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CSX Corporation (CSX)

Q3 2018 Earnings Conference Call

October 16, 2018, 04:30 PM ET

Executives

Kevin Boone - IR

Jim Foote - President and CEO

Frank Lonegro - CFO

Mark Wallace - EVP for Sales and Marketing

Analysts

Allison Landry - Credit Suisse

Chris Wetherbee - Citi

Brian Ossenbeck - JPMorgan

Amit Mehrotra - Deutsche Bank

Ken Dexter - Bank of America Merrill Lynch

Thomas Wadewitz - UBS

David Vernon - Bernstein

Brandon Oglenski - Barclays

Scott Group - Wolfe Research

Justin Long - Stephens

Matt Russell - Goldman Sachs

Walter Spracklin - RBC

Ravi Shanker - Morgan Stanley

Matthew Majors - Susquehanna Financial Group

Cherilyn Radbourne - TD Securities

Ben Hartford - Robert W. Baird

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2018 Earnings Call. [Operator Instructions]

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

Kevin Boone

Thank you, Shirley, and good afternoon, everyone. Joining me on today's call is Jim Foote, President and Chief Executive Officer; Frank Lonegro, Chief Financial Officer; and Mark Wallace, Executive Vice President for Sales and Marketing. On Slide 2 is our forward-looking disclosure followed by non-GAAP disclosure on Slide 3.

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

Jim Foote

Great. Thank you so much, Kevin, and thank you everyone who is on the call.

We are very excited about the strong performance of the railroad. Incredible things can be done by incredible people. The CSX workforce is proving every day that they are not going to back a backseat to anyone when it comes to running a safe, customer focused, and efficient railroad.

I want to give a special shout out to the operating team that positioned our effort out of harm’s way in advance of the recent hurricanes. And to Ricky Johnson and all the engineering folks that did an amazing job in getting us back up and running with minimal delay in the aftermath of both storms.

Before moving to third quarter results, I’d like to comment on a few initiatives we worked on in the third quarter. First, we made changes to the organizational structure on our operating apartment, which pushed more real time, decision-making to the field. Our management team has embraced the change and I am encouraged by the early positive results and momentum it has delivered.

Second, we announced new major initiatives at our Northwest Ohio Intermodal terminal. This facility functions has a sorting facility under the previous hub and spoke strategy. We will now leverage this app tech and its important strategic location as a traditional Intermodal terminal to drive new revenue opportunities.

As part of our plan, we are working with NorthPoint Development to establish a logistics park adjacent to the terminal. This logistic center will require no capital from CSX. We also announced the new haulage agreement with BNSF. That enhances western access to the facility. And we are working on expanding access from these coast ports. I believe these initiatives will drive long-term growth opportunities to CSX.

Now, let’s get to the results. I said it last quarter, and I’ll say it again today. Two words sum up everything, great performance. Nothing unusual, again, these numbers are straightforward. EPS increased 106% to $1.5 versus $0.51 last year. Operating income growth of nearly 50%, combined with the lower tax rate and 6% fewer outstanding shares contributed to the significant year-over-year increase.

Our operating ratio improved 970 basis points to 58.7, a substantial improvement and a record third quarter for CSX. The operating results are highlighted by 14% complex growth including 4% volume growth, combined with lower expenses despite much higher fuel costs.

Let's turn to Slide 6. Revenue increased 14% at volume, price, fuel surcharge and supplemental revenues all contributed to positive growth this quarter. Looking at the business segment, each was impacted by positive price and fuel recovery. Merchandise revenues grew 12% this quarter, helped somewhat by lapping some of the service issues last year. Nearly every end market saw a double digit increase with the exception of Fertilizers, which was impacted by a previously-disclosed customer shutdown.

I am encouraged by the broad-based growth across this portfolio. Coal revenues increased 14%, with strength in our export business offsetting domestic utility weakness. We also saw good growth in our steel and industrial business. In Intermodal, we saw a growth from both price and volume. Finally in other revenues, similar to previous quarters, we saw an increase in supplemental fees including demurrage.

On the next slide, Slide 7, let's take a look at our safety performance. The safety of our employees is my number one priority. As you can see on these charts, we made some good progress this quarter, and we need to sustain this momentum. The personal injury rate this quarter is encouraging but we must improve by training accident rates.

As I had mentioned, we have an initiative way to drive further improvement. We have a strong turn-up by employee in our recent safety survey, which is a good sign of employees' involvement. I will continue to prioritize safety above everything else and expect us to make further progress.

On the next slide, Slide 8, on the efficiency and service slide. Train velocity and dwell both saw improvement - significant improvement over last year. And they're also much better than last quarter, velocity improved 28% and dwell improved 26% both on a year-over-year basis.

Cars online continues to trend lower, down almost 14% year-over-year despite volume increasing 4%. This really shows the improved asset utilization we are achieving. And you can see our trip plan compliance. This is a very important measure as it reflects not only the railroad's operating performance but most importantly, how we are performing from a reliability standpoint for our customers. We have seen an improvement of 26% from the first quarter to the third quarter this year. And we just started measuring this in 2018. While we have made good progress, there is plenty of room to improve.

Now, let me hand it off to Frank who will take you through the financials and operating improvements in greater detail.

Read the rest of this transcript on seekingalpha.com