CSX is the most fuel-efficient U.S. Class 1 railroad. By using CSX Rail in 2021, our customers avoided 11 million metric tons of carbon dioxide emissions, which is equivalent to taking 2.3 million passenger vehicles off the road, an amount greater than all the hybrid and electric vehicles operating in the U.S. today. We are proud of the recognition we have received for these efforts from organizations such as CDP, Dow Jones, and Forbes, but we are certainly not done. CSX continues to invest in existing technologies to drive further improvement and we continue to evaluate emerging technologies, so we are prepared to realize those benefits when available. We are excited to see our customers increase focus on improving their carbon footprint. Customer engagement on ESG has accelerated, and we have seen them double their usage of CSX provided tools that help them calculate emissions savings from switching to rail. You will also see later this quarter, we will be recognizing customers for their efforts in prioritizing carbon emission savings by converting traditional truck volume to rail. I will now pass it on to Jaime to discuss our operations.

All right. Thank you, Kevin, and good afternoon. As Jim referenced, we are working very hard to provide customers with the capacity to help overcome the persistent supply chain challenges. One of the areas we have discussed is our ongoing T&E hiring initiatives. This effort is beginning to pay dividends as more employees finish training and begin moving freight. We are also encouraged to see ongoing hiring momentum at the start of the year as we continue to consistently fill weekly training classes while maintaining a strong pipeline of candidates. In total, we roughly doubled the average number of active trainees in the quarter. Also, the number of employees qualifying and moving to active status increased almost 50% sequentially in the fourth quarter to approximately 150. And we expect this number to double to over 300 employees in the first quarter. Recently, the benefit of these additional employees has been offset by the rapid rise in COVID cases across the network. Average daily cases have increased by several hundreds since early November and are approaching prior peak levels. That said, there is no doubt that the hiring actions taken to date have allowed us to better manage the current situation. We have also supplemented this hiring by bringing additional assets online to help offset network imbalance caused by pockets of concentrated case counts. We will maintain these tactical asset increases as needed to protect service. We will look to improve asset utilization and drive increased operating efficiency as employees return to work and our ongoing hiring initiatives provide the necessary resources to move incremental volumes and deliver the expected high-quality service to our customers. Additionally, until along the way capacity improves in intermodal terminals, we will continue making the necessary investments to keep terminals fluid by providing the overflow space and supplemental labor required to move long dwelling boxes out of our terminals. We're also continuing to take a long-term approach to network and infrastructure planning and have identified several strategic expansion opportunities that will provide additional long-term capacity by helping to alleviate congestion while also supporting growth for years to come. As always, we will pursue these initiatives while maintaining a balanced train plan and a continued focus on strong execution to maximize both reliability and service for our customers. I want to thank the entire operating team for their hard work and long hours they've put in to keep freight moving for our customers. Despite the incremental headwinds this quarter, service metrics remained consistent with the prior quarter, and we are taking the necessary steps to drive these metrics back towards pre-pandemic levels over the course of 2022. Turning to Slide 8, safety remains fundamental to everything we do at CSX and we hold ourselves to the highest standard for our employees, customers, and the communities in which we work and operate. Our hard work to instill a culture of safety at CSX continues to drive positive results, as shown by the reduction in our train accident rate this year. Heading into 2022, we continue to target further reductions in human factor incidents through a combination of increased awareness, best practice sharing, collaboration across regions, and expanding our successful drone program. We are also engaging with our new hires to instill our principles of safe operations and emphasize our commitment to make CSX the safest running railroad. I will now hand it to Sean to review our financial results.

Thank you, Jamie and good afternoon. As you've heard, operating income grew double digits, up $151 million, with revenue up 21% on gains across all major markets. Over the line, interest and other expenses were $60 million favorable, reflecting the prior year debt repurchase expense. Income taxes were up on higher pretax income though we recognized $25 million in benefits this quarter, primarily related to state tax adjustments. As a result, EPS of $0.42 is up 27% versus the prior year. Now, I'd like to take a minute to walk through operating expenses in more detail on the next slide. Total costs increased $451 million or 28% in the quarter. The addition of Quality Carriers drove approximately $200 million of the increase. Higher fuel prices were also a significant factor driving costs up to about $115 million versus last year. Non-locomotive fuel inflation remained consistent with prior quarters just above 3%, though as we turn the page to 2022, we expect a number around 4%. Drilling into a few specific line items, labor and fringe increased $115 million or 20% in the quarter. Quality accounted for about $30 million. Incentive compensation was a nearly $40 million headwind in the quarter, largely due to higher expected payouts versus last year, and the impact of accelerated expenses for certain employees. As Jamie discussed, we continue to focus on hiring and retaining train and engine employees. We invested over $20 million in new programs targeting our T&E workforce. In line with these efforts, average headcount increased by 230, or 1% sequentially. Labor inflation remained in line with prior quarters, though is expected to be slightly higher in 2022. Purchase services and other expenses increased $198 million or 44% in the quarter. As a reminder, this is where most of the Quality expense shows up, approximately $130 million. Also, you may recall that we expected investments in supply chain fluidity to result in higher costs on this line, and we saw about $45 million of increased expense as we work tirelessly to drive network and terminal fluidity in light of unprecedented challenges. We expect these costs to persist until we see a normalization of labor and the broader supply chain. The remaining increase reflected both the impact of inflation as well as a number of smaller items. Depreciation was up 4% on a higher asset base. Fuel costs were up on higher prices, and rents were up slightly, and we had about $20 million of higher real estate gains. Going forward, you can expect a modest level of base real estate gains, similar to the $35 million we recognized in 2020 as we shift our focus towards leveraging the real estate portfolio to support growth initiatives. However, the Virginia transaction will continue to impact results in 2022 with a $20 million gain in Q1, and a $120 million gain expected in Q2. We anticipate receiving the final $125 million of cash in Q4. Now turning to cash flow on Slide 11. On a full-year basis free cash flow before dividends increased 45% to $3.8 billion. As a reminder, this includes $400 million from Virginia, and over 500 million of total proceeds from property dispositions. Cash in short term investments finished the year at $2.3 billion. While this remains elevated, we nevertheless expect to continue to work the balance down this year to levels more in line with our historical liquidity needs. After fully funding capital investments, shareholder returns exceeded $3.7 billion. We will continue to be balanced and opportunistic in our buyback approach and we remain committed to returning excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.

Great, thanks, Sean. Let's conclude with our outlook for the year on Slide 13. We remain optimistic about the opportunity to grow this year, driven by a combination of strong underlying economic momentum and supply chain recovery. Based on these expected tailwinds, we are targeting GDP plus volume growth for the year. Volume should build sequentially throughout the year as supply chain bottlenecks ease. As a result, growth in the second half of the year is expected to be greater than in the first half. This growth will be supported by the initiative Jamie reviewed to appropriately resource our network for the current demand environment and to ensure we can provide customers with a consistently strong service product. We also expect pricing to benefit from a combination of market forces, including very strong demand for transportation services. Full-year capital expenditures are planned at approximately $2 billion. Our top capital priority is and always has been maintaining and improving the safety and reliability of our network. In 2022, we will replace in excess of 500 miles of rail as we continue to focus on the core infrastructure. The cost of this capital work has been offset by significant improvements in the efficiency of our engineering programs. While we expect to drive further efficiencies in 2022, our plan reflects the impact of increased inflation and a number of discrete strategic investment opportunities. We will continually evaluate future strategic opportunities as they come along, but still have ample capacity across our network to absorb future volume growth. And finally, after investing in the railroad and high return growth projects, we remain committed to returning excess capital to shareholders through a combination of dividends and share buybacks. We are entering the year with strong demand across the economy, but shippers are facing ongoing challenges and the lack of capacity in labor, materials, and transportation. Our focus remains supporting our customers by providing effective rail solutions to overcome these persistent bottlenecks. As I said earlier, we are encouraged by the progress we are making, and we expect our actions combined with improving global supply chain will provide a year of steadily improving growth. Thank you, and I'll turn it back to Matthew for questions.

Thanks, Jim. Now, in the interest of time, I'd ask that everyone please limit yourselves to one question. And with that, operator, we will now take questions.

Your first question comes from Brandon Oglenski with Barclays. Your line is now open.

Hey, good afternoon, everyone, and congrats, Matt. I guess you guys didn't provide any discussion on forward profitability or margins and I get it. You have the lapping of Quality Carriers, plus lower land sale gains. So I guess, can you talk to the core efficiencies in the business and how you plan to leverage growth this year? Are there incremental opportunities for you guys to drive core profitability in outlook?

Thank you, Brandon. This is Sean. To clarify, as we enter full year 2022, we will face the complete year impact of Quality and reduced real estate gains, which combined will have approximately a 350 basis point effect. So on a comparable basis, we are starting at a 59 operating ratio. Fundamentally, our story remains unchanged. Our expectation as we emerge from the pandemic this year is that supply chains will normalize. As this happens, some of the costs we've incurred to better serve our customers will begin to decrease slightly. Additionally, the growth we anticipate will be stronger in the second half than in the first half of the year, and this should result in good incremental margins. Ultimately, the core narrative you've observed over the past couple of years remains the same for this year. The only uncertainty is the speed of the normalization and how quickly we can adapt to the current environment.

Thank you.

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

All right. Thanks. Good evening. I just wanted to ask, Kevin, maybe you can go through some of the puts and takes of the outlook for some of the key end markets? I know Sean just talked about some of the uncertainty around the supply chains. But where do you feel like you have some maybe more opportunities that could come to bear and where you see some of the challenges? And then if you can layer in some of the impact of those new business development wins, it sounds like they might be a little bit more longer dated, but is it too early to see some benefit from those?

Thank you, Brian. There is considerable demand across nearly all markets right now, and we're feeling positive about that. As Sean mentioned, the main challenge lies in the supply chain and when it will stabilize, particularly as we approach the second, third, and fourth quarters. This will determine how quickly we can achieve improved operational fluidity. Focusing on merchandise, the auto sector is critical. We're looking forward to when auto production resumes fully. Our current expectations indicate that the latter half of the year will see volume increases, and the auto sector drives demand in other areas such as metals and plastics. There is undeniable demand, as evidenced by local dealerships having limited new car inventories that often require a 12-month wait for customers. Currently, the metals and plastics sectors are performing very well. However, we are seeing weakness in the energy market, which heavily depends on spread dynamics, and we will monitor that situation moving forward. In intermodal transportation, we've benefited from international demand, with no slowdown in sight. There are still many ships waiting to offload cargo at the port, and we've successfully managed to move that freight. However, domestically, disruptions are mainly due to driver and chassis shortages, a situation that seems to be prolonged. We expect chassis issues to be a challenge until the second half of the year. Nevertheless, we see strong underlying demand, which is encouraging for the latter part of the year. Regarding coal, demand is exceeding supply, as reflected in export benchmark prices reaching record highs. The mining sector has faced challenges, including underinvestment, strikes, and production ramp-up issues, but we anticipate normalization and benefits from this in the future. A new mine has recently started operations, which should also contribute positively as we progress through the year. The critical question remains how long export prices will sustain their current levels, but we hope to see volume increases in the coming months. These are some of the dynamic factors affecting the markets.

All right. Thanks, Kevin. If I can ask for just a quick comment on coal inventory levels. Do you think you can see some restocking given some of the dynamics you talked about with demand outstripping supply specifically on the domestic utility side?

Yes, coal levels, particularly in our Southern utilities are very low. So there's restocking as needed. We're working really closely with our customers, and I would expect that to persist through this year and probably in the next.

All right. Thanks very much. Your next question comes from the line of Tom Wadewitz with UBS. Your line is now open.

Yes. Good afternoon. I wanted to ask you a bit about how closely we should tie your own capacity and your growth in conductors coming out of the training classes. It seems like you have a nice pipeline and a nice ramp up in that. How closely should we tie that volume growth to that ramp in your capacity? And is that the right way to think about it? Or do you think that the factors outside of your control in broader supply chain are kind of a bigger variable in terms of your volume growth?

Tom, it's Jim. Just generally, clearly, CSX is no different than any other industry right now, where we have been challenged finding people to come to work. And because we have been short on our train and engine service employees, the simple fact is we have not been able to move the amount of freight we could have, had we been staffed up at the appropriate levels. That's why we've been talking for the last year at least about our attempts to try and ramp up the hiring of operating employees. As Jamie said, we're starting now just now, after 12 months of very, very hard work to get it back to a positive growth number in terms of the number of employees. And when we do that, we'll be able to move more freight. Jamie, do you want to add more detail?

Yes. I think Jim pretty much nailed it. This is probably one of the most difficult environments we've ever seen. When you think about all the stuff the rail industry has gone through over the past 10, 20 years, my 25 years of railroading, I can tell you, when you come in one week and you've got 60 people off on COVID, a new variant comes through, and you've got 350 off on COVID on your T&E side, you really start to feel the effects. Believe me, Kevin and I are talking all the time about the opportunities of moving as much product as we can for our customers. Not only just the product that we currently have with our current customers, but the growth side of things and what else can we move out there. So to Jim's point, our hiring classes of over, I would say, probably the past two months have been extremely successful. We are putting 150-plus T&E, well new conductors, I guess, through our training center in Atlanta and we continue every single week to hold a new class. I'm proud to say that all the hard work our HR team has done through Diana Sorfleet is paying off. Honestly, when we start looking at where we're going to be in three or four months from now, we're going to be a different look in railroads, and these opportunities that Kevin is talking about is going to be opportunities that we're going after.

So are you optimistic about a quick improvement related to Omicron or really just focus on second quarter for that improvement in capacity?

Yes, Tom, it's Jim. We're thinking about maybe getting an epidemiologist on staff. So if you're ready to step up and tell us, this is it, this is going to be over in two months, and we're not going to see another one, come on, you can start tomorrow.

Sounds like second quarter. Thank you, Jim.

Your next question comes from the line of Chris Wetherbee with Citigroup. Your line is now open.

Yes, good afternoon. I wanted to ask a question about pricing. Kevin, when considering renewals for 2022, what opportunities do you see and how are they progressing as we move through January? Additionally, on the coal side, can you provide insights on yields, particularly for the first half of the year or throughout 2022? I understand that thermal exports likely involve a full year renewal, which may offer some uplift, but some other aspects are closer to the market. Any clarity on these points would be appreciated.

Let me start with the pricing aspect. It's clear that we're facing supply chain tightness, particularly in transportation. Our main competitors have significantly increased truck rates, which means we need to adapt our strategies. We're also engaging with customers to encourage more freight conversions to rail. In this inflationary environment, they're actively seeking ways to reduce transportation costs, and rail often emerges as the most cost-effective option. I'm pleased to report that these discussions are gaining momentum, and I’m in regular contact with Jamie about our initiatives. Overall, the market conditions are an improvement compared to last year. Customers are aware of the global cost pressures and are looking for solutions. Regarding coal, as I mentioned earlier, export coal prices have reached high benchmarks. While I expect these prices will moderate throughout the year, if the economy picks up again post-Omicron and demand from China remains strong, the high prices could persist longer than anticipated. However, we are projecting a decline in those prices, which may affect yields in the latter half of the year. On a more positive note, we anticipate that there may be some improvement in volume as producers increase their output, particularly with the onset of new coal mines and resolution of strikes at some of the existing ones. We hope these developments will contribute positively to our volume metrics.

That's great. And just quickly, merchandise and intermodal, how much of the contracts come up for renewal at the beginning of the year?

Yes, we see about 50% to 60% renewed annually and about, call it, 75% of those in the first and fourth quarters of the year.

Great. Thank you very much.

Your next question comes from the line of Ken Hoexter with Bank of America. Your line is now open.

Great. Good afternoon. Jim, Union Pacific this morning talked about growing faster than industrial production or about 4.8% for their level of carloads. You picked GDP in your outlook. I just want to understand kind of trying to parse your growth target, which includes services on GDP. So can you kind of talk about that overall target or maybe that's a Sean question? And then, you're now more than half a year in with Quality, are you seeing any of the contributions that you expected at this point from the acquisition? Thanks.

Yes, I'm glad to discuss that, Ken. It's great to connect with you. We are pleased with the quality so far; it is aligning with our expectations. Customer excitement about our current product in the market is strong. We are having many discussions about shifting to a transload operation instead of direct truck delivery. Additionally, we have not yet received the equipment necessary to use some of the ISO containers, which would further facilitate this transition. Overall, I think they are a fantastic team—very knowledgeable and genuinely enthusiastic about this opportunity. I believe Sean would be better suited to bridge the perspectives on growth between Lance and me.

I don't know about that, but I can just kind of give you a little bit of color, which I think Kevin really sort of already went through in terms of each of the markets and the puts and takes there. But I think the first half of the year or first quarter, at least on the auto side, we're going to continue to remain challenged. So and you can see it in our weekly numbers in terms of how that's trending. So the hope is that as we get into the second half of the year, that's part of kind of what drives the above GDP growth now. Kevin also talked about some of the growth initiatives and the three he mentioned aren't the only three. Obviously, there's a lot going on within the sales and marketing team in terms of attracting new business to the railroad. And then fundamentally, our ability to capture the demand picture that's out there, assuming that the recent momentum we've had on the hiring front continues, and the tools that we're using, in terms of retaining the employees we have, continue to be successful, we grow the active T&E count, we're going to be able to move more volume.

Okay, thanks Jim. Thanks, Sean.

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

Thanks Emma. Good afternoon, everybody. Jamie, we've spent a lot of time on labor for obvious reasons, not just impacting you, it's impacting your customers as well. But if we could go all the way back to a few quarters ago before it really kind of rears its head, and the supply chain got into a real bad congestion issue, I know you were out in the field kind of looking for other types of improvements you can make within the network. So as we think about right-sizing the organization, getting through some of the supply chain congestion into normalized fluidity, you guys seemed to have a head start here. So are there other opportunities for you within the network, whether it's just on trip plan performance or some of the cost levers in the back half of the year into 2023 that you think being a front runner here, you have a real opportunity on a relative basis?

Jon, we continually assess the railroad. I will be visiting again next week to spend time on-site and review our plans. As market conditions evolve and various factors come into play, we adapt our strategies. Recently, we have identified new ways to enhance customer service, especially in the Carolinas, where we dedicated considerable effort in the past quarter. We have allocated resources to ensure we meet our customers' current service needs, which incurs some costs. In the next few quarters, as our hiring aligns with our requirements, we expect to retract some of those resources or utilize them for further growth. There are always opportunities within our railroad. The team on the ground is focused on execution, while the network center analyzes data. I bridge these efforts to ensure we make informed decisions. Our primary focus remains on growth and service while managing our expenses effectively. This will guide our initiatives moving into 2022.

Great. Thanks, Jamie.

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

Thanks. Hi everyone. I just had a couple of quick hit questions and then one kind of maybe a broad one for Jim. But for Sean, I wasn't sure about this when you answered it earlier. Are the margins of the business going to improve on a year-over-year basis against the 58.1 OR that you did in 2021, and I'm obviously excluding Virginia. I understand the timing of the Quality Carriers acquisition and all that, but ex-Virginia, are the margins going to improve year-over-year relative to the 58.1? And related to that, could you just talk about maybe what the expectations are on SS oil revenues year-over-year? Because I think that will probably be a little bit of a headwind in 2022. And then sorry, Jim, one out of the box question a little bit. You've had great success leading CSX and the whole team over the last many years under very difficult circumstances, for sure. What is the thought process around succession planning? Do you plan or are you willing to lead CSX for many, many more years to come, or do you think there is some scope for change internal or external? Can you just talk about that? Because it's a question that I get and we get a lot, and I thought it would be interesting to get your thoughts on it as well. Thank you.

Amit, this is Sean. I'll address the first two questions. Regarding your inquiry about our operating ratio, we have a full year impact of 58.1 from Quality, which brings us to a projection of 59. Your question seems to be whether we can exceed that in 2022. We won't offer specific OR guidance today, but we've discussed the key factors driving growth in terms of volumes, revenues, and operating income, and how these will affect our operating ratio. We are starting the year with a somewhat elevated cost structure. In the first quarter, we anticipate costs will be similar to those in the fourth quarter, as supply chain and labor availability have not improved. However, we expect conditions to get better as the year progresses, which should lead to increased volumes, positioning us favorably. There are uncertainties, particularly regarding the coal market and export pricing, as mentioned by Kevin. Additionally, concerning other revenue, it will likely follow the broader supply chain trends. The issues that are causing delays in intermodal containers are tied to the same challenges affecting the wider economy, including driver and chassis availability. We expect other revenue to remain high in the first quarter, with a normalization starting next quarter, hopefully returning to normal levels by the second half of the year, as we anticipate moving more volumes. Those are the relevant factors.

On the question of succession, clearly, it's been a topic since I got here starting in the beginning of 2018. You may recall there's been quite a significant change in the management makeup here over that four-year period. And it has always been my goal, and has always been the goal of the Board to make sure that we had in place a rock-solid diligent succession planning process and the procedure to follow for all of the executive management jobs. And I think when you talk on the call today and you heard these great new voices that are doing such an exceptional job, that's because of the diligence that went into making sure that we always have an available pipeline of qualified talent. And I could tell you from working with the Board, that's no different from my job. Our job and the Board's job is to make sure when Jim decides to go, whenever that might be, hopefully, it's when I decide, not when they decide. But whenever we're going to fill that job that we have qualified people, both internally and externally that can step right in, and being a significant shareholder, I hope you can do a better job than I think I have done. Maybe other people disagree, but it's been an interesting ride.

Yes, well, I appreciate you entertaining my question. Thank you very much.

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

I have two quick questions, if I may. The first is regarding the $2 billion of CapEx; could you clarify what portion of that is related to growth? Secondly, you mentioned coal outages, and I know there was an issue; how should we consider coal in the first quarter specifically?

Hi Ben, this is Sean. I'll take your first question around the CapEx, and I would say CapEx is up about $200 million versus 2021. About half of that is related to growth investments. So Jamie talked a little bit about the sidings already, which set us up very well for the long-term to grow into the capacity that he'll be creating. We're making some incremental investments on the technology side. Some of the Quality investments in the ISO tanks fall into that category and then some commercial facilities. So lots of good high-return growth-oriented investments. The balance of the increase in capital is really driven by sort of inflation in the core infrastructure spend as well as a slight increase in hardening the core infrastructure for safety and reliability.

I would just add on the CapEx side that the siding extensions we're looking at mostly on our L&M part of our property, which was down in the Southern Southwestern part of the railroad where we had smaller sidings. It worked for us, but the growth coming out of some of that area through Alabama and other stuff that's going on, the need is there. So that's where the majority of this CapEx money is going to, and we're excited to get it out in that area to support that growth that Kevin and his group are bringing.

With respect to Curtis Bay, yes, we were down for a couple of weeks, but we're back up doing direct dumping. We did redirect a few trains to a couple of different locations, but we are back in business.

All right, thanks.

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

Thanks and good afternoon. I was wondering if you could talk about the impact you expect from Quality in 2022 from both the revenue and operating expense perspective as we try to model that out? And then circling back to some of the labor commentary, can you help us think through what you're expecting for the sequential change in headcount as we progress through this year?

Yes, Justin, it's Sean. I can take both of those. So the Quality impact is pretty straightforward. What you saw in the second half of this year, both in terms of revenue and expense, is probably a pretty good run rate going into the next year into 2022, will have kind of a happier impact in Q1 and Q2, and then as we get into the back half, it should be pretty similar. The things that are going to drive any difference would really have to do with driver availability. The demand is very strong on the Quality side, but that's how I would think about it. So a little over $400 million of revenue in the second half of this year. That's probably a good run rate around $200 million a quarter. In terms of sequential labor headcount, so you saw an increase of 1% from the third quarter to the fourth quarter. I think that's probably a pretty good estimate of what we might see over the next couple of quarters. The good news is, as Jamie talked about, the headcount we report to you includes both T&E employees who are in training as well as those that are marked up in revenue service. The mix between those that are in training and in service will change a little bit over the course of the first half of year, which is great news. But the headcount should go up very modestly on a sequential basis over the first couple of quarters here.

Okay, helpful. Thank you.

Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.

Hey, thanks. Good afternoon. So Sean, we have some pretty big headwinds from comp per employee and purchase services in the quarter, I think, including some accelerated costs. How should we think about those two pieces this year? And then, Kevin, just circling back on coal for one second, was your point about the net prices at highs suggesting that there's another sequential uptick in coal RPU in 1Q?

Scott, so comp per employee, you're right, it was elevated here in the fourth quarter, and that was one of the big factors there obviously was the incentive comp piece. So that should normalize as we get into 2022. I think if you look at it, excluding that for the back half of this year, that's probably a good baseline to build off of. We're going to have some higher labor inflation, which includes health costs as well as payroll tax and railroad unemployment. That will be partially offset by the incentive comp and then there's some favorable mix from the Quality addition in the first half of the year. Hopefully, as we get later into the year and the network is cycling better, we also see a reduction in overtime and things like that. So they're probably as a result of inflation, there will be a modest increase versus the normalized comp per employee, but not significant. And then in terms of purchase services, that's a line that has a lot of different moving pieces. What I can tell you is that you're probably going to see something similar in the first quarter to what you saw in the fourth quarter. But a lot of the costs that we added recently have to do with offsite storage and intermodal facilities, supplemental labor, adding some locomotives things like that. And that ties directly to overall fluidity within not only our network but the broader supply chain. So as that gets better, the purchase services costs should come down commensurate with that.

Yes. And then on the coal RPU, we would expect something probably flattish in first quarter versus fourth quarter. Mix always matters. I would say the mix in terms of our domestic coal side should, if we see some of the supply issues at the mine improve, could help some of that southern coal longer haul pull, maybe later here in the quarter that could help, but largely flat is the way we see it today.

Okay. Sean, if I can just clarify one thing. It sounds like the purchase services headwind is an offset to this assessorial stuff. So as the accessorial goes lower, the purchase services costs go lower too, so don't think about the accessorial as 100% margin. Is that clear?

Yes, that's correct. I think it's — that's right. That's right. Now probably accessorial may come down a little bit faster than purchase services just as — just from a timing perspective, but they will trend together.

Okay, thank you.

Your next question comes from the line of Bascome Majors with Susquehanna. Your line is now open.

Yes, thanks for taking my question. Jim, you talked a little bit about having a lot of new faces in management over the last few years since you've been in the company. Can you talk about potentially updating the investor community with an Investor Day, other type of in? I mean, it's approaching four years, you've acquired some non-rail businesses, you've got new faces and we've been through the global pandemic. Just curious when you think it might be time to kind of share your vision of where you think and you take CSX kind of midterm and how we're going to get there? Thank you.

I think we had planned to hold another Investor Day at least a year ago, if not longer. However, I haven't found virtual formats like Teams or Zoom to be particularly useful. Each time we've discussed going to New York or organizing something, unforeseen circumstances have disrupted our plans. Once Tom Waterwood arrives and informs me when the pandemic will end, we'll schedule the event and reach out to all of you. I’m eager to introduce this amazing team.

Yes, thanks for the color.

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

Hey, thank you, operator. Good afternoon, gentlemen. I wanted to talk a little bit about the performance in the quarter on the operational side. I think this was the first time your trip plan compliance for the carload division got above 70%. So I wanted to find out what was going on there? And what else needs to be done to sort of try to close that gap between carload and intermodal?

Thank you, Jason. I'd say, as you've followed probably quarter-to-quarter, it is a slow climb. We're working really hard on the service product. It really comes down to the availability of people. Our COVID numbers were down into October, November, where we had maybe 30 or 40, maybe up to 60 T&E employees and then towards the end of the year up to where we are today, well over 300 to 350 folks off. So for us to really get this service product where we're arriving on the hour, as we continue to commit to, it really comes down to people. And we've been saying this for probably over a year now as we've struggled to even get that pipeline going. Now we've got a great pipeline. We continue to fill those classrooms and the folks in Atlanta are doing an absolutely amazing job under Jim Switzenberg and his team. It's all about producing conductors, and as this quarter continues, we should see that number come up, but again I think Jim has mentioned a couple of times, it all comes down to what happens in the world with respect to COVID or whatever the next pandemic or item might be that affects our crewing of our trains, so that for us is the dial that really turns us up and down when we think about our service product.

Well, you'll see that number we publish; we publish our velocity as well every week. And that’s a good proxy for understanding how fluid the railroad network is, whether you’re trying to look at it from a service standpoint, a customer perspective and where we in terms of trip plan compliance or how much extra cost we're having out there because we're running slow. In the region, we run slow. It is not that the locomotives are moving at a lower rate of speed; it's sitting someplace because it gets to a terminal where it's supposed to be recruited and there is nobody; we don’t have an employee to get on the train because he got sick. And so, as that velocity number increases, as that drone number goes down, the result is that our customer performance metrics or our trip plan compliance numbers will just improve over time.

Well, I always appreciate the fact that you guys publish this, because trip plan compliance is what most shippers look at anyway, so I much appreciate on my end.

Your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is now open.

Yes. Hi good afternoon. Just some, one if I have some thoughts on round revenue per carload, sort of from the total company perspective, obviously coming off two strong quarters, we talked a little about the first quarter recall, but as you think about moving through the year, taking into account mix, how do you think about revenue per carload first half, second half of wherever you want to talk through it? Thanks.

Hey, this is Kevin. I'll take this one. Clearly, yes, we had some strong performance. Some of that, obviously, was due to the impact of fuel surcharge. We see that probably being a favorable impact into the first quarter and probably less so as you move into the back half of the year and just face tougher comparisons there. There are a couple probably larger swing items we've talked about quite a bit already but the export coal side will be a large swing item into the second half of the year if prices and the benchmark prices remain. That will obviously be a good impact. We've talked about how we reprice 50% to 60% of our business every year, and so you'll start to see that impact start to flow through probably more heavily in the back half of the year. And then on, those are probably the major moving parts across the business and obviously mix always matters. If intermodal is outgrowing your merchandise side of your business, that's always a negative mix. So we would expect merchandise to remain strong, but intermodal has proven over the last few years to be outgrowing merchandise, which is a good thing, but can have a negative impact on the overall RPU.

Okay, thanks for the color.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is now open.

Thank you, operator. Good morning or good afternoon, everyone. I have a question regarding the current environment and how it differs from the past. I'm curious if this situation presents opportunities for you to rethink some of your traditional practices, specifically related to contracts with customers and employees. Given that you mentioned challenges in hiring, do you think this could lead to a stronger emphasis on automation, especially if there is a shortage of workforce? Additionally, with a high demand for transportation services, do you believe this enables you to modify contract terms that may not have been feasible before, whether that means extending or shortening duration? I would appreciate any insights you can share on these topics.

Well, regarding our customers, the last two years have prompted us to rethink everything, as unexpected changes have occurred. We view the world differently now. Our relationships with our customers are crucial, and it's a significant business. While our contracts are relatively long-term, often around three years, our customers are making substantial capital investments in their operations and need a reliable understanding of transportation costs to plan effectively. Altering that relationship can be challenging. Our customers are reasonable people, and we engage in discussions to find mutually beneficial solutions. This is a partnership aimed at helping our customers succeed in their markets. Some changes, especially in e-commerce, have shifted who purchases transportation services, and we are now more directly engaging with customers rather than relying on third parties as we did previously. This evolution in our interactions and contracts presents both a challenge and an opportunity to understand the profile of potential workers in the railroad industry not just for the immediate future, but for the next five to ten years. We need to adapt to the industry's demands. While we can't replace the roles of conductors or engineers with technology, we can leverage advancements to work more efficiently, possibly with fewer employees. However, we operate within a heavily unionized and regulated environment that often dictates our processes. This has made us more aware of the need for improvement in how we address industry challenges moving forward.

Have you found that the automation question has been easier to enter into with unions in the current environment compared to previously?

No.

Okay, I appreciate the time, Jim.

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

Hey, guys, good afternoon. Thanks for taking the time. Two from me, Jamie, could you talk a little bit about where you expect headcount to be as we exit sort of the 2022 time frame? And then, Jim, I'd love to get your perspective. Having had some time presumably to review Norfolk Gas asset and the CPKC transaction. Kind of what do you think about that and what you think about the implications of that would be for CSX in the long run?

Sean mentioned this briefly, but I want to emphasize that we experience an annual attrition rate of 6% to 8%. We need to keep that in mind. This means we not only have to hire to replace those who leave, but also to meet our target headcount necessary to deliver the required service and support the growth initiatives that Ken and his team are pursuing. I want to highlight that we are actively hiring. Currently, we have over 500 conductor trainees in Atlanta and in various locations, and we won’t slow down. We will keep working to qualify more conductors. Additionally, we have plans to train locomotive engineers within the next year or two. Our goal is to ensure we can provide excellent service and foster the company’s growth.

Regarding the other railroads' filings in the CP and KCS deal, I am not surprised. Several other railroads have expressed their concerns to ensure that their franchises and customers are adequately protected. Each railroad has specific requests, and that process is just beginning. We have not engaged in detailed discussions about the implications of that transaction. We previously stated to the FTB that we lacked sufficient information to form an opinion. Until we formally state our position on what we will request, we are still assessing both what we might ask for and how it aligns with the requests from others, among other considerations. Therefore, I will not comment on any specific filing made by another railroad at this time.

That's fair. But if I could just press a little bit, is the scope of that Norfolk Gas surprising to you, or was that kind of as expected?

Again, I'm not going to characterize anything.

No, no comments at this point.

No, as I mentioned, I can't really say whether I think it is aggressive or not. We are trying to understand what everyone else is doing, which takes time. It's a lengthy process for us to gather information, analyze everything, and then we will decide what we believe is the right course of action for CSX. At that stage, we will be better positioned to discuss my thoughts on what others have requested.

Your next question comes from the line of Cherilyn Radbourne with TD Securities. Your line is now open.

Thanks very much. Good afternoon. We're starting to run a little long, so I'll just ask a quick one here in terms of coal and the producer outages that you experienced during the quarter and the new mine you have coming online, just wondering if you can help us frame that a little better in terms of the tonnage impact and the timing of when it could come back or come online initially in case of the new mine?

Yes. I wish I had a crystal ball. There's one particular mine that keeps on telling us that they're going to come back online, and it seems to get pushed out every week. And so, no, I don't have a lot of visibility. I have probably more confidence that as we get into the second, third, fourth quarter that we’ll see some pickup there. The good news is they have a lot more cash to reinvest in their business, whether it's equipment and other things. So I would think we'll see some benefits of that as well. I mentioned one particular customer dealing with the strike. Those things have continued for quite a while, but eventually those things get resolved as well. The other one, the mine that I mentioned that's coming online, it will be a slow ramp-up, and we would expect more volumes in the second half and that's mainly into the export market. So we're positive there. It's a supportive market obviously, and we're going to look for opportunities to move more coal as we get more crude availability into the second half.

Thank you for the time.

Your last question comes from the line of Ravi Shanker with Morgan Stanley. Your line is now open.

Thank you everyone. One broad question and one follow-up. The main question is about domestic intermodal. Based on your discussions with customers, do you have an idea of what it will take for shippers to shift significant volumes from truck to rail? Is it simply a matter of easing congestion, or are there more complicated issues related to speed, service, and flexibility that will take longer to address? And just as a follow-up, Kevin, you mentioned the timing of your contract renewals. On the truck side, we're noticing that customers are pushing for shorter contracts or more frequent price adjustments. Are you experiencing anything similar?

On the contract side, nothing has really changed. We're obviously working with customers to create a more even cadence through the rail network, and I work with Jamie all the time, and we go out to customers and explain the challenges that they create, and they can create more ratability of their volumes through our system. That's extremely helpful. And so working with them a lot on that side, so that's a big opportunity there. And then what was the first part of the question? Okay, yes. On the intermodal side, I think having spoken to you recently just one of our many customers; I think consumer behavior is actually going the other way. The expectation is not that they necessarily need something next day. So I would say, the emphasis on speed is actually going the other way to some degree, and we're seeing conversations around maybe I don't need to move it over a truck and get it there in 24 hours, that 48, 72-hour option is valuable. It's obviously cost-effective, where a lot of our customers are looking to offset very, very high prices. I would say, on the domestic side, really the challenge has been equipment. It's not a lack of demand. We get calls every day. They want to put more volume on us. But if they can't get the volume out of the terminal, that's a problem. And that's what we've been dealing with. But we think that will resolve itself. It's obviously going to be easier to get truck drivers that you can get home at night that are doing the short haul, and that really plays into our sweet spot. The long-haul truckers aren't there. And I don't think that the drivers are going to come back to that market, but we do think the shorter haul drivers are going to become more and more available. But it's not just the drivers; it's the chassis, and we know there's a lot of orders out there, and so that will resolve itself. And then the container side, a lot of containers being ordered right now. So we do think as we get into the second half, we'll have a lot of tailwinds that will help us really accelerate growth.

Great, thank you.

This concludes today's conference. Thank you for attending. You may disconnect.