CSX Corporation (NASDAQ:CSX) Deutsche Bank 2023 Transportation Conference August 15, 2023 10:00 AM ET

Company Participants

Sean Pelkey - EVP and CFO

Conference Call Participants

Amit Mehrotra - Deutsche Bank

Amit Mehrotra

Very happy to kick it off with CSX, Executive Vice President and CFO, Sean Pelkey; Head of Investor Relations.

So we really appreciate everybody coming. We've got a packed schedule over the next couple of days. CSX, obviously, 1 of the few Class I rails, $61 billion, $62 billion of equity market value. It's been a tough year as you digest costs and, and we deal with the freight recession, but it seems like things are getting worse, and we hope volumes pick up. So I'm going to pass it on to Sean to give maybe 4 or 5 minutes of prepared remarks, and then we'll jump right into Q&A.

Sean, over to you.

Sean Pelkey

Yes. Great. Thanks, Amit. Thanks for having me here and hosting us here in New York. It's great to be here and be able to tell the CSX story.

I have prepared a couple of slides that I'll go through here. Feel free to stop me along the way if you got any questions as we're walking through it. So forward-looking disclosures as usual. I think it's important to start with the service story because the service story is foundational to ultimately what we're trying to achieve, which is transforming the way that we approach the customer experience and doing it in a way that allows us to capture share, not just from our peer railroads, but also from trucks over time. And that's really the key to unlocking profitable growth over the medium and the long term.

When we look at how CSX has done, it was right around this time last year that we finally started to see the signs of inflection in the service performance, not coincidentally, also about the same time that Joe joined us back in September of last year. And Joe, as you know, has done a tremendous job transforming the culture of the railroad, and with a fundamental belief that the more engaged the workforce is those 20,000 or so union employees that are out there moving freight every single day and maintaining the track and maintaining our assets, the more engaged they are in solving the problems and proactively coming up with solutions to serve the customer better. Overall, the better service product that we're able to deliver, which ultimately translates into growth over and above our rail peers and our truck competition.

Just at a high level in terms of what we're seeing in the markets right now, our service product is extraordinarily strong, and we're meeting significantly more of the customer orders this time this year than we were last year. Unfortunately, the absolute number of orders has come down and kind of that sort of break recession that you talked about in your opening remarks there. We do see some positive markets that continue to be supportive for us. Obviously, auto has been good all year long. We've had some competitive wins in the auto space, albeit a little bit lower RPU than average within auto with some shorter haul business and mix impacts there.

But it's been a very strong market. We see every reason to believe, even though production is not quite where it was in 2019, that we'll continue to see strength in the auto market. Fertilizers has been strong, particularly recently. We've been working very closely with customers to help them ramp up their production and allow us to move more freight by rail and that's been working very well. A lot of that freight that's been coming on in the last quarter, 1.5 quarters has been short haul, lower RPU freight, but still positive in terms of overall bottom line impact.

Export coal obviously has been supportive all year long. We'll continue to be supportive here in the third quarter from a volume perspective. Obviously, we talked about some of the rate headwinds on the quarter call, and that's, in large part, what drove our guidance around mid-teen declines in overall coal RPU from the second quarter to the third quarter, and that still appears to be the case. Minerals market, I think, is one that we feel very supportive about long term. We're going to see a lot of construction activity, road construction, building products.

A lot of that shows up within Minerals. We had a little bit of a slower patch, call it, within the last month, a lot of that had to do with customer production issues. Those seem to have resolved and that market has continued to pick back up. So that's a lot of good news within that. On the steady side, domestic intermodal, and I would say domestic intermodal is steady, sort of trending towards positive, hopefully.

Last week, we had our strongest week of the year in domestic intermodal. The team really has been scratching and applying in a market that has not been extraordinarily supportive to try to find opportunities, create new lanes, work directly with customers. win some share from truck and has been doing a really nice job. We were up mid-single digits in domestic intermodal last week, and that continues. Metals has been a market that's been supportive all year long.

We continue to see strong demand in metals particularly as it relates to auto production. Equipment has been off a little bit recently. Military moves a part of that, but that's a market that overall has been fairly good for us. And then domestic coal, I think going into the quarter, we were thinking that because of where inventory restocking had sort of landed at the end of the second quarter, we probably would see a little bit of a soft patch in domestic coal, we still likely see some headwinds year-over-year, but it's certainly stronger than what we expected given how hot the summer has been. So that's been supportive.

And then on the software side of things, chemicals has been a headwind all year long. We particularly on domestic and industrial chemical side, we have seen export plastics hold up fairly well. Again, that's a little bit lower RPU than the average within chemicals. Forest products. We've seen some weakness in paper and pulp board recently in line with consumer demand.

Ag and Food has been a little bit off, particularly grain. What's happening there, both the wheat harvest as well as we're seeing strong production in sort of the Carolina area, which is where a lot of the pigs, chickens, livestock is produced. So that's being trucked to the local market. We're not seeing as much come in from the Midwest. And so over the next couple of months, we're going to see that show up in our volumes.

That being said, the ag producers in terms of the number of sets they've ordered for the fall harvest, it's about as strong as we've seen in a long, long time. So we're optimistic once we get into the fourth quarter, that will turn around.

Question-and-Answer Session

Q - Amit Mehrotra

Can we talk about -- thanks, you're up a minute.

Sean Pelkey

Absolutely.

Amit Mehrotra

Let's talk about automotive, so because obviously the big -- the question now is with this UAW deadline, so I think on September 14. What's the latest thoughts there in terms of -- you're obviously very close to your customers. Talk about how your customers are thinking about shipments because it's obviously a big production hit if they go offline for a couple of months or so.

Sean Pelkey

Right. So hopefully, hopefully we're not looking at a couple of month situation. And I think the intel that we have or the best guess that we have is that even if there is a strike, hopefully, it's short-lived. We don't really know exactly what we're dealing with. This is an unprecedented territory in many ways in terms of some of the demands, but I don't want to comment on that labor situation specifically other than to say as long as -- if there is a strike, it's relatively short-lived in terms of -- we still have some finished vehicles that need to be moved.

So that will work its way through the pipeline. And then when you think about the broader supply chain in terms of inbound product, I don't think that the auto companies are going to turn that off day 1. So you think about metals, chemicals, plastics, those types of things.

Amit Mehrotra

I think accelerating parts and shipments to kind of protect themselves against...

Sean Pelkey

I haven't seen any of that or heard any of that in the data so far.

Amit Mehrotra

Got it. Got it.

Sean Pelkey

Yes. International and intermodal is the last one on the page. And obviously, that one has been a weak point all year long. I think we started out, we're a little bit surprised at how weak it was. And then there was predictions, that hey, we get past this destocking and then second half of the year, things would start to turn.

We just haven't seen that yet. The good news is that we've been stable for probably a couple of months now, sort of in the down mid-teens percentage basis. And hopefully, as we get towards the end of the year, start to see that free up. I would say one additional thing, this is all sort of the volume picture. But when you step back a second, I talked about some negative mix within merchandise.

We saw that show up in Q2. But when we look from Q2 to Q3, we see that persisting. So when you think about ex fuel, our RPUs with the merchandise probably pretty flat from [indiscernible] rates.

Amit Mehrotra

Chemicals coming back...

Sean Pelkey

Chemicals and short-haul business, things like that.

Amit Mehrotra

So just -- sorry to interrupt your prepared remarks, but just on domestic intermodal. So obviously, fuel prices have been creeping back up, up by 15% in the last month, which is pretty incredible. So that just obviously helps the spread between intermodal, rail and truck. Is that what's driving? You obviously have great service, too.

So that's helping. But is that what's kind of tipping the scale more towards domestic intermodal?

Sean Pelkey

I mean I think it's a combination of a couple of different things. Certainly, when the differential is compressed, it makes it harder to compete relative to truck and when fuel prices go up. And we do have a very effective fuel surcharge program within intermodal as well. And it responds real-time to those changes in fuel rates, unlike our merchandise program, which is on a 2-month lag. So we are catching up to it.

But you're right, that discount that we have relative to truck increases as fuel prices go up, that is supportive. But really, it's been [indiscernible] that the team has been working on, working directly with some shippers, sitting down with shippers and looking at matches of their traffic flows relative to the service that we can provide. And then running in the 90s, mid-90s percent in terms of ship line compliance now for the better part of almost a year now, certainly goes a long way. So how do we measure ourselves? I think a good way to look at it is on a tonnage basis.

And so when we look at how we have performed this year, relative to both truck and peer U.S. railroads, we've outperformed. So first quarter of the year, we significantly outperformed. We had some positive mix within there. Weather was supportive for us, we were able to move some traffic in an unseasonable way in the first quarter that was very supportive.

And then by the time we got to the second quarter, we were still up overall in light of a market that had clearly turned. The demand picture was not as supportive. So truck tons were down, rail ton miles were down, CSX was up. And so that's ultimately the story that we are portraying here. And I think that gives us a lot of optimism for what the future holds.

When we start to see customer orders turn around, the macro starts to be more supportive. We have the crews in place. We've got the locomotives. We have the cars, we have a network plan that works, and we're excited about what that might translate into for us. And then when we feel a little bit longer term, we've talked a lot about our select site program and our industrial development efforts.

We've had a lot of success there. over the course of the last year or 2. So much so that the number of sites that we had started to be depleted, and these are very difficult to try to rebuild because we are looking for sites that are shovel-ready and rail-served by CSX, and there's only a limited number of those potential sites across our service territory. I'm proud to report this morning that we now have 19 sites. Our goal was to get to 20 by the end of the year.

We're essentially there already here in August. So very exciting. You can see a concentration of those sites in the Southeastern part of the network. But frankly, we've got sites up and down the north to south across our network. Over 500 projects that are currently in the pipeline, and it spans across a lot of different markets.

So I think that's what's exciting is sort of the broad-based interest in manufacturing, building on the CSX railroad.

Amit Mehrotra

Great. Well, that was really helpful. And by the way, if anybody wants to ask questions, please feel free to come in and make this as interactive as possible. I want to start with the operational side of things because there's been a couple of big movements. I mean, first the big, Brian Barr went, left a few months ago.

The Union Pacific, and then obviously the big announcement originally Jamie Boychuk leaving, which caught people a lot by surprise. Wondering if you could just talk about that because it is in the context of CSX having such a great service. And Jamie was really well regarded at least generally in the industry for driving that service product. Talk about kind of the continuity of service, what the reasons that change were, how you guys are ensuring, protecting that service that has really led to kind of a lot of the successful merchandise side at least.

Sean Pelkey

Sure. Absolutely. So I think the first thing is we're 6 years into the scheduled railroading journey. It's in our DNA. And you've got a team of leaders across the operations group who understand what that plan looks like, how to run that land, and the repeatability of that plan is sort of what makes it so successful.

Casey Albright, who runs our network operations and service design, same guy that was there a couple of weeks ago. Ricky Johnson, who runs sort of the transportation engineering, mechanical, same guy that was there a couple of weeks ago and has been there for over 30 years. So there's a tremendous amount of continuity. I have a lot of respect for Jamie and what he brought to the railroad. He's a good railroader.

And we're thankful to have him. That decision that was made to make a change was a decision that Joe and the Board came to. Ultimately, I think whenever there's a significant change like that in an organization, you look for how is the organization going to respond. I would say that there's been a lot of optimism in terms of what we can do going forward. And so we're not going to look backwards.

We're going to come together. And so Kevin, myself, Brian and Ricky -- excuse me, Ricky and Casey got together last week, we sat together with our leadership teams, and we talked about all the opportunity that's out there. How do we break down some of the barriers that exist across the organizations? Anytime you've got over 20,000 people in an organization our size, you're going to have silos. How do we work through that?

So just as a very small example of that, Casey will met at a daily morning call, which the operating team has many, many calls every day, as you can imagine, to understand the state of the network.

But everybody in commercial, and frankly, anybody across the company that wants to join that has an interest is now invited to come on to that call. We had the first one of those yesterday, and it's very tactical. We're working through issues that really impact the customer and you've got the voice of the customer now on those calls represented by the commercial team. And so that's really exciting because I think we're going to be able to push our way through some of the challenges that may have prevented us from unlocking some of those incremental opportunities in the past.

Amit Mehrotra

One of the things I think about is when I think about what's been the recipe for success, and CSX from an operating perspective is really how Kevin's team and Jamie's team kind of got together. I mean I think they shared a conference room between both of their offices. So they would meet that daily. And when you look at like the C&I evolution, one of the big problems in C&I, that Chris Robinson talked about was the operating team and the sales team just never really collaborated and there was a breakdown there. And so I guess it's so important to continue that, that culture of transparency between sales and operating team.

And how are you continuing that beyond like the Jamie, Kevin, and relationship there which is not there.

Sean Pelkey

But I think it's healthy in an organization to have tension between your operating team and your sales and marketing team, right? And that exists in most organizations. And you want to make sure that there's a good dialogue and a healthy balance there. That's ultimately what's going to translate into the best service product for the customer that allows us to maximize bottom line profitability. And I think while there was a good line of communication there, where is the balance, right?

And so how do we make sure at all levels of the organization that we're engaged and that everybody feels empowered not that there's one person who's got a veto or there's one decision-maker in the organization that we at a Vice President level at a Head of level can bring ideas forward that are ultimately going to translate into bottom line growth and those ideas are going to be heard and well received. And I think you're going to see more of that going forward. not to the point where it disrupts the balance and the fluidity of the network, the plan is sacred. But we're talking about things like, hey, I've got a customer who we serve 3 days a week today. On days 4 and 5, you already have a local start that goes by that customer.

Could be pleased to add a fourth or a fifth and/or a fifth stop at that customer. There's really no incremental cost to that, potentially a little bit of over time. And so in instances where we have those opportunities, the more we say, yes, the more trust we build with the customer.

Amit Mehrotra

Can we talk about -- you're a CFO, so we can talk about some near-term trends, if that's okay.

Sean Pelkey

Yes.

Amit Mehrotra

Volume is down 3%, 3.5% quarter-to-date. Merchandise that's been pretty good, flat to kind of up a little bit, 20, 30 basis points. So a lot of that's in intermodal. But the yield is going to take a decent step-down year-over-year, started to in the second quarter. Can you just talk about kind of sequentially year-over-year, I don't want to frame it, the mix revenue and kind of let's just start there and then we'll work the way down the P&L.

Sean Pelkey

So are you thinking as it pertains to margins or just look at that...

Amit Mehrotra

We'll look into that but then let's just talk about revenue probably is flattish to down, maybe sequentially, down mid-high single digits year-over-year. How does the mix look within that as you think about sequentially...?

Sean Pelkey

Well, I mean I think the biggest thing, and I mentioned it earlier, we mentioned it on the call is a headwind to the coal RPU and that's almost entirely driven by met coal pricing, which is tied to the international rates. And so that resets going into the quarter, we have some contracts that we run on a monthly basis and reset monthly. It's been a little bit more supportive than we expected going into the quarter but because a lot of that traffic gets set going, where it was heading into the quarter. We've got pretty good visibility into that mid-teens decline in coal RPU. That's probably the biggest and most notable headwind.

Clearly, supplemental revenue continues to be a headwind for us it's come down. The intermodal storage revenue peaked this time last year with all of the supply chain hiccups and backups that we had across our terminals. So we're cycling that. That's going to be a big headwind year-over-year, not as much sequentially, but a huge headwind year-over-year. And then when we talk about merchandise pricing, I'm continue to be encouraged by the results that we see.

We've got to report every week that shows contracts that have been renewed and those discussions are going well. The team has been able to continue to achieve pricing that reflects the value of the service that we're providing, that continues to exceed inflation, and I'm optimistic that that's going to continue. We've got some contracts that are renewing now into next year, probably about 15% to 20% of the book has now repriced for 2024 and the results have been very encouraging. So I think all that's good news. Obviously, I talked about the mix on the merchandise side being a little bit negative sequentially from Q1 to Q2, and that's probably going to hold here going into Q3.

Amit Mehrotra

And do you have the ability to kind of offset that? I mean I know PS&O, you made really good progress from 1Q to 2Q, you still talk about $30 million, $40 million of inefficiencies per quarter. Are we able to lower that nonfuel OpEx base in the back half of the year to maybe cushion a little bit of the mix headwinds in the back half?

Sean Pelkey

So I mean, at that meeting we had that I described last week, one of the things we talked about was, hey, look, the volume environment is not as supportive as we'd like it to be. We want to make sure that we're doing everything we can to position for a rebound in the markets. But at the same time if there are costs that we can curtail, asset utilization efficiency gains that we can drive over the next couple of months, we ought to be looking at every opportunity. The operating team is focused on over time, particularly in the mechanical and engineering crafts. I would say that's probably an area that hasn't been as in focus over the last 6 months or so.

We've really been full out, let's make sure everything is ready to go. Let's make sure we have the crews in place where we need to, let's make sure we run the plan. We've got some opportunity there. We've got some opportunity with outside contractors, outside services, looking -- taking a fresh look at the vehicle fleet, work equipment fleet, the fewer of those we have, the less we need to maintain, the less we need to replace. So taking just a hard look at everything.

Frankly, I took a deep dive into my budget. I've only got $80 million, and half of that is already spent and the other half is labor. I took $2 million out of my budget. So it's -- everybody is focused. I can't necessarily tell you yet, we're going to see a dramatic decline in costs sequentially, but we're focused on in light of an environment that's not as supportive as we like it to be.

Amit Mehrotra

Do you think a lot of that -- a lot of that listing that you're doing can be effective in offsetting the wage July -- are we in a position to say that, hey, listen, like, it's going to be hard to lower the cost structure given that -- but maybe we can hold the line on it.

Sean Pelkey

Yes. There's opportunities there. We do still have higher headcount though and we are hiring. We're hiring for attrition. We're hiring for growth.

And we still have a couple of locations where we're still a little bit short. So and as volume may shift and we see flows shift from time to time, you've got to make sure that you've got enough folks in those locations. We also need to start doing some setback engineer training. We've been focused almost exclusively on conductor training. We've got about 80 or 100 engineers in the training pipeline right now.

We need to increase that number as we get into the sort of winter months. And I think the team is focused on doing that as well.

Amit Mehrotra

Just given intermodal has been such a tough place, especially in international intermodal, I mean, retail sales today were a little bit better. Home Depot reported results that were pretty good. Anything that you're seeing that it's a little bit more optimistic. I mean the interesting things you think that the discord on the West Coast with more ships coming to Savannah, the East Coast and Miami and all these places is good for -- but essentially not because a lot of that stuff gets trucked in and you're interchanging with the UP MDM on some of the stuff that goes to the West Coast. I mean talk about that dynamic.

One, are you kind of seeing anything that gets you a little bit more optimistic or we kind of on the bottom from an intermodal demand perspective? And what is kind of what's happening on the port side of the labor on the West Coast kind of think about your outlook or change your outlook for intermodal?

Sean Pelkey

Yes. So I mean I think longer term, clearly, we've been seeing the shift over to the East Coast ports. East Coast ports are making tremendous investments in continuing to make sure that they're a significant player in that freight flow and that's supportive for us. Yes, there is some business that lands there that trucks, but there's some inland port business. There's plenty of business that moves inland to the Midwest or other parts of our service territory that moves intermodal.

Clearly, I think a healthier, stronger West Coast port is also good for us because traffic that lands there that wants to make the land bridge east it's going to interchange with an Eastern partner. And if we're able to capture that a good portion of that share that's supportive for us. So ultimately, it's about how do we grow the pie, not necessarily are we worried about? Does it land East, does it land West? There's advantages and disadvantages about depending on where the ultimate destination of the freight is.

Amit Mehrotra

And with Norfolk now kind of through their remediation effort. I mean, I assume you guys benefited somewhat from the unfortunate events of what they have to go through and the rerouting of traffic and all that stuff. And has there been any benefit over the last several months from that, that you've given back now, how do you think about what's happening there? How that impacts you guys?

Sean Pelkey

So there isn't a tremendous amount of what I would call sort of spot opportunity benefit when, when another carrier is struggling and I hate where the overflow I would say. And so the good news about that is to the extent that there were opportunities, there were contracted opportunities. And we've been able to tie those up in many cases in multiyear contracts. Not only have we been able to provide a better service product, we've also been able to offer more service than our competitors. So it's been a supportive environment.

At the end of the day, though, when the rails, the U.S. rails are operating well, it's the best solution for the industry. It keeps us out at sort of the regulatory spotlight that keeps us out of the legislative spotlight, and we've got to operate safely, and we're going to meet the commitment that we have to our employees.

Amit Mehrotra

And the interchange, I mean, one thing I think about CSX is Kevin and the team kind of are always thinking about ways to actually create new business, business development opportunities. And obviously, the CP Kansas City interchange in Alabama and the new thing that's pretty -- could be pretty significant given the 2 best service railroads that are now interchanging and that could be. Any, any thoughts on what that could mean when that starts in greater volumes and when we start absolutely [indiscernible] ?

Sean Pelkey

Yes. So in terms of that deal, it's very exciting. At the end of the day, I've been here at CSX almost 20 years. I haven't seen a new interchange like this pop up over that time frame that's going to be as significant as this one. So that's extraordinarily exciting because it provides optionality.

It gives us a route for traffic that originates in Mexico that wants to come to the Southeast. There's some truck movements that CPKC can convert that's moving east. We're going to have a pipeline to do that across the Meridian Speedway -- or excuse me, the...

Amit Mehrotra

I'm going to ask you...

Sean Pelkey

To compete with the Meridian Speedway, I should say. And so that's exciting, and I think it's going to ramp over time. One thing that just to make sure folks are clear on in terms of our part of that transaction, there's a short line railroad that's been leased for a couple of decades. All we are doing is essentially taking that lease back. It's land that we already owned.

And so that should be relatively straightforward. We do need to go through the STB process. Hopefully, that will not be a long process. And at some point next year, we'll be able to take that line back, make some investments and start translating that into some growth.

Amit Mehrotra

Okay. Any questions from the audience?

Unidentified Analyst

What the circumstances where domestic intermodal does well and international intermodal will continue to struggle?

Sean Pelkey

Yes. So I mean I think on the domestic side, it's a continuation of the initiatives that we've got in terms of trying to grow the pie with some of the direct shippers that have been working with us and introducing some new lanes. So regardless of what the consumer demand levels are regardless of where inventory levels are at, we win share, right? On the international side, we've got long-term contracts with the international steamship lines, it lands in at ports that are conducive to moving that freight via rails, then we'll move it. And right now, there's just less freight that's landing and there's less freight to move.

Amit Mehrotra

Knight or Swift Intermodal, I should say, their contract with Norfolk was set to expire this year. And I know they were kind of getting all you all in the room together to talk about maybe optionalities. And it looks like I think they did secure that business with Norfolk 6 months before the contract is expiring. You have a better cost structure, you have better service. Why weren't you able to conquest that business because that's obviously a huge carrier with a lot of load capacity?

So talk about that a little bit.

Sean Pelkey

Yes. I mean, I'm hesitant to talk about any specific shipper specific situation. We're always looking to compete. Always want to make sure if we're going to try to win some new business that it fits with into our network that it's not going to cause undue disruption to the balance and fluidity of the network, that we have the right cost structure to be able to compete. And that when we look at it from a profitability basis on several different metrics that it's attractive.

So -- and then, of course, we've got to go out and we got to win it. And the customer needs to, on their own, decide that we're the better solution versus another. So I can’t...

Amit Mehrotra

Yes. I guess [indiscernible] being quite price disciplined, I think, which is great. And you talked about 2024 question, which is obviously in a pretty high inflationary environment. When do we start to like see a noticeable fuels like putting a lot of noise in the yield numbers right now? And we'll probably take another step down sequentially on fuel.

But then maybe on 4Q, it starts to get better. And so when do we start to see like a noticeable inflection in yield ex fuel, not just from a mix perspective, but within the different like the mix within the mix, excluding all that, to actually see like some real price reflected in the yield?

Sean Pelkey

Well, I mean, it's there, right? So we have a measure that we look at, which is same-store sales pricing that looks at same commodity, same lane, same shipper, same [OT] payroll, all that -- all those criteria. And then we look at what was the rate last year, what's the rate this year and how has that changed and that's been very supportive. So it gets down to well beyond the 10, 11 markets that we report at down to a very specific level of detail, and then we aggregate that together, and we can look at what that looks like. We don't disclose that publicly.

But if there -- so to the extent that from a public-facing standpoint, you're not seeing it, it doesn't mean that, that somehow we're not pricing in the way that we're conveying, it means that there's negative mix, there's fuel lag, there's other headwinds.

Amit Mehrotra

And what's the runway in terms of pricing? So the book of business for this year is pretty much fully baked and how you're thinking about '24. So do we have kind of another robust pricing environment for the next 12 months? And maybe as a fuel noise base, we start to see a little bit more of that flow through to the yield numbers?

Chris Wetherbee

Yes. So I talked about it earlier in terms of where we are on pacing for 2024. We're still in the early innings, but call it, 1/5 of the way in or so, the results have been pretty encouraging. Inflation is expected to come down a little bit as we get into next year. We still have, obviously, the labor inflation headwinds with July next year, an increase being 4.5%. But we're hopeful that we can still continue to price in excess of inflation.

Amit Mehrotra

Couples on headcount. So one of your competitors or direct competitor talked about the slowing headcount as the volumes come in weaker doesn't seem like that's what you guys are looking to actually replace attrition. And I know you're confident about growth on cyclical volumes come back. But is there any -- I mean you guys have seen a lot of growth in headcount. And any reason to say, hey, let's wait and see here until we get a little bit more robust volume outlook, a little bit more certainty on the volume outlook?

Sean Pelkey

Yes. So in terms of headcount, I think one of the things that's not as fully appreciated outside the industry is the difference between the active headcount and the available headcount, right? So you've got we have this sort of now public-facing number of what the active headcount is, and that's the number of people that are qualified to run the trains. And then you've got the available headcount, which is, okay, today, how many people can actually run the trains. And that excludes people who are out sick on vacation, personal leave, other leave statuses.

And that's what you ultimately need to manage to. We're in a period now in the summer months where that availability is much lower than it would be post Labor Day, right? So we get post Labor Day. Yes, we probably are going to be carrying a few too many people relative to what the network needs, but that ultimately is going to translate into us being fully ready for the spring peak. And what does that mean in terms of cost?

It might mean if you're not running the starts, it might mean you're running a couple of million dollars a month heavy versus where you'd like to be. And you do the math on the volume opportunity, it pales in comparison to what we might be able to translate that into in the spring if and when we see some growth opportunities.

Amit Mehrotra

Yes. Any one want to chime in with a question here. So a couple of ones for me in terms of the new business opportunities. So we talked about auto plants, battery plants coming online, and that's something you guys have been working on a lot. Just talk a little bit about the noncyclical volume opportunity over the next couple of years based on some of these business development kind of initiatives you've done?

Sean Pelkey

Sure. Sure. Yes. I mean I think it's broad-based. Like I said, we've got over 500 projects that we're working on.

We have -- we've actually invested more headcount into the industrial development space. We actually combined real estate and industrial development together. We were able to reallocate some resources from the real estate team over to industrial development, which helps us to have better touch points with the local communities, with the customers with government authorities. Because ultimately, this is about collaborating to make sure that we're landing the business on our network. And so I would say it's generally broad-based.

There's not one specific market that's going to benefit. Obviously, we've seen a lot of announcements around autos and EVs in that trend. But there's opportunities within metals within many of the other merchandise segments as well.

Amit Mehrotra

And then on the coal side, too, obviously, we know the benchmark price is going to drive that 15% reduction. But the coal volumes are actually doing pretty well. And so [indiscernible] base fully online, obviously. What's kind of the outlook for the rest of you on the coal volumes? Just to maybe meet some of that, not completely, but share ARPU benefit [indiscernible].

Sean Pelkey

Yes. Yes. So I mean we look at the trains that we've been running so far this month, and we're pretty much at the peak number of trains per day that we've been all year long, which is great. That's reflective of strength in the export market as well as the domestic market running pretty well. Is that going to continue through the end of the year?

Hard to say, let's see, does December finish out hot, what does the winter look like? That's going to be the impact there on domestic. We think exports should hold up well. The year-over-year comps get a lot tougher in Q4. That's when we really started to see a ramp last year.

So we'll cycle that. But sequentially here in the third quarter, we're off to a pretty good start on the coal market.

Amit Mehrotra

So we kind of, I guess, button this up a little bit. In terms of volumes are a little bit weak, but I see along the bottom here from an intermodal perspective, cost inflation coming a little bit more in the third quarter of labor deal. You're doing your best to offset it. But we're kind of in this holding pattern here. Things get a little bit weaker from where they are today from a profitability standpoint, but we're all waiting for when the volumes come back cyclically, I mean that's probably well primed to that.

Sean Pelkey

Yes.

Amit Mehrotra

You think about it?

Sean Pelkey

You got it. Yes.

Amit Mehrotra

Okay. Any last questions for Sean, CSX?

Unidentified Analyst

Exogenous shocks matter, Yellow to some of the other LTLs for traffic on the rail that might not have seen before, Panama Canal, any of the stuff.

Sean Pelkey

Yes. I would be -- Yellow not so much. Panama Canal, there could be an impact there temporarily might be a negative impact to the extent some of the ships that would be headed through the canal get rerouted to West Coast ports that actually could be a positive for us.

Unidentified Analyst

To follow up on Amit's question on auto earlier. Could you help us frame just be 3 exposure, we can see the direct auto volumes and then also indirect within chems, metals? Just how you think about the auto franchise as a whole?

Sean Pelkey

So big 3, I would say, is probably about half of our total auto exposure somewhere in that ballpark. And then you got markets within metals and chemicals, in particular, not something I can put a specific number on, but it's a chunk of our overall merchandise business that gets tied up into auto.

Unidentified Analyst

Just one more. The arrangement with CPKC, why would railroad ever figured out before those tracks line out that there's mutual benefit on market access?

Sean Pelkey

Well, I think CPKC is rightfully so, looking for as many opportunities as they possibly can in order to deliver on the revenue growth opportunity that they promised to investors. And so are they fighting a little harder than they would have otherwise to try to figure out solutions. They needed a willing partner. There was a line that needed to be purchased. We're thankful that all the stars aligned and we were able to get sort of a tri-party deal that worked for everybody.

Amit Mehrotra

Thanks, Sean. Have a great day. Appreciate it.

Sean Pelkey

Thanks.