Ladies and gentlemen, thank you for standing by. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Before beginning, the Company would like to remind you that the forward-looking disclosures have been provided on slide 2, and non-GAAP disclosures are on slide 3. I would now like to turn the call over to CSX President and CEO, Joe Hinrichs. You may begin your call.

Hello, everyone, and thank you for joining our conference call. I'm here with Kevin Boone, Jamie Boychuk, and Sean Pelkey, and we are excited to update you on our quarter results and share our initial views on the upcoming year. I first want to thank all our CSX employees for dedication as they work diligently on behalf of our customers through all the challenges and uncertainties that we faced in 2022. Because of their efforts, our network has continued to run safely and our financial performance has been very strong. We have accomplished a lot over the last four months since I joined the Company. This inventory my visits to our railroads out in the field, visit to our customers, our investors and our many partners in the government, we finalized agreements with our labor unions. We reached a positive solution for the Gulf Coast with our colleagues at Amtrak. And we started to make updates to the nuts and bolts policies on attendance and make a big difference for our employees' quality of life. I am particularly proud to report that our service metrics continue to show real improvement into the fourth quarter after starting a clear upward trend in the early fall. And we are very pleased this progress continued throughout this month. As we anticipated, our hiring successes have allowed us to deliver better customer service that will allow us to capture more business with more volume over time. Looking forward, we are focused on building on our momentum, leveraging our industry-leading operating model and growing this railroad. As we go through the details and answer your questions, I believe that you will get a great sense of the energy and optimism that we all share across the organization of the opportunities ahead for CSX. Now, let's turn to our presentation to review the highlights for the fourth quarter and the full year. CSX generated over $3.7 billion in revenue, up 9% from the previous year on 1.5 million carloads in the quarter. Revenues benefited from higher fuel surcharges, strong core pricing, and higher storage and other revenue. Operating income increased 7% year-over-year to $1.46 billion and our operating ratio was 60.9%. As we've reminded you before, our Quality Carriers trucking business adds roughly 250 basis points to our OR. Earnings per share increased 17% to $0.49. Quickly looking at the full year 2022, our revenues of nearly $15 billion were up almost 20% compared to 2021. Our full year operating income of $6 billion increased 8%. Excluding the gains from the 2021 real estate transaction with the Commonwealth of Virginia, our operating income grew in line with our guidance for double-digit growth. Operating ratio was 59.5% for 2022. Finally, earnings per share increased 16% in 2022 to $1.95. Now, let me turn it over to Kevin, Jamie and Sean for details.

Thank you, Joe. Turning to slide 7. Merchandise revenue increased 7% in the quarter, as a 9% increase in revenue per unit more than offset a 2% decline in volume. For the full year, merchandise revenue increased 9% on 1% lower volume. 2022 merchandise growth was driven by higher fuel surcharge combined with an increasing pricing environment as inflation accelerated through the year. Looking forward to 2023, we have significant network momentum as we began the year, and we expect to leverage industry-leading service into growth opportunities with our customers. This is reflected in our recent customer surveys where we have seen a significant improvement in overall customer satisfaction scores. We see opportunity for solid volume growth in merchandise for the year, led by continued strength in automotive, our growing export plastics business and share gains as customers respond to our improving service. This growth is likely to be partially offset by weaker housing-related and domestic chemical shipments as we start the year. On slide 8, you can see fourth quarter coal revenue increase 20% on 9% higher volume and a 9% increase in revenue per unit. Full year revenue increased 36% on 1% lower volume and a 38% increase in revenue per unit. In 2023, we expect export coal volumes to grow in both, met and the thermal markets. So, we do expect benchmark indexes to decline from the elevated averages of 2022. We're optimistic about the potential positive demand impact of China's reopening. While on the supply side, we have a new 4 million ton met coal mine coming online this year. We also anticipate volume opportunity as we lap 2022 issues, including reduced production at some CSX-served mines and capacity limitations at the Curtis Bay and Mobile export terminals. We expect domestic volumes to be low --…

Thank you, Kevin, and good afternoon, everyone. Safety remains our top priority at CSX and has been the foundation for our service restoration. As shown on this slide, a personal injury frequency index was flat from the third quarter and unchanged for the full year. The FRA train accident rate increased from the third quarter but improved versus the prior year. Most importantly, for the second year in a row, we ended the year without a life-changing event. These results were delivered with onboarding over 2,000 new conductors during the year and underscores the safety culture that runs deep within our One CSX workforce. Now hires learned the importance of operating safely in the classroom, but the most impactful lessons occured day in and day out on locomotives and in terminals working with more experienced employees. These daily interactions are reflected in our recent safety performance and emphasize the commitment to our operating safely at CSX. I would like to recognize the over 6,200 employees within CSX's engineering department, which set a record for the lowest number of train accidents in the department history. This is a true accomplishment, given the nature of their ballast-level work. In the year ahead, we will continue to instill the safety culture within our new hires, maintain that culture in our experienced employees and focus on the training and discipline we need to reduce human factor incidents. Moving to the next slide. You can see the success that our entire team has had in driving meaningful service improvement with a clear trend emerging around the middle of the third quarter as staffing levels at many of our locations reached key thresholds. Even with the temporary hit from the weather towards the end of the year, average velocity was up 11% sequentially in the fourth quarter, dwell was down 13%, and trip plan compliance improved by several percentage points for both intermodal and carload. This progress has not stopped as we crossed into 2023 with our service metrics continuing to trend towards pre-pandemic high water levels of late 2019 and early 2020. Our team is focused on improving network fluidity and delivering a consistent, reliable service that will encourage our customers to shift business onto our network, and the data shows that we are well on our way. Now turning to hiring. A robust training pipeline in over 350 conductor promotions over the fourth quarter allow the team to achieve our long-stated goal of 7,000 active T&E employees. Getting our resources to this level has driven the service momentum Joe discussed a few minutes ago. We will continue to support improved service into 2023. Going forward, we expect to stabilize active T&E headcount with targeted hiring continuing for key locations and to offset attrition. I will turn it over to Sean to discuss the financials.

Thank you, Jamie, and good afternoon. Looking at fourth quarter financial results, revenue increased 9% and operating income increased 7% to $1.5 billion as top line gain outpaced several expense headwinds that I will discuss in more detail on the next slide. Interest and other expense was $6 million favorable compared to the prior year and income tax expense increased by $15 million. The effective tax rate in the quarter was 21.9% as a result of favorable adjustments to deferred state taxes. Our expected tax rate going forward continues to be 24.5%. Fourth quarter net earnings increased 9% to $1 billion, while EPS grew 17%. Full year 2022 results were highlighted by top line growth of 19%. Operating income was up 8%, which includes a 4-point impact from the Virginia real estate transaction, resulting in 12% growth when adjusting for these gains. Let's now turn to the next slide and take a closer look at fourth quarter expense. Total fourth quarter expense increased $210 million compared to the prior year, driven primarily by higher fuel costs and inflation. Fuel expense was the most significant driver of $129 million due to higher prices. Labor and fringe expense increased $23 million as the impacts of additional headcount and wage inflation were partially offset by lower incentive compensation. PS&O increased $54 million, primarily due to higher operating support and terminal costs, which will remain somewhat elevated near term as operations continue to improve. PS&O inflation is also running around 5% and the quarter included about $10 million of expense from obsolete inventory and technology write-offs. Depreciation increased by $33 million in the quarter, which includes an ongoing quarterly impact of about $20 million related to the completion of a periodic equipment study. As a result of this study and a higher net asset…

Thank you, Sean. Before we discuss our outlook, I want to briefly touch on a couple of key ideas that we think about the ONE CSX concept and how it fits together with the fundamentals of scale railroading at the core of this company. This past year has seen a lot of commentary from many different parties about what scale railroading is and how it's supposed to work. For us, it really is quite simple operating philosophy based on the 5 principles that you see across the top of slide 20. The key, just as it is with the railroad network, is to keep everything in balance, optimize your assets and ensure you show respect for your employees; be disciplined in cost control; and maintain your client to good service. If you can't service your customers well and reliably, all the cost control in the world won't deliver a healthy growing business. CSX has been tremendously successful over the last several years as the company has undergone its transformation. In my view, we've done particularly well across the first three of these scale railroading principles. The opportunity for us now is to focus on getting to even better balance with those last two. We will redouble our efforts in serving our customers and ensuring that our employees, the people who are delivering that service to our customers, feel valued, appreciated and included. To address this and bring out the best of this operating model can deliver, we are building a One CSX culture that prioritizes our relationships and leverages our common goals. Whether you are an employee, a customer or a shareholder, you want a strong and thriving CSX. A healthy culture leverages that alignment to do better together. Under each heading, you will see a couple of the ways…

Thank you. [Operator Instructions] With that, our first question comes from the line of Amit Mehrotra with Deutsche Bank.

Thanks, operator. Hi, everyone. I wanted to ask about yields kind of on a consolidated basis for this year. Obviously, the supplemental revenue and fuel will be somewhat of a headwind. I guess, standing here today, would it be fair to say kind of yield will be flattish on a net basis? And Sean, I guess, if revenue is kind of flat, can you just remind us of kind of the cost that are in the system that you think can be reversed to maybe offset some of the cost inflation? Thank you.

Amit, this is Sean. Yes. So, in terms of the yields, I think Joe sort of laid out our expectation on the coal side, perhaps a little bit lower just looking at the comparison versus some of the record levels last year, fuel potentially a little bit of a headwind on a yield basis as well. We'll have a little bit of positive mix, at least in the first half here with the pressures on intermodal, specifically relative to the growth that we expect in merchandising coal. So, that's the yield story. And then, in terms of the costs, I think there's a number of different categories. Certainly, with the intermodal terminals becoming more fluid as some of that traffic moves its way out of the system and start spinning again. We should see some costs come down and the terminals are in very good shape right now. We should see reduction in freight car rents as our cycle times improve and they have already, things like overtime and ancillary costs related to the crews getting hung up last year with delays in service and then locomotive maintenance as we're able to spend the assets faster here. So, those are a few categories where I would say we ought to expect some improvement this year.

Sean, any numbers around that, though? I mean, in terms of -- I know you've talked about $40 million a quarter, but any sort of quantification around some of those efficiencies -- inefficiencies?

No specific number, no. I mean, we're going to have inflation headwinds, right? I think, probably in the 4% to 5% range. And our goal is going to be to offset as much of that as we can, both through taking out some of those extra costs that we carried last year as well as continuing to find efficiency gains across the business.

We'll take our next question from Justin Long with Stephens.

There are a lot of moving pieces this year in the outlook. So, I was just curious if you could give us any directional color on the year-over-year change you're anticipating for both revenue and operating income? And maybe you could comment on what that trend line could look like throughout the year, if things are going to get better or worse? Would just love some additional thoughts.

Yes. Justin, we're not going to get specific in terms of the guidance itself. When you look at first half, second half, the volume comps on coal are a little bit tougher in the second half than in the first half. In terms of intermodal, Kevin talked a little bit about some of the headwinds we're seeing on the international side here in the first half of the year. Those are really sort of the big drivers on the volume side. And then, in terms of all the revenue, that coming down about $300 million for the year, obviously, second half of 2022 was higher than first half of 2022. So we'll be facing sort of a bigger headwind there. And in terms of overall operating income, I think we've laid out some of the factors, right? I think we feel great about our ability to recapture some of the share that we missed in 2022, given where the service product is, given that we've got the headcount that we need and we've got the assets that we need, which is why we're going to grow above GDP. We're going to see gains in merchandise and in coal. We've got a strong price environment. We've got the cost opportunities that I've talked about. And on the flip side of that, we have a few headwinds between the supplemental revenue, the other revenue piece, higher depreciation and probably lower real estate gains. So, those are the factors. But that being said, I think the fact that we are expecting growth. And as we add that growth to the system, we're going to add that strong incremental margins.

We'll take our next question from Brandon Oglenski from Barclays.

So, I guess, maybe piggybacking off that answer there, Joe. And I know you've only been there a couple of quarters now, but we've heard for a year plus that the real limitation here was headcount, resources and more importantly, service levels that you're delivering. I mean we're seeing that come through the data, I think, pretty strongly in the fourth quarter and as we start out here in January. So, can you talk to how you're going to convert that. And Kevin and Jamie, maybe how closely are your teams working together to ensure that you're growing in the right places? Because I think in the past, we've seen growth that can come in the wrong places and lead to even more op challenges for the other carriers.

Yes. Thanks, Brandon. I think -- this is Joe. First off, thanks for recognizing the pretty significant service improvements and operating performance that we're seeing continuing into January. Our team works great together. So for what it's worth, and clearly, Jamie and Kevin, their offices are next to each other, and they're talking all day long. I'll let them talk more about that. But you referenced the fact that there's been some conversation for quite some time that our challenges were manpower levels and then how that affected the fluidity of the network, we're seeing, as you just referenced, the performance that comes from game of manpower levels where we want them to be and running this network the way it was run prior to the pandemic, which is a very strong operating team. So, the conversion opportunity is to demonstrate some repeatability and predictability around our performance and to show our customers that we now only have -- we have the capacity in place and we have the performance to demonstrate that you should come back to us. And I'm feeling optimistic about that. And the conversations we're having with customers, they're recognizing the improvements that we've shown for the last several months. And they're also confident in our ability to continue that, especially now that we have the manpower levels where we want them to be. So, if you look at it, we're still not meeting all the demand that’s out there for carloads at our business -- for our business. And as we go through the year, we'll look for every opportunity to do that. I'll let Kevin talk more about some of the opportunities in the markets themselves. And then I'll let Jamie talk about the operations. Thanks.

Yes. Brandon, you did mention obviously, the remarkable improvement in our service that we've seen, and it's a real change, and there's a lot of excitement around this organization about it and what we can do going forward. Joe has brought both, Jamie and I and his teams together to talk about some of the key markets. And there's been a lot of interesting ideas that have come out of that where we can really leverage what we can do service-wise and what we can do creatively to create those opportunities for us. And those things are the fun part of what we do every day, and we're doing a lot less of that and a lot less of customer service and a lot more coming up with new ideas and having those discussions with our customers about growing. I'll tell you, I've had a chance to meet with a lot of customers over the last month or two. And every time, probably 90% of those conversations, we walk out with a lot more opportunities to pursue. Sometimes it means that we have to think differently. We have to introduce customers to what the intermodal product is or what we're capable of. And what we're capable of today is much different, obviously, than what we were capable of a year ago. And so, the team is getting together the whole sales and marketing organization. Jamie is going to spend time with them. I was going to spend time with them next week and it's off to the races. It's up to us to find those opportunities and really pursue them. But I'll hand it over to Jamie to talk about the upside.

I think really, the only thing I can add to that is there's a lot of capacity out there. So what Kevin and I talk about is where is that capacity, what can we do with that capacity, and how do we get out there and sell it. My team is out in the field, ensuring that they are talking with customers more than they ever have because they have time to do that. Previously, we were trying to find a crew to run a train here or there or wherever else. Now they have the time to sit back and deal with any of those customer demands that might be out there that helps Kevin and his team grow. Some of those discussions we have are what does the customer really looking for? Is it the right metrics that we're looking at that the customers are looking for and that first mile, last mile improvement that the team has been able to put together is really record-breaking for us. If I look back at the last 6 years, we haven't -- '22, unfortunately, wasn't the best year for us, but exiting '22 with our customer service and in '23 are some of the world record numbers we just haven't seen. So, our job is to keep producing those numbers and making sure Kevin and the team has what they need to get out there and sell and commit to the customers that -- what you see out there is what you're going to continue to see. So some great collaboration between our two groups.

We'll take our next question from Chris Wetherbee with Citigroup.

So I guess, thinking about the outlook and the optimism around growing merchandise and coal and good incremental margins with that coming on sort of compared, contrasted against some of these what are perceived to be very high-margin sort of revenue headwinds that you have, whether it be the accessorials coming down $300 million or the coal -- export coal yields coming down. When you think about those two relative to each other and the potential for cost out, I guess, any help in terms of how to think about operating ratio or the outcome of that whether it be maybe first half versus second half or across the whole year would be helpful. Just I think that perception of high margin on those headwind pieces is something that we're struggling with a little bit.

Yes, Chris. So, on the -- obviously, the coal yields, there's no cost associated with that on the accessorials. There are costs associated with congestion in the terminals as well as needing to rent out space at container yards to move those containers around. So, that's part of the, call it, $150 million or so of additional costs that we carried over the course of this year. So, some of that will adjust down. And then, as we grow the business, our confidence is in the fact that we can grow it at very strong incrementals. And so, you put those together, and I think the question around what happens to the OR really depends on how much growth can we convert. We talked last year about the fact that there was demand out there that we weren't able to meet because we didn't have the crews that we needed in the right places. We've got those crews now. So, there's a real opportunity in front of us.

We'll take our next question from Scott Group with Wolfe Research.

So, maybe I'll try it this way. How much volume growth do you think you need to be able to grow earnings this year? And then, it sounds like there's going to be some OR pressure this year. You've got some headwinds. I think that's understood. I guess, Joe, I guess, I want to understand, what's your commitment to longer-term OR improvement kind of beyond 2023, just thinking out the next several years.

Yes. Scott, on your question about how much growth, I don't think we're in a position to answer that one right now that you kind of run it through the model, but I think we've given you enough of the factors. And I think the fact that we sort of pointed to coal and merchandise as areas where we think we can sort of meaningfully outperform whatever the economic indicators that are out there is a reflection of the fact that we feel good about where we are from a capacity and service standpoint and the ability to sell into that market. But, we're not going to give you a specific number there.

This is Joe. On the OR question, Scott, I think there's a couple of points here. I'm very confident that our team will continue to deliver on the denominator side, operating improvements and continue to show strong operating results. On the numerator side of the equation, you're right in the sense that there have been -- there were some things that were strong tailwinds last year, the fuel surcharge, intermodal storage, the coal price, et cetera, and we'll see how much of that repeats in 2023. But that certainly helped the numerator side of OR last year and maybe some of those things won't be quite as strong in 2023. But having said that, on the numerator side, the volume growth opportunity that we can now go after with the confidence that we have in our operating model and our performance and knowing that for our customers who are feeling cost pressures and feeling inflation pressures and potentially even feeling effects of a slowing economy are going to be looking for cost reduction opportunities. And so, we feel very, very strongly that this year and beyond, continue to demonstrate the capacity that we have in our performance, the growth opportunity will be there for us as we earn the right to do that and get that business. And our customers will be wanting to do more business with us. In addition, of course, we have the environmental advantage of ESGs and emissions when it comes to rail. So, all that being said is we're not going to put a target out there for OR. We're very proud of our performance. I mean, last year, with Quality Carriers, we still had an operating ratio for the year under 60, so we know what it's like to -- and that was not at our optimum performance level as we all admit. So, we believe there is a strong performance inside of this company that will continue to be delivered. The uncertainty is around some of those revenue pieces in this year and beyond. So, our challenge is to deliver real growth in the business, which does deliver strong incremental margins and continue to control our costs, utilize our assets well. And so, that should lead to very strong performance within an operating band of OR that we'll be comfortable with. At the end of the day, this company is very focused on delivering margins, delivering growth with -- profitable growth with margin improvement, which should lead over time to a good OR.

Our next question comes from Jon Chappell with Evercore ISI.

Kevin, as we watch these service metrics improved significantly since really the middle part of last year, and is intermodal trip plan performance just consistently around 90 and industry best standards. It's a little confusing that even given the headwinds, maybe your intermodal volumes are running lighter on a year-over-year basis than most of the other Class 1s. Can you help us explain any disconnect between those improving metrics and some of those intermodal shortfalls that may be unique to you? And maybe that also ties in then to explaining a bit more on some of the strategic opportunities that you noted in your prepared remarks?

Yes. I think when you look at -- and look, three years -- or three weeks doesn't make a year, so we've got a lot of work to do as a team. But we -- I think you'll see over the last two years and through the pandemic that we really outperformed the industry and a lot of that growth that we mentioned before came on the international side. And we don't pay -- we don't spend a lot of time thinking about the other Class 1 railroads, but I do believe we probably have a little bit higher percentage of our businesses, obviously, exposed to that international market where we've had a great, great success, and we see a long-term outlook that's very positive for us. So, I think that's probably contributing to some of the things we're seeing here recently. But we've obviously had great performance and continue to think we'll win share in the market. The team has got a number of initiatives that will take form later on in the year and that will drive incremental business to the railroad. So excited of what we can do in the quarters ahead.

We'll take our next question from Tom Wadewitz with UBS.

I just had a clarification for you first, before the question. I don't know if I caught what your GDP assumption is or which forecast you're referring to just in terms of how we anchor to the volume comment? And then, Joe, I wanted to see if you could offer some more thoughts about your comments on relationships? And I think tying into labor, how do you think about how you want that relationship to change? Does that cost you something to do that? And what's the benefit over time? Is it just probably attrition is running 15% a year, we wanted to get down to 5%, and that saves us sort of help service. Just some broader thoughts on when you talk about relationships and labor, what do you mean by that? And how do you think about what that does over time?

Tom, on your GDP question, roughly 0.5% growth is the GDP number that we're looking at. And so our guidance is to grow in total above that with intermodal headwinds and solid growth across the other markets?

Yes. Tom, this is Joe. Thanks for the question regarding labor. So lots of thoughts here, but I'll try to be concise. First, just a reminder to everybody that this is a service business. And we provide our service to our customers. We move their goods from point A to point B, and we're proud of the way we do that. But remember that in the service industry and service business, it's all about the employees. You're not selling a product, you're not developing a product. You're really relying on your employees to represent your company in the service of your customers. I start there because that's so critically important to understand why it's so critical to have a really strong relationship with your employees, including those represented by unions because they are the individuals doing the work, providing -- moving goods to make Point A to Point B and serving our customers. And so, the motive here isn't to try and leverage relationships to try and decrease costs or find a dollar here and there. It's all about building a culture where our employees feel valued and appreciated, included in the service of our customers in a way that we can demonstrate that CSX is unique and different from the other options they have, and provides a value proposition to our customers that we think can be very, very special. And so, there's a lot of -- I've been spending a lot of time out in the field, Jamie and I travel almost every week. And as I've learned a lot about this industry, about this business, there's a lot of variability and a lot of independence when it comes to the work that's done now in the field, because this is not a factory assembly line where you're…

We'll take our next question from Ken Hoexter with Bank of America.

Hey. Good afternoon. And thanks for the rundown there, Joe. Just maybe can we clarify? Sean, I guess you're looking for volume growth offset by accessorial and cold yield declines, efficiency gains with service costs gone, but inflation up. But I just want to clarify, you're not specifically committing to income or operating improvement for the year, right? There was no outlook on what that means for collateral or the EPS line?

That's right.

And then Jamie, the on-time originations fell to 54%. I think they've fallen now 12 of the past 13 quarters. Isn't the whole name of the game of what you're doing with precision railroading to leave on time and get that moving? Maybe talk to me about what the network needs to do to fix that? And Joe, I don't know if you've come in what your thoughts are on operations, what balance of operations versus top line growth.

Okay. And you're right. The last couple of years, really, we've seen our on-time originations drop. And that's been -- it's been consistent, unfortunately, because of the manpower situation we've been in. I'm happy to say, over the past three weeks into this year, we started to get back up to our record highs. The team is hitting up over 85% on-time, which is great. It starts to get us balanced. And as we continue to onboard some more folks, we'll continue to get that driven up to that record of, I think, in 2019, where we're up around 89%, 90% on-time origination. And that's what we're shooting for. So, it is important. It's an important metric we'll watch. We made some decisions last year to back off a little bit on that, so we could connect as much traffic as we could and not leave things behind when we did have a crew and make sure we took advantage of that crew, and we maximized what we could on those train starts. Not saying that we're letting that go at all. We're going to maximize what's on each one of these trains that we run out there car-wise, but we've now got the people to balance the assets across the network, and you can see it. If you take a look at our velocity, and you take a look at our dwell numbers just in the past 3, 4 weeks, you can see that the network is running much more fluid. We hit that magic number just into the new year that we're looking for that 7,000 T&E count. And actually, as a matter of fact, we're at 7,100 today. And we're going to push that number a little bit more to cover vacation coming up in the next few months. So, we're going to make sure that we've got the right headcount. We're going to make sure that we've got the right people in the right places, and we continue to drive those metrics that will drive the rest of the service metrics. I mean, again, TPC, whether it's carload, intermodal, all the rest of it that you see that we've put out there, we're starting to get back to our -- as a matter of fact, we're beyond our record numbers on some of those service metrics. So, we're going to provide a product that Kevin and his team can go out there and sell and start growing this company.

Yes. So Ken, thanks for the question. A couple of just additional comments. We spend a lot of time as a team talking about our customer service metrics, whether it's on-time, originations and arrivals, whether it's in the last mile, first mile, those kind of things. And I'm really pleased with how the team is looking at everything. And we want to make sure that we're seeing the world through the lens -- through the eyes of our customers, which is why we get feedback on surveys. And Kevin referenced, we've seen the best results in our customer surveys that we've seen in quite some time. So, I feel really good about that. Now, the balance between top line growth and operations, I think they're intertwined. And I said this in October. I feel even more strongly about it now. We have a phenomenal opportunity here at CSX to leverage our strength in our operational performance that you've seen pre-pandemic. You're seeing now again to earn the right to talk to our customers about getting more business. And that is a lot better than chasing top line growth, and to be able to demonstrate that you can rely on us with our capacity and our service levels and our prioritization on your service to be there for you. And I believe very strongly, there's business opportunity there. So, we can allow that to happen naturally organically because we have a better product. We have a lower price than most trucking. And we have a better ESG solution and to do that the right way. So that's why we've been so focused on getting the manpower where it needs to be and really getting -- making sure that we're focusing on the right metrics for the business, and I'm really pleased with where we are. So, I feel even more strongly today than I did in the call in October about this opportunity. We can't predict what's going to happen in the economy this year, and that's part of what you're seeing in some of this dialogue is we're not exactly sure what happens in the second and third quarter. We're very pleased with how the year has started. However, we don't know exactly where the economy is going to go, given rising interest rates and some of the other things that are going on. Actually, you could say that in the data that we've been seeing that some parts of the economy started slowing down really in October-November. And we just didn't see it in our business because we couldn't meet some of that demand back then. But we feel really good about where we are. We're not going to chase top line growth. We're continuing to leverage our operating model, but we believe it's there to be earned, and that's the conversation we're having with our customers.

Our next question comes from Brian Ossenbeck with JP Morgan.

Maybe just on that last part about unmet demand. We heard that a lot across the different Class I rail conference calls. And is there a way, since you're counting on it and you're seeing some of it through surveys and clearly, the service has improved. Is there a way you can sort of try to quantify that for us in terms of what you lost or what you think is coming back with fill rates or anything else you can put around there in terms of a metric? And what gives you that confidence that you can count on that coming back, not just the interest level is there, especially when you have a softer macro and probably contract truckloads heading lower as well?

Yes, Brian. Hey, it's Kevin. I think Joe actually touched on this really, really well. And I think what's probably a little bit underappreciated what's happened in some of the things that we've seen in some of the major markets that we serve today is -- and I had referenced this previously on other earnings calls, we were in that 60%, 70% type of order fill rates pretty much through most of 2022. What happened starting in, let's call it, the late third quarter, fourth quarter in some of these markets, we saw those orders come down. And obviously, our fill rates kind of remained -- or on mix or whatever our volumes that we're serving for those customers remained relatively flat. And so, we saw our fill rates start to increase, and they're at higher levels now and the markets we see maybe the demand, what they're requesting is down 30%, yet our volumes are slightly down today. What my expectation is and what we're starting to see is that they've already overshot what they saw what would be a normal demand environment, and we're seeing order flows start to increase. And so, that's encouraging that it feels like in some of these markets, we've established the bottom. Anything can happen in the economy, but it feels that way as of right now, and we'll see how it plays out. But a point on that is as those ores come back and as we're able to meet that demand going forward, that would imply growth versus last year. And so, that's embedded in what some of the guidance that we provided today and why we have a confidence around accelerating or beating that GDP number is that we're going to go and capture those orders and those demand that the customer has out there this year with the replenished workforce and all the things that the operations team is doing.

And would you expect that to be more heavily weighted on the merchandise side because that probably was a carload before, or are you seeing real momentum on truckload conversion, maybe more on the intermodal side?

Yes. I think you'll see it really start on the carload side. That's where we -- when I referenced the order fill rates, that's really carload specific. You'll remember on the intermodal side, it really was an equipment issue. Good thing is those equipment issues, whether it's chassis, containers, I think we have plenty of those in most locations now throughout that market. And you've heard different commentary around that, but there is some softness in the truck market today. There is some optimism, hopefully, as we get into the back half of the year that that will firm up a bit, and we have every intention of taking advantage of that market as it comes to us. We have the premier service in intermodal and it's been reflected in our growth over the last couple of years, and we continue to expect to capitalize on that.

Our next question comes from Ariel Rosa with Credit Suisse.

So, I wanted to stay on that topic. You mentioned some softness maybe in the trucking market. I wanted to ask to what extent that's an impediment to intermodal volume growth. And then, in a more normalized environment, how do you think about CSX's ability to kind of outgrow GDP or maybe something around kind of the magnitude at which you could outgrow GDP versus this kind of loose truck market?

Yes. The truck market is obviously -- centers around our intermodal product. That's where we go direct with truck, not that we don't compete on our carload business as well, but that's where you see the sensitivity sometimes. In international market, as everybody is aware of, has been weak, and we've got -- we've had great growth there, and we have a great market that we continue to expect to grow over time. But, as I mentioned in my recent comments -- opening comments that that market probably will be down somewhat double digits in the first half of the year. And hopefully, as the economy stabilizes and there's some green shoots out there that we'll see some better growth into the second half of the year, at least, not the decreases that we're experiencing today. I think, every bit of intention here is across our portfolio that we're going to outgrow the macro economy. And I think there's a lot of things at tailwinds at our back. But we've had a huge success rate on our industrial development side. We have a lot of new projects that are coming online when you look out beyond this year. Big, big backlog, probably the largest backlog that anybody here can remember in a long time whether it's new auto plants, metals plants, all those across the board, we've really had a good success rate there, and that will give us growth going forward. So, our intention is to outgrow the economy. And I know that's not something that the railroads have been able to do. But I think there's -- with the service product that we're going to have, I think that's really, really possible going forward.

Thanks for that Kevin. And then just really quickly on some of those projects, any thoughts on kind of what the incremental margins could look like around that?

I think -- I don't know a business that we're bringing on where the incremental margins aren't very attractive and are in a very good rate of return for us. I put my finance hat on every time I look at the business, and we're not going to chase unprofitable business just to show top line growth.

And we'll take our next question from Fadi Chamoun with BMO Capital Markets.

Maybe first on those two boxes and the guiding principles, and Joe, you highlighted improving customer service and developing the employees. And especially with respect to some of the conversation maybe you're having with customers, do you feel that there's going to be a lag between when you start demonstrating the success on the service side and really penetrating that share of wallet with these customers, or do you think there is really a quick potential turnaround between kind of making those improvements in the time, that market share improvement? And second, maybe a follow-up on the test conversation with Kevin, now like looking over into 2024 to 2025 and assuming we're back into a normalized GDP, given the backlog that you have and given some of these initiatives and the investments you've made in QC and PanAm. Outside of coal, is there a reason why you can't grow volume mid-single digits as we get into this more normalized environment? Ex coal, obviously.

I'll take -- this is Joe. I'll take the first part and ask Kevin to take the second since you directed at him. From my perspective, the opportunity here to grow the business really comes from increasing that service product. Now, your question around the timing of that, it's all really individually dependent on each customer, where they are, where their cost pressures, where their capacity issues and what are they looking for. So, we can't use a blanket statement that if we demonstrate these levels of performance for three months, the next comes from it. Really in our conversation with our customers, it’s really around their confidence in our ability to be repeatable and reliable. And so the answer to that question is different for each customer. But I can tell you, they're all watching and they're all noticing and they're all letting us to know that they're really appreciating the progress that we're making. So, it will play out over time. But there's nothing inconsistent that we're hearing from our customers about their appreciation for it and recognizing how important it is. Kevin?

Yes. I think the question was, is there a reason why we can't grow mid-single digits. I think Jamie answered the question on the network side, we have a lot of capacity to grow into and it's -- we're going to use that capacity and go after wallet share with our existing customers and identify new customers. So, there's no constraints from that perspective. Obviously, that putting up mid-single digits volume and then with price is a pretty attractive algorithm, we'll see what we can do and what the market conditions are at the time. It's a more normalized GDP growth rate, 3% or 4%, then that's different than maybe 1% to 2%. So, we'll see how things materialize as we get out of '23, and '24, '25. The great thing is we have some tailwinds from new customers that will be on our railroad, and that will give growth above the economy, hopefully, that will add to that algorithm over time as we build the funnel of all the projects that we've been able to develop and that will be coming on line in the future.

Our next question comes from Ravi Shanker with Morgan Stanley.

Two quick ones here. First, you've said you can grow GDP plus. Many of your peers are using industrial production as a benchmark. In fact, I think one of them has come out and said a couple of years ago that they don't think they can grow faster than GDP going forward, and they think they can try and outpace industrial production instead. So, a, do you think GDP is the right benchmark for you and kind of what gives you the ability and confidence to think that you can grow faster in GDP in the long run? And just as a quick follow-up. I think you had said that incentive comp was a tailwind to numbers in '22. How do we think about incentive comp in '23? Thank you.

Yes. Ravi, this is Sean. So on your GDP plus comment, look, I think if you look historically and you run the correlations, our business tends to move more closely with the underlying IDP indicators, particularly across the merchandise segment, maybe a little more on GDP in intermodal. But you look at this year specifically, the projection for IDP is a decline and the projection for GDP is growth, and we think we can grow the business. So, it made a lot of sense this year to peg it off of GDP. On your question on incentive comp, I mean, the year has to play itself out. We always go into the year planning to hit the targets that we set internally. And so, on that basis, incentive comp would be down a little bit year-over-year versus 2022, but we'll see how that plays out as the year continues.

We'll take our next question from Cherilyn Radbourne with TD Securities.

A question on labor for me. Some of your peers have talked about taking a different approach to furloughs going forward, just given that labor has become more scarce and valuable. So, I was hoping you could offer some thoughts on how you would approach headcount in the event that freight demand surprises to the downside, so that you don't lose the investments you've made in hiring and training this year?

Well, Cherilyn, thanks for the question. We've got the same stance as we did last quarter. Our T&E workforce is not a workforce that we would look at furloughing as we move forward. We're future -- we're looking into the future, really important that we -- Kevin and I obviously are -- as we stated here today, work really close together to see not only what's happening today, but what's happening in six months from now, what's happening a year from now. We know that there's customers coming on. And you're absolutely right. The conductors and filling those positions takes a long time. It can take up to six months to fill a conductor's position. And we can pull the trigger. Look, if there's a downturn in business, we can use the attrition that's there, which is up to 10%. So, it's easy for us to hold back classes if we need to, to bring those numbers down and rightsize it if we need to. But as we continue to move forward, we're looking at continuing to build our numbers up so we can get to a point where we can cover vacation time and making sure that our employees get the time off that at times they've struggled over the last couple of years. So, we're very close to that number, as you can see from our results that we're quite happy that we're moving in the right direction with our service. And it's a commitment that we've made that we're going to continue to be looking forward and not doing any knee-jerk reactions and pull that trigger with respect to attrition if required.

We'll take our next question from Bascome Majors with Susquehanna.

Joe, last time you spoke with us on the October call, you had a few days on the job, that's a few months now. Can you talk a little bit about when you'll be able to -- or I think you'll be able to roll out your strategy to the Board and investors? And any events like an Investor Day, other format around that as you look forward to kind of getting to where you want to be to really kind of put your stamp on the business? Thank you.

Yes. Thanks for the question. Just first, from a philosophy standpoint, this is a really talented team. And so, we -- we're doing all this together as a leadership team. We get together every Monday, we talk about the business, go through all elements of it. And so I want to just emphasize that. I'm one piece of that team, but this is a team effort. I'm really proud of the -- to get to work with every day. It has been 4, 5 months since -- role -- fast together. But 20-some visits out in the field and all the other discussions with all customers and regulators and everything else. I feel like I'm learning very quickly, but there's still a long way to go on that learning curve as far as the core business. I'm really excited about the emphasis we have on the customer, and I'm really proud of the progress the team has made on the operating side. All that to say, I'm not sure that -- I'm not sure it makes sense to have an Investor Day just to have an Investor Day. We want to do that when we really have some meaningful things to talk about from strategy or technology or some other things. So, we trust that we'll do that at the right time when it can be meaningful and not just something we put on the calendar every year just to do. We want it to be impactful. We don’t want to take everyone's time and we want it to be important. As far as the strategy and discussion with the Board, I hinted this a little bit in October, but I spent a lot of time with the Board as individuals and collectively in consideration of doing this in their…

We'll take our next question from David Vernon with Bernstein.

So, Joe, I wanted to ask you a question on the intermodal share take a little bit differently. I'm just curious about your thoughts on what kind of targets you're going to be holding the team accountable to delivering over, call it, a 3- or 5-year view. As you step back and look at the intermodal market in the East, it's grown at about 38 basis points a year for the last 7 years. you guys are doing about 3 million units, and you were doing about 3 million units in 2015, '16. What should we be thinking about on a 5-year view about how much share you could actually put onto the railroad. Not looking at the guidance for this year because the economy is weak, and I get it's tough to forecast. But I'm just trying to think like what kind of target are you putting out there for the team to hit?

Yes. Thanks for the question. I'm not going to get into specifics about what our targets are long term. But just conceptually, let's talk about it. Just stepping back and learning about this industry and staring at it more closely over the last many months, even before I joined CSX. We interchange a lot with a number of our Class 1 colleagues. And so, this is an industry issue as well as a CSX issue, and that is around real growth, volume growth. So you referenced it. So how do we make that happen? We have capacity. We have a strong fixed cost base, a very -- a substantial fixed cost base and incremental margins are really good. So, that lends itself to really wanting to grow, like most businesses, those kind of -- and we have strong margins to start with. So, how do we grow? As an industry, as a company, I mean that's the discussion we're having and the opportunities we're pursuing over the next several years. So, from our perspective, we need to demonstrate to ourselves and to others that we can grow volume ideally above either GDP or industrial production, whatever, where do you want -- ways you want to measure it year after year and bring the margins that come with that to show growth in the business, not just on pricing, but also on volume. That is something we're looking to do, and we'll continue to challenge ourselves to do. With that comes the customer service metrics and demonstrating continual progression there in things like trip lane compliance and first mile last mile, but also in with the way the customers measure things. Are the MTs there when they need to be there? Did the load get there when they need to be…

Okay. Jamie, if I could just sneak a little follow-on in there. As you think about the headcount plan from where we are today, are you expecting to continue to grow it into the year, or do you think we've got enough sort of resource on the property to maintain the service improvements?

I would say we are continuing to qualify conductors every week. We still have another 600 folks out there in training out in the field and some in Atlanta. And what we're doing as we move forward -- now remember, the retention rate has not been all that good with the new hires. So, if we continue to work on that retention rate, and we have a 10% all out with respect to just regular attrition as we move forward. I'm looking for another few hundred folks onto our headcount to get us into vacation season as we move forward and some of the growth that Kevin and the team see as we continue to move into the year. So, I'm comfortable with the headcount we have now, while the vacation season is low, but over the next few months, we're going to see that spike come up. And the way that we are guiding into that or gliding into that, our numbers are going to be able to hold up for what we need to not only continue where we are with our metrics, but to actually continue to improve on them as we move into the year. So, we are -- it's probably one of the first times in a couple of years, I've been on one of these calls, and I can say we're comfortable that our headcount is at a good spot and continuing to move into a good spot as we move into the year.

We'll take our next question from Allison Poliniak with Wells Fargo.

Just want to circle back to that last question a little bit more. Joe, you had talked about some of the processes in doing business easier with rails. Could you maybe expand on that a little bit? Do you feel like in these customer surveys, the ease of doing business with rails is sort of a key limitation right now for some of that structural share gain? And is that something that's maybe within the next 2 to 3 years that you guys can attack that, or is it much longer-term opportunity there?

Yes. Thanks. It's a great opportunity. And we do need to make it easier to do business. We recognize and we referenced that in our commentary tonight. I mean you think about the level of visibility that we have in the rail industry compared to packaged goods and UPS, FedEx, those kind of things, we have to improve in that area, and we will improve in that area. It's an industry issue as well as a CSX issue. That's an example. How do we get even more predictable and give more visibility to our performance and et cetera. So there's a number of ways we need to improve to improve the customer experience in our business, make it easier to do business with us. Kevin referenced, we've got some new things in ShipCSX to help with calculations for emissions reduction and those kind of things. How do we keep helping customers get better and be able to use our systems better and be able to work with those better. There's a number of ways we can make that happen. At the end of the day, the thing they want most from us, of course, is to be there on time and to deliver on time and to be reliable in doing that. So, that's obviously where our focus is. But clearly, we can make it easier for our customers to do business with us, and we can provide more information and visibility and that's some of the things that the industry is working on.

Our next question comes from Walter Spracklin with RBC Capital Markets.

My question for Kevin, looking back now at Quality Trucking, I know this was a little bit of an experiment when you made that purchase, and I see in your CapEx plan you're devoting a bit of capital towards it. So just curious as to what your take has been on it now that it's been under your umbrella for a little while now. Is it by calling it out in CapEx, are you expanding the fleet? Are you strategically looking at growing your trucking operation relative to your rail operation? And could you be looking for any other avenues outside of the company and from an M&A perspective into that trucking space if you see those opportunities pop up here in 2023?

Yes. I mean, first of all, quality is a very, very unique asset in a lot of ways. First, it touches our most valuable market in our largest market, which is chemicals. And I can't tell you how insightful. They have different contexts than we do on the trucking side, where those purchase managers have never dealt with truck and introducing that product to them has been eye-opening and it's something very, very new. When we talk about the CapEx related to QC this year is really a rail product, it's not more trucks that we're investing in. It's the ISO tanks that go on the railroad. And I am -- if Randy was sitting here today talking about it, he is very, very happy with how it's gone so far. The customer uptake has been pretty incredible so far. We've seen a lot of success. And our only issue is we haven't gotten them fast enough. And so that's a good problem to have, and we're going to continue to take delivery of those. Randy has come from the trucking market for a long time, and he has even been surprised about the service product and how quickly we can turn these assets for him on each side. So, things have gone extraordinarily well there. The intermodal network is ideal to convert a lot of this traffic that moves over truck today. It's meeting the customer requirements, and we're getting more and more demand from those customers out there as it gets into the market. So, that's really where the focus and the uptick in the CapEx that we talked about earlier are coming on that rail product that we're extraordinarily excited about. And we just think that the chemical customers, in particular, are looking for a holistic solution and it's pretty powerful to go in there and be able to talk and look at their network and tell them what we think fits from a rail perspective and what fits from a trucking perspective.

And just when you think about quality, even on the operating side, we're utilizing our current terminals. And yes, that CapEx is exactly right, where we're buying the ISO tanks and we're preparing. But everything else is already there, that fixed asset is there. So, this -- when we went into this, Kevin and I were somewhat hand-in-hand looking at this business thing is this what we want? Is this going to work, and it's really falling in really well. And I would say -- on the asset side is just we didn't get the ISO tanks. We'd like to get them quicker. We'd like to get more of them because there's more business, I believe that Randy and his team can get working with Kevin and his team. And our intermodal terminals have the capacity and the trains have the capacity. So it's just -- it's a great product on the operating side and very easy for us to move as well. So it fits really, really well.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

I'll just be quick. Sean, you were talking about employee levels, and it looks like cost inflation on the new contract, probably around 5% per employee. Year-on-year employees about 7%, 8% for the first half of 2023. So if I look away from fourth quarter where the incentive comp helped lower that and I looked at kind of what's the right run rate for modeling for labor cost inflation. Should I be thinking about something in the high single-digit, 10-percent-ish range for the first half of the year before productivity offsets that?

Yes. Jeff, I think on a gross basis, right, on a full year basis, the impact of inflation on the labor line is in that ballpark, right, mid-single digits. And if you look at the headcount, if we didn't hire anybody additional all year long, we'd be up 4% year-over-year. Jamie talked about adding a couple of hundred to the headcount, so call that 5% up year-over-year. So, there's your 10%, but we are confident that as we -- as the network continues to spend, we'll be able to drive some efficiency on the labor line. We’ll also cycle, as you alluded to, the true-up that we had to make in the third quarter on the back wages. So, that will be a little bit of an offset.

All right. So that will be a little better in the second half. But I guess at the end of the day, how much of that labor cost do you think you can offset through productivity? Is there a target out there? Do we just kind of see what we can achieve?

Well, yes, we've got targets and we're going to reduce over time. We're going to reduce crude travel and some of the ancillary costs that go along with that as the network spins faster, and we'll be able to offset a good chunk of it, offsetting 5% inflation or sort of in that range and another 5% headcount would be a lot in a single year. So, we're on the right track.

Thank you. And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.