CSX Corporation (CSX) Earnings Call Transcript & Summary

Okay. Welcome, everybody, on the webcast. We're going to continue on here with Day 2 of Deutsche Bank's 11th Annual Global Industrials & Materials Summit. I'm Amit Mehrotra, the transportation and shipping analyst. We just heard from both Canadian National and Union Pacific. I'm very pleased now to have the CEO of another very high-quality company. That, of course, is Jim Foote from CSX. Jim, welcome. Thanks for being here, and thanks also to Bill for being here as well. Why don't I hand it over to you for maybe a minute or so, and then we'll get right into Q&A?

Great. Amit, thank you so much for the opportunity to be here. As I was just expressing to you, the new normal here allows us to maintain our lines of communication with our investors and analyst community. And as frustrated as I'm getting with the new norm, I think we're all just trying to get -- maintain our level of usefulness here to you. And so hopefully, we can get all of communication out there that we normally would. The railroad is running good, despite all of the confusion associated with the economy right now. But we have adapted very well. I'm extremely impressed with the performance of our employees. They have done a very commendable job under difficult circumstances and have -- always, always, always with the safety of their fellow employees in mind, but also making sure that we were there and are there for our customers because that's the most critical thing that we need to do in this difficult time. We have worked extremely hard here to transform CSX into a different type of company, a different type of railroad that can meet the needs and be relevant in the transportation marketplace today, and we will do nothing that will upset our strategy as we move forward again. And hopefully, as these difficult times get behind us. So with that, I'll take any specific questions you want to answer about -- want me to answer.

Sure. Well, I appreciate that introductory comments, Jim. Obviously, let's just start with the current state of the market. We obviously know what the carloads are on a weekly basis, down about 21%, 22% quarter to date. But I know you spend a lot of your time talking to customers and have a good pulse of -- good sense of what's going on kind of here and now. And so I'd be -- we'd appreciate it -- would all appreciate maybe your perspective on what you think the leading edge looks like from a demand and volume perspective. Is the bottom sort of in here? And what are customers saying about how things are trending in the near to medium-term prospectively?

I think as we have moved over the last 4 weeks or so, we have clearly seen what I think at this point in time is the bottom of the volume decline, and we have been inching up week after week after week as we had moved through May and now into June. Clearly, the increases are slight, but the trend line is promising. The big milestone that we were focused on was the reopening of the auto assembly facilities and whether or not that that would go smoothly, I was pleasantly surprised that it did because that's somewhat -- as I said, that was in my personal milestone, which how that was going to go because there are so many other of our customers' businesses, whether that's metals, plastics, chemicals, et cetera, that are associated with that. And so I was more optimistic once we have reached that first milestone. So I think overall, I'm comfortable, but in -- you have to look at it from a realistic standpoint. In many of our markets, while we're saying sequentially we see improvement, we still have business segments like auto that are down in the 80% some range on a year-over-year basis. So we have a ways to go, but I'm more confident today clearly than I was a month ago.

Okay. And then obviously, mix is -- it appears kind of incredibly challenging in the quarter. You obviously have a -- this 40% decline in coal and the pricing headwind on the export met coal side or export coal side is quite strong as well. I mean, I think late last year, you quoted coal headwinds as kind of a double whammy from the volume and pricing perspective. I would say, over the next 6 months, it's kind of a big double whammy. And in that context, what can you -- you guys have done just a tremendous amount on the cost side already. What else is left to do to kind of limit the -- or mute the decremental impact from this kind of very weak volume and mix backdrop? And the other side of it is, is that times like this can create a lot of opportunity to actually change, structurally change the network or train plan for the better. I know you know this better than anybody else given the history of CSX back in 2017 and the disruption that, that caused. Well, it's a lot easier to do, I would imagine, when volume is as low as it is today. So maybe talk about some of the idiosyncratic cost opportunities that you have left on the network and what you're doing to maybe structurally change the business or use the size opportunity to structurally change the business for the better?

Well, you're absolutely right, a double whammy on the coal side because all 4 of the various business segments in that business unit, export steam, export met, domestic steam, domestic industrial are all stressed at the same time. So that's from a volume and from a pricing standpoint. So yes, that's a challenge for us that we are working on to try and offset as we move forward. Clearly, the difficulties associated with our coal franchise, specifically the domestic utility segment, was a challenge for us long before anyone heard about COVID-19. We were challenged in that business segment due to the cost differential between natural gas and coal. So we have been working diligently here to improve the rail network, so that we can concentrate on our core business, which is the Merchandise segment, which is the most -- has the most opportunity in it for us and is a very good, long-term, profitable business segment. That once we fixed the railroad operation, we are able to go after market share that we have lost for decades to the truck. So from a strategic perspective, we have been laser-focused on improving the quality of our service so that we can attack these markets where we used to play a much larger role, but because of the decline in service over so many years, we just lost business to the highway. So we will be offsetting, to some degree, the decline in the coal business and the export met business is always cyclical, and we would expect that at some point in time in the future, global demand for coal, met coal, will return and we'll be well positioned to take advantage of that when it happens. During this immediate, I would say, short-term situation you always want to be ready to take advantage of opportunities that show themselves to improve the way you run the company. Clearly, companies -- strong companies in economic -- periods of economic decline have normally improved themselves. Unfortunately, in this circumstance, it's a virus, which no one had hoped would ever impact the globe like this has, but we have taken this opportunity to look at all of our business processes from top to bottom, from the way I do business in my office, to the way we switch boxcars in Waycross or Rocky Mount or Chicago or Louisville and every single yard in between to identify places where we can change the way we do business, identify the processes that we have in place and make the company better for the future. But the most important -- as I said at the beginning, the most important thing to recognize is traditionally when railroads were forced with declines in business, they did what they used to do, they said we cut service, we cut service to our customers, we reduce the amount of times that we serve those facilities. And what happened? The customers went to the highway. In this circumstance, we are cutting expense, we are reducing our expense, but we are not diminishing the quality of the service that we provide to the customers. We are standing side-by-side with our customers in these difficult times, and this is an opportunity for us to gain market share, not lose market share. We have a significant cost advantage versus the truck. And in a difficult period of time, when you're going to a customer and said, "I could save you money if you put more of your transportation strength on rail," it's a good time for us to do that. In boom periods, when you go to the customer and you say, "Let's shift some of your transportation spend from the highway to rail," the guys says, "No. I don't care what it costs. Things are booming. I've got to move my stuff and I got to move it now." So everything that we have done to transform this company into a service-focused transportation business creates opportunities for us now to continue to move forward with our strategic plan, which is to grow this business by having a good quality, reliable service.

And I know one of the big initiatives from a growth perspective, especially on the Merchandise side, is to convert some of that market share that you lost to truck at the same mill, for example, that you service. Maybe you're doing 40%, 50% of what's coming out of there, and obviously, you're trying to recapture more market share. And I think you've achieved some success on that, particularly kind of at the aggregates -- with respect to aggregates. But the bottom line is that these things -- this market share loss has occurred over decades, as you said, and it will take a long time to maybe convince people that the service levels are reliable. And then truly the numbers with 98% on intermodal trip plan compliance is really, really impressive, albeit in a low volume environment. So how is that sales effort resonating? I assume that -- are you going to a more higher level in the organization? Because if you're going to the local general manager of the mill, they maybe are more focused on the reliability aspect and less willing to convert. But just talk about kind of the successes and maybe some of the struggles you've had in convincing some of those customers to bring volumes back onto the rail.

Well, before and even, I guess, during this period of time, you did see in the Merchandise business segment that our merchandise volumes were better than the industry. And we do know where we are gaining wallet share from our customers. And so the strategy is working. And I know better than probably anybody else in this building, having been through this longer than anybody else, how bad we used to be going to a customer and say, "Well, we'll move your stuff for you. It'll be there sometime in the next 3 to 7 days. We do that about 50% of the time. And the 50% of the time where we fail in the 3 to 7 days, I don't have a clue when it's going to get there. In fact, I probably don't even have a clue of where your car is." But trust me, trust me, you can't do that anymore. So now with all of the technology that we've rolled out, the visibility tools that we provide to our customers, we're in a position where we can go in there and say, "Don't trust me. Here, let me do it for you. You can track it. You can track it like you track your package, your e-commerce package that's going to be delivered on your front step in 24 to 48 hours. You can -- we'll tell you if it's going to be late." And when we roll that kind of sales tool out and prove to the customer that we're different, yes, it takes a sales initiative. It's not just entrusted to the salesperson who has that direct account. But his Sales Director, the Senior VP of Sales, Mark, me, the operating team, everyone is there contacting the customer and expressing to them our level of commitment and our availability if they need to talk to us at any time, 7 days a week, 24 hours a day. And that's what it takes to change the perception, to change the attitude, to become, what I like to say, relevant in the transportation marketplace as opposed to just some railroad goof who's selling a commodity because it's cheaper. And that's not what customers want. You ask the customer what he wants. What's the single most important thing that you're looking for in a transportation service provider? He doesn't take price. He says reliability. I pay more to truck it. I know I pay more to truck it because I pay a premium to buy reliability. And now you're starting to see customers and you start to see our channel partners in certain areas say these guys at CSX, they're at level of service in terms of reliability is truck-like. So that's what I mean by the term I'm relevant when I go in to make a call or when our sales team goes in to make a call. They're not arrogant. They're confident that we can deliver upon what we said we're going to do. And we're not selling this just simply based on how much of a discount I'm going to give to the truck. I sell it based on service.

And how are other rails -- obviously, all the rails in the U.S., except for Burlington, is engaging in some form of PSR. How are those efforts helping with this? Because I would imagine that there's a lot of transcontinental freight today that moves by truck that should or could move by rail but they're not because of maybe lack of cooperation between the rails in terms of exchanging or interchanging short-haul with long-haul traffic, et cetera, et cetera. So obviously, it seems like all the major rails have some level of Canadian National heritage in them now from a management perspective. So talk about what that does from an opportunity with respect to what exactly you're talking about in terms of converting more of that trucking traffic back on to the rails.

Well, you're right. The dream team is everywhere. And it makes me feel proud that all of us -- all of the people that are sprinkled throughout the industry all work together at one time as we developed and fine-tuned this strategy that Hunter had talked about for so many years. So to the extent that we are all like-minded, it is a benefit for the rail industry, but most important, I believe, it's a benefit for the customers that want to use rail and before were reluctant to use rail because of our lack of reliability. And you get the same result whatever your mindset is. If you say, I am going to run this railroad in the most efficient manner and I'm going to improve my margins and that is my goal, by taking out all of the unnecessary steps and costs that you have in your logistics chain, you achieved that result, you reduced your cost significantly. But what is the, in that world, unintended consequence? You dramatically improve your service reliability because you're not stopping and doing all of these unnecessary activities and your throughput through your network becomes faster, more efficient, but most important, reliable. If I came at it the other direction and said, "In order to be a success, I have to improve the reliability of my service," what would I do? I take out all the unnecessary steps and improve the throughput and improve the efficiency of my network, and I have dramatically improved service. So there is no conflict if there is no differing of opinion between the sales and marketing, focus on what we're trying to accomplish and the operating teams focus on what we are trying to accomplish. The melding of the 2 opinions produces the same results, and that's what we're seeing today, where we can go on and talk about trip plan compliance and all of these great and wonderful things and velocity and all of these things, which improve throughput, improve throughput, improve speed and reliability.

Right. And is it -- I mean, the service levels have obviously improved dramatically, and that's clear from the metrics. And obviously, you're doing all this because you want to attract more volumes to the network and you want to be able to be in a position to price for the service, the better service that you're offering and the more reliable service you're offering. And then, of course, your more direct competitor is, I would say, successfully pursuing a yield up strategy in terms of whether they're shrinking, calling lower-yielding business or -- anyways, they're focused on it. And so does that just allow you to more easily price effectively for your products? Or -- but it's kind of up in this backdrop of persistently weak volumes. We've been in this freight recession for a long time now. So just talk about kind of all the dynamics that go into the pricing from service competition and just the overall macroeconomic environment as well.

Well, as I said, to the extent that the business environment for basically all of our customers is challenged right now and I have a product that I can sell to those people that is reliable and historically, just based on physics, cheaper, it's -- I think, as I said earlier, I view this as a period of opportunity. And -- so we are working diligently to try to grow our business, number one, taking more and more traffic off the highway. And this is steel. This is plastics. This is lumber. This is paper. These are the core commodities that we move in our Merchandise business today in a railcar, that in our service territory today are moving from origins and destinations in our service territory, way over 500 miles in a truck. And the reason for that is because of the decades of poor service that we provided. So that is the principal focus of what we try to do here to grow the business. From a rail market share standpoint, all we can just -- clearly we compete as aggressively for every piece of business that is available to us out there. But when we go and call on a customer, we go and call on a customer, and we explain to them, as I've just been saying, how much improved our service levels are and express to them why we think it's in their best interest to move more of their freight with CSX because of the quality of our service. If that's freight that's moving on a truck and it comes to me because of my service, fantastic. If that's freight that's moving on another railroad and I have better service, fantastic. So again, I'm not myopically focused. I'm looking at the entire market which has tremendous opportunity available to me. And structuring my company, structuring this company so that we are nimble, so that we are focused, so that we have clarity of purpose and that we are relevant in the transportation marketplace. And based upon all the hard work that we have done, we are already seeing the beginnings -- took us a long time to get ourselves in this whole, not only CSX, but the rail industry, took us a long time to get ourselves in the whole, and we're not going to get out of it in a day or two. But we're going to earn our way back and we are going to build upon our success. Success breeds success. You don't win multiple Super Bowls by coming up with some crazy offense that somebody has never seen before. You have to have a good, solid team of professional transportation executives that know how to sell, that know what they need to do and that want to be successful, and that's the only difference that differentiates railroads that have been successful. We all have the same locomotives, we all have the same [indiscernible], the same rail. We buy everything from the same place. There's about 3 vendors that serve the railroad industry. Everything is the same. Our labor agreements are the same. What makes -- what differentiates the railroads that have been successful with this? The people. And I think right now, CSX has the best people, and we're building now the new dream team.

And in the last 5 or 10 minutes here for this webcast, for the people listening, we have many, many people on the webcast [Operator Instructions] Jim, for the last few minutes here, I wanted to pivot, if it's okay, to maybe some of the shorter-term aspects of the cost structure and what you're able to do. Firstly, you talked about this being an opportunity, I guess, you mean kind of to sell the product, get more efficient. I just wanted to know if you -- wanted to see if you can expand on that a little bit. There's obviously shorter unit trains, manifest trains in the network that -- where demand is down pretty considerably, I would imagine. Is that an opportunity to maybe accelerate the structural change to the network that maybe you weren't able to do because of the disruption it might cause? Just expand on that piece of kind of what you guys are doing.

Well, I think the operating team has done a tremendous job of adjusting under some extremely difficult circumstances as our volumes were down 26% when -- kind of when we hit the bottom. In terms of train starts, we were able to take out, if not that much, even more. We talked about before this dramatic business decline that we had available capacity on our merchandise trains and intermodal trains, that we would be able to handle growth without adding back a lot of additional, call it, variable expense to do that. We've also talked that we didn't need to spend any capital on railroad for years to be able to handle additional growth opportunities as it comes along as we expect. So the operating team has done an amazing job, keeping train lengths up,, utilizing distributed power, all of these strategies that we've talked about in the past, utilizing the same -- as an example, using the same amount of distributed power throughout the network with, say, a 25% to 30% fewer number of trains, which means we put on more distributed power during this process than we had done before. So it's the simple things of every single day, looking at the network, trying to find out where we can make structural changes to improve the overall efficiency and service reliability of the company, no different than we've done for the last 2.5 years around here. We've just accelerated it. And as I said before, when a company is stressed and a company is focused, you find opportunities that before maybe didn't reveal themselves. And now because you're hypersensitive to what's going on, you go like, "Wow, I never noticed that before." Or you go on, you make a field visit and you go, under normal circumstances, I probably -- Jamie Boychuk and the other operating guys, they probably wouldn't be calling on these locations, but now they're out in the field, they're looking around, they're trying to make sure the morale of the employees is extremely high. And they're going like, "Wow, I would have never been here before." But when I got there, I would like -- I instantly said, we can consolidate this, we can do that, we can make this change, we can make that change. And those are changes that are going to be with us in perpetuity. These are not just short term, as I said before. This is not the old railroad mentality. What do we do? Cut service. No, we don't cut service. We cut expense. When we cut expense, we improve service.

Right. And then just on the comp, on the labor side, obviously, that's been historically a very big conduit for margin expansion and efficiency. My understanding is kind of 1/3 of the total headcount is, I would say, highly variable. And so is it the right way to think about your ability to kind of manage the business in the near term, that 1/3 of the total kind of total headcount is flexed down along with volumes? And then the balance, kind of 2/3, what's your ability there to get more efficient on that front to really bring down the headcount in line -- more in line with kind of how volumes are trending?

Well, I think you've seen, again, the trend line of where -- what we've done with the headcount. In April, you saw a step down. We started out the year being down, I don't know what the numbers were, kind of 7% range to begin the year, January, February, March. And then -- and that was a direct reflection of: Number one, our desire to control costs as we always do; but two is a soft, call it, weak industrial economy that we have had here now for quite some time. But when all of a sudden, the bottom dropped out, you saw boom, we took the headcount, again, down and you'll see that again down. So yes, the variable aspects of the business, fuel and, call it, train and engine service employees, we have the ability to take advantage of that. On, let's call it, the maintenance way side of the business, we took advantage of the low volumes to actually do more work and got more work done and are ahead of schedule, really, on our capital plan. So how that plays out in the second half of the year depends upon how the volumes rebound as we get through the second quarter and maybe, maybe, maybe have some kind of clarity what the second half of the year is going to look like.

Yes. And I guess also we talk about headcount, but in terms of the total labor cost dollars amount, that will be maybe a little bit more important in the second quarter, in particular, because of the reserve board that you have and the way that gets reported in terms of total headcount. Jim, we're out of time, but I wanted to ask you one larger question that I think is important because you've been such a, I guess, a champion of the operating plan and how it's implemented and the execution of it. And I think that, that's going to be incredibly tested in the second quarter, unlike maybe any of us would have imagined. And so you guys obviously have this 6 handle OR target for the second quarter. Obviously, that's a very, very wide range. I'm just curious kind of how disappointed would you be if CSX reported kind of a 65 to 70 OR? And do you think there is scope, given all the work that you guys are doing in terms of restructuring the network and taking out these costs, that there's an ability to kind of be on the right side of that 50% decremental, which would put you kind of still at a sub 60 OR, but still within that 6 handle. So I just want to check your temperature on that because, obviously, you've been in this business for so long, and I want to understand what would disappoint you and what would encourage you.

Well, you're absolutely right. And I have to -- it's unfortunate that I have to remind myself, myself, everybody else recognizes, if I have to remind myself how freaking long I've been doing this. And it's been a long time. It's been through a lot. But nothing like this, I'll tell you that, nothing like this. But a wise sage with a lot of railroad, the financial experience, Kevin Boone, said the other day, we're going to have to a 6 handle. And I think that's good advice, and I'm not going to deviate from that -- what that means at this point in time. Still too early, and we have a long ways to go.

Okay. I respect you for keeping to the script on that. Okay. I'll end it there. We're a couple of minutes over. Jim, thanks so much for the time. For those on the webcast, Kansas City Southern is up next. Kind of finishing up our lineup for the rails today. That webcast starts in about 8 minutes at 10:30 Eastern time. Jim, Bill, thanks so much for taking the time and hope you have a good day of meetings. Appreciate it.

All Right. Thank you, Amit. Great to be with you.