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CSX Corp. (NASDAQ:CSX) This autumn 2022 Outcomes Convention Name January 25, 2023 4:30 PM ET

Firm Members

Joe Hinrichs – President and CEO

Kevin Boone – EVP, Gross sales & Advertising and marketing

Jamie Boychuk – EVP, Operations

Sean Pelkey – EVP and CFO

Convention Name Members

Amit Mehrotra – Deutsche Financial institution

Justin Lengthy – Stephens

Brandon Oglenski – Barclays

Chris Wetherbee – Citigroup

Scott Group – Wolfe Analysis

Jon Chappell – Evercore ISI

Tom Wadewitz – UBS

Ken Hoexter – Financial institution of America

Brian Ossenbeck – JP Morgan

Ariel Rosa – Credit score Suisse

Fadi Chamoun – BMO Capital Markets

Ravi Shanker – Morgan Stanley

Cherilyn Radbourne – TD Securities

Bascome Majors – Susquehanna

David Vernon – Bernstein

Allison Poliniak-Cusic – Wells Fargo

Walter Spracklin – RBC Capital Markets

Jeff Kauffman – Vertical Analysis Companions

Operator

Women and gents, thanks for standing by. My title is Lisa, and I’ll be your convention operator immediately. At the moment, I wish to welcome everybody to the CSX Company Fourth Quarter 2022 Earnings Convention Name. [Operator Instructions]

Earlier than starting, the Firm wish to remind you that the forward-looking disclosures have been offered on slide 2, and non-GAAP disclosures are on slide 3.

I’d now like to show the decision over to CSX President and CEO, Joe Hinrichs. You could start your name.

Joe Hinrichs

Good day, everybody, and thanks for becoming a member of our convention name. I’m right here with Kevin Boone, Jamie Boychuk, and Sean Pelkey, and we’re excited to replace you on our quarter outcomes and share our preliminary views on the upcoming yr.

I first wish to thank all our CSX staff for dedication as they work diligently on behalf of our prospects by means of all of the challenges and uncertainties that we confronted in 2022. Due to their efforts, our community has continued to run safely and our monetary efficiency has been very sturdy. Now we have completed lots during the last 4 months since I joined the Firm. This stock my visits to our railroads out within the discipline, go to to our prospects, our buyers and our many companions within the authorities, we finalized agreements with our labor unions. We reached a optimistic resolution for the Gulf Coast with our colleagues at Amtrak. And we began to make updates to the nuts and bolts insurance policies on attendance and make a giant distinction for our staff’ high quality of life.

I’m significantly proud to report that our service metrics proceed to indicate actual enchancment into the fourth quarter after beginning a transparent upward development within the early fall. And we’re very happy this progress continued all through this month. As we anticipated, our hiring successes have allowed us to ship higher customer support that may permit us to seize extra enterprise with extra quantity over time.

Wanting ahead, we’re centered on constructing on our momentum, leveraging our industry-leading working mannequin and rising this railroad. As we undergo the main points and reply your questions, I imagine that you’re going to get an excellent sense of the power and optimism that all of us share throughout the group of the alternatives forward for CSX.

Now, let’s flip to our presentation to evaluation the highlights for the fourth quarter and the complete yr. CSX generated over $3.7 billion in income, up 9% from the earlier yr on 1.5 million carloads within the quarter. Revenues benefited from increased gas surcharges, sturdy core pricing, and better storage and different income. Working earnings elevated 7% year-over-year to $1.46 billion and our working ratio was 60.9%.

As we’ve reminded you earlier than, our High quality Carriers trucking enterprise provides roughly 250 foundation factors to our OR. Earnings per share elevated 17% to $0.49.

Rapidly wanting on the full yr 2022, our revenues of almost $15 billion have been up virtually 20% in comparison with 2021. Our full yr working earnings of $6 billion elevated 8%. Excluding the features from the 2021 actual property transaction with the Commonwealth of Virginia, our working earnings grew in keeping with our steering for double-digit progress. Working ratio was 59.5% for 2022. Lastly, earnings per share elevated 16% in 2022 to $1.95.

Now, let me flip it over to Kevin, Jamie and Sean for particulars.

Kevin Boone

Thanks, Joe. Turning to slip 7.

Merchandise income elevated 7% within the quarter, as a 9% enhance in income per unit greater than offset a 2% decline in quantity. For the complete yr, merchandise income elevated 9% on 1% decrease quantity. 2022 merchandise progress was pushed by increased gas surcharge mixed with an rising pricing setting as inflation accelerated by means of the yr.

Wanting ahead to 2023, we now have important community momentum as we started the yr, and we count on to leverage industry-leading service into progress alternatives with our prospects. That is mirrored in our latest buyer surveys the place we now have seen a big enchancment in general buyer satisfaction scores. We see alternative for strong quantity progress in merchandise for the yr, led by continued energy in automotive, our rising export plastics enterprise and share features as prospects reply to our enhancing service. This progress is more likely to be partially offset by weaker housing-related and home chemical shipments as we begin the yr.

On slide 8, you may see fourth quarter coal income enhance 20% on 9% increased quantity and a 9% enhance in income per unit. Full yr income elevated 36% on 1% decrease quantity and a 38% enhance in income per unit. In 2023, we count on export coal volumes to develop in each, met and the thermal markets. So, we do count on benchmark indexes to say no from the elevated averages of 2022. We’re optimistic concerning the potential optimistic demand influence of China’s reopening. Whereas on the availability facet, we now have a brand new 4 million ton met coal mine coming on-line this yr. We additionally anticipate quantity alternative as we lap 2022 points, together with diminished manufacturing at some CSX-served mines and capability limitations on the Curtis Bay and Cell export terminals. We count on home volumes to be low — be pushed by low thermal stockpiles that stay beneath historic averages.

Wholesome stock ranges will permit utilities to raised reply to pure gasoline volatility and extra readily dispatch capability to cut back stress on the U.S. energy grid. U.S. metal manufacturing, which drives home coal consumption to profit from a restoration within the automotive {industry} in addition to increased infrastructure demand.

Now turning to slip 9. Fourth quarter intermodal income elevated 4% as a 9% enhance in income per unit greater than offset a 5% decline in volumes. For the complete yr, income elevated 13% on flat volumes resulting from a 14% enhance in income per unit. Worldwide intermodal markets proceed to be negatively impacted by slowing exercise, which appears more likely to proceed into the primary half of 2023. Imports have declined and warehouses have seen elevated stock ranges.

To assist counter this, we’re pursuing a number of initiatives to convey new options to our prospects to assist them attain new and present markets. With our home intermodal enterprise, we see alternatives even because the trucking market has softened. The workforce is concentrated on accelerating truck-to-rail conversions, and now with tools constraints largely behind us, the workforce has extra alternative to pursue these initiatives. We’re seeing present prospects and people which can be new to intermodal undertake methods to drive extra of their transportation spend to rail. The workforce is doing an excellent job of figuring out these alternatives and constructing the relationships to drive this progress.

Lastly, shifting to slip 10. Let’s talk about CSX’s position in lowering our prospects’ emissions. As we pursue truck-to-rail conversions throughout the markets we serve, we’re actively selling rail’s environmental benefits to our prospects. We’re more and more in search of methods to cut back their very own emissions. These are board degree initiatives for our prospects and the chance to decide on rail over vans offers actual, measurable financial savings throughout the whole provide chain.

In 2022, CSX prospects prevented emitting 10 million tons of carbon dioxide by selecting to ship with CSX versus truck. To proceed offering an emissions benefits for our prospects, we have to hold innovating. We’re not solely piloting new applied sciences that ought to present gas financial savings like zero to zero, however we’re exploring rising applied sciences that may be carried out sooner or later and hold CSX on the forefront of delivering best-in-class efficiencies.

Offering visibility to our prospects can also be a precedence. I’m excited concerning the further insights we are going to present to prospects to assist them determine and convert incremental freight to rail by using our up to date carbon calculator platform that may launch within the first quarter.

Lastly, we’re happy with the popularity CSX has obtained for our sustainability efforts, with a number of of our awards listed on this slide. It’s a precedence for us to stay an {industry} chief in environmental stewardship, and we stay up for sharing extra particulars on the a number of tasks we now have underway all year long.

Now, let me flip it over to Jamie to debate operations.

Jamie Boychuk

Thanks, Kevin, and good afternoon, everybody.

Security stays our high precedence at CSX and has been the inspiration for our service restoration. As proven on this slide, our private harm frequency index was flat from the third quarter and unchanged for the complete yr. The FRA practice accident fee elevated from the third quarter however improved versus the prior yr. Most significantly, for the second yr in a row, we ended the yr and not using a life-changing occasion. These outcomes have been delivered with onboarding over 2,000 new conductors throughout the yr and underscores the security tradition that runs deep inside our ONE CSX workforce.

Now hires discovered the significance of working safely within the classroom, however probably the most impactful classes happen day in and day trip on locomotives and in terminals working with extra skilled staff. These day by day interactions are mirrored in our latest security efficiency and emphasize the dedication to our working safely at CSX. I wish to acknowledge the over 6,200 staff inside CSX’s engineering division, which set a file for the bottom variety of practice accidents within the division historical past. It is a true accomplishment, given the character of their ballast-level work. Within the yr forward, we are going to proceed to instill the security tradition inside our new hires, keep that tradition amongst our skilled staff and give attention to the coaching and self-discipline we have to scale back human issue incidents.

Transferring to the following slide. You possibly can see the success that our whole workforce has had in driving significant service enchancment with a transparent development rising across the center of the third quarter as staffing ranges at lots of our areas reached key thresholds. Even with the momentary hit from the climate in direction of the tip of the yr, common velocity was up 11% sequentially within the fourth quarter, dwell was down 13%, and journey plan compliance improved by a number of proportion factors for each intermodal and carload.

This progress has not stopped as we crossed into 2023 with our service metrics persevering with to development in direction of pre-pandemic excessive water ranges of late 2019 and early 2020. Our workforce is concentrated on enhancing community fluidity and delivering a constant, dependable service that may encourage our prospects to shift enterprise onto our community, and the information exhibits that we’re nicely on our manner.

Now turning to hiring. A sturdy coaching pipeline in over 350 conductor promotions over the fourth quarter permit the workforce to attain our long-stated aim of seven,000 energetic T&E staff. Getting our assets to this degree has pushed the service momentum Joe mentioned a couple of minutes in the past. We are going to proceed to help improved service into 2023. Going ahead, we count on to stabilize energetic T&E headcount with focused hiring persevering with for key areas and to offset attrition.

I’ll flip it over to Sean to debate the financials.

Sean Pelkey

Thanks, Jamie, and good afternoon.

fourth quarter monetary outcomes, income elevated 9% and working earnings elevated 7% to $1.5 billion as high line achieve outpaced a number of expense headwinds that I’ll talk about in additional element on the following slide.

Curiosity and different expense was $6 million favorable in comparison with the prior yr and earnings tax expense elevated by $15 million. The efficient tax fee within the quarter was 21.9% on account of favorable changes to deferred state taxes. Our anticipated tax fee going ahead continues to be 24.5%. Fourth quarter web earnings elevated 9% to $1 billion, whereas EPS grew 17%. Full yr 2022 outcomes have been highlighted by high line progress of 19%. Working earnings was up 8%, which features a 4-point influence from the Virginia actual property transaction, leading to 12% progress when adjusting for these features.

Let’s now flip to the following slide and take a better take a look at fourth quarter expense. Whole fourth quarter expense elevated $210 million in comparison with the prior yr, pushed primarily by increased gas prices and inflation. Gas expense was probably the most important driver of $129 million resulting from increased costs. Labor and fringe expense elevated $23 million because the impacts of further headcount and wage inflation have been partially offset by decrease incentive compensation. PS&O elevated $54 million, primarily resulting from increased working help and terminal prices, which can stay considerably elevated close to time period as operations proceed to enhance.

PS&O inflation can also be working round 5% and the quarter included about $10 million of expense from out of date stock and expertise write-offs. Depreciation elevated by $33 million within the quarter, which incorporates an ongoing quarterly influence of about $20 million associated to the completion of a periodic tools examine. On account of this examine and a better web asset base, full yr depreciation expense will likely be up roughly $100 million in 2023. Tools and rents was comparatively flat versus the prior yr and features on property inclinations elevated $31 million.

Whereas we’re at all times in search of alternatives to leverage extra actual property, we’ll doubtless have just a few small features. We aren’t anticipating any important gross sales exercise in 2023 at this level. Total, congestion-related bills have been barely above $30 million within the fourth quarter, and a part of that value was incurred throughout winter storms on the finish of the interval. Regardless of elevated inflation and elevated headcount, we count on to ship sturdy value effectivity all through 2023, as higher fluidity reduces terminal prices, additional time pay and different bills.

Now turning to money movement on slide 18. Full yr free money movement of $3.7 billion decreased $100 million however was roughly $100 million above prior yr outcomes adjusting for the Virginia transaction. Working money movement elevated over $500 million on increased earnings, greater than offsetting roughly $350 million of further capital spend from our continued give attention to each, investing for the long-term reliability of our community, in addition to figuring out and executing high-return strategic tasks. After absolutely funding capital wants, we returned almost $5.6 billion to shareholders in 2022, together with over $4.7 billion of share repurchases and $850 million in dividends.

We exited the yr with a powerful stability sheet and liquidity place, together with $2.1 billion of money and short-term investments. Wanting ahead, we stay dedicated to a balanced and opportunistic strategy to returning extra money to shareholders.

With that, let me flip it again to Joe for his closing remarks.

Joe Hinrichs

Thanks, Sean. Earlier than we talk about our outlook, I wish to briefly contact on a few key concepts that we take into consideration the ONE CSX idea and the way it matches along with the basics of scale railroading [ph] on the core of this firm. This previous yr has seen plenty of commentary from many various events about what scale railroading is and the way it’s presupposed to work. For us, it actually is sort of easy working philosophy based mostly on the 5 rules that you simply see throughout the highest of slide 20.

The important thing, simply as it’s with the railroad community, is to maintain all the pieces in stability, optimize your property and make sure you present respect on your staff; be disciplined in value management; and keep your consumer to good service. For those who can’t service your prospects nicely and reliably, all the associated fee management on the earth received’t ship a wholesome rising enterprise.

CSX has been tremendously profitable during the last a number of years because the Firm has undergone its transformation. For my part, we’ve finished significantly nicely throughout the primary three of those scale railroading rules. The chance for us now could be to give attention to attending to even higher stability with these final two. We are going to redouble our efforts in serving our prospects and making certain that our staff, the people who find themselves delivering that service to our prospects, really feel valued, appreciated and included. To handle this and produce out one of the best of this working mannequin can ship, we’re constructing a ONE CSX tradition that prioritizes {our relationships} and leverages our widespread objectives.

Whether or not you might be an worker, a buyer or a shareholder, you need a sturdy and thriving CSX. A wholesome tradition leverages that alignment to do higher collectively. Below every heading, you will notice a few the methods we now have introduced these rules to life during the last yr. On the backside, we give examples of what we goal to do. For example, for customer support, we now have added the T&E assets we now have wanted to extend capability, and we now have constructed resilient momentum as our service measures have improved.

Now wanting ahead, it’s crucial that we make sure that our service metrics replicate our buyer expertise and that we’re measuring and evaluating ourselves in the best manner. We additionally know that we now have to enhance the best way that we interface with our prospects and make it simpler to do enterprise with us if we’re going to win market share from vans. Each week, we get collectively as a management workforce. We’re difficult ourselves to seek out new methods to deal with these points and make the most of the nice power that we’re creating right here at CSX. Now we have large expertise right here. And with these rules at our highway map, we now have a transparent, collective aim.

Now, let’s conclude with a evaluation of our outlook for ’23 as proven on slide 21. First, as our service ranges hold enhancing, we count on to attain general quantity progress for the yr, which can outpace actual GDP progress, pushed largely by sturdy contributions from merchandise and coal, as Kevin mentioned. That mentioned, we do imagine that worldwide intermodal quantity is more likely to be gentle, significantly over the primary half of the yr, as imports have slowed and retailer stock ranges have recovered.

Subsequent, the pricing setting stays favorable for us. Our prospects have skilled substantial inflation and perceive that we face our personal value pressures, together with the consequences of the latest labor agreements. This transparency has helped us as we renew our pricing agreements, which can help our high line efficiency. That mentioned, there are a few necessary issues to notice for 2023. First, we do count on revenues from intermodal storage to say no by means of the yr as provide chain situations enhance. We at the moment imagine it’s cheap to count on we are going to see a discount of roughly $300 million in intermodal storage income in comparison with final yr, which might indicate a quarterly common near ranges seen in early 2021. Second, worldwide met coal benchmarks have recovered from their lows of final fall, however remained risky. Top quality Australia met coal averaged roughly $355 in 2022 and sits at $315 immediately. It’s doubtless that the common this yr will likely be decrease year-over-year, which can influence our coal RPU and our complete income.

Now relating to profitability, we are going to face value pressures in 2023, however we all know that we will get higher operationally. The place it’s doable and the place it is sensible, we are going to make each effort to understand effectivity features and scale back among the additional prices that we now have been carrying to handle by means of the congestion and useful resource constraints of that post-pandemic interval.

Ultimately, our margin efficiency will largely depend upon our success in driving extra quantity by means of our community and realizing potential working leverage. Lastly, we estimate that our capital expenditures will enhance to roughly $2.3 billion, pushed by a full yr of spending for Pan Am, further tools for High quality Carriers truck to rail conversion alternatives, investing in strategic high-return progress tasks and the consequences of inflation.

Now, earlier than we shut, I wish to emphasize what an thrilling time it’s for all of us to be part of the ONE CSX workforce. Now we have a typical aim to profitably develop this railroad, and you might be seeing the actual progress that we’re making towards that aim as we put folks and assets into place. I’m personally very optimistic concerning the alternatives forward, and I stay up for updating you on the achievements all year long.

Thanks. And with that, we are going to now take your questions.

Query-and-Reply Session

Operator

Thanks. [Operator Instructions] With that, our first query comes from the road of Amit Mehrotra with Deutsche Financial institution.

Amit Mehrotra

Thanks, operator. Hello, everybody. I wished to ask about yields sort of on a consolidated foundation for this yr. Clearly, the supplemental income and gas will likely be considerably of a headwind. I suppose, standing right here immediately, would it not be truthful to say sort of yield be flattish on a web foundation? And Sean, I suppose, if income is sort of flat, are you able to simply remind us of sort of the prices which can be within the system that you simply suppose may be reversed to possibly offset among the value inflation? Thanks.

Sean Pelkey

Amit, that is Sean. Sure. So, by way of the yields, I believe Joe type of laid out our expectation on the coal facet, maybe just a little bit decrease simply wanting on the comparability versus among the file ranges final yr, gas probably just a little little bit of a headwind on a yield foundation as nicely. We’ll have just a little little bit of optimistic combine, no less than within the first half right here with the pressures on intermodal, particularly relative to the expansion that we count on in merchandising coal. So, that’s the yield story.

After which, by way of the prices, I believe there’s a lot of totally different classes. Actually, with the intermodal terminals changing into extra fluid as a few of that site visitors strikes its manner out of the system and begin spinning once more. We must always see some prices come down and the terminals are in excellent form proper now. We must always see discount in freight automotive rents as our cycle occasions enhance they usually have already, issues like additional time and ancillary prices associated to the crews getting hung up final yr with delays in service after which locomotive upkeep as we’re capable of spend the property quicker right here. So, these are just a few classes the place I’d say we must count on some enchancment this yr.

Amit Mehrotra

Sean, any numbers round that, although? I imply, by way of — I do know you’ve talked about $40 million 1 / 4, however any type of quantification round a few of these efficiencies — inefficiencies?

Sean Pelkey

No particular quantity, no. I imply, we’re going to have inflation headwinds, proper? I believe, most likely within the 4% to five% vary. And our aim goes to be to offset as a lot of that as we will, each by means of taking out a few of these additional prices that we carried final yr in addition to persevering with to seek out effectivity features throughout the enterprise.

Operator

We’ll take our subsequent query from Justin Lengthy with Stephens.

Justin Lengthy

There are plenty of shifting items this yr within the outlook. So, I used to be simply curious should you might give us any directional colour on the year-over-year change you’re anticipating for each income and working earnings? And possibly you can touch upon what that development line might appear to be all year long, if issues are going to get higher or worse? Would simply love some further ideas.

Sean Pelkey

Sure. Justin, we’re not going to get particular by way of the steering itself. If you take a look at first half, second half, the amount comps on coal are just a little bit more durable within the second half than within the first half. When it comes to intermodal, Kevin talked just a little bit about among the headwinds we’re seeing on the worldwide facet right here within the first half of the yr. These are actually type of the massive drivers on the amount facet.

After which, by way of different income, that coming down about $300 million for the yr, clearly, second half of 2022 was increased than first half of 2022. So we’ll be going through type of a much bigger headwind there. And by way of general working earnings, I believe we’ve laid out among the components, proper? I believe we really feel nice about our skill to recapture among the share that we missed in 2022, given the place the service product is, on condition that we’ve acquired the headcount that we want and we’ve acquired the property that we want, which is why we’re going to develop above GDP. We’re going to see features in merchandise and in coal.

We’ve acquired a powerful worth setting. We’ve acquired the associated fee alternatives that I’ve talked about. And on the flip facet of that, we now have just a few headwinds between the supplemental income, the opposite income piece, increased depreciation and doubtless decrease actual property features. So, these are the components. However that being mentioned, I believe the truth that we predict progress. And as we add that progress to the system, we’re going so as to add it at sturdy incremental margins.

Operator

We’ll take our subsequent query from Brandon Oglenski from Barclays.

Brandon Oglenski

So, I suppose, possibly piggybacking off that reply there, Joe. And I do know you’ve solely been there a few quarters now, however we’ve heard for a yr plus that the actual limitation right here was headcount, assets and extra importantly, service ranges that you simply’re delivering. I imply we’re seeing that come by means of the information, I believe, fairly strongly within the fourth quarter and as we begin out right here in January. So, are you able to discuss to the way you’re going to transform that. And Kevin and Jamie, possibly how carefully are your groups working collectively to make sure that you’re rising in the best locations? As a result of I believe prior to now, we’ve seen progress that may come within the mistaken locations and result in much more op challenges for the opposite carriers.

Joe Hinrichs

Sure. Thanks, Brandon. I believe — that is Joe. First off, thanks for recognizing the gorgeous important service enhancements and working efficiency that we’re seeing persevering with into January. Our workforce works nice collectively. So for what it’s value, and clearly, Jamie and Kevin, their workplaces are subsequent to one another, they usually’re speaking all day lengthy. I’ll allow them to discuss extra about that. However you referenced the truth that there’s been some dialog for fairly a while that our challenges have been manpower ranges after which how that affected the fluidity of the community, we’re seeing, as you simply referenced, the efficiency that comes from recreation of manpower ranges the place we wish them to be and working this community the best way it was run previous to the pandemic, which is a really sturdy working workforce.

So, the conversion alternative is to display some repeatability and predictability round our efficiency and to indicate our prospects that we now solely have — we now have the capability in place and we now have the efficiency to display that it is best to come again to us. And I’m feeling optimistic about that. And the conversations we’re having with prospects, they’re recognizing the enhancements that we’ve proven for the final a number of months. They usually’re additionally assured in our skill to proceed that, particularly now that we now have the manpower ranges the place we wish them to be.

So, should you take a look at it, we’re nonetheless not assembly all of the demand that’s on the market for carloads and our enterprise — for our enterprise. And as we undergo the yr, we’ll search for each alternative to do this. I’ll let Kevin discuss extra about among the alternatives within the markets themselves. After which I’ll let Jamie discuss concerning the operations. Thanks.

Kevin Boone

Sure. Brandon, you probably did point out clearly, the exceptional enchancment in our service that we’ve seen, and it’s an actual change, and there’s plenty of pleasure round this group about it and what we will do going ahead. Joe has introduced each, Jamie and I and his groups collectively to speak about among the key markets. And there’s been plenty of attention-grabbing concepts which have come out of that the place we will actually leverage what we will do service-wise and what we will do creatively to create these alternatives for us. And people issues are the enjoyable a part of what we do daily, and we’re doing lots much less of that and lots much less of customer support and much more developing with new concepts and having these discussions with our prospects about rising.

I’ll let you know, I’ve had an opportunity to satisfy with plenty of prospects during the last month or two. And each time, most likely 90% of these conversations, we stroll out with much more alternatives to pursue. Typically it implies that we now have to suppose in a different way. Now we have to introduce prospects to what the intermodal product is or what we’re able to. And what we’re able to immediately is way totally different, clearly, than what we have been able to a yr in the past. And so, the workforce is getting collectively the entire gross sales and advertising and marketing group. Jamie goes to spend time with them. I used to be going to spend time with them subsequent week and it’s off to the races. It’s as much as us to seek out these alternatives and actually pursue them. However I’ll hand it over to Jamie to speak concerning the upside.

Jamie Boychuk

I believe actually, the one factor I can add to that’s there’s plenty of capability on the market. So what Kevin and I discuss is the place is that capability, what can we do with that capability, and the way can we get on the market and promote it. My workforce is out within the discipline, making certain that they’re speaking with prospects greater than they ever have as a result of they’ve time to do this. Beforehand, we have been looking for a crew to run a practice right here or there or wherever else. Now they’ve the time to take a seat again and take care of any of these buyer calls for that could be on the market that helps Kevin and his workforce develop.

A few of these discussions we now have are what does the shopper actually in search of? Is it the best metrics that we’re taking a look at that the purchasers are in search of and that first mile, final mile enchancment that the workforce has been capable of put collectively is basically record-breaking for us. If I look again on the final 6 years, we haven’t — ’22, sadly, wasn’t one of the best yr for us, however exiting ’22 with our customer support and in ’23 are among the world file numbers we simply haven’t seen. So, our job is to maintain producing these numbers and ensuring Kevin and the workforce has what they should get on the market and promote and decide to the purchasers that — what you see out there’s what you’re going to proceed to see. So some nice collaboration between our two teams.

Operator

We’ll take our subsequent query from Chris Wetherbee with Citigroup.

Chris Wetherbee

So I suppose, fascinated about the outlook and the optimism round rising merchandise and coal and good incremental margins with that approaching type of in contrast, contrasted in opposition to a few of these what are perceived to be very high-margin type of income headwinds that you’ve got, whether or not or not it’s the accessorials coming down $300 million or the coal — export coal yields coming down. When you consider these two relative to one another and the potential for value out, I suppose, any assist by way of how to consider working ratio or the end result of that whether or not or not it’s possibly first half versus second half or throughout the entire yr can be useful. Simply I believe that notion of excessive margin on these headwind items is one thing that we’re battling just a little bit.

Sean Pelkey

Sure, Chris. So, on the — clearly, the coal yields, there’s no value related to that on the accessorials. There are prices related to congestion within the terminals in addition to needing to lease out area at container yards to maneuver these containers round. So, that’s a part of the, name it, $150 million or so of further prices that we carried over the course of this yr. So, a few of that may modify down. After which, as we develop the enterprise, our confidence is in the truth that we will develop it at very sturdy incrementals. And so, you set these collectively, and I believe the query round what occurs to the OR actually is dependent upon how a lot progress can we convert. We talked final yr about the truth that there was demand on the market that we weren’t capable of meet as a result of we didn’t have the crews that we would have liked in the best locations. We’ve acquired these crews now. So, there’s an actual alternative in entrance of us.

Operator

We’ll take our subsequent query from Scott Group with Wolfe Analysis.

Scott Group

So, possibly I’ll attempt it this manner. How a lot quantity progress do you suppose you want to have the ability to develop earnings this yr? After which, it seems like there’s going to be some OR strain this yr. You’ve acquired some headwinds. I believe that’s understood. I suppose, Joe, I suppose, I wish to perceive, what’s your dedication to longer-term OR enchancment sort of past 2023, simply considering out the following a number of years.

Sean Pelkey

Sure. Scott, in your query about how a lot progress, I don’t suppose we’re able to reply that one proper now that you simply sort of run it by means of the mannequin, however I believe we’ve given you sufficient of the components. And I believe the truth that we type of pointed to coal and merchandise as areas the place we expect we will type of meaningfully outperform regardless of the financial indicators which can be out there’s a reflection of the truth that we be ok with the place we’re from a capability and repair standpoint and the power to promote into that market. However, we’re not going to provide you a selected quantity there.

Joe Hinrichs

That is Joe. On the OR query, Scott, I believe there’s a few factors right here. I’m very assured that our workforce will proceed to ship on the denominator facet, working enhancements and proceed to indicate sturdy working outcomes. On the numerator facet of the equation, you’re proper within the sense that there have been — there have been some issues that have been sturdy tailwinds final yr, the gas surcharge, intermodal storage, the coal worth, et cetera, and we’ll see how a lot of that repeats in 2023. However that actually helped the numerator facet of OR final yr and possibly a few of these issues received’t be fairly as sturdy in 2023.

However having mentioned that, on the numerator facet, the amount progress alternative that we will now go after with the boldness that we now have in our working mannequin and our efficiency and realizing that for our prospects who’re feeling value pressures and feeling inflation pressures and probably even feeling results of a slowing financial system are going to be in search of value discount alternatives. And so, we really feel very, very strongly that this yr and past, proceed to display the capability that we now have in our efficiency, the expansion alternative will likely be there for us as we earn the best to do this and get that enterprise. And our prospects will likely be desirous to do extra enterprise with us. As well as, in fact, we now have the environmental benefit of ESGs and emissions on the subject of rail.

So, all that being mentioned is we’re not going to place a goal on the market for OR. We’re very happy with our efficiency. I imply, final yr, with High quality Carriers, we nonetheless had an working ratio for the yr underneath 60, so we all know what it’s wish to — and that was not at our optimum efficiency degree as all of us admit. So, we imagine there’s a sturdy efficiency inside this firm that may proceed to be delivered. The uncertainty is round a few of these income items on this yr and past.

So, our problem is to ship actual progress within the enterprise, which does ship sturdy incremental margins and proceed to regulate our prices, make the most of our property nicely. And so, that ought to result in very sturdy efficiency inside an working band of OR that we’ll be comfy with. On the finish of the day, this firm may be very centered on delivering margins, delivering progress with — worthwhile progress with margin enchancment, which ought to lead over time to an excellent OR.

Operator

Our subsequent query comes from Jon Chappell with Evercore ISI.

Jon Chappell

Kevin, as we watch these service metrics improved considerably since actually the center a part of final yr, and this intermodal journey plan efficiency simply constantly round 90 and {industry} greatest requirements. It’s just a little complicated that even given the headwinds, possibly your intermodal volumes are working lighter on a year-over-year foundation than many of the different Class 1s. Are you able to assist us clarify any disconnect between these enhancing metrics and a few of these intermodal shortfalls which may be distinctive to you? And possibly that additionally ties in then to explaining a bit extra on among the strategic alternatives that you simply famous in your ready remarks?

Kevin Boone

Sure. I believe while you take a look at — and look, three years — or three weeks doesn’t make a yr, so we’ve acquired plenty of work to do as a workforce. However we — I believe you’ll see during the last two years and thru the pandemic that we actually outperformed the {industry} and plenty of that progress that we talked about earlier than got here on the worldwide facet. And we don’t pay — we don’t spend plenty of time fascinated about the opposite Class 1 railroads, however I do imagine we most likely have just a little bit increased proportion of our companies, clearly, uncovered to that worldwide market the place we’ve had an excellent, nice success, and we see a long-term outlook that’s very optimistic for us. So, I believe that’s most likely contributing to among the issues we’re seeing right here lately. However we’ve clearly had nice efficiency and proceed to suppose we’ll win share out there. The workforce has acquired a lot of initiatives that may take type afterward within the yr and that may drive incremental enterprise to the railroad. So excited of what we will do within the quarters forward.

Operator

We’ll take our subsequent query from Tom Wadewitz with UBS.

Tom Wadewitz

I simply had a clarification for you first, earlier than the query. I don’t know if I caught what your GDP assumption is or which forecast you’re referring to only by way of how we anchor to the amount remark? After which, Joe, I wished to see should you might provide some extra ideas about your feedback on relationships? And I believe tying into labor, how do you consider the way you need that relationship to alter? Does that value you one thing to do this? And what’s the profit over time? Is it simply pay attritions working 15% a yr, we wished to get down to five%, and that saves us type of assist service. Just a few broader ideas on while you discuss relationships and labor, what do you imply by that? And the way do you consider what that does over time?

Sean Pelkey

Tom, in your GDP query, roughly 0.5% progress is the GDP quantity that we’re taking a look at. And so our steering is to develop in complete above that with intermodal headwinds and strong progress throughout the opposite markets?

Joe Hinrichs

Sure. Tom, that is Joe. Thanks for the query relating to labor. So numerous ideas right here, however I’ll attempt to be concise. First, only a reminder to everyone that it is a service enterprise. And we offer our service to our prospects. We transfer their items from level A to level B, and we’re happy with the best way we do this. However do not forget that within the service {industry} and repair enterprise, it’s all concerning the staff. You’re not promoting a product, you’re not growing a product. You’re actually relying in your staff to symbolize your organization within the service of your prospects.

I began there as a result of that’s so critically necessary to know why it’s so crucial to have a extremely sturdy relationship together with your staff, together with these represented by unions as a result of they’re the people doing the work, offering — shifting items from Level A to Level B and serving our prospects.

And so, the motive right here isn’t to try to leverage relationships to try to lower prices or discover a greenback right here and there. It’s all about constructing a tradition the place our staff really feel valued and appreciated, included within the service of our prospects in a manner that we will display that CSX is exclusive and totally different from the opposite choices they’ve, and offers a worth proposition to our prospects that we expect may be very, very particular.

And so, there’s plenty of — I’ve been spending plenty of day out within the discipline, Jamie and I journey virtually each week. And as I’ve discovered lots about this {industry}, about this enterprise, there’s plenty of variability and plenty of independence on the subject of the work that’s finished now within the discipline, as a result of this isn’t a manufacturing facility meeting line the place you’re stationed in a sure place and also you’ve acquired a cycle time to satisfy, and should you don’t make it, all bells and whistles go off.

When you will have your staff motivated, engaged and feeling valued, their efforts to help what your initiatives are, are enormously enhanced. And that’s simply human nature, and that’s actually what’s necessary about this relationship is that listening to our staff, resolving their points, engaged on issues that enhance their effectivity and their work life stability and their work life expertise and security and different issues, results in a greater service product for our prospects, which finally results in a greater enterprise for everybody, together with our staff.

From the labor facet, it’s actually about constructing relationships and producing belief and attending to the purpose the place you’re going to have actual dialogue round options and round concepts and round understanding one another’s wishes and perspective in order that we will discover one of the best options. I’ve present in my previous experiences that while you get to that time, you will have a more healthy enterprise and you’ve got happier, safer staff who’re working higher collectively to serve the purchasers. That’s actually the need right here is to offer that sort of alternative for our staff.

Now, what comes with that? Decrease attrition, higher suggestions for the referrals, for brand new hires and within the household and buddy community, and only a higher expertise for everyone. In order that’s actually a giant a part of the ONE CSX tradition initiative is throughout constructing this workforce, working all collectively and labor is a giant a part of that.

And so, it’s just a little extra sophisticated within the rail {industry} with 12 totally different unions. Nevertheless, we really feel actually good about the place we’re with our workforce, Jamie and his workforce are working daily, having numerous good discussions. We voluntarily on our personal, modified our attendance coverage based mostly on suggestions. That’s actually impactful to our staff. That’s an excellent first step on this relationship. We’re listening to them daily. We’re engaged on drawback fixing, and finally, with the aim in thoughts of making that setting the place staff wish to be part of that and wish to serve our prospects higher. And with that comes a way more environment friendly operation and, frankly, higher service for our prospects, which finally results in alternative for progress.

Operator

We’ll take our subsequent query from Ken Hoexter with Financial institution of America.

Ken Hoexter

Hey. Good afternoon. And thanks for the rundown there, Joe. Simply possibly can we make clear? Sean, I suppose you’re in search of quantity progress offset by accessorial and chilly yield declines, effectivity features with service prices gone, however inflation up. However I simply wish to make clear, you’re not particularly committing to earnings or working enchancment for the yr, proper? There was no outlook on what meaning for that or the EPS line?

Sean Pelkey

That’s proper.

Ken Hoexter

After which Jamie, the on-time originations fell to 54%. I believe they’ve fallen now 12 of the previous 13 quarters. Isn’t the entire title of the sport of what you’re doing with precision railroading to depart on time and get that shifting? Perhaps discuss to me about what the community must do to repair that? And Joe, I don’t know should you’ve are available what your ideas are on operations, what stability of operations versus high line progress.

Jamie Boychuk

Okay. And also you’re proper. The final couple of years, actually, we’ve seen our on-time originations drop. And that’s been — it’s been constant, sadly, due to the manpower state of affairs we’ve been in. I’m comfortable to say, over the previous three weeks into this yr, we began to get again as much as our file highs. The workforce is hitting up over 85% on-time, which is nice. It begins to get us balanced. And as we proceed to onboard some extra of us, we’ll proceed to get that pushed as much as that file of, I believe, in 2019, the place we’re up round 89%, 90% on-time origination. And that’s what we’re taking pictures for. So, it will be significant. It’s an necessary metric we’ll watch. We made some selections final yr to again off just a little bit on that, so we might join as a lot site visitors as we might and never go away issues behind after we did have a crew and ensure we took benefit of that crew, and we maximized what we might on these practice begins. Not saying that we’re letting that go in any respect. We’re going to maximise what’s on every one in all these trains that we run on the market car-wise, however we’ve now acquired the folks to stability the property throughout the community, and you’ll see it.

For those who check out our velocity, and also you check out our dwell numbers simply prior to now 3, 4 weeks, you may see that the community is working rather more fluid. We hit that magic quantity simply into the brand new yr that we’re in search of that 7,000 T&E depend. And truly, as a matter of truth, we’re at 7,100 immediately. And we’re going to push that quantity just a little bit extra to cowl trip developing within the subsequent few months. So, we’re going to be sure that we’ve acquired the best headcount. We’re going to be sure that we’ve acquired the best folks in the best locations, and we proceed to drive these metrics that may drive the remainder of the service metrics.

I imply, once more, TPC, whether or not it’s carload, intermodal, all the remainder of it that you simply see that we’ve put on the market, we’re beginning to get again to our — as a matter of truth, we’re past our file numbers on a few of these service metrics. So, we’re going to offer a product that Kevin and his workforce can go on the market and promote and begin rising this firm.

Joe Hinrichs

Sure. So Ken, thanks for the query. A few simply further feedback. We spend plenty of time as a workforce speaking about our customer support metrics, whether or not it’s on-time, originations and arrivals, whether or not it’s within the final mile, first mile, these sort of issues. And I’m actually happy with how the workforce is taking a look at all the pieces. And we wish to be sure that we’re seeing the world by means of the lens — by means of the eyes of our prospects, which is why we get suggestions on surveys. And Kevin referenced, we’ve seen one of the best ends in our buyer surveys that we’ve seen in fairly a while. So, I really feel actually good about that.

Now, the stability between high line progress and operations, I believe they’re intertwined. And I mentioned this in October. I really feel much more strongly about it now. Now we have an exceptional alternative right here at CSX to leverage our energy in our operational efficiency that you simply’ve seen pre-pandemic. You’re seeing now once more to earn the best to speak to our prospects about getting extra enterprise. And that could be a lot higher than chasing high line progress, and to have the ability to display which you can depend on us with our capability and our service ranges and our prioritization in your service to be there for you. And I imagine very strongly, there’s enterprise alternative there. So, we will permit that to occur naturally organically as a result of we now have a greater product. Now we have a cheaper price than most trucking. And we now have a greater ESG resolution and to do this the best manner. In order that’s why we’ve been so centered on getting the manpower the place it must be and actually getting — ensuring that we’re specializing in the best metrics for the enterprise, and I’m actually happy with the place we’re. So, I really feel much more strongly immediately than I did within the name in October about this chance.

We are able to’t predict what’s going to occur within the financial system this yr, and that’s a part of what you’re seeing in a few of this dialogue is we’re not precisely certain what occurs within the second and third quarter. We’re very happy with how the yr has began. Nevertheless, we don’t know precisely the place the financial system goes to go, given rising rates of interest and among the different issues which can be occurring. Truly, you can say that within the information that we’ve been seeing that some elements of the financial system began slowing down actually in October-November. And we simply didn’t see it in our enterprise as a result of we couldn’t meet a few of that demand again then. However we really feel actually good about the place we’re. We’re not going to chase high line progress. We’re persevering with to leverage our working mannequin, however we imagine it’s there to be earned, and that’s the dialog we’re having with our prospects.

Operator

Our subsequent query comes from Brian Ossenbeck with JP Morgan.

Brian Ossenbeck

Perhaps simply on that final half about unmet demand. We heard that lots throughout the totally different Class I rail convention calls. And is there a manner, because you’re relying on it and also you’re seeing a few of it by means of surveys and clearly, the service has improved. Is there a manner you may type of attempt to quantify that for us by way of what you misplaced or what you suppose is coming again with fill charges or the rest you may put round there by way of a metric? And what offers you that confidence which you can depend on that coming again, not simply the curiosity degree is there, particularly when you will have a softer macro and doubtless contract truckloads heading decrease as nicely?

Kevin Boone

Sure, Brian. Hey, it’s Kevin. I believe Joe truly touched on this actually, very well. And I believe what’s most likely just a little bit underappreciated what’s occurred in among the issues that we’ve seen in among the main markets that we serve immediately is — and I had referenced this beforehand on different earnings calls, we have been in that 60%, 70% sort of order fill charges just about by means of most of 2022. What occurred beginning in, let’s name it, the late third quarter, fourth quarter in a few of these markets, we noticed these orders come down. And clearly, our fill charges sort of remained — or on combine or no matter our volumes that we’re serving for these prospects remained comparatively flat. And so, we noticed our fill charges begin to enhance, they usually’re at increased ranges now and the markets we see possibly the demand, what they’re requesting is down 30%, but our volumes are barely down immediately.

What my expectation is and what we’re beginning to see is that they’ve already overshot what they noticed what can be a standard demand setting, and we’re seeing order flows begin to enhance. And so, that’s encouraging that it looks like in a few of these markets, we’ve established the underside. Something can occur within the financial system, but it surely feels that manner as of proper now, and we’ll see the way it performs out. However a degree on that’s as these orders come again and as we’re capable of meet that demand going ahead, that might indicate progress versus final yr. And so, that’s embedded in what among the steering that we offered immediately and why we now have a confidence round accelerating or beating that GDP quantity is that we’re going to go and seize these orders and people demand that the shopper has on the market this yr with the replenished workforce and all of the issues that the operations workforce is doing.

Brian Ossenbeck

And would you count on that to be extra closely weighted on the merchandise facet as a result of that most likely was a carload earlier than, or are you seeing actual momentum on truckload conversion, possibly extra on the intermodal facet?

Kevin Boone

Sure. I believe you’ll see it actually begin on the carload facet. That’s the place we — once I referenced the order fill charges, that’s actually carload particular. You’ll bear in mind on the intermodal facet, it actually was an tools subject. Good factor is these tools points, whether or not it’s chassis, containers, I believe we now have loads of these in most areas now all through that market. And also you’ve heard totally different commentary round that, however there’s some softness within the truck market immediately. There’s some optimism, hopefully, as we get into the again half of the yr that that may agency up a bit, and we now have each intention of benefiting from that market because it involves us. Now we have the premier service in intermodal and it’s been mirrored in our progress during the last couple of years, and we proceed to count on to capitalize on that.

Operator

Our subsequent query comes from Ariel Rosa with Credit score Suisse.

Ariel Rosa

So, I wished to remain on that matter. You talked about some softness possibly within the trucking market. I wished to ask to what extent that’s an obstacle to intermodal quantity progress. After which, in a extra normalized setting, how do you consider CSX’s skill to sort of outgrow GDP or possibly one thing round sort of the magnitude at which you can outgrow GDP versus this type of free truck market?

Kevin Boone

Sure. The truck market is clearly — facilities round our intermodal product. That’s the place we go direct with truck, not that we don’t compete on our carload enterprise as nicely, however that’s the place you see the sensitivity generally. In worldwide market, as everyone is conscious of, has been weak, and we’ve acquired — we’ve had nice progress there, and we now have an excellent market that we proceed to count on to develop over time. However, as I discussed in my latest feedback — opening feedback that that market most likely will likely be down considerably double digits within the first half of the yr. And hopefully, because the financial system stabilizes and there’s some inexperienced shoots on the market that we’ll see some higher progress into the second half of the yr, no less than, not the decreases that we’re experiencing immediately.

I believe, each little bit of intention right here is throughout our portfolio that we’re going to outgrow the macro financial system. And I believe there’s plenty of issues at tailwinds at our again. However we’ve had an enormous success fee on our industrial improvement facet. Now we have plenty of new tasks which can be coming on-line while you look out past this yr. Large, huge backlog, most likely the most important backlog that anyone right here can bear in mind in a very long time whether or not it’s new auto vegetation, metals vegetation, all these throughout the board, we’ve actually had an excellent success fee there, and that may give us progress going ahead.

So, our intention is to outgrow the financial system. And I do know that’s not one thing that the railroads have been capable of do. However I believe there’s — with the service product that we’re going to have, I believe that’s actually, actually doable going ahead.

Ariel Rosa

Thanks for that Kevin. After which simply actually shortly on a few of these tasks, any ideas on sort of what the incremental margins might appear to be round that?

Kevin Boone

I believe — I don’t know a enterprise that we’re bringing on the place the incremental margins aren’t very engaging and are in an excellent fee of return for us. I put my finance hat on each time I take a look at the enterprise, and we’re not going to chase unprofitable enterprise simply to indicate high line progress.

Operator

And we’ll take our subsequent query from Fadi Chamoun with BMO Capital Markets.

Fadi Chamoun

Perhaps first on these two containers and the guiding rules, and Joe, you highlighted enhancing customer support and growing the workers. And particularly with respect to among the dialog possibly you’re having with prospects, do you’re feeling that there’s going to be a lag between while you begin demonstrating the success on the service facet and actually penetrating that share of pockets with these prospects, or do you suppose there’s actually a fast potential turnaround between sort of making these enhancements anytime, that market share enchancment?

And second, possibly a follow-up on the this dialog with Kevin, now like wanting over into 2024 to 2025 and assuming we’re again right into a normalized GDP, given the backlog that you’ve got and given a few of these initiatives and the investments you’ve made in QC and Pan Am. Outdoors of coal, is there a cause why you may’t develop quantity mid-single digits as we get into this extra normalized setting? Ex coal, clearly.

Joe Hinrichs

I’ll take — that is Joe. I’ll take the primary half and ask Kevin to take the second because you directed at him. From my perspective, the chance right here to develop the enterprise actually comes from rising that service product. Now, your query across the timing of that, it’s all actually individually depending on every buyer, the place they’re, the place their value pressures, the place their capability points and what are they in search of.

So, we will’t use a blanket assertion that if we display these ranges of efficiency for 3 months, the following comes from it. Actually in our dialog with our prospects, it’s actually round their confidence in our skill to be repeatable and dependable. And so the reply to that query is totally different for every buyer. However I can let you know, they’re all watching they usually’re all noticing they usually’re all letting us to know that they’re actually appreciating the progress that we’re making. So, it’s going to play out over time. However there’s nothing inconsistent that we’re listening to from our prospects about their appreciation for it and recognizing how necessary it’s. Kevin?

Kevin Boone

Sure. I believe the query was, is there a cause why we will’t develop mid-single digits. I believe Jamie answered the query on the community facet, we now have plenty of capability to develop into and it’s — we’re going to make use of that capability and go after pockets share with our present prospects and determine new prospects. So, there’s no constraints from that perspective. Clearly, that placing up mid-single digits quantity after which with worth is a reasonably engaging algorithm, we’ll see what we will do and what the market situations are on the time. It’s a extra normalized GDP progress fee, 3% or 4%, then that’s totally different than possibly 1% to 2%. So, we’ll see how issues materialize as we get out of ’23, and ’24, ’25. The nice factor is we now have some tailwinds from new prospects that will likely be on our railroad, and that may give progress above the financial system, hopefully, that may add to that algorithm over time as we construct the funnel of all of the tasks that we’ve been capable of develop and that will likely be approaching line sooner or later.

Operator

Our subsequent query comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker

Two fast ones right here. First, you’ve mentioned you may develop GDP plus. Lots of your friends are utilizing industrial manufacturing as a benchmark. In actual fact, I believe one in all them has come out and mentioned a few years in the past that they don’t suppose they will develop quicker than GDP going ahead, they usually suppose they will try to outpace industrial manufacturing as an alternative. So, a, do you suppose GDP is the best benchmark for you and sort of what offers you the power and confidence to suppose which you can develop quick than GDP in the long term? And simply as a fast follow-up. I believe you had mentioned that incentive comp was a tailwind to numbers in ’22. How can we take into consideration incentive comp in ’23? Thanks.

Sean Pelkey

Sure. Ravi, that is Sean. So in your GDP plus remark, look, I believe should you look traditionally and also you run the correlations, our enterprise tends to maneuver extra carefully with the underlying IDP indicators, significantly throughout the merchandise section, possibly just a little extra on GDP in intermodal. However you take a look at this yr particularly, the projection for IDP is a decline and the projection for GDP is progress, and we expect we will develop the enterprise. So, it made plenty of sense this yr to peg it off of GDP.

In your query on incentive comp, I imply, the yr has to play itself out. We at all times go into the yr planning to hit the targets that we set internally. And so, on that foundation, incentive comp can be down just a little bit year-over-year versus 2022, however we’ll see how that performs out because the yr continues.

Operator

We’ll take our subsequent query from Cherilyn Radbourne with TD Securities.

Cherilyn Radbourne

A query on labor for me. A few of your friends have talked about taking a distinct strategy to furloughs going ahead, simply on condition that labor has turn into extra scarce and precious. So, I hoped you can provide some ideas on how you’d strategy headcount within the occasion that freight demand surprises to the draw back, so that you simply don’t lose the investments you’ve made in hiring and coaching this yr?

Joe Hinrichs

Effectively, Cherilyn, thanks for the query. We’ve acquired the identical stance as we did final quarter. Our T&E workforce just isn’t a workforce that we’d take a look at furloughing as we transfer ahead. We’re future — we’re wanting into the longer term, actually necessary that we — Kevin and I clearly are — as we said right here immediately, work actually shut collectively to see not solely what’s taking place immediately, however what’s taking place in six months from now, what’s taking place a yr from now. We all know that there’s prospects approaching. And also you’re completely proper. The conductors and filling these positions takes a very long time. It may possibly take as much as six months to fill a conductor’s place. And we will pull the set off.

Look, if there’s a downturn in enterprise, we will use the attrition that’s there, which is as much as 10%. So, it’s straightforward for us to carry again lessons if we have to, to convey these numbers down and rightsize it if we have to. However as we proceed to maneuver ahead, we’re taking a look at persevering with to construct our numbers up so we will get to some extent the place we will cowl trip time and ensuring that our staff get the day without work that at occasions they’ve struggled during the last couple of years. So, we’re very near that quantity, as you may see from our outcomes that we’re fairly comfortable that we’re shifting in the best path with our service. And it’s a dedication that we’ve made that we’re going to proceed to be wanting ahead and never doing any knee-jerk reactions and pull that set off with respect to attrition if required.

Operator

We’ll take our subsequent query from Bascome Majors with Susquehanna.

Bascome Majors

Joe, final time you spoke with us on the October name, you had just a few days on the job, that’s just a few months now. Are you able to discuss just a little bit about while you’ll be capable to — or I believe you’ll be capable to roll out your technique to the Board and buyers? And any occasions like an Investor Day, different format round that as you stay up for sort of attending to the place you wish to be to essentially sort of put your stamp on the enterprise? Thanks.

Joe Hinrichs

Sure. Thanks for the query. Simply first, from a philosophy standpoint, it is a actually proficient workforce. And so, we — we’re doing all this collectively as a management workforce. We get collectively each Monday, we discuss concerning the enterprise, undergo all components of it. And so I wish to simply emphasize that. I’m one piece of that workforce, however it is a workforce effort. I’m actually happy with the — to get to work with daily. It has been 4, 5 months since — position — quick collectively. However 20-some visits out within the discipline and all the opposite discussions with all prospects and regulators and all the pieces else. I really feel like I’m studying in a short time, however there’s nonetheless a protracted solution to go on that studying curve so far as the core enterprise.

I’m actually excited concerning the emphasis we now have on the shopper, and I’m actually happy with the progress the workforce has made on the working facet. All that to say, I’m unsure that — I’m unsure it is sensible to have an Investor Day simply to have an Investor Day. We wish to do this after we actually have some significant issues to speak about from technique or expertise or another issues. So, we belief that we’ll do this on the proper time when it may be significant and never simply one thing we placed on the calendar yearly simply to do. We would like it to be impactful. We all know it takes everybody’s time and we wish it to be necessary.

So far as the technique and dialogue with the Board, I hinted this just a little bit in October, however I spent plenty of time with the Board as people and collectively in consideration of doing this of their consideration of me. So, we had plenty of good dialog over a number of months concerning the alternative right here and the place to place the emphasis and the place to essentially make the most of the strengths that exist right here. And so, I really feel actually, actually good concerning the alignment we now have with our Board, with our workforce right here and the work we’re doing. And I’m very happy with the progress we’ve made on ONE CSX in simply 4 months’ time or so. You possibly can really feel the momentum on the tradition facet, you may really feel the momentum on what meaning for the way staff are working collectively after which the resultant results on our service.

So, I don’t really feel compelled to return out with some main technique simply because to place my fingerprints on it in some quick time interval. I believe the important thing factor is, we now have a proficient workforce right here, we now have a powerful working mannequin, we now have an excellent enterprise. I imply we made $6 billion on lower than $15 billion of income final yr, and we didn’t carry out our greatest final yr. So, we’re now beginning to display these efficiency ranges that we confirmed pre-pandemic ranges. So, that’s a great distance of claiming that I’m very optimistic concerning the enterprise and enthusiastic about it. And also you’ll see incremental concepts, initiatives come out, however we actually have a powerful basis. And actually executing off of that basis and leveraging the strengths we now have is our largest near-term alternative, as you’ve heard the workforce discuss tonight.

So, simply belief that after we’re able to have some extra significant dialogue on some new initiatives and whatnot, then we’ll have the best discussion board to do this. Within the close to time period, you’ll proceed to see us on a weekly, month-to-month foundation, speaking concerning the issues we’re doing and demonstrating the place our priorities are. And that’s actually round, as we’ve mentioned many occasions, enhancing our prospects’ expertise with us and our service we ship to them. And the expertise our staff have as workforce members of ours as a part of ONE CSX and simply getting probably the most out of working collectively to make that occur. So, these factors received’t change over time, however how we use expertise, how we use our operations and different initiatives will change, and we’ll discuss that on the proper time.

However simply to summarize what our workforce is saying right here tonight, we’re very assured concerning the issues we will management in our enterprise, our working efficiency, our capability now with our manpower, workforce we now have, the talents and the capabilities we now have. There’s just a little uncertainty concerning the well being of the financial system this yr. So we watch that very rigorously. However we really feel actually good about how we come into 2023, how we’re performing to this point in 2023 and the suggestions we’re getting from our prospects. And so, we’ll leverage that to indicate that we will ship progress and that we will construct an excellent stronger enterprise. Thanks.

Operator

We’ll take our subsequent query from David Vernon with Bernstein.

David Vernon

So, Joe, I wished to ask you a query on the intermodal share take just a little bit in a different way. I’m simply interested in your ideas on what sort of targets you’re going to be holding the workforce accountable to delivering over, name it, a 3- or 5-year view. As you step again and take a look at the intermodal market within the East, it’s grown at about 38 foundation factors a yr for the final 7 years. you guys are doing about 3 million items, and also you have been doing about 3 million items in 2015, ’16. What ought to we be fascinated about on a 5-year view about how a lot share you can truly put onto the railroad. Not wanting on the steering for this yr as a result of the financial system is weak, and I get it’s robust to forecast. However I’m simply attempting to suppose like what sort of goal are you placing on the market for the workforce to hit?

Joe Hinrichs

Sure. Thanks for the query. I’m not going to get into specifics about what our targets are long run. However simply conceptually, let’s discuss it. Simply stepping again and studying about this {industry} and observing it extra carefully during the last many months, even earlier than I joined CSX. We interchange lots with a lot of our Class 1 colleagues. And so, that is an {industry} subject in addition to a CSX subject, and that’s round actual progress, quantity progress. So that you referenced it. So how can we make that occur? Now we have capability. Now we have a powerful fastened value base, a really — a considerable fastened value base and incremental margins are actually good. So, that lends itself to essentially desirous to develop, like most companies, these sort of — and we now have sturdy margins to start out with.

So, how can we develop? As an {industry}, as an organization, I imply that’s the dialogue we’re having and the alternatives we’re pursuing over the following a number of years. So, from our perspective, we have to display to ourselves and to others that we will develop quantity ideally above both GDP or industrial manufacturing, wherever — methods you wish to measure it yr after yr and produce the margins that include that to indicate progress within the enterprise, not simply on pricing, but in addition on quantity. That’s one thing we’re seeking to do, and we’ll proceed to problem ourselves to do.

With that comes the customer support metrics and demonstrating continuous development there in issues like journey plan compliance and first mile final mile, but in addition in with the best way the purchasers measure issues. Are the MPs there after they have to be there? Do the hundreds get there after they have to be there? To allow them to handle their manpower and their enterprise, et cetera. So, continuous progress, Jamie referenced it on the shopper facet. After which on the worker facet, with our worker surveys and with {our relationships} with our union leaders and our union companions, et cetera, how can we turn into the sort of setting the place — again what we’ve had over time the place you will have simply all this multigenerational exercise as a result of individuals are so proud to be part of the CSX workforce and the way we work collectively and the tradition that we now have round one another. So, there’s methods to measure these issues and problem ourselves to be accountable with displaying progress.

However, should you bucket them into these areas after which, in fact, we are going to always remember the monetary outcomes. These are largely outcomes of all of the issues we’re speaking about, however persevering with to have a look at our working effectivity, proceed to have a look at our working earnings, in fact, — and our money movement, we are going to at all times do this. So with out stepping into particular, you may simply take into consideration the place the emphasis factors are and the place the priorities are.

After which, I’ve referenced expertise a few occasions right here tonight, and I wish to come again to that. How can we leverage expertise to be extra environment friendly, to be safer, to raised serve our prospects and to modernize our enterprise throughout the enterprise, whether or not that’s within the workplace or within the locomotive. And we see plenty of potential there. Steve Fortune has joined us. We’ve acquired an excellent expertise workforce. We’re enthusiastic about that, too.

So, a lot of issues to consider and problem ourselves for the longer term. And we’ll have extra to say about it over time. However after we get to some extent the place we’re undoubtedly the place we wish to be with our worker relationship and we now have a secure, trusting setting with our union companions, the place we search for options and work for each side after which enhance the work-life of our staff whereas additionally serving our prospects higher and having a extra environment friendly enterprise, we will obtain all these issues collectively. These are the goals. And I imagine we’ll get there, and we’ll do it the best manner.

David Vernon

Okay. Jamie, if I might simply sneak just a little follow-on in there. As you consider the headcount plan from the place we’re immediately, are you anticipating to proceed to develop it into the yr, or do you suppose we’ve acquired sufficient type of useful resource on the property to take care of the service enhancements?

Jamie Boychuk

I’d say we’re persevering with to qualify conductors each week. We nonetheless have one other 600 of us on the market in coaching out within the discipline and a few in Atlanta. And what we’re doing as we transfer ahead — now bear in mind, the retention fee has not been all that good with the brand new hires. So, if we proceed to work on that retention fee, and we now have a ten% all out with respect to only common attrition as we transfer ahead. I’m in search of one other few hundred of us onto our headcount to get us into trip season as we transfer ahead and among the progress that Kevin and the workforce see as we proceed to maneuver into the yr. So, I’m comfy with the headcount we now have now, whereas the holiday season is low, however over the following few months, we’re going to see that spike come up. And the best way that we’re guiding into that or gliding into that, our numbers are going to have the ability to maintain up for what we have to not solely proceed the place we’re with our metrics, however to truly proceed to enhance on them as we transfer into the yr.

So, we’re — it’s most likely one of many first occasions in a few years, I’ve been on one in all these calls, and I can say we’re comfy that our headcount is at a great spot and persevering with to maneuver into a great spot as we transfer into the yr.

Operator

We’ll take our subsequent query from Allison Poliniak with Wells Fargo.

Allison Poliniak-Cusic

Simply wish to circle again to that final query just a little bit extra. Joe, you had talked about among the processes in doing enterprise simpler with rails. May you possibly broaden on that just a little bit? Do you’re feeling like in these buyer surveys, the benefit of doing enterprise with rails is type of a key limitation proper now for a few of that structural share achieve? And is that one thing that’s possibly inside the subsequent 2 to three years that you simply guys can assault that, or is it a lot longer-term alternative there?

Joe Hinrichs

Sure. Thanks. It’s an excellent alternative. And we do must make it simpler to do enterprise. We acknowledge and we referenced that in our commentary tonight. I imply you consider the extent of visibility that we now have within the rail {industry} in comparison with packaged items and UPS, FedEx, these sort of issues, we now have to enhance in that space, and we are going to enhance in that space. It’s an {industry} subject in addition to a CSX subject. That’s an instance. How can we get much more predictable and provides extra visibility to our efficiency and et cetera. So there’s a lot of methods we have to enhance to enhance the shopper expertise in our enterprise, make it simpler to do enterprise with us. Kevin referenced, we’ve acquired some new issues in ShipCSX to assist with calculations for emissions discount and people sort of issues. How can we hold serving to prospects get higher and be capable to use our methods higher and be capable to work with these higher. There’s a lot of methods we will make that occur. On the finish of the day, the factor they need most from us, in fact, is to be there on time and to ship on time and to be dependable in doing that. So, that’s clearly the place our focus is. However clearly, we will make it simpler for our prospects to do enterprise with us, and we will present extra info and visibility and that’s among the issues that the {industry} is engaged on.

Operator

Our subsequent query comes from Walter Spracklin with RBC Capital Markets.

Walter Spracklin

My query for Kevin, wanting again now at High quality Trucking, I do know this was just a little little bit of an experiment while you made that buy, and I see in your CapEx plan you’re devoting a little bit of capital in direction of it. So simply curious as to what your take has been on it now that it’s been underneath your umbrella for a short while now. Is it by calling it out in CapEx, are you increasing the fleet? Are you strategically taking a look at rising your trucking operation relative to your rail operation? And will you be in search of some other avenues outdoors of the corporate and from an M&A perspective into that trucking area should you see these alternatives pop up right here in 2023?

Kevin Boone

Sure. I imply, initially, high quality is a really, very distinctive asset in plenty of methods. First, it touches our most precious market in our largest market, which is chemical substances. And I can’t let you know how insightful. They’ve totally different contexts than we do on the trucking facet, the place these buy managers have by no means handled truck and introducing that product to them has been eye-opening and it’s one thing very, very new. Once we discuss concerning the CapEx associated to QC this yr can be a rail product, it’s no more vans that we’re investing in. It’s the ISO tanks that go on the railroad. And I’m — if Randy was sitting right here immediately speaking about it, he’s very, very proud of the way it’s gone to this point.

The client uptake has been fairly unbelievable to this point. We’ve seen plenty of success. And our solely subject is we haven’t gotten them quick sufficient. And in order that’s an excellent drawback to have, and we’re going to proceed to take supply of these. Randy has come from the trucking market for a very long time, and he has even been stunned concerning the service product and the way shortly we will flip these property for him on all sides. So, issues have gone terribly nicely there. The intermodal community is right to transform plenty of this site visitors that strikes over truck immediately. It’s assembly the shopper necessities, and we’re getting increasingly demand from these prospects on the market because it will get into the market. So, that’s actually the place the main focus and the uptick within the CapEx that we talked about earlier are approaching that rail product that we’re terribly enthusiastic about.

And we simply suppose that the chemical prospects, specifically, are in search of a holistic resolution and it’s fairly highly effective to go in there and be capable to discuss and take a look at their community and inform them what we expect matches from a rail perspective and what matches from a trucking perspective.

Joe Hinrichs

And simply when you consider high quality, even on the working facet, we’re using our present terminals. And sure, that CapEx is precisely proper, the place we’re shopping for the ISO tanks and we’re making ready. However all the pieces else is already there, that fastened asset is there. So, this — after we went into this, Kevin and I have been considerably hand-in-hand taking a look at this enterprise saying is that this what we wish? Is that this going to work, and it’s actually falling in very well. And I’d say — on the asset facet is simply we didn’t get the ISO tanks. We’d wish to get them faster. We’d wish to get extra of them as a result of there’s extra enterprise, I imagine that Randy and his workforce can get working with Kevin and his workforce. And our intermodal terminals have the capability and the trains have the capability. So it’s simply — it’s an excellent product on the working facet and really straightforward for us to maneuver as nicely. So it matches actually, very well.

Operator

Our subsequent query comes from Jeff Kauffman with Vertical Analysis Companions.

Jeff Kauffman

I’ll simply be fast. Sean, you have been speaking about worker ranges, and it appears like value inflation on the brand new contract, most likely round 5% per worker. Yr-on-year staff about 7%, 8% for the primary half of 2023. So if I look away from fourth quarter the place the inducement comp helped decrease that and I checked out sort of what’s the best run fee for modeling for labor value inflation. Ought to I be fascinated about one thing within the excessive single-digit, 10-percent-ish vary for the primary half of the yr earlier than productiveness offsets that?

Sean Pelkey

Sure. Jeff, I believe on a gross foundation, proper, on a full yr foundation, the influence of inflation on the labor line is in that ballpark, proper, mid-single digits. And should you take a look at the headcount, if we didn’t rent anyone further all yr lengthy, we’d be up 4% year-over-year. Jamie talked about including a few hundred to the headcount, so name that 5% up year-over-year. So, there’s your 10%, however we’re assured that as we — because the community continues to spin, we’ll be capable to drive some effectivity on the labor line. We’ll additionally cycle, as you alluded to, the true-up that we needed to make within the third quarter on the again wages. So, that will likely be just a little little bit of an offset.

Jeff Kauffman

All proper. In order that will likely be just a little higher within the second half. However I suppose on the finish of the day, how a lot of that labor value do you suppose you may offset by means of productiveness? Is there a goal on the market? Can we simply sort of see what we will obtain?

Sean Pelkey

Effectively, sure, we’ve acquired targets and we’re going to cut back over time. We’re going to cut back crude journey and among the ancillary prices that go together with that because the community spins quicker, and we’ll be capable to offset an excellent chunk of it, offsetting 5% inflation or type of in that vary and one other 5% headcount can be lots in a single yr. So, we’re heading in the right direction.

Operator

Thanks. And that does conclude immediately’s presentation. Thanks on your participation, and it’s possible you’ll now disconnect.