CSX Q2 2024 Earnings Call Transcript

Yeah. I guess that's a magic question, right? When does domestic market recover, given what we've seen on the export -- or the import side of the business? I think I don't -- we're still not hearing from customers a major shift in their activity from the East to the West. If that were to occur, I think it probably presents maybe more opportunities than risks for our business especially if some things want to move further into the eastern part of our network, where today that's trucks. So it's a watch item for us. We'll be close with Mike and his team and able to capitalize on that if we see a shift, which this team is well prepared to capitalize on.

We all listen to the earnings calls from our customers on the domestic side. And I think we all came into the year a little bit more optimistic on the recovery, it will come, but it's been pushed to the right. That's for sure. And I think hopefully, the import business will be a precursor to some better days ahead on the domestic side, but we're not yet seeing that uplift necessarily, as you heard from a lot of our customers on their earnings calls.

Sure, Scott. Yeah, I mean, we're not going to give a pinpoint estimate on meaningful improvement in margins or we would have done that, obviously, but we feel good about the setup for the second half of the year. And I think what's exciting is some of the sort of dust that's been in the year in terms of year-over-year comparison starts to clear in the second half of the year, and you'll see the core momentum that we continue to build both on the cost side. But also, the pricing action supportive of the service -- reflective of the service that we're delivering as well as the growth that we're seeing in the business. That will drop through at very attractive incremental margins.

Sequentially, second to the third quarter, you got a couple of things going on that are probably worth remembering. One is Kevin's guidance on the coal RPU, which will be down mid- to high-single-digits. That will be a big impact. We got the wage step up for us. That will be about $20 million. Fuel, we had positive lag in the second quarter. So depending on where prices go, that could be a headwind as well. That said, we're holding the line on expenses. The things that we can control, obviously, we can't control the weight increase or fuel prices. But outside of that, we feel good about the run rate that we're at in terms of second quarter for expenses. And our focus is on growing year over year and delivering that growth as strong incrementals.

Yeah. I'll let Mike follow up. But from a capacity standpoint, we're working really close with our team. I think we're well positioned to adjust as we have in the past when these events happen temporarily, but like you mentioned, there's opportunities probably for some longer haul business should we see a disruption on the East Coast since some more volumes that would traditionally move East local. Think about the New York markets and maybe some of the Southeastern markets that are locally trucked that would have to move through the West Coast, that's an opportunity for all of us to participate, and we'll be more than ready to do that, but I'll hand it over to Mike to talk about capacity.

Sure. Thanks, Kevin. Hi, Jon. Lots of capacity, Jon. We have the odd train -- train pair, let's say, that's at a higher rate of using capacity. But for the most part, our network can withstand whatever Kevin brings us in terms of intermodal. We've done a lot of work at our terminals. Our intermodal team has really dug in deep here over the last six to eight months to provide that great first and the last mile for the customer. But in terms of the capacity over the network, it's there for us to get the business.

Chris, it's Sean. I'll take the restatement first. So what I mentioned was a $16 million impact in the prior year split between labor and PS&O even though there was no restatement for Q2, obviously, because we're reporting Q2 results of this year for the first time, that impact was similar in the second quarter, and that's pretty similar to what we expect on a go-forward basis as well. I'll turn it over to Kevin for pricing.

Yeah. On the second question, clearly, facing a truck market when you're trying to convert truck is not the most ideal backdrop to do that, but we've had a lot of success. And you're going to see that success really build momentum as that market comes back. So -- and on the intermodal side, not as strong of a pricing environment, which we've been pretty transparent about.

On the merchandise side, given our service, given the value we're providing to customers given the efficiencies we're driving for them, we're having really good discussions around there. And you're right, a lot of that repricing every year comes out at the end of the year and the first part of next year. But with inflation coming down, those things, those will be factors as well, but we still -- nothing has really changed from our strategy there. We want to go after volume and price and deliver the value to our customers so they see the value in giving us more business along with obviously covering the cost and the inflation that we will have to absorb every year.

Sure. Thanks for the question, Tom. Yeah, look, we have really made a lot of changes here in the last six months, most focused on two things. Well, safety first, as though you can't tell by our metrics on that. But service, we -- whatever we do in terms of whether as we make changes to the operating plan, which in some cases has caused trains not to run on time, right down to making sure that the assets that we have out there are being pushed. So locomotives being stored. We're doing things right now just to test the railway. And yes, there's been some drop in some of the metrics. And yes, they will improve as we go forward. But we have opportunities here, first of all, with a very young group of people to learn how to do this properly and second for them to partake in it.

So the changes we're making, yes, they're having some effects, nothing material, but some effect on some of our lagging indicators. But what we're able to do from a cost perspective and still maintain that service, is powerful. And really by focusing on the connectivity between our field people and their customers, we're starting to see even more benefits come up. So yes, we'll get our metrics back. But at the same time, we're not running for a metric. We're running for service, and we're running for a return, and that's very important. And so Tom, for me, just learning as I go, I've been here 10 months now. I'm not overly concerned. Trust me, it's a focus as we go through to improve those metrics. And prior to the storm we had going, we had a pretty good July in those regards. So metrics will improve, but focus is on cost and service and safety, and we'll figure out the right metrics from there.

Yeah. I mean, I think you first got to start with last year. Obviously, that was a difficult backdrop for our chemical market, but we have seen some wins on the industrial development side that are really starting to help us there. So that's been positive in the plastics market. So we've really capitalized on those opportunities. And I think it's all of the above that you mentioned, we obviously have quality carriers and that alignment with them, that understanding of the market has helped us in our conversations with customers.

In fact, there's a recent customer where we're kind of bundling that opportunity together, and it allows us for us to work together in a whiteboarding session to really look at their total network and how we can make that more rail centric over time. So those are exciting things, some of the things that we've been working on for a long time that are really picking up momentum, but it's really all of the above. It starts with the leading service in the East, and we're really delivering on that and that allows us to have a really different conversation with our customers than we were able to a year or two ago.

Yeah. I mean Joe mentioned at Investor Day in November, and we're certainly going to put probably more of a bow on the story and kind of open up a lot more of the details and share with all of you. But we are seeing that acceleration this year, year over year in that range that I mentioned. And when you look at full run rate, and some of these projects can take a year or two to really get up to full run rate volume, but the pickup in terms of things that we're seeing put in place this year has certainly accelerated this year, and we anticipate that will accelerate next year and then the following year. So that means several years of growth as those projects really come up to full rate production.

On average, a lot of these projects are $2 million. So it's a lot of small things that add up to a fairly large number. We do have the larger projects in there as well, but it's a very diverse set of projects, opportunities that are coming online across a number of our merchandise segments. So it's exciting. We still see the momentum out there. I think it's going to be fun to talk about it in November and share that share more of those details with you.

Yeah, Ken, I'll take the sequential part first. We're not going to guide specifically to sequential. I did lay out a couple of the factors there that will be somewhat challenging from 2Q to 3Q in terms of the wage step up, the net fuel and the coal RPU. That being said, core expenses, we should trend pretty similarly to Q2. And we'll see what happens in terms of the demand side of the equation. But again, feel good about low- to mid-single-digit volume and revenue growth year over year in the second half.

And then in terms of the labor opportunities, I think there's always continued opportunities to drive efficiencies on labor. Mike is clearly focused on overtime reductions out there. We're seeing momentum across many of the crafts. He's also got a team looking very closely at how do we increase retention across the craft, workforce, T&E in particular. There's significant costs in training those employees and retention is extraordinarily important, not just from an operating standpoint, but also from a cost and efficiency standpoint. So definitely opportunities going forward on the labor side, even if it's not headcount, I think headcount will be pretty stable, and we will drive year-over-year improvements in headcount efficiencies, where we do expect volume to grow more than headcount in the second half.

Okay. Great. Thanks. This is Brady [Phonetic] on for Daniel. I wanted to ask, as we've gone through earnings season, we've heard some anecdotes about the truck market maybe moving a little closer to balance than it has been over the last couple of years and maybe even showing some signs of seasonality again. I wanted to ask, have you seen or heard any anecdotes from customers to suggest truck to rail conversions are picking up sequentially or could pick up in the back half? Thanks.

Yeah. I listened to the same call as you did. I think they're obviously a lot closer to it on a day-to-day basis than we are. I think the environment has persisted a lot longer than what we expected, than anyone expected, quite frankly. And we're just setting ourselves up for the recovery. And I think we're well positioned there. But I don't have any additional anecdotes to add to what we've all heard. I'm hopeful that we're further along in this cycle than not. And I think we're set up with Mike mentioned on our intermodal ops side for -- from a capacity standpoint, we're better positioned than we ever have to bring on the volume.

Yeah. Thanks, Jason. I think Kevin has highlighted a number of the areas. One area we didn't talk about was automotive. And while we had a strong performance in the first half of the year, I think you've seen the shipments over the last few weeks have been down a little bit coming out of their shutdown period. So that's one we watch very carefully from the consumer side of things, interest rate sensitivity. If you think about it, housing market, auto market are two big areas in our business that are very rate sensitive.

So we're watching it very carefully. But my comment was -- so that's in addition to all the stuff that Kevin talked about earlier. But my comment was more in general, I think I mean, we were thinking about this call, this is even before today's events in the marketplace, I think there's just a little more uncertainty about where the economy really is. We see a number of areas that we're excited about for the second half of the year. But clearly, we're watching what happens with the Fed. We're watching what happens in the general economy. And so I think if you could say where we are today versus two months ago, the economy seems to be a little bit more fragile, and we're optimistic that it can pick itself up, but we're watching it very carefully.

Not really any slowdown. And I think we presented a slide last time that we do have a very, very diverse portfolio, and there was a lot of focus on the EV market, and certainly, we've seen some of that be pushed to the right, but our portfolio is much, much larger than just the EV segment. So other areas continue to stay on trend, on pace, and we'll obviously have a ramp-up period over time. But we have a pretty clear line of sight, a lot of construction is already underway. So a lot of sunk capital out there with these projects needing to be finished. So we feel pretty good that despite maybe even if the macro scene gets a little bit weaker in the back half that these projects in large part will continue on and be a positive factor for us in the back half and into the next year and the following year.

Well, I'll start it off, Walter, and nice to hear you. Good that you're on the call. I look, no different than any other time. We -- the margin is not what we're aiming for. We do see a pipeline in terms of efficiencies. And that's -- again, this is going to take time, but it's happening as we speak. We're developing supervisors to see these things, giving them the tools to be able to relate to them better. And I see a lot of the things I saw in my previous career. There's just opportunity here to to connect people and activities where we get rid of waste. And that's our focus, and I'll turn it over to my financial friend here.

No. Thanks, Mike. I agree. I mean margin, obviously, is an indicator of financial health. And in our industry, it helps helps us to understand how efficient we're running the railroad. Clearly, as we're able to grow the business as well and do that at strong incrementals, that's going to help the margin. But the margin really isn't the destination. The goal is to grow earnings, to grow economic profit be disciplined around the way that we spend capital and look for opportunities to invest in things that have a high return, whether those are growth-oriented projects or projects that help us to drive further efficiency gains, technology investments, capacity investments across the railroad. That's our primary focus. We think that's the quickest surest way to grow the value of the company.

And in terms of things changing versus previously, I think you make a good point in terms of the impact of inflation on the rail operating ratio, operating margin equation. That being said, I don't see any reason why we can't continue to see improvement in that metric as we expect across many other metrics in our financial performance over time. If the formula of the equation that we have going for us right now is able to continue, and we've got confidence that we'll be able to do that.

Yeah. This is Joe. Last comment to add to that. I appreciate you recognizing quality carriers as part of our equation when it comes to margins. If you look at our second quarter performance, even with now accounting for scrap and the related labor, according to our policies, even looking at fuel being down, we had over 39% margin in our corporate results. But if you look at the -- as we've said in the past, effective quality carriers is about a 250 basis point effect on our total margin. So our rail operations, then if you just do that simple math, had over a 41% margin in the second quarter. In a clean quarter with not a lot of exceptional things going on or like a lot of those quarters that you're referencing in the past had high fuel surcharge or had a lot of demurrage or storage charges or even had record export coal prices and other things like that.

We're at a pretty stable quarter even with the Baltimore Bridge collapse. And with our rail operations, even with the inflation that we've had over the last couple of years, capable of delivering that kind of performance. And as we've noted, optimistic about how we continue to run this forward. We're very excited about the margin potential of this business and recognizing that that service and our operating efficiency go hand in hand. Having said all of that, if the pursuit is just only to optimize the margin number, this industry or even this company has the potential to turn away good business, I mean, I think it has in the past. We had a 41-plus percent operating margin for our rail business last quarter and a 35% margin opportunity present itself, we turn it down. And where our cost of capital is a lot lower than that. And most businesses don't have that kind of margin.

It would deteriorate the average margin of the business, but still incrementally could be a good business. And so that's where Sean's point is very valid. We're going to grow earnings, grow cash so we can return that to shareholders and reinvest in the business for profitable growth. And that's the kind of way we look at it. efficiency matters. There's no question about it. So the safety, so the service. But the big opportunity at these margins is to create growth profitable growth, which has strong incremental margins. That's what we're excited about.

Yes. No, good question, David. If you look at the first half, I mean, I get to about $300 million of kind of unique year-over-year challenges between the Baltimore collapse, the lower export coal pricing decline in other revenue, net fuel, that's $300 million. Second half is not going to be anywhere near that significant. We will have coal pricing headwinds, but the rest is pretty clean. And then the other thing that's different, we are -- in the first half of the year, we were still cycling some of the labor additions that came on over the course of last year. So our labor productivity was negative in the first half of the year. That's going to turn positive in the second half of the year. on our volume growth and keeping headcount essentially flat from where we are right now. So those are the two big factors there.

There's been a lot of puts and takes. This is Sean, on a year-to-date basis, but we're pretty much right on our plan in terms of both total volume and revenue, which is great. We had a stretch plan in place. across the teams. And we've done a good job when there have been challenges figure out ways to offset them. Kevin did a good job of describing that with the key bridge outage in Baltimore and what we did to adjust there. And we think we'll be able to continue to do that as the year goes forward. And I think we also talked about a number of the opportunities.

There are some markets that are setting up quite well for us in the second half of the year. It's not it's not guaranteed until we actually move the freight, but we've got a couple of areas of strength between ago and minerals and chemicals continuing to show nice year-over-year growth. There are some headwinds and some uncertainties out there as well. So nothing is ever a given, but we're not only focused on growing the volumes. We're also focused on getting the price that we need to get in the marketplace.

A lot of that price for this year has already been locked in and then driving efficiency in the cost base. And we've already seen pretty significant improvements from where we entered the year to where we're exiting the first half of the year that give us confidence we'll be able to hold the line there into the second half. So if the macro is not as supportive and maybe we don't see as much growth as we expect, will we still be able to deliver margin improvement? Yes, I think we will.

Thanks, Jeff. Just to clarify, what I -- what we were speaking about before was an intermodal shift. So I was speaking specifically about our intermodal trains and the capacity that we have in that network. But everything you talked about, the answer is yes. Do we want to run with fewer locomotives? Will there be technology that enhances what it is we're doing? Absolutely. The biggest thing we're focused on right now is outside of the day-to-day sweeping the corners, making sure people understand what the standards are and for the goal about achieving them.

We're looking at infrastructure that we have. And so there's some opportunities to reduce out of route miles, reduce a lot of handling, essentially create mass where we don't have it today. This railroad has customers everywhere versus it being linear, where you can accumulate all your traffic, you can switch it out and it runs. So we're going to going to try. We are looking at our network to see areas where we can bring and create mass in certain places and eliminate all those touches that we do. We do a lot of work online and road with trains block swapping because we just don't have the mass at the origin terminal. So there's opportunities there in our Investor Day or when we get together, we'll lay out far more than just me talking about it. We'll show you what we're talking about there.