The CCSX Corporation held a conference call for their second quarter 2023 earnings. The call was led by Matthew Korn, Head of Investor Relations, and was joined by Joe Hinrichs, President and Chief Executive Officer; Jamie Boychuk, Executive Vice President of Operations; Kevin Boone, Executive Vice President of Sales and Marketing; and Sean Pelkey, Executive Vice President and Chief Financial Officer. The performance of the second quarter met expectations, with the merchandise business leading the way. Intermodal storage revenue and export coal prices were lower, but the company is gaining momentum with customers due to improved service performance and their ONE CSX efforts. The conference call highlighted the progress the company is making in order to lay the groundwork for long-term growth and value-creation.

CSX had a solid performance in the second quarter, with 1.5 million carloads moved and an operating ratio below 60%. Revenue was down 3% year-over-year and earnings per share decreased by 9%. CSX has released its new 2022 ESG report which highlights progress in creating a supportive and positive culture, and incorporating environmental, social and governance considerations into the company's priorities.

Joe talks about CSX's environmental leadership, their use of technology, and their testing of alternative fuels. He also mentions the company's efforts to increase their positive cultural impact through volunteer hours and community events. Lastly, he emphasizes the importance of safety and reminds everyone of the need to continue to work on it, as they lost an employee last month.

CSX saw their injury rate drop to the lowest rate since 2015 in the second quarter of the year, thanks to their employees' hard work and the positive response to their efforts to strengthen their safety-focused culture. Velocity, dwell, intermodal trip plan, and carload trip plan performance all improved significantly from the same period last year, and CSX has received compliments and support from customers, regulators, and shareholders on their service improvements.

The team is focusing on initiatives such as whiteboarding sessions with customers and leveraging their transload network in order to increase their growth opportunities. The second quarter saw a 5% increase in revenue, driven by a 3% increase in volume and a 1% increase in revenue per unit. The automotive, minerals, metals and equipment, and fertilizer businesses all saw increases in volume. These increases have been supported by improved service levels, which has led to new business wins.

In the second quarter of 2023, CSX saw a 2% decrease in coal revenue due to a 6% decline in revenue per unit. Export coal volumes increased due to beneficial cycle times, good performance at the Curtis Bay terminal, and coal customers pushing for more overseas shipments. Domestic utility shipments declined due to low natural gas prices. CSX expects momentum in the export markets to continue in the second half of the year, supported by new mine capacity and coal producers making opportunistic shipments. The company is also investing in new locations, transloading capabilities, and railcars to drive more business.

In the second quarter, revenue decreased by 18% due to a 10% decline in volume and a 9% reduction in revenue per unit, largely driven by declining imports and inventory destocking in the international intermodal business. Domestically, the company is encouraged by opportunities to work more closely with Class 1 partners and target truck conversion. The hot summer is providing a helpful tailwind early in the quarter, and international benchmark prices remain supportive of strong production into the back half of the year.

In the second quarter, revenue was down 3% and operating income was down 13%, due to a $122 million headwind from cycling a gain on the Virginia property transaction. Expenses increased $105 million, largely due to inflation and increased headcount, with network efficiency improvements leading to $20 million of cost savings. Interest and other expense was $25 million higher than the prior year, and income tax expense decreased by $64 million on lower pre-tax earnings, leading to a $0.05 drop in EPS. Recently, CPKC and the railroad reached an agreement to create a new interchange in Alabama.

CSX has seen improvements in service, with overtime ratios down nearly 10% and fewer employees away from home for over 24 hours. As a result of union wage rates stepping up by 4% on July 1, PS&O expense increased by $37 million and depreciation was up by $33 million due to an equipment study and larger asset base. Fuel cost was down by $134 million due to lower gallon price and equipment and rent costs were $5 million favorable due to improved car cycle times. Property gains were $117 million unfavorable in the quarter. CSX has generated $1.5 billion of free cash flow year-to-date, which has supported $2.4 billion in shareholder returns, including over $1.9 billion in share repurchases and $450 million of dividends. Economic profit, as measured by CSX cash earnings, is up by $80 million year-to-date.

In 2023, Union Pacific expects revenue ton miles to grow in the low-single digits, with strength in automotive, minerals, and metals shipments. Coal volumes are expected to be higher due to strong export demand, but domestic coal shipments will likely soften due to low natural gas prices. There are signs of improvement for domestic intermodal activity, but no signs of a near-term recovery for international business. Union Pacific is making efforts to drive efficiency and control costs, and is committed to improving service to customers. Capital expenditures are estimated at $2.3 billion with a focus on innovation and growth.

Joe Hinrichs answers Chris Wetherbee's question about how the ONE CSX team will manage resources in the second half of the year despite economic headwinds. He emphasizes the importance of safety, service, execution, and working together to achieve profitable growth. He also acknowledges that some of the benefits from last year won't repeat in the second half.

In the first quarter, Sean mentioned that productivity improvements would amount to $15-$20 million. Currently, the team is focusing on increasing manpower levels in order to sustain the improved customer service levels. The volume is mixed, with some businesses such as metals and automotive growing, and others such as intermodal being softer. However, merchandise business is growing, and the team is making sure they have the staffing levels to support high levels of customer service. This is important as they have been gaining market share and having positive conversations with customers.

Sean Pelkey discussed the fluidity-related savings they had achieved in the second quarter, which were over $20 million, and the plan to reach $30-40 million in the second half of the year. Kevin Boone then spoke about the coal market and how the export market moves with the benchmark prices.

In the third quarter, Sean Pelkey explains that the coal RPU guidance is helpful and one should consider the fuel impact in order to think about the operating ratio and profit between Q2 and Q3. He also states that the gap between underlying pricing and inflation is still elevated, but will normalize in the future.

The company is seeing a number of opportunities to win business due to their service product being one of the best in the industry. They are expecting a positive impact on their margins and top and bottom line. Inflation is causing mid-single-digit inflation in labor and fringe and purchase services and other, and pricing has been done for the year. Conversations around pricing for next year have been supportive.

Kevin Boone explains that the company is expecting a positive trend in revenue ton-mile growth as they enter the third quarter and the fourth quarter, due to the easier comps they are lapping. He also mentions that the coal market has been dynamic lately due to the hot summer weather, and that they are seeing destocking in many markets, but it is unclear when that will stop.

Kevin Boone responds to a question about truckload conversion, noting the team has been doing a fantastic job and the collaboration with Jamie's team has resulted in wins. Sean Pelkey then adds that they are not calling for a pullback in volumes, but they have levers they can pull if the macro presents something like that. Brian Ossenbeck then asks for context and quantification of the wins they are getting from truckload conversion, as well as clarification on the cost per employee for the next quarter.

The team is focused on increasing truck conversion opportunities and making sure they have the resources to do so. Their data is improving and the pipeline is up 30% year-over-year. They are hoping for an increase in optimism in the trucking market to drive more opportunities. They have had 25 whiteboarding sessions so far this year and are expecting more opportunities in the coming quarters. Cost per employee should remain stable, though there is an expectation of a 4% wage increase in the union piece.

In the second quarter, international intermodal volume was down in the high-teens, but had improved slightly from the mid-20s. On the domestic side, there was sequential improvement month-over-month and year-over-year. The team has been working with Class 1 partners to introduce new lanes and identify new business, which is showing in the numbers. They have been taking advantage of the softness in the market to set themselves up for growth when the market rebounds.

Kevin Boone discussed the potential for a cyclical swing up in volume and truck conversion when markets improve, and he believes that the company's internal investments will help them participate in the upside. He notes that it has been nine months since they have seen rail improvement, and customers are reacting to it.

Joe Hinrichs explains that the supply chain has been challenged in recent years, leading to customer service issues and increased storage costs. He notes that 40% of their carload shipments touch another rail provider, so interchanges are important for service levels. He adds that ports are no longer congested, so they should be able to run more fluidly when the market comes back.

Kevin Boone discusses the direction of non-coal yield and Sean explains how PS&O costs have been decreasing. He also notes that there are some headwinds in the second quarter, but the fuel headwinds will moderate in the third quarter. He further explains that the progress made on PS&O costs in the second quarter will continue in the back half due to expiring leases on intermodal container storage jars.

In the merchandise business, the chemical market has been under cyclical pressure and has weighed on the overall benefit of the business. The intermodal market has been affected by fuel surcharge headwinds, but despite this, the market held up better than the trucking rates. The NPA results have been some of the highest seen in a long time. When it comes to PS&O, the company is focused on cost control and if intermodal volumes pick up, that will have an impact on costs. However, outside of volume-related expenses, the company expects to be able to hold the line on improvement seen in the second quarter.

Kevin Boone of Union Pacific Corporation answered a question from David Vernon of Sanford Bernstein about the company's mid-teens sequential revenue guidance, which is based on a mark-to-market of $225. Paul Stoddard of Goldman Sachs then asked about the potential impact of the recent agreement on the West Coast for the Longshoremen, which could result in more freight being diverted back to the West Coast. Kevin Boone responded that Union Pacific Corporation has seen stability and a slight uptick in market pricing recently, and they will see what the fourth quarter brings.

Kevin Boone states that reliability is the most important thing for customers when considering modal conversion. He acknowledges that customers need to see more reliability before they are willing to convert, and that conversations need to take place lane-by-lane and carload-by-carload in order to build customer confidence. Price may also be a factor in the decision.

Kevin Boone discusses the current pipeline of merchandise for the company, noting that the majority of their business is in that area. He also addresses the potential impact of the EIA's revised forecast for ag and coal in 2024, noting that a hot summer could potentially offset some of the double digit volume growth decline in those categories. He also mentions that the weather conditions have been a surprise from a heat perspective in recent weeks.

Kevin Boone states that it is too early to predict the market for 2024 and that the export market is strong. He also mentions that the competition in the market is high and that the supply will increase next year. He believes that the third quarter will be weak, but that the fourth quarter will be better. He also says that customers have not changed their view of peak season.

In the fourth quarter, the market will have easier year-over-year comparisons, and it is hoped that this will lead to growth. However, there is no indication that the market is necessarily recovering and the rate of recovery will depend heavily on the consumer during the holiday season. The Q&A session for today's conference call has now concluded.

This summary was generated with AI and may contain some inaccuracies.