JS Earnings Call Notes – CSX

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CSX CEO Michael Ward said they were able to reduce expenses substantially during the quarter to match the decline in revenue

“Revenue declined 13% in the quarter. A strong pricing was more than offset by the impact of lower fuel recovery, a 6% volume decline and the continued transition in the Company’s business mix. Expenses also decreased 13%, primarily the result of lower fuel prices, lower volume related cost and efficiency gains.”

And their coal revenue as a percentage of the entire business declined significantly

“CSX coal revenue alone declined from $3.7 billion to $2.3 billion a cumulative reduction of $1.4 billion. CSX has overcome that loss by significantly diversifying its market mix, improving service and investing in long-term growth opportunities. As a result, in 2015, coal represented only 19% of CSX’s revenue, down from more than 30% in 2011.”

Even though overall volume quantity is down, they have been able to increase revenue per carload

“We continue to see strong core pricing, which for the fourth quarter was up 4.1% overall and 4.5% excluding coal.”

And they expect volume to remain down during the first quarter of 2016

“Now, let me turn to the market outlook for the first quarter. Looking forward, we expect volumes to decline in the first quarter. We expect the challenging freight environment to continue as the headwinds associated with coal, low commodity prices and a strong U.S. dollar more than offset the markets that will show growth.”

CSX CEO Michael Ward expects overall employee headcount to be down from previous years

Looking at labor and fringe, we expect the first quarter average headcount to be down approximately 2% on a sequential basis, driven primarily by the structural changes in our coal network that we announced in the fourth quarter. This reflects about a 10% reduction from the prior year.”

One of the company’s core themes in this challenged economic environment is “doing more with less”

“Looking at our expectations for 2016, we will continue to right-size resources with lower demand and pursue structural cost opportunities across our network. In addition, we expect to deliver productivity savings of around $200 million in 2016, which builds on the $184 million of productivity that we achieved in 2015.”

CSX CEO Michael Ward expects 2016 to be a tough year

“2016 will be a more challenging year. Volume in the first quarter and for the full year will decline as growth in some markets continues to be offset by the significant impact of continued coal declines, low commodity prices and the strong U.S. dollar.”

CSX CEO Michael Ward said it will be challenging to best their record sub 70% operating ratio in the coming year

I think on a 2016 basis, obviously as I mentioned, it’s going to be a bit of a unique year, continuing resets in the energy environment. And on the operating ratio question for 2016, obviously, it’s going to be difficult to sustain a sub-70 performance especially giving what we’re cycling and the coal projections that we’ve given you and the uncertainty in the industrial economy.”

CSX Executive Vice President Fredrik Eliasson explained how the company is thinking about pricing its services in the current environment

I think our philosophy hasn’t changed in terms of making sure that the value we provide to our customers and being able to continue to reinvest in our business. At the end of the day, it goes back to what is the second best option for our customers from a service and a price perspective. As we think through each one of them, we still think that we have an opportunity to continue to make sure we get the pricing that we need to getting to reinvest in our business, which benefits both our shareholders but also our customers as we continue to strengthen our infrastructure.”

CSX CEO Michael Ward said this is one of the toughest operating environments he has been through in his entire railroading career

We’ve not seen these kinds of pressures in so many different markets because you have multiple aspects working against you. The low gas prices; the low commodity prices; the strength of the dollar, all three of those together are really pushing. And in some ways, I think you can almost think of it as a straight recession, except for say markets like automotive and housing related, you’re seeing pressure on most of the markets. So clearly outside of a recession, this is one where we’re seeing lots of pressure in lots of different markets.”

CSX CEO Michael Ward does not forsee any M&A plans for the company

We think there is tremendous opportunity for shareholder value creation with our existing portfolio. And if you think about any mergers, there’s going to be substantial regulatory cost, some of the synergies will be very limited because they are end to end mergers. So, if you are going to offset those regulatory costs, you’ve got to have compelling interfaces of synergies. And I really have a hard time envisioning where that would be in any rail merger.”