CSX Corporation (CSX) Earnings Call Transcript & Summary

All right. Good morning. Thank you very much for coming. My name is Brian Ossenbeck, I cover transports here at JPMorgan. Kicking off day 2, very excited to have CSX and Jim Foote, President and CEO, with us in person. So we'll go through some questions. There's some microphones around the table. Raise your hand and get my attention if you want to get one in here, and we'll certainly cover a lot of ground. So Jim, thank you very much for coming. Appreciate you being here in person.

And maybe we can just start with talking about the state of the railroad, how the network is running, how things are going here in the first quarter to kind of set the stage, if you could.

Well, it's great to see people in person again. It's really tired of looking at the little screen all day long, and New York seems very healthy and vibrant and alive. So we all came out of it very well. I don't know how to describe, after all my career in the railroad industry, to describe anything anymore about how the railroad is. It's clearly the supply chain businesses are still facing challenges. But I think things are getting slightly better each and every day. My personal opinion, and CSX specifically, the biggest problems associated with our operations, which clearly are not perfect today, has been employees, shortage of workers, shortage of people that want to work, combined with extremely high numbers of people off in January, February due to the Omicron. But as fast as that spike went up, it seems that it's come down, so that -- early part of the quarter, we had just T&E employees over 300, 350, I believe, on 1 day off due to the virus. And we're now down about 35. So that's extremely helpful. Our metrics, which you look at, our velocity, our dwell, clearly are impacted by that. And we should begin to continue to see, as we bring on now a little over 100 T&E employees per month now, that are actually net-net positive growth in the number of employees, I think about 1% you'll see in our reported numbers is going to be a great benefit to our customers. We'll finally start to be able to move the amount of demand that's available for us.

Yes, I don't think we've seen the monthly numbers yet this morning, but it does sound like you're moving in the right direction. So can you just elaborate a little bit more on the training pipeline and what you're doing, I guess, to make that bigger, to make it stickier, to get maybe a wider net. And I know we're obviously in the middle of pandemic and it's hard to manage through all this stuff and the volume variability on top of it, but longer term, are there different things you think you can do to retain, to shorten the pipeline, things of that nature, for the next couple of years?

Yes. I think it was in the first quarter call -- year-end call, January of a year ago, when I said we're going to hire. I was extremely confident at that point in time that by the middle of the year, we would be back to workforce levels to meet what we saw as the, I guess, at that point in time, unexpected surge and rebound, the V recovery. And based upon the fact that I had about 250 people off sick with COVID and we hired 250 to 300 depending upon the total workforce that I -- most of the time I just use the T&E numbers. And we hired about 500 people. I thought we'd have that done in June. That kind of was the normal 6 months. You put an ad in the paper that says, "Hey, we're hiring on the railroad, these are fantastic jobs, high -- 85th percentile in terms of wage benefits. We never had any problem hiring people to work on the railroad. We didn't get any responses. And at the same time, we had people who with 20, 25 years of seniority that were saying, "I'm hanging it up." Again, unprecedented. So our traditional avenues to fill vacancies was ineffective, completely ineffective. We were talking to recruiters in South Africa, in Mexico, you name it, any place where we thought we could find people that were ready to go to work in the railroad business. And -- so we had to basically reengineer who we hire. We had to reengineer the processes that we went through; simple things like we would recruit, we would get people lined up, we would put them through the class, invest a lot of time and effort and money into getting people and then we'd give them a drug test when they are ready to go out in the field and go to work. And not smart. And -- but this functionalism reveals itself when it's stressed. And so we fixed a lot of that, a lot of that. Changed some of the minor tweaks on our requirements. And I think we've got now, at least over the last 5 months, a very steady stream of employees -- prospective employees because they first have to come in, then they go to a classroom training in our facility in Atlanta. And then depending upon the individuals, sometimes 3 to 6 months of training in the field before they can be released and go out there. So we've got 350 people right now that are still in the OJT process. And that's why I'm confident that this number of 100, hopefully a little bit more per month, to be coming online.

Okay. Yes, the last thing on labor and just kind of your point of having called this out first and for a long time ago, and working on it for a long time. Just as -- you wonder if there's anything more structural, challenging from that perspective. If you look on the West, they've got a bigger network to cover. They've obviously had different problems and different challenges, but they seem to be a little bit easier off in terms of the staffing. So it sounds like you've made a lot of changes and lot of structural ones, but is there anything else that kind of where you...

Well, I think that this is not an issue that we can ignore going forward. There's clearly a change in terms of the type of job that people -- where they want to work. Again, we pay an extremely good wage and benefit package. But for that, we expect people to have to work nights, weekends, in all kinds of crazy weather. And I think that attitude about -- we've talked about work-life balance in the past. Every business and industry has. But I think we have to address that more head on. And so I've had -- personally, I've had numerous conversations, just casual conversations with our union leadership about how we can better structure our jobs so that they're more desirable for the average person that might want to come to work in the railroad industry. A lot of people would love to come to work in the railroad business, but they don't want to work in these kind of crazy hours. So can we have tiered kind of, hey, I like the railroad business, but I like my time off. I don't really care if I make $1 billion a year. And the other guy says, hey, I'll work whenever, you just keep paying me and I'll just keep working. So how do we get around these older work rule seniority structure issues to collectively address that problem?

Okay. So the other big topic right now, at least in the last couple of weeks, has just been commodity prices and oil moving up the way it has. Is there -- before we talk about the long-term implications, that short term, it feels like it's going to be an impact on earnings from a fuel lag perspective and the optical impact on OR because you just have a higher fuel surcharge revenue.

That old OR thing.

Old OR, yes. So at least you guys have gotten a little bit away from it, but we're asking everybody in terms of like how they have -- it's not as important for CSX, of course, as it is for some others. But you sized up that sort of impact to you to start the quarter or for the full year.

Well, everybody knows how the lag works. And so we play catch up. And obviously, the rapid rise in diesel fuel prices is going to impact us until a month or 2 out when we catch up. So can I quantify it at this point in time? Not really. But it would be unrealistic to say that it's not going to have some kind of impact on the first quarter. And then when things reverse out, then we'll have a tailwind during that quarter.

So on the other side, we've got -- obviously, with Russia invading Ukraine, we've got commodity prices at levels we've never really seen before. So I guess the question is, are you seeing any sort of change in your end market demand? These prices are pretty high, but is there actual supply to move more things to the export coal market? And then if you can just remind us how that pricing kind of goes through quarter-to-quarter, because I think it's a little easy to get excited to see $600 a ton met coal, but that's obviously not something that we're going to -- we should be putting into our models.

The coal producers remind me on an hourly basis that it's $600 a ton and they would like to move a lot of it. And unfortunately, as I said in my opening remarks, it's going to take us a while to get there, which is a good problem to have. It's a bad problem because you're disappointing your customer at the same time, but it's a good problem because I see that more of a -- I don't see that as a blip. I see that more -- I don't think anybody really understands the impacts of the European crisis on commodity prices and how that's going to change sourcing. I mean whether it's coal, whether it's steel, whether it's grain, whether it's -- I think there's a lot of people right now just trying to get their hands around what that is. And so we're aggressively trying to make sure that we're -- we have as much line of sight to where the -- it doesn't do me any good to hire if I screw up and say, "Oh, yes, we're going to have a lot of growth in Chicago," and hire 50 people in Chicago and all the growth comes on the East. It can't take the people from Chicago and move them to the East. So it's very important that we are going to have visibility on a seniority district basis as we move forward and have Kevin and his team do an amazing job of dialoguing with the customers so we can try to get ahead of it and be prepared. But it's going to change things, without a doubt.

In terms of -- just on that point with -- dialoguing with customers, with the current network constraints and challenges you have right now, how do you feel about looking slow improvement through this quarter to next quarter to the back half of the year. That's a big theme in the industry, is just the back half recovery. So what -- how do you see that playing out? And what sort of confidence do you have that you can start to move those volumes and the demand is still going to be there when things get more fluid?

I have -- again, on the hiring side, absent, as what we were talking earlier, another wave like China and Europe are going through now with the virus, that's something that I think now, as I said, we've got a better handle around that process. And so that's something I should control. Shame on me for not having a better view, like I said, January a year ago when I said I thought we could fill these jobs and I couldn't. Shame on me, that's my fault. I should have had a crystal ball or something. But those are things we can control. And I think -- and I'm confident that we will be prepared as we move into the second half of the year to move whatever people want to move. We're not in a business to turn business away. And that's, unfortunately, what we've been doing, without a doubt. So as to the long-term growth opportunities in the railroad industry, and this is a great time to be in the railroad business, this is a fantastic time to be in the railroad. This is the time for us to shine. People want us to -- despite these commodity dislocations, shipping pattern changes, you name it, people want to move more by rail. Whether it's ESG, whether it's highway congestion, this is the time for us to shine. And we need to be there and we need to do a better job. And I don't see those big picture items changing over time.

So when you think about that truckload conversion off the highway or even just more rail-to-rail conversion as well, how do you effectuate that? How do you -- are there things -- obviously, $100 oil would help from a certain perspective. But are there things, kind of like quality carriers, where you extend different parts of the network to get more reach where you couldn't quite get to before because the demand is obviously there, but it just seems like it is...

Well, the #1 driving factor in us getting more business from truck is our service reliability. We have to get our service reliability back to where it was in 2019 when we were leading the industry by far in terms of velocity and dwell. What are the -- velocity up, dwell down, tells me that my railroad is running more fluid, faster, reliable. So if you look at that, yes, look at how efficient they are. Yes, I know what that means it's got a good service product. So when my velocity is down and my dwell is up, guess what, the customer is frustrated. And so for me go and knocking on his door and say, like, "Hey, how about I get -- can I get 10% more of your shipments out of here." He goes like, "Yes, you can't handle 50% of what I'm giving you today." So fix the service, build back the reliability, build up the credibility and then the opportunity gates open up. And then you can start talking about, well -- the guy says, "Yes, I'll give you more, but you don't go there." Those are the challenges where our transload -- aggressiveness on transloading, partnering with people for warehousing, container stuffing, quality, all of those initiatives are to remedy the situation where as traffic migrated away from the railroads for decades to truck, we lost the touch. And so that's where that -- those pieces of business come in there and drive -- and number one, they're great businesses to begin with; and two, they drive more business to the railroad because it's something that today we can't get to. So that's why these little areas of activity that we've talked about for years now come into play.

And maybe you can just talk more broadly about supply chain as you're experiencing not rail-specific things you can control, but the things you can't control. And we've seen, obviously, congestion pop up at different ports, some more so on the East Coast. But how are like the chassis, the equipment, the drayage? Are those still significant constraints? I think we saw some news there's going to be a bigger chassis pool, but that's not until '23, in the Southeast. So is that...

We have chassis pools. They blew them up. I don't know what that was all about. And so then we're back into the days when you're going to have 16 chassis sitting there and a guy comes in, but it's not my chassis, I can't move it. They're all -- they're just -- they're same thing, just painted different colors. So the biggest issue that I have heard about over the last, say, 3 months has been the shortage of chassis. And what drives that? They pick up a box, they put it on a chassis, they take it someplace where it's supposed to be unloaded. Well, they can't unload it. They don't have the people to unload it either. So all of these little bitty steps in the process need to be worked out and free up. And again, how many -- the turn times for the truckers, the cross-town drain in Chicago, or whatever you're talking about, their turn times are way down. Their number of trips per day is way down. Prices that they're paying are way up. This is not a good way to run an industry. But everybody is intently focused on that. And I believe that, that will continue to work its way through and correct itself. We've always been able to correct these things in the past. They're not insurmountable problems. They're just blocking and tackling each and every day.

I think it was probably back in October where you outlined a bunch of different initiatives across different channels and with different partners. Are there any updates there that you can kind of think about that are actually starting to make some improvement? I know Chicago is always a focal point. But anything, just from a partnership perspective, that you're feeling like you're getting some progress and some help with?

Well, again, each business is -- each business has its own unique set of challenges, as most of the time everybody focuses kind of on intermodal. The initiatives that we did there with the yard expansions, taking -- putting in additional surge capacity, taking control to a large degree over more of our own destiny, making sure that we had the right grade drivers, not just 100% reliant. You don't want to go crazy, but you can't be 100% reliant on the fact that somebody you don't know or control or whatever is going to show up and take the boxes out, because if they don't, it shuts terminal down. So we've got more and more -- tried to get ourselves more and more either a hard asset, like it was easier in Chicago with opening up some terminals, took a couple of helicopter trips over Chicago with some people to try and find where we could put boxes, but more on a soft basis, too, relationship building with your key drivers -- key companies who are going to -- you can rely on. And they can rely on you. People that go like, "Well, okay, you don't need me today." And you say, "I don't need you to go home." So it's got to be as partnerships, but kind of softer relationships there. The plastics pellets is a big business for us for export, Gulf Coast over to the East Coast for export. And we are partnering with the people that do the container stuffing, that build the warehouse, invest in the infrastructure facilities there. Our inland ports on the East Coast has been a big help to the East Coast Terminal. So every, whether it's sheet steel, whether it's lumber, whether it's plastics, all of these areas are where we can become more effective and more relevant in the complete supply chain of that product and therefore a better solution to our customers. We don't want to be, when we walk in the door and they go, oh, the railroad guy is here. However, some of the trucking guys walk in the door and they go like, oh, that guy's here, the guy that does the trucking and the rail and stuff, but he does not own the railroad, but they think of him as the guy that owns the railroad. We own the railroad. So we need to be more relevant in that space and it's been our goal really since 2018. And we've had -- we made significant progress in that area in 2018 and 2019. And so I have no reason to believe that we can't get back to where we were as kind of the base camp to move to the next level.

I think on that point, it was last earnings call where Kevin was talking about not using -- not selling off the land. Land sales are going to come down a bit in terms of maybe making more strategic investments. I know that's been a playbook for some of the other rails over time. But in the East, you got, I think, there's tremendous density, a lot of opportunities. Not that you weren't doing it before, but is there even more possibility when you talk about these partnerships to really put something down that CSX owns and really use that as a flag to make some of these strategic improvements?

We've had a book of what we call Select Sites where we work in advance in developing areas on our network where we think that if somebody wanted to put a facility in, we'd be ready. I think the railroad mentality, and CSX I don't think is alone in this, is -- our plan has always been, well, if somebody wants to build a $20 billion plan, we're ready to go. But they come along every how many years. So now we're taking -- and anything that doesn't look like, feel like and smell like it could someday be an auto assembly facility, we need to get rid of that. That's noncore. And then we get into situations where -- I mean there's people all over the city that has spent all day long trying to figure out where -- find me a piece of real estate that either touches water or touches rail. And if it touches water and rail, I want to buy it. And what do the railroads do? Oh, we want to sell it. Why can't we work together to figure out how to -- not that I want to get into the real estate business. But then again I just disintermediate myself from what's going on, who the customer is, what the activity is, what does he want to ship, where does he want to ship, is that the best -- okay, I'm going to sell off this great piece of property because somebody wants to buy it. And then they're going to put something in there that's going to -- everything -- 100% of it's going to be moved by truck. So we need to continue to play a more industrial development longer-term strategy on some of these smaller pieces of property, not be so shortsighted in what it is we're trying to do here. And at the end of the day, if you come up with a piece of property that is better for somebody to put in storage garages, those are a hot thing along the railroad tracks. Why? Because they can't be used for anything else. Then get rid of that, monetize that. And we're just getting smarter in how we look at that.

Okay. In terms of the -- I guess one of the last maybe pieces of truckload conversion would just be the IMC partners. Maybe the Western musical chairs doesn't affect CSX too much, but I imagine it probably does to a certain degree because it's a network business. So any initial thoughts on whether or not that makes a big change for how you approach some of the transcon and some of the interchanging if you do have a little bit more of a...

Well, we do have -- we have an extremely good relationship with the Orange trucks and see them as a big, big partner of ours. They're doing a phenomenal job. And I think that, that will continue to grow. We are aligned with UP, with the UMAX product today. So that's a good joint product to railroads, marketing a good product there together today. So building more density on those trains creates a lot of opportunity for us to -- then number one, improve the overall throughput, service and density, which then creates -- opens the door for us to be more competitive.

And on the density side, we talked a little bit about quality earlier, but just to come back to it from -- I guess, how is that progressing? It seems like it's a pretty good conversion business to get some of that chemical business on the network. Again, are these more qualities needed to kind of get more growth to the main network and assuming the service improves, which we think it will, is that how to kind of get more...

Quality is coming along very well. The interest from the customer base and the chemical shippers in that area has been off the chart. Quality is a quality company, but they also have a quality team. Their management team is really great and they're phenomenal to work with. And we, in the railroad business, can learn a lot from them. And so we have been seeing some incremental shift. And again, they're facing the same challenges that all truckers -- long-haul truckers are facing. They don't have drivers to want to go long distances. So you have the efficiencies of moving by rail. They're able to help with the driver issues associated with the long-haul nature of that business, leave the long-haul portion to the railroad and concentrate on the short-haul and the 2 ends. And so we're trying to make it -- we've somewhat changed how we felt the rail portion would best move, was instead of bringing it by truck, transloading it into a rail car, pumping the truck out, putting it into a truck -- railcar, taking it to the other end, pumping it out, was to pivot to ISO containers. And again, like everything else in the world right now, those -- there's -- it's like buying a refrigerator, it takes you a year to get a refrigerator. Well, guess what? Getting an ISO container, you don't go to Walmart and just pick one up. So we're -- there's a delay in how long it's going to take for us to get that equipment in there, but we'll begin to see in the second half of this year much more conversion. But again, there's a situation where this is not about -- there's not a market for the service. But clearly we have confirmed in the marketplace there is a market for this service. And so as soon as we get the equipment in there, we'll begin to more rapidly ratchet that up.

Okay. And then Pan Am is one that's kind of dragged down for a little while here in terms of the approvals and things that the regulators are looking at. But how do you think of that?

You would think we were buying a Union Pacific...

It's taking a little while, for sure.

Let's deal bankrupt Boston & Maine.

But when you get that -- assuming it gets done...

400 hours of hearings on that, [ I don't know ].

Is there a -- I mean the rationale is still the same. But I guess when do you think you can actually start to get some...

As soon as we get approval on that...

Is there demand waiting for that to get done and the strategy to get finished and just move...

I think it's the only railroad acquisition in history that never had a customer. They didn't think it was a fantastic idea. So that kind of says the market is -- the shipper community is ready for this service. We're ready to go. We need to put some money into the railroad. And so we're ready to go. We'd like to get started sooner than later. I don't want to be -- try to fix up the railroad in Maine in December. So yes, we're excited. We should have approval at the end of April and get it going. Again, good company, good quality employees. When I first looked at it, I was hesitant because my experience with the paper mills and all that in that region was like, what is the opportunity there? And there've been a lot of conversion of some of those old paper mills to making boxes. So it's a good franchise. It makes all the sense in the world. It just bolts on to our network perfectly. And we run at a significantly -- CSX today runs at a significantly better margin than that company does. So we have an opportunity to improve the efficiency, improve the network and grow the business. And then -- so that's completely bolt-on. So we're excited about that as well.

Okay. And from the other side of the M&A going on right now with the CPKC deal and everybody has put in their response with applications. There's a lot of lawyers getting paid a lot of money for these legal documents that could be going back and forth. But from your perspective, is it really just maintaining access and competition when you look at how that combination could potentially impact CSX and some of your customers?

The principal deal of putting CP and KCS together clearly didn't have a negative impact on us, and I think has the potential for a positive impact to the extent that they convert more of that cross-border truck traffic to rail. We interchange -- we don't do a lot of interchange today with KCS on Mexican traffic at all. So to the extent that they convert more of that to rail, we see opportunities coming to us in the south, coming to us at St. Louis from the markets that are moving into our territory that again we don't move any traffic today. If you look at Kansas City, St. Louis, well, then you've got Indianapolis, you got all of Ohio, you've got that region, maybe Nashville, Louisville, so you've got that whole market today that, to a large degree, is ignored in terms of rail service availability. So from a long-term perspective, I think that, that creates an opportunity. And our only position to date really has been to make sure that the competitive nature of those gateways stays available to both Eastern railroads when it's done.

So we're talking a lot about supply chains and connectivity and more need for a collaboration now than ever. From a rail perspective, do you feel like that somewhere technology can be a better part of integrating that? Obviously, the more you know is coming to you from a network perspective, you can plan the resources better, you get better service and then vice versa. When the shipper is seeing what's coming, they can be better prepared. So still feels like we're sort of, at least my perspective, industry is still in fairly early stages from that. I'd be curious to hear your thoughts on how that might help visibility and reliability going forward for everybody.

I think the railroad industry historically -- it has been a long time, but historically, has always been one of the largest users of technology in any business. I think back to the day with all of the hundred -- thousands and thousands, thousands of key punch operators that we had to do all of these waybill and clerical work. And the railroads were like probably bigger than the banks in terms of trying to modernize and use technology to make that more effective, more efficient and more cost effective. And then kind of, for some reason, the industry just kind of forgot about it. And all of the other technology, from an operations perspective, we just kind of said, well, it's up to the supply industry. The suppliers do that. The locomotives, if this guy decides to put a better chip in it, so be it. This track inspection vehicle, puts a different chip in it, so be it. We just bought what was available. And I think you're seeing a little bit more now, a lot more, in the use of technology being driven by the railroads from developing their own hybrid alternative fuel locomotives to doing more and more with their own automation, the portals and the inspection activity and starting to embrace, as I tell the people all the time. Digital -- a digital business transformation doesn't mean flying more drones or giving everybody an iPad. My grandkids have 62 iPads. So they're more proficient in the use of technology than we are. But that's just basic. That's just basic business sense. And so yes, I think there's more focus on real, real information. I have so much information that tells me what happened yesterday and no information. My phone is [indiscernible] get my phone. It tells you everything, what everybody had for lunch union and we track it, we trace it. We want to make sure that we have all that data. It doesn't tell me a bit about what's going to happen tomorrow, the next day or the next day in terms of planning, processes, things that we can do better, how we can interact with our customers better. Do we track the behavior? Every business in the world tracks the behavior of their customers. What do they want? What are they doing? What are they buying? Do they like this? What color are they going to have next week? All those kinds of things. We don't even -- we haven't even begun to really take our ShipCSX tool, which is supposedly some form of a transportation service management tool and get information back out of it so we can get better and we can adapt and we can understand our customers' behaviors better. That's technology, that's digital transformation. And I think we're just at the beginning of that. And we spend -- our non-engineering technology expense is probably 15% to 20% of our capital spend. So it's not insignificant. And we'll continue to focus on that. We'll continue to adapt in how we run the tech part of our business and become better and better and better at that in the future.

I guess last quick one. To get people to adapt and adopt to that rather from a shipper perspectives, does that just take time? Because it feels like there's a little bit of hesitancy from a shipper community to give more information. So I don't know if that's something you've seen so far rolling out these products.

I think the -- clearly, the customers are ahead of us. The competitors, the trucks, are ahead of us. And again, it was -- the word I always use quite often, if we want to be relevant, these are just things you have to do. These are just the basics. These are things you must do in order to be competitive so that they are not just always viewed as -- the only time I have a deal with those railroad guys is when I don't really care when it gets there and they'll give me the dirt cheap price. That's the history of the railroading. That's what we're trying to change. And all of these little pieces come together to make us from a customer perspective much more meaningful. They want to use you. They don't have pushback from -- everybody in the organization, says, we're not going to ship that by rail. It's got to get there. So we have made significant change, significant process over the last few years, despite everything that could go wrong, going wrong. And -- but I think the opportunities for us as we move forward are huge.

Okay. We are over time, but thank you very much, Jim, for joining us. I appreciate all the thoughts today.

Great. It's great to be here and great -- see you again. Thank you, everybody.