Okay. good morning. I'm Brandon Oglenski, airline and transport analyst here at Barclays. Welcome to day two of our 40th Annual Industrials Select Conference. Happy to have everyone here in Miami Beach, and very happy to be kicking off the day with CSX. Joining us from CSX, Joe Hinrichs, President and CEO of the company. Joe's been with CSX, I think, since September-
26 September. Twenty-sixth, yes.
Of last year, so.
Yeah.
I know we have lots of great topics to touch on here. Like yesterday, if you were in the fireside chats, we're gonna do the audience response questions real quick. Pick up that little keypad in front of you. Do you currently own CSX? Yes, overweight, two, equal weight, three, underweight, or four, no. Thank you for participating. We share this data.
I'm a one.
Unfortunately, we don't give the CEOs the clickers.
I'm just kidding.
It's true. All right, question number two. What is your general bias towards the stock right now? Positive, negative, or neutral? Favorable skew. Question number three, please. In your opinion, through cycle EPS growth for CSX will be above peers, in line with peers, or below peers? All right. Well, Joe, thank you for coming down. Welcome to Miami.
Yeah, thank you.
I definitely wanna ask some very CSX specific questions. I don't wanna be blind to the current media environment involving railroads and certain accidents.
Sure.
-in Ohio that has gotten a lot of attention. I'm not asking anything specific about that, but from your perspective at CSX, do you see any significant changes in safety or regulatory requirements that could come from this?
There's definitely gonna be a heightened sensitivity to anything safety related in the railroad industry, and we'll be having a number of conversations with DOT and FRA and the like. You know, once the NTSB comes out with their findings, which will be the fact-based data around what actually happened, we can then respond as an industry and as a company to what we're seeing and what happened. We've already taken a number of steps at CSX to learn from this and, you know, make sure that everything that we have is functioning properly and our processes are in place. I would expect there'll be some discussions, certainly, and also then some outcomes that will lead to enhanced safety in the railroad industry.
Most of those things, I think, can be worked out, between the industry and the different departments in a way that's good for everybody.
Okay. Any significant changes in capital or?
It's hard to tell. I mean, most of the things that Secretary Buttigieg listed in his letter would not be significant changes to capital. I mean, there's already a planned conversion of the you know cars to tank cars to you know another new level. That's already planned, you know, in the outer years. If it's pulled ahead a little bit, you know, that's something that the industry can handle. A number of the other things, you know, are more process driven, et cetera. We'll have to see what the technical analysis and what the technical experts have to say about electronic braking and those kind of things. I wouldn't necessarily believe there's a huge capital outlay in the near term, but we'll have to, you know, see where we get to.
Well, I appreciate that. I know we wanna focus on your new role here at CSX. Can you just, you know, give the audience some perspective here and context. You know, you had a long career at Ford...
Yep.
Came to CSX and just to, you know, provide some context from the investor perspective, a lot of folks when they see a new rail CEO, they say, "All right, is that a person from an operating background? That's the person we want to run a railroad." I'm not saying that folks are skeptical, but, you know, what does your background bring to CSX?
Yeah, sure. I mean, first of all, unlike, I think, any CEO in rail history, I was a customer of rails for decades. Actually 20 years ago, ran the organization inside Ford globally that managed all logistics and transportation spending, et cetera. I got to know the railroads pretty well then. That's a unique perspective, I think, that I get to bring to this role. I grew up in manufacturing. I grew up in the operations side of the auto industry. I've had about every job you can have in the operations side. I'm an engineer, so I have a great appreciation for the operating side of the business.
What I observed studying the rail industry and scale railroading and everything that's taken place the last five years ago, is really bringing lean thinking and lean optimization, you know, concepts to the rail industry, which have been going on for decades in the auto industry and in a number of other industrial industries. That lean thinking and that lean training is applicable no matter where you are. You know, waste is waste, whether it's a service organization or a product driven organization. Importantly, I have a great appreciation for the men and women that actually do the work.
Having worked in our, you know, like, seven different manufacturing plants throughout the Midwest, having run the manufacturing operations for Ford globally and having done four national contracts with UAW on the labor side, I have a great appreciation for the actual employees who are out there in the field doing the work. That's a really important part of what we're trying to do at CSX is, you know, make sure that our employees realize they're the most important part of what we do because they provide a service to our customers they pay us for, which has not been a strength of the railroad industry. There's a number of things in my background, I think, that actually carry over nicely.
I can tell you, talking to customers, they very much appreciate having somebody in this role that actually has been on the other side of this relationship. For a long time.
Yep. Well, you led off there with lean concepts. You know, what do you see happening at CSX today that you think could be better in the future?
Well, you know, since I joined the company, we've really been focused on reminding people of what the five, you know, guiding principles are of scheduled railroading, you know. At the start, it's about improving safety, controlling costs, improving asset utilization, improving the employee experience, engaging employees, and then improving customer service. Nobody really argues with those five principles. We've made a lot of progress in improving safety, and certainly the industry and CSX have made a lot of progress in controlling costs and asset utilization. You know, what I found in the rail industry and what we continue to see is there's a disconnect between the relationship between the employees that do the work out there, moving the goods from point A to point B, and the companies, and we wanna make that better.
You know, over the last several years especially, our customers do not feel like they've gotten the service they paid for. Our view has been these five principles still are relevant. They just need to be more in balance, and we need to make sure we're prioritizing our employees and our customers. Any service organization is driven by its employees. If our employees are feeling inspired and motivated, appreciated, they're gonna help us provide better service to our customers. Our focus has been on re-engaging with our employees, solving problems that are real for them, helping to make it a better experience, listening to them, making sure they know how important they are, and then focusing all that energy on serving our customers better.
As you've seen from the data lately, our operations are running the best they've ever run, and our customer service data is the best we can see in our history, in the data that we have. Customers are giving us that feedback. That cycle is working. At the same time, of course, we're controlling our costs, and we're not putting in more assets. You know, our view is you've got to have these things in balance. What's happened is PSR and these things have gotten a bad name, not because the principles in themselves are flawed at all. It's how they were implemented and how people were treated while they were being implemented and how people felt. Were customers prioritized? They didn't feel that way. Were employees, you know, treated with respect? Were they talked to?
Were they explained why things were changing? Not necessarily. There's a number of pieces here, but for me, you bring it all together. If you can get your employees really feeling like they're part of the team and feeling appreciated and valued, they'll provide you the service that we need for our customers, which will then in turn allow us to have the conversation with our customers about, okay, what more can we do together?
Well, Joe, this is a different message because I've been covering rails for 17 years, and I think you're the first CEO that leads talking about engaging frontline employees. Of course, everyone talks about it, but it feels like this is a big priority for you. You know, you mentioned you went through four contract cycles at your former employer. What have you seen coming into the rail industry that maybe has been neglected or overlooked in the past?
Well, it goes back to what I just talked about. I mean, there was tremendous distrust between the employees and the unions and the railroads. I mean, that was exacerbated by a three-year process to get to a contract agreement on a five-year contract, so it expires the end of next year.
Yeah.
You know, it's coming back at us again. One of the ways we've approached this is just to reengage with our workforce, make sure they understand that we know how important they are, that they're the ones creating the value by moving the goods for us safely from point A to point B. I go out almost every week in the field and visit with employees. We go unannounced. We don't tell them we're coming. We just show up. Jamie Boychuk, our EVP of operations, usually goes with me, and we just talk to people. How are you feeling? What's working? What can we do better? We're getting great feedback around, you know, hey, they told us about our demurrage policy. They gave us examples of where it wasn't fair. We fixed that voluntarily.
We just did the right thing. They told us that this paid sick leave issue, why it's important to them. We've resolved that with six of our unions, and we led the way in the industry in that. We're just working through the issues. They wanna know how we can do a better job of scheduling and making things better. You know, at the end of the day, the employees provide the service, and we can't be fighting with ourselves inside the industry.
All this negative attention that's been brought on the industry in the last six months or so with the threat of a strike, the contract negotiations, Congress having to get involved, the paid sick leave issue, now this derailment, is getting in the way of us, you know, really working well with our employees and our union leaders to create a better experience to serve the customers better. Our investors will be rewarded for that because you can see it in our numbers. I mean, just look at the data. You know, the CSX operations right now are running as fluidly or running as well as they have at any time.
We believe that has a lot to do with, of course, our operating model and our team, but also the re-engagement with employees and helping them understand what role they play in making this successful.
We've all heard about the paid sick leave issue. I have seen five or six agreements come across specific to CSX. Can you talk about what you've done there? Because I think that is unique to your network, is it not?
Yeah. Although in this week alone, both Union Pacific and Norfolk Southern have announced agreements with-
Okay.
Union Pacific with two and Norfolk Southern yesterday with one. You know, we sat down in December after the contract was, you know, ratified or, you know, voted on by Congress and sat down with our unions and said, "Okay, if we're serious about this issue and it means something to our employees, let's sit down together and listen to each other and find a collaborative solution." What we've been able to do is just listen to each other and say, "Okay, well, we reallocated three days that we already had off that had to be pre-approved to now be allowed for use for sick leave." On the four additional days, we talked with our union partners about how can we get efficiencies in our operations, not take money away from our employees' pocketbooks.
How can we get work together? We know there's all kinds of things we can do to be more efficient, and we have ideas around that. We reached agreements on those things to help pay for the paid sick leave in a way that was helping the company get more efficient, but not affect the employees themselves. You know, again, you can't take any one of these things out of context and say that's the solution. It's the feeling and it's the momentum of solving problems, of creating a better experience that allows you to have a better environment. A lot of these things are self-reinforcing. Let me give you an example, Brandon. We're just looking at data, and we look at data every week.
We get together as a leadership team, we go over all the numbers of the business, we go over the trends, we go over everything. Last year at this time, we had on average 200 senior employees, so conductors and engineers, who were stuck at a location over 30 hours. That's 200 people who are really upset about they can't get back home, they're not getting paid the higher wages by working. They're frustrated. This year, at the same time, it's 50. It's 150 less people getting stuck somewhere. Why is that? Because our network is running a lot better, and we have more manpower that's helping it run better. When the network runs better, it's like the airline industry. You don't get people stuck in the wrong places and you can't do anything about it.
What does that mean? Well, that's 150 people every day who are not upset, who are not who can go back to work after they have their rest period. These are examples of how this becomes self-reinforcing. If we can get all these things right and the network runs well, the experience gets better for the employees, which then leads to better service, better capacity, and better costs, frankly, because there's a cost to having someone sit somewhere for 30 hours. This is how it all fits together, and I think people have misunderstood these things. I get questioned all the time, "Well, you gave paid sick leave, it's gonna increase your costs." No, because the network running well is our biggest cost lever, and that's what we focus on.
Yep. Your third point here on customers and focusing on the customer, it is pretty clear in the new STB data that we've had for the past year that your on-time delivery rates are well above the industry average. What's driving that outperformance?
I think there's several things. First of all, this was done years ago, our operating model, the implementation of scheduled railroading that was done at CSX was done extremely well, and it's a very well-run railroad when it has the people working together. That's the first thing. We have a great team, and we've put an increased emphasis on it. Since the day I got here, I get asked all the time from people, "What do you look at when you wake up in the morning?" Because we have all kinds of data. The first thing I look at is the injury and accident report and what happened in the last 24 hours. Did anyone get injured? We have a report on that.
Were there any accidents? The second thing I look at is the customer service data, trip plan compliance, customer switch data, on-time arrivals, on-time originations, all these things. I talk to Jamie probably every day about these numbers, he and I and we've been really putting an emphasis on, you know, velocity and dwell are measures that are important because they're in service of our efficiency, but also more importantly, they're in service of our customer service. They're a means to an end. If we go really fast the wrong direction, we didn't the velocity looks good, but we didn't achieve anything meaningful to our customers.
What we focus on is, you know, prioritizing the customers, I mean, we were seeing tremendous progress in those numbers even before we started getting the additional headcount on because people were focused on it. They were paying attention to it, and they were understanding this is where we're gonna put the emphasis points. I'm really proud of the results we're seeing. In the, you know, the first six weeks of this year, you know, we're at levels we didn't even achieve back when we were running well in late 2020. That we're much higher now on customer focus metrics. Really proud of that. Customers are telling us they're seeing it and they're feeling it, that's where we wanna be.
Okay. If we can queue up question number four from the audience response system. If you guys have questions, just raise your hand, we'll get you a mic. Question four, in your opinion, what should CSX do with excess cash, both on M&A, larger M&A, share repurchases, dividends, debt pay down?
Yeah, you guys sitting in on our board meetings, I see. You know, we will always look for opportunities for M&A if they make sense. The challenge with this industry is there's, you know, there's limited opportunities, right?
Yep.
You know, the Pan Am acquisition, you know, we're investing heavily in it to bring that railroad up to our level of standards for, quality and safety on the network. That was a great example of, you know, kind of bolt-on M&A, if you will. Quality Carriers was another great example, especially chemical truck, you know, better margins than typical trucking business, but importantly, an opportunity for us to introduce a new product, a new service to the chemical customers, intermodal with ISO tanks, which is really going well in its early going so far. Obviously, we do a lot of share repurchases, and that's been the bulk of our activity and will probably still be the bulk of our activity going forward, given that we expect to continue to have excess cash. We've just raised our dividend 10%.
Our balance sheet's in really great shape. You know, I think that in reality, you're seeing that we don't really need to address the balance sheet. On internal investment, you're seeing we're actually raising the capital deployment in our business every year. One, to make sure that our network, as it expands, like with Pan Am, is continuing to be at the levels we want it to. Also, we have a number of initiatives on technology deployment. We're taking our data to the cloud from data centers. We're implementing a lot of new technology features for safety, et cetera. You'll see continued technology investment for growth, but also for safety and for efficiency.
You'll see that continue. But clearly, you know, we'll look for M&A activities, but right now the bulk of our excess cash will go to share repurchases.
Well, I want to come back to the M&A issue, but on capital investments, do you think maybe in the past, railroads have been a little bit maybe light on spending relative to the opportunity set?
It's really hard for me to tell. I really wasn't here, so it's hard for me to answer that. I know I looked at the data, 'cause you always wanna, you know, the data can set you free, and you can learn a lot from it. We're actually investing more in our network, now than we were before scheduled railroading, even though we took a lot of, you know, rail out. We took a lot of hump yards out. We took a lot of things that cost a lot of money to upkeep. We're actually investing more capital into our rail network today than we were even prior to the implementation of scheduled railroading. All I can say is we feel really good about the health of our network.
We feel really good about what it's delivering on from a safety standpoint, from an efficiency standpoint, and our commitment is to maintain that or even enhance it so that we can continue to feel good about our network. Obviously, what's happened in the last couple weeks has highlighted the need to make sure that all of our equipment, all of our technology is working for safety and for the communities that we serve.
Okay, can we queue up question, number five? In your opinion, what multiple of 2023 earnings should CSX trade?
Higher than it is today.
There's no 30+ option.
I'm not gonna. Yeah. I'm not gonna, you know, it's not for me to say. One of the feedbacks we get often is if you can really demonstrate the ability to grow volume, we've been demonstrating. We're still in a good pricing environment. If you can really demonstrate that you can leverage this operating model to grow profitably, that will affect the multiple. That's our plan for this year is to grow the volume ahead of GDP.
Yep, I wanna talk about growth. I wanna focus near term too, if we can, just for one question. It appears import activity really slowed down Q4.
Yes.
I think it's still very light-
It's still slow, yes.
Right now. What are you hearing from customers? Are we destocking in the economy right now?
There's no question the international intermodal business is down significantly. It's just like it was in the Q4. It's starting out the Q1 of this year that way as well. We're hearing it's a second half story. We're hearing from the shipping line, you know, lines, that that's what they're hearing and seeing as well. You know, we're being told it was a lot of destocking, that inventory was built up and destocking. I think there's also some nervousness around, you know, where's the economy really going? We'll have to see with that. Domestic intermodal has picked back up a little bit for us lately. Thankfully, we're seeing very strong start to the year on the merchandise side of our business.
Coal's been strong, a number of other sectors have been improving in the industrial side of the business. Auto, for us, has been down so far this year, largely because a number of our key customers have had production issues or have had units on hold for quality issues. We have every expectation that auto will pick back up and be strong for us for the full year. We feel really good about the merchandise side. I think intermodal is gonna be a second half story on the international side.
Well, can we touch a little bit on pricing as well? 'Cause that's been a huge topic for this conference across industrials.
Sure.
You know, transportation was a big source of inflation for a lot of supply chains. Obviously you guys have a lot of labor costs now that you didn't have, even a year before. How do you approach the pricing?
Pricing discussions so far this year have gone well, actually. They've been supportive of what we've said we expected to happen this year. I think number of things. One, the customers understand that we have inflation. They've seen the wage agreements. They understand we have inflation. They're experiencing inflation themselves, so they understand that. Second of all, it's a much easier conversation to have when you're delivering the best service to them you've delivered ever. They're appreciating that and recognizing that. They know, I believe that I know I've talked to 20 some CEOs of our major customers. They know how committed we are to this, to improving customer service.
So far, the pricing environment's been supportive of what we expected, starting the year out and, you know, I don't expect that to change. You know, we obviously saw a lot of pricing last year.
Yep.
You know, you know, metallurgical coal, export coal pricing has been elevated for the start of the year. We'll have to see where that ends up for the full year. You know, we feel good about the pricing environment we're in right now.
Well, can you talk to, you know, I think most railroads are challenged to provide a margin outlook this year. I'll try to get it out of you. What's the longer term view on the operating ratio and margins? Is that not the right focus?
Well, again, data and metrics, they're not inherently bad. It's just where do you put all your emphasis points? The operating ratio is important. It's not a perfect metric because in the denominator, you get things like fuel surcharge or demurrage storage costs or, you know, met coal prices that spike up that, you know, that don't purely identify how the operating side of the business is doing, 'cause those things are not controlled by how well the rail is running. Nevertheless, it's an important number and we, you know, we won't shy away from it. It can't be the end game, you know?
The end game is to provide a solution and provide a service to the customers that they're willing to pay for, that allows you to make an attractive margin because you have a cost structure that's supportive of that, and you have value being created for your customers. The operating ratio is a way of looking at that, but it's not the only way of looking at that. From our perspective, it's again about balance and about keeping all these things in context together. You know, you look at our numbers, we look at operating income, operating ratio, you look at the customer service data, you look at our cash flow, of course, and then our cash earnings, you know, after we take the charge for the capital. All these things are important.
Our belief is, we continue to run the railroad really well, we continue to engage our employees and help us run the railroad really well and safely, we serve our customers really well, we can grow the business. The incremental margins on this business when you grow it the right way are very attractive. All that being said, we should be able to demonstrate over time, an improving, you know, outlook for our business. It needs to be driven by growth in volume that's justified by how you're serving customers with that and then getting the incremental margin from that because squeeze. There's only so much more you can squeeze out of the operating side of the business going forward.
Appreciate that. I guess longer term, what are the most exciting growth verticals for you? Maybe with the context that U.S. rails historically have probably underperformed GDP on volume.
Yes. No question. Even if you take coal out because coal's been a little...
Yep.
I mean, certainly intermodal is an opportunity for growth. It has been. CSX has demonstrated significant growth over the last several years on intermodal. That will continue to be a focus because truck conversions are important for a lot of reasons. Obviously, we have the capacity to do that. It's good for the environment. It's good to get the trucks off the road for the infrastructure, for taxpayers and everything else. Intermodal is an opportunity. I mean, we'll see where coal goes over time. We know that's, you know, we know where coal's going over time. On the merchandise side, you know, our industrial development team's done a really good job of getting a number of big wins.
We have a number of the new auto plants being built in the Southeast, whether it's the Ford plant in Tennessee, Rivian plant in Atlanta, outside Atlanta, VinFast in North Carolina, or some big steel, Nucor, other things are all on our network. We're gonna see over the next couple of years some chunky, you know, increases opportunities with us, given some big wins we've had lately, including Shell Polymers Monaca and some other things going on. We're really excited about that. The merchandise side still has opportunity to grow, largely because a lot of this industrial development work and the onshoring going work on in America is largely focused on the Southeast. It's where we're strong and where we have a good presence. We see big opportunity there.
Coal will obviously over time will be in decline, so we have to offset that in other parts of the business.
Okay. Can we queue up question number six for the audience, please? What do you see as the most significant share price headwind for CSX? Core growth, margin performance, capital deployment, or execution?
Well, I'd like to say the execution piece, we already know we can do well. Probably growth is the biggest, you know, challenge because we haven't demonstrated it as an industry, and you all agree with that. We haven't demonstrated in the industry we can do that over extended time period. We also haven't demonstrated we can give consistently strong customer service to our customers over an extended period of time, so they're related to each other. I mean, our margin performance is already good. Obviously, our capital deployment, I think, is good. We have a really good strategy there. I feel good about our execution. We're working on our strategy development, spending more time on it than we probably have in the past.
We need to demonstrate to our customers, to our investors, to all of you, that we can profitably grow the business the right way.
You mentioned, you know, bolt-on M&A might play a role here, obviously Quality Carriers, Pan Am in the past. What do you look for in potential acquisitions?
I mean, the first thing we look for is obviously is there something we can bring to it to add value? Like Pan Am, for example, we can bring the strong operating, you know, leadership and performance in the operating model. Second thing is, can it, can it enhance our current business? Can it supplement like Quality Carriers can bring intermodal to our railroad, rail network? Can it expand our footprint to serve more customers or even our current customers better or differently? Those are the first things we look for. Obviously, it has to be an attractive, you know, price for obvious reasons. We don't want to just waste capital. We're not I want to be clear, we're not out spending a lot of time looking for, you know, M&A opportunities right now.
We're focused on bringing Pan Am up to speed and executing on our strategy this year and showing that we can demonstrate to our customers that we're gonna keep being there for them so we can grow with them.
Okay. Last question, number seven. We only got a minute left here, Joe. Does ESG play an active role in your investment decision, related to CSX? Yes, it does positive, yes, it does negative, or no.
That's obviously for the investors, but ESG is a very important part of the railroad story.
Yeah.
It gets lost sometimes. The STB, Chairman Martin Oberman and others have been really out front, like saying, "Listen, if the railroad networks can get the capacity up, provide the service, get more business on the rail network, it would be good for the economy and good for the environment.
Yeah.
I agree with that statement, and we're working hard to make that happen.
Well, Joe, with just a few seconds left here, how do you want investors to look back in a couple of years? What's the metric you want to be measured against?
Obviously, you know, volume growth and income growth and the margins that go with that are important for any business like ours. I also want us to look back and say that we did it the right way to make it sustainable, with a culture, a leadership, behaviors, and a working together environment that was focused on the customer and did it the right way so it's sustainable through the cycle and also through management teams, where we can continually show that we can grow the business by serving customers the right way with our employees.
Great chat, Joe.
All right.
We could keep going longer, but-
Thank you, guys. Appreciate it.
Thank you. Thanks.