CSX Corporation (NASDAQ:CSX) Q1 2024 Earnings Call Transcript April 17, 2024
CSX Corporation beats earnings expectations. Reported EPS is $0.46, expectations were $0.45. CSX Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matthew Korn, Head of Investor Relations. You may begin your conference.
Matthew Korn: Thank you, Brianna. Hello everyone and good afternoon and welcome to our first quarter earnings call. Joining me this afternoon are Joe Hinrichs, President and Chief Executive Officer; Mike Cory, Executive Vice President and Chief Operating Officer; Kevin Boone, Executive Vice President, and Chief Commercial Officer; and Sean Pelkey, Executive Vice President and Chief Financial Officer. In presentation accompanying this call, you will find slides with our forward-looking disclosure and our non-GAAP disclosures for your review. With that, it is now my pleasure to introduce Mr. Joe Hinrichs.
Joe Hinrichs: All right. Thank you, Matthew. Hello, everyone. Thank you for joining our first quarter call. CSX had a solid start to 2024 that was in line with our expectations. I’ve learned that when it comes to routing, it never really is an easy quarter. And this year has already brought us a number of challenges. Thankfully, we have a great ONE CSX team of over 23,000 people. And as you’ve seen in our weekly volume performance, our railroad has kept moving forward after the early periods of severe weather in January. The latest incident, of course, has been the tragic Francis Scott Key Bridge collapse. CSX had a deep historical relationship with Baltimore and we have important operations there, particularly with our export coal business.
We’re committed to doing our part to help the city recover. We are happy to see the progress already being made for reopening the port. Later in the call, Mike Cory and Kevin Boone will tell you more about what we are doing now to mitigate the impact of this event for our customers. All that said, we are very pleased with the momentum that we built over the quarter and are seeing in the business today. We knew we had the opportunity to grow our profitability compared to the fourth quarter and we did just that. Our goal was to maintain our strong customer service levels while looking for ways to run the network more efficiently and we have done so. We have more work to do and we are confident in our railroad and are excited about the rest of the year.
Now let’s start with Slide 1 where we highlight some of the key results from our first quarter. Total volume grew by a solid 3% with strong support from our international — our intermodal business franchise, which grew at 7% compared to last year. Our operating margin reached 36.8%, which represents a 90 basis point improvement compared to the fourth quarter. Revenue of just under $3.7 billion was about 1% lower than a year ago and flat compared to last quarter. Operating income was 8% lower than last year, but up 3% sequentially. While our earnings per share declined by 4% versus last year, EPS grew by 2% compared to the previous quarter. Now altogether, this was a good first quarter that reflected our solid progress. The entire ONE CSX team knows that there’s much more that we can achieve given all the opportunities ahead and the great people we have across the entire railroad.
But before we begin, I’d like to take a moment to recognize and remember Jim Foote, who passed away earlier this week. Jim was our President and CEO from late December, 2017, until I arrived in September of 2022. He guided this company through some very challenging and transformative times in our history, including rebuilding the network after the dramatic changes in 2017 and dealing with the COVID pandemic. I had several impactful and insightful conversations with Jim while I was being recruited to come to CSX. And I thank Jim for his support with our Board of Directors to bring an outsider in as CEO of CSX. We thank Jim for all his contributions to CSX and the railroad industry overall throughout his 40-plus year career. And our thoughts and prayers go out to his family and friends.
Now let me turn the call over to Mike Cory who has brought a tremendous amount of new energy and new ideas to CSX to discuss our operational performance.
Mike Cory: Yeah, thank you, Joe, and thanks for everybody for taking the time to be with us today. So let’s look at the first slide on safety. While we found improvement in the FRA train accident rate year-over-year, in my view, our overall performance results in this quarter pale in comparison to what this team is capable and will deliver. So as a team we’ve begun to really work collectively to elevate and integrate the beliefs and actions that a strong safety culture requires. We recognize that in order to successively change our safety performance, we need different and better skills. This includes proactive risk identification for our employees and their supervisors. And we thoroughly investigate every incident to determine the root cause and the necessary follow-ups for any recurrence.
And we pass that information on to our employees through portals to ensure the information is shared, learned from, and used in improving everything from training to oversight of all our employees. [Technical Difficulty] employees in both the union and their management provide a key opportunity to build a strong safety culture. We’re starting to partner with our union leaders to help us change risk tolerances across our property. And this partnership is starting to provide real benefit toward creating a strong safety culture. This takes time and effort on all sides, but I’m very pleased with our progress so far. We’re also listening to our employees’ suggestions and we’re applying it to our safety plan in order to become more responsive to our customers’ needs in a safe and efficient way.
Let’s look at the next slide. And looking at this slide, you’re going to see our standard velocity and dwell metrics that I’m sure we’ll talk about today. Our focus this quarter has been on providing strong customer service while controlling costs. And while we’ve seen a slight decrease in velocity and an increase in dwell, our train sizes have grown in line with the increase in volume we’ve handled for our customers year-over-year. Crew starts have remained flat with GTMs up 1.5% and carloads up 3%. Our cost focus also includes management of the large capital program we have our engineering crews working on. And we’re focused on making sure they have enough time for the work to be done properly. As a result, our crews are accomplishing all of their scheduled work and are also gaining efficiency.
In both [tie] (ph) and rails, we’ve seen reductions in unit costs, good reductions. As we’ve enforced stricter compliance with planned track time for crews, we’ve seen slight decreases in velocity increases as well. Our intent is to build and execute a more inclusive plan that provides the right work window while minimizing loss of velocity. And I expect to see improvement as we continue to refine and develop this plan for the rest of this year cycle and beyond. Our focus on cost has also identified some strategic locations that are not as productive as they could be. We see cost saving opportunities by reconfiguring and strategically utilizing these assets into our operating plan. This will reduce cars running out of route and excess handlings, and our customers will benefit as we increase speed and open up capacity in one of the corridors.
And that’s the most important part. It is we make these changes to our operation. There’s no change to our goal of servicing the customer the best way we can. Having an efficient network that can consistently perform to our customers needs will allow us to gain share, and build business from truck and attract new customers to rail. Over to the next slide. On this slide, you’re going to see some of our customer service metrics, which still remains strong. Intermodal trip plan compliance remains high. Truck drive return times and arrival to availability, which is a measure of efficiency at the yard, has also improved as we collaborate with our customers to improve the experience of their terminals. As an example, our Fairburn terminal, southeast of Atlanta, is a critical asset for our domestic intermodal business, but has not performed to our customers’ needs as well as our expectations.
Our intermodal leader put together a team and they developed better process for use of both the footprint and the assets, in turn creating fluidity that has reduced driver dwell at Fairburn by nearly 50% in recent weeks compared to earlier in the year and previous to that. This leads to capacity and more opportunity for conversion from truck. Our carload trip compliance declined slightly, but remained over 80% for the quarter and has improved in the first month of Q2. We’re very proud of the service that our customers experience with CSX. To show this, we’ve added another important metric to this slide, and that’s customer switch data, which represents our reliability to be able to deliver on our commitments at the first and last mile of service for our customers and most of our short-line partners.
As you can see, this remains very high. In closing, we have many opportunities ahead of us. The team is focused on creating a climate of success for all involved. Our focus on safety, service, and efficiency won’t waver as we continue to provide the best service product we can for our customers. With that, over to you Kevin.
Kevin Boone: All right, thank you, Mike, and good afternoon everyone. The team continues to build momentum with our customers, targeting modal share conversion and quickly bringing solutions to the market that target profitable growth. Our ability to react quickly and provide solutions for our customers was highlighted by our efforts in Baltimore, where we rapidly stood up an alternative solution to meet the intermodal needs of the community. Despite a continuing weak truck market, the team has done a great job focusing on developing new opportunities, including truck to rail conversion, industrial development, working closer with our rail partners to identify joint opportunities and accelerating strategic discussions that allow our customers to benefit from our best-in-class service.
Communication and collaboration between sales and marketing and operations is a key differentiator for CSX. Our recent voice of the customer survey results for the first quarter shows the highest service scores since we began the survey, which highlights the positive trajectory that we are on. Let’s turn to Slide 7 to look at our merchandise performance. Our merchandise revenues were up 1% compared to last year with flat volumes and a 1% increase in RPU as contract renewals and slightly favorable mix more than offset the effect of lower fuel surcharge. Across the business lines, automotive accelerated nicely after a slow start at several manufacturing plants. Chemicals, our largest market continues to gain momentum in plastics, food, and NGLs. Forest product volumes were flat overall but saw encouraging signs in pull board and building products as the construction season appears to be off to a stronger start.
We told you that minerals face a tough comparison for aggregates, which were unseasonably strong in the first quarter of 2023. But total demand is very strong against a healthy backlog of large construction projects with infrastructure spending expected to accelerate. Metals volumes were a bit weaker year-over-year with the weather affecting flows in certain scrap markets. Finished steel has also been a bit sluggish, but we see opportunity for sequential improvement in the back half of the year. Fertilizer volumes continue to be unimpacted by phosphate production issues here in Florida, but an early application season in certain markets supported demand for longer-haul, higher-yield shipments of potash and other fertilizers, which lifted our RPU.
Finally, our ag and food business remains relatively soft, constrained by a strong global soybean supplies, which limit demand for US exports and still high availability of local crops in many of our customer regions. Underlying demand across grains, feed, and food products is solid and we’re optimistic challenging conditions will normalize into the back half of the year. Turning to Slide 8. For the first quarter, coal revenue was flat year-over-year as 2% volume growth was offset by a 2% decline in all-in RPU, largely due to fuel surcharge. Our benchmark-based export yields were slightly lower compared to last year, but we also got some benefit from favorable mix on the domestic side. As expected, shipments reflected the strength in export markets with export tonnage up 25% year-over-year.
It really is a testament to the great work by the team, including the credible work by operations to meet the increased demand. We also anticipated that the domestic market would be challenged by low natural gas prices and lapping last year’s restocking demand. Domestic shipments for the quarter were down 17% against a very tough comparison in the first quarter of 2023. With Baltimore and the effects of the collapse of the Key Bridge, I’m going to stress how important our partnership is with the city. As Joe noted before, we have a long history with Baltimore, going back to the very beginning of our railroad. And the ONE CSX team is working hard to find alternative solutions to help the community and our customers. In terms of the revenue impact to CSX, export coal will see a near-term headwind with both our Curtis Bay facility and the dual-serve console marine terminal that are unable to load vessels.
Two days following the incident, Joe and I joined senior leadership from CSX to visit key alternative export facilities. We have already begun to divert a portion of our Baltimore volumes to other outlets. Currently, we estimate that the net revenue impact to CSX from the port closure is between $25 million and $30 million per month, including the benefit of diverting some of these tons. It’s still very early in the remediation process, but the Army Corps of Engineers has projected that the full channel depth, which we need for coal vessels to be reopened by the end of May. It’s also likely that you see a good amount of congestion immediately after reopening, but there’s potential for it to take a few weeks to ramp back up to full run rate.
In the meantime, we are studying in communication with our customers, business partners, state, local, and federal authorities. We are working closely with Mike and his team to make sure we are optimizing all available resources to serve our customers as successfully as possible. Turning the intermodal on Slide 9. Revenue increased 1% on 7% volume growth. Lower fuel surcharge and negative mix pulled our RPU lower by 5%. Growth was very strong for our international business as healthy consumer demand and more normalized inventories have supported higher import levels. We saw volumes increase year-over-year with many of our shipping partners as we gained from new contracts, new lanes, and a comparison with last year’s weak market conditions. We are very encouraged by the recovery we are seeing and continued positive demand signals as we look over the rest of the year.
Our domestic intermodal business also grew over the quarter at a more moderate pace than what we’ve seen over the last couple of quarters. What’s been constant is our service performance, which continues to help us win new business and drive truck conversion even as the weak truck market conditions persist. We’re optimistic that truck capacity will normalize in time, even benefit the intermodal market. More importantly, we are confident that we will be prepared when the demand rebounds. Finally, let’s turn to Slide 10, where we have an update on our industrial development program. Our project pipeline remains strong with hundreds of companies eager to partner with us to find attractive ways to expand their production capacity on rail surf sites.
Something that’s often overlooked is how diverse these development projects really are. The chart on left shows the market split. Based on potential carload volume or the approximately 100 facilities that have come online over the last 12 months, these new sites and expansions represent $4.2 billion in total capital investment and have added new capacity in many of our key markets such as chemicals, minerals and forest products. But this is only scratching the surface. The chart on the right shows the market split for the full development pipeline ranging from projects we anticipate starting up later this year to project proposals that will be constructed several years from now. There are two key takeaways from this forward-looking view. First, the total estimated potential carload opportunity measured by expected capacity implies a meaningful acceleration in activity as we look-forward.
Scopes can change and timelines can shift, but the setup is very encouraging for meaningful growth contribution over multiple years. Second, the long-term pipeline is also diverse. We are excited about the multiple electric vehicle manufacturing facilities that are scheduled to come online over the next several years. When combined together with related raw material or battery facilities, they represent approximately 12% of the total long-term volume potential. Minerals, metals, chemicals and other projects represent larger contributors. This is a big opportunity for CSX and our industrial development team has been working non-stop to build the partnerships that make all of this possible. We’re excited to tell you that there’s much more to come.
With that, let me turn it off — let me hand it over to Sean. Thank you.
Sean Pelkey: Thank you, Kevin, and good afternoon. First quarter revenue fell by 1%, while operating income was down 8% or $110 million. These results include a number of discrete items versus the prior year with approximately $140 million of impacts from last year’s insurance recovery, changes in net fuel, as well as declines in other revenue and export coal pricing. Across merchandise coal and intermodal, revenue excluding fuel recovery increased 4% in the quarter, benefiting from 3% volume growth and strong pricing across the merchandise portfolio. Expenses were 4% higher and I will discuss the line items in more detail on the next slide. Underlying results reflect continued momentum generated by the ONE CSX team, both in our service-driven top-line performance and broad-based cost-control and efficiency initiatives.
Q1 was our second consecutive quarter of sequential operating income growth despite a $30 million net fuel headwind relative to Q4. In addition, sequential operating margins grew nearly 100 basis points, demonstrating this team’s focus on growth and efficient service performance. This momentum positions us well to deliver year-over-year gains in the back half of 2024. Interest and other expense was $9 million higher compared to the prior year, while income tax expense fell $25 million on lower pretax earnings net of a slightly higher effective rate. As a result, earnings per share decreased $0.02, including $0.05 of impact from the previously mentioned discrete items. Let’s now turn to the next slide and take a closer look at expenses. Total first quarter expense increased by $85 million.
Turning to the individual line items, labor and fringe increased $75 million, mostly impacted by inflation, higher headcount, costs from union employees’ sick pay, and higher incentive compensation. Even so, cost per employee was down versus the fourth quarter, and we expect cost per employee to again be favorable sequentially in Q2. Total headcount should remain stable despite higher seasonal volumes. Purchase services and other expense increased $23 million, which includes a $46 million impact from a prior year insurance recovery. Efficiency gains evident on this line represent significant cross-functional collaboration to drive sustainable cost improvements across both operating and overhead budgets. We expect this momentum to continue going forward.
Depreciation was up $17 million due to a larger asset base. Fuel cost was down $39 million, mostly driven by a lower gallon price. Progress continued in fuel efficiency, which improved year-over-year and saw smaller than normal seasonal degradation from Q4, despite severe winter weather earlier in the quarter. Finally, equipment and rents increased by $2 million, while property gains were unfavorable by $7 million. Now turning to cash flow and distributions on Slide 14, free cash flow of $560 million is lower year-to-date, driven by a decrease in net earnings, increased investment in the business, and deferred tax payments, partially offset by prior year back wage payouts. CSX exits Q1 with a healthy balance sheet and an A-rated credit profile.
Our first priority remains investing capital towards safety, reliability, and long-term growth. CSX also distributed nearly $500 million to shareholders, split between share repurchases and dividends, demonstrating our balanced but opportunistic approach to returning excess cash. We also believe a long-term focus on economic profit aligns our interest with that of our shareholders. While first-quarter economic profit declined due to previously mentioned discrete headwinds, we expect it to increase over time as we efficiently convert freight off the highway while maintaining strong asset utilization and attractive returns on our capital spending. Now with that, let me turn it back to Joe for his closing remarks.
Joe Hinrichs: All right. Thank you, Sean. Now, we will conclude our remarks by walking through our guidance for the full year 2024, which has not changed. Led by our customer service, we continue to expect total volume and total revenue growth in the low to mid-single-digit range. We expect our merchandise business to gain momentum through the year as effects from new business wins, truck conversions, and the ramp-up of industrial development projects build on a favorable trends in many of our end markets. We look for steady growth in intermodal, supported by stable consumer demand and more normalized retail inventories, which are driving improved port activity. We continue to work closely with our channel partners, finding creative solutions to gain share even as the truck market remains soft.
Global benchmark coal prices have fluctuated but remain high compared to history. And though the situation at the port of Baltimore limits some of the export volume in the near term, we are taking actions to effectively mitigate as much of the impact as we can. Our team at Curtis Bay and across the rest of the coal franchise will be ready to ramp back up as quickly as possible once the channel returns to full operation. On profitability, we made good progress this quarter and grew our operation margins — operating margin sequentially. And as you saw in our results and heard from the team on this call, we benefited from volume growth, solid pricing gains, and focused efforts to improve efficiency and productivity. Our goal is to consistently grow our margins over time.
And while Baltimore and global coal prices are near-term challenges, we feel very good about our ability to deliver strong incremental performance in the second half of this year. There is no change to our CapEx forecast of $2.5 billion. And as you heard from Sean, our balanced opportunistic approach to capital returns remains in place. To conclude, during the quarter, where there were many potential distractions, I am very proud of how the ONE CSX team stuck to our plan, focused on execution, prioritized our customers, and achieved good results. There is much more to come as we make every effort to run safer, faster, and more reliably for our customers so we can deliver profitable growth over the long term. Thanks to all of your interest in the company and, Matthew, we’re ready to take 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 on this call has an opportunity to take part, we ask you to please limit yourselves to one and only one question. Brianna, we’re ready to start the process.
Operator: Thank you, Matthew. Your first question comes from Justin Long with Stephens. Please go ahead.
See also 30 Countries with the Highest Vulnerable Employment in the World and 35 Countries with the Lowest Poverty Rate in the World.
To continue reading the Q&A session, please click here.