CSX Corp (CSX) — Q4 2019 Earnings Call Transcript

Thank you, and good afternoon, everyone. Joining me on today’s call are Jim Foote, President and Chief Executive Officer; Mark Wallace, Executive Vice President of Sales and Marketing; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations. On slide two is our forward-looking disclosure, followed by our non-GAAP disclosure on slide three. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Thank you, Bill, and good afternoon. I want to begin by thanking all of our CSX employees for another great job this quarter. They continue to show that they are the best operators in the industry. For both the fourth quarter and full year, they once again broke their own records and set new all-time low operating ratios. Our service is the best it has ever been and getting better. The key here is reliability. Our operating a simpler, more efficient network, we are able to offer rail users a service that is truck-like inconsistency, but with lower costs and more environmentally responsible. More shippers are selecting us for their shipping needs, and we have tremendous opportunity for growth. Let's now turn to Slide 5 of the presentation. Our financial results are straightforward with only a few unique items, which Kevin will point out in a few minutes. Fourth quarter EPS declined 2% to $0.99. The operating ratio improved by 30 basis points to a new record of 60% as continued operating momentum offset top line headwinds. For the full year, EPS increased 9% to $4.17, and the operating ratio improved by 190 basis points to 58.4%. These are truly great results considering the industrial economy's second-half performance. Turning to Slide 6. Fourth quarter revenue declined 8% year-over-year, due to the continued impact of the softer industrial economy, intermodal lane rationalizations, and coal headwinds. Merchandise revenue and volume declined 3% as growth in Ag and Food & Minerals markets was more than offset by declines in chemicals, auto, and other markets. The Philadelphia refinery explosion and GM strike accounted for more than two-thirds of the volume declines in the quarter. Intermodal revenue declined 9% on 7% lower volume, primarily due to the impact of lane rationalizations implemented around the 2018 peak season. We have now lapped the impact of these changes. Coal revenue decreased 22% on 17% lower volumes with declines in both export and domestic markets, due to the impact of lower export demand and benchmark prices, as well as low natural gas prices. Lastly, other revenue declines resulted from lower storage revenue at intermodal facilities and lower demurrage charges. Moving to Slide 7. Let's review our safety performance. The full-year personal injury rate declined 15%, and we reduced the full-year train accident rate by 41%, including setting another company record in the fourth quarter for the lowest accident rate. This progress is a result of concerted daily effort on the part of the employees performing the work. At the same time, we still see areas where additional improvement is needed. In 2020, we will maintain our rigorous safety program focused on continuing education of our workforce, further strengthening rules compliance, and empowering employees to have the courage to act if they see something unsafe. As I have said before, we will never be satisfied with our performance if just one of our employees gets injured while at work. Moving to Slide 8. Let's review our operating performance for the quarter. CSX set new all-time Company records for both velocity and dwell achieving significant year-over-year improvements, as well as strong sequential momentum. The combination of these improved metrics helped significantly increase car miles per day as we continue to translate incremental operating efficiencies into higher asset utilization across the network. We also continue to set fuel efficiency records operating below 1 gallon of fuel per 1,000 GTM despite typical seasonal headwinds in this quarter. CSX is the only US Class 1 railroad to have crossed this threshold. Fuel efficiency remains a key focus for the team, given the combination of financial as well as significant environmental benefits from reducing fuel consumption, and we believe opportunities remain to get even better going forward. Reducing emissions is important to us, our customers, and the communities we serve. And we are proud to have been recognized by various institutions as leaders in sustainability for the transportation space. On Slide 9, most importantly, we are translating these operational improvements into more reliable service for our customers. Trip plan performance set new records again this quarter with 83% of our merchandise cars and 95% of intermodal containers hitting their hourly trip plan targets. Additionally, we successfully completed the roll-out of individualized trip plan performance data to our merchandise and intermodal customers. Feedback on the tool has been very positive, and we believe providing this unique level of transparency to our customers will continue to differentiate CSX's best-in-class service.

Thank you Jim and good afternoon everyone. Turning to Slide 11, I'll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 8% in the fourth quarter as the impact of lower intermodal and coal volume as well as reduced fuel recovery, lower other revenue and unfavorable mix more than offset the benefit of pricing gains and merchandise and intermodal. Moving to expenses. Total operating expenses were 9% lower in the fourth quarter, a significant achievement that reflects CSX's ability to react to changing markets while delivering record service levels. Overall, these results reflect the company's sustained operating improvements and significant gains in labor and asset efficiency. Labor and fringe expense was 3% lower with average headcount down 7% or nearly 1,600. Efficiency gains were strong in the quarter partially offset by inflation, other costs, and incentive compensation, including acceleration of stock compensation related to certain retirement eligible employees. Our ongoing refinement of the operating plan continued to drive savings from fewer crew starts, enabling a 9% year-over-year reduction in the active train and engine employee base and driving a 7% improvement in crew utilization as measured by gross ton miles per active train and engine employee. The workforce efficiency and management execution reduced over time across the operating department by nearly 15% sequentially or approximately 30% versus the fourth quarter of 2018. Additionally, the average active locomotive count was down 10% year-over-year in the quarter. The smaller fleet combined with fewer cars online and freight car repair efficiencies drove a 9% reduction in the mechanical workforce while also reducing mechanical overtime expense by over 40%. Finally, we saw a unique benefit in the prior year related to the railroad retirement tax refund. MS&O expense improved 20% versus the prior year. Continued improvements to the train plan combined with increased network fluidity enabled an 8% reduction in crew travel and repositioning expenses. On the mechanical side, the lower locomotive counts also drove savings in MS&O including a 26% reduction in locomotive materials and contracted service expense. Fuel expense was $37 million favorable or 15% year-over-year in the quarter. These savings were driven by a 7% decrease in the per gallon price but were further aided by lower volume and significant efficiency improvements. Our enhanced focus on utilization of distributed power and energy management software combined with training drive a fourth-quarter record fuel efficiency. Full-year 2019 fuel efficiency was also an all-time best for CSX.

Great, thank you, Kevin. Let's turn to Slide 14 in our outlook for 2020. We expect underlying economic demand to remain relatively consistent with current levels. It took industrial activity a while to cool off, and it will take a while to heat back up. Based on this, we expect full-year revenue to be flat to down 2% versus 2019. This forecast includes more than $300 million of top line headwinds from the coal business, driven primarily by lower export coal volumes and pricing. For the first half of the year, the merchandise business will continue to lap the higher economic level from the first half of 2019, but we expect merchandise volume growth to turn positive in the second half of the year. We expect intermodal volumes to increase in 2020 as we have now fully lapped the lane rationalization impact and look to grow the reengineered network. As to the operating ratio, our goal is to operate as efficiently as possible while ensuring we maintain our reliable service product. Our focus is on growing the business and in that context, we are targeting cost efficiencies that will not inhibit service. There are additional cost levers out there for us to pull, but we must make sure we are well positioned to capture new business and respond to demand when industrial production moves up.

Thank you, Jim. In the interest of time, I would like to ask everyone to please limit themselves to one question and one follow-up only if necessary. With that, we will now take questions.

Hey, good afternoon everyone and congrats on a pretty good year relative to pretty difficult conditions. Jim, or I don't know if Mark Wallace is on the line, but do you guys mind digging a little bit deeper into your macro assumptions behind the flat to down 2% revenue assumption? And I think you did call out some headwinds in coal as well. Do you mind just repeating that again?

Yes sure, Brandon. It's Mark. So going into 2020 we expect a continuation of the current macroeconomic trends to continue. We know the consumer economy remains strong but PMI and other macro indicators suggest that we're not going to see a near-term increase in industrial activity. IDP is projected to be relatively flat for the year and the PMI read in December was 47.2 which was the second worst since ‘09 and the fifth consecutive month signaling contraction. So given this, we're not forecasting a hockey stick recovery, but any improvement in the macro environment would be upside for us. Despite these challenges, we're going to continue to get better on what we can control providing high-quality service to our customers and executing. We have not changed our outlook for long term revenue growth intermodal as we've said many times, we think we can grow 2-ish times GDP and merchandise GDP plus. So we're going to stay close to our customers, watch things and see if sentiment improves throughout the year, but clearly as I said we're not forecasting any type of a big recovery in the year.

Okay. I guess it's a related follow-up Mark can you just tell us how the marketing strategy and sales strategy has changed with CSX especially related to intermodal and merchandise?

Yes. Sure. I mean in 2009 we spent a lot at a time revamping the entire sales and marketing organization. We've changed a lot of people, brought in some great talent. We've actually developed a strong marketing team, no longer a pricing team as we've discussed in the past. The marketing team is doing a fantastic job working hard doing actual marketing activities and looking for opportunities to gain share from truck and going after them and providing the sales team with those leads and those opportunities to grow our share as we are leveraging this fantastic service product that Jim and his operating colleagues have provided the sales team to sell. On the intermodal side again as Jim alluded to we are through our lane rationalizations that began in late 2017. We have a great intermodal network that we're leveraging and we're excited to sell our, as Jim said, our 95% plus trip plan compliance or trip plan performance numbers and even higher in some lanes is exciting and customers are taking note and we are executing and doing really well with our intermodal customers there.

Thank you.

Yes. Good afternoon. I wanted to see, I appreciate the detail on coal the perspective. I think that $300 million is a revenue number, any thoughts on how we might think of that in terms of an EBITD number? Is that presumably a fairly high incremental margin? Is that a 50% incremental margin or how would you think about the EBITD headwind related to the coal revenue comment that you provided?

Hey Tom, it's Kevin. We've really never broken down the profitability between our different segments but we've always said that the coal business is obviously a very attractive business for us and we're going to continue to move as much coal as we can but that's probably as far as we want to go there on the profitability side.

Okay. What about I guess start in terms of the pricing assumption you have for seaborne? I mean it seems like you see Queensland benchmark look like I think it went down to or the market went down to the 130 area you've kind of I think come back to 150. Is there any sense within that coal headwind kind of what you're assuming broad brush for the seaborne prices format?

Yes. Tom this is Mark again. The net benchmarks and again the met is about 65% of our export coal. The benchmark prices have continued to decline as the global production has weakened and currently there are about 150 bucks. As a reminder our contracts reprice quarterly so you should expect to see a bit of a drag on the RPU into Q1 but that's kind of where it is and we will see what happens throughout the year. As a reminder this time last year the met prices were coming into the first quarter of the year or about 220 bucks.

So you just assume they kind of stay where they are today. Is that the right way to think about it?

Correct. Yes. So we will see the overall for coal we are going to see a step down in the first quarter but sequentially throughout the rest of the year we don't think it's going to get any worse on the RPU.

Okay. Thank you for the time. Appreciate it.

Great. Hey, good afternoon and just maybe Jim looking at the expense side you've kind of accelerated costs here but if volumes are going to be down maybe you can talk about if most of the PSR gains are over, how do you think about moving along with reducing expenses in light of these reduced volumes in contrast to your statement about being cautious about not going too far to be prepared for the rebound?

Yes, I will ask Jim to give a little color on it here but there are significant amount of cost reduction embedded in that guidance that we provided just to offset inflation and other cost increases that we set out in terms of the increases in depreciation, etc. So but this game is not over and we're going to do the first and foremost thing is to make sure that we're a well-positioned to provide a really good quality product to our customers in the future and again Jamie offer a little more color on the specific initiatives.

Absolutely. We are continuing to look for good improvements this year on fuel definitely towards our car higher end of things. We're finding as we become more fluid out there and the railroad moves better, our bigger yards are able to do more for us. So we're looking at getting rid of more out of route miles. Our locomotive fleet continues to go in a great direction as we utilize to get more miles out of our engines which again turns into fewer asset costs with respect to repairs and parts and really it just keeps on chipping away each and every day we're getting involved and getting into what's going on out on the balanced line and that's probably the most important piece that the team is doing as we're getting on the balanced line and we're walking out there and looking at each industry looking at how we switch them, how can we do things better and by getting out of headquarters and making sure that all the right team including myself is out there each and every week taking a look at what we can do different and better not only does it give us an opportunity to continue to reduce costs but continue to improve the product that we're able to supply Mark and his team to get out there and gain some more business as we keep on moving along.

Thanks but I guess maybe I was trying to be more specific on the employee side. So employees were down over 1,500 year-on-year. Is that something you see accelerating at this point given the volume declines or is that holding, I don't understand given Jim's commentary over not taking out too much to be prepared for the rebound?

Well, you know as we've said before our focus is on labor cost not just headcount reduction. We've made a significant reduction in the labor costs and not just targeting heads. So we'll continue to look for ways to reduce our labor costs and as we did in this quarter and as we'll do in every quarter that we have to manage the company. We'll do what's necessary around here based upon what we see in terms of business activities. Right now we've kind of given you guidance that we think especially on the merchandise side of the business there's going to be some reasonable stability sequentially in terms of where the volume line should be and an increase on the intermodal side and we'll manage the headcount according to that if it goes sideways or downward you guys get the numbers every week and if you miss a week or something we will point it out to you that which direction the numbers are going in.

Great and just a quick follow-up Jim, the arrivals really jumped or maybe Jamie from 53% on time two quarters ago to 85% now? Is there something beyond just execution that you're kind of that you want to highlight I guess on the positive side something really a strong performance there?

I mean look at the team is executing. The guys are out on the ground taking a look at everything we can. We're probably ,I can tell you right now we're going to crank the times a little bit. We're going to pull sometimes out of our trains. We're going to get things moving faster on the network with respect to cutting out some hours on how long it takes to get across the network and that number might bump down a little bit into the next quarter because we tighten things up. So that's a gauge for us to make sure that our assets and people get to the other end so we can turn them back but at the same time when I see that number start to go up it tells myself and the team that on the service design side we can take a look at removing some hours and times from our trains getting across the network.

Appreciate the thoughts. Thanks guys.

Thanks. Good afternoon. So obviously this year you have a number of headwinds that you outlined and that was really helpful but I just want to understand and also you've talked about more to do on the cost side but just broadly speaking do you need a more normal volume environment in order to really leverage those costs and get the OR even lower somewhere in the mid to high 50s. How should we think about that in terms of the different revenue environments?

Hey Allison it's Kevin. Clearly, we've outlined more cost savings that we think and there's runway to continue to do that. The model we're setting up here is where we're positioning ourselves for growth and really to leverage that when the growth comes and so I think we're very excited about the model we've created. There's a lot of leverage in this model really drop the revenue at a higher incremental margin. That's what we're looking forward as Mark and the team are diligently pursuing growth opportunities for us. So but as Jim just explained too if the volume environment gets worse than what we expect we all know we have to react. We did it last year. We came into 2019 thinking revenue was going to be $500 million higher. We had to react after in the second quarter and Jamie and the team pulled together we came up with a new plan based on the volume that we saw from that point on and we adjust it and I think we did a great job. So we'll do it again if we have to.

The math will just work out in terms of what the margins should be when the business levels come back. We're building a tremendous company here with great operating leverage to take advantage of incremental volumes when they come back.

Thanks operator. Hi everybody. Kevin just wanted to quickly confirm the $300 million for coal that was a revenue number right?

Absolutely. Yes. That was a revenue number.

Okay. That makes sense and it's obviously implied 15% decline. Any help on how we can maybe you can provide some color on what's split between the volume in revenue per yield on that? What's the makeup of that and then I thought you had said last quarter the DNA expenses we're going to pick up sequentially by about $15 million. We obviously didn't see that. Just wondering if there's any impact in the first quarter and what should we think about from a sequential perspective?

Yes. I'll have the DNA question. I might pass off the coal question to Mark. Yes. On the depreciation like we did expect from the life study to have a little bit of uptick here in the fourth quarter which was offset by some smaller items so we basically netted out the zero. I did guide for 2020 in the 50 million to 60 million range incremental depreciation year-over-year. So we'll see some bump up from the life study and some incremental capital spend next year. That's the expectations. So no change at 2020 expectation there.

Amit on the coal side let me run through the coal environment and hopefully we can get to your answer without me answering just specifically but starting with export as we've talked about before it's been a tale of two cities between met and thermal. As we guided through the year up to 2019 our expectations for export coal was it was around 40 million tons. We slightly missed that number coming in around 38 million. I tried to round it up to 39 and Kevin will allow me to so it had to be 38 but we now expect this year to deliver low 30s for 2020. As I said we expect the declines both for met and thermal but probably larger for thermal than on the met side. On the thermal side again it's one third of our export shipments where we've seen largest volume declines given low natural gas prices and mild winters in Europe obviously impacting the coal demand there.

Okay. That's very helpful and then just one follow-up for me. Kevin we saw, I guess a pretty sizable uptake in the labor for inch per employee I know there was you called that some acceleration incentives stock comp. So I just wondering what's the right way to think about that line item in 2020 because you have regular inflation but you guys have also been kind of focusing on managing overtime and with the volume environment being what it is there could be some cross currents there. So if you can just talk about that and if I missed it just help us think about how headcount will be at the end of 2020 as well.

Yes. You talked about the incentive comp as a little bit headwind to that number when you calculated. The other thing that you have to remember in the fourth quarter is we have a lot of our capital teams particularly on the engineering side that go over into vacation and once a lot of their labor through the year is going towards capital but once they go on vacation it starts to hit ROE expense. So there is a bit of seasonality to our per employee cost and so that's what you saw there in the fourth quarter.

But it was a year-over-year number. It was up over 4% year-over-year?

Yes. I think some of that impact as well and then obviously the inflation that had set within that number. There's a little bit of mix as well but going on in the next year I wouldn't see any significant rise in our current employee cost. What was the other part of the question?

Just the year-end headcount in 2020?

Yes. I think look we have a lot of momentum obviously that we've carried through the 2019 that will go into 2020. We'll continue to focus on managing attrition. There's a process here where we look at every job that comes available and ask ourselves given the model whether that job is necessary. So we'll continue to evaluate those. With the lower volume there's opportunities on the operating side that we'll find. So we'll continue to manage the labor side. It's not all about headcount. It's about the overtime which we saw some great success in fourth quarter. We have big targets next year to continue to drive the overtime down as well. So it's across the board on the labor savings.

Hey thanks for taking my question. Mark, I want to ask you about the pricing environment especially given the softness here to start the year in rare volumes and the industrial economies mentioned. In last quarter you gave some indication of same store sales and how they were trending. So just given that the backdrop and what we're seeing on the rail industry is from a pricing perspective wanted to see what you thought was kind of the current market temperature when it came to price realizing you just commented on not gaining volume for price. So just what you see the market would be helpful.

Yes. I was going to repeat that but we're not so but within merchandise and intermodal our same store sales pricing in Q4 was about in line with what we saw in Q3 which again was the strongest I think I said back then was the strongest we had seen in the past three years and our contract renewals the pricing on our contract renewals that came up in the quarter exceeded our same store sales pricing. So clearly the team is doing a great job to value the product for the service that we're offering to customers and we're pleased and I am pleased with the great work that the team is doing on the pricing side.

And in terms of the inflation indices do you have a lot of exposure in the contracts they're just naturally reset lower in this coming year or is that not?

No, I mean on the thermal side those are annual contracts so they will reset sort of now on the met as I talked about earlier they retrace every quarter but clearly so that the met benchmarks being 140-ish or 150-ish h and $150 a ton in Q4 will sort of reset those contracts in Q1. So yes.

Hey. Thanks. Afternoon. So I think you talked earlier about $300 million of operating profit headwinds. So I presume that's coal plus any of the discrete cost stuff. I just want to review that discrete cost thing. So I got real estate and depreciation but maybe Kevin can you just walk us through any of the other discrete costs headwinds that you see in 2020?

Yes. I think we obviously we called out the real estate sales this year and 2019 we’ve realized roughly $160 million the guidance for that is $60 million which I talked about in my opening comments. The depreciation step up of $50 million to $60 million versus what we saw in 2019 are the items outside of coal that we've really kind of called out.

Anything on the other railway revenue or the other income that you want us to be thinking about?

Yes. I think where we run rating today is probably a consistent a good way to think about it going in the next year. So there will be a little bit headwind on the other revenue side as our customers, the merge cost stuff lowered gone down over the year. So we will have a little bit higher other revenue in the first half of the year and kind of normalized to where we are right now.

Okay. And then just lastly when we get back to revenue growth? What are the right incremental margin? Sounds like you're positioning yourself you said for incremental margins. Is that 50%, 60%, 40% how should we think about incremental margins when we get back to revenue growth?

Probably the best incremental margins that other businesses would envy itself.

At some level you know it doesn't matter where the business comes but we have a lot of trains that have capacity. So obviously in those situations on the merchandise manifest business when we're adding up a car to the back of a train, existing train there's not a lot of cost you add to it, little bit of car hire a little bit of fuel but I think the incremental margins will be quite attractive.

Hey thanks. Good afternoon. I want to ask about the revenue line. So if you take out the $300 million from coal that headwind sort of seems like you're guiding revenues kind of up a little bit to maybe up 2.5% or so and we know we have some headwinds from other revenue with some of the ancillary stuff from earlier in the year last year. How should we be thinking about maybe that cadence? Is it merchandise volume that improves as we go through the year in addition to intermodal volume? Maybe if you can help sort of bridge some of that gap because I would have thought mix might have been a bit negative too. So any color would be helpful there.

Sure Chris. So we talked about coal being a significant headwind down sort of mid to double digits as Jim alluded to. In intermodal revenue we expect in 2020 we're going to return to a GDP plus environment as we lap our lane rationalizations and as I said many times our service product is strong with 95% plus compliance. So I think a very good momentum there. On merchandise we exited 2019 a really well positioned to grow with a strong service product and I think even despite the tough environment and the tough comps year-over-year we can see a slight improvement revenue growth in the first half and with a stronger second half.

Again in the merchandise business segment if it hadn't been for the two specific items which I pointed out the refinery explosion and the GM strike we would have been close to flat this year in terms of volumes in merchandise which is significantly different than the rest of the industry and so we're reasonably positive as the business environment begins to stabilize. At what point in time, I don't know when that's going to happen. This is not the new norm. This is kind of a natural evolution. Things go down and then they go back up. When these things start to go back up we would expect to see merchandise volumes begin to increase and intermodal we have always said we believe we have a fantastic intermodal franchise. We have fantastic intermodal service and we had to bite the bullet over a two-year period to re-engineer the franchise to make it better as we go into 2020. We knew that's what we were doing and now we're going to see as Mark said hopefully a growth two times GDP. So put those together and 80% of our business should be doing extremely well. Unfortunately, all four discrete segments of the coal business are getting hit simultaneously which is difficult for us to overcome.

Yes. Good evening guys. I wanted to go back to the service levels. You improved your trip plan performance in the car load business by 7 full points in this quarter. It had been pretty steady in the mid 70s before this gap hire. Can you dig a little more into how you're able to drive such a big improvement in 4Q if there's anything that's sustainable or something lumpy there and as you look forward is the conversation with your customers changing? Are you feeling that this yields excess car load business growth over some period of time? Can you just tell us how that's going on the ground? Thank you.

I will start off with the product that we were able to create here and then let Mark touch on some of the feedback he's getting from the customers but look we've got a fantastic team of railroaders out there with CSX and we've gone through this transition over the past two and a half years almost three years and trip plans was a difficult piece for us to work on as a group. And we tackled the first piece of intermodal which Mark had just mentioned the team has been knocking it out of the park over 95%. We still haven't achieved internally what we want to achieve for a trip plan on the merchandise side but it is day in and day out grinding discussions, talking with the field working inside and out with each and every one of our operators in order to move up each percentage point. So we have I would like to say the most stringent trip plan with respect to a two-hour buffer and that's it. We measure empties which I don't believe any other railroad does and we work really hard hand-in-hand seven days a week driving that product.

In intermodal we measure to the minute.

Yes intermodal absolutely.

On October 1, we introduced trip plans. As Jim mentioned earlier, in December we rolled out our trip plan performance to all our merchandise customers, providing them with exceptional visibility into every car on the CSX network, whether it’s loaded or empty. This level of insight into their trip plans and our performance across all lanes has been unprecedented, and customers have expressed their appreciation for this tool, which is something no railroad has ever offered before. The impact has been noticeable; looking at our carload performance in Q4, we saw a 3% decline while the industry experienced a 5% decrease. Excluding the effects of PES refineries and the GM strike, our merchandise remained flat while the rest of the industry fell by 5%. This indicates that customers are responding positively to our performance and are increasingly choosing us over competitors, particularly trucks. Our trip plan performance has been impressive, exceeding 83% for the quarter with some customers reaching the high 80s and low 90s. We remain focused on improving, as Jamie and the team strive for even better results, committing to providing exceptional service akin to that of truck deliveries. As we enhance our performance, we expect to capture more business.

The one piece to remember on trip plans for us, what Mark and his team has taken beyond what I think anyone ever thought trip plans could be. Trip plans are more of an internal metrics, so we can see how we were doing and look at costs as well as getting hour-by-hour across the network by putting this out to the customers, put the pressure definitely on the operating team, but guess what, we are hitting it. And look, we got a little bit more work to go, but we've taken this beyond what I think anyone ever thought trip plans could be.

Our carload trip plan compliance has improved significantly over the past couple of quarters, moving from 75% to 85%. Two years ago, this number was just 35%. It's crucial for us to provide our customers with visibility and tracking capabilities so they can trust our new service product and see that it is as reliable as trucking. When we had a trip plan compliance of only 35%, it was challenging to convince customers to switch from trucks to rail because they lacked confidence in our on-time performance. This is why focusing on this metric is vital. We are confident that our numbers will remain reliable and consistent, and it’s equally important for our customers to believe in that reliability so they are willing to make the switch. Customers have been willing to pay a 15% premium for the reliability of trucking, and we need to demonstrate through transparent tools that we can deliver their products on time as promised.

Great. I appreciated the comprehensive answer from everyone. Thank you.

Thanks, and good afternoon. So I was wondering if you could give a little bit more color around what the guidance assumes for that quarterly cadence of consolidated volumes. Is it the right way to think about it that we should see something like a low- to-mid single-digit decline in the first half and then something like a low-single-digit growth number in the back half as the comps ease?

Yes. Clearly, we are facing some tough comparisons in the first quarter of the first half. We experienced a favorable environment in the first half of 2019. However, we have an excellent service product, and we will do our best to navigate through this. I believe we will perform well in intermodal during the first half and hopefully achieve some positive volume growth in merchandise. As we move into the latter half of the year, we anticipate it will be stronger than the first half.

Yes, Justin, I believe that the first quarter will be the lowest point for growth this year in terms of revenue, operating income, and earnings per share. After that, we expect growth to improve as we compare against the challenges we faced in 2019, particularly in the latter half of the year.

Okay. But when you put together all the pieces, do you think in the second half of this year, volumes can be up on a year-over-year basis, is that the assumption?

Yes.

Okay. Great. And then, secondly on free cash flow, obviously, that's a highlight of the business right now. So I wanted to ask in 2020 and beyond, what's the right framework in your mind to be thinking about for the free cash flow conversion percentage? And then, also on buybacks, Kevin, maybe you could provide a little color on the magnitude you're expecting in 2020 relative to what we saw last year?

Yes. Our goal is to keep free cash flow conversion high. We are facing some challenges with the cash tax rate, which is expected to increase over time. We will do everything possible to counteract this through working capital initiatives and by examining our capital program to find efficiencies and save costs. There are plenty of opportunities ahead. We have no intention of reverting to the historically low free cash flow conversion rates that CSX and the industry have experienced in the past. This is something we take pride in, and we plan to maintain it. Regarding the buyback, we expect to have $2 billion in cash by the end of the year, which provides us with significant flexibility. There is no need to keep $2 billion in cash on our balance sheet. This positions us well for next year to seize opportunities as they arise in the market. We will also consider the dividend. Our history of returning cash to shareholders will continue.

Okay. Great. Thanks for the time.

Hey, Mark, I just wanted to dig in a little bit more on the expectation that intermodal is going to get better, it sounds like you were thinking in the front half we might start to see a return to growth. How are your intermodal partners kind of talking to you about the outlook for the business in terms of their ability to actually attract share? We're coming off a year where domestic intermodal is down, call it, whatever 5%, 6%. What's going to flip that switch that's going to get that volume to start coming back onto the network?

Yes. Let me break it down a bit and discuss both the international and domestic aspects of intermodal. The international business has experienced a smaller decline compared to domestic. We are still seeing promising growth in the international sector, particularly through our inland port strategy and new service offerings for our customers. However, the overall market remains weak. We are managing to capture some business in this environment. Customers are responding positively to our revamped network, which is operating more quickly, reliably, and efficiently. They appreciate the service, and we are successfully expanding our intermodal operations. We have moved past the lane rationalizations and are now experiencing growth. Given the current environment and the quality of our service, we believe we can continue to drive growth in this area.

Okay. Maybe just as a follow-up, as you think about the improved service, obviously, some business is under contract. Is that going to give you a better leverage to kind of get some even better than sort of run rate pricing going forward, or should we be thinking about that as being kind of the standard and you're going to be using service more to drive growth than to really try to extract more value from the existing book?

We approach it from all angles. We have long-term contracts with our customers that include rate escalators, and we will continue to grow alongside them, bringing in more business and adjusting prices where possible. We are committed to maintaining the value of our service and will tackle this challenge comprehensively.

Thanks very much. Good afternoon. Just wanted to ask a question in terms of performance evaluation, and how you differentiate between performance improvements that may be associated with lower traffic volumes on the network versus improvements that would be associated with sustainable process optimization that would remain once volume growth returns?

I believe that productivity is easier to achieve in a growing volume environment. In a declining market, you first need to counter the decrease in revenue before you can see any productivity gains. The ability to mitigate the challenges we've discussed in this call indicates substantial productivity this year, with many smaller factors contributing to larger results across the board. When I assess overtime percentages and various metrics, these are not driven by reduced volumes; rather, we’re effectively managing operations. Even in terms of depreciation and amortization, we are extracting more productivity from our employees than ever before. We evaluate productivity internally, and it would have been significantly easier to achieve higher productivity this year in a market with increasing volumes if that had been our situation.

We can examine the metrics, and as Kevin mentioned, in a growing environment, it's easier to manage operations. Currently, we are facing challenging conditions to achieve the results we are posting. However, if you analyze the metrics and their current status, you can see that we are making improvements despite the circumstances, and cash flow is strong. If we were meeting metrics and cash flow was weak, that would indicate an easier situation due to increased volume. Nonetheless, we have demonstrated that our metrics are trending positively while cash flow continues to strengthen.

And many of these changes are transformational in nature and therefore, sustainable. We are not just kicking the can down the road. We are fundamentally in every respect changing the way we run this Company, and these changes that are resulting in these efficiency gains are to a large degree is going to stay with us as we go forward.

Okay. All of that makes sense. Maybe just by way of a quick follow-up, as operating ratios across the industry start to converge and maybe it's in the high-50s, what metrics do you think that investors should pivot to start focusing on to differentiate between the various franchises, whether it's ROIC, free cash flow conversion or some other metric?

Cash flow, we talk about it a lot around here, I think we're pretty proud of our cash flow conversion. It's not easy to both improve OR and generate a lot of cash flow, and I think we've proven that. So that's really the differentiator that we see out there. And as we shift longer term, we're here to drive operating income growth as well. So those are the two things that I think we'll be focused on.

Yes. Hi, just a quick question. We talked a lot on the coal side about the export front, can you touch base a little bit on the domestic side, and how much of that $300 million top line headwind might be tied to that or is it really all on the export side? Thanks.

On the domestic side, there is some impact. I don't believe it will be as significant a negative effect in 2020 as we have experienced in the past. Unfortunately, net gas prices have remained low, dropping to about $2 recently. We did not see the surge in prices that occurred in the fourth quarter of 2018 when they reached around $4 for a few weeks. For utility coal to remain competitive, prices will need to rise from current levels, and total electric demand must increase. In many areas, coal is used for peaking generation, so our potential benefits are often realized during extreme weather conditions and cold spells. Unfortunately for those in the northern half of the country, cold weather has been limited, which is unfavorable for utility coal. This year, natural gas capacity has not been significantly stretched. However, for 2020, we anticipate that our utility tonnage will remain relatively flat, as some gains have offset market declines.

And just a quick follow-up on the coal pricing, does domestic coal revenue per carload, I mean, does that stay positive or is it positive? I shouldn't say stay, I'm not sure that's the question.

There's going to be and they are on the domestic utility? Yes.

Thank you for including me. Kevin, as we move past 2020 and shift towards a growth-focused model with the implementation of this operating plan, I’m interested in your perspective on the 59% operating ratio target for the full year 2020. As Mark mentioned, we are nearing the lowest levels for PMI ratings and industrial activity. How do you view 59% or a similar figure as a representative low point or baseline for this model's operating ratio as we look towards the next decade? What reasons might there be for that not to hold true?

Why wouldn't 59% be the floor.

Correct. Yes. Can we treat this as a cycle trough, this 59%, the low point?

You mention a floor, so why wouldn’t it improve from this point?

Right at approximately 42% margins and as Kevin mentioned, it's easier for our margins to improve and our operating ratio to decrease with increased volumes. Our long-term strategy is to continue leveraging our service, reclaim business lost to the industry, while maintaining what I believe to be very strong margins and growing our operating income, cash flow, and earnings per share of the Company.

Thanks. Just a quick one, again on coal, you said that you probably hit the worst-ever Q1 and then things kind of normalize from there if the benchmark stays where it is. Given your, the kind of, take-or-pay as you have on the volume side and kind of the way the contract reset. If the benchmark stays where it is for, let's say, the next three to five years or forever, is all of the coal impact going to be isolated in 2020 or is there like another leg to come in 2021?

Oh my gosh Ravi. Coal benchmark stay here. That's not going to be happy.

Sorry, I'm making you do math at the end of the call.

I'm not in a position to predict what will happen to coal on an international scale, whether it's thermal or metallurgical. The demand for thermal coal will be influenced by consumption in countries like India, Turkey, and Pakistan, which is decreasing. In the next decade, we may not be exporting to Europe anymore. As for metallurgical coal, it depends on global industrial production, which tends to be cyclical.

Right, right. I get that. I mean, I get that. We don't really have any visibility of where coal is going to go. But my point was, if it didn't change starting tomorrow, if it just stayed where it was, are your contracts all going to just lap and kind of completely reset in 2020 or is there more to come in 2021?

Yes. No it would keep going. They would last.

Thank you for including me. Jim, I want to revisit your discussion about the improvements in operating metrics and how they enhance service, which Mark also highlighted. You talked about using these improvements to encourage truck customers to switch over. What signs are you seeing that indicate they are making that transition, or are they holding out for additional factors? Looking ahead to 2020, do you see a chance for significant market share gains against truck? What are your thoughts on that opportunity?

Yes. Well, let me touch it real briefly. It took us decades, it took the railroad industry decades of poor service to drive the business off the railroads onto the trucks. We are not going to get the business off to highway back on to the railroad in two weeks. So we're going to have to earn it. As we were talking about earlier, we're going to have to not only put up good metrics but prove to the customers that these metrics are as equal to a truck and that this business model is sustainable. In the past, I'm sure they've had a lot of railroad guys that have walked in and said, hey, trust me take your business off to truck, put it on the railroad, I'll get it there on time. And the next thing six months later, it wasn't performing as well, and that customer lost business as a result of his conversion from truck to rail. He is skeptical and rightly so. We need to prove to that customer that this is a long-term, as I said, structural fundamental change in the way we do business. And when we do that, we'll continue to see where we grow our merchandise and intermodal volumes at a rate that is faster than the industry. Is that going to be 1% greater than the industry? Is that going to be 1.5% greater than the industry? It isn't going to be 12% greater than the industry. It's going to be incremental quarter after quarter after quarter, year after year after year, where we have outsized growth relative to the industry that's going to prove this business model.

Let me turn around and ask that same question about your rail competitor. We've spoken to several of your customers, and they've confirmed the improvement in service metrics. Jim, you have experience working with a company that has achieved a much better operating ratio than its competitor. Is there a chance for gaining market share against rail if your operating metrics continue to improve as they have shown here, relative to the competitor? Could we see a more significant upward shift in your market share opportunity against your rail competitor?

I believe our business environment in the eastern half of the United States is significantly different from that in Canada. We have billions of dollars in opportunities from truck customers who are currently shipping products with us in a boxcar, but they are also relying on trucks for 50% to 60% of their product because trucks are more reliable. I want to take advantage of that opportunity, which amounts to billions. It doesn’t make sense for me to go over there and price my service as a commodity just to try to gain a few million from the other railroad. That approach has driven the railroad industry down for decades, and it is not the model we are pursuing.

Hi, everyone. I appreciate you taking my call and addressing my question. I wanted to discuss the significant progress you've made in operations over the last few years. You mentioned the various levers you can pull in 2020. As you evaluate those options, which ones do you think could pose the greatest challenges, especially given the current environment?

The levers are always challenging. We have mentioned that for the last several months. If the business had seen a drop of 10% to 12% in a few weeks during a typical recession, it would have been easier for us to identify and eliminate the necessary costs. However, when the decline is gradual, with small percentage drops week after week and month after month, it makes it more difficult for us to react. We were concerned that cutting services in some areas to reduce costs could worsen the situation by driving more business away from the railroad and towards the highway. This presents a challenge in deciding where to make cuts while maintaining service levels. If volumes continue to decline, there could be opportunities for us, and at some point, we may need to take a more aggressive approach. We haven't taken that step yet, but we have the capacity to do so if needed.

All right. Great. If there's no further questions thank you so much for joining us today and I look forward to seeing you on the road at the next conference or on the next call. Thank you.

Thank you.