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.”

Union Pacific (UNP) Q2 2016 Earnings Call

Union Pacific (UNP) CEO Lance Fritz said their was widespread weakness across a majority of their business groups

“Total volume decreased 11% in the quarter compared to 2015. Carload volume declined in five of our six commodity groups, with coal, Intermodal and industrial products all down double-digits. Agricultural products was the only group to show positive year-over-year growth, with volumes up 2% this quarter, reflecting stronger grain shipments versus 2015.”

The division that transports automobiles decelerated meaningfully 

“Automotive revenue was down 13% in the quarter, driven by 2% decrease in volume and 11% reduction in average revenue per car. Revenue in all were negatively impacted by mix of stronger parts growth, which has a lower average revenue per car then finished vehicles. Finished vehicle shipments decreased 10% driven by mix, production levels of passenger vehicles impacting key Union Pacific plants and contract changes.  The seasonally adjusted annual rate for the second quarter automotive sales were 17.1 million vehicles; however, June finished at 16.6 million, perhaps indicating softening consumer demand. Auto parts volume increased 9%, driven primarily by new over the road conversions.”

Union Pacific (UNP) COO Cameron Scott said they are lengthening trains in order to improve efficiency 

“While adjusting our resource to demand will always be a key focus area, overall productivity for us goes well beyond this effort. One primary area we continue to make progress is train length. While we’re unable to overcome the volume decline within the scheduled Intermodal network, we did run record train lengths in all other major categories.”

Weak economy is influencing volume levels for the company

“We continued to experience a challenging business environment in the second quarter, resulting in weak demand across many of our commodity groups.  A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year.”

Canadian Pacific Railway (CP) Q2 2016 Earnings

Canadian Pacific Railway (CP) CEO Hunter Harrison said railroad market is improving

“The market has turned much more positive.  Grain looks much better than we expected earlier in the year.  In fact, if you listen to the experts in Canada, this will probably be a record year of all time of production of grain in Canada. The bulk that has pretty well squared itself away. I think we see improvements second half, everywhere but probably crude and we know the question marks are there.”

Canadian Pacific Railway (CP) COO Keith Creel said they aren’t focused on being best in class in safety but are rather focused on “just being the best we can be” 

“So on the safety front, which is all very topical in this industry, topical with our responsibility to communities we operate in and through, although that scenario that you never get there, it’s a journey, it’s not a destination. We continue to drive dramatic improvement in that area as well, which is good for business from a societal cost to people cost, it’s the right thing to do. And it’s not about being the best in class or the best in the industry, it’s all about day-in and day-out being the best that we can be ourselves. We hold our own self to a high standard, and that’s something we’ll never forget about. And because of that, we’re driving culture, process change into the people. We’re producing some significant progress there that makes all of this possible.”

Canadian Pacific Railway (CP) CFO Mark Erceg called the demand environment weak

“We did face a very challenging demand environment during the second quarter, which was further exacerbated by the Northern Alberta wildfires, which we believe negatively impacted shipments by about CAD 20 million during the quarter.”

Canadian Pacific Railway (CP) COO Keith Creel said they’re using longer trains to improve efficiency

“nother margin issue that I think is critically important for people to understand, the day of the 112-car grain train of CP is done. We’re moving to 134 cars. Why are we doing that? Takes the same amount of locomotive. There’s a 17% or 18% pick-up in cars per train which means at the end of the day, same amount of grain is lower cost, lower locomotives, lower train starts. It’s an immediate margin opportunity for us, as well as an additional opportunity for the farmer and for us to work in concert with the grain companies to move more grain. That’s a powerful, powerful thing especially when you’re facing what might be a huge opportunity for us both in 2016 to make up some of what we’ve lost the first half, but the true power is going to be in 2017 in those lull months which we’ve experienced this year. But this is all a very positive story for us.”

Canadian Pacific Railway (CP) COO Keith Creel said coal prices have stabilized which is encouraging

“Actually, that’s something that is pretty encouraging. To your point, the prices have stabilized, the price for the third quarter is higher than the price for the second quarter, so I would suggest that that’s inflected as well.  The service is great, we’re controlling our cost, and I see line of sight to a little upside there.”

Canadian Pacific Railway (CP) COO Keith Creel stressed the important of grain

“Grain is king. Grain is king right now.  Everything is turning for grain. If you look, first of all, we get the rate action, which the increase was I think 4.6%.  That’s number one. Number two, I think I read that it’s the more acres planted in the pack.  The yield is better with new technology and so forth. So, if you believe what you read, the only thing that’s holding grain back is the supply chain coordination. And we want to be a player and a leader to help Canada, and we have the same issues in the U.S., just on a smaller scale, become a world leader in the movement of grain.”

 

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 Railway (CP) Q1 2016 Earnings Call Transcript

Canadian Pacific (CP) Chief Operating Officer Keith Creel said the company performed phenomenally well in a tough economic environment

“In this current very demanding environment that we are living in today it is all about focusing on and controlling what we can. It is leveraging this operating model to succeed. The metrics you see certainly speak for themselves. Double-digit improvements, [speed], locomotive productivity, car miles per day, train length and fuel efficiency both improving by 5%. So all fruits of the hard labor and the execution day in and day out while we improved service and delivered for our shareholders.”

Feels to them as if the Canadian economy is bottoming 

“So that said the Canadian economy though on a positive note appears to be stabilizing and recessionary fears seem to be subsiding. So we do feel that the second-quarter is going to be the bottom. Q3, Q4 obviously are going to be stronger on a demand standpoint.”

Canadian Pacific marketing team is cold calling customers in order to land sales

“Becoming part of our customers’ supply chains, part of our customers’ business offering, help them grow, so that we can grow with them to a point this past quarter, we did over 3000 cold call sales.  I bet CP never did 3000 cold call sales in the last decade. So that is how hungry this marketing team is and as a result of that we have got customers that never experienced CP, we have got customers that are under their own pressures to control cost that are taking advantage of this low-cost transportation service we can provide.”

Domestic economy is good, international is less so 

“From domestic, it’s both Tom, I think the economy is good, the economy is going to help us a little bit but share gain certainly from truck most specifically.  International, it’s sort of a wild card. We had a pretty strong start to the year before the Chinese New Year but things have fallen off a bit since.  I feel much more confident about the domestic piece but we are going to do well in the marketplace.”

Canadian Pacific (CP) Chief Operating Officer Keith Creel said they decided to in-source their information technology systems

“f we don’t have good data if we don’t have good systems to make decisions with around the railway with day in and day out. If our systems crash, we can’t get our report — give us gauges on how we’re doing across the network on a day-to-day basis. It’s challenging. So, since we’ve in-sourced it, we have our own people, we’ve been able to develop our own skill-sets, our own win strength and our own level of accountability; the results have improved dramatically. And it lowered cost. So, again, it’s win-win situation for us.”

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.”

Union Pacific 4Q15 Earnings Call Notes

Union Pacific’s (UNP) CEO Lance Fritz on Q4 2015 Results

Auto continues to be a bright spot, but volume declined in 5/6 commodity groups and industrial products

“Carload volume declined in five of our six commodity groups with coal and industrial products down 22% and 16% respectively. Automotive continued to be a bright spot for us in the quarter with the volume up 8% versus 2014.”

There are questions about the US consumer

“I will share with you though there is also questions that we have about U.S. consumers. There are indicators that the consumers are healthy like the unemployment rate is at a comfortable 5% level, the consumers are buying automobiles as Eric outlined. But labor participation rate isn’t that great and fourth quarter retail sales for goods was not that great.”

The drop-off in volume has been pretty dramatic, but nowhere near as bad as 2009

“Ken it is hard for me to speak and predict on whether the economy is going into a recession. Certainly our volume drop off as the 2015 year progressed quarter to quarter and as we are entering 2016 is dramatic and it is dramatic in historical reference but it is nothing, it is not approaching what we experienced in 2008 to 2009. I will tell again, a 6% decrease year-over-year and a quarterly 6%, 7%, 8%, 9% decrease year-over-year is pretty dramatic volume change.”

Eric L. Butler

Ag was down driven by lower exports

“Ag products revenue was down 12% on a 5% reduction and a 7% decrease in average revenue per car. Grain was down 12% in the fourth quarter. High worldwide production and a strong U.S. dollar reduced grain exports by 23%. Ethanol shipments were down 3% driven by lower exports.”

Auto was up

“Automotive revenue was up 1% in the fourth quarter as an 8% increase in volume was largely offset by a 6% reduction in average revenue per car. Finished vehicle shipments were up 8% this quarter, driven by continued strength in consumer demand.”

2% reduction in volume in chemicals

“Chemicals revenue was down 7% for the quarter on a 2% reduction in volume and a 5% decrease in average revenue per car. Lower crude oil prices and unfavorable price spreads continued to impact our crude oil shipments which were down 42% in the fourth quarter. Partially offsetting this decline was continued strength in the LPG markets including Propolene, Propane, and Bueten demand.”

Industrial products volumes down 16%

“Industrial products revenue was down 23% and a 16% decline in volume and 8% decrease in average revenue per car during the quarter. Reduced rig counts and shale drilling resulted in a 42% decline in minerals volume, primarily driven by a 52% decrease in frac sand car loadings. Metal shipments were down 27% from softening industrial production, reduced drilling activity, and a strong U.S. dollar.’

Intermodal revenue down 7%

“Intermodal revenue was down 14% in the fourth quarter and a 7% lower volume and an 8% decrease in average revenue per unit. ”

I think across the board you hear every customer talking about trying to right size their inventories

“I would say that every BCO is looking at rationalizing their inventories because they expect the holiday season higher than I think expected on inventories with sluggish retail sales. I think across the Board you hear every customer talking about trying to right size their inventories.”

Chemicals volumes from the gulf coast should come online in 2017-2018 time frame

‘We are seeing capital investment occurring specifically along the Gulf Coast in our chemical franchise. Those investments just haven’t yet turned over into operating units and so that’s a matter of time. That’s an end of this year 2017-2018 kind of impact. We are still hopeful for that impact”

Consumers are doing something with lower energy cost, but it’s not spending on goods

“The other part of it is consumers doing something with the windfall of lower energy cost and that’s where it is really hard to see that showing through in the goods that we shipped for retailers. And their feedback is while maybe services consumption is relatively healthy, goods consumption isn’t necessarily showing that.”

Robert M. Knight, Jr

We currently expect volumes to be slightly negative in 2016. Preparing ourselves for volume and mix pressures throughout March of 2016

“For the full year we currently expect total volumes to be slightly negative depending on coal and the strength of the overall economy as the year plays out. Fuel prices will have a negative impact on earnings at least in the first quarter given the $0.08 positive fuel benefit that we reported in the first quarter of 2015. While it is still early we are preparing ourselves for volume and mix pressures particularly in the first quarter and likely throughout March of 2016.”

At this point in time we do not see record earnings

“That is correct. Now nothing would please us more than to see the economy turn and things are going to go favorable. So we are going to fight like heck to do the best we can. But yes, you are correct. At this point in time, we do not see record earnings.”

Union Pacific 3Q15 Earnings Call Notes

6.5% decline in volume

“our volume was down 6.5%, with gains in automotive more than offset by declines in the other business groups. We generated core pricing gains of 3.5%, but it was not enough to offset decreased fuel surcharge and mix headwinds, as average revenue per car declined 4% in the quarter. Overall, the declines in volume and lower average revenue per car drove a 10% reduction in freight revenue.”

Business mix will continue to be a headwind to freight revenue

“business mix will continue to be a headwind to freight revenue for the remainder of the year.”

Reevaluating capital spending plans for next year

“Given the uncertain environment, we are taking a hard look at our capital spending for next year. We haven’t finalized our plans, so it too early to tell how it will relate to our long-term guidance of 16% to 17% of revenue. But from an absolute dollar perspective we do currently expect that it will be somewhat less than this year’s $4.2 billion, and the plan does include the acquisition of around 200 locomotives as part of a long-term purchase commitment.”

We are very pleased with our ability to move autos

” What we really are pleased with is the UP Automotive franchise. It’s outstanding, it gives us great access to Mexico, products produced in Mexico, gives us great access to the ports of products produced over season imported. And we have an excellent distribution system for finished vehicles on in the Western United States. We’re in a very good place when it comes to the automotive franchise.”

It would be a mistake to artificially regulate away coal

“I want to provide a little editorial comment as well. I think United States is blessed with the coal reserves that we are and our ability to generate electricity with coal, relatively cleanly, and it’s never been as clean as it is today. It would be a mistake from the U.S. economy perspective, our competitiveness globally to continue to regulate that out artificially. I think we have to work on continuous improvement with the emissions from coal fuel generation, but it would be a mistake to artificially retard that too much.’

Union Pacific 1Q15 Earnings Call Notes

Volume declined

“Total first quarter volumes were down 2%, with particular softness in coal, industrial products and intermodal. Throughout last year, we worked to add the people, locomotives and capacity needed to meet a dramatic increase in demand. By the end of 2014, we had seen full-year volume growth of 7% and we were fully resourced to meet this demand. Over the last few months, however, volume has shifted negative. As a result, our operation is in catch-up mode and not as efficient as it should be.”

Managing a network is a constant balancing act

“Managing a network is a constant balancing act to ensure you have the right resources in the right place at the right time. This balancing act becomes more difficult during significant volume swings. We’re taking the steps to align our resources with current demand, while remaining agile in an ever-changing environment. ”

Coal volumes weak

“Coal revenue declined 5% in the first quarter. Volumes were down 7%, partially offset by a 3% improvement in average revenue per car. Southern Powder River Basin tonnage was down 1% for the quarter. We experienced a very mild winter this year, which combined with low natural gas prices to reduce demand for coal.”

Industrial products affected by lower oil prices and imports

“Industrial products revenue was up 1%, as a 3% decline in volume was offset by a 3% improvement in average revenue per car. We continue to see strength in construction products, where volume was up 4% for the first quarter. Demand for rock was strong in the quarter, particularly in the southern part of our franchise. Metals volume was down 17%, as lower crude oil prices significantly reduced new drilling activity. In addition, the strong U.S. dollar drove increased imports, which reduced demand from domestic steel producers. Our government and waste shipments declined 8% in the quarter, primarily driven by a temporary reduction in short-haul waste shipments.”

Intermodal down 5% driven by volume

“Turning to intermodal, revenue was down 5%, driven by a 3% decrease in both volume and average revenue per unit. Due to the structure of intermodal fuel surcharge programs, there was a greater average revenue per unit impact to intermodal this quarter than seen in other commodities.”

Impacted by west coast labor dispute

“International intermodal volume was down 12%, driven by the west coast port labor dispute, which stretched late into the quarter. We’re encouraged that the parties have come to a tentative agreement and we’re working with our customers to reduce the backlog and return to normal.”

Continued strength in construction should drive construction materials

“On the positive side, we think continued strength in the construction and housing market should drive growth in aggregates and lumber. Finally, we anticipate strong demand for domestic intermodal to continue throughout the year, primarily from highway conversions. For international intermodal, we expect a backlog recovery to continue for the next few weeks, then return to normal seasonal patterns for the remainder of the year. Both domestic and international intermodal should benefit from the strength in consumer demand in the U.S..”

Gradual improvement in a dynamic environment

“we continue to see gradual improvement in the underlying economy, which should be a positive for other parts of our business. When you consider other wild cards, from the next grain harvest to the strength of the U.S. dollar, it all adds up to a dynamic environment. That’s the nature of our business. Our goal is to provide our customers with excellent service wherever the need arises.”

Company inflation in the 3-4% range

“Overall, for the year, expect overall company inflation to be in the 3%, 4% range. That gives you a guiding light in spite of the challenges we know we’re going to face on the labor line.”

I’m proud of the work we did in a tough environment

“When I look at the first quarter, I am proud of the hard work that the team did in terms of trying to get the cost suggested to the volume reality. I’m disappointed that we couldn’t have done better because we, here at the table, see the opportunity of what the franchise really has the ability to deliver. ”

Truck industry is having challenges that are forcing up prices despite lower oil costs

“I think actually truck pricing is increasing. If you look at most of the truck pricing indexes, because of the challenges that the truck industry is having, they are getting high single-digit type price increases. So I think would suggest instead of the gap narrowing it might even be expanding rather than staying the same.”

We don’t think opening of the Canal will have a huge impact on East coast volume

“currently East Coast has about 31. Historically, we’ve said that could go to 33 with the Panama Canal opening but as Lance said, the larger ships that are being built today really won’t even be able to go through the expanded Panama Canal. There is a value proposition for the West Coast. If you look at ship spread in terms of the West Coast versus East Coast and if you look at the cost of over land, bridge, rail, transportation, there is a natural economic driver to the West Coast.”