CSX Corporation (CSX) Earnings Call Transcript & Summary

This is Justin Long from Stephens. I want to welcome everyone to the next fireside chat with CSX. Thanks for joining us today. We're really excited to have Jim Foote, CEO, presenting on behalf of the company. As a reminder, for the fireside chat, I'll be moderating the questions. [Operator Instructions] We've got about 45 minutes scheduled, and I'll fit in as many as I can. So Jim, thanks for being here. Really appreciate your support of this event even if it's virtual. I'm going to kick it to you to get things started off with just an update on the business, how things are trending quarter-to-date, and then we'll dive into some questions. And I think you might be on mute.

Technology at its finest.

There we go. We're set now. Thanks.

Ah jeez, all of that, and I still screwed it up, what can I say? I probably would have done the same thing if we were in person, so I don't feel too bad. Great to see you. Yes, we were just saying I wish we were in Nashville together and with everyone in the room together, but maybe next year. How are things going? Wow, tough, tough. Better, obviously, everybody knows, things are better than -- better than it was with the business just coming around. We're doing well, trying to keep the railroad running to a high level of service and efficiency. And just trying to get through this with our customers and everyone else, taking care of our employees. And I think we're hopefully on track to get out of this mess as a country soon.

And I know you didn't provide much guidance in terms of the near term and the fourth quarter. But I am just curious, from a high level, when you look at the trends in the business quarter-to-date, volume, service, operating leverage, et cetera, have things kind of played out in line with your expectations? Or anything that you would call out as outperforming or underperforming?

Well, based on my personal -- my personal opinion is I think things have come back stronger and faster than I had originally anticipated. I know you play a lot of golf and every once in a while, you hit a good drive on a par 5, and you go over the sprinkler head and you're about 300 yards out and it says, "Are you kidding?" It's kind of like what I look -- what I see when I look into the crystal ball to try and tell me what next month or next week or the next day is going to be like, that's the answer I get. But I think everything has come back, clearly faster than what I personally had expected. And that's a good thing. The consumer economy has, I think, outperformed everyone's expectations. But we had 2 differing economic environments going into this, with a very, very sluggish for over a year period on the industrial economy and the consumer economy doing very well. So it's not unexpected that consumer economy came back quicker and faster. Automotive came back stronger, faster than what I had expected. And so those are good signs. The economy, I think, is resilient. The economy was relatively strong going in. And I think we're -- hopefully, we get back to where we were soon.

Maybe building on what you said about the consumer, there's obviously this restocking that needs to occur. Based on the conversations that you've had with your customers, how long do you think that restocking process could take? Is that through the end of the first quarter? Or is it longer? What are your thoughts around the timing of that?

Well, I still think -- everyone, I think, is expecting it to go into the first quarter. We're kind of going into -- we're going into peak with an -- in an unusual demand for e-commerce. The outlook in terms of the port projections and those sort of things, from an international perspective, are -- look like it's going to -- should, absent some sort of unusual occurrence globally, continue into the first quarter. And I think that our opinions are not inconsistent with everybody else in the intermodal world.

And then on the industrial side of the equation, are you seeing more green shoots on that front? And as we think about next year, do you think there's potential for industrial to outpace consumer? And I would assume if that happens, the mix implications for your business would be pretty good. So would love to get your thoughts around that.

No. Again, I don't think that we expect the industrial economy to overtake the consumer economy in any -- in the near term. But we were -- I think we were coming off of a relatively weak base. It's -- you have to go back and it seems like ancient history now, but remember what was going on with all the tariff issues and what the implications of that were on the industrial economy. And so we'll have to -- let's -- hopefully, we can get back to where that relatively weak base was. And then, whether it's stimulus or whether there are other factors at play that caused the industrial economy to rebound at rates above what we have traditionally seen, we'll have to just wait and see.

And thinking about peak season, I think the expectation across the board is it would be strong just given the strength we've seen in the consumer and the freight market. I'm assuming that's played out, but would love to kind of get your thoughts on what you've seen there. And more importantly, just from a service perspective, given things have bounced back, you made the point earlier at a pace that's greater than you anticipated, peak strong? How has the service of the business held up through all of that?

I think that the service has held up extremely well. It can always be better. We would always like to reach perfection. But the ability of the rail industry and CSX, in particular, to be able to pivot and respond in the manner in which we did, I think, says a lot about the transformation of the railroads to be much more nimble and be able to respond to the ups and downs and gyrations that in the past would have created a lot more service challenges for our customers than what we're seeing right now.

And I think at the end of the last quarter, from a trip plan compliance perspective, you said that you were around 80% for carload, around 90% for intermodal. When you look at those numbers here in the fourth quarter, have you seen them improve at all? Have they been stable? Is there any color you can give us there?

I think that's a good range. It's still not where we want them to be. I think I said we'll get back to where we were, and we'll get -- and we'll improve from there. We're not immune. Our employees are not immune from COVID. Sometimes, I think, based upon the number of cases, we should have developed herd immunity by now, but we're like everybody else. We're a long, long, long ways away from that. So we have our day-to-day challenges on parts of the railroad. And -- but I think we're working through that the best we can. We expect to meet our customers' demands for peak. But again, it's a challenging environment. And we have to balance the needs of our employees, our workforce, our customers and the communities every single day.

Maybe we could shift to truckload conversions and the opportunity there. I know that's something that you've highlighted repeatedly over the course of the last few earnings calls. But could you just talk about what you're seeing today in terms of truckload conversions? Are you seeing the pace of that activity accelerate here in the third and fourth quarter? And if so, in what areas?

I've been talking about truckload conversions probably for 20 years. The beauty of the, call it, scheduled railroad model or whatever you want to refer to it as, is the enormous improvement in the service reliability that we're able to generate and the benefits that, that has primarily for our carload shippers and so the truck converting business back from the highway that, in more cases than not, at one point in time in history, was probably moved in a railcar, is a huge priority for us because you couldn't compete in that market when your service was not reliable enough, that our customer could not trust us to get his product to his customer. So yes, we are continuing to grind that out and continuing to convert traffic back to rail. And these are customers that today have a plant or a factory some place, where on one side of their plant, they have rail doors, and on the other side of the plant, they have truck doors. And so they're used to shipping by rail. And so getting in there and proving to them with new lanes or lanes they haven't used rail on for a long time is we're making progress. But we have to prove ourselves, as simple as that. This is not something where you can just go flip a switch.

And you've talked about that market share percentage for rail. Looking at the transportation market as a whole, it's a very small piece of the pie, less than 10%. But when you look specifically at your customers, how do you typically see that? Or what do you typically see in terms of that percentage of their freight that's allocated towards rail? And any thoughts like, on average, on where that could go? Because I know this is something that you've been pushing for a while. You've been pitching this conversion story. So just wondering if you can put some more numbers around that.

Probably in a customer location -- and you have to take it by location because you have to take it by commodity. But in certain commodities, where we think we're -- we historically have thought we were doing a really good job and you go in and you talk to the logistics manager in charge of meeting the transportation needs across their network of mills or plants or whatever it may be. And we're sitting there at, say, 50%, 51%, 52%, and I say, "How much of that should be moved by rail? How much would you like to move by rail?" And they just look at me like I'm an idiot and they go like, all of it. We'd like to ship everything by rail if we could. You're substantially cheaper. And the reason that, that business migrated away from the railroads over the years was the fact that your service reliability just didn't meet our needs. They now see. They now have not only has our service dramatically improved, but we offer the tools available to them, just like the trucker does, so they can track and trace their equipment. They can keep track of things. They know what's going on. Visibility and not arrogance on the part of the railroad management that says, "Hey, when it gets there, it gets there." And so we're earning that business back. And is it going to be -- are we going to go from 52 to 88 in a year? No. Is 88 is something we should strive for? Absolutely. And I'd like to prove the guy right that we should handle 100% of it. But obviously, there are certain commodities in certain lanes that is always going to be truck, and that's the nature of the beast. But we gave this business away. We gave this business up, and it's our obligation and our responsibility to figure out a way to get it back.

And obviously, we know in intermodal, there's an opportunity for conversion. But on the general merchandise side, it's significant as well. Within general merchandise, what are the commodities where you see the biggest addressable market for truckload conversions?

Again, it's in the business that we handle today, whether it's lumber, paper, pulp, steel, metal, aggregates, things that -- things that we -- these are commodities that we move today that we have, maybe, historically, not -- number one, historically, didn't have a good service product. Number two, historically, didn't invest in the equipment necessary to move it. If we did have equipment, that was probably substandard. And so by working with the customers, we can earn that business back. And that's the primary -- it's a primary focus of ours.

And do you feel like the biggest hangup for your customers converting freight is just time and people saying that we were in an environment where the freight market was weak, rail volumes were down, and yes, service was good, but volumes were down. But now that's rail volumes have improved. The service has held up pretty well. We could see an inflection point in the conversion story as we look into 2021. Is that a fair way of thinking about it?

I think you'll see incremental gains quarter-to-quarter, year-to-year, above historical averages. But I mean, again, if we were growing our carload business, let's just say, at 2%, it's not going to go to 7%. If we can go from 2% to 2.5% to 3.5%, I think those are the kinds of grinded out, blocking and tackling kinds of results that we can look for. So if we can grow -- again, if we were historically -- let's put it in perspective, in the carload business. If we were historically shrinking, we need to turn that around, and we have. So we've gone from historically shrinking, getting smaller year after year to now getting -- stabilizing and beginning to grow year after year. And that is our strategy on the carload business. On the intermodal side, we have a really fantastic, fantastic franchise, serving a ton of customers with, I think, unparalleled service levels with capacity to grow. And so both of those -- both carload and intermodal created a lot of opportunity and potential for us. And our channel partners talk about the opportunities that they see, too, to move more and more things to rail. And whether that be cost savings associated with that, whether that be environmental benefits that are motivating shippers to want to move more and more things more environmentally friendly, whether it be highway congestion, the traditional challenges that our primary competitors face, which is lack of drivers, problems with insurance. The trucking industry seems to be more plagued by challenges year after year, after year, after year, than even the railroad industry does. So -- but we've changed our mindset. We've changed our focus. We've changed the way we want to do business. And I think -- and again, the opportunities there are very good for us.

On the point about being environmentally friendly and the focus on ESG, is that something that you feel is driving the conversion of freight from truck to rail today? Or is that something that is still on the horizon?

I think depending upon the company you're dealing with, one of our customers that we're dealing with, they have all had different philosophies about that for years. This is not new. There were various customers out there that set targets for themselves. There were customers a long time ago, that were planting grass on the roof of their buildings because they wanted to be more environmentally focused. And those were parts of the conversations that we've had for years. And so it's not that they didn't recognize that we were more environmentally friendly. It's not like this was really a shazam moment where it goes like, "Oh, my God, you guys burn only a quarter of the diesel compared to all the trucks that I'm hiring." But then the conversation went, "Yes, but you got to get it there on time. I'd love to use it, but I'm not going to put myself out of business just because I can say I have a lower carbon footprint." So now we're going to come in there with comparable truck-like service, yes, it's a big factor. And it's something that we -- number one, we're proud of as a company and especially as a company that's kind of leading in some of these areas. And so we'd be crazy not to be pitching it and not to be selling it. And there are a lot of -- there are a lot of customers out there -- there are more and more, and more customers, and it will continue to be more and more customers all the time that are focused on ways in which they can benefit the environment. Transportation is a big spend for a lot of our customers. If they can benefit the environment at the same time, they're definitely going to do that.

Maybe shifting to the excess capacity in the network today. So I did a fireside chat earlier with UP, one of the things they really emphasized was train lengths and a continued opportunity on that front. And I think that's a theme we're seeing in the industry as a whole right now as volumes are coming back, they're getting folded into existing trains, we're blending trains. Any way to help us understand the remaining runway on train lengths and if that opportunity is much different between general merchandise and intermodal. Just curious if there's more of an opportunity in one of those segments.