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CSX Corporation (CSX)

Q2 2018 Earnings Conference Call

July 17, 2018 04:30 PM ET

Executives

Kevin Boone - IR

Jim Foote - CEO

Frank Lonegro - CFO

Analysts

Amit Mehrotra - Deutsche Bank

Ken Hoexter - Merrill Lynch

Brandon Oglenski - Barclays Capital

Tom Wadewitz - UBS

Chris Wetherbee - Citigroup

Scott Group - Wolfe Research

Brian Ossenbeck - JPMorgan

Matt Reustle - Goldman Sachs

Allison Landry - Credit Suisse

David Vernon - Sanford Bernstein

Justin Long - Stephens

Walter Spracklin - RBC Capital

Ravi Shanker - Morgan Stanley

Benjamin Hartford - Robert W. Baird

Bascome Majors - Susquehanna International

Cherilyn Radbourne - TD Securities

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation’s Second Quarter 2018 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions]

For opening remarks and introduction, I would like to turn the call over to Mr. Kevin Boone, Chief Investor Relations Officer for CSX Corporation.

Kevin Boone

Thank you, Amber, and good afternoon, everyone. Today -- with me on today's call is Jim Foote, Chief Executive Officer; and Frank Lonegro, Chief Financial Officer. On slide 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on slide 3.

With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Jim Foote

Thank you, Kevin. Well, it’s great to be with you this afternoon. Thank you all for joining our call. In order to get started, I guess, the first way to kick it off is, the press release that we put out says it all, record financial results. These results are due to the hard work of all CSX employees, who, I can tell you, are really excited about what has been accomplished. We will all celebrate a little bit tonight and then it's back to work tomorrow and continue to drive change to fully realize the potential of this company.

Before I turn to the slides, let me comment on a couple of key initiatives. First, safety. We intend to be the safest railroad. In May, our new Chief Safety Officer, Jim Schwichtenberg joined the company. Schwich comes to us with 20 years of railroad experience, including almost 10 years with the FRA. I'm confident that he can bring new approaches that will drive an improvement in our safety performance.

Also in May, we engaged DEKRA, a highly regarded expert in helping companies improve their safety performance. A comprehensive safety assessment is underway and I expect positive changes to materialize as a result. The entire organization is committed to being the best in safety.

Second, we recently announced the appointment of Mark Wallace as Executive Vice President, Sales and Marketing. I have known Mark for a long time and his ability to lead, combined with more than 20 years of scheduled railroading experience will allow our sales and marketing team to work more effectively with our customers and drive profitable growth.

Diana Sorfleet will take over most of Mark’s former portfolio, assuming increased responsibility as Executive Vice President and Chief Administrative Officer. Diana in her role at CSX’s Chief Human Resources Officer has built a big -- has been a big part of our transformation by driving a more productive and engaged workforce. Her new responsibilities, which will now include technology and labor relations provide a significant opportunity to drive a more focused organization.

Now to get to the slide, let’s turn to slide 5 and start with our results, two words I think sum up everything, great performance. Just like the first quarter, there's nothing unusual in these numbers. They're very straightforward. EPS increased 58% to $1.01 versus last year’s adjusted EPS of $0.64. The new lower tax rate and lower share count, down 6% contributed to the significant year-over-year increase.

Our operating ratio improved 490 basis points to a record 58.6% compared to last year's adjusted OR of 63.5%, clearly the lowest ever for CSX and I believe the lowest ever by a US railroad. The significant year-over-year improvement in our results was driven by 6% top line growth, combined with price and lower costs, pretty much across the board with the exception of fuel. Revenue increased 6%, as price, fuel surcharge, supplemental revenues and a 2% increase in volume, all contributed to positive growth this quarter. Similar to recent trends, we did see slight improvement in pricing this quarter, excluding coal.

Quick look on the next slide on the business segments, each were -- which were positively impacted by higher fuel and price. In chemicals, strength in industrial products, plastics and crude by rail was partially offset by our fly ash losses, which we discussed last quarter. Auto saw strength based on North American US light truck production, which was up 5%. In Forest Products, lumber, panel, wallboard and paper products all increased in the quarter. In metals, shipments of sheet, steel and construction related field products drove increases. Fertilizer’s revenues as I have mentioned previously were mainly lower due to the Plant City facility closure last year.

And in the coal markets, export coal remained very good during the quarter and showed healthy gains. Utility coal continued to weaken. On the intermodal side of the business, growth continued to come from the international markets with domestic relatively flat on a year-over-year basis because of the line rationalizations that we went through in the fall of 2017. Other revenue declined $58 million or declined due to a $58 million of liquidated damages, which was in last year's results, which did not repeat this year. Excluding that item, we saw gains in supplemental revenue, including demurrage. We continue to work with customers to create a more fluid network, especially as we approach the fall peak season.

On slide 7, let’s take a quick look at some of the key operating metrics that this team is focused on. Train velocity increased year-over-year and on a sequential basis. Terminal dwell saw an 11% year-over-year and 7% sequential improvement. While we drove improved velocity in dwell, train length increased on both a year-over-year basis, 13% and sequentially, 5%. Let me tell you, improving all three of these metrics at the same time is no easy task. Finally, car miles per day showed low double digit improvement on both a year-over-year and sequential basis. This is a good measure of asset efficiency and our ability to effectively turn our assets. The improvements we saw in these metrics clearly translated into our financial results.

Read the rest of this transcript on seekingalpha.com