CSX Corporation (CSX) Earnings Call Transcript & Summary

Okay. Morning, everyone. We're starting our next fireside chat with Mark Wallace, EVP of Sales & Marketing at CSX. Sorry, we're a couple of minutes behind. We're going back-to-back all day here. Mark's got a couple of opening comments he's going to make, and then we'll jump right into questions. I've got a bunch ready to go, but definitely feel free to type in questions that you want to ask as well. Mark, I'll pass it on to you.

All right. Great. Thank you, Scott, and thank you for having us, and Good morning, everyone. I certainly wish we were all in New York as usual, but I'm glad we could still connect virtually. This is certainly first time for me to do a transportation conference remotely, but I imagine for all of us and for the foreseeable future, this is sort of what the new normal looks like. It's interesting for my team, Scott, working with customers, not being able to get on the road and go and visit them and sit down with them, working remotely using Zoom or Microsoft Teams is different. And -- but I think it's also important that we keep close to our customers and to our accounts, learning about how they're doing, understanding their challenges and figuring out how we can play a role in helping them succeed through these times in the marketplace. In fact, if there's ever a silver lining, Scott, with this whole pandemic, I think what it has done is it's actually brought us a lot closer to our customers. My sales and marketing team every week are checking in, having these types of meetings with their customers. And so I think it's developing new relationships and bringing us, as I said, a lot closer to them. At CSX, we're taking the necessary steps to deal with this challenging time so that we emerge out of this pandemic, a stronger company. And I just really would like to take a second to recognize, Scott, the men and women on the front lines at CSX, the engineers, the conductors, the mechanical employees, the engineers who are repairing the train -- the tracks and all the men and women in between who are doing such a remarkable job continuing to move this nation's economy and more importantly, delivering goods for our customers and rewarding our shareholders during this challenging environment. They're doing an excellent job, not only continuing the high levels of service that our customers have come to expect from CSX, but also realizing and rightsizing our network for the decline in volumes that we're experiencing. As I said, volumes are down, but our service is great. Our trip plan compliance for our merchandise business is in the high 80s and for intermodal, it's in the high 90s. Record, record performance in terms of service for our customers, and we're continuing to deliver even in the face of everything that we're all going through. Scott, we started the year excited at CSX. We started out of the gate really strong. Our merchandise and our intermodal volumes were really good. We were looking forward to a great 2020 until the COVID-19 pandemic hit us. But we're adapting. And as I said, we're rightsizing and doing everything we can to adjust to the new normal. And while I don't think any of us expected this pandemic to happen, nothing at CSX has changed. Our strategy, our focus, our commitment to delivering superior customer service and rewarding shareholders has not changed one iota. And I firmly believe, Scott, the best is still yet to come for CSX. So with that, I'd be happy to answer any questions.

Okay. Great. Thank you, Mark. I'm not sure I ever expect to hear any of my companies say that they miss being at the Marriott, but hopefully, next year.

I miss you, Scott, in-person.

So let's start on the volume side. Volumes down 22%, I think, quarter to date. Do you have -- do you feel at this point like volumes have bottomed? What's your expectation for volumes as the rest of the quarter plays out? Any differences in the different commodity segments as you see it?

Sure. I think, Scott, nothing really in our view has materially changed since we last spoke to the Street about 30 days ago when we reported our first quarter. If anything, in merchandise, we're getting a little bit more clarity in terms of this week, we all know the big 3 auto companies have started production again on Monday. So we have a little bit more visibility than I guess we did 30 days ago. So that's encouraging. I think when you look at all the other products that feed into the auto production, I think that's encouraging. We'll see a little bit of pickup there, steel and chemicals, plastics, auto parts, clearly. So hopefully, there's a little bit more sign of life in our merchandise segment that I think will come back here with auto production ramping up. With respect to auto production, I know the big 3 of -- they're starting off slow, one shift. GM this week announced that they expect to be back to full production by middle of June. The other 2 are sort of taking a wait-and-see approach. I think we're doing the same. I would expect sometime, hopefully, this summer, into the summer, we're sort of back to pre-COVID levels. We don't know. I mean my crystal ball is only as good as everyone else's, but certainly, we're hopeful on that front. So maybe a little bit more confidence in our merchandise business that we see going forward. So I would say maybe we've seen the bottom there. Turning to intermodal. International is still challenged, given everything that's going on. We saw big shipments of international sort of in March. And then unfortunately, our country shut down, and remains closed for the most part. So there's a lot of inventory in warehouses and DCs, and that has to bleed through before -- so the consumer has to get back and the economy has to open up and hopefully, people go out and buy things, and we'll see some pickup there over time. Clearly, I think for the foreseeable future, international is going to be a little soft. And that bleeds into, obviously, our domestic intermodal business as well, just given the environment, too. So I think we're treading along the bottom, and we'll see what happens going forward as I said, as the economy starts to reopen and hopefully stay open, and the consumer gets back on its feet and starts buying things and going to the malls again. But I think that's going to take some time still. With respect to coal, it's a challenging period for coal, both internationally and our domestic utility business. COVID certainly did not help our domestic utility coal. On the demand side, demand is way down, just given everyone working from home and a lot of industries closed and people were not working in downtown office towers and things. So that side of the business is soft. Have we seen the bottom? Again, hopeful, but the benchmarks are clearly soft there, and we'll see what happens. So overall, for revenue, Scott, I think what we're going to see in Q2 is sort of similar to what we saw in Q1. Revenue is definitely going to be softer than the volume environment, probably at the same levels that we saw in Q1.

And just to follow up there, Mark. So revenue down more than volume, probably not a big surprise. We have fuel that's more of a headwind, though, in the second quarter than the first quarter. So does that imply that the underlying yield ex-fuel is actually a little bit better in the second quarter than the first quarter, so maybe mix is less of a headwind than the first quarter?

Yes. I mean I'm not going to -- I won't guide -- we took away our guidance for the OR and certainly won't -- not going to guide there. But you heard Kevin last week, I think, say that we expect our yields to -- our OR to somewhat to start with the 6. I think that's reasonable. I think, as I said, revenue is going to be down or worse than our volumes and expenses. We won't make up for that. So it's a headwind. We've got fuel, other things, but we're doing our best. We're working on all measures to be as efficient as possible. We remain steadfast in our goal to remain the most efficient railroad out there regardless of the environment, regardless of COVID, and we're working hard to deliver on that.

Okay. That makes sense. And by the way, guys, remember, there's a lot of people logged in. If you have any questions, submit them, and we'll make sure we get to them. So I want to talk then on the cost and productivity side. So relative to those volumes down 22%, can you give us an update how is headcount trending and then how about train starts? So let's think about labor productivity, and then we'll also think about train productivity.

Sure. So Scott, as I said, we're obviously focused, intensely focused on our expenses and every line item there. We have -- just with the decline in volumes, now we're down 22%. We've seen about 1,200 people furloughed since this pandemic started. About 600 of those are on what we call reserve boards, special reserve boards, which is really interesting. They get paid one week out of the month. They're on -- they're available for duty. They still retain their health and welfare. But what's interesting is we can recall those employees with 24 -- within 48 hours. We have about 600 of those employees of the 1,200 that are on those special reserve boards. So we'll be able to react quickly if and when the volumes do rebound. We'll be nimble and being able to bring back those employees. We have about 1,500 locomotives stored now since the pandemic started. We took out about 300 of those. Train starts and crew starts. So mainline train starts are down and crew starts are down about 30%. So 22% reduction in volumes, 30% reduction in mainline crew starts, pretty dramatic increase. So we're doing all the things we can to address these issues and remain as nimble as we can for when things do rebound, and we can bring back that volume at low incremental cost. Let me give you a great example of how we're thinking about things in our auto business right now. Auto traditionally ships as unit trains, Scott, out of the plants. But as the ramp up begins, we're not putting in any other assets to deal with those volumes initially. We're absorbing that -- those volumes into current trains that are out there, so current manifest trains that are out there. So we expect that we'll be able to handle a lot of volume with the capacity that we have as volumes do pick up. Now -- so we're not bringing back expenses in these individuals and the locomotives, one for one as volumes come back.

So that's an interesting point. And one of my concerns was, it's easy when auto plants are shut down. You just don't send the train there, and it's easy to adjust the network. But then when -- as volumes recover, right? But they're recovering at pretty low levels, you need to now start sending them trains. So like is it easier? Does it get tougher to match volume and train starts? And you're saying that, hey, we can put the autos now in the manifest network and not in unit trains.

That's exactly right. Now we have capacity out there. We have trains today that are running. I mean we've -- as I said, we've taken out mainline, train starts are down 30%. When you look at our train lengths, pre-COVID to where we are today, really hasn't changed that much. So we're combining trains, but we still have, and we talked about it before publicly. We still have a lot of capacity on existing trains. We have the ability. We've got the assets. We have people, and we can put in more assets if needed. But certainly, we believe as the auto production starts to ramp up, there's no need for us to come back and put in dedicated trains for those volumes right away. As things ramp up and they get back to full production and 3 shifts and are producing at pre-COVID levels, then, yes, we'll take a look at that. But this team of railroad, Scott, just do some pretty neat things. We've got a great team that's out there, and they watch this stuff very, very closely. And so we're able to absorb a lot of this volume as it picks back up at very low incremental cost and high margin. So we're excited by that, and we think there's more opportunities to do that.

Mark, can this be structural? Meaning, can we -- as volumes at some point get back to pre-COVID levels, can we be at a place where train starts does never get back to where they were before this because of some of the stuff that you're talking about?

Well, we're going to try, right? We've done a lot over the last couple of years, Scott, as you know. The transformation has been remarkable. And we've certainly taken out a lot of -- right-sized the employee base down. We've taken a lot of locomotives assets, cars out of the network. We've done a lot over the last couple of years. And so we're faced now with really unprecedented times that I've never experienced in my career, I don't think any of us have. And so we're learning through this. But the focus on efficiency is always there. That's what Jamie lives and breathes by this day and night. And so we're going to continue this trend and where we can see things that stick and us being able to maintain the current level of train starts that we have out there. I do think as we get back, we'll probably need to put some assets back, but we're going to be really thoughtful about it. And do our best to maintain the efficiency that we're showing today.

Okay. And then can you try and help us connect the dots, right? It seems like all the rails are, including you, are doing just a great job reducing crew starts in line with or, in your case, even more than volumes, but help us connect the dots between train starts, crew starts and actual costs in the second quarter. So if crew starts are down 30%, is there any way to just put some perspective on how much operating expense could be down? And maybe this ties into, I think you said earlier, and Kevin said last week, the OR more likely with a 6 than a 5, but that is a big range. Any additional color you want to provide as to help us narrow that a little bit?

Right. So Scott, I think one thing that's important to remember, these 600 people that I talked about that are on these special reserve boards. Certainly, they're not entirely furloughed. So we are incurring a little bit of additional expense to have those people available and being able to be recalled within 48 hours, as I said earlier. So -- but we think it's worth it to be able to have that flexibility. As those employees would normally go on furlough, it's a 2-week callback. And so -- but we want to maintain as much flexibility as we can. I think it's good for the employee's base as well. But again, we're going through every expense item, looking at -- Kevin is doing just a remarkable job peeling back the onion on everything, looking at every lever that we can pull to be more efficient, control our costs. This isn't a slash-and-burn exercise by any stretch but it's really living up to what the -- some volumes are going to come back at some point. And so -- this is temporary, and we know it's temporary. So this is not a slash-and-burn exercise. This is really just an exercise to go through each line item of expense and really figure out how we can be more efficient and control the cost through this period.

Okay. Can you give us just some color on pricing trends in such a weak volume environment? Is this an environment where you can maintain inflation plus pricing on a sort of a same-store basis?

Yes. Scott, I think pricing, as we've talked to you about many a times, I'm still really pleased with the pricing that we're seeing at CSX. We're -- now we're pricing to the value of the service that we're providing, and we're seeing some really good success there. And I'm really pleased with what the team has been able to accomplish. Even in the space of this tough time, those conversations are difficult right now. And I think we're doing our best. We're not going to commoditize our service. We have worked really, really hard over the last couple of years to develop a service plan that has -- that is really delivering significant benefits for customers. And we're going through a short-term blip here with COVID-19. And certainly, we're going to come out of this stronger, as I said. And so we're going to have to grin and bear it through these times. But pricing, we're steadfast in our belief that we earn the price increases that we get. And we're not willing to give on that, just to commoditize ourselves. And so we're -- it's difficult, yes. But we're continuing to do what we've done over the last couple of years.

Can you just help, though, us think about -- so you're talking about continued good pricing trends. The yields, excluding fuel, were down 4% or so in the first quarter. It sounds like we'll see something similar in the second quarter. So is the -- the market share that you're taking, is this just initially coming on at lower yield? Is that just sort of a mix phenomenon? How do you think about yield versus price?

So let me -- I think what we report publicly and what everyone looks at is RPUs. And I think, Scott, RPUs is really, in my view, a really bad proxy for price. We have, call it, 70-plus lines of businesses. Every one of those lines of businesses have different characteristics, different growth profiles, different pricing, different RPUs. And we take those 70 and we bundle them into about 10 or so business units, merchandise or chemicals -- chemicals, forest products, metals, minerals, et cetera, et cetera. And so let me give you a good example of why I don't believe that it's a good reflection of price. In the first quarter, our fertilizer RPU was up 9%. And now I'd love to sit here and tell you that we got 9% pricing increases in fertilizer, but we didn't. We got good pricing increases that I'm happy with, but we didn't get 9%. What we saw on the dynamic there and the mix was that we had a shortage of our shorter haul fertilizer business here in Southern Florida, but we saw huge volumes in our higher RPU business going up country to the farms up north. And so that mix showed up as a 9% gain year-over-year in RPU. Similarly, and conversely in minerals, for instance, pricing was down about 4%, volume was up 6% in minerals. So you look at that, and guys like yourself say, well, they must be cutting price to grow the volumes. Well, no, that's not the answer. The answer is, we had something called limestone. Limestone is a line of business within minerals that's used primarily for scrubbing utility coal. We all know what's going on with utility coal. It's down. Our limestone volumes are down significantly. It's very high RPU within minerals. But what we did see was a huge surge in our aggregates business, shorter hauls from Georgia to Central Florida, truck competitive, lower RPU, great volumes and great contribution, falls right to the bottom line. It's really great in existing train service. We're really happy with that. We're getting great price increases. But the mix issue that you're seeing within minerals is looking like that we're cutting price. It's not happening. So you really have to unpeel the onion here, all the layers of the onion, to really understand the dynamics that are at play within each of those LOBs and each of the business units to really understand the pricing. And I get it. This is what we report. This is what you see. You don't have a better way of judging it, but...

You used to.

Yes. We did. And we don't anymore. But what I can tell you, Scott, is I continuously monitor and keep a very, very close eye on our pricing. I'm still extremely pleased with the -- and listen, your shipper survey that you released a couple of weeks ago, I think I'll highlight that, Scott. It's a great report. You saw in that report, that shippers are seeing that CSX continues to push price. We're #2 in the industry behind Norfolk Southern. But clearly, that demonstrates that we're not cutting rates, that we're still being aggressive on increasing rates in this environment. And what's really encouraging, too, Scott, is the chart in that report that showed over 80% of the people -- of the shippers that you surveyed feel like they're going to ship more with CSX than the closest #2, which was at 27%. So clearly, we're taking rates up, probably #2 in the industry. But clearly, a lot of people are also expecting to ship a lot more with CSX. So that's right out of your report, which I was happy to see. It's a great story.

So would you argue then that the yield up strategy at Norfolk then is a good thing for you because it means that you can take share without having to sacrifice price, maybe you just -- if they're pushing price more than normal, you can sort of just raise rates normally and still maybe take some market share?

Scott, listen, Norfolk Southern is a formidable competitor. They run a great railroad. We run a great railroad. The battles continue. As I've mentioned many, many times, my main focus is the competition from the highway. And we all know the reason why they're -- the billions and billions of billions of dollars that are available out there that are moving by truck that should be moving by rail. Rails used to own this freight over the years, decades. This has migrated to the highway for various reasons. We have a 3-pronged approach here at CSX. One is to grow with our current customer base, the volumes that they're shipping by truck. They ship by rail, but they ship by truck as well, and we want more of that truck share. So we're going after that with our current customer base. Second approach, customers that used to ship by rail and for whatever reason, many, many years ago, CSX had a similar pricing strategy where we took prices up very aggressively in '14, '15, '16, and we lost a lot of volume to the highway. Service was not where it should have been. And customers got fed up, and they went to the highway because of the reliability and the consistency was not there. We're developing that reliability and consistency today. So we're going to have those conversations with those customers. And introducing the new CSX to them and hopefully, bringing a lot of that volume back where it rightfully belongs, at CSX. Our third approach is really talking to customers who traditionally have never shipped by rail before. And for whatever reason, hard to do business with, bad reputations, et cetera, et cetera, getting in front of those accounts, talking to them, reintroducing CSX, reintroducing the way we do business, showing them the reliability and consistency that we're delivering today. We're a new company. And I believe that's winning in the marketplace. And you see it in the volumes. So for all those reasons, Scott, I'm happy with the -- with where things are going. But we're going to continue to compete very, very hard, whether it's with Norfolk Southern or whether it's with the highway.

So we had a shipper panel yesterday. We had an intermodal panel yesterday. We heard from both the IMCs and the shippers: we'd love to grow intermodal; we need a little bit of help from the rails because of what's going on with trucking rates or fuel prices. Is that an area where you're -- are you sympathetic to that? Is there -- do you give up some rate on intermodal to grow -- help grow the business more? I think...

Yes, Scott, I had a chance to tune in for that panel. Listen, I love our channel partners. They're great partners of ours. We have a great business relationship. I think we've done over the last couple of years as we've changed our business model and the approach to intermodal. And I think a lot of them admitted yesterday that rail service has never been better. We're pleased with that. We're going to continue that. We work day in and day out with our channel partners. And we have market-based pricing. So yes, of course, we're sympathetic with what's happening in the -- in that space right now. I mean we're being affected by it as well. And so we're all in this game together. We're partners in this endeavor. And it's in our interest to grow intermodal, just like it is theirs. And I believe the future for intermodal is great. I've always said, I believe intermodal should grow 2 to 3x GDP every year. Clearly this year, that's going to be challenged. But in normal circumstances, our intermodal product is great. The rates are -- to grow intermodal, the rates have to be cheaper than truck. And so that's why we have been on this journey to lower the cost and take out all the unnecessary touches and all the things that we're doing to be more efficient in intermodal and grow share. And that benefits our channel partners, and it will benefit us longer term as well.

So we're at the top of the hour. I've got 2 last ones. And hopefully, maybe you can just give, yes/no sorts of things. So I look at the first quarter operating ratio, sub 60%, and I say, hey, you get back to a normalized revenue environment based on 1Q, you're on a full year sort of run rate closer to a mid-50s. Is that a crazy way to think about it?

Well, there's been a lot of talk about what the right operating ratio should be and people have targets out there, and we haven't really set a longer-term OR target. Listen to me, I kid around with people here internally, I say there's no P-to-OR multiple, but there's a P-to-E -- P/E multiple. And so my job is to grow share, to grow this company, bring on sustainable, long-term profitable growth that grows the earnings of the company. Am I going to turn away 60% book of business because I want to get to a 55%? Of course, not. But -- and so, Scott, I think we're going to be as efficient. We want to grow this company, but we've got to grow earnings as well. But I'm telling you we -- our commitment is to be the best, and our commitment is to be the most efficient railroad into the Class 1. So we're going to see what the OR comes out with. But we've got to grow and we've got to grow profitably, and we've got to grow efficiently.

And then CapEx for next year, we're 1.6 this year. Is that a good sort of initial placeholder? Or do you think that's going to start going up at some point?

Yes, I don't see any reason why it should materially increase over the term. Listen, I think we're probably going to be at the lower end of that range this year. Just given this stay-at-home order and getting things done and working with contractors coming into the buildings and stuff as we're effectively shut down. So I think some of those projects, whether they're IT projects or whatever may be a little delayed just because of everything that's happening. So -- but we're continuously spending more in ties, rail, ballast, core infrastructure than ever before, well over a $1 billion. That commitment is steadfast there, and we're going to keep doing that. But again, we've got a lot of assets, a lot of locomotives that are in storage, no need really for longer-term asset sales there. So I can't see a reason why CapEx anytime soon would sort of start to increase from the current levels.

Okay. Great. We got to wrap it there. Thank you so much, Mark. Really appreciate it.

Thanks for having me, Scott.