CSX Corporation (CSX) Earnings Call Transcript & Summary

Alright, we are going to continue with our next session with CSX. Really happy to have Sean Pelkey, CFO of the company back at the conference. Thanks for being here Sean. We're going to get right into question. I'll start, but as folks have questions, raise your hand, we'll get you involved.

So generally, I'd just like to start with sort of a macro update and how you're seeing the world volumes, give or take, flattish starting second quarter. How are volumes mix trending relative to expectations in the quarter? What's -- what end market is doing better than you thought? What's doing worse than you thought? We'll start there on volume and then we'll -- a lot to talk about.

Okay. Well, sounds good, Scott, and thanks for having me here. We're a little bit better than flattish. We're up 1% quarter-to-date. So we'll take that. And of course, as everybody knows, we've been feeling the impacts of the Baltimore outage in terms of our impact on export coal. I'll talk a little bit about that because I've got a positive update on that situation. But if you were to strip that out, we'd actually probably be up about 2% to 3% volume on a quarter-to-date basis, which with a macro that's still not extraordinarily supportive and there are some markets that are positive, some markets that are negative. But that's a constructive sign that what the CSX team is doing is working. The service product is definitely translating into new customer wins. We've actually seen a pickup in some truckload conversion opportunities where the team -- I know Kevin has talked a lot about doing these whiteboard sessions with some of the customers and looking at where do we serve you today and where do we think we might be able to serve you differently in the future on lanes that you're currently moving truck. Let's try to convert some of those lanes to CSX given the success that we've had in serving you really consistently over the past 2 years, and we're starting to see a pickup in some of those truckload conversion wins even in the midst of a truckload environment that I think everybody would agree is still not very supportive in terms of rail conversion. So in terms of specific markets, I think we are seeing some strength in international Intermodal and Chemicals. Those are 2 markets that were off last year. Chemicals, we had a lot of inventory destocking. That has now seemed to have -- that seems to be in the rearview mirror. And we've seen nice growth in the chemicals market, which is a high RPU market, so that's good. International intermodal was down significantly last year. Again, inventory destocking. That has turned around. We're seeing double-digit growth in international intermodal, even a little bit ahead of our expectations. And then auto is strong last year and continues to be strong this year. We had some nice wins on the auto side. And so those are really impacting CSX's volume growth as well. We started out the year with a bunch of quality holds. We have lapped most of that, and there's actually a lot of inventory still on the ground that we've got to move. So I think that strength in autos is likely to continue. On the flip side of it, ag and food has been a soft spot for a little while for CSX now. A lot of that had to do with the strong Southeastern crop last year. So when it comes to feed grain, that's been a weak market for us. We actually, over the last couple of weeks, have seen that start to tick up. So there's positive signs there. We are setting up for, hopefully, some better trends in the second half of the year there. Metals has been off a little bit. Sheet steel has been okay. Finished steel, not as good, supporting the construction markets. And phosphates has been off, but it's important to kind of look at the details on that one because most of the volume decline that you're seeing in phosphates, which actually has a big impact on our merchandise volume is short haul. It's Bone Valley volume that's going from -- to the port of Tampa. So very, very short-haul business. There are some outages there. Those are going to resolve in the next couple of weeks. So you should see volume pick up. But in the meantime, we've actually had a lot of positive mix. You'll see that in Q1. You'll probably see that again in Q2 within the phosphate segment.

Very helpful. And just a couple of follow-ups. You mentioned Baltimore. What is the latest in terms of when you expect that to start reopening?

Yes. So we got really good news yesterday. Not only did they move the dolly out, they actually were able to get to a channel depth of 50 feet. 50 feet is kind of the magic number to get the big vessels in. The team did a phenomenal job getting the facility ready for the reopening. And so we actually started moving coal in about 10 days ago. We've been doing some mid-streaming so taking some smaller ships, loading those up and then taking them out into the harbor, doubling those up into the larger ships, right? So that started about 10 days ago. We've been running 2 trains a day into the Baltimore facility for the last 10 days. We actually have some Panamax vessels that will be arriving this weekend, and we've got Capesize vessels that are set to return next week. So we should see a return to full volumes as soon as next week. Again, I mentioned running kind of 2 trains a day over the last 10 days. We should ramp up to 3 trains a day in the next few days, which is great. That's on par with what we were doing in the first quarter.

And so to the extent that maybe there was less rerouting that maybe you would have ideally hope for, that actually bodes well, I would think, for like a quick ramp then specifically uphill...

Yes. So we did have some rerouting back in April. It went okay, probably not as well as we had hoped. There were some maintenance outages at some of the other facilities that we were rerouting to. But as we got into May here, again, the last 10 days, roughly half the month, we've been loading at Curtis Bay.

Okay. Good. And then you mentioned, I think it was within phosphate positive mix. But when you just think about the aggregate business, right, [indiscernible] up, sounds good for mix. International Intermodal, maybe negative mix. In aggregate, how should we think about mix in Q2?

Yes. So I think, in aggregate, slightly negative mix with intermodal being outpacing overall growth that's going to be the biggest factor there. And then obviously, the coal market is a swing factor.

Is that any different from Q1?

Only different in the sense that the coal is not as strong as it was in Q1, given the Baltimore outage.

Okay. So overall, just in terms of the guidance that you guys have laid out, you talked about low to mid-single-digit volume and revenue growth this year. How do you feel almost halfway through the year? Are we on track for that? Higher end, lower end, I don't know, any thoughts?

Probably not going to give any specific tightening of the range other than just to reaffirm that, yes, we still think low to mid-single-digit volume and revenue is the right place to be. And that's supported by strong pricing, particularly in the merchandise market. Intermodal is a little more challenging given where the truckload market is. Export coal is, of course, a wildcard. We feel very good about where the demand is at. In fact, if you look at our Q1, export coal tonnage. It was the best quarterly tonnage levels we've had in over a decade. We think that will continue going forward. We're going to see this ramp up in at Baltimore, and we've got good line of sight to the demand continuing. So that's very, very positive. That will be supportive. Fuel prices are down. So that's obviously a negative in terms of RPU and an offset to the volume growth that you're seeing and the pricing that we're getting in merchandise. But still feel confident in terms of the overall guidance.

Okay. Great. So you mentioned price, I want to spend a little bit of time here, right? It's been such a supportive part of the rail story for such a long time, just this idea of inflation plus pricing. And it just -- it feels like over the last couple of years, not for CSX, but for the industry broadly, just high inflation, challenging truck pricing, just like this idea of inflation plus pricing as a given has felt like less of a given. When do you think -- maybe you disagree with me, when do you think we get back to a clear not just in this one part of the business, but in aggregate, right, an inflation plus pricing story for rails. And whenever we get there, do you think that -- is there like a multiyear sort of inflation catch-up potential for you guys?

Yes. So a couple of things I would say there. Having a sustained service product, and that's really what CSX is all about, industry-leading service on a sustainable basis. That supports the ability to price a little bit above inflation every single year. And that is a key value driver. When we think about the long-term equation for operating income, EPS growth at CSX, it's being able to outprice inflation every year, not by hundreds of basis points, but by enough of a margin that we see a drop through to operating income. We've been doing that over the last 30 years. So that's -- we don't necessarily publish what the dollars of price are, what the percentage of price is. We've got to strip out, of course, export coal and the coal impacts on pricing. But if you just look at merchandise and intermodal on an aggregate basis, we are getting -- continuing to get strong combined pricing that exceeds inflation. In fact, if you were to look this year at combined merchandise and intermodal pricing relative to dollars of cost inflation, so dollars of price minus dollars of inflation. That differential is as good as it's been or pretty much on par with as good as it's been over the last decade as well. So while inflation has come down and pricing percentage has come down over the last 2 years, it's still on a relative basis, just as strong as it has been, if not a little bit better than it was the last couple of years. And then I think the last point I would make is kind of go back to the last 2 years, if you strip out the noise of other revenue and what's been going on there with intermodal storage coming down and you strip out trucking and fuel surcharge, our RPU revenue per unit was up about 7.5% in 2022 up 5% last year. Now export coal is a piece of that. But I think that's evidence that we've been able to deliver on this promise for the last couple of years and expect that to continue.

And so if I'm thinking about this right, Q2 is probably our peak headwind from a coal -- met coal year-over-year and then sort of maybe the final headwind with storage revenue. And so as we get to back half of '24 RPU, overall yield...

Yes, the comps are easier, certainly as you get to the back half of the year. I think, again, a lot depends on what happens with global met prices because those contracts do reset monthly and quarterly. So they've come down a little bit from the first quarter into the second quarter. So we'll see where they go from here. But stripping that out, yes, I think it's more constructive going into the second half on a year-over-year basis.

Okay. I want to talk a little bit about on the cost side. So if I look from Q4 to Q1, right, overall cost, excluding fuel, came down a little bit, right? I think the commentary on the Q1 call is maybe we see a little bit improvement again, Q1 to Q2. Just -- maybe just give us an update overall on the cost side?

Sure. Yes. So I think broadly, what I'd say is -- one of the things that you're seeing a lot of at CSX is a lot of collaboration across the groups, right? So you've got Mike Cory and his team sitting down with the sales and marketing team, finance is part of those discussions, and we're looking at every dollar of cost, every opportunity to drive efficiency across the network, right? And so it's making tweaks to the operating plan. It's trying to think about how do we operate with fewer locomotives. Again, putting some of those constraints in and seeing if the operating team can adjust to them to save some costs. Labor productivity is something that we're looking to deliver as we get into the second half of the year on a year-over-year basis. But we're more productive with our crews today than we were 3 months or 6 months ago as well, same thing with our locomotives. And I think that cost discipline has really kind of made its way across the entire organization. Everybody, even including myself kind of taking a fresh look at our budgets and saying, where are places we can find new opportunities for savings, whether that's legal fees or within my world insurance costs or you name it. And that is translating into what you're seeing on the cost side of the equation, not step function changes. But again, what we're trying to do is build sustainable improvements that drive ongoing momentum in the earnings. And I think you're seeing that happen. You saw it in Q1. We mentioned that from Q1 to Q2, we do expect labor -- the implication as labor costs come down, labor per employee should improve by few points sequentially. And we should be able to hold the line on purchased services and other costs, plus or minus a little bit depending on how things come out on the core PS&O?

So I think that sounds like, yes, there should be a little bit of further sequential improvement in cost.

Yes, I don't want to go quite that far and give you firm guidance on it, but we are seeing good momentum.

Okay. One of the questions that we're getting is -- and I think this came up a little bit on the Q1 call as well is just sort of balancing costs relative to the service metrics that we see every week and then the more customer-facing service metrics because when we look at 12x, they're now 15% higher, give or take year-over-year. So how -- just talk about the balance between the service metrics we see where customer service levels are and then what all this means for cost?

Yes. Well, right. I mean the fundamental question is, is service to the customer as good or better than it was a year ago, right? There's lots of metrics that we, as an industry publish, and it's easy to get lost in those metrics and draw conclusions from it. What we need to do is go by the evidence that's the most direct feedback that we can get from our customers. So there's a few data points, right? And I think we've talked about some of these before. One is, what are the customers telling us? And there's many, many touch points that we have with customers, the feedback remains extraordinarily positive. Customers are having a positive experience with CSX. In many cases, they're looking to figure out how they can move more, not less business with us on a go-forward basis. And that includes some of the truckload conversions I talked about earlier. You look at the customer satisfaction surveys, which we do on a quarterly basis. The service metrics within those surveys are as good as they as they've been -- as they've ever been in the history of doing this survey. So that's a positive data point. You look at -- we look internally at our customer switch data, how often did we actually switch the customer when we told them we were going to do that. That's been at 95% consistently for the last 1.5 years, 2 years. That has not changed. So to the extent that you've seen other public-facing metrics like velocity and dwell go in the wrong direction, I think that's a function of a couple of things. First is Mike and the team making changes to the operating plan, right? And a lot of those changes are driving efficiency gains, improving locomotive productivity, improving crew productivity. In some cases, recognizing that there are certain areas across the network where it's still really difficult to hire, we don't have enough crews to run the train plan that we have. So let's not run that train plan. Let's reduce it a little bit and see if we can get into building new habit strength. So as those train plan changes settle in, you see the velocity in that area of the network start to recover. You see a real focus on the dwell. They've got daily calls at 8:00 going through where our cars sitting, where do we need to get them moving. So I think you'll see some of that start to settle back down into where we were previously. The other thing I'd mention is just engineering. We've got a heavy capital plan this year. There's a lot that we needed to accomplish. And in order to do that, we needed to make sure that engineering got the track time they need. We actually have seen a 20% improvement in engineering productivity, laying rail this year. So that's significant. It means a lot less overtime. It means less dollars being spent to install that rail. And we're actually reallocating some of those dollars in places in the network where we can actually drive future efficiency. So that's a real positive. But when you think about it, how do you get 20% improvement in engineering efficiency, you need to give them more track time. Okay. So that's going to have an impact on velocity potentially on dwell as well. And Mike mentioned this on the Q1 call, but many of those projects in the first quarter of the year happened in the same areas across the southern part of the network that had an impact across there. So they're looking at how do we do this in a smarter way going forward? Is there a way we can spread some of that work out, still give engineering the track time but don't concentrate it in one geographic area to make sure we don't repeat the same issues.

Okay. But it sounds like, overall, right, you're happy with where -- what the aggregate service product is...