CSX Corporation (CSX) Earnings Call Transcript & Summary

Great. Everybody. Thank you once again for joining us for our 31st Annual BofA Transportation, Airlines and Industrials Conference. And I'm Ken Hoexter, BofA's Air Freight & Surface Transportation and Marine Shipping Analyst. So 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, starting at CSX back in 2017. Also in the audience here, from CSX, we've got Arthur Adams, SVP of Sales and Marketing; and Matthew Korn, Investor Relations. So we welcome Kevin to our conference for the fourth time in the past 5 years, CSX for its 16th consecutive year, and 21st time in the 23 years we hosted the conference. So truly thanks to CSX for the steadfast commitment to the conference. CSX is one of our top rail-focused stocks given its sustained operating performance, building capacity for growth and solid operational execution. So one quick one, just as it's our first time seeing Kevin live, so knowing how much Jim Foote meant to the team. I just want to send our condolences on his recent passing. It was a great contributor to the conference over the years as well and always great for in-depth rail discussions.

So we've got a lot to cover in the next 35 minutes. So let me turn it over to you, Kevin. I know you've got a few thoughts, update on service levels and maybe, just as we wrap up, I'm going to come, sit next to you. But what are your key messages as we're more than halfway through the second quarter? And what 3 key takeaway should we leave with today?

Yes, sure. First, great to be here. I guess I didn't realize 4 out of the last 5, I presented at. Last year was when I didn't present at. Thank you for your comments on Jim. Obviously, I learned a tremendous amount from him and my time working directly for him. So that was a sad loss for us all. Matthew, joining us today, he actually just had a strategy as well, so you didn't cover that, but we're very excited to work with him on the executive team on the strategy side and a lot to be done there, a lot to think about. And then Arthur is very important to us on the merchandise side and our franchise there, carload conversion, a lot of truck conversion, a lot of success we're having even in this, quite frankly, a very, very truck -- difficult truck market right now. The [indiscernible] is not at our back, unfortunately. But I got to say, there's a number of wins we've had just in the last few weeks where we've been able to identify and really target truck-competitive lanes and go after it. Some of those with our Western partners. So that's pretty exciting as well. So a lot of activity, I think it sets us up well when, maybe you're calling the bottom here on the trucking market, hopefully, that is the case. I don't think when we came into the year that we thought we'd see the trucking market may be as down as it is the last couple of months. So -- but like anything, it's cyclical, and it will come back, and we see some opportunity as that improves. In terms of what we're seeing out there, a lot of mixed signals. We've had a lot of success, as I mentioned, controlling what we can control, going after volume that hasn't traditionally moved on the rails or moved away from the rails for a period of time and working with our customers. I think we're earning that opportunity to have those discussions after our performance on the service side and a number of white-boarding sessions with our customers and really where they're handing over their truck file for the first time and really opening up to us and sharing what opportunities may exist over time. When you look at a procurement person sitting at one of our companies today, they have the easy win, which is, they keep and remain on truck and they get maybe a 10% to 20% reduction in the rate. So that's a challenge. We still can offer value, but in the do-nothing scenario when they can still deliver value to their companies, it makes those conversations sometimes a little more challenging than they should be. But we are seeing a lot of traction, as Arthur will remind me, time and time again, our average opportunity on -- even on the merchandise side is about $2 million. So it takes a lot of wins. There's a lot of positives in that. We're a very diversified portfolio. So there's not one single customer that really can hurt us necessarily, but it takes a lot of process, that takes a lot of the team working together to really build on that momentum. And we quite frankly have a lot of momentum. Our pipeline is up tremendously year-over-year, those will translate and we'll get into probably the industrial development side that you've seen there. And I got a partner in Mike. Look, he's an asset to walk into any customer. And he's a great listener. He understands the business. He's been doing it over 40 years. He doesn't like me saying for decades, but he's been doing it a long time, and I can learn a lot from that. And I'm excited to work with him. He's hitting a stride. We meet every Monday as a leadership team. He comes in there. And even this past Monday. More and more opportunities he's seeing across the network, whether it's out-of-route miles, better utilization of some of our terminals that he's really digging into. He's actually out on the railroad today. I think he left at 8 this morning for another trip with the team, going around up to I-95 corridor, through our coal territory and back over across. So every time they're going out on the network, he's finding just opportunity after opportunity to really improve the operations out there. So I'm excited about that. The team is working side-by-side with him. We spend a lot of customer time with the whole -- Joe, Mike and myself have spent a lot of time with customers here recently. It's a heavy customer season in terms of events and things like that. And the overwhelming feedback has been positive. Within our group, we have the customer service group, and Shannon and her team, those inbound complaints, those inbound tickets are down quite a bit year-over-year, and so we continue to monitor that. And our ability to react when customers have issues has never been better. So pretty excited about where we are. It would be nice to have a little bit of a wind out of our back at some of these markets, but we're making our own opportunities.

Let's dig into that, wind at the back, I guess, part of volumes, right? So you target low to mid-single-digit volume growth and revenue growth. So suggesting kind of flattish yields. Anything gives you the thoughts on what gets the upper end and lower end in this kind of market? .

Yes. I think -- well, one of the biggest factors between our carload growth and revenue growth this year is certainly the fuel surcharge, right? And so we can't really move the diesel price. It's been stable, but it was -- obviously, in the first quarter, 3- to 4-point headwind when you think about RPU, whether it's merchandise or intermodal. So that was a big headwind. That will start to moderate at current price levels, and we'll see where things play out through the summer, but that's a big factor. Export coal, our favorite topic, particularly with Baltimore, here is, obviously, we saw some tremendous price last year, and the export market was very supportive. It still remains very, very supportive at these levels, just not as high as they were last year. So that's year-over-year headwind from an RPU perspective, that we'll face. And we'll see how that plays out. We took a conservative approach coming into the year, how we're thinking about where prices will ultimately land because it's hard to predict. But there's a lot of things on the export market that I think are going to make it different going forward. You don't see the capacity coming in the market when prices are really high anymore. So the supply reaction is not as extreme from other markets, including Australia. So that has put the U.S. in a very, very good position to compete longer term, which is positive. We have some strategic assets and an alignment with some strategic customers where I think we're well positioned on the export side. So all of that is a positive for us. I think clearly, from a revenue growth perspective, the merchandise in some of these markets that are bouncing along the bottom, having some cyclical upside into the back half of the year would be supportive. We certainly have very easier comps, comparisons because we saw a lot of weakness starting last year in -- late in the second quarter, in the third and fourth quarter. So we'll be lapping that, which is helpful. And then if this truck market starts to recover, and I think everybody is predicting, I've seen predictions, from late third quarter to first quarter of next year. And who knows when that comes back, but that will certainly help on a pricing level and on our domestic side and other things. So a lot of moving parts. The chemical business still remains very healthy for us after a tough year last year. So you would typically see some of these markets moving in the same direction, but in [ mini ] markets, they're moving in inverse direction. So there's not a clear visibility of how things are moving. But the team has to work with what we have right now and really driving our own opportunities.

Wonderful. So let's dig into some of those commodities just for a second more, right? So volumes are trending up about 0.5% quarter-to-date, positive for the second straight quarter. Yet, as you mentioned, kind of comps start to get easier. So anything particularly you'd call out? I know you just talked about coal, which is down 7%. How about intermodal? You want to throw out thoughts on intermodal or anything else that...

Yes. I think coal, certainly, when you look at first quarter versus second quarter is the big one with the Baltimore outage. And I think we came up with solutions very, very quickly for diversion opportunities. Those probably weren't in April. They didn't go as well as we would have hoped. Some terminal capacity there and other things didn't work. We're just a piece of that supply chain. I would say the ag side, we expect that to improve through the back half of the year. That's been a headwind, with some transitory headwinds, whether it's a strong southeastern crop or the Brazilian crop, we think those were normalized, which will create opportunities for us. The team is doing a great job of chasing those opportunities. So that market is another one where -- in the fertilizer side, a lot of volume, when you think about the short haul. When you look at our first quarter performance, revenue was up mid-single digits. Our volumes were down low single digits. And that's because we're doing very, very well on the long haul, higher RPU business. But the short-haul business in Florida has really struggled for us. So it's a lot of volume, not as much revenue there. And we expect that to turn back on here in a few weeks. So that will be helpful to the volume side of our business.

So you mentioned coal, first of all, down 7%. We were actually looking for down 14%. So I know it's [indiscernible], but it's certainly doing better than we had. So the rerouting around Port of Baltimore, can you talk about that for a minute post the Key Bridge collapse? What went into rerunning the network so efficiently or as a beneficent or...

I think the team has done an amazing job. And one, Mike and the team working with Joe from our Sales and Marketing team on the coal side and understanding the issues, understanding where we have outlets for that supply was key. And we all got together in the first week right after it happened and said, what are the options for us in working with the customers. I will say -- the other thing that we saw is an opportunity where we needed some workers to temporarily transfer some of our conductors and engineers. We put a call out to them, and we had overwhelming demand for people to move on a temporary basis to help us move that coal. And so that's something I think you've heard Joe talk about the culture improvements engaging with our workforce. I think that's evidence of that they were there. I would say, traditionally, when we ask for temporary transfers, we haven't had as much engagement. So the engagement went up tremendously, and we were able to react very, very quickly. I mentioned before, on the terminal side, probably a little bit more struggle than what we had anticipated. So probably didn't hit that upside number that we were hoping for in April. But to your point, we did a pretty good job.

Yes. So sticking with short term for a minute here. So the operating ratio outperformed normal historical moves for a sequential decline in the first quarter. The last 5 years, you've averaged between the first quarter, second quarter, about 180 basis point improvement, thoughts on that, maybe potential for improvement given the outsized first quarter's seasonal shift? What should that mean for normality in 2Q here?

Yes. I don't think anything has changed when you look at our business. The tail quarters, the first quarter and fourth quarter, maybe for a little bit different reasons. Fourth quarter, a lot of holidays in the fourth quarter. In the first quarter, a lot of weather, winter weather you're facing that adds additional costs, while always traditionally with all things equal, be your lower margin in the quarters. And then second and third quarter, you'll see improvement. And I don't think you'll see any change in that as far as what we see today. Export coal is the one, probably, variable that it's kind of out of size of that. Obviously, that's a good business for us. We won't see as much opportunity in the second quarter as we did in the first quarter. But I think, Sean, on the call said that he expects some improvement.

So you sticking with the exact number, is what?

Yes.

All right. Talk about operations. Service has been pretty consistent. What has changed between Mike and Jamie in terms of how the service operates. We were talking outside kind of it looks like from us on the metrics we see, which is velocity and dwell, the things deteriorate, but yet other rails use different metrics in terms of that's not really as important. Maybe talk about what is important for a railroad in terms of determining, because sometimes those metrics get caught up in how fast is just 1 train moving, but that's not really as important as.....

Yes. It was funny, last night, over dinner, Arthur and I and Matthew, we're talking about some of our business and you think about an average chemical move, sometimes [indiscernible] can take 30 days, right? So how long does that move to get it to the customer and back, how long is that transit time really on the railroad, right? It's all the other things in between. It's the last mile, final mile, that really creates a lot of time on the railroad. And when I came into this role a little over 2 years ago, that was where we were really struggling, is getting that switch to the customer, making sure if you told them you're going to be there on Tuesday at noon, then you're doing it, not Thursday at noon, right? And that's where we're seeing vast improvement. If you ask Shannon, our -- we've spread out a survey and we do a survey with our customers on a quarterly basis. We had the best scores from a service perspective that we've ever had on that. And that's because that last mile, final mile service has been tremendous. And we're hearing it from the customers every day. And our ability to react, I will say, that's a real improvement. When we see problems, Mike and his team are able to go after them and fix them and listen to the customer and do those and really go after the systemic issues that we've traditionally had on the railroad that can be very, very frustrating for our customers. What I've seen from Mike is his ability to use data in a different way to really understand whether it's hiring, he is very data-driven, anticipating when we might have attrition, anticipating these things and getting ahead of them with data, really analyzing our network from that perspective, looking at the network on a holistic basis and really looking at feedback from a lot of our leaders within operations and where do they see the opportunities and really empowering them to go after those out-of-route miles, those things. He sees tremendous opportunities. I have to tell him, sometimes he's so bad, it's good, right? There's if you came in here and there wasn't any opportunities, that would be a bad thing and [indiscernible] do it with all this 40-years-plus of experience. He's really starting to understand the network. Our network is complex and it takes time, even for somebody that's been doing as long as them to really be able to dig in and really unravel and kind of some of the things that we've done and some of these terminals and how you can better utilize them and we're seeing that every day. [indiscernible] miles is huge and eliminating train starts where it makes sense and not to the detriment of the customer experience, everything he's doing is -- he's coming to our team and saying, "Hey, how is the customer going to feel about this? Is it going to impact the customer?" In most cases, the answer is no.

Let's go back to the revenue per car, where you talked -- I think you gave a good answer in terms of the fuel, but revenue per car was up double digits for 6 consecutive quarters. Last 4 quarters, we've seen up down, up down. So I know there's a lot of mix in there, coal being a driver, fuel being a driver. Is there anything maybe you can talk to about pure pricing underlying, how that's going? And then talk about where coal contracts are being priced currently? .

Yes. I think the team, when you look at a historical basis, our merchandise team is doing a great job of pricing to the value of the service. And as a service improves, we're seeing that. We're not in an environment where inflation is as high. So we don't expect our cost inflation to be as high as it has in the past couple of years. So obviously, that will create some moderation. But from a historical basis, we're doing tremendously well. When you look at our intermodal business on the domestic side, which can be more truck-competitive, certainly, there are headwinds there. It feels like we're at the bottom. You see that in your data as well. So I think that's probably an opportunity for that to improve into the back half of the year. So we'll see some opportunities there. Intermodal on the international side has been a nice -- probably a little bit stronger than what we expected coming in [ the area ], it has been. And that's, on average, a little bit lower RPU than our domestic business. So that's from a mix issue, it can be a little bit of a headwind. And then as export coal pricing bounces around quarter-to-quarter, that will be a big factor in the overall RPU for us.

All right. So international Intermodal being stronger, does that mean the domestic side is a little bit weaker?

Yes. Versus our plan.

All right. So still within -- in revenues last year, you called for a loss of $300 million in supplemental revenues. Maybe can you tell us what's left? We're seeing now about a $500 million run rate versus what was $800 million, $900 million prior?

Yes. I think we've guided for the quarter for about $130 million a quarter. It did a little bit better in the first quarter. But when you look at last year, I think in the second quarter last year, we're in that low $140 million range. So we'll lap that. And then as you get into third and fourth quarter, I think we're in that $130 million to $120 million range. So certainly, we'll be done lapping some of that storage that we saw during the pandemic and some of that displacement there. So, largely through that at this point.