CSX Corporation (CSX) Earnings Call Transcript & Summary

We are actually back here and live. Welcome to the afternoon session here at our in-person 38th Annual Strategic Decisions Conference. Thank you very much for coming out. Thank you all. So the CSX, Jim Foote and Matt Korn are here representing the company. I really appreciate you coming out and joining us for the conference again today. You guys should all be familiar with the digital process. I do have a way to get questions from the audience up here. If you'd like to scan that QR code, we will work them in. And we're going to largely do this as a fireside chat, no prepared remarks. So again, thanks very much for taking your time to come up here and chart with us today.

Why don't you give us kind of your high-level view on the state of your customers' business, right? We're hearing a lot about storm clouds becoming hurricanes, the worries about the Fed, worried about the macro. When you sit back and look at the activity on your railroad, what you're hearing from your customers about the outlook, are we starting to see any signs of weakness or do you feel like we're still in a pretty good place from an industrial freight demand standpoint?

Thanks. Great to be here. Easy question to start with the state of the world who knows.

Exactly, first of all...

I'm worried about the 2 hurricanes that are actually coming towards Florida, not the virtual ones -- then one happened in 6 months from now. It's a little more difficult than normal for me and CSX to really have an assessment of our customers' markets because, unfortunately, we're not up against them as tight as we normally would be because of so many of the service issues that we've been having. We are not meeting the demand today. So when you are meeting demand and then you start to see some softness, whether it be a plastics guy or steel guy or chemicals or whatever you need you have a better sense. So as much as we're hearing from a number of our customers' concerns, rightfully, with all the chaos that's going on in the world today, they're still telling us we'd like you to move more than you are today. So because of the difficulties in -- on our side, the supply side, it's a challenge. But yes, we're hearing that. It would be -- everybody is talking about it. But I think we're still in a kind of an exploratory mode right now to see how things further develop as we progress throughout the year. We're still optimistic about the second half of the year. Nothing has changed there. So we'll just kind of unfortunately in a wait and see to give you better guidance.

Okay. So you mentioned you're maybe underdelivering relative to what true demand could be. Can you give us a sense for what's being not picked up or what's not getting delivered and whether you can catch that up? Or is this going to be stuff that you might be losing to another mode of transportation or demand destruction or shifts of sourcing, whatever it is?

All of the above, when we don't meet the demand our customers to the extent that they need to try to find an alternative, which is normally truck. And so I guess, the term that I use a lot is how much are we -- how much business are we missing, lots. This is not minimal. This is not on the fringes. We're not doing the job that we should be doing. And I would say, at least on the -- everything but intermodal, it's across the board.

Okay. And we've seen some recent announcements on new factory openings. So Kevin and the team and the industrial development team are starting to build the pipeline further out. Automotive is a big chunk of the business. Have you started to see any recovery from the chip shortages and things of that nature? Are you starting to start -- see that demand level come back up? Or are we still in a wait and see as far as kind of the auto parts?

Well, I think we're seeing gradual improvements, but they seem to be as challenged as everyone is every time we get guidance from one of the manufacturers in terms of what they're seeing over the next months. They -- there's changes to it. They get -- they tell us they think they're going to run one 1 shift, 2 shifts that we're going to be back in business and then we find out, no, we're shutting down. We can't get this part. So it's still very, very choppy, trying to understand that.

All right. I do want to start and spend some time on the service recovery issue because it is becoming highly visible, right? The regulator is getting involved, shippers are getting involved, it's getting escalated in the department of transportation, everything else. How do we get here? What's your -- if you -- and again, we're in a generalist conference. If you can kind of make it simple for us to understand like how do we get in the service problem that we're in?

We're not responsible for baby formula. I can tell you that right now. Everything else I've been blaming before, but not that one. It's coming. How did we get there? Well, in 2020 and early 2020, I had to make the call. When the world was going sideways, the markets were getting the circuit breakers were popping and nobody could give me any idea in any way shape or form what the world was going to look like, 15 days to stop the spread. Remember all that kind of great stuff, L-shape recovery, V-shaped recoveries, Ws, you name it. We laid off our employees because we didn't have -- we had no idea, we hung on to them as long as we could. We did everything we could possibly do. People make a $75,000 a year cutting grass, reserve boards. And it got to the point where there was -- when the auto industry shut down completely, I never, ever, ever anticipated, anything like that, and we started laying off employees. And we thought it would always be the case. Like it has always been in my entire long, long, long career in the railroad industry, haven't been laid off myself on a number -- in my early years, they would not come back. They no longer wanted to work, but they didn't like the jobs that the railroad industry provided. And not only that, that more and more people would be a leaving normally about 7% -- 6%, 7%, attrition rates, now 10%. So the great resignation, the difficulties in hiring, no different than pizza delivery drivers or whatever it is. There's -- it's a phenomenon that's not unique to the railroad industry. But what happened, we laid people off and all of a sudden, the business came flying back at us. And since then, we have had to reengineer the entire hiring process and find different avenues and different ways of enticing people to come to work in the railroad industry. And it's taken -- I mean, God, it was 1 year, 1.5 years ago when I said we're hiring on an analyst call. I can't remember what quarter it was, but it was 1.5 years ago, it says, we're hiring. And in only the first year, we've hired 1,000 people and have basically got to the point where we flatlined. We've hired 1,000 people and didn't make any net gains. So we're in a better position today. I think it's because we started a little bit earlier maybe than others did, but we're in a very good position today in terms of our outlook, the visibility that we have for the second half of the year and we need to get back to about 7,000 active employees. We're at about 6,700 right now. We need to have an environment where we don't have another surge of COVID cases in the second half of the year. And if everything continues from what I can see today, we should be our service metrics. When the velocity goes down, guess what, you need more people to run the employee. So it's a cycle of not enough people slowing the railroad down, meaning we needed more people. And so we've done, I think, the best job I can't say this enough. All of our employees, all of our union employees who have been out there every single day -- essential workers every single day throughout the pandemic working every single day, have done an amazing job. They're committed to our customers. And we'll get back to where we were. And hopefully, it's a matter of months now, and we'll start to see some improvement.

So you mentioned the attrition rates are maybe a little bit higher than you would have thought, and it's tougher to get these guys to come -- minimum to come back to jobs that overall is equal or pretty high paid and with decent benefits. Is there something that's changed about the way that the job is done in the field, tied to PSR that's maybe kind of made it harder for workers to want to come back? Or is there some adjustments you need to make in terms of the way you're operating the railroad to adjust that? Or do you just think it's more a function of kind of where we are societally in terms of the great resonation as you mentioned?

That's a very good question. I think there were fundamental changes in the way things were done at CSX, just like there were fundamental changes and the way things were done at Canadian National when we took it from the worst to the best. There was fundamental changes when I worked at Chicago, Northwestern when we fundamentally changed that -- turned that company around. But those changes happened in 2017, and the railroad is running extremely well in 2019. It was the best service performance in the history of CSX. I mean our on-time performance now, which has become in vogue trip plans. I mean, where do trip plants come from? That's a scheduled railroad concept. But now all the railroads have to report to the STB trip plans. We're off the charts velocity. So -- in -- my God, I can remember -- I remember at the end of 2019 going into early 2020, we were so excited about the outlook for the company in 2020, coming from '18 to '19, the first time we've seen growth in the merchandise business over all of the changes in the reengineering and the process work we've done to improve the overall performance and profitability of intermodal. I got the new team. We thought 2020 was just going to be -- 2020 was going to be a phenomenal year, who will take us really to the next level. And -- so the only thing that's really changed is I think it's going to take society in general, all of us a little while to recover from what we've been through in the last couple of years, get used to stand and in lines wherever you go and wait for somebody to wait on you because nobody wants to work anymore.

So you mentioned -- I want to talk about growth -- turn to growth in a second because I think you have a unique perspective on this, given your history at CN and now at CSX. But you did mention sort of PSR in there, and there is some talk, at least as I watch the service recovery hearings or the urgent hearings on freight service...

I wasn't invited, you remember that.

I remember that. I also was watching [indiscernible] cough syrup because I was -- I had COVID at that time. But there is -- this seems to be -- this idea out there that somehow PSR is the cause of the service problems. What's your perspective on that? What are people getting wrong when they make that logical leap? And I know it's -- from your perspective, it's kind of -- there's a lot of reasons why it's wrong. But if you could help us kind of understand it at a fairly basic level, like why isn't the operating model at least in part to blame for some of the service challenges we have right now?

Well, I don't know why you would run any kind of a business, whether it's a railroad network business and auto manufacturing facility. Why would you want to reintroduce -- why would you not want to take out all the inefficient unnecessary steps in the production process in order to do it. I guess you take the robots out of the auto assembly facilities and say it's going to be better. You would not auto -- would not change the way UPS sorts boxes in their facilities and it all be done by hand. Let's put back thousands -- millions and millions and millions of unnecessary work activities associated with running a railroad that doesn't have a disciplined scheduled operating plan that's focused on moving the car through the railroad, not the train. So I personally and I've said this many times, I personally thought of if the railroads had not done what they had done over the last couple of years, the railroad industry right now would be a basket case. That would be an absolute basket case. So I don't buy into that at all. People can come up with charts and graphs and stuff. I've never seen anybody that I know that knows anything about railroading and try -- and tell me that this is not the right business model to have to run a company like this.

Okay. And I'm not going to ask for when the service problems are resolved. But can you comment at least on kind of have we stabilized or the call-out rates coming down? Are the things that should make it easier to run on a little bit more effectively? Are those early indicators trending in the right direction? Have we bottomed? Or are we still kind of working our way through?

Every time I think we're at the bottom, there's a new bottom. I think I'm more comfortable today because we've started -- I believe we started -- first of all, from -- this is all based on a number of employees. I got -- we've got locomotives. We've got serviceable locomotives ready to go at any time they're needed. And every time they are needed, we put extra locomotives in to make sure that we're meeting the demand. We've got caught freight cars. There might be a spot shortage here, but that's -- to a large degree, all of the sizing of the fleets, whether the railroad fleets or product car fleets are based upon cycle times. If your cycle times slow down, you need more equipment. And that's what happened. There's a lot of extra equipment got shrugged into the network, which then slows it down more. So you put more cars in the network, you slow the network down and you don't have the employees to be able to bring back your velocity to add additional assignments. It's all about the number of employees. This is not complicated. And so -- now that we've -- and we hired 1,000 people and the headcount was still going down. So between the 350 people off on COVID in any given day in January, 10% of our workforce is saying we're not working here anymore. We added 1,000 people just to get back to where we now have stability. So our head count now has stability. The STB numbers recognize people that are in training. So it shows you we have people in the pipeline that shows we have 7,000 or more. And now -- and we have 6,000 -- more than 6,700 active. So we've got people in the pipeline. They'll be coming on in the second half of the year. So unless we have the next plague, the monkeypox here, so -- we should be good to go.

All right. Let's turn to that growth imperative because I think investors for lack of a better word have been enamored by the rail story because of the margin improvement potential in the business. And they've always been a question about the U.S. railroads and the ability to grow, right? How do we think about what makes it so difficult to grow volume in the railroad? And what are you doing to kind of address or accelerate that growth story? Obviously, the cost structure is lower so conceptually to me, lower cost structure, better service level, higher truck rate, you should be able to start to find some areas to grow. But it's hard to grow volume in railroad. Can you talk about why that is and what you can do at a company level to changing that?

Well, it's -- I think it's North America. And you remember way back to the early days of the Canadian National when we had an operating ratio of 100. And then it just go to Ottawa and get a check to cover the losses, and we took that railroad to phenomenal levels. It's a great company and begin to realize growth. Why did you begin to realize growth because you ran a better railroad. Why did all the traffic? They used to all this traffic that's moving all over the place. It used to be on the railroads. Why did it go from the railroads to the trucks because the railroad service was horrible. The railroad industry in the United States in 1980 was bankrupt. It was a basket case. It was a dysfunctional industry. 60 Class 1 railroads, all with CEOs and private jets and blah, blah, blah and the cars chipping over in the middle of the night with a little bit of wind because there was no infrastructure for it. Well, we've taken that industry in 1980 to where it is today, the envy of the world. And we now -- and in that process, we've lost connectivity. We've lost touch with the customer. And so we're now beginning -- now you can have a conversation with a customer about why we're relevant again and with the ESG and everything that's going on. If you can't -- with the service product that we had in 2019, which we'll get to at the end of this year, with the 15% to 20% cost difference that we have between truck cheaper. And with this phenomenal environmental advantages of moving things by rail versus highway, if we can't grow the business right now, then you got to get another management team. Don't go back to the model that was there in 1980, get somebody else in here that can figure it out of why we can't grow. But there's no reason in the world we can't grow this business.

So organizationally, is there a cultural transformation that needs to happen in terms of the way you're going to market? I mean I always had this view that in the '80s and the '90s, sales was more order takers than out really kind of developing relationships and building new initiatives to drive growth?

Bang on, bang on that's just -- we've just brought in a great guy, Steve, to transform not only just our digital footprint, but our business processes. My God, the other people in the world, whether they be digitally driven virtual trucking companies living in the metaverse. We need to get up to speed. We need to act together. Yes, we need to be salespeople. We need to be marketing people. We need to understand what our customers need, want and how to sell it to them. And that's -- when you're -- why are you an order taker when you don't have a product to sell. When you view yourself, I don't have a product. So I'm just a commodity. What do I sell? Price and it's a discount. Why am I selling it at a discount? Well, because I got an inferior product. I can't compete with the restaurant down the street, but they got people -- they got a line at the door. Everybody wants to get in there. Why do they have a line at the door? And I have -- I'm selling it for half of what they're selling it for. Why is nobody here? Well, because you're food sucks. Like go to that -- I'm going to go to that guy. So we -- we're in this next phase of the transformation. I don't call it pivot to growth. It's always been pivot to growth. You can't grow until you got a product. So we've spent way, way, way too long getting a product that's competitive in an environment where people want to use it. Well, let's get out there and get the business and grow it. and we have capacity. We have capacity all the railroad step. We've created enormous capacity by eliminating all this excess -- these work activities. We've got the infrastructure, which builds some technology that makes us more real-world virtual with visibility and get going and get some business. It's our time.

So as you think about the potential in the business over the couple -- next couple of years as you get that service level restored, what is the growth algorithm? Is it GDP? Is it IP? Is it some segment of that? Do I have to strip out core? Is it all growth? Like how do I think about -- what do you talk about with investors as the growth outlook? Like that. I know I got ...

Turn and burn. Let's go -- it isn't going backwards. How about that.

Okay.

Growth is like, let's not go backwards. Other than intermodal, everything has been going backwards. So our intermodal opportunity there is it continues to be phenomenal. We are so much more relevant in shorter-haul markets than we could before. Our cost structure is so much better in the intermodal space that we can do things that we never thought of doing before. And now with the carload business, one of the things from 60 years ago when people were building plants, they didn't build plants on the railroad. They built plant, they didn't go -- they used to go, "look, hey, give me we're fine on the maps in place where 2 railroads cross, and that's why I want to build my new plant." No. Now for the last 50, 60 years ago, find me 2 interstate highway systems and find me some land, that's where I want to build my plant. We've become disconnected. That's our whole transload strategy. That's our whole quality carrier strategy. That's our whole reload strategy, get relevant, get connected. And you have to do that. You have to be -- you have to have relevance with the customer. If it's once it starts in a truck, it's going to go to its destination in a truck, 9 times out of 10. So I think that the opportunities across every commodity who knows, utility coal, it could be back.

[ If that wasn't MCF ], I would imagine the next couple of years are fine.

Do not rule out anything in the world anymore. Anything that you thought was going away is now new.

Okay. So this is a little bit related to the PSR question, but it does feel a little bit like the alignment between PSR, how PSR works, and how shippers are used to accessing the network, has fundamentally changed a bit, right? You used to -- if you were scheduling around the plant schedule and giving 3 pickups a week and now you're pushing it to 2 because that's more efficient for the railroad that level loads the operation a little bit...

To never go from 3 to 2, unless you can meet the customers' needs. That's crazy stuff. That's crazy logic. If the customer needs 3 switches a week, then give him 3 switches a week. There's nothing in PSR that says, oh, we just like eliminate a switch, what the heck, who would do that? That's insanity.

I'm just -- this is a couple of the anecdotes that came out of the service hearing -- are being done right?

No. Well, yes, when you don't have employees, in the current environment, yes. And the reason that, that has happened to so many -- when you've got a train that leaves Chicago and it's coming down and it comes down on our network and it comes down through Nashville and it goes to Birmingham and it gets to Manchester, da, da, da, you get to Manchester. You got a train coming down there. And all of a sudden, you've got no crew, it's going to take it away across. Guess what you do? You take the guy that's working in the yard and say, I got to move this train, I got to keep this network. If I shut this thing down, this thing will come to all. So I take the yard crew when I put them on the road crew and I say, go to Waycross. Well, those guys were supposed to go out and do the switching, they didn't go out and do the switching. And that happens all over the place in order to keep the network fluid. In certain circumstances, there has had to have been a reduction in the -- in days of implant switching to make up for the shortfall of crews. As we hire back, we'll put back. If they need 3 switches a week, we'll give them 3 switches a week.

Well, that's what I was trying to get at, just that tension in terms of reshaping the way you're delivering the service...

That's not PSR. Let's call it -- well, let's the P stands for pandemic service response, then I would agree with you. Then, it is -- PSR it is. Pandemic service response, yes.

Well, just as far as kind of managing the attention around what customer -- the customer definition is service and your definition of service. It does seem like there's been a little bit of a shift in the way that's been evolved. It struck me in looking at the service review tapes that a lot of these shippers don't know what their service level is supposed to be. And I guess what I was trying to get at was, as you think about rail service and your customer relationships, is that definition of service is that service level is supposed to be uniform across every customer? Or should we start moving towards a world where it's more customer-specific definitions of service. The folks that can pay for more frequent service if they need it, pay more for it and you move to a slightly more differentiated level of an offer from a service perspective? Like is that somewhere where the railroad is going to move further towards?

I don't think we move towards that model at all. I don't think there's a situation where -- like I said, if a customer needs service in order for us -- for me to give him an empty car or the customer to give me a load then we should serve the customer. It's not rocket science. That's what we do.

Okay. I guess I was thinking, as I was again watching all the stuff...

No, there's a difference between day of the week pricing. But those are all based upon the market dynamics. I mean I run my railroad 50 -- Saturday and Sunday my railroad runs at 50% capacity. I've always tried to get customers to ship more products on Saturdays and Sundays. I'll give you a rate or maybe I have a premium rate on Wednesday, when I'm all jammed up. But those are just market dynamics. Those are not scheduled railroading things like, "Oh, my God, I'm going to only do this on this day, and I'm only going to serve this customer on that day." No, those are market dynamics. So you should be able to take advantage of the market dynamics. Yes, ship on the weekends, everybody -- but guess what, customers don't work on the weekends. Why am I only moving at 50% of capacity on the weekends or less because nobody is open. So to the extent that we can incentivize people to work more 7 days a week, that works for our network, and there should be maybe pricing dynamics to be able to drive that behavior. But that's the same as anything. Restaurant opens at 4:00 and says, "Come on in for -- you get the blue light special, yesterday's meatloaf $4 and all you can drain." Perfect. I know a bunch of guys in Chicago, they do that all day long.

All right. So it sounds like there's still room to then think about how to push customers to better access to railroad network...

I don't think it's -- we don't push them. We don't push customers. Come on, we love customers, work with customers.

Work with customers.

See you're learning. It's like pandemic service response and working with people now.

Well, there was the CN sort of way to do it originally and then the supply chain enablement version, right? We're working to make it a little bit easier for customers and work with them to adjust plant operations, service levels, agreements, things like that. I'm just wondering if you think that, that's some -- an area that...

That's clearly the way CSX would approach it. I don't -- I can't speak for the other railroads, but I don't think any other railroad would have a dissimilar approach. Prior to PSR, everybody thought, oh my God, the only way I'm going to get service is kind of a unit train, right? Everything was going to move by unit train. We're going to have unit trains of rock. We're going to have unit trains. We had unit trains of paper, unit trains of lumber, unit trains of this. What does that mean? Well, that meant whatever produced on Monday sat and waited and waited for what I produced on Tuesday that sat and waited. And then whatever I produced on Wednesday, that made up enough train, then the railroad would come over and it would run a unit train. It would bring it to destination and it would get there in 7 days, even though half the time the stuff sat there for the next 2, 3 days and didn't work. So the railroad industry sold this idea. God, I have a unit train. God, I have a unit train, all the customers want, oh, we want unit trains. We want unit trains. It was the most inefficient way to run the railroad network that was possible. And why does they sell it that way because if they took it on any given day, if they took the first 10 days cars from the first day, what they probably did is they took them to the yard and they sat on them anyway.

Yes.

They didn't have a scheduled railroad where those cars got picked up and they were on their way to destination. They were on that train the next day. They were in the city that they were going to before the third day block even came out. So by unwinding all of those old crazy ideas that were built up over a period of time when the core railroad, the merchandise business was always defined as what some random act of insanity that maybe sometimes your goods got to where they were supposed to be. So we changed all that, and everybody says that's a bad idea. So this is the way to run a railroad. This is the way to provide customer service. And this is what we're all focused on trying to do.

Okay. Obviously, however, you want to define it, the service levels have been a little bit weaker. How does that play into discussions?

I call it horrible.

Horrible. How does that play into discussions around pricing as we think about the next 12, 18, 24 months? Is there a period of time where you've got to kind of maybe bend the knee a little bit and be a little more accommodative? Or are you able to continue to kind of recover the traditional definition of inflation plus kind of pricing through this environment? I know it's a complicated question because it's difficult...

It's not complicated. I don't feel bad. I have a lot of conversations with customers, as you can imagine.

Sure.

I don't have a lot of conversations with the lobbying associations that work for our customers that spend a lot of time in Washington, D.C. They never talked to. So I don't know what the lobbying the Chemistry Council and these guys and those guys are thinking about and talking about. The customers I talked to, when I tell them that we are trying very hard, "they go, Jim, I understand and I know it." And so am I. My plant has been shut down. I've had -- I remember at the beginning of the day talking to customers, what's your vaccination rate, "Oh my God, I see my vaccination rates at 38%, mines at 22%. What are we going to do? I don't know how can we get through this thing." So we've been working with our customers throughout this process as much as they want. And they empathize with me, just like I empathize with them. And so I don't think anybody that in the railroad industry or in the shipper community, maybe in other parts of the world, looks at one another and says, you're horrible because you didn't plan for a pandemic. Nobody planned for a pandemic. So are we getting out of it? Are we getting back to normal? Absolutely. So I don't think this disrupts our normal business relationships. We're now in a high inflationary period. I should go to my customer and say, "hey, I need X just like you raised your prices. Why? Because your cost, your input costs are so much higher." So I don't see that as being disruptive and that we have to somehow I'm not on an apology tour. I admit 100% that we are not serving the needs of our customers. I'm not an apology tour because while we plan for everything under the sun, and we had books of contingency plans for every conceivable event that it might happen. Unfortunately, when I looked in January of '20, I looked we didn't have a pandemic book. And nobody said what we were going to do. And I don't know of any other -- unless they were alive in the Spanish flu that knew what to expect.

All right. And you mentioned it before the return of utility coal. As you look at the book of business, obviously, one of the big headwinds that were -- has been working through over the last decade has been the decline of coal and shift away. How much of a bounce can you -- can we expect from a volume standpoint? Is the actual mining infrastructure and the liner is able to kind of respond to this demand environment? Or are we going to be -- or is it going to be a little bit more ...

There was an enormous push. There was an enormous push to kill the coal industry. And to a large degree, there still is. And so a lot of coal mines went out of business. There was very little reinvestment. Thank God, there was some reinvestment by a smart able-bodied individuals that is now positioned the world globally to have readily -- to have available some level of coal to burn despite not very sophisticated energy policies. And so is that going to come back? I think we would all love to go to a cleaner, more efficient universe, but in the meantime, I think we have to make sure we keep the lights on. And so a lot of people are talking about that. And there's a lot of demand globally. There's a lot of demand globally for steam coal. So I hope our -- the producers here are able to meet the needs. So the lights don't go up. And I hope that we're in a position to move as much of that coal as we possibly can for as long as we can. But I think everybody realizes by now, that probably is going to be longer than what everybody was talking about a year or so ago.

And as you think about that recovery in demand, are you -- are the miners you're working with and the customers you're serving right now, are they gearing up to start producing more? Is that where they...

I think if they can, they are. Can even borrow money if they wanted to. Can even barrow money if they wanted to invest in a coal mine, if they wanted to.

So does that mean this higher energy price, higher export prices means it's more of a pricing story in the coal side than a volume story for you or for CSX?

We hope it's a volume story because I think we need coal. I think we need to produce energy.

Okay. Let's talk a little bit about the cost structure inflation. The labor contracts remain a state of negotiation collective bargaining. They've been asked to be relieved from remediation. Should we be expecting that there's a higher rate of inflation the next time the contracts get renewed coming out of this than there was maybe during the last couple of contract renewal cycles to address some of the things like turnover and ...

Well, you know me, I usually love to talk about just about anything, but this is one thing I'm not going to get into greater detail on the present state of our labor negotiations with our unionized employees other than to say, we need to get an agreement. It's been too long. They've gone too long without a raise.

Okay. Maybe how about inflation on the non-labor side of the business in CapEx? Should we be expecting that to be material in any way? Do you ...

I don't think it's -- I wouldn't call -- clearly, I wouldn't call it material. I mean, in some areas, meaningful maybe, but I mean it's -- we've done a very good job. We did a very good job of buying forward when we could. But some of those periods of time are going to lapse out. So we're going to manage through a period of time where our prices for steel, et cetera, are going to be higher than what we're used to paying. It's kind of like retro railroading. That's the way everybody has done it, right? There's always been business cycles where things go up, things go down, but nothing that's -- nothing is going to use your term materially change our CapEx outlook or anything like that.

All right. And then you talked a little earlier about the Quality Carriers acquisition. Congratulations on closing the Pan Am acquisition just a couple of days ago. Historically, the railroad industry has been shifting away from ownership of anything except for running trains over track, whether it's freight car ownership, Union Pacific Houston overnight, the short lines are all been short line from preceding railroads. Why is now the right time for CSX to be investing in those capabilities, those lower density section tracks -- sections of track or revert assets when before it wasn't right. Can you help us understand kind of what that -- what changed your...

Well, the business model, I mean, think back, I mean, when the railroad -- when the short line started, the business model kind of started up because the Class I railroads couldn't run the railroad -- the short lines more efficiently than the Class 1s foot. No brainer, right -- than a rail link. Why did they do that?

Lower cost labor.

Yes. So it was like spin it out. I'm a Class 1 guys, spin it up. They can do it better than I can. [indiscernible] right? Of course. And I'm not making any money out there anyway. I don't even ever sales guys that go out there. They don't even know what's out there, get sell to somebody else. And that's not the case anymore. We can run -- we're going to run Pan Am a lot more efficiently than Pan Am was run as a stand-alone entity as simple as that. We have -- they have exceptional employees. We have exceptional employee base and by putting the 2 together, got to bump a little money into the infrastructure, but that is a good return. We've got a great customer base up there. I was a little skeptical at first when the idea was brought to me, I thought, "Jesus, I thought all those plants shut down." They don't know they've all been refurbished. They'll make something new now. I would, wow, okay, start looking at it. Now there's a lot of business up here and started to talk to the customers and they went, yes, single line -- do we want a class -- we bought that railroad even though it took forever to get it approved. We had not one customer opposed to it. Not one customer association opposed to it. They wanted a Class 1 railroad to come up there and serve them and connect our network because they see a tremendous amount of opportunity. So we can run it more efficiently. We can put in our systems and technology that will make it light years different than what it is today and get light years better as we improve -- continue to improve ours and grow the business. And so it was a unique yet simple formula, and that's why Pan Am made it similarly with quality by marrying the 2 companies, great, great, great quality carriers, great company, great employees, great customer relationships. All of the customers that we already did business with. And by marrying the 2 franchises together and being able to leverage the over-the-road part of their trucking operation to convert it to rail, we thought -- both companies quality in CSX, thought it was a great idea. And the customers thought it was like, "Wow, why hasn't somebody done this before." So the right boxes you need to check to say, why would you do something like that makes all the sense in the world. And one thing I said to my team -- I don't know what your time here -- one thing I said to my team was there the railroads have tried this thing in the past, and it's always screwed it up. You guys in the railroad, you leave those trucking guys alone. They know how to run their business. In fact, we can learn a lot from those guys, and we have already. It's great -- they have a great management team. And our goal is just to make sure that we don't repeat bearers that have made in the past by the railroad saying, "Oh, let's buy a trucking company and then we'll go run it like a railroad." Well, that didn't work out too good.

So I do want to talk a little bit about on the regulatory front? It does seem like tensions are high associated with the service issues. And just the overall economic or I guess, political environment. What do you think comes out of these hearings on service? And do you see any way to kind of move this towards less of a witch hunt more towards a collaborative effort around some of the specific -- supply chain specific problems that are out there?

Well, first thing, I think -- I don't know who came up with this, but it's a great -- maybe Kevin at one of his conferences or something like that, said, our interests are not on aligned. What the STB wants, what the customers want and what the railroads want is all one and the same thing. We want service. We want service, they want service and the regulators want us to serve the customers. So we're all aligned. And I think there doing what they should be doing oversight. Saying, "all right, we want service, you want service, they want service, but you're not providing service. So when are you going to provide service, tell us how we can look at what you're doing, so we can understand whether or not you're actually making progress." So I don't have any problem with that. In fact, I endorse it. I don't -- given the metrics -- I look at the metrics aren't secret to anything. I don't know that anybody is measuring the same way or they're all going to make sense to anybody. I don't know even know -- if we know how to measure first mile, last mile. What does that mean? You're going to measure that, okay, here's what my measure I'm a 2 -- what are you? Lance, what are you? I'm a 4, oh, I must be a 3, I'm sorry. So everybody is going to have a different idea about what it means until we figure it out. But so -- I don't have a problem in any way, shape or form would with the oversight. The only time I have expressed my frustration with the process has been how do we fix the problem, let's put more trains on. Okay. Well, I need another 1,000 employees to do that. I can't get the people need, let's turn off Trip Optimizer, it will burn up a lot more fuel.

So are you worried about some of that sort of regulatory...

They're very, very -- they're very smart people. They aren't going to do something that's wrong. We'll just work through the process and we better -- like we better get our act together and do a better job.

What about the hearings on access reform. If that were to kind of go down the path that some of the shipper groups are pushing for, how complicating -- how much of a complication would that be for CSX? Obviously, you guys -- the industry would fight against it. But like how real do you assess this potential risk of the business around?

Well, pushing for rate relief that's what they want, right? Let's call it what it is. The shipper organizations are looking for a methodology to lower rates.

Wrapped in [indiscernible].

By adding, it's not to say what it is. You want to do this railroad to take it -- instead of taking it to where it's going, take it, switch it to another railroad, put it in a yard, let it sit there for a couple of days, let him switch it, put it on another train and then take it to another destination. By adding complexity, additional work into the network if that's -- that makes no sense. So I don't think -- I do have a certain degree of confidence that things that don't make sense, don't get put into law.

Okay. Did you -- are you worried at all though that the revitalization of these hearings and the emphasis being put on creating competition?

It was about 2 days after railroads deregulated, 2 days after 1980, when a paper mill in Appleton, Wisconsin, Mid-Tech.

Yes. Mid-Tech Paper.

Asked for the Soo Line Railroad to come in and service it instead of the Chicago Northwestern. Since 2 days after deregulation, the shipper organizations would have been trying to get this done under the guys of there was a service problem. And that was the whole guys of why the Soo Line was going to come in there and get the traffic Chicago Northwestern was handling because Chicago Northwestern service was bad. And it went to court, it wasn't bad. It went to another court, it wasn't bad. And it eventually got killed. And that's -- but this has been going on since 2 days after deregulation. Every time there's an opportunity, the lobbyists come out. Here we are again.

All right. We're running up to the end of the hour here. I did want to maybe give you one last chance here to talk about what you're excited about in terms of the opportunity for future investment inside of CSX, as you're talking to group of journalists, investors, what do you think is the reasons to be looking at the railroad right now?

Well, that's what I said earlier, the opportunities, it's our time. As simple as that. It's our time to finally start to grow the business. The opportunities available to us are large. It's a good way of term to use as opposed to my usual -- absorb it into whatever large. And we're well positioned from a standpoint now after doing a lot of hard work over the last few years to get our railroad act together so we can actually run the railroad so we can take advantage of this is fantastic. So I think, us in particular, but the industry in general is in a great spot.

All right. Well, thank you for coming out. Thank you all for attending us -- attending sessions this afternoon. And pleasure having you. Thanks, appreciate it. Thanks for splendid conference.

You bet.