CSX Corporation (CSX) Earnings Call Transcript & Summary

All right. Good morning, everyone. Brandon Oglenski, again, Transport and Airline analyst here at Barclays. Next up, we have CSX and Mr. Kevin Boone, CFO.

And how long have you been CFO of the company?

It's official October. I was interim, starting in May of last year.

Okay. And not that long ago, you would have been out in the audience.

I've come to this conference, probably, what, 8 times, 9 times in my career. I was sitting out there for 8 of those years, so first time on stage.

And a lot of us know you because you came on board about 2 years ago, right, as...

September of 2017, yes. It's been quite a ride.

Yes. All right. But before we get into it though, I just want to queue up the audience response questions for CSX. So for those of you in the room, do you currently own the stock? Yes, overweight, market weight, underweight or no? It's nice to have you up here, too, by the way. [Voting]

Some potential owners in the room. Question number 2. What is your general bias towards CSX right now? Positive, negative or neutral? [Voting]

While we're waiting, I want to introduce a couple of colleagues I have out in the audience, our Chief Accounting Officer, Angie Williams, emphasis on Chief; and IR, Dan Schwartz, whom you've probably dealt with in your times.

Yes. And question number three, please. In your opinion, through-cycle EPS growth for CSX? Above peers, in line with peers or below peers? [Voting]

This is the one I'm interested in.

In line.

Okay. Work to do.

All right. Well, Kevin, I definitely want to talk about everything that's going on in CSX, the long-term opportunity. But I think a lot of folks in this room are a little bit concerned about how bad the situation in China can get? And the potential impact on revenue and volumes this year? I know it's very, very early, but have you guys heard any indications from your customers about what's going on in the supply chain and what to expect looking forward?

We're really having, at this point, certainly a watch item for us, particularly on the Intermodal side, on international business. But really, a lot of our business, fortunately, is domestic, and the economy still remains strong. You could see some opportunities on the commodity side that could come our way, if we're seeing some emphasis on the coal side, some firming up on the met side. So we'll see. There's a lot of moving parts. So it's really hard to call what third or fourth quarter really looks like or what the impact could be.

Okay. Talking about coal, that's been a pretty challenging segment for you guys, right?

Absolutely, particularly this year. I mean we came into the year telling everyone that we're going to have several hundred million dollars of headwinds related to coal, mainly on the export side, but also domestic coal. We expect to be down. $2 gas doesn't really work well for domestic coal right now, but we're doing a lot of interesting things with our new marketing person that we hired on, Adam Longson, creative ideas there, and we're working with our customers as much as we can.

We did talk about met firming. So incrementally, how has that changed from maybe where the discussion was a month or 2 ago?

I think it's more about firming versus seeing any -- it's more about stability at this point in the markets. That's the first sign of, hopefully, a recovery. You got to start somewhere. So that's a bit encouraging. I would say the domestic side is probably a little bit weaker. Obviously, with nat gas taking another leg down here recently. Hopefully, that firms up as well. But again, I think, these markets are so dynamic and things move around very, very quickly. And the only thing we can do is react as quick as we can.

Okay. I think from an investor perspective, obviously, railroads are of high interest, and we can see that at the conference here. But relative, CSX, and this is not a knock, but a lot of folks say, "Well, look, Kevin and team have already gone through the PSR transition, their margin is industry leading," but now there's just more incremental investment opportunity at the other carriers that are showing the traction to get to the profitability levels where you guys already are. So what is -- that's not necessarily my perspective, and I'm sure it's not yours, but where's the evolution now that you guys have gotten to the most efficient point? Does this become a story about growth?

Yes, I certainly do. First of all, it's not easy to get to where we've gotten. So I don't think that's a layup for anybody, and I hope it's taken a lot of hard work. We've quite frankly have the best operating team out there with Jamie and his team, and they find new opportunities every day. Just 2 weeks ago, they went on the train trip and came back with a multitude of opportunities, 360 miles of track that we may not need, multiple mainline switches that we're going to take out. These are all costs that will come out of the system. And so those efforts still continue and we'll see huge gains, I think, going forward on that side, as it continues to go out there, get in the field and see opportunities. It still amazes me that those opportunities still exist today, given all the change we've had. But really, what we created is a model that we could really leverage the growth. And we showed the board just recently a couple of weeks ago, a slide that basically shows the capacity we have in our system today. On average, our merchandise trains move about 99 cars. Today, we believe that capacity can go up to 150 cars per day -- cars per train, sorry. So 50% more capacity. And you could think about the incremental cost, just adding another car to the end of the train, it's not much, it's car hire, it's fuel. So the incremental margins would be very powerful. On our intermodal trains, we move about 144 containers on average per train. We believe the capacity can go up to 300. So you could just see, we don't have to add another locomotive to move the same amount of freight. There's huge opportunities on that side. So it's really leveraging the cost base and growing into it. We'll still continue to go after cost. There's automation. There's other things that we're really starting to focus on. But it's really leveraging the growth without having to add a lot of assets against it.

Well, and maybe what's underappreciated by investors, but there's been a lot of change at CSX from the leadership side, right? How long has the current team been in place?

Well, I mean, I started as CFO in October. Jamie just recently was named our Executive Vice President of operations, Mark's been in his role for about 2 years. But it's a very new team. It's a combination of people that have been there at CSX for a long time, that offer that perspective and then a few of us that have come from the outside. And so along with Jim's leadership, who -- he's been doing this thing forever. He provides a great perspective for us, but a lot of energy. We're looking at things, I think, in a new way. We always constantly ask questions. I think that's my reputation around CSX is to ask questions about everything, and I hope people are getting that. The culture is changing. I think we're on the very positive side of things in terms of the ability to empower people to make decisions, pushing down decision-making to the field. I think Jamie is really focused on that in the organization. So it's really empowering people. It's really elevating the people that are very good at what they do and giving them opportunities to add value.

Okay. And along those lines, I think you guys in the last year or 2, I don't know if restructuring is the right word, but restructured the intermodal business. You did walk away from some traffic, right? And you had a refinery issue last year as well. So is it possible that some of these things have really masked some of the core opportunities you see in the network?

Oh, absolutely. If you look at our intermodal growth ex the rationalizations, we're pretty happy with what we're able to do even last year. It, obviously, doesn't show up in the overall number, but we believe a service that we offer today is better than it's ever been. We had a -- and I think, Mark mentioned this on a call recently. We had a customer that called our service truck like, that's the best compliment you could have. So I think we're making strives there. If you look at our intermodal business today versus where it was 3 years ago, on average, our average lift per container is down 30%. That means we're able to be a lot more efficient, and ultimately, compete a lot better with truck, point-to-point, not -- no more hub and spoke. And that's very powerful to go on the market and provide the reliability, the speed, all those things that are hopefully matching truck performance. We're not done. We're going to get better and better. I know Jamie is not satisfied to where he is today, but it's a much different game when we go and have discussions with customers.

Well, I think there might be some historical perspective here, too, with maybe your eastern competitors just has a structurally better intermodal network. They have shown more growth there historically. Is there something about the CSX network that says, well, we just can't grow as fast as the market? Or is that actually maybe the big opportunity for you?

We don't see that. We don't believe that, particularly where the network is today. We're having great conversations with customers. They're seeing what we're able to deliver. We think we're differentiated. And so we think that's going to create opportunities for us. We're really, really excited about that.

Okay. What about on the merchandise side of the business, is that also an opportunity in the network?

Right now, we're running better, just like the intermodal network, we're running better than we ever have in those open up conversations with our large customers to say we're open for business. I know there's more freight for you to give us. We're delivering 30%, 40% of your freight today, why isn't it 60%, 70%, 80%? So we're having those conversations, and we talk about the truck conversion all the time, and it's real. It's showing up. It's -- it takes time, but it's building momentum. The sales team is able to offer tools and insight. We -- now we can go to our customer and say, here's what the data looks like, here's what we can deliver, here's where we're going to have accountability to and holding us accountable, and we're sharing that data with them, so they can hold us accountable. It's very, very different. We've rolled that out in the end of last year, our trip plan compliance to the customer. And so now they track just like UPS, they track their package through our network. And so they're digging out. They can they can call up and say, hey, this is not working, and we're on it. So it really changes the game, I think, from a customer perspective to know that you can rely on us. That's been the big issue with the railroad industry, as you know, is the reliability and our ability to deliver on what we're going to say we're going to do.

And can you talk more about trip plan compliance because I think you have made a pretty big push there.

We have.

And you're disclosing that now to us, too, right?

We have. Yes, we disclosed it on the earnings calls over the last few times, right? And so on the intermodal side, we're up in the high 90s or mid-90s, which is approaching truck like. When you look at truck, it's probably 98%. And then on the merchandise side, we're in the low 80s. I mean, these are -- these come from way lower ranges, you're looking at 50%, 60% that we were a year or 2 ago. And so that's just a huge shift in what -- in the service we're able to offer a customer. And it takes a little time. I think they want to see it over quarters and months rather than weeks. And so we're continuing to get better and better. And as we get better and better, they -- I think the customer is going to be more inclined to look at us and say, "Okay, we believe this is sustainable, and we're willing to risk that freight that we weren't willing to risk before. We want to put it on a truck because we knew it was going to get there. But now, we know we can put it on CSX, and know within the hour that is going to show up where it's supposed to."

And again, this is not just in intermodal, though, this is in merchandise?

This is merchandise. This is across. So we rolled out in merchandise as well.

Okay. And how does that differ with how you're measuring yourself against customers previously?

Well, first of all, we didn't tell our customers what we're doing. And quite frankly, we go in the meetings that we couldn't really show them the data to either tell them we were doing a good job or not. So I think that was problematic when you're going in and trying to sell your service. So today, we can do that, which helps tremendously, I think, in the sales and marketing discussions with our customers. And now we're sharing it with them. It's open book, here's what we can do, here's the lanes that you're interested in new lanes, here's what we're doing today, we'll show them that data. Here's our reliability, all of those things. And I think that really opens up the customer discussion.

I mean some of the folks you work with, predecessor company was Canadian National, we had them up here today, they were talking about how they've grown their revenue 80% since 2010. Not going to ask you to guide that for CSX, but is the opportunity in the east maybe even larger, just given that there's a larger population base, more freights moving? I mean, how significant of a growth opportunity is on your network?

We're -- our network overlaps where everything wants to go. Most of the population is in the east. And so there's a huge density opportunity for us. When we look at the truck conversion opportunity, obviously, and when I was on the other side, as analyst, the big opportunity is still in the east to convert. And quite frankly, with our better service, we can probably shrink that mileage; maybe, it was 500 miles that we could convert 4 years ago because nothing below that made sense, but now that maybe is 400 miles, 350 miles today that we can really go after. And in some cases, even shorter because we run a really, really efficient network. So our addressable market versus 3 years ago has expanded, I think, significantly from where we were, which is a huge opportunity. The other thing is, the merchandise side is still -- we think there's billions of dollars of freight out there that we don't understand why it's moving over truck today. The only thing that probably explains it is, over time, the reliability of those things, it just moved to truck. And so those conversations we have to have with the customer, they were different. We're offering a new improved service, that's different from the past, and it's going to be reliable going forward. So -- but those conversations are slow and they build momentum on top of them. Let's prove us in this lane, and then they'll give us maybe 1 lane, and then it's 2 and then it's 3. So it expands constantly, and it's a huge opportunity on the merchandise side. It's really, really where we're focused internally.

Okay. I don't know if there's any questions in the audience, just raise your hand, we'll get you a mic. There you go, one in upfront.

Do you plan that one?