Good morning, ladies and gentlemen, and welcome to the CSX Corporation Update Call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode.
Following the opening remarks, we will be conducting a question-and-answer session. To ask a question, press star one. I would now like to turn the call over to Mr. Kevin Boone, the Chief Investor Relations Officer for CSX Corporation. Thank you. You may begin.
Thank you, Carolyn. Before we get started, I would like to refer everyone to our forward-looking statements disclosure, which can be found on our company website. The purpose of today's call is to discuss last night's press release announcing Chief Executive Officer and President Hunter Harrison is on medical leave.
Yesterday, the board appointed Chief Operating Officer Jim Foote as acting CEO. I will turn over the call to Jim. But before we start, I would like to remind everyone that we have a busy day today, and we will try to get to all your questions, but I'll be available after the call. Jim?
Thank you very much, Kevin. Good morning, everyone. This is Jim Foote. I'm here in Jacksonville with the senior leadership team: Frank Lonegro, the CFO, Nathan Goldman, our Chief Legal Counsel, and Mark Wallace, our EVP of Administration. You've all seen the news that we released yesterday.
I know there are a lot of questions regarding the status of Hunter's health and what that means. Here's what I can say: two weeks ago, I participated with Hunter at the Credit Suisse Investor Conference. Last week, Hunter personally conducted a multi-day Hunter Camp, but sometime after that, he became ill, and that led to complications, and he is now on medical leave.
Beyond that, out of respect to his family, that's all we can say at this time. That said, on behalf of the entire CSX team, I'd like to again extend my well wishes to Hunter and his family. As you know, I worked with Hunter for 11 years at the Canadian National, and now, over the last couple of months here at CSX. I am always amazed at Hunter's vision and by his ability to transform railroads through the implementation of Precision Scheduled Railroading.
Simply put, the plan works, and most importantly, Hunter knows how to position people to effectively work the plan. Although I followed the CSX story prior to my arrival, you never really fully know what to expect until you're rooted in an organization. After spending some time with this group, I have discovered an outstanding team of railroaders. Execute the Precision Scheduled Railroading operating plan.
Once joining CSX, I realized just how much progress has been made replicating the transformation we affected at Canadian National some years ago. I believe that the battleship here has turned. The Precision Scheduled Railroading framework has been put into place, and the company has the critical railroad talent sufficient to follow through and execute on the PSR operating plan. Because the team has implemented a foundation consistent with Hunter's vision, I do not see any reason to diminish our expectations concerning the pace and magnitude of our future progress.
My experience has shown me that there are two phases to the implementation of Scheduled Railroading. The first phase is the implementation of the new operating plan across the company's network, the replacement of the company's traditional operating plan with the new Scheduled Railroading plan. This requires significant changes to the way the company operates from top to bottom.
Hunter forced the change in operating practices, made significant changes to the CSX network, including closing eight hump yards and other facilities, and probably most importantly, instilled a new railroading culture, a culture that has everyone focusing on improving customer service, driving asset utilization, and controlling cost. Again, it is astonishing how fast he has done it, faster, I believe, than the change that occurred at CP, and I know, having experienced it, much faster than we did it at CN.
The second phase of the implementation of PSR is the pure daily execution of the railroad operating plan. Strict adherence to the plan, which drives performance, is clearly underway across the network. Our performance metrics show the rate of change. Train velocity and car dwell have significantly improved over last year. Train velocity is nearly 18 miles per hour, a 19% improvement over last year, and car dwell dropped to 9.8 hours, which is 13% better than last year.
We are seeing improvements in every other part of the company. There is still much more work to be done here, but again, everyone is focused. As a 40-year veteran of the railroad industry and someone with a long history with implementing Precision Scheduled Railroading, I say with great certainty that we have a strong operating plan at CSX to deliver value to customers and shareholders. CSX railroaders know what we have to accomplish each day.
When we need to make adjustments, we will make them quickly and communicate them effectively to our teams and our customers. I am grateful for the support the board of directors has shown in me. Hunter has taught me well. I look forward to the opportunities ahead. Thank you very much.
Operator will now take questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one. To withdraw your question, press star two.
Again, press star one to ask a question, and one moment for our first question. Our first question comes from Brandon Oglenski from Barclays. Your line is open.
Hey. Company. A lot of people have left. So can you tell us what are the leadership succession plans now?
It's way too early for me to discuss succession plans, changes, etc. What I can do is, again, reiterate. Based upon my experience and having worked in a number of other railroads and been involved in the industry for many, many years, my assessment and my belief is that the talent here is. Run this railroad and become the best running railroad in North America.
Thank you.
Thank you. Our next question or comment comes from Ken Hoexter from Merrill Lynch. Your line is open.
Great. Good morning. So Jim, if I take a look at your comments on how long it took at CN, it took years and maybe 18 months at CP, can you maybe talk us through a little bit about how, I mean, you've been there for 2 months, how well you think this battleship has turned and maybe what is phase two here in terms of continuing that progress?
How do you think now what changes are made? Is all the upfront overhaul that needed to get done to PSR complete, or are there still yards to close, schedules to change from your perspective that Hunter was working on that might not have been finished, and kind of the integration of the new culture that you need to get started at CSX?
My experience of working with Hunter and having been here and looking at the network, again, the huge, the magnitude of the big changes that Hunter made were amazing. So the real, real, real heavy lifting has been done. Looking for further changes, further improvements that you can make in your network, which will allow you to drive further reductions in assets, further improvement in your train network performance.
W hich the end result is increased customer service, which is what it's all about here, so we can grow the business. So there still will be modifications and changes that we will make, but that's just the nature of the plan. It's an evolutionary process that continually changes. In terms of the execution, clearly the execution begins simultaneous with the implementation of the plan.
B ut the realization of the benefits has somewhat of a lag effect because you can't go out and say you have better service and sell better service and focus on delivering better service until you actually put the changes into effect and start doing it. So we are clearly leveraging the amount of work that's been accomplished in a very short period of time and making those operational changes and improvements every single day.
Great. Thanks for that, Jim.
Thank you. Our next question or comment comes from Christian Wetherbee from Citigroup. Your line is open.
Hey, thanks for taking the call. I guess, Jim, maybe you could help us understand a little bit what you've done sort of with the workforce, I guess, or what Hunter had done. Coming out of the summer, I think there was a need for some targeted replacements from an operation managerial perspective.
Just want to get a sense of sort of how that force has been shored up over the course of the last couple of months and if there is incremental work to be done there, maybe not necessarily at sort of the C level, but from a blocking and tackling perspective. Do you have what you need? Do you think there's more to be done there? I guess that probably goes hand in hand with some of the Hunter camp training that you guys have been doing with the internal talent as well. Just want to get a sense of sort of how that bit of the business looks right now.
I think the number of individuals that were brought in that had already gone through the turnaround implementation of Precision Scheduled Railroading, I would say, is on training people and strategically positioning them across our network, and they're doing an exceptional job every day. We have restructured and simplified our operating structure in the field network with four very strong supervisors now out there, and again, seeing the improved performance every day.
So the big focus that Hunter has had, and I have had since I've been here, is on the continual development of the leadership team at CSX, both at the senior level but down in the organization. The people who are extremely talented that want to work hard and are truly excited once they understand what we're trying to accomplish and that they can be a key component. I think Hunter probably individually mentored through these Hunter camps who, after exposure to Hunter, went from having.
I would say, somewhat junior level responsibility in the organization to much greater roles in the company and have become, as Hunter would say, rock stars. And so we're going to continue to, again, leverage that talent and continue to work on developing our existing workforce internally because if you get a person that has the institutional knowledge and years of experience in the company, and then they adopt the philosophy, that's how you really drive change in a very fast manner.
Okay. That's really helpful. One quick follow-up, if I may. I don't expect you to give sort of updated or sort of the long-term targets on this call, but when you think about sort of how you think about the net present value of the opportunity here, it sounds like you're suggesting it's not really changing at all.
Does Hunter's absence sort of maybe make you feel like you need to provide some more color around what you think the magnitude of this turnaround and more detail is maybe sooner than you would have otherwise? I think there was the potential to do something in the spring. Do you think this sort of pulls forward any of that need?
Well, you're right on there. I mean, yeah, our plans were to have a rollout and an investor day meeting where we would show the senior management team and discuss our vision for the next two to three years and what would fall out of the implementation of that plan. And there's absolutely nothing, absolutely nothing that has changed in our focus and our plans as we go forward.
So we'll get back to everybody on the timeframe, which Kevin is going to freak out because I'm going to give him a date, but early March is what he told me we were going to do it. And we'll be there early March, and we'll tell you what the plan is and what the progress is.
Okay. Great. Thank you very much. I appreciate it.
Thank you. Our next question or comment is from Tom Wadewitz from UBS. Your line is open.
Yes. Good morning. And I guess just wanted to say first that, I guess, obviously, but wish the best to Hunter and wish him a speedy recovery. Jim, what do you think? Where do you think the intermodal network is at?
That's, I think, an area where you've had more recent changes. Has that network been pretty much the difficult changes have already been made, or are there still some pretty significant things that need to be done there? And as you look at 2018, what would you say are your real priorities, the real focus for you in 2018?
Tom, well, thanks for your comments about Hunter. Yeah. Mark and I go way, way back with Hunter, so this is a very difficult—they're very difficult for us, and we're likewise all hoping for his speedy return here. In terms of the intermodal network, I would say yes, the big changes are done. Our pivot from the hub-and-spoke and delivering a high-value product to the customer is in the works, but we're always going to—we're always going to continue to make changes there.
But yeah, I mean, the unfortunate turmoil, and again, that's what Hunter is—that's why Hunter is known as a disruptive force, the disruptor. When he decided to change the hub-and-spoke model, it was not something that he thought about for weeks on end. He just intuitively knew with his vision that this was going to happen, and he did it. So that big change is behind us, and we're now focusing on executing that plan. In 2018, our focus now is, as I said earlier, delivering and executing on the plan on a daily basis and improving the quality of the service, which does both things, as you know, drives down the cost and allows us to grow the top line.
Okay. Great. I don't know if this is—I guess the second question, I don't know if this is something that's probably hard to comment on this, but do you think is the board—are you expecting that there's a reasonable chance that Hunter would come back in the future, or is that just too hard to make an assessment of the medical condition and talk about that issue?
No. Tom, we just need to stick to our statement of what we said, and we wish him a speedy recovery.
Yeah. Absolutely. Okay. Thanks for the time, Jim.
You bet.
Thank you. Our next question or comment is from Allison Landry from Credit Suisse. Your line is open.
Good morning. Thank you. Please send my best wishes to Hunter and his family. Jim, I think a couple of weeks ago, you had mentioned that you'd bring sales and marketing acumen to CSX. How does that change now? Will that be less of a focus in the short run, or will you continue to spend?
To Jeannie and Hunter's kids, your comment. Yeah. Just a couple of weeks ago, when Hunter and I were down there kind of laughing it up pretty good on the stage, I think at that point in time, I said my duties were probably skewed 70/30 or so. Going to have to equalize that to get kind of 50/50. There are a lot of—there are a lot of—and I clearly don't see any issue with that.
That's a good balance. And the team, the sales and marketing and operating team here, work very closely together. The other senior management, the guys in the room here with me, know what other kind of CEO type of activities that need to be covered. And between the four of us and the other people in the organization, we'll take care of business. Like I said on the comments before, there's no change in plan here, no change in focus, and we're just going to keep driving to get things done.
Great. Thank you for the time.
Thank you. Our next...
To Hunter. So Jim, you mentioned that no reason to change pace and magnitude of improvement. Maybe it's helpful to try and put some numbers around that today. So it feels like expectations are out there of a, call it a sub-60 operating ratio in that 2019-2020 timeframe, hundreds of millions of asset sales a year, CapEx coming down $500 million plus from here. Are any of those numbers that you're willing to sort of blast today?
Scott, you've formulated your expectations based upon kind of the guidance that Hunter laid out there for what he expected to achieve. As I said, we're going to continue to drive forward to run the company in the same manner that he would have in terms of any kind of specific guidance as to numbers on a go-forward basis. We'll be circling around back to everyone in just a few months in early March with our investor day and giving you guys a more in-depth look at what we see ahead from a financial perspective. So until then, it's just I shouldn't comment any further.
M&A over the years and probably haven't gotten to hear you talk much about that. Just curious if you share Hunter's long-term views or aspirations around M&A and just as you take control of it now.
I've been in it, like I said, I've been in it earlier. I've been in this industry for a long time, starting from the Chicago and North Western when there were a gillion Class I railroads in the United States. So I completely understand the synergies and efficiencies that come out of mergers and acquisitions. There aren't many more combinations that one could come up with, no, the difficulties of trying to do something like that, but I'm not going to, I'm not going to speculate on any of that, nothing like that.
Thank you, guys.
Thank you. Our next question or comment is from Brian Ossenbeck from J.P. Morgan. Your line is open.
Hi. Good morning. And please do pass my best along to Hunter and his family as well. Jim, I was wondering if you could give some of your initial impressions on intermodal as that continues to move away from the previous model, especially compared to your experience at CN, something along the lines of the length of haul being, the differential there being much shorter, what types of cargo and customers you're working with, different ports. If you give us a little bit more color on how you see that evolving and what some of the main differences are between how you operated at CN, I think that'd be helpful. Thank you.
Okay. Yeah. Sure. All you need is a map to figure out that there's a difference between the western railroads and the eastern railroads. And I'm still looking for that 2,000-mile length of haul. But we're doing a very, very extensive review of our intermodal strategy. And again, I think the big thing goes back to my earlier comments about the work that Hunter has done here and where we kind of stand.
Historically, CSX, CN, or not CN, did run two separate operations on their network, a separate merchandise network and a separate intermodal network, which in Hunter's view, and clearly a view that I endorse, was inefficient. And so along with a lot of other work that Hunter did, he blew that up too. And we now have a consolidated network, just like the other railroads operate, just like the way we ran the Canadian National and the way he ran the Canadian Pacific after that, a consolidated network that drives efficiencies.
And in our case, in our case, on trains and actually getting into new markets with better service at lower cost than we had before. So I'm very optimistic about our opportunities on the intermodal side. It's clearly a significant part of our business, a significant growth opportunity. And we're now much better positioned to take advantage of the market opportunities than we were before.
All right. Thank you. Just one quick follow-up. If you could just comment on not having the length of haul. You mentioned before, how do you offset that from a margin perspective?
Can you do that through just better density and better control in the network? Is that enough to offset the length of haul being much shorter in the east from an intermodal perspective? Thank you.
Well, clearly, working in the lanes where we have density and clearly is going to help us be more efficient. But the best way, the best, simply the best way to challenge that structural issue in terms of length of haul is to implement scheduled railroading where you're going to dramatically reduce your costs. And if you have lower costs and better service, you can be competitive and make as much money in a shorter haul situation. So is what gives you the advantage in the marketplace with the customers.
All right. Thank you, Jim.
Thank you. Our next question or comment is from Amit Mehrotra from Deutsche Bank. Your line is open.
Yes. Thank you, operator. Thanks for taking my question. So I just wanted to echo what's just for Hunter speedy recovery first and foremost. The first question for Jim is, when the analyst day was postponed, one of the reasons given was giving you time to get more familiar and assess the strategy and even tweak it a little bit.
Now that you're acting CEO, just wondering if you could talk about what you have tweaked or adjusted in terms of the precision railroading strategy for CSX since you've come on board. That'd be helpful. Thanks.
Well, I think part of the issue with canceling the other investor day, it would have given me about 12 hours to get prepared. And so now that I've been here a few months and have been working with the guys here, clearly we have, I think, a better view. We've circled around and we're on a daily basis discussing strategy and how to implement the strategy with Hunter and have, I would say, yes, we've tweaked the plan and have, more importantly, I think have the wherewithal to more clearly and articulately set forth our strategy, not only this team, but a large number of the other members of our team, how we intend to execute and what we think the results will be.
Right. Then I mean, you've talked about the same pace and magnitude of the improvement. Now that you've kind of had a better look and assessment of the strategy and tweaked it maybe a little bit here and there, is the cadence at all changing? I mean, I think the biggest uncertainty today is we're all waiting for this great analyst day, which hopefully will be great in early March.
But there's a relatively long time between now and early March. So any little bit more meat around the cadence? You've talked about sort of the same strategy, but are you guys going to maybe move a little bit slower given the disruptions earlier this year? Are you going to move faster given now a lot of those disruptions are in the rearview mirror? Any meat, I think, would be really helpful even ahead of that analyst day to just get us a little bit more comfortable.
We're not slowing down. I learned a long time ago in this business, again, going back to my early days in the railroad, I was taught by the old-timers at Blackstone what deal speed meant. And again, I, like you, expect a spectacular presentation out of everyone in the room. They're all looking at me like, "Oh my God." But we're going to have a great investor day, and it's two months to me. I haven't been here for two months. Two months seems like six years, but it'll be here before we know it.
Yeah. One quick one for me, if I could. The confidence that people need to have, I guess, on the outlook for the company is somewhat predicated on how Precision Railroading is going to be implemented or is typically implemented. I think there's basically two initial phases with respect to formulating a strategy and then executing that strategy.
I mean, correct me if I'm wrong, but it seems like what you're saying is the execution team has been handed the baton, essentially, the network strategy, which is what Hunter's key contribution was, has been set. But at the same time, the initial expectation was it would take Hunter about 18 months to do this. And so how do you reconcile those two points? If you could just help us think about that so we have some confidence that the progress can be achieved without Hunter Harrison being CEO of the company.
Well, I think, again, the expectation of that would take 18 or 19 months was based upon what he accomplished at Canadian Pacific. I think when he went to the Canadian Pacific, the strategy was probably that it would take him 2 or 3 years because that was kind of the pace that it took at CN. And he showed going from CN to CP, did it get it done much quicker, to a large degree, based upon the fact that he had done it so effectively at CN and knew what needed to get done.
And to a large degree, I think he understood that there is disruption that comes out of the implementation. And I know he was always concerned about the disruptive effects of the pace of change, both externally and internally. And when he came here, likewise, his vision was, again, do it faster and do it better than I did it at CP. And as an example, I don't remember exactly. I wasn't at CP.
I was only at CN with him. He took out maybe one hump yard at CP during that 18-month period. And here, in six months, he shut down eight. And hump yards are your major production facilities are running as smoothly as possible.
And he did that in a fraction of the time that he did at CP. So again, pace of change and everything is on course. And yes, we're on the second phase. We're executing aggressively and as fast as we can on every facet every day.
Okay. Well, good luck, Jim and team. Thank you for answering my questions. Our thoughts and prayers are also with Hunter and his family. Thank you very much.
Operator, we're going to take one more question.
Okay. Our last question or comment comes from Dan Sagan from RBC Capital Markets. Your line is open.
Hi. It's Walter Spracklin here. Just coming back, Jim, to the question on helping you guide his network in terms of who might be able to fill in the leadership role. And is there any restrictions that Hunter has with regards to non-solicits still apply to Hunter in this or apply to you in your role? In other words, are you free and open to look at whomever you choose, internal or external?
Yes, Walter. Hunter and I have worked together for a long time, as you know. And he's taught me well. And he's always believed that the best way to run an organization is to develop the people that you have. And only in a situation where you get to the point where you believe that you need some outside assistance, that's where you would go.
The last part of that question, I don't believe that based upon Hunter's coming here, there's any restriction. I honestly don't know the answer to that. I don't believe that there is. And I can also tell you that there's clearly I don't have any restrictions. I don't have any restrictions on me at all other than try to use a little self-discipline in certain things, but no business restrictions.
Okay. Thank you very much.
Thank you.
Thank you. Thank you very, very much, everyone, for taking your time so early in the morning today. We have, as you can imagine, an unbelievably busy schedule here to get done. Again, I appreciate your time, and I appreciate your concerns expressed about Hunter. We'll do our utmost to keep everyone informed, but.
This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your line.