CSX (CSX) Earnings Report: Q2 2015 Conference Call...
Transcript of CSX (CSX) Earnings Report: Q2 2015 Conference Call...
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
CSX(CSX)EarningsReport:Q22015ConferenceCallTranscriptThefollowingCSXconferencecalltookplaceonJuly15,2015,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
DavidBaggs;CSXCorp.;VP,Treasurer,IROfficerMichaelWard;CSXCorp.;ChairmanCEOFredrikEliasson;CSXCorp.;CFOOscarMunoz;CSXCorp.;President,COOClarenceGooden;CSXCorp.;ChiefMarketingOfficer
OtherPart icipants
BrianOssenbeck;JPMorgan;AnalystChrisWetherbee;Citi;AnalystTomWadewitz;UBS;AnalystAllisonLandry;CreditSuisse;AnalystRobSalmon;DeutscheBank;AnalystThomasKim;GoldmanSachs;AnalystBillGreene;MorganStanley;AnalystKenHoexter;MerrillLynch;AnalystBrandonOglenski;Barclays;AnalystJasonSeidl;CowenandCompany;AnalystMattTroy;Nomura;AnalystBenHartford;Baird;AnalystCherilynRadbourne;TDSecurities;AnalystDavidVernon;Bernstein;AnalystJohnLarkin;Stifel;AnalystBascomeMajors;SusquehannaFinancialGroup;AnalystJeffKauffman;BuckinghamResearch;AnalystScottGroup;WolfeResearch;AnalystDonaldBroughton;AvondalePartners;AnalystCleoZagrean;Macquarie;AnalystRickPaterson;TopekaCapitalMarkets;AnalystTylerBrown;RaymondJames;AnalystJohnBarnes;RBCCapitalMarkets;AnalystJustinLong;Stephens;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodmorning,ladiesandgentlemen,andwelcometotheCSXCorporationsecond-quarter2015earningscall.Asareminder,today'scallisbeingrecorded.
(OperatorInstructions)
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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Foropeningremarksandintroduction,IwouldliketoturnthecallovertoMr.DavidBaggs,VicePresident,Treasurer,andInvestorRelationsOfficerforCSXCorporation.
DavidBaggs (VP,Treasurer,IROfficer):
Thankyou,Shirley,andgoodmorning,everyone.Again,welcometoCSXCorporation'ssecond-quarter2015earningspresentation.
Thepresentationmaterialwe'llbereviewingthismorning,alongwithourquarterlyfinancialreportandoursafetyandservicemeasurements,areavailableonourWebsiteatCSX.comundertheinvestorssection.Inaddition,followingthepresentation,awebcastandpodcastreplaywillbeavailableonthatsameWebsite.
Thismorning,ourpresentationwillbeledbyMichaelWard,theCompany'sChairmanandChiefExecutiveOfficer,andFredrikEliasson,ourChiefFinancialOfficer.
Inaddition,OscarMunoz,ourPresidentandChiefOperatingOfficer,andClarenceGooden,ourChiefMarketingOfficer,willbeavailableduringthequestion-and-answersession.
NowbeforeIturnthepresentationovertoMichael,letmeremindeveryonethatthepresentationandotherstatementsmadebytheCompanycontainforward-lookingstatements.
YouareencouragedtoreviewtheCompany'sdisclosuresandtheaccompanyingpresentationonslidetwo.Thedisclosureidentifiesforward-lookingstatementsaswellastheuncertaintiesandrisksthatcouldcauseactualperformancetodiffermateriallyfromtheresultsanticipatedbythesestatements.
Inaddition,attheendofthepresentation,wewillconductaquestion-and-answersessionwiththeresearchanalysts.Withapproximately30analystscoveringCSXtoday,andoutofrespectforeveryone'stime,includingourinvestors,Iwouldaskasacourtesyforyoutopleaselimityourinquiriestoonequestionand,ifnecessary,aclarifyingquestiononthatsametopic.
Withthat,letmeturnthepresentationovertoCSXCorporation'sChairmanandChiefExecutiveOfficer,MichaelWard.Michael?
MichaelWard (ChairmanCEO):
Well,thankyou,David.Goodmorning,everyone.IampleasedtoreportthatyesterdayCSXannouncedsecond-quarterfinancialresultsforitsshareholdersthatincludedall-timeCompanyrecordsforoperatingincomeandoperatingratioaswellasearningspersharewhichwere$0.56,upfrom$0.53reportedin2014.Overall,significantoperatingefficiencyhelpedoffsetyear-over-yeardeclinesinrevenueandvolume.
Startingwiththetopline,revenueinthequarterdeclined6%to$3.1billion.Pricinggainsweremorethanoffsetbylowerfuelrecovery,achangingbusinessmixanda1%volumedeclineaswecycledlastyear'sdemandsurge.
Atthesametime,wehavetheresourcesinplacetomeetcustomerdemandacrossthenetwork,supportingimprovedserviceperformanceandoperationalefficiency.Thatefficiency,coupledwithlowerfuelprices,helpeddecreaseexpensesby9%anddeliveredall-timerecordsinoperatingincomeat$1billionandanoperatingratioof66.8%forthequarter.
Weexpectservicemomentumtocontinueasweprogresstowardtherecordservicelevelswesawin2012and2013.Thatserviceisthefoundationfordrivinglong-termgrowthandvaluecreationforourshareholdersasitalsosupportsourabilitytopricetothevalueofrailtransportationandproduceever
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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moreefficientoperations.
NowI'llturnthepresentationovertoFredrik,whowilltakeusthroughthetop-andbottom-lineresultsinmoredetail.Fredrik?
FredrikEliasson (CFO):
Thankyou,Michael,andgoodmorning,everyone.Letmebeginbyprovidingsomemoredetailonoursecond-quarterresults.
Revenuewasdown6%versustheprioryear,drivenmainlyby$183millionoflowerfuelsurchargerecoveries.Atthesametime,theimpactofnegativebusinessmixandlowervolumewereessentiallyoffsetbycorepricinggains.
Volumedecreased1%fromlastyearwithlowcommoditypricesimpactingcoalandcrudevolumesandsomeofourmerchandisemarkets,particularlymetals,beingchallengedbythestrongUSdollar.Corepricingcontinuestoimprovesequentiallyandforthequarterwasup3.5%overalland3.9%excludingcoal.
Otherrevenueincreased$46millionversustheprioryear.Theprimarydriverwasacyclingofabout$20millionnegativeimpacttothein-transitreservelastyear,coupledwithapositiveimpactthisquarterfromasimilaramountasnetworkperformanceimprovedsignificantly.
Expensesdecreased9%versustheprioryear,drivenmainlybytheimpactoflowerfuelprices.Ourongoingfocusonefficiencydrove$45millioninproductivitygainsinthequarter,whilelowervolumeresultedin$32millionofcostreductionversuslastyear.Inaddition,werecordeda$17milliongaininthequarterassociatedwiththesaleofanoperatingrailcorridor.
Operatingincomeexceeded$1billionforthequarterforthefirsttimeinCSX'shistoryandwasup2%versustheprioryear.Lookingbelowtheline,interestexpensewassimilartolastyear,whileotherincomewasfavorableaswecycledenvironmentalchargesfornon-operatingactivitiesfromtheprior-yearperiod.
Andfinally,incometaxeswere$334millioninthequarter,reflectinghigherpretaxearnings.Theeffectivetaxratewasabout38%,whichisconsistentwithourexpectationgoingforward.
Overall,netearningswere$553millionandEPSwas$0.56pershare,up5%and6%,respectively,versustheprior-yearperiod.Now,letmeturntothemarketoutlookforthethirdquarter.
Overall,weexpectvolumetodeclineslightlyinthethirdquarter.Althoughweexpectaslightdeclineofthehigher2014base,CSXportfolioremainsbalancedwithseveralgrowthmarketsoffsetbychallengingnear-termmarketdynamicsinother.Weareprojectingfavorableconditionsfor49%ofourvolumeinthethirdquarterandstabletounfavorableconditionsfortheremaining51%.
Strongintermodalperformancewillcontinueasourstrategicnetworkinvestmentssupporthighway-to-railconversionsandgrowthwithexistingcustomers.Increasedinfrastructuredevelopmentprojectscontinuetodriveafavorableoutlookforminerals.Agriculturalisneutralasstrengthindomesticgrainshipmentsclosingoutthepriorharvestisoffsetbyaweakerethanolmarketasaresultofhigherinventorylevels.
Automotivevolumeisexpectedtobesimilartothestronglevelwesawinthethirdquarterlastyear,reflectingNorthAmericanlightvehicleproduction.Chemicalsisexpectedtobeneutralduetolowerdrillingactivity,stemmingfromthecontinuedlowcommoditypriceenvironmentwhichwouldputadditionalpressureonvolumesinourcrudeandfracsandbusinesses.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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Bothmarketsareexpectedtodeclinebyabout15%inthethirdquarter;however,strengthinplasticsandLPGwillkeepthechemicalsportfoliostable.
Intheunfavorablecategory,withsustainedlownaturalgaspricesunder$3andhighstockpilesgoingintotheheartofthesummerseason,domesticcoalvolumeswilldeclinecloseto15%inthethirdquarterandforthefullyearweexpectvolumetobedownapproximately10%.Exportcoalvolumeisexpectedtobelowerinthethirdquarter,reflectingglobaloversupplyandastrongUSdollar,althoughwestillexpectabout30milliontonsforthefullyear.
Forestproductswillbenefitfromsteadyhousinggainsasinventoriesareworkedoff,butpaperproductsremainchallengedduetotheseculartrendsinthatmarket.Themetalsmarketisexpectedtobeunfavorableassteelproductionremainsbelowprior-yearlevelswithastrongUSdollarencouraginghigherimports.Thephosphatemarketswilldrawdownonexistinginventoriesandweexpectbuyingbehaviortobecautiousgoingintothenewharvestseason.
Overall,onasequentialbasis,intermodalwillexperiencethetypicalthird-quarterincreasegoingintothepeakseason,whilethemerchandisesegmentwillremainessentiallyflatandcoalwillbedown.Turningtothenextslide,letmetalkaboutexpectationsforexpensesinthethirdquarter.
Beginningwithlaborandfringe,weexpectthird-quarteraverageheadcounttodeclinesequentiallybyapproximately1%aswealignemployeestothelowerdemandenvironment.Weexpectlaborinflationtobearound$25millioninthethirdquarter,whichisareductionfromthelevelsseeninthefirsthalfasunionwageinflationbecomeslessofaheadwind.
Inaddition,weexpectlaborandfringeexpensetobenefitfromfurthernetworkfluidityimprovementandefficiencyasweremainfocusedonincreasingtrainlengthandaligningcrewstarts.
LookingatMS&Oexpense,weexpectinflationtobeoffsetbyproductivitygains.WealsoexpecttoincurremediationcostsinthethirdquarterassociatedwiththerecentderailmentinMaryville,Tennessee.Fuelexpenseinthethirdquarterwillbedrivenmainlybylowercostpergallon,reflectingthecurrentpriceenvironmentandcontinuedfocusonfuelefficiency.Weexpectdepreciationinthethirdquartertoincrease$10millionto$15millionversustheprioryear,reflectingtheongoinginvestmentinthebusiness.
Finally,equipmentandotherrentsinthethirdquarterisexpectedtostayrelativelyflattolastyearwithhigherfreightcarratesoffsetbyimprovingcarcycletimes.Nowletmewrapituponthenextslide.
CSXdeliveredanotherstrongfinancialperformancethisquarterand,asMichaelmentioned,wesetnewall-timerecordsforoperatingincome,operatingratio,andearningspershare.Lookingaheadtothethirdquarter,whileserviceexcellencewillcontinuetodrivecontinuedefficiencygainsandstrongpricingtosupportlong-terminvestmentinthebusiness,weexpectthird-quarterEPStoberelativelyflattotheprioryear.IncludedinthisoutlookweexpecttoincuraleastapennyimpactrelatedtotheMaryville,Tennessee,derailment.
Inaddition,wewillbecyclingastrongdemandenvironmentlastyear,which,coupledwiththedynamicconditionswe'refacing,isexpectedtoimpactourvolumegrowth.Domesticcoalcontinuestobeasignificantheadwindandwenowexpectthatmarkettobedowncloseto15%inthethirdquarter.
Lookingatthefull-year2015earnings,wearestilltargetingmidtohighsingle-digitEPSgrowth.However,giventhecurrentenergyenvironment,achievingtheupperendofthatrangewillclearlybechallenging.
Thatsaid,westillexpecttomakemeaningfulimprovementtoourfull-yearoperatingratioandwithimprovingservicedrivingefficiencyandstrongcorepricingthatsupportsinvestmentinthebusiness,we
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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areconfidentintheCompany'sfutureandourprogressiontowardsamid-60%sfull-yearoperatingratio.
Withthat,letmeturnthepresentationbacktoMichaelforhisclosingremarks.
MichaelWard (ChairmanCEO):
Thankyou,Fredrik.Asyou'veseentoday,CSXproducedexcellentresultsinthesecondquarterforitsshareholdersinachallengingmarketenvironmentbydrivingoperatingefficiencywiththecommittedeffortsofour32,000dedicatedemployees.Andwecontinuetofocusontheactionsthatarefoundationaltoourlong-termsuccess.
Deliveringexcellentservicesupportsgrowthandoperationalefficiency,which,inturn,createscustomervaluethatenablesstrongpricingforthevalueoftheserviceweprovideandallowsustocontinuedrivingearningsgrowthandmarginimprovement.Wearepursuingnewopportunitiesacrossourdiverseportfolioandfurtherimprovingnetworkperformancetoserveconsumersandproducersthroughouttheglobalsupplychainandtocreatevalueforyou,ourshareholders.
ThankyouforyourinterestinCSXandwe'renowgladtotakeyourquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
BrianOssenbeck,JPMorgan.
BrianOssenbeck(Analyst-JPMorgan):
Goodmorning,andthanksfortakingmycall.Soonethingthatstoodoutisthisisthefirsttimeinthequarterwhereyou'veputall-innumbersincoremerchandise,intermodal,same-storesalespricingresultsanywherereallyclosetooneanother,includingthelastquarter.
SoIwaswondering:howmuchdidtheshiftinthebusinessmiximpactthosenumbers?Couldyouhavehadevenhigherpricingtrendsifthecommoditycarloadsdidn'tdropoffabout4%inthequarter?Anyothercoloronthatwouldbehelpful.Thankyou.
FredrikEliasson (CFO):
Brian,thisisFredEliasson.Thebigdriverhereisthatwe'recyclingtheactionswetooklastyearintheexportcoalmarkets,andasaresult,we'reseeingthosetwonumbersharmonizemorenow.Andweexpectthatgoingforwardaswell.
BrianOssenbeck(Analyst-JPMorgan):
Okay.Soyouexpectthemtobeharmonizedinthenearfutureatthesamelevelinthat3.5%to4%ballpark?
FredrikEliasson (CFO):
No,we--whatI'msayingisthatthegapbetweenthetwonumbers,betweenourall-inpricingandthenon-coalpricing,hasbeenexacerbatedbecauseoftheactionswe'vetakenoverthelastyearortwoinactualcoalmarkets.Wearenow,aswemoveintothethirdquarter,movingpastthoseactionsfromlastyear.
AndIthinkovertimewecontinuetoexpectstrongpricinginallourmarketsaswecontinuetopriceto
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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marketandensurereinvestmentinthebusiness.SoIthinkthatgapwillbemuch,muchmorenarrowgoingforward.
Operator :
ChrisWetherbee,Citi.
ChrisWetherbee (Analyst-Citi):
Goodmorning,guys.Thanks.Wantedtotalkaboutsortoftheproductivitygainsthatyouaregetting.You'veseenthecostfromefficienciespickup2Qto3Q.Presumably,asservicecontinuestoimprove,thosenumbersshouldgetabitbetterinthebackhalf,butjustwantedtogetsortofanupdateonhowyouthinkaboutthebackhalfintermsofproductivityandefficiencygainsfromacostperspective.
FredrikEliasson (CFO):
Yes,thisisFredrikagain.We'vegoneofftoagoodstartherethisyear.Obviously,$45millionhereinthesecondquarter;about$41millioninthefirstquarter.Wehavesaidthatwestillthinkwecanapproach$200millionforthefullyear,butprobablynotascloseasweoriginallyhadthoughtbecauseofwhatwesawinthefirstquarterbecauseofweatherandalsobecauseofthefactthatthevolumeenvironmentisnotasstrongaswehadoriginallyanticipated.
However,we'reverymuchfocusedondrivingefficiencygains.Andas--butjustimpliedbythefirst-halfperformanceandourguidanceforthefullyear,we'regoingtohaveastrongsecondhalfaswell.
ChrisWetherbee (Analyst-Citi):
Okay,great.Thanks,guys.
Operator :
TomWadewitz,UBS.
T omWadewitz (Analyst-UBS):
Goodmorning,Michael.Wantedtoaskyouaquestiononcoal.Iappreciatethecommentaryonthirdquarterandkindofhowtolookatthings.
Ifyoulookbeyondthirdquarter,howmightwethinkaboutwhencoalvolumesmightbottom,bothontheutilityandontheexportside?Doyouthinkthatkindofdown15%infourthquarterandthenmaybeyouareflatnextyear,or--?Howdowethinkaboutthat?
Becauseitjustseemslikethepressuresareinplace,bothutilityandexport,andit'shardto--lookingoutacouplequartersit'sjusthardtoknowhowtothinkabouthowcoalvolumesmightplayout.Thankyou.
ClarenceGooden (ChiefMarketingOfficer):
Well,Tom,thisisClarence.It'slookinglikethefourthquartercouldbe--easily,ifgaspricesremainwheretheyarenow,couldbearepeatofthethirdquarter.It'sprobablytoosoontotellaboutwhatexportisgoingtolooklikenextyear,butitcertainlywon'tbeasstrongasitis--hasbeenthisyear.
IftheAustralianbenchmarkstayswhereitisnow,theAustraliandollarstayswhereitisnow,whichisabout$0.74,andtheAPI2stayswhereitisnow,whichisinthehigh50s,nextyearwon'tbeagoodexportyear.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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T omWadewitz (Analyst-UBS):
Butifyousaidthecurrentconditionspersist,doyouthinkcoalisdownnextyearfurtherordoyousay,well,it'salreadybeendownenoughthisyear,soit'sflat?
ClarenceGooden (ChiefMarketingOfficer):
Well,there'scertainlymoreupsidethandownsidefornextyear,butcouldbedown.
MichaelWard (ChairmanCEO):
SoalotdependsIguessontheweatherand…
ClarenceGooden (ChiefMarketingOfficer):
Weatherandgaspricesare.
MichaelWard (ChairmanCEO):
…wheregaspricesare,right?
ClarenceGooden (ChiefMarketingOfficer):
Right,weatherandgasprices.
FredrikEliasson (CFO):
IthinkjusttoclarifywhatClarencesaid,Ithinkthere'sprobablymoredownsidetothecoalvolumenextyearthanthereisupside.
ClarenceGooden (ChiefMarketingOfficer):
Right.
T omWadewitz (Analyst-UBS):
Ifthecurrent--ifgaspricesstayandtheexportmarketsare--kindofremainchallenging?
FredrikEliasson (CFO):
Yes.Basedonwhatwe'reseeingrightnow,bothbetweendomesticandexports,there'sprobablymoredownsidetoourvolumesfor2016thanthereisupsideinthosetwomarkets.
T omWadewitz (Analyst-UBS):
Okay.Yes,Iknowit'satoughmarkettofigureout,soIappreciatethecolor.
Operator :
AllisonLandry,CreditSuisse.
AllisonLandry(Analyst-CreditSuisse):
Goodmorning.Thanksfortakingmyquestion.Iwaswondering,intermsofthefourthquarter,doyouthinkthatyoucouldgrowearningsyearoveryear,evenifthevolumeenvironmentremainedsoft,justgiventheaccelerationinproductivitygains,gettingthenetworkbackinbalance,andthencontinuingtoseeaccelerationinthecorepricinggains?
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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FredrikEliasson (CFO):
Well,Ithink,Allison--thisisFredrikagain.Ithinkobviouslywehavetwoquartersbehindus.We'vegivenguidanceforthethirdquarterandwe'vegivenaguidanceforthefullyearthatrange,sothatrangereallydependsonwhatwe'reseeing--whatwe'regoingtoseeinthefourthquarter.
Sogreatmomentumintermsofwhatwedoontheproductivityside.Wecontinueto--weseeastrongpricingenvironmentaswell,butitreallydependsonhowmassivewillthiscoalheadwindbeinthesecondhalf.AndIthinkhowthose,thepositivesandnegatives,workoutwillallowustoseewhatwe'reultimatelygoingtobeproducing.
We'recertainlytargetingtoproduceearningsgrowth,butIthinkuntilwegetto--throughalittlebitmoreofthissummertoseeifthestockpilesstandupaswegointotheshoulderseasonit'shardtoexactlypinpointwherewe'regoingtoendup.
AllisonLandry(Analyst-CreditSuisse):
Okay.Soitseemslikecoalisreallythewildcardorquestionmarkfor4Q?
FredrikEliasson (CFO):
Yes,IthinkcoalisthewildcardandIalsothink,aswehaveindicatedinthepreparedremarks,thatwealsoexpectasequentialdeclineinourcrudevolumesbasedonwhatweseeinthespreadthere.AndIthinkwe'regoingtohavetofollowthataswelltoseewhattheimpactfromthatwillbeonourvolumesthere.
AllisonLandry(Analyst-CreditSuisse):
Okay.Allright,thankyouforthetime.
Operator :
RobSalmon,DeutscheBank.
RobSalmon (Analyst-DeutscheBank):
Goodmorning.Asafollow-uptosomeoftheproductivitydiscussions,couldyoutalkalittlebitabout--ifwelookbackacoupleyears,theproductivitywasacouplemilesanhourstronger.Maybecouldyouspeaktooperationallykindofwhatadditionaladjustmentsneedtobemadeacrossthenetworktogetbacktothoselevels?
Andthen,Fredrik,perhapsfromafinancialperspective,whatthebottom-linetailwindwoulditbeifCSXachievesthose2milesanhourofroughlyofimprovedvelocity?
OscarMunoz (President,COO):
Rob,thisisOscarMunoz.Nicetomeetyou.Listen,withregardstotherecoveryaspectofthat,Ithinkwhatwe'vesaidforsometimeistheinitialpointofrecoverywasthisquarter,secondquarter,andthentheaccelerationandcontinuedperformanceingettingbacktothoserecordlevels.Ithinkthetimingofthatisrelatedtoalotoftheotheractivitiesthatwe'vebeentalkingabout,butIthinkthat'stheprogressionwe'remaking.
FredrikEliasson (CFO):
And,yes,westillhave,hereinthesecondquarter,obviouslyimprovedsignificantlyandsequentiallythroughoutthequarter,butwe'restillattheplacewherewestillhaveovertimelevelsthatwethink
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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wouldcomedown.Wehavere-crewlevelsthatcouldbeimproved.
Equipmentcycletimescanbeimprovedaswell,whichispartofwhyweseeaveryrobustopportunityset;notjustinthesecondhalfof2015,butalsogoinginto2016aswell.Andthatisgoingtobecriticalforusasweseeatop-lineenvironmentthatfromavolumeperspectiveperhapsnotasstrongandrobustaswewouldlikeit,atleastbasedonwhatwe'reseeingrightnow.
Sogoodmomentumonourproductivitysideanditshouldtranslateintosomegoodnumbersfromabottom-lineperspectiveaswell.
RobSalmon (Analyst-DeutscheBank):
Andjustasaclarification,withtheproductivity,shouldwebeexpectinganotherelevatedproductivitygainslookingoutinto2016,giventhoseexpectedcontinuedimprovements?
FredrikEliasson (CFO):
Iliketothinkthatweshouldbeabletoexceedourhistoricalaverage,whichhasbeensomewherearound130,140aswemoveinto2016.
RobSalmon (Analyst-DeutscheBank):
Perfect.Thankssomuch.
Operator :
ThomasKim,GoldmanSachs.
T homasKim(Analyst-GoldmanSachs):
Goodmorning.Thanksforyourtime.LastquarteryoudisposedofanoperatingassetandI'mcuriousifyoucouldsortofframeoutforusyouropportunitysettomonetizewhatmanagementmightdeemtobenon-coreorperhapsmaybelessstrategicgoingforward.
FredrikEliasson (CFO):
Yes,thisisFredrikagain.Sowedidhaveanoperatingpropertythatwemonetizedherethisquarter.Itwasadealthatwehadworkedonforanextendedperiodoftime,frankly.Andwedohavesomemorebothoperatingandnon-operatingpropertiesgoingforwardandwhentheyoccur,wewillbetransparentwiththoseand,ofcourse,youwillseethem,asIsaid,whentheyoccur.
Idon'tthinkthattheopportunitysetisbigenoughorisgoingtomakeahugedifferenceovertimeforus,becausewe'vedonealotofthisoverthelastcoupleofdecades,frankly.Butitissomethingthatweconstantlylookattoseeifthereareopportunitiestorationalizesomeoftheinfrastructurethatwehave,whetherit'soperatingornon-operating.
T homasKim(Analyst-GoldmanSachs):
Great.AndifIcouldjustaskafollow-onquestionthatrelatestothat.Towhatextentdothese,forexample,themostrecentassetsale,improveyouroperatingexpense?
FredrikEliasson (CFO):
Onemoretime?
T homasKim(Analyst-GoldmanSachs):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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Withregardto,forexample,themostrecentassetsale,towhatextentisthesalebeneficialtoreducingtheoperatingexpense?Istheresomething(multiplespeakers)?
FredrikEliasson (CFO):
ThissalespecificallyIdon'tthinkisgoingtoimproveouroperatingexpense,becauseitwasessentiallyalinesegmentthatweweren'treallyoperatingmuchonatall,andsoitreallywon'thaveanimpact.Therecouldbeinstancesinthefuturewhereitwould,butthisonespecificallydidn't.
T homasKim(Analyst-GoldmanSachs):
Okay.Thanksverymuch.
Operator :
BillGreene,MorganStanley.
BillGreene (Analyst-MorganStanley):
Goodmorning,Michael.Clarence,Ihaveaquestionforyouonpricing,becauseIgetaskedthisafairamount.Andthatis,whenwelookatsortofwhatCSXchosetodoinexportcoalasthingsgotweakerthere,whywouldyounottakeasimilarapproachinthedomesticmarket?
Couldyou--orisityourviewthatyoucanorcannotsortofpreservesomevolume,savesomeutilityplantsgiventhelownaturalgasprice?Howdoyouthinkaboutthepricinginthecoalmarket?Becausethat'ssomething,givenwhatyou'vedoneinexportthatfolkslooktoandsayhowsustainableisthepricingdynamicthere?
ClarenceGooden (ChiefMarketingOfficer):
Bill,we'vetakenalookatitand,frankly,thegaspricesaresolowwejustcannotmateriallyimpactitenoughtomakeadifference.
BillGreene (Analyst-MorganStanley):
Okay.Andthenontheexportside,isthere--wesaidwewouldlapthis;it'sdone.Isthereanyriskfurtherthatthemarketscauseyoutorethinkthatatalloratthispointhaveyoudonewhatyoucandoandthevolumeswilljusttakecareofthemselvesfromhere?
ClarenceGooden (ChiefMarketingOfficer):
We'vedonewhatwecoulddoandthevolumeswilljusthavetotakecareofthemselves.
BillGreene (Analyst-MorganStanley):
Yes,fairenough.Thanksforthetime.Appreciateit.
Operator :
KenHoexter,MerrillLynch.
KenHoexter (Analyst-MerrillLynch):
Great.Goodmorning,Michaelandteam.Justonthelaborcosthere,youdugintocostperemployee.Itwasflatthisquarterversusup5%lastquarter.JustyourthoughtsIguessonacouplethingsaroundthatandfurtheremployeecuts,Ithinkyounoticeddown1%.Butifvolumescontinuetofall,howdoyouthink
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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aboutthat,Oscar,maybeinadvance?Andthencostperemployee,whathappenstothataswegoforwardhereonyourproductivity?
FredrikEliasson (CFO):
Yes,andthisisFredrik.Letmetakethatone.So,yes,costperemployeedidfallhereversuswhatwesawinthefirstquarterandthatis--obviously,partofthatisthefactthatwenowhavecloseto600peopleinfurloughandthatreducesit,butalsoareductioninovertime.Wehadalittlebitofareductionintrainingcostaswell,sothathelped.
Andaswemoveforwardnow,aswecontinuetorunbetter,weprobablyhaveanopportunityperhapstohaveevengreaternumberoffurloughsandreducedovertimeandreducedthecrew,there-crewsaswell.
Ithinkthereareopportunitiestoseeefficiencygainstherebecauseobviouslythatisourbiggestexpensecomponentand,therefore,theonethatwefocusrelentlesslyaroundhowdowereducethenumberofpeople,howdowebecomemoreefficient,howdowebecomemoreefficientintermsofcostofemployee.Andsothatyoushouldseeacontinuedimprovementthere.Thankyou,Ken.
Operator :
BrandonOglenski,Barclays.
BrandonOglenski(Analyst-Barclays):
Goodmorning,Michael.Goodmorning,team.FredrikorMichael,Ithinkinthepastyou'vetalkedabouthowyoureallyneedcoaltostabilize,andIreallywantedtohoneinontheideathatthereismoredownsideriskto2016coalthanthereprobablyisupside.Wehaveplentyofshalegasinthiscountry,soIthinkwe'reresettingintothisnewrealitythatgasisjustalotcheaperthanitusedtobe.
Butyouaregettingpositiveprice;you'regettingproductivity;you'regettinggrowth,especiallyincorridorslikeIntermodal.SointhelongertermisitpossibletogetsustainableearningsgrowthandmarginexpansiontohitthatORtarget,evenifwe'refacingcontinuedsequentialcoaldeclines?Oristhatstillgoingtobetoomuchheadwindonthebusiness?
Andmaybewedon'tunderstandhowdifficultitistogetthecostoutofthecoalsystem.Maybethat'swherewe'vebeenunderestimating.
FredrikEliasson (CFO):
Well,obviously,coalisaveryprofitablebusinessofoursinourportfolio,butIdothinkthefactthatwewereabletoproducea66.8%operatingratiohereinthesecondquarterwithcoalbeingdownmorethan$100millionyearoveryearisagreattestamenttowhatourcorestrategyofserviceexcellencetoourcustomersisproviding.
Nowclearly,aswelookforward,theimpactofthecoaldeclineisgoingtoalsoimpactthepathofprogression.We'regoingtomakemeaningfulimprovementherein2015andwefeelveryconfidentthatovertimewecangettothatmid-60%soperatingratioandIthinkthisquarter,asIsaidearlier,isagreattestamenttothat.
Butifcoaliscooperating,wecangettherefasterandifcoalisgoingtonotcooperate,it'sgoingtotakeuslonger,whichiswhyatthispointIdon'tthinkwehaveenoughclarityaroundthecoalpicturetoreallyputaflagdowninthegroundonwhenweactuallygettothemid-60%soperatingratio.Thankyou.
Operator :
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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JasonSeidl,CowenandCompany.
JasonSeidl(Analyst-CowenandCompany):
Thankyou.Goodmorning,guys.Howiseverything?
MichaelWard (ChairmanCEO):
Good.
JasonSeidl(Analyst-CowenandCompany):
Quickquestionhere.Obviouslyyoumentioneditalittlebitonfurloughsandyouhadsomeverygoodproductivitynumbersinthequarter.Isthenetworkrightsizedforthecurrentvolumes,oristherealittlebitmoreworktodoaswemovethroughoutthethirdquarter?
OscarMunoz (President,COO):
Jason,it'sOscar.Wearealways,alwaysreflectingonwhereourvolumeloadisandthecapacityis,soit'sneverperfectlyrightsized,butwe'reworkingtowardsthat.Wehavealotofcapacity.
Importantly,Ithinkourtrainsizeinitiativeshavebeenreallycreatingevenmorecapacityandmoreproductivity,sowe'llcontinuetoworkonthat.Theteamhasdoneagreatjobofit,butIthinkthereisstillopportunitytorightsize.
JasonSeidl(Analyst-CowenandCompany):
Okay.Appreciateit,guys.
Operator :
MattTroy,Nomura.
MattT roy(Analyst-Nomura):
Goodmorning.MyquestionwasonIntermodal,specificallyjustifyoucouldgiveusasense--intermsofthecompetitiveenvironmentyoureferencedinyourpressreleaseandcompetitiveshareloss,Iwaswonderingifyoujustputthatintocontext.
Andthenmorespecifically,justlookingattheratetrends,whetherwe'relookingatrevenuepercarloadorrevenuepertonmile,certainlywe'veseenastepdowninthosemetricsoverthelasttwoquarters.Obviously,fuelisabigcomponentofthattrafficcategory.Ijustwanttomakeitclearastowhat'sgoingonwiththerates.
Ifyoucouldjustanswerthosetwo,that'sallIgot.Thankyou.
ClarenceGooden (ChiefMarketingOfficer):
Okay.Onthecompetitiveloss,asyouareaware,wedon'tmakeparticularcommentsper--onindividualcustomers.
Ontherevenuetonmiles,asyousurmise,itisallinfuel.Ontheratesthemselves,inthetruckingmarketwestillfindthattruckersarekeepingtheirratestructuresupthisyearinthe3%to5%rangeonthetruckingrenewalrates.Ourparticularspotmarketsinourtruckingpartofourdoor-to-doorproducthasbeenverystrongthisyear.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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Ourtrans-conproducthasbeendownalittlebitbecausewe'restillrebuildingourowner-operatorbaseintheLAbasinfromthestrike,butthecorepartoftheIntermodalbusinessandthepricingthisyearhasremainedfairlystrong,aswebeenabletopriceforthevalueoftheservicethatwe'reoffering.Andthecompetitivemarketsforourinvestmentswe'vebeenverypleasedwiththat.
MichaelWard (ChairmanCEO):
Clarence,maybeyouwanttocommentonthedomesticvolumes.
ClarenceGooden (ChiefMarketingOfficer):
Well,you'veseenthedomesticintermodalvolumesthemselveshavebeenuparound9%inourintermodalbusiness,sothehighway-to-railconversionprogramsthatwe'vehadinplacehavebeenquitesuccessfulthisyear.
MattT roy(Analyst-Nomura):
Absolutely.That'swhatIwaspointingout.Thankyou.
Operator :
BenHartford,Baird.
BenHartf ord (Analyst-Baird):
Goodmorning.Clarence,maybejusttocontinuethatpoint.There'sbeenalotofdebateaboutthepaceofconversionsgoingforward.Asthetruckloadcapacitysituationsnormalizedabitin2015from2014,fuelpricesarelower;railservicehasnotfullybeenrestored.
Whatisyour--let'spickatimeframe--three-yearviewonthepaceofdomesticintermodalconversionsandtheopportunity?Whatareshipperssayinggivensomeofthedivergenttrendswithlowerdieselfuelprices,butsomeoftheseloomingcapacityconstraints?Hastheoutlookchangedatallmeaningfullyoverthepastseveralquarters?
ClarenceGooden (ChiefMarketingOfficer):
Ben,Idon'tthinkithas.We--in2014,it'struethatwelostsomeintermodalbusinessbacktothehighwayduetotheserviceissues,butwe'veactuallyseensomeofthatvolumereturnin2015asservicehasimproved.
AsImentionedinthehighway-to-railconversions,ourestimatesthisyearwillbeinexcessof40,000newloadsonCSXorganically,inadditiontowhatourtruckingpartnersaregrowing;backtorailthatwillgrow.
Asyouknow,theelectronicreportingthatwillberequirednextyearandthelegislationwillkickin,andwethinkthatthat'sgoingtoputmorestressonparticularlythesmallertruckloadcarriersthatwillmakeintermodalmoreattractive.
Nothing'schangedinthehighwayissuesthatarearoundcongestionthat'sinthehighway,thehighwaysinAmerica.Westillhavethedriverissuesandshortagesthatarefacingthetruckingcompaniesaswegoforward.
Ifyoulookatwhat'shappeninginCongresstoday,westilldon'thaveahighwaytransportationbill;probablywillbepassedwithacontinuingresolution,sononewinfusionofmoneytorebuildthehighwaysandtheinfrastructureinthiscountry.Soalltheissuesthatwe'vetalkedaboutoverthepastfewyears
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stillremain,sointermodal,tome,looks--isaverypositivethinggoingforwardforthenexttwoorthreeyears.
BenHartf ord (Analyst-Baird):
Great,thankyou.
Operator :
CherilynRadbourne,TDSecurities.
CherilynRadbourne (Analyst-TDSecurities):
Thanksverymuchandgoodmorning.Yousawgood,sequentialimprovementinbothon-timeoriginationsandarrivals,buttherewasmuchmoreimprovementinoriginationsthanarrivals,whichIthinkisthenormalorderofthingsasnetworkvelocityincreases.Maybeyoucanjusttalkaboutthatandwhenweshouldexpecttoseethegapbetweenthosetwometricsnarrow.
OscarMunoz (President,COO):
Cherilyn,thanks;it'sOscar.Historically,asyouprobablyknow,there'salwaysbeenasmallgapbetweenthearrivalsandtheoriginations,andwehaveseenbothmeasuresimproveasweworktorestoreourservicelevel.
Wewouldexpecttheimprovementinarrivalstoslightlylagthatoforiginations,againasthatcontinuityofserviceimproves.Thekeythingforusistofocusonhowlatetheaveragetrainisandthatisametricwe'veseensubstantialimprovementoverthelastseveralmonths,soineffectspan.
Sowhileyou'llstillseethe[optic]onarrivalsalittlelagging,andwhenweactuallylookatmoreinternallythenumberofhoursthatarelateisimproving.SoIthinkoverthenextquarterandtwoandcertainlyintonextyearIthinkyou'llseethatgapnarrowedtoitshistoricalaverage.
CherilynRadbourne (Analyst-TDSecurities):
Thankyou.That'smyone.
Operator :
DavidVernon,Bernstein.
DavidVernon (Analyst-Bernstein):
Goodmorning.Thanksfortakingthequestion.Fredrik,maybejustabiggerpicturehere.AsthevolumegrowthismoderatingandyourGPMsaredownalittlebit,doyouseeanyopportunitytopullintheCapExbudget?Andthenlongerterm,doyouthinkweshouldbe--howshouldwebethinkingabouttheimpactofthereducedutilizationofthecoalnetworkondepreciationgoingforward?
FredrikEliasson (CFO):
Yes,intermsofcapital,Ithinkwe're--wehavethe$2.5billionnumberoutthere.We'relookingatthat,seeifitmakessense,butgenerallyalotofthoseproductshavealreadybeensortedsoI'mnotsurethereismanyopportunitiesshortterm.
Wehaveaself-correctingmechanisminthatwe--tiesittorevenueandIthinkthatwillbecorrectingit.Ultimately,thatisaproxyforgrosstonmilesbecause80%ofwhatwespendisareflectionofhowmuchwerunoverthenetwork.Andsoasthat--ifthatcomesdown,thenourcapitalwillcomedown,sowe'll
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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lookatthataswegetintotheplanningfor2016.
Thenintermsofthecoalnetwork,Icanassureyouwehadaveryconcertedeffortin2012toseewhatwecoulddotodriveourcoststhere.Wewereexcellentattakingouttrainstartsandcrewbasetomorethanreflectthedeclinewesawinvolume.
Andherenowin2015and2016thereisarenewedfocusagain,becauseofthestepfunctionchangethatwe'veseen,tofurtherlooknotjustattrainstartsandlookatthecrewbaseandthelocomotiveassetswehavedeployed,butalsothefixedinfrastructurethatisupthereandtoseewhatwecando.
Itisnotasblackandwhiteasyouwouldlike,becausewedohavegrowthupthereaswellandwerunothertrafficaroundthere.We'veseenalotofgrowthinLPGandfracsandinthosesameareas,butthereshouldbemorethanwecandoandourteamisverymuchfocusedonthoseefforts.Thankyou.
DavidVernon (Analyst-Bernstein):
Appreciateit.Thanks.
Operator :
JohnLarkin,Stifel.
JohnLarkin (Analyst-Stifel):
Goodmorning,gentlemen.Clarencewasveryadamantonthefirst-quartercallabouthowpricingwasacceleratingfromthelaterstagesofthefirstquarterintothesecondquarter.Isthatgoingtocontinueintothethirdandfourthquarter,orarewegoingtoplateauatthisrelativelyhighlevelwheremerchandiseandintermodalsame-storepricingisupsay3.9%yearoveryear?
ClarenceGooden (ChiefMarketingOfficer):
Well,John,asyoucanseeinthepastseveralquarters,we'veimprovedthepricingsequentially.Andhereinthesecondquarteryoucanseethatwehada3.5%all-inanda3.9%inthemerchandiseandinourintermodal.
AsIlookforward,weremainfocusedonthatstrongpricing,reflectingthevalueoftheserviceweprovideacrossallthesecompetitivemarkets,whichjustifiesthereinvestmentinourbusinessthatdrivesthelong-termvalueofourshareholders.Sothat'swhatyou'llsee.
JohnLarkin (Analyst-Stifel):
Gotit.Anypushbackfromcustomersgiventhatservicelevelshaven'tfullyrecovered?Aretheywillingtoabsorbthoseever-higherpriceincreasesgivenwhereservicecurrentlystands?
ClarenceGooden (ChiefMarketingOfficer):
Ithinkthattheyseethattheservicethatwe'reprovidingrightnowisjustifyingthatpricelevelsforthereinvestmentthattheyseethatwe'redoing.
JohnLarkin (Analyst-Stifel):
Gotit.Thankyou.
Operator :
BascomeMajors,SusquehannaFinancialGroup.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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BascomeMajors (Analyst-SusquehannaFinancialGroup):
Goodmorning.Socoalminers'financialsituationhascontinuedtodeterioratehereandwe'veseenrecentreportsthatoneofyoursmallercustomersisgoingtofileforbankruptcythisweek.Andotherlargerminersarestillworkingonrestructuringshere.
Canyoujusttalkalittlebitabouthowyoumanageyourriskinthisbusinessgivenfinancialsituationonthatside?Maybealittlebitonthebusinessside,suchaspricingpressure,whichyouaddressedalittlebitalready,butcounterpartyriskaswell?
FredrikEliasson (CFO):
Yes,thisisFredrik.Obviously,fromacreditperspective,wedomonitoritveryclosely.Manytimesit'sactuallyutilitiesthatpaythebill,so--butwedohavesomeexposuretosomeoftheseproducersthataregoingthroughverydifficulttimes,sowe'vealreadyseensomeofthosegothroughrestructuring.
Generally,we'rewell-protectedthroughavarietyofmeansthroughthatprocessandoneofthemostimportantthingsisthatifyoudowanttorestructureoutofit,you'regoingtoneedtherailservicethatweprovideinordertobesuccessfulintransformingthecompany.
Andoverall,fromabroaderperspective,clearlywe'realsolookingatourcapitaldeploymentandyouheardinapreviousquestion,we'rereallytryingtomakesurethataswelookatreinvestmentincoal-relatedassetsthatwe'rereallytakingalongandhardlookatwhatevercapitalweputintheretomakesurethatwe'renotleavingcapitalstrandedfor40years,whichisessentiallythelifeofassetsthatwe'reputtingin.Soweworkvery,veryhardacrossoursystemtomakesurethatwearemakingaprudentdecisionaroundthat.
Greatquestion.Thankyou.
BascomeMajors (Analyst-SusquehannaFinancialGroup):
Doyouhaveasenseforhowmuchispaidtothe--orthispercentageofyourbusinesswhereyouarepayingtheminersversusutilities?Woulditjustbalancewithexportversusutilitymix,orisitmorecomplexthanthat?
FredrikEliasson (CFO):
Well,Ithink--onthedomesticside,IthinkthemajorityisclearlypaidbytheutilitiesandontheexportsideIthinkit'salittlebitofamoremixandmore,perhaps,theproducer.
BascomeMajors (Analyst-SusquehannaFinancialGroup):
Allright.Thankyou.
Operator :
JeffKauffman,BuckinghamResearch.
Jef f Kauf fman (Analyst-BuckinghamResearch):
Thankyou.Goodmorning,everyone.Thanksfortakingmyquestion.
Withtherevenue--Ishouldn'tsayrevenue,butthevolumeoutlooktakinganotherstepdown,haveyourethoughtthecapitalprogramatall?Andcanyoutalkalittlebitaboutwherethecapitalisgoingtohelpintermsoftheproductivityrecoveryandgetthesystembacktofluidity?
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
EventDescription:Q22015EarningsCallMarketCapasofEventDate:31.52BPriceasofEventDate:32.61
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FredrikEliasson (CFO):
Sure.Intermsofthecapital,$2.5billionisourcapitalplanherefor2015.Wearelookingtoseeiftherearesomethingsthatwewouldmoveoutofthisyear,butas[we're]sofarintotheyearit'shardtoaffectthecurrentyearbecausealotofthesethingsarewellunderwayatthispoint.
Butwearelookingatnextyearandwedohavethatkindofself-adjustingmechanismthatit'stiedtopercentageofrevenuetowherewetalkaboutitpublicly,butinternallywelookatitfromagrosstonmileperspectivemoreperhaps.
80%ofwhatwespendisonthemaintenancesideand20%isproductivity,andclearly,thisyearourmainfocushasbeentoacquireadditionallocomotives.We'reacquiringabout200locomotivesnewandrebuildingabout150,andthathasbeenthenumberonepriorityforus.
Alreadystartinglasttimethisyear--lastyearthistimewherethathasbeenafocusofourstomakesure,becausethathasbeenthelinchpininorderforustogetbacktothesortofserviceexcellencelevelsthatwe'vebeenlookingfor.
Otherproductivityinitiatives,wehaveplentyofthemthat--notjustiscapitaldriven,butisspecificallyoncapitalislocomotivefueloptimizer,forexample,tomakesurewedrivefuelefficiency.
Wehaveavarietyofothertechnologyproductsthatwe'reworkingonandalsoautomationofsomeoftheotherback-officefunctions.Sothereisawidevarietyofthingsthatweputcapitaltowardstodriveproductivity.Thankyou.
Operator :
ScottGroup,WolfeResearch.
Scott Group(Analyst-WolfeResearch):
Morning,guys.Wantedtofollow-up,Oscar,yourcomment,aboutmoretogointermsofrightsizingthenetwork.Justgiventhevolumesandnowtheservicelevelisimproving,isitpossibleaheadtostartseeingsomemorematerialheadcountreductions,Idon'tknow,3%,5%,10%?Idon'tknow.Isthatpossible?
OscarMunoz (President,COO):
Scott,IthinkIwouldansweritbythefactthatwealwaysmakethoseadjustmentscommensuratewithwhereweseethevolumeforecastandsoit'shardtopickspecificallyanumber.Butwe'll,asyou'veseenusdobefore,taketheappropriatemeasures.
FredrikEliasson (CFO):
AndtoaddtoOscar'sanswer,wedoexpect,andIsaidthatinpreparedremarks,abouta1%declinesequentiallyinheadcountandwealreadyhave600peopleinfurlough.
Itisourlargestexpensebasesowe'regoingtobevery,veryprudentandvery,verythoughtfulaboutwhatwe'redoingthere,becausewedoneedtoreduceourlaborexpenseinordertocreatetheproductivitysavingsthatwe'veoutlined.
Scott Group(Analyst-WolfeResearch):
Sojustwiththat,maybeFredrik,thevolumeenvironmentchangedmostnotablyinthesecondquarter.Howmuchofthecostresponsefromyouguysdidweseeinthesecondquarterversushowmucharewegoingtoseeahead?Ifthereisawaytokindofbucketitout.
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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FredrikEliasson (CFO):
Iguessit'saprettyhardquestiontoanswer.Idosay,though,fromanoverallproductivity,knowingourguidanceforthefullyearandthefactthatwe'vedonehereabout$86millionforthefirsthalf,clearlywehaveatleastasmuchinthesecondhalforsomewherearoundthere.Andsothere'salotofopportunitystill.
Wehavedonealotofstructuralthingsthatwehaveworkedonforaperiodoftimeintermsoftrainlengthandofcoursesomeoftheotherongoinginitiativesaswell.Andwhilewehavemadesomeinroadsintermsofdrivingthefluidityofthenetworkback,itwasonlypartlythroughthesecondquarterthatwereallygottractionaroundthat,soaswemoveintothesecondhalfweshouldexpectmoreofthat.
Andsowe're--onceagain,wefeelverystrongandwefeelverybullishabouttheopportunitysetgoingforwardonproductivityside.Thankyou,Scott.
Operator :
DonaldBroughton,AvondalePartners.
DonaldBroughton (Analyst-AvondalePartners):
Goodmorning,gentlemen.Helpmebetterunderstandyourguidanceofexpectingmeaningfulfull-yearORimprovementbecause,throughthefirsthalf,thegrosscostofdieselisdownabout$325million,soyou'reatarunrateoflet'scallit$650million.
IfIjustassumethatthecostofdieselisdownby$650millionforthefullyearandthefuelsurchargeisdownby$650millionandallofyourotheroperatingcostsremainconstantonayear-over-yearbasis,thatalonewouldcreate150basispointsoftheORimprovement.Soismeaningfulfull-yearORimprovementlessthanorgreaterthan150basispoints?
FredrikEliasson (CFO):
Well,thatislefttobeseen.It'sagoodquestion.Wehavetakenoutinthefirsthalf,ifyoujustlookatourquarterlyflash,we'vegonefromabout72%,73%lastyearinthefirsthalfto69.5%sothat'sobviouslyverymeaningfulimprovementinjustoneyeartimeframe.
Aswethinkaboutthisquarterspecifically,themajorityofourgainwasactuallynotfuelrelated,becausefuelthisquarter,whileitcamedown,weactuallyhadanegativeimpactyearoveryearbecauseofthenegativelagandthespreaddifferentialthatwesaw.SoI'mnotgoingtopinpointexactlywherewe'regoingtoendup,butwedoclearlyexpectmeaningfulimprovementdespitethefactthatthevolumeenvironmentislessthanstellar.Thankyou.
Operator :
CleoZagrean,Macquarie.
CleoZagrean (Analyst-Macquarie):
Goodmorning.Iwouldlikealittlebitofhelpwithframingtheutilitycoalvolumedownsideforthenextyear.Wheredoyouseethatcomingfrom?We'repotentiallyhopingforsomereversalofgasswitchingandinventorieshavingnormalize,sothatisentitlementdriven?Whatareyouhearingfromyourcustomersthatdrivesyourcautiousnessondomesticutility?Thankyou.
ClarenceGooden (ChiefMarketingOfficer):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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Well,thestockpilesare,bothintheNorthandtheSouth,arehigherthannormalsothereissomeinventoryhang.Westillexpectthatthegaspriceswillberelativelylow;wouldbethesecondpoint.Andthethirdisthereissomeresearchthatwouldindicatetheinstallationofmoregaspeakersintheregionthatweservethanarecurrentlyinservice.
Sothecombinationofthosethreewouldleadustobelievethattherecouldbeapossibilitythattheutilitiesconsumptionofcoalinourareawouldbeslightlylessthanitisthisyear.
CleoZagrean (Analyst-Macquarie):
Okay.Andthenjustasaquickclarifyingfollow-up,whenyougiveguidancefordomesticcoal,doyouincludethedomesticmetorthatreferstoutility?
ClarenceGooden (ChiefMarketingOfficer):
Itincludesboth,everything.
CleoZagrean (Analyst-Macquarie):
Thankyouverymuch.Thankyou.
Operator :
RickPaterson,TopekaCapitalMarkets.
RickPaterson (Analyst-TopekaCapitalMarkets):
Goodmorning,guys.Oscar,youputoutaserviceupdateinMaythatlistedyourT&Etraineesat1,235.What'sthatnumbertoday?
OscarMunoz (President,COO):
Thepeoplein--bytheway,Rick,nicetohearyou;welcomeback.
RickPaterson (Analyst-TopekaCapitalMarkets):
Thankyou.
OscarMunoz (President,COO):
Thenumberintrainingwehaveapproximatelyisabout800rightnow.
RickPaterson (Analyst-TopekaCapitalMarkets):
Beautiful.Excellent.
Operator :
TylerBrown,RaymondJames.
T ylerBrown (Analyst-RaymondJames):
Goodmorning.Iwasjustcuriousifwecouldgetalittlemoredetailontheaccelerationofthenon-coalpricing.AndIappreciatethismightbeabitofsemantics,but,Clarence,wasthesequentialaccelerationfairlybroad-basedorwasitmorehousedin,say,intermodalthantheothermerchandise?Justmaybesomebroadcommentsthere.
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ClarenceGooden (ChiefMarketingOfficer):
No,itwasverybroad-basedacrossalmostallofourcommoditylines.
T ylerBrown (Analyst-RaymondJames):
Perfect.Thankyou.
Operator :
JohnBarnes,RBCCapitalMarkets.
JohnBarnes (Analyst-RBCCapitalMarkets):
Goodmorning.GoingbacktotheCapExquestion--Ihatetobeatthistodeath,buthowquicklycanyoureprioritizetheprojectlistandreallocatethecapital?Andthen,ifvolumescontinuetobeweaker,howaggressiveareyouwillingtobeon,say,maintenanceCapEx?Isthereanygiveandtakethere?
FredrikEliasson (CFO):
Ithinkfromamaintenanceperspective,there'salotofthingsthatyoucandothatshorttermwouldsaveyoumoneybutlongtermwouldhurtyou.Forexample,shuttingoffourteamsthatareouttherereplacingtherailrightnowissomethingthatyoucoulddo,butlongtermdoesn'tmakesensebecauseit--mobilizinganddemobilizingsomethingismoreexpensivethantakingadvantageofthefactthatyouhavetheteamsoutthererightnow.
Sotherearethingsyoucando,butthekeythingisthatyoudothingsthataresmart.Andsothat'swhyIthinkthatmakingsignificantchangestothein-yearcapitalbudgetisnotnecessarilytherightthingtodofromalong-termeconomicperspective.
Butaswethinkaboutnextyearwewillalways--wealwayslookatwhatthegrosstonmileswillbe.Welookatthelinesegmentsandsoforththatweneedtoallocatecapitaltoandthat'swhereIthinkthecoalexampleisagoodplace.
Wereallyarelookinglongandhardtomakesurethatwhatweareputtingintheremakessense,ofcourse,withoutsacrificingsafetyinanyway,shape,orform.
Soweconstantlylookatthatandwewilltakealookatwhatnextyearcapitalbudgetwillbeinthecontextofwhatthegrosstonmilepicturewouldlooklike.
JohnBarnes (Analyst-RBCCapitalMarkets):
Thankyou.
Operator :
JustinLong,Stephens.
Just inLong (Analyst-Stephens):
Goodmorning,thankyou.Iwaswonderingifyoucouldcommentonthefinaltankcarregulationsthatwegotduringthesecondquarter.Assumingeverythinginthisregulationwithstandslegalpushback,howshouldwethinkabouttheimpactthesechangescouldhaveonyourbusinessgoingforward?
MichaelWard (ChairmanCEO):
CompanyName:CSXCorpCompanyTicker:CSXSector:ServicesIndustry:T ransportat ion
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Justin,Ithinkwewere,byandlarge,verypleasedwiththenewtankcarstandardstheycameoutwith.Wethinkit'samuchsafervehicle.Wewerealittlebitsurprisedthatthethermalblanketwasnotincludedandwewillcontinuetopushforthatasanindustry,becausewethinkitgivesanextralayerofsafetyatnotagreatexpense.
Asfarasalong-termimpactonthebusiness,obviously,asyouknow,wedon'townthetankcars.Thecustomersorleasingcompaniesdo.Ourearlyreadisthatmostplantoretrofittheircarsorbuynewcarsthatmeetthosestandards.
Obviously,itimpactstheeconomicsofthemovementsomewhat,andasClarencealludedtoearlier,there'salreadyalittlebitofpressureonthecrewmovejustbecauseofthecurrentspreadsbetweenBakkenandBrent.
Butwethinklongertermthiscarisabettercar,asafercar,andIthinkwe'llcontinuetoseethemovementsinthecrudeaswegoforward.
Just inLong (Analyst-Stephens):
Okay,great.Thanksforthetime.
MichaelWard (ChairmanCEO):
Thankyou.Thankyou,everybody.We'llseeyounextquarter.
Operator :
Thisconcludestoday'steleconference.Thanksforyourparticipationintoday'scall.Youmaydisconnectyourline.
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