Jan 20, 2022
Operator
Good afternoon. My name is Emma, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Q4 2021 CSX Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-answer session. [Operator Instructions] Thank you.
Matthew Korn, you may begin your conference.
Matthew Korn
Thank you. Good afternoon, everyone and welcome.
Joining me on today's call are Jim Foote, President and Chief Executive Officer; Kevin Boone, Executive Vice President of Sales and Marketing; Jamie Boychuk, Executive Vice President of Operations; and Sean Pelkey, Acting Chief Financial Officer. In our presentation, you will find our forward-looking disclosure on Slide 2, followed by our non-GAAP disclosure on Slide 3.
And with that, it's my pleasure to introduce our President and Chief Executive Officer, Jim Foote. Jim?
James Foote
Thank you, Matthew, and thank you to everyone for joining us for today's call. First, I'm pleased to welcome Matthew to CSX, and believe his investment and research background, including coverage of many of our customers, will make him a great contributor to our team, and I wish Bill success in his new role as Head of Finance and Treasury.
As we exit 2021, every CSX employee deserves recognition for their dedication to our customers in what has been another unbelievable year operating through the ongoing impacts of the pandemic and supply chain disruptions. As these challenges continue into the start of the New Year, we continue to take the necessary steps to move more freight for our customers.
We are putting the resources in place to deliver a high-quality service product and are working hard every day to make rail a meaningful part of our customers' transportation solutions. Throughout this period, we have remained true to our core principles, operate safely, reliably and efficiently and are committed to providing customers with additional capacity to help overcome the current challenges.
These actions, combined with expected easing of supply chain disruptions, positions CSX for growth. Turning to our presentation, let's start with Slide 4, which highlights our key financial results.
We moved nearly 1.6 million carloads in the fourth quarter and generated over $3.4 billion in revenue. Operating income increased by 12% to $1.37 billion.
The operating ratio increased 310 basis points to 60.1%, which includes approximately 250 basis points from the impact from Quality Carriers and 50 basis points from higher fuel prices, and earnings per share increased 27% to $0.42 a share. I'll now turn it over to Kevin, Jamie and Sean for details.
Kevin Boone
Thank you, Jim. Turning to Slide 5.
Fourth quarter revenue increased 21% year-over-year with growth across all major lines of business. Merchandise revenue increased 4% on 3% lower volume as the impact of ongoing automotive semiconductor shortages was more than offset by revenue growth across all other merchandise markets.
Industrial and construction-related end markets continued to demonstrate the strongest growth. Even though declines in energy-related markets remain a headwind for our chemical business, it’s important to highlight that our core chemical, plastics and waste markets continued to show solid year-over-year growth.
Intermodal revenue increased 16% on flat volumes as international growth driven by strong underlying demand and continued growth in rail volumes from East Coast ports was offset by domestic declines into ongoing driver and equipment shortages. Coal revenue increased 39% on 2% lower volume.
Increases in export coal shipments, driven by the impact of rising benchmark prices, was partially offset by the effect of declines in domestic volumes, largely related to producer outages. Other revenue increased primarily due to higher intermodal storage and equipment usage, driven by supply chain disruptions, resulting from truck driver shortages, chassis availability and the lack of warehouse capacity.
As we exited the fourth quarter, we clearly saw the effects of Omicron, with December volumes impacted by labor and supply chain disruptions. These challenges have continued into the New Year where we are seeing customers face labor shortages in their operations.
As we look across merchandise, intermodal and coal markets, demand signals remain strong. As supply chain challenges normalize, we would expect volumes to align more with demand.
Finally, I would like to highlight the positive results we have achieved by working with customers on new business development projects. Over the last few months, we have seen three significant announcements of new production of facilities to be located on CSX Railroad, including two electric vehicle plants and a new steel mill.
These projects are team effort and show the ability of sales and marketing team and partnership with operations to creatively come up with solutions that meet the requirements of our customers. Importantly, these projects represent significant long-term value to CSX.
Now let's discuss the progress CSX is making when it comes to our commitment to sustainability as summarized on Slide 6. Rail is the most efficient form of land-based transportation and CSX is the most fuel-efficient Class 1 railroad, U.S.
Class 1 railroad. By using CSX Rail in 2021, our customers avoided 11 million metric tons of carbon dioxide emissions, which is equivalent to taking 2.3 million passenger vehicles off the road, an amount greater than all the hybrid and electric vehicles operating in the U.S.
today. We are proud of the recognition we have received for these efforts to date by organizations such as CDP, Dow Jones, and Forbes, but we are certainly not done.
CSX continues to invest in existing technologies to drive further improvement and we continue to evaluate emerging technologies, so we are prepared to realize those benefits when available. We are excited to see our customers increase focus on improving their carbon footprint.
Customer engagement on ESG has accelerated and then we have seen them double their usage of CSX provided tools that help them calculate emissions savings from switching to rail. You will also see later this quarter, we will be recognizing customers for their efforts in prioritizing carbon emission savings by converting traditional truck volume to rail.
I will now pass it on to Jaime to discuss our operations.
Jamie Boychuk
All right. Thank you, Kevin, and good afternoon.
As Jim referenced, we are working very hard to provide customers the capacity to help overcome the persistent supply chain challenges. One of the areas we have discussed in our ongoing T&E hiring initiatives, this effort is beginning to pay dividends as more employees finish training and begin moving freight.
We are also encouraged to see ongoing hiring momentum at the start of the year as we continue to consistently fill weekly training classes, while maintaining a strong pipeline of candidates. In total, we roughly doubled the average number of active trainees in the quarter.
Also, the number of employees qualifying and moving to active status increased almost 50% sequentially in the fourth quarter to approximately 150. And we expect this number to double to over 300 employees in the first quarter.
Recently, the benefit of these additional employees have been offset by the rapid rise in COVID cases across the network. Average daily cases have increased by several 100 employees since early November and are approaching prior peak levels.
That said, there is no doubt that the hiring actions taken to date have allowed us to better manage the current situation. We have also supplemented this hiring by bringing additional assets online to help offset network imbalance caused by pockets of concentrated case counts.
We will maintain these tactical asset increases as needed to protect service. We will look to improve asset utilization and drive increased operating efficiency as employees return to work and our ongoing hire initiatives provide the necessary resources to move incremental volumes and deliver the expected high-quality service to our customers.
Additionally, until along the way capacity improves in intermodal terminals, we will continue making the necessary investments to keep terminals fluid by providing the overflow space and supplemental labor required to move long dwelling boxes out of our terminals. We're also continuing to take a long term approach to network and infrastructure planning, and have identified several strategic exciting extension opportunities that will provide additional long-term capacity by helping to alleviate congestion, while also supporting growth for years to come.
As always, we will pursue these initiatives while maintaining a balanced train plan and a continued focus on strong execution to maximize both reliability and service for our customers. I want to thank the entire operating team for their hard work and long hours they've put in to keep freight moving for our customers.
Despite the incremental headwinds this quarter, service metrics remained consistent with the prior quarter and we are taking the necessary steps to drive these metrics back towards pre-pandemic levels over the course of 2022. Turning to Slide 8, safety remains fundamental to everything we do at CSX and we hold ourselves to the highest standard for our employees, customers, and the communities in which we work and operate.
Our hard work to instill a culture of safety at CSX continues to drive positive results, as shown by the reduction in our train accident headcount this -- train accident rate this year. Heading into 2022, we continue to target further reductions in human factor incidents through a combination of increased awareness, best practice sharing, collaboration across regions, and expanding our successful drone program.
We are also engaging with our new hires to instill our principles of safe operations and emphasize our commitment to make CSX the safest running railroad. I will now hand it to Sean to review our financial results.
Sean Pelkey
Thank you, Jamie and good afternoon. As you've heard, operating income grew double digits up $151 million, with revenue up 21% on gains across all major markets.
Over the line, interest and other expense was $60 million favorable, reflecting the prior year debt repurchase expense. Income taxes were up on higher pretax income though we recognized $25 million in benefits this quarter, primarily related to state tax adjustments.
As a result, EPS of $0.42 is up 27% versus the prior year. Now, I'd like to take a minute to walk through operating expense in more detail on the next slide.
Total costs increased $451 million or 28% in the quarter. the addition of Quality Carriers drove approximately $200 million of the increase.
Higher fuel prices were also a significant factor driving costs up to about $115 million versus last year. Non-locomotive fuel inflation remained consistent with prior quarters just above 3%, though as we turn the page to 2022, we expect a number around 4%.
Drilling into a few specific line items, labor and fringe increased $115 million or 20% in the quarter. Quality was about $30 million.
Incentive compensation was a nearly $40 million headwind in the quarter, largely due to higher expected payouts versus last year, and the impact of accelerated expense for certain employees. As Jamie discussed, we continue to focus on hiring and retaining train and engine employees.
We invested over $20 million in new programs targeting our T&E workforce. In line with these efforts, average headcount increased by 230, or 1% sequentially.
Labor inflation remained in line with prior quarters, though is expected to be slightly higher in 2022. Purchase services and other expense increased $198 million or 44% in the quarter.
As a reminder, this is where most of the quality expense shows up, approximately $130 million. Also, you may recall that we expected investments in supply chain fluidity to result in higher costs on this line and we saw about $45 million of increased expense as we work tirelessly to drive network and terminal fluidity in light of unprecedented challenges.
We expect these costs will persist until we see a normalization of labor and the broader supply chain. The remaining increase reflected both the impact of inflation as well as a number of smaller items.
Depreciation was up 4% on a higher asset base. Fuel costs were up on higher price and trucking fuel.
Rents were up slightly, and we had about $20 million of higher real estate gains. Going forward, you can expect a modest level of base real estate gains, similar to the $35 million we recognized in 2020 as we shift our focus towards leveraging the real estate portfolio to support growth initiatives.
However, the Virginia transaction will continue to impact results in 2022 with a $20 million gain in Q1, and a $120 million gain expected in Q2. We anticipate receiving the final $125 million of cash in Q4.
Now turning to cash flow on Slide 11. On a full year basis free cash flow before dividends increased 45% to $3.8 billion.
As a reminder, this includes $400 million from Virginia, and over 500 million of total proceeds from property dispositions. Cash in short term investments finished the year at $2.3 billion.
While this remains elevated, we nevertheless expect to continue to work the balance down this year levels more in line with our historical liquidity needs. After fully funding capital investments, shareholder returns exceeded $3.7 billion.
We will continue to be balanced and opportunistic in our buyback approach and we remain committed to returning excess cash to our shareholders. With that, let me turn it back to Jim for his closing remarks.
James Foote
Great, thanks, Sean. Let's conclude with our outlook for the year on Slide 13.
We remain optimistic about the opportunity to grow this year, driven by a combination of strong underlying economic momentum and supply chain recovery. Based on these expected tailwinds, we are targeting GDP plus volume growth for the year.
Volume should build sequentially throughout the year as supply chain bottlenecks ease. As a result, growth in the second half of the year is expected to be greater than in the first half.
This growth will be supported by the initiative Jamie reviewed to appropriately resource our network for the current demand environment and to ensure we can provide customers with a consistently strong service product. We also expect pricing to benefit from a combination of market forces including very strong demand for transportation services.
Full year capital expenditures are planned at approximately $2 billion. Our top capital priority is and always has been maintaining and improving the safety and reliability of our network.
In 2022, we will replace an excess of 500 miles of rail as we continue to focus on the core infrastructure. The cost of this capital work has been offset by significant improvements in the efficiency of our engineering programs.
While we expect to drive further efficiencies in 2022, our plan reflects the impact of increased inflation and a number of discrete strategic investment opportunities. We will continually evaluate future strategic opportunities as they come along, but still have ample capacity across our network to absorb future volume growth.
And finally, after investing in the railroad and high return growth projects, we remain committed to returning excess capital to shareholders through a combination of dividends and share buybacks. We are entering the year with strong demand across the economy, but shippers are facing ongoing challenges and the lack of capacity in labor, materials and transportation.
Our focus remains supporting our customers by providing effective rail solutions to overcome these persistent bottlenecks. As I said earlier, we are encouraged by the progress we are making and we expect our actions combined with improving global supply chain will provide a year of steadily improving growth.
Thank you. And I'll turn it back to Matthew for questions.
Matthew Korn
Thanks, Jim. Now, in the interest of time, I'd ask that everyone please limit yourselves to one question.
And with that, operator, we will now take questions.
Operator
[Operator Instructions] Your first question comes from Brandon Oglenski with Barclays. Your line is now open.
Brandon Oglenski
Hey, good afternoon, everyone, and congrats, Matt. I guess you guys didn't provide any discussion on forward profitability or margins and I get it.
You have the lapping of Quality Carriers, plus lower land sale gains. So I guess, can you talk to the core efficiencies in the business and how you plan to leverage growth this year?
Are there incremental opportunities for you guys to drive core profitability in outlook [ph] higher?
Sean Pelkey
Yes, thanks, Brandon. This is Sean.
So just to clear the record, so you're going into full year 2022, we're going to have the full year impact of Quality and have lower real estate gains, as I just outlined, that together is about a 350 basis point impact. So on a like-for-like basis, you're starting at a 59 OR.
Fundamentally, nothing has really changed about our story, right? Our expectation, as we come out of the pandemic this year, is for supply chains to normalize.
As they do that, some of this - some of the costs that we've added in order to better serve our customers will start to come down a little bit. Obviously, the incremental growth that we see, stronger in the second half than in the first half of the year, should be at good incremental margins.
And so at the end of the day, I think the core story that you've seen over the last couple of years with us is the same next year or this year, as it's been. The only unknown is what's the pace of the normalization?
How do we get -- how quickly do we overcome what we're seeing right now out there in the environment.
Brandon Oglenski
Thank you.
Operator
Your next question comes from the line of Brian Ossenbeck with JPMorgan. Your line is now open.
Brian Ossenbeck
All right. Thanks.
Good evening. I just wanted to ask, Kevin, maybe you can go through some of the puts and takes of the outlook for some of the key end markets?
I know Sean just talked about some of the uncertainty around the supply chains. But where do you feel like you have some maybe more opportunities that could come to bear and where you see some of the challenges?
And then if you can layer in some of the impact of those new business development wins, it sounds like they might be a little bit more longer dated, but is it too early to see some benefit from those?
Kevin Boone
Yes, thanks, Brian. Look, there's a lot of demand tail winds that we see.
There's pretty robust demand across pretty much every end market currently, so we're optimistic there. As Sean pointed out that supply chain challenges and I think the timing of those normalizing is probably the biggest question as we move into second, third or fourth quarter kind of when does that really translate into some more, better fluidity out there for us.
But starting with merchandise, really, it's a story of auto, when did the autos really start to -- production really start to come back online. When you look at our current estimates, it's really for a back half story on the volume and certainly autos drives more than just the current car loads in the auto side such as the metals business, plastics business for us as well.
So auto is going to be very, very important. Certainly, we all know the demand.
We've all been to the local dealership and they do not have any new cars. If you want a new car you've probably got to wait 12 months, so that's - the demand is there.
There is no question about it. What we see right now, the metals business is very strong.
Plastics remains very, very strong. Probably the only thing that we're really seeing weak and I touched on a little bit is the energy market and then that's all about spreads.
And spreads can collapse and then get out again, so we'll continue to watch those and we'll benefit if those get more positive in the future. On the intermodal side, we've really benefitted from the international market and we see no slowdown at this point.
There's still a lot of ships waiting at the port to get in and we've been very successful in moving that freight and we continue to have the operations and I think we'll continue to benefit from that. The domestic side is really where we've seen a disruption and that's been largely due to the driver shortage, the equipment shortages that we're seeing on the chassis side.
And to be honest, I think the chassis problem seems to be being pushed out every month. I know the suppliers are having a hard time ramping up production, but that's probably going to be a second half story in terms of the chassis as far as we see it right now.
So - but we do see the underlying demand there and I think that's a good positive story for us into the back half of the year. And then finally, when moving to the coal.
The demand is outstripping supply. You see it in the exports benchmark prices, they are incredibly strong right now.
We’re at an all-time highs almost and when you look at the net and thermal markets today. And so we have some opportunity there.
The mines had struggled quite frankly. They are underinvested.
They had a hard time ramping back up production. Some have dealt with strikes.
Some have dealt with other problems. And so those things should normalize hopefully and we should see the benefit of that.
We've also seen recently a new mine come on line and so that should help us as we get through the year. But those, I think the biggest question is how long do the export prices stay at this levels?
But we would expect hopefully volumes to pick up as we move through the year. Those are some of the moving parts due to the markets.
Brian Ossenbeck
All right. Thanks, Kevin.
If I can ask for just a quick comment on coal inventory levels. Do you think you can see some restocking given some of the dynamics you talked about with demand outstripping supply specifically on the domestic utility side?
Kevin Boone
Yes, coal levels, particularly in our Southern utilities are very low. So there's restocking as needed.
We're working really closely with our customers, and I would expect that to persist through this year and probably in the next.
Brian Ossenbeck
All right. Thanks very much.
Operator
Your next question comes from the line of Tom Wadewitz with UBS. Your line is now open.
Tom Wadewitz
Yes. Good afternoon.
I wanted to ask you a bit about how closely we should tie your own capacity and your growth in conductors coming out of the training classes. It seems like you have a nice pipeline and a nice ramp up in that.
How closely should we tie that volume growth to that ramp in your capacity? And is that the right way to think about it?
Or do you think that the factors outside of your control in broader supply chain are kind of a bigger variable in terms of your volume growth?
James Foote
Tom, it's Jim. Just generally, clearly, CSX is no different than any other industry right now, where we have been challenged finding people to come to work.
And because we have been short on our train and engine service employees, simple fact is we have not been able to move the amount of freight we could have, had we've been staffed up at the appropriate levels. That's why we've been talking for the last year at least about our attempts to try and ramp up the hiring of operating employees.
And as Jamie said, we're starting now just now after 12 months of very, very hard work to get it back to a positive growth number in terms of the number of employees. And when we do that, we'll be able to move more freight.
Jamie, do you want to add more detail?
Jamie Boychuk
Yes. I think Jim pretty much nailed it.
This is probably one of the most difficult environments we've ever seen. When you think about all the stuff the rail industry has gone through over the past 10, 20 years, my 25 years of railroading, I can tell you, when you come in one week and you've got 60 people off on COVID a new variant comes through, and you've got 350 off on COVID on your T&E side, you really start to feel the effects.
And believe me, Kevin and I are talking all the time about the opportunities of moving as much product as we can for our customers. And not only just the product that we currently have with our current customers, but the growth side of things and what else can we move out there.
So to Jim's point, our hiring classes of over, I would say, probably the past two months have been extremely successful. We are putting 150-plus T&E, well new conductors, I guess, through our training center in Atlanta and we continue every single week to hold a new class.
And I'm proud to say that all the hard work our HR team has done through Diana Sorfleet is paying off. And honestly, when we start looking at where we're going to be in three or four months from now, we're going to be a different look in railroad and these opportunities that Kevin is talking about is going to be opportunities that we're going after.
Tom Wadewitz
So are you optimistic about a quick improvement related to Omicron or really just focus on second quarter for that improvement in capacity?
James Foote
Yes, Tom, it's Jim. We're thinking about maybe getting an epidemiologist on staff.
So if you're ready to step up and tell us, this is it, this is going to be over in two months, and we're not going to see another one, come on, you can start tomorrow.
Tom Wadewitz
Sounds like second quarter. Thank you, Jim.
James Foote
You bet.
Operator
Your next question comes from the line of Chris Wetherbee with Citigroup. Your line is now open.
Christian Wetherbee
Yes, hey thanks, good afternoon guys. Maybe I wanted to ask a question on pricing.
So Kevin, maybe when you think about renewals for 2022, maybe how -- what the opportunity set is there and maybe how those are progressing as we've gotten through the month of January here? And then on the coal side, any help you can give us with how to think about yields and maybe just the first half of the year or over the course of 2022?
I know the thermal exports are probably a full year renewal, so maybe you have some uplift there, but I think some of the next stuff is a little bit more closer to market. So if you could just help us with those points, that would be great.
Kevin Boone
Yes. So let me cover the pricing side first, and obviously, we're going to get this question.
The market is -- clearly, there's tight from the supply chain from the transportation side. You've seen our primary competition, truck rates are up significantly, and we're having to react to that, obviously, in what we're doing, but also working with customers on opportunities for them to convert more freight over to rail.
In this high inflation market, they're looking for ways that they can save on their transportation costs and rail is almost every time the most economical solution for them. And so those discussions, I'm happy to say are really accelerating now and talking to Jamie every day on what we can do.
So that's a really real positive for us. So I would say, certainly, the market is better than it was last year.
We're working with customers. They understand the cost pressures that are out there across the world, they're seeing it.
They're asking their customers for the same. So we're seeing some positive momentum on that side.
In terms of coal, I mentioned it in my opening remarks, export coal prices benchmarks are at highs. What we’ve assumed and your guess is probably as good as mine is that will moderate through the year.
But what I can tell you is, if the economy reaccelerates post Omicron and China demand continues to be strong, then who knows it could last much longer. But what our assumption is going forward is that likely those prices will come down, so that will impact the yields somewhat into the back half of the year.
But offsetting that somewhat we would expect maybe some volume progress as the producers ramp up some of their production as one of the new coal mines that I mentioned comes online as perhaps one of the coal mines that we serve resolve their strike and there's another major mine that we have right now that's shut down completely. So hopefully, some of those things come back online and help us on the volume side.
Christian Wetherbee
That's great. And just quickly, merchandise and intermodal, how much of the contracts come up for renewal at the beginning of the year?
Kevin Boone
Yes, we see about 50% to 60% renewed annually and about, call it, 75% of those in the first and fourth quarters of the year.
Christian Wetherbee
Great. Thank you very much.
Kevin Boone
Yes.
Operator
Your next question comes from the line of Ken Hoexter with Bank of America. Your line is now open.
Ken Hoexter
Great. Good afternoon.
Jim, Union Pacific this morning talked about growing faster than industrial production or about 4.8% for their level of carloads. You picked GDP in your outlook.
I just want to understand kind of trying to parse your growth target, which includes services on GDP. So can you kind of talk about that overall target or maybe that's a Sean question.
And then you're now more than half a year in with Quality, are you seeing any of the contributions that you expected at this point from the acquisition? Thanks.
James Foote
Yes, I'll talk about, Ken good to talk to you. Yes, I think we're comfortable with the Quality so far.
I mean, it's playing out as we had expected. The customer enthusiasm about this product that we have in the marketplace now is very good.
A lot of conversations are ongoing about converting to a transload type of operation versus truck direct. So -- and we haven't even got the equipment yet here from -- to utilize some of the ISO containers, which will help this conversion even more.
So all in, yes, I mean, they're a great team, really smart people, extremely enthusiastic and excited about this opportunity so far. I think Sean is probably better to mediate between Lance's [ph] view of growth in mind.
Sean Pelkey
I don't know about that, but I can just kind of give you a little bit of color, which I think Kevin really sort of already went through in terms of each of the markets and the puts and takes there. But I think the first half of the year or first quarter, at least on the auto side, we're going to continue to remain challenged.
So and you can see it in our weekly numbers in terms of how that's trending. So the hope is that as we get into the second half of the year, that's part of kind of what drives the above GDP growth.
Kevin also talked about some of the growth initiatives and the three he mentioned aren't the only three. Obviously, there's a lot going on within the sales and marketing team in terms of attracting new business to the railroad.
And then fundamentally, our ability to capture the demand picture that's out there, assuming that the recent momentum we've had on the hiring front continues, and the tools that we're using in terms of retaining the employees we have continue to be successful, we grow the active T&E count, we're going to be able to move more volume.
Ken Hoexter
Okay, thanks Jim. Thanks, Sean.
Operator
Your next question comes from the line of Jon Chappell with Evercore. Your line is now open.
Jonathan Chappell
Thanks Emma. Good afternoon everybody.
Jamie, we've spent a lot of time on labor for obvious reasons, not just impacting you, it's impacting your customers as well. But if we could go all the way back to a few quarters ago before it really kind of rears had and the supply chain got into a real bad congestion issue, I know you were out in the field kind of looking for other type of improvements you can make within the network.
So as we think about right-sizing the organization, getting through some of the supply chain congestion into normalized “fluidity” you guys seemed to have a head start here. So are there other opportunities for you within the network, whether it's just on trip plan performance or some of the cost levers in the back half of the year into 2023 that you think being a front runner here, you have a real opportunity on a relative basis?
Jamie Boychuk
Jon, we are always analyzing the railroad. So I'm going out there again next week to spend some time on the railroad, and we'll be analyzing again what we're doing with our plan out there.
So of course, as market conditions change, and other factors that go on out there, we analyze what we do. Yes, we just finished finding different opportunities to service our customers better, particularly in the Carolinas.
We spent a lot of time out there just over this past quarter. But as I mentioned, we've put some assets out there in order to ensure that we can provide the service that our customers require right now.
So there are some expenses that go along with that. And we see a quarter or two from now as our hiring catches up to where we need it to be, we'll be able to pull those assets back and/or use those assets for continued growth as we move forward.
So there is -- there absolutely is always an opportunity on our railroad. The job of the folks out there, who are working really hard on the ground, their job is to execute.
The network centers job is to analyze. And I work between those folks to make sure we're making the right decisions, and we'll continue to do that.
So yes, there's always opportunities, but I can tell you right now, our focus is on growth. Our focus is on service and our focus is to make sure we continue to balance those expenses along the way.
So that's going to be where we continue to push in towards 2022.
Jonathan Chappell
Great. Thanks, Jamie.
Operator
Your next question comes from the line of Amit Mehrotra with Deutsche Bank. Your line is now open.
Amit Mehrotra
Thanks. Hi everyone.
I just had a couple of quick hit questions and then one kind of maybe a broad one for Jim. But for Sean, I wasn't sure about this when you answered it earlier.
Are the margins of the business going to improve on a year-over-year basis against the 58.1 OR that you did in 2021 and I'm obviously excluding Virginia, I understand the timing of the Quality Carriers acquisition and all that, but ex-Virginia, are the margins going to improve year-over-year relative to the 58.1? And related to that, could you just talk about maybe what the expectations are on SS oil revenues year-over-year?
Because I think that will probably be a little bit of a headwind in 2022. And then sorry, Jim, one out of the box question a little bit.
You've had great success leading CSX and the whole team over the last many years under very difficult circumstances for sure. What is the thought process around succession planning?
Do you plan or are you willing to lead CSX for many, many more years to come or do you think there is some scope for change internal or external? Can you just talk about that?
Because it's a question that I get and we get a lot and I thought it would be interesting to get your thoughts on it as well. Thank you.
Sean Pelkey
Amit, this is Sean. I'll take the first two to begin with.
So on your operating ratio question, you've got the 58.1 full year impact of Quality. So what I was saying is that kind of takes you to a 59.
So I think your question is, can we do better than that in 2022? And we're not going to give OR guidance today.
And -- but that being said, I think we've kind of walked through all the factors that are going to drive growth, both in terms of our volumes, our revenues as well as operating income and what that means for OR. We go into the year with a little bit of an elevated cost profile.
Probably in Q1, you're going to see costs that are largely similar to Q4, given that things have not gotten better from a supply chain and labor availability perspective. As we go through the year, we think that does improve.
And if it does, then we also see volumes come along with it. And we think that sets us up very, very well.
There are other uncertainties. What happens in the coal market with export coal pricing and other factors like Kevin talked about.
And then the other piece of it that you hit on was the other revenue, I think largely other revenue is going to trend with the broader supply chain because the issues that we're facing that are causing containers to dwell on the intermodal side are the same factors that we're facing more broadly in the economy between driver availability, chassis availability and so on. And so it's likely other revenue is going to remain elevated here in the first quarter.
And then I would say our baseline expectation is that it begins to normalize starting next quarter and then hopefully sort of back to normal by the second half of the year, which means we're probably moving more volumes, so those are the factors.
James Foote
On the question of succession, clearly, it's been a topic since I got here starting in the beginning of 2018. You may recall, there's been quite a significant change in the management makeup here over that four-year period.
And it has always been my goal and has always been the goal of the Board to make sure that we had in place a rock-solid diligent succession planning process and the procedure to follow for all of the executive management jobs. And I think when you talk on the call today and you heard these great new voices that are, so doing such an exceptional job, that's because of the diligence that went into making sure that we always have an available pipeline of qualified talent.
And I could tell you from working with the Board, that's no different from my job. Our job and the Board's job is to make sure when Jim decides to go whenever that might be.
Hopefully, it's when I decide not when they decide. But whenever we're going to fill that job that we have qualified people, both internally and externally that can step right in and being a significant shareholder, I hope you can do a better job than I think I have done.
Maybe other people disagree, but it's been an interesting ride.
Amit Mehrotra
Yes, well I appreciate you entertaining my question. Thank you very much.
Operator
Your next question comes from the line of Ben Nolan with Stifel. Your line is now open.
Benjamin Nolan
Yes, I have two probably quick ones, if I can squeeze them in. The first is just when we're looking at the $2 billion of CapEx, curious if you might be able to parse that out between -- or what portion of that might actually be growth related?
And the other one is, you talked a little bit about coal outages and I know there was an issue it occurs, how should we think about coal in the first quarter specifically?
Sean Pelkey
Hi Ben, this is Sean. I'll take your first question around the CapEx and I would say CapEx is up about $200 million versus 2021.
About half of that is related to growth investments. So Jamie talked a little bit about the sidings already, which set us up very well for the long-term to grow into the capacity that he'll be creating.
We're making some incremental investments on the technology side. Some of the Quality investments in the ISO tanks fall into that category and then some commercial facilities.
So lots of good high-return growth-oriented investments. The balance of the increase in capital is really driven by sort of inflation in the core infrastructure spend as well as slight increase in hardening the core infrastructure for safety and reliability.
Jamie Boychuk
I would just add on the CapEx side that the siding extensions we're looking at mostly on our L&M part of our property, which was down in the Southern, Southwestern part of the railroad where we had smaller sidings. It worked for us, but the growth coming out of some of that area through Alabama and other stuff that's going on, the need is there.
So that's where the majority of this CapEx money is going to, and we're excited to get it out in that area to support that growth that Kevin and his group are bringing. With respect to Curtis Bay, yes, we were down for a couple of weeks, but we're back up doing direct dumping.
We did redirect a few trains to a couple of different locations, but we are back in business.
Benjamin Nolan
All right, thanks.
Operator
Your next question comes from the line of Justin Long with Stephens. Your line is now open.
Justin Long
Thanks and good afternoon. I was wondering if you could talk about the impact you expect from Quality in 2022 from both the revenue and operating expense perspective as we try to model that out?
And then circling back to some of the labor commentary, can you help us think through what you're expecting for the sequential change in headcount as we progress through this year?
Sean Pelkey
Yes, Justin, it's Sean. I can take both of those.
So the Quality impact is pretty straightforward. What you saw in the second half of this year, both in terms of revenue and expense is probably a pretty good run rate going into the next year into 2022, will have kind of a happier impact in Q1 and Q2 and then as we get into the back half, it should be pretty similar.
The things that are going to drive any difference would really have to do with driver availability. The demand is very strong on the Quality side, but that's how I would think about it.
So, a little over $400 million of revenue in the second half of this year. That's probably a good run rate around $200 million a quarter.
In terms of sequential labor headcount, so you saw an increase of 1% from the third quarter to the fourth quarter. I think that's probably a pretty good estimate of what we might see over the next couple of quarters.
The good news is, as Jamie talked about, the head count we report to you includes both T&E employees who are in training as well as those that are marked up in revenue service. The mix between those that are in training and in service will change a little bit over the course of the first half year, which is great news.
But the headcount should go up very modestly on a sequential basis over the first couple of quarters here.
Justin Long
Okay, helpful. Thank you.
Operator
Your next question comes from the line of Scott Group with Wolfe Research. Your line is open.
Scott Group
Hey, thanks. Good afternoon.
So Sean, we have some pretty big headwinds from comp per employee and purchase services in the quarter, I think, including some accelerated costs. How should we think about those two pieces this year?
And then, Kevin, just circling back on coal for one second, was your point about the net prices at highs suggesting that there's another sequential uptick in coal RPU in 1Q?
Sean Pelkey
Scott, so comp per employee, you're right, it was elevated here in the fourth quarter, and that was one of the big factors there obviously was the incentive comp piece. So that should normalize as we get into 2022.
I think if you look at it, excluding that for the back half of this year, that's probably a good baseline to build off of. We're going to have some higher labor inflation, which includes health costs as well as payroll tax and railroad unemployment.
That will be partially offset by the incentive comp and then there's some favorable mix from the Quality addition in the first half of the year. Hopefully, as we get later into the year and the network is cycling better, we also see a reduction in overtime and things like that.
So they're probably as a result of inflation, there will be a modest increase versus the normalized comp per employee, but not significant. And then in terms of purchase services, that's a line that has a lot of different moving pieces.
What I can tell you is that you're probably going to see something similar in the first quarter to what you saw in the fourth quarter. But a lot of the costs that we added recently have to do with offsite storage and intermodal facilities, supplemental labor, adding some locomotives things like that.
And that ties directly to overall fluidity within not only our network but the broader supply chain. So as that gets better, the purchase services costs should come down commensurate with that.
Kevin Boone
Yes. And then on the coal RPU, we would expect something probably flattish in first quarter versus fourth quarter.
Mix always matters. I would say the mix in terms of our domestic coal side should we see some of the supply issues at the mine and prove could help some of that southern coal longer haul pull maybe later here in the quarter that could help, but largely flat is the way we see it today.
Scott Group
Okay. Sean, if I can just clarify one thing.
It sounds like the purchase services headwind is an offset to this assessorial stuff. So as the accessorial goes lower, the purchase services costs go lower too, so don't think about the accessorial as 100% margin.
Is that clear?
Sean Pelkey
Yes, that's correct. I think it's --- that's right.
That's right. Now probably accessorial may come down a little bit faster than purchase services just as -- just from a timing perspective, but they will trend together.
Scott Group
Okay, thank you.
Operator
Your next question comes from the line of Bascome Majors with Susquehanna. Your line is now open.
Bascome Majors
Yes, thanks for taking my question. Jim, you talked a little bit about having a lot of new faces in management over the last few years since you've been in the company.
Can you talk about potentially updating the investor community with an Investor Day, other type of in? I mean it's approaching for years, you've acquired some non-rail businesses, you've got new faces and we've been through the global pandemic.
Just curious when you think it might be time to kind of share your vision of where you think and you take CSX kind of midterm and how we're going to get there? Thank you.
James Foote
I think we had probably planned on doing another Investor Day, at least a year ago, if not longer. But I don't really -- I personally have not felt that it's really that useful via teams or via Zoom and have every time we've kind of talked about getting out to New York or doing something here or whatever it is, something else comes along and kind of puts the kibosh on our plans.
So as soon as Tom Waterwood gets here and tells me when the pandemic is going to end, then we'll schedule it up and get out and talk to all of you. I'd love to show this team off, they're fantastic.
Bascome Majors
Yes, thanks for the color.
Operator
Your next question comes from the line of Jason Seidl with Cowen. Your line is now open.
Jason Seidl
Hey, thank you, operator. Good afternoon, gentlemen.
I wanted to talk a little bit about the performance in the quarter on the operational side. I think this was the first time your trip plan compliance for the carload division got above 70%.
So I wanted to find out what was going on there? And what else needs to be done to sort of try to close that gap between carload and Intermodal?
Jamie Boychuk
Thank you, Jason. I'd say, as you've followed probably quarter-to-quarter, it is a slow climb.
We're working really hard on the service product. It really comes down to the availability of people.
Our COVID numbers were down into October, November, where we had maybe 30 or 40, maybe up to 60 T&E employees and then towards the end of the year up to where we are today, well over 300 to 350 folks off. So for us to really get this service product where we're arriving on the hour, as we continue to commit to, it really comes down to people.
And we've been saying this for probably over a year now as we've struggled to even get that pipeline going. Now we've got a great pipeline.
We continue to fill those classrooms and the folks in Atlanta are doing an absolute amazing job under Jim Switzenberg [ph] and his team. It's all about producing conductors and as this quarter continues, we should see that number come up, but again I think Jim has mentioned couple of times, it all comes down to what happens in the world with respect to COVID or whatever the next pandemic or item might be that affects our crewing of our trains, so that for us is the dial that really turns us up and down when we think about our service product.
Jason Seidl
So I guess we'll just wait for a while to confirm the end of both, but good job and the numbers and we’ll look for more steady improvement as the year goes on. I appreciate the time.
James Foote
Well, you'll see that number we publish; we publish our velocity as well every week. And that’s a good proxy for understanding of how fluid the railroad network is, whether you’re trying to look at it from a service standpoint, a customer perspective and where we in terms of trip plan compliance or how much extra cost we're having out there because we're running slow.
In the region, we run slow. It is not that the locomotives moving at a lower rate of speed, it's sitting someplace because it gets to a terminal where it's supposed to be recruited and there is nobody; we don’t have an employee to get on the train because he got sick.
And so, as that velocity number increases, as that drone number goes down, the result is that our customer performance metrics or our trip plan compliance numbers will just improve over time.
Jason Seidl
Well, I always appreciated the fact that you guys publish this, because trip plan compliance is what most shippers look at anyway, so I much appreciate on my end.
Jason Seidl
Good, great.
Operator
Your next question comes from the line of Jordan Alliger with Goldman Sachs. Your line is now open.
Jordan Alliger
Yes. Hi good afternoon.
Just some, one if I have some thoughts on round revenue per carload, sort of from the total company perspective, obviously coming off two strong quarters, we talked a little about the first quarter recall, but as you think about moving through the year, taking into account mix, how do you think about revenue per carload first half, second half of wherever you want to talk through it? Thanks.
Kevin Boone
Hey, this is Kevin. I'll take this one.
Clearly, yes, we had some strong performance. Some of that, obviously, was due to the impact of fuel surcharge.
We see that probably being a favorable impact into the first quarter and probably less so as you move into the back half of the year and just face tougher comparisons there. There's a couple probably larger swing items we've talked about quite a bit already but the export coal side will be a large swing item into the second half of the year if prices and the benchmark prices remain.
That will obviously be a good impact. We've talked about how we reprice 50% to 60% of our business every year, and so you'll start to see that impact start to flow through probably more heavily in the back half of the year.
And then on, those are probably the major moving parts across the business and obviously mix always matters. If intermodal is outgrowing your merchandise side of your business, that's always a negative mix.
So we would, we would expect merchandise to remain strong, but intermodal has proven over the last few years to be outgrowing merchandise, which is a good thing, but can have a negative impact on the overall RPU.
Jordan Alliger
Okay, thanks for the color.
Operator
Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is now open.
Walter Spracklin
Yes, thanks very much operator. Good morning or good afternoon everyone.
Just a question here on the environment that we're in right now and how different it is and whether that creates opportunities for you to kind of re-envision some of the historical practices, you do, particularly around contracts with customers and contracts with employees. So given Jim, you mentioned you just can't get an Jamie as well, you can't get people, I’m wondering if this sets the stage possibly for a bigger push on automation, perhaps it's a little easier to get automation through if the workforce is short people?
And secondly, same thing on the customer base, if you've got a customer base if you got a -- high demand for transportation services, does it allow you to perhaps restructure aspects of the contract that you might not have been able to do in the past, open up that door whether it's on duration to your favor longer or shorter. I'm not sure which one you would prefer, but items like that on either of those two, I'd love to hear any color that you might have?
James Foote
Well, on the customers, we have -- for good or bad, and yes, maybe this -- the last two years has caused us to rethink everything because things that we never thought were possible to happen, have happened. So we look at -- I think we look at the world differently.
Our relationships with our customers is -- this is a big business. It's a big business.
Our -- we have relatively long term, not as long as some contracts. But a couple of three-year duration with a customer who is making huge capital investments in these plants, in order to produce and has to have some level of longer-term reliability on what is transportation costs are going to be for them to be able to plan how to run its business.
So trying to change that is difficult. I think every -- and again, our customers are reasonable people.
So I think there's dialogues about what works there's always what works for both. It's a partnership arrangement in terms of how we help our customers be successful in these markets.
In some circumstances, it may have accelerated our views to a certain degree in terms of -- there's been a modification. There's certainly been a change in the e-commerce arena about who buys themselves transportation in the marketplace.
And so, we're dealing in certain circumstances more directly with the customers as it worked with third parties in -- that we did in the past and I think that's something that probably will evolve and continue to change. In terms of working with how we interact and how we contract with people that want to work for us, I think this is a big challenge and a huge opportunity for us to really upfront address what we think the worker who wants to work for the railroad is, what's the profile of that individual, not six months from now and not a year from now, but five years and 10 years from now.
And how do we evolve for this industry in an extremely again, in most circumstances, how would you do this differently? How can you do this better?
We can't put kiosks in place to do the work of a conductor or an engineer. But there's certainly technology out there that would allow us to do things more effectively, easier and probably with fewer employees.
But we also work in an extremely heavily unionized environment that is also very heavily regulated with at times bent on telling us how we should do things. So we're always in the middle of going through the process and but yes, it's opened our eyes, and I think it's opened everybody's eyes in the transportation business about what we need to do to be more effective and handle these types of issues in the future.
Walter Spracklin
Have you found that the automation question has been easier to enter into with unions in the current environment compared to previously?
James Foote
No.
Walter Spracklin
Okay, I appreciate the time, Jim.
James Foote
You bet.
Operator
Your next question comes from the line of David Vernon with Bernstein. Your line is open.
David Vernon
Hey, guys, good afternoon. Thanks for taking the time.
Two from me, Jamie, could you talk a little bit about where you expect headcount to be as we exit sort of the 2022 time frame? And then, Jim, I'd love to get your perspective having had some time presumably to review Norfo Gas [ph] asset and the CPKC transaction.
Kind of what do you think about that and what you think about the implications of that, what you think the implications of that ask would be for CSX in the long run?
Jamie Boychuk
Just touching, I think Sean talk a little bit about it. But look, we have 6% to 8% attrition per year.
We have to remember that. So not only do we have to hire to cover attrition, we've got to hire to get that number where we need to be in our minds to be able to provide the service that's required and the growth that Ken and his group are going after.
So I'll leave it -- I'll kind of leave it at this. We are actively hiring.
We have over 500 conductor trainees right now between Atlanta and what's out in the field and we're not stopping. We're going to continue to get folks out there qualified as conductors.
And we've got a round of qualifying for locomotive engineers here at some point within the next year or two. So -- but we want to make sure that we can provide that service and grow this company.
James Foote
As it relates to the other railroads' filings in the CP and KCS deal, I'm not surprised at all, but the other railroads, some of the other railroads have weighed in with the requests to make sure that their franchises and their customers primarily are protected. And each railroad has its own unique requests and that process is just starting.
We're just -- we didn’t get involved in the substantive conversation around what the impacts are of that transaction. You may have seen that we took the position with the FTB that we didn't have enough information basically yet to formulate an opinion.
So until we have gone on the record, so to speak, with what it is, what it is that we're going to ask for and we're still kind of looking at what it is we're going to ask for and what do other people ask for and what does that mean that sort of thing? It's really -- I'm not going to comment on any specific filing that any other railroad that made yet.
David Vernon
That's fair. But I guess, if I could just press a little bit.
Is the scope of that Norfo Gas surprising to you or are you -- was that kind of as expected?
James Foote
Again, I'm not going to characterize anything.
Jamie Boychuk
No, no comments at this point.
James Foote
No. Like I said, it's not probably would be a comment really one way or the other where I thought it was aggressive or not aggressive or it's -- we're trying to figure out what everybody is doing and that takes time.
It's a long, long, long process here for us to gather information, for us to look at everything, and then we'll formulate what we think is the right thing for CSX to do. And then at that point in time, we'll be in a better position to comment on what I think about whatever everybody else asked for.
David Vernon
That’s fair. Thanks a lot for the time guys.
Operator
Your next question comes from the line of Cherilyn Radbourne with TD Securities. Your line is now open.
Cherilyn Radbourne
Thanks very much. Good afternoon We're starting to run a little long, so I'll just ask a quick one here in terms of coal and the producer outages that you experienced during the quarter and the new mine you have coming online, just wondering if you can help us frame that a little better in terms of the tonnage impact and the timing of when it could come back or come online initially in case of the new mine?
Kevin Boone
Yes. I wish I had a crystal ball.
There's one particular mine that keeps on telling us that they're going to come back online, and it seems to get pushed out every week. And so, no I don't have a lot of visibility, I have probably more confidence that as we get into the second, third, fourth quarter that we’ll see some pickup there.
The good news is they have a lot more cash to reinvest in their business, whether it's equipment and other things. So I would think we'll see some benefits of that as well.
I mentioned one particular customer dealing with the strike. Those things have continued for quite a while, but eventually those things get resolved as well.
The other one, the mine that I mentioned that's coming online, it will be a slow ramp-up, and we would expect more volumes in the second half and that's mainly into the export market. So we're positive there.
We're -- it's a supportive market obviously, and we're going to look for opportunities to move more coal as we get more crude availability into the second half.
Cherilyn Radbourne
Thank you for the time.
Operator
Your last question comes from the line of Ravi Shanker with Morgan Stanley. Your line is now open.
Ravi Shanker
Thank you everyone. One big picture question and one follow-up.
The big -- bigger question is on domestic intermodal. Just based on your conversations with your customers, kind of do you have a sense of what it's going to take for shippers to move significant amount of volumes off truck and third on the rail.
Is it as simple as just clearing the congestion or are there more complex issues with speed and service and flexibility that kind of take longer to resolve? And just a followup, Kevin, you kind of mentioned the cadence of your contract renewals, we are seeing on the truck side that customers are trying to push for shorter contracts or more frequent price resets on the contract side are you seeing anything similar?
Thank you.
Kevin Boone
On the contract side, nothing has really changed. We're obviously working with customers to create more even cadence through the rail network and I work with Jamie all the time, and we go out to customers and explain the challenges that they create and they can create more ratability of their volumes through our system.
That's extremely helpful. And so working with them a lot on that side, so that's a big opportunity there.
And then what was the first part of the question?
Ravi Shanker
Just intermodal and kind of what it takes to get…?
Kevin Boone
Okay, yes. On the intermodal side, I think having spoken to you recently just one of our many customers; I think consumer behavior is actually going the other way.
The expectation is not that they necessarily need something next day. So I would say, the emphasis on speed is actually going the other way to some degree, and we're seeing conversations around maybe I don't need to move it over a truck and get it there in 24 hours, that 48, 72-hour option is valuable.
It's obviously cost effective, where a lot of our customers are looking to offset very, very high prices. I would say, on the domestic side, really the challenge has been equipment.
It's not a lack of demand. We get calls every day.
They want to put more volume on us. But if they can't get the volume out of the terminal, that's a problem.
And that's what we've been dealing with. But we think that will resolve itself.
It's obviously going to be easier to get truck drivers that you can get home at night that are doing the short haul, and that really plays into our sweet spot. The long-haul truckers aren't there.
And I don't think that the drivers are going to come back to that market, but we do think the shorter haul drivers are going to become more and more available. But it's not just the drivers, it's the chassis, and we know there's a lot of orders out there, and so that will resolve itself.
And then the container side, a lot of containers being ordered right now. So we do think as we get into the second half, we'll have a lot of tailwinds that will help us really accelerate growth.
Ravi Shanker
Great, thank you.
Operator
This concludes today's conference. Thank you for attending.
You may disconnect.