CSX 3Q16 Earnings Call Notes

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CSX’s (CSX) CEO Michael Ward on Q3 2016 Results

Revenue declined 8% in line with volume decline

” Revenue declined 8% in the quarter, consistent with an overall volume decline of 8% which included a 21% decline in coal volume.”

Need to have some growth to improve operating efficiency

“But growth does have to be a critical component as we move to the mid-60s operating ratio. We’ve got already tempered economy here for the last two years and clearly growth has to be part of that equation. And we think with the service partners we have Fredrick’s team can grow it once we see any signs of vibrant in the economy, but that is part of the equation.”

Frank Lonegro

Automotive expected to grow, ag neutral

“Automotive is again expected to grow as light vehicle production remained strong and new business continues to ramp up. Agricultural and food products is expected to be neutral, the record grain harvest will drive year-over-year gains. However market dynamics for ethanol remained challenged near-term for CSX due to increased movements in storage in the Gulf region. Export coal is also neutral as we are seeing some near-term increase in meteorological demand, driven by reduced Chinese supply such that volume should be similar to last year’s levels.”

Significant amount of excess capacity impacts pricing power

“Sure so in terms of overall same store sale pricing we’re obviously very transparent. What we’re doing there each and every quarter you’ll have an opportunity to see that in the fourth quarter. There is clearly more difficult sale environment and it’s been there for a period of time as we see a significant amount of excess capacity. Our focus continues to be to price the value that we provide our customer to be able to continue to reinvest. We have an improved service product year-over-year that is very helpful. And what we are trying to do is to sell through this trough so to speak and sale that kind of the long-term access to a network and the capacity that we have.”

Coal inventories have come down, natural gas prices up a bit and that is helpful but we generally need to see those higher

“Sure so clearly the hot summer has been helpful the cooling degree days has been very helpful especially in the South we’ve seen significant reduction in the inventory levels, I think in the South in terms of days burn we’re down to from 150 a year ago to somewhere around 100 now. And even in North we have come down a little bit, I would say though overall that they’re probably still slightly above where they would like for them to be, in certain places they are less, certain places they are more, but they’re probably still a little bit above where they would like it for them to be.

But it is good news that we’re starting to see that and also to your point about natural gas prices they have come up a little bit, that’s also helpful. But generally though we do need to see those natural gas prices closer to 350 or above to make really meaningful impact and we’re excited where we’re heading we’ll have a much better view I think as we get into the fourth quarter and early next year in terms of what coal will do for 2017 not just on the domestic side, but also on the export side.”

We are seeing a continued shift towards more east coast intermodal vs west coast

“Sure this is Fredrick, so what we’re seeing and have been seeing is a continued shift towards more East Coast internationally intermodal coming in versus West Coast. And as a result the ports are clearly making investment not just Savannah, but other ports as well. And we are as well to make sure we can serve that. And that is attractive business that we want to get more of. And as we see additional investments come online we’ll have an opportunity.”

Our pricing power should get better eventually

“Sure, I mean it is clear that we’ve had a tough market for an extended period of time now in terms of excess capacity. And it does impact not just intermodal business, but certain markets within our merchandise business as well. Generally shorter haul also generally lower contributory traffic that are more susceptible to being switched over to truck. As the market turns and it will turn we see new orders of truck of Class A trucks have come down significantly 30% 40% year-over-year , year-to-date. We know ELDs will be coming in by sometime in the second half of next year. And if the economy continues to expand and unemployment stays low that should lead to a much better environment as we get into late ‘17 and that will be helpful.”

Shift to east cost intermodal not necessarily due to Panama Canal widening

“Sure, so this is Fredrik again. We have seen the shift for an extended period of time, that we see more of our international cargo coming in on the East Coast porch. We have not seen a significant change in the amount of volume coming in since the Panama Canal got widened. What we are seeing that there are some bigger vessels coming in, but generally it is not necessarily adding capacity.””