CSX Corp (CSX) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the CSX Corporation Second Quarter 2021 Earnings Call. (Operator Instructions) I would now like to hand the conference over to Bill Slater, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Joining me on today's call are Jim Foote, President and Chief Executive Officer; Kevin Boone, Executive Vice President of Sales & Marketing; Jamie Boychuk, Executive Vice President of Operations; and Sean Pelkey, Acting Chief Financial Officer.

On Slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3.

With that, it is my pleasure to introduce, President and Chief Executive Officer, Jim Foote.

Great. Thanks, Bill, and thank you for joining us on the call today. This quarter's results highlight just how quickly volumes have rebounded as each of our 3 lines of business experienced record growth as we lap the most severe economic impacts of the pandemic.

I want to first thank all of the CSX railroaders for their unwavering commitment to our customers as they worked very hard to deliver service in a very difficult operating environment. As we entered the second half of the year, our focus is squarely on continuing this growth. We have kept our yards and terminals open and freight moving throughout the recovery, and we will continue taking the necessary steps to add resources and increase fluidity in order to help customers meet their own growth targets this year despite the ongoing supply chain disruptions.

Let's begin with Slide 5 of the presentation and an overview of our second quarter financial results. Operating income increased to $1.69 billion and earnings per share rose to $0.52. These figures include $349 million and $0.12 per share impact from the sale of property rights to the Commonwealth of Virginia. Our operating ratio was 43.4%, including an 11.7 percentage point impact from the Virginia transaction. Excluding these impacts, operating income increased 62%, earnings per share increased 82%, and the operating ratio improved 820 basis points.

Turning to Slide 6. Revenue increased 33% on 27% volume growth. Merchandise revenue increased 26% on 21% higher volumes, led by automotive, metals and equipment and ag and food markets. Intermodal revenue increased 42% on 28% volume growth, setting a new record for average daily volume. Both domestic and international volumes increased significantly and continued to benefit from strong demand for transportation services as well as growth from East Coast ports. Coal revenue increased 47% on 44% higher volumes, with growth across all coal markets. Domestic coal benefited from higher utility and industrial demand, and both export met and thermal coal volumes rebounded meaningfully. Other revenue growth was driven by increased intermodal storage and equipment usage as well as higher revenue from affiliates.

Turning to Slide 7. We remain committed to being the safest railroad. In the second quarter, we achieved a new record low number of train accidents driven by a focus on increased communication and education to reduce human factor caused accidents. Safety initiatives for the remainder of the year will focus on culture, communication and continuous education.

As an example, we recently introduced a modified approach through operational testing for T&E employees. The new program is designed to be instructive rather than disciplinary to increase employee engagement and create lasting changes in behavior. Combined with face-to-face safety summit and expanded education of top causes of incidents, these new programs will further reduce risk and protect our workforce.

Moving to Slide 8. Let's review this quarter's operating metrics. The intermodal segment continues to perform well. Intermodal trip plan performance averaged 89% for the quarter. And through the use of our reservation system and the hard work of our intermodal team, we have kept all our intermodal's terminals open over the last year as volumes surged. Carload trip plan performance improved sequentially to 69% for the quarter, and we are focused on continuing this positive momentum throughout the rest of the year.

We are also working to further improve network fluidity. Car dwell improved sequentially and remains the lowest in the industry. Velocity began to trend positively exiting the quarter, and we expect to see further improvements in both metrics in the second half of the year.

On Slide 9, I want to take the opportunity to highlight some of the actions we're taking to resource the network for growth. As I mentioned on previous calls, we ended the year planning to add T&E headcount in response to the expected growth, and we'll continue adding through the second half of the year. Over the past several months, we have increased the size and number of our new conductor classes and then also enacted new programs to improve availability of existing employees to ensure that we have resources in place to capture the rising demand and serve our customers well.

We stage locomotives across the network as we prepared for the incremental volumes. While these assets provide additional flexibility to react to customer demand, we are maintaining a balanced operating plan. And we are investing in the safety and the reliability of our network. We demonstrated this commitment by maintaining our capital spend throughout the pandemic, and we continue to invest with a focus on the long-term growth and sustainability of our business. We still have ample capacity across the network for growth, and we are working to find new ways to improve the efficiency and impact of our capital spending programs.

Turning to Slide 10. Our focus on investing for the future extends to improving the safety, productivity and sustainability of CSX' operations through the increased use of technology, while we are driving further emissions reductions through our advancement of energy management software and the expanded use of fuel savings technologies.

In addition to the almost 40% increase in distributed powertrains year-over-year, we continued to expand the number of distributed power equipped locomotives. We are adding that capability to approximately 100 locomotives this year in addition to including that on all the locomotive rebuilds we are performing.

We're also expanding use of inspection technologies to improve the safety of our operations and increase the efficacy of our track maintenance and repair programs. We're performing roughly 80% more drone inspection flights this year, and our increased use of autonomous track inspection cars is improving safety by better highlighting areas in need of repair.

Lastly, we're providing our field employees with digital tools to replace inefficient manual or paper-based processes to increase the speed of the communication across the railroad. We have distributed roughly 9,000 tablets to employees, which are improving both safety and productivity by allowing real-time information sharing and feedback.

We are pleased with the success of these programs to date, and we are only beginning to see the potential value these investments can bring, from more efficient network planning and dispatching to changing how our customers interact with CSX. We see significant opportunities to leverage technology to improve the pace and quality of decision-making across our business.

I'll now turn it over to Sean to run through the numbers.

Thank you, Jim. I'm pleased to be here today, and I'm excited for the opportunity to continue serving this company at an important time in our history as we focus on culture, innovation and growth.

Looking at the second quarter financial results on Slide 12. Revenue increased $735 million or 33% versus the prior year. This reflects growth across every market as we cycle the impacts of COVID-19. Revenue per unit growth of 5% includes a 2% impact from higher fuel surcharge revenue, combined with favorable pricing and higher other revenue. Total expenses were 9% lower in the quarter. These results included a $349 million gain related to the sale of property rights to Virginia, which was partially offset by the impact of higher fuel price. Excluding the property gain and the impact of fuel price, expenses would have been up 9% on a volume increase of 27%.

Before I get into specifics by line, I would like to address the topic of inflation. The good news is we have secured adequate inventory and supply commitments for critical materials, and we've worked to lock in the vast majority of unit costs for 2021. Excluding locomotive fuel, expense inflation this quarter was just above 3%, and we don't expect that to move much going into the second half. We are seeing cost pressures on capital materials for core infrastructure and are working to offset that through increased productivity, sourcing shifts and inventory management. We don't expect any change to the overall capital budget this year.

Several of our supplier contracts are based on lagging indicators. So we'll continue to monitor things closely going into next year and ensure inventory levels for critical materials remain adequate.

Now moving down to the specific expense line items for Q2. Labor and fringe was up 18%. Higher volume and inflation together drove a $75 million increase in expense. Additionally, incentive compensation increased $60 million on higher projections for award payouts this year coupled with prior year downward adjustments related to COVID impacts.

We continue to absorb growth on the network and sustain productivity gains. As we work to hire conductors, we've increased the use of distributed power and continue to optimize the plan. While total head count is roughly flat from year-end 2020, the active T&E count is up approximately 200 this year, and we expect continued sequential increases in the third and fourth quarters.

MS&O expense increased 6% or $23 million in the second quarter as higher volumes and inflation were the primary drivers. Locomotive productivity measured in GTMs per available horsepower hour improved 4% compared to the second quarter of last year. We expect this to improve even further going forward as velocity and cycle times recover.

In addition, we are absorbing growth and driving efficiencies at our intermodal terminals with cost per container lift down 12% year-over-year. Fuel expense increased $103 million driven by average fuel prices that nearly doubled as well as higher volume. During the quarter, we also recorded an $18 million benefit related to the settlement of a state fuel tax matter.

Looking at other expenses. Depreciation increased $4 million in the quarter, primarily due to a larger asset base. Equipment rent expense increased $9 million or 12%. The impact of higher volume on freight car rents was partially offset by higher net earnings at affiliates.

As a result of the Virginia transaction, gains on property dispositions increased significantly in the second quarter. As a reminder, the gain during the quarter was related to the first phase of the transaction. Total proceeds are expected to be $525 million, including $200 million already received, $200 million later this year and the remaining $125 million expected next year.

Turning below the line. Interest expense improved $10 million due to a lower weighted average coupon and lower average debt balances. Other income increased $5 million as favorable pension impacts were partially offset by lower interest on cash held. Income tax expense increased $204 million, mostly due to higher pretax income. The effective tax rate was 23.3% and was impacted by a state legislative change this quarter.

Closing out the income statement, CSX delivered operating income of $1.7 billion. The reported operating ratio was 43.4%, including a benefit of approximately 1,200 basis points from property gains.

Now these results do not include any impact from the Quality Carriers acquisition, which closed on July 1. The acquisition will add approximately 6% to CSX' revenue and is expected to be relatively neutral to operating income and EPS this year due to the impact of transaction and integration-related expenses. Quality trucking revenue will be recorded in the other revenue line. On the cost side, about 2/3 of the expense will be MS&O. About 1/4 of it is split between labor and fuel, with the rest hitting depreciation and rents.

Going forward, we expect to leverage the quality transaction to accelerate rail growth by offering new multimodal products, extending our reach and further integrating CSX into our customers' supply chains.

Now turning to cash flow on Slide 13. As you know, free cash flow is a major focus for this team. Through the second quarter, free cash flow before dividends was $1.9 billion, up 35% versus the prior year. Just to put that in context, that's $300 million more free cash flow than we generated in all of 2017. Year-to-date free cash flow conversion on net income is 100%. And we expect it to remain near that level on a full year basis.

The company's cash balance remains elevated at nearly $3 billion. Our expectation remains that this will normalize over time as we continue to invest in the business and return capital to shareholders.

Year-to-date shareholder returns are nearly $1.7 billion, including approximately $1.3 billion in buybacks and $400 million in dividends. We remain committed to returning excess cash to our shareholders with a balanced and opportunistic approach to buybacks.

With that, let me turn it back to Jim for his closing remarks.

Great. Thanks, Sean. Concluding with Slide 15, we are maintaining our full year revenue outlook. Excluding the impact from Quality Carriers, we continue to project double-digit revenue growth for the year. As Sean mentioned, the acquisition will add approximately 6% incremental revenue growth on an annualized basis, and we expect the impact this year to be about half of that. We will achieve these growth targets by providing our customers with a high-quality service product. As I said, we are taking necessary steps to ensure we deliver on this commitment. Our capital expenditure outlook remains at $1.7 billion to $1.8 billion for the year, and we will continue returning cash to shareholders.

Demand remains strong and so does our commitment to customers. We are resourcing the network for growth. We are driving operational improvements to add capacity through increased asset utilization. We are investing in our business for the long term, and we continue to design new and creative solutions to allow customers to move more freight with CSX today and for years to come.

Now back to Bill for the Q&A.

Thank you, Jim. (Operator Instructions) With that, we will now take questions.

(Operator Instructions) Your first question comes from Allison Landry with Crédit Suisse.

I was hoping you could maybe talk about the underlying pricing environment, specifically what you're seeing on contract renewals even if just directionally from Q1. And then just given the myriad of inflationary pressures and very tight truck capacity, do you think there's scope for a more rapid acceleration in core price than you've seen in past cycles?

Allison, this is Kevin. In terms of price inflation today and cost inflation, what we're seeing -- and I'm keeping close with Sean and staying close to that so we can be transparent with our customers and explain to them what we're seeing in the market. None of it is a surprise to them. They're seeing it in their business. They certainly understand the pressures that are out there in terms of labor and other material costs. What we're really trying to do is see if some of these things are transitory or whether they're really here for the long term, and we'll continue to evaluate that throughout the year.

When you look at generally our contracts, we have a lot of those renewals that occur in the fourth and first quarter. They're concentrated in those quarters. And really, it represents about 70% of our annual contract renewal activity. So we'll continue to look at that. We're communicating transparent with our customers and expect to obviously achieve that cost inflation through our pricing.

Your next question comes from Amit Mehrotra with Deutsche Bank.

Congrats on the great performance. Sean, if I look at the underlying operating ratio in the second quarter, 55.1%, is there any reason that, that moderates in the back half? I guess you have to add that -- we have to add the Quality Carriers into the mix. That looks like it's maybe 100 bps of negative impact this year, given it's half of the $600 million or so in revenue. But I would just -- if you just take that and table it for a second, mix is getting better, hopefully in the back half. Kevin just talked about 70% repricing towards the end of this year, maybe half of that towards the end of this year.

I would just expect that the underlying OR ex the Quality Carriers acquisition gets better in the second half versus the stellar performance in the second quarter. If you can just help us think about that.

Yes. Thanks, Amit. So when you think about the second quarter, not a whole lot of unique items in there other than the Virginia transaction, and then I talked about the impact of the fuel tax settlement there. So strip those out and carry it forward to the second half of the year. What's going to impact the operating ratio in the second half of the year, quality. You're right. I think you're doing the math correctly there.

We've got some hiring to do. So we're going to be bringing on some crews. If we bring on the crews and network fluidity improves and we're able to move the volume, that will be a positive. But there will be a cost to bringing those crews on. We're also going to have some incentives here to increase the availability of crews. So that will be an impact.

And then probably the biggest variable is what does volume look like in the second half. We've been able to demonstrate here, albeit on a relatively easy comp that the drop-through is pretty good. The margins in the second half will be highly dependent on what the volume looks like.

Right. But then on the labor side, I think there's 6% to 7% of the workforce that attrits every year. So when you're talking about growth in sequential labor or headcount, is that a net number or a gross number, net of attrition? If you can just provide a little bit of color on that as well.

Yes. So I mean we're going to continue hiring through the rest of the year and as long as we need to in order to move the volume and increase fluidity. I would expect sequential headcount is probably going to go up a little bit on a net basis, both in the third quarter and the fourth quarter.

Your next question comes from Chris Wetherbee with Citi.

Maybe a question on the revenue outlook for the back half of the year. So obviously, you're maintaining your outlook, and that's fantastic. I guess when we think about volumes, do you feel like the network is at all constrained in order to take on incremental volume? Meaning do you think you're running kind of below what the demand environment would be able to sort of provide you? And then in that context, how do you feel about sort of service? Are there some improvements that need to be made, whether those heads coming back on or otherwise, so you can kind of reach maybe full potential from a volume growth perspective in the back half?

Yes, Chris. Look, when you look at the transportation sector as a whole, we're not unique. Everyone is having their challenges. The fluidity out there is not very good right now when you look across all modes of transportation and those challenges. We're facing the same challenges, getting trucks to pick up the boxes out of our yards, all those things create challenges for us.

So yes, I'd say there is opportunity that we weren't able to move in the second quarter. That's probably a fair assessment. As we get more fluid, as we bring on crews, I suspect that, that will generate opportunity. We're certainly having those conversations with our customers today. They want additional capacity, and we're committed to do everything we can, to react as quickly as we can, to bring on more people, more capacity to serve those customer needs.

We're already starting to have conversations around next year. So I'm communicating every day with Jamie when I'm having discussions with customers on what they need. And so we can get out ahead of it with our resources. We can plan ahead. We can commit to delivering the service that we expect to do.

Your next question comes from Ken Hoexter with Bank of America.

Congrats on the solid results. Just wanted to talk a little bit about the congestion that's going on. So obviously, you just had a couple of questions on employees and ability to handle it. We've seen the 2 Western rails kind of do embargoes on traffic. Maybe talk a bit about -- we've seen your metrics kind of come down in terms of on-time performance. Talk about if you're starting to see any of that spread to the Eastern network. Is there different congestion points that -- especially what's going on in Chicago that you fear is starting to create any larger backlogs?

And then just on that note, your cost per employee really scaled. Can you address kind of if there's anything in that, that we should look at going forward?

Yes, Ken, it's Jim. I'll make a quick comment, and then I'll let Jamie follow up with any details if things are necessary. We've been very, very, very committed to making sure that this railroad runs well. It has been an unbelievable challenge. I've never seen any kind of a thing like this in the transportation environment in my entire career where everything seems to be going sideways at the same time. Despite all that, we have been able to keep our terminals open in Chicago, and I hope we can continue to do that.

In January, when I got on this call, I said we were hiring because we anticipated growth. I fully expected that by now we would have about 500 new T&E employees on the property. No way did I or anybody else in the last 6 months realized how difficult it was going to be to try and get people to come to work these days. It is an enormous challenge for us to go out and find people that want to be conductors on the railroad, just like it's hard to find people that want to be Baristas or anything else. It's very, very difficult. Nor did we anticipate that a lot of the people were going to decide they didn't want to work anymore. So our attrition was much higher in the first half of the year than what we had expected.

So even though we brought on 200 new employees, we fell short of where we thought we would be by now going into the year because we anticipated that there was going to be strong demand. We continue to expect there to be strong demand. And as long as there continues to be the forecast for demand, we are going to continue to hire employees because you need employees to run a railroad. That's what we're managing this company to do, is to serve our customers' needs, and we will bring on the assets and put them into places where they need to be so we can move our customers' freight, simple as that.

Look, I think Jim's comments really nailed it with respect to some of the headwinds that we've faced here with respect to the metrics and where they sit. I'm proud of what this team has been able to do under the environment we've been at. Quite confident that in the environment we're in that Kevin and his team is providing us with some great numbers of what we need to look for going forward into the next 6 to 8 months as far as you can in this industry.

But we know we can do better on these metrics. And that's what I think is the great opportunity. As an operating team, as we look forward, we've got the rolling stock that we need. We've got the assets that are sitting there. It's people to Jim's point, and I think it was mentioned by Amit. It was -- yes, 8% is where we look at for our attrition, which means we're going to be hiring for attrition, but we're going to be hiring for above attrition as well. We need to -- we've got 200 trainees out there. We mentioned that our T&E count's up a couple of hundred. There's more numbers. We know what our number is, and we're going to go after that. And for us, it's all about the reliability to the customer.

So as the fluidity picks up, as dwell continues to drop, yes, we see some benefits there with costs and the rest of it as we move along. But ultimately, we look at our trip plan performance, which is getting better and better, particularly on the intermodal side. On the carload side, the reliability isn't where we need it to be. So we're going to take the steps required in order to get that reliability where it has to be.

And Kevin and his team are able to go out there and sell the product, which is service, and that's key for us. Without service, we're not any different than anybody else. So we've got to continue to capture that, which allows us to grow, and continue to push forward.

So maybe I'll let Sean really touch on the cost per employee question.

Yes, Ken, just quickly on that. So if you're looking year-over-year, there's a few things to think about. First is the incentive comp I called out. You've got inflation on the labor side. And then we've got a little bit higher over time versus last year as we were obviously scaling down over time with the plummeting volumes.

Just the other factor from last year, you remember we had those emergency reserve boards. So we had about 300 employees who didn't have significant wages along with their emergency status there. So looking for the -- from the first quarter, we're actually down a little bit sequentially, reflecting some normal seasonal trends.

Your next question comes from Tom Wadewitz with UBS.

Yes. This is a question, I think, for Jim, maybe Kevin as well. You've talked about, I think, for a couple of years about the opportunity with carload shippers to gain wallet share versus truck. And I think you were developing some good momentum or had some good momentum in that before COVID. I just -- I'm wondering -- it's unusual circumstance, but does it hurt your ability to continue that program and to kind of gain further share from these shippers given that the rail network is having these challenges? I mean they're not -- a lot of it is not in your control, but how do you think that affects the ability to gain share? And when do you think you kind of get back on track with that share gain for carload shippers?

Sure, Tom. Many times, we've tried to explain why we're so confident in our ability to grow above traditional rates in our carload merchandise business was because we have -- if we can develop a product that's truck-like, we have a cost advantage that gives the customer lower-cost transportation solution with a similar level of reliability. And as we were moving along, as you said, coming and starting in '17, getting into '19, our reliability was significantly better than where it had been in 2017.

Our carload trip plan compliance number was in the high -- mid- to high 80% range. And so going in and having conversations with a customer who, number one, was skeptical about switching from truck to rail, we had a very good track record and an interesting product for him to look at.

It's unfortunate when I now have to sit here much to my disillusionment and say our trip plan compliance number is 69. Is that 69 trip plan compliance much better than it was in 2017? Yes. So we still have the ability to have a good narrative with our customer base about why it makes sense for them to switch, but it's just simply not as compelling as it was 18 months ago or 15 months ago or before the world went sideways on us.

So -- but we're going to get that back. That number would be much higher had, as I said, the 500 employees that we hoped that we would have had here by now, new conductors here by now, that number would have been much higher. And we're hiring and doing whatever we possibly we can do to run and improve the speed, velocity and reliability of our service. And as we do, we'll get back to having -- being in a position to have similar conversations with our customers as we did before.

At the same time, it isn't easy to find a truck right now. So it's unfortunate that we're not really -- on the one hand, we're not as good as we were. But on the other hand, when we get back where we were, the opportunity right there is tremendous for us. So nothing has really changed about our optimism at all in terms of this strategy that will drive outsized growth for us as we move forward. It's just unfortunate. But as I said, the world went sideways on us here for a while. But we're coming back, we're coming back strong, and we'll be even better than where we were as we get more time to get things running right.

Is that something that bounces back quickly like you could be on track in 2022? Or do you think the shippers have some kind of readjustment period to engage on that share gain discussion again?

Again, I hope that our service metrics -- as I said, I kind of said on the last call, we'd be in great shape by now. So yes, I expect those numbers to get back by the end of the year and reposition ourselves in the transportation community as it had an extremely good service product that -- going into next year. Again, we're getting truck conversions now. Our intermodal growth to a large degree is coming from converting long haul, over-the-road trucking to intermodal. Our growth in certain segments with certain customers in the carload side is coming at the expense of the truck.

So we're still seeing that. I just think that the -- again, we are not in -- it's not as easy for a salesman or women to go in and talk to a customer today about how great we are and why they should convert more traffic to rail than it was in the fall of 2019. It doesn't mean it's not achievable, it just means it's not as easy and we'll just have to work harder.

Your next question comes from Scott Group with Wolfe Research.

Kevin, it feels like for now, we've got a favorable environment for coal. Maybe just talk about what you're expecting from a volume and RPU standpoint on coal going forward. And then just separately, Jim, just any thoughts on the executive order and how you guys think about reacting, responding in any way?

Yes. The coal market, similar to a lot of the other markets that we've talked about today, is the same. It's -- demand is outstripping supply. You're having the coal mines trying to catch up. They've underinvested. So they're catching up on some of their investments. They're having some of the same struggles we are on the people side. So we're seeing all that today.

You see the underlying commodity prices, whether it's natural gas here in the U.S. or met coal prices internationally and thermal coal prices internationally, they're all supportive of an uptick in volume. And we'll start to lap some -- continue to lap some very easy comps in the back half of the year, so we do expect growth but not back to the levels that we saw in 2019, and a lot of that is based on the supply chain continuing to try to catch up with the demand.

So what we're already having discussions with our customers is what does it look like for next year and how do we continue to replenish inventories, particularly here on the domestic side, where our inventory levels are very low. We're in a situation right now where we're trying to keep inventory levels to above those critical levels so they can continue to burn and serve their customers. And -- but the environment has quickly turned up. I had discussions last week. They didn't see this coming. They were surprised about how quickly the market recovered. And so we're all communicating and really trying to understand how they can do better, how they can -- on the supply side and how we can deliver the transportation services so they can deliver to their end customer.

But very good outlook. When you look at RPU, there's a little bit on the international side that will see favorability, particularly on the met side, where our price follows the commodity price and domestic will be relatively similar kind of dynamics that you saw in the second quarter going forward. So good market there.

Yes, Scott. On the executive order, I guess, when we first heard about it before it actually been released, it seemed like the administration had, for some reason, singled out the railroads and the steamship businesses. Once the full information got out and we were able to digest it and find out that it covered everything and everybody and especially tech, we got a little better viewpoint of what it was all about. And it appears to be pretty much not a lot of new items in it, if any, but the agenda as it relates to railroads, the agenda that has been moving full -- along at the Surface Transportation Board for years. So it was kind of like what is everything that's going on at the Surface Transportation Board, and we'll just kind of list it along with every other regulatory move afoot in all industries.

And it's really my personal opinion, it's really unfortunate when the supply chain, all of these essential workers who have been doing an amazing job now during a pandemic are kind of singled out. The railroad is made up of all these employees that are out there working. And all of these regulatory ideas which are really pushed forward by industry lobbyists, who want to change the rules and regulations, decided at this point in time when everybody is working so hard, that we should suddenly upend and take advantage of a difficult time to try and push forward a regulatory agenda. So it's not much new. I was somewhat disillusioned about what it really was. But we're used to handling it and we'll move forward.

Your next question comes from Fadi Chamoun with BMO.

A question on Quality Carriers. If you can give us maybe your first impression if you had some communication with clients. How are they perceiving this combination? And secondly, as we go into 2022 -- I think you mentioned for this year, it's going to break even on an operating income basis. But as we go into 2022, how are you thinking about the contribution of that business to operating income?

This is Kevin. On the Quality integration, July 1, you can imagine we got our teams together quickly after that, our sales team, along with the Quality sales team. And the feedback so far from the customers has been overwhelmingly positive. They're looking for capacity in the market. We have several ongoing initiatives currently with customers that will offer that capacity that they're looking for. We're doing all of our diligence, making sure when we bring on the service, we communicate with Jamie and his team and that we can service that business to the standard that we expect. So that -- we'll do it very carefully and very methodically, particularly in this market today.

But this is a product that -- and we knew this going in because we did our diligence ahead of it. We surveyed our customers, and we surveyed their customers, and we asked if this is something that they feel is needed in the market. And the overwhelming response was, yes, we'd like this in the market. They see the value. We'll be thoughtful on how we bring it on. We had a lot of inbound customers calling us looking to come up with additional solutions, and we'll bring those on.

But it's been great so far. Our teams are working very, very closely together, and we're working closely with ops and so they can understand the opportunities and ways that we're thinking about bringing incremental volume onto the network.

And I'll let Sean handle the financial side of it.

Yes. Fadi, so in terms of the financial impact as we get into next year, the core trucking business has truck-like margins. So you can expect to see that next year. But it's about the conversion that Kevin has been talking about when we're able to drive some of that business that's moving over the road today over to the rail and do it on existing trains. The incrementals on that growth should be pretty significant. We've got to ramp that up over time. We need to make sure we've got the equipment and all piping in place, but you should see a ramp-up in that next year.

Your next question comes from Justin Long with Stephens.

Jim, I wanted to clarify the comment you made earlier on the progression of carload trip plan compliance going forward. Were you saying that getting back to the mid- to high 80s was possible by year-end? And then from a resource perspective, we've talked a lot about headcount, but can you talk about your plans for redeploying locomotives in the back half of the year as well?

Yes. I'll let Jamie talk about locomotives. But in terms of my goal to get back to where we were, yes, I would hope that we could. Where we are right now would be challenges associated with being able to hire people. I don't know if that's achievable. That's my goal. That's what I'd like to see happen. And then I'd like to see us get better from there. I can't say right now whether or not -- until something changes dramatically in the hiring situation whether or not we'd be able to achieve that.

On the locomotive side, as we get faster and we can improve our fluidity out there from even where we are now, we're going to need less locomotives. So the question isn't necessarily where our number is at now. We're good with what we have for our locomotives. We've still got hundreds of locomotives in storage. We've got a great rebuild program that we're continuing to do. We've got 60 rebuilt locomotives coming out here over the next 3 months, which will allow us to put down some more locomotives that aren't as fuel efficient.

So we'll continue along that track. And nothing but continued opportunities, particularly on the technology side as we continue to work with our 0-to-0 program through Trip Optimizer and Wi-Tronix. There's a lot to gain as we continue to move forward on that front.

Your next question comes from Brian Ossenbeck with JPMorgan.

Just wanted to ask maybe, Kevin, for you, just for an update on the land portfolio, the industrial pipeline, how you think those things are trending, if those conversations have really changed given the demand backdrop? What's, I guess, your time line expectations for site development or something like that, that would come from those efforts that would be more noticeable?

And then just a follow up on the question about labor and resources. It sounds like that's the key, getting labor, but it also sounds like it's pretty hard for you and for everybody. So maybe you can just give us a sense of your confidence in that and then if there's any other levers you can pull across the network, different asset deployments that would help you get there if the labor doesn't -- ends up being as hard as it looks right now.

Well, let me touch on the industrial development and how we're thinking about it. The pandemic really has changed the way the customers are viewing their supply chains, and we're really -- what I'm pushing the team to do is we need to be in that conversation as they're reevaluating it. Are there new facilities? Are there new warehousing? Is there new production that they're going to want to onshore? And how do we sell the opportunity to put that on CSX rail and make it rail served.

I think the customers understand the opportunity that, that gives them in terms of options and being able to move their freight, particularly in an environment where global supply chains can be challenged that the freight -- that the railroads have been reliable and have continued to move freight throughout the pandemic. And they're increasingly seeing the value to that.

So I'm excited about leveraging our real estate portfolio. We have a lot of ready sites that they can build on today. We're marketing that along with the real estate team closely and seeing some traction there. So it's exciting. I think it's early. But I'm hopeful that we'll start to see a little bit more opportunity over the next 12 months as we get out and get in front of our customers there.

On the labor side, I've been working really closely with our HR department, Diana Sorfleet and her crew. Really, the last 8 months, it's been difficult. There's no question about it. We've gone through some ebbs and flows with how our applications have come forward, making sure we get the right people to work in new jobs.

Just recently, there's a couple of things that we've done that's helped us. We've come up with a deal with our conductor SMART TD for an availability agreement, which allows us to work closer with our conductors and make sure that their availability is better than it has been. So that agreement has been successful here over the past couple of weeks since it's kicked in. And believe it or not, being a fourth-generation railroader, I'm a believer that sometimes the best people you can get for railroads that stick around are actual people from railroad families. I think there's a few others around this table in the same situation.

We have put a referral program together, offering incentives to our employees to refer people to our railroad to work for CSX, and we went from application of just a few hundred people to, I would say, within a 2-week period, well over 1,000 applicants that we're going through right now to bring on as conductors. So the pipeline has gotten very strong, and this program has helped out. And of course, the referrals will then help people stick around, too. They understand what the job is. They know what it's about and understand the lifestyle. So this program is really going to help us move forward as we continue to do our hiring.

Your next question comes from Jordan Alliger with Goldman Sachs.

Just wondering if you could talk a little about the international intermodal front with the issues that are out on the West Coast and some of the gating procedures in Chicago. Do you think that's -- is that -- or will that lead as we move towards peak season, retailers and others perhaps diverting more traffic to the ports on the East Coast? And could that lead to additional opportunity for you, again, assuming your service could keep up?

Yes. I think you really identified a trend here. The West Coast ports have struggled, particularly through the pandemic and as freight demand has really picked up here. And the secular trend that we continue to see more freight moving to the East Coast, this is another reason why I think the shippers are going to look for that option, and that's a very good thing for our franchise in the East. We remained fluid. Jamie and his team have done a great job working with all of our port partners to continue to move freight.

And so the intermodal terminals remain open. We're continuing to move freight and we want more of it. We're continuing to invest in inland ports and other areas to make sure that we can serve it.

Your next question comes from David Vernon with Sanford.

Jamie, it's still not clear to me whether the resource initiatives you're having are a function of having cut too deep kind of on the way down or whether this is just sort of sand in the restart recruiting gears, trying to get guys off of the idle boards or whatever. Could you talk more specifically to what the core issue is here?

And then as a follow-up, Jim or Kevin, when do you start getting worried that the service-level issues you're having now are going to impact your ability to make hay on the [port] to be a pretty good market next year?

It was a little fuzzy, but I think the question is the issues associated with the employees and trying to hire people, correct?

Yes.

Yes. No, we're not -- I don't think -- I think this is a trend for every business right now. It's a challenge. I think we're evolving in the way we think about this and have to try and figure out things to do to make these jobs more attractive. They're extremely good paying jobs with extremely good benefits with all kinds of other bells and whistles, but in today's world, that's not enough.

So a lot of the things we're doing right now in terms of, as Jamie said, getting referrals, doing this, doing that, are going to fill the need on a short-term basis. But I'm convinced and I think the team is convinced that we need to kind of look at this from a long-term perspective and say, what do we really need to do to make sure that we have a stable, long-term pipeline of people that enjoy coming to work and doing what they need to do. And nights, weekends, holidays, winter, outside, all of that where people before kind of like that, they don't want to do that anymore.

So we have to look at the whole big picture, and we'll do that because we need employees to run the railroads, simple as that. And so we're going to change our thoughts, our processes and throwing money at people these days is not the answer.

And I guess the other question in there was whether and when you start to get worried that the service issues you're having now starts to impact your ability to kind of take rate up into '22.

Well, I think that the -- I'm not worried right now because I think we have plans in place that will get us where we need to be by the end of the year. As I said in my remarks earlier, we were caught somewhat surprised in as much as we had a plan in place to get us to where we thought we needed to be, and these issues that everybody is facing right now kind of flared up.

But we have -- it's been a full-court press. Jamie and I are personally doing everything we possibly can to work with the union leadership to help us, and they've been tremendous in their response to making sure that we're ready and willing and able to serve our customers.

So I feel pretty good about where we should be absent looking -- living in Jacksonville and working in Jacksonville today. It's not like the pandemic is going out there. Hello, it's alive and well right here. So who knows what things -- what's going to happen in the next couple of weeks, couple of months. Well, let's assume that we have some reasonable health conditions in the country. I feel pretty good we'll go into '22 well positioned, and we will continue to make sure that we have a pipeline of labor coming at us all the time in the future.

Your next question comes from Walter Spracklin with RBC.

I just wanted to come back on pricing, but I take a different angle in terms of how you're structuring or might be restructuring or changing at all the type of contracts you're negotiating with your customers. And in particular, we're in a period of high pricing, particularly in trucking and intermodal. And there are some questions whether that is sustainable. So my question to you is, are you changing -- or can you change at all the terms of your contract, lengthen them out to better capture and preserve the current pricing environment longer than you otherwise would have on your prior -- structure your prior contracts?

Look, I don't think there's anything in this environment that changes our overall approach to how we go to market. It's about being transparent with the customer around the cost pressures that we're facing in our business. They get it. They're facing the same issues and having a discussion around that. I'm more interested about how we partner with our customers to grow their business and help them compete in the markets. Those are the things that I'm really focused about. We all realize we have to cover our cost. That's really a secondary discussion when it comes to the conversations I'm trying to have with the customer.

I'm trying to understand how their business is being impacted today, how they expect to grow next year, what can we do from a service perspective to help them in our new markets, help them advantage in the market and compete and win share. If they're winning in the market, we're going to win. And so a lot of those conversations are happening today. Certainly, we expect to cover our cost going forward. But really, it's a combination of volume growth. We want to grow with our customers. We want them to be successful growing their business going forward.

Yes, it wasn't so much to take advantage, but more to come to an agreement where, okay, capacity is very tight. Maybe a customer wants to lock in higher for longer and you can accommodate that through longer terms. Just curious if any of that is coming up where customers wanting to -- desperate for capacity wants to lock in for longer and if you can keep that pricing in as a result for longer as well. But it sounds like that's not happening.

No. Look, I'm 100% confident. I talk to Jamie every day that this network is going to get better and better, and we're going to enter next year able to service our customers. And we're having those discussions of how we bring on more volume. And what we're asking our customers to do is tell us what that volume looks like, so we can resource and prepare from a headcount perspective all the crews. We certainly have the locomotives. We have the assets out there to go and service that business.

So we want to get ahead of that. It's been an incredibly hard market to predict what volumes are going to do. And we've all been surprised about the shape of the recovery. But what we're trying to do is get out in front. So we know how much we need to hire and how -- and get way ahead of it to make sure that we're there for the customer going forward.

Your next question comes from Cherilyn Radbourne with TD Securities.

I wanted to ask a question about automotive, where volumes are up a lot, but presumably not as much as they could be. So could you talk about the extent to which you have visibility to when the chip shortage might improve? And do you think that the pent-up demand that might be released once that happens could be a tailwind that could contribute to above-trend volume growth into 2022?

Well, you're probably looking at the same data I am. You can't find a used car, you can't find a new car. It's another market where demand is outstripping supply. We're close -- we stay close with our auto customers. We've seen rolling shutdowns and the auto plants that we serve, and that continues to persist.

When we came into the year, we started to see the problem. The problem seems to continue to move to the right. It's going to impact our third quarter. And the question remains how long into the fourth quarter that goes and does it extend into next year, are there going to be other supply constraints in the market, other materials that will provide shortages. It's a global supply chain. And so what's the next thing that we could run out of, that's what we're all watching.

But just staying close with the customers, and we do know there's pent-up demand going into next year that will help a lot of other markets that we serve. Think of the metals market, plastics, all those are inputs into the auto industry today. And hopefully, it provides another incremental growth lever that will be pulled as we move into '22. But there's -- everybody sees it. There's a lot of pent-up demand. The auto production today has continued to come down given the supply constraints out there.

Your next question comes from Ravi Shanker with Morgan Stanley.

A couple of follow-ups. Jim, I wanted to follow up on your comment earlier that throwing money is not going to solve the labor problem, which does make sense given some of the structural issues. But in the near term, I think a lot of the other industries are throwing money at the problem, whether it's trucking or fast food or retail or whatever. So I mean are you saying that you're not going to go down that route at all? Or kind of at what point do you do that? And also kind of how do we think about kind of revenue per employee in the back half of the year?

Well, it's -- I personally think that as I said, we need to look at -- fundamentally look at what we need to do to make sure that we have a content, happy workforce over the long period of time. And so that's what we're trying to do. I think that's kind of the plan in most businesses, whether it's bring your dog to work or whatever it is we need to do to make your job more fulfilling, that's great.

If I'm a trucking company or an intermodal company and I decide that the smart thing to do is to pay a truck driver $0.25 million a year to drive a truck and then as always happens in the trucking business, not maybe next year but the year after, when the bottom drops out and there's excess capacity all over the street and people are running -- driving trucks for the rates in order to put gas in the tank, that business model doesn't work so good. So we try to take a longer-term, more holistic approach to managing our workforce.

Got it. If I can squeeze in a follow-up. The other revenue was about over $103 million this quarter. Is that a good run rate to look at the back half of the year?

Yes, Ravi. So that was impacted by the intermodal storage fees that are due to the supply chain issues and the truck driver shortages that we've been talking about here. So does that continue into the second half of the year? I think it depends on what happens with the persistence of those issues. But that's really the fundamental driver here in the second quarter. And then, of course, you've got the quality impact that will hit other revenue in the second half. So don't forget about that as well.

Your next question comes from Jon Chappell with Evercore.

Kevin, just a quick one for you in your new seat. As you're going to these customers for the first time, what impact are Scope 3 emissions having either for their interest in using the rail to give a bit more of their wallet or from your side, pitching the rail in addition to your cost benefits, having emission benefit as well as an opportunity to take more business?

Well, I can tell you the environmental pitch definitely moved to the front of our marketing deck when we discuss with customers. And I think from the executive level down, it's starting to flow to the transportation buyers. They realize that's an initiative coming from the top. It's a high priority and we're an easy solution to solve for that. So it's something I've asked the sales team to continue to press. We are incorporating it in every discussion we have going forward, and it's resonating quite frankly.

And so it's huge. When I think about all of the secular trends that are going to help CSX grow going forward, you have the driver shortage. I don't think it gets fixed anytime soon. That's a huge advantage of -- for us. We can supply capacity into the market. And then you have the environmental side, very, very powerful, and it will continue to grow. We've seen all the things that have happened in the market. Investors want it. Our employees want it and our customers and the consumer wants it. So it's something I'm incredibly passionate about. We're going to continue to sell it, and it's pretty exciting.

Have you seen it translate yet? Or do you think it's more of just like the immediate future?

I think it's always -- it's hard to measure if we win that business because we're more environmentally friendly than the truck. It's another reason we're winning business today. The other reason, obviously capacity constrained, we can -- we have capacity. We're going to continue to grow capacity. We'll recover. I'm confident our operating team is going to recover, and we're going to have the best -- most capacity to offer our customers going into next year. It's as simple as that.

And so all those factors play into why we're winning business, why we're winning in the market. But the tailwinds are there from a growth perspective. It's just my responsibility, along with Jamie, to go out and deliver on that.

Your last question comes from Jeff Kauffman with Vertical Research.

Thank you for squeezing me in. Sadly, all the intelligent questions have been asked at this point. But let me just come back to the customer side, Jim, because that seems to be a focus on the market side right now. If you had your ability to put all the people you want at the railroad today -- and you talked about the challenge in getting to the 500 T&E by the summer. But let's just say you could and you could fix that element of what's going on. How much of the service and the trip plan issues would that solve? Because when I talk to transport companies, they tell me, well, customers are holding onto equipment a little longer than they should or we've had trouble getting our equipment back or just timely handoffs with some of our other service partners. How much would be fixed if you had every asset internally that you wanted?

The employee issue, the train and engine service employee issue will clean up the vast majority of the issues we have that show up in what we call our trip plan compliance number, will improve our velocity, will drive down our dwell. There will still be the noise in the supply chain. That's not going to correct a shortage of chassis. That's not going to correct a shortage of containers or draining or a port congestion and that sort of thing.

But it will -- and so therefore, it's not Nirvana but it will certainly help us in terms of being able to improve the overall reliability of our product again and get a bit to where it was, so we can focus on making it even better and better.

Okay. So you would say the lion's share of getting to where you need to be is something you can handle internally with more resources?

Yes. I mean we've always said that. I mean we -- by changing -- fundamentally changing the way this company runs over the last almost 4 years now, we've freed up capacity across the network. We have a significant amount of track capacity so we could add growth without investing in track capacity. As Jamie said earlier, we have locomotives available. We have locomotives on standby. We have locomotives in storage if we need to use them.

So yes, the impediment to our performance right now is primarily, if not exclusively, I'd like to say it's primarily because certainly in this business, you have to throw in the occasional pandemic or hurricane. But primarily when we can hire, we figure out ways like everybody else in the country to replenish our workforce. The problem was we had a pandemic. We didn't hire during the pandemic because the business went away.

We have 7% of our workforce that retires every year. 7% of our workforce retired, we thought, okay, the business bounce back, we'll hire 7% of our employees back plus a little bit more to handle the growth, and they're not available. So yes, we'll fix that. It's just taking us longer than we expected. And when we get that done, the railroad will be back running the way it did before, and we'll get it even better.

Congratulations to you and your team in a very challenging environment.

Thank you.

There are no further questions at this time. This concludes today's conference call. Thank you for joining. You may now disconnect.