CSX Corporation (NASDAQ:CSX) Q2 2023 Earnings Call Transcript

CSX Corporation (NASDAQ:CSX) Q2 2023 Earnings Call Transcript July 20, 2023

CSX Corporation reports earnings inline with expectations. Reported EPS is $0.49 EPS, expectations were $0.49.

Operator: Good afternoon, and welcome to the CCSX Corporation Second Quarter 2023 Earnings Conference Call. I will now turn the call over to today’s speaker Matthew Korn, Head of Investor Relations. You may begin your conference.

Matthew Korn: Thank you, operator. Hello, everyone, and welcome to our second quarter earnings call. Joining me this afternoon are Joe Hinrichs, President and Chief Executive Officer; Jamie Boychuk, Executive Vice President of Operations; Kevin Boone, Executive Vice President of Sales and Marketing; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In the presentation accompanying this call, you will find our forward-looking disclosure on slide two followed by our non-GAAP disclosure on slide three. And with that, it’s my pleasure to introduce Mr. Joe Hinrichs.

Joe Hinrichs: Thank you, Matthew, and good afternoon, everyone. Thank you for joining our conference call. Our performance over the second quarter met our expectations led by the strong results of our merchandise business. As we had indicated at year-end and again last quarter, we knew that we would have to manage through lower intermodal storage revenue and normalizing export coal prices. We expect the intermodal volume to be soft as imports slowed and destocking activity continued. That said, we also knew that we were gaining momentum with our customers, led by our improved service performance and in our own workplace as our ONE CSX efforts took hold. Our network continues to run well, and our company’s initiatives combined with our employees’ hard work and commitment to making a big difference and helping to set our railroad apart.

There was much more to do, but our results this quarter show signs of the progress we are making as we lay the groundwork for long-term growth and value-creation. Turning to slide five. Let’s review the highlights for the second quarter. We moved over 1.5 million carloads in the second quarter, led by a 3% volume growth in merchandise and 4% growth in coal, and our margins remained strong with an operating ratio below 60%, including the impact of the Quality Carriers’ trucking business. We generated $3.7 billion in revenue, which was 3% lower than the previous year and flat from the first quarter. Operating income decreased 13% year-over-year to $1.5 billion and our earnings per share decreased by 9% to $0.49. When making comparisons to last year, it’s important to remember that our second quarter 2022 results included a $122 million gain, representing $0.04 per share of EPS related to the Commonwealth of Virginia property sale.

All in, this was a solid performance highlighted by great results in our core business. The fact that our team was able to drive 3% merchandise volume growth in such an uncertain macroeconomic market is a testament to what we are able to do when we work together. Now moving on to slide six. Earlier this month, CSX released its new 2022 ESG report, which highlights the tremendous progress that our team has made in moving our company forward. Since I started here last fall, you’ve heard me talk about ONE CSX, about building a supportive and positive culture and about the need to consider all of our stakeholders who are measuring our success as a company. Many of you have asked me, what this really means in practice. What does the railroad look like where its people feel valued and included, where its customers feel appreciated, and where the communities in which it operates you are respected?

I think the picture and the highlight that you see here offer a small view into how we’re making this happen here at CSX. To us, incorporating environmental, social and governance considerations into the priorities of our company goes hand-in-hand with our ONE CSX focus. Adding to the greater sense of purpose that we all share. These are real, authentic actions that we’re taking today. We talk often about our environmental leadership and our clear advantage here over trucks as a core part of our value proposition to our customers and our shareholders. By expanding our use of technology, conducting practical testing of alternative fuels and offering support and encouragement to our suppliers, we continue to make progress. As we reported in our press release last week, we are testing biodiesel blends in locomotives in revenue service.

matthew siddons / Shutterstock.com

Last month, you heard that we are in talks with CPKC to form a joint venture for the development of hydrogen-powered locomotives, which offer encouraging promise as a low emissions fuel solution. What we probably do not talk enough about are all the incredible efforts made by our railroaders, to build up the places in which we live and work. It’s been a priority of ours to increase our company’s positive cultural impact. And I am proud of how quickly the people in CSX have responded. As you see here, our volunteer hours are up substantially. Our CSX-sponsored community events have multiplied. And the number of people who we have been able to help and support has been incredible. I look forward to much more to come. There’s one last item I’d like to mention.

At CSX, safety is our top priority, and that’s why we focus so much on our reported injury and accident rates. Our fundamental goal is to make sure that every one of our employees gets home safely every day. When that does not happen and we lose one of our colleagues as we lost Derek Little last month, it affects us deeply. As a reminder, why we make so much effort on safety and how much more work we need to do. Now let me turn it over to the team.

Jamie Boychuk: Thank you, Joe, and good afternoon, everyone. As Joe just said, we continue to make every effort to enhance our company’s safety performance. As slide eight shows, we made good progress this quarter with both our FRA injury frequency and FRA train accident rate improving sequentially. Our injury rate also improved year-over-year and was the lowest rate for a second quarter that we’ve seen since 2015. Our focus is to ensure that every employee, including new hires who are less familiar, understands and appreciates their part to reinforce our safety-focused culture. Turning to slide nine. Our operating performance held up well over the second quarter and continues to lead the industry. Thanks to the hard work of our railroaders, who execute the operating plan every day.

I’ve seen firsthand the positive response to the efforts being made by our employees to strengthen our culture. Our men and women in the field are valued, included, respected, appreciated and listen to, which helps them feel even more pride in the service they are delivering to our customers. Because of them, we’re able to show how well our scheduled railroading model works, and I am excited as there are more opportunities ahead. Velocity averaged 17.7 miles per hour in the second quarter, slightly lower than last quarter, but up substantially from the same period in 2022. Dwell averaged 9.3 hours, an improvement of over 20%, compared to the same period last year. Intermodal trip plan performance of 96%, increased by 6 percentage points year-over-year, while carload trip plan performance of 84% improved by 25 percentage points.

I’m pleased with the compliments and support we have received from our customers, regulators, and shareholders on our service improvements. Our goal is to keep improving our service and show that we can continue to sustain this over time so we can drive long-term growth for CSX. With that, I will turn it over to Kevin to discuss our sales and marketing performance.

Kevin Boone: Thank you, Jamie. As Joe noted, despite headwinds across many of our markets, the team was able to capitalize on strong year-over-year improvement in service. Importantly, as service has improved, there’s opening up opportunities to discuss new business with our customers where we are seeing in our year-to-date pipeline up 30%. I’m proud of the team and the progress we have made. There remains a lot of work ahead of us as we focus on building our pipeline of growth opportunities. Initiatives including whiteboarding sessions with customers, increasing direct engagement with small and medium-sized shippers, bringing new technology tools to better serve our customers and finally, expanding our reach by leveraging our transload network and collaborating with both with our short-line and Class 1 partners are just a few of the focus areas for the team as we move into the back half of the year.

Turning to slide 11. Our strong merchandise performance continued into the second quarter, with revenue increasing 5% even as our fuel surcharge declined substantially on lower diesel prices. This growth was driven by 3% higher volume, compared to last year and a 1% all-in increase in revenue per unit. As we saw in the first quarter, our customers are seeing improved service levels, which is opening up opportunities and encouraging them to bring more of their business to our network. For the quarter, we saw many of the market trends continue from the start of the year. In automotive, we are seeing more consistent production and we’ve seen our improved service lead to new opportunities and business wins. Minerals benefited from strong construction demand for aggregates in our improving cycle times.

And our metals and equipment business continues to be a bright spot, with volumes up across steel, scrap, and equipment. We’ve been successful in expanding our commercial relationships and translating our service product and to convert new business wins. I’m also pleased that our fertilizer business delivered higher volumes year-over-year, supported by strong domestic shipments of potash and nitrogen. On the other side, chemicals continues to be soft as demand remains challenged across our broad book of business. Forest products. [Technical Difficulty] products faces headwinds in paper and pulpboard. We’ve also seen some slowdown in export grains for ag and food. For the second-half of the year, we expect to build on the successes we’ve had to win more wallet share of our existing customers, while continuing our efforts to attract new customers away from truck.

We expect auto, minerals, and metals markets to remain supportive and will be important contributors to volume growth over the remainder of 2023. We look for destocking activity to wind down in many of the markets we serve including chemicals, so timing there remains uncertain. What’s most important is that our team is not sitting back and waiting for markets to turn. We are pushing forward with our own initiatives. Our business development group has been making great progress with our Select Site program and expanding our pipeline of partner projects. And we’re strategically investing in developing new locations, providing additional transloading capabilities and investing in railcars to drive more business to CSX. Turning to slide 12. Second quarter coal revenue decreased 2% as a 4% volume gain was more than offset by a 6% decline in revenue per unit, driven by lower export coal benchmarks.

We saw continued growth in export volumes due to beneficial cycle times, good performance at our Curtis Bay terminal and a push among our coal customers to move more tonnage into the overseas markets. Domestic utility shipments declined as we expected, as low natural gas prices weighed on coal burn. Though demand in Southern utilities remained favorable. We expect momentum in the export markets to continue over the second-half of the year, with CSX volume supported by new mine capacity and coal producers making opportunistic shipments into the international markets. On the domestic side, we see tougher comparisons versus a strong second-half last year. But the hot summer is providing a helpful tailwind early in this quarter and just recently we are seeing a few customers looking for additional sets.

Of course, as international pricing benchmarks have eased from last year’s record highs, we will see an impact on our revenue per unit into the third quarter. Most of our exports are met coal with the benchmark around $225 per metric ton. We anticipate our third quarter all-in coal RPU will sequentially decline by a mid-teens percentage. Current international benchmark prices remained very healthy and supportive of strong production into the back half of the year. Now turning to slide 13. Second quarter revenue decreased by 18% due to a 10% decline in volume and a 9% reduction in revenue per unit, reflecting the effect of lower fuel surcharge. As in the first quarter, international intermodal drove most of the volume decrease with the business seeing headwinds from declining imports and inventory destocking.

Volumes in the domestic business showed a much more modest decline [Technical Difficulty] by the good progress we continue to make with rail conversions and the team’s efforts to identify new markets and lanes. Our best-in-class Eastern service product continues to position us for truck conversion in the quarters and years ahead. Looking forward, while we and our customers are still looking for a rebound in the international business, pressing ahead with our own initiatives, we brought on a new shipper late in the quarter that recognize the value of our strong service product. And we’re seeing other opportunities in new lanes, growing activity at inland ports. Domestically, we’re encouraged by many opportunities to work more closely with all of our Class 1 partners to target truck conversion.

Just one example of this is the agreement we reached with CPKC just a few weeks ago to create a new interchange in Alabama that will link our customers across the Southeast with key markets in Texas and Mexico. We think there’s much more opportunities for new creative partnerships that can help bring even more business to all of the railroads. And we remain very excited about the opportunities ahead of us. Now I will turn it over to Sean to discuss the financials.

See also 25 Most Needed Jobs in US and 15 Most Consumed Crops in the World.

Sean Pelkey: Thank you, Kevin, and good afternoon. Looking at the second quarter results, revenue was lower by 3% or $116 million, declines in fuel recovery, other revenue, and benchmark-based export coal pricing [Technical Difficulty] benefits from strong merchandise pricing, as well as volume growth across merchandise and export coal. Operating income was down 13% to $1.5 billion, reflecting a $122 million headwind from cycling a gain on the Virginia property transaction. I’ll discuss the expense line items in more detail on the next slide. Interest and other expense was $25 million higher compared to the prior year, and income tax expense decreased by $64 million on lower pre-tax earnings. As a result, EPS fell by $0.05, reflecting a $0.04 impact of lower property gains.

Let’s now turn to the next slide and take a closer look at expenses. Total second quarter expense increased $105 million. Lower fuel price was largely offset by the prior year Virginia gain. While network efficiency improvements resulted in over $20 million of cost savings across labor, PS&O, and rents, it was not enough to overcome more than $100 million of headwinds from inflation and higher depreciation. Turning to the individual line items. Labor and fringe expense increased $57 million, impacted by inflation and increased headcount. Importantly, service improvements are helping us get more employees home sooner, with overtime ratios down nearly 10% and a significant reduction in the number of employees tuck away from home over 24 hours.

As a reminder mid-year union wage rates stepped-up by 4% on July 1, and will be reflected in our second half cost per employee. PS&O expense increased $37 million with inflation and higher repair and maintenance expense, partly offset by savings in intermodal operations and cycling of costs related to the Pan Am acquisition. While we are overhauling and rebuilding more engines than last year, locomotive efficiency was 4% improved in the quarter. Depreciation was up $33 million as a result of last year’s equipment study, as well as a larger asset base. Fuel cost was down $134 million driven by lower gallon price. Equipment and rents was $5 million favorable, reflecting strong improvement in car cycle times with merchandise cycles 13% better than last year.

These efficiency gains more than offset costs from inflation and higher volume, particularly in the automotive market. Finally, as discussed, property gains were $117 million unfavorable in the quarter. Now turning to cash flow and distributions on slide 17. After fully funding infrastructure investments and strategic projects, CSX has generated $1.5 billion of free cash flow year-to-date. This has supported $2.4 billion in shareholder returns, including over $1.9 billion in share repurchases and $450 million of dividends. We were encouraged to receive recent news of a credit ratings upgrade. This move reflects the strong core cash-generating power of CSX through economic cycles, which supports our ongoing commitment to investing in the business and our balanced opportunistic approach to capital return.

Economic profit, as measured by CSX cash earnings, is up over $80 million year-to-date. While intermodal storage revenue declines in export coal headwinds we’ll have a more significant year-over-year impact in the second-half, we remain committed to cultivating and investing in return-seeking projects that see the pipeline of mid and long-term growth and efficiency gains. With that, let me turn it back to Joe for his closing remarks.

Joe Hinrichs: Alright. Thank you, Sean. Now let’s conclude with some comments on our outlook for 2023 as shown on slide 19. First, we reiterate our expectation that revenue ton miles will grow in the low-single digits for the full-year. We remain very happy with the performance of our merchandise business through the first-half of the year and we look for volumes to be supported by continued strength in automotive, minerals and metals and the successes we’ve had in the marketplace. We expect full-year coal volumes to be higher, driven by strong demand for export coal. As we noted last quarter, domestic coal shipments will likely soften as demand is impacted by low natural gas prices. For intermodal, as Kevin said earlier, we have seen modest signs of improvement for domestic intermodal activity starting late in the second quarter, but there are no signs yet of a near-term recovery for the international business.

We’re still benefiting from a favorable pricing environment, though our expectation for $300 million decline in supplemental revenues is unchanged, with most of that year-over-year reduction occurring in the second-half of the year. Lower international met coal benchmark prices will also impact our coal revenue per unit over the remainder of the year. As before, we are making our best efforts to drive efficiency and control costs to offset real inflationary pressures, and we are committed to staying focused on improving service to our customers. And finally, we still estimate capital expenditures at $2.3 billion with a strong focus on innovation and growth. To sum up, I am proud of the progress that the ONE CSX team continues to make. There is no doubt that we face some mixed economic conditions in the near-term.

However, there are so many opportunities opening up for us to win share, expand our markets and achieve profitable growth if we remain focused on safety, service, execution and working together. I am very excited about what is ahead for CSX. Thank you, and we’ll now take your questions.

Matthew Korn: Thank you, Joe. We will now move to our question-and-answer session. In the interest of time and to make sure that everyone has an opportunity, we ask you to all please limit yourselves to one and only one question. Emma, we’re ready to start the process.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question today comes from the line of Chris Wetherbee with Citigroup. Your line is now open.

Chris Wetherbee: Hey, thanks. Good afternoon, guys. Joe, I guess maybe wanted to start with some thoughts on how you — the second-half of the year I guess, and in particular, how you think about matching resources to the volume and revenue environment that we’re in right now, as you noted you have coal, and you have other revenue headwinds that are greater on a year-over-year basis as we move into the back half of the year. Certainly, volume is still like it’s a little bit uncertain, Joe, as you mentioned around the economic outlook. So how do we think about sort of managing the resources? I know service is coming back. Is it time that headcount starts to decelerate on a sequential basis? Do you think that there is more work to be done there? And conceptually, how you think about that fits in and what it may be means to profitability in the back half of the year?

Joe Hinrichs: Thanks, Chris. It’s Joe. I think at a high level, we’ve noted some of the things that won’t repeat from last year’s second-half as you referenced. So we’re really focused on getting our manpower levels up to continue to sustain the improved customer service levels that we’ve been delivering. And Jamie highlighted the trip plan compliance in the second quarter around 84%. We’ve been in the 80s now pretty regularly since November of last year and that’s really resonating with our customers. We’re watching very carefully what’s happening with the volume. And we have a mixed kind of market out there. And Kevin highlighted, we’ve seen growth in metals and automotive and other parts of our business. Intermodal has been softer as we highlighted.

And chemicals, you know, little down, you know, we’ll see when that turns. But generally speaking, our volume has been holding up on the merchandise side. We’ve been growing merchandise business. So we’re watching the volumes very carefully and making sure that we have the staffing levels to support sustained high levels of customer service. And the reason why it’s so important is that, Kevin and his team have really started to have some really good conversations with our customers. We gained share in the first-half of the year and that picked up momentum in the second quarter. And we’re having very good conversations with our customers now that we’re sustaining these high levels — higher levels of service, and as Jamie noted, we want to continue to improve.

But our focus is really on making sure we have the manpower to be able to sustain that. And also, at the same time, of course, if we see volume reductions further than what we’re seeing right now it will respond accordingly. But right now, the volumes that we’re seeing are supporting this merchandise volume growth and our high levels of service.

Operator: Your next question comes from the line of Jon Chappell with Evercore. Your line is now open.

Jon Chappell: Thank you. Good afternoon. Sean, I wanted to ask you about the productivity improvements. In the first quarter, you said $15 million to $20 million. You said more than $20 million in the second quarter. I think the plan was to eventually get to $30 million. So I guess the question is essentially, do you get to $30 million by the back half of this year as a quarterly run rate? And kind of along the lines of Chris’ question, if the volume environment is a bit softer than you had anticipated six months ago, could that $30 million even become greater as you think about 2H ‘23?

Sean Pelkey: Thanks, Jon, for your question. Yes, your recollection is right in terms of what we said first quarter. So yes, we are building some momentum with $20 million, a little over $20 million of what I would call sort of fluidity-related savings year-over-year. Now just to be clear, we aren’t really counting, sort of, changes in volume in that number up or down if there’s costs related to that. This is sort of independent of that. This is things like cycling the cars faster and reducing costs related to that, reducing overtime, things along those lines. We do have line of sight to that number continuing to increase over the balance of the year, and we should be in that $30 million to $40 million range in the second-half of the year is our plan, especially as we get out of summer here and labor availability starts to pick up, we get some more employees out of training. We feel pretty good about what that’s going to set us up for in the second half of the year.

Operator: Your next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.