CSX Corporation (CSX) Earnings Call Transcript & Summary

All right. Good morning. Thank you for joining our discussion with Jim Foote, President and CEO of CSX. I'm Brian Ossenbeck. I cover transports and logistics for JPMorgan. We're very happy to have Jim here to wrap up our morning rail session. We're just going to do, basically, Q&A, start off with an introduction of how the network is running. [Operator Instructions] So Jim, thank you again for joining us today. Maybe we can turn it over to you and start with an update on the state of the network at CSX to get us started.

Great, Brian. Well, first of all, it's really nice to be here and nice to see you. I wish we could -- like everybody else, I wish we're doing this in person, but we've all learned how to adapt extremely well. The railroad, under the circumstances, is actually running pretty good. It's not -- it's clearly not Nirvana. We've had tough weather, and the weather as of today up North continues to haunt us. But overall, I think we've adapted. We've shown to the world, not only CSX, but the railroad industry, that we're a lot more nimble, and we're able to adapt and be able to work our way through just about anything they can throw at us. And I can't think of anything they haven't -- whatever they're going to throw next, and I haven't thought of it, I hate to see what it is. So overall, I'm extremely proud of the team here and the job that the employees out there in the field have done working through, like I said, some extremely difficult times, but have moved the nation's freight and have done an extremely wonderful job of doing that. And we're ready now to hopefully get this behind us and move on and handle the growth that your bank and everybody else in the bank says is going to -- become roaring at us in the near future. And we're ready and able to move it.

Yes, it's a big number, and it keeps going up. So I guess that's a good problem to have if it's in the ballpark.

In terms of just -- it sounds like January was pretty strong. February obviously had its challenges, and you got the auto plant shutdowns there as well. So I guess the 2 questions are, do you think recovery -- loss volumes are lost? Or is there a chance there'll just be a delay? And then the second one was, was there anything that was standing out, good or bad, before the weather hit and is now expected to be, I guess, good or bad afterwards?

Again, we're trying to get our hands around the outlook for this year. When we talked in January, we thought we would continue to see growth as the year moved on in excess of GDP. January was starting off on that track. February slammed us in the head. And it was tough operating. That builds term now. We've moved on. Things are better when you move from unprecedented to tough. And so it was a difficult operating environment. Clearly, our volumes -- the carload volumes on a weekly basis showed how much they dropped off for CSX and everyone else. Some of that is still there. Some of it moved. Some of it was missed opportunity. That's always the case. And we had additional unplanned operating expenses associated with the difficult weather, whether it was train length, the restrictions, where you can't run longer trains, you got to run shorter trains; whether it was congestion in and around Chicago or other terminals, where we had to stage trains across the railroad to make sure that we did maintain fluidity at the gateways. All those are additional onetime expenses that you just absorb. It's just part of the business we're in. And so, yes, February was not a good month from a revenue and a cost standpoint. So that's going to have an impact on the quarter. You combine that with a headwind associated with the pretty dramatic spike in diesel fuel prices, which, because of the lag associated with that, is probably going to be a full point on the operating ratio. But if you take out the impact of fuel, we'll probably be, from an operating ratio standpoint, about where we finished where we were last year. So all in, a good, good, solid start, a big bump in the road and a pretty good recovery right now into March.

Okay. Well, on the fuel side, I mean there's an optical OR aspect of it because it's -- as the pass-through of higher cost brings up the OR. And there's the timing issue you mentioned. But from a -- is that a -- when you talk about where you ended, is that from the end of the year? Or is that -- I'm assuming that's a year-over-year comparison in the first quarter of last year?

Year-over-year. Yes, like I said -- well, quarter-over-quarter, year-over-year with, like I said, if you'd take out fuel, we'll be about where we were last year.

Okay. And just one more end-market question. Is it too early or is there too much noise to even see any sort of industrial economy recovery? We are starting to see some things reopen. Florida seems like it never closed. But in terms of the recovery that we're all expecting, and I know you're probably more cautious in the back half of the year, have you seen any signs that that's kind of coming through as expected? Or is it a little too much noise given all that you just described that happened in the first quarter?

Well, that's been the issue in trying to provide people with a guidance or a forward view is there's always seems to be issues. And so in January, we were probably -- when we had our call in January, we were probably less transparent than a lot of people would like. But again, who knew February was going to be what it was. Who knew that suddenly, the auto industry was going to run out of chips. So who knew that there wasn't going to be a container available to move product in. I mean, so we're still kind of in this period where things are still very, very dynamic. But again, we look at the forecasts for GDP growth. We see people are taking them up. We see commodity prices, what they are. So we have reason to believe that we should be optimistic about the remainder of this year. And that's why we, again, said in January, we were aggressively making sure that we were bringing on employees to be able to handle the volume. So we've been doing that since the 1st of the year, trying to play a little catch-up on that because during COVID, we were not able to have in-class training for conductors. So we're kind of trying to play catch-up, make sure that we have employees ready and able to get out there and move the product when it starts to really surge as a lot of people are saying that, on the merchandise side, intermodal is off the charts. And record volumes for -- historical record volumes for CSX, and that's after we had done so much work that resulted in some volume going away in the '18-'19 time frame. So yes, we're -- a lot of capacity on the network. There's clearly a lot of locomotives available to move freight. It's just a question of making sure that we're trying to be as aggressive as we can on the crew side. But we believe we'll be in good shape and expect the year to be, like we said, GDP plus, and GDP keeps going. The number forecast keeps going up.

Yes. So on the crew side, I mean I think you were one of the ones who talked about hiring ahead or at least in a pretty meaningful way. Do you have a couple training classes in the pipeline already? And I guess from a longer-term perspective, I mean it seems like it's always just an issue with the rail industry in general. It's hard to figure out where the volumes are coming from and then layer on the crews on top of that. Is there anything that can change that in terms of technology or other visibility or planning tools? Or is this just the way railroading works, you have to just work through it?

Well, it's where railroad has -- the railroading industry has historically worked. That's not the way we want to do it in the future. We have to get a little bit better. We have restrictions on moving crews around the network because of their labor agreements and their seniority districts. So it's not like it's all of a sudden things in between New York and Chicago start booming, and we've got employees in Florida, Georgia, Alabama, we can move them up there. We can't. So yes, we need to have better planning, better visibility. And we're doing a lot of work in that area from a crew management standpoint to try and have a better foresight. And so as -- because of the difficulties, railroads historically said, well, let's wait and see what happens. And then all of a sudden the volume comes, oh, look, we're going to move a lot of grain this year, even though the customers told us for 6 months, we're going to be moving a lot of grain next year. And then because of the lead time in terms of the hiring process, the training process, we were often late to the game. And we're trying to get much, much better at that. If we want to be viewed by our customers as a service and not just a commodity that they go to when they just are looking for a low price, we have to be better at that. And we're trying really, really hard in that area to make improvements.

So you mentioned the intermodal is moving. Clearly, we're seeing congestion on the West Coast side. Has that trickled over, had a secondary impact on the East as either equipment gets tied up or just things get diverted around the horn there? And how do you feel like the Eastern port are positioned from just a growth perspective? I know the last time we had a disruption on the West Coast, they all put a bunch of money into the ground. So that was like 5 years ago. Are you expecting to see them start to outpace the industry on top of what we're seeing already from a share gain perspective? And how are you positioned in that regard?

I think there's been a long-term transition and not just associated with the increased capacity in Panama, but a long-term transition into away from the so-called rail bridge into more Eastern ports. And so I think that the port authorities on the East Coast have done an amazing job all -- from New York, New Jersey, all the way down to Savannah, now Tampa and Charleston. The port capacity and the port infrastructure that they put in Savannah is unbelievable. And I've been around the world to Europe and to Hong Kong and to you name it, and port infrastructure in Savannah is just amazing. And for them to have had, again, the foresight to focus on dock rail, the inland port development to alleviate the highway congestion associated with port development has really helped. And so we're in great shape on the East Coast. And I think from a capacity standpoint, there are still opportunities to develop more port infrastructure on the East Coast, whereas I don't know that you're going to be putting a new port in downtown L.A. anytime soon. So we're in a great position, I think. And as more cargo flows in from further East Asia, in India, and that, again, favors the East Coast ports. So we're excited about the opportunity. We're looking at more -- opening up the Howard Street Tunnel in Baltimore for it to double-stack capacity, so we can move into Chicago out of Baltimore now. So there -- it's a really exciting time to be in the international intermodal arena on the East Coast right now.

How does the -- how does transloading and, I guess, your TRANSFLO operation, which I feel like we don't talk a whole lot about, how does that fit into, I guess, the port opportunities, the inland terminals and, I guess, more broadly speaking, this truckload conversion? Is this something you're focused more in terms of growing in trying to outgrow the economy? Do you need more dots on the map to put more areas where you can have reliable first and final to get some of the trade off the highway or off the docks? How do you feel that that's positioned for growth here in the next couple of years in CSX?

Well, clearly, the railroad industry -- and let's talk about the carload business from -- so from a transload perspective, that's where the big benefits come from transloading. The rail industry, CSX in particular, has trailed and lost overall market share for decades. And in that process, many of the -- many of our customers either became disconnected from the railroad network or we were dis-intermediated by third parties getting in between us and our customers. And in order to become, the term I like to use all the time is more relevant in the transportation space, we need to have greater connectivity across the entire supply chain. So obviously, our core franchise and what we do is run a railroad, but we need to go from A to B, not just from halfway to halfway. And so, yes, we're going to continue to focus on doing more in the transload space, whether that be traditional transloading of liquid products or dry products or warehousing or connectivity with distribution centers. That's got to be an emphasis from a marketing standpoint. And we've talked about that for a while, and we'll continue to -- you say you don't talk about it much. I think you'll be talking more about that in the future as -- take a look at some of the international steamship guys. It's exactly the model that they're looking at. They don't want to just get to the port and end. They want to go beyond, and it's because they want to have connectivity to their customers.

Right. And I mean the industrial development pipeline, clearly, it's not a new thing for the railroads, but I think you have a new person in charge of that more recently. Is this an area where -- I guess we've seen it with some of the Canadian peers where they're really putting some emphasis or at least we're seeing some of the results. But I would think with CSX and all the land you probably freed up over the years, you probably have a pretty good amount of areas that you could possibly turn over for development or maybe a strategic partnership. Is that something we should also be considering as maybe another avenue of growth?

Yes. Again, I think the past has always been, let's take a look at this nonessential rail property, free it up and monetize it. And no really clear vision of, okay, now how do I take this land that I freed up and turn it into something where I can develop a new line of business where I can make more money. And so in all circumstances now, whether it be -- and that's, to a degree, a couple of years ago when I got here, there was talk of selling off a lot of lines and doing X and doing this. And then the people that would come in and look at buying the lines were talking about, oh, we're going to put industrial -- we're going to upgrade industrial development on the line. And I go like, why can't we do that or partner with them to do that or do something differently. So everything now that becomes available to us, first, has to go through a filter that says, what can we do with it, and not just in the traditional sense. What can we do with it from a transport? What can we do with it to be more, again, relevant in the e-commerce space? All of those different opportunities need to be vetted now before anybody comes forward with an idea that just says we should sell it and take the bucks and do with it what you wanted to do with the money because some of these projects and some of these ideas have very, very good returns.

Okay. Great. The other clear growth area you talked about before and earlier today is just the truckload conversion. We've done some work that shows there's about 9 million opportunities, loads from a merchandise and intermodal perspective. So clearly, that's a big number. You've been working on this for a long time. What inning do you think we are in this story? Again, it's been something that's been around for a long time, but I guess the rail industry hasn't really focused maybe as much on it or the service wasn't there or maybe a combination of things. So you can give us an update on where you think you are in that. And I guess there's recent wins that maybe solidify that. And I guess what are customers saying if they don't want to switch right now?

Oh, in terms of starting to really play a bigger role in the supply chain, what inning are we in, we're in spring training. And maybe even -- we got some AA ball we got to play before we're ready to go there. It took us a look to the railroad industry a long time to allow the competitor to come in and take all our business away from us. And as I've said many, many times, the reason that happened principally was because we didn't have a reliable service product. And so focus, focus, focus on continuing to make sure that we run a rail system, thinking of it more as a transportation system than just a rail system, making sure that the product we offer is competitive from a service standpoint, putting in the basic bells and whistles around it so you can do a business the same way that a truck does today. But then you got to prove that to the customer because he's got a lot of worse stories about how we -- the railroad guy came in and sold a bill of goods before and failed to deliver on his commitment. So we have to earn that respect. We have to show that we're committed. And that's why I say it takes time. It's not because there's a limited amount of opportunity. It's just because it's hard work and you have to earn it back, and I think we're doing that now. And a lot of that business is interline between the railroads. Half of our business starts or ends on a connecting railroad, whether that's a Class I or a short line. And now I think that the railroads are talking on the same -- of the same sheet of paper and understand the importance of service to growth. And you have this kind of like-mindedness in the industry. That's creating a lot of opportunity as well to -- for truck conversion. And I think that that's going to take a little while to get traction, but that's a big, big piece of the available pie.

Right. The other, I guess, partner in that equation would be this, the intermodal channel partners or IMCs. There's been a little, I guess, friction in the last couple of years, just generally speaking, with PSR and lanes being demarketed and the challenges with equipment more recently and just rail service overall. So is that a relationship, just generally speaking, that is in a good spot for growth and aligned for growth? Or do you think there's some discussions or some strategic initiatives or investments that need to be done to kind of get both those parties in line for going in the same direction, which is clearly growth and more convert in off-highway?

Well, yes, in the intermodal space, we were working with the trucking companies or the IMCs, whatever, how you want to refer to them. Yes, we're partners in the business, channel partners. We're partners. And again, we don't pick it up and we don't deliver it. So we're -- even though we might move at 99% of the way or 95% of the way, in any partnership relationship, then there's some friction about like how much of the piece of the pie do I get for doing 95% of the work. So you got a little natural friction in the partnership there, which always kind of flares up now and then. But yes, I mean in terms of, call it, PSR, call it scheduled railroading, I mean our performance is off the charts. And we couldn't be having conversations and you couldn't have major intermodal players in the trucking side talking about, well, finally, the railroads have truck-like service. So I think our service has improved, which is helpful to the relationship and allows us to have, like I said earlier, record intermodal volumes. And I expect that to continue. And we'll continue to work together, partner together to continue to grow. Again, the trucking industry hears all the time right now, like we do, ESG, ESG, ESG. They want to go with electric trucks. They want to have autonomous trucks. They want to reduce their carbon footprint. They're talking about like, wow, 2050 or 2040 or 2030, whatever it is, they're going to do all this stuff. I said, you can do it tomorrow. I can run 100 of your trucks autonomously tomorrow, reduce your carbon footprint significantly today. It's called intermodal on the rail, buddy. So again, things are aligning in that area very well. And the customers are talking more and more all the time about using rail where they can. It's a good news story for both of us.

Yes. I guess on that point, CSX has had some pretty high marks in ESG, how we look at it from a scoring perspective for a number of years, but it's front and center in a lot of conversations. You're the most fuel-efficient railroad in the U.S. Do you think that gives you an edge in terms of making some of these conversions? And I guess, just more generally speaking, are these starting to come down from like the strategic level down to the procurement level? Were you actually seeing a contract win or at least some fingerprints or aspect of ESG that helped you get the business? Or is it still just again spring training in that regard?

No. I think, yes, maybe we moved beyond spring training in the environmental arena. Yes, we're very, very proud of our fuel efficiency, not just because it's a cost-saving metric, but because of what it is. It's -- we're contributing to the health of the world, hereby reducing our greenhouse gases. And hopefully, we can do more and more and more of that. So yes, and I think that the -- maybe the transportation -- the guy that's buying transportation at a company is maybe not that -- maybe -- I'm sure he is concerned, but his primary concern is maybe not saving the world. His primary concern is making sure that his product gets to his customer and he gets there on time. But when he hears from his boss and his boss hears from his boss and they hear from the Board on a regular basis, like, hey, what are we doing in this area, it starts to filter down. I've been doing this a long time. It was years ago, there were certain customers that would come to you. They were planting grass on the roof of their warehouses and things like that, and they wanted to talk about ESG. Now we have major chemical companies, major petroleum companies talking to us about helping them meet their corporate goals by converting more to rail. So it's becoming a much, much bigger part of the way everyone wants to do business. And we're lucky that we have what we have. The asset that we have is just naturally more fuel-efficient. So we try to make it as fuel-efficient as possible, but at the same time, sell the heck out of it.

So if we assume more intermodal growth, more truckload conversion, I think there's always been a concern that that's mix-dilutive from an OR, from a margin perspective. But I guess, if you look at last year, coal was less than, I think, 11% of volume, intermodal was close to 50% and OR was still sub-59%. So do you think that, that concern is really no longer relevant because of all the changes and the structural improvements and the density that you've created over the years in redesigning the intermodal network? Have we gotten to that point where it's just more about growth at the company average margin instead of always fighting this mix headwind and this mix narrative?

Well, the impacts of the obvious change in mix that's happened and is going to continue to happen, I don't know of anybody that's talking about a renaissance for coal. Our export met franchise is pretty solid. But the utility side of the business, whether it's domestic utility or export utility, is going to continue to face challenges. That's just reality. So as more -- and as e-commerce grows and as we become more relevant in that space, you'll see over time intermodal continue to grow and coal, at best, continue to stay relatively flat, but probably down over the long term. And yes, one of the things we needed to fix immediately, embarking upon this a couple of years ago, was improving the overall profitability of the intermodal franchise and kind of getting out of some of the unusual things that were going on. And so, yes, we have greatly improved the margin in that business. And so that has an impact on what we do. And now, so it not only is not as dilutive, it justifies -- one of the reasons I looked at it as aggressively as we did, it just didn't justify capital expenditures on it. And now you're to the point where not only do you see the growth opportunity, but you can generate a pretty -- you can generate a very good return. If necessary, we don't have to spend capital on it. But if we did, it would be justified.

So the other -- what I want to touch on, just briefly moving away from the ops for a second, the pricing dynamic. Obviously, we see the same stuff on spot rates and capacity and disruption, creating more costs and, therefore, more pressure on rates. So there's always a lot of moving parts when it comes to yield. But how do you expect that to progress throughout the year when you think of things like mix and fuel and, I guess, contract renewals, which we seem to be pretty strong but are probably going to take some time to show up in the numbers?

I think we talked last year, kind of in the fourth quarter time frame, about that we expected the revenue per unit or however you want to measure it to improve as we went forward. Now fuel obviously has an impact on that on a quarter-by-quarter basis based again on the timing, as we were talking about earlier. But we expect that to improve as we move forward. The pricing environment continues to be a good pricing environment. And the reason, to a large degree, is we're selling a service now as opposed to just going to a customer and letting them hold the auction. That's not a good way to improve your revenue per unit. So we're selling a service. We're getting in and understanding our customers' business much better every single day. We're trying to get real-time information as opposed to not waiting to find out what happened the last quarter, but understanding what are the dynamics of Dial-A-Truck and how does Uber price their freight and those kinds of things. And those are not things that traditionally railroad marketing teams looked at. I can guarantee you, we are all over that. Our quants are better than anybody else's quants.

I'd like to hear that. So I guess on the -- probably refer to another baseball analogy here. But in terms of connectivity throughout the supply chain with the railroads, with the partners, you're going to be a focal point post-COVID, probably was before, but now it's accelerated. So you mentioned it just now, but what sort of, I guess, perception are you having in these conversations? I think it's probably a win-win, but it hasn't been something, as you mentioned, that the railroads have focused on. So do you feel like this takes some time to get traction? Or are you already getting some benefits of putting the quants to work?

Oh, absolutely. Absolutely. Whether it's just understanding the business, whether it's understanding the dynamics of pricing, understanding in the past, locking up a rate for 3 years, is that the smart thing to do? People always talk to the railroads about, wow, it's a tight truck market. Look at that, their prices are up 10%. You guys must be doing really good. Well, sorry, we priced that 2.5 years ago. We're kind of sitting this one out. And so every kind of business practice, every kind of marketing strategy, we're looking at all the time. And it's all about data and it's all about information, and that's why we rely more and more and more on smart people with unique backgrounds in whether it's finance or analytics or whatever. The people that we hire and the people in the marketing department now are financial wizards, so a lot of money in your business.

So the other area of applying technology, I guess, maybe on the operating side. So you joined in 2017. How much progress have you made just in general on the technology, like putting automated inspections, maybe something like you mentioned, automating the back office? But I guess in the field, how much progress have you made? And what are some of the initiatives you think we should be focused on in the next couple of years as you apply some of the same tech focus but more on the operating side?

Oh, I think the entire -- again, if you -- it's disappointing having been in the railroad business as long as I've been and to think that where the railroads were in the late '70s and '80s in terms of the adoption of technology when you used to have -- every railroad had thousands and thousands of thousands of clerks that were keypunch operators that manually ba-ba-ba-ba-ba all day long. That's what they did. And the railroads embarked upon the adoption of technology to automate all of that and improve it and have electronic waybills that you didn't have to have a guy carrying around a book of paper every time he got on and off the train and all. That's what the conductor used to do. He carried the waybills with him and was set in a caboose and waited until he got to the next crew change point so he could get off and hand the book of waybills to the next guy. But that's what railroads do. When they get in -- when they get focused on cost reduction, we're extremely effective. And so the adoption of technology at that point in time was to dramatically reduce the headcount and the cost structure. What we're doing now on the operating side, in my opinion, whether it's drones, whether it's portals, whether it's automatic detection inspections, that's so basic. That's so basic. I mean that's just taking something you can get at RadioShack and putting it to work in your business. We need to get back into this kind of digital mind frame and really look at what technology can do for us. I mean it's -- technology is transforming the way, as I said earlier, how the marketing team -- sales and marketing team work. Visibility, you think nothing of it when you order something online and they send you a tracking number, right? It's boom, it's automatic. Then it's the way that the UPS guys come to my door for 15 years. I mean the device they had might have been a little bit bigger. But still, it was the same principle. It was technology to track and trace and tell you when the box was going to get there. Now all of a sudden, the railroads are going like, whoa, shazam, look at what we're going to do. Wow, that's a 15-year-old technology. We're just taking and putting it to work on the railroad business. That's basic smart operating practices. So all of us, and CSX in particular, are doing that as much as we possibly can, but thinking differently in terms of what technology can do for overall operations, labor relations, how do we interact and interface with our employees on a daily, hourly basis so they have a better quality of life and those sorts of things. We're just at the beginning of trying to understand how to do more and more and more of that. And I think that's the next big phase of adoption of technology. And I don't think we've even scratched the surface on that yet.

So a lot of opportunities, some low-hanging fruit maybe. We've got time for one more question. So in the -- sticking with technology, looking at positive train control mandated on the industry several years ago, had some extensions in terms of the time line, but was now effective basically at the end of last year. And I think you and others have gotten ready for that beforehand. So is there anything helpful in terms of positive train control or at least some of the early signals in terms of what you may be able to do with it? Is it too early to think about some benefits in the next couple of years? Is this the digital backbone that we've been waiting for? How do you view that now that it's fully paid for and in place?

Well, clearly, over the years, the railroad industry has been investing in technology along its waysides to -- whether it's the wheel and hot box detector, you name it. I mean the amount of technology that's out in the field right now, coupled with PTC, coupled with the ongoing innovation that is coming along in terms of locomotive operations that used to just be so you could lower a cold train at a certain specific mile per hour. So I mean we're taking the basic guts of years of technology, and now we're just trying to figure out how we get them to work together. And so it's going to help. And -- but I think, as I said, we need to tell -- I need to know what's going to happen tomorrow. I don't want to know anymore what happened yesterday. And that's the essence of a smoother, more effective and efficient operation, but it's also the essence of a much, much higher quality of service product to our customers. So it gives us another tool. It gives us -- it's a huge investment in a tool. But now how do we link all of these pieces together? And I don't want to spend another $15 billion on something that's going to be obsolete in 3 years. So how do we plug and play? How do we use technology? How do we adapt at the speed that everyone else in every other industry is adapting? Everybody else is talking about robotics. We're talking about taking a kid's toy to go inspect a track. So we got to step up our game. It's exciting to hear railroads talking about wanting to develop things like their own locomotive technology. Railroads doing R&D, that's crazy. They don't do that. They wait until somebody comes and sells them the product, not anymore. Again, we've got smart people that are trying to figure out new, different and exciting ways to do things. And that's why it's a great time to be in this business.

Great. Well, Jim, I think we're out of time, and that's a great way to end it, covering a lot of ground today. Thank you very much for joining us. Thanks, everybody, for joining on the call here as well. I hope you have a good rest of the conference.

All right. Talk to you soon.

Thank you.