CSX Corporation (CSX) CEO James Foote Presents at Cowen 15th Annual Global Transportation & Sustainable Mobility Conference (Transcript)

Sep. 07, 2022 1:56 PM ETCSX Corporation (CSX)
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CSX Corporation (NASDAQ:CSX) Cowen 15th Annual Global Transportation & Sustainable Mobility Conference September 7, 2022 10:00 AM ET

Company Participants

James M. Foote - President & Chief Executive Officer

Conference Call Participants

Jason Seidl - Cowen and Company, LLC

Jason Seidl

Hi, everyone. Welcome back. I'm Jason Seidl, Cowen's Senior Transportation Analyst. With us today, Cowen is honored and pleased to have CSX. Representing CSX is Jim Foote. Jim, we want to count you in here with one of your favorite songs by AC/DC, as well promised. So, Jim is CEO of CSX. And he's going to answer some of those great questions investors have on their minds.

So, Jim, why don't we get started and really talk about one sort of larger theme that we've seen developing. It's about movement of freight on the international intermodal side, from the West Coast to the East Coast. We've seen it in some of the numbers coming out of some of the ports lately, especially like Savannah. There's been expansion plans over the last couple of years, some investors are frustrated with what's going on to the West Coast ports. Can you talk a little bit about what you're seeing? And how relevant do you think this is for your growth in international intermodal?

James M. Foote

Well, first, Jason, it's great to be here today. Thank you so much for the opportunity to participate today. 15 years, I guess you said it was, so congratulations on a great conference. The transition from the West Coast ports to East Coast ports has been going on for a number of years gradually, over time, whether it be due to the shift in trade patterns, in and out of Asia and other parts of Europe, whether it was the expansion of the canal.

And so as the build up on East Coast ports occurred that became a much more interesting proposition for the Eastern railroad CSX, in particular. And then over recent years now with the stress applied to the West Coast ports, whether it be from the demand driven, with higher imports, disruptions associated going back to you name it, many different factors, a lot more of that traffic found it more easier and sometimes more predictable to move to the East Coast port.

As you said, the port in Savannah, the port of Georgia, those guys did an amazing, amazing job of positioning themselves to be there to help. And then as that trade begins to make the East Coast ports, the first port of call [ph], it just becomes more conducive for more inland freight to come available to move into say we've got Atlanta big market for us, Chattanooga, big market for us, our new CCX terminal big opportunity for us, New York, New Jersey inland moves big opportunity for us. So it's been an evolution over time that's been accelerated by the pandemic, so -- but I don't see it going away.

I think we'll see more and more opportunity to come in through the East into Chicago, which again, is we're -- we got a great network, great configuration to move traffic and narrow service, intermodal service has been off the charts throughout the pandemic. So we're excited about the opportunity and expect it to be long-term in nature.

Jason Seidl

Well, that's good news for investors, for sure. Do you foresee any need for additional infrastructure, whether it be in and around the ports, or at CSX themselves to handle that additional influx of freight?

James M. Foote

The ports have been doing a very good job, whether it be in -- again, up and down the East Coast. Savannah, again, in particular has done well Charleston has done well. Virginia is doing good. Baltimore has put in a ton of infrastructure, New York, New Jersey have made changes whether it be bridges, et cetera. So there's been infrastructure improvements at the port. And I know there are more planned in the future. And there's available capacity in and around the ports to make that happen where that might not be the case, say in LA Long Beach.

Our infrastructure is in great shape. And from a track capacity standpoint, we don't really have any issues. We've made and we will continue to make investments in our terminal operations. Chicago is an example. One of the reasons we were able to keep our gates open every single day for the last 2 years by some other struggle was we plan to have overflow capacity, whether it be in our Bedford Park or 59th Street terminals. And we'll continue to focus on doing that as the outlook continues to be very positive for us.

Jason Seidl

That's good to hear. Let's talk about a different type of sort of "infrastructure" and more bodies, if you will, that seems to be all in the headlines, whether it's across the country or rail specific. Rails, obviously found themselves a little bit short handed and in more aggressive hiring mode earlier in the year. A couple of questions. So where are you at versus your original plan for this year in hiring and how's it going? And then, when you look at sort of the headcount issue that the rails has had in one age 2022. How much blame would you put on the lack of headcount for some of the service disruptions across the rail industry?

James M. Foote

Well, I can't really speak for the industry, but I can speak for CSX. And I think everyone would agree with me, maybe there's some a little piece here in there, which was not caused by labor, but without a doubt. I mean, we were -- at CSX, in particular, we were running at record numbers in terms of velocity load dwell, on time performance, trip planning compliance, in 2019 and into early 2020. And fully expected that those trends would not only continue, but the overall performance of the company would continue to improve.

When we were faced with the very difficult decision to have to reduce our headcount, when basically, the world shut down. It looked like the markets were going to collapse, and circuit breakers were popping every single day and it was crazy times. We did what normally we do is what again, difficult decision, but we began to furlough employees, fully expecting that the trends, the practices that had worked for the railroad industry for years, when the business volumes returned, when auto production went back to full time, and all of the other businesses returned to full time production, we would recall our employees and we would pick right up after a short period of time.

We would pick right back up where we were, and we did not anticipate the lingering effects of the pandemic on our workforce. Some of them were concerned about returning to work. Remember, we didn't have vaccines, we didn't have anything. We're all just out there, fighting the zombie apocalypse every single day, trying to figure out how to keep things moving. And our employees did an amazing, fantastic job.

And then, I don't know that the great resignation was in our vernacular, that employees would want to not return or those people that had long-term seniority would choose to decide to do something else. And then this amazing global phenomena of trying everyone, trying to get people to return to work, which is not isolated to the railroads in any way, shape or form. It's everything. School bus drivers in Chicago, they still can't figure out how they're going to get the kids to school. Look at the airline industry and how they're just trimming capacity in order to try and right size their flights to the available people.

So we've worked and we've worked and we've worked, are we behind. Obviously, where I thought we would be even a year ago when if normal trends had persisted, we would have been able to staff up quickly and keep things moving and returned to normal very quickly. But in terms of where we are today, versus say what we said early in the year, getting back to our headcount of 2019 of 7,000 employees, and that's active people working, available to work, not just people in training, but available to work. We said we'd get back to 7,000. We're over 6,800 today, with another quarter to go. So the only thing that could impact us not achieving that number is that I can foresee right now is another kind of crazy variance that would cause the number of employees to be off with COVID. So we're gradually, gradually improving service metrics show at velocity shows it, dwell shows it, on time performance shows it. So it's a grind, it's been really tough, but we're showing a continuing to show progress.

Jason Seidl

I'm glad that's the case if we see the numbers here, and that's always a good thing and you’re a 1,000%, right. It's across the board and many, many industries downright to the -- so the local pool lifeguards, we don't have enough in the summer. I want to make sure that I give investors a reminder that you can ask questions in the chat, just go in there, I will see them and I can call them out, or alternatively, you can email me at jason.seidl@cowen.com.

One of the stick [ph] to sort of that gradual improvement on service, because I think that's something that's not only deeply needed for your customer base, but also as you deal with the regulators, sort of in all my years, I don't think I've seen more, for lack of a better rail [indiscernible] STB than the one that we have right now. So what are the implications of the STB and some of their actions that you've seen on the industry? And what really can they do?

James M. Foote

What can they do? That's a good question, Jason, you tell me. Listen, I don't -- I clearly don't think our regulators, whether it be on the safety side, whether it be on the STB side, they're dealing with a once -- or once in a century phenomena just like we are, and they're trying to make sure that they're -- they do their job, which is to make sure that railroads provide the appropriate level of service to our customers. And I think every railroad CEO and I have said many times, we're not -- we're doing the best job under the circumstances that we can, we're improving, we're getting there.

And so most of the rhetoric around this has been centered on service issues. Trust me, I enjoy dealing with the STB. I think it's -- I think I enjoy especially Mr. Oberman Chairman, Oberman. He's a tough guy to do business with. Comes from Chicago, just like I do. Don't bring a knife to a gunfight, that's his motto, too. So, he's been extremely -- they've been extremely fair. They've been tough. Never would have thought we would go through what we did in order to acquire the bankrupt Boston and Maine. But we got it done. So it's not -- this is not a walk in the park. They expect us to do our homework. And if we don't do it, right, they tell us to go back and do your homework over again.

So they listen, they're fair. And there are some -- there's some pretty significant policy issues that need to be resolved out there. And -- but I think the railroads and CSX, in particular, we've been through this before, and we have to be on top of our game in order to have what we consider to be the appropriate and fair outcomes.

Jason Seidl

All fair enough. Let's switch gears a little bit and talk about rental pricing. So well over a decade, rails have been able to outpace in some cases, well outpace rail cost inflation. But this is an environment that in my 24-year analytical career that I've never seen, right? We have real strong inflationary pressures. It's not only against the railroads, it's against everybody that's out there. Is this going to sort of break the track record for the railroads being able to sort of, or CSX specifically, being able to push through price increases that cover your rail inflation costs, just because of timing?

James M. Foote

Well, I think our pricing power is very good, but it's clearly tied to the level of our service. It's extremely difficult to go in and speak with a customer about, hey, we need a rate increase, because XYZ the prices went up when the guys ordering 100 cars a week and we're delivering 60. So, as our service comes back, we'll be back in a position where we can make the appropriate adjustments and recover appropriately at a level above our costs. Whether or not -- and we're not in the some transportation trades where you can have a $4,000 rate from Shanghai to LA and suddenly it's $25,000 to do that overnight. We work, we have long-term commitments and relationships with big customers and we've -- we consider ourselves more than as partners in their business.

But, yes, long-term trends, I don't see them. In fact, I think the future for rail transportation for so many different factors is more positive that it's been, maybe forever with ESG, with the growth, with the on shoring, with everything that bodes well for rail to be more relevant. And the key factor -- number one, the key factor is I couldn't make that statement, if I didn't have 100% confidence that this railroad service levels are going to get back to where the reliability is equal to what a truck is.

When we have equal levels of reliability to truck service, I believe we’ve -- still have a tremendous amount of opportunity to grow the business, grow volume and demand, you know, appropriate prices for doing that. We're still -- we will still -- we are still significantly cheaper than a truck. And if you have equal levels of service, that's a good place to be in from a business that wants to grow.

Jason Seidl

Well, it's interesting, you mentioned being cheaper than truck and also ESG. And that response, we just put out a note on if you saw it this morning, talking about sort of the ESG opportunity at the railroads. And then we really studied, we just picked the lane and studied it. And we calculated that the rails are about when you factor in drayage [ph] moves are about 3.3x more fuel efficient. So, shippers were looking to do that. Can instantly sort of improve their carbon footprint if they switch over from truck to rail, if they can. So …

James M. Foote

Yes, we have continuing in growing conversations with our customers all the time where they have sets -- they have set targets, whether they're science-based initiatives or whether it just internal targets in order to reduce their carbon footprint. Rail clearly is a relatively easy way for them to achieve those targets.

Jason Seidl

And is this coming up more and more within actual contracts as ESG and of language -- of ESG being put into those or is it just in the discussions right now?

James M. Foote

I think it's in the discussions. I think it's more -- I think it's call it in the contract negotiations, but the contract negotiations are they want to go more from truck to rail. And -- but I think as we evolve, whether your industry or again, the regulators or someone says you need to do X, Y and Z, you have to document these things, you have to prove it. Don’t just tell me -- just don't tell me you're going to meet the Paris Accords, by planting a bunch of trees proven. And so, we and our customers are evolving in a way so that we can measure it. And they can -- and they could feel justifiably proud of the efforts that they're making.

Jason Seidl

Can you talk about any of the tools you might have to help customers sort of prove it, if you will?

James M. Foote

Well, proving it is, again, we're working on a lot of things in order to measure. We've had -- again, we've had rudimentary calculators on our website for years, and you could prove how much fuel you were saving. But now we need to get down into the point of proving to the ton, whatever it might -- whatever measure you want to use and have it being supportive. So, I think our customers and the railroads and probably all forms of transportation are working on these initiatives simultaneously.

Jason Seidl

That's some great color, Jim. I wanted to switch the conversation a little bit about going forward. CapEx largely set for '22. Directionally what are we looking at for '23? I know it's not out yet. And then about sort of use of funds, if you will, the rails have always done -- and yourself a great job of splitting it up between share repurchases and dividend expansions. Do you see that changing with some of the new regulations that are coming out in 2023 per share repurchases?

James M. Foote

No, I don't think that's going to have really any kind of a meaningful impact on our overall strategy and our split between -- first of all, we don’t have an overall strategy in terms of what we think is the appropriate thing to do with the uses of our capital. We spin off a lot of cash. In the first call on that is reinvesting in the railroad. And we're really proud of the job that we have done over the last 3, 4 or 5 years here in terms of building the railroad, adding capacity, reinvesting in the infrastructure, which shows very, very good safety, performance, industry leading safety performance.

So we're not going to back away ever from making sure that the railroad is properly maintained, and we have the capacity to move whatever freight comes along. But after that, at the end of the day, we still have this and looking at innovative ideas in terms of projects that provide very high returns, whether that be in technology, whether that be in adding capacity for us to be more relevant from a transport [ph] perspective. So a lot of different initiatives there. But then when you're done with that, we will continue to analyze each and every year, what's the appropriate level of split between dividends and share buybacks. And the surtax is not going to have a meaningful impact in how we make those decisions.

Jason Seidl

That's good to hear. I wanted to sort of talk a little bit about sort of outlook, if you will, a little bit of near-term, a little bit of longer term. So what are shippers telling you right now about peak season in your expectations? And you [indiscernible] earlier talking about how they've seen a lot of inventory buildup, probably going to be impacting peak season? And then what is your overall economic outlook? Because that's the $64 million question. I think on every investor's mind, whether they're looking at the railroads or anything else in the stock market these days?

James M. Foote

Well, again, it's kind of we seem to always be trying to look through the fog, right. And I mean, you have to look at what is -- what's going on when the policy in the U.S., it seems to be elsewhere is to slow the economy -- slow economic growth one could come to the inclusion, well, Jim, they're doing everything in their power to slow economic growth. What do you think? Is there going to be slower economic growth? I would say, yes, well, probably, they're putting every kind of pressure they can to slow things down to get inflation under control. So in that backdrop, every customer that I speak to says, yes, same thing. Yes, they're trying to slow economic growth. And then they go like, yes, but Jim, I want you to move more freight.

So if you guys could build it, we'd ship more by rail. So we have this kind of dynamic ongoing, where we clearly over the last -- we're not up against the market, like railroads usually are. I think Warren Buffett used to say, if you want to know what's going on in the economy, look at the railroad car loadings. The railroad car loadings really don't reflect the demand. So as we get back towards the end of the year, our service levels get back to where they should be, we get up against the market a lot closer. So when a customer wants 100 cars, we deliver 100 cars, then we can start to have a better sense for what the outlook appears to be for us going forward.

In the meantime, yes, everybody is kind of in a wait and see mode, trying to figure out what's going on in the world, what's going on in the U.S., what's going on with the economy. And yes, there are clearly adjustments up and down in inventory, there are clearly, I mean, just look at housing clearly is impacted by higher interest rates. Everybody sees that overnight, it used to be auto sales were going to be impacted by higher interest rates, right? Well, there's such a pent-up demand because of the problems with the chips over the last couple of years. I don't think everybody is looking down for a slow year [indiscernible]. So we have all of these different variables out there that are not necessarily -- history is not giving us a lot of help in [indiscernible] as I said earlier, see through the fog.

Jason Seidl

But it sounds like once service improves on the rail side and Warren Buffett statements probably is returns to accuracy.

James M. Foote

Warrens never run.

Jason Seidl

That's true [indiscernible]. I'm an investor here, full SEC disclosures, [indiscernible]. So let me get to some questions here. I know we have at least one or two that have come in. So question number one, if you start growing volumes the way you want to, are you going to need to step up CapEx, especially on locomotives and rail cars in order to meet the volume growth?

James M. Foote

Locomotives, no. We've had a very consistent program in place for years now, again, in terms of rebuilding and refurbishing and modernizing our locomotive fleet. So we have a very solid locomotive fleet and have -- and will have when our cycle times and our velocity returns back to 2019, '20 -- early 2020 levels, we will continue to have locomotives in store. So we're good there. Rail cars -- rail cars, one thing about rail cars is there hasn't been a high-level of investment, and they age out. So we'll be making investments in certain equipment. Most of it is made by our customers for their own fleets, but we will be making investments in equipment that is driven by growth opportunities, growth initiatives as well as the fleet just aging out over time. But trust me the way with the financial performance of the company today, there's no real question. It's in terms of is that a smart investment from a return standpoint.

Jason Seidl

Real quickly, my follow-up on that, Jim, what areas on the railcar side do you need to invest in right now? So what sort of part of the fleet is aging out?

James M. Foote

Oh, really, the boxcars is the area. And again, we see a strong demand. But the other thing is, as we go from a say a 50 foot to a 100 ton boxcar, I mean, the productivity, the performance is very strong. It's good for us, it's good for our customers. So again, the good -- the great investments, [indiscernible], plus we have a number of new facilities, plants that will be coming online on our network. Not so much '23, but it'd be '24 and beyond. And then we've got like everything else in the world, we've got to make sure we get in the queue. Because it's not like you can go out and buy something automatically today, it's like the grocery store shelves, or they're going to have what I want today or not.

Jason Seidl

One more question. And I just got the timing alert here, we'll squeeze it in. [Indiscernible] mentioned some weakness in the consumer. What are you specifically seeing on that side of the aisle?

James M. Foote

As I said earlier, yes, there is -- you just have to read the headlines every single day about whether or not inventories, what's going on with what's going on with Walmart, Target, Amazon, you name it. I mean, they're all talking about slower growth. But again, we're still anticipating that we're going to have a reasonably good end of the year with consumers sitting on how many trillion dollars in cash. There's no span and still buy and it's amazing what a stake costs these days and you can't get in a restaurant. So things are slowing, but the disposable income is still relatively strong, gas prices are coming down. So there's, yes, it's again, the fog trying to look through that, but [indiscernible] all pieces of our business based upon the strength of CSX, I'm very optimistic for the future.

Jason Seidl

I can tell you this much that that my kids saw no slow down in spending for their back-to-school session. That's for sure.

James M. Foote

Right.

Jason Seidl

Well, listen, on behalf of myself, my team and the rest of Cowen, Jim, thank you so much for coming in. It's been an honor and great to have you and thanks to all the investors for listening in.

James M. Foote

Thank you, Jason. Good to see you too.

Question-and-Answer Session

Q -

[No formal Q&A for this event]

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