CSX Corporation (CSX) Earnings Call Transcript & Summary

Good morning, everybody. This is Jason Seidl from Cowen, your friendly neighborhood transport analyst. Welcome to our 13th Annual Global Transportation and Sustainable Mobility Conference. Kicking off today, Cowen is honored and pleased to have CSX. With us from CSX, we have Mark Wallace, EVP of Sales and Marketing. And Mark, good morning, thank you for joining us from Jacksonville, Florida.

Thank you, Jason. It's great to be with you. And unfortunately, I know, we're doing this over Zoom. It'd be nice to see you in person, but it is what it is, and we look forward to a great conversation this morning. Thanks for having us.

Absolutely. So I'm going to just dive in with some questions right here. And then just for the audience, you can go into the chat room and ask some questions. And if we have time at the end, I'll relay these questions to Mark. Okay. Mark, so...

Jason, I am joined by my colleague, Bill Slater, as well, who's our EVP of Investor Relations, as well in the room here with me this morning.

Yes. Good morning to you, too, Bill. You're slightly out of the scene there a bit. But good morning. So Mark, so intermodal volumes have been in recovery mode of late. What's brought this about, in your opinion?

Yes. No, intermodal has been a nice boost here. We've really seen a real uptick in our volumes. On the domestic side, we really started to see at the sort of end of Q2, where our domestic volumes really started to rebound as we were sort of coming out of the shutdowns and people staying at home and people are coming back to work and the economy was sort of coming back to life a little bit. And we started to really see the replenishment of inventories happen around that sort of the end of Q2, beginning of July time frame. And that has carried on. The volumes have been very, very strong. Much to our delight, stronger than I thought it would have been. But clearly, the consumer is back. The consumer is spending. Inventories were depleted. People are buying things. You've seen some of the retailers, some of their numbers, the Walmarts of the world. I mean, people are out there spending money. They're doing quite well. E-commerce is doing really well as people were staying at home, ordering things online. That segment of our business has been extremely strong over the last couple of months. And then about 2 months ago, Jason, we really started to see the volumes pick up on the international side, especially on the West Coast of the United States. As people were -- the steamship lines were looking to get product into the United States as quickly as possible, they were bringing -- they were visiting the -- shipping to the West Coast, getting that product in land. A lot of that translated into some domestic volumes for us. And then just about recently, about a month ago, we started to see the sailings come to the East Coast. And our international volumes on the East Coast ports has been incredibly strong over the last month or so. So we're really excited by that. I've spoken to a number of customers. On the international side, the steamship lines are quite pleased with the volumes that they're seeing coming in internationally. They expect that will continue through Q3, probably into November, early December. After that, it gets a little murky. They're still sort of cautiously optimistic, is the word I keep hearing from them. But certainly, we're encouraged on the international side and the volumes that we're seeing. Domestically, again, I've spoken to a number of customers. I spoke to one yesterday, one of our channel partners, who was incredibly bullish in the volumes that they're seeing. They think this will continue until at least until the end of the year. A lot of it is supply and demand. I mean, the demand is quite strong. People are buying, but the inventories are being replenished just as rapidly. So we're seeing strength across the intermodal business. Our volumes quarter-to-date are up 6%, and we expect that trend to continue into the fourth quarter.

Knocking on wood for you there.

Absolutely.

Talk a little bit about the relationship with our truckload pricing and intermodal pricing. Truckload pricing, you've obviously seen spots sort of off into the races, almost at 2018 peak levels. When should we see intermodal pricing recover? And what type of lag is there typically that CSX has noticed over the years?

Yes. Certainly, with the demand, Jason, we've seen that truck prices go up. I think it's a function also, there's a lot of demand out there, but it's also a supply issue, I think, in talking to a couple of our customers, certainly, there's some concern with respect to drivers. So there's a shortage there. People who were laid off may not be coming back and not wanting to drive anymore, and be a truck driver. So there's a bit of an issue there. And I think you're starting to see -- and obviously, we're seeing the truck prices go up quite significantly. How that translate into intermodal? As you know, most of the -- the vast majority of our contracts in intermodal are with our channel partners. Those are longer-term deals. So we don't benefit just because the spot rate goes up significantly within 2 or 3 months. It takes some time for us to be able to really see the impact of that. I would say, sort of into next year and into bid season and when those contracts -- when those pricing mechanisms come up for renewal, we'll start to see a little bit of a bump there. But clearly, we're not -- we don't benefit in the short term just based on the spot rate. I think there's a very small fraction of our business that is tied to sort of the spot trucking market. It's very, very small. I've talked about this before. It's really not a material impact. So again, it really doesn't have a material impact on our overall intermodal business, at least in the short term.

Got you. That makes sense. Let's look at the intermodal business a little bit for the longer term now. If you go back, I hosted a state of the ports call. And on the call, we were fortunate enough to have the Executive Director of the Port of L.A., and he was talking about longer term, the West Coast losing like 15% of its business to the East Coast ports as well as the Gulf ports. How do you view this sort of shift for CSX and some of the even the longer-term trucking issues that might be out there and gaining enough drivers over the long run? When you look at the driver pool, we don't really typically get enough younger people in. The population is aged a little bit, at least heading into COVID at that. How do you view that business for you guys over the long run? Or what should we look at as a sustainable sort of volume number, if we would...

Yes, I certainly think the trucking industry has an issue there, and it's something they're going to need to address going forward and try to attract people into that industry for sure. But clearly, we're quite bullish on your question about the East Coast ports business. We've seen a lot of investment on the East Coast ports. Recently, Savannah is undergoing a major construction project and really adding a lot of additional capacity there. And when I was over in Europe and Asia last year, a number of our international steamship line customers are extremely bullish about the prospects of the East Coast ports, which we're quite excited about. We've also begun this inland port strategy at CSX, which is having tremendous success, customers are extremely pleased about. So overall, Jason, I think, I'm not sure about the prospects of the West Coast ports will -- that's not too much of my concern. But certainly, the East Coast ports, we're really pleased with. We got great partners there with all those ports right up and down the coast. And we love them all. They're good partners of ours, and we see continued growth there. There was a lot of concern back a couple of years ago with IMO 2020 and how that was all going to -- whether that was going to be a concern, whether the steamship lines were going to sail further to come around to the East Coast, that's a nonissue. And so we see some great business there, and we expect that to continue it for a long time.

Have any of your channel partners talked about sort of a shift in global supply chains, are more people now looking towards Southeast Asia and coming through the Suez?

They are. Obviously, global supply chains are changing, given all the changes that's occurred with the [indiscernible] and the like. So yes, supply chains aren't changing dramatically. And we think we're in a good position to capture a lot of that growth when it does come into the East Coast.

Perfect. Let's shift a little bit towards your sort of operating ratio. You've done a very impressive job over the years. PSR, obviously taken hold earlier at CSX than some of the other ones that are currently in the middle of implementing that operating procedure. Some of the investors that I speak to are worried about that the rate of improvement and it will slow dramatically in the coming years. But again, I would say that you've outstripped people's expectations. So that's the good news. Can we explore some of the steps taken by CSX to continue this impressive track record?

Well, Jason, I'm glad those people recognize the tremendous success that we have had. And I would say, it's been a lot of work, a lot of hard work. We've got a great team of railroaders here. Great operating team, amongst the best that I've ever worked with and a great leadership team and everyone is focused on delivering a superior service product and growing this business. We're always going to have our eye on the operating ratio. I don't think there's a day that goes by that we don't focus on efficiency and being as efficient as possible. We have proven ourselves over the rest, 3 years now, can't believe it's been that long, but it's 3.5 years since this journey began at CSX. We have proven ourselves over that time to be the most efficient railroad in North America. That journey is going to continue. That strive to be the best is going to continue bar none, period, full stop. So even as we look at bringing on additional volumes and growth, we do so in a way that always has the eye on doing it in the most efficient way. To give you an example, as we probably sort of came out of the doldrums of the COVID situation and when our auto franchise was virtually flat, stopped and the auto production started back up, started to ramp back up, and we saw Ford and GM started to reopen some of their facilities. They started off, as you know, with one shift. Some of the volumes started off very slowly. Typically, that volume moves out of those plants in unit trains. But because the volume was sort of lumpy and was very soft at the beginning, we took those volumes and shipped them in existing merchandise train service. So we are absorbing those volumes in sort of at low, very incremental cost to us until such time is justified putting on another train start to handle sort of the unit train volumes again. So those are types of things that we look at constantly every day. We've got additional capacity on this railroad. So every time we get a new a piece of business, or we're going after a new piece of business, we're able to absorb that into our existing train starts, very low incremental cost, high incremental margin. And those are all the types of efficiencies. I think, if you talk to Jamie and the operating team, they're always still looking for opportunities within our yards to do things better, more efficiently. How do we spend capital in the right ways to lower our cost basis and be more efficient? So there's a lot of initiatives across the railroad as we continue this journey to be the best and continue this journey to have the lowest operating ratio out there. And that journey is going to continue, and we're always going to keep our eye on the ball there.

Yes. Mark, you mentioned sort of adding that incremental business to your trains. Where do you think you have the most opportunity to add to those train lines? Is it intermodal? Is it merchandise? Is it something else?

I would say it's in both, intermodal and merchandise. As I said, we do have -- we talked -- pre-COVID levels, we were talking 30% additional capacity on existing train starts. And we have line of road capacity as well. So we have ample capacity across the railroad. And as we do look at sitting down with our customers, talking to them, especially in this time, Jason, when businesses are challenged, things are tough out there, our shippers, our customers are looking to save a buck, and we're able to go in and sit down with our customers and show us your book of business, show us your lanes where you're shipping. A lot of our customers, we recognize, both ship by rail and ship by truck. If we're able to go in, especially as we talked about earlier, with the trucking rates skyrocketing these days, going in and able to have those conversations with them and say, listen, we know even before these truck rates took off, we were still 10%, 12%, 15% cheaper than the truck. Now we're even more cheaper than the truck because of the rates are going up so dramatically. We've got a superior service. We've got reliability and consistency. We've demonstrated it to you over the last couple of years that we are a different kind of railroad. Let us give us a shot in some of these lanes where we haven't traditionally played. Give us some of that business. I think you're seeing that, some of that benefit in our weekly volumes as we continue to sort of outpace in some areas some of our competition and being able to convert a lot of that highway traffic onto the railroad. So we're extremely pleased with the progress we've been able to achieve over the last couple of months, and that journey is going to continue. And I think the more we can demonstrate to our customers that we're different, that we're better than we ever have been and that we're cheaper, and we can do a really good job for them, I think, once we get that volume and we continue to do really well for them over the time, then that becomes a lot stickier. And that business just won't migrate down back to the highway once trucking rates over time moderate. So it's our job to continue to do a good job and be there for our customers and do what we say we're going to do.

So you mentioned being cheaper. You said before, you knew you were cheaper. You said now you think you're in excess of 15% cheaper.

Correct. Correct. And then a lot of -- and again, it depends on the lane. It depends on the product and the customers and stuff. But clearly, given -- it's just not -- these high trucking rates just don't impact intermodal. We know a lot of our merchandise customers, whether it's paper, whether it's metals, or whether it's minerals, whether it's aggregates, whether it's whatever. Steel, they are using that spot market to ship some of their product. And we know those rates are going up, and we're able to offer an alternative to them with truck-like service.

And getting back to sort of that longer-term OR outlook, is your physical network where it needs to be? Or are you guys still potentially going to make some more changes around that into the future?

Yes. No, I mean, clearly, we've done a lot, right? I mean, I don't think we're going to be closing 8 more hump yards anytime soon. We don't have 8 more hump yards to close. Clearly, we've done a lot on the operating side. Always, as I said earlier, always looking for opportunities to continue to push the envelope and do things better and more efficiently. On the intermodal side, we went through 18 months of rail rationalization. We've gotten that network now on our intermodal side to where we really like it. We don't expect any more changes there. Listen, we're always looking for opportunities. If we see a high-return project where we think we could have -- we could spend some capital and get a very, very high return on that project, then we're looking to do that, we would do that. Nothing on the horizon. So from a capital perspective, I don't see anything really material that's going to change our view of sort of where we are every year, sort of that $1.6 billion to $1.7 billion -- $1.6 billion, $1.7 billion outlook. Really, there's nothing I see that would have us deviate from that.

So longer term, as CSX grows its revenues, your CapEx as a percent of revenues is actually going to go down?