CSX Corporation (CSX) Earnings Call Transcript & Summary

All right. Good morning, and welcome, everyone, to our third session of day 2 of Bernstein's 39th Annual Strategic Decisions Conference. My name is David Vernon. I cover transports and airlines for Bernstein. Privilege to have Joe Hinrichs, the newly -- recently new appointed maybe not for -- fresh new.

8 months.

8 months in, CEO of CSX Corporation. Matt Korn from IR is also here in the audience who would like to catch up with him. We're going to jump right into Q&A here. You guys should be familiar with the drill by now. If you have a question you'd like to post it up to myself, so I can work it into the conversation, please do so. I've got an iPad here that will alert me to that. And with that, I would like to say welcome and thank you for CSX for once again supporting the conference. Jim was here for a couple of years. It's lovely to get a chance to meet you in person. Maybe you could start us off with some early sort of remarks around kind of the state of the business, how CSX is running? And what are you seeing on the demand side right now?

Yes, sure. So good morning, everyone. Well, on the state of the business, I mean one thing I'm really proud of is the work the team has done to bring our service levels back and now exceeding where we were when we kind of peaked at the end of '19 and '20. We've really worked really -- we've worked really hard to engage our employees and work with our leadership team to focus on improving the relationship with all our employees, but also doing so in a way that serves our customer better. And I was a customer for decades in the auto industry, and so have the other extent of this experience, which is rare for a real CEO. And so we've been very focused on our customer service metrics and our culture and our employees. And I'm really proud of the work that we've done. You've seen it in the results that the team has done a really good job of getting our service levels to levels we're best in the industry and really sustaining those so we can continue to demonstrate to our customers that we're committed to them and we're committed to the service levels and also committed to helping them grow their business and ultimately help us grow our business as well. So -- but of course, there's so much else going on around us. We you can't talk about the state of the railroad without talking about everything else that's going on, whether that's conversations in Congress about rail safety or whether it's all the media attention our industry has gotten over the last several months post the Norfolk Southern East Palestine derailment or other things like that. So our goal at CSX is to work together with all the stakeholders to be part of the solution and to try and be engaged in the conversation and work together to find solutions that can help our industry and ultimately help CSX as well. But again, concentrated on focusing on improving the employee culture and experience because our employees provide the service, leveraging our strong operating model that we have that's been in place now for at least 5 years, which we're really -- we benefit from and then also working really hard to focus on serving that customer every day.

So as you think about those 3 priorities you laid out, employee, service levels and then customer satisfaction. Has that really been the mandate that you've had kind of coming in as far as kind of the order of priority, given that you've been in the seat now for 8 years as the Board kind of brought you in, like what was the -- what was that checklist of things that they're going to be managing new towards? If you can think about the priority?

Yes, sure, David. It's a great question. So I had extensive conversations with the Board over many months, as you might imagine, because it's not common for the rail industry to bring an outsider in as a CEO. And I was happily retired. So we all want to make sure this was something we wanted to do and was going to be -- we were going to be aligned. And when I talk to our different Board members and I talked to every one of them individually. They were very proud of the work that had gone in over the last 5 or 6 years to put scale of railroading into CSX and the work that went into all of that. Of course, it was disruptive at first, but certainly as things have settled down. But they also noticed that we had all of these other stakeholder relationships that were strained and we had challenges, whether with the STB, our customers, our employees, the labor unions, et cetera, Amtrak, et cetera. And so really, the goal was to come in and work on those types of -- the things around employees, customers, all the other stakeholders and leverage the operating model that we've had in place to demonstrate its capability to do that. And so that was the -- that's not really a mandate, but that was really what we talked about was -- and I talked to them about we were going to focus on because we're a service business, we're going to focus on improving the employee relationship, culture, morale, attitudes because -- if you look at the data, the rail industry as a whole is towards the bottom of the S&P 500 and things like Glassdoor and whatnot. So how do we engage with our workforce in a new and better way to find solutions to make it better for them to help provide the service we want and also then focus on the customers and really get back to focusing on serving our customers. And my view was and our view, collectively was that the scale of railroading in itself has a lot of benefits. Obviously, the cost control, the asset utilization, improvements in safety, those kind of things, but employees and customers kind of sell down their priority list since we want to make sure they [rose] up there. So that's what we've been focused on, and the Board was very supportive. And I give kudos to the board for having the courage to bring an outsider in especially at this time in the industry. But I've been really proud of how our team has come together to kind of take those emphasis points and execute in a way that is in the service of our employees and our customers and ultimately, our shareholders.

And as you think about the relatively low-level job satisfaction in the industry, you've kind of led the way in terms of paid time off and some of the benefits renegotiation, all that kind of stuff. But granular level, how do you address that? Like if it's at that lower end of the S&P 500, like how long do you think that takes to change? What are the things that you need to do from a from a job definition or a role definition or a scheduling standpoint that would maybe alleviate some of those concerns?

Yes. I think, first and foremost, it's important that employees see in your actions and in your words together that they are important. One of the things that happened to our industry in labor negotiations last year, which was a 3-year contract negotiation of a 5-year agreement, which means we're doing it again in the next year, by the way, is that employees felt devalued as a whole because it took 3 years, it's a high inflationary environment. They worked through COVID. They didn't get any raises. So the impression the union employees felt from that was that they were devalued, they weren't important. And then the kind of the critical moment that kind of solidified that in their minds was there was a statement made in -- with the conversations with the President's Emergency Board and the national contract negotiators who are part of the consortium of the rail industry, that was trying to make the point that the union labor didn't contribute to the increased profits of the industry over the last several years because they were arguing they had, and they deserve an upside portion of that. But the statement was rail didn't contribute to the profits. I mean labor didn't contribute to the profit or something to that effect, which, of course, is not true. But then we got people rallied around that, right, see if they don't value us. So that's the backdrop. So what we've done, Jamie Boychuk and myself have gone out, I've been to 41 sites in my 8 months. Jamie's with me for most of those. We don't -- we just show up. We talk to employees. We don't tell them we're coming, we just go to a rail yard or a terminal and just start talking to people, what's on your mind, what can we do to help, what's bothering you? And early on, especially -- that helped me get a sense for where the priorities were in attendance policy, work-life balance, scheduling for the conductors and engineers, which is still a big challenge for us. Then the paid [indiscernible] that she became bigger as time went on because they've got -- took a life on his own. And there were a lot of smaller things that, frankly, we could take care of that would show them that we're listening that we care. And then we recently just did a survey with all our employees in March, I think -- and we got 30% of our union employees to fill it out, 80% of our management to fill it out. And we got a lot of feedback on how they're feeling and Net Promoters Score and all those kinds of stuff. And we also gave them a box to write in. We got 3,600 sometimes lengthy comments around things because I read them all. It's been a little time-consuming. But again, they have to see that we care and that our actions are responding to the things that they think are important, whether that's pay claims or attendance policy that we change other things. So it's really about actions, listening, connecting and making sure that in all of our conversations, we're prioritizing customers and employees so that people get that message consistently. And I'm proud of the work, we led the industry in paid sick leave deals and that's become template now across the industry. We dramatically changed our tenants policies. We've done a lot of other things, which is helping CSX in some cases, the industry move forward on this.

And if you think about trying to make some of that more tangible in terms of metrics, turnover, the retention of the recently trained and released into the wild conductors and engineers. Can you add any sort of color into that in terms of how you think you know what's working or...

Yes. I mean our attrition rate has come down, especially for the new hires. Now I think there's a number of factors that contribute to that. So we don't want to -- I mean, the contract getting settled helped because it gave certainty to kind of that piece of it. The general economy overall isn't what it was a year ago in trying to hire people. But clearly, our culture improvements and the work we've been doing is also having an effect because we're hearing it. And also it's probably more prominently playing out and attracting people as opposed to retaining. I mean we're getting more candidates for job postings that we do than we did before. And a lot of them tell us because they see what's going on at CSX or they're intrigued by what's going on at CSX and they hear what's going on at CSX. But that's also management and union side. So that's encouraging. But yes, so our kind of high-level attrition rate of our experienced employees hasn't really changed a lot. Our attrition rate for our new hires, so the first year or so has come down, but still higher than we want it to be. And again, I think it's a lot of those factors that are all contributing to it. But the most important thing we can do to help with that really is make it an environment people want to be a part of. And you go back 8 months a year ago because there were so many -- so much negativity, the contract negotiations, all the other things, new hires, we'd hire them. They come in, they said and they get a lot of negativity and angst when they got to work, like, "Oh, maybe I should -- this isn't the place for me or maybe I should rethink what I'm doing". And we have a lot of people tell us [indiscernible] because people told them [indiscernible] don't work here. [That's that] Net Promoter Score and all that kind of stuff. So we've seen some significant improvements there. But there's a lot more work to be done. And on the work scheduling, life -- work schedule, life balance thing -- work-life balance thing. That's still a big challenge for our team employees, conductors and engineers because we're not a stable, predictable, not always, but it's stable and predictable. But I will tell you that the network running a lot better right now over the last several months is helping that situation because oftentimes, when you're all gummed up and things are not running very smoothly, the employees get stuck somewhere. They time out, they need rest or they can't get on a train to get back home or whatever. And those numbers have come down dramatically, which is again helping this whole feeling of my work-life balance and scheduling to challenge. But there's still a lot of work for -- and you'll see a lot of our a lot of the other railroads trying new things on the scheduling side especially because we've got to find new solutions. We certainly haven't found the answer yet, but we're making progress.

Okay. And as you think about the rate of service recovery at CSX. I mean, CSX has kind of led the industry back from the service challenges. What's been the secret sauce, if you will, to that rate of recovery? Is it just getting ahead of the hiring thing better? Is it?

Yes, there's a number of factors. I think, first and foremost, we have an operating model that when it's manned and when the people are motivated can run well. And we have, as I said, 5 or 6 years now stability of running this operating model. Certainly the manpower hiring helped a lot. If you look at our service level, they started increasing also early on, I think, due to this feeling now of appreciation and recognition that we're going to start working on the issue. So it's all of those factors. It's making sure the employees feel valued and listen to in solving their problems. It's the manpower training and hiring we've done, certainly, and it's also leveraging our operating network. And if you look at the data from last fall, we started seeing improvement in our service kind of a little bit ahead of where the manpower was growing, but the manpower was certainly a critical part of it. And we're not yet where we want to be with the manpower. We're about 100 T&E employees short where we want to be. And so we're still hiring and we're still training a lot and more to do there. But very pleased with kind of how the team came together to commit to these higher levels of service and sustaining them.

And as you think about having kind of gotten to the end of the pay time off in the sick leave, I think you guys have pretty much everybody covered?

Yes. We've got 2 more unions left on the [table] and [indiscernible], but we'll get there.

When all of that's in place, and we are adding some resource in here, -- is there a cost penalty to this? Is there a margin penalty for this year that we should be thinking about? Or is it not the right way to think about it?

Yes, the -- well, it's not exactly, I think, the way to think about it. But there is -- obviously, there is some cost to it. Sean Pelkey, our CFO in the last earnings call, said net $1 million to $2 million a quarter of our paid sick leave. So in the scheme of things, it's real money, but it's not -- but the benefit we get for resolving this issue, making it a more desirable workplace to be in, the morale of our employees, the [indiscernible] of our employees, we think far exceeds the cost that comes with that. And we get -- again, the biggest efficiency we can get from our business on the operating side is how the network flows and how fluid it is. And it's the employees who make that happen. Obviously, having a good network helps [indiscernible] employees. And if they have the right attitude and the right morale, they can make that system work. [Commercially], if they're doing disgruntled or not appreciated or not valued or unhappy or they can really slow us down because our network as a service business, it's all about people. And I remind people all the time in our business that oftentimes, we -- it's not the world I came from where people were tied on assembly line. They're out -- it's a lot of discretionary effort. If they want to move 10 cars or 100 -- switch 10 cars or 100 cars, they can probably make either of those things happen or when they're out in the road, we don't -- they're on a train, we don't even see them. So I think it's critical to understand that having people with the right frame of mind to deliver for the customer and deliver for the company is really critical. And resolving this paid sick leave issue and the attendance policies and it all contribute to that attitude and that morale that you want to have to attract and retain people, but also on their effort themselves.

Okay. So network is running pretty well. Services is running at good levels. Macros maybe not cooperating. How are you thinking about the volume outlook on a 6- to 12-month view? And then I do want to spend some more time talking larger about more -- at a bigger picture level, about growth prospects in the future. But right now from where you're sitting, how do you think the year is going to end up from a volume standpoint?

Yes. We came into the year thinking that we could grow volumes greater than the GDP forecast went up and then the intermodal continued to be softer than we expected. So in our last earnings call, we talked about -- we expect our ARPU to be up, the revenue per unit to be up this year and so far it has been. Our merchandise volume is up 3% to 4% this year so far year-to-date, which is great, driven by autos and coal and grain and metals and aggregates. And but intermodal is down over 10% or 11%, a lot of that is international intermodal. So what we see for the year is we think we'll grow revenue per unit. We believe we'll grow revenue per unit. So far, year-to-date, our merchandise volume has been up. That's been a good sign. We are seeing a little bit of sequential improvement month-over-month in intermodal and domestic specialty, but it's still very much depressed levels from where it was last year. And so one thing that we're going to watch for is does that -- some of that international intermodal come back in the second half of the year, which people are expecting it to, but that's an open-ended question. And remember, Intermodal is 50% of our volume, but 20% of our revenue. So that's why the merchandise stuff is so important on the revenue side, but the volume, a lot of that's driven by the intermodal. So we'll be -- the thing to watch will be does the domestic intermodal start to come -- continue its kind of monthly sequential improvement? And does the international intermodal come back in the second half of the year somewhat. That will help us out on volume side. But on the guidance side, all we said was that we expect ARPU growth, I think in the low single digit is what we said, and we're seeing that so far this year. But I'm really encouraged by the merchandise side of the business. Auto should be up for the year. Coal, I mean that pricing has been a little bit up and down, but it's still well above $200. And then you look at a lot of the other things like aggregates and metals and things that should be strong for the year. So Chemical is a little soft. [Pulp] and paper products are more soft than that and housing rate stuff has been a little soft. But in general, our merchandise business is doing very well.

And as you think about the knock-on effects of Norfolk not running well, right, their mid-American quarter has been running half speed for months. Is there a way to think about how much of that carload strength is maybe a little bit of a shared diversion? And is there a risk of that kind of going the other way of [indiscernible].

It's actually -- we haven't seen a lot of that in the short term largely remember, a lot of our businesses, we have contracts. So -- but we are seeing some share gains. We are seeing some wins when contracts expire and some of the contracts get redone. We're seeing some wins there we haven't been specific about it because we don't really want to talk about any of the customers, but we are gaining -- but those are contractual gains. They're not like short term, like for a month of the -- a date for the weekend. There's no question that customers are recognizing our service levels, especially relative to our competition and our coming to -- I've had CEOs fly down and seeing in [indiscernible] talking about how we can do more business together. I think it's going to play out over time a little bit. But there's no question that we're seeing more activity and having good conversations with a number of customers, and we've had some wins lately with business that wasn't ours before. You'll see that play out over the next 6 months to a year.

Okay. And as you think about maybe the long-term growth algorithm, the industry has not had a -- I would say it's had a very tenuous relationship with growth over the long run. Even if you separate out some of the headwinds from coal and pulp and paper and you look at the actual sort of carload volume, and that relationship with GDP has been tenuous at best. What do you -- why do you think that is historically? And what do you think changes to maybe improve that growth algorithm for CSX.

I think for -- I don't -- obviously, I don't have the history because I've only been here a little over 8 months. But I've been talking to people and learning and listening and getting educated. I think there's a number of reasons for that. I mean, certainly, obviously, CSX took a step back in '17, we introduced scale of railroading and kind of looked at all the contracts and the lanes and everything. And so what was profitable and what wasn't that kind of stuff. That's a piece of it. Coal is a piece of it, as you said. But I think, generally speaking, we haven't given customers the kind of service levels consistently at higher levels to have them motivated to work with us to find ways to do more business together. That's my theory. I have been on the other end of this, is that we never felt that the [indiscernible] rails were customer-centric enough to be able to be motivated for customers to say, "Okay, let's work together to find ways we can do more together". And where the trucking industry was very aggressive and very easy to meet your needs or even to go beyond. So that's why we've been so focused on getting to these higher levels of service and maintaining them and sustaining them. We'll have a challenge in the summer when we have a lot more vacations and holidays to continue to do that. But that's our goal and demonstrated customers, we're committed to this for the long term. That's it's who we are and one of our key principles and then leveraging our model that we have to be able to do that. We have more experience in the U.S. of the U.S. rails in the scale of railroading. We have more time doing it. We have more experience doing it. So it's an advantage for us, we think. And so I think on the growth side, what I've been telling all this, our major customers, CEOs or presidents, I have meetings with them or video calls with them is like we're committed to being part of the solution with your -- and so we'll show you we're committed to these higher levels of service will help your business run better. And then let's talk about where the art of the possible is. If you can count on us, what would be the business you'd like to have on rail? If we can -- if we sustain these levels of performance, what kind of business should be on rail for your company. And we're having some good conversations around that. And we have other examples where we've just gone -- the customers have come to us. We've gone to customers and said, "Hey, we're running better now, how about if we try different products, service, different service" and we've got a couple of examples we've had recently where we've been able to introduce new service because people got confident we'd be able to meet those needs with better reliability because that reliability thing is a big deal because if you're -- if they can count on us this month, they can't count on us next month, that's a big problem because we're such a critical part of kind of the cadence of how they run their business. On the merchandise side, I think there's some room to grow because obviously, the industrial development stuff is happening in Southeast U.S., and we're getting a lot of wins there. That will help us. On the intermodal side, we've had good service. Our service levels of Intermodal didn't drop off as much as our merchandise side did over the last couple of years. We've been growing until recently, especially on the international side. And for us, it's just we got to continue to execute and demonstrate our capabilities and then give confidence to our customers that they can count on us to give us more work. And we're seeing signs of that, but there's a lot more work to do because you think about our service levels have been improved for the last 5 or 6 months, but we had a couple of years there where they were not at the level we want to be at. The customers have good memories of that, and they remember it. So we've got to sustain this longer to be able to talk about growth. But I'm encouraged by what we're seeing, and we've got -- we've had some really good wins and some good example as lately we have customers saying, okay, we believe and we're seeing it. So let's -- because it's better for the environment, it's better for their cost structure if we can deliver for them. And so a number of customers have told us -- they told me and told us that we can help them meet their objectives if we can be more reliable and they can count on us because we're lower cost most of the time than there are other options.

So is service a sufficient catalyst to unlock that growth? Or do you -- I mean, I imagine there's more of a price-to-value equation to it as well, where if the truck market is super loose, it's a little harder to sell the service proposition versus if it's a tighter part of the year?

Yes, I think you have to kind of separate intermodal and merchandise, which includes coal and auto. On merchandise side, service is a big part of it especially you're trying to get share gains even from our competition, but also just how to help the companies run better, help us get there. On the intermodal side, we're not as exposed to spot rates as people think we are because we have contracts most of the time with our big shippers, our big customers on the intermodal side, but we are exposed somewhat to it. And over time, of course, you're all exposed to it because contracts come up. On that side of it, we'll have to watch and see what happens with diesel prices and also with the trucking market as things come back. But over the long haul, a longer distance, we're still cheaper than truck. And companies are also looking for more ways to demonstrate their commitment to ESG and our missions advantage is significant and we're helping customers to be able to calculate it, help them be able to use it in their materials, they put out every year on their commitments to the ESG, et cetera. So there are [vantage] we have and we can take advantage of. But to be clear, the issue with intermodal right now, I think, is more demand than supply, clearly, both on the trucking and on us. So as that comes back, I think we have some advantages we can take advantage of it. We're also trying new things like with quality carriers. The truck company we bought is specialized in chemicals. We have these ISO tanks coming in. We have 100 of them or so we have about 100 more coming this year, where we're introducing a new service, which is basically moving chemicals on an ISO tank, which we can do intermodal, and then we can -- obviously, it's traveling longer distance on a rail car as opposed to on the road, which is safer and it's cheaper in the total. And so far, we've had good experience. It's a slower ramp because people are nervous about all these kind of chemicals and things, making sure you can do it right. But we're excited about it. And the customers who have done it so far like it and are doing more trials, and we're building some momentum there.

Okay. So in talking about intermodal a little bit, right? CSX has probably the smallest intermodal franchise of any of the platforms. Is that by design? Is that by circumstance? And I mean how do you think about from a service design standpoint, participating more in that end market? Or is it a one of many priorities?

It's definitely a priority. I don't have the history to be able to explain how we got here. Obviously, Norfolk Southern and JB Hunt and [indiscernible] in Santa Fe kind of all came together and put together and JB Hunt has been the big growth engine in that side. So -- and BNSF has a strong intermodal franchise. So it's Norfolk Southern connected with. So there's that piece of it. So in the past, it appears that Norfolk Southern put a higher priority than CSX did. We had more coal business and stuff. So I'm not -- I have to go back and understand why some of the decisions were made. But it's definitely a priority for us. It's an opportunity for us. Schneider, who we are partnered with, we do a lot of business with JB Hunt, by the way, but Schneider it will be UP, which is a natural partner for us. So we'll see where that goes. The CPKC new dynamic is changing things a little bit. So we'll see how that plays out with the Western rails when it comes to intermodal. We've been really growing a lot, have a stronger international intermodal franchise lately, really working with the international shippers, the freight liners and the ports, and we've been seeing significant -- we have been seeing significant growth in the international intermodal business. And that's been a strength of ours, and I think you'll see that continue over the next several years. So lately, that's been more of an emphasis point for us, and we've had a lot of good wins there. You'll see that play out. So it's definitely part of our strategy to grow with Intermodal with international being a strong -- relatively stronger piece of it for us, which, of course, have been more hit this year than even domestic. But there's definitely a plan to grow. And we're going to watch all these changing dynamics between Schneider and J.B. Hunt, and we're very proud of our relationship with J.B. Hunt, too. CPKC now getting in the mix. And so it's going to be interesting to see how all that shakes out. And again, we get to lead with really strong service. On the intermodal side, General Commerce just did a survey of customers I think in the last few weeks, and they came out last week with their survey results, and we were rated by far the #1 railroad to deal with and from -- on the customers on intermodal. I think we got twice the vote from number two. So really significant achievement by our team, again, how we execute, how we treat the customer and how we're focused on it. So I believe that good service, good relationships done well and repeatedly will win us business over time, and that's what we're focused on.

Okay. So we talked about the operating and resource investment into the service product. What about the capital? How does capital play into the growth trajectory? Is that something that is done in advance of whatever grows? Or is that something that is done to enable growth? And how do you think about the application of capital to maybe accelerate the growth rate going forward?

Yes. So it's a little bit of both. I mean I gave the example of the ISO tanks, which is we're making capital investment, believing there's a service product tier that really has value between quality carriers and CSX. It puts more business on the rail, but it also connects with quality carriers. So it makes a lot of sense. That's an example of us investing. We're investing in certain car categories to increase our fleet, given where we see the market going in certain categories. So those are kind of leaning in. At the same time, we've been -- in one instance, we've won some more business, so we're working on getting more car availability for a certain sector. But our capital, if you look at it 2 years ago, I think in 2021, we spent $1.7 billion in capital last year, $2 billion in capital this year -- $[2.3] billion. A lot of that is driven by the acquisitions and investing in quality carriers and also in what was Pan-Am and now our New England region sort of getting that rail up to our standards and speeds and capabilities, which we're excited about that growth and then [expenses] in inflation. But our capital needs are pretty -- we see them being pretty steady now going forward. We invest heavily in our rail network where we have a really good network. I'm blessed with all the work that we did in the last several years to put it in place. So we don't see significant increased capital needs to grow our business because we have a lot of the cars and we have the infrastructure to support it. But we will invest, if appropriate and if necessary, to support growth with customers, and we've told customers that. And in some cases, we are doing that right now. But it's not significant. It's not like we can manage it within our spending levels that we're planning.

So investments in terminal throughput capacity, [indiscernible] cranes instead of [indiscernible]?

Yes. I mean we added a few cranes lately. We'll watch that very carefully. No new major intermodal terminals planned in the near term, but that could change, but that's not -- I mean, we have a pretty good network we want to take advantage of right now.

Okay. And as you're thinking about the idea of growth kind of coming up through this next cycle, whenever we bought them. Are you calibrating your volume growth against sort of economic activity? Are you calibrating it against market share? Like what's important to you, right?

Yes. We -- a lot of this is based on economic activity, industrial production and also the general GDP. That's one we look at very closely. We look at our share every week to make -- to see what's happening in sectors to make sure we're not missing anything and look for opportunities, of course. But a lot of us due to what's happening with industrial production, especially on the merchandise side and then on the GDP side, the intermodal side. As I mentioned earlier, we have a lot of new projects coming on our lines in our -- in Southeast -- just in the Southeast over the next couple of years, so we'll see growth from that. That's also going to be a contributor to our growth. But I think the big thing for us is to see what happens in the economy. We started seeing carload orders drop in September, October of last year. And they kind of continued to drop until December. And then we started seeing them come back a little bit, starting in January and February and through May on the merchandise side. So we kind of -- the way we see the orders, we kind of saw it kind of slow down and bottom out a little bit on the merchandise side in the third, fourth quarter of last year. And we've seen a little bit of it for our orders may not be true for the old economy, we're starting to see things come back a little bit. That's not true in the intermodal, as I said. But -- so we're watch -- we watch the orders. We watch the economic activity. It's clearly and reading everything we can into everything everyone else is looking at from inventory levels to et cetera. But generally speaking, we've been able to price beyond GDP or even inflation, and I think that will continue. And then we have to continue to deliver high levels of service to be able to support that pricing.

And as you think about the calibrating investor expectations for if the industry was growing sort of sub GDP, are we looking to get to GDP -- are we looking to get above GDP? How should we be thinking about that through the next cycle? Because obviously, new plant additions, right, adding a new steel plant in the Southeast means there was a steel plant somewhere else that shut down. Like it's not like -- unless we've all just are buying more steel for whatever reason, like how do we think about the calibration around what your expectations are for growth out of the network?

Well, as I said before, we came into the year kind of expecting to be able to demonstrate growth beyond GDP. That's a combination of what we were expecting to see in the network, our own performance and also the activity around us. That would be nice. We're more likely to over time, look at industrial production and try to exceed industrial production numbers. This year, they're supposed to be down. So that's not exactly the most exciting thing. But looking at industrial production, combine that somewhat of what's happening with GDP and somewhere in that range. But we -- there are great questions around growth as I believe that in this industry, we have to demonstrate for all the reasons that we know that we now have the capacity, the operating capability and the desire to profitably grow. And for me and our team, the belief is that it starts with having your employees on the same page and motivated and inspired to provide that service, I think consistently providing that service. I know I've said a lot of time. It's really important because we haven't demonstrated the capability to do that and get customers then confident in us to be able to be willing to trust us again those things in the periphery, it should be on rail that are on truck, come back to rail because they believe that we're now going to be -- they can count on us. And so that, along with the industrial production growth happening and the wins we've had in our region and hopefully -- sorry, hopefully, intermodal coming back should provide some growth opportunities.

Okay. What about the margin side? Obviously, there's been a lot of discussion around PSR cut margins too deep. And now we're -- now we're going to have to undo that because we're adding a bunch of resources. I don't really want to get a debate on is PSR over or not. But as you think about margins in the context of growth, obviously, we're adding some more resources into down volumes. So there should be some latent productivity. But as you think about that boundary for where you'd like that margin level to get to, how are you thinking about the margin?

Yes. I want to state that I believe scale of railroading is here to stay. I believe there's a benefit in scale of railroading. We could talk about how it was implemented, and that some of the effects we're dealing with. But clearly, I believe scale of railroading is an advantage for CSX and something that we continue to lean into. Having said that, the incremental margins that come from growth of volume in our business are pretty substantial. So if we can grow, it certainly should be positive for margin. Yes, there is some cost of the labor contract and then some other things we've done of adding some costs, but those costs are not as significant as the benefits you can get from a network running really well. So when we continue to leverage the opportunity to run our network well, we should be fine on the cost side. And then if we can show some volume, especially adding a few cars on existing trains is like very strong incremental margins, right? And we can leverage scale of railroading, add some volume to existing trains, especially those incremental margins are pretty substantial. So the key thing is for us is going to be to continue to have the network run really well, which is where all the focus is and grow some volumes on our existing network and that should be supportive of margins, especially in a pricing environment where you can usually price above inflation. So -- but we have to demonstrate that we can do that. As to your point earlier, we haven't demonstrated that as an industry and as CSX -- [indiscernible] new and exciting things about this is that if we can show how to do that well together as 1 big -- 1 CSX team, as we call it, as 1 CSX team, can we show how to do this together, that's a pretty compelling and pretty interesting scenario that we can execute, and our team is excited about it.

And do you worry at all that when the growth materializes that you don't need to continue to add resource to avoid sort of service degradations and the industry has at this -- I was talking to the [clients] about this morning kind of a push and a pull, right? You get pulled along and then the volumes are there, so then you chase after it and then you plug up the network. And then as you're just as you're adding resources to fix it, demand falls off and then you're sending them back off to the furlough boards like that sort of?

Yes. We've got to get out of that cycle because it didn't work very well for us the last go around, did it?

We're into [indiscernible] for shareholders for 25 years, but.

I meant the last 3 or 4 years of COVID. Yes. No question shareholders have been rewarded. The -- but we are in a different dynamic, I think, with employees now with this generation of workers -- and what we saw in COVID is when we furloughed the mid-income [volume] didn't come back. So we're all obviously conscious of that. And a number of us, including ourselves, even back in October on our earnings call, said we -- our plan is not to breach of [indiscernible] next time if it was a slowdown. But yes, there probably could be some manpower resources if we get some decent amount of volume growth, but it's on the fringe. I mean, with -- if it's 100 or 200 more T&E employees in the scheme of things, that's not that substantial, and it would be for our employment base. On the capital side, our real network is in great shape. We have plenty of locomotives. By and large, we have plenty of cars mostly. And so I don't think that volume growth would drive capital investment, maybe some cars, if it's the right [wherever] sector it is. And if we add a couple of hundred more T&E employees who have got some volume supported, that's good margin business and frankly, a good business decision. The key thing is going to be for the -- 1 of the key things for the industry is going to be how do we handle -- if there's a more substantial slowdown, how do we handle our workforce. And I think a number of us have said, listen, we got to do something differently next time because we didn't serve the customers well during that whole time frame coming out of it, especially, and that's part of what we're dealing with is on this confidence side of our customer base, believing that we're there for the long term to support them to have faith in us to give us more work.

So have you done anything within the labor agreements or with the union specifically around flexibility and job assignment?

We're trying a number of things. We actually have some decent language in that regard. We're trying some new things, piloting some things. We haven't been really public about it because we've been trying to just work on it. And we -- but we need to do more -- we need to try some more things. We have some number of initiatives going on with the unions to try and figure out new ideas because if we keep doing to the same thing we're going to get the same result. Obviously, as I said earlier, having a network run well helps everything in that regard. But there's more to be done here. And I know UP announced they were trying some things with 11 days on, 4 days off. As an example, we don't have that, but we have 6 and 1 and 6 and 2 which you do the math, not that different. So we're trying different things and -- but there's more to be done here. I believe that the whole industry hasn't found the right solution yet, and we're all trying things. We're all going to learn from each other, but this is 1 area where we have more work to do for sure.

Okay. I want to spend a few minutes on the regulatory environment because obviously, you stepped in at a time when the industry has been challenged on a lot of fronts. And one of those fronts is let's say, a more vocal and agitated regulator. What do you see as the biggest sort of risks kind of near term on the regulatory front, whether it's the commodity classification that has us materials handling rules that may come out of East Palestine. The access proposals that have been on the table at the regulator set is now becoming their priority post-CPKC. How do you think about the smoothing over things with [indiscernible]?

Yes. So I think there's -- you're right, there's 2 different kind of groups, right? There's Congress with safety which includes FRA and STB -- I'm sorry, NTSB. And then there's STB. On the Service Sanitation Board, we have a really good relationship with them. We've been demonstrating what they've been asking for, which is sort of the -- so at the highest level, the STB, the last several years has been focused on serving customers better and all the complaints that are coming from shippers, et cetera. And we were relieved we're the only U.S. Class I that was released from the enhanced reporting by the STB because of our service metrics. And so they've been focused on improved service, which we've been focused on. So our approach has been, and if you want to do anything around typical switching or anything like that, it should be motivated by what your priorities are, which is service to the customer. So it should be triggered by service or you should be able to get out by better service or however it plays out because it affects capital investment, it affects a lot of things, depending on how this plays out. So we'll see how that plays out. But our view has been -- if your main objective here is for the rails to provide better service to customers, let's focus on that. And if you do anything, let's make sure that that's part of the overriding issue. On the safety side, I've been spending a lot of time in Congress, I spent a lot of time with Senators and Representatives talking about this. We want to be part of the solution. And as an industry, we want to talk about what we're for, the things we're for. Certainly, the new tank cars and the first responder training and a lot of other things we're very much for, and we're very supportive of. If you look at, in our view, the Safety Act and the Senate gives too much authority and it's like 35 secretary [indiscernible] shall do these things. there's like too much authority being given in the sector [indiscernible] to basically run the railroad. So we're working on that. [Hazmat] train definition is important because the -- that Senate bill went from 15 pages to 75 pages. And so we know what got added was adding more things in the definition of Hazmat, et cetera. So we're working on all of that, and we'll have to see how that plays out because there's a lot of ramifications to that. There's speeds. There's notifications. There's a lot of things that could overwhelm some of these small towns if we're notifying them so often, it becomes [nominal], they won't look at them like your [phone really has notifications] or don't even look at them anymore. So we want to make sure that we're doing the right thing to solve the problem. But our goal is to -- I think the industry will be better off when we're all set and done with this, I think we're already sharing more on the safety side than we were before, which is good. We need to do more of that. It's not an industry that shares a lot, frankly, testing on that kind of stuff. And so I think we'll get through it. I think the fines are going to go up and things like that. We're also in the bill. 2-man crew is not in the House bill. We haven't been pursuing that taking to go to 1 person crew in the cab and ground-based conductor like some of the other rails have because we didn't think we were ready for it. But we don't think that language belongs in a bill around safety, it's a union FRA kind of thing. So we're working the process. The House has been more measured and more waiting for ST -- NTSB to give them more input. So the house has been a lot more measured on this. The Senate is the one that's been so agitated and so quick to do things. So in the end, they got to both work together, and we're actively a part of the discussion to be part of the solution. But absolutely, our industry can and should get safer. And it has, over the last 10 years, but we can't rest on the fact that we've gotten a lot better. There's still risk and there's still things happening, and we need to work as an industry there to be part of the solution.

And do you think that will also require sort of incremental investment at the margin around [these] and more wayside detection equipment, more...

Yes, I think so. We've already anticipated that. So we've already -- we went and purchased 53 more wayside detectors, and we're now going to have our network, we will, on average, below 15 miles distance and in the high density lanes, like a little over 14 miles. So we're already investing in that because we think it's right thing to do. We're also investing in our automated transportation inspection equipment. So I think there'll be some of that. I don't think it's that consequential in the scheme of things. We're doing it anyway. The key thing is going to be there's also -- there were a lot of other labor things worked into that Senate bill around restricting allocations of time for work and stuff that we got to work through. So more to come there.

One of the questions in here from the audience is around inflation. As you're thinking about input cost inflation '24 to '29. We know the labor deal is what it is, and we'll be back at the bargain table, as you mentioned in another couple of months here.

End of last -- end of next year.

End of next year, a few months. Yes, not too long. Is there -- what do you see about the risk of the non-labor inflation side? Obviously, we're coming out of a very inflationary environment for everything, terminal labor for your contract terminal operators and intermodal, all that kind of stuff. Is there maybe some good news out there, bad news? Like how should we be thinking about the inflationary environment?

Yes. I think I think from what we've seen, hopefully, it's peaked. I think that's generally what the economy is seeing. The thing about rail ties and all that kind of stuff, I think we could see that those increases certainly decrease over the near term. We talked about labor already. I think we'll be in an inflationary environment, but not as high as we've been in recently, and we'll just have to continue to get more efficient to help offset some of that. But I think we're seeing signs that some of those pressure points are backing off which will be good for the economy.

Okay. And the second question that's here from the audience. If you think about the contribution of real pricing above inflation. Volume, let's say, you're going to do better, do whatever works to take that out of the equation. How do you think about that real pricing as a driver of volume growth over the next 5 to 10 years?

Well on revenue growth, it's been substantial over the last several years. I don't think that we'll sustain that kind of level of rate, but I think it can be a contributor. It's an easier conversation to talk to customers about price increases when you're providing much better service, they do go hand-in-hand together. So we're -- we've said this publicly. We've had a supportive pricing environment so far this year, which has been good. And I think if we continue to deliver like we're doing, that should sustain itself.

Okay. Coming up to the end of our hour here. I usually like to give you a chance to see whatever was in your mind about to investors about why putting capital to work at CSX is a good idea, given where we are and what your outlook for the company. So it's more to [indiscernible].

Thanks, David. First of all, thank you all for being here, and thanks for the opportunity. Thanks for the good questions. I mean from my perspective, we've done exactly what we said we're going to do. And so I think that builds credibility of our leadership team and about CSX. And we said we were going to work on an improving relationship with employees and provide better service to our customers and we've done just that. And we said we're going to work on being part of the solution on other things, whether it was the Amtrak deal with Golf Coast service or whether it's other things, we've done that. So I think we're building a track record as a leadership team of doing what we said we're going to do and leading the industry in many ways on a number of fronts. I think you should expect us to continue to do that. We have a very -- we have -- we believe, at least in the U.S. Class I is an industry-leading operating model, and we've got a great team, and we're building momentum, but we're nowhere near where we are, where we can be to reach our potential. So I'm still excited about the opportunity ahead. We've only just begun this journey, but we're building our credibility by doing the things that we're going to do and showing and executing on things that are meaningful to shareholders. We had record profits in first quarter, and we had record service levels to customers in the first quarter. And so I think those are good talking points about how we're building momentum in leveraging this great model that we have and engage with our employees to make that happen.

Excellent. Well, thank you again for coming again for the support of the conference. Thank you all for joining us.

Thank you.