Q3 2020 CSX Corp Earnings Call
2020 earnings call.
As a reminder, today's call is being recorded during.
During this call all participants will be in listen only mode.
Following the presentation, we will be conducting a question and answer session.
To ask a question press Star and then one.
For opening remarks, and introduction I would like to turn the call over to Mr. Bill Slater head of Investor Relations for CSX Corporation.
Thank you and good afternoon, everyone. Joining me on today's call are Jim foot, President and Chief Executive Officer, Mark Wallace Executive Vice President of sales and marketing, Kevin Boone, Chief Financial Officer, Jamie Borgia Executive Vice President of operations.
On slide two is our forward looking disclosure followed by our non-GAAP disclosure on slide three with that it's my pleasure to introduce <unk>, President and Chief Executive Officer Jim.
Thanks, Bill and thank you to everyone for joining todays call.
The last six months of true then surreal.
Last quarter's call, we discussed the largest and most rapid sequential volume declines. Its CSX is history now just three months later records in quench <unk> increases.
Think about that volume declines and increases twice as steep as the largest swings we experienced in the great recession in a span of just a few months.
Managing this historic volatility is incredibly difficult and I.
I'm extremely proud of the dedicated men and women of CSX as they continue to deliver against these challenges.
Their hard work allowed us to efficiently absorbed the record rebound in volumes, while maintaining a high level of service.
This level of execution requires a commitment and coordination of the entire organization.
Rob This period it has been inspiring to see CSX employees banded together to reassess every aspect of the business and figure out where we can be even better.
We're already seeing the benefits of these efforts in this in this quarter's results and will come.
And we will continue to do so in the years to come.
Now, let's go to slide five for an overview of our financial results.
Second quarter, EPS declined 11% to 96 cents.
And our operating ratio of 56.9 remained in line with last year's record results.
Maintaining these record efficiency level, despite the combined headwinds from the pandemic.
Significantly weaker coal markets in approximately 250 basis points or on the favorable margin impact from lower real estate gains is truly impressive.
Moving to slide six third quarter revenue declined, 11% and 3% lower volumes due primarily to reduced industrial activity as a result of the pandemic.
Merchandise revenue declined 7% on 5% lower volumes will all end markets experiencing volume declines.
Intermodal revenue was flat on 7% higher volumes as growth in both domestic and international volumes from inventory restocking in a.
Any tightening truck market.
[music] were mostly offset by declines in fuel surcharge revenues.
Coal revenue decreased 36% and 27% lower volumes as the coal business continues to be negatively impacted by reduced electrical demand.
[music] industrial production and lower global benchmark prices.
Although revenue was down 12% due to lower affiliate revenue and declines in demurrage charges.
Turning to slide seven.
We cannot achieve any of our long term goals without first operating safely.
In the third quarter, we realize new quarterly record lows for both train accidents and personal injuries as well as a new quarterly record for low personal injury injury frequency rate.
Well CSX continues to lead the industry and safety metrics, we can never be satisfied if either one of our employees get injured while at work.
Team is working to be even better identifying and eliminating unsafe practices and conditions across the world.
We continue to increase employee training and engagement with the goal of improving critical rules compliance.
Turning to slide eight.
Our safety focus as part of CSX is broader commitment to E.S.G. and driving positive social impact.
Well it was the most sustainable mode of land transportation and we're working hard every day to further these inherent benefits and ensure CSX is the most sustainable railroad.
We've made great strides in reducing our emissions and fuel consumption, including setting another fuel efficiency record this quarter by consuming only <unk> 0.93 gallons of fuel for thousand gross ton miles.
And we have also set ambitious new long term emissions targets to continue this positive momentum.
Earlier this year, we were the first U.S. class one railroad to have an emissions reduction target approved by the science based targets initiative.
Setting a goal of reducing emissions intensity, 37% by 2030.
In addition to improving our emissions profile, we are focused on helping our customers meet their own emissions reduction targets.
Not only does every shipment on CSX consume 20% less fuel than it did a few years ago, but.
But our best in class service product uniquely positioned CSX to help customers further reduce emissions by converting freight off the highway and onto CSX without sacrificing the reliability of their supply chain.
We are honored by the recognition received today, including recently being named one of the top warrantee, most sustainably manage companies in the world by the Wall Street Journal, but couldn't.
But continuously push ourselves to be even better for our employees our customers and the communities we serve.
On slide nine let's review our operating performance despite.
Despite the challenges presented by record volume increases the railroad continues to run.
At a high level.
Plan changes enacted in the second quarter drove strong productivity gains across the system. We further balance the network and set a new quarterly record of 93 distributed power trains per day ever.
Averaging over 100 distributed power trains per day for the last two months of the quarter.
Yard productivity also improved by blocking cars further upstream reducing touches in the yards and finding new ways to be more dynamic to more dynamically share work between yard and local trades.
Slide 10 is proto <unk> productivity gains are further highlighted which compares current volume and asset levels against the pre corporate levels from March one.
In total volumes ended the third quarter above the pre cold at levels well.
Well absent counts were lower across the board look.
Looking at train starts we're currently running 3% more volumes with 11% fewer starts than we were required on more.
On a year over year basis train starts were down 15% in the third quarter compared to a 3% lower volume.
Additionally, since may the May trough, we have grown volume twice as fast as we have increased the train starts required to serve this growth.
No matter, how you frame. These results the strong operating leverage highlights the durable nature of the changes made last quarter and is a testament to the team's success in taking advantage of the challenging volume environment to pull forward lasting efficiencies.
I'm sure you might have some questions for Jamie on this later in the call.
Let's turn to slide 11 in Oh really trip planned performance Carlo trip planned performance of 73% in inter modal of 74% slide.
Slightly trailed previous quarters due primarily to the timing lag at the beginning of the quarter. When we began to step up to handle the surge in volumes.
Sure plant performance improved throughout the quarter, and we exited the third quarter and year, 80% for plant performance level for Carlo and 90% level for intermodal.
I'll now hand, it over to Kevin to redo the finance review the financial results.
Thank you Jim and good afternoon, everyone.
What do you hear it as it's been so far.
Just three months ago, we were reviewing second quarter results, where we experienced record declines in customer business activity.
We rapidly adopted and focused on driving efficiencies in structural changes that would serve us well as volumes returned.
As you can see from our third quarter results yes.
Yes that was able to deliver.
Generating very strong operating leverage on a sequential volume increase of over 20%.
As we sit here today we.
We are positioned for growth.
With a strong balance sheet and free cash flow profile.
We also made the strategic decision to come.
Do you continue to invest in our infrastructure at levels exceeding plan.
As we leverage the efficiencies and took advantage of slow business activity.
This will position us well to absorb future volume as growth returns.
As you can see in the income statement revenue.
Revenue was down 11% in the quarter.
As volume grows at intermodal was offset by economic weakness headwinds and merchandise.
Find with weak coal demand.
Well merchandise to coal markets remain challenged revenues improved sequentially each month through the quarter.
Partially offsetting the ongoing revenue headwinds total expense was down 11%.
A 3% decline in volume.
Walking down the expenses line items.
They phrase was 10% lower.
Reflecting significant efficiency improvements and lower volume related cost.
As Joe highlighted we.
Took the opportunity during this pandemic to make structural changes to the train plan as.
As a result.
It starts were down 15% year over year.
Compared to a 3% decline in volume.
These improvements were made across the line of road yard and local train plans.
Your crew starts results in fewer active trains yeah.
The active locomotive count was down 14% year over year in the quarter.
The smaller fleet combined with fewer cars online.
Youre and freight car repair efficiencies helped.
Helped drive a 19% reduction in the mechanical workforce.
You'll recall the overtime was a key cost lever for us in the second quarter.
As volumes recover we can flex back up using overtime, where it makes sense without adding head count.
Even with a small increase in overtime expense versus second quarter we.
We still have reduced over time year over year across all operating departments.
A total of 15%.
We were also able to maintain a significant reductions made in the second quarter, two our engineering contract labor expense and our.
And our intermodal terminal workforce.
Even as volumes increased sequentially.
You'll note the average head count was roughly flat versus the second quarter.
As the increase in the Genie count was offset by the impact of our management restructuring as well.
As well as the cycling of the emergency reserve boards from last quarter.
And that's an all expenses decreased 7% in the third quarter. Despite cycling some significant prior year impacts.
That's a 40 million and headwinds.
These include 65 real estate gains.
As well as non railroad asset impairment.
Adjusting for these impacts and I see no would be down 15%.
But if you weren't active locomotives and ongoing freight car repair efficiencies.
Locomotive support costs were down 24%.
Our material expense was 36% lower in the quarter.
In addition.
As volumes grow we are.
We are absorbing it and driving efficiencies that our intermodal terminals with cost per container down over 25% year over year.
We are focused on reducing costs across all areas include.
Including optimization of utility contracts to reflect current consumption levels and increased use of efficient lighting.
Minimizing the use of external and contracted labor where possible.
And leveraging technology to reduce redundancies.
These and other initiatives will continue to help control cost as volume returns.
Real estate gains were minimal in the third quarter.
And we continue to expect minimal sales activity in the fourth quarter.
Looking beyond 2020, we can.
We continue to manage a pipeline of future properties.
We will monetize when conditions are favorable.
As I mentioned before I am also.
I'm also excited about additional opportunities to leverage our real estate in general.
And generate recurring revenue streams.
Your expense was 104 million favorable at 40.
A 47% improvement year over year.
Even by a 36% decrease in the per gallon price lower.
Lower volume.
The cycling of prior year net expenses related to nonrecurring state fuel tax matters.
And record fuel efficiency.
Ongoing fuel efficiency gains are enabled by a relentless focus on your utilization of distributed power and.
In energy management software.
Combined with train handling rules compliance.
Looking at other expenses.
Depreciation increased 10 million or 3% in the quarter.
Equipment rents expenses increased 3 million or four.
Or 4%.
Due to higher intermodal related equipment costs and inflation.
Turning below the line interest.
Interest expense was essentially flat as higher net debt balances were mostly offset by a lower weighted average coupon.
Income tax expenses decreased 37 million or 14%.
Primarily resulting from lower pretax income.
Closing out the income statement CSX delivered operating income of 1.1 billion roughly.
Reflecting a 56.9% operating ratio.
Turning to the cash side of the equation on slide 15.
On a year to date basis capital investment is roughly flat.
We remain committed to investments that prioritize the safety and reliability of our core track bridge and signal infrastructure.
We use this opportunity to negotiate better materials and outside service costs.
Utilize track time to drive efficiencies and reinvest the savings into the network and take advantage of the lower train activity levels.
We have spent a lot of time evaluating our non infrastructure related capital that may.
Progress prioritizing high return projects.
While also eliminating projects that are no longer needed long term.
Capital allocation remains a focus as well.
As we identify and prioritize investments that will drive high returns in the future.
Through the third quarter free cash flow before dividends was 1.9 billion down 30% versus prior year.
Reflecting.
Lower operating income, but also including impacts from lower proceeds from property dispositions.
Free cash flow has continued to be a key focus for this team.
Even with the challenging environment free cash flow conversion on net income remains nearly 100%.
Our cash and short term investment balance remains strong.
During the quarter at 2.9 billion.
As I have referenced previously.
I expect this balance to normalize below 1 billion overtime.
As you saw with our announcement today of another 5 billion share repurchase program we remain.
We remain committed to ongoing return of capital with flexibility to remain opportunistic.
With that let me turn it back to Jim for his closing remarks.
Great. Thanks, a lot Kevin.
Concluding on slide 16.
We are continually assessing the pace of economic activity and we'll respond to the prevailing environment by delivering customers the highest levels of service and reliability in the most efficient manner.
We were encouraged by the speed at which volumes recovered from the trough, particularly the strength in the intermodal market.
Fourth quarter volumes to date are up year over year, and we all hope for continued positive economic momentum.
As for capital expenditures, we still expect to be at the low end of our initial $1.6 billion to $1.7 billion range.
This ability to confidently invest in our business throughout the cycle is a direct result of our industry, leading free cash flow profile and is.
And is a testament to the work done to transform this company.
We also remain committed to returning excess cash flow to shareholders.
Recently reaffirmed its commitment by expanding our reach purchase program by $5 billion, bringing our total buyback authority to more than $6 billion.
We entered into this pandemic period in a position of strength.
And confident that CSX will emerge a stronger company.
I am proud to say that by staying true to our core values of operating safely.
Operating efficiently and helping our customers succeed by providing a high level of service we are a better company today.
Thank you and I'll now turn you back to dollar Bill.
Thank you Jim and the interest of time I would ask everyone to please limit themselves to one question.
We will now take questions.
Thank you we will now be conducting a question and answer session.
Our first question is from Allison Landry with credit Suisse. Your line is open.
Thank you.
Can you talk about the trip plan compliance improving throughout the quarter. It sounds like it ended at least fairly close to where you were in the past few quarters.
What is the take from here to get those numbers up further and then maybe specifically if you could address on the carload side, where you think you need to be ultimately to start to chip away at the opportunity to convert the merchandise volume from the highway 90.
Do you think this is something that could start to accrue and 2021 or is this more of a 2022 and beyond thank you.
Right Allison that's a.
Perfect question.
Let me just say and then I'll turn it over to Jamie a mark to.
To follow up in terms of trip plan compliance.
You know the surge of volumes was a challenge.
But we're getting we're going to get back number one we're going to get back to where we were and were going to get back to where we were as quickly as we can and then we are going to get better and we're going to get better and we're going to get better and we're going to get better.
So and Jamie can talk about some of the details associated with that would that absolutely look at all.
As we continue to analyze the plan and we made meter or changes throughout the last few months.
We wanted to make sure that everything we gained with respect to our train footage and train tonnage road.
Road starts we didn't lose any momentum on that side and as Jim has said the traffic was was really.
At times it was all over the place and it was coming in different bubbles, we weren't sure exactly where it was going to end up working really close with mark and his team.
We were able to pull off some pretty amazing results I'm, making some large reductions if you take a look at just our train year over year. Our train length is up 13% or shrink tonnage is up 12% were able to do that with like 350 less locomotives. So there is a lot of assets that we were able to pull.
No.
As we were making these changes.
And and really its about exercising our people and getting them up to speed on running a network, that's a little bit different than what we're used to making.
Making that 18% reduction in road starts.
The longer trains heavier trains in some areas some of the execution wasn't perfect. Maybe what we were used to at the time, if I take a look at some of the areas where we missed.
On our trip plans it was only within a few hours it wasn't like it was days.
And and really for US services, all but reliability. So it's really important for us to get that reliability to the customer and we're working on it each and every day and we will continue to push that forward.
Mark commented the other yeah, no. It's a great. It's a great question Allison.
You know everything Jamey and his team are doing to continue to deliver great service for our customers is really helping us win share in the marketplace with our customers as we sit down and we open up their books and look for opportunities to gain share.
Gainshare in lanes, where maybe they havent traditionally used a rail they have been a more truck focused were in order.
In order for some lanes in order for us to gain more of their wallet share we're seeing a number of these wins even.
During Q2 and Q3 so.
It was as the service continues to get better.
And it will you know we're going to.
We're going to find more of those opportunities were excited by them.
We're growing a lot you know we've seen a lot of good wins and forest products and metals and and even in both markets like AG. We're seeing some great truck conversion wins. So the team is focused on it we're identifying them and and things to further your service product. The Janus team are delivering to us that's making those opportunities easier way.
Those conversations with our customers.
Thank you guys for the great color.
Our next question is from Brandon Oglenski with Deutsche Bank. Your line is open.
Hey.
Actually Brandon with Barclays unless there's been a bit.
It has been a big M&A transaction on the bank side.
Jim I just wanted to ask you.
No. There's a narrative out there with a lot of investor focus at other railroad thought the sector's doing really well, but you guys have already gone through your PSR and if you look at your former employer, obviously, some pretty big valuations north of the border. So I guess, what do you want investors to measure you guess next few years to hopefully regain some of that relative.
You issued premium to reflect your cash flow today.
Well, we don't measure ourselves necessarily against the other railroads I guess, if they thought we've already gone through it that's only because were so far ahead of them right now all this is our taillights.
And so yeah. We're you know we're benchmarking against what we think are the EPS excellent operating companies out there and also looking at how we can continue to expand.
Our services and and help mark out in any way he can possibly do it to continue to.
Grow our profile and grow our revenue base.
And that's that's what this company has been about since the first day I got here can't.
Can't you can't really self they can't really sell anything until you got a good product and we've created a fantastic an excellent product and and now we're going to continue to sell it.
Thank you Jim.
Our next question is from Ms. Mehrotra with Deutsche Bank. Your line is open.
Thanks first of all I'm glad brand and is still at Barclays I got worried there for a second.
Congrats guys, Jim Kevin Jamie and everybody on the on the strong operating results.
I was hoping you could give us maybe some high level thoughts as we enter 21 into 21, specifically you know about the point at which you guys just have to add back more add back costs more meaningfully given the recovery of the Caribbean revenue, its obviously pretty amazing to see close to a 20% sequential increase in revenue.
Headcount be flat to down M.S., so be down pretty materially sequentially. If you could just talk about you know the one way on that type of performance in terms of the revenue versus cost performance and just how you know incremental margins can try.
Trend relative to the 80% that you guys achieved in the third quarter. Thank you.
Yes. It is.
It's Kevin here, we're not going get into 2021 guidance at this point, but when you think.
No when you think about asking I'm not asking for guidance, but yes, I got it for like the mismatch Okay, Yes, yes.
When we think about to your point incremental margins clearly, what we were able to do here in the third quarter versus second quarter.
Shows the power of the leverage we have in the model.
Certainly if we see volume increase Oh.
At a good pace next year, we will have to add some some head count that will be a good good new story it won't be one for one.
I'll, let Jamie talk to that a little bit, but we're preparing for that we're preparing for growth around here, but we've done a lot of.
Well, we've done a lot of things structurally when you look at our management workforce you look at our DNA caused a that will certainly be a leverage into next year. So lot of work that we accelerated next year that I would fully anticipate that we take advantage of going forward. The fortunate part is good.
Through this a pandemic we invested in our network, we have a lot of capacity I think that actually differentiates us in the market today.
What weve heard out there.
So we have the ability to grow and grow the volumes there and so that's what we're all talking of.
All talking about right now as we look out to 2021, what that might look like how do we resource for it but still keeping an eye and capturing all the things that we've done over the last six to seven months and not losing those are great efforts that we were able to achieve.
So it sounds like yeah.
As Kevin noted I mean, we've got a network that we can still bring on 20% to 30%, we're quite comfortable with continuing to bring on business as we move forward, but I mean look at the plan. The plan itself is is running well we continue to analyze it and we continue to execute and will analyze an x.
Skewed and continue to work very close with Mark's team with all new business opportunities that are out there. We've got a number of locomotives in storage that we can pull out.
We are we are going to be doing some hiring we have got some hiring classes out there with some teeny employees and I think it's important that we stay ahead of what we see coming forward as well as working very close with our union groups and making sure that we're hand in hand with supplying the service that we said we would.
And and look at it.
I've said, it time and time again and I think we've proved it we don't bring on assets unless we the earn their keep and we swept them. So that's what we're going to continue to do is to stick on the same model that we've been working towards is the comment on 20% to 30% volume growth a capital a capex plan in terms of not having to add capex or is that also.
Comment about not having to add a significant amount of opex to to that too. Yeah go ahead.
That's on it like it on the Capex side.
We've got a great plant.
Plant out there we've got long side is Weve got double track, we've got a good mainline we've got good yards. So yes, absolutely. We can continue to absorb business on our mainline as as Marcus team brings it all.
Okay. Thank you very much.
The next question is from connects with Bank of America Merrill Lynch. Your line is open.
Great Good afternoon, and congrats on the really strong results great to see maybe I don't know Jim or Mark if you could talk a little bit about pricing, what you're seeing in the marketplace. Obviously competitor is focused on in region focused on on yielding up yet.
Yet you still seem to be taking share maybe you could talk us through a little bit because obviously with the down 8% on a revenue per car, it's tough to see on the mix impacts overall, you can talk a bit about what's going on in pricing and business wins.
Sure Ken Hope you're doing well.
So, let's look at let's Peel back the onion here on on the different markets merchandise RPU you down.
Down to fuel surcharge was a 3% headwind this quarter.
To that intermodal RPU down six fuel surcharge to Oh, sorry for a person and cool RPQ down 12, a fuel surcharge was was 3% headwind the rest obviously the delta there mix and price on.
On for coal most of that was due to price just given some of the export benchmarks that we saw in the softness in the in the domestic in the domestic utility markets.
You know obviously mix continue to play an overall driver of ARPU.
This quarter like it always does a there was negative mix overall.
We saw that in the in metals and equipment and chemicals, there was positive mix in some like coal export coal we had favorability.
Favorability due to the thermal exports a declining faster than the met exports and.
In minerals also saw some larger declines in shorter haul northern aggregate business Oh. It was just basically given some of the budget cuts and some of the project cuts because of a COVID-19. So mix is always a bit of an issue for us as you know, we're probably kept going to see the continued use seven to eight so.
Sorry, 7% to 8%.
Gap between volume and revenue growth.
Going forward into the Q4, I would expect that to sequentially improve.
Into Q1 and beyond.
Pricing.
Our pricing philosophy has not changed and price continues to be a main focus for the team as we deliver on sustainable and profitable growth, we're partnering with our customers to create solutions to help them grow and price to the value of the service product that Jim and his team.
Delivering.
I see I said, it before and I'll say it again.
Were not sacrificing price or volume.
Portfolio.
Wonderful appreciate the thoughts thanks, Mike.
Our next question is from Tom Wadewitz with EUV, Yes. Your line is open.
Yeah, great. Thanks, good afternoon.
Mark I've got.
I get the question for you or a question if you will.
How are you thinking about I guess, we've had kind of two different dynamics.
Dynamics, where the consumer and retail side has been super strong and truck and intermodal tight and industrial has been kind of slower rebounding, what's your thought on industrial.
Domestic that that's you're seeing signs of that picking up.
And what is the customers are seeing in the industrial side are they seeing a lot of tightness in truck that really really encouraging.
Conversion to rail or are they not seeing such a tight market given that the industrial side, maybe hasn't improved like the the retail and consumer side. Thank you as well so yes. So it's a it's a great question.
And so you know.
We are seeing a tight obviously the tight truck market out there things are on the intermodal side.
Clearly, there's a you know capacity has been constrained.
Replenishments have been going on.
There has been some driver shortages.
In several markets like sold Southern California, Chicago et cetera, we have seen some good pick up in some truck conversions within our intermodal business as Jim highlighted.
Well our intermodal a trip planned performance has been quite good or service has been quite good. So we're happy with that and I think that'll continue obviously the.
The consumer is still.
Very very strong we expect a robust peak season.
You know around Thanksgiving time is usually when we see that ecommerce peak to Christmas time, we expect that to be very strong actually you know it has been.
Husbands been strong through the pandemic.
Just as people have been staying at home and ordering stuff online, but we.
But we expected to pick up even more robustly going forward.
As we as we approach Thanksgiving. So we're looking for that to continue through.
Through Christmas and then overall intermodal.
We are quite quite happy with the business and speaking with our with our customers. We expect that to continue deep into Q1. So a good size. There I think you know on the on the merchandise side on the industrial side.
The Twitter truck market, obviously as I said, it's allowed us to sit down with our customers have different conversations they're looking in these tight times, though when their business levels are down to save some cost obviously transportation cost for them as is a significant headwind and so you know as we all know the 12 to.
You know, 15% discount at a real offers given with our with our good service product has allowed us to go and sit down with our customers and and they can't get trucks took truck market is is tied to spot rates are up and so we are seeing conversions there.
And we hope that continues and hopefully that but the traffic there.
It comes to us.
You know remain sticky even post as things do improve in the truck market eases up a little bit you know if we're able to show the power of rail and keep performing like we know we can hopefully a lot of that traffic will will stick on CSX going forward.
Great. Thank you.
Next question.
Yes from Scott Group with Wolfe Research your line is open.
Hey, Thanks afternoon, guys. So Kevin.
On the methanol costs, I know, they're lumpy, but anything unusual or onetime issue in this quarter any thoughts on how to think about an essence, though in the fourth quarter up or down and then I was just wondering with the buyback any thoughts on timing or are you guys considering NSR and does this change.
Leverage targets and anyway. Thank you.
Yes, let's start with them as to know.
No I wouldn't I wouldn't call anything extraordinary unusual in the third quarter, usually what's unusual or what the analysts like yourself like to call out of the real estate, which was almost a de minimis in the quarter. So nothing there and obviously, we had a year over year headwind. When you look at real estate gains we had some significant gains last year and the.
I didn't have that this year.
No look to fourth quarter, we always have seasonality and this is.
This is around a number of areas in our business when I look at engineering, the extra costs related to the winter.
Vacations start to the capital teams once they go off vacation on do they caissons start to hit all the expenses we had.
We have DNA seasonality in the fourth quarter. So I would expect some year over year improvement and I must know ended the fourth quarter.
When you exclude the real estate from from last year. They are so we'll see we'll see an uptick in emmis Uno sequentially, but still year over year improvement, excluding the real estate gains from last year.
What was the follow up question.
Just about the buyback in timing and leverage targets all that yeah, I think we're going to evaluate the buyback program Gemini talk mostly I think as we get more visibility but.
Ability in the markets here as we get more.
Get more clarity around the pandemic in the implications there.
Clearly 202.9 billion of cash is not what we need to operate our business. So I'd expect that to trend down in the next year.
So I would you should expect us to be back in the market.
Thank you.
Our next question is from Brian Ossenbeck with JP Morgan Your line is open.
[noise] hi, good afternoon. Thanks for taking the question, it's Kevin one more for you how are you viewing the opportunities in the land portfolio with with gains pretty much minimal here the rest of the year and you're going to elaborate on some of those recurring revenue streams that youre Valuating. If you look at this this book of business are there more ways to grow in the future.
And convert traffic off the highway with maybe leveraging some of Atlanta for the industrial development projects.
Absolutely we're in great conversations actually just had the opportunity to hire a new head of our real estate group I'm very very excited about what she's going to drive your at the company's hit the ground running here in the last few weeks.
But she's working really closely with Tom or with Mark's team under the industrial development side, and identifying areas, where we might be able to locate whether its warehousing other other opportunities whether its us investing in those assets or or partnering with others no.
I know how to do it so that's a great opportunity for us in terms of the real estate sales. We have I mentioned it on my prepared remarks, we have a great pipeline these things.
These things, we're not going to we're going to sell when the time is right. When we can maximize value, but there is.
But there's there's still a robust pipeline it'll probably be lumpy from here.
I'm pretty excited about what we have in store over the next few years. There are these things tend to take time to get to the close but we're working pretty hard on that area and then just on the recurring revenue side is something that I've asked the team to really focus on over the next six months, whether it's like electronic billboards, whether it's more fiber and.
I think we can do to leverage our real estate portfolio.
These are great great opportunities and once you sign these contracts. They they continue you get revenue every year after year. So it's really.
It's really we were there one of the largest landowners.
In the eastern United States, we should leverage that as much as we can and so I've challenged the team to go out and do that and I think they're doing a good job so far.
Thanks, Kevin appreciate the update on that.
The next question is from Chris Wetherbee with Citi. Your line is open.
Hey, Thanks, good afternoon guys.
And you have an interesting chart operating leverage and it really shows how much the resources have flattened out even as volume has continued to improve kind of coming out of August into September.
In October.
Separately is there a point with volume growth that you feel like there will be a step function higher and.
These resources or can you continue to maintain do you feel like you have capacity with the resources. They are operating right now even if volumes are ticking up ticking up Jim as you mentioned here in the fourth quarter.
Well clearly as a.
It's a two part question, which I think Jamie answered a second ago.
We've got a ton of capacity and available to availability to bring on more business from a physical infrastructure perspective without spending any capital to do that.
But you know you're not going to you're not going to grow the business forever.
Without having to add additional employees, mainly because we have you know funds of locomotives in storage and all of that so the question is with your operating performance.
When do you get to the point, where your train length gets to the point were long enough or heavy enough, where you need to split that train and when you split that dream you need to have the additional employees to utilize in order to be able to operate it.
And so we're we're moving into.
We're moving into a new.
Uh huh.
Level now.
But what you've seen.
Over the last few years and what was highlighted.
In great detail.
In the last few months is today, we can do things from a staffing perspective. The railroads in appears could do if you would have had that listen I've been doing this a long time, if youd had this kind of traffic surge across the rail network in North America, four or five years ago. We.
Would be now talking about gridlock across all the major cities in the country and we wouldn't be doing anything and now with the climb in common mindset of how you run a railroad we're able to respond we're able to pivot. We are nimble we can add capacity, we can shrink capacity we can.
Rightsize, our business and we can do that much more effectively and much more logically and thoughtfully add.
And God I hope, we get to the days sooner the better, but we've got to start hiring more and more people because the business has grown and grown and grown and marks just knocking them out of the park.
Every single day.
But.
In the meantime, we're not a big assets as Jamie said, when we don't need them, but the minute. We do we talk about that on your five times a day the minute. We do we'll we'll put them on so we can move the freight.
Okay got it thank you.
The next question is from Bascome majors with Susquehanna. Your line is open.
Yes. Thanks for taking my question, Kevin I want to go back to an earlier question can can you refresh us on your comfort level with leverage given some of the uncertainty on either tax policy economy et cetera, you know with that buyback what are the guardrails of the upper ends that you're watching for it.
Perhaps tap the brakes once you start once you start buying stock again.
Look as I talked about we have 3 billion of cash on our balance sheet. So I've got a I've got to get through that before we ever even.
I would think about leverage and.
Plus we're generating significant amount of cash at this point. So when you looked at the algorithm that we can create with that and.
It's quite compelling you know where we are on a leverage standpoint, we're in a great position. We we didn't go under stress during this a significant decline in the second quarter.
We had access to capital, which is what we always want to have with our strong investment grade rating. So thats important.
And you want to be at a point, where you can always have the ability to be opportunistic and so I think where we are today allows for that flexibility.
The opportunity arises we can react and.
You know.
Leverage the opportunity when is when is there. So I think we're quite comfortable today with where we are where we are.
Thank you.
Our next question is from Justin long with Stephens. Your line is open.
Thanks, and good afternoon.
So headed into this year, you had talked about some irregular year over year headwind, Kevin I know you had called out DNA lower gains on sale.
The state sales other revenue I know, you're not giving guidance on 2021, but just from a high level are there any unique items like that that we should be modeling or do you think next year, it's more that a clean year, where we should see the underlying operating leverage in the business play out.
Yes, I mean, we'll obviously get more into that.
On the next call here, but depreciation would be is a similar headwind to what we have right now.
But I would also point out are you know depreciation relative to our Capex is probably the smallest gap of you know.
In the industry right there so.
Probably not the step up that we saw this year on the depreciation side, we don't have any significant.
Life study that created a headwind this year.
Real estate taxes.
We will continue to be a headwind into next year.
Probably around the same level it was maybe a little bit.
Less of a headwind going into next year inflation.
We think inflation remains relatively modest no significant pickup there.
Which is which is good outside of that as we get into it on an.
On the next call, we'll highlight any other things that come up.
Okay and based on your comment about DNA being pretty close to Capex. It sounds like your expectation for 100% free cash flow conversion isn't going to change in the near term.
We are we are very focused on our free cash flow conversion.
Okay I'll leave it at that thanks for the time.
Our next question is from David Ross with Stifel. Your line is open.
Yes, good morning, gentlemen.
A lot of good stuff to talk about but I wanted to talk about what are the lingering pains in terms of coal.
What's the latest on inventory levels and outlook I think Kevin you had recent comments at an industry conference about.
Maybe getting flat comps in 2021, so any more color on coal would be helpful.
Yes sure David.
So.
Well just stick to domestic coal or who are you interested in export is world.
Give it all to me.
Perfect.
Let's start with domestic gets larger as part of our core business.
You know the stockpiles right now to your question or.
Our add or below.
Sort of averages both in the north and in the South.
No.
We have seen.
Good good summer for burn I was kind of hot.
In both north and south so the stockpiles did did.
The Ministry bed.
Gas prices Nat gas prices, we saw them creep up to two to 50 or so they came back.
He came back down now they are back up to the mid to high twos, we'd like to see them above a two.
280 to really.
The economics work for the utilities to really start to burn does burn more coal I'm really encouraged by sort of the November contract and the forward curve into 2021, as we see it above three bucks, which is which is quite encouraging so hope.
Hopefully you know that that continues and we can expect to move more coal going into a into the into the new year.
And in Q4, and the back half for Q4 on the export side. So.
Start with Matt.
Matt right now is it's actually about 75% of our export portfolio that used to be about 60% was about 60 40 65 35, but now it's about 75 met 25 thermal most of that met is going to Europe.
The 5%, 30% Asia the benchmarks as you know have been challenged.
We saw some some restocking in the quarter.
India and Brazil.
Fortunately the Chinese quarters on Australian coal has been a headwind is that keeping the benchmark prices low and it's offsetting some of the outputs for for our US coal. So we've had some issues there coupled with monsoon season and.
Obviously, the the Covance situation has really impacted.
Industrial production worldwide. So.
But but mostly the met side of the business has really been a price story.
More than a volume story.
Different on the thermal side, it's really been a volume story a third.
30.
Our thermal coal about 75% of that thermal coal goes to Asia.
Mostly India with some to Morocco was well no longer any coal going to Europe, which used to be a big OLED for us, but we have no thermal coal going in Europe. These days.
Two has been a headwind it was under 60 bucks for the quarter.
India, the covert situation in India, It really impacted a lot of the volumes there however, things.
Our picking up and we should see some increased volumes.
In the fourth quarter, and we'll see what happens is as the Covance situation plays itself out going into next year.
You know at the beginning of the year, we provided some guidance on what our export coal we see.
We said, we were going to be somewhere around 30, low thirtys million tons for two.
For 2020, My Best guess right now is we will be right up 30 million tons for the.
For the year.
Thats helpful around the world color. Thank you very much.
Mhm.
Our next question is from Jordan Alger with Goldman Sachs. Your line is open.
Hi, Bob.
You talked about sort of the last thing efficiencies and the structural changes.
Maybe I missed it a little but I was wondering if you could perhaps.
Give some further examples of what some of these changes are that has allowed metrics such as car cars processed per hour, so well frankly, just keeping headcount flat while volumes.
Here sequentially. So I know you talked about the structural changes I'm, assuming an estimate the operating plan and things along those lines, but.
Yes ill provide additional.
Additional color around that would be great.
Thanks for the question Jordan.
I guess some of the easiest ways I can put it as we.
Constantly analyzing the plan. So this is you think about the cars switched per man hour.
I go out with a number of my team members and we take a look at different terminals and good question, what we do and how we do it and and change the way we do things just because that's the way. It's always been done doesn't mean, that's how you do it and those are kind of the guidelines when you think of schedule railroading. So.
Were you know some yards you may have switched cars one.
One way, we've been able to find different ways of switching cars that made a more efficient.
And I mean, that's that's an ongoing process that we're always going through you think about a network as complicated as CSX can be we have cut.
Hundreds of terminals and yards in different areas, where we switch box cars, we probably have some of the greatest opportunity to make those changes and continue to make those changes as we move forward.
And then when you think about the the service plan.
With respect to growing our train size well, we said it earlier that we were blessed when we got here three and a half years ago that we have a plant that was built beyond what it needed to be and it wasn't necessarily being run in a P.S. Our method. So we have been able to.
Increase or train sizes move traffic better when you think about our train miles we've reduced our train miles significantly just by moving traffic in a bit.
In a better pattern. So as we continue to find those opportunities and they're still out there we still find them each and every day. The team is evolving everyday with respect to how we're plan works and how schedule railroading continues to develop.
Those different efficiencies you're going to you know, there's there's more and more opportunity as we continue forward.
To find those opportunities to move things better quicker and more reliable for a customer.
Thank you for the color.
Our next question is from Jon Chapelle with Evercore ISI. Your line is open.
Thank you good afternoon, everyone, Hey, and they spend a lot of time on a sustainable operations and you have the slide you added the SG recognition.
Mark as you're talking to customers and when we think about this is this just a nice to have for US right now maybe some investors open up a new investor base or is this really starting to move the needle in your conversations with customers that are as it relates to their total freight wallet or are those conversations still just service price.
One question no I think yes. She is really gone from a talking point to having a real world impact now.
Especially with their customers and so you know.
Several of our customers and several negotiations.
No.
Sitting down and really peeling back and showing them everything that we have done at CSX over the last number of years, we've been a leader in this space for a very long time and.
As Jim said in his opening remarks, you know, we're very proud of our leadership position, there and being recognized by the Wall Street Journal another.
Jones sustainability index, and others, and we're opening up having those discussions with customers and showing them that clearly.
Our safety performance is a big discussion there as well.
And you know I can tell you one of the major major contracts that came up for bid. This year one of the big factors was that really want us to business was on was it was around SGN safety and Jamie nice.
Spend a lot of time with this customer talking both these things.
And it's a it's having a real impact I would tell you also as customers looking especially some of the big shippers out there retail shippers as they look to their efficiency targets and their.
Targets to mission targets.
Taking trucks off the highway given all the efficiencies that Jim talked about are real and they can move more traffic.
Yes.
And take trucks off the highway that clearly leads to them achieving a lot of their efficiency metrics and so.
Real World impact real world negotiations and it.
And it's paying off.
Specifically in many deals that we've we've looked at this.
We've looked at this year.
That's great to hear thanks for the insights right absolutely.
Next question is from David Vernon with Bernstein. Your line is open.
Hey, guys. Thanks for taking their time, Mark I wanted to talk a little bit about intermodal.
What you see in the pipeline over the next three years, that's going to put you guys in less.
In less than a position to maybe take what the truck market gives you more of a physician to maybe improve the product.
Right and infrastructure level, a channel level like as you think about.
What you guys are investing in the animal side what is it what is it that's in the pipeline that you're excited about its going to get you, maybe a little bit better than market growth in that in that market.
So let me talk about.
You know the market then I'll ask Jamie to talk about some of the efficiencies that they're working on in the terminals because his group or.
As the intermodal terminals and and so we'll see.
Listen we.
We really like we love the intermodal business.
We think there is a lot of growth in though as I've said before.
Before I think this is this a intermodal space is one where we can continue to.
You know grow faster than the economy repeatedly every year and so we're doing a lot of different things working on a lot to do new different products with customers looking to take more share off the off the highway really talking about the benefits of of intermodal.
We have a lot of customers out there and we're working with them in a different shippers on the benefits of converting that freight E com.
Ecommerce is obviously, having a very big.
Impact on our business and we like that business and we think it's going to continue to grow here in the future and so we're thinking differently about things that we need to do going forward and position ourselves to capture a lot of that ecommerce growth in the future.
With that Jamie do you want to talk about the efficiencies and the journals our terminals.
Again, we've got a we've got terminals that I think.
I think probably overbuilt for the time when they are built and we're actually getting to utilize them to a maximum.
An unbelievable intermodal team led by Marcello Strada, and Scott motion and their team.
Been able to.
Number of years here put automated cranes and technology with X gate allow.
Allowing truck drivers to flow freely in and out of our terminals, giving us opportunities to use GPS cranes to operate economists Lee in some areas. So we've we've been able to bring our dwell times down over the past couple of years.
Bye.
From up over 24, 26 hours down to 15 to 14 hours in some circumstances of origin dwell that's significant when you turn your traffic over in these terminals you gain space you, a you're able to handle more and and the traffic volume that's come our way we haven't.
Hit a bottleneck.
We're definitely inviting more and more to come through the gate and looking forward to it.
Our next question comes from everybody Shanker with Morgan Stanley. Your line is open.
Hi, Thanks, Good evening, everyone Kevin.
Kevin maybe start off with you you, obviously, how the high quality problem of having more cash than you know what to do with.
So maybe you can share some of your thoughts on the M&A environment, you've seen some of your peers.
Make investments and and infrastructure assets, both three in related and adjacent to it.
Do you have any opportunities out there on this and kind of did you do you expect the movement that anytime soon.
Jim maybe as a follow up on the E. G question, obviously, very exciting and very encouraging to see that come up so much but.
But you get the sense that in shippers are looking to move from truck to rail on a structural basis or are they seeing real it's somewhat of a stop gap until we get to electrified crossed some sort of figure out how do you make these EPS GKN sticky.
I, Let me answer your second question first.
Absolutely.
It's.
It's significant it's a significant change when major major.
Customers.
Users.
Of the logistics supply chain globally.
Begin to make.
Public commitments.
To reducing their carbon footprint.
To be able to walk in the door and say.
I can help you do that.
Correct I might even be able to make you get it to your targets about it like a decade early.
Because you know I'm, 75% cleaner.
Then all these trucks you got run around out there.
And I'm just as reliable.
The good news was we couldn't do that.
If there was SG 10 years ago, or whatever we weren't that we weren't reliable enough you wouldn't be that have this kind of conversation so that.
Timing of our service offering coming together with a real.
Not just PR, but a real commitment globally to people to want to be able to do this.
It is creating a lot of opportunity.
For us in all all all lines of our business.
And and.
And we want to be.
Is environmentally responsible as we can be and so you know to the extent, we moved coal people don't like that but to the extent that we can be a huge player in other lines of business and be a.
Facilitator for improvement from a climate perspective.
That's a great news for us.
Before I'll, let Kevin follow up a little bit, but you know.
On the M&A issue.
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We've got a we've got a tremendous amount of as I said earlier I can't remember what the reason for the.
The question was you know, but from an M&A perspective as it relates to rail.
To the extent that we now have a.
A common focus and a common purpose across the rail.
Network as individual entities it is.
It is opening up great opportunities for us to work together to further become more effective and efficient is we.
Interchange traffic with one another as we do business areas.
As we understand our systems and we have a chance for information we want another better than we did before all with the sole purpose of being able to grow the business on a network basis.
It creates the capabilities for the individual companies to achieve a lot of the benefits and the synergies that before everybody thought well. The only we can do that has gotten spend a couple of hundred billion dollars to buy some other railroad.
Yeah, No. We don't look like we're much much much smarter than that than what we used to be.
And so we're eagerly pursuing all of those kinds of opportunities today.
With the sole purpose because it makes us better.
Competitors individually as individual railroad companies and as an industry.
Yeah and to add to that Robbie I think you're right in terms of our cash position today. We're in a position of strength gives us a lot of opportunity first to invest in our business.
It's been exciting as we've gone through our capital program, we're still going through that for next year in the years ahead.
We're finding some really good opportunities on some really high return investments and so.
That that's going to be the first priority for our cash going forward, but.
But as we sit here today.
You know I would point out to you know we just we just finished a quarter, where if you look at it.
Intermodal for the first time contributed the most to our revenue profile and coal was at least.
In our history, so on a percentage of our revenue over the lease has ever been and intermodal has been the best and we did 56 nine.
Here, we are in a position of strength gives us a lot of opportunity to invest in our railroad.
Well look at anything that will strengthen our franchise over the next few years. So.
I'm excited about looking at those opportunities and.
You know driving value for us.
Great. Thank you.
Our next question is from Walter Spracklin with RBC capital. Your line is open.
Thanks, very much good afternoon, everyone I want to turn to Mark if I could ask you about volume visibility I know when when the pandemic really hit in March that visibility tighten up quite a bit and was difficult to see.
See directionally, which buoyant wherever which we were volumes were going other than down at the early.
The early period.
Period, and then Jim you mentioned, obviously, the big rebound Mark when you look at and speak your customers now.
How would you how would you characterize that visibility I know you touched a little bit on coal.
Touched on intermodal, which some of the opportunities. There can you can you go through a few of the others and just directionally indicate whether that visibility is improving.
As you go to 2021 or is it really a coin toss here as to which direction. It goes kind of on a on a broad segment by segment basis.
No. Thanks Walter.
Great question I think.
Clearly the visibility we had when the bottom fell out sort of in Q2, when the when the economy shutdown.
No they didn't send no.
Notes to us or E mails to us and saying you know we're we're close.
We're closing it was kinda overnight things just tanked.
Tanked.
You know as as things are coming back you know our job has been and you know even while the pandemic was going on and.
The sales and marketing team, we're working from home, we meet as a priority to stay close to our customers checking you know on zoom teams and all the fancy a video conferencing technology.
Everyone had laptops and computers at home and phones and.
We made as a priority.
Already for them to stay close.
And really figure out you know to the best of what they could tell US you know.
We could relay that information to.
To to GBM team, but you know he was it was a challenge for them to even though things were so dynamic things were changing so rapidly.
You know it was a it was very tough to pinpoint them and you know when the volumes came back he was a snap back literally.
Literally within you know.
Within days and weeks and so it was very hard to know when we were you know our auto business was was effectively you know you'd open up the morning revenue reported numbers zeros.
And then a you know a week later boom the plants are reopening and they said were going to one shift.
For probably for a month and then you know we'll tell you when we're going to go to two and then a couple of days later, they say, which were one or two or three.
Right away and it was like worldwide. So we have to react pretty quickly to that and it was a it was a challenge.
Two weeks ago, we had they are 50 customer engagement forum.
We did it usually.
Customers come here to Jacksonville for a day or so.
We talk to them about whats going on in their markets and their business and share ideas. We did this by by Zhou meeting, let me spend a lot of time Jim was there.
Myself, and Jamie and really listening to a lot of their questions and their views on on on what they think is probably is going to happen likely to happen.
And you know I would say most are cautiously optimistic.
As we head into the back half of Q4 and into 2021, there's no visibility in some markets I mean clearly intermodal.
We know what's happening there and we've got some pretty good visibility you know we closed we talk to our channel partners in the ports and our international Steamship lines and clearly, there's they're seeing a lot of strength in those markets and the best visibility. They have now as you know, we see continued strength and replenishment.
And you know Chinese new year and deep into Q1 as I said earlier, so from that perspective good core.
Caller touched a battle I talked about a little bit earlier, and wont rehash that but clearly in your markets or our dynamic there and we'll see what happens with natural gas domestically, but the world markets clearly have a have an impact on our export business and for merchandise no I mean.
Well the people are watching.
What's what's going on there still remains many risks right. The pandemic you know what's going to happen with the pandemic theres. Other geopolitical factors that were monitoring extremely closely you know the election is coming up in a couple of weeks you know government stimulus.
You know the as we said to you the effects of the pandemic and on their workers and everyone's watching that I mean, we're heading into the fall and into the winter people are concerned if the keys to spike again, we'll be able to continue producing and then the health of the overall economy.
And what's that going to look like as we head into the end of the year and into next year. So.
Visibility is murky theirs.
It's been a challenging year.
Probably something that none of us have ever seen in our careers before but you know our job is to continue to stay close and provide as much clarity as we can to to gimi and the team. So that were prepared to handle the freight when it comes back.
Okay, that's great color I appreciate it.
Our last question is from Jason Seidl with Cowen Your line is open.
Thank you operator, and guys appreciate the opportunity to bat clean up here.
Jim You mentioned something that a treat me you mentioned about railroads now working more together than they have in the past I was wondering if you can give us. Some examples of what you guys are doing now and also do you see more of that in the future as some of your other partners go more through the lifecycle of PSR.
Sure, what Jamie might be able to jump in with a little bit.
Exactly you know again.
You basically have basically have or have had.
A group of individuals that worked together for years and years and years.
Built this.
Model.
More efficiently and effectively and reliably runs a railroad company and they are now in one way shape or another.
Having a significant influence on how those companies operate and we're you know we think of ourselves obviously as standalone entities, but we want to work together from a <unk> IND.
Industry perspective.
So that we can grow the business, it's not about forcing unnatural gateways to move traffic farther in outer route. So maybe you can make an extra $12.50 per car by all in something 500 miles longer and at the end of the day. When you do when you have business practices like that you drive all business.
I thought the railroad and in it moves by truck. So at the end of the day with a narrow focus like that.
You shrink and shrink and shrink and shrink and shrink and cutting cutting cutting shrink and shrink so.
We're all about growing the business and to grow the business by working together as a network 50.
50% of the business.
Originates on somebody else or terminates on somebody else so I'm.
I'm not an island and so I think that's the.
That's the ammo going forward.
And it's not a foreign concept when you talk to the other railroad executives, whether its muted or Jamie or mark or whether its anybody else in the organization.
There's a there's a much greater sense of urgency and a much greater focus on customer service and I think there has been in the past.
And hopefully that did not not only continues but hopefully we'll begin to.
Good better and better and better at that so we can become.
More relevant in the transportation marketplace and grow the you know what that today.
The overall share of our pursuit of our transportation spend is a very very small so we want to we want to get to we want to get bigger.
Just.
Jim nailed it down when you when you.
When you have a partner that things like you and acts like you. It sure makes it a whole lot easier to do business with them.
Always have we had issues over the years with interchange points travel.
Traffic could get locked up their customers didnt have visibility between railroad railroad. So as we as we continue to to have partners around us who are getting better and better at what they do.
You know what it makes a big difference for our customers and it helps to grow the industry. So it's exciting to to work with.
Some of the Western Rhodes, who are really starting to come around to work with us and of course, the Canadians I know the game. So it makes a big difference when we can all flow together.
I appreciate the color and time is always gentlemen, thank you.
And this does conclude today's teleconference. Thank you for your participation on today's call and you may now disconnect your line.
Thank you everyone for participating.
Yes.
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