CSX Corporation (NASDAQ:CSX) Stephens Annual Investment Conference 2022 November 15, 2022 10:00 AM ET
Company Participants
Kevin Boone – EVP & Chief, Sales & Marketing
Conference Call Participants
Justin Long – Stephens Inc.
Justin Long
All right. This is Justin Long with Stephens. I want to welcome everyone to our next fireside chat with CSX. Sitting to my left is Kevin Boone, he is EVP of Sales and Marketing. I want to thank you, Kevin, for being with us here in Nashville today. And this is a fireside chat format discussion.
So I’m going to start with a few questions, open it up to the audience, I’m going to do my best to repeat the questions, so the webcast catches them as well. So try to keep your questions tight. I’m from Arkansas. It’s hard for me to remember a lot.
Question-and-Answer Session
Q – Justin Long
So Kevin, maybe you could just start with how the business is performing quarter-to-date relative to expectations, areas of outperformance, areas of underperformance, we’ll just start high level, and then dive in?
Kevin Boone
Yes. Well, first of all, it’s great to be here. Joining me also in the audience is Matthew Korn with our IR. It certainly cold here. So for a Florida boy, it’s a little colder than I guess, my blood is spend here out a little bit, being in Florida for a number of years now.
In terms of the business here quarter-to-date, I wouldn’t say there’s been major variances from what we expected. We’re still seeing — we’re seeing — first of all, we’re seeing great improvement from a service perspective. So kudos to Jamie and his team really seeing some momentum there week-over-week, sequentially. You can see it in our numbers, our reported numbers to the AAR and others. And so that’s been a real, real positive note and we’re hearing it from the customers as well.
So — but with that said, there’s still many markets that we’re still playing catch-up to. I would say coal is one of those markets where we’re still catching up to the demand. We’re seeing the producers start to get a little bit better here as they reinvest some capital in deferred maintenance. So we expect that to continue into the next year.
On the grain side, I think you heard this from our peer, Union Pacific, but seeing a lot of good activity there, probably catching up the demand there. So we really focused the team is on the cycle times, how can we cycle these unit trains a little bit faster and get more volume through our network. So those are opportunities, particularly with what you’re hearing about on the river side with the Mississippi, where we’re seeing some of the same opportunities that Union Pacific here mentioned earlier.
Aggregates, it’s a good business for us. We’re still seeing a lot of activity there. When you think about the unfortunate circumstances around the hurricane that happened in Florida. Well, that’s right on our network. And we think — and we’re looking at opportunities to really be able to lean into that rebuild here over the next year or 2, and coming up with new solutions there. So a major, major rebuild. And our network is the only network that really touches the West Coast of Florida. So we’ll really be looking at that as well.
And then we have the infrastructure build that will start to really kick in here that we think there’s big opportunities for us moving forward. And with these large projects, sometimes you get a lot of natural moves that the local quarries can’t really handle the demand that’s there with these large projects. So you get longer, and long length of haul moves that really benefits our rail network.
And then everybody knows about the auto network. We’ve got a lot of finished vehicles on the ground waiting to move. So we’re really trying to play catch-up there. The whole industry is, quite frankly, I think there’s well over 100,000 of finished vehicles sitting on the ground for the railroads to move. And so we’re really focused on that, and we’ll see some — probably some opportunity to work through some holidays at some of these facilities as they’re really focused on getting these vehicles out to the dealerships.
So those are where we’re probably seeing a lot of strength and opportunity as the network continues to improve. And as Jamie and his team continue to do what they’re best in the industry at is improving our network and delivering the service that our customers expect that we’ll continue to benefit from that.
On the flip side, you’ve heard some of the international comments from some of our customers that are out there. And I think one specifically said storm clouds on the horizon. So you’re seeing maybe not that as much in our business today, but those are some things that we’ll probably face as we get in the first and second quarter. I think that’s largely around inventory levels. I think that’s a broad-based challenge, some of it more temporary than longer lasting.
So chemicals business, we’ve seen on the plastic side, some high inventory levels. I think that’s starting to normalize, at least that’s what we’re hearing from our customers. So I would expect that to hopefully trend a little bit better here. We did see some impacts on our phosphate business, fertilizer business related to the hurricane, specifically and you’ve seen our volumes down quite a bit here. That’s primarily almost all related to a short haul move that we have.
So think about a much lower RPU type move, but a lot of volume. So while the volume looks pretty significant, the revenue impact is much less in that business unit overall. And if you really — if you adjust that out, it’s probably having almost a point of impact to our carload volume growth this quarter. So it’s been pretty significant overall, but not as significant on a revenue base.
So those are some of the things we’re seeing across broadly. I think in these times of uncertainty, you see companies that have been running full out at 100% utilization. They’re taking a pause and doing some of that deferred maintenance that hadn’t occurred. So I think we’re seeing signs of that happening around different industries.
On the flip side, the good news is, obviously, auto is a big, big component of our business that touches a lot of different industries that we serve, whether it’s metals, plastics, all these industries that are out there today, and we see some pretty significant opportunity for further recovery there that will drive and probably help some of the over inventory levels that we have today as that industry starts to ramp up.
Justin Long
Okay. Great. That’s a good way to get things kicked off. Kevin. On the hurricane, is there any way to call out what the impact from that could be in the quarter?
Kevin Boone
The most recent hurricane?
Justin Long
Correct.
Kevin Boone
I think that’s probably pretty minimal. We’ve seen a little bit of disruption to our autos into Florida, where we had to do some things. But fairly minimal. I think largely, Jamie would probably tell you, he could catch up a lot of that volume, that would be our hope.
Obviously, the one that impacted West Florida was probably more significant for us, just given some of the impact to the phosphate in the fertilizers of business that we saw and flooded some of the facilities around there, so they weren’t able to produce for a period of time.
Justin Long
And did the guidance assume that fourth quarter volumes would be up year-over-year? And if so, are you still confident in that?
Kevin Boone
We didn’t actually guide. So I would just continue to say that I think we remain on track for what we’ve said for the full year. Nothing really meaningfully has changed.
Justin Long
Okay. And last one for me, and then I’ll open it up with the ongoing labor negotiations, we’ve had a few unions not ratify the agreement. We’ve got a couple of big ratification votes coming up, what are your latest thoughts on the probability that a deal gets finalized and if it doesn’t, where we go from there?
Kevin Boone
Yes, we all want to come to an agreement. That’s clear. Both sides want to do that. I don’t think I can add a whole lot to what Lance said previously. He had a long explanation, but we’re highly focused on it. And the good news is Joe is as well, and he’s got a lot of experience working with Union’s and highly focused, and I think everybody has probably seen how much time he’s spending out in the field getting to know those frontline employees that that’s our product. That’s a service every day. And listening and thinking about that more and more. And so we’re highly focused on it, but probably not a lot to add to what Lance said.
Justin Long
Okay. Any questions from the audience? Ted?
Unidentified Analyst
Kevin, as a customer, I acknowledge your services is running pretty well. But on the intermodal side, do you have a sense for how much of a drag the problems on Western railroads are causing you because we’re just seeing business off the West Coast disappear as service is so bad and trucks are so cheap. You have a sense of what that means to us and you’re on the receiving end of all that first while [indiscernible]?
Justin Long
And just to repeat the question, it was basically about issues in the West with rail service and how that may be impacting CSX?
Kevin Boone
Yes. I also want to add that he actually pointed out our good service as well. So Jamie and team always like to hear that. And so we had a customer just complement us on our service, which is great to hear. And we have had great intermodal service. That’s been a shining light showing star through this pandemic period, which has been so challenging that intermodal team has done an amazing job. We kept our terminals open operating. It’s taken monumental effort by that team to really do that, and we’ve seen it in the numbers as well.
In terms of the impact, the West Coast issues have had on probably our overall growth over the last 2 years through this is: one, given the limits on the equipment side, we’ve seen a lot of equipment gets stuck in the West, and that’s limited in a large way, the opportunity for us to grow in the East. So that’s been a limiting factor that I think Hopefully, we’ll see that go away as we get into next year, particularly on the domestic side, that has been a huge, huge challenge.
When you’re an intermodal partner and you’re probably targeting more of those longer length of haul moves versus some of the shorter moves that can occur in the East. And so we’ve seen that prioritization with equipment and other things that would probably hurt our overall volume.
You’re correct to say, if you look at the pandemic period, our domestic intermodal business really hasn’t grown and that’s been not because the demand hasn’t been there. It’s been because of equipment, like a truck, like a dray off the terminals, all those things have really impacted our ability to grow.
On the flip side, we’ve done an amazing job on the international side. And for a lot of reasons, you’ve seen the East Coast ports really be successful through this period given some of the challenges on the West Coast and we benefited from that. And we’ve had some very strong partnerships that have really done well through that period.
Now obviously, we’ll probably run into a little bit of a slow period here, at least over the next quarter or 2 based on what everybody is saying publicly, but we expect to continue to take share in that market as we look beyond in the second half of next year and into ’24 and beyond.
Justin Long
Sure. Go ahead.
Unidentified Analyst
Regarding your intermodal team on the operating side, are you concerned with the never-ending exits of talent?
Kevin Boone
I think the question was, are we concerned with some of the talent that’s left the intermodal organization?
We’re always focused on keeping our best talent around, I think the numbers and the performance proves that we’ve got a really deep bench and we’ve been successful and working through those transition periods. But no, we’ve got — I’m not concerned at this point. Jamie’s got again, a high focus on that area. We’ve got a lot of people up against it, a lot of knowledge, a lot of industry talent.
Justin Long
Maybe shifting back to the service commentary you mentioned, there has been a significant improvement when I look at your trip plan compliance numbers specifically in manifest over the last 2, 3 months, what’s driving that? Because it feels like there hasn’t been a step function change in headcount.
So can you just give a little bit more color on what’s driving that change and the sustainability of the trip plan compliance numbers we’re seeing today?
Kevin Boone
Yes. I think higher headcount is absolutely important, but even more important is getting that headcount in the right places. We have 120 supply points on our rail network, and you have to be very thoughtful and strategic around how you’re placing that headcount out in the field. And I think we continue to get better, quite frankly, in identifying those areas where there is a big need in hiring ahead of it, and so kudos to the team for doing that.
I’d also say that spikes in COVID. I think we were down to 18 cases that are out today on the whole network, which is, I think, the lowest number I can remember since this whole thing started. And so not having those outbreaks on your network in a specific location and creating a disruption is really, really helpful. Just the reliability of our workforce is starting to improve, and we’re seeing it just the availability improvement out there.
So I think those 2 elements have really helped. And then having the best operating team in the industry, starting to be able to capitalize on having the better headcount availability is really making the numbers turn quickly.
Justin Long
Okay. You mentioned inventories earlier. I was wondering, if you could comment on retail inventories and what you’re hearing from your customers, Walmart reported this morning and had some commentary on that. But just your thoughts about destocking, potentially restocking as we move into next year at some point and maybe peak season as well? Any thoughts there?
Kevin Boone
Yes. I think more antidotes that I’m hearing right now, but I do think largely inventory levels are high. We had a couple of customers mentioned buying your Christmas gifts after Christmas, right, when the discounts will happen.
I’m not — I don’t know for sure if that’s going to occur, but it does seem like we’re seeing a little bit of excess inventory out there. There is an adjustment period that I think is going on currently. And certainly, the international intermodal customers are saying that in the market today. And so we’ll feel that probably into the first quarter and then I think some things will normalize.
Justin Long
Question here?
Unidentified Analyst
To your point, the service has been fantastic, but I know sort of the outflows has been stable, more recently. Kind of wondering has there been a surprise that we haven’t seen, I guess, a fast compression in car loans, that sort of matches the improvement that you’re seeing here in service network.
Kevin Boone
No, I think the question was I surprised that the service or the volumes haven’t reflected the improved service over the last few weeks. And I’ve always expected a delay from a service improvement to the customer coming back and saying, I’m going to offer you more freight. In some cases, I think it will be weeks. In other cases, it will be months. In other cases, it will be quarters where customers are going to be more and more comfortable to put more freight on us.
And there is this looming labor issue that we have to resolve as well. And so I think the opportunity to really lean into those incremental opportunities is somewhat challenged over the next few weeks, but I expect our team, particularly in an environment where the macro is uncertain that we’ll have a lot more opportunities to have those discussions with our customers as our service product improves.
There’s not a meeting that goes by where our customers aren’t pointing out that there’s opportunity for us to grow with them, whether it’s winning share or additional opportunities. So we really haven’t been able to go after those. We’ve been focused on improving the core business, what we’re moving — supposed to be moving today.
And I think you’ll start to see that mindset shift within our organization of going after those incremental opportunities as we get into next year and really converting on them. We’ve got a lot of things in the pipeline that are exciting in business development, other areas that will really should benefit our business from a growth perspective going forward.
I know there’s others out there declaring that they’re going to lead the industry in growth, challenge accepted there. We’ve got a lot of pride at CSX, and I know the team that works with me has a lot of pride in that. And so we’ve got plenty of opportunities ourselves, and we’re focused on what we’re doing and what we can do better, certainly to really drive that outgrowth and that performance we expect — when I look back at this year and not necessarily being able to achieve that GDP-plus growth, I think a big part of that, not only the service levels that are the hiring levels that we’ve been challenged with, but also we’re over-indexed as an industry to the auto industry.
Not only has auto has obviously been challenged, but everything that feeds that as well has probably muted the growth overall for the industry. So as I look into next year, that recovery is going to be really, really important to how — what our growth looks like in commodity prices. We’ve talked about — we’re now sitting at net prices back up to $300, which is a very, very healthy level for us. API2, while it’s come down, it’s still at very, very supportive healthy levels for us. So that could really support some good incremental volume into next year where we also have another line coming online on the met side in the middle of the year that could benefit our volumes as well.
Justin Long
And I guess building on that comment as we think about your opportunity to grow and as you mentioned, challenge accepted maybe better than the market. So coal and auto are 2 areas that you just highlighted. Where else is there company-specific growth from new business wins that you have visibility to at this point?
Kevin Boone
Yes. I think when you look at our business development pipeline, I think you’re going to see that hit more in the ’24, ’25 period. Those are long lead times, but we’re having $1 billion facilities being built on our network. You’ve heard about many of them that are out there, but I think we won more than our fair share of those opportunities out there, and that team continues to win in the market, which is great.
And I don’t — I still am a believer that you’re seeing more and more activity on the on-shoring side with uncertainty in China, with some of the things that have been created with the Russia conflict, that’s going to be more and more of a driver for companies as they look at their supply chain as a competitive advantage, and how can they have the reliability to their customers that others can’t deliver.
And usually, the best way to create reliability is have your production closer to the end consumer and we touch the most valuable consumers in the world, 2/3 of them here in the U.S. And I think you’re really seeing that. I know there’s been debates before of whether we’re going to see onshoring. I remember when we had Chief Energy, everybody said a big way that onshoring is going to happen and never materialize. But I think this time, we are seeing the numbers come through on real capital being spent on that. So that’s — that’s a big opportunity for us going forward.
Justin Long
Okay. Any other questions from the audience? One in the back here.
Unidentified Analyst
[Indiscernible].
Kevin Boone
I mean we’re always — you always have to look at what the truck market is doing. I can tell you — let me repeat the question maybe.
Is there a rate or a number that we look towards truck to make intermodal competitive? We all know the trucking market moves around a lot, Justin, you’ve covered a lot. The rates can be up 30, up 40 and then sometimes can be down. Our value proposition to customers is to give them more visibility to what their rates can be and so they can plan long term.
Despite rates coming in on the truck side, we think there’s on almost every lane that we cover still today, there’s a value proposition moving over to intermodal particularly with high fuel cost today, right? And the fuel surcharge factor helps that value proposition even more for the rail side. So I don’t think that value has gone away. Maybe the value proposition is not quite as much as what it was when truck rates were up at extreme levels.
But the other thing that we have to have our customers think about more and more is that reliability and consistency of their service. And I think their focus on this more is, well, you can have truck loosen up for a period of time. But what happens when things tighten again and you want to have that ability to move it over rail, which can consistently provide that capacity even in tight markets.
And we’ve done that. We’ve been able to do that. We’ve proven that, that worked throughout this pandemic, I would have liked to had a lot more volume on us, but that was an equipment issue. That wasn’t a real issue at all. But I think we’ll have plenty of containers. We’ll have plenty of chassis by next year, probably too many in the market would be my guess. So that shouldn’t be a limiting factor in our growth going forward.
Justin Long
Maybe we could go back to coal, and you mentioned export prices. I believe on the conference call, you talked about coal RPU moderating some sequentially in the fourth quarter. Is that still your expectation? And then moving into 2023, a lot of people are assuming we see a big decline in coal RPU. Are you in that camp? Or do you think it could be a little bit more resilient than people think?
Kevin Boone
Yes. I think since we did see a step down in some of the extreme price levels on the met side and even on the API2, we’ll see a little bit of sequential decline in the RPU into the fourth quarter.
Now when we look at next year, if you just took a snapshot of where those commodity prices are to today, 300 met, API2 in that 200 range, I don’t see if that carries through to next year, a dramatic decline overall in our RPU. And we — and I obviously talked about the volume opportunity that we have.
These are really, really healthy levels for us to continue to drive some good business through the network. I also see a lot of replenishment happening in the South, and that’s a longer length of haul business for us, so higher RPU too that will start to benefit us as well just from a mix issue on the domestic side.
So no, I don’t see at this point. If you took a snapshot now, your guess is as good as mine where the commodity prices go. I think eventually, China coming back online would be helpful and supportive of net coal prices. So that’s a watch item for us. But we’re not seeing a lot of supply coming into the market. And so that’s helpful.
And generally, when you’ve seen previous cycles, maybe even similar to what you’re seeing on the crude side, you’re just not seeing that supply reaction like you have historically? And maybe that gives us hope that this can be sustained longer than what we’ve seen in previously cycles.
Justin Long
And I know this year, you’ve had a lot of disruptions in your coal network that have impacted volumes. If you were to normalize for all of those disruptions, how much higher would your coal volumes be this year?
Kevin Boone
Yes. I think when you talk about the disruptions, there’s 3 main ones that I think about the — obviously, the accident having at Curtis Bay that temporarily shut down that facility and hasn’t been operating at full run rate. Fortunately, where that rebuild is taking place and Phase 1 is completed and that should be up and fully running through next year. So that will be a benefit to us in the next year.
Some of our mobile business hasn’t been a lot of issues that we’ve experienced there, some at the port, other areas have impacted that business as well. And then you have sugar camp, which has been well publicized and the issues that they have there. Basically back up to running half of what they did, but — and that will be an incremental opportunity going into next year for us given that they weren’t moving a whole lot in the front half of the year.
So I think our volumes were down high single digits in the first half of the year, and they would have been flattish if you adjust for those 3 items alone. And I can also tell you we’re seeing incremental opportunities, some mines getting better at production going into next year, that’s going to create some additional opportunities for us.
Justin Long
Okay. That’s very helpful. Any questions from the audience? Obviously, a big change at CSX is the announcement of Joe as CEO. From where you sit as you’ve had more discussions with Joe, and he’s been very active going out on the network, it seems — what do you feel like changes strategically under his leadership? And what doesn’t change?
Kevin Boone
Yes. I first want to point out, there’s an incredible amount of excitement with Joe coming to the organization. He’s been very visible to all the employees, including the frontline employees, and that’s created a lot of momentum and excitement.
Our frontline employees are our service product. And the more they’re engaged, the more they’re behind us, the better the service product is. And they’re really the front lines into selling our product, they touch our customers every day. And so I think that’s hugely impactful, and he’s been very focused on it, which is been helpful.
We all know Joe was a customer. He was a customer of CSX. He was a customer of Rail for a long period of time. So he has a lot of thoughts he’s bringing to our organization on how we can really tap into what the customers want, whether it’s being more — providing more visibility, more transparency on those things. He’s got a lot of ideas around, but he understands it.
And more — and probably just as important, he understands a lot of the industries that are really, really important to CSX. He comes from the auto industry, but he knows the metals industry, he knows the plastics industry, all these industries that are very, very important to our success going forward, and he has a lot of relationships within those.
So he’s bringing a lot of ideas to the table. The sales and marketing team is extremely excited because he understands the need to grow to really leverage the cost base that we’ve created to leverage our great operating team and what they’re capable of. And he continued to say this is internal external that he’s — it’s not going backwards in terms of what we’ve done from a cost perspective. It’s really how can we enhance that with growth on top of it, and still looking for opportunities for to drive efficiencies.
That hasn’t — that mindset has not gone away. We want to continue to get leaner. We want to continue to get more efficient because that allows us to go after a business that before we couldn’t make — we couldn’t make a healthy return on. And so as we get more efficient, it opens up the opportunities for us to go after new markets that weren’t available to us before.
So all those things he’s — he continue to communicate within the team is we can’t go backwards on cost, but we have to have a mindset where we’re going to deliver our product to customers where they want to grow on us.
Justin Long
Got it. And you mentioned he had some ideas on how to deal with customers. Any examples you can give us of how the go-to-market strategy could be tweaked with some of these ideas?
Kevin Boone
I think we’re having a lot of those discussions right now on just the visibility that we can provide to them. He understands the customer experience, and he can really talk their language on what the opportunities are.
More importantly, he knows what the rail service is, and he knows how the supply chain works within these important industries. And that’s provided a lot of insight for us of how we can go-to-market, how can we attract more business as we have those conversations.
Now I would expect those conversations to really ramp up in the next year as a service product as we recover. But that’s really been the benefit of us. He’s met with — probably he’s had calls with 15 to 20 important customers. We’re going to have a customer engagement for them right now here in the next couple of weeks for he to get out in front of customers to answer questions. But the reaction has been very, very positive to have somebody that understands what their challenges have been historically, and that can help us focus on solving for those and really differentiating our product in the market.
Justin Long
Maybe we could shift to pricing for a moment. Truckload spot rates have come down, truckload contract rates have held up a bit better, but next year, everyone is expecting pressure. Could you talk about how CSX’s pricing has trended through all of that. And as we move into 2023, when you combine that with a higher level of inflation, what’s your confidence that you can continue to price above inflation next year?
Kevin Boone
Yes. Let’s — maybe we first talk about our merchandise business. About half of that business gets repriced every year. And a large concentration is in the fourth and first quarters of the year. And if you look back, it’s not that long ago, but it seems like a long time ago in the fourth and first quarters of — fourth quarter of ’21, in the first quarter of ’22, the current year, inflation wasn’t really that hot at the moment.
So it was a very, very different conversation we were having with our customers at the time. And so a lot of that business, obviously, was in a very different environment where we’re having those discussions. Now that business is coming up. Obviously, in the fourth and first quarters. And fortunate not enough for us, our customers are getting price in the market. We see it all the time, and they understand some of the challenges that we face from an inflation perspective.
Our contract — Union contract agreement, our negotiation is very public. People can see the inflation that’s embedded in our business that will be embedded going forward. Obviously, prices in the metals market and across many markets where that feed our CapEx are up. And so we have to pay for those. And so those discussions are taking place. Not every discussion is the same, but I think it’s a very different discussion than what we’re having in the fourth and first quarters of last year.
So I’m confident that we can continue to cover those — that inflationary environment. Our customers, quite frankly, expect us to. And — but we also have a value proposition to the customers where in a market now where they’re facing a lot of challenges, a lot of inflation. We’re the low-cost provider of transportation for them. And so those discussions are manifesting into, well, how can we bring over additional volume.
And when there are opportunities to do that, the one share, then that pricing discussion can be a little bit different as well. We’re looking to maximize opportunities for growth both through price and volume. It’s more of a balanced approach going forward. And that’s, I think, a more sustainable business model for our success and really to enhance what we’re trying to do.
Justin Long
Got it. Any questions from the audience?
Unidentified Analyst
[Indiscernible].
Kevin Boone
Yes. I think the comment on storm clouds on the horizon is for a pretty small portion of our business on the international intermodal side. I think that’s a pretty unique environment, where given all the challenges of the supply chain, you’ve seen a lot of companies, a lot of — particularly on the retail side, I want to get out in front of that and have the inventory levels, and you’re probably looking at just high levels of inventory that need to adjust to normal — more normalized levels over the next quarter or 2 would be my guess.
And how long that persists in the next year, I think, is a question for us. But on the flip side, combat some of that, we’re working on new lanes that we can introduce to drive more volume to offset that. So we’re not sitting still, and the message to the team over and over again is, I believe, in a market where things are weaker, where our service product is going to be improving allows for us to go after a lot more share.
I mentioned the inflationary environment. All of those things play into our opportunity to take share in the market. And I think it’s going to be easier to do that in this market than it has been, quite frankly, over the last 2 years because we’ve been trying to play catch-up to the current demand and the customers that we serve today, and not really even able to think about or go after that incremental opportunity that was out there that exists in the market. That’s not going away even if the macro slows a little bit here.
Justin Long
I’ll ask you a similar question to what I asked in the prior discussion. What’s the economic environment that you’re planning on for 2023? And if you’re assuming a mild recession, is that still an environment where CSX can grow volumes and improve margins?
Kevin Boone
Yes. I think I’ve always said the cycle, I believe, for the railroad industry is going to be different than previous cycles, just given our lack of participation in a lot of the growth that’s occurred over the last 2 years, given some of the service challenges, the hiring challenges that we’ve had. So it makes it very unique.
There’s markets right now where I’m clearly seeing the order rates have come down a bit, but that hasn’t impacted our volume because we haven’t been up against the demand here. And so that’s going to insulate some of the volatility that we could see going forward.
What my assumption is for the economy, I can probably add — probably matters what day of the week you asked me are — there’s a lot of moving parts. I highlighted the things, I think, that are really going to matter for us when we think about growth next year, the auto recovery is huge for our industry and for CSX, in particular, it’s — you can see it’s well, well below what we were doing in 2019, and I think that’s a multiyear recovery opportunity for us, absent a severe recession scenario.
I think commodity prices are really, really important that they stay at healthy levels, whether it’s on the ag side or the coal side all those things are important and supportive of what we’re doing. And I see no signs that those are going to necessarily let up even in a mild recession type of scenario at this point. So those are the things I think that are important.
Where the economy goes? Our objective is to try to take share in that environment as we see overall demand levels come down, where can we lean into opportunities to take share and be creative. We’ve got a lot of creative ideas out there, whether it’s quality carriers with the ISO tanks and other things where we think we’ll take share from truck.
Justin Long
Okay. How do you think about the long-term volume growth framework at CSX, maybe relative to GDP or IDP? And does that framework look different under Joe’s leadership?
Kevin Boone
Hopefully, it looks higher with his customer perspective, and I know he’s going to challenge the team to really grow, but grow — identify the profitable growth. We’re not going to grow for growth’s sake, just to put up a growth number. It’s got to drop to the bottom line. That is very, very important to us. And that’s something that I see as a huge opportunity for us.
There’s not a lack of opportunity out there, and our goal hasn’t changed. We want to outgrow the economy. And it’s going to take a lot of work. There are some obvious markets that have headwinds like coal over time and we’ve got to come up with solutions that offset that. And we’re pretty confident with intermodal and some of the products that we’re developing that we can do that. And so that’s where we need to lean into.
The cycle will be interesting. What I do know in many of this room, I’ve covered the rail sector for a long, long time, is we do a really great job of managing our costs on the downside, and we’ll continue to focus on that, protecting the margins, things like that. But sometimes we do it to the detriment of participating in the growth on the upside.
And so we’ve got to really think about how we maximize profitability through the cycle and really outgrow the industry when customers want to grow. We have to signal to them that we’re ready to grow when they are. And we haven’t been able to do that. I think in historically in some of the cycles previously.
So we’re highly focused on that. Where do we pull costs that don’t sacrifice our ability to flex as the market comes up because clearly, the economy can be surprised on both sides, and you’ve got to build in more resiliency into your network to be able to anticipate that and then adapt and that’s what we’re highly focused on as a leadership team is how do we do that?
Because the economy — if we have a recession, it’s going to come back. And we think in that environment, if we have a differentiated service product, we’re going to take a lot more share.
Justin Long
Can you build on that a little bit more? Because I think that’s a really interesting point and trend we’re seeing across the industry. Just in terms of the commentary we’re hearing with the service issues we have today. If we enter into a recession that’s not mild, maybe it’s deep maybe the rails don’t cut as much in terms of resources.
So how do you balance protecting earnings versus being prepared for that eventual upturn in the market. I guess a long way of asking, like, how do you think about managing those costs differently in this downturn versus prior downturns?
Kevin Boone
Yes. I think you got to — we have a lot of levers to pull. I think you got to understand which levers you might pull different levers going into it. And I know Sean and his team are highly focused on that if it comes to that. We have high attrition rate. So you can manage declines in overall demand levels in the economy through attrition naturally.
When you look at 6%, 7%, 8% attrition, that’s a natural lever that you don’t even have to pull, you can just let it play out, and you can slow down the hiring efforts, those things that are in a very calculated way, but don’t sacrifice your ability to flex back up over time. And I think that’s — those are the things that we’re talking about internally a lot is.
And then there are some other areas that we haven’t traditionally flexed the cost lever as much and looking at those things and what we can do in those environments, I think, is important.
Justin Long
Okay. Any questions from the audience? We’ve got maybe a few more minutes left on [indiscernible]
Unidentified Analyst
[Indiscernible] that still the right level [indiscernible].
Kevin Boone
Yes. I think the question was, is 7,000 is still right, is the right number for us to look at in terms of our T&E headcount?
We’re at — I think we’re a little bit over 6,900 as of this week, and we’re pretty confident we’ll hit that 7,000 number by the end of the year, and really deliver on that target. So again, kudos to the team, it’s not easy to hire in this environment and attract talent, and they’ve done an amazing job doing that.
Is that the right number? My answer is, I hope not because I want to grow this business, and we have a lot of plans to continue to grow and go after these markets. So we’ll have to continue to evaluate that number as the economy and other data points come in around that, and we’ll make sure we have the right workforce to handle the business.
But in my mind, as leading the sales and marketing effort, I hope that count continues to go up because that means we’re delivering a lot more business onto the railroad.
Justin Long
Can you talk about the capital requirements to support that growth above the economy above GDP, I guess, coming out of this down cycle once we see that outperformance materialize, how many years can we go without a meaningful step-up in CapEx? Maybe just talk about your capacity in the network today?
Kevin Boone
Yes. I think if you go — if you ask Jamie on the capacity on the network, he feels pretty good about handling a lot of incremental growth. We are making an investment over — it started last year, and we’ll go into this year and next a little bit on the Southwest Corridor of our network where we’re putting in sidings not a huge dollar amount, but somewhat material.
And so that will be very helpful when you think about our chemical franchise and other areas where we really want to grow over time. That was — if you asked Jamie, kind of the last real area of need from a track perspective on a larger scale to handle some of the growth that we anticipate going forward.
The Howard Street Tunnel in Baltimore, having to double stack capability, we’re making an investment there, that will be over the next 2 or 3 years. So you’ll see that come through. But beyond that, I think we’ve done a good job of thinking about our locomotive fleet, our car fleet and not having these peaks and valleys, continuing to invest through the cycle. And so we’re ready and prepared to handle the business.
We are with some of our business development wins seeing more need for cars over the next 3 to 4 years, but it’s not a huge step function. And that’s a good news. Those are — that’s a really high return investment for a company that’s making a 30-, 40-, 50-year investment in a new plant or a new manufacturing facility, and we’ll do those investments every time.
We’re seeing a lot more opportunity for growth investments, too, and at a very, very high return as well, and that’s probably an area where we haven’t been able to deliver as much as I would like to over the last few years. And so the team is working hard there. It’s got to have a strong hurdle rate in terms of returns, but we are seeing more opportunities. And I think that’s good news.
But again, not a meaningful step function in the capital, and we’re always looking at ways to make our maintenance capital more efficient. Is that either technologies? We look at a lot of numbers that drive efficiency of how we put rail in. Jamie is highly focused on that because that delivers a lot of value as well.
Justin Long
And I guess following up on that question. You mentioned locomotives. A couple of the other U.S. rails have announced some pretty significant locomotive modernization programs. CP has a $1 billion program that kicks off next year. Could you talk about where you stand on locomotive modernizations this year and going forward? Is that a big opportunity?
Kevin Boone
Yes. We have a healthy rebuild program that’s been fairly consistent through the last few years, and we’ll continue to invest in that over time. I think the plan is 40 to 60 rebuilds again into next year and keep that average age of our fleet at a level where we think it’s ideal from a maintenance cost perspective and those things.
When you look at the technologies out there like for locomotives, I don’t think we’re there yet in terms of having a need or a desire to make a major investment because there’s a new technology out there for us to benefit from battery technology. Those things are still a ways away, but it’s something that we have to continue to work on and develop as an industry because eventually, there will be a time.
Justin Long
Okay. Well, Kevin, I want to keep us on time, so we’ll end things there. But thanks so much for joining us today.
Kevin Boone
All right. Appreciate it. It’s great to be here.
Justin Long
Thanks, everyone.
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