CSX Corporation (CSX) Earnings Call Transcript & Summary

Hey, everyone. This is Jason Seidl from Cowen. We're pleased again to have CSX represented at our Global Transportation and Sustainable Mobility Conference. With us today, Jim Foote, CEO. And Jim is a big AC/DC fan, so I figured I'd play a little bit of AC/DC leading up to him here. A little bit of Thunderstruck introducing my good friend, Jim. So Jim, we want to get kicked off here talking a little bit about the macro demand side. It's shifted somewhat since 2Q. There's been supply chain issues out there causing automotive curtailments with chip shortages, Delta variant issues pushing some economic reopenings a little bit on the edges, major hurricanes slamming into the Gulf Coast to even flooding in the Northeast, which I'm sure you're well aware of, but I'm a Jersey boy, so I've seen it firsthand. It almost seemed like areas out of Mad Max with cars strewn across the road. What are your current views on the second half of '21? And how might these issues impact the rest of the year?

Well, I'm waiting for the meteor to strike and the locust to come, and then we can discuss what the fourth quarter is going to look like. It's unbelievable, the amount of disruption, chaos, call it whatever you want. I hope you guys are all well in the Northeast, the pictures of flooding was just unbelievable. And the fact that we have a bunch of railcars that's underwater is minor compared to what you guys are going through, so I wish you the best. Obviously, it's had an impact on logistics, not just rails but logistics in general. All of us would prefer a more stable environment to be able to plan, execute, deliver, make sure we have the resources in the right place at the right time. And it's a challenge to do that when every single day, there just seems to be some other event. And the events [ were in the ] network. So an event that impacts our brothers and sisters in the West, whether it be in Texas or wherever or forest fires, you name it, it ripples across. The same thing that they might not have a direct impact from a hurricane, but when it impacts us, take a look at New Orleans, where we don't try to give traffic to one another and keep everything moving this smoothly, it creates challenges. So that's going to have an impact. Factor in chip shortages, factor in the COVID impacts on the factories where they make the chips. I don't think the auto manufacturers have any better visibility about what's going to happen tomorrow than we do. We all just kind of try to collaborate, open lines of communication, transparency on where everybody stands. And we're all working very, very hard to get through this. And hopefully, some of these events become history and not just -- it seems like Groundhog Day, every day is just a repeat of yesterday.

Here's a knock on wood that we could have some smooth sailing between now and the -- at least the remaining end of the year here. Talk a little bit about some of the ports. I mean, obviously, we've seen the impacts on the West Coast earlier this year. It was terrible. They got a little better. Now they're worse than they ever were. Some of the backup seem to be heading out East now, too. We're largely steering clear of it this year from any major issues, but now we're seeing them backing up. So what is sort of your take on that? And sort of what should we expect going forward? And how is it going to impact CSX's network on the port side?

Well, clearly, there's a surge. And surges are difficult to plan for, whether it's us, the ports, the dray community, the location of containers, the availability of chassis, the availability of drivers. And yes, we continue to see these surges occur. The good news is we work them off, doing whatever it takes, adding capacity across the network in the areas where we can. And -- but it continues and it probably will continue throughout the fourth quarter and probably into next year as we hopefully get back to some normalization of shipping patterns.

Can you talk about the impacts, if you will, on sort of the equipment shortages and sort of the metering that some of the ports that we've had to do here, how the impact has been on the intermodal business? And where do you think the growth can go sort of once this eases? And I'm not asking for a date like May 1 or something like that. But assuming in the future, we get a more normalized network, I know shippers have the desire to use an intermodal product, especially one like yours. Where do you think that growth has been curtailed? And where do you think it can go once it eases?

Well, the metering is an attempt to again make sure that the terminals maintain fluidity. There's only so much capacity for throughput. We feel confident that we have capacity and can continue to grow capacity in areas where we see the demand increasing. But the metering is a result of when the box comes in, it doesn't move. So something has to give. And so we continue to try and make sure that we have the wherewithal when a train leaves New York, New Jersey heading for Chicago, that when it gets to New York, New Jersey, it's got a place to go and someone is going to come and pick it up. And even if there's somebody that's going to come and pick it up, is there -- is the receiver, the BCO going to take it because you have people, they're challenged with the workforce challenges just like everybody else. So the metering is necessary in order to keep that -- the flow moving. We've added capacity in Chicago. We added capacity at our 59th Street terminal in Chicago. We opened up another yard just down the road. We bought property next door. We built a railroad over to connect to it. So we're doing everything we can, looking for additional space for people to put containers if they need to. I know the other railroads have opened up terminals that, in the past, they felt weren't needed, but now in [ the surge bar ]. So I think the railroads are rallying around trying to do everything they can to create more room in the pipeline to handle this as things have slowed down on either end, they're slowed down. When you see the vessels backed up, whether it be L.A., Long Beach or Savannah, it's because there's a restriction on the other end. They can't get it in the pipeline if they can't get it out of the pipeline. And so we're working with them, trying to collaborate to figure out better ways to try and get it out of the pipeline. It's not an issue of capacity on the rail to move it from the port to the inland terminal. We have ample capacity and would add more and are adding more to the extent that it's needed.

When we look at intermodal over the longer run, I mean, converting freight off the highways is obviously something that's very big in your playbook at CSX. And I should probably add that it's probably much needed for the North American supply chain for the rails to take over more truck traffic. Can you talk a little bit about how CSX is looking to win over the shipper's service products, supply chain visibility? What are the things do you think that are -- that you guys are doing that are going to win more freight off that highway system, which is now obviously extremely congested and tight?

All comes down to reliability. Our traffic, our reliability needs to be more truck-like. We've said that many, many times. We worked on that for years and years since I've been here. In 2019, and the first quarter of 2020, the on-time performance, what we call trip plan compliance. From the time we pick up the box until the time we said we're going to deliver the box, in the intermodal space was in the high 90% range. In the carload business, it was in the mid-80% range, a huge leap from where that reliability had historically been. And when we get through some of these challenges, primarily at this point in time primarily related to hiring, we'll get back to that number. And when we get back to that number and we're continuing to see more conversions, I believe that we will see more and more of that as time goes on. And whether it's capacity on the highway, whether it's trucker issues. I see they want to lower the weight -- the age for drivers so they can find more drivers, whether it's the environmental -- significant environmental advantages that rail has over truck, it's -- that's all good for the railroads, and we'll get back to where we were. And I think we're doing an amazing job under unbelievable circumstances, and we'll continue to see that trend. 2019, we are -- 2019 is not a fantastic year. It was kind of the tale of 2 economies that we talked about. The consumer economy was going crazy and the industrial economy was under a lot of pressure, whether it be from tariffs or whatever. But it was still a really decent year. Well, despite all of the challenges that we're having right now, 211 people -- employees off with COVID today at CSX, and that's down. So we'll get back to where we were and -- but we'll move more freight this year than we did in 2019 despite all of these challenges.

All right. And that's a testament to the men and women at CSX who are getting it done despite all these things being thrown at them seemingly by mother nature and just COVID. You mentioned a little bit about rail employees. I mean you took a step down last quarter. I think before you highlighted the referral program, which incentivize people to bring people into CSX. Can you give us an update on the referral program? And maybe just your hiring process and onboarding process in the middle of this Delta variant?

Well, we stopped our pipeline of employees coming into the company in early -- I get the years mixed up about when this -- I wish we could go back 15 days to stop the spread. That was 16, 18 months ago, whenever it was. We had to stop the inflow of new hires. After a long period of time where we tried to do everything we could to keep the workforce active, but then really, in September, about a year ago, we felt comfortable enough to open up our training centers again and bringing people in. We could do -- we figured out ways to do things like we did it with everything [ in light of ] social distance to classroom training. And so we started to rehire over a year ago. And at that point in time is when we started to realize there's something new here. The number of people that we could find that wanted to come and work was greatly diminished from what we had historically seen. At the same time, we saw a lot of people that didn't want to work anymore. Our attrition rates went up, so we have been trying all sorts of different ways to increase our workforce. The referral program is just 1 example of where we went and said, we're having a challenge finding people that want to work in the railroad industry. Let's see if we have people who work in the railroad industry that knows somebody else that might want to work in the railroad industry. And we had a very strong response to that. I think the number was 1,500 applicants that came through the referral program. A lot of them, after having conversations with us, decided they didn't -- this was not the place for them, but it's part of the program. It helped us boost our employment. Since that time, when I said about a year ago, we've had about 500 people enter into the training program to -- and again, these numbers just relate to train and engine service employees, which is the most critical need right now. But we've -- we're talking to our existing employees that work in different crafts, whether or not they would like to have a career change from, say, someone in the mechanical department that would like to work in the operating department. We're shaking the trees for everything. And again, we have to look at new programs that we have not necessarily had the new channels into the workforce in ways that we've never had to do before. I think this is not a short-term problem, but we need to think about higher turnover, how do we retain people, things like why don't people want to work in the railroad industry, is there ways that we can change the way we do things, so that the work-life balance might be [ slightly ] different than what it is today. So all of these new ideas, new challenges that are going to be with us, I think it's the new norm, and we better get ahead of the curve and get out there and find ways to make these jobs more attractive. They pay extremely well. They have very good benefits. And -- but it's something that all of us face. I think the truckers have faced it already for a long time, and we just didn't wake up and say that could be us someday. So far, so good. We're gradually bringing -- building the workforce back up. We want to get the workforce back up to where it was, as I said, in 2019, early '20 when the railroad was running extremely well. And that's our goal, and we hope to be there. I wish I could say soon, but we're working our way towards getting there as quickly as we possibly can.

I think you're right. I think the rail industry for years is -- I followed it for 22 years, has probably largely thought of itself as insulated compared to the truckers on turnover. And -- but I think now it's not just the rails, it's -- there's a labor shortage across all different industries throughout North America. So this is not just a CSX or rail industry problem, it is a problem for everybody. I wanted to jump a little bit to your recent acquisition of Quality Carriers. I think it closed back in the beginning of July, operates like 2,500 trucks, 6,400 trailers, serving sort of chemical producers and processors. Can you give us an update on how this acquisition is going? And sort of how we should think about the growth trajectory of this new business? And any cross-selling opportunities that it may present?

Well, it's a combination. The rationale, it's a combination of putting together what is clearly the leader, the largest specialty chemical trucking company in the country with our very, very strong chemical franchise and building off the strengths of what we do together, can do together and are doing together. There are a lot of solutions that today move over the highway that can move by rail. We're already starting to do that. It's in the early stages, but that was -- that's the strategy here from the very, very beginning, building off each other's strengths in order to grow the business in total for both of us. They're a phenomenal operation with great people. They fit together well. Our sales -- rail sales team and their truck sales team had meetings right away and came up with unique innovative opportunities that so far, the customer base is very excited about. So it's a win-win situation for both companies, it drives more business to the rail. The ability to backfill on maybe shorter haul moves in the trucking area and taking advantage of the long-haul trucking moves on rail is paramount, and we're starting to already realize and see some of those moves materialize. So it's a great fit. They're a great company run -- with great people, and we're so happy to have them as part of our team.

Sounds like it's going well, so congratulations on that. I have one more follow-up question, but I want to remind investors if you want to ask Jim a question, you can do so over your little question queue there within the Zoom or alternatively you could reach me at [email protected]. I wanted to just touch lastly on sort of industry consolidation. It's been obviously front and center for everyone with 2 different railroads trying to acquire KSU. It looks like at least CP has gotten the edge right now based upon what the STB said. How should we view consolidation going forward in the rail industry? And would the potential acquisition of KSU by one of your competitors have any impacts on your business?

Well, I think a testament to -- and I've said this publicly, so this is not earth-shattering news, rail consolidation has been good, it's been good for the rail industry, but it's also been extremely beneficial to the customers. Single-line service is normally better in all recent activities, at least the ones I've been involved with when I was at CN, we always maintained a policy of open gateway. So if you want to take advantage of the single line service that should be better, should be faster, should be more reliable, perfect. But if you want to move via an alternate route, it's still your choice. So in both circumstances, whether you're looking at the CP's position or the CN's position, they've had enormous customer support for the improved quality of service and the -- that they saw would come from either transaction. So I think there's a recognition in the shipping community that these transactions are beneficial. So that was clearly not -- that was clearly not the case that, I guess, the STB viewed. There's always the government lobbyist groups that represent shippers who have a different agenda and always want to push a different agenda, but the overriding support that I saw from the shipper community by watching it like everybody, like you and everybody else was it was favorably viewed by almost all shippers. So we'll see how this continues to play out. The game hasn't even started yet. We're just talking about negotiating with the referees on what the rules are going to be here. So the game is yet to be played out, so we'll see how that all turns out.

Well the referees have definitely asserted themselves as having full control of the game, that's for sure. So listen, we are bumping up on the time. Jim, on behalf of Cowen, thank you so much for giving us your very valuable time. We appreciate it. I love having you back. And my best men and women at CSX out there, I hope you have 0 COVID cases very soon.

Great. Thanks, Jason. Talk to you soon.

Take care now.