CSX 2Q17 Earnings Call Notes

Hunter Harrison – President and CEO

Frank Lonegro

A few markets will experience y/y volume declines

” a few of our markets will experience year-over-year volume declines in the third quarter due to market specific headwinds you’re very familiar with. Auto shipments will be impact by softening production, as reflected in the forward views of North American light vehicle production. Crude oil trends have essentially gone to zero more than offsetting the growth we expect in the core chemicals markets. And domestic coal remains challenged due in large part to the impact of the shortfall competitive loss as of January the 1st.”

Frederick Eliasson

Tough transportation environment but capacity is tightening

“I think the key thing it’s been a tough transportation environment for several quarters now in terms of pricing to their market and generally this is about truck competition, there is a lot of excess truck competition. Fortunately though as we look at the market over the last few months and we’ve seen some signs of tightening capacity. I think the combination of tightening capacity environment does move into the second part of this year and early 2018 coupled with what we are expected to do from a service perspective should lead to a 2018 that is good from a top-line perspective and as I said ultimately this is all about providing a service to our customers that they want to use day-in and day-out. “

CSX 1Q17 Earnings Call Notes

Hunter Harrison – President and Chief Executive Officer

Fredrik Eliasson

Truck market continues to see excess capacity

“The consumer sentiment continues to be at high levels, which helps many of our markets especially the intermodal market. At the same time though the truck market right now continues to see excess capacity. But as we move through the year we do expect that to gradually improve in the second half and into ’18. And then, of course, on the favorable side export coal had a very strong year in the first quarter, 8.7 million tons that we moved in the first quarter.”

Auto production clearly flattening out

“As we think about some of the headwinds, we think that auto production is clearly flattening out, and we think for the rest of the year relatively flat. It is probably a good place to think about the auto business, and then while the core chemical market continues to grow at a nice pace we expect crude by rail to continue to decline both year-over-year and sequentially as we move through the rest of 2017.”

CSX 4Q16 Earnings Call Notes

CSX Corporation’s (CSX) CEO Michael Ward on Q4 2016 Results

Probably an opportunity to move to a one man crew

“Well clearly as you look out technology is evolving David, there is going to be autonomous vehicles out there. There is no question, the only question is when and how much they will be deployed. And if you think about us putting the Positive Train Control system in place, which we will have in place as required by law. One does have to question why there needs to be two people on the crew when you have that kind of safety overlay in there. So over time, I think that will be an issue. I don’t think it’s in the near-term, but longer-term, that’s certainly something we’re going to have to address.”

Frank Lonegro

Expect a healthier environment in 2017

“Overall the industrial economy is more stable and energy headwinds are moderating. However, we continue to face a strong U.S. dollar and low commodity prices which constrains growth in some markets. As we think about the full-year 2017, we anticipate a healthier volume environment. ”

Labor inflation is on the healthcare side not wage side necessarily

“Ravi on your inflation question I think in the prepared remarks, you heard the $35 million inflation on labor and fringe and there are some pretty key industry drivers as part of that, it’s not really on the wage side of things, it’s on health and welfare side so medical inflation obviously there’s always going to be a little bit, little bit higher than we would like. ”

Frederick Eliasson

Pricing environment improving but may not get where we want until 2018

“Sure. So I will just remind again, we really don’t forecast pricing, it obviously has been a tough period, an extended period now from a pricing perspective and lot of excess capacity out there and our challenge to our team is of course to sell through this trough, make sure we sell the improved service product that we have, the unparalled network access that we have and provide innovative solutions to our customers and I think the fact that we, we’ve been able to do as well as we have I think is a good testament to both the fact that, it isn’t value driver of ours and it is also a good testament to the fact that we really do need to make sure to continue to value price to be able to reinvest in the business the way we want to. And so it has been a sequential downtick. We’ll see when it when it turns, I think there’s a lot of good things going on as the economy picks up. I think is good thing if we continue to low unemployment that put pressure on the wages. We know that. We see the deal demand is coming into play here as we get into the second half of 2017. So I think things are lining up for better pricing environment as move through the second half of 2017 but it might not fully be where we want to be until we get to 2018.”

CSX 3Q16 Earnings Call Notes

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.””

CSX 2Q16 Earnings Call Notes

CSX’s (CSX) CEO Michael Ward on Q2 2016 Results

9% volume decline driven by coal

“Yesterday CSX reported second quarter earnings per share of $0.47, compared to $0.56 per share in the same period last year. Revenue declined 12% in the quarter; a strong pricing across nearly all markets, was more than offset by the impact of a 9% volume decline, which included a 34% decline in coal, as well as negative mix and lower fuel recovery.”

Continues to be a challenging freight environment

” it’s clear this continues to be a challenging freight environment with plenty of macroeconomic headwinds. Thanks to the extraordinary work of our employees, CSX is delivering record levels of efficiency and rightsizing resources to the business demand of today.”

Need more than just a hot summer to normalize coal inventories

” it is helping, but you have some of our utilities that we serve have an awful lot of coal on the ground at this point and it’s going to take more than just really hot summer to get it back to where it needs on average.”

Frank Lonegro

Expect y/y volumes to decline in 3Q

“Now let me turn to the market outlook for the third quarter. Looking forward we expect year-over-year volumes to decline in the third quarter, in the mid to high single digit range. Despite some markets growing, the majority of our markets will be down with the most significant declines continuing to be concentrated in coal and crude oil.”

Auto expected to still grow

“Automotive is again expected to grow, as light vehicle production remains higher on a year-over-year basis. Minerals volume will be higher with a continued ramp up of the new fly ash remediation business and ongoing strength in construction, which drives demand for aggregates.”

Comps will begin to ease in back half of year

“There are comps that begin to ease as we get into the back half of the year. Although as we mentioned, volumes in the third quarter will be down mid-to-high single digits, with crude down international intermodal losses in the coal as we mentioned on a year-over-year basis down as well.”

Fredrik Eliasson

Inventories are still at a high level

“Inventory is still at the high level, has been a sequential decline just a little bit, but it’s still high versus historical basis. So that’s certainly impacting the international part of our intermodal business more perhaps than it does on the domestic side, which is also why you’re seeing the steamship line continuing to struggle quite significant than demand on that side is very week at the moment.”

Overcapacity in truck is impacting our markets

“I think short term meaning for the next 12 months or so we see a period of excess capacity out there that certainly is impacting things but overall you have a chance to see it where it comes each and every quarter.”

A little early to say if the panama canal expansion will have impact on volumes

“In terms of Panama Canal obviously it is very recent, as little too early to tell, we have said this for a while that there is so many different drivers that comes into play here, that is very difficult to predict exactly what’s going to happen. The good news is that we have a flexible network. We will be able to handle additional volume coming into the East Coast. If that happens and we’re working very closely both with international customers and with the ports to make sure we have the capability that we need if it is a bigger shift that we’re currently anticipating.”

Canadian Pacific (CP) Chief Operating Officer Keith Creel And CSX Chief Financial Officer Frank Lonegro

Canadian Pacific (CP) Chief Operating Officer Keith Creel said that due to technological advancements, railroads don’t need as many employees as they used to which should help keep expenses in check

“We use to pay too much for too little.  People would effectively come in 6 hours for 12 hours of pay.  We don’t need as many people.”

CSX Chief Financial Officer Frank Lonegro said driverless locomotive trains will also help to improve efficiency 

“Labor is our largest cost.  In 5 to 10 years, we’ll move to less labor intensity, from two to one person in a cab, and maybe in my lifetime to zero.”






Miscellaneous Notes 4.14.16

Source: Amazon 2015 Annual Report

Amazon (AMZN) CEO Jeff Bezos says their success due in part to both luck and their differentiated culture

“This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Luck plays an outsized role in every endeavor, and I can assure you we’ve had a bountiful supply. But beyond that, there is a connection between these two businesses. Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence.”

Amazon (AMZN) CEO Jeff Bezos says cultures take years to reinforce

“A word about corporate cultures: for better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it – not creating it. It is created slowly over time by the people and by events – by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select. Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another. The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one – just that it’s ours – and over the last two decades, we’ve collected a large group of like-minded people. Folks who find our approach energizing and meaningful.”

Amazon culture embraces failure

“One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

Amazon getting into the finance business

“We also created the Amazon Lending program to help sellers grow. Since the program launched, we’ve provided aggregate funding of over $1.5 billion to micro, small and medium businesses across the U.S., U.K. and Japan through short-term loans, with a total outstanding loan balance of about $400 million. Click-to-cash access to capital helps these small enterprises grow, benefits customers with greater selection, and benefits Amazon since our marketplace revenue grows along with the sellers’ sales. We hope to expand Amazon Lending and are now working on ways to partner with banks so they can use their expertise to take and manage the bulk of the credit risk.”

Source: New York Times Interview https://www.youtube.com/watch?v=ru995JyegDc

Dupont (DD) Former CEO Ellen Kulman

“The world is a more competitive place, it is getting more competitive not less competitive. So what that means is that you have to be really clear about what you’re doing,where you’re going, and how you’re going to get there.”

Source: CSX 2015 Annual Report

CSX CEO Michael Ward emphasized cost reduction in his annual report, much like many of the other Fortune 500 CEO’s

“Over the past decade, CSX has consistently delivered significant gains in productivity, even during the tough years of the most recent recession. 2015 was no different, with efficiency initiatives and cost reductions driving more than $180 million in productivity despite declines in some of the most profitable markets. The initiatives behind those savings are designed to create sustainable changes such as improving fuel efficiency and increasing the use of technology automation. What’s more, CSX delivered a total cost reduction of nearly $375 million, which includes savings from right- sizing resources to match demand. We have demonstrated repeatedly that we can aggressively manage costs in what is often considered a high fixed-cost business.”

Doesn’t expect coal markets to recover anytime soon

“The baseline coal market, which generated $3.7 billion in revenue in 2011, declined to $2.3 billion in 2015, and will continue to decline in 2016 and beyond. While this market remains important, it has given way to more consumer-oriented markets that demand premium, and ever more cost-effective, service. In an era in which the $1.4 billion in coal revenue declines over the past five years will continue to accelerate, the status quo is no longer an option.”

Source: Schwab 2015 Annual Report

Schwab (SCHW) CEO Walt Bettinger tries to be as candid as possible in his annual letter to shareholders about the state of the business

“Each year it is an honor to sit down and craft a letter to share my thoughts on Schwab with you, our valued stockholders. I strive to write this letter with a minimum of jargon, corporate speak and trendy business buzzwords. It isn’t written to compete with the latest bestseller on business strategy or how to be a better leader in changing times; it is written with the goal of simply discussing the current state of our company and the future we face together. The litmus test for this letter is: “Does it read as if I were corresponding with a business partner who has been out of touch for the past year?” As always, my hope is that you will share with me your feedback on whether this goal has been achieved.”

Schwab (SCHW) CEO Walt Bettinger said humans will continue to seek a human relationship in some form when seeking investment or financial advice

“One of the most over-hyped aspects of investing in the past year is the concept of “robo-advice.” A “robo-advisor” offers a user-friendly website and mobile experience where an investor can answer a few questions, have a complete investment portfolio built, and receive ongoing management with rebalancing and, in some cases, tax-loss harvesting. Now, I say over-hyped because the press has speculated that growth in “robo-advice” could jeopardize the desire for investors to want an in-person relationship–a suggestion that we see as folly. That said, there are real benefits to the concept of automated investment advice if it is combined with the availability of live professionals by phone, chat or in person.”

Schwab (SCHW) CEO Walt Bettinger says they are disrupting themselves in order to create a better client experience

“Today, despite what you might hear in the press about “Silicon Valley disruptors” and “fintech,” Schwab remains the consummate challenger in the investment industry. Each day we ask ourselves a question consistent with our “Through Clients’ Eyes” strategy: “How can we use our deep knowledge of investing to help our clients be better investors, to deliver services to clients at a lower cost, and to ultimately help them achieve better outcomes and take ownership of their financial futures?”

Federal Reserve’s low interest rate policy is hurting their business results

“Punishing. There is no other way to describe the financial impact on our company from the unprecedented experiments taken by the Federal Reserve since 2008. While the Fed experimented with zero interest rates and printing money under the guise of a fancy term–quantitative easing–savers suffered, responsible people who had avoided large debt suffered, and our company suffered as well. In 2008, when client assets at Schwab were slightly in excess of $1 trillion, we generated revenue of just over $5 billion. In 2015, when client assets were in excess of $2.5 trillion, we generated revenue of just over $6 billion. Put more succinctly, during that period total client assets grew by about 120% while revenues grew just 24%. Punishing. And you can attribute virtually this entire scenario to the interest rate policies of the Fed.”

Schwab (SCHW) CFO Joe Martinetto said they are assuming one Federal Reserve rate hike this year for their internal budgeting

“With that crucial first Fed rate move behind us, the path forward could be a bit brighter. As we finalized our annual planning at the beginning of 2016, the forward rate curve implied that, despite some global market jitters, the U.S. economy was strong enough to support expectations for at least one more Fed move in 2016, and we developed our baseline scenario with that in mind. Our baseline scenario also includes relatively flat long-term rates and a 6.5% improvement in the S&P 500 Index relative to year-end 2015, as well as a potential decline in revenue trades as average portfolio turnover continues to slow.”

Source: October 2015 Stanford Interview https://www.youtube.com/watch?v=hcRxFRgNpns&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–&index=8

Alphabet (GOOGL) Chairman Eric Schmidt

“The ideal business is the Microsoft business. A monopoly software business with hardware competitors who are competing for good treatment by you in a global and growing industry. Let’s use Uber as an example. Uber spends an awful lot of time saying that the drivers don’t work for them and they don’t own the cars. There’s a reason and it’s not legal or liability reasons. It’s because if you think of them as a software infrastructure company that helps assemble this thing, they have very different economics. In that sense, it’s the modern version of a franchisee. Why do people own McDonald’s franchises rather than McDonald’s owning them? Well, it’s because McDonald’s couldn’t get the capital to own them all themselves.”

Source: November 2015 Stanford Interview https://www.youtube.com/watch?v=jYhP08uuffs&index=16&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–

Netflix (NFLX) CEO Reed Hastings says you can never know anything for sure

“Maintaining a reservoir of doubt is extremely important.
“We often do an exercise, every year or so, what would be different at Netflix if you were CEO? It’s a way for me to gather all the different strategies. Would you change the pricing? Would we be in the ad business? And I really try to think through all the different methods, We call it farming for dissent. You can never be confident of anything, you always have to be curious. Yet you have to be executing really firmly. Simultaneously, knowing there is no certainty yet working really hard to know what you think.”

They don’t do company acquisitions

“In 17 years, we’ve never done an acquisition. People have tried to acquire us, but it never worked.”

Source: McCormick 2015 Annual Report

McCormick (MKC) CEO Alan Wilson said they are accelerating their shift to digital advertising

“Across all of our markets, we increased brand marketing support by 6% in 2015. Increasingly, we are shifting toward digital marketing, which comprised 38% of our advertising, up from 11% in 2011. Digital marketing creates a direct connection to consumers, including Millennials, who view the McCormick brand positively. As an example, our mccormick.com site has become a top 50 most visited food/lifestyle site.”

Source: Morningstar 2015 Annual Report

Morningstar (MORN) CEO Joe Mansueto says the company benefits from key tailwinds

“We benefit from some important industrywide trends, such as outsourced investment management, the convergence of the advisor and workplace/retirement spaces, the shift to passive investing and strategic- beta strategies, and growing market acceptance of new credit-ratings entrants.

Morningstar (MORN) CEO Joe Mansueto says asset management clients remain cautious about spending

“Low interest rates and the industrywide shift to passive investment manage- ment continued to put pressure on spending for many of our asset management clients.”

CSX 1Q16 Earnings Call Notes

Frank Lonegro

Earnings down 19% from the prior year

“Overall, net earnings were $356 million down 19% versus the prior year, and EPS was $0.37 per share down 18% versus last year.”

Expect volumes to decline in 2Q

“Looking forward we again expect volumes to decline in the second quarter, the challenging freight environment will continue as headwinds in coal, energy and metals volume are expected to more than offset the markets that will show growth. Automotive is expected to grow, as light vehicle production continues to be a bright spot in the economy. Minerals will benefit from the continued ramp up of the new fly ash remediation project and continued highway construction, driving aggregate movement.”

Slowly recovering domestic steel production environment

“Despite a slowly recovering domestic steel production environment, metals is expected to be unfavorable year-over-year as the market works off excess supply from the strong US dollar and imported product. ”

Comp per employee is up 4-5%

“comp per employee is about 4% or 5% higher. There’s a couple of driver, some of those are industry related and some of those are CSX specific. Clearly you have general wage inflation of 4% a year or so, and then with probably as the biggest driver for us health and welfare inflation. As the industry is reducing resources, you’ve got fewer employees to spread the health and welfare cost over. So both of those are industry in nature.”

comps will be tough until the fourth quarter

“?the second quarter and probably even third quarter are going to be challenging quarters from the volume perspective. It’s not really until we get to the fourth quarter we will have a little bit easier comparisons year-over-year both on the coal side and on the general merchandize side as well.”

It is helpful that the dollar has weakened but even with the relief it’s still not until the fourth quarter that you will see improvements

“the dollar’s still well above its 10 year average of so forth, but it is clear that it’s been helpful in certain areas the fact that it has taken a step back to last two months or so. ..But it is fair to say that even with that sort of a relief over the last two months on the dollar; you’re looking in to the fourth quarter I think until you’re going to start seeing meaningful improvements in the volume performance.”

Still see economy having uninspiring growth for the next couple of quarters

“If taken to the highest level from what we see the economy, I think we still see the overall economy progressing in that 2%-2.5% range, kind of uninspiring growth. Clearly we’re still dealing with the aftermath that we saw last year both on the energy side and also the strength of the dollar and the low commodity prices. And as I said earlier that’s going to be with us for at least another two quarters and it is also why we guided to volumes to be down a little bit more year-over-year sequentially in the second quarter. ”

In last two weeks: Merchandize business has stayed strong, some weakness in coal, auto still looks good and intermodal has been weak

“Specifically the last couple of weeks to your question, we look at our four key markets merchandize, intermodal, coal and auto. Our merchandize business has stayed probably some of the two strongest weeks in fact in the last two weeks, but then we have seen some weakness in our coal markets which is consistent with our guidance…Our auto business was very strong early on in March. We probably had 65% of our cars under load and that’s kind of cycling through that right now. But we continue to see good strength there for the rest of the year, and yes we have seen a little bit of weakness in the intermodal space over the last few weeks, but I don’t think anything that has structurally changed there.”

Have seen a downtick in sequential pricing

“We’re certainly not immune to what’s going on in the market place and I think you’ve seen a reflection of that here in the quarter versus the fourth quarter as you’ve seen a sequential downtick in our pricing.”

JS Earnings Call Notes – CSX

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.”

JS Earnings Call Notes 10/15/2015 – Colfax, Fastenal, Johnson & Johnson, CSX, Blackrock, Bank of America, Wells Fargo, Winnebago

Colfax (CFX) CEO Matt Trerotola doesn’t expect a recovery in his industrial end markets until 2017 

We must be more aggressive at managing our cost structure in the short-term as we work through the down cycles in several of our important end markets, especially oil and gas, and marine. Through our strategic planning process, we believe these downturns are cyclical, not structural but the timing of recovery in these markets is uncertain and may not be seen before 2017.”

And they will cut costs to remain lean 

“We’ve identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad based across all three of our businesses and address manufacturing, operating and corporate expenses.”

Colfax (CFX) CEO Matt Trerotola said the company is actively looking for acquisitions as prices have come down in the cyclical sector

And as far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. And the rate at which we complete any of those will be related to the deal processes but also will be connected to our ability to be comfortable with the value in light of the current dynamic situation in the economy.”

Colfax (CFX) CEO Matt Trerotola said the Chinese government is balancing environmental reform and economic growth challenges

I was over in China a few times earlier this year and there’s a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front or at least a commitment from that portion of the government, at the same time as they’re having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those. And so, our challenge is how do we figure out a way to work with customers to get these investments, further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits.”





Fastenal (FAST) CFO Daniel Forness said their industrial customers are in a recession

Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us. In some case, their business is treading water and they decided to tighten their belt.  The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”

Fastenal (FAST) said the slowdown in the oil & gas sector continues to affect their business

“The first nine months of 2015 were hit hard by a slowdown in our business with customers connected to the oil and gas industry. This connection includes direct industry participants as well as those with a geographic connection.  Our end markets remain choppy, as demonstrated by our weak sequential patterns.”

And they are selectively choosing to open stores again

“After several years of holding back on store openings and even contracting our total store base, we plan to expand our pace of store openings in 2016 with a goal of opening 60 to 75 new stores.”

Fastenal said it would be difficult for their fastener customers to switch to another provider as it would be a time consuming process 

“We have strong capabilities at sourcing and procurement, at quality control, at logistics, and at local customer service. Each of these capabilities is focused on the customer at the end of the supply chain. This business is split about 50% production/construction needs and about 50% maintenance needs. The former is a great business, but it can be cyclical because about 75% of our manufacturing customer base is engaged in some type of heavy manufacturing. The sale of production fasteners is also a sticky business in the short-term as it is expensive and time consuming for our customers to change their supplier relationships.”

Weakness in some of their larger accounts hurt profitability

“The relationship between sales and gross profit depends on our success within our large account business (an area that is still under-represented in our customer mix). The large account end market produces a below company average gross profit; however, as demonstrated in recent quarters, it leverages our existing network of capabilities and allows us to enjoy strong incremental operating income growth. Given the sequential weakness with our largest customers, we saw a sequential improvement in our gross profit. Our gross profit is also impacted by supplier incentives. With weaker net sales growth and our tight management of inventory levels, the growth of spending with our suppliers is lower; hence, our supplier incentives are reduced.”

And they spent some time discussing how they view capital allocation

“Finally, some thoughts on capital allocation: During the latter half of 2014 and the first nine months of 2015, we have been modifying our capital allocation by buying back some stock. This is in response to several factors. The first centers on our external valuation. Our relative stock valuation has weakened over the last several years, which prompted us to reassess our cash deployment.  We are mindful of our shareholders expectations relative to our dividend paying history and have primarily funded this buyback with debt. Over the last three to four years, we had dramatically increased our capital expenditures, relative to our net earnings, for the rapid deployment of distribution automation and industrial vending.”

The company highlighted what makes the economics of the industrial fastener business compelling

“It is helpful to appreciate several aspects of our marketplace: (1) it’s big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.”

And they view their geographic proximity to their customer base as a competitive advantage

“We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this ‘closest economic point of contact’ is the local store; therefore, our focus centers on understanding our customers’ day, their opportunities, and their obstacles.”





Johnson & Johnson (JNJ) Chairmen of Medical Devices reiterated the company’s goal of being a market leader in their 

We have a companywide premise that we should be number one or number two in the categories where we’re committed and have a clear technology path to getting through either a number one or number two position.”

And he expects an accelerated pace of acquisitions going forward

“So I think in a disciplined focused approach where we divest we will also look at opportunities to acquire. I think certainly accelerating our pace of tuck-in deals would be a good opportunity for medical device we seek, considering our scale in the market, especially in surgery and orthopaedics is large, and we anticipate accelerating that pace over the next 12 to 18 months.”





CSX Chief Financial Officer Frank Lonegro said the company is increasing train length to improve cost & labor efficiency

“To illustrate our progress, in the third quarter we increased overall train length by about 10% versus the prior year, which drove a significant reduction in crew starts.”

And they were able to combat the slowdown in volume by lowering their employee expenses and fuel expenses

“Looking at labor and fringe, we expect the fourth quarter head count to be down approximately 2% on a sequential basis, which reflects about a 6% reduction from the prior year.  Fuel expense in the fourth quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency.”

And oil shipments by rail, which was a huge growth segment for the railroads just a few years ago, is down substantially 

“In addition, we expect headwinds in our coal and crude oil markets to increase in the fourth quarter, driven by sustained low commodity prices. As I mentioned earlier, domestic coal volume is expected to be down around 20% versus the prior year. And crude oil volume is expected to decline at least 25% sequentially.”

Intermodal has been an area of strength 

On the domestic side, we are seeing the benefit of the investment and the service product that we are seeing. We have been able to grow that business somewhere between 5 and 10% over last several years. We are seeing a little bit of an enhanced growth here this quarter, as we know one of our customers who has the contractual ability to further diversify their portfolio is doing just that here in the quarter. So we are seeing a little bit of an uptick in the growth with that customer right now, beyond what we would normally see. But we feel good about that business, feel good about the ability to continue to grow that at a multiple economic output for a period of time here going forward.”    

CSX Fredrik Eliasson Executive VP said there is an opportunity to re-price legacy contracts in the coming years

So, I think you know that in our merchandise business, only about half of our business is up on the annual basis. And most of our other businesses, they are mostly 3 to 5 year contracts. We do feel that we will have good opportunities to reflect what the value we have in the marketplace, and with improving service on top of that, we do feel good about our pricing opportunities going forward as well.”






Blackrock (BLK) CFO Gary Shedlin said the company saw lower fees during the quarter as clients shifted money out of higher fee based products, such as emerging markets & commodities, into lower fee based products, like index funds 

“Sequentially, base fees were down 3% due to lower quarterly average AUM, a seasonal decline in security’s lending activity and the impact of divergent data on our fee rate as emerging and commodities market underperformed developed market.”

Blackrock (BLK) CEO Larry Fink said Blackrock maintains the #1 global market share of ETF’s with 38% of the market

iShares captured the number one market share of the net new business globally in the U.S. and in Europe and in the third quarter year-to-date. iShares flows were driven by fixed income as investors utilized fixed income ETF as an effective tool for diversification and liquidity.  Equity flows were driven by $5 billion into European listed iShares and we saw positive inflows in Canada and Asia Pacific as well.”

Blackrock (BLK) President Robert Kapito said the lower price of ETF’s when compared to traditional funds is only one component of what makes the offering compelling 

But just to step back on the price, please keep in mind that prices are only one reason why people buy ETF. They are looking for precision or what you’re discussing a new approach in smart beta or factored investing, they’re certainly looking for liquidity, which means, you have to have a fund and have some sort of size depending upon the type investor they could get core investor which we call it buy and hold or they are looking to be more active. So, price is important but its only one aspect.”

Blackrock (BLK) President Robert Kapito said ETF’s are now being used as an alternative to futures contracts

So, this is the beauty of ETFs that we constantly have been finding new uses for the products, so as futures becomes more expensive to use than ETFs had opened up a whole new world that we didn’t even think about because of the collateral cost behind futures contracts.  So as you know now ETFs are being use as a surrogate for futures across many institutional accounts, so we think that’s going to continue, how big that can be, just think about the size of the futures markets and certainly regulation is going to play a big role in that as well.”

Blackrock (BLK) CEO Larry Fink said the company could potentially benefit from Department of Labor regulation which may potentially emphasize ETF’s in retirement accounts

I think one thing is very clear how this outplays that it means greater emphasis on beta products and ETFs.  I would also say that if investors feel more confident because of however the DOL reform plays out that if investors feel more confident that they can invest fairly, securely we are all benefited by that. Now, I’m not sure how that will play out, but we’ve always believed that we could have a market place where our clients feel more secure that they have an opportunity to earn a fair return over a long cycle everyone will be benefited by that.”

And their active equity unit, which has been a poor performer over the last several years, is starting to perform 

So where we are starting to see the biggest turnaround is from the fundamental equity business. We spent a lot of time and money I should know in trying to rebuild our efforts there and the teams. And I feel very good about this, certainly in Europe our team there has been together longer. Their record across the board is now very strong and now we are starting to see the same efforts in the U.S. through our capital appreciation fund, our equity dividend fund. So the performance is actually really good.  So when you see better performance it translates directly into flow and we are starting to see those flows or having much better dialogue with our consultants who are now putting us in the mix for proposals and we’re also internally very focused on building out the equity effort and you are going to hear a lot more from us, from our marketing teams and the rest of the teams across the firm, because we are going to be much bigger in the active equity space and we are very happy to have the performance to back that up, so very important part and we’re still adding people but we are getting results at the same time, good positive feedback from our clients.”





Bank of America (BAC) CEO Brian Moynihan said the bank’s performance is improving in a tough economic environment

the key message is we continued to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer’s volatility, especially the fixed income trading markets are remaining challenging. So with that we produced another good quarter of progress in all the businesses.  We continued to make progress towards our full earnings capacity here at Bank of America, and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year.”

Bank of America (BAC) CEO Brian Moynihan emphasized the evolving nature that the retail bank has with its customers as it seeks to right size their banking branching

As a reminder, our consumer franchise is the largest retail bank in the United States. In our consumer banking business, as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment. We have been restructuring our branch structure, selling some branches, closing some branches, and changing account structures, and with that this quarter our core consumer checking accounts continued to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank, and importantly the average balance per account continues to grow.”

And mobile banking is becoming a larger and larger component of the customers banking experience

When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers.  More customers are using mobile device to deposit checks and access their accounts, and now are starting to buy products as well as book appointments. To get a sense of that, we are now booking 15,000 appointments a week off of our mobile devices.”

And mobile banking is more cost efficient for the bank as well 

“Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing of financial centers and more convenient for customers.”

Bank of America (BAC) Paul Donofrio said the company’s retirement solutions business is gaining momentum from its ability to cross sell products 

The last thing I would note that’s not shown here is referral rates across the company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year-to-date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.”





Wells Fargo (WFC) CFO John Shrewsberry reminded investors that the bank is positioned for interest rates remaining “lower for longer” than most anticipate

As I have discussed previously our view on interest rates has evolved over the past year to be more of a lower for longer expectation for both short term and long term rates. As a result, we’ve been adding duration to our balance sheet, however our balance sheet remains asset sensitive and we are positioned to benefit from higher rates and we expect to be able to grow net interest income over the long term even if the rate environment continues to be challenging.”

Like many of the other banks, they continue investing in their IT infrastructure and effectiveness

We continued to invest in our businesses with particular focus on risk, cyber and technology projects. These investments partially reflected in higher outside professional services expense in the quarter.  Our new and existing customers are increasingly using our digital offerings with active online customers up 8% and active mobile customers up 17% from a year ago.”





Winnebago (WGO) CFO Sarah Nielson said the company has decided to exit the bus business

“We made the decision to enter the bus business as announced earlier this week and have sold the related inventory and tooling to our distributor partner at cost. In light of the labor constraints that we have experienced this past year, we determine that our resources were better used to focus on the design and manufacturing of our motor homes. Also, we had not achieved profitability within this operation since the interception. We’ve recorded 1 million in operating losses in fiscal 2015.”  

Winnebago (WGO) CFO Sarah Nielson wants the company to be reactive, as opposed to proactive, in terms of figuring out which RV models the customer wants

We’re going to have to kind of monitor kind of quarter by quarter, what makes the most sense from a production plans. When we plan in an aggregate for the year we’re looking a lot at the labor resources we have to allocate and assuming a certain mix, but it’s a market where we want to be very reactive to what the deals want, what the consumers want. So, we want to be able to change as needed in them, so it potentially could but its hard to predict how all that will play out as we set today for the whole fiscal year for 2016.”