CSX Corporation (CSX) Earnings Call Transcript & Summary

Everyone, we're going to get started here. Welcome back to Day 2 of Deutsche Bank's 2022 Transportation Conference. We have people in the room as well as people dialed in on the webcast. I'm really happy to introduce CSX Corporation. Kevin Boone, Executive Vice President of Sales and Marketing, he's worn many different hats of the company ever since the Hunter Harrison Day. So I really appreciate you coming and joining us today. We have Matthew Korn, who is Head of Investor Relations, right at the front here.

I want to get into service and volume and all that fun stuff. But obviously, the PEB came out this morning talking about some guidance, nonbinding guidance on labor costs. Any comment you can make on that in terms of where is that relative to your expectations? And anything related to that, please?

Yes. First of all, it's great to be here. Being back in New York, it feels good. In terms of the PEB, I knew you delve at this first. It's hot off the presses, so we're taking some time to evaluate. It certainly sets a framework that we can all work off of. I think every party wants to reach an agreement, and we certainly do at CSX. So we'll evaluate it going forward, and we'll have our CFO analyze the numbers. And we'll probably come out with some information once we finalize the sales.

Like 47% inflation is a little bit higher, I would say, than obviously, which makes perfect sense over the next 2 to 3 years. I mean do you think that changes the way you think about maybe the profitability outlook for the company? Or obviously, railroads have incredible pricing power and they price north of inflation. So that's something that can be revisited as well's.

Yes. My goal and our goal as a company is always to be transparent with our customers. And obviously, there's nothing more transparent than what our labor agreement will be. And so those costs will be transparent to the customers, and we'll look to recover those as much as we can.

Yes. So let's talk about precision scheduled railroading and the promise of PSR. And I think CSX obviously led the PSR revolution among the U.S. railroads way back in 2017. I think where we are today is very different than maybe where we would have anticipated, where we would have been. There's no doubt the Precision Scheduled Railroading, I think, helped all the rails navigate through the pandemic remarkably well. But the whole promise of PSR was to get to a point where service is more reliable, and that you could sell that more reliable service into a more truck-like product and win some market share. Truck-to-rail conversions was almost a cliche for the last several years, and now it's almost like rail back to truck conversions. So the question I have is do you think U.S. rails cut too much in PSR from a headcount perspective? And what's the way forward? How do we get back on track from a service perspective, given all the work that you've done on PSR?

Yes. You've heard Jim talk about this a lot, and I fundamentally believe it as well. The core tenet of PSR is to eliminate unnecessary steps in the process, and we did a lot of that. The handlings made a lot more efficient network. And the outcome of that is sometimes you need less people to do it. And if you take a step back to 2018 and 2019, obviously operating very well, and then we went into an industrial recession in 2019. And remember, at the end of 2019, we're coming out of that. We're seeing a lot of growth, right? We're seeing -- and we're handling it very, very well. Because of all the things that we had done, all the subset we eliminated in process. So we were very well positioned into 2020, quite bullish. Actually, I remember in January, February, obviously, before the pandemic broke out, that we were extremely confident that we're going to handle the upside that was coming that not necessarily everybody expected, but was there. And then obviously, the world changed very, very quickly, and we aren't alone in the struggles that we have. Every customer I talk to that has a workforce that they need to come to work every day is having the same struggle as we are. It's apparent in their flows. We're not seeing consistency in their production, which actually makes it very, very challenging for Jamie and the team to handle that. When you're seeing volumes one day spike up and then the next day, maybe the factory is shutting down because of COVID outbreak or other issues that they have, supply issues, makes it really, really challenging for our network. The other thing is we're a net receiver from the other Class 1s. You look at almost 2:1 net receiver. And so fluidity coming out of the West really helps us. And so when we're not seeing that, obviously, that creates challenges for our network as well being a net receiver. But I'm confident we're seeing a lot more -- our classes are bursting at the seams right now. We're recruiting more people than we ever have in the last 2 years. And I think we have more people on -- at our Atlanta trading center than we've ever had in the history of the company. So that gives us a lot of optimism on being able to handle all these growth opportunities that my team and others are working on to really capture those because, right now, it's an environment where we're not handling all the demand, still. Now there's different markets that are seeing some different demand outcomes. But overall, I would say we're not up against demand in almost every market that we serve today.

So can we go back to that -- the classes kind of bursting at the seam. So is that a little bit different than kind of what the outlook was a few months ago? It felt like the churn in some of the classes was pretty high. I know you guys have been a little bit more careful in screening the potential people to enter your classes. You've talked about getting just a few more hundred conductors in and that could be a significant benefit to the fluidity of the network. Just talk about where we are in that in terms of the improvement you're seeing in filling those classes? And where are you in kind of getting to the point where you feel like you have enough resources?

Yes, until a few weeks ago, we were averaging in that 30, maybe we'd see a 40-person class. Now we're 60 and well above 50 probably for the foreseeable future. So that's a lot of -- I got to complement the team. They've really found new ways to attract talent, new -- whether it's recruiting military, really going after that market, we've seen a lot of success there. So -- and I think you're right. I think every employer, even railroads have taken a different approach. We've tried to bringing them heavily coming in, so we get that yield up. And so I got to meet a lot of them. I was in Atlanta 3 weeks ago and got to meet a lot of the people we're bringing in, and I was pretty impressed with the quality of people -- person that the background that they're bringing, their commitment to the job, their expectations, their eyes wide open in terms of what to expect going forward. So I think our yields will go up. I'm very confident in that. But we've got a lot of people in class. We've got a lot of people out training. More importantly, I think we're identifying the areas where we need people. Because remember, it's not just hiring people and that solves the problem. You got to put them in the right places where you see the demand, and it's communicating to the operations team every day, where we're seeing the demand. And that moves around and probably moves around more than it ever has versus other periods of time. So communication is key.

Yes. And I want to -- obviously, I know you're the Head of Sales and Marketing, so I want to talk about the volume outlook and the opportunities you see. But just maybe circling back on service before we move to that piece of the conversation. The service in the East has been really, really challenging. We've seen U&P start to see some momentum improvement. CP and the Canadians generally have been okay. But the East has been really, really challenged. And I think some of that has to do with the ports getting more congested because of what's happening in the West Coast ports and the risk there. What do you think outside of labor are some of the key bottlenecks that are really driving some of these velocity metrics and dwell metrics more challenged, I would say, than other regions?

Yes. I think there's no question we're not where we want to be from a service level. But don't forget, when you look at intermodal and what we've done over the last 2 years, it's been pretty remarkable. I was just with one of our biggest port partners yesterday, and he was complementing us on what we've been able to do, whether it's putting on inland ports, reacting, doing things in weeks where it would have taken maybe months, even years to do, we were able to do it. We kept all our terminals open through the pandemic. I don't think any other -- most railroads can't claim that.

But those reservation systems helped too.

The reservation systems helped, but I think we've been complemented publicly by most of our partners of what we've been able to achieve. And the East Coast ports, we're continuing to serve them. I know there still struggles out West, still hearing about those. So that's been a real, real challenge. We've also seen equipment challenges probably more pronounced on the East than the West, where we've seen some of our partners decide with the longer length to haul that they'll put their equipment into the West rather than the East. And that's created challenges, whether it's chassis and containers. But we've done a phenomenal job on the intermodal side, and I don't want that to go unnoticed to the market because I get compliments almost weekly about what the job we have done and what we've continued to do there. Now on the rest of our business, it's been challenging. We've seen pockets where certainly during the pandemic where you have outbreaks of areas, where 40% of your workforce could be down and out with COVID. That's less now. We saw a little bit of a spike up from the low levels that we were at, but that's kind of leveled off here. And hopefully, that will be roughly another 100 that come back to work over the next few months once that hopefully goes away and we get through this period. And then adding all of the headcount that we have and the pipeline is going to be huge. We do see a higher level of entitlements this time of year. So I'm looking forward to getting past Labor Day, particularly up in the North, where everybody in this room is taking vacations during August. And as we get through to the middle of September, I think we'll see a little bit more availability where we've seen in that Midwest and Northeast corridor, probably more challenges today than we have seen historically. You'll remember probably 6, 9 months ago, it was the South. And South is in much, much better shape right now because of a lot of the work that we've done from a hiring perspective. And now we're seeing some of the challenges kind of creep up in the Midwest, Northeast corridor. But I do think with the hiring and what we've done from -- and what you see on the entitlement is probably coming down here on the next month that we'll see some relief there as well.

So we should -- I mean, I guess the way to think about it is maybe middle of September start to see, kind of more consequential steps in the right direction from a service perspective. Do you think that's a fair statement?

Yes. I think that's our expectation. And we said that on the last earnings call that we expect to get sequentially better and we've got to build on the momentum. But every indication is that we're going to continue to see some improvement here with the pipeline getting better, with entitlements probably coming down. Just the seasonality and some of the things we're doing.

And can we talk about now the volume environment? So I think volumes are up maybe a couple of percent quarter-to-date. Comps are getting still accommodative, I'll call it that. But the volume increase is not really reflective of, I would say, like a sequential improvement in overall volumes. It's really more of a comp effect. And so one, obviously, that's a function of service that we talked about. But obviously, truckload spot rates are coming way down. J.B. Hunt was here yesterday talking about seeing some of that impact their intermodal business in the East, in particular. Fuel prices are still high. So obviously, rail economics still makes a lot of sense. Just help us frame like the overall demand environment and outside of just the service bottlenecks that are impacting maybe volumes?

Yes. When you break it down, you see markets, even on the metal side, where we're not up against the demand right now. So I think as you see the cycle times improve, assuming all the market remains relatively stable, we have opportunity there. Pulp board is another area where we see a lot of opportunity. I mentioned I was just with one of our international partners, and they see very strong demand through the end of the year. So we expect that to remain very strong. And we've obviously been winners in the market there. You can see it in our intermodal volumes every week where we've seen great success. The domestic side is interesting. Can't ignore the spot rates on the truck side. Certainly, those have come in. We've had an equipment issue that is starting to alleviate in the East, and my hope is that will offer some opportunity to have -- go after some volume that just quite frankly couldn't go after. Now how does that balance with the market softening a little bit? I think that's TBD. But there is probably on the spot market side, which you'll remember is a very small piece of our business, some softness -- how much of that is seasonal. And when we get into the peak season here, I think that's a watch item for us. But we'll see how things trend. But we really, on the domestic side, and I've mentioned this before, really didn't participate in a lot of the growth over the last 2 years. We saw a lot of our partners want to put equipment in the West, maybe more so than the East, and that was challenging the growth. So it's probably some cushion there, hopefully, if you do see that market soften. And then you got coal and oil volumes we have seen over the last couple of weeks have been down for us year-over-year. The market is very, very strong.

Yield is still very high.

We do have -- I do have some optimism that we'll see some of the bottlenecks, some of the mining issues with some of our larger partners are getting resolved here in the next month or 2. And so we should see some benefits from that. Obviously, Curtis Bay, as that comes back online will be helpful. But pretty optimistic that you'll see some volume uplift on the gold side, hopefully sequentially going into the fourth quarter.

Is there an opportunity to drive some of that non-intermodal volume through more injection of resources? I mean I think you guys have been incredibly disciplined on the cost side that you saw last quarter where I think you're -- I think your nonfuel costs actually went down sequentially from $1.82 billion to $1.78 billion, which is something that we hadn't seen for any other rails. So you guys have always had really good discipline on the cost side. But is there a way to just inject more locomotives, other assets? I know you mentioned probably chassis on the intermodal side, it's a little bit difficult to come by. But on the non-intermodal side, can you move more stuff by adding more resources?

Yes. We've injected an extra 100-plus locomotives that honestly, if the network was more fluid right now, Jamie has said this repeatedly, I wouldn't need those locomotives. So we would expect as those things get better, that we would actually be able to take equipment out, not particularly on the locomotive side. When you look at some of our inability to fill order rates, maybe whether it's pulp, our pulp board or some other areas, it's really increasing that cycle time, where we see cycle times down in the range of 20%, 30% in some areas. And then as you get those back up, that inherently creates a lot more capacity in your network and certainly not going to buy equipment to solve a temporary issue. We do see growth opportunities beyond that. So we are looking at car purchases for the next few years, but those will be kind of waived in as needed. But this is the same network we had in 2019 when we were running very, very well. We have made some siding additions down in the Southwest corridor where we see growth opportunities. But all these -- anything that we're doing is for additional growth opportunities beyond that. But before in 2019, we said there's 30% capacity in our network, and nothing's changed around that.

Yes. And on the chemical side, obviously, it's the highest-yielding commodity. Carload grew for you and you made that quality acquisition, the goal was to kind of convert some of that into more chemical carloads. We haven't really seen that. I know there was a ISO tank car sort of shortage, you're looking to get delivery of that. Just talk about how that's going in terms of being able to convert some of that into new chemical carloads. .

Yes, I think you're right. The core business has done well above our expectations. They've done very well in the market. And when you hear about all the softness in the truck market, given that it's a value-added service, given their relationships with customers, they're not seeing that. And so that's very encouraging. It's also strengthening our relationships with our chemical customers, and we're having different conversations. Now from a truck conversion standpoint, I would say probably a little bit slower than what we had hoped, and that's been, to your point, a lot of it is supply driven. We do have ISO tanks now on water headed to the port to be delivered to us. That will be small increments. So we'll start to see that in the fourth quarter. And then in the next year, you'll see that ramp. And we're -- I know Randy and his team are incredibly excited about it. Customers, we have a prototype that a lot of customers have seen. They're very, very excited about it. So we have a lot of demand. We see a lot of opportunities in different corridors, particularly in the South, over time to really unlock value and provide a service that, quite frankly, just doesn't exist today. So -- and then on the -- what we call a multimodal where it's truck-to-rail, car and then back to truck, or on the front end or on the back end, we've been slow in that market for a couple of reasons. Pump -- getting pumps, 6- to 9-month lag. We found when we -- customers that come with us with new opportunities, we haven't had the equipment readily available, so we're working on that. I think we need to build stock in that, small numbers, but -- so we can react to the market more quickly. And then we're being very, very deliberate in terms of when we want to bring business over given the network challenges. We want to get it right the first time because you have one time to get it, first time to make a first impression. So we're bringing on those very methodically. We've had some wins, some great wins. We have a lot in the pipeline. I just reviewed it with Randy the other day. And we expect to convert on that into the fourth quarter and then into next year.

And you guys are one of the largest landowners generally. And I know one of the biggest focus is how do you leverage that ownership into creating new business opportunities. And I think you have real estate people that are focusing on this right now. Just give us an update, I know it's a longer lead cycle thing, but it's been really successful companies like CP over the years. And just wondering how you think about how that's progressing?

Yes. I think we obviously had, at the beginning of 2017, a lot of excess property where we thought there was a better commercial opportunity for. And we'll still have those properties around our network and we'll evaluate that. But we're highly focused on how can we leverage our real estate portfolio to attract new customers to the railroad. And we've had a lot of success. We have the CSX, the [ Lakeside ]. Now not in every case, we don't own that land, but we partner with the people to create a really shovel-ready opportunity for customers to build a facility and we still see a huge robust pipeline of companies looking to onshore back in the U.S., and we've had a lot of wins. We're probably not as public with those.

Is it really like an automotive win or battery wins?

We have a lot of battery wins. On the metal side, we've had a number of wins. So if you think about the Ford F-150 plant, which is the largest plant Ford would ever build, on the CSX network along with the battery plants. When you think about Vivia -- or Rivian, sorry, in Georgia. That's on the CSX network. A company called VinFast in the Carolina is building facility as well. But we've had a lot of other wins, again, that have been announced here recently. And probably the most wins we've seen that anybody can remember over the last 10, 15 years. .

And that underwrites growth, maybe not this year or next year?

Yes, I think you'll see that in '24, '25, but it's very visible growth. The best thing that we can do is have customers seeing hundreds of millions, if not billions, into infrastructure that's touching our railroad.

Yes. And those plants are going to be run.

Strong capital is a very, very good thing.

Can we talk about yield. So there's a lot of moving parts. There's mix, there's pricing, there's fuel. Fuel looks like, obviously, because of the lag, it kind of stays consistent, even though we've seen a little bit of decline in fuel prices. Is there -- I mean, I know 70% of your pricing gets renegotiated kind of in the fourth quarter, early first quarter. So maybe there's not as much repricing opportunities, correct me if I'm wrong on that. But just talk about -- I mean, have we seen peak yield for CSX in the second quarter because of the jump in fuel surcharge and all that, and then the pricing renegotiation? Or are we kind of going to be at these levels? I know coal is a little bit of a headwind, but if you could talk about that.

Yes, I pointed out probably the 2 biggest swing factors, obviously, fuel. Fuel surcharge, given the 2-month lag on a lot of our business will carry into the third quarter, right? And so we'll probably see a little bit higher levels than what we saw in the second quarter. That will be partially offset by the met coal prices that you've seen come down, although we've seen a recent bump back up the levels. And you have this interesting environment. I was just with a lot of coal customers last week where you're seeing the thermal market well above the met market, which is something very, very unusual. I will say, generally, our pricing on the met side reacts more in line with the market real time. Thermal is usually a 1 year contract. So should you see strength in that, that would be perhaps an opportunity in the next year to capture some of that. We've also seen some of our met customers looking at putting volume into the thermal market. At the margin, they have the opportunity to do that, so that's an opportunity for us if these levels...

But the net impact of obviously the export met will be negative, right?

Yes, it should be. There's probably more opportunity if this holds in on the thermal side in the next year, if this holds.

But Kevin, to be fair, you've been talking about declining coal yields for several quarters every time? So [indiscernible] up sequentially?