CSX Corp (CSX) JPMorgan 2023 Industrials Conference Call Transcript

CSX Corp (NASDAQ:CSX) JPMorgan 2023 Industrials March 15, 2023 8:00 AM ET

Company Participants

Sean Pelkey - EVP & CFO

Conference Call Participants

Brian Ossenbeck - JPMorgan Chase & Co.

Brian Ossenbeck

Good morning. Thank you all for joining us here on Day 2 of the transport track of the JPMorgan Industrial Conference. I'm Brian Ossenbeck, I cover the group for the bank. Very happy to kick off Day 2 here with CSX and CFO, Sean Pelkey, also have Matt Korn and the audience from IR. So Sean's got some slides, they should be available online. You can watch them on the webcast. And let me just turn it over to him, and then we'll get into Q&A. If you have questions in the room, feel free to raise your hand, and we will get you a mic. And if you can't get my attention, just start waving and we'll get it to you because there's certainly a lot to cover, but I'll let Sean kick us off.

Sean Pelkey

Great. Thank you, Brian, and delighted to be here today to tell the CSX story, which I think is a really compelling story. I have a couple of slides, I'm just going to kick off with to take you through sort of the general landscape of where we're at. So beyond some forward-looking disclosures here, what I really want to start with is the 5 guiding principles that really undergird the way that we operate at CSX. And if you've been following CSX, you've probably seen these before. These are the principles under which sort of Hunter coined the term scheduled railroading. And Joe Hinrichs, our CEO of 6 months now, has really emphasized that we're going to build on the principles of operating safely, optimizing asset utilization and controlling cost with a renewed focus on improving customer service and value and developing employees.

And I would be remiss if I didn't point out the fact that the rail industry has been in the headlines the last couple of weeks, months, unfortunately, due to some safety issues and a significant derailment in the industry, but I wanted to talk about the first guiding principle of operating safely because I think from the outside in, sometimes it's underappreciated just how embedded the safety culture is at CSX. I can remember from my very first days many years ago as an office worker getting trained in CPR certification and getting out in the field and seeing how these safety briefings take place and how seriously are operating folks take this mandate to operate safely.

We have weekly calls -- network calls with operating folks, sales and marketing and support folks. And the first thing that we do is not talk about how is the business doing and how is the network doing? The first thing we do is we talk about safety. We look at any injury or accident that's happened in the last week. We dissect it and figure out what we can learn from it. And that's that culture of continuous improvement on safety that really is embedded at the core of what we do. There's been a lot of talk about the derailment in East Palestine. And I think anytime you have an incident like that, that's that significant in the industry, we have a duty as a company and an industry to sit back and say, what could we do better? We always have to learn.

And I think the positive news is that we've had hot bearing detectors across the network for several decades. This is a technology that's not new. And we've had algorithms that can help us to predict wheel bearing failures for over 15 years. We've made improvements to those algorithms. We are now sharing a lot of those learnings across the industry. And just last year, we caught about 1,000 of these across the network -- bearings that were heating up or that had reached the threshold and we set the cars aside. In some cases, those were false positives. In some cases, they were real positives.

So there's a heavy focus on technology investment for accident prevention, which is good for our communities, it's good for our employees. And importantly, it's the right thing to do. Last year, we had 1 wheel bearing related derailment. It was a minor derailment. It's 1 too many. But it just goes to show you that the technology underlying all this is working. We are filling in the gaps. We did some GPS location mapping to figure out where we had our hot bearing spacing. And on average, it's every 16 miles across the network. We're going to add a few of those across the network in areas where the spacing is around 20 miles or so to fill in those gaps and our average will be 15 after we're completed with that.

The other sort of proof point around the investments that we're making in safety. For a long time, we've had cars that go across the network and measure the track health. And there's usually a couple of those that are making their way around the network. They may touch different parts of the mainline network once a year, twice a year. A couple of years ago, we started introducing these autonomous inspection train -- cars that are actually running in revenue service. And so we are actually covering the vast majority of our mainline track every single week.

We're getting reports of track health and those are immediately being sent if there's an issue to the engineering department, who goes out and fixes these issues right away. So just looking at the data, you go back 5, 6, 7 years, we were running about 25 track-caused mainline derailments a year. That average over the last 3 years has been 5. Now again, that's still 5 too many and there's investments that we can make to continue to improve track health. Part of that is investments that we're making in the core infrastructure to upgrade it and use science-based principles to figure out where to replace track and ties across the network. And part of that is the continued evolution of autonomous technology to help those who are out there visually inspecting do a better job of figuring out where those issues are.

So heavy emphasis on safety, which I think supports network fluidity and ultimately helps us get to where we need to be to drive profitable growth. So let's turn to the next slide and see how the network is performing.

Again, if you've been following CSX, you've probably seen these numbers. I like to look at the trends, and we do this every week as a leadership team just to make sure that we've got our finger on the pulse of how the network is running. Here are 4 key metrics: velocity, dwell and trip plan performance across both intermodal and the carload. Those numbers that you're seeing there are just about the best numbers that we've ever seen across the network.

It began to improve in the fourth quarter when we were finally able to get enough train and engine employees to run the plan. I think that was the major issue that we were facing last year was when you don't have the right number of employees to run the starts that are dictated by the operating plan, then you're not running the scheduled operating plan that you need to run in order to maximize the fluidity of the network. We're now able to do that and you're seeing these cycle time improvements, you're seeing reductions in overtime, you're seeing crews who are actually able to get home to their families. They're not held away as much as they were last year, significant improvements and the customer is feeling that as well, which is a great new story.

I had the opportunity last week to have lunch with our service measures group. And this is a group of data scientists, data analytics folks who dig into this service data every single day. And I ask them, "Hey, all the measures that I'm seeing look really positive. What are you seeing? Is there anything that I should be concerned about? Any sort of canary in the coal mine type thing?" And the answer I got was pleasantly surprising. They said, "We are natural skeptics. We're always looking for that kind of thing, and we're just not seeing it right now." The network is not perfect. It's never going to be perfect. We operate with human beings in all-weather conditions and there's things that happen. But by and large, the network is running just about as well as it can right now.

And that is supportive of our ability to capture a lot more carload volume than we did last year. And so let's flip to the next slide and look at how the volumes have been tracking. On a year-to-date basis, we are down a little bit, but you'll see based on those gold bars on the left-hand side of the page, which is intermodal volume. Intermodal and particularly international intermodal is what's dragging down our overall volume trends for the year. That's something that we expected going into the year. It's something that our international intermodal partners were very clear about, very much related to an overbuild on retail inventories as well as uncertainty around consumer demand.

They still see this trend continuing for most of the first half of this year and then hopefully, it stabilizes after that. Clearly, the long-term growth perspectives for intermodal remain very strong for us. But that's dragging the overall volumes down. If you look at merchandise, which is the blue bars on the left-hand side of the page, we've had merchandise growth every single week. Overall, about 3.5% growth in this economy is something that we'll certainly hang our hats on any day. And that's even in light of the fact that auto is not running quite as strong as we expected it to be. It's still up year-over-year. But we've been hampered by some quality issues at a lot of the plants -- several of the plants that we serve with some of our largest customers. We should see that start to turn around in the coming weeks, and that will propel merchandise growth from here forward.

We've seen strong demand in aggregates, lots of municipal construction projects going on. We've had some good weeks in Metals. In fact, a couple of weeks ago, Week 8, we had our best week in Metals since 2015, so almost a decade high in metal shipments. We are running significantly better in grain. Cycle times last year were 18 to 19 days. This year, they're closer to 10 days, nearly a 50% improvement in cycle time, which means we're moving more volume. And you see that in coal as well. Now we're lapping some issues -- production issues at mines from last year. We're lapping the Curtis Bay incident. So the percent growth that you're seeing right out of the gates this year is not going to continue quite at that clip, but we do feel good about where the export market is at.

Utility is holding up so far, as we're continuing to do some restocking. Obviously, natural gas could be a headwind going forward. But feel very good in total about where we're at from a growth perspective. And if we flip to the last slide here, as we sort of take this foundation of operating safely, controlling costs and optimizing asset utilization, that's really ingrained in our culture, and we think about how do we use that foundation to drive profitable growth. We need to make sure that we have measures -- incentive compensation measures that are aligned to that goal. And so at the beginning of last year, we introduced a measure of economic profit, that's called CSX Cash Earnings, very similar to EVA with a few small differences. But the punch line of it is, we've got to be a company that continues to focus on cost control and asset utilization, while also figuring out how we can stimulate investments and innovation, technology that ultimately will position us to grow profitably in the coming years.

And we're not talking about significant increase in capital by any stretch of the imagination, but just a shift in the culture that is supportive of being able to add business to existing trains in terminals where we have capacity. So Brian, with that, I'll turn it to you for Q&A.

Question-and-Answer Session

Q - Brian Ossenbeck

Right. Great. Thank you, Sean. It's a good run down. I want to come back to safety in a second, but just to tie off on the quarterly performance, it seems like things are running, as you mentioned, probably as good as you've seen in quite some time relative to -- I know you don't have a quarterly guide, but relative to the -- what we would have expected, we all spoke a few months ago now, seems like it's pretty much in line, and they added 1 derailment that everything is in the news from a derailment perspective. So is that a challenge we've heard, Softer demand, tougher weather? So I just wanted to see if you had any further comments maybe qualitatively around what you're seeing just to start the year.

Sean Pelkey

Yes. Thanks, Brian. I would say you're right, it's probably largely in line with what we expected. I think we've been doing really well from an execution perspective in markets like coal and grain, as I just talked about, and the fact that the network is running as well supports volume growth. That's probably a little bit in excess of what we expected in those markets going into the year. International intermodal has been a drag. The last couple of weeks, it's been even worse than where it was in the first 8 weeks of the year. So that's been a little bit of a miss, but largely in line with what we expected.

I think the -- probably the market that's been the most behind our expectations has been auto. And as I talked about, we do expect that, that's going to turn around here. It's up year-over-year. We think it could be up more as we go forward here so...

Brian Ossenbeck

So I think it was last week, you had the press release, which is quite helpful to outline your safety and infrastructure initiatives -- that's on all of our minds, and it's going to be a fair amount of our questions here. So then the industry came out the AR, which is the industry trade associate came out of the next day with more standards. So maybe you could just tie those 2 together. I know you mentioned the spacing of the hot bearing detectors is going to come down a little bit. So it seems like, from my interpretation, correct me if I'm wrong, that you've already moved a lot toward where the industry was putting the new standard, so to speak. Maybe we'll see regulation, who knows, but maybe you can just give us a context of what else you have to do? How long is going to take? And of course, if there's a financial cost associated with installing the new equipment?

Sean Pelkey

Sure. Yes. So in terms of the -- I talked about the hot box detectors and the spacing there. We'll be at 15 miles across the network when we're complete with that. That's a, call it, $10 million to $15 million incremental investment for us to get there. We already have a significant number of these across the network, and we continually refresh them as we go forward as needed. We inspect those every couple of weeks. We will continue to do that. We've gone in and sort of calibrated all of them to make sure that everything is functioning properly. And I think it's also just sort of a wake-up call to say, "Hey, what can we do from an operational testing perspective to make sure the crews understand when they get these alerts, what needs to be done?" We have very, very high compliance with that as we speak.

I know Joe Hinrichs, our CEO, actually went out to the data center -- data operations center in Jacksonville to talk with the dispatchers and understand when they get these trending alerts, what do they do? While he was there, there actually was 1 that came through and essentially, what happens is, they'll get an alert on their screen the dispatcher does that says, "Hey, train XYZ, axle #15 is heating up. It's reached the threshold. It's gone past 2 of these detectors and the indication is that this needs to be stopped."

And so the dispatcher will then call into the crew. They've got to stop the train. They walk down, they check the temperature. They have a device that allows them to check whether there is an issue or not. And what we found is with the trending data, the vast, vast majority of the time, that trending data is resulting in a real positive that there is something that needs to be switched out. There is a bearing that's heating up. So that is a very accurate way of anticipating potential issues down the road. And I think it's working, and we're sharing a lot of good information across the industry. This is not -- safety is not intended to be a sustainable competitive advantage in the industry. We are an extraordinarily safe industry to begin with, but the consequences of even 1 incident are so significant that we've all got to be working together on this stuff.

Brian Ossenbeck

And on that point, specifically, we're all seeing just how interconnected the network is with the interchanges with the parts and then obviously, the cars. So there's been more focus on that. Norfolk identified some loose wheel sets. I'm sure it's another area of collaboration, but maybe you can just remind us or at least explain like how that works. And you obviously have an obligation to make sure it gets there safely, but clearly, you're not the only ones who have an economic interest in that asset. So how does that work now? And do you think that will change going forward from a car inspection perspective?

Sean Pelkey

Sure. so just to level set, as we look at our -- at the cars online on CSX's network, about 15% of those are system cars, the owned fleet. About 2/3 of the cars that are on our network are privately owned, meaning owned by customers, generally speaking. There are some foreign cars from other railroads, TTX and so forth. The inspection of all of those cars takes place anytime it touches a CSX facility. So there is an FRA mandate that says every time a train is built in a terminal, before it departs, it's got to have a visual inspection. The -- most of the time, it's the mechanical employee walking the train front to back and making sure all the air hoses are laced, the safety appliances look right, doing whatever testing needs to be done of the air breaks.

So that is in place that will continue. We have talked about, and I think there's been others in the industry who have introduced train inspection portals. Those portals are really interesting because they provide a 360-degree view of the freight car, as it's coming into and out of the major terminals. And what that allows us to do is to use algorithms to pick up on potential issues that need to be fixed on that freight car. It's coming into the terminal, and we see, "Hey, this safety appliance needs some welding, we can get that taken care of so you don't have a delay in the outbound yard with the inspector catching it before the train departs and then you've got to set it out." So there are some efficiency benefits in addition to the safety benefits that you're getting there.

And as those algorithms advance, you'll be able to pick up on even more things that there'll be a little bit of an increase in some of the maintenance that you're going to need to do on those freight cars, but it's going to have a significantly positive effect on those bearings that may have been faulty. We don't have to wait for the hot bearing detector to pick it up and trend it, we can actually see it as it's coming into the yard, set it out, fix it there and you don't have to have a mainline stop. So those are the types of things that we're excited about, as we continue and invest in this technology.

Brian Ossenbeck

So on the technology front, I think you do have 1 of those inspection portals down in the southern part of the network, if I remember correctly. But 1 thing that the DOT at least to put out there is a suggestion that in response to all this, and we'll see how the regulatory plays out, that you might have to do human and automated inspection like you have to have both. So I don't know, just if you could give us a sense of what you think the regulatory environment is. It's challenging, it's changing. There might not be too much to comment on ahead of any firm proposals. But what are some of the implications or potential ramifications you think are we should be considering coming out of in the last month or so and all the things that are going to be coming down the road in terms of further hearings in testimony.

Sean Pelkey

Yes. So I think if we're all working together towards a common goal to improve rail safety, then we should end in a good place. CSX has always been in favor of common sense rail regulation and standards that protect our employees, protect our communities and protect our customers, and I think that you're going to see that continue. When you have a major incident that hits the front-page headlines and is there for a while, there's going to be -- everybody is going to come out of the woodwork and say, well, we need to add this, we need to add this, we need to add this.

Our hope is that over time, again, common sense prevails, and we all focus on things that are going to move the industry forward, not things that end up being just simply in place because some special interest decided that this is important and has really nothing to do with rail safety. So I think that's the hope. And I think we are working together collaboratively across the industry in collaboration with the AR as you mentioned, to make sure that we're all following the same standards and working to improve the safety and efficiency of the rail network.

Brian Ossenbeck

So 1 of the areas I think CSX has been out in the lead on is just labor relations. I think a big part of that is Joe and his background and his focus. But it obviously came through a period of time where there's very contentious multiyear negotiation. And because it went so long, we're going to be into a new 1 before too long. So maybe you can just talk about why you took the lead -- CSX took the lead and from our perspective in getting those paid time off agreements and getting some of those other things addressed, which I know can necessarily be done at the national level because a lot of it is local and complicated, but -- what was the rationale behind that? And what sort of benefits are you seeing having probably some of those already in place?

Sean Pelkey

Yes. I think if you look at the history of railroading. There's been lots of consolidations and lots of downsizing and many -- a lot of redundant infrastructure that's been rationalized over the years and a lot of that had to happen because things were overbuilt. And you have employees out there, who are decades-long employees that have been impacted by all of these changes. And what that leads to is sort of this negative view of the company that I work for. And that's -- if you're trying to figure out -- and Joe has said this, we're a service-oriented industry, right? We're not B2C, but our train and engine employees, mechanical, engineering employees who are out there every day, the service that they provide to the customer is fundamental to our ability to grow the freight profitably.

And if they're not engaged when they come to work and excited about working for this company, they're not going to have the discretionary effort that we need them to have in order to move trains safely across the network, spot problems and actually say something about them, try to make sure that every car that needs to get switched, gets switched during their shift and doesn't get shifted to the next person to come and fix. And so coming out of the labor negotiations, it was very clear. There were several unions, for whom paid sick time was extraordinarily important to their quality of life and balance. And if that was something that we could provide and we could do it in a way that was mutually beneficial, then why would we not do that, right? It's about building some goodwill with the employee base coming out of, like you said, protracted labor negotiations that weren't all that positive at the end of the day. We got there, but I don't think anybody walked away feeling all that grateful about how it went down. And so when you have that as the backdrop, you've got a new CEO coming in who can sort of establish some positive momentum very early on without a significant give, these are employees, for the most part, who are working in a shop or they're working with a team of folks going out and maintaining the railroad.

So if they're going to call in sick, and they have a legitimate sick excuse. We'll make that up. Maybe we need to work a little over time. Maybe when they come back, we've got to do a little bit more work. It's not a significant cost to the company, and it's the right thing to do for the employee. It builds the goodwill that we need ultimately going forward.

Brian Ossenbeck

And we've seen a number of these already, but at least my understanding with the T&E employees is this maybe a different issue. It's not necessarily paid sick time. It's more about scheduling and consistency. So maybe you can touch on that. And then also, just labor availability. We've seen the pipeline actually came down a bit in January. Everybody else was moving up. You moved first, I think, in terms of filling that. So maybe it's a good sign that this year, we might not be talking about as much about labor and how many folks you have and can focus more on growth and the potential.

Sean Pelkey

Yes. So you're right, in terms of the T&E employees. I think we're at 6,000 employees now of our union employees that have agreed to new sick leave arrangements. We already had about 1,000 that had it already through legacy union agreements. So 7,000 out of the 17,000 union employees now have paid sick leave. The vast majority of those remaining are in the T&E ranks. And so far, they have not indicated that that's the most important issue to them. It's really around, like you said, quality of life, predictability and scheduling. And I would say we're having discussions around that. There's a lot of different models. There is some give and take that's going to need to occur, not just between the railroad and the union, but any change you make to scheduling impact -- benefit somebody, but it may have a negative impact on somebody else who's been here for a long time and has the seniority and the job that they want.

So we are willing to cooperate on that and work towards solutions that improve the quality of life. Solving that puzzle is not an easy equation. When it comes to the hiring, you're right, we sort of -- I wouldn't say we're at steady state necessarily because there are still a few areas of the network where hiring has been a challenge, and we continue to have a focal point on those areas. But by and large, we're in really good shape on our T&E employees. We've got about 7,200 active T&E employees today. Jamie has talked about wanting to have a few more as we get into summer vacation season. Those are already in the pipeline. They're in training as we speak. So they'll be graduating from classes in the coming months. So that active count may come up to 7,400 or so at its peak.

And what we're doing right now is basically hiring for attrition on the conductor ranks. We're running, on average, 2 classes a month instead of 4 classes a month. And what that allows us to do is to focus on other areas of need at our training center. As an example, we've had several classes already this year of engineer trainees. So a conductor, who's an experienced conductor, has the ability to go to engineer training school and learn how to drive the train essentially. We have not focused on engineer training in 6, 7 years. We've got enough engineers today to run the network, But as we look forward at attrition curves, retirement curves, that's something that we absolutely need to address. So we're sort of balancing between conductors and engineers. We've got -- we've had some new classes of management employees that are coming in.

We've had a lot of really positive external management employees that have come in fresh. They brought great ideas, great energy, enthusiasm. They're learning how to railroad. And I think that's helping to build a really positive culture out there in the operating environment.

Brian Ossenbeck

So on the financial side, we'll get to question in a second. One thing I'm worried about, just for the industry is we have a bit of a lag in terms of all the labor costs have gone up immediately. You've got the back pay. Inflation is still elevated. It's going to be the highest on record based on some of our estimates for the second quarter. Pricing is obviously strong, but there's, I think, a little bit of a lag in terms of you can reprice half the book and some of these are annual contracts and indices and then, of course, you have to move the volume to get the higher price related in the new contract.

So maybe if you can just give a little more clarity on how you see that. Is there a little bit of a lag in terms of those 2 catching up, at least maybe in the first quarter or the second quarter? Or is it less of a gap than maybe we're worried about?

Sean Pelkey

Sure. So I think on the inflationary front, we've talked about kind of mid-single-digit inflation across labor and PS&O and what we're seeing so far would indicate that, that's probably going to be where things shake out. On PS&O, most of the inflation that we experience is based off of contracts that get set on last year's change. So inflation last year impacts the rate that we pay this year. So that's the headwind that we're up against. At the same time, we've talked about this quite a bit. We -- when we -- the majority of the contracts that we repriced are in Q4 and Q1, that's our renewal season. And if you think about end of 2021, beginning of 2022, we were in a heightened inflationary environment, but we were not in an 8% inflationary environment at that point in time.

So we were certainly able to reflect that inflationary environment in those renewals, but we were behind the 8% ball when it came to really catching up to what we were seeing in the broader inflationary environment, the 14% wage increase that we experienced when the new agreements became active across our union employees. And as we got to end of last year and beginning of this year, that's been a large part of those conversations that we've been having with customers. So I wouldn't say there's a significant lag. We're seeing very positive results on the repricing front, particularly in the merchandise segment and strong pricing in coal as well and met coal prices have held up. So I would say we feel good about where we're at from that perspective.

Brian Ossenbeck

Question there?

Unidentified Analyst

Just wanted to come back to the labor discussion for a minute. There was a lot of focus in the industry last year on trying to hire T&E and the struggle that the industry had, which was kind of different than you experienced in the past. You've had success there and brought the ranks up. But I'm wondering on the kind of the maintenance side of things, the maintenance of way and equipment. If you've had trouble hiring there as well and maybe those ranks are still kind of thin. And if that's had anything to do with some of the safety issues in the industry or not?

Sean Pelkey

No, it's a good question because you're right, we've talked almost exclusively about train and engine employees. I would say -- and we have just as many engineering employees as we do train and engine, almost and mechanical is a little bit smaller than that. But when we look at those ranks, I would say we're in really good shape on the engineering side of the house. We are continuously hiring in small chunks for engineering maintenance employees. But that head count has been fairly steady over the last couple of years. So we feel good about that.

I think on the mechanical side, there have been a few crafts that have been in need, particularly in certain geographical areas. Electricians, as an example, there's a lot of competition for labor there. So we've had a push. We've seen some success. We've got some classes of mechanical employees that are running through our training center as we speak. I wouldn't say we're at a significant deficit, though, versus where we want to be. I mean we're talking about maybe a few dozen people below where we'd like to be network-wide, not significant numbers like we were facing on the T&E side last year.

Brian Ossenbeck

So 1 other thing that we focus on from the financial side, just looking at the normalization of supply chains is the accessorials and the merge that the industry has incurred, recognized based on everything that's gone on -- or not gone on in terms of in the network. So I think you guys have done a good job of actually calling that out, leaving a little bit of the guess work to the other. So is there -- I don't know if you necessarily got credit for it, but we at least appreciate it. But in terms of the other side of that, though, is that still something we should think about in the $40 million to $50 million of congestion-related costs coming out. Like, obviously, your storing boxes, but there's a cost associated with it. Is that something that will ramp down ratably as you start to see normalization and potentially this quarter with international intermodal coming down so much. I imagine that's going to be probably the first sign that's underway already.

Sean Pelkey

Yes. So let me first hit on the first part, which is the revenue piece and the guidance was that other revenue would be down about $300 million versus last year as a result of reduced storage and premise used charges specific to intermodal as that -- as supply chain returns back to normal. That's consistent with what we're seeing here. This year, those numbers have come down quite a bit, pretty much every month since August of last year. And I would say, February, March, we're kind of at the run rate that we expected for the full year. So no change to that guidance. And then in terms of the cost side, what we've talked about is last year was $40 million to $50 million of, let's call it, excess congestion-related costs that we were running each quarter.

And we are seeing some of those costs begin to normalize. I talked about overtime, recrews, held-away pay, travel expenses, those types of things as the network becomes more fluid, those tend to normalize pretty quickly. Cycle times have improved, which means the amount that we're paying for freight car rents is going down, but there is a lag on some of the costs. We're still running with a few more locomotives than we probably need once we've got the right level of confidence, and we get through some of the seasonal peaks and certain types of volume. And then on the intermodal side, there's some supplemental labor. There's some outsourced facilities that for storage of containers.

Those costs will come down. We're starting to see them come down already, but there is a little bit of stickiness to some of those costs. So -- and I would say -- so while we may not get the full $40 million to $50 million a quarter right away by the time we get to the second half of the year, we should see all of that come through, but we've got other initiatives on top of that to drive efficiency. And of course, as we grow and we add to existing trains, we get more efficient as a result of that as well.

Brian Ossenbeck

Okay. One thing we're keeping from the industry is that the demand is still there. It's just the service product hasn't been. So there's a lot of unmet demand. I know you guys typically talk about fill rates and customer orders, which I think is helpful because we can sort of quantify it and see the trends. So is that still moving in the right direction? I'm assuming all the slides you showed about performance and dwell and speed and the throughput would suggest that is there, but is it going to come back quickly in some areas, maybe not so much in others. Like how does that shape out? I'm assuming some customers are just going to really want to see this stick for a very long time before they really make that switch back or give you more volume than maybe they had in the past?

Sean Pelkey

Yes. So in terms of order fill rates, we -- last year, in many of the merchandise fleets, we were running 60% to 70% of customer orders. Now what you don't know is how much our customers padding the orders knowing that we're not able to service 100% of them. So there was probably a little bit of inflation in those numbers versus a normalized level of demand. We're now running pretty much in every fleet at 90-plus percent order fill and in some cases, 95%, 98% order fill, which is great. So we are, by and large, meeting the customer demand that is out there. I think 1 thing that Joe has really emphasized for us is we can't judge our customer service based on our own metrics. What we need to do is ask the customer, what is your experience? And are there any gaps in what we think we're providing versus what you need us to provide and how do we fill those gaps.

So every Monday when we come together as an executive team, Kevin Boone, our Chief Sales and Marketing Officer, shows a slide of, here's what our customers are asking for, can the operating team make an adjustment in order to meet that customer demand. And in many cases, it's, "Hey, they're getting switched Monday, Wednesday, Friday. They want us to come Tuesday, Thursday as well. And if we can do that, they can give us a couple of thousand more carloads a year." These are in most cases, not huge wins, but you have 6 or 8 of these every single week, you're talking about numbers that add up to something a lot more significant. And we're seeing more and more of that as the customers gain confidence back in our ability to serve them. There's incremental opportunities. And I think that coordination and collaboration between sales and marketing and operations where Operations is saying, whereas last year, it was -- "No, I can't serve on Tuesday and Thursday. I can't even serve Monday, Wednesday, Friday." So this year, it's -- yes, we can add that start as long as you can commit sales and marketing if the volume is going to come, and then we need to take another look at it in a couple of months and make sure that it's justified.

So there's a lot of really positive stories happening across the board. We're seeing freight come back to rail that had moved to truck previously last year. There are customers for whom we need to prove it for longer than just a couple of months -- 5, 6 months. We need to prove it for years. And as we sit right now, I think we're on a path to do that. I don't see anything that would disrupt this momentum at this point in time, which is great news.

Brian Ossenbeck

So on the coal side, it's obviously always an interesting and challenging market to say the least. But you have pretty strong volumes right now. Obviously, the export market is still strong with that can take a thing and give it. But in terms of the gas price being so low, I mean, what's the sense on inventory levels and it feels like maybe this is the time we should start to maybe worry or at least be mindful of potential coal plant retirements. So maybe if you can end on that note, just -- what's the coal franchise look like now both on the export side and then on the domestic side, which is strong, but get the sense that that's not necessarily going to be the case, maybe even 6, 9 months from now.

Sean Pelkey

So on export, strong demand across the board, both met and thermal. Last year, I think the vast, vast majority, probably 90% of what we moved was met, a very small amount of thermal. We're seeing strong demand across both strong double-digit growth in both met and thermal, and that demand is expected to continue at least as we sit right here, right now. On the utility side, we are still rebuilding inventories. I think we had so many mine production issues last year. Our own ability to run the starts that the customers needed and then some specific issues, particularly at certain facilities that prevented us from really meeting customer demand.

So those stockpiles still need to be rebuilt. We're in that phase right now. So utility coal is growing. I think you're right to point out natural gas prices at $2, $2.50 is not supportive of continued coal burn across many of the plants that we serve. And so I think it's a watch item as we get a little bit further into the year. We see what the summer looks like in terms of weather. We see what happens to natural gas prices and demand, but I think it's something we're watching as we sit right now.

Brian Ossenbeck

Maybe we can just end with a little bit longer term in the industrial development pipeline. As I look to prior years, obviously, you just talked a lot about service and some people want to see more sustained and some maybe are willing to hop back on. But it seems like the industry, maybe a little while ago was really trying to use more of the land developments to cite more things. I know that's been a focus for the team and for Kevin for quite some time. But are those on the horizon? Or are they still kind of lumpy things are going to take a little bit of time that maybe won't necessarily move the needle that will be additive, but how is that portfolio developing? And are you getting more interest now that the service is back.

Sean Pelkey

Yes. Well, last year was a banner year for industrial development. I mean I don't think there's been a year in my nearly 20-year history with CSX that we've had a better year for new plant announcements on CSX's network. And these are new manufacturing plants that are going to -- it's billions and billions of dollars of customer investment. It's thousands and thousands of new jobs that are going to locate on CSX's network, they'll be exclusively served by us. And we've got tremendous goodwill with many of those customers as they build those pipelines out. In most cases, there's very limited investment required from CSX.

In some cases, we may need to invest in some cars, some track infrastructure to get to the new facility, but the payoff is certainly there. And in terms of where we are right now, going forward, I think we feel very good about the pipeline. We've got still over a dozen sites across the network that are shovel-ready in partnership with state and local municipalities. And we're always looking to add to that portfolio. We have some land ourselves that we're looking at creative uses for and how do we drive new growth to the rail. So that certainly -- industrial development is certainly part of the equation.

I think the other part is just serving the customers better consistently and reliably and seeing some of that business that over the years has shifted over to truck, moved back to rail where the service is already there. And so you put those 2 things together, and I think we feel pretty confident in our ability to continue to outgrow the economy.

Brian Ossenbeck

Okay. Well, we are out of time, so we're going to have to end it there. But thank you, Sean, for all the insights and participating today. Really appreciate it.

Sean Pelkey

Thank you.