CSX Corporation (CSX) Earnings Call Transcript & Summary

We are here in Boston for our 30th Annual Transport Conference. BofA Transport, Airlines and Industrials Conference. To open our conference, we welcome CSX and Kevin Boone, EVP of Sales and Marketing, a position he has held at CSX since June of 2021 after serving as acting CFO. He started at CSX back in 2017. Also here in the audience is Matt Korn from Investor Relations. We welcome Kevin to our conference for the third time in the past 4 years, welcome CSX for its 15th consecutive year and 20th time in the 22 times we've hosted the conference. So thank you to CSX for your steadfast commitment to the conference. CSX is actually one of our top rail-focused stocks given its sustained operating performance, building capacity for growth and solid operational execution. We've got a lot to cover in the 35 minutes, so I'm going to take a seat, join Kevin and just jump right in with some questions.

So Kevin, let me turn it over to you. I guess I understand you've got a few thoughts. You get updates on service levels, what are your key messages as we're now more than halfway through the second quarter?

Yes. Well, first of all, thanks for having me. I think 2 of those were virtual, right, 2 of the 3. So this is the first time back in Boston in a long time. Celtics lost last night. I was here. Tough. I wasn't awake by the end of that game. But no, there's a lot to talk about. We have a lot of excitement, a lot of energy around CSX. We've obviously had a leadership change, and that's been exciting for -- internally for our employees and some other things. A lot's happening today. Certainly, a challenging backdrop in terms of the market. A lot of debate around the recession, and I agree with some of your comments earlier. I believe we're already in the recession from a lot of the things that we've seen from a demand perspective. On the flip side, we've made tremendous progress on the service side. We're getting really, really positive feedback from our customers, and that's translating into strong merchandise growth as you've seen. Intermodal has been weak. That's consumer facing, and we're seeing that weakness continue, but we've seen stability, I would say, in the last few weeks. So that's encouraging in terms of our numbers. And we're hearing signs that hopefully, the back half, particularly on the international side, could be a little bit, almost a sequential basis, stronger than what we've seen, but that's all dependent on where the economy goes from here. But when you think about aggregates and some of the other markets, we're very, very strong right now, and we're ramping up our service there to meet the needs of the customers. So tremendous growth that we've seen, and we see a long opportunity to continue on that. On the chemical side, a little bit more weakness there. And I would say that's more consumer facing, a lot of destocking. So many markets, I think, are destocking right now. We're seeing declines that are, quite frankly, probably more acute than what the underlying demand is. So my hope is, as we get through that destocking event, you'll see more stabilization in some of the markets that have been weakest for us. But internally, Joe has had the team focused on the customer. We're looking at how we can improve customer measurements, measure what they are really focused on. And that, quite frankly, matters market to market. So a lot of work internally with our technology team and the customer service team of putting those metrics together and really getting out in the front of the customers and saying, what do you need from us so we can win more market share. Big effort on the small and medium-sized customers, we're able to reach out to them, have our customer service group now that they have a little more time less service issues out there. We're using their time to really reach out to the customers that don't have that day-to-day interaction with our sales and marketing team. So a lot of momentum around that. And then I would say, finally, on the industrial side, and I've talked about this a lot and we had a slide in the last earnings presentation, we've never seen this much activity in decades and a lot of momentum around that. A lot of that will come to fruition in late '24 and '25. But we're really, really pushing there and have a great team around that. That's pushing, but we've seen a lot of activity. There's clearly demand, particularly in the Southeast for industrial sites, and we have got a great inventory. We're continuing to go out and rebuild our inventory, and that's probably the biggest challenge right now. We've been so successful is we've got to replenish those industrial sites and have those shovel-ready sites for customers to develop. But I'm excited about some of the emerging industries that are coming along, EV. You obviously have the battery markets, and we're participating in all of those. And then a huge shift on the Metals side, we're seeing a lot of new development there and working closely with the customers. But a lot of activity. We're shifting into growth mode and really leaning into it. And I challenge the team every day. This is certainly a backdrop where things are challenging, but customers are more willing in these environments. I believe they shift their share from truck to rail, and we're seeing that.

Wonderful. Let me follow up, I guess, on what you just mentioned, right? So I guess, on 3 parts. One is the new leadership, service and operations. And it sounds like we might even throw a new one in CapEx. Joe has been CEO now for about 8 months, succeeding what we think was the great [indiscernible] and for that Hunter. What's changed from your point of view? Is it -- it sounds like you mentioned small, medium-sized business, service levels. Has he changed the focus or tried to shift the culture of the organization toward one part?

No. I think day 1, when he got there and in my first meeting with him, we've had 5 core principles. We're focused on operating efficiency. He said he never -- he wants to continue on that path. Asset utilization, critically important. First of all is safety. We're not going to sacrifice safety for anything. And quite frankly, he's challenged the team in more ways moving forward to use technology and look at ways where we can advance even quicker on the safety side. But on the flip side, the 2 areas, which remain our core principles, is the customer and the employees. And there's been a lot more focus on those 2 areas. Joe came from Ford, and they make things. He reminds us we don't make things. Our people are our service and our product that we're selling every day. And the more engaged they are, the better the product that we have, and we're feeling it. I'm sure you can see a lot of the momentum and hear about it. We're hearing it from our customers a lot of positive response so far, but it's early. And our customers are reacting, I think this will build on itself. But it's fun going out in the field, and it's fun working with the operating team and seeing their energy now and what that's translating into some of the growth -- early signs of growth for us.

So I'm going to jump back to that kind of Southeast comment, where you need to replenish. We heard from one of your peer railroads during earnings that they're raising CapEx, right? And so you've got a $2.3 billion target of CapEx, about 16% when your peers raised it up to 18%, 19%. Is that the new ballpark to where you need to be? Are you comfortable where you are? Just trying to think what happens in PSR when CapEx came down to now do we need to get back to rebuild levels, I think that's a concern for investors as to where does the capital go?

I ran into Ed earlier, he was in the room. I think I haven't spent a lot of time analyzing their network, but I think a lot of what they talked about is they need more capacity on their network and to handle the growth that they have, which sounds exciting for them. Where we are today, and Ed would be familiar with our network is what we did in '17 is we reduced train starts. We have a lot of capacity to grow into. And Jamie will tell you this every day, a lot of our network, the key corridors are double tracked today. So we don't feel like there's a huge investment from a network perspective that we need to make. If we can find investments that generally are smaller on the [ TRANSFLO ] side and other areas, where it's expanding our addressable market, we'll do that all day long because we've seen the returns are tremendous. 20%, 30% plus type of returns when we find those opportunities. So if we see the opportunity to take up CapEx, it will be for those reasons and not necessarily for more network. We don't see that -- we have a great plan in terms of our rebuild plan that we'll continue on, but no spike in capital that we see going forward.

Great to hear. So service levels have just been so consistent and really more close to the top of your 5-year bands lately. 1Q carload trip performance at 86%, intermodal up at 96%. Does that mean there's still costs that are coming out of the system as you run that efficiently? I guess, is there room for improvement? How do you measure that compliance? Is it -- are they tight enough in your view? Can you tighten them further?

Yes. I think we work with the team every day on tightening those schedules because the tighter those schedules, particularly on the intermodal side and some of the truck competitive side, you're going against truck every day. And so the tighter the schedules and we look at those every day, the more truck competitive you are. So I think there's probably opportunity, and we'll continue to look at that. From a cost perspective, and I think Sean mentioned this on the earnings call, we expect some incremental opportunity as we get in the second half of the year, whether it's overtime, car hire, all those things as you speed up the network tend to fall out of your cost base. So we have a lot of momentum there. You'll start to see that probably accelerate in the second half of the year.

Are you done hiring [ T&E&Y ] employees -- not done, you're never done, but did you get back to -- you targeted 74 or 100, you have a 10% attrition rate. Your overall employees are down to 22,000 from 32,000 at the peak, but above your 19,000 trough, right? So you've rebuilt the base. You've gotten your [ T&Y ] if I'm right kind of back to where you want? Or how do you feel about the employee levels after the struggles of the industry [indiscernible]?

We're around 7,300 [ T&E ] today. So about 100 short of that 7,400 that you mentioned. My team is doing their job. We're going to need to hire more people. We have a lot of opportunity to grow. And obviously, in that environment, you need more people. And so that's our focus. We'll look at -- we're entering the summer months, and that's a huge focus for us with vacations and other things to keep the network resilient. So there's still a lot of hiring going on to replenish, as you said, the attrition rates, which hopefully are falling. We're seeing a lot of stability in the attrition rates there. But there's still pockets out of our network where there's opportunity that we'll need to add employees over time. And they're working hard. We've done a great job. We called the ball very early on the need to hire. I think everybody realizes it was a lot more difficult during the pandemic to do that than we've all realized. But I think you're seeing the early signs of all the work, the hard work that, quite frankly, our HR department and the ops team did to really go out and find people, and now our services back to those levels to your point are approaching those levels that we saw before the pandemic.

No, absolutely. So carloads are -- I'm going to talk near term for a minute. Carloads are down about 3%, second quarter-to-date, slightly below our 1-and-change target. Still the third best rail performer, but -- and you're almost 500 basis points better than your regional peer. So should we think about some of that being share shift from -- given their accident? Is it benefits of your good service? I guess talk near term, let's talk -- maybe parse that a little bit.

We're certainly leveraging our service product, which we think is industry-leading right now, and that's really resonating with our customers. The focus has always been how do we expand the addressable market for us and how do we go after that truck share. And we're having -- quite frankly, we're having different conversations than we did the last 2 years around that as customers are seeing the service, are willing to give us more of their wallet share. It's very, very early. I think we're seeing some customers more willing to do it now. Others saying, yes, I want to see a few more months of this, or I want to see a few more quarters to have that discussion. But the early signs are there. We compete every day with our eastern peer, and we have the best service product today, and that makes competing a little bit easier, and we're leaning into that.

So given the way things are trending, it seemed like you switched from a kind of a GDP outlook to an RTM outlook, maybe walk through your near-term volume outlook, what you're expecting. International intermodal still seems a bit weak. I know Joe mentioned it was about 1/5 of your revenues, half your volume. So maybe just delve into kind of your thoughts.

Yes. I think coming into the year, we probably didn't see intermodal as weak as it has been in the first half of the year. That's clear. And that was the driver of the guidance change. On the flip side, I think we've had a lot more success on the merchandise side, particularly really capitalizing off of the service improvement. We certainly were modeling in an improvement through the year. I think that improvement has been stronger to start the year than what we even expected, which is a positive, and that's manifested into a better merchandise performance, which, quite frankly, is to your point, it's almost 2/3 of our revenue base. And coal still is a very positive volume story for us as well. So between those 2, it's -- I'll take that mix shift any day. If you told me merchandise is going to outperform and intermodal came in a little bit weaker. I'd probably take that trade all day long.

Yes. So let's talk about that big picture then, right? Because CSX right now moves about 6.2 million carloads, give or take, this year, if volumes are somewhat flattish. It's almost the same level as 2019, down from 2014's peak of 6.9 million. So clearly, your network has capacity, right, to grow. And I think we're going to talk to rails throughout the day about the target is growth, right, and has always been. So what gets us to believe that rails can get back on that growth trajectory. Obviously, we had coal fall 50% between 2011 and 2016, and you had to battle that. So what gives you the confidence that we flip that into growth.

I mean, it is a [indiscernible] story, right? We really haven't proven it as an industry. And so we've got to put up the numbers. We've got to put up -- we have to have a commitment. You need to hear from our customers that we're willing to grow, that we're willing to open up new lanes, provide new service that they need. Those things were out there delivering that message day in and day out, and it helps to have a leader that's very, very focused on that. I can't tell you how many customers Joe has been in front of in his first 7 months, but he's been out there a lot, and he's resonating with our customers. He was a customer. They like to hear that. He understands some of their challenges. He would have liked to have put more volume on the railroad during his time at Ford. So those things are highly focused. You need to have Jamie and I aligned, we are aligned. He is -- we just had of a meeting yesterday, and we're talking about a specific customer, and how we can open up even more capacity there. So that alignment needs to happen internally, and the teams are working really, really well together. It helps that we're not putting out fires, like we had 2 on the network, day in and day out, and that way you can focus on having a different conversation with the customer. And so -- but at the end of the day, we got to perform. And we can talk about it. But we've got to put out the numbers. And I'm confident that we're building on the momentum. We're having fun. Last 2 years, as times weren't that much fun, but all of that is really changing, and people are feeling the energy inside and our customers are feeling it quite frankly.

That's great. I love the fact that you've got both the marketing hat on now, but you've got your CFO hat on in the past, so I can ask you minutia questions and get real number answer. So just -- there's a lot going on, right? You talk about the mix impact change, talk about loss -- losing, I think it was $300 million of accessorial revenues for the year, right? How do we think about yields in as much as you can discuss it in terms of sequential change, right, because you've got the loss of fuel understanding, I guess, ultimately, how do we see core pricing follow through in this kind of market, right? And I know you've got so many mix issues with coal and things. Maybe talk a little bit about that overall.

Yes. Let's break it down. First of all, our accessorial charges are in other revenues. So you can see those are very transparent. So that when I look at yields, you can -- you don't have to -- you can easily adjust for that. But when you look at our merchandise business, still, obviously, with what's happened with inflation, still a lot of pricing momentum. We've got to cover our costs. And so that -- we see no change there. We're having that discussion with our customers. We want to grow with them through pricing, through volume and price. And if there's opportunities to grow volume and be partners around that, that's certainly a discussion we're willing to have. So a lot of momentum there, in some cases where we had 2, 3-year contracts, we're obviously renewing those in a different environment and taking advantage of that opportunity. On the intermodal side, a challenging backdrop on the truck side, and you'll hear from a lot of other of -- other companies today that will talk about that. Hopefully, we're seeing a floor here. But we didn't participate in the dramatic price increases that occurred on the trucking side on intermodal. And so -- we typically don't participate in the severe declines either. So we're seeing stability there, I would say. And our spot business, which is a very, very small part of our business, obviously, we're seeing some softness. But otherwise, we're just waiting for the demand, the return in the market to start to stabilize, which there are early signs that suggest that's what's happening. Then on the coal side, the met price is probably the biggest swing factor as we get into the year. They're not as high as where they were in the first quarter. So we'll see sequentially, probably more in the third quarter, some RPU declines there if things don't change from here, but still a really healthy levels for that market that support volume. And we have some new production coming online, which we're really excited about into the second half of the year that we'll take advantage of. So production should be up, and that will be helpful and partially offset some of the RPU head that we'll have on the met coal side.

When you talk production -- I'm sorry, when you talk healthy, you're talking volume side, not necessarily...

I mean pricing, on a historical basis, is very, very healthy. We just had some extremely good pricing last year.

But just to kind of revisit what you said though, you don't see the -- necessarily the impact in 2Q. It can be delayed until 3Q based on that timing of this...

So when you look at our -- particularly our met portfolio on the export side, some of that business prices on a quarterly basis. So that would have already priced in the March kind of levels that we saw. And then some of it is on a monthly basis. So really, where you'll see the largest impact from second quarter to third quarter is that quarterly business, if prices remain here kind of resetting a little bit lower.

Okay. Last 5 years, you've averaged about a 240-basis point improvement in your operating ratio from 1Q to 2Q. You're starting from a soft first quarter with a 62% excluding the insurance recovery and real estate gain. Given the economic background, the loss of accessorials, what starting point should we see above historical norm performance in second quarter? Is that something that can happen just given the starting point?

Yes. You kind of touched on it. First of all, first quarter, I don't think it was soft. It was a really, really strong performance. We're really happy with the overall performance, particularly in the backdrop that we're coming out of. So very happy with that performance. But you made the point when you adjust for the insurance claim and the fuel surcharge lag, about a 62.5% kind of base to look at if you're going to compare first quarter to second quarter. And what we've traditionally seen with the railroads, in particular, our railroad is second and third quarters are typically our best [ OR ] quarters, less weather impacts, a little bit more volume on a seasonal basis. So those factors that continues to hold. So we'll see those factors off that 62.5% hopefully play out here in the quarter. The big swing factors, obviously, are met coal. As you get in the back half of the year, you have the labor costs that will -- the union will get their labor increase in July. So we'll have to work to offset that. But on the flip side, you continue to have pricing momentum, particularly on your merchandise side that will drive some performance. And then we'll see where the market takes us. I'm more and more convinced every day that the operating leverage is there. We're going to see that. And so if our team is successful in bringing on more volume, you should see that drop to the bottom line in a very healthy way.

So there are a couple of things I want to revisit with what we just ran through. Let me just start on coal. We had a lot last year, right? You had Sugar Camp mine was closed. We had a strike at the Port Curtis Bay, right? It's fully up and running now. Warrior mine had a strike. Are you -- is your network now fully up and running? Do you still have some of that legacy impacts from that?