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

Thank you, Krista. Hello, everyone. Good afternoon and welcome to our fourth 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. Now in the presentation accompanying this call, you will find our forward-looking disclosure on Slide 2, followed by our non-GAAP disclosures on Slide 3. And with that, it is now my pleasure to introduce Mr. Joe Hinrichs.

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

Yeah, thank you, Joe. And good afternoon, everyone. Let's go to Slide 8 and let's just go to the Q4 recap. As I've said many times before, safety is foundational to every success we have. We saw a reduction in engineering and mechanical-related accidents and a reduction in transportation injuries during the quarter. And I really want to thank every CSX employee for their continued efforts on creating a safe working environment for themselves and each other and that is extremely important. But we know we still have work to do well. Though the full year numbers showed overall improvement, we were flat on transportation-related accidents and saw an increase in engineering-related accidents. These are all areas of opportunities we aim to improve in 2024 and beyond. At its core, safety isn't solely about incidents; it's about how employees feel working within the organization. We have an environment where employees feel included, respected, valued, and listened to. We can continue to identify areas of improvement as a team and change them. In 2023, we listened to our employees and we made positive changes to the work environment in response, converting these conversations into effective practices. Our results are beginning to demonstrate that this is already making a difference, but we have a long way to go. We'll continue to keep this dialogue open and learn from each other. When done right, the entire ONE CSX team will meet its great potential when it comes to operating safely and efficiently in service to our customers. Over the next slide, and on this slide is pretty self-explanatory to me. It shows we've stabilized our network and we've performed pretty well over the quarter. While one of our key focus areas is on maintaining and bettering our customer-facing metrics. Our fluidity has started to allow us to look deeper at our operating plan, again to better align the hard assets needed to move the volume. The team's been focused on maximizing car connections and maximizing the train load, while at the same time reducing locomotive dwell and active horsepower on trains. As a result, we've seen both a reduction in active locomotive use and daily train starts. Tightening connection standards in our yards are starting to drive changes to our operating plan that result in quicker connections. Driving a strong focus on using our locomotive technology to reduce fuel usage on line of road has contributed to savings in overall fuel costs. Altogether, we're finding tangible opportunities to open up more capacity on this network. I expect these metrics to continue to improve as we go forward. Moving over to Slide 10. And I really believe we've made good headway in Q4 and especially over 2023. Our key metrics continue to improve in our network fluid. Our headcount is at the point that we're now able to manage through efficiency and attrition. We’re paying close attention to resource requirements for any new business coming online when needed. Our focus on car connections and train tonnage closely matched horsepower along with network fluidity allowed us to reduce 2.5% of our daily starts in the quarter and begin to store active locomotives. Among other things, in this coming quarter, we'll be performing full territory reviews with our team that will further improve our customer service and continue to identify opportunities to better align asset use. And of course, we'll be working closely with Kevin and his sales and marketing team to deliver this great service and grow with our customers. During closing, during my four months on the property, I continue to learn more about this network and especially about the women and men that make up this tremendous ONE CSX team. I'm extremely excited about our potential to deliver our customers better service with greater safety, efficiency and teamwork. I'm excited to do this together as one group of great railroaders. So thanks for the time. Over to you, Kevin.

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

Thanks, Kevin, and good afternoon. Fourth quarter revenue fell by 1%, while operating income was down 10% or $139 million. Now these results include $180 million of discrete year-over-year impacts from declines in other revenue, real estate gains, and export coal benchmark prices. However, the underlying results also reflect the benefit of our sustained service levels throughout 2023 and growing momentum in the business. Across merchandise, coal, and intermodal, revenue excluding fuel increased by 5%, benefiting from strong core pricing across the merchandise portfolio and 3% volume growth in both merchandise and coal. Counter to normal seasonal trends, the team delivered sequential volume gains, helping operating income increase by $25 million relative to the third quarter. Interest and other expenses were $16 million higher compared to the prior year. Income tax expense decreased $23 million. The effective tax rate of 22.9% included $19 million of favorable adjustments primarily for state tax matters compared to $33 million of favorable adjustments in the prior year. Our expected tax rate going forward remains 24.5%. Earnings per share fell by $0.04, including $0.07 of impact from the previously mentioned discrete items. For the full year, operating income fell by 8% or $462 million, while earnings per share were 5% lower. These results were impacted by the prior year Virginia real estate transaction, declining intermodal storage revenue, and lower export coal benchmarks totaling nearly $700 million on a combined basis. The hard work of our ONE CSX team provided our customers reliable and consistent service throughout 2023 and laid a strong foundation for long-term profitable growth. With profitable growth in mind, we will also be making a change in how we report results going forward. Starting in the first quarter of 2024, we will transition to a more conventional approach of reporting operating margins rather than operating ratio. Our goal is to target margin improvement, aligning the business around a balanced approach that includes profitable volume gains and pricing to the value of our service, all while controlling costs and optimizing asset utilization. Let's now turn to the next slide and take a closer look at fourth quarter expenses. Total fourth quarter expenses increased by $89 million as the impacts of lower real estate gains, inflation, increased depreciation, and higher headcount were partly offset by lower fuel prices and efficiency savings in PS&O and rents. Turning to the individual line items. Labor and fringe were up $82 million, impacted by inflation and additional headcount. The quarter also included costs that related to the timing of union employee vacation and sick benefits. We expect this to adjust down, resulting in lower sequential costs per employee in the first quarter. Purchased services and other expenses increased $4 million versus last year, as inflation was mostly offset by savings from our intermodal and engineering teams. We expect a modest sequential increase in the first quarter, similar to what we have seen in recent years. As a reminder, we'll cycle a prior year insurance recovery of nearly $50 million in the first quarter. And while we expect increased technology carry costs and a need for more locomotive overhauls to impact expenses in 2024, we are actively implementing cost savings and efficiency initiatives that will help offset these headwinds. Depreciation was up $24 million, including an $11 million adjustment related to prior periods. We are projecting roughly $40 million to $50 million higher full-year depreciation expenses in 2024. Fuel costs were down $59 million, driven by a lower gallon price. While fuel efficiency was stable year-over-year, we saw strong sequential improvement. These results are especially encouraging as we typically face seasonal efficiency headwinds in the fourth quarter. Mike and the team expect to continue the momentum in this critical measure into 2024 and drive meaningful year-over-year savings. Equipment and rents were $9 million favorable, driven by faster car cycle times across all markets. Finally, property gains were $47 million unfavorable in the quarter. At this time, we do not expect any individually significant transactions during 2024. Now turning to cash flow and distributions. Full year free cash flow remains strong at $3.3 billion. Our first priority use of cash remains investing for the safety, reliability, and growth of our business. As such, this figure includes $2.3 billion of capital spend across a wide range of projects to ensure the integrity of our network infrastructure as well as the high return strategic investment opportunities. Looking to 2024, note that free cash flow will be impacted by about $380 million of Federal Cash Tax Payments that were deferred from 2023. Cash flow generation also supported close to $4.4 billion in shareholder returns for the year, including $3.5 billion in share repurchases and nearly $900 million of dividends. While economic profit finished lower for the year, largely due to lower intermodal storage revenue and export coal pricing, our goal is to increase economic profit over time, which has been shown to strongly correlate with outsized shareholder returns. With that, let me turn it back to Joe for his closing remarks.

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

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 question. Krista, we're ready to start the process.

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

Thank you and good afternoon. Sean, I wanted to dig a little deeper on this part of the guide and maybe some of the delayed productivity improvements that you spoke about. If the volume commentary is low to mid-single digit, you have some of the productivity levers that you were hoping to pull even though you have some of these, I guess, other fixed cost increases in the form of D&A, et cetera. How do you think about margin expansion in 2024 based on your base case of volume and revenue?

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

Thanks, Sean.

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

Joe, you opened the call talking about a lot of the progress you had made in your first year leading the business. Can you talk about how your focus or at least investors will see your focus evolve over the next 12 to 18 months following the success you've had improving a lot of stakeholder relationships in your first year?

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

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

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

Sure, Brian. I'll begin on the copper employees. So we did have some true-ups in terms of vacation and sick leave that I mentioned in the quarter. That was probably about $15 million. We also had work that moved from capital into OE. We typically have that in the fourth quarter. So those will both be tailwinds going into the first quarter on comp per employee. So I would expect if you're modeling that a couple of percentage point improvement versus what we reported in Q4. Should be pretty steady in the first half. And then again, we have that 4% wage increase scheduled in July, so probably step up a little bit in the second half of the year. Notwithstanding the efficiency initiatives that Mike and the team are focused on.

Your next question comes from the line of Mike Cory. Please go ahead. Your line is open.

Sorry. I was just going to finish up. Overall asset use, whether it's locomotives, trains we run, how productive all of us are, they're front and center for what we look at. And so for me, it's really, I'd say out of a scale of 1 to 10, I'm about a 4 in terms of where I am in understanding our network and understanding our people. However, we're really starting to focus on the things that aren't working right. They aren't working against what we think we can do with the franchise, with the network we have. So whether it's size of trains, the state of the train, the use of the technology we have to get the most out of the locomotive. It's just, right now, it's blocking and tackling, and it's everybody coming together. So we're learning, we're teaching, we're sharing best practices. We're doing the things that, in that fourth quarter, were really the last couple of months that we really started to see the things we could do because, first of all, we had the headcount. We had the reliability and the fluidity of the network. And so we’re just going to keep grinding that stone. But as I said in my remarks, we’re going to really get deep into the operating plans over every corridor over the next few quarters. And I’ll leave that charge, but I tell you what, I’ve got a lot of people that are out there ready to go and they’re very qualified to do this. So I see, to Sean’s point, we got further efficiency ahead of us, but never at the expense of safety and never at the expense of customer service. So our hope is that we continue to provide this great product, and the customers are going to come. And that’s how we’ll also get the efficiency that we need.

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

Thanks, good afternoon. So with the 2024 guidance being the same for volumes and revenue, low to mid-single digit growth. Is it right to think that your assumption for revenue per unit all-in is flattish? And either way, I was wondering if you could provide some more color on your expectations for coal RPU maybe for the first quarter and then the full year as well? Thanks.

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

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

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

Yeah. Thanks, Scott. I can take a stab at it here. So I think fourth quarter, let's remember, we've got the dynamic of some work moving off of capital and going to OE. That's normal. We'll typically see a little bit of a step-up that reverses back in Q1. We probably had, call it, $30 million, $35 million of costs in the quarter that were somewhat unusual items that we mentioned but just as a reminder, we had a true-up on vacation and sick leave, that was about $15 million, as I just mentioned. We had another $10 million on depreciation true-up at the end of the year there for that, that's not going to recur. And then the Livingston, Kentucky derailment was about $10 million as well. So you kind of add all that together, those costs roll off as we go into the first quarter. And then we built some momentum. I mean, as Mike said, he’s already looked at the train plan. He’s reduced some starts driving tonnage up. That’s going to drive fuel efficiency as well, taking some locomotives out. We’re not paying maintenance on those locomotives. So we’re certainly building some momentum. I think that’s going to gradually add in as we go through the year. And that’s why I feel really good about where the incrementals are going to be in the second half of the year.

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

Yeah, good afternoon. Wanted to ask, I think it's probably for Kevin, just a little bit on the revenue side. You've had a pretty meaningful storage revenue headwind in 2023. And I think you feel surcharge can be an impact too. How do you think about those two factors as you go in '24? Are they kind of neutral? Or is there still some lingering headwind? And then in terms of price, what kind of a price assumption do you have? Are you thinking stable pricing versus what we got in '23? Or is it kind of up or down? Thank you.

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

Yeah. And then on pricing, I think, as we talked about all last year, we had to react to a much higher inflation environment that we all experienced, quite frankly. And, you'll see a lot of that carryover, right? These contracts are negotiated some on a multiyear period, some year-over-year. We know how to negotiate every year. So it's fair to say our expectation coming into '24 is that cost inflation for our business will be a little bit lower. So I would expect that number to come down when we have our conversations, but still very healthy when you look at historical rates, what we were able to achieve. And obviously, that's an important part of our revenue growth story, balancing volume and price.

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

Hey, good evening, everyone. Thanks for taking my question. Mike, I wonder if you could speak more specifically to labor efficiency this year, especially in reference to Kevin's remarks that you're going to have new merchandise business bringing on about a point of volume additionally. So how are you planning for headcount? And what are the opportunities for efficiency there? Thank you.

Hey, Brandon, I hope you're doing well. At this point, I can't commit to increasing volume without adding more staff. It really depends on the specifics. However, I feel confident about our recent performance with a larger train size, which should help lessen the need for additional headcount. There are areas we haven't tackled yet during my time here. It's not solely about train size; we have a network that is very focused on customer needs, with numerous yards and local services. Our priority is to stabilize service reliability, and with our current staffing levels, we believe we can achieve that. This gives us confidence that there is room for improvement. I see potential for further enhancements in how we handle the cars we currently manage. With the additional capacity from the locomotives and storage, alongside reduced movements, I believe we will be able to accommodate more volume with our existing resources in many instances. However, we need to ensure we have the right staffing in those critical areas.

Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead. Your line is open.

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

Yeah, thanks, Ken. It just goes back to what I'm talking about in our yards and our terminal performance, and that's where our focus will be. Again, I've been getting the folks to really focus on connecting cars, increasing train size. So we're going through some growth periods in that sense. Yeah, it's affecting the on-time performance. But at the end of the day, we're counting on making sure we fulfill the trip plan of the customer, and in some cases, it's going to change the way we design our network and the time the trains go. So I'm not concerned about that at this stage. It certainly isn't anything to do with congestion or poor performance. These are the growing, the growth what I call, growth observations of a network that's starting to change and really look to maximize the assets that we have out there to create capacity. So it’s not a cause of concern at this moment. Trust me, we look at it in a lot and measured it the minute. So this isn’t, it’s not like we’ve got trains that are late, late, late. These are fractions of hours. And so that’s fine. We know we have to operate on time. But at the end of the day, it’s the delivery to the customer. It’s their first mile, last miles, their pain points that we’re focused on. And at the same time, we’re driving efficiency through running a more condensed network.

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

Hey, thanks. Good afternoon, guys. Maybe I just wanted to follow up on the Resources question. I guess, as you think about the portfolio of the business opportunities ahead of you that informs the volume growth outlook. Can that be done? Or what are the resources required, I guess, as you think about the plans? When we think about headcount, maybe specifically, but maybe also locomotives, what is the growth associated with that that you guys have in the plan for 2024?

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

Yeah. And just on top of that too, Chris. Staying with locomotives, where we still have an opportunity to use the locomotives we have out there working, use them harder. And so that’s a big focus for us, whether it’s dwell, whether it’s connection, whether it’s what they’re pulling, I believe we have the capacity to grow just off of what we have out there right now.

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

Thanks, Operator. Hi, everybody. So, Sean, can you just help us, I guess, calibrate 1Q expectations in terms of operating ratio. You talked about $30 million to $35 million of kind of one-timers in the fourth quarter. I think that's like a point of OR. Volume is down, I guess, a little over 6%. So that's obviously a headwind whether it's tough. So just talk about that. And then on the cost side, PS&O costs, there's a lot of focus on labor. Again, it's your biggest cost bucket, but PS&O is a pretty large bucket. And if I look over the last three to four years, the rate of inflation in PS&O costs are like more than double revenue growth. What's going on there? What's the opportunity to kind of hold the line or bring that down? Because if I remember correctly, back in '17- '18 was really a great place to look for efficiency and opportunity. I just want to know if there's an opportunity there in '24 as well.

Amit, on your Q1 margin question, I think I'll just sort of stick to what I said before in terms of building momentum from Q4 to Q1. That's our goal. It's to deliver if we can, operating income growth sequentially from Q4 to Q1. The margins will be what they are based on where fuel prices settle. But can we grow margins as well in Q1? Sure. I think that's within the realm of possibility. Again, whether or notwithstanding, we had a rough couple of weeks we're coming out of that, things are certainly looking better across the network as we speak. So you'll see the weekly volumes and see how that catches up from there.

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

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

Yeah, Walter, we all read your notes here. Obviously, we've been intimately looking at that, and we have our own sources. But we do a bottoms-up build up, right? We talk to our customers. We understand what the demand they're seeing in their business, how they're forecasting, what they're telling their investors and their stakeholders in terms of what they're seeing. And quite frankly, this market right now is still a production-constrained market from everything that we're seeing. We see some weakness in the domestic market. We think there is an export market that can continue to put some of that volume into that market. So there is optimism. Obviously, I know this market can change quite quickly. The global environment changes quickly. But for what we see right now and what our customers are telling us, and, there will be some weather impacts as we get into the year, we'll look at the summer to see if it's hotter than usual or where that shakes out, that will obviously impact our domestic business, but we do think there's an export business that serves as an outlet for some of the domestic side if we saw some further weakness there.

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