CSX Corp (CSX) — Q1 2020 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 2 is our forward-looking disclosure, followed by our non-GAAP disclosure on Slide 3. With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

Thanks, Bill, and thank you all for joining our call today. Before I get into the details of the first quarter, I want to say that our thoughts are with those who have been affected by the virus. No one ever imagined that we would be dealing with anything like this, but to see people everywhere respond to the challenge is uplifting. With the beginning of the transformation of CSX just a few years ago, we adopted a few tenets by which to operate. First, be safe. The employee should never be injured while on the job. Second, help our customers be successful by providing them with good service. And third, operate as efficiently as possible. We knew that if we did those three things, we would be a great company and shareholders would be rewarded. We clearly did not change how we operate with a pandemic in mind. But because of the intense adoption of those core beliefs, CSX is now a much stronger and resilient company and in the best possible position to respond to this unprecedented and uncertain environment. I am incredibly proud of the men and women of CSX who are working on the front lines. They have once again shown what outstanding railroaders they are. CSX is running at peak condition, keeping the nation’s supply chain moving and delivering critical products to millions of Americans. Thousands of customers trust CSX with their freight, and every one of them right now is experiencing some degree of disruption. And we are deeply committed to maintaining the best-in-class service they have come to expect from us. I am proud to say that service is currently the best it has ever been. Now let’s go to Slide 5 of the presentation for highlights of the first quarter financial performance. First quarter EPS declined 2% to $1. While the operating ratio improved by 80 basis points to 58.7%, a new Class I railroad first quarter record. Given the combination of the known headwinds this year from export coal and other non-core items, as well as the initial impact from the pandemic in the final weeks of the quarter, these results are impressive. Moving to Slide 6, first quarter revenues declined 5%, as merchandise growth was more than offset by declines in coal and other revenue. Merchandise revenue increased 3% on 2% higher volumes as broad-based volume growth across markets was partially offset by declines in automotive and fertilizers. Excluding automotive, merchandise revenue and volume were up 5% and 4% respectively. Intermodal revenue declined 1% on flat volumes as domestic revenue and volume growth was more than offset by declines in the international business. Excluding the COVID-19 impact from the final weeks of the quarter, international volume would have been positive as well. Coal revenues decreased 25% on 15% lower volumes. Both the domestic and export markets continue to be negatively impacted by natural gas prices, weak export demand and benchmark prices. Other revenue declined 40%, representing a 2% headwind to total revenue, due to lapsing a favorable customer contract settlement last year and lower demurrage and intermodal storage revenues. Turning to Slide 7 and our safety performance where we again showed improvement. This quarter was one of the safest in CSX’s history. The personal injury rate declined 22% and the train accident rate declined 34% with both figures approaching all-time company records. Let’s now turn to Slide 8 and review our operating performance. CSX continued to operate at an extremely high level during what is typically the most seasonally difficult quarter, setting first quarter records for velocity, dwell and car miles per day. Additionally, CSX continues to lead U.S. Class I railroads in fuel efficiency, operating at 1 gallon of fuel per 1,000 gross ton miles. Improving fuel efficiency is a top priority for the team and we are proud of our success. Fuel efficiency initiatives over the last several years have reduced annual diesel consumption by approximately 60 million gallons. The emissions avoided from this reduction are equivalent to planting almost 1 million acres of forest each year, and we’re challenging ourselves to be even better. CSX recently became the first U.S. Class I railroad to have its long-term emission intensity reduction goal approved by the Science-Based Target Initiative. Reducing emissions is important to us, our customers and the communities we serve. Critically, as shown on Slide 9, our operating performance continues to drive best-in-class service and reliability for our customers. Trip plan performance is the best it has ever been with 84% of merchandise carloads and 98% of intermodal containers currently meeting their hourly trip plans in April so far. This performance includes the implementation of substantial service design changes in recent weeks to adjust our network and respond to the current lower volumes. Let me turn it over now to Kevin for more detail on the quarter.

Thank you, Jim, and good afternoon, everyone. As you will see in my review of the first quarter financial results, CSX was once again able to drive significant efficiency gains, hosting yet another quality operating ratio record by the top line headwinds Jim described. This quarter marks three years since the transformation of CSX, and while there remains considerable uncertainty around the severity and duration of the economic impact related to the pandemic, CSX has never been in a stronger position to take on this unique challenge. Our liquidity position is extremely strong with nearly $2.5 billion of cash and short-term investments at the end of March. This represents multiples of what we would consider normal targeted cash levels. You can also imagine we have run quite a few scenarios over the past several weeks. Every model we’ve run has this substantial liquidity emerging in a stronger position from this downturn and leveraging the subsequent recovery. All of these scenarios will soon react and adapt our business to changing conditions, and we have already begun to quickly adjust to the current environment. From a financial perspective, we have taken many proactive steps to position the company to endure the economic downturn. First, we have ensured our cash position is liquid and available, shifting the majority of our cash investment to safer government funds for the time being. While we would like to be earning more on our cash, we have taken a very conservative position until we are comfortable that conditions have normalized. We also raised an incremental $500 million in debt, taking advantage of historically low-interest rates. But I look out over the next 36 months; we have less than $1 billion in debt maturities, which could easily be funded through our annual free cash flow. We continue to closely monitor our receivable balance and I’m not seeing any significant change to our aging profile. Our transportation services remain critical to our customers and their ability to generate cash flow. Finally, while the current backdrop is challenging, we are realizing opportunities and efficiencies that we will be able to leverage when we return to growth. These environments provide an opportunity to evaluate every cost and challenge the way we do things, and I expect the savings to be durable when growth returns. Now, turning my attention to Slide 11. I’ll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 5% in the first quarter. A significant decline in coal, lower other revenue and unfavorable mix more than offset the benefits of merchandise gains. Moving to expenses, total operating expenses were 7% lower than in the first quarter, driven almost entirely by the strong gains in operating efficiency we once again delivered. Labor and fringe expense was 10% lower versus the first quarter of 2019, as the average employee count was down 1,600 or 7%. Notably, even with volume directly flat year-over-year in the first quarter, we continued to find opportunities to tighten the train plan. First quarter crew starts were down 11% versus the prior year. This is a year-over-year average for the quarter and reflects efficiency gains we made over the last 12 months. Starting in the second half of March and through April to date, we have reacted to the declining volume environment and have continued to aggressively reduce train starts. I’m sure Jamie will touch on this in the Q&A. I have also talked a lot about our focus on overtime over the last few quarters, and once again, we saw a significant 33% reduction year-over-year. With current volume headwinds, we expect to continue to drive significant improvement in overtime spend. In addition to these gains in employee efficiency, we also had $14 million of lower incentive compensation expense in the quarter. Finally, $10 million of other labor cost increases were primarily driven by the cycling of the railroad retirement tax refunds in the prior year. MS&O expense improved 4% versus the prior year. Continued efficiency improvements across the operating support departments, including significant reductions in engineering, contracted spend, terminal expense, and crew travel drove a $32 million reduction year-over-year in MS&O. While MS&O is traditionally less volume-variable than labor costs, a month ago, we began to work to eliminate discretionary spending across the company, most of which will show up on this line item. Reductions in active locomotives and freight cars will also drive MS&O savings, and we expect outsourced terminal costs to adjust down as well. While MS&O will not be down one-for-one with volume, we are clearly focused on costs within this bucket that are traditionally less variable. Real estate and line sale gains of $18 million or $9 million lower in the quarter, while there continues to be a pipeline of these opportunities; sales activity is likely to be lower over the balance of the year given current economic conditions. That said, we have already closed one transaction in April and expect gains in the second quarter to be relatively flat with the first quarter. Fuel expense was $41 million favorable, an 18% improvement year-over-year driven by a 12% decrease in the per-gallon price as well as significant efficiency improvement in lower volume. Our continued focus on utilization of distributed power and energy management software combined with train handling rules compliance for the first quarter drove record fuel efficiency. Looking at other expenses, depreciation increased $14 million or 4% in the quarter, which reflects a $10 million impact from the fourth quarter 2019 depreciation study, which will continue to impact year-over-year depreciation expense for the next two quarters. We still expect full-year depreciation to be up $50 million to $60 million. Equipment rent expense decreased 8%. Improved network performance has enabled faster car cycle times as measured by merchandise and intermodal days per load, which include decreases of 6% and 13% respectively. This combined with lower payable volumes will result in the majority of savings in equipment rents. Going forward, we will see volume-related reductions in equipment rent expenses, so these will be partially offset by lower car utilization. In addition, we expect lower equity earnings from our TTX affiliate, which will also show up in equipment rents. Turning below the line, interest expense increased primarily due to higher debt balances, partially offset by a lower all-in coupon. The income tax expense increased $30 million as lower pre-tax earnings were more than offset by prior year benefits related to option exercises investing with other equity awards. Absent unique items, we continue to expect an effective tax rate of approximately 24.5% for future quarters. Closing out the P&L, as Jim highlighted in his opening remarks, CSX operating income declined 3% year-over-year, while the first quarter operating ratio of 58.7% represents an 80 basis point improvement. Turning to the cash side of the equation on Slide 12. In the first quarter of 2020, capital investment was up slightly year-over-year. We continue to invest in our core track, bridge and signal infrastructure and we continue to prioritize investments that provide safe and reliable train operations, but we are evaluating our capital expenditures in total. Even during this downturn and volume reductions, our commitment to invest in the safety of our core infrastructure will not change. In the first quarter, free cash flow before dividends was $812 million, down slightly reflecting higher capital expenditures and lower proceeds from property disposition. Free cash flow has continued to be a key focus for this team and we saw free cash flow conversion exceed 100%. The company continues to demonstrate a commitment to shareholder distribution, including dividend payments. Importantly, I mentioned previously that our cash and short-term investment balance entering the second quarter is nearly $2.5 billion. This position gives us confidence that, combined with efficiency initiatives, we can not only weather the storm ahead of us but take advantage of opportunities that may present themselves to create long-term value for shareholders. With that, let me turn it back to Jim for his closing remarks.

Great. Thank you, Kevin. Concluding on slide 14, due to the uncertain economic environment, and this should be of no surprise to anyone, we are withdrawing our guidance for the year. The potential range of outcomes for both production and demand, as well as the potential shape of the recovery are too wide to predict at this time. We are constantly assessing the economic situation and we’ll respond like we always do by taking appropriate steps to control costs, but with an ever vigilant eye toward maintaining current, but most importantly, long-term service for our customers, we have worked too hard to get this right to go backward. We are also evaluating our capital expenditure outlook for the year. Our first priority is and always will be the reliability and integrity of our railroad. We will not reduce or defer any spending that impacts safety. We will install about the same amount of rail and more this year than last. And Kevin and his team are looking for materials buying opportunities. We are, however, identifying potential areas of efficiency within our capital plan and considering opportunities to defer some non-essential spending. The plan will be fine-tuned as the year progresses, but we currently expect capital expenditures at the low end of our initial $1.6 billion to $1.7 billion range. Importantly, CSX entered into this period with a dramatically different cash flow profile than at any point in the company’s history. Over the course of our transformation, we have more than doubled CSX’s free cash flow conversion and ended the quarter with almost $2.5 billion of cash in short-term investments and an untapped revolver. We will take the necessary steps to ensure sufficient liquidity. These are unprecedented times. I’ve been through a lot in my career from Black Monday to the Great Recession and a lot of other unsettling events, but nothing like this. But I can say with certainty, strong companies adapt, they make changes and they get even stronger. I hope this current situation passes soon and we settle into the new normal. But for sure, the best is yet to come for CSX.

Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. Also, we ask everyone to please bear with us as we work through the logistical challenges presented by joining today’s call from different locations. With that, we will now take questions.

Thanks, operator. Thanks everybody for taking my questions and congrats on the cost performance in the quarter. Kevin, I think it would just be really helpful to get some help on how we can think about decremental margins in the second quarter. We’re obviously facing 20% plus volume declines, the 25%, 26% decremental as you guys achieved in the first quarter was great, but obviously, facing maybe, a more benign volume environment than what we’re going to get in the second quarter. So, just any way to think about that? And since I only get one question, if you can just also comment on how the pricing environment has evolved, if at all, in the context of the volume declines? Thanks a lot.

Yes, Amit. I think that qualifies as two, and I’ll give you a pass. Let me do the first one going today. Look, I knew the decremental margin question would come up on this call and we talked about it a lot, and I know you want to plug into your models, a certain decremental margin given your assumption here, I can give you a framework, but I don’t think we’re going to lay out necessarily what the decremental margins could be because there are a lot of different scenarios that could occur. What we’re really focused on in this environment is taking out structural costs and really, on the other side of this, really emerging in quite frankly, a better position than maybe we would have had this not happened. But just going through the P&L here, obviously, the depreciation is a cost that’s more difficult to go after in the near-term and medium-term. We’ve done a great job on becoming more capital efficient; that will work its way through depreciation over time. But that’s something in the near-term that’s obviously part of the move. When we look at our labor costs, as I described in the script, we obviously, with the great work that Jamie and his team have done, eliminating train starts and other things, we’re seeing headcount and reduced labor come out pretty significantly with the lower volume environment that we’re seeing. MS&O, as your experience will tell you, includes a lot of different items. When I look across MS&O and how we look at it internally, traditionally, we’ve said about 30% is highly variable, and then you have the rest of it, 25%, we’ve generally said it’s less variable. But those are the things that we have to look at in this environment to really go after. And so that’s where we’re going to challenge ourselves. Clearly the rent expense from a car hire perspective shouldn’t move the volume, but there are some offsetting relationships where we want to earn as much on our fleet in terms of rents. And then the TTX relationship obviously creates somewhat of a less volume-related upside that we will traditionally see. So there are a lot of pieces; we’re not going to draw the line in the sand on what the decremental margins are. I can tell you what we have done is we’re taking a review of everything. Our challenge here is to variabilize every cost we can and reevaluate it. The current working conditions today, working from home and all of those, I think are introducing opportunities for more efficiency for us. So, we’re driving those and will react as volume plays out over the next quarter or two. And I think you’ll see additional opportunities that will drive.

Maybe I’ll take the second part of that first question. I think that was cheap but probably going to be a reoccurring theme throughout the afternoon here. The pricing story continues to be very strong. I think if you look at the RPU results, the RPU is a mixed story—not, and I’ll repeat again, it’s not a pricing story. Pricing continues to be very good. Same-store sales sequentially and year-over-year are very, very good and our negotiated contracts exceeded our same-store sales pricing. So, the team is doing an exceptional job in these circumstances to extract good value for the transportation product that we are delivering to our customers, which is, as Jim and both Kevin said, continues to be outstanding. So, I’m very, very pleased the team has done a phenomenal job and has delivered great results on the pricing side.

Hey, good afternoon everyone and thanks for taking my question. Congrats on the quarter. Although, the question I’m going to focus on here is the rate of decline that we’re seeing in the second quarter. And Mark, maybe if you can speak to that. I mean, I think we show your volume down about 20% so far in April. Do you have any indications from customers when they plan to reopen sites or go back to higher levels of shipping or have we not even felt potentially the bottom of it yet?

Brandon, I would say my crystal ball is probably as good as yours. In this uncertain environment, things are so fluid. What we’re doing is we’re continuing to stay very, very close to our customers. I know the team, while working remotely, is staying very close to customers, reaching out to them on a weekly basis to get a feel for their business and the impact on supply chains, and what we can do to react. What I would say is these times are very uncertain and customers are seeing the same sort of things that we are. So we’re doing what we can control and that’s continuing to provide our customers with the best possible service and watching the volumes very closely. Jamie and I talk every day, and sometimes more than once, and our teams do as well. We’re doing an exceptional job of staying on top of things, but I can tell you, once our customers reopen and things come back to normal, we’re going to be there to provide exceptional service for them and be there for them when they get back. So there’s a lot of uncertainty. As I said, clearly the automotive guys are down. We hear the public reports that those facilities, those plants will be open sometime in early May, around May 4. I think GM said today they may push some of those plants back a week or two. But we’re staying very, very close to them. We have weekly calls with all our customers and especially the automotive guys, and we’re just watching it and seeing what happens.

Thank you.

Good afternoon. Thanks. So in the past, you’ve said that you still had many cost levers to pull as part of ongoing PSR implementation. So does the current downturn in volumes provide opportunities to speed up some of those remaining initiatives? So if you could speak to an acceleration of cost takeouts and also any other changes in the network that you might be able to pull forward that would potentially put you guys in an even better position to benefit from a recovery sooner than you might have otherwise? Thank you.

Thanks, Allison. I’ve talked many times about the difficulties associated with the decline on a gradual basis over the last 12 to 18 months associated with a stagnant industrial economy. And that we can respond quicker when there are downturns. And the job that the team did in responding over the last four weeks, not counting the international intermodal, let’s start a little bit earlier, but over a short period of time that responding to this quick downturn was nothing short of amazing. Jamie, why don’t you talk about all of the steps that you guys took?

Sure, absolutely. We’ve really adjusted our network to what we’re seeing as the current environment and the way that demand sits over the past few weeks. We’ve made a lot of changes out there where we’ve reduced the number of our assets. But really, we’ve reduced our total road starts by 23% year-over-year against the 25% decline in volume. We stored over 400 locomotives since the end of March, driving our active locomotive count under 2,000. To put that in perspective, three years ago when we started scheduled railroading at CSX, we had over 4,000 locomotives. We also held our merchandise train link consistent, yet we’ve been able to eliminate over 500 merchandise trains from our daily plan, which has been more than a 20% reduction. While we’ve been doing all that, we’ve been able to reduce our train delays by over 66%. So, I think it’s really important to know that these changes are not just volume related that we started, really right off the start, ready for growth, working with Mark and his team while they were driving with customers. Now, we’re really starting to pivot and use the current environment to go after structural opportunities in our operation. We will continue to adjust our network as demand dictates going forward, but we are also making changes where assets will not need to come back in the future. This is really an exercise for us to continue to work closely with our marketing team, adjust our volumes and network each and every day. But at the same time, we are ready when volume returns to go after that volume and not leave a carload behind.

Thank you, guys.

Yes, good afternoon. Remarkable job on the cost side, very impressive how quickly you’ve responded. Wanted to get your thoughts, Mark or Jim, just in terms of how does the—I guess, I mean, when the markets moved so much, maybe it’s irrelevant. But how do you interact with customers in terms of you’ve got to cut costs? Is the kind of share gain versus truck story something you can kind of put on hold and say, we’ll revisit it in another year? Or is it something that you kind of gauge the way you manage the way you cut costs so that you still have that service and kind of dialogue from before? I mean, it seems like it’s kind of an incremental question in a market that’s big, very macro driven. But how do you think about that relative to the obvious success in cutting a lot of costs?

Tom, as I said in my opening remarks, we have worked tirelessly to get these service levels of this railroad up to where they belong and to win back credibility from our customers. First of all, Mark can follow up on this, but Mark and Jamie, as Jamie said, are in constant communication with each other and ensuring that our customers are aware of what service changes we need to make and what the impacts to them may be. In many circumstances, the reason we’re reducing train starts is because their volumes are down and all we need to do is to have an honest dialog with our customers about the fact that we don’t think we can serve them five days a week; how about three? And they go, sure, let me make the necessary adjustments where it is appropriate. But Mark and his team are, as he said, constantly communicating with customers about that.

Yes, sure. Jim is exactly right. We’re talking with our customers, clearly where they’re seeing volume decline because their own businesses and their businesses are softer. And we have an opportunity to maybe take a day out of the service or whatever. We’re having those conversations and we’re staying close to Jamie and making those changes. Service is paramount around here, and our commitment to our customers is important. We take that responsibility very, very seriously. As Jim said, we have worked really hard over the last three years to put in place the reliability and consistency of service that customers expect from us. We’re doing that. We continue to do that, and we’re not going to just because volumes are declining, walk away from that strategy. We’re continuing to work with everybody. And listen, I think the weekly carloads are showing that with our better service, as I’ve talked many times, we have repositioned our marketing teams to really get away from just placing people to really understanding and doing real marketing work and looking for opportunities for us to gain share from other modes of transportation. They’re going to continue that work; I’m not sending them home for a year just because their volumes are down. They’re going to continue to work. We’re winning in the marketplace. We’re uncovering opportunities with our better service products to win share from other modes of transportation, and I think you’re seeing it in the carload. So we’re having tremendous success there, and that work is going to continue.

Okay, great. Thank you.

Hey, good afternoon. Thanks for taking the question. You had a few comments on fuel efficiency. I wanted to circle back to that. I think going to the 2018 Investor Day, the thought was about 0.95%. It’s probably the only target you didn’t hit early from that outlook. So I just wanted to hear, can you still get to that number? It sounds like a lot of efficiency gains you’re making now aren’t necessarily volume dependent. So just wanted to see what were the main factors to drive that if that goal was still potentially on the table?

Jamie, you want to take that?

Yes, absolutely. Look, fuel is something that we talk about consistently here at CSX. Everyone on our team knows clearly where our targets and goals are with respect to that. We are using technology constantly to make sure that we hit those targets as we continue to break through new records each and every quarter as we move forward. We feel confident that we will continue to show the improvement that we’ve had in the past and we’ll continue to move that forward. Definitely as we fill out our trains, we make our trains bigger and longer; that helps with the efficiency, where two locomotives are pulling more freight than they were before as we consolidate trains and continue to move forward into volume growth at some point in time when the market conditions change. But, yes, it’s an important key factor. I’ve got an unbelievable operating team who is working on this. We have created our own small department of a few individuals who are solely concentrating on fuel efficiency, and those people will continue to do what they’re doing and driving the metrics to where we’re seeing them.

I guess we’ll take an A minus on one of our categories.

All right, thanks, Jamie.

Great. Good afternoon. Hope all is well and safe. And Jim, you’ve always provided good insight into kind of the calling the volume outlook. Maybe just talk a bit about keeping the costs around if you anticipate a quick bounce back, given the speed of the decline compared to suffering with some higher costs in the near term. And I guess I’m more specifically referring to employees and how you think about furloughing or cutting additional employees with the ability to get them back up and running quickly.

Well, Ken, that has been the number one area of concentration for me for the last month: trying to deal with not only making sure that we have the employees ready, willing and able when this business turns around, but to make sure due to the tragic circumstances both with the disease and the economic fallout at the same time to make sure that we were very humanitarian in the way we’ve approached things. We have been working diligently with the labor unions from day one and have come up with some unique arrangements to address those concerns, recognizing the fact that the future is clearly unknown in terms of how long this is going to last. So, we’ve done a lot of interesting and unique things in conjunction with labor, especially in the early days to keep the employees working and then to adjust in a manner when volumes began to decline, but to make sure we have access to those employees when things turn back. We have been thinking way outside the box to try and come up with ideas wherever we can, and right now I feel we’re in as good a position as one could be in that circumstance. I wish I had a crystal ball in terms of future volumes, but right now we just don’t have that.

Just on some of the points that Jim put out there; we have set up some agreements with our union groups that will allow our employees to go on what we call a retention board. It’s their choice – sorry, it’s a reserve board. It’s their choice to get on that board or not. Most of our employees, a large number of them have decided to go on that board instead of taking furlough on the T&E side. The benefits for us, and of course these are tough decisions we are making as we continue to work on this downturn and control our costs, but the benefits is a less carrying cost for us, but it allows the employees to have medical benefits and other benefits along the way. That gives us, in most cases, a 48-hour recall for when the volume starts to come back; we don’t have to wait the normal period, which is around a 15-day recall cycle. We’re able to jump on volumes as Mark and his team work on as the economic conditions change.

Thanks, Jim. Thanks, Jamie. Appreciate the insight.

Hey, thanks. Good afternoon, guys. Maybe a question on intermodal and I guess maybe two pieces to it. I guess, first, when you think about sort of the customer mix and what you guys are moving both on the international and the domestic side, is there any sense that you can give us to sort of what is maybe more consumer and sort of essential type businesses that could be operating kind of what the floor might be like in that? And then, secondarily, in times of disruption like this, do you tend to see modal shift occur? Obviously, truck spot rates have gone down quite a bit here, but that typically isn’t the sort of measure that you guys tell us to look to in terms of how to think about share between truck and rail, it’s more contractual. So just want to get a sense of maybe how that plays out when you’re in a very disrupted state like we are right now.

Mark?

Sure. Thanks. So when we started off the quarter, modal was doing quite well. We had the traditional Chinese New Year on the international side, where volumes were reduced significantly. And then because of COVID-19, the outbreak in China with the extended shutdowns, we sort of saw a pause on the international front for quite some time. Meanwhile, the domestic side of the business was doing actually pretty well. I think as people saw what was happening, there was a lot of inventory being moved out of the warehouses and positioned to stores in anticipation of the increased demand, and so we saw that dynamic. And then China opened up a little bit later in the quarter; we saw some international volumes come in, and then meanwhile, the domestic side of the business was slowing down considerably. So right now, as we look out, a lot of reports are out there about the demand equation and clearly, with many of the shutdowns, retail businesses are closed and there’s not a lot of demand for things. And so with a lot of price ceilings on the international front, we expect that our domestic intermodal business will slow down considerably, and is slowing down considerably now and for the foreseeable future. Those are the dynamic shifts that have been going on. Service is tremendous. Our on-time performance is in the high 90s; 98%, 99%, and we’re seeing. As it pertains to trucks, the trucking environment was tight, and then it loosened up quite significantly, and it’s pretty fluid now. So we have to continue doing what we’re doing: providing great service to our customers. Clearly, competition from the trucks is there; there are a lot of trucks out there, and we’re going to compete harder and try to win some business, but that’s kind of the environment right now.

Okay. That’s very helpful color. Appreciate it. Thank you.

Hey, thanks. Afternoon, guys.

Hey, Scott.

So Kevin, last quarter you talked about some specific headwinds. I think it was $300 million or so in coal revenue, $90 million lower gains, $50 million in the other railway revenue. I don’t know if those are so impacted by what’s going on. So maybe just a comment if you think any of those have materially changed. And then, Mark, for you just quickly, have we seen the full impact of the benchmarks in coal RPU or is there one more leg down to come here?

Yes, I’ll cover a few of those headwinds. I think on the previous call I mentioned real estate sales; last year was about $160 million. We’ve guided for this full year of $50 million. Based on my comments, we’ll probably see something a little bit south of that $60 million. The market is fluid right now. We feel sequentially the number will be in line with the first quarter. Fourth quarter is probably a little bit more uncertain depending on the marketing condition that exists today. We’re certainly not going to buy or sell anything, and we have plenty of cash. We’re going to maximize value, of course. And then on the depreciation as I described, there’s a $50 million to $60 million headwind primarily related to the group life study. There are obviously non-cash items, but they’re impacting the income statement on that side. From a culture cycle, I’ll let Mark talk a little bit more about that, but I don’t think in aggregate that that headwind has changed, and the market is probably somewhat similar. But I’ll let Mark touch on that.

Yes, no thanks, Kevin. Scott, yes, I would say I don’t know. I would say the benchmarks are sort of all over the place. I think from what we told you in Q4 in January, I think from a benchmark perspective, we’re still sort of thinking the same thing quarterly. There is a little bit of weakness on API and prices—a little bit less of a factor now because a lot of coal is going to Europe. Most of our coal— a lot of our coal, especially on the thermal side, is going to India. India is closed down for a month. When that reopens is anybody’s guess. So, no coal is going to India right now. So, those dynamics are happening. The net benchmark came up a little bit; those are repriced quarterly. So, clearly, as Jim said in his opening, coal has some headwinds. We didn’t foresee any of these coal dynamics when we were talking to you in January; the markets have changed dramatically. So, there are clearly some headwinds out there, and benchmarks are one, but the demand is clearly the driving force here.

Okay. Thank you, guys.

Yes, good afternoon, gentlemen. And maybe, this is a question for Jamie. You talked about mix specifically, are there any commodity types that you hauled that either help or hurt overall network productivity that might be harder to handle or sort of the network for some reason? For example, if auto is not around, is that a good thing or is there any other commodity type that might limit network efficiency?

Yes. Look at—on the operating end of things, of course, we’ve really only got three different types of commodity. Our type of trains, I guess we would say. So, you’ve got our bulk service, which is easier, lower costs in most circumstances in cases. And then we have our merchandise, which is usually handled multiple times throughout a network, by the time it gets from online or from customer to customer. With respect to the auto side of the business, I would say that it is—it’s heavily on our network. It’s very customer-based with respect to a lot of work done at the loading facilities and unloading facilities. So, there are a number of yards and locals, and we do have some dedicated auto trains that run in certain parts of the network. When it comes to cutting off auto, even though it’s revenue that we don’t want to lose and it’s a good revenue for us, you can pull out a lot of costs with respect to auto when the auto network shuts down the way it did.

Thank you.

Yes, just a quick question. Obviously, most of the volume environment’s pretty tough right now, but as some buffer comes from agriculture, agricultural products, is that something that might actually not look that bad in the grand scheme of things? Thanks.

Well, it’s certainly, freight commodities got a little different cycle to it. I think we’re looking at, as an example, a reasonably good movement of fertilizer now because that’s the time of the year to do that. I think everybody’s still planning on planting a crop this year. And then in all the various buckets, a lot of them, again, as you said, agricultural, it has its own cycle based upon its commodity. It’s not tied to auto production as an example.

So there is, as you said, a different cycle than the rest of the industrial, so maybe there could be some hope on that volume product?

Yes, there’s certainly, yes. Certainly each element has its own drivers so to speak. And auto as an example has a—is one thing that impacts a lot of different groups within the industrial and merchandise segment. But yes, there are certain elements. I mean there’s been a still be some coal is going to move. Like I said, fertilizer’s going to move; grains are going to get harvested. We’ve always relied on that grains in one shape or another to keep the railroads going, whether it’s corn, wheat, or beer.

Great. Thank you.

Thanks and good afternoon. So, one of the noticeable trends year-to-date has been the outperformance of your volumes versus your eastern rail competitor. So, I was wondering if you could comment on how much of that outperformance in your opinion is coming as a function of market share gains from that rail competitor, market share gains from truck and mix. And maybe as you answer that question, you could also address the lower fuel price environment and how you’re thinking about the modal share impact from that going forward as well. Thanks.

Mark?

We are seeing share, good share gains across the portfolio. What’s our strategy when we started this thing was to put in place the best service product that we could. We’re doing that we continue to do that. Next, we are focused on the sales and marketing organization is really focused on three things: Number one, because of the superior service that we have, working with our existing customers to expand the amount of rail they use. Number two, work with customers who have traditionally used rail to move freight but for some reason over the last couple of years have pursued various reasons, and we’re working hard with those customers to bring that story back home, I would say. And the third strategy is working with shippers, who may have traditionally never used rail in the past, but have always looked at trucking easier to do business with and have never been properly considering rail as an option. Because of the work that we’re doing to make it easier to do business with; because of our cost profile, we’re able to go into some of those markets now that our marketing team is identifying and looking to enable and being able to win share there. For instance, we’ve been very successful in one segment in the business of aggregates. Aggregates continue to be a very strong commodity for us these days. There are a lot of road construction projects that are going on. Traditionally, a lot of that coming out of Georgia into the middle of about Florida. Less than 300 miles used to move by truck, because we had the capacity, because we had the service, we’re able to play in those markets and make a very good return by doing so. So we’re very—so we’re looking at all these different buckets of opportunities. The teams are being very aggressive. And I think as you said in your question, you can see it in the results you see on a weekly basis.

On your comment about the dynamics between the rail and truck in the impact that lower fuel prices might have. That’s one of the reasons why we continue to work so hard to make sure we reduce our fuel efficiency is, so that we can be more competitive with the highway. But there have been a number of recent independent surveys that are out there right now, where they ask customers what they think about rail transportation. Is it reliable? Yes. It’s fantastic, yes. Or do you like leadership? Probably a little bit more than it was in the past? Is there still value to rail shipping versus truck? Well, maybe it’s not 15% when oil is negative 35%. But they still stay at 10% cheaper with the same truck-like service, which is extremely compelling in the marketplace.

Great. That’s helpful. Appreciate the responses.

Right, Justin.

Hey, good afternoon. Kevin, question for you on the balance sheet side, you’ve got about $2 billion of cash, obviously ample liquidity, the cash flow position and business is good. Are you guys going to get back to a more aggressive capital return through buyback or are you thinking about changing the way you’re going to be returning some of that capital to investors emphasizing more of the dividend and any changing thoughts on that the capital return profile going forward?

Yes, it’s a—clearly, it’s a dynamic market right now. We’re very happy and to have $2.5 billion of cash and balance sheet, and growing every day; we're still generating positive free cash flows. So that’s clearly, we look over the medium term and even long-term, that’s not a cash balance that we are going to need on the balance sheet. And we still feel distributing this to our shareholders is something that we’ll prioritize going forward when the buybacks will continue for you to discuss that over the next few months. But I would expect that at some point for that to still be a core component of our cash returns to shareholders. I mentioned in the opening remarks that we’re committed to our dividend. It’s something we re-evaluate every year. We just recently this year increased that. And so we’ll see what we do next year. But again, we’re generating significant free cash flow even in these market conditions, and we can cover that dividend as we continue to be committed to shareholder returns.

All right. Thank you. Maybe, if I can tweak one quick follow-up in. Jim, is there anything on the policy side you’re looking at coming out of DC that would be beneficial or game-changing beyond obviously, the economy just restarting, anything in infrastructure spending or stuff like that that we should be keeping an eye on that would have an outside impact on CSX?

Nothing that is game-changing. We’re clearly interested in any cause for financial stimulus that would involve infrastructure because that would be a benefit to us. But, no, so far to date, the government in terms of providing flexibility to the rail industry to be able to operate and maintain all of the safety requirements, especially with the ad hoc nature of the way some of this was implemented in the States. We have not really been impacted and the government’s been very cooperative with us.

All right. Thanks a lot, guys.

Yes, thanks very much. Good afternoon, everyone. I guess, if we were to look out beyond COVID-19 and understanding that there’s a world in the future is not going to be—we’re not going back to normal and there could be some opportunities that emerge in that new normal, Jim. When you look at how the world might develop post-COVID-19 and how it’s structurally different, is there anything that a railroad or CSX in particular can do to capitalize on a new normal that is just different from the way things operated before? If I could lead the witness for a second. The retail focus on e-commerce and the higher costs that are contained in that strategy of e-commerce is a new strategy. Can you benefit in that e-commerce either because the retailers are also looking to offset that with a lower cost rail option? Or can you somehow play a role in the e-commerce chain in a way that you didn’t before?

Well, yes. there are two benefits—well, not call it benefits, I shouldn’t use that word. There are two opportunities for us that may arise as things evolve. First is, I think—and this is just my personal view. I think that there will be more manufacturing that takes place in this country and any kind of business activity like that. It’s good for the railroad. Secondly, we now can compete with truck in the markets as they become more and more large quantity shippers that fit well into the rail dynamics because of our service. So with our service product that we had before and because of the disparate network the way product moved, it was difficult for the railroads to compete in the e-commerce arena. I think that as we go forward, that will be a big opportunity for us.

Okay. I appreciate the time.

Thank you, operator. Hey, Jim and team, hope you guys are doing well. It seems like we’re going to be coming out of this pandemic on a state-by-state basis. So, it’s going to be a little bit choppy and disparate. What kind of challenges is that going to present to CSX and the network?

Probably, the same kind of challenges that we experienced in the past. When I talked about a slow decline being harder to manage than a complete shut off, it was easier for us to adjust, as we described when the auto industry just completely shut down in a week. My guess is the auto industry won’t completely start up in a week. So we will be challenged as the traditional logistics chain is not the same. And so we’ll have to-evolve; we’ll have to work with our customers, and it will present more of a challenge for us. I don’t see the fact that one state might come back online in certain areas two weeks before somebody else does. Texas starting out before Pennsylvania is not that big of a deal. It’s the industry that will start up across the country based on the comfort level of the population as the states come back.

Yes, that makes sense. And is this where sort of that flexibility with your headcount is going to really come into play and help you out?

Yes, that’s why, again, we’re trying to anticipate. You may have heard a lot of people talking about planning, modeling, thinking, what do we do, new norms, etc. Listen, we have spent and continue to spend a lot of time brainstorming about what could happen and how are we going to be in a position to respond.

Sounds good. Listen, everyone, be safe out there.

Thank you.