Good afternoon, ladies and gentlemen, and welcome to the CSX Corporation Q1 2020 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode. Following the presentation, we will conduct a question and answer session. To ask a question, press star one. For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Head of Investor Relations for CSX Corporation.
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.
Thanks, Bill. 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. 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.
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. 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 five 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 six, first quarter revenue 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 lapping a favorable customer contract settlement last year and lower demurrage and intermodal storage revenues. Turning to slide seven 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 eight 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 one gallon of fuel per thousand 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 the equivalent of planting almost 1 million acres of forest each year. We are 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 Targets initiative. Reducing emissions is important to us, our customers, and the communities we serve. Critically, as shown on slide nine, our operating performance continues to drive best-in-class service and reliability for our customers. The 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 in response to the current lower volumes. Let me turn it over now to Kevin for more detail on the quarter.
Thank you, Jim. 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, posting 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 this pandemic, CSX has never been in a stronger position to face 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 us with substantial liquidity, emerging in a stronger position from this downturn and leveraging the subsequent recovery. All of these scenarios assume we 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 investments to safer government funds for the time being. While we'd like to be earning more on our cash, we have taken a very conservative position until we are comfortable conditions have normalized. We also raised an incremental $500 million of debt, taking advantage of what are historically low interest rates.
When 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 have not seen any significant change to our aging profile. Our transportation services remain critical to our customers and their ability to generate cash flow. 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. I expect these savings to be durable when growth returns. 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 benefit of merchandise gains. Moving to expenses. Total operating expenses were 7% lower 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 volumes roughly 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 am sure Jamie will touch on this in the Q&A. I have also talked a lot about our focus on overtime 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 comp 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 cost, a month ago, we began the 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 volume variable. Real estate and line sale gains of $18 million were $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 improvements and lower volume. Our continued focus on utilization of distributed power and energy management software, combined with train handling rules compliance, drove a first quarter record fuel efficiency. Looking at other expenses. Depreciation increased $14 million, or 4% in the quarter. This 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-$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 improved 6% and 13% respectively. This, combined with lower payable volumes, drove the majority of the savings in equipment rents. Going forward, we will see volume related reductions in equipment rent expense, though these will be partially offset by lower car utilization. In addition, we expect lower equity earnings from our TTX affiliate, which 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. Income tax expense increased $13 million as lower pre-tax earnings were more than offset by prior year benefits related to option exercises and vesting of other equity awards. After 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 represented 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. While we are evaluating our capital spend total, even during this downturn in volumes, 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 dispositions.
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 distributions, including dividend payments. Importantly, I mentioned previously, 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 in front 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 will respond like we always do, by taking appropriate steps to control cost, 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 backwards. 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 spend that impacts safety.
We will install about the same amount of rail and more ballast this year than last. Kevin and his team are looking for materials buying opportunities. We are, however, identifying potential areas of efficiency within our capital plan and the opportunities to defer some non-essential spend. The plan will be refined as the year progresses, but currently expect capital expenditures at the low end of our initial $1.6 billion-$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, nothing like this. 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, for sure, the best is yet to come for CSX. Bill?
Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. 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.
Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.
Thanks, operator. Thanks everybody for taking my questions, and congrats on the cost performance in the quarter, it was pretty impressive. 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%+ 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. Just any way to think about that. 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.
Yeah. Amit, I think that qualifies as two, but we might give you a pass since you're 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's 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've had this not happened.
Just going through the P&L here, obviously the depreciation is a cost that's more something that in the near term and medium term is more difficult to go after. 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 harder to move. When we look at our labor costs, as I described in my 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 costs 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 generally said it's structurally less variable. Those are things that we have to look at in this environment to really go after. That's where we're going to challenge ourselves. Clearly the rent expense from a car hire perspective should move with volume, but there are some offsetting relationships where we won't earn as much on our fleet in terms of rents. The TTX relationship obviously creates somewhat of a less volume-related upside that we will traditionally see. Those 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 working conditions today, working from home and all of those, I think are introducing opportunities for more efficiency for us. We're driving those. We'll react as the volume plays out here over the next quarter or two. I think you'll see additional opportunities that we'll drive.
So on that-
Pricing.
Maybe I'll take the second part of that first question. I think that was cheap, it's probably going to be a reoccurring theme throughout the afternoon here. Listen, the pricing story continues to be very strong. I think if you look at the RPU results, the RPU is a mix story, not, 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, our negotiated contracts exceeded our same store sales pricing. The team is doing an exceptional job in these circumstances to extract a good value for the transportation product that we are delivering to our customers, which, as Jim and Kevin said, continues to be outstanding. I'm very, very pleased. The team has done a phenomenal job and has delivered great results on the pricing side.
Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.
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. Mark, maybe if you can speak to that. 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?
You know, 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 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, trying to get a feel for their business, the impacts to their business, how that affects the supply chain, what we can do to react. What I would say is these times are very uncertain. Customers are seeing the same sort of things that we are. 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 way more than once, and our team's doing well.
We're doing an exceptional job of staying on top of things. I can tell you when our customers reopen and things come back to normal, so to speak, we're going to be there to provide exceptional service for them and be there for them when they get back. 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 4th. I think GM said today they may push some of those plants back a week or two. We're staying very close to them. We have weekly calls with all our customers, and especially the automotive guys. We're just watching it and seeing what happens.
Thank you.
Your next question comes from the line of Allison Landry from Credit Suisse. Please go ahead.
Good afternoon. Thanks. In the past, you've said that you still had many cost levers to pull as part of ongoing PSR implementation. Does the current downturn in volumes provide an opportunity to speed up some of those remaining initiatives? 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. That we can respond quicker when there are downturns. The job that the team did in responding over the last four weeks, in essence, not counting the international intermodal that started a little bit earlier, over the latest 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. Obviously over the past few weeks here, we've really started to adjust our network to what we're seeing as the current environment and the way that demand sits. We've made a lot of changes out there where we've reduced, over the last couple of weeks, a number of our assets. 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 length consistent, yet we've been able to eliminate over 500 merchandise trains from our daily plan, which is more than a 20%-- sorry, 50 merchandise trains from our daily plan, which is more than a 20% reduction. While we've been doing all that, we've been able to reduce our train delays by over 66%. I think it's really important to note 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. 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 close with our marketing team, adjust our volumes and network each and every day. At the same time, we are ready when volume returns, to go after that volume and not leave a carload behind.
Thank you, guys.
Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.
Yeah, 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 when the markets move so much, maybe it's irrelevant, but how do you interact with customers in terms of you got to cut costs, and is the kind of share gain versus truck story something you can put on hold and say we'll revisit it in another year? Is it something that you gauge the way you manage the way you cut costs so that you still have that service and kind of dialogue from before? It seems like it's kind of an incremental question in a market that's 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 like dogs to get these service levels of this railroad up to where they belong and to win back credibility from our customers. We are, first of all, and Mark can follow up on this, but Mark and Jamie, as Jamie said, are in constant communication with each other and making sure that our customers are aware of what service changes we need to make and what the impacts to our customers may be. In many circumstances, again, the reason that we're reducing train starts is because their volumes are down, and all we need to do is have an honest dialogue with our customers about the fact that we don't think we can serve them five days a week, how about three?
They go, "Sure, let me make the necessary adjustments where it is appropriate." Mark and his team are, as he said, constantly communicating with the customers about that. Mark, why don't you follow up?
Sure. No, Jim's exactly right, and we're talking with our customers clearly where they're seeing volume decline because their own 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 sacred around here, and our commitment to our customers is important, and we take that responsibility very importantly. As Jim said, we've worked really hard over the last three years to put in the reliability and the consistency of service that customers expect from us. We're doing that. We continue to do that, and just because volumes are declining, we're not going to walk away from that strategy.
We're continuing to work with everybody. 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 being price-selling 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. 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 carloads. We're having tremendous success there, and that work's going to continue.
Okay, great. Thank you.
Your next question comes from the line of Brian Ossenbeck from JPMorgan. Please go ahead.
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 target was about 0.95. It's probably the only target you didn't hit early from that outlook. I just wanted to hear, can you still get to that number? It sounds like a lot of the efficiency gains you're making now aren't necessarily volume dependent. Just wanted to see what were the main factors to drive to that and if that goal was still potentially on the table.
Jamie, you want to take that?
Yeah, absolutely. Look, fuel is something that we talk about consistently here at CSX, and everyone on our team, on the operating team knows clearly where our targets and our 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 have in the past, and we'll continue to move that forward. Definitely, as we fill out our trains and 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 as we continue to move forward into volume growth at some point in time when the market conditions change.
Yeah, 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 - on one of the categories.
All right. Thanks, Jamie.
Your next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.
Great. Good afternoon. I hope all is well and safe. Jim, you've always provided good insight into kind of the calling the volume outlook. Maybe just talk a bit more 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. 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.
Boy, Ken, that has been the number one area of concentration for me for the last month, is 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 because of 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.
We've done a lot of interesting and unique things in conjunction with labor, especially in the early days, to keep the employees working, then to be able to pivot, to adjust in a manner when volumes really 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. 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. Right now, we just don't have that.
I guess just to clarify.
Just on some of the points that Jim kind of put out there was. With our union groups, we have set up some agreements that will allow our employees to go on what we call a retention board. It's their choice. I'm 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 onto that board instead of taking furlough on the T&E side. The benefits for us, and of course, these are tough decisions that we're making as we continue to work on this downturn and control our costs, but the benefit is it's a less carrying cost for us, but it allows the employees to have medical benefits and other benefits along the way, but 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 it as the economic conditions change.
Thanks, Jim. Thanks, Jamie. Appreciate the insight.
Your next question comes from the line of Chris Wetherbee from Citi. Please go ahead.
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 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 what is maybe more consumer and essential type businesses that could be operating, kind of what the floor might be like in that? 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.
Just want to get a sense of maybe how that kind of plays out when you're in a very disrupted state like we're in right now.
Sure, Chris.
Mark?
Sure. Thanks. When we started off the quarter, intermodal was doing quite well. We had the traditional Chinese New Year on the international side, where volumes were reduced significantly. Because of COVID-19 and 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 positions to stores, in anticipation of the increased demand. We saw that dynamic, and then China opened up a little bit. Later in the quarter, we saw some international volumes come in, and meanwhile, the domestic side of the business was slowing down considerably.
Right now, as we look out, a lot of reports out there about the demand equation right now, and clearly with a lot of the shutdowns and the retail businesses that are closed, there's not a lot of demand for things. There are a lot of blank sailings on the international front, and we expect that our domestic intermodal business will slow down considerably and is slowing down considerably now and for the foreseeable future. Those are sort of the dynamic shifts that have been going on. Service is tremendous. Our on-time performance is in the high 90s, 98%, 99%. As it pertains to truck, the trucking environment was tight, and then it loosened up quite significantly, and it's pretty fluid now. We have to continue doing what we're doing, providing great service to our customers.
Clearly, competition from the trucks, there's a lot of trucks out there, and we're going to compete hard and try to win some business, but that's kind of the environment right now.
Okay. That's a very helpful call. Appreciate it. Thank you.
Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.
Hey, thanks. Afternoon, guys.
Hey, Scott.
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. Maybe just a comment if you think any of those have materially changed. 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?
Yeah, I'll cover a few of those headwinds. I think we, on the previous call, mentioned real estate sales. Last year was about $160 million. We guided for this full year of $60 million. Based on my comments, we'll probably see something a little bit south of that $60 million. The market's fluid right now. We obviously feel sequentially the number will be in line with the first quarter. Fourth quarter is probably a little bit more uncertain, depending on the market conditions that exist today. We're certainly not going to fire sale anything, and we have plenty of cash, and we're going to maximize value, of course.
On the depreciation, as I described, the $50 million to $60 million headwind, primarily related to the group life study there is obviously non-cash, but is impacting the income statement on that side. From a coal perspective, I'll let Mark talk a little bit more about that, but I don't think in aggregate that headwind has changed, and the market is probably somewhat similar, but I'll let Mark touch on that.
Yeah, no, thanks Kevin. Scott, yeah, I would say, I don't know. I would say, benchmarks are sort of all over the place. I think from what we told you at Q4 in January, I think from a benchmark perspective, we're still sort of thinking the same thing. Clearly, little bit of weakness on API 2 prices. A little bit less of a factor now because not a lot of coal is going to Europe. Most of our coal, a lot of our coal, especially on the thermal side, has been going to India. India's closed down for a month. When that reopens, anybody's guess. No coal is going to India right now. Those dynamics are happening. The net benchmark came up a little bit. Those are replaced quarterly. 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. There's clearly some headwinds out there, and benchmarks are one, but demand is clearly the driving force here.
Okay. Thank you, guys.
Your next question comes from the line of David Ross from Stifel. Please go ahead.
Yes, good afternoon, gentlemen. Maybe this is a question for Jamie. Can you talk about mix, specifically, are there any commodity types that you haul that either help or hurt overall network productivity, that might be harder to handle or that slow the network for some reason? For example, if auto is not around, is that a good thing? Is there any other commodity type that might limit network efficiency?
It's probably a good thing.
Look, on the operating end of things, of course, we've really only got three different types of commodity, or type of trains, I guess we would say. You've got our bulk service, which is easier, lower cost in most circumstances and cases. 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'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. 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 a revenue that we don't want to lose and it's a good revenue for us, you can pull out a lot of cost with respect to auto when the auto network shuts down the way it did.
Thank you.
Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.
Yeah, just a quick question. Obviously, most of the volume environment's pretty tough right now, but does some buffer come from agriculture, agricultural products? Is that something that might actually not look that bad in the grand scheme of things? Thanks.
Well, certainly, each commodity's got a little different cycle to it. 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, and I think everybody's still planning on planting a crop this year. In all the various buckets, a lot of them, again, as you said, agricultural has its own cycle based upon its commodity. It's not tied to auto production as an example.
There is, as you said, a different cycle than the rest of the industrial, so maybe there could be some hope on that volume front.
Yeah. Yes, certainly each element has its own drivers, so to speak. Auto, as an example, is one thing that impacts a lot of different groups within the industrial and merchandise segment. Yes, there are certain elements. There's going to still be some coal is going to move. Like I said, fertilizer's going to move, grain's going to get harvested. We've always relied on grains in one shape or another to keep the railroad going, whether it's corn, wheat, or beer.
Great. Thank you.
Your next question comes from the line of Justin Long from Stephens. Please go ahead.
Thanks. Good afternoon. One of the noticeable trends year-to-date has been the outperformance of your volumes versus your eastern rail competitor. 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. 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?
Sure. The question, so I can share. Sorry, I was doing something else. Apologize. We are seeing good share gains across the portfolio. Listen, 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, 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 that they use. Number two, work with customers who used to move freight with CSX, but for some reason, over the last couple of years, that freight for various reasons might have went away. We're working hard with those customers to bring that freight back home, I would say.
The third strategy is working with shippers who may have traditionally never used rail in the past, that have always looked at truck as easier to do business with, and never really wanted to consider 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 at, and being able to win share there. For instance, we've been very successful in one segment in the business of aggregates. Aggregates continues to be a very strong commodity for us these days. There's a lot of road construction projects that are going on. Traditionally, a lot of that coming out from Georgia into middle of Florida. It's less than 300 miles, used to move by truck.
Because we have the capacity, because we have the service, we're able to play in those markets, and make a very good return by doing so. The contribution on that is very good. We're looking at all these different buckets of opportunities. The teams are being very aggressive, and I think as you said during your question, you can see it in the results that you see on a weekly basis.
Justin, on your comment about the dynamics between the rail versus truck and the impact that lower fuel prices might have. 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. There have been a number of recent independent surveys that are out there right now where they ask customers, "What do you think about rail transportation? Is it reliable?" "Yes." "Fantastic?" "Yes." "Are you likely to shift?" "Probably a little bit more than I was in the past." Is there still value to shipping rail versus truck? Maybe it's not 15% when oil's -35, but they still say it's 10%. 10% cheaper with the same truck-like service is extremely compelling in the marketplace.
Great. That's helpful. Appreciate the responses.
Great, Justin.
Your next question comes from the line of David Vernon from Bernstein. Please go ahead.
Hey, good afternoon. Kevin, a question for you on the balance sheet side. You got about $2 billion worth of cash, obviously ample liquidity. The cash flow position of the business is good. Are you guys going to get back to more aggressive capital returns through buyback? Are you thinking about changing in the way you're going to be returning some of that capital to investors, emphasizing more of the dividend? Any changing thoughts on that capital return profile going forward?
Yeah. Clearly, it's a dynamic market right now. We're very happy to have $2.5 billion in cash on the balance sheet and growing every day. We're still generating positive f ree cash flow. Clearly, when 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. We still feel distributing it to our shareholders is something that we'll prioritize going forward. When the buybacks will continue, we'll continue to discuss that over the next few months. I would expect at some point for that to be still a core component of our cash return to shareholders. I mentioned on the opening remarks that we're committed to our dividend. It's something that we reevaluate every year. We just recently this year increase that. We'll see what we do next year.
Again, we're generating significant free cash clow even in these market conditions, and we can cover that dividend. We continue to be committed to shareholder returns.
All right. Thank you. Maybe if I can squeak one quick follow-up in. Jim, is there anything on the policy side you're looking at coming out of D.C. that would be beneficial or game-changing beyond, obviously, the economy just restarting? Is there anything in infrastructure spending or stuff like that we should be keeping an eye on that would have an outsized impact on CSX?
Nothing that is game-changing. We're clearly interested in any kind of financial stimulus that would involve infrastructure because that would be a benefit to us. 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 U.S., we have not really been impacted, and the government's been very cooperative with us.
All right. Thanks a lot, guys.
Your next question comes from the line of Walter Spracklin from RBC Capital Markets. Please go ahead.
Yeah. Thanks very much. Good afternoon, everyone. I guess if we were to look out beyond COVID-19 and understanding that the world in the future is not going to be normal, 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, 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 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's two benefits-- Well, let's 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 own personal thoughts, I think that there will be more manufacturing that takes place in this country. Any kind of business activity like that is good for the railroad. Secondly, we now can compete with a truck in the market as they become more and more large quantity shippers that fit well into the rail dynamics because of our service. With our service product that we had before, and because of the disparate network of 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. Appreciate the time.
Your next question comes from the line of Jason Seidl from Cowen. Your line is open. Jason, your line is open. Please unmute yourself.
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 is harder to manage than a complete shutoff. 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, and 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 up 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.
Yeah, that makes sense. Is this where sort of that flexibility with your headcount is going to really come into play and help you out?
Yeah. That's why, again, we're trying to anticipate. You maybe heard a lot of people talking about planning, modeling, thinking, what do we do, new norms, da, da, da. 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.
Your next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.
Thank you. Jim, in your closing comments, you mentioned some of the prior periods of disruption that you've been through, and obviously each one's different. Your former employer, you, Jamie, and Mark all arguably had the best performance, both operationally and financially, during probably the closest thing to what we're dealing with now in 2008, 2009. What are some of the similarities that you see to this environment back to 2008, 2009, and some lessons that you can bring from that period that help you proactively to get the system right-sized, yet still without disrupting the service?
I think 2008, 2009, again, we saw not this sudden shutdown, but we saw clearly a dramatic shutdown. As a result, we looked back to those days to see, because I wasn't at CSX and pretty much none of us were here, to see what the traffic declines were, what the traffic pattern declines were. It was helpful for us to try and to understand what it's like when 20% of your business goes away in two weeks. Lessons learned from all of those things. I hate to age myself, but yeah, I've been through just about every modern-day financial calamity plus, like I said, others in my career. This one is clearly the most challenging.
Are you implementing similar operational things that you did north of the border 12 years ago? Or is it a completely different response given the network and the geographic exposure?
Again, there's no magic to the geography. There's magic to people. The mindset of the people here in terms of making decisions, being quick, being nimble, and getting things done, all while looking forward and not getting tunnel vision, is the same. We have a phenomenal team that recognizes what needs to get done, and we work together, and we execute. Just the way we did it before. It was just good people there, too.
Thank you.
Your next question comes from the line of Cherilyn Radbourne from TD Securities. Please go ahead.
Thanks very much, good afternoon. Clearly, we're in uncharted territory here, and you've talked a lot about how you're staying close to your customers. I wonder if you could just talk a bit about how you're collaborating with your interchange partners to prepare for various downturn and recovery scenarios.
Well, it's a network business. What happens to one of us happens to all of us. It wasn't that just the auto plants shut down on CSX, they shut down across the country. We work together on a constant basis, managing the fleet as it moves across the network. Open lines of communication, good coordination, making sure that we don't get a lot of equipment stuck in one terminal that could begin to slow down the network. I think over the last couple of years, you've heard many of us say, most of the operating people now at the various railroads all think alike. We're all kind of working off the same page in terms of moving assets and running the network to the maximum level of efficiency, and that's been extremely helpful. The coordination and understanding has been extremely helpful.
Thank you. That's my one.
Great.
Your last question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.
Thanks. Jim or Kevin, if I can just follow up on the last response. Obviously, completely understandable that you pulled your guidance given the variety of the spread of uncertainty out there. I'm sure you guys have planned for multiple scenarios that can play out in the next two or three quarters. Can you share some of the bull/bear base case scenario, kind of what volumes look like in 2Q, 3Q, 4Q, kind of as far as your planning assumptions?
Well, yes. We've certainly looked at all of the alphabets, the V, the U, the L, and what I use, the W, as possible recovery scenarios. Obviously, the volumes in each one of those numbers is significantly different. As a result, because there is such a huge difference between that's why at this point in time, maybe give me another 30 days, we'll have a better vision as to what the real startup plan for the auto is, what's going on with steel, what's going on with X, Y, and Z. Other than that, it's just a hypothetical exercise, and that's why we didn't want to try to guess at this point in time. I apologize, but we're just not going to give you some kind of numbers like that.
Okay, thanks.
Yeah, Ravi.
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